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This system of supervision and regulation covers, among other things: · Standards of minimum capital requirements and solvency, including RBC measurements; · Restrictions on certain transactions, including, but not limited to, reinsurance between our insurance subsidiaries and their affiliates; · Restrictions on the nature, quality and concentration of investments; · Restrictions on the receipt of reinsurance credit; · Restrictions on the types of terms and conditions that we can include in the insurance policies offered by our primary insurance operations; · Limitations on the amount of dividends that insurance subsidiaries can pay; · Licensing status of the company; · Certain required methods of accounting pursuant to statutory accounting principles (“SAP”); · Reserves for unearned premiums, losses and other purposes; · Payment of policy benefits (claims); and · Assignment of residual market business and potential assessments for the provision of funds necessary for the settlement of covered claims under certain policies provided by impaired, insolvent or failed insurance companies. |
(i) The sum of our consolidated net income for the four trailing fiscal quarters ending on the quarter that is two quarters prior to the most recently completed quarter prior to the determination date is zero or negative, and (ii) our consolidated stockholders’ equity (excluding accumulated OCI and any increase in stockholders’ equity resulting from the issuance of preferred stock during a quarter), or “adjusted stockholders’ equity,” as of (x) the most recently completed quarter and (y) the end of the quarter that is two quarters before the most recently completed quarter, has declined by 10% or more as compared to the quarter that is ten fiscal quarters prior to the last completed quarter, or the “benchmark quarter.” The ACSM would generally require us to use commercially reasonable efforts to satisfy our obligation to pay interest in full on the capital securities with the net proceeds from sales of our common stock and warrants to purchase our common stock with an exercise price greater than the market price. |
Risks and uncertainties that may cause actual results to vary materially, some of which are described within the forward-looking statements, include, among others: · Deterioration in general economic and business conditions that may affect account values, investment results, guaranteed benefit liabilities, premium levels, claims experience and the level of pension benefit costs, funding and investment results; · Adverse global capital and credit market conditions could affect our ability to raise capital, if necessary, and may cause us to realize impairments on investments and certain intangible assets, including goodwill and the valuation allowance against deferred tax assets, which may reduce future earnings and/or affect our financial condition and ability to raise additional capital or refinance existing debt as it matures; · Because of our holding company structure, the inability of our subsidiaries to pay dividends to the holding company in sufficient amounts could harm the holding company’s ability to meet its obligations; · Legislative, regulatory or tax changes, both domestic and foreign, that affect: the cost of, or demand for, our subsidiaries’ products, the required amount of reserves and/or surplus, our ability to conduct business and our captive reinsurance arrangements as well as restrictions on revenue sharing and 12b-1 payments, the potential for U.S. federal tax reform and the effect of the Department of Labor’s (“DOL”) regulation defining fiduciary; · Actions taken by reinsurers to raise rates on in-force business; · Declines in or sustained low interest rates causing a reduction in investment income, the interest margins of our businesses, estimated gross profits (“EGPs”) and demand for our products; · Rapidly increasing interest rates causing contract holders to surrender life insurance and annuity policies, thereby causing realized investment losses, and reduced hedge performance related to variable annuities; · Uncertainty about the effect of continuing promulgation and implementation of rules and regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act on us and the economy, and financial services sector in particular; · The initiation of legal or regulatory proceedings against us, and the outcome of any legal or regulatory proceedings, such as: adverse actions related to present or past business practices common in businesses in which we compete; adverse decisions in significant actions including, but not limited to, actions brought by federal and state authorities and class action cases; new decisions that result in changes in law; and unexpected trial court rulings; · A decline in the equity markets causing a reduction in the sales of our subsidiaries’ products, a reduction of asset-based fees that our subsidiaries charge on various investment and insurance products, an acceleration of the net amortization of deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and deferred front-end loads (“DFEL”) and an increase in liabilities related to guaranteed benefit features of our subsidiaries’ variable annuity products; · Ineffectiveness of our risk management policies and procedures, including various hedging strategies used to offset the effect of changes in the value of liabilities due to changes in the level and volatility of the equity markets and interest rates; · A deviation in actual experience regarding future persistency, mortality, morbidity, interest rates or equity market returns from the assumptions used in pricing our subsidiaries’ products, in establishing related insurance reserves and in the net amortization of DAC, VOBA, DSI and DFEL, which may reduce future earnings; · Changes in GAAP that may result in unanticipated changes to our net income; · Lowering of one or more of our debt ratings issued by nationally recognized statistical rating organizations and the adverse effect such action may have on our ability to raise capital and on our liquidity and financial condition; · Lowering of one or more of the insurer financial strength ratings of our insurance subsidiaries and the adverse effect such action may have on the premium writings, policy retention, profitability of our insurance subsidiaries and liquidity; · Significant credit, accounting, fraud, corporate governance or other issues that may adversely affect the value of certain investments in our portfolios, as well as counterparties to which we are exposed to credit risk, requiring that we realize losses on investments; · Inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others; · Interruption in telecommunication, information technology or other operational systems or failure to safeguard the confidentiality or privacy of sensitive data on such systems from cyberattacks or other breaches of our data security systems; · The effect of acquisitions and divestitures, restructurings, product withdrawals and other unusual items; · The adequacy and collectability of reinsurance that we have purchased; · Acts of terrorism, a pandemic, war or other man-made and natural catastrophes that may adversely affect our businesses and the cost and availability of reinsurance; · Competitive conditions, including pricing pressures, new product offerings and the emergence of new competitors, that may affect the level of premiums and fees that our subsidiaries can charge for their products; · The unknown effect on our subsidiaries’ businesses resulting from changes in the demographics of their client base, as aging baby-boomers move from the asset-accumulation stage to the asset-distribution stage of life; and · The unanticipated loss of key management, financial planners or wholesalers. |
Certain Debt Covenants on Capital Securities Our $1.2 billion in principal amount of capital securities outstanding contain certain covenants that require us to make interest payments in accordance with an alternative coupon satisfaction mechanism (“ACSM”) if we determine that one of the following trigger events exists as of the 30th day prior to an interest payment date (“determination date”): · The Lincoln National Life Insurance Company’s (“LNL”) risk-based capital (“RBC”) ratio is less than 175% (based on the most recent annual financial statement filed with the State of Indiana); or · (i) The sum of our consolidated net income for the four trailing fiscal quarters ending on the quarter that is two quarters prior to the most recently completed quarter prior to the determination date is zero or negative; and (ii) our consolidated stockholders’ equity (excluding AOCI and any increase in stockholders’ equity resulting from the issuance of preferred stock during a quarter), or “adjusted stockholders’ equity,” as of (x) the most recently completed quarter and (y) the end of the quarter that is two quarters before the most recently completed quarter, has declined by 10% or more as compared to the quarter that is 10 fiscal quarters prior to the last completed quarter, or the “benchmark quarter.” The ACSM would generally require us to use commercially reasonable efforts to satisfy our obligation to pay interest in full on the capital securities with the net proceeds from sales of our common stock and warrants to purchase our common stock with an exercise price greater than the market price. |
Income (loss) from operations is GAAP net income excluding the after-tax effects of the following items, as applicable: · Realized gains and losses associated with the following (“excluded realized gain (loss)”): § Sales or disposals and impairments of securities; § Changes in the fair value of derivatives, embedded derivatives within certain reinsurance arrangements and trading securities; § Changes in the fair value of the derivatives we own to hedge our GDB riders within our variable annuities; § Changes in the fair value of the embedded derivatives of our GLB riders reflected within variable annuity net derivative results accounted for at fair value; § Changes in the fair value of the derivatives we own to hedge our GLB riders reflected within variable annuity net derivative results; and § Changes in the fair value of the embedded derivative liabilities related to index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products accounted for at fair value; · Changes in reserves resulting from benefit ratio unlocking on our GDB and GLB riders; · Income (loss) from reserve changes, net of related amortization, on business sold through reinsurance; · Gains (losses) on early extinguishment of debt; · Losses from the impairment of intangible assets; · Income (loss) from discontinued operations; and · Income (loss) from the initial adoption of new accounting standards. |
Signature Title /s/ Dennis R. Glass President, Chief Executive Officer and Director Dennis R. Glass (Principal Executive Officer) /s/ Randal J. Freitag Executive Vice President and Chief Financial Officer Randal J. Freitag (Principal Financial Officer) /s/ Christine A. Janofsky Senior Vice President and Chief Accounting Officer Christine A. Janofsky (Principal Accounting Officer) /s/ Deirdre P. Connelly Director Deirdre P. Connelly /s/ William H. Cunningham Director William H. Cunningham /s/ George W. Henderson, III Director George W. Henderson, III /s/ Eric G. Johnson Director Eric G. Johnson /s/ Gary C. Kelly Director Gary C. Kelly /s/ M. Leanne Lachman Director M. Leanne Lachman /s/ Michael F. Mee Director Michael F. Mee /s/ William Porter Payne Director William Porter Payne /s/ Patrick S. Pittard Director Patrick S. Pittard /s/ Isaiah Tidwell Director Isaiah Tidwell Index to Financial Statement Schedules I - Summary of Investments - Other than Investments in Related Parties FS-2 II - Condensed Financial Information of Registrant FS-3 III - Supplementary Insurance Information FS-6 IV - Reinsurance FS-8 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. |
This system of supervision and regulation covers, among other things: · Standards of minimum capital requirements and solvency, including RBC measurements; · Restrictions on certain transactions, including, but not limited to, reinsurance between our insurance subsidiaries and their affiliates; · Restrictions on the nature, quality and concentration of investments; · Restrictions on the receipt of reinsurance credit; · Restrictions on the types of terms and conditions that we can include in the insurance policies offered by our primary insurance operations; · Limitations on the amount of dividends that insurance subsidiaries can pay; · Licensing status of the company; · Certain required methods of accounting pursuant to statutory accounting principles (“SAP”); · Reserves for unearned premiums, losses and other purposes; and · Assignment of residual market business and potential assessments for the provision of funds necessary for the settlement of covered claims under certain policies provided by impaired, insolvent or failed insurance companies. |
(i) The sum of our consolidated net income for the four trailing fiscal quarters ending on the quarter that is two quarters prior to the most recently completed quarter prior to the determination date is zero or negative, and (ii) our consolidated stockholders’ equity (excluding accumulated OCI and any increase in stockholders’ equity resulting from the issuance of preferred stock during a quarter), or “adjusted stockholders’ equity,” as of (x) the most recently completed quarter and (y) the end of the quarter that is two quarters before the most recently completed quarter, has declined by 10% or more as compared to the quarter that is ten fiscal quarters prior to the last completed quarter, or the “benchmark quarter.” The ACSM would generally require us to use commercially reasonable efforts to satisfy our obligation to pay interest in full on the capital securities with the net proceeds from sales of our common stock and warrants to purchase our common stock with an exercise price greater than the market price. |
Risks and uncertainties that may cause actual results to vary materially, some of which are described within the forward-looking statements, include, among others: · Deterioration in general economic and business conditions that may affect account values, investment results, guaranteed benefit liabilities, premium levels, claims experience and the level of pension benefit costs, funding and investment results; · Adverse global capital and credit market conditions could affect our ability to raise capital, if necessary, and may cause us to realize impairments on investments and certain intangible assets, including goodwill and the valuation allowance against deferred tax assets, which may reduce future earnings and/or affect our financial condition and ability to raise additional capital or refinance existing debt as it matures; · Because of our holding company structure, the inability of our subsidiaries to pay dividends to the holding company in sufficient amounts could harm the holding company’s ability to meet its obligations; · Legislative, regulatory or tax changes, both domestic and foreign, that affect: the cost of, or demand for, our subsidiaries’ products, the required amount of reserves and/or surplus, our ability to conduct business and our captive reinsurance arrangements as well as restrictions on revenue sharing and 12b-1 payments, the potential for U.S. federal tax reform and the effect of the Department of Labor’s (“DOL”) proposed regulation defining fiduciary; · Actions taken by reinsurers to raise rates on in-force business; · Declines in or sustained low interest rates causing a reduction in investment income, the interest margins of our businesses, estimated gross profits (“EGPs”) and demand for our products; · Rapidly increasing interest rates causing contract holders to surrender life insurance and annuity policies, thereby causing realized investment losses, and reduced hedge performance related to variable annuities; · Uncertainty about the effect of rules and regulations to be promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) on us and the economy and financial services sector in particular; · The initiation of legal or regulatory proceedings against us, and the outcome of any legal or regulatory proceedings, such as: adverse actions related to present or past business practices common in businesses in which we compete; adverse decisions in significant actions including, but not limited to, actions brought by federal and state authorities and class action cases; new decisions that result in changes in law; and unexpected trial court rulings; · A decline in the equity markets causing a reduction in the sales of our subsidiaries’ products, a reduction of asset-based fees that our subsidiaries charge on various investment and insurance products, an acceleration of the net amortization of deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and deferred front-end loads (“DFEL”) and an increase in liabilities related to guaranteed benefit features of our subsidiaries’ variable annuity products; · Ineffectiveness of our risk management policies and procedures, including various hedging strategies used to offset the effect of changes in the value of liabilities due to changes in the level and volatility of the equity markets and interest rates; · A deviation in actual experience regarding future persistency, mortality, morbidity, interest rates or equity market returns from the assumptions used in pricing our subsidiaries’ products, in establishing related insurance reserves and in the net amortization of DAC, VOBA, DSI and DFEL, which may reduce future earnings; · Changes in GAAP, including convergence with International Financial Reporting Standards, that may result in unanticipated changes to our net income; · Lowering of one or more of our debt ratings issued by nationally recognized statistical rating organizations and the adverse effect such action may have on our ability to raise capital and on our liquidity and financial condition; · Lowering of one or more of the insurer financial strength ratings of our insurance subsidiaries and the adverse effect such action may have on the premium writings, policy retention, profitability of our insurance subsidiaries and liquidity; · Significant credit, accounting, fraud, corporate governance or other issues that may adversely affect the value of certain investments in our portfolios, as well as counterparties to which we are exposed to credit risk, requiring that we realize losses on investments; · Inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others; · Interruption in telecommunication, information technology or other operational systems or failure to safeguard the confidentiality or privacy of sensitive data on such systems from cyberattacks or other breaches of our data security systems; · The effect of acquisitions and divestitures, restructurings, product withdrawals and other unusual items; · The adequacy and collectability of reinsurance that we have purchased; · Acts of terrorism, a pandemic, war or other man-made and natural catastrophes that may adversely affect our businesses and the cost and availability of reinsurance; · Competitive conditions, including pricing pressures, new product offerings and the emergence of new competitors, that may affect the level of premiums and fees that our subsidiaries can charge for their products; · The unknown effect on our subsidiaries’ businesses resulting from changes in the demographics of their client base, as aging baby-boomers move from the asset-accumulation stage to the asset-distribution stage of life; and · Loss of key management, financial planners or wholesalers. |
Certain Debt Covenants on Capital Securities Our $1.2 billion in principal amount of capital securities outstanding contain certain covenants that require us to make interest payments in accordance with an alternative coupon satisfaction mechanism (“ACSM”) if we determine that one of the following trigger events exists as of the 30th day prior to an interest payment date (“determination date”): · The Lincoln National Life Insurance Company’s (“LNL”) risk-based capital (“RBC”) ratio is less than 175% (based on the most recent annual financial statement filed with the State of Indiana); or · (i) The sum of our consolidated net income for the four trailing fiscal quarters ending on the quarter that is two quarters prior to the most recently completed quarter prior to the determination date is zero or negative; and (ii) our consolidated stockholders’ equity (excluding AOCI and any increase in stockholders’ equity resulting from the issuance of preferred stock during a quarter), or “adjusted stockholders’ equity,” as of (x) the most recently completed quarter and (y) the end of the quarter that is two quarters before the most recently completed quarter, has declined by 10% or more as compared to the quarter that is 10 fiscal quarters prior to the last completed quarter, or the “benchmark quarter.” The ACSM would generally require us to use commercially reasonable efforts to satisfy our obligation to pay interest in full on the capital securities with the net proceeds from sales of our common stock and warrants to purchase our common stock with an exercise price greater than the market price. |
Income (loss) from operations is GAAP net income excluding the after-tax effects of the following items, as applicable: · Realized gains and losses associated with the following (“excluded realized gain (loss)”): § Sales or disposals and impairments of securities; § Changes in the fair value of derivatives, embedded derivatives within certain reinsurance arrangements and trading securities; § Changes in the fair value of the derivatives we own to hedge our GDB riders within our variable annuities; § Changes in the fair value of the embedded derivatives of our GLB riders reflected within variable annuity net derivative results accounted for at fair value; § Changes in the fair value of the derivatives we own to hedge our GLB riders reflected within variable annuity net derivative results; and § Changes in the fair value of the embedded derivative liabilities related to index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products accounted for at fair value; · Changes in reserves resulting from benefit ratio unlocking on our GDB and GLB riders; · Income (loss) from reserve changes, net of related amortization, on business sold through reinsurance; · Gains (losses) on early extinguishment of debt; · Losses from the impairment of intangible assets; · Income (loss) from discontinued operations; and · Income (loss) from the initial adoption of new accounting standards. |
Signature Title /s/ Dennis R. Glass President, Chief Executive Officer and Director Dennis R. Glass (Principal Executive Officer) /s/ Randal J. Freitag Executive Vice President and Chief Financial Officer Randal J. Freitag (Principal Financial Officer) /s/ Douglas N. Miller Senior Vice President and Chief Accounting Officer Douglas N. Miller (Principal Accounting Officer) /s/ William H. Cunningham Director William H. Cunningham /s/ George W. Henderson, III Director George W. Henderson, III /s/ Eric G. Johnson Director Eric G. Johnson /s/ Gary C. Kelly Director Gary C. Kelly /s/ M. Leanne Lachman Director M. Leanne Lachman /s/ Michael F. Mee Director Michael F. Mee /s/ William Porter Payne Director William Porter Payne /s/ Patrick S. Pittard Director Patrick S. Pittard /s/ Isaiah Tidwell Director Isaiah Tidwell Index to Financial Statement Schedules I - Summary of Investments - Other than Investments in Related Parties FS-2 II - Condensed Financial Information of Registrant FS-3 III - Supplementary Insurance Information FS-6 IV - Reinsurance FS-8 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. |
This system of supervision and regulation covers, among other things: · Standards of minimum capital requirements and solvency, including RBC measurements; · Restrictions on certain transactions, including, but not limited to, reinsurance between our insurance subsidiaries and their affiliates; · Restrictions on the nature, quality and concentration of investments; · Restrictions on the receipt of reinsurance credit; · Restrictions on the types of terms and conditions that we can include in the insurance policies offered by our primary insurance operations; · Limitations on the amount of dividends that insurance subsidiaries can pay; · Licensing status of the company; · Certain required methods of accounting pursuant to statutory accounting principles (“SAP”); · Reserves for unearned premiums, losses and other purposes; and · Assignment of residual market business and potential assessments for the provision of funds necessary for the settlement of covered claims under certain policies provided by impaired, insolvent or failed insurance companies. |
(i) The sum of our consolidated net income for the four trailing fiscal quarters ending on the quarter that is two quarters prior to the most recently completed quarter prior to the determination date is zero or negative, and (ii) our consolidated stockholders’ equity (excluding accumulated OCI and any increase in stockholders’ equity resulting from the issuance of preferred stock during a quarter), or “adjusted stockholders’ equity,” as of (x) the most recently completed quarter and (y) the end of the quarter that is two quarters before the most recently completed quarter, has declined by 10% or more as compared to the quarter that is ten fiscal quarters prior to the last completed quarter, or the “benchmark quarter.” The ACSM would generally require us to use commercially reasonable efforts to satisfy our obligation to pay interest in full on the capital securities with the net proceeds from sales of our common stock and warrants to purchase our common stock with an exercise price greater than the market price. |
Risks and uncertainties that may cause actual results to vary materially, some of which are described within the forward-looking statements, include, among others: · Deterioration in general economic and business conditions that may affect account values, investment results, guaranteed benefit liabilities, premium levels, claims experience and the level of pension benefit costs, funding and investment results; · Adverse global capital and credit market conditions could affect our ability to raise capital, if necessary, and may cause us to realize impairments on investments and certain intangible assets, including goodwill and the valuation allowance against deferred tax assets, which may reduce future earnings and/or affect our financial condition and ability to raise additional capital or refinance existing debt as it matures; · Because of our holding company structure, the inability of our subsidiaries to pay dividends to the holding company in sufficient amounts could harm the holding company’s ability to meet its obligations; · Legislative, regulatory or tax changes, both domestic and foreign, that affect: the cost of, or demand for, our subsidiaries’ products, the required amount of reserves and/or surplus, our ability to conduct business and our captive reinsurance arrangements as well as restrictions on revenue sharing and 12b-1 payments; and the potential for U.S. federal tax reform; · Actions taken by reinsurers to raise rates on in-force business; · Declines in or sustained low interest rates causing a reduction in investment income, the interest margins of our businesses, estimated gross profits (“EGPs”) and demand for our products; · Rapidly increasing interest rates causing contract holders to surrender life insurance and annuity policies, thereby causing realized investment losses, and reduced hedge performance related to variable annuities; · Uncertainty about the effect of rules and regulations to be promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) on us and the economy and financial services sector in particular; · The initiation of legal or regulatory proceedings against us, and the outcome of any legal or regulatory proceedings, such as: adverse actions related to present or past business practices common in businesses in which we compete; adverse decisions in significant actions including, but not limited to, actions brought by federal and state authorities and class action cases; new decisions that result in changes in law; and unexpected trial court rulings; · A decline in the equity markets causing a reduction in the sales of our subsidiaries’ products, a reduction of asset-based fees that our subsidiaries charge on various investment and insurance products, an acceleration of the net amortization of deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and deferred front-end loads (“DFEL”) and an increase in liabilities related to guaranteed benefit features of our subsidiaries’ variable annuity products; · Ineffectiveness of our risk management policies and procedures, including various hedging strategies used to offset the effect of changes in the value of liabilities due to changes in the level and volatility of the equity markets and interest rates; · A deviation in actual experience regarding future persistency, mortality, morbidity, interest rates or equity market returns from the assumptions used in pricing our subsidiaries’ products, in establishing related insurance reserves and in the net amortization of DAC, VOBA, DSI and DFEL, which may reduce future earnings; · Changes in GAAP, including convergence with International Financial Reporting Standards (“IFRS”), that may result in unanticipated changes to our net income; · Lowering of one or more of our debt ratings issued by nationally recognized statistical rating organizations and the adverse effect such action may have on our ability to raise capital and on our liquidity and financial condition; · Lowering of one or more of the insurer financial strength ratings of our insurance subsidiaries and the adverse effect such action may have on the premium writings, policy retention, profitability of our insurance subsidiaries and liquidity; · Significant credit, accounting, fraud, corporate governance or other issues that may adversely affect the value of certain investments in our portfolios, as well as counterparties to which we are exposed to credit risk, requiring that we realize losses on investments; · Inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others; · Interruption in telecommunication, information technology or other operational systems or failure to safeguard the confidentiality or privacy of sensitive data on such systems from cyberattacks or other breaches of our data security systems; · The effect of acquisitions and divestitures, restructurings, product withdrawals and other unusual items; · The adequacy and collectability of reinsurance that we have purchased; · Acts of terrorism, a pandemic, war or other man-made and natural catastrophes that may adversely affect our businesses and the cost and availability of reinsurance; · Competitive conditions, including pricing pressures, new product offerings and the emergence of new competitors, that may affect the level of premiums and fees that our subsidiaries can charge for their products; · The unknown effect on our subsidiaries’ businesses resulting from changes in the demographics of their client base, as aging baby-boomers move from the asset-accumulation stage to the asset-distribution stage of life; and · Loss of key management, financial planners or wholesalers. |
Certain Debt Covenants on Capital Securities Our $1.2 billion in principal amount of capital securities outstanding contain certain covenants that require us to make interest payments in accordance with an alternative coupon satisfaction mechanism (“ACSM”) if we determine that one of the following trigger events exists as of the 30th day prior to an interest payment date (“determination date”): · The Lincoln National Life Insurance Company’s (“LNL”) risk-based capital (“RBC”) ratio is less than 175% (based on the most recent annual financial statement filed with the State of Indiana); or · (i) The sum of our consolidated net income for the four trailing fiscal quarters ending on the quarter that is two quarters prior to the most recently completed quarter prior to the determination date is zero or negative; and (ii) our consolidated stockholders’ equity (excluding AOCI and any increase in stockholders’ equity resulting from the issuance of preferred stock during a quarter), or “adjusted stockholders’ equity,” as of (x) the most recently completed quarter and (y) the end of the quarter that is two quarters before the most recently completed quarter, has declined by 10% or more as compared to the quarter that is 10 fiscal quarters prior to the last completed quarter, or the “benchmark quarter.” The ACSM would generally require us to use commercially reasonable efforts to satisfy our obligation to pay interest in full on the capital securities with the net proceeds from sales of our common stock and warrants to purchase our common stock with an exercise price greater than the market price. |
Income (loss) from operations is GAAP net income excluding the after-tax effects of the following items, as applicable: · Realized gains and losses associated with the following (“excluded realized gain (loss)”): § Sales or disposals and impairments of securities; § Changes in the fair value of derivatives, embedded derivatives within certain reinsurance arrangements and trading securities; § Changes in the fair value of the derivatives we own to hedge our GDB riders within our variable annuities; § Changes in the fair value of the embedded derivatives of our GLB riders accounted for at fair value, net of the change in the fair value of the derivatives we own to hedge them; and § Changes in the fair value of the embedded derivative liabilities related to index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products accounted for at fair value; · Changes in reserves resulting from benefit ratio unlocking on our GDB and GLB riders; · Income (loss) from reserve changes, net of related amortization, on business sold through reinsurance; · Gains (losses) on early extinguishment of debt; · Losses from the impairment of intangible assets; · Income (loss) from discontinued operations; and · Income (loss) from the initial adoption of new accounting standards. |
Signature Title /s/ Dennis R. Glass President, Chief Executive Officer and Director Dennis R. Glass (Principal Executive Officer) /s/ Randal J. Freitag Executive Vice President and Chief Financial Officer Randal J. Freitag (Principal Financial Officer) /s/ Douglas N. Miller Senior Vice President and Chief Accounting Officer Douglas N. Miller (Principal Accounting Officer) /s/ William J. Avery Director William J. Avery /s/ William H. Cunningham Director William H. Cunningham /s/ George W. Henderson, III Director George W. Henderson, III /s/ Eric G. Johnson Director Eric G. Johnson /s/ Gary C. Kelly Director Gary C. Kelly /s/ M. Leanne Lachman Director M. Leanne Lachman /s/ Michael F. Mee Director Michael F. Mee /s/ William Porter Payne Director William Porter Payne /s/ Patrick S. Pittard Director Patrick S. Pittard /s/ Isaiah Tidwell Director Isaiah Tidwell Index to Financial Statement Schedules I - Summary of Investments - Other than Investments in Related Parties FS-2 II - Condensed Financial Information of Registrant FS-3 III - Supplementary Insurance Information FS-6 IV - Reinsurance FS-8 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. |
(i) The sum of our consolidated net income for the four trailing fiscal quarters ending on the quarter that is two quarters prior to the most recently completed quarter prior to the determination date is zero or negative, and (ii) our consolidated stockholders’ equity (excluding accumulated OCI and any increase in stockholders’ equity resulting from the issuance of preferred stock during a quarter), or “adjusted stockholders’ equity,” as of (x) the most recently completed quarter and (y) the end of the quarter that is two quarters before the most recently completed quarter, has declined by 10% or more as compared to the quarter that is ten fiscal quarters prior to the last completed quarter, or the “benchmark quarter.” The ACSM would generally require us to use commercially reasonable efforts to satisfy our obligation to pay interest in full on the capital securities with the net proceeds from sales of our common stock and warrants to purchase our common stock with an exercise price greater than the market price. |
Risks and uncertainties that may cause actual results to vary materially, some of which are described within the forward-looking statements, include, among others: · Deterioration in general economic and business conditions that may affect account values, investment results, guaranteed benefit liabilities, premium levels, claims experience and the level of pension benefit costs, funding and investment results; · Adverse global capital and credit market conditions, including another shutdown of the U.S. federal government and/or failure to reach agreement on the U.S. federal government’s debt ceiling, could affect our ability to raise capital, if necessary, and may cause us to realize impairments on investments and certain intangible assets, including goodwill and the valuation allowance against deferred tax assets, which may reduce future earnings and/or affect our financial condition and ability to raise additional capital or refinance existing debt as it matures; · Because of our holding company structure, the inability of our subsidiaries to pay dividends to the holding company in sufficient amounts could harm the holding company’s ability to meet its obligations; · Legislative, regulatory or tax changes, both domestic and foreign, that affect the cost of, or demand for, our subsidiaries’ products, the required amount of reserves and/or surplus, or otherwise affect our ability to conduct business, including changes to statutory reserve requirements related to secondary guarantee universal life and annuities; regulations regarding captive reinsurance arrangements; restrictions on revenue sharing and 12b-1 payments; and the potential for U.S. federal tax reform; · Actions taken by reinsurers to increase rates on in-force business; · Declines in or sustained low interest rates causing a reduction in investment income, the interest margins of our businesses, estimated gross profits (“EGPs”) and demand for our products; · Rapidly increasing interest rates causing contract holders to surrender life insurance and annuity policies, thereby causing realized investment losses, and reduced hedge performance related to variable annuities; · Uncertainty about the effect of rules and regulations to be promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) on us and the economy and the financial services sector in particular; · The initiation of legal or regulatory proceedings against us, and the outcome of any legal or regulatory proceedings, such as: adverse actions related to present or past business practices common in businesses in which we compete; adverse decisions in significant actions including, but not limited to, actions brought by federal and state authorities and class action cases; new decisions that result in changes in law; and unexpected trial court rulings; · A decline in the equity markets causing a reduction in the sales of our subsidiaries’ products, a reduction of asset-based fees that our subsidiaries charge on various investment and insurance products, an acceleration of the net amortization of deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and deferred front-end loads (“DFEL”) and an increase in liabilities related to guaranteed benefit features of our subsidiaries’ variable annuity products; · Ineffectiveness of our risk management policies and procedures, including various hedging strategies used to offset the effect of changes in the value of liabilities due to changes in the level and volatility of the equity markets and interest rates; · A deviation in actual experience regarding future persistency, mortality, morbidity, interest rates or equity market returns from the assumptions used in pricing our subsidiaries’ products, in establishing related insurance reserves and in the net amortization of DAC, VOBA, DSI and DFEL, which may reduce future earnings; · Changes in GAAP, including convergence with International Financial Reporting Standards (“IFRS”), that may result in unanticipated changes to our net income; · Lowering of one or more of our debt ratings issued by nationally recognized statistical rating organizations and the adverse effect such action may have on our ability to raise capital and on our liquidity and financial condition; · Lowering of one or more of the insurer financial strength ratings of our insurance subsidiaries and the adverse effect such action may have on the premium writings, policy retention, profitability of our insurance subsidiaries and liquidity; · Significant credit, accounting, fraud, corporate governance or other issues that may adversely affect the value of certain investments in our portfolios, as well as counterparties to which we are exposed to credit risk, requiring that we realize losses on investments; · Inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others; · Interruption in telecommunication, information technology or other operational systems or failure to safeguard the confidentiality or privacy of sensitive data on such systems; · The effect of acquisitions and divestitures, restructurings, product withdrawals and other unusual items; · The adequacy and collectibility of reinsurance that we have purchased; · Acts of terrorism, a pandemic, war or other man-made and natural catastrophes that may adversely affect our businesses and the cost and availability of reinsurance; · Competitive conditions, including pricing pressures, new product offerings and the emergence of new competitors, that may affect the level of premiums and fees that our subsidiaries can charge for their products; · The unknown effect on our subsidiaries’ businesses resulting from changes in the demographics of their client base, as aging baby-boomers move from the asset-accumulation stage to the asset-distribution stage of life; and · Loss of key management, financial planners or wholesalers. |
Certain Debt Covenants on Capital Securities Our $1.2 billion in principal amount of capital securities outstanding contain certain covenants that require us to make interest payments in accordance with an alternative coupon satisfaction mechanism (“ACSM”) if we determine that one of the following trigger events exists as of the 30th day prior to an interest payment date (“determination date”): · LNL’s risk-based capital ratio is less than 175% (based on the most recent annual financial statement filed with the State of Indiana); or · (i) The sum of our consolidated net income for the four trailing fiscal quarters ending on the quarter that is two quarters prior to the most recently completed quarter prior to the determination date is zero or negative; and (ii) our consolidated stockholders’ equity (excluding accumulated other comprehensive income and any increase in stockholders’ equity resulting from the issuance of preferred stock during a quarter), or “adjusted stockholders’ equity,” as of (x) the most recently completed quarter and (y) the end of the quarter that is two quarters before the most recently completed quarter, has declined by 10% or more as compared to the quarter that is 10 fiscal quarters prior to the last completed quarter, or the “benchmark quarter.” The ACSM would generally require us to use commercially reasonable efforts to satisfy our obligation to pay interest in full on the capital securities with the net proceeds from sales of our common stock and warrants to purchase our common stock with an exercise price greater than the market price. |
Income (loss) from operations is GAAP net income excluding the after-tax effects of the following items, as applicable: · Realized gains and losses associated with the following (“excluded realized gain (loss)”): § Sales or disposals of securities; § Impairments of securities; § Changes in the fair value of derivatives, embedded derivatives within certain reinsurance arrangements and trading securities; § Changes in the fair value of the derivatives we own to hedge our GDB riders within our variable annuities; § Changes in the fair value of the embedded derivatives of our GLB riders accounted for at fair value, net of the change in the fair value of the derivatives we own to hedge them; and § Changes in the fair value of the embedded derivative liabilities related to index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products accounted for at fair value; · Changes in reserves resulting from benefit ratio unlocking on our GDB and GLB riders; · Income (loss) from reserve changes, net of related amortization, on business sold through reinsurance; · Gains (losses) on early extinguishment of debt; · Losses from the impairment of intangible assets; · Income (loss) from discontinued operations; and · Income (loss) from the initial adoption of new accounting standards. |
Signature Title /s/ Dennis R. Glass President, Chief Executive Officer and Director Dennis R. Glass (Principal Executive Officer) /s/ Randal J. Freitag Executive Vice President and Chief Financial Officer Randal J. Freitag (Principal Financial Officer) /s/ Douglas N. Miller Senior Vice President and Chief Accounting Officer Douglas N. Miller (Principal Accounting Officer) /s/ William J. Avery Director William J. Avery /s/ William H. Cunningham Director William H. Cunningham /s/ George W. Henderson, III Director George W. Henderson, III /s/ Eric G. Johnson Director Eric G. Johnson /s/ Gary C. Kelly Director Gary C. Kelly /s/ M. Leanne Lachman Director M. Leanne Lachman /s/ William Porter Payne Director William Porter Payne /s/ Patrick S. Pittard Director Patrick S. Pittard /s/ Isaiah Tidwell Director Isaiah Tidwell Index to Financial Statement Schedules I - Summary of Investments - Other than Investments in Related Parties FS-2 II - Condensed Financial Information of Registrant FS-3 III - Supplementary Insurance Information FS-6 IV - Reinsurance FS-8 V - Valuation and Qualifying Accounts FS-9 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. |
(i) The sum of our consolidated net income for the four trailing fiscal quarters ending on the quarter that is two quarters prior to the most recently completed quarter prior to the determination date is zero or negative, and (ii) our consolidated stockholders’ equity (excluding accumulated OCI and any increase in stockholders’ equity resulting from the issuance of preferred stock during a quarter), or “adjusted stockholders’ equity,” as of (x) the most recently completed quarter and (y) the end of the quarter that is two quarters before the most recently completed quarter, has declined by 10% or more as compared to the quarter that is ten fiscal quarters prior to the last completed quarter, or the “benchmark quarter.” The ACSM would generally require us to use commercially reasonable efforts to satisfy our obligation to pay interest in full on the capital securities with the net proceeds from sales of our common stock and warrants to purchase our common stock with an exercise price greater than the market price. |
Risks and uncertainties that may cause actual results to vary materially, some of which are described within the forward-looking statements, include, among others: · Deterioration in general economic and business conditions that may affect account values, investment results, guaranteed benefit liabilities, premium levels, claims experience and the level of pension benefit costs, funding and investment results; · Adverse global capital and credit market conditions could affect our ability to raise capital, if necessary, and may cause us to realize impairments on investments and certain intangible assets, including goodwill and the valuation allowance against deferred tax assets, which may reduce future earnings and/or affect our financial condition and ability to raise additional capital or refinance existing debt as it matures; · Because of our holding company structure, the inability of our subsidiaries to pay dividends to the holding company in sufficient amounts could harm the holding company’s ability to meet its obligations; · Legislative, regulatory or tax changes, both domestic and foreign, that affect the cost of, or demand for, our subsidiaries’ products, the required amount of reserves and/or surplus, or otherwise affect our ability to conduct business, including changes to statutory reserve requirements related to secondary guarantee universal life and annuities; regulations regarding captive reinsurance arrangements; restrictions on revenue sharing and 12b-1 payments; and the potential for U.S. federal tax reform; · Declines in or sustained low interest rates causing a reduction in investment income, the interest margins of our businesses, estimated gross profits (“EGPs”) and demand for our products; · Uncertainty about the effect of rules and regulations to be promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act on us and the economy and the financial services sector in particular; · The initiation of legal or regulatory proceedings against us, and the outcome of any legal or regulatory proceedings, such as: adverse actions related to present or past business practices common in businesses in which we compete; adverse decisions in significant actions including, but not limited to, actions brought by federal and state authorities and class action cases; new decisions that result in changes in law; and unexpected trial court rulings; · A decline in the equity markets causing a reduction in the sales of our subsidiaries’ products, a reduction of asset-based fees that our subsidiaries charge on various investment and insurance products, an acceleration of the net amortization of deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and deferred front-end loads (“DFEL”) and an increase in liabilities related to guaranteed benefit features of our subsidiaries’ variable annuity products; · Ineffectiveness of our risk management policies and procedures, including various hedging strategies used to offset the effect of changes in the value of liabilities due to changes in the level and volatility of the equity markets and interest rates; · A deviation in actual experience regarding future persistency, mortality, morbidity, interest rates or equity market returns from the assumptions used in pricing our subsidiaries’ products, in establishing related insurance reserves and in the net amortization of DAC, VOBA, DSI and DFEL, which may reduce future earnings; · Changes in GAAP, including convergence with International Financial Reporting Standards (“IFRS”), that may result in unanticipated changes to our net income; · Lowering of one or more of our debt ratings issued by nationally recognized statistical rating organizations and the adverse effect such action may have on our ability to raise capital and on our liquidity and financial condition; · Lowering of one or more of the insurer financial strength ratings of our insurance subsidiaries and the adverse effect such action may have on the premium writings, policy retention, profitability of our insurance subsidiaries and liquidity; · Significant credit, accounting, fraud, corporate governance or other issues that may adversely affect the value of certain investments in our portfolios, as well as counterparties to which we are exposed to credit risk, requiring that we realize losses on investments; · Inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others; · Interruption in telecommunication, information technology or other operational systems or failure to safeguard the confidentiality or privacy of sensitive data on such systems; · The effect of acquisitions and divestitures, restructurings, product withdrawals and other unusual items; · The adequacy and collectibility of reinsurance that we have purchased; · Acts of terrorism, a pandemic, war or other man-made and natural catastrophes that may adversely affect our businesses and the cost and availability of reinsurance; · Competitive conditions, including pricing pressures, new product offerings and the emergence of new competitors, that may affect the level of premiums and fees that our subsidiaries can charge for their products; · The unknown effect on our subsidiaries’ businesses resulting from changes in the demographics of their client base, as aging baby-boomers move from the asset-accumulation stage to the asset-distribution stage of life; and · Loss of key management, financial planners or wholesalers. |
Certain Debt Covenants on Capital Securities Our $1.2 billion in principal amount of capital securities outstanding contain certain covenants that require us to make interest payments in accordance with an alternative coupon satisfaction mechanism (“ACSM”) if we determine that one of the following trigger events exists as of the 30th day prior to an interest payment date (“determination date”): · LNL’s risk-based capital ratio is less than 175% (based on the most recent annual financial statement filed with the State of Indiana); or · (i) The sum of our consolidated net income for the four trailing fiscal quarters ending on the quarter that is two quarters prior to the most recently completed quarter prior to the determination date is zero or negative; and (ii) our consolidated stockholders’ equity (excluding accumulated other comprehensive income and any increase in stockholders’ equity resulting from the issuance of preferred stock during a quarter), or “adjusted stockholders’ equity,” as of (x) the most recently completed quarter and (y) the end of the quarter that is two quarters before the most recently completed quarter, has declined by 10% or more as compared to the quarter that is 10 fiscal quarters prior to the last completed quarter, or the “benchmark quarter.” The ACSM would generally require us to use commercially reasonable efforts to satisfy our obligation to pay interest in full on the capital securities with the net proceeds from sales of our common stock and warrants to purchase our common stock with an exercise price greater than the market price. |
Signature Title /s/ Dennis R. Glass President, Chief Executive Officer and Director Dennis R. Glass (Principal Executive Officer) /s/ Randal J. Freitag Executive Vice President and Chief Financial Officer Randal J. Freitag (Principal Financial Officer) /s/ Douglas N. Miller Senior Vice President and Chief Accounting Officer Douglas N. Miller (Principal Accounting Officer) /s/ William J. Avery Director William J. Avery /s/ William H. Cunningham Director William H. Cunningham /s/ George W. Henderson, III Director George W. Henderson, III /s/ Eric G. Johnson Director Eric G. Johnson /s/ Gary C. Kelly Director Gary C. Kelly /s/ M. Leanne Lachman Director M. Leanne Lachman /s/ Michael F. Mee Director Michael F. Mee /s/ William Porter Payne Director William Porter Payne /s/ Patrick S. Pittard Director Patrick S. Pittard /s/ Isaiah Tidwell Director Isaiah Tidwell Index to Financial Statement Schedules I - Summary of Investments - Other than Investments in Related Parties FS-2 II - Condensed Financial Information of Registrant FS-3 III - Supplementary Insurance Information FS-6 IV - Reinsurance FS-8 V - Valuation and Qualifying Accounts FS-9 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. |
(i) The sum of our consolidated net income for the four trailing fiscal quarters ending on the quarter that is two quarters prior to the most recently completed quarter prior to the determination date is zero or negative, and (ii) our consolidated stockholders’ equity (excluding accumulated OCI and any increase in stockholders’ equity resulting from the issuance of preferred stock during a quarter), or “adjusted stockholders’ equity,” as of (x) the most recently completed quarter and (y) the end of the quarter that is two quarters before the most recently completed quarter, has declined by 10% or more as compared to the quarter that is ten fiscal quarters prior to the last completed quarter, or the “benchmark quarter.” The ACSM would generally require us to use commercially reasonable efforts to satisfy our obligation to pay interest in full on the capital securities with the net proceeds from sales of our common stock and warrants to purchase our common stock with an exercise price greater than the market price. |
Risks and uncertainties that may cause actual results to vary materially, some of which are described within the forward-looking statements, include, among others: · Deterioration in general economic and business conditions that may affect account values, investment results, guaranteed benefit liabilities, premium levels, claims experience and the level of pension benefit costs, funding and investment results; · Adverse global capital and credit market conditions could affect our ability to raise capital, if necessary, and may cause us to realize impairments on investments and certain intangible assets, including goodwill and a valuation allowance against deferred tax assets, which may reduce future earnings and/or affect our financial condition and ability to raise additional capital or refinance existing debt as it matures; · Because of our holding company structure, the inability of our subsidiaries to pay dividends to the holding company in sufficient amounts could harm the holding company’s ability to meet its obligations; · Legislative, regulatory or tax changes, both domestic and foreign, that affect the cost of, or demand for, our subsidiaries’ products, the required amount of reserves and/or surplus, or otherwise affect our ability to conduct business, including changes to statutory reserve requirements related to secondary guarantees under universal life, such as a change to reserve calculations under Actuarial Guideline 38 (also known as The Application of the Valuation of Life Insurance Policies Model Regulation, or “AG38”), and variable annuity products under Actuarial Guideline 43 (also known as Commissioners Annuity Reserve Valuation Method for Variable Annuities, or “AG43”); restrictions on revenue sharing and 12b-1 payments; and the potential for U.S. federal tax reform; · Uncertainty about the effect of rules and regulations to be promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act on us and the economy and the financial services sector in particular; · The initiation of legal or regulatory proceedings against us, and the outcome of any legal or regulatory proceedings, such as: adverse actions related to present or past business practices common in businesses in which we compete; adverse decisions in significant actions including, but not limited to, actions brought by federal and state authorities and class action cases; new decisions that result in changes in law; and unexpected trial court rulings; · Changes in or sustained low interest rates causing a reduction in investment income, the interest margins of our businesses, estimated gross profits and demand for our products; · A decline in the equity markets causing a reduction in the sales of our subsidiaries’ products, a reduction of asset-based fees that our subsidiaries charge on various investment and insurance products, an acceleration of the net amortization of deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and deferred front-end loads (“DFEL”) and an increase in liabilities related to guaranteed benefit features of our subsidiaries’ variable annuity products; · Ineffectiveness of our risk management policies and procedures, including various hedging strategies used to offset the effect of changes in the value of liabilities due to changes in the level and volatility of the equity markets and interest rates; · A deviation in actual experience regarding future persistency, mortality, morbidity, interest rates or equity market returns from the assumptions used in pricing our subsidiaries’ products, in establishing related insurance reserves and in the net amortization of DAC, VOBA, DSI and DFEL, which may reduce future earnings; · Changes in GAAP, including the potential incorporation of International Financial Reporting Standards (“IFRS”) into the U.S. financial reporting system, that may result in unanticipated changes to our net income; · Lowering of one or more of our debt ratings issued by nationally recognized statistical rating organizations and the adverse effect such action may have on our ability to raise capital and on our liquidity and financial condition; · Lowering of one or more of the insurer financial strength ratings of our insurance subsidiaries and the adverse effect such action may have on the premium writings, policy retention, profitability of our insurance subsidiaries and liquidity; · Significant credit, accounting, fraud, corporate governance or other issues that may adversely affect the value of certain investments in our portfolios, as well as counterparties to which we are exposed to credit risk, requiring that we realize losses on investments; · The effect of acquisitions and divestitures, restructurings, product withdrawals and other unusual items; · The adequacy and collectibility of reinsurance that we have purchased; · Acts of terrorism, a pandemic, war or other man-made and natural catastrophes that may adversely affect our businesses and the cost and availability of reinsurance; · Competitive conditions, including pricing pressures, new product offerings and the emergence of new competitors, that may affect the level of premiums and fees that our subsidiaries can charge for their products; · The unknown effect on our subsidiaries’ businesses resulting from changes in the demographics of their client base, as aging baby-boomers move from the asset-accumulation stage to the asset-distribution stage of life; and · Loss of key management, financial planners or wholesalers. |
Certain Debt Covenants on Capital Securities Our $1.2 billion in principal amount of capital securities outstanding contain certain covenants that require us to make interest payments in accordance with an alternative coupon satisfaction mechanism (“ACSM”) if we determine that one of the following trigger events exists as of the 30th day prior to an interest payment date (“determination date”): · LNL’s risk-based capital ratio is less than 175% (based on the most recent annual financial statement filed with the State of Indiana); or · (i) The sum of our consolidated net income for the four trailing fiscal quarters ending on the quarter that is two quarters prior to the most recently completed quarter prior to the determination date is zero or negative; and (ii) our consolidated stockholders’ equity (excluding accumulated other comprehensive income and any increase in stockholders’ equity resulting from the issuance of preferred stock during a quarter), or “adjusted stockholders’ equity,” as of (x) the most recently completed quarter and (y) the end of the quarter that is two quarters before the most recently completed quarter, has declined by 10% or more as compared to the quarter that is 10 fiscal quarters prior to the last completed quarter, or the “benchmark quarter.” The ACSM would generally require us to use commercially reasonable efforts to satisfy our obligation to pay interest in full on the capital securities with the net proceeds from sales of our common stock and warrants to purchase our common stock with an exercise price greater than the market price. |
Income (loss) from operations is GAAP net income excluding the after-tax effects of the following items, as applicable: · Realized gains and losses associated with the following (“excluded realized gain (loss)”): § Sale or disposal of securities; § Impairments of securities; § Change in the fair value of derivative instruments, embedded derivatives within certain reinsurance arrangements and our trading securities; § Change in the fair value of the derivatives we own to hedge our GDB riders within our variable annuities; § Change in the GLB embedded derivative reserves, net of the change in the fair value of the derivatives we own to hedge the changes in the embedded derivative reserves; and § Changes in the fair value of the embedded derivative liabilities related to index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC. |
Signature Title /s/ Dennis R. Glass Dennis R. Glass President, Chief Executive Officer and Director (Principal Executive Officer) /s/ Randal J. Freitag Randal J. Freitag Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Douglas N. Miller Douglas N. Miller Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) /s/ William J. Avery William J. Avery Director /s/ William H. Cunningham William H. Cunningham Director /s/ George W. Henderson, III George W. Henderson, III Director /s/ Eric G. Johnson Eric G. Johnson Director /s/ Gary C. Kelly Gary C. Kelly Director /s/ M. Leanne Lachman M. Leanne Lachman Director /s/ Michael F. Mee Michael F. Mee Director /s/ William Porter Payne William Porter Payne Director /s/ Patrick S. Pittard Patrick S. Pittard Director /s/ Isaiah Tidwell Isaiah Tidwell Director Index to Financial Statement Schedules I - Summary of Investments - Other than Investments in Related Parties FS-2 II - Condensed Financial Information of Registrant FS-3 III - Supplementary Insurance Information FS-6 IV - Reinsurance FS-8 V - Valuation and Qualifying Accounts FS-9 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. |
(i) The sum of our consolidated net income for the four trailing fiscal quarters ending on the quarter that is two quarters prior to the most recently completed quarter prior to the determination date is zero or negative, and (ii) our consolidated stockholders’ equity (excluding accumulated OCI and any increase in stockholders’ equity resulting from the issuance of preferred stock during a quarter), or “adjusted stockholders’ equity,” as of (x) the most recently completed quarter and (y) the end of the quarter that is two quarters before the most recently completed quarter, has declined by 10% or more as compared to the quarter that is ten fiscal quarters prior to the last completed quarter, or the “benchmark quarter.” The ACSM would generally require us to use commercially reasonable efforts to satisfy our obligation to pay interest in full on the capital securities with the net proceeds from sales of our common stock and warrants to purchase our common stock with an exercise price greater than the market price. |
Income (loss) from operations is net income recorded in accordance with United States of America generally accepted accounting principles (“GAAP”) excluding the after-tax effects of the following items, as applicable: · Realized gains and losses associated with the following (“excluded realized gain (loss)”): § Sales or disposals of securities; § Impairments of securities; § Change in the fair value of derivative investments, embedded derivatives within certain reinsurance arrangements and our trading securities; § Change in the fair value of the derivatives we own to hedge our guaranteed death benefit (“GDB”) riders within our variable annuities, which is referred to as “GDB derivatives results”; § Change in the fair value of the embedded derivatives of our guaranteed living benefit (“GLB”) riders within our variable annuities accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the Financial Accounting Standards Board (“FASB”) Accounting Standards CodificationTM (“ASC”) (“embedded derivative reserves”), net of the change in the fair value of the derivatives we own to hedge the changes in the embedded derivative reserves, the net of which is referred to as “GLB net derivative results”; and § Changes in the fair value of the embedded derivative liabilities related to index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC (“indexed annuity forward-starting option”). |
Risks and uncertainties that may cause actual results to vary materially, some of which are described within the forward-looking statements, include, among others: · Deterioration in general economic and business conditions that may affect account values, investment results, guaranteed benefit liabilities, premium levels, claims experience and the level of pension benefit costs, funding and investment results; · Economic declines and credit market illiquidity could cause us to realize additional impairments on investments and certain intangible assets, including goodwill and a valuation allowance against deferred tax assets, which may reduce future earnings and/or affect our financial condition and ability to raise additional capital or refinance existing debt as it matures; · Because of our holding company structure, the inability of our subsidiaries to pay dividends to the holding company in sufficient amounts could harm the holding company’s ability to meet its obligations; · Legislative, regulatory or tax changes, both domestic and foreign, that affect the cost of, or demand for, our subsidiaries’ products, the required amount of reserves and/or surplus, or otherwise affect our ability to conduct business, including changes to statutory reserves and/or risk-based capital (“RBC”) requirements related to secondary guarantees under universal life and variable annuity products such as Actuarial Guideline 43 (“AG43,” also known as Commissioners Annuity Reserve Valuation Method for Variable Annuities or “VACARVM”); restrictions on revenue sharing and 12b-1 payments; and the potential for U.S. Federal tax reform; · Uncertainty about the effect of rules and regulations to be promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) on us and the economy and the financial services sector in particular; · The initiation of legal or regulatory proceedings against us, and the outcome of any legal or regulatory proceedings, such as: adverse actions related to present or past business practices common in businesses in which we compete; adverse decisions in significant actions including, but not limited to, actions brought by federal and state authorities and extra-contractual and class action damage cases; new decisions that result in changes in law; and unexpected trial court rulings; · Changes in or sustained low interest rates causing reductions of investment income, estimated gross profits relating to our variable annuity and universal life products, margins of our subsidiaries’ fixed annuity and life insurance businesses and demand for their products; · A decline in the equity markets causing a reduction in the sales of our subsidiaries’ products, a reduction of asset-based fees that our subsidiaries charge on various investment and insurance products, an acceleration of amortization of deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and DFEL and an increase in liabilities related to guaranteed benefit features of our subsidiaries’ variable annuity products; · Ineffectiveness of our various hedging strategies used to offset the effect of changes in the value of liabilities due to changes in the level and volatility of the equity markets and interest rates; · A deviation in actual experience regarding future persistency, mortality, morbidity, interest rates or equity market returns from the assumptions used in pricing our subsidiaries’ products, in establishing related insurance reserves and in elevated impairments on investments and amortization of intangible assets that may cause an increase in reserves and/or a reduction in assets, resulting in a corresponding decrease in net income; · Changes in GAAP, including moving to International Financial Reporting Standards (“IFRS”), as well as the methodologies, estimations and assumptions thereunder, that may result in unanticipated changes to our net income; · Lowering of one or more of our debt ratings issued by nationally recognized statistical rating organizations and the adverse effect such action may have on our ability to raise capital and on our liquidity and financial condition; · Lowering of one or more of the insurer financial strength ratings of our insurance subsidiaries and the adverse effect such action may have on the premium writings, policy retention, profitability of our insurance subsidiaries and liquidity; · Significant credit, accounting, fraud or corporate governance issues that may adversely affect the value of certain investments in our portfolios requiring that we realize losses on such investments; · The effect of acquisitions and divestitures, restructurings, product withdrawals and other unusual items, including our ability to integrate acquisitions and to obtain the anticipated results and synergies from acquisitions; · The adequacy and collectibility of reinsurance that we have purchased; · Acts of terrorism, a pandemic, war or other man-made and natural catastrophes that may adversely affect our businesses and the cost and availability of reinsurance; · Competitive conditions, including pricing pressures, new product offerings and the emergence of new competitors, that may affect the level of premiums and fees that our subsidiaries can charge for their products; · The unknown effect on our subsidiaries’ businesses resulting from changes in the demographics of their client base, as aging baby-boomers move from the asset-accumulation stage to the asset-distribution stage of life; and · Loss of key management, financial planners or wholesalers. |
Certain Debt Covenants on Capital Securities Our $1.5 billion in principal amount of capital securities outstanding contain certain covenants that require us to make interest payments in accordance with an alternative coupon satisfaction mechanism (“ACSM”) if we determine that one of the following trigger events exists as of the 30th day prior to an interest payment date (“determination date”): · LNL’s risk-based capital ratio is less than 175% (based on the most recent annual financial statement filed with the State of Indiana); or · (i) The sum of our consolidated net income for the four trailing fiscal quarters ending on the quarter that is two quarters prior to the most recently completed quarter prior to the determination date is zero or negative; and (ii) our consolidated stockholders’ equity (excluding accumulated other comprehensive income and any increase in stockholders’ equity resulting from the issuance of preferred stock during a quarter), or “adjusted stockholders’ equity,” as of (x) the most recently completed quarter and (y) the end of the quarter that is two quarters before the most recently completed quarter, has declined by 10% or more as compared to the quarter that is 10 fiscal quarters prior to the last completed quarter, or the “benchmark quarter.” The ACSM would generally require us to use commercially reasonable efforts to satisfy our obligation to pay interest in full on the capital securities with the net proceeds from sales of our common stock and warrants to purchase our common stock with an exercise price greater than the market price. |
Income (loss) from operations is GAAP net income excluding the after-tax effects of the following items, as applicable: · Realized gains and losses associated with the following (“excluded realized gain (loss)”): § Sale or disposal of securities; § Impairments of securities; § Change in the fair value of derivative instruments, embedded derivatives within certain reinsurance arrangements and our trading securities; § Change in the fair value of the derivatives we own to hedge our GDB riders within our variable annuities; § Change in the GLB embedded derivative reserves, net of the change in the fair value of the derivatives we own to hedge the changes in the embedded derivative reserves; and § Changes in the fair value of the embedded derivative liabilities related to index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC. |
Signature Title /s/ Dennis R. Glass Dennis R. Glass President, Chief Executive Officer and Director (Principal Executive Officer) /s/ Randal J. Freitag Randal J. Freitag Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Douglas N. Miller Douglas N. Miller Vice President and Chief Accounting Officer (Principal Accounting Officer) /s/ William J. Avery William J. Avery Director /s/ William H. Cunningham William H. Cunningham Director /s/ George W. Henderson, III George W. Henderson, III Director /s/ Eric G. Johnson Eric G. Johnson Director /s/ Gary C. Kelly Gary C. Kelly Director /s/ M. Leanne Lachman M. Leanne Lachman Director /s/ Michael F. Mee Michael F. Mee Director /s/ William Porter Payne William Porter Payne Director /s/ Patrick S. Pittard Patrick S. Pittard Director /s/ David A. Stonecipher David A. Stonecipher Director /s/ Isaiah Tidwell Isaiah Tidwell Director Index to Financial Statement Schedules I - Summary of Investments - Other than Investments in Related Parties FS-2 II - Condensed Financial Information of Registrant FS-3 III - Supplementary Insurance Information FS-6 IV - Reinsurance FS-8 V - Valuation and Qualifying Accounts FS-9 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. |
(i) The sum of our consolidated net income for the four trailing fiscal quarters ending on the quarter that is two quarters prior to the most recently completed quarter prior to the determination date is zero or negative, and (ii) our consolidated stockholders’ equity (excluding accumulated OCI and any increase in stockholders’ equity resulting from the issuance of preferred stock during a quarter), or “adjusted stockholders’ equity,” as of (x) the most recently completed quarter and (y) the end of the quarter that is two quarters before the most recently completed quarter, has declined by 10% or more as compared to the quarter that is ten fiscal quarters prior to the last completed quarter, or the “benchmark quarter.” The ACSM would generally require us to use commercially reasonable efforts to satisfy our obligation to pay interest in full on the capital securities with the net proceeds from sales of our common stock and warrants to purchase our common stock with an exercise price greater than the market price. |
Income (loss) from operations is net income recorded in accordance with GAAP excluding the after-tax effects of the following items, as applicable: · Realized gains and losses associated with the following (“excluded realized loss”): § Sales or disposals of securities; § Impairments of securities; § Change in the fair value of embedded derivatives within certain reinsurance arrangements and the change in the fair value of our trading securities; § Change in the fair value of the derivatives we own to hedge our guaranteed death benefit (“GDB”) riders within our variable annuities, which is referred to as “GDB derivatives results”; § Change in the fair value of the embedded derivatives of our guaranteed living benefit (“GLB”) riders within our variable annuities accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC (“embedded derivative reserves”), net of the change in the fair value of the derivatives we own to hedge the changes in the embedded derivative reserves, the net of which is referred to as “GLB net derivative results”; and § Changes in the fair value of the embedded derivative liabilities related to index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC (“indexed annuity forward-starting option”). |
Risks and uncertainties that may cause actual results to vary materially, some of which are described within the forward-looking statements, include, among others: · Deterioration in general economic and business conditions, both domestic and foreign, that may affect foreign exchange rates, premium levels, claims experience, the level of pension benefit costs and funding and investment results; · Economic declines and credit market illiquidity could cause us to realize additional impairments on investments and certain intangible assets, including goodwill and a valuation allowance against deferred tax assets, which may reduce future earnings and/or affect our financial condition and ability to raise additional capital or refinance existing debt as it matures; · Uncertainty about the impact of existing or new stimulus legislation on the economy; · The cost and other consequences of our participation in the Capital Purchase Program (“CPP”), including the impact of existing regulation and future regulations to which we may become subject; · Legislative, regulatory or tax changes, both domestic and foreign, that affect the cost of, or demand for, our subsidiaries’ products, the required amount of reserves and/or surplus, or otherwise affect our ability to conduct business, including changes to statutory reserves and/or risk-based capital (“RBC”) requirements related to secondary guarantees under universal life and variable annuity products such as Actuarial Guideline (“AG”) 43 (“AG43,” also known as Commissioners Annuity Reserve Valuation Method for Variable Annuities or “VACARVM”); restrictions on revenue sharing and 12b-1 payments; and the potential for U.S. Federal tax reform; · The initiation of legal or regulatory proceedings against us, and the outcome of any legal or regulatory proceedings, such as: adverse actions related to present or past business practices common in businesses in which we compete; adverse decisions in significant actions including, but not limited to, actions brought by federal and state authorities and extra-contractual and class action damage cases; new decisions that result in changes in law; and unexpected trial court rulings; · Changes in interest rates causing a reduction of investment income, the margins of our subsidiaries’ fixed annuity and life insurance businesses and demand for their products; · A decline in the equity markets causing a reduction in the sales of our subsidiaries’ products, a reduction of asset-based fees that our subsidiaries charge on various investment and insurance products, an acceleration of amortization of deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and DFEL and an increase in liabilities related to guaranteed benefit features of our subsidiaries’ variable annuity products; · Ineffectiveness of our various hedging strategies used to offset the impact of changes in the value of liabilities due to changes in the level and volatility of the equity markets and interest rates; · A deviation in actual experience regarding future persistency, mortality, morbidity, interest rates or equity market returns from the assumptions used in pricing our subsidiaries’ products, in establishing related insurance reserves and in the amortization of intangibles that may cause an increase in reserves and/or a reduction in assets, resulting in a corresponding decrease in net income; · Changes in GAAP that may result in unanticipated changes to our net income; · Lowering of one or more of LNC’s debt ratings issued by nationally recognized statistical rating organizations and the adverse impact such action may have on LNC’s ability to raise capital and on its liquidity and financial condition; · Lowering of one or more of the insurer financial strength ratings of our insurance subsidiaries and the adverse impact such action may have on the premium writings, policy retention, profitability of our insurance subsidiaries and liquidity; · Significant credit, accounting, fraud or corporate governance issues that may adversely affect the value of certain investments in our portfolios requiring that we realize losses on such investments; · The impact of acquisitions and divestitures, restructurings, product withdrawals and other unusual items, including our ability to integrate acquisitions and to obtain the anticipated results and synergies from acquisitions; · The adequacy and collectibility of reinsurance that we have purchased; · Acts of terrorism, a pandemic, war or other man-made and natural catastrophes that may adversely affect our businesses and the cost and availability of reinsurance; · Competitive conditions, including pricing pressures, new product offerings and the emergence of new competitors, that may affect the level of premiums and fees that our subsidiaries can charge for their products; · The unknown impact on our subsidiaries’ businesses resulting from changes in the demographics of their client base, as aging baby-boomers move from the asset-accumulation stage to the asset-distribution stage of life; and · Loss of key management, financial planners or wholesalers. |
Insurance Solutions - Life Insurance Income from Operations Details underlying the results for Insurance Solutions - Life Insurance (in millions) were as follows: Comparison of 2009 to 2008 Income from operations for this segment increased due primarily to the following: · A $7 million unfavorable prospective unlocking of DAC, VOBA, DFEL and secondary guarantee life insurance product reserves from assumption changes due primarily to lower investment spreads and higher expenses, mortality and lapse rates than our model projections assumed in 2009, compared to a $53 million unfavorable prospective unlocking (a $34 million unfavorable unlocking from model refinements and a $19 million unfavorable unlocking from assumption changes due primarily to the impact of significantly unfavorable equity markets on our VUL block of business, partially offset by adjustments to secondary guarantee life insurance product reserves) in 2008: § See “Critical Accounting Policies and Estimates - DAC, VOBA, DSI and DFEL” for more information; · Growth in insurance fees and net investment income driven by an increase in business in force, partially offset by increases in benefits and underwriting, acquisition, insurance and other expenses, excluding unlocking, the inter-company reinsurance transaction effective December 31, 2008 (discussed below), and the transfer of a closed block of life insurance policies to a third party (discussed below); and · A reduction in federal income tax expense due primarily to favorable tax return true-ups in the first quarter of 2009. |
Comparison of 2008 to 2007 Income from operations for this segment decreased due primarily to the following: · A $53 million unfavorable prospective unlocking of DAC, VOBA, DFEL and secondary guarantee life insurance product reserves (discussed above) in 2008, compared to a $4 million favorable prospective unlocking (a $12 million favorable unlocking from assumption changes due primarily to lower lapses and expenses and higher interest rates than our model projections assumed, net of an $8 million unfavorable unlocking from model refinements) in 2007: § See “Critical Accounting Policies and Estimates - DAC, VOBA, DSI and DFEL” for more information; · A $24 million unfavorable retrospective unlocking of DAC, VOBA, and DFEL in 2008 due primarily to lower premiums received, higher death claims and lower investment income on alternative investments and prepayment and bond makewhole premiums than our model projections assumed, compared to a $28 million favorable retrospective unlocking in 2007 due primarily to higher persistency, higher investment income on alternative investments and prepayment and bond makewhole premiums and lower expenses than our model projections assumed, partially offset by the impact of a correction to account values; · An increase in benefits due primarily to an increase in secondary guarantee life insurance product reserves from continued growth of business in force and the effects of model refinements along with higher mortality due to an increase in the average attained age of the in-force block as a result of targeting higher net worth individuals and lower benefits in the first quarter of 2007 related to a purchase accounting adjustment to the opening balance sheet of Jefferson-Pilot; and · Lower net investment income due primarily to unfavorable results from our investment income on alternative investments (see “Consolidated Investments - Alternative Investments” below for additional information on our alternative investments) and prepayment and bond makewhole premiums due to deterioration of the financial markets, the inter-company reinsurance transaction effective October 2007 and the merger of several of our insurance subsidiaries, discussed in “Strategies to Address Statutory Reserve Strain” below, and certain assumption changes in the fourth quarter of 2007. |
Loss from Operations Details underlying the results for Other Operations (in millions) were as follows: Comparison of 2009 to 2008 Loss from operations for this segment increased due primarily to the following: · The $64 million unfavorable impact in the first quarter of 2009 of the rescission of the reinsurance agreement on certain disability income business sold to Swiss Re as discussed in “Reinsurance” below, which resulted in pre-tax increases in benefits of $78 million, interest credited of $15 million and other expenses of $5 million, partially offset by a $34 million tax benefit, and unfavorable results of our run-off disability income business due primarily to an increase in reserves as a result of our review of the adequacy of reserves supporting this business and the write-off of certain receivables related to the rescission in the fourth quarter of 2009 of $33 million; · Lower net investment income related to our short-term liquidity strategy during the recent volatile markets that has reduced our portfolio yield and lower dividend income from our holdings of Bank of America common stock due to dividend rate cuts, partially offset by higher invested assets driven by distributable earnings received from our insurance segments, issuances of common stock, preferred stock and debt, and proceeds from the sale of Lincoln UK, partially offset by transfers to other segments for OTTI; and · Lower media earnings related primarily to the general weakening of the U.S. economy causing substantial declines in revenues throughout the radio market. |
Certain Debt Covenants on Capital Securities Our $1.5 billion in principal amount of capital securities outstanding contain certain covenants that require us to make interest payments in accordance with an alternative coupon satisfaction mechanism (“ACSM”) if we determine that one of the following triggers (“trigger events”) exists as of the 30th day prior to an interest payment date (“determination date”): · LNL’s risk-based capital ratio is less than 175% (based on the most recent annual financial statement filed with the State of Indiana); or · The sum of our consolidated net income for the four trailing fiscal quarters ending on the quarter that is two quarters prior to the most recently completed quarter prior to the determination date is zero or negative; and · Our consolidated stockholders’ equity (excluding accumulated other comprehensive income and any increase in stockholders’ equity resulting from the issuance of preferred stock during a quarter) (“adjusted stockholders’ equity”) as of the most recently completed quarter and the end of the quarter that is two quarters before the most recently completed quarter, has declined by 10% or more as compared to the quarter that is ten fiscal quarters prior to the last completed quarter (the “benchmark quarter”). |
Income (loss) from operations is GAAP net income excluding the after-tax effects of the following items, as applicable: · Realized gains and losses associated with the following (“excluded realized loss”): § Sale or disposal of securities; § Impairments of securities; § Change in the fair value of embedded derivatives within certain reinsurance arrangements and the change in the fair value of our trading securities; § Change in the fair value of the derivatives we own to hedge our GDB riders within our variable annuities; § Change in the GLB embedded derivative reserves, net of the change in the fair value of the derivatives we own to hedge the changes in the embedded derivative reserves; and § Changes in the fair value of the embedded derivative liabilities related to index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC. |
Signature Title /s/ Dennis R. Glass Dennis R. Glass President, Chief Executive Officer and Director (Principal Executive Officer) /s/ Frederick J. Crawford Frederick J. Crawford Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Douglas N. Miller Douglas N. Miller Vice President and Chief Accounting Officer (Principal Accounting Officer) /s/ William J. Avery William J. Avery Director /s/ William H. Cunningham William H. Cunningham Director /s/ George W. Henderson, III George W. Henderson, III Director /s/ Eric G. Johnson Eric G. Johnson Director /s/ Gary C. Kelly Gary C. Kelly Director /s/ M. Leanne Lachman M. Leanne Lachman Director /s/ Michael F. Mee Michael F. Mee Director /s/ William Porter Payne William Porter Payne Director /s/ Patrick S. Pittard Patrick S. Pittard Director /s/ David A. Stonecipher David A. Stonecipher Director /s/ Isaiah Tidwell Isaiah Tidwell Director Index to Financial Statement Schedules I - Summary of Investments - Other than Investments in Related Parties FS-2 II - Condensed Financial Information of Registrant FS-3 III - Supplementary Insurance Information FS-6 IV - Reinsurance FS-8 V - Valuation and Qualifying Accounts FS-9 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. |
Risks and uncertainties that may cause actual results to vary materially, some of which are described within the forward-looking statements, include, among others: • Continued deterioration in general economic and business conditions, both domestic and foreign, that may affect foreign exchange rates, premium levels, claims experience, the level of pension benefit costs and funding and investment results; • Continued economic declines and credit market illiquidity could cause us to realize additional impairments on investments and certain intangible assets, including goodwill and a valuation allowance against deferred tax assets, which may reduce future earnings and/or affect our financial condition and ability to raise additional capital or refinance existing debt as it matures; • Uncertainty about the impact of the U.S. Treasury’s Troubled Asset Relief Program (“TARP”) on the economy, and LNC’s ability to participate in the program; • Legislative, regulatory or tax changes, both domestic and foreign, that affect the cost of, or demand for, LNC’s products, the required amount of reserves and/or surplus, or otherwise affect our ability to conduct business, including changes to statutory reserves and/or risk-based capital (“RBC”) requirements related to secondary guarantees under universal life and variable annuity products such as Actuarial Guideline 43 (also known as “VACARVM”); restrictions on revenue sharing and 12b-1 payments; and the potential for U.S. Federal tax reform; • The initiation of legal or regulatory proceedings against LNC or its subsidiaries, and the outcome of any legal or regulatory proceedings, such as: adverse actions related to present or past business practices common in businesses in which LNC and its subsidiaries compete; adverse decisions in significant actions including, but not limited to, actions brought by federal and state authorities and extra-contractual and class action damage cases; new decisions that result in changes in law; and unexpected trial court rulings; • Changes in interest rates causing a reduction of investment income, the margins of LNC’s fixed annuity and life insurance businesses and demand for LNC’s products; • A decline in the equity markets causing a reduction in the sales of LNC’s products, a reduction of asset-based fees that LNC charges on various investment and insurance products, an acceleration of amortization of DAC, VOBA, DSI and DFEL and an increase in liabilities related to guaranteed benefit features of LNC’s variable annuity products; • Ineffectiveness of LNC’s various hedging strategies used to offset the impact of changes in the value of liabilities due to changes in the level and volatility of the equity markets and interest rates; • A deviation in actual experience regarding future persistency, mortality, morbidity, interest rates or equity market returns from LNC’s assumptions used in pricing its products, in establishing related insurance reserves and in the amortization of intangibles that may result in an increase in reserves and a decrease in net income, including as a result of stranger-originated life insurance business; • Changes in GAAP that may result in unanticipated changes to LNC’s net income; • Lowering of one or more of LNC’s debt ratings issued by nationally recognized statistical rating organizations and the adverse impact such action may have on LNC’s ability to raise capital and on its liquidity and financial condition; • Lowering of one or more of the insurer financial strength ratings of LNC’s insurance subsidiaries and the adverse impact such action may have on the premium writings, policy retention, profitability of its insurance subsidiaries and liquidity; • Significant credit, accounting, fraud or corporate governance issues that may adversely affect the value of certain investments in the portfolios of LNC’s companies requiring that LNC realize losses on such investments; • The impact of acquisitions and divestitures, restructurings, product withdrawals and other unusual items, including LNC’s ability to integrate acquisitions and to obtain the anticipated results and synergies from acquisitions; • The adequacy and collectibility of reinsurance that LNC has purchased; • Acts of terrorism, war or other man-made and natural catastrophes that may adversely affect LNC’s businesses and the cost and availability of reinsurance; • Competitive conditions, including pricing pressures, new product offerings and the emergence of new competitors, that may affect the level of premiums and fees that LNC can charge for its products; • The unknown impact on LNC’s business resulting from changes in the demographics of LNC’s client base, as aging baby-boomers move from the asset-accumulation stage to the asset-distribution stage of life; and • Loss of key management, portfolio managers in the Investment Management segment, financial planners or wholesalers. |
Certain Debt Covenants on Capital Securities Our $1.6 billion in principal amount of capital securities outstanding contain certain covenants that require us to make interest payments in accordance with an alternative coupon satisfaction mechanism (“ACSM”) if we determine that one of the following triggers (“trigger events”) exists as of the 30th day prior to an interest payment date (“determination date”): • LNL’s risk-based capital ratio is less than 175% (based on the most recent annual financial statement filed with the State of Indiana); or • The sum of our consolidated net income for the four trailing fiscal quarters ending on the quarter that is two quarters prior to the most recently completed quarter prior to the determination date is zero or negative; and • Our consolidated stockholders’ equity (excluding accumulated other comprehensive income and any increase in stockholders’ equity resulting from the issuance of preferred stock during a quarter) (“adjusted stockholders’ equity”) as of the most recently completed quarter and the end of the quarter that is two quarters before the most recently completed quarter, has declined by 10% or more as compared to the quarter that is ten fiscal quarters prior to the last completed quarter (the “benchmark quarter”). |
Income (loss) from operations is GAAP net income excluding the after-tax effects of the following items, as applicable: • Realized gains and losses associated with the following (“excluded realized gain (loss)”): • Sale or disposal of securities; • Impairments of securities; • Change in the fair value of embedded derivatives within certain reinsurance arrangements and the change in the fair value of related trading securities; • Change in the fair value of the embedded derivatives of our GLBs within our variable annuities net of the change in the fair value of the derivatives we own to hedge the changes in the embedded derivative; • Net difference between the benefit ratio unlocking of SOP 03-1 reserves on our GDB riders within our variable annuities and the change in the fair value of the derivatives excluding our expected cost of purchasing the hedging instruments; and • Changes in the fair value of the embedded derivative liabilities related to index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products as required under SFAS 133 and 157. |
Signature Title /s/ Dennis R. Glass Dennis R. Glass President, Chief Executive Officer and Director (Principal Executive Officer) /s/ Frederick J. Crawford Frederick J. Crawford Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Douglas N. Miller Douglas N. Miller Vice President and Chief Accounting Officer (Principal Accounting Officer) /s/ William J. Avery William J. Avery Director /s/ J. Patrick Barrett J. Patrick Barrett Director /s/ William H. Cunningham William H. Cunningham Director /s/ George W. Henderson, III George W. Henderson, III Director /s/ Eric G. Johnson Eric G. Johnson Director /s/ M. Leanne Lachman M. Leanne Lachman Director /s/ Michael F. Mee Michael F. Mee Director Index to Financial Statement Schedules I - Summary of Investments-Other than Investments in Related Parties FS-2 II - Condensed Financial Information of Registrant FS-3 III - Supplementary Insurance Information FS-6 IV - Reinsurance FS-8 V - Valuation and Qualifying Accounts FS-9 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. |
Risks and uncertainties that may cause actual results to vary materially, some of which are described within the forward-looking statements, include, among others: • Legislative, regulatory or tax changes, both domestic and foreign, that affect the cost of, or demand for, LNC’s products, the required amount of reserves and/or surplus, or otherwise affect our ability to conduct business, including changes to statutory reserves and/or risk-based capital requirements related to secondary guarantees under universal life and variable annuity products such as Actuarial Guideline VACARVM (“VACARVM”); restrictions on revenue sharing and 12b-1 payments; and the potential for U.S. Federal tax reform; • The initiation of legal or regulatory proceedings against LNC or its subsidiaries, and the outcome of any legal or regulatory proceedings, such as: (a) adverse actions related to present or past business practices common in businesses in which LNC and its subsidiaries compete; (b) adverse decisions in significant actions including, but not limited to, actions brought by federal and state authorities and extra-contractual and class action damage cases; (c) new decisions that result in changes in law; and (d) unexpected trial court rulings; • Changes in interest rates causing a reduction of investment income, the margins of LNC’s fixed annuity and life insurance businesses and demand for LNC’s products; • A decline in the equity markets causing a reduction in the sales of LNC’s products, a reduction of asset-based fees that LNC charges on various investment and insurance products, an acceleration of amortization of deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and deferred front-end loads (“DFEL”) and an increase in liabilities related to guaranteed benefit features of LNC’s variable annuity products; • Ineffectiveness of LNC’s various hedging strategies used to offset the impact of changes in the value of liabilities due to changes in the level and volatility of the equity markets and interest rates; • A deviation in actual experience regarding future persistency, mortality, morbidity, interest rates or equity market returns from LNC’s assumptions used in pricing its products, in establishing related insurance reserves and in the amortization of intangibles that may result in an increase in reserves and a decrease in net income, including as a result of investor-owned life insurance business; • Changes in GAAP that may result in unanticipated changes to LNC’s net income, including the impact of Statement of Financial Accounting Standards (“SFAS”) No. |
159, “The Fair Value Option for Financial Assets and Financial Liabilities;” • Lowering of one or more of LNC’s debt ratings issued by nationally recognized statistical rating organizations and the adverse impact such action may have on LNC’s ability to raise capital and on its liquidity and financial condition; • Lowering of one or more of the insurer financial strength ratings of LNC’s insurance subsidiaries and the adverse impact such action may have on the premium writings, policy retention and profitability of its insurance subsidiaries; • Significant credit, accounting, fraud or corporate governance issues that may adversely affect the value of certain investments in the portfolios of LNC’s companies requiring that LNC realize losses on such investments; • The impact of acquisitions and divestitures, restructurings, product withdrawals and other unusual items, including LNC’s ability to integrate acquisitions and to obtain the anticipated results and synergies from acquisitions, including LNC’s ability to successfully integrate Jefferson-Pilot’s businesses, to achieve the expected synergies from the merger or to achieve such synergies within our expected timeframe; • The adequacy and collectibility of reinsurance that LNC has purchased; • Acts of terrorism, war or other man-made and natural catastrophes that may adversely affect LNC’s businesses and the cost and availability of reinsurance; • Competitive conditions, including pricing pressures, new product offerings and the emergence of new competitors, that may affect the level of premiums and fees that LNC can charge for its products; • The unknown impact on LNC’s business resulting from changes in the demographics of LNC’s client base, as aging baby-boomers move from the asset-accumulation stage to the asset-distribution stage of life; • Loss of key management, portfolio managers in the Investment Management segment, financial planners or wholesalers; and • Changes in general economic or business conditions, both domestic and foreign, that may be less favorable than expected and may affect foreign exchange rates, premium levels, claims experience, the level of pension benefit costs and funding and investment results. |
Signature Title /s/ Dennis R. Glass President, Chief Executive Officer and Director Dennis R. Glass (Principal Executive Officer) /s/ Frederick J. Crawford Senior Vice President and Chief Financial Officer Frederick J. Crawford (Principal Financial Officer) /s/ Douglas N. Miller Vice President and Chief Accounting Officer Douglas N. Miller (Principal Accounting Officer) /s/ William J. Avery Director William J. Avery /s/ J. Patrick Barrett Director J. Patrick Barrett /s/ William H. Cunningham Director William H. Cunningham /s/ George W. Henderson, III Director George W. Henderson, III /s/ Eric G. Johnson Director Eric G. Johnson /s/ M. Leanne Lachman Director M. Leanne Lachman /s/ Michael F. Mee Director Michael F. Mee /s/ William Porter Payne Director William Porter Payne /s/ Patrick S. Pittard Director Patrick S. Pittard Signature Title /s/ David A. Stonecipher Director David A. Stonecipher /s/ Isaiah Tidwell Director Isaiah Tidwell Index to Financial Statement Schedules I Summary of Investments - Other than Investments in Related Parties FS-2 II Condensed Financial Information of Registrant FS-3 III Supplementary Insurance Information FS-6 IV Reinsurance FS-8 V Valuation and Qualifying Accounts FS-9 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 are omitted. |
Risks and uncertainties that may cause actual results to vary materially, some of which are described within the forward-looking statements include, among others: • Problems arising with the ability to successfully integrate our and Jefferson-Pilot’s businesses, which may affect our ability to operate as effectively and efficiently as expected or to achieve the expected synergies from the merger or to achieve such synergies within our expected timeframe, and the application of purchase price accounting on results of operations; • Legislative, regulatory or tax changes, both domestic and foreign, that affect the cost of, or demand for, LNC’s products, the required amount of reserves and/or surplus, or otherwise affect our ability to conduct business, including changes to statutory reserves and/or risk-based capital requirements related to secondary guarantees under universal life and variable annuity products such as Actuarial Guideline VACARVM; restrictions on revenue sharing and 12b-1 payments; and the potential for U.S. Federal tax reform; • The initiation of legal or regulatory proceedings against LNC or its subsidiaries and the outcome of any legal or regulatory proceedings, such as: (a) adverse actions related to present or past business practices common in businesses in which LNC and its subsidiaries compete; (b) adverse decisions in significant actions including, but not limited to, actions brought by federal and state authorities, and extra-contractual and class action damage cases; (c) new decisions that result in changes in law; and (d) unexpected trial court rulings; • Changes in interest rates causing a reduction of investment income, the margins of LNC’s fixed annuity and life insurance businesses and demand for LNC’s products; • A decline in the equity markets causing a reduction in the sales of LNC’s products, a reduction of asset fees that LNC charges on various investment and insurance products, an acceleration of amortization of deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and deferred front-end loads (“DFEL”) and an increase in liabilities related to guaranteed benefit features of LNC’s variable annuity products; • Ineffectiveness of LNC’s various hedging strategies used to offset the impact of declines in and volatility of the equity markets; • A deviation in actual experience regarding future persistency, mortality, morbidity, interest rates or equity market returns from LNC’s assumptions used in pricing its products, in establishing related insurance reserves, and in the amortization of intangibles that may result in an increase in reserves and a decrease in net income; • Changes in accounting principles generally accepted in the United States (“GAAP”) that may result in unanticipated changes to LNC’s net income, including the impact of adopting Statement of Position 05-1; • Lowering of one or more of LNC’s debt ratings issued by nationally recognized statistical rating organizations, and the adverse impact such action may have on LNC’s ability to raise capital and on its liquidity and financial condition; • Lowering of one or more of the insurer financial strength ratings of LNC’s insurance subsidiaries and the adverse impact such action may have on the premium writings, policy retention, and profitability of its insurance subsidiaries; • Significant credit, accounting, fraud or corporate governance issues that may adversely affect the value of certain investments in the portfolios of LNC’s companies requiring that LNC realize losses on such investments; • The impact of acquisitions and divestitures, restructurings, product withdrawals and other unusual items, including LNC’s ability to integrate acquisitions and to obtain the anticipated results and synergies from acquisitions; • The adequacy and collectibility of reinsurance that LNC has purchased; • Acts of terrorism, war, or other man-made and natural catastrophes that may adversely affect LNC’s businesses and the cost and availability of reinsurance; • Competitive conditions, including pricing pressures, new product offerings and the emergence of new competitors, that may affect the level of premiums and fees that LNC can charge for its products; • The unknown impact on LNC’s business resulting from changes in the demographics of LNC’s client base, as aging baby-boomers move from the asset-accumulation stage to the asset-distribution stage of life; • Loss of key management, portfolio managers in the Investment Management segment, financial planners or wholesalers; and • Changes in general economic or business conditions, both domestic and foreign, that may be less favorable than expected and may affect foreign exchange rates, premium levels, claims experience, the level of pension benefit costs and funding, and investment results. |
The total gross carrying amount and accumulated amortization in total and for each major specifically identifiable intangible asset class by segment are as follows: Future estimated amortization of specifically identifiable intangible assets is as follows (in millions): Details of investment contract and policyholder funds on the Consolidated Balance Sheets are as follows: Details underlying debt on the Consolidated Balance Sheets are as follows: Future maturities of long-term debt are as follows (in millions): At December 31, 2006, we maintained three revolving credit agreements with a group of domestic and foreign banks: a $1.6 billion five-year credit facility entered into in March 2006 and maturing in March 2011, allowing for borrowing or issuances of letters of credit (LOC); a $1 billion five-year credit facility entered into in February 2006 and maturing in February 2011, allowing for borrowing or issuances of LOCs; and a U.K. facility for use by our U.K. subsidiary, which was renewed in December 2006 for 10 million pounds sterling ($20 million at December 31, 2006) maturing in December 2007. |
Signature Title /s/ JON A. BOSCIA Chairman, Chief Executive Officer and Director Jon A. Boscia (Principal Executive Officer) /s/ DENNIS R. GLASS President, Chief Operating Officer and Director Dennis R. Glass (Principal Operating Officer) /s/ FREDERICK J. CRAWFORD Senior Vice President and Chief Financial Officer Frederick J. Crawford (Principal Financial Officer) /s/ DOUGLAS N. MILLER Vice President and Chief Accounting Officer Douglas N. Miller (Principal Accounting Officer) /s/ WILLIAM J. AVERY Director William J. Avery /s/ J. PATRICK BARRETT Director J. Patrick Barrett /s/ WILLIAM H. CUNNINGHAM Director William H. Cunningham /s/ GEORGE W. HENDERSON, III Director George W. Henderson, III /s/ ERIC G. JOHNSON Director Eric G. Johnson /s/ M. LEANNE LACHMAN Director M. Leanne Lachman /s/ MICHAEL F. MEE Director Michael F. Mee /s/ WILLIAM P. PAYNE Director William P. Payne /s/ PATRICK S. PITTARD Director Patrick S. Pittard Index to Financial Statement Schedules I- Summary of Investments-Other than Investments in Related Parties FS-2 II- Condensed Financial Information of Registrant FS-3 III- Supplementary Insurance Information FS-6 IV- Reinsurance FS-8 V- Valuation and Qualifying Accounts FS-9 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. |
Debt Ratings The long-term credit rating scales of A.M. Best, Fitch Ratings, S&P and Moody’s are characterized as follows: • A.M. Best-aaa to d • Fitch-AAA to D • Moody’s-Aaa to C • S&P-AAA to D As of February 28, 2006, our long-term credit ratings, as published by the principal rating agencies that rate our long-term credit, are as follows: A. M. Best Fitch S&P Moody's LNC a- (7th of 22) A (6th of 24) A- (7th of 22) A3 (7th of 21) The short-term credit rating scales of A.M. Best, Fitch Ratings, S&P and Moody’s are characterized as follows: • A.M. Best-AMB-1+ to d • Fitch-F1 to D • Moody’s-P-1 to NP • S&P-A-1 to D As of February 28, 2006, our short-term credit ratings, as published by the principal rating agencies that rate our short-term credit, are as follows: A. M. Best Fitch S&P Moody's LNC AMB-1 (2nd of 6) (1st of 6) A-2 (2nd of 6) P-2 (2nd of 4) A downgrade of our debt ratings could affect our ability to raise additional debt with terms and conditions similar to our current debt, and accordingly, likely increase our cost of capital. |
Risks and uncertainties that may cause actual results to vary materially, some of which are described within the forward-looking statements include, among others: • Legislative, regulatory or tax changes, both domestic and foreign, that affect the cost of, or demand for, LNC’s products, the required amount of reserves and/or surplus, or otherwise affect our ability to conduct business, including changes to statutory reserves and/or risk-based capital requirements related to secondary guarantees under universal life and variable annuity products such as Actuarial Guideline 38; restrictions on revenue sharing and 12b-1 payments; and the potential for United States Federal tax reform; • The initiation of legal or regulatory proceedings against LNC or its subsidiaries and the outcome of any legal or regulatory proceedings, such as: (a) adverse actions related to present or past business practices common in businesses in which LNC and its subsidiaries compete; (b) adverse decisions in significant actions including, but not limited to, actions brought by federal and state authorities, and extra-contractual and class action damage cases; (c) new decisions which change the law; and (d) unexpected trial court rulings; • Changes in interest rates and reductions in or continued low interest rates may cause a reduction of investment income, the margins of LNC’s fixed annuity and life insurance businesses and demand for LNC’s products; • A decline in the equity markets may cause a reduction in the sales of LNC’s products, a reduction of asset fees that LNC charges on various investment and insurance products, an acceleration of amortization of deferred acquisition costs (“DAC”), present value of in-force (“PVIF”), deferred sales inducements (“DSI”) and deferred front-end loads (“DFEL”) and an increase in liabilities related to guaranteed benefit features of LNC’s variable annuity products; • Ineffectiveness of LNC’s various hedging strategies used to offset the impact of declines in the equity markets; • A deviation in actual experience regarding future persistency, mortality, morbidity, interest rates and equity market returns from LNC’s assumptions used in pricing its products, in establishing related insurance reserves, and in the amortization of intangibles that may result in an increase in reserves and a decrease in net income; • Changes in accounting principles generally accepted in the United States (“GAAP”) that may result in unanticipated changes to LNC’s net income; • Lowering of one or more of LNC’s credit ratings issued by nationally recognized statistical rating organizations, and the adverse impact such action may have on LNC’s ability to raise capital and on its liquidity and financial condition; • Lowering of one or more of the insurer financial strength ratings of LNC’s insurance subsidiaries, and the adverse impact such action may have on the premium writings, policy retention, and profitability of its insurance subsidiaries; • Significant credit, accounting, fraud or corporate governance issues that may adversely affect the value of certain investments in the portfolios of LNC’s companies requiring that LNC realize losses on such investments; • The impact of acquisitions and divestitures, restructurings, product withdrawals and other unusual items, including LNC’s ability to integrate acquisitions and to obtain the anticipated results and synergies from acquisitions; • The adequacy and collectibility of reinsurance that LNC has purchased; • Acts of terrorism or war that may adversely affect LNC’s businesses and the cost and availability of reinsurance; • Competitive conditions including pricing pressures, new product offerings and the emergence of new competitors, that may affect the level of premiums and fees that LNC can charge for its products; • The unknown impact on LNC’s business resulting from changes in the demographics of LNC’s client base, as aging baby-boomers move from the asset-accumulation stage to the asset-distribution stage of life; • Loss of key management, portfolio managers in the Investment Management segment, financial planners in Lincoln Financial Advisors (“LFA”) or wholesalers in Lincoln Financial Distributors (“LFD”); and • Changes in general economic or business conditions, both domestic and foreign, that may be less favorable than expected and may affect foreign exchange rates, premium levels, claims experience, the level of pension benefit costs and funding, and investment results. |
• In connection with the merger: (1) our shareholders may not approve the issuance of shares in connection with the merger and/or the Jefferson-Pilot shareholders may not approve and adopt the merger agreement and the transactions contemplated by the merger agreement at the special shareholder meetings; (2) we may be unable to obtain regulatory approvals required for the merger, or required regulatory approvals may delay the merger or result in the imposition of conditions that could have a material adverse effect on the combined company or cause us to abandon the merger; (3) we may be unable to complete the merger or completing the merger may be more costly than expected because, among other reasons, conditions to the closing of the merger may not be satisfied; (4) problems may arise with the ability to successfully integrate our and Jefferson-Pilot's businesses, which may result in the combined company not operating as effectively and efficiently as expected; (5) the combined company may not be able to achieve the expected synergies from the merger or it may take longer than expected to achieve those synergies; and (6) the merger may involve unexpected costs or unexpected liabilities, or the effects of purchase accounting may be different from our expectations. |
/s/ Ernst & Young LLP Philadelphia, Pennsylvania February 24, 2006 Consolidated Financial Statements The Consolidated Financial Statements and Notes to Consolidated Financial Statements of Lincoln National Corporation and Subsidiaries can be found on the following pages: Page Consolidated Balance Sheets-December 31, 2005 and 2004 Consolidated Statements of Income-Years Ended December 31, 2005, 2004 and Consolidated Statements of Shareholders’ Equity-Years Ended December 31, 2005, 2004 and Consolidated Statements of Cash Flows-Years Ended December 31, 2005, 2004 and Notes to Consolidated Financial Statements LINCOLN NATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS See accompanying Notes to the Consolidated Financial Statements LINCOLN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME See accompanying Notes to the Consolidated Financial Statements LINCOLN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY LINCOLN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY -CONTINUED- See accompanying Notes to the Consolidated Financial Statements LINCOLN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS See accompanying Notes to the Consolidated Financial Statements LINCOLN NATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. |
Signature Title /s/ JON A. BOSCIA Jon A. Boscia Chairman, Chief Executive Officer and Director (Principal Executive Officer) /s/ FREDERICK J. CRAWFORD Frederick J. Crawford Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ DOUGLAS N. MILLER Douglas N. Miller Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) /s/ MARCIA J. AVEDON, Ph.D. Marcia J. Avedon, Ph.D. Director /s/ WILLIAM J. AVERY William J. Avery Director /s/ J. PATRICK BARRETT J. Patrick Barrett Director /s/ JENNE K. BRITELL, PH.D. Jenne K. Britell, Ph.D. Director /s/ ERIC G. JOHNSON Eric G. Johnson Director /s/ M. LEANNE LACHMAN M. Leanne Lachman Director /s/ MICHAEL F. MEE Michael F. Mee Director /s/ RON J. PONDER, PH.D. Ron J. Ponder, Ph.D. Director /s/ JILL S. RUCKELSHAUS Jill S. Ruckelshaus Director /s/ GLENN F. TILTON Glenn F. Tilton Director Index to Financial Statement Schedules I - Summary of Investments-Other than Investments in Related Parties FS-2 II - Condensed Financial Information of Registrant FS-3 III - Supplementary Insurance Information FS-6 IV - Reinsurance FS-8 V - Valuation and Qualifying Accounts FS-9 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. |
Debt Ratings The long-term credit rating scales of A.M. Best, Fitch Ratings, S&P and Moody’s are characterized as follows: • A.M. Best-aaa to d • Fitch-AAA to D • Moody’s-Aaa to C • S&P-AAA to D As of February 28, 2005, our long-term credit ratings, as published by the principal rating agencies that rate our long-term credit, are as follows: Fitch S&P Moody’s A. M. Best LNC A (6th of 24) A- (7th of 22) A3 (7th of 21) a- (7th of 22) The short-term credit rating scales of A.M. Best, Fitch Ratings, S&P and Moody’s are characterized as follows: • A.M. Best-AMB-1+ to d • Fitch-F1 to D • Moody’s-P-1 to NP • S&P-A-1 to D As of February 28, 2005, our short-term credit ratings, as published by the principal rating agencies that rate our short-term credit, are as follows: Fitch S&P Moody’s A. M. Best LNC (1st of 6) A-2 (2nd of 6) P-2 (2nd of 4) AMB-1 (2nd of 6) A downgrade of our debt ratings could affect our ability to raise additional debt with terms and conditions similar to our current debt, and accordingly, likely increase our cost of capital. |
Risks and uncertainties that may cause actual results to vary materially, some of which are described within the forward-looking statements include, among others: • Legislative, regulatory or tax changes, both domestic and foreign, that affect the cost of, or demand for, LNC’s products, the required amount of reserves and/or surplus, or otherwise affect our ability to conduct business, including changes to statutory reserves and/or risk-based capital requirements related to secondary guarantees under universal life and variable annuity products; restrictions on revenue sharing and 12b-1 payments; and the repeal of the federal estate tax; • The institution of legal or regulatory proceedings against LNC or its subsidiaries and the outcome of any legal or regulatory proceedings, such as: (a) adverse actions related to present or past business practices common in businesses in which LNC and its subsidiaries compete; (b) adverse decisions in significant actions including, but not limited to, actions brought by federal and state authorities, and extra-contractual and class action damage cases; (c) new decisions which change the law; and (d) unexpected trial court rulings; • Changes in interest rates causing a reduction of investment income, the margins of LNC’s fixed annuity and life insurance businesses and demand for LNC’s products; • A decline in the equity markets causing a reduction of asset fees that LNC charges on various investment and insurance products, an acceleration of amortization of deferred acquisition costs (DAC) and an increase in liabilities related to guaranteed benefit features of LNC’s variable annuity products; • Ineffectiveness of LNC’s various hedging strategies used to offset the impact of declines in the equity markets; • A deviation in actual experience regarding future persistency, mortality, morbidity, interest rates and equity market returns from LNC’s assumptions used in pricing its products, in establishing related insurance reserves, and in the amortization of intangibles that may result in an increase in reserves and a decrease in net income; • Changes in accounting principles generally accepted in the United States that may result in unanticipated changes to LNC’s net income; • Lowering of one or more of LNC’s debt ratings issued by nationally recognized statistical rating organizations, and the adverse impact such action may have on LNC’s ability to raise capital and on its liquidity and financial condition; • Lowering of one or more of the insurer financial strength ratings of LNC’s insurance subsidiaries, and the adverse impact such action may have on the premium writings, policy retention, and profitability of its insurance subsidiaries; • Significant credit, accounting, fraud or corporate governance issues that may adversely affect the value of certain investments in the portfolios of LNC’s companies requiring that LNC realize losses on such investments; • The impact of acquisitions and divestitures, restructurings, product withdrawals and other unusual items, including LNC’s ability to integrate acquisitions and to obtain the anticipated results and synergies from acquisitions; • The adequacy and collectibility of reinsurance that LNC has purchased; • Acts of terrorism or war that may adversely affect LNC’s businesses and the cost and availability of reinsurance; • Competitive conditions that may affect the level of premiums and fees that LNC can charge for its products; • The unknown impact on LNC’s business resulting from changes in the demographics of LNC’s client base, as aging baby-boomers move from the asset-accumulation stage to the asset-distribution stage of life; • Loss of key portfolio managers in the Investment Management segment, financial planners in LFA or wholesalers in LFD; and • Changes in general economic or business conditions, both domestic and foreign, that may be less favorable than expected and may affect premium levels, claims experience, the level of pension benefit costs and funding, and investment results. |
Par value, amortized cost and estimated fair value of investments in asset and mortgage-backed securities available-for-sale summarized by interest rates of the underlying collateral are as follows: The quality ratings for fixed maturity securities available-for-sale are as follows: The major categories of net investment income are as follows: LINCOLN NATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Trading securities at fair value retained in connection with Modco and CFW reinsurance arrangements, consisted of the following: The detail of the realized gain (loss) on investments is as follows: The detail of the realized loss on investments and derivative instruments is as follows: LINCOLN NATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Provisions (credits) for write-downs and net changes in allowances for loss, which are included in the realized gain (loss) on investments and derivative instruments shown above, are as follows: The portion of market adjustment for trading securities and the corresponding market adjustment for the reinsurance embedded derivative related to trading securities at December 31, 2004 and 2003 was $22.1 million and $334.7 million, respectively. |
2001 Restructuring Plan During 2001, LNC implemented restructuring plans relating to 1) the consolidation of the Syracuse operations of Lincoln Life & Annuity Company of New York into the Lincoln Retirement segment operations in Fort Wayne, Indiana and Portland, Maine; 2) the elimination of duplicative functions in the Schaumburg, Illinois operations of First Penn-Pacific, and the absorption of these functions into the Lincoln Retirement and Life Insurance segment operations in Fort Wayne, Indiana and Hartford, Connecticut; 3) the reorganization of the life wholesaling function within the independent planner distribution channel, consolidation of retirement wholesaling territories, and streamlining of the marketing and communications functions in LFD; 4) the reorganization and consolidation of the life insurance operations in Hartford, Connecticut related to the streamlining of underwriting and new business processes and the completion of outsourcing of administration of certain closed blocks of business; 5) the planned consolidation of the Boston, Massachusetts investment and marketing office with the Philadelphia, Pennsylvania investment and marketing operations in order to eliminate redundant facilities and functions within the Investment Management segment; 6) the combination of LFD channel oversight, positioning of LFD to take better advantage of ongoing “marketplace consolidation” and expansion of the customer base of wholesalers in certain non-productive territories and 7) the consolidation of operations and space in LNC’s Fort Wayne, Indiana operations. |
These risks and uncertainties include, among others, subsequent significant changes in: • the Company (e.g., acquisitions and divestitures of legal entities and blocks of business - directly or by means of reinsurance transactions); • financial markets (e.g., interest rates and securities markets and stock and bond market performance); • the performance of the investment portfolios of LNC’s subsidiaries and of the portfolios which they manage (both internal and external); • competitors and competing products and services; • LNC’s ability to operate its businesses in a relatively normal manner; • legislation (e.g., corporate, individual, estate and product taxation) including the recently enacted provisions affecting the taxation of dividends and retirement savings; • the price of LNC’s stock; • accounting principles generally accepted in the United States; • regulations (e.g., insurance and securities regulations); • debt and claims-paying ratings issued by nationally recognized statistical rating organizations; and • the National Association of Insurance Commissioners’ (“NAIC”) capital requirements. |
During 2001, LNC implemented restructuring plans relating to 1) the consolidation of the Syracuse operations of Lincoln Life & Annuity Company of New York into the Lincoln Retirement segment’s operations in Fort Wayne, Indiana and Portland, Maine; 2) the elimination of duplicative functions in the Schaumburg, Illinois operations of First Penn-Pacific, and the absorption of these functions into the Lincoln Retirement and Life Insurance segments operations in Fort Wayne, Indiana and Hartford, Connecticut; 3) the reorganization of the life wholesaling function within the independent planner distribution channel, consolidation of retirement wholesaling territories, and streamlining of the marketing and communications functions in LFD; 4) the reorganization and consolidation of the life insurance operations in Hartford, Connecticut related to the streamlining of underwriting and new business processes and the completion of outsourcing of administration of certain closed blocks of business; 5) the consolidation of the Boston, Massachusetts investment and marketing office with the Philadelphia, Pennsylvania investment and marketing operations in order to eliminate redundant facilities and functions within the Investment Management segment; 6) the combination of LFD channel oversight, positioning of LFD to take better advantage of ongoing “marketplace consolidation” and expansion of the customer base of wholesalers in certain non-productive territories; and 7) the consolidation of operations and space in LNC’s Fort Wayne, Indiana operations. |
Par value, amortized cost and estimated fair value of investments in asset and mortgage-backed securities available-for-sale summarized by interest rates of the underlying collateral are as follows: The quality ratings for fixed maturity securities available-for-sale are as follows: The major categories of net investment income are as follows: LINCOLN NATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Trading securities at fair value retained in connection with Modco and CFW reinsurance arrangements, consisted of the following: The detail of the realized loss on investments and derivative instruments is as follows: Provisions (credits) for write-downs and net changes in allowances for loss, which are included in the realized gain (loss) on investments and derivative instruments shown above, are as follows: LINCOLN NATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The portion of market adjustment for trading securities and the corresponding market adjustment for the reinsurance embedded derivative related to trading securities at December 31, 2003 was $334.7 million. |
2001 Restructuring Plan During 2001, LNC implemented restructuring plans relating to 1) the consolidation of the Syracuse operations of Lincoln Life & Annuity Company of New York into the Lincoln Retirement segment operations in Fort Wayne, Indiana and Portland, Maine; 2) the elimination of duplicative functions in the Schaumburg, Illinois operations of First Penn-Pacific, and the absorption of these functions into the Lincoln Retirement and Life Insurance segment operations in Fort Wayne, Indiana and Hartford, Connecticut; 3) the reorganization of the life wholesaling function within the independent planner distribution channel, consolidation of retirement wholesaling territories, and streamlining of the marketing and communications functions in LFD; 4) the reorganization and consolidation of the life insurance operations in Hartford, Connecticut related to the streamlining of underwriting and new business processes and the completion of outsourcing of administration of certain closed blocks of business 5) the planned consolidation of the Boston, Massachusetts investment and marketing office with the Philadelphia, Pennsylvania investment and marketing operations in order to eliminate redundant facilities and functions within the Investment Management segment 6) the combination of LFD channel oversight, positioning of LFD to take better advantage of ongoing “marketplace consolidation” and expansion of the customer base of wholesalers in certain non-productive territories and 7) the consolidation of operations and space in LNC’s Fort Wayne, Indiana operations. |
During 2001, LNC implemented restructuring plans relating to 1) the consolidation of the Syracuse operations of Lincoln Life & Annuity Company of New York into the Lincoln Retirement segment’s operations in Fort Wayne, Indiana and Portland, Maine; 2) the elimination of duplicative functions in the Schaumburg, Illinois operations of First Penn-Pacific, and the absorption of these functions into the Lincoln Retirement and Life Insurance segments operations in Fort Wayne, Indiana and Hartford, Connecticut; 3) the reorganization of the life wholesaling function within the independent planner distribution channel, consolidation of retirement wholesaling territories, and streamlining of the marketing and communications functions in LFD; 4) the reorganization and consolidation of the life insurance operations in Hartford, Connecticut related to the streamlining of underwriting and new business processes and the completion of outsourcing of administration of certain closed blocks of business; 5) the consolidation of the Boston, Massachusetts investment and marketing office with the Philadelphia, Pennsylvania investment and marketing operations in order to eliminate redundant facilities and functions within the Investment Management segment 6) the combination of LFD channel oversight, positioning of LFD to take better advantage of ongoing “marketplace consolidation” and expansion of the customer base of wholesalers in certain territories and 7) the consolidation of operations and space in LNC’s Fort Wayne, Indiana operations. |
During 2001, LNC implemented restructuring plans relating to 1) the consolidation of the Syracuse operations of Lincoln Life & Annuity Company of New York into the Lincoln Retirement segment operations in Fort Wayne, Indiana and Portland, Maine; 2) the elimination of duplicative functions in the Schaumburg, Illinois operations of First Penn-Pacific, and the absorption of these functions into the Lincoln Retirement and Life Insurance segment operations in Fort Wayne, Indiana and Hartford, Connecticut; 3) the reorganization of the life wholesaling function within the independent planner distribution channel, consolidation of retirement wholesaling territories, and streamlining of the marketing and communications functions in LFD; 4) the reorganization and consolidation of the life insurance operations in Hartford, Connecticut related to the streamlining of underwriting and new business processes and the completion of outsourcing of administration of certain closed blocks of business; 5) the planned consolidation of the Boston, Massachusetts investment and marketing office with the Philadelphia, Pennsylvania investment and marketing operations in order to eliminate redundant facilities and functions within the Investment Management segment; 6) the combination of LFD channel oversight, positioning of LFD to take better advantage of ongoing “marketplace consolidation” and expansion of the customer base of wholesalers in certain non-productive territories and 7) the consolidation of operations and space in LNC’s Fort Wayne, Indiana operations. |
Exhibits, Financial Statement Schedules and Reports on Form 8-K Item 15(a)(1) Financial Statements The following consolidated financial statements of Lincoln National Corporation are included in Item 8: Consolidated Balance Sheets - December 31, 2002 and 2001 Consolidated Statements of Income - Years ended December 31, 2002, 2001 and 2000 Consolidated Statements of Shareholders’ Equity - Years ended December 31, 2002, 2001 and Consolidated Statements of Cash Flows - Years ended December 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements Report of Ernst & Young LLP, Independent Auditors Item 15(a)(2) Financial Statement Schedules The following consolidated financial statement schedules of Lincoln National Corporation are included in Item 15(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. |
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 LNC's 2001 Annual Report to Shareholders and are incorporated by reference to Item 8 of this Form 10-K: Consolidated Balance Sheets - December 31, 2001 and 2000 Consolidated Statements of Income - Years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Shareholders' Equity - Years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows - Years ended December 31, 2001, 2000 and 1999 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. |
------------------------------------------- Thomas D. Bell, Jr By /s/ Jenne K. Britell, Ph.D. March 14, 2002 ------------------------------------------- Jenne K. Britell, Ph.D. By /s/ John G. Drosdick March 14, 2002 ------------------------------------------- John G. Drosdick By /s/ Eric G. Johnson March 14, 2002 ------------------------------------------- Eric G. Johnson By /s/ M. Leanne Lachman March 14, 2002 ------------------------------------------- M. Leanne Lachman By /s/ Michael F. Mee March 14, 2002 ------------------------------------------- Michael F. Mee By /s/ John M. Pietruski March 14, 2002 ------------------------------------------- John M. Pietruski By /s/ Ron J. Ponder, Ph.D. March 14, 2002 ------------------------------------------- Ron J. Ponder, Ph.D. By /s/ Jill S. Ruckelshaus March 14, 2002 ------------------------------------------- Jill S. Ruckelshaus By /s/ Glenn F. Tilton March 14, 2002 ------------------------------------------- Glenn F. Tilton By /s/ Gilbert R. Whitaker, Jr., Ph.D. March 14, 2002 ------------------------------------------- Gilbert R. Whitaker, Jr., Ph.D. |
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 LNC's 2000 Annual Report to Shareholders and are incorporated by reference to Item 8 of this Form 10-K: Consolidated Balance Sheets - December 31, 2000 and 1999 Consolidated Statements of Income - Years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Shareholders' Equity - Years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows - Years ended December 31, 2000, 1999 and 1998 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. |
Selected Financial Data (in millions, except per share data) Year Ended December 31 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------------ Total revenue $6,803.7 $6,087.1 $4,898.5 $4,733.6 $4,586.5 Net income from continuing operations (1) 460.4 509.8 22.2 356.4 301.4 Net income from discontinued operations -- -- 134.9 157.2 180.8 Gain on sale of discontinued operations -- -- 776.9 -- -- ----------- --------- --------- --------- --------- Net income (1) $460.4 $509.8 $934.0 $513.6 $482.2 Per Share Data (2): Net income from continuing operations $2.30 $2.51 $0.11 $1.69 $1.44 Net income from discontinued operations -- -- 0.65 0.75 0.86 Gain on sale of discontinued operations -- -- 3.73 -- -- ----------- --------- --------- --------- --------- Net Income-Diluted $2.30 $2.51 $4.49 $2.44 $2.30 Net Income-Basic $2.33 $2.54 $4.56 $2.47 $2.39 Common stock dividends $1.115 $1.055 $0.995 $0.935 $0.875 (in millions, except per share data) December 31 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------------ Assets $103,095.7 $93,836.3 $77,174.7 $71,713.4 $63,257.7 Long-term debt 712.0 712.2 511.0 626.3 659.3 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures 745.0 745.0 315.0 315.0 -- Shareholders' equity 4,263.9 5,387.9 4,982.9 4,470.0 4,378.1 Per Share Data: (2) Shareholders' equity (Securities at market) $21.76 $26.59 $24.63 $21.50 $20.95 Shareholders' equity (Securities at cost) 24.14 23.86 22.48 19.51 17.61 Market value of common stock $40.00 $40.91 $39.07 $26.25 $26.88 (1) Factors affecting the comparability of net income from continuing operations and net income from continuing operations for the 1995-1999 period are shown on page 8 (see "Supplemental Data"). |
Year Ended December 31 (in millions) 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------------ Income (loss) from continuing operations (1) $475.5 $530.4 $(50.7) $298.8 $140.9 Realized gain (loss) on investments, net of associated amortization of deferred policy acquisition costs, provision for policyholder commitments, investment expenses and income taxes 3.8 13.7 72.9 57.6 102.2 Gain (loss) on sale of subsidiary, net of income taxes -- -- -- -- 58.3 Restructuring charges, net of income taxes (18.9) (34.3) -- -- -- ----------- --------- --------- --------- --------- Net Income from Continuing Operations $460.4 $509.8 $22.2 $356.4 $301.4 (1) Income (loss) from continuing operations for 1999 includes changes in estimates of reserves for 1) Lincoln UK' s pension business of $126.1 million, after-tax and 2) Reinsurance's HMO excess-of-loss reinsurance programs of $25.0 million, after-tax and workers' compensation carve-out business underwritten by Unicover Managers, Inc. of $40.4 million, after-tax; and includes a tax benefit of $42.1 million relating to the decision to explore exiting the UK insurance market. |
OVERVIEW: RESULTS OF CONSOLIDATED OPERATIONS Summary Information Increase (Decrease) Year Ended December 31 (in millions) 1999 1998 1997 1999 1998 ------------------------------------------------------------------------------------------------------ Continuing Operations: Life insurance and annuity premiums $ 1,183.0 $985.6 $756.2 20% 30% Health premiums 698.5 635.1 572.5 10% 11% Insurance fees 1,537.6 1,274.6 832.2 21% 53% Investment advisory fees 223.8 227.1 204.9 (1%) 11% Net investment income 2,807.5 2,681.4 2,250.8 5% 19% Equity in earnings of unconsolidated affiliates 5.8 3.3 2.1 Realized gain on investments 3.0 19.0 122.6 Other revenue and fees 344.5 261.0 157.2 32% 66% Life insurance and annuity benefits 3,145.3 2,762.0 2,358.7 14% 17% Health benefits 659.7 566.9 833.1 16% (32%) Underwriting, acquisition, insurance and other expenses 2,295.0 1,943.7 1,579.3 18% 23% Interest and debt expenses 133.7 117.1 92.5 14% 27% Federal income taxes 109.6 187.6 12.7 ----------- --------- --------- Net Income from Continuing Operations 460.4 509.8 22.2 Discontinued Operations: Income prior to disposal -- -- 134.9 Gain on disposal -- -- 776.9 ----------- --------- --------- Net Income $460.4 $509.8 $934.0 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). |
Results of Operations (1): The Life Insurance and Annuities segment's financial results, sales, first year premiums, account values and in-force were as follows: Year Ended December 31 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------------ Financial Results by Source (in millions) Annuities $312.3 $257.6 $203.0 $165.0 $149.3 Insurance 230.3 147.0 36.1 36.4 31.2 Disability Income (2) -- -- -- -- (18.3) Other (42.2) 0.6 23.4 20.4 34.5 ----------- --------- --------- --------- --------- Income from Operations 500.4 405.2 262.5 221.8 196.7 Realized Gain on Investments 4.0 2.6 44.0 37.4 78.8 Restructuring Charge -- (20.0) -- -- -- ----------- --------- --------- --------- --------- Net Income $504.4 $387.8 $306.5 $259.2 $275.5 Sales -- Face Amount (in billions) Term Insurance $24.5 $27.6 $16.2 $13.3 $2.2 Universal Life and Other 12.2 9.0 2.2 2.9 2.8 First Year Premiums (in millions) $569.7 $406.3 $205.3 $216.3 $166.5 December 31 (in billions) 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------------ Annuity and Insurance Account Values Annuities $59.7 $51.5 $44.6 $38.0 $30.3 Reinsurance Ceded -- Annuities (1.4) (1.6) (1.8) (1.8) (1.7) Universal and Variable Life Insurance 8.4 7.4 3.0 2.9 2.6 Interest-Sensitive Whole Life 2.0 1.8 -- -- -- ----------- --------- --------- --------- --------- Total Account Values $68.7 $59.1 $45.8 $39.1 $31.2 In Force -- Face Amount Universal Life and Other $109.9 $105.8 $32.8 $32.9 $32.2 Term Insurance 85.7 67.1 30.3 16.3 3.8 (1) The 1995-1998 data was restated from the prior year as follows: a) the 401(k) portion of a subsegment (Pensions) previously included in this segment was moved under the direction of the Investment Management segment and b) the remaining portion of this subsegment (Pensions) which is business that is in run-off has been moved to other operations. |
Results of Operations (1): Lincoln Re's financial results, sales and in-force were as follows: Year Ended December 31 (in millions) 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------------ Financial Results by Source Individual Markets $91.9 $83.5 $71.9 $49.9 $43.4 Group Markets (1.6) 1.6 3.4 10.2 10.5 Financial Reinsurance 21.7 17.1 15.5 17.5 11.0 Other (1.5) (0.9) (0.3) (0.3) 0.7 ----------- --------- --------- --------- --------- Income from Operations, excluding Exited Businesses 110.5 101.3 90.5 77.3 65.6 Exited Businesses (2) (72.2) 0.2 (242.1) (3.3) (118.3) ----------- --------- --------- --------- --------- Income (Loss) from Operations (2) 38.3 101.5 (151.6) 74.0 (52.7) Realized Gain (Loss) on Investments (1.4) 0.7 15.2 11.7 10.7 Restructuring Charge (3.2) -- -- -- -- ----------- --------- --------- --------- --------- Net Income (Loss) (2) $33.7 $102.2 $(136.4) $85.7 $(42.0) Individual Life Sales -- Face Amount (in billions) $116.9 $78.1 $39.5 $26.6 $22.7 December 31 (in billions) 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------------ Individual and Group Life Insurance In-Force Face Amount $340.8 $250.3 $183.5 $160.9 $142.8 (1) The 1995-1998 data was restated from prior year to identify exited businesses including carrier medical, HMO excess-of-loss reinsurance and personal accident programs previously reported in Group Markets, Seguros Serfin Lincoln previously reported in Other and Disability Income. |
Results of Operations (1): The Investment Management segment's financial results and assets under management were as follows: Year Ended December 31 (in millions) 1999 1998 1997 1996 1995 (2) ------------------------------------------------------------------------------------------------------ Financial Results Revenues: Investment Advisory Fees $248.6 $249.0 $229.9 $199.8 $134.7 Investment Advisory Fees At Cost (3) 37.7 47.9 46.2 43.7 32.2 Other Revenue and Fees 117.0 102.6 78.9 60.1 38.5 Income: Income (Loss) from Operations $34.6 $20.9 $(0.8) $2.3 $10.7 Realized Gain (Loss) on Investments (0.8) 1.1 6.9 6.3 6.7 Restructuring Charge (9.2) -- -- -- -- ----------- --------- --------- --------- --------- Net Income 24.6 22.0 6.1 8.6 17.4 Income from Operations -- Excluding Amortization of Intangibles $62.3 $49.6 $26.3 $26.2 $25.5 December 31 (in billions) 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------------ Assets Under Management Regular Operations: Retail-Equity $23.4 $22.1 $17.8 $13.1 $10.0 Retail-Fixed 7.4 8.2 8.1 5.9 6.1 ----------- --------- --------- --------- --------- Total Retail 30.8 30.3 25.9 19.0 16.1 Institutional-Equity 23.6 24.2 24.9 22.9 21.6 Institutional-Fixed 7.0 7.0 5.7 3.6 3.0 ----------- --------- --------- --------- --------- Total Institutional 30.6 31.2 30.6 26.5 24.6 Total Retail and Institutional 61.4 61.5 56.5 45.5 40.7 At Cost Operations 35.9 39.4 35.6 37.4 36.4 ----------- --------- --------- --------- --------- Total Assets Under Management $97.3 $100.9 $92.1 $82.9 $77.1 (1) The 1995-1998 data was restated from prior year as follows: a) LNC's internal investment advisor was moved from Other Operations to this segment and b) Lincoln Life's 401(k) business was moved from the Life Insurance and Annuities segment to this segment due to changes in reporting relationship for these units. |
Consolidated Investments The consolidated investments on the balance sheet classified by investment advisor, mean invested assets, net investment income and investment yield are as follows: December 31 (in billions) 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------------ Assets Managed by Advisor Investment Management Segment (1): External Assets $61.4 $61.5 $56.5 $45.5 $40.7 Internal Assets 35.9 39.4 35.6 37.4 36.4 Lincoln UK 8.6 7.6 6.8 6.1 5.3 Within Business Units (Policy Loans) 1.9 1.8 0.8 0.8 0.6 Non-LNC Affiliates 32.7 23.5 19.4 15.3 11.8 ----------- --------- --------- --------- --------- Total Assets Managed $140.5 $133.8 $119.1 $105.1 $94.8 Mean Invested Assets $39.03 $36.50 $30.34 $27.91 $25.89 Adjusted Net Investment Income (2) $2.82 $2.69 $2.26 $2.10 $1.98 Investment Yield (ratio of net investment income to mean invested assets) 7.21% 7.36% 7.46% 7.52% 7.67% (1) See Investment Management segment data starting on page 19 for additional detail. |
There- Fair (in millions) 2000 2001 2002 2003 2004 after Total Value ------------------------------------------------------------------------------------------------------------------------------ Rate Sensitive Assets: Fixed interest rate securities 883.8 1,146.7 1,290.5 1,702.4 1,582.8 23,376.6 29,982.8 26,876.2 Average interest rate 7.20% 7.52% 7.57% 7.59% 7.72% 7.93% 7.84% Variable interest rate securities -- -- 56.5 -- 3.6 1,460.2 1,520.3 812.6 Average interest rate 17.30% 8.28% 9.25% 9.78% Mortgage loans 254.5 187.9 556.5 266.2 643.3 2,821.4 4,729.8 4,615.5 Average interest rate 9.02% 8.31% 8.33% 8.17% 7.73% 7.92% 8.03% Rate Sensitive Liabilities: Guaranteed Interest Contracts: Interest paid out annually 94.0 -- -- -- -- -- 94.0 98.0 Average interest rate 7.02% 7.02% Interest paid at maturity 87.0 41.0 2.0 17.0 26.0 17.0 190.0 196.0 Average interest rate 7.38% 8.15% 6.18% 10.67% 10.71% 10.72% 8.61% Investment type insurance contracts, excluding guaranteed interest contracts (1) 786.8 921.9 1,236.2 1,168.7 1,250.9 15,730.6 21,095.1 19,065.2 Average interest rate 7.41% 7.59% 7.70% 7.42% 7.55% 7.97% 7.86% Debt (2) 460.1 230.0 100.0 -- -- 1,128.3 1,918.4 1,806.5 Average interest rate 5.80% 7.75% 7.63% 7.75% 7.27% Rate Sensitive Derivative Financial Instruments: Interest Rate and Foreign Currency Swaps: Pay variable/receive fixed 10.0 49.6 26.2 48.4 5.0 535.9 675.1 (20.0) Average pay rate 6.5% 6.5% 6.6% 7.0% 7.0% 7.2% 7.1% Average receive rate 6.4% 6.0% 7.0% 5.3% 5.9% 6.8% 6.6% Interest Rate Caps and Swaptions: (3) Outstanding notional 2,966.4 3,232.2 2,542.3 659.3 250.0 250.0 14.0 Average strike rate (4) 9.0% 8.9% 8.9% 8.4% 8.4% 8.4% Forward CMT curve (5) 6.5% 6.6% 6.6% 6.5% 6.5% 6.7% The table shows the principal amounts and fair values of assets, liabilities and derivatives having significant interest rate risks as of December 31, 1998. |
Financial Statements and Supplementary Data (in millions, except per share data) Operating Results by Quarter 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr ------------------------------------------------------------------------------------------ 1999 Data Premiums and other considerations $963.9 $981.5 $939.7 $1,108.1 Net investment income 709.5 700.8 697.1 700.1 Realized gain (loss) on investments 1.9 (4.0) 5.4 (0.3) Net income (1) 145.1 148.4 132.3 34.6 Net income per diluted share (2) $0.71 $0.73 $0.66 $0.18 1998 Data Premiums and other considerations $765.7 $823.2 $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 (2) $0.60 $0.73 $0.56 $0.62 (1) Net income for the third and fourth quarters of 1999 includes special charges for changes in estimates of reserves and the fourth quarter includes a charge for estimated settlement costs for participation in workers' compensation carve-out business and a tax benefit related to the release of a tax valuation allowance. |
LINCOLN NATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS December 31 (000s omitted) 1999 1998 -------------------------------------------------------------------------------------- ASSETS Investments: Securities available-for-sale, at fair value: Fixed maturity (cost: 1999-$28,357,057; 1998-$28,639,558) $ 27,688,613 $ 30,232,892 Equity (cost: 1999-$481,531; 1998-$436,718) 603,954 542,843 Mortgage loans on real estate 4,735,397 4,393,082 Real estate 256,202 488,722 Policy loans 1,892,392 1,839,970 Other investments 401,826 431,964 ------------- ----------- Total Investments 35,578,384 37,929,473 Investment in unconsolidated affiliates 25,825 18,811 Cash and invested cash 1,895,883 2,433,350 Property and equipment 203,753 174,762 Deferred acquisition costs 2,800,290 1,964,366 Premiums and fees receivable 259,630 246,203 Accrued investment income 533,183 528,500 Assets held in separate accounts 53,654,223 43,408,858 Federal income taxes 345,010 204,075 Amounts recoverable from reinsurers 3,954,345 3,127,093 Goodwill 1,423,039 1,484,343 Other intangible assets 1,746,499 1,848,442 Other assets 675,669 467,984 ------------- ----------- Total Assets $103,095,733 $ 93,836,260 December 31 (000s omitted) 1999 1998 ---------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Insurance and Investment Contract Liabilities: Insurance policy and claim reserves $ 20,924,768 $ 20,139,982 Contractholder funds 20,228,753 20,753,064 Liabilities related to separate accounts 53,654,223 43,408,858 ------------- ----------- Total Insurance and Investment Contract Liabilities 94,807,744 84,301,904 Short-term debt 460,153 314,610 Long-term debt 711,963 712,171 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures 745,000 745,000 Other liabilities 2,107,005 2,374,634 ------------- ----------- Total Liabilities 98,831,865 88,448,319 Shareholders' Equity: Series A preferred stock - 10,000,000 shares authorized (1999 liquidation value - $2,309) 948 1,083 Common stock - 800,000,000 shares authorized 1,007,099 994,472 Retained earnings 3,691,470 3,790,038 Accumulated Other Comprehensive Income (Loss): Foreign currency translation adjustment 30,049 49,979 Net unrealized gain (loss) on securities available-for-sale (465,698) 552,369 ------------- ----------- Total Accumulated Other Comprehensive Income (Loss) (435,649) 602,348 ------------- ----------- Total Shareholders' Equity 4,263,868 5,387,941 ------------- ----------- Total Liabilities and Shareholders' Equity $103,095,733 $ 93,836,260 See notes to the consolidated financial statements on pages 44 through 76. |
LINCOLN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (000s omitted except for Year Ended December 31 per share amounts) 1999 1998 1997 ------------------------------------------------------------------------------------------------------ Revenue: Insurance premiums $1,881,515 $1,620,629 $1,328,735 Insurance fees 1,537,605 1,274,569 832,153 Investment advisory fees 223,803 227,059 204,926 Net investment income 2,807,512 2,681,406 2,250,764 Equity in earnings of unconsolidated affiliates 5,797 3,336 2,081 Realized gain on investments 2,955 19,034 122,570 Other revenue and fees 344,513 261,030 157,250 ---------- ---------- ---------- Total Revenue 6,803,700 6,087,063 4,898,479 Benefits and Expenses: Benefits 3,805,024 3,328,865 3,191,733 Underwriting, acquisition, insurance and other expenses 2,295,015 1,943,749 1,579,341 Interest and debt expense 133,697 117,051 92,524 ---------- ---------- ---------- Total Benefits and Expenses 6,233,736 5,389,665 4,863,598 ---------- ---------- ---------- Net Income from Continuing Operations Before Federal Income Taxes 569,964 697,398 34,881 Federal Income Taxes 109,610 187,623 12,651 ---------- ---------- ---------- Net Income from Continuing Operations 460,354 509,775 22,230 Discontinued Operations (net of income taxes): Net income prior to disposal -- -- 134,886 Gain on disposal -- -- 776,872 ---------- ---------- ---------- Net Income $ 460,354 $ 509,775 $ 933,988 Earnings Per Common Share-Basic (1): Net Income from Continuing Operations $2.33 $2.54 $0.11 Discontinued Operations -- -- 4.45 ---------- ---------- ---------- Net Income $2.33 $2.54 $4.56 Earnings Per Common Share-Diluted (1): Net Income from Continuing Operations $2.30 $2.51 $0.11 Discontinued Operations -- -- 4.38 ---------- ---------- ---------- Net Income $2.30 $2.51 $4.49 (1) 1998 and 1997 amounts have been restated to reflect the two-for-one stock split of LNC's common stock which was effective June, 1999. |
LINCOLN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 (000s omitted) 1999 1998 1997 ----------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income $ 460,354 $ 509,775 $ 933,988 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Deferred acquisition costs (309,318) (208,150) 1,754 Premiums and fees receivable (14,817) 3,151 39,836 Accrued investment income (4,683) (101,555) (5,426) Policy liabilities and accruals 443,713 1,055,277 540,676 Contractholder funds 918,762 800,678 636,600 Amounts recoverable from reinsurers (316,982) (775,064) (22,252) Federal income taxes 40,410 (205,198) 255,105 Equity in undistributed earnings of unconsolidated affiliates (5,797) (1,636) (2,081) Provisions for depreciation 57,169 58,070 58,136 Amortization of goodwill and other intangible assets 167,173 137,508 82,396 Realized (gain) loss on investments (2,955) (19,034) (122,570) Gain on sale of subsidiaries/discontinued operations -- -- (1,192,226) Other 202,294 (4,660) (169,362) ---------- --------- ---------- Net Adjustments 1,174,969 739,387 100,586 ---------- --------- ---------- Net Cash Provided by Operating Activities 1,635,323 1,249,162 1,034,574 Cash Flows from Investing Activities: Securities-available-for-sale: Purchases (6,255,493) (11,780,821) (10,740,292) Sales 4,210,498 9,278,969 10,098,697 Maturities 2,279,680 1,987,506 1,461,390 Purchase of other investments (1,948,818) (2,922,984) (2,128,852) Sale or maturity of other investments 1,812,079 1,865,874 2,039,783 Sale of subsidiary/blocks of business and discontinued operations (490,381) -- 2,650,000 Purchase of affiliates/business 11,086 (2,285,081) (11,847) Cash acquired from purchase of affiliates/business -- 2,323,220 -- Increase (decrease) in cash collateral on loaned securities (485,792) 274,426 353,550 Other (271,992) (434,889) 121,065 ---------- ---------- ---------- Net Cash Provided by (Used in) Investing Activities (1,139,133) (1,693,780) 3,843,494 Cash Flows from Financing Activities: Decrease in long-term debt (includes payments and transfers to short-term debt) (476) (99,977) (116,942) Issuance of long-term debt -- 299,198 -- Net increase in short-term debt 145,543 17,402 108,248 Issuance of preferred securities of subsidiary companies -- 430,000 -- Issuance costs related to FELINE PRIDES -- (14,834) -- Universal life and investment contract deposits 1,837,769 1,314,301 986,541 Universal life and investment contract withdrawals (2,468,354) (2,655,688) (2,709,662) Common stock issued for benefit plans 48,014 48,747 33,199 Retirement of common stock (377,719) (46,871) (327,585) Dividends paid to shareholders (218,434) (209,016) (201,927) ---------- ---------- ---------- Net Cash Used in Financing Activities (1,033,657) (916,738) (2,228,128) ---------- ---------- ---------- Net Increase (Decrease) in Cash and Invested Cash (537,467) (1,361,356) 2,649,940 Cash and Invested Cash at Beginning-of-Year 2,433,350 3,794,706 1,144,766 ---------- ---------- ---------- Cash and Invested Cash at End-of-Year $1,895,883 $2,433,350 $3,794,706 See notes to the consolidated financial statements on pages 44 through 76. |
LINCOLN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (000s omitted except for Year Ended December 31 per share amounts) 1999 1998 1997 ----------------------------------------------------------------------------------------------------- Series A Preferred Stock: Balance at beginning-of-year $ 1,083 $ 1,153 $ 1,212 Conversion into common stock (135) (70) (59) ---------- ---------- ---------- Balance at End-of-Year 948 1,083 1,153 Common Stock: Balance at beginning-of-year 994,472 966,461 904,331 Conversion of series A preferred stock 135 70 59 Issued for benefit plans 51,288 50,666 34,592 Shares forfeited under benefit plans (3,274) (1,919) (1,393) Issued for acquisition of subsidiaries 2,793 -- 74,390 Retirement of common stock (38,315) (5,972) (45,518) Issuance costs related to FELINE PRIDES -- (14,834) -- ---------- ---------- ---------- Balance at End-of-Year 1,007,099 994,472 966,461 Retained Earnings: Balance at beginning-of-year 3,790,038 3,533,105 3,082,368 Comprehensive income (loss) (577,643) 629,927 934,139 Less other comprehensive income (loss): Foreign currency translation gain (loss), net (19,930) 3,775 (20,250) Net unrealized gain (loss) on securities available-for-sale, net (1,018,067) 116,377 20,401 ---------- ---------- ---------- Net Income 460,354 509,775 933,988 Retirement of common stock (339,404) (40,919) (279,808) Dividends declared: Series A, preferred ($3.00 per share) (89) (100) (106) Common (1) (1999-$1.115; 1998-$1.055; 1997-$0.995) (219,429) (211,823) (203,337) ---------- ---------- ---------- Balance at End-of-Year 3,691,470 3,790,038 3,533,105 Foreign Currency Translation Adjustment: Accumulated adjustment at beginning-of-year 49,979 46,204 66,454 Change during the year (19,930) 3,775 (20,250) ---------- ---------- ---------- Balance at End-of-Year 30,049 49,979 46,204 Net Unrealized Gain (Loss) on Securities Available-for-Sale: Balance at beginning-of-year 552,369 435,992 415,591 Removal of discontinued operations -- -- (176,603) Other change during the year (1,018,067) 116,377 197,004 ---------- ---------- ---------- Balance at End-of-Year (465,698) 552,369 435,992 ---------- ---------- ---------- Total Shareholders' Equity at End-of-Year $4,263,868 $5,387,941 $4,982,915 Year Ended December 31 (Number of Shares) 1999 1998(1) 1997(1) ------------------------------------------------------------------------------------------------------ Series A Preferred Stock: Balance at beginning-of-year 32,959 35,091 36,885 Conversion into common stock (4,102) (2,132) (1,794) ------------- ----------- --------- Balance at End-of-Year 28,857 32,959 35,091 Common Stock: Balance at beginning-of-year 202,111,174 201,718,956 207,317,150 Conversion of series A preferred stock 65,632 34,112 28,704 Issued for benefit plans 1,026,130 1,651,554 1,518,660 Shares forfeited under benefit plans (100,933) (46,886) (43,982) Issued for purchase of subsidiaries 67,895 -- 2,796,224 Retirement of common stock (7,675,000) (1,246,562) (9,897,800) ------------- ----------- --------- Balance Issued and Outstanding at End-of-Year 195,494,898 202,111,174 201,718,956 Common Stock at End-of-Year: Assuming conversion of preferred stock 195,956,610 202,638,518 202,280,412 Diluted basis 197,003,999 203,395,433 204,726,230 (1) 1998 and 1997 amounts have been restated to reflect the two-for-one stock split of LNC's common stock which was effective June, 1999. |
Investments The amortized cost, gross unrealized gains and losses, and fair value of securities available-for-sale are as follows: Amortized Fair December 31 (in millions) Cost Gains Losses Value ---------------------------------------------------------------------------------------------------------------- 1999: Corporate bonds $21,760.2 $ 272.3 $ (913.0) $21,119.5 U.S. Government bonds 552.5 29.8 (44.0) 538.3 Foreign government bonds 1,383.8 88.1 (24.5) 1,447.4 Asset and mortgage-backed securities: Mortgage pass-through securities 1,043.9 6.8 (31.4) 1,019.3 Collateralized mortgage obligations 2,015.0 39.1 (46.6) 2,007.5 Other asset-backed securities 1,415.7 14.7 (53.2) 1,377.2 State and municipal bonds 15.3 -- (0.6) 14.7 Redeemable preferred stocks 170.7 2.8 (8.8) 164.7 --------- -------- --------- --------- Total fixed maturity securities 28,357.1 453.6 (1,122.1) 27,688.6 Equity securities 481.5 151.4 (28.9) 604.0 --------- -------- --------- --------- Total $28,838.6 $ 605.0 $(1,151.0) $28,292.6 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 government bonds 1,240.1 127.5 (46.4) 1,321.2 Asset and mortgage-backed securities: Mortgage pass-through securities 1,176.6 34.6 (0.9) 1,210.3 Collateralized mortgage obligations 2,532.9 120.7 (5.4) 2,648.2 Other asset-backed securities 1,170.0 54.1 (2.1) 1,222.0 State and municipal bonds 15.9 0.9 -- 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 Future maturities of fixed maturity securities available-for-sale are as follows: Amortized Fair December 31, 1999 (in millions) Cost Value ------------------------------------------------------------------------------ Due in one year or less $871.7 $871.5 Due after one year through five years 5,506.4 5,452.7 Due after five years through ten years 8,365.3 8,093.0 Due after ten years 9,139.1 8,867.4 --------- --------- Subtotal 23,882.5 23,284.6 Asset and mortgage-backed securities 4,474.6 4,404.0 --------- --------- Total $28,357.1 $27,688.6 The foregoing data is based on stated maturities. |
Par value, amortized cost and estimated fair value of investments in asset and mortgage-backed securities summarized by interest rates of the underlying collateral are as follows: Par Amortized Fair December 31, 1999 (in millions) Value Cost Value ----------------------------------------------------------------------------------------------- Below 7% $890.8 $341.7 $338.8 7% - 8% 2,454.8 2,438.4 2,349.7 8% - 9% 1,117.8 1,082.0 1,082.3 Above 9% 622.6 612.5 633.2 -------- -------- --------- Total $5,086.0 $4,474.6 $4,404.0 The quality ratings for fixed maturity securities available-for-sale are as follows: December 31 1999 ------------------------------------------------------------- Treasuries and AAA 22.8% AA 7.0 A 29.8 BBB 32.5 BB 4.9 Less than BB 3.0 ------------- 100.0% The major categories of net investment income are as follows: Year Ended December 31 (in millions) 1999 1998 1997 ----------------------------------------------------------------------------------------------- Fixed maturity securities $2,232.9 $2,065.8 $1,832.1 Equity securities 20.1 22.9 19.2 Mortgage loans on real estate 369.2 383.6 279.2 Real estate 64.1 86.8 99.4 Policy loans 116.5 99.5 44.5 Invested cash 110.2 156.7 102.4 Other investments 51.8 88.4 20.6 -------- -------- -------- Investment revenue 2,964.8 2,903.7 2,397.4 Investment expense 157.3 222.3 146.6 -------- -------- -------- Net investment income $2,807.5 $2,681.4 $2,250.8 The realized gain (loss) on investments is as follows: Year Ended December 31 (in millions) 1999 1998 1997 ----------------------------------------------------------------------------------------------- Fixed maturity securities available-for-sale: Gross gain $129.1 $211.7 $240.0 Gross loss (251.7) (211.2) (91.5) Equity securities available-for-sale: Gross gain 97.0 107.8 136.8 Gross loss (36.5) (50.4) (41.8) Other investments 49.3 11.9 (32.3) Associated amortization of deferred acquisition costs, provision for policyholder commitments and investment expenses 15.8 (50.8) (88.6) ------ ------ ------ Total $ 3.0 $ 19.0 $122.6 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) 1999 1998 1997 ----------------------------------------------------------------------------------------------- Fixed maturity securities $17.2 $60.0 $ 13.1 Equity securities (4.4) 3.4 0.3 Mortgage loans on real estate (0.1) (0.2) (8.9) Real estate -- (7.2) (13.6) Other long-term investments (7.6) 5.4 (6.5) Guarantees -- (0.5) -- ----- ----- ------- Total $ 5.1 $60.9 $(15.6) The change in unrealized appreciation (depreciation) on investments in fixed maturity and equity securities available-for-sale is as follows: Year Ended December 31 (in millions) 1999 1998 1997 ----------------------------------------------------------------------------------------------- Fixed maturity securities $(2,261.8) $152.9 $549.0 Equity securities 16.4 (37.1) 20.2 --------- ------ ------ Total $(2,245.4) $115.8 $569.2 During the second quarter of 1998, LNC purchased three bonds issued with offsetting interest rate characteristics. |
A reconciliation of this difference is as follows: Year Ended December 31 (in millions) 1999 1998 1997 ----------------------------------------------------------------------------------------------- Tax rate times pre-tax income from continuing operations $199.5 $244.1 $12.2 Effect of: Tax-preferred investment income (47.7) (51.1) (34.8) Change in valuation allowance (38.2) (5.3) 43.5 Other items (4.0) (0.1) (8.2) ------ ------ ----- Provision for income taxes $109.6 $187.6 $12.7 Effective tax rate 19% 27% 36% The Federal income tax recoverable asset (liability) is as follows: December 31 (in millions) 1999 1998 ------------------------------------------------------------------------------ Current $ 15.4 $ (6.3) Deferred 329.6 210.4 ------ ------ Total Federal income tax asset $345.0 $204.1 Significant components of LNC's net deferred tax asset are as follows: December 31 (in millions) 1999 1998 -------------------------------------------------------------------------------------------- Deferred tax assets: Insurance and investment contract liabilities $1,252.8 $1,386.3 Net operating loss 186.7 103.1 Postretirement benefits other than pensions 46.5 39.9 Compensation related 74.4 48.7 Net unrealized loss on securities available-for-sale 232.3 -- Other 76.2 98.6 -------- -------- Total deferred tax assets 1,868.9 1,676.6 Valuation allowance for deferred tax assets 229.0 38.2 -------- -------- Net deferred tax assets 1,639.9 1,638.4 Deferred tax liabilities: Deferred acquisition costs 572.3 214.9 Premiums and fees receivable 23.4 11.6 Investments related 66.2 24.8 Net unrealized gain on securities available-for-sale -- 542.0 Present value of business in-force 473.7 625.9 Other 174.7 8.8 -------- -------- Total deferred tax liabilities 1,310.3 1,428.0 -------- -------- Net deferred tax asset $ 329.6 $ 210.4 Cash paid for Federal income taxes in 1999, 1998 and 1997 was $70.6 million, $379.6 million and $158.0 million, respectively. |
A reconciliation of the present value of insurance business acquired included in other intangible assets is as follows: December 31 (in millions) 1999 1998 1997 ------------------------------------------------------------------------------------------------------ Balance at beginning of year $1,753.3 $501.3 $602.4 Adjustments to balance 3.4 1,323.2 22.0 Interest accrued on unamortized balance (Interest rates range from 5% to 7%) 69.9 44.4 36.9 Balance sheet reclassifications related to Lincoln UK -- -- (94.8) Amortization (163.7) (117.4) (48.1) Foreign exchange adjustment (8.7) 1.8 (17.1) -------- -------- ------ Balance at end-of-year 1,654.2 1,753.3 501.3 Other intangible assets (non-insurance) 92.3 95.1 112.6 -------- -------- ------ Total other intangible assets at end-of-year $1,746.5 $1,848.4 $613.9 Future estimated amortization of insurance business acquired net of interest on unamortized balance for LNC's insurance subsidiaries is as follows (in millions): 2000 - $89.6 2002 - $88.1 2004 - $81.5 2001 - 88.3 2003 - 84.7 Thereafter - 1,222.0 Details underlying the balance sheet caption, "Contractholder Funds", are as follows: December 31 (in millions) 1999 1998 ------------------------------------------------------------------------------ Premium deposit funds $19,624.1 $20,171.9 Undistributed earnings on participating business 132.0 142.8 Other 472.7 438.4 --------- --------- Total $20,228.8 $20,753.1 Details underlying the balance sheet captions related to total debt are as follows: December 31 (in millions) 1999 1998 ------------------------------------------------------------------------------------------------------ Short-term debt: Commercial paper $ 414.0 $ 214.4 Other short-term notes 45.6 -- Current portion of long-term debt 0.5 100.2 -------- -------- Total short-term debt 460.1 314.6 Long-term debt less current portion: 7.625% notes payable, due 2002 99.9 99.8 7.250% notes payable, due 2005 191.8 191.6 6.500% notes payable, due 2008 100.2 100.2 7% notes payable, due 2018 200.3 200.3 9.125% notes payable, due 2024 119.8 119.8 Mortgages and other notes payable -- 0.5 -------- -------- Total long-term debt 712.0 712.2 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures: 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 200.0 200.0 7.75% FELINE PRIDES 230.0 230.0 -------- -------- Total 745.0 745.0 -------- -------- Total Debt $1,917.1 $1,771.8 The combined U.S. and U.K. commercial paper outstanding at December 31, 1999 and 1998, had a blended weighted average interest rate of approximately 5.77% and 6.67%, respectively. |
Information with respect to defined benefit plan asset activity and defined benefit plan obligations is as follows: Other Postretirement Pension Benefits Benefits ----------------------- ------------------------ Year Ended December 31 (in millions) 1999 1998 1999 1998 ---------------------------------------------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year $362.4 $ 336.3 $ -- $ -- Actual return on plan assets 41.6 40.9 -- -- Company contributions -- 6.6 -- -- Administrative expenses (0.3) (0.3) -- -- Benefits paid (13.6) (21.1) -- -- ------ ------- ------- ------- Fair value of plan assets at end of year $390.1 $ 362.4 $ -- $ -- Change in benefit obligation: Benefit obligation at beginning of year $485.9 $ 390.6 $ 111.1 $ 90.0 Plan amendments -- 10.7 -- -- Acquisitions 5.2 25.7 2.0 8.1 Service cost 19.2 16.1 3.6 3.6 Interest cost 30.2 27.7 6.6 6.5 Plan participants' contributions -- -- 1.3 1.0 Plan curtailment gain -- -- (10.2) -- Actuarial (gains) losses (89.2) 38.0 0.1 6.7 Benefits paid (16.6) (22.9) (6.5) (4.8) ------ ------- ------- ------- Benefit obligation at end of year $434.7 $ 485.9 $ 108.0 $ 111.1 Funded (underfunded) status of the plans $(44.6) $(123.5) $(108.0) $(111.1) Unrecognized net actuarial (gains) losses (54.3) 45.4 -- -- Unrecognized prior service cost 8.2 9.3 3.3 3.4 ------ ------- ------- ------- Prepaid (accrued) benefit cost $(90.7) $(68.8) $(104.7) $(107.7) Weighted-average assumptions as of December 31: Weighted-average discount rate 7.75% 6.25% 7.75% 6.25% Expected return on plan assets 9.00% 9.17% -- -- Rate of increase in compensation: Salary continuation plan 5.50% 5.50% -- -- All other plans 4.50% 4.50% 4.50% 4.50% The funded status amounts in the pension benefits columns above combine plans with projected benefit obligations in excess of plan assets and plans with plan assets in excess of projected benefit obligations. |
Information with respect to incentive plan stock options outstanding at December 31, 1999 is as follows: Options Outstanding Options Exercisable ------------------------------------------------ ------------------------------- Weighted- Average Weighted- Weighted- Range of Number Remaining Average Number Average Exercise Outstanding at Contractual Exercise Exercisable at Exercise Prices Dec. 31, 1999 Life (Years) Price Dec. 31, 1999 Price ---------------------------------------------------------------------------------------------------------------- $10 - $20 1,302,788 3.16 $17.54 1,302,788 $17.54 21 - 30 3,143,934 6.70 26.00 2,291,189 25.19 31 - 40 208,281 8.21 37.41 76,158 35.49 41 - 50 4,860,753 8.40 44.77 1,323,367 44.86 51 - 60 4,148,679 9.36 50.85 147,936 50.88 -------------- ----------- $10 - $60 13,664,435 5,141,438 LNC recognizes compensation expense for its stock option incentive plans using the intrinsic value based method of accounting (see Note 1) and provides the required pro forma information for stock options granted after December 31, 1994. |
The option price assumptions used were as follows: Year Ended December 31 1999 1998 1997 ------------------------------------------------------------------------------------------------ Dividend yield 2.7% 3.6% 3.8% Expected volatility 29.7% 20.4% 19.0% Risk-free interest rate 5.4% 5.6% 6.6% Expected life (in years) 5.5 6.1 6.0 Weighted-average fair values per option granted $14.31 $9.08 $5.62 Restricted stock (non-vested stock) awarded from 1997 through 1999 was as follows: Year Ended December 31 1999 1998 1997 ------------------------------------------------------------------------------------------------ Restricted stock (number of shares) 57,012 876,006 237,672 Weighted-average price per share at time of grant $43.91 $41.25 $30.99 Information with respect to the incentive plans involving stock options is as follows: Options Outstanding Options Exercisable ------------------------------- -------------------------- Weighted- Weighted- Average Average Exercise Exercise Shares Price Shares Price ---------------------------------------------------------------------------------------------------------------- Balance at January 1, 1997 6,310,326 $18.15 3,666,538 $15.61 Granted-original 2,094,400 30.03 Granted-reloads 94,058 34.21 Exercised (includes shares tendered) (1,806,814) 15.84 Expired (1,566) 35.54 Forfeited (88,632) 23.22 ------------- Balance at December 31, 1997 6,601,772 22.54 3,203,944 17.91 Granted-original 5,211,750 44.60 Granted-reloads 87,450 44.71 Exercised (includes shares tendered) (976,882) 18.11 Forfeited (139,238) 35.95 ------------- Balance at December 31, 1998 10,784,852 33.61 3,596,946 21.63 Granted-original 4,445,316 50.51 Granted-reloads 104,422 49.32 Exercised (includes shares tendered) (1,216,263) 48.68 Forfeited (453,892) 44.90 ------------- Balance at December 31, 1999 13,664,435 39.59 5,141,438 29.21 The number of shares and the per share data for prior years throughout this note has been restated to reflect the impact of the 1999 two-for-one stock split (see Note 10). |
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) 1999 1998 1999 1999 1998 1998 --------------------------------------------------------------------------------------------------------------- Interest rate derivatives: Interest rate cap agreements $2,508.8 $4,108.8 $ 5.2 $ 3.2 $ 9.3 $ 0.9 Swaptions 1,837.5 1,899.5 10.8 10.8 2.5 2.5 Interest rate swap agreements 630.9 258.3 (19.5) (19.5) 9.9 9.9 Put options 21.3 21.3 1.9 1.9 2.2 2.2 -------- -------- ----- ----- ----- ----- Total interest rate derivatives 4,998.5 6,287.9 (1.6) (3.6) 23.9 15.5 Foreign currency derivatives: Foreign exchange forward contracts -- 1.5 -- -- * * Foreign currency swaps 44.2 47.2 (0.4) (0.4) 0.3 0.3 -------- -------- ----- ----- ----- ----- Total foreign currency derivatives 44.2 48.7 (0.4) (0.4) 0.3 0.3 Commodity derivatives: Commodity swap -- 8.1 -- -- 2.4 2.4 Equity indexed derivatives: Call options (based on FTSE) 4.3 11.1 8.6 8.6 11.7 11.7 Call options (based on S&P) 129.6 79.9 24.8 24.8 23.1 23.1 -------- -------- ----- ----- ----- ----- Total equity indexed derivatives 133.9 91.0 33.4 33.4 34.8 34.8 -------- -------- ----- ----- ----- ----- Total derivatives $5,176.6 $6,435.7 $31.4 $29.4 $61.4 $53.0 *Less than $100,000. |
A reconciliation of the notional or contract amounts for the significant programs using derivative agreements and contracts is as follows: Interest Rate Cap Agreements Swaptions -------------------- -------------------- December 31 (in millions) 1999 1998 1999 1998 --------------------------------------------------------------------------------------- Balance at beginning-of-year $4,108.8 $4,900.0 $1,899.5 $1,752.0 New contracts -- 708.8 -- 218.3 Terminations and maturities (1,600.0) (1,500.0) (62.0) (70.8) -------- -------- -------- -------- Balance at end-of-year $2,508.8 $4,108.8 $1,837.5 $1,899.5 Interest Rate Swap Agreements Put Options -------------------- -------------------- December 31 (in millions) 1999 1998 1999 1998 --------------------------------------------------------------------------------------- Balance at beginning-of-year $258.3 $ 10.0 $21.3 $ -- New contracts 482.4 2,226.6 -- 21.3 Terminations and maturities (109.8) (1,978.3) -- -- ------ -------- ----- ----- Balance at end-of-year $630.9 $ 258.3 $21.3 $21.3 Foreign Currency Derivatives ----------------------------------------- Foreign Exchange Foreign Currency Forward Contracts Swaps ----------------- ----------------- December 31 (in millions) 1999 1998 1999 1998 --------------------------------------------------------------------------------------- Balance at beginning-of-year $ 1.5 $163.1 $47.2 $15.0 New contracts 42.7 419.8 -- 39.2 Terminations and maturities (44.2) (581.4) (3.0) (7.0) ----- ------ ----- ----- Balance at end-of-year $ -- $ 1.5 $44.2 $47.2 Commodity Call Options Call Options Swaps (Based on FTSE) (Based on S&P) ----------------- ----------------- ------------------ December 31 (in millions) 1999 1998 1999 1998 1999 1998 --------------------------------------------------------------------------------------------------------------- Balance at beginning-of-year $ 8.1 $-- $11.1 $14.1 $ 79.9 $ 5.3 New contracts -- 8.1 -- -- 52.9 74.6 Terminations and maturities (8.1) -- (6.6) (3.1) (3.2) -- Foreign exchange adjustment -- -- (0.2) 0.1 -- -- ----- ---- ----- ----- ------ ----- Balance at end-of-year $ -- $8.1 $ 4.3 $11.1 $129.6 $79.9 Interest Rate Cap Agreements. |
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) 1999 1999 1998 1998 --------------------------------------------------------------------------------------- Assets (liabilities): Fixed maturities securities $27,688.6 $27,688.6 $30,232.9 $30,232.9 Equity securities 604.0 604.0 542.8 542.8 Mortgage loans on real estate 4,735.4 4,615.4 4,393.1 4,580.4 Policy loans 1,892.4 2,024.8 1,840.0 1,938.4 Other investments 401.8 401.8 432.0 432.0 Cash and invested cash 1,895.9 1,895.9 2,433.4 2,433.4 Investment type insurance contracts: Deposit contracts and certain guaranteed interest contracts (18,601.5) (18,267.5) (18,746.3) (18,419.8) Remaining guaranteed interest and similar contracts (1,129.8) (1,091.7) (1,444.9) (1,433.8) Short-term debt (460.1) (460.1) (314.6) (314.6) Long-term debt (712.0) (690.7) (712.2) (748.7) Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures (745.0) (655.7) (745.0) (744.4) Guarantees (0.3) -- (0.3) -- Derivatives 31.4 29.4 61.4 53.0 Investment commitments -- (3.5) -- 0.1 As of December 31, 1999 and 1998, the carrying value of the deposit contracts and certain guaranteed contracts is net of deferred acquisition costs of $58.0 million and $52.6 million, respectively, excluding adjustments for deferred acquisition costs applicable to changes in fair value of securities. |
Financial data by segment for 1997 through 1999 is as follows: Year Ended December 31 (in millions) 1999 1998 1997 ------------------------------------------------------------------------------------------------- Revenue, Excluding Net Investment Income and Realized Gain (Loss) on Investments and Subsidiaries: Life Insurance and Annuities $1,778.1 $1,450.2 $826.3 Lincoln UK 368.3 350.7 340.0 Reinsurance 1,509.6 1,267.5 1,073.7 Investment Management 403.2 399.5 355.0 Other Operations (includes consolidating adjustments) (66.0) (81.2) (69.9) -------- -------- -------- Total $3,993.2 $3,386.7 $2,525.1 Net Investment Income: Life Insurance and Annuities $2,356.4 $2,184.3 $1,770.8 Lincoln UK 75.3 87.9 85.2 Reinsurance 310.3 307.8 284.4 Investment Management 56.9 65.4 72.3 Other Operations 8.6 36.0 38.1 -------- -------- -------- Total $2,807.5 $2,681.4 $2,250.8 Realized Gain (Loss) on Investments and Subsidiaries: Life Insurance and Annuities $ 5.0 $ 6.2 $ 76.7 Lincoln UK 3.0 1.1 2.1 Reinsurance (2.1) 1.5 23.6 Investment Management (1.1) 1.8 11.3 Other Operations (1.8) 8.4 8.9 -------- -------- -------- Total $ 3.0 $ 19.0 $ 122.6 Net Income (Loss) from Continuing Operations before Federal Income Taxes: Life Insurance and Annuities $ 705.0 $ 520.6 $ 403.5 Lincoln UK (100.1) 106.9 (96.8) Reinsurance 49.2 156.7 (210.2) Investment Management 40.6 38.8 16.9 Other Operations (includes interest expense) (124.7) (125.6) (78.5) -------- -------- -------- Total $ 570.0 $ 697.4 $ 34.9 Income Tax Expense (Benefit): Life Insurance and Annuities $ 200.6 $ 132.8 $ 97.0 Lincoln UK (81.9) 35.2 10.0 Reinsurance 15.5 54.5 (73.8) Investment Management 16.0 16.8 10.8 Other Operations (40.6) (51.7) (31.3) -------- -------- -------- Total $ 109.6 $ 187.6 $ 12.7 Net Income (Loss) from Continuing Operations: Life Insurance and Annuities $ 504.4 $ 387.8 $ 306.5 Lincoln UK (18.2) 71.7 (106.8) Reinsurance 33.7 102.2 (136.4) Investment Management 24.6 22.0 6.1 Other Operations (includes interest expense) (84.1) (73.9) (47.2) -------- -------- -------- Total Net Income from Continuing Operations 460.4 509.8 22.2 Discontinued Operations -- -- 911.8 -------- -------- -------- Total Net Income $ 460.4 $ 509.8 $ 934.0 Year Ended December 31 (in millions) 1999 1998 1997 ------------------------------------------------------------------------------------------------- Assets: Life Insurance and Annuities $ 81,299.1 $73,966.1 $57,070.5 Lincoln UK 9,712.8 8,757.3 7,923.8 Reinsurance 6,766.1 6,408.0 5,540.2 Investment Management 1,484.1 1,622.6 1,756.7 Other Operations (includes interest expense) 3,833.6 3,082.3 4,883.5 ---------- --------- --------- Total $103,095.7 $93,836.3 $77,174.7 Select data shown above for 1998 and 1997 for the Life Insurance & Annuities segment, Investment Management segment and Other Operations has been reclassified due to a change in the reporting relationship for LNC's internal investment advisor and 401(k) pension operations. |
Subsets and Splits