Lincoln National Corporation 2002 Annual Report
To Shareholders
To Our Shareholders:
As I write this, we are in the midst of what some have described as the ""Ñnancial services' perfect
storm'' Ì an apt description given that Ñnancial services companies are being negatively impacted in so many
ways by the roiling capital markets. Lincoln's results in 2002 reÖected this impact.
Declines in equity markets aÅect fees, reserve assumptions, and a host of other assumptions on variable
products. For the full year, the S&P 500 fell 24 percent Ì the third consecutive year of negative returns for
this key index and a downturn this country hasn't seen since the tumultuous years of 1939-1941. In our
interest sensitive business, credit quality concerns and lower interest rates impact investment performance and
spreads.
The past several quarters have been a period marked by aggressive industry-wide moves by the major
rating agencies, which have taken downward action on roughly 40 percent of the names in the life insurance
industry. Lincoln distinguished itself in 2002 with an upgrade to ""A° Superior'' by A.M. Best Co., a rating
agency respected for its focus on the insurance industry. Our Ñnancial strength ratings remain safely in the
""AA'' category with Fitch, S&P and Moody's and our outlook is ""stable'' with all agencies.
But all is not so dire for Ñnancial services Ñrms. What many don't recognize is that the capital markets
have a way of masking what is really going on in the industry. We saw this during most of the nineties, as
soaring equity markets contributed to climbing variable account asset levels Ì and this rising tide lifted all
boats even as many in the industry aggressively underpriced important product features. The other extreme is
occurring today. The negative impact from capital markets is masking the good work that is happening in the
midst of the turmoil. And it's cloaking compelling growth opportunities that may be just around the corner Ì
opportunities that are driven by huge demographic shifts, evolving market requirements and increased
consumer expectations for levels of service and tools.
Controlling the Controllables
What is our approach to navigating through this period and capitalizing on the opportunities? Our mantra
hasn't changed Ì and it won't. Accepting that market performance is clearly beyond our control, we target
our eÅorts, resources and energy on those things we can impact. Things that truly drive our business for the
long-term Ì not short-term boosts to proÑtability that carry unjustiÑable risks. This approach of ""controlling
the controllables'' remains at the core of our philosophy today and will stand as the guiding principle for
operating the business through this period.
So, despite the bleak market picture, Lincoln delivered strong fundamentals in key areas of its business.
In reporting 2002 net income of $91.6 million, or $0.49 per diluted share, we achieved positive net Öows for the
year in each of our businesses, retail deposits reached a record $12.8 billion in 2002, up 16 percent over 2001,
and assets under management at the end of the year were $119 billion. We also meaningfully reduced general
and administrative spending levels relative to a year ago. Our newer generation of products gained tremendous
market share as we forged and strengthened key distribution alliances. And we redeployed assets generated
from the sale of our reinsurance business into share repurchases, debt repayment and maintaining competi-
tively superior capital strength.
As we move through 2003, we will continue to focus on (1) producing positive net Öows by growing sales
and reducing redemptions; (2) enforcing rigorous expense controls; (3) maintaining our strong capital
position; (4) maintaining high asset quality in our investment portfolios; (5) managing crediting rates to
maintain acceptable spreads; and (6) developing and distributing state-of-the-art products, consistent with our
stringent proÑtability and risk management disciplines. Each of these areas will serve to lessen the impact of
further market downturns in the short-term, while at the same time positioning Lincoln to become the partner
for long-term Ñnancial planning as the new marketplace takes shape.
The Field is Open for a Leader
While there's no question that we've hit some tough and uncharted waters, we are conÑdent that we are in
businesses that have signiÑcant long-term potential. From a broad industry perspective, the focus of Ñnancial
services is evolving, reÖecting changing buyer behavior. For about 130 years (from 1850-1980) insurance
focused on protection: mortality and morbidity risk. Then, in the 1980s, the industry started to feel the
pressure of the boomer wave and we focused on accumulation: protection plus asset accumulation, tax
eÇciency and estate planning.
As the baby boomers enter retirement age, longevity and quality of life will drive them to look not only at
asset preservation and risk management, but to ensure they have income to sustain quality of life, a legacy for
their heirs, and the ability to transfer wealth. As this shift takes place, the life insurance industry is poised to
succeed. We alone straddle all the right essentials Ì the ability to oÅer mortality and morbidity protection,
the technical expertise that enables us to provide complex Ñnancial and estate planning services and products
that position us to provide retirement income solutions.
But merely having the disparate tools and the opportunity to use them isn't enough. The end game is to
coordinate delivery of money management, Ñnancial planning, life insurance and annuities into a seamless
package. Going forward, we anticipate tremendous growth in the Retirement Income and Wealth Transfer
business, and we believe that Lincoln is best positioned to lead the industry into this next wave. Our various
accumulation products and services feed naturally into this model and we have the right distribution platform
to deliver these solutions.
Day in and day out, Lincoln's three manufacturers work closely with distributors to understand current
and future buyer behaviors in order to proactively design products. And, every day we take steps to further
enhance our delivery platform to drive long-term performance, whether by leveraging key relationships and
technologies at Lincoln Financial Distributors or training and recruiting at Lincoln Financial Advisors. In the
new era, customers want innovation, investment performance and responsive service, intermediaries want tools
and a strong brand to work with, and shareholders want Ñnancial discipline with growth. We have all that, a
vision for how to use it and demonstrated ability to execute through a core group of talented and committed
professionals.
Final Thoughts
In recent months, some have questioned our industry's future in light of the recent legislative changes
proposed on Capitol Hill. We believe the proposals reÖect the fact that Americans just aren't saving enough
and the fact that people are living longer and will need more income for a longer period of time. For us,
heightened awareness around consumer savings and the need for retirement income planning is a good
thing Ì rather than fearing impending changes we are pleased that the administration has sparked a national
dialogue. We intend to be an active participant in these conversations.
As I close, I want to circle back to our ""controllables.'' In addition to operating measures, two important
controllables are communications and corporate governance. We are committed to providing our shareholders
with visibility and transparency into our earnings through very active and candid communication. Examples
are our regular disclosure on such issues as capitalized acquisition costs, reserves for product guarantees, and
equity market impact. While we've eliminated the traditional glossy portion of our annual report, you'll see
that we've expanded Ñnancial disclosures in the attached 10-K and have added content to our investor site at
LFG.com. Going forward, this will be our preferred vehicle for the dissemination of information.
Just as important, we will maintain Lincoln's long-standing commitment to industry-leading corporate
governance practices. Lincoln has always held Ñrm to the fundamental premise that stringent governance
procedures are healthy and appropriate. To name just a few highlights, Lincoln has an independent board
where 12 of 13 directors are outsiders. We have an appointed lead director and almost all of our major board
committees are chaired by and comprised of independent directors. Our board also meets regularly without
management present and conducts regular and rigorous assessments of all our directors and total board
composition.
As you can tell, it's clear we think Lincoln is an attractive opportunity for investors. When you look
beyond the unpleasant veneer of recent market activity, this is an organization that has staked out prime space
in a business with great future potential. Lincoln has a disciplined mindset, superb products and distribution,
and a motivated and talented group of employees. We're conÑdent in our skills, the strength of our economy,
and the resulting outcome for investors over time.
Thank you for your continued support of Lincoln Financial Group,
Jon A. Boscia
Chairman and Chief Executive OÇcer
March 18, 2003
Forward-Looking Statement Ì Cautionary Language Ì Reference is made to ""Forward-Looking State-
ments Ì Cautionary Language'' on page 15 of the Form 10-K which immediately follows this letter which
applies to this letter as well as to the 10-K.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Ñscal year ended December 31, 2002
Commission File Number 1-6028
Lincoln National Corporation
(Exact name of registrant as speciÑed in its charter)
Indiana
(State of Incorporation)
35-1140070
(I.R.S. Employer
IdentiÑcation No.)
1500 Market Street, Suite 3900, Philadelphia, Pennsylvania 19102-2112
(Address of principal executive oÇces)
Registrant's telephone number
(215) 448-1400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock
Common Share Purchase Rights
$3.00 Cumulative Convertible Preferred Stock, Series A
7.40% Trust Originated Preferred Securities, Series C*
5.67% Trust Originated Preferred Securities, Series D*
7.65% Trust Preferred Securities, Series E*
Exchanges on which registered
New York, Chicago and PaciÑc
New York, Chicago and PaciÑc
New York and Chicago
New York
New York, Chicago and PaciÑc
New York
* Issued by Lincoln National Capital III, Lincoln National Capital IV and Lincoln National Capital V,
respectively. Payments of distributions and payments on liquidation or redemption are guaranteed by
Lincoln National Corporation.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has Ñled all reports required to be Ñled 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 Ñle such reports), and (2) has been subject to such Ñling requirements for the
past 90 days. Yes ¥
No n
Indicate by check mark if disclosure of delinquent Ñlers 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 deÑnitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. n
Indicate by check mark whether the registrant is an accelerated Ñler (as deÑned in Rule 12b-2 of the
Act). Yes ¥
No n
As of February 28, 2003, 177,362,916 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
non-aÇliates was approximately $5,024,691,000.
Select materials from the Proxy Statement for the Annual Meeting of Shareholders, scheduled for
May 8, 2003 have been incorporated by reference into Part III of this Form 10-K.
The exhibit index to this report is located on page 165.
Item
1. Business
Lincoln National Corporation
Table of Contents
PART I
A. Business Overview ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
B. Description of Business Segments:
1. Lincoln Retirement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2. Life Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3. Investment ManagementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4. Lincoln UK ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
C. Other Matters:
1. RegulatoryÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2. Miscellaneous ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3. Available Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2. Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3. Legal Proceedings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4. Submission of Matters to a Vote of Security Holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6. Selected Financial Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
7. Management's Discussion and Analysis ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
7A. Quantitative and Qualitative Disclosures About Market RiskÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
8. Financial Statements and Supplementary DataÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures ÏÏÏÏ
PART III
10. Directors and Executive OÇcers of the Registrant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
11. Executive Compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
12. Security Ownership of Certain BeneÑcial Owners and Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
13. Certain Relationships and Related Transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
14. Controls and Procedures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Index to ExhibitsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Signatures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CertiÑcations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Page
2
5
8
10
11
12
12
13
13
13
14
14
14
15
73
82
150
150
151
151
152
152
152
165
167
169
1
PART I
Item 1. Business
Business Overview
Lincoln National Corporation (""LNC'') is a holding company. Through subsidiary companies, LNC
operates multiple insurance and investment management businesses. The collective group of companies uses
""Lincoln Financial Group'' as its marketing identity. Based on assets, LNC is the 39th largest U.S.
Corporation (2002 Fortune 500, Largest U.S. Corporations, April 2002). Based on revenues, LNC is the 8th
largest U.S. stockholder-owned company within the Fortune 500 Life/Health Insurance Industry Ranking
(2002 Fortune 500 by Industry Rankings, April 2002). Operations are divided into four business segments:
1) Lincoln Retirement (formerly known as the Annuities segment), 2) Life Insurance, 3) Investment
Management and 4) Lincoln UK. Over the past Ñve years, segments have been redeÑned as follows. During
the Ñrst quarter of 2000, changes to the structure of LNC's internal organization resulted in the creation of a
separate Annuities segment (now known as the Lincoln Retirement segment) and a separate Life Insurance
segment. At the end of 2000, LNC established a new wholesaling distribution organization, Lincoln Financial
Distributors (""LFD''), to focus on the changing business needs of Ñnancial intermediaries. Beginning with the
Ñrst quarter of 2001, LFD's results were reported within Other Operations. Previously, LNC's wholesaling
eÅorts were conducted separately within the Lincoln Retirement, Life Insurance and Investment Manage-
ment segments. Prior to the fourth quarter of 2001, LNC had a Reinsurance segment. LNC's reinsurance
operations were acquired by Swiss Re on December 7, 2001 and the related segment information prior to the
close of this transaction was moved to Other Operations.
Revenues, pre-tax income and assets for LNC's major business segments and other operations are shown
in this Form 10-K report as part of the consolidated Ñnancial statements (see Note 9 to the consolidated
Ñnancial statements). The LNC ""Other Operations'' category includes the Ñnancial data for operations that
are not directly related to the business segments, unallocated corporate items (such as, corporate investment
income and interest expense on short-term and long-term borrowings), the operations of Lincoln Financial
Advisors (""LFA'') and LFD, and the historical results of the former Reinsurance segment along with the
ongoing amortization of deferred gain on the indemnity reinsurance portion of the transaction with Swiss Re
(for further discussion of the transaction with Swiss Re, refer to Acquisitions, Divestitures and Discontinued
Lines of Business below).
Although one of the subsidiaries held by LNC was formed in 1905, LNC itself was formed in 1968. LNC
is an Indiana corporation that maintains its principal oÇces at 1500 Market Street, Suite 3900, Philadelphia,
Pennsylvania 19102-2112. As of December 31, 2002, there were 60 persons engaged in the governance of the
LNC holding company. Total employment of Lincoln National Corporation at December 31, 2002 on a
consolidated basis was 5,830. Of this total, approximately 2,140 employees are included in ""Other Operations''
related primarily to the operations of LFA and LFD.
The primary operating subsidiaries that comprise LNC are Lincoln National Life Insurance Company
(""LNL''); First Penn-PaciÑc Life Insurance Company (""First Penn''); Lincoln Life & Annuity Company of
New York (""Lincoln Life New York''), Delaware Management Holdings, Inc. (""Delaware''), Lincoln
National (UK) plc, LFA and LFD.
LNL is an Indiana corporation with its annuities operations headquartered in Fort Wayne, Indiana and its
life insurance operations headquartered in Hartford, Connecticut. The primary operations of LNL are
reported in the Lincoln Retirement and Life Insurance segments. LNL also has operations that are reported in
the Investment Management segment and the results of LNL's reinsurance operations acquired by Swiss Re
via an indemnity reinsurance transaction are reported in Other Operations.
First Penn is an Indiana corporation headquartered in Schaumburg, Illinois. First Penn oÅers universal
life, term life and deferred Ñxed annuity products for distribution in most states of the United States. Through
the end of 2000, all of the operations of First Penn were reported in the Life Insurance segment. Beginning in
2
the Ñrst quarter of 2001, the reporting of First Penn's annuities business was moved from the Life Insurance
segment into the Lincoln Retirement segment.
Lincoln Life New York is a New York company headquartered in Syracuse, New York. Lincoln Life
New York oÅers Ñxed annuities, variable annuities, universal life, variable universal life, term life and other
individual life insurance products within the state of New York utilizing the distribution networks described
below under Distribution. The operations of Lincoln Life New York are primarily reported in the Lincoln
Retirement and Life Insurance segments.
Acquisitions, Divestitures and Discontinued Lines of Business
Over the last several years, LNC has undertaken a variety of acquisitions and divestitures, and has exited
certain businesses. These actions have been conducted with the goal of strengthening shareholder value by
providing more consistent sources of earnings and by focusing on Ñnancial products that have the potential for
signiÑcantly growing earnings. To this end, the following transactions have occurred during the three years
covered by this Form 10-K:
On August 30, 2002, LNC acquired The Administrative Management Group, Inc. (""AMG''), an
employee beneÑts record keeping Ñrm for $21.6 million in cash. Contingent payments up to an additional
$14 million will be paid over a period of 4 years (2003-2006) if certain criteria are met. Any such contingent
payments will be expensed as incurred. AMG, a strategic partner of LNC's Retirement segment for several
years, provides record keeping services for the Lincoln Alliance Program along with approximately 400 other
clients nationwide. As of December 31, 2002, the application of purchase accounting to this acquisition
resulted in goodwill of $20.2 million.
On December 7, 2001, Swiss Re acquired LNC's reinsurance operation for $2.0 billion. In addition, LNC
retained the capital supporting the reinsurance operation. After giving eÅect to the increased levels of capital
needed within the Life Insurance and Lincoln Retirement segments that result from the change in the ongoing
mix of business under LNC's internal capital allocation models, the disposition of LNC's reinsurance
operation freed-up approximately $100 million of retained capital.
The transaction structure involved a series of indemnity reinsurance transactions combined with the sale
of certain stock companies that comprised LNC's reinsurance operation. At the time of closing, an immediate
gain of $15.0 million after-tax was recognized on the sale of the stock companies. A gain of $723.1 million
after-tax ($1.1 billion pre-tax) relating to the indemnity reinsurance agreements was reported at the time of
closing. This gain was recorded as a deferred gain on LNC's consolidated balance sheet, in accordance with
the requirements of FAS 113, and is being amortized into earnings at the rate that earnings on the reinsured
business are expected to emerge, over a period of 15 years.
On October 29, 2002 LNC and Swiss Re settled disputed matters totaling about $770 million that had
arisen in connection with the Ñnal closing balance sheets associated with Swiss Re's acquisition of LNC's
reinsurance operations. The settlement provided for a payment by LNC of $195 million to Swiss Re, which
was recorded by LNC as a reduction in deferred gain. As a result of additional information made available to
LNC following the settlement with Swiss Re in the fourth quarter of 2002, LNC recorded a further reduction
in the deferred gain of $51.6 million after-tax ($79.4 million pre-tax), as well as a $9.4 million after-tax
($8.3 million pre-tax) reduction in the gain on the sale of subsidiaries.
As part of the dispute settlement, LNC also paid $100 million to Swiss Re in satisfaction of LNC's
$100 million indemniÑcation obligation with respect to personal accident business. As a result of this payment,
LNC has no further underwriting risk with respect to the reinsurance business sold. However, because LNC
has not been relieved of it legal liabilities to the underlying ceding companies with respect to the portion of the
business indemnity reinsured by Swiss Re, under FAS 113 the reserves for the underlying reinsurance
contracts as well as a corresponding reinsurance recoverable from Swiss Re will continue to be carried on
LNC's balance sheet during the run-oÅ period of the underlying reinsurance business. This is particularly
relevant in the case of the exited personal accident and disability income reinsurance lines of business where
the underlying reserves are based upon various estimates that are subject to considerable uncertainty.
3
Also during 2002, LNC exercised a contractual right to ""put'' its interest in a subsidiary company
containing LNC's disability income reinsurance business to Swiss Re for $10 million. The $10 million sale
price was approximately equal to LNC's book basis in the subsidiary.
During 2000, LNC transferred Lincoln UK's sales force to Inter-Alliance Group PLC. Concurrent with
the announcement of this transfer, LNC also ceased writing new business in the United Kingdom (""UK'')
through direct distribution. These actions followed a strategic review of the Lincoln UK segment in late 1999,
where LNC concluded that trends in the UK insurance market including the unfavorable regulatory
environment raised signiÑcant concerns regarding the ongoing Ñt of the Lincoln UK segment within LNC's
overall strategic plans. While these actions have changed the focus of Lincoln UK's business to maintaining
the in-force policies, it is not closed to new business and continues to sell some new products.
Distribution of Products
LNC has an extensive distribution network for the sale of Ñxed annuities, variable annuities, universal life
insurance, variable universal life insurance, term life insurance, other individual insurance coverages, retail
mutual funds, ""529'' college savings plans, 401(k) products and managed account products. LNC's
distribution strategy reÖects a marketplace where consumers increasingly want to do business on their own
terms. LNC's network consists of internally owned wholesaling and retailing business units: LFD and LFA,
respectively, as well as distribution for annuities through a third party alliance with American Funds
Distributors (""AFD''). In 2003, LNC and AFD agreed to transition the wholesaling of the American Legacy
Variable Annuity product line to LFD. For further discussion, see the Lincoln Retirement Distribution
section. LFD, headquartered in Philadelphia, Pennsylvania, consists of approximately 250 internal and
external wholesalers organized to penetrate multiple channels including the Wirehouse/Regional channel, the
Independent Financial Planner channel, the Marketing General Agent channel and the Financial Institutions
channel. Through its relationships with a large number of Ñnancial intermediaries, LFD has access to
approximately 200,000 Ñnancial consultants, intermediaries and advisors.
LFA is a retail broker/dealer and Ñnancial planning Ñrm that oÅers a full range of Ñnancial and estate
planning services. LFA and its consolidated aÇliate, Sagemark, oÅer access to annuities, 401(k) plans,
pensions, universal and variable universal life insurance and other wealth accumulation and protection
products and services, and is a preferred distributor of LNC retail products. LFA and Sagemark are
headquartered in Hartford, Connecticut and consist of nearly 2,100 planners in 39 oÇces across the United
States.
Institutional investment products managed in the Investment Management segment including large case
401(k) plans which are marketed by a separate sales force in conjunction with pension consultants. These
products are oÅered primarily to deÑned beneÑt and deÑned contribution plan sponsors, endowments,
foundations and insurance companies.
National Branding Campaign
During 2002, Lincoln Financial Group (""LFG''), the marketing name for LNC and its aÇliates,
continued building its brand on a national basis through an integrated package of national magazine, television
and Internet advertising, sponsorships of major sporting events, educational partnerships, public relations and
promotional events. In 2002, much of the advertising eÅort was focused on an advertising plan designed to
secure brand awareness and familiarity with Ñnancial intermediaries, the No. 1 target audience. Since
introducing trade advertising with the LFD's ""Hero'' campaign in March 2001, LFG's aided awareness has
grown to 91% among intermediaries. Familiarity also is climbing and reached a high of 72% in 2002.
A new consumer advertising campaign was launched in July 2002 depicting Abraham Lincoln guiding
customers through dangerous waters and on challenging putting greens. These ads continue the brand promise
of providing Clear solutions in a complex worldTM. This new campaign was tested in independent research and
was viewed as signiÑcantly more likeable and unique than a base of 818 Ñnancial competitor ads.
In June 2002, Lincoln Financial Group announced a major new partnership with the Philadelphia Eagles
football team to name its new state-of-the-art stadium Lincoln Financial Field. The new facility is nearing
completion and is scheduled to open its gates to the public in August 2003. Based on evidence from other
major markets and sports teams, stadium entitlements are a proven way to build strong brand awareness. The
4
announcement has already resulted in signiÑcant new visibility for the Lincoln Financial Group brand
nationwide.
Description of Business Segments
1. Lincoln Retirement
The Lincoln Retirement segment (formerly the Annuities segment), headquartered in Fort Wayne,
Indiana, with additional operations in Portland, Maine and the Chicago, Illinois metro area, provides tax-
deferred investment growth and lifetime income opportunities for its clients through the manufacture and sale
of Ñxed and variable annuities. There are two lines of business within this segment, individual annuities and
employer-sponsored markets. Both lines of business oÅer Ñxed annuity and variable annuity products.
The individual annuities line of business markets non-qualiÑed and qualiÑed Ñxed and variable annuities
to individuals. Annuities are attractive, because they provide tax-deferred growth in the underlying principal,
thereby deferring the tax consequences of the growth in value until withdrawals are made from the
accumulation values, often at lower tax rates occurring during retirement. In addition to favorable tax
treatment, annuities are unique in that retirees can select a variety of payout alternatives to help provide an
income Öow during life. The individual annuities market is a growth market that has seen an increase in
competition along with new product types and promotion.
The employer-sponsored retirement line of business markets Ñxed and variable annuities along with a
turnkey retirement program (investments, record-keeping, employee education and compliance) to targeted
markets. The key segments of the employer-sponsored retirement markets are: healthcare, pub-
lic/governmental, education, corporate and not-for-proÑt. Within these segments, LNC targets those markets
that oÅer the most favorable demographics, distribution synergies and current and potential market share.
Products
In general, an annuity is a contract between an insurance company and an individual or group in which
the insurance company, after receipt of one or more contributions, agrees to pay an amount of money either in
one lump sum or on a periodic basis (i.e., annually, semi-annually, quarterly or monthly), beginning on a
certain date and continuing for a period of time as speciÑed in the contract. Such payments can begin the
month after the deposit is received (referred to as an immediate annuity) or at a future date in time (referred
to as a deferred annuity). This retirement vehicle helps protect an individual from outliving his money and can
be either a Ñxed annuity or a variable annuity.
Fixed Annuity: A Ñxed deferred annuity preserves the principal value of the contract while guaranteeing
a minimum interest rate to be credited to the accumulation value. LNC oÅers both single and Öexible
premium Ñxed deferred annuities to the individual annuities market. Single premium Ñxed deferred annuities
are contracts that allow only a single contribution to be made. Flexible premium Ñxed deferred annuities are
contracts that allow multiple contributions on either a scheduled or non-scheduled basis. With Ñxed deferred
annuities, the contractholder has the right to surrender the contract and receive the current accumulation
value less any applicable surrender charge and, if applicable, market value adjustment. Also, certain Ñxed
annuity products, such as the popular Step Five Fixed Annuity, allow for a window period between the end of
the Ñxed guarantee period and the start of the subsequent guarantee period during which the account holder
can withdraw their funds without incurring a surrender charge. Fixed annuity contributions are invested in
LNC's general account. LNC bears the investment risk for Ñxed annuity contracts. To protect itself from
premature withdrawals, LNC imposes surrender charges. Surrender charges are typically applicable during
the early years of the annuity contract, with a declining level of surrender charges over time. LNC expects to
earn a spread between what it earns on the underlying general account investments supporting the Ñxed
annuity product line and what it credits to its Ñxed annuity contractholders' accounts.
Throughout 2001 and 2002, even with the historically low interest rate environment, Ñxed annuities have
taken on increased importance due to the sustained volatility of the equity markets that began in the second
quarter of 2000. LNC primarily distributes Ñxed annuities through the Financial Institutions channel and to a
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lesser extent in the Independent Financial Planner and Wirehouse/Regional channels. LNC's Ñxed annuity
sales in 2001 through 2002 were bolstered by product oÅerings that were introduced in 2001 including the
Lincoln Select and ChoicePlus Fixed Annuities and the StepFive» Fixed Annuity.
The guarantees of the StepFive Fixed Annuity have been especially well-received in the Financial
Institutions channel. New product oÅerings launched in 2002 in the Financial Institutions channel included
the AccelaRate and ChoiceGuarantee» Fixed Annuities. The market value adjusted (""MVA'') feature of the
Lincoln Select and ChoicePlus Fixed Annuities is expected to be more attractive in the Wirehouse/Regional
channel during a volatile interest rate environment. This feature increases or decreases the cash surrender
value of the annuity based on a decrease or increase in interest rates. Contractholders participate in gains when
the contract is surrendered in a falling interest rate market, and LNC is protected from losses up to a cap when
the contract is surrendered in a rising interest rate market. A new version of Lincoln Select that provides the
individual with a higher interest rate but a larger potential penalty for early withdrawal or surrender is being
considered.
Variable Annuity: A variable annuity provides the contractholder the ability to direct the investment of
deposits into one or more sub-accounts oÅered by the product. The value of the contractholder's account
varies with the performance of the underlying sub-accounts chosen by the contractholder. The underlying
assets of the sub-accounts are managed within a special insurance series of mutual funds. Because the
contractholder's return is tied to the performance of the segregated assets underlying the variable annuity, the
contractholder bears the investment risk associated with these investments. LNC charges the contractholder
insurance and administrative fees based upon the value of the variable contract.
The separate account choices for LNC's variable annuities cover diverse asset classes with varying levels
of risk and include both equity funds and Ñxed income funds. The Individual and Group Multi-Fund»
Variable Annuity product line oÅers 36 fund choices from 13 well known advisors: AIM», Alliance Capital»,
American Fund Insurance Seriessm, Baron Capital Funds, Delaware Investmentssm, Deutsche Asset Manage-
ment, Fidelity Investments», Janus, MFS Investment Management», Neuberger Berman Management Inc.,
Putnam Investments, Inc., Scudder Investments and Wells Fargo. LNC's Lincoln Choice Plussm Variable
Annuity, an individual multi-manager product line, has 44 fund oÅerings from AIM», Alliance Capital»,
American Funds Insurance Seriessm, Delaware Investmentssm, Fidelity Investments», Franklin», Janus, MFS
Investment Management», Neuberger Berman Management, Inc., Putnam Investments, Inc., and Scudder
Investments. LNC's American Legacy Variable Annuity, a premier single manager individual and group
variable annuity product line, oÅers 13 mutual fund choices from American Funds Insurance Seriessm.
American Funds is the 3rd largest mutual fund company for 2002 based on assets under management. LNC's
Alliance Program, which is for the employer-sponsored market, has over 2000 mutual fund choices plus a
Ñxed account. This product is customized for each employer.
Most of LNC's variable annuity products also oÅer the choice of a Ñxed option that provides for
guaranteed interest credited to the account value. In addition, many of LNC's individual variable annuities
feature minimum guaranteed death beneÑts. These minimum guaranteed death beneÑts include either
guaranteed return of premium, the highest account value attained on any policy anniversary through attained
age 80 (i.e., high water mark), or a 5% annual step up (i.e., roll-up) of the account value depending on the
speciÑc terms of the contract.
LNC earns mortality assessments and expense assessments on variable annuity accounts to cover
insurance and administrative charges. These expenses are built into accumulation unit values, which when
multiplied by the number of units owned for any sub-account equals the contractholder's account value for
that sub-account. Some products feature decreasing fee schedules based on account value break points. The
fees that LNC earns from these policies are classiÑed as insurance fees on the income statement. In addition,
for some contracts, LNC collects surrender charges when contractholders surrender their contracts during the
early years of a contract. For other contracts, LNC collects surrender charges when contractholders surrender
their contracts during a number of years subsequent to each deposit. LNC's individual variable annuity
products have a maximum surrender period of ten years. The assets that support variable annuities are
6
included in the assets held in separate accounts balance and the related liabilities for the current account
values are included in the liabilities related to separate accounts balance.
In 2002, LNC continued to grow variable annuity incremental deposits (i.e., gross deposits reduced by
transfers from other Lincoln Retirement products). These sales were the result of the product momentum
which started in the year 2000 when LNC introduced more new variable annuity products than it did in the
preceding Ñve years and continued through 2002. In 2002, a new low cost variable annuity product, Multi-
Fund 5 was launched. In addition, the ChoicePlus and American Legacy product oÅerings in New York were
expanded to include bonus, L-share and A-share (American Legacy only) contracts. LNC now oÅers through
most of its variable annuity product lines, A-share, B-share, C-share, L-share and bonus variable annuities.
The diÅerences in A, B, C and L-shares relate to the sales charge and fee structure associated with the
contract. An A-share has a front-end sales charge. A B-share has a contingent deferred sales charge that is
only paid if the account is surrendered or withdrawals are in excess of contractual free withdrawals within the
contract's speciÑed surrender charge period. A C-share has no front-end sales charge or back-end surrender
charge. Like a B-share, an L-share has a contingent deferred sales charge that is only paid if the account is
surrendered or withdrawals are in excess of contractual free withdrawals within the contract's speciÑed
surrender charge period. The diÅerences between the L-share and B-share are the length of the surrender
charge period and the fee structure. L-shares have a shorter surrender charge period, so for the added liquidity,
mortality and expense assessments are higher.
A bonus annuity is a variable annuity contract, which oÅers a bonus credit to a contract based on a
speciÑed percentage (typically ranging from 2% to 5%) of each deposit. Bonus products, in general have come
under increased scrutiny due to concerns with whether they have been properly designed and sold with the
contractholders' interests in mind. The concern is that the higher expenses and extended surrender charge
periods that are often associated with bonus annuities may not be adequately understood by contractholders.
In developing bonus annuity products for its Lincoln ChoicePlus and American Legacy variable annuities,
LNC has attempted to address these concerns, while at the same time designing products that are competitive
in the marketplace. A key competitive feature of LNC's bonus annuity that is attractive to long-term
contractholders is the persistency credit. This feature rewards a contractholder with a bonus credit of 20 basis
points per annum after maintaining an account for 14 years. In addition, a 30 basis point per annum
persistency credit is oÅered on LNC's L-share products after a contractholder maintains an account for eight
years.
LNC oÅers other innovative product features including the Income4Life» Solution, Income4Life
Advantage and when sold in conjunction with Income4Life, the Accumulated BeneÑt Enhancement
(""ABE'') rider. The Income4Life Solution and Income4Life Advantage features allow variable annuity
contractholders access and control during the income distribution phase of their contract. This added
Öexibility allows the contractholder to access the account value for transfers, additional withdrawals and other
service features like portfolio rebalancing. The ABE rider which was Ñrst introduced in 2002 lets clients
transfer their balances to LNC variable annuity products and retain the death beneÑt of their prior variable
annuity. Unlike bonus products, which require longer surrender penalties and increased mortality and expense
assessments, this rider is available only in conjunction with Income4Life on all share classes of most LNC
variable annuity product lines with no additional charge.
According to Variable Annuity Research and Data Services (""VARDS''), LNC's American Legacy III
Variable Annuity ranked number 3 out of 122 variable annuities for asset-weighted performance for the Ñve-
year period ended December 31, 2002. The American Legacy I Variable Annuity ranked number 1 on this
basis. Challenging equity markets like those experienced in 2001 and 2002 may prompt contactholders of
competitors' variable annuities to consider better-performing LNC variable annuities.
Looking forward, so-called living beneÑts that provide equity market performance guarantees, are
becoming more prevalent in the industry. LNC is looking at various product approaches and designs in this
area that will provide a competitive beneÑt while still falling within its risk tolerance levels for such
guarantees.
7
Distribution
Fixed annuity products as well as most individual variable annuity product lines are distributed by LFD.
Recently, LNC and American Funds Distributors (""AFD'') have agreed to transition the wholesaling of the
American Legacy Variable Annuity product line to LFD. Currently, AFD uses wholesalers who focus on both
American Funds mutual funds, as well as the American Legacy Variable Annuity products. Segment
management believes that the change to a dedicated team focused on key broker/dealer relationships
developed in conjunction with AFD, should lead to renewed growth in American Legacy Variable Annuity
sales. Lincoln Financial Advisors (""LFA''), LNC's retail broker/dealer and Ñnancial planning Ñrm, as a client
of AFD and LFD, sells the American Legacy Variable Annuity and the ChoicePlus Variable Annuity. LFA
also sells LNC's MultiFund Variable Annuity product line in both the individual and employer-sponsored
retirement markets and the Alliance Program in the employer-sponsored retirement market. Group Ñxed and
variable annuity products are also distributed through the Lincoln Retirement Fringe BeneÑt Division's
dedicated sales force to the employer-sponsored retirement market.
Market Position
Capitalizing on a broad product portfolio and a strong and diverse distribution network, LNC is a leader
in both the individual and employer-sponsored annuity markets. According to VARDS, LNC ranks 4th in
assets as of December 31, 2002 and 10th in variable annuity sales for the year ended December 31, 2002 in the
United States. LNC ranked 10th in Ñxed annuity sales through Ñnancial institutions for 2002 (Kenneth Kehrer
Associates Fixed Annuity Sales Through Financial Institutions Rankings for 2002).
LNC was an early entrant into the Ñxed and variable annuity business and as such has a mature book of
business with many contracts that are out of the surrender charge period. As a result, LNC, as well as other
seasoned industry participants, have been vulnerable to what are referred to as Section 1035 exchanges, named
after the Internal Revenue Code Section that governs these exchanges. In 1035 exchanges, contractholders
surrender their annuity and make a non-taxable transfer to another insurance company's non-qualiÑed
annuity. Over the last three years LNC's lapse rate went from approximately 12% in 2000 to 9.7% in 2001 and
back up to 10.5% in 2002, which was better than pricing in all three years. LNC's strong persistency and new
sales growth have contributed to the maintenance of overall positive net Öows throughout 2002. LNC Ñrst
achieved overall positive net Öows in the third quarter of 2001 after over three years of net outÖows. Over the
last few years, a contributing factor to the strong persistency experienced by LNC's variable annuities has
been the weak equity markets. Contractholders whose variable annuity contracts have guaranteed minimum
death beneÑts that are in the money due to equity market declines are less likely to transfer from these
contracts. In the future, however, given the ongoing volatility of the equity markets, living beneÑt guarantees
oÅered by some competitors may provide contractholders with an inducement to do a 1035 exchange.
Approximately 1,420 employees are involved in this business segment.
2. Life Insurance
The Life Insurance segment, headquartered in Hartford, Connecticut, focuses on the creation and
protection of wealth for its clients through the manufacture and sale of life insurance products. The Life
Insurance segment oÅers both single and survivorship versions of universal life (""UL''), variable universal life
(""VUL''), and interest-sensitive whole life (""ISWL''), as well as corporate owned life insurance (""COLI'')
and term insurance. The segment also oÅers a linked-beneÑt product which is a universal life insurance policy
linked with an accelerated beneÑts rider that provides a beneÑt for long-term care needs. This operation
targets the aÉuent market, deÑned as households with at least $500,000 of investable net worth. Two key
measures of the eÅectiveness of meeting the needs of this market include average face amount of policies sold,
which was $1.2 million for the year ended December 31, 2002, and average premiums paid per policy sold,
which were approximately $28,000 for the same period.
8
Products
The Life Insurance segment's book of business includes interest/market-sensitive products (UL, VUL,
ISWL, COLI) and traditional life products (term and guaranteed cost whole life). ProÑtability is driven by
mortality margins (deÑned below), investment margins (spreads/fees), expenses and surrender fees.
Mortality margins represent the diÅerence between amounts charged the customer to cover the mortality
risk and the cost of reinsurance and death beneÑts paid. Mortality charges are either speciÑcally deducted
from the contractholder's fund (i.e. cost of insurance assessments or ""COIs'') or embedded in the premiums
charged to the customer. In either case, these amounts are a function of the rates priced into the product and
level of insurance in-force (less reserves previously set aside to fund beneÑts). Insurance in-force, in turn, is
driven by sales, persistency and mortality experience.
Similar to the annuity product classiÑcations described above, life products can be classiÑed as ""Ñxed''
and ""variable'' contracts. This classiÑcation describes whether the policyholder or LNC bears the investment
risk of the assets supporting the policy. This also determines the manner in which LNC earns investment
margin proÑts from these products, either as investment spreads for Ñxed products or as fees charged for
variable products.
Fixed Life Insurance (primarily UL and ISWL): Premiums net of expense loads and charges received
on Ñxed products are invested in LNC's general account investment portfolio, so LNC bears the risk on
investment performance. LNC manages investment margins, (i.e. the diÅerence between the rate the portfolio
earns compared to the rate that is credited to the customer) by seeking to maximize current yields, in line with
asset/liability and risk management targets, while crediting a competitive rate to the customer. Crediting rates
are typically subject to guaranteed minimums speciÑed in the underlying life insurance contract.
Variable Universal Life Insurance (VUL): Premiums net of expense loads and charges received on
VUL products are invested in separate accounts which oÅer several investment options for the customer's
selection. The investment choices are the same, in most cases, as the investment choices oÅered in LNC's
variable annuity contracts. In addition, VUL products oÅer a Ñxed account option which is managed by LNC.
Investment risk is borne by the customer on all but the Ñxed account option. LNC charges fees for mortality
costs and administrative expenses, as well as investment management fees.
Corporate Owned Life Insurance (""COLI''): COLI is typically purchased by corporations funding non-
qualiÑed beneÑt plans. These include 401(k) excess Ì voluntary deferrals of executive salary and/or bonus in
excess of 401(k) limits and Supplemental Executive Retirement Plans (SERP's) in a variety of forms, paid
for with corporate funds. LNC oÅers a portfolio of both Ñxed UL and variable UL COLI products sold
primarily through specialty brokers.
Term Life Insurance: Term life insurance provides a death beneÑt without a cash accumulation
balance. Policy premiums are generally paid annually.
Distribution
Distribution of the Life Insurance segment's products occurs primarily through LNC's internally owned
wholesaling arm, LFD, and its retail sales arm, LFA. Both channels have an industry-wide reputation of being
highly skilled in the development of Ñnancial and estate planning solutions for the aÉuent market. During
August of 2002, the Life Insurance segment entered into a marketing agreement with M Group Financial
(""M Group'') to sell LNC's life insurance products. LNC became one of Ñve core carriers providing life
insurance and annuity products to the member Ñrms of M Group. M Group is the largest Independent
Producer Group in the nation. It is represented by over 100 Ñrms. M Group Ñrm members provide an
opportunity to further broaden the distribution of LNC's products to the aÉuent market.
Market Position
LNC is a leading provider of life insurance products designed speciÑcally for the high net-worth and
aÉuent markets. Product breadth, design innovation, competitiveness and speed to market all contribute to
9
the strength of LNC's life insurance operations. Averaging close to 10 major product upgrades and/or new
features per year since 1998, including 14 signiÑcant VUL, UL, Term and COLI product enhancements and
new riders in 2002, the Life Insurance segment is successful at meeting changing needs when market trends
shift.
LNC's current market leadership position is a result of the breadth and quality of its product portfolio
along with its commitment to exceptional customer service, its extensive distribution network and the growth
opportunity oÅered by its target market, the aÉuent.
Approximately 790 employees are involved in this business segment.
3.
Investment Management
The Investment Management segment, which is headquartered in Philadelphia, Pennsylvania with oÇces
in Fort Wayne, London, and Denver, provides investment products and services to both individual and
institutional investors. The primary companies within this business segment include Lincoln National
Investments, Inc. (""LNI''), Lincoln National Investment Companies, Inc. (""LNIC''), and Delaware
Management Holdings, Inc. (""Delaware''). LNI and LNIC are intermediate level holding companies that
own the operating companies within this segment. The Investment Management segment also includes the
401(k) operations of LNL. The operating subsidiaries within Delaware oÅer a broad line of mutual funds,
retirement plan services and other investment products including managed accounts, and ""529'' college
savings plans to retail investors and also oÅer investment advisory services and products to institutional clients,
which primarily include pension funds, foundations, endowment funds and trusts. Delaware currently serves as
investment advisor to approximately 275 institutional accounts; acts as investment manager and/or share-
holder services agent for approximately 100 open-end funds; and serves as investment manager for 10 closed-
end funds. The Investment Management segment also provides investment advisory services for LNC's
corporate portfolios.
Products
The Investment Management segment provides an array of products for a range of investors. Products
include domestic and international equity and Ñxed-income retail mutual funds, separate accounts, institu-
tional mutual funds, managed accounts, ""529'' college savings plans, and retirement plans and services as well
as administration services for these products.
For the individual investor, Delaware oÅers various products including mutual funds and managed
accounts. Delaware also provides investment management and account administration services for variable
annuity products. Delaware oÅers alternative pricing schemes for mutual funds including traditional front-end
load funds, back-end load funds, and level-load funds. Variable annuity products provide the contractholder
the ability to direct the investment of deposits into one or more funds oÅered by the product. The Institutional
Class shares of the mutual funds are also available to institutional clients and retirement plan participants
(such as deÑned contribution plans). Delaware also provides investment services to high net worth and small
institutional investor markets through managed accounts. A managed account is provided to individual
investors through relationships with broker-dealer sponsored programs.
Delaware oÅers various retirement plans and services, including 401(k) plans. A 401(k) plan allows
employees to divert a portion of their salary to a company-sponsored tax-sheltered account, thus deferring
taxes until retirement. These plans generally oÅer several investment options such as equity and Ñxed income
products. In 2002, Delaware entered the ""529'' college savings plan market with the roll out of ""529''
programs for the state of Hawaii and the Commonwealth of Pennsylvania. The persistence of poor equity
markets, combined with a more crowded ""529'' marketplace, resulted in lower than anticipated sales in 2002.
These programs, however, provide Delaware with an opportunity to attract signiÑcant long-term assets under
management.
Delaware provides a broad range of institutional investment advisory services to corporate and public
retirement plans, endowments and foundations, nuclear decommissioning trusts, socially responsible investors,
10
sub-advisory clients and Taft-Hartley plans, among others. Most clients utilize individually managed separate
accounts, which means clients have the opportunity to customize the management of their portfolio by
including or excluding certain types of securities, sectors or segments within a given asset class. Because of
their individually managed nature, these separate accounts are best suited for larger investment mandates.
Currently, Delaware's minimum account size is typically $10 million for U.S. investments and $100 million
for non-U.S. investments.
The funds included in the Delaware Pooled Trust product oÅering are no-load mutual funds designed for
the institutional investor and high net worth individual. Delaware Pooled Trust is a series of SEC registered
mutual funds managed in styles that are similar to institutional separate account oÅerings and best suited for
smaller to medium-sized institutional investment mandates. Delaware's minimum account size for these
vehicles is typically $1 million.
Market Position
Diversity of investment styles, as well as diversity of clients served are prudent ways to diversify risk in
varying market environments. Delaware, historically known primarily for a conservative, ""value'' equity
investment style, has evolved over the last few years into an investment manager with strong and diversiÑed
oÅerings across multiple asset classes including value and growth equity investment styles; high-grade, high-
yield and municipal Ñxed-income investment styles; balanced and quantitative investment styles; and
international and global equity and Ñxed income investment styles. Delaware's investment performance, which
began to improve in 2000 with the implementation of various targeted initiatives, has been strong over the last
two years. Positive investment performance has been the key driver of the overall positive net Öows that have
been achieved throughout 2002. The segment experienced positive net Öows of $2.9 billion in 2002, an
improvement of $3.5 billion from the prior year. The key contributors to this improvement were higher retail
and institutional sales and improved retention of institutional assets, primarily in response to the improved
investment performance relative to peers. Overall retail sales increased $2.0 billion and institutional inÖows
increased $1.4 billion. In addition, retail equity sales increased $1.7 billion in what was a diÇcult sales
environment given the further weakening of the equity markets in 2002. The retail sales growth was primarily
attributable to increased sales of managed accounts. A portion of these sales was bolstered by external events
aÅecting key competitors. While the Investment Management segment has made measurable progress on the
initiatives of investment performance, sales growth and institutional asset retention, its focus in 2003 is not
only to sustain and improve upon those results, but also to improve overall proÑtability.
Distribution
The businesses in the Investment Management segment deliver their broad range of products through
multiple distribution channels, enabling them to reach an expanding community of retail and institutional
investors. Delaware distributes retail mutual funds, managed accounts, ""529'' college savings plans and
retirement products through the LFD distribution network, LFA, and Delaware's direct retirement sales force.
Institutional products are marketed primarily by Delaware's institutional marketing group working closely
with manager selection consultants. These products are also oÅered primarily to deÑned beneÑt and deÑned
contribution plan sponsors, endowments, foundations and insurance companies.
Approximately 1,270 employees are involved in this business segment.
4. Lincoln UK
Lincoln UK is headquartered in Barnwood, Gloucester, England, and is licensed to do business
throughout the United Kingdom (""UK''). Although Lincoln UK transferred its sales force to Inter-Alliance
Group PLC in the third quarter of 2000, it continues to manage, administer and accept new deposits on its
current block of business and, accept new business for certain products. Lincoln UK's product portfolio
principally consists of unit-linked life and pension products, which are similar to U.S. produced variable life
and annuity products.
11
In the third quarter of 2002, Lincoln UK agreed to outsource its customer service and policy
administration function to the Capita Group, plc (""Capita''). The agreement involved the transfer of
approximately 500 employees to Capita. The number of employees noted below reÖects the actual level of
staÇng for the current business structure.
Approximately 210 employees are involved in this business segment.
Other Matters
1. Regulatory
LNC's Retirement, Life Insurance and Lincoln UK business segments, in common with those of other
insurance companies, are subject to regulation and supervision by the states, territories and countries in which
they are licensed to do business. The laws of these jurisdictions generally establish supervisory agencies with
broad administrative powers relative to granting and revoking licenses to transact business, regulating trade
practices, licensing agents, prescribing and approving policy forms, regulating premium rates for some lines of
business, establishing reserve requirements, regulating competitive matters, prescribing the form and content
of Ñnancial statements and reports, regulating the type and amount of investments permitted and prescribing
minimum levels of capital. The ability to continue an insurance business is dependent upon the maintenance
of the licenses in the various jurisdictions. In addition, variable annuities and variable life insurance businesses
and products are subject to regulation and supervision by the Securities and Exchange Commission (""SEC'')
and the National Association of Securities Dealers (""NASD'').
LNC's Investment Management segment, in common with other investment management groups, is
subject to regulation and supervision by the SEC, NASD, Municipal Securities Rulemaking Board
(""MSRB''), Financial Services Authority (""FSA'') in London, the Pennsylvania Department of Banking and
jurisdictions of the states, territories and foreign countries in which they are licensed to do business.
LFA is subject to regulation and supervision by the SEC and NASD on broker dealer and registered
investment advisor issues.
2. Miscellaneous
LNC's insurance subsidiaries protect themselves against losses greater than the amount they are willing
to retain on any one risk or event by purchasing reinsurance from unaÇliated insurance companies (see
Note 7 to the consolidated Ñnancial statements).
All businesses LNC is involved in are highly competitive due to the market structure and the large
number of competitors. At the end of 2001, the latest year for which data is available, there were
approximately 1,225 life insurance companies in the United States. As noted previously, based on revenues,
LNC is the 8th largest U.S. stockholder-owned company within the Fortune 500 Life/Health Insurance
industry ranking (2002 Fortune 500 by Industry Rankings, April 2002). LNC's investment management
companies were the 51st largest U.S. investment management group at the end of 2001 (2001 Institutional
Investor 300 Money Managers, July 2002). Also, many of the products oÅered by LNC's operating companies
are similar to products oÅered by non-insurance Ñnancial services companies, such as banks. The Financial
Services Modernization Act was passed in November 1999 and repealed the Glass-Steagall Act of 1933 and
expands the Bank Holding Company Act of 1956. This act allows, among other things, cross-ownership by
banks, securities Ñrms and insurance companies. In 2002, there were some cross-ownership activities in the
Ñnancial services industry; however, there was minimal impact on LNC's operations.
Because of the nature of the insurance and investment management businesses, there is no single
customer or group of customers upon whom the business is dependent. Although LNC does not have any
signiÑcant concentration of customers, LNC's Retirement segment has a long-standing distribution relation-
ship with American Funds Distributors (""AFD'') that is signiÑcant to this segment. In 2002, the American
Legacy Variable Annuity product line sold through AFD accounted for about 15% of LNC's total gross
annuity deposits. In addition, the American Legacy Variable Annuity product line represents approximately
31% of LNC's total gross annuity account values at December 31, 2002. Recently, LNC and AFD have
12
agreed to transition the wholesaling of American Legacy to LFD. Currently, AFD uses wholesalers who focus
on both American Funds mutual funds as well as the American Legacy Variable Annuity products. Segment
management believes that this change to a dedicated team focused on key broker/dealer relationships
developed in conjunction with AFD should renew growth in American Legacy Variable Annuity sales.
LNC does not have a separate unit that conducts market research. Research activities related to new
products or services, or the improvement of existing products or services, are conducted within the business
segments. Expenses related to such activities are not material. Also, sales are not dependent upon select
geographic areas. LNC has foreign operations that are signiÑcant in relationship to the consolidated group
(see Note 9 to the consolidated Ñnancial statements).
3. Available Information
LNC Ñles annual, quarterly and current reports, proxy statements and other documents with the
Securities and Exchange Commission (the ""SEC'') under the Securities Exchange Act of 1934 (the
""Exchange Act''). The public may read and copy any materials that LNC Ñles with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC
maintains an Internet website that contains reports, proxy and information statements, and other information
regarding issuers, including LNC, that Ñle electronically with the SEC. The public can obtain any documents
that LNC Ñles with the SEC at http://www.sec.gov.
LNC also makes available free of charge on or through its Internet website (http://www.lfg.com) LNC's
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to those reports Ñled or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as
soon as reasonably practicable after LNC electronically Ñles such material with, or furnishes it to, the SEC.
Item 2. Properties
LNC and the various operating businesses own or lease approximately 2.9 million square feet of oÇce
space. The governance group for LNC and the Investment Management segment lease 0.4 million square feet
of oÇce space in Philadelphia, Pennsylvania. The operating units in the Fort Wayne, Indiana area own or lease
1.0 million square feet. Also, businesses operating in the Chicago, Illinois metro area; Hartford, Connecticut
and the United Kingdom own or lease another 0.6 million square feet of oÇce space. An additional 0.9 million
square feet of oÇce space is owned or leased in other U.S. cities and foreign countries for branch oÇces and
other operations. As shown in the notes to the consolidated Ñnancial statements (see Note 7 to the
consolidated Ñnancial statements), the rental expense on operating leases for oÇce space and equipment
totaled $67.0 million for 2002. OÇce space rent expense accounts for $56.6 million of this total. This
discussion regarding properties does not include information on investment properties.
Item 3. Legal Proceedings
LNC and its subsidiaries are involved in various pending or threatened legal proceedings, including
purported class actions, arising from the conduct of business. In some instances, these proceedings include
claims for unspeciÑed or substantial punitive damages and similar types of relief in addition to amounts for
alleged contractual liability or requests for equitable relief. After consultation with legal counsel and a review
of available facts, it is management's opinion that these proceedings ultimately will be resolved without
materially aÅecting the consolidated Ñnancial position of LNC. (See Note 7 to the consolidated Ñnancial
statements).
13
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 2002, 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
The dividend on LNC's common stock is declared each quarter by LNC's Board of Directors. In
determining dividends, the Board takes into consideration items such as LNC's Ñnancial condition, including
current and expected earnings, projected cash Öows and anticipated Ñnancing needs. The range of market
prices and cash dividends declared by calendar quarter for the past two years are as follows:
Common Stock Data: (per share)
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
2002
High ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Low ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividend Declared ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2001
High ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Low ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividend Declared ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$53.650
$47.200
$ 0.320
$52.540
$40.750
$ 0.320
$42.080
$29.120
$ 0.320
$35.950
$25.150
$ 0.335
$48.250
38.000
$ 0.305
$52.300
41.280
$ 0.305
$52.750
41.000
$ 0.305
$49.450
40.000
$ 0.320
Note: At December 31, 2002, the number of shareholders of record of LNC's common stock was
10,381.
Exchanges: New York, Chicago and PaciÑc.
Stock Exchange Symbol: LNC
Item 6. Selected Financial Data
Total revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before cumulative eÅect of accounting
changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative EÅect of Accounting Changes ÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Per Share Data:(1)
2002
$4,635.5
2001
Year Ended December 31
2000
(millions of dollars, except per share data)
$6,847.1
$6,378.0
$6,803.7
1999
1998
$6,087.1
91.6
Ì
91.6
605.8
(15.6)
621.4
Ì
460.4
Ì
509.8
Ì
$ 590.2
$ 621.4
$ 460.4
$ 509.8
Net Income Ì Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net Income Ì Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
0.49
$
$
0.50
$ 1.295
3.05
$
$
3.13
$ 1.235
3.19
$
$
3.25
$ 1.175
2.30
$
$
2.33
$ 1.115
2.51
$
$
2.54
$ 1.055
14
Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Company-obligated mandatorily
redeemable preferred securities of
subsidiary trusts holding solely junior
subordinated debentures ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Shareholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Per Share Data:(1)
Shareholders' equity (Including
accumulated other comprehensive
income)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Shareholders' equity (Excluding
accumulated other comprehensive
income)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Market value of common stock ÏÏÏÏÏÏÏÏÏ
2002
$93,133.4
1,119.2
2001
December 31
2000
(millions of dollars, except per share data)
$103,095.7
$99,844.1
$98,001.3
712.0
712.2
861.8
1999
1998
$93,836.3
712.2
392.7
5,296.3
474.7
5,263.5
745.0
4,954.1
745.0
4,263.9
745.0
5,387.9
$
29.82
$
28.10
$
25.92
$
$
25.97
31.58
$
$
27.13
48.57
$
$
25.85
47.31
$
$
$
21.76
$
26.59
24.14
40.00
$
$
23.86
40.91
(1) Per share amounts were aÅected by the retirement of 12,088,100; 11,278,022; 6,222,581; 7,675,000 and
1,246,562 shares of common stock in 2002, 2001, 2000, 1999 and 1998, respectively. In addition,
4,630,318 shares of common stock were issued in 2001 related to the settlement of purchase contracts
issued in conjunction with FELINE PRIDES Ñnancing.
Item 7. Management's Discussion and Analysis of Results and Financial Condition
Introduction
Lincoln National Corporation (""LNC'') is a holding company. Through subsidiary companies, LNC
operates multiple insurance and investment management businesses. The collective group of companies uses,
""Lincoln Financial Group'' as its marketing identity. LNC is the 39th largest (based on assets) United States
Corporation (2001 Fortune 500, Largest U.S. Corporations, April 2002). Operations are divided into four
business segments: 1) Lincoln Retirement (formerly known as the Annuities segment), 2) Life Insurance,
3) Investment Management and 4) Lincoln UK. LNC reports operations not directly related to the business
segments and unallocated corporate items (i.e., corporate investment income, interest expense on corporate
debt, unallocated overhead expenses, and the operations of Lincoln Financial Advisors (""LFA'') and Lincoln
Financial Distributors (""LFD'') and the amortization of the deferred gain on the sale of Lincoln Re) in
""Other Operations''. Prior to the fourth quarter of 2001, LNC had a Reinsurance segment. Total employment
of LNC at December 31, 2002 on a consolidated basis was 5,830.
Forward-Looking Statements Ì Cautionary Language
The pages that follow review results of operations of LNC Consolidated, LNC's four business segments
and ""Other Operations''; LNC's consolidated investments; and consolidated Ñnancial condition including
liquidity, cash Öows and capital resources. Historical Ñnancial information is presented and analyzed. Where
appropriate, factors that may aÅect future Ñnancial performance are identiÑed and discussed. Certain
statements made in this report are ""forward-looking statements'' within the meaning of the Securities
Litigation Reform Act of 1995 (the ""Act''). Forward-looking statements include, without limitation, any
statement that may predict, forecast, indicate or imply future results, performance or achievements, and may
contain words like: ""believe'', ""anticipate'', ""expect'', ""estimate'', ""project'', ""will'', ""shall'' and other words or
phrases with similar meaning.
Forward-looking statements involve risks and uncertainties that may cause actual results to diÅer
materially from the results contained in the forward-looking statements. These risks and uncertainties include,
among others, subsequent signiÑcant changes in: the Company (e.g., acquisitions and divestitures of legal
15
entities and blocks of business Ì directly or by means of reinsurance transactions); Ñnancial markets (e.g.,
interest rates and securities markets); competitors and competing products and services; LNC's ability to
operate its businesses in a relatively normal manner; legislation (e.g., corporate, individual, estate and product
taxation); the price of LNC's stock; accounting principles generally accepted in the United States; regulations
(e.g., insurance and securities regulations); and debt and claims-paying ratings issued by nationally recognized
statistical rating organizations.
Other risks and uncertainties include:
the risk that signiÑcant accounting, fraud or corporate governance
issues may adversely aÅect the value of certain investments; whether necessary regulatory approvals are
obtained (e.g., insurance department, Hart-Scott-Rodino, etc.) and, if obtained, whether they are obtained on
a timely basis; whether proceeds from divestitures of legal entities and blocks of business can be used as
planned; litigation, arbitration and other actions (e.g., (a) adverse decisions in signiÑcant actions including,
but not limited to extra contractual and class action damage cases, (b) new decisions which change the law,
(c) unexpected trial court rulings, (d) unavailability of witnesses and (e) newly discovered evidence); acts of
God (e.g., hurricanes, earthquakes and storms); whether there will be any signiÑcant charges or beneÑts
resulting from the contingencies described in the footnotes to LNC's consolidated Ñnancial statements; acts of
terrorism or war; the stability of governments in countries in which LNC's subsidiaries do business; and other
insurance risks (e.g., policyholder mortality and morbidity).
The risks included here are not exhaustive. Other sections of this report, and LNC's quarterly reports on
Form 10-Q, current reports on Form 8-K and other documents Ñled with the Securities and Exchange
Commission include additional factors which could impact LNC's business and Ñnancial performance.
Moreover, LNC operates in a rapidly changing and competitive environment. New risk factors emerge from
time to time and it is not possible for management to predict all such risk factors. Further, it is not possible to
assess the impact of all risk factors on LNC's business or the extent to which any factor, or combination of
factors, may cause actual results to diÅer materially from those contained in any forward-looking statements.
Given these risks and uncertainties, investors should not place undo reliance on forward-looking statements as
a prediction of actual results. In addition, LNC disclaims any obligation to update any forward-looking
statements to reÖect events or circumstances that occur after the date of this report.
Critical Accounting Policies
Given the nature of LNC's business, the Company's accounting policies require the use of judgments
relating to a variety of assumptions and estimates. Because of the inherent uncertainty in the assumptions and
estimates underlying these accounting policies, under diÅerent conditions or assumptions the amounts
reported in LNC's Ñnancial statements could be materially diÅerent. Throughout Management's Discussion
and Analysis, the application of these various critical accounting policies is addressed along with the eÅect of
changes in estimates and assumptions.
To provide an overall perspective on these critical accounting policies, and guidance as to the speciÑc
areas within Management's Discussion and Analysis where these critical accounting policies are discussed in
detail, a summary of critical accounting policies and the disclosure location is presented below.
Accounting for intangible assets requires numerous assumptions, such as estimates of expected future
proÑtability for various LNC operations and LNC's ability to retain its existing blocks of life and annuity
business in force. LNC's accounting policies for the intangible assets of deferred acquisition costs (""DAC'')
and the present value of acquired blocks of in-force policies (""PVIF'') are discussed within the Lincoln
Retirement, Life Insurance and Lincoln UK segments. LNC's overall accounting policy for other identiÑed
intangibles and goodwill is discussed within Results of Consolidated Operations. A key assumption aÅecting
the accounting for DAC and PVIF is the performance of equity markets. Sensitivity to changes in equity
market performance upon LNC's net income is discussed under the heading ""First Quarter 2003 Guidance for
the EÅects of Equity Market Volatility on Fee Income, DAC and GMDB'' found within LNC's discussion of
Consolidated Operating results. Additionally, LNC has goodwill resulting from various acquisitions. Refer to
the ""Accounting for Business Combinations and Goodwill and Other Intangible Assets'' section for discussion
of the evaluation of goodwill for impairment. Within the Investment Management segment, LNC has an
16
intangible asset for Deferred Dealer Commissions. A signiÑcant decrease in the equity markets could aÅect
the carrying value of this asset. Refer to the Investment Management Results of Operations section for future
discussion of this asset.
Determining whether a decline in current fair values for invested assets is other than a temporary decline
in value can frequently involve a variety of assumptions and estimates, particularly for investments that are not
actively traded on established markets. For instance, assessing the value of some investments requires an
analysis of expected future cash Öows. Some investment structures, such as collateralized debt obligations,
often represent selected levels, or tranches of underlying investments in a wide variety of underlying issuers.
LNC's accounting policies for its invested assets are discussed within Results of Consolidated Operations and
Consolidated Investments. SpeciÑc discussion of LNC's accounting policy for write-downs for securities that
were determined to have declines in fair value that were other than temporary along with analysis of securities
available-for-sale in an unrealized loss position can be found within Consolidated Investments.
To protect itself from a variety of equity market and interest rate risks that are inherent in many of LNC's
life insurance and annuity products, LNC uses various derivative instruments. Assessing the eÅectiveness of
these hedging programs and evaluating the carrying values of the related derivatives often involves a variety of
assumptions and estimates. LNC's accounting policies for derivatives are discussed within Results of
Consolidated Operations, Consolidated Investments and within the discussion of Quantitative and Qualitative
Disclosures About Market Risk. In addition, discussion of the potential impact on interest rate risk in a falling
rate environment is included in the ""Interest Rate Risk Ì Falling Rates'' section within LNC's discussion of
Quantitative and Qualitative Disclosures About Market Risk.
Establishing adequate liabilities for LNC's obligations to its policyholders requires assumptions to be
made regarding mortality and morbidity. The eÅect of variances in these assumptions is discussed within the
Lincoln Retirement and Life Insurance segments. In addition, refer to the discussion of personal accident and
disability income reserves included within the Acquisition and Divestiture discussion of the disposition of
LNC's former Reinsurance segment within Other Operations. As discussed within the Lincoln Retirement
segment, one of the liabilities is the reserve for Guaranteed Minimum Death BeneÑts (""GMDB''). A key
assumption aÅecting the accounting for GMDB is the performance of equity markets. Sensitivity to changes
in equity market performance upon GMDB and LNC's net income is discussed under the heading ""First
Quarter 2003 Guidance for the EÅects of Equity Market Volatility'' found within LNC's discussion of
Quantitative and Qualitative Disclosures About Market Risk.
Pursuant to the accounting rules for LNC's obligations to employees under its various retirement and
welfare beneÑt plans, LNC is required to make a large number of assumptions, such as the future performance
of Ñnancial markets and the composition of LNC's employee workforce in the future. LNC's accounting for
its employee plans is discussed in detail within Note 6 Employee BeneÑt Plans, which is included in the notes
to consolidated Ñnancial statements.
Establishing reserves for litigation and compliance-related regulatory actions inherently involve a variety
of estimates of potential future outcomes. These matters are discussed within Results of Consolidated
Operations and in the Lincoln UK segment, with additional detail provided within Note 7 Restrictions,
Commitments and Contingencies, which is included in the notes to consolidated Ñnancial statements.
As LNC responds to an ever-changing business environment and continues to adapt its organizational
and operational structures, the frequency of necessary restructuring activities increases. Establishing reserves
for the expected costs of these restructurings requires a variety of estimates and assumptions. The accounting
for LNC's restructurings is discussed within Results of Consolidated Operations and within Results of
Operations for each aÅected business segment, as well as within Note 12 Restructuring Charges included in
the notes to consolidated Ñnancial statements.
Continued access to capital markets and maintenance of favorable debt and claims paying ratings are
critical to LNC's future success. LNC's accounting, in a wide variety of areas, is inherently dependant upon
continued access to capital and maintaining adequate ratings. Detailed discussion of LNC's access to capital
markets, liquidity status and ratings are contained within Review of Consolidated Financial Condition.
17
Finally, it is LNC's policy to provide disclosure of commitments or guarantees so that its Ñnancial
statements present as complete a picture of LNC's Ñnancial condition as possible. The vast majority of these
commitments or guarantees relate to LNC's life insurance and retirement businesses and, as such, are
reÖected on LNC's balance sheet. Any oÅ-balance sheet commitments or guarantees that LNC is subject to
are disclosed within Review of Consolidated Financial Condition and Note 7 Restrictions, Commitments and
Contingencies which is included in the notes to consolidated Ñnancial statements.
On pages 19 through 55, the results of operations of LNC consolidated, LNC's four business segments
and ""Other Operations'' are presented and discussed. Pages 56 through 68 discuss LNC's consolidated
investments. Pages 68 through 73 discuss LNC's consolidated Ñnancial condition including liquidity and cash
Öow, and capital resources. Pages 73 through 81 provide LNC's quantitative and qualitative disclosures about
market risk. Please note that all amounts stated in this ""Management's Discussion and Analysis'' are on an
after-tax basis except where speciÑcally identiÑed as pre-tax.
This ""Management's Discussion and Analysis'' should be read in conjunction with the audited
consolidated Ñnancial statements and accompanying notes presented on pages 83 through 148.
18
Overview: Results of Consolidated Operations
Summary Information
Life insurance and annuity premiumsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Health insurance premiums ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Insurance fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment advisory fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net investment incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity in earnings of unconsolidated aÇliates ÏÏÏÏÏÏÏÏÏÏÏ
Realized gain (loss) on investments and derivative
instrumentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gain (loss) on sale of subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other revenue and feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Life insurance and annuity beneÑtsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Health beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Underwriting, acquisition, insurance and other expenses ÏÏ
Interest and debt expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Federal income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before cumulative eÅect of accounting
changesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative eÅect of accounting changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Items Included in Net income:
Increase
(Decrease)
2002
2001
(78%) (3%)
(94%) (17%)
(7%) (7%)
(7%) (8%)
(3%) (2%)
7% (21%)
(27%) (7%)
(19%) Ì
18% (33%)
(19%) (10%)
(20%) (13%)
2000
2002
Year Ended December 31
2001
(in millions)
$1,363.4
340.6
1,544.0
197.2
2,679.6
5.7
$ 295.6
20.3
1,434.4
183.3
2,608.3
(0.6)
$1,403.3
409.8
1,661.4
213.2
2,747.1
(0.4)
(114.5)
12.8
349.2
6,378.0
3,107.6
302.1
2,083.2
121.0
158.3
(28.3)
Ì
441.0
6,847.1
3,108.2
449.0
2,314.1
139.5
214.9
605.8
(15.6)
621.4
Ì
(271.5)
(8.3)
373.9
4,635.4
2,504.4
355.1
1,677.7
96.6
(90.0)
91.6
Ì
91.6
$ 590.2
$ 621.4
(84%) (5%)
$ (73.6)
$ (17.5)
Realized Gain (Loss) on Investments and
Derivative Instruments (after-tax) ÏÏÏÏÏÏÏÏÏÏÏÏ
Gain (Loss) on Sale of Subsidiaries (after-tax) ÏÏÏ
Restructuring Charges (after-tax)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
FAS 113 Reserve Development on Business Sold
$ (176.4)
(9.4)
2.0
15.0
(24.7)
through Indemnity Reinsurance (after-tax)ÏÏÏÏÏ
(199.1)
Ì
Cumulative EÅect of Accounting Changes
(after-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill Amortization (after-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
(15.6)
43.4
(80.2)
Ì
Ì
45.1
Summary
Comparison of 2002 to 2001
Net income decreased $498.6 million or 84%. The decrease in net income included an increase in realized
losses on investments and derivatives of $102.8 million and expenses totaling $199.1 million recorded in 2002
related to increases in reserves for the business sold through indemnity reinsurance to Swiss Re. The realized
losses on investments resulted from declines in value and the sale and write-downs of Ñxed maturity securities.
See the Consolidated Investment section for further discussion of this matter.
19
A signiÑcant contributor to the decrease in net income was the poor performance of the equity markets
impact on fee income, DAC and PVIF amortization and GMDB reserves and beneÑts. The equity market
impact is discussed in more detail within the discussion of results of operations by segment.
Consolidated revenue decreased primarily due to the reduction of revenue of $1,699.4 million (pre-tax),
excluding realized losses on investments, from the former Reinsurance segment in 2001. Another contributor
to the decline in revenue was the increase in realized losses on investments noted above. Included in 2002
revenue was $74.4 million (pre-tax) for the amortization of the deferred gain on indemnity reinsurance
compared to $20.4 million in 2001. The Lincoln Retirement and Lincoln UK segments experienced decreased
fee income due to the negative impact that 2001 and 2002 equity market declines had on average variable
annuity (Retirement) and unit-linked (Lincoln UK) account values. The Investment Management segment
had decreased investment advisory fees and other revenue and fees as a result of lower retail and institutional
assets under management during 2002. The decrease in assets under management was primarily a result of the
declining equity markets.
Consolidated expenses (excluding goodwill amortization, restructuring charges, reserve increases on
business sold through reinsurance and federal income taxes) decreased by $1,202.0 million or 22% largely due
to the sale of LNC's reinsurance business to Swiss Re in the fourth quarter of 2001. Expenses for the
operations of the former Reinsurance segment, excluding goodwill amortization, were $1,503.7 million in
2001. Expenses were negatively aÅected by the decline in the equity markets which resulted in negative
unlocking of DAC and PVIF in the Lincoln Retirement, Life Insurance and Lincoln UK business segments,
and increased reserves and payments for GMDB in the Lincoln Retirement segment.
For 2002, LNC reported a tax beneÑt of $90.0 million on $1.6 million of pre-tax earnings. This unusual
relationship between tax beneÑt and pre-tax earnings results from the fact that LNC has tax-preferred
investment income that does not change proportionately with the change in consolidated pre-tax earnings.
LNC's tax-preferred investment income is primarily the result of dividend received deductions attributable to
LNC's allocable share of dividend income generated by equity securities held within the Lincoln Retirement
segments' separate accounts. See note 4, Federal Income Taxes, to the consolidated Ñnancial statements for
more details.
Comparison of 2001 to 2000
Net income for 2001 was $590.2 million compared to $621.4 million for 2000, a $31.2 million or 5%
decrease. Restructuring charges, net of the release of liabilities, included in net income in 2001 and 2000 were
$24.7 million and $80.2 million, respectively. Contributing to the decrease in 2001 were realized losses on
investments and derivative instruments of $73.6 million in 2001 compared to $17.5 million in 2000. These
investment losses were due primarily to losses of $41.8 million (pre-tax) taken on Enron and Argentina
securities in the fourth quarter of 2001 in addition to increased write-downs of other securities throughout
2001 due to credit deterioration. Partially oÅsetting the additional losses in 2001 was the gain on sale of certain
reinsurance stock companies to Swiss Re of $15.0 million. The remaining $30.1 million decrease in Net
Income between years was primarily the result of decreased earnings from the Lincoln Retirement and
Investment Management segments, as well as LNC's distributors, LFA and LFD, which are reported in Other
Operations. These negative variances were partially oÅset by improved earnings from the Life Insurance
segment and the former Reinsurance segment, included within Other Operations. In addition, included in net
income for 2001 was one month's amortization of the deferred gain on the business transferred to Swiss Re via
indemnity reinsurance. There was also a decrease in the net loss from LNC Financing and Other Corporate
within Other Operations.
Total revenue, excluding realized gains and losses on investments and derivative instruments and gain on
sale of subsidiaries, decreased by $395.7 million or 6% in 2001 due primarily to lower fee income in the
Lincoln Retirement segment and lower investment advisory fees in the Investment Management segment
resulting from the depressed equity markets in 2001 and to a lesser extent to net outÖows in annuities and
investment products. In addition, Lincoln UK had a decrease in operating revenue due to lower business
volume along with lower fee income resulting from a downturn in the United Kingdom equity markets over
20
the last half of 2001. The former Reinsurance segment's operating revenue was down in 2001 as its results only
included eleven months of activity. Finally, LFA and LFD included in Other Operations had lower sales
revenue largely attributable to the volatile equity markets. Partially oÅsetting these negative variances, the
Life Insurance segment had increased operating revenue due to growth in life insurance in-force.
Total expenses, exclusive of restructuring charges and Federal income taxes, decreased by $329.9 million
or 6% in 2001 due primarily to decreased expenses in the Lincoln UK segment as a result of the decrease in
business volume along with eÅective expense management. The former Reinsurance segment had a decrease
due to only eleven months of expenses being reported for its operations. However, included in 2001 expenses
for the former Reinsurance segment were losses recorded for the events of September 11. The Lincoln
Retirement segment had a decrease in expenses due primarily to less amortization of deferred acquisition costs
and other intangible assets partially oÅset by increased operating and administrative expenses and beneÑts
expenses. The Investment Management segment also experienced decreased expenses due to eÅective expense
management and lower amortization of other intangibles assets. Partially oÅsetting these positive variances
were increases in expenses in the Life Insurance segment, as well as LFD and LFA. Expenses increased in the
Life Insurance segment primarily as a result of the growth in in-force, which drove interest credited to
policyholders higher. LFD had higher expenses primarily as a result of its investment in new wholesalers
during 2001 and LFA experienced an increase in general and administrative expenses partially oÅset by a
decrease in commissions and other volume-related expenses. These expenses fell as a direct result of lower
sales volume in 2001. For further discussion of the results of operations, see the discussion of the results of
operations by segment.
LNC's domestic consolidated product deposits and net Öows were as follows:
Year Ended December 31
2001
2000
2002
(in billions)
Deposits (1):
Lincoln Retirement SegmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Life Insurance Segment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment Management Segment (including both retail and institutional
deposits)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidating Adjustments (2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 6.4
2.1
$ 6.4
1.9
$ 5.2
1.9
10.9
(1.4)
7.5
(1.0)
8.4
(0.4)
Total Deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$18.0
$14.8
$15.1
Net Flows (1):
Lincoln Retirement SegmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Life Insurance Segment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment Management Segment (including both retail and institutional net
Öows) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidating Adjustments (2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 0.5
1.3
$ 0.1
1.2
$(2.9)
1.2
2.9
Ì
(0.6)
(0.2)
(7.2)
1.4
Total Net Flows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 4.7
$ 0.5
$(7.5)
(1) For additional detail of deposit and net Öow information see the discussion of the Results of Operations
by Segment.
(2) Consolidating adjustments represent the elimination of deposits and net Öows on products aÅecting more
than one segment.
First Quarter 2003 Guidance for the Estimated EÅect of Equity Market Volatility
In prior periods, Lincoln National Corporation (""LNC'') provided guidance on the estimated eÅect of
equity market volatility on its 2002 results. The following guidance is being provided for purposes of modeling
the expected eÅects of equity market volatility for the Ñrst quarter of 2003. As will be explained in greater
21
detail below, the eÅects on LNC's results of signiÑcant volatility in equity markets are complex and are not
expected to be proportional for market increases and market decreases. The Ñrst quarter 2003 information
provided below is based upon market conditions and LNC's mix of business as of the beginning of the year.
This guidance can be expected to change as actual circumstances change. Although LNC believes this
guidance provides reasonable estimates based upon conditions as of January 1, 2003, LNC claims no
responsibility for updating this forward-looking information.
This guidance is intended to provide a general indication of the expected eÅect of equity market volatility
on LNC's fee income; deferred acquisition costs (""DAC'') and present value of in-force (""PVIF'') intangible
assets; and guaranteed minimum death beneÑt (""GMDB'') reserves. Excluded from this guidance is the eÅect
that equity market changes may have upon LNC's realized and unrealized gains and losses on investments and
intangible assets, other than DAC and PVIF. For example, write-downs for impairment of goodwill and
deferred dealer commission assets may be necessary under certain market conditions. These matters are not
included within the guidance provided in this document.
In measuring the estimated eÅects of changes in equity markets on its Retirement segment, LNC uses
the S&P 500 index. LNC has generally found that the S&P 500 index is reasonably correlated to the eÅect of
overall equity markets performance on this segment's account values. Because LNC's fee income earned on its
variable annuity business is determined daily, the change in the S&P 500 on a daily average basis relative to
the level of the S&P 500 at the beginning of each quarter provides a reasonable indication of the impact
quarterly changes in equity markets have on the Retirement segment's fee income. Because end of period
account values are used for computing DAC unlocking and for incurred GMDB costs, the end of period
change in the S&P 500 is used in measuring the estimated market impact of DAC unlocking and for the
impact associated with incurred GMDB costs. In addition, because DAC and GMDB calculations have an
assumed 9% positive annual equity market return, or a 2.25% quarterly assumption, variances in actual market
performance relative to these calculation assumptions will generate positive or negative DAC unlocking and
GMDB adjustments.
It is important to understand that the actual eÅect on fee income of market changes in the current quarter
of an equity market change and the eÅect in the immediately following quarter will not be equal to a pro-rata
25% of the estimated annualized eÅect of the market change. This is due to the fact that the actual change in
fee income in the immediate quarter during which the market changes is measured by the change in actual
variable account values from the beginning of the quarter compared to the average balance of variable account
values for the quarter. The change in fee income due to the change from average account values to ending
account values does not occur in the immediate quarter of the market change; rather, that change in fee
income will occur in the quarter following the market change. LNC estimates that this lagging eÅect for the
fourth quarter 2002 equity markets change will create a decrease of $0.5 million in fee income in the Ñrst
quarter of 2003, because average account values for the fourth quarter of 2002 exceeded the level of ending
account values at December 31, 2002.
LNC also uses the S&P 500 index when describing the general eÅects of changes in equity markets for
the Life Insurance segment. For the Lincoln UK segment, the FTSE 100 index provides a reasonable measure
for approximating the eÅect of equity markets performance on earnings. LNC estimates that the lagging eÅect
for the fourth quarter 2002 equity markets change will create a decrease of $0.1 million in fee income for
Lincoln UK in the Ñrst quarter of 2003, because average account values for the fourth quarter of 2002
exceeded the level of ending account values at December 31, 2002.
Additional market indices are used in measuring the eÅects of the market on the results of LNC's
Investment Management segment. All of the relevant equity market indices (S&P, NASDAQ and MSCI
EAFE) declined during the third quarter, ranging from a 19.9% NASDAQ decline to a 19.7% decline in the
MSCI EAFE index. The fourth quarter increases were a 13.9% increase in the NASDAQ and a 6.5% increase
in the MSCI EAFE index. The ongoing eÅect of the fourth quarter equity markets increase is expected to be a
$0.1 million increase in the Ñrst quarter of 2003.
The following discussion concerning the estimated eÅects of ongoing equity market volatility on LNC's
earnings is intended to be illustrative. Actual eÅects may vary depending on a variety of factors, many of which
22
are outside of LNC's control, such as changing customer behaviors that might result in changes in the mix of
LNC's business between variable or Ñxed annuity contracts, switching between investment alternatives
available within variable products, or changes in policy lapsation rates. The relative eÅects shown in the
illustrative scenarios presented below should not be considered to be indicative of the proportional eÅects on
earnings that more signiÑcant changes in equity markets may generate. Such non-proportional eÅects include
those discussed earlier, such as incurred GMDB costs and DAC unlocking.
Since the eÅect of continued equity market volatility is complex and subject to a variety of estimates and
assumptions, such as assumed rates of long-term equity market performance, it is diÇcult to provide
information that can be reliably applied to predict earnings eÅects over a broad range of equity markets
performance alternatives. But in an eÅort to provide some insight into these matters, LNC has provided below
illustrative examples of the eÅects that equity market volatility might be expected to have on LNC's earnings.
The underlying assumptions regarding these illustrations are as follows:
1) The Ñrst scenario assumes that equity markets remain unchanged from their respective levels at
December 31, 2002 through the Ñrst quarter of 2003.
2) The second scenario assumes that from December 31, 2002 through the end of the Ñrst quarter of
2003 equity markets increase smoothly by 2.5%.
3) The third scenario assumes that from December 31, 2002 through the end of the Ñrst quarter of 2003
equity markets decline smoothly by 2.5%.
As the above assumptions indicate, actual equity market changes that may have occurred since
December 31, 2002 up to the date of issuance of this guidance are not being considered; rather, the examples
that follow are provided to illustrate the eÅects of a hypothetical change in equity markets from December 31,
2002. The following tables are examples of the estimated eÅects on earnings that might be expected for each
of these scenarios.
Scenario #1:
No change in equity markets from December 31, 2002 through March 31, 2003.
Estimated EÅect on First Quarter of 2003 Results (Million $):
Segment
Market EÅects Ongoing EÅects of
Market Changes
from 4Q02 on
1Q03
Reported in
Fourth
Quarter 2002
Current EÅects in
First Quarter 2003 First Quarter 2003
Total EÅect in
Retirement
Fees Q1 EÅect* ÏÏÏÏÏÏÏÏÏÏ
Fees Q4 EÅect* ÏÏÏÏÏÏÏÏÏÏ
Total Fee Income ÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
GMDB ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DAC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retirement
Total EÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Life Insurance Total EÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment
Management
Lincoln UK
Total EÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fee Income* ÏÏÏÏÏÏÏÏÏÏÏÏÏ
DAC/PVIF ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total EÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total EÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lincoln UK
LNC Total
$ Ì
$2.8
$2.8
$ Ì
$2.5
$0.6
$5.9
$0.6
$1.4
$0.5
$1.4
$1.9
$9.8
$ Ì
$(0.5)
$(0.5)
$ Ì
$ Ì
$ Ì
$(0.5)
$ Ì
$ 0.1
$(0.1)
$ Ì
$(0.1)
$(0.5)
$ Ì
$ Ì
$ Ì
$ Ì
$(5.9)
$ Ì
$(5.9)
$(0.2)
$ Ì
$ Ì
$(0.9)
$(0.9)
$(7.0)
$ Ì
$(0.5)
$(0.5)
$ Ì
$(5.9)
$ Ì
$(6.4)
$(0.2)
$ 0.1
$(0.1)
$(0.9)
$(1.0)
$(7.5)
* DiÅerences exist in the market change eÅect on fee income for the current quarter, as compared to the
ongoing quarterly eÅect, because the change in fee income in the immediate quarter is determined by the
change in beginning variable account balances to average variable account balances for the current quarter.
The change in fee income in the next subsequent quarter is determined by the change in average account
values to ending variable account values that occurred due to the market changing in the preceding quarter.
23
However, in all following quarters, the ongoing eÅect of changes in the market occurring in the current
quarter will be determined by the diÅerence in beginning of quarter to end of quarter variable account
balances. For purposes of this guidance, the change in account values is assumed to correlate with the
change in the relevant index.
Scenario #2:
2.5% increase in equity markets from December 31, 2002 to March 31, 2003
occurs smoothly during the quarter.
Estimated EÅect on First Quarter of 2003 Results (Million $):
Segment
Market EÅects Ongoing EÅects of
Market Changes
from 4Q02
on 1Q03
Reported in
Fourth
Quarter 2002
Current EÅects
in
Total EÅect
in
First Quarter 2003 First Quarter 2003
Retirement
Fees Q1 EÅect* ÏÏÏÏÏÏÏÏÏÏ
Fees Q4 EÅect* ÏÏÏÏÏÏÏÏÏÏ
Total Fee Income ÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
GMDB ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DAC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retirement
Total EÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Life Insurance Total EÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment
Management
Lincoln UK
Total EÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fee Income* ÏÏÏÏÏÏÏÏÏÏÏÏÏ
DAC/PVIF ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total EÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total EÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lincoln UK
LNC Total
$ Ì
$2.8
$2.8
$ Ì
$2.5
$0.6
$5.9
$0.6
$1.4
$0.5
$1.4
$1.9
$9.8
$ Ì
$(0.5)
$(0.5)
$ Ì
$ Ì
$ Ì
$(0.5)
$ Ì
$ 0.1
$(0.1)
$ Ì
$(0.1)
$(0.5)
$ 0.6
$ Ì
$ 0.6
$ Ì
$(3.9)
$ Ì
$(3.3)
$ Ì
$ 0.4
$ 0.1
$ 0.1
$ 0.2
$(2.7)
$ 0.6
$(0.5)
$ 0.1
$ Ì
$(3.9)
$ Ì
$(3.8)
$ Ì
$ 0.5
$ Ì
$ 0.1
$ 0.1
$(3.2)
* See * under Scenario #1 for explanation.
Scenario #3:
2.5% decline in equity markets from December 31, 2002 to March 31, 2003
occurs smoothly during the quarter.
Estimated EÅect on First Quarter of 2003 Results (Million $):
Segment
Market EÅects Ongoing EÅects of
Market Changes
from 4Q02
on 1Q03
Reported in
Fourth
Quarter 2002
Current EÅects
in
Total EÅect
in
First Quarter 2003 First Quarter 2003
Retirement
Fees Q1 EÅect* ÏÏÏÏÏÏÏÏÏÏ
Fees Q4 EÅect* ÏÏÏÏÏÏÏÏÏÏ
Total Fee Income ÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
GMDB ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DAC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total EÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retirement
Life Insurance Total EÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment
Management
Total EÅect** ÏÏÏÏÏÏÏÏÏÏÏÏ
$ Ì
$(0.5)
$(0.5)
$ Ì
$ Ì
$ Ì
$(0.5)
$ Ì
$ 0.1
$ (0.6)
$ Ì
$ (0.6)
$ (0.6)
$(10.7)
$ (2.4)
$(14.3)
$ (0.5)
$ (0.6)
$ (0.5)
$ (1.1)
$ (0.6)
$(10.7)
$ (2.4)
$(14.8)
$ (0.5)
$ (0.4)
$ (0.3)
$ Ì
$2.8
$2.8
$ Ì
$2.5
$0.6
$5.9
$0.6
$1.4
24
Market EÅects Ongoing EÅects of
Market Changes
from 4Q02
on 1Q03
Reported in
Fourth
Quarter 2002
Current EÅects
in
Total EÅect
in
First Quarter 2003 First Quarter 2003
Fee Income* ÏÏÏÏÏÏÏÏÏÏÏÏÏ
DAC/PVIF ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total EÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total EÅect ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$0.5
$1.4
$1.9
$9.8
$(0.1)
$ Ì
$(0.1)
$(0.5)
$ (0.1)
$ (1.9)
$ (2.0)
$(17.2)
$ (0.2)
$ (1.9)
$ (2.1)
$(17.7)
Segment
Lincoln UK
Lincoln UK
LNC Total
* See * under Scenario #1 for explanation.
** The above table excludes the impact of an impairment of the deferred dealer commission asset within the
Investment Management segment. For instance, a review of the deferred dealer commission asset was
performed as of March 10, 2003. Based on information currently available, it is estimated that a decline of
approximately 3% in the equity markets from March 10, 2003 levels may trigger a loss, which would range
from approximately $7.4 million to $11.4 million after-tax with the application of assumed discount rates
ranging between 10% to 18% for purposes of measuring the fair value of the deferred dealer commission
asset. The estimated balance of the deferred dealer commission asset as of March 10, 2003 was
approximately $50 million.
The above examples are based upon the estimated annual eÅect on earnings for each one-percentage
point change in relevant equity market indices. Taking one-fourth of this annual estimate would generate the
expected eÅect of the equity market change on quarterly results, with the exception of DAC unlocking and
GMDB incurred cost calculations where the eÅect is fully reÖected in one quarter. The estimated annual
eÅect in millions of dollars per one-percentage change and the changes in each of the relevant market indices
used in the above examples, are listed in the following table.
Segment and EÅect
Relevant Measure
No Change in Market
2.50% increase in
First Quarter 2003
2.50% decline in
First Quarter 2003
Retirement Ì Fee
Income
Retirement Ì Other
Items
Ave Daily Change in
S&P 500
Actual Change in S&P
500 vs. Expected
Retirement Ì GMDB
Incurred Costs
Actual Change in S&P
500 vs. Expected
Retirement Ì DAC
Actual Change in S&P
500 vs. Expected
$2.0 M £ 0.0
$2.0 M £ 1.25
$2.0 M £ (1.25)
$0.5 M £ 0.0
$0.5 M £ 0.25
$0.5 M £ (4.75)
($5.9M)
($5.9M) ° $0.8M £ 2.5 ($5.9M) ° ($1.9 M) £ (2.5)
$0.0 M £ 0.0
$0.0 M £ 0.25
$0.5 M £ (4.75)
Life Insurance Ì DAC Actual Change in S&P
$0.11 M £ (2.25)
$0.11 M £ 0.25
$0.11 M £ (4.75)
500 vs. Expected
Investment
Blend of Market Indices
$0.6 M £ 0.0
$0.6 M £ 2.5
$0.6 M £ (2.5)*
Management Ì Total*
Lincoln UK Ì Fee
Income
Ave Daily Change in
FTSE 100
Lincoln UK Ì
DAC/PVIF
Actual Change in FTSE
100 vs. Expected Change
$0.2 M £ 0.0
$0.2 M £ 1.25
$0.2 M £ (1.25)
$0.4 M £ (2.25)
$0.3 M £ 0.25
$0.4 M £ (4.75)
* The above table excludes the impact of an impairment of the deferred dealer commission asset within the
Investment Management segment. For instance, a review of the deferred dealer commission asset was
performed as of March 10, 2003. Based on information currently available, it is estimated that a decline of
approximately 3% in the equity markets from March 10, 2003 levels may trigger a loss, which would range
from approximately $7.4 million to $11.4 million after-tax with the application of assumed discount rates
ranging between 10% to 18% for purposes of measuring the fair value of the deferred dealer commission
asset. The estimated balance of the deferred dealer commission asset as of March 10, 2003 was
approximately $50 million.
As the above table indicates, the annual eÅect of a one percent change in equity markets varies depending
upon the severity of the change. Presented below are estimated one million dollar eÅects for various market
changes that are currently used by LNC in modeling the Lincoln Retirement segment. These estimated
25
eÅects are subject to ongoing modiÑcation, as they are particularly sensitive to the mix of business and to the
actual level of variable account balances.
The following table provides the annual eÅect for changes in equity markets for the Lincoln Retirement
segment related to fee income and other:
20% °
Decline
11 Ó 20%
Decline
6 Ó 10%
Decline
1 to 5%
Decline
No Change
1 to 5%
Increase
6 Ó 10%
Increase
11% °
($ Millions for each 1% Change in Relevant Market Index)
Fee Income
Other
(1.6)
(0.5)
(1.8)
(0.5)
(1.9)
(0.5)
(2.0)
(0.5)
Ì
Ì
2.0
0.5
2.1
0.5
2.2
0.5
The estimated annual eÅects indicated in the table above are applicable for the Ñrst quarter of 2003. For
example, assume an estimate is being computed for the quarterly eÅect on Lincoln Retirement's fee income
due to a 2.5% increase in the markets occurring in the Ñrst quarter of 2003. In this example, the expected
quarterly eÅect of a Ñrst quarter 2.5% increase is estimated as: ($2.0*1.25/4) • $0.625 million.
The table provided below contains information for use in estimating the Ñrst quarter 2003 eÅect for
changes in equity markets for the Lincoln Retirement segment related to GMDB and DAC. For GMDB,
quarterly results will include a reserve adjustment. This is due to the fact that LNC has established the
GMDB reserves net of anticipated future GMDB fee revenues. As a result, an adjustment will be required to
increase GMDB reserves during periods where a GMDB Net Amount At Risk exists.
Based upon the Net Amount At Risk for GMDB at December 31, 2002, the Ñrst quarter 2003 GMDB
reserve adjustment is estimated at $5.9 million (included in the no change column in the table below).
GMDB
DAC
20% °
Decline
11 Ó 20%
Decline
6 Ó 10%
Decline
1 to 5%
Decline
No Change
1 to 5%
Increase
6 Ó 10%
Increase
11% °
($ Millions for each 1% Change in Relevant Market Index)
(2.7)
(0.9)
(2.3)
(0.6)
(2.1)
(0.6)
(1.9)
(0.5)
(5.9)
Ì
0.8
Ì
1.0
0.3
1.3
0.4
The estimated quarterly eÅects indicated in the table above are applicable for the Ñrst quarter of 2003.
For example, assume an estimate is being computed for the quarterly eÅect on Lincoln Retirement's GMDB
reserve due to a 2.5% increase in the equity markets occurring in the Ñrst quarter of 2003. The estimated
quarterly eÅect is calculated as follows: $(5.9) ° 0.8*2.5 • $(3.9) million.
Accounting for Business Combinations and Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting
Standards No. 141, ""Business Combinations'' (""FAS 141''), and No. 142, ""Goodwill and Other Intangible
Assets'' (""FAS 142''). FAS 141 is eÅective for all business combinations initiated after June 30, 2001, and
FAS 142 is eÅective for Ñscal years beginning after December 15, 2001. Under the new rules, goodwill and
indeÑnite lived intangible assets are no longer amortized, but are subject to impairment tests conducted at
least annually in accordance with the new standards. Intangible assets that do not have indeÑnite lives
continue to be amortized over their estimated useful lives. LNC adopted FAS 142 on January 1, 2002. After
consideration of the provisions of the new standards regarding proper classiÑcation of goodwill and other
intangible assets on the consolidated balance sheet, LNC did not reclassify any goodwill or other intangible
balances held as of January 1, 2002.
In compliance with the transition provision of FAS 142, LNC completed the Ñrst step of the transitional
goodwill impairment test during the second quarter of 2002. The valuation techniques used by LNC to
estimate the fair value of the group of assets comprising the diÅerent reporting units varied based on the
characteristics of each reporting unit's business and operations. A number of valuation approaches, including
discounted cash Öow modeling, were used to assess the goodwill of the reporting units within LNC's Lincoln
Retirement, Life Insurance and Lincoln UK segments. Valuation approaches combining multiples of
revenues, earnings before interest, taxes, depreciation and amortization (""EBITDA'') and assets under
management were used to estimate the fair value of the reporting units within LNC's Investment Manage-
26
ment segment. The results of the Ñrst step of the tests indicated that LNC did not have impaired goodwill.
LNC has chosen October 1 as its annual review date. As such, LNC performed another valuation review
during the fourth quarter of 2002. The results of the Ñrst step of the tests performed as of October 1, 2002
indicated that LNC did not have impaired goodwill. The valuation techniques used by LNC for each reporting
unit were consistent with those used during the transitional testing.
As a result of the application of the non-amortization provisions of the new standards, LNC had an
increase in net income of $41.7 million ($0.22 per common share on a fully diluted basis) for the year ended
December 31, 2002.
Accounting for the Impairment or Disposal of Long-lived Assets
In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 144, ""Accounting for the Impairment or Disposal of Long-Lived Assets'' (""FAS 144''), which
supersedes Statement of Financial Accounting Standards No. 121, and the accounting and reporting
provisions of APB Opinion No. 30. FAS 144 is eÅective for Ñscal years beginning after December 15, 2001.
LNC adopted FAS 144 on January 1, 2002 and the adoption of the Statement did not have a material impact
on the consolidated Ñnancial position and results of operations of LNC.
Accounting for Costs Associated with Exit or Disposal Activities
In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 146, ""Accounting for Costs Associated with Exit or Disposal Activities'' (""FAS 146''), which
addresses Ñnancial accounting and reporting for costs associated with exit or disposal activities and nulliÑes
Emerging Issues Task Force Issue No. 94-3, ""Liability Recognition for Certain Employee Termination
BeneÑts and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)'' (""Issue
94-3''). The principal diÅerence between FAS 146 and Issue 94-3 is that FAS 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when the liability is incurred, rather than at the
date of an entity's commitment to an exit plan. FAS 146 is eÅective for exit or disposal activities after
December 31, 2002. Adoption of FAS 146 by LNC will result in a change in timing of when expense is
recognized for restructuring activities after December 31, 2002.
Accounting for Stock-Based Compensation Ì Transition and Disclosure. On December 31, 2002, the
Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148,
""Accounting for Stock-Based Compensation Ì Transition and Disclosure'' (""FAS 148''), which provides
alternative methods of transition for entities that change to the fair value method of accounting for stock-
based employee compensation. In addition, FAS 148 amends the disclosure provisions of Statement of
Financial Accounting Standards No. 123, ""Accounting for Stock-Based Compensation,'' to require expanded
and more prominent disclosure of the eÅects of an entity's accounting policy with respect to stock-based
employee compensation on reported net income and earnings per share in annual and interim Ñnancial
statements.
The three transition methods provided under FAS 148 are the prospective, the modiÑed prospective and
the retroactive restatement methods. LNC will adopt the retroactive restatement method, which requires that
companies restate all periods presented to reÖect stock-based employee compensation cost under the fair value
accounting method in FAS 123 for all employee awards granted, modiÑed or settled in Ñscal years beginning
after December 15, 1994. FAS 148's amendment of the transition and annual disclosure requirements of
FAS 123 is eÅective for Ñscal years ending after December 15, 2002. LNC will adopt the fair value method of
accounting under FAS 123, as amended by FAS 148, as of January 1, 2003 and will present restated Ñnancial
statements for the years 2002, 2001 and 2000 in its Ñrst quarter 2003 Ñling on Form 10-Q (see Note 1 for pro
forma net income and pro forma basic and diluted earnings per share amounts for 2002, 2001 and 2000 and
Note 6 for discussion of stock-based employee compensation cost.).
EÅective January 1, 2003, LNC's stock option employee compensation plan and long-term cash incentive
compensation plan were revised and combined to provide for performance vesting, and to provide for awards
that may be paid out in a combination of stock options, performance shares of LNC stock and cash. The
27
performance measures for the initial grant under the new plan will be calculated over a three-year period from
grant date and will compare LNC's performance relative to a selected group of peer companies. Comparative
performance measures will include relative growth in earnings per share, return on equity and total share
performance. Certain participants in the new plans will select from seven diÅerent combinations of stock
options, performance shares and cash in determining the form of their award. Other participants will have
their award paid in performance shares. This plan will replace the current LNC stock option plan; however,
the separate stock option incentive plans established by Delaware Investments U.S., Inc. (""DIUS'') and
DIAL Holding Company, Inc. (""DIAL''), both wholly-owned subsidiaries of Delaware Management
Holdings, Inc., will continue. The revised long-term incentive plan for 2003 is expected to result in about the
same amount of total expense as would have been reported in 2002 for the stock option employee
compensation plan, if stock options had been expensed, combined with previously expensed accrual for the
long-term cash incentive plan. This estimated 2003 expense is subject to uncertainty given that several
assumptions are required to be made regarding LNC's performance.
Accounting for Variable Interest Entities
In January 2003, the Financial Accounting Standards Board issued Financial Accounting Standards
Board Interpretation No. 46, ""Consolidation of Variable Interest Entities'' (""Interpretation 46''), which
requires the consolidation of variable interest entities (""VIE'') by an enterprise if that enterprise has a variable
interest that will absorb a majority of the VIE's expected losses if they occur, receive a majority of the entity's
expected residual returns if they occur, or both. If one enterprise will absorb a majority of a VIE's expected
losses and another enterprise will receive a majority of that VIE's expected residual returns, the enterprise
absorbing a majority of the losses shall consolidate the VIE. VIE refers to an entity in which equity investors
do not have the characteristics of a controlling Ñnancial interest or do not have suÇcient equity at risk for the
entity to Ñnance its activities without additional subordinated Ñnancial support from other parties. This
Interpretation applies in the third quarter of 2003 to VIEs in which an enterprise holds a variable interest that
is acquired before February 1, 2003. This Interpretation may be applied prospectively with a cumulative-eÅect
adjustment as of the date on which it is Ñrst applied or by restating previously issued Ñnancial statements for
one or more years with a cumulative-eÅect adjustment as of the beginning of the Ñrst year restated.
Among the matters that LNC is currently reviewing in connection with the third quarter 2003 eÅective
date of Interpretation No. 46 to existing VIEs is the potential application to Collateralized Debt Obligation
(CDO) pools that are managed by LNC. If the fees earned by LNC for managing these CDOs are required to
be included in the analysis of expected residual returns, it is possible that such CDO pools would fall under the
consolidation requirements of Interpretation No. 46. While LNC does not currently have access to all
information necessary to determine the ultimate eÅects of such a required consolidation (because LNC is not
the trustee or the administrator to the CDOs), based upon currently available information LNC estimates that
the eÅect of consolidation would result in recording additional assets and liabilities on LNC's consolidated
balance sheet of about $1.3 billion. If such liabilities are required to be recorded, LNC would disclose that
such liabilities are without recourse to LNC, as LNC's role of investment manager for such CDO pools does
not expose LNC to risk of loss.
Although LNC and the industry continue to review the new rules, at the present time LNC does not
believe there are other signiÑcant VIEs that would result in consolidation with LNC, beyond the managed
CDOs discussed above.
Accounting for ModiÑed Coinsurance
Currently, there are ongoing discussions surrounding the implementation and interpretation of SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities'', by the Financial Accounting
Standards Board's (""FASB'') Derivative Implementation Group regarding receivables and payables that are
indexed to a pool of assets; and speciÑc to LNC, modiÑed coinsurance agreements and coinsurance with funds
withheld reinsurance agreements that reference a pool of securities. An exposure draft for this issue has been
issued by the FASB. It is not expected to be Ñnalized by the FASB until sometime in the second quarter of
2003. If the deÑnition of derivative instruments is altered, this may impact LNC's prospective reported
28
consolidated net income and consolidated Ñnancial position. Until the FASB Ñnalizes the Statement 133
Implementation Issue, LNC is unable to determine what, if any, impact it will have on LNC's consolidated
Ñnancial statements.
Restructuring Charges
During 1998, LNC implemented a restructuring plan relating to the integration of existing life and
annuity operations with the new business operations acquired from CIGNA Corporation (""CIGNA'') and a
second restructuring plan relating to the streamlining of LNC's corporate center operations. The aggregate
charges associated with these two unrelated restructuring plans totaled $34.3 million after-tax ($52.8 million
pre-tax) and were included in Underwriting, Acquisition, Insurance and Other Expenses on the Consolidated
Statement of Income for the year ended December 31, 1998. These aggregate pre-tax costs include
$19.6 million for employee severance and termination beneÑts, $9.9 million for asset impairments and
$23.3 million for costs relating to exiting business activities. The CIGNA restructuring plan was completed in
the Ñrst quarter of 2000. During the fourth quarter of 2000, $0.5 million (pre-tax) of the original charge to
downsize LNC's corporate center operations was reversed. This plan was completed in the third quarter of
2002 due to the termination of the lease, which resulted from LNC's purchase and ultimate sale of the
abandoned building. The remaining $0.2 million related to the terminated lease was reversed as a reduction in
restructuring costs during the third quarter of 2002. Total pre-tax costs of $56.2 million were expended or
written-oÅ under these restructuring plans.
During 1999, LNC implemented restructuring plans relating to 1) the downsizing and consolidation of
the operations of Lynch & Mayer, Inc. (""Lynch & Mayer''); 2) the discontinuance of HMO excess-of-loss
reinsurance programs and 3) the streamlining of Lincoln UK's operations. The aggregate charges associated
with these three unrelated restructuring plans totaled $21.8 million after-tax ($31.8 million pre-tax) and were
included in Underwriting, Acquisition, Insurance and Other Expenses on the Consolidated Statement of
Income for the year ended December 31, 1999. During the fourth quarter of 1999, $3.0 million (pre-tax) of
the original charge recorded for the Lynch & Mayer restructuring plan was reversed as a reduction of
restructuring costs due primarily to a change in estimate for space costs. In addition, during the fourth quarter
of 1999, $1.5 million (pre-tax) associated with lease terminations was released into income. During the fourth
quarter of 2000, the Lynch & Mayer restructuring plan was completed and $0.3 million (pre-tax) of the
original charge recorded was reversed as Lynch & Mayer was able to successfully exit certain contracts
without any further obligations or penalties. Also, during the fourth quarter of 2000, $1.0 million (pre-tax) of
the original charge for the discontinuance of HMO excess-of-loss reinsurance programs was reversed. During
the fourth quarter of 2001, the remaining restructuring reserve of $0.2 million relating to the HMO excess-of-
loss reinsurance programs was transferred to Swiss Re as part of its acquisition of LNC's reinsurance
operations. Actual pre-tax costs totaling $24.8 million have been expended or written-oÅ for all three plans
through December 31, 2002. As of December 31, 2002, a balance of $2.5 million remains in the restructuring
reserve for the Lincoln UK plan and is expected to be utilized in the completion of this plan. Additional details
of each of the three restructuring plans are discussed in Note 12 to the consolidated Ñnancial statements.
During 2000, LNC implemented restructuring plans relating to 1) the downsizing and consolidation of
the operations of Vantage Global Advisors, Inc. (""Vantage''); 2) the exit of all direct sales and sales support
operations of Lincoln UK and the consolidation of its Uxbridge home oÇce with its Barnwood home oÇce,
and 3) the downsizing and consolidation of the investment management operations of Lincoln Investment
Management. The Vantage restructuring charge was recorded in the second quarter, the Lincoln UK
restructuring charge was recorded in the third and fourth quarters, and the Lincoln Investment Management
restructuring was recorded in the fourth quarter of 2000. The aggregate charges associated with all
restructuring plans entered into during 2000 totaled $81.8 million after-tax ($107.4 million pre-tax). These
charges were included in Underwriting, Acquisition, Insurance and Other Expenses on the Consolidated
Statement of Income for the year ended December 31, 2000. The component elements of these aggregate pre-
tax costs include employee severance and termination beneÑts of $33.8 million, write-oÅ of impaired assets of
$40.9 million and other exit costs of $32.7 million. During the fourth quarter of 2000, $0.6 million (pre-tax) of
the original charge recorded for the Vantage restructuring plan was reversed as a reduction of restructuring
29
costs due primarily to changes in estimates associated with severance and abandoned leased oÇce space costs.
All expenditures and write-oÅs for the Lincoln Investment Management restructuring plan were completed in
the third quarter of 2002 and $0.4 million of the original reserve was released. The release of the reserve was
primarily due to LNC's purchase and ultimate sale of the vacant oÇce space on terms, which were favorable
to what was included in the original restructuring plan for rent on this oÇce space. In the fourth quarter of
2002, $1.7 million of the Lincoln UK restructuring reserve was released as a result of new tenants being
contracted for several of the abandoned oÇce facilities on terms that were better than originally expected.
Actual pre-tax costs totaling $95.0 million have been expended or written oÅ for these plans through
December 31, 2002. As of December 31, 2002, a balance of $9.7 million remains in the restructuring reserve
for the Lincoln UK plan and is expected to be utilized in the completion of the plan. Additional details of each
of the three restructuring plans are discussed in Note 12 to the consolidated Ñnancial statements.
During 2001, LNC implemented restructuring plans relating to 1) the consolidation of the Syracuse
operations of Lincoln Life & Annuity Company of New York into the Lincoln Retirement segment's
operations in Fort Wayne, Indiana and Portland, Maine; 2) the elimination of duplicative functions in the
Schaumburg, Illinois operations of First Penn-PaciÑc, and the absorption of these functions into the Lincoln
Retirement and Life Insurance segments operations in Fort Wayne, Indiana and Hartford, Connecticut;
3) the reorganization of the life wholesaling function within the independent planner distribution channel,
consolidation of retirement wholesaling territories, and streamlining of the marketing and communications
functions in LFD; 4) the reorganization and consolidation of the life insurance operations in Hartford,
Connecticut related to the streamlining of underwriting and new business processes and the completion of
outsourcing of administration of certain closed blocks of business; 5) the consolidation of the Boston,
Massachusetts investment and marketing oÇce with the Philadelphia, Pennsylvania investment and marketing
operations in order to eliminate redundant facilities and functions within the Investment Management
segment 6) the combination of LFD channel oversight, positioning of LFD to take better advantage of
ongoing ""marketplace consolidation'' and expansion of the customer base of wholesalers in certain territories
and 7) the consolidation of operations and space in LNC's Fort Wayne, Indiana operations.
The Syracuse restructuring charge was recorded in the Ñrst quarter of 2001, the Schaumburg, Illinois
restructuring charge was recorded in the second quarter of 2001, the LFD restructuring charges were recorded
in the second and fourth quarters of 2001, and the remaining restructuring charges were all recorded in the
fourth quarter of 2001. The aggregate charges associated with all restructuring plans entered into during 2001
totaled $24.6 million after-tax ($38.0 million pre-tax). The component elements of these aggregate pre-tax
costs include employee severance and termination beneÑts of $12.2 million, write-oÅ of impaired assets of
$3.3 million and other exit costs of $22.5 million primarily related to the termination of equipment leases
($1.4 million) and rent on abandoned oÇce space ($20.0 million). The Syracuse restructuring plan was
completed in the Ñrst quarter of 2002 with expenditures and write-oÅs totaling $1.3 million. The total amount
expended exceeded the original charge by $0.3 million. The LFD restructuring plan that was initiated in the
second quarter of 2001 was completed in the fourth quarter of 2002. Actual pre-tax costs totaling $1.8 million
were expended or written oÅ, which was equal to the original reserve. The Life Insurance segment
restructuring plan that was initiated in the fourth quarter of 2001 was completed in the fourth quarter of 2002.
Actual pre-tax costs totaling $2.3 million dollars were expended or written-oÅ. The amount expended for this
plan was in excess of the original reserve by less than $0.1 million. In addition, $0.1 million of excess reserve
on the FPP restructuring plan was released during the second quarter of 2002 and $1.5 million of excess
reserve on the Fort Wayne restructuring plan was released during the third quarter of 2002. The release of the
reserve on the Fort Wayne restructuring plan was due to LNC's purchase and ultimate sale of the vacant
building on terms which were favorable to what was included in the original restructuring plan for rent on this
abandoned oÇce space. Actual pre-tax costs totaling $34.0 million have been expended or written oÅ for the
four remaining plans through December 31, 2002. As of December 31, 2002, a balance of $1.4 million remains
in the restructuring reserves for these plans and is expected to be utilized in the completion of the plans.
Additional details of each of these restructuring plans are discussed in Note 12 to the consolidated Ñnancial
statements.
30
During the second quarter of 2002, Lincoln Retirement completed a review of its entire internal
information technology organization. As a result of that review, Lincoln Retirement decided in the second
quarter of 2002 to reorganize its IT organization in order to better align the activities and functions conducted
within its own organization and its IT service providers. This change was made in order to focus Lincoln
Retirement on its goal of achieving a common administrative platform for its annuities products, to better
position the organization and its service providers to respond to changing market conditions, and to reduce
overall costs in response to increased competitive pressures. The restructuring plan implemented to achieve
these objectives included aggregate pre-tax costs of $1.6 million, composed of $1.4 million for employee
severance and $0.2 million for employee outplacement. Actual pre-tax costs expended through December 31,
2002 were $0.9 million. As of December 31, 2002, a balance of $0.7 million remains in the restructuring
reserve for this plan and is expected to be utilized in the completion of the plan. Additional details of this
restructuring plan are discussed in Note 12 to the consolidated Ñnancial statements.
In January 2003, the Life Insurance segment announced that it was realigning its operations in Hartford,
Connecticut and Schaumburg, Illinois to enhance productivity, eÇciency and scalability while positioning the
segment for future growth. The Ñnancial impact of the realignment will result in the Life Insurance segment
incurring costs of approximately $15-$17 million after-tax during 2003. While some savings may materialize
in the second half of 2003, the majority of the savings will be realized in 2004, at which time the run-rate for
operating and administrative expenses should be reduced by $15-$20 million pre-tax.
In February 2003, Lincoln Retirement announced plans to consolidate its Ñxed annuity operations in
Schaumburg, Illinois into Fort Wayne, Indiana. Restructuring costs under the plan are expected to be $3-
$5 million after-tax and are expected to be incurred during 2003. The consolidation is expected to result in
pre-tax savings of approximately $4-$6 million annually beginning in the third quarter of 2003.
Acquisition and Divestiture
On August 30, 2002, LNC acquired The Administrative Management Group, Inc. (""AMG''), an
employee beneÑts record keeping Ñrm for $21.6 million in cash. Contingent payments up to an additional
$14 million will be paid over a period of 4 years (2003-2006) if certain criteria are met. Any such contingent
payments will be expensed as incurred. AMG, a strategic partner of the Lincoln Retirement segment for
several years, provides record keeping services for the Lincoln Alliance Program along with approximately 400
other clients nationwide. As of December 31, 2002, the application of purchase accounting to this acquisition
resulted in goodwill of $20.2 million.
On December 7, 2001, Swiss Re acquired LNC's reinsurance operation for $2.0 billion. In addition, LNC
retained the capital supporting the reinsurance operation. After giving eÅect to the increased levels of capital
needed within the Life Insurance and Lincoln Retirement segments that result from the change in the ongoing
mix of business under LNC's internal capital allocation models, the disposition of LNC's reinsurance
operation freed-up approximately $100 million of retained capital.
The transaction structure involved a series of indemnity reinsurance transactions combined with the sale
of certain stock companies that comprised LNC's reinsurance operation. At closing, an immediate gain of
$15.0 million after-tax was recognized on the sale of the stock companies. A gain of $723.1 million after-tax
($1.1 billion pre-tax) relating to the indemnity reinsurance agreements was reported at the time of closing.
This gain was recorded as a deferred gain on LNC's consolidated balance sheet, in accordance with the
requirements of FAS 113, and is being amortized into earnings at the rate that earnings on the reinsured
business are expected to emerge, over a period of 15 years.
EÅective with the closing of the transaction, the former Reinsurance segment's historical results were
moved into ""Other Operations.'' During December 2001 LNC recognized in Other Operations $5.0 million
($7.9 million pre-tax) of deferred gain amortization. In addition, in December 2001, LNC recognized $7.9
million ($12.5 million pre-tax) of accelerated deferred gain amortization relating to the fact that certain
Canadian indemnity reinsurance contracts were novated after the sale, but prior to December 31, 2001.
31
On October 29, 2002 LNC and Swiss Re settled disputed matters totaling about $770 million that had
arisen in connection with the Ñnal closing balance sheets associated with Swiss Re's acquisition of LNC's
reinsurance operations. The settlement provided for a payment by LNC of $195 million to Swiss Re, which
was recorded by LNC as a reduction in deferred gain. As a result of additional information made available to
LNC following the settlement with Swiss Re in the fourth quarter of 2002, LNC recorded a further reduction
in the deferred gain of $51.6 million after-tax ($79.4 million pre-tax), as well as a $9.4 million after-tax
($8.3 million pre-tax) reduction in the gain on the sale of subsidiaries.
As part of the dispute settlement, LNC also paid $100 million to Swiss Re in satisfaction of LNC's
$100 million indemniÑcation obligation with respect to personal accident business. As a result of this payment,
LNC has no further underwriting risk with respect to the reinsurance business sold. However, because LNC
has not been relieved of its legal liabilities to the underlying ceding companies with respect to the portion of
the business reinsured by Swiss Re, under FAS 113 the reserves for the underlying reinsurance contracts as
well as a corresponding reinsurance recoverable from Swiss Re will continue to be carried on LNC's balance
sheet during the run-oÅ period of the underlying reinsurance business. This is particularly relevant in the case
of the exited personal accident and disability income reinsurance lines of business where the underlying
reserves are based upon various estimates that are subject to considerable uncertainty.
As a result of developments and information obtained during 2002 relating to personal accident and
disability income matters, LNC increased these exited business reserves by $198.5 million after-tax
($305.4 million pre-tax). After giving eÅect to LNC's $100 million indemniÑcation obligation, LNC recorded
a $133.5 after-tax ($205.4 million pre-tax) increase in reinsurance recoverable from Swiss Re with a
corresponding increase in the deferred gain.
The combined eÅects of the 2002 settlement of disputed matters and exited business reserve increases
reduced the $723.1 million after-tax ($1.1 billion pre-tax) deferred gain reported at closing by $44.9 million
after-tax ($69 million pre-tax). During 2002, LNC amortized $47 million after-tax ($72.3 million pre-tax) of
deferred gain. This includes the amortization of deferred gain from the sale of the direct disability income
business in 1999. An additional $1.3 million after-tax ($2 million pre-tax) of deferred gain was recognized due
to a novation of certain Canadian business during 2002.
Also during 2002, LNC exercised a contractual right to ""put'' its interest in a subsidiary company
containing LNC's disability income reinsurance business to Swiss Re for $10 million. The $10 million sale
price was approximately equal to LNC's book basis in the subsidiary.
Through December 31, 2002, of the original $2 billion in proceeds received by LNC, approximately
$0.56 billion was paid for taxes and deal expenses and approximately $1.0 billion was used to repurchase stock,
reduce debt, and support holding company cash Öow needs. LNC also paid $195 million to Swiss Re to settle
the closing balance sheet disputed matters and $100 million to satisfy LNC's personal accident business
indemniÑcation obligations. The remaining proceeds have been dedicated to the ongoing capital needs of the
Lincoln National Life Insurance Company.
Critical Accounting Policy Ì Personal Accident and Disability Income Reserves
Because of ongoing uncertainty related to personal accident and disability income businesses, the reserves
related to these exited business lines carried on LNC's balance sheet at December 31, 2002 may ultimately
prove to be either excessive or deÑcient. For instance, in the event that future developments indicate that these
reserves should be increased, under FAS 113 LNC would record a current period non-cash charge to record
the increase in reserves. Because Swiss Re is responsible for paying the underlying claims to the ceding
companies, LNC would record a corresponding increase in reinsurance recoverable from Swiss Re. However,
FAS 113 does not permit LNC to take the full beneÑt in earnings for the recording of the increase in the
reinsurance recoverable in the period of the change. Rather, LNC would increase the deferred gain recognized
upon the closing of the indemnity reinsurance transaction with Swiss Re and would report a cumulative
amortization ""catch-up'' adjustment to the deferred gain balance as increased earnings recognized in the
period of change. Any amount of additional increase to the deferred gain above the cumulative amortization
""catch-up'' adjustment must continue to be deferred and will be amortized into income in future periods over
32
the remaining period of expected run-oÅ of the underlying business. No cash would be transferred between
LNC and Swiss Re as a result of these developments
Accordingly, even though LNC has no continuing underwriting risk, and no cash would be transferred
between LNC and Swiss Re, in the event that future developments indicate LNC's December 31, 2002
personal accident or disability income reserves are deÑcient or redundant, FAS 113 requires LNC to adjust
earnings in the period of change, with only a partial oÅset to earnings for the cumulative deferred gain
amortization adjustment in the period of change. The remaining amount of increased gain would be amortized
into earnings over the remaining run-oÅ period of the underlying business.
Results of Operations by Segment
Lincoln Retirement
The Lincoln Retirement segment (formerly known as the Annuities segment), headquartered in Fort
Wayne, Indiana, provides tax-deferred investment growth and lifetime income opportunities for its clients
through the manufacture and sale of Ñxed and variable annuities. Through a broad-based distribution network,
Lincoln Retirement provides an array of annuity products to individuals and employer-sponsored groups in all
50 states of the United States. Lincoln Retirement distributes some of its products through LNC's wholesaling
unit, LFD, as well as LNC's retail unit, LFA. In addition, group Ñxed and variable annuity products and the
Alliance program are distributed to the employer-sponsored retirement market through Lincoln Retirement's
Fringe BeneÑt Division dedicated sales force.
Results of Operations: Lincoln Retirement's Ñnancial results and account values were as follows:
Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Items Included in Net Income:
Realized Gain (Loss) on Investments and
Derivative Instruments (after-tax) ÏÏÏÏÏÏ
Restructuring Charges (after-tax) ÏÏÏÏÏÏÏÏ
Cumulative EÅect of Accounting Changes
(after-tax)(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill Amortization (after-tax) ÏÏÏÏÏÏÏÏ
Average Daily Variable Account Values (in
2002
$
57.8
2001
Year Ended December 31
2000
(in millions)
$358.6
$269.2
1999
$291.5
1998
$273.8
(128.7)
(1.0)
(42.5)
(1.3)
(3.4)
Ì
(7.9)
Ì
11.4
Ì
Ì
Ì $
(7.3)
1.2
Ì
$ (0.6)
$
Ì
2.0
Ì
2.2
$
billions) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
30.8
$ 35.6
$ 41.8
$ 35.9
2002
2001
December 31
2000
(in billions)
1999
1998
Account Values
Variable Annuities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$27.4
$34.6
$39.4
$41.5
$33.4
Fixed Annuities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Reinsurance Ceded ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$20.1
(2.0)
18.0
(1.5)
16.6
(1.2)
18.2
(1.4)
18.1
(1.6)
Total Fixed AnnuitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Account ValuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
18.1
$45.5
16.5
$51.1
15.4
$54.8
16.8
$58.3
16.5
$49.9
(1) Cumulative EÅect of Accounting Changes relates to the transition adjustment of $(3.6) million recorded
in the Ñrst quarter of 2001 upon adoption of FAS 133 and the adjustment of $(3.7) million recorded in
the second quarter of 2001 upon adoption of EITF 99-20.
33
Comparison of 2002 to 2001
Net income decreased $211.4 million or 79% in 2002. The decrease in net income between periods was
primarily the result of the decline in the equity markets and an increase in realized losses on investments of
$86.2 million, resulting from the decline in value and the sale and write-downs of Ñxed maturity securities.
In 2002, the S&P 500 index declined 23.4%. The signiÑcant decline in the equity markets negatively
aÅected the segment's earnings through lower fees from lower average variable account values, negative
unlocking of deferred acquisition costs (""DAC'') and the present value of in-force (""PVIF'') intangible assets
and increases in reserves and beneÑt payments for guaranteed minimum death beneÑts (""GMDB'').
Average daily variable annuity account values decreased $4.8 billion or 13% and variable annuity account
values at December 31, 2002 were $7.2 billion or 21% lower than at December 31, 2001. The decrease in
variable annuity account values was caused primarily by the overall decline in the equity markets in 2002. This
decrease reduced fees and lowered net income by $29.9 million. The eÅect of equity market impact on DAC
and PVIF from retrospective unlocking and net changes in amortization decreased net income by $18.4 mil-
lion. The current year negative unlocking was due to actual equity market performance lagging the expected
market performance used in LNC's DAC assumptions. Increases in GMDB reserves and beneÑt payments
decreased net income by $40.4 million from 2001. In addition, in the fourth quarter of 2002 the segment had
reduced net income of $30.3 million due to prospective unlocking of various assumptions underlying DAC,
PVIF and GMDB calculations, including the reversion to the mean net growth assumption. The tax beneÑt
from the Separate Account Dividend Received Deduction (""DRD'') was $17.7 million lower in 2002 than in
2001 due to lower fees, primarily resulting from the decline in the equity markets.
Decreased earnings from investment partnerships resulted in a negative variance of $21.7 million
compared to 2001. Partially oÅsetting the negative variances were $17.6 million from higher investment
margins. Overall investment spreads on Ñxed annuity products was relatively Öat between years: 2.04% in 2002
versus 2.05% in 2001. For annuity products spread, the yield on earning assets is calculated as net investment
income on Ñxed product investment portfolios divided by the average earning assets, the average crediting rate
is calculated using interest credited on annuity products less bonus credits and excess dollar cost averaging
(""DCA'') interest, divided by the average Ñxed account values net of coinsured account values. Fixed account
values reinsured under modiÑed coinsurance agreements are included in account values for this calculation.
(See discussion on investment margins and the interest rate risk due to falling interest rates within Item 7A,
Quantitative and Qualitative Disclosures About Market Risk.)
Average Ñxed annuity account values increased $2.1 billion in 2002 resulting in an increase in income of
$17.7 million. The increase in Ñxed annuity account values was due to the positive net cash Öows for Ñxed
annuities, reÖecting strong sales of the StepFive», Lincoln Select and Lincoln ChoicePlusSM Fixed annuity
products. (See below for further discussion of net Öows.) These strong sales increases could be interrupted if
the interest rates decrease signiÑcantly and remain lower. In the event that LNC is not able to achieve spread
targets, sales of Ñxed annuities could be signiÑcantly reduced.
Critical Accounting Policy Ì Deferred Acquisition Cost
The amortization of the Lincoln Retirement segment's deferred acquisition costs is impacted by the
change in market value of variable annuity accounts. Statement of Financial Accounting Standard No. 97,
""Accounting by Insurance Companies for Certain Long-Duration Contracts & Realized Gains & Losses on
Investment Sales'' (""FAS 97'') requires that acquisition costs for variable annuity contracts be amortized over
the lives of the contracts in relation to the incidence of estimated gross proÑts. Estimated gross proÑts on
variable annuity contracts vary based on surrenders, fee income, expenses and realized gains/losses on
investments. The amortization is adjusted retrospectively (DAC unlocking) when estimates of current or
future gross proÑts to be realized from variable annuity contracts are revised. Because equity market
movements have a signiÑcant impact on the value of variable annuity accounts and the fees earned on these
accounts, estimated future proÑts increase or decrease with movements in the equity markets. Movements in
equity markets also have an impact on reserves and payments for the guaranteed minimum death beneÑt
feature within certain annuity contracts. The Lincoln Retirement segment's assumption for the long-term
34
annual gross growth rate of the equity markets used in the determination of DAC amortization and GMDB
beneÑts is 9%, which is reduced by mortality and expense charges (""M&E'') and asset management charges
resulting in a net variable account growth assumption of less than 9%. As equity markets do not move in a
systematic manner, LNC uses a methodology referred to as ""reversion to the mean'' to maintain its long-term
gross growth rate assumption while also giving consideration to the eÅect of short-term swings in the equity
markets. The application of this methodology results in the use of a higher or lower future gross equity market
growth assumption for a period of four years subsequent to the valuation date which, together with actual
historical gross equity growth, is expected to produce a 9% gross return.
The use of a reversion to the mean assumption is common within the industry; however, the parameters
used in the methodology are subject to judgment and vary within the industry. An important aspect of LNC's
application of the reversion to the mean is the use of caps and Öoors on the growth rate assumption, which
limit the gross growth rate assumption to reasonable levels above and below the long-term assumption. In the
fourth quarter 2002, LNC adjusted its reversion to the mean gross growth rate assumption to 9%. This change
along with changes to assumptions for variable annuity persistency and revisions to amortization periods
resulted in DAC and PVIF adjustments reducing income by $8.8 million. Going forward, as the growth rate of
the equity market varies from LNC's growth rate assumption, the period over which the reversion to the mean
gross growth rate assumption needs to be earned will be four years. The segment is reviewing the appropriate
cap or Öoor levels and will incorporate this into the methodology. On a quarterly basis, LNC reviews the
assumptions of its DAC amortization model and records a retrospective adjustment to the amount expensed,
(i.e. unlocks the DAC). On an annual basis, LNC reviews and adjusts as necessary its assumptions for
prospective amortization of DAC, as well as its other intangible asset, present value of in-force (""PVIF'').
Critical Accounting Policy Ì Guarantee Minimum Death BeneÑts Reserving
The GMDB reserves are a function of the net amount at risk (""NAR''), mortality, persistency, and
incremental death beneÑt M&E expected to be incurred over the period of time for which the NAR is
positive. At any given point in time, the NAR is the diÅerence between the potential death beneÑt payable and
the total account balance, with a Öoor value of zero (when account values exceed the potential death beneÑt
there is no amount at risk). As part of the estimate of future NAR, gross equity growth rates which are
consistent with those used in the DAC valuation process are utilized. On average, the current gross equity
growth rate would project to a zero NAR over roughly four years from the balance sheet date. The fourth
quarter of 2002 change to the reversion to the mean assumption resulted in an increase to GMDB reserves and
reduced income by $21.5 million. Projections of account values and NAR followed by computation of the
present value of expected NAR death claims using product pricing mortality assumptions less expected
GMDB M&E revenue during the period for which the death beneÑt options are assumed to be in the money
are made each valuation date for every variable annuity contract with a GMDB beneÑt feature. If equity
market returns exactly match LNC's reversion to the mean rate and actual mortality and lapse experience is
as assumed, the GAAP reserve plus interest and GMDB M&E revenue would exactly cover the future
expected GMDB payments as they arise.
As discussed above, the decline of the equity markets eÅect has resulted in increased GMDB reserves
and beneÑt payments which negatively eÅected Lincoln Retirement's income. Although there is no method
currently prescribed under generally accepted accounting principles for GMDB reserving, LNC uses a method
that recognizes that there is an amount at risk that will result in future payments and that over time the equity
market growth will reduce the payment stream. This approach is expected to cover future GMDB payments,
net of future GMDB fee income. Currently, there are few companies that reserve for the liability caused by
the decline in the equity markets with some companies recognizing the cost on a pay as you go basis. At
December 31, 2002, LNC's net amount at risk (""NAR'') was $4.6 billion and the GAAP reserve was
$84.5 million. The reserve for statutory accounting was $144.1 million, reÖecting the more conservative
market performance and mortality assumptions required under statutory accounting.
In evaluating the relative GMBD exposures that exist within LNC's variable annuity business relative to
industry peers, it is important to distinguish between the various types of GMDB structures, and other factors
35
such as average account values, average amounts of NAR, and the age of contractholders. The following
discussion provides this information for LNC's variable annuity business.
At December 31, 2002 LNC had $19.2 billion of variable annuity account value, about 52% of LNC's
total, that was subject to a return of premium type GMDB beneÑt. LNC's average variable annuity with a
return of premium feature has an average account value of $32,000 and an average remaining premium base of
$26,300 resulting in an average NAR of $5,700. The average attained age of these contract holders is just over
50 with less than 9% over age 70. The GAAP GMDB reserve on these accounts was $27.2 million on a total
NAR of $1.8 billion.
At December 31, 2002 LNC had $9.1 billion of variable annuity account value, about 25% of LNC's
total, that is subject to a high water mark type GMDB beneÑt. LNC's average variable annuity with a high
water mark feature has an average account value of $58,400 and average NAR of $19,800. The average
attained age of these contract holders is just over 60 with 24% over age 70. The GAAP GMDB reserve on
these accounts was $56.9 million on a total NAR of $2.8 billion.
At December 31, 2002 only $262 million of variable account value, less than 1% of LNC's total, was
subject to roll-up type GMDB beneÑt. LNC's average variable annuity with a roll-up feature has an average
account value of $91,000 and average NAR of $17,700. The average attained age of these contract holders is
just under 63 with 28% over age 70. The GAAP GMDB reserve on these accounts was $0.4 million on a total
NAR of $40 million.
At December 31, 2002 LNC had $8.5 billion of variable annuity account value, about 23%, that was not
subject to any GMDB beneÑt. These accounts average $45,800 in account value. The average attained age of
these contract holders is 58 with 20% over 70.
LNC's contract holders overall average attained age is just over 53 with only 13% over age 70. LNC
average attained ages are lower than industry average (per The Gallup Organization's 2001 Survey) due to the
mix of business that includes signiÑcant amounts of qualiÑed and employer sponsored business.
LNC's average non-qualiÑed contract holder's attained age is just under 64 with 35% over age 72
compared to the industry average attained age of 65 with 35% over age 72.
LNC has variable annuity contracts containing GMDB's which have a dollar for dollar withdrawal
feature. Under such a feature, withdrawals reduce both current account value and the GMDB amount on a
dollar for dollar basis. For contracts containing this dollar for dollar feature, the account holder could withdraw
a substantial portion of their account value resulting in a GMDB which is multiples of the current account
value. LNC's exposure to this dollar for dollar risk is somewhat mitigated by the fact that LNC does not allow
for partial 1035 exchanges on non-qualiÑed contracts. To take advantage of the dollar for dollar feature, the
contract holder must take constructive receipt of the withdrawal and pay any applicable surrender charges.
LNC will report the appropriate amount of the withdrawal that is taxable to the IRS, as well as indicating
whether or not tax penalties apply under the premature distribution tax rules. LNC closely monitors its dollar
for dollar withdrawal GMDB exposure and works with key broker dealers that distribute LNC's variable
annuity products. As of December 31, 2002, there were 276 contracts for which the death beneÑt to account
value ratio was greater than ten to one. The net amount at risk on these contracts was $19.3 million. EÅective
May of 2003, the GMDB feature oÅered on new sales will be a pro-rata GMDB feature whereby each dollar
of withdrawal will reduce the GMDB beneÑt in proportion to the current GMDB to account value ratio.
As illustrated in the discussion of Lincoln Retirement's results of operations above, the segment's income
is extremely sensitive to swings in the equity markets. Refer to the First Quarter 2003 Guidance for Estimated
EÅect of Equity Market Volatility section for estimates of the eÅect of movements in the equity markets on
Lincoln Retirement's earnings.
Comparison of 2001 to 2000
The $89.4 million or 25% decrease in net income was due in part to an increase in realized loss on
investments and derivative instruments of $39.1 million. These investment losses were due primarily to losses
36
taken on Enron and Argentina securities in the fourth quarter of 2001 in addition to increased write-downs of
other securities throughout 2001 due to credit deterioration.
Weak performance of the equity markets in 2001 caused variable annuity account values to be depressed
throughout 2001. Fee income, which is calculated daily based on the ending variable annuity account values,
decreased $48.9 million between years as a result of market depreciation experienced in the last quarter of
2000 and overall in 2001 and to a lesser extent, net outÖows for variable annuities in 2000. Average variable
annuity account values decreased by $6.2 billion or 15% in 2001 from 2000. Variable annuity net Öows
(including the Ñxed portion of variable contracts) were essentially zero for 2001 due to a strong second half of
the year. Partially oÅsetting the decrease in fee income was a $6.2 million positive fee income rate variance
related to a change in mix of the variable annuity business. The downturn in the equity markets also
contributed to an increase of $7.3 million in beneÑt payments and reserve requirements for guaranteed
minimum death beneÑts. Average Ñxed annuity account values decreased by $331 million or 1.9% in 2001
from the average in 2000 due to net outÖows in 2000. This decreased earnings by $1.4 million between years.
As a result of improved retention and lower account values in 2001, surrender charges decreased $6.9 million
between years.
Increased operating and administrative expenses of $16.2 million also contributed to the decrease in net
income between years. This increase was due primarily to higher information technology costs including
computer software write-oÅs and equipment amortization, as well as increased severance and relocation costs
related to LNC's initiative to build a high performance culture.
Net investment income decreased between years due primarily to reduced earnings of $5.2 million on
investment partnerships. Overall investment spreads on Ñxed annuity products (excluding the impact of
investment income earned on surplus supporting the segment which includes investment partnerships)
decreased between years: 2.05% in 2001 versus 2.14% in 2000.
The Lincoln Retirement segment experienced negative DAC unlocking in the Ñrst and third quarters of
2001 and positive unlocking in the second and fourth quarters of 2001 due to movements in the market. DAC
unlocking created a negative variance in earnings of $4.0 million compared to 2000. Due to changes in
assumptions for prospective DAC amortization made at the beginning of 2001, the segment experienced a
decrease in DAC amortization expense of $37.8 million relative to 2000. This unlocking created a positive
variance of $4.5 million between years, which was caused by improved persistency in 2001 and lower expense
projections.
Net Flows(1)
Lincoln Retirement's product net Öows were as follows:
2002
Variable Portion of Annuity Deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Variable Portion of Annuity Withdrawals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Variable Portion of Annuity Net Flows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixed Portion of Variable Annuity Deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixed Portion of Variable Annuity WithdrawalsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixed Portion of Variable Annuity Net Flows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixed Annuity Deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixed Annuity WithdrawalsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2001
1999
Year Ended December 31
2000
(in billions)
$ 3.1
(4.8)
$ 2.6
(3.8)
$ 3.1
(3.9)
$ 2.7
(3.3)
(0.6)
1.8
(1.1)
0.7
1.9
(1.5)
(0.8)
1.6
(0.8)
0.8
1.7
(1.6)
(1.7)
1.6
(1.0)
0.6
0.5
(2.3)
(1.2)
1.9
(1.2)
0.7
0.7
(1.4)
1998
$ 2.8
(3.0)
(0.2)
1.0
(1.1)
(0.1)
0.5
(1.4)
Fixed Annuity Net Flows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Annuity Net Flows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Incremental Deposits(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
0.4
$ 0.5
$ 6.2
0.1
$ 0.1
$ 5.8
(1.8)
($2.9)
$ 4.5
(0.7)
($1.2)
$ 4.7
(0.9)
($1.2)
$ 3.9
(1) Incremental Deposits represent gross deposits reduced by transfers from other Lincoln Annuity products.
37
In order to achieve proÑtable future earnings growth for both Ñxed and variable annuity products the
ability to attract new deposits and to retain existing accounts is crucial. In 2002, the Lincoln Retirement
segment experienced a continuation of the trend of positive net Öows that began in the third quarter of 2001.
For the year, total annuity deposits were $6.4 billion, Öat with 2001. However, withdrawals were $5.9 billion,
an improvement of $0.5 billion resulting in positive net Öows of $0.5 billion.
The improvement in net Öows is reÖective of LNC's goal of maintaining positive net Öows by growing
deposits and retaining existing accounts. LNC has experienced six consecutive quarters of positive net Öows.
This improvement is largely attributable to LNC's balanced array of products and distribution breadth.
Although American Legacy Variable Annuity gross deposits were down 14%, its incremental deposits
decreased only 2% in 2002. In addition, Lincoln ChoicePlusSM with its multi-manager variable annuity
experienced a $302 million or 40% increase in gross deposits in 2002. In the Ñrst quarter of 2002, LFD
launched Lincoln ChoicePlus in UBS PaineWebber, one of the largest distributors of variable annuity
products in the country. Also, in April 2002, LFD launched Lincoln ChoicePlus in Salomon Smith Barney,
another key distributor of variable annuity products. Sales of the SEI Variable Annuity product line,
distributed through SEI, declined 30% to $57 million in 2002. EÅective February 28, 2003, SEI Investments
will no longer take applications for new contract sales in the SEI Variable Annuity Program. Total Ñxed
annuity gross deposits (excluding the Ñxed portion of variable annuity gross deposits) were $1.9 billion in
2002, a $0.2 billion or 12% increase. The increase was reÖective of the strong sales of the StepFive, Lincoln
Select Fixed Annuity and the Alliance Program Fixed Annuities.
At December 31, 2002, 52% of Lincoln Retirement's account values contained the most conservative type
of GMDB which is return of premium. There are two other primary types of GMDB's in the portfolio, the
high-water mark and the 5% step-up. The 5% step-up product accounts for less than 1 percent of Lincoln
Retirement's variable annuity account values. LNC is currently reviewing this feature and other guarantees. In
the future they may be changed or discontinued.
LNC's eÅorts to grow deposits by introducing innovative products that meet the changing needs of its
customers and to retain existing accounts through targeted conservation eÅorts and by oÅering better
replacement alternatives for current customers have yielded positive results. In addition, Lincoln Retirement's
improvement in Öows is even more powerful when looking at current industry activity. Aggressive pricing
strategies aimed at increasing market share which are prevalent in the marketplace, but counter to LNC's
strategy, include signiÑcant commission specials that are 100-200 basis points above LNC's; aggressive living
beneÑt riders that give the customer the opportunity to transfer market risk to the company at their discretion
and could ultimately spell disaster for either client or company; and combination high bonus and high
commission products that could promote inappropriate sales behavior. LNC has been able to grow new
deposits without employing, to any signiÑcant extent, the various aggressive strategies listed above. This
progress can be attributed to not only its strong product line-up and distribution breadth, but also the
implementation of more stringent standards and controls on internal transfers.
Retention of Assets
In looking at annuity withdrawals and the overall proÑtability of the business, it is important to look
beyond the mere total dollar amount of withdrawals and assess how total withdrawals compare to total
retained account values. These measures of account persistency are referred to as lapse rates, which are key
elements to assessing underlying proÑtability. By comparing actual lapse rates to the rates assumed in
designing the annuity product, it is possible to gauge whether performance is better or worse than pricing.
Overall lapse rates were 10.47% in 2002, 9.72% in 2001 and 11.95% in 2000. In all three years, overall lapse
rates have been more favorable than expected in pricing assumptions. The improvement in persistency over
the three year period has partially countered the reduction in fee income resulting from lower average variable
annuity account values caused by market depreciation.
38
To sustain and further improve overall retention levels, LNC is utilizing targeted conservation eÅorts and
is exploring other retention initiatives. In addition, LNC believes that maintaining a strong and balanced
portfolio of Ñxed and variable annuities provides a platform for maintaining positive net Öows. If equity
markets continue to decline, LNC may see increased exchange activity in 2003, particularly if consumers
move funds to products that provide an account value Öoor (i.e. living beneÑts).
Growth of New Deposits
LNC has been focused over the last several years on growing new deposits. This eÅort has been
concentrated on both product and distribution breadth. As a result of the continued volatility of the equity
markets, sales of Ñxed annuities have increased in spite of the historically low interest rate environment.
LNC's Ñxed annuity sales in 2001 through 2002 were bolstered by product oÅerings that were introduced in
2001 including the Lincoln Select Fixed Annuity and the StepFive» Fixed Annuity. The guarantees of the
StepFive Fixed Annuity made it an important product for LNC in the Financial Institutions channel. New
product oÅerings launched in 2002 in the Financial Institutions channel include AccelaRate and
ChoiceGuarantee. The market value adjusted (""MVA'') feature of the Lincoln Select Fixed Annuity is
expected to be more attractive in the Wirehouse/Regional channel during a volatile interest rate environment.
This feature increases or decreases the cash surrender value of the annuity based on a decrease or increase in
interest rates. Contractholders participate in gains when the contract is surrendered in a falling interest rate
market, and LNC is protected from losses up to a cap when the contract is surrendered in a rising interest rate
market. A new version of Lincoln Select that provides the individual with a higher interest rate but a larger
potential penalty for early withdrawal or surrender is being developed. LNC continues to approach the Ñxed
annuity marketplace opportunistically and only oÅer rates that are consistent with LNC's required spreads. If
interest rates drop further, it may result in reduced product oÅerings and could impact net Öows.
In 2002, an enhanced low cost variable annuity product, Multi-Fund 5 was launched. In addition, LNC
expanded the ChoicePlus and American Legacy product oÅerings in New York to include Bonus, L-share and
A-share (American Legacy only) contracts. Annuities with living beneÑt riders, that provide equity market
performance guarantees, are becoming much more prevalent in the industry. LNC is evaluating various
product approaches and designs in this area that will provide a competitive beneÑt while still falling within
LNC's risk tolerance levels for such guarantees.
LFD, LNC's wholesaling distribution arm and internal partner of Lincoln Retirement, provides a
wholesaling unit for the distribution of the Lincoln ChoicePlus variable annuity, Lincoln ChoicePlus Ñxed
annuity and StepFive Ñxed annuity product lines. In 2002, LFD contributed signiÑcantly to the level of
ChoicePlusSM Variable Annuity sales which reached $1.0 billion, an increase of 40% from 2001. LFD has also
been a driver of Ñxed annuity products with $1.2 billion of sales in 2002. LNC is continuing to build and
reinvent its strategic partnerships as part of its ongoing marketing strategy, while selectively working on other
alliances that will provide increased access for LNC annuity products through various distribution channels.
American Legacy variable annuity gross deposits were $1.7 billion in 2002, a decrease of 14% from 2001. One
means for improving American Legacy annuity sales would be the use of a dedicated wholesaling team of
Lincoln Insurance Planning Consultants focused strictly on American Legacy Variable Annuity products.
Recently, LNC and American Funds Distributors (""AFD'') have agreed to transition the wholesaling of
American Legacy to LFD. Currently, AFD uses wholesalers who focus on both American Funds mutual funds
as well as the American Legacy Variable Annuity products. Segment management believes that this change to
a dedicated team focused on key broker/dealer relationships developed in conjunction with AFD, has the
potential to renew growth in American Legacy VA sales. The transitioning of wholesaling and distribution
responsibility for the American Legacy variable annuities from AFD to LFD will provide LFD with two
distinct annuity product areas: The single-manager (American Legacy) and the multi-manager
(ChoicePlusSM and Multi-Fund»).
Proposed Bush Administration Tax Legislation
President Bush's proposed 2003 budget legislation contains a variety of changes to the taxation of
corporations and shareholders. Of particular importance to the Lincoln Retirement segment are proposed
39
changes intended to mitigate the double taxation of dividends. At this point, the potential impact of this
developing legislative proposal on annuities products is uncertain. Concerns expressed in this regard by the
industry have been favorably received by key Bush administration oÇcials, with indications that these matters
are being given careful consideration during the ongoing drafting of the legislative proposal. Also unknown at
this time is the impact, if any, that the proposed legislation may have on the Lincoln Retirement segment
future corporate tax burden, including how corporate dividends would be treated under the proposed new
approach to corporate taxation. At this point, LNC is unable to predict, with any degree of certainty, the
likelihood or Ñnal form in which this proposed legislation might become law.
Outlook
Tax legislation, along with current economic and market conditions continue to be very uncertain which
may adversely aÅect annuity sales for the industry and Lincoln Retirement. Although LNC is committed to
its two-pronged approach of growing new deposits and retaining existing assets to manage its net Öows;
achieving positive net Öows in 2003 may be diÇcult for the industry and Lincoln Retirement. LNC expects to
continue to strengthen its distribution breadth and emphasize expense management as key proÑtability drivers
in an increasingly challenging market.
Life Insurance
The Life Insurance segment, headquartered in Hartford, Connecticut, creates and protects wealth for its
clients through the manufacture and sale of life insurance products throughout the United States. The Life
Insurance segment oÅers term life, universal life, variable universal life, interest-sensitive whole life and
corporate owned life insurance. A majority of the Life Insurance segment's products are currently distributed
through LFD and LFA. In the third quarter 2002, the Life Insurance segment entered into a marketing
agreement to distribute life insurance products through the M Financial Group, a well-respected and
successful nationwide organization of independent Ñrms serving the needs of aÉuent individuals and
corporations. In addition to the marketing agreement, most business sold through M Financial Group will be
subject to a 50% modiÑed coinsurance arrangement.
Results of Operations: The Life Insurance segment's Ñnancial results, Ñrst year premiums by product,
account values and in-force amounts were as follows:
Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Items Included in Net Income:
Realized Loss on Investments and
Derivative Instruments (after-tax) ÏÏÏÏÏÏÏÏ
Restructuring Charges (after-tax) ÏÏÏÏÏÏÏÏÏÏ
Cumulative EÅect of Accounting Changes
(after-tax) (1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill Amortization (after-tax) ÏÏÏÏÏÏÏÏÏÏ
First Year Premiums (by Product)
Universal Life ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Variable Universal Life ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Whole LifeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
TermÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Retail ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate Owned Life Insurance (""COLI'') ÏÏÏ
2002
$209.0
2001
Year Ended December 31
2000
(in millions)
$249.3
1999
$211.5
$233.1
1998
$127.5
(62.9)
Ì
(36.9)
(3.5)
(10.6)
Ì
(0.5)
Ì
(1.7)
(20.0)
Ì
(5.5)
$ Ì $ 23.7
Ì
$ 23.7
Ì
$ 23.4
Ì
$ 19.7
$495.3
134.4
30.3
32.3
692.3
88.1
$292.7
228.5
26.4
30.8
578.4
47.2
$289.3
218.7
22.4
41.9
572.3
87.0
$342.9
142.2
24.0
45.9
555.0
14.7
$233.0
101.3
20.0
48.0
402.3
4.0
Total First Year Premiums ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$780.4
$625.6
$659.3
$569.7
$406.3
40
2002
2001
December 31
2000
(in billions)
1999
1998
Account Values
Universal Life ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Variable Universal Life ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest-Sensitive Whole Life ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
8.2
1.7
2.2
$
7.5
1.8
2.1
$
6.9
1.8
2.1
$
6.6
1.6
2.0
$
Total Life Insurance Account ValuesÏÏÏÏÏÏÏÏ
$ 12.1
$ 11.4
$ 10.8
$ 10.2
$
6.3
1.2
1.8
9.3
In Force Ì Face Amount
Universal Life and Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Term Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$126.0
127.9
$121.2
113.2
$115.9
100.1
$109.3
85.7
$105.8
67.1
Total In-Force ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$253.9
$234.4
$216.0
$195.0
$172.9
(1) Cumulative EÅect of Accounting Changes relates to the transition adjustment of $(0.2) million recorded
in the Ñrst quarter of 2001 upon adoption of FAS No. 133 and the adjustment of $(5.3) million recorded
in the second quarter of 2001 upon adoption of EITF 99-20.
Comparison of 2002 to 2001
Net income decreased $24.1 million or 10% in 2002 from the prior year. Excluding the amortization of
goodwill in 2001, net income decreased $47.8 million or 19%. A signiÑcant contributor to the decrease in net
income between periods was an increase in realized losses on investments of $26.0 million primarily resulting
from the write-down of Ñxed maturity securities in 2002. In 2001, the Life Segment reported two restructuring
charges which reduced 2001 net income by $3.5 million. There were no restructuring charges for the segment
in 2002. Also, in 2001 net income was negatively aÅected by $5.5 million to due the cumulative eÅect of the
adopting FAS. No. 133 and EITF 99-20. There were no accounting principles adopted in 2002 requiring a
cumulative adjustment.
In addition to the items noted above, other factors contributing to the decline in net income in 2002
compared to 2001 were less favorable mortality, declining investment margins, poor results in investment
partnerships and declines in the equity markets.
Mortality experience (mortality assessments less net death beneÑts and negative DAC unlocking) in
2002 was less favorable relative to 2001 and resulted in a $13.1 million reduction in income. Volatility is
expected from mortality risk, but LNC attempts to lessen the impact of volatility on earnings by reinsuring
approximately 90% of the new business written by the Life Insurance segment. Investment yields declined at a
faster pace than reductions in crediting rates which reduced investment margins $10.5 million. (See discussion
on investment margins and the interest rate risk due to falling interest rates within Item 7A, Quantitative and
Qualitative Disclosures About Market Risk.) In addition, decreased earnings from investment partnerships
resulted in a negative variance of $6.7 million.
Life insurance in-force, increased 8% from December 31, 2001 due to strong sales growth over the last
year and continued favorable persistency. Total sales as measured by Ñrst year premiums were up $154.8 mil-
lion or 25% and retail sales were up $113.9 million or 20% in 2002. Sales of universal life (""UL''), whole life
and term life insurance products improved by 69%, 15% and 5%, respectively. Due to the volatile equity
markets experienced over the last several quarters, there has been a sustained Öight to interest-sensitive
products from variable universal life insurance (""VUL''). As a result, sales of VUL products were down 41%
from the prior year period.
Account values of $12.1 billion at December 31, 2002 increased $0.7 billion or 6% from December 31,
2001. The drivers of this increase were positive cash Öows, net of policyholder assessments, of approximately
$0.3 billion across all products during the last twelve months, the transfer of the Legacy Life block of business
($0.15 billion) from the Lincoln Retirement segment in the Ñrst quarter of 2002 and interest earned on the
41
Ñxed products. These increases were partially oÅset by the negative eÅect of the equity markets on VUL
account values.
Critical Accounting Policy Ì DAC and PVIF
FAS 97 requires that acquisition costs for universal life insurance (""UL'') policies and variable universal
life insurance (""VUL'') policies be amortized over the lives of the contracts in relation to the incidence of
estimated gross proÑts, consistent with the treatment noted previously for variable annuities. Factors aÅecting
estimated gross proÑts are surrender charges; investment, mortality net of reinsurance ceded and expense
margins; and realized gains/losses on investments. For VUL policies, estimated gross proÑts are aÅected by
fee income as well. For the Life Insurance segment, based on the current mix of life insurance in-force on the
books, the factors that have the most signiÑcant impact on estimated gross proÑts are mortality (net of
reinsurance) and interest margins. Market movement, which has the greatest impact on DAC amortization for
the Retirement segment relative to its variable annuity block of business, has less impact on DAC
amortization for the Life Insurance segment. The Life Insurance segment earns fee income on its VUL
product line based on the ending daily VUL account values. This product only makes up 14% of the segment's
total account values at December 31, 2002.
On a quarterly basis, LNC reviews the assumptions of its DAC amortization model and records a
retrospective adjustment to the amount expensed, (i.e. unlocks the DAC). On an annual basis, LNC reviews
and adjusts as necessary its assumptions for prospective amortization of DAC, as well as its other intangible
asset, PVIF. Although the Life Insurance segment is not as sensitive to the performance of the equity markets
as the Lincoln Retirement segment, the negative performance of the equity markets resulted in negative
retrospective DAC unlocking in 2002 of $2.4 million. In addition, negative DAC unlocking of $3.9 million
related to changes in various prospective assumptions occurred in 2002.
As illustrated in the discussion of the Life Insurance segment's results of operations above, the segment
earnings are not particularly sensitive to swings in the equity markets. Refer to the First Quarter 2003
Guidance for Estimated EÅect of Equity Market Volatility section for estimates of the eÅect of movements in
the equity markets on Life Insurance's earnings.
Comparison of 2001 to 2000
The $16.2 million or 6% decrease in net income in 2001 was due primarily to increased realized losses on
investments and derivative instruments of $26.3 million. The Life Insurance segment also incurred two
restructuring charges in the second and fourth quarters of 2001 of $2.0 million and $1.5 million, respectively.
The $2.0 million charge recorded in the second quarter of 2001 related to a restructuring plan with the
objective of eliminating duplicative staÅ functions in the Schaumburg, Illinois operations of First Penn-PaciÑc
by transitioning them into the Annuities and Life Insurance segment operations in Fort Wayne, Indiana and
Hartford, Connecticut, respectively, in order to reduce ongoing operating costs. The $1.5 million charge
recorded in the fourth quarter of 2001 was for the reorganization and consolidation of the life insurance
operations in Hartford, Connecticut related to the streamlining of underwriting and new business processes
and the completion of outsourcing of administration of certain closed blocks of business.
Life Insurance experienced less favorable mortality throughout 2001 after having a favorable year in
2000. Partially contributing to the downturn in mortality experience were the losses of $1.1 million recorded
for the September 11 terrorist attacks. The Life Insurance segment also experienced lower earnings on
investment partnerships. The Life Insurance segment's 2001 income was positively impacted by growth in life
insurance in-force from sales, favorable persistency and lower general and administrative expenses. General
and administrative expenses decreased due to expense reduction initiatives implemented in the second half of
2001. In 2000 and 2001, the Life Insurance segment did not experience DAC unlocking that resulted in a
signiÑcant impact on earnings.
Sales as measured by Ñrst year premiums were down overall in 2001 by $33.7 million or 5%. This decline
was due to a $39.8 million decrease in Corporate Owned Life Insurance (""COLI'') sales. COLI sales, which
42
consist of very large cases, decreased from the prior year due to two large cases accounting for $42.5 million in
Ñrst year premiums recorded in the fourth quarter of 2000.
First year premiums on retail products increased by $6.1 million or 1% between years. UL sales increased
$3.4 million or 1% between years. Although this overall increase is modest, sales in the fourth quarter of 2001
were $98 million, a 20% increase over the prior year quarter. Sales rebounded nicely in the fourth quarter after
a volatile year for UL sales. VUL sales were up $9.8 million or 4% between years. These results were
encouraging given the performance of the equity markets in 2001.
Partially oÅsetting the increased retail UL/UVL sales levels noted above was a decrease in term life sales
of $11.1 million or 26% between years. Term life sales for the Ñrst six months of 2001 lagged the prior year
period largely due to strong Ñrst half of 2000 sales that were bolstered by the impending enactment of the
Valuation of Life Insurance Model Regulation (""Regulation XXX''). Regulation XXX required companies to
increase reserves relative to certain term life and permanent insurance policies with secondary guarantees as of
January 1, 2000. There was a rush of term business in anticipation of the related price increases for
implementation of Regulation XXX with sales up in the Ñrst half of 2000 due to a back log of business at
December 31, 1999. Term sales increased incrementally each quarter in 2001 and for the fourth quarter were
20% higher compared to the same quarter in 2000.
Account values increased $0.6 billion or 6% to $11.4 billion at December 31, 2001 from $10.8 billion at
the prior year-end. Positive cash Öows for the year of $1.2 billion were the main contributor to the increase
between years. Cash Öows in 2001 were Öat compared to the prior year. VUL account values were down
between years by $62 million due to market depreciation.
Product Development
The Life Insurance segment oÅers a broad portfolio of Life Insurance products. In addition to Term, the
segment oÅers three distinct permanent insurance product types: Universal Life, Variable Universal Life and
Interest Sensitive Whole Life. Within these product types are wealth accumulation and wealth transfer
speciÑc products, including single life and survivorship versions of all three. Insurance riders such as return of
premium and long-term care beneÑt provisions are available with certain products. .In addition, the segment
oÅers both UL and VUL versions of COLI. This allows the segment to eÅectively align its portfolio of
products with the primary aÉuent market segments, and to also provide products that perform under a variety
of market conditions.
Given the economic environment of the recent past, portfolio breadth has proven its value. The industry
has experienced a dramatic shift from variable to Ñxed products over the last year, driven primarily by the
equity market decline and a Öight to conservatism exacerbated by the events of September 11, 2001. Over the
last 12 months, the Life segment's mix of business has shifted dramatically from VUL to UL, but the dollar
decline in VUL sales has been more than oÅset by the dollar increase in UL sales. Universal Life accounted
for 79% of total retail UL/VUL sales in 2002 versus 56% of those sales in 2001. In times like these, when
clients have less tolerance for market risk, it is important to have a competitive Ñxed Universal Life portfolio.
The Life Insurance segment has continued to develop products that meet the changing needs of its target
aÉuent market. Throughout 2002, the segment revamped its entire retail UL portfolio. In March 2002, it
introduced a new single life series of products with Lincoln ULLPR and Lincoln ULDB. The Lapse Protection
Rider (""LPR'') product is an upgrade to the product introduced in 2001 which oÅers the innovative lapse
protection rider, designed to provide Öexibility and guaranteed death beneÑt coverage Ó important features in
today's market. The Death BeneÑt (""DB'') product is designed to oÅer cost-eÇcient coverage for people less
interested in guarantees. In August of 2002, new survivorship versions of both the LPR and DB products were
also introduced. Overall, the response to these new products has been very positive. In 2003, the segment plans
to continue to be aggressive in product development.
43
Estate Tax Reform
Estate tax reform was a major legislative debate in 2002, which is expected to continue. Among a variety
of alternatives being considered is a temporary extension of the one-year estate tax repeal that will occur in
2010 under current law. If this occurs, inheritance taxes on a state-by-state basis may be increased to oÅset
the projected reduction in revenues to state governments. More costly to both federal and state governments
would be a permanent repeal of estate taxes. The outlook for permanent repeal remains highly uncertain,
particularly in light of increasing federal and state budgetary concerns.
To date, the impact on LNC's life insurance sales of the recent changes in estate tax laws has not been
signiÑcant to overall sales for the Life Insurance segment. Total survivorship sales as a percent of overall retail
sales dropped from 29% of the total Ñrst year premiums in 2001 to 22% of the total in 2002. If estate taxes are
permanently repealed, LNC believes there will continue to be a demand for survivorship products to meet a
variety of tax, business and family needs. The Life Insurance segment's survivorship wealth transfer products
support a wide variety of Ñnancial planning needs such as business succession and charitable giving, not just
management of estate tax exposure.
Guideline AXXX
The Application of the Valuation of Life Insurance Policies Model Regulation (""AXXX'') was
developed to clarify statutory reserve requirements for particular policy designs under the NAIC Valuation of
Life Insurance Policies Model Regulation (""Regulation XXX''). AXXX will increase statutory reserves for
universal life policies sold beginning in 2003 with secondary guarantees using shadow accounts and for
speciÑed premium guarantees that are prefunded. The secondary guarantee promises to keep a policy in force
as long as certain conditions are met, regardless of whether the policy has any cash value.
Regardless of the value in the actual account value, the policy will not lapse as long as the shadow
account is positive. A shadow account is a hypothetical account that accumulates actual premium payments
and interest less fees based on the secondary guarantee assumptions. However, the shadow account does not
provide any cash value to the policyholder. All companies oÅering secondary guarantees that allow prefunding
will be impacted to a greater or lesser degree depending on product design. A prefunded policy is one where
premiums are paid earlier than is necessary to maintain the policy's beneÑts.
To reÖect the Ñnancial requirements of AXXX, Lincoln is repricing single life and survivorship products
that oÅer secondary guarantees using shadow accounts. The products are scheduled to be released in the latter
part of Ñrst quarter 2003. Lincoln also markets universal life products that do not oÅer secondary guarantees,
which will not be impacted by AXXX. LNC believes that secondary guarantees are going to continue to be
critical to LNC's target aÉuent market and that the repriced versions of these products should remain
competitive. However, LNC may lose market share if competitors are slow to replace their secondary
guarantees for AXXX.
Split Dollar
New regulations have set forth the IRS' views regarding the tax treatment of split dollar funding
arrangements. Split dollar is a premium funding mechanism that has been used for many years, with IRS
approval, to provide life insurance beneÑts to a Ñrm's key executives, or to provide life insurance beneÑts to
family members of closely held Ñrms, etc. In some cases, split dollar funding may not be as attractive under
the new IRS rules.
Further aÅecting some split dollar programs have been accounting reforms under Sarbanes-Oxley, which
prohibit publicly traded companies from extending credit to their directors or executives. However, most of the
products sold by LNC for use in split dollar arrangements are sold to closely held companies, limited
partnerships and family owned businesses, not for publicly traded companies. Segment management believes
that given LNC's target market, and the fact that the amount of split dollar sales in relationship to the level of
total Ñrst year life premium sold is insigniÑcant to the Life Insurance segment, the impacts of these changes
should have minimal overall eÅect on sales.
44
COLI
A variety of legislative proposals are being considered that would eÅect corporate owned life insurance.
LNC believes that life insurance remains a legitimate method of corporate funding of anticipated future
commitments as well as protection from unpredictable events such as the loss of key business executives. The
Life Insurance segment continues to approach COLI as an opportunistic market strategy. LNC's COLI
product is only marketed to organizations for coverage of oÇcers and require the prospective permission of
oÇcers to be covered under the COLI policy. Given the continuing legislative debates over corporate owned
life insurance LNC management is not currently able to determine what impact this environment will have on
product design or sales. At December 31, 2002, Life Insurance had $684 million of account values for COLI,
representing less than 6% of total segment account values.
Outlook
The Life Insurance segment experienced strong retail sales growth in 2002. Sales trends over the next
year for both UL and VUL products will likely continue to be heavily inÖuenced by the equity markets
performance and the uncertainty of the regulatory environment as well as the continued competitive
environment. There should continue to be a demand among the aÉuent for sophisticated life products to meet
a variety of tax, business and family needs. LNC's balanced portfolio of products is nicely positioned to take
advantage of this demand. The Life Insurance segment expects to continue to hold Ñrm its operating
fundamentals of: strong distribution relationships, solid underwriting, mortality and investment management
and strong expense controls as it strives to be among the top Ñve generators of new premiums in the life
insurance industry. The Life Insurance segment's earnings can be expected to reÖect some volatility due to
short-term eÅects of swings in mortality and morbidity.
Investment Management
The Investment Management segment, headquartered in Philadelphia, Pennsylvania, oÅers a variety of
asset management services to retail and institutional clients located throughout the United States and certain
foreign countries. Its product oÅerings include mutual funds and managed accounts. It also provides
investment management and account administration services for variable annuity products, 401(k) plans,
""529'' college savings plans, pension, endowment, and trust and other institutional accounts. The primary
operating companies within this segment are the subsidiaries of Delaware Management Holdings, Inc.
(""Delaware''). Retail products are primarily marketed by LFD and Delaware Distributors, L.P. through
Ñnancial intermediaries including LFA. Institutional products, including large case 401(k) plans, are
marketed by a separate sales force within Delaware working closely with pension consultants.
Diversity of investment styles, as well as diversity of clients served, are prudent ways to manage risk in
varying market environments. Delaware, historically known for a conservative, ""value'' equity investment style
has now evolved into an investment manager with strong and diversiÑed oÅerings across all major asset classes
including value and growth equity investment styles; high-grade, high-yield and municipal Ñxed income
investment styles; balanced and quantitative investment styles; and international and global equity and Ñxed
income investment styles.
45
Results of Operations: The Investment Management segment's Ñnancial results were as follows:
Total Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Investment Advisory Fees (Included in
Total Revenue) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Items Included in Net Income:
Realized Gain (Loss) on Investments (after-
tax)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restructuring Charges (after-tax) ÏÏÏÏÏÏÏÏÏÏ
Cumulative EÅect of Accounting Change
(after-tax) (1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill Amortization (after-tax) ÏÏÏÏÏÏÏÏÏÏ
2002
$404.7
2001
Year Ended December 31
2000
(in millions)
$494.2
1999
$495.6
$437.4
1998
$491.0
$267.1
$ 25.6
$284.7
$ 11.8
$320.5
$ 37.0
$332.2
$ 51.6
$331.5
$ 44.4
(3.6)
0.3
(2.3)
(0.4)
(2.5)
(4.6)
(0.1)
(9.3)
0.5
Ì
Ì
(0.1)
$ Ì $ 16.2
Ì
$ 16.2
Ì
$ 16.2
Ì
$ 16.3
(1) Cumulative EÅect of Accounting Change relates to the second quarter 2001 adoption of EITF 99-20.
Comparison of 2002 to 2001
Net income for 2002 increased $13.8 million or 117% over 2001. Excluding the eÅect of goodwill
amortization in 2001, net income decreased $2.4 million or 9% in 2002. The decrease in income is primarily a
result of declines in the equity markets reducing retail and institutional assets under management and
revenues. OÅsetting the negative eÅect of the markets on revenues has been a reduction in expenses of
$19.2 million, excluding the reduction in expenses from the change in accounting for goodwill amortization
and restructuring charges. This improvement in expenses is a result of cost containment eÅorts, the eÅect of
the equity market decline on variable expenses, $1.7 million reduction in amortization of other intangible
assets resulting from certain intangibles being fully amortized in the second quarter of 2001 and $4.2 million
for the release of accrued compensation resulting from the fourth quarter 2002 resignation of the segment's
CEO. In addition to lower expenses, positive net cash Öows in 2002 partially oÅset the negative eÅect of the
equity markets on assets under management and revenues.
Net income for 2002 included releases of $0.3 million related to restructuring charges reported in the
fourth quarter of 2000 to combine the investment management operations for Ñxed income products of
Lincoln Investment Management and Delaware in Philadelphia.
Critical Accounting Policy Ì Equity Market Sensitivity
As illustrated in the discussion of the Investment Management segment's results of operations above, the
segment's earnings are sensitive to swings in the equity markets. Refer to the First Quarter 2003 Guidance for
Estimated EÅect of Equity Market Volatility section for estimates of the eÅect of movements in the equity
markets on Investment Management's earnings.
Critical Accounting Policy Ì Deferred Dealer Commission Asset
The Investment Management segment has a deferred dealer commission asset of approximately
$53 million as of December 31, 2002 relating to upfront sales commissions paid to brokers for the sale of
""Class B'' shares of Delaware Investments retail mutual funds. The asset is amortized over the estimated
period of time that it is expected to be realized or recovered from future cash Öows in the form of asset-based
distribution (""12b-1'') fees from the mutual funds or contingent deferred sales charges (""CDSCs'') from
shareholders who redeem shares during the CDSC period. The estimate of future cash Öows from these
sources has been negatively impacted by the continued declines in the equity markets.
46
In accordance with SFAS 144 ""Accounting for the Impairment or Disposal of Long-Lived Assets'',
should the estimated undiscounted future cash Öows from 12b-1 fees and CDSC's drop below the carrying
value of the deferred dealer commission asset, then an impairment write-down would be required to be
recognized. In that event, the amount of the impairment write-down would be computed by comparing the
carrying value of the deferred dealer commission asset to the discounted value of the future 12b-1 and CDSC
cash Öows. As of December 31, 2002, the estimated undiscounted future 12b-1 and CDSC cash Öows
exceeded the carrying value of the deferred dealer commission asset.
However, continued declines in the Ñnancial markets or Net Asset Values (""NAVs'') of the underlying
retail mutual funds may trigger the recognition of a write-down of the deferred dealer commission asset. For
instance, a review of the deferred dealer commission asset was performed as of March 10, 2003. Based on
information currently available, it is estimated that a decline of approximately 3% in the equity markets from
March 10, 2003 levels may trigger a loss, which would range from approximately $7.4 million to $11.4 million
after-tax with the application of assumed discount rates ranging between 10% to 18% for purposes of
measuring the fair value of the deferred dealer commission asset. The estimated balance of the deferred dealer
commission asset as of March 10, 2003 was approximately $50 million.
The determination of any impairment of the deferred dealer commission asset is performed at quarter end
when complete information is available. The determination of any impairment includes both the Ñxed income
and equity mutual funds. Once an impairment loss is recognized, no write-up of the value of the deferred
dealer commission asset is permitted even if there are subsequent increases in the NAVs of the underlying
retail mutual funds from favorable Ñnancial markets.
Comparison of 2001 to 2000
The decreases in net income of $25.2 million or 68% in 2001 were primarily attributable to lower
investment advisory fees and to a lesser extent lower other revenue partially oÅset by lower expenses. Revenue
decreased as a result of a decrease in external assets under management, reduced distribution, shareholder
servicing and investment accounting revenue associated with lower retail mutual fund sales and lower assets
under management.
The primary driver of the decrease in external assets under management between years was net cash
outÖows of $7.2 billion in 2000 that caused the 2001 beginning of year external assets under management to be
much lower than the prior year beginning balance and to a lesser extent, market depreciation of $4.3 billion.
Total net outÖows in 2001 of $0.6 billion also had a slight negative impact on investment advisory fees.
The Investment Management segment made signiÑcant investments in 2000 and 2001 in upgrading talent
and revamping investment processes; however, eÅective expense management resulted in an overall decrease
in expenses. Expenses decreased by $10.9 million (pre-tax) or 3% in 2001. This decrease was primarily due to
the absence of signiÑcant severance expenses incurred during 2000, lower amortization expense associated
with other intangible assets and eÅective management of other expenses. Certain other intangible assets
capitalized as part of LNC's acquisition of Delaware Management Holdings, Inc. in 1995 had six-year lives
and were fully amortized in April of 2001. In addition, the segment had lower incentive compensation expense
accruals due primarily to the declining Ñnancial results between years. Partially oÅsetting the decreased
expenses noted above was higher amortization of deferred broker commissions due to an increase in the
deferred broker commission asset and expenses incurred during 2001 to close and/or merge a number of
mutual funds.
The change in net income for 2001 compared to 2000 also included the impact of restructuring charges.
The Investment Management segment incurred a restructuring charge in the fourth quarter of 2001 of
$0.4 million related to the consolidation of the Boston, Massachusetts investment and marketing oÇce with
the Philadelphia, Pennsylvania investment and marketing operations in order to eliminate redundant facilities
and functions within this business segment. In 2000, the Investment Management segment incurred two
restructuring charges of $2.7 million and $2.5 million in the second and fourth quarters, respectively. The
objectives of the $2.7 million charge recorded in the second quarter of 2000 were to combine the structured
product teams of Delaware and Vantage in Philadelphia and to consolidate the back oÇce operations of
47
Vantage into Delaware, in order to reduce ongoing operating costs and to eliminate redundant facilities within
this business segment. The objectives of the $2.5 million charge recorded in the fourth quarter of 2000 were to
combine the investment management operations for Ñxed income products of Lincoln Investment Manage-
ment and Delaware in Philadelphia, in order to reduce ongoing operating costs and eliminate redundant
facilities within this business segment. In addition, in 2000 there were reversals totaling $0.6 million related to
the Lynch & Mayer restructuring charge originally recorded in 1999 and the Vantage restructuring charge
recorded in 2000. For further discussion of these restructuring plans refer to Note 12 to the consolidated
Ñnancial statements.
Assets Under Management and Client Net Flows(1)
The Investment Management segment's assets under management were as follows:
Assets Under Management
Regular Operations:
Retail-Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retail-Fixed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Retail(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Institutional-Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Institutional-Fixed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Institutional ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Insurance Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Assets Under Management(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2002
2001
December 31
2000
(in billions)
1999
1998
$14.9
7.6
22.5
16.7
7.3
24.0
41.1
$87.6
$18.0
7.1
25.1
17.8
5.5
23.3
38.1
$86.5
$21.5
6.6
28.1
19.1
6.1
25.2
35.7
$89.0
$23.4
7.5
30.9
23.6
6.9
30.5
35.9
$97.3
$ 22.1
8.2
30.3
24.2
7.0
31.2
39.4
$100.9
The Investment Management segment's net Öows were as follows:
Retail:
Equity Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity Redemptions and Transfers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net FlowsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixed SalesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixed Redemptions and Transfers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net FlowsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Retail Net Flows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Institutional:
Equity InÖows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity Withdrawals and Transfers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net FlowsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixed InÖows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fixed Withdrawals and Transfers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net FlowsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Institutional Net Flows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Retail and Institutional Net Flows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2002
$ 4.5
(3.9)
0.6
1.2
(1.0)
0.2
0.8
2.9
(1.9)
1.0
2.3
(1.2)
1.1
2.1
$ 2.9
Year Ended December 31
2000
1999
2001
(in billions)
$ 2.8
(3.4)
(0.6)
0.9
(0.7)
0.2
(0.4)
3.2
(2.8)
0.4
0.6
(1.2)
(0.6)
(0.2)
$(0.6)
$ 4.1
(4.6)
(0.5)
0.8
(1.8)
(1.0)
(1.5)
2.7
(7.2)
(4.5)
0.8
(2.0)
(1.2)
(5.7)
$(7.2)
$ 3.3
(5.1)
(1.8)
1.0
(1.4)
(0.4)
(2.2)
5.2
(7.8)
(2.6)
2.0
(1.7)
0.3
(2.3)
$(4.5)
1998
$ 3.6
(1.7)
1.9
1.1
(1.2)
(0.1)
1.8
3.8
(7.4)
(3.6)
2.2
(1.3)
0.9
(2.7)
$(0.9)
(1) Retail assets under management and net Öows for 2000 and 2001 have been restated to include assets
under administration by the segment. Previously, these assets were excluded as the investments are
managed by third parties. Assets under administration are now included so that assets under management
includes all assets for which the segment receives asset based revenues. The restatements increased assets
under management by $0.5 billion at both December 31, 2001 and December 31, 2000 and net retail
Öows increased by $81 million and $18 million for the year ended December 31, 2001 and 2000,
respectively.
48
Assets under management increased $1.1 billion to $87.6 billion at the end of 2002. The increase was the
result of a $3.0 billion increase in insurance assets (i.e. primarily general account assets of LNC's insurance
subsidiaries). In addition, institutional assets under management increased $0.7 billion as positive net inÖows
of $2.1 billion oÅset the reduction in assets of $1.4 billion resulting from the negative performance of the
equity markets. Retail assets under management decreased $2.6 billion as the equity markets reduced assets
by $3.4 billion, more than oÅsetting the $0.8 billion positive net Öows.
The Investment Management segment's net Öows turned positive for 2002, a signiÑcant improvement
over the net outÖows in prior years. Total net Öows improved $3.5 billion over 2001. The improvement in net
Öows in 2002 was the result of a $1.4 billion increase in institutional inÖows and improvement in retention of
institutional assets. In addition, higher retail sales oÅset increased redemptions and transfers.
Positive investment performance has been a key driver of the improvement in net Öows. On the
institutional side, for the year ended December 31, 2002, 4 of the 8 largest product composites met or
outperformed their respective indices and these 4 composites accounted for 74% of institutional assets under
management. However, this relative performance is below the results experienced for the year ended
December 31, 2001, in which 6 of the 8 largest composites outperformed their respective indices. On the retail
side, for the year ended December 31, 2002, 17 of 25 or 68% of the largest retail funds in Delaware
Investments Family of Funds (the Delaware Investments Family of Funds does not include mutual funds
managed by Delaware for certain LNC aÇliates) performed in the top half of their respective Lipper
universes; 76% of the 25 largest retail funds performed in the top half of their respective Lipper universes for
the year ended December 31, 2001. These 17 funds represented 63% of assets under management of the
largest 25 retail funds at December 31, 2002. In addition, Delaware had 15 funds labeled Lipper Leaders for
""Consistent Return,'' 8 funds named Lipper Leaders for ""Capital Preservation,'' 10 funds labeled Lipper
Leaders for ""Total Return,'' 7 funds labeled Lipper Leaders for ""Expense'' and 22 funds labeled Lipper
Leaders for ""Tax EÇciency.'' For the year, 41 of Delaware's 52 retail funds have been labeled a Lipper Leader
in at least one category and 17 funds have been selected in multiple categories.
Retail sales for 2002 were a record $5.7 billion, up $2.0 billion or 54% over 2001. The growth in retail
sales was driven by increased sales of managed account business. Managed account deposits in 2002 more
than doubled deposits in 2001, with deposits of $1.2 billion in 2002 compared to $0.5 billion in 2001. A portion
of the sales increase in managed accounts was a result of events aÅecting key competitors (a group departure
of investment professionals from one Ñrm and a second Ñrm temporarily closing for new business).
Sales of Delaware's mutual funds by LFA continued to decline during 2002 as sales through LFA
represented approximately 4% and 5% of LFA's total mutual fund sales in 2002 and 2001, respectively. Sales
of mutual funds, managed accounts, 401(k) products and ""529'' plans through LFD, the internal wholesaling
arm for distribution of Delaware's investment products increased 32% in 2002 relative to 2001. LFD was
organized at the end of 2000 and was in the ramp up stage throughout 2001. Delaware is working closely with
both LFA and LFD to increase sales through improved communication, focusing on selected funds and
working with the newly formed research teams to ensure optimum positioning of competitive Delaware
products. Delaware was awarded program management and certain investment advisory services for the ""529''
college savings plans for the state of Hawaii and the Commonwealth of Pennsylvania during 2001. Services
commenced in mid-2002 for the ""529'' plans. The persistence of poor equity markets, combined with a more
crowded ""529'' marketplace, has resulted in lower than anticipated sales; however, these programs provide
Delaware with an opportunity to attract signiÑcant long-term assets under management. Although ""529''
programs should have a favorable impact on retail sales, positive earnings impact is not expected to occur until
at least 2005 because of signiÑcant start-up and distribution costs.
Outlook
In October 2002, the President and CEO of Delaware, Charles E. Haldeman, Jr. announced his
resignation. In January 2003, Jude T. Driscoll, Executive Vice-President and Head of Fixed Income for
Delaware, was named President and CEO. LNC believes that a strong team of investment and research
professionals exists at Delaware that continues to be committed to a team approach to research and
49
investment management. Delaware continues to focus on improving investment performance, attracting and
retaining client assets and/or funds, managing expenses and ultimately improving proÑtability. The Invest-
ment Management segment has made progress on these initiatives, and will continue to focus on sustaining
and improving those results.
Lincoln UK
Lincoln UK is headquartered in Barnwood, Gloucester, England, and is licensed to do business
throughout the United Kingdom (""UK''). Although Lincoln UK transferred its sales force to Inter-Alliance
Group PLC in the third quarter of 2000, it continues to manage, administer and accept new deposits on its
current block of business and accept new business for certain products. Lincoln UK's product portfolio
principally consists of unit-linked life and pension products, which are similar to variable life and annuity
products sold in the U.S.
Result of Operations: Lincoln UK's Ñnancial results, account values, in-force and exchange rates were
as follows:
Net Income (Loss)(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Items Included in Net Income:
2002
$40.0
2001
Year Ended December 31
2000
(in millions)
$(13.2)
1999
$(18.2)
$68.9
1998
$71.7
Realized Gain on Investments (after-tax) ÏÏÏÏÏÏÏ
Restructuring Charges (after-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill Amortization (after-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.3
1.7
8.7
Ì
$ Ì $ 0.6
2.3
(76.5)
4.0
$
2.2
(6.5)
7.0
$
0.8
Ì
$ 6.3
Unit-Linked Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Individual Life Insurance In-ForceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exchange Rate Ratio Ì U.S. Dollars to Pounds
Sterling
2002
2001
$ 5.1
$18.9
$ 5.6
$20.9
December 31
2000
(in billions)
$ 6.4
$24.3
1999
1998
$ 7.2
$25.7
$ 6.3
$25.0
Average for the Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
End of YearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.503
1.610
1.441
1.456
1.518
1.493
1.617
1.615
1.658
1.660
(1) Income (loss) from operations and net income (loss) for 1999 include a charge of $126.1 million
($194.0 million pre-tax) for a change in estimate of the cost of settling pension misselling liabilities and
1999 also includes a tax beneÑt of $42.1 million relating to the decision to explore exiting the UK
insurance market.
Comparison of 2002 to 2001
The $28.9 million or 42% decrease in net income in 2002 was primarily due to the decline in the UK
equity markets. The FSTE 100 index declined 24% in 2002 compared to a 16% decline in 2001. The decline in
the equity markets reduced assets in equity-linked accounts resulting in lower fee income. The equity market
decline also resulted in increased amortization from retrospective unlocking of DAC and PVIF assets and the
liability, deferred front-end loads revenue (""DFEL''). There was negative unlocking of $22.8 million in 2002
compared to negative unlocking of $8.4 million in 2001. As required under FAS 97, acquisition costs for unit-
linked contracts are amortized over the lives of the contracts in relation to the incidence of estimated gross
proÑts. Estimated gross proÑts on unit-linked contracts vary based on surrenders, fee income, expenses and
realized gains/losses on investments. The amortization is adjusted retrospectively when estimates of current or
future gross proÑts to be realized from unit-linked contracts are revised. Because market movement has such a
signiÑcant impact on fee income, estimated future proÑts will go up or down accordingly. On a quarterly basis,
Lincoln UK reviews the assumptions of its DAC amortization model and records a retrospective adjustment to
50
the amount expensed, (i.e. unlocks the DAC). On an annual basis, Lincoln UK reviews and adjusts as
necessary its assumptions for prospective amortization of DAC, PVIF and DFEL.
In 2001, Lincoln UK consolidated its home oÇce operations into the Barnwood oÇce. In 2002,
Lincoln UK sold its former Uxbridge home oÇce and recognized a realized gain on the transaction of
$5.5 million ($7.9 million pre-tax) which is included in realized gain on investments. Excluding this gain,
Lincoln UK's realized gains (losses) decreased $12.9 million from 2001. The impact of realized gain
(losses) in both years was a result of sales relating to the realignment of the investment portfolio in order to
better match invested assets with the liabilities they support.
Net income for 2002 included releases of $1.7 million related to restructuring charges reported in 2000 for
the restructuring plan to exit all direct sales and sales support operations and to consolidate the Uxbridge
home oÇce with the Barnwood home oÇce.
Critical Accounting Policy Ó Equity Market Sensitivity
As illustrated in the discussion of the Lincoln UK segment's results of operations above, the segment
earnings are sensitive to swings in the equity markets. Refer to the First Quarter 2003 Guidance for Estimated
EÅect of Equity Market Volatility on Fee Income, DAC and GMDB section for estimates of the eÅect of
movements in the equity markets on Lincoln UK's earnings.
Comparison of 2001 to 2000
The increase in net income of $82.1 million in 2001 was due primarily to the absence of restructuring
charges of $76.5 million recorded in the third and fourth quarters of 2000 as discussed above. This
restructuring plan resulted from LNC's decisions to cease writing new business in the UK through its sales
force and transfer of the sales force to Inter-Alliance Group PLC. In addition, Lincoln UK had an increase in
realized gains on investments of $6.4 million between years. The gains reported in 2001 relate to the
realignment of the investment portfolio to better match invested assets with the liabilities they support.
Outsourcing Agreement
In the third quarter 2002, Lincoln UK agreed to outsource its customer service and policy administration
function to the Capita Group, Plc (""Capita''). The agreement involved the transfer of approximately 500
employees to Capita. The purpose of the transaction was to reduce the operational risk and variability of future
costs associated with administering the business by taking advantage of Capita's proven expertise in providing
outsourcing solutions to a variety of industries including general insurance companies.
Exchange Rates
LNC's subsidiary in the UK has its balance sheets and income statements translated at the current spot
exchange rate as of the year end and average spot exchange rate for the year, respectively. From time to time,
LNC will hedge its exposure to foreign currency as it relates to its net investment in Lincoln UK.
Outlook
During 2003, Lincoln UK will continue to work to resolve all past misselling exposures while focusing on
retaining and managing its current block of business and maximizing earnings through eÅective expense
management.
Other Operations
Activity that is not included in the major business segments is reported in ""Other Operations.'' ""Other
Operations'' includes operations not directly related to the business segments and unallocated corporate items
(i.e., corporate investment income, interest expense on corporate debt, unallocated overhead expenses, and the
operations of LFA and LFD.
51
Prior to the fourth quarter of 2001, LNC had a Reinsurance segment (""Lincoln Re''). LNC's
reinsurance business was acquired by Swiss Re in December 2001. As the majority of the business acquired by
Swiss Re was via indemnity reinsurance agreements, LNC is not relieved of its legal liability to the ceding
companies for this business. This means that the liabilities and obligations associated with the reinsured
contracts remain on the consolidated balance sheets of LNC with a corresponding reinsurance receivable from
Swiss Re. In addition, the gain resulting from the indemnity reinsurance portion of the transaction was
deferred and is being amortized into earnings at the rate that earnings on the reinsured business are expected
to emerge, over a period of 15 years. The ongoing management of the indemnity reinsurance contracts and the
reporting of the deferred gain will be within LNC's Other Operations. Given the lengthy period of time over
which LNC will continue to amortize the deferred gain, and the fact that related assets and liabilities will
continue to be reported on LNC's Ñnancial statements, the historical results for the Reinsurance segment prior
to the close of the transaction with Swiss Re will not be reÖected in discontinued operations, but as a separate
line in Other Operations. The results for 2001 included eleven months of Reinsurance segment operations
through the period ended November 30, 2001.
Results of Operations: Other Operations' Ñnancial results were as follows:
2002
2001
Year Ended December 31
2000
(in millions)
1999
1998
Net Income by Source:
LFA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
LFD ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
LNC Financing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Reinsurance Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of Deferred Gain on Indemnity
$ (27.6) $(15.9)
(34.4)
(77.9)
(18.2)
128.8
(33.9)
(43.0)
5.8
Ì
$(11.7)
(18.5)
(84.9)
(15.1)
123.2
$(20.8)
(14.0)
(83.5)
(4.9)
36.9
$(23.7)
(8.2)
(51.5)
(31.8)
104.9
Reinsurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
48.9
12.9
FAS 113 Reserve Development on Business
Sold through Indemnity Reinsurance ÏÏÏÏÏÏÏ
(199.1)
Ì
Ì
Ì
Ì
Ì
Gain (Loss) on Sale of Reinsurance
Subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(9.4)
15.0
Gain on Sale of Equity Investment in
Reinsurance Marketing Company ÏÏÏÏÏÏÏÏÏÏ
21.7
Ì
Ì
Ì
Realized Gain (Loss) on Investments and
Derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative EÅect of Accounting Changes(1)
(4.2)
Ì
(0.4)
(2.7)
(3.2)
Ì
10.2
Ì
Ì
Ì
Ì
2.7
Ì
Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(240.8)
7.2
(10.2)
(76.1)
(7.6)
Items Included in Net Income:
Realized Gain (Loss) on Investments and
Derivatives (including gain on sale of
Equity Investment in Reinsurance
Marketing Company) (after-tax) ÏÏÏÏÏÏÏÏ
Restructuring Charges (after-tax) ÏÏÏÏÏÏÏÏÏ
Cumulative EÅect of Accounting
Changes(1) (after-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
17.5
1.1
(0.4)
(19.5)
(3.2)
1.0
10.2
(3.2)
2.7
(14.3)
Ì
(2.7)
Ì
Ì
Ì
(1) Cumulative EÅect of Accounting Changes relates to the transition adjustment of $(0.5) million recorded
in the Ñrst quarter of 2001 upon adoption of FAS No. 133 and the adjustment of $(2.2) million recorded
in the second quarter of 2001 upon adoption of EITF 99-20.
52
Comparison of 2002 to 2001
The net loss in 2002 was a $248.0 million higher compared to net income in 2001. The net loss includes
$199.1 million related to charges required by FAS 113 for increases in personal accident and disability income
reserves for the business sold through indemnity reinsurance to Swiss Re. Included in the charge is
$0.6 million of amortization related to the reserve increases and the settlement with Swiss Re on disputed
matters. In addition, the amortization of deferred gain on indemnity reinsurance increased $36.0 million due to
a full year's amortization in 2002 compared to one month's amortization in 2001.
Net income for 2001, included $128.8 million of income from the former Reinsurance segment. In 2002,
LNC reported a gain of $21.7 million on the sale of its investment (included in realized gains on investments)
in an international marketing company associated with LNC's former Reinsurance segment. OÅsetting this
gain was an adjustment in 2002 of $9.4 million to the gain on sale of reinsurance subsidiaries sold in 2001. The
adjustment related primarily to the true-up of estimated taxes associated with the sale.
LNC Financing had a positive variance of $34.9 million from 2001. In 2002, LNC Financing included
investment income of $19.6 million from the proceeds of the sale of LNC's reinsurance business to Swiss Re.
In addition to the investment income, there was a decrease in long-term debt expense associated with various
long-term Ñnancing activities that occurred in the second half of 2001 and third quarter of 2002 as described in
the Liquidity and Cash Flow section within Review of Consolidated Financial Conditions. In addition, short-
term borrowing costs were lower due to lower interest rates and lower daily average borrowings under the
commercial paper program in the U.K. The Lincoln UK segment has experienced increased cash Öow from
operations over the last year, which was used in part to eliminate its outstanding commercial paper balance
during 2002.
Other Corporate had income of $5.8 million in 2002, an improvement of $24.0 million compared to 2001.
Included in the 2001 loss was a restructuring charge of $15.8 million to consolidate operations and reduce
excess space in LNC's Fort Wayne, Indiana operations resulting from LNC's divestiture of its reinsurance
operations.
LFA had an increase in net loss of $11.7 million compared to 2001. Included in LFA's expenses are the
eÅects of changes in the measurement of LFA's liability for deferred compensation due to changes in fair
value primarily resulting from changes in the equity markets. The declines in the equity markets during 2002,
reduced LFA's liability for deferred compensation and increased income by $6.4 million. However, in the
fourth quarter 2001, LNC invested in a variable annuity contract to partially oÅset the impact on net income
of equity market volatility associated with the liability for deferred compensation. Due to the fall of the equity
markets in 2002, the annuity value decreased resulting in a loss of $8.3 million. In addition, in 2002 the Fringe
BeneÑt operation (""FBD'') was moved from LFA to the Retirement segment. In 2001, FBD had a loss of
$2.2 million which was included in LFA's results. Excluding the net eÅect of the annuity and the deferred
compensation liability and FBD's income in 2001, LFA's net loss was $25.6 million and $18.5 million in 2002
and 2001, respectively, an increase of $7.1 million between years. LFA sales during the fourth quarter 2002 did
not reÖect the typical seasonal fourth quarter increase over the prior three quarters of the year as had been
seen during the fourth quarter of the previous four years. This deviation from the prior trend in sales resulted
in a decrease in revenues for the year. In 2003, LFA expects to focus on its growth strategy to increase its
Ñnancial planner base in order to expand sales while employing eÅective expense management.
LFD, LNC's wholesaling distribution arm, experienced an improvement in net losses of $0.5 million in
2002. However, included in LFD's 2002 net income were expenses of $5.0 million resulting from a decision to
expense previously deferred costs related to speciÑc initiatives to expand life insurance sales. Excluding this
expense, LFD's net losses improved as a result of a combination of increased sales in all of its product
categories including life insurance, annuity and investment products and a reduction in Ñxed operating costs
primarily due to lower expenses following two restructurings that occurred in 2001 and ongoing disciplined
expense management. LFD incurred expenses of $3.7 million in 2001 for the restructuring activities. The
objectives of LFD restructuring charges were to reorganize the life wholesaling function within the
independent planner distribution channel; consolidate retirement wholesaling territories; streamline the
marketing and communications functions in LFD; combine channel oversight; position LFD to take better
53
advantage of ongoing ""marketplace consolidation'' and to expand the customer base of wholesalers in certain
non-productive territories. LFD's on-going strategy is to develop existing strategic alliances across all
distribution channels. However, given the continued uncertainty of the equity markets and interest rate
environment, LNC is cautious about sales expectations for 2003.
Critical Accounting Policy Ì Personal Accident & Disability Income Reserves
Refer to the Acquisition and Divestiture section for discussion of the impact on income for changes in
reserves for the personal accident and disability income sold to Swiss Re through indemnity reinsurance.
Comparison of 2001 to 2000
Net income increased $17.4 million to $7.2 million in 2002. Net income for 2001 included the impact of
three restructuring charges totaling $19.5 million: two charges were recorded related to LFD totaling
$3.7 million and the other charge was for $15.8 million noted above in Other Corporate. Net income for 2001
also included the impact of a $15.0 million gain on sale of reinsurance subsidiaries.
The loss in Financing decreased $7.0 million between years primarily due to lower short-term borrowing
costs resulting from the ten Fed rate cuts that occurred in 2001 and lower long-term debt costs. The decrease
in long-term debt costs resulted from several corporate Ñnance activities in 2001 as described in the Liquidity
and Cash Flow section of the Review of Consolidated Financial Conditions.
Other Corporate experienced a negative variance of $3.1 million between years. Included in the 2001 loss
was the restructuring charge noted above. In 2000, there were losses of $2.6 million associated with litigation
items and a $2.4 million loss related to LNC's equity investment in AnnuityNet. In addition, there was
$8.6 million in incentive compensation expense in 2000 resulting from the achievement of the three-year long-
term incentive compensation goals.
The Reinsurance line, which includes the historical earnings of the former Reinsurance segment had an
increase in income of $5.6 million in 2001. The 2001 results, however, only represents eleven months of
earnings through November 30, 2001.
The Amortization of Deferred Gain line includes the amortization of the deferred gain on the indemnity
reinsurance portion of the transaction with Swiss Re for December ($5.0 million) along with the recognition
of accelerated amortization of the deferred gain on Canadian reinsurance business that was novated to
Swiss Re after December 7, 2001 ($7.9 million), but prior to December 31, 2001. In accordance with
FAS 113, the gain associated with the indemnity reinsurance portion of the transaction with Swiss Re was
recorded as a deferred gain and is being amortized into earnings over a period of 15 years. Upon novation
(transfer of the legal liability), generally accepted accounting principles provide for immediate recognition in
earnings of the deferred gain related to the novated business.
LFA had an increased net loss of $4.2 million between years due primarily to a decrease in sales revenue.
LFA, a fee-based investment planning Ñrm and broker/dealer, experienced a decrease in sales across all
product lines: annuities, life insurance and other investment products. The downturn in the equity markets
caused a diÇcult sales environment for broker/dealers. Sales in the fourth quarter of 2001 rebounded from the
lower levels experienced in the Ñrst three quarters of 2001 and contributed to positive earnings for the quarter
which reduced the loss for the year. This fourth quarter 2001 increase in sales was consistent with the trend
experienced over the prior three years and can be explained as a seasonal improvement related to the year-end
increase in tax planning and other related activities. In addition, in 2001, the events of September 11 derailed
sales in the third quarter which created increased demand in the fourth quarter. In addition to lower revenues,
LFA had an increase in overall expenses in 2001 as a result of increased salaries and other general and
administrative expenses partially oÅset by reduced commissions and other volume related expenses.
LFD had an increased loss of $15.9 million between years due to decreased sales revenue and increased
expenses, including the restructuring charge in 2001 noted above. LFD experienced slightly lower retail sales
in 2001, and revenue decreased as a result of changes in the mix of business. In addition, LFD had lower sales
of corporate owned life insurance as previously discussed in the Life Insurance segment's result of operations.
54
Retail sales were bolstered by strong second half sales of the StepFive» Fixed Annuity, Lincoln ChoicePlussm
Variable Annuity product line and the MoneyGuard universal life product which includes a long-term care
beneÑt. Mutual fund sales, however, were weak throughout the year due primarily to the poor performance of
the equity markets. In addition, LFD's wholesaling force was not at full strength until the end of 2001. LFD
had higher expenses primarily as a result of its investment in new wholesalers during 2001 partially oÅset by
the positive impact on expenses of the two restructuring plans implemented in 2001, as well as other targeted
expense reduction activities. LFD started with 221 wholesalers at the beginning of 2001 and had 241 at
December 31, 2001.
Litigation
During the Ñrst quarter of 2000, the appellate court upheld LNC's position in litigation relating to the
1992 sale of the Employee Life-Health BeneÑt business segment. As a result of this favorable decision, LNC's
2000 earnings increased by approximately $11.2 million ($17.2 million pre-tax).
In 2001, Lincoln National Life Insurance Company (""LNL') concluded the settlement of all class action
lawsuits alleging fraud in the sale of LNL non-variable universal life and participating whole life policies
issued between January 1, 1981 and December 31, 1998. Since 2001, LNL has reached settlements with a
substantial number of the owners of policies that opted out of the class action settlement. LNL continues to
defend a small number of opt out claims and lawsuits. While there is continuing uncertainty about the
ultimate costs of settling the remaining opt out cases, it is management's opinion that established reserves are
adequate and future developments will not materially aÅect the consolidated Ñnancial position of LNC.
LNC and LNL have pursued claims with their liability insurance carriers for reimbursement of certain
costs incurred in connection with the class action settlement and the settlement of claims and litigation
brought by owners that opted out of the class action settlement. During the fourth quarter of 2002, LNC and
LNL settled their claims against three liability carriers on a favorable basis. LNC and LNL continue to
pursue similar claims against a fourth liability insurance carrier.
In December 2000, LNC received a $43 million (pre-tax) cash payment in exchange for agreeing to
modify certain non-compete terms included in an acquisition completed by LNC prior to 1999. In LNC's
purchase accounting for this acquisition, the non-compete terms of the acquisition agreement were believed to
have only negligible value and there was no reasonable basis for estimating the additional business and proÑts,
if any, that might result from these non-compete terms. Under these facts and circumstances, LNC concluded
that no separately identiÑable intangible asset should be recorded for the non-compete terms. However, events
in 2000 resulted in a substantial increase in the value of these non-compete terms, culminating with the receipt
of the $43 million payment. LNC does not believe that the forfeiture of its remaining non-compete rights and
beneÑts, which would have otherwise expired in 2001, diminishes the value of goodwill recorded in the
acquisition. As a result, LNC recorded the $28.0 million ($43 million pre-tax) payment in fourth quarter 2000
net income.
55
Consolidated Investments
The consolidated assets under management including consolidated investments and assets held in
separate accounts on the balance sheet, and external assets under management classiÑed by investment
advisor, mean invested assets, net investment income and investment yield are as follows:
2002
2001
December 31
2000
(in billions)
1999
1998
Assets Managed by Advisor
Investment Management Segment(1):
External Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Insurance Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lincoln UK ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Within Business Units (Policy Loans)ÏÏÏÏÏÏÏÏÏ
By Non-LNC Entities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Assets Managed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mean Invested AssetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjusted Net Investment Income(2)ÏÏÏÏÏÏÏÏ
Investment Yield ( ratio of net investment
$ 46.5
41.1
6.4
1.9
23.2
$119.1
$38.83
$ 2.61
$ 48.4
38.1
6.9
1.9
30.9
$126.2
$37.62
$ 2.69
$ 53.4
35.7
7.9
1.9
32.4
$131.3
$37.47
$ 2.75
$ 61.4
35.9
8.6
1.9
32.7
$140.5
$39.03
$ 2.82
$ 61.5
39.4
7.6
1.8
23.5
$133.8
$36.50
$ 2.69
income to mean invested assets)ÏÏÏÏÏÏÏÏÏÏÏÏ
6.74%
7.14%
7.35%
7.21%
7.36%
(1) See Investment Management segment data for additional detail.
(2) Includes tax-exempt income.
Investment Objective:
Invested assets are an integral part of the Lincoln Retirement, Life Insurance
and Lincoln UK segments' operations. For discussion of external assets under management, i.e. retail and
institutional assets, see the Investment Management segment discussion. LNC follows a balanced approach of
investment for both current income and prudent risk management, with an emphasis on generating suÇcient
current income to meet LNC's obligations. This approach requires the evaluation of risk and expected return
of each asset class utilized, while still meeting the income objectives of LNC. This approach also permits
LNC to be more eÅective in its asset-liability management, since decisions can be made based upon both the
economic and current investment income considerations aÅecting assets and liabilities.
Investment Portfolio Composition and DiversiÑcation: Fundamental to LNC's investment policy is
diversiÑcation across asset classes. LNC's investment portfolio, excluding cash and invested cash, is composed
of Ñxed maturity securities; mortgage loans on real estate; real estate either wholly owned or in joint ventures
and other long-term investments. LNC purchases investments for its segmented portfolios that have yield,
duration and other characteristics that take into account the liabilities of the products being supported. The
dominant investments held are Ñxed maturity securities, which represent approximately 82% the investment
portfolio. The total investment portfolio increased $3.9 billion in 2002 and $744 million in 2001. The increase
in 2002 was due to the purchase of investments from cash Öow generated by the business units, positive net
Öows for Ñxed annuity portfolios and market appreciation of Ñxed maturity securities. The increase in 2001
was due to the purchase of investments from cash Öow generated by the business units, positive net Öows for
Ñxed annuity portfolios and market appreciation of Ñxed maturity securities due to the signiÑcant decline in
interest rates during 2001.
Securities Available-for-Sale: LNC's entire Ñxed maturity and equity securities portfolio is classiÑed as
""available-for-sale'' and is carried at fair value on its balance sheet. Because the general intent of the
""available-for-sale'' accounting rules is to reÖect shareholders' equity as if unrealized gains and losses were
actually recognized, it is necessary for LNC to consider all related accounting adjustments that would occur
upon such a hypothetical recognition of unrealized gains and losses. Such related balance sheet eÅects include
adjustments to the balances of deferred acquisition costs, policyholder commitments and deferred income
56
taxes. Adjustments to each of these balances are charged or credited directly to shareholders' equity as part of
LNC's ""available-for-sale'' accounting. For instance, deferred acquisition costs are adjusted upon the
recognition of unrealized gains or losses since the amortization of deferred acquisition costs is based upon an
assumed emergence of gross proÑts on certain insurance business. In a similar manner, adjustments to the
balances of policyholder reserves or commitments are made because LNC has either a contractual obligation
or has a consistent historical practice of making allocations of investment gains or losses to certain
policyholders. Deferred income tax balances are also adjusted, since unrealized gains or losses do not aÅect
actual taxes currently paid. See Note 3 to the consolidated Ñnancial statements for details of the gross
unrealized gains and losses as of December 31, 2002.
Mortgaged-Backed Securities: LNC's Ñxed maturity securities available-for-sale include mortgage-
backed securities. The mortgage-backed securities included in LNC's investment portfolio are subject to risks
associated with variable prepayments. This may result in these securities having a diÅerent actual cash Öow
and maturity than expected at the time of purchase. Securities that have an amortized cost greater than par
and are backed by mortgages that prepay faster than expected will incur a reduction in yield or a loss. Those
securities with an amortized cost lower than par that prepay faster than expected will generate an increase in
yield or a gain. In addition, LNC may incur reinvestment risks if market yields are lower than the book yields
earned on the securities. Prepayments occurring slower than expected have the opposite impact. LNC may
incur disinvestment risks if market yields are higher than the book yields earned on the securities and LNC is
forced to sell the securities. The degree to which a security is susceptible to either gains or losses is inÖuenced
by 1) the diÅerence between its amortized cost and par, 2) the relative sensitivity of the underlying mortgages
backing the assets to prepayment in a changing interest rate environment and 3) the repayment priority of the
securities in the overall securitization structure.
LNC limits the extent of its risk on mortgage-backed securities by prudently limiting exposure to the
asset class, by generally avoiding the purchase of securities with a cost that signiÑcantly exceeds par, by
purchasing securities backed by stable collateral, and by concentrating on securities with enhanced priority in
their trust structure. Such securities with reduced risk typically have a lower yield (but higher liquidity) than
higher-risk mortgage-backed securities. At selected times, higher-risk securities may be purchased if they do
not compromise the safety of the general portfolio. At December 31, 2002, LNC did not have a signiÑcant
amount of higher-risk mortgage-backed securities. There are negligible default risks in the mortgage-backed
securities portfolio as a whole as the vast majority of the assets are either guaranteed by U.S. government-
sponsored entities or are supported in the securitization structure by junior securities enabling the assets to
achieve high investment grade status. See Note 3 to the consolidated Ñnancial statements for additional detail
about the underlying collateral.
Mortgage Loans on Real Estate and Real Estate: As of December 31, 2002, mortgage loans on real
estate and investments in real estate represented 10.5% and 0.7% of the total investment portfolio. As of
December 31, 2002, the underlying properties supporting the mortgage loans on real estate consisted of 36.8%
in commercial oÇce buildings, 23.3% in retail stores, 18.1% in industrial buildings, 10.3% in apartments, 7.7%
in hotels/motels and 3.8% in other. In addition to the dispersion by property type, the mortgage loan portfolio
is geographically diversiÑed throughout the United States. However, mortgage loans on real estate in
California and Texas accounted for approximately 28% of the total carrying value of mortgage loans at
December 31, 2002.
All mortgage loans that are impaired have an established allowance for credit loss. Changing economic
conditions impact LNC's valuation of mortgage loans. Increasing vacancies, declining rents and the like are
incorporated into the discounted cash Öow analysis that LNC performs for monitored loans and may
contribute to the establishment of (or an increase in) an allowance for credit losses. In addition, LNC recently
completed a detailed review of its entire hotel mortgage loan portfolio in light of the downturn in that sector
and has done similar analysis for its portfolio of anchored retail mortgage loans. LNC also monitors and
evaluates oÇce mortgage loan exposures to troubled sectors such as telecom. Where warranted, LNC has
established or increased loss reserves based upon this analysis. Impaired mortgage loans as a percentage of
total mortgage loans has deteriorated over the last year as a result of increased credit losses in the sectors
noted above. This percentage was 1.7%, 0.6%, 0.5%, 0.6%, 0.8%, 1.1%, 1.9% and 3.9% as of December 31,
57
2002, 2001, 2000, 1999, 1998, 1997, 1996 and 1995, respectively. See Note 3 to the consolidated Ñnancial
statements for additional detail regarding impaired mortgage loans.
LNC completed securitizations of commercial mortgage loans in both the fourth quarter of 2000 and the
fourth quarter of 2001. In each securitization, the loans were transferred to a trust held in a ""qualiÑed'' special
purpose entity (""SPE''), which is therefore not consolidated into LNC. In the Ñrst securitization, the loans
had a fair value of $186.0 million and a carrying value of $185.7 million. LNC retained a 6.3% interest in the
securitized assets. LNC received $172.7 million from the trust for the sale of the senior trust certiÑcates
representing the other 93.7% beneÑcial interest. A realized gain of $0.4 million pre-tax was recorded on this
sale. A recourse liability was not recorded since LNC is not obligated to repurchase any loans from the trust
that may later become delinquent. Cash Öows received during 2002, 2001 and 2000 from interests retained in
the trust were $2.6 million, $2.6 million and $0.4, respectively.
In the second securitization completed in 2001, the loans had a fair value of $209.7 million and a carrying
value of $198.1 million. LNC received $209.7 million from the trust for the sale of the loans. A recourse
liability was not recorded since LNC is not obligated to repurchase any loans from the trust that may later
become delinquent. Servicing fees of $0.03 million were received in 2001 and $0.2 million were received in
2002. The transaction was hedged with total return swaps to lock in the value of the loans. LNC recorded a
loss on the hedge of $10.1 million pre-tax and a realized gain on the sale of $11.6 million pre-tax resulting in a
net gain of $1.5 million pre-tax. LNC did not initially retain an interest in the securitized assets; however,
LNC later invested $14.3 million of its general account assets in the certiÑcates issued by the trust. This
investment is included in Ñxed maturity securities on the balance sheet.
Limited Partnership Investments: As of December 31, 2002 and 2001, there were $294.2 million and
$329.5 million, respectively, of limited partnership investments included in consolidated investments. These
include investments in approximately 50 diÅerent partnerships that allow LNC to gain exposure to a broadly
diversiÑed portfolio of asset classes such as venture capital, hedge funds, and oil and gas. They are generally
fairly large partnerships with several third party partners. These partnerships do not represent oÅ-balance
sheet Ñnancing to LNC. Select partnerships contain ""capital calls'' which require LNC to contribute capital
upon notiÑcation by the general partner. These capital calls are contemplated during the initial investment
decision and are planned for well in advance of the call date. The capital calls are not material in size and pose
no threat to LNC's liquidity. The capital calls are included on LNC's table of contingent commitments within
Review of Consolidated Financial Condition. Limited partnership investments are accounted for using the
equity method of accounting and the majority of these investments are included in ""Other Investments'' on
the consolidated balance sheets.
Net Investment Income: Net Investment income decreased $71.3 million or 3% in 2002 due to a
decrease in the yield on investments from 7.14% to 6.74% (all calculations on a cost basis). The decrease in
yield was primarily due to lower interest rates on new securities purchased along with higher than historical
levels of defaults due to the weak economy of 2002. In addition, 2002 net investment income generated by
partnership investments was lower than the unusually favorable levels of net investment income generated by
partnerships in 2001. Net investment income decreased $67.5 million or 2% in 2001 due to a decrease in the
yield on investments from 7.35% to 7.14% (all calculations on a cost basis). The decrease in the yield on
investments was primarily due to lower interest rates on new securities purchased along with an increase in
security defaults resulting from the weak economy in 2001. In addition, LNC transferred higher yielding
invested assets, and received current fair value as part of the close of the sale of the reinsurance business to
Swiss Re on December 7, 2001. The proceeds of the sale were invested in lower yielding highly liquid short-
term investments. Mean invested assets only increased 0.4% in 2001.
Critical Accounting Policy Ì Realized Gain (Loss) on Investments and Derivative Instruments: LNC
had net pre-tax realized losses on investments and derivatives of $271.5 million, $114.5 million and
$28.3 million in 2002, 2001 and 2000, respectively. Prior to the amortization of acquisition costs, provision for
policyholder commitments and investment expenses, net pre-tax realized losses were $405.3 million,
$202.8 million, and $56.4 million in 2002, 2001 and 2000, respectively. Also included in the 2002 loss was a
pre-tax realized gain of $33.4 million ($21.7 million after-tax) from the sale of LNC's investment in
58
unconsolidated aÇliate related to LNC's former Reinsurance segment (see further discussion of this
investment in the Results of Operations for ""Other Operations'').
The gross realized gains on Ñxed maturity and equity securities were $181.2 million, $223.2 million and
$204.5 million, in 2002, 2001 and 2000, respectively. Gross realized losses on Ñxed maturity and equity
securities were $609.9 million, $459.7 million and $266.8 million, respectively. Included within losses are
write-downs for impairments of $321.5 million, $252.9 million and $55.8 million in 2002, 2001 and 2000,
respectively.
Although the realized losses that resulted from sales and impairments originated from a number of
sectors, the larger losses can be attributed to collateralized debt obligations (CDOs) and the telecommunica-
tions and airline sectors.
LNC's overall strategy of reducing exposure to CDOs was complicated by the deteriorating economy and
the lack of liquidity of these instruments driven by declining economic conditions and increased corporate
default rates. All these eÅects negatively impacted the CDO market, resulting in prolonged implementation of
our strategy. As a result of sales and impairment write-downs, the CDO exposure has been reduced to
approximately 1.6% of LNC's Ñxed maturity securities, with 90% rated investment grade.
The losses in the telecommunications sector were largely due to sales and impairment write-downs of
Worldcom bonds, although there were other telecommunications issuers that were sold at losses throughout
the year. Similar to the telecommunication sector, LNC also experienced realized losses in the airline sector
due to the bankruptcies of US Airways and United Airlines. LNC's exposure to the airline sector is primarily
equipment trust certiÑcates and enhanced equipment trust certiÑcates. Airplanes collateralize these invest-
ments, but the declines in underlying valuations of airplanes have resulted in the impairment of LNC's
holdings.
In addition to the aforementioned sectors, the realized losses and gains in 2002 arose from investment
transactions as a result of the active management of LNC's portfolio quality. There were several strategies that
drove transactions, some of which include:
1. In addition to credit evaluations and relative value considerations, investments that do not provide
adequate return relative to statutory capital requirements were liquidated and replaced with investments
that are more capital eÇcient.
2. Portfolio exposure to certain high-risk sectors, such as bonds of issuers that have asbestos related
litigation risk, was reduced.
3. Small proportions of the LNC portfolio are allocated to high-risk asset classes such as emerging
markets. Given the volatile markets in 2002, the turnover was higher on this sub-segment of the portfolio
than in previous years. This resulted in realized gains as well as realized losses.
SigniÑcant circumstances that contributed to realized losses on investments in 2001 included the Enron
bankruptcy, the defaults by Kmart and Argentina, as well as rapid declines in credit ratings and deterioration
of expected cash Öows on various collateralized debt obligation investments. The loss in 2000 was primarily
the result of the sale of investments, and to a lesser extent the write-down and provision for losses on
investments.
LNC has considered economic factors and circumstances within countries and industries where recent
write-downs have occurred in its assessment of the status of securities owned by LNC of similarly situated
issuers. While it is possible for realized or unrealized losses on a particular investment to aÅect other
investments, LNC's risk management has been designed to identify correlation risks and other risks inherent
in managing an investment portfolio. Once identiÑed, strategies and procedures are developed to eÅectively
monitor and manage these risks. The areas of risk correlation that LNC's investment management group pays
particular attention to are risks that may be correlated within speciÑc Ñnancial and business markets, risks
within speciÑc industries and risks associated with related parties.
59
Critical Accounting Policy Ì Write-Downs and Allowance for Losses: Securities available-for-sale,
that were deemed to have declines in fair value that were other than temporary were written down to fair
value. The Ñxed maturity securities to which these write-downs apply were generally of investment grade
quality at the time of purchase, but were subsequently down graded by rating agencies to ""below-investment
grade.'' Factors considered by LNC in determining whether declines in the fair value of Ñxed maturity
securities are other than temporary include 1) the signiÑcance of the decline, 2) LNC's ability and intent to
retain the investment for a suÇcient period of time for it to recover, 3) the time period during which there has
been a signiÑcant decline in value, and 4) fundamental analysis of the liquidity, business prospects and overall
Ñnancial condition of the issuer. Based upon these factors, securities that have indications of potential
impairment are subject to intensive review. Where such analysis results in a conclusion that declines in fair
values are other than temporary, the security is written down to fair value. See Note 8 (Fair Value of Financial
Instruments) to the consolidated Ñnancial statements for a general discussion of the methodologies and
assumptions used to determine estimated fair values.
Fair values for private securities are estimated by (1) a matrix process that employs discounting expected
future cash Öows using a current market rate applicable to the coupon rate, credit quality, industry sector and
maturity of the investments, (2) third party-supplied prices or secondary market transactions, and (3) apply-
ing professional judgment to arrive at fair value based upon prices of public or non-public securities of
similarly situated issuers. The fair value for all private securities was $4,601.3 million and $4,537.7 million at
December 31, 2002 and 2001, respectively, representing about 11.5% and 12.5% of total invested assets,
respectively.
As the discussion above indicates, there are risks and uncertainties associated with determining whether
declines in the fair value of investments are other than temporary. These include subsequent signiÑcant
changes in general overall economic conditions as well as speciÑc business conditions aÅecting particular
issuers, future Ñnancial market eÅects such as interest rate spreads, stability of foreign governments and
economies, future ratings agency actions and signiÑcant accounting, fraud or corporate governance issues that
may adversely aÅect certain investments. In addition, there are often signiÑcant estimates and assumptions
required by LNC to estimate the fair values of securities, including projections of expected future cash Öows
and pricing of private securities. LNC is continuously monitoring developments and updating underlying
assumptions and Ñnancial models based upon new information. Provided below are additional facts concerning
the potential aÅect upon LNC's future earnings and Ñnancial position should management later conclude that
some of the current declines in fair value of securities are other than temporary declines.
EITF 99-20 changed the manner in which impairment on certain investments in collateralized securities
is determined. The cumulative eÅect adjustment that LNC recorded in connection with the adoption of EITF
99-20 in the second quarter of 2001 was a net realized loss on investments of $11.3 million after-tax
($17.3 million pre-tax).
Write-downs and allowances for losses on select mortgage loans on real estate, real estate and other
investments were established when the underlying value of the property was deemed to be less than the
carrying value. These write-downs and provisions for losses, as well as the write-downs of Ñxed maturity and
equity securities are disclosed within the notes to the accompanying consolidated Ñnancial statements (see
Note 3 to the consolidated Ñnancial statements).
Unrealized Gains and Losses: At December 31, 2002 and 2001, gross unrealized gains on securities
available-for-sale were $2,402.5 million and $1,075.4 million, respectively, and gross unrealized losses on
securities available-for-sale were $735.4 million and $659.6 million, respectively. At December 31, 2002, gross
unrealized gains and losses on Ñxed maturity securities available-for-sale were $2,357.5 million and
$693.1 million, respectively, and gross unrealized gains and losses on equity securities available-for-sale were
$11.2 million and $8.5 million, respectively. At December 31, 2001, gross unrealized gains and losses on Ñxed
maturity securities available-for-sale were $1,005.6 million and $615.9 million, respectively, and gross
unrealized gains and losses on equity securities available-for-sale were $69.8 million and $43.7 million,
respectively. The great majority of these unrealized gains and losses can be attributed to changes in interest
rates, which have created temporary price Öuctuations. However, within the portfolio of securities with
60
unrealized losses are certain securities that LNC has identiÑed as exhibiting indications that the decline in fair
value may be other than a temporary decline in value.
Where detailed analysis by LNC credit analysts and investment portfolio managers leads to the
conclusion that a security's decline in fair value is other than temporary, the security is written down to fair
value. In instances where declines are considered temporary, the security will continue to be carefully
monitored.
The following information is applicable to unrealized loss securities that were subject to these enhanced
analysis and monitoring processes as of the relevant balance sheet date. In viewing this information, it is
important to realize that LNC is continuously reviewing and updating the status of its investment portfolios.
Accordingly, the information presented below relates to the status of securities that were being monitored at a
particular point in time, and may not be indicative of the status of LNC's investment portfolios subsequent to
the balance sheet date. Further, since the timing of the recognition of realized investment gains and losses
through the selection of which securities are sold is largely at management's discretion, it is important to
consider the information provided below within the context of the overall unrealized gain or loss position of
LNC's investment portfolios. These are important considerations that should be included in any evaluation of
the potential impact of unrealized loss securities upon LNC's future earnings. LNC had an overall net
unrealized gain (after the amortization of acquisition costs, provision for policyholder commitments,
investment expenses and taxes) on securities available-for-sale under FAS 115 of $753.3 million and
$195.7 million at December 31, 2002 and 2001, respectively.
For traded and private securities held by LNC at December 31, 2002 that were subject to enhanced
analysis and monitoring for potential changes in unrealized loss status, the fair value, amortized cost,
unrealized loss and total time period that the security has been in an unrealized loss position are presented in
the table below.
% Fair
Value
Cost
Amortized % Amortized
(000s omitted)
Fair Value
fi 90 daysÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 13,595
H 90 days but fi 180 days ÏÏÏÏÏÏÏÏÏ
27,026
H 180 days but fi 270 days ÏÏÏÏÏÏÏÏ
23,448
H 270 days but fi 1 yearÏÏÏÏÏÏÏÏÏÏÏ
24,827
195,644
H 1 year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4.8% $ 14,627
38,118
9.5%
39,151
8.2%
37,898
8.7%
346,954
68.8%
Cost
3.1%
8.0%
8.2%
7.9%
72.8%
Unrealized
Loss
% Unrealized
Loss
$
(1,032)
(11,092)
(15,702)
(13,071)
(151,311)
0.5%
5.8%
8.2%
6.8%
78.7%
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $284,540
100.0% $476,748
100.0%
$(192,208)
100.0%
For traded and private securities held by LNC at December 31, 2001 that were subject to enhanced
analysis and monitoring for potential changes in unrealized loss status, the fair value, amortized cost,
unrealized loss and total time period that the security has been in an unrealized loss position are presented in
the table below.
% Fair
Value
Amortized % Amortized Unrealized % Unrealized
Cost
Cost
Loss
(000s omitted)
Fair Value
fi 90 daysÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 67,107
H 90 days but fi 180 days ÏÏÏÏÏÏÏÏÏÏ
6,618
H 180 days but fi 270 days ÏÏÏÏÏÏÏÏÏ
13,515
H 270 days but fi 1 yearÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
70,049
H 1 year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
42.7% $ 87,006
4.2%
8,706
18,428
8.6%
Ì
Ì
93,926
44.5%
41.80% $(19,899)
(2,088)
4.20%
8.90%
(4,913)
Ì
45.10%
(23,877)
Ì
Loss
39.2%
4.1%
9.7%
Ì
47.0%
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $157,289
100.0% $208,066
100.00% $(50,777)
100.0%
61
For total traded and private securities held by LNC at December 31, 2002 that are in unrealized loss
status, the fair value, amortized cost, unrealized loss and total time period that the security has been in an
unrealized loss position are presented in the table below.
(000s omitted)
Fair Value
fi 90 daysÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,910,152
H 90 days but fi 180 days ÏÏÏÏÏÏ
607,070
H 180 days but fi 270 days ÏÏÏÏÏ
349,872
H 270 days but fi 1 yearÏÏÏÏÏÏÏÏ
358,915
1,782,873
H 1 year *ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
% Fair
Value
Amortized
Cost
% Amortized
Cost
Unrealized
Loss
% Unrealized
Loss
38.1% $1,981,327
684,139
12.1%
421,977
7.0%
426,758
7.2%
2,230,058
35.6%
34.5%
11.9%
7.3%
7.4%
38.8%
$ (71,175)
(77,069)
(72,105)
(67,843)
(447,185)
10.1%
11.0%
10.3%
9.6%
59.0%
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,008,882
100.0% $5,744,259
100.0%
$(735,377)
100.0%
* Included in the amount of unrealized losses greater than one year are unrealized losses of $36.0 million
related primarily to participating polices in the Lincoln UK segment. Gain and losses on securities
supporting this business are credited to the policyholder when incurred and do not aÅect net income of
LNC.
For total traded and private securities held by LNC at December 31, 2001 that are in unrealized loss
status, the fair value, amortized cost, unrealized loss and total time period that the security has been in an
unrealized loss position are presented in the table below.
Fair Value
(000s omitted)
fi 90 daysÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,411,635
H 90 days but fi 180 days ÏÏÏ
709,976
H 180 days but fi 270 days ÏÏ
142,493
H 270 days but fi 1 yearÏÏÏÏÏ
507,417
2,478,173
H 1 year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
% Fair
Value
Amortized
Cost
% Amortized
Cost
Unrealized
Loss
% Unrealized
Loss
62.5% $ 6,596,925
789,048
6.9%
165,441
1.4%
558,307
5.0%
2,799,543
24.2%
60.5% $(185,290)
(79,072)
7.2%
(22,948)
1.5%
(50,890)
5.1%
(321,370)
25.7%
28.1%
12.0%
3.5%
7.7%
48.7%
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,249,694
100.0% $10,909,264
100.0% $(659,570)
100.0%
62
LNC has no concentrations of issuers or guarantors of Ñxed maturity and equity securities. The
composition by industry categories of securities subject to enhanced analysis and monitoring for potential
changes in unrealized loss status, held by LNC at December 31, 2002 is presented in the table below.
Fair Value
% Fair
Value
Amortized
Cost
% Amortized
Cost
(000s omitted)
Unrealized
Loss
% Unrealized
Loss
Electric Power ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Asset-Backed Securities ÏÏÏÏÏÏ
Chemicals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Oil Field ServicesÏÏÏÏÏÏÏÏÏÏÏÏ
Pharmaceuticals ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pipelines ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Airlines ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consumer Non-Cyclical ÏÏÏÏÏÏ
Sovereigns ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Textile ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-Captive ConsumerÏÏÏÏÏÏÏ
Wirelines ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retailers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CMBS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 96,797
67,138
7,565
9,530
15,068
11,880
26,688
19,881
7,488
3,452
7,813
4,050
1,080
423
1,934
3,753
34.0% $173,008
23.6% 100,650
30,000
2.7%
28,387
3.3%
28,450
5.3%
22,294
4.2%
32,689
9.4%
25,433
7.0%
9,386
2.6%
4,961
1.2%
8,672
2.7%
4,646
1.4%
1,629
0.4%
780
0.2%
2,009
0.7%
3,754
1.3%
36.3%
21.1%
6.3%
6.0%
6.0%
4.7%
6.8%
5.3%
2.0%
1.0%
1.8%
1.0%
0.3%
0.2%
0.4%
0.8%
$ (76,211)
(33,512)
(22,435)
(18,857)
(13,382)
(10,414)
(6,001)
(5,552)
(1,898)
(1,509)
(859)
(596)
(549)
(357)
(75)
(1)
39.7%
17.4%
11.7%
9.8%
7.0%
5.4%
3.1%
2.9%
1.0%
0.8%
0.4%
0.3%
0.3%
0.2%
0.0%
0.0%
$284,540
100.0% $476,748
100.0%
$(192,208)
100.0%
The composition by industry categories of securities subject to enhanced analysis and monitoring for
potential changes in unrealized loss status, held by LNC at December 31, 2001 is presented in the table below.
Fair Value
% Fair
Value
Amortized
Cost
% Amortized
Cost
(000s omitted)
Unrealized
Loss
% Unrealized
Loss
Textile ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Electric Power ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Distributors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Wirelines ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Asset-Backed Securities ÏÏÏÏÏÏÏ
IndustrialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Metals and Mining ÏÏÏÏÏÏÏÏÏÏÏ
Non-Captive ConsumerÏÏÏÏÏÏÏÏ
Utility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
REITs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic IndustryÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 11,531
47,467
36,350
9,058
16,977
14,664
4,264
6,764
2,686
3,900
3,628
7.3% $ 21,499
55,482
30.2%
43,534
23.1%
16,062
5.8%
23,097
10.8%
19,748
9.3%
6,680
2.7%
8,686
4.3%
4,140
1.7%
5,037
2.5%
4,101
2.30%
10.3%
26.7%
20.9%
7.7%
11.1%
9.5%
3.2%
4.2%
2.0%
2.4%
2.00%
$ (9,968)
(8,015)
(7,184)
(7,004)
(6,120)
(5,084)
(2,416)
(1,922)
(1,454)
(1,137)
(473)
19.6%
15.8%
14.1%
13.8%
12.1%
10.0%
4.8%
3.8%
2.9%
2.2%
0.90%
$157,289
100.0% $208,066
100.0%
$(50,777)
100.0%
63
The composition by industry categories of all securities in unrealized loss status, held by LNC at
December 31, 2002 is presented in the table below.
Fair Value
% Fair
Value
Amortized
Cost
% Amortized
Cost
(000's omitted)
Unrealized
Loss
% Unrealized
Loss
Electric Power ÏÏÏÏÏÏÏÏÏÏÏÏ
Airlines ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Asset-Backed Securities ÏÏÏÏ
Pipelines ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Banking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Chemicals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
WirelinesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
SovereignsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Oil Field Services ÏÏÏÏÏÏÏÏÏ
Media CableÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Automotive ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pharmaceuticals ÏÏÏÏÏÏÏÏÏÏÏ
Retailers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CMBSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Industrial Other ÏÏÏÏÏÏÏÏÏÏÏ
Technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
P&C ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ReÑningÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign Agencies ÏÏÏÏÏÏÏÏÏÏ
Metals and Mining ÏÏÏÏÏÏÏÏ
Integrated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Supermarkets ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Wireless ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 692,086
240,684
566,568
157,596
319,051
66,657
144,079
266,654
43,253
57,937
116,021
39,983
49,183
67,330
39,719
18,566
82,308
38,307
680,255
22,425
124,446
60,547
31,598
98,502
13.8% $ 856,740
339,997
633,628
199,625
354,941
96,285
170,803
289,079
62,945
74,174
131,566
53,450
61,416
79,316
51,178
29,152
90,840
46,758
688,168
29,385
130,646
66,425
37,145
104,010
4.8%
11.3%
3.1%
6.4%
1.3%
2.9%
5.3%
0.9%
1.2%
2.3%
0.8%
1.0%
1.3%
0.8%
0.4%
1.6%
0.8%
13.6%
0.4%
2.5%
1.2%
0.6%
2.0%
14.9%
5.9%
11.0%
3.5%
6.2%
1.7%
3.0%
5.0%
1.1%
1.3%
2.3%
0.9%
1.1%
1.4%
0.9%
0.5%
1.6%
0.8%
12.0%
0.5%
2.3%
1.2%
0.6%
1.8%
$(164,654)
(99,313)
(67,060)
(42,029)
(35,890)
(29,628)
(26,724)
(22,425)
(19,692)
(16,237)
(15,545)
(13,467)
(12,233)
(11,986)
(11,459)
(10,586)
(8,532)
(8,451)
(7,913)
(6,960)
(6,200)
(5,878)
(5,547)
(5,508)
22.4%
13.5%
9.1%
5.7%
4.9%
4.0%
3.6%
3.1%
2.7%
2.2%
2.1%
1.8%
1.7%
1.6%
1.6%
1.4%
1.1%
1.1%
1.1%
1.0%
0.8%
0.8%
0.8%
0.8%
(Continued on next page.)
64
Fair Value
% Fair
Value
Amortized
Cost
% Amortized
Cost
(000's omitted)
Unrealized
Loss
% Unrealized
Loss
Transportation Services ÏÏÏÏÏ
Paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Utility OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consumer Cyclical
Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Building Materials ÏÏÏÏÏÏÏÏÏ
RailroadsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tennessee Valley
AuthorityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Food and Beverage ÏÏÏÏÏÏÏÏ
Consumer Non-Cyclical ÏÏÏÏ
MortgageÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Aerospace/Defense ÏÏÏÏÏÏÏÏ
Life ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Distributors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Media Non-Cable ÏÏÏÏÏÏÏÏÏ
Textile ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Captive ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Construction Machinery ÏÏÏÏ
Non-Captive Consumer ÏÏÏÏ
Non-Captive DiversiÑed ÏÏÏÏ
Collateralized Mortgage
Obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consumer Products ÏÏÏÏÏÏÏÏ
Consumer CyclicalÏÏÏÏÏÏÏÏÏ
Foreign Local
Governments ÏÏÏÏÏÏÏÏÏÏÏ
Financial Other ÏÏÏÏÏÏÏÏÏÏÏ
EntertainmentÏÏÏÏÏÏÏÏÏÏÏÏÏ
Healthcare ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Municipal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lodging ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Brokerage ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
FNMA FHA VA 30YR ÏÏÏÏ
REITS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lincoln UK Fixed Maturity
64,921
36,883
27,578
21,657
41,614
25,666
32,862
28,166
7,488
51,291
20,791
34,893
15,070
23,470
7,813
30,931
4,250
10,597
3,220
96,018
12,544
773
4,454
25,592
23,276
850
17,905
1,840
1,392
208
445
1.3%
0.7%
0.6%
0.4%
0.8%
0.5%
0.7%
0.6%
0.1%
1.0%
0.4%
0.7%
0.3%
0.5%
0.2%
0.6%
0.1%
0.2%
0.1%
1.9%
0.3%
0.0%
0.1%
0.5%
0.5%
0.0%
0.4%
0.0%
0.0%
0.0%
0.0%
69,801
41,453
31,166
24,933
44,320
28,005
35,133
30,349
9,386
53,025
22,280
35,947
16,015
24,406
8,672
31,782
5,083
11,348
3,667
96,463
12,960
1,146
4,750
25,827
23,501
1,033
18,054
1,988
1,412
214
446
Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
181,758
3.6%
187,086
Lincoln UK Equity
1.2%
0.7%
0.5%
0.4%
0.8%
0.5%
0.6%
0.5%
0.2%
0.9%
0.4%
0.6%
0.3%
0.4%
0.2%
0.6%
0.1%
0.2%
0.1%
1.7%
0.2%
0.0%
0.1%
0.4%
0.4%
0.0%
0.3%
0.0%
0.0%
0.0%
0.0%
3.3%
(4,880)
(4,570)
(3,588)
(3,276)
(2,706)
(2,339)
(2,271)
(2,183)
(1,898)
(1,734)
(1,489)
(1,054)
(945)
(936)
(859)
(851)
(833)
(751)
(447)
(445)
(416)
(373)
(296)
(235)
(225)
(183)
(149)
(148)
(20)
(6)
(1)
(5,328)
Securities* ÏÏÏÏÏÏÏÏÏÏÏÏÏ
128,911
2.6%
164,936
2.9%
(36,025)
0.7%
0.6%
0.5%
0.5%
0.4%
0.3%
0.3%
0.3%
0.3%
0.2%
0.2%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.7%
4.9%
$5,008,882
100.0% $5,744,259
100.0%
$(735,377)
100.0%
* The unrealized losses for Lincoln UK Equity Securities are primarily related to participating polices in the
Lincoln UK segment. Gain and losses on securities supporting this business are credited to the policyholder
when incurred and do not aÅect net income of LNC.
65
The composition by industry categories of all securities in unrealized loss status, held by LNC at
December 31, 2001 is presented in the table below.
Fair Value
% Fair
Value
Amortized
Cost
% Amortized Unrealized % Unrealized
Loss
Loss
Cost
(000's omitted)
Asset- Backed SecuritiesÏÏÏÏÏÏÏÏÏÏ $
Electric ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Airlines ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Automotive ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Chemicals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Banking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pipelines ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Wirelines ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
P&C ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Industrial Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Sovereigns ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retailers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Media Non-Cable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Metals and Mining ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Textile ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Beverage ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Distributors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Transportation Services ÏÏÏÏÏÏÏÏÏÏÏ
ReÑningÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Building Materials ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EntertainmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
WirelessÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Oil Field ServicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CMBS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Collateralized Mortgage Obligations ÏÏ
Media Cable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Utility OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
REITs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Railroads ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lodging ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-Callable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Integrated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Captive ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Food ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Conglomerates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Financial Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Aerospace/Defense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
966,070
997,693
366,334
244,003
223,614
568,173
243,255
202,401
116,502
135,387
261,942
171,429
228,365
188,734
30,080
36,296
114,546
171,275
50,584
88,015
157,335
134,073
39,358
161,150
148,716
288,754
35,146
60,861
65,097
121,372
77,741
37,608
97,239
68,293
167,765
123,778
177,804
138,682
38,191
92,886
9.4% $ 1,065,451
1,062,158
9.7%
417,161
3.6%
269,613
2.4%
247,673
2.2%
590,271
5.5%
264,136
2.4%
221,842
2.0%
135,819
1.1%
151,800
1.3%
277,802
2.6%
185,648
1.7%
241,429
2.2%
200,763
1.8%
41,207
0.3%
47,176
0.4%
124,603
1.1%
180,689
1.7%
57,535
0.5%
94,624
0.9%
163,940
1.5%
140,578
1.3%
45,771
0.4%
167,528
1.6%
154,382
1.5%
294,301
2.8%
40,641
0.3%
65,911
0.6%
69,977
0.6%
126,050
1.2%
82,310
0.8%
42,119
0.4%
101,698
0.9%
72,568
0.7%
171,595
1.6%
127,400
1.2%
181,372
1.7%
142,106
1.4%
41,368
0.4%
96,040
0.9%
(Continued on next page.)
66
9.8% $ (99,381)
(64,465)
9.7%
(50,827)
3.8%
(25,610)
2.5%
(24,059)
2.3%
(22,098)
5.4%
(20,881)
2.4%
(19,441)
2.0%
(19,317)
1.3%
(16,413)
1.4%
(15,860)
2.5%
(14,219)
1.7%
(13,064)
2.2%
(12,029)
1.8%
(11,127)
0.4%
(10,880)
0.4%
(10,057)
1.1%
(9,414)
1.7%
(6,951)
0.5%
(6,609)
0.9%
(6,605)
1.5%
(6,505)
1.3%
(6,413)
0.4%
(6,378)
1.5%
(5,666)
1.4%
(5,547)
2.7%
(5,495)
0.4%
(5,050)
0.6%
(4,880)
0.6%
(4,678)
1.2%
(4,569)
0.8%
(4,511)
0.4%
(4,459)
0.9%
(4,275)
0.7%
(3,830)
1.6%
(3,622)
1.2%
(3,568)
1.7%
(3,424)
1.3%
(3,177)
0.4%
(3,154)
0.9%
15.1%
9.8%
7.7%
3.9%
3.6%
3.4%
3.2%
2.9%
2.9%
2.5%
2.4%
2.2%
2.0%
1.8%
1.7%
1.6%
1.5%
1.4%
1.1%
1.0%
1.0%
1.0%
1.0%
1.0%
0.9%
0.8%
0.8%
0.8%
0.7%
0.7%
0.7%
0.7%
0.7%
0.6%
0.6%
0.5%
0.5%
0.5%
0.5%
0.5%
Fair Value
% Fair
Value
Amortized
Cost
% Amortized Unrealized % Unrealized
Loss
Loss
Cost
Communications ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Life ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
FNMA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consumer CyclicalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-Captive DiversiÑed ÏÏÏÏÏÏÏÏÏÏ
Yankee CorporatesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
MortgageÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Municipal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pharmaceuticals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consumer Products ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Finance Companies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consumer Cyclical Services ÏÏÏÏÏÏÏ
Construction Machinery ÏÏÏÏÏÏÏÏÏÏ
FNMA Conventional 30 Yr ÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lincoln UK Fixed Maturity
Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lincoln UK Equity Securities ÏÏÏÏÏ
2,940
67,926
19,472
6,851
24,011
3,087
55,786
36,185
74,631
31,188
49,824
28,550
24,476
121,842
1,505,678
0.0%
0.7%
0.2%
0.1%
0.2%
0.0%
0.5%
0.4%
0.7%
0.3%
0.5%
0.3%
0.2%
1.2%
14.7%
(000's omitted)
5,632
70,284
21,676
8,987
26,044
5,112
57,686
37,928
76,270
32,639
51,125
29,654
25,567
122,842
1,539,057
0.1%
0.6%
0.2%
0.1%
0.2%
0.0%
0.5%
0.3%
0.7%
0.3%
0.5%
0.3%
0.2%
1.1%
14.1%
(2,692)
(2,358)
(2,204)
(2,136)
(2,033)
(2,025)
(1,900)
(1,743)
(1,639)
(1,451)
(1,301)
(1,104)
(1,091)
(1,000)
(33,379)
435,104
125,596
4.2%
1.2%
444,278
149,428
4.1%
1.4%
(9,174)
(23,832)
0.4%
0.4%
0.3%
0.3%
0.3%
0.3%
0.3%
0.3%
0.2%
0.2%
0.2%
0.2%
0.2%
0.2%
5.0%
1.4%
3.6%
$10,249,694
100.0% $10,909,264
100.0% $(659,570)
100.0%
At December 31, 2002 and 2001, less than 9% and 5%, respectively, of the traded and private securities
held that were subject to enhanced analysis and monitoring for potential changes in unrealized loss status were
rated as investment grade. The range of maturity dates for these securities varies, with about 57% of these
securities maturing between 5 and 10 years, about 20% maturing in greater than 10 years and the remaining
maturity dates maturing in less than 5 years. At December 31, 2002 and 2001, 65.3% and 84.7%, respectively
of total traded and private securities in unrealized loss status were rated as investment grade. At December 31,
2002, the range of maturity dates for total traded and private securities in unrealized loss status varies, with
about 22% maturing between 5 and 10 years, 46% maturing after 10 years and the remaining securities
maturing in less than 5 years. At December 31, 2001, the range of maturity dates for these securities varies,
with about 39% maturing between 5 and 10 years, 37% maturing after 10 years and the remaining securities
maturing in less than 5 years. See Note 3 to the consolidated Ñnancial statements for ratings and maturity date
information for LNC's Ñxed maturity investment portfolio.
The information presented above is subject to rapidly changing conditions. As such, LNC expects that
the level of securities with overall unrealized losses will Öuctuate, as will the level of unrealized loss securities
that are subject to enhanced analysis and monitoring. The recent volatility of Ñnancial market conditions has
resulted in increased recognition of both investment gains and losses, as portfolio risks are adjusted through
sales and purchases. As discussed below, this is consistent with LNC's classiÑcation of its investment
portfolios as available-for-sale.
During the year ended December 31, 2002 and 2001, LNC sold securities at gains and at losses. As
discussed earlier, in the process of evaluating whether a security with an unrealized loss reÖects an other than
temporary decline, LNC considers its ability and intent to hold the security until its value recovers. However,
subsequent decisions on securities sales are made within the context of overall risk monitoring, assessing value
relative to other comparable securities and overall portfolio maintenance. Although LNC's portfolio managers
may, at a given point in time, believe that the preferred course of action is to hold securities with unrealized
losses that are considered temporary until such losses are recovered, the dynamic nature of portfolio
management may result in a subsequent decision to sell. These subsequent decisions are consistent with the
67
classiÑcation of LNC's investment portfolio as available-for-sale. In the future, LNC expects to continue to
manage all invested assets within its portfolios in a manner that is consistent with the available-for-sale
classiÑcation.
Use of Derivatives: The primary use of derivatives at LNC is to hedge interest rate risk that is
embedded in either life insurance and annuity product liabilities or investment portfolios. To a lesser extent,
derivatives are also used to hedge exposures to foreign currency and equity market risks. Derivatives held at
December 31, 2002 contain industry standard terms and are entered into with Ñnancial institutions with long-
standing, superior performance records.
Review of Consolidated Financial Condition
Liquidity and Cash Flow
Liquidity refers to the ability of an enterprise to generate adequate amounts of cash from its normal
operations to meet cash requirements with a prudent margin of safety. Because of the interval of time from
receipt of deposit or premium until payment of beneÑts or claims, LNC and other insurers employ investment
portfolios as an integral element of operations. By segmenting its investment portfolios along product lines,
LNC enhances the focus and discipline it can apply to managing the liquidity, as well as the interest rate and
credit risk of each portfolio commensurate with the proÑle of the liabilities. For example, portfolios backing
products with less certain cash Öows and/or withdrawal provisions are kept more liquid than portfolios backing
products with more predictable cash Öows.
The consolidated statements of cash Öows indicate that operating activities provided cash of $0.5 billion,
$1.3 billion and $2.0 billion in 2002, 2001 and 2000, respectively. This statement also classiÑes the other
sources and uses of cash by investing activities and Ñnancing activities and discloses the amount of cash
available at the end of the year to meet LNC's obligations.
Although LNC generates adequate cash Öow to meet the needs of its normal operations, periodically
LNC may issue debt or equity securities to fund internal expansion, acquisitions, investment opportunities and
the retirement of LNC's debt and equity. In April 2002, a new shelf registration statement was declared
eÅective by the Securities and Exchange Commission. The new shelf registration totaled $1.2 billion
(including $402.5 million of registered but unissued securities from previous registration statements). After
giving consideration to the $250 million 5.25% Ñve-year senior notes issued in June 2002, LNC has
$950 million remaining under the shelf registration to issue debt securities, preferred stock, common stock,
warrants, stock purchase contracts and stock purchase units of LNC and trust preferred securities of four
subsidiary trusts. The net proceeds from the sale of the securities oÅered by this shelf registration and the
applicable prospectus supplement(s) are expected to be used by LNC for general corporate purposes,
including repurchases of outstanding common stock, repayment or redemption of outstanding debt or
preferred stock, the possible acquisition of Ñnancial services businesses or assets thereof, investment in
portfolio assets and working capital needs. Cash funds are also available from LNC's revolving credit
agreements. In June 2002, LNC reduced its revolving bank lines of credit from $700 million to $500 million
when LNC suspended its commercial paper issuance under its European Commercial Paper program (see
Note 5 to the consolidated Ñnancial statements).
LNC purchased and retired 12,088,100; 11,278,022; and 6,222,581 shares of common stock at a cost of
$474.5 million, $503.7 million and $210.0 million in 2002, 2001 and 2000, respectively. In November 2000, the
LNC board authorized $500 million to repurchase LNC securities. At the time of this authorization, there
was $99.7 million remaining under a $500 million May 1999 board authorization. All of the shares
repurchased in 2000 came under the May 1999 board authorization. In July 2001, the LNC board authorized
an additional $500 million to repurchase LNC securities. In 2001, the remaining amount ($53.4 million)
under the May 1999 board authorization was used and $450.4 million under the November 2000 board
authorization was used. On August 8, 2002, the LNC Board authorized the repurchase of up to an additional
$600 million of LNC securities. In 2002, the remaining amount ($49.6 million) under the November 2000
board authorization was used and $424.9 million under the July 2001 board authorization was used. The
remaining amount under the combined repurchase authorization at December 31, 2002 was $675.1 million.
68
On August 16, 2001, LNC settled mandatory stock purchase contracts issued in conjunction with the
FELINE PRIDES Ñnancing. This action resulted in the issuance of 4.6 million shares of LNC stock at $49.67
per share. Investors had the option of settling the purchase contract with separate cash or by having the
collateral securing their purchase obligations sold. In the case of investors who held the Trust Originated
Preferred Securities (""TOPrS'') as collateral for the purchase contracts, they were permitted to enter into a
remarketing process with proceeds used to settle the contracts. On August 13, 2001, the remarketing failed
resulting in the retirement of $225 million TOPrS. A total of $5 million of two-year TOPrS remain
outstanding which represents investors who chose to settle with separate cash and hold onto their TOPrS until
maturity.
On September 13, 2001, LNC redeemed all 8.6 million shares of the $215 million outstanding 8.75%
Cumulative Quarterly Income Preferred Securities, Series A that were issued by Lincoln National Capital I
and guaranteed by LNC.
On November 19, 2001, LNC issued 6.9 million shares of $172.5 million 7.65% Trust Preferred
Securities (""TRUPS'') through Lincoln National Capital V. In conjunction with the $172.5 million TRUPS
issue, LNC executed a $172.5 million notional amount interest rate swap that eÅectively converted the 7.65%
Ñxed rate coupon on the TRUPS into a LIBOR-based Öoating rate obligation. On December 7, 2001, LNC
issued $250 million 6.20% ten-year senior notes.
On January 7, 2002, LNC redeemed $100 million 8.35% Trust Originated Preferred Securities issued by
Lincoln Capital II and guaranteed by LNC. On June 3, 2002, LNC issued $250 million 5.25% Ñve-year senior
notes. The net proceeds of that oÅering was used for general corporate purposes, and pending such application,
have been used to pay down short-term debt. In conjunction with the $250 million debt issue, LNC executed a
$100 million notional amount interest rate swap that eÅectively converted the 5.25% Ñxed rate coupon on the
bond into a LIBOR-based Öoating rate obligation for that portion of the bond.
On December 7, 2001, Swiss Re acquired LNC's reinsurance operation for $2.0 billion. In addition, LNC
retained the capital supporting the reinsurance operation. After giving aÅect to the increased levels of capital
needed within the Life Insurance and Lincoln Retirement segments that results from the change in the
ongoing mix of business under LNC's internal capital allocation models, the disposition of LNC's reinsurance
operation has freed-up approximately $100 million of capital. The transaction structure involved a series of
indemnity reinsurance transactions combined with the sale of certain stock companies that comprised LNC's
reinsurance operation. Approximately $0.56 billion of the proceeds from the transaction were used to pay taxes
and associated deal costs and approximately $1.0 billion was used to repurchase stock, reduce debt, and
support holding company cash Öow needs. LNC used approximately $0.3 billion to pay the fourth quarter 2002
settlement with Swiss Re (see the Acquisition and Divestiture section for regarding the settlement with Swiss
Re). Any remaining proceeds will be dedicated to the ongoing capital needs of LNL.
In order to maximize the use of available cash, the holding company (LNC) 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 Ñnancial 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.
LNC's insurance subsidiaries are subject to certain insurance department regulatory restrictions as to the
transfer of funds and payment of dividends to the holding company. Generally, these restrictions pose no
short-term liquidity concerns for the holding company. However, as discussed in detail within Note 7 to the
consolidated Ñnancial statements, the acquisition of two blocks of business in 1998 resulted in negative
statutory earned surplus for LNL which triggered certain approval requirements in order for LNL to declare
and pay dividends to LNC. As a result of negative earned surplus, LNL was required to obtain the prior
approval of the Indiana Insurance Commissioner (""Commissioner'') before paying any dividends to LNC
until its statutory earned surplus became positive. During the Ñrst quarter 2002, LNL received approval from
the Commissioner to reclassify total dividends of $495 million paid to LNC in 2001 from LNL's earned
69
surplus to paid-in-capital. This change plus the increase in statutory earned surplus from the indemnity
reinsurance transaction with Swiss Re resulted in positive statutory earned surplus for LNL at December 31,
2001.
In general, dividends are not subject to prior approval from the Commissioner provided LNL's statutory
earned surplus is positive and such dividends do not exceed the standard limitation of the greater of 10% of
total statutory earned surplus or the amount of statutory earnings in the prior calendar year. Dividends of
$710 million were paid by LNL to LNC in the second quarter of 2002. These distributions were made in two
installments. The Ñrst installment of $60 million was paid in April. The second installment of $650 million was
paid in June. As both installments exceeded the standard limitation noted above, a special request was made
for each payment and each was approved by the Commissioner. Both distributions represented a portion of the
proceeds received from the indemnity reinsurance transaction with Swiss Re. As a result of the payment of
dividends and statutory losses in 2002, LNL's statutory earned surplus is negative as of December 31, 2002.
The statutory losses resulted from realized losses on investments, the eÅect of the equity markets and the
reserve strengthening in 2002 related to the reinsurance business sold to Swiss Re. Due to the negative
statutory earned surplus as of December 31, 2002, any dividend(s) paid by LNL in 2003 will be subject to
prior approval from the Commissioner. As occurred in 2001, dividends approved and paid while statutory
earned surplus is negative are expected to be classiÑed as a reduction to paid-in-capital.
LNL is recognized as an accredited reinsurer in the state of New York, which eÅectively enables it to
conduct reinsurance business with unrelated insurance companies that are domiciled within the state of New
York. As a result, in addition to regulatory restrictions imposed by the state of Indiana, LNL is also subject to
the regulatory requirements that the State of New York imposes upon accredited reinsurers.
Contractual Obligations and Contingent Commitments
The tables below summarize LNC's obligations and commitments to make future payments under
contracts in place at December 31, 2002, as well as contingent commitments in place at December 31, 2002.
Contractual Obligations
Contractual Obligations
2003
2004
2005
2006
2007
Thereafter
Total
(in millions)
Future
Amortization/
Adjustment
Amount Per
Balance Sheet
Short Term Debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$153.0
$ Ì $ Ì $ Ì $ Ì $
Ì $ 153.0
Long Term Debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì 193.0
Ì 250.0
670.3
1,113.3
$ Ì
5.9
$ 153.0
1,119.2
Company Obligated Mandatorily
Redeemable Preferred Securities of
Subsidiary Trusts Holding Soley
Junior Subordinated Debentures ÏÏÏ
Operating Leases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stadium Naming Rights-Lincoln
5.0
59.8
58.6
58.0
54.6
53.1
372.5
77.2
377.5
361.3
15.2
392.7
Financial Field (1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.5
5.6
5.7
5.8
6.0
106.4
135.0
Lincoln UK Administration Contract
(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Information Technology Contract ÏÏÏÏ
33.3
70.0
30.1
70.0
28.2
5.8
27.8
26.7
113.1
259.2
145.8
TotalsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$326.6
$164.3
$290.7
$88.2
$335.8
$1,339.5
$2,545.1
$21.1
$1,664.9
70
Commitments
Contingent Commitments
Total
Amount
Committed
Less than
1 Year
Amount of Commitment
Expiring per Period
4Ó5
Years
1Ó3
Years
(in millions)
After 5
Years
Lines of Credit (amount outstanding at 12/31/2002 is
$11.9 million) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 580.0
$280.0
$300.0
$ Ì $ Ì
Standby Letters of Credit (amount outstanding at
12/31/2002 is $223.8 million) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Guarantees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment Commitments (3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Standby Commitments to Purchase Real Estate upon
450.0
22.3
390.8
450.0
0.1
143.5
Ì
1.2
202.8
Ì
2.5
44.4
Ì
18.5
0.1
Completion and LeasingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
168.1
31.7
136.4
Ì
Ì
$1,611.2
$905.3
$640.4
$46.9
$18.6
(1) The amount includes a maximum annual increase related to the CPI.
(2) The contract is for a term of 10 years and the annual cost is based on a per policy charge plus an amount
for other services provided. The amounts quoted above are the estimated fees as the actual cost will
depend on the number of policies in force and the applicable inÖation rate for the each period.
(3) Total includes $72.0 million of capital calls on limited partnership investments, $182.9 million of real
estate pre-buys and $49.7 million and $86.2 million of commitments for mortgage loans and private
placement securities, respectively.
As of December 31, 2002, LNC's senior debt ratings were Moody's at A3 (""Upper Medium Grade''),
Standard and Poor's at A¿ (""Strong''), Fitch at A (""Strong'') and A.M. Best at ""a'' (""Strong''), and LNC's
commercial paper ratings included Moody's at P¿2 (""Strong''), Standard and Poor's at A¿2 (""Satisfac-
tory'') and Fitch at F¿1 (""Very Strong''). On September 19, 2002 Fitch lowered LNC's senior debt ratings
from A° to A and the trust preferred security ratings for Lincoln Capital III, IV, and V from A to A¿ both on
""stable outlook.'' Fitch's action did not impact LNC's commercial paper rating or the insurance Ñnancial
strength ratings of LNC's insurance subsidiaries. The move was part of industry-wide action on several life
insurance companies given the recent market environment and, in the case of LNC, reÖects Fitch's desire to
maintain a traditional three notch separation between debt and insurance Ñnancial strength ratings. The rating
action is expected to have no eÅect on LNC's liquidity, access to capital, or cost of capital. Although there are
less investors for A¿2/P¿2 commercial paper and there are periods in which there is weak investor interest in
A¿2/P¿2 commercial paper, through December 31, 2002, liquidity has not been adversely impacted. LNC
can draw upon alternative short-term borrowing facilities such as revolving bank lines of credit.
At December 31, 2002 LNC maintained three revolving credit agreements with a group of domestic and
foreign banks totaling $580 million. LNC's commercial paper is supported by these facilities, a $200 million
364-day revolving credit facility maturing in December 2003 and a $300 million revolving credit facility
maturing in December 2005 and a $80 million revolving credit facility, maintained by Lincoln UK, which
matured in January 2003. The UK facility was renewed in January 2003 for $48 million maturing in January
2004. At December 31, 2002, LNC had $12 million in outstanding borrowings under the Lincoln UK
agreement. All three agreements provide for interest on borrowings based on various money market indices.
Under all three agreements, LNC must maintain senior unsecured long-term debt ratings of at least S&P A¿
and Moody's A3 or be restricted by an adjusted debt to capitalization ratio. LNC's 364-day revolving credit
contains a one-year term-out feature which allows LNC to convert any loans outstanding on the maturity date
of the credit facility into a one-year term loan subject to a Öoating interest rate.
On average, LNC's commercial paper borrowing rates have increased 0.20% per annum since LNC was
downgraded to an A¿2/P¿2 issuer. However, historically there have been times of greater volatility in
commercial paper borrowing rates for an A¿2/P¿2 issuer with the spread above A¿1/P¿1 rates ranging
71
from 0.10% to 0.50%. During such times of greater volatility, LNC may experience diÇculty in placing longer-
term commercial paper (deÑned as 30-90 day maturities), and as a result, experience increased short-term
Ñnancing costs.
If current debt ratings and claims paying ratings were downgraded in the future, certain covenants of
various contractual obligations may be triggered which could impact overall liquidity. In addition, contractual
selling agreements with intermediaries could be negatively impacted which could have an adverse impact on
overall sales of annuities, life insurance and investment products.
As a result of increased cash Öow from operations, Lincoln National (UK) PLC was able to retire its
remaining outstanding commercial paper in the second quarter of 2002 and LNC eliminated the bank lines
and ratings associated with this program.
On June 3, 2002, LNC announced an agreement with the Philadelphia Eagles to name the Eagles' new
stadium, Lincoln Financial Field. In exchange for the naming rights, LNC agreed to pay $139.6 million over a
20-year period, through annual payments to the Eagles, which average approximately $6.7 million per year.
This future commitment has not been recorded as a liability on LNC's balance sheet as it will be accounted
for in a manner consistent with the accounting for operating leases.
EÅect of InÖation
LNC's insurance aÇliates, as well as other companies in the insurance industry, attempt to minimize the
eÅect of inÖation on their revenues and expenses by anticipating inÖationary trends in the pricing of their
products. InÖation, except for changes in interest rates, does not have a signiÑcant eÅect on LNC's balance
sheet due to the minimal amount of dollars invested in property, plant and equipment and the absence of
inventories.
Capital Resources
Total shareholders' equity increased $32.8 million during the year ended December 31, 2002. Accumu-
lated other comprehensive income increased shareholders' equity by $561.4 million. The components of the
changes to accumulated other comprehensive income were: $564.5 million related to the increase in the
unrealized gain on securities available-for-sale and derivative instruments, $58.8 million related to an increase
in the accumulated foreign exchange gain and a decrease of $61.9 million for minimum pension liability
adjustments. Excluding changes due to other comprehensive income, shareholders' equity decreased
$528.6 million. This decrease is the net of increases due to $91.6 million of net income and $93.6 million from
the issuance of common stock related to beneÑt plans and decreases due to $234.3 million from the
declaration of dividends to shareholders, $474.5 million for the retirement of common stock, $4.5 million for
the forfeiture of shares under beneÑt plans and $0.5 million for the cancellation of shares related to the
acquisition of subsidiaries
Capital adequacy is a primary measure used by insurance regulators to determine the Ñnancial stability of
an insurance company. In the U.S., risk-based capital guidelines are used by the National Association of
Insurance Commissioners to determine the amount of capital that represents minimum acceptable operating
amounts related to insurance and investment risks. Regulatory action is triggered when an insurer's statutory-
basis capital falls below the formula-produced capital level. At December 31, 2002, statutory-basis capital for
each of LNC's U.S. insurance subsidiaries was in excess of regulatory action levels of risk-based capital
required by the jurisdiction of domicile.
As noted above, shareholders' equity includes accumulated other comprehensive income. At Decem-
ber 31, 2002, the book value of $29.82 per share included $3.85 of accumulated other comprehensive income.
At December 31, 2001, the book value of $28.10 per share included $0.97 related to accumulated other
comprehensive income.
72
Contingencies
See Note 7 to the consolidated Ñnancial statements for information regarding contingencies.
Legislation
In the 2003 Budget proposal, President Bush proposed an economic stimulus package and changes to
retirement savings. The centerpiece of the stimulus proposal is the elimination of the double taxation of
corporate dividends. Both the Bush Administration and Congress have expressed concerns regarding the
impact of the proposal on variable annuities. The life insurance industry has proposed that dividends in equity
securities held in separate accounts Öow through to increase the basis in the variable annuity contract.
The overall impact of these proposals on LNC's products and corporate tax burden cannot be accurately
predicted at this time. Initial legislative language has been introduced to implement certain aspects of the
President's proposals, which is currently the subject of debate and testimony before Congress It is too early to
predict the Ñnal form of the legislation that Congress will pass, if any.
Tax legislation could increase or reduce tax-advantages for some of LNC's life insurance and annuity
products. LNC continues to support reductions in the tax burden imposed on its businesses, employees and
policyholders.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Exposures of Financial Instruments
LNC analyzes and manages the risks arising from market exposures of Ñnancial instruments, as well as
other risks, in an integrated asset-liability management process that takes diversiÑcation into account. By
aggregating the potential eÅect of market and other risks of the entire enterprise, LNC estimates, reviews and
in some cases manages the risk to its earnings and shareholder value. LNC has exposures to several market
risks including interest rate, default risk, foreign currency exchange, liquidity and equity price risks.
The exposures of Ñnancial instruments to market risks, and the related risk management processes, are
most important in the Lincoln Retirement (formerly known as Annuities) and Life Insurance segments. It is
within these segments where most of the invested assets support accumulation and investment oriented
insurance products. As an important element of its integrated asset-liability management process, LNC uses
derivatives to minimize the eÅects of changes in interest levels and the shape of the yield curve. In this
context, derivatives are designated as a hedge and serve to reduce interest rate risk by mitigating the eÅect of
signiÑcant increases in interest rates on LNC's earnings. Additional market exposures exist in LNC's other
general account insurance products and in its debt structure and derivatives positions. The primary sources of
market risk are: 1) substantial, relatively rapid and sustained increases or decreases in interest rates,
2) Öuctuations in currency exchange rates or 3) a sharp drop in equity market values. Each of these market
risks are discussed in detail in the following pages.
1)
Interest Rate Risk
Accumulation and Investment Oriented Insurance Products. General account assets supporting ac-
cumulation and investment oriented insurance products total $31.2 billion or 78% and $26.5 billion or 73% of
total invested assets at December 31, 2002 and 2001, respectively.
With respect to these products, LNC seeks to earn a stable and proÑtable spread between investment
income and interest credited to account values. If LNC has adverse experience on investments that cannot be
passed onto customers, its spreads are reduced. Alternatively, LNC may seek to maintain spreads and this
may result in crediting rates that are not competitive in the market place. This strategy could result in adverse
surrender experience on policies and could force LNC to liquidate a portion of its portfolio to fund cash
surrender value beneÑts.
LNC does not view the near term risk to spreads over the next twelve months to be material. The
combination of a probable range of interest rate changes over the next twelve months, asset-liability
73
management strategies, Öexibility in adjusting policy crediting rate levels and protection aÅorded by policy
surrender charges and other switching costs all work together to minimize this risk. The interest rate scenarios
of concern are those in which there is a substantial, relatively rapid increase or decrease in interest rates that is
then sustained over a long period.
Fixed Deferred Annuities. Assets of $19.9 billion and $16.5 billion at December 31, 2002 and 2001,
respectively, support the largest category of accumulation and investment oriented insurance products, Ñxed
deferred annuities. For these products, LNC may adjust renewal crediting rates monthly or quarterly, subject
to guaranteed minimums ranging from 3% to 5%. The higher minimums apply to in-force blocks of older
products that no longer are sold. Annuity insurance customers have the right to surrender their policies at
account value less a surrender charge that grades to zero over periods ranging from 5 to 10 years from policy
issue date or, in some cases, the date of each premium received. In some cases, a market value adjustment
may also apply. Due to LNC's ability to change crediting rates to reÖect investment experience on the
majority of its traditional annuity products, the underlying assets are assumed to be a good proxy for the
interest rate risk inherent in these liabilities. This assumption is appropriate for probable movements in
interest rates over the next 12 months. This assumption may not be appropriate for a substantial, relatively
rapid increase or decrease in interest rates that is then sustained over a long period.
Universal Life and Interest-Sensitive Whole Life. LNC had $9.3 billion and $8.1 billion in assets at
December 31, 2002 and 2001, respectively, supporting universal life and interest-sensitive whole life insurance
on which it has the right to adjust renewal crediting rates. The credited rates are subject to guaranteed
minimums ranging from 3% to 4.5% for universal life and 4.0% to 7.0% for interest-sensitive whole life, at
December 31, 2002. Similar to annuities, universal life insurance customers have the right to surrender their
policies at account value less a surrender charge that grades to zero over periods ranging from 10 to 20 years
from policy issue date or, in some cases, the date of each premium received.
Guaranteed Interest Contracts and Group Pension Annuities. LNC had assets totaling $2.0 billion and
$1.9 billion at December 31, 2002 and 2001, respectively that support guaranteed interest contracts, group
pension annuities and immediate annuities. Generally, the cash Öows expected on these liabilities do not vary
with Öuctuations in market interest rates and are not adjustable by LNC. Accordingly, if experience on the
assets supporting these products is more adverse than the assumptions used in pricing the products, spreads
will tend to be below expectations. LNC limits exposure to interest rate risk by managing the duration and
maturity structure of each investment portfolio in relation to the liabilities it supports.
Other General Account Insurance Products. LNC had $8.8 billion and $9.6 billion of assets at
December 31, 2002 and 2001, respectively, supporting general account products. For these products, the
liability cash Öows may have actuarial uncertainty. However, their amounts and timing do not vary
signiÑcantly with interest rates. LNC limits interest rate risk by analyzing the expected cash Öows of the
products and structuring investment portfolios with similar cash Öows.
Interest Rate Risk Ì Falling Rates.
Interest rates declined in 1998, rose in 1999 and declined again in
2000, 2001 and 2002. For example, the Ñve-year Treasury yield decreased from 5.7% in 1997 to 4.5% by the
end of 1998, increased to 6.3% by the end of 1999, and declined from 5.0% at the end of 2000 to 4.3% at the
end of 2001 and declined again to 2.70% at the end of 2002. Under scenarios in which interest rates fall and
remain at levels signiÑcantly lower than those prevailing at December 31, 2002, minimum guarantees on
annuity and universal life insurance policies (generally 3% to 5% or an average of approximately 4%) could
cause the spread between the yield on the portfolio and the interest rate credited to policyholders to
deteriorate. The earned rate on the annuity and universal life insurance portfolios averaged 6.8% and 7.3%,
respectively, for the year ended December 31, 2002, providing a cushion for a decline before the earned rates
would be insuÇcient to cover minimum guaranteed rates plus the target spread.
The following table provides detail on the diÅerence between interest crediting rates and minimum
guaranteed rates as of December 31, 2002. For example, at December 31, 2002, there are $5.920 billion of
74
combined Retirement and Life Insurance account values where the excess of the crediting rate over contact
minimums is between 1.51% and 2.00%.
Fixed Rate and On-BeneÑt type annuities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discretionary rate setting products*
No diÅerence ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
up to .1%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
.11% to .20%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
.21% to .30%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
.31% to .40%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
.41% to .50%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
.51% to .60%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
.61% to .70%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
.71% to .80%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
.81% to .90%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
.91% to 1.0%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.01% to 1.50%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.51% to 2.00%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2.01% to 2.50%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2.51% to 3.00%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3.01% and above ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
As of December 31, 2002
Excess of Crediting Rates over
Contract Minimums
Retirement
Life
(in millions)
Total
%
$ 4,359
$ Ì $ 4,359
14.4%
2,104
107
54
391
2,941
368
40
93
41
5,195
295
2,228
1,118
447
279
28
696
0
0
728
0
39
246
158
844
0
20
1,893
4,802
584
157
0
2,800
107
54
1,119
2,941
407
286
251
885
5,195
315
4,121
5,920
1,031
436
28
9.3%
0.4%
0.2%
3.7%
9.7%
1.4%
0.9%
0.8%
2.9%
17.2%
1.0%
13.6%
19.6%
3.4%
1.4%
0.1%
85.6%
Total Discretionary rate setting products ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
15,729
10,167
25,896
Grand Total Ì Account Values ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$20,088
$10,167
$30,255
100.0%
* For purposes of this exhibit, contracts currently within new money rate bands are grouped according to the
corresponding portfolio rate band in which they will fall upon their Ñrst anniversary.
The maturity structure and call provisions of the related portfolios are structured to aÅord protection
against erosion of this cushion for a period of time. However, spreads would be at risk if interest rates
continued to fall and remained lower for a long period. LNC devotes extensive eÅort to evaluating these risks
by simulating asset and liability cash Öows for a wide range of interest rate scenarios. LNC seeks to manage
these exposures by maintaining a suitable maturity structure and by limiting its exposure to call risk in each
respective investment portfolio.
LNC believes that the portfolios supporting its accumulation and investment oriented insurance products
have a prudent degree of call protection individually and on a consolidated basis. For instance, as of
December 31, 2002, the mortgage-backed securities (""MBS'') and asset-backed securities (""ABS'') portion
represented a total of $5.0 billion or 17% of the $31.2 billion of general account assets supporting such
products. Of this portfolio, 11% of general account assets or $3.1 billion is subject to residential prepayment
risk from investments made in Collateralized Mortgage Obligations (""CMOs''), mortgage pass-throughs,
manufactured housing and home equity loans. As of December 31, 2001, the MBS and ABS portion of the
portfolio represented a total of $3.5 billion or 14% of the $24.6 billion of general account assets supporting
such products. LNC's MBS portfolio has equal to or slightly less prepayment risk than the MBS pass-through
market in general primarily due to holding more seasoned securities in the portfolio.
75
Interest Rate Risk Ì Rising Rates. For both annuities and universal life insurance, a rapid and
sustained rise in interest rates poses risks of deteriorating spreads and high surrenders. The portfolios
supporting these products have Ñxed-rate assets laddered over maturities generally ranging from one to ten
years or more. Accordingly, the earned rate on each portfolio lags behind changes in market yields. As rates
rise, the lag may be increased by slowing MBS prepayments. The greater and faster the rise in interest rates,
the more the earned rate will tend to lag behind market rates. If LNC sets renewal crediting rates to earn the
desired spread, the gap between its renewal crediting rates and competitors' new money rates may be wide
enough to cause increased surrenders. If LNC credits more competitive renewal rates to limit surrenders, its
spreads will narrow. LNC devotes extensive eÅort to evaluating these risks by simulating asset and liability
cash Öows for a wide range of interest rate scenarios. Such analysis has led to adjustments in the target
maturity structure and to hedging the risk of rising rates by buying out-of-the-money interest rate cap
agreements and swaptions (see discussion below). With these instruments in place, the potential adverse
impact of a rapid and sustained rise in rates is kept within corporate risk tolerances.
Debt. As of December 31, 2002, LNC had short-term debt, long-term debt and company-obligated
mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures
totaling $1.67 billion ($1.22 billion with Ñxed rates and $0.45 billion with Öoating rates) on the balance sheet.
As of December 31, 2001, LNC had short-term debt, long-term debt and minority interest-preferred securities
of subsidiary companies totaling $1.69 billion ($1.27 billion with Ñxed rates and $0.42 billion with Öoating
rates) on the balance sheet. LNC manages the timing of maturities and the mixture of Ñxed-rate and Öoating-
rate debt as part of the process of integrated management of interest rate risk for the entire enterprise.
Derivatives. As indicated in Note 7 to the consolidated Ñnancial statements, LNC has entered into
derivative transactions to reduce its exposure to rapid rises in interest rates. The four programs discussed below
are used to help LNC achieve more stable margins while providing competitive crediting rates to policyholders
during periods when interest rates are rising. Failure to maintain competitive crediting rates could cause
policyholders to withdraw their funds and place them in more competitive products.
LNC uses interest rate cap agreements to hedge against the negative impact of a signiÑcant and sustained
rise in interest rates. Interest rate caps are contracts that require counterparties to pay LNC at speciÑed future
dates the amount, if any, by which a speciÑed market interest rate exceeds the cap rate stated in the
agreements, applied to a notional amount. As of December 31, 2002 and 2001, LNC had agreements with
notional amounts of $1.3 billion in both periods. At December 31, 2002, the agreements had cap rates ranging
from 200 to 850 basis points above prevailing interest rates. The cap rates in some contracts increase over
time. These agreements expire in 2003 through 2007.
LNC also uses swaptions to hedge against the negative impact of a signiÑcant and sustained rise in
interest rates. Swaptions are options to enter into a swap at a speciÑed future date. If the option is exercised at
expiration, the option is either settled in cash or exercised into a swap agreement. LNC purchases swaptions to
be settled in cash. At expiration, the counterparty is required to pay LNC the amount, if any, of the present
value of the diÅerence between the Ñxed rate on a market rate swap and the strike rate stated in the
agreement, applied to a notional amount. As of December 31, 2002 and 2001, LNC had agreements with
notional amounts of $0.2 billion and $1.8 billion, respectively. At December 31, 2002, the agreements had
strike rates ranging from 550 to 700 basis points above prevailing interest rates. These agreements expire in
2003.
Notional for swaptions decreased by $1.6 billion as a result of expirations and a change in the method of
reporting notional. No additional swaptions were purchased during the year.
For future periods, the fair value of LNC's interest rate caps and swaptions depends on the levels of
future U.S. Treasury and U.S. dollar swap interest rates. The table below shows estimates of fair value levels
for the cap and swaption portfolio at December 31, 2002 for future time periods and selected potential future
interest rate levels.
76
2002
2003
No change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Up 2% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Up 4% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Up 6% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
4.7
26.1
65.8
119.0
$ 1.7
13.3
42.6
86.6
2004
(in millions)
$ 0.3
4.9
23.6
56.5
$ Ì $ Ì $ Ì
Ì
0.5
6.4
Ì
2.7
15.0
0.9
10.0
31.7
2005
2006
2007
Year Ended December 31, 2002
LNC uses exchange-traded Ñnancial futures contracts to hedge against interest rate risks on a portion of
its Ñxed maturity securities. Financial futures contracts obligate LNC to buy or sell a Ñnancial instrument at a
speciÑed future date for a speciÑed price. They may be settled in cash or through delivery of the Ñnancial
instrument. Cash settlements on the change in market values of Ñnancial futures contracts are made daily. As
of December 31, 2002, LNC did not have any open futures.
LNC uses interest rate swap agreements to hedge its exposure to Öoating rate bond coupon payments,
replicating a Ñxed rate bond. An interest rate swap is a contractual agreement to exchange payments at one or
more times based on the actual or expected price level, performance or value of one or more underlying
interest rates. LNC is required to pay the counterparty the stream of variable interest payments based on the
coupon payments from the hedged bonds, and in turn, receives a Ñxed payment from the counterparty, at a
predetermined interest rate. In addition, LNC uses interest rate swap agreements to hedge its exposure to
interest rate Öuctuations related to the forecasted purchase of assets to support newly acquired blocks of
business or certain other portfolios of assets. Finally, LNC uses interest rate swap agreements to hedge the risk
of paying a higher Ñxed rate interest on company-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely junior subordinated debentures and on senior debt than can be paid on long-
term debt based on current interest rates in the marketplace. As of December 31, 2002 and 2001, LNC had
swap agreements with a notional amount of $701.6 million and $507.6 million, respectively. The agreements
expire in 2003 through 2050. Notional for interest rate swaps increased $194.0 million during 2002 primarily
as a result of entering into interest rate swaps to hedge variable rate assets and to convert Ñxed rate debt
payments into Öoating rate debt payments.
LNC used a treasury lock agreement to hedge its exposure to variability in future semi-annual interest
payments, attributable to changes in the benchmark interest rate, related to the issuance of its 10-year
$250 million senior debt in December 2001 and its 5-year $250 million senior debt in 2002. A treasury lock is
an agreement that allows the holder to lock in a benchmark interest rate, so that if the benchmark interest rate
increases, the holder is entitled to receive a payment from the counterparty equal to the present value of the
diÅerence in the benchmark interest rate at the determination date and the locked-in benchmark interest rate.
If the benchmark interest rate decreases, the holder must pay the counterparty an amount equal to the present
value of the diÅerence in the benchmark interest rate at the determination date and the locked-in benchmark
interest rate. As of December 31, 2002, LNC did not have any open treasury locks.
In addition to continuing existing programs, LNC may use derivative products in other strategies to limit
risk and enhance returns, particularly in the management of investment spread businesses. LNC has
established policies, guidelines and internal control procedures for the use of derivatives as tools to enhance
management of the overall portfolio of risks assumed in LNC's operations. Annually, LNC's Board of
Directors reviews LNC's derivatives policy and LNC's compliance with the policy.
Table of SigniÑcant Exposures. The table below provides a general measure of LNC's signiÑcant
interest rate risk (principal amounts are shown by year of maturity and include amortization of premiums and
discounts); notional amounts for interest rate caps and swaptions are shown by amount outstanding at the
year-end given) as of December 31, 2002.
77
2003
2004
2005
2006
2007
(in millions)
There-
after
Total
Value
Fair
Rate Sensitive Assets
Fixed interest rate securitiesÏÏÏÏÏÏÏÏ
$ 929.1
$ 959.1
$1,556.4
$1,646.8
$2,311.0
$23,183.0
$30,585.4
$30,726.5
Average interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
7.14%
6.98%
7.04%
6.58%
6.45%
6.71%
6.71%
Variable interest rate securities ÏÏÏÏÏ
$
12.0
$
85.9
$ 153.3
$
39.9
$
45.7
$ 2,704.9
$ 3,041.7
$ 2,041.0
Average interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
7.88%
8.08%
8.50%
6.89%
6.75%
5.52%
5.94%
Mortgage loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 110.4
$ 478.8
$ 214.0
$ 336.9
$ 313.3
$ 2,765.1
$ 4,218.5
$ 4,678.8
Average interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
8.21%
8.15%
8.39%
7.79%
8.21%
7.91%
7.99%
Rate Sensitive Liabilities
Guaranteed Interest Contracts:
Interest paid at maturity ÏÏÏÏÏÏÏÏÏ
$
24.0
$
36.0
$
23.0
$
Ì $
Ì $
Ì $
83.0
$
95.0
Average interest rate ÏÏÏÏÏÏÏÏÏÏÏÏ
10.67%
10.71%
10.72%
10.70%
Investment type insurance contracts,
excluding guaranteed interest
contracts (1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 410.8
$1,218.4
$ 692.0
$ 833.6
$1,124.7
$15,662.1
$19,941.6
$20,283.3
Average interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
7.45%
7.33%
7.19%
6.93%
6.79%
6.98%
7.01%
Debt (2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 158.0
Average interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.79%
$ 193.0
7.25%
$ 250.0
$ 1,042.8
$ 1,643.8
$ 1,727.7
5.25
7.19%
6.36%
Rate Sensitive Derivative
Financial Instruments:
Interest Rate and Foreign Currency
Swaps:
Pay variable/receive ÑxedÏÏÏÏÏÏÏÏ
85.0
Average pay rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Average receive rate ÏÏÏÏÏÏÏÏÏÏÏÏ
1.8%
5.3%
5.0
2.0%
5.9%
47.2
13.4
224.6
387.9
763.1
72.7
4.4%
6.9%
2.7%
6.6%
1.7%
4.9%
2.3%
7.0%
2.2%
6.2%
Interest Rate Caps and Swaptions:
(3) Outstanding notional ÏÏÏÏÏÏÏÏ
1,050.0
1,050.0
1,050.0
800.0
4.7
Average strike rate (4) ÏÏÏÏÏÏÏÏÏÏÏÏ
Forward CMT curve (5) ÏÏÏÏÏÏÏÏÏÏ
7.8%
3.9%
7.9%
4.5%
8.0%
5.0%
7.9%
5.3%
The table shows the principal amounts and fair values of assets, liabilities and derivatives having
signiÑcant interest rate risks as of December 31, 2001.
Principal
Amount
Fair
Value
(in millions)
Fixed interest rate securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Variable interest rate securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Guaranteed interest contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment type insurance contracts (1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Debt (2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest rate and foreign currency swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest rate caps and swaptionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$27,474.7
3,154.2
4,538.9
77.0
19,041.1
1,691.0
602.2
Ì
$26,380.6
1,965.1
4,691.1
89.0
18,297.1
1,703.6
24.1
0.7
(1) The information shown is for the Ñxed maturity securities and mortgage loans that support these insurance contracts.
(2) Includes company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated
debentures.
(3) Swaptions notional is shown converted to cap equivalent.
(4) The indexes are a mixture of Ñve-year and ten-year Constant Maturity Treasury (""CMT'') and Constant Maturity Swap (""CMS'').
(5) The CMT curve is the Ñve-year constant maturity treasury forward curve.
78
2) Foreign Currency Risk
Foreign Currency Denominated Investments. LNC invests in foreign currency denominated securities
for incremental return and risk diversiÑcation relative to United States Dollar-Denominated (""USD'')
securities. The fair value of foreign securities totaled $975.1 million as of December 31, 2002. LNC
periodically uses foreign exchange forward contracts and foreign currency swaps to hedge some of the foreign
exchange risk related to its investment in securities denominated in foreign currencies. The currency risk is
hedged using foreign currency derivatives of the same currency as the bonds. The table below shows LNC's
exposure to foreign currency securities. Also included is the relevant information relating to the foreign
currency derivatives that are hedging the currency risk of these securities. The table below presents the
principal or notional amount in U.S. dollar equivalents by expected maturity for LNC's foreign currency
denominated investments and foreign currency swaps as of December 31, 2002.
2003
2004
2005
2006
2007
There-
After
Total
Fair
Value
Currencies:
Canadian Dollar ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
British Pound ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
French Franc ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
All Other Currencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest Rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Currencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivatives:
$ Ì $ Ì $ Ì $ 3.3
$12.7
$
6.37% 4.65%
37.8
27.7
47.1
40.1
122.0
6.77% 12.90% 9.10% 5.40% 4.80%
Ì
Ì
Ì
Ì
2.7
5.53%
579.3
5.41%
Ì
1.7
13.14%
123.7
Ì
Ì
Ì
Ì
47.1
40.1
43.9
40.4
582.0
2.8
8.90%
Ì
$ 18.7
$ 19.8
5.08%
854.0
6.22%
2.8
8.90%
1.7
13.14%
877.2
950.7
2.9
1.7
975.1
Foreign Currency Swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
44.5
Ì
13.5
3.4
Ì
Ì
61.4
(2.4)
The table below presents the principal or notional amount in U.S. dollar equivalents of LNC's foreign
currency denominated investments and foreign currency swaps as of December 31, 2001.
Currencies
Canadian Dollar ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
British PoundÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Filipino Peso ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
All other currencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Principal/
Notional
Fair
Value
(in millions)
$ 12.9
840.9
5.6
2.8
$ 13.5
895.3
5.6
2.6
Total Currencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$862.2
$917.0
Derivatives
Foreign Currency Swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 94.6
$
5.9
Foreign Currency Forward Contracts. LNC uses foreign currency forward contracts to hedge some of
the foreign exchange risk related to its investments in Ñxed maturity securities denominated in foreign
currencies. LNC typically engages in short term currency forward contracts of less than six months and
actively monitors currency markets in determining those currencies to hedge, the duration of the hedge and
the nominal amount to hedge. A foreign currency forward contract obligates LNC to deliver a speciÑed
amount of currency at a future date at a speciÑed exchange rate. The value of the foreign exchange forward
contracts at any given point Öuctuates according to the underlying level of exchange rate and interest rate
diÅerentials.
79
During 2002, LNC entered into foreign currency forward contracts to hedge a portion of its net
investment in Lincoln UK. At December 31, 2002, the total notional and fair value for these contracts was
$43.0 million and $(1.8) million, respectively. These contracts expire in 2003.
Foreign Currency Swaps. A foreign currency swap is a contractual agreement to exchange the
currencies of two diÅerent countries at a speciÑed rate of exchange in the future. LNC uses foreign currency
swaps to convert the cash Öow of foreign currency securities to U.S. dollars.
3) Equity Market Exposures
LNC's revenues, assets, liabilities and derivatives are exposed to equity market risk. Refer to the section
captioned ""First Quarter 2003 Guidance for the Estimated EÅect of Equity Market Volatility'' for additional
discussion of equity market risk.
Fee Revenues. The fee revenues of LNC's Investment Management segment and fees earned from
variable annuities and variable life insurance products are exposed to the risk of a decline in equity market
values. These fees are generally a Ñxed percentage of the market value of assets under management. In a
severe equity market decline, fee income could be reduced by not only reduced market valuations but also by
customer withdrawals and redemptions. Such withdrawals and redemptions from equity funds and accounts
might be partially oÅset by transfers to LNC's Ñxed-income accounts and the transfer of funds to LNC from
its competitors' customers.
Assets. While LNC invests in equity assets with the expectation of achieving higher returns than would
be available in its core-Ñxed-income investments, the returns on, and values of, these equity investments are
subject to somewhat greater market risk than its Ñxed income investments. These investments, however, add
diversiÑcation beneÑts to LNC's Ñxed income investments. The table below shows the sensitivity of price
changes to LNC's equity assets owned.
U.S. Equities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign Equities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Emerging Market EquitiesÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Real Estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Equity Interests
December 31, 2002
10% Fair
Value
Increase
Fair
Value
10% Fair
Value
Decrease
December 31, 2001
Carrying
Value
Fair
Value
(in millions)
$133.7
198.6
4.9
337.2
312.0
279.2
$ 147.1
218.4
5.4
370.9
343.2
307.1
$120.3
178.8
4.4
303.5
280.8
251.3
$ 154.2
309.6
6.7
$ 154.2
309.6
6.7
470.5
267.9
366.7
470.5
296.9
356.9
Carrying
Value
$133.7
198.6
4.9
337.2
279.7
300.5
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$917.4
$928.4
$1,021.2
$835.6
$1,105.1
$1,124.3
Liabilities. LNC has exposure to U.S. equity markets through stock appreciation rights (""SARs'')
issued in 2000 through 2002. The aggregate value for vested and non-vested SARs was $3.7 million and
$4.1 million at December 31, 2002, respectively. The aggregate value for vested and non-vested SARs was
$6.5 million and $15.3 million at December 31, 2001, respectively. This program is being hedged with equity
derivatives as discussed below.
Derivatives Hedging Equity Risks. LNC uses OTC equity call options on LNC stock to hedge against
the increase in its liabilities arising from stock appreciation rights granted on LNC stock in 2000 through
2002. These call options require the counterparty to pay LNC at speciÑed future expiration dates the amount,
if any, of the increase in LNC's stock price over the strike price of the option, applied to the number of
contracts. LNC had 1.3 million and 1.1 million call options on an equal number of shares of LNC stock at
December 31, 2002 and 2001, respectively. The call options expirations are matched to the liabilities and
expire in 2005 through 2007.
80
Default Risk. LNC's portfolio of invested assets was $40.0 billion as of December 31, 2002. Of this
total, $25.9 billion consists of corporate bonds and $4.2 billion consists of commercial mortgages. LNC
manages the risk of adverse default experience on these investments by applying disciplined credit evaluation
and underwriting standards, prudently limiting allocations to lower-quality, higher-yielding investments, and
diversifying exposures by issuer, industry, region and property type. For each counterparty or borrowing entity
and its aÇliates, LNC's exposures from all transactions are aggregated and managed in relation to formal
limits set by rating quality and industry group. LNC remains exposed to occasional adverse cyclical economic
downturns during which default rates may be signiÑcantly higher than the long-term historical average used in
pricing. As of December 31, 2001, LNC had a portfolio of invested assets of $36.1 billion.
LNC is depending on the ability of derivative product dealers and their guarantors to honor their
obligations to pay the contract amounts under various derivatives agreements. In order to minimize the risk of
default losses, LNC diversiÑes its exposures among several dealers and limits the amount of exposure to each
in accordance with the credit rating of each dealer or its guarantor. LNC generally limits its selection of
counterparties that are obligated under these derivative contracts to those with an A credit rating or above.
Credit-Related Derivatives. LNC periodically uses spread-lock agreements to hedge a portion of the
value of its Ñxed maturity investments against the risk of widening in the spreads between their yields and the
yields of comparable maturity U.S. or other Government obligations. As of December 31, 2002, LNC did not
have any open spread-lock agreements. LNC used put options, combined with various perpetual Ñxed-income
securities and interest rate swaps to replicate Ñxed-income, Ñxed-maturity investments. The risk being hedged
was a drop in bond prices due to credit concerns with the international bond issuers.
The put options allowed LNC to put the bonds back to the counterparties at original par. As of
December 31, 2002, LNC did not have any open put options.
LNC uses credit default swaps to hedge against a drop in bond prices due to credit concerns of certain
bond issuers. A credit swap allows LNC to put the bond back to the counterparty at par upon a credit event by
the bond issuer. A credit event is deÑned as bankruptcy, failure to pay, or obligation acceleration. As of
December 31, 2002 and 2001, LNC had credit swaps with a notional amount of $26 million and $29 million,
respectively. The credit swaps expire in 2003 through 2006.
LNC used total return swaps to hedge its exposure to interest rate and spread risk resulting from the
forecasted sale of assets in a securitization of certain LNC mortgage loans. A total return swap is an
agreement that allows the holder to protect itself against loss of value by eÅectively transferring the economic
risk of asset ownership to the counterparty. The holder pays (receives) the total return equal to interest plus
capital gains or losses on a referenced asset and receives a Öoating rate of interest. As of December 31, 2002,
LNC did not have any open total return swaps.
Ratings-based Termination Events. LNC and LNL are required to maintain minimum ratings as a
matter of routine practice in negotiating ISDA agreements. Under the majority of ISDA agreements and as a
matter of policy, LNL has agreed to maintain Ñnancial strength or claims-paying ratings above S&P BBB and
Moody's Baa2. A downgrade below these levels would result in termination of the derivatives contract at
which time any amounts payable by LNC would be dependent on the market value of the underlying
derivative contract. In certain transactions, LNC and the counterparty have entered into a collateral support
agreement requiring LNC to post collateral upon signiÑcant downgrade. LNC is required to maintain long-
term senior debt ratings above S&P BBB and Moody's Baa2. LNC also requires for its own protection
minimum rating standards for counterparty credit protection. LNL is required to maintain Ñnancial strength
or claims-paying ratings above S&P A¿ and Moody's A3 under certain ISDA agreements, which collectively
do not represent material notional exposure. LNC does not believe the inclusion of termination or
collateralization events pose any material threat to its liquidity position.
81
Item 8. Financial Statements and Supplementary Data
2002 Data
Premiums and other considerations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net investment income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Realized gain (loss) on investments, derivatives and sale of
subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income per diluted share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2001 Data
Premiums and other considerations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net investment income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Realized gain (loss) on investments, derivatives and sale of
subsidiariesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income per diluted share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Financial Statements
Operating Results by Quarter
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
(in millions, except per share data)
$ 581.2
648.1
$587.5
651.0
$ 553.2
647.0
$585.0
662.2
(103.3)
94.5
0.49
$
$
(81.1)
$ 59.4
$ 0.31
(36.8)
$(125.5)
$ (0.68)
(58.6)
$ 63.2
$ 0.35
$1,049.6
673.7
$938.0
673.1
$ 969.4
686.2
$843.0
646.6
(20.7)
$ 160.2
0.83
$
(17.5)
$141.7
$ 0.74
(37.6)
$ 119.1
0.61
$
(25.8)
$169.2
$ 0.88
The consolidated Ñnancial statements and notes to consolidated Ñnancial statements of Lincoln National
Corporation and Subsidiaries follow on pages 83 through 148.
82
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31
2002
2001
(000s omitted)
Investments:
Securities available-for-sale, at fair value:
ASSETS
Fixed maturity (cost: 2002 Ì $31,103,146; 2001 Ì $27,955,981) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity (cost: 2002 Ì $334,493; 2001 Ì $444,398) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage loans on real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Policy loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total InvestmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment in unconsolidated aÇliates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and invested cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred acquisition costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Premiums and fees receivableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued investment income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Assets held in separate accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Federal income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amounts recoverable from reinsurers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other intangible assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$32,767,465
337,216
4,205,470
279,702
1,945,626
86,236
378,136
39,999,851
Ì
1,690,534
242,135
2,970,866
212,942
536,720
36,178,336
266,503
7,280,014
1,233,232
1,291,973
1,230,316
$93,133,422
$28,345,673
470,459
4,535,550
267,882
1,939,683
46,445
507,386
36,113,078
8,134
3,095,480
257,518
2,885,311
400,076
563,490
44,833,419
15,117
6,030,368
1,211,794
1,412,596
1,174,923
$98,001,304
Liabilities:
Insurance and Investment Contract Liabilities:
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance policy and claim reservesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Contractholder funds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Liabilities related to separate accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Insurance and Investment Contract LiabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely junior subordinated debenturesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred gain on indemnity reinsurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Shareholders' Equity:
Series A preferred stock Ì 10,000,000 shares authorized (2002 liquidation value Ì
$1,609) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock Ì 800,000,000 shares authorizedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated Other Comprehensive Income:
$23,558,874
21,286,396
36,178,336
81,023,606
153,045
1,119,245
392,658
4,171,452
977,149
87,837,155
$21,609,269
19,247,894
44,833,419
85,690,582
350,203
861,754
474,656
4,216,095
1,144,530
92,737,820
666
1,292,779
3,268,268
762
1,255,112
3,834,427
Foreign currency translation adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net unrealized gain on securities available-for-sale, net of reclassiÑcation adjustment ÏÏ
Net unrealized gain on derivative instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minimum pension liability adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Accumulated Other Comprehensive Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Shareholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Liabilities and Shareholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
50,780
753,272
28,349
(97,847)
734,554
5,296,267
$93,133,422
(8,062)
195,681
21,523
(35,959)
173,183
5,263,484
$98,001,304
See notes to the consolidated Ñnancial statements on pages 88 through 148.
83
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
2001
(000s omitted except for per share amounts)
2002
2000
Revenue:
Insurance premiums ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Insurance feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment advisory fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net investment income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity in earnings (losses) of unconsolidated aÇliates ÏÏÏÏÏÏÏÏÏÏ
Net realized loss on investments and derivative instruments (net
of amounts restored/(amortized) against balance sheet
accounts, Note 5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Realized gain (loss) on sale of subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of deferred gain on indemnity reinsuranceÏÏÏÏÏÏÏÏÏ
Other revenue and fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 315,943
1,434,414
183,317
2,608,327
(647)
$1,704,002
1,544,041
197,150
2,679,617
5,672
$1,813,111
1,661,442
213,065
2,747,118
(379)
(271,526)
(8,258)
74,381
299,511
(114,457)
12,848
20,387
328,744
(28,295)
Ì
Ì
441,085
Total Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4,635,462
6,378,004
6,847,147
BeneÑts and Expenses:
BeneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Underwriting, acquisition, insurance and other expenses (Note 5)
Interest and debt expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,859,505
1,677,720
96,613
3,409,740
2,083,106
121,019
3,557,160
2,314,158
139,538
Total BeneÑts and Expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4,633,838
5,613,865
6,010,856
Income before Federal Income Taxes and Cumulative EÅect of
Accounting Changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Federal income taxes (beneÑt) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before Cumulative EÅect of Accounting Changes ÏÏÏÏÏÏÏ
Cumulative EÅect of Accounting Changes (net of Federal
1,624
(89,966)
91,590
764,139
158,362
605,777
836,291
214,898
621,393
income tax beneÑt) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
(15,566)
Ì
Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Earnings Per Common Share Ì Basic
Income before Cumulative EÅect of Accounting Changes ÏÏÏÏÏÏÏ
Cumulative EÅect of Accounting Changes (net of Federal
income tax beneÑt) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Earnings Per Common Share Ì Diluted:
Income before Cumulative EÅect of Accounting Changes ÏÏÏÏÏÏÏ
Cumulative EÅect of Accounting Changes (net of Federal
income tax beneÑt) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
$
$
Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
91,590
$ 590,211
$ 621,393
0.50
Ì
0.50
0.49
Ì
0.49
$
$
$
$
3.21
(0.08)
3.13
3.13
(0.08)
3.05
$
$
$
$
3.25
Ì
3.25
3.19
Ì
3.19
See notes to the consolidated Ñnancial statements on pages 88 through 148.
84
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Year Ended December 31
2001
(000s omitted except for per share amounts)
2000
2002
Series A Preferred Stock:
Balance at beginning-of-year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Conversion into common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Balance at End-of-Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common Stock:
Balance at beginning-of-year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Conversion of series A preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issued for beneÑt plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Shares forfeited under beneÑt plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cancelled/issued for acquisition of subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retirement of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
FELINE PRIDES conversion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
762
(96)
666
$
857
(95)
762
948
(91)
857
1,255,112
96
93,580
(4,471)
(474)
(51,064)
Ì
1,003,651
95
90,527
(268)
(4,740)
(64,147)
229,994
1,007,099
91
33,609
(868)
893
(37,173)
Ì
Balance at End-of-Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,292,779
1,255,112
1,003,651
Retained Earnings:
Balance at beginning-of-year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Comprehensive income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less other comprehensive income (loss) (net of income tax):
Foreign currency translation adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net unrealized gain on securities available-for-sale, net of reclassiÑcation
adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net unrealized gain on derivative instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minimum pension liability adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retirement of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends declared:
3,834,427
652,961
3,915,598
729,416
3,691,470
1,091,020
58,842
(29,992)
(8,119)
557,591
6,826
(61,888)
91,590
(423,422)
183,633
21,523
(35,959)
590,211
(439,603)
477,746
Ì
Ì
621,393
(172,848)
Series A preferred ($3.00 per share) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common (2002 Ì $1.295; 2001 Ì $1.235; 2000 Ì $1.175) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(61)
(234,266)
(71)
(231,708)
(78)
(224,339)
Balance at End-of-Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3,268,268
3,834,427
3,915,598
Foreign Currency Translation Adjustment:
Balance at beginning-of-year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change during the yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at End-of-Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net Unrealized Gain (Loss) on Securities Available-for-Sale:
Balance at beginning-of-year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change during the yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at End-of-Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net Unrealized Gain on Derivative Instruments:
Balance at beginning-of-year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change during the yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at End-of-Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minimum Pension Liability Adjustment:
Balance at beginning-of-year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change during the yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at End-of-Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(8,062)
58,842
50,780
195,681
557,591
753,272
21,523
Ì
6,826
28,349
(35,959)
(61,888)
(97,847)
21,930
(29,992)
(8,062)
12,048
183,633
195,681
Ì
17,583
3,940
21,523
Ì
(35,959)
(35,959)
30,049
(8,119)
21,930
(465,698)
477,746
12,048
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Total Shareholders' Equity at End-of-Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
5,296,267
$
5,263,484
$
4,954,084
See notes to the consolidated Ñnancial statements on pages 88 through 148.
85
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Ì (Continued)
2002
Year Ended December 31
2001
(Number of shares)
2000
Series A Preferred Stock:
Balance at beginning-of-year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Conversion into common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at End-of-Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common Stock:
Balance at beginning-of-year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Conversion of series A preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issued for beneÑt plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Shares forfeited under beneÑt plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cancelled/issued for acquisition of subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retirement of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
FELINE PRIDES conversion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
23,034
(2,916)
20,118
25,980
(2,946)
23,034
28,857
(2,877)
25,980
186,943,738
46,656
2,529,631
(112,680)
(11,246)
(12,088,100)
Ì
190,748,050
47,136
2,911,250
(7,000)
(107,994)
(11,278,022)
4,630,318
195,494,898
46,032
1,435,015
(29,698)
24,384
(6,222,581)
Ì
Balance Issued and Outstanding at End-of-YearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
177,307,999
186,943,738
190,748,050
Common Stock at End-of-Year:
Assuming conversion of preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted basis ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
177,629,887
179,031,280
187,312,282
191,143,748
191,163,730
195,230,153
See notes to the consolidated Ñnancial statements on pages 88 through 148.
86
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities:
Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Deferred acquisition costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Premiums and fees receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued investment income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Policy liabilities and accruals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Contractholder fundsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amounts recoverable from reinsurers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Federal income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Federal income taxes paid on proceeds from disposition ÏÏÏÏÏÏ
Provisions for depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of other intangible assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net realized loss on investments and derivative instruments ÏÏÏ
(Gain) loss on sale of subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of deferred gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net Adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net Cash Provided by Operating Activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash Flows from Investing Activities:
Securities-available-for-sale:
Purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchase of other investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Sale or maturity of other investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Sale of unconsolidated aÇliates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from (adjustments to) disposition of business ÏÏÏÏÏÏÏÏÏ
Increase (decrease) in cash collateral on loaned securities ÏÏÏÏÏÏ
OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net Cash Provided by (Used in) Investing Activities ÏÏÏÏÏÏ
Cash Flows from Financing Activities:
Decrease in long-term debt (includes payments and transfers to
2002
Year Ended December 31
2001
(000s omitted)
2000
$
91,590
$
590,211
$
621,393
(280,587)
187,134
26,770
(361,432)
852,098
222,771
(42,615)
(516,152)
36,266
Ì
144,717
271,526
8,258
(74,381)
(76,399)
397,974
489,564
(346,397)
63,931
(47,860)
(491,417)
1,119,013
(81,461)
124,118
Ì
30,765
43,385
125,168
114,457
(12,848)
(20,387)
52,656
673,123
1,263,334
(427,450)
(37,075)
(13,210)
120,480
1,020,756
206,611
239,415
Ì
41,552
45,146
150,314
28,295
Ì
Ì
(1,140)
1,373,694
1,995,087
(14,232,238)
8,389,010
2,539,219
(1,281,117)
1,776,515
Ì
(195,000)
(95,341)
(165,288)
(3,264,240)
(11,113,886)
5,989,074
2,520,373
(1,832,593)
1,865,438
Ì
2,036,238
78,259
(158,007)
(615,104)
(4,926,319)
4,005,859
1,866,911
(1,902,639)
1,748,335
85,000
Ì
236,811
(202,760)
911,198
Ì
(81,998)
248,990
(197,158)
short-term debt) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retirement/call of preferred securities of subsidiary trusts ÏÏÏÏÏÏ
Issuance of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net increase (decrease) in short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of preferred securities of subsidiary companies ÏÏÏÏÏÏÏÏ
Universal life and investment contract deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Universal life and investment contract withdrawalsÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment contract transfers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock issued for beneÑt plansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
NonqualiÑed employee stock option exercise tax beneÑt ÏÏÏÏÏÏÏÏ
Retirement of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other liabilities Ì retirement of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends paid to shareholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net Cash Provided by (Used in) Financing Activities ÏÏÏÏÏÏ
Net Increase (Decrease) in Cash and Invested CashÏÏÏÏÏÏÏ
Cash and Invested Cash at Beginning-of-Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
5,305,499
(3,262,194)
108,479
79,424
9,685
(474,486)
(131,890)
(234,621)
1,369,730
(1,404,946)
3,095,480
Cash and Invested Cash at End-of-Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,690,534
(99,968)
(440,038)
249,220
48,031
169,694
4,897,828
(3,288,290)
(373,000)
77,217
13,040
(503,750)
Ì
(230,127)
519,857
1,168,087
1,927,393
$ 3,095,480
Ì
Ì
Ì
(147,226)
Ì
3,543,763
(4,524,371)
(1,347,000)
18,879
13,862
(210,021)
Ì
(222,661)
(2,874,775)
31,510
1,895,883
$ 1,927,393
See notes to the consolidated Ñnancial statements on pages 88 through 148.
87
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of SigniÑcant Accounting Policies
Basis of Presentation. The accompanying consolidated Ñnancial statements include Lincoln National
Corporation (""LNC'') and its majority-owned subsidiaries. Through subsidiary companies, LNC operates
multiple insurance and investment management businesses divided into four business segments (see Note 9).
The collective group of companies uses ""Lincoln Financial Group'' as its marketing identity. Less than
majority-owned entities in which LNC has at least a 20% interest are reported on the equity basis. These
consolidated Ñnancial statements have been prepared in conformity with accounting principles generally
accepted in the United States.
Use of Estimates. The nature of the insurance and investment management businesses requires
management to make numerous estimates and assumptions that aÅect the amounts reported in the
consolidated Ñnancial statements and accompanying notes. Actual results will diÅer from those estimates.
Investments. LNC classiÑes its Ñxed maturity and equity securities as available-for-sale and, accord-
ingly, such securities are carried at fair value. The cost of Ñxed maturity securities is adjusted for amortization
of premiums and discounts. The cost of Ñxed maturity and equity securities is reduced to fair value with a
corresponding charge to realized loss on investments for declines in value that are other than temporary.
For the mortgage-backed securities portion of the Ñxed maturity securities portfolio, LNC recognizes
income using a constant eÅective yield based on anticipated prepayments and the estimated economic life of
the securities. When estimates of prepayments change, the eÅective yield is recalculated to reÖect the revised
anticipated future payments. The new eÅective yield is used to recognize income on the security prospectively.
This adjustment is reÖected in net investment income.
Mortgage loans on real estate, which are primarily held in the Life Insurance and Retirement segments,
are carried at the outstanding principal balances adjusted for amortization of premiums and discounts and are
net of valuation allowances. Valuation allowances are established for the excess carrying value of the mortgage
loan over its estimated fair value when it is probable that, based upon current information and events, LNC
will be unable to collect all amounts due under the contractual terms of the loan agreement. When LNC
determines that a loan is impaired, the cost is adjusted or a provision for loss is established equal to the
diÅerence between the amortized cost of the mortgage loan and the estimated value. Estimated value is based
on: 1) the present value of expected future cash Öows discounted at the loan's eÅective interest rate; 2) the
loan's observable market price; 3) the fair value of the collateral. The provision for losses is reported as
realized gain (loss) on investments. Mortgage loans deemed to be uncollectible are charged against the
allowance for losses and subsequent recoveries, if any, are credited to the allowance for losses. Interest income
on mortgage loans includes interest collected, the change in accrued interest, and amortization of premiums
and discounts. Mortgage loan fees and costs are recorded in net investment income as they are incurred.
Investment real estate is carried at cost less accumulated depreciation. Depreciation is provided on a
straight-line basis over the estimated useful life of the asset. Cost is adjusted for impairment when the
projected undiscounted cash Öow from the investment is less than the carrying value. Impaired real estate is
written down to the estimated fair value of the real estate, which is generally computed using the present value
of expected future cash Öows from the real estate discounted at a rate commensurate with the underlying risks.
Also, valuation allowances for losses are established, as appropriate, for real estate holdings that are in the
process of being sold. Real estate acquired through foreclosure proceedings is reclassiÑed on the balance sheet
from mortgage loans on real estate to real estate and is recorded at fair value at the settlement date, which
establishes a new cost basis. If a subsequent periodic review of a foreclosed property indicates the fair value,
less estimated costs to sell, is lower than the carrying value at settlement date, the carrying value is adjusted to
the lower amount. Write-downs to real estate and any changes to the reserves on real estate are reported as
realized gain (loss) on investments.
Policy loans are carried at aggregate unpaid balances.
88
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Cash and invested cash are carried at cost and include all highly liquid debt instruments purchased with a
maturity of three months or less.
Realized gain (loss) on investments is recognized in net income, net of associated amortization of
deferred acquisition costs and investment expenses, using the speciÑc identiÑcation method. Changes in the
fair values of securities carried at fair value are reÖected directly in shareholders' equity, after deductions for
related adjustments for deferred acquisition costs and amounts required to satisfy policyholder commitments
that would have been recorded had these securities been sold at their fair value, and after deferred taxes or
credits to the extent deemed recoverable.
Realized gain (loss) on sale of subsidiaries, net of taxes, is recognized in net income.
Derivative Instruments. For the years ended December 31, 2002, 2001 and 2000, LNC hedged certain
portions of its exposure to interest rate Öuctuations, the widening of bond yield spreads over comparable
maturity U.S. Government obligations, credit risk, foreign exchange risk and equity risk Öuctuations by
entering into derivative transactions. A description of LNC's accounting for its hedging of such risks is
discussed in the following paragraphs.
EÅective upon the adoption of Statement of Financial Accounting Standard No. 133, ""Accounting for
Derivative Instruments and Hedging Activities,'' (""FAS 133'') on January 1, 2001, LNC recognizes all
derivative instruments as either assets or liabilities in the consolidated balance sheet at fair value. FAS 133
standardized the accounting for derivative instruments, including certain derivative instruments embedded in
other contracts. The accounting for changes in the fair value of a derivative instrument depends on whether it
has been designated and qualiÑes as part of a hedging relationship and further, on the type of hedging
relationship. For those derivative instruments that are designated and qualify as hedging instruments, LNC
must designate the hedging instrument based upon the exposure being hedged Ì as a cash Öow hedge, fair
value hedge or a hedge of a net investment in a foreign operation. As of December 31, 2002 and 2001, LNC
had derivative instruments that were designated and qualiÑed as cash Öow hedges and fair value hedges. In
addition, LNC had derivative instruments that were economic hedges, but were not designated as hedging
instruments under FAS 133. LNC also had derivative instruments that were designated as hedges of a portion
of its net investment in a foreign operation at December 31, 2002.
For derivative instruments that are designated and qualify as a cash Öow hedge, the eÅective portion of
the gain or loss on the derivative instrument is reported as a component of other comprehensive income
(""OCI'') and reclassiÑed into net income in the same period or periods during which the hedged transaction
aÅects net income. The remaining gain or loss on the derivative instrument in excess of the cumulative change
in the present value of designated future cash Öows of the hedged item (hedge ineÅectiveness), if any, is
recognized in current income during the period of change. For derivative instruments that are designated and
qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the oÅsetting loss or gain
on the hedged item attributable to the hedged risk are recognized in current income during the period of
change in fair values. For derivative instruments that are designated and qualify as a hedge of a net investment
in a foreign operation, the gain or loss is reported in OCI as part of the cumulative translation adjustment to
the extent it is eÅective. For derivative instruments not designated as hedging instruments, the gain or loss is
recognized in current income during the period of change.
See Note 7 for further discussion of LNC's accounting policy for derivative instruments.
Prior to January 1, 2001, derivative instruments were carried in other investments. The premiums paid for
interest rate caps and swaptions were deferred and amortized to net investment income on a straight-line basis
over the term of the respective derivative. Interest rate caps that hedged interest credited on Ñxed annuity
liabilities were carried at amortized cost. Any settlement received in accordance with the terms of the interest
rate caps was also recorded as net investment income. Realized gain (loss) from the termination of the
interest rate caps was included in net income.
89
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Swaptions, put options, spread-lock agreements, interest rate swaps and Ñnancial futures that hedge Ñxed
maturity securities available-for-sale were carried at fair value. The change in fair value was reÖected directly
in shareholders' equity. Settlements on interest rate swaps and commodity swaps were recognized in net
investment income. Realized gain (loss) from the termination of swaptions, put options, spread-lock
agreements, interest rate swaps and Ñnancial futures were deferred and amortized over the life of the hedged
assets as an adjustment to the yield. Forward-starting interest rate swaps were also used to hedge the
forecasted purchase of investments. These interest rate swaps were carried oÅ-balance sheet until the
occurrence of the forecasted transaction at which time the interest rate swaps were terminated and any gain
(loss) on termination was used to adjust the basis of the forecasted purchase. If the forecasted purchase did
not occur or the interest rate swaps were terminated early, changes in the fair value of the swaps were recorded
in net income.
Over-the-counter call options which hedged liabilities tied to the S&P stock index were carried at fair
value. The change in fair value was reÖected directly in net income. Gain (loss) realized upon termination of
these call options was included in net income. Over-the-counter call options which hedge stock appreciation
rights were carried at fair value when hedging vested stock appreciation rights and at cost when hedging
unvested stock appreciation rights. The change in fair value of call options hedging vested stock appreciation
rights was included in net income. Gain (loss) upon termination was reported in net income.
Foreign exchange forward contracts which hedged debt issued by Lincoln UK in a foreign currency were
carried at fair value. The change in fair value was included in income. Gain (loss) upon termination was
reported in net income. Foreign currency swaps, which hedged some of the foreign exchange risk of
investments in Ñxed maturity securities denominated in foreign currencies, were carried at fair value. The
change in fair value was included in shareholders' equity. Realized gain (loss) from the termination of such
derivatives was included in net income. Foreign exchange forward contracts were also used to hedge LNC's
net investment in a foreign subsidiary. These foreign exchange forward contracts were initially carried at zero.
Carrying value was adjusted for changes in the currency spot rate, as well as amortization of forward points.
Changes in carrying value were recorded in the foreign currency translation adjustment.
Prior to January 1, 2001, hedge accounting was applied as indicated above after LNC determined that the
items to be hedged exposed LNC to interest rate Öuctuations, the widening of bond yield spreads over
comparable maturity U.S. Government obligations, credit risk, foreign exchange risk or equity risk. Moreover,
the derivatives used to hedge these exposures were designated as hedges and reduced the indicated risk
demonstrating a high correlation between changes in the value of the derivatives and the items being hedged
at both the inception of the hedge and throughout the hedge period. If such criteria was not met or if the
hedged items were sold, terminated or matured, the change in value of the derivatives was included in net
income.
Loaned Securities. Securities loaned are treated as collateralized Ñnancing transactions and a liability is
recorded equal to the cash collateral received which is typically greater than the market value of the related
securities loaned. In other instances, LNC will hold as collateral securities with a market value at least equal
to the securities loaned. Securities held as collateral are not recorded in LNC's consolidated balance sheet in
accordance with accounting guidance for secured borrowings and collateral. LNC's agreements with third
parties generally contain contractual provisions to allow for additional collateral to be obtained when
necessary. LNC values collateral daily and obtains additional collateral when deemed appropriate.
Property and Equipment. Property and equipment owned for company use is carried at cost less
allowances for depreciation. 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.
90
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Premiums and Fees on Investment Products and Universal Life and Traditional Life Insurance
Investment Products and Universal Life Insurance Products: Investment products consist prima-
Products.
rily of individual and group variable and Ñxed deferred annuities. Universal life insurance products include
universal life insurance, variable universal life insurance, corporate-owned life insurance, bank-owned life
insurance and other interest-sensitive life insurance policies. Revenues for investment products and universal
life insurance products consist of net investment income, asset based fees, cost of insurance charges, percent of
premium charges, policy administration charges and surrender charges that have been assessed and earned
against policy account balances and premiums received during the period. The timing of revenue recognition
as it relates to fees assessed on investment contracts is determined based on the nature of such fees. Asset
based fees, cost of insurance and policy administration charges are assessed on a daily or monthly basis and
recognized as revenue when assessed and earned. Percent of premium charges are assessed at the time of
premium payment and recognized as revenue when assessed and earned. Certain amounts assessed that
represent compensation for services to be provided in future periods are reported as unearned revenue and
recognized in income over the periods beneÑted. Surrender charges are recognized upon surrender of a
contract in accordance with contractual terms.
Traditional Life Insurance Products: Traditional life insurance products include those products with
Ñxed and guaranteed premiums and beneÑts and consist primarily of whole life insurance, limited-payment life
insurance, term life insurance and certain annuities with life contingencies. Premiums for traditional life
insurance products are recognized as revenue when due from the policyholder.
Investment Advisory Fees. As speciÑed in the investment advisory agreements with the mutual funds,
fees are generally determined and recognized as revenues monthly, based on the average daily net assets of the
mutual funds managed. Investment advisory contracts with other types of clients generally provide for the
determination and payment of advisory fees based on market values of managed portfolios at the end of a
calendar month or quarter. Investment management and advisory contracts typically are renewable annually
with cancellation clauses ranging up to 90 days.
Assets Held in Separate Accounts/Liabilities Related to Separate Accounts. These assets and
liabilities represent segregated funds administered and invested by LNC's insurance subsidiaries for the
exclusive beneÑt of pension and variable life and annuity contractholders. Both the assets and liabilities are
carried at fair value. The fees earned by LNC's insurance subsidiaries for administrative and contractholder
maintenance services performed for these separate accounts are included in insurance fee revenue.
Deferred Acquisition Costs. Commissions and other costs of acquiring universal life insurance, variable
universal life insurance, unit-linked products, traditional life insurance, annuities and other investment
contracts, which vary with and are primarily related to the production of new business, have been deferred to
the extent recoverable. The methodology for determining the amortization of acquisition costs varies by
product type based on two diÅerent accounting pronouncements: Statement of Financial Accounting
Standards No. 97, ""Accounting by Insurance Companies For Certain Long-Duration Contracts & Realized
Gains and Losses on Investment Sales'' (""FAS 97'') and Statement of Financial Accounting Standards
No. 60, ""Accounting and Reporting by Insurance Enterprises'' (""FAS 60''). Under FAS 97, acquisition costs
for universal life and variable universal life insurance and investment-type products, which include unit-linked
products and Ñxed and variable deferred annuities, are amortized over the lives of the policies in relation to the
incidence of estimated gross proÑts from surrender charges; investment, mortality net of reinsurance ceded
and expense margins; and actual realized gain (loss) on investments.
Past amortization amounts are adjusted when revisions are made to the estimates of current or future
gross proÑts expected from a group of products. Policy lives for universal and variable universal life policies are
estimated to be 30 years, based on the expected lives of the policies and are variable based on the inception of
each policy for unit-linked policies. Policy lives for Ñxed and variable deferred annuities are 13 to 18 years for
the traditional, long surrender charge period products and 8 to 10 years for the more recent short-term, or no
91
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
surrender charge products. The front-end load annuity product has an assumed life of 25 years. Longer lives
are assigned to those blocks that have demonstrated favorable experience.
Under FAS 60, acquisition costs for traditional life insurance products, which include whole life and term
life insurance contracts, are amortized over periods of 10 to 30 years on either a straight-line basis or as a level
percent of premium of the related policies depending on the block of business. There are currently no deferred
acquisition costs being amortized under FAS 60 for Ñxed and variable payout annuities.
For all FAS 97 and FAS 60 policies, amortization is based on assumptions consistent with those used in
the development of the underlying policy form adjusted for emerging experience and expected trends.
Policy sales charges that are collected in the early years of an insurance policy have been deferred
(referred to as ""deferred front-end loads'') and are amortized into income over the life of the policy in a
manner consistent with that used for DAC. (See above for discussion of amortization methodologies.)
BeneÑts and Expenses. BeneÑts and expenses for universal life-type and other interest-sensitive life
insurance products include interest credited to policy account balances and beneÑt claims incurred during the
period in excess of policy account balances. Interest crediting rates associated with funds invested in the
general account of LNC's insurance subsidiaries during 2000 through 2002 ranged from 4.00% to 10.00%. For
traditional life, group health and disability income products, beneÑts and expenses, other than deferred
acquisition costs, are recognized when incurred in a manner consistent with the related premium recognition
policies.
Interest and debt expense includes interest on company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior subordinated debentures.
Goodwill and Other Intangible Assets. Prior to January 1, 2002, goodwill, as measured by the excess of
the cost of acquired subsidiaries or businesses over the fair value of net assets acquired, was amortized using
the straight-line method over periods of 20 to 40 years in accordance with the beneÑts expected to be derived
from the acquisitions. EÅective January 1, 2002, goodwill is not amortized, but is subject to impairment tests
conducted at least annually.
Insurance businesses typically produce ongoing proÑt streams from expected new business generation
that extend signiÑcantly beyond the maximum 40-year period allowed for goodwill amortization. Accordingly,
for acquired insurance businesses where Ñnancial modeling indicated that anticipated new business beneÑts
would extend for 40 years or longer, goodwill was amortized over a 40-year period.
Other intangible assets for acquired insurance businesses consist of the value of existing blocks of
business (referred to as the ""present value of in-force''). The present value of in-force is amortized over the
expected lives of the block of insurance business in relation to the incidence of estimated proÑts expected to be
generated on universal life and investment-type products acquired and over the premium paying period for
insurance products acquired, (i.e., traditional life insurance products). Amortization is based upon assump-
tions used in pricing the acquisition of the block of business and is adjusted for emerging experience.
Accordingly, amortization periods and methods of amortization for present value of in-force vary depending
upon the particular characteristics of the underlying blocks of acquired insurance business.
Prior to January 1, 2002, goodwill relating to acquisitions of investment management subsidiaries was
amortized using the straight-line method, over a 25-year period. EÅective January 1, 2002, goodwill is not
amortized, but is subject to impairment tests conducted at least annually. Other intangible assets relating to
these acquisitions include institutional customer relationships, covenants not to compete and mutual fund
customer relationships. These assets are still required to be amortized on a straight-line basis over their useful
life for periods ranging from 6 to 15 years depending upon the characteristics of the particular underlying
relationships for the intangible asset.
92
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Prior to January 1, 2002, the carrying values of goodwill and other intangible assets were reviewed
periodically for indicators of impairment in value that are other than temporary, including unexpected or
adverse changes in the following: (1) the economic or competitive environments in which the company
operates, (2) proÑtability analyses, (3) cash Öow analyses, and (4) the fair value of the relevant subsidiary. If
there was an indication of impairment then the cash Öow method would be used to measure the impairment
and the carrying value would be adjusted as necessary. However, eÅective January 1, 2002, goodwill is subject
to impairment tests conducted at least annually. Other intangible assets will continue to be reviewed
periodically for indicators of impairment consistent with the policy that was in place prior to January 1, 2002.
Insurance and Investment Contract Liabilities. The liabilities for future policy beneÑts and claim
reserves for universal and variable universal life insurance policies consist of policy account balances that
accrue to the beneÑt of the policyholders, excluding surrender charges. The liabilities for future insurance
policy beneÑts and claim reserves for traditional life policies are computed using assumptions for investment
yields, mortality and withdrawals based principally on generally accepted actuarial methods and assumptions
at the time of policy issue. Interest assumptions for traditional direct individual life reserves for all policies
range from 2.25% to 6.75% depending on the time of policy issue. The interest assumptions for immediate and
deferred paid-up annuities range from 1.50% to 13.55%.
The liabilities for future claim reserves for the guaranteed minimum death beneÑt (""GMDB'') feature on
certain variable annuity contracts are a function of the net amount at risk (""NAR''), mortality, persistency
and incremental death beneÑt mortality and expense assessments (""M&E'') expected to be incurred over the
period of time for which the NAR is positive. At any point in time, the NAR is the diÅerence between the
potential death beneÑt payable and the total variable annuity account values subject to the GMDB. At each
quarterly valuation date, the GMDB reserves are calculated for every variable annuity contract with a GMDB
feature based on projections of account values and NAR followed by the computation of the present value of
expected NAR death claims using product pricing mortality assumptions less expected GMDB M&E revenue
during the period for which the death beneÑt options are assumed to be in the money. As part of the estimate
of future NAR, gross equity growth rates which are consistent with those used in the DAC valuation process
are utilized.
With respect to its insurance and investment contract liabilities, LNC continually reviews its: 1) overall
reserve position; 2) reserving techniques and 3) reinsurance arrangements. As experience develops and new
information becomes known, liabilities are adjusted as deemed necessary. The eÅects of changes in estimates
are included in the operating results for the period in which such changes occur.
Reinsurance. LNC's insurance companies enter into reinsurance agreements with other companies in
the normal course of their business. Prior to the acquisition of LNC's reinsurance operations by Swiss Re on
December 7, 2001, LNC's insurance subsidiaries assumed reinsurance from unaÇliated companies. The
transaction with Swiss Re involved a series of indemnity reinsurance transactions combined with the sale of
certain stock companies that comprised LNC's reinsurance operations. Assets/liabilities and premi-
ums/beneÑts from certain reinsurance contracts that granted statutory surplus to other insurance companies
are netted on the consolidated balance sheets and income statements, respectively, since there is a right of
oÅset. All other reinsurance agreements including the Swiss Re indemnity reinsurance transaction are
reported on a gross basis.
Postretirement Medical and Life Insurance BeneÑts. LNC accounts for its postretirement medical and
life insurance beneÑts using the full accrual method.
Stock Options. Through 2002, LNC recognized compensation expense for its stock option incentive
plans using the intrinsic value method of accounting. Under the terms of the intrinsic value method,
compensation cost is the excess, if any, of the quoted market price of the stock at the grant date, or other
measurement date, over the amount an employee must pay to acquire the stock. On August 8, 2002, LNC
93
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
announced plans to expense the fair value of employee stock options beginning in 2003 under Statement of
Financial Accounting Standards No. 123, ""Accounting for Stock-Based Compensation'' (""FAS 123''). On
December 31, 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 148, ""Accounting for Stock-Based Compensation-Transition and Disclosure'' (""FAS 148''),
which provides alternative methods of transition for entities that change to the fair value method of accounting
for stock-based employee compensation. In addition, FAS 148 amends the disclosure provisions of FAS 123 to
require expanded and more prominent disclosure of the eÅects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share in annual and interim
Ñnancial statements.
The three transition methods provided under FAS 148 are the prospective method, the modiÑed
prospective and the retroactive restatement method. LNC will adopt the retroactive restatement method,
which requires that companies restate all periods presented to reÖect stock-based employee compensation cost
under the fair value accounting method in FAS 123 for all employee awards granted, modiÑed or settled in
Ñscal years beginning after December 15, 1994. FAS 148's amendment of the transition and annual disclosure
requirements of FAS 123 is eÅective for Ñscal years ending after December 15, 2002. As the recognition
provisions of FAS 123 should be applied as of the beginning of the year, LNC will adopt the fair value method
of accounting under FAS 123, as amended by FAS 148, as of January 1, 2003 and will present restated
Ñnancial statements for the years 2002, 2001 and 2000 in its Ñrst quarter 2003 Ñling on Form 10-Q (see
Note 6 for further discussion of stock-based employee compensation cost).
The following table illustrates the eÅect on net income and earnings per share for 2002, 2001 and 2000 if
LNC had applied the fair value recognition provisions of FAS 123.
Net income, as reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less:
Total stock-based employee compensation expense determined under
2002
Year Ended December 31,
2001
2000
(in millions)
$91.6
$590.2
$621.4
the fair value based method for all awards, net of tax eÅects ÏÏÏÏÏÏ
35.0
41.0
33.1
Pro forma net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Earnings per share:
$56.6
$549.2
$588.3
Basic Ì as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic Ì pro forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted Ì as reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted Ì pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$0.50
$0.31
$0.49
$0.31
$ 3.13
$ 2.91
$ 3.05
$ 2.84
$ 3.25
$ 3.08
$ 3.19
$ 3.02
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 aÅect cash Öows are reported in comprehensive income.
Earnings per Share. Basic earnings per share is computed by dividing earnings available to common
shareholders by the average common shares outstanding. Diluted earnings per share is computed assuming the
conversion or exercise of dilutive convertible preferred securities, non-vested stock, stock options and deferred
compensation shares outstanding during the year.
ReclassiÑcations. Certain amounts reported in prior years' consolidated Ñnancial statements have been
reclassiÑed to conform with the presentation adopted in the current year. These reclassiÑcations have no eÅect
on net income or shareholders' equity of the prior years.
94
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
2. Changes in Accounting Principles and Changes in Estimates
Accounting for Derivative Instruments and Hedging Activities.
In June 1998, the Financial Accounting
Standards Board (""FASB'') issued Statement of Financial Accounting Standards No. 133, ""Accounting for
Derivative Instruments and Hedging Activities'' (""FAS 133''). In July 1999, the FASB issued Statement of
Financial Accounting Standards No. 137, ""Accounting for Derivative Instruments and Hedging Activities Ì
Deferral of the EÅective Date of FASB Statement No. 133'' (""FAS 137''), which delayed the eÅective date
of FAS 133 one year (i.e., adoption required no later than the Ñrst quarter of 2001). In June 2000, the FASB
issued Statement of Financial Accounting Standards No. 138, ""Accounting for Certain Derivative Instru-
ments and Certain Hedging Activities'' (""FAS 138''), which addresses a limited number of implementation
issues arising from FAS 133.
LNC adopted FAS 133, as amended, on January 1, 2001. Upon adoption, the provisions of FAS 133 were
applied prospectively. The transition adjustments that LNC recorded upon adoption of FAS 133 on January 1,
2001 resulted in a net loss of $4.3 million after-tax or $0.02 per share ($6.6 million pre-tax) recorded in net
income, and a net gain of $17.6 million after-tax or $0.09 per share ($27.1 million pre-tax) recorded as a
component of Other Comprehensive Income (""OCI'') in equity. Deferred acquisition costs of $4.8 million
were restored and netted against the transition loss on derivatives recorded in net income and deferred
acquisition costs of $18.3 million were amortized and netted against the transition gain recorded in OCI. A
portion of the transition adjustment ($3.5 million after-tax) recorded in net income upon adoption of FAS 133
was reclassiÑed from the OCI account, Net Unrealized Gain on Securities Available-for-Sale. These
transition adjustments were reported in the Ñnancial statements as a cumulative eÅect of a change in
accounting principle.
Change in Estimate of Premium Receivables on Certain Client-Administered Individual Life Reinsur-
ance. During the Ñrst quarter of 2001, LNC's former Reinsurance segment reÑned its estimate of due and
unpaid premiums on its client-administered individual life reinsurance business. As a result of the signiÑcant
growth in the individual life reinsurance business generated in recent years, the Reinsurance segment initiated
a review of the block of business in the last half of 2000. An outgrowth of that analysis resulted in a review of
the estimation of premiums receivable for due and unpaid premiums on client-administered business. During
the Ñrst quarter of 2001, the Reinsurance segment completed the review of this matter, and concluded that
enhanced information Öows and reÑned actuarial techniques provided a basis for a more precise estimate of
premium receivables on this business. As a result, the Reinsurance segment recorded income of $25.5 million
or $0.13 per share ($39.3 million pre-tax) related to periods prior to 2001.
Recognition of Interest Income and Impairment on Purchased and Retained BeneÑcial Interests in
Securitized Financial Assets. On April 1, 2001, LNC adopted Emerging Issues Task Force Issue No. 99-20,
""Recognition of Interest Income and Impairment on Purchased and Retained BeneÑcial Interests in
Securitized Financial Assets'' (""EITF 99-20''). EITF 99-20 was eÅective for Ñscal quarters beginning after
March 15, 2001. EITF 99-20 changed the manner in which LNC determined impairment of certain
investments including collateralized bond obligations. Upon the adoption of EITF 99-20, LNC recognized a
net realized loss on investments of $11.3 million after-tax or $0.06 per share ($17.3 million pre-tax) reported
as a cumulative eÅect of change in accounting principle. In arriving at this amount, deferred acquisition costs
of $12.2 million were restored and netted against net realized loss on investments.
Accounting for Business Combinations and Goodwill and Other Intangible Assets.
In June 2001, the
Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141,
""Business Combinations'' (""FAS 141''), and No. 142, ""Goodwill and Other Intangible Assets'' (""FAS 142'').
FAS 141 is eÅective for all business combinations initiated after June 30, 2001, and FAS 142 is eÅective for
Ñscal years beginning after December 15, 2001. Under the new rules, goodwill is no longer amortized, but is
subject to impairment tests conducted at least annually in accordance with the new standards. Intangible
assets that do not have indeÑnite lives continue to be amortized over their estimated useful lives. LNC
95
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
adopted FAS 142 on January 1, 2002. After consideration of the provisions of the new standards regarding
proper classiÑcation of goodwill and other intangible assets on the consolidated balance sheet, LNC did not
reclassify any goodwill or other intangible balances held as of January 1, 2002.
In compliance with the transition provision of FAS 142, LNC completed the Ñrst step of the transitional
goodwill impairment test during the second quarter of 2002. The valuation techniques used by LNC to
estimate the fair value of the group of assets comprising the diÅerent reporting units varied based on the
characteristics of each reporting unit's business and operations. A number of valuation approaches, including,
discounted cash Öow modeling, were used to assess the goodwill of the reporting units within LNC's Lincoln
Retirement, Life Insurance and Lincoln UK segments. Valuation approaches combining multiples of
revenues, earnings before interest, taxes, depreciation and amortization (""EBITDA'') and assets under
management were used to estimate the fair value of the reporting units within LNC's Investment Manage-
ment segment. The results of the Ñrst step of the tests indicate that LNC does not have impaired goodwill. In
accordance with FAS 142, LNC has chosen October 1 as its annual review date. As such, LNC performed
another valuation review during the fourth quarter of 2002. The results of the Ñrst step of the tests performed
as of October 1, 2002 indicate that LNC does not have impaired goodwill. The valuation techniques used by
LNC for each reporting unit were consistent with those used during the transitional testing.
As a result of the application of the non-amortization provisions of the new standards, LNC had an
increase in net income of $41.7 million ($0.22 per common share on a fully diluted basis) for the year ended
December 31, 2002.
During 2002, the consolidated carrying value of goodwill changed as a result of changes to the goodwill
balances in the Lincoln UK and Retirement segments. The Lincoln UK segment's carrying value changed as a
result of the translation of the Lincoln UK balance from British pounds to U.S. dollars based on the prevailing
exchange rate as of the balance sheet date. The adjustment to the Retirement segment carrying value was a
result of the acquisition of The Administrative Management Group, Inc. (""AMG''). Total purchased goodwill
in 2002 was $20.2 million (see Note 11).
The carrying amount of goodwill by reportable segment as of December 31, 2002 is as follows:
Lincoln Retirement Segment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Life Insurance Segment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment Management SegmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lincoln UK Segment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(in millions)
$
64.1
855.1
300.7
13.3
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,233.2
96
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The reconciliation of reported net income to adjusted net income is as follows:
Year Ended
December 31,
2001
2000
(in millions except
per share amounts)
Reported Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Add back: Goodwill Amortization (after-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$590.2
43.4
Adjusted Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$633.6
Earnings Per Common Share Ì Basic:
Reported Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Add back: Goodwill Amortization (after-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 3.13
0.23
Adjusted Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 3.36
Earnings Per Common Share Ì Diluted:
Reported Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Add-back: Goodwill Amortization (after-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 3.05
0.22
Adjusted Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 3.27
$621.4
45.1
$666.5
$ 3.25
0.24
$ 3.49
$ 3.19
0.23
$ 3.42
For intangible assets subject to amortization, the total gross carrying amount and accumulated
amortization in total and for each major intangible asset class by segment are as follows:
As of December 31, 2002
As of December 31, 2001
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
(in millions)
Amortized Intangible Assets:
Lincoln Retirement Segment:
Present value of in-force ÏÏÏÏÏÏÏÏÏÏ
$ 225.0
$102.3
$ 225.0
$ 70.5
Life Insurance Segment:
Present value of in-force ÏÏÏÏÏÏÏÏÏÏ
1,254.2
364.1
1,254.2
290.2
Investment Management Segment:
Client lists ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-compete agreements* ÏÏÏÏÏÏÏÏ
Lincoln UK Segment:
103.6
Ì
103.6
61.8
Ì
61.8
103.6
2.3
105.9
53.6
2.2
55.8
Present value of in-force** ÏÏÏÏÏÏÏÏ
344.2
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,927.0
106.8
$635.0
311.2
$1,896.3
67.2
$483.7
* The non-compete agreements included in the Investment Management segment as of December 31, 2001
were fully amortized during the Ñrst quarter of 2002 resulting in a net carrying value of zero at
December 31, 2002.
** The gross carrying amount and accumulated amortization of the present value of in-force for the Lincoln
UK segment changed from December 31, 2001 to December 31, 2002 due to the translation of the
balances from British pounds to U.S. dollars based on the prevailing exchange rate as of the balance sheet
dates.
The aggregate amortization expense for other intangible assets for the years ended December 31, 2002,
2001 and 2000 was $144.7 million, $125.2 million and $150.3 million, respectively.
97
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Future estimated amortization of other intangible assets is as follows (in millions):
2003 Ì $91.9
2006 Ì 85.0
2004 Ì $87.6
2007 Ì 84.9
2005
Ì $ 85.9
Thereafter Ì 856.7
Accounting for the Impairment or Disposal of Long-lived Assets.
In August 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, ""Accounting for
the Impairment or Disposal of Long-Lived Assets'' (""FAS 144''), which addresses Ñnancial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes Statement of Financial
Accounting Standards No. 121, ""Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of,'' and the accounting and reporting provisions of APB Opinion No. 30, ""Reporting
the Results of Operations'' for a disposal of a segment of a business. FAS 144 is eÅective for Ñscal years
beginning after December 15, 2001. LNC adopted FAS 144 on January 1, 2002 and the adoption of the
Statement did not have a material impact on the consolidated Ñnancial position and results of operations of
LNC.
Accounting for Costs Associated with Exit or Disposal Activities.
In June 2002, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, ""Accounting for
Costs Associated with Exit or Disposal Activities'' (""FAS 146''), which addresses Ñnancial accounting and
reporting for costs associated with exit or disposal activities and nulliÑes Emerging Issues Task Force Issue
No. 94-3, ""Liability Recognition for Certain Employee Termination BeneÑts and Other Costs to Exit an
Action (including Certain Costs Incurred in a Restructuring)'' (""Issue 94-3''). The principal diÅerence
between FAS 146 and Issue 94-3 is that FAS 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred, rather than at the date of an entity's commitment
to an exit plan. FAS 146 is eÅective for exit or disposal activities after December 31, 2002. Adoption of
FAS 146 by LNC will result in a change in timing of when expense is recognized for restructuring activities
after December 31, 2002.
Change in Estimate for Disability Income and Personal Accident Reinsurance Reserves. As a result of
developments and information obtained during 2002 relating to personal accident and disability income
matters, LNC increased these exited business reserves by $198.5 million after-tax or $1.07 per fully diluted
share ($305.4 million pre-tax). After giving eÅect to LNC's $100 million indemniÑcation obligation to
Swiss Re, LNC recorded a $133.5 after-tax ($205.4 million pre-tax) increase in reinsurance recoverable from
Swiss Re with a corresponding increase in the deferred gain. (See Note 11 for further explanation of LNC's
Reinsurance transaction with Swiss Re.)
Accounting for Variable Interest Entities.
In January 2003, the Financial Accounting Standards Board
issued Financial Accounting Standards Board Interpretation No. 46, ""Consolidation of Variable Interest
Entities'' (""Interpretation No. 46''), which requires the consolidation of variable interest entities (""VIE'') by
an enterprise if that enterprise has a variable interest that will absorb a majority of the VIE's expected losses if
they occur, receive a majority of the entity's expected residual returns if they occur, or both. If one enterprise
will absorb a majority of a VIE's expected losses and another enterprise will receive a majority of that VIE's
expected residual returns, the enterprise absorbing a majority of the losses shall consolidate the VIE. VIE
refers to an entity in which equity investors do not have the characteristics of a controlling Ñnancial interest or
do not have suÇcient equity at risk for the entity to Ñnance its activities without additional subordinated
Ñnancial support from other parties. This Interpretation applies in the third quarter of 2003 to VIEs in which
an enterprise holds a variable interest that is acquired before February 1, 2003. This Interpretation may be
applied prospectively with a cumulative-eÅect adjustment as of the date on which it is Ñrst applied or by
restating previously issued Ñnancial statements for one or more years with a cumulative-eÅect adjustment as
of the beginning of the Ñrst year restated.
98
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Among the matters that LNC is currently reviewing in connection with the third quarter 2003 eÅective
date of Interpretation No. 46 to existing VIEs is the potential application to Collateralized Debt Obligation
(CDO) pools that are managed by LNC. If the fees earned by LNC for managing these CDOs are required to
be included in the analysis of expected residual returns, it is possible that such CDO pools would fall under the
consolidation requirements of Interpretation No. 46. While LNC does not currently have access to all
information necessary to determine the ultimate eÅects of such a required consolidation (because LNC is not
the trustee or administrator to the CDOs), based upon currently available information, LNC estimates that
the eÅect of consolidation would result in recording additional assets and liabilities on LNC's consolidated
balance sheet of about $1.3 billion. If such liabilities are required to be recorded, LNC would disclose that
such liabilities are without recourse to LNC, as LNC's role of investment manager for such CDO pools does
not expose LNC to risk of loss.
Although LNC and the industry continue to review the new rules, at the present time LNC does not
believe there are other signiÑcant VIEs that would result in consolidation with LNC, beyond the managed
CDOs discussed above.
99
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
3.
Investments
The amortized cost, gross unrealized gains and losses, and fair value of securities available-for-sale are as
follows:
Amortized
Cost
December 31
Gains
Losses
(in millions)
Fair
Value
2002:
Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
U.S. Government bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign government bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Asset and mortgage-backed securities:
Mortgage pass-through securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Collateralized mortgage obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other asset-backed securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State and municipal bondsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Redeemable preferred stocks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$24,703.8
410.8
1,063.8
$1,876.8
105.0
73.2
$(645.9)
(2.3)
(26.7)
$25,934.7
513.5
1,110.3
711.2
2,100.7
1,924.7
109.4
78.7
26.5
114.7
152.3
5.1
1.7
(1.8)
(0.4)
(12.4)
(0.1)
(1.3)
735.9
2,215.0
2,064.6
114.4
79.1
Total Ñxed maturity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
31,103.1
334.5
2,355.3
47.2
(690.9)
(44.5)
32,767.5
337.2
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$31,437.6
$2,402.5
$(735.4)
$33,104.7
2001:
Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
U.S. Government bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign government bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Asset and mortgage-backed securities:
Mortgage pass-through securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Collateralized mortgage obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other asset-backed securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State and municipal bondsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Redeemable preferred stocks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$22,934.8
357.9
1,117.3
$ 742.8
57.4
70.1
$(572.5)
(4.8)
(12.7)
$23,105.1
410.5
1,174.7
609.9
1,479.1
1,328.5
45.9
82.6
15.1
63.7
52.7
0.3
3.5
(7.4)
(5.5)
(11.3)
(1.5)
(0.2)
617.6
1,537.3
1,369.9
44.7
85.9
Total Ñxed maturity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
27,956.0
444.4
1,005.6
69.8
(615.9)
(43.7)
28,345.7
470.5
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$28,400.4
$1,075.4
$(659.6)
$28,816.2
Future maturities of Ñxed maturity securities available-for-sale are as follows:
Due in one year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after one year through Ñve years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after Ñve years through ten yearsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due after ten years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
SubtotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Asset and mortgage-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2002
Fair
Value
Amortized
Cost
(in millions)
$
917.5
6,547.3
9,815.9
9,085.8
26,366.5
4,736.6
$
921.2
6,849.3
10,339.0
9,642.5
27,752.0
5,015.5
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$31,103.1
$32,767.5
100
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The foregoing data is based on stated maturities. Actual maturities will diÅer in some cases because
borrowers may have the right to call or pre-pay obligations.
Par value, amortized cost and estimated fair value of investments in asset and mortgage-backed securities
summarized by interest rates of the underlying collateral are as follows:
Par
Value
December 31, 2002
Amortized
Cost
(in millions)
Fair
Value
Below 7% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
7% - 8% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
8% - 9% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Above 9% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,178.4
2,343.8
605.9
265.3
$1,533.4
2,341.6
594.9
266.7
$1,590.6
2,501.5
643.7
279.7
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$5,393.4
$4,736.6
$5,015.5
The quality ratings for Ñxed maturity securities available-for-sale are as follows:
December 31, 2002
% of
Total
Fair Value
(in millions except %)
Treasuries and AAAÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BBB ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BBÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less than BBÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 6,574.5
1,888.0
10,854.6
11,302.0
1,264.4
884.0
20.1
5.7
33.1
34.5
3.9
2.7
$32,767.5
100.0
The major categories of net investment income are as follows:
2002
Year Ended December 31
2001
(in millions)
2000
Fixed maturity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage loans on real estateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Policy loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Invested cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,118.2
15.4
356.8
47.4
134.5
36.4
16.3
2,725.0
116.7
$2,121.0
17.6
374.5
49.5
125.3
68.4
69.5
2,825.8
146.2
$2,148.7
19.4
373.8
51.8
125.0
87.2
66.9
2,872.8
125.7
Net investment income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,608.3
$2,679.6
$2,747.1
101
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The detail of the net realized loss on investments and derivative instruments is as follows:
2002
Year Ended December 31
2001
(in millions)
2000
Fixed maturity securities available-for-sale
Gross gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 171.4
(586.3)
$ 193.0
(435.3)
$ 146.5
(218.2)
Equity securities available-for-sale
Gross gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Associated restoration of deferred acquisition costs and provision
for policyholder commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative Instruments net of associated amortization of deferred
acquisition costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
9.8
(23.6)
23.4
145.0
(12.4)
30.2
(24.4)
33.7
106.8
(9.2)
58.0
(48.6)
5.9
35.3
(7.2)
(272.7)
(105.2)
(28.3)
1.2
(9.3)
Ì
Total Investments and Derivative Instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(271.5)
$(114.5)
$ (28.3)
Provisions (credits) for write-downs and net changes in allowances for loss, which are included in the
realized gain (loss) on investments and derivative instruments shown above, are as follows:
2002
Year Ended December 31
2001
(in millions)
2000
Fixed maturity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage loans on real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other long-term investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Guarantees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$300.1
21.4
9.7
Ì
6.4
0.1
$237.2
15.7
(2.7)
0.7
0.9
Ì
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$337.7
$251.8
$41.2
14.6
0.2
Ì
Ì
Ì
$56.0
The change in net unrealized appreciation (depreciation) on investments in Ñxed maturity and equity
securities available-for-sale is as follows:
2002
Year Ended December 31
2001
(in millions)
2000
Fixed maturity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,274.7
(23.4)
$317.0
(60.8)
$741.2
(35.6)
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,251.3
$256.2
$705.6
During the second quarter of 1998, LNC purchased three bonds issued with oÅsetting interest rate
characteristics. Subsequent to the purchase of these bonds, interest rates increased and the value of one of
these bonds decreased. This bond was sold at the end of the second quarter 1998 and a realized loss of
$28.8 million ($18.7 million after-tax) was recorded. The other two bonds are still owned by LNC and are
producing net investment income on an annual basis of $9.9 million ($6.4 million after-tax). Subsequent to
these transactions being recorded, the Emerging Issues Task Force of the Financial Accounting Standards
Board reached consensus with regard to accounting for this type of investment strategy. LNC is not required
to apply the new accounting rules, however, if such rules were applied, the realized loss on the sale of
102
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
$28.8 million ($18.7 million after-tax) on one of these bonds recorded at the end of the second quarter of 1998
would be reduced to $8.8 million ($5.7 million after-tax) and the diÅerence would be applied as a change in
the carrying amount of the two bonds that remain in LNC's portfolio. Also, net investment income for the
year ended December 31, 2002, 2001 and 2000 would be less than reported by $2.9 million ($1.9 million after-
tax), $2.7 million ($1.8 million after-tax) and $2.5 million ($1.6 million after-tax), respectively.
The balance sheet captions, ""Real Estate'' and ""Property and Equipment,'' are shown net of allowances
for depreciation as follows:
Real estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 41.0
242.1
$ 38.4
211.7
Impaired mortgage loans along with the related allowance for losses are as follows:
December 31
2002
2001
(in millions)
December 31
2002
2001
(in millions)
Impaired loans with allowance for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Allowance for lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impaired loans with no allowance for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 72.3
(11.9)
Ì
$25.6
(2.2)
Ì
Net impaired loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 60.4
$23.4
The allowance for losses is maintained at a level believed adequate by management to absorb estimated
probable credit losses. Management's periodic evaluation of the adequacy of the allowance for losses is based
on LNC's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may
aÅect the borrower's ability to repay (including the timing of future payments), the estimated value of the
underlying collateral, composition of the loan portfolio, current economic conditions and other relevant
factors. This evaluation is inherently subjective, as it requires estimating the amounts and timing of future
cash Öows expected to be received on impaired loans that may be susceptible to signiÑcant change.
A reconciliation of the mortgage loan allowance for losses for these impaired mortgage loans is as follows:
2002
Year Ended December 31
2001
(in millions)
2000
Balance at beginning-of-year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provisions for losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Releases due to principal paydowns ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Releases due to foreclosures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 2.2
12.7
(3.0)
Ì
Balance at end-of-year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$11.9
$ 4.9
0.7
(3.4)
Ì
$ 2.2
$ 4.7
1.8
(1.6)
Ì
$ 4.9
The average recorded investment in impaired mortgage loans and the interest income recognized on
impaired mortgage loans were as follows:
Average recorded investment in impaired loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest income recognized on impaired loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$54.0
5.6
$25.0
3.0
$27.9
2.6
All interest income on impaired mortgage loans was recognized on the cash basis of income recognition.
103
Year Ended December 31
2000
2001
2002
(in millions)
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
As of December 31, 2002 and 2001, LNC had mortgage loans on non-accrual status of $1.8 million and
$0.0 million, respectively. As of December 31, 2002 and 2001, LNC had no mortgage loans past due 90 days
and still accruing.
As of December 31, 2002 and 2001, LNC had restructured mortgage loans of $4.6 million and
$5.2 million, respectively. LNC recorded $0.4 million and $0.5 million of interest income on these
restructured mortgage loans in 2002 and 2001, respectively. Interest income in the amount of $0.4 million and
$0.5 million would have been recorded on these mortgage loans according to their original terms in 2002 and
2001, respectively. As of December 31, 2002 and 2001, LNC had no outstanding commitments to lend funds
on restructured mortgage loans.
As of December 31, 2002, LNC's investment commitments for Ñxed maturity securities (primarily
private placements), mortgage loans on real estate and real estate were $558.9 million. This includes
$168.1 million of standby commitments to purchase real estate upon completion and leasing.
For the year ended December 31, 2002, Ñxed maturity securities available-for-sale, mortgage loans on
real estate and real estate investments which were non-income producing were not signiÑcant. As of
December 31, 2002 and 2001, the carrying value of non-income producing securities was $37.3 million and
$32.4 million, respectively.
The balance sheet account for other liabilities includes a reserve for guarantees of third-party debt in the
amount of $0.4 million and $0.3 million at December 31, 2002 and 2001, respectively.
During the fourth quarter of 2000, LNC completed a securitization of commercial mortgage loans. In the
aggregate, the loans had a fair value of $186.0 million and carrying value of $185.7 million. LNC retained a
6.3% beneÑcial interest in the securitized assets. LNC received $172.7 million from the trust for the sale of the
senior trust certiÑcates representing the other 93.7% beneÑcial interest. A realized gain of $0.4 million pre-tax
was recorded on this sale. A recourse liability was not recorded since LNC is not obligated to repurchase any
loans from the trust that may later become delinquent. Cash Öows received during 2002, 2001 and 2000 from
interests retained in the trust were $2.6 million, $2.6 million and $0.4 million, respectively. The fair values of
the mortgage loans were based on a discounted cash Öow method based on credit rating, maturity and future
income. Prepayments are expected to be less than 1% with an expected weighted-average life of 6.4 years.
Credit losses are anticipated to be minimal over the life of the trust.
During the fourth quarter of 2001, LNC completed a second securitization of commercial mortgage
loans. In the aggregate, the loans had a fair value of $209.7 million and a carrying value of $198.1 million.
LNC received $209.7 million from the trust for the sale of the loans. A recourse liability was not recorded
since LNC is not obligated to repurchase any loans from the trust that may later become delinquent. Servicing
fees of $0.2 million and $0.03 million were received in 2002 and 2001, respectively. The transaction was
hedged with total return swaps to lock in the value of the loans. LNC recorded a loss on the hedge of
$10.1 million pre-tax and a realized gain on the sale of $11.6 million pre-tax resulting in a net gain of
$1.5 million pre-tax. Upon securitization, LNC did not retain an interest in the securitized assets; however,
LNC later invested $14.3 million of its general account assets in the certiÑcates issued by the trust. This
investment is included in Ñxed maturity securities on the balance sheet.
104
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
4. Federal Income Taxes
The Federal income tax expense (beneÑt) is as follows:
2002
Year Ended December 31
2001
(in millions)
2000
CurrentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(163.9)
73.9
$ 489.6
(331.2)
Total tax expense (beneÑt) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (90.0)
$ 158.4
$ 25.2
189.7
$214.9
The eÅective tax rate on pre-tax income is lower than the prevailing corporate Federal Income tax rate. A
reconciliation of this diÅerence is as follows:
Tax rate times pre-tax incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EÅect of:
Tax-preferred investment income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
UK taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other items ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2002
Year Ended December 31
2001
(in millions)
2000
$
0.6
$267.5
$292.7
(45.7)
(16.1)
(28.8)
(62.6)
(28.5)
(18.0)
(64.3)
(14.0)
0.5
Provision for income taxes (beneÑt) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EÅective tax rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (90.0)
$158.4
$214.9
(5,558)%
21%
26%
The eÅective tax rate is a ratio of tax expense over pre-tax income. Since the pre-tax income of
$1.6 million resulted in a tax beneÑt of $90.0 million in 2002, an unusual eÅective tax rate of (5,558)% is
reported.
The Federal income tax asset (liability) is as follows:
Current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 70.0
196.5
$(439.0)
454.1
Total Federal income tax assetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$266.5
$
15.1
December 31
2002
2001
(in millions)
105
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
SigniÑcant components of LNC's deferred tax assets and liabilities are as follows:
December 31
2002
2001
(in millions)
Deferred tax assets:
Insurance and investment contract liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Reinsurance deferred gainÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net operating loss carryforwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Postretirement beneÑts other than pensions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Compensation related ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ceding commission asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Valuation allowance for deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred tax liabilities:
Deferred acquisition costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment related ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net unrealized gain on securities available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Present value of business in-force ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,170.2
397.5
197.2
33.0
87.3
16.7
81.2
1,983.1
51.2
1,931.9
540.6
225.4
582.8
354.5
32.1
$ 969.3
459.0
69.8
42.5
66.9
18.6
109.6
1,735.7
51.2
1,684.5
515.0
57.9
135.4
391.5
130.6
Total deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,735.4
1,230.4
Net deferred tax asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 196.5
$ 454.1
Cash paid for Federal income taxes in 2002 and 2001 was $382.9 million and $57.6 million, respectively.
Cash received for Federal income taxes in 2000 was $79.1 million due to the carry back of 1999 tax losses.
LNC is required to establish a valuation allowance for any gross deferred tax assets that are unlikely to
reduce taxes payable in future years' tax returns. At December 31, 2002, LNC believes that it is more likely
than not that all gross deferred tax assets will reduce taxes payable in future years except for the amount of the
valuation allowance established in 2001. In 2001, LNC established a valuation allowance of $51.2 million for
the gross deferred tax assets relating to net operating losses of its remaining foreign life reinsurance subsidiary,
Lincoln National Reinsurance Company (Barbados) (""LNR Barbados''). The net operating losses of LNR
Barbados are subject to Federal income tax limitations that only allow the net operating losses to be used to
oÅset future taxable income of the subsidiary. Due to the disposition of its reinsurance operations, LNC
believes that it is more likely than not that LNC will not realize all of the tax beneÑts associated with LNR
Barbados' net operating losses. Because LNC has been required to defer recognition of the gain on the portion
of the disposition of its reinsurance operation that was structured as indemnity reinsurance, the establishment
of this valuation allowance was recorded as a decrease in the after-tax amount of the reinsurance deferred gain
carried on LNC's consolidated balance sheet.
Since LNC made the decision in 1999 not to permanently reinvest Lincoln UK's earnings in Lincoln UK,
the U.S. tax rules rather than UK tax rules are the primary factor in determining the deferred taxes for the
segment. In 2002, LNC established $16.4 million of deferred taxes relating to the segment.
At December 31, 2002, LNC had net operating loss carryforwards for Federal income tax purposes of:
$290.0 million for LNR Barbados that expire in the years 2014, 2016 and 2017 and $31.7 million for Lincoln
Life & Annuity Company of New York that expire in the year 2013. LNC also had net capital loss
carryforwards of $156.2 million for The Lincoln National Life Insurance Company and $7.4 million for First
Penn-PaciÑc Life Insurance Company that expire in the year 2007. Net capital losses of $33.5 million for
106
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Lincoln Life & Annuity Company of New York will expire in years 2004 through 2007. Net capital losses of
$44.5 million for LNR Barbados will expire in the year 2007. In contrast to the net operating losses of LNR
Barbados, the net capital losses can be used in future LNC consolidated U.S. tax returns. Accordingly, LNC
believes that it is more likely than not that the capital losses will be fully utilized within the allowable
carryforward period.
Under prior Federal income tax law, one-half of the excess of a life insurance company's income from
operations over its taxable investment income was not taxed, but was set aside in a special tax account
designated as ""Policyholders' Surplus.'' At December 31, 2002, LNC has approximately $196.0 million of
untaxed ""Policyholders' Surplus'' on which no payment of Federal income taxes will be required unless it is
distributed as a dividend, or under other speciÑed conditions. Barring the passage of unfavorable tax
legislation, LNC does not believe that any signiÑcant portion of the account will be taxed in the foreseeable
future. Accordingly, no deferred tax liability has been recognized relating to LNC's Policyholders' Surplus
balance. If the entire Policyholders' Surplus balance became taxable at the current Federal rate, the tax would
be approximately $68.6 million.
5. Supplemental Financial Data
Reinsurance transactions included in the income statement captions, ""Insurance Premiums'' and
""Insurance Fees'', are as follows:
2002*
Year Ended December 31
2001*
(in millions)
2000
Insurance assumedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Insurance ceded ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,017.5
1,843.3
$1,457.6
993.9
$1,299.8
559.9
Net reinsurance premiums and feesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (825.8)
$ 463.7
$ 739.9
* The reinsurance activity for the year ended December 31, 2001 includes the activity of the former
Reinsurance segment for the eleven months ended November 30, 2001 and the activity related to the
indemnity reinsurance transaction with Swiss Re for the one month ended December 31, 2001. The
reinsurance activity for 2002 includes activity related to the indemnity reinsurance transaction with
Swiss Re.
The income statement caption, ""BeneÑts,'' is net of reinsurance recoveries of $1,165 million, $637 million
and $448 million for the years ended December 31, 2002, 2001 and 2000, respectively.
Detailed below is a breakdown of amounts included in LNC's balance sheet related to the reinsurance
business sold to Swiss Re through indemnity reinsurance. Because LNC is not relieved of its liability to the
ceding companies for this business, the liabilities and obligations associated with the reinsured contracts
remain on the consolidated balance sheet of LNC with a corresponding reinsurance receivable from Swiss Re.
In addition, a portion of the business has been reinsured on a funds withheld basis. This means that LNC
107
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
transferred reserves for the reinsurance business to Swiss Re, but LNC continues to hold assets in support of
those reserves. The payable to Swiss Re related to the assets is included in ""Other Liabilities.''
December 31
2002
2001
(in millions)
Assets:
Total investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Premiums and fees receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amounts recoverable from reinsurers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,840.2
142.4
5,406.9
164.1
$1,679.1
367.2
4,202.0
291.2
Total Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$7,553.6
$6,539.5
Liabilities:
Insurance policy and claim reservesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Contractholder funds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$5,521.1
47.5
1,985.0
$4,560.2
112.9
1,866.4
Total Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$7,553.6
$6,539.5
A roll forward of the balance sheet account, ""Deferred Acquisition Costs,'' is as follows:
Year Ended
December 31
2002
2001
(in millions)
Balance at beginning-of-year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferral ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AmortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustment related to realized losses on securities available-for-sale ÏÏÏÏÏÏ
Adjustment related to unrealized gains on securities available-for-sale ÏÏÏÏÏ
Foreign currency translation adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,885.3
627.3
(346.7)
115.0
(338.5)
56.9
(28.4)
$3,070.5
714.1
(367.7)
112.9
(187.2)
(16.0)
(441.3)
Balance at end-of-yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,970.9
$2,885.3
Realized gains and losses on investments and derivative instruments on the Statements of Income for the
year ended December 31, 2002, 2001 and 2000 are net of amounts restored or (amortized) against deferred
acquisition costs of $115.0 million, $112.9 million and $38.5 million, respectively. In addition, realized gains
and losses for the years ended December 31, 2002, 2001 and 2000 are net of adjustments made to policyholder
reserves of $27.3 million, $10.5 million and $(3.2) million, respectively. LNC has either a contractual
obligation or has a consistent historical practice of making allocations of investment gains or losses to certain
policyholders.
108
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Details underlying the income statement caption, ""Underwriting, Acquisition, Insurance and Other
Expenses,'' are as follows:
2002
Year Ended December 31
2001
(in millions)
2000
CommissionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other volume related expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating and administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred acquisition costs net of amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restructuring charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other intangibles amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 579.4
256.8
867.8
(280.6)
(2.2)
Ì
144.7
111.8
$1,677.7
$ 860.3
184.8
1,050.9
(346.4)
38.0
43.4
125.2
126.9
$2,083.1
$ 919.1
253.8
1,157.0
(427.5)
104.9
45.1
150.3
111.5
$2,314.2
A reconciliation of the present value of insurance business acquired included in other intangible assets is
as follows:
Balance at beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustments to balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest accrued on unamortized balance (Interest rates range
from 5% to 7%) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AmortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign exchange adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at end-of-yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other intangible assets (non-insurance) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,250.2
41.8
2002
December 31
2001
(in millions)
2000
$1,362.5
Ì
$1,483.3
$1,654.2
(0.7)
(15.6)
81.4
(217.8)
24.1
84.5
(197.6)
(7.0)
1,362.5
50.1
92.2
(224.9)
(22.6)
1,483.3
73.7
Total other intangible assets at end-of-year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,292.0
$1,412.6
$1,557.0
Future estimated amortization of insurance business acquired net of interest on unamortized balance for
LNC's insurance subsidiaries is as follows (in millions):
2003 Ì $84.0
2006 Ì 78.6
2004 Ì $79.7
2007 Ì 79.4
2005
Ì $ 78.1
Thereafter Ì 850.4
Details underlying the balance sheet caption, ""Contractholder Funds,'' are as follows:
Premium deposit funds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Undistributed earnings on participating business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$20,518.8
156.7
610.9
$18,585.0
100.2
562.7
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$21,286.4
$19,247.9
December 31
2002
2001
(in millions)
109
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Details underlying the balance sheet captions related to total debt are as follows:
December 31
2002
2001
(in millions)
Short-term debt:
Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other short-term notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 141.1
11.9
Ì
$ 221.7
28.5
100.0
Total short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
153.0
350.2
Long-term debt less current portion:
7.250% notes payable, due 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.25% notes payable, due 2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.5% notes payable, due 2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.20% notes payable, due 2011 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
7% notes payable, due 2018 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
9.125% notes payable, due 2024 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
192.5
257.2
100.1
249.3
200.2
119.9
Total long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,119.2
Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely junior subordinated debentures:
8.35% Trust Originated Preferred Securities (redeemed on January 7,
2002) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
7.40% Trust Originated Preferred SecuritiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.67% Trust Originated Preferred SecuritiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
7.65% Trust Preferred Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
200.0
5.0
187.7
392.7
192.2
Ì
100.1
249.2
200.3
119.9
861.7
100.0
200.0
5.0
169.7
474.7
Total Debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,664.9
$1,686.6
The U.S. commercial paper outstanding at December 31, 2002 had a weighted average interest rate of
1.59%. There was no U.K. commercial paper outstanding at December 31, 2002. The Ñnal Lincoln UK
commercial paper retirement was in May 2002. The combined U.S. and U.K. commercial paper outstanding
at December 31, 2001 had a blended weighted average interest rate of approximately 3.10%.
Future maturities of long-term debt are as follows (in millions):
2003 Ó $Ì
2004 Ó Ì
2005 Ó $193.0
Ì
2006 Ó
Ó $250.0
2007
Thereafter Ó 670.3
LNC also has access to capital from minority interest in preferred securities of subsidiary companies.
Hybrid securities currently outstanding, which combine debt and equity characteristics, were oÅered through a
series of subsidiaries (Lincoln National Capital III, IV and V). These subsidiaries were formed solely for the
purpose of issuing preferred securities and lending the proceeds to LNC. The common securities of these
subsidiaries are owned by LNC. The only assets of Lincoln National Capital III, IV, and V are the notes
receivable from LNC for such loans. Distributions are paid by these subsidiaries to the preferred securi-
tyholders on a quarterly basis. The principal obligations of these subsidiaries are irrevocably guaranteed by
LNC. Upon liquidation of these subsidiaries, the holders of the preferred securities would be entitled to a Ñxed
amount per share plus accumulated and unpaid distributions. LNC reserves the right to: 1) redeem the
preferred securities at a Ñxed price plus accumulated and unpaid distributions and; 2) extend the stated
redemption date up to 19 years if certain conditions are met.
110
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
In August 1998, Lincoln National Capital IV issued 9,200,000 shares or $230 million of 7.75% FELINE
PRIDES (service mark of Merrill Lynch & Co. Inc.). The purchasers of such securities were also provided
stock purchase contract agreements that indicated they would receive a speciÑed amount of LNC common
stock on or before the August 2001 maturity date of the FELINE PRIDES. A portion of the issuance costs
associated with this oÅering along with the present value of the payments associated with the stock purchase
agreements were charged to the common stock line within shareholders' equity.
On August 16, 2001, LNC settled mandatory stock purchase contracts issued in conjunction with the
FELINE PRIDES Ñnancing. This action resulted in the issuance of 4,630,318 shares of LNC stock at
$49.67 per share. Investors had the option of settling the purchase contract with separate cash or by having the
collateral securing their purchase obligations sold. In the case of investors who held the Trust Originated
Preferred Securities (""TOPrS'') as collateral for the purchase contracts, they were permitted to enter into a
remarketing process with proceeds used to settle the contracts. On August 13, 2001, the remarketing failed
resulting in the retirement of $225 million TOPrS. A total of $5 million of two-year TOPrS remain
outstanding which represents investors who chose to settle with separate cash and hold onto their TOPrS until
maturity.
In September 2001, LNC redeemed $215 million 8.75% Quarterly Income Preferred Securities which
were issued by Lincoln National Capital I in July 1996. In November 2001, Lincoln National Capital V issued
6,900,000 shares of $172.5 million 7.65% Trust Preferred Securities (""TRUPS''). In conjunction with the
$172.5 million TRUPS issue, LNC executed an interest rate swap in the amount of 172.5 million notional that
eÅectively converted the 7.65% Ñxed rate into a LIBOR-based Öoating interest rate.
In December 2001, LNC issued $250 million 6.20% ten-year senior notes. In January 2002, LNC
redeemed $100 million 8.35% TOPrS which were issued by Lincoln Capital II in August 1996. In June 2002,
LNC issued $250 million 5.25% Ñve-year senior notes. In conjunction with the $250 million debt issue, LNC
executed an interest rate swap in the amount of 100 million notional that eÅectively converted the 5.25% Ñxed
rate coupon on that portion of the bond into LIBOR-based Öoating rate debt.
In April 2002, a new shelf registration statement was declared eÅective by the Securities and Exchange
Commission. The new shelf registration totaled $1.2 billion (including $402.5 million of registered but
unissued securities from previous registration statements). After giving consideration to the $250 million
5.25% Ñve-year senior notes issued in June 2002, LNC has $950 million remaining under the shelf registration
to issue debt securities, preferred stock, common stock, warrants, stock purchase contracts and stock purchase
units of LNC and trust preferred securities of four subsidiary trusts. The net proceeds from the sale of the
securities oÅered by this shelf registration and the applicable prospectus supplement(s) are expected to be
used by LNC for general corporate purposes, including repurchases of outstanding common stock, repayment
or redemption of outstanding debt or preferred stock, the possible acquisition of Ñnancial services businesses or
assets thereof, investment in portfolio assets and working capital needs.
Finally, LNC maintains three revolving credit agreements with a group of domestic and foreign banks
totaling $580 million. One agreement, in the amount of $300 million, expires in December 2005 and the
second agreement, in the amount of $200 million, expires in December 2003. The third agreement, in the
amount of $80 million, is maintained by Lincoln UK and expired in January 2003. The Lincoln UK agreement
was renewed in January 2003 for $48 million maturing in January 2004. All three agreements provide for
interest on borrowings based on various money market indices. Under all three agreements, LNC must
maintain senior unsecured long-term debt ratings of at least S&P A¿ and Moody's A3 or be restricted by an
adjusted debt to capitalization ratio. At December 31, 2002, LNC had $11.9 million in outstanding borrowings
under the Lincoln UK agreement. During 2002, 2001 and 2000, fees paid for maintaining revolving credit
agreements amounted to $0.55 million, $0.65 million and $0.64 million, respectively.
111
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Cash paid for interest for 2002, 2001 and 2000 was $96.6 million, $123.1 million and $145.4 million
million, respectively.
6. Employee BeneÑt Plans
Pension and Other Postretirement BeneÑt Plans Ì U.S. LNC maintains funded deÑned beneÑt
pension plans for most of its U.S. employees and, prior to January 1, 1995, most full-time agents. EÅective
January 1, 2002, the employees' pension plan has a cash balance formula. Employees retiring before 2012 will
have their beneÑts calculated under both the old and new formulas and will receive the better of the two
calculations. Employees retiring in 2012 or after will receive beneÑts under the amended plan. BeneÑts under
the old employees' plan are based on total years of service and the highest 60 months of compensation during
the last 10 years of employment. Under the amended plan, employees have guaranteed account balances that
grow with pay and interest credits each year. The amendment to the employees' pension plan resulted in a
$27.8 million pre-tax negative unrecognized prior service cost in 2001 that will be evenly recognized over
future periods. All beneÑts applicable to the deÑned beneÑt plan for agents were frozen as of December 31,
1994. 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
beneÑts attributed to service to date, but also those expected to be earned in the future.
LNC sponsors three types of unfunded, nonqualiÑed, deÑned beneÑt plans for certain U.S. employees and
agents: supplemental retirement plans, a salary continuation plan, and supplemental executive retirement
plans.
The supplemental retirement plans provide deÑned beneÑt pension beneÑts in excess of limits imposed by
Federal tax law. EÅective January 1, 2000, one of these plans was amended to limit the maximum
compensation recognized for beneÑt payment calculation purposes. The eÅect of this amendment was to
reduce the pension beneÑt obligation by $5.4 million.
The salary continuation plan provides certain oÇcers of LNC deÑned pension beneÑts based on years of
service and Ñnal monthly salary upon death or retirement.
The supplemental executive retirement plan provides deÑned pension beneÑts for certain executives who
became employees of LNC as a result of the acquisition of a block of individual life insurance and annuity
business from CIGNA Corporation (""CIGNA''). EÅective January 1, 2000, this plan was amended to freeze
beneÑts payable under this plan. The eÅect of this plan curtailment was to decrease the pension beneÑt
obligation by $2.4 million. EÅective January 1, 2000, a second supplemental executive retirement plan was
established for this same group of executives to guarantee that the total beneÑt payable under the LNC
employees' deÑned beneÑt pension plan beneÑt formula will be determined using an average compensation not
less than the minimum three-year average compensation as of December 31, 1999. All beneÑts payable from
this plan are reduced by beneÑts payable from the LNC employees' deÑned beneÑt pension plan.
LNC also sponsors unfunded plans that provide postretirement medical, dental and life insurance beneÑts
to full-time U.S. employees and agents who, depending on the plan, have worked for LNC 10 years and
attained age 55 (60 for agents). Medical and dental beneÑts are also available to spouses and other dependents
of employees and agents. For medical and dental beneÑts, limited contributions are required from individuals
who 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. Life insurance beneÑts are
noncontributory; however, participants can elect supplemental contributory life beneÑts up to age 70. EÅective
July 1, 1999, the agents' postretirement plan was changed to require agents retiring on or after that date to pay
the full medical and dental premium costs. This change in the plan resulted in a one-time curtailment gain of
$10.2 million pre-tax. Beginning January 1, 2002, the employees' postretirement plan was changed to require
employees not yet age 50 with Ñve years of service by year end 2001 to pay the full medical and dental
112
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
premium cost when they retire. This change in the plan resulted in the immediate recognition at the end of
2001 of a one-time curtailment gain of $11.3 million pre-tax.
On December 1, 2001, Swiss Re acquired LNC's reinsurance business. This transaction resulted in the
immediate recognition of a one-time curtailment gain on post retirement beneÑts of $6 million pre-tax and
additional expense of $1.4 million pre-tax related to pension beneÑts for a net curtailment gain of $4.6 million
pre-tax. This net curtailment gain was included in the realized gain on sale of subsidiaries for the year ended
December 31, 2001. Due to the release of the pension obligations on these former LNC employees, there was
a $16 million gain in the pension plan that was used to oÅset prior plan losses.
Information with respect to deÑned beneÑt plan asset activity and deÑned beneÑt plan obligations is as
follows:
Year Ended December 31
Pension BeneÑts
2001
2002
Other Postretirement
BeneÑts
2002
2001
(in millions)
Change in plan assets:
Fair value of plan assets at beginning-of-yearÏÏÏÏÏÏÏÏÏÏ
Actual return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Company contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 389.7
(36.2)
66.5
(1.7)
(26.5)
$385.5
(17.7)
41.0
(0.9)
(18.2)
$ Ì $ Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Fair value of plan assets at end-of-yearÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 391.8
$389.7
$ Ì $ Ì
Change in beneÑt obligation:
BeneÑt obligation at beginning-of-year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Plan amendmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Plan participants' contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Sale of business segmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Plan curtailment gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Actuarial (gains) lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BeneÑt obligation at end-of-year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Underfunded status of the plansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrecognized net actuarial lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrecognized negative prior service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 474.7
Ì
18.5
31.8
Ì
Ì
Ì
22.1
(26.5)
$ 520.6
$(128.8)
132.0
(20.1)
$469.3
(27.8)
14.3
34.0
Ì
Ì
(16.0)
19.1
(18.2)
$474.7
$(85.0)
44.9
(25.8)
$
96.8
Ì
1.5
6.1
1.4
Ì
Ì
8.7
(8.0)
106.5
$(106.5)
9.2
Ì
$108.3
Ì
2.7
7.2
2.1
(6.0)
(11.8)
3.8
(9.5)
$ 96.8
$(96.8)
Ì
Ì
Accrued beneÑt cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (16.9)
$(65.9)
$ (97.3)
$(96.8)
Weighted-average assumptions as of December 31:
Weighted-average discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rate of increase in compensation:
Salary continuation plan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
All other plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.50%
8.25%
5.00%
4.00%
7.00%
9.00%
5.00%
4.00%
6.50%
Ì
Ì
4.00%
7.00%
Ì
Ì
4.00%
In 2002, all plans have projected beneÑt obligations in excess of plan assets. In 2001, the funded status
amounts in the pension beneÑts columns above combine plans with projected beneÑt obligations in excess of
plan assets and plans with plan assets in excess of projected beneÑt obligations. At December 31, 2001, for
plans that had projected beneÑt obligations in excess of plan assets, the aggregate projected beneÑt obligations
113
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
were $400.1 million, the aggregate accumulated beneÑt obligations were $373.0 million and the aggregate fair
value of plan assets was $314.9 million.
As required by Statement of Financial Accountant Standards No. 87, ""Employer's Accounting for
Pensions,'' for plans where the accumulated beneÑt obligation exceeds the fair value of plan assets, LNC has
recognized the minimum pension liability of the unfunded accumulated beneÑt obligation as a liability with an
oÅsetting adjustment to Other Comprehensive Income, net of tax impact. As of December 31, 2002, this
minimum pension liability amounted to $64.8 million ($99.7 million pre-tax) for U.S. pension plans. In
addition, as of December 31, 2002 and 2001, for the non-U.S. deÑned beneÑt plan, a minimum pension
liability of $33.0 million ($50.9 million pre-tax) and $36.0 million, respectively, was recorded in Accumulated
Other Comprehensive Income (see below for further discussion of the non-U.S. deÑned beneÑt plan). The
total amount recorded in Accumulated Other Comprehensive Income as of December 31, 2002 and 2001 was
$97.8 million and $36.0 million, respectively.
Plan assets for both the funded employees and agents plans are principally invested in equity and Ñxed
income funds managed by LNC's Investment Management segment.
The components of net deÑned beneÑt pension plan and postretirement beneÑt plan costs are as follows:
Year Ended December 31
Pension BeneÑts
2001
2002
Other Postretirement
BeneÑts
2001
2000
2000
(in millions)
2002
Service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected return on plan assets ÏÏÏÏÏÏÏÏÏÏ
Amortization of prior service cost ÏÏÏÏÏÏÏ
Recognized net actuarial (gains) losses ÏÏ
$ 19.0
31.8
(31.1)
(2.5)
0.3
$ 14.8
34.0
(34.0)
0.4
0.3
$ 14.6
32.1
(34.5)
0.4
(2.2)
$ 1.5
6.1
Ì
Ì
(0.5)
$ 2.7
7.2
Ì
Ì
(0.5)
$ 2.3
7.0
Ì
Ì
(0.9)
Net periodic beneÑt cost ÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 17.5
$ 15.5
$ 10.4
$ 7.1
$ 9.4
$ 8.4
The calculation of the accumulated postretirement beneÑts obligation assumes a weighted-average
annual rate of increase in the per capita cost of covered beneÑts (i.e. health care cost trend rate) of 10.0% for
2002. It further assumes the rate will gradually decrease to 5.0% by 2014 and remain at that level. The health
care cost trend rate assumption has a signiÑcant eÅect 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 beneÑts obligation as of December 31, 2002 and 2001 by $7.5 million and $6.8 million,
respectively. The aggregate of the estimated service and interest cost components of net periodic postretire-
ment beneÑts cost for the year ended December 31, 2002 and 2001 would increase by $0.6 million and
$0.8 million, respectively.
LNC maintains a deÑned contribution plan for its U.S. insurance agents. Contributions to this plan are
based on a percentage of the agents' annual compensation as deÑned in the plan. EÅective January 1, 1998,
LNC assumed the liabilities for a non-contributory deÑned contribution plan covering certain highly
compensated former CIGNA agents and employees. Contributions for this plan are made annually based upon
varying percentages of annual eligible earnings as deÑned in the plan. Contributions to this plan are in lieu of
any contributions to the qualiÑed agent deÑned contribution plan. EÅective January 1, 2000, this plan was
expanded to include certain highly compensated Lincoln agents. The combined pre-tax expenses for these
plans amounted to $1.0 million, $2.8 million and $4.2 million in 2002, 2001 and 2000, respectively. These
expenses reÖect both LNC's contribution as well as changes in the measurement of LNC's liabilities under
these plans.
114
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Pension Plan Ì Non U.S. The employees of LNC's primary foreign subsidiary are covered by a
deÑned beneÑt pension plan. The plan provides death and pension beneÑts based on Ñnal pensionable salary.
At December 31, 2002 and 2001, plan assets were under the projected beneÑt obligations by $62.7 million and
$47.0 million, respectively, and was included in other liabilities in LNC's balance sheet. As a result of the
accumulated beneÑt obligation being in excess of plan assets at December 31, 2002 and 2001, a minimum
pension liability adjustment of $33.0 million ($50.9 million pre-tax) and $36.0 million, respectively, was
recorded in Accumulated Other Comprehensive Income in equity. There was no tax recorded on the
minimum pension liability adjustment in 2001. Net pension costs for the foreign plan were $10.0 million,
$7.4 million and $4.4 million for 2002, 2001 and 2000, respectively.
401(k), Money Purchase and ProÑt Sharing Plans. LNC also sponsors contributory deÑned contribu-
tion plans for eligible U.S. employees and agents. These plans include 401(k) plans and eÅective April 1,
2001, a deÑned contribution money purchase plan for eligible employees of Delaware Management Holdings,
Inc. (""Holdings''). Prior to April 1, 2001, the deÑned contribution money purchase plan was structured as a
proÑt sharing plan. LNC's contributions to the 401(k) plans are equal to participant's pre-tax contribution,
not to exceed 6% of base pay, multiplied by a percentage, ranging from 50% to 150%, which varies according
to certain incentive criteria as determined by LNC's Board of Directors. As a result of LNC attaining the
goals established under the three-year long-term incentive plan for 1998 through 2000, an additional match
was made on a participant's 2000 pre-tax contribution.
LNC's contribution to the deÑned contribution money purchase plan is equal to 7.5% per annum of a
participant's eligible compensation, while its contribution to the previous proÑt sharing plan of Holdings was
equal to an amount, if any, determined in accordance with a resolution of the Board of Directors. Each plan
year's contribution is allocated in the proportion that the plan compensation of each eligible participant bears
to the total plan compensation of all eligible participants for such plan year. Compensation is deÑned as all of
an eligible participant's plan year earnings and is subject to the limitation of Section 401(a) of the Internal
Revenue Code of 1986, as amended. For 2002 and 2001, the contribution to the deÑned contribution money
purchase plan was based on 7.5% of the eligible compensation for the year ended December 31, 2002 and for
the nine-month period ended December 31, 2001, respectively. For the proÑt sharing plan's Ñscal years ended
March 31, 2001 and 2000, the Board issued a resolution authorizing a 15% per annum contribution to the plan.
Expense for the 401(k) and proÑt sharing plans amounted to $22.6 million, $27.0 million and $43.5 million in
2002, 2001 and 2000, respectively.
Deferred Compensation Plans. LNC sponsors contributory deferred compensation plans for certain
U.S. employees and agents. Plan participants may elect to defer payment of a portion of their compensation,
as deÑned by the plans. At this point, LNC has not chosen to fund these plans. Plan participants may select
from a variety of alternative measures for purposes of calculating the investment return considered attributable
to their deferral. Under the terms of these plans, LNC agrees to pay out amounts based upon the alternative
measure selected by the participant. Plan participants who are also participants in an LNC 401(k) plan and
who have reached the contribution limit for that plan may also elect to defer the additional amounts into the
deferred compensation plan. LNC makes matching contributions to these plans based upon amounts placed
into the deferred compensation plans by individuals who have reached the contribution limit under the 401(k)
plan. The amount of LNC's contribution is calculated in a manner similar to the employer match calculation
described in the 401(k) plans section above. Expense for these plans amounted to $1.7 million, $0.6 million
and $4.3 million in 2002, 2001 and 2000, respectively. These expenses reÖect both LNC's employer matching
contributions, as well as changes in the measurement of LNC's liabilities under these plans.
In the fourth quarter of 1999, LNC modiÑed the terms of the deferred compensation plans to provide that
plan participants who selected LNC stock as the measure for their investment return would receive shares of
LNC stock in satisfaction of this portion of their deferral. In addition, participants were precluded from
diversifying any portion of their deferred compensation plan account that is measured by LNC's stock
115
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
performance. As a result of these modiÑcations to the plans, ongoing changes in value of LNC's stock no
longer aÅect the expenses associated with this portion of the deferred compensation plans.
In connection with the acquisition of the block of individual life insurance and annuity business from
CIGNA, LNC assumed the liability for an unfunded contributory deferred compensation plan covering
certain former CIGNA employees and agents. These participants became immediately eligible for the LNC
contributory deferred compensation plans, and therefore this plan was frozen as to future deferrals as of
January 1, 1998. EÅective January 1, 2001, this frozen plan was merged into the LNC contributory deferred
compensation plans and the associated expenses for 2002, 2001 and 2000 are included in those plan expenses
disclosed above.
The total liabilities associated with these plans were $161.3 million and $149.5 million at December 31,
2002 and 2001, respectively.
Incentive Plans. LNC has various incentive plans for employees, agents and directors of LNC and its
subsidiaries that provide for the issuance of stock options, stock appreciation rights, restricted stock awards
and stock incentive awards. These plans are comprised primarily of stock option incentive plans. Stock options
awarded under the stock option incentive plans are granted with an exercise price equal to the market value of
LNC stock at the date of grant and, subject to termination of employment, expire 10 years from the date of
grant. Such options are transferable only upon death. Options become exercisable in 25% increments over the
four-year period following the option grant anniversary date. A ""reload option'' feature was added on May 14,
1997. In most cases, persons exercising an option after that date have been granted new options in an amount
equal to the number of matured shares tendered to exercise the original option award. The reload options are
granted for the remaining term of the related original option and have an exercise price equal to the market
value of LNC stock at the date of the reload award. Reload options can be exercised two years after the grant
date if the value of the new option has appreciated by at least 25%.
In 2000, as a result of changes in the interpretation of the existing accounting rules for stock options,
LNC decided not to continue issuing stock options to agents that do not meet the stringent deÑnition of a
common law employee. In the Ñrst quarter of 2000, LNC adopted a stock appreciation right (""SAR'')
program as a replacement to the agent stock option program. The Ñrst awards under this program were also
made in the Ñrst quarter of 2000. The SARs under this program are rights on LNC stock that are cash settled
and become exercisable in 25% increments over the four year period following the SAR grant date. SARs are
granted with an exercise price equal to the market value of LNC stock at the date of grant and, subject to
termination of employment, expire Ñve years from the date of grant. Such SARs are transferable only upon
death.
LNC recognizes compensation expense for the SAR program based on the fair value method using an
option-pricing model. Compensation expense and the related liability are recognized on a straight-line basis
over the vesting period of the SARs. The SAR liability is marked-to-market through net income. This
accounting treatment causes volatility in net income as a result of changes in the market value of LNC stock.
LNC hedges this volatility by purchasing call options on LNC stock. Call options hedging vested SARs are
also marked-to-market through net income. Total compensation expense (income) recognized for the SAR
program for 2002, 2001 and 2000 was $(0.7) million, $4.8 million and $3.1 million, respectively. The mark-to-
market gain (loss) recognized through net income on the call options on LNC stock for 2002, 2001 and 2000
was $(6.7) million, $0.8 million and $1.3 million, respectively. The SAR liability at December 31, 2002 and
2001 was $3.7 million and $6.5 million, respectively.
In 2001, Holdings, through its wholly-owned subsidiaries Delaware Investments U.S., Inc. (""DIUS'')
and DIAL Holding Company, Inc. (""DIAL''), established separate stock option incentive plans for its
domestic and international personnel, respectively. Stock options awarded under the plans are granted with an
exercise price equal to the estimated fair market value per share at the date of the grant, as determined by an
116
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
outside appraiser, and expire 10 years from the date of the grant, subject to conditions of the plan agreements.
Options granted under the DIUS plan become exercisable and vest in 25% increments over the four-year
period following the option grant anniversary date. Options granted under the DIAL plan also vest in 25%
increments over the four-year period following the option grant anniversary date, however, such options are
exercisable immediately. In the event DIAL options are exercised prior to vesting, such stock acquired is
restricted from resale until vested under the option terms.
Shares acquired upon exercise, provided they have been held for more than six months and are vested,
may be ""put'' to Holdings at the most recent determined fair market value per share, subject to the speciÑc
terms of the plan agreements. Fair market value is determined on a semi-annual basis by the outside appraiser.
Additionally, shares acquired upon exercise, provided they have been held for more than six months and are
vested, may be ""called'' by Holdings, DIUS or DIAL, as applicable, at the most recent determined fair
market value per share.
Through 2002, LNC recognized compensation expense for its stock option incentive plans using the
intrinsic value method of accounting and provides the required pro forma information for stock options granted
after December 31, 1994. Accordingly, no compensation expense has been recognized for stock option
incentive plans. LNC's pro forma net income and earnings per diluted share for the last three years (2002,
2001 and 2000) would have been $56.6 million ($0.31 per diluted share); $549.2 million ($2.84 per diluted
share) and $588.3 million ($3.02 per diluted share), respectively (a decrease of $35.0 million or $0.19 per
diluted share; $41.0 million or $0.21 per diluted share and $33.1 million or $0.17 per diluted share,
respectively). Included in this pro forma information is the following eÅect of the DIUS and DIAL stock
option incentive plans.
If compensation expense for the DIUS and DIAL stock option incentive plans had been determined
based on the estimated fair value at the grant dates for awards under those plans, LNC's net income and
earnings per share for 2002 and 2001 would have been further reduced by $8.2 million ($0.04 per diluted
share) and $1.9 million ($0.01 per diluted share), respectively.
These eÅects on pro forma net income and earnings per share of expensing the estimated fair value of
stock options are not necessarily representative of the eÅects on reported net income for future years due to
factors such as the vesting period of the stock options and the potential for issuance of additional stock options
in future years.
The fair value of options used as a basis for the pro forma disclosures, shown above, was estimated as of
the date of grant using a Black-Scholes option-pricing model. Included in the above pro forma decrease in net
income for 2001 was $6.1 million after-tax of stock option expense related to the former Reinsurance segment.
On August 8, 2002, LNC announced plans to expense the fair value of employee stock options beginning
in 2003 under FAS 123. FAS 148, issued on December 31, 2002, provides for alternative methods of transition
for entities that change to the fair value method of accounting for stock-based compensation. On January 1,
2003, LNC will adopt the retroactive restatement method under FAS 148, which requires that companies
restate all periods presented to reÖect stock-based employee compensation cost under the fair value
accounting method in FAS 123 for all employee awards granted, modiÑed or settled in Ñscal years beginning
after December 15, 1994. LNC will present restated Ñnancial statements for the years 2002, 2001 and 2000 in
its Ñrst quarter 2003 Ñling on Form 10-Q
EÅective January 1, 2003, LNC's stock option employee compensation plan and long-term cash incentive
compensation plan were revised and combined to provide for performance vesting, and to provide for awards
that may be paid out in a combination of stock options, performance shares of LNC stock and cash. The
performance measures for the initial grant under the new plan will be calculated over a three-year period from
grant date and will compare LNC's performance relative to a selected group of peer companies. Comparative
performance measures will include relative growth in earnings per share, return on equity and total share
117
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
performance. Certain participants in the new plans will select from seven diÅerent combinations of stock
options, performance shares and or cash in determining the form of their award. Other participants will have
their award paid in performance shares. This plan will replace the current LNC stock option plan; however,
the separate stock option incentive plans established by DIUS and DIAL, both wholly-owned subsidiaries of
Delaware Management Holdings, Inc., will continue.
Information with respect to the LNC incentive plan stock options outstanding at December 31, 2002 is as
follows:
Options Outstanding
Number
Outstanding at
December 31,
2002
Weighted-Average
Remaining
Contractual Life
(Years)
Weighted-Average
Exercise Price
234,860
5,346,024
2,520,378
5,621,503
4,885,244
18,608,009
0.89
5.24
6.99
5.72
6.94
$19.79
25.20
33.46
44.32
51.35
Options Exercisable
Number
Exercisable at
December 31,
2002
234,860
3,154,602
1,010,571
4,110,259
2,372,761
10,883,053
Weighted-Average
Exercise Price
$19.79
25.53
33.69
44.55
50.87
Range of
Exercise Prices
$10 - $20
21 - 30
31 - 40
41 - 50
51 - 60
$10 - $60
The option price assumptions used for the LNC stock option incentive plans were as follows:
2002
2001
2000
Dividend yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected volatilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Risk-free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected life (in years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted-average fair value per option granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2.5%
39.6%
4.5%
4.2
$16.03
2.8%
4.3%
40.0% 39.2%
6.6%
4.9
$8.43
4.6%
4.2
$13.39
Information with respect to the LNC incentive plans involving stock options is as follows:
Options Outstanding
Options Exercisable
Balance at January 1, 2000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted-original ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted-reloads ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised (includes shares tendered) ÏÏÏÏÏÏÏÏÏ
Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at December 31, 2000ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted-original ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted-reloads ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised (includes shares tendered) ÏÏÏÏÏÏÏÏÏ
Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at December 31, 2001ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted-original ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted-reloads ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised (includes shares tendered) ÏÏÏÏÏÏÏÏÏ
Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Shares
13,664,435
9,890,245
100,544
(1,485,816)
(1,222,170)
20,947,238
2,561,883
130,129
(3,096,146)
(619,596)
19,923,508
2,154,709
40,609
(2,554,776)
(956,041)
Weighted-
Average
Exercise
Price
Shares
Weighted-
Average
Exercise
Price
5,141,438
$29.21
6,715,434
35.05
9,437,881
37.91
$39.59
27.85
46.13
47.44
43.76
34.69
43.74
48.19
27.24
44.63
36.74
51.67
49.67
31.89
42.20
Balance at December 31, 2002ÏÏÏÏÏÏÏÏÏÏÏÏÏ
18,608,009
$38.89
10,883,053
$38.87
118
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Information with respect to the LNC incentive plan SARs outstanding at December 31, 2002 is as
follows:
SARs Outstanding
Number
Outstanding at
December 31,
2002
Weighted-Average
Remaining
Contractual Life
(Years)
487,710
3,875
518,588
372,075
1,382,248
2.19
2.45
3.20
4.20
Range of
Exercise Prices
$21 - $30
31 - 40
41 - 50
51 - 60
$10 - $60
SARs Exercisable
Weighted-Average
Exercise Price
$24.72
36.98
43.57
52.10
Number
Exercisable at
December 31,
2002
183,364
1,788
115,956
Ì
301,108
Weighted-Average
Exercise Price
$24.72
36.90
43.59
Ì
The option price assumptions used for the LNC SAR plan were as follows:
2002
2001
2000
Dividend yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected volatilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Risk-free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected life (in years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted-average fair value per SAR granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2.7%
29.5%
5.0%
5.0
$10.86
2.7%
42.0%
5.5%
5.0
$18.84
3.8%
46.0%
7.3%
5.0
$14.62
Information with respect to the LNC incentive plan involving SARs is as follows:
SARs Outstanding
SARs Exercisable
Balance at January 1, 2000 ÏÏÏÏÏÏÏÏÏÏ
Granted-original ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised (includes shares tendered) ÏÏÏÏ
Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at December 31, 2000 ÏÏÏÏÏÏÏ
Granted-original ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised (includes shares tendered) ÏÏÏÏ
Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at December 31, 2001 ÏÏÏÏÏÏÏ
Granted-original ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised (includes shares tendered) ÏÏÏÏ
Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Shares
Ì
866,168
(72,823)
(42,293)
751,052
544,205
(142,785)
(27,381)
1,125,091
383,675
(90,818)
(35,700)
Weighted-Average
Exercise Price
Shares
Weighted-Average
Exercise Price
Ì
$ Ì
82,421
24.72
102,710
25.02
$ Ì
24.94
24.72
25.19
24.94
43.51
24.74
28.92
33.85
51.95
28.57
34.95
Balance at December 31, 2002 ÏÏÏÏÏÏÏ
1,382,248
$39.20
301,108
$32.06
The option price assumptions used for the DIUS and DIAL stock option incentive plans were as follows:
2002
DIUS
2001
DIUS
2002
DIAL
2001
DIAL
Dividend yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected volatility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Risk-free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected life (in years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted-average fair value per option granted ÏÏÏÏÏÏÏÏÏ
2.42%
50.0%
4.1%
4.6
$41.24
1.95%
50.0%
4.2%
4.6
$41.25
3.76%
50.0%
4.3%
4.6
$9.22
6.01%
50.0%
4.2%
4.6
$7.28
119
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
At December 31, 2002, DIUS had 10,000,000 shares of common stock outstanding. Information with
respect to the DIUS incentive plan involving stock options is as follows:
Options Outstanding
Options Exercisable
Balance at December 31, 2000 ÏÏÏÏÏÏÏ
Granted-original ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised (includes shares tendered) ÏÏÏÏ
Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Shares
Ì
810,796
Ì
Ì
Balance at December 31, 2001 ÏÏÏÏÏÏÏ
Granted-original ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised (includes shares tendered) ÏÏÏÏ
Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at December 31, 2002 ÏÏÏÏÏÏÏ
810,796
277,200
Ì
Ì
1,087,996
Weighted-Average
Exercise Price
Shares
Weighted-Average
Exercise Price
$ Ì
103.23
Ì
Ì
103.23
107.45
Ì
Ì
$104.31
Ì
$ Ì
Ì
Ì
202,699
$103.23
At December 31, 2002, DIAL had 10,000,000 shares of common stock outstanding. Information with
respect to the DIAL incentive plan involving stock options is as follows:
Options Outstanding
Options Exercisable
Balance at December 31, 2000 ÏÏÏÏÏÏÏ
Granted-original ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised (includes shares tendered) ÏÏÏÏ
Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance at December 31, 2001 ÏÏÏÏÏÏÏ
Granted-original ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised (includes shares tendered) ÏÏÏÏ
Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Shares
Ì
810,810
Ì
Ì
810,810
277,200
Ì
Ì
Weighted-Average
Exercise Price
Shares
Weighted-Average
Exercise Price
Ì
$ Ì
Ì
Ì
$ Ì
25.47
Ì
Ì
25.47
26.62
Ì
Ì
Balance at December 31, 2002 ÏÏÏÏÏÏÏ
1,088,010
$25.76
202,703
$25.47
Restricted stock (non-vested stock) awarded from 2000 through 2002 was as follows:
2002
2001
2000
Restricted stock (number of shares) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted-average price per share at time of grant ÏÏÏÏÏÏÏÏÏÏÏÏ
71,079
$ 35.67
72,155
$ 46.60
237,358
38.10
$
7. Restrictions, Commitments and Contingencies
Statutory Information and Restrictions
Net income (loss) as determined in accordance with statutory accounting practices for LNC's insurance
subsidiaries excluding the insurance subsidiaries sold to Swiss Re in 2001 was $(0.159) billion, $0.268 billion
and $0.547 billion for 2002, 2001 and 2000, respectively. On December 7, 2001, Swiss Re acquired LNC's
reinsurance operations. The transaction structure involved a series of indemnity reinsurance transactions
combined with the sale of certain stock companies that comprised LNC's reinsurance operation. See Note 11
for further discussion of Swiss Re's acquisition of LNC's reinsurance operations. All of LNC's foreign life
reinsurance companies were sold to Swiss Re on December 7, 2001 except Lincoln National Reinsurance
Company (Barbados) and Lincoln Re (Ireland) Limited. In the second quarter of 2002, LNC exercised a
contractual right to ""put'' its interest in Lincoln Re (Ireland) Limited to Swiss Re.
120
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Shareholders' equity as determined in accordance with statutory accounting practices for LNC's
insurance subsidiaries was $3.0 billion and $3.8 billion for December 31, 2002 and 2001, respectively.
The National Association of Insurance Commissioners revised the Accounting Practices and Procedures
Manual in a process referred to as CodiÑcation. The revised manual became eÅective January 1, 2001. The
domiciliary states of LNC's U.S. insurance subsidiaries have adopted the provisions of the revised manual.
The revised manual has changed, to some extent, prescribed statutory accounting practices and has resulted in
changes to the accounting practices that LNC's U.S. insurance subsidiaries use to prepare their statutory-basis
Ñnancial statements. The impact of these changes to LNC and its U.S. insurance subsidiaries' statutory-based
capital and surplus as of January 1, 2001 was not signiÑcant.
LNC's primary insurance subsidiary, The Lincoln National Life Insurance Company (""LNL'') acquired
a block of individual life insurance and annuity business from CIGNA in January 1998 and a block of
individual life insurance from Aetna Inc. in October 1998. These acquisitions were structured as indemnity
reinsurance transactions. The statutory accounting regulations do not allow goodwill to be recognized on
indemnity reinsurance transactions and therefore, the related statutory ceding commission Öows through the
statement of operations as an expense resulting in a reduction of statutory earned surplus. As a result of these
acquisitions, LNL's statutory earned surplus was negative.
LNC's insurance subsidiaries are subject to certain insurance department regulatory restrictions as to the
transfer of funds and payment of dividends to the holding company. Generally, these restrictions pose no
short-term liquidity concerns for the holding company. As a result of negative statutory earned surplus, LNL
was required to obtain the prior approval of the Indiana Insurance Commissioner (""Commissioner'') before
paying any dividends to LNC until its statutory earned surplus became positive. During the Ñrst quarter of
2002, LNL received approval from the Commissioner to reclassify total dividends of $495 million paid to
LNC in 2001 from LNL's earned surplus to paid-in-capital. This change plus the increase in statutory earned
surplus from the disposition of LNC's reinsurance operations through an indemnity reinsurance transaction
with Swiss Re resulted in positive statutory earned surplus for LNL at December 31, 2001.
In general, dividends are not subject to prior approval from the Commissioner provided LNL's statutory
earned surplus is positive and such dividends do not exceed the standard limitation of the greater of 10% of
total statutory earned surplus or the amount of statutory earnings in the prior calendar year. Dividends of
$710 million were paid by LNL to LNC in the second quarter of 2002. These distributions were made in two
installments. The Ñrst installment of $60 million was paid in April. The second installment of $650 million was
paid in June. As both installments exceeded the standard limitation noted above, a special request was made
for each payment and each was approved by the Commissioner. Both distributions represented a portion of the
proceeds received from the indemnity reinsurance transaction with Swiss Re. As a result of the payment of
dividends plus the statutory loss in 2002, LNL's statutory earned surplus is negative as of December 31, 2002.
Due to the negative statutory earned surplus as of December 31, 2002, any dividend(s) paid by LNL in 2003
will be subject to prior approval from the Commissioner. As occurred in 2001, dividends approved and paid
while statutory earned surplus is negative are expected to be classiÑed as a reduction to paid-in-capital.
LNL is recognized as an accredited reinsurer in the state of New York, which eÅectively enables it to
conduct reinsurance business with unrelated insurance companies that are domiciled within the state of New
York. As a result, in addition to regulatory restrictions imposed by the state of Indiana, LNL is also subject to
the regulatory requirements that the State of New York imposes upon accredited reinsurers.
Reinsurance Contingencies
See Note 11, ""Acquisitions and Divestitures,'' for discussion of contingencies surrounding Swiss Re's
acquisition of LNC's reinsurance operations on December 7, 2001.
121
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
United Kingdom Selling Practices
Various selling practices of the Lincoln UK operations have come under scrutiny by the U.K. regulators
at diÅerent times in the recent past. These selling practices include the sale and administration of individual
pension products, mortgage endowments and the selling practices of City Financial Partners Limited
(""CFPL''), a subsidiary company purchased in December 1997. Regarding the sale and administration of
pension products to individuals, regulatory agencies have raised questions as to what constitutes appropriate
advice to individuals who bought pension products as an alternative to participation in an employer-sponsored
plan. In cases of alleged inappropriate advice, an extensive investigation has been or is being carried out and
the individual put in a position similar to what would have been attained if the individual had remained in an
employer-sponsored plan.
With regard to mortgage endowments, on November 30, 2000, U.K. regulators issued a paper containing
draft guidelines explaining how mortgage endowment policyholders would be compensated in instances where
it is determined that mis-selling occurred. This release also indicated that an extensive analysis is underway of
mortgage endowment products oÅered by insurance companies in the U.K. marketplace since 1988. Where
the results of this analysis indicate that products are designed in a way that could lead to potential mis-selling,
U.K. regulators are contacting companies to review sales practices. Subsequently, further guidance has been
issued by the U.K. regulators to clarify the treatment of complaints concerning the sale of these products.
Lincoln UK received a letter from U.K. regulators on February 8, 2001, raising concerns with certain
mortgage endowment products sold by British National Life Assurance Company (""BNLA''). The speciÑc
policies at issue were sold between the period of July 1988 through March 1994. Lincoln UK acquired BNLA
from Citibank in August of 1993. Less than 6,000 of these BNLA policies remain in force.
In their letter and in subsequent discussions, U.K. regulators are contending that BNLA's sales literature
was written in a manner that provides a contractual warranty that, if certain assumptions are achieved, the
mortgage endowment would grow to a balance suÇcient to repay the contractholder's mortgage. LNC strongly
disagrees that any contractual warranties were made in the sale of these mortgage endowment policies. In
August of 2001, LNC reaÇrmed its position in a letter to the UK regulators.
In March of 2002, LNC received a letter saying that the U.K. regulators had appointed enforcement
investigators to review BNLA's charging structure. This change was not a result of anything LNC had done to
resolve this matter, but was a formality according to the U.K. regulators, reÖecting how they wish to proceed
with these matters across the entire industry. They want to obtain more information to be able to understand
the background of the arguments. Accordingly, LNC has provided a signiÑcant amount of data about BNLA
mortgage endowments and their charging structure. On May 31, 2002, the U.K. regulator wrote to LNC
informing them that enforcement investigations had been completed and suggesting a meeting between the
parties' leading counsel to try to resolve the issues. This meeting has taken place but agreement was not
reached. LNC is prepared to proceed with all available means of resolution, including pursuing regulatory,
administrative and legal means of concluding this matter.
On March 20, 2002, the U.K. regulator wrote to LNC expressing the opinion that Laurentian Life,
Liberty Life (acquired by Lincoln UK in January and April 1995, respectively) and Lincoln UK had in some
cases calculated premiums for certain endowment mortgage policies issued between July 1988 and October
2000 based upon growth rates that were, for that time, unduly optimistic, creating exceptional risks for
consumers. LNC has reviewed a sample of the Liberty Life policies and based on the results of this review,
LNC and the regulators have agreed that no further action is required on the Liberty Life policies unless
additional information is discovered. Discussions continue on the Laurentian Life and Lincoln UK blocks of
business.
Following allegations made by the U.K. Consumers' Association (an organization which acts on behalf of
consumers of goods and services provided in the U.K.) concerning various selling practices of CFPL, LNC
122
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
conducted an internal review of 5,000 ten-year savings plans sold by CFPL during the period September 1,
1998 to August 31, 2000 and, following discussions with the U.K. regulator, LNC wrote to all customers with
a ten-year savings plan sold by CFPL to determine whether the sales of those policies were appropriate. As of
December 31, 2002, the mailings were substantially complete.
At December 31, 2002 and 2001, the aggregate liability associated with Lincoln UK selling practices was
$82.2 million and $164.3 million, respectively. The decrease in the aggregate liability was a result of redress
payments and expenditures partially oÅset by exchange rate Öuctuation. The reserves for these issues are
based on various estimates that are subject to considerable uncertainty. Accordingly, the aggregate liability
may prove to be deÑcient or excessive. However, it is management's opinion that future developments
regarding Lincoln UK selling practices will not materially aÅect the consolidated Ñnancial position of LNC.
Marketing and Compliance Issues
Regulators continue to focus on market conduct and compliance issues. Under certain circumstances,
companies operating in the insurance and Ñnancial services markets have been held responsible for providing
incomplete or misleading sales materials and for replacing existing policies with policies that were less
advantageous to the policyholder. LNC's management continues to monitor the company's sales materials and
compliance procedures and is making an extensive eÅort to minimize any potential liability. Due to the
uncertainty surrounding such matters, it is not possible to provide a meaningful estimate of the range of
potential outcomes at this time; however, it is management's opinion that such future developments will not
materially aÅect the consolidated Ñnancial position of LNC.
Euro Conversion
LNC owns operating companies in the U.K. and previously conducted business with companies located
within Europe. LNC has modiÑed its systems, Ñnancial activities and currency risk exposures to align with the
Ñrst phase of the European Union's conversion to a new common currency (the Euro) that was adopted
January 1, 1999. On January 1, 2002, the Euro banknotes and coins were put into circulation. It is
management's opinion that the additional phases of this conversion, which will be implemented during the
next few years, will not materially aÅect the consolidated Ñnancial position of LNC.
Leases
Certain of LNC's subsidiaries lease their home oÇce properties through sale-leaseback agreements. The
agreements provide for a 25-year lease period with options to renew for six additional terms of Ñve years each.
The agreements also provide LNC with the right of the Ñrst refusal to purchase the properties during the
terms of the lease, including renewal periods, at a price deÑned in the agreements. LNC also has the option to
purchase the leased properties at fair market value as deÑned 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 2002, 2001 and 2000 was $67.0 million, $79.4 million and
$88.4 million, respectively. Future minimum rental commitments are as follows (in millions):
2003 Ì $59.8
2004 Ì 58.6
2005 Ì $58.0
2006 Ì 54.6
Ì $53.1
2007
Thereafter Ì 77.2
Information Technology Commitment
In February 1998, LNL signed a seven-year contract with IBM Global Services for information
technology services for the Fort Wayne operations. Annual costs are dependent on usage but are expected to
range from $60.0 million to $70.0 million.
123
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Lincoln UK Outsourcing Agreement
Lincoln UK agreed to outsource its customer and policy administration functions to the Capita Group Plc
(""Capita'') on August 1, 2002. The contract is for a term of 10 years and the annual cost is based on a per
policy charge plus an amount for other services provided. The total costs over the life of the contract are
estimated to be $259.2 million and annual costs over the next Ñve years are estimated to decline from
$33.3 million to $26.7 million. The amounts quoted are estimates as the actual cost will depend on the number
of policies in force and the applicable inÖation rate for the period concerned. Lincoln UK or Capita may
terminate the contract, subject to the necessary conditions being satisÑed, by serving six and 12 months notice,
respectively.
Football Stadium Naming Rights Commitment
On June 3, 2002, LNC announced an agreement with the Philadelphia Eagles to name the Eagles' new
stadium Lincoln Financial Field. In exchange for the naming rights, LNC agreed to pay $139.6 million over a
20-year period, through annual payments to the Eagles which average approximately $6.7 million per year.
The total amount includes a maximum annual increase related to the Consumer Price Index (""CPI''). This
future commitment has not been recorded as a liability on LNC's balance sheet as it will be accounted for in a
manner consistent with the accounting for operating leases under Statement of Financial Accounting
Standards No. 13, ""Accounting for Leases.''
Insurance Ceded and Assumed
LNC's insurance companies cede insurance to other companies. The portion of risks exceeding each
company's retention limit is reinsured with other insurers. LNC seeks reinsurance coverage within the
businesses that sell life insurance to limit its liabilities. As of December 31, 2002, LNC's retention policy was
to retain no more than $10 million on a single insured life. For 2003, the retention policy was changed to limit
retention on new sales to $5 million. Portions of LNC's deferred annuity business have also been co-insured
with other companies to limit LNC's exposure to interest rate risks. At December 31, 2002, the reserves
associated with these reinsurance arrangements totaled $2,009.0 million. To cover products other than life
insurance, LNC acquires other insurance coverages with retentions and limits that management believes are
appropriate for the circumstances. The accompanying Ñnancial statements reÖect premiums, beneÑts and
deferred acquisition costs, net of insurance ceded (see Note 5). LNC's insurance companies remain liable if
their reinsurers are unable to meet contractual obligations under applicable reinsurance agreements.
Certain LNC insurance companies assume insurance from other companies. At December 31, 2002,
LNC's insurance companies provided $80.2 million of statutory surplus relief to other insurance companies
under reinsurance transactions. Generally, such amounts are oÅset by corresponding receivables from the
ceding company, which are secured by future proÑts 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 oÅset would
not be permitted. LNC's reinsurance operations were acquired by Swiss Re on December 7, 2001. The
transaction structure involved a series of indemnity reinsurance transactions combined with the sale of certain
stock companies that comprised LNC's reinsurance operation. Under the indemnity reinsurance agreements,
Swiss Re reinsured certain liabilities and obligations of LNC. Because LNC is not relieved of its legal liability
to the ceding companies, the liabilities and obligations associated with the reinsured contracts remain on the
balance sheets of LNC with a corresponding reinsurance receivable from Swiss Re.
Letters of Credit
LNC maintains $450 million in bank agreements to issue standby letters of credit on behalf of
subsidiaries of LNC and for the beneÑt of third parties. These letters of credit support LNL's reinsurance
needs and speciÑc treaties associated with LNC's reinsurance business, which was acquired by Swiss Re on
124
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
December 7, 2001 (see Note 11 for further discussion of this transaction). Letters of credit are primarily used
to satisfy the U.S. regulatory requirements of domestic clients of the former Reinsurance segment who have
contracted with the Reinsurance subsidiaries not domiciled in the United States. The letter of credit allows the
cedents to take credit for reinsured reserves on their statutory balance sheets. At December 31, 2002, there
was a total of $223.8 million in outstanding bank letters of credit supporting six separate reinsurance treaties.
In exchange for the letters of credit, LNC paid the banks approximately $3.8 million in fees in 2002.
Vulnerability from Concentrations
At December 31, 2002, LNC did not have a material concentration of Ñnancial instruments in a single
investee or industry. LNC's investments in mortgage loans principally involve commercial real estate. At
December 31, 2002, 28% of such mortgages, or $1.2 billion, involved properties located in California and
Texas. Such investments consist of Ñrst mortgage liens on completed income-producing properties and the
mortgage outstanding on any individual property does not exceed $38.2 million. Also at December 31, 2002,
LNC did not have a concentration of: 1) business transactions with a particular customer or lender; 2) sources
of supply of labor or services used in the business or; 3) a market or geographic area in which business is
conducted that makes it vulnerable to an event that is at least reasonably possible to occur in the near term
and which could cause a severe impact to LNC's Ñnancial position. Although LNC does not have any
signiÑcant concentration of customers, LNC's Retirement segment has a long-standing distribution relation-
ship with American Funds Distributors (""AFD'') that is signiÑcant to this segment. In 2002, the American
Legacy Variable Annuity product line sold through AFD accounted for about 15% of LNC's total gross
annuity deposits. In addition, the American Legacy Variable Annuity product line represents approximately
31% of LNC's total gross annuity account values at December 31, 2002. Recently, LNC and AFD have
agreed to transition the wholesaling of American Legacy to LFD. Currently, AFD uses wholesalers who focus
on both American Funds mutual funds as well as the American Legacy Variable Annuity products. Segment
management believes that this change to a dedicated team focused on key broker/dealer relationships
developed in conjunction with AFD, should lead to renewed growth in American Legacy Variable Annuity
sales.
Other Contingency Matters
LNC and its subsidiaries are involved in various pending or threatened legal proceedings, including
purported class actions, arising from the conduct of business. In some instances, these proceedings include
claims for unspeciÑed or substantial punitive damages and similar types of relief in addition to amounts for
alleged contractual liability or requests for equitable relief. After consultation with legal counsel and a review
of available facts, it is management's opinion that these proceedings ultimately will be resolved without
materially aÅecting the consolidated Ñnancial position of LNC.
In 2001, LNL concluded the settlement of all class action lawsuits alleging fraud in the sale of LNL non-
variable universal life and participating whole life policies issued between January 1, 1981 and December 31,
1998. Since 2001, LNL has reached settlements with a substantial number of the owners of policies that opted
out of the class action settlement. LNL continues to defend a small number of opt out claims and lawsuits.
While there is continuing uncertainty about the ultimate costs of settling the remaining opt out cases, it is
management's opinion that established reserves are adequate and future developments will not materially
aÅect the consolidated Ñnancial position of LNC.
LNC and LNL have pursued claims with their liability insurance carriers for reimbursement of certain
costs incurred in connection with the class action settlement and the settlement of claims and litigation
brought by owners that opted out of the class action settlement. During the fourth quarter of 2002, LNC and
LNL settled their claims against three liability carriers on a favorable basis. LNC and LNL continue to
pursue similar claims against a fourth liability insurance carrier.
125
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
For discussion of the resolution of legal proceedings related to LNC's sale of its former reinsurance
business to Swiss Re, refer to the discussion within Note 11, ""Acquisitions and Divestitures.''
State guaranty funds assess insurance companies 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 expected assessments net of estimated future premium
tax deductions.
Guarantees
LNC has guarantees with oÅ-balance-sheet risks whose contractual amounts represent credit exposure.
Guarantees with oÅ-balance sheet risks having contractual values of $22.4 million and $23.9 million were
outstanding at December 31, 2002 and 2001, respectively.
Certain subsidiaries of LNC have invested in real estate partnerships that use industrial revenue bonds to
Ñnance 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 case of default by the partnerships, LNC has recourse to the underlying real estate.
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. These guarantees
expire in 2003 through 2012.
In addition, certain subsidiaries of LNC have sold commercial mortgage loans through grantor trusts,
which issued pass-through certiÑcates. 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. In case of default by the partnerships, LNC
has recourse to the underlying real estate. It is management's opinion that the value of the properties
underlying these commitments is suÇcient that in the event of default, the impact would not be material to
LNC. These guarantees expire in 2004 through 2009.
Derivative Instruments
LNC maintains an overall risk management strategy that incorporates the use of derivative instruments
to minimize signiÑcant unplanned Öuctuations in earnings that are caused by interest rate risk, foreign
currency risk, equity risk, and credit risk. LNC assesses these risks by continually identifying and monitoring
changes in interest rate exposure, foreign currency exposure, equity market exposure, and credit exposure that
may adversely impact expected future cash Öows and by evaluating hedging opportunities. Derivative
instruments that are currently used as part of LNC's interest rate risk management strategy include interest
rate swaps, interest rate caps and swaptions. Derivative instruments that are used as part of LNC's foreign
currency risk management strategy include foreign currency swaps and foreign exchange forwards. Call
options on LNC stock are used as part of LNC's equity market risk management strategy. Call options on the
S&P 500 index were used for reinsurance programs and as a result of the acquisition by Swiss Re of LNC's
reinsurance operations in December 2001, this equity market risk management strategy was terminated. LNC
also uses credit default swaps as part of its credit risk management strategy.
By using derivative instruments, LNC is exposed to credit and market risk. If the counterparty fails to
perform, credit risk is equal to the extent of the fair value gain in the derivative. When the fair value of a
derivative contract is positive, this generally indicates that the counterparty owes LNC and, therefore, creates
a payment risk for LNC. When the fair value of a derivative contract is negative, LNC owes the counterparty
and therefore LNC has no payment risk. LNC minimizes the credit (or payment) risk in derivative
instruments by entering into transactions with high quality counterparties that are reviewed periodically by
126
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
LNC. LNC also maintains a policy of requiring that all derivative contracts be governed by an International
Swaps and Derivatives Association (""ISDA'') Master Agreement.
LNC and LNL are required to maintain minimum ratings as a matter of routine practice in negotiating
ISDA agreements. Under the majority of ISDA agreements and as a matter of policy, LNL has agreed to
maintain Ñnancial strength or claims-paying ratings above S&P BBB and Moody's Baa2. A downgrade below
these levels would result in termination of the derivatives contract at which time any amounts payable by
LNC would be dependent on the market value of the underlying derivative contract. In certain transactions,
LNC and the counterparty have entered into a collateral support agreement requiring LNC to post collateral
upon signiÑcant downgrade. LNC is required to maintain long-term senior debt ratings above S&P BBB and
Moody's Baa2. LNC also requires for its own protection minimum rating standards for counterparty credit
protection. LNL is required to maintain Ñnancial strength or claims-paying ratings above S&P A¿ and
Moody's A3 under certain ISDA agreements, which collectively do not represent material notional exposure.
LNC does not believe the inclusion of termination or collateralization events pose any material threat to its
liquidity position.
Market risk is the adverse eÅect that a change in interest rates, currency rates, implied volatility rates, or
a change in certain equity indexes or instruments has on the value of a Ñnancial instrument. LNC manages the
market risk by establishing and monitoring limits as to the types and degree of risk that may be undertaken.
LNC's derivative instruments are monitored by its risk management committee as part of that
committee's oversight of LNC's derivative activities. LNC's derivative instruments committee is responsible
for implementing various hedging strategies that are developed through its analysis of Ñnancial simulation
models and other internal and industry sources. The resulting hedging strategies are then incorporated into
LNC's overall risk management strategies.
127
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
LNC has derivative instruments with oÅ-balance-sheet risks whose notional or contract amounts exceed
the credit exposure. Outstanding derivative instruments with oÅ-balance-sheet risks, shown in notional or
contract amounts along with their carrying value and estimated fair values, are as follows:
December 31
Notional or Contract
Amounts
2002
2001
Assets (Liabilities)
Carrying
Value
2001
Fair
Value
2002
Carrying
Value
2002
(in millions)
Fair
Value
2001
Interest rate derivative instruments:
Interest rate cap agreements ÏÏÏÏÏÏÏÏÏ
Swaptions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest rate swap agreementsÏÏÏÏÏÏÏÏ
Total interest rate derivative
1,276.8
180.0
701.6
1,258.8
1,752.0
507.6
$ 4.7
Ì
75.1
$ 4.7
Ì
75.1
$ 0.6
0.1
18.1
$ 0.6
0.1
18.1
instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,158.4
3,518.4
79.8
79.8
18.8
18.8
Foreign currency derivative
instruments:
Foreign exchange forward contracts ÏÏÏ
Foreign currency swaps ÏÏÏÏÏÏÏÏÏÏÏÏÏ
43.0
61.5
67.0
94.6
(1.8)
(2.4)
(1.8)
(2.4)
(0.3)
5.8
(0.3)
5.8
Total foreign currency derivative
instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
104.5
161.6
(4.2)
(4.2)
Credit derivative instruments:
Credit default swapsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity indexed derivative instruments:
Call options (based on LNC Stock) ÏÏ
Embedded derivatives per FAS 133ÏÏÏ
26.0
29.0
1.3
Ì
1.1
Ì
0.9
7.4
2.3
0.9
7.4
2.3
5.5
0.9
20.5
0.4
5.5
0.9
20.5
0.4
Total derivative instruments* ÏÏÏÏÏÏ
2,290.2
3,710.1
$86.2
$86.2
$46.1
$46.1
* Total derivative instruments for 2001 are composed of $46.4 million and $(0.3) million on the consolidated
balance sheet in Derivative Instruments and Other Liabilities, respectively.
A reconciliation of the notional or contract amounts for the signiÑcant programs using derivative
agreements and contracts is as follows:
Interest Rate Cap
Agreements
2002
2001
December 31
Swaptions
Interest Rate Swap
Agreements
2002
2001
2002
2001
(in millions)
Balance at beginning-of-year ÏÏÏÏÏÏ
New contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Terminations and maturities ÏÏÏÏÏÏ
1,258.8
800.0
(782.0)
1,558.8
Ì
1,752.0
Ì
(300.0)
(1,572.0)
1,752.0
507.6
Ì 246.6
Ì (52.6)
708.2
172.5
(373.1)
Balance at end-of-year ÏÏÏÏÏÏÏÏÏ
1,276.8
1,258.8
180.0
1,752.0
701.6
507.6
128
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Treasury Locks
2001
2002
December 31
Foreign Exchange
Forward Contracts
2001
2002
(in millions)
Foreign Currency
Swap Agreements
2001
2002
Balance at beginning-of-year ÏÏÏÏÏÏÏÏ
New contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Terminations and maturities ÏÏÏÏÏÏÏÏ
Foreign exchange adjustment ÏÏÏÏÏÏÏ
Ì
100.0
(100.0)
Ì
Ì
200.0
(200.0)
Ì
67.0
138.6
(162.7)
0.1
124.3
523.1
(578.5)
(1.9)
94.6
Ì
(33.1)
Ì
Balance at end-of-year ÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
43.0
67.0
61.5
37.5
80.9
(23.8)
Ì
94.6
Credit Default
Swaps
2002
2001
December 31
Call Options
(Based on S&P)
2001
2002
(in millions)
Call Options
(Based on LNC
Stock)
2002
2001
Balance at beginning-of-year ÏÏÏÏÏÏÏÏ
New contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Terminations and maturities ÏÏÏÏÏÏÏÏ
Balance at end-of-year ÏÏÏÏÏÏÏÏÏÏÏ
29.0
Ì
(3.0)
26.0
29.0
Ì
Ì
29.0
Ì
Ì
Ì
Ì
183.3
141.9
(325.2)
Ì
1.1
0.3
(0.1)
1.3
0.6
0.6
(0.1)
1.1
December 31
Total Return
Swaps
2002
2001
(in millions)
Balance at beginning-of-year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
New contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Terminations and maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
Ì
190.0
Ì (190.0)
Balance at end-of-year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
Accounting for Derivative Instruments and Hedging Activities
As of December 31, 2002 and 2001, LNC had derivative instruments that were designated and qualiÑed
as cash Öow hedges and fair value hedges and derivative instruments that were not designated as hedging
instruments. LNC also had derivative instruments that were designated as hedges of a portion of its net
investment in a foreign operation at December 31, 2002. See Note 1 to the consolidated Ñnancial statements
for detailed discussion of the accounting treatment for derivative instruments. For the year ended Decem-
ber 31, 2002 and 2001, LNC recognized a net gain of $2.5 million after-tax and a net loss of $6.0 million after-
tax, respectively, in net income as a component of realized gains and losses on investments and derivative
instruments. These gains (losses) relate to the ineÅective portion of cash Öow hedges, the change in market
value for derivative instruments not designated as hedging instruments, and the gain (loss) on swap
terminations. For the year ended December 31, 2002 and 2001, LNC recognized a gain of $6.8 million after-
tax and $3.5 million after-tax, respectively, in OCI related to the change in market value on derivative
instruments that are designated and qualify as cash Öow hedges. In addition, for the year ended December 31,
2001, $3.5 million after-tax was reclassiÑed from unrealized gain (loss) on securities available-for-sale to
unrealized gain (loss) on derivative instruments, both in OCI. This reclassiÑcation relates to derivative
instruments that were marked to market through unrealized gain (loss) on securities available-for-sale prior to
the adoption of FAS 133.
129
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Derivative Instruments Designated in Cash Flow Hedges
Interest Rate Swap Agreements. LNC uses interest rate swap agreements to hedge its exposure to
Öoating rate bond coupon payments, replicating a Ñxed rate bond. An interest rate swap is a contractual
agreement to exchange payments at one or more times based on the actual or expected price level,
performance or value of one or more underlying interest rates. LNC is required to pay the counterparty the
stream of variable interest payments based on the coupon payments from the hedged bonds, and in turn,
receives a Ñxed payment from the counterparty, at a predetermined interest rate. The net receipts/payments
from these interest rate swaps are recorded in net investment income. Gains (losses) on interest rate swaps
hedging interest rate exposure on Öoating rate bond coupon payments are reclassiÑed from accumulated OCI
to net income as bond interest is accrued.
LNC also uses interest rate swap agreements to hedge its exposure to interest rate Öuctuations related to
the forecasted purchase of assets for certain investment portfolios. The gains (losses) resulting from the swap
agreements are recorded in OCI. The gains (losses) are reclassiÑed from accumulated OCI to earnings over
the life of the assets once the assets are purchased. As of December 31, 2002, there were no interest rate swaps
hedging forecasted asset purchases.
Foreign Currency Swaps. LNC uses foreign currency swaps, which are traded over-the-counter, to
hedge some of the foreign exchange risk of investments in Ñxed maturity securities denominated in foreign
currencies. A foreign currency swap is a contractual agreement to exchange the currencies of two diÅerent
countries at a speciÑed rate of exchange in the future. Gains (losses) on foreign currency swaps hedging
foreign exchange risk exposure on foreign currency bond coupon payments are reclassiÑed from accumulated
OCI to net income as bond interest is accrued. The foreign currency swaps expire in 2003 through 2006.
Call Options on LNC Stock. LNC uses call options on LNC stock to hedge the expected increase in
liabilities arising from stock appreciation rights (""SARs'') granted on LNC stock. Upon option expiration, the
payment, if any, is the increase in LNC's stock price over the strike price of the option applied to the number
of contracts. Call options hedging vested SARs are not eligible for hedge accounting and both are marked to
market through net income. Call options hedging nonvested SARs are eligible for hedge accounting and are
accounted for as cash Öow hedges of the forecasted vesting of SAR liabilities. To the extent that the cash Öow
hedges are eÅective, changes in the fair value of the call options are recorded in accumulated OCI. Amounts
recorded in OCI are reclassiÑed to net income upon vesting of SARs. LNC's call option positions will be
maintained until such time the SARs are either exercised or expire and LNC's SAR liabilities are
extinguished. The SARs expire Ñve years from the date of grant.
Treasury Lock. LNC used treasury lock agreements to hedge its exposure to variability in future semi-
annual interest payments, attributable to changes in the benchmark interest rate, related to the issuance of its
10-year $250 million senior debt in 2001 and its 5-year $250 million senior debt in 2002. A treasury lock is an
agreement that allows the holder to lock in a benchmark interest rate, so that if the benchmark interest rate
increases, the holder is entitled to receive a payment from the counterparty to the agreement equal to the
present value of the diÅerence in the benchmark interest rate at the determination date and the locked-in
benchmark interest rate. If the benchmark interest rate decreases, the holder must pay the counterparty to the
agreement an amount equal to the present value of the diÅerence in the benchmark interest rate at the
determination date and the locked-in benchmark interest rate. The receipt (payment) from the termination of
a treasury lock is recorded in OCI and is reclassiÑed from accumulated OCI to interest expense over the
coupon-paying period of the related senior debt.
Total Return Swaps. LNC used total return swaps to hedge its exposure to interest rate and spread risk
resulting from the forecasted sale of assets in a securitization of certain LNC mortgage loans in 2001. A total
return swap is an agreement that allows the holder to protect itself against loss of value by eÅectively
transferring the economic risk of asset ownership to the counterparty. The holder pays (receives) the total
130
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
return equal to interest plus capital gains or losses on a referenced asset and receives a Öoating rate of interest.
As of December 31, 2002, LNC did not have any open total return swaps.
Gains and losses on derivative contracts are reclassiÑed from accumulated OCI to current period
earnings. As of December 31, 2002, $13.6 million of the deferred net gains on derivative instruments
accumulated in OCI are expected to be reclassiÑed as earnings during the next twelve months. The amount
reclassed from OCI to earnings for derivative instruments was $15.9 million and $9.7 million for the year
ended December 31, 2002 and 2001, respectively. This reclassiÑcation is primarily due to the receipt of
interest payments associated with variable rate securities and forecasted purchases, payment of interest on
LNC's senior debt, the receipt of interest payments associated with foreign currency securities, and the
periodic vesting of SARs.
Derivative Instruments Designated in Fair Value Hedges
Interest Rate Swap Agreements. LNC uses interest rate swap agreements to hedge the risk of paying a
higher Ñxed rate interest on company-obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely junior subordinated debentures and on senior debt than would be paid on long-term debt
based on current interest rates in the marketplace. LNC is required to pay the counterparty a stream of
variable interest payments based on the referenced index, and in turn, receives a Ñxed payment from the
counterparty, at a predetermined interest rate. The net receipts/payments from these interest rate swaps are
recorded as an adjustment to the interest expense related to the debt being hedged. The changes in fair value
of the interest rate swap are reported in the consolidated statement of income in the period of change along
with the oÅsetting changes in fair value of the debt being hedged.
Derivative Instruments Designated in Net Investment in a Foreign Operation
Foreign Currency Forward Contract. LNC uses foreign currency forward contracts to hedge a portion
of its net investment in its foreign subsidiary, Lincoln National (UK) PLC. The foreign currency forward
contracts obligate LNC to deliver a speciÑed amount of currency at a future date at a speciÑed exchange rate.
All gains or losses on the foreign currency forward contracts are recorded in OCI and remain in accumulated
OCI until such time that Lincoln National (UK) PLC is sold or liquidated. The foreign currency forward
contracts outstanding at December 31, 2002 terminate in 2003.
All Other Derivative Instruments
LNC uses various other derivative instruments for risk management purposes that either do not qualify
for hedge accounting treatment or have not currently been qualiÑed by LNC for hedge accounting treatment.
The gain or loss related to the change in market value for these derivative instruments is recognized in current
income during the period of change (reported as realized gain (loss) on investments in the consolidated
statements of income except where otherwise noted below).
Interest Rate Cap Agreements. The interest rate cap agreements, which expire in 2003 through 2007,
entitle LNC to receive quarterly payments from the counterparties on speciÑed future reset dates, contingent
on future interest rates. For each cap, the amount of such quarterly payments, if any, is determined by the
excess of a market interest rate over a speciÑed cap rate multiplied by the notional amount divided by four.
The purpose of LNC's interest rate cap agreement program is to provide a level of protection for its annuity
line of business from the eÅect of rising interest rates. The interest rate cap agreements provide an economic
hedge of the annuity line of business. However, the interest rate cap agreements are not linked to assets and
liabilities on the balance sheet that meet the signiÑcantly increased level of speciÑcity required under
FAS 133. Therefore, the interest rate cap agreements do not qualify for hedge accounting under FAS 133.
131
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Swaptions. Swaptions, which expire in 2003, entitle LNC to receive settlement payments from the
counterparties on speciÑed expiration dates, contingent on future interest rates. For each swaption, the amount
of such settlement payments, if any, is determined by the present value of the diÅerence between the Ñxed rate
on a market rate swap and the strike rate multiplied by the notional amount. The purpose of LNC's swaption
program is to provide a level of protection for its annuity line of business from the eÅect of rising interest rates.
The swaptions provide an economic hedge of the annuity line of business. However, the swaptions are not
linked to speciÑc assets and liabilities on the balance sheet that meet the signiÑcantly increased level of
speciÑcity required under FAS 133. Therefore, the swaptions do not qualify for hedge accounting under
FAS 133.
Foreign Exchange Forwards. LNC's foreign aÇliate, Lincoln UK, used foreign exchange forward
contracts, which are traded over-the-counter, to hedge short-term debt issuance in currencies other than the
British Pound until Lincoln UK terminated their commercial paper program in the second quarter of 2002.
The foreign currency forward contracts obligate LNC to deliver a speciÑed amount of currency at a future
date at a speciÑed exchange rate. The foreign exchange forward contracts were marked to market through
interest and debt expense within the income statement.
Credit Default Swaps. LNC uses credit default swaps which expire in 2003 through 2006 to hedge
against a drop in bond prices due to credit concerns of certain bond issuers. A credit swap allows LNC to put
the bond back to the counterparty at par upon a credit event by the bond issuer. A credit event is deÑned as
bankruptcy, failure to pay, or obligation acceleration. LNC has not currently qualiÑed credit default swaps for
hedge accounting under FAS 133 as amounts are insigniÑcant.
Call Options on S&P 500 Index. Prior to Swiss Re's acquisition of LNC's reinsurance operation in
December 2001, LNC used S&P 500 index call options to oÅset the increase in its liabilities resulting from
certain reinsurance agreements which guaranteed payment of the appreciation of the S&P 500 index on
certain underlying annuity products. The call options provided LNC with settlement payments from the
counterparties on speciÑed expiration dates. The payment, if any, was the percentage increase in the index,
over the strike price deÑned in the contract, applied to the notional amount. The S&P 500 call options
provided an economic hedge of the reinsurance liabilities, but the hedging relationship was not eligible for
hedge accounting treatment under FAS 133.
Call Options on LNC Stock. As discussed previously in the Cash Flow Hedges section, LNC uses call
options on LNC stock to hedge the expected increase in liabilities arising from SARs granted on LNC stock.
Call options hedging vested SARs are not eligible for hedge accounting treatment under FAS 133.
Derivative Instrument Embedded in Deferred Compensation Plan. LNC has certain deferred compen-
sation plans that have embedded derivative instruments. The liability related to these plans varies based on the
investment options selected by the participants. The liability related to certain investment options selected by
the participants is marked to market through net income. This derivative instrument is not eligible for hedge
accounting treatment under FAS 133.
Call Options on Bifurcated Remarketable Put Bonds. LNC owns various debt securities that contain
call options attached by an investment banker before the sale to the investor. These freestanding call options
are exercisable by a party other than the issuer of the debt security to which they are attached and are
accounted for separately from the debt security. LNC has not currently qualiÑed call options bifurcated from
remarketable put bonds for hedge accounting treatment as amounts are insigniÑcant.
LNC has used certain other derivative instruments in the past for hedging purposes. Although other
derivative instruments may have been used in the past, any derivative type that was not outstanding from
January 1, 2001 through December 31, 2002 is not discussed in this disclosure. Other derivative instruments
LNC has used include spread-lock agreements, Ñnancial futures and put options. At December 31, 2002, there
are no outstanding positions in these derivative instruments.
132
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Additional Derivative Information.
Income and (expenses) for the agreements and contracts described
above amounted to $23.0 million, $3.5 million and $(7.3) million in 2002, 2001 and 2000, respectively. The
increase in income for 2002 was primarily because of payments received on interest rate swaps. The increase in
2001 was primarily because under FAS 133 premiums for caps and swaptions are no longer amortized.
LNC is exposed to credit loss in the event of nonperformance by counterparties on various derivative
contracts. However, LNC does not anticipate nonperformance by any of the counterparties. The credit risk
associated with such agreements is minimized by purchasing such agreements from Ñnancial institutions with
long-standing, superior performance records. The amount of such exposure is essentially the net replacement
cost or market value less collateral held for such agreements with each counterparty if the net market value is
in LNC's favor. At December 31, 2002, the exposure was $85.8 million.
8. Fair Value of Financial Instruments
The following discussion outlines the methodologies and assumptions used to determine the estimated
fair value of LNC's Ñnancial instruments. Considerable judgment is required to develop these fair values.
Accordingly, the estimates shown are not necessarily indicative of the amounts that would be realized in a
one-time, current market exchange of all of LNC's Ñnancial instruments.
Fixed Maturity and Equity Securities. Fair values for Ñxed maturity securities are based on quoted
market prices, where available. For Ñxed maturity securities not actively traded, fair values are estimated using
values obtained from independent pricing services. In the case of private placements, fair values are estimated
by discounting expected future cash Öows using a current market rate applicable to the coupon rate, credit
quality and maturity of the investments. The fair values for equity securities are based on quoted market
prices.
Mortgage Loans on Real Estate. The estimated fair value of mortgage loans on real estate was
established using a discounted cash Öow method based on credit rating, maturity and future income. The
ratings for mortgages in good standing are based on property type, location, market conditions, occupancy,
debt service coverage, loan to value, caliber of tenancy, borrower and payment record. Fair values for impaired
mortgage loans are based on: 1) the present value of expected future cash Öows discounted at the loan's
eÅective interest rate; 2) the loan's market price or; 3) the fair value of the collateral if the loan is collateral
dependent.
Policy Loans. The estimated fair value of investments in policy loans was calculated on a composite
discounted cash Öow basis using Treasury interest rates consistent with the maturity durations assumed. These
durations were based on historical experience.
Derivative Instruments. LNC employs several diÅerent methods for determining the fair value of its
derivative instruments. Fair values for these contracts are based on current settlement values. These values are
based on: 1) quoted market prices for foreign currency exchange contracts and Ñnancial futures contracts;
2) industry standard models that are commercially available for interest rate cap agreements, swaptions,
spread-lock agreements, interest rate swaps, commodity swaps, credit default swaps, total return swaps and put
options; 3) Monte Carlo techniques for the equity call options on LNC stock. These techniques project cash
Öows of the derivatives using current and implied future market conditions. The cash Öows are then present
valued to arrive at the derivatives' current fair market values; and 4) Black-Scholes pricing methodology for
standard European equity call options.
Other Investments, and Cash and Invested Cash. The carrying value for assets classiÑed as other
investments, and cash and invested cash in the accompanying balance sheets approximates their fair value.
Other investments include limited partnership investments which are accounted for using the equity method
of accounting.
133
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Investment Type Insurance Contracts. The balance sheet captions, ""Insurance Policy and Claims
Reserves'' and ""Contractholder Funds,'' include investment type insurance contracts (i.e. deposit contracts
and certain guaranteed interest contracts). The fair values for the deposit contracts and certain guaranteed
interest contracts are based on their approximate surrender values. The fair values for the remaining
guaranteed interest and similar contracts are estimated using discounted cash Öow calculations. These
calculations are based on interest rates currently oÅered on similar contracts with maturities that are
consistent with those remaining for the contracts being valued.
The remainder of the balance sheet captions, ""Insurance Policy and Claims Reserves'' and ""Con-
tractholder Funds'' that do not Ñt the deÑnition of ""investment type insurance contracts'' are considered
insurance contracts. Fair value disclosures are not required for these insurance contracts and have not been
determined by LNC. It is LNC's position that the disclosure of the fair value of these insurance contracts is
important because readers of these Ñnancial statements could draw inappropriate conclusions about LNC's
shareholders' equity determined on a fair value basis. It could be misleading if only the fair value of assets and
liabilities deÑned as Ñnancial instruments are disclosed. LNC and other companies in the insurance industry
are monitoring the related actions of the various rule-making bodies and attempting to determine an
appropriate methodology for estimating and disclosing the ""fair value'' of their insurance contract liabilities.
Short-term and Long-term Debt. Fair values for long-term debt issues are based on quoted market
prices or estimated using discounted cash Öow analysis based on LNC's current incremental borrowing rate for
similar types of borrowing arrangements where quoted prices are not available. For short-term debt, the
carrying value approximates fair value.
Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely
Junior Subordinated Debentures. Fair values for company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior subordinated debentures are based on quoted market prices.
Guarantees. LNC's guarantees include guarantees related to industrial revenue bonds, real estate
partnerships and mortgage loan pass-through certiÑcates. Based on historical performance where repurchases
have been negligible and the current status of the debt, none of the loans are delinquent and the fair value
liability for the guarantees related to the industrial revenue bonds, real estate partnerships and mortgage loan
pass-through certiÑcates is insigniÑcant.
Investment Commitments. Fair values for commitments to make investments in Ñxed maturity
securities (primarily private placements), mortgage loans on real estate and real estate are based on the
diÅerence between the value of the committed investments as of the date of the accompanying balance sheets
and the commitment date. These estimates take into account changes in interest rates, the counterparties'
credit standing and the remaining terms of the commitments.
Separate Accounts. Assets held in separate accounts are reported in the accompanying consolidated
balance sheets at fair value. The related liabilities are also reported at fair value in amounts equal to the
separate account assets.
134
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The carrying values and estimated fair values of LNC's Ñnancial instruments are as follows:
December 31
Carrying
Value
2002
Fair
Value
2002
Carrying
Value
2001
Fair
Value
2001
(in millions)
$ 32,767.5
337.2
4,205.5
1,945.6
86.2
378.1
1,690.5
$ 32,767.5
337.2
4,678.8
2,117.3
86.2
378.1
1,690.5
$ 28,345.7
470.5
4,535.6
1,939.7
46.1*
507.4
3,095.5
$ 28,345.7
470.5
4,691.0
2,098.1
46.1*
507.4
3,095.5
Assets (liabilities):
Fixed maturities securities ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Mortgage loans on real estateÏÏÏÏÏÏÏÏÏÏÏ
Policy loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivatives Instruments*ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and invested cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment type insurance contracts:
Deposit contracts and certain
guaranteed interest contracts ÏÏÏÏÏÏÏ
(20,016.7)
(20,250.1)
(18,142.7)
(18,183.5)
Remaining guaranteed interest and
similar contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Company-obligated mandatorily
redeemable preferred securities of
subsidiary trusts holding solely junior
subordinated debentures ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Guarantees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(120.5)
(153.0)
(1,119.2)
(128.2)
(153.0)
(1,186.7)
(205.2)
(350.2)
(861.7)
(202.6)
(350.2)
(870.5)
(392.7)
(0.4)
Ì
(387.9)
Ì
0.9
(474.7)
(0.3)
Ì
(478.3)
Ì
(5.3)
* Total derivative instruments for 2001 are composed of $46.4 million and $(0.3) million on the consolidated
balance sheet in Derivative Instruments and Other Liabilities, respectively.
As of December 31, 2002 and 2001, the carrying value of the deposit contracts and certain guaranteed
contracts is net of deferred acquisition costs of $486.0 million and $338.9 million, respectively, excluding
adjustments for deferred acquisition costs applicable to changes in fair value of securities. The carrying values
of these contracts are stated net of deferred acquisition costs so that they are comparable with the fair value
basis.
9. Segment Information
LNC has four business segments: Lincoln Retirement (formerly known as the Annuities segment), Life
Insurance, Investment Management and Lincoln UK. Prior to the fourth quarter of 2001, LNC had a
Reinsurance segment. LNC's reinsurance business was acquired by Swiss Re in December 2001. As the
majority of the business acquired by Swiss Re was via indemnity reinsurance agreements, LNC is not relieved
of its legal liability to the ceding companies for this business. This means that the liabilities and obligations
associated with the reinsured contracts remain on the balance sheets of LNC with a corresponding reinsurance
receivable from Swiss Re. In addition, the gain resulting from the indemnity reinsurance portion of the
transaction was deferred and is being amortized into earnings at the rate that earnings on the reinsured
business are expected to emerge over a period of 15 years. The ongoing management of the indemnity
reinsurance contracts and the reporting of the deferred gain is within LNC's Other Operations. Given the
lengthy period of time over which LNC will continue to amortize the deferred gain, and the fact that related
assets and liabilities will continue to be reported on LNC's Ñnancial statements, the historical results for the
135
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Reinsurance segment prior to the close of the transaction with Swiss Re are not reÖected in discontinued
operations, but as a separate line in Other Operations. The results for 2001 related to the former Reinsurance
segment are for the eleven months ended November 30, 2001.
The Lincoln Retirement segment, headquartered in Fort Wayne, Indiana, provides tax-deferred invest-
ment growth and lifetime income opportunities for its clients through the manufacture and sale of Ñxed and
variable annuities. Through a broad-based distribution network, Lincoln Retirement provides an array of
annuity products to individuals and employer-sponsored groups in all 50 states of the United States. Lincoln
Retirement distributes some of its products through LNC's wholesaling unit, Lincoln Financial Distributors
(""LFD''), as well as LNC's retail unit, Lincoln Financial Advisors (""LFA''). In addition, group Ñxed and
variable annuity products and the Alliance program are distributed to the employer-sponsored retirement
market through Lincoln Retirement's Fringe BeneÑt Division dedicated sales force.
The Life Insurance segment, headquartered in Hartford, Connecticut, focuses on the creation and
protection of wealth for its clients through the manufacture and sale of life insurance products throughout the
United States. The Life Insurance segment oÅers universal life, variable universal life, interest-sensitive whole
life, term life and corporate owned life insurance. The segment also oÅers linked-beneÑt life insurance (a
universal life product with a long-term care beneÑt). A majority of the Life Insurance segment's products are
currently distributed through LFD and LFA. In the third quarter 2002, the Life Insurance segment entered
into a marketing agreement to distribute life insurance products through the M Financial Group, a well-
respected and successful nationwide organization of independent Ñrms serving the needs of aÉuent individuals
and corporations.
The Investment Management segment, headquartered in Philadelphia, Pennsylvania, oÅers a variety of
asset management services to retail and institutional clients throughout the United States and certain foreign
countries. Its product oÅerings include mutual funds and managed accounts. It also provides investment
management and account administration services for variable annuity products, and 401(k) plans, ""529''
college savings plans, pension, endowment, trust, and other institutional accounts. Retail products are
primarily marketed by LFD through Ñnancial intermediaries including LFA. Institutional products, including
large case 401(k) plans, are marketed by a separate sales force within Delaware working closely with manager
selection consultants.
Lincoln UK is headquartered in Barnwood, Gloucester, England, and is licensed to do business
throughout the United Kingdom (""UK''). Although Lincoln UK transferred its sales force to Inter-Alliance
Group PLC in the third quarter of 2000, it continues to manage, administer and accept new deposits on its
current block of business and, as required by UK regulation, accept new business for certain products. Lincoln
UK's product portfolio principally consists of unit-linked life and pension products, which are similar to
U.S. produced variable life and annuity products.
LNC reports operations not directly related to the business segments and unallocated corporate items
(i.e., corporate investment income, interest expense on corporate debt, unallocated overhead expenses, and the
operations of LFA and LFD) in ""Other Operations''. As noted above, the Ñnancial results of the former
Reinsurance segment were moved to Other Operations upon the close of the transaction with Swiss Re in
December 2001.
136
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Financial data by segment for 2000 through 2002 is as follows:
2002
Year Ended December 31
2001
(in millions)
2000
Revenue, Excluding Net Investment Income and Realized
Gain (Loss) on Investments and Derivative Instruments and
Sale of Subsidiaries:
Lincoln Retirement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Life Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment Management(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lincoln UK ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidating adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net Investment Income:
Lincoln Retirement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Life Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment ManagementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lincoln UK ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidating adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 551.6
982.6
354.2
213.2
405.1
(199.8)
$2,306.9
$1,433.9
899.1
50.5
62.1
168.7
(6.0)
$ 663.1
987.3
383.8
213.4
1,741.8
(189.4)
$3,800.0
$1,370.0
910.2
53.6
64.8
292.1
(11.1)
$ 745.4
964.9
436.5
360.3
1,843.6
(222.4)
$4,128.3
$1,393.5
871.5
57.7
70.3
332.9
21.2
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,608.3
$2,679.6
$2,747.1
Realized Gain (Loss) on Investments and Derivative
Instruments and Sale of Subsidiaries:
Lincoln Retirement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Life Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment ManagementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lincoln UK ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidating adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (197.8)
(96.7)
(5.4)
1.9
15.1
3.2
$ (64.8)
(56.9)
(3.7)
12.4
9.8
1.6
$
(5.2)
(17.4)
(3.9)
3.2
(5.0)
Ì
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (279.7)
$ (101.6)
$ (28.3)
Income (Loss) before Federal Income Taxes and Cumulative
EÅect of Accounting Changes:
Lincoln Retirement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Life Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment ManagementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lincoln UK ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidating adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
0.8
298.7
31.4
36.9
(369.4)
3.2
$ 312.8
369.8
19.1
61.6
(0.8)
1.6
$ 438.0
392.7
58.2
(23.7)
(28.9)
Ì
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
1.6
$ 764.1
$ 836.3
137
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
2002
Year Ended December 31
2001
(in millions)
2000
Income Tax Expense (BeneÑt):
Lincoln RetirementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Life Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lincoln UK ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other OperationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidating adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (57.0)
89.7
5.8
(3.1)
(126.5)
1.1
$ 36.3
131.2
7.2
(7.3)
(9.7)
0.6
$ 79.4
143.4
21.2
(10.5)
(18.6)
Ì
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (90.0)
$158.3
$214.9
Cumulative EÅect of Accounting Changes:
Lincoln RetirementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Life Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lincoln UK ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other OperationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidating adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net Income (Loss):
Lincoln RetirementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Life Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lincoln UK ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Operations (includes consolidating adjustments)ÏÏÏÏÏÏÏÏÏÏÏ
Consolidating adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
91.6
Ì $ (7.3)
(5.5)
Ì
(0.1)
Ì
Ì
Ì
(2.7)
Ì
Ì
Ì
Ì $(15.6)
Ì
Ì
Ì
Ì
Ì
Ì
Ì
$
57.8
209.0
25.6
40.0
(242.9)
2.1
$269.2
233.1
11.8
68.9
6.1
1.1
$590.2
2002
December 31
2001
(in millions)
$358.6
249.3
37.0
(13.2)
(10.3)
Ì
$621.4
2000
Assets:
Lincoln Retirement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Life Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment ManagementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lincoln UK ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidating adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$52,896.4
19,591.6
1,461.4
7,327.1
13,951.5
(2,094.6)
$56,888.2
18,409.7
1,460.5
7,788.8
15,582.7
(2,128.6)
$60,267.1
17,939.1
1,439.0
8,763.7
13,495.1
(2,059.9)
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$93,133.4
$98,001.3
$99,844.1
(1) Revenues for the Investment Management segment include inter-segment revenues for asset manage-
ment services provided to the other segments of LNC. These inter-segment revenues totaled $83.8 mil-
lion, $87.5 million and $88.9 million for 2002, 2001 and 2000, respectively.
During 2000, management initiated a plan to change the operational and management reporting structure
of LNC's wholesale distribution organization. Beginning with the quarter ended March 31, 2001, LFD, the
wholesaling arm of LNC's distribution network, was reported within Other Operations. Previously, LNC's
wholesaling eÅorts were conducted separately within the Lincoln Retirement, Life Insurance and Investment
138
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Management segments. Earlier periods were restated to aid comparability of segment reporting between
periods.
Also, in the fourth quarter of 2000, a decision was made to change the management reporting and
operational responsibilities for First Penn-PaciÑc's Schaumburg, Illinois annuities business. Beginning with
the quarter ended March 31, 2001, the Ñnancial reporting for First Penn-PaciÑc's annuities business was
included in the Lincoln Retirement segment. This business was previously managed and reported in the Life
Insurance segment. Earlier periods were restated to aid the comparability of segment reporting between
periods.
Prior to 2001, the management of general account investments performed by the Investment Manage-
ment segment for LNC's U.S. based insurance operations was generally priced on an ""at cost'' basis. EÅective
January 1, 2001, substantially all of these internal investment management services were priced on an arms-
length ""proÑt'' basis. Under this new internal pricing standard, the Investment Management segment receives
approximately 18.5 basis points on certain assets under management. The change in pricing of internal
investment management services impacted segment reporting results for the Lincoln Retirement, Life
Insurance, Reinsurance and Investment Management segments, along with Other Operations. Earlier periods
were restated to aid the comparability of segment reporting between periods.
Most of LNC's foreign operations are conducted by Lincoln UK, a UK company. The data for this
company is shown above under the Lincoln UK segment heading. In addition, the Investment Management
segment has non-U.S. operations. Foreign intracompany revenues are not signiÑcant. Financial data for
Lincoln UK and the other non-U.S. units* is as follows:
2002
Year Ended December 31
2001
(in millions)
2000
Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net Income (Loss) before Federal Income Taxes ÏÏÏÏÏÏÏÏÏÏÏ
Income Tax Expense (BeneÑt) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 326.8
50.2
(23.8)
$ 392.8
111.9
9.5
$ 532.0
(7.1)
(10.2)
Net Income (Loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
74.0
$ 102.4
$
3.1
Assets (at end of year) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$7,394.1
$7,889.7
$8,896.8
* The Ñnancial data for other non-U.S. units includes the activity of several former reinsurance subsidiaries
for the year ended December 31, 2000 and for the eleven months ended November 30, 2001. These entities
were sold to Swiss Re in December 2001.
10. Shareholders' Equity
LNC's common and series A preferred stock is without par value.
All of the issued and outstanding series A preferred stock is $3 cumulative convertible and is convertible
at any time into shares of common stock. The conversion rate is sixteen shares of common stock for each share
of series A preferred stock, subject to adjustment for certain events. The series A preferred stock is
redeemable at the option of LNC at $80 per share plus accrued and unpaid dividends. Outstanding series A
preferred stock has full voting rights, subject to adjustment if LNC is in default as to the payment of
dividends. If LNC is liquidated or dissolved, holders of series A preferred stock will be entitled to payments of
$80 per share. The diÅerence between the aggregate preference on liquidation value and the Ñnancial
statement balance for the series A preferred stock was $0.9 million at December 31, 2002.
LNC has outstanding one common share purchase (""Right'') on each outstanding share of LNC's
common stock. A Right will also be issued with each share of LNC's common stock that is issued before the
139
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Rights become exercisable or expire. If a person or group announces an oÅer that would result in beneÑcial
ownership of 15% or more of LNC's common stock, the Rights will become exercisable and each Right will
entitle its holder to purchase one share of LNC's common stock for $100. Upon the acquisition of 15% or
more of LNC's common stock, each holder of a Right (other than the person acquiring the 15% or more) will
have the right to acquire the number of shares of LNC common stock that have a market value of two times
the exercise price of the Right. If LNC is acquired in a business combination transaction in which LNC does
not survive, each holder of a Right (other than the acquiring person) will have the right to acquire common
stock of the acquiring person having a market value of two times the exercise price of the Right. LNC can
redeem each Right for one cent at any time prior to the tenth day after a person or group has acquired 15% or
more of LNC's common stock. The Rights expire on November 14, 2006. As of December 31, 2002, there
were 177,307,999 Rights outstanding.
During 2002, 2001 and 2000, LNC purchased and retired 12,088,100; 11,278,022 and 6,222,581 shares,
respectively, of its common stock at a total cost of $474.5 million, $503.7 million and $210.0 million,
respectively. The common stock account was reduced for these purchases in proportion to the percentage of
shares acquired. The remainder of the purchase price was charged to retained earnings.
Per share amounts for net income are shown on the income statement using 1) an earnings per common
share basic calculation and 2) an earnings per common share-assuming dilution calculation. A reconciliation
of the factors used in the two calculations are as follows:
Numerator: ®millions©
Income before cumulative eÅect of accounting
changes as used in basic calculation ÏÏÏÏÏÏÏÏÏ
Cumulative eÅect of accounting changes as used
in basic calculation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends on convertible preferred stockÏÏÏÏÏÏÏÏ
Denominator: ®number of shares©
Weighted-average shares, as used in basic
calculationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Shares to cover conversion of preferred stockÏÏÏÏ
Shares to cover non-vested stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Average stock options outstanding during the
2002
Year Ended December 31
2001
2000
$
$
91.5
$
605.6
$
621.3
Ì
91.5
0.1
91.6
$
(15.5)
590.1
0.1
590.2
$
Ì
621.3
0.1
621.4
182,664,850
336,734
70,697
188,624,613
389,024
31,160
191,257,414
438,391
10,673
periodÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
11,895,565
16,624,905
13,652,143
Assumed acquisition of shares with assumed
proceeds and beneÑts from exercising stock
options (at average market price for the year)
Average deferred compensation shares ÏÏÏÏÏÏÏÏÏ
Weighted-average shares, as used in diluted
(10,230,937)
859,402
(13,163,012)
796,575
(11,102,355)
664,551
calculationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
185,596,311
193,303,265
194,920,817
LNC has stock options outstanding which were issued at prices that are above the current average market
price of LNC common stock. In the event the average market price of LNC's common stock exceeds the issue
price of stock options, such options would be dilutive to LNC's earnings per share and will be shown in the
table above. During 1999, LNC changed its deferred compensation plans so that participants selecting LNC
140
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
stock for measuring the investment return attributable to their deferral amounts will be paid out in LNC stock.
The obligation to satisfy these deferred compensation plan liabilities is dilutive and is shown in the table above.
Details underlying the balance sheet caption ""Net Unrealized Gain (Loss) on Securities Available-for-
sale,'' are as follows:
December 31
2002
2001
(in millions)
Fair value of securities available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cost of securities available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$33,104.7
31,437.6
$28,816.2
28,400.4
Unrealized gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustments to deferred acquisition costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amounts required to satisfy policyholder commitments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign currency exchange rate adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income credits (taxes) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,667.1
(418.4)
(76.4)
9.8
(428.8)
415.8
(83.1)
(38.8)
Ì
(98.2)
Net unrealized gain (loss) on securities available-for-sale ÏÏÏÏÏÏÏÏÏÏÏ
$
753.3
$
195.7
Adjustments to deferred acquisition costs and amounts required to satisfy policyholder commitments are
netted against the Deferred Acquisition Costs asset line and included within the Insurance Policy and Claim
Reserves line on the balance sheet, respectively.
Details underlying the change in ""Net Unrealized Gain (Loss) on Securities Available-for-Sale, Net of
ReclassiÑcation Adjustment'' shown on the Consolidated Statements of Shareholder's Equity are as follows:
Year Ended December 31
2001
2000
2002
Unrealized gains on securities available-for-sale arising during the
year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$802.2
$345.4
$317.4
Less: reclassiÑcation adjustment for gains (losses) included in net
income(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: Federal income tax expense (beneÑt) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(72.1)
316.7
43.8
117.9
(60.9)
(99.4)
Net unrealized gain (loss) on securities available-for-sale, net of
reclassiÑcation and Federal income tax expense (beneÑt) ÏÏÏÏÏÏ
$557.6
$183.7
$477.7
(1) The reclassiÑcation adjustment for gains (losses) does not include the impact of associated adjustments
to deferred acquisition costs and amounts required to satisfy policyholder commitments.
The ""Net Unrealized Gain (Loss) on Derivative Instruments'' component of other comprehensive
income shown on the Consolidated Statements of Shareholders' Equity is net of Federal income tax expense
of $1.2 million and $12.6 million ($9.5 million of the tax expense relates to the transition adjustment recorded
in the Ñrst quarter of 2001 for the adoption of FAS 133) for 2002 and 2001, respectively, and net of
adjustments to deferred amortization costs of $1.6 million and $23.8 million ($18.3 million relates to the
transition adjustment recorded for the adoption of FAS 133) for 2002 and 2001, respectively.
The ""Foreign Currency Translation'' component of other comprehensive income shown on the Consoli-
dated Statements of Shareholders' Equity is net of Federal income tax expense (beneÑt) of $31.7 million,
$(16.1) million and $(4.4) million for 2002, 2001 and 2000, respectively.
11. Acquisitions and Divestitures
On August 30, 2002, LNC acquired The Administrative Management Group, Inc. (""AMG''), an
employee beneÑts record keeping Ñrm for $21.6 million in cash. Contingent payments up to an additional
141
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
$14 million will be paid over a period of 4 years (2003-2006) if certain criteria are met. Any such contingent
payments will be expensed as incurred. AMG, a strategic partner of LNC's Retirement segment for several
years, provides record keeping services for the Lincoln Alliance Program along with approximately 400 other
clients nationwide. As of December 31, 2002, the application of purchase accounting to this acquisition
resulted in goodwill of $20.2 million.
On December 7, 2001, Swiss Re acquired LNC's reinsurance operation for $2.0 billion. In addition, LNC
retained the capital supporting the reinsurance operation. After giving eÅect to the increased levels of capital
needed within the Life Insurance and Lincoln Retirement segments that result from the change in the ongoing
mix of business under LNC's internal capital allocation models, the disposition of LNC's reinsurance
operation freed-up approximately $100 million of retained capital.
The transaction structure involved a series of indemnity reinsurance transactions combined with the sale
of certain stock companies that comprised LNC's reinsurance operation. At the time of closing, an immediate
gain of $15.0 million after-tax was recognized on the sale of the stock companies. A gain of $723.1 million
after-tax ($1.1 billion pre-tax) relating to the indemnity reinsurance agreements was reported at the time of
closing. This gain was recorded as a deferred gain on LNC's consolidated balance sheet, in accordance with
the requirements of FAS 113, and is being amortized into earnings at the rate that earnings on the reinsured
business are expected to emerge, over a period of 15 years.
EÅective with the closing of the transaction, the former Reinsurance segment's historical results were
moved into ""Other Operations.'' During December 2001 LNC recognized in Other Operations $5.0 million
($7.9 million pre-tax) of deferred gain amortization. In addition, in December 2001, LNC recognized
$7.9 million ($12.5 million pre-tax) of accelerated deferred gain amortization relating to the fact that certain
Canadian indemnity reinsurance contracts were novated after the sale, but prior to December 31, 2001.
On October 29, 2002 LNC and Swiss Re settled disputed matters totaling about $770 million that had
arisen in connection with the Ñnal closing balance sheets associated with Swiss Re's acquisition of LNC's
reinsurance operations. The settlement provided for a payment by LNC of $195 million to Swiss Re, which
was recorded by LNC as a reduction in deferred gain. As a result of additional information made available to
LNC following the settlement with Swiss Re in the fourth quarter of 2002, LNC recorded a further reduction
in the deferred gain of $51.6 million after-tax ($79.4 million pre-tax), as well as a $9.4 million after-tax
($8.3 million pre-tax) reduction in the gain on the sale of subsidiaries.
As part of the dispute settlement, LNC also paid $100 million to Swiss Re in satisfaction of LNC's
$100 million indemniÑcation obligation with respect to personal accident business. As a result of this payment,
LNC has no further underwriting risk with respect to the reinsurance business sold. However, because LNC
has not been relieved of its legal liabilities to the underlying ceding companies with respect to the portion of
the business reinsured by Swiss Re, under FAS 113 the reserves for the underlying reinsurance contracts as
well as a corresponding reinsurance recoverable from Swiss Re will continue to be carried on LNC's balance
sheet during the run-oÅ period of the underlying reinsurance business. This is particularly relevant in the case
of the exited personal accident and disability income reinsurance lines of business where the underlying
reserves are based upon various estimates that are subject to considerable uncertainty.
As a result of developments and information obtained during 2002 relating to personal accident and
disability income matters, LNC increased these exited business reserves by $198.5 million after-tax
($305.4 million pre-tax). After giving eÅect to LNC's $100 million indemniÑcation obligation, LNC recorded
a $133.5 after-tax ($205.4 million pre-tax) increase in reinsurance recoverable from Swiss Re with a
corresponding increase in the deferred gain.
The combined eÅects of the 2002 settlement of disputed matters and exited business reserve increases
reduced the $723.1 million after-tax ($1.1 billion pre-tax) deferred gain reported at closing by $44.9 million
after-tax ($69 million pre-tax). During 2002, LNC amortized $47 million after-tax ($72.4 million pre-tax) of
142
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
the deferred gain. An additional $1.3 million after-tax ($2 million pre-tax) of deferred gain was recognized,
due to a novation of certain Canadian business during 2002.
Also during 2002, LNC exercised a contractual right to ""put'' its interest in a subsidiary company
containing LNC's disability income reinsurance business to Swiss Re for $10 million. The $10 million sale
price was approximately equal to LNC's book basis in the subsidiary.
Through December 31, 2002, of the original $2 billion in proceeds received by LNC, approximately
$0.56 billion was paid for taxes and deal expenses and approximately $1.0 billion was used to repurchase stock,
reduce debt, and support holding company cash Öow needs. LNC also paid $195 million to Swiss Re to settle
the closing balance sheet disputed matters and $100 million to satisfy LNC's personal accident business
indemniÑcation obligations. The remaining proceeds have been dedicated to the ongoing capital needs of The
Lincoln National Life Insurance Company.
Because of ongoing uncertainty related to personal accident and disability income businesses, the reserves
related to these exited business lines carried on LNC's balance sheet at December 31, 2002 may ultimately
prove to be either excessive or deÑcient. For instance, in the event that future developments indicate that these
reserves should be increased, under FAS 113 LNC would record a current period non-cash charge to record
the increase in reserves. Because Swiss Re is responsible for paying the underlying claims to the ceding
companies, LNC would record a corresponding increase in reinsurance recoverable from Swiss Re. However,
FAS 113 does not permit LNC to take the full beneÑt in earnings for the recording of the increase in the
reinsurance recoverable in the period of the change. Rather, LNC would increase the deferred gain recognized
upon the closing of the indemnity reinsurance transaction with Swiss Re and would report a cumulative
amortization ""catch-up'' adjustment to the deferred gain balance as increased earnings recognized in the
period of change. Any amount of additional increase to the deferred gain above the cumulative amortization
""catch-up'' adjustment must continue to be deferred and will be amortized into income in future periods over
the remaining period of expected run-oÅ of the underlying business. No cash would be transferred between
LNC and Swiss Re as a result of these developments.
Accordingly, even though LNC has no continuing underwriting risk, and no cash would be transferred
between LNC and Swiss Re, in the event that future developments indicate LNC's December 31,
2002 personal accident or disability income reserves are deÑcient or redundant, FAS 113 requires LNC to
adjust earnings in the period of change, with only a partial oÅset to earnings for the cumulative deferred gain
amortization adjustment in the period of change. The remaining amount of increased gain would be amortized
into earnings over the remaining run-oÅ period of the underlying business.
As noted above, eÅective with the closing of the transaction, the Reinsurance segment's results for the
eleven months ended November 30, 2001 and the year ended December 31, 2000 were moved into ""Other
Operations.''
143
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Earnings from LNC's reinsurance operations were as follows:
Year Ended December 31
Eleven Months Ended
November 30, 2001
Year Ended
December 31, 2000
(in millions)
Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BeneÑts and ExpensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,681.3
1,505.3
$1,769.3
1,592.2
Income before Federal Income Taxes and Cumulative
EÅect of Accounting Changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Federal Income Taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income before Cumulative EÅect of Accounting
Changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative EÅect of Accounting Changes (after-tax)ÏÏÏÏ
176.0
59.0
117.0
(2.4)
177.1
54.8
122.3
Ì
Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 114.6
$ 122.3
12. Restructuring Charges
During 1998, LNC implemented a restructuring plan relating to the integration of existing life and
annuity operations with the new business operations acquired from CIGNA, and a second restructuring plan
related to downsizing LNC's corporate center operations. The aggregate charges associated with these two
unrelated restructuring plans totaled $34.3 million after-tax ($52.8 million pre-tax) and were included in
Underwriting, Acquisition, Insurance and Other Expenses on the Consolidated Statement of Income for the
year ended December 31, 1998. These aggregate pre-tax costs include $19.6 million for employee severance
and termination beneÑts, $9.9 million for asset impairments and $23.3 million for costs relating to exiting
business activities. The CIGNA restructuring plan was completed in the Ñrst quarter of 2000. During the
fourth quarter of 2000, $0.5 million (pre-tax) of the original charge to downsize LNC's corporate center
operations was reversed. This plan was completed in the third quarter of 2002 due to the termination of the
lease which resulted from LNC's purchase and ultimate sale of the abandoned building. The remaining
$0.2 million related to the terminated lease was reversed as a reduction in restructuring costs during the third
quarter of 2002. Total pre-tax costs of $56.2 million were expended or written-oÅ under these restructuring
plans.
In 1999, LNC implemented three diÅerent restructuring plans relating to 1) the downsizing and
consolidation of the operations of Lynch & Mayer, Inc. (""Lynch & Mayer''); 2) the discontinuance of HMO
excess-of-loss reinsurance programs; and 3) the streamlining of Lincoln UK's operations. The aggregate
charges associated with these three unrelated restructuring plans totaled $21.8 million after-tax ($31.8 million
pre-tax) and were included in Underwriting, Acquisition, Insurance and Other Expenses on the Consolidated
Statement of Income for the year ended December 31, 1999. These aggregate pre-tax costs include
$8.3 million for employee severance and termination beneÑts, $9.8 million for asset impairments and
$13.7 million for costs relating to exiting business activities. Through December 31, 2002, actual pre-tax costs
of $24.8 million have been expended or written-oÅ under these restructuring plans. During the fourth quarter
of 1999, $3.0 million (pre-tax) of the original charge recorded for the Lynch & Mayer restructuring plan was
reversed due primarily to a change in estimate for space cost. This reversal reduced the reported fourth quarter
1999 restructuring charges. In addition, during the fourth quarter of 1999, $1.5 million (pre-tax) associated
with lease terminations was released into income. During the fourth quarter of 2000, the Lynch & Mayer
restructuring plan was completed and $0.3 million (pre-tax) of the original charge for the Lynch & Mayer was
reversed. Also, during the fourth quarter of 2000, $1.0 million (pre-tax) of the original charge for the
discontinuance of HMO excess-of-loss restructuring plan was reversed. During the fourth quarter of 2001, the
remaining restructuring reserve of $0.2 million relating to the HMO excess-of-loss reinsurance programs was
144
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
transferred to Swiss Re as part of its acquisition of LNC's reinsurance operations. As of December 31, 2002, a
balance of $2.5 million (pre-tax) remains in the restructuring reserve for the Lincoln UK restructuring plan
and is expected to be utilized in completion of this plan. Details of the Lincoln UK restructuring plan are
provided below.
During the fourth quarter of 1999, LNC recorded a restructuring charge in its Lincoln UK segment of
$6.5 million after-tax ($10.0 million pre-tax). The objective of this restructuring plan was to reduce operating
costs by consolidating and eliminating redundant staÅ functions and facilities. The restructuring plan identiÑed
the following activities and associated costs to achieve the objectives of the restructuring plan: (1) severance
and termination beneÑts of $3.9 million related to the elimination of 119 positions, and (2) other costs of
$6.1 million primarily related to the remaining lease payments on closed facilities. Expenditures and write-oÅs
under the restructuring plan began in the fourth quarter of 1999 and were completed in the 3rd quarter of 2001
except for lease payments on closed facilities which will continue until 2016. Through December 31, 2002,
$7.5 million (pre-tax) has been expended or written-oÅ under this restructuring plan and 112 positions have
been eliminated.
During 2000, LNC implemented restructuring plans relating to 1) the downsizing and consolidation of
the operations of Vantage Global Advisors, Inc. (""Vantage''); 2) the exit of all direct sales and sales support
operations of Lincoln UK and the consolidation of its Uxbridge home oÇce with its Barnwood home oÇce;
and 3) the downsizing and consolidation of the investment management operations of Lincoln Investment
Management. The Vantage restructuring charge was recorded in the second quarter, the Lincoln UK
restructuring was recorded in the third and fourth quarters, and the Lincoln Investment Management
restructuring charge was recorded in the fourth quarter of 2000. The aggregate charges associated with all of
these restructuring plans entered into during 2000 totaled $81.8 million after-tax ($107.4 million pre-tax).
These charges were included in Underwriting, Acquisition, Insurance and Other Expenses on the Consoli-
dated Statement of Income for the year ended December 31, 2000. The component elements of these
aggregate pre-tax costs include employee severance and termination beneÑts of $33.8 million, write-oÅ of
impaired assets of $40.9 million and other exit costs of $32.7 million. During the fourth quarter of 2000,
$0.6 million (pre-tax) of the original charge recorded for the Vantage restructuring plan was reversed as a
reduction of restructuring costs. The Vantage restructuring plan was completed in the fourth quarter of 2001
and total expenditures and write-oÅs under this plan totaled $3.5 million pre-tax and 13 positions were
eliminated under this plan. Expenditures and write-oÅs for the Lincoln UK restructuring plan were completed
in the fourth quarter of 2001 except for lease payments on abandoned oÇce facilities, which will continue until
2015. In the fourth quarter of 2002, $1.7 million of the Lincoln UK restructuring reserve was released as a
result of new tenants being contracted for several of the abandoned oÇce facilities on terms that were better
than originally expected. All expenditures and write-oÅs for the Lincoln Investment Management restructur-
ing plan were completed in the third quarter of 2002 and $0.4 million of the original reserve was released. The
release of the reserve was primarily due to LNC's purchase and ultimate sale of the vacant oÇce space on
terms which were favorable to what was included in the original restructuring plan for rent on this oÇce space.
Actual pre-tax costs totaling $3.5 million were expended or written-oÅ and 19 positions were eliminated.
Details of the Lincoln UK restructuring plan are provided below.
On September 28, 2000, LNC announced the transfer of the Lincoln UK sales force to Inter-Alliance
and the decision to cease writing new business in the UK through direct sales distribution. As a result of these
decisions, Lincoln UK continues to manage, administer and accept new deposits on its current block of
business and will only accept new business for certain products as required by UK regulations. To implement
these decisions, LNC entered into an exit plan (""restructuring plan'') in the third quarter of 2000. The
objective of this restructuring plan was to exit all sales and sales support operations and consolidate the
Uxbridge home oÇce with the Barnwood home oÇce. Where all commitment date and liability recognition
criteria were met in the third quarter of 2000, charges for this restructuring plan were recorded in the third
quarter of 2000. The charges associated with this restructuring plan that were recorded in the fourth quarter of
145
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
2000 occurred as Ñnal decisions under the contract with Inter-Alliance related to personnel and facilities were
made, as regulatory requirements related to certain employee involuntary termination beneÑts were met, and
as the decision to consolidate the Uxbridge home oÇce with the Barnwood home oÇce was Ñnalized.
The charges recorded in the third and fourth quarters of 2000 related to this restructuring plan were
$40.5 million after-tax ($53.5 million pre-tax) and $36.1 million after-tax ($45.9 million pre-tax), respec-
tively. The components of the pre-tax costs include employee severance and termination beneÑts of
$29.8 million related to the elimination of 671 positions, write-oÅ of impaired assets of $39.2 million and other
costs to exit of $30.4 million. All expenditures under this plan except for those related to abandoned oÇce
facilities were completed by the end of 2001. Expenditures for rents on abandoned oÇce facilities are expected
to be complete by 2015. In the fourth quarter of 2002, $1.7 million of the Lincoln UK restructuring reserve
was released as a result of new tenants being contracted for several of the abandoned oÇce facilities on terms
that were better than originally expected. Through December 31, 2002, $88.0 million (pre-tax) has been
expended or written-oÅ under this restructuring plan and 671 positions have been eliminated. As of
December 31, 2002, a balance of $9.7 million remains in the restructuring reserve for this plan.
During 2001, LNC implemented restructuring plans relating to 1) the consolidation of the Syracuse
operations of Lincoln Life & Annuity Company of New York into the Lincoln Retirement segment operations
in Fort Wayne, Indiana and Portland, Maine; 2) the elimination of duplicative functions in the Schaumburg,
Illinois operations of First Penn-PaciÑc, and the absorption of these functions into the Lincoln Retirement and
Life Insurance segment operations in Fort Wayne, Indiana and Hartford, Connecticut; 3) the reorganization
of the life wholesaling function within the independent planner distribution channel, consolidation of
retirement wholesaling territories, and streamlining of the marketing and communications functions in LFD;
4) the reorganization and consolidation of the life insurance operations in Hartford, Connecticut related to the
streamlining of underwriting and new business processes and the completion of outsourcing of administration
of certain closed blocks of business; 5) the planned consolidation of the Boston, Massachusetts investment and
marketing oÇce with the Philadelphia, Pennsylvania investment and marketing operations in order to
eliminate redundant facilities and functions within the Investment Management segment; 6) the combination
of LFD channel oversight, positioning of LFD to take better advantage of ongoing ""marketplace consolida-
tion'' and expansion of the customer base of wholesalers in certain non-productive territories and 7) the
consolidation of operations and space in LNC's Fort Wayne, Indiana operations.
The Syracuse restructuring charge was recorded in the Ñrst quarter of 2001 and was completed in the Ñrst
quarter of 2002. The Schaumburg, Illinois restructuring charge was recorded in the second quarter of 2001,
the LFD restructuring charges were recorded in the second and fourth quarters of 2001, and the remaining
restructuring charges were all recorded in the fourth quarter of 2001. The LFD restructuring plan that was
initiated in the second quarter of 2001 was completed in the fourth quarter of 2002. The Life Insurance
segment restructuring plan that was initiated in the fourth quarter of 2001 was completed in the fourth quarter
of 2002.
The aggregate charges associated with all restructuring plans entered into during 2001 totaled $24.6 mil-
lion after-tax ($38.0 million pre-tax) and were included in Underwriting, Acquisition, Insurance and Other
Expenses on the Consolidated Statement of Income for the year ended December 31, 2001. The component
elements of these aggregate pre-tax costs include employee severance and termination beneÑts of $12.2 mil-
lion, write-oÅ of impaired assets of $3.3 million and other exit costs of $22.5 million primarily related to the
termination of equipment leases ($1.4 million) and rent on abandoned oÇce space ($20.0 million). Actual
pre-tax costs totaling $1.3 million were expended or written-oÅ and 30 positions were eliminated under the
Syracuse restructuring plan. The total amount expended for this plan exceeded the original restructuring
reserve by $0.3 million. Actual pre-tax costs totaling $1.8 million were expended or written-oÅ and
26 positions were eliminated under the second quarter of 2001 LFD restructuring plan. The amount expended
for this plan was equal to the original reserve. Actual pre-tax costs totaling $2.3 million were expended or
146
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
written-oÅ and 36 positions were eliminated under the fourth quarter of 2001 Life Insurance segment
restructuring plan. The amount expended for this plan was in excess of the original reserve by less than
$0.1 million. In addition, $0.1 million of excess reserve on the FPP restructuring plan was released during the
second quarter of 2002 and $1.5 million of excess reserve on the Fort Wayne restructuring plan was released
during the third quarter of 2002. The release of the reserve on the Fort Wayne restructuring plan was due to
LNC's purchase and ultimate sale of the vacant building on terms which were favorable to what was included
in the original restructuring plan for rent on this abandoned oÇce space. Actual pre-tax costs totaling
$34.0 million have been expended or written-oÅ for the remaining plans through December 31, 2002. As of
December 31, 2002, a balance of $1.4 million remains in the restructuring reserves for the remaining plans and
is expected to be utilized in the completion of the plans. Details of each of the remaining 2001 restructuring
plans are provided below.
During the second quarter of 2001, LNC recorded restructuring charges in its Lincoln Retirement and
Life Insurance segments of $0.63 million ($0.97 million pre-tax) and $2.03 million ($3.12 million pre-tax),
respectively, related to a restructuring plan for the Schaumburg, Illinois operations of First Penn-PaciÑc. The
objective of this plan was to eliminate duplicative functions in Schaumburg, Illinois by transitioning them into
the Lincoln Retirement and Life Insurance segment operations in Fort Wayne, Indiana and Hartford,
Connecticut, respectively, in order to reduce on-going operating costs. The restructuring plan identiÑed the
following activities and associated pre-tax costs to achieve the objectives of the plan: (1) severance and
termination beneÑts of $3.19 million related to the elimination of 27 positions and (2) other costs of
$0.9 million. In the second quarter of 2002, $0.1 million of the restructuring reserve was released. Actual pre-
tax costs totaling $3.7 million have been expended or written-oÅ and 26 positions have been eliminated under
this plan through December 31, 2002. As of December 31, 2002, a balance of $0.3 million remains in the
restructuring reserve for this plan. Expenditures under this plan are expected to be completed in the Ñrst
quarter of 2004.
During the fourth quarter of 2001, LNC recorded a restructuring charge in its Investment Management
segment of $0.4 million ($0.6 million pre-tax). The objectives of this restructuring plan were to consolidate
the Boston, Massachusetts investment and marketing oÇce with the Philadelphia, Pennsylvania investment
and marketing operations in order to eliminate redundant facilities and functions within the segment. The
restructuring plan identiÑed the following activities and associated pre-tax costs to achieve the objectives of
the plan: (1) write-oÅ of impaired assets of $0.1 million and (2) other costs of $0.5 million primarily related
to lease payments on abandoned oÇce space. Actual pre-tax costs totaling $0.2 million have been expended or
written-oÅ through December 31, 2002. As of December 31, 2002, a balance of $0.4 million remains in the
restructuring reserve for this plan. Expenditures under this plan are expected to be completed by the fourth
quarter of 2005 consistent with the lease term.
During the fourth quarter of 2001, LNC recorded a restructuring charge for LFD in ""Other Operations''
of $2.5 million ($3.8 million pre-tax). The objectives of this restructuring plan were to combine channel
oversight, position LFD to take better advantage of ongoing ""marketplace consolidation'' and to expand the
customer base of wholesalers in certain territories. The restructuring plan identiÑed severance and termination
beneÑts of $3.8 million (pre-tax) related to the elimination of 63 positions. Actual pre-tax costs totaling
$3.8 million have been expended and 62 positions have been eliminated under this plan through December 31,
2002. As of December 31, 2002, less than $0.1 million remains in the restructuring reserve for this plan.
Expenditures under this restructuring plan are expected to be completed in the Ñrst quarter of 2003.
During the fourth quarter of 2001, LNC recorded a restructuring charge in ""Other Operations'' of
$15.8 million ($24.4 million pre-tax). The objectives of this restructuring plan were to consolidate operations
and reduce excess space in LNC's Fort Wayne, Indiana operations. In light of LNC's divestiture of its
reinsurance operations, which were headquartered in Fort Wayne, excess space and printing capacity will not
be used. The restructuring plan identiÑed the following activities and associated pre-tax costs to achieve the
147
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
objectives of the plan: (1) severance and termination beneÑts of $0.3 million related to the elimination of
9 positions; (2) write-oÅ of leasehold improvements of $3.2 million and (2) other costs of $20.9 million
primarily related to termination of equipment leases ($1.4 million) and rent on abandoned oÇce space
($19.5 million). In the third quarter of 2002, $1.5 million of the restructuring reserve related to rent was
released. The release was due to LNC's purchase and ultimate sale of the vacant building on terms which were
favorable to what was included in the original restructuring plan for rent on this abandoned oÇce space.
Actual pre-tax costs totaling $22.3 million have been expended and 19 positions have been eliminated under
this plan through December 31, 2002. As of December 31, 2002, a balance of $0.6 million remains in the
restructuring reserve for this plan. Expenditures under this restructuring plan are expected to be completed in
2004. LNC estimates an annual reduction in future operating expenses of $4.6 million (pre-tax) after the plan
is fully implemented.
During the second quarter of 2002, Lincoln Retirement completed a review of its entire internal
information technology organization. As a result of that review, Lincoln Retirement decided in the second
quarter of 2002 to reorganize its IT organization in order to better align the activities and functions conducted
within its own organization and its IT service providers. This change was made in order to focus Lincoln
Retirement on its goal of achieving a common administrative platform for its annuities products, to better
position the organization and its service providers to respond to changing market conditions, and to reduce
overall costs in response to increased competitive pressures. The segment recorded a restructuring charge of
$1.0 million ($1.6 million pre-tax). The restructuring plan identiÑed the following activities and associated
pre-tax costs to achieve the objectives of the plan: $1.4 million for employee severance and $0.2 million for
employee outplacement relative to 49 eliminated positions. Actual pre-tax costs totaling $0.9 million have
been expended and 49 positions have been eliminated under this plan through December 31, 2002. As of
December 31, 2002, a balance of $0.7 million remains in the restructuring reserve for this plan. The plan is
expected to be completed in the third quarter of 2003.
13. Subsequent Events
In January 2003, the Life Insurance segment announced that it was realigning its operations in Hartford,
Connecticut and Schaumburg, Illinois to enhance productivity, eÇciency and scalability while positioning the
segment for future growth. The Ñnancial impact of the realignment will result in the Life Insurance segment
incurring costs of approximately $15-$17 million after-tax during 2003.
In February 2003, Lincoln Retirement announced plans to consolidate its Ñxed annuity operations in
Schaumburg, Illinois into Fort Wayne, Indiana. Restructuring costs under the plan are expected to be
$3-$5 million after-tax and are expected to be incurred during 2003.
148
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Lincoln National Corporation
We have audited the accompanying consolidated balance sheets of Lincoln National Corporation as of
December 31, 2002 and 2001, and the related consolidated statements of income, shareholders' equity and
cash Öows for each of the three years in the period ended December 31, 2002. Our audits also included the
Ñnancial statement schedules listed in the Index at Item 15(a)(2). These Ñnancial statements and schedules
are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these
Ñnancial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
Ñnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Ñnancial statements. An audit also includes assessing the
accounting principles used and signiÑcant estimates made by management, as well as evaluating the overall
Ñnancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the Ñnancial statements referred to above present fairly, in all material respects, the
consolidated Ñnancial position of Lincoln National Corporation at December 31, 2002 and 2001, and the
consolidated results of its operations and its cash Öows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in
our opinion, the related Ñnancial statement schedules, when considered in relation to the basic Ñnancial
statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated Ñnancial statements, in 2002 the Corporation changed its
method of accounting for goodwill and its related amortization. As discussed in Notes 2 and 7 to the
consolidated Ñnancial statements, in 2001 the Corporation changed its method of accounting for derivative
instruments and hedging activities as well as its method of accounting for impairment of certain investments.
Philadelphia, Pennsylvania
February 7, 2003
149
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
There have been no disagreements with LNC's independent auditors which are reportable pursuant to
Item 304 of Regulation S-K.
Item 10. Directors and Executive OÇcers of the Registrant
PART III
Information for this item relating to directors of LNC is incorporated by reference to the sections
captioned ""NOMINEES FOR DIRECTOR'', ""DIRECTORS CONTINUING IN OFFICE'' and ""COM-
PLIANCE WITH SECTION 16(a) OF THE SECURITIES AND EXCHANGE ACT OF 1934'', of
LNC's Proxy Statement for the Annual Meeting scheduled for May 8, 2003.
Executive OÇcers of the Registrant as of March 14, 2003 were as follows:
Name
Age**
Jon A. Boscia ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
50
George E. Davis ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Robert W. DineenÏÏÏÏÏÏÏÏÏÏÏÏÏ
Jude T. DriscollÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
59
53
40
Jason S. Glazier ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
35
John H. Gotta ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
52
Barbara S. Kowalczyk ÏÏÏÏÏÏÏÏÏ
Dennis L. SchoÅ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
52
43
Lorry J. Stensrud ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Michael Tallett-Williams ÏÏÏÏÏÏÏ
53
49
Westley V. Thompson ÏÏÏÏÏÏÏÏÏ
47
Casey J. Trumble ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Richard C. Vaughan ÏÏÏÏÏÏÏÏÏÏÏ
49
53
Position with LNC and Business Experience
During the Past Five Years
Chairman, Chief Executive OÇcer and Director, LNC (since
2001). President, Chief Executive OÇcer and Director, LNC
(1998-2001). Chief Executive OÇcer, LNL* (1996-1998).
President, Chief Operating OÇcer, LNL* (1994-1996).
Senior Vice President, LNC (since 1993).
Chief Executive OÇcer and President, LFA* (since 2002).
Chief Executive OÇcer and President of LNIC* and
Delaware* (since 2003). Interim Chief Executive OÇcer
(2002). Executive Vice President (2000-2002).
Senior Vice President, Chief Technology OÇcer and Chief
E-Commerce OÇcer, LNC (since 2002). Senior Vice
President and Chief E-Commerce OÇcer, LNC (2001).
Chief Executive OÇcer and Executive Vice President Ì Life
Insurance, LNL* (since 2000). Chief Executive OÇcer Ì
Life Insurance and Senior Vice President, LNL* (1999-
2000). Senior Vice President, LNL* (1998-1999).
Senior Vice President, LNC (since 1994).
Senior Vice President, LNC and General Counsel (since
2002). Vice President and Deputy General Counsel (2001-
2002). Vice President and Associate General Counsel (2000-
2001).
Executive Vice President and Chief Executive OÇcer Ì
Lincoln Retirement, LNL*, (since 2000).
Chief Executive OÇcer and Managing Director, Lincoln
National (UK)* (since 2000). Chief Financial OÇcer,
Lincoln National (UK)* (1995-2000).
Chief Executive OÇcer, LFD* (since 2000). Senior Vice
President, Lincoln Life and Annuity Distributors (1998-
2002).
Senior Vice President and Chief Accounting OÇcer, LNC
(since 1999). Vice President, LNC (1994-1998).
Executive Vice President (since 1995) and Chief Financial
OÇcer, LNC (since 1992).
* Denotes a subsidiary of LNC.
** Age shown is based on the oÇcer's age as of March 14, 2003.
There is no family relationship between any of the foregoing executive oÇcers, all of whom are elected
annually.
150
LNC has adopted a code of ethics that applies, among others, to its principal executive oÇcer, principal
Ñnancial oÇcer, principal accounting oÇcer, or controller, and other persons performing similar functions. The
code of ethics will be posted on our Internet website (www.lfg.com) around the Ñrst of April 2003. In
addition, after posting on its web site, LNC will provide to any person without charge, upon request, a copy of
such code. Requests for the code should be directed to: Corporate Secretary, Lincoln National Corporation,
1500 Market Street, Suite 3900, Centre Square West, Philadelphia, PA 19102-2112.
Item 11. Executive Compensation
Information for this item is incorporated by reference to the section captioned ""EXECUTIVE
COMPENSATION'' of LNC's Proxy Statement for the Annual Meeting scheduled for May 8, 2003.
Item 12. Security Ownership of Certain BeneÑcial Owners and Management
Certain information for this item is incorporated by reference to the sections captioned ""SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS'' and ""SECURITY OWNERSHIP OF DIREC-
TORS, NOMINEES AND EXECUTIVE OFFICERS'' of LNC's Proxy Statement for the Annual Meeting
scheduled for May 8, 2003.
The table below provides information as of December 31, 2002 regarding securities authorized for
issuance under LNC's equity compensation plans.
Equity Compensation Plan Information
(a)
(b)
Number of securities Weighted-average
to be issued
upon exercise of
outstanding options,
warrants and rights
exercise price
of outstanding
options, warrants
and rights
(c)
Number of securities remaining
available for future issuance
under equity compensation
(excluding securities reÖected
in column (a))
Equity compensation plans approved by
shareholders for:
Stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred compensation shares ÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity compensation plans not approved
by shareholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
18,608,009
906,478
19,514,487
38.89
Ì
8,925,026*
None
Ì
Ì
* The number of securities remaining available for future issuance under equity compensation (excluding
securities reÖected in column (a)) is the combined total for the future issuance of LNC stock options,
restricted stock and deferred compensation shares as provided under LNC's incentive compensation plans.
151
Item 13. Certain Relationships and Related Transactions
None
Item 14. Controls and Procedures
(a) Evaluation of disclosure controls and procedures Ì The Corporation's Principal Executive OÇcer
and Principal Financial OÇcer have reviewed and evaluated the eÅectiveness of the Corporation's disclosure
controls and procedures ®as deÑned in Rules 240.13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934 (the ""Exchange Act'')© as of a date within ninety days before the Ñling date of this annual report.
Based on that evaluation, the Principal Executive OÇcer and the Principal Financial OÇcer have concluded
that the Corporation's disclosure controls and procedures are eÅective, providing them with material
information relating to the Corporation as required to be disclosed in the reports the Corporation Ñles or
submits under the Exchange Act on a timely basis.
(b) Changes in internal controls Ì There were no signiÑcant changes in the Corporation's internal
controls or in other factors that could signiÑcantly aÅect the Corporation's disclosure controls and procedures
subsequent to the date of their evaluation, nor were there any signiÑcant deÑciencies or material weaknesses in
the Corporation's internal controls. As a result, no corrective actions were required or undertaken.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Item 15(a)(1) Financial Statements
The following consolidated Ñnancial statements of Lincoln National Corporation are included in Item 8:
Consolidated Balance Sheets Ì December 31, 2002 and 2001
Consolidated Statements of Income Ì Years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Shareholders' Equity Ì Years ended December 31, 2002, 2001 and
2000
Consolidated Statements of Cash Flows Ì Years ended December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
Item 15(a)(2) Financial Statement Schedules
The following consolidated Ñnancial statement schedules of Lincoln National Corporation are included in
Item 15(d):
I Ì Summary of Investments Ì Other than Investments in Related Parties
II Ì Condensed Financial Information of Registrant
III Ì Supplementary Insurance Information
IV Ì Reinsurance
V Ì Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulation of the Securities
and Exchange Commission are not required under the related instructions, are inapplicable, or the required
information is included in the consolidated Ñnancial statements, and therefore omitted.
152
Item 15(a)(3) Listing of Exhibits
The following exhibits of Lincoln National Corporation are included in Item 15 Ì (Note: The numbers
preceding the exhibits correspond to the speciÑc numbers within Item 601 of Regulation S-K.):
3(a)
3(b)
4(a)
4(b)
4(c)
4(d)
4(e)
4(f)
4(g)
4(h)
4(i)
4(j)
4(k)
4(l)
The Articles of Incorporation of LNC as last amended eÅective May 12, 1994 are incorporated by
reference to Exhibit 3(a) of LNC's Form 10-K for the year ended December 31, 2001, as Ñled with
the Commission on March 18, 2002.
The Bylaws of LNC as last amended February 18, 2002 are incorporated by reference to
Exhibit 3(b) of LNC's Form 10-K for the year ended December 31, 2001, as Ñled with the
Commission on March 18, 2002.
Indenture of LNC dated as of January 15, 1987 is incorporated by reference to Exhibit 4(a) of
LNC's Form 10-K for the year ended December 31, 1994, as Ñled with the Commission on
March 27, 1995.
First Supplemental Indenture dated as of July 1, 1992, to Indenture of LNC dated as of January 15,
1987 is incorporated by reference to Exhibit 4(b) of LNC's Form 10-K for the year ended
December 31, 2001, as Ñled with the Commission on March 18, 2002.
Rights Agreement of LNC as last amended November 14, 1996 is incorporated by reference to
LNC's Form 8-K, as Ñled with the Commission on November 22, 1996.
Indenture of LNC dated as of September 15, 1994, between LNC and The Bank of New York, as
Trustee, is incorporated by reference to Exhibit 4(e) of LNC's Form 10-K for the year ended
December 31, 1998, as Ñled with the Commission on March 11, 1999.
Form of Note dated as of September 15, 1994 is incorporated by reference to Exhibit 4(d) on
LNC's Registration Statement on Form S-3/A (File No. 33-55379), as Ñled with the Commission
on September 15, 1994.
Form of Zero Coupon Security dated as of September 15, 1994 is incorporated by reference to
Exhibit 4(f) on LNC's Registration Statement on Form S-3/A (File No. 33-55379), as Ñled with
the Commission on September 15, 1994.
Specimen of LNC's 91/8% Debentures due October 1, 2024 is incorporated by reference to
Schedule I of LNC's Form 8-K, as Ñled with the Commission on September 29, 1994.
Specimen of LNC's 71/4% Debenture due May 15, 2005 is incorporated by reference to Schedule III
of LNC's Form 8-K, as Ñled with the Commission on May 17, 1995.
Junior Subordinated Indenture dated as of May 1, 1996 between LNC and The First National Bank
of Chicago is incorporated by reference to Exhibit 4(j) of LNC's Form 10-K, as Ñled with the
Commission on March 18, 2002.
Specimen of 61/2% Notes due March 15, 2008 incorporated by reference to Exhibit 4.1 LNC's
Form 8-K, as Ñled with the commission on March 24, 1998.
Specimen of 7% Notes due March 15, 2018 incorporated by reference to Exhibit 4.2 of LNC's
Form 8-K, as Ñled with the Commission on March 24, 1998.
Amended and Restated Trust Agreement for Lincoln National Capital III between LNC, as
depositor, The First National Bank of Chicago, as property trustee, First Chicago Delaware, Inc. as
Delaware trustee, and the administrative trustees is incorporated by reference to Exhibit 4.1 of
LNC's Form 8-K, as Ñled with the Commission on July 30, 1998.
4(m)
Form of 7.40% Trust Originated Preferred Securities, Series C, of Lincoln National Capital III is
incorporated by reference to Exhibit 4.2 of LNC's Form 8-K, as Ñled with the Commission on
July 30, 1998.
4(n)
Guarantee Agreement for Lincoln National Capital III is incorporated by reference to Exhibit 4.4
of LNC's Form 8-K, as Ñled with the Commission on July 30, 1998.
153
4(o)
4(p)
4(q)
4(r)
4(s)
4(t)
4(u)
4(v)
4(w)
4(x)
4(y)
4(z)
Amended and Restated Trust Agreement for Lincoln National Capital IV between LNC, as
depositor, The First National Bank of Chicago, a property trustee, First Chicago Delaware Inc., as
Delaware trustee, and the administrative trustees is incorporated by reference to Exhibit 4.1 of
LNC's Form 8-K, as Ñled with the Commission on August 27, 1998.
Form of Income Prides CertiÑcate of Lincoln National Capital IV is incorporated by reference to
Exhibit 4.7 of LNC's Form 8-K, as Ñled with the Commission on August 27, 1998.
Form of Growth Prides CertiÑcates of Lincoln National Capital IV is incorporated by reference to
Exhibit 4.8 of LNC's Form 8-K, as Ñled with the Commission on August 27, 1998.
Guarantee Agreement for Lincoln National Capital IV is incorporated by reference to Exhibit 4.5
of LNC's Form 8-K, as Ñled with the Commission on August 27, 1998.
Purchase Contract Agreement between LNC and The First National Bank of Chicago, as Purchase
Contract Agent, relating to Lincoln National Capital IV is incorporated by reference to Exhibit 4.6
of LNC's Form 8-K, as Ñled with the Commission on August 27, 1998.
Pledge Agreement among LNC, The Chase Manhattan Bank, as agent, and The First National
Bank of Chicago, as Purchase Agent, relating to Lincoln National Capital IV is incorporated by
reference to Exhibit 4.9 of LNC's Form 8-K, as Ñled with the Commission on August 27, 1998.
Underwriting Agreement dated November 9, 2001 is incorporated by reference to Exhibit 1.1 of
LNC's Form 8-K, as Ñled with the Commission on November 21, 2001.
Amended and Restated Trust Agreement dated November 19, 2001, between LNC, as Depositor,
and Bank One Trust Company, National Association, as Property Trustee, Bank One Delaware,
Inc., as Delaware Trustee, and the Administrative Trustee named herein is incorporated by
reference to Exhibit 4.1 of LNC's Form 8-K, as Ñled with the Commission on November 21, 2001.
Form of 7.65% Trust Preferred Security CertiÑcate is incorporated by reference to Exhibit 4.2 of
LNC's Form 8-K, as Ñled with the Commission on November 21, 2001.
Guarantee Agreement dated November 19, 2001, between LNC, as Guarantor, and Bank One
Trust Company, National Association, Guarantee Trustee is incorporated by reference to
Exhibit 4.4 of LNC's Form 8-K, as Ñled with the Commission on November 21, 2001.
Underwriting Agreement dated December 4, 2001 is incorporated by reference to Exhibit 1.1 of
LNC's Form 8-K, as Ñled with the Commission on December 11, 2001.
Form of Note dated December 7, 2001 is incorporated by reference to Exhibit 4.1 of LNC's
Form 8-K, as Ñled with the Commission on December 11, 2001.
4(aa) Underwriting Agreement dated May 29, 2002 is incorporated by reference to Exhibit 1.1 of LNC's
Form 8-K, as Ñled with the Commission on June 6, 2002.
4(bb)
Form of Note dated June 3, 2002 is incorporated by reference to Exhibit 4.1 of LNC's Form 8-K, as
Ñled with the Commission on June 6, 2002.
10(a)
10(b)
10(c)
The Lincoln National Corporation 1986 Stock Option Incentive Plan, as amended through
January 15, 1997. Plan terminated May 15, 1997, but outstanding options are administered under
the Lincoln National Corporation Incentive Compensation Plan. This document is incorporated by
reference to Exhibit 10(a) of LNC's Form 10-K for the year ended December 31, 2001, as Ñled
with the Commission on March 18, 2002.
Salary Continuation Plan for Executives of Lincoln National Corporation and AÇliates Plan last
amended August 1, 2000 is incorporated by reference to Exhibit 10(b) of LNC's Form 10-K, as
Ñled with the Commission on March 18, 2002.
Lincoln National Corporation Executives' Severance BeneÑt Plan as Amended and Restated on
January 10, 2002 is incorporated by reference to Exhibit 10(c) of LNC's Form 10-K for the year
ended December 31, 2001, as Ñled with the Commission on March 18, 2002.
154
10(d)
10(e)
10(f)
10(g)
10(h)
10(i)
10(j)
10(k)
10(l)
The Lincoln National Corporation Outside Directors Retirement Plan as last amended eÅective
March 15, 1990 is incorporated by reference to Exhibit 10(d) of LNC's Form 10-K for the year
ended December 31, 2001, as Ñled with the Commission on March 18, 2002.
The Lincoln National Corporation Outside Directors' Value Sharing Plan, last amended March 8,
2001 is incorporated by reference to Exhibit 10(e) of LNC's Form 10-K for the year ended
December 31, 2001, as Ñled with the Commission on March 18, 2002.
Lincoln National Corporation Executive Deferred Compensation Plan for Employees (Commission
File No. 33-51721), as last amended August 1, 2002 is incorporated by reference to Exhibit 10(f)
of LNC's Form 10-Q for the quarter ended September 30, 2002, as Ñled with the Commission on
November 5, 2002.
Lincoln National Corporation 1993 Stock Plan for Non-Employee Directors (Commission File
No. 33-58113), as last amended May 10, 2001 is incorporated by reference to Exhibit 10(g) of
LNC's Form 10-K for the year ended December 31, 2001, as Ñled with the Commission on
March 18, 2002.
Lincoln National Corporation Executives' Excess Compensation Pension BeneÑt Plan (File
No. 33-58113) as last amended January 1, 1989 is incorporated by reference to Exhibit 10(h) of
LNC's Form 10-K for the year ended December 31, 2001, as Ñled with the Commission on
March 18, 2002.
First Amendment to Lincoln National Corporation Executives' Excess Compensation Pension
BeneÑt Plan eÅective December 22, 1999 is incorporated by reference to Exhibit 10(k) of LNC's
Form 10-K for the year ended December 31, 1999, as Ñled with the Commission on March 11,
2000.
Lincoln National Corporation Incentive Compensation Plan, as last amended March 8, 2001 is
incorporated by reference to Exhibit 10(j) of LNC's Form 10-K for the year ended December 31,
2001, as Ñled with the Commission on March 18, 2002.
Lease and Agreement dated August 1, 1984, with respect to LNL's Home OÇce properties located
at Clinton Street and Harrison Street, Fort Wayne, Indiana is incorporated by reference to
Exhibit 10(n) of LNC's Form 10-K for the year ended December 31, 1995, as Ñled with the
Commission on March 27, 1996.
Form of Lease and Agreement dated March 1, 1999, with respect to LNC's Corporate OÇce
located at Centre Square West Tower, 1500 Market Street, Suite 3900, Philadelphia, Pennsylvania
is incorporated by reference to Exhibit 10(p) of LNC's Form 10-K for the year ended
December 31, 1999, as Ñled with the Commission on March 11, 2000.
10(m) Agreement of Lease dated February 17, 1998, with respect to LNL's life products headquarters
located at 350 Church Street, Hartford, Connecticut is incorporated by reference to Exhibit 10(q)
of LNC's Form 10-K for the year ended December 31, 1997, as Ñled with the Commission on
March 18, 1998.
10(n)
10(o)
10(p)
Lease and Agreement dated December 10, 1999 with respect to Delaware Management Holdings,
Inc. for Home OÇce property located at One Commerce Square, Philadelphia, Pennsylvania is
incorporated by reference to Exhibit 10(r) of LNC's Form 10-K for the year ended December 31,
1999, as Ñled with the Commission on March 11, 2000.
Sublease and Agreement dated December 10, 1999 by and between Delaware Management
Holdings, Inc. and New York Central Lines LLC for property located at Two Commerce Square,
Philadelphia, Pennsylvania is incorporated by reference to Exhibit 10(s) of LNC's Form 10-K for
the year ended December 31, 1999, as Ñled with the Commission on March 11, 2000.
Consent to Sublease dated December 10, 1999 with respect to Delaware Management Holdings,
Inc. for property located at Two Commerce Square and Philadelphia Plaza Phase II, Philadelphia,
Pennsylvania is incorporated by reference to Exhibit 10(t) of LNC's Form 10-K for the year ended
December 31, 1999, as Ñled with the Commission on March 11, 2000.
155
10(q)
10(r)
12
21
23
Stock and Asset Purchase Agreement by and among Lincoln National Corporation, The Lincoln
National Life Insurance Company, Lincoln National Reinsurance Company (Barbados) Limited
and Swiss Re Life & Health America Inc. dated July 27, 2001 is incorporated by reference to
Exhibit 99.1 of LNC's Form 8-K, as Ñled with the Commission on August 1, 2001. Omitted
schedules and exhibits listed in the Agreement will be furnished to the Commission upon request.
Agreement, Waiver and General Release between J. Michael Hemp and Lincoln Financial
Advisors Corporation on behalf of itself and Lincoln National Corporation, their aÇliates and
subsidiaries, dated January 20, 2003.*
Historical Ratio of Earnings to Fixed Charges.
List of Subsidiaries of LNC.
Consent of Ernst & Young LLP, Independent Auditors
* This exhibit is a management contract or compensatory plan or arrangement required to be Ñled as an
exhibit to this form pursuant to Item 15 of this report.
Item 15(b) Reports on Form 8-K
The following Form 8-Ks were Ñled by LNC during the fourth quarter of 2002:
8-K Ñled September 30, 2002 under Item 5 containing the Statistical Report for the quarter ended
September 30, 2002
8-K Ñled on October 3, 2002 under Item 5 containing the Statistical Report for the quarter ended
June 30, 2002
8-K Ñled on October 8, 2002 under Item 9 containing a press release reporting the resignation of
Charles E. Haldeman Jr.
8-K Ñled on October 30, 2002 under Item 9 containing a press release announcing third quarter
earnings (including a Digest of Earnings) and a settlement of its disputes, disagreements and litigation
with Swiss Re Life & Health America Inc. and a copy of the settlement agreement
Item 15(c)
The exhibits of Lincoln National Corporation are listed in Item (a)(3) above.
Item 15(d)
The Ñnancial statement schedules for Lincoln National Corporation follow on pages 157 through 164.
156
LINCOLN NATIONAL CORPORATION
SCHEDULE 1 Ì SUMMARY OF INVESTMENTS Ì OTHER THAN INVESTMENTS IN
RELATED PARTIES
Column A
Column B
Column C
Cost
Fair Value
Column D
Amount at Which
Shown in the
Balance Sheet
December 31, 2002 (000s omitted)
Type of Investment
Fixed maturity securities available-for-sale(1):
Bonds:
United States government and government agencies
and authorities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
States, municipalities and political subdivisionsÏÏÏÏÏ
Asset/Mortgage-backed securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign governmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Public utilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Convertibles and bonds with warrants attachedÏÏÏÏÏ
All other corporate bondsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Redeemable preferred stocks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
410,834
109,442
4,736,600
1,063,789
2,468,646
Ì
22,235,151
78,684
$
513,598
114,424
5,015,481
1,110,231
2,464,393
Ì
23,470,291
79,047
$
513,598
114,424
5,015,481
1,110,231
2,464,393
Ì
23,470,291
79,047
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
31,103,146
32,767,465
32,767,465
Equity securities available-for-sale(1):
Common stocks:
Public UtilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Banks, trusts and insurance companiesÏÏÏÏÏÏÏÏÏÏÏÏ
Industrial, miscellaneous and all other ÏÏÏÏÏÏÏÏÏÏÏÏ
Nonredeemable preferred stocks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Equity Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
313
170,855
56,528
106,797
334,493
380
144,526
83,107
109,203
337,216
380
144,526
83,107
109,203
337,216
Mortgage loans on Real Estate: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Real Estate
Investment properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Acquired in satisfaction of debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Policy Loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative instruments:ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4,205,470
4,205,470
4,205,470
279,527
175
1,945,626
378,136
279,527
175
1,945,626
86,236
378,136
86,236
Total Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$38,246,573
$39,999,851
(1) Investments deemed to have declines in value that are other than temporary are written down or reserved
for to reduce the carrying value to their estimated realizable value.
157
LINCOLN NATIONAL CORPORATION
SCHEDULE II Ì CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
Lincoln National Corporation (Parent Company Only)
December 31
2002
2001
(000's omitted)
Assets:
Investments in subsidiaries* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
InvestmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Derivative Instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and invested cash** ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued investment income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Receivable from subsidiaries*ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans to subsidiaries* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Federal income taxes recoverableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$4,546,318
1,689
23,291
410,901
179
409
40,047
1,558,933
7,833
110,263
$5,140,208
592
(2,806)
321,245
2,678
514
210,500
1,594,278
26,792
129,806
Total Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$6,699,863
$7,423,807
Liabilities and Shareholders' Equity
Liabilities:
Cash collateral on loaned securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loans from subsidiaries*ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued expenses and other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Ì $
59,273
141,121
1,119,221
740,048
126,904
75,750
59,565
254,968
861,731
875,870
250,819
Total Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,186,567
2,378,703
Shareholders' Equity
Series A preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign currency translation adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net adjustment to OCI Ì minimum pension liability adj. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net unrealized gain on securities available-for-sale (excluding unrealized gain
666
1,292,779
3,268,268
50,780
(97,847)
762
1,255,112
3,834,427
(8,062)
(35,959)
of subsidiaries) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(1,350)
(1,176)
Total Shareholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4,513,296
5,045,104
Total Liabilities and Shareholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$6,699,863
$7,423,807
* Eliminated in consolidation.
** Includes short-term funds invested on behalf of LNC's subsidiaries.
158
LINCOLN NATIONAL CORPORATION
SCHEDULE II Ì CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
STATEMENTS OF INCOME
Lincoln National Corporation (Parent Company Only)
2002
Year Ended December 31
2001
(000s omitted)
2000
Revenue:
Dividends from subsidiaries* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest from subsidiaries* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net investment income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Realized gain (loss) on investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 748,000
84,009
8,021
(6,239)
5,587
$532,482
89,080
20,350
18,275
2,846
$474,318
90,988
38,715
20,898
11,312
Total Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
839,378
663,033
636,231
Expenses:
Operating and administrativeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest-subsidiaries* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest-other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
13,806
6,093
93,492
Total Expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
113,391
19,401
17,848
116,312
153,561
7,743
31,804
130,817
170,364
Income Before Federal Income Tax BeneÑt (Expense), Equity in
Income (Loss) of Subsidiaries, Less Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Federal income tax beneÑt (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
725,987
(13,695)
509,472
13,258
465,867
19,853
Income Before Equity in Income (Loss) of Subsidiaries, Less
Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity in income (loss) of subsidiaries, less dividendsÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
712,292
(620,702)
522,730
67,481
485,720
135,673
Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
91,590
$590,211
$621,393
* Eliminated in consolidation.
159
LINCOLN NATIONAL CORPORATION
SCHEDULE II Ì CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
STATEMENTS OF CASH FLOWS
Lincoln National Corporation (Parent Company Only)
Cash Flows from Operating Activities:
Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Equity in income of subsidiaries less than (greater than)
distributions* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity in undistributed earnings of unconsolidated aÇliates ÏÏÏÏÏ
Realized (gain) loss on investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Federal income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash decrease from FIT paid on sale of subsidiariesÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net AdjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net Cash Provided by Operating ActivitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash Flows from Investing Activities:
Net sales (purchases) of investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash collateral on loaned securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Decrease (increase) in investment in subsidiaries*ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Sale of (investment in) unconsolidated aÇliate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from Sale of Subsidiary ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net (purchase) sale of property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net Cash Provided by (Used in) Investing Activities ÏÏÏÏÏÏÏÏ
Cash Flows from Financing Activities:
Decrease in long-term debt (includes payments and (transfers to
short-term debt) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net increase (decrease) in short-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Increase in loans from subsidiaries* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Decrease (increase) in loans to subsidiaries* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Decrease (increase) in receivables from subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Increase in Common Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock issued for beneÑt plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retirement of Common Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Liabilities Ì Retirement of Common StockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends paid to shareholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2002
Year Ended December 31
2001
(000s omitted)
2000
$
91,590
$ 590,211
$ 621,393
620,702
Ì
6,239
19,743
(9,079)
5,564
643,169
734,759
(849)
(75,750)
(17,298)
Ì
Ì
2,340
(6,302)
(97,859)
Ì
248,990
(113,847)
(135,822)
35,345
170,453
(475)
89,109
(474,486)
(131,890)
(234,621)
(67,481)
(115,173)
Ì
(18,275)
55,482
Ì
22,616
Ì
(20,898)
5,629
Ì
7,297
(7,658)
(123,145)
582,553
498,248
(55,276)
(72,671)
(19,900)
Ì
141,743
(205)
73,974
67,665
(99,968)
249,220
104,968
(389,909)
(104,865)
(13,000)
225,254
90,259
(503,750)
Ì
69,537
(38,027)
(20,364)
3,517
85,000
225
29,193
129,081
Ì
Ì
(122,451)
(53,089)
(83,880)
25,500
Ì
32,741
(210,021)
Ì
(230,127)
(222,661)
Net Cash Used in Financing Activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(547,244)
(671,918)
(633,861)
Net Increase (Decrease) in Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and Invested Cash at Beginning of the Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
89,656
321,245
(21,700)
342,945
(6,532)
349,477
Cash and Invested Cash at End-of-Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 410,901
$ 321,245
$ 342,945
* Eliminated in consolidation.
160
LINCOLN NATIONAL CORPORATION
SCHEDULE III Ì SUPPLEMENTARY INSURANCE INFORMATION
Column A
Segment
Column B
Deferred
Acquisition
Costs
Column C
Insurance
Policy and
Claim
Reserves
Column D
Unearned
Premiums
Column E
Other Policy
Claims and
BeneÑts
Payable
Column F
Premium
Revenue(1)
Year Ended December 31, 2002
Lincoln Retirement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Life Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment ManagementÏÏÏÏÏÏÏÏÏÏÏÏ
Lincoln UKÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other (incl. consol. adj's.) ÏÏÏÏÏÏÏÏÏÏ
$ 855,835
1,424,473
Ì
597,632
92,926
$ 2,766,759
13,889,550
Ì
1,429,399
5,473,166
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,970,866
$23,558,874
Year Ended December 31, 2001
Lincoln Retirement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Life Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment ManagementÏÏÏÏÏÏÏÏÏÏÏÏ
Lincoln UKÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other (incl. consol. adj's.) ÏÏÏÏÏÏÏÏÏÏ
$ 912,819
1,265,606
Ì
587,345
119,541
$ 2,653,963
13,049,065
Ì
1,426,577
4,479,664
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,885,311
$21,609,269
Year Ended December 31, 2000
Lincoln Retirement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Life Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment ManagementÏÏÏÏÏÏÏÏÏÏÏÏ
Lincoln UKÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other (incl. consol. adj's.) ÏÏÏÏÏÏÏÏÏÏ
$ 812,465
1,079,333
Ì
635,002
543,707
$ 2,693,517
12,892,092
Ì
1,626,453
4,516,036
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$3,070,507
$21,728,098
$Ì
Ì
Ì
Ì
Ì
$Ì
$Ì
Ì
Ì
Ì
Ì
$Ì
$Ì
Ì
Ì
Ì
Ì
$Ì
(1) Includes insurance fees on universal life and other interest-sensitive products.
$Ì
Ì
Ì
Ì
Ì
$Ì
$Ì
Ì
Ì
Ì
Ì
$Ì
$Ì
Ì
Ì
Ì
Ì
$Ì
$ 548,384
958,932
Ì
188,314
54,727
$1,750,357
$ 646,422
969,341
Ì
214,801
1,417,479
$3,248,043
$ 734,426
950,692
Ì
357,798
1,431,637
$3,474,553
161
LINCOLN NATIONAL CORPORATION
SCHEDULE III Ì SUPPLEMENTARY INSURANCE INFORMATION(Continued)
Column G
Column H
Column I
Net
Investment
Income(2)
BeneÑts
Column J
Amortization
of Deferred
Policy
Acquisition
Costs
Column K
Column L
Other
Operating
Expenses(2)
Premiums
Written
Segment
Year Ended December 31, 2002
Lincoln Retirement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Life Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment ManagementÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lincoln UK ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other (incl. consol. adj's.) ÏÏÏÏÏÏÏÏÏÏÏ
$1,433,892
899,098
50,531
62,146
162,660
$1,217,910
1,101,973
Ì
84,202
455,420
$157,652
105,790
50,044
33,213
$ 411,375
278,569
367,861
106,115
263,714
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,608,327
$2,859,505
$346,699
$1,427,634
Year Ended December 31, 2001
Lincoln Retirement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Life Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment ManagementÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lincoln UK ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other (incl. consol. adj's.) ÏÏÏÏÏÏÏÏÏÏÏ
$1,369,961
910,166
53,573
64,787
281,130
$1,127,747
1,066,968
Ì
83,397
1,131,628
$125,492
95,008
Ì
35,819
111,404
$ 402,213
308,816
414,650
109,828
600,895
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,679,617
$3,409,740
$367,723
$1,836,402
Year Ended December 31, 2000
Lincoln Retirement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Life Insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment ManagementÏÏÏÏÏÏÏÏÏÏÏÏÏ
Lincoln UK ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other (incl. consol. adj's.) ÏÏÏÏÏÏÏÏÏÏÏ
$1,393,512
871,453
57,742
70,258
354,153
$1,120,791
1,017,816
Ì
178,545
1,240,008
$ 87,962
121,583
Ì
76,947
60,224
$ 486,945
286,944
432,068
202,126
698,897
$
$
$
$
$
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,747,118
$3,557,160
$346,716
$2,106,980
$
(2) The allocation of expenses between investments and other operations are based on a number of
assumptions and estimates. Results would change if diÅerent methods were applied.
162
LINCOLN NATIONAL CORPORATION
SCHEDULE IV Ì REINSURANCE
Column A
Column B
Column C
Column D
Column E
Description
Gross Amount
Ceded to Other
Companies
Assumed from
Other
Companies
(000s omitted)
Net Amount
Column F
Percentage
of Amount
Assumed
to Net
Year Ended December 31,
2002
Individual life insurance in
force ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
284,200
Premiums:
Life insurance and
annuities(1) ÏÏÏÏÏÏÏÏÏÏÏ
Health insurance ÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
2,523,621
52,555
2,576,176
$
$
$
730,048
1,623,999
219,271
1,843,270
$
$
$
589,395
830,407
187,043
1,017,450
$
$
$
143,547
410.6%
1,730,029
20,327
1,750,356
48.0%
920.2%
Year Ended December 31,
2001
Individual life insurance in
force ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$255,700,000
$586,500,000
$396,200,000
$ 65,400,000
605.8%
Premiums:
Life insurance and
annuities(1) ÏÏÏÏÏÏÏÏÏÏÏ
Health insurance ÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Year Ended December 31,
2000
Individual life insurance in
$
$
2,552,962
263,607
2,816,569
$
$
679,630
346,489
1,026,119
$
$
1,034,131
423,462
1,457,593
$
$
2,907,463
340,580
3,248,043
35.6%
124.3%
force ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$241,000,000
$191,500,000
$396,100,000
$445,600,000
88.9%
Premiums:
Life insurance and
annuities(1) ÏÏÏÏÏÏÏÏÏÏÏ
Health insurance ÏÏÏÏÏÏÏÏÏ
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
2,583,403
151,204
2,734,607
$
$
453,537
106,328
559,865
$
$
934,913
364,898
1,299,811
$
$
3,064,779
409,774
3,474,553
30.5%
89.0%
(1) Includes insurance fees on universal life and other interest-sensitive products.
163
LINCOLN NATIONAL CORPORATION
SCHEDULE V Ì VALUATION AND QUALIFYING ACCOUNTS
Column A
Column B
Column C
Additions
Column D
Column E
Balance at
Beginning of
Period
Charged to
Costs
Expenses(1)
Charged to
Other
Accounts Ì Deductions Ì
Describe(2)
Describe
(000s omitted)
Balance at
End of
Period
$Ì
Ì
$Ì
Ì
$Ì
Ì
$(3,015)
$11,926
Ì
399
$(3,432)
$ 2,211
Ì
323
$(1,614)
$ 4,907
Ì
323
Description
Year Ended December 31, 2002
Deducted from Asset Accounts:
Reserve for Mortgage Loans on real
estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Included in Other Liabilities:
$2,211
$12,730
Investment Guarantees ÏÏÏÏÏÏÏÏÏÏÏ
323
76
Year Ended December 31, 2001
Deducted from Asset Accounts:
Reserve for Mortgage Loans on real
estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Included in Other Liabilities:
$4,907
$
736
Investment Guarantees ÏÏÏÏÏÏÏÏÏÏÏ
323
Ì
Year Ended December 31, 2000
Deducted from Asset Accounts:
Reserve for Mortgage Loans on real
estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Included in Other Liabilities:
$4,691
$ 1,830
Investment Guarantees ÏÏÏÏÏÏÏÏÏÏÏ
323
Ì
(1) Excludes charges for the direct write-oÅ assets.
(2) Deductions reÖect sales or foreclosures of the underlying holdings.
164
LINCOLN NATIONAL CORPORATION
EXHIBIT INDEX FOR THE ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2002
Articles of Incorporation dated as of May 12, 1994*
Bylaws of LNC as last amended February 18, 2002*
Indenture of LNC dated as of January 15, 1987*
LNC First Supplemental Indenture dated July 1, 1992, to Indenture of LNC dated as of
January 15, 1987*
Rights Agreement dated November 14, 1996*
Indenture of LNC dated as of September 15, 1994*
Form of Note dated as of September 15, 1994*
Form of Zero Coupon Security dated as of September 15, 1994*
Specimen of Debenture for 91/8% Notes due October 1, 2024*
Specimen of 71/4% Debenture due May 15, 2005*
Junior Subordinated Indenture of LNC as of May 1, 1996*
Specimen Notes for 61/2% Notes due March 15, 2008*
Specimen Notes for 7% Notes due March 15, 2018*
Trust Agreement for Lincoln National Capital III*
Exhibit
Number
3(a)
3(b)
4(a)
4(b)
4(c)
4(d)
4(e)
4(f)
4(g)
4(h)
4(i)
4(j)
4(k)
4(l)
4(m)
Form of Lincoln National Capital III Preferred Securities, Series C*
4(n)
4(o)
4(p)
4(q)
4(r)
4(s)
4(t)
4(u)
4(v)
4(w)
4(x)
4(y)
4(z)
Guarantee Agreement for Lincoln National Capital III*
Trust Agreement for Lincoln National Capital IV*
Form of Lincoln National Capital IV Income Prides CertiÑcates*
Form of Lincoln National Capital IV Growth Pride CertiÑcates*
Guarantee Agreement for Lincoln National Capital IV*
Purchase Contract Agreement for Lincoln National Capital IV*
Pledge Agreement for Lincoln National Capital IV*
Underwriting Agreement dated November 9, 2001*
Trust Agreement dated November 19, 2001*
Form of 7.65% Trust Preferred Security CertiÑcate*
Guarantee Agreement dated November 19, 2001*
Underwriting Agreement dated December 4, 2001*
Form of Note dated December 7, 2001*
4(aa) Underwriting Agreement dated May 29, 2002*
4(bb)
Form of Note dated June 6, 2002*
10(a)
10(b)
10(c)
10(d)
10(e)
10(f)
LNC 1986 Stock Option Plan*
Salary Continuation Plan for Executives of Lincoln National Corporation and AÇliates*
LNC Executives' Severance BeneÑt Plan*
The LNC Outside Directors Retirement Plan*
The LNC Outside Directors Value Sharing Plan*
The LNC Executive Deferred Compensation Plan for Employees*
165
Exhibit
Number
10(g)
10(h)
10(i)
10(j)
10(k)
10(l)
LNC 1993 Stock Plan for Non-Employee Directors*
Lincoln National Corporation Executives' Excess Compensation Pension BeneÑt Plan*
First Amendment to LNC Executives' Excess Compensation BeneÑt Plan dated December 22,
1999*
LNC 1997 Incentive Compensation Plan*
Lease and Agreement Ì LNL's home oÇce property*
Form of Lease Ì LNC's Corporate OÇces dated March 14, 1999*
10(m)
Lease and Agreement Ì additional LNL headquarter property*
10(n)
10(o)
10(p)
10(q)
Form of Delaware's Lease and Agreement for One Commerce Square Property*
Form of Delaware's Sublease for Two Commerce Square Property*
Form of Delaware's Consent to Sublease for Philadelphia Plaza II Property*
Stock and Asset Purchase Agreement by and among Lincoln National Corporation, The Lincoln
National Life Insurance Company, Lincoln National Reinsurance Company (Barbados) Limited
and Swiss Re Life & Health America Inc. dated July 27, 2001*
10(r)
Agreement, Waiver and General Release Ì J. Michael Hemp
12
21
23
Historical Ratio of Earnings to Fixed Charges
List of Subsidiaries of LNC.
Consent of Ernst & Young LLP, Independent Auditors.
* Incorporated by Reference
NOTE: This is an abbreviated version of the Lincoln National Corporation Form 10-K. Copies of these
exhibits are available electronically at www.sec.gov or www.lfg.com or by writing to the Corporate Secretary at
Lincoln National Corporation, Centre Square, 1500 Market Street, Suite 3700, Philadelphia, Penn-
sylvania 19102-2112.
166
SIGNATURE PAGE
LINCOLN NATIONAL CORPORATION
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, LNC has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
By
/s/
JON A. BOSCIA
Jon A. Boscia
(Chairman, Chief Executive OÇcer
and Director)
March 13, 2003
By
/s/ RICHARD C. VAUGHAN
Richard C. Vaughan
(Executive Vice President and Chief
Financial OÇcer)
March 13, 2003
By
/s/ CASEY J. TRUMBLE
Casey J. Trumble
(Senior Vice President and Chief
Accounting OÇcer)
March 13, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below
by the following Directors of LNC on the date indicated.
By
/s/ WILLIAM J. AVERY
By
/s/
William J. Avery
J. PATRICK BARRETT
J. Patrick Barrett
By
/s/ THOMAS D. BELL, JR.
Thomas D. Bell, Jr.
By
/s/
JENNE K. BRITELL, PH.D.
Jenne K. Britell, Ph.D.
By
/s/
JOHN G. DROSDICK
John G. Drosdick
By
/s/ ERIC G. JOHNSON
Eric G. Johnson
By
/s/ M. LEANNE LACHMAN
M. Leanne Lachman
By
/s/ MICHAEL F. MEE
Michael F. Mee
By
/s/
JOHN M. PIETRUSKI
John M. Pietruski
By
/s/ RON J. PONDER, PH.D.
Ron J. Ponder, Ph.D.
167
March 13, 2003
March 13, 2003
March 13, 2003
March 13, 2003
March 13, 2003
March 13, 2003
March 13, 2003
March 13, 2003
March 13, 2003
March 13, 2003
SIGNATURE PAGE - (Continued)
LINCOLN NATIONAL CORPORATION
By
/s/
JILL S. RUCKELSHAUS
Jill S. Ruckelshaus
By
/s/ GLENN F. TILTON
Glenn F. Tilton
March 13, 2003
March 13, 2003
168
I, Jon A. Boscia, Chairman and Chief Executive OÇcer certify that:
CERTIFICATION
1. I have reviewed this annual report on Form 10-K of Lincoln National Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the Ñnancial statements, and other Ñnancial information included in this
annual report, fairly present in all material respects the Ñnancial condition, results of operations and cash Öows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying oÇcers and I are responsible for establishing and maintaining
disclosure controls and procedures (as deÑned in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
(b) evaluated the eÅectiveness of the registrant's disclosure controls and procedures as of a date
within 90 days prior to the Ñling date of this annual report (the ""Evaluation Date''); and
(c) presented in this annual report our conclusions about the eÅectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying oÇcers and I have disclosed, based on our most recent evaluation, to
the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all signiÑcant deÑciencies in the design or operation of internal controls which could adversely
aÅect the registrant's ability to record, process, summarize and report Ñnancial data and have identiÑed
for the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a
signiÑcant role in the registrant's internal controls; and
6. The registrant's other certifying oÇcers and I have indicated in this annual report whether or not there
were signiÑcant changes in internal controls or in other factors that could signiÑcantly aÅect internal controls
subsequent to the date of our most recent evaluation, including any corrective actions with regard to signiÑcant
deÑciencies and material weaknesses.
/s/
JON A. BOSCIA
Jon A. Boscia
Chairman and Chief Executive OÇcer
Date: March 18, 2003
169
CERTIFICATION
I, Richard C. Vaughan, Executive Vice President and Chief Financial OÇcer certify that:
1. I have reviewed this annual report on Form 10-K of Lincoln National Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the Ñnancial statements, and other Ñnancial information included in this
annual report, fairly present in all material respects the Ñnancial condition, results of operations and cash Öows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying oÇcers and I are responsible for establishing and maintaining
disclosure controls and procedures (as deÑned in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
(b) evaluated the eÅectiveness of the registrant's disclosure controls and procedures as of a date
within 90 days prior to the Ñling date of this annual report (the ""Evaluation Date''); and
(c) presented in this annual report our conclusions about the eÅectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying oÇcers and I have disclosed, based on our most recent evaluation, to
the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all signiÑcant deÑciencies in the design or operation of internal controls which could adversely
aÅect the registrant's ability to record, process, summarize and report Ñnancial data and have identiÑed
for the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a
signiÑcant role in the registrant's internal controls; and
6. The registrant's other certifying oÇcers and I have indicated in this annual report whether or not there
were signiÑcant changes in internal controls or in other factors that could signiÑcantly aÅect internal controls
subsequent to the date of our most recent evaluation, including any corrective actions with regard to signiÑcant
deÑciencies and material weaknesses.
/s/ RICHARD C. VAUGHAN
Richard C. Vaughan
Executive Vice President and Chief Financial OÇcer
Date: March 18, 2003
170
Report of Management
LNC's management is responsible for the preparation, integrity and objectivity of the consolidated
Ñnancial statements. The statements have been prepared in conformity with accounting principles generally
accepted in the United States and, as such, include amounts based on estimates and judgments of
management. Management has also prepared the other information included in this annual report, and is
responsible for its accuracy and consistency with the consolidated Ñnancial statements.
Management is responsible for maintaining internal controls, policies, and procedures designed to provide
reasonable assurance as to the integrity of the Ñnancial records and the protection of assets. LNC maintains an
internal auditing program designed to monitor compliance with policies and procedures and to evaluate the
internal control structure.
Ernst & Young LLP, independent auditors, has audited the consolidated Ñnancial statements of Lincoln
National Corporation. The audit was conducted in accordance with auditing standards generally accepted in
the United States. Those standards require that the independent auditor plan and perform the audit to obtain
reasonable assurance about whether the Ñnancial statements are free of material misstatements. An audit
includes examining on a test basis, evidence supporting the amounts and disclosures in the Ñnancial
statements. An audit also includes assessing the accounting principles used and signiÑcant estimates made by
management, as well as evaluating the overall Ñnancial statement presentation. The independent auditors have
discussed with the Audit Committee accounting principles, estimates and judgments used by management in
the preparation of the consolidated Ñnancial statements.
The Board of Directors is responsible for engaging the independent auditors, evaluating the independent
auditors' independence, overseeing the independent audit, and for assuring that management fulÑlls its
responsibilities in the preparation of Ñnancial statements and for maintaining the system of internal controls.
An Audit Committee of the Board, each of whose members is not an oÇcer or employee of LNC, meets
periodically with management, the internal auditors and the independent auditors, both separately and jointly,
to enable the Board to fulÑll these responsibilities.
Jon A. Boscia
Chairman and Chief Executive OÇcer
Richard C. Vaughan
Executive Vice President and Chief Financial OÇcer
Corporate Headquarters
Lincoln National Corporation
Centre Square, West Tower
1500 Market Street, 39th Floor
Philadelphia, PA 19102-2112
Internet Information
Information on the Corporation's financial results and its products and services is available on the Internet at www.LFG.com.
Stock Listings
LNC's common stock is traded on the New York, Chicago and PaciÑc stock exchanges under the symbol LNC. In
newspapers, stock information is most frequently listed as LincNatCp.
Inquiries
Analysts and institutional investors should contact:
Priscilla Brown
Vice President of Investor Relations
Lincoln National Corporation
Centre Square, West Tower
1500 Market Street, 39th Floor
Philadelphia, PA 19102
E-mail: investorrelations@LNC.com.
Annual Meeting of Shareholders
The annual meeting of shareholders will be held at The Ritz-Carlton, Ten Avenue of The Arts, Philadelphia, PA 19102 at
10 a.m. (local time) on Thursday, May 8, 2003.
Shareholder Services
General inquiries or concerns about LNC shareholder services may be directed to shareholder services at 1-800-237-2920
or by email at shareholderservices@LNC.com. Questions that are speciÑc in nature, such as transfer of stock, change of
address or general inquiries regarding stock or dividend matters, should be directed to the transfer agent and registrar.
Transfer Agent and Registrar
For Regular mailings use:
Mellon Investor Services LLC
P.O. Box 3315
South Hackensack, NJ 07606-1915
1-866-541-9693
website: www.melloninvestor.com.
For registered or overnight mailings use:
Mellon Investor Services
85 Challenger Road
RidgeÑeld, NJ 07660
Dividend Reinvestment Program/Direct Stock Purchase Plan
Lincoln National Corporation has a Dividend Reinvestment and Cash Investment Plan. For further information, write to
Mellon Investor Services at the addresses noted above.
Direct Deposit of Dividends
Quarterly dividends can be electronically deposited to shareholders' checking or savings accounts on the dividend payment
date. Telephone inquiries may be directed to Mellon Investor Services at 1-866-541-9693.
Dividend Payment Schedule
Dividends on LNC common stock are paid February 1, May 1, August 1 and November 1.
Duplicate Mailings
Shareholders who own shares in more than one account may be receiving duplicate mailings of annual reports and other
shareholder information. To eliminate duplicate mailings and reduce expense to the Corporation, please contact Mellon
Investor Services at the addresses previously noted.
Exchanges: New York, Chicago and PaciÑc.
Stock Exchange Symbol: LNC
Lincoln Financial Group is a registered service mark of Lincoln National Corporation.
Annual Report Form Number: 579A-02
Lincoln National Corporation
1500 Market Street
Suite 3900
Philadelphia, PA 19102
www.LFG.com
This is the annual report of Lincoln
National Corporation, the parent
company of the Lincoln Financial
Group of companies. Lincoln
Financial Group is the marketing
name for Lincoln National
Corporation and its aÇliates.