-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Eq0QblQLg1UPzbYXVNt2aMtBV01B9L102TuUfQ19qMg5RyLszW4KQ6UNVMMXhhSm PLRl4eqYGqXo8zZPujNu3w== 0000059558-94-000014.txt : 19940331 0000059558-94-000014.hdr.sgml : 19940331 ACCESSION NUMBER: 0000059558-94-000014 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LINCOLN NATIONAL CORP CENTRAL INDEX KEY: 0000059558 STANDARD INDUSTRIAL CLASSIFICATION: 6311 IRS NUMBER: 351140070 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-06028 FILM NUMBER: 94518988 BUSINESS ADDRESS: STREET 1: 1300 S CLINTON ST STREET 2: PO BOX 1110 CITY: FORT WAYNE STATE: IN ZIP: 46801 BUSINESS PHONE: 2194552000 10-K 1 TEXT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 1993 Commission File Number 1-6028 LINCOLN NATIONAL CORPORATION (Exact name of registrant as specified in its charter) Indiana 35-1140070 (State of incorporation) (I.R.S. Employer Identification No.) 200 East Berry Street, Fort Wayne, Indiana 46802-2706 (Address of principal executive offices) Registrant's telephone number (219) 455-2000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of each exchange on Title of each class which registered Common Stock (Without Par Value) New York, Chicago, Pacific, London and Tokyo Stock Exchanges Common Share Purchase Rights New York, Chicago and Pacific Stock Exchanges $3.00 Cumulative Convertible Preferred New York and Chicago Stock Stock, Series A (Without Par Value) Exchanges SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 4, 1994, 94,217,427 shares of Common Stock were outstanding. The aggregate market value of such shares (based upon the closing price of these shares on the New York Stock Exchange) held by nonaffiliates was approximately $3,827,600,000. Select materials from the Proxy statement for the Annual meeting of Shareholders, scheduled for May 12, 1994, have been incorporated by reference into Part III of this Form 10-K. The exhibit index to this report is located on page 69. Page 1 of 167 -2- *PART I Item 1. Business Lincoln National Corporation ("LNC") is a holding company. Through subsidiary companies, LNC operates multiple insurance businesses. Operations are divided into four major business segments, 1) Property-Casualty, 2) Life Insurance and Annuities, 3) Life-Health Reinsurance and 4) Employee Life-Health Benefits. Although one of the subsidiaries held by LNC was formed as early as 1905, LNC itself was formed in 1968. LNC is an Indiana corporation with its principal office at 200 East Berry Street, Fort Wayne, Indiana 46802-2706. As of December 31, 1993, there were 215 persons on the staff of LNC. Total employment of Lincoln National Corporation at December 31, 1993 on a consolidated basis was 11,890. Although acquisition and disposition activity has occurred, there has been no activity of this nature during the past five years involving all or predominately all of a business segment. Numeric presentations showing revenues, pre-tax income, and assets for LNC's four major business segments and other operations in which LNC engages through its subsidiaries are included in this report as part of the consolidated financial statements (see note 8 to the consolidated financial statements on page 54). The LNC "Other Operations" category includes LNC's investment management companies and unallocated corporate items, including corporate investment income, interest expense on short-term and long-term borrowings, and unallocated corporate overhead expenses. Following is a brief description of the four major business segments: 1. Property-Casualty Property-Casualty insurance includes automobile, boiler and machinery, workers' compensation, fire and allied lines, inland marine, home-owners, general casualty, special risks and multiple peril insurance. Fidelity and surety bonds are also included within property-casualty insurance. Most of LNC's property-casualty business is conducted through American States Insurance Company ("American States"), headquartered in Indianapolis, Indiana, and its property-casualty subsidiaries. These companies operate a multi-line property-casualty insurance business in most states of the United States through 22 semi-autonomous division offices with broad authority for underwriting, agency contracting, marketing and claims settlement for most lines of business. The distribution network involves approximately 5,000 independent local agencies. Other companies within this business segment include Lincoln National Specialty Insurance Company ("LNSIC") which underwrites select coverages in the sports and entertainment market and Lincoln National Reinsurance Company which is a property-casualty company that is involved in servicing a closed block of reinsurance business. Approximately 3,900 employees are involved in this business segment. 2. Life Insurance and Annuities The primary company within this business segment is The Lincoln National Life Insurance Company ("LNL"). Other companies within this business segment include, Security-Connecticut Life Insurance Company ("Security- Connecticut"), First Penn-Pacific Life Insurance Company ("First Penn"), American States Life Insurance Company ("American States Life"), and Lincoln National (UK) PLC. LNL, the 6th largest U.S. stockholder-owned life insurance Company (1992 Fortune Rankings of 50 Largest Life Insurance Companies by Assets) is an Indiana corporation headquartered in Fort Wayne, Indiana. A network of 36 life insurance agencies, independent life insurance brokers, insurance agencies located within financial institutions and specifically trained employees sells fixed annuities, variable annuities, pension products, universal life, variable universal life and other individual insurance coverages in most states of the United States and various foreign countries including Canada. The distribution network includes approximately 1,900 career agents, 13,000 brokers and access to 42,000 stockbrokers and financial planners. -3- Security-Connecticut is a Connecticut corporation headquartered in Avon, Connecticut. It specializes in writing universal life and term insurance through independent general agencies in most states of the United States. A wholly owned subsidiary of Security-Connecticut, Lincoln Security Life Insurance Company, operates in the state of New York. In January 1993, LNC announced it would seek a buyer for Security-Connecticut. The sale of the common stock of Security-Connecticut Corporation (a recently formed holding company to which ownership of the operating companies was transferred prior to the sale) was completed on February 2, 1994 through an Initial Public Offering (IPO). First Penn, headquartered in Oakbrook Terrace, Illinois, specializes in the writing and administration of universal life products through independent marketing companies and the sale of LNL's annuities through insurance agencies located within financial institutions in most states of the United States. American States Life is an Indiana corporation headquartered in Indianapolis, Indiana. Its products, principally universal life and term insurance, are marketed through independent local agencies (who also offer property-casualty insurance) in most states of the United States. Lincoln National (UK) PLC is a United Kingdom company headquartered in Wembley, England that is licensed to do business throughout the United Kingdom. The principal products produced by this operation known as unit- linked assets are similar to U.S. produced universal life products. This company was previously named Cannon Assurance Limited, but was renamed following the acquisition and merger of another UK company that previously operated as Citibank Life (UK). Lincoln National (UK) is the 16th largest writer of unit-linked new business premiums in the UK as measured in 1992 (Money Management Survey-New Business Trends, published in June 1993.) Approximately 4,325 employees are involved in this business segment. 3. Life-Health Reinsurance The primary companies within this business segment are Lincoln National Life Reinsurance Company ("LNLR"), Lincoln National Reassurance Company, ("LNRAC"), Lincoln National Health & Casualty Insurance Company ("LNH&C") and LNL. These companies are headquartered in Fort Wayne, Indiana. A broad range of risk management products and services are offered to insurance companies, HMOs, self-funded employers and other primary market risk accepting organizations throughout the United States and economically attractive international markets. Marketing efforts are conducted primarily through the efforts of a reinsurance sales staff. Some business is presented by reinsurance intermediaries and brokers. The reinsurance organization is one of the largest life-health reinsurers worldwide (Swiss Re survey, May 1993). LNH&C offers accident and health products and services on both a direct and reinsurance basis. Other companies in this business segment include various general business corporations and foreign reinsurance companies. The general business corporations are used to support the segment's sales, service and administration efforts. One of the general business corporations, Lincoln National Risk Management Inc. has developed and patented a knowledge based underwriting system ("Life Underwriting System") which it is marketing to other insurance companies. The foreign reinsurance corporations are used to support LNC's U.S. companies through reinsuring select business. Approximately 575 employees are involved in this business segment. 4. Employee Life-Health Benefits This segment's business is conducted through Employers Health Insurance Company ("Employers Health"), a Wisconsin Corporation, headquartered in Green Bay, Wisconsin. Employers Health manufactures and distributes group life and health insurance, managed health care, dental, disability products and flexible benefit administrative services with a primary focus on the small business market (companies with 2-150 employees). It also provides administrative services to medium and large self-funded accounts in Wisconsin and is extending such services to other core market areas for self-funded groups of 100 - 1,000 lives. Employers Health has a strong market position in the Midwest, California, Texas, Colorado, Georgia, Tennessee, Maryland and Virginia, representing approximately 80 percent of its in-force business. In December 1993, LNC announced it would attempt to sell a portion of its -4- ownership in Employers Health through an initial public offering (IPO) of Common Stock in a newly formed holding company known as EMPHESYS Financial Group, Inc. In March 1994, this IPO was completed and resulted in the sale of 64% of the company. Approximately 2,590 employees are involved in this segment. Liabilities for losses and loss adjustment expenses ("LAE") for the property- casualty business segment are estimated at the end of each accounting period using case-basis evaluations and statistical projections. These liabilities include estimates for the ultimate cost of claims 1) which have been reported but not settled and 2) which have been incurred but not yet reported. A provision for inflation is implicitly considered in the estimated liability as the development of the estimated liability is based on historical data which reflects past inflation and on other factors which are judged to be appropriate modifiers of past experience. Adjustments to previously established estimates are reflected in current operating results along with initial estimates for claims arising within the current accounting period. Further, beginning in 1993 such estimates no longer recognize the effects of reinsurance recoverable because such amounts are now recorded as an asset with the adoption of FAS 113 (see note 2 to the consolidated financial statements on page 38). A reconciliation of the beginning of year and end of year liability for losses and LAE is as follows: Year Ended December 31 (in millions) 1993 1992 1991 Liability for losses and LAE at beginning of year $2,672.5 $2,502.4 $2,246.4 Plus: Provision for losses and LAE for claims arising in the current year ------------------- 1,433.3 1,670.6 1,824.6 Increase (decrease) in estimated losses and LAE for claims arising in prior years ------------- (26.5) 47.0 12.3 Total incurred losses and LAE --------------- 1,406.8 1,717.6 1,836.9 Less: Losses and LAE payments arising in the current year ---------------------------------- 633.5 709.1 771.4 Losses and LAE payments arising in prior year --- 861.2 838.4 809.5 Total payments ------------------------------ 1,494.7 1,547.5 1,580.9 Total liability for losses and LAE at end of year net of reinsurance ---------------- 2,584.6 2,672.5 2,502.4 Reinsurance recoverable related to adoption of FAS 113 in 1993 ------------------------------- 225.5 -- -- Total liability reported on a GAAP basis ---- $2,810.1 $2,672.5 $2,502.4
The reconciliation shows an increase (decrease) of ($26.5) million, $47.0 million, and $12.3 million to the December 31, 1992, 1991 and 1990 liability for losses and LAE, respectively, for claims arising in prior years. Such reserve adjustments, which affected current operations during 1993, 1992 and 1991, respectively, resulted from developed losses for prior years being different than were anticipated when the liabilities for losses and LAE were originally estimated. The liability for losses and LAE shown above and within the data to follow are shown on a basis prescribed by generally accepted accounting principles ("GAAP"). Such liabilities differ from that reported to state insurance regulators. A reconciliation of the GAAP liability and the corresponding liability reported to state insurance regulators is as follows: December 31 (in millions) 1993 1992 Liability reported to state insurance regulators --- $2,617.7 $2,707.8 Increase (decrease) related to: Estimated salvage and subrogation recoveries ----- (38.3) (35.9) Amount recoverable from reinsurers related to adoption of FAS 113 in 1993 ----------------- 225.5 -- Other -------------------------------------------- 5.2 .6 Liability reported on a GAAP basis ----------- $2,810.1 $2,672.5
-5- The following table shows the development of the estimated liability for loss and LAE for the ten year period prior to 1993. Each column shows the liability as originally estimated and cumulative data on payments and re- estimated liabilities for that accident year and all prior accident years, making up that calendar year-end liability; and all amounts are reflected net of reinsurance recoverable for all years. As a result of adopting FAS 113 in 1993, the 1993 liability is $225 million less than reported in the financial statements. The resulting redundancy (deficiency) is also a cumulative amount for that year and all prior years. The reserves include an estimated liability for unreported environmental losses. Prior to 1993, this liability was generally recognized in the more recent accident years and allocated to the appropriate accident year when reported. In 1993, this estimated liability for unreported environmental losses was reallocated to more appropriate accident years and as a result increased the deficiency for the period 1983 and prior. Beginning in 1986, the overall reserves were strengthened and this action has been maintained as evidenced by the cumulative development reported for 1987 through 1993. Conditions and trends that have affected the development of these liabilities in the past may not necessarily recur in the future; therefore, it would not be appropriate to use this cumulative history in the projection of future performance. Analysis of Combined Property-Casualty Losses and LAE Development December 31 (in millions) 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Liability for unpaid losses and LAE, net of reinsurance recoverable $479 $760 $1,370 $1,730 $2,020 $2,372 $2,669 $2,246 $2,502 $2,673 $2,585 Liability re-estimated as of: (First column represents number of years later) 1 514 811 1,410 1,692 1,984 2,347 2,690 2,258 2,549 2,634 2,585 2 503 846 1,439 1,753 1,990 2,382 2,718 2,303 2,571 3 523 860 1,566 1,790 2,026 2,403 2,767 2,384 4 540 973 1,595 1,833 2,054 2,443 2,847 5 591 1,009 1,636 1,863 2,104 2,538 6 611 1,042 1,672 1,910 2,199 7 637 1,078 1,713 2,003 8 667 1,108 1,805 9 695 1,196 10 780 Cumulative redundancy (deficiency) (301) (436) (435) (273) (179) (166) (178) (138) (69) 39 0 Change in redundancy (deficiency) (135) 1 162 94 13 (12) 40 69 108 (39) Cumulative amount of liability paid through: (First column represents number of years later) 1 219 333 531 571 649 750 1,430* 809 839 849 2 310 517 842 935 1,012 1,650* 1,862 1,253 1,325 3 376 638 1,036 1,160 1,568* 1,875 2,088 1,542 4 426 684 1,177 1,508* 1,700 1,996 2,255 5 468 721 1,390* 1,593 1,776 2,095 6 479 862* 1,450 1,647 1,890 7 504 903 1,488 1,694 8 531 928 1,525 9 551 955 10 571 *Includes the release of reserves for National Reinsurance Corporation due to the sale of that company during April 1990. The reserves released for LNC's period of ownership of National Re were $97 million, $139 million, $241 million, $386 million, $526 million and $665 million in 1984, 1985, 1986, 1987, 1988 and 1989, respectively.
In order to protect itself against losses greater than the amount it is willing to retain on any one risk or event, LNC's insurance subsidiaries purchase reinsurance from unaffiliated insurance companies (see note 7 to the consolidated financial statements on page 50). -6- In order to maximize returns on its investment portfolio, LNC's investment personnel continually monitor both current investment income produced by the portfolio and current market values of the portfolio. The type, maturity, quality and liquidity of investments selected to place in the segmented portfolios vary depending on the nature of the underlying liabilities that are being supported. All the areas of business activity in which LNC is involved are highly competitive because of the marketing structure and the large number of competing companies. At the end of 1992, the latest year for which data is available, there were approximately 1,200 groups and unaffiliated individual companies selling property and casualty insurance. LNC's group of companies writing property-casualty insurance ranked 25th in net written premiums for 1992 (A.M. Best Aggregates and Averages) among all such groups and companies. At the end of 1992 there were more than 2,100 life insurance companies in the United States and LNL was the 13th largest stock and mutual life insurance company in the United States based on assets and 15th based on insurance in-force (1992 Fortune Ranking of 50 Largest Life Insurance Companies by Assets). The business of LNC's property-casualty, life insurance and annuities, life-health reinsurance and employee life-health benefits business segments, in common with those of other insurance companies, is subject to regulation and supervision by the states, territories and foreign countries in which they are admitted to do business. The laws of these jurisdictions generally establish supervisory agencies with broad administrative powers relative to granting and revoking licenses to transact business, regulating trade practices, licensing agents, prescribing and approving policy forms, regulating premium rates for some lines of business, establishing reserve requirements, regulating competitive matters, prescribing the form and content of financial statements and reports, and regulating the type and amount of investments permitted. The ability to continue an insurance business is dependent upon the maintenance of the licenses in the various jurisdictions. Because of the nature of the insurance business, there is no single customer or group of customers upon whom the business is dependent. Factors such as backlog, raw materials, patents (including trademarks, licenses, franchises, and any other concessions held), seasonality, or environmental impact do not have a material effect upon such business. However, within LNC's Life-Health Reinsurance segment, Lincoln National Risk Management, Inc. does own the patent for a knowledge based underwriting system known as "Life Underwriting System." LNC does not have a separate unit that conducts market research. Research activities related to new products or services or the improvement of existing products or services is completed by persons within the business segments. Expenses related to such activities are not material. Also, sales are not dependent upon select geographic areas and foreign sales are not material in relationship to either LNC's total sales or sales of individual business segments. Item 2. Properties LNC and the various operating businesses headquartered in Fort Wayne lease approximately 1.3 million square feet of office space in the Fort Wayne area. Approximately 1.0 million square feet of space is leased by operating businesses headquartered in Indianapolis, Indiana; Oakbrook Terrace, Illinois; Green Bay, Wisconsin; and Wembley, London England. In addition, branch offices owned or leased for all of the operating businesses referenced above as well as the space for some smaller operations total approximately 1.2 million square feet. As shown in the notes to consolidated financial statements, (see note 7 to the consolidated financial statements on page 49) the rental expense on operating leases for office space and equipment for continuing operations totaled $55.9 million for 1993 of which $49.6 million was for office space. This discussion regarding properties does not include information on investment properties. -7- Item 3. Legal Proceedings LNC and its subsidiaries are involved in various pending or threatened legal proceedings arising from the conduct of their business. In some instances, these proceedings include claims for punitive damages and similar types of relief in unspecified or substantial amounts, in addition to amounts for alleged contractual liability or requests for equitable relief. After consultation with counsel and a review of available facts, it is management's opinion that these proceedings ultimately will be resolved without materially affecting the consolidated financial statements of LNC. Item 4. Submission of Matters to a Vote of Security Holders During the fourth quarter of 1993, no matters were submitted to security holders for a vote. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Stock Market and Dividend Information Common Stock Data: (per share) 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1993 Data: High -------------------------------- $40.625 $41.813 $47.875 $48.250 Low --------------------------------- 34.688 37.000 37.125 41.000 Dividend declared ------------------- $.380 $.380 $.380 $.410 1992 Data: High -------------------------------- $30.500 $31.125 $33.563 $38.063 Low --------------------------------- 26.813 25.250 30.125 31.875 Dividend declared ------------------- $.365 $.365 $.365 $.380
Exchanges: New York, Chicago, Pacific, London and Tokyo. Stock Exchange Symbol: LNC Dividend Guideline: The dividend on LNC's Common Stock is determined each quarter by the Corporation's Board of Directors. The Board takes into consideration the financial condition of the Corporation, including current and expected earnings, projected cash flows and anticipated financing needs. The Board also considers the ability to maintain the dividend through bad times as well as good so that the dividend rate would need to be reduced only under unusual circumstances. One guideline that the Board has found useful in recent years is to consider a dividend approximately equal to five percent of the book value per share with such book value computed excluding the impact of marking its securities available-for-sale to fair value. Notes: 1. The data for 1992 and the first quarter of 1993 has been adjusted to reflect the effects of a June 1993 two-for-one split of LNC's Common Stock. 2. At December 31, 1993, the number of shareholders of record of LNC's Common Stock was 13,600. 3. The payment of dividends to shareholders is subject to the restrictions described in notes 5, Supplemental Financial Data, and 7, Restrictions, Commitments and Contingencies to the consolidated financial statements (see pages 45 and 48) and is discussed in the Management's Discussion and Analysis of Financial Information (see page 28). -8-
Item 6. Selected Financial Data (Millions of dollars, except per share data) Year Ended December 31 1993 1992 1991 1990 1989 Total revenue ------------------- 8,289.8 8,034.1 9,169.0 8,489.5 8,081.1 Income before cumulative effect of accounting change* -------- 415.3 359.2 201.9 176.6 256.1 Net income* --------------------- 318.9 359.2 201.9 176.6 256.1 Income before cumulative effect of accounting change per share* $4.06 $3.86 $2.23 $1.97 $2.88 Net income per share* ----------- $3.12 $3.86 $2.23 $1.97 $2.88 Dividends per common share* ----- $1.550 $1.475 $1.385 $1.315 $1.255 December 31 1993 1992 1991 1990 1989 Assets* ----------------------- 48,380.4 39,547.3 34,013.1 27,597.3 25,070.1 Long-term obligations --------- 335.1 423.0 252.6 378.5 378.8 Shareholders' equity* --------- 4,072.3 2,826.9 2,655.8 2,279.5 2,292.4 Market value of Common Stock* - $43.500 $37.000 $27.375 $21.500 $30.438 *Income before cumulative effect of accounting change and net income for 1993 includes two changes in estimate which essentially offset each other (see note 2 to the consolidated financial statements on page 38). Other factors affecting the comparability of net income for the 1989-1993 period are shown below (see "Supplemental Data"). Prior year data (1989-1992) has been restated for the adoption of FAS 109 (see note 2 to the consolidated financial statements on page 38). Shareholders' equity as of December 31, 1993 includes the effect of the adoption of FAS 115 (see note 2 to the consolidated financial statements on page 39). Per share amounts were affected by the 1993 two-for-one split of LNC's Common Stock (see note 9 to consolidated financial statements on page 52) and the issuance in July 1990, May 1991 and February 1993 of 2,201,443 shares of Series E Preferred Stock, 2,216,454 shares of Series F Preferred Stock and 9,200,000 shares of Common Stock, respectively.
Supplemental Data Year Ended December 31 (in millions) 1993 1992 1991 1990 1989 Income from operations* -------------- $343.5 $240.6 $177.7 $213.8 $195.6 Realized gain (loss) on investments, net of related amortization and taxes -------------------------- 170.3 118.6 113.3 (64.9) 60.5 Realized gain (loss) on sale of subsidiaries, net of taxes --------- (98.5) -- (89.1) 27.7 -- Cumulative effect of accounting change (postretirement benefits), net of taxes ------------ (96.4) -- -- -- -- Net Income ---------------------- $318.9 $359.2 $201.9 $176.6 $256.1 *Income from operations is defined as "Net Income" less gain (loss) on investments, gain (loss) on sale of subsidiaries and cumulative effect of accounting change, all net of taxes.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The pages to follow review LNC's results of operations and financial condi- tion. Historical financial information is presented and analyzed. Where appropriate, factors that may affect future financial performance are identified and discussed. On pages 9 through 22, the financial results of our business segments, investments and other operations are presented and discussed. Within these business segment discussions reference is made to "Income from Operations" (see definition in item 6 above). Pages 23 through 28 discuss factors that have affected specific elements of the consolidated financial statements as well as information pertaining to LNC as a whole. This "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with the audited financial statements, including the notes thereto, presented on pages 30 through 54. -9-
Review of Operations: Property-Casualty Year Ended December 31 (in millions) 1993 1992 1991 1990 1989 Financial Results by Source Underwriting Income (Loss): Personal Insurance -------------- $(18.4) $(31.8) $(56.7) $(78.7) $(66.2) Commercial Insurance ------------ (63.3) (133.3) (102.1) (49.7) (29.7) Reinsurance --------------------- -- -- (12.8) (7.1) (19.0) Investment Income ----------------- 217.0 242.4 229.6 221.2 244.5 Other ----------------------------- (1.4) .3 1.2 4.6 4.6 Income from Operations ------ 133.9 77.6 59.2 90.3 134.2 Realized Gain on Investments*------ 91.8 -- -- -- -- Net Income ------------------ $225.7 $ 77.6 $ 59.2 $ 90.3 $134.2 Catastrophe Losses $ 58.3 $106.9 $ 61.8 $ 70.6 $118.6 Combined Loss and Expense Ratios** Personal Insurance ---------------- 103.0% 105.5% 111.8% 116.3% 113.4% Commercial Insurance -------------- 110.3% 116.5% 111.0% 105.1% 103.1% Reinsurance ----------------------- -- -- 124.3% 114.8% 109.2% Consolidated Combined Ratio ------- 107.5% 112.7% 111.9% 109.2% 106.7% Consolidated Combined Ratio Excluding Catastrophe Losses ---- 104.3% 107.6% 109.1% 106.1% 101.6% *Prior to 1993, all realized gain (loss) on investments was included in Other Operations (see note 8 to the consolidated financial statements on page 51). **The combined loss and expense ratio is the ratio of losses and loss expenses to earned premiums plus the ratio of underwriting expense to premiums written.
In 1993, the Property-Casualty segment, primarily American States Insurance Companies, produced its second consecutive year of improving profitability and its best results in four years. Income from operations increased substantially to $133.9 million from $77.6 million a year ago. The combined loss and expense ratio improved 5.2 points to 107.5% from the segment's 1992 experience of 112.7%. More than half of this improvement is attributed to the ongoing recovery in underwriting results. The programs implemented in recent years to counteract the uncertainties of a changing market have firmly taken hold. Fewer catastrophe losses during the year for American States account for the remainder of the combined ratio improvement. American States' favorable financial performance in 1993 resulted from a combination of being able to sustain strong results on its preferred book of personal lines business while making significant progress to improve results on its high quality book of small commercial business. The company is focused on specializing in these areas and continues to provide significant value for customers, shareholders and agents. Return to Profitability In the last few years, industry observers have watched for traditional signs marking the beginning of a cycle upturn. American States' management decided several years ago it would no longer wait for a general industry recovery and took purposeful measures, counter to the industry, to bring its business back to profitability. The company began a process of focusing underwriting efforts on those geographies and product lines which have historically provided better than average returns while de-emphasizing those lines and areas of less profitable experience. As a result of these activities, American States' profitability has returned to levels superior to the general property-casualty industry. The aggressive restructuring of the book of business did result in a moderate reduction in premium volume. For 1993, direct written premiums decreased 12%. While we're currently continuing to see a reduction in the commercial lines premium volume, we have relative stability in premium volume in the personal lines business. We anticipate there will be an aggregate positive change in premium volume in the latter part of 1994. -10- Restructuring In 1993, LNC divested two minor operations in an effort to streamline and focus its resources on those businesses that have the greatest potential for profitable growth. The business of the American Union, a small property- casualty reinsurance affiliate, was unable to contribute to earnings in a significant manner because the company lacked substantial size. K&K Insurance Group, Inc., a specialty risk insurer, did not strategically fit LNC's underwriting approach nor its definition of "main street" business risks. Personal Lines American States' personal lines business continued to show strong improvement in 1993. The combined ratio improved to 103.0% from 105.5% a year ago. Approximately 40% of the company's total net written premiums are from the personal lines business. The preferred private passenger automobile and homeowners markets represent 86% of the personal lines business. Over the last five years, the company worked to improve private passenger automobile pricing and profitability by writing all new business in the preferred sector. This strategy has been successful, returning this line to a position of profitability. In the homeowners line, American States also continues to emphasize the preferred sector of the market. While standard homeowners business is still written, an increasing percentage of new premium written in 1993 was in the preferred sector. Homeowners has been a troubled line for the industry because of the mismatch between coverage purchased and actual replacement costs. American States undertook an aggressive program to improve the profitability of this business line over the last two years. Each homeowners policy has been evaluated to ensure that the amount of insurance purchased does indeed correlate to the current property value. Commercial Lines In the commercial lines, American States is focused on serving those markets where it can deliver to its customer base the greatest service levels and efficiencies its automated systems can provide. American States defines this market as small-to-medium-sized commercial "main street" business risks. Selected larger accounts with low-hazard risk characteristics are also among American States' current and potential client base. The commercial lines combined ratio improved to 110.3% in 1993 from 116.5% in 1992. The 6.2 points of total improvement is the result of 4.6 points of basic underlying improvement with the remainder attributable to fewer catastrophic losses. Management anticipates more selective underwriting, geographic repositioning of exposures and a continuation of overall pricing increases will result in greater profitability and a slowing and subsequent reversal of the decline in premium levels. Product Distribution American States distributes its products through a unique network of 22 semi-autonomous division offices across the United States which maintain relationships with approximately 5,000 independent local agencies. This "multi-regional" structure allows each division office to function as an independent operation with broad authority for underwriting, agency contracting, marketing and claims settlement. Nearly all of the agencies are electronically interfaced with the division offices. American States continues to realize one of the lowest internal expense ratios in the industry while at the same time providing distinctive levels of underwriting and claims service. Investment Income Paralleling the decline in investment income throughout the property-casualty industry, American States' net investment income after taxes fell to $217.0 million in 1993 versus $242.4 million in 1992. As premium levels declined, the amount of funds available for new investment also decreased. In addition, the general decline in interest rates during 1993 has resulted in lower investment yields. -11- Outlook In early 1994, the property-casualty industry experienced two significant catastrophic events: the Southern California earthquake and the Eastern and Midwestern winter freeze. Based on information currently available, American States estimates it will pay approximately $15 million, pre-tax, for claims on the earthquake, while the freeze will result in claims of about $18 million, pre-tax. The industry currently estimates property-casualty claims from both catastrophes may reach more than $3 billion. American States is optimistic that its methodology for operating in a changing environment will continue to yield stronger profitability and opportunities for growth. Absent further unusually severe catastrophic losses, we expect that 1994 will be our third consecutive year of increased property-casualty earnings.
Review of Operations: Life Insurance and Annuities Year Ended December 31 (in millions) 1993 1992 1991 1990 1989 Financial Results by Source Lincoln National Life (Annuities) --- $ 79.2 $ 61.3 $ 40.6 $ 38.8 $ 30.3 Lincoln National Life (Pensions) ---- 30.6 15.5 12.8 15.8 14.0 Lincoln National Life (Life-Health) - 31.4 22.0 24.5 23.9 27.0 Security-Connecticut (Life) --------- 16.6 21.4 16.7 7.9 12.1 American States Life (Life) --------- 12.1 11.1 10.2 10.6 6.3 First Penn-Pacific (Life) ----------- 9.9 5.2 5.4 5.5 5.7 First Penn-Pacific (Annuities) ------ 17.3 12.6 4.9 .6 - Lincoln National (U.K.) PLC --------- 11.8 9.2 14.3 13.3 10.5 Other ------------------------------- (33.6) (7.4) (11.4) (6.9) (1.6) Income from Operations* ------- 175.3 150.9 118.0 109.5 104.3 Realized Gain on Investments**------- 59.3 -- -- -- -- Net Income*-------------------- $234.6 $150.9 $118.0 $109.5 $104.3 December 31 (in billions) 1993 1992 1991 1990 1989 Annuity and Pension Assets Under Management Lincoln National Life (Annuities) -- $18.400 $14.467 $11.209 $ 8.420 $ 6.648 Lincoln National Life (Pensions) --- 6.832 6.192 5.455 4.897 4.220 First Penn-Pacific (Annuities) ----- 1.833 1.653 1.153 .156 .027 Total Annuity and Pension Assets Under Management ----- $27.065 $22.312 $17.817 $13.473 $10.895 Universal Life Account Values Lincoln National Life(Life-Health) - $1.586 $1.419 $1.308 $1.184 $1.057 Security-Connecticut (Life) -------- .667 .620 .583 .534 .474 First Penn-Pacific (Life) ---------- .592 .523 .449 .362 .296 American States Life (Life) -------- .174 .153 .133 .112 .092 Total Universal Life Account Values ------------- $3.019 $2.715 $2.473 $2.192 $1.919 Unit-linked Assets Lincoln National (U.K.) PLC -------- $1.235 $ .652 $ .669 $ .588 $ .569 *Income from operations and net income of the annuities and pensions sub- segments for 1993 include the impact of a change in estimate of net investment income (see note 2 to the consolidated financial statements on page 39). **Prior to 1993, all realized gain (loss) on investments was included in Other Operations (see note 8 to the consolidated financial statements on page 51).
The Life Insurance and Annuities segment produced an all time high income from operations of $175.3 million, a 16% increase over 1992. This reflects record results in the majority of operations that comprise the business segment. Earnings were affected by an unusually large charge of $20.5 million, after-tax, for guaranty fund assessments. This is $16.3 million greater than the previous year's assessment. In addition, there was an unusually large $23.2 million, after-tax, credit arising from an accelerated amortization of discount on mortgage-backed securities caused by interest rate declines. -12- Our strategy with respect to mortgage-backed securities has included the purchase of securities with lower underlying interest rates, at a discount. The accounting for such securities provides that the discount is to be amortized over the expected life of the investment to produce an estimated constant effective yield. However, even on the lower interest rate securities, repayments generally increase and the expected duration of the investment shortens. This releases additional discount and increases investment income. The significant change in interest rates in 1993 coupled with the implementation of new investment computer software in the fourth quarter released the $23.2 million of additional discount into investment income. The new software allows us to calculate more accurately the estimated constant effective yields on these securities. Lincoln Life Progress The Life Insurance and Annuities segment made substantial progress in 1993 toward its goal of comprehensively streamlining and integrating the various units selling products under the Lincoln Life banner. These actions are aimed at transforming an already substantial operation with a wide range of asset accumulation and income protection products into one with sustainable profitability, well above-average growth potential, and benchmark product and service capabilities. During the year, Lincoln Life, our flagship life insurance company, completed a progressive analytical effort. The goal of this self-analysis was to re-examine all tasks and functions and to determine the value each function adds to customer service and sales efforts. This analysis resulted in a clearer vision of Lincoln Life's strengths and capabilities and a reinforced commitment to increase the market visibility of the Lincoln Life brand name. Security-Connecticut Divested In early 1993, LNC announced that as part of the restructuring of the Lincoln Life operations, it would consider divesting Security-Connecticut Corporation, an affiliate specializing in sales of universal life and term life insurance through independent insurance brokers. With the decision to rebuild the visibility of the Lincoln Life brand name, Security-Connecticut's distribution system no longer fit with Lincoln Life's distribution strategy. In October, LNC filed a registration statement for an initial public offering of 8.5 million shares of Security-Connecticut common stock, representing 100% of Lincoln Life's interest in this affiliate. The offering was completed at $22 per share on February 2, 1994. Please refer to "Other Operations" on page 32 for more detail on how the sale affected LNC's net income. Going forward, the proceeds from the sale will be reinvested in Lincoln Life to support growth of its life insurance and annuities operations. Lincoln Life agents will have the ability to continue selling Security-Connecticut term life insurance products for at least two years. Lincoln National UK Positioned for Growth In another restructuring move, LNC completed its first strategic acquisition in six years. Cannon-Lincoln, its life insurance affiliate in the United Kingdom, consolidated with Citibank Life UK following LNC's acquisition of that company to form Lincoln National (UK) PLC. This acquisition effectively doubled the size of LNC's United Kingdom operations. The acquisition is part of LNC's corporate strategy to grow its UK operations to ensure that it continues to be a significant player in the UK life and pension markets. Lincoln National, is the 16th largest writer of unit-linked new business premiums in the UK as measured in 1992. (Money Management Survey-New Business Trends, published June 1993). Distribution Lincoln Life's core strengths are the variety of markets it serves and the expansive portfolio of products it offers. Unlike many of its single- product, single-channel competitors, Lincoln Life offers a portfolio of insurance and retirement planning products through multiple distributors. It sells life insurance through approximately 1,900 career agents and 13,000 independent agents and wholesalers. It sells annuities, not just through these channels, but also through 42,000 stockbrokers, financial planners and a wide range of financial institutions. In general, Lincoln Life's products and services are engineered to meet the financial security needs of middle- to-upper income professionals and small-business owners. -13- Lincoln Life Annuities Lincoln Life's annuities operation produced another year of record earnings. Income from operations increased 29% to $79.2 million and annuity assets under management grew 27% to $18.4 billion. Maintaining excellent services for contractholders and delivering attractive investment returns in an environment of lower interest rates played an important part in this performance. Measured by individual annuity deposits in 1992, Lincoln Life was recognized as being the leading seller of individual annuities in the United States (Best's Review, Life-Health Edition, November 1993). Another of Lincoln Life's unique marketing advantages is its ability and commitment to continually improve the service it provides to the distributors and owners of its annuities. In 1993, the company established electronic interfaces to transmit applications to and from many of the broker/dealers, simplifying and increasing the speed of the application process. In 1994, the operation will enhance its annuity products with additional fund alternatives and options, including a wider selection of outside investment managers. New product development remains active in order to meet the changing needs of the marketplace. Lincoln Life Pensions Lincoln Life's pension operations had a banner year, earning a record $30.6 million and increasing assets under management by 10% to $6.8 billion. Among the pension products the company sells, the 401(k) product continues to be in great demand among employers who wish to provide their employees the option of a contributory retirement savings benefit in addition to or in place of a defined benefit upon retirement. Lincoln Life introduced a new version of the 401(k) product in 1993 with new fund options to meet the needs of this growing employer market. Opportunistic sales in Guaranteed Interest Contracts (GICs) continue as a steady source of pension earnings. Low acquisition costs and an integrated investment strategy give the GIC unit the flexibility to bid on contracts selectively, when adequate profit margins are available. Lincoln Life -- Life/Health Lincoln Life's life/health operations sell a wide range of life insurance products including universal life, variable universal life, disability income and long-term care products. Income from operations increased to $31.4 million in 1993. Variable universal life sales increased by 75% in 1993. The variable universal life product has been increasingly attractive to individuals seeking returns greater than those generally available in the current low interest rate environment. Universal life account values, including both the variable and fixed products, increased more than 11% to $1.6 billion during 1993. In recent years, disability income claim experience had been deteriorating. By 1992, it had become clear that additional reserves were needed to avoid future losses from this product, and such reserving action was taken at that time. In addition, new management with disability income experience was brought into the product line. Other corrective actions included modifying the design of the product's basic underwriting and benefit structure, strengthening claims administration and tracking procedures, and increasing rates. These actions were completed while maintaining the marketplace competitiveness of the product. As a result of these changes, the disability income product returned to profitability in 1993. American States Life Insurance Company American States Life contributed a record $12.1 million to 1993 income from operations. This affiliate sells universal life, term life insurance and annuity products, distributing them through the American States property- casualty independent agency network. Sales remained level in 1993 and in- force business grew by 5% despite actions related to our property-casualty operations which reduced the number of independent agents distributing the product. -14- First Penn-Pacific First Penn-Pacific posted a sizeable increase in income from operations as increased investment income contributed to record earnings in both the life insurance and annuities units. Earnings from the life insurance unit also benefitted from improved mortality as income from operations nearly doubled to $9.9 million. Annuity earnings increased 37% to $17.3 million as annuity assets, after coinsurance, grew to $1.8 billion. First Penn underwrites and distributes universal life through independent marketing companies and administers and distributes annuities, including Lincoln National Life annuities, through financial institutions. Lincoln National UK PLC Lincoln National (UK) PLC, formerly Cannon-Lincoln, produced earnings of $11.8 million in 1993, a 28% increase in income from operations. These results primarily reflect the successful consolidation with the Citibank Life operations. Lincoln National UK markets life and pension products, similar to variable universal life policies, through more than 1,700 career agents across the United Kingdom. FAS 115 Effective December 31, 1993, LNC adopted Financial Accounting Standard 115 (FAS 115), which results in the inclusion in Shareholders' Equity of the unrealized gain or loss on fixed-income securities, subject to certain adjustments. The December 31, 1993 book value of $39.39 per share includes $8.85 of unrealized gains on securities. Gains, whether realized or unrealized, on securities that support long-term life insurance and annuity contracts are expected to be used to support life insurance and annuity benefits. If there are losses, those losses would generally be recovered from reduced future insurance and annuity payments. Net Income and Shareholders' Equity now include realized and unrealized, respectively, gains and losses on securities, part of which will be needed to support insurance and annuity benefits. Current accounting standards do not require or permit adjustment of insurance and annuity reserves to recognize the full effect of these realized and unrealized gains and losses on future benefit payments, unless there is a contractual obligation which requires the attribution of these gains or losses to policyholders. We believe that an appropriate adjustment for these future benefits as of December 31, 1993 would increase policy reserves and reduce Shareholders' Equity by $665.3 million, net of taxes, or $6.45 per share. If Shareholders' Equity were calculated on this adjusted basis, it would be $32.94 per share. These adjustments reflect the reversal of interest related fixed income unrealized gains and the deferral and amortization of such realized gains from portfolios supporting life and annuity products. Outlook In 1994, efforts will continue to streamline and bring greater focus to the identity of Lincoln Life and its nationwide network of agencies. One strategy that will be implemented during the year will involve gathering our life insurance agency offices under a common banner. They will all be members of the Lincoln Financial Group. Lincoln Life will continue to find opportunities to apply its knowledge of the retirement marketplace and the investment markets to continue growing its life insurance and annuities operations. In 1994, Lincoln Life's agency system will be the primary distributor for LNC's new family of mutual funds, the Lincoln Advisor Funds. We are encouraged by the growth in sales of Lincoln Life's life insurance products. It appears that this growth is continuing into 1994. We anticipate that annuity assets will continue to grow near the high rate of recent years. -15-
Review of Operations: Life-Health Reinsurance Year Ended December 31 (in millions) 1993 1992 1991 1990 1989 Income from Operations* ------------ $18.9 $58.3 $33.0 $52.2 $48.5 Realized Loss on Investments** ----- $(1.6) -- -- -- -- Net Income* ---------------- $17.3 $58.3 $33.0 $52.2 $48.5 Individual Life Sales (in billions) $17.3 $14.0 $17.0 $19.1 $25.0 December 31 (in billions) 1993 1992 1991 1990 1989 Life Insurance In-Force ------------ $118.0 $113.6 $102.2 $101.4 $98.7 *Income from operations and net income for 1993 include the impact of a change in estimate of the reserve level needed for LNC's reinsurance disability income business (see note 2 to the consolidated financial statements on page 39). **Prior to 1993, all realized gain (loss) on investments was included in Other Operations (see note 8 to the consolidated financial statements on page 51).
The Life-Health Reinsurance segment, comprised of Lincoln National Reinsurance Cos. (LNRC), reported 1993 income from operations of $18.9 million. This included a loss of $51.0 million from disability income reinsurance, largely from reserve strengthening. Reinsurance products other than disability income produced earnings of $69.9 million. Thus, strong performances in the individual life, group and international lines of business were overshadowed by the poor results in the disability income reinsurance area. In 1992, the segment earnings of $58.3 million included a loss from disability income of $8.7 million. Customer Focus LNRC provides a full range of risk management products and consulting services to four primary customer groups: insurance companies in the United States and selected international markets, health maintenance organizations (HMOs), self-funded employer groups with risk management needs, and other primary risk-accepting organizations. An exclusive network of account executives and sales specialists distributes products with a consultative client approach. Based upon LNRC's competitive analysis of premium volume for the year ended December 31, 1992, it is clear that the long-term business relationships and the value added in providing unique client solutions continue to position LNRC as the leading life-health reinsurer in the United States. Disability Income The reinsurance industry's profitability in the disability income business has been adversely affected by several external factors. These included consolidation among the direct disability income writers, lower interest rates, and the white-collar recession's effect on the professional market. The key competitive factors in the marketplace became large amounts of monthly income replacement and liberal benefit definitions for non-cancelable policies which do not provide any means to correct underpricing. In 1990, LNRC, then the largest reinsurer of disability income, began to perceive problems developing in the market. The company took action to apply its risk management skills to those aspects of the business it could positively affect. This included increasing rates and tightening underwriting standards. One consequence of these actions was a reduction in new business by 67% since 1990. -16- Because of the inability to correct pricing on existing in-force business, and in order to manage its exposure, LNRC expanded its aggressive program to help client companies with claims management and claims closure. In the fourth quarter of 1993, we recognized that despite our efforts, our experience was not improving. This led to further strengthening reserves to recognize expected future losses. The adequacy of disability income reserves is dependent on future morbidity experience and other factors which are subject to substantial variability. Accordingly, we cannot be assured future losses will not emerge. Individual Life One of the primary reasons for LNRC's strong earnings of the last two years was favorable mortality on Individual Life reinsurance. Individual life sales increased 24% in 1993. Group Markets Group Reinsurance has experienced favorable morbidity in the last two years, contributing to the strong earnings reported. Competition has intensified in the HMO market, one of LNRC's primary group market customers. As HMO's move to a broader spectrum of products, LNRC is prepared to provide market knowledge and ancillary products such as short-term disability, accidental death and dismemberment, and group life. There are still many uncertainties surrounding national health care reform. Whatever the outcome, LNRC is well positioned to follow the risk to design and provide products and services to meet risk management needs. Life Underwriting System The essence of the partnership and integration between an insurer and reinsurer is moving to new, more sophisticated levels. Today, strategic relationships are developed around the flow of information. Companies are migrating to electronic commerce where billing, underwriting and other risk management functions are increasingly shared with their reinsurer in a direct electronic interface. LNRC's Life Underwriting System (LUS), a patented state-of-the-art risk management tool, provides decision support to the underwriter, improving service and reducing insurers' expenses. In addition to the LUS, a new risk management product, Datalliance, has been delivered to the marketplace. Both products were developed by LNRC. Datalliance provides an electronic interchange of information between parties sharing in the risk management process. These products provide the foundation for insurance companies to re-engineer their internal processes and interactions with their risk management partners. Outlook LNRC will continue to closely monitor the disability income situation and, as always, take necessary actions to protect the fundamental earnings strength in our other reinsurance operations. The company expects 1994 reinsurance earnings to recover and believes over the long-term LNRC will continue to contribute a steady and significant stream of earnings to LNC. LNRC's ongoing strategy will be to make the best use of its unique competencies to design customer focused, custom-made, total risk management solutions for its clients. LNRC will expand the range of products and services offered to maintain its position as the premier life-health reinsurer in the United States. -17-
Review of Operations: Employee Life-Health Benefits Year Ended December 31 (in millions) 1993 1992 1991 1990 1989 Financial Results by Source Employers Health Insurance Company $54.3 $40.8 $39.5 $34.2 $5.2 Managed Health Care -------------- -- -- 4.0 19.0 (.6) Income from Operations ----- 54.3 40.8 43.5 53.2 4.6 Realized Gain on Investments*----- 1.0 -- -- -- -- Net Income ----------------- $55.3 $40.8 $43.5 $53.2 $4.6 Other Information Premiums ----------------------- $1,228.6 $1,184.0 $2,436.9 $2,260.3 $2,076.4 Equivalents -------------------- 217.3 195.5 841.3 707.6 648.5 December 31 (in thousands of lives) 1993 1992 1991 1990 1989 Health-Individual Enrollees Employers Health Insurance Company - 1,030 926 996 879 811 Managed Health Care ---------------- -- -- 2,679 2,865 2,834 Total Enrollees -------------- 1,030 926 3,675 3,744 3,645 *Prior to 1993, all realized gain (loss) on investments was included in Other Operations (see note 8 to the consolidated financial statements on page 51).
Employers Health Insurance Company produced record income from operations of $54.3 million in 1993 versus $40.8 million in 1992. A reduction in medical cost trends contributed to this earnings improvement. For the year, the company's health insurance premium reached $1.2 billion. Employers Health is ranked as the 12th largest U.S. group health insurer based on 1992 annual statutory premiums (The National Underwriter, June 1993). In 1993, in-force members grew by 11% over the previous year, bringing total members to more than 1 million. Employers Health is a single source provider of a broad line of managed care products and employee benefit products for small businesses. The company has focused primarily on employer groups of 2 to 150 lives and also offers administrative services for larger groups in selected markets. Employers Health distributes managed care medical insurance products, as well as non-medical specialty products and administrative services through more than 40,000 independent agents. While it writes business in 40 states, the company has managed care geographic concentration, with more than 75% of its medical membership concentrated in 10 states. Employers Health offers Preferred Provider Organizations (PPOs) and Health Maintenance Organizations (HMOs) services through wholly or partially owned plans and through alliances and contractual relationships with other managed care organizations. In July 1993, Employers Health began providing all of the marketing and administrative services for the Health Insurance Plan of California, the nation's first state sponsored purchasing pool. A purchasing pool enables employers to group together for combined purchasing power and administrative efficiencies. Outlook In December 1993, LNC, through its wholly-owned subsidiary Lincoln National Life Insurance Company, announced it would sell, through a public offering, approximately 60% or 10.5 million shares of EMPHESYS Financial Group, Inc. EMPHESYS is a holding company created by Lincoln Life which owns the stock of Employers Health. Depending on market demand, Lincoln Life may sell more than 60% of the company. LNC has decided to divest a majority interest of Employers Health in order to devote more of its resources to its primary businesses and further reduce its investment in the group health business. LNC intends to use the proceeds from the sale for further growth. At the time of this writing, LNC anticipates the sale will close in March 1994. -18-
Discussion and Analysis of Investments December 31 (in billions) 1993 1992 1991 1990 1989 Total Invested Assets*----------- $29.7 $25.5 $23.0 $19.1 $17.8
Year Ended December 31 (in millions) 1993 1992 1991 1990 1989 Net Investment Income**---------- $2,146.5 $1,987.3 $1,799.3 $1,653.4 $1,580.2
Net Realized Gain (Loss) on Investments ---------------- 268.4 176.9 163.1 (103.0) 86.7 *Effective December 31, 1993, with the adoption of FAS 115, all fixed maturity securities are carried at fair values. **Net investment income for 1993 includes a change in estimate of income from mortgage-backed bonds (see note 2 to the consolidated financial statements on page 39).
Net realized gain (loss) on investments in 1993 and 1992 was $268.4 million ($170.3 million after taxes) and $176.9 million ($118.6 million after taxes), respectively. These gains were the result of the sale of investments, less write-downs and allowances for losses. The write-downs of fixed maturity and equity securities were recorded when the securities were deemed to have declines in market value that were other than temporary. With the exception of interest only mortgage-backed securities, the fixed maturity securities to which these write-downs apply were generally of investment grade quality at the time of purchase, but were classified as "below investment grade" at the time of the write-downs. Provision for losses were established for mortgage loans on real estate and real estate where the underlying value of the property was deemed to be less than the carrying value. The provision for losses in 1993 includes $64.1 million for the adoption of FAS 114 (see note 2 to the consolidated financial statements on page 38). The amount of these write-downs and provisions for losses is disclosed within the notes to the accompanying financial statements (see note 3 to the consolidated financial statements on page 40). Net investment income increased 8% in 1993 as the result of a 12% increase in mean invested assets (cost basis) being partially offset by a decrease in the yield on investments from 8.24% to 7.93%. Lower net investment income for 1993 in the Property-Casualty segment, due to lower volumes of business, were more than offset by increases in the other business segments. Net investment income increased 10% in 1992 as the result of a 13% increase in invested assets being partially offset by a decrease in the yield from 8.38% to 8.24%. The investment portfolio, excluding cash and invested cash, is comprised of fixed maturity securities; equities; mortgage loans on real estate; real estate, either wholly owned or joint ventures; and other long-term investments. LNC purchases investments which have yield, duration and other characteristics which take into account the liabilities of the products being supported. The dominant investment held is fixed maturity securities which represents 81% of the investment portfolio. A $3.6 billion increase in the fixed maturity portfolio, including increases related to the adoption of FAS 115, accounted for most of the $4.2 billion increase in the investment portfolio in 1993. Fixed Maturity Securities In 1993, LNC's fixed maturity portfolio produced a return of 12.7% compared to an industry recognized index (Lehman Brothers, Government/Corporate Bond Index) which produced 11.0% LNC maintains a high-quality fixed maturity securities portfolio. As of December 31, 1993, $11.8 billion or 53% of the securities in the portfolio were rated AA or better and $956.9 million or 4.3% of the portfolio was -19- invested in below investment grade (BB or less) securities (see note 3 to the consolidated financial statements on page 41). The below investment grade securities represent 3.2% of the total investment portfolio. The interest rates available on these below investment grade securities are significantly higher than are available on other corporate debt securities. Also, the risk of loss due to default by the borrower is significantly greater with respect to such below investment grade securities because these securities are generally unsecured, often subordinated to other creditors of the issuer and issued by companies that usually have high levels of indebtedness. LNC attempts to minimize the risks associated with these below investment grade securities by limiting the exposure to any one issuer and by closely monitoring the credit worthiness of such issuers. For the year ended December 31, 1993, the aggregate cost of such investments purchased was $391.4 million. Aggregate proceeds from such investments sold were $283.2 million, resulting in a realized pre-tax gain at the time of sale of $17.4 million. As of December 31, 1993, LNC adopted FAS 115 and reclassified its entire fixed maturity securities portfolio as "available-for-sale." With such reclassification, the fixed maturity securities are carried at current fair value and changes in fair values, net of related deferred acquisition costs, amounts required to satisfy policyholder commitments and taxes, are charged or credited directly to shareholders' equity (see note 2 to the consolidated financial statements on page 39). As of December 31, 1993, LNC's fixed maturity securities were comprised of securities with gross unrealized gains of $1,925.0 million and gross unrealized losses of $179.9 million. LNC's fixed maturity securities available-for-sale includes mortgage-backed bonds. The mortgage-backed bonds are subject to risks associated with variable prepayments. This may result in these securities having a different actual maturity than planned at the time of purchase. Securities that have an amortized cost greater than par which are backed by mortgages that prepay faster than expected will incur a reduction in yield or a loss. Those securities that have an amortized cost lower than par that prepay faster than expected will generate an increase in yield or a gain. The degree to which a security is susceptible to either gains or losses is influenced by the difference between its amortized cost and par, the relative sensitivity of the underlying mortgages backing the assets to prepayment in a changing interest rate environment and the repayment priority of the securities in the overall securitization structure. LNC limits the extent of these risks by generally avoiding securities whose cost significantly exceeds par, by purchasing securities which are backed by stable collateral, and by concentrating on securities with enhanced priority in their trust structure. Such securities with reduced risk typically have a lower yield (but higher liquidity) than higher-risk mortgage-backed bonds. At selected times, higher-risk securities may be purchased if they do not compromise the safety of the general portfolio. At December 31, 1993, LNC did not have a significant amount of higher-risk mortgage-backed bonds. There are negligible default risks in the mortgage-backed bond portfolio as a whole as the vast majority of the assets are either guaranteed by U.S. government- sponsored entities or are supported in the securitization structure by junior securities enabling the assets to achieve high investment grade status. At December 31, 1993, the current par, amortized cost and estimated fair value of investments in mortgage-backed bonds summarized by interest rates of the underlying collateral are as follows: Current Fair December 31 (in millions) Par Cost Value Below 7% ------------------------------- $ 269.1 $ 271.7 $ 272.2 7% - 8% -------------------------------- 1,296.5 1,271.2 1,298.0 8% - 9% -------------------------------- 1,378.6 1,319.8 1,427.0 Above 9% ------------------------------- 2,933.8 2,823.0 3,064.8 Total $5,878.0 $5,685.7 $6,062.0
-20- Equities The equity securities portion of the investment portfolio produced a realized pre-tax gain of $156.7 million in 1993 as compared with $83.5 million in 1992. This continued strong performance reflects the success of LNC's two affiliates (Lynch & Mayer and Vantage Global Advisors, Inc). These advisors manage equity funds for Lincoln National. While the stock market, as measured by the S&P 500, had an investment return of 10.1% for the year, the combined return on assets managed by Lynch & Mayer and Vantage Global Advisors, Inc. was 14.6%. Total Return While many insurance companies invest to maximize current income, we follow a total return strategy that focuses the change in market value of our assets in addition to current income. This approach permits us to be more effective in our asset liability management efforts, since decisions can be made based upon the true economic value of assets and true economic costs of liabilities. Total return requires that we evaluate the risk and expected return of each asset. Mortgage Loans and Real Estate Mortgage loans on real estate represented 11.1% of the total investment portfolio as of December 31, 1993, while real estate owned represented 2.1%. In January 1994, LNC announced its intention to sell approximately $300 million in performing and non-performing mortgage loans and real estate holdings through a sealed bid process. If the transaction is consummated, the selling price is expected to approximate the carrying value. As of December 31, 1993, the underlying properties supporting the mortgage loans on real estate consisted of 29% in commercial office buildings, 27% in retail stores, 19% in apartments, 12% in industrial buildings, 3% in hotels/motels and 10% in other. In addition to the dispersion by type of property, the mortgage loan portfolio is distributed regionally throughout the United States. Mortgage loans on real estate are actively monitored to identify problem loans. LNC classifies mortgage loans as problem loans if they are non-accrual loans (i.e., principal and interest are 60 days past due), restructured loans (i.e., the terms of the original loan have been modified) or all other loans not in the first two categories that are considered impaired. LNC considers a mortgage loan impaired when, based on current information and events, it is probable that LNC will be unable to collect all amounts due according to the contractual terms of the loan agreement. In addition, LNC also classifies loans as potential problem loans when available information causes management to be concerned about the borrowers' ability to comply with the present loan terms, including the repayment of outstanding interest and principal. When LNC determines that a loan is impaired as defined above, a provision for loss is established for the difference between the carrying value of the mortgage loan and the estimated value. Estimated value is based on either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or the fair value of the collateral. Additional amounts were added to the mortgage loan provision for losses during 1993 due to the adoption of FAS 114 (see note 2 to the consolidated financial statements on page 38). When a mortgage loan becomes 60 days past due, all existing accruals for interest due are reversed and interest is recorded on a cash basis until the mortgage loan is brought current. The commercial mortgage loan market deteriorated throughout the nation in 1992 and 1993. Lincoln National, like many other insurers, did not escape an increase in impaired loans. We continued to strengthen our provision for losses throughout 1992 and 1993, increasing the reserve level and the ratio of reserves to impaired mortgages. Net impaired loans as of December 31, 1993, totaled $554.7 million, as compared with $421.7 million as of December 31, 1992. Net impaired loans were only 1.9% of total investments at December 31, 1993. -21- A summary of LNC's problem mortgage loans on real estate and supplemental information with respect to such loans is as follows: December 31 (in millions) 1993 1992 Problem Loans: Non-accrual loans -------------------------------- $276.3 $338.2 Restructured loans ------------------------------- 59.8 90.2 Other problem loans ------------------------------ 445.2 127.8 Total Problem Loans ------------------------ $781.3 $556.2 Potential problem loans -------------------------- $ 92.1 $ 69.3 Total problem loans as of December 31, 1993 and 1992 of $781,300,000 and $556,200,000, respectively, include $684,500,000 and $356,300,000, respectively, of impaired loans and, accordingly, a provision for losses of $226,600,000 and $134,500,000 for 1993 and 1992, respectively, have been provided for such loans. Year Ended December 31 (in millions) 1993 1992 Interest Income from Problem Loans: Amount that would have been recorded under original terms ------------------ $76.5 $54.6 Interest income recorded during the period ------- 52.3 33.8
LNC has a commitment to lend $132,000 on a restructured loan. No other future commitments have been made on non-accrual or restructured loans. Outlook Entering 1994, the market consensus was for slightly higher inflation than last year and moderate improvement in the economy. The current consensus view and market focus are on much stronger economic growth and increasing inflationary pressures. Much of this focus could be attributed to the unusually high fourth quarter Gross Domestic Product report and potential inflationary findings in the Purchasing Manager's Report. This has resulted in further declines in bond and stock prices. We are not as concerned with inflation versus the market at this time. While interest rates may be expected to continue to rise in the short term, we believe they are likely to fall in the second half of this year. We made a strong commitment to the international equity market last year and continue to pursue this strategy. The returns for both domestic fixed-income and equity instruments will not approach that of the decade of the 1980's but should result in real returns closer to historical averages. -22-
Review of Other Operations: Year Ended December 31 (in millions) 1993 1992 1991 1990 1989 Financial Results by Source Investment Management -------------- $ 9.7 $ 9.2 $ 4.6 $ 2.9 $ 1.9 LNC Financing ---------------------- (26.7) (33.8) (34.2) (37.2) (41.7) LNC Operations --------------------- (22.3) (18.2) (16.3) (19.5) (21.3) Other Corporate* ------------------- .4 (7.6) 9.5 5.5 (1.8) Corporate Equity Investments -- (36.6) (39.6) (43.1) (33.1) Income (Loss) from Operations (38.9) (87.0) (76.0) (91.4) (96.0) Realized Gain(Loss)on Investments**- 19.8 118.6 113.3 (64.9) 60.5 Gain(Loss)on Sale of Subsidiaries -- (98.5) -- (89.1) 27.7 -- Cumulative Effect of Accounting Change (Postretirement Benefits)*** (96.4) -- -- -- -- Net Income (Loss) ------------ $(214.0) $ 31.6 $(51.8) $(128.6) $(35.5) *Prior year data (1989-1992) has been restated for the adoption of FAS 109 (see note 2 to the consolidated financial statements on page 38). **Prior to 1993, all realized gain (loss) on investments was included in Other Operations (see note 8 to consolidated financial statements on page 51). ***This accounting change relates to the adoption of FAS 106 (see note 2 to the consolidated financial statements on page 38).
The income (loss) from operations shown above for "Other Operations" represents unallocated revenues and expenses including LNC's investment management companies, corporate investment income, interest expense on short- term and long-term borrowings, corporate overhead expenses and certain other operations that are not directly related to the four business segments. The Investment Management operations reported above include Lincoln National Investment Management Company, Lynch & Mayer and Vantage Global Advisors, Inc. These investment advisors provide investment advisory services and asset management services to LNC's annuity, pension and insurance customers as well as for LNC's corporate portfolios. In addition to managing these accounts, their services are provided to outside, institutional clients and high net worth individuals. Corporate interest expense included within the LNC financing line above was less for 1993 than 1992 due to the use of proceeds from a Common Stock offering (see note 9 to the consolidated financial statements on page 52) to pay down corporate debt. Net income shown above for "Other Operations" includes the items described above under income from operations plus the cumulative effect of the accounting change for the consolidated group of companies related to postretirement benefits, the gain (loss) on sale of subsidiaries (see note 10 to the consolidated financial statements on page 53) and certain realized gain (loss) on sale of investments. -23-
REVIEW OF CONSOLIDATED OPERATIONS AND FINANCIAL CONDITION Summary Information Increase (Decrease) Year Ended December 31 (in millions) 1993 1992 1991 1993 1992 Insurance premiums: Property-casualty ------------ $1,841.4 $2,083.0 $2,242.0 (12%) (7%) Health ----------------------- 1,927.0 1,857.7 3,106.3 4% (40%) Life and annuity ------------- 1,588.4 1,358.2 1,381.8 17% (2%) Insurance fees ----------------- 470.4 409.5 357.5 15% 15% Net investment income ---------- 2,146.5 1,987.3 1,799.3 8% 10% Realized gain on investments --- 268.4 176.9 163.1 52% 8% Loss on sale of subsidiaries --- (98.5) -- (135.0) Other revenue ------------------ 146.1 161.5 254.0 (10%) (36%) Insurance benefits and expenses: Property-casualty ------------- 1,406.8 1,717.6 1,844.9 (18%) (7%) Health ------------------------ 1,478.6 1,428.6 2,396.5 4% (40%) Life and annuity -------------- 2,742.9 2,554.2 2,645.4 7% (3%) Expenses: Operating expenses ------------ 2,029.3 1,855.2 2,012.2 9% (8%) Interest ---------------------- 44.3 53.8 71.2 (18%) (24%) Federal income taxes (credits)* - 172.5 65.5 (3.1) *Prior year data (1992-1991) has been restated for the adoption of FAS 109 (see note 2 to the consolidated financial statements on page 38).
REVIEW OF CONSOLIDATED OPERATIONS Consolidated operations are reviewed below except for Net Investment Income and Realized Gain on Investments which are reviewed in the preceding Discussion and Analysis of Investments section. Revenue and expenses associated with the portion of the Employee Life-Health Benefits segment which was sold have been excluded from the 1993 and 1992 operating results as the estimated cost of the run-off of such operations was included in the loss on sale of subsidiaries recorded in the fourth quarter of 1991. Insurance Premiums Property-casualty premiums decreased 12% in 1993 and 7% in 1992. The decrease in 1993 and 1992 is primarily the result of implementing a more stringent underwriting policy to improve loss experience. The volume of premium that this segment will produce in 1994 is dependent upon whether the pricing within the property-casualty insurance market place allows price increases that are necessary to maintain and improve profitability. Health premiums increased $69.3 million or 4% in 1993 as the result of increased volumes of business and rate increases implemented over the past year. Health premiums decreased $1.2 billion in 1992. Excluding the 1991 impact of the portion of the Employee Life-Health Benefits segment which was sold in 1992, health premiums decreased $22.2 million or 1%. This decrease was due to premium rate increases on business retained being more than offset by lower volumes of business. The premium rate increases and the lower volume resulted from holding healthcare trend factors at a high level for new and renewal business quotes. If LNC consummates the sale of its primary direct writer of health coverages (see note 10 to the consolidated financial statements on page 53) health premiums will be approximately 50% lower in 1994. -24- Life and annuity premiums increased 17% in 1993. This increase resulted from increases in the volume of transactions by the Life Insurance and Annuities and Life-Health Reinsurance segments. Life and annuity premiums decreased 2% in 1992. Excluding the 1991 impact of the portion of the Employee Life-Health Benefits segment which was sold in 1992, life and annuity premiums increased 4% primarily as the result of an increase in the volume of transactions in the Life-Health Reinsurance segment. Barring the passage of unfavorable tax legislation that would eliminate the tax-advantages for some of LNC's life and annuity products, LNC expects life and annuity premium growth in 1994 similar to the growth for 1993. Insurance Fees Insurance fees from universal life and other interest-sensitive life insurance contracts increased 15% in 1993 and 1992. The growth in fees from this business is expected to continue in 1994. Loss on Sale of Subsidiaries In December 1993, LNC recorded a provision for loss on the sale of its Security-Connecticut subsidiary (see note 10 to the consolidated financial statements on page 56). In December 1991, LNC recorded a loss on the anticipated sale of a portion of the Employee Life-Health Benefits segment (see note 10 to the consolidated financial statements on page 53). Other Revenue Other revenue decreased 10% in 1993 as a result of a decrease in the Property- Casualty segment due to the sale of an agency company that specialized in the sports and entertainment market. Excluding the 1991 impact of a portion of the Employee Life-Health Benefits segment which was sold in 1992, other revenue increased 20% in 1992. This increase is the result of increased revenues from fees in the Life Insurance and Annuities segment. Insurance Benefits and Expenses Property-casualty benefits decreased by 18% compared with 1992. This decrease was the result of reduced volumes of insurance as indicated by the reduction in insurance premiums and a decrease in weather-related claims. Property- casualty benefits decreased by 7% as compared with 1991. This decrease was the net result of reduced volumes of insurance in-force and an increase in weather-related claims. The 1991-1993 period had above average catastrophe and storm losses. Assuming an average catastrophe and storm loss year in 1994, the property-casualty benefits will likely parallel the change in property-casualty premiums. Health benefits increased 4% in 1993 compared to 1992. This increase was the result of higher volumes of business and the impact of a change in estimate of the reserve level needed for the Life-Health Reinsurance segments disability income business (see note 2 to the consolidated financial statements on page 42) being partially offset by moderating claims in the Employee Life-Health Benefits segment. Health benefits, excluding the 1991 impact of the portion of the Employee Life-Health Benefits segment which was sold in 1992, were $12.6 million or 7% more in 1992 than in 1991. This is the net result of lower volumes of business and inflation in the cost of providing health care in the Life-Health Reinsurance and Employee Life-Health Benefits segments. As noted within the insurance premium section, if LNC consummates the partial sale of its primary direct writer of health coverages (see note 10 to the consolidated financial statements on page 53) the volume of health business will decrease by about 50% in 1994. Health benefits are also expected to decrease by approximately 50%. -25- Life and annuity benefits and settlement expenses increased 7% in 1993 compared to 1992. This increase was the result of increased volumes of business in the Life Insurance and Annuities and Life-Health Reinsurance segments. Life and Annuity benefits and settlement expenses, excluding the 1991 impact of the portion of the Employee Life-Health Benefits segment which was sold in 1992, increased by 9%, primarily as a result of increased business in 1992 in the Life-Health Reinsurance segment and more favorable mortality than in 1991. The increase in life and annuity benefits expense in 1994 is expected to parallel the growth in life and annuity premiums. Expenses Underwriting, Acquisition, Insurance and Other expenses increased 9% in 1993 compared to 1992. This increase was the result of inflation, higher volumes of insurance and higher costs for postretirement benefits. Excluding the 1991 impact of the portion of the Employee Life-Health Benefits segment which was sold in 1992, underwriting, acquisition, insurance and other expenses increased $232.9 million or 14% in 1992. This increase was the result of inflation and an increase in the volume of insurance except in the Property-Casualty segment. In 1994, LNC's segments will continue to adjust staff levels as appropriate to match business volumes. Interest expense decreased $9.5 million or 18% in 1993 compared to 1992 as a result of decreases in the average debt outstanding. The average debt was lower due to the use of the proceeds of the February 1993 Common Stock offering to pay down debt (see note 9 to the consolidated financial statements on page 52). Interest expense decreased $17.4 million in 1992 as the result of decreases in the average debt outstanding, decreases in short-term interest rates and changes in the composition of debt outstanding. The average debt level for 1994 is expected to be lower than 1993 due to cash available at the holding company from subsidiary dividends being used to reduce debt outstanding. In addition, the 8% notes due in 1997 were called in March 1994. Federal Income Taxes (Credits) Federal income taxes increased $107.0 million in 1993 compared to 1992. This increase is primarily the result of increased pre-tax earnings and the lack of any tax benefit on the loss on sale of subsidiary (due to federal income tax regulations) being partially offset by an increase in tax-exempt investment income. The increase in the prevailing Corporate federal income tax rate from 34% to 35% during 1993 increased 1993 current taxes by approximately $5 million. However, this increase was offset by a one-time increase to LNC's deferred tax recoverable (see note 4 to the consolidated financial statements on page 42). As restated for the effect of FAS 109 (see note 2 to the consolidated financial statements on page 38), federal income taxes increased from the tax credit of $3.1 million in 1991 to a tax charge of $65.5 million in 1992. This increase resulted primarily from an increase in pre-tax earnings. Summary Net income for 1993 was $318.9 million compared with $359.2 million in 1992. The 1992 amount has been restated for the effect of FAS 109 (see note 2 to the consolidated financial statements on page 38). Excluding realized gain on investments, loss on sale of subsidiary and the cumulative effect of implementing FAS 106, all net of tax, LNC earned $343.5 million for 1993 compared to $240.6 million in 1992. All the business segments except for Life-Health Reinsurance contributed to this increase. Net income for 1993 includes two changes in estimates which essentially offset each other (see note 2 to the consolidated financial statements on pages 39). As restated, net income for 1992 was $359.2 million compared with $201.9 million in 1991. Excluding net realized gains on investments net of taxes and the 1991 impact of the $89.1 million after-tax ($135.0 million pre-tax) loss on sale of subsidiaries, LNC earned $240.6 million in 1992 compared to $177.7 million in 1991. All the business segments contributed to this increase. -26- REVIEW OF CONSOLIDATED FINANCIAL CONDITION Consolidated financial condition is reviewed below except for Investments which are reviewed in the preceding Discussion and Analysis of Investments section. Cash and Invested Cash Cash and invested cash decreased by $306.2 million in 1993 as the result of moving invested cash to longer term investments. Variable Life and Annuity and Segregated Pension Funds This asset account as well as the corresponding liability account increased by $4.1 billion, reflecting a continued increase in funds under management. Federal Income Taxes Federal Income Taxes increased $261.3 million in 1993 and on a restated basis (see note 2 to the consolidated financial statements on page 38) increased $149.3 million in 1992. These increases resulted from the net effect of increases in discounting of insurance reserves, deferred acquisition costs and investment reserve additions; and in 1993 due to the effect of implementing FAS 115 (see note 2 to the consolidated financial statements on page 39). Amount Recoverable from Reinsurers This balance sheet account was added in 1993 as the result of the adoption of FAS 113 (see note 2 to the consolidated financial statements on page 38). These amounts were previously netted against policy liabilities and accruals. Other Assets The decrease in other assets relates to a decrease in expected proceeds from sales of security investments in the last few days of 1993 versus a higher volume of such transactions late in 1992. Total Liabilities Total liabilities increased by $7.6 billion in 1993. This increase reflects 1)an increase in business activity as evidenced by an increase of $2.1 billion in contractholder funds, an increase of $4.1 billion in the liability for variable life and annuity and segregated pension funds and an increase in the policy liabilities and accruals of $1.4 billion; 2)a decrease in debt of $169.9 million; and 3)an increase in all other liabilities of $.2 million. The increase in the policy liabilities and accruals includes $900 million related to the adoption of FAS 113 (see note 2 to the consolidated financial statements on page 38). Policy liabilities for both December 31, 1993 and December 31, 1992 included a liability for environmental losses of approximately $204.0 million. The increase in other liabilities relates to an increase in the expected payouts for security investments purchased in the last few days of 1993 versus a lower volume of such transactions late in 1992. Shareholders' Equity The increase in Shareholders' Equity of $1.2 billion compared to the restated December 31, 1992 balance (see note 2 to the consolidated financial statements on page 38), was the result of increases of $316.1 million from the public stock offering (see note 9 to the consolidated financial statements on page 52), $318.9 million of net income, $26.2 million from the issuance of Common Stock related to benefit plans and $768.4 million related to the cumulative effect of accounting change for debt and equity securities (see note 2 to the consolidated financial statements on page 39) being partially offset by $162.8 million in dividends to stockholders, $16.5 million related to the change in net unrealized gain (loss) on trading and equity securities and a $4.8 million reduction in the accumulated foreign exchange gain. -27- Capital adequacy is a primary measurement used by insurance regulators to determine the financial stability of an insurance company. New risk-based capital guidelines developed by the National Association of Insurance Commissioners became effective in 1993 for life insurance companies. The risk-based capital formula is designed to analytically determine,based on the level of insurance and investment risks of individual companies,the amount of capital that represents minimum acceptable operating amounts related to these risks. Regulatory action is triggered when an insurer's statutory-basis capital falls below the formula-produced capital level. Similar guidelines for property-casualty insurance companies were adopted for 1994. At December 31, 1993, statutory-basis capital for each of LNC's life and property casualty insurance subsidiaries was substantially in excess of regulatory action levels of risk-based capital (using the 1994 formula for property-casualty). LIQUIDITY AND CASH FLOW In the insurance industry, liquidity generally refers to the ability of an enterprise to generate adequate amounts of cash from its normal operations, including activities in its investment portfolio, to meet its financial commitments. LNC manages its operations, including prudent investment portfolio structuring, to provide for appropriate liquidity levels. The portfolio structuring involves segregating LNC's investments by segment, sub-segment or type of product. The investments selected for each segregated portfolio are based on LNC's desire to match the characteristics (e.g. duration and yield) of the underlying liabilities. The Consolidated Statements of Cash Flows on page 38 indicate that operating activities provided cash of $1.0 billion, $870 million and $1.3 billion in 1993, 1992 and 1991, respectively. This statement also classifies the other sources and uses of cash by investing activities and financing activities and discloses the amount of cash available at the end of the year to meet LNC's obligations. Although LNC generates adequate cash flow to meet the needs of its normal operations, periodically LNC may issue debt or equity securities to fund internal expansion, acquisitions, investment opportunities and the retirement of LNC's debt and equity. Additional cash funds are available from LNC's revolving credit agreements which provides for borrowing up to $550 million (see note 5 to the consolidated financial statements on page 45). Transactions such as those described in the preceding paragraph that occurred during 1993 included a public stock offering which netted $316.1 million after expenses (see note 9 to the consolidated financial statements on page 52). The proceeds from this offering were used to paydown short-term debt pending application for general corporate purposes, which may include further investment in existing insurance businesses or to finance acquisitions. In March 1994, LNC redeemed its $100 million of 8% notes payable due in 1997. The redemption was funded with additional short-term debt. In order to maximize the use of available cash, the holding company (Lincoln National Corporation) maintains a facility where subsidiaries can borrow from the holding company to meet their short-term needs and can invest their short-term funds with the holding company. Depending on the overall cash availability or need, the holding company invests excess cash in short-term investments or borrows funds in the external financial markets. In addition to facilitating the management of cash, the holding company receives dividends from its subsidiaries, invests in operating companies, maintains an investment portfolio and pays shareholder dividends and certain corporate expenses. -28-
Holding Company Cash Flow Year Ended December 31 (in millions) 1993 1992 1991 Dividends from subsidiaries: Lincoln National Life -------------------------- $ 12.0 $ -- $ 15.0 American States Insurance ---------------------- 60.0 64.0 -- Other ------------------------------------------ 4.0 12.3 18.5 Net investment income ---------------------------- 4.3 8.0 7.8 Operating expenses ------------------------------- (19.5) (34.9) (30.9) Interest ----------------------------------------- (39.0) (43.2) (62.9) Net sales (purchases) of investments ------------- 31.6 86.5 (5.4) Increase (decrease) in cash collateral on loaned securities ------------------------------ 9.5 (31.7) 54.8 Sale of subsidiaries ----------------------------- -- 145.3 -- Pre-closing dividend from subsidiaries sold ------ -- 40.9 -- Additional investment in existing subsidiaries --- (105.8) (103.1) (154.6) Net increase (decrease) in debt ------------------ (207.2) (59.1) 195.8 Decrease (increase) in receivables from subsidiaries ----------------------------------- (14.2) 40.7 (9.8) Increase (decrease) in loans from subsidiaries --- (127.6) 113.4 (108.8) Decrease (increase) in loans to subsidiaries ----- 34.7 50.1 (64.1) Federal income taxes paid ------------------------ (270.0) (171.1) (108.8) Net tax receipts from subsidiaries --------------- 319.8 204.9 119.0 Dividends paid to shareholders ------------------- (156.2) (139.2) (126.0) Issuance of Series F Preferred Stock ------------- -- -- 158.7 Public offering of Common Stock ------------------ 316.1 -- -- Other -------------------------------------------- (2.8) (24.2) 6.7 Cash and invested cash - December 31 ------------- $ 271.7 $ 422.0 $ 262.4 Other investments - December 31 ------------------ 43.9 58.4 72.0 Debt - December 31 ------------------------------- 939.8 1,274.6 1,220.2
The table above shows the cash flow activity for the holding company from 1991 through 1993. The line, "net tax receipts from subsidiaries", recognizes that the holding company receives tax payments from subsidiaries, pays the consolidated tax liability and reimburses subsidiaries for the tax effect of any taxable operating or capital loss. LNC's insurance subsidiaries are subject to assessments by state guaranty funds to cover losses to policyholders of insolvent or rehabilitated companies (see note 7 to the consolidated financial statements on page 51). LNC believes that it is unlikely that any such payments required to be made in 1994 could have a material negative effect on LNC's liquidity and cash flows. As of December 31, 1993, $2.3 billion of consolidated shareholders' equity represents net assets of the consolidated insurance subsidiaries that is limited as to transfer in the form of dividends, loans or advances to the holding company (see note 7 to the consolidated financial statements on page 48). However, this restriction poses no short-term liquidity concerns for the holding company. The financial strength and stability of the subsidiaries permit ready access to short-term or long-term credit sources for the holding company. Effect of Inflation As indicated earlier in this review of consolidated operations, inflation affects LNC's revenues and expenses. LNC's insurance affiliates, as well as other companies in the insurance industry, attempt to minimize the effect of inflation by anticipating inflationary trends in the pricing of their products. Inflation does not have a significant effect on LNC's balance sheet due to the minimal amount of dollars invested in property, plant and equipment and the absence of inventories. -29- Item 8. Financial Statements and Supplementary Data
Operating Results by Quarter (in millions, except per share) 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1993 Data Premiums and other considerations --- $1,417.8 $1,332.4 $1,644.0 $1,579.1 Net investment income --------------- 511.8 523.6 521.6 589.5 Realized gain on investments -------- 9.4 45.9 161.8 51.3 Loss on sale of subsidiary ---------- -- -- -- (98.5) Income before cumulative effect of accounting change -------------- 69.0 127.2 187.5 31.6 Net income (loss) ------------------- (27.4) 127.2 187.5 31.6 Income before cumulative effect of accounting change per share ------- $.69 $1.23 $1.82 $.31 Net income (loss) per share --------- (.28) 1.23 1.82 .31 1992 Data Premiums and other considerations --- $1,392.8 $1,431.0 $1,537.1 $1,509.0 Net investment income --------------- 472.7 483.8 513.0 517.8 Realized gain on investments -------- 59.4 28.7 87.4 1.4 Net income -------------------------- 100.4 68.9 113.7 76.2 Net income per share ---------------- $1.08 $.74 $1.22 $.82
Applicable 1992 data has been restated for the adoption of FAS 109 (see note 2 to the consolidated financial statements on page 38) and the 1993 two-for-one split of LNC's Common Stock (see note 9 to the consolidated financial statements on page 52). Operating results in the first quarter of 1993 were affected by the adoption of FAS 106 and FAS 114 (see note 2 to the consolidated financial statements on page 38) and in the fourth quarter of 1993 by a provision for the loss on sale of Security-Connecticut Corporation which was completed in February 1994 (see note 10 to the consolidated financial statements on page 53). Income before cumulative effect of accounting change and net income for the fourth quarter of 1993 include two changes in estimate which essentially offset each other (see note 2 to the consolidated financial statements on page 39). Per share amounts were affected by the February 1993 issuance of 9,200,000 shares of Common Stock (see note 9 to the consolidated financial statements on page 52). Consolidated Financial Statements The consolidated financial statements of Lincoln National Corporation and Subsidiaries follow on pages 30 through 54. -30-
LINCOLN NATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS December 31 (000'S omitted) 1993 1992 (Restated) ASSETS Investments: Securities available-for-sale, at fair value: Fixed maturity (cost: 1993-$22,219,285; 1992-$1,951,277) ------------------------- $23,964,335 $ 1,978,845 Equity (cost: 1993-$896,477; 1992 $706,939) -------------------------------- 1,080,301 923,419 Fixed maturity securities held for investment, at amortized cost (fair value: 1992-$19,482,614) ------------- -- 18,352,318 Mortgage loans on real estate ---------------- 3,300,951 3,135,075 Real estate ---------------------------------- 633,103 400,687 Policy loans --------------------------------- 595,085 563,532 Other investments ---------------------------- 158,170 171,037 Total Investments ---------------------- 29,731,945 25,524,913 Cash and invested cash ------------------------- 709,664 1,015,850 Property and equipment ------------------------- 233,467 192,744 Deferred acquisition costs --------------------- 2,011,131 2,117,896 Premiums and fees receivable ------------------- 601,883 791,582 Accrued investment income ---------------------- 413,144 436,286 Variable life and annuity and segregated pension funds ----------------- 12,430,577 8,368,108 Federal income taxes --------------------------- -- 110,324 Amounts recoverable from reinsurers ------------ 1,460,038 -- Goodwill --------------------------------------- 228,530 261,894 Other assets ----------------------------------- 559,982 727,698 Total Assets --------------------------- $48,380,361 $39,547,295 See notes to consolidated financial statements on pages 36 - 53.
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LINCOLN NATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS -CONTINUED- December 31 (000's omitted) 1993 1992 (Restated) LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Policy liabilities and accruals: Future policy benefits and losses, claims and loss expenses ---------- $12,652,036 $11,124,560 Unearned premiums --------------------------- 858,805 980,497 Total Policy Liabilities and Accruals ------------------------- 13,510,841 12,105,057 Contractholder funds -------------------------- 14,872,141 12,849,280 Variable life and annuity and segregated pension funds ---------------- 12,430,577 8,368,108 Federal income taxes -------------------------- 150,951 -- Short-term debt ------------------------------- 351,418 433,407 Long-term debt -------------------------------- 335,097 423,034 Other liabilities ----------------------------- 2,657,015 2,541,538 Total Liabilities ---------------------- 44,308,040 36,720,424 Shareholders' Equity: Series A Preferred Stock (1993 liquidation value - $3,783) ----------- 1,553 1,896 Series E Preferred Stock (1993 liquidation value - $151,569) --------- 151,206 151,206 Series F Preferred Stock (1993 liquidation value - $158,707) --------- 158,707 158,707 Common Stock ---------------------------------- 543,659 200,986 Earned surplus -------------------------------- 2,303,731 2,147,691 Foreign currency translation adjustment ------- (1,214) 3,643 Net unrealized gain on securities available-for-sale --------------- 914,679 162,742 Total Shareholders' Equity ------------- 4,072,321 2,826,871 Total Liabilities and and Shareholders' Equity ------------- $48,380,361 $39,547,295 See notes to consolidated financial statements on pages 36 - 53.
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LINCOLN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31 (000's omitted) 1993 1992 1991 (Restated) (Restated) Revenue: Insurance premiums ------------------ $5,356,797 $5,298,892 $6,730,157 Insurance fees ---------------------- 470,395 409,474 357,485 Net investment income --------------- 2,146,519 1,987,296 1,799,348 Realized gain on investments -------- 268,422 176,948 163,119 Loss on sale of subsidiaries -------- (98,500) -- (135,000) Other ------------------------------- 146,124 161,493 253,938 Total Revenue ------------------- 8,289,757 8,034,103 9,169,047 Benefits and Expenses: Benefits and settlement expenses ---- 5,628,279 5,700,443 6,886,818 Underwriting, acquisition, insurance and other expenses ------ 2,029,348 1,855,167 2,012,257 Interest expense -------------------- 44,301 53,794 71,202 Total Benefits and Expenses ----- 7,701,928 7,609,404 8,970,277 Income before Federal Income Taxes and Cumulative Effect of Accounting Change ---------- 587,829 424,699 198,770 Federal income taxes (credits) -------- 172,546 65,528 (3,190) Income before Cumulative Effect of Accounting Change ---------- 415,283 359,171 201,960 Cumulative effect of accounting change (postretirement benefits) ---- (96,431) -- -- Net Income ---------------------- $ 318,852 $ 359,171 $ 201,960 Earnings Per Share: Income before cumulative effect of accounting change --------- $4.06 $3.86 $2.23 Cumulative effect of accounting change (postretirement benefits) ---- (.94) -- -- Net Income ---------------------- $3.12 $3.86 $2.23 See notes to consolidated financial statements on pages 36 - 53.
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LINCOLN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Year Ended December 31 (000's omitted) 1993 1992 1991 (Restated) (Restated) Preferred Stock: Series A Preferred Stock: Balance at beginning of year ---------- $ 1,896 $ 2,208 $ 2,490 Conversion into Common Stock ---------- (343) (312) (282) Balance at End of Year ------------- 1,553 1,896 2,208 Series E Preferred Stock: Balance at beginning and end of year --------------------- 151,206 151,206 151,206 Series F Preferred Stock: Balance at beginning of year ---------- 158,707 158,707 -- Issuance of shares -------------------- -- -- 158,707 Balance at End of Year ------------- 158,707 158,707 158,707 Common Stock: Balance at beginning of year ------------ 200,986 179,656 177,306 Conversion of series A Preferred Stock -- 343 312 282 Public offering of Common Stock --------- 316,100 -- -- Issued for benefit plans ---------------- 26,930 22,095 2,571 Shares forfeited under benefit plans ---- (700) (1,077) (503) Balance at End of Year ------------- 543,659 200,986 179,656 Earned Surplus: Balance at beginning of year as previously reported ---------------- 2,272,055 2,049,937 1,969,645 Retroactive adjustment for the new method of accounting for income taxes -------------------------- (124,364) (120,674) (114,226) Balance at Beginning of Year, as Restated ---------------- 2,147,691 1,929,263 1,855,419 Net income ------------------------------ 318,852 359,171 201,960 Dividends declared: Series A Preferred Stock -------------- (146) (181) (211) Series E Preferred Stock -------------- (8,336) (8,336) (8,336) Series F Preferred Stock -------------- (8,729) (8,729) (4,486) Common Stock -------------------------- (145,601) (123,497) (115,083) Balance at End of Year ------------- 2,303,731 2,147,691 1,929,263 Foreign Currency Translation Adjustment: Accumulated adjustment at beginning of year --------------------- 3,643 24,710 26,660 Change during the year ------------------ (4,857) (21,067) (1,950) Balance at End of Year ------------- (1,214) 3,643 24,710 Net Unrealized Gain (Loss) on Securities Available-for-sale: Balance at beginning of year ------------ 162,742 210,082 66,346 Cumulative effect of accounting change -- 768,419 -- -- Other change during the year ------------ (16,482) (47,340) 143,736 Balance at End of Year ------------- 914,679 162,742 210,082 Total Shareholders' Equity at End of Year ------------------- $4,072,321 $2,826,871 $2,655,832 See notes to consolidated financial statements on pages 36 - 53.
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LINCOLN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - continued Year Ended December 31 (Number of Shares) 1993 1992 1991 Preferred Stock: (10,000,000 shares authorized) Series A Preferred Stock: Balance at beginning of year -------- 57,716 67,208 75,801 Conversion into Common Stock -------- (10,427) (9,492) (8,593) Balance Issued and Outstanding at End of Year ------------------ 47,289 57,716 67,208 Series E Preferred Stock: Balance issued and outstanding at beginning and end of year ------- 2,201,443 2,201,443 2,201,443 Series F Preferred Stock: Balance at beginning of year -------- 2,216,454 2,216,454 -- Issuance of shares ------------------ -- -- 2,216,454 Balance Issued and Outstanding at End of Year ------------------ 2,216,454 2,216,454 2,216,454 Common Stock: (400,000,000 shares authorized) Balance at beginning of year ---------- 84,142,458 83,174,370 82,991,938 Conversion of series A Preferred Stock- 83,416 75,936 68,744 Public offering of Common Stock ------- 9,200,000 -- -- Issued for benefit plans -------------- 786,192 896,350 129,736 Shares forfeited under benefit plans -- (28,876) (4,198) (16,048) Balance Issued and Outstanding at End of Year ------------------ 94,183,190 84,142,458 83,174,370 Common Stock (assuming conversion of Series A, E and F Preferred Stock): End of Year ---------------------- 103,397,296 93,439,980 92,547,828 Average for the Year ------------- 102,307,356 92,977,312 90,658,726 Dividends Per Share: Series A Preferred Stock -------------- $ 3.00 $ 3.00 $ 3.00 Series E Preferred Stock -------------- 3.79 3.79 3.79 Series F Preferred Stock -------------- 3.94 3.94 2.02 Common Stock -------------------------- 1.550 1.475 1.385 See notes to consolidated financial statements on pages 36 - 53.
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LINCOLN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 (000's omitted) 1993 1992 1991 (Restated) (Restated) Cash Flows from Operating Activities: Net income ----------------------------- $ 318,852 $ 359,171 $ 201,960 Adjustments to reconcile net income to net cash provided by operating activities: Deferred acquisition costs --------- (203,661) (146,010) (378,118) Premiums and fees receivable ------- 189,699 134,033 82,391 Accrued investment income ---------- 23,141 (5,734) (79,622) Policy liabilities and accruals ---- 361,397 256,237 909,927 Contractholder funds --------------- 1,177,229 636,088 688,916 Amounts recoverable from reinsurers- (710,038) -- -- Federal income taxes --------------- (96,469) (128,074) (148,901) Provisions for depreciation -------- 58,893 60,142 60,944 Realized gain on investments ------- (292,153) (176,948) (163,119) Loss on sale of subsidiaries ------- 98,500 -- 135,000 Cumulative effect of accounting change --------------------------- 96,431 -- -- Other ------------------------------ (8,725) (118,406) 40,124 Net Adjustments ------------------ 694,244 511,328 1,147,542 Net Cash Provided by Operating Activities ----------- 1,013,096 870,499 1,349,502 Cash Flows from Investing Activities: Securities available-for-sale: Purchases ---------------------------- (9,158,159) (8,553,010) (803,882) Sales -------------------------------- 8,834,823 8,472,278 736,549 Maturities --------------------------- 45,937 17,645 -- Fixed maturity securities held for investment: Purchases ---------------------------- (6,626,937) (7,773,996)(14,826,510) Sales -------------------------------- 3,205,203 4,245,048 10,709,786 Maturities --------------------------- 1,858,044 1,446,902 732,106 Purchase of other investments ---------- (1,362,579) (1,181,106) (773,634) Sale or maturity of other investments -- 733,585 916,652 744,806 Sale of subsidiaries ------------------- -- 145,270 -- Increase in cash collateral on loaned securities -------------------- 30,906 275,614 59,894 Other ---------------------------------- 145,343 (159,964) 72,248 Net Cash Used in Investing Activities- (2,293,834) (2,148,667) (3,348,637) Cash Flows from Financing Activities: Principal payments on long-term debt --- (2,805) (32,855) (11,283) Issuance of long-term debt ------------- 14,819 204,042 375 Net increase (decrease) in short-term debt ---------------------- (181,989) (243,899) 190,922 Universal life and investment contract deposits -------------------- 2,467,540 3,162,277 2,658,161 Universal life and investment contract withdrawals ----------------- (1,509,108) (1,218,461) (1,124,020) Public offering of Common Stock -------- 316,100 -- -- Issuance of Series F Preferred Stock --- -- -- 158,707 Common Stock issued for benefit plans -- 26,230 21,018 2,068 Dividends paid to shareholders --------- (156,235) (139,151) (125,956) Net Cash Provided by Financing Activities ------------------------- 974,552 1,752,971 1,748,974 Net Increase (Decrease) in Cash ------ (306,186) 474,803 (250,161) Cash at Beginning of Year -------------- 1,015,850 541,047 791,208 Cash at End of Year ------------------ $ 709,664 $1,015,850 $ 541,047 See notes to consolidated financial statements on pages 36 - 53.
-36- LINCOLN NATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Basis of Presentation. The accompanying consolidated financial statements of Lincoln National Corporation ("LNC") and its majority owned subsidiaries have been prepared in conformity with generally accepted accounting principles. Investments. As of December 31, 1993, fixed maturity securities are classified based on management's current intent as available-for-sale and, accordingly, are carried at fair value (see note 2 on page 42). The cost of fixed maturity securities are adjusted for amortization of premiums and discounts. Equity securities (common and non-redeemable preferred stocks) are carried at fair value. Securities designated as fixed maturity-trading account and equity as of December 31, 1992, have been reclassified for the 1993 balance sheet as securities available-for-sale since their accounting treatment is the same as the securities designated as such as of December 31, 1993. Prior to December 31, 1993, LNC classified fixed maturity securities in accordance with existing accounting standards and, accordingly, selected those fixed maturity securities that were not intended to be held to maturity and designated them as a trading account. These securities were carried at fair value. Other fixed maturity securities were carried at cost, adjusted for amortization of premium or discount, since LNC had both the ability and intent to hold such securities until maturity. For the mortgage-backed bond portion of the fixed maturity securities portfolio, LNC recognizes income using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The net investment in the securities is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the securities. This adjustment is reflected in net investment income. Mortgage loans on real estate are carried at the outstanding principal balances less unaccrued discounts. Investment real estate and property and equipment owned for company use are carried at cost less allowances for depreciation. Policy loans are carried at the aggregate unpaid balances. All such investments are carried net of reserves for declines in value that are other than temporary. The change in these reserves is reported as realized gain (loss) on investments. Cash and invested cash are carried at cost and include all highly liquid debt instruments purchased with a maturity of three months or less and carrying value approximates fair value. Realized gain (loss) on investments are recognized in net income, net of related amortization of deferred acquisition costs, using the specific identification method. Changes in the fair values of securities carried at fair value are reflected directly in shareholders' equity after deductions for related adjustments for deferred acquisition costs and amounts required to satisfy policyholder commitments that would have been recorded if these securities would have sold at their fair value and after deferred tax effects. Premiums and Fees. Property-casualty and group health gross premiums are prorated over the contract term of the policies. Revenue for universal life and other interest-sensitive life insurance policies consist of policy charges for the cost of insurance, policy initiation and administration, and surrender charges that have been assessed. Traditional individual life-health and annuity premiums are recognized as revenue over the premium-paying period of the policies. -37- Deferred Acquisition Costs. Commissions and other costs of acquiring property-casualty insurance, group health insurance, universal life and other interest-sensitive life insurance, and traditional life insurance and annuities, which vary with and are primarily related to the production of new business, have been deferred. Deferred acquisition costs for property- casualty policies are amortized over the contract term of the policies; property-casualty acquisition costs that are not recoverable from future premiums and related investment income are expensed. Acquisition costs for universal life and other interest-sensitive life insurance policies are being amortized over the lives of the policies in relation to the incidence of estimated gross profits from surrender charges and investment, mortality, and expense margins, and actual realized gain (loss) on investments. The traditional life-health and annuity acquisition costs are being amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policy reserves. Expenses. Expenses for universal life and other interest-sensitive life insurance policies include interest credited to policy account balances and benefit claims incurred during the period in excess of policy account balances. Interest crediting rates for these products during 1991 through 1993 ranged from 6.25% to 9.10%. Intangible Assets. The present value of acquired insurance in-force, which is classified with other assets on the balance sheet, is amortized over the premium recognition period of the policies acquired. The costs of acquired subsidiaries in excess of the fair value of net assets (goodwill) are amortized using the straight-line method over a 20 to 40 year period. Policy Liabilities and Accruals. The liability for unpaid property-casualty claims is based on estimates of payments to be made for individual claims reported and unreported losses, reduced by estimated recoveries from salvage and subrogation. These estimates are continually reviewed and, as experience develops and new information becomes known, the liability is adjusted as necessary; such adjustments are included in current operations. The liabilities for future policy benefits and expenses for universal life and other interest-sensitive life insurance policies consist of policy account balances that accrue to the benefit of the policyholders, excluding surrender charges. The liabilities for future policy benefits and expenses for traditional life-health policies and annuities are computed using a net level premium method and assumptions for investment yields, mortality, morbidity, and withdrawals based principally on company experience projected at the time of policy issue, with provision for possible adverse deviations. Interest assumptions range from a 2.25% level to a 14.5% level graded to 5.7% after 30 years depending on time of policy issue. Depreciation. Provisions for depreciation of investment real estate and property and equipment owned for company use are computed principally on the straight-line method over the estimated useful lives of the assets. Postretirement Medical and Life Insurance Benefits. Effective January 1, 1993, LNC changed its method of accounting for its postretirement medical and life insurance benefits to the full accrual method (see note 2 on page 38). Prior to January 1, 1993, LNC accounted for such benefits on a pay-as-you-go method. Foreign Exchange. LNC's foreign subsidiaries' balance sheet accounts and income statement items are translated at the current exchange and average exchange rates for the year, respectively. Resulting translation adjustments are reported as a component of shareholders' equity. Other translation adjustments for foreign currency transactions that affect cash flows are reported in earnings. -38- 2. Changes in Accounting Principles and Changes in Estimates Postretirement Benefits Other than Pensions. Effective January 1, 1993, LNC changed its method of accounting for postretirement medical and life insurance benefits for its eligible employees and agents from a pay-as-you-go method to a full accrual method in accordance with the Financial Accounting Standards Board statement entitled "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106"). This full accrual method recognizes the estimated obligation for retired employees and agents and active employees and agents that are expected to retire in the future. The effect of the change for 1993 was to increase net periodic postretirement benefit cost by $9,200,000 and decrease income before cumulative effect of accounting change by $6,000,000 ($.06 per share). The implementation of FAS 106 resulted in a one-time charge to first quarter 1993 net income of $96,400,000 ($146,100,000 pre-tax) or $.94 per share for the cumulative effect of the accounting change. Prior year data has not been restated for the accounting change. See note 6 on page 47 for further postretirement benefits other than pensions disclosures. Accounting for Income Taxes. Effective January 1, 1993, LNC changed its method of accounting for income taxes in accordance with the Financial Accounting Standards Board statement entitled "Accounting for Income Taxes" ("FAS 109"). Under FAS 109, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws. Prior to the adoption of FAS 109, income tax expense was determined using the deferred method. Deferred tax expense was based on items of income and expense that were reported in different years in the financial statements and tax returns and were measured at the tax rate in effect in the year the differences originated. The implementation of FAS 109 resulted in the restatement of the 1992 and 1991 financial statements. Net income for the years ended December 31, 1992 and 1991 decreased by $3,700,000 ($.04 per share) and $6,500,000 ($.07 per share), respectively. The cumulative effect of adopting FAS 109 as of December 31, 1990, decreased 1991's beginning earned surplus by $114,200,000. See note 4 on page 45 for further income tax disclosures. Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. Effective January 1, 1993, LNC adopted the Financial Accounting Standards Board statement entitled "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" ("FAS 113"). Under FAS 113, all assets and liabilities related to reinsurance ceded contracts are reported on a gross basis rather than the previous practice of reporting such assets and liabilities net of reinsurance. The effect of adopting FAS 113 was to increase both assets and liabilities by $900,000,000. All amounts recoverable from reinsurers are now classified separately on the balance sheet. As permitted under the new rules, the prior year's balance sheet has not been restated to the gross basis. Accounting by Creditors for Impairment of a Loan. Financial Accounting Standards Board statement entitled "Accounting by Creditors for Impairment of a Loan" ("FAS 114") issued in May 1993, was adopted by LNC during the second quarter of 1993. LNC adopted this statement with an effective date of January 1, 1993 by restating its first quarter 1993 financial statements. FAS 114 requires that an impaired mortgage loan's fair value be measured based either on the present value of expected future cash flows discounted at the loan's effective interest rate, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. If the fair value of the mortgage loan as described above is less than the recorded investment in the loan, the difference is recorded in the mortgage loan allowance for losses account. The change in the mortgage loan allowance for losses account is reported with realized gain (loss) on investments. The adoption of FAS 114 resulted in additions to the mortgage loan allowance for losses account and reduced first quarter 1993 income before cumulative effect of accounting change and net income by $42,300,000 or $.41 per share ($64,100,000 pre-tax). See note 3 on page 41 for further mortgage loan disclosures. Most of the effect of this change in accounting was within the Life Insurance and Annuities segment. -39- Accounting for Certain Investments in Debt and Equity Securities. Financial Accounting Standards Board statement entitled "Accounting for Certain Invest- ments in Debt and Equity Securities" ("FAS 115") issued in May 1993, was adopted by LNC as of December 31, 1993. In accordance with the new rules, the prior year financial statements have not been restated to reflect the change in accounting principle. Under FAS 115, securities can be classified as available-for-sale, trading or held-to-maturity according to the holders intent. LNC classified its entire fixed maturity securities portfolio as "available-for-sale." Securities classified as available-for-sale are carried at fair value and unrealized gains and losses on such securities are carried as a separate component of shareholders' equity. The ending balance of shareholders' equity was increased by $768,400,000 (net of $384,600,000 of related adjustments to deferred acquisition costs, $62,900,000 of policyholder commitments and $412,400,000 in deferred income taxes, all of which would have been recognized if those securities would have been sold at their fair value, net of amounts applicable to Security-Connecticut Corporation) to reflect the net unrealized gain on fixed maturity securities classified as available-for- sale previously carried at amortized cost. Prior to the adoption of FAS 115, LNC carried a portion of its fixed maturity securities at fair value with unrealized gains and losses carried as a separate component of stockholders' equity. The remainder of such securities were carried at amortized cost. Change in Estimate for Net Investment Income Related to Mortgage-backed Bonds. At December 31, 1993, LNC had $6,062,000,000 invested in mortgage-backed bonds. As indicated in note 1 on page 36, LNC recognizes income on these securities using a constant effective yield based on anticipated prepayments. With the implementation of new investment software in December 1993, LNC was able to significantly refine its estimate of the effective yield on such securities to better reflect actual prepayments and estimates of future prepayments. This resulted in an increase in the amortization of purchase discount on these securities of $58,600,000 and, after related amortization of deferred acquisition costs ($18,500,000) and income taxes ($14,100,000), increased 1993's income before cumulative effect of accounting change and net income by $26,000,000 or $0.25 per share. Most of the effect of this change in estimate was within the Life Insurance and Annuities business segment. Change in Estimate for Reinsurance Disability Income Reserves. During December 1993, income before cumulative effect of accounting change and net income decreased by $32,800,000 or $0.32 per share as the result of strengthening reinsurance disability income reserves by $50,500,000. The need for this reserve increase within the Life-Health Reinsurance segment was identified as the result of management's assessment of current expectations for morbidity trends and the impact of lower investment income due to lower interest rates.
3. Investments The major categories of net investment income are as follows: Year Ended December 31 (in millions) 1993 1992 1991 Fixed maturity securities --------------------- $1,757.6 $1,608.6 $1,374.5 Equity securities ----------------------------- 28.9 25.6 29.3 Mortgage loans on real estate ----------------- 297.2 296.6 304.6 Real estate ----------------------------------- 82.3 54.1 38.5 Policy loans ---------------------------------- 37.3 35.2 33.0 Invested cash --------------------------------- 39.6 31.1 61.9 Other investments ----------------------------- 33.4 60.0 73.5 Investment revenue -------------------------- 2,276.3 2,111.2 1,915.3 Investment expense ---------------------------- 129.8 123.9 116.0 Net investment income ----------------------- $2,146.5 $1,987.3 $1,799.3
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The realized gain (loss) on investments is as follows: Year Ended December 31 (in millions) 1993 1992 1991 Fixed maturity securities available-for-sale: Gross gain ------------------------------------ $142.3 $111.2 $ -- Gross loss ------------------------------------ (13.3) (45.4) -- Equity securities available-for-sale: Gross gain ------------------------------------ 225.8 136.2 176.2 Gross loss ------------------------------------ (69.1) (52.7) (26.8) Fixed maturity securities held for investment: Gross gain ------------------------------------ 248.9 210.7 209.0 Gross loss ------------------------------------ (75.8) (37.5) (92.4) Other investments------------------------------ (166.7) (145.6) (102.9) Related amortization of deferred acquisition costs --------------------------- (23.7) -- -- Total ---------------------------------- $268.4 $176.9 $163.1
Provisions for write-downs and allowances for losses, which are included in the realized gain (loss) on investments shown above, are as follows: Year Ended December 31 (in millions) 1993 1992 1991 Fixed maturity securities (interest only mortgage-backed bonds) ---------------------- $ 40.6 $ -- $ -- Fixed maturity securities (other) ------------- 19.4 19.4 14.7 Equity securities ----------------------------- 1.6 3.8 1.0 Mortgage loans on real estate ----------------- 140.6 91.9 49.1 Real estate ----------------------------------- 33.4 36.1 34.4 Other long-term investments ------------------- 4.3 20.3 16.8 Guarantees ------------------------------------ 1.4 6.9 15.9 Total ----------------------------------- $241.3 $178.4 $131.9
The change in unrealized appreciation (depreciation) on investments in fixed maturity and equity securities is as follows: Year Ended December 31 (in millions) 1993 1992 1991 Fixed maturity securities available-for-sale - $1,717.5 $ (72.0) $ 99.5 Equity securities available-for-sale --------- (32.7) (6.7) 124.3 Fixed maturity securities held for investment (1,130.3) (99.5) 1,166.1 Total -------------------------------------- $ 554.5 $(178.2) $1,389.9
The cost, gross unrealized gain and loss, and fair value of securities available-for-sale and securities held for investment are as follows: Fair December 31 (in millions) Cost Gain Loss Value Securities available-for-sale 1993: Corporate bonds ------------------- $11,688.8 $1,129.5 $ 73.5 $12,744.8 U.S. Government bonds ------------- 1,657.3 48.3 14.3 1,691.3 Foreign governments bonds --------- 493.7 61.9 4.0 551.6 Mortgage-backed bonds ------------- 5,685.7 453.0 76.7 6,062.0 State and municipal bonds --------- 2,558.2 214.3 .8 2,771.7 Redeemable preferred stocks ------- 135.6 18.0 10.6 143.0 Total fixed maturity securities - 22,219.3 1,925.0 179.9 23,964.4 Equity securities ----------------- 896.5 201.1 17.3 1,080.3 Total --------------------------- $23,115.8 $2,126.1 $197.2 $25,044.7
Securities available-for-sale 1992: U.S. government bonds ------------- $1,544.8 $ 29.3 $ 3.2 $1,570.9 Mortgage-backed bonds ------------- 406.5 2.7 1.2 408.0 Total fixed maturity securities - 1,951.3 32.0 4.4 1,978.9 Equity securities ----------------- 706.9 233.9 17.4 923.4 Total --------------------------- $2,658.2 $265.9 $21.8 $2,902.3
Securities held for investment 1992: Corporate bonds ------------------- $ 9,466.2 $ 653.5 $ 57.2 $10,062.5 U.S. Government bonds ------------- 41.2 6.3 -- 47.5 Foreign governments bonds --------- 574.4 30.9 12.9 592.4 Mortgage-backed bonds ------------- 5,684.4 435.9 38.7 6,081.6 State and municipal bonds --------- 2,346.4 111.6 5.7 2,452.3 Redeemable preferred stocks ------- 239.7 10.9 4.3 246.3 Total --------------------------- $18,352.3 $1,249.1 $118.8 $19,482.6
-41- Fair values for fixed maturity securities are based on quoted market prices, where available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services or, in the case of private placements, are estimated by discounting expected future cash flows using a current market rate applicable to the coupon rate, credit quality, and maturity of the investments. The fair values for equity securities are based on quoted market prices. Future maturities of fixed maturity securities available-for-sale are as follows: 1993 Fair December 31 (in millions) Cost Value Due in one year or less ------------------------------ $ 286.4 $ 294.7 Due after one year through five years ---------------- 2,561.2 2,725.6 Due after five years through ten years --------------- 6,327.0 6,819.4 Due after ten years ---------------------------------- 7,359.0 8,062.7 Subtotal ------------------------------------------- 16,533.6 17,902.4 Mortgage-backed bonds -------------------------------- 5,685.7 6,062.0 Total ---------------------------------------------- $22,219.3 $23,964.4
The foregoing data is based on stated maturities. Actual maturities will differ in some cases because borrowers may have the right to call or pre-pay obligations. The fixed maturity securities available-for-sale quality ratings are as follows: December 31 1993 Treasuries and AAA ----------------------------------- 39.2% AA --------------------------------------------------- 14.0 A ---------------------------------------------------- 24.5 BBB -------------------------------------------------- 18.0 BB --------------------------------------------------- 2.5 Less than BB ----------------------------------------- 1.8 100.0%
Fixed maturity securities available-for-sale, mortgage loans on real estate and real estate with a combined carrying value of $147,300,000 were non-income producing for the year ended December 31, 1993. The cost information for fixed maturity securities available-for-sale, held for investment, equity securities, mortgage loans on real estate, real estate and other long-term investments are net of writedowns and provisions for losses. The balance sheet account for other liabilities includes a reserve for guarantees of third-party debt. The amount of provisions and reserves for such items is as follows: December 31 (in millions) 1993 1992 Fixed maturity securities: Available-for-sale------------------------------ $ 60.5 $ -- Held for investment ---------------------------- -- 47.7 Equity securities -------------------------------- 6.0 4.8 Mortgage loans on real estate -------------------- 226.6 134.5 Real estate -------------------------------------- 121.4 131.1 Other long-term investments ---------------------- 27.2 40.3 Guarantees --------------------------------------- 18.5 30.0
LNC has estimated the fair value of its investment in mortgage loans on real estate to be $3,466,700,000 at December 31, 1993 and $3,252,400,000 at December 31, 1992. These estimates were established using a discounted cash flow method based on rating, maturity and future income when compared to the expected yield for mortgages having similar characteristics. The rating for mortgages in good standing are based on property type, location, market conditions, occupancy, debt service coverage, loan to value, caliber of tenancy, borrower and payment record. Impaired mortgage loan's fair values are measured based either on the present value of expected future cash flows discounted at the loan's effective interest rate, at the loan's observable -42- market price or the fair value of the collateral if the loan is collateral dependent. If the fair value of the mortgage loan as described above is less than the recorded investment in the loan, the difference is recorded in the mortgage loan provision for losses account. The change in the mortgage loan provision for losses account is reported with realized gain (loss) on invest- ments. LNC's recorded investment in impaired mortgage loans was $584,500,000 and $365,300,000 for December 31, 1993 and December 31, 1992, respectively. A reconciliation of the mortgage loan provision for losses for these impaired mortgage loans is as follows: Year Ended December 31 (in millions) 1993 1992 1991 Balance at beginning of year -------------------- $134.5 $ 72.0 $31.8 Provisions for losses --------------------------- 76.5 91.9 49.1 Provision for adoption of FAS 114 --------------- 64.1 -- -- Releases due to sales --------------------------- (12.4) (7.0) (4.9) Releases due to foreclosures -------------------- (36.1) (22.4) (4.0) Balance at End of Year ----------------------- $226.6 $134.5 $72.0
LNC has estimated the fair value of its investments in policy loans to be $626,400,000 at December 31, 1993 and $582,200,000 at December 31, 1992. This estimate was calculated on a composite discounted cash flow basis using Treasury interest rates consistent with the maturity durations assumed. These durations were based on historical experience. The carrying value for assets classified as other investments in the accompanying balance sheet approximates their fair value. As of December 31, 1993, LNC's commitments to make investments in fixed maturity securities (primarily private placements), mortgage loans on real estate and real estate were $256,700,000. At December 31 1993, the $2,400,000 net fair value of the liability for these commitments, was based on the difference between the value of the committed investments as of this date and the commitment date, which would take into account changes in interest rates, the counterparties' credit standing and the remaining terms of the commit- ments.
4. Federal Income Taxes The federal income tax expense (credit) before cumulative effect of accounting change is as follows: Year Ended December 31 (in millions) 1993 1992 1991 Current -------------------------------------- $308.2 $222.9 $112.5 Deferred ------------------------------------- (135.7) (157.4) (115.6) Total -------------------------------------- $172.5 $ 65.5 $ (3.1)
Cash paid for federal income taxes in 1993, 1992 and 1991 was $279,700,000, $195,300,000, and $123,400,000 respectively. The Omnibus Reconciliation Act of 1993 ("1993 Act") changed LNC's prevailing corporate federal income tax rate from 34% to 35% effective January 1, 1993. The application of this new tax rate to the December 31, 1992 deferred tax recoverable balance resulted in a decrease in federal income taxes of $4.9 million for 1993. The effective tax rate on pre-tax income before cumulative effect of accounting change is lower than the prevailing corporate federal income tax rate. A reconciliation of this difference is as follows: Year Ended December 31 (in millions) 1993 1992 1991 Tax rate times pre-tax income ----------------- $205.7 $144.4 $67.6 Effect of: Tax-exempt investment income ------------------ (75.8) (59.2) (57.1) Loss on sale of subsidiary -------------------- 34.5 -- -- Other items ----------------------------------- 8.1 (19.7) (13.6) Provision for income taxes (credits) -------- $172.5 $ 65.5 $(3.1) Effective tax rate -------------------------- 29% 15% (2%)
-43- The federal income tax liability (recoverable) is as follows: December 31 (in millions) 1993 1992 Current ----------------------------------------------- $ 83.0 $ 57.5 Deferred ---------------------------------------------- 68.0 (167.8) Total ----------------------------------------------- $151.0 $(110.3)
Significant components of LNC's net deferred tax asset (liability) are as follows: December 31 (in millions) 1993 1992 Deferred tax assets: Policy liabilities and accruals and contractholder funds -------------------------------- $ 772.3 $629.4 Net operating loss ------------------------------------ 109.3 148.6 Loss on investments ----------------------------------- 149.0 132.0 Sale of subsidiaries ---------------------------------- 20.1 25.0 Postretirement benefits other than pensions ----------- 54.8 -- Other ------------------------------------------------- 68.0 83.2 Total deferred tax assets --------------------------- 1,173.5 1,018.2 Deferred tax liabilities: Deferred acquisition costs ---------------------------- 680.1 721.0 Premiums and fees receivable -------------------------- 32.7 3.7 Net unrealized gain on securities available-for-sale--- 496.6 81.3 Tax over book depreciation ---------------------------- 13.2 11.2 Other ------------------------------------------------- 18.9 33.2 Total deferred tax liabilities ---------------------- 1,241.5 850.4 Net deferred tax (liability) asset ------------------ $ (68.0) $167.8
At December 31, 1993, LNC had net operating loss carryforwards of $312,100,000 for income tax purposes related to its foreign life reinsurance companies that expire in years 1999 through 2008. LNC is required to establish a "valuation allowance" for any portion of the deferred tax asset that management believes will not be realized. In the opinion of management it is more likely than not that LNC will realize the benefit of the deferred tax asset and therefore no valuation allowance has been established. Of the total deferred tax asset, $548,800,000 is realizable as a carryback to prior years income. The remaining amounts will be realized as they reverse against future income over the fifteen year carryforward period. Based on LNC's historical taxable income record, future income should be more than sufficient to absorb the reversal of the deferred tax asset. Prior to 1984, a portion of the life companies' current income was not subject to current income tax, but was accumulated for income tax purposes in a memorandum account designated as "policyholders' surplus." The total of the life companies' balances in their respective "policyholders' surplus" accounts at December 31, 1983 of $222,400,000 was "frozen" by the Tax Reform Act of 1984 and, accordingly, there have been no additions to the accounts after that date. That portion of current income on which income taxes have been paid will continue to be accumulated in a memorandum account designated as "shareholders' surplus," and is available for dividends to shareholders without additional payment of tax. The December 31, 1993 total of the life companies' account balances for their respective "shareholders' surplus" was $1,560,500,000. Should dividends to shareholders for each life company exceed its respective "shareholders' surplus," amounts would need to be transferred from its respective "policyholders' surplus" and would be subject to federal income tax at that time. In connection with the sale of Security-Connecticut (see note 10 on page 53) $8,800,000 was transferred from policyholders' surplus to shareholders' surplus and current income tax of $3,100,000 was paid. Under existing or foreseeable circumstances, LNC neither expects nor intends that distributions will be made from the remaining balance in "policyholders' surplus" of $213,600,000 that will result in any such tax. Accordingly, no provision for deferred income taxes has been provided by LNC on its "policyholders' surplus" account. In the event that such excess distributions were made, it is estimated that income taxes of approximately $74,800,000 would be due. Undistributed earnings of LNC's foreign subsidiaries that are considered to be indefinitely reinvested amounted to approximately $135,000,000 at December 31, 1993. Accordingly, no provisions for U.S. income taxes have been provided -44- thereon. Upon distribution of those earnings in the form of dividends or otherwise, LNC would be subject to both U.S. income taxes (subject to adjust- ments for foreign tax credits) and withholding taxes payable to the applicable foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculations.
5. Supplemental Financial Data The balance sheet captions, "Real Estate" and "Property and Equipment" are shown net of allowances for depreciation as follows: December 31 (in millions) 1993 1992 Real estate ----------------------------------------- $ 37.1 $ 31.6 Property and equipment ------------------------------ 252.4 168.0
Prior to January 1, 1993, the balance sheet caption, "Other Assets," includes amounts recoverable from other insurers for claims paid by LNC's insurance subsidiaries and the balance sheet caption, "Policy Liabilities and Accruals," has been reduced for reinsurance ceded as follows (see note 2 on page 46): December 31 (in millions) 1992 Amounts recoverable from other insurers ------------- $ 48.8 Reinsurance ceded ----------------------------------- 599.3
Details underlying the balance sheet caption, "Contractholder Funds," are as follows: December 31 (in millions) 1993 1992 Premium deposit funds ------------------------------- $14,546.8 $12,530.9 Undistributed earnings on participating business ---- 88.0 68.5 Other ----------------------------------------------- 237.3 249.9 Total --------------------------------------------- $14,872.1 $12,849.3
The balance sheet captions, "Future Policy Benefits and Losses, Claims and Loss Expense" and "Contractholder Funds," include investment type insurance contracts (i.e. deposit contracts and guaranteed interest contracts). As of December 31, 1993 and 1992, the deposit contracts, which do not have defined maturities, have a carrying value of $10,756,100,000 and $8,919,200,000, respectively, (net of deferred acquisition costs of $636,700,000 and $552,000,000, respectively) and a corresponding fair value of $10,557,000,000 and $8,782,800,000, respectively. The fair values for the deposit contracts are based on their approximate surrender values. As of December 31, 1993 and 1992, guaranteed interest and similar contracts have a carrying value of $3,824,400,000 and $3,506,900,000, respectively (net of deferred acquisition costs of $17,300,000 and $30,900,000, respectively), and a corresponding fair value of $3,967,700,000 and $3,696,600,000, respectively. The fair values for the guaranteed interest and similar contracts are estimated using principally discounted cash flow calculations based on interest rates currently being offered on similar contracts with maturities consistent with those remaining for the contracts being valued. The carrying value of the investment type insurance contracts is stated net of deferred acquisition costs in order that they be comparable with the fair value basis. The remainder of the balance sheet captions, "Future Policy Benefits and Losses, Claims and Loss Expense" and "Contractholder Funds," that do not fit the definition of "investment type insurance contracts" are considered insurance contracts. Fair value disclosures are not required for these insurance contracts and have not been determined by LNC. It is LNC's position that the disclosure of the fair value of these insurance contracts is important in that readers of these financial statements could draw inappropriate conclusions about the LNC's shareholders' equity determined on a fair value basis if only the fair value of assets and liabilities defined as financial instruments are disclosed. LNC and other companies in the insurance industry are monitoring the related actions of the various rule-making bodies and attempting to determine an appropriate methodology for estimating and disclosing the "fair value" of their insurance contract liabilities. -45- Details underlying the balance sheet captions, "Short-term and Long-term Debt," are as follows: Carrying Fair Carrying Fair Value Value Value Value December 31 (in millions) 1993 1993 1992 1992 Short-term debt: Commercial paper ---------------------- $212.7 $212.7 $416.4 $416.4 Other short-term notes ---------------- 37.2 37.2 11.3 11.3 Current portion of long-term debt ----- 101.5 101.5 5.7 5.7 Total short-term debt --------------- $351.4 $351.4 $433.4 $433.4 Long-term debt less current portion: 9 3/4% notes payable, due 1995 -------- $100.3 $108.4 $100.5 $110.1 8% notes payable, due 1997 ------------ -- -- 100.0 103.8 7 1/8% notes payable, due 1999 -------- 99.1 105.2 98.9 98.8 7 5/8% notes payable, due 2002 -------- 98.9 107.6 98.8 99.8 Mortgages and other notes payable ----- 36.8 39.4 24.8 27.3 Total long-term debt ---------------- $335.1 $360.6 $423.0 $439.8
The 8% notes were called in March 1994 and, therefore, are classified as "current portion of long-term debt." Future maturities of long-term debt are as follows (in millions): 1994 - $101.5 1996 - $1.6 1998 - $ 1.6 1995 - 101.6 1997 - 1.5 Thereafter - 228.8 Fair values for long-term debt are estimated using discounted cash flow analysis based on LNC's current incremental borrowing rate for similar types of borrowing arrangements. For short-term debt, the carrying value approxi- mates fair value. LNC has a revolving credit agreement with a group of domestic and foreign banks in the aggregate amount of $500,000,000. This agreement, which expires in July 1995, provides for interest on borrowings on various bases, including prime rates and certificate of deposit rates. Under the terms of this agreement, LNC must maintain a prescribed level of tangible net worth and debt levels below 50% of tangible net worth, and is restricted in its ability to place additional liens against Corporate assets. LNC has an additional $50,000,000 revolving credit agreement with a bank. At December 31, 1993, LNC had no outstanding borrowings under these agreements. During 1993, 1992 and 1991, fees paid under these agreements amounting to $1,300,000, $1,700,000, and $518,000, respectively. At December 31, 1993 and 1992, the $250,000 and $1,100,000 fair value, respectively, for these unexercised revolving credit agreements are based on fees LNC has paid to enter into these agreements or will pay prior to maturity after taking into account the remaining term of the agreements and LNC's credit standing. Cash paid for interest for 1993, 1992 and 1991 was $44,200,000, $48,500,000, and $73,300,000, respectively. Reinsurance transactions included in the income statement caption, "Insurance Premiums," are as follows: Year Ended December 31 (in millions) 1993 1992 1991 Reinsurance assumed ------------------------- $1,895.5 $1,960.2 $2,048.2 Reinsurance ceded --------------------------- 291.1 286.2 442.1 Net reinsurance premiums ------------------ $1,604.4 $1,674.0 $1,606.1
The income statement caption, "Benefits and Settlement Expenses," is net of reinsurance recoveries of $274,000,000, $218,200,000 and $348,400,000 for the years ended December 31, 1993, 1992 and 1991, respectively The income statement caption, "Underwriting, Acquisition, Insurance and Other Expenses," includes amortization of deferred acquisition costs of $571,800,000, $563,700,000 and $588,200,000 for the years ended December 31, 1993, 1992 and 1991, respectively. An additional $23,700,000 of deferred acquisition costs was amortized and netted against "Realized Gain on Investments" for the year ended December 31, 1993. -46- 6. Employee Benefit Plans Pensions Plans. Eligible employees and full-time agents of LNC and its principal subsidiaries are covered by tax-qualified defined benefit pension plans. The benefits for employees are based on total years of service and the highest 60 months of compensation during the last 10 years of employment. The benefits for agents are based on a percentage of each agents' yearly earnings. The plans are funded by contributions to tax-exempt trusts. LNC's funding policy is consistent with the funding requirements of federal law and regulations. Contributions are intended to provide not only the benefits attributed to service to date, but also those expected to be earned in the future. Plan assets consist principally of listed equity securities and corporate obligations and U.S. Government bonds. LNC also sponsors three types of unfunded, nonqualified, defined benefit plans. A supplemental retirement plan provides employees and agents defined benefit pension benefits in excess of limits imposed by federal tax law. A salary continuation plan provides certain officers of LNC defined pension benefits based on years of service and final monthly salary upon death or retirement. A retirement plan for directors provides benefits based on years of service and the amount of the retainer paid during the last year of service. The status of the funded defined benefit pension plans and the amounts recognized on the balance sheets are as follows: December 31 (in millions) 1993 1992 Actuarial present value of benefit obligation: Vested benefits --------------------------------------- $(310.5) $(250.9) Nonvested benefits ------------------------------------ (14.7) (15.7) Accumulated benefit obligation ---------------------- (325.2) (266.6) Effect of projected future compensation increases ----- (82.7) (81.5) Projected benefit obligation ------------------------ (407.9) (348.1) Plan assets at fair value ----------------------------- 372.3 339.3 Projected benefit obligations in excess of plan assets ------------------------------ (35.6) (8.8) Unrecognized transition asset ------------------------- (7.6) (15.1) Unrecognized net loss --------------------------------- 26.1 13.7 Unrecognized prior service cost ----------------------- 8.5 21.0 Prepaid pension asset (accrued pension cost) included in other assets and other liabilities, respectively -------------------- $ (8.6) $ 10.8 The status of the unfunded defined benefit pension plans and the amounts recognized on the balance sheets are as follows: December 31 (in millions) 1993 1992 Actuarial present value of benefit obligation: Vested benefits --------------------------------------- $(18.7) $(14.3) Nonvested benefits ------------------------------------ (3.8) (2.7) Accumulated benefit obligation ---------------------- (22.5) (17.0) Effect of projected future compensation increases ----- (5.0) (6.8) Projected benefit obligation ------------------------ (27.5) (23.8) Unrecognized transition obligation -------------------- .7 1.2 Unrecognized net loss --------------------------------- 5.6 5.8 Unrecognized prior service cost (reduction in benefits) (3.5) (4.0) Accrued pension cost included in other liabilities -- $(24.7) $(20.8)
Determination of the projected benefit obligation for the defined benefit plans was based on an assumed discount rate of 7.0% and 7.5% for December 31, 1993 and 1992, respectively. The assumed long-term rate of increase in compensation was 5.0% and 5.5% (6.0% and 6.5% for the salary continuation plan) for December 31, 1993 and 1992, respectively. The assumed long-term rate of return on plan assets was 9.0% for 1993, 1992 and 1991. -47- The components of net pension cost for the defined benefit pension plans are as follows: Year Ended December 31 (in millions) 1993 1992 1991 Service cost-benefits earned during the year ------- $20.3 $20.6 $17.1 Interest cost on projected benefit obligation ------ 27.9 24.3 20.9 Actual return on plan assets ----------------------- (42.1) (13.9) (61.3) Net amortization (deferral)------------------------- 11.8 (15.1) 34.5 Net pension cost --------------------------------- $17.9 $15.9 $11.2
401k Plan. LNC and its subsidiaries also sponsor contributory defined contribution plans for eligible employees and agents. LNC's contributions to the plans are equal to a participant's pre-tax contribution, not to exceed 6% of base pay, multiplied by a percentage, ranging from 25% to 150%, which varies according to the certain incentive criteria as determined by LNC's Board of Directors. Expense for these plans amounted to $26,300,000, $15,200,000 and $7,000,000 in 1993, 1992 and 1991, respectively. Postretirement Medical and Life Insurance Benefit Plans. LNC sponsors unfunded defined benefit plans that provide postretirement medical and life insurance benefits to full-time employees and agents who, depending on the plan, have worked for LNC 10 to 15 years and attained age 55 to 60. Medical benefits are also available to spouses and other dependents of employees and agents. For medical benefits, limited contributions are required from individuals retired prior to November 1, 1988; contributions for later retirees, which can be adjusted annually, are based on such items as years of service at retirement and age at retirement. The life insurance benefits are noncontributory, although participants can elect supplemental contributory benefits. The status of the postretirement medical and life insurance benefit plans and the amount recognized on the balance sheet is as follows: December 31 (in millions) 1993 1992 Accumulated postretirement benefit obligation: Retirees -------------------------------------------- $ 91.3 $ 87.4 Fully eligible active plan participants ------------- 25.1 19.2 Other active plan participants ---------------------- 48.2 39.5 Accumulated postretirement benefit obligation------ 164.6 146.1 Unrecognized net loss ------------------------------- (8.1) -- Unrecognized transition obligation ------------------ -- (146.1) Accrued plan cost included in other liabilities --- $156.5 $ --
The components of periodic postretirement benefit cost are as follows: Year Ended December 31 (in millions) 1993 1992 1991 Service cost ------------------------------------------- $ 5.0 Interest cost ------------------------------------------ 10.7 Net periodic postretirement benefit cost ------------- $15.7 $6.5 $5.6
The costs for postretirement benefits for years ended December 31, 1992 and 1991 shown above are prior to the adoption of FAS 106 (see note 2 on page 41) and, therefore, represent the total amount of claims and premiums actually paid. The calculation of the accumulated postretirement benefit obligation assumes a weighted-average annual rate of increase in the per capita cost of covered benefits (i.e. health care cost trend rate) of 13.5% for 1994 gradually decreasing to 5.5% by 2004 and remaining at that level thereafter. The health care cost trend rate assumption has a significant affect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point each year would increase the accumulated postretirement benefit obligation as of December, 1993 and 1992 by $13,600,000 and $13,000,000, respectively, and the aggregate of the estimated service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1993 by $1,500,000. The calculation assumes a long-term rate of increase in compensation of 5.0% and 5.5% for December 31, 1993 and 1992, respectively. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.0% and 7.5% for December 31, 1993 and 1992, respectively. -48- Stock Option Plan. LNC has a stock option incentive plan for key employees of LNC and its subsidiaries which provides for the issuance of stock options, stock appreciation rights, restricted stock awards and stock incentive awards. Stock options granted under the plan are at the market value at the date of grant and, subject to termination of employment, expire ten years from the date of grant. Such options are not transferable other than on death and are exercisable one year from date of grant for options issued prior to 1992. Options issued subsequent to 1991 are exercisable in 25% increments on the option issuance anniversary in the four years following issuance. Information with respect to the stock option plan is as follows: Shares Options Outstanding Available Average for Grant Shares Option Price Balance at January 1, 1991 2,996,846 2,412,588 $23.28 Granted ------------------------ (554,700) 554,700 24.99 Exercised ---------------------- -- (159,582) 19.32 Expired ------------------------ 107,400 (150,400) Restricted stock awarded ------- (9,600) -- Balance at December 31, 1991 - 2,539,946 2,657,306 $23.77 Granted ------------------------ (528,500) 528,500 $27.74 Exercised ---------------------- -- (996,632) 22.55 Expired ------------------------ 27,540 (38,340) Restricted stock awarded ------- (50,336) -- Balance at December 31, 1992 - 1,988,650 2,150,834 $25.29 Granted ------------------------ (570,600) 570,600 $39.75 Exercised ---------------------- -- (260,756) 24.21 Expired ------------------------ 17,826 (18,826) Restricted stock awarded ------- (144,154) -- Balance at December 31, 1993 - 1,291,722 2,441,852 $28.75
Shares under options that were exercisable at December 31, 1993 totaled 1,497,502. 7. Restrictions, Commitments and Contingencies Generally, the net assets of LNC's insurance subsidiaries available for transfer to the parent company are limited to the amounts that the insurance subsidiaries' net assets, as determined in accordance with statutory accounting practices, exceed minimum statutory capital requirements; however, payments of such amounts as dividends may be subject to approval by regulatory authorities. As of December 31, 1993, $2,300,000,000 of consolidated shareholders' equity represents net assets of the LNC's insurance subsidiaries that cannot be transferred in the form of dividends, loans or advances to the parent company without prior approval of such regulatory authorities. Net income as determined in accordance with statutory accounting practices for LNC's insurance subsidiaries was as follows: Year Ended December 31 (in millions) 1993 1992 1991 Life-health insurance --------------------- $229.7 $163.7 $240.8 Property-casualty insurance --------------- 247.6 84.1 54.4
Life-health insurance statutory net income for 1993, 1992 and 1991, excluding LNC's foreign life reinsurance companies, was $267,200,000, $202,600,000 and $259,600,000, respectively. Shareholders' equity as determined in accordance with statutory accounting practices for LNC's insurance subsidiaries was as follows: December 31 (in millions) 1993 1992 Life-health insurance --------------------- $1,626.7 $1,474.6 Property-casualty insurance --------------- 1,061.7 1,040.8
Certain of LNC's subsidiaries lease their home office properties through sale-leaseback agreements. The agreements provide for a 25 year lease period with options to renew for six additional terms of five years each. The -49- agreements also provide LNC with the right of first refusal to purchase the properties during the term of the lease, including renewal periods, at a price as defined in the agreements. In addition, LNC has the option to purchase the leased properties at fair market value as defined in the agreements on the last day of the initial 25 year lease period ending in 2009 or the last day of any of the renewal periods. Total rental expense on operating leases in 1993, 1992 and 1991 was $55,900,000, $62,300,000 and $78,700,000, respectively. Future minimum rental commitments are as follows (in millions): 1994 - $51.8 1996 - $42.8 1998 - $ 33.4 1995 - 47.1 1997 - 37.8 Thereafter - 378.6 Rental expense excludes amounts previously reserved for as part of the sale of a portion of the Employee Life-Health Benefit segment (see note to 10 on page 53); future minimum rental commitments include amounts applicable to such businesses. LNC has financial instruments with off-balance-sheet risks. These include guarantees whose contractual amounts represent credit exposure and derivatives whose notional or contract amounts exceed the credit exposure. LNC has entered into derivative transactions to reduce its exposure to fluctuations in interest and foreign exchange risks. Outstanding financial instruments 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) 1993 1992 1993 1993 1992 1992 Guarantees: Industrial revenue bonds ------ $ 130.2 $ 134.3 $ (16.3)$(12.5)$(17.2) $(21.9) Real estate partnerships ------ 43.8 66.5 (2.2) (3.8) (12.8) (18.5) Mortgage loan pass-through certificates ----------------- 96.0 131.8 -- -- -- -- Derivatives: Foreign currency exchange contracts -------------------- 101.3 43.8 .8 .8 7.9 7.9 Financial futures contracts --- 33.1 78.5 -- -- -- (.5) Interest rate swaps ----------- 57.0 46.8 -- (1.2) -- (1.9) United Kingdom forward swaps -- 20.0 20.0 -- .4 -- (.1) Interest rate cap agreements -- 3,800.0 1,200.0 24.4 18.5 13.3 8.1 Spread-lock agreements -------- 1,700.0 600.0 -- (5.6) -- (.1) Mortgage-backed securities total return swaps ----------- 47.6 -- -- .9 -- --
Certain subsidiaries of LNC have invested in real estate partnerships which use industrial revenue bonds to finance their projects. LNC has guaranteed the repayment of principal and interest on these bonds. Certain subsidiaries of LNC are also involved in other real estate partnerships that use conventional mortgage loans. In some cases, the terms of these arrangements involve guarantees by each of the partners to indemnify the mortgagor in the event a partner is unable to pay its principal and interest payments. In addition, certain subsidiaries of LNC have sold commercial mortgage loans through grantor trusts which issued pass-through certificates. These subsidiaries have agreed to repurchase any mortgage loans which remain delinquent for 90 days at a repurchase price substantially equal to the outstanding principal balance plus accrued interest thereon to the date of repurchase. It is management's opinion that the value of the properties underlying these commitments is sufficient that in the event of default the impact would not be material to LNC. Based on historical performance where repurchases have been negligible and the current status, which indicates none of the loans are delinquent, the fair value liability for the guarantees related to the mortgage loan pass-through certificates is insignificant. Fair values for all other guarantees are based on fees that would be charged currently to enter into similar agreements, taking into consideration the remaining terms of the agreements and the counterparties' credit standing. -50- LNC has entered into foreign currency exchange contracts to sell foreign currencies at future dates and at specific prices. LNC has also entered into interest rate swaps, United Kingdom forward swaps, interest rate cap agreements, spread-lock agreements, mortgage-backed securities total return swaps and purchased financial future contracts. LNC is subject to the risk that the counterparties to these contracts will fail to perform and the risks associated with changes in the value of underlying securities; however, such changes in the value generally are offset by changes in the value of the items being hedged by such contracts. Fair values for these contracts are based on current settlement values. The current settlement values are based on quoted market prices for the foreign currency exchange contracts and financial future contracts, and on brokerage quotes, which utilized pricing models or formulas using current assumptions, for all other swaps and agreements. A reconciliation of the notional or contract amounts for the interest rate cap and spread lock agreements is as follows: Interest Rate Caps Spread Locks December 31 (in millions) 1993 1992 1993 1992 Balance at beginning of year ------- $1,200.0 $ -- $ 600.0 $ -- New contracts ---------------------- 2,600.0 1,200.0 2,000.0 900.0 Terminated contracts --------------- -- -- (900.0) (300.0) Balance at End of Year ----------- $3,800.0 $1,200.0 $1,700.0 $ 600.0
The spread-lock agreements expire in 1994 and 1995 and the interest rate cap agreements expire in 1997 through 2003. No realized gains or losses from these agreements have been deferred. Expense for these agreements amounted to $3,600,000 and $1,200,000 in 1993 and 1992, respectively. At December 31, 1993, LNC did not have a material concentration of financial instruments in a single investee, industry or geographic location. LNC's insurance companies both cede and assume reinsurance from other companies. That portion of risks exceeding each company's retention limit is reinsured with other insurers. During 1993, catastrophe reinsurance arrangements for property-casualty coverages provided for a recovery of an average of approximately 85% of losses in excess of $30,000,000 up to $180,000,000 per occurrence. The same limits are in effect for 1994 with average recovery of 93% of losses. Also, LNC seeks reinsurance coverage within the business segments that sell life insurance that limits its liabilities on an individual insured to $3,000,000. To cover products other than property-casualty and life insurance, LNC acquires other reinsurance coverages with retentions and limits which management believes are appropriate for the circumstances. The accompanying financial statements reflect premiums, benefits and settlement expenses and deferred acquisition costs, net of reinsurance ceded (see note 5 on page 48). Prior to January 1, 1993, policy liabilities and accruals were also net of reinsurance ceded (see note 2 on page 38). LNC's insurance companies remain liable if their reinsurers are unable to meet their contractual obligations under the applicable reinsurance agreements. For financial reinsurance assumed, reserve charges are netted against premiums and substantially all assets and liabilities are netted due to a right of offset. At December 31, 1993, LNC's insurance companies have granted $767,000,000 of statutory surplus to other insurance companies under these transactions. Generally, such amounts are offset by corresponding receivables from the ceding company, which are secured by future profits on the reinsured business. However, LNC's insurance companies are subject to the risk that the ceding company may become insolvent and the right of offset would not be permitted. Associated with these transactions, LNC's foreign reinsurance companies have obtained letters of credit in favor of various unaffiliated insurance companies from which LNC assumes business. This allows the ceding companies to take statutory reserve credit. The letters of credit issued by the banks represent a guarantee of performance under the financial reinsurance agree- ments. At December 31, 1993, there were $928,800,000 of outstanding bank letters of credit. In exchange for the letters of credits, LNC paid the banks $2,255,000 in fees. Since substantially all the fees were based on rates effective December 31, 1993, such fees approximate the fair value of LNC's asset for the letters of credit as of December 31, 1993. -51- LNC and its subsidiaries are involved in various pending or threatened legal proceedings arising from the conduct of their business. In some instances, these proceedings include claims for punitive damages and similar types of relief in unspecified or substantial amounts, in addition to amounts for alleged contractual liability or requests for equitable relief. After consultation with counsel and a review of available facts, it is management's opinion that these proceedings ultimately will be resolved without materially affecting the consolidated financial statements of LNC. The increase in the number of insurance companies that are under regulatory supervision has resulted and is expected to continue to result in an increase in assessments by state guaranty funds to cover losses to policyholders of insolvent or rehabilitated companies. Mandatory assessments may be partially recovered through a reduction in future premium taxes in some states. LNC has accrued for these assessments net of estimated future premium tax deductions. 8. Segment Information LNC has four major business segments: Property-Casualty, Life Insurance and Annuities, Life-Health Reinsurance and Employee Life-Health Benefits. The Property-Casualty segment writes both commercial and personal coverages through a network of independent agents. The Life Insurance and Annuities segment offers universal life, pension products and other individual coverages through a network of career agents, independent general agencies, and insurance agencies located within a variety of financial institutions. Life-Health Reinsurance sells reinsurance products and services to insurance companies, HMOs, self-funded employers and other primary risk accepting organizations in the U.S. and economically attractive international markets. The Employee Life-Health Benefits segment distributes group life and health insurance, managed health care and other related coverages through career agents and independent general agencies. Activity which is not included in the four major business segments is shown as "Other Operations." "Other Operations" includes unallocated corporate items, including corporate investment income, interest expense on corporate debt and unallocated overhead expenses. Prior to 1993, all realized gain (loss) on investments were included in Other Operations and corporate investment income was net of amounts allocated to the business segments in lieu of realized gain (loss) on investments. The revenue, pre-tax income and assets by segment for 1991 through 1993 are as follows: Year Ended December 31 (in millions) 1993 1992 1991 Revenue: Property-Casualty ---------------------- $2,240.6 $2,408.7 $2,558.9 Life Insurance and Annuities ----------- 2,858.3 2,438.7 2,233.4 Life-Health Reinsurance ---------------- 1,930.5 1,781.8 1,710.4 Employee Life-Health Benefits ---------- 1,297.3 1,241.6 2,646.3 Other Operations ----------------------- (36.9) 163.3 20.0 Total Revenue ------------------------ $8,289.8 $8,034.1 $9,169.0 Income (loss) before income taxes and cumulative effect of accounting change: Property-Casualty ---------------------- $257.6 $ 22.1 $ 26.3 Life Insurance and Annuities ----------- 344.3 197.0 155.1 Life-Health Reinsurance ---------------- 27.5 84.3 48.7 Employee Life-Health Benefits ---------- 86.0 62.9 66.8 Other Operations ----------------------- (127.6) 58.4 (98.1) Total Income Before Income Taxes and Cumulative Effect of Accounting Change ------------------- $587.8 $424.7 $198.8 December 31 (in millions) 1993 1992 1991 Assets: Property-Casualty ---------------------- $ 5,550.5 $ 5,101.3 $ 5,035.1 Life Insurance and Annuities ----------- 38,711.7 30,519.6 24,728.0 Life-Health Reinsurance ---------------- 3,227.2 2,402.9 2,160.4 Employee Life-Health Benefits ---------- 679.7 558.1 1,298.0 Other Operations ----------------------- 211.3 965.4 791.6 Total Assets ------------------------- $48,380.4 $39,547.3 $34,013.1
Provisions for depreciation and capital additions were not material. -52- 9. Shareholders' Equity LNC's common and preferred stock is without par value. All of the issued and outstanding Series A Preferred Stock is $3 Cumulative Convertible and is convertible at any time into shares of Common Stock at a conversion rate of eight shares of Common Stock for each share of Series A Preferred Stock, subject to adjustment for certain events. The Series A Preferred Stock is redeemable at the option of the Corporation at $80 per share plus accrued and unpaid dividends. Each share of the Series E and F Preferred Stock is 5 1/2% Cumulative Convertible Exchangeable Preferred Stock and is convertible into two shares of LNC's Common Stock. The Series E and Series F (issued during May 1991) Preferred Stock issued at $68.85 and $71.604 per share, respectively, are owned by Dai-ichi Mutual Life Insurance Company. The Series A, E and F Preferred Stock have full voting rights, subject to adjustment if LNC is in default as to the payment of dividends. If LNC is liquidated or dissolved, holders of Series A, E and F Preferred Stock will be entitled to payments of $80.00, $68.85 and $71.604 per share, respectively. The difference between the aggregate preference on liquidation value and the financial statement balance for the Series A and E Preferred Stock was $2,200,000 and $400,000, respectively, at December 31, 1993. Series A, E and F Preferred Stock have parity with respect to liquidating distributions. LNC has outstanding one Common Share Purchase Right ("Rights") on each outstanding share of LNC's Common Stock. A Right will also be issued with each share of LNC's Common Stock that becomes outstanding prior to the time the Rights become exercisable or expire. If a person or group acquires beneficial ownership of 20% or more or announces an offer that would result in beneficial ownership of 30% or more of LNC's outstanding Common Stock, the Rights become exercisable and each Right will entitle its holder to purchase one share of LNC's Common Stock for $75. If LNC is acquired in a business combination transaction, each Right will entitle its holder to purchase, for $75, common shares of the acquiring company having a market value of $150. Alternatively, if a 20% holder were to acquire LNC by means of a reverse merger in which LNC and its stock survive or were to engage in certain "self-dealing" transactions, each Right not owned by the 20% holder would entitle its holder to purchase, for $75, Common Stock of LNC having a market value of $150. LNC can redeem each Right for one cent at any time prior to its becoming exercisable. The Rights expire in November 1996. As of December 31, 1993, there were 94,183,190 Rights outstanding. During February 1993, LNC issued 9,200,000 shares of Common Stock. The proceeds from this offering, net of issuance and distribution costs, were $316,100,000. During May 1993, LNC's Board of Directors approved a two-for-one stock split for its Common Stock. The record date for the stock split was June 4, 1993 and the additional shares were distributed to shareholders on June 25, 1993. Following this Common Stock split the conversion rate of LNC's Preferred Stock Series A changed from four shares of Common Stock to eight shares of Common Stock for each Series A Preferred Stock. The conversion rate of LNC's Preferred Stock Series E and F changed from one share of Common Stock to two shares of Common Stock for each share of Series E and F Preferred Stock. The consolidated financial statements have been adjusted to reflect the effects of the common stock split for all periods presented. Earnings per share are computed based on the average number of common shares outstanding during each year (1993 - 102,307,356; 1992 - 92,977,312; 1991 - 90,658,726) after assuming conversion of the Series A, E and F Preferred Stock and the retroactive effect of the 1993 two-for-one stock split. The effect of stock options is not dilutive in the computation of earnings per share. -53- Details underlying the balance sheet caption "Net Unrealized Gain on Securities Available-for-Sale," are as follows: December 31 (in millions) 1993 1992 Fair value of securities available-for-sale ------------- $25,044.7 $2,902.3 Cost of securities available-for-sale ------------------- (23,115.8) (2,658.2) Unrealized gain --------------------------------------- 1,928.9 244.1 Adjustments to deferred acquisition costs --------------- (429.2) -- Amounts required to satisfy policyholder commitments ---- (58.3) (.1) Amounts related to disposal of subsidiary included in other liabilities -------------------------------------- (30.1) -- Deferred income taxes ----------------------------------- (496.6) (81.3) Net unrealized gain on securities available-for-sale ----------------------------------- $ 914.7 $ 162.7
Adjustments to deferred acquisition costs and amounts required to satisfy policyholder commitments are netted against the Deferred Acquisition Costs asset account and included with the Future Policy Benefits and Losses, Claims and Loss Expenses liability account on the balance sheet, respectively. 10. Sale of Subsidiaries LNC decided to substantially exit certain businesses that made up its Employee Life-Health Benefits segment by selling the third party administrator operations and the health maintenance organizations along with certain related group life and health policies, and to allow the remaining group life and health operations conducted within the Lincoln National Life Insurance Company to run off, except for certain small group business, which was to be transferred to a subsidiary. In December 1991, the estimated pre-tax loss from these planned transactions of $135,000,000 ($89,100,000, after-tax) was charged to loss on sale of subsidiaries. This loss, which affected "Other Operations", included the estimated cost of operating these entities to the date of sale in May 1992, and the estimated cost of the run-off of the group life and health operations and downsizing LNC's related management staff and service operation, less the estimated gain from the sale of the business described above. During 1992, LNC completed the sale and received cash of $145,300,000. The 1992 gain from the sale and the disposal expenses have not differed materially from the 1991 estimate. The after-tax income from operations for these businesses for the year ended December 31, 1991 was $200,000. The revenues for these businesses for the year ended December 31, 1991 was $1,461,000,000. In December 1993, LNC recorded a provision for loss of $98,500,000 (also $98,500,000 after-tax) in the "Other Operations" segment for the sale of Security-Connecticut Corporation ("Security-Connecticut"). The sale was completed on February 2, 1994 through an initial public offering and LNC received cash and notes, net of related expenses, totaling $237,700,000. For the years ended December 31, 1993, 1992 and 1991, Security-Connecticut, which operated in the Life Insurance and Annuities segment, had revenues of $274,500,000, $252,400,000 and $243,600,000, respectively, and net income of $24,000,000, $26,200,000 and $29,400,000, respectively. As of December 31, 1993, Security-Connecticut had assets of $1,830,600,000 and liabilities of $1,504,900,000. LNC filed a registration statement in December 1993 with the Securities Exchange Commission involving an initial public offering of stock of its subsidiary Employers Health Insurance Company ("Employers Health"), which comprises the Employee Life-Health Benefits segment. Should the initial public offering be consummated, it is anticipated that LNC will retain a less than 50% equity ownership interest in Employers Health and that a gain on sale will be recognized in 1994. The amount of gain cannot be determined until the pricing of the offering has been completed. For the years ended December 31, 1993, 1992 and 1991, Employers Health had revenues of $1,304,700,000, $1,247,600,000 and $1,184,100,000, respectively, and net income of $55,300,000, $43,900,000 and $43,700,000, respectively. As of December 31, 1993, Employers Health had assets of $793,700,000 and liabilities of $453,400,000. -54- Report of Ernst and Young, Independent Auditors Board of Directors Lincoln National Corporation We have audited the accompanying consolidated balance sheets of Lincoln National Corporation as of December 31, 1993 and 1992, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lincoln National Corporation at December 31, 1993 and 1992, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in note 2 to the consolidated financial statements, in 1993 the Corporation changed its method of accounting for postretirement benefits other than pensions, accounting for income taxes, accounting for impairment of loans, and accounting for certain investments in debt and equity securities. Ernst & Young Fort Wayne, Indiana February 10, 1994 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no disagreements with LNC's independent auditors which are reportable pursuant to Item 304 of Regulation S-K. -55- PART III Item 10. Directors and Executive Officers of the Registrant Information for this item relating to directors of LNC is incorporated by reference to the sections captioned "NOMINEES FOR DIRECTOR" and "DIRECTORS CONTINUING IN OFFICE" of LNC's Proxy Statement for the Annual Meeting scheduled for May 12, 1994. Executive Officers of the Registrant as of December 31, 1993 were as follows: Name Position with LNC and Business Experience (Age) During the Past Five Years Robert A. Anker President, Chief Operating Officer and Director, (52) LNC since 1992. President and Chief Executive Officer, American States* (1990-1991). President and Chief Operating Officer, American States* (1985-1990). Jon A. Boscia Executive Vice President, LNC since 1991. (42) President, Lincoln National Investment Management Company* since 1991. Senior Vice President, LNL* (1985-1991). George E. Davis Senior Vice President, LNC since March 1993. (51) Vice President, Eastman Kodak Co. (1985-March 1993). P. Kenneth Dunsire Executive Vice President, LNC since 1986. (62) Jack D. Hunter Executive Vice President, LNC since 1986. General (57) Counsel since 1971. William J. Lawson President and Chief Executive, Officer, Employers (54) Health* since 1988. Senior Vice President, LNL* (1984-1988). F. Cedric McCurley President and Chief Executive Officer, American (59) States* since 1992. Executive Vice President, American States* (1986-1991). H. Thomas McMeekin, III Senior Vice President, LNC since 1992. (40) Executive Vice President, Lincoln National Investment Management Company* (1987-1992). Richard S. Robertson Executive Vice President, LNC since 1986. (51) Ian M. Rolland Chairman and Director, LNC since 1992. (60) President and Director, LNC (1975-1991). Chief Executive Officer, LNC since 1977. Richard C. Vaughan Senior Vice President and Chief Financial Officer, (44) LNC since 1992. Senior Vice President, LNL* since 1990. Vice President, EQUICOR, Inc. (1988-1990). Donald L. Van Wyngarden Second Vice President and Controller, LNC since (54) 1975. Thomas M. West Executive Vice President, LNL* since 1981. (53) *Denotes a subsidiary of LNC There is no family relationship between any of the foregoing executive officers, all of whom are elected annually. -56- Item 11. Executive Compensation Information for this item is incorporated by reference to the section cap- tioned "EXECUTIVE COMPENSATION" of LNC's Proxy Statement for the Annual Meeting scheduled for May 12, 1994. Item 12. Security Ownership of Certain Beneficial Owners and Management Information for this item is incorporated by reference to the sections captioned "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" and "SECURITY OWNERSHIP OF DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS" of LNC's Proxy Statement for the Annual Meeting scheduled for May 12, 1994. Item 13. Certain Relationships and Related Transactions Information for this item is incorporated by reference to the section cap- tioned "TERMINATION OF EMPLOYMENT ARRANGEMENTS" of LNC's Proxy Statement for the Annual Meeting scheduled for May 12, 1994. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K Item 14(a)(1) Financial Statements The following consolidated financial statements of Lincoln National Corpora- tion and subsidiaries are included in Item 8: Consolidated Balance Sheets - December 31, 1993 and 1992 Consolidated Statements of Income - Years ended December 31, 1993, 1992 and 1991 Consolidated Statements of Shareholders' Equity - Years ended December 31, 1993, 1992 and 1991 Consolidated Statements of Cash Flows - Years ended December 31, 1993, 1992 and 1991 Notes to Consolidated Financial Statements Report of Independent Auditors Item 14(a)(2) Financial Statement Schedules The following consolidated financial statement schedules of Lincoln National Corporation and subsidiaries are included in Item 14(d): I - Summary of Investments - Other than Investments in Related Parties III - Condensed Financial Information of Registrant V - Supplementary Insurance Information VI - Reinsurance VII - Guarantees of Securities of Other Issuers VIII - Valuation and Qualifying Accounts IX - Short-term Borrowings X - Supplementary Information Concerning Property-Casualty Insurance Operations 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 have been omitted. -57- Item 14(a)(3) Listing of Exhibits The following exhibits of Lincoln National Corporation and subsidiaries are included in Item 14(c) - (Note: The numbers preceding the exhibits correspond to the specific numbers within Item 601 of Regulation S-K.): 3(a) The Articles of Incorporation of LNC as last amended May 24, 1991 are incorporated by reference to Exhibit 3(a) of LNC's Form 10-K for the year ended December 31, 1991 filed with the Commission on March 27, 1992. 3(b) The Bylaws of LNC as last amended January 1, 1992 are incorporated by reference to Exhibit 3(b) of LNC's Form 10-K for the year ended December 31, 1991 filed with the Commission on March 27, 1992. 4(a) Indenture for 8% Notes of LNC due March 15, 1997 and the specimen Notes is incorporated by reference to Exhibit 4(b) of LNC's Form 10-K for the year ended December 31, 1991, filed with the Commission on March 27, 1992. 4(b) First Supplemental Indenture and Specimen Notes for LNC's 7 1/8% Notes due July 15, 1999 are incorporated by reference to Annex B and Annex C of LNC's Form 8-K filed with the Commission on July 7, 1992. 4(c) First Supplemental Indenture and Specimen Notes for LNC's 7 5/8% Notes due July 15, 2002 are incorporated by reference to Annex B and Annex D of LNC's Form 8-K filed with the Commission on July 7, 1992. 4(d) Fiscal Agency Agreement related to sale of $100,000,000 aggregate principal amount of 9 3/4% Notes of LNC due October 20, 1995 and the specimen of 9 3/4% Notes. 10(a)* The Lincoln National Corporation 1986 Stock Option Incentive Plan as last amended May 13, 1993. 10(b)* The Lincoln National Corporation 1982 Stock Option Incentive Plan as last amended May 7, 1987. 10(c)* The Lincoln National Corporation Executives' Salary Continuation Plan as last amended January 1, 1992 is incorporated by reference to Exhibit 10(c) of LNC's Form 10-K for the year ended December 31, 1992, filed with the Commission on March 30, 1993. 10(d)* The Lincoln National Corporation Executive Value Sharing Plan is incorporated by reference to Exhibit 10(d) of LNC's Form 10-K for the year ended December 31, 1992, filed with the Commission on March 30, 1993. 10(e)* The Lincoln National Corporation Management Incentive Plan II as last amended August 1, 1989, is incorporated by reference to Exhibit 10(e) of LNC's Form 10-K for the year ended December 31, 1989, filed with the Commission on March 29, 1990. 10(f)* Lincoln National Corporation Executives' Severance Benefit Plan as last amended January 10, 1990, is incorporated by reference to Exhibit 10(f) of LNC's Form 10-K for the year ended December 31, 1990, filed with the Commission on March 28, 1991. 10(g)* The Lincoln National Corporation Outside Directors Retirement Plan as last amended March 15, 1990, is incorporated by reference to Exhibit 10(g) of LNC's Form 10-K for the year ended December 31, 1990, filed with the Commission on March 28, 1991. 10(h)* The Lincoln National Corporation Outside Directors Benefits Plan is incorporated by reference to Exhibit 10(h) of LNC's Form 10-K for the year ended December 31, 1992, filed with the Commission on March 30, 1993. -58- 10(i) Lease and Agreement dated August 1, 1984, with respect to the American States' home office property, is incorporated by reference to Exhibit 10(i) of LNC's Form 10-K for the year ended December 31, 1990, filed with the Commission on March 28, 1991. 10(j) Lease and Agreement dated August 1, 1984, with respect to LNL's home office property, is incorporated by reference to Exhibit 10(j) of LNC's Form 10-K for the year ended December 31, 1990, filed with the Commission on March 28, 1991. 10(k) Lease and Agreement dated August 1, 1984, with respect to Lincoln National Pension Insurance Company's ("LNP") home office property, is incorporated by reference to Exhibit 10(k) of LNC's Form 10-K for the year ended December 31, 1990, filed with the Commission on March 28, 1991. [LNP was merged into its parent, LNL, effective January 1, 1989.] 10(l) Lease dated March 1, 1984, with respect to Security- Connecticut's home office property, is incorporated by reference to Exhibit 10(l) of LNC's Form 10-K for the year ended December 31, 1990, filed with the Commission on March 28, 1991. 10(m)* Descriptions of compensation arrangements with Executive Officers. 10(n)* The Lincoln National Corporation Executives' Supplemental Pension Benefit Plan is incorporated by reference to Exhibit 10(n) of LNC's Form 10-K for the year ended December 31, 1992, filed with the Commission on March 30, 1993. 10(o)* Lincoln National Corporation Executive Savings and Profit Sharing Plan as amended as of January 1, 1992 is incorporated by reference to Exhibit 10(o) of LNC's Form 10-K for the year ended December 31, 1992, filed with the Commission on March 30, 1993. 10(p) Lease dated February 14, 1991, with respect to property occupied by select Fort Wayne operations of the Registrant is incorporated by reference to Exhibit 10(q) of LNC's Form 10-K for the year ended December 31, 1991 filed with the Commission on March 27, 1992. 10(q)* Lincoln National Corporation 1993 Stock Plan for Non-Employee Directors. 10(r)* Lincoln National Corporation Executives' Excess Compensation Benefit Plan. *This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. 11 Computation of Per Share Earnings 21 The List of Subsidiaries of LNC. 23 Consent of Independent Auditors. 28 Information from Reports Furnished to State Insurance Regulatory Authorities. Item 14(b) - During the fourth quarter of the year ended December 31, 1993, no reports on Form 8-K were filed with the Commission. Item 14(c) - The exhibits of Lincoln National Corporation and subsidiaries are listed in Item 14(a)(3) above. Item 14(d) - The financial schedules for Lincoln National Corporation and subsidiaries follow on pages 59 through 68. -59-
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1993 (000's omitted) Col. A Col. B Col. C Col. D Amount at Which Shown in the Type of Investment Cost Value Balance Sheet Fixed maturity securities available-for-sale: Bonds: United States Government and government agencies and authorities ------------ $ 1,657,255 $ 1,691,261 $ 1,691,261 States, municipalities and political subdivisions ----- 2,558,205 2,771,654 2,771,654 Mortgage-backed bonds -------- 5,685,674 6,061,996 6,061,996 Foreign governments ---------- 493,716 551,567 551,567 Public utilities ------------- 3,167,517 3,421,002 3,421,002 Convertibles and bonds with warrants attached ----- 143,869 158,199 158,199 All other corporate bonds ---- 8,377,453 9,165,616 9,165,616 Redeemable preferred stocks ---- 135,596 143,040 143,040 Total -------------------- 22,219,285 23,964,335 23,964,335 Equity securities available-for-sale: Common stocks: Public utilities ------------- 23,139 31,686 31,686 Banks, trusts and insurance companies -------- 94,228 159,284 159,284 Industrial, miscellaneous and all other -------------- 559,142 648,639 648,639 Nonredeemable preferred stocks - 219,968 240,692 240,692 Total Equity Securities -- 896,477 1,080,301 1,080,301 Mortgage loans on real estate ---- 3,527,590 3,300,951(A) Real estate: Investment properties ---------- 469,913 469,913 Acquired in satisfaction of debt ---------- 284,617 163,190(A) Policy loans --------------------- 595,085 595,085 Other investments ---------------- 185,366 158,170(A) Total Investments -------- $28,178,333 $29,731,945
(A) Investments which are deemed to have declines in value that are other than temporary are written down or reserved for to reduce their carrying value to their estimated realizable value. -60-
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS Lincoln National Corporation (Parent Company Only) December 31 (000's omitted) 1993 1992 (Restated) Assets: Investments in subsidiaries* ------------------ $4,870,705 $3,833,654 Investments ----------------------------------- 43,868 58,361 Cash and invested cash ------------------------ 271,721 421,974 Property and equipment ------------------------ 5,941 1,419 Accrued investment income --------------------- 16 65 Receivable from subsidiaries* ----------------- 62,835 48,600 Loans to subsidiaries* ------------------------ 16,025 50,750 Dividends receivable from subsidiaries* ------- 80,000 -- Goodwill -------------------------------------- 10,008 11,015 Other assets ---------------------------------- 116,215 17,638 Total Assets -------------------- $5,477,334 $4,443,476 Liabilities and Shareholders' Equity Liabilities: Cash collateral on loaned securities ---------- $ 189,256 $ 179,709 Dividends payable ----------------------------- 38,591 32,014 Short-term debt ------------------------------- 312,867 420,232 Long-term debt -------------------------------- 298,422 398,288 Loans from subsidiaries* ---------------------- 328,467 456,069 Federal income taxes payable (receivable) ----- 30,717 (4,907) Accrued expenses and other liabilities -------- 206,693 135,200 Total Liabilities --------------- $1,405,013 $1,616,605 Shareholders' Equity: Series A Preferred Stock --------------------- 1,553 1,896 Series E Preferred Stock --------------------- 151,206 151,206 Series F Preferred Stock --------------------- 158,707 158,707 Common Stock --------------------------------- 543,659 200,986 Earned surplus ------------------------------- 2,303,731 2,147,691 Foreign currency translation adjustment ------ (1,214) 3,643 Net unrealized gain on investment securities available-for-sale [including unrealized gain of subsidiaries: 1993 - $891,997,000, 1992 - $133,945,000] -- 914,679 162,742 Total Shareholders' Equity ----- 4,072,321 2,826,871 Total Liabilities and Shareholders' Equity ---------- $5,477,334 $4,443,476 *Eliminated in consolidation.
These condensed financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes of Lincoln National Corporation and subsidiaries (see pages 30 through 54). -61-
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) STATEMENTS OF INCOME Lincoln National Corporation (Parent Company Only) Year Ended December 31 (000's omitted) 1993 1992 1991 (Restated)(Restated) Revenue: Dividends from subsidiaries* --------------- $155,980 $ 60,324 $ 49,524 Interest from subsidiaries* ---------------- 1,730 1,799 2,743 Pre-closing dividend from subsidiaries sold- -- 40,917 -- Net investment income ---------------------- 14,634 22,610 37,834 Realized gain (loss) on investments -------- 27,106 49,807 (2,753) Loss on sale of subsidiaries --------------- -- -- (90,274) Other -------------------------------------- (61) 1,235 1,063 Total Revenue -------------------------- 199,389 176,692 (1,863) Expenses: Operating and administrative --------------- 21,682 32,078 31,811 Interest-subsidiaries* --------------------- 13,811 18,246 36,436 Interest-other ----------------------------- 41,136 51,861 62,033 Total Expenses ------------------------- 76,629 102,185 130,280 Income before Federal Income Tax (Credits), Equity in Undistributed Net Income of Subsidiaries and Cumulative Effect of Accounting Change ------------------ 122,760 74,507 (132,143) Federal income tax expense (credits) --------- (6,032) (7,521) (65,966) Income (Loss) Before Equity in Undistributed Net Income of Subsidiaries and Cumulative Effect of Accounting Change ----------- 128,792 82,028 (66,177) Equity in undistributed net income of subsidiaries -------------------------------- 286,491 277,143 268,137 Income Before Cumulative Accounting Change -------------------------------- 415,283 359,171 201,960 Cumulative effect of accounting change: Parent company ------------------------------- (8,006) -- -- Subsidiaries --------------------------------- (88,425) -- -- Total Accounting Change ---------------- (96,431) -- -- Net Income ----------------------------- $318,852 $359,171 $201,960 *Eliminated in consolidation.
These condensed financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes of Lincoln National Corporation and subsidiaries (see pages 30 through 54). -62-
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) STATEMENTS OF CASH FLOWS Lincoln National Corporation (Parent Company Only) Year Ended December 31 (000's omitted) 1993 1992 1991 (Restated)(Restated) Cash Flows from Operating Activities: Net Income ----------------------------------- $318,852 $359,171 $201,960 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries * ------------------------ (278,065) (264,833) (290,585) Realized (gain) loss on investments ------- (27,106) (49,807) 2,753 Loss on sale of subsidiaries -------------- -- -- 90,274 Cumulative effect of accounting change ---- 8,006 -- -- Other ------------------------------------- 23,375 10,088 (49,259) Net Adjustments ------------------------- (273,790) (304,552) (246,817) Net Cash Provided by (Used in) Operating Activities ------------------- 45,062 54,619 (44,857) Cash Flows from Investing Activities: Purchase of investments ---------------------- (414) (6,915) (14,250) Sale or maturity of investments -------------- 32,062 93,363 8,865 Cash collateral on loaned securities --------- 9,547 (31,746) 54,799 Net investment in consolidated subsidiaries* - (105,846) (103,149) (154,593) Sale of subsidiaries ------------------------- -- 145,270 -- Net (purchase) sale of property and equipment- (5,563) 5,141 (1,002) Other ---------------------------------------- 3,147 (24,079) 8,258 Net Cash Provided by (Used in) Investing Activities ------------------- (67,067) 77,885 (97,923) Cash Flows from Financing Activities: Principal payments on long-term debt --------- -- (31,283) (10,585) Issuance of long-term debt ------------------- -- 197,737 -- Net increase (decrease) in short-term debt --- (207,231) (225,503) 206,396 Issuance of Series F Preferred Stock --------- -- -- 158,707 Increase (decrease) in loans from subsidiaries* ------------------------------- (127,602) 113,436 (108,848) Decrease (increase) in loans to subsidiaries*- 34,725 50,091 (64,146) Decrease (increase) in receivables from subsidiaries* ------------------------------- (14,235) 40,735 (9,835) Public offering of Common Stock -------------- 316,100 -- -- Common Stock issued for benefit plans -------- 26,230 21,018 2,068 Dividends paid to shareholders --------------- (156,235) (139,151) (125,956) Net Cash Provided by Financing Activities ------------------- (128,248) 27,080 47,801 Net Increase (Decrease) in Cash --------- (150,253) 159,584 (94,979) Cash at beginning of year -------------------- 421,974 262,390 357,369 Cash at End of Year --------------------- $271,721 $421,974 $262,390 *Eliminated in consolidation.
These condensed financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes of Lincoln National Corporation and subsidiaries (see pages 30 through 54). -63-
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES SCHEDULE V - SUPPLEMENTARY INSURANCE INFORMATION Column A Column B Column C Column D Column E Column F Column G Future Policy Other Benefits, Policy Deferred Losses, Claims Claims and Net Acquisition and Loss Unearned Benefits Premium Investment Segment Costs Expenses Premiums Payable Revenue (B) Income(A) --------------------------------(000's Omitted)--------------------------------- Year Ended December 31, 1993 Property-Casualty ------------ $ 153,073 $ 2,810,037 $777,011 $ $1,841,363 $ 250,633 Life Insurance and Annuities - 1,176,852 7,305,262 6,527 969,579 1,717,503 Life-Health Reinsurance ------ 681,206 2,340,654 76,606 1,787,644 124,856 Employee Life-Health Benefits- 320,189 1,228,606 42,931 Other (incl. consol. adj's.) - (124,107) (1,339) 10,596 Total ------------- $2,011,131 $12,652,035 $858,805 $ -- $5,827,192 $2,146,519 Year Ended December 31, 1992 Property-Casualty ------------ $ 172,378 $ 2,672,503 $840,349 $ $2,082,953 $ 287,224 Life Insurance and Annuities - 1,430,790 6,617,403 4,587 789,796 1,572,744 Life-Health Reinsurance ------ 509,453 1,497,314 135,543 1,651,166 108,713 Employee Life-Health Benefits- 269,044 13 1,184,183 37,775 Other (incl. consol. adj's.) - 5,275 68,296 5 268 (19,160) Total ------------- $2,117,896 $11,124,560 $980,497 $ -- $5,708,366 $1,987,296 Year Ended December 31, 1991 Property-Casualty ------------ $ 194,242 $ 2,502,421 $919,007 $ $2,242,009 $ 276,992 Life Insurance and Annuities - 1,278,993 6,078,897 2,809 805,426 1,378,980 Life-Health Reinsurance ------ 483,756 1,393,569 41,089 1,600,730 94,204 Employee Life-Health Benefits- 14,895 500,739 6,945 2,436,929 72,263 Other (incl. consol. adj's.) - (17,816) 2,548 (23,091) Total ------------- $1,971,886 $10,457,810 $969,850 $ -- $7,087,642 $1,799,348 Column A Column H Column I Column J Column K Amortiza- Benefits, tion of Claims, Deferred Lossess and Policy Ac- Other Settlement quisition Operating Premiums Segment Expenses Costs Expenses (A) Written ----------------------(000's Omitted)----------------- Year Ended December 31, 1993 Property-Casualty ------------ $1,406,781 $384,185 $ 187,654 $1,766,649 Life Insurance and Annuities - 1,883,656 139,824 371,756 Life-Health Reinsurance ------ 1,421,329 42,549 561,790 Employee Life-Health Benefits- 916,513 294,810 Other (incl. consol. adj's.) - 5,274 85,807 Total ------------- $5,628,279 $571,832 $1,501,817 Year Ended December 31, 1992 Property-Casualty ------------ $1,721,802 $435,353 $ 229,426 $2,003,534 Life Insurance and Annuities - 1,723,165 122,652 395,874 Life-Health Reinsurance ------ 1,349,444 (3,955) 352,025 Employee Life-Health Benefits- 902,096 276,616 Other (incl. consol. adj's.) - 3,936 9,621 91,349 Total ------------- $5,700,443 $563,671 $1,345,290 Year Ended December 31, 1991 Property-Casualty ------------ $1,844,892 $456,706 $ 229,557 $2,242,692 Life Insurance and Annuities - 1,655,770 102,040 318,933 Life-Health Reinsurance ------ 1,465,148 26,013 170,447 Employee Life-Health Benefits- 1,919,470 3,481 654,438 Other (incl. consol. adj's.) - 1,538 53,653 Total ------------- $6,886,818 $588,240 $1,427,028 (A) The allocation of expenses between investments and other operations are based on number of assumptions and estimates. Results would change if different methods were applied. (B) Includes insurance fees on universal life and other interest sensitive products.
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LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES SCHEDULE VI - REINSURANCE (A) Column A Column B Column C Column D Column E Column F Ceded Assumed Percentage of Gross to Other from Other Net Amount Assumed Amount Companies Companies Amount to Net -------------------------(000's Omitted)----------------------- Year Ended December 31, 1993 Life insurance in force ------------ $144,054,000 $46,255,000 $89,712,000 $187,511,000 47.8% Premiums: Property-casualty insurance ----- $1,760,560 $ 71,472 $ 152,275 $ 1,841,363 8.3% Health insurance ---------------- 1,376,038 80,731 613,951 1,909,258 32.2 Life insurance (B) -------------- 1,086,349 139,013 1,129,235 2,076,571 54.4 Total ----------------- $4,222,947 $291,216 $1,895,461 $5,827,192 Year Ended December 31, 1992 Life insurance in force ------------ $131,104,000 $46,938,000 $86,881,000 $171,047,000 50.8% Premiums: Property-casualty insurance ----- $1,954,569 $ 99,858 $ 228,242 $2,082,953 11.0% Health insurance ---------------- 1,184,817 34,391 707,365 1,857,791 38.1 Life insurance (B) -------------- 895,004 151,975 1,024,593 1,767,622 58.0 Total ----------------- $4,034,390 $286,224 $1,960,200 $5,708,366 Year Ended December 31, 1991 Life insurance in force ------------ $158,185,000 $48,580,000 $ 97,372,000 $206,977,000 47.0% Premiums: Property-casualty insurance ----- $2,078,083 $ 88,970 $ 252,896 $2,242,009 11.3% Health insurance ---------------- 2,419,096 52,683 739,914 3,106,327 23.8 Life insurance (B) -------------- 984,384 300,415 1,055,337 1,739,306 60.7 Total ----------------- $5,481,563 $442,068 $2,048,147 $7,087,642 (A) Special-purpose bulk reinsurance transactions have been excluded. (B) Includes insurance fees on universal life and other interest sensitive products.
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LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES SCHEDULE VII - GUARANTEES OF SECURITIES OF OTHER ISSUERS December 31, 1993 Column A Column B Column C Column D Column E Column F Column G Amount Amount Title of Guaranteed Amount in Name of Issuer of Securities Issue and Owned Treasury Nature of Nature of Guaranteed Guaranteed Outstanding by LNC of Issuer Guarantee Default Industrial Revenue Bonds: Econ. Devel. Corp of the Var. Rev. Bonds $ 6,050,000 Principal/Int. None City of Troy City of Waterloo, Iowa IRB Floating Rate 8,000,000 Principal/Int. None Monthly Demand Note St. Louis City - IRB Var. Rev. Bond 7,800,000 Principal/Int. None LA Public Facilities Auth. 3.25% Tax Exempt Bds 9,400,000 Principal/Int. None Oakland Cty, MI. Econ. Devel. Corp. 6.00% Tax Exempt 1,505,000 Principal/Int. None Bonds City of Clayton, MO IRB Var. 1st Mort.IRB 8,600,000 Principal/Int. None Charter Township of Pittsfield 6.4% Rev. Bonds 6,500,000 Principal/Int. None Chester City. PA Econ. Devel. Floating Rate 5,200,000 Principal/Int. None Corp. Monthly Demand Note City of Oak Ridge, TN Indus. Variable Rate 2,650,000 Principal/Int. None Devel. Board Rev. Bonds Fulton Cty, GA Housing Auth. Var. Flexible 18,000,000 Principal/Int. None Demand Multi-Family Housing Rev. Bds Village of Schaumburg, IL Var. Multi-Family 9,500,000 Principal/Int. None Housing Rev. Bds LA Public Facilities 5.25% Rev. Bonds 8,000,000 Principal/Int. None FL State Housing Auth. Var. Tax Exempt 9,350,000 Principal/Int. None Housing Auth. Bd City of Plymouth, MN 6.75% Multi-Family 9,500,000 Principal/Int. None Housing Rev. Bds FL State Housing Finance Var. Rate Multi- 9,500,000 Principal/Int. None Agency Family Housing Rev. Bonds City of Fort Wayne, IN Floating Rate 10,700,000 Principal/Int. None Rev. Bond Rounding (55,000) Total Industrial Revenue Bond Guarantees 130,200,000 Other Real Estate Guarantees: National Westminster Constr. Loan 2,339,430 Principal/Int. None Constr. Loan 4,290,111 Principal/Int. None Constr. Loan 4,027,545 Principal/Int. None Constr. Loan 5,127,516 Principal/Int. None Var. Rate Loan 3,275,000 Principal/Int. None National Westminster PLC Adj. Rate Loan 5,000,000 Principal/Int. None Adj. Rate Loan 5,200,000 Principal/Int. None Citizens & Peoples National Bank Line of Credit 200,000 Principal/Int. None Chase Manhattan Bank Var. Mortgage Loan 6,200,000 Principal/Int. None LaSalle National Bank Var. Rate Loan 570,000 Principal/Int. None Banc Boston Mortgage Corporation Var. Rate Mortgage 7,578,060 Principal/Int. None Rounding (7,662) Total Other Real Estate Guarantees 43,800,000 Total Guarantees $174,000,000
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LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS Col. A Col. B Col. C Col. D Col. E Additions Balance at (1) (2) Balance at Beginning Charged to Charged to Other Deductions- End of Description of Period Costs & Expenses Accounts-Describe(A) Describe(B) Period (000's Omitted) Year Ended December 31, 1993 Deducted from Asset Accounts: Reserve for Mortgage Loans on Real Estate -------------------- $134,476 $140,568 $(48,405) $226,639 Reserve for Real Estate ------------ 131,060 33,389 (43,022) 121,427 Reserve for Other Long-term Investments ----------------------- 40,307 4,321 (17,432) 27,196 Included in Other Liabilities: Investment Guarantees -------------- 30,033 1,427 (12,925) 18,535 Year Ended December 31, 1992 Deducted from Asset Accounts: Reserve for Mortgage Loans on Real Estate -------------------- $ 72,094 $ 91,909 $(22,540) $(6,987) $134,476 Reserve for Real Estate ------------ 92,000 36,034 22,540 (19,514) 131,060 Reserve for Other Long-term Investments ----------------------- 23,220 20,341 (3,254) 40,307 Included in Other Liabilities: Investment Guarantees -------------- 24,950 6,883 (1,800) 30,033 Year Ended December 31, 1991 Deducted from Asset Accounts: Reserve for Mortgage Loans on Real Estate -------------------- $ 31,814 $ 49,078 $ (3,928) (4,870) $ 72,094 Reserve for Real Estate ------------ 59,065 34,429 3,928 (5,422) 92,000 Reserve for Other Long-term Investments ----------------------- 9,092 16,762 (2,000) (634) 23,220 Included in Other Liabilities: Investment Guarantees -------------- 13,290 15,860 2,000 (6,200) 24,950 (A) Transfer between investment classifications. (B) Deductions reflect sales or foreclosures of the underlying holdings.
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LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES SCHEDULE IX - SHORT-TERM BORROWINGS Col. A Col. B Col. C Col. D Col. E Col. F Maximum Average Weighted Weighted Amount Amount Average Balance Average Outstanding Outstanding Interest Rate Category of Aggregate at End Interest During the During the During the Short-Term Borrowings of Period Rate Period Period (C) Period (D) (000's Omitted) ----------- -(000's Omitted)----------------- Year Ended December 31, 1993 Commercial paper (A) ---------------- $212,700 3.35% $416,430 $184,945 2.75% Notes payable (B) ------------------- 37,255 6.27% 110,865 64,822 4.31% Current portion of long-term debt --- 101,463 Total ----------------------------- $351,418 Year Ended December 31, 1992 Commercial paper (A) ---------------- $416,430 3.58% $494,621 $316,280 4.11% Notes payable (B) ------------------- 11,320 6.59% 100,362 41,887 6.27% Current portion of long-term debt --- 5,657 Total ----------------------------- $433,407 Year Ended December 31, 1991 Commercial paper (A) ---------------- $494,621 5.09% $613,180 $471,967 5.83% Notes payable (B) ------------------- 67,607 6.50% 127,637 51,655 8.08% Current portion of long-term debt --- 115,078 Total ---------------------------- $677,306 Notes: (A) Commercial paper matures generally within three months from date of issue with no provision for the extension of its maturity. (B) Notes payable represents unsecured term loans having a fixed maturity of one year or less with no provision for renewal. (C) The average amount outstanding during the period was computed by averaging the total of month-end outstanding principal balances. (D) The weighted average interest rate during the period was computed by dividing the actual interest expense by the average amount outstanding as computed in (C).
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LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES SCHEDULE X - SUPPLEMENTARY INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS Column A Column B Column C Column D Column E Column F Column G Reserves for Deferred Unpaid Claims Discount, Affiliation Policy and Claim if any Net with Acquisition Adjustment Deducted in Unearned Earned Investment Registrant Costs Expenses Column C Premiums Premium Income ----------------------------(000's Omitted)---- - ------------------------------- Consolidated subsidiaries: Year Ended December 31, 1993 $153,073 $2,810,037 $ -- $777,011 $1,841,363 $250,633 Year Ended December 31, 1992 $172,378 $2,672,503 $ -- $840,349 $2,082,953 $287,224 Year Ended December 31, 1991 $194,242 $2,502,421 $ -- $919,007 $2,242,009 $276,992 Column A Column H Column I Column J Column K Claims and Claim Adj Expenses(Credits) Amortization Paid Incurred Related to of Deferred Claims Affiliation (1) (2) Policy and Claim with Current Prior Acquisition Adjustment Premium Registrant Year Years Costs Expenses Written ----------------------(000's omitted)-------------------------- Consolidated subsidiaries: Year Ended December 31, 1993 $1,433,270 $(26,489) $384,185 $1,494,764 $1,766,649 Year Ended December 31, 1992 $1,670,603 $ 46,965 $435,353 $1,547,486 $2,003,534 Year Ended December 31, 1991 $1,824,662 $ 12,266 $456,706 $1,580,911 $2,242,692
-69- LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES EXHIBIT INDEX FOR THE ANNUAL REPORT ON FORM 10-K For the Year Ended December 31, 1993 Exhibit Number Page 3(a) Articles of Incorporation of LNC as last amended May 24, 1991. 3(b) Bylaws of LNC as last amended January 1, 1992. 4(a) Indenture for 8% Notes due March 15, 1997 and Specimen Notes. 4(b) Indenture for 7 1/8% due July 15, 1999 and Specimen Notes.* 4(c) Indenture for 7 5/8% Notes due July 15, 2002 and Specimen Notes.* 4(d) Fiscal Agency Agreement for 9 3/4% Notes due October 30, 1995, and Specimen Notes. 71 10(a) Lincoln National Corporation 1986 Stock Option Incentive Plan. 101 10(b) Lincoln National Corporation 1982 Stock Option Incentive Plan. 110 10(c) The Lincoln National Corporation Executives' Salary Continuation Plan.* 10(d) The Lincoln National Corporation Executive Value Sharing Plan.* 10(e) The Lincoln National Corporation Management Incentive Plan II.* 10(f) Lincoln National Corporation Executives' Severance Benefit Plan as last amended January 10, 1990.* 10(g) The Lincoln National Corporation Outside Directors Retirement Plan.* 10(h) The Lincoln National Corporation Outside Directors Benefits Plan.* 10(i) Lease and Agreement dated August 1, 1984, with respect to the American States' home office property.* 10(j) Lease and Agreement dated August 1, 1984, with respect to LNL's home office property.* 10(k) Lease and Agreement dated August 1, 1984, with respect to LNP's home office property.* 10(l) Lease dated March 1, 1984, with respect to the Security-Connecticut's home office property.* 10(m) Descriptions of Compensation Arrangements with Executive Officers. 118 10(n) The Lincoln National Corporation Executives' Supplemental Pension Benefit Plan.* 10(o) The Lincoln National Corporation Executive Savings and Profit Sharing Plan as last amended January 1, 1992.* 10(p) Lease dated February 14, 1991, with respect to select Fort Wayne business operation's office space.* 10(q) Lincoln National Corporation 1993 Stock Plan for Non- Employee Directors. 120 10(r) Lincoln National Corporation Executives' Excess Compensation Benefit Plan. 125 11 Computation of Per Share Earnings. 128 21 List of Subsidiaries of LNC. 129 23 Consent of Independent Auditors. 135 28 Information from Reports Furnished to State Insurance Regulatory Authorities. P 136 *Incorporated by Reference -70- Signature Page LINCOLN NATIONAL CORPORATION Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act By /s/ Ian M. Rolland March 10, 1994 of 1934, LNC has duly caused Ian M. Rolland, this report to be signed on (Chairman, Chief Executive Officer and behalf by the under- Director) signed, thereunto duly authorized. By /s/ Robert A. Anker March 10, 1994 Robert A. Anker, (President, Chief Operating Officer and Director) By /s/ Richard C. Vaughan March 10, 1994 Richard C. Vaughan, (Senior Vice President and Chief Financial Officer) By /s/ Donald L. Van Wyngarden March 10, 1994 Donald L. Van Wyngarden (Second Vice President and Controller) Pursuant to the requirements By /s/ J. Patrick Barrett March 10, 1994 of the Securities Exchange J. Patrick Barrett Act of 1934, this report has been signed below by By /s/ Thomas D. Bell, Jr. March 10, 1994 the following Directors Thomas D. Bell, Jr of LNC on the date indicated. By /s/ Daniel R. Efroymson March 10, 1994 Daniel R. Efroymson By /s/ Harry L. Kavetas March 10, 1994 Harry L. Kavetas By /s/ M. Leanne Lachman March 10, 1994 M. Leanne Lachman By /s/ Leo J. McKernan March 10, 1994 Leo J. McKernan By /s/ Earl L. Neal March 10, 1994 Earl L. Neal By /s/ John M. Pietruski March 10, 1994 John M. Pietruski By /s/ Jill S. Ruckelshaus March 10, 1994 Jill S. Ruckelshaus By /s/ Gordon A. Walker March 10, 1994 Gordon A. Walker By /s/ Gilbert R. Whitaker,Jr. March 10, 1994 Gilbert R. Whitaker,Jr. EX-4 2 -71- LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES EXHIBIT 4(d) - FISCAL AGENCY AGREEMENT FOR 9 3/4% NOTES DUE OCTOBER 30, 1995, AND SPECIMEN NOTES FISCAL AGENCY AGREEMENT Between LINCOLN NATIONAL CORPORATION Issuer and MORGAN GUARANTY TRUST COMPANY OF NEW YORK Fiscal Agent Dated as of October 20, 1988 U.S.$100,000,000 9 3/4% Notes Due 1995 -72- FISCAL AGENCY AGREEMENT, dated as of October 20, 1988, between LINCOLN NATIONAL CORPORATION, a corporation duly organized and existing under the laws of the State of Indiana ("Company"), and Morgan Guaranty Trust Company of New York, a corporation duly organized and existing under the laws of the State of New York, as Fiscal Agent. 1. The Company has, by a Subscription Agreement, dated September 29, 1988, between the Company and Credit Suisse First Boston Limited and the other Managers named therein, agreed to issue U.S.$100,000,000 aggregate principal amount of its 9 3/4% Notes Due 1995 (the "Securities"). The Securities shall be issued initially in the form of a temporary global security in bearer form, without coupons, substantially in the form of Exhibit A hereto ("Global Security"). The Global Security will be exchangeable, as provided below, for definitive Securities issuable as bearer Securities, in the denomination of U.S.$5,000, with interest coupons attached ("coupons"), and as registered Securities, without coupons, in denominations of U.S.$5,000 and integral multiples thereof, all substantially in the forms set forth in Exhibit B hereto. The term "Securities" as used herein includes the Global Security. The term "Holder", when used with respect to a bearer Security or any coupon, means the bearer thereof and, when used with respect to-a registered Security, means the person in whose name such Security is registered in the Security Register (as defined in Section 3 hereof). 2. The Company hereby appoints Morgan Guaranty Trust Company of New York, at present having its principal corporate trust office ("Principal Office") at 30 West Broadway, New York, New York 10015, as its fiscal agent in respect of the Securities upon the terms and subject to the conditions herein set forth. (Morgan Guaranty Trust Company of New York and its successor or successors as such fiscal agent qualified or appointed in accordance with Section 8 hereof are herein called "Fiscal Agent".) The Fiscal Agent shall have the powers and authority granted to and conferred upon it herein and in the Securities and such further powers and authority, acceptable to it, to act on behalf of the Company as the Company may hereafter grant to or confer upon it. Any power or authority granted to the Fiscal Agent herein or hereafter by the Company may be exercised by the Fiscal Agent or by any duly authorized agent of the Fiscal Agent. As used herein, "paying agencies" shall mean paying agencies (including the Fiscal Agent, if so appointed by the Company) maintained by the Company as provided in Section 8(b) hereof. 3. (a) The Securities shall be executed on behalf of the Company by its Chairman, its President or one of its Vice Presidents ("executive officers"), any of whose signatures may be manual or facsimile, under a facsimile of its corporate seal reproduced thereon and attested by its Secretary or an Assistant Secretary, any of whose signatures may be manual or facsimile. Securities bearing the manual or facsimile signatures of persons who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such persons or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of issue of such Securities. (b) Registered Securities may be surrendered for registration of transfer and may be exchanged for registered Securities, and bearer Securities may be exchanged for registered Securities, all upon the terms and conditions set forth in Paragraph 3 of the definitive Securities. Registered Securities may not be exchanged for bearer Securities. The Company shall cause to be kept at an office or agency in the Borough of Manhattan, The City of New York a register (the register maintained in such office and in any other office or agency for such purpose being herein sometimes collectively referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of registered Securities and of transfers of registered Securities. The Company hereby appoints the Fiscal Agent as "Security Registrar" for the purpose of registering registered Securities and transfers of registered Securities as herein provided. In addition, the Company has appointed the main offices of Morgan Guaranty Trust Company of New York in London, England and Banque Internationale a Luxembourg S.A. in Luxembourg as additional agencies where Securities may be surrendered for registration of transfer or exchange. -73- (c) The Fiscal Agent is hereby authorized, in accordance with the provisions of Paragraph 9 of the definitive Securities and this Section, from time to time to authenticate and deliver a security in exchange for or in lieu of any Security or coupon, as the case may be, which becomes mutilated, lost, stolen or destroyed. Each Security authenticated and delivered in exchange for or in lieu of any such Security shall carry all the rights to interest accrued and unpaid and to accrue which were carried by such Security. (d) At any time when any of the Securities remain Outstanding, the Fiscal Agent may appoint an authenticating agent or agents ("Authenticating Agent or Agents") which shall be authorized to act on behalf of the Fiscal Agent to authenticate Securities issued upon exchange, registration of transfer or partial redemption thereof, and Securities so authenticated shall be entitled to the benefits of this Fiscal Agency Agreement and shall be valid obligations for all purposes as if authenticated by the Fiscal Agent here- under. Wherever reference is made in this Fiscal Agency Agreement to the authentication and delivery of Securities by the Fiscal Agent or the Fiscal Agent's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Fiscal Agent by an Authenticating Agent and a certificate of authentication executed on behalf of the Fiscal Agent by an Authenticating Agent; provided, however, that the Global Security may only be authenticated by the Fiscal Agent. Each Authenticating Agent shall be acceptable to the Company. 4. (a) The Company initially shall execute and deliver the Global Security to the Fiscal Agent, and the Fiscal Agent shall, upon the order of the Company signed by an executive officer of the Company, authenticate the Global Security and deliver the Global Security to The Chase Manhattan Bank, London Branch, as common depositary (the "Common Depositary") for the benefit of the operator of the Euro-clear System ("EURO-CLEAR") and of CEDEL S.A. for credit to the respective accounts of the beneficial owners of Securities (or to such other accounts as they may direct). (b) The Company shall execute and deliver to the Fiscal Agent U.S.$100,000,000 principal amount of definitive Securities prior to the exchange date for issuing such definitive securities (the "Exchange Date"), which shall be the date 90 days after the date on which the distribution of the Securities has been completed, as Credit Suisse First Boston Limited shall have advised the Fiscal Agent in writing with a copy to the Company, the Common Depositary, EURO-CLEAR and CEDEL S.A. Such definitive Securities shall be in the form of bearer Securities, registered Securities or any combination thereof as may be specified by the Fiscal Agent. (c) The interest of a beneficial owner of securities in the Global Security shall be exchanged for definitive securities when the account holder instructs EURO-CLEAR or CEDEL S.A., as the case may be, to request such exchange on his behalf and delivers to EURO-CLEAR or CEDEL S.A., as the case may be, a certificate substantially in the form set forth in Exhibit C hereto, copies of which certificate shall be available from the offices of EURO-CLEAR and CEDEL S.A., the Fiscal Agent and each other paying agency of the Company. Any exchange pursuant to this Section shall be made free of charge to the beneficial owners of the Global Security, except that a person receiving definitive Securities must bear the cost of insurance, postage, transportation and the like in the event that such person does not take delivery of such definitive securities in person at the offices of EURO-CLEAR or CEDEL S.A. Notwithstanding any other provision hereof or of the Securities, no bearer Security will be mailed to or otherwise delivered in connection with its original issuance to any location within the United States (as defined.in Section 5(b) hereof). -74- (d) On or after the Exchange Date, the Global Security shall be surrendered by the Common Depositary to the Fiscal Agent at its main office in London, as the Company's agent, for purposes of the exchange of Securities described below. Following such surrender, upon the request of EURO-CLEAR or CEDEL S.A., acting on behalf of beneficial owners of Securities, the Fiscal Agent or an Authenticating Agent shall authenticate and deliver to EURO-CLEAR or CEDEL S.A., as the case may be, for the account of such owners, definitive Securities in the form of bearer Securities or registered Securities, or any combination thereof, as shall be specified by such owners in exchange for the aggregate principal amount of the Global Security beneficially owned by such owners, but only upon delivery by EURO-CLEAR or CEDEL S.A., acting on behalf of such owners, to the Fiscal Agent, the Authenticating Agent that will authenticate such definitive Securities, if any, and to the Company-of a certificate or certificates substantially in the form set forth in Exhibit D hereto. The delivery to the Fiscal Agent and to the Company by EURO-CLEAR or CEDEL S.A. of such a certificate or certificates may be relied upon by the Fiscal Agent and the Company as conclusive evidence that a related certificate or certificates has or have been delivered to EURO-CLEAR or CEDEL S.A., as the case may be, as contemplated by the terms of Section 4(c) hereof. Upon any exchange of a portion of the Global Security for definitive Securities, the Global Security shall be endorsed by the Fiscal Agent to reflect the reduction of the principal amount evidenced thereby, whereupon its remaining principal amount shall be reduced for all purposes by the amount so exchanged. Until so exchanged in full, the Global Security shall in all respects be entitled to the same benefits under this Agreement as definitive Securities authenticated and delivered hereunder, except that none of EURO- CLEAR, CEDEL S.A. or the beneficial owners of the Global Security shall be entitled to receive payment of interest thereon. 5. (a) The Company will pay or cause to be paid to the main office of its paying agent in the Borough of Manhattan, The City of New York (the "Principal Paying Agent") the amounts required to be paid by it herein and in the Securities, at the times and for the purposes set forth herein and in the Securities, and the Company hereby authorizes and directs the Fiscal Agent, and the Fiscal Agent hereby directs and authorizes the Principal Paying Agent, to make payment of the principal of and interest on the Securities in accordance with the terms of the Securities. Funds sufficient to provide for payment by the Company to the Principal Paying Agent, or to such other office or agency as the Fiscal Agent shall direct, shall be deposited by the Company with the Principal Paying Agent, or such other office or agency, at least one business day prior to the relevant payment date specified in the Securities. (b) Notwithstanding any other provision hereof (other than the last sentence of this Section 5(b)) or any provision of the Securities, no payment with respect to principal of or interest or any additional amounts payable pursuant to Paragraph 5 of the definitive Securities ("additional amounts"), on any bearer Security may be made at any office of the Fiscal Agent or any paying agency maintained by the Company in the United States of America (including the States and the District of Columbia), its territories, its possessions or other areas subject to its jurisdiction ("United States") or by transfer to an account in, or by mail to an address in, the United States. Notwithstanding the foregoing, payment of principal of bearer Securities may, at the Company's option, be made at the paying agent in the Borough of Manhattan, The City of New York, and payment of interest on bearer Securities and payment of any additional amounts payable on bearer Securities may be made at the paying agent in the Borough of Manhattan, The City of New York, if (but only if) the full amount of such payments at all paying agents located outside the United States through which payment is to be made in accordance with the terms of the Securities is illegal or effectively precluded by exchange controls or other similar restrictions, as determined by the Company. -75- (c) At least 10 days prior to the first Interest Payment Date (as defined in the definitive Securities) and at least 10 days prior to each date of payment of principal or interest thereafter if there has been any change with respect to the matters set forth on the below-mentioned certificate, the Company will furnish the Fiscal Agent and each paying agency of the Company with a certificate of one of its executive officers instructing the Fiscal Agent and each paying agency of the Company whether such payment of principal of or interest on the Securities shall be made without deduction or withholding for or on account of any tax, assessment or other governmental charge described in Paragraph 5(a) of the definitive Securities. If any such deduction or withholding shall be required, then such certificate shall specify, by country, the percentage and the amount, if any, required to be withheld on such payment to Holders of Securities or coupons, and the Company will pay or cause to be paid to the Fiscal Agent any required Additional Amounts (as defined in such Paragraph 5(a)). The company agrees to indemnify the Fiscal Agent and each paying agency of the Company for, and to hold them harmless against, any loss, liability or expense reasonably incurred without negligence on their part arising out of or in connection with actions taken or omitted by them in reliance on any certificate furnished pursuant to this Section. (d) In the case of any redemption of Securities at the option of the Company, at least 60 days (unless shorter notice is acceptable to the Fiscal Agent) before the date designated for redemption, the Company shall give notice to the Fiscal Agent of its election to redeem the Securities on the redemption date specified in such notice, stating the principal amount of Securities to be redeemed. The Fiscal Agent shall cause notice of redemption to be given in the name of and at the expense of the Company in the manner provided in Paragraph 6(d) of the definitive Securities. 6. All Securities and coupons surrendered for payment, redemption, registration of transfer or exchange shall, if surrendered to anyone other than the Fiscal Agent or the Principal Paying Agent, be delivered to the Principal Paying Agent. All registered Securities and matured coupons so delivered shall be promptly cancelled by the Fiscal Agent or the Principal Paying Agent, as the case may be. All bearer securities and unmatured coupons so delivered shall be promptly cancelled by the Principal Paying Agent unless the Fiscal Agent is instructed by the Company to hold such bearer Securities and unmatured coupons for reissuance. If the Fiscal Agent is so instructed by the Company, bearer Securities and unmatured coupons held for reissuance may be reissued only in replacement of mutilated, lost, stolen or destroyed bearer Securities or coupons pursuant to Paragraph 9 of the definitive Securities. All Securities and unmatured coupons held by the Fiscal Agent or the Principal Paying Agent pending such cancellation or reissuance shall be deemed delivered for all purposes of this Agreement and the Securities. All cancelled Securities and coupons held by the Fiscal Agent or the Principal Paying Agent shall be destroyed, and the Fiscal Agent shall furnish to the Company a certificate with respect to such destruction, except that the cancelled Global Security and the certificates as to beneficial ownership required by Section 4 hereof (including any certificates in the form set forth in Exhibit D hereto) shall not be destroyed but shall be delivered to the Company. 7. The Fiscal Agent accepts, and each other agent of the Company or the Fiscal Agent shall be deemed to accept, its obligations set forth herein and in the Securities upon the terms and conditions hereof and thereof, including the following, to all of which the Company agrees and to all of which the rights hereunder of the Holders from time to time of the securities and coupons shall be subject: (a) The Fiscal Agent and each other agency of the Company shall be entitled to the compensation to be agreed upon with the Company for all services rendered by it, and the Company agrees promptly to pay such compensation and to reimburse the Fiscal Agent and each other agency of the Company for its reasonable out-ofpocket expenses (including, but not limited to, counsel fees and expenses) incurred by it in connection with the services rendered by it hereunder. The Company also agrees to indemnify each of the Fiscal Agent and each other agency of the Company hereunder for, and to hold it harmless against, any loss, liability or expense incurred without -76- negligence or bad faith on the part of the Fiscal Agent or such other agency, arising out of or in connection with its acting as such Fiscal Agent or other agency of the Company hereunder, including the reasonable costs and expenses of defending against any claim of liability. For purposes of this Section, the obligations of the Company shall survive the payment of the Securities and the resignation or removal of the-Fiscal Agent or any other agency of the Company hereunder. (b) In acting under this Agreement and in connection with the Securities, the Fiscal Agent and each other agency of the Company are acting solely as agents of the Company and do not assume any obligation or relationship of agency or trust for or with any of the Holders of the Securities or coupons, except that all funds held by the Fiscal Agent or any paying agency of the Company for payment of principal of or interest on the Securities shall be held in trust, but need not be segregated from other funds except as required by law, and shall be applied as set forth herein and in the Securities; provided, however, that monies paid by the Company to the Fiscal Agent or any paying agency of the Company for the payment of principal of or interest on Securities remaining unclaimed at the end of two years after such principal or interest shall have become due and payable shall be repaid to the Company as provided and in the manner set forth in the Securities, whereupon the aforesaid trust shall terminate and all liability of the Fiscal Agent or such paying agency of the Company with respect thereto shall cease. (c) The Fiscal Agent and each other agency of the Company hereunder may consult with counsel (who may also be counsel to the Company) satisfactory to such Fiscal Agent or agency, in its reasonable judgment, and the written opinion of such counsel shall be full and complete authorization and protection in respect of any action taken, omitted or suffered by it hereunder in good faith and in reliance thereon. (d) The Fiscal Agent and each other agency of the Company hereunder shall be protected and shall incur no liability for or in respect of any action taken, omitted or suffered by it in reliance upon any Security, coupon, notice, direction, consent, certificate, affidavit, statement or other paper or document reasonably believed by the Fiscal Agent or such other agency to be genuine and to have been signed by the proper parties. (e) The Fiscal Agent and each other agency of the Company hereunder and its officers, directors and employees may become the owner of, or acquire an interest in, any Securities or coupons, with the same rights that it or they would have if it were not the Fiscal Agent or such other agency of the Company hereunder, may engage or be interested in any financial or other transaction with the Company and may act on, or as depositary, trustee or agent for, any committee or body of Holders of Securities or coupons or holders of other obligations of the Company as freely as if it were not the Fiscal Agent or an agency of the Company hereunder. (f) Neither the Fiscal Agent nor any other agency of the Company hereunder shall be under any liability for interest on any monies at any time received by it pursuant to any of the provisions of this Agreement or of the Securities except as may be otherwise agreed with the Company. (g) The recitals contained herein and in the Securities (except the Fiscal Agent's certificates of authentication) and in the coupons shall be taken as the statements of the Company; the Fiscal Agent and the other agents of the Company (including the Principal Paying Agent and the Security Registrar) assume no responsibility for their correctness. The Fiscal Agent and such other agents make no representation as to the validity or sufficiency of this Agreement or the Securities or coupons, except for the Fiscal Agent's due authorization to execute and deliver this Agreement; provided, however, that the Fiscal Agent shall not be relieved of its duty to authenticate Securities, acting itself or through an appointed Authenticating Agent, as authorized by this Agreement. The Fiscal Agent shall not be accountable for the use of any of the Securities or the use or application by the Company of the proceeds of the sale of the Securities or for compliance by the Company with any of the Company's covenants or agreements contained in the Securities. -77- (h) The Fiscal Agent and each other agency of the Company hereunder shall be obligated to perform such duties and only such duties as are herein and in the Securities specifically set forth and no implied duties or obligations shall be read into this Agreement or the securities against the Fiscal Agent or any other agency of the Company. Neither the Fiscal Agent, the Principal Paying Agent, the Security Registrar nor any other agent of the Company shall be under any obligation to take any action hereunder which may tend to involve it in any expense or liability, the payment of which within a reasonable time is not, in its reasonable opinion, assured to it. (i) Unless herein or in the Securities otherwise specifically provided, any order, certificate, notice, request, direction or other communication from the Company under any provision of this Agreement shall be sufficient if signed by an executive officer of the Company. (j) The Fiscal Agent may discharge any of its responsibilities hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Fiscal Agent shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed by it with due care hereunder. (k) No provision of this Agreement shall be construed to relieve the Fiscal Agent from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct or that of its officers, directors or employees; nor shall any such provision relieve any agent or attorney of the Company or the Fiscal Agent from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct or that of its officers, directors or employees. 8. (a) The Company agrees that, uhtil all securities or coupons (other than coupons the surrender of which has been waived under Paragraphs 3 and 6 of the definitive Securities and coupons which have been replaced as provided in Paragraph 9 of the definitive securities) authenticated and delivered hereunder shall have (i) been delivered to the Fiscal Agent or the Principal Paying Agent for cancellation or (ii) become due and payable, whether at maturity or upon redemption, and monies sufficient to pay the principal thereof and interest thereon shall have been made available to the Fiscal Agent or the Principal Paying Agent and either paid to the persons entitled thereto or returned to the Company as provided herein and in the Securities, there shall at all times be a Fiscal Agent hereunder which shall be a corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to exercise corporate trust powers and having a combined capital and surplus of at least U.S.$50,000,000. (b) The Company hereby appoints (i) Morgan Guaranty Trust Company of New York, at its corporate trust office in the Borough of Manhattan, The City of New York, as its Principal Paying Agent where registered Securities may be presented or surrendered for payment, and where bearer Securities and coupons may be presented or surrendered for payment in the circumstances described in Section 5(b) (and not otherwise), and as its Security Registrar where Securities may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities and coupons and this Agreement may be served, and (ii) Banque Internationale a Luxembourg S.A. in Luxembourg, Morgan Guaranty Trust Company of New York in London, England and in Brussels, Belgium and Swiss Bank Corporation in Basle, Switzerland as its agents outside the United States where, subject to any applicable laws or regulations, Securities and coupons may be presented and surrendered for payment. The Company may at any time and from time to time vary or terminate the appointment of any such agent or appoint any additional agents for any or all of such purposes; provided, however, that, so long as the Company is required to maintain a Fiscal Agent hereunder, the Company will maintain (i) in the Borough of Manhattan, The City of New York, an office or agency where registered Securities may be presented or surrendered for payment, where bearer securities and coupons may be presented or surrendered for payment in the circumstances described in Section 5(b) (and not otherwise), where Securities may be presented for registration of transfer or exchange and where -78- notices and demands to or upon the Company in respect of the Securities and coupons and this Agreement may be served and (ii) subject to any laws or regulations applicable thereto, in Europe an office or agency where Securities and coupons may be presented and surrendered for payment and where Securities may be presented for registration of transfer or exchange; and provided, further, that so long as the Securities are listed on the Luxembourg Stock Exchange and such exchange shall so require, the Company will maintain a paying agency in Luxembourg. The Company will give prompt written notice to the Fiscal Agent of the appointment or termination of any such office or agency and of the location and any change in the location of any such office or agency and shall give notice thereof to Holders in the manner described in the first sentence of Paragraph 6(d) of the definitive securities. If at any time the Company shall fail to maintain any such required office or agency in the Borough of Manhattan, The City of New York, or in Europe, or shall fail to furnish the Fiscal Agent with the address thereof, presentations and surrenders may be made (subject to the limitations described in the preceding paragraph) at and notices and demands may be served on the Principal Office of the Fiscal Agent, and Securities and coupons may be presented and surrendered for payment to Morgan Guaranty Trust Company of New York, at the main office of its Corporate Trust Department in London, England, and the Company hereby appoints the same as its agent to receive such presentations, surrenders, notices and demands. (c) The Fiscal Agent, the Principal Paying Agent and the Security Registrar may at any time resign as such Fiscal Agent, Principal Paying Agent or Security Registrar by giving written notice to the Company of such intention on its part, specifying the date on which its desired resignation shall become effective; provided, however, that such date shall never be less than three months after the receipt of such notice by the Company unless the Company agrees to accept less notice. The Fiscal Agent may be removed at any time, with or without cause, by the filing with it of an instrument in writing signed on behalf of the Company and specifying such removal and the date when it is intended to become effective. Any resignation or removal of the Fiscal Agent or paying agency of the Company, if such paying agency is the only paying agency of the Company then maintained in Europe, shall take effect upon the date of the appointment by the Company as hereinafter provided of a successor and the acceptance of such appointment by such successor. Upon its resignation or removal, such agent shall be entitled to the payment by the Company of its compensation for the services rendered hereunder and to the reimbursement of all reasonable out-of-pocket expenses incurred in connection with the services rendered hereunder by such agent. (d) In case at any time the Fiscal Agent or paying agency of the Company, if such paying agency is the only paying agency of the Company then maintained in Europe, shall resign, or shall be removed, or shall become incapable of acting or shall be adjudged a bankrupt or insolvent, or if a receiver of it or of its property shall be appointed, or if any public officer shall take charge or control of it or of its property or affairs, for the purpose of rehabilitation, conservation or liquidation, a successor agent, eligible as aforesaid, shall be appointed by the Company by an instrument in writing. Upon the appointment as aforesaid of a successor agent and acceptance by it of such appointment, the agent so superseded shall cease to be such agent hereunder. If no-successor Fiscal Agent or paying agency of the Company, as the case may be, shall have been so appointed by the Company and shall have accepted appointment as hereinafter provided, and, in the case of such paying agency, if such paying agency is the only paying agency of the Company then maintained in Europe, then any Holder of a Security who has been a bona fide Holder of a Security for at least six months, on behalf of himself and all others similarly situated, or the Fiscal Agent may petition any court of competent jurisdiction for the appointment of a successor Fiscal Agent or paying agency, as the case may be. -79- (e) Any successor Fiscal Agent appointed hereunder shall execute, acknowledge and deliver to its predecessor and to the Company an instrument accepting such appointment hereunder, and thereupon such successor Fiscal Agent, without any further act, deed or conveyance, shall become vested with all the authority, rights, powers, trusts, immunities, duties and obligations of such predecessor with like effect as if originally named as such Fiscal Agent hereunderl and such predecessor, upon payment of its charges and disbursements then unpaid, shall simultaneously therewith become obligated to transfer, deliver and pay ovet, and such successor Fiscal Agent shall be entitled to receive, all monies, securities or other property on deposit with or held by such predecessor, as such Fiscal Agent hereunder. The Company will give prompt written notice to each paying agency of the Company of the appointment of a successor Fiscal Agent and shall give notice thereof to Holders, at least once, in the manner described in Paragraph 6(d) of the definitive Securities. (f) Any corporation, bank or trust company into which the Fiscal Agent may be merged or converted, or with which it may be consolidated, or any corporation, bank or trust company resulting from any merger, conversion or consolidation to which the Fiscal Agent shall be a party, or any corporation, bank or trust company succeeding to all or substantially all the assets and business of the Fiscal Agent, shall be the successor to the Fiscal Agent under this Agreement, provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any document or any further act on the part of any of the parties hereto. 9. The Company will pay all stamp taxes and other duties, if any, which may be imposed by the United States, the United Kingdom or any political subdivision or taxing authority of or in the foregoing, with respect to the execution or delivery of this Agreement, the issuance of the Global Security, the initial issuance of the definitive Securities or the exchange from time to time of the Global Security for definitive Securities. 10. (a) A meeting of Holders of Securities may be called at any time and from time to time to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Agreement or the Securities to be made, given or taken by Holders of Securities. (b) The Company or the Fiscal Agent may at any time call a meeting of Holders of Securities for any purpose specified in Section 10(a) to be held at such time and at such place in the Borough of Manhattan, The City of New York, or in London as the Fiscal Agent shall determine. Notice of every meeting of Holders of Securities, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting shall be given, in the same manner as provided in Paragraph 6(d) of the definitive Securities, not more than 180 days nor less than 21 days prior to the date fixed for the meeting. In case at any time the Company or the Holders of at least 10% in principal amount of the Outstanding (as defined in Paragraph 3 of the definitive Securities) Securities shall have requested the Fiscal Agent to call a meeting of the Holders of Securities for any purpose specified in Section 10(a), by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Fiscal Agent shall not have published the first notice of such meeting within 21 days after receipt of such request or shall not thereafter proceed to cause the meeting to be held as provided herein, then the Company or the Holders of Securities in the amount above-specified, as the case may be, may determine the time and the place in the Borough of Manhattan, The City of New York, or in London for such meeting and may call such meeting for such purposes by giving notice thereof as provided in this subsection (b). (c) To be entitled to vote at any meeting of Holders of Securities, a person shall be a Holder of outstanding Securities or a person appointed by an instrument in writing as proxy for such a Holder. -80- (d) The persons entitled to vote a majority in principal amount of the Outstanding Securities shall constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of the Holders of Securities, be dissolved. In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Section 10(b), except that such notice need be given only once not less than five days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting shall state expressly the percentage of the principal amount of the Outstanding Securities which shall constitute a quorum. At the reconvening of any meeting adjourned for a lack of a quorum in accordance with the provisions of the prior paragraph the persons entitled to vote 25% in principal amount of the Outstanding Securities shall constitute a quorum for the taking of any action set forth in the notice of the original meeting. Any meeting of Holders of Securities at which a quorum is present may be adjourned from time to time by vote of a majority in principal amount of the Outstanding Securities represented at the meeting, and the meeting may be held as so adjourned without further notice. At a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid, any resolution and all matters shall be effectively passed or decided if passed or decided by the persons entitled to vote 66 2/3% in principal amount of the Outstanding Securities represented and voting. (e) The Fiscal Agent may make such reasonable regulations as it may deem advisable for any meeting of Holders of Securities in regard to proof of the holding of Securities and of the appointment of proxies and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall deem appropriate. The Fiscal Agent shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or Holders of Securities as provided above, in which case the Company or the Holders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the persons entitled to vote a majority in principal amount of the Outstanding Securities represented and voting at the meeting. The chairman of the meeting shall have no right to vote, except as a Holder of Securities or a proxy. A record, at least in duplicate, of the proceedings of each meeting of Holders of Securities shall be prepared, and one such copy shall be delivered to the Company and another to the Fiscal Agent to be preserved by the Fiscal Agent. 11. All notices hereunder shall be deemed to have been given when deposited in the mails as first-class mail, registered or certified mail, return receipt requested, postage prepaid, or, if electronically communicated, then when delivered, or when hand delivered, addressed to either party hereto as follows: Address The Company............. Lincoln National Corporation 1300 South Clinton Street P.O. Box 1110 Fort Wayne, Indiana 46801 Attention: Treasurer Fiscal Agent............ Morgan Guaranty Trust Company of New York 30 West Broadway New York, New York 10015 Attention: Corporate Trust Department or at any other address of which either of the foregoing shall have notified the other in writing. -81- 12. This Agreement and each of the Securities and coupons shall be governed by and construed in accordance with the laws of the State of New York. 13. This Agreement may be amended by the Company and the Fiscal Agent, without the consent of the Holder of any security or coupon, for the purpose of (a) adding to the covenants of the Company for the benefit of the Holders of Securities or coupons, or (b) surrendering any right or power conferred upon the Company, or (c) securing the Securities pursuant to the requirements of the Securities or otherwise, or (d) permitting registered Securities to be exchanged for bearer Securities or relaxing or eliminating the restrictions on payment of principal, if any, and interest in respect of bearer Securities in the United States to the extent then permitted under applicable regulations of the United States Treasury Department, and provided no adverse consequences would result to the Holders of the Securities, or (e) evidencing the succession of another corporation to the Company and the assumption by any such successor of the covenants and obligations of the Company herein and in the Securities and coupons as permitted by the Securities, or (f) curing any ambiguity or correcting or supplementing any defective provision contained herein or in the Securities or coupons. This Agreement may also be amended by the Company and the Fiscal Agent with the consent of the Holders of the Securities as provided in Paragraph 10 of the definitive Securities. The Fiscal Agent shall not enter into any amendment to this Agreement unless there shall have been delivered to the Fiscal Agent a certificate signed by an executive officer of the Company and a written opinion of counsel satisfactory to the Fiscal Agent (who may be counsel to the Company), each stating that such amendment is authorized or permitted by this Agreement or the Securities. 14. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original but all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. LINCOLN NATIONAL CORPORATION [CORPORATE SEAL] By Attest: MORGAN GUARANTY TRUST COMPANY OF NEW YORK [CORPORATE SEAL] By Vice President Attest: Assistant Secretary -82- EXHIBIT A (FORM OF GLOBAL SECURITY] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933. NEITHER THIS SECURITY NOR ANY PORTION HEREOF MAY BE OFFERED OR SOLD DIRECTLY OR INDIRECTLY IN THE UNITED STATES OF AMERICA (INCLUDING THE STATES AND THE DISTRICT OF COLUMBIA), ITS TERRITORIES, ITS POSSESSIONS OR OTHER AREAS SUBJECT TO ITS JURISDICTION ("UNITED STATES") OR TO OR FOR THE ACCOUNT OF CITIZENS OR RESIDENTS THEREOF, ANY CORPORATION, PARTNERSHIP OR OTHER ENTITY CREATED OR ORGANIZED IN OR UNDER THE LAWS OF THE UNITED STATES OR ANY ESTATE OR TRUST THE INCOME OF WHICH IS SUBJECT TO UNITED STATES FEDERAL INCOME TAXATION REGARDLESS OF ITS SOURCE ("UNITED STATES PERSONS"). LINCOLN NATIONAL CORPORATION 9 3/4% Notes Due 1995 TEMPORARY GLOBAL SECURITY LINCOLN NATIONAL CORPORATION, a corporation duly organized and existing under the laws of the State of Indiana ("Company"), for value received, hereby promises to pay to bearer upon presentation and surrender of this Global Security the principal sum of One Hundred Million United States Dollars (U.S.$100,000,000) on October 20, 1995 and to pay interest thereon, from the date hereof, annually in arrears on October 20 in each year, commencing October 20, 1989, at the rate of 9 3/4% per annum, until the principal hereof is paid or made available for payment; provided, however, that interest on this Global security shall be payable only after the issuance of the definitive Securities for which this Global Security is exchangeable and, in the case of definitive Securities in bearer form, only upon presentation and surrender (at an office or agency outside the United States, except as otherwise provided in the Fiscal Agency Agreement referred to below) of the interest coupons thereto attached as they severally mature. This Global Security is one of a duly authorized issue of Securities of the Company designated as specified in the title hereof, entitled to the benefits of and to be entitled to the benefits of the Fiscal Agency Agreement, dated as of October 20, 1988 ("Fiscal Agency Agreement), between the Company and Morgan Guaranty Trust Company of New York, as Fiscal Agent ("Fiscal Agent"). It is a temporary security and is exchangeable in whole or from time to time in part without charge upon request of the Holder hereof for definitive Securities in bearer form, with interest coupons attached, or in registered form, without coupons, of authorized denominations, (a) not earlier than 90 days after the date on which the distribution of the Securities has been completed as Credit Suisse First Boston Limited shall have advised the Company and the Fiscal Agent in writing and (b) as promptly as practicable following presentation of certification, in the form required by the Fiscal Agency Agreement for such purpose, that the beneficial owner or owners of this Global Security (or, if such exchange is only for a part of this Global Security, of such part) are not United States Persons. Definitive Securities in bearer form to be delivered in exchange for any part of this Global Security shall be delivered only outside the United States. Upon any exchange of a part of this Global Security for definitive Securities, the portion of the principal amount hereof so exchanged shall be endorsed by the Fiscal Agent on the Schedule hereto, and the principal amount hereof shall be reduced for all purposes by the amount so exchanged. Until exchanged in full for definitive Securities, this Global Security shall in all respects be entitled to the same benefits and subject to the same terms and conditions of, and the Company shall be subject to the same restrictions as those to be endorsed on, the definitive Securities and those contained in the Fiscal Agency Agreement, except that neither the Holder hereof nor the beneficial owners of this Global Security shall be entitled to receive payment of interest hereon. -83- This Global Security shall be governed by and construed in accordance with the laws of the State of New York. All terms used in this Global Security which are defined in the Fiscal Agency Agreement or the definitive Securities shall have the meanings assigned to them therein. Unless the certificate of authentication hereon has been executed by the Fiscal Agent or by the manual signature of one of the duly authorized officers of the Fiscal Agent, this Global Security shall not be valid or obligatory for any purpose. IN WITNESS WHEREAS, the Company has caused this Global Security to be duly executed and its corporate seal to be hereunto affixed and attested. Dated as of October 20, 1988. LINCOLN NATIONAL CORPORATION [CORPORATE SEAL] By Attest: (FORM OF FISCAL AGENT'S CERTIFICATE OF AUTHENTICATION) This is the Global Security referred to in the within-mentioned Fiscal Agency Agreement. MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Fiscal Agent By Authorized Officer SCHEDULE OF EXCHANGES Remaining principal amount Principal Amount following Notation made Date exchanged for such on behalf of the made definitive Securities exchange Fiscal Agent -84- EXHIBIT B (FORMS OF DEFINITIVE SECURITIES) [Form of Face] [If Bearer Security: ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE. LINCOLN NATIONAL CORPORATION 9 3/4 % Notes Due 1995 No. B- U.S.$5,000 LINCOLN NATIONAL CORPORATION, a corporation duly organized and existing under the laws of the State of Indiana ("Company"), for value received, hereby promises to pay to bearer upon presentation and surrender of this Security the principal sum of Five Thousand United States Dollars on October 20, 1995 and to pay interest thereon, from the date hereof, annually in arrears on October 20 in each year ("Interest Payment Date"), commencing October 20, 1989, at the rate of 9 3/4% per annum (calculated on the basis of a year of twelve 30-day months), until the principal hereof is paid or made available for payment, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. Such payments shall be made subject to any laws or regulations applicable thereto and to the right of the Company (limited as provided below) to terminate the appointment of any such paying agency, at the main offices of Morgan Guaranty Trust Company of New York in London, England, and in Brussels, Belgium, Swiss Bank Corporation in Basle, Switzerland and Banque Internationale a Luxembourg S.A. in Luxembourg, or at such other offices or agencies in Europe as the Company may designate and notify the Holder (as defined in Paragraph 2 hereof) as provided in Paragraph 6(d) hereof, by United States dollar check drawn on a bank in The City of New York or, at the option of the Holder, by transfer to a United States dollar account maintained by the payee with a bank located in Europe. Interest on this Security due on or before maturity shall be payable only upon presentation and surrender at such an office or agency of the coupons attached hereto as they severally mature. No payment of principal or interest with respect to this Security shall be made at any office or agency of the Company in the United States (as defined in Paragraph 5 hereof) or by transfer to an account in, or by mail to an address in, the United States. Notwithstanding the foregoing, payment of principal of bearer Securities may, at the Company's option, be made at the paying agent in the Borough of Manhattan, The City of New York, and payment of interest on bearer Securities and payment of any additional amounts payable on bearer Securities may be made at the paying agent in the Borough of Manhattan, The City of New York, if (but only if) the full amount of such payments at all offices and agencies located outside the United States through which payment is to be made in accordance with the terms of the Securities is illegal or effectively precluded by exchange controls or other similar restrictions, as determined by the Company. The Company covenants that until this Security has been delivered to the Fiscal Agent for cancellation, or monies sufficient to pay the principal of and interest on this Security have been made available for payment and either paid or returned to the Company as provided herein, it will at all times maintain offices or agencies in the Borough of Manhattan, The City of New York, and in Europe (which, so long as the Securities are listed on the Luxembourg Stock Exchange and such exchange shall so require, shall include an office or agency in Luxembourg) for the payment of the principal of and interest on the Securities as herein provided. -85- Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as though fully set forth at this place. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Fiscal Agency Agreement referred to on the reverse of this Security. Unless the certificate of authentication hereon has been executed by the Fiscal Agent or by an Authenticating Agent, by the manual signature of one of the authorized officers of the Fiscal Agent or such Authenticating Agent, as the case may be, neither this Security nor any coupon appertaining hereto shall be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this Security to be duly executed and its corporate seal to be hereunto affixed and attested and duly executed coupons to be annexed hereto. Dated as of October 20, 1988 LINCOLN NATIONAL CORPORATION (CORPORATE SEAL] Attest: By (If Registered Security: LINCOLN NATIONAL CORPORATION 9 3/4% Notes Due 1995 No. R- U.S.$ LINCOLN NATIONAL CORPORATION, a corporation duly organized and existing under the laws of the State of Indiana ("Company"), for value received, hereby promises to, or registered assigns, the principal sum of United States Dollars on October 20, 1995 and to pay interest thereon from October 20, 1988 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, annually in arrears on October 20 in each year ("Interest Payment Date"), commencing October 20, 1989, at the rate of 9 3/4% per annum (calculated on the basis of a year of twelve 30-day months), until the principal hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will be paid to the person in whose name this Security is registered at the close of business on the October 5 next preceding such Interest Payment Date ("Record Date"). Any such interest not so punctually paid or duly p,rovided for will forthwith cease to be payable to the person in whose name this Security is registered on such Record Date and may be paid to the person in whose name this Security is registered at the close of business on a special record date for the payment of such defaulted interest to be fixed by the Company or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which this Security may be listed. Payments of principal shall be made at the option of the Holder (as defined in Paragraph 2 hereof) (a) at the main office of Morgan Guaranty Trust Company of New York in the Borough of Manhattan, The City of New York, or at such other office or agency of the Company as may be designated by it for such purpose in the Borough of Manhattan, The City of New York, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts or (b) subject to any laws or regulations applicable thereto and to the right of the Company (limited as provided below) to terminate the appointment of any such paying agency, at the main offices of Morgan Guaranty Trust Company of New York in London, England and in Brussels, Belgium; Swiss Bank Corporation in Basle, Switzerland;and Banque -86- Internationale a Luxembourg S.A. in Luxembourg, or at such other agencies as the Company may designate and notify the Holders as provided in Paragraph 6(d) hereof, by United States dollar check drawn on, or transfer to a United States dollar account maintained by the payee with, a bank in The City of New York. Payment of interest on this Security will be made by United States dollar check drawn on a bank in The City of New York mailed to the address of the person entitled thereto as such address shall appear in the Security Register (as defined in Paragraph 3 hereof) or, upon application by the Holder to the Fiscal Agent not later than the Record Date in the year the payment is to be received, by transfer to a dollar account maintained by the Holder with a bank in the Borough of Manhattan, The City of New York. The Company covenants that until this security has been delivered to the Fiscal Agent for cancellation, or monies sufficient to pay the principal of and interest on this Security have been made available for payment and either paid or returned to the Company as provided herein, it will at all times maintain offices or agencies in the Borough of Manhattan, The City of New York, and in Europe (which, so long as the Securities are listed on the Luxembourg Stock Exchange and such stock exchange shall so require, shall include an office or agency in Luxembourg) for the payment of the principal of and interest on the Securities as herein provided. Reference is made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as though fully set forth at this place. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Fiscal Agency Agreement referred to on the reverse of this Security. Unless the certificate of authentication hereon has been executed by the Fiscal Agent or an Authenticating Agent by the manual signature of one of the authorized officers of the Fiscal Agent or such Authenticating Agent, as the case may be, this Security shall not be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this Security to be duly executed and its corporate seal to be hereunto affixed and attested. Dated: 19_ LINCOLN NATIONAL CORPORATION [CORPORATE SEAL] By Attest: (FORM OF FISCAL AGENT'S OR AUTHENTICATING AGENT'S CERTIFICATE OF AUTHENTICATION) This is one of the Securities referred to in the within-mentioned Fiscal Agency Agreement. (Morgan Guaranty Trust Company of New York, As Fiscal Agent) [As Authenticating Agent] By Authorized Officer -87- [Form of Reverse] 1. This Security is one of a duly authorized issue of Securities of the Company in the aggregate principal amount of One Hundred Million United States Dollars (U.S.$100,000,000), designated as its "9 3/4% Notes Due 1995" ("Securities"). The Company, for the benefit of the Holders from time to time of the Securities, has entered into a Fiscal Agency Agreement, dated as of October 20, 1988 ("Fiscal Agency Agreement"), between the Company and Morgan Guaranty Trust Company of New York, as Fiscal Agent, copies of which Fiscal Agency Agreement are on file and available for inspection at the Principal Office of the Fiscal Agent in the City of New York and the main office of the paying agencies named on the face of this Security. (Morgan Guaranty Trust Company of New York and its respective successors as Fiscal Agent are herein called "Fiscal Agent".) The Securities are unsecured and rank equally with all unsecured and unsubordinated indebtedness for borrowed money of the Company. 2. The Securities are issuable as bearer Securities, with interest coupons attached ("coupons"), in the denomination of U.S.$5,000 and as registered Securities, without coupons, in the denominations of U.S.$5,000 and integral multiples thereof. As used herein, the term "Holder", when used with respect to a registered Security, means the person in whose name such Security is registered in the Security Register and, when used with respect to a bearer Security or any coupon, means the bearer thereof. 3. The Company will maintain in the Borough of Manhattan, The City of New York, an office or agency where Securities may be surrendered for registration of transfer or exchange. The Company has appointed Morgan Guaranty Trust Company of New York, having its Corporate Trust Office at 30 West Broadway, New York, New York 10015 as its agent in the Borough of Manhattan, The City of New York, for such purpose ("Security Registrar") and has agreed to cause to be kept at such office a register (the register maintained in such office and in any other office or agency for such purpose being herein sometimes collectively referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company will provide for the registration of registered Securities and of transfers of registered Securities. In addition, the Company has appointed the main offices of Morgan Guaranty Trust Company of New York in London, England and Banque Internationale a Luxembourg S.A. in Luxembourg as additional agencies where Securities may be surrendered for registration of transfer or exchange. The Company reserves the right to vary or terminate the appointment of Morgan Guaranty Trust Company of New York as Security Registrar or of any transfer agent or to appoint additional or other registrars or transfer agents or to approve any change in the office through which any security registrar or any transfer agent acts, provided that there will at all times be a security registrar in the Borough of Manhattan, The City of New York, and a transfer agent in a European city. [If Bearer Security - At the option of the Holder upon request confirmed in writing, bearer Securities may be exchanged for registered Securities, of any authorized denominations and of a like aggregate principal amount, upon surrender of the bearer Securities to be exchanged at the office of the Security Registrar or any transfer agent, with all unmatured coupons and all matured coupons in default thereto appertaining. If the Holder is unable to produce any such unmatured coupon or coupons or matured coupon or coupons in default, such exchange may be effected if the bearer securities are accompanied by payment in funds acceptable to the Company in an amount equal to the face amount of such missing coupon or coupons, or the surrender of such missing coupon or coupons may be waived by the Company and the Fiscal Agent if there be furnished to them such security or indemnity as they may require to save each of them and each other agency of the Company hereunder harmless. Notwithstanding the foregoing, if a bearer Security is surrendered in exchange for a registered Security (i) after the close of business on a Record Date and before the opening of business on the relevant Interest Payment Date, or (ii) after the close of business on any special record date for the payment of defaulted interest and before the opening of business on the relevant proposed -88- date of payment of such defaulted interest, such bearer Security shall be surrendered without the coupon relating to such Interest Payment Date or pro- posed date of payment, as the case may be, and the interest payable on such Interest Payment bate or proposed date of payment shall not be payable in respect of the registered Security issued in exchange for such bearer Security, but will be payable only to the Holder of such coupon upon presentation and surrender thereof when due. Registered Securities may not be surrendered in exchange for bearer Securities. The Company shall not be required to make any exchange of Securities if as a result thereof the Company would incur adverse tax consequences under United States Federal income tax laws.] [If Registered Security - The transfer of a registered Security is registrable on the Security Register upon surrender of such Security at the office of the Security Registrar or any transfer agent duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company duly executed by, the Holder thereof or his attorney duly authorized in writing. Upon such surrender of this Security for registration of transfer, the Company shall execute, and the Fiscal Agent or an Authenticating Agent shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new registered Securities, dated the date of authentication thereof, of any authorized denominations and of a like aggregate principal amount. At the option of the Holder upon request confirmed in writing, registered Securities may be exchanged for registered Securities of any authorized denominations and of a like aggregate principal amount, upon surrender of the Securities to be exchanged at the office of the Security Registrar or any transfer agent. Registered Securities may not be surrendered in exchange for bearer Securities. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Fiscal Agent or an Authenti- cating Agent shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. Any registration of transfer or exchange will be effected upon the transfer agent or the Security Registrar, as the case may be, being satisfied with the documents of transfer and identity of the person making the request and subject to such reasonable regulations as the Company may from time to time agree with the transfer agents, the Security Registrar and the Fiscal Agent. The Company shall not be required to make any exchange of Securities if as a result thereof the Company would incur adverse tax consequences under United States Federal income tax laws.] All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits, as the Securities surrendered upon such registration of transfer or exchange. No service charge shall be made for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. [If bearer Security - Title to bearer Securities and coupons shall pass by delivery.] The Company, the Fiscal Agent, the Security Registrar and any transfer or paying agent of the Company may deem and treat the person in whose name a registered Security is registered, the bearer of a bearer Security and the bearer of a coupon as the owner thereof for all purposes, whether or not such Security or coupon be overdue, and neither the Company, the Fiscal Agent, the Security Registrar nor any such agent shall be affected by notice to the contrary. For purposes of the provisions of this Security and the Fiscal Agency Agreement, any Security authenticated and delivered pursuant to the Fiscal Agency Agreement shall, as of any date of determination, be deemed to be "Outstanding", except: (i) Securities theretofore cancelled by the Fiscal Agent or the paying agent of the Company in the Borough of Manhattan, The City of New York, or delivered to the Fiscal Agent or such paying agent for cancellation or held by the Fiscal Agent or such paying agent for reissuance and not reissued; -89- (ii) Securities which have been called for redemption in accordance with Paragraph 6 hereof or which have become due and payable at maturity or otherwise and with respect to which monies sufficient to pay the principal thereof and interest thereon shall have been made available to the Fiscal Agent; or (iii) Securities in lieu of or in substitution for which other Securities shall have been authenticated and delivered pursuant to the Fiscal Agency Agreement; provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Securities are present at a meeting of Holders of Securities for quorum purposes or have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or beneficially owned by any subsidiary or any entity controlled by or under common control with the Company shall be disregarded and deemed not to be Outstanding. 4. (a) The Company shall pay to the Fiscal Agent at its Principal office in New York, New York (or, if so instructed by the Fiscal Agent, to the paying agent of the Company in the Borough of Manhattan, The City of New York), at least one business day prior to each Interest Payment Date, any redemption date and the maturity date of the Securities, in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts, amounts sufficient (with any amounts then held by the Fiscal Agent or other agent and available for the purpose) to pay the interest on, the redemption price of and accrued interest (if the redemption date is not an Interest Payment Date) on, and the principal of, the Securities due and payable on such Interest Payment Date, redemption date or maturity date, as the case may be. The Fiscal Agent shall apply the amounts so paid to it to the payment of such interest, redemption price and principal in accordance with the terms of the Securities. Any monies paid by the Company to the Fiscal Agent for the payment of the principal of or interest on any securities and remaining unclaimed at the end of two years after such principal or interest shall have become due and payable (whether at maturity, upon call for redemption or otherwise) shall then be repaid to the Company upon its written request, and upon such repayment all liability of the Fiscal Agent with respect thereto shall thereupon cease, without, however, limiting in any way any obligation the Company may have to pay the principal of and interest on this Security as the same shall become due. (b) In any case where the date for the payment of the principal of or interest on any Security or the date fixed for redemption of any Security shall be at any place of payment a day on which banking institutions are authorized or obligated by law to close, then payment of principal or interest need not be made on such date at such place but may be made on the next succeeding day at such place of payment which is not a day on which banking institutions are authorized or obligated by law to close, with the same force and effect as if made on the date for the payment of the principal or interest or the date fixed for redemption, and no interest shall accrue for the period after such date. 5. (a) The Company will pay to the Holder of this Security (If bearer Security - or any coupon appertaining hereto) who is a United States Alien (as defined below) such amounts ("Additional Amounts") as may be necessary in order that every net payment of the principal of and interest on this Security, after deduction or withholding by the Company or any of its paying agents for or on account of any present or future tax, assessment or other governmental charge imposed upon such Holder with respect to or as a result of such payment by the United States (If registered Security - (as defined below)] or any political subdivision or taxing authority thereof or therein, will not be less than the amount provided for in this Security if bearer security - or in such coupon] to be then due and payable; provided, however, that the foregoing obligation to pay Additional Amounts shall not apply to any one or more of the following: -90- (i) any tax, assessment or other governmental charge which would not have been so imposed but for (A) the existence of any present or former connection between such Holder (or between a fiduciary, settlor, beneficiary of, or a person holding a power over such holder, if such holder is an estate or a trust, or between a member or shareholder of such Holder if such Holder is a partnership or a corporation) and the United States or any political subdivision thereof, including, without limitation, such Holder (or such fiduciary, settlor, beneficiary, person holding a power, member or share- holder) being or having been a citizen or resident or treated as a resident thereof, or being or having been engaged in a trade or business therein or being or having been present therein or having or having had a permanent establishment therein, or (B) such Holder's present or former status as a domestic or foreign personal holding companyl or a controlled foreign corporation, a private foundation or other tax exempt organization for United States federal income tax purposes or a corporation which accumulates earnings to avoid United States federal income tax; (ii) any tax, assessment or other governmental charge which would not have been so imposed but for the presentation by the Holder of this Security (If bearer Security or any coupon appertaining hereto) for payment on a date more than 15 days after the date on which such payment became due and payable or the date on which payment thereof is duly provided for, whichever occurs later; (iii) any estate, inheritance, gift, sales, transfer, excise or personal property tax or any similar tax, assessment or other governmental charge; (iv) any tax, assessment or other governmental charge which would not have been imposed but for the failure to comply with any certification, information, documentation or other reporting requirements concerning the nationality, residence, identity or connection with the United States of the Holder or beneficial owner of this Security (If bearer Security - or any coupon appertaining hereto], if such compliance is required by statute or by regulation of the United States or any political subdivision or taxing authority thereof as a precondition to relief or exemption from such tax, assessment or other governmental charge; (v) any tax, assessment or other governmental charge which is (A) payable otherwise than by deduction or withholding from payments of principal of or interest on this Security (If bearer Security - or any coupon appertaining hereto), or (B) required to be withheld by any paying agent from any such payment, if such payment can be made without such withholding by any other paying agent in a European city; or (vi) any tax, assessment or other governmental charge imposed on interest received by a person holding, actually or constructively, ten percent or more of the total combined voting power of all classes of stock of the Company entitled to vote; nor will Additional Amounts be paid with respect to payment of the principal of or interest on this Security (If bearer Security - or any coupon appertaining hereto] to any United States Alien which is a fiduciary or partnership or other than the sole beneficial owner of such payment to the extent that a beneficiary or settlor with respect to such fiduciary or a member of such a partnership or a beneficial owner would not have been entitled to the Additional Amounts had such beneficiary, settlor, member or beneficial owner been the Holder of this Security (If bearer Security - or any coupon appertaining hereto.] The term "United States Alien" means any person who, for United States federal income tax purposes, is a foreign corporation, a nonresident alien individual, a nonresident alien fiduciary of a foreign estate or trust, or a foreign partnership one or more of the members of which is, for United States federal income tax purposes, a foreign corporation, a nonresident alien individual or a nonresident alien fiduciary of a foreign estate or trust, and the term "United States" means the United States of America (including the States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction. -91- (b) Notwithstanding the foregoing, if and so long as a certification, information or other reporting requirement referred to in Paragraph 6(c) hereof would be fully satisfied by payment of a backup withholding tax or similar charge, the Company may elect, by so stating in the Determination Notice (as defined in Paragraph 6(c) hereof), to have the provisions of this Paragraph apply in lieu of the provisions of such Paragraph. In such event, the Company will pay as Additional Amounts such amounts as may be necessary so that every net payment made following the effective date of such requirements outside the United States by the Company or any of its paying agents of principal or interest due in respect of any bearer Security or any coupon appertaining thereto of which the beneficial owner is a United States Alien (but without any requirement that the nationality, residence or identity of such beneficial owner be disclosed to the Company, any paying agent or any governmental authority), after deduction or withholding for or on account of such backup withholding tax or similar charge (other than a backup withholding tax or similar charge which is (i) the result of a certification, information or other reporting requirement described in the first parenthetical clause of such paragraph, or (ii) imposed as a result of the fact that the Company or any of its paying agents has actual knowledge that the beneficial owner of such bearer Security or coupon is within the category of persons described in clause (a)(i) of this Paragraph 5, or (iii) imposed as a result of presentation of such bearer Security or coupon for payment more than 15 days after the date on which such payment becomes due and payable or on which payment thereof is duly provided for, whichever occurs later), will not be less than the amount provided for in such bearer Security or coupon to be then due and payable. (c) Except as specifically provided in this Security and in the Fiscal Agency Agreement, the Company shall not be required to make any payment with respect to any tax, assessment or other governmental charge imposed by any government or any political subdivision or taxing authority thereof or therein. Whenever in this Security there is a reference, in any context, to the payment of the principal of or interest on, or in respect of, any Security or any coupon, such mention shall be deemed to include mention of the payment of Additional Amounts provided for in this Paragraph 5 to the extent that, in such context, Additional Amounts are, were or would be payable in respect thereof pursuant to the provisions of this Paragraph 5 and express mention of the payment of Additional Amounts (if applicable) in any provisions hereof shall not be construed as excluding Additional Amounts in those provisions hereof where such express mention is not made. 6. (a) The Securities are not redeemable prior to maturity except as provided below in this Paragraph 6. (b) The Securities may be redeemed at the option of the Company in whole, but not in part, at any time on giving not less than 30 nor more than 60 days' notice in the manner provided in clause (d) of this Paragraph 6 (which notice shall be irrevocable), at a redemption price equal to 100% of their principal amount, together with interest accrued to the date fixed for redemption, if the Company has or will become obligated to pay Additional Amounts (as provided in Paragraph 5(a) hereof) on the next succeeding interest Payment Date, as a result of any change in, or amendment to, the laws (or any regulations or rulings promulgated thereunder) of the United States or any political subdivision or taxing authority thereof or therein, or any amendment to or change in an official interpretation or application of such laws, regulations or rulings which amendment or change becomes effective, or action is taken, on or after September 29, 1988, and such obligation cannot be avoided by the Company taking measures which in its judgment are reasonable; provided however, that (i) no such notice of redemption shall be given earlier Than 90 days prior to the earliest date on which the Company would be obliged to pay such Additional Amounts were a payment in respect of the Notes then due and (ii) at the time such notice of redemption is given, such obligation to pay such Additional Amounts remains in effect. The Company's right to redeem the Securities pursuant to the preceeding sentence shall continue for so long as the conditions giving rise thereto shall exist. Prior to the publication of notice of redemption of the Securities pursuant to this Paragraph 6(b), the Company will deliver to the Fiscal Agent (i) a certificate of the Company -92- stating that the Company is entitled to effect such redemption and setting forth in reasonable detail a statement of facts showing that the conditions precedent to the right of the Company so to redeem the Securities pursuant to this Paragraph 6(b) have occurred and (ii) and an opinion of independent counsel to the effect that the Company has or will become obligated to pay such Additional Amounts as a result of such change or amendment. (c) In addition, if the Company determines that any payment made outside the United States by the Company or any of its paying agents of principal or interest due in respect to any bearer Security or coupon would, under any present or future laws or regulations of the United States, be subject to any certification, information or other reporting requirement of any kind, the effect of which requirement is the disclosure to the company, any paying agent or any governmental authority of the nationality, residence or identity of a beneficial owner of such bearer Security or coupon who is a United States Alien (other than such a requirement (i) which would not be applicable to a payment made by the Company or any one of its paying agents (A) directly to the beneficial owner or (B) to any custodian, nominee or other agent of the beneficial owner, or (ii) which can be satisfied by such custodian, nominee or other agent certifying to the effect that such beneficial owner is a United States Alien, provided that in each case referred to in clauses (i)(B) and (ii) payment by such custodian nominee or other agent of such beneficial owner is not otherwise subject to any such requirement), the Company at its election will either (x) redeem the Securities in whole on giving not less than 30 nor more than 60 days' notice in the manner provided in clause (d) of this Paragraph 6, at a redemption price equal to 100% of their principal amount, together with interest accrued to the date fixed for redemption, or (y) if and so long as the conditions set forth in Paragraph 5(b) are satisfied, pay the Additional Amounts specified in such Paragraph. The Company will make such determination and such election and notify the Fiscal Agent thereof as soon as practicable, and the Fiscal Agent will promptly give notice of such determination in the manner provided in clause (d) of this Paragraph 6 (the "Determination Notice"), in each case stating the effective date of such certification, information or reporting requirement, whether the Company has elected to redeem the Securities or to pay the Additional Amounts specified in such Paragraph and (if applicable) the last date by which the redemption of the Securities must take place. If the Company elects to redeem the Securities, such redemption will take place on such date, not later than one year after publication of the Determination Notice, as the Company elects by notice to the Fiscal Agent at least 60 days before the redemption date, unless shorter notice is acceptable to the Fiscal Agent. Notwithstanding the foregoing, the Company will not so redeem the Securities if the Company subsequently determines, not less than 30 days prior to the date fixed for redemption, that subsequent payments would not be subject to any such requirement, in which case the Company will notify the Fiscal Agent, which will promptly give notice of that determination in the manner provided in clause (d) of this Paragraph 6, and any earlier redemption notice will thereupon be revoked and of no further effect. If the Company elects as provided in clause (y) above to pay Additional Amounts, and as long as the Company is obligated to pay such Additional Amounts, the Company may subsequently redeem the Securities, at any time, as a whole but not in part, upon not more than 60 days' nor less than 30 days' prior notice given in the manner provided in clause (d) of this Paragraph 6, at 100% of their principal amount, together with interest accrued to the date fixed for redemption, but without reduction for United States withholding taxes discussed in this Paragraph. However, if the Company has made the election to pay Additional Amounts with respect to interest and subsequently, as a result of developments subsequent to such initial determination, makes such a determination with respect to certification, information or other reporting requirements applicable to principal, the Company may elect to redeem the Securities in the manner and on the terms described in this Paragraph 6(c), provided, in such case the Company shall have no obligation to pay Additional Amounts with respect to principal, but will be obligated to pay Additional Amounts with respect to interest accrued to the date of such redemption for which an election has been made. -93- (d) Notices to redeem Securities shall be given to Holders of bearer Securities by publication at least once in a leading daily newspaper in the English language of general circulation in The City of New York and in London and, so long as the Securities are listed on the Luxembourg Stock Exchange and such Exchange shall so require, in a daily newspaper of general circulation in Luxembourg or, if publication in either London or Luxembourg is not practicable, in Europe, and to Holders of registered Securities in writing mailed, first-class postage prepaid, to each Holder of registered Securities so to be redeemed, at his address as it appears in the Security Register. Such notice will be given once not more than 60 days nor less than 30 days prior to the date fixed for redemption. The term "daily newspaper" as used herein shall be deemed to mean a newspaper customarily published on each business day, whether or not it shall be published in Saturday, Sunday or holiday editions. If by reason of the suspension of publication of any newspaper or of regular mail service, or by reason of any other cause, it shall be impracticable to give notice to the Holders of Securities in the manner prescribed herein, then such notification in lieu thereof as shall be made by the Company or by the Fiscal Agent on behalf of and at the instruction of the Company shall constitute sufficient provision of such notice, if such notification shall, sb far as may be practicable, approximate the terms and conditions of the publication or mailed notice in lieu of which it is given. Neither the failure to give notice nor any defect in Any notice given to any particular Holder of a Security shall affect the sufficiency of any notice with respect to other Securities. Such notices will be deemed to have been given on the date of such publication or mailing or, if published in such newspapers on different dates, on the date of the first such publication. Notices to redeem Securities shall specify the date fixed for redemption, the applicable redemption price, the place or places of payment, that payment will be made upon presentation and surrender of the Securities to be redeemed, together, in the case of a bearer Security, with all appurtenant coupons, if any, maturing subsequent to the date fixed for redemption, that interest accrued to the date fixed for redemption (unless the redemption date is an Interest Payment Date) will be paid as specified in said notice, and that on and after said date interest thereon will cease to accrue. Such notice shall also state that the conditions precedent to such redemption have occurred and state that the Company has elected to redeem all the Securities. (e) If notice of redemption has been given in the manner set forth in Paragraph 6(d) hereof, the Securities so to be redeemed shall become due and payable on the redemption date specified in such notice, and upon pre- sentation and surrender of the Securities at the place or places specified in such notice, together in the case of bearer Securities with all appurtenant coupons, if any, maturing subsequent to the redemption date, the Securities shall be paid and redeemed by the Company at the places and in the manner and currency herein specified and at the redemption price together with accrued interest (unless the redemption date is an Interest Payment Date) to the redemption date; provided, however, that interest due on or prior to the redemption date on bearer Securities shall be payable only upon the presentation and surrender of coupons for such interest (at an office or agency outside the United States except as otherwise-provided on the face of the bearer Securities). If any bearer Security surrendered for redemption shall not be accompanied by all appurtenant coupons maturing after the redemption date, such Security will be paid after deducting from the amount otherwise payable an amount equal to the face amount of all such missing coupons, or the surrender of such missing coupon or coupons may be waived by the Company and the Fiscal Agent if they are furnished with such security or indemnity as they may require to save each of them and each paying agency of the Company harmless. From and after the redemption date, if monies for the redemption of Securities to be redeemed shall have been made available at the Principal office of the Fiscal Agent for redemption on the redemption date, the Securities to be redeemed shall cease to bear interest, the coupons for interest appertaining to bearer Securities maturing subsequent to the redemption date shall be void (unless the amount of such coupons shall have been deducted from the redemption price at the time of surrender of the related bearer Security as aforesaid), and the only right of the Holders of such Securities shall be to receive payment of the redemption price together with accrued interest (unless the redemption date is an Interest Payment Date) to the redemption date as aforesaid. If monies for the redemption of the Securities are not made available for payment until after the redemption date, the Securities called for redemption shall not cease to bear interest until such monies have been so made available. -94- (f) Securities redeemed or otherwise acquired by the Company will forthwith be delivered to the Fiscal Agent for cancellation and may not be reissued or resold, except that bearer Securities delivered to the Fiscal Agent may, pursuant to written instructions from the Company, be reissued by the Fiscal Agent in replacement of mutilated, lost, stolen or destroyed Securities pursuant to Paragraph 9 hereof. 7. In the event of: (a) default in the payment of any instalment of interest on any Security for a period of 30 days after the date when due; or (b) default in the payment of the principal of any security when due (whether at maturity, upon redemption or otherwise); or (c) failure on the part o to observe or perform in any material respect any other term, covenant or agreement on the part of the Company contained in the Securities which shall continue unremedied for a period of 60 days after the date on which written notice of such failure, requiring the Company to remedy the same and stating that such notice is a "Notice of Default", shall first have been given to the Company and the Fiscal Agent, by registered or certified mail, return receipt requested, by the Holders of at least 25% in aggregate principal amount of the Securities at the time outstanding; or (d) a default under any other indebtedness of the Company for money borrowed having unpaid principal in excess of $1,000,000 or under any indenture or other instrument under which any such indebtedness has been issued or by which it is governed, whether now existing or hereafter created, shall happen and result in the failure to pay such indebtedness at maturity or in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable, without such indebt- edness being paid or such acceleration being rescinded or annulled within 30 days after written notice thereof stating that such notice is a "Notice of Default" shall first have been given to the Company and the Fiscal Agent, by registered or certified mail, return receipt requested, by the Holders of at least 25% in aggregate principal amount of the Securities of the time Outstanding; or (e) the Company pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a Custodian of it or for all or substantially all of its property, (D) makes a general assignment for the benefit of its creditors, or (E) fails generally to pay its debts as they become due; or (f) a court of competent jurisdiction enters an drder or decree under any Bankruptcy Law that: (A) is for relief against the company in an involuntary case, (B) appoints a Custodian of the Company or for all or substantially all of its property, or (C) orders the liquidation of the Company, and the order or decree remains unstayed and in effect for 90 days; the Holder of this Security may, at such Holder's option, declare the principal of this Security and the interest accrued hereon to be due and payable immediately by written notice to the Company and the Fiscal Agent at its Principal Office, and unless all such defaults shall have been cured by the Company prior to receipt of such written notice, the principal of this Security and the interest accrued thereon shall become and be immediately due and payable. -95- The term "Bankruptcy Law" means Title 11, U.S. Code or any similar Federal or State law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. 8. (a) The Company shall not consolidate with or merge into any other corporation or convey or transfer its properties and assets substantially as an entirety to any person, unless: (i) the corporation formed by such consolidation or into which the Company is merged or the person which acquires by conveyance or transfer the properties and assets of the Company substantially as an entirety shall be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia (the "Successor Corporation") and shall expressly assume, by amendment to the Fiscal Agency Agreement signed by the Company and such Successor Corporation and delivered to the Fiscal Agent, the due and punctual payment of the principal of and interest on (including Additional Amounts payable pursuant to Paragraph 5 hereof) all the Securities and the performance or observance of every covenant hereof and of the Fiscal Agency Agreement on the part of the Company to be performed or observed; and (ii) the Company shall have delivered to the Fiscal Agent a certificate signed by an executive officer of the Company and a written opinion of counsel satisfactory to the Fiscal Agent (who may be counsel to the Company), each stating that such transaction and such amendment to the Fiscal Agency Agreement comply with this Paragraph 8 and that all conditions precedent herein provided for relating to such transaction have been complied with. (b) Upon any such consolidation or merger, or any conveyance or transfer of the properties and assets of the Company substantially as an entirety in accordance with Paragraph 8(a) hereof, the Successor Corporation shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Fiscal Agency Agreement and the Securities and the coupons with the same effect as if the Successor Corporation had been named as the Company therein and herein and thereafter the Company shall be released from its liability as obligor on any of the Securities and the coupons and under the Fiscal Agency Agreement. 9. If any mutilated Security or a Security with a mutilated coupon appertaining to it is surrendered to the Fiscal Agent or to the paying agent of the Company in the Borough of Manhattan, The City of New York, the Company shall execute, and the Fiscal Agent shall authenticate and deliver in exchange therefor, a new Security of like tenor and principal amount, bearing a number not contemporaneously outstanding, with coupons corresponding to the coupons, if any, appertaining to the surrendered Security. If there be delivered to the Company and the Fiscal Agent (and the paying agent of the Company in the Borough of Manhattan, The City of New York, if such be the place of surrender) (i) evidence to their satisfaction of the destruction, loss or theft of any Security or coupon, and (ii) such security or indemnity as may be required by them to save each of them and any agent of each of them harmless, then, in the absence of notice to the Company or the Fiscal Agent (and the paying agent of the Company in the Borough of Manhattan, The City of New York, if such be the place of surrender) that such Security or coupon has been acquired by a bona fide purchaser, the Company shall execute, and upon its written request the Fiscal Agent shall authenticate and deliver in lieu of any such destroyed, lost or stolen Security or in exchange for and upon surrender of the Security to which such coupon appertains (with all appurtenant coupons not destroyed, lost or stolen), a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding, with coupons corresponding to the coupons, if any, appertaining to such destroyed, lost or stolen Security or to the Security to which such destroyed, lost or stolen coupon appertains. Upon the issuance of any new Security under this Paragraph, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and the expenses of the Fiscal Agent) connected therewith. -96- Every new Security with its coupons, if any, issued pursuant to this Paragraph in lieu of any destroyed, lost or stolen Security, or in exchange for a Security to which a destroyed, lost or stolen coupon appertains, shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security and its coupons, if Any, or the destroyed, lost or stolen coupon shall be at any time enforceable by anyone. Any new Security delivered pursuant to this Paragraph shall be so dated, or have attached thereto such coupons, that neither gain nor loss in interest shall result from such exchange. The provisions of this Paragraph 9 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement of mutilated, destroyed, lost or stolen Securities or coupons. 10. (a) The Fiscal Agency Agreement and the terms and conditions of the Securities may be modified or amended by the Company and the Fiscal Agent, without the consent of any Holders of Securities or coupons, for the purpose of (i) adding to the covenants of the Company for the benefit of the Holders of Securities or coupons, or (ii) surrendering any right or power conferred upon the Company, or (iii) securing the Securities pursuant to the requirements of the Securities or otherwise, or (iv) permitting registered Securities to be exchanged for bearer Securities or relaxing or eliminating the restrictions on payment of principal or interest in respect of bearer Securities in the United States to the extent then permitted under applicable regulations of the United States Treasury Department, and provided no adverse tax consequences would result to the Holders of the Securities, or (v) evidencing the succession of another corporation to the Company and the assumption by any such successor of the covenants and obligations of the Company in the Securities, in the coupons or in the Fiscal Agency Agreement, or (vi) curing any ambiguity or correcting or supplementing any defective provision contained herein or in any coupon appertaining hereto or in the Fiscal Agency Agreement, to all of which each Holder of any Security or coupon shall, by acceptance thereof, consent. (b) The Fiscal Agency Agreement and the terms and conditions of the Securities may also be modified or amended by the Company and the Fiscal Agent, and past defaults thereunder by the Company may be waived, either with the written consent of the Holders of not less than a majority in aggregate principal amount of the Securities at the time Outstanding, or by the adoption, at a meeting duly convened and held in accordance with the provisions of the Fiscal Agency Agreement at which a quorum is present or represented, of a resolution by the Holders of not less than 66 2/3% in aggregate principal amount of the Outstanding Securities present or represented and voting at the meeting; provided that no such modification, amendment or waiver may, without the consent or affirmative vote of the Holder of each Security affected thereby: (i) change the stated maturity of the principal of or any instalment of interest on any Security, or reduce the principal amount thereof or the rate of interest thereon, or change the obligation of the Company to pay Additional Amounts pursuant to Paragraph 5 (except as otherwise permitted hereby), or change the coin or currency in which any Security or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or with respect to any such Security, or (ii) reduce the percentage in principal amount of the Outstanding Securities, the consent of whose Holders is required for any modification or amendment to the Fiscal Agency Agreement or to the terms and conditions of the Securities, or for any waiver of any past default, or reduce the requirements for voting and quorum at any meeting of Holders of Securities at which a resolution is to be adopted, or (iii) modify the obligation of the Company to maintain offices or agencies in the Borough of Manhattan, The City of New York, and in a European city, or -97- (iv) modify any of the provisions of this Paragraph 10(b), except to provide that certain other provisions of the Fiscal Agency Agreement or the terms and conditions of the Securities cannot be modified, amended or waived without the consent of the Holder of each Outstanding Security affected thereby. It shall not be necessary for the Holders of Securities to approve the particular form of any proposed amendment, but it shall be sufficient if they approve the substance thereof. (c) The Fiscal Agent shall not enter into any amendment to the Fiscal Agency Agreement and the Company shall not modify or amend the terms and conditions of the Securities unless there shall have been delivered to the Fiscal Agent a certificate signed by an executive officer of the Company and a written opinion of counsel satisfactory to the Fiscal Agent (who may be counsel to the Company), each stating that such amendment or modification is authorized or permitted by the Fiscal Agency Agreement or the Securities. (d) Any modifications, amendments or waivers to the Fiscal Agency Agreement or to the terms and conditions of the Securities in accordance with the foregoing provisions will be conclusive and binding on all Holders of Securities, whether or not they have given such consent, and on all Holders of coupons, whether or not notation of such modifications, amendments or waivers is made upon the Securities or coupons, and on all future Holders of Secu- rities and coupons. (e) Promptly after the execution of any amendment to the Fiscal Agency Agreement or the effectiveness of any modification or amendment of the terms and conditions of the securities, notice of such amendment or modification shall be given by the Company or by the Fiscal Agent on behalf of and at the expense of the Company to Holders of the Securities in the manner provided in Paragraph 6(d) hereof. The failure to give such notice on a timely basis shall not invalidate such amendment or modification, but the Company shall cause the Fiscal Agent to give such notice as soon as practicable upon discovering such failure or upon any impediment to the giving of such notice being overcome. 11. (a) The Company will not, nor will it permit any Restricted Subsidiary to, issue, assume or guarantee any indebtedness for borrowed money (hereinafter referred to as "Debt") secured by a mortgage, security interest, pledge, lien or other encumbrance upon any shares of stock of any Restricted Subsidiary without effectively providing that the Securities (together with, if the Company shall so determine, any other indebtedness of or guarantee by the Company ranking equally with the Securities and then existing or thereafter created) shall be secured equally and ratably with such Debt. (b) The Company will not, and will not permit any Restricted Subsidiary to, issue, sell assign, transfer or otherwise dispose of, directly or indirectly, any of the capital stock (other than nonvoting preferred stock) of any Restricted Subsidiary (except to the Company or to one or more Restricted Subsidiaries or for the purpose of qualifying directors); provided, however, that this covenant shall not apply if: (1) the entire capital stock of a Restricted Subsidiary is disposed of in a single transaction, or in a series of related transactions, for a consideration consisting of cash or other property which is at least equal to the fair value of such capital stock, as determined by the Board of Directors of the Company; or (2) the issuance, sale, assignment, transfer or other disposition is required to comply with the order of a court or regulatory authority of competent jurisdiction, other than an order issued at the request of the Company or of one of its Restricted Subsidiaries; or (3) after giving effect to the issuance, sale, assignment, transfer- or other disposition, the Company and its Restricted Subsidiaries would own directly or indirectly at least 80% of the issued and outstanding capital stock of such Restricted Subsidiary and such issuance, sale, assignment, transfer or other disposition is made for a consideration consisting of cash or other property which is at least equal to the fair value of such capital stock, as determined by the Board of Directors of the Company. -98- (c) For the purposes of this Paragraph 11, "Restricted Subsidiary" means each of American States Insurance Company, The Lincoln National Life Insurance Company, Lincoln National Pension Insurance Company, Security- Connecticut Life Insurance Company and The Western Casualty and Surety Company, as well as any successor to all or a principal part of the business of any such subsidiary, and any other subsidiary which the Company's Board of Directors designates a Restricted Subsidiary. 12. Subject to the authentication of this Security by the Fiscal Agent, the Company hereby certifies and declares that all acts, conditions and things required to be done and performed and to have happened precedent to the creation and issuance of the Securities and any coupons, and to constitute the same the valid obligations of the Company, have been done and performed and have happened in due compliance with all applicable laws. [FORM OF COUPON] [Face of Coupon] ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE. U.S.$487.50 Due October 20, LINCOLN NATIONAL CORPORATION 9 3/4% Notes Due 1995 On the date set forth hereon, LINCOLN NATIONAL CORPORATION ("Company") will pay to bearer, upon surrender hereof, the amount shown hereon (together with any Additional Amounts in respect thereof which the Company may be required to pay according to the terms of the Security to which this coupon appertains) at the paying agencies set out on the reverse hereof or at such other places outside the United States of America (including the States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction as the Company may determine from time to time, by United States dollar check drawn on a bank in The City of New York or transfer to a United States dollar account maintained by the payee with a bank in Europe, being the interest then payable on said Security. LINCOLN NATIONAL CORPORATION By [Reverse of Coupon] MORGAN GUARANTY TRUST MORGAN GUARANTY TRUST COMPANY OF NEW YORK COMPANY OF NEW YORK Avenues Des Arts 35 Morgan House 1040 Brussels P.O. Box 161 Belgium 1 Angel Court London ECR 7AE England SWISS BANK CORPORATION BANQUE INTERNATIONALE A P.O. Box 1132 LUXEMBOURG S.A. Aeschenvorstadt 1 2 Boulevard Royal CH-4002 Basle Luxembourg Switzerland Grand Duchy of Luxembourg -99- EXHIBIT C [FORM OF CERTIFICATE TO BE GIVEN TO CEDEL OR THE EURO-CLEAR OPERATOR BY BENEFICIAL OWNERS WHICH ARE NOT U.S. PERSONS] CERTIFICATE LINCOLN NATIONAL CORPORATION 9 3/4% Notes Due 1995 This is to certify that as of the date hereof and except as provided in the third paragraph hereof, none of the above-captioned Securities held by you for our account is beneficially owned by citizens or residents of the United States, any corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof, or any estate or trust the income of which is subject to United States federal income taxation regardless of its source ("United States Persons") or by persons who have purchased for resale to United States Persons. As used herein, "United States" means the United States of America (including the States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction. We undertake to advise you by telex if the above statement as to beneficial ownership is not correct on (Insert the exchange date] as to all of the above-captioned Securities then appearing in your books as being held for our account. This certificate excepts and does not relate to U.S.$ principal amount of the above-captioned Securities appearing in your books as being held for our account but which we have sold or as to which we are not yet able to certify and as to which we understand exchange and delivery of definitive Securities cannot be made until we are able so to certify. We understand that this certificate is required in connection with certain securities and tax legislation in the United States. If administrative or legal prodeedings are commenced or threatened in connection with which this certificate is or would be relevant, we irrevocably authorize you to produce this certificate or a copy thereof to any interested party in such proceedings. Dated: 1989 To be dated on or after the 15th day before the Exchange Date [Name of Account Holder] (Authorized Signatory) Name: Title: -100- EXHIBIT D (FORM OF CERTIFICATE TO BE GIVEN BY EURO-CLEAR AND CEDEL S.A.)* CERTIFICATE LINCOLN NATIONAL CORPORATION 9 3/4% Notes Due 1995 This is to certify with respect to U.S. $ principal amount of the above-captioned Securities (i) that we have received from each of the persons appearing in our records as persons being entitled to a portion of such prin- cipal amount (our "Qualified Account Holders") a certificate with respect to such portion substantially in the form attached hereto and (ii) that we are not submitting herewith for exchange any portion of such Global Security excepted in such certificates. We further certify that as of the date hereof we have not received any notification from any of our Qualified Account Holders to the effect that the statements made by such Qualified Account Holders with respect to any portion of the part submitted herewith for exchange are no longer true and cannot be relied upon as of the date hereof. Dated: , 1989 Yours faithfully, To be dated no earlier than (MORGAN GUARANTY TRUST the Exchange Date COMPANY OF NEW YORK, BRUSSELS OFFICE, as Operator of the Euro- Clear Clearance System] (CENTRALE DE LIVRAISON DE VALEURS MOBILIERES S.A.] By A copy of the form of Exhibit C should be attached to this Exhibit D. EX-10 3 -101- LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES EXHIBIT 10(a) - LINCOLN NATIONAL CORPORATION 1986 STOCK OPTION INCENTIVE PLAN LINCOLN NATIONAL CORPORATION 1986 STOCK OPTION INCENTIVE PLAN (as amended through May 13, 1993) SECTION 1 GENERAL 1.1. Effective Date and Purpose. Lincoln National Corporation, an Indiana corporation, ("LNC") has established the LINCOLN NATIONAL CORPORATION 1986 STOCK OPTION INCENTIVE PLAN (the "Plan") effective as of January 8, 1986 (the "Effective Date"), subject to approval of the Plan at the 1986 Annual Meeting of LNC shareholders by the holders of a majority of the shares of LNC stock entitled to vote at that meeting. The purpose of the Plan is to promote the long-term financial performance of LNC by (a) attracting and retaining executive and other key employees of LNC and its Subsidiaries (as defined in subsection 2.1) who possess outstanding abilities with incentive compensation opportunities which are competitive with those of other major corporations; (b) motivating such employees to further the long-range goals of LNC; and (c) furthering the identity of interests of participating employees and LNC shareholders through opportunities for increased employee ownership of LNC common stock. 1.2. Plan Administration. The Plan shall be administered by the Committee (as described below). In addition to those rights, duties, and powers vested in the Committee by other provisions of the Plan, the Committee shall have sole authority to: (a) interpret the provisions of the Plan; (b) adopt, amend and rescind rules and regulations for the administration of the Plan; and (c) make all other determinations deemed by it to be necessary or advisable for the administration of the Plan; provided that the Committee shall exercise its authority in accordance with the provisions of the Plan. The Committee may not exercise its authority at any time that it has fewer than three members. The Committee shall exercise its authority only by a majority vote of its members at a meeting or by a writing without meeting. At any date, the members of the Committee shall be those members of the Compensation Committee of the Board of Directors of LNC who are not eligible and who have not been eligible within one year preceeding that date to participate in the Plan or any other plan of LNC or a Subsidiary under which stock, stock options or stock appreciation rights of LNC or a Subsidiary may be granted. In the event that fewer than three members of the Compensation Committee of the Board are eligible to serve on the Committee, the Board of Directors of LNC may appoint one of its other members who is otherwise eligible to serve, to serve on the Committee until such time as three members of the Compensation Committee are eligible to serve. 1.3. Shares Available. The sum of the number of shares of LNC common stock for which Incentive Stock Options and Non-qualified Stock Options (both as defined in subsection 3.1) may be granted; of shares of LNC common stock which may be awarded under a Restricted Stock Award (as defined in subsection 5.1); and of shares awarded pursuant to Section 6 may not exceed 5,000,000. If all or a portion of an Incentive Stock Option or Non-qualified Stock Option expires or is terminated without having been exercised in full and without having been surrendered to exercise any related Stock Appreciation Rights (as defined in subsection 4.1) or if any Restricted Stock Award is forfeited, then the number of shares which were forfeited or not purchased shall not thereafter be considered in determining whether the 5,000,000 limitation described in the next preceding sentence has been exceeded. The shares of -102- LNC common stock delivered pursuant to the Plan shall be authorized but unissued shares. In the event of a merger, consolidation, reorganization, recapitalization, stock dividend, stock split or other similar change in the corporate structure or capitalization of LNC which affects the LNC common stock, appropriate adjustment, as determined by the Board of Directors of LNC (or its successor), shall be made with respect to the number and kinds of shares (or other securities) which may thereafter be awarded or be subject to option under the Plan. The shares available provided for in this subsection 1.3 reflect an adjustment for a two for one stock split effected through a stock dividend declared by the Board of Directors of LNC on May 13, 1993. Agreements evidencing grants and awards under the Plan shall be subject to and shall provide for appropriate adjustments, determined by the Board of Directors of LNC (or its successor) in the event of such changes in the corporate structure or capitalization of LNC occurring after the date of grant or award. 1.4. Term, Amendment, and Termination of Plan. Grants and awards may not be made under the Plan after the earlier of January 7, 1996, or the termination date of the Plan. The Board of Directors of LNC may amend or terminate the Plan at any time except that, without the approval of the holders of a majority of LNC stock entitled to vote at a duly held meeting of such shareholders, the Board may not: (a) increase the number of shares of LNC common stock which may be issued under the Plan, except as provided in subsection 1.3; (b) reduce the minimum option price under any stock option, except as provided in subsection 1.3; (c) increase the maximum period during which Incentive Stock Options, Non-qualified Stock Options and Stock Appreciation Rights may be exercised; (d) extend the term of the Plan; and (e) amend the standards for participation described in Section 2. Amendment or termination of the Plan shall not affect the validity or terms of any grant or award previously made to a Participant in any way which is adverse to the Participant without the consent of the Participant. SECTION 2 PLAN PARTICIPATION 2.1. Participation Designations. The Committee may, at any time, designate any key executive, managerial, supervisory or professional employee of LNC or of a Subsidiary (as defined below) or any person holding either an agent`s or broker's contract with a Subsidiary to be a Participant. For purposes of the Plan, the term "Subsidiary" means any corporation at any date that LNC owns directly, or indirectly through an unbroken chain of subsidiary corporations, stock possessing a majority of the total combined voting power of all classes of stock of that corporation. 2.2. Participation Not Contract of Employment. The Plan does not constitute a contract of employment. Participation in the Plan does not give any employee the right to be retained in the employ of LNC or a Subsidiary and does not limit in any way the right of LNC or a Subsidiary to change the duties or responsibilities of any employee. 2.3. Withholding Taxes on Plan Benefits. LNC and the Subsidiaries shall have the right to deduct from any cash payment made pursuant to the Plan the amount of any tax required by law to be withheld from that payment. LNC and the Subsidiaries shall have the right to require payment to them from any person entitled to receive LNC common stock pursuant to the Plan of the amount of any tax required by law to be withheld with respect to that stock prior to its delivery. A Participant may elect with respect to any -103- Non-qualified Stock Option, any Stock Appreciation Right which is paid in whole or in part in LNC common stock and any Restricted Stock Award, to surrender shares of LNC common stock the fair market value of which on the date of surrender satisfies all or part of the withholding requirements. Such election must be made by filing a Stock Surrender Withholding Election with the Secretary of LNC which meets the following requirements and conditions: (a) Any Stock Surrender Withholding Election shall be in writing and be irrevocable; (b) The Committee shall have the right with respect to any or all outstanding awards to terminate or suspend for any period the right of a Participant to make a Stock Surrender Withholding Election at any time prior to the making of such election; (c) Any Stock Surrender Withholding Election must be made prior to the date that the amount of tax to be withheld is determined (the "Tax Date"); and (d) If a Participant is an "officer" of LNC within the meaning of section 16 of the Securities Exchange Act of 1934, as amended, or any successor law, the Stock Surrender Withholding Election must be made: (i) more than six months after the date of grant of the award with respect to which such election is made (except whenever such election is made by a disabled Participant or the estate or personal representative of a deceased Participant); and (ii) either at least six months prior to the Tax Date or during the ten day "window period" beginning on the third day following the release for publication of LNC`s summary statement of earnings for a quarter or fiscal year. SECTION 3 STOCK OPTIONS 3.1. Grantees. The Committee may, at any time, designate a participant to receive an Incentive Stock Option or Non-qualified Stock Option (each as defined below) whether or not the Participant has previously received a grant under the Plan. For purposes of the Plan, the term "Incentive Stock Option" means an option to purchase LNC common stock which meets the requirements of section 422A(b) of the Internal Revenue Code of 1986, as amended, (the "Code") and which has been designated by the Committee as an Incentive Stock Option, and the term "Non-qualified Stock Option" means an option to purchase LNC common stock which is not an Incentive Stock Option and which is designated by the Committee as a Non-qualified Stock Option." Each Incentive Stock Option ("ISO") and Non-Qualified Stock Option ("NQSO") granted under the Plan shall be evidenced by an agreement between the Participant and LNC. The Provisions of each agreement shall be determined by the Committee in accordance with the provisions of the Plan. LNC shall notify a Grantee of any grant of a Stock Option, and a written option agreement or agreements shall be duly executed and delivered by LNC to the Grantee. A Participant shall not have any rights of a shareholder of LNC common stock with respect to shares subject to an ISO or NQSO until such shares are purchased on exercise of the option. -104- 3.2. Number of Shares Optioned and Option Price. The Committee shall, subject to the limitations of subsection 1.3 and this Section 3, determine the number of shares of LNC common stock which may be purchased and the option price of each share on exercise of each ISO and NQSO granted under the Plan. The number of shares of LNC common stock for which ISOs may be granted to a Participant under this Plan and any other plan of LNC or a Subsidiary during any calendar year beginning before January 1, 1987 shall not exceed the number whose aggregate Fair Market Value (as defined below), at the time each ISO is granted, does not exceed the dollar limitation (including unused carry- overs) described in section 422A(b)(8) of the Code. The aggregate Fair Market Value (determined as of the time the option is granted) of LNC stock with respect to which ISOs granted after December 31, 1986 are exercisable for the first time by a Participant during any calendar year under the Plan or any other Plan of LNC or a Subsidiary shall not exceed $100,000. The option price of each share under an ISO or NQSO shall not be less than 100% the Fair Market Value of a share of LNC common stock on the date the option is granted. For purposes of the Plan, the term "Fair Market Value" means the average of the highest and lowest prices of a share of stock, as quoted on the composite transactions table covering transactions on the New York Stock Exchange, on the first date that the stock was traded on that Exchange which next precedes the date as of which the determination is being made. 3.3. Exercise of Options and Payment. Each ISO and NQSO shall become exercisable in full at such time, or in such portions at such times, as the Committee determines subject to the following provisions of this subsection 3.3. No ISO or NQSO granted to a Participant shall be exercisable prior to the first anniversary of the date that the option was granted except, in the discretion of the Committee and subject to the limitations of subsection 3.2, if the Participant`s employment with LNC and all Subsidiaries terminates by reason of death, disability (as defined by the Committee), or retirement (as described in subsection 3.4(d)). During any period that an ISO or NQSO is exercisable, it may be exercised by delivering a written notice which specifies the number of shares purchased and full payment of the purchase price to the Secretary of LNC. Payment may be made in cash, in shares of LNC common stock with an aggregate Fair Market Value on the date of exercise equal to the purchase price, or in any combination of cash and such shares, provided, however, payment of the exercise price may only be made in shares of LNC common stock which have been owned by the Participant for at least six months. 3.4. Termination of Options. Each ISO and NQSO shall terminate and not be exercisable after the date determined by the Committee which date shall not be later than the earliest of (a) the tenth anniversary of the date that the option was granted; (b) the last day of the three month period beginning on the date the Participant's employment with LNC and all Subsidiaries terminates for reasons other than described in (c) or (d) following; (c) the first anniversary of the date the Participant's employment with LNC and all Subsidiaries terminates on account of death or disability (as defined by the Committee); or (d) the fifth anniversary of the Participant's normal retirement or, with the approval of the Participant's employer, early retirement at either age 55 with 5 years of service or under the terms of a retirement plan of LNC or a Subsidiary. 3.5. Transferability. Each ISO and NQSO granted to a Participant may not be transferred by the Participant except by will or the laws of descent and distribution, and may be exercisable during the Participant`s lifetime only by the Participant. -105- SECTION 4 STOCK APPRECIATION RIGHTS 4.1. Grantees. The Committee may, at the time a stock option is granted under Section 3 to a Participant or at any time thereafter, designate that Participant to be granted, in conjunction with that stock option, a Stock Appreciation Right (as defined below). The Committee may grant a Stock Appreciation Right to a Participant only after it has determined that such grant is necessary or desirable to create a reasonable opportunity for the Participant to acquire an increased ownership interest in LNC. In making such determination, the Committee shall consider the number of shares of LNC common stock then owned by the Participant, the Participant`s outstanding stock options for LNC common stock and related Stock Appreciation Rights, and such other factors that the Committee considers relevant. No Stock Appreciation Right may be granted in conjunction with a previously granted ISO without the written consent of the affected Participant. For purposes of the Plan, the term "Stock Appreciation Right" means a right to surrender all or a portion of a stock option and receive, in exchange, payment of an amount no greater than the excess of the Fair Market Value (as defined in subsection 3.2) of one or more shares of LNC common stock determined on the date the related stock option was granted. Each Stock Appreciation Right ("SAR") granted under the Plan shall be evidenced by an agreement between the Participant and LNC. The provisions of each agreement shall be determined by the Committee in accordance with the provisions of the Plan. 4.2. Terms of SARs. The Committee shall determine the number of shares of LNC common stock and the percentage (not more than 100 percent) or maximum amount of the increase in the Fair Market Value of those shares over the relevant period upon which payment of each SAR at exercise shall be based. Each SAR may be exercisable at any date with respect to no more than the number of shares for which the related stock option is exercisable on that date. Each SAR issued in conjunction with an ISO may be exercisable only when there has been an increase in Fair Market Value of the shares over the relevant period. If a Participant to whom an SAR has been granted is subject to Section 16 of the Securities Exchange Act of 1934, as amended, the Committee may, at any time, impose such conditions and limitations to such SAR as the Committee deems necessary or desirable for the Participant to comply with or obtain an exemption from such Section 16 and applicable rules and regulations. The terms of an SAR may include such other conditions and limitations on exercise as the Committee deems desirable. 4.3. Exercise of SARs and Payment. During any period that a SAR is exercisable, it may be exercised by delivering a written notice which specifies the extent to which the SAR is being exercised to the Secretary of LNC. Payment to the Participant shall be made as soon as practicable after exercise of the SAR and may be made in cash, in shares of LNC common stock with an aggregate Fair Market Value on the date of exercise equal to the amount to be paid, or in any combination of cash and such shares as determined by the Committee. Upon exercise of an SAR, the right to exercise the related stock option shall automatically be terminated to the same extent that the SAR was exercised. 4.4. Termination of SARs. Each SAR shall terminate and not be exercisable after the same date that the related stock option terminates. 4.5. Transferability. Each SAR granted to a Participant may not be transferred by the Participant except together with the related stock option and except by will or the laws of descent and distribution, any may be exercisable during the Participant`s lifetime only by the Participant. -106- SECTION 5 RESTRICTED STOCK AWARDS 5.1. Grantees. The Committee may, at any time, designate a Participant to receive a Restricted Stock Award (as defined below) whether or not the Participant has previously received a grant under the Plan. For purposes of the Plan, the term "Restricted Stock Award" means the right to receive, at specified times and subject to specified conditions, shares of LNC common stock which may bear such restrictive endorsements as the Committee determines. Each Restricted Stock Award ("RSA") shall be evidenced by an agreement between the Participant and LNC. The provisions of each agreement shall be determined by the Committee in accordance with the provisions of the Plan. 5.2. Grants of Restricted Stock Awards. The Committee shall, subject to subsection 1.3 and this Section 5, determine the number of shares of LNC common stock which may be awarded, the time or times the shares may be awarded, and the conditions which must be met for award and delivery of the shares to the Participant under each RSA granted under the Plan. An RSA may provide, in the discretion of the Committee, for the crediting to the Participant, on each dividend payment date, of an amount equal to the product of the dividend paid on a share of LNC common stock multiplied by the number of shares which may be awarded under that RSA, and for the payment in cash to the Participant of the amounts so credited at such time as the Committee may determine. An RSA may provide, in the discretion of the Committee, for the issuance of the shares which may be awarded under the RSA in the name of the Participant subject to the following restrictions: (a) the shares may not be issued earlier than six months after the grant of the RSA; (b) the shares may not be sold, transferred, pledged or otherwise assigned or encumbered; (c) each stock certificate shall be registered in the name of the Participant and deposited with the Secretary of LNC; (d) dividends paid on the shares shall be paid to the Participant at such times as the Committee shall determine; and (e) the shares and dividends paid shall be subject to a forfeiture in accordance with subsection 5.4. Subject to the foregoing restrictions, the Participant shall have all of the rights of a holder of LNC common stock with respect to the shares issued to him or her under this subsection 5.2. 5.3. Distribution of Shares. Subject to the provisions of subsection 5.4, each RSA shall provide for the distribution of the awarded shares of LNC Common stock free of all restrictions to the Participant or, in the event of the Participant`s death, the person or persons to whom the RSA was transferred by will or the laws of descent and distribution. Distribution shall be provided for at such time or times during the period beginning on the first anniversary and ending on the tenth anniversary of the date of grant of the RSA as the Committee shall determine; except that, in the discretion of the Committee, distribution may be provided for prior to such first anniversary if the Participant's employment with LNC and all Subsidiaries terminates on account of death, disability (as determined by the Committee), or retirement (as described in subsection 3.4(d)). -107- 5.4. Forfeiture. Each RSA shall provide that a Participant shall forfeit all rights under the RSA, all shares of LNC common stock issued pursuant to the RSA which had not been distributed to the Participant free of all restrictions, and all undistributed amounts credited to the Participant with respect to dividends paid on LNC common stock pursuant to the RSA if: (a) the Participant`s employment with LNC and all Subsidiaries terminates for any reason other than death, disability (as defined by the Committee), retirement (as described in subsection 3.4(d)), or other reasons determined by the Committee which should not cause forfeiture; or (b) the conditions, if any, specified in the RSA are not fully satisfied within the prescribed time. 5.5. Transferability. Each RSA granted to a Participant may not be transferred by the Participant except by will or the laws of descent and distribution. SECTION 6 STOCK INCENTIVE AWARDS 6.1. Management Incentive Plan II. The Committee may, in its discretion, designate that a Participant who is eligible for a cash award under the terms of the LNC Management Incentive Plan II (the "MIP II Plan") receive such award as a grant of restricted stock in lieu of all or a portion of the MIP II Plan cash award, such RSA shall be made subject to subsection 1.3 and Section 5. The amount, if any, of the MIP II award which is not paid as an RSA shall be paid in cash. This cash payment shall be determined by subtracting from the MIP II Plan award the total Fair Market Value, on the date of the RSA, of the shares of LNC common stock represented by the RSA without discount for any restrictions. 6.2. Executive Value Sharing Plan. The Committee may, in its discretion, designate that a Participant who is eligible for a cash award under the terms of the LNC Executive Value Sharing Plan (the "EVS Plan") receive such award as a grant of restricted stock in lieu of all or a portion of the EVS Plan cash award. If the Committee decides to make an RSA in lieu of all or a portion of the EVS Plan cash award, such RSA shall be made subject to subsection 1.3 and Section 5. The amount, if any, of the EVS Plan award which is not paid as an RSA shall be paid in cash. SECTION 7 POSTPONEMENT OF EXERCISE The Committee may postpone any exercise of an ISO, NQSO, or SAR or distribution pursuant to an RSA for such time as the Committee in its discretion may deem necessary in order to permit LNC (a) to effect or maintain registration of the Plan or LNC common stock issuable pursuant to the Plan under the Securities Act of 1933, as amended, or the securities laws of any applicable jurisdiction; (b) to take any action necessary to comply with restrictions or regulations incident to the maintenance of a public market for LNC common stock; or (c) to determine that no action referred to in (a) or (b) above needs to be taken. LNC shall not be obligated to issue shares upon exercise of any ISO, NQSO or SAR or to issue shares pursuant to an RSA in violation of any law. Any such postponement shall not extend the term of an ISO, NQSO or SAR. Neither LNC nor its directors or officers shall have any obligation or liability to any Participant (or successor in interest) because of the loss or rights under any grant or award under the Plan due to postponements pursuant to this Section 7. -108- SUPPLEMENT A THE LNC STOCK OPTION INCENTIVE SCHEME FOR U.K. EMPLOYEES This Supplement A is adopted as part of the Lincoln National Corporation 1986 Stock Option Incentive Plan ('the Plan') and is referred to as 'the U.K. Scheme'. The Rules of the Plan will apply to United Kingdom employees subject to the following additions and modifications. 1. The U.K. Scheme will be effective from the date approved by the Board of Inland Revenue. 2. (1) Subject to sub paragraphs (2) and (3) of this paragraph participation in the U.K. Scheme will be determined in the same manner as for the Plan. (2) No person shall obtain rights under the U.K. Scheme unless he is at that time an eligible employee of a participating Company. For this purpose (i) an eligible employee of a company is any director or employee who is required to devote to his duties not less than 25 hours (or in the case of any employee who is not a director, 20 hours) per week (excluding meal breaks), including any time spent in carrying out duties for any other participating company, and this is not precluded by paragraph 4(1)(b) of Schedule 10 of the Finance Act of 1984 from participating in the U.K. Scheme, and (ii) a participating company is any body corporate including Cannon Assurance Limited which is under the control (within the meaning of Section 534 of the Income and Corporation Taxes Act of 1970) of Lincoln National Corporation. (3) No person shall be entitled to obtain or exercise rights under the U.K. Scheme at any time when he has or within the preceding 12 months had a material interest in a close company within the meaning of Chapter IV of Part XI of the Income and Corporation Taxes Act 1970, which is (i) a company the shares of which may be acquired pursuant to the exercise of rights obtained under the U.K. Scheme; or (ii) a company which has control of such a company or is a member of a consortium which controls such a company. 3. No option shall be granted under the U.K. Scheme to an eligible employee if immediately following such grant he would hold outstanding options which have neither lapsed nor been exercised with an aggregate subscription price exceeding the greater of 100,000 British Pounds Sterling or four times the amount of the Eligible Employee`s relevant emoluments for the period of 12 months beginning with the first day during the current year of assessment in respect of which there are relevant emoluments. For this purpose (i) outstanding options include all options granted under the U.K. Scheme and other scheme approved under schedule 10 of the Finance Act 1984 and established by Lincoln National Corporation or any participating company (as defined in Rule 1 and Rule 2 above) and (ii) relevant emoluments has the same meaning as in paragraph 5(5) of Schedule 10 of the Finance Act of 1984. -109- 4. For the purpose of the U.K. Scheme the option price of each share shall instead of the price quoted under paragraph 3.2. of the Plan be the middle market quotation derived from the Stock Exchange Daily Official List for the date the option is granted, provided that if the Fair Market Value (as defined in the said paragraph 3.2.) for that date is higher when converted to sterling at the rate of exchange quoted for that day by National Westminster Bank, then the option price will be the Fair Market Value (as so converted). 5. (1) On exercise of an option by a Participant payment shall be made in cash and the right under the Plan (paragraph 3.3.) to make payment or partially to make payment in shares of LNC common stock shall not apply to the U.K. Scheme. (2) Shares acquired on the exercise of an option under the U.K. Scheme will be issued and allocated not later than 30 days after the exercise of the option. 6. For the purposes of the U.K. Scheme all references to 'LNC Common Stock' shall be deemed to be references to LNC common stock which satisfy the conditions specified in Paragraphs 7 to 11 inclusive of Schedule 10 to the Finance Act 1984. 7. Section 4 (Stock Appreciation Rights), Section 5 (Restricte Stock Awards) and Section 6 (Stock Incentive Awards) of the Plan shall not apply to the U.K. Scheme. 8. All amendments to the U.K. Scheme shall be subject to the prior approval of the Board of Inland Revenue and any amendments to the Plan shall be ineffective for the purposes of the U.K. Scheme until approved by the Board of Inland Revenue. EX-10 4 -110- LINCOLN NATIONAL CORPORATION EXHIBIT 10(b) 1982 STOCK OPTION INCENTIVE PLAN SECTION 1 GENERAL 1.1. Effective Date and Purpose. Lincoln National Corporation, an Indiana corporation, ("LNC") has established the LINCOLN NATIONAL CORPORATION 1982 STOCK OPTION INCENTIVE PLAN (the "Plan") effective as of May 13, 1982 (the "Effective Date"), subject to approval of the Plan at the 1982 Annual Meeting of LNC shareholders by the holders of a majority of the shares of LNC stock entitled to vote at that meeting. The purpose of the Plan is to promote the long-term financial performance of LNC by (a) attracting and retaining executive and other key employees of LNC and its Subsidiaries (as defined in subsection 2.1) who possess outstanding abilities with incentive compensation opportunities which are competitive with those of other major corporations; (b) motivating such employees to further the long-range goals of LNC; and (c) furthering the identity of interests of participating employees and LNC shareholders through opportunities for increased employee ownership of LNC common stock. 1.2. Plan Administration. The Plan shall be administered by the Committee (as described below). In addition to those rights, duties, and powers vested in the Committee by other provisions of the Plan, the Committee shall have sole authority to: (a) interpret the provisions of the Plan; (b) adopt, amend and rescind rules and regulations for the administration of the Plan; and (c) make all other determinations deemed by it to be necessary or advisable for the administration of the Plan; provided that the Committee shall exercise its authority in accordance with the provisions of the Plan. The Committee may not exercise its authority at any time that it has fewer than three members. The Committee shall exercise its authority only by a majority vote of its members at a meeting or by a writing without meeting. At any date, the members of the Committee shall be those members of the Compensation Committee of the Board of Directors of LNC who are not eligible and who have not been eligible within one year preceeding that date to participate in the Plan or any other plan of LNC or a Subsidiary under which stock, stock options or stock appreciation rights of LNC or a Subsidiary may be granted. In the event that fewer than three members of the Compensation Committee of the Board are eligible to serve on the Committee, the Board of Directors of LNC may appoint one of its other members who is otherwise eligible to serve, to serve on the Committee until such time as three members of the Compensation Committee are eligible to serve. 1.3. Shares Available. The sum of the number of shares of LNC common stock for which Incentive Stock Options and Non-qualified Stock Options (both as defined in subsection 3.1) may be granted; of shares of LNC common stock which may be awarded under a Restricted Stock Award (as defined in subsection 5.1); and of shares awarded pursuant to Section 6 in connection with awards under LNC Management Incentive Plan II may not exceed 2,000,000. If all or a portion of an Incentive Stock Option or Non-qualified Stock Option expires or is terminated without having been exercised in full and without having been surrendered to exercise any related Stock Appreciation Rights (as defined in subsection 4.1) or if any Restricted Stock Award is forfeited, then the number of shares which were forfeited or not purchased shall not thereafter be considered in determining whether the 2,000,000 limitation described in the next preceding sentence has been exceeded. For purposes of determining if the limitation described above has been exceeded, the number of shares of LNC common stock for which Incentive Stock Options and Non-qualified Stock Options have been granted prior to January 6, 1984, shall be multiplied by two. The shares of LNC common stock delivered pursuant to the Plan shall be authorized but unissued shares or reacquired shares held by LNC as treasury shares (including shares purchased in the open market). In the event of a merger, -111- consolidation, reorganization, recapitalization, stock dividend, stock split or other similar change in the corporate structure or capitalization of LNC which affects the LNC common stock, appropriate adjustment, as determined by the Board of Directors of LNC (or its successor), shall be made with respect to the number and kinds of shares (or other securities) which may thereafter be awarded or be subject to option under the Plan. Agreements evidencing grants and awards under the Plan shall be subject to and shall provide for appropriate adjustments, determined by the Board of Directors of LNC (or its successor) in the event of such changes in the corporate structure or capitalization of LNC occurring after the date of grant or award. 1.4. Term, Amendment, and Termination of Plan. Grants and awards may not be made under the Plan after the earlier of May 12, 1987, or the termination date of the Plan. The Board of Directors of LNC may amend or terminate the Plan at any time except that, without the approval of the holders of a majority of LNC stock entitled to vote at a duly held meeting of such shareholders, the Board may not: (a) increase the number of shares of LNC common stock which may be issued under the Plan, except as provided in subsection 1.3; (b) reduce the minimum option price under any stock option, except as provided in subsection 1.3; (c) increase the maximum period during which Incentive Stock Options, Non-qualified Stock Options and Stock Appreciation Rights may be exercised; (d) extend the term of the Plan; and (e) amend the standards for participation described in Section 2. Amendment or termination of the Plan shall not affect the validity or terms of any grant or award previously made to a Participant in any way which is adverse to the Participant without the consent of the Participant. SECTION 2 PLAN PARTICIPATION 2.1. Participation Designations. The Committee may, at any time, designate any key executive, managerial, supervisory or professional employee of LNC or of a Subsidiary (as defined below) to be a Participant. For purposes of the Plan, the term "Subsidiary" means any corporation at any date that LNC owns directly, or indirectly through an unbroken chain of subsidiary corporations, stock possessing a majority of the total combined voting power of all classes of stock of that corporation. 2.2. Participation Not Contract of Employment. The Plan does not constitute a contract of employment. Participation in the Plan does not give any employee the right to be retained in the employ of LNC or a Subsidiary and does not limit in any way the right of LNC or a Subsidiary to change the duties or responsibilities of any employes. 2.3. Withholding Taxes on Plan Benefits. LNC and the Subsidiaries shall have the right to deduct from any cash payment made pursuant to the Plan the amount of any tax required by law to be withheld from that payment. LNC and the Subsidiaries shall have the right to require payment to them from any person entitled to receive LNC common stock pursuant to the Plan of the amount of any tax required by law to be withheld with respect to that stock prior to its delivery. -112- SECTION 3 STOCK OPTIONS 3.1. Grantees. The Committee may, at any time, designate a Participant to receive an Incentive Stock Option or Non-qualified Stock Option (each as defined below) whether or not the Participant has previously received a grant under the Plan. For purposes of the Plan, the term "Incentive Stock Option" means an option to purchase LNC common stock which meets the requirements of section 422A(b) of the Internal Revenue Code of 1954, as amended, (the "Code") and the term "Non-qualified Stock Option" means an option to purchase LNC common stock which is not an Incentive Stock Option. Each Incentive Stock Option ("ISO") and Non-Qualified Stock Option ("NQSO") granted under the Plan shall be evidenced by an agreement between the Participant and LNC. The Provisions of each agreement shall be determined by the Committee in accordance with the provisions of the Plan. A Participant shall not have any rights of a shareholder of LNC common stock with respect to shares subject to an ISO or NQSO until such shares are purchased on exercise of the option. 3.2. Number of Shares Optioned and Option Price. The Committee shall, subject to the limitations of subsection 1.3 and this Section 3, determine the number of shares of LNC common stock which may be purchased and the option price of each share on exercise of each ISO and NQSO granted under the Plan. The number of shares of LNC common stock for which ISOs may be granted to a Participant under this Plan and any other plan of LNC or a Subsidiary during any calendar year beginning before January 1, 1987 shall not exceed the number whose aggregate Fair Market Value (as defined below), at the time each ISO is granted, does not exceed the dollar limitation (including unused carry- overs) described in section 422A(b)(8) of the Internal Revenue Code of 1954, as amended. With respect to ISOs granted after December 31, 1986, the aggregate Fair Market Value (determined as of the time the option is granted) of LNC common stock with respect to which ISOs are exercisable for the first time by a Participant during any calendar year under the Plan or any other Plan of LNC or a Subsidiary shall not exceed $100,000. The option price of each share under an ISO or NQSO shall not be less than 100% of the Fair Market Value of a share of LNC common stock on the date the option is granted. For purposes of the Plan, the term "Fair Market Value" means the average of the highest and lowest prices of a share of stock, as quoted on the composite transactions table covering transactions on the New York Stock Exchange on the first date that the stock was traded on that Exchange which next precedes the date as of which the determination is being made. 3.3. Exercise of Options and Payment. Each ISO and NQSO shall become exercisable in full at such time, or in such portions at such times, as the Committee determines subject to the following provisions of this subsection 3.3. No ISO or NQSO granted to a Participant shall be exercisable prior to the first anniversary of the date that the option was granted except, in the discretion of the Committee and subject to the limitations of subsection 3.2, if the Participant`s employment with LNC and all Subsidiaries terminates by reason of death, disability (as defined by the Committee), or retirement (as described in subsection 3.4(d)). During any period that an ISO or NQSO is exercisable, it may be exercised by delivering a written notice which specifies the number of shares purchased and full payment of the purchase price to the Secretary of LNC. Payment may be made in cash, in shares of LNC common stock with an aggregate Fair Market Value on the date of exercise equal to the purchase price, or in any combination of cash and such shares. 3.4. Termination of Options. Each ISO and NQSO shall terminate and not be exercisable after the date determined by the Committee which date shall not be later than the earliest of (a) the tenth anniversary of the date that the option was granted; (b) the last day of the three month period beginning on the date the Participant`s employment with LNC and all Subsidiaries terminates for reasons other than described in (c) or (d) following; (c) the first anniversary of the date the Participant`s employment with LNC and all Subsidiaries terminates on account of death or disability (as defined by the Committee); or (d) the fifth anniversary of the Participant`s normal retirement or, with the approval of the Participant`s employer, early retirement under the terms of a retirement plan of LNC or a Subsidiary. -113- 3.5. Transferability. Each ISO and NQSO granted to a Participant may not be transferred by the Participant except by will or the laws of descent and distribution, and may be exercisable during the Participant`s lifetime only by the Participant. SECTION 4 STOCK APPRECIATION RIGHTS 4.1. Grantees. The Committee may, at the time a stock option is granted under Section 3 to a Participant or at any time thereafter, designate that Participant to be granted, in conjunction with that stock option, a Stock Appreciation Right (as defined below). The Committee may grant a Stock Appreciation Right to a Participant only after it has determined that such grant is necessary or desirable to create a reasonable opportunity for the Participant to acquire an increased ownership interest in LNC. In making such determination, the Committee shall consider the number of shares of LNC common stock then owned by the Participant, the Participant`s outstanding stock options for LNC common stock and related Stock Appreciation Rights, and such other factors that the Committee considers relevant. No Stock Appreciation Right may be granted in conjunction with a previously granted ISO without the written consent of the affected Participant. For purposes of the Plan, the term "Stock Appreciation Right" means a right to surrender all or a portion of a stock option and receive, in exchange, payment of an amount no greater than the excess of the Fair Market Value (as defined in subsection 3.2) of one or more shares of LNC common stock determined on the date the related stock option was granted. Each Stock Appreciation Right ("SAR") granted under the Plan shall be evidenced by an agreement between the Participant and LNC. The provisions of each agreement shall be determined by the Committee in accordance with the provisions of the Plan. 4.2. Terms of SARs. The Committee shall determine the number of shares of LNC common stock and the percentage (not more than 100 percent) or maximum amount of the increase in the Fair Market Value of those shares over the relevant period upon which payment of each SAR at exercise shall be based. Each SAR may be exercisable at any date with respect to no more than the number of shares for which the related stock option is exercisable on that date. Each SAR issued in conjunction with an ISO may be exercisable only when there has been an increase in Fair Market Value of the shares over the relevant period. If a Participant to whom an SAR has been granted is subject to Section 16 of the Securities Exchange Act of 1934, as amended, the Committee may, at any time, impose such conditions and limitations to such SAR as the Committee deems necessary or desirable for the Participant to comply with or obtain an exemption from such Section 16 and applicable rules and regulations. The terms of an SAR may include such other conditions and limitations on exercise as the Committee deems desirable. 4.3. Exercise of SARs and Payment. During any period that a SAR is exercisable, it may be exercised by delivering a written notice which specifies the extent to which the SAR is being exercised to the Secretary of LNC. Payment to the Participant shall be made as soon as practicable after exercise of the SAR and may be made in cash, in shares of LNC common stock with an aggregate Fair Market Value on the date of exercise equal to the amount to be paid, or in any combination of cash and such shares as determined by the Committee. Upon exercise of an SAR, the right to exercise the related stock option shall automatically be terminated to the same extent that the SAR was exercised. 4.4. Termination of SARs. Each SAR shall terminate and not be exercisable after the same date that the related stock option terminates. 4.5. Transferability. Each SAR granted to a Participant may not be transferred by the Participant except together with the related stock option and except by will or the laws of descent and distribution, any may be exercisable during the Participant`s lifetime only by the Participant. -114- SECTION 5 RESTRICTED STOCK AWARDS 5.1. Grantees. The Committee may, at any time, designate a Participant to receive a Restricted Stock Award (as defined below) whether or not the Participant has previously received a grant under the Plan. For purposes of the Plan, the term "Restricted Stock Award" means the right to receive, at specified times and subject to specified conditions, shares of LNC common stock which may bear such restrictive endorsements as the Committee determines. Each Restricted Stock Award ("RSA") shall be evidenced by an agreement between the Participant and LNC. The provisions of each agreement shall be determined by the Committee in accordance with the provisions of the Plan. 5.2. Grants of Restricted Stock Awards. The Committee shall, subject to subsection 1.3 and this Section 5, determine the number of shares of LNC common stock which may be awarded, the time or times the shares may be awarded, and the conditions which must be met for award and delivery of the shares to the Participant under each RSA granted under the Plan. An RSA may provide, in the discretion of the Committee, for the crediting to the Participant, on each dividend payment date, of an amount equal to the product of the dividend paid on a share of LNC common stock multiplied by the number of shares which may be awarded under that RSA, and for the payment in cash to the Participant of the amounts so credited at such time as the Committee may determine. An RSA may provide, in the discretion of the Committee, for the issuance of the shares which may be awarded under the RSA in the name of the Participant subject to the following restrictions: (a) the shares may not be issued earlier than six months after the grant of the RSA; (b) the shares may not be sold, transferred, pledged or otherwise assigned or encumbered; (c) each stock certificate shall be registered in the name of the Participant and deposited with the Secretary of LNC; (d) dividends paid on the shares shall be paid to the Participant at such times as the Committee shall determine; and (e) the shares and dividends paid shall be subject to a forfeiture in accordance with subsection 5.4. Subject to the foregoing restrictions, the Participant shall have all of the rights of a holder of LNC common stock with respect to the shares issued to him or her under this subsection 5.2. 5.3. Distribution of Shares. Subject to the provisions of subsection 5.4, each RSA shall provide for the distribution of the awarded shares of LNC Common stock free of all restrictions to the Participant or, in the event of the Participant`s death, the person or persons to whom the RSA was transferred by will or the laws of descent and distribution. Distribution shall be provided for at such time or times during the period beginning on the first anniversary and ending on the tenth anniversary of the date of grant of the RSA as the Committee shall determine; except that, in the discretion of the Committee, distribution may be provided for prior to such first anniversary if the Participant`s employment with LNC and all Subsidiaries terminates on account of death, disability (as determined by the Committee), or retirement (as described in subsection 3.4(d)). 5.4. Forfeiture. Each RSA shall provide that a Participant shall forfeit all rights under the RSA, all shares of LNC common stock issued pursuant to the RSA which had not been distributed to the Participant free of all restrictions, and all undistributed amounts credited to the Participant with respect to dividends paid on LNC common stock pursuant to the RSA if: -115- (a) the Participant`s employment with LNC and all Subsidiaries terminates for any reason other than death, disability (as defined by the Committee), retirement (as described in subsection 3.4(d)), or other reasons determined by the Committee which should not cause forfeiture; or (b) the conditions, if any, specified in the RSA are not fully satisfied within the prescribed time. 5.5. Transferability. Each RSA granted to a Participant may not be transferred by the Participant except by will or the laws of descent and distribution. SECTION 6 STOCK INCENTIVE AWARDS A Participant who is eligible for a cash award under the terms of LNC Management Incentive Plan II (the "Incentive Plan") may file a request with the Committee (at such time and in such manner as it determines) for distribution of shares of LNC common stock in lieu of all or a portion of such cash award (reduced by taxes withheld). The Committee may, in its discretion, approve or deny the Participant`s request and shall notify the participant of its decision. If the Committee approves the Participant`s request, it shall direct delivery to the Participant of the number of whole shares of LNC common stock determined by dividing the amount of the surrendered cash award by the Fair Market Value, on the date that the request is approved, of a share of LNC common stock. The amount, if any, of the cash award which is not paid in LNC common stock shall be paid in cash under the Incentive Plan. SECTION 7 POSTPONEMENT OF EXERCISE The Committee may postpone any exercise of an ISO, NQSO, or SAR or distribution pursuant to an RSA for such time as the Committee in its discretion may deem necessary in order to permit LNC (a) toeffect or maintain registration of the Plan or LNC common stock issuable pursuant to the Plan under the Securities Act of 1933, as amended, or the securities laws of any applicable jurisdiction; (b) to take any action necessary to comply with restrictions or regulations incident to the maintenance of a public market for LNC common stock; or (c) to determine that no action referred to in (a) or (b) above needs to be taken. LNC shall not be obligated to issue shares upon exercise of any ISO, NQSO or SAR or to issue shares pursuant to an RSA in violation of any law. Any such postponement shall not extend the term of an ISO, NQSO or SAR. Neither LNC nor its directors or officers shall have any obligation or liability to any Participant (or successor in interest) because of the loss or rights under any grant or award under the Plan due to postponements pursuant to this Section 7. -116- SUPPLEMENT A THE LNC STOCK OPTION INCENTIVE SCHEME FOR U.K. EMPLOYEES This Supplement A is adopted as part of the Lincoln National Corporation 1986 Stock Option Incentive Plan (`the Plan`) and is referred to as `the U.K. Scheme`. The Rules of the Plan will apply to United Kingdom employees subject to the following additions and modifications. 1. The U.K. Scheme will be effective from the date approved by the Board of Inland Revenue. 2. (1) Subject to sub paragraphs (2) and (3) of this paragraph participation in the U.K. Scheme will be determined in the same manner as for the Plan. (2) No person shall obtain rights under the U.K. Scheme unless he is at that time an eligible employee of a participating Company. For this purpose (i) an eligible employee of a company is any director or employee who is required to devote to his duties not less than 25 hours (or in the case of any employee who is not a director, 20 hours) per week (excluding meal breaks), including any time spent in carrying out duties for any other participating company, and this is not precluded by paragraph 4(1)(b) of Schedule 10 of the Finance Act of 1984 from participating in the U.K. Scheme, and (ii) a participating company is any body corporate including Cannon Assurance Limited which is under the control (within the meaning of Section 534 of the Income and Corporation Taxes Act 1970) of Lincoln National Corporation. (3) No person shall be entitled to obtain or exercise rights under the U.K. Scheme at any time when he has or within the preceding 12 months had a material interest in a close company within the meaning of Chapter IV of Part XI of the Income and Corporation Taxes Act 1970, which is (i) a company the shares of which may be acquired pursuant to the exercise of rights obtained under the U.K. Scheme; or (ii) a company which has control of such a company or is a member of a consortium which controls such a company. 3. No option shall be granted under the U.K. Scheme to an eligible employee if immediately following such grant he would hold outstanding options which have neither lapsed nor been exercised with an aggregate subscription price exceeding the greater of 100,000 (pounds) or four times the amount of the Eligible Employee`s relevant emoluments for the period of 12 months beginning with the first day during the current year of assessment in respect of which there are relevant emoluments. For this purpose (i) outstanding options include all options granted under the U.K. Scheme and other scheme approved under schedule 10 of the Finance Act 1984 and established by Lincoln National Corporation or any participating company (as defined in Rule 1 and Rule 2 above) and (ii) relevant emoluments has the same meaning as in paragraph 5(5) of Schedule 10 of the Finance Act of 1984. -117- 4. For the purpose of the U.K. Scheme the option price of each share shall instead of the price quoted under paragraph 3.2. of the Plan be the middle market quotation derived from the Stock Exchange Daily Official List for the date the option is granted, provided that if the Fair Market Value (as defined in the said paragraph 3.2.) for that date is higher when converted to sterling at the rate of exchange quoted for that day by National Westminster Bank, then the option price will be the Fair Market Value (as so converted). 5. (1) On exercise of an option by a Participant payment shall be made in cash and the right under the Plan (paragraph 3.3.) to make payment or partially to make payment in shares of LNC common stock shall not apply to the U.K. Scheme. (2) Shares acquired on the exercise of an option under the U.K. Scheme will be issued and allocated not later than 30 days after the exercise of the option. 6. For the purposes of the U.K. Scheme all references to `LNC Common Stock` shall be deemed to be references to LNC common stock which satisfy the conditions specified in Paragraphs 7 to 11 inclusive of Schedule 10 to the Finance Act 1984. 7. Section 4 (Stock Appreciation Rights), Section 5 (Restricted Stock Awards) and Section 6 (Stock Incentive Awards) of the Plan shall not apply to the U.K. Scheme. 8. All amendments to the U.K. Scheme shall be subject to the prior approval of the Board of Inland Revenue and any amendments to the Plan shall be ineffective for the purposes of the U.K. Scheme until approved by the Board of Inland Revenue. EX-10 5 -118- LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES EXHIBIT 10(m) DESCRIPTION OF COMPENSATION ARRANGEMENTS WITH EXECUTIVE OFFICERS 1. Severance Agreement with P. Kenneth Dunsire. In connection with the hiring by LNL of P. Kenneth Dunsire in October 1984, LNL entered into a Severance Agreement with Mr. Dunsire. Pursuant to that Agreement, if for any reason the registrant terminates Mr. Dunsire's employment, one year of base salary will be paid as severance pay. 2. LNC Executive Employee's Supplemental Pension Arrangement. Under this arrangement payments supplemental to pension benefits are provided to eligible executive employees at the discretion of the Chief Executive Officer (the "CEO") of LNC with the consent of the Personnel Committee of the Board of Directors of LNC. Participation is generally limited to very senior executives. This arrangement was established to provide an incentive for attracting experienced senior executive personnel. Executives who are selected under this arrangement must be eligible for retirement under the Lincoln National Corporation Employees' Retirement Plan (Retirement Plan) to be eligible for payments. In addition, executives who are eligible for early retirement under the Retirement Plan may be eligible for payments under this arrangement at the CEO's discretion. Payments are calculated using a final average compensation approach which coordinates benefits with the Retirement Plan to produce a cumulative "benefit," which is a percentage of the highest five year average salary rated by years of service, according to the following formula: PAYMENTS = CUMULATIVE BENEFIT - RETIREMENT PLAN BENEFIT. The following chart illustrates how the cumulative benefit is arrived at: Service Rate of Accrual Cumulative Benefit first 15 years - 3.0% per year - 45% after 15 years next 5 years - 1.5% per year - 52.5% after 20 years next 5 years - 1.0% per year - 57.5% after 25 years over 25 years - 0.2% per year - 59.5% max. after 34 years The formula integrates at the end of 34 years into the Retirement Plan basic formula. The primary social security benefit attributable to LNC is offset. For retirements prior to age 65, the payment is reduced by the same actuarial reduction that the Retirement Plan would require for 20 or more years of service. However, unreduced payments may be provided in the event of early retirement invited by management. No payments shall be made in the event of termination prior to normal retirement age unless approved by the CEO. Any right to receive payments is forfeited subsequent to retirement in the event an executive receiving benefits engages in employment with a competitor of LNC. No preretirement death benefits or disability benefits are available under the arrangement. This arrangement is not an employee benefit plan subject to ERISA. No "benefit" is vested. The arrangement is not prefunded. It is funded from general assets. Mr. Dunsire is currently a participant. His annual estimated benefit at age 65 and payable under the plan is $62,490 and as of December 31, 1993, he became vested in his benefit payable upon attainment of his 62nd birthday. -119- 3. Life Insurance Program. LNC has a "split dollar" insurance program that provides life insurance coverage for certain officers in addition to the group term life insurance plan generally provided to all employees. Each participant in this split dollar program is provided ordinary life insurance coverage at varying levels, and enters into premium retrieval and split dollar agreements with LNC which define (a) the division of cash premium payments between LNC and the participant, and (b) the division between the participant and LNC of death benefits and the cash value of the policy covering such participant. After approximately seven years, LNC will recover its previous premium payments, and all ongoing premium payments will be funded, through policy loans; cash outlays by LNC will cease except for interest payments on policy loans. At the employee's termination of employment or death (other than on account of disability, retirement or termination within two years of a change in control of LNC), LNC will recover any of its net unrecovered outlays, and the balance (cash value or death benefit) will be paid to the employee or his estate. The program thus provides the insurance to the employees at essentially no cost to LNC. EX-10 6 -120- LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES EXHIBIT 10(q) 1993 STOCK PLAN FOR NON-EMPLOYEE DIRECTORS ARTICLE I - PURPOSE OF PLAN 1.1 Purpose of Plan. Lincoln National Corporation (the "Corporation") has adopted the 1993 Stock Plan for Non-Employee Directors (the "Plan") to provide for payment in shares of the Corporation's Common Stock ("Stock") of a portion of the retainer fee payable to members of the Board of Directors of the Corporation who are not employees of the Corporation or any of its affiliates or subsidiaries ("Non-Employee Directors") and to allow Non- Employee Directors to elect to defer receipt of all or a portion of their retainer and/or meeting fees. The Plan also provides a restricted stock bonus in the form of Restricted Stock for Non-Employee Directors. The Plan is intended to provide Non-Employee Directors with a larger equity interest in the Corporation in order to attract and retain well-qualified individuals to serve as Non-Employee Directors and to enhance the identity of interests between Non-Employee Directors and the shareholders of the Corporation. ARTICLE II - ELIGIBILITY AND PARTICIPATION 2.1 Eligibility and Participation. Only Non-Employee Directors of the Corporation and its subsidiaries shall be eligible to participate in the Plan, and participation in the Plan is mandatory for all Non-Employee Directors. Except as specifically provided herein, a Non-Employee Director may not elect to increase or decrease the portion of the retainer fee payable in Stock. ARTICLE III - RETAINER STOCK AWARDS AND DEFERRAL ELECTIONS 3.1 Retainer Stock Awards. (a) Amount of Award. On each July 1 after the Effective Date through and including July 1, 2004 (each such date hereinafter a "Grant Date"), in lieu of the portion of the retainer fee payable to a Non-Employee Director on such Grant Date determined without regard to this Plan ("Retainer"), and in consideration for services rendered as a Non-Employee Director of the Corporation, the Corporation shall issue to each Non-Employee Director a whole number of shares of Stock (a "Stock Award") equal to the number of shares determined by dividing (a) twenty-five percent (25%) of the Retainer, by (b) the Fair Market Value of the Stock on such Grant Date. For purposes of this Plan, the "Fair Market Value" of Stock on any business day shall be the average of the high and low sales prices quoted on the New York Exchange Composite Listing on the next preceding business day on which there were such quotations for the day in question. To the extent that the formula described in this Section 3.1(a) does not result in a whole number of shares of Stock, the result shall be rounded upwards to the next whole number such that no fractional shares of Stock shall be issued under the Plan. Such shares shall be restricted from sale or transfer as provided in Section 3.1(b). (b) Restrictions on Stock Awards. A stock certificate representing the Stock Award shall be registered in each Non-Employee Director's name but shall be held in custody by the Company for the Non-Employee Director's account pursuant to a stock power. The Non-Employee Director shall have all rights and privileges of a shareholder as to such Stock Award, including the right to vote such Restricted Shares, except that the following restrictions shall apply: (i) the Non-Employee Director shall not be entitled to delivery of the certificate until the expiration of the Restricted Period, (ii) none of the Restricted Shares may be sold, transferred, assigned, pledged, or otherwise encumbered or disposed of during the Restricted Period, and (iii) except as provided in Section 3.1(c), all of the Restricted Shares shall be forfeited and all rights of the Non-Employee Director to such Restricted Shares shall terminate without further obligation on the part of the Corporation and its subsidiaries upon the Non-Employee Director's ceasing to be a director of the Corporation and its subsidiaries. -121- (c) Termination of Directorship. (i) Vesting of Shares. If a Non-Employee Director ceases to be a director of the Corporation and its subsidiaries by reason of Disability, Death, Retirement or Change of Control, the Restricted Shares granted to such Non-Employee Director shall immediately vest. If a Non-Employee Director ceases to be a director of the Corporation and its subsidiaries for any other reason, the Non-Employee Director shall immediately forfeit all Stock Awards, except to the extent that a majority of the Board other than the Non-Employee Director approves the vesting of such Stock Award. Uponvesting, except as provided in Article X, all restrictions applicable to such Stock Award shall lapse and a certificate for such shares shall be delivered to the Non-Employee Director, or the Non-Employee Director's beneficiary or estate, in accordance with Article VI. (ii) Disability. For purposes of this Section 3.1(c), "Disability" shall mean a permanent and total disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended. (iii) Retirement. For purposes of this Section 3.1(c), "Retirement" shall mean ceasing to be a director of the Company (i) on or after age 70, or (ii) on or after age 65 with the consent of a majority of the members of the Board other than the Non-Employee Director. (iv) Change of Control. For purposes of this Section 3.1(c), "Change of Control" shall have the same meaning as in the LNC Executives' Severance Benefit Plan on the date immediately preceding the "Change of Control." 3.2 Deferral of Retainer and/or Fees. (a) Deferral Elections. Commencing on the effective date of the Plan, payment of all or part of the Retainer (excluding Stock Awards pursuant to Section 3.1(a)) and/or fees payable to a Non-Employee Director for meetings of the Board or Board Committees or for extraordinary services may be deferred by election of the Non-Employee Director. Each such election must be made prior to the start of the calendar year for which the Retainer and/or fees will be paid and must be irrevocable for the affected calendar year, provided, however, that for 1994, each Non-Employee Director shall be permitted to elect deferred payment of all or a portion of the Retainer and/or the fees earned after the effective date of the Plan and before December 31, 1994, provided such Non-Employee Director has made an irrevocable election to this effect prior to stockholder approval of the Plan. In addition, each election to defer payment of any amount of the Retainer and/or fees payable in cash shall be made at least six (6) months in advance of the date such election is to be effective and shall be irrevocable except upon a subsequent irrevocable election that takes effect at least six (6) months after the date of such subsequent election, to the extent necessary to satisfy the requirements of Rule 16b-3(d) promulgated under the Securities Exchange Act of 1934 ("1934 Act"), as the same may be hereafter amended. (b) Crediting Stock Units to Accounts. Amounts deferred pursuant to Section 3.2(a) shall be credited as of the date of the deferral to a bookkeeping reserve account maintained by the Corporation ("Account") in units which are equivalent in value to shares of Stock ("Stock Units"). The number of Stock Units credited to an Account with respect to any Non-Employee Director shall equal a number of Stock Units equal to any deferred cash amount divided by the Fair Market Value of the Stock on the date on which such cash amount would have been paid but for the deferral election pursuant to Section 3.2(a). -122- (c) Fully Vested Stock Units. All Stock Units credited to a Non- Employee Director's Account pursuant to this Article III shall be at all times fully vested and nonforfeitable. (d) Payment of Stock Units. Stock Units credited to a Non-Employee Director's Account pursuant to this Article III shall be payable in an equal number of shares of Stock or cash in a single distribution made at such time specified by the Non-Employee Director in the applicable deferral election, provided that the designated payment date with respect to any election must be the first day of a subsequent calendar year which is no earlier than twelve (12) months following the establishment of the affected Stock Unit. ARTICLE IV - RESTRICTED STOCK BONUS 4.1 Restricted Stock Bonus for Non-Employee Directors on the Effective Date. Each Non-Employee Director serving as such on the effective date of the Plan shall be awarded 200 shares of Stock (a "Stock Bonus") in consideration for services rendered as a Non-Employee Director of the Corporation and its subsidiaries. The restrictions on the Stock Bonus shall be the same as those restrictions described in Section 3.1(b). 4.2 Restricted Stock Bonus for Non-Employee Directors After the Effective Date. Each Non-Employee Director who commences serving a new three year term after the effective date of the Plan shall be issued a whole number of Shares of Stock ("Stock Bonus") equal to $10,000 divided by the Fair Market Value of Stock on the July 1 on which he or she begins serving a new term as a Non-Employee Director. To the extent that the formula described in this Section 4.2 does not result in a whole number of Shares of Stock, the result shall be rounded upwards to the next whole number such that no fractional shares shall be issued under the Plan. This Stock Bonus shall contain the same restrictions as specified in Section 3.1(b). ARTICLE V - DIVIDEND EQUIVALENT PAYMENTS 5.1 Dividend Equivalent Payments. As of each dividend payment date with respect to Stock, each Non-Employee Director shall receive additional Stock Units ("Dividend Equivalent Payment") equal to the product of (i) the per- share cash dividend payable with respect to each share of Stock on such date, and (ii) the total number of Restricted Shares issued in his or her name and held by the Corporation and Stock Units credited to his Account as of the record date corresponding to such dividend payment date, divided by the Fair Market Value of Stock on the date. Fractional Stock Units may be awarded. ARTICLE VI - DELIVERY OF STOCK CERTIFICATES 6.1 Stock Awards. The Stock certificate for shares of Stock issued to any Non-Employee Director pursuant to a Retainer Stock Award or Stock Bonus with respect to a Grant Date shall be held by the Corporation until the restrictions lapse. As soon as practicable following the expiration of the restrictions, but in no event sooner than six (6) months from such Grant Date, the Corporation shall deliver to the Non-Employee Director the Stock certificate with respect to the shares of Stock issued pursuant to such Stock Award and Stock Bonus. During any six (6) month period after the Grant Date and before delivery of the Stock certificate after the restrictions have lapsed, the Non-Employee Director shall have all the rights of a shareholder with respect to such Stock, except that such Stock shall not be transferable by the Non-Employee Director other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order. -123- 6.2 Stock Unit Payments. The Corporation shall issue and deliver to the Non-Employee Director cash or a Stock certificate, as elected by the Non- Employee Director for payment of Stock Units as soon as practicable following the date on which Stock Units are payable in accordance with Section 3.2(d). No fractional shares will be distributed. ARTICLE VII - STOCK 7.1 Stock. The Aggregate number of shares of Stock that may be issued under the Plan shall not exceed one hundred fifty thousand (150,000) shares, unless such number of shares is adjusted as provided in Article VIII of this Plan. In addition to the foregoing limit, the aggregate number of restricted shares that may be granted during the term of the Plan shall not exceed thirty thousand (30,000) shares, unless such number of shares is adjusted as provided in Article VIII of this Plan. To the extent that an award lapses or the rights of the Non-Employee Director terminate or the award is settled in cash (e.g. cash settlement of Stock Units) any shares of Common Stock subject to such award shall again be available for the grant of an award. ARTICLE VIII - ADJUSTMENT UPON CHANGES IN CAPITALIZATION 8.1 Adjustment Upon Changes in Capitalization. In the event of a stock dividend, stock split or combination, reclassification, recapitalization or other capital adjustment of shares of Stock, the number of shares of Stock that may be issued pursuant to Stock Awards, Stock Bonuses, and Stock Units and the number of Stock Units credited to Accounts shall be appropriately adjusted by the Board of Directors of the Corporation, whose determination shall be final, binding and conclusive. No fractional shares of Stock shall be issued under the Plan on account of any adjustment specified herein. The grant of Stock Awards, Stock Bonuses, or Stock Units pursuant to this Plan shall not affect in any way the right or power of the Corporation to issue additional Stock or other securities, make adjustments, reclassifications, reorganizations or other changes in its corporate, capital or business structure, to participate in a merger, consolidation or share exchange or to transfer its assets or dissolve or liquidate. ARTICLE IX - TERMINATION OR AMENDMENT OF PLAN 9.1 In General. The Board of Directors of the Corporation may at any time terminate, suspend or amend this Plan. However, except as otherwise determined by the Board, no such amendment shall become effective without the approval of the stockholders of the Corporation to the extent stockholder approval is required in order to comply with Rule 16b-3 under the 1934 Act. 9.2 Amendment No More than Once in 6 Months. Those provisions of this Plan that set forth the amounts and the formula for determining the amounts, prices and timing of Stock Awards, Stock Bonuses, and Stock Units, respectively, may not be amended more than once every six (6) months. 9.3 Written Consents. No amendment may adversely affect the right of any Non-Employee Director to receive any Stock previously issued as a Stock Award, Stock Bonus, or to receive any Stock of Dividend Equivalent Payments pursuant to an outstanding Stock Unit without the written consent of such Non-Employee Director. 9.4 Termination of Stock Awards. Unless the Plan is sooner terminated, no Stock Award shall be granted after July 1, 2004. -124- ARTICLE X - GOVERNMENT REGULATIONS 10.1 Government Regulations. (a) The obligations of the Corporation to issue any Stock granted under this Plan shall be subject to all applicable laws, rules and regulations and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Board of Directors of the Corporation. (b) Except as otherwise provided in Article IX of this Plan, the Board of Directors of the Corporation may make such changes as may be necessary or appropriate to comply with the rules and regulations of any governmental authority. ARTICLE XI - MISCELLANEOUS 11.1 Unfunded Plan. The Plan shall be unfunded with respect to the Corporation's obligation to pay any amounts due pursuant to Stock Units and Dividend Equivalent Payments, and a Non-Employee Director's rights to receive any payment of any Stock Unit or Dividend Equivalent Payment shall be not greater than the rights of an unsecured general creditor of the Corporation. 11.2 Assignment; Encumbrances. The right to receive a Stock Award, Stock Bonus or Stock Unit and the right to receive payment with respect to a Stock Unit under this Plan are not assignable or transferable and shall not be subject to any encumbrances, liens, pledges or charges of the Non-Employee Director or his or her creditors. Any attempt to assign, transfer or hypothecate any Restricted Stock Award, Stock Bonus, or Stock any right to receive a Stock Award, Stock Bonus or Stock Unit shall be void and and of no force and effect whatsoever. 11.3 Designation of Beneficiaries. A Non-Employee Director may designate a beneficiary or beneficiaries to receive any distributions under the Plan upon his or her death. 11.4 Applicable Law. The validity, interpretation and administration of this plan and any rules, regulations, determinations or decisions made hereunder, and the rights of any and all persons having or claiming to have any interest herein or hereunder, shall be determined exclusively in accordance with the laws of the State of Indiana, without regard to the choice of laws provisions hereof. 11.5 Headings. The headings in this Plan are for reference purposes only and shall not affect the meaning or interpretation of this Plan. 11.6 Notices. All notices or other communications made or given pursuant to this Plan shall be in writing and shall be sufficiently made or given if hand-delivered or mailed by certified mail, addressed to any Non-Employee Director at the address contained in the records of the Corporation or to the Corporation at its principal office. ARTICLE XII - EFFECTIVE DATE OF PLAN 12.1 Effective Date of Plan. This Plan shall become effective on the date on which it is adopted by the Board of Directors of the Corporation, subject, however, to the approval by the affirmative vote of the holders of a majority of the votes cast by shareholders of the Corporation present, or represented and entitled to vote, at the next annual meeting of the shareholders of the Corporation duly held in accordance with the laws of the State of Indiana. EX-10 7 -125- LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES EXHIBIT 10(r) EXECUTIVES' EXCESS COMPENSATION PENSION BENEFIT PLAN LINCOLN NATIONAL CORPORATION EXECUTIVES' EXCESS COMPENSATION PENSION BENEFIT PLAN As Adopted Effective as of January 1, 1989 LINCOLN NATIONAL CORPORATION By: Ian M. Rolland Its Chairman and Chief Executive Officer Section 1 General 1.1 Effective as of January 1, 1989, Lincoln National Corporation, an Indiana corporation (the "Company") has established the Lincoln National Corporation Employees' Excess Compensation Benefit Plan (the "Plan"). 1.2 This Plan is for a select group of highly compensated and management personnel who are participants in the Lincoln National Corporation Employees' Retirement Plan, which plan is maintained for employees of Lincoln National Corporation and its affiliates who retire, or have retired, under the said plan and the beneficiaries of such participants. 1.3 The Company and any of its affiliates which with the written consent of the Chief Executive Officer of the Company adopt the Plan are referred to below collectively as the "Employers" and individually as an "Employer". 1.4 This Plan is completely separate from the Lincoln National Corporation Employees' Retirement Plan and is not funded or qualified for special tax treatment under the Internal Revenue Code. 1.5 The purpose of the Plan is to restore retirement benefit payments to those participants, and the beneficiaries of such participants, who retire or have retired under the Lincoln National Corporation Employees' Retirement Plan and whose retirement benefits are limited by section 401(a)(17) of the Internal Revenue Code of 1986, as amended. 1.6 Any action required or permitted to be taken by any Employer under the Plan shall be by resolution of its Board of Directors, or by a person or persons authorized by resolution of its Board of Directors. -126- Section 2 Eligibility 2.1 Any participant in the Lincoln National Corporation Employees' Retirement Plan who retires or has retired under said plan, or such participant's beneficiary, shall be entitled to a benefit, payable hereunder in accordance with section three of this Plan, equal to the excess, if any, of (A) The amount of such participant's or surviving beneficiary's annual benefit under the Lincoln National Corporation Employees' Retirement Plan computed under the provisions of the said plan, without regard to the above-mentioned limitations of section 401(a)(17) of the Internal Revenue Code (B) The sum of (i) the amount of such participant's or surviving beneficiary's annual benefit actually payable for each year under the Lincoln National Corporation Employees' Retirement Plan, computed under the provisions of the said retirement plan and subject to the above-mentioned limitations of section 401(a)(17) of the Internal Revenue Code, and (ii) the amount of such particicipant's or surviving beneficiary's annual benefit actually payable for each year under the Lincoln National Corporation Employee's Supplemental Pension Benefit Plan. In the event of a change of control of Lincoln National Corporation, as defined for purposes of the Lincoln National Corporation Executives' Severance Benefit Plan (as in effect immediately prior to such change of control), hereinafter referred to as "the Severance Benefit Plan," any participant in the Lincoln National Corporation Employees' Retirement Plan, hereinafter "the Retirement Plan," who terminates employment with a nonforfeitable right to benefits under the Retirement Plan within two years after such change of control shall be deemed to have retired under the Plan. 2.2 The benefits payable under the Plan shall be payable to a participant and the participant's beneficiary in the same manner and subject to all the same options, conditions, privileges and restrictions as are applicable to the benefits payable to a participant or to the beneficiary of a participant under the Lincoln National Corporation Employees' Retirement Plan. 2.3 The Plan does not constitute a contract of employment, and participation in the Plan will not give any employee the right to be retained in the employ of any Employer nor any right to or claim to any benefit under the Plan, unless such right or claim has specifically accrued under the terms of the Plan. Section 3 Benefits 3.1 The benefits under this Plan shall become payable when a participant retires and begins to receive payments or to a retired participant or beneficiary receiving payments under the Lincoln National Corporation Employees' Retirement Plan, and shall be payable in the same manner and at the same time as the participant's or beneficiary's benefits under the said retirement plan are paid. 3.2 In the event that a person entitled to benefits under the Plan is declared incompetent and a conservator or other person legally charged with the care of this person or of his estate is appointed, any benefits to which such person is entitled under the Plan shall be paid to such conservator or other person legally charged with the care of this person or of his estate. 3.3 The benefits payable to any Participant under the Plan may not be voluntarily or involuntarily assigned or alienated. -127- Section 4 Amendment or Termination 4.1 Lincoln National Corporation may amend or terminate this Plan at any time, but such amendment or termination shall not adversely affect the rights of any participant or beneficiary then receiving benefits, or the beneficiary of any participant then receiving benefits under this Plan. In the event of a change of control of Lincoln National Corporation, as defined in the Severance Benfit Plan (as in effect immediately prior to such change of control), no amendment or termination of this Plan shall adversely affect the right of any participant to the benefits accrued to the participant or to payment of such benefits under the terms of this Plan as in effect immediately prior to such change of control. Section 5 Employee's Rights or Title to Funds 5.1 The Plan is deemed to be an unfunded plan and no Employer has any obligation to set aside, earmark, or entrust any fund, policy, or money with which to pay any obligations under the Plan. 5.2 The amount of any benefit payable under the Plan with respect to any Participant shall be paid from the general revenues of the Employer that last employed that Participant. 5.3 Any participant or beneficiary shall be and remain a general creditor of an Employer with respect to any promises to pay under the Plan in the same manner as any other creditor who has a general claim for an unpaid liability. EX-11 8 128
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS Year Ended December 31 1993 1992 1991 (Restated) (Restated) PRIMARY Average shares outstanding (assuming conversion of Series A, E and F Preferred Stock) -------------------- 102,307,356 92,977,312 90,658,726 Net effect of dilutive stock options (based on the treasury stock method using average market price) -- 777,468 506,356 168,350 Total shares outstanding ------- 103,084,824 93,483,668 90,827,076 FULLY DILUTED Average shares outstanding (assuming conversion of Series A, E and F Preferred Stock) --------------------- 102,307,356 92,977,312 90,658,726 Net effect of dilutive stock options (based on the treasury stock method using the year-end market price, if higher than average market price) - 876,936 833,948 480,914 Total shares outstanding ------- 103,184,292 93,811,260 91,139,640 DOLLAR INFORMATION (000's Omitted) Income before cumulative effect of accounting change ------------------ 415,283 359,171 201,960 Cumulative effect of accounting change -- (96,431) -- -- Net Income ---------------------- 318,852 359,171 201,960 PER SHARE INFORMATION Primary: Income before cumulative effect of accounting change -------- $4.03 $3.84 $2.22 Cumulative effect of accounting change ------------------ (.94) -- -- Net Income --------------------- $3.09 $3.84 $2.22 Fully Diluted: Income before cumulative effect of accounting change -------- $4.03 $3.83 $2.22 Cumulative effect of accounting change ------------------ (.94) -- -- Net Income --------------------- $3.09 $3.83 $2.22 Notes: 1. Earnings per share are computed based on the average number of common shares outstanding during each year after assuming conversion of the Series A, E and F Preferred Stock. 2. LNC did not include the dilutive impact of the stock option program in the computation of the earnings per share information appearing in the consolidated financial statements since it was immaterial.
EX-21 9 -129- EXHIBIT 21 - LIST OF SUBSIDIARIES OF LNC March 14, 1994 All the members of the holding company system are corporations, with the exception of American States Lloyds Insurance Company, Lincoln National Mezzanine Fund, L.P., and Servicios de Evalucion de Riesgos, S. de R.L. de C.V. Lincoln National Corporation Indiana - Holding Company --- American States Insurance Company 100% - Indiana - Property/Casualty --- American Economy Insurance Company 100% - Indiana - Property/Casualty ---- American States Insurance Company of Texas 100% - Texas - Property/Casualty --- American States Life Insurance Company 100% - Indiana - Life/Health --- American States Lloyds Insurance Company Lloyds Plan - * - Texas - Property/Casualty --- American States Preferred Insurance Company 100% - Indiana - Property/Casualty --- American Union Reinsurance Company 100% - New York - Property/Casualty --- Amstats Insurance Company (formerly Covenant Insurance Company) 100% - Connecticut - Property/Casualty --- City Insurance Agency, Inc. 100% - Indiana --- Insurance Company of Illinois 100% - Illinois - Fire & Casualty Insurance --- Corporate Benefit Systems, Inc. 100% - Arizona - Insurance Agency --- Corporate Benefit Systems Services Corporation 100% - Delaware - Insurance Agency --- Corporate Benefit Systems Services Corporation 100% - Alabama/Colorado/New Mexico - Ins. Agencies --- LNC/CBS Services Corporation 100% - Massachusetts - Insurance Agency --- Heritage Reinsurance, Ltd. 100% ** - Bermuda --- The Insurers' Fund, Inc. # 100% - Maryland - Inactive --- LNC Administrative Services Corporation 100% - Indiana - Third Party Administrator -130- Lincoln National Corporation Indiana - Holding Company --- The Richard Leahy Corporation 100% - Indiana - Insurance Agency --- The Financial Alternative, Inc. 100% - Utah- Insurance Agency --- Financial Choices, Inc. 100% - Pennsylvania - Insurance Agency --- Financial Investment Services, Inc. (formerly Financial Services Department, Inc.) 100% - Indiana - Insurance Agency --- The Financial Resources Department, Inc. 100% - Michigan - Insurance Agency --- Insurance Alternatives, Inc. 100% - Indiana - Insurance Agency --- Investment Alternatives, Inc. 100% - Pennsylvania - Insurance Agency --- The Investment Center, Inc. 100% - Tennessee - Insurance Agency --- The Investment Group, Inc. 100% - New Jersey - Insurance Agency --- Personal Financial Resources, Inc. 100% - Arizona - Insurance Agency --- Personal Investment Services, Inc. 100% - Pennsylvania - Insurance Agency --- LincAm Properties, Inc. 50% - Delaware - Real Estate Investment --- Lincoln European Reinsurance Company 100% - Belgium --- Lincoln Life Improved Housing, Inc. 100% - Indiana --- Lincoln National Intermediaries, Inc. 100% - Indiana - Reinsurance Intermediary --- Lincoln National Investment Management Company 100% - Illinois - Mutual Fund Manager and Registered Investment Adviser --- Lincoln National Mezzanine Corporation 100% - Indiana - General Partner for Mezzanine Financing Limited Partnership --- Lincoln National Mezzanine Fund, L.P. 50% - Delaware - Mezzanine Financing Limited Partnership -131- Lincoln National Corporation Indiana - Holding Company --- The Lincoln National Life Insurance Company 100% - Indiana --- First Penn-Pacific Life Insurance Company 100% ** - Indiana --- Lincoln National Aggressive Growth Fund, Inc. 100% - Maryland - Mutual Fund --- Lincoln National Bond Fund, Inc. 100% - Maryland - Mutual Fund --- Lincoln National Capital Appreciation Fund, Inc. 100% - Maryland - Mutual Fund --- Lincoln National Equity-Income Fund, Inc. 100% - Maryland - Mutual Fund --- Lincoln National Growth Fund, Inc. 100% - Maryland - Mutual Fund --- Lincoln National Health & Casualty Insurance Company 100% - Indiana --- Lincoln National International Fund, Inc. 100% - Maryland - Mutual Fund --- Lincoln National Life Reinsurance Company 100% - Indiana --- Special Pooled Risk Administrators, Inc. 100% - New Jersey - Catastrophe Reinsurance Pool Administrator --- Lincoln National Managed Fund, Inc. 100% - Maryland - Mutual Fund --- Lincoln National Money Market Fund, Inc. 100% - Maryland - Mutual Fund --- Lincoln National Putnam Master Fund, Inc. 100% - Maryland - Mutual Fund --- Lincoln National Social Awareness Fund, Inc. 100% - Maryland - Mutual Fund --- Lincoln National Special Opportunity Fund, Inc. 100% - Maryland - Mutual Fund --- EMPHESYS Financial Group, Inc. 100% - Delaware - Holding Company --- Employers Health Insurance Company 89% - Wisconsin (Remaining 11% owned by Wisconsin Employers Group, Inc. --- Plan Management Administrators, Inc. 100% - Wisconsin - TPA --- Wisconsin Employers Group, Inc. 100% - Wisconsin - Holding Company --- Employers Health Insurance Company 11% - Wisconsin - (Remaining 89% owned by EMPHESYS Financial Group, Inc. ---Plan Management Administrators, Inc. 100% - Wisconsin - TPA -132- Lincoln National Corporation Indiana - Holding Company --- Lincoln National Sales Corporation 100% - Indiana --- LNC Equity Sales Corporation 100% - Indiana - Broker-Dealer --- Professional Financial Planning, Inc. 100% - Indiana - Financial Planning Services --- Corporate agencies: Lincoln National Sales Corporation (LNSC) also has as subsidiaries, corporations (of which LNSC owns from 80% to 100% of the common stock) which serve as agency offices for the marketing and servicing of products of The Lincoln National Life Insurance Company. As of January 1, 1987, there were 32 such corporations (see list below). Registrant deems the omission of these corporations not material to an understanding of the rela- tionship of Registrant to other persons in the holding company system. Upon request of any interested person, Registrant will file with the Insurance Commissioner as an amendment to this Form B, a list of such corporations showing percentage of voting securities and the states of domicile. 1) Lincoln Financial Group of the South, Inc. (AL) 2) Lincoln Southwest Financial Group, Inc. (Phoenix, AZ) 3) Lincoln Financial and Insurance Services Corporation (Wal. Crk., CA) 3a) California Fringe Benefit and Insurance Marketing Corporation DBA/California Fringe Benefit Company (Walnut Creek, CA) 4) Lincoln West Financial and Insurance Services Corporation (Orange, CA) 5) Southwest Financial and Insurance Services Corporation (Los Ang., CA) 6) Colorado-Lincoln Financial Group, Inc. (Denver, CO) 7) The Lincoln Financial Group, Inc. (Norwalk, CT) 8) Lincoln National Financial Services, Inc. (Lake Worth, FL) 9) Lincoln Financial Services, Inc. (Jacksonville, FL) 10) Lincoln National Sales Corporation of Georgia (Atlanta, GA) 11) CMP Financial Services, Inc. (Chicago, IL) 12) Lincoln Financial Group, Inc. (Indianapolis, IN) 13) Lincoln National Financial Services, Inc. (Fort Wayne, IN) 14) The Financial Group, Inc. (Mission, KS) 14a) Financial Planning Partners, Ltd. (Mission, KS) 15) Lincoln National Midsouth Corporation (Louisville, KY) 16) The Lincoln National Financial Group of Louisiana, Inc. (Shreveport, LA) 17) Benefits Marketing Group, Inc. (D.C. & Chevy Chase, MD) 18) Morgan Financial Group, Inc. (Baltimore, MD) 19) Lincoln National of New England Insurance Agency, Inc. (Worcester, MA) 20) Lincoln Financial Group of Michigan, Inc. (Troy, MI) 20a) Financial Consultants of Michigan, Inc. (Troy, MI) 21) Lincoln National Financial Group, Inc. (Minneapolis, MN) 22) John J. Moore & Associates, Inc. (St. Louis, MO) 23) Financial Associates, Inc. (Omaha, NE) 23a) Cornerstone Financial, Inc. (Omaha, NE) 24) Beardslee & Associates, Inc. (Clifton, NJ) 25) Resources/Financial, Inc. (Albuquerque, NM) 26) Lincoln Financial Group/Carolinas, Inc. (Charlotte, NC) 27) Lincoln National Financial Planning, Inc. (Columbus, OH) 28) Lincoln Cascades, Inc. (Portland, OR) 29) Lincoln Financial Services, Inc. (Pittsburgh, PA) 30) Lincoln National Financial Group of Philadelphia, Inc. (Philadelphia, PA) 30a) Cavalier Financial Planners, Inc. (Philadelphia, PA) 31) Lincoln Financial Group, Inc. (Salt Lake City, (UT) 32) Lincoln Financial Services of Virginia, Inc. (Norfolk, VA) (DBA/Group Concepts Unlimited) -133- Lincoln National Corporation Indiana - Holding Company --- Lincoln National (UK) PLC (formerly Cannon Lincoln PLC) 100% - England/Wales - Holding Company --- Allied Westminster & Company Limited (formerly One Olympic Way Financial Services Limited) 100% - England/Wales - Sales Services --- Cannon Assurance Limited 100% ** - England/Wales - Life Assurance --- Cannon Fund Managers Limited 100% - England/Wales - Unit Trust Management --- Cannon Lincoln Fund Managers Limited (formerly Crown Unit Trust Services Limited) 100% - England/Wales - Unit Trust Management --- Cannon Lincoln Insurance Services Ltd. 100% - Holding Company --- British National Life Assurance Co. Ltd. 100% - Life Assurance --- British National Life Sales Ltd. 100% - Inactive --- Cannon General Insurance Co. Ltd. 100% - Accident & Health Insurance --- Chapel Ash Financial Services Ltd. 100% - Direct Insurance Sales --- P.N. Kemp-Gee & Co. Ltd. 100% - Inactive --- Cannon Lincoln Investment Management Limited 100% - England/Wales - Investment Management Services --- CL CR Management Ltd. 50% - England/Wales - Administrative Services --- Cannon Lincoln Management Limited 100% - England/Wales - Administrative Services --- Cannon Lincoln Sales Corporation Limited 100% - England/Wales - Sales Services --- Cannon Lincoln Training Services Limited 100% - England/Wales - Training Company --- Cannon Pension Trustees Limited 100% - England/Wales - Corporate Trustee Services --- Cannon Securities Limited 100% - England/Wales - Nominee Company --- CL Mortgages Limited 100% - England/Wales - Mortgage Administration --- Crown Nominees Limited 100% - England/Wales --- Culverin Property Services Limited 100% - England/Wales - Property Development Services --- ILI Supplies Limited 100% - England/Wales - Computer Leasing --- Matheson Unit Trust Managers Limited 100% - England/Wales - Inactive --- Niloda Limited 100% - England/Wales - Investment Company -134- Lincoln National Corporation Indiana - Holding Company --- Lincoln National Management Services, Inc. 100% - Indiana - Underwriting and Management Services --- Lincoln National Realty Corporation 100% - Indiana - Real Estate --- Lincoln National Reassurance Company 100% - Indiana - Life Insurance --- Linsco Reinsurance Company 100% - Indiana - Property/Casualty --- Lincoln National Reinsurance Company (Barbados) Limited 100% - Barbados --- Lincoln National Reinsurance Company Limited 100% ** - Bermuda --- Lincoln National Risk Management, Inc. 100% - Indiana - Risk Management Services --- Lincoln National Specialty Insurance Company (formerly Western Casualty and Surety Company) 100% ** - Kansas - Property/Casualty --- Lincoln National Structured Settlement, Inc. 100% - New Jersey --- Lynch & Mayer, Inc. 100% - Indiana - Investment Adviser --- Lynch & Mayer Securities Corporation 100% - Delaware - Securities Broker --- Old Fort Insurance Company (Barbados) Ltd. 100% - Barbados --- Resource Re (Barbados) Ltd. 100% - Barbados --- Old Fort Insurance Company, Ltd. 100% ** - Bermuda --- Servicios de Evaluacion de Riesgos, S. de R.L. de C.V. 49% - Mexico (a partnership) --- SOTRISS Corporation 100% - Georgia - Data Processing --- Underwriters & Management Services, Inc. 100% - Indiana - Underwriting Services --- Vantage Global Advisors, Inc. (formerly Modern Portfolio Theory Associates, Inc.) 100% - Delaware - Investment Adviser Footnotes: * The funds contributed by the Underwriters were, and continue to be subject to trust agreements between American States Insurance Company, the grantor, and each Underwriter, as trustee. ** Except for director-qualifying shares. # Lincoln National Corporation has subscribed for and paid for 100 shares of Common Stock (with a par value of $1.00 per share) at a price of $10 per share, as part of the organizing of the fund. As such stock is further sold, the ownership of voting securities by Lincoln National Corporation will decline and fluctuate. EX-23 10 -135- LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES EXHIBIT 23 - CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Forms S-3 and S-8 (Securities and Exchange Commission Registration Numbers 33-51415, 33-51721, 33-59444, 33-52667, 33-13605, 33-4711, 33-13445, and 2-77599) of Lincoln National Corporation and in the related Prospectuses of our report dated February 10, 1994, with respect to the consolidated financial statements and schedules of Lincoln National Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 1993. ERNST & YOUNG Fort Wayne, Indiana March 25, 1994 EX-28 11 -136- [Hard copy of this Exhibit encompassses pages 136 - 167] LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES EXHIBIT 28 - INFORMATION FROM REPORTS FURNISHED TO STATE INSURANCE REGULATORY AUTHORITIES This exhibit consists of an excerpt from LNC's Consolidated Annual Statement for its Affiliated Fire and Casualty Insurers as filed with the Commission of Insurance for each state in which LNC's affiliates write property-casualty coverages. The specific excerpt, known as "Schedule "P" is an analysis of Property-Casualty Losses and Loss Expense by type of coverage. Due to the incapability of LNC's current electronic systems used to produce Form 10-K and Schedule P, LNC was not able to add schedule P as the last exhibit within its electronic filing of Form 10-K. This exhibit has been filed in paper format with the Securities and Exchange Commission ("SEC") pursuant to a continuing hardship exemption and is available for inspection at the SEC or at LNC's Corporate offices at 200 East Berry Street, Fort Wayne, Indiana, 46802-2706. Alternatively, a copy of "Schedule P" can be obtained by writing to Donald L. Van Wyngarden, Controller, at LNC's Corporate office at the address shown above. -----END PRIVACY-ENHANCED MESSAGE-----