2008 Annual Report to Shareholders - Lincoln Financial Group

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future changes to regulatory capital requirements could impact the dividend capacity of our U.K. insurance subsidiaries and cash flow to the holding company. Risk-Based Capital The NAIC has adopted RBC requirements for life insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks. The requirements provide a means of measuring the minimum amount of statutory surplus appropriate for an insurance company to support its overall business operations based on its size and risk profile. There are five major risks involved in determining the requirements: Category Name Description Asset risk - affiliates C-0 Risk of assets' default for certain affiliated investments Asset risk - other C-1 Risk of assets' default of principal and interest or fluctuation in fair value Insurance risk C-2 Risk of underestimating liabilities from business already written or inadequately pricing business to be written in the future Interest rate risk, health credit C-3 Risk of losses due to changes in interest rate levels, risk risk and market risk that health benefits prepaid to providers become the obligation of the health insurer once again and risk of loss due to changes in market levels associated with variable products with guarantees Business risk C-4 Risk of general business A company’s risk-based statutory surplus is calculated by applying factors and performing calculations relating to various asset, premium, claim, expense and reserve items. Regulators can then measure adequacy of a company’s statutory surplus by comparing it to the RBC determined by the formula. Under RBC requirements, regulatory compliance is determined by the ratio of a company’s total adjusted capital, as defined by the NAIC, to its company action level of RBC (known as the RBC ratio), also as defined by the NAIC. Accordingly, factors that have an impact on the total adjusted capital of our insurance subsidiaries, such as the permitted practices discussed above, will also affect their RBC levels. Four levels of regulatory attention may be triggered if the RBC ratio is insufficient: “Company action level” – If the RBC ratio is between 75% and 100%, then the insurer must submit a plan to the regulator detailing corrective action it proposes to undertake; “Regulatory action level” – If the RBC ratio is between 50% and 75%, then the insurer must submit a plan, but a regulator may also issue a corrective order requiring the insurer to comply within a specified period; “Authorized control level” – If the RBC ratio is between 35% and 50%, then the regulatory response is the same as at the “Regulatory action level,” but in addition, the regulator may take action to rehabilitate or liquidate the insurer; and “Mandatory control level” – If the RBC ratio is less than 35%, then the regulator must rehabilitate or liquidate the insurer. As of December 31, 2008, the RBC ratios of LNL, LLANY and FPP reported to their respective states of domicile and the NAIC all exceeded the “company action level.” We believe that we will be able to maintain the RBC ratios of our insurance subsidiaries in excess of “company action level” through prudent underwriting, claims handling, investing and capital management. However, no assurances can be given that developments affecting the insurance subsidiaries, many of which could be outside of our control, will not cause the RBC ratios to fall below our targeted levels. These developments may include, but may not be limited to: changes to the manner in which the RBC ratio is calculated; new regulatory requirements for calculating reserves such as VACARVM and principles based reserving; economic conditions leading to higher levels of impairments of securities in our insurance subsidiaries' general accounts; and an inability to securitize life reserves including the issuing of letters of credit supporting captive reinsurance structures. See “Item 1A. Risk Factors – A decrease in the capital and surplus of our insurance subsidiaries may result in a downgrade to our credit and insurer financial strength ratings.” 24
Federal Initiatives The U.S. federal government does not directly regulate the insurance industry; however, federal initiatives from time to time can impact the insurance industry. In reaction to the current credit market illiquidity and global financial crisis, Congress enacted the Emergency Economic Stabilization Act of 2008 (“EESA”) on October 3, 2008, and enacted the American Recovery and Reinvestment Act of 2009 (“ARRA”) on February 17, 2009, in an effort to restore liquidity to the U.S. credit markets. The EESA defines financial institutions to include insurance companies. The EESA contains the TARP. The TARP authorized the U.S. Treasury to purchase “troubled assets” (as defined in the TARP) from financial institutions, including insurance companies. Pursuant to the authority granted under the TARP, the U.S. Treasury has adopted the CPP, the Generally Available Capital Access Program (“GACAP”) and the Exceptional Financial Recovery Assistance (“EFRA”). The ARRA contains provisions impacting participants in these various capital assistance programs, such as limits imposed on executive compensation. Under the CPP, as currently adopted, bank and thrift holding companies may apply to the U.S. Treasury for the direct sale of preferred stock and warrants to the U.S. Treasury. We filed an application with the U.S. Treasury to participate in the CPP, but there are no assurances that the U.S. Treasury will approve our application, or that we will participate in the GACAP or the EFRA. It remains unclear at this point if or when the EESA and the ARRA will restore sustained liquidity and confidence in the markets and its affect on the fair value of our invested assets. In June 2001, the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) was enacted. The EGTRRA contains provisions that have and will continue, near term, to significantly lower individual tax rates. These may have the effect of reducing the benefits of tax deferral on the inside build-up of annuities and life insurance products. The EGTRRA also includes provisions that will eliminate, over time, the estate, gift and generation-skipping taxes and partially eliminates the step-up in basis rule applicable to property held in a decedent’s estate. Some of these changes might hinder our sales and result in the increased surrender of insurance and annuity products. These provisions expire after 2010, unless extended. In May 2003, the Jobs and Growth Tax Relief Reconciliation Act of 2003 (“JGTRRA”) was enacted. Individual taxpayers are the principal beneficiaries of the JGTRRA, which includes an acceleration of certain of the income tax rate reductions enacted originally under the EGTRRA, as well as capital gains and dividend tax rate reductions. On May 17, 2006, the Tax Increase Prevention and Reconciliation Act of 2006 (“TIPRA”) was signed into law. TIPRA extends the lower capital gains and dividends rates through the end of 2010. Although most of these rate reductions expire after 2010, these reductions have the effect of reducing the benefits of tax deferral on the build-up of value of annuities and life insurance products. Like the EGTRRA changes, the JGTRRA changes may hinder our sales and result in increased surrender of insurance and annuity products. On August 17, 2006, the Pension Protection Act of 2006 (“PPA”) was signed into law. The PPA makes numerous changes to pension and other tax laws including: permanence for the EGTRRA enacted pension provisions including higher annual contribution limits for defined contribution plans and IRAs as well as catch-up contributions for persons over age 50; clarification of the safest available annuity standard for the selection of an annuity as a distribution option for defined contribution plans; expansion of investment advice options for defined contribution plan participants and IRA owners; more stringent funding requirements for defined benefit pension plans and clarification of the legal status of hybrid (cash balance) pension plans; nonpension related tax changes, such as the codification of COLI best practices, bringing more certainty to this market segment; permanence for EGTRRA enacted tax benefits for Section 529 college savings plans; and favorable tax treatment for long-term care insurance included as a rider to or on annuity products. We expect many of these changes to have a beneficial effect upon various segments of our business lines. The USA PATRIOT Act of 2001 (the “Patriot Act”), enacted in response to the terrorist attacks on September 11, 2001, contains anti-money laundering and financial transparency laws and mandates the implementation of various new regulations applicable to broker-dealers and other financial services companies, including insurance companies. The Patriot Act seeks to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. Anti-money laundering laws outside of the U.S. contain provisions that may be different, conflicting or more rigorous. The increased obligations of financial institutions to identify their customers, watch for and report suspicious transactions, respond to requests for information by regulatory authorities and law enforcement agencies, and share information with other financial institutions require the implementation and maintenance of internal practices, procedures and controls. Employee Retirement Income Security Act (“ERISA”) Considerations ERISA is a comprehensive federal statute that applies to U.S. employee benefit plans sponsored by private employers and labor unions. Plans subject to ERISA include pension and profit sharing plans and welfare plans, including health, life and disability plans. ERISA provisions include reporting and disclosure rules, standards of conduct that apply to plan fiduciaries and prohibitions on transactions known as “prohibited transactions,” such as conflict-of-interest transactions and certain transactions between a benefit plan and a party in interest. ERISA also provides for a scheme of civil and criminal penalties and enforcement. Our insurance, asset management, plan administrative services and other businesses provide services to employee benefit plans 25
Page 1: Lincoln National Corporation 2008 A
Page 4 and 5: insurance/long-term care product, b
Page 6 and 7: Manage costs prudently, find ways t
Page 9 and 10: Lincoln National Corporation Table
Page 11 and 12: PART I The “Business” section a
Page 13 and 14: Insurance Corporation’s (“FDIC
Page 15 and 16: charge period, which is generally h
Page 17 and 18: Individual fixed annuity account va
Page 19 and 20: The LINCOLN ALLIANCE® program is a
Page 21 and 22: customer. In either case, these amo
Page 23 and 24: management tracks the speed, accura
Page 25 and 26: for the general account of LNC’s
Page 27 and 28: Competition The Investment Manageme
Page 29 and 30: REINSURANCE We follow the industry
Page 31 and 32: Debt Ratings The long-term credit r
Page 33: inter-company transactions, includi
Page 37 and 38: Intellectual Property We rely on a
Page 39 and 40: Difficult conditions in the global
Page 41 and 42: Our reserves for future policy bene
Page 43 and 44: Losses due to defaults by others co
Page 45 and 46: The determination of the amount of
Page 47 and 48: current debt, and accordingly, like
Page 49 and 50: A drop in the rankings of the mutua
Page 51 and 52: Our sales representatives are not c
Page 53 and 54: Executive Officers of the Registran
Page 55 and 56: Item 6. Selected Financial Data The
Page 57 and 58: measurement provisions of SFAS 157,
Page 59 and 60: advisory services through a nationa
Page 61 and 62: On January 8, 2009, the Office of T
Page 63 and 64: Critical Accounting Policies and Es
Page 65 and 66: Details underlying our prospective
Page 67 and 68: Details underlying our fourth quart
Page 69 and 70: For our tests performed as of Octob
Page 71 and 72: Fixed maturity, equity, trading sec
Page 73 and 74: issues that may adversely affect ce
Page 75 and 76: For information on our GLB hedging
Page 77 and 78: usiness. This is particularly relev
Page 79 and 80: RESULTS OF CONSOLIDATED OPERATIONS
Page 81 and 82: For the Years Ended December 31, Ch
Page 83 and 84: A $12 million favorable prospective
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We expect to manage the effect of c
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For the Years Ended December 31, Ch
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Basis Point Change For the Years En
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Retirement Solutions - Defined Cont
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We provide information about this s
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For the Years Ended December 31, Ch
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for this segment represents the exc
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age of the in-force block (discusse
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Insurance Fees Details underlying i
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Basis Point Change For the Years En
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Insurance Solutions - Group Protect
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Benefits and Interest Credited Deta
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Future Expectations We expect lower
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Investment advisory fees are genera
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Insurance Premiums Excluding the ef
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RESULTS OF OTHER OPERATIONS Other O
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We provide information about this s
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Comparison of 2008 to 2007 The favo
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GDB GDB represents the change in th
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Derivatives - Guaranteed Living Ben
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Details underlying our fixed maturi
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Available-for-Sale Securities The g
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The market value of investments bac
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The following summarizes our invest
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losses may change as a result of th
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The composition by industry categor
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Unrealized Loss on Below-Investment
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Unrealized Loss on Fixed Maturity a
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As of December 31, 2008 Length of T
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As of December 31, 2008, available-
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Alternative Investments The carryin
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The decline in net investment incom
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We consider economic factors and ci
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For factors that could cause actual
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We expect our domestic insurance su
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Details underlying debt and financi
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greater assurance to both issuers a
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In addition to the contractual comm
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Item 7A. Quantitative and Qualitati
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The following provides the principa
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tend to lag behind market rates. If
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As of December 31, 2008 As of Decem
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Item 8. Financial Statements and Su
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Report of Independent Registered Pu
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LINCOLN NATIONAL CORPORATION CONSOL
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LINCOLN NATIONAL CORPORATION CONSOL
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Accounting Estimates and Assumption
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principal or recorded in net invest
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evenues or amortization expense to
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Enterprises for Certain Nontraditio
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Income Taxes We file a U.S. consoli
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Level 2 - inputs to the valuation m
Page 189 and 190:
Derivative Implementation Group Sta
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SFAS 161 - Disclosures about Deriva
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Dispositions Discontinued Media Ope
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5. Investments Available-for-Sale S
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The fair value and gross unrealized
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Mortgage Loans on Real Estate Mortg
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invested the proceeds of $850 milli
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Pursuant to SFAS 157, we have categ
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The settlement payments and mark-to
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Derivative Instruments Designated a
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Credit Default Swaps We buy credit
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A reconciliation of the effective t
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We recognize interest and penalties
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Changes in DFEL (in millions) were
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10. Goodwill and Specifically Ident
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11. Guaranteed Benefit Features We
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13. Short-Term and Long-Term Debt D
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The ACSM would generally require us
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mortgage loans which remain delinqu
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Accumulated OCI The following summa
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17. Underwriting, Acquisition, Insu
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Obligations, Funded Status and Assu
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Components of Net Periodic Benefit
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The expenses (in millions) for the
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Total unrecognized compensation exp
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Information with respect to our inc
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Information with respect to DIUS re
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Specified statutory information (in
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Mortgage Loans on Real Estate The f
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For the Year Ended December 31, 200
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As of December 31, 2007 Fair % of T
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Operating revenues represent GAAP r
Page 253 and 254:
For the Years Ended December 31, 20
Page 255 and 256:
25. Quarterly Results of Operations
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PART III Item 10. Directors, Execut
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SIGNATURES Pursuant to the requirem
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Index to Financial Statement Schedu
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LINCOLN NATIONAL CORPORATION SCHEDU
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Page 267 and 268:
Page 269 and 270:
Page 271 and 272:
INDEX TO EXHIBITS 2.1 Agreement and
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10.1 LNC Amended and Restated Incen
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10.39 LNC Non-Employee Director Com
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* This exhibit is a management cont
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Exhibit 23 CONSENT OF INDEPENDENT R
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Exhibit 31.2 Certification Pursuant
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Exhibit 32.2 Certification Pursuant
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[This page intentionally left blank
Page 287 and 288:
Corporate Headquarters Lincoln Nati
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2008 Annual Report to Shareholders - Lincoln Financial Group

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