2008 Annual Report to Shareholders - Lincoln Financial Group

REGULATORY
Insurance Regulation
Our insurance subsidiaries, like other insurance companies, are subject to regulation and supervision by the states, territories and
countries in which they are licensed to do business. The extent of such regulation varies, but generally has its source in statutes
that delegate regulatory, supervisory and administrative authority to supervisory agencies. In the U.S., this power is vested in state
insurance departments.
In supervising and regulating insurance companies, state insurance departments, charged primarily with protecting contract holders
and the public rather than investors, enjoy broad authority and discretion in applying applicable insurance laws and regulation for
that purpose. Our principal insurance subsidiaries, LNL, LLANY and FPP, are domiciled in the states of Indiana, New York and
Indiana, respectively.
The insurance departments of the domiciliary states exercise principal regulatory jurisdiction over our insurance subsidiaries. The
extent of regulation by the states varies, but in general, most jurisdictions have laws and regulations governing standards of
solvency, adequacy of reserves, reinsurance, capital adequacy, licensing of companies and agents to transact business, prescribing
and approving policy forms, regulating premium rates for some lines of business, prescribing the form and content of financial
statements and reports, regulating the type and amount of investments permitted and standards of business conduct. Insurance
company regulation is discussed further under “Insurance Holding Company Regulation” and “Restrictions on Subsidiaries’
Dividends and Other Payments.”
As part of their regulatory oversight process, state insurance departments conduct periodic, generally once every three to five years,
examinations of the books, records, accounts, and business practices of insurers domiciled in their states. During the three-year
period ended December 31, 2008, we have not received any material adverse findings resulting from state insurance department
examinations of our insurance subsidiaries conducted during this three-year period.
State insurance laws and regulations require our U.S. insurance companies to file financial statements with state insurance
departments everywhere they do business, and the operations of our U.S. insurance companies and accounts are subject to
examination by those departments at any time. Our U.S. insurance companies prepare statutory financial statements in accordance
with accounting practices and procedures prescribed or permitted by these departments. The National Association of Insurance
Commissioners (“NAIC”) has approved a series of statutory accounting principles that have been adopted, in some cases with
minor modifications, by virtually all state insurance departments.
We received approval from the Indiana Department of Insurance for a permitted practice to the prescribed NAIC statutory
accounting principles for our Indiana-domiciled insurance subsidiaries as of December 31, 2008. The permitted practice modifies
the statutory accounting for deferred income taxes prescribed by the NAIC by increasing the realization period for deferred tax
assets from one to three years and increasing the asset recognition limit from 10% to 15% of statutory capital and surplus. This
permitted practice is expected to benefit the statutory capital and surplus of our Indiana-domiciled insurance subsidiaries by
approximately $300 million, but may not be considered when calculating the dividends available from the insurance subsidiaries.
We also received approval from the Department for two more permitted practices for LNL relating to the application of specified
mortality tables for life insurance. These are expected to benefit the statutory capital and surplus of LNL by approximately $16
million.
A new statutory reserving standard, Actuarial Guideline 43, Commissioners Annuity Reserve Valuation Method for Variable
Annuities (“VACARVM”), replaces current statutory reserve practices for variable annuities with guaranteed benefits, such as
GWBs. VACARVM was adopted by the NAIC in September 2008 and will be effective as of December 31, 2009. Based upon the
level of variable annuity account values as of December 31, 2008, we estimate that VACARVM would have decreased our statutory
capital by $125 million to $175 million. The actual impact of the adoption will be dependent upon account values and conditions
that exist as of December 31, 2009. We plan to utilize existing captive reinsurance structures, as well as pursue additional thirdparty
reinsurance arrangements, to lessen any negative impact on statutory capital and dividend capacity in our life insurance
subsidiaries. However, additional statutory reserves could lead to lower risk-based capital (“RBC”) ratios and potentially reduce
future dividend capacity from our insurance subsidiaries. For more information on VACARVM and our use of captive reinsurance
structures, see “Review of Consolidated Financial Condition – Liquidity and Capital Resources” in the MD&A.
Insurance Holding Company Regulation
LNC and its primary insurance subsidiaries are subject to regulation pursuant to the insurance holding company laws of the states
of Indiana and New York. These insurance holding company laws generally require an insurance holding company and insurers
that are members of such insurance holding company’s system to register with the insurance department authorities, to file with it
certain reports disclosing information including their capital structure, ownership, management, financial condition, and certain
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