<PAGE>
As filed with the Securities and Exchange Commission on July 10, 2000
Registration No.: 333-35784
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. 1 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
POST-EFFECTIVE AMENDMENT NO. 27 [X]
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
American Legacy III C-Share
(Exact Name of Registrant)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(Name of Depositor)
1300 South Clinton Street
Post Office Box 1110
Fort Wayne, Indiana 46801
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(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, including Area Code: (219)455-2000
Elizabeth A. Frederick, Esq.
The Lincoln National Life Insurance Company
1300 S. Clinton St.
Post Office Box 1110
Fort Wayne, Indiana 46802
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(Name and Address of Agent for Service)
Copy to:
Mary Jo Ardington, Esq.
The Lincoln National Life Insurance Company
1300 S. Clinton St.
Fort Wayne, Indiana 46802
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of the Registration Statement.
Title of securities being registered:
Interests in a separate account under individual flexible premium deferred
variable annuity contracts.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
SHALL DETERMINE.
<PAGE>
American Legacy III C-Share
Lincoln National Variable Annuity Account H
individual variable annuity contracts
Home Office:
Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46802
www.lincolnlife.com
This Prospectus describes the individual flexible premium deferred variable
annuity contract that is issued by The Lincoln National Life Insurance Company
(Lincoln Life). It is primarily for use with nonqualified plans and retirement
plans under Section 408 (IRAs) and 408A (Roth IRAs) of the tax code. Qualified
403(b) contracts will only be issued for purchase payments that are either
lump sum transfers or rollovers. Generally, you do not pay federal income tax
on the contract's growth until it is paid out. The contract is designed to ac-
cumulate contract value and to provide retirement income that you cannot out-
live or for an agreed upon time. These benefits may be a variable or fixed
amount or a combination of both. If you die before the annuity commencement
date, we will pay your beneficiary a death benefit. In the alternative, you
may choose to receive a death benefit upon the death of the annuitant.
The minimum initial purchase payment for the contract is $25,000. Additional
purchase payments may be made to the contract and must be at least $100 per
payment ($25 if transmitted electronically), and at least $300 annually.
You choose whether your contract value accumulates on a variable or a fixed
(guaranteed) basis or both. If you put all your purchase payments into the
fixed account, we guarantee your principal and a minimum interest rate. We
limit withdrawals and transfers from the fixed side of the contract.
All purchase payments for benefits on a variable basis will be placed in Lin-
coln National Variable Annuity Account H (variable annuity account [VAA]). The
VAA is a segregated investment account of Lincoln Life. You take all the in-
vestment risk on the contract value and the retirement income for amounts
placed into one or more of the contract's variable options. If the subaccounts
you select make money, your contract value goes up; if they lose money, it
goes down. How much it goes up or down depends on the performance of the
subaccounts you select. We do not guarantee how any of the variable options or
their funds will perform. Also, neither the U.S. Government nor any federal
agency insures or guarantees your investment in the contract.
The available funds, listed below, are each part of American Funds Insurance
Series (series) Class 2 Shares, also known as American Variable Insurance Se-
ries:
Global Growth
Global Small Capitalization
Growth
International
New World
Growth-Income
Asset Allocation
Bond
High-Yield Bond
U.S. Government/AAA-Rated Securities
Cash Management
This Prospectus gives you information about the contracts that you should know
before you decide to buy a contract and make purchase payments. You should
also review the prospectus for the funds that is attached, and keep both pro-
spectuses for reference.
Neither the SEC nor any state securities commission has approved this contract
or determined that this Prospectus is accurate or complete. Any representation
to the contrary is a criminal offense.
You can obtain a current Statement of Additional Information (SAI), dated the
same date as this Prospectus, about the contracts which has more information.
Its terms are made part of this Prospectus. For a free copy, write: Lincoln
National Life Insurance Company, P.O. Box 2348, Fort Wayne, Indiana 46801, or
call 1-800-942-5500. The SAI and other information about Lincoln Life and Ac-
count H are also available on the SEC's web site (http://www.sec.gov). There
is a table of contents for the SAI on the last page of this Prospectus.
, 2000
1
<PAGE>
Table of contents
<TABLE>
<CAPTION>
Page
-------------------------------------------------
<S> <C>
Special terms 2
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Expense tables 3
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Summary 5
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Condensed financial information 6
-------------------------------------------------
Investment results 6
-------------------------------------------------
Financial statements 6
-------------------------------------------------
The Lincoln National Life Insurance Co. 6
-------------------------------------------------
DCA fixed account 6
-------------------------------------------------
Variable annuity account (VAA) 6
-------------------------------------------------
Investments of the variable annuity account 7
-------------------------------------------------
Charges and other deductions 9
-------------------------------------------------
The contracts 9
-------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
------------------------------------------------------------------------
<S> <C>
Annuity payouts 14
------------------------------------------------------------------------
Federal tax matters 15
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Voting rights 18
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Distribution of the contracts 19
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Return privilege 19
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State regulation 19
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Restrictions under the Texas Optional Retirement Program 19
------------------------------------------------------------------------
Records and reports 19
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Other information 19
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Statement of additional information table of contents for Variable
Annuity Account H American Legacy III C-Share 21
------------------------------------------------------------------------
</TABLE>
Special terms
(We have italicized the terms that have special meaning throughout the Pro-
spectus)
Account or variable annuity account (VAA) -- The segregated investment ac-
count, Account H, into which Lincoln Life sets aside and invests the assets
for the variable side of the contract offered in this Prospectus.
Accumulation unit -- A measure used to calculate contract value for the vari-
able side of the contract before the annuity commencement date.
Annuitant -- The person on whose life the annuity benefit payments are based
and upon whose death a death benefit may be paid.
Annuity commencement date -- The valuation date when funds are withdrawn or
converted into annuity units or fixed dollar payout for payment of retirement
income benefits under the annuity payout option you select.
Annuity payout -- An amount paid at regular intervals after the annuity com-
mencement date under one of several options available to the annuitant and/or
any other payee. This amount may be paid on a variable or fixed basis, or a
combination of both.
Annuity unit -- A measure used to calculate the amount of annuity payouts for
the variable side of the contract after the annuity commencement date.
Beneficiary -- The person you choose to receive the death benefit that is paid
if you die before the annuity commencement date.
Contractowner (you, your, owner) -- The person who has the ability to exercise
the rights within the contract (decides on investment allocations, transfers,
payout option, designates the beneficiary, etc.). Usually, but not always, the
owner is the annuitant.
Contract value -- At a given time before the annuity commencement date, the
total value of all accumulation units for a contract plus the value of the DCA
fixed account of the contract.
Contract year -- Each one-year period starting with the effective date of the
contract and starting with each contract anniversary after that.
DCA fixed account -- An account established to accept purchase payments or
transfers of contract value, that may only be used for dollar cost averaging
purposes. The DCA fixed account is part of the general account of Lincoln
Life.
Death benefit -- The amount payable to your designated beneficiary if the
owner dies before the annuity commencement date or, if selected, to the owner
if the annuitant dies.
Lincoln Life (we, us, our) -- The Lincoln National Life Insurance Company.
Purchase payments -- Amounts paid into the contract.
Series -- American Funds Insurance Series (series), the funds to which you di-
rect purchase payments.
Subaccount or American Legacy III C-Share subaccount -- The portion of the VAA
that reflects investments in accumulation and annuity units of a class of a
particular fund available under the contracts. There is a separate subaccount
which corresponds to each class of a fund.
Valuation date -- Each day the New York Stock Exchange (NYSE) is open for
trading.
Valuation period -- The period starting at the close of trading (currently
4:00 p.m. New York time) on each day that the NYSE is open for trading (valua-
tion date) and ending at the close of such trading on the next valuation date.
2
<PAGE>
Expense tables
Account H annual expenses for American Legacy III C-Share subaccounts:*
(as a percentage of average account value):
<TABLE>
<CAPTION>
Enhanced
Guaranteed Guarantee of
Minimum Principal
Death Benefit Death
(EGMDB) Benefit
<S> <C> <C>
Mortality and expense risk charge 1.55% 1.45%
Administrative charge .10% .10%
----- -----
Total annual charge for each American Legacy
subaccount 1.65% 1.55%
</TABLE>
Annual expenses of the funds for the year ended December 31, 1999:
(as a percentage of each fund's average net assets):
<TABLE>
<CAPTION>
Management 12b-1 Other Total
fees + fees + expenses = expenses
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1. Global Growth .68% .25% .03% .96%
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2. Global Small Capitalization .78 .25 .03 1.06
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3. Growth .38 .25 .01 .64
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4. International .55 .25 .05 .85
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5. New World** .89 .25 .06 1.20
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6. Growth-Income .34 .25 .01 .60
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7. Asset Allocation .43 .25 .01 .69
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8. Bond .51 .25 .02 .78
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9. High-Yield Bond .50 .25 .01 .76
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10. U.S. Govt./AAA-Rated
Securities .51 .25 .01 .77
-------------------------------------------------------------------------------
11. Cash Management .44 .25 .01 .70
-------------------------------------------------------------------------------
</TABLE>
*The VAA is divided into separately-named subaccounts, eleven of which are
available under the contracts. Each subaccount, in turn, invests purchase pay-
ments in shares of a class of its respective fund.
**These expenses are annualized. The fund began operations on June 17, 1999.
3
<PAGE>
Example
(expenses of the subaccounts and of the funds):
If you surrender your contract at the end of the time period shown, you would
pay the following expenses on a $1,000 investment, assuming a 5% annual return:
<TABLE>
<CAPTION>
1 year 3 years
------------------------------------------------------------------------------------------
<S> <C> <C>
1. Global Growth $26 $81
------------------------------------------------------------------------------------------
2. Global Small Capitalization 27 84
------------------------------------------------------------------------------------------
3. Growth 23 72
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4. International 25 78
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5. New World 29 88
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6. Growth-Income 23 70
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7. Asset Allocation 24 73
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8. Bond 25 76
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9. High-Yield Bond 24 75
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10. U.S. Govt./AAA-Rated Securities 25 75
------------------------------------------------------------------------------------------
11. Cash Management 24 73
------------------------------------------------------------------------------------------
</TABLE>
We provide this example to help you understand the direct and indirect costs
and expenses of the contract. The example assumes that an EGMDB is in effect.
Without this benefit, expenses would be lower.
For more information, see Charges and other deductions in this Prospectus, and
Management and Organization in the prospectus for the funds. Premium taxes may
also apply, although they do not appear in the examples. This example should
not be considered a representation of past or future expenses. Actual expenses
may be more or less than those shown.
4
<PAGE>
Summary
What kind of contract am I buying? It is an individual variable annuity con-
tract between you and Lincoln Life. See The contracts.
What is the variable annuity account (VAA)? It is a separate account we estab-
lished under Indiana insurance law, and registered with the SEC as a unit in-
vestment trust. VAA assets are allocated to one or more subaccounts, according
to your investment choices. VAA assets are not chargeable with liabilities
arising out of any other business which Lincoln Life may conduct. See Variable
annuity account.
What are my investment choices? Based upon your instruction, the VAA applies
your purchase payments to buy series shares in one or more of the investment
funds of the series: Global Growth, Global Small Capitalization, Growth, In-
ternational, New World, Growth-Income, Asset Allocation, Bond, High-Yield
Bond, U.S. Government/AAA-Rated Securities and Cash Management. In turn, each
fund holds a portfolio of securities consistent with its investment policy.
See Investments of the variable annuity account--Description of the series.
Who invests my money? The investment advisor for the series is Capital Re-
search and Management Company (CRMC), Los Angeles, California. CRMC is regis-
tered as an investment advisor with the SEC. See Investments of the variable
annuity account--Investment advisor.
How does the contract work? If we approve your application, we will send you a
contract. When you make purchase payments during the accumulation phase, you
buy accumulation units. If you decide to receive retirement income payments,
your accumulation units are converted to annuity units. Your retirement income
payments will be based on the number of annuity units you received and the
value of each annuity unit on payout days. See The contracts.
What charges do I pay under the contract? We
will deduct any applicable premium tax from purchase payments or contract
value at the time the tax is incurred or at another time we choose.
We apply an annual charge totaling 1.65% to the daily net asset value of the
VAA. This charge includes 0.10% as an administrative charge and 1.55% as a
mortality and expense risk charge. If the enhanced death benefit is not in ef-
fect, the mortality and expense risk charge is 1.45%, for an annual charge to-
taling 1.55%. See Charges and other deductions.
The series pays a management fee to CRMC based on the average daily net asset
value of each fund. See Investments of the variable annuity account--Invest-
ment advisor. Each fund also has a 12b-1 fee and additional operating ex-
penses. These are described in the prospectus for the series.
What purchase payments do I make, and how often? Subject to the minimum and
maximum payment amounts, your payments are completely flexible. See The con-
tracts--Purchase payments.
How will my annuity payouts be calculated? If you decide to annuitize, you may
select an annuity option and start receiving retirement income payments from
your contract as a fixed option or variable option or a combination of both.
See Annuity payouts--Annuity options. Remember that participants in the VAA
benefit from any gain, and take a risk of any loss, in the value of the secu-
rities in the funds' portfolios.
What happens if I die before I annuitize? The enhanced death benefit, if in
effect, will be paid to your beneficiary. If the enhanced death benefit is not
in effect, your beneficiary will receive the guarantee of principal. Your ben-
eficiary has options as to how the death benefit is paid. In the alternative,
you may choose to receive a death benefit upon the death of the annuitant. See
The contracts--Death benefit before the annuity commencement date.
May I transfer contract value between variable options? Yes, with certain lim-
its. See The contracts--Transfers between subaccounts on or before the 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 the restrictions of any qualified retirement plan for
which the contract was purchased. A portion of surrender/withdrawal proceeds
may be taxable. In addition, if you decide to take a distribution before age
59 1/2, a 10% Internal Revenue Service (IRS) tax penalty may apply. A surren-
der or a withdrawal also may be subject to 20% withholding. See Federal tax
mat- ters.
Do I get a free look at this contract? Yes. You can cancel the contract within
ten days (in some states longer) of the date you first receive the contract.
You need to return the contract, postage prepaid, to our home office. In most
states you assume the risk of any market drop on purchase payments you allo-
cate to the variable side of the contract. See Return privilege.
5
<PAGE>
Condensed financial information for the variable annuity account
Because the subaccounts which are available under the contracts did not begin
operation before the date of this Prospectus, financial information for the
subaccounts is not included in this Prospectus or in the SAI.
Investment results
At times, the VAA may compare its investment results to various unmanaged in-
dices 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. See the SAI for further informa-
tion.
Financial statements
The financial statements of the VAA and the statutory-basis financial state-
ments of Lincoln Life are located in the SAI. If you would like a free copy of
the SAI, complete and mail the enclosed card, or call 1-800-942-5500.
The 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.
DCA fixed account
Purchase payments allocated to the DCA fixed account of the contract become
part of Lincoln Life's general account, and do not participate in the invest-
ment 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 com-
pany under the Investment Company Act of 1940. Accordingly, neither the gen-
eral account nor any interests in it are regulated under the 1933 Act or the
1940 Act. Lincoln Life has been advised that the staff of the SEC has not made
a review of the disclosures which are included in this Prospectus which relate
to our general account and to the DCA fixed account under the contract. These
disclosures, however, may be subject to certain provisions of the federal se-
curities 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 con-
tract. Complete details regarding the DCA fixed account of the contract are in
the contract.
Purchase payments allocated to the DCA fixed account of the contract are guar-
anteed to be credited with a minimum interest rate, specified in the contract,
of at least 3.0%. A purchase payment allocated to the DCA fixed account of the
contract is credited with interest beginning on the next calendar day follow-
ing the date of receipt if all data is complete. Lincoln Life may vary the way
in which it credits interest to the DCA fixed account 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 liabili-
ties 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 ac-
cordance with the applicable annuity contracts, credited to or charged against
the VAA. They are credited or charged without regard to any other income,
gains or losses of Lincoln Life. The VAA satisfies the definition of a sepa-
rate account under the federal securities laws. We do not guarantee the in-
vestment 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 other annuity contracts offered by Lincoln Life in
addition to the contracts described in this Prospectus. The other annuity con-
tracts supported by the VAA invest in the same portfolios of the series as the
contracts described in this Prospectus. These other annuity contracts may have
different charges that could affect performance of the subaccount.
6
<PAGE>
Investments of the variable annuity account
You decide the subaccount(s) to which you allocate purchase payments. There is
a separate subaccount which corresponds to each class of each fund of the se-
ries. You may change your allocation without penalty or charges. Shares of the
funds will be sold at net asset value with no initial sales charge to the VAA
in order to fund the contracts. The series is required to redeem fund shares
at net asset value upon our request. We reserve the right to add, delete or
substitute funds.
Investment advisor
The investment advisor for the series is Capital Research and Management Com-
pany (CRMC), 333 South Hope Street, Los Angeles, California 90071. CRMC is one
of the nation's largest and oldest investment management organizations. As
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.
With respect to the series, the advisor and/or distributor, or an affiliate
thereof, may compensate Lincoln Life (or an affiliate) for administrative,
distribution, or other services. It is anticipated that such compensation will
be based on assets of the particular series attributable to the contracts
along with certain other variable contracts issued or administered by Lincoln
Life (or an affiliate).
Description of the series
The series was organized as a Massachusetts business trust in 1983 and is reg-
istered as a diversified, open-end management investment company under the
1940 Act. Diversified means not owning too great a percentage of the securi-
ties of any one company. An open-end company is one which, in this case, per-
mits Lincoln Life to sell its shares back to the series when you make a with-
drawal, surrender the contract or transfer from one fund to another. Manage-
ment 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 eleven separate portfolios of funds. Fund assets are segregated
and a shareholder's interest is limited to those funds in which the share-
holder 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, pow-
ers, restrictions, limitations, qualifications and terms and conditions, ex-
cept 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 sub-
mitted to shareholders in which the interests of one class differ from the in-
terests 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 Lin-
coln 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.
Certain funds offered as part of this contract have similar investment objec-
tives and policies to other portfolios managed by the advisor. The investment
results of the funds, however, may be higher or lower than the other portfo-
lios that are managed by the advisor. There can be no assurance, and no repre-
sentation is made, that the investment results of any of the funds will be
comparable to the investment results of any other portfolio managed by the ad-
visor.
Following are brief summaries of the investment objectives and policies of the
funds. Each fund is subject to certain investment policies and restrictions
which may not be changed without a majority vote of shareholders of that fund.
More detailed information may be obtained from the current prospectus for the
series which is included in this booklet. Please be advised that there is no
assurance that any of the funds will achieve their stated objectives.
1. Global Growth Fund--The fund seeks to make your investment grow over time
by investing primarily in common stocks of companies located around the
world. The fund is designed for investors seeking capital appreciation
through stocks. Investors in the fund should have a long-term perspective
and be able to tolerate potentially wide price fluctuations.
2. Global Small Capitalization Fund--The fund seeks to make your investment
grow over time by investing primarily in stocks of smaller companies lo-
cated around the world that typically have market capitalizations of $50
million to $1.5 billion. The fund is designed for investors seeking capital
appreciation through stocks. Investors in the fund should have a long-term
perspective and be able to tolerate potentially wide price fluctuations.
7
<PAGE>
3. Growth Fund--The fund seeks to make your investment grow by investing pri-
marily in common stocks of companies that appear to offer superior opportu-
nities for growth of capital. The fund is designed for investors seeking
capital appreciation through stocks. Investors in the fund should have a
long-term perspective and be able to tolerate potentially wide price fluc-
tuations.
4. International Fund--The fund seeks to make your investment grow over time
by investing primarily in common stocks of companies located outside the
United States. The fund is designed for investors seeking capital apprecia-
tion through stocks. Investors in the fund should have a long-term perspec-
tive and be able to tolerate potentially wide price fluctuations.
5. New World Fund--The fund seeks to make your investment grow over time by
investing primarily in stocks of companies with significant exposure to
countries which have developing economies and/or markets. The fund may also
invest in debt securities of issuers, including issuers of high-yield,
high-risk bonds, in these countries. Investors in the fund should have a
long-term perspective and be able to tolerate potentially wide price fluc-
tuations.
6. Growth-Income Fund--The fund seeks to make your investment grow and provide
you with income over time by investing primarily in common stocks or other
securities which demonstrate the potential for appreciation and/or divi-
dends. The fund is designed for investors seeking both capital appreciation
and income. Investors in the fund should have a long-term perspective and
be able to tolerate potentially wide price fluctuations.
7. Asset Allocation Fund--The fund seeks to provide you with high total return
(including income and capital gains) consistent with preservation of capi-
tal over the long-term by investing in a diversified portfolio of common
stocks and other equity securities; bonds and other intermediate and long-
term debt securities, and money market instruments (debt securities matur-
ing in one year or less). Investors in the fund should have a long-term
perspective and be able to tolerate potentially wide price fluctuations.
8. Bond Fund--The fund seeks to maximize your level of current income and pre-
serve your capital by investing primarily in bonds. The fund is designed
for investors seeking income and more price stability than stocks, and cap-
ital preservation over the long-term. Investors in the fund should have a
long-term perspective and be able to tolerate potentially wide price fluc-
tuations.
9. High-Yield Bond Fund--The fund seeks to provide you with a high level of
current income and secondarily capital appreciation by investing primarily
in lower quality debt securities (rated Ba or BB or below by Moody's In-
vestors Services, Inc. or Standard & Poor's Corporation), including those
of non-U.S. issuers. The fund may also invest in equity securities that
provide an opportunity for capital appreciation. Investors in the fund
should have a long-term perspective and be able to tolerate potentially
wide price fluctuations.
10. U.S. Government/AAA-Rated Securities Fund--The fund seeks to provide you
with a high level of current income, as well as preserve your investment.
The fund invests primarily in securities that are guaranteed by the "full
faith and credit" pledge of the U.S. Government and securities that are
rated AAA or Aaa by Moody's Investor's Services, Inc. or Standard & Poor's
Corporation or unrated but determined to be of equivalent quality.
11. Cash Management Fund--The fund seeks to provide you an opportunity to earn
income on your cash reserves while preserving the value of your investment
and maintaining liquidity by investing in a diversified selection of high
quality money market instruments.
Sale of fund shares
We will purchase shares of the funds at net asset value and direct them to the
appropriate subaccounts of the VAA. We will redeem sufficient shares of the
appropriate funds to pay annuity payouts, death benefits, surrender/withdrawal
proceeds or for other purposes described in the contract. If you want to
transfer all or part of your investment from one subaccount to another, we may
redeem shares held in the first and purchase shares of the other. Redeemed
shares are retired, but they may be reissued later.
Shares of the funds are not sold directly to the general public. They are sold
to Lincoln Life, and may be sold to other insurance companies, for investment
of the assets of the subaccounts established by those insurance companies to
fund variable annuity and variable life insurance contracts.
When the series sells shares in any of its funds both to variable annuity and
to variable life insurance separate accounts, it is said to engage in mixed
funding. When the series sells shares in any of its funds to separate accounts
of unaffiliated life insurance companies, it is said to engage in shared fund-
ing.
The series currently engages in mixed and shared funding. Therefore, due to
differences in redemption rates or tax treatment, or other considerations, the
interests of various contractowners participating in a fund could conflict.
The series' Board of Trustees will monitor for the existence of any material
conflicts, and determine what action, if any, should be taken. See the pro-
spectus for the series.
Reinvestment of dividends and capital gain distributions
All dividend and capital gain distributions of the funds are automatically re-
invested in shares of the distribut-
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ing 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 substi-
tutions 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 pur-
chased, or to be purchased in the future, under the contract. This substitu-
tion might occur if shares of a fund should no longer be available, or if in-
vestment in any fund's shares should become inappropriate, in the judgment of
our management, for the purposes of the contract.) We cannot substitute shares
of one fund for another without approval by the SEC. We will also notify you.
Charges and other
deductions
We will deduct the charges described below to cover our costs and expenses,
services provided and risks assumed under the 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 ad-
ministrative services include: processing applications for and issuing the
contracts, processing purchases and redemptions of fund shares as required
(including dollar cost averaging, cross-reinvestment, portfolio rebalancing,
and automatic withdrawal services--See Additional services and the SAI for
more information about these programs), maintaining records, administering an-
nuity payouts, furnishing accounting and valuation services (including the
calculation and monitoring of daily subaccount values), reconciling and depos-
iting cash receipts, providing contract confirmations, providing toll-free in-
quiry services and furnishing telephone fund transfer services. The risks we
assume include: the risk that annuitants receiving annuity payouts under con-
tract live longer than we assumed when we calculated our guaranteed rates
(these rates are incorporated in the contract and cannot be changed); the risk
that death benefits paid will exceed the actual contract value; and the risk
that our costs in providing the services will exceed our revenues from con-
tract charges (which we cannot change). The amount of a charge may not neces-
sarily correspond to the costs associated with providing the services or bene-
fits indicated by the description of the charge.
Deductions from the VAA for American Legacy
We deduct from the VAA an amount, computed daily, which is equal to an annual
rate of 1.65% (1.55% for contracts without the EGMDB) of the daily net asset
value. The charge consists of a 0.10% administrative charge and a 1.55% (1.45%
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 contract
value when incurred, or at another time of our choosing.
The applicable premium tax rates that states and other governmental entities
impose on the purchase of an annuity are subject to change by legislation, by
administrative interpretation or by judicial action. These premium taxes gen-
erally depend upon the law of your state of residence. The tax ranges from
zero to 5.0%.
Other charges and deductions
There are deductions from and expenses paid out of the assets of the under-
lying series that are more fully described in the prospectus for the series.
Among these 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 described previously may be reduced or eliminated
for any particular contract. However, these charges will be reduced only to
the extent that we anticipate lower distribution and/or administrative ex-
penses, or that we perform fewer sales or administrative services than those
originally contemplated in establishing the level of those charges. Lower dis-
tribution and administrative expenses may be the result of economies associ-
ated 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 de-
posits on behalf of its employees or (4) any other circumstances which reduce
distribution or administrative expenses. The exact amount of administrative
charges applicable to a particular contract will be stated in that contract.
The contracts
Purchase of contracts
If you wish to purchase a contract, you must apply for it through a sales rep-
resentative authorized by us. The completed application is sent to us and we
decide whether to accept or reject it. If the application is accepted, a con-
tract is prepared and executed by our legally authorized officers. The con-
tract is then sent to you through your sales representative. See Distribution
of the contracts.
When a completed application and all other information necessary for process-
ing a purchase order is received, an initial purchase payment will be priced
no later than two business days after we receive the order. While attempting
to finish an incomplete application, we may hold the initial purchase payment
for no more
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than five business days. If the incomplete application cannot be completed
within those five days, you will be informed of the reasons, and the purchase
payment will be returned immediately. Once the application is complete, the
initial purchase payment must be priced within two business days.
Who can invest
To apply for a contract, you must be of legal age in a state where the con-
tracts may be lawfully sold and also be eligible to participate in any of the
qualified or nonqualified plans for which the contracts are designed. The
contractowner, joint owner, and annuitant cannot be older than age 90.
Purchase payments
Purchase payments are payable to us at a frequency and in an amount selected
by you in the application. The minimum initial purchase payment is $25,000.
For any contract issued to employees and registered representatives of any
member of the selling group and their spouses and minor children, or to offi-
cers, directors, trustees or bona-fide full-time employees and their spouses
and minor children, of Lincoln Financial Group or The Capital Group, Inc. or
their affiliated or managed companies (based upon the contractowner's status
at the time the contract was purchased), the minimum initial purchase payment
is $10,000. The minimum annual amount for additional purchase payments is
$300. The minimum payment to the contract at any one time must be at least
$100 ($25 if transmitted electronically). Purchase payments in total may not
exceed $2 million for an owner or $1 million for each joint owner without Lin-
coln Life approval. If you stop making purchase payments, the contract will
remain in force as a paid-up contract. However, we may terminate the contract
as allowed by your state's non-forfeiture law for individual deferred annui-
ties. Purchase 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 payment of any death benefit, whichever comes first. Lincoln Life reserves
the right to limit purchase payments made to the contract.
Valuation date
Accumulation and annuity units will be valued once daily at the close of
trading (currently, normally, 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
Purchase payments are placed into the VAA's subaccounts, each of which invests
in shares of the class of its corresponding fund of the series, according to
your instructions.
The minimum amount of any purchase payment which can be put into any one
subaccount is $20. Upon allocation to a subaccount, purchase payments are con-
verted into accumulation units. The number of accumulation units credited is
determined by dividing the amount allocated to each subaccount by the value of
an accumulation unit for that subaccount on the valuation date on which the
purchase payment is received at our home office if received before 4:00 p.m.,
New York time. If the purchase payment is received at or after 4:00 p.m., New
York time, we will use the accumulation unit value computed on the next valua-
tion date. The number of accumulation units determined in this way is not
changed by any subsequent change in the value of an accumulation unit. Howev-
er, 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.
Valuation of accumulation units
Purchase payments allocated to the VAA are converted into accumulation units.
This is done by dividing each purchase payment by the value of an accumulation
unit for the valuation period during which the purchase payment is allocated
to the VAA. The accumulation unit value for each subaccount was or will be es-
tablished at the inception of the subaccount. It may increase or decrease from
valuation period to valuation period. The accumulation unit value for a
subaccount for a later valuation period is determined as follows:
(1) The total value of the fund shares held in the subaccount is calculated by
multiplying the number of fund shares owned by the subaccount at the be-
ginning of the valuation period by the net asset value per share of the
fund at the end of the valuation period, and adding any dividend or other
distribution of the fund if an ex-dividend date occurs during the valua-
tion period; minus
(2) The liabilities of the subaccount at the end of the valuation period;
these liabilities include daily charges imposed on the subaccount, and may
include a charge or credit with respect to any taxes paid or reserved for
by us that we determine result from the operations of the VAA; and
(3) The result of (2) is divided by the number of subaccount units outstanding
at the beginning of the valuation period.
The daily charges imposed on a 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. Be-
cause 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 corre-
sponding accumulation unit values on any given day.
Transfers between subaccounts on or before the annuity commencement date
After the first thirty days from the effective date of your contract, you may
transfer all or a portion of your
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investment from one subaccount to another. A transfer involves the surrender
of accumulation units in one subaccount and the purchase of accumulation units
in the other subaccount. A transfer will be done using the respective accumu-
lation unit values determined at the end of the valuation date on which the
transfer request is received.
Transfers are limited to twelve (12) per contract year unless otherwise autho-
rized by Lincoln Life. This limit does not apply to transfers made under a
dollar cost averaging, portfolio rebalancing, or cross-reinvestment program
elected on forms available from us. (See Additional services and the SAI for
more information about these programs.) The minimum amount which may be trans-
ferred between subaccounts is $300 (or the entire amount in the subaccount, if
less than $300). If the transfer from a subaccount would leave you with less
than $300 in the subaccount, we may transfer the total balance of the
subaccount.
A transfer may be made by writing to our home office or, if a Telephone Ex-
change Authorization form (available from us) is on file with us, by a toll-
free telephone call or by the Lincoln Life internet site. In order to prevent
unauthorized or fraudulent telephone transfers, we may require the caller to
provide certain identifying information before we will act upon his or her in-
structions. 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 in-
herent risk involved. Frequent transfers based on short-term expectations may
increase the risk that a transfer will be made at an inopportune time. This
contract is not designed for professional market timing organizations or other
entities using programmed and frequent transfers.
Repeated patterns of frequent transfers are disruptive to the operation of the
subaccounts, and should Lincoln Life become aware of such disruptive practic-
es, Lincoln Life may refuse to permit such transfers.
Payment or transfer may be delayed as permitted by the 1940 Act.
Transfers after the annuity commencement date
You may transfer all or a portion of your investment in one subaccount to an-
other subaccount of the contract. Those transfers will be limited to three
times per contract year. You may also transfer from a variable annuity payout
to a fixed annuity payout. No transfers are allowed from the fixed side of the
contract to the subaccounts.
Additional Services
There are four additional services available to you under your contract: dol-
lar-cost averaging (DCA), automatic withdrawal service (AWS), cross-reinvest-
ment service and portfolio rebalancing. In order to take advantage of one of
these services, you will need to complete the election form for the service
that is available from us. For further detailed information on these services,
please see Advertising and sales literature in the SAI.
Dollar-cost averaging allows you to transfer amounts from the DCA fixed ac-
count or certain variable subaccounts into the variable subaccounts on a
monthly basis. The minimum amount that can be dollar cost averaged is $1,500.
The automatic withdrawal service (AWS) provides for an automatic periodic
withdrawal of your contract value. The minimum contract value required to es-
tablish an AWS is $10,000.
The cross-reinvestment service allows you to automatically transfer the ac-
count value in a designated variable subaccount that exceeds a baseline amount
to another specific variable subaccount at specific intervals. The minimum
contract value required for this service is $10,000.
Portfolio rebalancing is an option that restores to a pre-determined level the
percentage of contract value allocated to each variable account subaccount.
The rebalancing may take place monthly, quarterly, semi-annually or annually.
Death benefit before the annuity commencement date
You may designate a beneficiary during your lifetime and change the benefi-
ciary by filing a written request with our home office. Each change of benefi-
ciary revokes any previous designation. We reserve the right to request that
you send us the contract for endorsement of a change of beneficiary.
Upon the death of the contractowner, a death benefit will be paid to the bene-
ficiary. Upon the death of a joint owner, the death benefit will be paid to
the surviving joint owner. Upon the death of an annuitant who is not the
contractowner or joint owner, a death benefit may be paid to the contractowner
(and joint owner, if applicable, in equal shares). If the contractowner is a
corporation or other non-individual (non-natural person), the death of the an-
nuitant will be treated as death of the contractowner. Death benefits are tax-
able. See Federal tax matters.
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If the death occurs before the annuity commencement date and the enhanced
guaranteed minimum death benefit (EGMDB) is in effect, the death benefit paid
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 contract anniversary date (including the in-
ception date) for ages up to, and including, the deceased's age 80. The high-
est contract value is increased by purchase payments and is decreased by par-
tial withdrawals, partial annuitizations, and any premium taxes incurred sub-
sequent to the anniversary date on which the highest contract value is ob-
tained.
If the EGMDB is not in effect, the death benefit will be equal to the guaran-
tee of principal death benefit, which is the greater of contract value as of
the day Lincoln Life approved the payment of the claim or the sum of all pur-
chase payments, minus all withdrawals, partial annuitizations and premium tax
incurred.
If the beneficiary is the spouse of the contractowner, then the spouse may
elect to continue the contract as owner.
If there are joint owners, upon the death of the first contractowner, Lincoln
Life will pay a death benefit to the surviving joint owner. 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 is the spouse of the de-
ceased joint owner he/she may continue the contract as sole contractowner.
Upon the death of the spouse who continues the contract, Lincoln Life will pay
a death benefit to the designated beneficiary(s).
Upon the death of a contractowner, joint owner or annuitant, if the surviving
spouse continues the contract, any portion of the death benefit that would
have been payable (if the contract had not been continued) that exceeds the
current contract value will be credited to the contract. This provision ap-
plies only one time for each contract.
If an annuitant who is not the contractowner or joint owner dies, then the
contingent annuitant, if named, becomes the annuitant and no death benefit is
payable on the death of the annuitant. If no contingent annuitant is named,
the contractowner (or younger of joint owners) becomes the annuitant. Alterna-
tively, the contractowner may elect a death benefit payable to the
contractowner (and joint owner, if applicable, in equal shares) if the annui-
tant named on this contract has not been changed, unless the change occurred
because of the death of a prior annuitant.
Notification of the election of this death benefit must be received by Lincoln
Life within 75 days of the death of the annuitant. If no contractowner is liv-
ing on the date of death of the annuitant, the death benefit will be available
to the beneficiary. The contract terminates when any death benefit is paid due
to the death of the annuitant. A death benefit payable on the death of the an-
nuitant will not be paid if the annuitant has been changed subsequent to the
effective date of this contract unless the change occurred because of the
death of a prior annuitant.
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 (e.g. an original certified death certificate), or any other proof
of death satisfactory to us, of the death; (2) written authorization for pay-
ment; and (3) our receipt of all required claim forms, fully completed. If the
beneficiary is a minor, court documents appointing the guardian/custodian must
be submitted.
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, joint owner or annu-
itant who is age 80 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 Discontinu-
ance form and sending it to Lincoln Life. The benefit will be discontinued as
of the valuation date we receive the request, and we will stop 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 a lump sum settlement is elected, the proceeds will be mailed within seven
days of approval by us of the claim subject to the laws, regulations and tax
code governing payment of death benefits. This payment may be postponed as
permitted by the Investment Company Act of 1940.
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 inter-
est 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.
Unless the contractowner has already selected a settlement option, the benefi-
ciary may choose the method of payment of the death benefit. The death benefit
payable to the beneficiary or joint owner must be distributed within five
years of the contractowner's date of death unless the beneficiary begins re-
ceiving 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 be-
yond the beneficiary's life expectancy.
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The death benefit payable on the death of the annuitant will be distributed in
either a lump sum settlement or under an annuity payout. The annuity payout
must be selected within 60 days after Lincoln Life has approved the death
claim.
Joint ownership
If the contract has joint owners, 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. Not more than two
owners (an owner and joint owner) may be named and contingent owners are not
permitted.
Surrenders and withdrawals
Before the annuity commencement date, we will allow the surrender of the con-
tract or a withdrawal of the contract value upon your written request, subject
to the rules discussed below. Surrender or withdrawal rights after the annuity
commencement date are not available at this time, but may be available in the
future.
The amount available upon surrender/withdrawal is the contract value less any
applicable fees and taxes at the end of the valuation period during which the
written request for surrender/withdrawal is received at the home office. The
minimum amount which can be withdrawn is $300. Unless a request for withdrawal
specifies otherwise, withdrawals will be made from all subaccounts within the
VAA and from the DCA fixed account in the same proportion that the amount of
withdrawal bears to the total contract value. Unless prohibited,
surrender/withdrawal payments will be mailed within seven days after we re-
ceive a valid written request at the home office. The payment may be postponed
as permitted by the 1940 Act.
The tax consequences of a surrender/withdrawal are discussed later in this
booklet. See Federal tax matters.
Special restrictions on surrenders/withdrawals apply if your contract is pur-
chased as part of a retirement plan of a public school system or 501(c)(3) or-
ganization under Section 403(b) of the tax code. Beginning January 1, 1989, in
order for a contract to retain its tax-qualified status, Section 403(b) pro-
hibits a withdrawal from a 403(b) contract of post-1988 contributions (and
earnings on those contributions) pursuant to a salary reduction agreement.
However, this restriction does not apply if the annuitant (a) attains age 59
1/2, (b) separates from service, (c) dies, (d) becomes totally and permanently
disabled and/or (e) experiences financial hardship (in which event the income
attributable to those contributions may not be withdrawn). Pre-1989 contribu-
tions and earnings through December 31, 1988, are not subject to the previ-
ously stated restriction. Funds transferred to the contract from a 403(b)(7)
custodial account will also be subject to the restrictions.
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 sur-
rendered in accordance with applicable law for individual deferred annuities.
Participants in the Texas Optional Retirement Program should refer to the Re-
strictions under the Texas Optional Retirement Program, later in this Prospec-
tus.
Delay of payments
Contract proceeds from the VAA will be paid within seven days, except (i) when
the NYSE is closed (other than weekends and holidays); (ii) times when market
trading is restricted or the SEC declares an emergency, and we cannot value
units or the funds cannot redeem shares; or (iii) when the SEC so orders to
protect contractowners.
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
Commissions are paid to dealers under different commission options. The maxi-
mum commission paid as a percentage of each purchase payment is 2.50% plus on-
going annual compensation of up to 1.00%. Alternate commission schedules are
available with lower initial commission amounts based on purchase payments. At
times, additional sales incentives (up to an annual continuing 0.10% of con-
tract value) may be provided to dealers maintaining certain sales volume lev-
els. Upon annuitization, the commissions paid to dealers are a maximum of
6.00% of account annuitized and/or an annual continuing commission of up to
1.00% (or up to 1.10% for dealers maintaining certain sales volume levels) of
statutory reserves. These commissions are not deducted from purchase payments
or contract value; they are paid by us.
Ownership
As contractowner, you have all rights under the contract. According to Indiana
law, the assets of the VAA are held for the exclusive benefit of all
contractowners and their designated beneficiaries; and the assets of the VAA
are not chargeable with liabilities arising from any other business that we
may conduct. Qualified contracts may not be assigned or transferred. Non-qual-
ified 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.
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Annuity payouts
When you apply for a contract, you may select any annuity commencement date
permitted by law. 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. The contract provides that all or
part of the contract value may be used to purchase an annuity.
You may elect annuity payouts in monthly, quarterly, semiannual or annual in-
stallments. If the payouts from any subaccount would be or become less than
$50, we have the right to reduce their frequency until the payouts are at
least $50 each. Following are explanations of the variable annuity options
available.
Annuity options
Life Annuity. This option offers a periodic payout during the lifetime of the
annuitant and ends with the last payout before the death of the annuitant.
This option offers the highest periodic payout since there is no guarantee of
a minimum number of payouts or provision for a death benefit for beneficia-
ries. However, there is the risk under this option that the 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 guaran-
tees periodic payouts during a designated period, usually 10 or 20 years, and
then continues throughout the lifetime of the annuitant. The designated period
is selected by the contractowner.
Joint Life Annuity. This option offers a periodic payout during the joint
lifetime of the annuitant and a designated joint annuitant. The payouts con-
tinue during the lifetime of the survivor.
Joint Life Annuity with Guaranteed Period. This option guarantees periodic
payouts during a designated period, usually 10 or 20 years, and continues dur-
ing the joint lifetime of the annuitant and a designated joint annuitant. The
payouts continue during the lifetime of the survivor. The designated period is
selected by the contractowner.
Joint Life and Two Thirds to Survivor Annuity. This option provides a periodic
payout during the joint lifetime of the annuitant and a designated joint annu-
itant. When one of the joint annuitants dies, the survivor receives two thirds
of the periodic payout made when both were alive.
Joint Life and Two-Thirds Survivor Annuity with Guaranteed Period. This option
provides a periodic payout during the joint lifetime of the annuitant and a
joint annuitant. When one of the joint annuitants dies, the survivor receives
two-thirds of the periodic payout made when both were alive. This option fur-
ther provides that should one or both of the annuitants dies during the
elected guaranteed period, usually 10 or 20 years, full benefit payment will
continue for the rest of the guaranteed period.
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 minus
(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
Under the annuity options listed above, you may not make withdrawals. Other
options, with or without withdrawal features, may be made available by us. You
may pre-select an annuity payout option as a method of paying the death bene-
fit to a beneficiary. If you do, the beneficiary cannot change this payout op-
tion. At death, 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 tax code, if applicable. The mortality and expense risk charge of 1.30%
and the charge for administrative services of .10% 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 op-
tion or change the allocation of the investment among subaccounts up to 30
days before the scheduled annuity commencement date, upon written notice to
the home office. You must give us at least 30 days notice before the date on
which you want payouts to begin. If proceeds become available to a beneficiary
in a lump sum, the beneficiary may choose any annuity payout option.
Unless you select another option, the contract automatically provides for a
life annuity with annuity payouts guaranteed for 10 years (on a fixed, vari-
able or combination fixed and variable basis, in proportion to the account al-
locations at the time of annuitization) except when a joint life payout is re-
quired 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.
Variable annuity payouts
Variable annuity payouts will be determined using:
1. The contract value on the annuity commencement date, less any applicable
premium taxes;
2. The annuity tables contained in the contract;
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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.
Annuity payouts assume an investment return of 3%, 4%, 5% or 6% per year, as
applied to the applicable mortality table. The higher the assumed interest
rate you choose, the higher your initial annuity payment will be. The amount
of each payout after the initial payout will depend upon how the underlying
fund(s) perform, relative to the assumed rate. If the actual net investment
rate (annualized) exceeds the assumed rate, the payment will increase at a
rate proportional to the amount of such excess. Conversely, if the actual rate
is less than the assumed rate, annuity payments will decrease. The higher the
assumed interest rate, the less likely future annuity payments are to in-
crease, or the payments will increase more slowly than if a lower assumed rate
was used. There is a more complete explanation of this calculation in the SAI.
Federal tax matters
Introduction
The Federal income tax treatment of the contract is complex and sometimes un-
certain. The Federal income tax rules may vary with your particular circum-
stances. This discussion does not include all the Federal income tax rules
that may affect you and your contract. This discussion also does not address
other Federal tax consequences, or state or local tax consequences, associated
with the contract. As a result, you should always consult a tax advisor about
the application of tax rules to your individual situation.
Taxation of nonqualified annuities
This part of the discussion describes some of the Federal income tax rules ap-
plicable to nonqualified annuities. A nonqualified annuity is a contract not
issued in connection with a qualified retirement plan receiving special tax
treatment under the tax code, such as an IRA or a section 403(b) plan.
Tax deferral on earnings
The Federal income tax law generally does not tax any increase in your con-
tract value until you receive a contract distribution. However, for this gen-
eral rule to apply, certain requirements must be satisfied:
. An individual must own the contract (or the tax law must treat the contract
as owned by the individual).
. The investments of the VAA must be "adequately diversified" in accordance
with IRS regulations.
. Your right to choose particular investments for a contract must be limited.
. The annuity commencement date must not occur near the end of the annuitant's
life expectancy.
Contracts not owned by the individual
If a contract is owned by an entity (rather than an individual) the tax code
generally does not treat it as an annuity contract for Federal income tax pur-
poses. This means that the entity owning the contract pays tax currently on
the excess of the contract value over the purchase payments for the contract.
Examples of contracts where the owner pays current tax on the contract's earn-
ings are contracts issued to a corporation or a trust. Exceptions to this rule
exist. For example, the tax code treats a contract as owned by an individual
if the named owner is a trust or other entity that holds the contract as an
agent for an individual. However, this exception does not apply in the case of
any employer that owns a contract to provide deferred compensation for its em-
ployees.
Investments in the VAA must be diversified
For a contact to be treated as an annuity for Federal income tax purposes, the
investments of the VAA must be "adequately diversified." IRS regulations de-
fine standards for determining whether the investments of the VAA are ade-
quately diversified. If the VAA fails to comply with these diversification
standards, you could be required to pay tax currently on the excess of the
contract value over the contract purchase payments. Although we do not control
the investments of the underlying investment options, we expect that the un-
derlying investment options will comply with the IRS regulations so that the
VAA will be considered "adequately diversified."
Restrictions
Federal income tax law limits your right to choose particular investments for
the contract. Because the IRS has not issued guidance specifying those limits,
the limits are uncertain and your right to allocate contract value among
subaccounts may exceed those limits. If so, you would be treated as the owner
of the assets of the VAA and thus subject to current taxation on the income
and gains from those assets. We do not know what limits may be set by the IRS
in any guidance that it may issue and whether any such limits will apply to
existing contracts. We reserve the right to modify the contract without your
consent to try to prevent the tax law from considering you as the owner of the
assets of the VAA.
15
<PAGE>
Age at which annuity payouts begin
Federal income tax rules do not expressly identify a particular age by which
annuity payouts must begin. However, those rules do require that an annuity
contract provide for amortization, through annuity payouts, of the contract's
purchase payments and earnings. If annuity payouts under the contract begin or
are scheduled to begin on a date past the annuitant's 85th birthday, it is pos-
sible that the tax law will not treat the contract as an annuity for Federal
income tax purposes. In that event, you would be currently taxable on the ex-
cess of the contract value over the purchase payments of the contract.
Tax treatment of payments
We make no guarantees regarding the tax treatment of any contract or of any
transaction involving a contract. However, the rest of this discussion assumes
that your contract will be treated as an annuity for Federal income tax pur-
poses and that the tax law will not tax any increase in your contract value un-
til there is a distribution from your contract.
Taxation of withdrawals and surrenders
You will pay tax on withdrawals to the extent your contract value exceeds your
purchase payments in the contract. This income (and all other income from your
contract) is considered ordinary income. A higher rate of tax is paid on ordi-
nary income than on capital gains. You will pay tax on a surrender to the ex-
tent the amount you receive exceeds your purchase payments. In certain circum-
stances, your purchase payments are reduced by amounts received from your con-
tract that were not included in income.
Taxation of annuity payouts
The tax code imposes tax on a portion of each annuity payout (at ordinary in-
come tax rates) and treats a portion as a nontaxable return of your purchase
payments in the contract. We will notify you annually of the taxable amount of
your annuity payout. Once you have recovered the total amount of the purchase
payment in the contract, you will pay tax on the full amount of your annuity
payouts. If annuity payouts end because of the annuitant's death and before the
total amount of the purchase payments in the contract has been received, the
amount not received generally will be deductible.
Taxation of death benefits
We may distribute amounts from your contract because of the death of a
contractowner or an annuitant. The tax treatment of these amounts depends on
whether you or the annuitant dies before or after the annuity commencement
date.
. Death prior to the annuity commencement date--
. If the beneficiary receives death benefits under an annuity payout option,
they are taxed in the same manner as annuity payouts.
. If the beneficiary does not receive death benefits under an annuity payout
option, they are taxed in the same manner as withdrawal.
. Death after the annuity commencement date--
. If death benefits are received in accordance with the existing annuity
payout option, they are excludible from income if they do not exceed the
purchase payments not yet distributed from the contract. All annuity
payouts in excess of the purchase payments not previously received are
includible in income.
. If death benefits are received in a lump sum, the tax law imposes tax on
the amount of death benefits which exceeds the amount of purchase payments
not previously received.
Penalty taxes payable on withdrawals, surrenders, or annuity payouts
The tax code may impose a 10% penalty tax on any distribution from your con-
tract which you must include in your gross income. The 10% penalty tax does not
apply if one of several exceptions exists. These exceptions include withdraw-
als, surrenders or annuity payouts that:
. you receive on or after you reach age 59 1/2,
. you receive because you became disabled (as defined in the tax law),
. a beneficiary receives on or after your death, or
. you receive as a series of substantially equal periodic payments for your
life (or life expectancy).
Special rules if you own more than one annuity contract
In certain circumstances, you must combine some or all of the nonqualified an-
nuity contracts you own in order to determine the amount of an annuity payout,
a surrender or a withdrawal that you must include in income. For example, if
you purchase two or more deferred annuity contracts from the same life insur-
ance company (or its affiliates) during any calendar year, the tax code treats
all such contracts as one contract. Treating two or more contracts as one con-
tract could affect the amount of a surrender, withdrawal or an annuity payout
that you must include in income and the amount that might be subject to the
penalty tax described above.
Loans and assignments
Except for certain qualified contracts, the tax code treats any amount received
as a loan under a contract, and any assignment or pledge (or agreement to as-
sign or pledge) any portion of your contract value, as a withdrawal of such
amount or portion.
Gifting a contract
If you transfer ownership of your contract to a person other than your spouse
(or to your former spouse inci-
16
<PAGE>
dent to divorce), and receive a payment less than your contract's value, you
will pay tax on your contract value to the extent it exceeds your purchase
payments not previously received. The new owner's purchase payments in the
contract would then be increased to reflect the amount included in income.
Charges for a contract's death benefit
Your contract may have an EGMDB, for which you pay an annual charge, computed
daily. It is possible that the tax law may treat all or a portion of the EGMDB
charge as a contract withdrawal.
Loss of interest deduction
After June 8, 1997, if a contract is issued to a taxpayer that is not an indi-
vidual, or if a contract is held for the benefit of an entity, the entity will
lose a portion of its deduction for otherwise deductible interest expenses.
This disallowance does not apply if you pay tax on the annual increase in the
contract value. Entities that are considering purchasing a contract, or enti-
ties that will benefit from someone else's ownership of a contract, should
consult a tax advisor.
Qualified retirement plans
We also designed the contracts for use in connection with certain types of re-
tirement plans that receive favorable treatment under the tax code. Contracts
issued to or in connection with a qualified retirement plan are called "quali-
fied contracts." We issue contracts for use with different types of qualified
plans. The Federal income tax rules applicable to those plans are complex and
varied. As a result, this Prospectus does not attempt to provide more than
general information about use of the contract with various types of qualified
plans. Persons planning to use the contract in connection with a qualified
plan should obtain advice from a competent tax advisor.
Types of qualified contracts and terms of contracts
Currently, we may issue contracts in connection with the following types of
qualified plans:
. Individual Retirement Accounts and Annuities ("Traditional IRAs")
. Roth IRAs
. Simplified Employee Pensions ("SEPs")
. Savings Incentive Matched Plan for Employees ("SIMPLE 401(k) plans")
. Public school system and tax-exempt organization annuity plans ("403(b)
plans")
. Qualified corporate employee pension and profit sharing plans ("401(a)
plans") and qualified annuity plans ("403(a) plans")
. Self-employed individual plans ("H.R. 10 plans" or "Keogh Plans")
. Deferred compensation plans of state and local governments and tax-exempt
organizations ("457 plans").
Section 403(b) business will normally be accepted only for purchase payments
qualifying as a 403(b) lump sum transfer or rollover. We may issue a contract
for use with other types of qualified plans in the future.
We will amend contracts to be used with a qualified plan as generally neces-
sary to conform to tax law requirements for the type of plan. However, the
rights of a person to any qualified plan benefits may be subject to the plan's
terms and conditions, regardless of the contract's terms and conditions. In
addition, we are not bound by the terms and conditions of qualified plans to
the extent such terms and conditions contradict the contract, unless we con-
sent.
Tax treatment of qualified contracts
The Federal income tax rules applicable to qualified plans and qualified con-
tracts vary with the type of plan and contract. For example,
. Federal tax rules limit the amount of purchase payments that can be made,
and the tax deduction or exclusion that may be allowed for the purchase pay-
ments. These limits vary depending on the type of qualified plan and the
plan participant's specific circumstances, e.g., the participant's compensa-
tion.
. Under most qualified plans, e.g., 403(b) plans and Traditional IRAs, the an-
nuitant must begin receiving payments from the contract in certain minimum
amounts by a certain age, typically age 70 1/2. However, these "minimum dis-
tribution rules" do not apply to a Roth IRA.
. Loans are allowed under certain types of qualified plans, but Federal income
tax rules prohibit loans under other types of qualified plans. For example,
Federal income tax rules permit loans under some section 403(b) plans, but
prohibit loans under Traditional and Roth IRAs. If allowed, loans are sub-
ject to a variety of limitations, including restrictions as to the loan
amount, the loan's duration, and the manner of repayment. Your contract or
plan may or may not permit loans.
Tax treatment of payments
Federal income tax rules generally include distributions from a qualified con-
tract in the recipient's income as ordinary income. These taxable distribu-
tions will include purchase payments that were deductible or excludible from
income. Thus, under many qualified contracts the total amount received is in-
cluded in income since a deduction or exclusion from income was taken for pur-
chase payments. There are exceptions. For example, you do not include amounts
received from a Roth IRA in income if certain conditions are satisfied.
17
<PAGE>
Failure to comply with the minimum distribution rules applicable to certain
qualified plans, such as Traditional IRAs, will result in the imposition of an
excise tax. This excise tax generally equals 50% of the amount by which a min-
imum required distribution exceeds the actual distribution from the qualified
plan.
Federal penalty taxes payable on distributions
The tax code may impose a 10% penalty tax on the amount received from the
qualified contract that must be included in income. The tax code does not im-
pose the penalty tax if one of several exceptions applies. The exceptions vary
depending on the type of qualified contract you purchase. For example, in the
case of an IRA, exceptions provide that the penalty tax does not apply to a
withdrawal, surrender or annuity payout:
. received on or after the annuitant reaches age 59 1/2,
. received on or after the annuitant's death or because of the annuitant's
disability (as defined in the tax law),
. received as a series of substantially equal periodic payments for the
annuitant's life (or life expectancy), or
. received as reimbursement for certain amounts paid for medical care.
These exceptions, as well as certain others not described here, generally ap-
ply to taxable distributions from other qualified plans. However, the specific
requirements of the exception may vary.
Transfers and direct rollovers
In many circumstances, money may be moved between qualified contracts and
qualified plans by means of a rollover or transfer. Special rules apply to
such rollovers and transfers. If the applicable rules are not followed, you
may suffer adverse Federal income tax consequences, including paying taxes
which might not otherwise have had to be paid. A qualified advisor should al-
ways be consulted before you move or attempt to move funds between any quali-
fied plan or contract and another qualified plan or contract.
The direct rollover rules apply to certain payments (called "eligible rollover
distributions") from section 401(a) plans, section 403(a) or (b) plans, H.R.
10 plans and contracts used in connection with these types of plans. (The di-
rect rollover rules do not apply to distributions from IRAs or section 457
plans.) The direct rollover rules require that we withhold Federal income tax
equal to 20% of the eligible rollover distribution from the distribution
amount, unless you elect to have the amount directly transferred to certain
qualified plans or contracts. Before we send a rollover distribution, we will
provide the recipient with a notice explaining these requirements and how the
20% withholding can be avoided by electing a direct rollover.
The EGMDB and IRAs
Pursuant to IRS regulations, IRAs may not invest in life insurance contracts.
We do not believe that these regulations prohibit the EGMDB from being pro-
vided under the contracts when we issue the contract as Traditional IRAs or
Roth IRAs. However, the law is unclear and it is possible that the presence of
the EGMDB under a contract issued as a Traditional IRA or Roth IRA could re-
sult in increased taxes to you.
Federal income tax withholding
We will withhold and remit to the IRS a part of the taxable portion of each
distribution made under a contract unless the distributee notifies us at or
before the time of the distribution that tax is not to be withheld. In certain
circumstances, Federal income tax rules may require us to withhold tax. At the
time a withdrawal, surrender or annuity payout is requested, we will give the
recipient an explanation of the withholding requirements.
Tax status of Lincoln Life
Under existing Federal income tax laws, Lincoln Life does not pay tax on in-
vestment income and realized capital gains of the VAA. Lincoln Life does not
expect that it will incur any Federal income tax liability on the income and
gains earned by the VAA. We, therefore, do not impose a charge for Federal in-
come taxes. If Federal income tax law changes and we must pay tax on some or
all of the income and gains earned by the VAA, we may impose a charge against
the VAA to pay the taxes.
Changes in law
The above discussion is based on the tax code, IRS regulations and interpreta-
tions existing on the date of this Prospectus. However, Congress, The IRS and
the courts may modify these authorities, sometimes retroactively.
Voting rights
As required by law, we will vote the series shares held in the VAA at meetings
of the shareholders of the series. The voting will be done according to the
instructions of contractowners who have interests in any subaccounts which in-
vest in classes of funds of the series. If the 1940 Act or any regulation un-
der it should be amended or if present interpretations should change, and if
as a result we determine that we are permitted to vote the series shares in
our own right, we may elect to do so.
The number of votes which you have the right to cast will be determined by ap-
plying your percentage interest in a subaccount to the total number of votes
attributable to the subaccount. In determining the number of votes, fractional
shares will be recognized.
Series shares of a class held in a subaccount for which no timely instructions
are received will be voted by us in
18
<PAGE>
proportion to the voting instructions which are received for all contracts par-
ticipating in that subaccount. Voting instructions to abstain on any item to be
voted on will be applied on a pro-rata basis to reduce the number of votes eli-
gible to be cast.
Whenever a shareholders meeting is called, each person having a voting interest
in a subaccount will receive proxy voting material, reports and other materials
relating to the series. Since the series engages in shared funding, other per-
sons or entities besides Lincoln Life may vote series shares. See Investments
of the variable annuity account--Sale of fund shares.
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 con-
tract canceled under this provision will be void. We will return the contract
value as of the date of receipt of the cancellation, plus any premium taxes
which had been deducted. A purchaser who participates in the VAA is subject to
the risk of a market loss during the free-look period.
For contracts written in those states whose laws require that we assume this
market risk during the free-look period, a contract may be canceled, subject to
the conditions explained before, except that we will return only the purchase
payment(s).
State regulation
As a life insurance company organized and operated under Indiana law, we are
subject to provisions governing life insurers and to regulation by the Indiana
Commissioner of Insurance.
Our books and accounts are subject to review and examination by the Indiana In-
surance Department at all times. A full examination of our operations is con-
ducted 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 partici-
pants in the Texas Optional Retirement Program (ORP) to redeem their interest
in a variable annuity contract issued under the ORP only upon:
1. Termination of employment in all institutions of higher education as defined
in Texas law;
2. Retirement; or
3. Death.
Accordingly, a participant in the ORP will be required to obtain a certificate
of termination from their employer before accounts can be redeemed.
Records and reports
As presently required by the 1940 Act and applicable regulations, we are re-
sponsible 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 informa-
tion 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 informa-
tion about the VAA, Lincoln Life and the contracts offered. Statements in this
Prospectus about the content of contracts and other legal instruments are sum-
maries. For the complete text of those contracts and instruments, please refer
to those documents as filed with the SEC.
We are a member of the Insurance Marketplace Standards Association ("IMSA") and
may include the IMSA logo and information about IMSA membership in our adver-
tisements. Companies that belong to IMSA subscribe to a set of ethical stan-
dards covering the various aspects of sales and services for individually sold
life insurance and annuities.
19
<PAGE>
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 rou-
tine and in the ordinary course of business. In some instances they include
claims for unspecified or substantial punitive damages and similar types of
relief in addition to amounts for equitable relief. After consultation with
legal counsel and a review of available facts, it is management's opinion that
the ultimate liability, if any, under these suits will not have a material ad-
verse effect on the financial position of Lincoln Life.
With the recent filing of a lawsuit alleging fraud in the sale of interest-
sensitive universal and whole life policies, Lincoln Life now has three such
actions pending. As of the date of this Prospectus, the courts have not certi-
fied a class in any of the suits. In each of these lawsuits, 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 discovery stages of litigation, and it is premature to make assessments
about potential loss, if any. Management is defending these suits vigorously.
The amount of liability, if any, which may arise as a result of these lawsuits
cannot be reasonably estimated at this time. In a fourth lawsuit, a settlement
has been preliminarily approved by the court, and a class has been condition-
ally certified for settlement purposes. Two similar lawsuits were previously
resolved and dismissed.
20
<PAGE>
Statement of additional information table of contents for Separate Account H
<TABLE>
<CAPTION>
Item
----------------------------------------------------
<S> <C>
General information and history of Lincoln Life B-2
----------------------------------------------------
Special terms B-2
----------------------------------------------------
Services B-2
----------------------------------------------------
Principal underwriter B-2
----------------------------------------------------
Purchase of securities being offered B-2
</TABLE>
For a free copy of the SAI please see page one of this booklet.
<TABLE>
<CAPTION>
Item
--------------------------------------
<S> <C>
Calculation of investment results B-2
--------------------------------------
Annuity payouts B-5
--------------------------------------
Advertising and sales literature B-5
--------------------------------------
Financial statements B-7
</TABLE>
21
<PAGE>
The Lincoln National Life Insurance Company
Attn: American Legacy Customer Service
P. O. Box 2348
Fort Wayne, IN 46802
7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7
PLACE
STAMP
HERE
POSTAL SERVICES
WILL NOT
DELIVER
UNLESS STAMPED
<PAGE>
7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7
STATEMENT OF ADDITIONAL INFORMATION REQUEST CARD
AMERICAN LEGACY III C-Share
(LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H)
AMERICAN VARIABLE INSURANCE SERIES
Please send me a copy of the current Statement of Additional Information
for AMERICAN LEGACY III C-Share and American Variable Insurance Series.
(Please print)
Name: _______________________________________________________________
Address: ____________________________________________________________
City: _________________________________________________ State: Zip:
<PAGE>
The American Legacy III C-Share
Lincoln NationalVariable Annuity Account H (Registrant)
The Lincoln NationalLife Insurance Company (Depositor)
Statement of Additional Information (SAI)
This Statement of Additional Information should be read in conjunction with the
American
Legacy III C-Share Prospectus of Lincoln National Variable Annuity Account H
dated .
You may obtain a copy of the American Legacy III C-Share Prospectus on request
and without charge.
Please write American Legacy Customer Service, The Lincoln National Life Insur-
ance 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
------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Item Page
<S> <C>
Calculation of investment results B-2
Annuity payouts B-5
Advertising and sales literature B-5
Financial statements B-7
</TABLE>
This SAI is not a Prospectus.
The date of this SAI is .
<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 in-
surance of life and health insurance contracts and annuities, and is also a
professional reinsurer. Lincoln Life is wholly owned by Lincoln National Cor-
poration (LNC), a publicly held insurance and financial services holding com-
pany 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 (Ex-
change) 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, In-
dependence 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 VAA financial statements and the statutory-basis financial statements of
Lincoln Life appearing in this SAI and Registration Statement have been au-
dited by Ernst & Young LLP, independent auditors, as set forth in their re-
ports also appearing elsewhere in this document and in the Registration State-
ment. The financial statements audited by Ernst & Young LLP have been included
in this document in reliance on their reports given on their authority as ex-
perts in accounting and auditing.
Keeper of records
All accounts, books, records and other documents which are required to be
maintained for the VAA are maintained by Lincoln Life or by third parties re-
sponsible to Lincoln Life. We have entered into an agreement with the Delaware
Management Company, 2005 Market Street, Philadelphia, PA 19203, to provide ac-
counting 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
be the principal underwriter and to distribute the contracts through certain
legally authorized sales persons and organizations (brokers). AFD and its bro-
kers 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. There are no spe-
cial purchase plans for any class of prospective buyers.
Both before and after the annuity commencement date, there are exchange privi-
leges between subaccounts, and from the VAA to the general account subject to
restrictions set out in the Prospectus. See The contracts, in the Prospectus.
No exchanges are permitted between the VAA and other separate accounts.
The offering of the contracts is continuous.
Calculation of investment results
The seven-day yield is determined by calculating the change in unit value for
the base period (the 7-day period ended December 31, 1999); then dividing this
figure by the account value at the beginning of the period; then annualizing
this result by the factor of 365/7. This yield includes all deductions charged
to the contractowner's account, and excludes any realized gains and losses
from the sale of securities.
Standard investment results:
Standard performance is based on a formula to calculate performance that is
prescribed by the SEC. Under rules issued by the SEC, standard performance
must be included in any marketing material that discusses the performance of
the VAA and the subaccounts. This information represents past performance and
does not indicate or represent future performance.
Average annual return for each period is determined by finding the average an-
nual compounded rate of return over each period that would equate the initial
B-2
<PAGE>
amount invested to the ending redeemable value for that period, according to
the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial purchase payment of $1,000
T = average annual total return for the period in question
N = number of years
ERV = ending 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
period thereof)
The formula assumes that: (1) all recurring fees have been charged to the
contractowner accounts; and (2) there will be a complete redemption upon the
anniversary of the 1-year, 5-year, or 10-year period in question.
In accordance with SEC guidelines, we will report standard performance back to
the first date that the fund became available in the VAA. Because standard
performance reporting periods of less than one year could be misleading, we
may report "N/A's" for standard performance until one year after the option
became available in the separate account.
Standard Performance Data:
Period Ending December 31, 1999
<TABLE>
<CAPTION>
10 Years
1- 5- or Since
Year Years Inception
With With With
EGMDB EGMDB EGMDB
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Global Growth Subaccount 66.90% N/A 35.80%
(commenced activity 4/30/97)
Global Small Capitalization 88.24% N/A 47.00%
Subaccount
(commenced activity 4/30/98)
Growth Subaccount 54.70% 30.77% 19.10%
(commenced activity 8/1/89)
International Subaccount 73.09% 22.96% 14.58%
(commenced activity 5/1/90)
New World Subaccount N/A N/A 17.14%
(commenced activity 6/17/99)
Growth-Income Subaccount 9.38% 19.00% 12.50%
(commenced activity 8/1/89)
Asset Allocation Subaccount 5.17% 14.81% 10.09%
(commenced activity 8/1/89)
Bond Subaccount 0.88% N/A 3.78%
(commenced activity 1/2/96)
High-Yield Bond Subaccount 3.81% 8.42% 8.17%
(commenced activity 8/1/89)
U.S. Gov't./AAA Subaccount -2.40% 4.79% 5.16%
(commenced activity 8/1/89)
Cash Management Subaccount 2.86% 3.19% 2.93%
(commenced activity 8/1/89)
</TABLE>
The performance figures shown reflect the cost of the EGMDB option. If
contractowners had chosen to eliminate the EGMDB, their returns would have
been higher.
B-3
<PAGE>
Non-standard investment results:
The VAA may report its results over various periods -- daily, monthly, three-
month, six-month, year-to-date, yearly (fiscal year), three, five, ten years
or more and lifetime -- and compare its results to indices and other variable
annuities in sales materials including advertisements, brochures and reports.
Performance information for the periods prior to the date that a fund became
available in the VAA will be calculated based on (1) the performance of the
fund adjusted for contract charges (ie: mortality and expense risk fees, any
applicable administrative charges, and the management and other expenses of
the fund) and (2) the assumption that the subaccounts were in existence for
the same periods as indicated for the fund. It may or may not reflect charges
for any options (ie: EGMDB) that were in effect during the time periods shown.
This performance is referred to as non-standardized performance data. Such re-
sults may be computed on a cumulative and/or annualized basis. We may also re-
port performance assuming that you deposited $10,000 into a subaccount at in-
ception of the underlying fund or 10 years ago (whichever is less). This non-
standard performance may be shown as a graph illustrating how that deposit
would have increased or decreased in value over time based on the performance
of the underlying fund adjusted for contract charges. This information repre-
sents past performance and does not indicate or represent future performance.
The investment return and value of a contract will fluctuate so that
contractowner's investment may be worth more or less than the original invest-
ment. Cumulative quotations are arrived at by calculating the change in accu-
mulation 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 ap-
plying a formula which reflects the level rate of return, which if earned over
the entire base period, would produce the cumulative return.
Non-Standard Performance Data (adjusted for contract expense charges):
Period Ending December 31, 1999
<TABLE>
<CAPTION>
1- 3- 5- 10- Since
YTD year year year year Inception
With With With With With With
EGMDB EGMDB EGMDB EGMDB EGMDB EGMDB
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Global Growth Subaccount 66.90% 66.90% N/A N/A N/A 35.80%
(commenced activity 4/30/97)
Global Small Capitalization 88.24% 88.24% N/A N/A N/A 47.00%
Subaccount
(commenced activity 4/30/98)
Growth Subaccount 54.70% 54.70% 37.99% 30.77% 19.10% 17.70%
(as if commenced activity 2/8/84)
International Subaccount 73.09% 73.09% 30.13% 22.96% N/A 14.58%
(as if commenced activity 5/1/90)
New World Subaccount N/A N/A N/A N/A N/A 17.14%
(as if commenced activity 6/17/99)
Growth-Income Subaccount 9.38% 9.38% 16.20% 19.00% 12.50% 13.68%
(as if commenced activity 2/8/84)
Asset Allocation Subaccount 5.17% 5.17% 11.35% 14.81% 10.09% 9.87%
(as if commenced activity 8/1/89)
Bond Subaccount 0.88% 0.88% 3.74% N/A N/A 3.78%
(as if commenced activity 1/2/96)
High-Yield Bond Subaccount 3.81% 3.81% 4.12% 8.42% 8.17% 9.62%
(as if commenced activity 2/8/84)
U.S. Gov't./AAA Subaccount -2.40% -2.40% 3.32% 4.79% 5.16% 5.61%
(as if commenced activity 12/1/85)
Cash Management Subaccount 2.86% 2.86% 3.08% 3.19% 2.93% 3.84%
(as if commenced activity 2/8/84)
</TABLE>
The performance figures shown reflect the cost of the EGMDB option. If
contractowners had chosen to eliminate the EGMDB, their returns would have
been higher.
B-4
<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 calcula-
tion: first, it determines the dollar amount of the first payout; second, it
credits the contract with a fixed number of annuity units based on the amount
of the first payout; and third, it calculates the value of the annuity units
each period thereafter. These steps are explained 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 con-
tract valued as of the annuity commencement date (less any premium taxes) to
the annuity tables contained in the contract. The first variable annuity pay-
out will be paid 14 days after the annuity commencement date. This day of the
month will become the day on which all future annuity payouts will be paid.
Amounts shown in the tables are based on the 1983 Table "a" Individual Annuity
Mortality Tables, modified, with an assumed investment return at the rate of
3%, 4%, 5% or 6% per annum. The first annuity payout is determined by multi-
plying 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 assumed interest rate is
the measuring point for subsequent annuity payouts. If the actual net invest-
ment rate (annualized) exceeds the assumed rate, the payout will increase at a
rate equal to the amount of such excess. Conversely, if the actual rate is
less than the assumed rate, annuity payouts will decrease. If the assumed rate
of interest were to be increased, annuity payouts would start at a higher
level but would decrease more rapidly or increase more slowly.
Lincoln Life may use sex distinct annuity tables in contracts that are not as-
sociated with employer sponsored plans and where not prohibited by law.
At an annuity commencement date, the contract is credited with annuity units
for each subaccount on which variable annuity payouts are based. The number of
annuity units to be credited is determined by dividing the amount of the first
periodic payout by the value of an annuity unit in each subaccount selected.
Although the number of annuity units is fixed by this process, the value of
such units will vary with the value of the underlying fund. The amount of the
second and subsequent periodic payouts is determined by multiplying the
contractowner's fixed number of annuity units in each subaccount by the appro-
priate annuity unit value for the valuation date ending 14 days prior to the
date that payout is due.
The value of each subaccount's annuity unit will be set initially at $1.00.
The annuity unit value for each subaccount at the end of any valuation date is
determined by multiplying the subaccount annuity unit value for the immedi-
ately preceding valuation date by the product of:
(a) The net investment factor of the subaccount for the valuation period for
which the annuity unit value is being determined, and
(b) A factor to neutralize the assumed investment return in the annuity table.
The value of the annuity units is determined as of a valuation date 14 days
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.
Advertising and sales
literature
As set forth in the Prospectus, Lincoln Life may refer to the following orga-
nizations (and others) in its marketing materials:
A.M. Best's Rating System is designed to evaluate the various factors affect-
ing 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 quantita-
tive 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 mea-
sures performance of equity 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 di-
versification representing over 1,000 companies across 20 different countries.
B-5
<PAGE>
Lipper Variable Insurance Products Performance Analysis Service is a publisher
of statistical data covering the investment company industry in the United
States and overseas. Lipper is recognized as the leading source of data on
open-end and closed-end funds. Lipper currently tracks the performance of over
5,000 investment companies and publishes numerous specialized reports, includ-
ing reports on performance and portfolio analysis, fee and expense analysis.
Moody's insurance financial strength rating is an opinion of an insurance
company's financial strength 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 sta-
tistical and analytical coverage of open-end and closed-end funds and variable
annuities.
Standard & Poor's insurance claims-paying ability rating is an opinion 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 and 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 con-
tracts.
Standard & Poor's 500 Index -- A broad-based measurement of U.S. stock-market
performance based on the weighted average performance of 500 common stocks of
leading company's and leading industries; 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 currently including Ameri-
can 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 tax savings through tax deferral;
the potential advantage of the variable annuity account over the fixed ac-
count; 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 subaccounts and adver-
tisement 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. 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 $1,500 over any period between six and 60 months. Once elect-
ed, 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 tel-
ephone authorization on file. If you have cancelled the DCA program prior to
the end of the selected DCA period, any remaining contract value in the DCA
holding account within the fixed account, will automatically be transferred to
the variable subaccounts selected by you. A transfer under this program is not
considered a transfer for purposes of limiting the number of transfers that
may be made. 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 re-
quired 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 tele-
phone authorization has been elected, certain changes may be made by tele-
phone. Notwithstanding the requirements
B-6
<PAGE>
of the program, any withdrawal must be permitted by Section 401(a)(9) of the
code for qualified plans or permitted under Section 72 for non-qualified con-
tracts. We reserve the right to discontinue this service at any time.
Cross-Reinvestment Service. -- Under this option, account value in a desig-
nated variable subaccount of the contract that exceeds a certain baseline
amount is automatically transferred to another specific variable subaccount(s)
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 com-
mencement 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 ac-
count, 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. A transfer under this program is not considered a transfer for pur-
poses of limiting the number of transfers that may be made. We reserve the
right to discontinue this service at any time.
Portfolio Rebalancing. -- Portfolio rebalancing is an option which, if elected
by the contractowner, restores to a pre-determined level the percentage of
contract value allocated to each variable account subaccount (e.g., 20% Money
Market, 50% Growth, 30% International). This pre-determined level will be the
allocation initially selected when the contract was purchased, unless subse-
quently changed. The portfolio rebalancing allocation may be changed at any
time by submitting a written request to Lincoln Life or by telephone if we
have your telephone authorization on file.
If portfolio rebalancing is elected, all purchase payments allocated to the
variable account subaccounts must be subject to portfolio rebalancing.
Portfolio rebalancing may take place on either a monthly, quarterly, semi-an-
nual or annual basis, as selected by the contractowner. Once the portfolio
rebalancing option is activated, any variable account subaccount transfers ex-
ecuted outside of the portfolio rebalancing option will terminate the portfo-
lio rebalancing option. Any subsequent purchase payment or withdrawal that
modifies the account balance within each variable account subaccount may also
cause termination of the portfolio rebalancing option. Any such termination
will be confirmed to the contractowner. The contractowner may terminate the
portfolio rebalancing option or re-enroll at any time by writing Lincoln Life,
or by calling, if we have your telephone authorization on file.
The portfolio rebalancing program is not available following the annuity com-
mencement date.
Lincoln Financial Group. Lincoln Financial Group is the marketing name for
Lincoln National Corporation (NYSE:LNC) and its affiliates. With headquarters
in Philadelphia, Lincoln Financial Group has consolidated assets of over $103
billion and annual consolidated revenues of $6.8 billion. Through its wealth
accumulation and protection businesses, the company provides annuities, life
insurance, 401(k) plans, life-health reinsurance, mutual funds, institutional
investment management and financial planning and advisory services.
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 cli-
ents which Lincoln Life serves. As of the date of this SAI, Lincoln Life was
serving over 15,000 employers and more than 1.5 million individuals.
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 com-
panies, based upon recognized evaluation criteria (see reference to A.M. Best
Company above). For example, at year-end 1999 Lincoln Life had statutory ad-
mitted assets of over $79 billion.
Financial statements
Financial statements of the VAA and the statutory-basis financial statements
of Lincoln Life appear on the following pages.
B-7
<PAGE>
Lincoln National Variable Annuity Account H
Statement of assets and liability
December 31, 1999
<TABLE>
<CAPTION>
Growth-Income
Growth-Income Class II
Combined Subaccount Subaccount
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Investments at Market--
Unaffiliated (Cost
$17,753,933,654) $23,675,772,125 $5,898,495,515 $1,132,139,150
-------------------------------- --------------- -------------- --------------
Total Assets 23,675,772,125 5,898,495,515 1,132,139,150
Liability--Payable to The
Lincoln National Life Insurance
Company 877,209 218,803 42,284
-------------------------------- --------------- -------------- --------------
Net assets $23,674,894,916 $5,898,276,712 $1,132,096,866
-------------------------------- =============== ============== ==============
Percent of net assets 100.00% 24.91% 4.78%
-------------------------------- =============== ============== ==============
Net assets are represented by:
Legacy II without guaranteed
minimum death benefit:
. Units in accumulation period 1,563,524,672 --
------------------------------
. Annuity reserves units 6,071,368 --
------------------------------
. Unit value $ 3.503 $ --
------------------------------ -------------- --------------
. Value in accumulation period 5,476,349,424 --
------------------------------
. Annuity reserves 21,265,373 --
-------------------------------
Legacy II with guaranteed
minimum death benefit:
. Units in accumulation period 114,842,624 --
------------------------------
. Unit value $ 3.489 $ --
------------------------------ -------------- --------------
. Value in accumulation period 400,661,915 --
-------------------------------
Legacy III without guaranteed
minimum death benefit:
. Units in accumulation period -- 129,156,674
------------------------------
. Annuity reserves units -- 1,762,500
------------------------------
. Unit value $ -- $ 1.520
------------------------------ -------------- --------------
. Value in accumulation period -- 196,369,678
------------------------------
. Annuity reserves -- 2,679,703
-------------------------------
Legacy III with guaranteed
minimum death benefit:
. Units in accumulation period -- 614,232,524
------------------------------
. Unit value $ -- $ 1.514
------------------------------ -------------- --------------
. Value in accumulation period -- 930,152,106
-------------------------------
Shareholder's Advantage without
guaranteed minimum death
benefit:
. Units in accumulation period -- 731,753
------------------------------
. Annuity reserves units -- --
------------------------------
. Unit value $ -- $ 1.092
------------------------------ -------------- --------------
. Value in accumulation period -- 799,374
------------------------------
. Annuity reserves -- --
-------------------------------
Shareholder's Advantage with
guaranteed minimum death
benefit:
. Units in accumulation period -- 1,919,178
------------------------------
. Unit value $ -- $ 1.092
------------------------------ -------------- --------------
. Value in accumulation period -- 2,096,005
--------------------------------
Net assets $5,898,276,712 $1,132,096,866
-------------------------------- ============== ==============
</TABLE>
See accompanying notes.
H-2
<PAGE>
<TABLE>
<CAPTION>
U.S.
U.S. Government/
Asset High-Yield Government/ AAA-Rated
Growth Asset Allocation High-Yield Bond Class AAA-Rated Securities Cash
Growth Class II Allocation Class II Bond II Securities Class II Management
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$7,174,597,906 $1,071,095,846 $1,302,564,162 $326,008,212 $512,965,962 $98,987,168 $364,696,561 $47,860,527 $271,446,046
-------------- -------------- -------------- ------------ ------------ ----------- ------------ ----------- ------------
7,174,597,906 1,071,095,846 1,302,564,162 326,008,212 512,965,962 98,987,168 364,696,561 47,860,527 271,446,046
264,822 39,860 48,277 12,130 19,073 3,688 13,625 1,793 10,128
-------------- -------------- -------------- ------------ ------------ ----------- ------------ ----------- ------------
$7,174,333,084 $1,071,055,986 $1,302,515,885 $325,996,082 $512,946,889 $98,983,480 $364,682,936 $47,858,734 $271,435,918
============== ============== ============== ============ ============ =========== ============ =========== ============
30.30% 4.52% 5.50% 1.38% 2.17% 0.42% 1.54% 0.20% 1.15%
============== ============== ============== ============ ============ =========== ============ =========== ============
1,091,099,055 -- 430,364,472 -- 207,730,728 -- 191,847,850 -- 173,803,366
4,944,792 -- 2,134,647 -- 1,147,002 -- 944,812 -- 461,714
$ 6.118 $ -- $ 2.823 $ -- $ 2.330 $ -- $ 1.778 $ -- $ 1.449
-------------- -------------- -------------- ------------ ------------ ----------- ------------ ----------- ------------
6,675,106,847 -- 1,215,049,873 -- 484,029,853 -- 341,043,890 -- 251,874,190
30,251,166 -- 6,026,756 -- 2,672,610 -- 1,679,573 -- 669,112
76,952,649 -- 28,960,340 -- 11,308,416 -- 12,402,425 -- 13,089,058
$ 6.094 $ -- $ 2.812 $ -- $ 2.321 $ -- $ 1.771 $ -- $ 1.443
-------------- -------------- -------------- ------------ ------------ ----------- ------------ ----------- ------------
468,975,071 -- 81,439,256 -- 26,244,426 -- 21,959,473 -- 18,892,616
-- 60,530,171 -- 50,804,846 -- 16,310,537 -- 10,249,990 --
-- 1,092,833 -- 471,027 -- 329,991 -- 516,074 --
$ -- $ 2.605 $ -- $ 1.343 $ -- $ 1.131 $ -- $ 1.114 $ --
-------------- -------------- -------------- ------------ ------------ ----------- ------------ ----------- ------------
-- 157,687,149 -- 68,239,697 -- 18,449,044 -- 11,421,328 --
-- 2,846,940 -- 632,671 -- 373,256 -- 575,049 --
-- 349,496,915 -- 191,453,944 -- 70,524,971 -- 32,309,998 --
$ -- $ 2.595 $ -- $ 1.338 $ -- $ 1.127 $ -- $ 1.110 $ --
-------------- -------------- -------------- ------------ ------------ ----------- ------------ ----------- ------------
-- 906,830,937 -- 256,131,033 -- 79,454,055 -- 35,858,343 --
-- 1,188,330 -- 486,416 -- 441,334 -- 2,000 --
-- -- -- -- -- -- -- -- --
$ -- $ 1.313 $ -- $ 1.069 $ -- $ 1.047 $ -- $ 1.003 $ --
-------------- -------------- -------------- ------------ ------------ ----------- ------------ ----------- ------------
-- 1,559,923 -- 520,076 -- 461,894 -- 2,007 --
-- -- -- -- -- -- -- -- --
-- 1,623,917 -- 442,117 -- 234,372 -- 2,000 --
$ -- $ 1.312 $ -- $ 1.069 $ -- $ 1.046 $ -- $ 1.003 $ --
-------------- -------------- -------------- ------------ ------------ ----------- ------------ ----------- ------------
-- 2,131,037 -- 472,605 -- 245,231 -- 2,007 --
-------------- -------------- -------------- ------------ ------------ ----------- ------------ ----------- ------------
$7,174,333,084 $1,071,055,986 $1,302,515,885 $325,996,082 $512,946,889 $98,983,480 $364,682,936 $47,858,734 $271,435,918
============== ============== ============== ============ ============ =========== ============ =========== ============
</TABLE>
H-3
<PAGE>
Lincoln National Variable Annuity Account H
Statement of assets and liability (continued)
December 31, 1999
<TABLE>
<CAPTION>
Cash
Management International
Class II International Class II
Subaccount Subaccount Subaccount
------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Investments at Market--Unaffiliated
(Cost $17,753,933,654) $47,751,238 $3,817,892,127 $368,999,954
------------------------------------- ----------- -------------- ------------
Total Assets 47,751,238 3,817,892,127 368,999,954
Liability--Payable to The Lincoln
National Life Insurance Company 1,791 141,216 13,747
------------------------------------- ----------- -------------- ------------
Net assets $47,749,447 $3,817,750,911 $368,986,207
------------------------------------- =========== ============== ============
Percent of net assets 0.20% 16.13% 1.56%
------------------------------------- =========== ============== ============
Net assets are represented by:
Legacy II without guaranteed minimum
death benefit:
. Units in accumulation period -- 909,205,118 --
-----------------------------------
. Annuity reserves units -- 5,201,907 --
-----------------------------------
. Unit value $ -- $ 3.932 $ --
----------------------------------- ----------- -------------- ------------
. Value in accumulation period -- 3,574,688,180 --
-----------------------------------
. Annuity reserves -- 20,452,146 --
------------------------------------
Legacy II with guaranteed minimum
death benefit:
. Units in accumulation period -- 56,848,874 --
-----------------------------------
. Unit value $ -- $ 3.916 $ --
----------------------------------- ----------- -------------- ------------
. Value in accumulation period -- 222,610,585 --
------------------------------------
Legacy III without guaranteed
minimum death benefit:
. Units in accumulation period 8,461,080 -- 26,368,918
-----------------------------------
. Annuity reserves units 233,715 -- 668,069
-----------------------------------
. Unit value $ 1.096 $ -- $ 2.127
----------------------------------- ----------- -------------- ------------
. Value in accumulation period 9,273,327 -- 56,089,351
-----------------------------------
. Annuity reserves 256,151 -- 1,421,049
------------------------------------
Legacy III with guaranteed minimum
death benefit:
. Units in accumulation period 34,892,204 -- 146,311,598
-----------------------------------
. Unit value $ 1.092 $ -- $ 2.119
----------------------------------- ----------- -------------- ------------
. Value in accumulation period 38,089,813 309,974,140
------------------------------------
Shareholder's Advantage without
guaranteed minimum death benefit:
. Units in accumulation period 9,425 -- 592,649
-----------------------------------
. Annuity reserves units -- -- --
-----------------------------------
. Unit value $ 1.009 $ -- $ 1.408
----------------------------------- ----------- -------------- ------------
. Value in accumulation period 9,514 -- 834,201
-----------------------------------
. Annuity reserves -- -- --
------------------------------------
Shareholder's Advantage with
guaranteed minimum death benefit:
. Units in accumulation period 119,534 -- 474,304
-----------------------------------
. Unit value $ 1.009 $ -- $ 1.407
----------------------------------- ----------- -------------- ------------
. Value in accumulation period 120,642 -- 667,466
----------------------------------- ----------- -------------- ------------
Net assets $47,749,447 $3,817,750,911 $368,986,207
------------------------------------- =========== ============== ============
</TABLE>
See accompanying notes.
H-4
<PAGE>
<TABLE>
<CAPTION>
Global
Global Global Small New
Bond Global Growth Small Capitalization New World
Bond Class II Growth Class II Capitalization Class II World Class II
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$161,019,866 $78,440,200 $296,575,865 $378,124,464 $161,422,718 $101,098,240 $31,385,405 $32,204,993
------------ ----------- ------------ ------------ ------------ ------------ ----------- -----------
161,019,866 78,440,200 296,575,865 378,124,464 161,422,718 101,098,240 31,385,405 32,204,993
5,999 2,924 10,934 14,057 5,953 3,744 1,161 1,200
------------ ----------- ------------ ------------ ------------ ------------ ----------- -----------
$161,013,867 $78,437,276 $296,564,931 $378,110,407 $161,416,765 $101,094,496 $31,384,244 $32,203,793
============ =========== ============ ============ ============ ============ =========== ===========
0.68% 0.33% 1.25% 1.60% 0.68% 0.43% 0.13% 0.14%
============ =========== ============ ============ ============ ============ =========== ===========
128,409,290 -- 120,206,220 -- 77,664,595 -- 24,595,832 --
903,192 -- 700,953 -- 329,121 -- 44,131 --
$ 1.185 $ -- $ 2.298 $ -- $ 1.920 $ -- $ 1.176 $ --
------------ ----------- ------------ ------------ ------------ ------------ ----------- -----------
152,182,648 -- 276,220,233 -- 149,119,835 -- 28,920,791 --
1,070,406 -- 1,610,710 -- 631,928 -- 51,891 --
6,574,709 -- 8,185,381 -- 6,090,590 -- 2,052,631 --
$ 1.180 $ -- $ 2.289 $ -- $ 1.915 $ -- $ 1.175 $ --
------------ ----------- ------------ ------------ ------------ ------------ ----------- -----------
7,760,813 -- 18,733,988 -- 11,665,002 -- 2,411,562 --
-- 14,078,598 -- 27,671,349 -- 7,492,254 -- 3,728,134
-- 346,169 -- 484,012 -- 296,365 -- 108,111
$ -- $ 1.125 $ -- $ 2.291 $ -- $ 1.917 $ -- $ 1.175
------------ ----------- ------------ ------------ ------------ ------------ ----------- -----------
-- 15,845,420 -- 63,382,553 -- 14,359,483 -- 4,381,538
-- 389,612 -- 1,108,653 -- 568,006 -- 127,058
-- 55,096,652 -- 137,048,068 -- 44,615,754 -- 23,252,868
$ -- $ 1.121 $ -- $ 2.280 $ -- $ 1.912 $ -- $ 1.174
------------ ----------- ------------ ------------ ------------ ------------ ----------- -----------
-- 61,762,825 -- 312,436,490 -- 85,295,758 -- 27,305,402
-- 375,630 -- 197,674 -- 360,180 -- 58,929
-- -- -- -- -- -- -- --
$ -- $ 1.020 $ -- $ 1.400 $ -- $ 1.304 $ -- $ 1.238
------------ ----------- ------------ ------------ ------------ ------------ ----------- -----------
-- 383,286 -- 276,744 -- 469,812 -- 72,958
-- -- -- -- -- -- -- --
-- 55,023 -- 647,276 -- 307,838 -- 255,977
$ -- $ 1.020 $ -- $ 1.400 $ -- $ 1.304 $ -- $ 1.238
------------ ----------- ------------ ------------ ------------ ------------ ----------- -----------
-- 56,133 -- 905,967 -- 401,437 -- 316,837
------------ ----------- ------------ ------------ ------------ ------------ ----------- -----------
$161,013,867 $78,437,276 $296,564,931 $378,110,407 $161,416,765 $101,094,496 $31,384,244 $32,203,793
============ =========== ============ ============ ============ ============ =========== ===========
</TABLE>
H-5
<PAGE>
Lincoln National Variable Annuity Account H
Statement of Operations
Year Ended December 31, 1999
<TABLE>
<CAPTION>
Growth-Income
Growth-Income Class II
Combined Subaccount Subaccount
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Investment Income:
. Dividends from investment
income $ 363,649,245 $ 105,809,593 $ 13,787,028
---------------------------------
. Dividends from net realized
gains on investments 2,762,130,665 949,657,269 180,270,242
---------------------------------
. Mortality and expense
guarantees:
---------------------------------
. Legacy II without guaranteed
minimum death benefit (227,055,455) (78,372,764) --
---------------------------------
. Legacy II with guaranteed
minimum death benefit (14,804,893) (5,441,299) --
---------------------------------
. Legacy III without guaranteed
minimum death benefit (5,489,569) -- (2,024,469)
---------------------------------
. Legacy III with guaranteed
minimum death benefit (27,866,710) -- (9,817,618)
---------------------------------
. Shareholder's Advantage without
guaranteed minimum death
benefit (1,103) -- (144)
---------------------------------
. Shareholder's Advantage with
guaranteed minimum death
benefit (3,452) -- (999)
--------------------------------- -------------- ------------- -------------
Net investment income 2,850,558,728 971,652,799 182,214,040
----------------------------------
Net Realized and Unrealized Gain
(Loss) on Investments:
. Net realized gain (loss) on
investments 674,284,647 228,634,133 (76,730)
---------------------------------
. Net change in unrealized
appreciation or depreciation on
investments 2,383,264,765 (612,847,050) (112,083,394)
---------------------------------- -------------- ------------- -------------
Net realized and unrealized gain
(loss) on investments 3,057,549,412 (384,212,917) (112,160,124)
---------------------------------- -------------- ------------- -------------
Net increase (decrease) in net
assets resulting from operations $5,908,108,140 $ 587,439,882 $ 70,053,916
---------------------------------- ============== ============= =============
</TABLE>
See accompanying notes.
H-6
<PAGE>
<TABLE>
<CAPTION>
U.S.
U.S. Government/
Asset High-Yield Government/ AAA-Rated
Growth Asset Allocation High-Yield Bond Class AAA-Rated Securities Cash
Growth Class II Allocation Class II Bond II Securities Class II Management
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10,612,046 $ -- $ 47,705,526 $ 8,770,098 $ 53,806,588 $ 8,251,537 $ 25,688,251 $ 2,524,271 $11,747,694
970,545,790 142,587,425 82,283,415 20,367,315 -- -- -- -- --
(73,609,144) -- (17,736,386) -- (7,301,578) -- (5,354,630) -- (3,229,152)
(4,920,359) -- (1,076,547) -- (371,550) -- (335,851) -- (251,032)
-- (1,220,870) -- (698,399) -- (199,132) -- (120,652) --
-- (7,278,541) -- (2,775,100) -- (950,317) -- (424,913) --
-- (514) -- (39) -- (14) -- (2) --
-- (965) -- (252) -- (102) -- (2) --
---------------- ------------ ------------ ------------ ------------ ----------- ------------ ----------- -----------
902,628,333 134,086,535 111,176,008 25,663,623 46,133,460 7,101,972 19,997,770 1,978,702 8,267,510
275,670,145 42,140 43,128,169 (92,641) (10,243,941) (670,173) (3,165,354) (171,695) 35,255
1,474,521,234 176,203,033 (75,303,263) (13,767,288) (11,867,689) (2,962,809) (25,194,562) (2,632,879) 336,632
---------------- ------------ ------------ ------------ ------------ ----------- ------------ ----------- -----------
1,750,191,379 176,245,173 (32,175,094) (13,859,929) (22,111,630) (3,632,982) (28,359,916) (2,804,574) 371,887
---------------- ------------ ------------ ------------ ------------ ----------- ------------ ----------- -----------
$2,652,819,712 $310,331,708 $ 79,000,914 $ 11,803,694 $ 24,021,830 $ 3,468,990 $ (8,362,146) $ (825,872) $ 8,639,397
================ ============ ============ ============ ============ =========== ============ =========== ===========
</TABLE>
H-7
<PAGE>
Lincoln National Variable Annuity Account H
Statement of Operations (continued)
Year Ended December 31, 1999
<TABLE>
<CAPTION>
Cash
Management International
Class II International Class II
Subaccount Subaccount Subaccount
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Investment Income:
. Dividends from investment income $1,740,187 $ 47,853,420 $ 3,298,825
-------------------------------------
. Dividends from net realized gains
on investments -- 335,072,851 31,742,057
-------------------------------------
. Mortality and expense guarantees:
-------------------------------------
. Legacy II without guaranteed
minimum death benefit -- (35,623,837) --
-------------------------------------
. Legacy II with guaranteed minimum
death benefit -- (2,044,777) --
-------------------------------------
. Legacy III without guaranteed
minimum death benefit (110,773) -- (402,219)
-------------------------------------
. Legacy III with guaranteed minimum
death benefit (434,303) -- (2,402,441)
-------------------------------------
. Shareholder's Advantage without
guaranteed minimum death benefit (4) -- (269)
-------------------------------------
. Shareholder's Advantage with
guaranteed minimum death benefit (27) -- (352)
------------------------------------- ---------- -------------- ------------
Net investment income 1,195,080 345,257,657 32,235,601
-------------------------------------
Net Realized and Unrealized Gain
(Loss) on Investments:
. Net realized gain (loss) on
investments 7,876 136,759,947 300,753
-------------------------------------
. Net change in unrealized
appreciation or depreciation on
investments 47,577 1,197,092,804 105,733,268
------------------------------------- ---------- -------------- ------------
Net realized and unrealized gain
(loss) on investments 55,453 1,333,852,751 106,034,021
------------------------------------- ---------- -------------- ------------
Net increase (decrease) in net assets
resulting from operations $1,250,533 $1,679,110,408 $138,269,622
------------------------------------- ========== ============== ============
</TABLE>
See accompanying notes.
H-8
<PAGE>
<TABLE>
<CAPTION>
Global
Global Global Small New
Bond Global Growth Small Capitalization New World
Bond Class II Growth Class II Capitalization Class II World Class II
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$11,939,045 $ 4,414,596 $ 2,504,131 $ 2,418,646 $ 393,998 $ 118,591 $ 143,163 $ 122,011
-- -- 11,923,190 15,003,882 14,024,003 8,627,543 12,535 13,148
(2,207,324) -- (2,418,878) -- (1,091,378) -- (110,384) --
(111,045) -- (160,485) -- (81,275) -- (10,673) --
-- (160,887) -- (448,375) -- (89,068) -- (14,725)
-- (680,920) -- (2,438,893) -- (561,173) -- (102,491)
-- (13) -- (66) -- (21) -- (17)
-- (46) -- (375) -- (197) -- (135)
----------- ----------- ------------ ------------ ----------- ----------- ---------- ----------
9,620,676 3,572,730 11,847,958 14,534,819 13,245,348 8,095,675 34,641 17,791
(907,102) (165,313) 1,908,891 237,892 2,901,161 146,994 1,486 2,754
(6,398,389) (2,564,024) 98,681,854 116,946,207 44,645,168 25,882,604 4,421,837 4,373,894
----------- ----------- ------------ ------------ ----------- ----------- ---------- ----------
(7,305,491) (2,729,337) 100,590,745 117,184,099 47,546,329 26,029,598 4,423,323 4,376,648
----------- ----------- ------------ ------------ ----------- ----------- ---------- ----------
$ 2,315,185 $ 843,393 $112,438,703 $131,718,918 $60,791,677 $34,125,273 $4,457,964 $4,394,439
=========== =========== ============ ============ =========== =========== ========== ==========
</TABLE>
H-9
<PAGE>
Lincoln National Variable Annuity Account H
Statements of changes in net assets
Years Ended December 31, 1998 and 1999
<TABLE>
<CAPTION>
Growth-Income
Growth-Income Class II
Combined Subaccount Subaccount
------------------------------------------------------------------------------
<S> <C> <C> <C>
Net assets at January 1,
1998 $15,810,842,079 $ 5,822,004,732 $ 195,003,386
Changes From Operations:
. Net investment income 1,958,360,879 893,049,622 86,889,615
--------------------------
. Net realized gain (loss)
on investments 448,669,912 188,316,732 (97,997)
--------------------------
. Net change in unrealized
appreciation or
depreciation on
investments 670,203,311 (160,295,045) (24,918,745)
--------------------------- --------------- --------------- --------------
Net Increase (Decrease) in
Net Assets Resulting from
Operations 3,077,234,102 921,071,309 61,872,873
Change From Unit
Transactions:
Accumulation Units:
. Contract purchases 3,687,600,242 580,662,940 391,845,842
--------------------------
. Terminated contracts and
transfers to annuity
reserves (4,095,996,116) (1,145,406,574) (35,431,367)
-------------------------- --------------- --------------- --------------
(408,395,874) (564,743,634) 356,414,475
Annuity Reserves:
. Transfer from
accumulation units and
between accounts 20,809,984 5,153,286 895,860
--------------------------
. Annuity payments (9,098,361) (2,717,517) (356,520)
--------------------------
. Receipt (reimbursement)
of mortality guarantee
adjustment 345,001 44,580 88,801
-------------------------- --------------- --------------- --------------
12,056,624 2,480,349 628,141
Net Increase (Decrease) in
net assets resulting from
unit transactions (396,339,250) (562,263,285) 357,042,616
--------------------------- --------------- --------------- --------------
Total Increase (Decrease)
in Net Assets 2,680,894,852 358,808,024 418,915,489
--------------------------- --------------- --------------- --------------
Net Assets at December 31,
1998 $18,491,736,931 $ 6,180,812,756 $ 613,918,875
--------------------------- =============== =============== ==============
Changes From Operations:
. Net investment income $ 2,850,558,728 $ 971,652,799 $ 182,214,040
--------------------------
. Net realized gain (loss)
on investments 674,284,647 228,634,133 (76,730)
--------------------------
. Net change in unrealized
appreciation or
depreciation on
investments 2,383,264,765 (612,847,050) (112,083,394)
--------------------------- --------------- --------------- --------------
Net Increase (Decrease) in
Net Assets Resulting from
Operations 5,908,108,140 587,439,882 70,053,916
Change From Unit
Transactions:
Accumulation Units:
. Contract purchases 4,055,223,256 396,604,891 532,499,824
--------------------------
. Terminated contracts and
transfers to annuity
reserves (4,793,427,647) (1,268,182,228) (85,270,021)
-------------------------- --------------- --------------- --------------
(738,204,391) (871,577,337) 447,229,803
Annuity Reserves:
. Transfer from
accumulation units and
between accounts 27,417,634 5,179,744 1,616,167
--------------------------
. Annuity payments (14,312,517) (3,587,278) (727,206)
--------------------------
. Receipt (reimbursement)
of mortality guarantee
adjustment 149,119 8,945 5,311
-------------------------- --------------- --------------- --------------
13,254,236 1,601,411 894,272
Net Increase (Decrease) in
net assets resulting from
unit transactions (724,950,155) (869,975,926) 448,124,075
--------------------------- --------------- --------------- --------------
Total Increase (Decrease)
in Net Assets 5,183,157,985 (282,536,044) 518,177,991
--------------------------- --------------- --------------- --------------
Net Assets at December 31,
1999 $23,674,894,916 $ 5,898,276,712 $1,132,096,866
--------------------------- =============== =============== ==============
</TABLE>
See accompanying notes to financial stlatements.
H-10
<PAGE>
<TABLE>
<CAPTION>
U.S.
U.S. Government/
Asset High-Yield Government/ AAA-Rated
Growth Asset Allocation High-Yield Bond Class AAA-Rated Securities
Growth Class II Allocation Class II Bond II Securities Class II
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 4,193,287,754 $ 93,370,037 $1,338,256,534 $ 50,823,817 $ 688,468,198 $ 25,011,764 $ 408,607,919 $ 8,726,936
635,842,827 44,825,117 127,393,254 15,295,564 56,598,764 5,029,262 19,916,539 999,083
165,304,535 (16,906) 26,232,366 (6,931) (225,013) (157,115) 204,281 31,201
521,153,770 25,360,098 (1,300,515) (3,954,214) (62,572,679) (6,308,219) 6,962,613 69,637
--------------- -------------- -------------- ------------ ------------- ------------ ------------- ------------
1,322,301,132 70,168,309 152,325,105 11,334,419 (6,198,928) (1,436,072) 27,083,433 1,099,921
<CAPTION>
Cash
Management
Subaccount
-------------------------------------------------------------------------------------------------------------------------
<C>
$ 186,571,276
7,428,068
305,944
66,278
---------------
7,800,290
493,741,514
(473,937,066)
---------------
19,804,448
24,415
(158,324)
551,914,456 217,793,895 192,171,653 132,102,805 135,804,932 55,113,767 166,657,873 34,821,390
(982,427,432) (22,967,104) (260,845,905) (9,974,982) (200,788,113) (8,353,986) (136,101,572) (10,222,891)
--------------- -------------- -------------- ------------ ------------- ------------ ------------- ------------
(430,512,976) 194,826,791 (68,674,252) 122,127,823 (64,983,181) 46,759,781 30,556,301 24,598,499
4,395,770 234,502 1,776,864 141,714 1,867,393 74,730 712,721 --
(1,831,321) (226,163) (1,217,453) (36,686) (454,376) (33,896) (288,555) (39,846)
24,785 73,099 (17,136) 26,476 1,122 14,692 40,320 (1,672)
--------------- -------------- -------------- ------------ ------------- ------------ ------------- ------------
2,589,234 81,438 542,275 131,504 1,414,139 55,526 464,486 (41,518)
(427,923,742) 194,908,229 (68,131,977) 122,259,327 (63,569,042) 46,815,307 31,020,787 24,556,981
--------------- -------------- -------------- ------------ ------------- ------------ ------------- ------------
894,377,390 265,076,538 84,193,128 133,593,746 (69,767,970) 45,379,235 58,104,220 25,656,902
--------------- -------------- -------------- ------------ ------------- ------------ ------------- ------------
$ 5,087,665,144 $ 358,446,575 $1,422,449,662 $184,417,563 $ 618,700,228 $ 70,390,999 $ 466,712,139 $ 34,383,838
=============== ============== ============== ============ ============= ============ ============= ============
$ 902,628,333 $ 134,086,535 $ 111,176,008 $ 25,663,623 $ 46,133,460 $ 7,101,972 $ 19,997,770 $ 1,978,702
275,670,145 42,140 43,128,169 (92,641) (10,243,941) (670,173) (3,165,354) (171,695)
1,474,521,234 176,203,033 (75,303,263) (13,767,288) (11,867,689) (2,962,809) (25,194,562) (2,632,879)
--------------- -------------- -------------- ------------ ------------- ------------ ------------- ------------
2,652,819,712 310,331,708 79,000,914 11,803,694 24,021,830 3,468,990 (8,362,146) (825,872)
678,361,603 457,300,098 100,358,222 161,643,397 69,919,522 42,803,558 84,455,291 32,006,021
(1,248,483,617) (56,143,544) (299,229,623) (32,229,411) (199,680,418) (17,811,654) (178,030,011) (17,984,427)
--------------- -------------- -------------- ------------ ------------- ------------ ------------- ------------
(570,122,014) 401,156,554 (198,871,401) 129,413,986 (129,760,896) 24,991,904 (93,574,720) 14,021,594
7,809,103 1,627,925 1,050,198 427,965 511,359 188,151 193,581 345,971
(3,878,242) (507,939) (1,175,443) (66,895) (527,587) (54,980) (285,712) (66,852)
39,381 1,163 61,955 (231) 1,955 (1,584) (206) 55
--------------- -------------- -------------- ------------ ------------- ------------ ------------- ------------
3,970,242 1,121,149 (63,290) 360,839 (14,273) 131,587 (92,337) 279,174
(566,151,772) 402,277,703 (198,934,691) 129,774,825 (129,775,169) 25,123,491 (93,667,057) 14,300,768
--------------- -------------- -------------- ------------ ------------- ------------ ------------- ------------
2,086,667,940 712,609,411 (119,933,777) 141,578,519 (105,753,339) 28,592,481 (102,029,203) 13,474,896
--------------- -------------- -------------- ------------ ------------- ------------ ------------- ------------
$ 7,174,333,084 $1,071,055,986 $1,302,515,885 $325,996,082 $ 512,946,889 $ 98,983,480 $ 364,682,936 $ 47,858,734
=============== ============== ============== ============ ============= ============ ============= ============
2,044
---------------
(131,865)
19,672,583
---------------
27,472,873
---------------
$ 214,044,149
===============
$ 8,267,510
35,255
336,632
---------------
8,639,397
542,479,627
(494,074,307)
---------------
48,405,320
412,110
(68,251)
3,193
---------------
347,052
48,752,372
---------------
57,391,769
---------------
$ 271,435,918
===============
</TABLE>
H-11
<PAGE>
Lincoln National Variable Annuity Account H
Statements of changes in net assets (continued)
Years Ended December 31, 1998 and 1999
<TABLE>
<CAPTION>
Cash
Management International
Class II International Class II
Subaccount Subaccount Subaccount
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Net assets at January 1, 1998 $14,621,232 $2,452,767,098 $ 54,786,406
Changes From Operations:
. Net investment income 894,482 42,557,185 2,207,875
----------------------------------
. Net realized gain (loss) on
investments 3,239 68,479,051 (121,402)
----------------------------------
. Net change in unrealized
appreciation or depreciation on
investments (77,111) 326,267,926 12,867,429
----------------------------------- ----------- -------------- ------------
Net Increase (Decrease) in Net
Assets Resulting from Operations 820,610 437,304,162 14,953,902
Change From Unit Transactions:
Accumulation Units:
. Contract purchases 66,014,956 238,711,087 78,349,055
----------------------------------
. Terminated contracts and
transfers to annuity reserves (47,275,290) (627,305,056) (12,270,273)
---------------------------------- ----------- -------------- ------------
18,739,666 (388,593,969) 66,078,782
Annuity Reserves:
. Transfer from accumulation units
and between accounts 6,484 3,860,451 274,690
----------------------------------
. Annuity payments (1,165) (1,301,839) (47,154)
----------------------------------
. Receipt (reimbursement) of
mortality guarantee adjustment (1,812) 9,854 19,785
---------------------------------- ----------- -------------- ------------
3,507 2,568,466 247,321
Net Increase (Decrease) in net
assets resulting from unit
transactions 18,743,173 (386,025,503) 66,326,103
----------------------------------- ----------- -------------- ------------
Total Increase (Decrease) in Net
Assets 19,563,783 51,278,659 81,280,005
----------------------------------- ----------- -------------- ------------
Net Assets at December 31, 1998 $34,185,015 $2,504,045,757 $136,066,411
----------------------------------- =========== ============== ============
Changes From Operations:
. Net investment income $ 1,195,080 $ 345,257,657 $ 32,235,601
----------------------------------
. Net realized gain (loss) on
investments 7,876 136,759,947 300,753
----------------------------------
. Net change in unrealized
appreciation or depreciation on
investments 47,577 1,197,092,804 105,733,268
----------------------------------- ----------- -------------- ------------
Net Increase (Decrease) in Net
Assets Resulting from Operations 1,250,533 1,679,110,408 138,269,622
Change From Unit Transactions:
Accumulation Units:
. Contract purchases 76,596,463 233,170,102 114,066,150
----------------------------------
. Terminated contracts and
transfers to annuity reserves (64,527,757) (600,613,674) (19,828,191)
---------------------------------- ----------- -------------- ------------
12,068,706 (367,443,572) 94,237,959
Annuity Reserves:
. Transfer from accumulation units
and between accounts 263,628 4,544,323 548,952
----------------------------------
. Annuity payments (18,435) (2,529,837) (134,337)
----------------------------------
. Receipt (reimbursement) of
mortality guarantee adjustment -- 23,832 (2,400)
---------------------------------- ----------- -------------- ------------
245,193 2,038,318 412,215
Net Increase (Decrease) in net
assets resulting from unit
transactions 12,313,899 (365,405,254) 94,650,174
----------------------------------- ----------- -------------- ------------
Total Increase (Decrease) in Net
Assets 13,564,432 1,313,705,154 232,919,796
----------------------------------- ----------- -------------- ------------
Net Assets at December 31, 1999 $47,749,447 $3,817,750,911 $368,986,207
----------------------------------- =========== ============== ============
</TABLE>
See accompanying notes.
H-12
<PAGE>
<TABLE>
<CAPTION>
Global
Global Global Small New
Bond Global Growth Small Capitalization New World
Bond Class II Growth Class II Capitalization Class II World Class II
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$132,273,025 $14,125,185 $ 78,828,107 $ 53,308,673 $ -- $ -- $ -- $ --
8,759,946 1,909,940 3,998,971 3,855,611 649,435 259,719 -- --
329,427 (21,838) 585,376 8,138 (475,613) (7,563) -- --
(4,706,995) (1,194,598) 19,497,337 18,070,094 3,093,466 2,122,784 -- --
------------ ----------- ------------ ------------ ------------ ------------ ----------- -----------
4,382,378 693,504 24,081,684 21,933,843 3,267,288 2,374,940 -- --
95,771,458 38,310,391 70,605,753 68,726,468 58,682,748 19,797,259 -- --
(55,017,820) (5,362,264) (41,136,434) (9,505,490) (10,773,580) (892,917) -- --
------------ ----------- ------------ ------------ ------------ ------------ ----------- -----------
40,753,638 32,948,127 29,469,319 59,220,978 47,909,168 18,904,342 -- --
651,791 65,465 267,744 107,634 252,165 46,305 -- --
(267,133) (21,305) (55,215) (31,478) (11,776) (639) -- --
(176) 2,007 (969) 17,065 -- 2,136 -- --
------------ ----------- ------------ ------------ ------------ ------------ ----------- -----------
384,482 46,167 211,560 93,221 240,389 47,802 -- --
41,138,120 32,994,294 29,680,879 59,314,199 48,149,557 18,952,144 -- --
------------ ----------- ------------ ------------ ------------ ------------ ----------- -----------
45,520,498 33,687,798 53,762,563 81,248,042 51,416,845 21,327,084 -- --
------------ ----------- ------------ ------------ ------------ ------------ ----------- -----------
$177,793,523 $47,812,983 $132,590,670 $134,556,715 $ 51,416,845 $ 21,327,084 $ -- $ --
============ =========== ============ ============ ============ ============ =========== ===========
$ 9,620,676 $ 3,572,730 $ 11,847,958 $ 14,534,819 $ 13,245,348 $ 8,095,675 $ 34,641 $ 17,791
(907,102) (165,313) 1,908,891 237,892 2,901,161 146,994 1,486 2,754
(6,398,389) (2,564,024) 98,681,854 116,946,207 44,645,168 25,882,604 4,421,837 4,373,894
------------ ----------- ------------ ------------ ------------ ------------ ----------- -----------
2,315,185 843,393 112,438,703 131,718,918 60,791,677 34,125,273 4,457,964 4,394,439
50,106,319 40,847,679 106,957,975 128,756,329 95,581,462 51,794,935 29,928,449 28,985,339
(69,209,717) (11,273,934) (56,115,684) (17,408,970) (46,466,522) (6,526,057) (3,047,501) (1,290,379)
------------ ----------- ------------ ------------ ------------ ------------ ----------- -----------
(19,103,398) 29,573,745 50,842,291 111,347,359 49,114,940 45,268,878 26,880,948 27,694,960
370,737 257,336 798,409 557,713 164,132 387,634 46,955 115,541
(363,229) (45,949) (104,946) (75,049) (70,298) (16,035) (1,603) (6,414)
1,049 (4,232) (196) 4,751 (531) 1,662 (20) 5,267
------------ ----------- ------------ ------------ ------------ ------------ ----------- -----------
8,557 207,155 693,267 487,415 93,303 373,261 45,332 114,394
(19,094,841) 29,780,900 51,535,558 111,834,774 49,208,243 45,642,139 26,926,280 27,809,354
------------ ----------- ------------ ------------ ------------ ------------ ----------- -----------
(16,779,656) 30,624,293 163,974,261 243,553,692 109,999,920 79,767,412 31,384,244 32,203,793
------------ ----------- ------------ ------------ ------------ ------------ ----------- -----------
$161,013,867 $78,437,276 $296,564,931 $378,110,407 $161,416,765 $101,094,496 $31,384,244 $32,203,793
============ =========== ============ ============ ============ ============ =========== ===========
</TABLE>
H-13
<PAGE>
Lincoln National Variable Annuity Account H
Notes to Financial Statements
1. Accounting Policies and Variable Account Information
The Variable Account: Lincoln National Variable Annuity Account H (the Variable
Account) is a segregated investment account of The Lincoln National Life
Insurance Company (the Company) and is registered with the Securities and
Exchange Commission under the Investment Company Act of 1940, as amended, as a
unit investment trust. The Variable Account consists of three products, each
offering a guaranteed minimum death benefit (GMDB) rider option. The available
contracts are as follows:
. Legacy II
. Legacy III
. Shareholder's Advantage
Legacy III and Shareholder Advantage contracts became available to clients of
the Company on April 30, 1997 and September 23, 1999, respectively.
The assets of the Variable Account are owned by the Company. The portion of the
Variable Account's assets supporting the annuity contracts may not be used to
satisfy liabilities arising from any other business of the Company.
Basis of Presentation: The accompanying financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States for unit investment trusts.
Investments: The Variable Account invests in the American Variable Insurance
Series (AVIS) which consists of the following funds:
Growth-Income Fund
Growth-Income Class II Fund
Growth Fund
Growth Class II Fund
Asset Allocation Fund
Asset Allocation Class II Fund
High-Yield Bond Fund
High-Yield Bond Class II Fund
U.S. Government/AAA-Rated Securities Fund
U.S. Government/AAA-Rated Securities Class II Fund
Cash Management Fund
Cash Management Class II Fund
International Fund
International Class II Fund
Bond Fund
Bond Class II Fund
Global Growth Fund
Global Growth Class II Fund
Global Small Capitalization Fund
Global Small Capitalization Class II Fund
New World Fund
New World Class II Fund
AVIS is registered as an open-ended management investment company. Investment
in the funds are stated at the closing net asset value per share on December
31, 1999, which approximates fair value. The difference between cost and fair
value is reflected as unrealized appreciation and depreciation of investments.
Investment transactions are accounted for on a trade date-basis. The cost of
investments sold is determined by the average-cost method.
Dividends: Dividends paid to the Variable Account are automatically reinvested
in shares of the Funds on the payable date. Dividend income is recorded on the
ex-dividend date.
Federal Income Taxes: Operations of the Variable Account form a part of and are
taxed with operations of the Company, which is taxed as a "life insurance
company" under the Internal Revenue Code. The Variable Account will not be
taxed as a regulated investment company under Subchapter M of the Internal
Revenue Code. Under current federal income tax law, no federal income taxes are
payable with respect to the Variable Account's net investment income and the
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 three 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)
. Shareholder Advantage at a daily rate of .0016438% (.60% on an annual basis)
. Shareholder Advantage with GMDB rider at a daily rate of .0019726% (.72% on
an annual basis)
In addition, amounts retained by the Company from the proceeds of the sales of
annuity contracts for
H-14
<PAGE>
Lincoln National Variable Annuity Account H
Notes to Financial Statements (continued)
2. Mortality and Expense Guarantees and Other Transactions with Affiliates
(continued)
contract charges and surrender charges were as follows during 1999 for the
Legacy II and Legacy III products:
<TABLE>
<S> <C>
Growth-Income Subaccount $ 6,342,982
Growth-Income Class II Subaccount 441,667
Growth Subaccount 5,593,781
Growth Class II Subaccount 292,821
Asset Allocation Subaccount 1,478,596
Asset Allocation Class II Subaccount 125,744
High-Yield Bond Subaccount 674,635
High-Yield Bond Class II Subaccount 56,894
U.S. Government/AAA-Rated Securities Subaccount 516,562
U.S. Government/AAA-Rated Securities Class II Subaccount 44,317
Cash Management Subaccount 1,353,124
Cash Management Class II Subaccount 140,274
International Subaccount 2,728,396
International Class II Subaccount 104,337
Bond Subaccount 192,878
Bond Class II Subaccount 40,373
Global Growth Subaccount 177,255
Global Growth Class II Subaccount 84,564
Global Small Capitalization Subaccount 83,310
Global Small Capitalization Class II Subaccount 6,998
New World Subaccount 6,141
New World Class II Subaccount 297
-------------------------------------------------------- -----------
$20,485,946
===========
</TABLE>
For the Shareholder's Advantage product a front-end load, or sales charge is
applied as a percentage (5.75% maximum) to all gross purchase payments. The
sales charge percentage decreases as the value accumulated under certain of the
owner's investment increase. For the period ending December 31, 1999, sales
charges were $289,537.
Accordingly, the Company is responsible for all sales and general and
administrative expenses applicable to the Variable Account.
H-15
<PAGE>
Lincoln National Variable Annuity Account H
Notes to Financial Statements (continued)
3. Net Assets
The following is a summary of net assets owned at December 31, 1999.
<TABLE>
<CAPTION>
Growth-Income
Growth-Income Class II
Combined Subaccount Subaccount
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $ 7,710,448,323 $1,430,506,713 $ 991,703,174
Annuity reserves 52,990,956 12,052,311 2,372,291
-------------------------- --------------- -------------- --------------
7,763,439,279 1,442,559,024 994,075,465
Accumulated net investment
income 8,439,370,833 3,281,518,114 287,811,775
Accumulated net realized
gain (loss) on
investments 1,550,246,333 538,461,005 (174,060)
Net unrealized
appreciation
(depreciation) on
investments 5,921,838,471 635,738,569 (149,616,314)
--------------- -------------- --------------
$23,674,894,916 $5,898,276,712 $1,132,096,866
-------------------------- =============== ============== ==============
<CAPTION>
Cash
Management International
Class II International Class II
Subaccount Subaccount Subaccount ===
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $ 45,235,876 $ 903,089,298 $ 218,030,488
Annuity reserves 248,700 9,259,833 855,833
-------------------------- --------------- -------------- --------------
45,484,576 912,349,131 218,886,321
Accumulated net investment
income 2,402,533 874,971,913 40,215,001
Accumulated net realized
gain (loss) on
investments 10,050 286,310,586 172,018
Net unrealized
appreciation
(depreciation) on
investments (147,712) 1,744,119,281 109,712,867
--------------- -------------- --------------
$ 47,749,447 $3,817,750,911 $ 368,986,207
-------------------------- =============== ============== ==============
</TABLE>
H-16
<PAGE>
<TABLE>
<CAPTION>
U.S.
U.S. Government/
Asset Government/ AAA-Rated
Growth Asset Allocation High-Yield High-Yield AAA-Rated Securities
Growth Class II Allocation Class II Bond Bond Class II Securities Class II
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$1,003,234,732 $ 684,924,376 $ 474,728,156 $300,993,375 $272,960,383 $ 95,954,308 $212,519,053 $46,781,757
13,057,249 1,842,316 3,511,536 623,127 2,282,205 374,923 1,300,796 553,938
-------------- -------------- -------------- ------------ ------------ ------------ ------------ -----------
1,016,291,981 686,766,692 478,239,692 301,616,502 275,242,588 96,329,231 213,819,849 47,335,695
2,528,834,096 189,615,897 555,138,469 44,086,152 293,513,746 13,192,699 179,981,244 3,191,966
643,772,273 25,761 90,561,885 (99,967) (7,694,922) (827,279) (6,495,962) (129,350)
2,985,434,734 194,647,636 178,575,839 (19,606,605) (48,114,523) (9,711,171) (22,622,195) (2,539,577)
-------------- -------------- -------------- ------------ ------------ ------------ ------------ -----------
$7,174,333,084 $1,071,055,986 $1,302,515,885 $325,996,082 $512,946,889 $ 98,983,480 $364,682,936 $47,858,734
============== ============== ============== ============ ============ ============ ============ ===========
<CAPTION>
Global Global Small
Growth Global Small Capitalization New World
Bond Bond Class II Global Growth Class II Capitalization Class II New World Class II
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 140,647,385 $ 76,252,477 $ 158,417,783 $223,961,680 $ 97,024,108 $ 64,173,220 $ 26,880,948 $27,694,960
1,021,736 382,840 1,029,593 748,659 333,692 421,063 45,332 114,394
-------------- -------------- -------------- ------------ ------------ ------------ ------------ -----------
141,669,121 76,635,317 159,447,376 224,710,339 97,357,800 64,594,283 26,926,280 27,809,354
26,835,629 5,904,896 15,901,198 18,434,900 13,894,783 8,355,394 34,641 17,791
(280,396) (187,033) 2,498,826 246,559 2,425,548 139,431 1,486 2,754
(7,210,487) (3,915,904) 118,717,531 134,718,609 47,738,634 28,005,388 4,421,837 4,373,894
-------------- -------------- -------------- ------------ ------------ ------------ ------------ -----------
$ 161,013,867 $ 78,437,276 $ 296,564,931 $378,110,407 $161,416,765 $101,094,496 $ 31,384,244 $32,203,793
============== ============== ============== ============ ============ ============ ============ ===========
<CAPTION>
Cash
Management
Subaccount
-----------------------------------------------------------------------------------------------------
<C>
$214,734,073
558,589
-------------
215,292,662
55,517,996
1,507,120
(881,860)
-------------
$271,435,918
=============
----------------------------------------------------------------------------------------------------
<C>
</TABLE>
H-17
<PAGE>
Lincoln National Variable Annuity Account H
Notes to Financial Statements (continued)
4. Purchases and Sales of Investments
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold were as follows for 1999.
<TABLE>
<CAPTION>
Aggregate Aggregate
Cost of Proceeds from
Purchases Sales
----------------------------------------------------------------------------
<S> <C> <C>
Growth-Income Fund $1,046,745,841 $ 945,078,445
Growth-Income Class II Fund 633,173,526 2,815,929
Growth Fund 1,017,409,917 680,855,107
Growth Class II Fund 536,557,452 166,597
Asset Allocation Fund 130,940,473 218,703,574
Asset Allocation Class II Fund 161,642,881 6,199,165
High-Yield Bond Fund 67,817,613 151,463,180
High-Yield Bond Class II Fund 39,101,915 6,875,396
U.S. Government/AAA-Rated Securities Fund 41,970,576 115,643,643
U.S. Government/AAA-Rated Securities Class II
Fund 23,698,855 7,418,878
Cash Management Fund 242,160,107 185,138,088
Cash Management Class II Fund 43,651,032 30,141,535
International Fund 393,431,739 413,530,827
International Class II Fund 128,909,721 2,015,298
Bond Fund 31,119,807 40,594,582
Bond Class II Fund 37,665,708 4,310,946
Global Growth Fund 70,793,360 7,403,809
Global Growth Class II Fund 127,607,341 1,228,727
Global Small Capitalization Fund 75,917,880 13,460,217
Global Small Capitalization Class II Fund 54,422,224 681,456
New World Fund 27,339,438 377,356
New World Class II Fund 28,079,133 250,788
--------------------------------------------- -------------- --------------
$4,960,156,539 $2,834,353,543
============== ==============
</TABLE>
5. Investments
The following is a summary of investments owned at December 31, 1999.
<TABLE>
<CAPTION>
Net
Shares Asset Value of Cost of
Outstanding Value Shares Shares
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth-Income Fund 178,310,022 $33.08 $ 5,898,495,515 $ 5,262,756,946
Growth-Income Class II Fund 34,234,628 33.07 1,132,139,150 1,281,755,464
Growth Fund 101,594,420 70.62 7,174,597,906 4,189,163,172
Growth Class II Fund 15,177,779 70.57 1,071,095,846 876,448,210
Asset Allocation Fund 86,434,251 15.07 1,302,564,162 1,123,988,323
Asset Allocation Class II
Fund 21,647,292 15.06 326,008,212 345,614,817
High-Yield Bond Fund 40,232,624 12.75 512,965,962 561,080,485
High-Yield Bond Class II
Fund 7,763,699 12.75 98,987,168 108,698,339
U.S. Government/AAA-Rated
Securities Fund 34,535,659 10.56 364,696,561 387,318,756
U.S. Government/AAA-Rated
Securities Class II Fund 4,532,247 10.56 47,860,527 50,400,104
Cash Management Fund 24,565,253 11.05 271,446,046 272,327,906
Cash Management Class II
Fund 4,321,381 11.05 47,751,238 47,898,950
International Fund 142,778,314 26.74 3,817,892,127 2,073,772,846
International Class II Fund 13,804,712 26.73 368,999,954 259,287,087
Bond Fund 16,531,814 9.74 161,019,866 168,230,353
Bond Class II Fund 8,053,408 9.74 78,440,200 82,356,104
Global Growth Fund 13,845,745 21.42 296,575,865 177,858,334
Global Growth Class II Fund 17,661,114 21.41 378,124,464 243,405,855
Global Small Capitalization
Fund 9,293,190 17.37 161,422,718 113,684,084
Global Small Capitalization
Class II Fund 5,823,631 17.36 101,098,240 73,092,852
New World Fund 2,666,559 11.77 31,385,405 26,963,568
New World Class II Fund 2,736,194 11.77 32,204,993 27,831,099
--------------------------- --------------- ---------------
$23,675,772,125 $17,753,933,654
=============== ===============
</TABLE>
6. New Investment Funds
Effective April 30, 1998, the AVIS Global Small Capitalization Fund and the
AVIS Global Small Capitalization Class II Fund became available as investment
options for Variable Account contract owners. Effective June 17, 1999, the AVIS
New World Fund and the AVIS New World Fund Class II Fund became available as
investment options for Variable Account contract owners.
H-18
<PAGE>
Report of Ernst & Young LLP,
Independent Auditors
Board of Directors of The Lincoln National Life Insurance Company
and
Contract Owners of Lincoln National Variable Annuity Account H
We have audited the accompanying statement of assets and liability of Lincoln
National Variable Annuity Account H ("Variable Account") (comprised of the AVIS
Growth-Income, AVIS Growth-Income Class II, AVIS Growth, AVIS Growth Class II,
AVIS Asset Allocation, AVIS Asset Allocation Class II, AVIS High-Yield Bond,
AVIS High-Yield Bond Class II, AVIS U.S. Government/AAA-Rated Securities, AVIS
U.S. Government/AAA-Rated Securities Class II, AVIS Cash Management, AVIS Cash
Management Class II, AVIS International, AVIS International Class II, AVIS
Bond, AVIS Bond Class II, AVIS Global Growth, AVIS Global Growth Class II, AVIS
Global Small Capitalization, AVIS Global Small Capitalization Class II, AVIS
New World Opportunities and AVIS New World Opportunities Class II Subaccounts),
as of December 31, 1999, 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 auditing standards generally
accepted in the United States. 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 investments owned as of
December 31, 1999, 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 each of the respective
subaccounts constituting the Lincoln National Variable Annuity Account H at
December 31, 1999, and the results of their operations and changes in their net
assets for each of the two years in the period then ended in conformity with
accounting principles generally accepted in the United States.
Fort Wayne, Indiana
March 10, 2000
H-19
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
--------- ---------
(IN MILLIONS)
---------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $22,985.0 $23,830.9
------------------------------------------------------------
Preferred stocks 253.8 236.0
------------------------------------------------------------
Unaffiliated common stocks 166.9 259.3
------------------------------------------------------------
Affiliated common stocks 604.7 322.1
------------------------------------------------------------
Mortgage loans on real estate 4,211.5 3,932.9
------------------------------------------------------------
Real estate 254.0 473.8
------------------------------------------------------------
Policy loans 1,652.9 1,606.0
------------------------------------------------------------
Other investments 426.6 434.4
------------------------------------------------------------
Cash and short-term investments 1,409.2 1,725.4
------------------------------------------------------------ --------- ---------
Total cash and investments 31,964.6 32,820.8
------------------------------------------------------------
Premiums and fees in course of collection 115.8 33.3
------------------------------------------------------------
Accrued investment income 435.3 432.8
------------------------------------------------------------
Reinsurance recoverable 199.0 171.6
------------------------------------------------------------
Funds withheld by ceding companies 73.5 53.7
------------------------------------------------------------
Federal income taxes recoverable from parent company 61.6 64.7
------------------------------------------------------------
Goodwill 43.1 49.5
------------------------------------------------------------
Other admitted assets 66.7 89.3
------------------------------------------------------------
Separate account assets 46,105.1 36,907.0
------------------------------------------------------------ --------- ---------
Total admitted assets $79,064.7 $70,622.7
------------------------------------------------------------ ========= =========
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $12,184.0 $12,310.6
------------------------------------------------------------
Other policyholder funds 16,589.5 16,647.5
------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 364.0 897.6
------------------------------------------------------------
Funds held under reinsurance treaties 796.9 795.8
------------------------------------------------------------
Asset valuation reserve 490.9 484.5
------------------------------------------------------------
Interest maintenance reserve 72.3 159.7
------------------------------------------------------------
Other liabilities 627.0 504.5
------------------------------------------------------------
Short-term loan payable to parent company 205.0 140.0
------------------------------------------------------------
Net transfers due from separate accounts (896.5) (789.0)
------------------------------------------------------------
Separate account liabilities 46,105.1 36,907.0
------------------------------------------------------------ --------- ---------
Total liabilities 76,538.2 68,058.2
------------------------------------------------------------
CAPITAL AND SURPLUS:
Common stock, $2.50 par value:
Authorized, issued and outstanding shares -- 10 million
(owned by Lincoln National Corporation) 25.0 25.0
------------------------------------------------------------
Surplus notes due to Lincoln National Corporation 1,250.0 1,250.0
------------------------------------------------------------
Paid-in surplus 1,942.6 1,930.1
------------------------------------------------------------
Unassigned surplus -- deficit (691.1) (640.6)
------------------------------------------------------------ --------- ---------
Total capital and surplus 2,526.5 2,564.5
------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $79,064.7 $70,622.7
------------------------------------------------------------ ========= =========
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
--------- --------- --------
(IN MILLIONS)
--------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $ 7,273.6 $12,737.6 $5,589.0
------------------------------------------------------------
Net investment income 2,203.2 2,107.2 1,847.1
------------------------------------------------------------
Amortization of interest maintenance reserve 29.1 26.4 41.5
------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 472.3 179.9 99.7
------------------------------------------------------------
Expense charges on deposit funds 146.5 134.6 119.3
------------------------------------------------------------
Separate account investment management and administration
service fees 473.9 396.3 325.5
------------------------------------------------------------
Other income 88.8 31.3 21.3
------------------------------------------------------------ --------- --------- --------
Total revenues 10,687.4 15,613.3 8,043.4
------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 8,504.9 13,964.1 4,522.1
------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 1,618.3 2,919.4 3,053.9
------------------------------------------------------------ --------- --------- --------
Total benefits and expenses 10,123.2 16,883.5 7,576.0
------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before dividends to
policyholders, income taxes and net realized gain on
investments 564.2 (1,270.2) 467.4
------------------------------------------------------------
Dividends to policyholders 80.3 67.9 27.5
------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before federal income taxes and
net realized gain on investments 483.9 (1,338.1) 439.9
------------------------------------------------------------
Federal income taxes (credit) 85.4 (141.0) 78.3
------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before net realized gain on
investments 398.5 (1,197.1) 361.6
------------------------------------------------------------
Net realized gain on investments, net of income tax expense
and excluding net transfers to the interest maintenance
reserve 114.4 46.8 31.3
------------------------------------------------------------ --------- --------- --------
Net income (loss) $ 512.9 $(1,150.3) $ 392.9
------------------------------------------------------------ ========= ========= ========
</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
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $2,564.5 $2,968.4 $1,868.0
------------------------------------------------------------
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income (loss) 512.9 (1,150.3) 392.9
------------------------------------------------------------
Difference in cost and admitted investment amounts (101.9) (304.8) (36.2)
------------------------------------------------------------
Nonadmitted assets (22.9) (17.1) (0.4)
------------------------------------------------------------
Regulatory liability for reinsurance 26.0 (35.2) (3.9)
------------------------------------------------------------
Gain on reinsurance of disability income business 71.8 -- --
------------------------------------------------------------
Life policy reserve valuation basis -- (0.4) (0.9)
------------------------------------------------------------
Asset valuation reserve (6.4) (34.5) (36.9)
------------------------------------------------------------
Proceeds from surplus notes from shareholder -- 1,250.0 --
------------------------------------------------------------
Paid-in surplus, including contribution of common stock of
affiliated company in 1997 12.5 108.4 938.4
------------------------------------------------------------
Separate account receivable due to change in valuation -- -- (2.6)
------------------------------------------------------------
Dividends to shareholder (530.0) (220.0) (150.0)
------------------------------------------------------------ -------- -------- --------
Capital and surplus at end of year $2,526.5 $2,564.5 $2,968.4
------------------------------------------------------------ ======== ======== ========
</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
1999 1998 1997
--------- ---------- ---------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 7,671.1 $ 13,495.2 $ 6,364.3
------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (19.9) (632.4) (649.2)
------------------------------------------------------------
Investment income received 2,168.6 2,003.9 1,798.8
------------------------------------------------------------
Separate account investment management and administration
service fees 470.6 396.3 325.5
------------------------------------------------------------
Benefits paid (8,699.4) (7,395.8) (5,345.2)
------------------------------------------------------------
Insurance expenses paid (1,734.5) (2,909.7) (3,193.0)
------------------------------------------------------------
Proceeds related to sale of disability income business 71.8 -- --
------------------------------------------------------------
Federal income taxes recovered (paid) (81.2) 84.2 (87.0)
------------------------------------------------------------
Dividends to policyholders (82.8) (12.9) (28.4)
------------------------------------------------------------
Other income received and expenses paid, net 252.1 207.0 (8.7)
------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) operating activities 16.4 5,235.8 (822.9)
------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 6,557.7 10,926.5 12,142.6
------------------------------------------------------------
Purchase of investments (5,940.8) (16,950.0) (10,345.0)
------------------------------------------------------------
Other sources (uses) including reinsured policy loans (497.0) (778.3) 529.1
------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) investing activities 119.9 (6,801.8) 2,326.7
------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 12.5 108.4 --
------------------------------------------------------------
Proceeds from surplus notes from shareholder -- 1,250.0 --
------------------------------------------------------------
Proceeds from borrowings from shareholder 205.0 140.0 120.0
------------------------------------------------------------
Repayment of borrowings from shareholder (140.0) (120.0) (100.0)
------------------------------------------------------------
Dividends paid to shareholder (530.0) (220.0) (150.0)
------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) financing activities (452.5) 1,158.4 (130.0)
------------------------------------------------------------ --------- ---------- ---------
Net increase (decrease) in cash and short-term investments (316.2) (407.6) 1,373.8
------------------------------------------------------------
Cash and short-term investments at beginning of year 1,725.4 2,133.0 759.2
------------------------------------------------------------ --------- ---------- ---------
Cash and short-term investments at end of year $ 1,409.2 $ 1,725.4 $ 2,133.0
------------------------------------------------------------ ========= ========== =========
</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 (the "Company") is a wholly
owned subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
Indiana. As of December 31, 1999, the Company owned 100% of the outstanding
common stock of four insurance company subsidiaries and four non-insurance
subsidiaries. The Company also owned 85% of the common stock of an Internet
distributor of variable annuities.
The Company's principal businesses consist of underwriting annuities,
deposit-type contracts and life and health insurance through multiple
distribution channels and the reinsurance of individual and group life and
health business. The Company is licensed and sells its products in 49
states, Canada and several U.S. territories.
USE OF ESTIMATES
The nature of the insurance and investment management businesses requires
management to make estimates and assumptions that affect the amounts
reported in the statutory-basis financial statements and accompanying notes.
Actual results could differ from those estimates.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Indiana Department of
Insurance ("Insurance Department"), which practices differ from accounting
principles generally accepted in the United States ("GAAP"). The more
significant variances from GAAP are as follows:
INVESTMENTS
Bonds and preferred stocks 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 and preferred stocks are
classified as available-for-sale and, accordingly, are reported at fair
value with changes in the fair values reported directly in shareholder's
equity after adjustments for related amortization of deferred acquisition
costs, additional policyholder commitments and deferred income taxes.
Investments in real estate are reported net of related obligations rather
than on a gross basis. Real estate owned and occupied by the Company is
classified as a real estate investment rather than reported as an operating
asset, and investment income and operating expenses include rent for the
Company's occupancy of those properties. Changes between cost and admitted
asset investment amounts are credited or charged directly to unassigned
surplus rather than to a separate surplus account.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the general
level of interest rates and amortizes those deferrals over the remaining
period to maturity of the individual security sold. The net deferral is
reported as the interest maintenance reserve ("IMR") in the accompanying
balance sheets. Realized capital gains and losses are reported in income net
of federal income tax and transfers to the IMR. The asset valuation reserve
("AVR") is determined by a NAIC prescribed formula and is reported as a
liability rather than unassigned surplus. Under GAAP, realized capital gains
and losses are reported in the income statement on a pre-tax basis in the
period in which the asset giving rise to the gain or loss is sold and
writedowns 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
insurance subsidiaries are carried at their statutory-basis net equity and
the non-insurance subsidiaries are carried at their GAAP-basis net equity,
adjusted for certain items which would be non-admitted under statutory
accounting principles. Both insurance subsidiaries and non-insurance
subsidiaries are presented in the balance sheet as investments in affiliated
common stocks.
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
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 policy acquisition costs, to the extent recoverable from future
gross profits, are amortized generally in proportion to the present value of
expected gross profits from surrender charges and investment, mortality and
expense margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally furniture and
equipment and certain receivables, are excluded from the accompanying
balance sheets and are charged directly to unassigned surplus.
PREMIUMS
Revenues for universal life policies consist of the entire premium received.
Under GAAP, premiums received in excess of policy charges are not recognized
as premium revenue.
Premiums and deposits with respect to annuity and other investment-type
contracts are reported as premium revenues; whereas, under GAAP, such
premiums and deposits are treated as liabilities and policy charges
represent revenues.
BENEFIT RESERVES
Certain policy reserves are calculated based on statutorily required
interest and mortality assumptions rather than on estimated expected
experience or actual account balances as would be required under GAAP.
Death benefits paid, policy and contract withdrawals, and the change in
policy reserves on universal life policies, annuity and other
investment-type contracts are reported as benefits and settlement expenses
in the accompanying statements of income; whereas, under GAAP, withdrawals
are treated as a reduction of the policy or contract liabilities and
benefits represent the excess of benefits paid over the policy account value
and interest credited to the account values.
REINSURANCE
Premiums, claims and policy benefits and contract liabilities are reported
in the accompanying financial statements net of reinsurance amounts. For
GAAP, all assets and liabilities related to reinsurance ceded contracts are
reported on a gross basis.
A liability for reinsurance balances has been provided for unsecured policy
and contract liabilities and unearned premiums ceded to reinsurers not
authorized by the Insurance Department to assume such business. Changes to
those amounts are credited or charged directly to unassigned surplus. Under
GAAP, an allowance for amounts deemed uncollectible is established through a
charge to income.
Commissions on business ceded are reported as income when received rather
than deferred and amortized with deferred policy acquisition costs. Business
assumed under 100% indemnity reinsurance agreements is accounted for as a
purchase for GAAP reporting purposes and the ceding commission represents
the purchase price. Under purchase accounting, assets acquired and
liabilities assumed are reported at fair value at the date of the
transaction and the excess of the purchase price over the sum of the amounts
assigned to assets acquired less liabilities assumed is recorded as
goodwill. On a statutory-basis, the ceding commission is expensed when paid
and reinsurance premiums and benefits are accounted for on bases consistent
with those used in accounting for the original policies issued and the terms
of the reinsurance contracts.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using
traditional reinsurance accounting; whereas, such contracts are accounted
for using deposit accounting under GAAP.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
INCOME TAXES
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
POLICYHOLDER DIVIDENDS
Policyholder dividends are recognized when declared rather than over the
term of the related policies.
SURPLUS NOTES DUE TO LNC
Surplus notes due to LNC are reported as surplus rather than as liabilities.
On a statutory-basis, interest on surplus notes is not accrued until
approval is received from the Indiana Insurance Commissioner; whereas, under
GAAP, interest would be accrued periodically based on the outstanding
principal and the interest rate.
STATEMENTS OF CASH FLOWS
Cash and short-term investments in the statements of cash flows represent
cash balances and investments with initial maturities of one year or less.
Under GAAP, the corresponding captions of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
A reconciliation of the Company's net income (loss) and capital and surplus
determined on a statutory-basis with amounts determined in accordance with
GAAP is as follows:
<TABLE>
<CAPTION>
CAPITAL AND SURPLUS NET INCOME (LOSS)
----------------------------------------------------------------------
DECEMBER 31 YEAR ENDED DECEMBER 31
1999 1998 1999 1998 1997
----------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory-basis $ 2,526.5 $ 2,564.5 $ 512.9 $(1,150.3) $392.9
-----------------------------------------
GAAP adjustments:
Deferred policy acquisition costs,
present value of future profits and
non-admitted goodwill 3,628.2 3,085.2 135.0 48.5 (98.9)
--------------------------------------
Policy and contract reserves (1,943.1) (2,299.9) (97.9) 1,743.4 (48.6)
--------------------------------------
Interest maintenance reserve 72.3 159.7 (86.6) 24.4 58.7
--------------------------------------
Deferred income taxes 244.5 181.6 (117.4) (218.6) 70.3
--------------------------------------
Policyholders' share of earnings and
surplus on participating business (122.7) (132.8) (1.8) 3.2 5.3
--------------------------------------
Asset valuation reserve 490.9 484.5 -- -- --
--------------------------------------
Net realized gain (loss) on investments (186.4) (174.1) (32.4) (116.7) (20.4)
--------------------------------------
Unrealized gain (loss) on investments (555.2) 1,335.1 -- -- --
--------------------------------------
Nonadmitted assets, including
nonadmitted investments 139.6 119.1 -- -- --
--------------------------------------
Investments in subsidiary companies 460.9 490.4 39.1 41.3 (80.5)
--------------------------------------
Surplus notes and related interest (1,250.0) (1,251.5) 1.5 (1.5) --
--------------------------------------
Other, net (61.0) (120.1) 129.8 103.6 (35.0)
-------------------------------------- --------- --------- --------- --------- ------
Net increase (decrease) 918.0 1,877.2 (30.7) 1,627.6 (149.1)
----------------------------------------- --------- --------- --------- --------- ------
Amounts on a GAAP basis $ 3,444.5 $ 4,441.7 $ 482.2 $ 477.3 $243.8
----------------------------------------- ========= ========= ========= ========= ======
</TABLE>
S-7
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Other significant accounting practices are as follows:
INVESTMENTS
Bonds not backed by loans are principally stated at amortized cost and the
discount or premium is amortized using the interest method.
Mortgage-backed bonds are valued at amortized cost and income is recognized
using a constant effective yield based on anticipated prepayments and the
estimated economic life of the securities. When actual prepayments differ
significantly from anticipated prepayments, the effective yield is
recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the securities is adjusted to the amount
that would have existed had the new effective yield been applied since the
acquisition of the securities.
Short-term investments include investments with maturities of less than one
year at the date of acquisition. The carrying amounts for these investments
approximate their fair values.
Preferred stocks are reported at cost or amortized cost.
Unaffiliated common stocks are reported at fair value as determined by the
Securities Valuation Office of the NAIC and the related unrealized gains
(losses) are reported in unassigned surplus without adjustment for federal
income taxes.
Policy loans are reported at unpaid balances.
The Company uses various derivative instruments as part of its overall
liability-asset management program for certain investments and life
insurance and annuity products. The Company values all derivative
instruments on a basis consistent with that of the hedged item. Upon
termination, gains and losses on those instruments are included in the
carrying values of the underlying hedged items or deferred in IMR, where
applicable, and are amortized over the remaining lives of the hedged items
as adjustments to investment income. 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 amortized 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 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 are
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 cash collateral received which is
typically greater than the market value of the related securities loaned. In
other instances, the Company will hold as collateral securities with a
market value at least equal to the securities loaned. Securities held as
collateral are not recorded in the Company's balance sheet in accordance
with accounting guidance for secured borrowings and collateral. The
Company's agreements with third parties generally contain contractual
provisions to allow for additional collateral to be obtained when necessary.
The Company values collateral daily and obtains additional collateral when
deemed appropriate.
GOODWILL
Goodwill, which represents the excess, subject to certain limitations, of
the ceding commission over statutory-basis net assets of business purchased
S-8
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
under an assumption reinsurance agreement, is amortized on a straight-line
basis over ten years.
PREMIUMS
Life insurance and annuity premiums are recognized as revenue when due.
Accident and health premiums are earned pro rata over the contract term of
the policies.
BENEFITS
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest rates and valuation methods that will
provide, in the aggregate, reserves that are greater than or equal to the
minimum or guaranteed policy cash values or the amounts required by the
Insurance Department. The Company waives deduction of deferred fractional
premiums on the death of life and annuity policy insureds and returns any
premium beyond the date of death, except for policies issued prior to March
1977. Surrender values on policies do not exceed the corresponding benefit
reserves. Additional reserves are established when the results of cash flow
testing under various interest rate scenerios indicate the need for such
reserves. If net premiums exceed the gross premiums on any insurance
in-force, additional reserves are established. Benefit reserves for policies
underwritten on a substandard basis are determined using the multiple table
reserve method.
The tabular interest, tabular less actual reserves released and tabular cost
have been determined by formula or from the basic data for such items.
Tabular interest funds not involving life contingencies were determined
using the actual interest credited to the funds plus the change in accrued
interest.
Liabilities related to guaranteed investment contracts and policyholder
funds left on deposit with the Company generally are equal to fund balances
less applicable surrender charges.
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Unpaid claims and claim adjustment expenses on accident and health policies
represent the estimated ultimate net cost of all reported and unreported
claims incurred during the year. The Company does not discount claims and
claim adjustment expense reserves. The reserves for unpaid claims and claim
adjustment expenses are estimated using individual case-basis valuations and
statistical analyses. Those estimates are subject to the effects of trends
in claim severity and frequency. Although considerable variability is
inherent in such estimates, management believes that the reserves for claims
and claim adjustment expenses are adequate. The estimates are continually
reviewed and adjusted as necessary as experience develops or new information
becomes known; such adjustments are included in current operations.
REINSURANCE CEDED AND ASSUMED
Reinsurance premiums, benefits and claims and claim adjustment expenses are
accounted for on bases consistent with those used in accounting for the
original policies issued and the terms of the reinsurance contracts. Certain
business is transacted on a funds withheld basis and investment income on
investments managed by the Company are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans are
systematically accrued during the expected period of active service of the
covered employees.
INCOME TAXES
The Company and eligible subsidiaries have elected to file consolidated
federal and state income tax returns with LNC and certain LNC subsidiaries.
Pursuant to an intercompany tax sharing agreement with LNC, the Company
provides for income taxes on a separate return filing basis. The tax sharing
agreement also provides that the Company will receive benefit for net
operating losses, capital losses and tax credits which are not usable on a
separate return basis to the extent such items may be utilized in the
consolidated income tax returns of LNC.
STOCK OPTIONS
The Company recognizes compensation expense for its stock option incentive
plans using the intrinsic value method of accounting. Under the terms of the
intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
LNC's common stock at the grant date, or other measurement date, over the
amount an employee or agent must pay to acquire the stock.
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
ACCOUNTS
Separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered for variable life
and variable annuity contracts and for which the contractholder, rather than
the Company, bears the investment risk. Separate account assets are reported
at fair value. The operations of the separate accounts are not included in
the accompanying financial statements. Policy administration and investment
management fees charged on separate account policyholder deposits are
included in income from separate account investment management and
administration service fees. Mortality charges on variable universal life
contracts are included in income from expense charges on deposit funds. Fees
charged relative to variable annuity and variable universal life
administration agreements for separate account products sold by other
insurance companies and not recorded on the Company's financial statements
are included in income from separate account investment management and
administration service fees.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in
accordance with accounting practices prescribed or permitted by the
Insurance Department. "Prescribed" statutory accounting practices are
interspersed throughout state insurance laws and regulations, the NAIC's
ACCOUNTING PRACTICES AND PROCEDURES MANUAL and a variety of other NAIC
publications. "Permitted" statutory accounting practices encompass all
accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state and may
change in the future.
In 1998, the NAIC adopted codified statutory accounting principles
("Codification") effective January 1, 2001. Codification will likely change,
to some extent, prescribed statutory accounting practices and may result in
changes to the accounting practices that the Company uses to prepare its
statutory-basis financial statements. Codification will require adoption by
the various states before it becomes the prescribed statutory-basis of
accounting for insurance companies domesticated within those states.
Accordingly, before Codification becomes effective for the Company, the
state of Indiana must adopt Codification as the prescribed basis of
accounting on which domestic insurers must report their statutory-basis
results to the Insurance Department. At this time, it is anticipated that
Indiana will adopt Codification, however, based on current guidance,
management believes that the impact of Codification will not be material to
the Company's statutory-basis financial statements.
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
1999 1998 1997
--------------------------------------
(IN MILLIONS)
--------------------------------------
<S> <C> <C> <C>
Income:
Bonds $1,840.6 $1,714.3 $1,524.4
------------------------------------------------------------
Preferred stocks 20.3 19.7 23.5
------------------------------------------------------------
Unaffiliated common stocks 6.3 10.6 8.3
------------------------------------------------------------
Affiliated common stocks 7.8 5.2 15.0
------------------------------------------------------------
Mortgage loans on real estate 321.0 323.6 257.2
------------------------------------------------------------
Real estate 57.8 81.4 92.2
------------------------------------------------------------
Policy loans 101.7 86.5 37.5
------------------------------------------------------------
Other investments 50.6 26.5 28.2
------------------------------------------------------------
Cash and short-term investments 95.9 104.7 70.3
------------------------------------------------------------ -------- -------- --------
Total investment income 2,502.0 2,372.5 2,056.6
------------------------------------------------------------
Expenses:
Depreciation 14.4 19.3 21.0
------------------------------------------------------------
Other 284.4 246.0 188.5
------------------------------------------------------------ -------- -------- --------
Total investment expenses 298.8 265.3 209.5
------------------------------------------------------------ -------- -------- --------
Net investment income $2,203.2 $2,107.2 $1,847.1
------------------------------------------------------------ ======== ======== ========
</TABLE>
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, 1999:
Corporate $17,758.4 $ 229.6 $763.0 $17,225.0
------------------------------------------------
U.S. government 316.8 29.6 21.5 324.9
------------------------------------------------
Foreign government 984.5 49.8 39.9 994.4
------------------------------------------------
Mortgage-backed 3,913.7 46.2 139.0 3,820.9
------------------------------------------------
State and municipal 11.6 -- .5 11.1
------------------------------------------------ --------- -------- ------ ---------
$22,985.0 $ 355.2 $963.9 $22,376.3
========= ======== ====== =========
At December 31, 1998:
Corporate $17,658.4 $1,159.8 $148.2 $18,670.0
------------------------------------------------
U.S. government 900.7 88.8 3.4 986.1
------------------------------------------------
Foreign government 947.8 59.9 61.2 946.5
------------------------------------------------
Mortgage-backed 4,312.1 171.6 33.4 4,450.3
------------------------------------------------
State and municipal 11.9 .7 -- 12.6
------------------------------------------------ --------- -------- ------ ---------
$23,830.9 $1,480.8 $246.2 $25,065.5
========= ======== ====== =========
</TABLE>
The carrying amounts of bonds in the balance sheets at
December 31, 1999 and 1998 reflect adjustments of
$38,900,000 and $11,800,000, respectively, to decrease
amortized cost as a result of the Securities Valuation
Office of the NAIC ("SVO") designating certain investments
as in or near default.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1999, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Maturity:
In 2000 $ 598.0 $ 599.2
------------------------------------------------------------
In 2001-2004 4,359.8 4,313.4
------------------------------------------------------------
In 2005-2009 6,636.0 6,392.9
------------------------------------------------------------
After 2009 7,477.5 7,249.9
------------------------------------------------------------
Mortgage-backed securities 3,913.7 3,820.9
------------------------------------------------------------ --------- ---------
Total $22,985.0 $22,376.3
------------------------------------------------------------ ========= =========
</TABLE>
S-12
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The expected maturities may differ from the contractual
maturities in the foregoing table because certain borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
Proceeds from sales of investments in bonds during 1999,
1998 and 1997 were $5,351,400,000, $9,395,000,000 and
$9,715,000,000, respectively. Gross gains during 1999, 1998
and 1997 of $95,400,000, $186,300,000 and $218,100,000,
respectively, and gross losses of $195,500,000, $138,000,000
and $78,000,000, respectively, were realized on those sales.
At December 31, 1999 and 1998, investments in bonds, with an
admitted asset value of $116,500,000 and $97,800,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
Unrealized gains and losses on investments in unaffiliated
common stocks are reported directly in unassigned surplus
and are not reported in the statutory-basis Statements of
Operations. The cost or amortized cost, gross unrealized
gains and losses and the fair value of investments in
unaffiliated common stocks and preferred stocks are as
follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------
(IN MILLIONS)
-----------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1999:
Preferred stocks $253.8 $ 1.3 $31.5 $223.6
----------------------------------------
Unaffiliated common stocks 150.4 34.2 17.7 166.9
----------------------------------------
At December 31, 1998:
Preferred stocks $236.0 $ 8.9 $ 2.4 $242.5
----------------------------------------
Unaffiliated common stocks 223.3 62.0 26.0 259.3
----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1999 and 1998 reflects adjustments of
$4,100,000 and $5,800,000, respectively, to decrease
amortized cost as a result of the SVO designating certain
investments as low or lower quality.
During 1999, the minimum and maximum lending rates for
mortgage loans were 6.5% and 11.5%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. All properties covered by
mortgage loans have fire insurance at least equal to the
excess of the loan over the maximum loan that would be
allowed on the land without the building.
S-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
Components of the Company's investments in real estate are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------
(IN MILLIONS)
-------------------
<S> <C> <C>
Occupied by the Company:
Land $ 2.5 $ 2.5
------------------------------------------------------------
Buildings 11.1 9.0
------------------------------------------------------------
Less accumulated depreciation (2.2) (1.7)
------------------------------------------------------------ ------ ------
Net real estate occupied by the Company 11.4 9.8
------------------------------------------------------------
Other:
Land 46.2 93.2
------------------------------------------------------------
Buildings 226.8 413.0
------------------------------------------------------------
Other 4.7 7.9
------------------------------------------------------------
Less accumulated depreciation (35.1) (50.1)
------------------------------------------------------------ ------ ------
Net other real estate 242.6 464.0
------------------------------------------------------------ ------ ------
Net real estate $254.0 $473.8
------------------------------------------------------------ ====== ======
</TABLE>
Net realized capital gains are reported net of federal
income taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------
(IN MILLIONS)
--------------------------------
<S> <C> <C> <C>
Net realized capital gains $ 20.8 $179.7 $209.3
------------------------------------------------------------
Less amount transferred to IMR (net of related taxes
(credits) of ($31.4), $27.3 and $54.0 in 1999, 1998 and
1997, respectively) (58.3) 50.8 100.2
------------------------------------------------------------ ------ ------ ------
79.1 128.9 109.1
Less federal income taxes (credits) on realized gains (35.3) 82.1 77.8
------------------------------------------------------------ ------ ------ ------
Net realized capital gains after transfer to IMR and taxes
(credits) $114.4 $ 46.8 $ 31.3
------------------------------------------------------------ ====== ====== ======
</TABLE>
4. SUBSIDIARIES
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 ("LNY"). The Company also owns 100% of
the outstanding common stock of four non-insurance company
subsidiaries: Lincoln National Insurance Associates
("LNIA"), Sagemark Consulting, Inc. ("Sagemark"), Wakefield
Tower Alpha Limited ("Wakefield"), and Lincoln Realty
Capital
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
Corporation ("LRCC"). The Company also owns 85% of one
non-insurance company subsidiary, AnnuityNet, Inc.
(AnnuityNet). Statutory-basis financial information related
to the insurance subsidiaries is summarized as follows (in
millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------
FIRST
PENN LNH&C LNRAC LNY
----------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $1,318.7 $434.6 $443.6 $1,888.6
---------------------------------------------------------
Other assets 40.6 55.5 492.6 403.1
--------------------------------------------------------- -------- ------ ------ --------
Total admitted assets $1,359.3 $490.1 $936.2 $2,291.7
--------------------------------------------------------- ======== ====== ====== ========
Insurance reserves $1,242.2 $394.4 $261.4 $1,802.4
---------------------------------------------------------
Other liabilities 44.3 27.9 614.4 25.6
---------------------------------------------------------
Liabilities related to separate accounts -- -- -- 328.8
---------------------------------------------------------
Capital and surplus 72.8 67.8 60.4 134.9
--------------------------------------------------------- -------- ------ ------ --------
Total liabilities and capital and surplus $1,359.3 $490.1 $936.2 $2,291.7
--------------------------------------------------------- ======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------
FIRST
PENN LNH&C LNRAC LNY
-----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $332.7 $263.3 $ 88.4 $ 313.3
-----------------------------------------------------------
Expenses 329.0 346.9 75.4 291.4
-----------------------------------------------------------
Net realized gains (losses) -- -- .2 (2.0)
----------------------------------------------------------- ------ ------ ------ --------
Net income (loss) $ 3.7 $(83.6) $ 13.2 $ 19.9
----------------------------------------------------------- ====== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------
FIRST
PENN LNH&C LNRAC LNY
----------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $1,221.1 $333.9 $403.6 $1,938.0
----------------------------------------------------------
Other assets 40.3 31.3 490.0 270.2
---------------------------------------------------------- -------- ------ ------ --------
Total admitted assets $1,261.4 $365.2 $893.6 $2,208.2
---------------------------------------------------------- ======== ====== ====== ========
Insurance reserves $1,149.8 $266.3 $281.8 $1,814.5
----------------------------------------------------------
Other liabilities 42.0 24.0 553.7 45.1
----------------------------------------------------------
Liabilities related to separate accounts -- -- -- 236.9
----------------------------------------------------------
Capital and surplus 69.6 74.9 58.1 111.7
---------------------------------------------------------- -------- ------ ------ --------
Total liabilities and capital and surplus $1,261.4 $365.2 $893.6 $2,208.2
---------------------------------------------------------- ======== ====== ====== ========
</TABLE>
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------
FIRST
PENN LNH&C LNRAC LNY
---------------------------------
<S> <C> <C> <C> <C>
Revenues $310.4 $ 165.0 $150.3 $1,402.6
-----------------------------------------------------------
Expenses 310.6 164.4 139.5 1,656.1
-----------------------------------------------------------
Net realized gains (losses) (0.3) 0.9 (0.1) (0.7)
----------------------------------------------------------- ------ ------- ------ --------
Net income (loss) $ (0.5) $ 1.5 $10.7 $ (254.2)
----------------------------------------------------------- ====== ======= ====== ========
</TABLE>
AnnuityNet was formed in 1998 for the distribution of
variable annuities over the Internet and is valued on the
equity method (at 85% of GAAP equity) with an admitted asset
value of $2,400,000 at December 31, 1999. LNIA was purchased
in 1998 for $600,000 and is valued on the equity method with
an admitted asset value of $800,000 at December 31, 1999.
Sagemark is a broker dealer and was acquired in connection
with a reinsurance transaction completed in 1998. Sagemark
is valued on the equity method with an admitted asset value
of $6,400,000 at December 31, 1999. Wakefield was formed in
1999 to engage in the ownership and management of
investments and is valued on the equity method with an
admitted asset value of $248,300,000. Wakefield's assets as
of December 31, 1999 consist entirely of investments in
bonds. LRCC was formed in 1999 to engage in the management
of certain real estate investments. It was capitalized with
cash and three real estate investments of $12,700,000 and is
valued on the equity method with an admitted asset value of
$10,900,000.
The carrying value of all affiliated common stocks, was
$604,700,000 and $322,100,000 at December 31, 1999 and 1998,
respectively. The insurance affiliates are carried at
statutory-basis net equity while other affiliates are
recorded at GAAP-basis net equity, adjusted for certain
items which would be non-admitted under statutory accounting
principles. The cost basis of investments in subsidiaries as
of December 31, 1999 and 1998 was $970,700,000 and
$631,100,000, respectively.
During 1999, 1998 and 1997 the Company's insurance
subsidiaries paid dividends of $5,200,000, $5,200,000 and
$15,000,000, respectively.
5. FEDERAL INCOME TAXES
The effective federal income tax rate in the accompanying
Statements of Operations differs from the prevailing
statutory tax rate principally due to tax-exempt investment
income, dividends received tax deductions and differences
between statutory accounting and tax return recognition
relative to policy acquisition costs, policy and contract
liabilities and reinsurance ceding commissions.
In 1999, 1998 and 1997, federal income tax expense (benefit)
incurred totaled $85,400,000, ($141,000,000) and
$78,300,000, respectively. In 1999, capital losses of
$151,700,000 were incurred, and carried back to recover
taxes paid in prior years.
The Company paid $45,300,000, $2,300,000 and $164,500,000 to
LNC in 1999, 1998 and 1997, respectively, in federal income
taxes.
Under prior income tax law, one-half of the excess of a life
insurance company's income from operations over its taxable
investment income was not taxed, but was set aside in a
special tax account designated as "Policyholders' Surplus."
The Company has approximately $187,000,000 of untaxed
"Policyholders' Surplus" on which no payment of federal
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
income taxes will be required unless it is distributed as a
dividend, or under other specified conditions. Barring the
passage of unfavorable legislation, the Company does not
believe that any significant portion of the account will be
taxed in the foreseeable future and no related tax liability
has been recognized. If the entire balance of the account
became taxable under the current federal income tax rate,
the tax would be approximately $65,500,000.
6. SUPPLEMENTAL FINANCIAL DATA
The balance sheet caption "Reinsurance recoverable" includes
amounts recoverable from other insurers for claims paid by
the Company. The balance sheet caption, "Future policy
benefits and claims," and the balance sheet caption "Other
policyholder funds" have been reduced for insurance ceded as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Insurance ceded $5,340.0 $4,081.8
------------------------------------------------------------
Amounts recoverable from other insurers 81.2 79.9
------------------------------------------------------------
</TABLE>
Reinsurance transactions, excluding assumption reinsurance,
included in the income statement caption, "Premiums and
deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------
(IN MILLIONS)
------------------------------------
<S> <C> <C> <C>
Insurance assumed $2,606.5 $9,018.9 $727.2
------------------------------------------------------------
Insurance ceded 1,675.1 877.1 302.9
------------------------------------------------------------ -------- -------- ------
Net amount included in premiums $ 931.4 $8,141.8 $424.3
------------------------------------------------------------ ======== ======== ======
</TABLE>
The income statement caption, "Benefits and settlement
expenses," is net of reinsurance recoveries of
$2,609,000,000, $2,098,800,000 and $1,240,500,000 for 1999,
1998 and 1997, respectively.
Details underlying the balance sheet caption "Other
policyholder funds" are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Premium deposit funds $16,208.3 $16,285.2
------------------------------------------------------------
Undistributed earnings on participating business 346.9 348.4
------------------------------------------------------------
Other 34.3 13.9
------------------------------------------------------------ --------- ---------
$16,589.5 $16,647.5
========= =========
</TABLE>
S-17
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
6. SUPPLEMENTAL FINANCIAL DATA (CONTINUED)
Deferred and uncollected life insurance premiums and annuity
considerations included in the balance sheet caption,
"Premiums and fees in course of collection," are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------
NET OF
GROSS LOADING LOADING
---------------------------------
(IN MILLIONS)
---------------------------------
<S> <C> <C> <C>
Ordinary new business $10.8 $ 7.3 $ 3.5
------------------------------------------------------------
Ordinary renewal 54.2 6.8 47.4
------------------------------------------------------------
Group life 13.7 .1 13.6
------------------------------------------------------------ ----- ----- -----
$78.7 $14.2 $64.5
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------
NET OF
GROSS LOADING LOADING
---------------------------------
(IN MILLIONS)
---------------------------------
<S> <C> <C> <C>
Ordinary new business $ 9.5 $ 3.4 $ 6.1
------------------------------------------------------------
Ordinary renewal (13.7) 11.3 (25.0)
------------------------------------------------------------
Group life 14.2 .2 14.0
------------------------------------------------------------ ----- ----- -----
$10.0 $14.9 $(4.9)
===== ===== =====
</TABLE>
7. ANNUITY RESERVES
At December 31, 1999, the Company's annuity reserves and
deposit fund liabilities, including separate accounts, that
are subject to discretionary withdrawal with adjustment,
subject to discretionary withdrawal without adjustment and
not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value adjustment $ 2,427.7 4%
------------------------------------------------------------
At book value, less surrender charge 2,237.3 3
------------------------------------------------------------
At market value 44,076.2 68
------------------------------------------------------------ --------- ---
48,741.2 75
Subject to discretionary withdrawal without adjustment at
book value with minimal or no charge or adjustment 13,486.5 21
------------------------------------------------------------
Not subject to discretionary withdrawal 2,622.4 4
------------------------------------------------------------ --------- ---
Total annuity reserves and deposit fund 64,850.1 100%
------------------------------------------------------------ ===
Less reinsurance 1,548.0
------------------------------------------------------------ ---------
Net annuity reserves and deposit fund liabilities, including
separate accounts $63,302.1
------------------------------------------------------------ =========
</TABLE>
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL AND SURPLUS
In 1998, the Company issued two surplus notes to LNC in return for cash of
$1,250,000,000. The first note for $500,000,000 was issued to LNC in
connection with the CIGNA Corporation ("CIGNA")indemnity reinsurance
transaction on January 5, 1998. This note calls for the Company to pay the
principal amount of the notes on or before March 31, 2028 and interest to be
paid quarterly at an annual rate of 6.56%. Subject to approval by the
Indiana Insurance Commissioner, LNC also has a right to redeem the note for
immediate repayment in total or in part once per year on the anniversary
date of the note, but not before January 5, 2003. Any payment of interest or
repayment of principal may be paid only out of the Company's earnings, only
if the Company's surplus exceeds specified levels ($2,315,700,000 at
December 31, 1999), and subject to approval by the Indiana Insurance
Commissioner.
The second note for $750,000,000 was issued on December 18, 1998 to LNC in
connection with the Aetna, Inc. ("Aetna") indemnity reinsurance transaction.
This note calls for the Company to pay the principal amount of the notes on
or before December 31, 2028 and interest to be paid quarterly at an annual
rate of 6.03%. Subject to approval by the Indiana Insurance Commissioner,
LNC also has a right to redeem the note for immediate repayment in total or
in part once per year on the anniversary date of the note, but not before
December 18, 2003. Any payment of interest or repayment of principal may be
paid only out of the Company's earnings, only if the Company's surplus
exceeds specified levels ($2,379,600,000 at December 31, 1999), and subject
to approval by the Indiana Insurance Commissioner.
A summary of the terms of these surplus notes follows (in millions):
<TABLE>
<CAPTION>
PRINCIPAL INCEPTION ACCRUED
OUTSTANDING AT TO DATE INTEREST AT
PRINCIPAL DECEMBER 31, CURRENT YEAR INTEREST DECEMBER 31,
DATE ISSUED AMOUNT OF NOTE 1999 INTEREST PAID PAID 1999
----------- -------------- -------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
January 5, 1998 $ 500.0 $ 500.0 $ 32.8 $ 65.1 $ --
-------------------------------
December 18, 1998 750.0 750.0 46.7 46.7 --
-------------------------------
</TABLE>
Life insurance companies are subject to certain Risk-Based Capital ("RBC")
requirements as specified by the NAIC. Under those requirements, the amount
of capital and surplus maintained by a life insurance company is to be
determined based on the various risk factors related to it. At December 31,
1999, the Company exceeds the RBC requirements.
The payment of dividends by the Company is limited and cannot be made except
from earned profits. The maximum amount of dividends that may be paid by
life insurance companies without prior approval of the Indiana Insurance
Commissioner is subject to restrictions relating to statutory surplus and
net gain from operations. In January 1998, the Company assumed a block of
individual life insurance and annuity business from CIGNA and in
October 1998, the Company assumed a block of individual life insurance
business from Aetna (SEE NOTE 10). The statutory accounting regulations do
not allow goodwill to be recognized on indemnity reinsurance transactions
and therefore, the related ceding commission was expensed in the
accompanying Statement of Operations and resulted in the reduction of
unassigned surplus. As a result of these transactions, the Company's
statutory-basis unassigned surplus is negative as of December 31, 1999 and
it will be necessary for the Company to obtain prior approval of the Indiana
Insurance Commissioner before paying any dividends to LNC until such time as
statutory-basis unassigned surplus is positive. The time frame for
unassigned surplus to return to a positive position is dependent upon future
statutory earnings and dividends paid to LNC. Although no assurance can be
given, management believes that the approvals for the payment of such
dividends in amounts consistent with those paid in the past can be obtained.
S-19
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFIT PLANS
LNC maintains defined benefit pension plans for its employees (including
Company employees) and a defined contribution plan for the Company's agents.
LNC also maintains 401(k) plans, deferred compensation plans and
postretirement medical and life insurance plans for its employees and agents
(including the Company's employees and agents). Effective July 1, 1999, the
agents' postretirement plan was changed to require agents retiring on or
after that date to pay the full premium costs. This change to the plan
resulted in a one-time curtailment gain of $1,400,000 in 1999. 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 Operations 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. Options issued subsequent to 1991
are exercisable in 25% increments on the option issuance anniversary in the
four years following issuance.
As of December 31, 1999, there were 2,072,087 and 1,397,005 shares of LNC
common stock subject to options granted to Company employees and agents,
respectively, under the stock option incentive plans of which 919,749 and
241,097, respectively, were exercisable on that date. The exercise prices of
the outstanding options range from $12.50 to $56.75. During 1999, 1998 and
1997, there were 318,421, 136,469 and 170,789 options exercised,
respectively, and 82,024, 18,288 and 1,846 options 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, 1999 and 1998 is
$221,600,000 and $670,100,000, respectively. This liability is based on the
assumption that the recent experience will continue in the future. If
incidence levels and/or claim termination rates fluctuate significantly from
the assumptions underlying reserves, adjustments to reserves could be
required in the future. Accordingly, this liability may prove to be
deficient or excessive. The Company reviews reserve levels on an ongoing
basis. However, it is management's opinion that such future development will
not materially affect the financial position of the Company.
During 1997, the Company conducted an in-depth review of loss experience on
its disability income business. As a result of this study, the reserve level
was deemed to be inadequate to meet future obligations if current incident
levels were to continue in the future. In order to address this situation,
the Company strengthened its disability income reserves by $80,000,000 in
1997.
PERSONAL ACCIDENT PROGRAMS
In the past, the Company and its wholly owned subsidiary, LNH&C, accepted
personal accident reinsurance programs from other insurance companies. Most
of these programs were presented by independent brokers who represented the
ceding companies. Certain excess-of-loss personal accident reinsurance
programs created in the London market during 1993 through 1996 have produced
and have potential to produce significant losses. The liabilities for these
programs, net of related assets recoverable from reinsurers, were
$174,700,000 and $177,400,000 at December 31, 1999 and 1998, respectively.
Settlement activities relating to the Company's participation in workers'
compensation carve-out (i.e., life and health risks associated with workers'
compensation coverage) programs managed by Unicover Managers, Inc. have
allowed the Company to evaluate the possibility of settlements and to
estimate its potential costs to settle Unicover-related exposures. As of
December 31, 1999, a liability of $62,200,000 has been established for the
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
settlement of the Company's exposure to the Unicover programs.
These amounts are based on various estimates that are subject to
considerable uncertainty. Accordingly, the liabilities may prove to be
deficient or excessive. However, it is management's opinion that future
developments in these programs will not materially affect the financial
position of the Company.
HMO EXCESS-OF-LOSS REINSURANCE PROGRAMS
In light of the continued volatility in the HMO excess-of-loss line of
business, LNH&C discontinued writing new HMO excess-of-loss reinsurance
programs in the third quarter of 1999. The liability for HMO claims, net of
the related assets for amounts recoverable from reinsurers, was $101,900,000
and $55,900,000 at December 31, 1999 and 1998, respectively. LNH&C reviews
reserve levels on an ongoing basis. The liability is based on the assumption
that recent experience will continue in the future. If claims and loss
ratios fluctuate significantly from the assumptions underlying the reserves,
adjustments to reserves could be required in the future. Accordingly, the
liability may prove to be deficient or excessive. However, it is
management's opinion that such future developments will not materially
affect the financial position of the Company.
MARKETING AND COMPLIANCE MATTERS
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 1999, 1998 and 1997 was
$38,900,000, $34,000,000 and $29,300,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
2000 $ 28.7
--------------------------------
2001 28.8
--------------------------------
2002 27.5
--------------------------------
2003 26.2
--------------------------------
2004 26.5
--------------------------------
Thereafter 123.5
-------------------------------- ------
$261.2
======
</TABLE>
INFORMATION TECHNOLOGY COMMITMENT
In February 1998, the Company signed a seven-year contract with IBM Global
Services for information technology services for the Fort Wayne
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
operations. Total costs incurred in 1999 and 1998 were $67,400,000 and
$54,800,000, respectively. Future minimum annual costs range from
$33,600,000 to $56,800,000, however future costs are dependent on usage and
could exceed these amounts.
INSURANCE CEDED AND ASSUMED
The Company cedes insurance to other companies, including certain
affiliates. The portion of risks exceeding the Company's retention limit is
reinsured with other insurers. The Company limits its maximum coverage that
it retains on an individual to $10,000,000. Portions of the Company's
deferred annuity business have also been coinsured with other companies to
limit its exposure to interest rate risks. At December 31, 1999, the
reserves associated with these reinsurance arrangements totaled
$1,422,800,000. 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.
Proceeds from the sale of common stock of American States Financial
Corporation ("American States") and proceeds from the January 5, 1998
surplus note, were used to finance an indemnity reinsurance transaction
whereby the Company and LNY reinsured 100% of a block of individual life
insurance and annuity business from CIGNA. The Company paid $1,264,400,000
to CIGNA on January 2, 1998 under the terms of the reinsurance agreement and
recognized a ceding commission expense of $1,127,700,000 in 1998, which is
included in the Statement of Operations line item "Underwriting,
acquisition, insurance and other expenses." At the time of closing, this
block of business had statutory liabilities of $4,780,300,000 that became
the Company's obligation. The Company also received assets, measured on a
historical statutory-basis, equal to the liabilities.
In connection with the completion of the CIGNA reinsurance transaction, the
Company recorded a charge of $31,000,000 to cover certain costs of
integrating the existing operations with the new block of business.
In 1999, the Company and CIGNA reached an agreement through arbitration on
the final statutory-basis values of the assets and liabilities reinsured. As
a result, the Company's ceding commission for this transaction was reduced
by $58.6 million.
Subsequent to this transaction, the Company and LNY announced that they had
reached an agreement to sell the administration rights to a variable annuity
portfolio that had been acquired as part of the block of business assumed on
January 2, 1998. This sale closed on October 12, 1998 with an effective date
of September 1, 1998.
On October 1, 1998, the Company and LNY entered into an indemnity
reinsurance transaction whereby the Company and LNY reinsured 100% of a
block of individual life insurance business from Aetna. The Company paid
$856,300,000 to Aetna on October 1, 1998 under the terms of the reinsurance
agreement and recognized a ceding commission expense of $815,300,000 in
1998, which is included in the Statement of Operations line item
"Underwriting, acquisition, insurance and other expenses." At the time of
closing, this block of business had statutory liabilities of $2,813,800,000
that became the Company's obligation. The Company also received assets,
measured on a historical statutory-basis, equal to the liabilities. The
Company financed this reinsurance transaction with proceeds from short-term
debt borrowings from LNC until the December 18, 1998 surplus note was
approved by the Insurance Department. Subsequent to the Aetna transaction,
the Company and LNY announced that they had reached an agreement to
retrocede the sponsored life business assumed for $87,600,000. The
retrocession agreement closed on October 14, 1998 with an effective date of
October 1, 1998.
On November 1, 1999, the Company closed its previously announced agreement
to transfer a block of disability income business to MetLife. Under this
indemnity reinsurance agreement, the Company transferred $490,800,000 of
cash to MetLife representing the statutory reserves transferred on this
business less $17,800,000 of purchase price consideration. A gain on the
reinsurance transaction of $71,800,000 was recorded directly in unassigned
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
surplus and will be recognized in statutory earnings over the life of the
business.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1999, the Company provided $270,000,000 of
statutory-basis surplus relief to other insurance companies under
reinsurance transactions. The Company retroceded 100% of this accepted
surplus relief to its off-shore reinsurance affiliates. Generally, such
amounts are offset by corresponding receivables from the ceding company,
which are secured by future profits on the reinsured business. However, the
Company is subject to the risk that the ceding company may become insolvent
and the right of offset would not be permitted.
The regulatory required liability for unsecured reserves ceded to
unauthorized reinsurers was $17,300,000 and $43,400,000 at December 31, 1999
and 1998, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1999, the Company did not have a material concentration of
financial instruments in a single investee or industry. The Company's
investments in mortgage loans principally involve commercial real estate. At
December 31, 1999, 29% of such mortgages ($1,212,700,000) involved
properties located in Texas and California. Such investments consist of
first mortgage liens on completed income-producing properties and the
mortgage outstanding on any individual property does not exceed $70,000,000.
At December 31, 1999, 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 certain claims in excess of $5,000,000. The
degree of applicability of this coverage will depend on the specific facts
of each proceeding. In some instances, these proceedings include claims for
compensatory and punitive damages and similar types of relief in addition to
amounts for alleged contractual liability or requests for equitable relief.
After consultation with legal counsel and a review of available facts, it is
management's opinion that the ultimate liability, if any, under these
proceedings will not have a material adverse affect on the financial
position of the Company.
With the recent filing of a lawsuit alleging fraud in the sale of interest
sensitive universal and whole life insurance policies, the Company now has
several such actions pending. While each of these lawsuits seeks class
action status, the court has not certified a class in any of them. In each
of these lawsuits, plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. While relief sought in these
lawsuits is substantial, they are in the discovery stages of litigation, and
it is premature to make assessments about potential loss, if any. Management
intends to defend these lawsuits vigorously. The amount of liability, if
any, which may arise as a result of these lawsuits cannot be reasonably
estimated at this time. In another lawsuit, a settlement has been
preliminarily approved by the court, and a class has been conditionally
certified for settlement purposes. Two other similar lawsuits previously
have been resolved and dismissed.
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
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
credit exposure. Outstanding guarantees with off-balance-sheet risks at
December 31, 1999 relate to mortgage loan pass-through certificates. The
Company has sold commercial mortgage loans through grantor trusts that
issued pass-through certificates. The Company has agreed to repurchase any
mortgage loans which remain delinquent for 90 days at a repurchase price
substantially equal to the outstanding principal balance plus accrued
interest thereon to the date of repurchase. The outstanding guarantees as of
December 31, 1999 and 1998 were $25,900,000 and $30,900,000, respectively.
It is management's opinion that the value of the properties underlying these
commitments is sufficient that in the event of default the impact would not
be material to the Company. Accordingly, both the carrying value and fair
value of these guarantees is zero at December 31, 1999 and 1998.
DERIVATIVES
The Company has derivatives with off-balance-sheet risks whose notional or
contract amounts exceed the credit exposure. The Company has entered into
derivative transactions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable maturity U.S.
government obligations, commodity risk, credit risk 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:
<TABLE>
<CAPTION>
ASSETS (LIABILITIES)
---------------------------------
NOTIONAL OR CARRYING FAIR CARRYING FAIR
CONTRACT AMOUNTS VALUE VALUE VALUE VALUE
-----------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1999 1999 1998 1998
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $2,508.8 $4,108.8 $ 5.2 $ 3.2 $ 9.3 $ .9
---------------------------------
Swaptions 1,837.5 1,899.5 12.2 10.8 16.2 2.5
---------------------------------
Interest rate swaps 630.9 258.3 -- (19.5) -- 9.9
---------------------------------
Put options 21.3 21.3 -- 1.9 -- 2.2
--------------------------------- -------- -------- ----- ------ ----- -----
4,998.5 6,287.9 17.4 (3.6) 25.5 15.5
Foreign currency derivatives:
Forward contracts -- 1.5 -- -- -- --
---------------------------------
Foreign currency swaps 44.2 47.2 -- (.4) -- .3
--------------------------------- -------- -------- ----- ------ ----- -----
44.2 48.7 -- (.4) -- .3
Commodity derivatives:
Commodity swaps -- 8.1 -- -- -- 2.4
--------------------------------- -------- -------- ----- ------ ----- -----
$5,042.7 $6,344.7 $17.4 $ (4.0) $25.5 $18.2
======== ======== ===== ====== ===== =====
</TABLE>
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
A reconciliation of the notional or contract amounts for the significant
programs using derivative agreements and contracts at December 31 is as
follows:
<TABLE>
<CAPTION>
INTEREST RATE CAPS SWAPTIONS
-----------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $4,108.8 $4,900.0 $1,899.5 $1,752.0
-------------------------------------------------------
New contracts -- 708.8 -- 218.3
-------------------------------------------------------
Terminations and maturities (1,600.0) (1,500.0) (62.0) (70.8)
------------------------------------------------------- -------- -------- -------- --------
Balance at end of year $2,508.8 $4,108.8 $1,837.5 $1,899.5
------------------------------------------------------- ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
INTEREST RATE SWAPS
-----------------------
1999 1998
-----------------------
<S> <C> <C>
Balance at beginning of year $ 258.3 $ 10.0
------------------------------------------------------------
New contracts 482.4 2,226.6
------------------------------------------------------------
Terminations and maturities (109.8) (1,978.3)
------------------------------------------------------------ ------- ---------
Balance at end of year $ 630.9 $ 258.3
------------------------------------------------------------ ======= =========
</TABLE>
<TABLE>
<CAPTION>
COMMODITY
PUT OPTIONS SWAPS
----------------------------------------
1999 1998 1999 1998
----------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $21.3 $ -- $ 8.1 $ --
------------------------------------------------------------
New contracts -- 21.3 -- 8.1
------------------------------------------------------------
Terminations and maturities -- -- (8.1) --
------------------------------------------------------------ ----- ----- ----- ----
Balance at end of year $21.3 $21.3 $ -- $8.1
------------------------------------------------------------ ===== ===== ===== ====
</TABLE>
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES
(FOREIGN INVESTMENTS)
-------------------------------------------
FOREIGN CURRENCY
SWAPS
FOREIGN EXCHANGE
-------------------------------------------
FORWARD CONTRACTS
1999 1998 1999 1998
-------------------------------------------
(IN MILLIONS)
-------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 1.5 $ 163.1 $47.2 $15.0
------------------------------------------------------------
New contracts 2.7 419.8 -- 39.2
------------------------------------------------------------
Terminations and maturities (4.2) (581.4) (3.0) (7.0)
------------------------------------------------------------ ----- ------- ----- -----
Balance at end of year $ -- $ 1.5 $44.2 $47.2
------------------------------------------------------------ ===== ======= ===== =====
</TABLE>
INTEREST RATE CAP AGREEMENTS
The interest rate cap agreements, which expire in 2000 through 2006, entitle
the Company to receive quarterly payments from the counterparties on
specified future reset dates, contingent on future interest rates. For each
cap, the amount of such payments, if any, is determined by the excess of a
market interest rate over a specified cap rate multiplied by the notional
amount divided by four. The purpose of the Company's interest rate cap
agreement program is to protect its annuity line of business from the effect
of rising interest rates. The
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
premium paid for the interest rate caps is included in other investments
(amortized costs of $5.2 million as of December 31, 1999) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 2000 through 2003, entitle the Company to receive
settlement payments from the counterparties on specified expiration dates,
contingent on future interest rates. For each swaption, the amount of such
settlement payments, if any, is determined by the present value of the
difference between the fixed rate on a market rate swap and the strike rate
multiplied by the notional amount. The purpose of the Company's swaption
program is to protect its annuity line of business from the effect of rising
interest rates. The premium paid for the swaptions is included in other
investments (amortized cost of $12.2 million as of December 31, 1999) and is
being amortized over the terms of the agreements. This amortization is
included in net investment income.
SPREAD LOCK AGREEMENTS
Spread-lock agreements provide for a lump sum payment to or by the Company,
depending on whether the spread between the swap rate and a specified
government security 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. While spreadlocks are
used periodically, there are no spreadlock agreements outstanding at
December 31, 1999.
INTEREST RATE SWAP AGREEMENTS
The Company uses interest rate swap agreements to hedge its exposure to
floating rate bond coupon payments, replicating a fixed rate bond. An
interest rate swap is a contractual agreement to exchange payments at one or
more times based on the actual or expected price, level, performance or
value of one or more underlying interest rates. The Company is required to
pay the counterparty to the agreement the stream of variable interest
payments based on the coupon payments hedged bonds, and in turn, receives a
fixed payment from the counterparty at a predetermined interest rate. The
net receipts/payments from interest rate swaps are recorded in net
investment income. The Company also uses interest rate swap agreements to
hedge its exposure to interest rate fluctuations related to the anticipated
purchase of assets to support newly acquired blocks of business or to extend
the duration of certain portfolios of assets. Once the assets are purchased
the gains (losses) resulting from the termination of the swap agreements
will be applied to the basis of the assets. The gains (losses) will be
recognized in earnings over the life of the assets. The anticipated purchase
of assets related to extending the duration of certain portfolios of assets
is expected to be completed in 2000.
PUT OPTIONS
The Company uses put options, combined with various perpetual fixed income
securities, and interest rate swaps to replicate fixed income, fixed
maturity investments. The risk being hedged is a drop in bond prices due to
credit concerns with international bond issuers. The put options allow the
Company to put the bonds back to the counterparties at original par.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts and
foreign currency swaps, 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. A foreign currency swap is a contractual
agreement to exchange the currencies of two different countries at a fixed
rate of exchange in the future.
COMMODITY SWAPS
The Company used a commodity swap to hedge its exposure to fluctuations in
the price of gold. A commodity swap is a contractual agreement to exchange a
certain amount of a particular commodity for a fixed amount of cash. The
Company owned a fixed income security that met its coupon
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
payment obligations in gold bullion. The Company is obligated to pay to the
counterparty the gold bullion, and in return, receives from the counterparty
a stream of fixed income payments. The fixed income payments were the
product of the swap notional multiplied by the fixed rate stated in the swap
agreement. The net receipts or payments from commodity swaps were recorded
in net investment income. The fixed income security was called in the third
quarter of 1999 and the commodity swap expired.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$6,200,000, $10,000,000 and $7,000,000 in 1999, 1998 and 1997, respectively.
Deferred gains of $100,000 as of December 31, 1999, were the result of
terminated interest rate swaps. These gains are included with the related
fixed maturity securities to which the hedge applied or as deferred
liabilities 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 various derivative contracts. 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 less collateral held for such agreements with each
counterparty if the net market value is in the Company's favor. At
December 31, 1999, the exposure was $8,500,000.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and
assumptions used to determine the estimated fair values of
the Company's financial instruments. Considerable judgment
is required to develop these fair values. Accordingly, the
estimates shown are not necessarily indicative of the
amounts that would be realized in a one-time, current market
exchange of all of the Company's financial instruments.
BONDS AND UNAFFILIATED COMMON STOCK
Fair values of bonds are based on quoted market prices,
where available. For bonds not actively traded, fair values
are estimated using values obtained from independent pricing
services. In the case of private placements, fair values are
estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit
quality and maturity of the investments. The fair values of
unaffiliated common stocks are based on quoted market
prices.
PREFERRED STOCK
Fair values of preferred stock are based on quoted market
prices, where available. For preferred stock not actively
traded, fair values are based on values of issues of
comparable yield and quality.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair value of mortgage loans on real estate
was established using a discounted cash flow method based on
credit rating, maturity and future income. The ratings for
mortgages in good standing are based on property type,
location, market conditions, occupancy, debt service
coverage, loan to value, caliber of tenancy, borrower and
payment record. Fair values for impaired mortgage loans are
based on: 1) the present value of expected future cash flows
discounted at the loan's effective interest rate; 2) the
loan's market price; or 3) the fair value of the collateral
if the loan is collateral dependent.
POLICY LOANS
The estimated fair values of investments in policy loans are
calculated on a composite discounted cash flow basis using
Treasury interest rates consistent with the maturity
durations assumed. These durations are based on historical
experience.
OTHER INVESTMENTS AND CASH AND SHORT-TERM INVESTMENTS
The carrying values for assets classified as other
investments and cash and short-term investments in the
accompanying statutory-basis balance sheets approximate
their fair value.
INVESTMENT-TYPE INSURANCE CONTRACTS
The balance sheet captions, "Future policy benefits and
claims" and "Other policyholder funds," include investment
type insurance contracts (i.e.,
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
SHORT-TERM DEBT
For short-term debt, the carrying value approximates fair
value.
SURPLUS NOTES DUE TO LNC
Fair values for surplus notes are estimated using discounted
cash flow analysis based on the Company's current
incremental borrowing rate for similar types of borrowing
arrangements.
GUARANTEES
The Company's guarantees include guarantees related to
mortgage loan pass-through certificates. Based on historical
performance where repurchases have been negligible and the
current status, which indicates none of the loans are
delinquent, the fair value liability for the guarantees
related to the mortgage loan pass-through certificates is
zero.
DERIVATIVES
The Company employs several different methods for
determining the fair value of its derivative instruments.
Fair values for these contracts are based on current
settlement values. These values are based on quoted market
prices for the foreign currency exchange contracts and
industry standard models that are commercially available for
interest rate cap agreements, swaptions, spread lock
agreements, interest rate swaps, commodity swaps and put
options.
INVESTMENT COMMITMENTS
Fair values for commitments to make investment in fixed
maturity securities (primarily private placements), mortgage
loans on real estate and real estate are based on the
difference between the value of the committed investments as
of the date of the accompanying balance sheets and the
commitment date. These estimates would take into account
changes in interest rates, the counterparties' credit
standing and the remaining terms of the commitments.
SEPARATE ACCOUNTS
Assets held in separate accounts are reported in the
accompanying statutory-basis balance sheets at fair value.
The related liabilities are also reported at fair value in
amounts equal to the separate account assets.
S-28
<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
-------------------------------------------------------------
1999 1998
-------------------------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 22,985.0 $ 22,376.3 $ 23,830.9 $ 25,065.5
-----------------------------------------------
Preferred stocks 253.8 223.6 236.0 242.5
-----------------------------------------------
Unaffiliated common stocks 166.9 166.9 259.3 259.3
-----------------------------------------------
Mortgage loans on real estate 4,211.5 4,104.0 3,932.9 4,100.1
-----------------------------------------------
Policy loans 1,652.9 1,770.5 1,606.0 1,685.9
-----------------------------------------------
Other investments 426.6 426.6 434.4 434.4
-----------------------------------------------
Cash and short-term investments 1,409.2 1,409.2 1,725.4 1,725.4
-----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,730.4) (17,364.3) (17,845.8) (17,486.4)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (454.7) (465.1) (714.4) (738.2)
--------------------------------------------
Short-term debt (205.0) (205.0) (140.0) (140.0)
-----------------------------------------------
Surplus notes due to LNC (1,250.0) (1,022.1) (1,250.0) (1,335.1)
-----------------------------------------------
Derivatives 17.4 (4.0) 25.5 18.2
-----------------------------------------------
Investment commitments -- (0.8) -- (.6)
-----------------------------------------------
Separate account assets 46,105.1 46,105.1 36,907.0 36,907.0
-----------------------------------------------
Separate account liabilities (46,105.1) (46,105.1) (36,907.0) (36,907.0)
-----------------------------------------------
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
In 1997, LNC contributed 25,000,000 shares of common stock of American
States to the Company. American States is a property casualty insurance
holding company of which LNC owned 83.3%. The contributed common stock was
accounted for as a capital contribution equal to the fair value of the
common stock received by the Company. Subsequently, the American States
common stock owned by the Company, along with all other American States
common stock owned by LNC and its affiliates, was sold. The Company received
proceeds from the sale in the amount of $1,175,000,000. The Company
recognized no gain or loss on the sale of its portion of the common stock
due to the receipt of the stock at fair value. The proceeds from this sale
of stock were used to partially finance the CIGNA indemnity reinsurance
transaction.
13. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Life and Annuity
Distributors, Inc. ("LLAD"), has a nearly exclusive general agent's contract
with the Company under which it sells the Company's products and provides
the service that otherwise would be provided by a home office marketing
department and regional offices. For providing these selling and marketing
services, the Company paid LLAD override commissions of $60,400,000 and
$76,700,000 in 1999 and 1998, respectively, and override commissions and
operating expense allowances of $61,600,000 in 1997. LLAD incurred expenses
of $113,400,000, $102,400,000 and
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES (CONTINUED)
$5,500,000 in 1999, 1998 and 1997, respectively, in excess of the override
commissions and operating expense allowances received from the Company,
which the Company is not required to reimburse. Effective in January 1998,
the Company and LLAD agreed to increase the override commission expense and
eliminate the operating expense allowance.
Cash and short-term investments at December 31, 1999 and 1998 include the
Company's participation in a short-term investment pool with LNC of
$390,300,000 and $383,600,000, respectively. Related investment income
amounted to $16,700,000, $16,800,000 and $15,500,000 in 1999, 1998 and 1997,
respectively. Short-term loan payable to parent company at December 31, 1999
and 1998 represent notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $49,400,000, $92,100,000 and
$48,500,000 in 1999, 1998 and 1997, 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
1999 1998 1997
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C> <C>
Insurance assumed $ 19.7 $ 13.7 $ 11.9
----------------------
Insurance ceded 777.6 290.1 100.3
</TABLE>
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Future policy benefits
and claims assumed
$ 413.7 $ 197.3
------------------------
Future policy benefits
and claims ceded 1,680.4 1,125.0
------------------------
Amounts recoverable on
paid and unpaid losses 146.4 84.2
------------------------
Reinsurance payable on
paid losses 8.8 6.0
------------------------
Funds held under
reinsurance treaties --
net liability 2,106.4 1,375.4
------------------------
</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 $917,300,000 and $318,300,000 at December 31, 1999 and 1998,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1999 and 1998, LNC had guaranteed $818,900,000 and $237,000,000,
respectively, of these letters of credit. At December 31, 1999 and 1998, the
Company has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $118,800,000 and $122,400,000,
respectively, for statutory surplus relief received under financial
reinsurance ceded agreements.
14. SEPARATE ACCOUNTS
Separate account assets held by the Company consist primarily of long-term
bonds, common stocks, short-term investments and mutual funds and are
carried at market value. Substantially none of the separate accounts have
any minimum guarantees and the investment risks associated with market
S-30
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
value changes are borne entirely by the policyholder.
Separate account premiums, deposits and other considerations amounted to
$4,572,600,000, $3,953,300,000 and $4,821,800,000 in 1999, 1998 and 1997,
respectively. Reserves for separate accounts with assets at fair value were
$45,198,900,000 and $36,145,900,000 at December 31, 1999 and 1998,
respectively. All reserves are subject to discretionary withdrawal at market
value.
A reconciliation of transfers to (from) separate accounts is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Transfers as reported in the Summary of Operations of the
various separate accounts:
Transfers to separate accounts $ 4,573.2 $ 3,954.9 $ 4,824.0
------------------------------------------------------------
Transfers from separate accounts (4,933.8) (4,069.8) (2,943.8)
------------------------------------------------------------ --------- --------- ---------
Net transfers to (from) separate accounts as reported in the
Summary of Operations $ (360.6) $ (114.9) $ 1,880.2
------------------------------------------------------------ ========= ========= =========
</TABLE>
15. CENTURY COMPLIANCE (UNAUDITED)
The Year 2000 issue was complex and affected many aspects of the Company's
business. The Company was particularly concerned with Year 2000 issues that
related to the Company's computer systems and interfaces with the computer
systems of vendors, suppliers, customers and business partners. From 1996
through 1999 the Company and its operating subsidiaries redirected a large
portion of internal Information Technology ("IT") efforts and contracted
with outside consultants to update systems to address Year 2000 issues.
Experts were engaged to assist in developing work plans and cost estimates
and to complete remediation activities.
For the year ended December 31, 1999, the Company identified expenditures of
$39,500,000 to address this issue. This brings the expenditures for 1996
through 1999 to $75,300,000. Because updating systems and procedures is an
integral part of the Company's on-going operations, most of the expenditures
shown above are expected to continue after all Year 2000 issues have been
resolved. All Year 2000 expenditures have been funded from operating cash
flows.
The scope of the overall Year 2000 program included the following four major
project areas: 1) addressing the readiness of business applications,
operating systems and hardware on mainframe, personal computer and local
area network platforms (IT); 2) addressing the readiness of non-IT embedded
software and equipment (non-IT); 3) addressing the readiness of key business
partners and 4) establishing Year 2000 contingency plans. The Company
completed these projects prior to year-end.
The Company's businesses have not identified any major problems in their
business processing. Minor problems have been resolved quickly. The
Company's businesses have not experienced any significant interruption in
service to clients or business partners or in reporting to regulators.
S-31
<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 (the "Company"),
a wholly owned subsidiary of Lincoln National Corporation, as of
December 31, 1999 and 1998, and the related statutory-basis
statements of operations, changes in capital and surplus and
cash flows for each of the three years in the period ended
December 31, 1999. 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 auditing standards
generally accepted in the United States. 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 accounting principles
generally accepted in the United States. The variances between
such practices and accounting principles generally accepted in
the United States 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 accounting
principles generally accepted in the United States, the
financial position of The Lincoln National Life Insurance
Company at December 31, 1999 and 1998, or the results of its
operations or its cash flows for each of the three years in the
period ended December 31, 1999.
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, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
January 31, 2000
S-32
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
REGISTRATION STATEMENT ON FORM N-4
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) List of Financial Statements
1. Part A The Table of Condensed Financial Information is included in
Part A of this Registration Statement.
2. Part B The following Financial Statements for the Variable Account are
included in Part B of this Registration Statement.
Statement of Assets and Liability--December 31, 1999
Statement of Operations--Year ended December 31, 1999
Statements of Changes in Net Assets--Years ended December 31, 1999 and
1998
Notes to Financial Statements--December 31, 1999
Report of Ernst & Young LLP, Independent Auditors
3. Part B The following Statutory-Basis Financial Statements of The
Lincoln National Life Insurance Company are included in the SAI:
Balance Sheets--Statutory Basis--December 31, 1999 and 1998
Statements of Operations--Statutory Basis--Years ended December 31,
1999, 1998 and 1997
Statements of Changes in Capital and Surplus--Statutory Basis--Years
ended December 31, 1999, 1998 and 1997
Statements of Cash Flows--Statutory Basis--Years ended December 31,
1999, 1998 and 1997
Notes to Statutory-Basis Financial Statements--December 31, 1999
Report of Ernst & Young LLP, Independent Auditors
<PAGE>
Item 24. (Continued)
(b) List of Exhibits
(1) Resolutions of the Board of Directors of The Lincoln National Life
Insurance Company establishing Separate Account H are incorporated herein
by reference to Registration Statement on Form N-4 (33-27783) filed on
December 5, 1996.
(2) None.
(3)(a) Underwriting Agreement incorporated herein by reference to Registration
Statement on Form N-4 (33-27783) filed on March 31, 1997.
(3)(b) Amendment to Underwriting Agreement incorporated herein by reference to
Registration Statement on Form N-4 (333-18419) filed on March 27, 1998.
(3)(c) Selling Group Agreement incorporated herein by reference to Registration
Statement on Form N-4 (333-18419) filed on March 27, 1998.
(3)(d) Amendment dated October 15, 1999 to Underwriting Agreement incorporated
herein by reference to Registration Statement on Form N-4 (333-63505)
filed on March 28, 2000.
(3)(e) Amendment dated September 1999 to Selling Group Agreement incorporated
herein by reference to Registration Statement on Form N-4 (333-63505)
filed on March 28, 2000.
(3)(f) Amendment dated February 2000 to Selling Group Agreement incorporated
herein by reference to Registration Statement on Form N-4 (333-63505)
filed on March 28, 2000.
(4)(a) Variable Annuity Contract
(5) Application
(6)(a) Articles of Incorporation of The Lincoln National Life Insurance Company
are incorporated herein by reference to Registration Statement on Form N-
4 (333-40937) filed on November 9, 1998
(b) By-laws of The Lincoln National Life Insurance Company are incorporated
herein by reference to Registration Statement on Form N-4 (333-40937)
filed on November 9, 1998.
(7) Not applicable.
(8)(a) Services Agreement between Delaware Management Holdings, Inc., Delaware
Service Company, Inc. and The Lincoln National Life Insurance Company is
incorporated herein by reference to the Registration Statement on Form
S-6 (333-40745) filed on November 21, 1997.
(8)(b) Participation Agreement incorporated herein by reference to Registration
Statement on Form N-4 (333-18419) filed on April 1, 1997.
(8)(c) Amendment to Participation Agreement incorporated herein by reference to
Registration Statement on Form N-4 (333-18419) filed on April 1, 1997.
(d) Amendment dated October 15, 1999 to Participation Agreement incorporated
herein by reference to Registration Statement on Form N-4 (333-63505)
filed on March 28, 2000.
(9) Opinion and consent of Mary Jo Ardington, Counsel of The Lincoln National
Life Insurance Company as to legality of securities being issued.
(10) Consent of Ernst & Young LLP, Independent Auditors
(11) Not applicable.
(12) Not applicable.
(13) Schedule for Computation for Performance Quotations
(14) Not applicable
(15) Other Exhibits:
(a) Organizational Chart of the Lincoln National Insurance
Holding Company System is incorporated herein by reference
to filing on Form N-4 (File No. 333-35784) filed April 27,
2000.
(b) Books and Records Report is incorporated herein by
reference to Post-Effective Amendment No. 13 on Form N-4
(File No. 33-27783) filed on March 28, 2000.
Item 25.
DIRECTORS AND OFFICERS OF THE DEPOSITOR
Name Positions and Offices with LNL
---- ------------------------------
Jon A. Boscia** President and Director
Lorry J. Stensrud* Chief Executive Officer of Annuities, Executive Vice
President and Director
John H. Gotta**** Chief Executive Officer of Life Insurance, Executive
Vice President and Director
Stephen H. Lewis* Senior Vice President and Director
Cynthia A. Rose* Secretary and Assistant Vice President
Lawrence T. Rowland*** Executive Vice President and Director
Keith J. Ryan* Vice President, Controller and Chief Accounting Officer
Eldon J. Summers* Second Vice President and Treasurer
Richard C. Vaughan** Director
Diane Dillman* Interim Director of Compliance for Annuities
Janet Chrzan** Senior Vice President, Chief Financial Officer and
Director
*Principal business address is 1300 South Clinton Street, Fort Wayne, Indiana
46802-3506
**Principal business address is Center Square West Tower, 1500 Market Street-
Suite 3900, Philadelphia, PA 19102-2112.
***Principal business address is One Reinsurance Place, 1700 Magnavox Way,
Fort Wayne, Indiana 46804-1538.
****Principal business address is 350 Church Street, Hartford, CT 06103
*****Principal business address is One Commerce Square, 2005 Market Street 39th
floor, Philadelphia, PA 19103
<PAGE>
Item 26.
PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
WITH THE DEPOSITOR OR REGISTRANT
See Exhibit 15(a): Organizational Chart of the Lincoln National Insurance
Holding Company System.
Item 27.
NUMBER OF CONTRACTOWNERS
As of May 31, 2000, there were 286,335 (variable and fixed) Contract
Owners under Account H.
Item 28. Indemnification
(a) Brief description of indemnification provisions.
In general, Article VII of the By-Laws of The Lincoln National Life
Insurance Company (LNL) provides that LNL will indemnify certain
persons against expenses, judgments and certain other specified costs
incurred by any such person if he/she is made a party or is threatened
to be made a party to a suit or proceeding because he/she was a
director, officer, or employee of LNL, as long as he/she acted in good
faith and in a manner he/she reasonably believed to be in the best
interests of, or act opposed to the best interests of, LNL. Certain
additional conditions apply to indemnification in criminal proceedings.
In particular, separate conditions govern indemnification of directors,
officers, and employees of LNL in connection with suits by, or in the
right of, LNL.
Please refer to Article VII of the By-Laws of LNL (Exhibit no. 6(b)
hereto) for the full text of the indemnification provisions.
Indemnification is permitted by, and is subject to the requirements of,
Indiana law.
(b) Undertaking pursuant to Rule 484 of Regulation C under the Securities
Act of 1933:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described in Item
28(a) above or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the
Registrant in the successful defense of any such action, suit or
proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 29. Principal Underwriter
(a) American Funds Distributors, Inc., is also the Principal Underwriter of
shares of: AMCAP Fund, Inc., American Balanced Fund, Inc., The American Funds
Income Series, The American Funds Tax-Exempt Series I, The American Funds Tax-
Exempt Series II, American High-Income Municipal Bond Fund, Inc., American High-
Income Trust, American Mutual Fund, Inc., The Bond Fund of America, Inc.,
Capital Income Builder, Inc., Capital World Bond Fund, Inc., Capital World
Growth and Income Fund, Inc., The Cash Management Trust of America, Fundamental
Investors, Inc., The Growth Fund of America, Inc., The Income Fund of America,
Inc., Intermediate Bond Fund of America, The Investment Company of America,
Limited Term Tax-Exempt Bond Fund of America, The New Economy Fund, New
Perspective Fund, Inc., New World Fund, Inc., SMALLCAP World Fund, Inc., The
Tax-Exempt Bond Fund of America, Inc., The Tax-Exempt Money Fund of America,
U.S. Treasury Money Fund of America and Washington Mutual Investors Fund, Inc.
Lincoln National Variable Annuity Account E, Lincoln Life Flexible Premium
Variable Life Accounts F and J (all registered as investment companies under the
1940 Act) and Lincoln National Flexible Premium Group Variable Annuity Accounts
50, 51, and 52.
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ---------------------
David L. Abzug Vice President
27304 Park Vista Road
Agoura Hills, CA 91301
John A. Agar Vice President
1501 N. University, Suite 227A
Little Rock, AR 72207
<PAGE>
Robert B. Aprison Vice President
2983 Bryn Wood Drive
Madison, WI 53711
L William W. Bagnard Vice President
Steven L. Barnes Senior Vice President
5400 Mount Meeker Road, STE 1
Boulder CO 80301-3508
B Carl R. Bauer Assistant Vice President
Michelle A. Bergeron Senior Vice President
4160 Gateswalk Drive
Smyrna, GA 30080
J. Walter Best, Jr. Regional Vice President
9013 Brentmeade Blvd.
Brentwood, TN 37027
Joseph T. Blair Senior Vice President
148 E Shore Ave.
Groton Long Point, CT 06340
<PAGE>
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ---------------------
John A. Blanchard Vice President
6421 Aberdeen Road
Mission Hills, KS 66208
Ian B. Bodell Senior Vice President
P.O. Box 1665
Brentwood, TN 37024-1665
Mick L. Brethower Senior Vice President
2320 North Austin Avenue
Georgetown, TX 78626
Alan Brown Regional Vice President
4129 Laclede Avenue
St. Louis, MO 63108
B J. Peter Burns Vice President
Brian C. Casey Regional Vice President
8002 Greentree Road
Bethesda, MD 20817
<PAGE>
Victor C. Cassato Senior Vice President
609 W. Littleton Blvd., Suite 310
Greenwood Village, CO 80120
Christopher J. Cassin Senior Vice President
19 North Grant Street
Hinsdale, IL 60521
Denise M. Cassin Vice President
1301 Stoney Creek Drive
San Ramon, CA 94538
L Larry P. Clemmensen Director
L Kevin G. Clifford Director, President and Co-Chief
Executive Officer
Ruth M. Collier Senior Vice President
29 Landsdowne Drive
Larchmont, NY 10538
S David Coolbaugh Assistant Vice President
<PAGE>
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
--------------------- ---------------------
H Carlo O. Cordasco Assistant Vice President
Thomas E. Cournoyer Vice President
2333 Granada Boulevard
Coral Gables, FL 33134
Douglas A. Critchell Senior Vice President
3521 Rittenhouse Street, N.W.
Washington, D.C. 20015
L Carl D. Cutting Vice President
William F. Daugherty Vice President
1216 Highlander Way
Mechanicsburg, PA 17055
Daniel J. Delianedis Vice President
8689 Braxton Drive
Eden Prairie, MN 55347
Michael A. DiLella Vice President
P.O. Box 661
Ramsey, NJ 07446
G. Michael Dill Senior Vice President
505 E. Main Street
Jenks, OK 74037
<PAGE>
Kirk D. Dodge Senior Vice President
633 Menlo Avenue, Suite 210
Menlo Park, CA 94025
Peter J. Doran Director, Executive Vice President
100 Merrick Road, Suite 216W
Rockville Centre, NY 11570
L Michael J. Downer Secretary
Robert W. Durbin Vice President
74 Sunny Lane
Tiffin, OH 44883
I Lloyd G. Edwards Senior Vice President
Timothy L. Ellis Regional Vice President
1441 Canton Mart Road, Suite 9
Jackson, MS 39211
L Paul H. Fieberg Senior Vice President
John Fodor Senior Vice President
15 Latisquama Road
Southborough, MA 01772
<PAGE>
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ----------------------
Daniel B. Frick Regional Vice President
845 Western Avenue
Glen Ellyn, IL 60137
Clyde E. Gardner Senior Vice President
Route 2, Box 3162
Osage Beach, MO 65065
B Evelyn K. Glassford Vice President
Jeffrey J. Greiner Vice President
12210 Taylor Road
Plain City, OH 43064
L Paul G. Haaga, Jr. Director
B Mariellen Hamann Assistant Vice President
David E. Harper Senior Vice President
150 Old Franklin School Road
Pittstown, NJ 08867
H Mary Pat Harris Assistant Vice President
Ronald R. Hulsey Senior Vice President
6744 Avalon
Dallas, TX 75214
Robert S. Irish Vice President
1225 Vista Del Mar Drive
Delray Beach, FL 33483
Michael J. Johnston Director
630 Fifth Ave., 36th Floor
New York, NY 10111
B Damien M. Jordan Vice President
Andrew R. LeBlanc Regional Vice President
12558 Highlands Place
Fishers, IN 46038
Arthur J. Levine Senior Vice President
12558 Highlands Place
Fishers, IN 46038
<PAGE>
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ---------------------
B Karl A. Lewis Assistant Vice President
T. Blake Liberty Vice President
5506 East Mineral Lane
Littleton, CO 80122
Mark J. Lien Regional Vice President
5570 Beechwood Terrace
West Des Moines IA 50266
L Lorin E. Liesy Assistant Vice President
L Susan G. Lindgren Vice President - Institutional
Investment Services
LW Robert W. Lovelace Director
Stephen A. Malbasa Senior Vice President
13405 Lake Shore Blvd.
Cleveland, OH 44110
Steven M. Markel Senior Vice President
5241 South Race Street
Littleton, CO 80121
L J. Clifton Massar Director, Senior Vice President
L E. Lee McClennahan Senior Vice President
James R. McCrary Regional Vice President
963 1st Street, #1
Hermosa Beach, CA 90254
S John V. McLaughlin Senior Vice President
Terry W. McNabb Vice President
2002 Barrett Station Road
St. Louis, MO 63131
L R. William Melinat Vice President-Institutional
Investment Services
David R. Murray Vice President
1263 Brookwood Street
Birmingham, MI 48009
Stephen S. Nelson Vice President
P.O. Box 470528
Charlotte, NC 28247-0528
<PAGE>
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ---------------------
William E. Noe Vice President
304 River Oaks Road
Brentwood, TN 37027
Peter A. Nyhus Vice President
3084 Wilds Ridge Court
Prior Lake, MN 55372
Eric P. Olson Vice President
62 Park Drive
Glenview, IL 60025
Gary A. Peace Regional Vice President
291 Kaanapali Drive
Napa, CA 94558
Samuel W. Perry Regional Vice President
6133 Calle del Paisano
Scottsdale, AZ 85251
Fredric Phillips Senior Vice President
175 Highland Avenue, 4th Floor
Needham, MA 02494
B Candance D. Pilgrim Assistant Vice President
Carl S. Platou Vice President
7455 80th Place, S.E.
Mercer Island, WA 98040
L John O. Post Senior Vice President
S Richard P. Prior Vice President
Steven J. Reitman Senior Vice President
212 The Lane
Hinsdale, IL 60521
Brian A. Roberts Vice President
244 Lambeau Lane
Glenville, NC 28736
George S. Ross Senior Vice President
55 Madison Avenue
Morristown, NJ 07960
L Julie D. Roth Vice President
L James F. Rothenberg Director
Douglas F. Rowe Vice President
414 Logan Ranch Road
Georgetown, TX 78628
<PAGE>
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ---------------------
Christopher S. Rowey Vice President
9417 Beverlywood Street
Los Angeles, CA 90034
Dean B. Rydquist Senior Vice President
1080 Bay Pointe Crossing
Alpharetta, GA 30005
Richard R. Samson Senior Vice President
4604 Glencoe Avenue, #4
Marina del Rey, CA 90292
Joseph D. Scarpitti Vice President
31465 St. Andrews
Westlake, OH 44145
L R. Michael Shanahan Director
L Sherrie L. Shaw Assistant Vice President
Brad W. Short Regional Vice President
1601 Seal Way
Seal Beach, CA 90740
David W. Short Chairman of the Board and
1000 RIDC Plaza, Suite 212 Co-Chief Executive Officer
Pittsburgh, PA 15238
William P. Simon Senior Vice President
912 Castlehill Lane
Devon, PA 19333
L John C. Smith Assistant Vice President-
Institutional Investment
Services
Rodney G. Smith Senior Vice President
100 N. Central Expressway,
Suite 1214
Richardson, TX 75080
S Sherrie L. Snyder-Senft Assistant Vice President
Anthony L. Soave Regional Vice president
8831 Morning Mist Drive
Clarkston, MI 48348
Therese L. Souiller Assistant Vice President
2652 Excaliber Court
Virginia Beach, VA 23454
Nicholas D. Spadaccini Vice President
855 Markley Woods Way
Cincinnati, OH 45230
L Kristen J. Spazafumo Assistant Vice President
<PAGE>
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ---------------------
Daniel S. Spradling Senior Vice President
181 Second Avenue, Suite 228
San Mateo, CA 94401
LW Eric H. Stern Director
B Max D. Stites Vice President
Thomas A. Stout Vice President
1004 Ditchley Road
Virginia Beach, VA 23451
Craig R. Strauser Vice President
3 Dover Way
Lake Oswego, OR 97034
Francis N. Strazzeri Senior Vice President
31641 Saddletree Drive
Westlake Village, CA 91361
L Drew W. Taylor Assistant Vice President
Gary J. Thoma Regional Vice President
604 Thelosen Drive
Kimberly, WI 54136
S James P. Toomey Vice President
I Christopher E. Trede Vice President
George F. Truesdail Senior Vice President
400 Abbotsford Court
Charlotte, NC 28270
Scott W. Ursin-Smith Vice President
60 Reedland Woods Way
Tiburon, CA 94920
J. David Viale Regional Vice President
204 Fernleaf Drive
Corona Del Mar, CA 92625
Thomas E. Warren Vice President
119 Faubel Street
Sarasota, FL 34242
L J. Kelly Webb Senior Vice President, Treasurer and
Controller
<PAGE>
<TABLE>
<CAPTION>
(b) (1) (2)
<S> <C>
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ---------------------
Gregory J. Weimer Vice President
206 Hardwood Drive
Venetia PA 15367
B Timothy W. Weiss Director
George J. Wenzel Regional Vice President
3406 Shakespeare Drive
Troy MI 48084
J. D. Wiedmaier Assistant Vice President
3513 Riverstone Way
Chesapeake, VA 23325
Timothy J. Wilson Vice President
113 Farmview Place
Venetia, PA 15367
B Laura L. Wimberly Vice President
H Marshall D. Wingo Director, Senior Vice President
L Robert L. Winston Director, Senior Vice President
William R. Yost Senior Vice President
9320 Overlook Trail
Eden Prairie, MN 55347
Janet M. Young Regional Vice President
1616 Vermont
Houston, TX 77006
Scott D. Zambon Regional Vice President
2887 Player Lane
Tustin Ranch, CA 92782
</TABLE>
-------------
L Business Address, 333 South Hope Street, Los Angeles, CA 90071
LW Business Address, 11100 Santa Monica Boulevard, 15th Floor, Los Angeles,
CA 90025
B Business Address, 135 South State College Boulevard, Brea, CA 92821
S Business Address, 3500 Wiseman Boulevard, San Antonio, TX 78251
H Business Address, 5300 Robin Hood Road, Norfolk, VA 23513
I Business Address, 8332 Woodfield Crossing Blvd., Indianapolis, IN 46240
(c) Name of Principal Underwriter: American Funds Distributors, Inc.; Net
Underwriting Discounts and Commissions: $15,918,533.87.
Item 30. Location of Accounts and Records
See Exhibit 15(b)
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
(a) Registrant undertakes that it will file a post-effective amendment to this
registration statement as frequently as necessary to ensure that the
audited financial statements in the registration statement are never more
than 16 months old for so long as payments under the variable annuity
contracts may be accepted.
(b) Registrant undertakes that it will include either (1) as part of any
application to purchase a Certificate or an Individual Contract offered
by the Prospectus, a space that an applicant can check to request a
Statement of Additional Information, or (2) a post card or a similar
written communication affixed to or included in the Prospectus that the
applicant can remove to send for a Statement of Additional Information.
(c) Registrant undertakes to deliver any Statement of Additional Information
and any financial statements required to be made available under this Form
promptly upon written or oral request to Lincoln Life at the address or
phone number listed in the Prospectus.
(d) The Lincoln National Life Insurance Company hereby represents that the fees
and charges deducted under the contract, in the aggregate, are reasonable
in relation to the services rendered, the expenses expected to be incurred,
and the risks assumed by The Lincoln National Life Insurance Company.
(e) Registrant hereby represents that it is relying on the American Council of
Life Insurance (avail. Nov. 28, 1988) no-action letter with respect to
Contracts used in connection with retirement plans meeting the requirements
of Section 403(b) of the Internal Revenue Code, and represents further that
it will comply with the provisions of paragraphs (1) through (4) set forth
in that no-action letter.
<PAGE>
SIGNATURES
(a) As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant has duly caused this Pre-Effective Amendment to the
Registration Statement to be signed on its behalf, in the City of Fort Wayne and
the State of Indiana on this 10th day of July, 2000.
LINCOLN NATIONAL VARIABLE ANNUITY
ACCOUNT H -- American Legacy III C-Share
(Registrant)
By: /s/ Jeffrey K. Dellinger
--------------------------
Jeffrey K. Dellinger
Vice President, LNL
(Title)
By: THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
(Depositor)
By: /s/ Lorry J. Stensrud
--------------------------
Lorry J. Stensrud
(Signature-Officer of Depositor)
Executive Vice President, LNL
(Title)
(b) As required by the Securities Act of 1933, this Pre-Effective Amendment to
the Registration Statement has been signed for the Depositor by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Jon A. Boscia President & Director July 10, 2000
---------------------- (Principal Executive Officer)
Jon A. Boscia
/s/ Lorry J. Stensrud Chief Executive Officer of Annuities, July 10, 2000
---------------------- Executive Vice President and Director
Lorry J. Stensrud
/s/ Lawrence T. Rowland Executive Vice President and July 10, 2000
---------------------- Director
Lawrence T. Rowland
/s/ Keith J. Ryan Vice President and Controller July 10, 2000
---------------------- (Principal Accounting Officer)
Keith J. Ryan
/s/ Janet Chrzan Senior Vice President, Chief July 10, 2000
---------------------- Financial Officer and Director
Janet Chrzan (Principal Financial Officer)
/s/ John H. Gotta Executive Vice President, Chief July 10, 2000
---------------------- Executive Officer of Life Insurance
John H. Gotta and Director
/s/ Stephen H. Lewis Senior Vice President and Director July 10, 2000
----------------------
Stephen H. Lewis
/s/ Richard C. Vaughan Director July 10, 2000
----------------------
Richard C. Vaughan
</TABLE>
