-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J4Qx/C4uLSKGZhUNWJP687CYEtUWmTUpr5MRmw9ap5hb+zloD0U0wYVmzTtrqiD6 T7nctqlJpBGFEUYgLPSlAg== 0000950131-00-002535.txt : 20000412 0000950131-00-002535.hdr.sgml : 20000412 ACCESSION NUMBER: 0000950131-00-002535 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 20000411 EFFECTIVENESS DATE: 20000411 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E CENTRAL INDEX KEY: 0000804223 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 350472300 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 033-26032 FILM NUMBER: 598643 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-04882 FILM NUMBER: 598644 BUSINESS ADDRESS: STREET 1: P O BOX 1110 CITY: FORT WAYNE STATE: IN ZIP: 46801 BUSINESS PHONE: 2194273018 MAIL ADDRESS: STREET 1: P O BOX 1110 CITY: FORT WAYNE STATE: IN ZIP: 46801 485BPOS 1 AMENDMENT LINOLN NAT'L VA ACCOUNT E As filed with the Securities and Exchange Commission on April 11, 2000 Registration No.: 33-26032 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_] POST-EFFECTIVE AMENDMENT NO. 15 [X] AND REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_] AMENDMENT NO. 19 [X] LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E ------------------------------------------- (Exact Name of Registrant) THE LINCOLN NATIONAL LIFE INSURANCE COMPANY ------------------------------------------- (Name of Depositor) 1300 South Clinton Street Fort Wayne, Indiana 46802 -------------------------- (Address of Depositor's Principal Executive Offices) Depositor's Telephone Number, including Area Code: (219)455-2000 Elizabeth A. Frederick, ESQ. The Lincoln National Life Insurance Company 1300 S. Clinton St. P.O. Box 1110 Fort Wayne, Indiana 46802 -------------------------- (Name and Address of Agent for Service) Copy to: Kimberly J. Smith Sutherland Asbill & Brennan LLP 1275 Pennsylvania Avenue, N.W. Washington, D.C. 20004 ------------------------------- Title of securities being registered: Interests in a separate account under individual flexible premium deferred variable annuity contracts. ------------------------------------- It is proposed that this filing will become effective: immediately upon filing pursuant to paragraph (b) of Rule 485 - --- X on April 30, 2000, pursuant to paragraph (b) of Rule 485 - --- 60 days after filing pursuant to paragraph (a)(1) of Rule 485 - --- On _______, 2000 pursuant to paragraph (a)(1) of Rule 485 - --- American Legacy Lincoln National Variable Annuity Account E individual variable annuity contracts Home Office: Lincoln National Life Insurance Company 1300 South Clinton Street Fort Wayne, IN 46802 www.lincolnlife.com This Prospectus describes the individual flexible premium deferred variable annuity contract that is issued by Lincoln National Life Insurance Company (Lincoln Life). It is for use with nonqualified and qualified retirement plans. Generally, you do not pay federal income tax on the contract's growth until it is paid out. Qualified 403(b) business will only be accepted for pur- chase payments that are either lump sum transfers or rollovers. The contract is designed to accumulate contract value and to provide retirement income that you cannot outlive or for an agreed upon time. These benefits may be a vari- able or fixed amount or a combination of both. If you die before the annuity commencement date, we will pay your beneficiary a death benefit. The minimum initial purchase payment for the contract is: 1. $1,500 for a nonqualified plan and a 403(b) transfer/rollover or 2. $300 for a qualified plan. Additional purchase payments may be made to the contract and must be at least $25 per payment and at least $300 annually. You choose whether your contract value accumulates on a variable or a fixed (guaranteed) basis or both. If you put all your purchase payments into the fixed account, we guarantee your principal and a minimum interest rate. We limit withdrawals and transfers from the fixed side of the contract. All purchase payments for benefits on a variable basis will be placed in Lin- coln National Variable Annuity Account E (variable annuity account [VAA]). The VAA is a segregated investment account of Lincoln Life. If you put all or some of your purchase payments into one or more of the contract's variable options you take all the investment risk on the contract value and the retirement in- come. If the subaccounts you select make money, your contract value goes up; if they lose money, it goes down. How much it goes up or down depends on the performance of the subaccounts you select. We do not guarantee how any of the variable options or their funds will perform. Also, neither the U.S. Govern- ment nor any federal agency insures or guarantees your investment in the con- tract. The available funds, listed below, are each part of American Funds Insurance Series (series), also known as American Variable Insurance Series: Global Growth Global Small Capitalization Growth International New World Growth-Income Asset Allocation Bond High-Yield Bond U.S. Government/AAA-Rated Securities Cash Management This Prospectus gives you information about the contracts that you should know before you decide to buy a contract and make purchase payments. You should also review the prospectus for the funds that is attached, and keep both pro- spectuses for reference. Neither the SEC nor any state securities commission has approved this contract or determined that this prospectus is accurate or complete. Any representation to the contrary is a criminal offense. You can obtain a current Statement of Additional Information (SAI), 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 Account E are also available on the SEC's web site (http://www.sec.gov). There is a table of contents for the SAI on the last page of this Prospectus. April 30, 2000 1 Table of contents
Page - ------------------------------------------------- Special terms 2 - ------------------------------------------------- Expense tables 3 - ------------------------------------------------- Summary 5 - ------------------------------------------------- Condensed financial information 6 - ------------------------------------------------- Financial statements 8 - ------------------------------------------------- Lincoln National Life Insurance Co. 8 - ------------------------------------------------- Fixed side of the contract 8 - ------------------------------------------------- Variable annuity account (VAA) 8 - ------------------------------------------------- Investments of the variable annuity account 8 - ------------------------------------------------- Charges and other deductions 10 - ------------------------------------------------- The contracts 12 - -------------------------------------------------
Page - ------------------------------------------------------------------------ Annuity payouts 17 - ------------------------------------------------------------------------ Federal tax matters 18 - ------------------------------------------------------------------------ Voting rights 21 - ------------------------------------------------------------------------ Distribution of the contracts 22 - ------------------------------------------------------------------------ Return privilege 22 - ------------------------------------------------------------------------ State regulation 22 - ------------------------------------------------------------------------ Restrictions under the Texas Optional Retirement Program 22 - ------------------------------------------------------------------------ Records and reports 22 - ------------------------------------------------------------------------ Other information 22 - ------------------------------------------------------------------------ Statement of additional information table of contents for Variable Annuity Account E American Legacy 23 - ------------------------------------------------------------------------
Special terms (We have italicized the terms that have special meaning throughout this Pro- spectus.) Account or variable annuity account (VAA) -- The segregated investment ac- count, Account E, into which Lincoln Life sets aside and invests the assets for the variable side of the contract offered in this Prospectus. Accumulation unit -- A measure used to calculate contract value for the vari- able side of the contract before the annuity commencement date. Annuitant -- The person on whose life the annuity benefit payments made after the annuity commencement date are based. Annuity commencement date -- The valuation date when funds are withdrawn or converted into annuity units or fixed dollar payout for payment of retirement income benefits under the annuity payout option you select. Annuity payout -- An amount paid at regular intervals after the annuity com- mencement date under one of several options available to the annuitant and/or any other payee. This amount may be paid on a variable or fixed basis, or a combination of both. Annuity unit -- A measure used to calculate the amount of annuity payouts for the variable side of the contract after the annuity commencement date. Beneficiary -- The person you choose to receive the death benefit that is paid if you die before the annuity commencement date. Contractowner (you, your, owner) -- The person who has the ability to exercise the rights within the contract (decides on investment allocations, transfers, payout option, designates the beneficiary, etc.). Usually, but not always, the owner is the annuitant. Contract value -- At a given time before the annuity commencement date, the total value of all accumulation units for a contract plus the value of the fixed side of the contract. Contract year -- Each one-year period starting with the effective date of the contract and starting with each contract anniversary after that. Death benefit (GMDB, EGMDB) -- The amount payable to your designated benefi- ciary if the annuitant dies before the annuity commencement date. An enhanced guaranteed minimum death benefit is also available. Free Amount -- First withdrawal in a contract year, not to exceed 10% of total purchase payments. 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 subaccount -- The portion of the VAA that re- flects investments in accumulation and annuity units of a class of a particu- lar fund available under the contracts. There is a separate subaccount which corresponds to each class of a fund. Valuation date -- Each day the New York Stock Exchange (NYSE) is open for trading. Valuation period -- The period starting at the close of trading (currently 4:00 p.m. New York time) on each day that the NYSE is open for trading (valua- tion date) and ending at the close of such trading on the next valuation date. 2 Expense tables Summary of Contractowner expenses: The maximum surrender charge (contingent deferred sales charge) (as a percentage of purchase payments surrendered/withdrawn): 6% The surrender charge percentage is reduced over time. The later the redemption occurs, the lower the surrender charge with respect to that surrender or with- drawal. We may waive this charge in certain situations. See Surrender charges. - -------------------------------------------------------------------------------- Annual administration charge: $35 We make this charge against the contract value on the last valuation date of each contract year and upon full surrender. It is not a separate charge for each subaccount. - -------------------------------------------------------------------------------- Account E annual expenses for American Legacy subaccounts:* (as a percentage of average account value):
With Enhanced Without Enhanced Death Benefit Death Benefit Mortality and expense risk charge 1.25% 1.25% Enhanced Death Benefit charge .15% -- ----- ---- Total annual charge for each American Legacy subaccount 1.40% 1.25%
Annual expenses of the funds for the year ended December 31, 1999: (as a percentage of each fund's average net assets):
Management Other Total fees + expenses = expenses - ------------------------------------------------------------------------- 1. Global Growth .68% .03% .71% - ------------------------------------------------------------------------- 2. Global Small Capitalization .78 .03 .81 - ------------------------------------------------------------------------- 3. Growth .38 .01 .39 - ------------------------------------------------------------------------- 4. International .55 .05 .60 - ------------------------------------------------------------------------- 5. New World** .89 .06 .95 - ------------------------------------------------------------------------- 6. Growth-Income .34 .01 .35 - ------------------------------------------------------------------------- 7. Asset Allocation .43 .01 .44 - ------------------------------------------------------------------------- 8. Bond .51 .02 .53 - ------------------------------------------------------------------------- 9. High-Yield Bond .50 .01 .51 - ------------------------------------------------------------------------- 10. U.S. Govt./AAA-Rated Securities .51 .01 .52 - ------------------------------------------------------------------------- 11. Cash Management .44 .01 .45 - -------------------------------------------------------------------------
* The VAA is divided into separately-named subaccounts. ** These expenses are annualized. The fund began operations on June 17, 1999. 3 Examples (expenses of the subaccounts and of the funds): If you surrender your contract at the end of the time period shown, you would pay the following expenses on a $1,000 investment, assuming a 5% annual re- turn:
1 year 3 years 5 years 10 years - ---------------------------------------------------------------------------------- 1. Global Growth $82 $117 $145 $248 - ---------------------------------------------------------------------------------- 2. Global Small Capitalization 83 120 151 259 - ---------------------------------------------------------------------------------- 3. Growth 79 108 129 215 - ---------------------------------------------------------------------------------- 4. International 81 114 140 237 - ---------------------------------------------------------------------------------- 5. New World 84 125 158 273 - ---------------------------------------------------------------------------------- 6. Growth-Income 78 106 127 211 - ---------------------------------------------------------------------------------- 7. Asset Allocation 79 109 132 220 - ---------------------------------------------------------------------------------- 8. Bond 80 112 136 230 - ---------------------------------------------------------------------------------- 9. High-Yield Bond 80 111 135 228 - ---------------------------------------------------------------------------------- 10. U.S. Govt./AAA-Rated Securities 80 112 136 229 - ---------------------------------------------------------------------------------- 11. Cash Management 79 109 132 221 - ---------------------------------------------------------------------------------- If you do not surrender your contract, you would pay the following expenses on a $1,000 investment, assuming a 5% annual return: 1 year 3 years 5 years 10 years - ---------------------------------------------------------------------------------- 1. Global Growth $22 $67 $115 $248 - ---------------------------------------------------------------------------------- 2. Global Small Capitalization 23 70 121 259 - ---------------------------------------------------------------------------------- 3. Growth 19 58 99 215 - ---------------------------------------------------------------------------------- 4. International 21 64 110 237 - ---------------------------------------------------------------------------------- 5. New World 24 75 128 273 - ---------------------------------------------------------------------------------- 6. Growth-Income 18 56 97 211 - ---------------------------------------------------------------------------------- 7. Asset Allocation 19 59 102 220 - ---------------------------------------------------------------------------------- 8. Bond 20 62 106 230 - ---------------------------------------------------------------------------------- 9. High-Yield Bond 20 61 105 228 - ---------------------------------------------------------------------------------- 10. U.S. Govt./AAA-Rated Securities 20 62 106 229 - ---------------------------------------------------------------------------------- 11. Cash Management 19 59 102 221 - ----------------------------------------------------------------------------------
We provide these examples to help you understand the direct and indirect costs and expenses of the contract. The examples as- sume that an enhanced death benefit is in effect. Without this benefit, ex- penses would be lower. For more information, see Charges and other deductions in this Prospectus, and Management and Organization in the Prospectus for the funds. Premium taxes may also apply, although they do not appear in the examples. We also reserve the right to impose a charge on transfers between subaccounts and to and from the fixed account--currently, there is no charge. These examples should not be considered a representation of past or future expenses. Actual expenses may be more or less than those shown. 4 Summary What kind of contract am I buying? It is an individual annuity contract be- tween you and Lincoln Life. It may provide for a fixed annuity and/or a vari- able annuity. This Prospectus describes the variable side of the contract. See The contracts. What is the variable annuity account (VAA)? It is a separate account we estab- lished under Indiana insurance law, and registered with the SEC as a unit in- vestment trust. VAA assets are allocated to one or more subaccounts, according to your investment choices. VAA assets are not chargeable with liabilities arising out of any other business which Lincoln Life may conduct. See Variable annuity account. What are my investment choices? Based upon your instruction, the VAA applies your purchase payments to buy series shares in one or more of the investment funds of the series: Global Growth, Global Small Capitalization, Growth, 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 and 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 and Investment advisor. How does the contract work? If we approve your application, we will send you a contract. When you make purchase payments during the accumulation phase, you buy accumulation units. If you decide to receive retirement income payments, your accumulation units are converted to annuity units. Your retirement income payments will be based on the number of annuity units you received and the value of each annuity unit on payout days. See The contracts. What charges do I pay under the contract? At the end of each contract year and at the time of surrender, we will deduct $35 from your contract value as a maintenance charge. If you withdraw contract value, you pay a surrender charge from 0% to 6%, depending upon how many contract years those payments have been in the contract. We may waive surrender charges in certain situations. See Surrender charges. We will deduct any applicable premium tax from purchase payments or contract value at the time the tax is incurred or at another time we choose. We apply an annual charge totaling 1.25% to the daily net asset value of the VAA for the mortality and expense risk charge. If the enhanced death benefit is in effect, the mortality and expense risk charge is 1.25% and 0.15% for the enhanced death benefit, for an annual charge totaling 1.40%. See Charges and other deductions. The series pays a management fee to CRMC based on the average daily net asset value of each fund. See Investments of the variable annuity account--Invest- ment advisor. What purchase payments do I make, and how often? Subject to the minimum and maximum payment amounts, your payments are completely flexible. See The con- tracts--Purchase payments. How will my annuity payouts be calculated? If you decide to annuitize, you may select an annuity option and start receiving retirement income payments from your contract as a fixed option or variable option or a combination of both. See Annuity Options. Remember that participants in the VAA benefit from any gain, and take a risk of any loss, in the value of the securities in the funds' portfolios. What happens if I die before I annuitize? If the enhanced death benefit is in effect, your beneficiary will receive the greater of the enhanced death bene- fit or the contract value. If the enhanced death benefit is not in effect, your beneficiary will receive the greater of the guaranteed minimum death ben- efit or the contract value. Your beneficiary has options as to how the death benefit is paid. See Death benefit before the annuity commencement date. May I transfer contract value between variable options and between the fixed side of the contract? Yes, with certain limits. See The contracts--Transfers between subaccounts on or before the annuity commencement date and Transfers following the annuity commencement date. Transfers to and from the General Ac- count on or before the annuity commencement date. May I surrender the contract or make a withdrawal? Yes, subject to contract requirements and to the restrictions of any qualified retirement plan for which the contract was purchased. See Surrenders and withdrawals. If you sur- render the contract or make a withdrawal, certain charges may apply. See Charges and other deductions. A portion of surrender/withdrawal proceeds may be taxable. In addition, if you decide to take a distribution before age 59 1/2, a 10% Internal Revenue Service (IRS) tax penalty may apply. A surrender or a withdrawal also may be subject to 20% withholding. See Federal tax status and withholding. Do I get a free look at this contract? Yes. You can cancel the contract within 20 days (in some states longer) of the date you first receive the contract. You need to return the contract, postage prepaid, to our home office. In most states you assume the risk of any market drop on purchase payments you allo- cate to the variable side of the contract. See Return privilege. 5 Condensed financial information for the variable annuity account accumulation unit values (For an accumulation unit outstanding throughout the period) The following information relating to accumulation unit values and number of accumulation units for The American Legacy subaccounts for each of the ten years in the period ended December 31, 1999 comes from the VAA's financial statements. It should be read along with the VAA's financial statements and notes which are all included in the SAI.
1990 1991 1992 1993 1994 1995 1996 - --------------------------------------------------------------------------------- Global Growth subaccount* Accumulation unit value .Beginning of period............................................................ .End of period.................................................................. Number of accumulation units .End of period (000's omitted).................................................. - --------------------------------------------------------------------------------- Global Small Capitalization subaccount** Accumulation unit value .Beginning of period............................................................ .End of period.................................................................. Number of accumulation units .End of period (000's omitted).................................................. - --------------------------------------------------------------------------------- Growth subaccount Accumulation unit value .Beginning of period.... $ 1.200 1.133 1.492 1.632 1.875 1.861 2.450 .End of period.......... $ 1.133 1.492 1.632 1.875 1.861 2.450 2.743 Number of accumulation units .End of period (000's omitted)............... 99,094 106,335 110,169 111,230 105,312 101,710 90,842 - --------------------------------------------------------------------------------- International subaccount*** Accumulation unit value .Beginning of period.................................... $ 1.000 1.001 1.114 .End of period.......................................... $ 1.001 1.114 1.294 Number of accumulation units .End of period (000's omitted).......................... 27,787 31,592 38,351 - --------------------------------------------------------------------------------- New World subaccount*++ Accumulation unit value .Beginning of period............................................................ .End of period.................................................................. Number of accumulation units .End of period (000's omitted).................................................. - --------------------------------------------------------------------------------- Growth-Income subaccount Accumulation unit value .Beginning of period.... $ 1.180 1.136 1.392 1.484 1.646 1.659 2.180 .End of period.......... $ 1.136 1.392 1.484 1.646 1.659 2.180 2.556 Number of accumulation units .End of period (000's omitted)............... 199,880 203,868 201,913 199,178 183,608 172,288 158,861 - --------------------------------------------------------------------------------- Asset Allocation subaccount*** Accumulation unit value .Beginning of period.................................... $ 1.000 .986 1.262 .End of period.......................................... $ .986 1.262 1.443 Number of accumulation units .End of period (000's omitted).......................... 3,807 5,168 7,199 - --------------------------------------------------------------------------------- Bond subaccount*+ Accumulation unit value .Beginning of period.................................................... $ 1.000 .End of period.......................................................... $ 1.046 Number of accumulation units .End of period (000's omitted).......................................... 1,681 - --------------------------------------------------------------------------------- High-Yield Bond subaccount Accumulation unit value .Beginning of period.... $ 1.204 1.234 1.543 1.714 1.971 1.819 2.188 .End of period.......... $ 1.234 1.543 1.714 1.971 1.819 2.188 2.447 Number of accumulation units .End of period (000's omitted)............... 29,430 28,254 27,823 29,951 25,988 23,867 20,767 - --------------------------------------------------------------------------------- U.S. Government/AAA- Rated subaccount Accumulation unit value .Beginning of period.... $ 1.108 1.187 1.359 1.444 1.586 1.498 1.707 .End of period.......... $ 1.187 1.359 1.444 1.586 1.498 1.707 1.738 Number of accumulation units .End of period (000's omitted)............... 43,779 44,335 42,291 39,387 31,118 29,062 22,652 - --------------------------------------------------------------------------------- Cash Management subaccount Accumulation unit value .Beginning of period.... $ 1.179 1.256 1.309 1.335 1.353 1.388 1.447 .End of period.......... $ 1.256 1.309 1.335 1.353 1.388 1.447 1.502 Number of accumulation units .End of period (000's omitted)............... 29,312 19,913 21,963 13,982 14,312 10,001 9,605 - ---------------------------------------------------------------------------------
*The Global Growth subaccount began operations on April 30, 1997 so the figures for 1997 represent experience of less than one year. **The Global Small Capitalization subaccount began operations on April 30, 1998 so the figures for 1998 represent experience of less than one year. ***The International subaccount and Asset Allocation subaccount began operations on January 3, 1994. *+The Bond subaccount began operations on January 2, 1996 so the figures for 1996 represent experience of less than one year. +The EGMDB rider was not available until May 1, 1997. *++The New World subaccount began operations on June 17, 1999 so the figures for 1999 represent experience of less than one year. 6
1997 1998 1999 with without with without with without EGMDB+ EGMDB EGMDB EGMDB EGMDB EGMDB - --------------------------------------------- $1.000 1.000 1.076 1.077 1.369 1.371 $1.076 1.077 1.369 1.371 2.295 2.304 10 3,217 103 5,104 256 5,916 - --------------------------------------------- .............. $1.000 1.000 1.014 1.015 .............. $1.014 1.015 1.918 1.923 .............. 116 2,312 197 4,047 - --------------------------------------------- $1.000 2.743 3.523 3.525 4.709 4.719 $3.523 3.525 4.709 4.719 7.320 7.346 652 79,682 3,154 69,849 3,590 61,714 - --------------------------------------------- $1.000 1.294 1.392 1.393 1.664 1.668 $1.392 1.393 1.664 1.668 2.896 2.907 386 36,534 954 30,346 1,176 28,263 - --------------------------------------------- ............................. $1.000 1.000 ............................. $1.176 1.176 ............................. 158 1,194 - --------------------------------------------- $1.000 2.556 3.175 3.177 3.706 3.714 $3.175 3.177 3.706 3.714 4.074 4.089 1,197 144,349 5,723 124,069 6,007 107,545 - --------------------------------------------- $1.000 1.443 1.716 1.717 1.914 1.918 $1.716 1.717 1.914 1.918 2.024 2.032 49 9,636 228 10,239 359 9,445 - --------------------------------------------- $1.000 1.046 1.136 1.137 1.170 1.172 $1.136 1.137 1.170 1.172 1.186 1.190 2 2,437 84 3,664 101 3,350 - --------------------------------------------- $1.000 2.447 2.714 2.716 2.689 2.694 $2.714 2.716 2.689 2.694 2.805 2.815 204 18,820 614 16,651 682 13,478 - --------------------------------------------- $1.000 1.738 1.860 1.862 1.985 1.989 $1.860 1.862 1.985 1.989 1.947 1.954 150 18,080 545 16,965 640 13,853 - --------------------------------------------- $1.000 1.502 1.559 1.560 1.616 1.620 $1.559 1.560 1.616 1.620 1.671 1.677 213 7,157 456 7,102 556 8,045 - ---------------------------------------------
7 Financial Statements The financial statements of the VAA and the statutory-basis financial state- ments of Lincoln Life are located in the SAI. If you would like a free copy, complete and mail the enclosed card, or call 1-800-942-5500. Lincoln National Life Insurance Co. Lincoln Life was founded in 1905 and is organized under Indiana law. We are one of the largest stock life insurance companies in the United States. We are owned by Lincoln National Corp. (LNC) which is also organized under Indiana law. LNC's primary businesses are insurance and financial services. Fixed side of the contract Purchase payments allocated to the fixed side of the contract become part of Lincoln Life's general account, and do not participate in the investment expe- rience of the VAA. The general account is subject to regulation and supervi- sion 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 fixed account under the contract. These dis- closures, however, may be subject to certain generally applicable provisions of the federal securities laws relating to the accuracy and completeness of statements made in Prospectuses. This Prospectus is generally intended to serve as a disclosure document only for aspects of the contract involving the VAA, and therefore contains only selected information regarding the fixed side of the contract. Complete details regarding the fixed side of the contract are in the contract. Purchase payments allocated to the fixed side of the contract are guaranteed to be credited with a minimum interest rate, specified in the contract, of at least 3.0%. A purchase payment allocated to the fixed side of the contract is credited with interest beginning on the next calendar day following the date of receipt if all data is complete. Lincoln Life may vary the way in which it credits interest to the fixed side of the contract from time to time. ANY INTEREST IN EXCESS OF 3.0% WILL BE DECLARED IN ADVANCE IN LINCOLN LIFE'S SOLE DISCRETION, CONTRACTOWNERS BEAR THE RISK THAT NO INTEREST IN EXCESS OF 3.0% WILL BE DECLARED. Variable annuity account (VAA) On September 26, 1986, the VAA was established as an insurance company sepa- rate account under Indiana law. It is registered with the SEC as a unit in- vestment trust under the provisions of the Investment Company Act of 1940 (1940 Act). The SEC does not supervise the VAA or Lincoln Life. The VAA is a segregated investment account, meaning that its assets may not be charged with liabilities resulting from any other business that we may conduct. Income, gains and losses, whether realized or not, from assets allocated to the VAA are, in accordance with the applicable annuity contracts, credited to or charged against the VAA. They are credited or charged without regard to any other income, gains or losses of Lincoln Life. The VAA satisfies the defini- tion of a separate account under the federal securities laws. We do not guar- antee the investment performance of the VAA. Any investment gain or loss de- pends on the investment performance of the funds. You assume the full invest- ment risk for all amounts placed in the VAA. Investments of the variable annuity account You decide the subaccount(s) to which you allocate purchase payments. There is a separate subaccount which corresponds to each class of each fund in the se- ries. You may change your allocation without penalty or charges. Shares of the funds will be sold at net asset value with no initial sales charge to the VAA in order to fund the contracts. The series is required to redeem fund shares at net asset value upon our request. We reserve the right to add, delete or 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 Purchases and redemptions of shares, in the Prospectus for the series. 8 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. The series has adopted a plan pursuant to Rule 18f-3 under the 1940 Act to permit the series to estab- lish a multiple class distribution system for all of its portfolios. The se- ries' Board of Trustees may at any time establish additional funds or classes, which may or may not be available to the VAA. Fund assets are segregated and a shareholder's interest is limited to those funds in which the shareholder owns shares. Under the multi-class system adopted by the series, shares of each multi-class fund represent an equal pro rata interest in that fund and, generally, have identical voting, dividend, liquidation and other rights, preferences, powers, restrictions, limitations, qualifications and terms and conditions, except that: (1) each class has a different designation; (2) each class of shares bears its class expenses; (3) each class has exclusive voting rights on any matter submitted to shareholders that relates solely to its distribution ar- rangement; and (4) each class has separate voting rights on any matter submit- ted to shareholders in which the interests of one class differ from the inter- ests of any other class. Expenses currently designated as class expenses by the series' Board of Trustees under the plan pursuant to Rule 18f-3 include, for example, service fees paid under a 12b-1 plan to cover servicing fees paid to dealers selling the contracts. Each fund has two classes of shares, designated as Class 1 and Class 2 shares. Class 1 and 2 differ primarily in that Class 2 but not Class 1 shares are sub- ject to a 12b-1 plan. Only Class 1 shares are available under the contracts. Certain funds offered as part of this contract have similar investment objec- tives and policies to other portfolios managed by the advisor. The investment results of the funds, however, may be higher or lower than the other 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. 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. 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. 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; 9 bonds and other intermediate and long-term debt securities, and money market instruments (debt securities maturing in one year or less). 8. Bond Fund--The fund seeks to maximize your level of current income and pre- serve your capital by investing primarily in bonds. The fund is designed for investors seeking income and more price stability than stocks, and capital preservation over the long-term. 9. High-Yield Bond Fund--The fund seeks to provide you with a high level of current income and secondarily capital appreciation by investing primarily in lower quality debt securities (rated Ba or BB or below by Moody's Invest- ors Services, Inc. or Standard & Poor's Corporation), including those of non-U.S. issuers. The fund may also invest in equity securities that provide an opportunity for capital appreciation. 10. U.S. Government/AAA-Rated Securities Fund--The fund seeks to provide you with a high level of current income, as well as preserve your investment. The fund invests primarily in securities that are guaranteed by the "full faith and credit" pledge of the U.S. Government and securities that are rated AAA or Aaa by Moody's Investor's Services, Inc. or Standard & Poor's Corporation or unrated but determined to be of equivalent quality. 11. Cash Management Fund--The fund seeks to provide you an opportunity to earn income on your cash reserves while preserving the value of your investment and maintaining liquidity by investing in a diversified selection of high quality money market instruments. Sale of fund shares We will purchase shares of the funds at net asset value and direct them to the appropriate subaccounts of the VAA. We will redeem sufficient shares of the ap- propriate funds to pay annuity payouts, death benefits, surrender/withdrawal proceeds or for other purposes described in the contract. If you want to trans- fer all or part of your investment from one subaccount to another, we may redeem shares held in the first and purchase shares of the other. The shares are retired, but they may be reissued later. Shares of the funds are not sold directly to the general public. They are sold to Lincoln Life, and may be sold to other insurance companies, for investment of the assets of the subaccounts established by those insurance companies to fund variable annuity and variable life insurance contracts. When the series sells shares in any of its funds both to variable annuity and to variable life insurance separate accounts, it is said to engage in mixed funding. When the series sells shares in any of its funds to separate accounts of unaffiliated life insurance companies, it is said to engage in shared fund- ing. The series currently engages in mixed and shared funding. Therefore, due to differences in redemption rates or tax treatment, or other considerations, the interests of various contractowners participating in a fund could conflict. The series' Board of Trustees will monitor for the existence of any material con- flicts, and determine what action, if any, should be taken. See the Prospectus for the series. Reinvestment of dividends and capital gain distributions All dividend and capital gain distributions of the funds are automatically re- invested in shares of the distributing funds at their net asset value on the date of distribution. Dividends are not paid out to contractowners as addi- tional units, but are reflected in changes in unit values. Addition, deletion or substitution of investments We reserve the right, within the law, to make additions, deletions and substi- tutions for the series and/or any funds within the series in which the VAA par- ticipates. (We may substitute shares of other funds for shares already pur- chased, or to be purchased in the future, under the contract. This substitution might occur if shares of a fund should no longer be available, or if investment in any fund's shares should become inappropriate, in the judgment of our man- agement, for the purposes of the contract.) We cannot substitute shares of one fund for another without approval by the SEC. We will also notify you. Charges and other deductions We will deduct the charges described below to cover our costs and expenses, services provided and risks assumed under the contract. We incur certain costs and expenses for the distribution and administration of the contracts and for providing the benefits payable thereunder. Our administrative services include: processing applications for and issuing the contracts, processing purchases and redemptions of fund shares as required (including dollar cost averaging, cross- reinvestment, portfolio rebalancing and automatic withdrawal services), main- taining records, administering annuity payouts, furnishing accounting and valu- ation services (including the calculation and monitoring of daily subaccount values), reconciling and depositing cash receipts, providing contract confirma- tions, providing toll-free inquiry services and furnishing telephone fund transfer services. The benefits we provide include death benefits, annuity pay- out benefits and cash surrender value benefits. The risks we assume include: the risk that annuitants receiving annuity payouts under contract live longer than we assumed when we calculated our guaranteed rates (these rates are incor- porated in the contract and can - 10 not be changed); the risk that death benefits paid under the EGMDB or GMDB, will exceed actual contract value; the risk that more owners than expected will qualify for waivers of the surrender charge; and the risk that our costs in providing the services will exceed our revenues from contract charges (which we cannot change). The amount of a charge may not necessarily correspond to the costs associated with providing the services or benefits indicated by the de- scription of the charge or associated with a particular contract. For example, the surrender charge collected may not fully cover all of the sales and distri- bution expenses actually incurred by us. Deductions from the VAA for assumption of mortality and expense risks We deduct from the VAA an amount, computed daily, which is equal to an annual rate of 1.25% of the daily net asset value as a mortality and expense risk charge. For those contracts which include the EGMDB, the aggregate charge against the VAA is 1.40% consisting of a 1.25% mortality and expense risk charge and a 0.15% risk charge for the EGMDB. Maintenance charge We will deduct a contract maintenance charge of $35 per contract year. This charge will be deducted from the contract value on the last valuation date of each contract year. This charge will also be deducted from the contract value upon surrender. Surrender charge A surrender charge applies (except as described below) to surrenders and with- drawals of purchase payments that have been invested for the periods indicated as follows:
Number of complete contract years that a purchase payment has been invested - -------------------------------------------------------------------------------- Less At than least 2 2 3 4 5 6 7+ surrender charge as a percentage of the surrendered or withdrawn purchase payments 6% 5 4 3 2 1 0
A surrender charge does not apply to: 1. A surrender or withdrawal of purchase payments that have been invested at least seven full contract years. 2. The first withdrawal of contract value during a contract year to the extent the withdrawal does not exceed 10% of the purchase payments (this 10% with- drawal exception does not apply to a surrender of a contract); 3. Automatic withdrawals, not in excess of 10% of the purchase payments during a contract year, made by non-trustee contractowners who are at least 59 1/2; 4. Electing any annuity option available within the contract; 5. A surrender of a contract or withdrawal of contract value as a result of the annuitant's permanent and total disability [as defined in Section 22(e)(3) of the tax code], after the effective date of the contract and before the annuitant's 65th birthday. 6. When the surviving spouse assumes ownership of the contract as a result of the death of the original owner; 7. A surrender of a contract or withdrawal of contract value of a contract is- sued to employees and registered representatives of any member of the sell- ing group and their spouses and minor children, or to officers, directors, trustees or bona-fide full-time employees of LNC or The Capital Group, Inc. or their affiliated or managed companies (based upon the contractowner's status at the time the contract was purchased); and 8. A surrender of the contract as a result of the death of the contractowner, sole joint owner, pre-designated joint owner or annuitant. However, the sur- render charge is not waived upon the death of a non pre-designated joint owner. For purposes of calculating the surrender charge on withdrawals on contracts where the contractowner is not a Charitable Remainder Trust, Lincoln Life as- sumes that: a. the free amount will be withdrawn from purchase payments on a "first in- first out (FIFO)" basis. b. Prior to the seventh anniversary of the contract, any amount withdrawn above the free amount during a contract year will be withdrawn in the fol- lowing order: 1. from purchase payments (on a FIFO basis) until exhausted; then 2. from earnings. c. On or after the seventh anniversary of the contract, any amount withdrawn above the free amount during a contract year will be withdrawn in the fol- lowing order: 1. from purchase payments (on a FIFO basis) to which a surrender charge no longer applies until exhausted; then 2. from earnings until exhausted; then 3. from purchase payments (on a FIFO basis) to which a surrender charge still applies. In some states, paragraph c. does not apply and paragraph b. continues to apply after the 7th anniversary of the contract. In most states, for purposes of calculating the surrender charge on withdrawals on contracts where the contractowner is a Charitable Remainder Trust, Lincoln Life assumes that: a. the free amount will be withdrawn from purchase payments on a "first in- first out (FIFO)" basis. 11 b. Any amount withdrawn above the free amount during a contract year will be withdrawn in the following order: 1. from purchase payments (on a FIFO basis) to which a surrender charge no longer applies until exhausted; then 2. from earnings until exhausted; then 3. from purchase payments (on a FIFO basis) to which a surrender charge still applies. The surrender charge is calculated separately for each contract year's pur- chase payments to which a charge applies. The surrender charges associated with surrender or withdrawal are paid to us to compensate us for the loss we experience on contract distribution costs when contractowners surrender or withdraw before distribution costs have been recovered. If the contractowner is a corporation or other non-individual (non-natural person), the annuitant or joint annuitant will be considered the contractowner or joint owner for purposes of determining when a surrender charge does not apply. 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 described in the Prospectus for the series. Additional information The administrative and surrender charges described previously may be reduced or eliminated for any particular contract. However, these charges will be re- duced only to the extent that we anticipate lower distribution and/or adminis- trative expenses, or that we perform fewer sales or administrative services than those originally contemplated in establishing the level of those charges. Lower distribution and administrative expenses may be the result of economies associated with (1) the use of mass enrollment procedures, (2) the performance of administrative or sales functions by the employer, (3) the use by an em- ployer of automated techniques in submitting deposits or information related to deposits on behalf of its employees or (4) any other circumstances which reduce distribution or administrative expenses. The exact amount of adminis- trative and surrender 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. If a completed application and all other information necessary for processing a purchase order are received, an initial purchase payment will be priced no later than two business days after we receive the order. While attempting to finish an incomplete application, we may hold the initial purchase payment for no more than five business days. If the incomplete application cannot be com- pleted within those five days, you will be informed of the reasons, and the purchase payment will be returned immediately. Once the application is com- plete, the initial purchase payment must be priced within two business days. Who can invest? To apply for a contract, you must be of legal age in a state where the con- tracts may be lawfully sold and also be eligible to participate in any of the qualified or nonqualified plans for which the contracts are designed. The an- nuitant cannot be older than age 85 (or older than age 80 in Pennsylvania). Purchase payments Purchase payments are payable to us at a frequency and in an amount selected by you in the application. The minimum initial purchase payment is $1,500 for nonqualified contracts and Section 403(b) transfers/rollovers; and $300 for qualified contracts. The minimum annual amount for additional purchase pay- ments is $300 for nonqualified and qualified contracts, with a minimum of $25 per payment. Purchase payments in total may not exceed $2 million for each an- nuitant. If you stop making purchase payments, the contract will remain in force as a paid-up contract as long as the total contract value is at least $300. Payments may be resumed at any time until the annuity commencement date, the surrender of the contract, the maturity date, or the payment of any death benefit, whichever comes first. Valuation date Accumulation and annuity units will be valued once daily at the close of trad- ing (currently, normally, 4:00 p.m., 12 New York time) on each day the NYSE is open (valuation date). On any date other than a valuation date, the accumulation unit value and the annuity unit value will not change. Allocation of purchase payments Purchase payments are placed into the VAA's subaccounts, each of which invests in shares of the class of its corresponding fund of the series, according to your instructions. The minimum amount of any purchase payment which can be put into any one subaccount is $20. Upon allocation to a subaccount, purchase payments are con- verted into accumulation units. The number of accumulation units credited is determined by dividing the amount allocated to each subaccount by the value of an accumulation unit for that subaccount on the valuation date on which the purchase payment is received at the home office if received before 4:00 p.m., New York time. If the purchase payment is received at or after 4:00 p.m., New York time, we will use the accumulation unit value computed on the next valua- tion date. The number of accumulation units determined in this way shall not be changed by any subsequent change in the value of an accumulation unit. However, the dollar value of an accumulation unit will vary depending not only upon how well the investments perform, but also upon the expenses of the VAA and the un- derlying 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 estab- lished 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 begin- ning 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 distri- bution of the fund if an ex-dividend date occurs during the valuation peri- od; 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 in- clude 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 charge imposed on a subaccount for any valuation period are equal to the daily mortality and expense risk charge multiplied by the number of calen- dar days in the valuation period. Because a different daily charge is made for contracts with the EGMDB than for those without, each of the two types of con- tracts will have different corresponding accumulation unit values on any given day. Transfers between subaccounts on or before the annuity commencement date You may transfer all or a portion of your investment from one subaccount to an- other. A transfer involves the surrender of accumulation units in one subaccount and the purchase of accumulation units in the other subaccount. A transfer will be done using the respective accumulation unit values as of the valuation date we receive your request provided that your request is received by 4 p.m. New York time. If your request is received after 4 p.m. New York time, the transfer will be done using the accumulation unit values as of the next valuation date. Transfers between subaccounts are restricted to six times every contract year. We reserve the right to waive this six-time limit. This limit does not apply to transfers made under a dollar cost averaging, portfolio rebalancing or cross- reinvestment program elected on forms available from us. The minimum amount which may be transferred between subaccounts is $300 (or the entire amount in the subaccount, if less than $300). If the transfer from a subaccount would leave you with less than $300 in the subaccount, we may transfer the total bal- ance of the subaccount. A transfer may be made by writing to the home office or, if a telephone ex- change authorization form (available from us) is on file with us, by a toll- free telephone call 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 their instruc- tions. 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 re- corded 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 cus- tomer 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. 13 Transfers to and from the General Account on or before the annuity commencement date You may transfer all or any part of the contract value from the subaccount(s) to the fixed side of the contract. These transfers cannot be elected more than six times every contract year. We reserve the right to waive this six-time limit. The minimum amount which can be transferred to the fixed side is $300 or the total amount in the subaccount, if less than $300. However, if a trans- fer from a subaccount would leave you with less than $300 in the subaccount, we may transfer the total amount to the fixed side. You may also transfer all or any part of the contract value from the fixed side of your contract to the various subaccount(s) subject to the following restrictions: (1) the sum of the percentages of fixed value transferred is limited to 25% of the value of the fixed side in any 12 month period; (2) the minimum amount which can be transferred is $300 or the amount in the fixed ac- count; and (3) a transfer cannot be made during the first 30 days after the issue date of the contract. These transfers cannot be elected more than six times every contract year. We reserve the right to waive these restrictions. These restrictions do not apply to transfers made under a dollar cost averaging, portfolio rebalancing or cross-reinvestment program elected on forms available from us. Transfers after the annuity commencement date You may transfer all or a portion of your investment in one subaccount to an- other subaccount or to the fixed side of the contract. Those transfers will be limited to three times per contract year. However, no transfers are allowed from the fixed side of the contract to the subaccounts. Death benefit before the annuity commencement date You may designate a beneficiary during the life of the annuitant and change the beneficiary by filing a written request with the home office. Each change of beneficiary revokes any previous designation. We reserve the right to re- quest that you send us the contract for endorsement of a change of beneficia- ry. The contract owner may pre-select an annuity payout option as a method of pay- ing the death benefit to a beneficiary. If you do, the beneficiary cannot change this payout option. In addition to paying a death benefit when the annuitant dies, we will also pay a death benefit when the contract owner, sole joint owner, or pre-desig- nated joint owner dies before the annuity commencement date. This death bene- fit equals the greater of: (1) the GMDB or, if elected, the EGMDB; or (2) the current value of the contract as of the day we approve the claim for payment. If the contract has more than one joint owner, this death benefit will only be paid on the death of the pre-designated joint owner. The contractowner may make this pre-designation to us in writing. If the contractowner does not make this designation, the youngest joint owner will be the pre-designated joint owner. Only the cash surrender value will be paid upon the death of a non-pre- designated joint owner. To summarize, the death benefit will be paid as follows: If the annuitant dies, the death benefit will be paid to the beneficiary. If the contractowner dies, we will pay a death benefit to the contingent owner, if any, otherwise to the annuitant. It the contractowner or joint owner dies, payment of either the death bene- fit or the cash surrender value will be paid to the remaining contractowner or joint owners equally. If the contractowner or joint owner is also the annuitant, the death bene- fit will be paid to the beneficiary. Death benefits are taxable. See Federal tax matters. A surrender charge does not apply to a surrender of the contract as a result of the death of a contractowner, sole joint owner, pre-designated joint owner or annuitant. If there are two or more joint owners, the surrender charge is waived only on the death of the pre-designated joint owner. If the surviving spouse elects to continue the contract, a portion of the death benefit may be credited to the contract. Any portion of the death bene- fit that would have been payable (if the contract had not been continued) and that exceeds the current contract value will be credited to the contract. This feature will only apply one time for each contract. 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 of the annuitant; (2) Written autho- rization for payment; and (3) Our receipt of all required claim forms, fully completed. If the beneficiary is a minor, court documents appointing the guardian/custodian must be submitted. The GMDB is equal to the sum of all purchase payments plus any attributable gain, minus any withdrawals, partial annuitizations and premium taxes in- curred. We determine the attributable gain separately for each contract year on its seventh anniversary (once its surrender charge period has expired). The attributable gain consists of the earnings on a contract year's net purchase payment(s) [purchase payment(s) minus any withdrawals and partial annuitizations, applied on a first-in-first-out basis] as of the valuation date just before its seventh anniversary. This amount will then be included in the GMDB calculation. 14 If contract conditions are met, the GMDB will be increased automatically by us according to the prescribed formula based upon the contract's internal rate of return. For this to occur, the contractowner, sole joint owner, pre-designated joint owner or the annuitant, as of the seventh anniversary of each eligible contract year, must still be living and must be less than 81 years of age. For more information about GMDB calculations, please refer to the SAI. The EGMDB is an alternative to the GMDB for owners of nonqualified contracts or contracts used under an IRA plan. Under the EGMDB, the death benefit pay- able is the amount equal to the greater of: (1) contract value as of the day on which Lincoln Life approves the payment of the claim; or (2) the highest contract value which the contract attains on any policy anniversary date (in- cluding the inception date) from the time the EGMDB takes effect up to and in- cluding the the contractowner, sole joint owner, pre-designated joint owner or annuitant's age up to and including 80. The highest contract value so deter- mined is then increased by purchase payments and decreased by partial with- drawals, partial annuitizations and any premium taxes made, effected or in- curred subsequent to the anniversary date on which the highest contract value is obtained. You may elect the EGMDB within six months after the benefit is approved in your state. Please see your investment dealer for assistance. If you elect the EGMDB, the benefit will begin as of the valuation date we re- ceive the request and we will begin deducting the charge for the EGMDB as of that date. If we receive an election for this benefit on a policy anniversary date, the EGMDB will take effect and we will begin deducting the charge for the benefit at the valuation time on that date. If you elect the EGMDB, you may discontinue the benefit at any time by com- pleting the Enchanced Guaranteed Minimum Death Benefit Discontinuance form and sending it to Lincoln Life. The benefit will be discontinued effective at the valuation time on the next policy anniversary date after we receive the re- quest, and we will cease deducting the charge for the benefit as of that date. If the benefit is discontinued on the policy anniversary date, the benefit and the charge will terminate at the valuation time on that date. If you discon- tinue the benefit, it cannot be reinstated. If you do not elect the EGMDB or you discontinue the benefit after electing it, the GMDB will apply instead and will determine what death benefit is payable. If the death benefit becomes payable, the beneficiary may elect to receive payment either in the form of a lump-sum settlement or an annuity payout. Fed- eral tax law requires that an annuity election be made no later than 60 days after we receive satisfactory notice of death as discussed previously. If a lump-sum settlement is requested, the proceeds will be mailed within seven days of receipt of satisfactory claim documentation as discussed previ- ously, subject to the laws and regulations governing payment of death bene- fits. If an election has not been made by the end of the 60-day period, a lump-sum settlement will be made to the beneficiary at that time. This payment may be postponed as permitted by the Investment Company Act of 1940. Payment will be made in accordance with applicable laws and regulations gov- erning payment of death benefits. Unless otherwise provided in the beneficiary designation, one of the following procedures will take place on the death of a beneficiary: 1. If any beneficiary dies before the annuitant, that beneficiary's interest will go to any other beneficiaries named, according to their respective in- terests (There are no restrictions on the beneficiary's use of the pro- ceeds.); and/or 2. If no beneficiary survives the annuitant, the proceeds will be paid to the contractowner or to his/her estate, as applicable. 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. Joint/contingent ownership If a joint owner is named in the application, the joint owners shall be treated as having equal undivided interests in the contract. Either owner, in- dependently of the other, may exercise any ownership rights in this contract. A contingent owner may not exercise ownership rights in this contract while the contractowner is living. Surrenders and withdrawals Before the annuity commencement date, we will allow the surrender of the con- tract or a withdrawal of the contract value upon your written request, subject to the rules discussed below. Surrender or withdrawal rights after the annuity commencement date depend upon the annuity payout option you select. The amount available upon surrender/withdrawal is the cash surrender value at the end of the valuation period during which the written request for surrender/withdrawal is received at the home office. Unless a request for withdrawal specifies otherwise, withdrawals will be made from all subaccounts within the VAA and from the General Account in the same pro- 15 portion that the amount of withdrawal bears to the total contract value. The minimum amount which can be withdrawn is $300. Unless prohibited, surrender/ withdrawal payments will be mailed within seven days after we receive a valid written request at the home office. The payment may be postponed as permitted by the 1940 Act. There are charges associated with the surrender of a contract or withdrawal of contract value. You may specify whether these charges are deducted from the amount you request to be withdrawn or from the remaining contract value. See Charges and other deductions. The tax consequences of a surrender/withdrawal are discussed later in this booklet. See Federal tax status. Special restrictions on surrenders/withdrawals apply if your contract is pur- chased as part of a retirement plan of a public school system or 501(c)(3) or- ganization under Section 403(b) of the tax code. Beginning January 1, 1989, in order for a contract to retain its tax-qualified status, Section 403(b) pro- hibits a withdrawal from a 403(b) contract of post-1988 contributions (and earnings on those contributions) pursuant to a salary reduction agreement. However, this restriction does not apply if the annuitant (a) attains age 59 1/2, (b) separates from service, (c) dies, (d) becomes totally and permanently disabled and/or (e) experiences financial hardship (in which event the income attributable to those contributions may not be withdrawn). Pre-1989 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 Restric- tions under the Texas Optional Retirement Program, later in this Prospectus booklet. Delay of payments Contract proceeds from the VAA will be paid within seven days, except (i) when the NYSE is closed (except weekends and holidays); (ii) times when market trading is 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. Reinvestment privilege You may elect to make a reinvestment purchase with any part of the proceeds of a surrender/withdrawal, and we will recredit that portion of the surrender/withdrawal charges attributable to the amount returned. This elec- tion must be made within 30 days of the date of the surrender/withdrawal, and the repurchase must be of a contract covered by this Prospectus. A representa- tion must be made that the proceeds being used to make the purchase have retained their tax-favored status under an arrangement for which the contracts offered by this Prospectus are designed. The number of accumulation units which will be credited when the proceeds are reinvested will be based on the value of the accumulation unit(s) on the next valuation date. This computation will occur following receipt of the proceeds and request for reinvestment at the home office. You may utilize the reinvestment privilege only once. For tax reporting purposes, we will treat a surrender/withdrawal and a subsequent re- investment purchase as separate transactions. You should consult a tax advisor before you request a surrender/withdrawal or subsequent reinvestment purchase. Amendment of contract We reserve the right to amend the contract to meet the requirements of the 1940 Act or other applicable federal or state laws or regulations. You will be notified in writing of any changes, modifications or waivers. Commissions The maximum commission which will be paid to dealers is equal to 4.0% of each purchase payment; plus an annual continuing commission equal to 0.25% of the value of contract purchase payments invested for at least 15 months; plus an annual persistency bonus equal to 0.40% of each contract year's increased GMDB (regardless of whether or not the EGMDB is in effect), paid over a period of eight years. At times, additional sales incentives (up to 0.30% of purchase payments and up to 0.05% of the contract value in the VAA while the EGMDB is in effect) may be provided to dealers maintaining certain sales volume levels. In addition, the equivalent of 4.0% of contract value can be paid to dealers upon annuitization. These commissions are not deducted from purchase payments or contract value; they are paid by us. Ownership As contractowner, you have all rights under the contract. According to Indiana law, the assets of the VAA are held for the exclusive benefit of all contractowners and their designated beneficiaries; and the assets of the VAA are not chargeable with liabilities arising from any other business that we may conduct. Qualified contracts may not be assigned or transferred except as permitted by the Employee Retirement Income Security Act (ERISA) of 1974 and upon written notification to us. Non-qualified contracts may not be collater- ally assigned. We assume no responsibility for the validity or effect of any assignment. Consult your tax advisor about the tax consequences of an assign- ment. 16 Contractowner questions The obligations to purchasers under the contracts are those of Lincoln Life. Questions about your contract should be directed to us at 1-800-942-5500. Annuity payouts When you apply for a contract, you may select any annuity commencement date permitted by law. (Please note the following exception: Contracts issued under qualified employee pension and profit-sharing trusts [described in Section 401(a) and tax exempt under Section 501(a) of the tax code] and qualified annu- ity plans [described in Section 403(a) of the tax code], including H.R.10 trusts and plans covering self-employed individuals and their employees, pro- vide for annuity payouts to start at the date and under the option specified in the plan.) The contract provides optional forms of payouts of annuities (annuity options), each of which is payable on a variable basis, a fixed basis or a combination of both. The contract provides that all or part of the contract value may be used to purchase an annuity. You may elect annuity payouts in monthly, quarterly, semiannual or annual in- stallments. If the payouts from any subaccount would be or become less than $50, we have the right to reduce their frequency until the payouts are at least $50 each. Following are explanations of the annuity options available: Annuity options Life Annuity. This option offers a periodic payout during the lifetime of the annuitant and ends with the last payout before the death of the annuitant. This option offers the highest periodic payout since there is no guarantee of a min- imum number of payouts or provision for a death benefit for beneficiaries. How- ever, there is the risk under this option that the annuitant would receive no payouts if he/she dies before the date set for the first payout; only one pay- out 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 life- time of the annuitant and a designated joint annuitant. The payouts continue during the lifetime of the survivor. Joint Life Annuity with Guaranteed Period. This option guarantees periodic payouts during a designated period, usually 10 or 20 years, and continues 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 Survivor Annuity. This option provides a periodic payout during the joint lifetime of the annuitant and a designated joint annui- tant. 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 die 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 life- time of the annuitant with the guarantee that upon death a payout will be made of the value of the number of annuity units (see Variable annuity payouts) equal to the excess, if any, of: (a) the total amount applied under this option divided by the annuity unit value for the date payouts begin, divided by (b) the annuity units represented by each payout to the annuitant multiplied by the number of payouts paid before death. The value of the number of annuity units is computed on the date the death claim is approved for payment by the home of- fice. General information Under the annuity options listed above, you may not make withdrawals. Other op- tions, with or without withdrawal features, may be made available by us. Op- tions are only available to the extent they are consistent with the require- ments 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 will be assessed on all variable annuity payouts, including options that may be offered that do not have a life contingency and therefore no mortality risk. The annuity commencement date is usually on or before the annuitant's 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, variable or combination fixed and variable basis, in proportion to the ac- 17 count allocations at the time of annuitization) except when a joint life pay- out is required by law. Under any option providing for guaranteed payouts, the number of payouts which remain unpaid at the date of the annuitant's death (or surviving annuitant's death in case of a joint life annuity) will be paid to your beneficiary as payouts become due. Variable annuity payouts Variable annuity payouts will be determined using: 1. The contract value on the annuity commencement date; 2. The annuity tables contained in the contract; 3. The annuity option selected; and 4. The investment performance of the fund(s) selected. To determine the amount of payouts, we make this calculation: 1. Determine the dollar amount of the first periodic payout; then 2. Credit the contract with a fixed number of annuity units equal to the first periodic payout divided by the annuity unit value; and 3. Calculate the value of the annuity units each period thereafter. We assume an investment return of 4% per year, as applied to the applicable mortality table. The amount of each payout after the initial payout will de- pend upon how the underlying fund(s) perform, relative to the 4% assumed rate. If the actual net investment rate (annualized) exceeds 4%, the payment will increase at a rate proportional to the amount of excess. Conversely, if the actual rate is less than 4%, annuity payouts will decrease. There is a more complete explanation of this calculation in the SAI. Federal tax 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 18 issue and whether any such limits will apply to existing contracts. We reserve the right to modify the contract without your consent to try to prevent the tax law from considering you as the owner of the assets of the VAA. Age at which annuity payouts begin Federal income tax rules do not expressly identify a particular age by which annuity payouts must begin. However, those rules do require that an annuity contract provide for amortization, through annuity payouts, of the contract's purchase payments and earnings. If annuity payouts under the contract begin or are scheduled to begin on a date past the annuitant's 85th birthday, it is 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 excess of the contract value over the purchase payments of the contract. Tax treatment of payments We make no guarantees regarding the tax treatment of any contract or of any transaction involving a contract. However, the rest of this discussion assumes that your contract will be treated as an annuity for Federal income tax pur- poses and that the tax law will not tax any increase in your contract value 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 extends your purchase payments. In certain circum- stances, your purchase payments are reduced by amounts received from your con- tract that were not included in income. Taxation of annuity payouts The tax code imposes tax on a portion of each annuity payout (at ordinary 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 assign 19 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 incident to divorce), and receive a payment less than your contract's value, you will pay tax on your contract value to the ex- tent it exceeds your purchase payments not previously received. The new own- er'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 issue contracts in connection with the following types of quali- fied plans: . Individual Retirement Accounts and Annuities ("Traditional IRAs") . Roth IRAs . Simplified Employee Pensions ("SEPs") . Savings Incentive Matched Plan for Employees ("SIMPLE 401(k) plans") . Public school system and tax-exempt organization annuity plans ("403(b) plans") . Qualified corporate employee pension and profit sharing plans ("401(a) plans") and qualified annuity plans ("403(a) plans") . Self-employed individual plans ("H.R. 10 plans" or "Keogh Plans") . Deferred compensation plans of state and local governments and tax-exempt 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 20 deduction or exclusion from income was taken for purchase payments. There are exceptions. For example, you do not include amounts received from a Roth IRA in income if certain conditions are satisfied. Failure to comply with the minimum distribution rules applicable to certain qualified plans, such as Traditional IRAs, will result in the imposition of an excise tax. This excise tax generally equals 50% of the amount by which a 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 funds of the series. If the 1940 Act or any regulation under it should be amended or if present interpretations should change, and if as a result we determine that we are permitted to vote the series shares in our own right, we may elect to do so. The number of votes which you have the right to cast will be determined by ap- plying your percentage interest in a subaccount to the total number of votes attributable to the subaccount. In determining the number of 21 votes, fractional shares will be recognized. After the annuity commencement date, the votes attributable to a contract will decrease. Series shares of a class held in a subaccount for which no timely instructions are received will be voted by us in proportion to the voting instructions which are received for all contracts participating in that subaccount. Voting instructions to abstain on any item to be voted on will be applied on a pro- rata basis to reduce the number of votes eligible to be cast. Whenever a shareholder's meeting is called, each person having a voting inter- est in a subaccount will receive proxy voting material, reports and other ma- terials relating to the series. Since the series engages in shared funding, other persons or entities beside Lincoln Life may vote series shares. See Sale of fund shares by the series. Distribution of the contracts American Funds Distributors, Inc. (AFD), 333 South Hope Street, Los Angeles, Ca 90071, is the distributor and principal underwriter of the contracts. They will be sold by properly licensed registered representatives of independent broker-dealers which in turn have selling agreements with AFD and have been licensed by state insurance departments to represent us. AFD is registered with the SEC under the Securities Exchange Act of 1934 as a broker-dealer and is a member of the National Association of Securities Dealers (NASD). Lincoln Life will offer contracts in all states where it is licensed to do business. Return privilege Within the free-look period after you receive the contract, you may cancel it for any reason by delivering or mailing it postage pre-paid, to the home of- fice at P.O. Box 2348, 1300 South Clinton Street, Fort Wayne, Indiana, 46801. A contract canceled under this provision will be void. With respect to the fixed portion of a contract, we will return purchase payments. With respect to the VAA, except as explained in the following paragraph, we will return the contract value as of the date of receipt of the cancellation, plus any con- tract maintenance and administrative fees and any premium taxes which had been deducted. No contingent deferred sales charge will be assessed. A purchaser who participates in the VAA is subject to the risk of a market loss during the free-look period. For contracts written in those states whose laws require that we assume this market risk during the free-look period, a contract may be canceled, subject to the conditions explained before, except that we will return only the pur- chase payment(s). State regulation As a life insurance company organized and operated under Indiana law, we are subject to provisions governing life insurers and to regulation by the Indiana Commissioner of Insurance. Our books and accounts are subject to review and examination by the Indiana Insurance Department at all times. A full examination of our operations is conducted by that Department at least every five years. Restrictions under the Texas Optional Retirement Program Title 8, Section 830.105 of the Texas Government Code, consistent with prior interpretations of the Attorney General of the State of Texas, permits partic- ipants in the Texas Optional Retirement Program (ORP) to redeem their interest in a variable annuity contract issued under the ORP only upon: 1. Termination of employment in all institutions of higher education as de- fined in Texas law; 2. Retirement; or 3. Death. Accordingly, participants in the ORP will be required to obtain a certificate of termination from their employer(s) before accounts can be redeemed. Records and reports As presently required by the 1940 Act and applicable regulations, we are re- sponsible for maintaining all records and accounts relating to the VAA. We have entered into an agreement with the Delaware Management Company, 2005 Mar- ket Street, Philadelphia, PA 19203, to provide accounting services, to the VAA. We will mail to you, at your last known address of record at the home of- fice, at least semiannually after the first contract year, reports containing information required by the 1940 Act or any other applicable law or regula- tion. Other information A Registration Statement has been filed with the SEC, under the Securities Act of 1933 as amended, for the contracts being offered here. This Prospectus does not contain all the information in the Registration Statement, its amendments and exhibits. Please refer to the Registration Statement for further informa- tion about the VAA, Lincoln Life and the contracts offered. Statements in this Prospectus about the content of contracts and other legal instruments are sum- maries. For the 22 complete text of those contracts and instruments, please refer to those docu- ments 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 ad- vertisements. Companies that belong to IMSA subscribe to a set of ethical standards covering the various aspects of sales and services for individually sold life insurance and annuities. Legal proceedings Lincoln Life is involved in various pending or threatened legal proceedings arising from the conduct of its business. Most of these proceedings are rou- tine and in the 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 adverse effect on the financial position of Lincoln Life. Lincoln Life is presently defending several lawsuits in which Plaintiffs seek to represent national classes of policyholders in connection with alleged fraud, breach of contract and other claims relating to the sale of interest- sensitive universal and participating whole life insurance policies. As of the date of this prospectus, the courts have not certified a class in any of the suits. Plaintiffs seek unspecified damages and penalties for themselves and on behalf of the putative class. Although the relief sought in these cases is substantial, the cases are in the preliminary stages of litigation, and it is premature to make assessments about potential loss, if any. Management is de- fending these suits vigorously. The amount of liability, if any, which may ul- timately arise as a result of these suits cannot be reasonably determined at this time. Statement of additional information table of contents for Separate Account E
Item Page - ---------------------------------------- General information and history of Lincoln Life B-2 - ---------------------------------------- Special terms B-2 - ---------------------------------------- Services B-2 - ---------------------------------------- Principal underwriter B-2 - ----------------------------------------
Item Page - ------------------------------------------ Purchase of securities being offered B-2 - ------------------------------------------ Annuity payouts B-2 - ------------------------------------------ Automatic increase in the guaranteed minimum death benefit B-3 - ------------------------------------------ Financial statements B-4 - ------------------------------------------ For a free copy of the SAI please see page one of this booklet.
23 The American Legacy Lincoln National Variable Annuity Account E (Registrant) Lincoln National Life Insurance Co. (Depositor) Statement of additional information (SAI) This SAI should be read in conjunction with the Prospectus of Lincoln National Variable Annuity Account E dated April 30, 2000. You may obtain a copy of the Account E Prospectus on request and without charge. Please write American Leg- acy Customer Service, Lincoln National Life Insurance Co., P.O. Box 2348, Fort Wayne, Indiana 46801 or call 1-800-942-5500. Table of contents
Page - ---------------------------------------- General information and history of Lincoln Life B-2 - ---------------------------------------- Special terms B-2 - ---------------------------------------- Services B-2 - ---------------------------------------- Principal underwriter B-2 - ----------------------------------------
Page - Purchase of securities being offered B-2 - Annuity payouts B-2 - Automatic increase in the guaranteed minimum death benefit B-3 - Financial statements B-4 -
The date of this SAI is April 30, 2000. General information and history of Lincoln National Life Insurance Co. (Lincoln Life) The prior Depositor of the Account, Lincoln National Pension Insurance Compa- ny, was merged into Lincoln Life, effective January 1, 1989. Lincoln Life, or- ganized in 1905, is an Indiana stock insurance corporation, engaged primarily in the direct issuance of annuities and life and health insurance contracts, and is also a professional reinsurer. Lincoln Life is wholly owned by Lincoln National Corporation (LNC), a publicly held insurance holding company domi- ciled in Indiana. Special terms The special terms used in this SAI are the ones defined in the Prospectus. In connection with the term, valuation date, the NYSE is currently closed on weekends and on these holidays: New Year's Day, Martin Luther King's Birthday, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. If any of these holidays occurs on a week- end day, the Exchange may also be closed on the business day occurring just before or just after the holiday. Services Independent auditors The financial statements of the variable annuity account (VAA) and the statu- tory-basis financial statements of Lincoln Life appearing in this SAI and Reg- istration Statement have been audited by Ernst & Young LLP, independent audi- tors, as set forth in their reports which also appear elsewhere in this docu- ment and in the Registration Statement. The financial statements audited by Ernst & Young LLP have been included in this document in reliance on their re- ports given on their authority as experts in accounting and auditing. Keeper of records All accounts, books, records and other documents which are required to be maintained for the VAA are maintained by Lincoln Life or by third parties re- sponsible to Lincoln Life. We have entered into an agreement with the Delaware Management Company, 2005 Market Street, Philadelphia, PA 19203, to provide accounting services to the VAA. No separate charge against the assets of the VAA is made by Lincoln Life for this service. Principal underwriter Lincoln Life has contracted with American Funds Distributors, Inc. (AFD), 333 South Hope St., Los Angeles, California 90071, a licensed broker-dealer, to distribute the contracts through certain legally authorized sales persons and organizations (brokers). AFD and its brokers are compensated under a standard compensation schedule. Purchase of securities being offered The contracts are no longer being offered. Although there are no special pur- chase plans for any class of prospectus buyers, the contingent deferred sales charge normally assessed upon surrender or withdrawal of contract value will be waived for officers, directors or bona fide full time employees of the LNC, the Capital Group, Inc., their affiliated or managed companies and certain other persons. See Charges and other deductions in the Prospectus. Both before and after the annuity commencement date, there are exchange privi- leges between subaccounts, and from the VAA to the General Account, subject to restrictions set out in the Prospectus. See The contracts, in the Prospectus. No exchanges are permitted between the VAA and other separate accounts. Annuity payouts Variable annuity payouts Variable annuity payouts will be determined on the basis of: (1) the dollar value of the contract before the annuity commencement date; (2) the annuity tables contained in the contract; (3) the type of annuity option selected; and (4) the investment results of the fund(s) selected. In order to determine the amount of variable annuity payouts, Lincoln Life makes the following calcula- tion: first, it determines the dollar amount of the first payout; second, it credits the contract with a fixed number of annuity units based on the amount of the first payout; and third, it calculates the value of the annuity units each period thereafter. These steps are explained as follows. The dollar amount of the first periodic variable annuity payout is determined by applying the total value of the accumulation units credited under the con- tract valued as of the annuity commencement date (less any premium taxes) to the annuity tables contained in the contract. The first variable annuity pay- out will be paid 14 days after the annuity commencement date. This day of the month will become the day on which all future annuity payouts will be paid. Amounts shown in the tables are based on B-2 the 1971 Individual Annuity Mortality Tables, modified, with an assumed in- vestment return at the rate of 4% per annum. The first annuity payout is de- termined by multiplying the benefit per $1,000 of value shown in the contract tables by the number of thousands of dollars of value accumulated under the contract. These annuity tables vary according to the form of annuity selected and the age of the annuitant at the annuity commencement date. The 4% interest rate stated above is the measuring point for subsequent annuity payouts. If the actual net investment rate (annualized) exceeds 4%, the payout will in- crease at a rate equal to the amount of such excess. Conversely, if the actual rate is less than 4%, annuity payouts will decrease. If the assumed rate of interest were to be increased, annuity payouts would start at a higher level but would decrease more rapidly or increase more slowly. Lincoln Life may use sex distinct annuity tables in contracts that are not as- sociated with employer sponsored plans and where not prohibited by law. At the annuity commencement date, the contract is credited with annuity units for each subaccount on which variable annuity payouts are based. The number of annuity units to be credited is determined by dividing the amount of the first periodic payout by the value of an annuity unit in each subaccount selected. Although the number of annuity units is fixed by this process, the value of such units will vary with the value of the underlying fund. The amount of the second and subsequent annuity payouts is determined by multiplying the contractowner's fixed number of annuity units in each subaccount by the appro- priate annuity unit value for the valuation date ending 14 days before the date that payout is due. The value of each subaccount's annuity unit will be set initially at $1.00. The annuity unit value for each subaccount at the end of any valuation date is determined by multiplying the subaccount annuity unit value for the immedi- ately preceding valuation date by the product of: a. The net investment factor of the subaccount for the valuation period for which the annuity unit value is being determined, and b. A factor to neutralize the assumed investment return in the annuity table. The value of the annuity units is determined as of a valuation date 14 days before the payout date in order to permit calculation of amounts of annuity payouts and mailing of checks in advance of their due dates. Such checks will normally be issued and mailed at least three days before the due date. Proof of age, sex and survival Lincoln Life may require proof of age, sex or survival of any payee upon whose age, sex or survival payouts depend. Automatic increase in the guaranteed minimum death benefit Subject to the following terms and conditions, once a contract has been in force for a certain period, Lincoln Life will automatically increase the guar- anteed minimum death benefit (GMDB): Lincoln Life will automatically increase the GMDB, separately for each con- tract year's purchase payment(s), effective upon the seventh anniversary of each eligible contract year in which those payments were made (as the contin- gent deferred sales charge expires on those payments). The attributable gain (AG), used to increase the GMDB, will be calculated based on the contract value at the close of business on the last valuation date preceding the seventh anniversary of the contract year for which the in- crease is made. The AG will be the amount which results from allocating the total appreciation in the contract to each contract year's purchase payments adjusted by withdrawals on a first-in-first out (FIFO) basis based on Lincoln Life's internal rate of return (IRR) calculation (as described below). If a single purchase payment was deposited or multiple deposits were made in the first contract year only, then, upon adjustment, the increased GMDB will be the contract value on the seventh contract anniversary. However, if con- tract value is less than net purchase payments, the GMDB will not be adjusted. If purchase payments have been deposited in multiple contract years, then, upon adjustment, the increased GMDB will be the sum of all purchase payments plus any attributable gain, as calculated for each contract year which has reached its seventh anniversary, minus any withdrawals, partial annuitizations and premium taxes incurred. The IRR is the level compound rate of return, calculated by Lincoln Life, at which purchase payments less withdrawals will accumulate to the contract value on the contract anniversary beginning with the seventh anniversary. The appli- cation of the IRR methodology to any particular contract year could allocate gain, if any, in a manner which does not precisely correlate with the con- tract's actual investment experience for a particular contract year or subaccount. The calculation of the IRR assumes all purchase payments and with- drawals occur at the beginning of the contract year in which they were made. Once the IRR has been determined, the gain attributable to each contract year is calculated by applying the IRR to the purchase payments, less any withdraw- als applied on a FIFO basis. B-3 Financial statements Financial statements of the VAA and the statutory-basis financial statements of Lincoln Life appear on the following pages. B-4 [THIS PAGE INTENTIONALLY LEFT BLANK] Lincoln National Variable Annuity Account E Statement of Assets and Liability December 31, 1999
Growth- Asset Income Growth Allocation Combined Subaccount Subaccount Subaccount - ----------------------------------------------------------------------------------- Assets Investments at Market-- Unaffiliated (Cost $827,587,199) $1,159,991,811 $464,201,146 $479,634,614 $19,920,231 -------------- ------------ ------------ ----------- Total Assets 1,159,991,811 464,201,146 479,634,614 19,920,231 Liability--Payable to The Lincoln National Life Insurance Company 39,717 15,921 16,372 680 -------------- ------------ ------------ ----------- Net Assets $1,159,952,094 $464,185,225 $479,618,242 $19,919,551 ============== ============ ============ =========== Percent of net assets 100.00% 40.01% 41.35% 1.72% ============== ============ ============ =========== Net assets are represented by: Legacy I without guaranteed minimum death benefit: . Units in accumulation period 106,639,474 61,232,144 9,335,071 ------------------------ . Annuity reserves units 905,759 482,210 110,053 ------------------------ . Unit value $ 4.089 $ 7.346 $ 2.032 ------------------------ ------------ ------------ ----------- . Value in accumulation period 436,009,133 449,795,727 18,969,360 ------------------------ . Annuity reserves 3,703,310 3,542,194 223,634 ------------------------ ------------ ------------ ----------- 439,712,443 453,337,921 19,192,994 ------------------------ ------------ ------------ ----------- Legacy I with guaranteed minimum death benefit: . Units in accumulation period 6,007,211 3,590,334 358,886 ------------------------ . Unit value $ 4.074 $ 7.320 $ 2.024 ------------------------ ------------ ------------ ----------- . Value in accumulation period 24,472,782 26,280,321 726,557 ------------------------ ------------ ------------ ----------- Net Assets $464,185,225 $479,618,242 $19,919,551 ============ ============ ===========
See accompanying notes. E-2
U.S. Government/ Global High-Yield AAA-Rated Cash Global Small New Bond Securities Management International Bond Growth Capitalization World Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount - --------------------------------------------------------------------------------------------------------- $39,858,400 $28,317,326 $14,423,139 $85,562,971 $4,107,836 $14,215,161 $8,160,596 $1,590,391 ----------- ----------- ----------- ----------- ---------- ----------- ---------- ---------- 39,858,400 28,317,326 14,423,139 85,562,971 4,107,836 14,215,161 8,160,596 1,590,391 1,373 979 507 2,926 142 485 277 55 ----------- ----------- ----------- ----------- ---------- ----------- ---------- ---------- $39,857,027 $28,316,347 $14,422,632 $85,560,045 $4,107,694 $14,214,676 $8,160,319 $1,590,336 =========== =========== =========== =========== ========== =========== ========== ========== 3.44% 2.44% 1.24% 7.38% 0.35% 1.23% 0.70% 0.14% =========== =========== =========== =========== ========== =========== ========== ========== 13,416,178 13,728,281 8,009,500 28,018,531 3,311,793 5,811,717 4,008,037 1,193,592 61,542 124,661 35,934 244,538 38,321 103,969 38,477 -- $ 2.815 $ 1.954 $ 1.677 $ 2.907 $ 1.190 $ 2.304 $ 1.923 $ 1.176 ----------- ----------- ----------- ----------- ---------- ----------- ---------- ---------- 37,771,689 26,826,896 13,433,182 81,422,104 3,942,232 13,388,056 7,708,441 1,404,263 173,265 243,605 60,267 710,804 45,615 239,505 74,000 -- ----------- ----------- ----------- ----------- ---------- ----------- ---------- ---------- 37,944,954 27,070,501 13,493,449 82,152,908 3,987,847 13,627,561 7,782,441 1,404,263 ----------- ----------- ----------- ----------- ---------- ----------- ---------- ---------- 681,720 639,967 556,139 1,176,489 101,076 255,833 196,976 158,293 $ 2.805 $ 1.947 $ 1.671 $ 2.896 $ 1.186 $ 2.295 $ 1.918 $ 1.176 ----------- ----------- ----------- ----------- ---------- ----------- ---------- ---------- 1,912,073 1,245,846 929,183 3,407,137 119,847 587,115 377,878 186,073 ----------- ----------- ----------- ----------- ---------- ----------- ---------- ---------- $39,857,027 $28,316,347 $14,422,632 $85,560,045 $4,107,694 $14,214,676 $8,160,319 $1,590,336 =========== =========== =========== =========== ========== =========== ========== ==========
E-3 Lincoln National Variable Annuity Account E Statement of operations Year Ended December 31, 1999
Growth- Asset Income Growth Allocation Combined Subaccount Subaccount Subaccount - -------------------------------------------------------------------------------- Net Investment Income: .Dividends from investment income $ 17,910,646 $ 8,261,103 $ 709,121 $ 722,850 - ------------------------- .Dividends from net realized gains on investments 149,498,739 74,639,363 64,861,082 1,248,830 - ------------------------- Mortality and expense guarantees: .Legacy I without guaranteed minimum death benefit (12,613,448) (5,738,180) (4,597,802) (255,053) - ------------------------- .Legacy I with guaranteed minimum death benefit (646,414) (305,109) (251,392) (6,699) - ------------------------- ------------ ------------ ------------ ---------- Net Investment Income 154,149,523 76,857,177 60,721,009 1,709,928 - ------------------------- Net Realized and Unrealized Gain (Loss) on Investments: .Net realized gain (loss) on investments 50,578,309 22,299,906 24,579,682 387,143 - ------------------------- .Net change in unrealized appreciation or depreciation on investments 68,218,314 (52,539,057) 92,616,958 (894,434) - ------------------------- ------------ ------------ ------------ ---------- Net Realized and Unrealized Gain (Loss) on Investments 118,796,623 (30,239,151) 117,196,640 (507,291) - ------------------------- ------------ ------------ ------------ ---------- Net Increase (Decrease) in Net Assets Resulting From Operations $272,946,146 $ 46,618,026 $177,917,649 $1,202,637 - ------------------------- ============ ============ ============ ==========
See accompanying notes. E-4
U.S. Government/ Global High-Yield AAA-Rated Cash Global Small Bond Securities Management International Bond Growth Capitalization New World Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount - ----------------------------------------------------------------------------------------------------- $ 4,090,337 $1,957,080 $ 690,457 $ 1,035,296 $ 295,443 $ 122,712 $ 18,635 $ 7,612 -- -- -- 7,480,161 -- 563,416 705,233 654 (515,151) (384,782) (179,832) (718,518) (51,643) (117,769) (48,901) (5,817) (22,543) (14,552) (11,471) (27,173) (1,533) (3,064) (2,304) (574) ----------- ---------- --------- ----------- --------- ---------- ---------- -------- 3,552,643 1,557,746 499,154 7,769,766 242,267 565,295 672,663 1,875 (311,441) (19,688) 9,524 2,832,191 (29,236) 588,552 240,296 1,380 (1,339,838) (2,131,713) 20,987 26,034,063 (152,290) 4,378,110 2,001,600 223,928 ----------- ---------- --------- ----------- --------- ---------- ---------- -------- (1,651,279) (2,151,401) 30,511 28,866,254 (181,526) 4,966,662 2,241,896 225,308 ----------- ---------- --------- ----------- --------- ---------- ---------- -------- $ 1,901,364 $ (593,655) $ 529,665 $36,636,020 $ 60,741 $5,531,957 $2,914,559 $227,183 =========== ========== ========= =========== ========= ========== ========== ========
E-5 Lincoln National Variable Annuity Account E Statements of changes in net assets Years Ended December 31, 1998 and 1999
Growth- Asset Income Growth Allocation Combined Subaccount Subaccount Subaccount - --------------------------------------------------------------------------------------------------------- Net assets at January 1, 1998 $ 916,977,868 $462,366,573 $283,173,827 $16,630,085 Changes From Operations: . Net investment income 122,892,301 70,042,284 43,343,307 1,798,556 - ----------------------------------------------- . Net realized gain (loss) on investments 40,684,337 23,883,099 14,636,236 338,845 - ----------------------------------------------- . Net change in unrealized appreciation or depreciation on investments 15,462,196 (20,327,136) 32,372,928 (125,855) - ----------------------------------------------- -------------- ------------ ------------ ----------- Net increase (decrease) in net assets resulting from operations 179,038,834 73,598,247 90,352,471 2,011,546 - ----------------------------------------------- Change From Unit Transactions: Accumulation Units: .Contract purchases 129,114,132 38,864,166 31,402,360 5,678,293 - ----------------------------------------------- . Terminated contracts and transfers to annuity reserves (219,443,153) (93,145,754) (60,915,801) (4,201,548) - ----------------------------------------------- -------------- ------------ ------------ ----------- (90,329,021) (54,281,588) (29,513,441) 1,476,745 Annuity Reserves: . Transfer from accumulation units and between accounts 1,862,889 787,496 748,421 65,743 - ----------------------------------------------- . Annuity payments (1,227,838) (491,099) (296,803) (104,794) - ----------------------------------------------- . Receipt (reimbursement) of mortality guarantee adjustment 8,237 6,745 (269) 147 - ----------------------------------------------- -------------- ------------ ------------ ----------- 643,288 303,142 451,349 (38,904) Net increase (decrease) in net assets resulting from unit transactions (89,685,733) (53,978,446) (29,062,092) 1,437,841 - ----------------------------------------------- -------------- ------------ ------------ ----------- Total increase (decrease) in net assets 89,353,101 19,619,801 61,290,379 3,449,387 - ----------------------------------------------- -------------- ------------ ------------ ----------- Net assets at December 31, 1998 $1,006,330,969 $481,986,374 $344,464,206 $20,079,472 - ----------------------------------------------- ============== ============ ============ =========== Changes From Operations: . Net investment income $ 154,149,523 $ 76,857,177 $ 60,721,009 $ 1,709,928 - ----------------------------------------------- . Net realized gain (loss) on investments 50,578,309 22,299,906 24,579,682 387,143 - ----------------------------------------------- . Net change in unrealized appreciation or depreciation on investments 68,218,314 (52,539,057) 92,616,958 (894,434) - ----------------------------------------------- -------------- ------------ ------------ ----------- Net increase (decrease) in net assets resulting from operations 272,946,146 46,618,026 177,917,649 1,202,637 - ----------------------------------------------- Change From Unit Transactions: Accumulation Units: . Contract purchases 110,011,803 19,059,307 34,255,852 3,780,995 - ----------------------------------------------- . Terminated contracts and transfers to annuity reserves (229,490,093) (83,522,485) (76,866,972) (5,166,197) - ----------------------------------------------- -------------- ------------ ------------ ----------- (119,478,290) (64,463,178) (42,611,120) (1,385,202) Annuity Reserves: . Transfer from accumulation units and between accounts 1,544,242 694,159 212,566 99,422 - ----------------------------------------------- . Annuity payments (1,436,442) (666,051) (386,765) (78,295) - ----------------------------------------------- . Receipt (reimbursement) of mortality guarantee adjustment 45,469 15,895 21,706 1,517 - ----------------------------------------------- -------------- ------------ ------------ ----------- 153,269 44,003 (152,493) 22,644 Net increase (decrease) in net assets resulting from unit transactions (119,325,021) (64,419,175) (42,763,613) (1,362,558) - ----------------------------------------------- -------------- ------------ ------------ ----------- Total increase (decrease) in net assets 153,621,125 (17,801,149) 135,154,036 (159,921) - ----------------------------------------------- -------------- ------------ ------------ ----------- Net assets at December 31, 1999 $1,159,952,094 $464,185,225 $479,618,242 $19,919,551 - ----------------------------------------------- ============== ============ ============ ===========
See accompanying notes. E-6
U.S. Government/ High-Yield AAA-Rated Cash Global Global Small Bond Securities Management International Bond Growth Capitalization New World Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount - -------------------------------------------------------------------------------------------------------------- $ 51,675,154 $ 33,939,009 $ 11,498,211 $ 51,446,323 $ 2,774,405 $ 3,474,281 $ -- $ -- 4,221,855 1,622,182 445,061 942,302 223,583 220,664 32,507 -- 481,279 170,143 13,391 1,138,439 (12,596) 54,672 (19,171) -- (5,008,809) 452,020 10,075 7,036,206 (114,211) 959,034 207,944 -- - ------------ ------------ ------------ ------------ ----------- ----------- ---------- ---------- (305,675) 2,244,345 468,527 9,116,947 96,776 1,234,370 221,280 -- 6,740,370 7,333,988 21,570,779 7,644,881 3,621,203 3,493,376 2,764,716 -- (11,482,659) (8,660,566) (21,240,095) (15,988,577) (2,061,197) (1,226,466) (520,490) -- - ------------ ------------ ------------ ------------ ----------- ----------- ---------- ---------- (4,742,289) (1,326,578) 330,684 (8,343,696) 1,560,006 2,266,910 2,244,226 -- (14,489) 32,660 -- 34,089 -- 208,969 -- -- (95,062) (61,875) (55,542) (42,690) (38,050) (41,923) -- -- 537 614 87 162 -- 214 -- -- - ------------ ------------ ------------ ------------ ----------- ----------- ---------- ---------- (109,014) (28,601) (55,455) (8,439) (38,050) 167,260 -- -- (4,851,303) (1,355,179) 275,229 (8,352,135) 1,521,956 2,434,170 2,244,226 -- - ------------ ------------ ------------ ------------ ----------- ----------- ---------- ---------- (5,156,978) 889,166 743,756 764,812 1,618,732 3,668,540 2,465,506 -- - ------------ ------------ ------------ ------------ ----------- ----------- ---------- ---------- $ 46,518,176 $ 34,828,175 $ 12,241,967 $ 52,211,135 $ 4,393,137 $ 7,142,821 $2,465,506 $ -- ============ ============ ============ ============ =========== =========== ========== ========== $ 3,552,643 $ 1,557,746 $ 499,154 $ 7,769,766 $ 242,267 $ 565,295 $ 672,663 $ 1,875 (311,441) (19,688) 9,524 2,832,191 (29,236) 588,552 240,296 1,380 (1,339,838) (2,131,713) 20,987 26,034,063 (152,290) 4,378,110 2,001,600 223,928 - ------------ ------------ ------------ ------------ ----------- ----------- ---------- ---------- 1,901,364 (593,655) 529,665 36,636,020 60,741 5,531,957 2,914,559 227,183 2,175,282 5,217,067 22,451,124 10,623,983 1,203,999 5,541,044 4,097,189 1,605,961 (10,706,930) (11,203,650) (20,829,715) (14,132,864) (1,531,493) (3,915,811) (1,371,168) (242,808) - ------------ ------------ ------------ ------------ ----------- ----------- ---------- ---------- (8,531,648) (5,986,583) 1,621,409 (3,508,881) (327,494) 1,625,233 2,726,021 1,363,153 38,270 139,181 36,076 279,529 19,135 (28,329) 54,233 -- (70,737) (73,344) (6,644) (58,974) (38,267) (57,365) -- -- 1,602 2,573 159 1,216 442 359 -- -- - ------------ ------------ ------------ ------------ ----------- ----------- ---------- ---------- (30,865) 68,410 29,591 221,771 (18,690) (85,335) 54,233 -- (8,562,513) (5,918,173) 1,651,000 (3,287,110) (346,184) 1,539,898 2,780,254 1,363,153 - ------------ ------------ ------------ ------------ ----------- ----------- ---------- ---------- (6,661,149) (6,511,828) 2,180,665 33,348,910 (285,443) 7,071,855 5,694,813 1,590,336 - ------------ ------------ ------------ ------------ ----------- ----------- ---------- ---------- $ 39,857,027 $ 28,316,347 $ 14,422,632 $ 85,560,045 $ 4,107,694 $14,214,676 $8,160,319 $1,590,336 ============ ============ ============ ============ =========== =========== ========== ==========
E-7 Lincoln National Variable Annuity Account E Notes to financial statements 1. Accounting policies and variable account information The Variable Account: Lincoln National Variable Annuity Account E (the Vari- able Account) is a segregated investment account of The Lincoln National Life Insurance Company (the Company) and is registered with the Securities and Ex- change Commission under the Investment Company Act of 1940, as amended, as a unit investment trust. The Variable Account consists of one product offering a guaranteed minimum death benefit (GMDB) rider option. The assets of the Variable Account are owned by the Company. The portion of the Variable Account's assets supporting the annuity contracts may not be used to satisfy liabilities arising from any other business of the Company. Basis of Presentation: The accompanying financial statements have been pre- pared 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 Fund, Asset Allocation Fund, High-Yield Bond Fund, U.S. Government/AAA- Rated Securities Fund, Cash Management Fund, International Fund, Bond Fund, Global Growth Fund, Global Small Capitalization Fund and New World Fund (the Funds). AVIS is registered as an open-ended management investment company. In- vestment 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 in- vestments. 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 in- volving life contingencies are calculated using a modification of the 1971 In- dividual Annuitant Mortality Table and an assumed investment rate of 4%. 2. Mortality and expense guarantees & other transactions with affiliates Amounts are paid to the Company for mortality and expense guarantees at a per- centage of the current value of the Variable Account each day. The rates are as follows: . Legacy I at a daily rate of .0034247% (1.25% on an annual basis) . Legacy I with GMDB at a daily rate of .00383561643% (1.40% on an annual ba- sis) In addition, amounts retained by the Company from the proceeds of the sales of annuity contracts for contract charges and surrender charges were as follows during 1999: Growth-Income Subaccount $283,659 - ----------------------------------------------- Growth Subaccount 206,039 - ----------------------------------------------- Asset Allocation Subaccount 11,076 - ----------------------------------------------- High-Yield Bond Subaccount 28,377 - ----------------------------------------------- U.S. Government/AAA-Rated Securities Subaccount 23,867 - ----------------------------------------------- Cash Management Subaccount 15,632 - ----------------------------------------------- International Subaccount 32,995 - ----------------------------------------------- Bond Subaccount 2,294 - ----------------------------------------------- Global Growth Subaccount 4,164 - ----------------------------------------------- Global Small Capitalization Subaccount 2,203 - ----------------------------------------------- New World Subaccount 285 - ----------------------------------------------- -------- $610,591 ========
Accordingly, the Company is responsible for all sales, general, and adminis- trative expenses applicable to the Variable Account. E-8 [THIS PAGE INTENTIONALLY LEFT BLANK] E-9 Lincoln National Variable Annuity Account E Notes to financial statements (continued) 3. Net assets The following is a summary of net assets owned at December 31, 1999:
Growth- Asset Income Growth Allocation Combined Subaccount Subaccount Subaccount - --------------------------------------------------------------------------------- Unit Transactions: Accumulation units $ (17,621,975) $(36,506,632) $(30,219,133) $11,933,678 - ------------------------ Annuity reserves 2,793,375 1,320,684 489,916 150,826 - ------------------------ -------------- ------------ ------------ ----------- (14,828,600) (35,185,948) (29,729,217) 12,084,504 Accumulated net investment income 622,197,159 317,088,697 191,936,144 6,147,668 - ------------------------ Accumulated net realized gain (loss) on investments 220,178,923 102,465,500 103,554,653 1,147,261 - ------------------------ Net unrealized appreciation (depreciation) on investments 332,404,612 79,816,976 213,856,662 540,118 - ------------------------ -------------- ------------ ------------ ----------- $1,159,952,094 $464,185,225 $479,618,242 $19,919,551 ============== ============ ============ ===========
E-10
U.S. Government/ High-Yield AAA-Rated Cash Global Global Small Bond Securities Management International Bond Growth Capitalization New World Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount - -------------------------------------------------------------------------------------------------------- $ (4,761,841) $(4,612,690) $ 2,791,375 $26,418,307 $3,647,822 $ 7,353,739 $4,970,247 $1,363,153 46,903 180,973 29,119 376,346 42,176 102,199 54,233 -- ----------- ----------- ----------- ----------- ---------- ----------- ---------- ---------- (4,714,938) (4,431,717) 2,820,494 26,794,653 3,689,998 7,455,938 5,024,480 1,363,153 44,447,460 31,209,270 10,393,109 18,831,250 644,173 792,343 705,170 1,875 2,641,978 2,734,651 1,250,097 5,544,342 (24,837) 642,773 221,125 1,380 (2,517,473) (1,195,857) (41,068) 34,389,800 (201,640) 5,323,622 2,209,544 223,928 ----------- ----------- ----------- ----------- ---------- ----------- ---------- ---------- $39,857,027 $28,316,347 $14,422,632 $85,560,045 $4,107,694 $14,214,676 $8,160,319 $1,590,336 =========== =========== =========== =========== ========== =========== ========== ==========
E-11 Lincoln National Variable Annuity Account E Notes to financial statements (continued) 4. Purchases and sales of investments The aggregate cost of investments purchased and the aggregate proceeds from in- vestments sold were as follows for 1999.
Aggregate Aggregate Cost of Proceeds Purchases from Sales - -------------------------------------------------------------------- Growth-Income Fund $ 83,796,890 $ 71,359,440 - ----------------------------------------- Growth Fund 73,363,264 55,401,182 - ----------------------------------------- Asset Allocation Fund 4,535,077 4,187,714 - ----------------------------------------- High-Yield Bond Fund 4,820,936 9,831,029 - ----------------------------------------- U.S. Government/AAA-Rated Securities Fund 5,778,641 10,139,305 - ----------------------------------------- Cash Management Fund 18,667,017 16,516,762 - ----------------------------------------- International Fund 15,011,945 10,528,149 - ----------------------------------------- Bond Fund 1,185,319 1,289,245 - ----------------------------------------- Global Growth Fund 4,606,736 2,501,300 - ----------------------------------------- Global Small Capitalization Fund 4,481,761 1,028,651 - ----------------------------------------- New World Fund 1,493,858 128,775 - ----------------------------------------- ------------ ------------ $217,741,444 $182,911,552 ============ ============
5. Investments The following is a summary of investments owned at December 31, 1999.
Net Shares Asset Value of Cost of Outstanding Value Shares Shares - --------------------------------------------------------------------------- Growth-Income Fund 14,032,683 $33.08 $ 464,201,146 $384,384,170 - --------------------------- Growth Fund 6,791,767 70.62 479,634,614 265,777,952 - --------------------------- Asset Allocation Fund 1,321,847 15.07 19,920,231 19,380,113 - --------------------------- High-Yield Bond Fund 3,126,149 12.75 39,858,400 42,375,873 - --------------------------- U.S. Government/AAA-Rated Securities Fund 2,681,565 10.56 28,317,326 29,513,183 - --------------------------- Cash Management Fund 1,305,261 11.05 14,423,139 14,464,207 - --------------------------- International Fund 3,199,812 26.74 85,562,971 51,173,171 - --------------------------- Bond Fund 421,749 9.74 4,107,836 4,309,476 - --------------------------- Global Growth Fund 663,640 21.42 14,215,161 8,891,539 - --------------------------- Global Small Capitalization Fund 469,811 17.37 8,160,596 5,951,052 - --------------------------- New World Fund 135,122 11.77 1,590,391 1,366,463 - --------------------------- -------------- ------------ $1,159,991,811 $827,587,199 ============== ============
6. New investment funds Effective April 30, 1998, the AVIS Global Small Capitalization Account became available as an investment option for Variable Account contract owners. Effec- tive June 17, 1999, the AVIS New World Account became available as an invest- ment option for Variable Account contract owners. E-12 Report of Ernst & Young LLP, Independent Auditors Board of Directors of The Lincoln National Life Insurance Company and Contract Owners of Lincoln National Variable Annuity Account E We have audited the accompanying statement of assets and liability of Lincoln National Variable Annuity Account E ("Variable Account") (comprised of the AVIS Growth- Income, AVIS Growth, AVIS Asset Allocation, AVIS High-Yield Bond, AVIS US Government/AAA-Rated Securities, AVIS Cash Management, AVIS International, AVIS Bond, AVIS Global Growth, AVIS Global Small Capitalization, and AVIS New World subaccounts), as of December 31, 1999, and the related statement of oper- ations 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 ac- cepted 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 ba- sis, evidence supporting the amounts and disclosures in the financial state- ments. Our procedures included confirmation of investments owned as of December 31, 1999, by correspondence with the custodian. An audit also includes assess- ing the accounting principles used and significant estimates made by manage- ment, 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 E at De- cember 31, 1999, the results of their operations for the year then ended, and the changes in their net assets for each of the two years in the period then ended in conformity with accounting principles generally accepted in the United States. Fort Wayne, Indiana March 24, 2000 E-13 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY BALANCE SHEETS -- STATUTORY BASIS
DECEMBER 31 1999 1998 --------- --------- (IN MILLIONS) --------------------- 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 - ------------------------------------------------------------ ========= =========
See accompanying notes. S-1 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS -- STATUTORY BASIS
YEAR ENDED DECEMBER 31 1999 1998 1997 --------- --------- -------- (IN MILLIONS) -------------------------------- 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 - ------------------------------------------------------------ ========= ========= ========
See accompanying notes. S-2 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
YEAR ENDED DECEMBER 31 1999 1998 1997 -------- -------- -------- (IN MILLIONS) ------------------------------ 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 - ------------------------------------------------------------ ======== ======== ========
See accompanying notes. S-3 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
YEAR ENDED DECEMBER 31 1999 1998 1997 --------- ---------- --------- (IN MILLIONS) ---------------------------------- 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 - ------------------------------------------------------------ ========= ========== =========
See accompanying notes. S-4 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 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 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:
CAPITAL AND SURPLUS NET INCOME (LOSS) ---------------------------------------------------------------------- DECEMBER 31 YEAR ENDED DECEMBER 31 1999 1998 1999 1998 1997 ---------------------------------------------------------------------- (IN MILLIONS) ---------------------------------------------------------------------- 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 ----------------------------------------- ========= ========= ========= ========= ======
S-7 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 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 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 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:
YEAR ENDED DECEMBER 31 1999 1998 1997 -------------------------------------- (IN MILLIONS) -------------------------------------- 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 ------------------------------------------------------------ ======== ======== ========
S-11 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:
COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------------------------------------------------------- (IN MILLIONS) ----------------------------------------------------------- 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 ========= ======== ====== =========
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:
COST OR AMORTIZED FAIR COST VALUE ------------------------- (IN MILLIONS) ------------------------- 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 ------------------------------------------------------------ ========= =========
S-12 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:
COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------------------------------------- (IN MILLIONS) ----------------------------------------- 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 ----------------------------------------
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 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:
DECEMBER 31 1999 1998 ------------------- (IN MILLIONS) ------------------- 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 ------------------------------------------------------------ ====== ======
Net realized capital gains are reported net of federal income taxes and amounts transferred to the IMR as follows:
1999 1998 1997 -------------------------------- (IN MILLIONS) -------------------------------- 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 ------------------------------------------------------------ ====== ====== ======
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 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):
DECEMBER 31, 1999 ---------------------------------- FIRST PENN LNH&C LNRAC LNY ---------------------------------- 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 --------------------------------------------------------- ======== ====== ====== ========
YEAR ENDED DECEMBER 31, 1999 ----------------------------------------------- FIRST PENN LNH&C LNRAC LNY ----------------------------------------------- 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 ----------------------------------------------------------- ====== ====== ====== ========
DECEMBER 31, 1998 ---------------------------------- FIRST PENN LNH&C LNRAC LNY ---------------------------------- 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 ---------------------------------------------------------- ======== ====== ====== ========
S-15 THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED) 4. SUBSIDIARIES (CONTINUED)
YEAR ENDED DECEMBER 31, 1998 --------------------------------- FIRST PENN LNH&C LNRAC LNY --------------------------------- 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) ----------------------------------------------------------- ====== ======= ====== ========
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 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:
DECEMBER 31 1999 1998 ----------------------- (IN MILLIONS) ----------------------- Insurance ceded $5,340.0 $4,081.8 ------------------------------------------------------------ Amounts recoverable from other insurers 81.2 79.9 ------------------------------------------------------------
Reinsurance transactions, excluding assumption reinsurance, included in the income statement caption, "Premiums and deposits," are as follows:
YEAR ENDED DECEMBER 31 1999 1998 1997 ------------------------------------ (IN MILLIONS) ------------------------------------ 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 ------------------------------------------------------------ ======== ======== ======
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:
DECEMBER 31 1999 1998 ------------------------- (IN MILLIONS) ------------------------- 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 ========= =========
S-17 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:
DECEMBER 31, 1999 --------------------------------- NET OF GROSS LOADING LOADING --------------------------------- (IN MILLIONS) --------------------------------- 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 ===== ===== =====
DECEMBER 31, 1998 --------------------------------- NET OF GROSS LOADING LOADING --------------------------------- (IN MILLIONS) --------------------------------- 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) ===== ===== =====
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:
AMOUNT PERCENT ----------------------- (IN MILLIONS) ----------------------- 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 ------------------------------------------------------------ =========
S-18 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):
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 ----------- -------------- -------------- ------------- ----------- --------------- January 5, 1998 $ 500.0 $ 500.0 $ 32.8 $ 65.1 $ -- ------------------------------- December 18, 1998 750.0 750.0 46.7 46.7 -- -------------------------------
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 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 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): 2000 $ 28.7 -------------------------------- 2001 28.8 -------------------------------- 2002 27.5 -------------------------------- 2003 26.2 -------------------------------- 2004 26.5 -------------------------------- Thereafter 123.5 -------------------------------- ------ $261.2 ======
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 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 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 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:
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) ----------------------------------------------------- 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 ======== ======== ===== ====== ===== =====
S-24 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:
INTEREST RATE CAPS SWAPTIONS ----------------------------------------------------- 1999 1998 1999 1998 ----------------------------------------------------- (IN MILLIONS) ----------------------------------------------------- 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 ------------------------------------------------------- ======== ======== ======== ========
INTEREST RATE SWAPS ----------------------- 1999 1998 ----------------------- 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 ------------------------------------------------------------ ======= =========
COMMODITY PUT OPTIONS SWAPS ---------------------------------------- 1999 1998 1999 1998 ---------------------------------------- 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 ------------------------------------------------------------ ===== ===== ===== ====
FOREIGN CURRENCY DERIVATIVES (FOREIGN INVESTMENTS) ------------------------------------------- FOREIGN CURRENCY SWAPS FOREIGN EXCHANGE ------------------------------------------- FORWARD CONTRACTS 1999 1998 1999 1998 ------------------------------------------- (IN MILLIONS) ------------------------------------------- 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 ------------------------------------------------------------ ===== ======= ===== =====
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 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 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 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 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:
DECEMBER 31 ------------------------------------------------------------- 1999 1998 ------------------------------------------------------------- CARRYING CARRYING ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE -------------------------------------------------------------------------------------------------------------- (IN MILLIONS) ------------------------------------------------------------- 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) -----------------------------------------------
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 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:
YEAR ENDED DECEMBER 31 1999 1998 1997 ------------------------ (IN MILLIONS) ------------------------ Insurance assumed $ 19.7 $ 13.7 $ 11.9 ---------------------- Insurance ceded 777.6 290.1 100.3
The balance sheets include reinsurance balances with affiliated companies as follows:
DECEMBER 31 1999 1998 ----------------------- (IN MILLIONS) ----------------------- 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 ------------------------
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 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:
YEAR ENDED DECEMBER 31 1999 1998 1997 ----------------------------------- (IN MILLIONS) ----------------------------------- 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 ------------------------------------------------------------ ========= ========= =========
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 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 LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E POST-EFFECTIVE AMENDMENT ON FORM N-4 PART C - OTHER INFORMATION Item 24. Financial Statements and Exhibits (a) List of Financial Statements 1. Part A. The Table of Condensed Financial Information is included in Part A of this Registration Statement. 2. Part B. The following Financial Statements of Account E are included in Part B of this Registration Statement: Statement of Assets and Liability -- December 31, 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. The following Statutory-Basis Financial Statements of The Lincoln National Life Insurance Company are included in the SAI: Balance Sheets -- Statutory Basis -- Years ended December 31, 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 (b) List of Exhibits (1)(a) Resolutions of the Board of Directors of the Lincoln National Life Insurance Company establishing Separate Account E incorporated herein by reference to Registration Statement on Form N-4 (33-26032) filed on April 28, 1998. (1)(b) Establishing Resolution of Segregated Investment Account incorporated herein by reference to Registration Statement on Form N-4 (33-26032) filed on April 28, 1998. (2) None. (3)(a) Underwriting Agreement incorporated herein by reference to Registration Statement on Form N-4 (33-26032) filed on April 28, 1998. (3)(b) Amendment to Underwriting Agreement incorporated herein by reference to Registration Statement on Form N-4 (33-26032) filed on April 28, 1998. (3)(c) Selling Group Agreement incorporated herein by reference to Registration Statement on Form N-4 (33-27783) filed on March 27, 1998. (3)(d) 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. (e) 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 incorporated herein by reference to Registration Statement on Form N-4 (33-26032) filed on April 28, 1998. (4)(b) Form of Rider to Variable Annuity Contract incorporated herein by reference to Registration Statement on Form N-4 (33-27783) filed on March 31, 1997. (4)(c) Amendment No. 1 to Variable Annuity Contract. (4)(d) Amendment No. 2 to Variable Annuity Contract. (4)(e) Amendment No. 3 to Variable Annuity Contract. (5) Application incorporated herein by reference to Registration Statement on Form N-4 (33-26032) filed on April 28, 1998. (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. (6)(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 Lincoln National Life Insurance Company is incorporated herein by reference to the Registration Statement on Form N1-A (2-80741), Amendment No. 21 filed on April 10, 2000. (8)(b) Participation Agreement incorporated herein by reference to Registration Statement on Form N-4 (33-26032) filed on April 28, 1998. (9) Consent and Opinion of Jeremy Sachs, incorporated herein by reference to Post-Effective Amendment #12 filed on April 22, 1998. (10) Consent of Ernst & Young LLP, Independent Auditors (11) Not applicable (12) Not applicable (13) Not applicable (14) N/A (15) Other Exhibits: (a) Organizational Chart of the Lincoln National Insurance Holding Company System (b) Books and Records Report. (16) Powers of Attorney (16)(a) Todd R. Stephenson (16)(b) Lawrence T. Rowland, incorporated herein by reference to Registration Statement on Form N-4 (33-26032) filed on April 7, 1999. (16)(c) Keith J. Ryan (16)(d) H. Thomas McMeekin, incorporated herein by reference to Registration Statement on Form N-4 (33-26032) filed on April 7, 1999. (16)(e) Richard C. Vaughan, incorporated herein by reference to Registration Statement on Form N-4 (33-26032) filed on April 7, 1999. (16)(f) Jon A. Boscia Item 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR Name Positions and Offices with LNL - ---- ------------------------------ Jon A. Boscia** President and Director John H. Gotta**** Chief Executive Officer of Life Insurance, Senior Vice President, and Director Stephen H. Lewis* Interium Chief Executive Officer of Annuities, Senior Vice President and Director H. Thomas Mc Meekin***** Director Cynthia A. Rose* Secretary and Assistant Vice President Lawrence T. Rowland*** Executive Vice President and Director Keith J. Ryan* Vice President, Controller Chief Accounting Officer Todd R. Stephenson* Senior Vice President, Chief Financial Officer and Assistant Treasurer Eldon J. Summers* Second Vice President and Treasurer Richard C. Vaughan** Director Roy V. Washington* Vice President and Chief Compliance Officer *Principal business address is 1300 South Clinton Street, Fort Wayne, Indiana 46802-3506 **Principal business address is 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 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 February 29, 2000, there were 11,986 Contract Owners (fixed and variable). Item 28. Indemnification (a) Brief description of indemnification provisions. In general, Article VIII of the By-Laws of Lincoln National Pension Insurance Company (LNP) provides that LNP 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 LNP, 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 not opposed to the best interests of, LNP. Certain additional conditions apply to indemnification in criminal proceedings. In particular, separate conditions govern indemnification of directors, officer, and employees of LNP in connection with suits by, or in the rights of, LNP. Please refer to Article VIII of the By-Laws of LNP (Exhibit No. 6 at Item 24 [b] of this Registration Statement) 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, The U.S. Treasury Money Fund of America and Washington Mutual Investors Fund, Inc. Lincoln National Variable Annuity Account H and Lincoln National 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 are all segregated investment accounts of Lincoln Life which also invest in the series. The series also offers shares of the funds to other segregated investment accounts. (b) (1) (2) Name and Principal Positions and Offices Business Address with Underwriter ------------------ --------------------- David L. Abzug Regional Vice President 27304 Park Vista Road Agoura Hills, CA 91301 John A. Agar Vice President 1501 N. University, Suite 227A Little Rock, AR 72207 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, Suite 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 N. Brentmeade Blvd. Brentwood, TN 37027 Joseph T. Blair Senior Vice President 148 E. Shore Ave. Groton Long Point, CT 06340 (b) (1) (2) Name and Principal Positions and Offices Business Address with Underwriter ------------------ --------------------- John A. Blanchard Vice President 6421 Aberdeen Road Mission Hills, KS 66208 Ian B. Bodell Senior Vice President P.O. Box 1665 Brentwood, TN 37024-1655 Mick L. Brethower Senior Vice President 29003 Colonial Drive Georgetown, TX 78628 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 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 (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 Daugherty Regional Vice President 1216 Highlander Way Mechanicsburg, PA 17055 Daniel J. Delianedis Regional Vice President 8689 Braxton Drive Eden Prairie, MN 55347 Michael A. Dilella Vice President P.O. Box 661 Ramsey, NJ 07446 G. Michael Dill Senior Vice President 505 E. Main Street Jenks, OK 74037 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 L Paul H. Fieberg Senior Vice President John Fodor Vice President 15 Latisquama Road Southborough, MA 01772 Daniel B. Frick Regional Vice President 845 Western Avenue Glen Ellyn, IL 60137 (b) (1) (2) Name and Principal Positions and Offices Business Address with Underwriter ------------------ ---------------------- Clyde E. Gardner Senior Vice President Route 2, Box 3162 Osage Beach, MO 65065 B Evelyn K. Glassford Vice President Jeffrey J. Greiner Vice President 12210 Taylor Road Plain City, OH 43064 L Paul G. Haaga, Jr. Director B Mariellen Hamann Assistant Vice President David E. Harper Senior Vice President 150 Old Franklin School Road Pittstown, NJ 08867 H Mary Pat Harris Assistant Vice President Ronald R. Hulsey Vice President 6744 Avalon Dallas, TX 75214 Robert S. Irish Regional 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 Arthur J. Levine Senior Vice President 12558 Highlands Place Fishers, IN 46038 (b) (1) (2) Name and Principal Positions and Offices Business Address with Underwriter ------------------ --------------------- B Karl A. Lewis Assistant Vice President T. Blake Liberty Regional Vice President 5506 East Mineral Lane Littleton, CO 80122 Mark Lien Regional Vice President 5570 Beechwood Terrace West Des Moines, IA 50266 L Lorin E. Liesy Assistant Vice President L Susan G. Lindgren Vice President - Institutional Investment Services LW Robert W. Lovelace Director Stephen A. Malbasa Vice President 13405 Lake Shore Blvd. Cleveland, OH 44110 Steven M. Markel Senior Vice President 5241 South Race Street Littleton, CO 80121 L J. Clifton Massar Director, Senior Vice President L E. Lee McClennahan Senior Vice President S John V. McLaughlin Senior Vice President Terry W. McNabb Vice President 2002 Barrett Station Road St. Louis, MO 63131 L R. William Melinat Vice President-Institutional Investment Services David R. Murray Vice President 60 Briant Drive Sudbury, MA 01776 Stephen S. Nelson Vice President P.O. Box 470528 Charlotte, NC 28247-0528 (b) (1) (2) Name and Principal Positions and Offices Business Address with Underwriter ------------------ --------------------- William E. Noe Regional Vice President 304 River Oaks Road Brentwood, TN 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 224 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 (b) (1) (2) Name and Principal Positions and Offices Business Address with Underwriter ------------------ --------------------- Christopher S. Rowey Regional 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 Brad W. Short Regional Vice President 306 15th Street Seal Beach, CA 90740 David W. Short Chairman of the Board and 1000 RIDC Plaza, Suite 212 Co-Chief Executive Pittsburgh, PA 15238 Officer William P. Simon, Jr. Senior Vice President 912 Castlehill Lane Devon, PA 19333 John C. Smith Assistant Vice President- Institutional Investment Services Rodney G. Smith 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 Regional Vice President 855 Markley Woods Way Cincinnati, OH 45230 L Kristen J. Spazafumo Assistant Vice President (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 Regional 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 S James P. Toomey Vice President I Christopher E. Trede Vice President George F. Truesdail Vice President 400 Abbotsford Court Charlotte, NC 28270 Scott W. Ursin-Smith Vice President 60 Reedland Woods Way Tiburon, CA 94920 J. David Viale Regional Vice President 7 Gladstone Lane Laguna Niguel, CA 92677 Thomas E. Warren Regional Vice President 119 Faubel Street Sarasota, FL 34242 L J. Kelly Webb Senior Vice President, Treasurer and Controller
(b) (1) (2) 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 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
- ------------- 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 Exhibit 15(b) is hereby expressly incorporated herein by this reference. Item 31. Management Services Not Applicable. 50 Item 32. Undertakings - --------------------- (a) Registrant undertakes that it will file a post-effective amendment to this registration statement as frequently as necessary to ensure that the audited financial statements in the registration statement are never more than 16 months old for so long as payments under the variable annuity contracts may be accepted. (b) Registrant undertakes that it will include either (1) as part of any application to purchase a Certificate or an Individual Contract offered by the Prospectus, a space that an applicant can check to request a Statement of Additional Information, or (2) a post card or similar written communication affixed to or included in the Prospectus that the applicant can remove to send for a Statement of Additional Information. (c) Registrant undertakes to deliver any Statement of Additional Information and any financial statements required to be made available under this Form promptly upon written or oral request to Lincoln Life at the address or phone number listed in the Prospectus. (d) Lincoln National Life Insurance Company hereby represents that the fees and charges deducted under the contract, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by the Lincoln National Life Insurance Company. Item 33. ( Additional Item) - Undertaking Concerning the Texas Optional Retirement Program Refer to the initial Registration Statement. Item 34. (Additional Item) - Undertaking Concerning Withdrawal Restrictions on IRC Section 403(b) Plan Participants Refer to initial Registration Statement. 51 SIGNATURES (a) As required by the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets the requirements of Securities Rule 485 (b) for effectiveness of this Amendment and has caused this Amendment to the Registration Statement to be signed on its behalf, in the City of Fort Wayne and the State of Indiana on this 11th day of April, 2000. LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E - Legacy I (Registrant) By: /s/ Jeffrey K. Dellinger ________________________________ Jeffrey K. Dellinger Vice President, LNL (Title) By: THE LINCOLN NATIONAL LIFE INSURANCE COMPANY (Depositor) By: /s/ Stephen H. Lewis ________________________________ Stephen H. Lewis (Signature-Officer of Depositor) Interim Chief Executive Officer & Senior Vice President, LNL (Title) (b) As required by the Securities Act of 1933, this Amendment to the Registration Statement has been signed for the Depositor by the following persons in the capacities and on the dates indicated.
Signatures Title Date - ---------- ----- ----- ** President & Director April 11, 2000 - ------------------- (Principal Executive Officer) Jon A. Boscia * Executive Vice President and April 11, 2000 - ------------------- Director Lawrence T. Rowland ** Vice President and Controller April 11, 2000 - ------------------- (Principal Accounting Officer) Keith J. Ryan ** Senior Vice President, Chief April 11, 2000 - ------------------- Financial Officer and Assistant Todd R. Stephenson Treasurer (Principal Financial Officer) Chief Executive Officer of Life ________, 2000 - ------------------- Insurance, Senior Vice President John H. Gotta and Director /s/ Stephen H. Lewis Interim Chief Executive Officer April 11, 2000 - ------------------- of Annuities, Senior Vice Stephen H. Lewis President and Director * Director April 11, 2000 - ------------------- H. Thomas McMeekin * Director April 11, 2000 - ------------------- Richard C. Vaughan
*By /s/ Steven M. Kluever Pursuant to a Power of Attorney filed with Post- ---------------------- effective Amendment No. 14 to the Registration Steven M. Kluever Statement **By /s/ Steven M. Kluever Pursuant to a Power of Attorney filed with this ---------------------- Registration Statement Steven M. Kluever EX-99.4.C 2 VARIABLE ANNUITY CONTRACT #1 ENHANCED GUARANTEED MINIMUM DEATH BENEFIT (EGMDB) AMENDMENT Made a part of the Contract to which it is attached ("this Contract"). This amendment replaces, where applicable, the "Rider" Form 25923, the "Increased Guaranteed Minimum Death Benefit" rider Form DBA-2, the "Enhanced Guaranteed Minimum Death Benefit (EGMDB)" rider Form DBA-5 4/97, and the "Enhanced Guaranteed Minimum Death Benefit (EGMDB) Amendment" Form DBA-5A 11/98 which were attached to your Contract. The following shall be inserted into Section 1.04 NET INVESTMENT RATE AND NET INVESTMENT FACTOR following the sixth paragraph: For any period in which the EGMDB is in effect, the Net Investment Rate for each sub-account is equal to the Gross Investment Rate of the Fund less a daily charge. The daily charge is deducted at an annual rate of 1.40% on each day of the Valuation Period. The Net Investment Rate is then adjusted, plus or minus, for any taxes imposed due to the operation of the Variable Account. This daily charge of 1.40% consists of 1.25% for mortality and distribution expense risks and 0.15% for the EGMDB rider. The EGMDB takes effect as of the time of fund valuation on the next policy anniversary date following the election of this benefit. If the election of this benefit is made on any policy anniversary date or at Contract inception, the EGIVIDB takes effect at the time of fund valuation on that date. There is a daily charge for this benefit at an annual rate of 0.15%. This daily charge is deducted from the Gross Investment Rate of each sub-account. The charge will begin at the time of fund valuation on the policy anniversary date following the election of this rider. This charge will continue for all future Contract years, including Contract years following age 80, unless the Owner elects to discontinue this benefit. After this benefit has been elected, the Owner may discontinue it at any time. If discontinued, the benefit will terminate at the time of fund valuation on the next policy anniversary date. The 0.15% annual charge will also cease when the benefit terminates. If the Owner elects to discontinue this benefit on a policy anniversary date, the benefit and the charge will terminate at the time of fund valuation on that date. Once discontinued, the Owner may not re-elect this benefit. Once Annuity Payments have begun, the EGIVIDB will be discontinued and the charge for this benefit will cease. The following shall be added after the last sentence of the first paragraph of Section 2.02 CHOICE OF ANNUITY PAYMENT OPTION: In addition, before Annuity Payments commence the Owner may select an Annuity Payment Option as a method of paying the Death Benefit to a Beneficiary. The following shall replace the third paragraph of Section 2.11 SURRENDER OPTION: The Contingent Deferred Sales Charge will be waived in the event the Contract is surrendered as a result of the total and permanent disability of the Annuitant or the payment of a Death Benefit paid on the death of the Annuitant, the Owner, or the Joint Owner (if there are two or more Joint Owners, only the Joint Owner pre-designated for payment of the Death Benefit as defined in Section 2.13). The following replaces Section 2.13 DEATH OF ANNUITANT in its entirety: 2.13 DEATH BENEFITS Death Before Commencement of Annuity Payments. Entitlement to Death Benefits. LNL will pay a Death Benefit upon the death of the Annuitant, the Owner or the Joint Owner (if there are two or more Joint Owners, only the Joint Owner pre-designated for payment of the Death Benefit). The payment of the Death Benefit will occur upon receipt of. (1) proof, satisfactory to LNL, of the death; (2) written authorization for payment; and (3) receipt by LNL of all required claim forms, fully completed. Proof of death may be a certificate of death, a certified copy of a decree of a court of competent jurisdiction as to the finding of death, or any other proof of death that is acceptable to LNL. Upon the death of the Annuitant, the Death Benefit will be paid to the Beneficiary in accordance with the terms of Article 3. Upon the death of the sole Owner, LNL will pay a Death Benefit to the Contingent Owner, if any; otherwise, to the Annuitant. If there is an Owner and one Joint Owner, upon the death of either the Owner or the Joint Owner, LNL will pay a Death Benefit to the surviving Owner or Joint Owner. If there is an Owner and two or more Joint Owners, the Owner may pre-designate one of the Joint Owners upon whose death LNL will pay a Death Benefit. If the Owner has not pre-designated a Joint Owner, in writing to LNL, the youngest Joint Owner will be the pre-designated Joint Owner. Upon the death of either the Owner or the pre-designated Joint Owner, LNIL will pay a Death Benefit to the surviving Owner and/or any Joint Owner equally. Upon the death of a Joint Owner who was NOT the pre-designated Joint Owner, LNL will pay the cash surrender value to the surviving Owner and any Joint Owner equally. If the deceased Owner or Joint Owner is also the Annuitant, then the death will be treated as the death of the Annuitant and will be subject to the provisions of this Contract regarding death of Annuitant. Determination of Amounts for EGMDB. The EGMDB is only in effect for Non-Qualified Contracts and Contracts sold as Individual Retirement Annuities (IRA) under Code Section 408(b) or 408A that have elected, but not terminated, the EGMDB. For all other Contracts the EGMDB is not in effect and the Death Benefit is equal to the Increased GMDB (see Determination of Amounts for Increased GMDB). LNL will pay a Death Benefit of an EGMDB for Contracts in which the EGMDB is in effect when the death occurs. The EGMDB is equal to the greater of the following two amounts: a. the current value of the Contract as of the date on which the death claim is approved for payment as described above; or b. the highest account value at the time of fund valuation on any policy anniversary date following election of this Death Benefit prior to the 81st birthday of the deceased and prior to the death of the deceased. The highest account value is adjusted for certain transactions. It is increased by Purchase Payments and is decreased by partial withdrawals, partial annuitizations, and premium taxes, if applicable, incurred subsequent to such policy anniversary date on which the highest account value occurred. If the recipient of the Death Benefit is the surviving spouse of the deceased, the surviving spouse may continue the Contract as the sole Owner and receive a Death Benefit credited to the Contract. The Death Benefit which will be credited to the Contract is equal to the excess of "b." over "a.". If "a." is greater than "b." then no Death Benefit will be credited to the Contract on the first death. A Death Benefit credited into the Contract will only apply one time for each Contract. Determination of Amounts for Increased GMDB. LNL will pay a Death Benefit of an Increased GMDB for Contracts in which the EGMDB is NOT in effect when the death occurs. LNL will automatically increase the Guaranteed Minimum Death Benefit (GMDB), separately for each Contract Year's purchase payment(s), effective upon the Seventh Anniversary of each eligible Contract Year in which those payments were made (as the contingent deferred sales charge period expires on those payments). The Increased GMDB will be calculated based on the contract value at the close of business on the last Valuation Date preceding the Seventh Anniversary of the Contract Year for which the increase is made. The gain attributable to the eligible Contract Year would be calculated by allocating the appreciation in the Contract, respectively, to each year's net purchase payments based on LNL's internal rate of return (IRR) calculation. This gain will be referred to as "Attributable Gain". If the death occurs after the GMDB is increased, LNL will pay an increased Death Benefit which will be the greater of: a. the current value of the Contract as of the date on which the death claim is approved for payment as described above; or b. the sum of all purchase payments plus any Attibutable Gain, less any partial surrenders, partial annuitizations and premium taxes, if applicable, incurred. The GMDB will be increased provided the Annuitant is less than 81 years of age and is still living on the Seventh Anniversary of the eligible Contract Year. This increase will only be made once with respect to each Contract Year's net purchase payments. If the recipient of the Death Benefit is the surviving spouse of the deceased, the surviving spouse may continue the Contract as the sole Owner and receive a Death Benefit credited to the Contract. The Death Benefit which will be credited to the Contract is equal to the excess of "b." over "a.". If "a." is greater than "b." then no Death Benefit will be credited to the Contract on the first death. A Death Benefit credited into the Contract will only apply one time for each Contract. Payment of Amounts on Death. If the Owner is a corporation or other non-individual (non-natural person), the death of the Annuitant will be treated as the death of the Owner. The proceeds (either the Death Benefit or the cash surrender value) payable on the first death of the Owner or any Joint Owner, or upon the death of the spouse who continues the Contract, will be distributed as follows: a. the proceeds must be completely distributed within five years of the (Joint) Owner's date of death; or b. the recipient of the proceeds may elect, within the one year period after the (Joint) Owner's date of death, to receive the proceeds in substantially equal installments over the life of such recipient or over a period not extending beyond the life expectancy of such recipient; provided that such distributions begin not later than one year after the (Joint) Owner's date of death. The Death Benefit payable on the death of the Annuitant will be distributed to the designated Beneficiary in either the form of a lump sum or an Annuity Payment Option. An Annuity Payment Option must be selected within 60 days after LNL approves the death claim as discussed previously. If a lump sum settlement is elected, the proceeds will be mailed within seven days of approval by LNL of the claim. This payment may be postponed as permitted by the Investment Company Act of 1940. Notwithstanding any provision of this Contract to the contrary, no payment of proceeds provided under the Contract will be allowed that does not satisfy the requirements of Code Section 72(s) or 401(a)(9) as applicable, as amended from time to time. All payments will be subject to the laws and regulations governing death benefits. Death On or After the Commencement of Annuity Payments. If upon the death of the Annuitant, or both Joint Annuitants when applicable, any Annuity Payments remain under the Option they will be paid to the Beneficiary as provided by the Option. The following shall be added prior to the first paragraph of Section 4.02 CONTROL: If a Joint Owner(s) is named in the application, the Owner and any Joint Owner shall be treated as having equal and undivided interests in the Contract. The Owner and any Joint Owner, independent of the other, may exercise any ownership rights in this Contract. A Contingent Owner cannot exercise any ownership rights in this Contract while the Contract Owner or any Joint Owner is alive. The Lincoln National Life Insurance Company /s/ Kathleen Peterson Kathleen Peterson, Second Vice President EX-99.4.D 3 VARIABLE ANNUITY CONTRACT #2 VARIABLE ANNUITY AMENDMENT This Amendment is made a part of the Contract to which it is attached (this Contract). . For purposes of this Amendment, Earnings shall be defined as the excess of the Contract Value over Purchase Payments which have not yet been withdrawn from this Contract. . The following shall replace the first three sentences of the first paragraph of Section 2.12, WITHDRAWAL OPTION: The Owner may withdraw a part of the surrender value of this Contract, subject to the charges outlined under Surrender Option (see Section 2.11). However, the Owner may withdraw up to the Free Amount once each Contract Year without incurring a Contingent Deferred Sales Charge (CDSC). The Free Amount is equal to 10% of the total Purchase Payments. For purposes of calculating the CDSC on withdrawals, LNL assumes that: a. The Free Amount will be withdrawn from Purchase Payments on a "first in- first out (FIFO)" basis. b. Prior to the seventh anniversary of the Contract Date, any amount withdrawn above the Free Amount during a Contract Year will be withdrawn in the following order: 1. from Purchase Payments (on a FIFO basis) until exhausted; then 2. from Earnings. c. On or after the seventh anniversary of the Contract Date, any amount withdrawn above the Free Amount during a Contract Year will be withdrawn in the following order: 1. from Purchase Payments (on a FIFO basis) to which a CDSC no longer applies until exhausted; then 2. from Earnings until exhausted; then 3. from Purchase Payments (on a FIFO basis) to which a CDSC still applies. The Lincoln National Life Insurance Company /s/ Kathleen Peterson Kathleen Peterson, Second Vice President [Effective Date: March 1, 2000] EX-99.4.E 4 VARIABLE ANNUITY CONTRACT #3 VARIABLE ANNUITY AMENDMENT This Amendment is made a part of the Contract to which it is attached (this Contract). For purposes of this Amendment, Earnings shall be defined as the excess of the Contract Value over Purchase Payments which have not yet been withdrawn from this Contract. The following shall replace the first three sentences of the first paragraph of Section 2.12, WITHDRAWAL OPTION: The Owner may withdraw a part of the surrender value of this Contract, subject to the charges outlined under Surrender Option (see Section 2.11). However, the Owner may withdraw up to the Free Amount once each Contract Year without incurring a Contingent Deferred Sales Charge (CDSC). The Free Amount is equal to 10% of the total Purchase Payments. For purposes of calculating the CDSC on withdrawals, LNL assumes that: a. The Free Amount will be withdrawn from Purchase Payments on a "first in- first out (FIFO)" basis. b. Any amount withdrawn above the Free Amount during a Contract Year will be withdrawn in the following order: 1. from Purchase Payments (on a FIFO basis) to which a CDSC no longer applies until exhausted; then 2. from Earnings until exhausted; then 3. from Purchase Payments (on a FIFO basis) to which a CDSC still applies. The Lincoln National Life Insurance Company /s/ Kathleen Peterson Kathleen Peterson, Second Vice President [Effective Date: March 1, 2000] EX-99.10 5 CONSENT OF INDEPENDENT AUDITORS Exhibit 10 Consent of Ernst & Young LLP, Independent Auditors We consent to the reference to our firm under the caption "Independent Auditors" in the Post Effective Amendment No. 15 to the Registration Statement (Form N-4 No. 33-26032) and the related Statement of Additional Information appearing therein and pertaining to Lincoln National Variable Annuity Account E, and to the use therein of our reports dated (a) January 31, 2000, with respect to the statutory-basis financial statements of The Lincoln National Life Insurance Company, and (b) March 24, 2000, with respect to the financial statements of Lincoln National Variable Annuity Account E. Fort Wayne, Indiana April 10, 2000 EX-99.1 6 ORGCHART_2000 PC Docs 12752 3/8/99 ORGANIZATIONAL CHART OF THE LINCOLN NATIONAL INSURANCE HOLDING COMPANY SYSTEM All the members of the holding company system are corporations, with the exception of, Delaware Distributors, L.P and Founders CBO, L.P. | | | Lincoln National Corporation | | Indiana - Holding Company | | |--| Lincoln National Management Corporation | | | 100% - Pennsylvania - Management Company | | |--| City Financial Partners Ltd. | | | 100% - England/Wales - Distribution of life| | | assurance & pension products | | |--| LNC Administrative Services Corporation | | | 100% - Indiana - Third Party Administrator | | |--|Lincoln National Financial Institutions Group, Inc.| | |(fka The Richard Leahy Corporation) | | | 100% - Indiana - Insurance Agency | | | | |--| The Financial Alternative, Inc. | | | | 100% - Utah- Insurance Agency | | | | |--| Financial Alternative Resources, Inc. | | | | 100% - Kansas - Insurance Agency | | | | |--| Financial Choices, Inc. | | | | 100% - Pennsylvania - Insurance Agency | | | | | | Financial Investment Services, Inc. | | |--| (fka Financial Services Department, Inc.) | | | | 100% - Indiana - Insurance Agency | | | | | | Financial Investments, Inc. | | |--| (fka Insurance Alternatives, Inc.) | | | | 100% - Indiana - Insurance Agency | | | | |--| The Financial Resources Department, Inc. | | | | 100% - Michigan - Insurance Agency | | | | |--| Investment Alternatives, Inc. | | | | 100% - Pennsylvania - Insurance Agency | | | | |--| The Investment Center, Inc. | | | | 100% - Tennessee - Insurance Agency | | | | |--| The Investment Group, Inc. | | | | 100% - New Jersey - Insurance Agency | | | | Lincoln National Corporation | | Indiana - Holding Company | | |--|Lincoln National Financial Institutions Group, Inc.| | |(fka The Richard Leahy Corporation) | | | 100% - Indiana - Insurance Agency | | | | |--| Personal Financial Resources, Inc. | | | | 100% - Arizona - Insurance Agency | | | | |--| Personal Investment Services, Inc. | | | 100% - Pennsylvania - Insurance Agency | | |--| LincAm Properties, Inc. | | | 50% - Delaware - Real Estate Investment | | | | Lincoln Life and Annuity Distributors, Inc. | |--| (fka Lincoln Financial Group, Inc.) | | | 100% - Indiana - Insurance Agency | | | | |--| Lincoln Financial Advisors Corporation | | | | (fka LNC Equity Sales Corporation) | | | | 100% - Indiana - Broker-Dealer | | | | | |Corporate agencies: Lincoln Life and Annuity Distributors, | | | | Inc. ("LLAD")has subsidiaries of which LLAD owns from | | | | 80%-100% of the common stock (see Attachment #1). These | | | | subsidiaries serve as the corporate agency offices for the | | | | marketing and servicing of products of The Lincoln National | | | | Life Insurance Company. Each subsidiary's assets are less | | | | than 1% of the total assets of the ultimate controlling | | | | person. | | | | |--| Professional Financial Planning, Inc. | | | 100% - Indiana - Financial Planning Services | | |--| Lincoln Life Improved Housing, Inc. | | | 100% - Indiana | | | |--| Lincoln National (China) Inc. | | | 100% - Indiana - China Representative Office | | | |--| Lincoln National Intermediaries, Inc. | | | 100% - Indiana - Reinsurance Intermediary | | |__| Lincoln National Investments, Inc. | | | (fka Lincoln National Investment Companies, Inc.)| | | 100% - Indiana - Holding Company | | | | |--| Lincoln National Investment Companies, Inc.| | | |(fka Lincoln National Investments, Inc.) | | | | 100% - Indiana - Holding Company | | | | Lincoln National Corporation | | Indiana - Holding Company | | |__| Lincoln National Investments, Inc. | | | (fka Lincoln National Investment Companies, Inc.)| | | 100% - Indiana - Holding Company | | | | |--| Lincoln National Investment Companies, Inc.| | | |(fka Lincoln National Investments, Inc.) | | | | 100% - Indiana - Holding Company | | | | | | |--|Delaware Management Holdings, Inc.| | | | | 100% - Delaware - Holding Company| | | | | | | | |--| DMH Corp. | | | | | | 100% - Delaware - Holding Company | | | | | | | | |--| Delaware International Advisers Ltd.| | | | | | 81.1% - England - Investment Advisor | | | | | | |--| Delaware Management Trust Company | | | | | 100% - Pennsylvania - Trust Service| | | | | | | | |__| Delaware International Holdings, Ltd. | | | | | | 100% - Bermuda - Mktg & Admin Services| | | | | | | | | | |--| Delaware International Advisers, Ltd.| | | | | | 18.9% - England - Investment Advisor | | | | | | | | |__| Delvoy, Inc. | | | | | | 100% - Minnesota - Holding Company | | | | | | | | | | |--| Delaware Management Company, Inc. | | | | | | | 100% - Delaware - Holding Company | | | | | | | ________________________________________ | | | | | |--|Delaware Management Business Trust | | | | | | | |100% - Delaware - Investment Advisor | | | | | | | |consists of: | | | | | | | |Delaware Management Company Series | | | | | | | | and Delaware Investment Advisers Series | | | | | | | | | | | | |--| Delaware Distributors, L.P. | | | | | | | |98%-Delaware-MutualFund Distrib. | | | | | | | |& Broker/Dealer | | | | | | | |1%Equity-Delaware Capital | | | | | |Management, Inc. | | | | | |1% Equity-Delaware Distributors, | | | | | |Inc.(G.P) | | | | | | | | | | | | |--| Founders Holdings, Inc. | | | | | | | | 100% - Delaware - General | | | | | | | Partner | | | | | | | | | | | | |--| Founders CBO, L.P. | | | | | | | |1%-Delaware-Investment | | | | | | | | Partnership | | | | | | | |99% held by outside | | | | | | | |investors | | | | | | | | | | | | |--|Founders CBO Corporation| | | | | |100%-Delaware-Co-Issuer | | | | | |with Founders CBO | | | | Lincoln National Corporation | | Indiana - Holding Company | | |__| Lincoln National Investments, Inc. | | | (fka Lincoln National Investment Companies, Inc.)| | | 100% - Indiana - Holding Company | | | | |--| Lincoln National Investment Companies, Inc.| | | |(fka Lincoln National Investments, Inc.) | | | | 100% - Indiana - Holding Company | | | | | | |--|Delaware Management Holdings, Inc.| | | | | 100% - Delaware - Holding Company| | | | | | | | |--| DMH Corp. | | | | | | 100% - Delaware - Holding Company | | | | | | | | |__| Delvoy, Inc. | | | | | | 100% - Minnesota - Holding Company | | | | | | | | | | |--| Delaware Distributors, Inc. | | | | | | | 100% - Delaware - General Partner | | | | | | | | | | | | | |--| Delaware Distributors, L.P. | | | | | | | |98%-Delaware-Mutual Fund Distributor & | | | | | | | |Broker/Dealer | | | | | | |1% Equity-Delaware Capital | | | | | | |Management, Inc. | | | | | | |1% Equity-Delaware Distributors, Inc.| | | | | | |(G.P) | | | | | | | | | | | |--| Delaware Capital Management, Inc. | | | | | | |(fka Delaware Investment Counselors, Inc.)| | | | | | | 100% - Delaware - Investment Advisor | | | | | | | | | | | | | |--| Delaware Distributors, L.P. | | | | | | | | 98%-Delaware-Mutual Fund Distributor & | Broker/Dealer | | | | | | | |1% Equity-Delaware Capital | | | | | | | Management, Inc. | | | | | | | | 1% Equity-Delaware Distributors, | | | | | | | | Inc. | | | | | |--| Delaware Service Company, Inc. | | | | | |100%-Delaware-Shareholder Services & | | | | | |Transfer Agent | | | | | | | | | | | |__| Retirement Financial Services, Inc. | | | | | | |(fka Delaware Investment & Retirement | | | | | | Services,Inc.) | | | | | | | 100% - Delaware - Registered Transfer | | | | | | Agent & I/A | | | | | | |--| Lynch & Mayer, Inc. | | | | | 100% - Indiana - Investment Adviser | | | | | | | | |--| Lynch & Mayer Securities Corp. | | | | | 100% - Delaware - Securities Broker | | | | | | | | Vantage Global Advisors, Inc. | | | |--| (fka Modern Portfolio Theory Associates, Inc.)| | | | | 100% - Delaware - Investment Adviser | | | | Lincoln National Corporation | | Indiana - Holding Company | | |__| Lincoln National Investments, Inc. | | | (fka Lincoln National Investment Companies, Inc.)| | | 100% - Indiana - Holding Company | | | | | | Lincoln Investment Management, Inc. | | |--| (fka Lincoln National Investment Management Company) | | | | 100% - Illinois - Mutual Fund Manager and | | | | Registered Investment Adviser | | |--| The Lincoln National Life Insurance Company | | | 100% - Indiana | | | | |--|AnnuityNet, Inc. | | | | 100% - Indiana - Distribution of annuity products| | | | | | |--| AnnuityNet Insurance Agency, Inc. | | | | | 100% - Indiana - Insurance Agency | | | | |--|Lincoln National Insurance Associates, Inc.| | | | (fka Cigna Associates, Inc.) | | | | 100% - Connecticut - Insurance Agency | | | | | | |--|Lincoln National Insurance Associates of Alabama, Inc. | | | | | 100% - Alabama - Insurance Agency | | | | | | | | Lincoln National Insurance Associates of Massachusetts,| | | | | Inc. (fka Cigna Associates of Massachusetts, Inc.) | | | |--| 100% - Massachusetts - Insurance Agency | | | | |--|Sagemark Consulting, Inc. | | | | (fka Cigna Financial Advisors, Inc.) | | | | 100% - Connecticut - Broker Dealer | | | | |--| First Penn-Pacific Life Insurance Company | | | | 100% - Indiana | | | | |--| Lincoln Life & Annuity Company of New York | | | | 100% - New York | | | | |--| Lincoln National Aggressive Growth Fund, Inc. | | | | 100% - Maryland - Mutual Fund | | | | |--| Lincoln National Bond Fund, Inc. | | | | 100% - Maryland - Mutual Fund | | | | |--| Lincoln National Capital Appreciation Fund, Inc. | | | | 100% - Maryland - Mutual Fund | | | | |--| Lincoln National Equity-Income Fund, Inc. | | | | 100% - Maryland - Mutual Fund | | | | | | Lincoln National Global Asset Allocation Fund, Inc. | | |--| (fka Lincoln National Putnam Master Fund, Inc.) | | | | 100% - Maryland - Mutual Fund | | Lincoln National Corporation | | Indiana - Holding Company | | |--| The Lincoln National Life Insurance Company | | | 100% - Indiana | | | | | | Lincoln National Growth and Income Fund, Inc. | | |--| (fka Lincoln National Growth Fund, Inc.) | | | | 100% - Maryland - Mutual Fund | | | | |--| Lincoln National Health & Casualty Insurance Company | | | | 100% - Indiana | | | | |--| Lincoln Re, S.A. | | | | 1% Argentina - General Business Corp | | | | (Remaining 99% owned by Lincoln National | | | | Reassurance Company) | | | | |--| Lincoln National International Fund, Inc. | | | | 100% - Maryland - Mutual Fund | | | | |--| Lincoln National Managed Fund, Inc. | | | | 100% - Maryland - Mutual Fund | | | | |--| Lincoln National Money Market Fund, Inc. | | | | 100% - Maryland - Mutual Fund | | | | |--| Lincoln National Social Awareness Fund, Inc. | | | | 100% - Maryland - Mutual Fund | | | | |--| Lincoln National Special Opportunities Fund, Inc. | | | | 100% - Maryland - Mutual Fund | | | | |--| Lincoln National Reassurance Company | | | 100% - Indiana - Life Insurance | | | | |--| Lincoln Re, S.A. | | | | 99% Argentina - General Business Corp | | | | (Remaining 1% owned by Lincoln National Health| | | | & Casualty Insurance Company) | | | | |--| Special Pooled Risk Administrators, Inc. | | | 100% - New Jersey - Catastrophe Reinsurance | | | Pool Administrator | | |--| Lincoln National Management Services, Inc. | | | 100% - Indiana - Underwriting and Management Services | | |--| Lincoln National Realty Corporation | | | 100% - Indiana - Real Estate | | |--| Lincoln National Reinsurance Company (Barbados) Limited | | | 100% - Barbados | | Lincoln National Corporation | | Indiana - Holding Company | | |--| Lincoln National Reinsurance Company Limited | | | (fka Heritage Reinsurance, Ltd.) | | | 100% ** - Bermuda | | | | | | Lincoln National Underwriting Services, Ltd. | | |--| 90% - England/Wales - Life/Accident/Health Underwriter | | | | (Remaining 10% owned by Old Fort Ins. Co. Ltd.) | | | | | | Servicios de Evaluacion de Riesgos, S. de R.L. de C.V. | | |--| 51% - Mexico - Reinsurance Underwriter | | | (Remaining 49% owned by Lincoln National Corp.) | | |--| Lincoln National Risk Management, Inc. | | | 100% - Indiana - Risk Management Services | | |--| Lincoln National Structured Settlement, Inc. | | | 100% - New Jersey | | |--| Lincoln National (UK) PLC | | | 100% - England/Wales - Holding Company | | | | |--| Allied Westminster & Company Limited | | | | (fka One Olympic Way Financial Services Limited) | | | | 100% - England/Wales - Sales Services | | | | |--| Culverin Property Services Limited | | | | 100% - England/Wales - Property Development Services | | | | |--| HUTM Limited | | | | 100% - England/Wales - Unit Trust Management (Inactive) | | | | |--| ILI Supplies Limited | | | | 100% - England/Wales - Computer Leasing | | | | |--| Lincoln Financial Advisers Limited | | | | (fka: Laurentian Financial Advisers Ltd.) | | | | 100% - England/Wales - Sales Company | | | | |--| Lincoln Financial Group PLC | | | | (fka: Laurentian Financial Group PLC) | | | | 100% - England/Wales - Holding Company | | | | | | |--| Lincoln ISA Management Limited | | | | | (fka Lincoln Unit Trust Management Limited; | | | | | Laurentian Unit Trust Management Limited) | | | | | 100% - England/Wales - Unit Trust Management | | Lincoln National Corporation | | Indiana - Holding Company | | |--| Lincoln National (UK) PLC | | | 100% - England/Wales - Holding Company | | | | |--| Lincoln Financial Group PLC | | | | (fka: Laurentian Financial Group PLC) | | | | 100% - England/Wales - Holding Company | | | | | | |--| Lincoln Milldon Limited | | | | |(fka: Laurentian Milldon Limited) | | | | | 100% - England/Wales - Sales Company | | | | | | |--| Laurtrust Limited | | | | 100% - England/Wales - Pension Scheme Trustee (Inactive) | | | | | | |--| Lincoln Management Services Limited | | | | |(fka: Laurentian Management Services Limited) | | | | | 100% - England/Wales - Management Services | | | | | | | | |--|Laurit Limited | | | | | |100% - England/Wales - Data Processing Systems | | | | |--| Liberty Life Pension Trustee Company Limited | | | | 100% - England/Wales - Corporate Pension Fund (Dormat) | | | | |--| LN Management Limited | | | | 100% - England/Wales - Administrative Services (Dormat) | | | | | | |--| UK Mortgage Securities Limited | | | | | 100% - England/Wales - Inactive | | | | |--| Liberty Press Limited | | | | 100% - England/Wales - Printing Services | | Lincoln National Corporation | | Indiana - Holding Company | | |--| Lincoln National (UK) PLC | | | 100% - England/Wales - Holding Company | | | | |--| Lincoln General Insurance Co. Ltd. | | | | 100% - Accident & Health Insurance | | | | |--|Lincoln Assurance Limited | | | | 100% ** - England/Wales - Life Assurance | | | | | | | | |--|Barnwood Property Group Limited | | | | | |100% - England/Wales - Property Management Co| | | | | | | | | | |--| Barnwood Developments Limited | | | | | | | 100% England/Wales - Property Development| | | | | | | | | | |--| Barnwood Properties Limited | | | | | | | 100% - England/Wales - Property Investment | | | | | | | | |--|IMPCO Properties G.B. Ltd. | | | | | |100% - England/Wales - Property Investment | | | | |(Inactive) | | | | | | | |--| Lincoln Insurance Services Limited | | | | | 100% - Holding Company | | | | | | | | |--| British National Life Sales Ltd.| | | | | | 100% - Inactive | | | | | | | | |--| BNL Trustees Limited | | | | | | 100% - England/Wales - Corporate Pension | | | | | | Fund (Inactive) | | | | | | | | |--| Chapel Ash Financial Services Ltd. | | | | | | 100% - Direct Insurance Sales | | | | Lincoln National Corporation | | Indiana - Holding Company | | | |--| Lincoln National (UK) PLC | | | 100% - England/Wales - Holding Company | | | | | |--| Lincoln Unit Trust Managers Limited | | | | 100% - England/Wales - Investment Management | | | | | |--| LIV Limited (fka Lincoln Investment Management Ltd.)| | | | 100% - England/Wales - Investment Management Services | | | | | | |--| CL CR Management Ltd. | | | | 50% - England/Wales - Administrative Services | | | | |--| Lincoln Independent Limited | | | |(fka: Laurentian Independent Financial Planning Ltd.) | | | | 100% - England/Wales - Independent Financial Adviser | | | | | |--| Lincoln Investment Management Limited | | | |(fka: Laurentian Fund Management Ltd.) | | | | 100% - England/Wales - Investment Management | | | | |--| LN Securities Limited | | | | 100% - England/Wales - Nominee Company | | | | |--| Niloda Limited | | | | 100% - England/Wales - Investment Company | | | | |--| Lincoln National Training Services Limited | | | | 100% - England/Wales - Training Company | | | | |--| Lincoln Pension Trustees Limited | | | | 100% - England/Wales - Corporate Pension Fund | | | | |--| Lincoln Independent (Jersey) Limited | | | | (fka Lincoln National (Jersey) Limited) | | | | 100% - England/Wales - Dormat | | | | |--| Lincoln National(Guernsey) Limited | | | | 100% - England/Wales - Dormat | | | | |--| Lincoln SBP Trustee Limited | | | | 100% - England/Wales | | | | Lincoln National Corporation | | Indiana - Holding Company | | | | Linsco Reinsurance Company | |--| (fka Lincoln National Reinsurance Company) | | | 100% - Indiana - Property/Casualty | | | |--| Old Fort Insurance Company, Ltd. | | | 100% ** - Bermuda | | | | | | Lincoln National Underwriting Services, Ltd. | | |--| 10% - England/Wales - Life/Accident/Health Underwriter | | | (Remaining 90% owned by Lincoln Natl. Reinsurance Co.) | | | | | | Solutions Holdings, Inc. | | |--| 100% - Delaware - General Business Corporation | | | | | | |--|Solutions Reinsurance Limited | | | | | 100% - Bermuda - Class III Insurance Co| | | | Seguros Serfin Lincoln, S.A. | |--| 49% - Mexico - Insurance | | | | Servicios de Evaluacion de Riesgos, S. de R.L. de C.V. | |--| 49% - Mexico - Reinsurance Underwriter | | | (Remaining 51% owned by Lincoln Natl. Reinsurance Co.) | | |--| Underwriters & Management Services, Inc. | | 100% - Indiana - Underwriting Services | Footnotes: * The funds contributed by the Underwriters were, and continue to be subject to trust agreements between American States Insurance Company, the grantor, and each Underwriter, as trustee. ** Except for director-qualifying shares # Lincoln National Corporation has subscribed for and paid for 100 shares of Common Stock (with a par value of $1.00 per share) at a price of $10 per share, as part of the organizing of the fund. As such stock is further sold, the ownership of voting securities by Lincoln National Corporation will decline and fluctuate. ATTACHMENT #1 LINCOLN LIFE AND ANNUITY DISTRIBUTORS, INC. CORPORATE AGENCY SUBSIDIARIES 1) Lincoln Financial Group, Inc. (AL) 2) Lincoln Financial and Insurance Services Corporation (Walnut Creek, CA) 3) California Fringe Benefit and Insurance Marketing Corporation DBA/California Fringe Benefit Company (Walnut Creek, CA) 4) Colorado-Lincoln Financial Group, Inc. (Denver, CO) 5) Lincoln National Financial Services, Inc. (Lake Worth, FL) 6) CMP Financial Services, Inc. (Chicago, IL) 7) Lincoln Financial Group of Northern Indiana, Inc. (Fort Wayne, IN) 8) Financial Planning Partners, Ltd. (Mission, KS) 9) The Lincoln National Financial Group of Louisiana, Inc. (Shreveport, LA) 10) Benefits Marketing Group, Inc. (D.C. & Chevy Chase, MD) 11) Lincoln Financial Services and Insurance Brokerage of New England, Inc. (fka: Lincoln National of New England Insurance Agency, Inc.) (Worcester, MA) 12) Financial Consultants of Michigan, Inc. (Troy, MI) 13) Lincoln Financial Group of Missouri, Inc. (fka: John J. Moore & Associates, Inc.) (St. Louis, MO) 14) Beardslee & Associates, Inc. (Clifton, NJ) 15) Lincoln Financial Group, Inc. (fka: Resources/Financial, Inc. (Albuquerque, NM) 16) Lincoln Cascades, Inc. (Portland, OR) 17) Lincoln Financial Group, Inc. (Salt Lake City, (UT) Summary of Changes to Organizational Chart: JANUARY 1, 1995-DECEMBER 31, 1995 SEPTEMBER 1995 a. Lincoln National (Jersey) Limited was incorporated on September 18, 1995. Company is dormat and was formed for tax reasons per Barbara Benoit, Assistant Corporate Secretary at Lincoln UK. JANUARY 1, 1996-DECEMBER 1, 1996 MARCH 1996 a. Delaware Investment Counselors, Inc. changed its name to Delaware Capital Management, Inc. effective March 29, 1996. AUGUST 1996 a. Lincoln National (Gernsey) Limited was incorporated on August 9, 1996; company is dormat and was formed for tax reasons. SEPTEMBER 1996 a. Morgan Financial Group, Inc. changed its name to Lincoln National Sales Corporation of Maryland effective September 23, 1996. OCTOBER 1996 a. Addition of Lincoln National (India) Inc., incorporated as an Indiana corporation on October 17, 1996. NOVEMBER 1996 a. Lincoln National SBP Trustee Limited was bought "off the shelf" and was incorporated on November 26, 1996; it was formed to act ast Trustee for Lincoln Staff Benefits Plan. DECEMBER 1996 a. Addition of Lincoln National Investments, Inc., incorporated as an Indiana corporation on December 12, 1996. JANUARY 1, 1997-DECEMBER 31, 1997 JANUARY 1997 a. Delaware Management Holdings, Inc., Lynch & Mayer, Inc. and Vantage Global Advisors, Inc. were transferred via capital contribution to Lincoln National Investments, Inc. effective January 2, 1997. b. Lincoln National Investments, Inc. changed its name to Lincoln National Investment Companies, Inc. effective January 24, 1997. c. Lincoln National Investment Companies, Inc. changed its named to Lincoln National Investments, Inc. effective January 24, 1997. JANUARY 1997 CON'T d. The following Lincoln National (UK) subsidiaries changed their name effective January 1, 1997: Lincoln Financial Group PLC (fka Laurentian Financial Group PLC); Lincoln Milldon Limited (fka Laurentian Milldon Limited); Lincoln Management Services Limited (fka Laurentian Management Services Limited). FEBRUARY 1997 a. Removal of Lincoln National Financial Group of Philadelphia, Inc. which was dissolved effective February 25, 1997. MARCH 1997 a. Removal of Lincoln Financial Services, Inc. which was dissolved effective March 4, 1997. APRIL 1997 a. Acquisition of Dougherty Financial Group, Inc. on April 30, 1997. Company then changed its name to Delvoy, Inc. The acquisition included the mutual fund group of companies as part of the Voyager acquisition. The following companies all then were moved under the newly formed holding company, Delvoy, Inc. effective April 30, 1997: Delaware Management Company, Inc., Delaware Distributors, Inc., Delaware Capital Management, Inc., Delaware Service Company, Inc. and Delaware Investment & Retirement Services, Inc. b. Acquisition of Voyager Fund Managers, Inc. and Voyager Fund Distributors, Inc. on April 30, 1997; merger is scheduled for May 31, 1997 for Voyager Fund Managers, Inc. into Delaware Management Company, Inc. and Voyager Fund Distributors, Inc. is to merge into Delaware Distributors, L.P. c. Removal of Aseguradora InverLincoln, S.A. Compania de Seguros y Reaseguros, Grupo Financiero InverMexico. Stock was sold to Grupo Financiero InverMexico effective April 18, 1997. MAY 1997 a. Name change of The Richard Leahy Corporation to Lincoln National Financial Institutions Group, Inc. effective May 6, 1997. b. Voyager Fund Managers, Inc. merged into Delaware Management Company, Inc. effective May 30, 1997 at 10:00 p.m. with Delaware Management Company, Inc. surviving. c. On May 31, 1997 at 2:00 a.m., Voyager Fund Distributors, Inc. merged into a newly formed company Voyager Fund Distributors (Delaware), Inc., incorporated as a Delaware corporation on May 23, 1997. Voyager Fund Distributors (Delaware), Inc. then merged into Delaware Distributors, L.P. effective May 31, 1997 at 2:01 a.m. Delaware Distributors, L.P. survived. JUNE 1997 a. Removal of Lincoln National Sales Corporation of Maryland -- company dissolved June 13, 1997. b. Addition of Lincoln Funds Corporation, incorporated as a Delaware corporation on June 10, 1997 at 2:00 p.m. c. Addition of Lincoln Re, S.A., incorporated as an Argentina company on June 30, 1997. JULY 1997 a. LNC Equity Sales Corporation changed its name to Lincoln Financial Advisors Corporation effective July 1, 1997. b. Addition of Solutions Holdings, Inc., incorporated as a Delaware corporation on July 27, 1997. SEPTEMBER 1997 a. Addition of Solutions Reinsurance Limited, incorporated as a Bermuda corporation on September 29, 1997. OCTOBER 1997 a. Removal of the following companies: American States Financial Corporation, American States Insurance Company, American Economy Insurance Company, American States Insurance Company of Texas, American States Life Insurance Company, American States Lloyds Insurance Company, American States Preferred Insurance Company, City Insurance Agency, Inc. and Insurance Company of Illinois -- all were sold 10-1-97 to SAFECO Corporation. b. Liberty Life Assurance Limited was sold to Liberty International Holdings PLC effective 10-6-97. c. Addition of Seguros Serfin Lincoln, S.A., acquired by LNC on 10-15-97. DECEMBER 1997 a. Addition of City Financial Partners Ltd. as a result of its acquisition by Lincoln National Corporation on December 22, 1997. This company will distribute life assurance and pension products of Lincoln Assurance Limited. b. Removal of Lynch & Mayer Asia, Inc. which was dissolved December 24, 1997. JANUARY 1998 a. Addition of Cigna Associates, Inc., Cigna Financial Advisors, Inc. and Cigna Associates of Massachusetts, Inc., acquired by The Lincoln National Life Insurance Company on January 1, 1998. Cigna Associates of Massachusetts is 100% owned by Cigna Associates, Inc. b. Removal of Lincoln National Mezzanine Corporation and Lincoln National Mezzanine Fund, L.P. Lincoln National Mezzanine Corporation was dissolved on January 12, 1998 and Lincoln National Mezzanine Fund, L.P. was cancelled January 12, 1998. c. Corporate organizational changes took place in the UK group of companies on January 21, 1998: Lincoln Insurance Services Limited and its subsidiaries were moved from Lincoln National (UK) PLC to Lincoln Assurance Limited; Lincoln General Insurance Co. Ltd. was moved from Lincoln Insurance Services Limited to Lincoln National (UK) PLC. d. Addition of AnnuityNet, Inc., incorporated as an Indiana corporation on January 16, 1998 and a wholly-owned subsidiary of The Lincoln National Life Insurance Company. JUNE 1998 a. Name Change of CIGNA Financial Advisors, Inc. to Sagemark Consulting, Inc. effective June 1, 1998. b. Name Change of CIGNA Associates, Inc. to Lincoln National Insurance Associates, Inc. effective June 1, 1998. c. Addition of Lincoln National Insurance Associates of Alabama, Inc., incorporated as a wholly-owned subsidiary of Lincoln National Insurance Associates, Inc. as an Alabama domiciled corporation. d. Dissolution of LUTM Nominees Limited effective June 10, 1998. e. Dissolution of Cannon Fund Managers Limited June 16, 1998. f. Dissolution of P.N. Kemp Gee & Co. Ltd. June 2, 1998. JULY 1998 a. Name change of CIGNA Associates of Massachusetts, Inc. to Lincoln National Insurance Associates of Massachusetts, Inc. effective July 22, 1998. SEPTEMBER 1998 a. Removal of Lincoln Financial Group of Michigan, Inc., voluntarily dissolved September 15, 1998. b. Name change of Lincoln Financial Group, Inc. to Lincoln Life and Annuity Distributors, Inc. on September 29, 1998. c. Removal of Lincoln European Reinsurance S.A. -- company dissolved September 30, 1998. d. Removal of Lincoln Funds Corporation -- company voluntarily dissolved September 30, 1998. OCTOBER 1998 a. Addition of AnnuityNet Insurance Agency, Inc., incorporated as an Indiana corporation October 2, 1998., a wholly-owned subsidiary of AnnuityNet, Inc. b. Removal of Lincoln National (India) Inc., voluntarily dissolved October 26, 1998. DECEMBER 1998 a. Removal of The Insurers' Fund, Inc., voluntarily dissolved December 10, 1998. b. Addition of Lincoln National Management Corporation, a Pennsylvania corporation and a wholly-owned subsidiary of Lincoln National Corporation, incorporated on December 17, 1998. JANUARY 1999 Lincoln Unit Trust Management changed its name on January 5, 1999 to Lincoln ISA Management Limited. FEBRUARY 1999 Removal of Lincoln Southwest Financial Group, Inc. -- company's term of existence expired July 18, 1998. EX-99.15.B 7 BOOKS & RECORDS BOOKS AND RECORDS LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E RULES UNDER SECTION 31 OF THE INVESTMENT COMPANY ACT OF 1940 Records to Be Maintained by Registered Investment Companies, Certain Majority-Owned Subsidiaries Thereof, and Other Persons Having Transactions with Registered Investment Companies. Reg. 270.31a-1. (a) Every registered investment company, and every underwriter, broker, dealer, or investment advisor which is a majority-owned subsidiary of such a company, shall maintain and keep current the accounts, books, and other documents relating to its business which constitute the record forming the basis for financial statements required to be filed pursuant to Section 30 of the Investment Company Act of 1940 and of the auditor's certificates relating thereto. LN-Record Location Person to Contact Retention - --------- -------- ----------------- --------- Annual Reports Finance Eric Jones Permanently, the first two To Shareholders years in an easily accessible place Semi-Annual Finance Eric Jones Permanently, the first two Reports years in an easily accessible place Form N-SAR Finance Eric Jones Permanently, the first two years in an easily accessible place (b) Every registered investment company shall maintain and keep current the following books, accounts, and other documents: Type of Record - -------------- (1) Journals (or other records of original entry) containing an itemized daily record in detail of all purchases and sales of securities (including sales and redemptions of its own securities), all receipts and deliveries of securities (including certificate numbers if such detail is not recorded by custodian or transfer agent), all receipts and disbursements of cash and all other debits and credits. Such records shall show for each such transaction the name and quantity of securities, the unit and aggregate purchase or sale price, commission paid, the market on which effected, the trade date, the settlement date, and the name of the person through or from whom purchased or received or to whom sold or delivered. Purchases and Sales Journals - ---------------------------- Daily reports CSRM Nancy Alford Permanently, the first two of securities Finance Eric Jones years in an easily accessible place transactions Portfolio Securities - -------------------- C-Port Purchase/ Finance Eric Jones Permanently, the first two Sales Report years in an easily accessible place LN-Record Location Person to Contact Retention - --------- -------- ----------------- --------- Receipts and Deliveries of Securities (units) - --------------------------------------------- Not Applicable. Portfolio Securities - -------------------- Not Applicable. Receipts and Disbursements of Cash and other Debits and Credits - --------------------------------------------------------------- Daily Journals CSRM Nancy Alford Permanently, the Finance Eric Jones first two years in an easily accessible place (2) General and auxiliary ledgers (or other record) reflecting all asset, liability, reserve, capital, income and expense accounts, including: (i) Separate ledger accounts (or other records) reflecting the following: (a) Securities in transfer; (b) Securities in physical possession; (c) Securities borrowed and securities loaned; (d) Monies borrowed and monies loaned (together with a record of the collateral therefore and substitutions in such collateral); (e) Dividends and interest received; (f) Dividends receivable and interest accrued. Instructions. (a) and (b) shall be stated in terms of securities quantities only; (c) and (d) shall be stated in dollar amounts and securities quantities as appropriate; (e) and (f) shall be stated in dollar amounts only. LN-Record Location Person to Contact Retention - --------- -------- ----------------- --------- General Ledger - -------------- LNL trial Finance Eric Jones Permanently, the first Balance (5000 two years in an easily series) accessible place Securities in Transfer - ---------------------- Not Applicable. Securities in Physical Possession - --------------------------------- Not Applicable. Securities Borrowed and Loaned - ------------------------------ Not Applicable. Monies Borrowed and Loaned - -------------------------- Not Applicable. LN-Record Location Person to Contact Retention - --------- -------- ----------------- --------- Dividends and Interest Received - ------------------------------- LNL Trial Finance Eric Jones Permanently, the first Balance (5000 two years in an easily series) accessible place Dividends Receivable and Interest Accrued - --------------------------------------------- LNL Trial Finance Eric Jones Permanently, the first Balance (5000 two years in an easily series) accessible place (ii) Separate ledger accounts (or other records) for each portfolio security, showing (as of trade dates), (a) the quantity and unit and aggregate price for each purchase, sale, receipt, and delivery of securities and commodities for such accounts, and (b) all other debits and credits for such accounts. Securities positions and money balances in such ledger accounts (or other records) shall be brought forward periodically but not less frequently than at the end of fiscal quarters. Any portfolio security, the salability of which is conditioned, shall be so noted. A memorandum record shall be available setting forth, with respect to each portfolio security accounts, the amount and declaration, ex-dividend, and payment dates of each dividend declared thereon. Ledger Account for each portfolio Security - ------------------------------------------ Daily Report Finance Eric Jones Permanently, the first Of Securities years in an easily Transactions (Daily accessible place Trade File) (iii) Separate ledger accounts (or other records) for each broker-dealer, bank or other person with or through which transactions in portfolio securities are affected, showing each purchase or sale of securities with or through such persons, including details as to the date of the purchase or sale, the quantity and unit and aggregate prices of such securities, and the commissions or other compensation paid to such persons. Purchases or sales effected during the same day at the same price may be aggregated. Not Applicable. (iv) Separate ledger accounts (or other records), which may be maintained by a transfer agent or registrar, showing for each shareholder of record of the investment company the number of shares of capital stock of the company held. in respect of share accumulation accounts (arising from periodic investment plans, dividend reinvestment plans, deposit of issued shares by the owner thereof, etc.), details shall be available as to the dates and number of shares of each accumulation, and except with respect to already issued shares deposited by the owner thereof, prices of each such accumulation. Shareholder Accounts - -------------------- Master file Finance Eric Jones Permanently, the first Record (Daily Trade CSRM Nancy Alford two years in an easily File & Leg. Syst. accessible place Client Rpt.) (3) A securities record or ledger reflecting separately for each portfolio security as of trade date all "long" and "short" positions carried by the investment company for its own account and showing the location of all securities long and the off-setting position to all securities short. The record called for by this paragraph shall not be required in circumstances under which all portfolio securities are maintained by a bank or banks or a member or members of a national securities exchange as custodian under a custody agreement or as agent for such custodian. LN-Record Location Person to Contact Retention - --------- -------- ----------------- --------- Not Applicable (4) Corporate charters, certificates of incorporation or trust agreements, and bylaws, and minute books of stockholders' and directors' or trustees' meetings; and minute books of directors' or trustees' committee and advisory board or advisory committee meetings. Corporate Documents - ------------------- Memorandum Legal Janet Lindenberg Permanently, the first Establishing SA two Years in an easily accessible place (5) A record of each brokerage order given by or in behalf of the investment company for, or in connection with, the purchase or sale of securities, whether executed or unexecuted. Such record shall include the name of the broker, the terms and conditions of the order and of any modification or cancellation thereof, the time of entry or cancellation, the price at which executed, and the time of receipt of report of execution. The record shall indicate the name of the person who placed the order in behalf of the investment company. Order Tickets - ------------- UIT applica- CSRM Nancy Alford Six years, the first two tions and Finance Eric Jones years in an easily daily reports accessible place of securities transactions (6) A record of all other portfolio purchase or sales showing details comparable to those prescribed in paragraph 5 above. Commercial Paper - ---------------- Not Applicable. (7) A record of all puts, calls, spreads, straddles, and other options in which the investment company has any direct or indirect interest or which the investment company has granted or guaranteed; and a record of any contractual commitments to purchase, sell, receive or deliver securities or other property (but not including open orders placed with broker-dealers for the purchase or sale of securities, which may be cancelled by the company on notices without penalty or cost of any kind); containing at least an identification of the security, the number of units involved, the option price, the date of maturity, the date of issuance, and the person to whom issued. LN-Record Location Person to Contact Retention - --------- -------- ----------------- --------- Record of Puts, Calls, Spreads, Etc. - ------------------------------------ Not Applicable. (8) A record of the proof of money balances in all ledger accounts (except shareholder accounts), in the form of trial balances. Such trial balances shall be prepared currently at least once a month. Trial Balance - ------------- LNL Trial Finance Eric Jones Permanently, the first Balance (5000 two years in an easily series) accessible place (9) A record for each fiscal quarter, which shall be completed within 10 days after the end of such quarter, showing specifically the basis or bases upon which the allocation of orders for the purchase and sale of portfolio securities to named brokers or dealers and the division of brokerage commissions or other compensation on such purchase and sale orders among named persons were made during such quarter. The record shall indicate the consideration given to (a) sales of shares of the investment company by brokers or dealers, (b) the supplying of services or benefits by brokers or dealers to the investment company, its investment advisor or principal underwriter or any persons affiliated therewith, and (c) any other considerations other than the technical qualifications of the brokers and the dealers as such. The record shall show the nature of their services or benefits made available, and shall describe in detail the application of any general or specific formula or other determinant used in arriving at such allocation of purchase and sales orders and such division of brokerage commissions or other compensation. The record shall also include the identifies of the person responsible for the determination of such allocation and such division of brokerage commissions or other compensation. Not Applicable. (10) A record in the form of an appropriate memorandum identifying the person or persons, committees, or groups authorizing the purchase or sale of portfolio securities. Where an authorization is made by a committee or group, a record shall be kept in the names of its members who participated in the authorization. There shall be retained a part of the record required by this paragraph any memorandum, recommendation, or instruction supporting or authorizing the purchase or sale of portfolio securities. The requirements of this paragraph are applicable to the extent they are not met by compliance with the requirements of paragraph 4 of this Rule 31a1(b). Advisory Legal Products and Six years, the first Agreements Distribution two years in an easily LNL Law Division accessible place (11) Files of all advisory material received from the investment advisor, any advisory board or advisory committee, or any other persons from whom the investment company accepts investment advice publications distributed generally. Not Applicable. (12) The term "other records" as used in the expressions "journals (or other records of original entry)" and "ledger accounts (or other records)" shall be construed to include, where appropriate, copies of voucher checks, confirmations, or similar documents which reflect the information required by the applicable rule or rules in appropriate sequence and in permanent form, including similar records developed by the use of automatic data processing systems. LN-Record Location Person to Contact Retention - --------- -------- ----------------- --------- Correspondence CSRM Nancy Alford Six years, the first two years in an easily accessible place Proxy State- CSRM Nancy Alford Six years, the first ments and two years in an easily Proxy Cards accessible place Pricing Sheets Finance Eric Jones Permanently, the first two years in an easily accessible place Bank Statements Treasurers Rusty Summers Six years, the first two years in an easily accessible place March 24, 2000 EX-99.16.A 8 POWERS OF ATTORNEY POWER OF ATTORNEY I undersigned officer of The Lincoln National Life Insurance Company, hereby revoke all powers of attorney authorizing any person to act as attorney-in-fact relative to Lincoln National Variable Annuity Account E (American Legacy I), which were previously executed by me and do hereby severally constitute and appoint Kelly D. Clevenger, Jeffrey K. Dellinger, and Steven M. Kluever, my true and lawful attorneys-in-fact, with full power in each of them to sign for me, in my name and in the capacities indicated below, any and all amendments to Registration Statement No. 33-26032 filed with the Securities and Exchange Commission under the Securities Act of 1933, on behalf of the Company in its own name or in the name of one of its Separate Accounts, hereby ratifying and confirming my signature as it may be signed by any of my attorneys-in-fact to any such amendment to that Registration Statement. The power of attorney was signed on April 30, 1999. Signature Title - --------- ----- /s/ Todd R. Stephenson Senior Vice President, Chief Financial Officer - ---------------------- and Assistant Treasurer Todd R. Stephenson (Principal Financial Officer) STATE OF INDIANA) )SS: COUNTY OF ALLEN) Subscribed and sworn to before me this 30th day of April, 1999. /s/ Kimberly J. DeLong ----------------------------------------- Notary public Commission Expires: 1-29.2007 --------- EX-99.16.C 9 POWERS OF ATTORNEY POWER OF ATTORNEY I undersigned officer of The Lincoln National Life Insurance Company, hereby revoke all powers of attorney authorizing any person to act as attorney-in-fact relative to Lincoln National Variable Annuity Account E (American Legacy I), which were previously executed by me and do hereby severally constitute and appoint Kelly D. Clevenger, Jeffrey K. Dellinger, and Steven M. Kluever, my true and lawful attorneys-in-fact, with full power in each of them to sign for me, in my name and in the capacities indicated below, any and all amendments to Registration Statement No. 33-26032 filed with the Securities and Exchange Commission under the Securities Act of 1933, on behalf of the Company in its own name or in the name of one of its Separate Accounts, hereby ratifying and confirming my signature as it may be signed by any of my attorneys-in-fact to any such amendment to that Registration Statement. The power of attorney was signed on April 29, 1999. Signature Title - --------- ----- /s/ Keith J. Ryan Vice President and Controller - ----------------- (Principal Accounting Officer) Keith J. Ryan STATE OF INDIANA) )SS: COUNTY OF ALLEN) Subscribed and sworn to before me this 29/th/ day of April, 1999. /s/ Janet L. Lindenberg -------------------------------------- Notary public Commission Expires: 7-10-2001 ---------- EX-99.16.F 10 POWERS OF ATTORNEY POWER OF ATTORNEY I undersigned officer of The Lincoln National Life Insurance Company, hereby revoke all powers of attorney authorizing any person to act as attorney-in-fact relative to Lincoln National Variable Annuity Account E (American Legacy I), which were previously executed by me and do hereby severally constitute and appoint Kelly D. Clevenger, Jeffrey K. Dellinger, and Steven M. Kluever, my true and lawful attorneys-in-fact, with full power in each of them to sign for me, in my name and in the capacities indicated below, any and all amendments to Registration Statement No. 33-26032 filed with the Securities and Exchange Commission under the Securities Act of 1933, on behalf of the Company in its own name or in the name of one of its Separate Accounts, hereby ratifying and confirming my signature as it may be signed by any of my attorneys-in-fact to any such amendment to that Registration Statement. The power of attorney was signed on January 6, 2000. Signature Title - --------- ----- /s/ Jon A. Bosica President and Director - ------------------- Jon A. Boscia (Principal Executive Officer) STATE OF PENNSYLVANIA) )SS: COUNTY OF PHILADELPHIA) Subscribed and sworn to before me this 6th day of January, 2000. /s/ Judith M. Callihan --------------------------------------------- Notary public Commission Expires: Oct. 18, 2003 -----END PRIVACY-ENHANCED MESSAGE-----