-----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, HBEx8g+AV/4F2sM5q2ztHH6FxADiKwWF0Zhd5OejhY6XGiHR5fIT6KuBtYJkCaLQ lp5gQpDY4kslwUPQzbabjg== 0000059558-99-000016.txt : 19990312 0000059558-99-000016.hdr.sgml : 19990312 ACCESSION NUMBER: 0000059558-99-000016 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990311 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LINCOLN NATIONAL CORP CENTRAL INDEX KEY: 0000059558 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 351140070 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06028 FILM NUMBER: 99563126 BUSINESS ADDRESS: STREET 1: 200 E BERRY ST STREET 2: PO BOX 1110 CITY: FORT WAYNE STATE: IN ZIP: 46802 BUSINESS PHONE: 2194552000 MAIL ADDRESS: STREET 1: 200 EAST BERRY STREET CITY: FORT WAYNE STATE: IN ZIP: 46802-2706 10-K 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission File Number 1-6028 LINCOLN NATIONAL CORPORATION (Exact name of registrant as specified in its charter) Indiana 35-1140070 (State of incorporation) (I.R.S. Employer Identification No.) 200 East Berry Street, Fort Wayne, Indiana 46802-2706 (Address of principal executive offices) Registrant's telephone number (219) 455-2000 Securities registered pursuant to Section 12(b) of the Act:
Title of each class Exchanges on which registered - ------------------- ----------------------------- Common Stock New York, Chicago and Pacific Common Share Purchase Rights New York, Chicago and Pacific $3.00 Cumulative Convertible Preferred Stock, Series A New York and Chicago 8.75% Cumulative Quarterly Income Preferred Securities, Series A* New York 8.35% Trust Originated Preferred Securities, Series B* New York 7.40% Trust Originated Preferred Securities, Series C* New York 7.75% FELINE PRIDES, Series D* New York, Chicago and Pacific
* Issued by Lincoln National Capital I, Lincoln National Capital II, Lincoln National Capital III and Lincoln National Capital IV, respectively. Payments of distributions and payments on liquidation or redemption are guaranteed by Lincoln National Corporation. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ x ] As of February 26, 1999, 101,245,205 shares of common stock were outstanding. The aggregate market value of such shares (based upon the closing price of these shares on the New York Stock Exchange) held by nonaffiliates was approximately $9,586,700,000. Select materials from the Proxy Statement for the Annual Meeting of Shareholders, scheduled for May 13, 1999 have been incorporated by reference into Part III of this Form 10-K. The exhibit index to this report is located on page 80. Page 1 of 218 2 Lincoln National Corporation Table of Contents Item Page PART I 1. Business A. General Description.......................................... 3 B. Description of Business Segments: Life Insurance and Annuities.............................. 3 Lincoln UK................................................ 4 Reinsurance .............................................. 4 Investment Management..................................... 4 C. Other Matters: Regulation................................................ 5 Miscellaneous............................................. 5 2. Properties....................................................... 5 3. Legal Proceedings................................................ 6 4. Submission of Matters to a Vote of Security Holders.............. 6 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters 6 6. Selected Financial Data.......................................... 7 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 8 7A. Quantitative and Qualitative Disclosures About Market Risk....... 28 8. Financial Statements and Supplementary Data...................... 35 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.................................... 67 PART III 10. Directors and Executive Officers of the Registrant............... 68 11. Executive Compensation........................................... 69 12. Security Ownership of Certain Beneficial Owners and Management... 69 13. Certain Relationships and Related Transactions................... 69 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 69 Index to Exhibits............................................... 80 Signatures...................................................... 81 3 PART I Item 1. Business Lincoln National Corporation ("LNC") is a holding company. Through subsidiary companies, LNC operates multiple insurance and investment management businesses. During 1998, the collective group of companies adopted "Lincoln Financial Group" as its marketing identity. LNC is the 39th largest (based on assets) U.S. corporation (1997 Fortune 500, Largest U.S. Corporations, April 1998). Operations are divided into four business segments: 1) Life Insurance and Annuities, 2) Lincoln UK, 3) Reinsurance and 4) Investment Management. Over the past five years, segments have been redefined as noted below. Prior to 1997, LNC had a Property-Casualty segment. This segment was sold in 1997 and the related segment information was reclassified to discontinued operations (see note 11 to the consolidated financial statements on page 65). The Lincoln UK segment, which was added in 1997, was included in the Life Insurance and Annuities segment prior to the adoption of Financial Accounting Standard No. 131. The Investment Management segment was added in April of 1995 following the acquisition of Delaware Management Holdings, Inc. Prior to the sale of 71% of its direct writer of employee life-health coverages in the first quarter of 1994, LNC operated a business segment entitled Employee Life-Health Benefits. After the sale, the earnings from the 29% minority interest retained were included in "Other Operations" as described below. Although one of the subsidiaries held by LNC was formed as early as 1905, LNC itself was formed in 1968. LNC is an Indiana corporation with its principal office at 200 East Berry Street, Fort Wayne, Indiana 46802-2706. As of December 31, 1998, there were 210 persons on the staff of the LNC holding company. Once the organizational/expense review discussed in note 11 to the consolidated financial statements on page 67 is fully implemented, the governance of the holding company will be under the direction of a staff of approximately 65 persons. Total employment of Lincoln National Corporation at December 31, 1998 on a consolidated basis was 8,015. Revenues, pre-tax income and assets for LNC's major business segments and other operations are shown in this Form 10-K report as part of the consolidated financial statements (see note 9 to the consolidated financial statements on page 62). The LNC "Other Operations" category includes the financial data for an unconsolidated affiliate (subsequent to the first quarter of 1994 and prior to the sale of this unit in October of 1995) engaged in the employee life-health benefits business, an investment management company that services LNC's business segments, certain other operations that are not directly related to the business segments and unallocated corporate items (i.e., corporate investment income, interest expense on short-term and long-term borrowings and unallocated corporate overhead expenses). Following is a brief description of the four business segments: 1. Life Insurance and Annuities The primary companies within this business segment are Lincoln National Life Insurance Company ("Lincoln Life"); First Penn-Pacific Life Insurance Company ("First Penn"); Lincoln Life & Annuity Company of New York ("LLANY") and Lincoln Financial Advisors ("LFA"). Lincoln Life, an Indiana corporation headquartered in Fort Wayne, Indiana with significant operations in Hartford, Connecticut, is the 10th largest U.S. stockholder-owned life insurance company, based on revenues (1997 Fortune Rankings of Largest Life Insurance Companies by Revenues, April 1998) and the 13th largest, based on assets (Best's Review Life-Health Edition, July 1998). A network of 58 life insurance agencies, independent life insurance brokers, insurance agencies located within financial institutions and specifically trained employees sell fixed annuities, variable annuities, pension products, universal life insurance, variable universal life insurance, term insurance and other individual insurance coverages in most states of the United States. The distribution network includes approximately 2,050 career agents, 34,500 brokers, 4,500 bank agents and access to 75,000 stockbrokers and financial planners. First Penn is an Indiana Corporation headquartered in Oakbrook Terrace, Illinois. Its universal life, term life and deferred annuity products are distributed through stockbrokers, financial planners, banks and personal producing general agents. It also manufactures universal life, term life and deferred annuity products for Lincoln Life for distribution through its career agents and banks. These products are marketed in most states of the United States. LLANY is a New York company, headquartered in Syracuse, New York. This company was formed in connection with the acquisition of the tax-qualified annuity business from UNUM Corporation's affiliates in 1996 (see note 11 to the consolidated financial statements on page 65). LLANY also offers other types of annuities, pension and life insurance products within the state of New York. 4 LFA is a securities broker/dealer and a registered investment advisor that offers a full range of financial and estate planning. LFA also offers access to annuities, 401(k) plans, pensions, universal life insurance and other wealth accumulation and protection products and services. Other companies within this segment include various general business corporations that support the segment's sales, service and administrative efforts. Approximately 4,285 employees are involved in this business segment. 2. Lincoln UK Business in this segment is conducted through a series of operating companies owned by Lincoln National (UK) plc. Lincoln UK is headquartered in Gloucester, England, and is licensed to do business throughout the United Kingdom. The principal products produced by this operation, unit-linked life and pension products, are similar to U.S. produced variable life and annuity products. The distribution network includes approximately 1,630 sales representatives and tied agents. Lincoln National (UK) was the 12th largest writer of unit-linked new business premiums in the UK for 1997 (Money Management Magazine-New Business Trends, June 1998). Approximately 1,400 employees are involved in this business segment. 3. Reinsurance The primary companies within this business segment are Lincoln National Reassurance Company ("LNRAC"), Lincoln National Health & Casualty Insurance Company ("LNH&C"), Lincoln Life, Lincoln National Reinsurance Company Ltd (Bermuda), Old Fort Insurance Company Ltd (Bermuda) and Lincoln National Reinsurance Company Ltd (Barbados). LNRAC and Lincoln Life offer reinsurance programs for individual life, group life, group medical, disability income, personal accident and annuity products to U.S. and international clients. LNH&C offers group medical products and services on both a direct and reinsurance basis as well as personal accident reinsurance. The insurance companies in Bermuda and Barbados offer specialized reinsurance programs for life, health and annuity business. They also offer funded cover programs to property-casualty carriers in the U.S. and select international markets. This segment provides a broad range of risk management products and services to insurance companies, Health Maintenance Organizations, self-funded employers and other primary market risk accepting organizations throughout the United States and economically attractive international markets. Marketing efforts are conducted primarily through the efforts of a reinsurance sales staff. Some business is generated through reinsurance intermediaries and brokers. The reinsurance organization is one of the leading life-health reinsurers worldwide measured on gross premiums, net of ceded (Business Insurance, August 1998). Other companies in this business segment include various general business corporations that support the segment's sales, service and administration efforts. Approximately 840 employees are involved in this business segment. 4. Investment Management The primary companies within this business segment include Lincoln National Investments, Inc. ("LNI"), Lincoln National Investment Companies, Inc. ("LNIC"), Delaware Management Holdings, Inc. ("Delaware"), Lynch & Mayer, Inc. ("L&M") and Vantage Investment Advisors ("Vantage"). LNI and LNIC are intermediate level holding companies that own the operating companies within this segment. The operating companies provide a variety of asset management services to institutional and retail customers including pension plans, endowment funds, individuals and trusts. These companies serve as investment advisor to approximately 455 pension funds and other institutional accounts; act as investment manager/national distributor and/or shareholder services agent for 114 open-end funds; and serve as investment manager for 10 closed-end funds. Approximately 1,045 employees are involved in this business segment. 5 LNC's insurance subsidiaries protect themselves against losses greater than the amount they are willing to retain on any one risk or event by purchasing reinsurance from unaffiliated insurance companies (see note 7 to the consolidated financial statements on page 55. All businesses LNC is involved in are highly competitive due to the market structure and the large number of competitors. At the end of 1997, the latest year for which data is available, there were more than 1,700 life insurance companies in the United States. Lincoln Life is the 10 largest stock and mutual life insurance company in the United States based on revenues (1997 Fortune Ranking of Largest Life Insurance Companies by Revenues, April 1998). LNC's investment management companies were the 35th largest U.S. investment management group at the end of 1997 (1997 Institutional Investor 300 Money Managers, July 1998). LNC's Life Insurance & Annuities, Lincoln UK and Reinsurance business segments, in common with those of other insurance companies, are subject to regulation and supervision by the states, territories and countries in which they are licensed to do business. The laws of these jurisdictions generally establish supervisory agencies with broad administrative powers relative to granting and revoking licenses to transact business, regulating trade practices, licensing agents, prescribing and approving policy forms, regulating premium rates for some lines of business, establishing reserve requirements, regulating competitive matters, prescribing the form and content of financial statements and reports, regulating the type and amount of investments permitted and prescribing minimum levels of capital. The ability to continue an insurance business is dependent upon the maintenance of the licenses in the various jurisdictions. LNC's Investment Management segment, in common with other investment management groups, is subject to regulation and supervision by the Securities and Exchange Commission, National Association of Securities Dealers, the Investment Management Regulatory Organization ("IMRO"), the Pennsylvania Department of Banking and jurisdictions of the states, territories and foreign countries in which they are licensed to do business. Because of the nature of the insurance and investment management businesses, there is no single customer or group of customers upon whom the business is dependent. Factors such as backlog, raw materials, seasonality, patents (including trademarks, licenses, franchises and any other concessions held) or environmental impact do not have a material effect upon such businesses. However, within LNC's Reinsurance segment, Lincoln National Risk Management, Inc. ("LNRM") does hold patents for "The Method and Apparatus for Evaluating a Potentially Insurable Risk," and "Automated Decision-making Arrangements." LNRM markets multiple knowledge-based underwriting products that rely on these products. LNC does not have a separate unit that conducts market research. Research activities related to new products or services, or the improvement of existing products or services, are conducted within the business segments. Expenses related to such activities are not material. Also, sales are not dependent upon select geographic areas. LNC has foreign operations that are significant in relationship to the consolidated group (see note 9 to the consolidated financial statements on page 63). Item 2. Properties LNC and the various Fort Wayne operating businesses own or lease approximately 1.6 million square feet of office space in the Fort Wayne area. Businesses operating in suburban Chicago, Illinois; Philadelphia, Pennsylvania; Hartford, Connecticut and the United Kingdom own or lease another 1.2 million square feet of office space. An additional 1.1 million square feet of office space is owned or leased in other U.S. cities and foreign countries for branch offices and other smaller operations. LNC expects to move its corporate headquarters from Fort Wayne to Philadelphia in mid-1999. The future lease commitments shown within note 7 includes a commitment for 30,000 square feet in Philadelphia for LNC's headquarters. As shown in the notes to the consolidated financial statements (see note 7 to the consolidated financial statements on page 55), the rental expense on operating leases for office space and equipment for continuing operations totaled $81.3 million for 1998. Office space rent expense accounts for $63.2 million of this total. This discussion regarding properties does not include information on investment properties. 6 Item 3. Legal Proceedings LNC and its subsidiaries are involved in various pending or threatened legal proceedings arising from the conduct of business. In some instances, these proceedings include claims for unspecified or substantial punitive damages and similar types of relief in addition to amounts for alleged contractual liability or requests for equitable relief. After consultation with legal counsel and a review of available facts, it is management's opinion that these proceedings ultimately will be resolved without materially affecting the consolidated financial position of LNC. Item 4. Submission of Matters to a Vote of Security Holders During the fourth quarter of 1998, no matters were submitted to securityholders for a vote. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Stock Market and Dividend Information The dividend on LNC's common stock is declared each quarter by LNC's Board of Directors. In determining dividends, the Board takes into consideration items such as LNC's financial condition, including current and expected earnings, projected cash flows and anticipated financing needs. The range of market prices and cash dividends declared by calendar quarter for the past two years are as follows:
Common Stock Data: (per share) 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr - ------------------------------------------------------------------------------------------------------------------ 1998 High...................................................... $86.500 $94.125 $98.875 $86.688 Low....................................................... 72.250 83.688 82.250 67.000 Dividend declared......................................... $.52 $.52 $.52 $.55 1997 High...................................................... $61.625 $68.625 $73.000 $78.125 Low....................................................... 51.375 49.000 63.813 64.625 Dividend declared......................................... $.49 $.49 $.49 $.52
Notes: (1) At December 31, 1998, the number of shareholders of record of LNC's common stock was 12,025. (2) The payment of dividends to shareholders is subject to the restrictions described in note 7 to the consolidated financial statements (see page 54) and is discussed in the Management's Discussion and Analysis of Financial Condition (see page 28). Exchanges: New York, Chicago and Pacific. Stock Exchange Symbol: LNC 7
Item 6. Selected Financial Data (millions of dollars, except per share data) Year Ended December 31 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- Total revenue.................................... 6,087.1 4,898.5 4,733.6 4,586.5 3,932.7 Net income from continuing operations (1)........ 509.8 22.2 356.4 301.4 165.5 Net income from discontinued operations.......... -- 134.9 157.2 180.8 184.4 Gain on sale of discontinued operations.......... -- 776.9 -- -- -- -------- ----- -------- -------- -------- Net Income (1)............................... 509.8 934.0 513.6 482.2 349.9 Per Share Data: (2) Net income from continuing operations............ $5.02 $ .21 $3.38 $2.88 $1.59 Net income from discontinued operations.......... -- 1.30 1.49 1.72 1.76 Gain on sale of discontinued operations.......... -- 7.47 -- -- -- -------- ---- ----- ------ ------- Net Income-Diluted........................... $5.02 $8.98 $4.87 $4.60 $3.35 Net Income-Basic............................. $5.08 $9.11 $4.95 $4.78 $3.52 Common stock dividends........................... $2.11 $1.99 $1.87 $1.75 $1.66
(millions of dollars, except per share data) December 31 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- Assets........................................... 93,836.3 77,174.7 71,713.4 63,257.7 48,864.8 Long-term debt................................... 712.2 511.0 626.3 659.3 474.2 Minority interest-preferred securities of subsidiary companies............................ 745.0 315.0 315.0 -- -- Shareholders' equity............................. 5,387.9 4,982.9 4,470.0 4,378.1 3,042.1 Per Share Data: (2) Shareholders' equity (Securities at market)...... $53.18 $49.27 $43.00 $41.89 $29.35 Shareholders' equity (Securities at cost)........ 47.73 44.96 39.03 35.21 32.35 Market value of common stock..................... 81.81 78.13 52.50 53.75 35.00
(1) Factors affecting the comparability of net income from continuing operations and net income from continuing operations for the 1994- 1998 period are shown on page 8 (see "Supplemental Data"). Other factors affecting comparability are shown within the review of operations for each segment (see pages 9-18). (2) Per share amounts were also affected by the issuance of 9,200,000 and 1,398,112 shares of common stock in 1993 and 1997, respectively, and the retirement of 500,000; 694,582; 4,948,900 and 623,281 shares of common stock in 1994, 1996; 1997 and 1998 respectively. 8 Supplemental Data The following table presents a reconciliation of "Income (Loss) from Continuing Operations" to "Net Income (Loss) from Continuing Operations" determined in accordance with generally accepted accounting principles. Income (Loss) from Continuing Operations is LNC's alternative measure of operating performance which excludes the after-tax realized gain (loss) on investments and associated items, gain (loss) on sale of subsidiaries and restructuring charges.
Year Ended December 31 (in millions) 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations (1)......... $530.4 $(50.7) $298.8 $140.9 $218.6 Realized gain (loss) on investments, net of associated amortization of deferred policy acquisition costs, investment expenses and income taxes.................................... 13.7 72.9 57.6 102.2 (101.9) Gain (loss) on sale of subsidiary, net of taxes...... -- -- -- 58.3 48.8 Restructuring charges................................ (34.3) -- -- -- -- ------- -------- -------- --------- -------- Net Income from Continuing Operations............. $509.8 $ 22.2 $356.4 $301.4 $165.5
(1) Income (loss) from continuing operations for 1997 and 1995 includes the impact of the changes in estimate of the reserve level needed for LNC's disability income business ($130.0 million and $121.6 million, after-tax, respectively). Also 1997 includes a change in estimate for reserves for 1) Lincoln UK's pension business of $174.9 million after-tax and 2) Reinsurance's personal accident programs of $113.7 million after-tax. Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition The pages to follow review LNC's results of operations and financial condition. Historical financial information is presented and analyzed. Where appropriate, factors that may affect future financial performance are identified and discussed. Actual results could differ materially from those indicated in forward-looking statements due to, among other specific changes currently not known, subsequent significant changes in: the company (e.g., acquisitions and divestitures), financial markets (e.g., interest rates and securities markets), legislation (e.g., taxes and product taxation), regulations (e.g., insurance and securities regulations), acts of God (e.g., hurricanes, earthquakes and storms), other insurance risks (e.g., policyholder mortality and morbidity) and competition. On pages 9 through 18, the financial results of LNC's four business segments and other operations are presented and discussed. Within these business segment discussions, reference is made to "Income from Operations". This alternative measure of earnings is defined as "Net income less realized gain (loss) on sale of investments, gain (loss) on sale of subsidiaries and restructuring charges, all net of taxes." Page 19 discusses factors affecting LNC's consolidated investment performance. Pages 20 through 34 discuss factors that have affected specific elements of the consolidated financial statements as well as information pertaining to LNC as a whole. This "Management's Discussion and Analysis of Results of Operations and Financial Condition" should be read in conjunction with the audited consolidated financial statements and accompanying notes presented on pages 36 through 67. 9 Review of Operations: Life Insurance and Annuities
Year Ended December 31 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- Financial Results by Source (in millions) Annuities......................................... $257.6 $203.0 $165.0 $149.3 $120.0 Insurance......................................... 147.0 36.1 36.4 31.1 34.2 Pensions.......................................... 10.4 6.3 2.9 22.1 22.4 Disability Income (1)............................. -- -- -- (18.3) (14.9) Other............................................. (10.4) 10.4 8.2 8.5 (5.5) ----- ---- ---- ----- ----- Income from Operations......................... 404.6 255.8 212.5 192.7 156.2 Realized Gain (Loss) on Investments............... 2.9 47.5 38.5 81.3 (93.4) Restructuring charge.............................. (20.0) -- --- -- -- ----- ------ ------ ------ ------- Net Income..................................... $387.5 $303.3 $251.0 $274.0 $ 62.8 Sales - Face Amount (in billions) Term Insurance.................................... $27.6 $16.2 $13.3 $2.2 $ .3 Universal Life and Other.......................... 9.0 2.2 2.9 2.8 3.2
December 31 (in billions) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Account Values Annuities........................................ $51.5 $44.6 $38.0 $30.3 $24.6 Reinsurance Ceded - Annuities..................... (1.6) (1.8) (1.8) (1.7) (1.5) Universal and Variable Life Insurance............. 7.4 3.0 2.9 2.6 2.4 Interest Sensitive Whole Life..................... 1.8 -- -- -- -- 401(k) Retirement Plans........................... 3.7 3.4 2.9 2.4 1.9 Other Pensions.................................... 3.6 4.5 4.9 5.6 5.5 ----- --- ---- ---- ---- Total Account Values........................... $66.4 $53.7 $46.9 $39.2 $32.9 In Force - Face Amount Universal Life and Others......................... $107.6 $32.8 $32.9 $32.2 $32.1 Term Insurance.................................... 54.3 30.3 16.3 3.8 1.9
(1) Lincoln stopped writing disability income coverages on a direct basis at the end of March 1996. The administration of this business was moved to the Reinsurance segment at the end of September 1995. The Life Insurance and Annuities segment reported record income from operations of $404.6 million in 1998, a 58% increase over the $255.8 million reported in 1997. Continuing double-digit growth in the annuity business, plus the added earnings from the blocks of business acquired from CIGNA and Aetna during 1998 (see note 11 to the consolidated financial statements on page 66), were the primary factors in this segment's earnings performance. Profile: LNC's Insurance and Annuities segment is composed of Lincoln National Life Insurance Company ("Lincoln Life"), First Penn-Pacific Life Insurance Company ("First Penn"), Lincoln Life & Annuity Company of New York ("LLANY") and Lincoln Financial Advisors Corporation ("LFA"). As shown above, account values for this segment's annuities, life insurance, 401(k) retirement plans and other pensions totaled $66.4 billion as of December 31, 1998. Life insurance in force for these companies as of December 31,1998, totaled $161.9 billion, an increase of 157% in comparison with $63.1 billion as of December 31, 1997. Lincoln Life, which is based in Fort Wayne, Indiana, is the 13th largest life insurer in the United States when measured by assets (Best's Review, Life/Health Edition, July 1998). First Penn, which is headquartered in Oakbrook Terrace, Illinois, is recognized for product innovations. One unique product is MoneyGuard (Registered Trade Mark), a policy that links the benefits of universal life and long-term care insurance in one. LLANY, which is based in Syracuse, New York, provides group tax-qualified annuities and other insurance products in the state of New York. Lincoln Life, First Penn and LLANY earned charter memberships in the Insurance Marketplace Standards Association ("IMSA"), an independent, voluntary organization created by the American Council of Life Insurance. IMSA membership demonstrates a company's commitment to honesty, fairness and integrity in all customer contacts involving sales and service of individual life and annuity products. 10 National Branding Campaign: As part of our strategy to gain name recognition on a national level, we kicked off an aggressive branding campaign where we introduced our new marketing name, Lincoln Financial Group. Print ads emphasizing our ability to provide "clear and understandable solutions in a complex world," appeared in high profile business and lifestyle publications. Also, part of our strategic targeting was our participation with other nationally branded companies in an ESPN cable "Sports Century" sponsorship, an 18-month long special series of programs commemorating highlights in sports during the past century. Acquisitions/Divestitures: LNC completed the acquisition of a block of individual life insurance and annuities business on January 2, 1998, from CIGNA Corporation, adding a career agency system of 600 producers; a life brokerage operation; an annuity distribution system; and $37 billion of individual life insurance in force. The acquisition of another block of individual life insurance business on October 1, 1998, from Aetna, Inc. added 30 life brokerage managers, 30 managing general agent relationships, a corporate-owned life insurance sales force, access to more than 30,000 independent agents and a total of $42 billion of individual life insurance in force. A block of employer-sponsored life insurance business acquired in connection with the Aetna businesses was sold to Protective Life Corp. In addition, an agreement was reached with Allstate Life under which they would reinsure and administer a variable annuity portfolio acquired in connection with the CIGNA business. In order to eliminate redundancies and capitalize on newly acquired competencies and existing efficiencies, Hartford, Connecticut, became the platform for operating the segment's life insurance business, while the annuities operation remained in Fort Wayne, Indiana. Varied Distribution: Products from the companies in this segment are sold through multiple distribution channels, reflecting a marketplace where consumers increasingly want to do business on their own terms. These channels are career agents, independent agencies, insurance brokers, banks, stockbrokers, financial planners and the Internet. Lincoln Life's and LLANY's wealth accumulation and wealth protection products include: fixed, variable and tax-deferred annuities; term, whole life, universal and variable universal life insurance; and employer sponsored retirement plans. These products are sold in 50 states through the 58 regional offices of LFA, a broker/dealer that serves approximately 2,050 career agents, 34,500 brokers and 4,500 bank agents as well as through 75,000 stockbrokers and financial planners. LFA includes a network of regional financial planning offices that serve as the preferred distributor of Lincoln Life products. LFA offers a full range of financial planning services and investments and is a securities broker/dealer and registered investment advisor. Lincoln Life formed a strategic alliance with BDO Seidman, LLP, one of the top 10 accounting and consulting firms serving the dynamic entrepreneurial business market. Through this alliance, LFA planners will offer estate planning, business continuity planning, investment management services and financial planning to BDO Seidman's client base at more than 40 offices across the country. First Penn offers linked benefit, universal and term life insurance and fixed annuities through stockbrokers, financial planners, banks, independent agents and LFA. Life products are available for individual and worksite markets. First Penn designs, managers distribution and administers fixed annuities sold through banks for Lincoln Life. Annuities: Lincoln Life is a leading writer of annuities in the United States (National Underwriter, August 1998). Annuity earnings in this segment increased 27% in 1998, reaching a record $257.6 million. As of December 31, 1998, annuity account values were $51.5 billion, up from $44.6 billion the year before. Variable annuity account values at year-end were $33.4 billion, while fixed annuities represented $18.1 billion. Annuity deposits in 1998 were $3.9 billion. Annuity deposits sold through producers were $2.0 billion, while annuity deposits sold through stockbrokers were $1.4 billion. 11 Lincoln is working with American Funds Distributors ("AFD") on a number of initiatives aimed at further strengthening sales. The American Legacy variable annuity products are marketed to stockbrokers by AFD and to banks through Lincoln Financial Institutions Group, a strategic business unit of First Penn. As a result of restructuring its wholesaler network, AFD has broadened its distribution capabilities and its wholesalers now market both mutual funds and annuities. Today, the American Legacy product has the potential of being marketed by three times as many wholesalers as in the past. Lincoln also is supporting the wholesaler network by providing its own American Legacy sales support team to assist in sales promotion and stockbroker training programs. Product improvements, including the expansion of fund offerings, are being made to American Legacy. In response to the increased demand for multi-manager products, Lincoln introduced the Delaware Lincoln ChoicePlus (Service Mark) variable annuity in the fourth quarter of 1998. This new product contains 30 variable investment options in addition to a number of fixed account options. Delaware Distributors LP wholesales the Delaware Lincoln ChoicePlus variable annuity. During 1998, Lincoln also introduced two new multi-manager products in the employer-sponsored market. Lincoln Alliance gives an employer more choices by offering a solid, fixed annuity foundation, combined with a vast array of mutual funds. In addition, the Lincoln/Delaware Advantage product offers the investment stability of a Lincoln Life fixed annuity and the investment performance and diversity available through the Delaware family of funds. The product is targeted at the mid- to large-size employer in the health care industry. Finally, eAnnuity (Trade Mark), the first variable annuity targeted to the self-directed investor and sold completely online, was also launched. Life Insurance: In 1998, Lincoln began building a life insurance platform that allowed the company to quickly achieve scale, deliver higher growth and better financial performance, as well as leverage its expertise in serving the super affluent market. Operating income from life insurance was $147.0 million as of December 31, 1998, four times higher than 1997, as a result of the businesses acquired from CIGNA and Aetna. Combined universal life, whole life, variable life and interest sensitive whole life insurance account values tripled in 1998 to $9.2 billion. Individual life insurance sales, as measured by face amount of in force, nearly doubled for the year to $36.6 billion. All CIGNA products were duplicated within Lincoln Life within four months after the transaction closed. In addition, Lincoln introduced three new universal life products, two of which provide second-to-die coverage, for estate protection. One also offers the opportunity for equity returns on account values. All three offer lifetime death benefit guarantees, including a Survivor Variable Universal Life I and a Survivor Universal Life II product in 1998. Pensions: This segment's pension business is focused on 401(k) retirement plans for businesses with fewer than 200 employees. Account values for these plans were $3.7 billion as of December 31, 1998, a 9% increase over 1997. To better service the retirement services market and to achieve economies of scale, Lincoln Life's 401(k) retirement plans were combined with the Investment Management segment's defined contributions effective January 1999. Outlook: The Life Insurance and Annuities segment has laid the foundation for increased sales in the future. With the kickoff of an aggressive national branding campaign, were moving forward to build national brand recognition. In addition, a well-balanced distribution system, coupled with product improvements, new product introductions and strategic partnerships will help in strengthening our market presence and will be the driving forces in placing our annuities and life insurance operations among the top five. 12 Review of Operations: Lincoln UK (1)
Year Ended December 31 (in millions) 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------- Financial Results Income (Loss) from Operations (1)..................... $70.9 $(108.3) $66.1 $45.9 $17.2 Realized Gain (Loss) on Investments................... .8 1.5 (.1) (.2) 1.3 ----- ------ ----- ----- ----- Net Income (Loss) (1)............................. $71.7 $(106.8) $66.0 $45.7 $18.5 Net Initial Commission Value (2)....................... $54.9 $55.4 $47.2 $39.4 $32.1
December 31 (in billions) 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------- Unit-Linked Assets..................................... $6.265 $5.643 $5.074 $4.307 $1.320 Individual Life Insurance In Force - Face Amount................................ $25.002 $25.026 $23.835 $23.509 $9.412 Exchange Rate Ratio - U.S. Dollars to Pounds Sterling Average for the Year................................... 1.658 1.644 1.567 1.582 1.536 End of Year............................................ 1.660 1.651 1.713 1.553 1.565
(1) Income (loss) from operations and net income (loss) for 1997 include a charge of $174.9 million ($199.4 million pre-tax) for a change in estimate of the cost of settling pension mis-selling liabilities (see note 2 to the consolidated financial statements on page 45). (2) Net Initial Commissions is a measure used by Lincoln UK to measure sales progress and future profitability. LNC's Lincoln UK segment, conducted through Lincoln National (UK) plc and its operating subsidiaries reported record income from operations of $70.9 million in 1998 compared with $66.6 million in 1997, excluding a special charge noted above. Profile: Lincoln UK offers life, investment, protection and retirement planning products primarily through 1,630 direct sales representatives and tied agents. Lincoln UK sells predominantly unit-linked products where the investment risk is borne by the policyholder. These products are similar to the variable life products sold in the United States. Home office operations are divided between Uxbridge, Middlesex, and Barnwood, Gloucester, England. Product Development: Lincoln UK relaunched Financial Foundations, its flagship unit-linked life insurance product with improved features allowing it to be much more competitive in the marketplace. Since its relaunch in mid-1998, sales are 20% ahead of the same period last year, and now represent over 25% of new business. In response to a UK government promotional program on individual savings, plans also are under way to relaunch a wide range of medium- to long-term savings products this year, including a new tax preferred Individual Savings Account (ISA) product. National Branding Campaign: During 1998, Lincoln UK took major steps to develop its brand awareness in the UK with two key initiatives - the Company's first ever integrated television and print advertising campaign, as well as participation in top level sports sponsorship. The advertising campaign was held during April and May in Scotland, using creative concepts adapted from Lincoln's corporate campaign in the U.S. Subsequent research indicated that awareness was raised throughout Scotland and that the campaign had a positive effect on product sales. Lincoln UK also participated in the sponsorship of the Rugby League Test Series between Great Britain and New Zealand, two of the top three leaders in Rugby League football in the world. The three matches were played during October and November 1998 and received wide media coverage, on television and radio, and in the national and local press. The sponsorship was widely acclaimed by the public, sales advisors and members of staff as one of the most positive name awareness promotions ever to have been undertaken by Lincoln UK. 13 City Financial Partners Ltd ("CFPL"): Lincoln UK's largest tied agent, CFPL, was acquired at the end of 1997 and is now a wholly-owned subsidiary. Its integration into the organization was successfully completed in 1998, a year in which CFPL agents produced 45% of Lincoln UK's new business. Markets: Account values in the unit-linked asset business were $6.3 billion as of December 31, 1998, an increase of 11% over the year before. Net initial commission values were $54.9 million, slightly lower than the $55.4 million in 1997. Individual life insurance in force as of December 31, 1998, was $25.0 billion. Exchange Rates: LNC's subsidiary in the United Kingdom, as with subsidiaries in other foreign countries, has its balance sheet accounts and income statements translated at the current exchange and average exchange rates for the year, respectively. The average exchange rate for 1998 was $1.658 per British pound sterling. This was 1% higher than the 1997 average exchange rate of $1.644 per British pound. Pension Product Mis-selling: A charge of $174.9 million after-tax was taken in the fourth quarter of 1997 to increase reserves for liabilities in the so-called "pension mis-selling" situation in the United Kingdom. Regulatory agencies raised questions as to whether individuals who bought pensions in the UK and exited employer plans were given appropriate advice by insurance agents and brokers. The regulatory agencies asked the insurance companies to review their cases and to provide redress to those individuals harmed by the activities of agents or brokers. As a result of what the government viewed as a slow response by the insurance industry, regulators have set targets, publicly named companies that it sees as tardy in their resolution of cases and taken disciplinary actions. Lincoln UK is committed to completing its review as quickly as possible so that appropriate action can be taken. The regulatory agency deadline for Lincoln UK to complete phase one of its review was December 31, 1998. The achievement of this target was a critical milestone for the company. Lincoln has made offers of redress, or provided reassurance that redress is not required to all its priority policyholders. The segment has also obtained acceptance of offers or, in accordance with the regulatory agency requirements, believe they can demonstrate that every effort to obtain their acceptance has been made. Nearly 11,000 cases have been assessed by a dedicated team of 170 full-time staff at four locations. The company is well positioned to deal with phase two of the review, which began on January 4, 1999. This will entail the review of the balance of policyholders who took out personal pensions between April 1988 and June 1994 and have not had their cases reviewed under phase one. As of December 31, 1998 and December 31, 1997, the balance in the liability account established for this matter was $202.1 million and $291.0 million, respectively. These liabilities, which are net of expected recoveries, were established for the estimated cost of this issue following regulatory guidance as to activities to be undertaken. These liabilities are net of expected recoveries of $84.9 million and $113.0 million, respectively, from previous owners of companies acquired over the last few years as specified in the indemnification clauses of the purchase agreements. Outlook: By the end of 1999, Lincoln UK will have made substantial progress in the pensions review and expects a stable earnings picture with some growth going forward. Lincoln UK anticipates growing faster than the rest of the U.K. life insurance industry through increased distribution, a superior trained sales force, improved products and investment performance. 14 Review of Operations: Reinsurance
Year Ended December 31 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------ Financial Results by Source (in millions) Individual Markets................................... $ 83.5 $ 71.9 $49.9 $43.4 $41.4 Group Markets (1).................................... 2.7 (103.3) 19.0 25.2 21.6 Financial Reinsurance................................ 15.2 14.4 16.4 10.2 5.5 Other................................................ (1.3) (.3) (.2) .7 (1.9) ---- ------ ----- ------ --- Income (Loss) from Operations, excluding Disability Income..................... 100.1 (17.3) 85.1 79.5 76.6 Disability Income (1)................................ 1.4 (134.3) (11.1) (132.2) (10.0) ------ ----- ----- ----- ---- Income (Loss) from Operations (1)................ 101.5 (151.6) 74.0 (52.7) 66.6 Realized Gain on Investments......................... .7 15.2 11.7 10.7 .5 ------- ----- ----- ---- ---- Net Income (Loss) (1)............................ $102.2 $(136.4) $85.7 $(42.0) $67.1 Individual Life Sales - Face Amount (in billions)............................ $78.1 $39.5 $26.6 $22.7 $19.9
December 31 (in billions) 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- Individual and Group Life Insurance In Force Face Amount................................ $250.3 $183.5 $160.9 $142.8 $125.6
(1) Income (loss) from operations and net income (loss) for 1997 and 1995 include the impact of a change in estimate of the reserve level needed for LNC's disability income business ($130.0 million, and $121.6 million after-tax, respectively). Also, income (loss) from operations and net income (loss) for 1997 include a charge of $113.7 million after-tax for the impact of a change in estimate of the reserve level needed for personal accident programs. LNC's Reinsurance segment ("Lincoln Re"), reported record income from operations of $101.5 million in 1998, exceeding its $100 million target established a few years ago. This compares with $92.1 million in 1997, excluding special charges. As of December 31, 1998, Lincoln Re's individual and group life business in force was $250.3 billion, an increase of 36% over the prior year. Profile: One of the leading life-health reinsurers in the world, Lincoln Re reported consolidated, worldwide net premium income of $2.1 billion in 1998. This compares with $1.7 billion net premium income reported in 1997. Lincoln Re maintains offices in a number of U.S. cities and has offices in Toronto, Brussels, Buenos Aires, London, Mexico City, Manila and Singapore. Lincoln Re also is charged with managing LNC's activities in several emerging markets, including LNC's joint venture, Seguros Serfin Lincoln, which sells insurance products through Banca Serfin, Mexico's oldest and third largest bank. Lincoln Re also maintains representative offices in China (Beijing, Shanghai, Guangzhou) and, in 1998, signed a letter of intent with Ping An, the largest private insurance company in the People's Republic of China with a national charter, to work toward creating a joint venture that will sell life insurance. Lincoln Re's approach is that the traditional risk-transfer commodity business is in decline and that today's reinsurer must provide innovative, tailored programs. As a result, Lincoln Re uses a mass customization approach. This involves packaging and distributing modular pricing, underwriting, systems, alliance resources, marketing consultation, product development and claims management components to meet the needs of client companies. It has a current client base of more than 1,700 U.S. and 350 international companies, and a client retention rate of more than 95%. Lincoln Re's intellectual capital is critical to its success and its systems are used throughout the insurance industry. Its knowledge-based approach to reinsurance continues to distinguish itself as a leader in an increasingly competitive marketplace, allowing for customer retention and to build new relationships on a global basis. 15 Foremost among these systems is Lincoln National Risk Management's ("LNRM") patented Life Underwriting System, a state-of-the-art risk management technology now licensed to more than 50 insurers. Further, nearly 30 % of new life business written during 1998 can be attributed to companies that have utilized the Lincoln Mortality System (Trade Mark), a system which helps design new preferred term insurance products. In 1998, Lincoln Re was granted a second patent to protect its Lincoln Mortality System and other automated decision-making systems. Other proprietary systems assist health insurers, claims processors and agents. Datalliance (Registered Trade Mark), is an electronic data interchange that can link agents, insurers, information sources, medical labs and reinsurers. In 1998, Lincoln Re introduced the industry's first browser-based life underwriting manual on CD-ROM to its reinsurance clients, enabling faster, more efficient underwriting of life insurance policies. Lincoln Re also entered into a strategic alliance with Cybertek, a major developer of administrative solutions in the life insurance business. Cybertek is working to incorporate the Lincoln Underwriting System into its base product. Lincoln Re's approach also involves the capabilities of more than 40 alliance partners. These include direct marketers, medical equipment suppliers, electronic information providers, specialized legal firms, accountants, variable life and annuity administrators, all ready to form a "virtual organization" to help Lincoln Re clients do business. Individual Markets: Strong sales in recent years contributed to record income from operations for individual markets in 1998. Income from operations was $83.5 million, a 16% increase over 1997. Very favorable life mortality throughout the year was an integral factor in the strong performance. Sales volume, measured by face amount of new business, was a record $78.1 billion in 1998, nearly double the amount of last year. Group Markets: Income from operations in 1998 in group markets was $2.7 million. This compares with $10.4 million in 1997, excluding the special charge for personal accident programs. Total annualized premium of $248.4 million represents an increase of 23% over the $202.2 million in 1997. Financial Reinsurance: Income from operations was $15.2 million, slightly higher than income from operations of $14.4 million in 1997. Disability Income: The disability income business has proved to be one of the most difficult for the industry in this decade. Lincoln Life, the largest company in LNC's Life Insurance and Annuities segment, withdrew from the disability income market in 1996 and its block of business was transferred to Lincoln Re where it has been managed along with a block of reinsurance disability income business. In the fourth quarter of 1995, LNC took a $121.6 million after-tax charge against earnings to strengthen reserves for the direct and reinsurance disability income business. These reserves were established assuming that the current experience would continue. In the second quarter of 1997, LNC took an additional after-tax charge of $130 million against earnings when it obtained new information indicating that experience had deteriorated further. Outlook: Lincoln Re continues to enhance its reputation as a leading life-health reinsurer in the world with the development of new knowledge-based tools and marketing methods. It continues to build partnerships inside and outside the traditional insurance marketplace. 16 Review of Operations: Investment Management (1)
Year Ended December 31 (in millions) 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------- Financial Results Fees: Investment Advisory Fees........................................... $244.2 $219.6 $190.4 $130.1 Other Revenue and Fees............................................. 57.1 38.1 24.6 18.7 Income: Income from Operations............................................. $20.8 $4.5 $10.2 $13.3 Realized Gain on Investments....................................... .7 3.3 5.2 4.3 ----- --- ---- ----- Net Income..................................................... $21.5 $7.8 $15.4 $17.6 Income from Operations-Excluding Amortization of Intangibles....................................... $49.6 $31.6 $34.1 $28.1
December 31 (in billions) 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------- Assets Under Management Retail-Fixed....................................................... $ 7.1 $ 6.9 $ 4.6 $ 4.8 Retail-Equity...................................................... 19.5 15.6 11.5 8.8 ---- ---- ---- --- Total Retail.................................................. 26.6 22.5 16.1 13.6 Institutional-Fixed................................................ 6.9 5.7 3.6 3.0 Institutional-Equity............................................... 25.3 25.8 23.5 22.1 ---- ---- ---- ---- Total Institutional............................................ 32.2 31.5 27.1 25.1 Total Assets Under Management.................................. $58.8 $54.0 $43.2 $38.7
(1) Data shown in the 1995 column is for a partial year, as this segment was added in April 1995 following the acquisition of Delaware Management Holdings, Inc. LNC's Investment Management segment reported record income from operations of $20.8 million in 1998, compared with $4.5 million in 1997. The segment's 1998 operating income, excluding amortization of goodwill and other intangible assets, was $49.6 million. The improvement was driven by increased revenues due to record levels of inflows, higher net sales and the impact of the market levels during the year. LNIC's assets under management at December 31, 1998 were $58.8 billion, an increase of $4.8 billion or 9% from December 31, 1997 assets of $54.0 billion, primarily due to the upward trend of the market during the year. LNIC had record levels of retail sales ($4.2 billion for 1998) and institutional inflows ($6.2 billion for 1998). In addition, LNIC's net retail cash flows were $2.0 billion for the year versus $0.6 billion for 1997. Domestic institutional assets represent $21.5 billion of the Investment Management segment's total assets under management, while domestic retail assets were $25.2 billion. International equity and global bond assets managed by Delaware International Advisers, Ltd. account for $12.1 billion ($10.7 billion institutional, $1.4 billion retail). Profile: The companies that comprise this segment are: Delaware Management Holdings, Inc.; Lynch & Mayer, Inc.; and Vantage Investment Advisors. Delaware has its headquarters in Philadelphia, with affiliates in London, Denver and Minneapolis. Lynch & Mayer and Vantage each maintain separate headquarters in New York. Although investment management has long been an area of expertise within LNC, the addition of Delaware in 1995 signaled LNC's intention to expand its role as a money manager and meet its objective of becoming a force in the financial services industry. During 1998, two external transactions positively affected the retail business of LNIC: the acquisition of CIGNA's ACCRU business and the sale of Delaware's Unit Investment Trust business to Nike Securities. These transactions reinforced Delaware's market focus on core retail products, (i.e., mutual funds, variable annuities and participant directed retirement plans) and strengthened Delaware's retail distribution by the addition of the former CIGNA ACCRU wholesalers. 17 Delaware Investments' defined contribution area performed well in 1998, growing to $5.9 billion in assets under management as of December 31, 1998. In the first quarter of 1999, Lincoln Life's retirement area was combined under Delaware, resulting in an organization with $9.6 billion in retirement assets. This combination should result in a broader product range that is better serviced and more profitable over the long term, with consistent asset growth because retirement plans tend to be long-term relationships with continuing cash flow. Complementary Approaches: Delaware, Lynch & Mayer and Vantage are encouraged to preserve their complementary and distinctive investment styles. Diversity of investment styles, as well as diversity of clients served, are prudent ways to diversify risk in varying market environments. Delaware is best known for a conservative, "value" equity investment style that focuses on stocks with above average dividend yields. It is also recognized for expertise in the small-cap and mid-cap growth styles and in municipal and high-yield bonds. Delaware International Advisers, Ltd. in London provides global and international equity and fixed income investment expertise. Lynch & Mayer pursues a "growth" investment style and specializes in mid-cap and large-cap equities. Vantage invests in undervalued companies that have strong potential for above-average growth. It employs a disciplined, systematic, risk-controlled investment approach, which delivers growth at a reasonable price (GARP). Vantage is especially well known for its socially responsible investing expertise, the practice of aligning investment objectives with social concerns in one investment portfolio. Distribution: Multiple distribution channels enable the businesses in the Investment Management segment to deliver their broad range of products to an expanding community of retail and institutional investors. Delaware markets its mutual funds through regional and national broker/dealers, financial planners, banks, and insurance agents, including those associated with the regional marketing offices of Lincoln Life. Institutional products are marketed primarily by each company's sales force through pension consultants and directly to defined benefit and defined contribution plan sponsors, endowments, foundations and insurance companies. Retail Mutual Funds: The Investment Management segment's retail mutual fund and wrap fee assets totaled $26.6 billion at December 31, 1998, an 18% increase from $22.5 billion at December 31, 1997. Delaware offers 74 open-end retail mutual funds and 8 closed-end funds with assets under management of $13.2 billion, an increase of 7% over the $12.3 billion at December 31, 1997. The remaining $13.4 billion was from wrap-fee business and retail mutual funds managed by Lynch & Mayer and Vantage. The acquisition and integration of CIGNA's ACCRU business increased the number of retail wholesalers to 51 as of December 31, 1998 from 37 as of December 31, 1997, strengthening Delaware's retail sales presence. The multi-manager ACCRU variable annuity product, which was re-launched in the 4th quarter of 1998 under the name Delaware-Lincoln ChoicePlus (Service Mark), has further broadened and diversified Delaware's product line. Delaware received excellent ratings in the 1998 Dalbar Broker/Dealer Survey that rates the quality of marketing and service of approximately 25 large mutual fund complexes. Delaware is the 4th highest ranked firm in the Main Office Operations category, up from 8th last year. In addition, financial advisors ranked Delaware 2nd in Wholesaler Support and 1st in Dedicated Marketing Support. High ratings are important because quality service is a key factor in growing and retaining assets. Improved performance and service contributed to Delaware increasing its retail non-money market sales to $3.1 billion in 1998, up 55% in comparison with $2.0 billion for 1997. In addition, Delaware's net retail cash flows were $1.5 billion for 1998 versus $0.1 billion for 1997. Institutional Investments: The institutional investment management business had assets under management of $32.2 billion as of December 31, 1998, compared with $31.5 billion at December 31, 1997. LNIC's institutional inflows of $6.2 billion for 1998, were 22% higher than the $5.1 billion in 1997. Institutional net cash flows, however, declined slightly to ($2.2) billion for 1998 versus ($2.0) billion for 1997, largely due to client losses resulting from underperformance in Lynch & Mayer's mid- and large-cap growth products. Investment Performance: As of December 31, 1998, Delaware had 16 funds, representing 28% of the company's mutual fund assets under management, ranked as four- and five-star funds by Morningstar, Inc., a service that assigns risk-adjusted performance ratings to mutual funds. One star is the lowest rating; five 18 is the highest. High Morningstar ratings are significant because virtually all equity net inflows are directed into funds with high risk-adjusted ratings. Vantage manages the Lincoln Life MultiFund (Registered Trade Mark) Social Awareness subaccount. The Fund has performed exceptionally well over the long term. For the five years ended December 31, 1998, the Fund's annualized return earned Vantage 30th place among 572 variable annuity funds. Among U.S. institutional investment managers, Delaware produced strong results in the value equity category, with a return of 11.19% for the year ended December 31, 1998 that qualified as second quartile performance as measured by Callan's Yield Universe. Underperformance in Lynch & Mayer's mid-cap growth product resulted in the loss of clients and a decline in institutional assets under management from $4.5 billion at December 31, 1997 to $2.8 billion at December 31, 1998. This issue was addressed during 1998 and a restructured investment team is in place with a mandate to improve performance. Outlook: The rapid growth of Delaware's retail mutual fund business, both through internal efforts and selective acquisitions, continues to be an essential component of LNC's long-term strategy. Given the improvements realized in 1998, LNC is well positioned for accelerating this growth. Review of Other Operations:
Year Ended December 31 (in millions) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Financial Results by Source Lincoln Investment Management............................. $ .7 $ 1.4 $ 1.5 $ 1.7 $ 7.1 LNC Financing............................................. (52.5) (31.9) (49.7) (52.7) (31.7) LNC Operations............................................ (18.5) (18.4) (14.8) (19.5) (21.8) Other Corporate........................................... 2.9 (2.2) (.9) (1.5) (3.9) Earnings from Unconsolidated Affiliate.................... -- -- -- 13.7 14.8 ----- ------ ----- ----- ----- Income (Loss) from Operations......................... (67.4) (51.1) (63.9) (58.3) (35.5) Realized Gain (Loss) on Investments....................... 8.6 5.4 2.2 6.1 (10.6) Gain (Loss) on Sale of Subsidiaries....................... -- -- -- 58.3 48.8 Restructuring Charge...................................... (14.3) -- -- -- -- ----- ------ ------ ------ ------ Net Income (Loss)..................................... $(73.1) $(45.7) $(61.7) $ 6.1 $ 2.7
The income (loss) from operations shown above includes the earnings from Lincoln Investment Management, certain other operations that are not directly related to the business segments and unallocated corporate revenues and expenses, such as corporate investment income, interest expense on short-term and long-term borrowings, and corporate overhead expenses. Prior to the date of sale in October 1995, Other Operations also include LNC's investment in an unconsolidated affiliate engaged in the employee life-health benefits business. Lincoln Investment Management provides investment advisory services and asset management services for LNC's Corporate portfolios as well as entities not owned by LNC. Corporate interest expense reported within the LNC financing line above was greater for 1995 and 1996 than years prior to 1995 as the result of additions to long-term debt and minority interest-preferred securities of subsidiary companies. The 1997 amount was less than 1995 and 1996 due to reduced interest expense and investment earnings in the fourth quarter of 1997 that resulted from the use of proceeds from the sale of discontinued operations (see liquidity and cash flow discussion on page 34). This benefit did not continue into 1998 as most of these funds were used to purchase blocks of individual life insurance and annuity business in January and October of 1998 (see note 11 to the consolidated financial statements on page 66). Net income (loss) shown above for "Other Operations" includes the items described above under loss from operations plus the realized gain (loss) on sale of certain investments, the gain (loss) on sale of subsidiaries (see note 11 to the consolidated financial statements on page 65) and a restructuring charge. The 1998 restructuring charge is the result of an organizational/expense review and represents severance pay and space abandonment charges because of staff reductions in the parent and other select companies. 19 Discussion and Analysis of Consolidated Investments
December 31 (in billions) 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------- Assets Managed (by advisor) Investment Management Segment (1)......................... $ 58.8 $ 54.0 $ 43.2 $38.7 $ -- Lincoln Investment Management: Regular Fees............................................ 1.9 2.9 8.2 4.2 11.8 At Cost For Business Units.............................. 38.7 33.9 30.6 33.3 36.3 Lincoln UK................................................ 7.6 6.8 6.1 5.3 1.0 Within Business Units (Policy Loans)...................... 1.8 .8 .8 .6 .6 Non-LNC Affiliates........................................ 25.2 20.7 16.2 12.7 9.4 ----- ----- ----- ---- ---- Total Assets Managed.................................. $134.0 $119.1 $105.1 $94.8 $59.1
(1) See Investment Management segment data on page 16 for additional detail. The following discussion covers select general investment matters. The review of consolidated operations, which begins on page 20, includes the fact that LNC's net investment income for the year ended December 31, 1998 was $2.7 billion, an increase of 17% over 1997. Also, this discussion indicates that during 1998 net gains on investments totaling $19 million were realized. The review of consolidated financial condition begins on page 24 and discusses the composition and quality of the LNC portfolio. Investment Objective: LNC follows a balanced approach of investing for both current income and total return, with an emphasis on generating sufficient current income to meet LNC's obligations. This approach requires the evaluation of risk and expected return of each asset class utilized, while still meeting the income objectives of LNC. This approach also permits LNC to be more effective in its asset-liability management, since decisions can be made based upon both the economic and current investment income considerations affecting assets and liabilities. Asset Diversification: Fundamental to LNC's investment policy is diversification across asset classes. LNC's investment portfolio, excluding cash and invested cash, is composed of fixed maturity securities; equities; mortgage loans on real estate; real estate either wholly owned or in joint ventures and other long-term investments. LNC purchases investments that have yield, duration and other characteristics which take into account the liabilities of the products being supported. The dominant investment held is fixed maturity securities, which represent approximately 80% of the investment portfolio. Fixed Maturity Performance: In 1998, the LNC fixed maturity portfolio produced a return of 7.57%, compared to the Lehman Brothers Government/Corporate index (68% government bonds, 32% corporate bonds) which produced 9.47%. The underperformance relative to the index during 1998 is due to the investment strategy of investing in bonds with sufficient spread to support long-term insurance liabilities. During 1998, LNC experienced extreme spread widening in all sectors which had the effect of reducing returns. The spread widening was caused by the Emerging Markets crisis and the subsequent flight to high quality U.S. treasury bonds by global investors. The government bond component of the index performed very well relative to corporate bonds. Use of Derivatives: The primary use of derivatives at LNC is to hedge interest rate risk that is embedded in either life insurance and annuity product liabilities or investment portfolios. To a lesser extent, derivatives are also used to hedge exposures to foreign currency and equity market risks. 20 REVIEW OF CONSOLIDATED OPERATIONS AND FINANCIAL CONDITION
Summary Information Increase (Decrease) Year Ended December 31 (in millions) 1998 1997 1996 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- Continuing Operations: Life insurance and annuity premiums.................... $ 985.6 $ 756.2 $ 728.7 30% 4% Health premiums........................................ 635.1 572.5 790.5 11% (28%) Insurance fees......................................... 1,274.6 832.2 713.5 53% 17% Investment advisory fees............................... 227.1 204.9 180.8 11% 13% Net investment income.................................. 2,681.4 2,250.8 2,087.9 19% 8% Equity in earnings of unconsolidated affiliates............................. 3.3 2.1 1.4 Realized gain (loss) on investments.................... 19.0 122.6 92.5 Other revenue and fees................................. 261.0 157.2 138.3 14% Life insurance and annuity benefits ................... 2,762.0 2,358.7 2,036.3 17% 16% Health benefits........................................ 566.9 833.1 673.6 (32%) 24% Underwriting, acquisition, insurance and other expenses.................................... 1,943.7 1,579.3 1,434.9 23% 10% Interest and debt expenses............................. 117.1 92.5 84.7 27% 9% Federal income taxes................................... 187.6 12.7 147.7 ------- ------- ------ Net Income from Continuing Operations............. 509.8 22.2 356.4 Discontinued Operations: Income prior to disposal............................... -- 134.9 157.2 Gain on disposal....................................... -- 776.9 -- ------- ----- ------- Net Income....................................... $ 509.8 $ 934.0 $ 513.6
REVIEW OF CONSOLIDATED OPERATIONS Some of the increases shown above are the result of the purchase of two blocks of individual life insurance and annuity business in January and October of 1998 (see note 11 to the consolidated financial statements on page 66). Life Insurance and Annuity Premiums Life insurance and annuity premiums increased $229.4 million or 30% in 1998 and $27.5 million or 4% in 1997 as the result of increases in volumes of business in the Life Insurance & Annuities and Reinsurance segments. A portion of the increase from the Life Insurance and Annuities segment in 1998 is the result of the acquisition of the blocks of business. Barring the passage of unfavorable tax legislation that would eliminate the tax-advantages for some of LNC's life and annuity products, LNC expects growth in life insurance and annuity premiums in 1999. Health Premiums Health premiums within the Reinsurance segment increased $62.6 million or 11% in 1998 after decreasing $218.0 million or 28% in 1997. The 1997 reduction included planned cut backs in the level of business. Insurance Fees Insurance fees from universal life, other interest-sensitive life insurance contracts and variable life insurance contracts increased $442.4 million or 53% in 1998 and $118.7 million or 17% in 1997. These increases are the result of an increase in the volume of transactions (including the addition of two blocks of business in 1998 as described in note 11 to the consolidated financial statements on page 66) and a market-driven increase in the value of existing customer accounts upon which some of the fees are based in the Life Insurance & Annuities and Lincoln UK segments. The growth in fees from this business is expected to continue in 1999. Investment Advisory Fees Investment advisory fees increased $22.2 million or 11 % in 1998 and $24.1 million or 13% in 1997. These increases were the result of increased volumes of business and an increase in the market value of customer accounts. The increased volumes were the result of increasing the number of wholesalers and products, including the addition of wholesalers in the bank market. 21 Net Investment Income Net investment income increased $430.6 million or 19% in 1998 as the net result of a 21% increase in mean invested assets, a decrease in the yield on investments from 7.46% to 7.36% (all calculations on a cost basis). This increase in mean invested assets is the result of increased volumes of business in all the business segments and funds held in Other Operations that were applied toward the purchase of a block of business in October of 1998 (see note 11 to the consolidated financial statements on page 66). The increase in the Life Insurance and Annuities segment includes the impact of the acquisition of the blocks of business in 1998 (see note 11 to the consolidated financial statements on page 66). Net investment income increased $162.9 million or 8% in 1997 as a net result of a 9% increase in mean invested assets, a decrease in the yield on investments from 7.52% to 7.46% (all calculations on a cost basis) and a benefit of a reduction in the recurring adjustment of discount on mortgage-backed securities. In 1997, this adjustment was a charge of $.4 million versus a charge of $7.6 million in 1996. The increase in mean invested assets in 1997 was the result of increased volumes of business in the Life Insurance and Annuities segment. Realized Gain on Investments The pre-tax realized gain on investments, net of related amortization and expenses, was $19.0 million, $122.6 million and $92.5 million in 1998, 1997 and 1996, respectively. The after-tax gain in 1998, 1997 and 1996 was $13.7 million, $72.9 million and $57.6 million, respectively. These gains were primarily the result of the sale of investments. Write-downs and provisions for losses offset a portion of the realized gains. During 1996, LNC completed a bulk sale of performing and non-performing mortgage loans and real estate holdings through a sealed bid process. The selling price for these holdings was $6.1 million in excess of the carrying value, resulting in a gain on sale. Securities available-for-sale, mortgage loans on real estate and real estate that were deemed to have declines in fair value that were other than temporary were written down. The fixed maturity securities to which these write-downs apply were generally of investment grade quality at the time of purchase but were classified as "below-investment-grade" at the time of the write-downs. Also, write-downs and allowances for losses on select mortgage loans on real estate, real estate and other investments were established when the underlying value of the property was deemed to be less than the carrying value. These write-downs and provisions for losses are disclosed within the notes to the accompanying financial statements (see note 3 to the consolidated financial statements on page 46). Other Revenue and Fees Other revenue and fees increased $103.8 million in 1998 and $18.9 million in 1997 as the result of increases in the volume of transactions in each of the business segments. Total Revenue The level of revenue produced for select revenues listed above, primarily the fee based revenues, such as insurance fees and investment advisory fees, fluctuates from year to year because of changes in the equity investment markets. For example, a 1% change in the equity investment market, as represented by a measure such as the S&P 500, increases or decreases total revenue by approximately $4.5 million based on the business currently managed. Although the impact is not dollar for dollar because of the impact of Federal income taxes, such changes in revenues also increases or decreases LNC's earnings. Barring a major drop in the equity markets, LNC expects to produce revenues in future years in excess of the revenues produced for the year ended December 31, 1998. Life Insurance and Annuity Benefits Life insurance and annuity benefits increased $403.3 million or 17% in 1998 as compared to 1997. This increase was the net result of increases of $470.8 million in the Life Insurance and Annuities segment (includes the addition of two blocks of individual life insurance and annuity business as described in note 11 to the consolidated financial statements on page 66) and increases in the Reinsurance segment of $122.5 million being partially offset by a decrease in the Lincoln UK segment of $190.0 million due to the absence of special charges in 1998. Life insurance and annuity benefits in 1997 increased $322.4 million or 16% as compared to 1996. This increase was the result of increases of $89.4 million or 6% from the Life Insurance and Annuities segment, $25.6 million or 7% from the Reinsurance segment and $207.1 million from the Lincoln UK segment. The Lincoln UK increase includes a change in estimate for its pension mis-selling liability (see note 2 to the consolidated financial statements on page 45). Health Benefits Health benefits increased $108.8 million or 24% in 1998 compared to 1997 health benefits, excluding the 1997 special additions to the disability income and personal accident programs reserves ($130.0 million and $113.7 million, respectively) as the result of increased volumes of business. See note 2 to the consolidated financial 22 statements on page 45. Health benefits increased $159.5 million in 1997 as the net result of decreased volumes of business being more than offset by additions to the reserves for disability income business and personal accident programs within the Reinsurance segment. Underwriting, Acquisition, Insurance and Other Expenses These expenses increased $364.4 million or 23% in 1998 as the result of increased business volumes in all business segments, the addition of the operating costs associated with the block of business acquired in January 1998 and increased expenditures related to Year 2000 issues. Underwriting, Acquisition, Insurance and other expenses increased $144.4 million or 10% in 1997. The primary drivers behind this increase beyond the general inflation rate was increased business volumes in the various segments due to general growth and the one-time and on-going costs associated with the acquisition of the two blocks of business (see note 11 to the consolidated financial statements on page 66) and the write-off of deferred acquisition costs associated with the disability income business (see note 2 to the consolidated financial statements on page 45). In 1999, all business segments will continue to adjust staff levels as appropriate to match business volumes. Due to LNC's change in its business focus during the last few years (i.e., exited property-casualty business, added emphasis on annuities, life insurance and investment management) as well as the on-going and increasing competitive pressures within the business LNC operates in, the decision was made in 1998 to initiate an organizational/expense review. This review, which was completed in the fourth quarter of 1998, resulted in a one-time restructuring charge to earnings. The amount of the pre-tax charge was $22.0 million and the estimate of the reduction in future expenses once implementation is complete is $15-$20 million per year. Interest and Debt Expense Interest and debt expense increased $24.6 million or 27% in 1998 and $7.8 million or 9% in 1997. These increases were the result of increases in the average debt outstanding and the impact of changes in the composition of debt outstanding (see page 32). During 1998, Moody's re-affirmed LNC's debt ratings as A2 ("Very Good, Strong or High"), Standard and Poor's changed its rating from A to A- ("both Very Good, Strong or High") and Duff & Phelps changed its rating from AA- ("Excellent") to A+ ("Very Good, Strong or High"). Federal Income Taxes Federal income taxes increased $174.9 million in 1998 as the result of an increase in the pre-tax earnings. Federal income taxes decreased from $147.7 million in 1996 to $12.7 million in 1997 as the result of a decrease in pre-tax earnings. Discontinued Operations In 1997, lines were added to the income statement to accommodate the operating activity and gain on sale associated with LNC's decision to sell its 83.3% ownership in American States Financial Corporation (see note 11 to the consolidated financial statements on page 65. Summary Net income for 1998 was $509.8 million compared with $934.0 million in 1997. Excluding realized gain (loss) on investments, gain (loss) on sale of subsidiaries, restructuring charges, discontinued operations and the 1997 special additions to the disability income, personal accident programs and UK pension product reserves, all net of taxes, LNC earned $530.4 million for 1998 compared to $368.0 million in 1997. This increase is the result of increased earnings from each of the business segments. In the fourth quarter of 1997 Other Operations benefited from earnings on proceeds from discontinued operations. This benefit did not continue into 1998 as most of these funds were used to purchase a block of individual life and annuity business on January 2, 1998 (see note 11 to the consolidated financial statements on page 66). Net income for 1997 was $934.0 million compared with $513.6 million in 1996. Excluding realized gain (loss) on investments, gain on sale of subsidiaries, discontinued operations and the 1997 special additions to reserves, LNC earned $368.0 million for 1997 compared to $298.8 million in 1996. This increase is the result of increased earnings in the Life Insurance & Annuities, Lincoln UK and Reinsurance segments. Century Compliance The Year 2000 issue is pervasive and complex and affects virtually every aspect of LNC's businesses. LNC's computer systems and interfaces with the computer systems of vendors, suppliers, customers and business partners are particularly vulnerable. LNC and its operating subsidiaries have been redirecting a large portion of internal Information Technology ("IT") efforts and contracting with outside consultants to update systems to address Year 2000 issues. Experts have been engaged to assist in developing work plans and cost estimates and to complete remediation activities. 23 For the year ended December 31, 1998, LNC identified expenditures of $37.5 million ($24.4 million after-tax) to address this issue. This brings the expenditures for 1996-1998 to $48.5 million ($31.5 million after-tax). LNC's financial plans for 1999-2000 include expected expenditures of an additional $44.4 million ($28.9 million after-tax) bringing estimated overall Year 2000 expenditures to $92.9 million ($60.4 million after-tax). Because updating systems and procedures is an integral part of LNC's on-going operations, approximately 50% of expenditures shown above are expected to continue after all Year 2000 issues have been resolved. Actual Year 2000 expenditures through December 31, 1998 and future Year 2000 expenditures are expected to be funded from operating cash flows. The anticipated cost of addressing Year 2000 issues is based on management's current best estimates which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. Such costs will be monitored closely by management. Nevertheless, there can be no guarantee that actual costs will not be higher than these estimated costs. Specific factors that might cause such differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer problems and other uncertainties. The current scope of the overall Year 2000 program includes the following four major project areas: 1) addressing the readiness of business applications, operating systems and hardware on mainframe, personal computer and Local Area Network platforms (IT); 2) addressing the readiness of non-IT embedded software and equipment (non-IT); 3) addressing the readiness of key business partners and 4) establishing year 2000 contingency plans. The projects to address IT and non-IT readiness have four major phases. Phase one involves raising awareness and creating an inventory of all IT and non-IT assets. The second phase consists of assessing all items inventoried to initially determine whether they are affected by the Year 2000 issue and preparing general plans and strategies. The third phase entails the detailed planning and remediation of affected systems and equipment. The last phase consists of testing to verify Year 2000 readiness. LNC has completed these four phases for over two-thirds of its high priority IT systems, including those provided by software vendors. While LNC's year 2000 program for nearly all high priority IT systems is expected to be completed in the first quarter of 1999, phase four, for a small but important subset of these systems, will continue through the end of the second quarter 1999. As of December 31, 1998 the status of projects addressing readiness of IT assets is: 100% of IT assets have been inventoried (Phase 1) and assessed (Phase 2); 97% of IT projects have been through the remediation phase (Phase 3) with the last project scheduled for completion by the end of March 1999; and 71% of IT projects have completed the testing phase (Phase 4) with the last project scheduled to finish testing by the end of June 1999. A portion of the effort that extends into 1999 is dependent on outside third parties and is behind the original schedule. LNC is working with these parties to modify the completion schedule. As of December 31, 1998 the status of projects that address readiness of high priority non-IT assets, is:100% of non-IT assets have been inventoried (Phase 1) and assessed (Phase 2); 72% of non-IT projects addressing remediation (Phase 3) have been completed and 23% of non-IT projects have completed the testing phase (Phase 4). LNC expects to have all phases related to high priority non-IT completed by the end of October 1999. Concurrent with the IT and non-IT projects, the readiness of key business partners is being reviewed and Year 2000 contingency plans are being developed. The most significant categories of key business partners are financial institutions, software vendors, and utility providers (gas, electric and telecommunications). Surveys have been mailed to these key business partners. Based on responses received, current levels of readiness are being assessed, follow-up contacts are underway, alternative strategies are being developed and testing is being scheduled where feasible. This effort is expected to continue well into 1999. As noted above, software vendor assessments are considered part of the IT projects and, therefore, would follow the schedule shown above for such projects. While LNC is working to meet the schedules outlined above, some uncertainty remains. Specific factors that give rise to this uncertainty include a possible loss of technical resources to perform the work, failure to identify all susceptible systems, non-compliance by third parties whose systems and operations impact LNC and other similar uncertainties. A worst case scenario might include LNC's inability to achieve Year 2000 readiness with respect to one or more of LNC's significant policyholder systems, resulting in a material disruption to LNC's operations. Specifically, LNC could experience an interruption in its ability to collect and process premiums or deposits, 24 process claim payments, accurately maintain policyholder information, accurately maintain accounting records, and/or perform adequate customer service. Should the worst case scenario occur, it could, depending on its duration, have a material impact on LNC's results of operations and financial position. Simple failures can be repaired and returned to production within a matter of hours with no material impact. Unanticipated failures with a longer service disruption period would have a more serious impact. For this reason, LNC is placing significant emphasis on risk management and Year 2000 contingency planning. LNC is in the process of modifying its contingency plans to address potential year 2000 issues. Where these efforts identify high risks due either to unacceptable work around procedures or significant readiness risks, appropriate risk management techniques are being defined. These techniques, such as resource shifting or use of alternate providers, will be employed to provide stronger assurances of readiness. LNC has gone through exercises to identify worst case scenario failures. At this time, LNC believes its plans are sufficient to mitigate identified worst case scenarios. REVIEW OF CONSOLIDATED FINANCIAL CONDITION Some of the increases in the balance sheet accounts described below are a result of the purchase of two blocks of individual life insurance and annuity business in January and October of 1998 (see note 11 to the consolidated financial statements on page 66). Investments The investment portfolio, excluding cash and invested cash, is comprised of fixed maturity and equity securities; mortgage loans on real estate; real estate, either wholly owned or joint ventures; and other long-term investments. LNC purchases investments for its segmented portfolios with yield, duration and other characteristics that take into account the liabilities of the products being supported. The total investment portfolio increased $8.1 billion in 1998. This increase was the net result of increases from 1) the addition of $7.7 billion in invested assets related to the two blocks of business acquired in 1998, 2) the increase in fair value of securities available-for-sale and 3) the new purchases of investments from cash flow generated by the business units being partially offset by the continuation of fixed annuity contractholders opting to transfer funds to variable annuity contracts. LNC maintains a high-quality fixed maturity securities portfolio. As of December 31, 1998, $9.9 billion or 32.7% of its fixed maturity securities portfolio had ratings of AA or better. Fixed maturity securities with below- investment-grade ratings (BB or less) were $2.1 billion or 7.0% of the total fixed maturity securities portfolio (see note 3 to the consolidated financial statements on page 47). The below-investment-grade fixed maturity securities represent 5.6% of LNC's total investment portfolio. The interest rates available on these below- investment-grade securities are significantly higher than are available on other corporate debt securities. Also, the risk of loss due to default by the borrower is significantly greater with respect to such below investment grade securities because these securities are generally unsecured, often subordinated to other creditors of the issuer and issued by companies that usually have high levels of indebtedness. LNC attempts to minimize the risks associated with these below investment grade securities by limiting the exposure to any one issuer and by closely monitoring the credit worthiness of such issuers. For the year ended December 31, 1998, the aggregate cost of below investment grade securities purchased was $1.6 billion. Aggregate proceeds from such investments sold were $1.1 billion, resulting in a realized pre-tax loss at the time of sale of $55.2 million. LNC's entire fixed maturity and equity securities portfolio is classified as "available-for-sale" and is carried at fair value. Changes in fair values, net of related deferred acquisition costs, amounts required to satisfy policyholder commitments and taxes are charged or credited directly to shareholders' equity. Note 3 to the consolidated financial statements on page 46 shows the gross unrealized gains and losses as of December 31, 1998. LNC's fixed maturity securities available-for-sale include mortgage-backed securities. The mortgage-backed securities included in LNC's investment portfolio are subject to risks associated with variable prepayments. This may result in these securities having a different actual cash flow and maturity than planned at the time of purchase. Securities that have an amortized cost greater than par and backed by mortgages that prepay faster than expected will incur a reduction in yield or a loss. Those securities with an amortized cost lower than par that prepay faster than expected will generate an increase in yield or a gain. In addition, LNC may incur reinvestment risks if market yields are lower than the book yields earned on the securities. Prepayments occurring slower than expected have the opposite impact. LNC may incur disinvestment risks if market yields are higher than the book yields earned on the securities and LNC is forced to sell the securities. The degree to which a security is susceptible to either gains or losses is influenced by 1) the difference between its amortized cost and par, 2) the relative sensitivity of the underlying mortgages backing the assets to 25 prepayment in a changing interest rate environment and 3) the repayment priority of the securities in the overall securitization structure. LNC limits the extent of its risk on mortgage-backed securities by prudently limiting exposure to the asset class, by generally avoiding the purchase of securities with a cost that significantly exceeds par, by purchasing securities backed by stable collateral, and by concentrating on securities with enhanced priority in their trust structure. Such securities with reduced risk typically have a lower yield (but higher liquidity) than higher-risk mortgage-backed securities. At selected times, higher-risk securities may be purchased if they do not compromise the safety of the general portfolio. At December 31, 1998, LNC did not have a significant amount of higher-risk mortgage-backed securities. There are negligible default risks in the mortgage-backed securities portfolio as a whole as the vast majority of the assets are either guaranteed by U.S. government- sponsored entities or are supported in the securitization structure by junior securities enabling the assets to achieve high investment grade status. Note 3 to the consolidated financial statements on page 48 shows additional detail about the underlying collateral. As of December 31, 1998, mortgage loans on real estate and investments in real estate represented 11.5% and 1.3% of the total investment portfolio. As of December 31, 1998, the underlying properties supporting the mortgage loans on real estate consisted of 25.4% in commercial office buildings, 33.5% in retail stores, 18.8% in apartments, 12.6% in industrial buildings, 4.0% in hotels/motels and 5.7% in other. In addition to the dispersion by type of property, the mortgage loan portfolio is geographically diversified throughout the United States. Cash and Invested Cash Cash and invested cash decreased by $1.4 billion in 1998. This decrease is the result of paying out the funds that had been accumulated at the end of 1997 in anticipation of the purchase of a block of individual life and annuity business on January 2, 1998 (see note 11 to the consolidated financial statements on page 66). Deferred Acquisition Costs Deferred acquisition costs increased $340.6 million in 1998. This increase was the net result of an increase related to the growth in business being partially offset by reductions related to the increase in unrealized gain on securities available-for-sale. Premiums and Fees Receivable Premiums and fees receivable increased $48.7 million in 1998 as the result of increased volumes of business in the Life Insurance & Annuities and Reinsurance segments. Assets Held in Separate Accounts This asset account, as well as the corresponding liability account, increased by $6.3 billion in 1998 as a result of increases in annuity and pension funds under management. This increase resulted from new deposits, market appreciation and the continuation of fixed annuity contractholders opting to transfer funds to variable annuity contracts. Amounts Recoverable from Reinsurers The increase of $776.3 million in amounts recoverable from reinsurers was the result of an increased volume of business ceded in the Life Insurance and Annuities segment. Goodwill and Other Intangible Assets The increase of $1.0 billion and $1.2 billion, respectively, is the net result of additions related to business acquired (see note 11 to the consolidated financial statements on page 66) being more than the on-going amortization. Other Assets The decrease in other assets of $76.8 million is the result of having a lower receivable related to investment securities sold in the last few days of 1998 versus the end of 1997. Total Liabilities Total liabilities increased by $16.3 billion in 1998. The primary item underlying this increase is the addition of the blocks of individual life and annuity business described above. Insurance policy reserves increased $8.9 billion as a result of the new blocks of business and increased levels of business in the Life Insurance and Annuities segment. Contractholder funds increased $689.7 million which is the net result of additions related to the block of business acquired and new deposits being partially offset by the withdrawal upon maturity of guaranteed interest contracts. Liabilities related to separate accounts increased $6.3 billion (see discussion of Assets Held in Separate Accounts above). Total debt increased $648.5 million as the result of 26 issuing new debt in the first and third quarters of 1998 (see note 5 to the consolidated financial statements on page 51). The decrease in the remaining liabilities of $225.4 is the net amount from an increase in the expected payouts for securities purchased in the last few days of 1998 versus a lower volume of such transactions late in 1997 being more than offset by the Federal income tax decrease. While it is management's judgement that, based on available information, the appropriate level of liabilities have been recorded, LNC has areas where changes in estimates of related liabilities required could occur in the near term. These areas include claims for disability income coverages, liabilities and recoveries related to inappropriate selling of products in the United Kingdom, liabilities for personal accident programs, liabilities for marketing and compliance issues and the reserve for the run-off of group pension annuities (see note 7 to the consolidated financial statements on page 54). Shareholders' Equity Total shareholders' equity increased $405.0 million during the year ended December 31, 1998. Excluding the increase of $116.4 million related to an increase in the unrealized gain (loss) on securities available-for- sale, shareholders' equity increased $288.6 million. This increase in shareholders' equity was the net result of increases due to $509.8 million of net income, $48.7 million from the issuance of common stock related to benefit plans and $3.8 million related to an increase in the accumulated foreign exchange gain being offset by $211.8 million related to the declaration of dividends to shareholders, $14.8 million of issuance costs related to an offering of FELINE PRIDES and $46.9 million for the retirement of common stock. Capital adequacy is a primary measure used by insurance regulators to determine the financial stability of an insurance company. In the U.S., risk-based capital guidelines are used by the National Association of Insurance Commissioners to determine the amount of capital that represents minimum acceptable operating amounts related to insurance and investment risks. Regulatory action is triggered when an insurer's statutory- basis capital falls below the formula-produced capital level. At December 31, 1998, statutory-basis capital for each of LNC's U.S. insurance subsidiaries was substantially in excess of regulatory action levels of risk- based capital required by the jurisdiction of domicile. As noted above, shareholders' equity includes net unrealized gain (loss) on securities available-for-sale. At December 31, 1998, the book value of $53.18 per share included $5.45 of unrealized gains on securities and at December 31, 1997, the book value of $49.27 per share included $4.31 of unrealized gains on securities. A significant portion of both realized and unrealized gains or losses on investments that support long-term life insurance, pension and annuity contracts are expected to be applied to contract benefits. These realized and unrealized gains or losses are included in net income and shareholders' equity, respectively. Current accounting standards do not require or permit adjustment of policyholder reserves to recognize the full effect of these realized and unrealized gains or losses on future benefit payments in the absence of a contractual obligation requiring their attribution to policyholders. LIQUIDITY AND CASH FLOW Liquidity refers to the ability of an enterprise to generate adequate amounts of cash from its normal operations to meet cash requirements with a prudent margin of safety. Because of the interval of time from receipt of a deposit or premium until payment of benefits or claims, LNC and other insurers employ investment portfolios as an integral element of operations. By segmenting its investment portfolios along product lines, LNC enhances the focus and discipline it can apply to managing the liquidity as well as the interest rate and credit risk of each portfolio commensurate with the profile of the liabilities. For example, portfolios backing products with less certain cash flows and/or withdrawal provisions are kept more liquid than portfolios backing products with more predictable cash flows. The consolidated statements of cash flows on page 39 indicate that operating activities provided cash of $1.3 billion, $1.1 billion and $1.4 billion in 1998, 1997 and 1996, respectively. This statement also classifies the other sources and uses of cash by investing activities and financing activities and discloses the amount of cash available at the end of the year to meet LNC's obligations. Although LNC generates adequate cash flow to meet the needs of its normal operations, periodically LNC may issue debt or equity securities to fund internal expansion, acquisitions, investment opportunities and the retirement of LNC's debt and equity. In April 1998, LNC filed a shelf registration for $1.3 billion which included the right to offer regular debt, preferred stock, common stock or various forms of hybrid securities. This $1.3 billion filing included an aggregate of $300 million that had not been utilized from a previously filed shelf registration. In December, 1998 LNC combined the unused portion of another previously filed shelf 27 registration. The combination of these two filings, less securities offered in 1998 (see below), resulted in an unused balance as of December 31, 1998 of $825 million that would allow LNC to issue various securities. The hybrid securities offerings utilize six subsidiaries (Lincoln National Capital I, II, III, IV, V and VI) which were formed for the specific purpose of issuing such securities. All of these subsidiaries' common securities are owned by LNC. Cash funds are also available from LNC's revolving credit agreement, which provides for borrowing up to $750 million (see note 5 to the consolidated financial statements on page 52). In 1998, LNC issued $300 million of long-term debt, $200 million of Series C Trust Originated Preferred Securities and $230 million of FELINE PRIDES. Also LNC purchased and retired; 623,281; 4,948,900 and 694,582 shares of common stock at a cost of $46.9 million; $325.3 million and $35.0 million in 1998, 1997 and 1996, respectively. The 5,572,181 shares purchased in 1997 - 1998 includes 4,993,281 shares at a cost of $341.8 million that have been purchased since the June 1997 board authorization to repurchase up to $500 million of common stock. This leaves a Board authorization to repurchase an additional $158.2 million of LNC's common stock as of December 31, 1998. Also LNC issued 1,323,144 shares of LNC common stock in 1997 to purchase subsidiary companies. Another transaction that occurred in 1997 that had a major impact on LNC's cash flow was the sale of a subsidiary for $2.65 billion (see note 11 to the consolidated financial statements on page 65). LNC used these proceeds to 1) repurchase $341.8 million of its own common stock, 2) retire $86.7 million in long-term debt, 3) fund the purchase of a 49% interest in Seguros Serfin Lincoln for $85.0 million, 4) pay the $447.6 million of taxes related to the gain on sale of discontinued operations and 5) purchase a block of individual life insurance and annuity business for $1.4 billion (see note 11 to the consolidated financial statements on page 66). The remaining balance was initially applied to pay off a portion of LNC's short-term debt and invested for general corporate purposes, then later used to fund a portion of the purchase of another block of individual life insurance business. In order to maximize the use of available cash, the holding company (Lincoln National Corporation) maintains a facility where subsidiaries can borrow from the holding company to meet their short-term needs and can invest their short-term funds with the holding company. Depending on the overall cash availability or need, the holding company invests excess cash in short-term investments or borrows funds in the financial markets. In addition to facilitating the management of cash, the holding company receives dividends from its subsidiaries, invests in operating companies, maintains an investment portfolio and pays shareholder dividends and certain corporate expenses.
Holding Company Cash Flow Year Ended December 31 (in millions) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Dividends from subsidiaries: Lincoln Life.................................................. $ 220.0 $ 150.0 $ 135.0 American States (subsidiary subsequently transferred to discontinued operations ).................... -- 24.7 74.7 Other......................................................... 54.8 63.2 96.4 Net investment income........................................... 7.0 10.7 4.3 Operating expenses.............................................. (25.7) (36.9) (44.6) Interest........................................................ (95.1) (84.1) (67.8) Net sales (purchases) of investments............................ 188.9 4.2 91.2 Increase (decrease) in cash collateral on loaned securities.............................................. (73.1) (21.9) (53.4) Decrease (increase) in investment in subsidiaries............... (159.5) (116.8) 217.8 Sale of subsidiary (discontinued operations).................... (124.2) 822.5 -- (Investment in) sale of unconsolidated affiliates............... -- (69.0) (16.0) Net increase (decrease) in debt................................. 268.6 (72.7) (178.5) Decrease (increase) in receivables from subsidiaries............ 280.3 (23.0) (36.0) Increase in loans from subsidiaries............................. 251.3 454.3 28.2 Decrease (increase) in loans to subsidiaries.................... (1,272.7) 414.7 (303.5) Federal income taxes paid....................................... (374.3) (158.0) (143.8) Net tax receipts from subsidiaries.............................. 354.7 206.8 122.3 Dividends paid to shareholders.................................. (209.0) (201.9) (191.2) Common stock issued for benefit plans........................... 48.7 33.2 (0.2) Retirement of common stock...................................... (46.9) (327.6) (32.7) Other........................................................... (28.4) 24.0 (35.2)
The table above shows the cash flow activity for the holding company from 1996 through 1998. The line, "net tax receipts from (payments to) subsidiaries", recognizes that the holding company receives tax payments from subsidiaries, pays the consolidated tax liability and reimburses subsidiaries for the tax effect of any taxable operating and capital losses. 28 LNC's insurance subsidiaries are subject to certain insurance department regulatory restrictions as to the transfer of funds and payment of dividends to the holding company. Generally, these restrictions pose no short-term liquidity concerns for the holding company. However, as discussed in detail within note 7 on page 54, the acquisition of two blocks of business in 1998 will place further restrictions on the ability of LNC's primary insurance subsidiary, Lincoln National Life Insurance Company ("Lincoln Life"), to declare and pay dividends. As a result of these acquisitions, Lincoln Life's statutory earned surplus will be negative and it will be necessary for Lincoln Life to obtain the prior approval of the Indiana Insurance Commissioner before paying any dividends to LNC until such time its statutory earned surplus is positive. It is expected that statutory earned surplus will return to a positive position within two to three years from the closing of the Aetna transaction assuming a level of statutory earnings coinciding with recent earnings patterns. If statutory earnings are less than recent patterns due, for example, to adverse operating conditions or further indemnity reinsurance transactions of this nature, the statutory earned surplus may not return to a positive position as soon as expected. Although no assurance can be given, management believes that the approvals for the payment of dividends in amounts consistent with those paid in the past can be obtained. In the event such approvals are not obtained, management believes that LNC can obtain the funds required to satisfy its obligations from its existing credit facilities and other sources. Effect of Inflation LNC's insurance affiliates, as well as other companies in the insurance industry, attempt to minimize the effect of inflation on their revenues and expenses by anticipating inflationary trends in the pricing of their products. Inflation, except for changes in interest rates, does not have a significant effect on LNC's balance sheet due to the minimal amount of dollars invested in property, plant and equipment and the absence of inventories. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Market Risk Exposures of Financial Instruments LNC analyzes and manages the risks arising from market exposures of financial instruments, as well as other risks, in an integrated asset-liability management process that takes diversification into account. By aggregating the potential effect of market and other risks of the entire enterprise, LNC estimates, reviews and in some cases manages the risk to its earnings and shareholder value. LNC has material exposures to several market risks including interest rate, default risk, foreign currency exchange and equity price risks. The exposures of financial instruments to market risks, and the related risk management processes, are most important in the Life Insurance and Annuities segment. This segment is where most of the invested assets support accumulation and investment oriented insurance products. As an important element of its integrated asset-liability management process, LNC uses derivatives to minimize the effects of changes in interest rate levels and the shape of the yield curve. In this context, derivatives are designated as a hedge and serve to reduce interest rate risk by mitigating the effect of large rises in interest rates on LNC's stream of earnings. Additional market exposures exist in LNC's other general account insurance products and in its debt structure and derivatives positions. The primary sources of market risk are: 1) substantial, relatively rapid and sustained increases or decreases in interest rates, 2) fluctuations in currency exchange rates 3) a sharp drop in equity market values. Each of these market risks are discussed in detail in the following pages. 1) Interest Rate Risk Accumulation and Investment Oriented Insurance Products. General account assets supporting accumulation and investment oriented insurance products total $26.0 billion or 69% and $22.4 billion or 75% of total invested assets at December 31, 1998 and 1997, respectively. Fixed maturity and equity securities are held at fair value on the balance sheet, mortgage loans on real estate are held at amortized cost and real estate is held at cost less depreciation while liabilities are generally held at account values less surrender charges (see note 1 to the consolidated financial statements on page 42). The fair values for mortgage loans on real estate and guaranteed interest rate contracts are calculated on a discounted cash flow basis while fixed annuities and other deposit liabilities are at policy cash surrender value (see note 8 to the consolidated financial statements on page 60). With respect to these products, LNC seeks to earn a stable and profitable spread between investment income and interest credited to account values. If LNC has adverse experience on investments that cannot be passed onto customers, its spreads are reduced. Alternatively, LNC may seek to maintain spreads and this may result in crediting rates that are not competitive in the market place. This strategy could result in adverse surrender experience on policies and could force LNC to liquidate a portion of its portfolio to fund excess cash surrender value benefits. 29 LNC does not view the near term risk to spreads over the next twelve months to be material. The combination of a probable range of interest rate changes over the next twelve months, asset-liability management strategies, flexibility in adjusting crediting rate levels and protection afforded by policy surrender charges and other switching costs all work together to minimize this risk. The interest rate scenarios of concern are those in which there is a substantial, relatively rapid increase or decrease in interest rates that is then sustained over a long period. Fixed Deferred Annuities. Assets of $17.2 billion and $15.6 billion at December 31, 1998 and 1997, respectively, supports the biggest category of accumulation and investment oriented insurance products, fixed deferred annuities. For these products, LNC may adjust renewal crediting rates monthly or annually, subject to guaranteed minimums ranging from 3% to 5%. The higher minimums apply to in-force blocks of older products that no longer are sold. Annuity insurance customers have the right to surrender their policies at account value less a surrender charge that grades to zero over periods ranging from 5 to 10 years from policy issue date or, in some cases, the date of each premium received. Due to LNC's ability to change crediting rates to reflect investment experience, the underlying assets are assumed to be a good proxy for the interest rate risk inherent in these liabilities. This assumption is appropriate for probable movements in interest rates over the next 12 months. This assumption may not be appropriate for a substantial, relatively rapid increase or decrease in interest rates that is then sustained over a long period. Universal Life. LNC had $6.1 billion and $3.4 billion in assets at December 31, 1998 and 1997, respectively, supporting universal life insurance on which it has the right to adjust renewal crediting rates subject to guaranteed minimums ranging from 4% to 6% at December 31, 1998. Similar to annuities, universal life insurance customers have the right to surrender their policies at account value less a surrender charge that grades to zero over periods ranging from 10 to 20 years from policy issue date or, in some cases, the date of each premium received. Guaranteed Interest Contracts and Group Pension Annuities. LNC had assets totaling $2.7 billion and $3.4 billion at December 31, 1998 and 1997, respectively, that support guaranteed interest contracts, group pension annuities and immediate annuities. Generally, the cash flows expected on these liabilities do not vary with fluctuations in market interest rates and are not adjustable by LNC. Accordingly, if experience on the assets supporting these products is more adverse than the assumptions used in pricing the products, spreads will tend to be below expectations. LNC limits exposure to interest rate risk by managing the duration and maturity structure of each investment portfolio in relation to the liabilities it supports. Other General Account Insurance Products. LNC had $11.9 billion and $7.4 billion of assets at December 31, 1998 and 1997, respectively, supporting general account products, including disability income and term life insurance. For these products, the liability cash flows may have actuarial uncertainty. However, their amounts and timing do not vary significantly with interest rates. LNC limits interest rate risk by analyzing the duration of the projected cash flows and structuring investment portfolios with similar durations. Interest Rate Risk--Falling Rates. Interest rates fell in 1995, rose again in 1996 and declined in 1997 and 1998. For example, the five-year Treasury yield declined from 7.8% in 1994 to 5.4% at the end of 1995, increased to 6.2% by the end of 1996, decreased to 5.7% by the end of 1997 and decreased to 4.5% by the end of 1998. Under scenarios in which interest rates fall and remain at levels significantly lower than those prevailing at December 31, 1998, minimum guarantees on annuity and universal life insurance policies (generally 3% to 5% or an average of approximately 4%) could cause the spread between the yield on the portfolio and the interest rate credited to policyholders to deteriorate. Select contracts that specify these minimum guarantees can be amended periodically to reflect current interest rate conditions. The earned rate on the annuity and universal life insurance portfolios averaged 8% and 7.7%, respectively, for the year ended December 31, 1998, providing a cushion for further decline before the earned rates would be insufficient to cover minimum guaranteed rates plus the target spread. The maturity structure and call provisions of the related portfolios are structured to afford protection against erosion of this cushion for a period of time. However, spreads would be at risk if interest rates continued to fall and remained lower for a long period. LNC manages these exposures by maintaining a suitable maturity structure and by limiting its exposure to call risk in each respective investment portfolio. LNC believes that the portfolios supporting its accumulation and investment oriented insurance products have a prudent degree of call protection individually and on a consolidated basis. As of December 31, 1998 the mortgage-backed securities ("MBS") and asset-backed securities ("ABS") portion of the portfolio represented a total of $5.1 billion or 20% of the $26.0 billion of general account assets supporting such products. Of this 30 portfolio, 15% of general account assets or $4.0 billion is subject to residential prepayment risk from investments made in Collateralized Mortgage Obligations ("CMOs"), mortgage pass-throughs, manufactured housing and home equity loans. As of December 31, 1997 the MBS and ABS portion of the portfolio represented a total of $4.5 billion or 20% of the $22.4 billion of general account assets supporting such products. LNC's MBS portfolio has equal to or slightly less prepayment risk than the MBS pass-through market in general primarily due to holding more seasoned securities in the portfolio. Due to the combination of recent lower interest rates and increased efficiency by mortgage-holders in exercising their prepayment options, the riskiness of these securities has increased over the last few years without a compensating adjustment to risk premiums. This trend has also reduced the degree of protection provided by the purchase of protected amortization class CMOs. As a result, LNC has reduced its exposure to the MBS asset class in recent years. Interest Rate Risk--Rising Rates. For both annuities and universal life insurance, a rapid and sustained rise in interest rates poses risks of deteriorating spreads and high surrenders. The portfolios supporting these products have fixed-rate assets laddered over maturities generally ranging from one to ten years or more. Accordingly, the earned rate on each portfolio lags behind changes in market yields. As rates rise, the lag may be increased by slowing MBS prepayments. The greater and faster the rise in interest rates, the more the earned rate will tend to lag behind market rates. If LNC sets renewal crediting rates to earn the desired spread, the gap between its renewal crediting rates and competitors' new money rates may be wide enough to cause increased surrenders. If LNC credits more competitive renewal rates to limit surrenders, its spreads will narrow. LNC devotes extensive effort to evaluating these risks by simulating asset and liability cash flows for a wide range of interest rate scenarios. Such analysis has led to adjustments in the target maturity structure and to hedging the risk of rising rates by buying out-of-the-money interest rate cap agreements and swaptions (see discussion below). With this hedge, the potential adverse impact of a rapid and sustained rise in rates is kept within corporate risk tolerances. LNC believes that the risks of rising interest rates are also mitigated by its emphasis on periodic premium products. Debt. As of December 31, 1998, LNC had short-term debt, long-term debt and minority interest-preferred securities of subsidiary companies totaling $1.8 billion ($1.6 billion with fixed rates and $214.4 million with floating rates). As of December 31, 1997, LNC had short-term debt, long-term debt and minority, interest- preferred securities of subsidiary companies totaling $1.1 billion ($835.6 million with fixed rates and $287.6 million with floating rates). LNC manages the timing of maturities and the mixture of fixed-rate and floating-rate debt as part of the process of integrated management of interest rate risk for the entire enterprise. Derivatives. As indicated in note 7 to the consolidated financial statements on page 57, LNC has entered into derivative transactions to reduce its exposure to rapid rises in interest rates. The four programs discussed below are used to help LNC achieve more stable margins while providing competitive crediting rates to policyholders during periods when interest rates are rising. Failure to maintain competitive crediting rates could cause policyholders to withdraw their funds and place them in more competitive products. LNC uses interest rate cap agreements to hedge against the negative impact of a significant and sustained rise in interest rates. Interest rate caps are contracts that require counterparties to pay LNC at specified future dates the amount, if any, by which a specified market interest rate exceeds the cap rate stated in the agreements, applied to a notional amount. As of December 31, 1998, LNC had agreements with notional amounts of $4.1 billion with cap rates ranging from 250 to 800 basis points above prevailing interest rates. The cap rates in some contracts increase over time. These agreements expire in 1999 through 2006. LNC also uses swaptions to hedge against the negative impact of a significant and sustained rise in interest rates. Swaptions are options to enter into a swap at a specified future date. If the option is exercised at expiration, the option is either settled in cash or exercised into a swap agreement. LNC purchases swaptions to be settled in cash. At expiration, the counterparty is required to pay LNC the amount, if any, of the present value of the difference between the fixed rate on a market rate swap and the strike rate stated in the agreement, applied to a notional amount. As of December 31, 1998, LNC had agreements with notional amounts of $1.9 billion with strike rates ranging from 350 to 900 basis points above prevailing interest rates. These agreements expire in 1999 through 2003. For future periods, the fair value of LNC's interest rate caps and swaptions depends on the levels of interest rates on U.S. Treasury securities with maturities of two, five, seven and ten years and U.S. dollar swap rates with five, seven and ten year maturities. The table below analyzes fair value levels at December 31, 1998 and for the next five years if the rates were 2%, 4%, 6%, 8%,10% or 12% higher than they were at December 31 31, 1998. In relation to the level of these rates at December 31, 1998, the cap and swaption rates were from 2.5% to 9.0% out-of-the-money, i.e., higher. The table below shows the fair value levels of interest rate caps and swaptions under these scenarios.
Year Ended December 31, 1998 (in millions) 1998 1999 2000 2001 2002 2003 - ------------------------------------------------------------------------------------------------------------------- No change........................................ 3.4 1.6 .5 .1 -- -- Up 2%.......................................... 30.1 20.4 9.4 3.4 1.1 0.5 Up 4%.......................................... 111.3 93.1 62.9 38.6 15.1 4.6 Up 6%.......................................... 267.1 286.9 249.6 137.8 86.8 47.3 Up 8%.......................................... 466.0 412.2 346.8 278.7 203.8 130.7 Up 10%........................................... 666.5 592.6 513.7 429.0 330.0 239.6 Up 12%........................................... 856.5 770.7 683.6 587.4 474.8 367.4
LNC uses exchange-traded financial futures contracts and options on financial futures to hedge against interest rate risks and to manage duration of a portion of its fixed maturity securities. Financial futures contracts obligate LNC to buy or sell a financial instrument at a specified future date for a specified price. They may be settled in cash or through delivery of the financial instrument. Cash settlements on the change in market values of financial futures contracts are made daily. Put options on a financial futures contract give LNC the right, but not the obligation, to assume a long or short position in the underlying futures contract at a specified price during a specified time period. As of December 31, 1998, LNC did not have any open futures or options on futures. LNC 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 interests. LNC is required to pay the counterparty the stream of variable coupon payments generated from the bonds, and in turn, receives a fixed payment from the counterparty, at a predetermined interest rate. LNC also uses interest rate swap agreements to hedge its exposure to interest rate fluctuations related to the anticipated purchase of assets that support newly acquired blocks of business. As of December 31, 1998, LNC had swap agreements with a notional amount of $258.3 million that expires in 2000 through 2009. In addition to continuing existing programs, LNC may use derivative products in other strategies to limit risk and enhance returns, particularly in the management of investment spread businesses. LNC has established policies, guidelines and internal control procedures for the use of derivatives as tools to enhance management of the overall portfolio of risks assumed in LNC's operations. The table below provides a general measure of LNC's significant interest rate risk (principal amounts are shown by year of maturity and include amortization of premiums and discounts) as of December 31, 1998.
There- Fair (in millions of dollars) 1999 2000 2001 2002 2003 after Total Value - -------------------------------------------------------------------------------------------------------------------- Rate Sensitive Assets: Fixed maturity securities....... 915 975 1,308 1,309 1,752 25,543 31,802 30,233 Average interest rate............ 7.48% 7.21% 7.43% 7.95% 7.32% 7.65% 7.61% Mortgage loans................... 246.4 316.9 221.5 590.4 250.8 2,752.1 4,378.1 4,580.4 Average interest rate............ 8.91% 9.04% 8.62% 8.44% 8.35% 8.30% 8.41% Rate Sensitive Liabilities: Guaranteed Interest Contracts: Interest paid out annually....... 133.0 103.0 236.0 247.0 Average interest rate............ 7.23% 6.96% 7.11% Interest paid at maturity........ 133.0 132.0 38.0 1.0 16.0 39.0 359.0 375.0 Average interest rate............ 6.93% 7.18% 8.15% 6.18% 10.67% 10.71% 7.72% Investment type insurance contracts, excluding guaranteed interest contracts (1)................... 731 820 1,066 1,135 1,134 13,755 18,641 19,232 Average interest rate............ 7.62% 7.66% 7.44% 7.83% 7.47% 7.88% 7.81% Debt (2)......................... 314.6 .1 230.4 100.0 -- 1,128.3 1,773.4 1,807.7 Average interest rate............ 6.81% 7.75% 7.63% 7.75% 7.58%
32
There- Fair (in millions of dollars) 1999 2000 2001 2002 2003 after Total Value - ------------------------------------------------------------------------------------------------------------------- Rate Sensitive Derivative Financial Instruments: Interest Rate and Foreign Currency Swaps: Pay variable/receive fixed....... 2.4 10.0 49.6 26.2 50.1 167.2 305.5 10.2 Average pay rate................. 4.79% 5.11% 5.14% 5.12% 5.28% 5.37% 5.29% Average receive rate............. 8.13% 6.36% 6.00% 6.97% 5.32% 6.51% 6.28% Interest Rate Caps and Swaptions: (3) Outstanding cap notional.........2,511.1 2,741.5 3,216.3 2,542.3 659.3 613.7 3.4 Average strike rate (4).......... 9.3% 9.0% 8.9% 8.9% 8.4% 8.4% Forward CMT curve (5)............ 4.6% 4.7% 4.6% 4.6% 4.8% 5.1%
The table below shows the principal amount and fair value for LNC's significant interest rate risks as of December 31, 1997.
Principal (in millions of dollars) Amount Fair Value - --------------------------------------------------------------------------------------------------------------- Fixed maturity securities............................................. 25,373.0 24,066.4 Mortgage loans........................................................ 3,294.8 3,473.5 Guaranteed interest contracts......................................... 1,139.0 1,169.9 Investment type insurance contracts (1)............................... 17,632.7 18,329.8 Debt.................................................................. 1,126.2 1,161.8 Interest rate caps and swaptions (notional) (3)....................... 7.8
(1) The information shown is for the fixed maturity securities and mortgage loans that support these insurance contracts. (2) Includes minority interest - preferred securities of subsidiary companies. (3) Swaptions notional is shown converted to cap equivalent. (4) The indexes are a mixture of five-year and ten-year Constant Maturity Treasury ("CMT") and Constant Maturity Swap ("CMS"). (5) The CMT curve is the five-year constant maturity treasury forward curve. 2) Foreign Currency Risk Foreign Currency Denominated Investments. LNC invests in foreign currency securities for incremental return and risk diversification relative to United States Dollar-Denominated ("USD") securities. The fair value of foreign securities, which are denominated in six different foreign currencies, totaled $166.8 million as of December 31, 1998. LNC periodically uses a combination of foreign exchange forward contracts, foreign currency options, and foreign currency swaps to hedge some of the foreign exchange risk related to its investments in securities denominated in foreign currencies. The currency risk is hedged using foreign currency derivatives of the same currency as the bonds. Unhedged, a 10% adverse move in the currency would create a $16.7 million pre-tax loss. The aggregate USD equivalent of forward currency positions hedging the portfolio was $47.4 million; the unhedged amount of the portfolio was $119.4 million. A 10% adverse currency move has thus been reduced to $11.9 million pre-tax through hedging. This number is approximate because not all foreign currency derivatives are struck at the current spot rate. The table below shows LNC's exposure to foreign currency securities. Also included is the relevant information relating the foreign currency derivatives that are hedging the currency risk of these securities. The table below presents the principal (notional) amount in U.S. dollar equivalents by expected maturity for LNC's foreign currency denominated investments as of December 31, 1998.
There- Fair (in millions of dollars) 1999 2000 2001 2002 2003 after Total Value - --------------------------------------------------------------------------------------------------------------- Currencies Canadian Dollar............ 16.3 .6 9.4 10.6 9.8 59.2 105.9 114.0 Interest Rate............ 9.50% 5.57% 8.29% 7.67% 7.15% 6.22% 7.13% British Pound.............. 6.5 15.6 22.1 25.9 Interest Rate............ 5.07% 10.07% 8.54% Argentine Peso............. 10.0 7.0 17.0 14.0 Interest Rate............ 11.54% 11.70% 11.61% All Other Currencies....... 8.1 .5 5.2 13.8 12.9 Interest Rate............ 19.54% 14.73% 12.40% 16.94% ------ ------ ----- ------ ----- ------ ------ ----- Total Currencies.... 24.4 1.1 15.9 20.6 9.8 87.0 158.8 166.8 Derivatives Forwards................. 1.5 -- -- -- -- -- 1.5 .004 Swaps.................... 2.4 -- 9.6 8.3 -- 26.9 47.2 .4
33 The table below presents the principal (notional) amount in U.S. dollar equivalents as of December 31, 1997.
Fair (in millions) Principal Value - ------------------------------------------------------------------------------------------------------------------- Currencies: Canadian Dollar............................................................... $ 83.5 $ 91.2 British Pound................................................................. 78.3 90.0 Japanese Yen.................................................................. 65.1 73.6 German Mark................................................................... 62.1 67.3 Italian Lira.................................................................. 44.9 54.8 All other currencies.......................................................... 134.9 142.9 ----- ----- Total Currencies........................................................ $468.8 $519.8 Derivatives: Forwards...................................................................... $163.1 $ 5.4 Swaps......................................................................... 15.0 (2.1)
Foreign Currency Forward Contracts. LNC uses foreign currency forward contracts to hedge some of the foreign exchange risk related to its investments in fixed maturity securities denominated in foreign currencies. LNC typically engages in short-term currency forward contracts of less than six months and actively monitors currency markets in determining those currencies to hedge, the duration of the hedge and the nominal amount to hedge. A foreign currency forward contract obligates LNC to deliver a specified amount of currency at a future date at a specified exchange rate. The value of the foreign exchange forward contracts at any given point fluctuates according to the underlying level of exchange rate and interest rate differentials. LNC periodically uses foreign exchange forward contracts to hedge against foreign exchange risk related to LNC's investment in its British subsidiary, Lincoln National (UK). As of December 31, 1998, LNC did not have any open foreign exchange forward contracts related to its investment in Lincoln National (UK). Foreign Currency Options. A foreign currency option gives LNC the right, but not the obligation, to buy or sell a foreign currency at a specific exchange rate during a specified time period. LNC has historically used options that were slightly "out-of-the-money" resulting in a "corridor" of currency risk assumed, but limited the risk above the strike price. At December 31, 1998, LNC did not have any open positions in foreign currency options. Foreign Currency Swaps. A foreign currency swap is a contractual agreement to exchange the currencies of two different countries pursuant to an agreement to re-exchange the two currencies at the same rate of exchange at a specified future date. LNC uses foreign currency swaps to convert the cash flow of foreign currency securities to U.S. dollars. LNC had foreign currency swaps with a total notional amount of $47.2 million and $15.0 million for December 31, 1998 and 1997, respectively. 3) Equity Market Exposures LNC's revenues, assets, liabilities and derivatives are exposed to equity market risk. Fee Revenues. The fee revenues of LNC's Investment Management segment and fees earned from variable annuities are exposed to the risk of a decline in equity market values. These fees are generally a fixed percentage of the market value of assets under management. In a severe equity market decline, fee income could be reduced by not only reduced market valuations but also by customer withdrawals. Such withdrawals from equity funds and accounts might be partially offset by transfers to LNC's fixed-income accounts and the transfer of funds to LNC by its competitors' customers. Assets. While LNC invests in equity assets with the expectation of achieving higher returns than would be available in its core fixed-income investments, the returns on, and values of, these equity investments are subject to somewhat greater market risk than its fixed income investments. These investments, however, add diversification benefits to LNC's fixed income investments. The table below shows the sensitivity of price changes to LNC's equity assets owned.
------------ December 31, 1998 --------------- --December 31, 1997-- 10% Fair 10% Fair Carrying Fair Value Value Carrying Fair (in millions) Value Value Increase Decrease Value Value - ------------------------------------------------------------------------------------------------------------------ U.S. Equities....................... 231.3 231.3 254.4 208.2 498.1 498.1 Foreign Equities..................... 276.5 276.5 304.2 248.8 157.7 157.7 Emerging Market Equities............. 35.0 35.0 38.5 31.5 4.6 4.6 ------ ------ ------ ------ ------- ------- Sub-Total....................... 542.8 542.8 597.1 488.5 660.4 660.4 Real Estate.......................... 488.7 536.0 589.6 482.4 576.0 621.3 Other Equity Interests............... 312.5 356.9 392.6 321.2 202.1 245.5 ------- ------- ------- ------- ------- -------- Total........................... $1,344.0 $1,435.7 $1,579.3 $1,292.1 $1,438.5 $1,527.2
34 Liabilities. LNC has an exposure to foreign currency equity risk with respect to unit-linked annuity policies issued in the UK. The aggregate U.S. dollar equivalent amount of account value was $11.1 million and $14.1 million at December 31, 1998 and 1997, respectively. LNC also has exposure to U.S. equity markets through reinsurance contracts that reinsure equity-indexed annuities. The aggregate amount of account value of these annuities is $89.4 million and $6.6 million at December 31, 1998 and 1997, respectively. These risks are being hedged with equity derivatives as discussed below. Derivatives Hedging Equity Risks. LNC has two programs hedging equity market risk in annuities issued in the U.K. and U.S. that contain equity features. LNC uses Over-the-Counter ("OTC") foreign currency equity call options to hedge against the foreign equity market risk component contained in its U.K. unit-linked annuities which are a function of the Financial Times Stock Exchange ("FTSE") index. These call options require the counterparties to pay LNC at specified future expiration dates the amount, if any, of the percentage increase in the FTSE index over the strike price defined in the contract, applied to a notional amount. LNC had agreements with notional amounts of $11.1 million and $14.1 million at December 31, 1998 and 1997, respectively. The call options expirations are matched to the liabilities and expire in 1999 through 2001. LNC uses OTC equity call options on the S&P 500 index to hedge against the increase in its liabilities resulting from certain reinsurance agreements which guarantee payment of the appreciation of the S&P 500 index on certain underlying annuity products. These call options require the counterparty to pay LNC at specified future expiration dates the amount, if any, of the percentage increase in the S&P 500 index over the strike price defined in the contract, applied to the notional amount. The reinsurance agreement then requires LNC to pay any appreciation on the S&P 500 index to the reinsurance client. LNC had agreements with notional amounts of $79.9 million and $5.3 million for December 31, 1998 and 1997, respectively. The call options expirations are matched to the liabilities and expire in 1999 through 2006. Default Risk. In assessing the risk that the rate of default losses for each category of asset may be higher than the rates assumed in pricing its products, LNC considers the entire $37.9 billion portfolio of invested assets as of December 31, 1998, taking diversification into account. Of this total, $22.5 billion consists of corporate bonds and $4.4 billion consists of commercial mortgages. LNC manages the risk of adverse default experience on these investments by applying disciplined credit evaluation and underwriting standards, prudently limiting allocations to lower-quality, higher-yielding investments, and diversifying exposures by issuer, industry, region and property type. For each counterparty or borrowing entity and its affiliates, LNC's exposures from all transactions are aggregated and managed in relation to formal limits set by rating quality and industry group. LNC remains exposed to occasional adverse cyclical economic downturns during which default rates may be significantly higher than the long-term historical average used in pricing. As of December 31, 1997, LNC had a portfolio of invested assets of $29.8 billion. LNC is depending on the ability of derivative product dealers and their guarantors to honor their obligations to pay the contract amounts under interest rate cap agreements, swaptions, spread-lock agreements, interest rate swaps, commodity swaps, call options, put options foreign currency exchange contracts, foreign currency options and foreign currency swaps. In order to minimize the risk of default losses, LNC diversifies its exposures among several dealers and limits the amount of exposure to each in accordance with the credit rating of each dealer or its guarantor. LNC generally limits its selection of counterparties that are obligated under these derivative contracts to those with an A credit rating or above. Credit-Related Derivatives. LNC periodically uses spread-lock agreements to hedge a portion of the value of its fixed maturity securities against the risk of widening in the spreads between their yields and the yields of comparable maturity U.S. or other Government obligations. As of December 31, 1998, LNC did not have any open spread-lock agreements. LNC 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 the international bond issuers. The put options allow LNC to put the bonds back to the counterparties at original par. As of December 31, 1998, LNC had put options with a notional amount of $21.3 million that expire in 2007. 35 Item 8. Financial Statements and Supplementary Data
(in millions, except per share) Operating Results by Quarter 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr - ------------------------------------------------------------------------------------------------------------- 1998 Data Premiums and other considerations .................. $765.7 $823.3 $794.7 $1,003.0 Net investment income................................ 658.4 658.7 649.6 714.7 Realized gain (loss) on investments.................. 23.9 25.5 (26.7) (3.7) Net income........................................... $122.0 $ 148.7 $113.5 $ 125.6 Net income per diluted share......................... $ 1.20 $ 1.46 $ 1.11 $ 1.24 1997 Data Premiums and other considerations.................... $626.6 $567.8 $661.5 $ 669.2 Net investment income................................ 559.4 557.8 548.5 585.1 Realized gain on investments......................... 12.1 2.5 57.0 51.0 Net income (loss) from continuing operations (1)..... $ 83.0 $(48.0) $124.9 $ (137.7) Discontinued operations (1).......................... 48.3 40.2 46.4 776.9 ----- ----- ----- ------ Net Income (Loss)................................. $131.3 $ (7.8) $171.3 $ 639.2 Net income from continuing operations per diluted share........................ $ .79 $ (.46) $ 1.20 $ (1.34) Discontinued operations per share.................... .47 .39 .45 7.55 ----- --- ---- ----- Net Income (Loss) Per Diluted Share.............. $ 1.26 $ (.07) $ 1.65 $ 6.21
(1)Net income (loss) from continuing operations for the second and fourth quarters of 1997 include special charges for changes in estimates on reserves. The discontinued operations amount for the fourth quarter of 1997 includes the gain on sale of the discontinued operations. See notes 2 and 11 to the consolidated financial statements on pages 45 and 65, respectively. Consolidated Financial Statements The consolidated financial statements of Lincoln National Corporation and Subsidiaries follow on pages 36 through 67. 36
LINCOLN NATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS December 31 (000s omitted) 1998 1997 - ---------------------------------------------------------------------------------------------------------- ASSETS Investments: Securities available-for-sale, at fair value: Fixed maturity (cost: 1998-$28,639,558; 1997-$22,626,036)............. $30,232,892 $24,066,376 Equity (cost: 1998-$436,718; 1997-$517,156)................... 542,843 660,428 Mortgage loans on real estate............................ 4,393,082 3,288,112 Real estate.............................................. 488,722 575,956 Policy loans............................................. 1,839,970 763,148 Other investments........................................ 431,964 464,826 ----------- ----------- Total Investments..................................... 37,929,473 29,818,846 Investment in unconsolidated affiliates................... 18,811 20,975 Cash and invested cash.................................... 2,433,350 3,794,706 Property and equipment.................................... 174,762 189,811 Deferred acquisition costs................................ 1,964,366 1,623,845 Premiums and fees receivable.............................. 246,203 197,509 Accrued investment income................................. 528,500 423,008 Assets held in separate accounts.......................... 43,408,858 37,138,845 Federal income taxes...................................... 204,075 -- Amounts recoverable from reinsurers....................... 3,127,093 2,350,766 Goodwill.................................................. 1,484,343 457,729 Other intangible assets................................... 1,848,442 613,909 Other assets.............................................. 467,984 544,759 ----------- ------------ Total Assets.......................................... $93,836,260 $77,174,708
37
December 31 (000s omitted) 1998 1997 - -------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Insurance and Investment Contract Liabilities: Insurance policy and claim reserves................................ $20,139,982 $11,266,272 Contractholder funds............................................... 20,753,064 20,063,393 Liabilities related to separate accounts........................... 43,408,858 37,138,845 ---------- ---------- Total Insurance and Investment Contract Liabilities............. 84,301,904 68,468,510 Federal income taxes............................................... -- 487,805 Short-term debt.................................................... 314,610 297,208 Long-term debt..................................................... 712,171 511,037 Minority interest - preferred securities of subsidiary companies.............................................. 745,000 315,000 Other liabilities.................................................. 2,374,634 2,112,233 ---------- ---------- Total Liabilities............................................. 88,448,319 72,191,793 Shareholders' Equity: Series A preferred stock - 10,000,000 shares authorized (1998 liquidation value - $2,637)................................. 1,083 1,153 Common stock - 800,000,000 shares authorized...................... 994,472 966,461 Retained earnings.................................................. 3,790,038 3,533,105 Accumulated Other Comprehensive Income: Foreign currency translation adjustment............................ 49,979 46,204 Net unrealized gain (loss) on securities available-for-sale........ 552,369 435,992 ---------- ---------- Total Accumulated Other Comprehensive Income................... 602,348 482,196 ---------- ---------- Total Shareholders' Equity..................................... 5,387,941 4,982,915 ---------- ---------- Total Liabilities and Shareholders' Equity..................... $93,836,260 $77,174,708
See notes to the consolidated financial statements on pages 42-67. 38
LINCOLN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31 (000s omitted) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Revenue: Insurance premiums..................................... $1,620,629 $1,328,735 $1,519,169 Insurance fees......................................... 1,274,569 832,153 713,519 Investment advisory fees............................... 227,059 204,926 180,792 Net investment income.................................. 2,681,406 2,250,764 2,087,946 Equity in earnings of unconsolidated affiliates....... 3,336 2,081 1,416 Realized gain (loss) on investments.................... 19,034 122,570 92,520 Other revenue and fees................................. 261,030 157,250 138,246 --------- --------- --------- Total Revenue....................................... 6,087,063 4,898,479 4,733,608 Benefits and Expenses: Benefits............................................... 3,328,865 3,191,733 2,709,881 Underwriting, acquisition, insurance and other expenses......................... 1,943,749 1,579,341 1,434,948 Interest and debt expense.............................. 117,051 92,524 84,721 --------- ---------- ---------- Total Benefits and Expenses.......................... 5,389,665 4,863,598 4,229,550 --------- --------- --------- Net Income from Continuing Operations Before Federal Income Taxes......................... 697,398 34,881 504,058 Federal income tax expense............................... 187,623 12,651 147,669 --------- -------- --------- Net Income from Continuing Operations................ 509,775 22,230 356,389 Discontinued Operations (Net of income taxes): Income prior to disposal .............................. -- 134,886 157,169 Gain on disposal ...................................... -- 776,872 -- ------------- --------- -------------- Net Income........................................... $ 509,775 $ 933,988 $ 513,558 Earnings Per Common Share-Basic: Net Income from Continuing Operations.................. $5.08 $ .22 $3.43 Discontinued Operations................................ -- 8.89 1.52 ------- ---- ---- Net Income.......................................... $5.08 $9.11 $4.95 Earnings Per Common Share-Diluted: Net Income from Continuing Operations.................. $5.02 $ .21 $3.38 Discontinued Operations................................ -- 8.77 1.49 ------- ---- ---- Net Income........................................... $5.02 $8.98 $4.87
See notes to the consolidated financial statements on pages 42-67. 39
LINCOLN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 (000s omitted) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income.................................................... $ 509,775 $ 933,988 $ 513,558 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Deferred acquisition costs................................. (226,253) (23,519) 34,471 Premiums and fees receivable............................... 3,151 39,836 (77,379) Accrued investment income.................................. (101,555) (5,426) (22,079) Policy liabilities and accruals............................ 1,055,277 540,676 71,471 Contractholder funds....................................... 800,678 636,600 1,280,205 Amounts recoverable from reinsurers........................ (775,064) (22,252) (128,538) Federal income taxes....................................... (205,198) 255,105 30,418 Equity in undistributed earnings of unconsolidated affiliates................................. (1,636) (2,081) (1,428) Provisions for depreciation................................ 58,070 58,136 51,328 Amortization of goodwill and other intangible assets....... 183,756 82,396 70,748 Realized (gain) loss on investments........................ (19,034) (122,570) (92,520) Gain on sale of subsidiaries/discontinued operations....... -- (1,192,226) -- Other...................................................... 47,905 (65,857) (356,819) --------- ----------- -------- Net Adjustments......................................... 820,097 178,818 859,878 --------- ---------- --------- Net Cash Provided by Operating Activities............... 1,329,872 1,112,806 1,373,436 Cash Flows from Investing Activities: Securities available-for-sale: Purchases................................................... (11,780,821) (10,740,292) (15,661,295) Sales....................................................... 9,278,969 10,098,697 12,135,338 Maturities.................................................. 1,987,506 1,461,390 981,264 Purchase of other investments................................. (2,922,984) (2,128,852) (2,450,400) Sale or maturity of other investments......................... 1,831,412 1,961,551 2,187,615 Sale of subsidiary/discontinued operations.................... -- 2,650,000 -- Purchase of affiliates/business............................... (2,285,081) (11,847) (71,593) Cash acquired from purchase of affiliates/business............ 2,323,220 -- 2,650,733 Increase (decrease) in cash collateral on loaned securities............................................ 274,426 353,550 (97,257) Other......................................................... (481,137) 121,065 (146,768) --------- --------- -------- Net Cash Provided by (Used in) Investing Activities....... (1,774,490) 3,765,262 (472,363) Cash Flows from Financing Activities: Decrease in long-term debt (includes payments and transfers to short-term debt)................................ (99,977) (116,942) (35,074) Issuance of long-term debt.................................... 299,198 -- -- Net increase (decrease) in short-term debt.................... 17,402 108,248 (237,888) Issuance of preferred securities of subsidiary companies...... 430,000 -- 315,000 Issuance costs related to FELINE PRIDES....................... (14,834) -- -- Universal life and investment contract deposits............... 1,314,301 986,541 1,125,532 Universal life and investment contract withdrawals............ (2,655,688) (2,709,662) (2,366,725) Common stock issued for benefit plans......................... 48,747 33,199 (565) Retirement of common stock.................................... (46,871) (327,585) (32,716) Proceeds from sale of minority interest in subsidiary......... -- -- 215,182 Dividends paid to shareholders................................ (209,016) (201,927) (191,223) ------- -------- -------- Net Cash Provided by (Used in) Financing Activities........ (916,738) (2,228,128) (1,208,477) ----------- ----------- --------- Net Increase (Decrease) in Cash............................ (1,361,356) 2,649,940 (307,404) Cash and Invested Cash at Beginning-of-Year................... 3,794,706 1,144,766 1,452,170 --------- --------- --------- Cash and Invested Cash at End-of-Year...................... $2,433,350 $3,794,706 $1,144,766
See notes to the consolidated financial statements on pages 42-67. 40
. LINCOLN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Year Ended December 31 (000s omitted) 1998 1997 1996 -------------------------------------------------------------------------------------------------------------- Series A Preferred Stock: Balance at beginning-of-year................................ $ 1,153 $ 1,212 $ 1,335 Conversion into common stock................................ (70) (59) (123) ----- ----- ---- Balance at End-of-Year................................... 1,083 1,153 1,212 Common Stock: Balance at beginning-of-year................................ 966,461 904,331 907,432 Conversion of series A preferred stock...................... 70 59 123 Issued for benefit plans.................................... 50,666 34,592 7,597 Shares forfeited under benefit plans........................ (1,919) (1,393) (4,771) Issued for purchase of subsidiaries......................... -- 74,390 -- Retirement of common stock.................................. (5,972) (45,518) (6,050) Issuance costs related to FELINE PRIDES .................... (14,834) -- -- ------- ------- ------- Balance at End-of-Year.................................... 994,472 966,461 904,331 Retained Earnings: Balance at beginning-of-year................................ 3,533,105 3,082,368 2,757,762 Comprehensive income........................................ 629,927 934,139 284,010 Less other comprehensive income (loss): Foreign currency translation............................... 3,775 (20,250) 53,041 Net unrealized gain (loss) on securities available-for-sale....................................... 116,377 20,401 (282,589) ------- ------- ------- Net Income........................................... 509,775 933,988 513,558 Realized gain (loss) on sale of minority interest in subsidiary..................................... -- -- 34,121 Retirement of common stock.................................. (40,899) (279,808) (28,925) Dividends declared: Series A Preferred ($3.00 per share)........................ (100) (106) (112) Common stock (1998 - $2.11; 1997 - $1.99; 1996 - $1.87)................................ (211,823) (203,337) (194,036) ------- ------- ------- Balance at End-of-Year.................................. 3,790,038 3,533,105 3,082,368 Foreign Currency Translation Adjustment: Accumulated adjustment at beginning-of-year................. 46,204 66,454 13,413 Change during the year...................................... 3,775 (20,250) 53,041 ------- ------- ------- Balance at End-of-Year.................................. 49,979 46,204 66,454 Net Unrealized Gain (Loss) on Securities Available-for-sale: Balance at beginning-of-year................................ 435,992 415,591 698,180 Realized gain (loss) on sale of minority interest in subsidiary............................ -- -- (19,101) Removal of discontinued operations.......................... -- (176,603) -- Other change during the year................................ 116,377 197,004 (263,488) --------- --------- --------- Balance at End-of-Year.................................. 552,369 435,992 415,591 --------- --------- --------- Total Shareholders' Equity at End-of-Year............... $5,387,941 $4,982,915 $4,469,956
41
Year Ended December 31 (Number of Shares) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------- Series A Preferred Stock: Balance at beginning-of-year................................. 35,091 36,885 40,646 Conversion into common stock................................. (2,132) (1,794) (3,761) ------ ----- ------ Balance Issued and Outstanding at End-of-Year............. 32,959 35,091 36,885 Common Stock: Balance at beginning-of-year................................ 100,859,478 103,658,575 104,185,117 Conversion of series A preferred stock...................... 17,056 14,352 30,088 Issued for benefit plans.................................... 825,777 759,330 250,072 Shares forfeited under benefit plans........................ (23,443) (21,991) (112,120) Issued for purchase of subsidiaries......................... -- 1,398,112 -- Retirement of common stock.................................. (623,281) (4,948,900) (694,582) ----------- ----------- ------------ Balance Issued and Outstanding at End-of-Year............. 101,055,587 100,859,478 103,658,575 Common Stock at End-of-Year: Assuming conversion of preferred stock.................... 101,319,259 101,140,206 103,953,655 Diluted basis............................................. 101,697,717 102,363,115 104,766,000
See notes to the consolidated financial statements on pages 42-67. 42 LINCOLN NATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Basis of Presentation. The accompanying consolidated financial statements include Lincoln National Corporation ("LNC") and its majority-owned subsidiaries. Through subsidiary companies, LNC operates multiple insurance and investment management businesses. During 1998, the collective group of companies adopted "Lincoln Financial Group" as its marketing identity. Operations are divided into four business segments (see note 9 on page 62). Less than majority-owned entities in which LNC has at least a 20% interest are reported on the equity basis. These consolidated financial statements have been prepared in conformity with generally accepted accounting principles. 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 consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Investments. LNC classifies its fixed maturity and equity securities as available-for-sale and, accordingly, such securities are carried at fair value. The cost of fixed maturity securities is adjusted for amortization of premiums and discounts. The cost of fixed maturity and equity securities is adjusted for declines in value that are other than temporary. For the mortgage-backed securities portion of the fixed maturity securities portfolio, LNC recognizes income using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. When estimates of prepayments change, 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 at the time of acquisition. This adjustment is reflected in net investment income. Mortgage loans on real estate are carried at the outstanding principal balances less unaccrued discounts. Investment real estate is carried at cost less allowances for depreciation. The cost for both mortgage loans and real estate and investment real estate is adjusted for declines in value that are other than temporary. Also, allowances for losses are established, as appropriate, for real estate holdings that are in the process of being sold. Real estate acquired through foreclosure proceedings is recorded at fair value on the settlement date which establishes a new cost basis. If a subsequent periodic review of a foreclosed property indicates the fair value, less estimated costs to sell, is lower than the carrying value at the settlement date, the carrying value is adjusted to the lower amount. Any changes to the reserves for mortgage loans on real estate and real estate are reported as realized gain (loss) on investments. Policy loans are carried at aggregate unpaid balances. Cash and invested cash are carried at cost and include all highly liquid debt instruments purchased with a maturity of three months or less. Realized gain (loss) on investments is recognized in net income, net of associated amortization of deferred acquisition costs and capital gains expenses, using the specific identification method. Changes in the fair values of securities carried at fair value are reflected directly in shareholders' equity, after deductions for related adjustments for deferred acquisition costs and amounts required to satisfy policyholder commitments that would have been recorded had these securities been sold at their fair value, and after deferred taxes or credits to the extent deemed recoverable. Realized gain (loss) on sale of subsidiaries, net of taxes, is recognized in net income. Realized gain (loss) on sale of minority interests in subsidiaries is reflected directly in shareholders' equity net of deferred taxes, if any. Derivatives. LNC hedges certain portions of its exposure to interest rate fluctuations, the widening of bond yield spreads over comparable maturity U.S. Government obligations, commodity risk, credit risk, fluctuations in certain stock indices, increased liabilities associated with certain reinsurance agreements and foreign exchange risk by entering into derivative transactions. A description of LNC's accounting for its hedging of such risks is discussed in the following two paragraphs. 43 The premiums paid for interest rate caps, swaptions, put options and S&P call options are deferred and amortized to net investment income on a straight-line basis over the term of the respective derivative. Any settlement received in accordance with the terms of the interest rate caps is also recorded as net investment income. Realized gain (loss) from the termination of the interest rate caps is included in net income. Settlements received on swaptions are deferred and amortized over the life of the hedged assets as an adjustment to yield. Swaptions, put options, spread-lock agreements, interest rate swaps, commodity swaps and financial futures that hedge fixed maturity securities available-for-sale are carried at fair value. The change in fair value is reflected directly in shareholders' equity. Realized gain (loss) from the settlement of such derivatives is deferred and amortized over the life of the hedged assets as an adjustment to the yield. Over-the-counter call options are carried at fair value. The change in fair value is reflected directly in shareholders' equity. Any gain (loss) realized upon termination of these call options is included in net income. Foreign exchange forward contracts, which hedge LNC's investment in its British subsidiary, Lincoln National (UK), are carried at fair value. The change in fair value and realized gain (loss) on such contracts is reflected directly in the foreign currency translation adjustment component of shareholders' equity. Foreign exchange forward contracts, foreign currency options and foreign currency swaps, which hedge some of the foreign exchange risk of investments in fixed maturity securities denominated in foreign currencies, are carried at fair value. The change in fair value is included in shareholders' equity. Realized gain (loss) from the settlement of such derivatives is included in net income. Hedge accounting is applied as indicated above after LNC determines that the items to be hedged expose LNC to interest rate fluctuations, the widening of bond yield spreads over comparable maturity U.S. Government obligations, fluctuations in certain stock indices, increased liabilities associated with certain reinsurance agreements and foreign exchange risk. Moreover, the derivatives used are designated as a hedge and reduce the indicated risk by having a high correlation between changes in the value of the derivatives and the items being hedged at both the inception of the hedge and throughout the hedge period. Should such criteria not be met or if the hedged items have been sold, terminated or matured, the change in value of the derivatives is included in net income. Loaned Securities. Securities loaned are treated as collateralized financing transactions and a liability is recorded equal to the repurchase price. It is LNC's policy to take possession of securities with a market value at least equal to the securities loaned. Securities loaned are recorded at fair value as long as the value of the related collateral is sufficient. LNC's agreements with third parties generally contain contractual provisions to allow for additional collateral to be obtained when necessary. LNC values collateral daily and obtains additional collateral when deemed appropriate. Property and Equipment. Property and equipment owned for company use is carried at cost less allowances for depreciation. Premiums and Fees. Revenue for universal life and other interest-sensitive insurance policies consists of policy charges for the cost of insurance, policy initiation and administration, and surrender charges that have been assessed. Traditional individual life-health and annuity premiums are recognized as revenue over the premium-paying period of the policies. Group health premiums are prorated over the contract term of the policies. Investment Advisory Fees. As specified in the investment advisory agreements with the mutual funds, fees are determined and recognized as revenues monthly, based on the average daily net assets of the mutual funds managed. Investment advisory contracts generally provide for the determination and payment of advisory fees based on market values of managed portfolios at the end of a calendar month or quarter. Investment management and advisory contracts are renewable annually with cancellation clauses ranging from 30 to 90 days. Assets Held in Separate Accounts/Liabilities Related to Separate Accounts. These assets and liabilities represent segregated funds administered and invested by LNC's insurance subsidiaries for the exclusive benefit of pension and variable life and annuity contractholders. Both the assets and liabilities are carried at fair value. The fees earned by LNC's insurance subsidiaries for administrative and contractholder maintenance services performed for these separate accounts are included in insurance fee revenue. Deferred Acquisition Costs. Commissions and other costs of acquiring universal life insurance, variable universal life insurance, unit-linked products, traditional life insurance, annuities and group health insurance which vary with and are primarily related to the production of new business, have been deferred to the extent recoverable. Acquisition costs for universal and variable universal life insurance policies and unit-linked products are being amortized over the lives of the policies in relation to the incidence of estimated gross profits from surrender charges and investment, mortality, and expense margins, and actual realized gain 44 (loss) on investments. That amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised. Traditional life acquisition costs are being amortized over periods of 10 to 30 years on either a straight-line basis or as a level percent of premium of the related policies depending on the block of business. Annuity acquisition costs are amortized over a period of 15 years for more recently issued policies, and over the surrender charge period for all other policies. For all policies, amortization is based on assumptions consistent with those used in the development of the underlying policy form adjusted for emerging experience. Benefits and Expenses. Benefits for universal and variable universal life insurance policies include interest credited to policy account balances and benefit claims incurred during the period in excess of policy account balances. Interest crediting rates associated with funds invested in the insurance company's general account during 1996 through 1998 ranged from 5.80% to 7.05%. Interest and debt expense includes interest on Minority Interest-Preferred Securities of Subsidiary Companies. Goodwill and Other Intangible Assets. The cost of acquired insurance subsidiaries or blocks of business in excess of the fair value of net assets (goodwill) is amortized using the straight-line method over periods of 20 to 40 years which corresponds with the benefits expected to be derived from the acquisitions. Other intangible assets for the non-insurance subsidiaries (i.e., institutional customer relationships, covenants not to compete and mutual fund customer relationships) have been recorded in connection with the acquisition of asset management services companies. These assets are amortized on a straight-line basis over 6 to 15 years. The carrying value of goodwill and other intangible assets is reviewed periodically for indicators of impairment in value. Insurance and Investment Contract Liabilities. The liabilities for future policy and claim reserves for universal and variable universal life insurance policies consist of policy account balances that accrue to the benefit of the policyholders, excluding surrender charges. The liabilities for future insurance policy and claim reserves for traditional life policies are computed using assumptions for investment yields, mortality and withdrawals based principally on generally accepted actuarial methods and assumptions at the time of policy issue. Interest assumptions for traditional direct individual life reserves for all policies range from 2.5% to 7.0% depending on the time of policy issue. Interest rate assumptions for reinsurance reserves range from 5.0% to 11.0% graded to 8.0% after 20 years. The interest assumptions for immediate and deferred paid-up annuities range from 4.5% to 7.75%. With respect to its insurance and investment contract liabilities, LNC continually reviews its: 1) overall reserve position; 2) reserving techniques and 3) reinsurance arrangements. As experience develops and new information becomes known, liabilities are adjusted as deemed necessary. The effects of changes in estimates are included in the operating results for the period in which such changes occur. Reinsurance. LNC's insurance companies enter into reinsurance agreements with other companies in the normal course of their business. LNC's insurance subsidiaries may assume reinsurance from unaffiliated companies and/or cede reinsurance to such companies. Assets/liabilities and premiums/benefits from certain reinsurance contracts that grant statutory surplus to other insurance companies have been netted on the balance sheets and income statements, respectively, since there is a right of offset. All other reinsurance agreements are reported on a gross basis. Depreciation. Provisions for depreciation of investment real estate and property and equipment owned for company use are computed principally on the straight-line method over the estimated useful lives of the assets. Postretirement Medical and Life Insurance Benefits. LNC accounts for its postretirement medical and life insurance benefits using the full accrual method. Stock Options. LNC 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 the stock at the grant date, or other measurement date, over the amount an employee must pay to acquire the stock. Foreign Exchange. LNC's foreign subsidiaries' balance sheet accounts and income statement items are translated at the current exchange and average exchange rates for the year, respectively. Resulting translation adjustments are reported as a component of shareholders' equity. Other translation adjustments for foreign currency transactions that affect cash flows are reported in earnings. 45 2. Changes in Accounting Principles and Change in Estimates Change in Estimate for Disability Income Reserve. During the second quarter of 1997, LNC conducted an additional 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 incidence levels were to continue in the future. In order to address this situation, LNC's Reinsurance segment strengthened its disability income reserve by $92,800,000, wrote-off deferred acquisition costs of $71,100,000 and reduced related assets by $36,100,000. Combined these actions reduced net income in the second quarter of 1997 by $130,000,000 or $1.23 per share ($200,000,000 pre-tax). Change in Estimate for United Kingdom Pension Mis-selling. During the fourth quarter of 1997, an in-depth review was completed of the United Kingdom regulatory environment, settlements to date and the remaining liability established to settle claims associated with this business. As a result of this study, the Lincoln UK segment strengthened its liability by $199,400,000 reducing net income in the fourth quarter of 1997 by $174,900,000 after-tax or $1.70 per share. Change in Estimate for Personal Accident Programs. During the fourth quarter of 1997, an in-depth review was completed of certain excess-of-loss personal accident reinsurance programs written by LNC's Reinsurance segment. Based on a concern that these programs were generating claims substantially in excess of expectations, an investigation and audit was conducted covering all such programs. While LNC continues to investigate the manner in which these programs were designed and all legal remedies available, it has been determined that the incurred but not reported reserve liability related to this business should be strengthened. Accordingly, a charge of $175,000,000 ($113,700,000 after-tax or $1.11 per share) was taken in the fourth quarter of 1997. Accounting for Derivative Instruments and Hedging Activities. In June 1998, the Financial Accounting Standards Board issued an accounting standard entitled "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). This standard indicates that adoption may occur at the beginning of any fiscal quarter but no later than the first quarter of 2000. LNC has not completed the analysis necessary to provide a precise estimate of the effect of this statement or to specify the quarter in which it plans to adopt the standard. 3. Investments The major categories of net investment income are as follows:
Year Ended December 31 (in millions) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------- Fixed maturity securities...................................... $2,065.8 $1,832.1 $1,690.1 Equity securities.............................................. 22.9 19.2 14.4 Mortgage loans on real estate ................................. 383.6 279.2 292.7 Real estate.................................................... 86.8 99.4 125.4 Policy loans . . . . . . . . . . . . . . . . . . . . . . . .... 99.5 44.5 40.7 Invested cash.................................................. 156.7 102.4 69.2 Other investments.............................................. 88.4 20.6 14.7 -------- -------- -------- Investment revenue.......................................... 2,903.7 2,397.4 2,247.2 Investment expense............................................. 222.3 146.6 159.3 ------- ------- -------- Net investment income....................................... $2,681.4 $2,250.8 $2,087.9
The realized gain (loss) on investments is as follows:
Year Ended December 31 (in millions) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Fixed maturity securities available-for-sale: Gross gain.................................................... $211.7 $240.0 $209.5 Gross loss.................................................... (211.2) (91.5) (202.6) Equity securities available-for-sale: Gross gain.................................................... 107.8 136.8 152.7 Gross loss.................................................... (50.4) (41.8) (37.8) Other investments.............................................. 11.9 (32.3) 40.4 Amortization of deferred acquisition costs, provision for policyholder commitments and capital gains expenses........................................ (50.8) (88.6) (69.7) ------ ------ ----- Total....................................................... $ 19.0 $122.6 $ 92.5
46 Provisions (credits) for write-downs and net changes in allowances for loss, which are included in the realized gain (loss) on investments shown above, are as follows:
Year Ended December 31 (in millions) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------- Fixed maturity securities..................................... $60.0 $13.1 $12.3 Equity securities............................................. 3.4 .3 3.2 Mortgage loans on real estate................................. (.2) (8.9) 3.1 Real estate................................................... (7.2) (13.6) 4.6 Other long-term investments................................... 5.4 (6.5) (.8) Guarantees.................................................... (.5) -- .2 ------- ----- ---- Total...................................................... $60.9 $(15.6) $22.6
The change in unrealized appreciation (depreciation) on investments in fixed maturity and equity securities is as follows:
Year Ended December 31 (in millions) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------- Fixed maturity securities available-for-sale.................. $152.9 $549.0 $(735.5) Equity securities available-for-sale.......................... (37.1) 20.2 (42.1) ------ ------ ------- Total..................................................... $115.8 $569.2 $(777.6)
The amortized cost, gross unrealized gain and loss, and fair value of securities available-for-sale are as follows:
Amortized Fair December 31 (in millions) Cost Gain Loss Value - -------------------------------------------------------------------------------------------------------------- 1998: Corporate bonds............................ $21,289.6 $1,350.2 $134.6 $22,505.2 U.S. Government bonds...................... 1,043.9 94.3 3.6 1,134.6 Foreign governments bonds.................. 1,240.1 127.5 46.4 1,321.2 Asset/mortgage-backed securities: Mortgage pass-through securities......... 1,176.6 34.6 .9 1,210.3 Collateralized mortgage obligations...... 2,532.9 120.7 5.4 2,648.2 Asset-backed securities.................. 1,170.0 54.1 2.1 1,222.0 State and municipal bonds.................. 15.9 .9 -- 16.8 Redeemable preferred stocks................ 170.6 7.4 3.4 174.6 --------- --------- ------ --------- Total fixed maturity securities........ 28,639.6 1,789.7 196.4 30,232.9 Equity securities.......................... 436.7 141.2 35.1 542.8 --------- -------- ------ --------- Total.................................. $29,076.3 $1,930.9 $231.5 $30,775.7 1997: Corporate bonds............................ $15,622.9 $ 1,077.2 $ 66.8 $16,633.3 U.S. Government bonds...................... 591.9 70.7 .2 662.4 Foreign governments bonds.................. 1,683.4 129.0 7.9 1,804.5 Asset/mortgage-backed securities: Mortgage pass-through securities......... 952.5 34.8 2.6 984.7 Collateralized mortgage obligations...... 2,522.0 170.9 3.4 2,689.5 Asset-backed securities.................. 818.0 26.9 .9 844.0 Other mortgage-backed securities......... 11.1 -- -- 11.1 State and municipal bonds.................. 236.1 5.3 -- 241.4 Redeemable preferred stocks................ 188.1 8.0 .6 195.5 --------- --------- ------ -------- Total fixed maturity securities........ 22,626.0 1,522.8 82.4 24,066.4 Equity securities.......................... 517.2 163.9 20.7 660.4 --------- ------- ----- --------- Total.................................. $23,143.2 $1,686.7 $103.1 $24,726.8
Future maturities of fixed maturity securities available-for-sale are as follows:
Amortized Fair December 31, 1998 (in millions) Cost Value - --------------------------------------------------------------------------------------------------------------- Due in one year or less....................................................... $ 909.8 $ 916.7 Due after one year through five years......................................... 5,112.4 5,283.7 Due after five years through ten years........................................ 7,989.4 8,274.7 Due after ten years........................................................... 9,748.5 10,677.3 -------- -------- Subtotal.................................................................. 23,760.1 25,152.4 Asset/mortgage-backed securities.............................................. 4,879.5 5,080.5 -------- --------- Total..................................................................... $28,639.6 $30,232.9
47 The foregoing data is based on stated maturities. Actual maturities will differ in some cases because borrowers may have the right to call or pre-pay obligations. Par value, amortized cost and estimated fair value of investments in asset/mortgage-backed securities summarized by interest rates of the underlying collateral are as follows:
Par Amortized Fair December 31, 1998 (in millions) Value Cost Value - -------------------------------------------------------------------------------------------------------------- Below 7%....................................................... $ 594.2 $ 318.1 $ 339.8 7% - 8%........................................................ 2,450.5 2,430.8 2,492.6 8% - 9%........................................................ 1,241.3 1,198.7 1,255.7 Above 9%....................................................... 950.2 931.9 992.4 ------- ------- ------- Total...................................................... $5,236.2 $4,879.5 $5,080.5
The quality ratings of fixed maturity securities available-for-sale are as follows: December 31 1998 - -------------------------------------------------------------------------------- Treasuries and AAA............................................. 25.6% AA............................................................. 7.0 A.............................................................. 27.5 BBB............................................................ 32.9 BB............................................................. 4.3 Less than BB................................................... 2.7 ----- 100.0% During the second quarter of 1998, LNC purchased two bonds issued with offsetting interest rate characteristics. Subsequent to the purchase of these bonds, interest rates increased and the value of one of these bonds decreased. This bond was sold at the end of the second quarter 1998 and a realized loss of $20.0 million ($13.0 million after-tax) was recorded. The other bond is still owned by LNC and is producing net investment income on an annual basis of $10.0 million ($6.5 million after-tax). Subsequent to these transactions being recorded, the Emerging Issues Task Force of the Financial Accounting Standards Board reached consensus with regard to accounting for this type of investment strategy. LNC is not required to apply the new accounting rules, however, if such rules were applied, the realized loss on the sale of $20.0 million ($13.0 million after-tax) on one of these bonds recorded at the end of the second quarter of 1998 would be reversed and the amount would be applied as a change in the carrying amount of the bond that remains in LNC's portfolio. Also, net investment income for the year ended December 31, 1998 would be less than reported by $5.0 million ($3.3 million after-tax). The balance sheet captions, "Real Estate" and "Property and Equipment," are shown net of allowances for depreciation as follows: December 31 (in millions) 1998 1997 - -------------------------------------------------------------------------------- Real estate......................................... $ 51.0 $ 50.2 Property and equipment.............................. 222.1 155.9 Mortgage loans on real estate which are primarily held in the Life Insurance and Annuities segment are considered impaired when, based on current information and events, it is probable that LNC will be unable to collect all amounts due according to the contractual terms of the loan agreement. When LNC determines that a loan is impaired, the cost is adjusted or a provision for loss is established equal to the difference between the initial cost of the mortgage loan and the estimated value. Estimated value is based on: 1) the present value of expected future cash flows discounted at the loan's effective interest rate; 2) the loan's observable market price or; 3) the fair value of the collateral. The provision for losses is reported as realized gain (loss) on investments. Mortgage loans deemed to be uncollectible are charged against the allowance for losses and subsequent recoveries, if any, are credited to the allowance for losses. The allowance for losses is maintained at a level believed adequate by management to absorb estimated probable credit losses. Management's periodic evaluation of the adequacy of the allowance for losses is based on LNC's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay (including the timing of future payments), the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires estimating the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. 48 Impaired mortgage loans along with the related allowance for losses are as follows: December 31 (in millions) 1998 1997 - -------------------------------------------------------------------------------- Impaired loans with allowance for losses......... $37.0 $41.2 Allowance for losses............................. (4.8) (5.0) Impaired loans with no allowance for losses...... 2.2 -- ------ ------ Net impaired loans............................... $34.4 $36.2 Impaired mortgage loans with no allowance for losses are a result of: 1) direct write-downs or; 2) collateral dependent loans where the fair value of the collateral is greater than the recorded investment in the loan. A reconciliation of the mortgage loan allowance for losses for these impaired mortgage loans is as follows: Year Ended December 31 (in millions) 1998 1997 1996 - ------------------------------------------------------------------------------- Balance at beginning-of-year............ $5.0 $12.4 $29.6 Provisions for losses................... .7 .8 3.1 Releases due to write-downs............. -- -- -- Releases due to sales................... (.9) (4.8) (19.9) Releases due to foreclosures............ -- (3.4) (.4) ---- ----- ----- Balance at end-of-year.............. $4.8 $ 5.0 $12.4 The average recorded investment in impaired mortgage loans and the interest income recognized on impaired mortgage loans were as follows: Year Ended December 31 (in millions) 1998 1997 1996 - -------------------------------------------------------------------------------- Average recorded investment in impaired loans..$33.4 $74.9 $139.6 Interest income recognized on impaired loans... 3.5 7.0 12.7 All interest income on impaired mortgage loans was recognized on the cash basis of income recognition. As of December 31, 1998 and 1997, LNC had restructured mortgage loans of $32,000,000 and $38,500,000, respectively. LNC recorded $3,100,000 and $3,800,000 of interest income on these restructured mortgage loans in 1998 and 1997, respectively. Interest income in the amount of $3,200,000 and $3,900,000 would have been recorded on these mortgage loans according to their original terms in 1998 and 1997, respectively. As of December 31, 1998 and December 31, 1997, LNC had no outstanding commitments to lend funds on restructured mortgage loans. An investment in real estate is considered impaired when the projected undiscounted cash flow from the investment is less than the carrying value. When LNC determines that an investment in real estate is impaired, it is written-down to reduce the carrying value to the estimated value. As of December 31, 1998, LNC's investment commitments for fixed maturity securities (primarily private placements), mortgage loans on real estate and real estate were $487,800,000. For the year ended December 31, 1998, fixed maturity securities available-for-sale, mortgage loans on real estate and real estate investments which were non-income producing were not significant. The cost information for mortgage loans on real estate, real estate and other long-term investments are net of allowances for losses. The balance sheet account for other liabilities includes a reserve for guarantees of third-party debt. The amount of allowances and reserves for such items is as follows: December 31 (in millions) 1998 1997 - -------------------------------------------------------------------------------- Mortgage loans on real estate....................... $4.8 $ 5.0 Real estate......................................... -- 1.5 Guarantees.......................................... .3 .8 49 4. Federal Income Taxes The Federal income tax expense (benefit) is as follows:
Year Ended December 31 (in millions) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------- Current........................................................... $(37.0) $137.4 $129.8 Deferred.......................................................... 224.6 (124.7) 17.9 ----- ------ ----- Total for continuing operations............................... $187.6 $ 12.7 $147.7
The effective tax rate on pre-tax income is lower than the prevailing corporate Federal income tax rate. A reconciliation of this difference is as follows:
Year Ended December 31 (in millions) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------- Tax rate times pre-tax income from continuing operations.......... $244.1 $12.2 $176.4 Effect of: Tax-preferred investment income................................... (51.1) (34.8) (25.6) Change in valuation allowance..................................... (5.3) 43.5 -- Other items....................................................... (.1) (8.2) (3.1) ------ ----- ----- Provision for income taxes.................................... $187.6 $12.7 $147.7 ----- ---- ----- Effective tax rate............................................ 27% 36% 29%
The Federal income tax recoverable (liability) is as follows:
December 31 (in millions) 1998 1997 - ----------------------------------------------------------------------------------------------------------------- Current.......................................................................... $ (6.3) $(431.8) Deferred......................................................................... 210.4 (56.0) ------ ----- Total Federal income tax recoverable (liability)............................. $204.1 $(487.8)
Significant components of LNC's net deferred tax asset (liability) for continuing operations are as follows:
December 31 (in millions) 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Deferred tax assets: Insurance and investment contract liabilities.................................... $1,386.3 $ 914.3 Net operating loss............................................................... 103.1 66.3 Postretirement benefits other than pensions...................................... 39.9 39.4 Other............................................................................ 147.3 102.9 -------- -------- Total deferred tax assets.................................................... 1,676.6 1,122.9 Valuation allowance for deferred tax assets...................................... 38.2 43.5 -------- -------- Net deferred tax asset....................................................... 1,638.4 1,079.4 Deferred tax liabilities: Deferred acquisition costs....................................................... 214.9 271.2 Premiums and fees receivable..................................................... 11.6 3.9 Net unrealized gain on securities available-for-sale............................. 542.0 520.0 Present value of business in-force............................................... 625.9 211.2 Other............................................................................ 33.6 129.1 -------- -------- Total deferred tax liabilities................................................ 1,428.0 1,135.4 ------- ------- Net deferred tax asset (liability)............................................ $ 210.4 $ (56.0)
LNC's Lincoln UK segment has incurred losses in its pension business which under United Kingdom tax law can only be utilized against its future pension business earnings. At December 31, 1998 and 1997 the deferred tax asset related to these pension business losses was $86,700,000 and $92,000,000, respectively. The valuation allowances shown in the table above reflect managements assessment, based upon all available information, that it is more likely than not that a portion of this deferred tax asset will not be realized. Adjustment to the valuation allowance will be made if there is a change in management's assessment of the amount of the deferred tax asset that is realizable. Cash paid for Federal income taxes in 1998, 1997 and 1996 was $379,600,000, $158,000,000 and $143,800,000 respectively. At December 31, 1998, LNC had net operating loss carryforwards of $257,000,000 for Federal income tax purposes related to its foreign life reinsurance companies that expire in years 2006 through 2018. Delaware Management Holdings, Inc. ("Delaware"), acquired in 1995, has net operating loss carryforwards for Federal 50 income tax purposes of $79,100,000 at December 31, 1998, which expire in the years 2003 through 2008. These carryforwards will only be available to reduce the respective taxable income of the foreign life reinsurance companies and Delaware. Under prior Federal 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." LNC has approximately $196,000,000 of untaxed "Policyholders' Surplus" on which no payment of Federal income taxes will be required unless it is distributed as a dividend, or under other specified conditions. Barring the passage of unfavorable tax legislation, LNC does not believe that any significant portion of the account will be taxed in the foreseeable future and no related deferred tax liability has been recognized. If the entire balance of account became taxable under the current Federal rate, the tax would be approximately $68,600,000. LNC has declared its intention to reinvest the undistributed earnings of Lincoln UK and will not provide U.S. income tax on these undistributed earnings. At December 31, 1998, for the years covered by this declaration there was a deficit in earnings for Lincoln UK. 5. Supplemental Financial Data Reinsurance transactions included in the income statement captions, "Insurance Premiums" and "Insurance Fees," are as follows:
Year Ended December 31 (in millions) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Insurance assumed................................................. $1,259.8 $1,079.1 $1,201.0 Insurance ceded................................................... 695.4 315.0 168.6 --------- ----- ----- Net reinsurance premiums....................................... $ 564.4 $ 764.1 $1,032.4
The income statement caption, "Benefits," is net of reinsurance recoveries of $1,056,800,000; $393,000,000 and $250,100,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The income statement caption, "Underwriting, Acquisition, Insurance and Other Expenses," includes amortization of deferred acquisition costs of $440,000,000; $468,000,000 and $428,500,000 for the years ended December 31, 1998, 1997 and 1996, respectively. An additional $(34,500,000); $(78,200,000) and $(65,200,000) of deferred acquisition costs was restored (amortized) and netted against "Realized Gain (Loss) on Investments" for the years ended December 31, 1998, 1997 and 1996, respectively. A reconciliation of the present value of business in-force for LNC's insurance subsidiaries included in other intangible assets is as follows:
December 31 (in millions) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Balance at beginning-of-year..................................... $ 501.3 $602.4 $407.4 Acquisitions of insurance companies/business..................... 1,323.2 22.0 163.5 Interest accrued on unamortized balance.......................... 44.4 36.9 37.9 (Interest rates range from 5% to 7%) Balance sheet reclassification related to Lincoln UK............. -- (94.8) -- Amortization..................................................... (117.4) (48.1) (47.6) Foreign exchange adjustment...................................... 1.8 (17.1) 41.2 --------- ----- ----- Balance at end-of-year........................................ 1,753.3 501.3 602.4 Other intangible assets (non-insurance).......................... 95.1 112.6 106.0 -------- ----- ----- Total other intangible assets at end-of-year.................. $1,848.4 $613.9 $708.4
Future estimated amortization of the present value of business in-force net of interest on unamortized balance for LNC's insurance subsidiaries is as follows (in millions): 1999 - $112.2 2001 - $115.1 2003 - $ 109.7 2000 - 113.0 2002 - 112.4 Thereafter - 1,190.9 Details underlying the balance sheet caption, "Contractholder Funds," are as follows: December 31 (in millions) 1998 1997 - -------------------------------------------------------------------------------- Premium deposit funds.................................. $20,171.9 $19,803.0 Undistributed earnings on participating business....... 142.8 79.8 Other.................................................. 438.4 180.6 --------- --------- Total............................................... $20,753.1 $20,063.4 51 Details underlying the balance sheet captions related to total debt are as follows:
December 31 (in millions) 1998 1997 - ----------------------------------------------------------------------------------------------------------------- Short-term debt: Commercial paper.................................................................... $ 214.4 $ 286.3 Other short-term notes.............................................................. -- 1.3 Current portion of long-term debt................................................... 100.2 9.6 ----- ------- Total short-term debt........................................................... 314.6 297.2 Long-term debt less current portion: 7.125% notes payable, due 1999...................................................... -- 99.7 7.625% notes payable, due 2002...................................................... 99.8 99.4 7.250% notes payable, due 2005...................................................... 191.6 191.4 6.500% notes payable, due 2008...................................................... 100.2 -- 7% notes payable, due 2018.......................................................... 200.3 -- 9.125% notes payable, due 2024...................................................... 119.8 119.8 Mortgages and other notes payable................................................... .5 .7 ------- ------- Total long-term debt............................................................ 712.2 511.0 Minority interest - preferred securities of subsidiary companies: 8.75% Quarterly Income Preferred Securities......................................... 215.0 215.0 8.35% Trust Originated Preferred Securities......................................... 100.0 100.0 7.40% Trust Originated Preferred Securities......................................... 200.0 -- 7.75% FELINE PRIDES................................................................. 230.0 -- ------- -------- Total.......................................................................... 745.0 315.0 Total debt..................................................................... $1,771.8 $1,123.2
The combined U.S. and U.K. commercial paper outstanding at December 31, 1998 and 1997, had a blended weighted average interest rate of approximately 6.67% and 7.03%, respectively. Future maturities of long-term debt are as follows (in millions): 1999 - $100.2 2001 - $ .4 2003 - $ -- 2000 - .1 2002 - 100.0 Thereafter - 613.3 LNC also has access to capital from minority interest in preferred securities of subsidiary companies. In May 1996, LNC filed a shelf registration with the Securities and Exchange Commission that would allow LNC to offer and sell up to $500,000,000 of various forms of hybrid securities. These securities, which combine debt and equity characteristics, are offered through a series of three subsidiaries (Lincoln National Capital I, II and III). These subsidiaries were formed solely for the purpose of issuing preferred securities and lending the proceeds to LNC. The common securities of these subsidiaries are owned by LNC. The only assets of Lincoln National Capital I, II and III are the notes receivable from LNC for such loans. Distributions are paid by these subsidiaries to the preferred securityholders on a quarterly basis. The principal obligations of these subsidiaries are irrevocably guaranteed by LNC. Upon liquidation of these subsidiaries, the holders of the preferred securities would be entitled to a fixed amount per share plus accumulated and unpaid distributions. LNC reserves the right to: 1) redeem the preferred securities at a fixed price plus accumulated and unpaid distributions and; 2) extend the stated redemption date up to 19 years if certain conditions are met. In April 1998, LNC filed a shelf registration with the Securities and Exchange Commission, that would allow LNC to offer and sell up to $1,300,000,000 of various securities, including regular debt, preferred stock, common stock or hybrid securities. This filing included an aggregate of $300,000,000 from a previous filing that had not been utilized. In conjunction with this shelf registration, three additional subsidiaries were added (Lincoln National Capital IV, V and VI) to accommodate the issuance of additional preferred securities. The purpose and terms of these new subsidiaries essentially parallel Lincoln National Capital I, II and III. In July 1996, Lincoln National Capital I issued 8,600,000 shares or $215,000,000, 8.75% Quarterly Income Preferred Securities ("QUIPS"). In August 1996, Lincoln National Capital II issued 4,000,000 shares or $100,000,000, 8.35% Trust Originated Preferred Securities ("TOPrS"). Both issues mature in 2026 at $25 per share and are redeemable in whole or in part at LNC's option any time after 2001. In March 1998, LNC issued notes of 1) $100,000,000, 6.5% due 2008 and 2) $200,000,000, 7% due 2018. In July 1998, Lincoln National Capital III issued 8,000,000 shares or $200,000,000 of 7.4% TOPrS which mature in 2028 at $25 per share and are redeemable in whole or in part at LNC's option anytime after July 2003. In August 1998, Lincoln National Capital IV issued 9,200,000 shares or $230,000,000 of 7.75% FELINE PRIDES (service 52 mark of Merrill Lynch & Co. Inc.). The purchasers of such securities were also provided stock purchase contract agreements that indicate they will receive a specified amount of LNC common stock on or before the August 2001 maturity date of the FELINE PRIDES. A portion of the issuance costs associated with this offering along with the present value of the payments associated with the stock purchase agreements were charged to the common stock line within shareholders' equity. In December 1998, LNC filed a shelf registration with the Securities Exchange Commission that combines unused portions of the April 1998 registration ($640,000,000) and the May 1996 registration ($185,000,000) resulting in an active shelf registration allowing LNC to sell up to an additional $825,000,000 of securities. The funds raised in 1998 from the various public offerings of securities described above were used to acquire a block of individual life insurance business from Aetna (see note 11 on page 66). Finally, LNC maintains a revolving credit agreement with a group of domestic and foreign banks in the aggregate amount of $750,000,000. This agreement, which expires in October 2001, provides for interest on borrowings based on various money market indices. Under the terms of this agreement, LNC must maintain a prescribed level of adjusted consolidated net worth. At December 31, 1998, LNC had no outstanding borrowings under this agreement. During 1998, 1997 and 1996, fees paid for maintaining revolving credit agreements amounted to $662,000; $670,000 and $715,000, respectively. Cash paid for interest for 1998, 1997 and 1996 was $108,300,000; $96,000,000 and $83,200,000, respectively. 6. Employee Benefit Plans Incentive Plans. 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 grant and, subject to termination of employment, expire 10 years from the date of grant. Such options are transferable only upon death and are exercisable one year from 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. A "reload option" feature was added on May 14, 1997. In most cases, persons exercising an option after that date have been granted new options in an amount equal to the number of matured shares tendered. The reload options are granted for the remaining term of the related original option and can be exercised two years after the grant date if the value of the new option has appreciated by 25%. Information with respect to incentive plan stock options outstanding at December 31, 1998 is as follows:
Options Outstanding Options Exercisable Weighted- Average Weighted- Number Weighted- Range of Number Out- Remaining Average Exercisable Average Exercise standing at Contractual Exercise at Exercise Prices Dec 31, 1998 Life (Years) Price Dec 31, 1998 Price - ------------------------------------------------------------------------------------------------------------------- $21 - $ 35 388,895 2.65 $26.53 387,645 $26.50 36 - 50 1,360,963 6.18 42.64 1,037,211 41.96 51 - 65 979,856 8.35 58.84 278,569 58.54 66 - 80 359,279 9.04 78.14 69,772 77.49 81 - 95 2,303,372 9.37 90.45 25,276 89.86 96 - 110 61 9.59 96.41 -- --------- --------- $21 - $110 5,392,426 1,798,473
LNC recognizes compensation expense for its stock option incentive plans using the intrinsic value based method of accounting (see note 1 on page 44) and provides the required pro forma information for stock options granted after December 31, 1994. Accordingly, no compensation expense has been recognized for stock option incentive plans. Had compensation expense for LNC's stock option incentive plans for options granted after December 31, 1994 been determined based on the estimated fair value at the grant dates for awards under those plans, LNC's pro forma net income and earnings per share for the last three years (1998, 1997 and 1996) would have been $500,984,000 ($4.93 per diluted share); $930,538,000 ($8.95 per diluted share) and $511,253,000 ($4.85 per diluted share), respectively (a decrease of $8,791,000 or $.09 per diluted share; $3,450,000 or $.03 per diluted share and $2,305,000 or $.02 per diluted share, respectively). These effects on pro forma net income and earnings per share of expensing the estimated fair value of stock options are not necessarily representative of the effects on reported net income for future years due to factors such as the vesting period of the stock options and the potential for issuance of additional stock options in future years. 53 The fair value of options granted after December 31, 1994, used as a basis for the pro forma disclosures, shown above, was estimated as of the date of grant using a Black-Scholes option pricing model. The option price assumptions used were as follows:
Year Ended December 31 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------- Dividend yield.................................................... 3.6% 3.8% 4.1% Expected volatility............................................... 20.4% 19.0% 18.0% Risk-free interest rate........................................... 5.6% 6.6% 6.5% Expected life (in years).......................................... 6 6 5 Weighted-average fair values per option granted................... $18.15 $11.24 $7.35
Restricted stock (non-vested stock) awarded from 1996 through 1998 was as follows:
Year Ended December 31 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Restricted stock (number of shares)................................... 438,003 118,836 55,538 Weighted-average price per share at time of grant..................... $ 82.50 $61.98 $46.16
Information with respect to the incentive plans involving stock options is as follows:
Options Outstanding Options Exercisable Weighted- Weighted- Shares Average Average Available Exercise Exercise for Grant Shares Price Shares Price ____________________________________________________________________________________________________________________ Balance at January 31, 1996................ 7,747,911 2,832,280 $33.21 1,647,872 $28.56 Granted.................................... (636,500) 636,500 45.69 Exercised.................................. -- (273,967) 26.68 Expired.................................... (1,600) (1,000) 27.75 Forfeited.................................. 151,818 (38,650) 36.03 Restricted stock awarded........................ (55,538) --------- --------- Balance at December 31, 1996................ 7,206,091 3,155,163 36.29 1,833,269 31.22 Additional authorized. . . . . . . . . . . ..... 5,493,909 Granted-original. . . . . . . . .. . . . . . ... (1,047,200) 1,047,200 60.05 Granted-reloads................................. (47,029) 47,029 68.41 Exercised (includes shares tendered)............ 149,139 (903,407) 31.67 Expired......................................... -- (783) 71.07 Forfeited....................................... 60,797 (44,316) 46.43 Restricted stock awarded........................ (118,836) ------- --------- Balance at December 31, 1997................. 11,696,871 3,300,886 45.08 1,601,972 35.81 Granted-original................................ (2,605,875) 2,605,875 89.19 Granted-reloads................................. (43,725) 43,725 89.41 Exercised (includes shares tendered)............ 97,862 (488,441) 36.22 Forfeited....................................... 71,287 (69,619) 71.89 Restricted stock awarded........................ (438,003) -------- ---------- Balance at December 31, 1998................. 8,778,417 5,392,426 67.21 1,798,473 43.25
Other Benefit Plans. LNC maintains defined benefit pension plans for its U.S. and U.K. employees and a defined contribution plan for its U.S. agents. LNC also maintains 401(k) Plans, deferred compensation plans and postretirement medical and life insurance plans for its U.S. employees and agents. The aggregate expenses and accumulated obligations for these plans are not material to LNC's consolidated statements of income or financial position for any of the periods shown in the accompanying consolidated financial statements. 7. Restrictions, Commitments and Contingencies Statutory Information and Restrictions Net income (loss) as determined in accordance with statutory accounting practices for LNC's insurance subsidiaries was $(1,452,400,000); $345,200,000 and $384,600,000 for 1998, 1997 and 1996, respectively. The 1998 amounts includes the statutory ceding commissions associated with the acquisition of two blocks 54 of business as described below. Excluding the impact of these acquisitions, net income for 1998 would have been $545,900,000. Statutory net income (loss) for 1998, 1997 and 1996, excluding LNC's foreign life reinsurance companies, was $(1,397,600,000); $299,100,000 and $342,700,000, respectively. Shareholders' equity as determined in accordance with statutory accounting practices for LNC's insurance subsidiaries was $2,952,500,000 and $2,660,900,000 for December 31, 1998 and 1997, respectively. The National Association of Insurance Commissioners is involved in a multi-year project to examine and challenge the appropriateness of current statutory accounting practices. This project could result in changes to statutory accounting practices that could cause changes to the statutory net income and shareholders' equity data shown above. LNC's insurance subsidiaries are subject to certain insurance department regulatory restrictions as to the transfer of funds and payments of dividends to LNC. Based upon these regulations, and without giving effect to the 1998 acquisitions, (see note 11 on page 66), LNC's insurance subsidiaries would have been able to pay dividends to LNC in 1999 of approximately $603,400,000 without obtaining specific approval from the insurance commissioners. LNC's primary insurance subsidiary, Lincoln National Life Insurance Company ("Lincoln Life") acquired a block of individual life insurance and annuity business from CIGNA in January 1998 and a block of individual life insurance from Aetna in October 1998. These acquisitions were structured as indemnity reinsurance transactions. The statutory accounting regulations do not allow goodwill to be recognized on indemnity reinsurance transactions and therefore, the related statutory ceding commission flows through the statement of operations as an expense resulting in a reduction of earned surplus. As a result of these acquisitions, Lincoln Life's statutory earned surplus is negative and it is necessary for Lincoln Life to obtain the prior approval of the Indiana Insurance Commissioner before paying any dividends to LNC until such time as statutory earned surplus is positive. It is expected that statutory earned surplus will return to a positive position within two-three years from the closing of the Aetna transaction described above assuming a level of statutory earnings coinciding with recent earnings patterns. If statutory earnings are less than recent patterns due, for example, to adverse operating conditions or further indemnity reinsurance transactions of this nature or if dividends are approved or paid at amounts higher than recent history, the statutory earned surplus may not return to a positive position as soon as expected. Although no assurance can be given, management believes that the approvals for the payment of dividends in amounts consistent with those paid in the past can be obtained. In the event such approvals are not obtained, management believes that LNC can obtain the funds required to satisfy its obligations from its existing credit facilities and other sources. Disability Income Claims The liability for disability income claims net of the related asset for amounts recoverable from reinsurers at December 31, 1998 and 1997 is a net liability of $1,813,400,000 and $1,654,000,000, respectively, excluding deferred acquisition costs. This liability is based on the assumption that recent experience will continue in the future. If incidence levels and/or claim termination rates fluctuate significantly from the assumptions underlying the reserves, adjustments to reserves could be required in the future. Accordingly, this liability may prove to be deficient or excessive. However, it is management's opinion that such future development will not materially affect the consolidated financial position of LNC. LNC reviews reserve levels on an on-going basis. United Kingdom Pension Products Operations in the U.K. include the sale of pension products to individuals. Regulatory agencies have raised questions as to what constitutes appropriate advice to individuals who bought pension products as an alternative to participation in an employer sponsored plan. In cases of inappropriate advice, an extensive investigation has to be done and the individual put in a position similar to what would have been attained if the individual had remained in the employer sponsored plan. At December 31, 1998 and 1997, liabilities of $202,100,000, and $291,000,000, respectively, had been established for this issue. The decrease in the level of the reserve reflects the settlement payouts that occurred during 1998. These liabilities, which are net of expected recoveries, have been established for the estimated cost of this issue following regulatory guidance as to activities to be undertaken. The expected recoveries from previous owners of companies acquired over the last few years as specified in the indemnification clauses of the purchase agreements at December 31, 1998 and 1997 were $84,900,000 and $113,000,000, respectively . These liabilities and recoveries are based on various estimates that are subject to considerable uncertainty. Also, there is further uncertainty from the regulator perspective as additional guidelines were issued in December of 1998 that extended the review to a wider range client population. These guidelines specify actions expected from the companies that issued such products. 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 consolidated financial position of LNC. 55 Personal Accident Programs LNC's Reinsurance segment accepts personal accident reinsurance programs from other insurance companies. Most of these programs are presented to the Reinsurance segment by independent brokers who represent the ceding companies. Certain excess of loss personal accident reinsurance programs created in the London market during 1993-1996 have produced and have potential to produce significant losses. At December 31, 1998 and 1997, liabilities of $177,400,000 and $186,300,000, respectively had been established for such programs. This reserve is based on various estimates that are subject to considerable uncertainty. Accordingly, this reserve may prove to be deficient or excessive. However, it is management's opinion that such future development will not materially affect the consolidated financial position of LNC. LNC continues to investigate its personal accident reinsurance programs to determine if there are additional programs including certain workers compensation programs which may produce losses. At this time LNC 1) does not have sufficient information to determine whether or not it is probable that additional losses have been incurred and 2) can not accurately estimate the ultimate cost or timing of the outcome on these programs. Marketing and Compliance Issues Regulators continue to focus on market conduct and compliance issues. Under certain circumstances companies operating in the insurance and financial services markets have been held responsible for providing incomplete or misleading sales materials and for replacing existing policies with policies that were less advantageous to the policyholder. LNC'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 consolidated financial position of LNC. Group Pension Annuities The liabilities for guaranteed interest and group pension annuity contracts 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 consolidated financial position of LNC. Euro Conversion LNC owns operating companies in Europe and conducts business with companies located within Europe. LNC has modified its systems, financial activities and currency risk exposures to align with the first phase of the European union's conversion to a new common currency (the euro) that was adopted January 1, 1999. It is management's opinion the additional phases of this conversion, which will be implemented during the next few years, will not materially affect the consolidated financial condition of LNC. Leases Certain of LNC's subsidiaries lease their 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 LNC with the right of first refusal to purchase the properties during the term of the lease, including renewal periods, at a price defined in the agreements. LNC 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 period ending in 2009 or the last day of any of the renewal periods. Total rental expense on operating leases in 1998, 1997 and 1996 was $81,300,000, $62,500,000 and $54,500,000, respectively. Future minimum rental commitments are as follows (in millions): 1999 - $55.0 2001 - $48.2 2003 - $ 36.1 2000 - 51.6 2002 - 41.9 Thereafter - 217.1 Information Technology Commitment In February 1998, Lincoln Life signed a seven-year contract with IBM Global Services for information technology services for the Fort Wayne operations. Annual costs are dependent on usage but are expected to range from $33,600,000 to $56,800,000. Insurance Ceded and Assumed LNC's insurance companies cede insurance to other companies. The portion of risks exceeding each company's retention limit is reinsured with other insurers. LNC seeks reinsurance coverage within the 56 business segments that sell life insurance to limit its liabilities. As of December 31, 1998, LNC's maximum retention was $10,000,000 on a single insured. Portions of LNC's deferred annuity business have also been co-insured with other companies to limit LNC's exposure to interest rate risks. At December 31, 1998, the reserves associated with these reinsurance arrangements totaled $1,608,500,000. To cover products other than life insurance, LNC acquires other insurance coverages with retentions and limits that management believes are appropriate for the circumstances. The accompanying financial statements reflect premiums, benefits and deferred acquisition costs, net of insurance ceded (see note 5 on page 49). LNC's insurance companies remain liable if their reinsurers are unable to meet contractual obligations under applicable reinsurance agreements. Certain LNC insurance companies assume insurance from other companies. At December 31, 1998, LNC's insurance companies have provided $228,800,000 of statutory surplus relief to other insurance companies under reinsurance transactions. Generally, such amounts are offset by corresponding receivables from the ceding company, which are secured by future profits on the reinsured business. However, LNC's insurance companies are subject to the risk that the ceding company may become insolvent and the right of offset would not be permitted. Associated with these transactions, LNC's insurance companies have obtained letters of credit in favor of various insurance companies. This allows the ceding companies to take statutory reserve credit. The letters of credit issued by the banks represent a guarantee of performance under the reinsurance agreements. At December 31, 1998, there was a total of $656,200,000 in outstanding bank letters of credit. In exchange for the letters of credit, LNC paid the banks approximately $1,637,000 in fees in 1998. Vulnerability from Concentrations At December 31, 1998, LNC did not have a material concentration of financial instruments in a single investee, industry or geographic location. Also at December 31, 1998, LNC 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 LNC's financial condition. Other Contingency Matters LNC and its subsidiaries are 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. LNC maintains professional liability insurance coverage for claims in excess of $5 million. The degree of applicability of this coverage will depend on the specific facts of each proceeding. In some instances, these proceedings include claims for compensatory and punitive damages and similar types of relief in addition to amounts for alleged contractual liability or requests for equitable relief. After consultation with legal counsel and a review of available facts, it is management's opinion that the ultimate liability, if any, under these suits will not have a material adverse effect on the consolidated financial condition of LNC. Four lawsuits involving alleged fraud in the sale of interest sensitive universal life and whole life insurance have been filed as class actions against Lincoln Life, although the court has not certified a class in any of these cases. Plaintiffs seek unspecified damages and penalties for themselves and on behalf of the putative class. While the relief sought in these cases is substantial, it is premature to make assessments about the potential loss, if any, because the status of the cases ranges from the early stages of litigation to the dismissal and appeals stage. Management intends to defend these suits vigorously. The amount of liability, if any, which may arise as a result of these suits cannot be reasonably estimated at this time. UK regulatory authorities have completed a review of Lincoln UK selling practices. This review does not include matters related to the pension product mis-selling investigations. Management is currently working with the regulators to address compliance issues that have been raised in the course of this review. The extent of corrective measures and potential disciplinary actions, if any, that may result from this review are actively being discussed with the regulatory authorities. It is not possible to provide a meaningful estimate of the potential outcome of this matter at the present time. However, it is management's opinion that the resolution of these matters will not materially affect the consolidated financial position of LNC. 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 57 rehabilitated companies. Mandatory assessments may be partially recovered through a reduction in future premium taxes in some states. LNC has accrued for expected assessments net of estimated future premium tax deductions. Guarantees LNC has guarantees with off-balance-sheet risks whose contractual amounts represent credit exposure. Outstanding guarantees with off-balance-sheet risks, shown in notional or contract amounts 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 (in millions) 1998 1997 1998 1998 1997 1997 - ------------------------------------------------------------------------------------------------------------------ Industrial revenue bonds.......................... $27.1 $27.9 -- -- $(.8) $ -- Real estate partnerships.......................... -- 2.9 -- -- -- -- Mortgage loan pass-through certificates........... 30.9 41.6 -- -- -- -- ---- ---- ------ ------ --- ----- Total guarantees............................. $58.0 $72.4 -- -- $(.8) $ --
Certain subsidiaries of LNC have invested in real estate partnerships which use industrial revenue bonds to finance their projects. LNC has guaranteed the repayment of principal and interest on these bonds. Certain subsidiaries of LNC are also involved in other real estate partnerships that use conventional mortgage loans. In some cases, the terms of these arrangements involve guarantees by each of the partners to indemnify the mortgagor in the event a partner is unable to pay its principal and interest payments. In addition, certain subsidiaries of LNC have sold commercial mortgage loans through grantor trusts which issued pass-through certificates. These subsidiaries have agreed to repurchase any mortgage loans which remain delinquent for 90 days at a repurchase price substantially equal to the outstanding principal balance plus accrued interest thereon to the date of repurchase. It is management's opinion that the value of the properties underlying these commitments is sufficient that in the event of default the impact would not be material to LNC. Derivatives LNC has derivatives with off-balance-sheet risks whose notional or contract amounts exceed the credit exposure. LNC has entered into derivative transactions to reduce its exposure to fluctuations in interest rates, the widening of bond yield spreads over comparable maturity U.S. Government obligations, Commodity risk, credit risk, increased liabilities associated with certain reinsurance agreements, foreign exchange risks and fluctuations in the FTSE and S&P indexes. In addition, LNC 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 (in millions) 1998 1997 1998 1998 1997 1997 - ------------------------------------------------------------------------------------------------------------------ Interest rate derivatives: Interest rate cap agreements.............. $4,108.8 $4,900.0 $ 9.3 $ .9 $13.9 $ .9 Swaptions................................. 1,899.5 1,752.0 2.5 2.5 6.9 6.9 Interest rate swap agreements............. 258.3 10.0 9.9 9.9 .2 .2 Put options............................... 21.3 -- 2.2 2.2 -- -- --------- -------- ----- ----- ----- ----- Total interest rate derivatives........ 6,287.9 6,662.0 23.9 15.5 21.0 8.0 Foreign currency derivatives: Forward exchange forward contracts: Foreign investments..................... 1.5 163.1 * * 5.4 5.4 Foreign currency swaps.................... 47.2 15.0 .3 .3 (2.1) (2.1) ---- ------ ----- ----- --- --- Total foreign currency derivatives..... 48.7 178.1 .3 .3 3.3 3.3 Commodity derivatives: Commodity swap............................ 8.1 -- 2.4 2.4 -- -- Equity indexed derivatives: Call options (based on FTSE).............. 11.1 14.1 11.7 11.7 13.5 13.5 Call options (based on S&P)............... 79.9 5.3 23.1 23.1 1.1 1.1 Total derivatives...................... $6,435.7 $6,859.5 $61.4 $53.0 $38.9 $25.9 *Less than $100,000.
58 A reconciliation of the notional or contract amounts for the significant programs using derivative agreements and contracts is as follows:
Interest Rate Spread-Lock Cap Agreements Swaptions Agreements December 31 (in millions) 1998 1997 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------ Balance at beginning-of-year............ $4,900.0 $5,500.0 $1,752.0 $ 672.0 $ -- $ -- New contracts........................... 708.8 -- 218.3 1,080.0 -- 50.0 Terminations and maturities............. (1,500.0) (600.0) (70.8) -- -- (50.0) ------- -------- ------ -------- --- ---- Balance at end-of-year............... $4,108.8 $4,900.0 $1,899.5 $1,752.0 $ -- $ --
Financial Futures Interest Rate Contracts Swap Agreements Put Options December 31 (in millions) 1998 1997 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------------------- Balance at beginning-of-year............ $ -- $ 147.7 $ 10.0 $ -- $ -- $ -- New contracts........................... -- 88.3 2,226.6 10.0 21.3 -- Terminations and maturities............. -- (236.0) (1,978.3) -- -- -- --- ------ ------- ----- ----- --- Balance at end-of-year................ $ -- $ -- $ 258.3 $10.0 $21.3 $ --
Foreign Currency Derivatives (Foreign Investments) Foreign Exchange Foreign Foreign Forward Currency Currency Contracts Options Swaps December 31 (in millions) 1998 1997 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------ Balance at beginning-of-year............ $ 163.1 $ 251.6 $ -- $ 50.2 $15.0 $15.0 New contracts........................... 419.8 833.1 -- -- 39.2 -- Terminations and maturities............. (581.4) (921.6) -- (50.2) (7.0) -- ----- ------- ---- ----- ---- ------ Balance at end-of-year............... $ 1.5 $ 163.1 $ -- $ -- $47.2 $15.0
Commodity Call Options Call Options Swap (Based on FSTE) (Based on S&P) December 31 (in millions) 1998 1997 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Balance at beginning-of-year............ $ -- $ -- $14.1 $14.7 $ 5.3 $ -- New contracts........................... 8.1 -- -- -- 74.6 5.3 Terminations and maturities............. -- -- (3.1) -- -- -- Foreign exchange adjustment............. -- -- .1 (.6) -- -- ---- --- ----- ---- ----- ---- Balance at end-of-year............... $8.1 $ -- $11.1 $14.1 $79.9 $5.3
Interest Rate Cap Agreements. the interest rate cap agreements, which expire in 1999 through 2006, entitle LNC to receive quarterly payments from the counterparties on specified future reset dates, contingent on future interest rates. For each cap, the amount of such quarterly payments, if any, is determined by the excess of a market interest rate over a specified cap rate multiplied by the notional amount divided by four. The purpose of LNC's interest rate cap agreement program is to protect its annuity line of business from the effect of rising interest rates. The premium paid for the interest rate caps is included in other investments ($9,300,000 as of December 31, 1998) and is being amortized over the terms of the agreements. This amortization is included in net investment income. Swaptions. Swaptions, which expire in 1999 through 2003, entitle LNC 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 LNC'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 $16,200,000 as of December 31, 1998) and is being amortized over the terms of the agreements. This amortization is included in net investment income. Spread-Lock Agreements. Spread-lock agreements provide for a lump sum payment to or by LNC, depending on whether the spread between the swap rate and a specified Government note is larger or smaller than a contractually specified spread. Cash payments are based on the product of the notional amount, the spread between the swap rate and the yield of an equivalent maturity Government security, and the price sensitivity of the swap at that time. The purpose of LNC's spread-lock program is to protect a portion of its fixed maturity securities against widening spreads. 59 Financial Futures Contracts. LNC uses exchange-traded financial futures contracts to hedge against interest rate risks and to manage duration of a portion of its fixed maturity securities. Financial futures contracts obligate LNC to buy or sell a financial instrument at a specified future date for a specified price. They may be settled in cash or through delivery of the financial instrument. Cash settlements on the change in market values of financial futures contracts are made daily. Interest Rate Swap Agreements. LNC 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 interests rates. LNC is required to pay the counterparty to the agreements the stream of variable coupon payments generated from the bonds, and in turn, receives a fixed payment from the counterpart, at a predetermined interest rate. The net receipts/payments from interest rate swaps are recorded in net investment income. LNC 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. Once the assets are purchased the gains resulting from the termination of the swap agreements will be applied to the basis of the assets. The gains will be recognized in earnings over the life of the assets. Put Options. LNC uses put options, combined with various perpetual fixed income securities, and interest rate swaps to replicate a fixed income, fixed maturity investment. The put options give LNC the right, but not the obligation, to sell to the counterparty of the agreement the specified securities on a specified date at a fixed price. Foreign Currency Derivatives (Foreign Investments). LNC uses a combination of foreign exchange forward contracts, foreign currency options and foreign currency swaps, all of which are traded over-the-counter, to hedge some of the foreign exchange risk of investments in fixed maturity securities denominated in foreign currencies. The foreign currency forward contracts obligate LNC to deliver a specified amount of currency at a future date at a specified exchange rate. Foreign currency options give LNC the right, but not the obligation, to buy or sell a foreign currency at a specified exchange rate during a specified time period. A foreign currency swap is a contractual agreement to exchange the currencies of two different countries pursuant to an agreement to re-exchange the two currencies at the same rate of exchange at a specified future date. Foreign Exchange Forward Contracts (Foreign Subsidiary). LNC has used foreign exchange forward contracts, which are traded over-the-counter, to hedge the foreign exchange risk assumed with its investment in its U.K. subsidiary, Lincoln National (UK). The foreign exchange forward contracts obligated LNC to deliver a specified amount of currency at a future date at a specified exchange rate. Commodity Swap. LNC uses a commodity swap to hedge its exposure to fluctuations in the price of gold, which is the underlying variable in determining the periodic interest payments associated with a fixed income security. A commodity swap is a contractual agreement to exchange a certain amount of a particular commodity for a fixed amount of cash. LNC owns a fixed income security that meets its coupon payment obligations in gold bullion. LNC is obligated to pay to the counterparty the gold bullion, and in return receives from the counterparty a stream of fixed income payments. The fixed income payments are the product of the swap notional multiplied by the fixed rate stated in the swap agreement. The net receipts/payments from commodity swaps are recorded in net investment income. Call Options. LNC uses both FTSE index and S&P 500 index call options. Call options which expire in 1999 through 2006, provide LNC with settlement payments from the counterparties on specified expiration dates. The payment, if any, is the percentage increase in the index, over the strike price defined in the contract, applied to the notional amount. The purpose of LNC's FTSE call option program is to offset the cost of increases in the liabilities of certain single premium investment contracts which are tied to the FTSE index. The purpose of LNC's S&P 500 call option program is to offset the increase in its liabilities resulting from certain reinsurance agreements which guarantee payment of the appreciation of the S&P 500 index on certain underlying annuity products. The premium paid for the S&P 500 index call options is included in other assets ($16,800,000 as of December 31, 1998) and is being amortized over the terms of the agreements. This amortization is included in net investment income. Additional Derivative Information. Expenses for the agreements and contracts described above amounted to $11,600,000 and $10,000,000 in 1998 and 1997, respectively. Deferred gains of $64,800,000 as of December 31, 1998, were the result of: 1) terminated and expired spread-lock agreements and; 2) terminated 60 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. LNC is exposed to credit loss in the event of nonperformance by counterparties on interest rate cap agreements, swaptions, spread-lock agreements, interest rate swaps, commodity swaps, call options, put options, foreign exchange forward contracts, foreign currency options and foreign currency swaps. However, LNC does not anticipate nonperformance by any of the counterparties. The credit risk associated with such agreements is minimized by purchasing such agreements from financial institutions with long-standing, superior performance records. The amount of such exposure is essentially the net replacement cost or market value for such agreements with each counterparty if the net market value is in LNC's favor. At December 31, 1998, the exposure was $53,000,000. 8. Fair Value of Financial Instruments The following discussion outlines the methodologies and assumptions used to determine the estimated fair value of LNC'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 LNC's financial instruments. Fixed Maturity and Equity Securities. Fair values for fixed maturity securities are based on quoted market prices, where available. For fixed maturity securities 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 for equity securities are based on quoted market prices. Mortgage Loans on Real Estate. The estimated fair value of mortgage loans on real estate was established using a discounted cash flow method based on credit rating, maturity and future income. 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 value of investments in policy loans was calculated on a composite discounted cash flow basis using Treasury interest rates consistent with the maturity durations assumed. These durations were based on historical experience. Other Investments, and Cash and Invested Cash. The carrying value for assets classified as other investments, and cash and invested cash in the accompanying balance sheets approximates their fair value. Investment Type Insurance Contracts. The balance sheet captions, "Future Policy Benefits, Claims and Claim Expenses" and "Contractholder Funds," include investment type insurance contracts (i.e. deposit contracts and guaranteed interest contracts). The fair values for the deposit contracts and certain guaranteed interest contracts are based on their approximate surrender values. The fair values for the remaining guaranteed interest and similar contracts are estimated using discounted cash flow calculations. These calculations are based on interest rates currently offered on similar contracts with maturities that are consistent with those remaining for the contracts being valued. The remainder of the balance sheet captions "Future Policy Benefits, Claims and Claim Expenses" and "Contractholder 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 LNC. It is LNC'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 LNC's shareholders' equity 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. LNC and other companies in the insurance industry are monitoring the related actions of the various rule-making bodies and attempting to determine an appropriate methodology for estimating and disclosing the "fair value" of their insurance contract liabilities. Short-term and Long-term Debt. Fair values for long-term debt issues are based on quoted market prices or estimated using discounted cash flow analysis based on LNC's current incremental borrowing rate for 61 similar types of borrowing arrangements where quoted prices are not available. For short-term debt, the carrying value approximates fair value. Minority Interest - Preferred Securities of Subsidiary Companies. Fair values for minority interest- preferred securities of subsidiary companies are based on quoted market prices less the unamortized cost of issue. Guarantees. LNC's guarantees include guarantees related to industrial revenue bonds, real estate partnerships and mortgage loan pass-through certificates. Based on historical performance where repurchases have been negligible and the current status, which indicates none of the loans are delinquent, the fair value liability for the guarantees related to the mortgage loan pass-through certificates is insignificant. Derivatives. LNC 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: 1) quoted market prices for foreign currency exchange contracts and financial futures contracts 2) industry standard models that are commercially available for interest rate cap agreements, swaptions, spread-lock agreements, interest rate swaps, commodity swaps and put options. 3) Monte Carlo techniques are used for the exotic equity call options. These techniques project cash flows of the derivatives using current and implied future market conditions. The cash flows are then present valued to arrive at the derivatives current fair market value. 4) Black-Scholes pricing methodology for standard European equity call options. Investment Commitments. Fair values for commitments to make investments 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 consolidated balance sheets at fair value. The related liabilities are also reported at fair value in amounts equal to the separate account assets. The carrying values and estimated fair values of LNC's financial instruments are as follows:
Carrying Fair Carrying Fair Value Value Value Value December 31 (in millions) 1998 1998 1997 1997 - ------------------------------------------------------------------------------------------------------------------- Assets (liabilities): Fixed maturities securities........................ $30,232.9 $30,232.9 $24,066.4 $24,066.4 Equity securities.................................. 542.8 542.8 660.4 660.4 Mortgage loans on real estate...................... 4,393.1 4,580.4 3,288.1 3,473.5 Policy loans....................................... 1,840.0 1,938.4 763.1 754.4 Other investments.................................. 432.0 432.0 464.8 464.8 Cash and invested cash............................. 2,433.4 2,433.4 3,794.7 3,794.7 Investment type insurance contracts: Deposit contracts and certain guaranteed interest contracts.................. (18,746.3) (18,419.8) (17,844.6) (17,489.1) Remaining guaranteed interest and similar contracts........................... (1,444.9) (1,433.8) (2,032.0) (2,010.0) Short-term debt.................................... (314.6) (314.6) (297.2) (297.2) Long-term debt..................................... (712.2) (748.7) (511.0) (541.7) Minority interest-preferred securities of subsidiary companies................ (745.0) (744.4) (315.0) (322.9) Guarantees......................................... -- -- (.8) -- Derivatives........................................ 61.4 53.0 38.9 25.9 Investment commitments............................. -- .1 -- .3
As of December 31, 1998 and 1997, the carrying value of the deposit contracts and certain guaranteed contracts is net of deferred acquisition costs of $52,600,000 and $96,400,000, respectively, excluding adjustments for deferred acquisition costs applicable to changes in fair value of securities. The carrying values of these contracts are stated net of deferred acquisition costs so that they are comparable with the fair value basis. 62 9. Segment Information LNC has four business segments: Life Insurance and Annuities, Lincoln UK, Reinsurance and Investment Management. The Life Insurance and Annuities segment offers annuities, universal life, pension products and other individual coverages through a network of career agents, independent general agencies, and insurance agencies located within a variety of financial institutions. These products are sold throughout the United States. The Lincoln UK segment offers similar products within the United Kingdom through sales representatives. Reinsurance sells reinsurance products and services to insurance companies, HMOs, self-funded employers and other primary risk accepting organizations in the U.S. and economically attractive international markets. The Investment Management segment offers a variety of asset management services to institutional and retail customers primarily throughout the United States. Activity which is not included in the major business segments is shown as "Other Operations." "Other Operations" includes operations not directly related to the business segments and unallocated corporate items (i.e., corporate investment income, interest expense on corporate debt and unallocated overhead expenses). LNC's other operations also includes data for its investment management company that services LNC's business segments. Financial data by segment for 1996 through 1998 is as follows:
Year Ended December 31 (in millions) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------- Revenue, Excluding Net Investment Income and Realized Gain (Loss) on Investments and Subsidiaries: Life Insurance and Annuities..................................... $1,495.6 $ 867.0 $ 755.9 Lincoln UK....................................................... 350.8 340.1 311.4 Reinsurance...................................................... 1,267.5 1,073.7 1,279.2 Investment Management............................................ 301.3 257.7 215.0 Other Operations (includes consolidating adjustments)............ (28.5) (13.4) (8.3) -------- -------- ------- Total........................................................ $3,386.7 $2,525.1 $2,553.2 Net Investment Income: Life Insurance and Annuities..................................... $2,249.0 $1,842.4 $1,741.7 Lincoln UK....................................................... 87.9 85.1 82.0 Reinsurance...................................................... 307.8 284.4 263.7 Investment Management............................................ .2 .5 .7 Other Operations................................................. 36.5 38.4 (.2) -------- -------- ------- Total........................................................ $2,681.4 $2,250.8 $2,087.9 Realized Gain (Loss) on Investments and Subsidiaries: Life Insurance and Annuities..................................... $ 6.7 $ 82.1 $65.5 Lincoln UK....................................................... 1.1 2.1 (.2) Reinsurance...................................................... 1.5 23.6 18.1 Investment Management............................................ 1.2 5.9 8.1 Other Operations................................................. 8.5 8.9 1.0 ----- ------ ----- Total........................................................ $19.0 $122.6 $92.5 Net Income (Loss) from Continuing Operations before Federal Income Taxes: Life Insurance and Annuities..................................... $518.9 $397.3 $346.7 Lincoln UK....................................................... 106.9 (96.8) 101.5 Reinsurance...................................................... 156.7 (210.2) 131.1 Investment Management............................................ 39.4 20.9 32.4 Other Operations (includes interest expense)..................... (124.5) (76.3) (107.6) ----- ------- ------ Total........................................................ $697.4 $ 34.9 $504.1
63
Year Ended December 31 (in millions) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Income Tax Expense (Benefit): Life Insurance and Annuities..................................... $131.4 $ 94.0 $ 95.7 Lincoln UK....................................................... 35.2 10.0 35.5 Reinsurance...................................................... 54.5 (73.8) 45.4 Investment Management............................................ 17.9 13.1 17.0 Other Operations................................................. (51.4) (30.6) (45.9) ----- ---- ----- Total........................................................ $187.6 $ 12.7 $147.7 Net Income (Loss) from Continuing Operations: Life Insurance and Annuities..................................... $387.5 $303.3 $251.0 Lincoln UK....................................................... 71.7 (106.8) 66.0 Reinsurance...................................................... 102.2 (136.4) 85.7 Investment Management............................................ 21.5 7.8 15.4 Other Operations (includes interest expense)..................... (73.1) (45.7) (61.7) ----- ------- ------ Total Net Income from Continuing Operations.................. 509.8 22.2 356.4 Discontinued Operations.......................................... -- 911.8 157.2 ------ ------- ------ Total Net Income............................................. $509.8 $934.0 $513.6
December 31 (in millions) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Assets: Life Insurance and Annuities..................................... $77,797.9 $60,604.4 $53,089.3 Lincoln UK....................................................... 8,757.3 7,923.8 7,331.8 Reinsurance...................................................... 6,408.0 5,540.2 5,196.1 Investment Management............................................ 698.3 697.4 623.4 Other Operations................................................. 174.8 2,408.9 (9.9) --------- --------- --------- Sub-total..................................................... 93,836.3 77,174.7 66,230.7 Discontinued Operations.......................................... -- -- 5,482.7 --------- ---------- --------- Total......................................................... $93,836.3 $77,174.7 $71,713.4
Substantially all of LNC's foreign operations are conducted by Lincoln National (UK) plc, a United Kingdom company. The data for this company is shown above under the Lincoln UK segment heading. Foreign intracompany revenue is not significant. All earnings from LNC's U.K. operations have been retained in the U.K. 10. Shareholders' Equity LNC's common and preferred stock is without par value. All of the issued and outstanding series A preferred stock is $3 Cumulative Convertible and is convertible at any time into shares of common stock. The conversion rate is eight shares of common stock for each share of series A preferred stock, subject to adjustment for certain events. The series A preferred stock is redeemable at the option of LNC at $80 per share plus accrued and unpaid dividends. Outstanding series A preferred stock has full voting rights, subject to adjustment if LNC is in default as to the payment of dividends. If LNC is liquidated or dissolved, holders of series A preferred stock will be entitled to payments of $80.00 per share. The difference between the aggregate preference on liquidation value and the financial statement balance for the series A preferred stock was $1,554,000 at December 31, 1998. LNC has outstanding one common share purchase right ("Right") on each outstanding share of LNC's common stock. A Right will also be issued with each share of LNC's common stock that is issued before the Rights become exercisable or expire. If a person or group announces an offer that would result in beneficial ownership of 15% or more of LNC's common stock, the Rights will become exercisable and each Right will entitle its holder to purchase one share of LNC's common stock for $200. Upon the acquisition of 15% or more of LNC's common stock, each holder of a Right (other than the person acquiring the 15% or more) will have the right to acquire the number of shares of LNC common stock that have a market value of two times the exercise price of the Right. If LNC is acquired in a business combination transaction in which LNC does not survive, each holder of a Right (other than the acquiring person) will have the right to acquire common stock of the acquiring person having a market value of two times the exercise price of the Right. LNC can redeem each Right for one cent at any time prior to the tenth day after a person or group has acquired 15% or more of LNC's common stock. The Rights expire on November 14, 2006. As of December 31, 1998, there were 101,055,587 Rights outstanding. 64 During 1998, 1997 and 1996, LNC purchased and retired 623,281; 4,948,900 and 694,582 shares, respectively, of its common stock at a total cost of $46,900,000; $325,300,000 and $35,000,000, respectively. The common stock account was reduced for these purchases in proportion to the percentage of share acquired. The remainder of the purchase price was charged to retained earnings. Per share amounts for net income from continuing operations are shown on the income statement using 1) an earnings per common share basic calculation and 2) an earnings per common share-assuming dilution calculation. A reconciliation of the factors used in the two calculations are as follows:
Year Ended December 31 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Numerator: [in millions] Net income from continuing operations, as used in basic calculation................................. $509.7 $22.1 $356.3 Dividends on convertible preferred stock...................... .1 .1 .1 ----- ---- ----- Net income from continuing operations, as used in diluted calculation......................... $509.8 $22.2 $356.4 Denominator: [number of shares] Weighted average shares, as used in basic calculation......... 100,357,079 102,495,557 103,828,451 Shares to cover conversion of preferred stock................. 271,019 287,077 307,784 Shares to cover restricted stock.............................. 228,288 208,664 423,112 Average stock options outstanding during the year............. 3,195,155 3,199,539 2,979,244 Assumed acquisition of shares with assumed proceeds and tax benefits from exercising stock options (at average market price during the year).................... (2,420,314) (2,194,950) (2,167,199) --------- --------- --------- Weighted-average shares, as used in diluted calculation.................................. 101,631,227 103,995,887 105,371,392
LNC has stock options outstanding which were issued at prices that are above the current average market price of LNC common stock. In the event the average market price of LNC's common stock exceeds the issue price of stock options, such options would be dilutive to LNC's earnings per share and will be shown in the table above. Also, LNC has purchase contracts outstanding which require the holder to purchase LNC common stock by August 16, 2001. These purchase contracts were issued in conjunction with the FELINE PRIDES financing. The common shares involved are not currently dilutive to LNC's earnings per share and will not be dilutive in the future except during periods when the average market price of LNC's common stock exceeds a stated threshold price of $111.45 per share. Details underlying the balance sheet caption "Net Unrealized Gain (Loss) on Securities Available-for-Sale," are as follows:
December 31 (in millions) 1998 1997 - ----------------------------------------------------------------------------------------------------------------- Fair value of securities available-for-sale............................. $30,775.7 $24,726.8 Cost of securities available-for-sale................................... 29,076.3 23,143.2 -------- ---------- Unrealized gain.................................................... 1,699.4 1,583.6 Adjustments to deferred acquisition costs............................... (244.6) (355.9) Amounts required to satisfy policyholder commitments.................... (665.0) (571.1) Deferred income credits (taxes).......................................... (251.1) (207.6) ----- --------- Net unrealized gain on securities available-for-sale for continuing operations...................... 538.7 449.0 Change in fair value of derivatives designated as a hedge (classified as other investment)....................................... 13.7 (13.0) -------- ---------- Net unrealized gain on securities available for sale............... $ 552.4 $ 436.0
Adjustments to deferred acquisition costs and amounts required to satisfy policyholder commitments are netted against the Deferred Acquisition Costs asset line and included within the Insurance Policy and Claim Reserves line on the balance sheet, respectively. 65 The "Net Unrealized Gain (Loss) on Securities Available-for-Sale" shown above is net of realized gain (loss) on investments. Following is the detail of the realized gain (loss) on investments and gross unrealized gain (loss) on securities available-for-sale:
Year Ended December 31 (in millions) 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Continuing operations: Pre-tax realized gain (loss) on securities available-for-sale................ $ 19.0 $112.2 Federal income taxes @ 35%................................................... 6.7 39.3 ---- ----- Realized gain (loss) on securities available-for-sale................... $ 12.3 $ 72.9 Discontinued operations: Pre-tax realized gain (loss) on securities available-for-sale................ $ -- $ 38.2 Federal income taxes @ 35%................................................... -- 13.4 ------ ---- Realized gain (loss) on securities available-for-sale.................... $ -- $ 24.8 Previously unrealized gains on securities that became realized at time of sale of discontinued operations: Pre-tax...................................................................... $ -- $271.7 After-tax.................................................................... -- 176.6 Gross unrealized gain (loss) on securities available- for-sale arising during the year: Pre-tax...................................................................... $179.1 $256.9 After-tax.................................................................... 116.4 197.0
11. Acquisitions/Sales of Subsidiaries, Discontinued Operations and Organizational Review In May 1996, 16.7% of American States Financial Corporation ("ASFC"), the holding company of LNC's principal property-casualty subsidiary, was sold to the public in the form of an initial public offering of its common stock. ASFC received net proceeds of $215,200,000 from the sale of this 16.7% minority interest and LNC recorded a non-taxable realized gain, net of expenses, directly in shareholders' equity of $15,000,000. LNC continued to fully consolidate this operation within its financial statements and tax reporting until the sale of the remaining 83.3% (see below). In October 1996, LNC purchased a block of group tax-qualified annuity business from UNUM Corporation's affiliates. The bulk of the transaction was completed in the form of a reinsurance transaction, which resulted in a ceding commission of $71,800,000. The ceding commission, along with $67,000,000 to cover expenses associated with the purchase, represents the present value of business in-force and accordingly has been classified as an intangible asset. LNC's assets and liabilities increased $3,200,000,000 as a result of this transaction. In April 1997, LNC completed the acquisition of Voyageur Fund Managers, Inc. ("Voyageur") for $74,000,000. While this includes cash paid out for expenses associated with the purchase, the bulk of the purchase price was covered by the issuance of 1,323,144 shares of LNC common stock to the previous owners of Voyageur. Purchase accounting has been applied to this acquisition resulting in intangible assets of $78,900,000. Voyageur's operating results are included in LNC's consolidated financial statements from the closing date. On June 9, 1997, LNC announced that it agreed to sell its 83.3% ownership in American States Financial Corporation for $2,650,000,000. As this sale resulted in an exit from the property-casualty business (previously a business segment), the financial data from the units being sold are shown as discontinued operations in the accompanying financial statements. June 9, 1997, is the measurement date for purposes of discontinued operations. Following the closing of this transaction on October 1, 1997, the gain on sale of $776,900,000 ($1,224,500,000 pre-tax) was recorded within discontinued operations. LNC used these proceeds to repurchase $341,800,000, (4,993,281 shares) of its own common stock, retire $86,700,000 of long-term debt, purchase a 49% ownership in Seguros Serfin Lincoln for $85,000,000 pay income taxes of $447,600,000 related to the sale of discontinued operations and purchase a block of individual life insurance and annuity business for $1,642,500,000 (see below). The remainder was used to pay off a portion of LNC's short-term debt and to invest for general corporate purposes, then later used to fund a portion of the purchase of another block of individual life insurance business. 66 Net Income from discontinued operations was as follows: Nine Months Year Ended Ended September December 31 (in millions) 30, 1997 1996 - -------------------------------------------------------------------------------- Revenue . . . . . . . . . . . . . . . . . $1,538.5 $1,987.7 Benefits and expenses.................... 1,363.6 1,799.0 ------- ------- Pre-tax net income.................... 174.9 188.7 Federal income taxes...................... 40.0 31.5 -------- -------- Net income............................ $ 134.9 $ 157.2 On January 2, 1998, LNC acquired of a block of individual life insurance and annuity business from CIGNA Corporation for $1,414,000,000. Additional funds ($228,500,000) were required to provide additional capital for the Life Insurance and Annuities segment to support this business and to cover expenses associated with the purchase. Funding used to complete this acquisition was from the proceeds of the sale of the property-casualty business in 1997 (see note 11 on page 65). This transaction was accounted for using purchase accounting and, accordingly, operating results generated by this block of business after the closing date are included in LNC's consolidated financial statements. At the time of closing, this block of business had liabilities, measured on a statutory basis, of $5,500,000,000 that became LNC's obligation. LNC also received assets measured on a historical statutory basis, equal to the liabilities. Subsequent to this acquisition, LNC announced that it 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 acquired January 2, 1998. This sale closed on October 12, 1998 with an effective date of August 1, 1998. The application of purchase accounting to this block of business, net of the administration rights sold, resulted in goodwill and other intangible assets of $807,000,000 and $464,000,000, respectively. Pursuant to the terms of the acquisition agreement LNC and CIGNA are in the final stages of agreeing to the value of these assets and liabilities. Any changes to these values that may occur in future periods will not be material to LNC's financial position. In connection with the completion of this acquisition, LNC recorded a charge to its Life Insurance and Annuities segment during the first quarter of 1998 of $20,000,000 ($31,000,000 pre-tax). This restructuring charge covered certain costs of integrating the existing operations with the new block of business. On October 1, 1998, LNC acquired a block of individual life insurance from Aetna, Inc for $1,000,000,000. Funding used to complete this acquisition was primarily from public securities offered in 1998 (see note 5 on page 51). This transaction was accounted for using purchase accounting and, accordingly, the operating results generated by this block of business after the closing date are included in LNC's consolidated financial statements. At the time of closing this block of business had liabilities measured on a statutory basis, of $3,300,000,000 that became LNC's obligation. LNC also received assets, measured on a historical statutory basis, equal to the liabilities. In August of 1998, LNC announced that it had reached an agreement to sell the sponsored life business acquired as part of the Aetna block of business. This sale closed on October 14, 1998 with an effective date of October 1, 1998 at a sales price of $99,500,000. During 1997, after deducting the sponsored life income statement amounts, the Aetna block produced premiums and fees of $227,800,000 and earnings of $65,000,000 on a basis of generally accepted accounting principles (prior to adjustments required by purchase accounting). The initial application of purchase accounting to this block of business, net of the sponsored life business resulted in goodwill and other intangibles of $220,000,000 and $871,000,000, respectively. Additional analysis of this block of business may result in a change in the amounts or the shifting of amounts between goodwill and other intangible assets. The consolidated proforma results of operations shown below assumes that the two blocks of business described in the preceding paragraphs were purchased on January 1, 1997.
(unaudited) Year Ended December 31 (in millions, except per share data) 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... $6,469.4 $6,366.4 Net income from continuing operations........................................... 547.3 145.5 Net income...................................................................... 547.3 1,057.3 Net income from continuing operation per diluted share.......................... $ 5.38 $ 1.40 Net income per diluted share.................................................... 5.38 10.17
This proforma financial information is not necessarily indicative of the actual results that would have occurred had the purchases been made on January 1, 1997 or of the results which may occur in the future. 67 As noted above, LNC has been involved in a series of divestitures and acquisitions during the last few years. These changes, along with on-going and increasing competitive pressures within the business LNC operates in, led to a decision to initiate an organizational/expense review. This review, which centered around the size and make-up of the parent company, was completed in the fourth quarter of 1998. As a result, LNC recorded a restructuring charge of $14,300,000 ($22,000,000 pre-tax) in the fourth quarter of 1998 to provide severance for the personnel that were eliminated and to cover costs associated with the resulting excess office space and equipment. Report of Ernst & Young LLP, Independent Auditors Board of Directors Lincoln National Corporation We have audited the accompanying consolidated balance sheets of Lincoln National Corporation as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lincoln National Corporation at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Ernst & Young LLP Fort Wayne, Indiana February 1, 1999 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures There have been no disagreements with LNC's independent auditors which are reportable pursuant to Item 304 of Regulation S-K. 68 PART III Item 10. Directors and Executive Officers of the Registrant Information for this item relating to directors of LNC is incorporated by reference to the sections captioned "NOMINEES FOR DIRECTOR", "DIRECTORS CONTINUING IN OFFICE" and "COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES AND EXCHANGE ACT OF 1934", of LNC's Proxy Statement for the Annual Meeting scheduled for May 13, 1999.
Executive Officers of the Registrant as of March 1, 1999 were as follows: Name Age** Position with LNC and Business Experience During the Past Five Years Jon A. Boscia, 47 President, Chief Executive Officer and Director, LNC (since November 1998). President and Director, LNC (since January 1998). Chief Executive Officer, Lincoln Life* (1996 - January, 1998). President, Chief Operating Officer, Lincoln Life* (1994-1996). Executive Vice President, LNC (1991-1994). President, Lincoln National Investment Companies ("LNIC")* (1991-1994). Bernard G. Brown 48 Managing Director, Lincoln National (UK)* (since January 1998). Operations Director, Lincoln National (UK)* (1995 - January 1998). Managing Director, Liberty Life Assurance Company, Ltd. (1992- 1995). George E. Davis 56 Senior Vice President, LNC (since 1993). Jack D. Hunter 62 Executive Vice President, LNC (since 1986). General Counsel (since 1971). Barbara S. Kowalczyk 48 Senior Vice President, LNC (since 1994). Senior Vice President, LNIC* (1992-1994). H. Thomas McMeekin 46 Executive Vice President, LNC (since 1994). President, LNIC* (1994- 1996). Senior Vice President, LNC (1992-1994). Jeffrey J. Nick 46 President and Chief Executive Officer, LNI* (since 1996). Managing Director, Lincoln National (UK)* (1992-1996). Lawrence T. Rowland 47 President and Chief Executive Officer, Lincoln National Reassurance Company* and other Lincoln Re affiliates* (since 1996). Senior Vice President, LNRC* (1995-1996). Vice President, Lincoln Re* (1991- 1994). Gabriel L. Shaheen 45 President and Chief Executive Officer, Lincoln Life* (since January 1998). Managing Director, Lincoln National (UK)* (1996 - January 1998). President and Chief Executive Officer, Lincoln Re* (1994-1996). Senior Vice President, Lincoln Life* (1991-1994). Donald L. Van Wyngarden 59 Second Vice President and Controller, LNC (since 1975). Richard C. Vaughan 49 Executive Vice President and Chief Financial Officer, LNC (since 1995). Senior Vice President and Chief Financial Officer, LNC (1992-1994).
* Denotes a subsidiary of LNC ** Age shown is based on nearest birthdate to March 1, 1999. There is no family relationship between any of the foregoing executive officers, all of whom are elected annually. 69 Item 11. Executive Compensation Information for this item is incorporated by reference to the section captioned "EXECUTIVE COMPENSATION" of LNC's Proxy Statement for the Annual Meeting scheduled for May 13, 1999. Item 12. Security Ownership of Certain Beneficial Owners and Management Information for this item is incorporated by reference to the sections captioned "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" and "SECURITY OWNERSHIP OF DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS" of LNC's Proxy Statement for the Annual Meeting scheduled for May 13, 1999. Item 13. Certain Relationships and Related Transactions Information for this item is incorporated by reference to the section captioned "TERMINATION OF EMPLOYMENT ARRANGEMENT" of LNC's Proxy Statement for the Annual Meeting scheduled for May 13, 1999. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K Item 14(a)(1) Financial Statements The following consolidated financial statements of Lincoln National Corporation are included in Item 8: Consolidated Balance Sheets - December 31, 1998 and 1997 Consolidated Statements of Income - Years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Shareholders' Equity - Years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows - Years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements Report of Ernst & Young LLP, Independent Auditors Item 14(a)(2) Financial Statement Schedules The following consolidated financial statement schedules of Lincoln National Corporation are included in Item 14(d): I - Summary of Investments - Other than Investments in Related Parties II - Condensed Financial Information of Registrant III - Supplementary Insurance Information IV - Reinsurance V - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the required information is included in the consolidated financial statements, and therefore omitted. 70 Item 14(a)(3) Listing of Exhibits The following exhibits of Lincoln National Corporation are included in Item 14 - Note: The numbers preceding the exhibits correspond to the specific numbers within Item 601 of Regulation S-K.): 3(a) The Articles of Incorporation of LNC as last amended effective May 12, 1994. 3(b) The Bylaws of LNC as last amended January 14, 1998 is incorporated by reference to Exhibit 3(b) of LNC's Form 10-K for the year ended December 31, 1997, filed with the Commission on March 18, 1998. 4(a) Indenture of LNC dated as of January 15, 1987 is incorporated by reference to Exhibit 4(a) of LNC's Form 10-K for the year ended December 31, 1994, filed with the Commission on March 27, 1995. 4(b) First Supplemental Indenture dated as of July 1, 1992, to Indenture of LNC dated as of January 15, 1987 is incorporated by reference to Exhibit 4(b) of LNC's Form 10-K for the year ended December 31, 1996, filed with the Commission on March 13, 1997. 4(c) Specimen Notes for 7 1/8% Notes due July 15, 1999 and for 7 5/8% Notes due July 15, 2002 are incorporated by reference to Exhibit 4(c) of LNC's Form 10-K for the year ended December 31, 1996, filed with the Commission on March 13, 1997. 4(d) Rights Agreement of LNC as last amended November 14, 1996 is incorporated by reference to LNC's Form 8-K filed with the Commission on November 22, 1996. 4(e) Indenture of LNC dated as of September 15, 1994, between LNC and The Bank of New York, as Trustee. 4(f) Form of Note is incorporated by reference to Exhibit No.4(d) to LNC's Registration Statement on Form S-3/A (Commission File No. 33-55379), filed with the Commission on September 15, 1994. 4(g) Form of Zero Coupon Security is incorporated by reference to Exhibit No. 4(f) of LNC's Registration Statement on Form S-3/A (Commission File No. 33-55379), filed with the Commission on September 15, 1994. 4(h) Specimen of LNC's 9 1/8% Debentures due October 1, 2024 is incorporated by reference to Schedule I of LNC's Form 8-K filed with the Commission on September 29, 1994. 4(I) Specimen of LNC's 7 1/4% Debenture due May 15, 2005 is incorporated by reference to Schedule III of LNC's Form 8-K filed with the Commission on May 17, 1995. 4(j) Junior Subordinated Indenture dated as of May 1, 1996 between LNC and The First National Bank of Chicago is incorporated by reference to Exhibit 4(j) of LNC's Form 10-K for the year ended December 31, 1996, filed with the Commission on March 13, 1997. 4(k) Guarantee Agreement for Lincoln National Capital I is incorporated by reference to Exhibit 4(k) of LNC's Form 10-K for the year ended December 31, 1996, filed with the Commission on March 13, 1997. 4(l) Guarantee Agreement for Lincoln National Capital II is incorporated by reference to Exhibit 4(l) of LNC's form 10-K for the year ended December 31, 1996, filed with the Commission on March 13, 1997. 4(m) Form of Lincoln National Capital I 8.75% Cumulative Quarterly Income Preferred Securities, Series A (Commission File No. 333-04133) is incorporated by reference to Exhibit 4(m) to LNC's Form 10- K for the year ended December 31, 1996, filed with the Commission on March 13, 1997. 4(n) Form of Lincoln National Capital II 8.35% Trust Originated Preferred Securities, Series B (Commission File No. 333-04133) is incorporated by reference to Exhibit 4(n) to LNC's Form 10-K for the year ended December 31, 1996, filed with the Commission on March 13, 1997. 71 4(o) Form of Amended and Restated Declaration of Trust for Lincoln National Capital I and Lincoln National Capital II between LNC, as depositor, The First National Bank of Chicago, as property trustee, First Chicago Delaware, Inc., as Delaware trustee, and certain administrative trustees is incorporated by reference to Exhibit 4(o) of LNC's Registration Statement (Commission File No. 333-4133) filed with the commission on May 21, 1996. 4(p) Specimen of 6 1/2% Notes due March 15, 2008 incorporated by reference to Exhibit 4.1 LNC's Form 8-K filed with the commission on March 24, 1998. 4(q) Specimen of 7% Notes due March 15, 2018 incorporated by reference to Exhibit 4.2 of LNC's Form 8-K filed with the Commission on March 24, 1998. 4(r) Amended and Restated Trust Agreement for Lincoln National Capital III between LNC, as depositor, The First National Bank of Chicago, as property trustee, First Chicago Delaware, Inc. as Delaware trustee, and the administrative trustees is incorporated by reference to Exhibit 4.1 of LNC's Form 8-K filed with the Commission on July 30, 1998. 4(s) Form of 7.40% Trust Originated Preferred Securities, Series C, of Lincoln National Capital III is incorporated by reference to Exhibit 4.2 of LNC's Form 8-K filed with the Commission on July 30, 1998. 4(t) Guarantee Agreement for Lincoln National Capital III is incorporated by reference to Exhibit 4.4 of LNC's Form 8-K filed with the Commission on July 30, 1998. 4(u) Amended and Restated Trust Agreement for Lincoln National Capital IV between LNC, as depositor, The First National Bank of Chicago, a property trustee, First Chicago Delaware Inc., as Delaware trustee, and the administrative trustees is incorporated by reference to Exhibit 4.1 of LNC's Form 8-K filed with the Commission on August 27, 1998. 4(v) Form of Income Prides Certificate of Lincoln National Capital IV is incorporated by reference to Exhibit 4.7 of LNC's Form 8-K filed with the Commission on August 27, 1998. 4(w) Form of Growth Prides Certificates of Lincoln National Capital IV is incorporated by reference to Exhibit 4.8 of LNC's Form 8-K filed with the Commission on August 27, 1998. 4(x) Guarantee Agreement for Lincoln National Capital IV is incorporated by reference to Exhibit 4.5 of LNC's Form 8-K filed with the Commission on August 27, 1998. 4(y) Purchase Contract Agreement between LNC and The First National Bank of Chicago, as Purchase Contract Agent, relating to Lincoln National Capital IV is incorporated by reference to Exhibit 4.6 of LNC's Form 8-K filed with the Commission on August 27, 1998. 4(z) Pledge Agreement among LNC, The Chase Manhattan Bank, as agent, and The First National Bank of Chicago, as Purchase Agent, relating to Lincoln National Capital IV is incorporated by reference to Exhibit 4.9 of LNC's Form 8-K filed with the Commission on August 27, 1998. 10(a)* The Lincoln National Corporation 1986 Stock Option Incentive Plan. 10(b)* The Lincoln National Corporation Executives' Salary Continuation Plan as last amended January 1, 1992 is incorporated by reference to Exhibit 10(c) LNC's Form 10-K for the year ended December 31, 1997, filed with the Commission on March 18, 1998. 10(c)* The Lincoln National Corporation Executive Value Sharing Plan as Amended and Restated effective January 1, 1994. 10(d)* Lincoln National Corporation Executives' Severance Benefit Plan as Amended and Restated effective November 9, 1995 is incorporated by reference to Exhibit 10(e) of LNC's Form 10-K for the year ended December 31, 1995, filed with the Commission on March 27, 1996. 10(e)* The Lincoln National Corporation Outside Directors Retirement Plan as last amended effective March 15, 1990 is incorporated by reference to Exhibit 10(f) of LNC's Form 10-K for the year ended December 31, 1995, filed with the Commission on March 27, 1996. 10(f)* The Lincoln National Corporation Outside Directors Benefits Plan is incorporated by reference to Exhibit 10(g) of LNC's Form 10-K for the year ended December 31, 1997, filed with the Commission on March 18, 1998. 72 10(g)* Lincoln National Corporation Directors' Value Sharing Plan as last amended effective May 14, 1998 is incorporated by reference to Exhibit 10(6) of LNC's Form 10-Q for the quarter ended June 30, 1998, filed with the Commission on July 27, 1998. 10(h)* Lincoln National Corporation Executive Deferred Compensation Plan for Employees (Commission File No. 33-51721) as last amended effective February 16, 1998 is incorporated by reference to Exhibit 10(I) of LNC's Form 10-K for the year ended December 31, 1997, filed with the Commission on March 18, 1998. 10(I)* Lincoln National Corporation 1993 Stock Plan for Non-Employee Directors (Commission File No.33-58113) as last amended effective November 11, 1998. 10(j)* Lincoln National Corporation Executives' Excess Compensation Benefit Plan. 10(k)* Lincoln National Corporation 1997 Incentive Compensation Plan as last amended effective May 14, 1998 is incorporated by reference to Exhibit 10(a) of LNC's Form 10-Q for the quarter ended June 30, 1998, filed with the Commission on July 27, 1998. 10(l)* Descriptions of compensation arrangements with Executive Officers. 10(m) Lease and Agreement dated August 1, 1984, with respect to LNL's Home Office property located at Magnavox Way, Fort Wayne, Indiana are incorporated by reference to Exhibit 10(m) of LNC's Form 10-K for the year ended December 31, 1995, filed with the Commission on March 27, 1996. 10(n) Lease and Agreement dated August 1, 1984, with respect to LNL's Home Office properties located at Clinton Street and Harrison Street, Fort Wayne, Indiana are incorporated by reference to Exhibit 10(n) of LNC's Form 10-K for the year ended December 31, 1995, filed with the Commission on March 27, 1996. 10(o) Lease and Agreement dated December 1, 1994, with respect to LNC's Corporate Office located at 200 East Berry Street, Fort Wayne, Indiana, are incorporated by reference to Exhibit 10(p) of LNC's Form 10-K for the year ended December 31, 1994, filed with the Commission on March 27, 1995. 10(p) Agreement of Lease dated February 17, 1998, with respect to Lincoln Life's life products headquarters located at 350 Church Street, Hartford, Connecticut is incorporated by reference to Exhibit 10(q) of LNC's Form 10-K for the year ended December 31, 1997, filed with the Commission on March 18, 1998. *This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14 of this report. 12 Historical Ratio of Earnings to Fixed Charges. 21 List of Subsidiaries of LNC. 23 Consent of Ernst & Young LLP, Independent Auditors. 27 Financial Data Schedule. Item 14(b) During the fourth quarter of 1998, LNC filed a Form 8-K and Form 8-K/A with the Commission regarding LNC's acquisition of a block of individual life insurance from Aetna, Inc. These filings which were dated October 14, 1998 and December 14, 1998 include pro forma information and audited statements covering the business acquired. Item 14(c) The exhibits of Lincoln National Corporation are listed in Item 14(a)(3) above. Item 14(d) The financial statement schedules for Lincoln National Corporation follow on pages 73 through 79. 73 LINCOLN NATIONAL CORPORATION SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1998 (000s omitted) Column A Column B Column C Column D Amount at Which Shown in the Type of Investment Cost Value Balance Sheet Fixed maturity securities available-for-sale: Bonds: United States Government and government agencies and authorities.............................. $1,043,850 $1,134,614 $1,134,614 States, municipalities and political subdivisions....... 15,871 16,738 16,738 Asset/Mortgage-backed securities........................ 4,879,524 5,080,535 5,080,535 Foreign governments..................................... 1,240,113 1,321,175 1,321,175 Public utilities........................................ 3,130,998 3,325,448 3,325,448 Convertibles and bonds with warrants attached........... 25,214 24,325 24,325 All other corporate bonds............................... 18,133,334 19,155,425 19,155,425 Redeemable preferred stocks............................... 170,654 174,632 174,632 ----------- ----------- ----------- Total................................................. 28,639,558 30,232,892 30,232,892 Equity securities available-for-sale: Common stocks: Public utilities........................................ 20,913 24,466 24,466 Banks, trusts and insurance companies................... 37,777 41,990 41,990 Industrial, miscellaneous and all other................. 296,287 396,614 396,614 Nonredeemable preferred stocks.......................... 81,741 79,773 79,773 ----------- ---------- ---------- Total Equity Securities................................ 436,718 542,843 542,843 Mortgage loans on real estate............................... 4,397,876 4,393,082(1) Real estate: Investment properties................................... 470,095 470,095 Acquired in satisfaction of debt........................ 18,627 18,627 Policy loans................................................ 1,839,970 1,839,970 Other investments........................................... 431,964 431,964 ----------- ----------- Total Investments...................................... $36,234,808 $37,929,473
(1) Investments deemed to have declines in value that are other than temporary are written down or reserved for to reduce their carrying value to their estimated realizable value. 74 LINCOLN NATIONAL CORPORATION SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS
Lincoln National Corporation (Parent Company Only) December 31 (000s omitted) 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Assets: Investments in subsidiaries*........................................... $5,642,793 $5,341,786 Investments........................................................... 35,717 231,931 Investment in unconsolidated affiliate................................ 18,811 18,500 Cash and invested cash**.............................................. 495,612 1,230,180 Property and equipment................................................ 4,437 10,316 Accrued investment income............................................. 1,774 4,071 Receivable from subsidiaries*......................................... 153,300 433,580 Dividends receivable from subsidiaries*............................... 6,500 12,875 Loans to subsidiaries*................................................ 1,305,028 32,299 Goodwill.............................................................. 65,217 66,500 Federal income taxes recoverable...................................... 31,365 -- Other assets.......................................................... 80,079 48,470 ---------- -------- Total Assets........................................................ $7,840,633 $7,430,508 Liabilities and Shareholders' Equity Liabilities: Cash collateral on loaned securities.................................. $50,625 $ 123,688 Dividends payable..................................................... 55,074 52,167 Short-term debt....................................................... 149,956 82,767 Long-term debt........................................................ 711,671 510,301 Loans from subsidiaries*.............................................. 1,291,714 1,040,431 Federal income taxes payable ......................................... -- 418,783 Accrued expenses and other liabilities................................ 193,652 219,456 --------- --------- Total Liabilities................................................... 2,452,692 2,447,593 Shareholders' Equity Series A preferred stock.............................................. 1,083 1,153 Common stock.......................................................... 994,472 966,461 Retained earnings..................................................... 3,790,038 3,533,105 Foreign currency translation adjustment............................... 49,979 46,204 Net unrealized gain on securities available-for-sale [including unrealized gain of subsidiaries and discontinued operations: 1998 - $531,138; 1997 - $410,281]........... 552,369 435,992 ---------- ---------- Total Shareholders' Equity......................................... 5,387,941 4,982,915 --------- --------- Total Liabilities and Shareholders' Equity......................... $7,840,633 $7,430,508
*Eliminated in consolidation. **Includes short-term funds invested in behalf of LNC's subsidiaries. These condensed financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes of Lincoln National Corporation (see pages 36 through 67). 75 LINCOLN NATIONAL
Lincoln National Corporation (Parent Company Only) Year Ended December 31 (000s omitted) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Revenue: Dividends from subsidiaries*.................................. $268,454 $ 250,725 $601,701 Interest from subsidiaries*................................... 44,068 22,807 18,945 Equity in earnings of unconsolidated affiliate................ 1,636 -- 1,428 Net investment income......................................... 48,597 38,108 21,790 Realized gain (loss) on investments........................... 1,001 (1,403) (432) Gain on sale of subsidiaries and discontinued operations..................................... -- 1,192,226 -- Other......................................................... 2,202 1,180 1,127 -------- ----------- -------- Total Revenue............................................... 365,958 1,503,643 644,559 Expenses: Operating and administrative.................................. 41,922 36,540 36,275 Interest-subsidiaries*........................................ 32,251 25,703 23,529 Interest-other................................................ 106,059 85,512 72,086 -------- -------- -------- Total Expenses.............................................. 180,232 147,755 131,890 ------- ------- ------- Income before Federal Income Tax Expense (Benefit), Equity in Income of Subsidiaries and Discontinued Operations, Less Dividends................ 185,726 1,355,888 512,669 Federal income tax expense (benefit)............................ (28,891) 389,791 (34,157) ------- --------- ------- Income Before Equity in Income of Subsidiaries and Discontinued Operations, Less Dividends................ 214,617 966,097 546,826 Equity in income of subsidiaries and discontinued operations, less dividends....................... 295,158 (32,109) (33,268) ------- --------- -------- Net Income.................................................. $509,775 $ 933,988 $513,558
*Eliminated in consolidation. These condensed financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes of Lincoln National Corporation (see pages 36 through 67). 76 LINCOLN NATIONAL CORPORATION SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) STATEMENTS OF CASH FLOWS
Lincoln National Corporation (Parent Company Only) Year Ended December 31 (000's omitted) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income........................................................ $ 509,775 $ 933,988 $ 513,558 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in income of subsidiaries and discontinued operations less than (greater than) distributions*............ (288,784) 18,950 (262,268) Equity in undistributed earnings of unconsolidated affiliate... (1,636) -- (1,428) Realized (gain) loss on investments............................ (1,001) 1,403 432 Gain on sale of subsidiaries and discontinued operations....... -- (1,192,226) -- Tax on sale of discontinued operations......................... -- 415,354 -- Other.......................................................... (66,445) 26,038 (80,715) -------- ------- ------- Net Adjustments.............................................. (357,866) (730,481) (343,979) ------- --------- ------- Net Cash Provided by Operating Activities.................... 151,909 203,507 169,579 Cash Flows from Investing Activities: Net sales (purchases) of investments............................ 188,938 4,157 91,161 Cash collateral on loaned securities............................ (73,063) (21,906) (53,406) Decrease (increase) in investment in subsidiaries*.............. (159,458) (116,824) 217,844 Sale of (investment in) unconsolidated affiliate................ -- (68,959) (16,041) Sale of discontinued operations................................. (124,151) 822,500 -- Net (purchase) sale of property and equipment................... (256) (1,417) (790) Other........................................................... (36,831) (1,096) (26,883) ------- -------- ------- Net Cash Provided by (Used in) Investing Activities........... (204,821) 616,455 211,885 Cash Flows from Financing Activities: Decrease in long-term debt (includes payments and transfers to short-term debt).................................. (99,737) (86,338) -- Issuance of long-term debt...................................... 299,198 -- -- Net increase (decrease) in short-term debt...................... 67,189 13,056 (179,033) Increase in loans from subsidiaries*............................ 251,283 454,311 28,224 Decrease (increase) in loans to subsidiaries*................... (1,272,729) 414,669 (303,506) Decrease (increase) in receivables from subsidiaries*........... 280,280 (23,000) (36,000) Common stock issued for benefit plans........................... 48,747 33,199 (153) Retirement of common stock...................................... (46,871) (327,585) (32,716) Dividends paid to shareholders.................................. (209,016) (201,927) (191,223) -------- --------- ------- Net Cash Provided by (Used in) Financing Activities........... (681,656) 276,385 (714,407) -------- ------- ------- Net Increase (Decrease) in Cash............................... (734,568) 1,096,347 (332,943) Cash and invested cash at beginning-of-year....................... 1,230,180 133,833 466,776 --------- ------- -------- Cash and Invested Cash at End-of-Year......................... $ 495,612 $1,230,180 $ 133,833
*Eliminated in consolidation. These condensed financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes of Lincoln National Corporation (see pages 36 through 67). 77 LINCOLN NATIONAL CORPORATION SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
Column A Column B Column C Column D Column E Column F -------- ---------- ---------- ---------- ---------- -------- Insurance Other Policy Deferred Policy and Claims and Acquisition Claim Unearned Benefits Premium Segment Costs Reserves Premiums Payable Revenue(1) Year Ended December 31, 1998 ------------------------------------(000s Omitted)------------------------- Life Insurance and Annuities......... $1,012,635 $14,511,012 $ $ $ 1,330,793 Lincoln UK........................... 636,254 1,498,820 339,518 Reinsurance.......................... 315,477 4,238,609 1,224,887 Investment Management................ Other (incl. consol. adj's.)......... (108,459) ---------- ----------- --------- ----------- ---------- Total.............................. $1,964,366 $20,139,982 $ -- $ -- $ 2,895,198 Year Ended December 31, 1997 Life Insurance and Annuities......... $ 779,703 $ 6,418,417 $ $ $ 788,040 Lincoln UK........................... 563,080 1,442,768 336,721 Reinsurance.......................... 281,062 3,513,311 1,036,127 Investment Management................ Other (incl. consol. adj's.)......... (108,224) --------- --------- -------- -------- ----------- Total.............................. $1,623,845 $11,266,272 $ -- $ -- $ 2,160,888 Year Ended December 31, 1996 Life Insurance and Annuities......... $ 926,593 $ 6,180,970 $ $ $ 676,047 Lincoln UK........................... 440,414 1,252,276 306,238 Reinsurance.......................... 322,709 3,144,785 1,250,403 Investment Management................ Other (incl. consol. adj's.)......... (120,135) ---------- ---------- -------- -------- ----------- Total.............................. $1,689,716 $10,457,896 $ -- $ -- $ 2,232,688
Column A Column G Column H Column I Column J Column K -------- -------- -------- --------- ---------- -------- Amortization of Net Deferred Policy Other Investment Acquisition Operating Premiums Segment Income (2) Benefits Costs Expenses( 2) Written Year Ended December 31, 1998 --------------------------------------(000s Omitted)--------------------- Life Insurance and Annuities......... $2,248,946 $2,118,107 $368,290 $ 746,104 $ Lincoln UK........................... 87,930 150,962 26,252 155,651 Reinsurance.......................... 307,784 1,059,796 45,477 314,903 Investment Management................ 232 263,275 Other (incl. consol. adj's.)......... 36,514 140,848 ---------- ----------- -------- --------- ------- Total.............................. $2,681,406 $3,328,865 $440,019 $1,620,781 $ -- Year Ended December 31, 1997 Life Insurance and Annuities......... $1,842,351 $1,646,581 $316,346 $ 431,301 $ Lincoln UK........................... 85,132 339,637 4,342 180,132 Reinsurance.......................... 284,430 1,205,515 147,300 239,135 Investment Management................ 457 243,206 Other (incl. consol. adj's.)......... 38,394 110,103 ---------- ----------- -------- -------- ------ Total.............................. $2,250,764 $3,191,733 $467,988 $1,203,877 $ -- Year Ended December 31, 1996 Life Insurance and Annuities......... $1,741,649 $1,562,087 $266,343 $ 388,020 $ Lincoln UK........................... 81,955 133,927 157,732 Reinsurance.......................... 263,870 1,013,867 162,150 253,880 Investment Management................ 701 191,416 Other (incl. consol. adj's).......... (229) 100,128 ---------- ---------- ---------- ---------- ------ Total.............................. $2,087,946 $2,709,881 $428,493 $1,091,176 $ --
(1) Includes insurance fees on universal life and other interest sensitive products. (2) The allocation of expenses between investments and other operations are based on a number of assumptions and estimates. Results would change if different methods were applied. 78 LINCOLN NATIONAL CORPORATION SCHEDULE IV - REINSURANCE
Column A Column B Column C Column D Column E Column F -------- -------- -------- -------- -------- -------- Percentage Ceded Assumed of Amount Gross to Other from Other Net Assumed Amount Companies Companies Amount to Net --------------------------(000s Omitted)---------------------------------- Year Ended December 31, 1998 Individual life insurance in force... $187,100,000 $108,100,000 $213,700,000 $292,700,000 73.0% Premiums: Life insurance and annuities (1)... $ 2,182,847 $ 573,532 $ 650,807 $ 2,260,122 28.8% Health insurance................... 147,940 121,848 608,984 635,076 95.9% --------- ------- --------- ---------- Total............................ $ 2,330,787 $ 695,380 $ 1,259,791 $ 2,895,198 Year Ended December 31, 1997 Individual life insurance in force .. $125,800,000 $ 37,300,000 $124,000,000 $212,500,000 58.4% Premiums: Life insurance and annuities (1)... $ 1,235,085 $196,929 $ 550,173 $ 1,588,329 34.6% Health insurance................... 161,693 118,083 528,949 572,559 92.4% ------- ---------- ------- -------- Total............................ $ 1,396,778 $ 315,012 $ 1,079,122 $ 2,160,888 Year Ended December 31, 1996 Individual life insurance in force... $110,700,000 $37,600,000 $130,400,000 $203,500,000 64.0% Premiums: Life insurance and annuities (1).... $ 1,031,740 $ 96,999 $ 507,512 $1,442,253 35.2% Health insurance................... 168,545 71,636 693,526 790,435 87.7% --------- ------ -------- -------- Total............................ $ 1,200,285 $168,635 $1,201,038 $2,232,688
(1) Includes insurance fees on universal life and other interest sensitive products. 79 LINCOLN NATIONAL CORPORATION SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E ----------- ---------- ---------------- --------- -------- Additions Charged Balance at Charged to Other Balance at Description Beginning to Costs Accounts- Deductions- End of of Period Expenses(1) Describe Describe(2) Period ---------------------------(000's Omitted)---------------------- Year Ended December 31, 1998 Deducted from Asset Accounts: Reserve for Mortgage Loans on Real Estate.............................. $5,019 $ 675 $(900) $4,794 Reserve for Real Estate...................... 1,500 (1,500) -- Included in Other Liabilities: Investment Guarantees........................ 790 (467) 323 Year Ended December 31, 1997 Deducted from Asset Accounts: Reserve for Mortgage Loans on Real Estate.............................. $12,385 $1,778 $(9,144) $5,019 Reserve for Real Estate...................... 3,000 (1,500) 1,500 Included in Other Liabilities: Investment Guarantees........................ 1,775 (985) 790 Year Ended December 31, 1996 Deducted from Asset Accounts: Reserve for Mortgage Loans on Real Estate.............................. $29,592 $3,136 $(20,343) $12,385 Reserve for Real Estate...................... 58,029 3,000 $(51,517) (6,512) 3,000 Reserve for Other Long-term, Investments................................. 13,644 (388) (12,971) (285) -- Included in Other Liabilities: Investment Guarantees........................ 7,099 (886) (4,438) 1,775
(1) Excludes charges for the direct write-offs of assets. The negative amounts shown in the additions columns represent improvement in the underlying assets and guarantees for which valuation accounts had previously been established. (2) Deductions reflect sales or foreclosures of the underlying holdings. 80 LINCOLN NATIONAL CORPORATION EXHIBIT INDEX FOR THE ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 1998 Exhibit Number Page 3(a) Articles of Incorporation dated as of May 12, 1994. 82 3(b) Bylaws of LNC as last amended May 15, 1997.* 4(a) Indenture of LNC dated as of January 15, 1987.* 4(b) LNC First Supplemental Indenture dated July 1, 1992, to Indenture of LNC dated as of January 15, 1987.* 4(c) Specimen Notes for 7 1/8% Notes due July 15, 1999 and 7 5/8% Notes due July 15, 2002.* 4(d) Rights Agreement dated November 14, 1996.* 4(e) Indenture of LNC dated as of September 15, 1994. 120 4(f) Form of Note dated as of September 15, 1994.* 4(g) Form of Zero Coupon Security dated as of September 15, 1994.* 4(h) Specimen Debenture for 9 1/8% Notes due October 1, 2024.* 4(I) Specimen of 7 1/4% Debenture due May 15, 2005.* 4(j) Junior Subordinated Indenture of LNC as of May 1, 1996.* 4(k) Guarantee Agreement for Lincoln National Capital I.* 4(l) Guarantee Agreement for Lincoln National Capital II.* 4(m) Form of Lincoln National Capital I Preferred Securities, Series A.* 4(n) Form of Lincoln National Capital II Preferred Securities, Series B.* 4(o) Declaration of Trust for Lincoln National Capital I.* 4(p) Specimen Notes for 6 1/2% Notes due March 15, 2008.* 4(q) Specimen Notes for 7% Notes due March 15, 2018.* 4(r) Trust Agreement for Lincoln National Capital III.* 4(s) Form of Lincoln National Capital III Preferred Securities, Series C.* 4(t) Guarantee Agreement for Lincoln National Capital III.* 4(u) Trust Agreement for Lincoln National Capital IV.* 4(v) Form of Lincoln National Capital IV Income Prides Certificates.* 4(w) Form of Lincoln National Capital IV Growth Pride Certificates.* 4(x) Guarantee Agreement for Lincoln National Capital IV.* 4(y) Purchase Contract Agreement for Lincoln National Capital IV.* 4(z) Pledge Agreement for Lincoln National Capital IV.* 10(a) LNC 1986 Stock Option Plan. 150 10(b) The LNC Executives' Salary Continuation Plan.* 10(c) LNC Executive Value Sharing Plan 165 10(d) LNC Executives' Severance Benefit Plan.* 10(e) The LNC Outside Directors Retirement Plan.* 10(f) The LNC Outside Directors Benefits Plan.* 10(g) LNC Directors' Value Sharing Plan.* 10(h) The LNC Executive Deferred Compensation Plan for Employees.* 10(i) LNC 1993 Stock Plan for Non-Employee Directors. 171 10(j) LNC Executives' Excess Compensation Benefit Plan. 177 10(k) LNC 1997 Incentive Compensation Plan.* 10(l) Description of compensation arrangements with Executive Officers. 181 10(m) Lease and Agreement-Lincoln Life's home office property.* 10(n) Lease and Agreement-additional Lincoln Life home office property.* 10(o) Lease-LNC's Corporate Offices.* 10(p) Lease and Agreement-additional Lincoln Life headquarter property.* 12 Historical Ratio of Earnings to Fixed Charges. 205 21 List of Subsidiaries of LNC. 206 23 Consent of Ernst & Young LLP, Independent Auditors. 217 27 Financial Data Schedule. 218
*Incorporated by Reference 81
Signature Page LINCOLN NATIONAL CORPORATION Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act By /s/ Jon A. Boscia March 11, 1999 ------------------------------------------------- of 1934, LNC has duly caused Jon A. Boscia this report to be signed on (President, Chief Executive Officer and its behalf by the under- Director) signed, thereunto duly authorized. By /s/ Richard C. Vaughan March 11, 1999 ------------------------------------------------- Richard C. Vaughan (Executive Vice President and Chief Financial Officer) By /s/ Donald L. Van Wyngarden March 11, 1999 ------------------------------------------------- Donald L. Van Wyngarden (Second Vice President and Controller) Pursuant to the requirements By /s/ J. Patrick Barrett March 11, 1999 ------------------------------------------------- of the Securities Exchange J. Patrick Barrett Act of 1934, this report has been signed below by By /s/ Thomas D. Bell, Jr. March 11, 1999 ------------------------------------------------- the following Directors Thomas D. Bell, Jr of LNC on the date indicated. By /s/ Daniel R. Efroymson March 11, 1999 ------------------------------------------------- Daniel R. Efroymson By /s/ Eric G. Johnson March 11, 1999 ------------------------------------------------- Eric G. Johnson By /s/ Harry L. Kavetas March 11, 1999 ------------------------------------------------- Harry L. Kavetas By /s/ M. Leanne Lachman March 11, 1999 ------------------------------------------------- M. Leanne Lachman By /s/ Roel Pieper March 11, 1999 ------------------------------------------------- Roel Pieper By /s/ John M. Pietruski March 11, 1999 ------------------------------------------------- John M. Pietruski By /s/ Ian M. Rolland March 11, 1999 ------------------------------------------------- Ian M. Rolland By /s/ Jill S. Ruckelshaus March 11, 1999 ------------------------------------------------- Jill S. Ruckelshaus By /s/ Gilbert R. Whitaker,Jr. March 11, 1999 ------------------------------------------------- Gilbert R. Whitaker,Jr.
EX-3 2 Exhibit 3(a) ARTICLES OF INCORPORATION OF LINCOLN NATIONAL CORPORATION (Filed and Approved in Indiana January 5, 1968; Last Amended May 12, 1994) ARTICLE I Name The name of the Corporation is Lincoln National Corporation. ARTICLE II Purpose The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Indiana Business Corporation Law. (Amended May 28, 1987) ARTICLE III Term of Existence The period during which the Corporation shall continue is perpetual. ARTICLE IV Registered Office and Registered Agent The address of the Corporation's registered office in Indiana is Circle Tower, Indianapolis, Indiana 46204, and the name of the Corporation's registered agent at that office is The Prentice-Hall Corporation System, Inc. (Last amended May 28, 1987) ARTICLE V Number, Terms and Voting Rights of Shares Section 1. Number and Classes of Shares. The total number of shares which the Corporation shall have authority to issue is eight hundred ten million (810,000,000) shares, consisting of eight hundred million (800,000,000) shares of a single class of shares to be known as Common Stock, and ten million (10,000,000) shares of a single class of shares to be known as Preferred Stock. (Last amended May 12, 1994) Section 2. Terms of Common Stock. Only when all dividends accrued on all preferred or special classes of shares entitled to preferential dividends shall have been paid or declared and set apart for payment, but not otherwise, the holders of Common Stock shall be entitled to receive dividends, when and as declared by the Board of Directors. In event of any dissolution, liquidation or winding up of the Corporation, the holders of the Common Stock shall be entitled, after due payment or provision for payment of the debts and other liabilities of the Corporation, and the amounts to which the holders of preferred or special classes of shares may be entitled, to share ratably in the remaining net assets of the Corporation. (Last amended May 10, 1988) Section 3. Voting Rights of Common Stock. Except as otherwise provided by law, every holder of Common Stock of the Corporation shall have the right at every shareholders' meeting to one vote for each share of Common Stock standing in his name on the books of the Corporation on the date established by the Board of Directors as the record date for determination of shareholders entitled to vote at such meeting. (Amended May 28, 1969) Section 4. Terms of Preferred Stock. The Board of Directors shall have authority to determine and state in the manner provided by law the rights, preferences, qualifications, limitations and restrictions (other than voting rights) of the Preferred Stock. The Preferred Stock may be issued in one or more series for such an amount of consideration as may be fixed from time to time by the Board of Directors, and the Board of Directors shall have authority to determine and state in the manner provided by law the designations and the relative rights, preferences, qualifications, limitations and restrictions (other than voting rights) of each series. (Last amended May 10, 1988) Section 5. Voting Rights of Preferred Stock. Except as otherwise provided by law, every holder of Preferred Stock of the Corporation shall have the right at every shareholders' meeting to one vote for each share of Preferred Stock standing in his name on the books of the Corporation on the date established by the Board of Directors as the record date for determination of shareholders entitled to vote at such meeting. At any time when six or more quarterly dividends, whether or not consecutive, on the Preferred Stock, or on any one or more series thereof, shall be in default, the holders of all Preferred Stock at the time or times outstanding as to which such default shall exist shall be entitled, at the next annual meeting of shareholders, voting as a class, to vote for and elect two Directors of the Corporation. In the case of any vacancy in the office of a Director occurring among the Directors elected by the holders of the shares of the Preferred Stock voting as a class pursuant to this Section, the remaining Director or Directors elected by the holders of the shares of the Preferred Stock pursuant to this Section may elect a successor or successors to hold office until the next annual or special meeting of the shareholders. At all meetings of shareholders held for the purpose of electing Directors during such time as the holders of the shares of the Preferred Stock shall have the right, voting as a class, to elect Directors pursuant to this Section, the presence in person or by proxy of the holders of a majority of the outstanding shares of the Preferred Stock then entitled, as a class, to elect Directors pursuant to this Section shall be required to constitute a quorum of such class for the election of Directors; provided, that the absence of a quorum of the holders of Preferred Stock shall not prevent the election at any such meeting or adjournment thereof of Directors by any other class or classes of stock if the necessary quorum of the holders of such stock is present in person or by proxy at such meeting. The right of the holders of Preferred Stock, voting as a class, to participate in the election of Directors pursuant to this Section shall continue in effect, in the case of all Preferred Stock entitled to receive cumulative dividends, until all accumulated and unpaid dividends have been paid or declared and set apart for payment on all cumulative Preferred Stock, the holders of which shall have been entitled to vote at the previous annual meeting of shareholders, or in the case of all non-cumulative Preferred Stock until non-cumulative dividends have been paid or declared and set apart for payment for four consecutive quarterly dividend periods on all non-cumulative Preferred Stock, the holders of which shall have been entitled to vote at the previous annual meeting of shareholders, and thereafter the right of the holders of Preferred Stock, voting as a class, to participate in the election of Directors pursuant to this Section shall terminate. Upon termination of the right of the holders of Preferred Stock, voting as a class, to participate in the election of Directors pursuant to this Section, the term of office of each Director then in office elected by the holders of the Preferred Stock shall terminate, and any vacancy so created may be filled as provided by the bylaws of the Corporation. Any Director or Directors elected by the holders of Preferred Stock, voting as a class pursuant to this Section, may be removed, with or without cause, only by a vote of the holders of three-fourths of the outstanding shares of Preferred Stock taken at a meeting as provided by Section 4 of Article VII of these Articles of Incorporation. The Corporation shall not, without the approval of the holders of at least two-thirds of the Preferred Stock at the time outstanding, voting as a class: (a) Amend these Articles of Incorporation to create or authorize any kind of stock ranking prior to or on a parity with the Preferred Stock with respect to payment of dividends or distribution on dissolution, liquidation or winding up, or create or authorize any security convertible into shares of stock of any such kind; or (b) Amend, alter, change or repeal any of the express terms of the Preferred Stock, or of any series thereof, then outstanding in a manner prejudicial to the holders thereof; provided, that if any such amendment, alteration, change or repeal would be prejudicial to the holders of one or more, but not all, of the series of the Preferred Stock at the time outstanding, only such consent of the holders of two-thirds of the total number of outstanding shares of all series so affected shall be required, unless a different or greater vote shall be required by law; or (c) Authorize the voluntary dissolution of the Corporation or any revocation of dissolution proceedings theretofore approved, authorize the sale, lease, exchange, or other disposition of all or substantially all of the property of the Corporation, or approve any limitation of the term of existence of the Corporation; or (d) Merge or consolidate with another corporation in such manner that the Corporation does not survive as a continuing entity, if thereby the rights, preferences, or powers of the Preferred Stock would be adversely affected, or if there would thereupon be authorized or outstanding securities which the Corporation, if it owned all of the properties then owned by the resulting corporation, could not create without the approval of the holders of the Preferred Stock. (Last amended May 10, 1988) Section 6. Class Voting. The holders of the outstanding shares of a class, or of any series thereof, shall not be entitled to vote as a class except as shall be expressly provided by this Article or by law. (Amended May 28, 1969) ARTICLE VI Initial Stated Capital The Corporation will not commence business until consideration of the value of at least One Thousand Dollars ($1,000) has been received for the issuance of shares. ARTICLE VII Directors Section 1. Number. The Initial Board of Directors shall be composed of thirteen members. The number of Directors may from time to time be fixed by the bylaws of the Corporation at any number not less than three. In the absence of a bylaw fixing the number of Directors, the number shall be thirteen. Section 2. Qualifications. Directors need not be shareholders of the Corporation, but shall have other qualifications as the bylaws of the Corporation prescribe. Section 3. Classification. When the Board of Directors consists of nine or more members, the bylaws of the Corporation may provide that the Directors shall be divided into two or more classes whose terms of office shall expire at different times, but no term shall continue longer than three years. Section 4. Removal. Any or all of the members of the Board of Directors may be removed, with or without cause, at a meeting of shareholders called expressly for that purpose by a vote of the holders of three-fourths of the shares of the Corporation outstanding and then entitled to vote at an election of Directors. Section 5. Amendment, Repeal, etc. Notwithstanding anything contained in these Articles of Incorporation to the contrary, the affirmative vote of the holders of at least three-fourths of the shares of the Corporation outstanding and then entitled to vote at an election of Directors, voting together and not by class, shall be required to alter, amend, repeal, or adopt provisions inconsistent with, this Article VII of these Articles of Incorporation. (Added May 30, 1985) ARTICLE VIII Initial Board of Directors The names and post-office addresses of the first Board of Directors of the Corporation are as follows:
Name Number and Street City State Zip Code Edward D. Auer .......... The Lincoln National Life Insurance Fort Wayne Indiana 46801 Company 1301 South Harrison Street Wallis B. Dunckel ....... Bankers Trust Company New York New York 10015 P.O. Box 318 Robert A. Efroymson... Real Silk Hosiery Mills, Inc. Indianapolis Indiana 46204 611 North Park Avenue William B. F. Hall ........ 2000 Lincoln Bank Tower Fort Wayne Indiana 46801 A. J. Hettinger, Jr. ....... Lazard Freres & Co. New York New York 10005 44 Wall Street James F. Keenan ....... Keenan Hotel Co., Inc. Fort Wayne Indiana 46801 1006 South Harrison Street William T. McKay ........ 1423 East California Road Fort Wayne Indiana 46805 Walter O. Menge ......... The Lincoln National Life Insurance Fort Wayne Indiana 46801 Company 1301 South Harrison Street Henry W. Persons ....... The Lincoln National Life Insurance Fort Wayne Indiana 46801 Company 1301 South Harrison Street Henry F. Rood ............. The Lincoln National Life Insurance Fort Wayne Indiana 46801 Company 1301 South Harrison Street Ronald G. Stagg .......... The Lincoln National Life Insurance Fort Wayne Indiana 46801 Company 1301 South Harrison Street Harold A. MacKinnon .. 1391 Ruffner Road Schenectady New York 12309 Thomas A. Watson ..... The Lincoln National Life Insurance Fort Wayne Indiana 46801 Company 1301 South Harrison Street
ARTICLE IX Incorporators Section 1. Names and Post-Office Addresses. The names and post-office addresses of the incorporators of the Corporation are as follows:
Name Number and Street City State Zip Code ---- ----------------- ---- ----- -------- Henry F. Rood ............ 1301 South Harrison Street Fort Wayne Indiana 46801 Gordon C. Reeves ...... 1301 South Harrison Street Fort Wayne Indiana 46801 Jack D. Hunter ............ 1301 South Harrison Street Fort Wayne Indiana 46801
Section 2. Age. All of such incorporators are of lawful age. ARTICLE X Provisions for Regulation of Business and Conduct of Affairs of Corporation No shares of the Common Stock of The Lincoln National Life Insurance Company owned by the Corporation shall be sold, leased, exchanged, mortgaged, pledged, or otherwise disposed of except by the vote of the holders of three-fourths of the shares of the Corporation outstanding and entitled to vote thereon at an annual or special meeting of the shareholders held upon notice which includes notice of the proposed sale, lease, exchange, mortgage, pledge, or other disposition. (Last amended May 28, 1987) ARTICLE XI Provisions for Certain Business Combinations Section 1. Vote Required. Clause(a). Higer Vote for Certain Business Combinations. In addition to any affirmative vote required by law or these Articles of Incorporation, and except as otherwise expressly provided in Section 2 of this Article XI: 1. any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (A) any Interested Shareholder (as hereinafter defined), or (B) any other corporation (whether or not itself an Interested Shareholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Shareholder; or 2. any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Shareholder or any Affiliate of any Interested Shareholder of any assets, of the Corporation or any Subsidiary, having an aggregate Fair Market Value of $1,000,000 or more; or 3. the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Shareholder or any Affiliate of any Interested Shareholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $1,000,000 or more; or 4. the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Shareholder or any Affiliate of any Interested Shareholder; or 5. any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Shareholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Shareholder or any Affiliate of any Interested Shareholder; shall require the affirmative vote of the holders of at least three-fourths of the shares of the Corporation outstanding and then entitled to vote at an election of directors (the "Voting Stock"), voting together and not by class (it being understood that for purposes of this Article XI, each share of the Voting Stock shall have the number of votes granted to it pursuant to Article V of these Articles of Incorporation). Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise. Clause (b). Definition of "Business Combination". The term "Business Combination" as used in this Article XI shall mean any transaction which is referred to in any one or more of paragraphs 1 through 5 of Clause (a) of this Section 1. Section 2. When Higher Vote is Not Required. The provisions of Section 1 of this Article XI shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any other provision of these Articles of Incorporation, if all of the conditions specified in either of the following Clauses (a) and (b) are met: Clause (a). Approval by Continuing Directors. The Business Combination shall have been approved by a majority of the Continuing Directors (as hereinafter defined). Clause (b). Price and Procedure Requirements. All of the following conditions shall have been met: 1. The aggregate amount of the cash and the Fair Market Value (as hereinafter defined), as of the date of the consummation of the Business Combination, of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the higher of the following: A. the Highest Per Share Price paid by the Interested Shareholder for any shares of Common Stock acquired by it (i) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date") or (ii) in the transaction in which it became an Interested Shareholder, whichever is higher; and B. the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder (such latter date is referred to in this Article XI as the "Determination Date"), whichever is higher. 2. The aggregate amount of the cash and the Fair Market Value, as of the date of the consummation of the Business Combination, of consideration other than cash to be received per share by holders of shares of any other class of outstanding Voting Stock shall be at least equal to the highest of the following (it being intended that the requirements of this Clause (b)2 shall be required to be met with respect to every class of outstanding Voting Stock whether or not the Interested Shareholder has previously acquired any shares of a particular class of Voting Stock): A. the Highest Per Share Price paid by the Interested Shareholder for any shares of such class of Voting Stock acquired by it (i) within the two-year period immediately prior to the Announcement Date or (ii) in the transaction in which it became an Interested Shareholder, whichever is higher; B. the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; and C. the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher. 3. The consideration to be received by holders of a particular class of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as the Interested Shareholder has previously paid for shares of such class of Voting Stock. If the Interested Shareholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by it. 4. After such Interested Shareholder has become an Interested Shareholder and prior to the consummation of such Business Combination: (A) except as approved by a majority of the Continuing Directors, there shall have been no failure to declare and pay at the regular date therefor any full periodic dividends (whether or not cumulative) on the outstanding Preferred Stock, No Par Value; (B) there shall have been (i) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Continuing Directors, and (ii) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure so to increase such annual rate is approved by a majority of the Continuing Directors; and (C) such Interested Shareholder shall not have become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Shareholder becoming an Interested Shareholder. 5. After such Interested Shareholder has become an Interested Shareholder, such Interested Shareholder shall not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation (or any Subsidiary of the Corporation), whether in anticipation of or in connection with such Business Combination or otherwise. 6. A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall have been mailed to shareholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement was required to be mailed pursuant to such Act or subsequent provisions). Section 3. Certain Definitions. For the purposes of this Article XI: Clause (a). A "person" shall include any individual, firm, corporation or other entity. When two or more persons act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring Voting Stock of the Corporation, such partnership, syndicate or group shall be deemed a "person". Clause (b). "Interested Shareholder" shall mean any person (other than the Corporation or any Subsidiary) who or which: 1. is the beneficial owner, directly or indirectly, of more than 10% of the voting power of the outstanding Voting Stock; or 2. is an Affiliate (as hereinafter defined) of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding Voting Stock; or 3. is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. Clause (c). A person shall be a "beneficial owner" of any Voting Stock: 1. which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly; or 2. which such person or any of its Affiliates or Associates has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (B) the right to vote pursuant to any agreement, arrangement or understanding; or 3. which is beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. Clause (d). For the purpose of determining whether a person is an Interested Shareholder pursuant to Clause (b) of this Section 3, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of Clause (c) of this Section 3 but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. Clause (e). "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on January 13, 1985. Clause (f). "Subsidary" means any corporation of which a majority of any class of equity securities is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Shareholder set forth in Clause (b) of this Section 3, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity securities is owned, directly or indirectly, by the Corporation. Clause (g). "Continuing Director" means any member of the Board of Directors of the Corporation (the "Board") who is unaffiliated with the Interested Shareholder and was a member of the Board prior to the time that the Interested Shareholder became an Interested Shareholder, and any successor of a Continuing Director who is unaffiliated with the Interested Shareholder and is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the Board. Clause (h). "Fair Market Value" means: 1. in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange-Listed Stock, or if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing sale price, or, if none, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value of a share of such stock as determined by a majority of the Continuing Directors in good faith, in any case with respect to any class of stock, appropriately adjusted for any dividend or distribution in shares of such stock or any stock split, reclassification, recapitalization or combination of outstanding shares of such stock into a greater or lesser number of shares of such stock; and 2. in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by a majority of the Continuing Directors in good faith. Clause (i). References to "Highest Per Share Price" shall in each case with respect to any class of stock reflect an appropriate adjustment for any dividend or distribution in shares of such stock or any stock split, reclassification, recapitalization or combination of outstanding shares of such stock into a greater or lesser number of shares of such stock. Clause (j). In the event of any Business Combination in which the Corporation survives, the phrase "consideration other than cash to be received" as used in Clauses (b)1 and 2 of Section 2 of this Article XI shall include the shares of Common Stock and/or the shares of any other class of outstanding Voting Stock owned by the holders of such shares. Section 4. Powers of the Board of Directors. A majority of the Continuing Directors of the Corporation shall have the power and duty to determine for the purposes of this Article XI, on the basis of information known to them after reasonable inquiry, (a) whether a person is an Interested Shareholder, (b) the number of shares of Voting Stock beneficially owned by any person, (c) whether a person is an Affiliate or Associate of another, and (d) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $1,000,000 or more. Section 5. No Effect on Fiduciary Obligations of Interested Shareholders. Nothing contained in this Article XI shall be construed to relieve any Interested Shareholder from any fiduciary or other obligation imposed by law. Section 6. Amendment, Repeal, etc. Notwithstanding any other provisions of these Articles of Incorporation or the bylaws of the Corporation (and notwithstanding the fact that a lesser percentage may be specified by law, in these Articles of Incorporation or the bylaws of the Corporation), the affirmative vote of the holders of three-fourths or more of the voting power of the shares of the then outstanding Voting Stock, voting together and not by class, shall be required to alter, amend, repeal, or adopt provisions inconsistent with, this Article XI of these Articles of Incorporation. (Article XI added May 30, 1985) CERTIFICATE OF RESOLUTION BY BOARD OF DIRECTORS DETERMINING AND STATING THE DESIGNATION AND THE RELATIVE RIGHTS, PREFERENCES, QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS (OTHER THAN VOTING RIGHTS) OF A SERIES OF A CLASS OF PREFERRED SHARES OF LINCOLN NATIONAL CORPORATION (Filed and Approved in Indiana August 20, 1969; Amended May 24, 1988) RESOLVED that, pursuant to the authority expressly granted to and vested in the Board of Directors of the Corporation by the provisions of the Articles of Incorporation of the Corporation, this Board of Directors hereby creates and authorizes the issue of, for the consideration stated, a series of the Preferred Stock of the Corporation, to consist of 2,233,421 shares of Preferred Stock of the Corporation, and this Board of Directors hereby fixes the designation and the relative rights, preferences, qualifications, limitations and restrictions (other than voting rights) of the shares of such series as follows: Section 1. Designation. 1.1 The designation of the series of Preferred Stock created by this resolution shall be "$3.00 Cumulative Convertible Preferred Stock, Series A" (the "Series A Preferred Stock"). Section 2. Dividends. 2.1 The holders of the Series A Preferred Stock shall be entitled to receive, but only when and as declared by the Board of Directors, out of any assets of the Corporation legally available for the purpose, cash dividends at the rate of $3.00 per share per annum, and no more, payable $0.75 per share quarterly on the fifth day of March, June, September, and December of each year to such stockholders of record on the respective dates, not exceeding 50 days preceding such dividend dates, fixed for the purpose by the Board of Directors. 2.2. Dividends shall be cumulative on shares of the Series A Preferred Stock from and after dates determined as follows: (a) if issued on or prior to the record date for the first dividend on such shares, then from and after the fifth day of March, June, September or December next preceding such record date; (b) if issued during the period immediately after a record date for a dividend on the Series A Preferred Stock and ending on the payment date for such dividend, then from and after such dividend payment date; and (c) if otherwise from and after the fifth day of March, June, September, or December next preceding the date of issue of such shares. Accumulation of dividends shall not bear interest. 2.3 No dividends (other than dividends payable in Common Stock of the Corporation) shall be paid or declared on the Common Stock of the Corporation or on any other series of the Preferred Stock or on any other class or series of stock of the Corporation ranking as to dividends junior to or on a parity with the Series A Preferred Stock, unless full dividends on all outstanding shares of the Series A Preferred Stock for all past dividend periods have been paid and unless full dividends on all such shares for the then current dividend period shall have been paid or declared. Section 3. Preference in Liquidation. 3.1 In the event of the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Series A Preferred Stock then outstanding shall be entitled to receive, after payment or provision for payment of all creditors of the Corporation, but before any distribution or payment shall be made in respect of the Common Stock or any other stock of the Corporation ranking junior to the Series A Preferred Stock as to assets on liquidation, dissolution or winding up, an amount equal to $80 per share, plus an amount equal to all unpaid dividends thereon accrued on a daily basis to the date when funds for payment are made available to the holders; and no payment on account of liquidation, dissolution or winding up shall be made to the holders of any series of Preferred Stock or any other stock of the Corporation ranking on a parity with the Series A Preferred Stock as to assets, unless there shall likewise be paid at the same time to the holders of all shares of Series A Preferred Stock like proportionate distributive amounts ratably, in proportion to the full distributive amounts to which they are respectively entitled. The holders of the Series A Preferred Stock shall have no rights in respect of the remaining assets of the Corporation. 3.2 Neither the consolidation or merger of the Corporation with or into any other corporation or corporations, nor the sale or transfer by the Corporation of all or any part of its assets, shall be deemed to be a liquidation, dissolution or winding up of the Corporation for purposes of this Section 3. Section 4. Redemption. 4.1 At any time or from time to time after October 31, 1974, (but not before such time) and so long as any dividends on the Series A Preferred Stock are not in arrears, the Corporation at the option of its Board of Directors, shall have the right to redeem the Series A Preferred Stock, in whole or from time to time in part, at a price equal to $80 per share plus an amount equal to all unpaid dividends thereon accrued on a daily basis to the date of redemption. 4.2 Notice of every redemption shall be mailed at least 30 days, but not more than 60 days, prior to the date fixed for redemption, addressed to the holders of record of the shares to be redeemed at their respective addresses as the same shall appear on the books of the Corporation. In the case of a redemption of a part only of the Series A Preferred Stock the Corporation shall select by lot the shares so to be redeemed. 4.3 If notice or redemption shall have been mailed as aforesaid, and if on or before the redemption date specified in such notice a sum equal to the redemption price of the shares so called for redemption shall have been set aside by the Corporation, separate and apart from its other funds for the pro rata benefit of the holders of the shares so called for redemption, so as to be and continue to be available therefor, then, whether or not certificates for the shares so called for redemption shall have been surrendered for cancellation, such shares, from and after the date of redemption so designated, shall be deemed to be no longer outstanding, the right to receive dividends thereon shall cease to accrue and all rights with respect to such shares shall forthwith on such redemption date cease and terminate except only the right of the holders thereof to receive the redemption price. 4.4 The Corporation may, however, at any time prior to the redemption date specified in the notice of redemption but after such notice of redemption shall have been mailed as aforesaid, deposit in trust, for the account of the holders of the Series A Preferred Stock to be redeemed, with a bank or trust company in good standing organized under the laws of the United States of America or of the State of New York, or of the State of Illinois, doing business in the Borough of Manhattan, City of New York, or in the City of Chicago, Illinois, having capital, surplus and undivided profits aggregating at least $5,000,000, designated in such notice of redemption, a sum equal to the redemption price of such shares so called for redemption, and thereupon, whether or not certificates for the shares so called for redemption shall have been surrendered for cancellation (if such notice shall state that holders of the shares so called for redemption may receive their redemption price at any time after such deposit), all shares with respect to which such deposit shall have been made shall be deemed to be no longer outstanding, the right to receive dividends thereon for any period after the date so fixed for redemption shall cease to accrue and all rights with respect to such shares shall forthwith upon such deposit in trust cease and terminate except only (a) the rights of the holders thereof to receive from such bank or trust company, at any time after the time of such deposit, the redemption price of such shares to be redeemed, or (b) the right to exercise, on or before the close of business on the third business day prior to the date fixed for redemption, the privileges of conversion. Any moneys so deposited by the Corporation which shall not be required for such redemption because of the exercise of any such right of conversion, shall be repaid to the Corporation forthwith. Any moneys so deposited by the Corporation and unclaimed at the end of six years from the date fixed for such redemption shall be repaid to the Corporation upon its request expressed in a resolution of its Board of Directors, after which repayment the holders of the shares so called for redemption shall look only to the Corporation for the payment thereof. 4.5 Shares of Series A Preferred Stock so redeemed shall, after the Corporation takes appropriate steps required or permitted by the laws of Indiana, have the status of authorized and unissued shares of Preferred Stock, and the number of shares of Preferred Stock which the Corporation shall have authority to issue shall not be decreased by the redemption of shares of Series A Preferred Stock. 4.6 Nothing in this Section 4 shall limit any legal right of the Corporation to purchase or otherwise acquire any shares of the Preferred Stock at not exceeding the price at which the same may be redeemed at the option of the Corporation. Section 5. Conversion Rights. 5.1 Subject to adjustment as provided in this Section 5, each share of Series A Preferred Stock shall be convertible at the option of the respective holder thereof, at the office of the transfer agent for the Common Stock, and at such other place or places, if any, as the Board of Directors may determine, into one fully paid and non-assessable share of Common Stock (the "Common Stock") of the Corporation. In case of the redemption of any shares of Series A Preferred Stock, such right of conversion shall terminate, as to the shares called for redemption, at the close of business on the third business day prior to the date fixed for redemption, unless default shall be made in the payment of the redemption price. Upon conversion the Corporation shall make no payment or adjustment on account of unpaid dividends accrued on the Series A Preferred Stock surrendered for conversion. 5.2 The Common Stock issuable upon conversion of Series A Preferred Stock shall be Common Stock as constituted at the date of this resolution, except as otherwise provided in subdivision (b) of Section 5.5. 5.3 Before any holder of Series A Preferred Stock shall be entitled to convert the same into Common Stock, he shall surrender the certificate or certificates for such Series A Preferred Stock at the office of the transfer agent for the Common Stock, which certificate or certificates, if the Corporation shall so request, shall be duly endorsed to the Corporation or in blank or accompanied by proper instruments of transfer to the Corporation or in blank, and shall give written notice to the Corporation at that office that he elects so to convert Series A Preferred Stock, and shall state in writing therein the name of or names in which he wishes the certificate or certificates for Common Stock to be issued. Every such notice of election to convert shall constitute a contract between the holder of such Series A Preferred Stock and the Corporation, whereby the holder of such Series A Preferred Stock shall be deemed to subscribe for the amount of Common Stock which he shall be entitled to receive upon such conversion, and, in satisfaction of such subscription, to deposit the Series A Preferred Stock to be converted and to release the Corporation from all liability thereunder, and thereby the Corporation shall be deemed to agree that the surrender of the certificate or certificates for the Series A Preferred Stock and the extinguishment of liability thereon shall constitute full payment of such subscription for Common Stock to be issued upon such conversion. 5.4 As soon as practicable after such deposit of certificates for Series A Preferred Stock accompanied by the written notice and the statement above prescribed, the Corporation will issue and deliver at the office of the transfer agent to the person for whose account such Series A Preferred Stock was so surrendered, or to his nominee or nominees, certificates for the number of full shares of Common Stock to which he shall be entitled as aforesaid, together with a cash adjustment of any fraction of a share as herein stated, if not evenly convertible. Subject to the following provisions of this paragraph, such conversion shall be deemed to have been made as of the date of such surrender of the Series A Preferred Stock to be converted; and the person or persons entitled to receive the Common Stock issuable upon conversion of such Series A Preferred Stock shall be treated for all purposes as the record holder or holders of such Common Stock on such date. The Corporation shall not be required to convert, and no surrender of Series A Preferred Stock shall be effective for that purpose, while the stock transfer books of the Corporation are closed for any purpose; but the surrender of Series A Preferred Stock for conversion during any period while such books are so closed shall become effective for conversion immediately upon the re-opening of such books, as if the conversion had been made on the date such Series A Preferred Stock was surrendered. 5.5 The number of shares of Common Stock into which the shares of Series A Preferred Stock shall be convertible shall be subject to adjustment from time to time as follows: (a) In case the Corporation shall at any time or from time to time (1) declare a dividend payable in Common Stock, (2) issue any shares of its Common Stock in subdivision of outstanding shares of Common Stock, by reclassification or otherwise, or (3) make any combination of shares of Common Stock, by reclassification or otherwise, the conversion rate shall be adjusted so that the holder of each share of Series A Preferred Stock shall thereafter be entitled to receive upon the conversion of such share the number of shares of the Corporation which he would have owned or have been entitled to receive after the happening of any of the events described above had such share been converted immediately prior to the happening of such event. Further such adjustments shall be made whenever any of the events listed above shall occur. (b) In case of any capital reorganization or any reclassification of the capital stock of the Corporation of in case of the consolidation or merger of the Corporation with or into another corporation, or in case of any sale or conveyance to another corporation of the assets of the Corporation as an entirety or substantially as an entirety, the holder of each share of Series A Preferred Stock then outstanding shall have the right to convert such share into the kind and number of shares of stock and other securities and property receivable upon such reorganization, reclassification, consolidation, merger, sale or conveyance, as the case may be, by a holder of that number of shares of Common Stock into which one share of Series A Preferred Stock is convertible; and, in any such case, appropriate adjustment (as determined in good faith by a resolution of the Board of Directors of the Corporation) shall be made in the application of the provisions herein set forth with respect to rights and interests thereafter of the holders of the Series A Preferred Stock, to the end that the provisions set forth herein (including the specified adjustments) shall thereafter be applicable, as near as reasonably may be, in relation to any shares or other property thereafter deliverable upon the conversion of the Series A Preferred Stock. (c) In case the Corporation shall issue rights or warrants to the holders of its Common Stock for the purpose of entitling them to subscribe for or purchase shares of Common Stock at a price per share less than 95% of the "current market price" per share of Common Stock (as defined in Section 5.9) on the date at which a record is taken of the holders of such issuance, the number of shares of Common Stock into which each share of Series A Preferred Stock shall thereafter be convertible shall be determined by multiplying the number of shares of Common Stock into which such share of Series A Preferred Stock was immediately theretofore convertible by a fraction, of which the numerator shall be the sum of the number of shares of Common Stock outstanding at the time of the taking of such record plus the number of additional shares of Common Stock so offered for subscription or purchase, and of which the denominator shall be the sum of the number of shares of Common Stock outstanding at the time of the taking of such record plus the number of shares of Common Stock which the aggregate offering price of the total number of shares so offered would purchase at such current market price per share for such date. (d) No adjustment in the number of shares of Common Stock into which any share of Series A Preferred Stock is convertible shall be required unless such adjustment would require an increase or decrease of at least 5% in the number of shares of Common Stock into which a share of Series A Preferred Stock is then convertible; provided, however, that any adjustment which by reason of this subdivision (d) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 5.5 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. Whenever such an adjustment is to be made, the Corporation shall forthwith file with the transfer agent for the Series A Preferred Stock and the Common Stock, a statement signed by the President or one of the Vice Presidents of the Corporation and by its Treasurer or an Assistant Treasurer, stating the adjustment to be made. Such statement shall show in detail the facts requiring such adjustment. Whenever such an adjustment is to be made, the Corporation will forthwith cause a notice stating the adjustment to be mailed to the respective holders of record of Series A Preferred Stock. Where appropriate, such notice may be given in advance and included as a part of a notice required to be mailed under the provisions of the following paragraph of this Section 5.5 In case at any time: (i) the Corporation shall pay any dividend payable in stock upon its Common Stock or make any distribution (other than cash dividends) to the holders of its Common Stock; or (ii) the Corporation shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or any other rights; or (iii) the consolidation or merger of the Corporation with or into another corporation or the sale or conveyance of all or substantially all the assets of the Corporation shall be proposed by the Corporation; then in any one or more of those cases, the Corporation shall cause at least fifteen days' prior notice to be mailed to the transfer agent for the Series A Preferred Stock and the Common Stock and to the holders of record of the outstanding Series A Preferred Stock of the date on which (x) the books of the Corporation shall close, or a record be taken for such stock dividend, distribution or subscription rights, or (y) such consolidation or merger or conveyance shall take place, as the case may be. Such notice shall also specify the date as of which holders of Common Stock of record shall participate in the dividend, distribution or subscription rights or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such consolidation, merger, sale or conveyance, as the case may be, and shall specify the proposed transactions in reasonable detail. 5.6 Shares of Series A Preferred Stock converted into Common Stock shall have the status of authorized and unissued shares of Preferred Stock, and the number of shares of Preferred Stock which the Corporation shall have authority to issue shall not be decreased by the conversion of shares of Series A Preferred Stock. 5.7 The Corporation shall at all times reserve and keep available, out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Series A Preferred Stock, such number of shares as shall from time to time be sufficient to effect the conversion of all shares of Series A Preferred Stock from time to time outstanding. The Corporation shall from time to time, in accordance with the laws of Indiana increase the authorized amount of its Common Stock if at any time the number of shares of Common Stock remaining unissued shall not be sufficient to permit the conversion of all the then outstanding Series A Preferred Stock. 5.8 No fractions of shares of Common Stock will be issued upon conversion. In the event that because of any adjustments required to be made by Section 5.5 fractions of shares of Common Stock would be required to be issued upon conversion, the Corporation will, in lieu of issuing such fractions of shares, pay to the person otherwise entitled to such fractions the cash value of such fractions based upon the current market price (as defined in Section 5.9) per share of Common Stock on the day prior to that on which shares of Series A Preferred Stock are surrendered by such person for conversion. 5.9 The "current market price" per share of Common Stock as to any specified day shall be deemed to be the last reported sale price of the Common Stock for such day (or, if there is no sale on such day, the last bid quotation for the Common Stock) on the New York Stock Exchange (or, if the Common Stock is not listed on the New York Stock Exchange, on a national securities exchange designated by the Corporation) or, if the Common Stock is not listed upon any national securities exchange, the average of the closing bid and asked quotations for the Common Stock for such day as furnished by the trading department of any New York Stock Exchange member firm selected from time to time by the Corporation for the purpose and deemed by it to be reliable. If an exchange was not open, or if the Common Stock was not traded on an exchange or elsewhere, on a day as of which the current market price is to be determined, the determination of price or quotation shall be made as of the last business day before such day. 5.10 The Corporation will pay any and all issue and other taxes that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of Series A Preferred Stock pursuant hereto. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of Common Stock in a name other than that in which the Series A Preferred Stock so converted was registered, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Corporation the amount of any such tax, or has established, to the satisfaction of the Corporation, that such tax has been paid. 5.11 The Corporation covenants that if any shares of Common Stock, required to be reserved for purposes of conversion of the Series A Preferred Stock hereunder, require registration with, or approval of, any governmental authority under any federal or state law or listing on any national securities exchange, before such shares may be issued upon conversion, the Corporation will in good faith and as expeditiously as possible take such action as may be necessary to secure such registration or approval or listing on the relevant national securities exchange, as the case may be. Section 6. Consideration for Issue of Series A Preferred Stock. 6.1 Shares of Series A Preferred Stock shall be issued in exchange for shares of common stock of Chicago Title and Trust Company pursuant to the terms of the Memorandum of Understanding between this Corporation and Chicago Title and Trust Company, which memorandum was approved by the Board of Directors of the Corporation at its special meeting of April 28, 1969. Pursuant to Section 4 of Article V of the Articles of Incorporation, the Board of Directors hereby fixes as the amount of consideration to be received by the Corporation for the issue of each share of Series A Preferred Stock, one share of common stock of Chicago Title and Trust Company. ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION LINCOLN NATIONAL CORPORATION (Filed and Approved in Indiana July 3, 1990) The undersigned officer of LINCOLN NATIONAL CORPORATION (hereinafter referred to as "Corporation") existing pursuant to the provisions of the Indiana Business Corporation Law, as amended (hereinafter referred to as the "Act"), desiring to give notice of corporate action effectuating amendment of its Articles of Incorporation, certifies to the following facts: ARTICLE I AMENDMENT SECTION 1. The date of incorporation of the Corporation is January 5, 1968. SECTION 2. The name of the Corporation is LINCOLN NATIONAL CORPORATION. SECTION 3. The text of the amendment, which determines and sets forth the designation and the relative rights, preferences, qualifications, limitations and restrictions (other than voting rights) of the shares of a series of Preferred Stock, is as follows: Section 1. Designation. 1.1 The designation of the series of Preferred Stock, without par value, of the Corporation created by this amendment is the "5 1/2% Cumulative Convertible Exchangeable Preferred Stock, Series E", without par value (the "Series E Preferred Stock"). Section 2. Authorized Number of Shares 2.1 The number of authorized shares constituting the Series E Preferred Stock is 2,201,443 shares. Section 3. Dividends. 3.1 The holders of shares of Series E Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors of the Corporation (the "Board") out of assets of the Corporation legally available therefor, cumulative cash dividends at the annual rate of 5 1/2% of the Liquidation Preference (specified in section 5.1 hereof) per share, and no more, payable quarterly on the 5th day of March, June, September and December in each year beginning on the first quarterly dividend payment date following the first date on which the Corporation shall issue any shares of the Series E Preferred Stock. Dividends on the Series E Preferred Stock shall be cumulative from the first date on which the Corporation shall issue any shares of the Series E Preferred Stock. Dividends on the Series E Preferred Stock shall be payable to holders of record as they appear on the stock record books of the Corporation on the dividend payment dates, provided that the Board or any duly authorized committee may in any case fix a record date, not more than 60 days nor less than 15 days before the dividend payment date, in which event the dividend shall be payable to the holders of record on such record date (whether or not such holders shall have exercised their rights of conversion after such record date). Dividends on the Series E Preferred Stock will be calculated on the basis of a 360-day year of twelve 30-day months. Holders of the Series E Preferred Stock shall not be entitled to any interest, or sum of money in lieu of interest, in respect of any dividend payment or payments on shares of Series E Preferred Stock which may be in arrears. 3.2 No dividend shall be declared or paid or set apart for payment on shares of any series of the Preferred Stock of the Corporation for any period unless full cumulative dividends on all outstanding shares of Series E Preferred Stock shall have been or shall contemporaneously be declared and paid or declared and a sum sufficient for payment thereof set apart for such payment for the current and all past dividend periods; provided, however, that there may be declared and paid or declared and a sum sufficient for payment thereof set apart for such payment full dividends on all outstanding shares of Series A Preferred Stock created by resolutions of the Board adopted on May 28, 1969 outstanding on the first date the Corporation issues any shares of Series E Preferred Stock and dividends pro rata, as provided in the next proviso, on all outstanding shares of Series E Preferred Stock and of all series of Preferred Stock ranking on a parity with the Series E Preferred Stock with respect to dividends; and provided further that dividends may be declared and paid or declared and a sum sufficient for payment thereof set apart for such payment pro rata on all outstanding shares of Series E Preferred Stock and all series of Preferred Stock of the Corporation ranking on a parity with the Series E Preferred Stock with respect to dividends so that the amounts of the dividends per share declared on the respective outstanding series of such Preferred Stock shall bear to each other the same ratios that the amounts of accumulated and unpaid dividends on such respective series shall bear to each other. 3.3 No dividend (other than a dividend payable in Common Stock of the Corporation or in any other shares of the Corporation ranking junior to the shares of Series E Preferred Stock as to dividends and upon liquidation, dissolution or winding up) shall be declared or paid or set apart for payment, and no other distribution shall be declared or made, on shares of Common Stock of the Corporation or any other shares of the Corporation ranking junior to the Series E Preferred Stock as to dividends or upon liquidation, dissolution or winding up, and no shares of Common Stock or Preferred Stock, other than the Series E Preferred Stock, of the Corporation and no other shares of the Corporation ranking junior to or on a parity with the Series E Preferred Stock as to dividends or upon liquidation, dissolution or winding up (except Series F Preferred Stock contemplated in resolutions adopted by the Board on June 25, 1990) shall be redeemed, purchased or otherwise acquired for any consideration (and no moneys shall be paid to or made available for a sinking fund for the redemption of any such shares) by the Corporation (except by conversion into or exchange for shares of Common Stock or other shares of the Corporation ranking junior to the Series E Preferred Stock as to dividends and upon liquidation, dissolution or winding up), unless, in each such case, full cumulative cash dividends on all outstanding shares of Series E Preferred Stock shall have been or shall contemporaneously be declared and paid or declared and a sum sufficient for payment thereof set apart for such payment for the current and all past dividend periods and unless, in the case of any such action after the twelfth anniversary of the first date on which shares of Series E Preferred Stock are issued, no shares of Series E Preferred Stock shall be outstanding. Section 4. Voting. The holders of the Series E Preferred Stock shall have the voting rights provided in Section 5 Article V of the Articles of Incorporation of the Corporation. Section 5. Liquidation Rights. 5.1 In the event of the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of shares of Series E Preferred Stock then outstanding shall be entitled to receive, after payment or provision for payment of all creditors of the Corporation, but before any distribution or payment shall be made in respect of the Common Stock or any other shares of the Corporation ranking junior to the Series E Preferred Stock upon liquidation, dissolution or winding up, an amount equal to $68.85 per share (the "Liquidation Preference"), plus an amount equal to all accumulated and unpaid dividends thereon (whether or not earned or declared) to the distribution or payment date, but such holders shall not be entitled to any further participation in any distribution or payment in connection with any such liquidation, dissolution or winding up. If, upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the net assets of the Corporation distributable among the holders of all outstanding shares of Series E Preferred Stock and any other series of Preferred Stock and of any other shares of the Corporation ranking on a parity with the Series E Preferred Stock upon liquidation, dissolution, or winding up shall be insufficient to permit the payment in full to all such holders of the preferential amounts to which they are entitled, then, the net assets so distributable shall be distributed among such holders ratably in proportion to the full amounts to which they would otherwise be entitled. 5.2 Neither the consolidation or merger of the Corporation with or into any other corporation or corporations, nor the sale or transfer by the Corporation of all or any part of its assets, shall be deemed to be a liquidation, dissolution or winding up of the Corporation for purposes of this Section 5. Section 6. Redemption. 6.1 The Corporation may at its option at any time or from time to time redeem, in whole or in part, any share of Series E Preferred Stock that, at the time the notice of redemption thereof is given as provided in Section 6.3 hereof, is not beneficially owned by the Dai-ichi Mutual Life Insurance Company ("Dai-ichi") or any direct or indirect successor to all or substantially all of Dai-ichi's business or by any corporation at least 99% of whose outstanding voting securities is at the time owned directly or indirectly by such Company or any such successor and which agrees to be bound to the same obligations as to which Dai-ichi is bound under that certain Investment Agreement, dated as of June 25, 1990, at a redemption price per share, in cash, equal to the Liquidation Preference plus an amount equal to all accumulated and unpaid dividends thereon (whether or not earned or declared) to the redemption date. If fewer than all of the outstanding shares of Series E Preferred Stock that are subject to redemption pursuant to the provisions of this Section 6.1 are to be redeemed, the Board shall have complete discretion as to which of such shares subject to redemption are to be redeemed. 6.2 On the twelfth anniversary of the first date on which shares of Series E Preferred Stock are issued, the Corporation shall redeem (but only out of assets of the Corporation legally available therefor and subject to any applicable redemption or dividend limitations set forth in Section 2.3 of the terms of the Series A Preferred Stock and Section 3(d) of the terms of the Series B, C and D Preferred Stocks, as such terms are in effect at the date of this amendment to the Articles of Incorporation, Section 9.3 of the Purchase Agreement, dated as of July 13, 1979, for the purchase of the Company's 9-3/4% Subordinated Notes due 1994, Section 8.6 of the $300,000,000 Revolving Credit Agreement, dated as of July 14, 1987, among the Company, Swiss Bank Corporation International Limited, Swiss Bank Corporation, New York Branch, and several financial institutions and Section 5.06 of the $200,000,000 Revolving Credit Agreement, dated as of July 28, 1987, among the Company, certain financial institutions and Morgan Guaranty Trust Company of New York) all shares of Series E Preferred Stock then outstanding, at a redemption price per share, in cash, equal to the Liquidation Preference per share plus an amount equal to all accumulated and unpaid dividends thereon (whether or not earned or declared) to the redemption date, provided, however, that this Section 6.2 shall not apply to any shares in exchange for which the Corporation shall on such date issue other securities pursuant to and in accordance with the provisions of Section 7 hereof. In the event that on such twelfth anniversary date the Corporation shall be unable, by reason of an insufficiency of assets legally available therefor or by reason of the redemption and dividend limitations referred to above, to redeem all of the outstanding shares of Series E Preferred Stock, the Corporation shall redeem on such twelfth anniversary date under this Section 6.2 such number of shares as it shall be able to redeem, pro rata as nearly as practicable (without redemption of fractions of shares) in proportion to the respective numbers of shares held by each holder, and thereafter, if and to the extent assets shall at any time or from time to time become legally available therefore and such redemption and dividend limitations shall permit, the Corporation shall as promptly as practicable redeem shares of Series E Preferred Stock, pro rata as provided above, at such redemption price, plus an amount equal to accumulated and unpaid dividends thereon (whether or not earned or declared) to the redemption date. 6.3 In the event the Corporation shall elect or be obligated to redeem shares of Series E Preferred Stock, notice of such redemption shall be given by airmail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the redemption date, to each holder of record of the shares to be redeemed, at such holder's address as the same shall appear on the stock record books of the Corporation. Each such notice shall state: (1) the redemption date; (2) the number of shares of Series E Preferred Stock to be redeemed and, if fewer than all the shares held by the holder are to be redeemed, the number of such holder's shares to be redeemed; (3) the redemption price; (4) the place or places in the States of Indiana or New York where certificates for such shares are to be surrendered for payment of the redemption price; (5) that dividends on the shares to be redeemed will cease to accumulate on the redemption date specified in the notice; (6) the provision of this amendment to the Articles of Incorporation authorizing or requiring such redemptions; and (7) the then effective Conversion Price (as defined in Section 8.1 hereof), that until the close of business on the redemption date the holders may exercise their right to convert shares of Series E Preferred Stock being redeemed and that such right will terminate at the close of business on the redemption date. 6.4 From and after the redemption date specified in any such notice of redemption, unless default shall be made by the Corporation in providing monies at the time and place specified for payment of the redemption price pursuant to such notice, all dividends on the shares of Series E Preferred Stock thereby called for redemption shall cease to accumulate and all rights of the holders thereof as such holders, except the right to receive the redemption price upon surrender, shall cease and terminate. 6.5 The Corporation may, however, at any time prior to the redemption date specified in a duly given notice of redemption but after such notice of redemption shall have been mailed as aforesaid, deposit in trust for the benefit of the holders of the Series E Preferred Stock to be redeemed, with a bank or trust company in good standing organized under the laws of the United States of America or of the State of New York, or of the State of Indiana, doing business in the Borough of Manhattan, City of New York, or in the State of Indiana, having capital, surplus and undivided profits aggregating at least $50,000,000, designated in such notice of redemption, an amount in cash equal to the redemption price of all such shares so called for redemption under arrangements providing irrevocably for payment to such holders, and thereupon, whether or not certificates for the shares so called for redemption shall have been surrendered for cancellation (if such notice shall state that holders of the shares so called for redemption may receive their redemption price at any time after such deposit), all shares with respect to which such deposit shall have been made shall be deemed to be no longer outstanding, dividends thereon for any period after the date so fixed for redemption shall cease to accumulate and all rights with respect to such shares shall forthwith upon such deposit in trust cease and terminate except only (a) the rights of the holders thereof to receive from such bank or trust company, at any time after the time of such deposit, the redemption price of such shares to be redeemed, or (b) the right to exercise, on or before the close of business on the date fixed for redemption, the privileges of conversion. Any moneys so deposited by the Corporation which shall not be required for such redemption because of the exercise of any such right of conversion, shall be repaid to the Corporation forthwith. Any moneys so deposited by the Corporation and unclaimed at the end of six years from the date fixed for such redemption shall be repaid to the Corporation upon its request expressed in a resolution of its Board of Directors, after which repayment the holders of the shares so called for redemption shall look only to the Corporation for the payment thereof. 6.6 Nothing in this Section 6 shall limit any legal right of the Corporation to purchase or otherwise acquire any shares of the Series E Preferred Stock at not exceeding the price at which the same may be redeemed at the option of the Corporation. Section 7. Exchange. 7.1 On the twelfth anniversary of the first date on which shares of Series E Preferred Stock are issued, the Corporation may, at its option, with respect to any shares of Series E Preferred Stock then outstanding, other than any for which notice of redemption shall have previously been given, issue in exchange therefor either: (1) a whole number of shares of a series of nonconvertible Preferred Stock of the Corporation, or (2) a whole number of shares of Common Stock of the Corporation, or any combination of shares described in the foregoing clauses (1) and (2) (and cash in lieu of fractional interests, if any), provided that the shares so issued shall (a) have on the date of issue an aggregate fair market value, as determined by an Independent Financial Firm (as defined hereinafter in this section 7.1) selected by the Board, equal to the aggregate Liquidation Preference of the shares of Series E Preferred Stock for which such shares are to be issued in exchange, plus an amount equal to accumulated and unpaid dividends on such shares of Series E Preferred Stock (whether or not earned or declared) to the exchange date; (b) be free of any transfer restriction and, if and to the extent necessary for public offering and resale, registered or qualified under the Federal Securities Act of 1933, as amended, or any successor statute, and under such State securities laws as any holder may reasonably request (provided, that in connection with qualification under State securities laws the Corporation shall not be obligated to qualify to do business in any jurisdiction when it is not so qualified or to take any action that would subject it to taxation or general service of process in any State where it is not otherwise subject to taxation or general service of process); and (c) in the case of Common Stock, listed on each securities exchange, if any, upon which outstanding Common Stock is listed at the time of the exchange. The term "Independent Financial Firm," as of any time, shall mean an internationally recognized investment banking or investment advisory firm which does not at such time have a direct or indirect material interest in, or other direct or indirect material relationship with, the Corporation or any of its subsidiaries or affiliates. 7.2 In the event the Corporation shall elect to issue shares in exchange pursuant to Section 7.1 hereof, notice of such exchange shall be given by airmail, postage prepaid, mailed not less that 30 nor more than 60 days prior to the exchange date, to each holder of record of the shares of Series E Preferred Stock to be exchanged, at such holder's address as the same shall appear on the stock record books of the Corporation. Each such notice shall state: (1) the exchange date; (2) the number and terms of the shares to be issued in exchange for shares held by such holder; (3) the identity of the Independent Financial Firm selected by the Board to determine fair market value as provided in Section 7.1 hereof; (4) the place or places in the State of Indiana or New York where certificates for the shares of Series E Preferred Stock to be exchanged are to be surrendered for the shares to be issued in exchange therefor; (5) that dividends on the shares of Series E Preferred Stock to be exchanged will cease to accumulate on the exchange date; and (6) the then effective Conversion Price (as defined in Section 8.1 hereof), that until the close of business on the exchange date the holders may exercise the right to convert shares of Series E Preferred Stock being exchanged and that such right shall terminate at the close of business on the exchange date. 7.3 From and after the exchange date specified on any such notice of exchange, unless default shall be made by the Corporation in issuing the shares to be issued in the exchange, all dividends on the shares of Series E Preferred Stock to be exchanged as specified in the notice shall cease to accumulate and all rights of the holders thereof as such holders, except the right to receive the shares to be issued in the exchange, shall cease and terminate and the person or persons entitled to the shares to be issued in the exchange shall be treated for all purposes as the registered holder of the shares to be issued. Section 8. Conversion. 8.1 Subject to and upon compliance with the provisions of this Section 8, the holder of each share of Series E Preferred Stock shall have the right, at the holder's option, at any time (except that, if such share is called for redemption or exchange, not after the close of business on the date fixed for such redemption or exchange, unless default shall be made in the payment of the redemption price or the issuance of shares in the exchange) to convert such share into that number of fully paid and nonassessable shares of Common Stock (calculated as to each conversion to the nearest 1/1,000th of a share) obtained by dividing the Liquidation Preference of such share being converted by the Conversion Price (as defined below) and by surrender of such share so to be converted, such surrender to be made in the manner provided in Section 8.2. For the purposes of this Section 8, the term "Common Stock" shall include any stock of any class of the Corporation which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation and which is not subject to redemption by the Corporation. However, shares issuable on conversion of shares of Series E Preferred Stock shall include only shares of the class designated as Common Stock of the Corporation as of the date of this amendment to the Articles of Incorporation creating the Series E Preferred Stock, or shares of any class or classes resulting from any reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation and which are not subject to redemption by the Corporation; provided that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable upon conversion shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. The term "Conversion Price" shall mean the Initial Conversion Price, as adjusted in accordance with the provisions of this Section 8. The term "Initial Conversion Price" shall mean an amount equal to the Liquidation Preference. On the fifth anniversary of the first date on which shares of Series E Preferred Stock are issued, the Conversion Price then in effect shall be increased by 4-1/6% and on the eighth anniversary of such first date, the Conversion Price then in effect shall be increased by 4%. 8.2 In order to exercise the conversion privilege, the holder of each share of Series E Preferred Stock to be converted shall surrender the certificate representing such share at the office of the conversion agent for the Series E Preferred Stock in the Borough of Manhattan, City of New York, appointed for such purpose by the Corporation or, if no conversion agent has been appointed, to the Corporation at its offices at 1300 South Clinton, Fort Wayne, Indiana 46801 Attention: Treasurer (such conversion agent or Corporation, as the case may be, referred to herein as the "conversion agent"), with the Notice of Election to Convert on the back of said certificate completed and signed. Such notice shall be substantially in the following form: "NOTICE OF ELECTION TO CONVERT The undersigned, being a holder of the 5-1/2% Cumulative Convertible Exchangeable Preferred Stock, Series E (the "Series E Preferred Stock") of Lincoln National Corporation, irrevocably exercises the right to convert ____________ outstanding shares of Series E Preferred stock on ____________________, into shares of Common Stock of Lincoln National Corporation in accordance with the terms of the Series E Preferred Stock, and directs that the shares issuable and deliverable upon the conversion, together with any check in payment for fractional shares, be issued and delivered in the denominations indicated below to the registered holder hereof unless a different name has been indicated below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Dated: Fill in for registration of shares of Common Stock if to be issued otherwise than to registered holder: _____________________________________ If fractional interests: Name TAX ID #______________________ - ------------------------------------- Address - ------------------------------------- ------------------------------- (Please print name and address, including (Signature) postal code number) Denominations:________________________" Unless the shares issuable in conversion are to be issued in the same as the name in which such share of Series E Preferred Stock is registered, each share surrendered for conversion shall be accompanied by instruments of transfer, in form satisfactory to the Corporation, duly executed by the holder or his duly authorized attorney and an amount sufficient to pay any transfer or similar tax. A payment shall be made on conversion for dividends accumulated on the Series E Preferred Stock surrendered for conversion but not for dividends on Common Stock delivered on such conversion. As promptly as practicable after the surrender of the certificates for shares of Series E Preferred Stock as aforesaid, the Corporation shall issue and shall deliver at such office to such holder, or on his written order, a certificate or certificates for the number of full shares of Common Stock issuable upon the conversion if such shares in accordance with provision of this Section 8, and any fractional interest in respect of a share of Common Stock arising upon such conversion shall be settled as provided in Section 8.3 hereof. Each conversion shall be deemed to have been effected immediately prior to the close of business on the date on which the certificates for shares of Series E Preferred Stock shall have been surrendered and such notice received by the Corporation as aforesaid, and the person or persons in whose name or names any certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby at such time on such date and such conversion shall be at the Conversion Price in effect at such time on such date. All shares of Common Stock delivered upon conversions of the Series E Preferred Stock shall upon delivery be duly and validly issued and fully paid and non-assessable, free of all liens and charges and not subject to any preemptive rights. 8.3 No fractional shares or scrip representing fractions of shares of Common Stock shall be issued upon conversion of shares of Series E Preferred Stock. Instead of any fractional interest in a share of Common Stock which would otherwise be deliverable upon the conversion of a share of Series E Preferred Stock, the Corporation shall pay to the holder of such share an amount in cash (computed to the nearest one cent) equal to the Average Market Price of the Common Stock at the close of business on the business day next preceding the day of conversion. If more than one share shall be surrendered for conversion at one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate Conversion Price of the shares of Series E Preferred Stock so surrendered. The term "Average Market Price" of any security on any date means the average of the daily closing prices of such security for a period of five consecutive trading days within the 10 days immediately preceding the day in question, which five consecutive trading days are selected by the Corporation provided, however, that if the "ex" date for any event (other than the event requiring such computation) that requires an adjustment pursuant to Section 8.4 occurs during the 10-trading day period in question and prior to the "ex" date for the event requiring computation, the closing price for each trading day prior to the "ex" date for such other event shall be adjusted by multiplying such closing price by the same fraction by which the Conversion Price is required to be adjusted pursuant to Section 8.4 as a result of such other event (and in the case of Section 8.4(a) the fraction that would result in the adjustment provided for therein). The closing price for each day shall be the last reported sales price regular way or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange or, if such security is not listed or admitted to trading on such Exchange, on the principal national securities exchange on which such security is listed or admitted to trading on such Exchange, on the principal national securities exchange on which such security is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the National Association of Securities Dealers Automated Quotations National Market System or, if such security is not listed or admitted to trading on any national securities exchange or quoted on such National Market System, the average of the closing bid and asked prices in the over-the-counter market as furnished by any New York Stock Exchange member firm selected from time to time by the issuer of such security for that purpose. For the purposes of this definition, the term "trading day" means each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day on which such security is not traded on such exchange or in such market. For the purposes of this definition, the term "`ex' date", (i) when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the relevant exchange or in the relevant market from which the closing price was obtained without the right to receive such issuance or distribution and (ii) when used with respect to any subdivision or combination of shares of Common Stock, means the first date on which the Common Stock trades regular was on such exchange or in such market after the time at which such subdivision or combination becomes effective. 8.4 In addition to the increases in the Conversion Price set forth in the Section 8.1 hereof, the Conversion Price shall be adjusted from time to time as follows: (a) In case the Corporation shall hereafter (i) pay a dividend or make a distribution on the Common Stock in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, or (iii) combine its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such action shall be adjusted so that the holder of any share of Series E Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock which he would have been entitled to receive immediately following such action had such share been converted immediately prior thereto. An adjustment made pursuant to this Section 8.4(a) shall become effective immediately after the record date, in the case of a dividend or distribution, or immediately after the effective date, in the case of a subdivision or combination. (b) In case the Corporation shall hereafter pay or make a dividend or other distribution in shares of Common Stock on any class of capital stock of the Corporation other than the Common Stock, the Conversion Price in effect immediately after the record date mentioned in the next sentence shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the record date mentioned in the next sentence by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the record date mentioned in the next sentence and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution. Such reduction shall become effective immediately after the record date for the determination of shareholders entitled to receive such dividend or other distribution. For the purposes of this Section 8.4(b), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Corporation but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Corporation shall not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Corporation. (c) In case the Corporation shall hereafter issue rights or warrants to holders of its outstanding shares of Common Stock generally entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the Average Market Price of the Common Stock (as defined in Section 8.3 hereof) on the record date mentioned in the next sentence (other than pursuant to an automatic dividend reinvestment plan of the Corporation or any substantially similar plan) the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the record date mentioned in the next sentence by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the record date mentioned in the next sentence plus the number of shares which the aggregate offering price of the total number of shares so offered for subscription or purchase would purchase at such Average Market Price, and of which the denominator shall be the number of shares of Common Stock outstanding at the close of business on the record date mentioned in the next sentence plus the number of shares of Common Stock so offered for subscription of purchase. Such reduction shall become effective immediately after the record date for the determination of shareholders entitled to receive such rights or warrants. For the purposes of this Section 8.4(c), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Corporation but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. Rights or warrants issued or distributed by the Company to all holders of its Common Stock entitling the holders thereof to subscribe for or purchase shares of Common Stock, which rights or warrants (x) are deemed to be transferred with such shares of Common Stock, (y) are not exercisable and (z) are issued also in respect of future issuances of Common Stock, in each case in clauses (x) through (z) until the occurrence of a specified event or events ("Trigger Event"), shall for purposes of this Section 8.4 not be deemed issued or distributed until the occurrence of the earliest Trigger Event. Such rights or warrants are referred to herein as "Rights". (d) In case the Corporation shall, by dividend or otherwise, hereafter distribute to holders of its outstanding shares of Common Stock generally evidences of its indebtedness, any securities of the Corporation, any rights or warrants to subscribe to securities of the Corporation, cash or assets (excluding (i) any cash dividend paid from retained earnings of the Corporation to the extent such dividends in any calendar year do not in the aggregate exceed 150% of the aggregate regular periodic cash dividends actually paid in the prior calendar year, (ii) dividends or distributions payable in stock for which adjustment is made pursuant to Section 8.4(a) or 8.4(b) hereof, (iii) rights or warrants to subscribe to Common Stock for which adjustment is made pursuant to Section 8.4(c) hereof, and (iv) pursuant to a consolidation, merger, statutory exchange, sale or conveyance for which adjustment is made pursuant to Section 8.11 hereof), then in each such case the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the record date mentioned in the next sentence by a fraction (not equal or less than zero) of which the numerator shall be the Average Market Price of the Common Stock (as defined in Section 8.3 hereof) on the record date mentioned in the next sentence less the fair market value (as determined by the Board and Dai-ichi (or any direct or indirect successor to all or substantially all of such Company's business) jointly (if such Company or successor or any corporation at least 99% of whose outstanding voting securities at the time outstanding is owned by such Company or successor shall be a holder of any of the Series E Preferred Stock) or an internationally recognized investment banking firm selected by them if they are unable to reach agreement, or the Board in its reasonable discretion whose determination will be conclusive and evidenced by a board resolution filed with the conversion agent (if none of the foregoing shall be a holder of Series E Preferred Stock) of the portion of the evidences of indebtedness, securities, right or warrants, cash or assets so distributed to the holder of one share of Common Stock, and of which the denominator shall be such Average Market Price of the Common Stock. Such adjustment shall become effective immediately after the record date for the determination of shareholders entitled to receive such distribution. Such determination of fair market value shall be set forth in a statement filed with the conversion agent by the Corporation as soon as practicable. (e) The reclassification (including any reclassification upon a merger in which the Corporation is the continuing corporation but excluding a reclassification upon a consolidation, merger, statutory exchange, sale or conveyance as to which Section 8.11 applies) of Common Stock into securities including other than Common Stock shall be deemed to involve (i) a distribution of such securities other than Common Stock to all holders of Common Stock and the effective date of such reclassification shall be deemed to be "the record date for the determination of shareholders entitled to receive such distribution" within the meaning of Section 8.4(d) hereof, and (ii) a subdivision or combination, as the case may be, of the number of shares of Common Stock outstanding immediately prior to such reclassification into the number of shares of Common Stock outstanding immediately thereafter and the effective date of such reclassification shall be deemed to be "the day upon which such subdivision becomes effective" or "the day upon which such combination becomes effective," as the case may be. (f) In any case in which this Section 8 shall require that an adjustment be made immediately following a record date or an effective date, the Corporation may elect to defer (but only until five business days following the prompt filing by the Corporation with the conversion agent of the certificate of independent accountants required by Section 8.4(h) hereof) issuing to the holder of any share of Series E Preferred Stock converted after such record date or effective date the additional shares of Common Stock or other capital stock issuable upon such conversion over and above the shares of Common Stock or other capital stock issuable upon such conversion on the basis of the Conversion Price prior to adjustment, and paying to such holder any amount of cash in lieu of a fractional share. (g) All calculations under this Section 8 shall be made to the nearest one cent or to the nearest 1/1,000th of a share, as the case may be. Anything in this Section 8 to the contrary notwithstanding, the Corporation shall be entitled to make such reduction in the Conversion Price, in addition to those required by this Section 8, as it considers to be advisable in order that any stock dividend, subdivision of shares, distribution of rights to purchase stock or securities, or distribution of securities convertible into or exchangeable for stock hereafter made by the Corporation to its shareholders shall not be taxable to the recipients. (h) Whenever the Conversion Price is adjusted as herein provided, (A) the Corporation shall promptly obtain and file with the conversion agent a certificate of a firm of independent public accountants (who may be the regular accountants employed by the Corporation) setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment and the manner of computing the same, and (B) a notice stating that the Conversion Price has been adjusted and setting forth that the adjusted Conversion Price shall forthwith be airmailed by the Corporation to the holders of the Series E Preferred Stock at their addresses as shown on the stock record books of the Corporation. (i) In the event that at any time as a result of an adjustment made pursuant to this Section 8, the holder of any share of Series E Preferred Stock thereafter surrendered for conversion shall become entitled to receive any shares of the Corporation other than shares of Common Stock, thereafter the Conversion Price of such other shares so receivable upon conversion of any share shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in this Section 8. (j) Anything herein to the contrary notwithstanding, in the event the Corporation shall declare any dividend or distribution requiring an adjustment in the Conversion Price hereunder and shall, thereafter and before the payment of such dividend or distribution to shareholders, legally abandon its plan to pay such dividend or distribution, the Conversion Price then in effect hereunder, if changed to reflect such dividend or distribution, shall be changed to the Conversion Price which would have been in effect immediately after the date of such abandonment had such dividend or distribution never been declared. Such change shall become effective immediately after the date of such abandonment. (k) No adjustment (except pursuant to Section 8.4(a)) in the Conversion Price need be made unless the adjustment would require an increase or decrease of at least 2% in the Conversion Price provided, however, that any adjustments which by reason of this subsection (k) are not required to be made shall be carried forward and taken into account in any subsequent adjustment, and provided further, that adjustment shall be required and made in accordance with the provisions hereof not later than such time as may be required in order to preserve the tax-free nature of a distribution to the holders of shares of Series E Preferred Stock. 8.5 In case: (i) the Corporation shall declare a dividend (or any other distribution) on its Common Stock other than a cash dividend payable in cash out of its retained earnings for which adjustment under Section 8.4(d) is not required; or (ii) the Corporation shall authorize the granting to the holders of the Common Stock of rights or warrants to subscribe for or purchase any shares of stock of any class or of any other rights; or (iii) there shall be any capital stock reorganization or reclassification of the Common Stock (other than a subdivision or combination of the outstanding Common Stock and other than a change in the par value of the Common Stock), or any consolidation or merger to which the Corporation is a party or any statutory exchange of securities with another corporation, or any sale or transfer of all or substantially all the assets of the Corporation, in each case which is to be effected in such a way that holders of the Common Stock will be entitled to receive stock, securities, cash or other property with respect to or in exchange for Common Stock; or (iv) there shall be a voluntary dissolution, liquidation or winding up of the Corporation; then the Corporation shall cause to be filed with the conversion agent, and shall cause to be airmailed to the holders of shares of the Series E Preferred Stock at their addresses as shown on the stock record books of the Corporation, at least 15 days (or 10 days in any case specified in clause (i) or (ii) above) prior to the applicable record or effective date hereinafter specified, a notice stating (A) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, is a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights or warrants are to be determined, or (B) the date on which such reorganization, reclassification, consolidation, merger, statutory exchange, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, statutory exchange, sale, transfer, dissolution, liquidation or winding up. 8.6 The Corporation covenants that it will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued shares of Common Stock or its issued shares of Common Stock held in its treasury, or both, for the purpose of effecting conversions of the Series E Preferred Stock, the full number of shares of Common Stock, deliverable upon the conversion of all outstanding shares of Series E Preferred Stock not theretofore converted. For purposes of this Section 8.6, the number of shares of Common Stock which shall be deliverable upon the conversion of all outstanding shares of Series E Preferred Stock shall be computed as if at the time of computation all such outstanding shares were held by a single holder. 8.7 Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value (if any) of the shares of Common Stock deliverable upon conversion of the Series E Preferred Stock, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and non-assessable shares of Common Stock, at such adjusted Conversion Price. 8.8 The Corporation shall use its best efforts to list the shares of Common Stock required to be delivered upon conversion of the Series E Preferred Stock prior to such delivery upon each securities exchange, if any, upon which the outstanding Common Stock is listed at the time of such delivery. 8.9 Prior to the delivery of any securities which the Corporation shall be obligated to deliver upon conversion of the Series E Preferred Stock, the Corporation shall use its best efforts to comply with all Federal and state laws and regulations thereunder requiring the registration of such securities with, or any approval of or consent to the delivery thereof by, any governmental authority. 8.10 The Corporation shall pay any and all documentary, stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversions of the Series E Preferred Stock pursuant hereto; provided, however, that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the holder of the Series E Preferred Stock to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. 8.11 In case of any consolidation or merger in which the Corporation is a party (other than a merger in which the Corporation is the continuing corporation), or in case of any sale or conveyance to another corporation of the property of the Corporation as an entirety or substantially as an entirely, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Corporation), in each case effected in such a way that holders of Common Stock shall be entitled to receive stock, securities, cash or other property with respect to or in exchange for Common Stock, the holder of each share of Series E Preferred Stock then outstanding shall have the right thereafter to convert such share into the kind and amount of stock, securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance by a holder of the number of shares of Common Stock into which such share of Series E Preferred Stock might have been converted immediately prior to such consolidation, merger, statutory exchange, sale or conveyance, assuming such holder of Common Stock failed to exercise his rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale, or conveyance (provided, that if the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance is not the same for each share of Common Stock in respect of which such rights of election shall not have been exercised ("non-electing share"), then for the purpose of this Section 8.11 the kind and amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance for each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). Thereafter, the holders of the Series E Preferred Stock shall be entitled to appropriate adjustments with respect to their conversion rights to the end that the provisions set forth in this Section 8.11 shall correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable on the conversion of the Series E Preferred Stock. Any such adjustment shall be approved by a firm of independent public accountants (who may be the regular accountants employed by the Corporation), evidenced by a certificate to that effect delivered to the conversion agent. The foregoing provisions of this Section 8.11 shall similarly apply to successive consolidations, mergers, statutory exchanges, sales or conveyances. 8.12 Notwithstanding Section 8.4(c) and (d) hereof, no adjustments to the Conversion Price by reason of any issuance or distribution or any Rights shall be made if either (i) the Corporation had made proper provision so that each holder of shares of Series E Preferred Stock who converts such shares into shares of Common Stock after the record date for such distribution and prior to the expiration or redemption of the Rights shall be entitled to receive upon such conversion, in addition to the shares of Common Stock issuable upon such conversion, a number of Rights to be determined as follows: (A) if such conversion occurs on or prior to the date for the distribution to the holders of Rights of separate certificates evidencing such Rights ("Distribution Date"), the same number of Rights to which a holder of a number of shares of Common Stock equal to the number of shares of Common Stock issuable upon such conversion is entitled at the time of such conversion in accordance with the terms and provisions of the applicable Rights; and (B) if such conversion occurs after the Distribution Date, the same number of Rights to which a holder of the same number of shares of Common Stock into which the shares of Series E Preferred Stock so converted was convertible immediately prior to the Distribution Date would have been entitled on the Distribution Date in accordance with the terms and provisions of and applicable to the Rights or (ii) each holder of shares of Series E Preferred Stock shall have received rights at all times substantially equivalent to the Rights, if any, held from time to time by a holder of the number of shares of Common Stock issuable upon conversion of the shares of Series E Preferred Stock held by such Series E Preferred Stock holder. Section 9. Status Upon Conversion, Redemption or Exchange. Upon any conversion, redemption or exchange of shares of Series E Preferred Stock, the shares of Series E Preferred Stock so converted, redeemed or exchanged shall have the status of authorized and unissued shares of Preferred Stock undesignated as to series. Section 10. General. 10.1 Certificates representing shares of the Series E Preferred Stock shall be exchangeable, at the option of the holder, for a new certificate or certificates of the same or different denominations representing in the aggregate the same number of shares. 10.2 The headings of the various subdivisions of this amendment to the Articles of Incorporation are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. ARTICLE II MANNER OF ADOPTION AND VOTE SECTION 1. Action by Directors. The Board of Directors of the Corporation adopted the foregoing amendment to the Articles of Incorporation by resolution duly adopted at a meeting held on June 25, 1990, at which a quorum was present. SECTION 2. Action by Shareholders. The foregoing amendment to the Articles of Incorporation was duly adopted by the Board of Directors without shareholder action. Pursuant to Sections 23-1-25-2(d) and 23-1-38-2(7) of the Act, no shareholder action is required in connection with such amendment to the Articles of Incorporation. SECTION 3. Compliance with Legal Requirements. The manner of adoption of the Articles of Amendment and the vote by which they were adopted constitute full legal compliance with the provisions of the Act and the Articles of Incorporation and the Bylaws of the Corporation. I hereby state subject to the penalties of perjury, that the statements contained herein are true this 3rd day of July, 1990. John L. Steinkamp Vice President ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION LINCOLN NATIONAL CORPORATION (Filed and Approved in Indiana May 24, 1991) The undersigned officer of LINCOLN NATIONAL CORPORATION (the "Corporation") existing pursuant to the provisions of the Indiana Business Corporation Law, as amended (the "Act"), desiring to give notice of corporate action effectuating amendment of its Articles of Incorporation, certifies to the following facts: ARTICLE I AMENDMENT SECTION 1. The date of Incorporation of the Corporation is January 5, 1968. SECTION 2. The name of the Corporation is LINCOLN NATIONAL CORPORATION. SECTION 3. The text of the amendment, which determines and sets forth the designation and the relative rights, preferences, qualifications, limitations and restrictions (other than voting rights) of the shares of a series of Preferred Stock, is as follows: Section 1. Designation. 1.1 The designation of the series of Preferred Stock, without par value, of the Corporation created by this amendment is the "5 1/2% Cumulative Convertible Exchangeable Preferred Stock, Series F", without par value (the "Series F Preferred Stock"). Section 2. Authorized Number of Shares. 2.1 The number of authorized shares constituting the Series F Preferred Stock is 2,216,454 shares. Section 3. Dividends. 3.1 The holders of shares of Series F Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors of the Corporation (the "Board") out of assets of the Corporation legally available therefor, cumulative cash dividends at the annual rate of 5 1/2% of the Liquidation Preference (specified in Section 5.1 hereof) per share, and no more, payable quarterly on the 5th day of March, June, September and December in each year beginning on the first quarterly dividend payment date following the first date on which the Corporation shall issue any shares of the Series F Preferred Stock. Dividends on the Series F Preferred Stock shall be cumulative from the first date on which the Corporation shall issue any shares of the Series F Preferred Stock. Dividends on the Series F Preferred Stock shall be payable to holders of record as they appear on the stock record books of the Corporation on the dividend payment dates, provided that the Board or any duly authorized committee may in any case fix a record date, not more than 60 days nor less than 15 days before the dividend payment date, in which event the dividend shall be payable to the holders of record on such record date (whether or not such holders shall have exercised their rights of conversation after such record date). Dividends on the Series F Preferred Stock will be calculated on the basis of a 360-day year of twelve 30-day months. Holders of the Series F Preferred Stock shall not be entitled to any interest, or sum of money in lieu of interest, in respect of any dividend payment or payments on shares of Series F Preferred Stock which may be in arrears. 3.2 No dividend shall be declared or paid or set apart for payment on shares of any series of the Preferred Stock of the Corporation for any period unless full cumulative dividends on all outstanding shares of Series F Preferred Stock shall have been or shall contemporaneously be declared and paid or declared and a sum sufficient for payment thereof set apart for such payment for the current and all past dividend periods; provided, however, that there may be declared and paid or declared and a sum sufficient for payment thereof set apart for such payment full dividends on all outstanding shares of $3.00 Cumulative Convertible Preferred Stock, Series A, without par value (the "Series A Preferred Stock"), created by resolutions of the Board adopted on May 28, 1969, which were outstanding on July 6, 1990, the first date the Corporation issued any shares of its 5 1/2% Cumulative Convertible Exchangeable Preferred Stock, Series E (the "Series E Preferred Stock") and dividends pro rata, as provided in the next proviso, on all outstanding shares of Series F Preferred Stock and of all series of Preferred Stock ranking on a parity with the Series F Preferred Stock with respect to dividends; and provided further that dividends may be decared and paid or declared and a sum sufficient for payment thereof set apart for such payment pro rata on all outstanding shares of Series F Preferred Stock and all series of Preferred Stock of the Corporation ranking on a parity with the Series F Preferred Stock with respect to dividends so that the amount of the dividends per share declared on the respective outstanding series of such Preferred Stock shall bear to each other the same ratios that the amounts of accumulated and unpaid dividends on such respective series shall bear to each other. 3.3 No dividend (other than a dividend payable in Common Stock of the Corporation or in any other shares of the Corporation ranking junior to the shares of Series F Preferred Stock as to dividends and upon liquidation, dissolution or winding up) shall be declared or paid or set apart for payment, and no other distribution shall be declared or made, on shares of Common Stock of the Corporation or any other shares of the Corporation ranking junior to the Series F Preferred Stock as to dividends or upon liquidation, dissolution or winding up, and no shares of Common Stock or Preferred Stock, other than the Series F Preferred Stock, of the Corporation and no other shares of the Corporation ranking junior to or on a parity with the Series F Preferred Stock as to dividends or upon liquidation, dissolution or winding up (except the Series E Preferred Stock) shall be redeemed, purchased or otherwise acquired for any consideration (and no moneys shall be paid to or made available for a sinking fund for the redemption of any such shares) by the Corporation (except by conversion into or exchange for shares of Common Stock or other shares of the Corporation ranking junior to the Series F Preferred Stock as to dividends and upon liquidation, dissolution or winding up), unless, in each such case, full cumulative cash dividends on all outstanding shares of Series F Preferred Stock shall have been or shall contemporaneously be declared and paid or declared and a sum sufficient for payment thereof set apart for such payment for the current and all past dividend periods and unless, in the case of any such action after July 6, 2002, the twelfth anniversary of the first date on which shares of Series E Preferred Stock were issued, no shares of Series F Preferred Stock shall be outstanding. Section 4. Voting. The holders of the Series F Preferred Stock shall have the voting rights provided in Section 5 Article V of the Articles of Incorporation of the Corporation. Section 5. Liquidation Rights. 5.1 In the event of the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of shares of Series F Preferred Stock then outstanding shall be entitled to receive, after payment or provision for payment of all creditors of the Corporation, but before any distribution or payment shall be made in respect of the Common Stock or any other shares of the Corporation ranking junior to the Series F Preferred Stock upon liquidation, dissolution or winding up, an amount equal to $71.604 per share (the "Liquidation Preference"), plus an amount equal to all accumulated and unpaid dividends thereon (whether or not earned or declared) to the distribution or payment date, but such holders shall not be entitled to any further participation in any distribution or payment in connection with any such liquidation, dissolution or winding up. If, upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the net assets of the Corporation distributable among the holders of all outstanding shares of Series F Preferred Stock and any other series of Preferred Stock and of any other shares of the Corporation ranking on a parity with the Series F Preferred Stock upon liquidation, dissolution, or winding up shall be insufficient to permit the payment in full to all such holders of the preferential amounts to which they are entitled, then, the net assets so distributable shall be distributed among such holders ratably in proportion to the full amounts to which they would otherwise be entitled. 5.2 Neither the consolidation or merger of the Corporation with or into any other corporation or corporations, nor the sale or transfer by the Corporation of all or any part of its assets, shall be deemed to be a liquidation, dissolution or winding up of the Corporation for purposes of this Section 5. Section 6. Redemption 6.1 The Corporation may at its option at any time or from time to time redeem, in whole or in part, any share of Series F Preferred Stock that, at the time the notice of redemption thereof is given as provided in Section 6.3 hereof, is not beneficially owned by The Dai-ichi Mutual Life Insurance Company ("Dai-ichi") or any direct or indirect successor to all or substantially all of Dai-ichi's business or by any corporation at least 99% of whose outstanding voting securities is at the time owned directly or indirectly by such Company or any such successor and which agrees to be bound to the same obligations as to which Dai-ichi is bound under that certain Investment Agreement, dated as of June 25, 1990, at a redemption price per share, in cash, equal to the Liquidation Preference plus an amount equal to all accumulated and unpaid dividends thereon (whether or not earned or declared) to the redemption date. If fewer than all of the outstanding shares of Series F Preferred Stock that are subject to redemption pursuant to the provisions of this Section 6.1 are to be redeemed, the Board shall have complete discretion as to which of such shares subject to redemption are to be redeemed. 6.2 On July 6, 2002, the twelfth anniversary of the first date on which shares of Series E Preferred Stock were issued, the Corporation shall redeem (but only out of assets of the Corporation legally available therefor and subject to any applicable redemption or dividend limitations set forth in Section 2.3 of the terms of the Series A Preferred Stock and Section 3(d) of the terms of the Series B Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock as such terms were in effect on July 3, 1990, the date the amendment to the Articles of Incorporation creating the Series E Preferred Stock was filed with the Indiana Secretary of State, Section 9.3 of the Purchase Agreement, dated as of July 13, 1979, for the purchase of the Company's 9-3/4% Subordinated Notes due 1994, Section 8.6 of the $300,000,000 Revolving Credit Agreement, dated as of July 14, 1987, among the Company, Swiss Bank Corporation International Limited, Swiss Bank Corporation, New York Branch, and several financial institutions and Section 5.06 of the $200,000,000 Revolving Credit Agreement, dated as of July 28, 1987, among the Company, certain financial institutions and Morgan Guaranty Trust Company of New York) all shares of Series F Preferred Stock then outstanding, at a redemption price per share, in cash, equal to the Liquidation Preference per share plus an amount equal to all accumulated and unpaid dividends thereon (whether or not earned or declared) to the redemption date, provided, however, that this Section 6.2 shall not apply to any shares in exchange for which the Corporation shall on such date issue other securities pursuant to and in accordance with the provisions of Section 7 hereof. In the event that on July 6, 2002 the Corporation shall be unable, by reason of an insufficiency of assets legally available therefor or by reason of the redemption and dividend limitations referred to above, to redeem all of the outstanding shares of Series F Preferred Stock, the Corporation shall redeem on July 6, 2002 under this Section 6.2 such number of shares as it shall be able to redeem, pro rata as nearly as practicable (without redemption of fractions of shares) in proportion to the respective numbers of shares held by each holder, and thereafter, if and to the extent assets shall at any time or from time to time become legally available therefor and such redemption and dividend limitations shall permit, the Corporation shall as promptly as practicable redeem shares of Series F Preferred Stock, pro rata as provided above, at such redemption price, plus an amount equal to accumulated and unpaid dividends thereon (whether or not earned or declared) to the redemption date. 6.3 In the event the Corporation shall elect or be obligated to redeem shares of Series F Preferred Stock, notice of such redemption shall be given by airmail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the redemption date, to each holder of record of the shares to be redeemed, at such holder's address as the same shall appear on the stock record books of the Corporation. Each such notice shall state: (1) the redemption date; (2) the number of shares of Series F Preferred Stock to be redeemed and, if fewer than all the shares held by the holder are to be redeemed, the number of such holder's shares to be redeemed; (3) the redemption price; (4) the place or places in the States of Indiana or New York where certificates for such shares are to be surrendered for payment of the redemption price; (5) that dividends on the shares to be redeemed will cease to accumulate on the redemption date specified in the notice; (6) the provision of this amendment to Articles of Incorporation authorizing or requiring such redemptions; and (7) the then effective Conversion Price (as defined in Section 8.1 hereof), that until the close of business on the redemption date the holders may exercise their right to convert shares of Series F Preferred Stock being redeemed and that such right will terminate at the close of business on the redemption date. 6.4 From and after the redemption date specified in any such notice of redemption, unless default shall be made by the Corporation in providing monies at the time and place specified for payment of the redemption price pursuant to such notice, all dividends on the shares of Series F Preferred Stock thereby called for redemption shall cease to accumulate and all rights of the holders thereof as such holders, except the right to receive the redemption price upon surrender, shall cease and terminate. 6.5 The Corporation may, however, at any time prior to the redemption date specified in a duly given notice of redemption but after such notice of redemption shall have been mailed as aforesaid, deposit in trust for the benefit of the holders of the Series F Preferred Stock to be redeemed, with a bank or trust company in good standing organized under the laws of the United States of America or of the State of New York, or of the State of Indiana, doing business in the Borough of Manhattan, City of New York, or in the State of Indiana, having capital, surplus and undivided profits aggregating at least $50,000,000 designated in such notice of redemption, an amount in cash equal to the redemption prices of all such shares so called for redemption under arrangements providing irrevocably for payment to such holders, and thereupon, whether or not certificates for the shares so called for redemption shall have been surrendered for cancellation (if such notice shall state that holders of the shares so called for redemption may receive their redemption price at any time after such deposit), all shares with respect to which such deposit shall have been made shall be deemed to be no longer outstanding, dividends thereon for any period after the date so fixed for redemption shall cease to accumulate and all rights with respect to such shares shall forthwith upon such deposit in trust cease and terminate except only (a) the rights of the holders thereof to receive from such bank or trust company, at any time after the time of such deposit, the redemption price of such shares to be redeemed, or (b) the right to exercise, on or before the close of business on the date fixed for redemption, the privileges of conversion. Any moneys so deposited by the Corporation which shall not be required for such redemption because of the exercise of any such right of conversion, shall be repaid to the Corporation forthwith. Any moneys so deposited by the Corporation and unclaimed at the end of six years from the date fixed for such redemption shall be repaid to the Corporation upon its request expressed in a resolution of its Board of Directors, after which repayment the holders of the shares so called for redemption shall look only to the Corporation for the payment thereof. 6.6 Nothing in this Section 6 shall limit any legal right of the Corporation to purchase or otherwise acquire any shares of the Series F Preferred Stock at not exceeding the price at which the same may be redeemed at the option of the Corporation. Section 7. Exchange. 7.1 On July 6, 2002, the twelfth anniversary of the first date on which shares of Series E Preferred Stock were issued, the Corporation may, at its option, with respect to any shares of Series F Preferred Stock then outstanding, other than any for which notice of redemption shall have previously been given, issue in exchange therefore either: (1) a whole number of shares of a series of nonconvertible Preferred Stock of the Corporation, or (2) a whole number of shares of Common Stock of the Corporation, or any combination of shares described in the foregoing clauses (1) and (2) (and cash in lieu of fractional interests, if any), provided that the shares so issued shall (a) have on the date of issue an aggregate fair market value, as determined by an Independent Financial Firm (as defined hereinafter in this Section 7.1) selected by the Board, equal to the aggregate Liquidation Preference of the shares of Series F Preferred Stock for which such shares are to be issued in exchange, plus an amount equal to accumulated and unpaid dividends on such shares of Series F Preferred Stock (whether or not earned or declared) to the exchange date; (b) be free of any transfer restriction and, if and to the extent necessary for public offering and sale, registered or qualified under the Federal Securities Act of 1933, as amended, or any successor statute, and under such State securities laws as any holder may reasonably request (provided, that in connection with qualification under State securities laws the Corporation shall not be obligated to qualify to do business in any jurisdiction when it is not so qualified or to take any action that would subject it to taxation or general service of process in any State where it is not otherwise subject to taxation or general service of process); and (c) in the case of Common Stock, listed on each securities exchange, if any, upon which outstanding Common Stock is listed at the time of the exchange. The term "Independent Financial Firm," as of any time, shall mean an internationally recognized investment banking or investment advisory firm which does not at such time have a direct or indirect material interest in, or other direct or indirect material relationship with, the Corporation or any of its subsidiaries or affiliates. 7.2 In the event the Corporation shall elect to issue shares in exchange pursuant to Section 7.1 hereof, notice of such exchange shall be given by airmail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the exchange date, to each holder of record of the shares of Series F Preferred Stock to be exchanged, at such holder's address as the same shall appear on the stock record books of the Corporation. Each such notice shall state: (1) the exchange date; (2) the number and terms of the shares to be issued in exchange for shares held by such holder; (3) the identity of the Independent Financial Firm selected by the Board to determine fair market value as provided in Section 7.1 hereof; (4) the place or places in the State of Indiana or New York where certificates for the shares of Series F Preferred Stock to be exchanged are to be surrendered for the shares to be issued in exchange therefore; (5) that dividends on the shares of Series F Preferred Stock to be exchanged will cease to accumulate on the exchange date; (6) the then effective Conversion Price (as defined in Section 8.1 hereof), that until the close of business on the exchange date the holders may exercise their right to convert shares of Series F Preferred Stock being exchanged and that such right shall terminate at the close of business on the exchange date. 7.3 From and after the exchange date specified on any such notice of exchange, unless default shall be made by the Corporation in issuing the shares to be issued in the exchange, all dividends on the shares of Series F Preferred Stock to be exchanged as specified in the notice shall cease to accumulate and all rights of the holders thereof as such holders, except the right to receive the shares to be issued in the exchange, shall cease and terminate and the person or persons entitled to the shares to be issued in the exchange shall be treated for all purposes as the registered holder of the shares to be issued. Section 8. Conversion. 8.1 Subject to and upon compliance with the provisions of this Section 8, the holder of each share of Series F Preferred Stock shall have the right, at the holder's option, at any time (except that, if such share is called for redemption or exchange, not after the close of business on the date fixed for such redemption or exchange, unless default shall be made in the payment of the redemption price or the issuance of shares in the exchange) to convert such share into that number of fully paid and nonassessable shares of Common Stock (calculated as to each conversion to the nearest 1/1,000th of a share) obtained by dividing the Liquidation Preference of such share being converted by the Conversion Price (as defined below) and by surrender of such share so to be converted, such surrender to be made in the manner provided in Section 8.2. For the purposes of this Section 8, the term "Common Stock" shall include any stock of any class of the Corporation which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation and which is not subject to redemption by the Corporation. However, shares issuable on conversion of shares of Series F Preferred Stock shall include only shares of the class designated as Common Stock of the Corporation as of the date of this amendment to the Articles of Incorporation creating the Series F Preferred Stock, or shares of any class or classes resulting from any reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation and which are not subject to redemption by the Corporation; provided that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable upon conversion shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. The term "Conversion Price" shall mean the Initial Conversion Price, as adjusted in accordance with the provisions of this Section 8. The term "Initial Conversion Price" shall mean an amount equal to the Liquidation Preference. On July 6, 1995, the fifth anniversary of the first date on which shares of Series E Preferred Stock were issued, the Conversion Price then in effect for the Series F Preferred Stock shall be increased by 4-1/6% and on July 6, 1998, the eighth anniversary of such first date, the Conversion Price then in effect for the Series F Preferred Stock shall be increased by 4%. 8.2 In order to exercise the conversion privilege, the holder of each share of Series F Preferred Stock to be converted shall surrender the certificate representing such share at the office of the conversion agent for the Series F Preferred Stock in the Borough of Manhattan, City of New York, appointed for such purpose by the Corporation or, if no conversion agent has been appointed, to the Corporation at its offices at 1300 South Clinton Street, Fort Wayne, Indiana 46801, Attention: Treasurer (such conversion agent or Corporation, as the case may be, referred to herein as the "conversion agent"), with the Notice of Election to Convert on the back of said certificate completed and signed. Such notice shall be substantially in the following form: "NOTICE OF ELECTION TO CONVERT The undersigned, being a holder of the 5 1/2% Cumulative Convertible Exchangeable Preferred Stock, Series F (the "Series F Preferred Stock") of the Lincoln National Corporation, irrevocably exercises the right to convert outstanding shares of Series F Preferred Stock on , into shares of Common Stock of Lincoln National Corporation in accordance with the terms of the Series F Preferred Stock, and directs that the shares issuable and deliverable upon the conversion, together with any check in payment for fractional shares, be issued and delivered in the denominations indicated below to the registered holder hereof unless a different name has been indicated below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Dated: Fill in for registration of shares of Common Stock if to be issued otherwise than to the registered holder: If fractional interests: Name TaxID# Address Please print name and address, including (Signature) postal code number) Denominations: Unless the shares issuable on conversion are to be issued in the same name as the name in which such share of Series F Preferred Stock is registered, each share surrendered for conversion shall be accompa- nied by instruments of transfer, in form satisfactory to the Corporation, duly executed by the holder or his duly authorized attorney and an amount sufficient to pay any transfer or similar tax. A payment shall be made on conversion for dividends accumulated on the Series F Preferred Stock surrendered for conversion but not for dividends on Common Stock delivered on such conversion. As promptly as practicable after the surrender of the certificates for shares of Series F Preferred Stock as aforesaid, the Corporation shall issue and shall deliver at such office to such holder, or on his written order, a certificate or certificates for the number of full shares of Common Stock issuable upon the conversion of such shares in accordance with the provisions of this Section 8, and any fractional interest in respect of a share of Common Stock arising upon such conversion shall be settled as provided in Section 8.3 hereof. Each conversion shall be deemed to have been effected immediately prior to the close of business on the date on which the certificates for shares of Series F Preferred Stock shall have been surrendered and such notice received by the Corporation as aforesaid, and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby at such time on such date and such conversion shall be at the Conversion Price in effect at such time on such date. All shares of Common Stock delivered upon conversion of the Series F Preferred Stock shall upon delivery be duly and validly issued and fully paid and non-assessable, free of all liens and charges and not subject to any preemptive rights. 8.3 No fractional shares or scrip representing fractions of shares of Common Stock shall be issued upon conversion of shares of Series F Preferred Stock. Instead of any fractional interest in a share of Common Stock which would otherwise be deliverable upon the conversion of a share of Series F Preferred Stock, the Corporation shall pay to the holder of such share an amount in cash (computed to the nearest one cent) equal to the Average Market Price of the Common Stock at the close of business on the business day next preceding the day of conversion. If more than one share shall be surrendered for conversion at one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate Conversion Price of the shares of Series F Preferred Stock so surrendered. The term "Average Market Price" of any security on any date means the average of the daily closing prices of such security for a period of five consecutive trading days within 10 trading days immediately preceding the day in question, which five consecutive trading days are selected by the Corporation provided, however, that if the "ex" date for any event (other than the event requiring such computation) that requires an adjustment pursuant to Section 8.4 occurs during the 10-day trading period in question and prior to the "ex" date for the event requiring computation, the closing price for each trading day prior to the "ex" date for such other event shall be adjusted by multiplying such closing price by the same fraction by which the Conversion Price is required to be adjusted pursuant to Section 8.4 as a result of such other event (and in the case of Section 8.4(a) the fraction that would result in the adjustment provided for therein). The closing price for each day shall be the last reported sales price regular way or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange or, if such security is not listed or admitted to trading on such Exchange, on the principal national securities exchange on which such security is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the National Association of Securities Dealers Automated Quotations National Market System or, if such security is not listed or admitted to trading on any national securities exchange or quoted on such National Market System, the average of the closing bid and asked prices in the over-the-counter market as furnished by any New York Stock Exchange member firm selected from time to time by the issuer of such security for that purpose. For the purposes of this definition, the term "trading day" means each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day on which such security is not traded on such exchange or in such market. For the purposes of this definition, the term " `ex' date," (i) when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the relevant exchange or in the relevant market from which the closing price was obtained without the right to receive such issuance or distribution and (ii) when used with respect to any subdivision or combination of shares of Common Stock, means the first date on which the Common Stock trades regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective. 8.4 In addition to the increases in the Conversion Price set forth in Section 8.1 hereof, the Conversion Price shall be adjusted from time to time as follows: (a) In case the Corporation shall hereafter (i) pay a dividend or make a distribution on the Common Stock in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, or (iii) combine its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such action shall be adjusted so that the holder of any share of Series F Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock which he would have been entitled to receive immediately following such action had such share been converted immediately prior thereto. An adjustment made pursuant to this Section 8.4(a) shall become effective immediately after the record date, in the case of a dividend or distribution, or immediately after the effective date, in the case of a subdivision or combination. (b) In case the Corporation shall hereafter pay or make a dividend or other distribution in shares of Common Stock on any class of capital stock of the Corporation other than the Common Stock, the Conversion Price in effect immediately after the record date mentioned in the next sentence shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the record date mentioned in the next sentence by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the record date mentioned in the next sentence and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution. Such reduction shall become effective immediately after the record date for the determination of shareholders entitled to receive such dividend or other distribution. For the purposes of this Section 8.4(b), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Corporation but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Corporation shall not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Corporation. (c) In case the Corporation shall hereafter issue rights or warrants to holders of its outstanding shares of Common Stock generally entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the Average Market Price of the Common Stock (as defined in Section 8.3 hereof) on the record date mentioned in the next sentence (other than pursuant to an automatic dividend reinvestment plan of the Corporation or any substantially similar plan), the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the record date mentioned in the next sentence by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the record date mentioned in the next sentence plus the number of shares which the aggregate offering price of the total number of shares so offered for subscription or purchase would purchase at such Average Market Price, and of which the denominator shall be the number of shares of Common Stock outstanding at the close of business on the record date mentioned in the next sentence plus the number of shares of Common Stock so offered for subscription or purchase. Such reduction shall become effective immediately after the record date for the determination of shareholders entitled to receive such rights or warrants. For the purposes of this Section 8.4(c), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Corporation but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. Rights or warrants issued or distributed by the Company to all holders of its Common Stock entitling the holders thereof to subscribe for or purchase shares of Common Stock, which rights or warrants (x) are deemed to be transferred with such shares of Common Stock, (y) are not exercisable and (z) are issued also in respect of future issuances of Common Stock, in each case in clauses (x) through (z) until the occurrence of a specified event or events ("Trigger Event"), shall for purposes of this Section 8.4 not be deemed issued or distributed until the occurrence of the earliest Trigger Event. Such rights or warrants are referred to herein as "Rights". (d) In case the Corporation shall, by dividend or otherwise, hereafter distribute to holders of its outstanding shares of Common Stock generally evidences of its indebtedness, any securities of the Corporation, any rights or warrants to subscribe to securities of the Corporation, cash or assets (excluding (i) any cash dividend paid from retained earnings of the Corporation to the extent such dividends in any calendar year do not in the aggregate exceed 150% of the aggregate regular periodic cash dividends actually paid in the prior calendar year, (ii) dividends or distributions payable in stock for which adjustment is made pursuant to Section 8.4(a) or 8.4(b) hereof, (iii) rights or warrants to subscribe to Common Stock for which adjustment is made pursuant to Section 8.4(c) hereof, and (iv) pursuant to a consolidation, merger, statutory exchange, sale or conveyance for which adjustment is made pursuant to Section 8.11 hereof), then in each such case of Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the record date mentioned in the next sentence by a fraction (not equal to or less than zero) or which the numerator shall be the Average Market Price of the Common Stock (as defined in Section 8.3 hereof) on the record date mentioned in the next sentence less the then fair market value (as determined by the Board and Dai-ichi (or any direct or indirect successor to all or substantially all of such Company's business) jointly (if such Company or successor or any corporation at least 99% of whose outstanding voting securities at the time outstanding is owned by such Company or successor shall be a holder of any of the Series F Preferred Stock) or an internationally recognized investment banking firm selected by them if they are unable to reach agreement, or the Board in its reasonable discretion whose determination will be conclusive and evidenced by a board resolution filed with the conversion agent (if none of the foregoing shall be a holder of Series F Preferred Stock)) of the portion of the evidences of indebtedness, securities, rights or warrants, cash or assets so distributed to the holder of one share of Common Stock, and of which the denominator shall be such Average Market Price of the Common Stock. Such adjustment shall become effective immediately after the record date for the determination of shareholders entitled to receive such distribution. Such determination of fair market value shall be set forth in a statement filed with the conversion agent by the Corporation as soon as practicable. (e) The reclassification (including any reclassification upon a merger in which the Corporation is the continuing corporation but excluding a reclassification upon a consolidation, merger, statutory exchange, sale or conveyance as to which Section 8.11 applies) of Common Stock into securities including other than Common Stock shall be deemed to involve (i) a distribution of such securities other than Common Stock to all holders of Common Stock and the effective date of such reclassification shall be deemed to be "the record date for the determination of shareholders entitled to receive such distribution" within the meaning of Section 8.4(d) hereof, and (ii) a subdivision or combination, as the case may be, of the number of shares of Common Stock outstanding immediately prior to such reclassification into the number of Common Stock outstanding immediately thereafter and the effective date of such reclassification shall be deemed to be "the day upon which such subdivision becomes effective "or" the day upon which such combination becomes effective," as the case may be. (f) In any case in which this Section 8 shall require that an adjustment be made immediately following a record date or an effective date, the Corporation may elect to defer (but only until five business days following the prompt filing by the Corporation with the conversion agent of the certificate of independent accountants required by Section 8.4(h) hereof) issuing to the holder of any share of Series F Preferred Stock converted after such record date or effective date the additional shares of Common Stock or other capital stock issuable upon such conversion over and above the shares of Common Stock or other capital stock issuable upon such conversion on the basis of the Conversion Price prior to adjustment, and paying to such holder any amount of cash in lieu of a fractional share. (g) All calculations under this Section 8 shall be made to the nearest one cent or to the nearest 1/1,000th of a share, as the case may be. Anything in this Section 8 to the contrary notwithstanding, the Corporation shall be entitled to make such reduction in the Conversion Price, in addition to those required by this Section 8, as it considers to be advisable in order that any stock dividend, subdivision of shares, distribution of rights to purchase stock or securities, or distribution of securities convertible into or exchangeable for stock hereafter made by the Corporation to its shareholders shall not be taxable to the recipients. (h) Whenever the Conversion Price is adjusted as herein provided, (A) the Corporation shall promptly obtain and file with the conversion agent a certificate of a firm of independent public accountants (who may be the regular accountants employed by the Corporation) setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment and the manner of computing the same, and (B) a notice stating that the Conversion Price has been adjusted and setting forth that the adjusted Conversion Price shall forthwith be airmailed by the Corporation to the holders of the Series F Preferred Stock at their addresses as shown on the stock record books of the Corporation. (i) In the event that at any time as a result of an adjustment made pursuant to this Section 8, the holder of any share of Series F Preferred Stock thereafter surrendered for conversion shall become entitled to receive any shares of the Corporation other than shares of Common Stock, thereafter the Conversion Price of such other shares so receivable upon conversion of any share shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in this Section 8. (j) Anything herein to the contrary notwithstanding, in the event the Corporation shall declare any dividend or distribution requiring an adjustment in the Conversion Price hereunder and shall, thereafter and before the payment of such dividend or distribution to shareholders, legally abandon its plan to pay such dividend or distribution, the Conversion Price then in effect hereunder, if changed to reflect such dividend or distribution, shall be changed to the Conversion Price which would have been in effect immediately after the date of such abandonment had such dividend or distribution never been declared. Such changes shall become effective immediately after the date of such abandonment. (k) No adjustment (except pursuant to Section 8.4(a)) in the Conversion Price need be made unless the adjustment would require an increase or decrease of at least 2% in the Conversion Price provided, how-ever, that any adjustments which by reason of this subsection (k) are not required to be made shall be carried forward and taken into account in any subsequent adjustment, and provided further, that adjustment shall be required and made in accordance with the provision hereof not later than such time as may be required in order to preserve the tax-free nature of a distribution to the holders of shares of Series F Preferred Stock. 8.5 In case: (i) the Corporation shall declare a dividend (or any other distribution) on its Common Stock other than a cash dividend payable in cash out of its retained earnings for which adjustment under Section 8.4(d) is not required; or (ii) the Corporation shall authorize the granting to the holders of the Common Stock of rights or warrants to subscribe for or purchase any shares of stock of any class or of any other rights; or (iii) there shall be any capital stock reorganization or reclassification of the Common Stock (other than a subdivision or combination of the outstanding Common Stock and other than a change in the par value of the Common Stock), or any consolidation or merger to which the Corporation is a party or any statutory exchange of securities with another corporation, or any sale or transfer of all or substantially all the assets of the Corporation, in each case which is to be effected in such a way that holders of the Common Stock will be entitled to receive stock, securities, cash or other property with respect to or in exchange for Common Stock; or (iv) there shall be a voluntary dissolution, liquidation or winding up of the Corporation; then the Corporation shall cause to be filed with the conversion agent, and shall cause to be air mailed to the holders of shares of the Series F Preferred Stock at their addresses as shown on the stock record books of the Corporation, at least 15 days (or 10 days in any case specified in clause (i) or (ii) above) prior to the applicable record or effective date hereinafter specified, a notice stating (A) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights or warrants are to be determined, or (B) the date on which such reorganization, reclassification, consolidation, merger, statutory exchange, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, statutory exchange, sales, transfer, dissolution, liquidation or winding up. 8.6 The Corporation covenants that it will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued shares of Common Stock or its issued shares of Common Stock held in its treasury, or both, for the purpose of effecting conversions of the Series F Preferred Stock, the full number of shares of Common Stock, deliverable upon the conversion of all outstanding shares of Series F Preferred Stock not theretofore converted. For purposes of this Section 8.6, the number of shares of Common Stock which shall be deliverable upon the conversion of all outstanding shares of Series F Preferred Stock shall be computed as if at the time of computation all such outstanding shares were held by a single holder. 8.7 Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value (if any) of the shares of Common Stock deliverable upon conversion of the Series F Preferred Stock, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and non-assessable shares of Common Stock, at such adjusted Conversion Price. 8.8 The Corporation shall use its best efforts to list the shares of Common Stock required to be delivered upon conversion of the Series F Preferred Stock prior to such delivery upon each securities exchange, if any, upon which the outstanding Common Stock is listed at the time of such delivery. 8.9 Prior to the delivery of any securities which the Corporation shall be obligated to deliver upon conversion of the Series F Preferred Stock, the Corporation shall use its best efforts to comply with all Federal and state laws and regulations thereunder requiring the registration of such securities with, or any approval of or consent to the delivery thereof by, any governmental authority. 8.10 The Corporation shall pay any and all documentary, stamp or similar issues or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversions of the Series F Preferred Stock pursuant hereto; provided, however, that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the holder of the Series F Preferred Stock to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. 8.11 In case of any consolidation or merger in which the Corporation is a party (other than a mer- ger in which the Corporation is the continuing corporation), or in case of any sale or conveyance to another corporation of the property of the Corporation as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Corporation), in each case effected in such a way that holders of Common Stock shall be entitled to receive stock, securities, cash or other property with respect to or in exchange for Common Stock, the holder of each share of Series F Preferred Stock then outstanding shall have the right thereafter to convert such share into the kind and amount of stock, securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sales or conveyance by a holder of the number of shares of Common Stock into which such share of Series F Preferred Stock might have been converted immediately prior to such consolidation, merger, statutory exchange, sales or conveyance, assuming such holder of Common Stock failed to exercise his rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance (provided, that if the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance is not the same for each share of Common Stock in respect of which such rights of election shall not have been exercised ("non-electing share"), then for the purpose of this Section 8.11 the kind and amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance for each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). Thereafter, the holders of the Series F Preferred Stock shall be entitled to appropriate adjustments with respect to their conversion rights to the end that the provisions set forth in this Section 8.11 shall correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or property thereafter deliverable on the conversion of the Series F Preferred Stock. Any such adjustment shall be approved by a firm of independent public accountants (who may be the regular accountants employed by the Corporation), evidenced by a certificate to that effect delivered to the conversion agent. The foregoing provisions of this Section 8.11 shall similarly apply to successive consolidations, mergers, statutory exchanges, sales or conveyances. 8.12 Notwithstanding Sections 8.4(c) and (d) hereof, no adjustment to the Conversion Price by reason of any issuance or distribution of any Rights shall be made if either (i) the Corporation had made proper provision so that each holder of shares of Series F Preferred Stock who converts such shares into shares of Common Stock after the record date for such distribution and prior to the expiration or redemption of the Rights shall be entitled to receive upon such conversion, in addition to the shares of Common Stock issuable upon such conversion, a number of Rights to be determined as follows: (A) if such conversion occurs on or prior to the date for the distribution to the holders of Rights of separate certificates evidencing such Rights ("Distribution Date"), the same number of Rights to which a holder of a number of shares of Common Stock equal to the number of shares of Common Stock issuable upon such conversion is entitled at the time of such conversion in accordance with the terms and provisions of the applicable Rights; and (B) if such conversion occurs after the Distribution Date, the same number of Rights to which a holder of the same number of shares of Common Stock into which the shares of Series F Preferred Stock so converted was convertible immediately prior to the Distribution Date would have been entitled on the Distribution Date in accordance with the terms and provisions of and applicable to the Rights or (ii) each holder of shares of Series F Preferred Stock shall have received rights at all times substantially equivalent to the Rights, if any, held from time to time by a holder of the number of shares of Common Stock issuable upon conversion of the shares of Series F Preferred Stock held by such Series F Preferred Stock holder. Section 9. Status Upon Conversion, Redemption or Exchange Upon any conversion, redemption or exchange of shares of Series F Preferred Stock, the shares of Series F Preferred Stock so converted, redeemed or exchanged shall have the status of authorized and unissued shares of Preferred Stock undesignated as to series. Section 10. General. 10.1 Certificates representing shares of the Series F Preferred Stock shall be exchangeable, at the option of the holder, for a new certificate or certificates of the same or different denominations representing in the aggregate the same number of shares. 10.2 The headings of the various subdivisions of this amendment to the Articles of Incorporation are for convenience of reference only shall not affect the interpretation of any of the provisions hereof. ARTICLE II MANNER OF ADOPTION AND VOTE SECTION 1. Action by Directors. The Board of Directors of the Corporation adopted the foregoing amendment to the Articles of Incorporation by resolution duly adopted at a meeting held on June 25, 1990, at which a quorum was present. SECTION 2. Action by Shareholders. The foregoing amendment to the Articles of Incorporation was duly adopted by the Board of Directors without shareholder action. Pursuant to Sections 23-1-25-2(d) and 23-1-38-2(7) of the Act, no shareholder action is required in connection with such amendment to the Articles of Incorporation. SECTION 3. Compliance with Legal Requirements. The manner of adoption of the Articles of Amendment and the vote by which they were adopted constitute full legal compliance with the provisions of the Act and the Articles of Incorporation and the Bylaws of the Corporation. I hereby state subject to the penalties of perjury, that the statements contained herein are true this 20 day of May, 1991. John L. Steinkamp Vice President EX-4 3 Exhibit 4(e) As filed with the Securities and Exchange Commission on September 15,1994 Registration No. 33-55379 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- AMENDMENT NO. 1 to FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- LINCOLN NATIONAL CORPORATION (Exact name of registrant as specified in its charter) INDIANA 35-1140070 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 200 East Berry Street Fort Wayne, Indiana 46802-2706 (219) 455-2000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) JACK D. HUNTER, ESQ. Executive Vice President and General Counsel 200 East Berry Street Fort Wayne, Indiana 46802-2706 (219) 455-2000 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------------- Copy to: ARTHUR J. SIMON GARDNER, CARTON & DOUGLAS 321 North Clark Street, Quaker Tower Chicago, Illinois 60610 (312) 245-8451 and JOHN L. STEINKAMP Vice President and Associate General Counsel LINCOLN NATIONAL CORPORATION 1300 South Clinton Street Fort Wayne, Indiana 46802 (219)455-3628 Approximate date of commencement of the proposed sale to the public: From time to time after the effective date of this Registration Statement as determined in light of market conditions. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. | | If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. |X| ------------------ The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. Subject to Completion, Dated September 15, 1994 LINCOLN NATIONAL CORPORATION COMMON STOCK, PREFERRED STOCK AND DEBT SECURITIES Lincoln National Corporation (the "Company") from time to time may offer up to $500,000,000 aggregate public offering price (or the equivalent in foreign denominated currencies or composite currencies) of its (i) unsecured securities consisting of notes, debentures and or other unsecured evidences of indebtedness ("Debt Securities"), (ii) Preferred Stock (without par value) ("Preferred Stock"),or (iii) Common Stock (without par value)("Common Stock"). The Debt Securities, Preferred Stock and Common Stock (collectively, the "Securities") may be offered either together or separately and will be offered in amounts, at prices and on terms to be determined at the time of offering. The Company may sell Securities directly, through agents designated from time to time, through dealers or one or more underwriters, or through a syndicate of underwriters managed by one or more underwriters. See "Plan of Distribution." Certain specific terms of the particular Securities in respect of which this Prospectus is being delivered ("Offered Securities")are set forth in the accompanying Prospectus Supplement ("Prospectus Supplement"),including, where applicable, the initial public offering price of the Securities, the listing on any securities exchange, other special terms, and (i) in the case of Debt Securities, the specific designation, aggregate principal amount, the denomination, maturity, premium, if any, the rate (which may be fixed or variable), time and method of calculating payment of interest, if any, the place or places where principal of, premium, if any, and interest, if any, on such Debt Securities will be payable, the currency in which principal of, premium, if any, and interest, if any, on such Debt Securities will be payable, any terms of redemption at the option of the Company or the holder, any sinking fund provisions and any terms for conversion or exchange into Common Stock and (ii) in the case of Preferred Stock, the specific title and stated value, any dividend, liquidation, redemption, voting and other rights and any terms for exchange for Debt Securities or conversion or exchange into Common Stock. The Prospectus Supplement sets forth the names of any underwriters, dealers or agents involved in the distribution of the Offered Securities and any applicable discounts, commissions or allowances. If so specified in the applicable Prospectus Supplement, Offered Securities may be issued in whole or in part in the form of one or more temporary or permanent global securities. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. This Prospectus may not be used to consummate sales of Securities unless accompanied by a Prospectus Supplement. The date of this Prospectus is September 15, 1994 -1- No person is authorized to give any information or to make any representations other than those contained or incorporated by reference in this Prospectus or any Prospectus Supplement and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or any underwriter, dealer or agent. Neither this Prospectus nor any Prospectus Supplement constitutes an offer to sell or a solicitation of an offer to buy any securities other than the registered securities to which it relates or an offer to sell or a solicitation of an offer to buy such securities in any circumstance in which such offer or solicitation is unlawful. Neither the delivery of this Prospectus or any Prospectus Supplement nor any sale made hereunder or thereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof or thereof or that the information contained or incorporated by reference herein or therein is correct as of any time subsequent to its date. AVAILABLE INFORMATION The Company is subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by the Company with the Commission may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and are also available for inspection and copying at the regional offices of the Commission located at 75 Park Place, New York, New York 10007 and at Northwestern Atrium Center, 500 West Madison Street, Suite 1400 , Chicago, Illinois 60661. Copies of such information can also be obtained by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, such information can be inspected at the offices of the New York Stock Exchange, Inc. at 20 Broad Street, New York, New York 10005, at the offices of the Chicago Stock Exchange, Inc. at 440 South LaSalle Street, Chicago, Illinois, 60603 and at the offices of the Pacific Stock Exchange, Inc. at 301 Pine Street, San Francisco, California 94104. This Prospectus constitutes a part of a registration statement filed on Form S-3 (herein, together with all amendments and exhibits, referred to as the "Registration Statement") by the Company with the Commission under the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus omits certain of the information contained in the Registration Statement, and reference is hereby made to the Registration Statement for further information with respect to the Company. Any statements contained herein concerning the provisions of any document are not necessarily complete and, in each instance, reference is made to the copy of each document filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. The Company is not required to, and does not,provide annual reports to holders of its debt securities unless specifically requested by a holder. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company's Annual Report on Form 10-K for its fiscal year ended December 31,1993, Quarterly Reports on Form 10-Q for the quarters ended March 31 and June 30,1994 (as amended on Form 10-Q/A) and Current Report on Form 8-K dated March 29, 1994 filed with the Commission pursuant to Section 13 of the Exchange Act are incorporated herein by reference. All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offerings of the Common Stock, Preferred Stock and Debt Securities made by the prospectuses included in the Registration Statement are deemed incorporated herein by reference and such documents shall be deemed to be a part hereof from the date of filing of such documents. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed -2- to be modified or superseded for purposes of this Prospectus to the extent that any statement contained herein or in any subsequently filed document which also is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge, upon written or oral request, to each person to whom a copy of this Prospectus is delivered a copy of any of the documents incorporated by reference herein (not including the exhibits to such documents, unless such exhibits are specifically incorporated by reference in such documents). Requests should be directed to C. Suzanne Womack, Secretary, Lincoln National Corporation, 200 East Berry Street, Fort Wayne, Indiana, 46802-2706, telephone number (219) 455-3271. FOR NORTH CAROLINA RESIDENTS: THE COMMISSIONER OF INSURANCE OF THE STATE OF NORTH CAROLINA HAS NOT APPROVED OR DISAPPROVED THIS OFFERING NOR HAS THE COMMISSIONER PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. IN CONNECTION WITH ANY OFFERINGS OF COMMON STOCK, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK, CHICAGO OR PACIFIC STOCK EXCHANGES OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. [End of Second Page of Prospectus] -3- THE COMPANY The Company is an insurance holding company with consolidated assets at June 30, 1994, of approximately $47.8 billion and shareholders' equity of approximately $3.3 billion. The Company, through its subsidiaries, provides property-casualty insurance, life insurance and annuities and life-health reinsurance to its customers. The Property-Casualty segment's products are comprised substantially of exposures that tend to produce claims that are reported and settled in the short-term. Products are distributed nationally, with an emphasis on desirable business environments, and target small and medium-sized commercial accounts and preferred personal line customers. The Life Insurance and Annuity segment provides a broad range of life insurance and annuity contracts through a variety of distribution channels. This segment attempts to differentiate its products through quality service and flexibility. Universal life is the dominant life insurance product. Both fixed and variable annuities have registered strong growth during the past several years. For the six months ended June 30, 1994 and for the year ended December 31, 1993, the Company's consolidated revenue and net income were as follows:
Six Months Year Ended Ended June 30, 1994 December 31, 1993 Revenue Net Income Revenue Net Income (millions of dollars) Property-Casualty....................... $1,002.8 $ 67.8 $2,240.6 $ 225.7 Insurance and Annuities.............. 1,255.6 57.1 2,858.3 234.6 Life-Health Reinsurance............... 913.5 29.2 1,930.5 17.3 Employee Life-Health Benefits 314.9 14.4 1,297.3 55.3 Other Operations .................. 64.5 29.3 (36.9) (214.0) Total................................... $3,551.3 $197.8 $8,289.8 $ 318.9
Data shown for the six months ended June 30, 1994 is for the January 1, 1994 through March 21, 1994 (the date on which the Company sold to the public64% of the outstanding shares of the subsidiary involved in this segment) Net Income for "Other Operations" for the year ended December 31, 1993 consists of $19.8 million in net realized capital gains, a loss of $98.5 million from the sale of a subsidiary, a charge of $96.4 million for the adoption of an accounting charge (post-retirement benefits) and $38.9 million of corporate expenses and interest on corporate debt. Lincoln National Corporation is an Indiana corporation with its principal office at 200 East Berry Street, Fort Wayne, Indiana 46802-2706. Its telephone number is (219) 455-2000. USE OF PROCEEDS Unless otherwise indicated in the accompanying Prospectus Supplement, the net proceeds to the Company from the sale of Securities offered hereby will be used for general corporate purposes and may be used for the repayment of short-term debt, or to fund future acquisitions, capital expenditures or working capital needs. Specific allocations of the proceeds for the various purposes have not been made at this time, and the amount and timing of such offerings will depend upon the Company's requirements and the availability of other funds. All or a portion of the proceeds may be invested on a temporary basis in short-term, interest-bearing securities. The specific allocations of the proceeds of a particular series or issuance of Securities will be described in the Prospectus Supplement relating thereto. -4- RISK FACTORS RELATING TO CURRENCIES Debt Securities denominated or payable in foreign currencies may entail significant risks. These risks include, without limitation,the possibility of significant fluctuations in foreign currency exchange rates. These risks may vary depending upon the currency or currencies involved. These risks will be more fully described in the Prospectus Supplement relating thereto.
HISTORICAL RATIO OF EARNINGS TO FIXED CHARGES Six months ended June 30, Year Ended December 31, 1994 1993 1993 1992 1991 1990 1989 Ratio of Earnings to Fixed Charges: Excluding interest on annuities and financial products ...........................7.90 8.99 10.35 6.69 3.04 3.04 4.01 Including interest on annuities and financial products .......................... 1.33 1.36 1.43 1.32 1.16 1.18 1.34 Ratio of earnings to combined fixed charges and preferred stock dividends .................. 1.31 1.34 1.40 1.30 1.15 1.17 1.31
For purposes of determining this ratio, earnings consist of income before federal income taxes and cumulative effect of accounting change adjusted for the difference between income or losses from unconsolidated equity investments and cash distributions from such investments, plus fixed charges. Fixed charges consist of interest expense on debt and the portion of operating leases that are representative of the interest factor. Same as the ratio of earnings to fixed charges, excluding interest on annuities and financial products, except fixed charges and earnings include interest on annuities and financial products. Same as the ratio of earnings to fixed charges, including interest on annuities and financial products, except that fixed charges include the pre-tax earnings required to cover preferred stock dividend requirements. DESCRIPTION OF DEBT SECURITIES The Debt Securities may be issued in one or more series under an Indenture (the "Indenture"), between the Company and The Bank of New York, as trustee (the "Trustee"), a copy of which is included as an exhibit to the Registration Statement filed with the Commission with respect to the Debt Securities. The following summaries of certain provisions of the Indenture are not complete and are subject to, and are qualified in their entirety by reference to, all provisions of the Indenture. Certain terms defined in the Indenture are capitalized in this Prospectus. Parenthetical references are to the Indenture. General The Debt Securities will be unsecured and will rank on the parity with all other unsecured and unsubordinated indebtedness of the Company. -5- The Indenture does not limit the amount of Debt Securities which may be issued thereunder and provides that Debt Securities may be issued up to the aggregate principal amount which may be authorized from time to time by the Company. Reference is made to the Prospectus Supplement for the following terms of Debt Securities being offered thereby; (i) the title, aggregate principal amount and authorized denominations of Debt Securities; (ii) the percentage of their principal amount at which such Debt Securities will be issued; (iii) the date or dates on which Debt Securities will mature; (iv) the rate or rates per annum (which may be fixed or variable), if any, at which Debt Securities will bear interest (or the method of determination or calculation thereof); (v) the times at which any such interest will be payable; (vi) the currency or units based on or relating to currencies in which the Debt Securities are denominated and in which principal, premium, if any, any interest and Additional Amounts (as defined below) will or may be payable; (vii) the dates, if any, on which and the price or prices at which the Debt Securities will, pursuant to any mandatory sinking fund provisions, or may, pursuant to any optional sinking fund provisions, be redeemed by the Company, and other terms and provisions of sinking fund; (viii) any redemption terms or any terms for repayment of principal amount at the option of the holder; (ix) whether and under what circumstances the Company will pay additional amounts ("Additional Amounts") in respect of certain taxes imposed on certain holders or as otherwise provided; (x) the terms and conditions upon which such Debt Securities may be convertible into shares of Common Stock or other securities of the Company, including the conversion price, conversion period and other conversion provisions; (xi) the defeasance provisions, if any, that are applicable to such Debt Securities; (xii) whether the Debt Securities are to be issuable in global form and, if so, the terms and conditions, if any, upon which interests in such Debt Securities in global form may be exchanged, in whole or in part, for the individual Debt Securities represented thereby and the initial Depository with respect to such global Debt Security; (xiii) the person to whom any interest on a Registered Security is payable, if other than the registered holder thereof, or the manner in which any interest is payable on a Bearer Security if other than upon presentation of the coupons pertaining thereto, as the case may be; or (xiv) any other specific terms of such Debt Securities. Principal, interest and premium and Additional Amounts, if any, will be payable in the manner, at the places and subject to the restrictions set forth in the Indenture, the Debt Securities and the Prospectus Supplement relating thereto. Unless otherwise indicated in the Prospectus Supplement relating thereto, the Debt Securities will be issued in fully registered form without coupons. Where Debt Securities of any series are issued in bearer form, the special restrictions and considerations, including special offering restrictions and special Federal income tax considerations, applicable to any such Debt Securities and to payment on and transfer and exchange of such Debt Securities will be described in the applicable Pricing Supplement. Some of the Debt Securities may be issued as discounted Debt Securities (bearing no interest or at a rate which at the time of issuance is below market rates) to be sold at the substantial discount below their stated principal amount. Federal income tax consequences and other special considerations applicable to any such discounted Debt Securities will be described in the Prospectus Supplement relating thereto. If the purchase price of any Debt Securities is payable in one or more foreign currencies or currency units or if any Debt Securities are denominated in one or more foreign currencies or currency units or if the principal of, premium, if any, or interest, if any, on any Debt Securities is payable in one or more foreign currencies or currency units, the restrictions, elections, certain Federal income tax considerations, specific terms and other information with respect to such issue of Debt Securities and such foreign currency or currency units will be set forth in the applicable Prospectus Supplement. Debt Securities may be presented for exchange, and registered Debt Securities may be presented for transfer, in the manner, at the places and subject to the restrictions set forth in the Indenture, the Debt Securities and the Prospectus Supplement relating thereto. Debt Securities in -6- bearer form and the coupons, if any,appertaining thereto will be transferable by delivery. No service charge will be made for any transfer or exchange of Debt Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. (Section 2.06) Unless otherwise indicated in the applicable Prospectus Supplement, the covenants contained in the Indenture and the Debt Securities would not necessarily afford Holders of the Debt Securities protection in the event of a highly leveraged or other transaction involving the Company that may adversely affect Holders. If the Debt Securities are convertible into shares of Common Stock, the conversion price payable and the number of shares purchasable upon conversion may be subject to adjustment in certain events as set forth in the applicable Prospectus Supplement. Form, Registration, Transfer and Exchange The Debt Securities of a series may be issued solely as Registered Securities, solely as Bearer Securities (with or without coupons attached) or as both Registered Securities and Bearer Securities. Debt Securities of a series may be issuable in whole or part in the form of one or more global Debt Securities ("Global Securities"), as described below under "Book-Entry Debt Securities." Registered Securities of any series will be exchangeable for other Registered Securities of the same series of any authorized denominations and of a like aggregate principal amount and tenor. In addition, if Debt Securities of any series are issuable as both Registered Securities and as Bearer Securities, at the option of the holder, subject to the terms of the Indenture, Bearer Securities (accompanied by all unmatured coupons, except as provided below, and all matured coupons in default) of such series will be exchangeable for Registered Securities of the same series of any authorized denominations and of a like aggregate principal amount and tenor. Unless otherwise indicated in the applicable Prospectus Supplement, any Bearer Security surrendered in exchange for a Registered Security between a record date or a special record date for defaulted interest and the relevant date for payment of interest will be surrendered without the coupon relating to such date for payment of interest and interest will not be payable in respect of the Registered Security issued in exchange for such Bearer Security, but will be payable only to the holder of such coupon when due in accordance with the terms of the Indenture. Bearer Securities will not be issued in exchange for Registered Securities. (Sections 2.06, 2.12 and 4.01) Debt Securities may be presented for exchange as provided above, and unless otherwise indicated in the applicable Prospectus Supplement, Registered Securities may be presented for registration of transfer (duly endorsed, or accompanied by a duly executed written instrument of transfer), at the office of any transfer agent designated by the Company for such purpose with respect to any series of Debt Securities and referred to in the applicable Prospectus Supplement, without service charge and upon payment of any taxes and other governmental charges as described in the Indenture. Such transfer or exchange will be effected upon such transfer agent being satisfied with the documents of title and identity of the person making the request. The Company may at any time rescind the designation of any transfer agent,provided,however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in each Place of Payment for Debt Securities of such series. The Company may at any time designate additional transfer agents with respect to any series of Debt Securities. (Sections 2.06 and 4.02) In the event of any redemption of Debt Securities of any series, the Company will not be required to (i) register the transfer of or exchange Debt Securities of that series during a period of 15 days next preceding the selection of securities of such series to be redeemed; (ii) register the transfer of or exchange any Registered Security, or portion thereof, called for redemption, except the unredeemed portion of any Registered Security being redeemed in part; or (iii) exchange any Bearer -7- Security called for redemption except, to the extent provided with respect to any series of Debt Securities and referred to in the applicable Prospectus Supplement, to exchange such Bearer Security for a Registered Security of that series and of like tenor and principal amount that is immediately surrendered for redemption. (Section 2.06) Payment and Paying Agents Unless otherwise indicated in the applicable Prospectus Supplement, payment of principal, interest and Additional Amounts, if any, on Registered Securities will be made at the office of such paying agent or paying agents as the Company may designate from time to time, except that at the option of the Company payment of any interest and any Additional Amounts may be made by check or draft mailed to the address of the Person entitled thereto as such address shall appear in the Debt Security Register. Unless indicated in an applicable Prospectus Supplement, payment of any installment of interest on Registered Securities will be made to the Person in whose name such Registered Security is registered at the close of business on the record date for such interest. (Section 4.01) Unless otherwise indicated in the applicable Prospectus Supplement, payment of principal and interest or Additional Amounts, if any, on Bearer Securities will be payable, subject to any applicable laws and regulations, at the offices of such paying agents outside the United States as the Company may designate from time to time, or by check or by transfer to an account maintained by the payee outside the United States. Unless otherwise indicated in the applicable Prospectus Supplement, any payment of interest on any Bearer Securities will be made only against surrender of the coupon relating to such interest installment. (Sections 2.06 and 4.02) Any paying agents in or outside the United States initially designated by the Company for the Debt Securities will be named in the applicable Prospectus Supplement. If the Debt Securities of a series are listed on a stock exchange located outside the United States, and such stock exchange shall so require, the Company will maintain a paying agent with respect to such series in London, Luxembourg or any other city so required located outside the United States so long as the Debt Securities of such series are listed on such exchange. The Company may at any time designate additional paying agents or rescind the designation of any paying agent, provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in each Place of Payment. (Section 4.02) All monies paid by the Company to a paying agent for the payment of principal of or interest or Additional Amounts, if any, on any Debt Security which remain unclaimed at the end of one year after such principal, interest or Additional Amounts shall have become due and payable will be repaid to the Company and the holder of such Debt Security or any coupon will thereafter look only to the Company for payment thereof. (Section 4.03) Book-Entry Debt Securities The Debt Securities of a series may be issued in the form of one or more Global Securities that will be deposited with a Depository or its nominee identified in the applicable Prospectus Supplement. In such a case, one or more Global Securities will be issued in a denomination or aggregate denominations equal to the portion of the aggregate principal amount of outstanding Debt Securities of the series to be represented by such Global Security or Global Securities. Unless and until it is exchanged in whole or in part for Debt Securities in registered form, a Global Security may not, subject to certain exceptions, be registered for transfer or exchange except to the Depository for such Global Security or a nominee of such Depository. (Section 2.06) The specific terms of the depository arrangement with respect to any portion of a series of Debt Securities to be represented by a Global Security will be described in the applicable Prospectus -8- Supplement. The Company expects that the provisions described below will be applicable to depository arrangements. Unless otherwise specified in the applicable Prospectus Supplement, Debt Securities which are to be represented by a Global Security to be deposited with or on behalf of a Depository will be represented by a Global Security registered in the name of such Depository or its nominee. Upon the issuance of such Global Security and the deposit of such Global Security with or on behalf of the Depository for such Global Security, the Depository will credit on its book-entry registration and transfer system the respective principal amounts of the Debt Securities represented by such Global Security to the accounts of institutions that have accounts with such Depository or its nominee ("participants"). The accounts to be credited will be designated by the underwriters or agents of such Debt Securities or by the Company if such Debt Securities are offered and sold directly by the Company. Ownership of beneficial interests in such Global Security will be limited to participants or persons that may hold interests through participants. Ownership of beneficial interest by participants in such Global Security will be shown on, and the transfer of that ownership interest will be effected only through, records maintained by the Depository for such Global Security. Ownership of beneficial interests in such Global Security by persons that hold through participants will be shown on, and the transfer of that ownership interest within such participant will be effected only through, records maintained by such participant. The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such securities in certificated form. The foregoing limitations and such laws may impair the ability to transfer beneficial interests in such Global Securities. So long as the Depository for a Global Security or its nominee is the registered owner of such Global Security, such Depository or such nominee, as the case may be, will be considered the sole owner or holder of the Debt Securities represented by such Global Security for all purposes under the Indenture. Unless otherwise specified in the applicable Prospectus Supplement, owners of beneficial interests in such Global Security will not be entitled to have Debt Securities of the series represented by such Global Security registered in their names, will not receive or be entitled to receive physical delivery of Debt Securities of such series in certificated form and will not be considered the holders thereof for any purposes under the Indenture. (Sections 2.06 and 11.03) Accordingly, each person owning a beneficial interest in such Global Security must rely on the procedures of the Depository and, if such person is not a participant on the procedures of the participant through which such person owns its interest to exercise any rights of a holder under the Indenture. The Company understands that, under existing industry practices, if the Company requests any action of holders or an owner of a beneficial interest in such Global Security desires to give any notice or take any action a holder is entitled to give or take under the Indenture, the Depository would authorize the participants to give such notice or take such action, and participants would authorize beneficial owners owning through such participants to give such notice or take such action or would otherwise act upon the instructions of beneficial owners owning through them. Principal of and any premium, interest and Additional Amounts on a Global Security, will be payable in the manner described in the applicable Prospectus Supplement. Limitation on Liens on Stock of Restricted Subsidiaries The Company will not, nor will it permit any Restricted Subsidiary to, issue, assume or guarantee any indebtedness for borrowed money (hereinafter referred to as "Debt") secured by a mortgage, security interest, pledge, lien or other encumbrance upon any shares of stock of any Restricted Subsidiary without effectively providing that the Debt Securities (together with, if the Company shall so determine, any other indebtedness of or guarantee by the Company ranking equally with the Debt Securities and then existing or thereafter created) shall be secured equally and ratably with such Debt. (Section 4.06). -9- For purposes of the Indenture, "Restricted Subsidiary" means each of American States Insurance Company and The Lincoln National Life Insurance Company so long as it remains a subsidiary, as well as any successor to all or a principal part of the business of any such subsidiary and any other subsidiary which the Board of Directors designates as a Restricted Subsidiary. (Section 1.01) The Restricted Subsidiaries accounted for approximately 56% of the consolidated revenues of the Company during the year ended December 31, 1993, and 85% of the consolidated assets of the Company at December 31, 1993. Limitation on Issuance or Disposition of Stock of Restricted Subsidiaries The Company will not, nor will it permit any Restricted Subsidiary to, issue, sell, assign, transfer or otherwise dispose of, directly or indirectly, any Capital Stock (other than nonvoting preferred stock) of any Restricted Subsidiary, except for (i) the purpose of qualifying directors; (ii) sales or other dispositions to the Company or one or more Restricted Subsidiaries; (iii)the disposition of all or any part of the Capital Stock of any Restricted Subsidiary for consideration which is at least equal to the fair value of such Capital Stock as determined by the Company's Board of Directors(acting in good faith); or (iv) an issuance, sale, assignment, transfer or other disposition required to comply with an order of a court or regulatory authority of competent jurisdiction, other than an order issued at the request of the Company or any Restricted Subsidiary.(Section 4.07) For the purposes of the Indenture, "Capital Stock" means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) corporate stock. (Section 1.01) Defaults and Remedies An Event of Default with respect to Debt Securities of any series is defined in the Indenture as being: (a) default for 30 days in payment of any interest or Additional Amounts on the Debt Securities of such series; (b) default in payment of principal or premium, if any, on the Debt Securities of such series when due either at maturity, upon redemption, by declaration or otherwise (except a failure to make payment resulting from mistake, oversight or transfer difficulties not continuing for more than 3 Business Days beyond the date on which such payment is due); (c) default in payment of any sinking fund installment when due and payable (except a failure to make payment resulting from mistake, oversight or transfer difficulties not continuing for more than 3 Business Days beyond the date on which such payment is due); (d) default by the Company in the performance or breach of any other covenant or warranty of the Company in respect of the Debt Securities of such series for a period of 60 days after notice thereof to the Company or Trustee; (e) certain events involving the bankruptcy or insolvency of the Company; or (f) other Events of Default as specified in the Supplemental Indenture or Board Resolution under which series of Debt Securities was issued. (Section 6.01) The Indenture provides that (1) if an Event of Default described in clauses (a),(b),(c) or, in the event of a default with respect to less than all Outstanding series under the Indenture, (d) above shall have occurred and be continuing with respect to one or more series, either the Trustee or the holders of 25 percent in principal amount of the Debt Securities of such series then Outstanding (each such series voting as a separate class) may declare the principal (or, in the case of original issue discount Debt Securities, the portion thereof specified in the terms thereof) of all Outstanding Debt Securities of such series and the interest accrued thereon and Additional Amounts payable in respect thereof, if any, to be due and payable immediately and (2) if an Event of Default described in clause (d) (in the event of a default with respect to all Outstanding series) or (e) above shall have occurred and be continuing, either the Trustee or the holders of 25 percent in principal amount of all Debt Securities then Outstanding (voting as one class) may declare the principal (or, in the case of original issue discount Debt Securities, the portion of the principal amount thereof specified in the terms thereof) of all Debt Securities then Outstanding and the interest accrued thereon and Additional Amounts payable in respect thereof, if any, to be due and payable immediately, but upon certain conditions such -10- declarations may be annulled and past defaults (except for defaults in the payment of principal of, or premium, interest or Additional Amounts, if any, on such Debt Securities) may be waived by the holders of a majority in principal amount of the Debt Securities of such series (or of all series, as the case may be) then Outstanding. (Sections 6.01 and 6.10) Holders may not enforce the Indenture or the Debt Securities except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Debt Securities unless it receives indemnity satisfactory to it. Subject to certain limitations, holders of a majority in principal amount of the Debt Securities of any series may direct the Trustee in its exercise of any trust or power. The Company is required to deliver annually to the Trustee an officer's statement indicating whether the signer knows of any default by the Company in performing any of its obligations under the Indenture. The Trustee may withhold from Holders notice of any continuing default (except a default in payment of principal, premium, if any, interest or Additional Amounts, if any, or any sinking or purchase fund installment) if it determines that withholding notice is in their interest. (Sections 4.05, 6.06, 6.09, 6.11, 7.01 and 7.05). Defeasance Unless otherwise described in a Prospectus Supplement with respect to any series of Debt Securities, the Company, at its option, (a) will be discharged from any and all obligations in respect of such Debt Securities (except in each case for certain obligations to register the transfer or exchange of such Debt Securities, replace stolen, lost or mutilated Debt Securities, maintain paying agencies and hold moneys for payment in trust) on the ninety-first day after satisfaction of all conditions thereto or (b) effective upon the satisfaction of all conditions thereto, need not comply with certain restrictive covenants (including any covenants or agreements applicable with respect to a particular series of Debt Securities) under the Indenture and will not be limited by any restrictions with respect to merger, consolidation or sales of assets, in each case if the Company deposits with the Trustee, in trust, (x) money or (y) Government Obligations or a combination of (x) and (y) which, through the payment of interest thereon and principal thereof in accordance with their terms, will in the written opinion of independent public accountants selected by the Company provide money in an amount sufficient to pay all the principal (including any mandatory sinking fund payments) of, and interest and Additional Amounts, if any, and premium, if any, on, such Debt Securities on the dates such payments are due in accordance with the terms of such series. (Section 8.02) In order to avail itself of either of the foregoing options, no Event or Default shall have occurred and be continuing under the Indenture and the Company must provide to the Trustee (i) an opinion of counsel to the effect that holders of the Debt Securities of such series will not recognize income, gain or loss for Federal income tax purposes as a result of the Company's exercise of its option and will be subject to Federal income tax on the same amount and in the same manner, and at the same time as would have been the case if such option had not been exercised and, in the case of Debt Securities being discharged, such opinion shall be accompanied by a private letter ruling to that effect received from the United States Internal Revenue Service (the "Service") or a revenue ruling pertaining to a comparable form of transaction to that effect published by the Service, (ii) an officers' certificate to the effect that no Event of event which with the giving of notice or lapse of time, or both, would become an Event of Default, with respect to such Debt Securities shall have occurred and be continuing on the date of the deposit, and (iii) if the Debt Securities are listed on the New York Stock Exchange, an opinion of counsel to the effect that the exercise of such option will not cause the Debt Securities to be delisted. (Section 8.02) "Government Obligations" means generally direct noncallable obligations of the government which issued the currency in which the Debt Securities of the applicable series are denominated, noncallable obligations the payment of the principal of and interest on which is fully guaranteed by such government, and noncallable obligations on which the full faith and credit of such government is pledged to the payment of the principal thereof and interest thereon. (Section 1.01). In addition, the Company may obtain a discharge under the Indenture with respect to all the Debt Securities of a series by depositing with the Trustee, in trust, moneys or Government Obligations sufficient to pay at maturity or upon redemption principal of, premium, if any, and any interest and Additional Amounts on, all of -11- the Debt Securities of such series, provided that all of the Debt Securities of such series are by their terms to become due and payable within one year or are to be called for redemption within one year. No opinion of counsel or ruling relating to the tax consequences to holders is required with respect to a discharge pursuant to the provisions described in the immediately preceding sentence. (Section 8.01) In the event of any discharge of Debt Securities pursuant to the terms of the Indenture described above, the holders of such Debt Securities will thereafter be able to look solely to such trust fund, and not to the Company, for payments of principal, premium, if any, and interest and Additional Amounts, if any. (Sections 8.01 and 8.02) Consolidation, Merger and Sale of Assets The Company may not consolidate with or merge into, or sell, lease or convey all or substantially all of its assets to, another corporation unless (i) the successor or transferee corporation, which shall be a corporation organized and existing under the laws of the United States or a State thereof, assumes by supplemental indenture all the obligations of the Company under the Debt Securities and the Indenture and (ii) the Company or successor corporation, as the case may be, will not, immediately after such consolidation or merger or sale, lease or conveyance, be in default in the performance of any covenant or condition with respect to the Debt Securities or the Indenture. The Company will deliver to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indenture comply with the terms of the Indenture. Upon any consolidation or merger, or any sale, lease or conveyance of all or substantially all of the assets of the Company, the successor corporation formed by such consolidation or into which the Company is merged or to which such transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture. (Sections 5.01 and 5.02). Thereafter all obligations of the predecessor corporation shall terminate. (Section 5.01) Modification of the Indenture The Indenture permits the Company and the Trustee to amend or supplement the Indenture or the Debt Securities without notice to or consent of any holder of a Debt Security for certain purposes, including without limitation, to cure any ambiguity, defect or inconsistency, to comply with Section 5.01 (relating to when the Company may consolidate, merge or sell all or substantially all of its assets), to provide for uncertificated Debt Securities, to establish the form or terms of Debt Securities of any series or to make any change that does not adversely affect the rights of any holder of a Debt Security. (Section 9.01) Certain modifications and amendments of the Indenture may be made by the Company and the Trustee only with the consent of the holders of at least 50% in aggregate principal amount of the Outstanding Debt Securities of each series issued under the Indenture which is affected by the modification or amendment (voting as one class). However, no such modification or amendment may, without the consent the holder of each Debt Security affected thereby, (i) reduce the aforesaid percentage of Debt Securities whose holders must consent to an amendment, supplement or waiver; (ii) reduce the rate or rates or extend the time for payment of interest or Additional Amounts, if any, on any Debt Security; (iii) reduce the principal of or premium, if any, on or extend the fixed maturity of any Debt Security; (iv) modify or effect in any manner adverse to the holders of Debt Securities the terms and conditions of the obligations of the Company in respect of its obligations under the Indenture; (v) waive a default in payment of principal of or premium or interest or Additional Amounts, if any, on any Debt Security; (vi) impair the right to institute a suit for the enforcement of any payment on or with respect to any series of Debt Securities; (vii) change a Place of Payment; or (viii) make any Debt Security payable in currency other than that stated in the Debt Security. (Section 9.02) Regarding the Trustee The Trustee is a participant in the Company's revolving credit agreement, and the Company has maintained other banking relationships with the Trustee in the normal course of business. -12- The Trustee also acts as paying agent for the Company's 7 1/8% Notes due July 15, 1999, and 7 5/8% Notes due July 15, 2002. DESCRIPTION OF PREFERRED STOCK AND COMMON STOCK General The Company may issue, separately or together with other Securities, shares of Common Stock or Preferred Stock, all as set forth in the Prospectus Supplement relating to the Common Stock or Preferred Stock for which this Prospectus is being delivered. In addition, if the Prospectus Supplement so provides, the Debt Securities or Preferred Stock may be convertible into or exchangeable for Common Stock. The Company's Articles of Incorporation currently authorize the issuance of 800,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock ("Preferred Stock"). The Company's Preferred Stock may be issued from time to time in one or more series by resolution of the Board of Directors. At the present time, the Company has outstanding three series of Preferred Stock, consisting of the Company's $3.00 Cumulative Convertible Preferred Stock, Series A (without par value) (the "Series A Preferred Stock") and its 5 1/2% Cumulative Convertible Exchangeable Preferred Stock, Series E and F (without par value) ("Series E Preferred Stock" and "Series F Preferred Stock" respectively). At June 30, 1994, the Company had issued and outstanding 94,774,640 shares of Common Stock, 45,556 shares of Series A Preferred and 2,201,443 and 2,216,454 shares of Series E and F Preferred Stock, respectively. The following descriptions of the classes of the Company's capital stock are summaries, do not purport to be complete, and are subject,in all respects, to the applicable provisions of the Indiana Business Corporation Law and the Company's Articles of Incorporation (including the Certificate of Resolution by the Board of Directors of the Company Designating the Rights and Preferences of the Series A Preferred Stock), Articles of Amendment Designating the Rights and Preferences of the Series E and F Preferred Stock, and the Rights Agreement, referred to below, with The First National Bank of Boston, which, in each case, are included as Exhibits to the Registration Statement of which this Prospectus forms a part. Common Stock Holders of the Company's Common Stock are entitled to receive dividends when, as and if declared by the Board of Directors after all dividends accrued on all preferred or special classes of shares entitled to preferential dividends have been paid or declared and set apart for payment out of funds legally available therefore. Upon liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or involuntary, holders of Common Stock are entitled to receive pro rata any net assets of the Company remaining after the claims of creditors and preferences of the Series A, E, and F Preferred Stock,and any other series of Preferred Stock at the time outstanding, have been paid in full. The Company's Articles of Incorporation provide that holders of Common Stock and holders of any series of Preferred Stock from time to time outstanding shall each have the right at every meeting of shareholders to one vote for each share of Common Stock and/or Preferred Stock so held, and holders of Common Stock and holders of Preferred Stock shall so vote as one class. Under certain circumstances as provided by law, the Company's Articles of Incorporation or the terms of the Preferred Stock, certain series of Preferred Stock may vote as a separate class or classes. The Company's Bylaws presently provide for three classes of directors, with directors in each class serving staggered three-year terms. The holders of Common Stock do not have any preemptive rights to subscribe for additional shares, and the Common Stock does not have cumulative voting rights. The Company's Common Stock is listed on the New York, Chicago, Pacific, London and Tokyo -13- Stock Exchanges. The outstanding shares of Common Stock are, and the Common Stock offered hereby when issued will be, validly issued, fully paid and non-assessable. The Company will take appropriate action to list the Common Stock offered hereby as described in the Prospectus Supplement relating to any issuance of Common Stock. Common Stock Purchase Rights. Under a Rights Agreement between the Company and The First National Bank of Boston ("Common Rights Agreement"), each outstanding share of Common Stock is coupled with a right (the "Common Rights")entitling the holder to purchase from the Company one share of Common Stock at a price of $75.00 per share, subject to adjustment. Until the earlier to occur of (i) 10 days following a public announcement that a person or group of affiliated or associated persons (other than the Company or certain related persons or approved purchasers) (an "Acquiring Person") acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the outstanding Common Stock or (ii) 10 days following the commencement or announcement of an intention to make a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of affiliated or associated persons of 30% or more or such outstanding Common Stock (the earlier of such dated being called the "Distribution Date"), the Common Rights will be transferred with and only with the Common Stock. As soon as practicable following the Distribution Date, separate certificates evidencing the Common Rights ("Common Rights Certificate") will be mailed to holders of the Common Stock as of the close of business on the Distribution Date and such separate Common Right Certificates alone will evidence the Common Rights. The Common Rights are not exercisable until the Distribution Date. The Common Rights will expire on November 21, 1996, unless earlier redeemed by the Company as described below. The Common Right purchase price payable, and the number of shares of Common Stock or other Securities or property issuable, upon exercise of the Common Rights are subject to adjustment from time to time to prevent dilution (i)in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Common Stock, (ii) upon the grant to holders of the Common Stock of certain rights or warrants to subscribe for the Common Stock or convertible Securities at less then the current market price of the Common Stock, or (iii) upon the distribution to holders of the Common Stock of evidences of indebtedness or assets (excluding regular quarterly cash dividends out of earnings or retained earnings theretofore paid or dividends payable in Common Stock) or of subscription rights or warrants (other than those referred to above). In the event that the Company were acquired in a merger or other business combination transaction in which more than 50% of its assets or earning power were sold, proper provision will be made so that each holder of a Common Right shall thereafter have the right to receive upon the exercise thereof at the then current exercise price of the Common Right, that number of shares of common stock of the acquiring company which at the time of such transaction would have a market value of two times the exercise price of the Common Right. In the event an Acquiring Person merges into the Company, the Company is the surviving corporation and the Company's Common Stock is not changed into or exchanged for stock or other Securities of the Company or any other person or cash or any other property and (i) an Acquiring Person engages in one of a number of self-dealing transactions specified in the Common Rights Agreement or (ii) during such time as there is an Acquiring Person, there is a reclassification of Securities, reverse stock split, recapitalization of the Company, merger or consolidation of Company with any of its subsidiaries or any other transaction involving the Company or its subsidiaries which has the effect of increasing by more than 1% the proportionate equity Securities ownership of the Company or any of its subsidiaries by an Acquiring Person, proper provision will be made so that each holder of a Common Right, other than Common Rights that were beneficially owned by the Acquiring Person on the earlier of the Distribution Date or the date of the public announcement that an Acquiring Person acquired 20% or more of the outstanding shares of Common Stock, will thereafter have the right to receive upon exercise that number of shares of Common Stock having a market value of two times the exercise price of the Common Right. -14- With certain exceptions, no adjustment in the Common Right purchase price will be required until cumulative adjustments require an adjustment of at least 1% in such Common Right purchase price. No fractional shares will be issued and in lieu thereof an adjustment in cash will be made based on the market price of the Common Stock on the last trading day prior to the date of exercise. At any time prior to the time that any person becomes an Acquiring Person, the Company may redeem the Common Rights in whole, but not in part, at a price of $.01 per Right (the "Redemption Price") payable in cash. Immediately upon the action of the Board of Directors electing to redeem the Common Rights, the Company shall make an announcement thereof, and upon such election, the right to exercise the Common Rights will terminate and the only right of the holders of Common Rights will be to receive the Redemption Price. Until a Common Right is exercised, the holder thereof, as such, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends. Certain Provisions of the Company's Articles of Incorporation. The Company's Articles of Incorporation provide that the affirmative vote of the holders of three-fourths of the Company's voting stock is required to amend Article VII, which deals with the number, classification, qualifications and removal of directors. Article VII provides that the number of directors may be fixed in the Bylaws, that qualifications for directors may be set in the Bylaws, and that the Bylaws may provide for classification of the Board. The Bylaws can be amended only by action of the Board. Article VII also provides that directors can be removed, with or without cause, at a meeting of shareholders called expressly for that purpose upon the affirmative vote of the holders of at least three-fourths of the Company's voting stock. The provisions of Article VII requiring the affirmative vote of three-fourths of the Company's voting stock to amend Article VII could make it difficult for the shareholders to change the existing provision of that Article, which, in turn, could discourage proxy contests and tender offers and make it more likely that incumbent directors will maintain their positions. The Articles of Incorporation also contain a "fair price" provision which requires, subject to certain exceptions, certain kinds of business combinations involving the Company and any shareholder holding 10% or more of the Company's voting stock (or certain affiliates of such shareholder) to be approved by the holders of at least three-fourths of the Company's voting stock, unless (i) the transaction is approved by a majority of the members of the Board of Directors of the Company who are not affiliated with the 10% shareholder making the proposal, or (ii) the transaction meets certain minimum price and procedural requirements (in either of which cases, only the normal shareholder and director approval requirements of the Indiana Business Corporation Law would govern the transaction). The "fair price" provision may be amended or repealed only upon the affirmative vote of the holders of at least three-fourths of the Company's voting stock. The "fair price" provision is intended to increase the likelihood that all shareholders of the Company will be treated similarly if certain kinds of business combinations are effected. The "fair price" provision may have the effect of making a takeover of the Company more expensive and may therefore discourage tender offers for less than three-fourths of the Company's stock and acquisitions of substantial blocks of the Company's stock with a view to acquiring control of the Company. Certain State Law Provisions. Chapter 43 of the Indiana Business Corporation Law also restricts business combinations with interested shareholders. It prohibits certain business combinations, including mergers, sales of assets, recapitalizations, and reverse stock splits, between certain corporations having 100 or more shareholders that also have a class of voting shares registered with the Securities and Exchange Commission under Section 12 of the Exchange Act (which includes the Company) and an interested shareholder, defined as the beneficial owner of 10% or more of the voting power of the outstanding voting shares of that corporation, for five years following the date the shareholder acquired such 10% beneficial ownership, unless the acquisition or the business combination was approved by the board of directors in advance of such date. Moreover, the acquisition or business -15- combination must meet all requirements of the corporation's articles of incorporation, as well as the requirements specifically set out in the Indiana Business Corporation Law. After the five-year period expires, a business combination with an interested shareholder that did not receive board approval prior to the interested shareholder's acquisition date may take place only if such combination is approved by a majority vote of shares not held by the interested shareholder or its affiliates or if the proposed combination meets certain minimum price requirements based upon the highest price paid by the interested shareholder. The aggregate amount of cash and the market value of non-cash consideration to be received by holders of all outstanding stock other than common stock is to be determined under criteria similar to those for common stock, except that the minimum price to be received by such shareholders cannot be less than the highest preferential amount per share to which holders of such class of stock are entitled in the event of voluntary dissolution, plus dividends declared or due. The consideration to be received by holders of a particular class must be distributed promptly and paid in cash or in the same form as the interested shareholder used to acquire the largest number of shares it owns in that class. Finally, the interested shareholder must not have become the beneficial owner of any more voting shares of stock since it became an interested shareholder, with certain exceptions. Chapter 42 of the Indiana Business Corporation Law includes provisions designed to protect minority shareholders in the event that a person acquires, pursuant to a tender offer or otherwise, shares giving it more than 20%, more than 33 1/3%, or more than 50% of the outstanding voting power ("Control Shares") of corporations having 100 or more shareholders. Unless the corporation's articles of incorporation or bylaws provide that Chapter 42 does not apply to control share acquisitions of shares of the corporation before the control share acquisition, an acquirer who purchases Control Shares without seeking and obtaining the prior approval of the board of directors cannot vote the Control Shares until each class or series of shares entitled to vote separately on the proposal, by a majority of all votes entitled to be cast by that group (excluding the Control Shares and any shares held by officers of the corporation and employees of the corporation who are directors thereof), approve in a special or annual meeting the rights of the acquirer to vote the Control Shares. An Indiana corporation otherwise subject to Chapter 42 may elect not to be covered by the statute by so providing in its articles of incorporation or bylaws. The Company is currently subject to the statute. Indiana insurance laws and regulations provide that no person may acquire voting securities of the Company if after such acquisition such person would directly or indirectly be in control of the Company, unless such person has provided certain required information to the Indiana Insurance Commissioner (the "Indiana Commissioner") and the Indiana Commissioner has approved the acquisition. Control of the Company is presumed to exist if any person beneficially owns 10% or more of the voting securities of the Company. Furthermore, the Indiana Commissioner may determine, after notice and hearing, that control exists notwithstanding the absence of a presumption to that effect. Consequently, no person may acquire, directly or indirectly, 10% or more of the voting securities of the Company to be outstanding after the Offerings, or otherwise acquire control of the Company, unless such person has provided such required information to the Indiana Commissioner and the Indiana Commissioner has approved such acquisition. Transfer Agent and Registrar. The First National Bank of Boston serves as Transfer Agent and Registrar for shares of the Company's Common Stock. Preferred Stock The Company's Preferred Stock has, upon issuance, preference over the Common Stock with respect to the payment of dividends and the distribution of assets in the event of liquidation, dissolution or winding up of the company. Other relative rights,preferences and limitations of each series of Preferred Stock, including dividend, redemption, liquidation, sinking fund, conversion and other provisions, are determined by the Board of Directors in the resolutions establishing and designating such series and as described in the Prospectus Supplement relating to the series of Preferred Stock. The Series A Preferred Stock and the Series E and F Preferred Stock constitute the only series of Preferred -16- Stock currently authorized for issuance by the Board of Directors. The Company's Articles of Incorporation provide that each holder of Preferred Stock of any series from time to time outstanding shall be entitled to one vote per share upon all matters submitted to vote at every meeting of shareholders of the Company. Further, in the event that six or more quarterly dividends, whether or not consecutive, on any series of Preferred Stock shall be in default, the holders of any outstanding series of Preferred Stock as to which such default exists shall be entitled, at the next annual meeting of shareholders, to vote as a class to elect two directors of the Company. Such right shall continue with respect to shares of cumulative Preferred Stock, including the Series A Preferred and Series E and F Preferred Stock, until all accumulated and unpaid dividends on all such shares, the holders of which were entitled to vote at the previous annual meeting of shareholders, have been paid or declared and set aside for payment and, with respect to shares of non-cumulative Preferred Stock, if any, until any non-cumulative dividends have been paid or declared and set apart for payment for four consecutive quarterly dividend periods on all such shares, the holders of which were entitled to vote at the previous annual meeting of shareholders. The approval of the holders of record of at least two-thirds of the outstanding shares of all series of Preferred Stock of the Company, voting as a class, will be required to (a) amend the Company's Articles of Incorporation to create or authorize any stock ranking prior to or on a parity with such Preferred Stock with respect to the payment of dividends or distributions upon dissolution, liquidation or winding up, or to create or authorize any security convertible into shares of any such stock; (b) amend, alter, change or repeal any of the express terms of the Preferred Stock, or any series thereof, in any prejudicial manner (provided only holders of two-thirds of the outstanding shares of the series prejudiced by such change or repeal need consent to such action); (c)merge or consolidate with another corporation whereby the Company is not the surviving entity, if thereby the rights, preferences or powers of the Preferred Stock would be adversely affected or Securities would thereupon be authorized or outstanding which could not otherwise have been created without the approval of such Preferred Stockholders; or (d) authorize, or revoke a previously authorized, voluntary dissolution of the Company, approve any limitation of the term of the existence of the Company or authorize the sale, lease, exchange or other disposition of all or substantially all of the property of the Company. In the event of voluntary or involuntary dissolution, liquidation or winding-up of the Company, the holders of each series of the Preferred Stock will be entitled to receive out of the assets of the Company available for distribution to its shareholders, before distribution of assets is made to holders of Common Stock or any other class of stock ranking junior to such series of Preferred Stock upon liquidation, a liquidating distribution in an amount per share as set forth in the Prospectus Supplement relating to such series of Preferred Stock, plus accrued and unpaid dividends. The Preferred Stock, when issued, will be fully paid and non-assessable. Unless otherwise specified in the Prospectus Supplement relating to the particular series of a Preferred Stock, each series of Preferred Stock will be on a parity in all respect with other series of Preferred Stock. Series A Preferred Stock At June 30, 1994, the Company had issued and outstanding 45,556 shares of Series A Preferred Stock. Cumulative dividends are payable quarterly, as declared by the Board of Directors, on shares of Series A Preferred Stock at the per annum rate of $3.00 per share. Upon the liquidation, dissolution or winding up of the Company, the Series A Preferred Stock is entitled to a liquidation preference of $80.00 per share, or approximately $3,644,480 in the aggregate at June 30, 1994, plus accrued dividends, before any assets may be distributed to holders of Common Stock or any other stock ranking junior to the Series A Preferred Stock. The Series A Preferred Stock may be redeemed at any time at the option of the Company, in whole or in part, at a redemption price of $80.00 per share plus accrued dividends, and the Series A Preferred Stock is convertible into Common Stock at the option of the holder at a rate of eight shares of Common Stock (subject to adjustment) for each -17- share of Series A Preferred Stock. In the six months ended June 30, 1994, 1,723 shares of Series A Preferred Stock were converted into shares of the Company's Common Stock. Series E and F Preferred Stock The Company issued to The Dai-ichi Mutual Life Insurance Company ("Dai-ichi"), a mutual insurance company organized under the laws of Japan, 2,201,443 shares of Series E Preferred Stock on July 6, 1990 and 2,216,454 shares of Series F Preferred Stock on May 31, 1991. The holders of the Series E and F Preferred Stock are entitled to receive, when and as declared by the Company's Board of Directors, cumulative cash dividends at the annual rate of 5 1/2% of the Liquidation Preference (as defined below) payable quarterly on the 5th day of March, June, September and December. Each share of Series E and F Preferred Stock may, at the option of the holder, be converted into that number of fully paid and non-assessable shares of Common Stock obtained by dividing the Liquidation Preference of each such share of Preferred Stock being converted by the Conversion Price. The Liquidation Preferences of the Series E and F Preferred Stock are $68.850 and $71.604, respectively. The Conversion Prices of the Series E and F Preferred Stock are $34.425 and $35.802, respectively, but are increased by 4 1/6% on July 6, 1995 and 4% on July 6, 1998. The shares of Series E and F Preferred Stock are subject to both mandatory and optional redemption provisions. The shares are subject to mandatory redemption on July 6, 2002 by payment in cash of the respective Liquidation Preference plus accrued dividends, if any. In lieu of mandatory redemption, the Company may, at its option, issue in exchange for its then outstanding shares of Series E and F Preferred Stock shares of non-convertible Preferred Stock or Common Stock, which in either case are freely tradable and have a fair market value equal to the respective Liquidation Preference of the shares of Series E and F Preferred Stock plus any accrued dividends. The Company may, at its option, redeem in cash, in whole or in part, any of the Series E and F Preferred Stock which is not owned by Dai-ichi or its wholly-owned subsidiaries at a redemption price per share equal to the respective Liquidation Preference plus accrued dividends. In connection with its purchase of the shares of Series E and F Preferred Stock, Dai-ichi has agreed to vote its shares of such stock,together with any shares of Common Stock owned by Dai-ichi, in accordance with the recommendation of the Company's Board of Directors, or under certain circumstances, in the same proportion as all other voting Securities voting on the particular matter. Dai-ichi may dispose of such shares only upon certain conditions, including that the shares first be offered for sale to the Company and that the Shares be sold in a manner that would ensure a wide distribution of the shares. Registration Rights. Pursuant to an Investment Agreement between the Company and Dai-ichi, dated as of June 25, 1990 (the "Investment Agreement"), Dai-ichi and certain subsequent holders of Dai-ichi's shares are entitled to certain registration rights covering such Preferred Stock, all shares of Common Stock into which such Preferred Stock is convertible and all shares of Common Stock or other Securities distributed with respect to such shares of Preferred Stock or Common Stock (the "Registrable Securities"). Under the Investment Agreement, Dai-ichi (or certain subsequent holders of Registrable Securities) has the right (the "Demand Right"), exercisable up to three times, to require the Company to use its best efforts to effect the registration of all or part of the Registrable Securities under the Securities Act in connection with a public offering of such Registrable Securities. The Demand Right may be exercisable at any time unless (i) the request for registration is made within 120 days after the most recent registration pursuant to exercise of a Demand Right, (ii) registration of the Registrable Securities would adversely affect a public financing contemplated by the Company at the time the request for registration is made, in which case a "black out" period of up to 60 days would apply, (iii) -18- audited financial statements necessary for registration are unavailable or (iv) registration would require disclosure of material information which the Company wishes to delay for a bona fide business purpose. In addition, Dai-ichi or any subsequent holder of Registrable Securities has the right, exercisable one time only, to include their Registrable Securities in a registration by the Company of any of its Securities having the ordinary power to vote in the election of the director of the Company (including a proposed registration of Common Stock) under the Securities Act, unless (i) in the reasonable judgment of the Company, inclusion of any Registrable Securities in the Company's registration statement at that time would adversely affect the Company's own financing, (ii) the Company's registration statement is withdrawn or (iii) the Company's registration of Securities is in connection with a merger, acquisition, exchange offer or subscription offer, stock option or a dividend reinvestment, or other employee benefit plan. The Company is required to bear all registration expenses in connection with the Registration of the Registrable Securities pursuant to the Investment Agreement. Common Share Equivalent Purchase Rights. The Company is party to a Rights Agreement with The First National Bank of Boston, which relates to the Series E and F Preferred Stock (the "Preferred Rights Agreement"). In general, the Preferred Rights are intended to provide the holders of the Series E and F Preferred Stock with the same rights as they would have had if they had owned the shares of Common Stock into which the shares of Series E and F Preferred are convertible. One common share equivalent purchase right (the "Preferred Rights") was issued for each share of Series E and F Preferred Stock. In accordance with the Preferred Rights Agreement, the Preferred Rights entitle the holders of such Rights to purchase that number of shares of Common Stock into which the shares of Series E and F Preferred Stock are convertible at a price of $75 per share, subject to the same adjustments described with respect to the Common Rights. Upon the occurrence of the same triggering events outlined with respect to the Common Rights, each holder of a Preferred Right shall be entitled to receive that number of common shares of an Acquiring Person obtained by multiplying the current purchase price of the Preferred Rights by the total number of shares of Common Stock for which the Preferred Rights may be exercised, and dividing the product by 50% of the current per share market price of the common share of the other person. Alternatively, if a person beneficially owning 20% of the Common Stock acquires the Company by means of a reverse merger in which the Company survives or such person engages in certain "self-dealing" transactions each Preferred Right not owned by the 20% holder becomes exercisable for the number of shares of Common Stock which at the time would have a market value of two times the exercise price of the Preferred Rights. The Preferred Rights expire on November 21, 1996 and are subject to redemption and cancellation. REGULATION State Supervision. The Company's insurance affiliates are subject to regulation and supervision by the states, territories and foreign countries in which they are admitted to do business. These jurisdictions generally maintain supervisory agencies with broad discretionary powers relative to granting and revoking licenses to transact business, regulating trade practices, licensing agents, prescribing and approving policy forms, regulating premium rates for some lines of business, establishing premium requirements, regulating competitive matters, prescribing the form and content of financial statements and reports,determining the reasonableness and adequacy of capital and surplus and regulating the type and amount of investments permitted. The Company's insurance subsidiaries conduct business in numerous jurisdictions and, accordingly, are subject to the laws and regulations of each of those jurisdictions. Most of the Company's principal insurance subsidiaries, including The Lincoln National Life Insurance Company and American States Insurance Company, are domiciled in Indiana and are primarily regulated by the Indiana Commissioner. As an insurance holding company, the Company is also subject to regulatory requirements of the states where its insurance subsidiaries are domiciled. For example, certain transactions involving an affiliated insurance company, such as loans, extraordinary dividends or investments, in some cases may require the prior approval of such company's primary regulators. Additionally, these requirements -19- restrict the ability of any person to acquire control of the Company or any of its subsidiaries engaged in the insurance business without prior regulatory approval. Control is generally deemed to exist if an entity beneficially owns 10% or more of the voting securities of a company. Such requirements may have the effect of preventing an acquisition of the Company. PLAN OF DISTRIBUTION The Company may sell the Securities being offered hereby by any one or more of the following methods: (i) through underwriters or dealers; (ii) directly to one or more purchasers; (iii) through agents; or (iv) to both investors and/or dealers through a specific bidding or auction process or otherwise. The Prospectus Supplement with respect to the Securities sets forth the terms of the offering of the Securities, including the name or names of any underwriters, the purchase price of the Securities and the proceeds to the Company from such sale, any underwriting discounts and other items constituting underwriters' compensation, any initial public offering price and any discounts or concessions allowed or reallowed or paid to dealers, any bidding or auction process, any Securities exchanges on which the Securities may be listed and any restrictions on the sale and delivery of Securities in bearer form to U.S. persons. If underwriters are used in the sale, the Securities will be acquired by the underwriters for their own account and may be resold from time to time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. The Securities may be offered to the public either through underwriting syndicates represented by managing underwriters or directly by underwriters. The specific underwriter or underwriters or managing underwriter or underwriters, as the case may be, will be set forth on the cover of the Prospectus Supplements relating to such Securities and the members of the underwriting syndicate, if any, will be named in such Prospectus Supplement. Unless otherwise set forth in the Prospectus Supplement, the obligations of the underwriters to purchase the Securities will be subject to certain conditions precedent and the underwriters will be obligated to purchase all the Securities if any are purchased. Any initial public offering price and any discounts or concessions allowed or reallowed or paid to dealers may be changed from time to time. Securities may be sold directly by the Company or through agents designated by the Company from time to time. Any agent involved in the offer or sale of the Securities in respect of which this Prospectus is delivered will be named, and any commissions payable by the company to such agent will be set forth, in the Prospectus Supplement. Unless otherwise indicated in the Prospectus Supplement, any such agent will be acting on a best efforts basis for the period of its appointment. If so indicated in the Prospectus Supplement, the Company will authorize agents, underwriters or dealers to solicit offers by certain specified institutions to purchase Securities from the Company at the public offering price set forth in the Prospectus Supplement pursuant to delayed delivery contracts providing for payment and delivery on a specified date in the future. Such contract will be subject only to those conditions set forth in the Prospectus Supplement and the Prospectus Supplement will set forth the commission payable for solicitation of such contracts. Dealers, agents and underwriters may be entitled under agreements entered into with the Company to indemnification by the Company against certain civil liabilities, including liabilities under the Securities Acts, or to contribution with respect to payments which the dealers, agents or underwriters may be required to make in respect thereof. Dealers, agents and underwriters may be customers of, engage in transactions with, or perform services for the Company in the ordinary course of business. -20- LEGAL OPINIONS The validity of the Securities offered hereby will be passed upon for the Company by Gardner, Carton & Douglas, 321 North Clark Street, Chicago , Illinois 60610. Gardner, Carton & Douglas will rely on the opinion of Jack D. Hunter, Esq., Executive Vice President and General Counsel of the Company, as to matters of Indiana law. As of August 16, 1994, Mr. Hunter beneficially owned 57,298 shares of Common Stock of the Company, including shares held in the Lincoln National Corporation Savings and Profit-Sharing Plan and the Lincoln National Corporation Employees' and Agents' Stock Bonus Plan,and holds options to acquire an additional 55,602 shares of Common Stock, which options are currently exerciseable except for options to acquire: 8,250 shares in each of 1995 and 1996; 5,750 shares in 1997; and 3,000 shares in 1998. EXPERTS The consolidated financial statements and schedules of Lincoln National Corporation and subsidiaries appearing in the Lincoln National Corporation's Annual Report (Form 10-K) for the year ended December 31, 1993, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon included therein and incorporated herein by reference. Such consolidated financial statements and schedules are incorporated herein by reference in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. -21- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution Securities and Exchange Commission fee $172,400 Legal fees and expenses $ 50,000* Accounting fees and expenses $ 30,000* Blue Sky fees and expenses (including counsel fees) $ 10,000* Printing and engraving expenses $ 30,000* Trustee fees and expenses $ 20,000* Miscellaneous $ 27,600* Total $340,000 * Estimated Item 15. Indemnification of Directors and Officers The following discussion of the indemnification provisions of the Indiana Business Corporation Law (Indiana Code Section 23-1-37) (the "Law"), which applies to the Registrant, is a summary, is not meant to be complete, and is qualified in its entirety by reference to the Law. The Law provides indemnity for present and past directors, officers, employees and agents of the Registrant and of other entities, including partnerships, trusts and employee benefit plans, who serve in such capacities at the request of the Registrant, against obligations to pay as the result of threatened, pending or completed actions, suits or proceedings, whether criminal, civil, administrative or investigations to which they are parties, if it is determined by a majority of disinterested directors, a committee of the board of directors or special counsel selected by the board of directors that they acted in good faith and they reasonably believed their conduct in their official capacity was in the Registrant's best interests or if such conduct was not in their official capacity, that the same was at least not opposed to the Registrant's best interests, and that in criminal proceedings they had reasonable cause to believe their conduct was lawful or no reasonable cause to believe that it was unlawful. The Law provides for mandatory indemnification for directors and officers against reasonable expenses incurred if they were wholly successful in the defense of such proceeding. Also termination of a proceeding by judgment, settlement or like disposition is not determinative that the director, officer, employee or agent did not meet the standard of conduct set forth in the Law. The indemnity provided by the Law may be enforced in court and provision is made for advancement of expenses. The Law also permits the Registrant to insure its liability on behalf of the directors, officers, employees and agents so indemnified and the Law does not exclude any other rights in indemnification and advancement of expenses provided in the Registrant's Articles of Incorporation, Bylaws, or resolutions of its board of directors or its shareholders. The Bylaws of the Registrant provide for the indemnification of its officers, directors and employees against reasonable expenses, including settlements, that may be incurred by them in connection with the defense of any action, suit or proceeding to which they are made or threatened to be made parties so long as (i) the individual's conduct was in good faith, (ii) he reasonably believed that the conduct was in the Company's best interests (or for non-corporate acts, not against the best interest of the Company), and (iii) in the case of criminal proceedings, the individual either had reason to believe the conduct was lawful, or no reasonable cause to believe it was unlawful. In the case of directors, a determination as to whether indemnification or reimbursement is proper shall be made by a majority of disinterested directors, a committee of the board of directors or special counsel selected by the board of directors. In the case of individuals who are not directors, such determination shall be made by the chief executive officer of the Registrant or, if the chief executive officer so directs, in the manner it would be made if the individual were a director of the Registrant. Such indemnification may apply to claims arising under the Securities Act of 1933, as amended. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted for directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in that Act and 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 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. The Registrant maintains directors' and officers' liability insurance with an annual aggregate limit of $50,000,000 for the current policy period, subject to a $1,000,000 deductible at the corporate level, for each wrongful act where corporate reimbursement is available to any director or officer. Item 16. Exhibits Exhibit Number Nature of Exhibit 1 Form of Underwriting Agreement (previously filed) 3(a) Articles of Incorporation of Lincoln National Corporation, as amended 3(b) Bylaws, as amended (incorporated by reference to Exhibit No. 3(b) to Registrant's Form 10-K for fiscal year ended December 31, 1991) 4(a) Rights Agreement, dated November 7, 1986 (incorporated by reference to Registrant's 8-K (File No. 1-6028) filed November 18, 1986) 4(b) Rights Agreement, dated July 5, 1990 (incorporated by reference to Exhibit No. 28 to Registrant's Registration Statement on Form S-3 (File No. 33-55652) filed December 11, 1992) 4(c) Form of Indenture between the Company and The Bank of New York 4(d) Form of Note 4(e) Form of Debenture 4(f) Form of Zero Coupon Security 5 Opinion and consent of Gardner, Carton & Douglas (previously filed) 12 Computation of the Ratio of Earnings to Fixed Charges (previously filed) 23(a) Consent of Ernst & Young LLP (previously filed) 23(b) Consent of Gardner, Carton & Douglas (included in Exhibit No. 5) 24 Powers of Attorney (Included on Signature Page filed electronically with Form S-3 on September 6, 1994) 25 Form T-1, Statement of Eligibility and Qualification under the Trust Indenture Act of 1939 of The Bank of New York (previously filed) 28 Information from reports furnished to State Insurance Regulatory Authorities (incorporated by reference to Exhibit 28 of REgistrant's Form 10-K dated December 31, 1993) Item 17. Undertakings The undersigned Registrant hereby undertakes: (1) to file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) to include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this Registration Statement, and (iii) to include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement or any material change to such information in this Registration Statement; provided, however, that clauses (1)(i) and (1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the Registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in this Registration Statement; (2) that for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; (3) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering; (4) for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in this Registration Statement shall be deemed to be a new Registration Statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; (5) 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 above in Item 15 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 Securities Act of 1933 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 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; (6) for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective; (7) for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; (8) to use its best efforts to distribute prior to the opening of bids, to prospective bidders, underwriters, and dealers, a reasonable number of copies of a prospectus which at that time meets the requirements of section 10(a) of the Securities Act of 1933, and relating to the securities offered at competitive bidding, as contained in the registration statement, together with any supplements thereto; and (9) to file an amendment to the registration statement reflecting the results of bidding, the terms of the reoffering and related matters to the extent required by the applicable form, not later than the first use, authorized by the issuer after the opening of bids, of a prospectus relating to the securities offered at competitive bidding, unless no further public offering of such securities by the issuer and no reoffering of such securities by the purchasers is proposed to be made. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Fort Wayne, State of Indiana, on the 15th day of September, 1994. LINCOLN NATIONAL CORPORATION By: /s/ RICHARD C. VAUGHAN Richard C. Vaughan itle: Senior Vice President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date /s/ Ian M. Rolland* Ian. M. Rolland Chairman, Chief Executive Officer September 15, 1994 & Director (Principal Executive Officer) /s/ Robert A. Anker* Robert A. Anker President, Chief Operating Officer September 15, 1994 & Director /s/ Richard C. Vaughan* Richard C. Vaughan Senior Vice President September 15, 1994 (Principal Financial Officer) /s/ Donald L. Van Wyngarden * Donald L. Van Wyngarden Second Vice President & September 15, 1994 Controller (Principal Accounting Officer) /s/ J. Patrick Barrett* J. Patrick Barrett Director September 15, 1994 /s/ Thomas D. Bell, Jr.* Thomas D. Bell, Jr. Director September 15, 1994 /s/ Daniel R. Efroymson* Daniel R. Efroymson Director September 15, 1994 /s/ Harry L. Kavetas* Harry L. Kavetas Director September 15, 1994 /s/ M. Leanne Lachman* M. Leanne Lachman Director September 15, 1994 /s/ Leo J. McKernan* Leo J. McKernan Director September 15, 1994 /s/ Earl L. Neal* Earl L. Neal Director September 15, 1994 /s/ John M. Pietruski* John M. Pietruski Director September 15, 1994 /s/ Jill S. Ruckelshaus* Jill S. Ruckelshaus Director September 15, 1994 /s/ Gordon A. Walker* Gordon A. Walker Director September 15, 1994 /s/ Gilbert R. Whitaker, Jr.* Gilbert R. Whitaker, Jr. Director September 15, 1994 *By:/S/ RICHARD C. VAUGHAN Richard C. Vaughan, as Attorney-in-Fact Pursuant to Power of Attorney included on signature page filed electronically with Form S-3 on September 6, 1994. EXHIBIT 3(a) STATE OF INDIANA OFFICE OF THE SECRETARY OF STATE Edgar D. Whitcomb, Secretary of State CERTIFICATE OF INCORPORATION OF LINCOLN NATIONAL CORPORATION - - ----------------------------------------------------------------------------- - - ----------------------------------------------------------------------------- I, Edgar D. Whitcomb, Secretary of State of the State of Indiana, hereby certify that Articles of Incorporation of the above Corporation, in the form prescribed by my office, prepared and signed in triplicate by all of the incorporators and acknowledged and verified by at least three of them before a Notary Public, have been presented to me at my office accompanied by the fees prescribed by law; that I have found such Articles conform to law; that I have endorsed my approval upon the triplicate copies of such Articles; that all fees have been paid as required by law;that one copy of such Articles has been filed in my office; and that two copies of such Articles bearing the endorsement of my approval and filing have been returned by me to the incorporators or their representatives; all as prescribed by the provisions of the Indiana General Corporation Act, as amended. Wherefore, I hereby issue to such Corporation this Certificate of Incorporation, and further certify that its corporate existence has begun. In Witness Whereof, I have hereunto set my hand and affixed the seal of the State of Indiana, at the City of Indianapolis, 5th this.................................day of [SEAL OF STATE OF INDIANA] January 68 ............................, 19.. ........................................... Edgar D. Whitcomb, Secretary of State, By......................................... Deputy EX-10 4 Exhibit 10(a) LINCOLN NATIONAL CORPORATION 1986 STOCK OPTION INCENTIVE PLAN (As Amended and Restated Effective as of May 12, 1994) SECTION 1 GENERAL 1.1. Purpose. The purpose of the LINCOLN NATIONAL CORPORATION 1986 STOCK OPTION INCENTIVE PLAN (the "Plan") is to promote the long-term financial performance of Lincoln National Corporation ("LNC") by (a) attracting and retaining key employees, agents and brokers by providing incentive compensation opportunities which are competitive with those of other major corporations; (b) motivating such persons to further the long-range goals of LNC; and (c) furthering the identity of interests of participating employees, agents and brokers and LNC shareholders through opportunities for increased ownership of LNC Common Stock, thereby strengthening their concern for the welfare of LNC by enhancing its profitable growth. 1.2. Definitions. The following definitions shall be applicable throughout the Plan: (a) "Award" means, individually or collectively, any Option, Restricted Stock Award, Performance Award, Stock Appreciation Right, Incentive Award or Dividend Equivalent Right. (b) "Board" means the Board of Directors of Lincoln National Corporation. (c) "Change of Control" has the same meaning as in the LNC Executives' Severance Benefit Plan on the date immediately preceding the Change of Control. (d) "Code" means the Internal Revenue Code of 1986. Reference in the Plan to any section of the Code shall be deemed to include any amendments or successor provisions to such section and any regulations under such section. (e) "Committee" means not less than three members of the Board who are selected by the Board as provided in subsection 1.4. (f) "Common Stock" means the common stock of Lincoln National Corporation. (g) "Company" means, collectively, Lincoln National Corporation and its subsidiaries. (h) "Dividend Equivalent Right" or "DER" means the right of the holder thereof to receive, pursuant to the terms of the DER, credits based on cash dividends that would be paid in shares specified by the DER if such shares were held by the Holder, as more particularly described in Section 8. (i) "Fair Market Value" means, as of any specified date, the average of the highest and lowest quoted selling prices of the Common Stock as reported on the Composite Tape for issues listed on the New York Stock Exchange on the first business day that the Common Stock was traded on that Exchange which next precedes the date as of the Award, or, if no sales were reported on the Composite Tape on such specified date, the average of the highest and lowest quoted selling prices of the Common Stock on the nearest dates before and after such specified date on which sales of the Common Stock were so reported. (j) "Holder" means an employee, agent or broker of the Company who has been granted an Option, a Restricted Stock Award, a Performance Award, Dividend Equivalent Right, Stock Appreciation Right or an Incentive Award. (k) "Incentive Award" means an Award granted under Section 6 of the Plan. (l) "Incentive Stock Option" means an Option within the meaning of section 422(b) of the Code. (m) "Option" means an Award under Section 3 of the Plan and includes both Nonqualified Stock Options and Incentive Stock Options to purchase Common Stock. (n) "Performance Award" means an Award granted under Section 7 of the Plan. (o) "Personal Representative" means the person who upon the death, disability or incompetency of a Holder shall have acquired, by will or by the laws of descent and distribution or by other legal proceedings, the right to exercise an Option or the right to any Restricted Stock Award, Performance Award, Dividend Equivalent Right or Incentive Award therefore granted or made to such Holder. (p) "Plan" means the Lincoln National Corporation 1986 Stock Option Incentive Plan (As Amended and Restated Effective as of May 12, 1994). (q) "Restricted Stock Award" means an Award granted under Section 5 of the Plan. (r) "Stock Appreciation Right" or "SAR" means an Award granted under Section 4 of the Plan. (s) "Subsidiary" means any corporation at any date that LNC owns directly, or indirectly through an unbroken chain of subsidiary corporations, stock possessing a majority of the total combined voting power of all classes of stock of that corporation. 1.3. Effective Date and Duration of Plan. The amended and restated Plan shall become effective following adoption by the Board and approval of shareholders of Lincoln National Corporation at its 1994 Annual Meeting of Shareholders. No further Awards may be granted under the Plan after ten years from the date the amended and restated Plan becomes effective. The Plan shall remain in effect until all Options granted under the Plan have been exercised or expired by reason of lapse of time, all restrictions on Restricted Stock Awards have been eliminated, and all DER's and SAR's satisfied. 1.4. Plan Administration. The Plan shall be administered by the Committee. In addition to those rights, duties, and powers vested in the Committee by other provisions of the Plan, the Committee shall have sole authority, in its discretion, to: (a) determine which employees, agents and brokers of the Company, shall receive an Award; (b) construe the Plan and respective agreements executed thereunder; (c) adopt, amend and rescind rules and regulations for the administration of the Plan; (d) ensure that awards continue to qualify under Rule 16b-3 of the Securities Exchange Act of 1934, as the same may be hereafter amended; and (e) make all other determinations deemed by it to be necessary or advisable for the administration of the Plan; provided that the Committee shall exercise its authority in accordance with the provisions of the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any agreement relating to an Award in the manner and to the extent it shall deem expedient to carry it into effect. The determinations of the Committee on the matters referred to in this subsection 1.4 shall be conclusive. The Committee may not exercise its authority at any time that it has fewer than three members. The Committee shall exercise its authority only by a majority vote of its members at a meeting or by a writing without meeting. At any date, the members of the Committee shall be those members of the Compensation Committee of the Board who are not eligible and who have not been eligible within one year preceding that date to participate in the Plan or any other plan of LNC or a Subsidiary under which stock, stock options or stock appreciation rights of LNC or a Subsidiary may be granted. In the event that fewer than three members of the Compensation Committee of the Board are eligible to serve on the Committee, the Board may appoint one of its other members who is otherwise eligible to serve on the Committee until such time as three members of the Compensation Committee are eligible to serve. 1.5. Shares Available. The aggregate number of shares of LNC Common Stock that may be issued under the Plan shall not exceed the sum of (a) 5,000,000 shares originally authorized by shareholders in 1986 (formerly 2,500,000 prior to the two for one stock split effected through a stock dividend declared by the Board on May 13, 1993), less the aggregate number of shares issued under the Plan prior to the effective date of its amendment and restatement and (b) an additional 5,000,000 shares. In addition to the foregoing limit on the aggregate number of shares that may be issued under all Awards, the aggregate number of Restricted Stock Awards that may be granted during any calendar year (or portion thereof) after the effective date of the amendment and restatement of this Plan, shall not exceed three-tenths of one percent (0.3%) of the number of shares of Common Stock outstanding as of December 31 of the prior year. If the number of shares of Common Stock awarded as Restricted Stock Awards in any year is less than the number of shares that could have been so granted pursuant to this subsection, the balance of such unused shares may be added to the maximum number of shares of Restricted Stock that may be effectively awarded in following years. To the extent that an Award lapses or the rights of its Holder terminate or the Award is paid in cash, any shares of Common Stock subject to such Award shall again be available for the grant of an Award and not be included in calculating shares available under this subsection. 1.6. Individual Dollar Limitations. The aggregate Fair Market Value of shares of Common Stock with respect to which Awards (excluding the underlying shares for Dividend Equivalent Rights) may be made to any individual in any one calendar year cannot exceed $5,000,000. 1.7. Stock Offered. The shares of Common Stock to be offered, pursuant to the grant of an Award shall be authorized but unissued shares. 1.8 Change in Corporate Structure. In the event of a merger, consolidation, reorganization, combination, exchange, recapitalization, stock dividend, stock split or other similar change in the corporate structure or capitalization of LNC which affects the Common Stock, outstanding Awards shall be subject to adjustment by the Committee at its discretion as to the number and price of shares of Common Stock or other consideration subject to such Awards. In the event of such changes in the corporate structure or capitalization of LNC, the aggregate number of shares available under the Plan may be appropriately adjusted by the Committee, whose determination shall be conclusive. 1.9. Amendment and Termination of Plan. The Board may amend or terminate the Plan at any time except that, without the approval of the holders of a majority of LNC stock entitled to vote at a duly held meeting of such shareholders, the Board may not: (a) increase the number of shares of Common Stock which may be issued under the Plan, except as provided in subsection 1.8; (b) reduce the minimum option price under any Option, except as provided in subsection 1.8; (c) increase the maximum period during which Options and related Stock Appreciation Rights or related Dividend Equivalent Rights may be exercised; (d) extend the maximum period during which Awards may be granted under the Plan; (e) amend the standards for eligibility described in Section 2; and (f) materially increase the benefits accruing to employees under the Plan. Amendment or termination of the Plan shall not affect the validity or terms of any Award previously made to a Holder in any way which is adverse to the Holder without the consent of the Holder. 1.10. Amendment to Awards. Any Award which was granted under the 1982 Stock Option Incentive Plan, or which was granted under this Plan prior to the effective date of the amendment and restatement, may, subject to any requirements of applicable law or regulation, be amended by action of the Committee so as to incorporate in that award any terms that might have been incorporated in an award under this Plan as amended and restated. SECTION 2 ELIGIBILITY; EFFECT OF THE PLAN 2.1. Participation Designations. The Committee may, at any time, make Awards to any key executive, managerial, supervisory or professional employee of the Company or any person holding either an agent's or broker's contract with a Subsidiary. Awards may not be granted to (i) any director who is not an employee of the Company or (ii) any person who immediately after such grant is the owner, directly or indirectly of more than 10% of the total combined voting power of all classes of stock of LNC. The right to select eligible employees, agents, and brokers who are subject to Rule 16(a) of the Securities Exchange Act of 1934 ("Reporting Persons") and all decisions regarding Awards to such Reporting Persons are reserved exclusively to the Committee. The right to select individuals who are not Reporting Persons for participation in the Plan is reserved to the Committee, but such reserved right may be delegated in whole or in part by the Committee to the chief executive officer or chief operating officer of LNC. 2.2. Participation Not Contract of Employment. The Plan does not constitute a contract of employment. Participation in the Plan does not give any employee the right to be retained in the employ of LNC or a Subsidiary nor does it limit in any way the right of LNC or a Subsidiary to change the duties or responsibilities of any employee, agent or broker. 2.3. Multiple Awards. An Award may be made on more than one occasion to the same person, and such Award may include an Incentive Stock Option, Nonqualified Stock Option, Restricted Stock Award, Stock Appreciation Right, Dividend Equivalent Right, Performance Award, Incentive Award, or any combination thereof. 2.4. Withholding Taxes on Plan Benefits. The Company shall have the right to deduct from any cash payment made pursuant to the Plan the amount of any tax required by law to be withheld from that payment. The Company shall have the right to require payment from any person entitled to receive Common Stock pursuant to the Plan of the amount of any tax required by law to be withheld with respect to that stock prior to its delivery. A Holder may elect with respect to any Option, any Stock Appreciation or Dividend Equivalent Right which is paid in whole or in part in Common Stock and any Restricted Stock, Incentive or Performance Award to surrender shares of Common Stock the Fair Market Value of which on the date of surrender satisfies all or part of the withholding requirements. Such election must be made by filing a Stock Surrender Withholding Election with the Secretary of LNC which meets the following requirements and conditions: (a) Any Stock Surrender Withholding Election shall be in writing and be irrevocable; (b) The Committee shall have the right with respect to any or all outstanding awards to terminate or suspend for any period the right of a Holder to make a Stock Surrender Withholding Election at any time prior to the making of such election; (c) Any Stock Surrender Withholding Election must be made prior to the date that the amount of tax to be withheld is determined (the "Tax Date"); and (d) If a Holder is a Reporting Person, the Stock Surrender Withholding Election must be made: (i) more than six months after the date of grant of the Award with respect to which such election is made (except whenever such election is made by a disabled Holder or the estate or personal representative of a deceased Holder); and (ii) either at least six months prior to the Tax Date or during the ten day "window period" beginning on the third day following the release for publication of LNC's summary statement of earnings for a quarter or fiscal year. 2.5. Awards to Employees Who Are Foreign Nationals. Without amending the Plan, the Committee may, subject to the limitations in subsections 1.5 and 1.9, grant, amend, administer, annul or terminate awards to employees who are foreign nationals on such terms and conditions different from those specified in the Plan as may in the judgment of the Committee be necessary or desirable to foster and promote achievement of the purposes of the Plan. SECTION 3 STOCK OPTIONS 3.1. Grantees. The Committee may, at any time, award an Incentive Stock Option or Nonqualified Stock Option to an eligible employee, agent, or broker whether or not such individual has previously received a grant under the Plan. 3.2. Stock Option Agreement. Each Option granted under the Plan shall be evidenced by an agreement between the Holder and LNC. The Provisions of each agreement shall be determined by the Committee in accordance with the provisions of the Plan. LNC shall notify a Holder of any grant of an Option, and a written option agreement or agreements shall be duly executed and delivered by LNC to the Holder. 3.3. Shareholder Rights and Privileges. A Holder shall be entitled to all rights and privileges of a shareholder only with respect to such shares of Common Stock as have been purchased on exercise of the Option and for which certificates of stock have been registered in the Holder's name. 3.4. Individual Limitations. In the case of Incentive Stock Options, the aggregate Fair Market Value (determined as of the time the Option is granted according to Section 422(d)(1) of the Code) of shares of Common Stock with respect to which are exercisable for the first time in any one calendar year by any one individual cannot exceed $100,000 (or such other individual limits as may be in effect under the Code on the date of grant). In the case of Options, the maximum number of Options awarded to one individual cannot exceed 100,000 Options. 3.5. Exercise of Options and Payment. The price at which a share of Common Stock may be purchased upon exercise of an Option shall not be less than 100% of the Fair Market Value of a share of Common Stock when the Option is granted. During any period that an Option is exercisable, it may be exercised by delivering an irrevocable notice of exercise which specifies the number of shares purchased and full payment of the purchase price to the Secretary of LNC. Payment may be made in cash, in shares of Common Stock with an aggregate Fair Market Value equal to the purchase price, or in any combination of cash and such shares, provided, however, payment of the exercise price may only be made in shares of Common Stock which have been owned by the Holder for at least six months. 3.6. Limitations on Exercise of Option.An Option shall be exercisable in whole or in such installments and at such times, commencing not earlier than six months from the date of grant, as determined by the Committee. Generally, Options granted to a Holder shall not be exercisable prior to the first anniversary of the grant date except, in the discretion of the Committee and subject to the limitations of subsection 3.4, if the Holder`s employment with LNC and all Subsidiaries terminates by reason of death, Disability, or retirement (as described in subsection 3.7(d)). 3.7. Option Period. Each Option shall terminate and not be exercisable as specified by the Committee which date shall not be later than the earliest of (a) the tenth anniversary of the grant date; (b) the last day of the three month period beginning on the date the Holder's service with LNC and all Subsidiaries terminates for reasons other than described in (c), (d) or (e) following; (c) the first anniversary of the date of Holder's termination of service with LNC and all Subsidiaries on account of death or Disability; (d) the fifth anniversary of the Holder's retirement at or after age 65 or, with the approval of the Holder's employer, early retirement at either age 55 with 5 years of service or under the terms of a retirement plan of LNC or a Subsidiary, or (e) the sixth anniversary of the Holder's termination of service after a Change of Control of LNC. 3.8. Transferability. An Option shall not be transferable except by will or the laws of descent and distribution, and may be exercisable during the Holder's lifetime only by the Holder; provided, however, to the extent permitted under Rule 16b-3 under the Securities Exchange Act of 1934, the Committee may develop rules to permit the transfer of Nonqualified Options to an immediate family member of the Holder or to a family trust. 3.9. Surrender of Options. The Committee (concurrently with the grant of an Option or subsequent to such grant) may in its sole discretion, grant to any Option Holder the right upon written request; to surrender any exercisable Option or portion thereof in exchange for cash, whole shares of Common Stock or a combination thereof, as determined by the Committee, with a value equal to the Fair Market Value, as of the date of such request, of one share of Common Stock over the Option price for such share multiplied by the number of Shares covered by the Option or portion thereof to be surrendered. In the case of any such surrender right which is granted with an Incentive stock Option, such right shall be exercisable only when the Fair Market Value of the Common Stock exceeds the price specified therefor in the Option or portion thereof to be surrendered. In the event of the exercise of any surrender right granted hereunder; the number of shares reserved under the Plan shall be reduced only to the extent that shares of Common Stock are actually issued in connection with the exercise of such surrender right. Additional terms and conditions governing any such surrender rights may from time to time be prescribed by the Committee in its sole discretion. SECTION 4 STOCK APPRECIATION RIGHTS 4.1. Holders. The Committee may, at the time an Award is made, designate that a Holder be granted, in conjunction with that Award, a Stock Appreciation Right ("SAR"). No SAR may be granted in conjunction with a previously granted Incentive Stock Option without the written consent of the affected Holder. No more than 100,000 SARs may be awarded to one participant in one calendar year. For purposes of the Plan, the term "Stock Appreciation Right" means a right to surrender all or a portion of an Option and receive, in exchange, payment of a cash amount no greater than the excess of the Fair Market Value of one or more shares of LNC common stock over the Fair Market Value of such option share on the date the related Option was granted. Each Stock Appreciation Right granted under the Plan shall be evidenced by an agreement between the Holder and LNC. The provisions of each agreement shall be determined by the Committee in accordance with the provisions of the Plan. 4.2. Terms of SARs. The Committee shall determine the number of shares of Common Stock and the percentage (not more than 100 percent) or maximum amount of the increase in the Fair Market Value of those shares over the relevant period upon which payment of each SAR at exercise shall be based. Each SAR may be exercisable at any date with respect to no more than the number of shares for which the related Option is exercisable on that date. Each SAR issued in conjunction with an Incentive Stock Option may be exercisable only when there has been an increase in Fair Market Value of the shares over the relevant period. If a Holder to whom an SAR has been granted is subject to Section 16 of the Securities Exchange Act of 1934, as amended, the Committee may, at any time, impose such conditions and limitations to such SAR as the Committee deems necessary or desirable for the Holder to comply with or obtain an exemption from such Section 16 and applicable rules and regulations. The terms of an SAR may include such other conditions and limitations on exercise as the Committee deems desirable. 4.3. Exercise of SARs and Payment. During any period that a SAR is exercisable, it may be exercised by delivering an irrevocable written notice to the Secretary of LNC which specifies the extent to which the SAR is being exercised. Payment to the Holder shall be made as soon as practicable after exercise of the SAR and may be made in cash, in shares of Common Stock with an aggregate Fair Market Value on the date of exercise equal to the amount to be paid, or in any combination of cash and such shares as determined by the Committee. Upon exercise of an SAR, the right to exercise the related Option shall automatically be terminated to the same extent that the SAR was exercised. Upon exercise of a SAR attached to a Restricted Stock Award, the restrictions on the Restricted Stock Award shall lapse. 4.4. Termination of SARs. Each SAR shall terminate and not be exercisable after the same date that the related Award terminates. 4.5. Transferability. Each SAR granted to a Holder shall not be transferable except by will or the laws of descent and distribution; provided, however, to the extent permitted under Rule 16b-3 under the Securities Exchange Act of 1934, the Committee may develop rules to permit the transfer of the SAR together with the related Option and only to the extent that the related Option may be transferred. SECTION 5 RESTRICTED STOCK AWARDS 5.1. Holders. The Committee may, at any time, designate a Holder to receive a Restricted Stock Award whether or not the Holder has previously received a grant under the Plan. For purposes of the Plan, the term "Restricted Stock Award" means the right to receive, at specified times and subject to specified conditions, shares of Common Stock which may bear such restrictive endorsements as the Committee determines. Each Restricted Stock Award ("RSA") shall be evidenced by an agreement between the Holder and LNC. The provisions of each agreement shall be determined by the Committee in accordance with the provisions of the Plan. 5.2. Grants of Restricted Stock Awards. The Committee shall, subject to subsection 1.5 and this Section 5, determine the number of shares of Common Stock which may be awarded, the time or times the shares may be awarded, and the conditions which must be met for award and delivery of the shares to the Holder under each RSA granted under the Plan. An RSA may provide, in the discretion of the Committee,for the crediting to the Holder,on each dividend payment date, of an amount equal to the product of the dividend paid on a share of Common Stock multiplied by the number of shares which may be awarded under that RSA, and for the payment in cash to the Holder of the amounts so credited at such time as the Committee may determine.An RSA may provide, in the discretion of the Committee, for the issuance of the shares which may be awarded under the RSA in the name of the Holder subject to the following restrictions: (a) the shares may not be issued earlier than six months after the grant of the RSA; (b) the shares may not be sold, transferred, pledged or otherwise assigned or encumbered; (c) each stock certificate shall be registered in the name of the Holder and deposited with the Secretary of LNC; (d) if dividends are paid on the shares, they shall be paid to the Holder at such times as the Committee shall determine; and (e) the shares and any dividends accumulated shall be subject to forfeiture in accordance with subsection 5.4. Subject to the foregoing restrictions, the Holder shall have all of the rights of a holder of Common Stock with respect to the shares issued to him or her under this subsection 5.2. 5.3. Distribution of Shares. Subject to the provisions of subsection 5.4, each RSA shall provide for the distribution of the awarded shares of Common Stock free of all restrictions to the Holder or, in the event of the Holder`s death, the person or persons to whom the RSA was transferred by will or the laws of descent and distribution. Distribution shall be provided for at such time or times during the period beginning on the first anniversary of the date of grant of the RSA and ending on a date as the Committee shall determine; except that, in the discretion of the Committee, distribution may be provided for prior to such first anniversary if the Holder's service with LNC and all Subsidiaries terminates on account of death, Disability, or retirement (as described in subsection 3.7(d)). 5.4. Forfeiture. Each RSA shall provide that a Holder shall forfeit all rights under the RSA, all shares of Common Stock issued pursuant to the RSA which had not been distributed to the Holder free of all restrictions, and all undistributed amounts credited to the Holder with respect to dividends paid on Common Stock pursuant to the RSA if: (a) the Holder`s service with LNC and all Subsidiaries terminates for any reason other than death, Disability, retirement (as described in subsection 3.7(d)), or other reasons determined by the Committee which should not cause forfeiture; or (b) the conditions, if any, specified in the RSA are not fully satisfied within the prescribed time. 5.5. Transferability. Each RSA granted to a Holder may not be transferred by the Holder except by will or the laws of descent and distribution. SECTION 6 INCENTIVE AWARDS 6.1 General. An Incentive Award may be granted hereunder in the form of shares. Incentive shares may be granted to an eligible employee for no cash consideration, for such minimum as may be required by applicable law, or for such other consideration as may be specified by the grant. The terms and conditions of incentive shares shall be specified by the grant. 6.2 Terms of Incentive Awards. Incentive shares may be paid to the grantee in a single installment or in installments and may be paid at the time of grant or deferred to a later date or dates. Each grant shall specify the time and method of payment as determined by the Committee, provided that no such determination shall authorize delivery of shares to be made later than the tenth anniversary of the Holder's date of termination. The Committee, by amendment of the grant prior to delivery, can modify the method of payment for any incentive shares, provided that the delivery of any incentive shares shall be completed not later than the tenth anniversary of the Holder's date of termination. 6.3 Distribution of Incentive Awards. If any incentive shares are payable after the Holder dies, such shares shall be payable (a) to the Holder's designated beneficiary or, if there is no designated beneficiary, to the Holder's personal representative, and (b) either in the form specified by the Award or otherwise, as may be determined in the individual case by the Committee under this Plan. 6.4 Forfeiture. Any grant of incentive shares is provisional, as any share, until delivery of the certificate representing such share. If, while the grant is provisional, (a) the grantee terminates, but does not terminate normally, or (b) the grantee is determined to have engaged in detrimental activity, the grant shall be annulled as of the date of termination or, the date of such determination, as the case may be. 6.5. Management Incentive Plan II. The Committee may, in its discretion, designate that a Holder who is eligible for a cash award under the terms of the LNC Management Incentive Plan II (the "MIP II Plan") receive such award as a grant of restricted stock in lieu of all or a portion of the MIP II Plan cash award, such RSA shall be made subject to subsection 1.5 and Section 5. The amount, if any, of the MIP II award which is not paid as an RSA shall be paid in cash. This cash payment shall be determined by subtracting from the MIP II Plan award the total Fair Market Value, on the date of the RSA, of the shares of Common Stock represented by the RSA without discount for any restrictions. 6.6. Executive Value Sharing Plan. The Committee may, in its discretion, designate that a Holder who is eligible for a cash award under the terms of the LNC Executive Value Sharing Plan (the "EVS Plan") receive such award as a grant of restricted stock in lieu of all or a portion of the EVS Plan cash award. If the Committee decides to make an RSA in lieu of all or a portion of the EVS Plan cash award, such RSA shall be made subject to subsection 1.5 and Section 5. The amount, if any, of the EVS Plan award which is not paid as an RSA shall be paid in cash. 6.7. Career Stock. The Committee may, in its discretion, designate Restricted Stock Awards, subject to subsection 1.5 and section 5, to employees of LNC and its subsidiaries who make an irrevocable election to waive participation in and any benefits under designated retirement programs maintained by the Company. The Committee may also, in its sole discretion, award shares of Restricted Stock to individuals who become officers after the effective date of the Plan in lieu of participation in certain retirement programs maintained by the Company. SECTION 7 PERFORMANCE AWARDS 7.1 General. Performance awards may be granted hereunder to an eligible employee, for no cash consideration, for such minimum as may be required by applicable law, or for such other consideration as may be specified by the grant. The terms and conditions of performance awards, which may include provisions establishing performance periods, performance criteria to be achieved during a performance period, and vesting dates shall be specified by the award. 7.2 Terms of Performance Awards. Performance awards shall be credited as of the date of the award to a bookkeeping reserve account maintained by LNC ("Account") in units which are equivalent in value to Shares of Common Stock ("Stock Units"). Performance awards may be paid in cash, shares, or other consideration, or any combination thereof. The extent to which any applicable performance criteria have been achieved shall be conclusively determined by the Committee. Performance awards may be payable in a single payment or in installments and may be payable at a specified date or dates or upon attaining performance criteria. 7.3 Forfeiture. Except as otherwise specified by the award, if the Holder terminates, but does not terminate on account of death, Disability, or retirement, as defined in subsection 1.7(d), any performance award or installment thereof not vested prior to the Holder's termination shall be annulled as of the date of termination. 7.4 Executive Value Sharing Plan. The Committee may, in its discretion, designate that a person who is eligible to receive a cash award under the EVS Plan receive such award in Stock Units as a Performance Award. The Committee may also in its sole discretion convert outstanding RSAs to Stock Units as Performance Awards. 7.5 Transferability. Each Performance Award shall not be transferable except by will or the laws of descent and distribution. SECTION 8 DIVIDEND EQUIVALENT RIGHTS; INTEREST EQUIVALENTS 8.1 Dividend Equivalent Right. A Dividend Equivalent Right or DER may be granted hereunder to an eligible employee, as a component of another award or as a separate award. The terms and conditions of DERs shall be specified by the grant. Dividend equivalents credited to the holder of a DER may be paid currently or may be deemed to be reinvested in additional shares (which may thereafter accrue additional dividend equivalents). Any such reinvestment shall be at Fair Market Value at the time thereof. DERs may be settled in cash or shares or combination thereof, in a single installment or installments. A DER granted as a component of another award may provide that such DER shall be settled upon exercise, settlement, or payment of, or lapse of restrictions on, such other award, and that such DER shall expire or be forfeited or annulled under the same conditions as such other awards. A DER granted as a component of another award may also contain terms and conditions different from such other award. 8.2 Interest Crediting. Any award under this Plan that is settled in whole or in part in cash on a deferred basis may provide, as determined in the sole discretion of the Committee, for interest equivalents to be credited with respect to such cash payment. Interest equivalents may be compounded and shall be paid upon such terms and conditions as may be specified by the grant. SECTION 9 POSTPONEMENT OF EXERCISE The Committee may postpone any exercise of an Option or SAR or distribution pursuant to an RSA for such time as the Committee in its discretion may deem necessary in order to permit LNC (a) to effect or maintain registration of the Plan or Common Stock issuable pursuant to the Plan under the Securities Act of 1933, as amended, or the securities laws of any applicable jurisdiction; (b) to take any action necessary to comply with restrictions or regulations incident to the maintenance of a public market for Common Stock; or (c) to determine that no action referred to in (a) or (b) above needs to be taken. LNC shall not be obligated to issue shares upon exercise of any Option or SAR or to issue shares pursuant to an RSA in violation of any law. Any such postponement shall not extend the term of an Award. Neither LNC nor its directors or officers shall have any obligation or liability to any Holder (or successor in interest) because of the loss or rights under any Award under the Plan due to postponements pursuant to this Section 10. EX-10 5 Exhibit 10(c) 1994 AMENDED AND RESTATED LINCOLN NATIONAL CORPORATION EXECUTIVE VALUE SHARING PLAN SECTION 1 General 1.1 History, Effective Date and Purpose. The LINCOLN NATIONAL CORPORATION EXECUTIVE VALUE SHARING PLAN was established by the Lincoln National Corporation, an Indiana corporation (the "Corporation"), effective January 1, 1992. The purpose of this 1994 AMENDED AND RESTATED LINCOLN NATIONAL CORPORATION EXECUTIVE VALUE SHARING PLAN (the "Plan") is to make certain amendments to the Plan, to allow Corporation shareholders to approve the Plan at the annual shareholders' meeting of May 12, 1994, and to authorize shares of the Corporation's Common Stock to be awarded under the Plan. The objective of the Plan is to create rewards to participants for superior performance which reflects corporate, business unit and individual contributions to the corporation. The Plan is also intended to aid in the retention of key executives by providing for the payment of awards in shares of the Corporation's restricted stock or restricted phantom stock. 1.2 Plan Administration. The Plan shall be administered by the Compensation Committee (the "Committee") of the Board of Directors (the "Board") of the Corporation. In addition to those rights, duties, and powers vested in the Committee by other provisions of the Plan, the Committee shall have sole authority to: (a) interpret the provisions of the Plan; (b) adopt, amend and rescind rules and regulations for the administration of the Plan; and (c) make all other determinations deemed by it to be necessary or advisable for the administration of the Plan; provided that the Committee shall exercise its authority in accordance with the provisions of the Plan. The Committee may not exercise its authority at any time that it has fewer than three members. The Committee shall exercise its authority only by a majority vote of its members at a meeting or by a writing without meeting. Prior to the first meeting of shareholders at which members of the Board are to be elected that occurs after July 1, 1994, the Committee shall be composed of members of the Board who qualify as "disinterested persons" within the meaning of Rule 16B-3(c)(2)(i) as promulgated under the Securities Exchange Act of 1934 (the "1934 Act"). Following the date of such a meeting, however, the Committee shall be composed solely of members of the Board who also qualify as "outside directors" within the meaning of section 163(m)(4)(C)(i) of the Internal Revenue Code of 1986, as amended (the "Code"). For purposes of the Performance Cycle beginning January 1, 1994, any action taken by the Committee before April 1, 1994 shall be deemed for purposes of this Plan to have been taken on December 31, 1993. 1.3 Applicable Laws. The Plan shall be construed and administered in accordance with the laws of the State of Indiana to the extent that such laws are not preempted by the laws of the United States of America. 1.4 Gender and Number. Where the context permits, words in any gender shall include the other gender, words in the singular shall include the plural and the plural shall include the singular. 1.5 Performance Period. The term "Performance Cycle" shall mean a calendar-year period. 1.6 Performance Cycle. The term "Performance Cycle" generally means the three-year period ending each December 31. Each three-year Performance Cycle shall be composed of three Performance Periods. The Committee shall have the discretion, however, to create Performance Cycles that are composed of one or two Performance Periods and applicable to all or a portion of the participation in the Plan of individuals designated by the Committee before the commencement of such Performance Cycles. 1.7 Corporation. For purposes of Section 3 of the Plan, the Committee may interpret the term "Corporation" to mean a Subsidiary or division of the Corporation, and the Committee may establish separate 1.6. Amendment and Termination of Plan. The Board of Directors of LNC may amend or terminate the Plan at any time. Amendment or termination of the Plan shall not affect the validity or terms of any award previously made to a Participant in any way which is adverse to the Participant without the consent of the Participant. SECTION 2 PLAN PARTICIPATION 2.1. Participation Designations. The Committee may, at any time, designate any key executive, managerial, supervisory or professional employee of LNC or of a Subsidiary (as defined below) or any person holding either an agent`s or broker`s contract with a Subsidiary to be a Participant. The Chief Executive Officer will always be Participant. Each Participant shall be notified of his designation. For purposes of the Plan, the term "Subsidiary" means any corporation at any date that LNC owns directly, or indirectly through an unbroken chain of subsidiary corporations, stock possessing a majority of the total combined voting power of all classes of stock of that corporation. 2.2. Participation Not Contract of Employment. The Plan does not constitute a contract of employment. Participation in the Plan does not give any employee the right to be retained in the employ of LNC or a Subsidiary and does not limit in any way the right of LNC or a Subsidiary to change the duties or responsibilities of any employee. 2.3. Withholding Taxes on Plan Benefits. LNC and the Subsidiaries shall have the right to deduct from any cash payment made pursuant to the Plan the amount of any tax required by law to be withheld from that payment. SECTION 3 Plan Benefits 3.1. Performance Pools. Performance Pools shall be established by the Committee for each Performance Cycle. Each Performance Pool shall have a Performance Goal that measures LNC's relative performance against a peer group of companies selected by the Committee for a Performance Cyle. Each Performance Pool is designed to enhance cooperation between major business units of LNC and overall productivity and efficiency of Participants for the benefit of LNC and its shareholders. 3.2. Performance Goals. A Performance Goal shall be established in advance of each Performance Cycle. Each Performance Goal shall measure the value achieved for shareholders of LNC as compared to its peer group of companies. The peer group of companies may be different for each Performance Cycle and Pool. 3.3. Benefit Levels. For each Performance Goal a hurdle rate will be established by the Committee. The amount allocated to a Performance Pool for achieving the hurdle rate is zero. For each Performance Cycle, the Committee will establish the total amount to be allocated to each Performance Pool. In no event will the total amount allocated to all Performance Pools for any Performance Cycle exceed 15% of the increase in book value of LNC Common Stock for a Performance Cycle. SECTION 4 Payment of Benefits 4.1. Determination of Amount of Award. The determination of award shall be at the end of each Performance Cycle. Awards shall be distributed to all Participants as soon as possible after the end of the Performance Cycle (the "Payment Date"). 4.2. Payment of Award. The Committee may convert the cash value of each Participant`s award to the equivalent number of Restricted Stock of LNC as a Restricted Stock Award, under the terms of Section 6 of the Lincoln National Corporation 1986 Stock Option Incentive Plan or its successor. The conversion of the award to Restricted Stock shall be based on the Fair Market Value of LNC's Common Stock as of the close of the business day immediately preceding January 1, February 1, and March 1 of next succeding Performance Cycle. These Fair Market Values shall be averaged to determine the price of a share of LNC's Common Stock for that prior Performance Cycle (the "19XX Stock Price") "Fair Market Value" means the average of the highest and lowest prices of a share of stock, as quoted on the composite transactions table covering transactions on the New York Stock Exchange, on the first date that the stock was traded on that Exchange which next precedes the date as of which the determination is being made. Any amount which is not converted to a Restricted Stock Award shall be paid to the Participant in cash. 4.3. Exclusion. No Participant whose personal performance is judged to be less than "competent" by the Committee, who voluntarily terminates employment (other than on account of death, disability, retirement, or a resignation by mutual agreement) or who is discharged for gross misconduct shall be paid or due an award. 4.4 Termination of Employment. If a Participant leaves the employ of LNC and all of its affiliates during a Performance Cycle the guidelines below shall be followed: (a) Retirement. If the Participant retires during a Performance Cycle, the Participant will be awarded a Performance Award on the Payment Date multiplied by the percentage of that Performance Cycle during which he was an employee and a Participant. (b) Disability. If the Participant`s employment terminates during a Performance Cycle because he is disabled (as defined in the Lincoln National Corporation Employees` Retirement Plan), any award on account of participation during a noncompleted Performance Cycle is in the discretion of the Committee. (c) Death. In the event of death of a Participant, any award on account of participation during a noncompleted Performance Cycle is in the discretion of the Committee. Payments under the Plan in the event of a Participant's death shall be made in accordance with a writing filed with the Committee, or if no writing is filed, to the Participant's estate for disposition under the terms of the Participant's will or by the laws of descent and distribution. (d) Termination After a Change in Control. In the event of a change of control of LNC, as defined for purposes of the Lincoln National Corporation Executives` Severance Benefit Plan (as in effect immediately prior to such change of control), any Participant who terminates employment with LNC and all of its subsidiaries within the Performance Cycle in which the change of control occurs shall be deemed to have retired in that year under paragraph (a) above and paragraph (e) below shall not apply. (e) Other Termination. If a Participant`s employment with LNC and all of its subsidiaries terminates other than for reasons described in (a), (b), (c) and (d) above, no award shall be payable with respect to a noncompleted Performance Cycle. 4.5. Effect on Other Employee Benefits. Benefits under the Plan will have no effect on the level of employee benefits or other forms of noncash compensation that are salary based. SECTION 5 Employee`s Rights or Title to Funds 5.1. The Plan is deemed to be an unfunded plan and no Employer has any obligation to set aside, earmark, or entrust any fund, policy, or money with which to pay any obligations under the Plan. 5.2. The amount of any benefit payable under the Plan with respect to any Participant shall be paid from the general revenues of LNC. 5.3. Any Participant or beneficiary shall be and remain a general creditor of LNC with respect to any promises to pay under the Plan in the same manner as any other creditor who has a general claim for an unpaid liability. EX-10 6 Exhibit 10(i) LINCOLN NATIONAL CORPORATION 1993 STOCK PLAN FOR NON-EMPLOYEE DIRECTORS (Including All Amendments Through November 11, 1998) ARTICLE I - PURPOSE OF PLAN 1.1 Purpose of Plan. Lincoln National Corporation (the "Corporation") has adopted the 1993 Stock Plan for Non-Employee Directors (the "Plan") to provide for payment in shares of the Corporation's Common Stock ("Stock") of a portion of the retainer fee payable to members of the Board of Directors of the Corporation who are not employees of the Corporation or any of its affiliates or subsidiaries ("Non-Employee Directors") and to allow Non-Employee Directors and directors of any of the Corporation's affiliates or subsidiaries ("Non-LNC Directors") to elect to defer receipt of all or a portion of their retainer and/or meeting fees. The Plan also provides a restricted stock bonus in the form of Restricted Stock for Non-Employee Directors, and for the granting to Non-Employee Directors of nonqualified options to purchase Stock and Stock equivalents. The Plan is intended to provide Non-Employee Directors with a larger equity interest in the Corporation in order to attract and retain well-qualified individuals to serve as Non-Employee Directors and to enhance the identity of interests between Non-Employee Directors and the shareholders of the Corporation. ARTICLE II - ELIGIBILITY AND PARTICIPATION 2.1 Eligibility and Participation. Only Non-Employee Directors of the Corporation and Non-LNC Directors shall be eligible to participate in the Plan, and participation in the Plan is mandatory for all Non-Employee Directors. Except as specifically provided herein, a Non-Employee Director may not elect to increase or decrease the portion of the retainer fee payable in Stock. ARTICLE III - RETAINER STOCK AWARDS AND DEFERRAL ELECTIONS 3.1 Retainer Stock Awards. (a) Amount of Award. On each July 1 after the Effective Date through and including July 1, 2004 (each such date hereinafter a "Grant Date"), in lieu of the retainer fee payable to a Non-Employee Director with respect to the calendar quarter beginning on the Grant Date determined without regard to the Plan ("Retainer"), and in consideration for services rendered as a Non-Employee Director, the Corporation shall issue to each Non-Employee Director a whole number of shares of Stock (a "Stock Award") equal to the number of shares determined by dividing (a) the sum of (i) twenty-five percent (25%) of the Retainer established by resolution of the Board of Directors of the Corporation and payable for services prior to July 1, 1995, plus (ii) one hundred per cent (100%) of any increase in the Retainer adopted by the Board of Directors of the Corporation for services after July 1, 1995 (provided, however, that this clause (ii) shall take effect with respect to each such increase only upon the effective date of such increase), by (b) the Fair Market Value of the Stock on such Grant Date. For purposes of this Plan, the "Fair Market Value" of Stock on any business day shall be the average of the high and low sales prices of the Stock quoted on the New York Exchange Composite Listing on the next preceding business day on which there were such quotations for the day in question. To the extent that the formula described in this Section 3.1(a) does not result in a whole number of shares of Stock, the result shall be rounded upwards to the next whole number such that no fractional shares of Stock shall be issued under the Plan. Such shares shall be restricted from sale or transfer as provided in Section 3.1(b). (b) Restrictions on Stock Awards. A stock certificate representing the Stock Award shall be registered in each Non-Employee Director's name. The Non-Employee Director shall have all rights and privileges of a shareholder as to such Stock Award, including the right to vote such Restricted Shares, except that the following restrictions shall apply: (i) no dividends shall be payable on the shares, however, a Dividend Equivalent Payment, as defined in Article V, below, shall be credited to an account established under the Plan, invested in Stock Units, as described under Section 3.2(b) and shall have the same restrictions as the relevant restricted shares, (ii) none of the Restricted Shares may be sold, transferred, assigned, pledged, or otherwise encumbered or disposed of during the Restricted Period, and (iii) except as provided in Section 3.1(c), all of the Restricted Shares and Dividend Equivalent Payments shall be forfeited and all rights of the Non-Employee Director to such Restricted Shares shall terminate without further obligation on the part of the Corporation and its subsidiaries upon the Non-Employee Director's ceasing to be a director of the Corporation and its subsidiaries. (c) Termination of Directorship. (i) Vesting of Shares. If a Non-Employee Director ceases to be a director of the Corporation and its subsidiaries by reason of Disability, Death, Retirement or Change of Control, the Restricted Shares granted to and Dividend Equivalent Payments on such shares accumulated for such Non-Employee Director shall immediately vest. If a Non-Employee Director ceases to be a director of the Corporation and its subsidiaries for any other reason, the Non-Employee Director shall immediately forfeit all Restricted Shares, except to the extent that a majority of the Board of Directors of the Corporation other than the Non-Employee Director approves the vesting of such Restricted Shares. Upon vesting, except as provided in Article XI, all restrictions applicable to such Restricted Shares shall lapse. (ii) Disability. For purposes of this Section 3.1(c), "Disability" shall mean a permanent and total disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended. (iii) Retirement. For purposes of this Section 3.1(c), "Retirement" shall mean ceasing to be a director of the Company (A) on or after age 70, or (B) on or after age 65 with the consent of a majority of the members of the Board of Directors of the Corporation other than the Non-Employee Director. (iv) Change of Control. For purposes of this Section 3.1(c), "Change of Control" shall have the same meaning as in the Lincoln National Corporation Executives' Severance Benefit Plan on the date that is six (6) months immediately preceding the "Change of Control." 3.2 Deferral of Retainer and/or Fees. (a) Deferral Elections. Commencing on the effective date of the Plan, payment of all or part of the Retainer (excluding Stock Awards pursuant to Section 3.1 [a]) and/or fees payable to a Non-Employee Director for meetings of the Board of Directors of the Corporation or Board Committees or for extraordinary services may be deferred by election of the Non-Employee Director. Payment of all or a part of any retainer and/or fees payable to a Non-LNC Director by an affiliate or subsidiary of the Corporation for meetings of the Board of Directors of the subsidiary or affiliate or for board committees or for extraordinary services, may also be deferred commencing with the adoption of the Plan by the affiliate or subsidiary. Each such election must be made prior to the start of the calendar year for which the Retainer and/or fees will be paid and must be irrevocable for the affected calendar year, provided, however, that for 1994, each Non-Employee Director shall be permitted to elect deferred payment of all or a portion of the Retainer and/or the fees earned after the effective date of the Plan and before December 31, 1994, provided such Non-Employee Director has made an irrevocable election to this effect prior to stockholder approval of the Plan. In addition, each election to defer payment of any amount of the Retainer and/or fees payable in cash must be made in a manner that complies with Section 16 of the Securities Exchange Act of 1934 ("1934 Act"), as the same may be hereafter amended. (b) Crediting Stock Units to Accounts. Amounts deferred pursuant to Section 3.2(a) shall be credited as of the date of the deferral to a bookkeeping reserve account maintained by the Corporation ("Account") in units which are equivalent in value to shares of Stock ("Stock Units"). The number of Stock Units credited to an Account with respect to any Non-Employee Director shall equal a number of Stock Units equal to any deferred cash amount divided by the Fair Market Value of the Stock on the date on which such cash amount would have been paid but for the deferral election pursuant to Section 3.2(a). (c) Fully Vested Stock Units. All Stock Units credited to a Non-Employee Director's Account pursuant to this Section 3.2 shall be at all times fully vested and nonforfeitable. (d) Payment of Stock Units. Stock Units credited to a Non-Employee Director's Account pursuant to this Article III shall be payable in an equal number of shares of Stock or cash in a single lump sum distribution or annual installment payments made at such time specified by the Non-Employee Director in the applicable deferral election, provided that the designated payment date with respect to any election must be the first day of a subsequent calendar year which is no earlier than twelve (12) months following the date on which the election is made. (e) Payment of Stock Units Upon a Change of Control. Stock Units credited to a Non-Employee Director's Account shall be automatically distributed in a single lump sum amount of shares of Stock, with fractional Stock Units being distributed in cash, upon a Change of Control. ARTICLE IV - RESTRICTED STOCK BONUS 4.1 Restricted Stock Bonus for Non-Employee Directors on July 1, 1994. Each Non-Employee Director serving as such on the date of shareholder approval of the Plan shall be awarded a whole number of restricted Shares of Stock (a "Stock Bonus") equal to $10,000 divided by Fair Market Value of Common Stock in consideration for services rendered as a Non-Employee Director of the Corporation and its subsidiaries. To the extent that the formula described in this Section 4.1 does not result in a whole number of Shares of Stock, the result shall be rounded upwards to the next whole number such that no fractional shares shall be issued under the Plan. The restrictions on the Stock Bonus shall be the same as those restrictions described in Section 3.1(b). 4.2 Restricted Stock Bonus for Non-Employee Directors After July 1, 1994. Each Non-Employee Director who commences serving a new three year term after July 1, 1994 shall be issued an additional Stock Bonus equal to $10,000 divided by the Fair Market Value of Common Stock as of the July 1 on which he or she begins serving a new term as a Non-Employee Director, and thereafter until the Plan is terminated. A new Non-Employee Director who is appointed or elected to an unexpired term, shall receive a partial Stock Bonus on the next succeeding July 1 after his or her appointment or election to such partial term in an amount equal to the Fair Market Value of Stock on such July 1 of $10,000 multiplied by a fraction the numerator being the number of months remaining in the unexpired term since being so appointed or elected and the denominator being 36. To the extent that the formula described in this Section 4.2 does not result in a whole number of Shares of Stock, the result shall be rounded upwards to the next whole number such that no fractional shares shall be issued under the Plan. This Stock Bonus shall contain the same restrictions as specified in Section 3.1(b). ARTICLE V - DIVIDEND EQUIVALENT PAYMENTS 5.1 Dividend Equivalent Payments. As of each dividend payment date with respect to Stock, each Non-Employee Director shall receive additional Stock Units ("Dividend Equivalent Payment") equal to the product of (i) the per-share cash dividend payable with respect to each share of Stock on such date, and (ii) the total number of Restricted Shares issued in his or her name and Stock Units credited to his Account as of the record date corresponding to such dividend payment date, divided by the Fair Market Value. Fractional Stock Units may be awarded. The Dividend Equivalent Payments with respect to Restricted Shares shall contain the same restrictions as specified in Section 3.1(b). ARTICLE VI - STOCK OPTIONS 6.1 Options. The Board of Directors of the Corporation may in its discretion grant nonqualified options to purchase Stock or Stock Units ("Options") to Non-Employee Directors on the following terms and conditions: (a) Exercise Price. The exercise price per share of Stock purchasable under an Option shall be determined by the Board of Directors of the Corporation provided that such exercise price shall be not less than the Fair Market Value of a share of Stock on the date of grant of such Option. (b) Time and Method of Exercise. The Board of Directors of the Corporation shall determine, at the date of grant or thereafter, the time or times at which or the circumstances under which an Option may be exercised in whole or in part (including based on achievement by the Corporation of performance goals and/or satisfaction by the Non- Employee Director of future service requirements), the methods by which such exercise price may be paid or deemed to be paid, and the form of such payment, including, without limitation, cash, Stock, or other property (including notes or other contractual obligations of Non- Employee Directors to make payment on a deferred basis). In no event, however, shall an Option be exercisable within six months of the date on which it was granted. (c) Exercise only by Non-Employee Director. An Option shall be exercisable only by the Non-Employee Director or by a person who acquires the Option from the Non-Employee Director, following his death, by will or the laws of descent and distribution. (d) Exercise of Option to Purchase Stock Units. The exercise of an Option to purchase Stock Units shall be made in the manner, and on such other terms with respect to payments of Stock Units and other matters, as may be prescribed by the Board of Directors of the Corporation. Stock Units received on exercise shall be credited as of the date of exercise to an Account (as described in Section 3.2(b)). The number of Stock Units credited to an Account on behalf of a Non-Employee Director as a result of his exercise of an Option shall equal (i) the difference between the exercise price of the Option and the Fair Market Value of the Stock on the date of exercise, multiplied by (ii) the number of shares of Stock subject to the Option, divided by (iii) the Fair Market Value of the Stock on the date of exercise. 6.2 Option Agreements. Each Option shall be evidenced by an agreement between the Corporation and the Non-Employee Director setting forth all the relevant terms and conditions applicable to the Option. An agreement executed by a Non-Employee Director may be different from one executed by another Non-Employee Director and/or an agreement previously executed by the Non-Employee Director. ARTICLE VII - DELIVERY OF STOCK CERTIFICATES 7.1 Stock Awards. As soon as practicable following the expiration of the restrictions, but in no event sooner than six (6) months from such Grant Date, the Corporation shall deliver to the Non-Employee Director an unrestricted Stock certificate with respect to the shares of Stock issued pursuant to such Stock Award and Stock Bonus. During any six (6) month period after the Grant Date and before delivery of the Stock certificate after the restrictions have lapsed, the Non-Employee Director shall have all the rights of a shareholder with respect to such Stock, except for the right to receive dividend payments and except that such Stock shall not be transferable by the Non-Employee Director other than by will or the laws of descent and distribution. 7.2 Stock Unit Payments. The Corporation shall issue and deliver to the Non-Employee Director cash or a Stock certificate, as elected by the Non-Employee Director, for payment of Stock Units as soon as practicable following the date on which Stock Units are payable in accordance with Section 3.2(d). No fractional shares will be distributed. 7.3 Stock Options. As soon as practicable following the exercise of an Option, the Corporation shall deliver to the Non-Employee Director an unrestricted Stock certificate with respect to the shares of Stock issued pursuant to the exercise of such Option. ARTICLE VIII - STOCK 8.1 Stock. The aggregate number of shares of Stock that may be issued under the Plan, including shares issued on exercise of an Option, shall not exceed one hundred fifty thousand (150,000) shares, unless such number of shares is adjusted as provided in Article VIII of this Plan. In addition to the foregoing limit, the aggregate number of restricted shares that may be granted during the term of the Plan shall not exceed fifty thousand (50,000) shares, unless such number of shares is adjusted as provided in Article IX of this Plan. To the extent that an award or Option lapses or the rights of the Non-Employee Director terminate or the award is settled in cash (e.g. cash settlement of Stock Units) any shares of Common Stock subject to such award shall again be available for the grant of an award. ARTICLE IX - ADJUSTMENT UPON CHANGES IN CAPITALIZATION 9.1 Adjustment Upon Changes in Capitalization. In the event of a stock dividend, stock split or combination, reclassification, recapitalization or other capital adjustment of shares of Stock, the number of shares of Stock that may be issued pursuant to Stock Awards, Stock Bonuses, Stock Units and Options and the number of Stock Units credited to Accounts shall be appropriately adjusted by the Board of Directors of the Corporation, whose determination shall be final, binding and conclusive. No fractional shares of Stock shall be issued under the Plan on account of any adjustment specified herein. The grant of Stock Awards, Stock Bonuses, Stock Units or Options pursuant to this Plan shall not affect in any way the right or power of the Corporation to issue additional Stock or other securities, make adjustments, reclassifications, reorganizations or other changes in its corporate, capital or business structure, to participate in a merger, consolidation or share exchange or to transfer its assets or dissolve or liquidate. ARTICLE X - TERMINATION OR AMENDMENT OF PLAN 10.1 In General. The Board of Directors of the Corporation may at any time terminate, suspend or amend this Plan. However, except as otherwise determined by the Board of Directors of the Corporation, no such amendment shall become effective without the approval of the stockholders of the Corporation to the extent stockholder approval is required in order to comply with Rule 16b-3 under the 1934 Act. 10.2 Written Consents. No amendment may adversely affect the right of any Non-Employee Director to receive any Stock previously issued as a Stock Award or Stock Bonus, to receive any Stock pursuant to the exercise of an outstanding Option, or to receive any Stock of Dividend Equivalent Payments pursuant to an outstanding Stock Unit without the written consent of such Non-Employee Director. 10.3 Termination of Plan. Unless the Plan is sooner terminated, no Stock Award, Stock Bonus or Option shall be granted after July 1, 2004. The termination of the Plan shall have no effect on outstanding Stock Awards, Stock Bonuses, Stock Units or Options. ARTICLE XI - GOVERNMENT REGULATIONS 11.1 Government Regulations. (a) The obligations of the Corporation to issue any Stock granted under this Plan shall be subject to all applicable laws, rules and regulations and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Board of Directors of the Corporation. (b) Except as otherwise provided in Article X of this Plan, the Board of Directors of the Corporation may make such changes as may be necessary or appropriate to comply with the rules and regulations of any governmental authority. ARTICLE XII - MISCELLANEOUS 12.1 Unfunded Plan. The Plan shall be unfunded with respect to the Corporation's obligation to pay any amounts due pursuant to Stock Units and Dividend Equivalent Payments, and a Non-Employee Director's rights to receive any payment of any Stock Unit or Dividend Equivalent Payment shall be not greater than the rights of an unsecured general creditor of the Corporation. 12.2 Assignment; Encumbrances. The right to receive a Stock Award, Stock Bonus, Stock Unit or Option and the right to receive payment with respect to a Stock Unit under this Plan are not assignable or transferable and shall not be subject to any encumbrances, liens, pledges or charges of the Non-Employee Director or his or her creditors. Any attempt to assign, transfer or hypothecate any Restricted Stock Award, Stock Bonus, Stock Unit or Option or any right to receive a Stock Award, Stock Bonus, Stock Unit or Option shall be void and of no force and effect whatsoever 12.3 Designation of Beneficiaries. A Non-Employee Director may designate a beneficiary or beneficiaries to receive any distributions under the Plan upon his or her death. 12.4 Applicable Law. The validity, interpretation and administration of this Plan and any rules, regulations, determinations or decisions made hereunder, and the rights of any and all persons having or claiming to have any interest herein or hereunder, shall be determined exclusively in accordance with the laws of the State of Indiana, without regard to the choice of laws provisions hereof. 12.5 Headings. The headings in this Plan are for reference purposes only and shall not affect the meaning or interpretation of this Plan. 12.6 Notices. All notices or other communications made or given pursuant to this Plan shall be in writing and shall be sufficiently made or given if hand-delivered or mailed by certified mail, addressed to any Non-Employee Director at the address contained in the records of the Corporation or to the Corporation in care of the Corporation's Secretary, 200 East Berry Street, Fort Wayne, IN 46802-2706. ARTICLE XIII - EFFECTIVE DATE OF PLAN 13.1 Effective Date of Plan. This Plan shall become effective on the date on which it is approved by the affirmative vote of the holders of a majority of the votes cast by shareholders of the Corporation present, or represented and entitled to vote, at the next annual meeting of the shareholders of the Corporation duly held in accordance with the laws of the State of Indiana. EX-10 7 LINCOLN NATIONAL CORPORATION EXECUTIVES' EXCESS COMPENSATION PENSION BENEFIT PLAN As Adopted Effective as of January 1, 1989 LINCOLN NATIONAL CORPORATION By:_________________________________________ Ian M. Rolland Its Chairman and Chief Executive Officer -3- LINCOLN NATIONAL CORPORATION EMPLOYEES' EXCESS COMPENSATION PENSION BENEFIT PLAN Section 1 General 1.1 Effective as of January 1, 1989, Lincoln National Corporation, an Indiana Corporation (the "Company") has established the Lincoln National Corporation Corporation Employees' Excess Compensation Benefit Plan (the "Plan"). 1.2 This Plan is for the a select group of highly compensated and management personnel who are participants in the Lincoln National Corporation Employees' Retirement Plan, which plan is maintained for employees of Lincoln National Corporation and its affiliates who retire, or have retired, under the said plan and the beneficiaries of such participants. 1.3 The Company and any of its affiliates which with the written consent of the Chief Executive Officer of the Company adopt the Plan are referred to below collectively as the "Employers" and individually as an "Employer". 1.4 This Plan is completely separate from the Lincoln National Corporation Employees' Retirement Plan and is not funded or qualified for special tax treatment under the Internal Revenue Code. 1.5 The purpose of the Plan is to restore retirement benefit payments to those participants, and the beneficiaries of such participants, who retire or have retired under the Lincoln National Corporation Employees' Retirement Plan and whose retirement benefits are limited by section 401(a)(17) of the Internal Revenue Code of 1986, as amended. 1.6 Any action required or permitted to be taken by any Employer under the Plan shall be by resolution of its Board of Directors, or by a person or persons authorized by resolution of its Board of Directors. Section 2 Eligibility 2.1 Any participant in the Lincoln National Corporation Employees' Retirement Plan who retires or has retired under said plan, or such participant's beneficiary, shall be entitled to a benefit, payable hereunder in accordance with section three of this Plan, equal to the excess, if any, of (A) The amount of such participant's or surviving beneficiary's annual benefit under the Lincoln National Corporation Employees' Retirement Plan computed under the provisions of the said plan, without regard to the above-mentioned limitations of section 401(a)(17) of the Internal Revenue Code over (B) The sum of (i) the amount of such participant's or surviving beneficiary's annual benefit actually payable for each year under the Lincoln National Corporation Employees' Retirement Plan, computed under the provisions of the said retirement plan and subject to the above-mentioned limitations of section 401(a)(17) of the Internal Revenue Code, and (ii) the amount of such participant's's or surviving beneficiary's annual benefit actually payable for each year under the Lincoln National Corporation Employee's Supplemental Pension Benefit Plan. In the event of a change of control of Lincoln National Corporation, as defined for purposes of the Lincoln National Corporation Executives' Severance Benefit Plan (as in effect immediately prior to such change of control), hereinafter referred to as "the Severance Benefit Plan," any participant in the Lincoln National Corporation Employees' Retirement Plan, hereinafter "the Retirement Plan," who terminates employment with a nonforfeitable right to benefits under the Retirement Plan within two years after such change of control shall be deemed to have retired under the Plan. 2.2 The benefits payable under the Plan shall be payable to a participant and the participant's beneficiary in the same manner and subject to all the same options, conditions, privileges and restrictions as are applicable to the benefits payable to a participant or to the beneficiary of a participant under the Lincoln National Corporation Employees' Retirement Plan. 2.3 The Plan does not constitute a contract of employment, and participation in the Plan will not give any employee the right to be retained in the employ of any Employer nor any right to or claim to any benefit under the Plan, unless such right or claim has specifically accrued under the terms of the Plan. Section 3 Benefits 3.1 The benefits under this Plan shall become payable when a participant retires and begins to receive payments or to a retired participant or beneficiary receiving payments under the Lincoln National Corporation Employees' Retirement Plan, and shall be payable in the same manner and at the same time as the participant's or beneficiary's benefits under the said retirement plan are paid. 3.2 In the event that a person entitled to benefits under the Plan is declared incompetent and a conservator or other person legally charged with the care of this person or of his estate is appointed, any benefits to which such person is entitled under the Plan shall be paid to such conservator or other person legally charged with the care of this person or of his estate. 3.3 The benefits payable to any Participant under the Plan may not be voluntarily or involuntarily assigned or alienated. Section 4 Amendment or Termination 4.1 Lincoln National Corporation may amend or terminate this Plan at any time, but such amendment or termination shall not adversely affect the rights of any participant or beneficiary then receiving benefits, or the beneficiary of any participant then receiving benefits under this Plan. In the event of a change of control of Lincoln National Corporation, as defined in the Severance Benefit Plan (as in effect immediately prior to such change of control), no amendment or termination of this Plan shall adversely affect the right of any participant to the benefits accrued to the participant or to payment of such benefits under the terms of this Plan as in effect immediately prior to such change of control. Section 5 Employee's Rights or Title to Funds 5.1 The Plan is deemed to be an unfunded plan and no Employer has any obligation to set aside, earmark, or entrust any fund, policy, or money with which to pay any obligations under the Plan. 5.2 The amount of any benefit payable under the Plan with respect to any Participant shall be paid from the general revenues of the Employer that last employed that Participant. 5.3 Any participant or beneficiary shall be and remain a general creditor of an Employer with respect to any promises to pay under the Plan in the same manner as any other creditor who has a general claim for an unpaid liability. EX-21 8 Exhibit 21 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. | | |--| (formerly Financial Services Department, Inc.)| | | | 100% - Indiana - Insurance Agency | | | | | | Financial Investments, Inc. | | |--| (formerly Insurance Alternatives, Inc.) | | | | 100% - Indiana - Insurance Agency | | | | |--| The Financial Resources Department, Inc. | | | | 100% - Michigan - Insurance Agency | | | | |--| Investment Alternatives, Inc. | | | | 100% - Pennsylvania - Insurance Agency | | | | |--| The Investment Center, Inc. | | | | 100% - Tennessee - Insurance Agency | | | | |--| The Investment Group, Inc. | | | | 100% - New Jersey - Insurance Agency | -2- | | | 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. | |--| (formerly Lincoln Financial Group, Inc.) | | | 100% - Indiana - Insurance Agency | | | | |--| Lincoln Financial Advisors Corporation | | | | (formerly 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 | -------------------------------------------- -3- | | | 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 - Investment Advisor | ------------------------------------------------- | | | | | ------------------------------------ | | | | |--| Delaware International Advisers, Ltd.| | | | | | 18.9% - England - Investment Advisor | -------------------------------------- | | | | ------------------------------------------------- | | | |__| Delvoy, Inc. | | | | | | 100% - Minnesota - Holding Company | ------------------------------------------------- | | | | | --------------------------------------- | | | |--| Delaware Management Company, Inc. | | | | | | | 100% - Delaware - Investment Advisor | --------------------------------------- | | | | | | ------------------------------------------- | | | | | |--| Delaware Distributors, L.P. | | | |98%-Delaware-MutualFund Distributor & Broker/Dealer | | | | | | | | 1% Equity-Delaware Capital Management, Inc | 1% Equity-Delaware Distributors, Inc. | ------------------------------------------ | | | | | | ------------------------------------- | | | | | |--| 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 | ---------------------------------- -4- | | | 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. --------------------------------------- | | | | --------------------------------------- | | | --| Delaware Capital Management, Inc. | | | | | |(formerly 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 & Transfe Agent | --------------------------------------------- | | | | | ----------------------------------------- | | | | |__| Delaware Investment & Retirement Services,Inc. | | | | | | | 100% - Delaware - Registered Transfer Agent| ----------------------------------------- | | | ----------------------------------------- | | |--| Lynch & Mayer, Inc. | | | | | 100% - Indiana - Investment Adviser | -------------------------------------- | | | | ---------------------------------------- | | | |--| Lynch & Mayer Securities Corp. | | | | | 100% - Delaware - Securities Broker | --------------------------------------- | | | ---------------------------------------------------- | | | | Vantage Global Advisors, Inc. | | | |--| (formerly Modern Portfolio Theory Associates, Inc.)| | | | | 100% - Delaware - Investment Adviser | ---------------------------------------------------- -5- | | | Lincoln National Corporation | | Indiana - Holding Company | | |--| Lincoln National Investments, Inc. | | | (fka Lincoln National Investment Companies, Inc.)| | | 100% - Indiana - Holding Company | | | | | | Lincoln Investment Management, Inc. | | |--| (formerly 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.| | | | |(formerly 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. | | |--| (formerly Lincoln National Putnam Master Fund, Inc.) | | | | 100% - Maryland - Mutual Fund | ------------------------------------------------------ -6- | Lincoln National Corporation | | Indiana - Holding Company | | |--| The Lincoln National Life Insurance Company | | | 100% - Indiana | | | | | | Lincoln National Growth and Income Fund, Inc. | | |--| (formerly Lincoln National Growth Fund, Inc.) | | | | 100% - Maryland - Mutual Fund | | | -------------------------------------------------------- | |--| Lincoln National Health & Casualty Insurance Company | | | | 100% - Indiana | -------------------------------------------------------- | | ----------------------------------------------- | |--| Lincoln 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 Reinsurance Company Limited | | | (formerly Heritage Reinsurance, Ltd.) | | | 100% ** - Bermuda | ---------------------------------------------- -7- | Lincoln National Corporation | | Indiana - Holding Company | | |--| Lincoln National Reinsurance Company Limited | | | (formerly 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 | | | | (formerly 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 | | | | (formerly: Laurentian Financial Advisers Ltd.) | | | | 100% - England/Wales - Sales Company | | | | |--| Lincoln Financial Group PLC | | | | (formerly: Laurentian Financial Group PLC) | | | | 100% - England/Wales - Holding Company | | | | | | |--| Lincoln ISA Management Limited | | | | | (formerly Lincoln Unit Trust Management Limited; | | | | | Laurentian Unit Trust Management Limited) | | | | | 100% - England/Wales - Unit Trust Management | -8- | Lincoln National Corporation | | Indiana - Holding Company | | |--| Lincoln National (UK) PLC | | | 100% - England/Wales - Holding Company | | | -------------------------------------------------- | |--| Lincoln Financial Group PLC | | | | (formerly: Laurentian Financial Group PLC) | | | | 100% - England/Wales - Holding Company | -------------------------------------------------- | | | --------------------------------------- | | |--| Lincoln Milldon Limited | | | | |(formerly: Laurentian Milldon Limited) | | | | | 100% - England/Wales - Sales Company | --------------------------------------- | | | ----------------------------------------------------------- | | |--| Laurtrust Limited | | | | 100% - England/Wales - Pension Scheme Trustee (Inactive) | ----------------------------------------------------------- | | | -------------------------------------------------- | | |--| Lincoln Management Services Limited | | | | |(formerly: 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 | ------------------------------------------ -9- | 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 | ------------------------------------- -10- | | | 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 (formerly Lincoln Investment Management Ltd.)| | | | 100% - England/Wales - Investment Management Services | | | | | | |--| CL CR Management Ltd. | | | | 50% - England/Wales - Administrative Services | | | | |--| Lincoln Independent Limited | | | |(formerly: Laurentian Independent Financial Planning Ltd.) | | | | 100% - England/Wales - Independent Financial Adviser | | | | | |--| Lincoln Investment Management Limited | | | |(formerly: 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 | | | | (formerly Lincoln National (Jersey) Limited) | | | | 100% - England/Wales - Dormat | | | | |--| Lincoln National(Guernsey) Limited | | | | 100% - England/Wales - Dormat | | | | |--| Lincoln SBP Trustee Limited | | | | 100% - England/Wales | -11- | | | Lincoln National Corporation | | Indiana - Holding Company | | | | Linsco Reinsurance Company | |--| (formerly Lincoln National Reinsurance Company) | | | 100% - Indiana - Property/Casualty | | | |--| Old Fort Insurance Company, Ltd. | | | 100% ** - Bermuda | | | | | | Lincoln National Underwriting Services, Ltd. | | |--| 10% - England/Wales - Life/Accident/Health Underwriter | | | (Remaining 90% owned by Lincoln Natl. Reinsurance Co.) | | | | | | 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 | EX-12 9 205 LINCOLN NATIONAL CORPORATION EXHIBIT 12 - HISTORICAL RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, (millions of dollars) 1998 1997(4) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Net Income before Taxes, Accounting Change and Minority Interests...................... 697.4 1427.1 692.7 626.6 376.3 Equity in the Earnings of Unconsolidated Affiliates.......................... (3.3) (2.1) (1.4) (12.4) (14.6) Sub-total of Fixed Charges.......................... 144.1 113.3 108.6 94.4 66.6 ------ ------ ----- ----- ----- Sub-total of Adjusted Net Income................. 838.2 1538.3 799.9 708.6 428.3 Interest on Annuities & Financial Products.......... 1446.2 1253.5 1185.6 1147.1 1064.6 ------ ------ ------ ------ ------ Adjusted Income Base............................. 2284.4 2791.8 1985.5 1855.7 1492.9 Rent Expense........................................ 81.3 62.5 71.6 65.7 51.3 Fixed Charges: Interest and Debt Expense........................... 117.1 92.5 84.7 72.5 49.5 Rent (Pro-rated).................................... 27.0 20.8 23.9 21.9 17.1 ------- -------- -------- --------- -------- Sub-total of Fixed Charges....................... 144.1 113.3 108.6 94.4 66.6 Interest on Annuities & Financial Products.......... 1446.2 1253.5 1185.6 1147.1 1064.5 ------ ------ ------ ------- ------ Sub-total of Fixed Charges....................... 1590.3 1366.8 1294.2 1241.5 1131.1 Preferred Dividends (Pre-tax)....................... .1 .2 .2 13.4 24.2 --------- --------- --------- ------ ------- Total Fixed Charges.............................. 1590.4 1367.0 1294.4 1254.9 1155.3 Ratio of Earnings to Fixed Charges: Excluding Interest on Annuities and Financial Products (1)........................ 5.82 13.57 7.37 7.51 6.43 Including Interest on Annuities and Financial Products (2)........................ 1.44 2.04 1.53 1.49 1.32 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (3)..................................... 1.44 2.04 1.53 1.48 1.29
(1) For purposes of determining this ratio, earnings consist of income before federal income taxes, cumulative effect of accounting change and minority interests adjusted for the difference between income or losses from unconsolidated equity investments and cash distributions from such investments, plus fixed charges. Fixed charges consist of 1) interest and debt expense on short and long-term debt and distributions to minority interest-preferred securities of subsidiary companies and 2) the portion of operating leases that are representative of the interest factor. (2) Same as the ratio of earnings to fixed charges, excluding interest on annuities and financial products, except fixed charges and earnings include interest on annuities and financial products. (3) Same as the ratio of earnings to fixed charges, including interest on annuities and financial products, except that fixed charges include the pre-tax earnings required to cover preferred stock dividend requirements. (4) Coverage ratios for 1997 are higher than other historical periods shown due to the inclusion of the gain on sale of discontinued operations (see note 11 to the consolidated financial statements on page 65). EX-23 10 217 LINCOLN NATIONAL CORPORATION EXHIBIT 23 - CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Forms S-3 and S-8 (Securities and Exchange Commission Registration Numbers 33-51415, 33-51721, 33-58113, 33-52667, 33-04711, 33-13445, 33-62315, 333-04133, 333-32667 and 333-49201) of Lincoln National Corporation and in the related Prospectuses of our report dated February 1, 1999, with respect to the consolidated financial statements and schedules of Lincoln National Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 1998. /s/ ERNST & YOUNG LLP Fort Wayne, Indiana March 9, 1999 EX-27 11 FDS FOR 10-K
7 This schedule contains summary financial information extracted from the condensed consolidated financial statements of Lincoln National Corporation and is qualified in its entirety by reference to such condensed consolidated financial statements. 0000059558 Lincoln National Corporation 12-MOS Dec-31-1998 Jan-01-1998 Dec-31-1998 30,232,892,000 0 0 542,843,000 4,393,082,000 488,722,000 37,929,473,000 2,433,350,000 3,127,093,000 1,964,366,000 93,836,260,000 20,139,982,000 0 0 20,753,064,000 1,771,781,000 0 1,083,000 994,472,000 4,392,386,000 93,836,260,000 2,895,198,000 2,681,406,000 19,034,000 491,425,000 3,328,865,000 440,019,000 1,503,730,000 697,398,000 187,623,000 509,775,000 0 0 0 509,775,000 5.08 5.02 0 0 0 0 0 0 0
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