lincolns-3asr.htm
As filed
with the Securities and Exchange Commission on May __, 2009
File No.
333-
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________________
FORM
S-3
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
Lincoln National
Corporation
(Exact
Name of Registrant as Specified in Its Charter)
Indiana
(State or
Other Jurisdiction of Incorporation or Organization)
35-1140070
(I.R.S.
Employer Identification No.)
150
N. Radnor Chester Road
Radnor,
PA 19087
(484)
583-1400
(Address,
Including Zip Code, and Telephone Number, Including
Area
Code, of Registrant's Principal Executive Offices)
Lincoln
National Corporation
2009 Amended and Restated
Incentive Compensation Plan
(Full Title of
Plan)
Dennis
L. Schoff
Senior
Vice President & General Counsel
Lincoln
National Corporation
150
N. Radnor Chester Road
Radnor,
PA 19087
(484)
583-1400
(Name,
Address, Including Zip Code, and Telephone Number, Including
Area
Code, of Agent for Service)
Approximate date of commencement of
proposed sale to the public: From time to time after the effective date
of this registration statement.
______________________
If the
only securities being registered on this Form are being offered pursuant to
dividend or interest reinvestment plans, please check the following box. [
]
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If
this Form is filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. [ ] __________________
If this
Form is a registration statement pursuant to General Instruction I.D. or a
post-effective amendment thereto that shall become effective upon filing with
the Commission pursuant to Rule 462(e) under the Securities Act, check the
following box. [X]
If this
Form is a post-effective amendment to a registration statement filed pursuant to
General Instruction I.D. filed to register additional securities or additional
classes of securities pursuant to Rule 413(b) under the Securities Act, check
the following box. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer [X] Accelerated filer [ ] Non-accelerated filer
[ ] (Do not check if a smaller reporting company). Smaller reporting
company [ ]
|
CALCULATION
OF REGISTRATION FEE
|
|
Title
of
Securities
to be
registered
|
Amount
to be
registered
|
Proposed
Maximum
offering
price
per share
|
Proposed
maximum
aggregate
offering price
|
Amount
of
registration fee
|
|
Common
Stock
(no
par value)
|
6,400,000
(1),
(3)
|
$15.18
(2)
|
$94,290,000
|
$5464
|
|
|
|
|
|
|
(1)
Pursuant to Rule 416(a) under the Securities Act of 1933, as amended (the
“Securities Act”), there are being registered such additional shares as may be
issuable pursuant to the anti-dilution provisions of the Lincoln National
Corporation Long Term Stock Compensation Plan (the “Plan”), by reason of stock
splits, stock dividends, recapitalizations or similar transactions . The shares
of common stock to which this Registration Statement relates are to be issued
upon exercise of options and in connection with certain other stock-related
awards, all of which will be granted or awarded under the Plan for no
consideration.
(2)
Estimated solely for purposes of calculating the registration fee pursuant to
Rules 457(c) and 457(h)(1) under the Securities Act based upon the average of
the high and low sale prices of LNC’s Common Stock on May 13, 2009 as reported
on the New York Stock Exchange composite transactions tape.
(3)
Pursuant to Rule 429 under the Securities Act, the prospectus included in
this registration statement is a combined prospectus, which also relates to
LNC's Registration Statements on Form S-3, Registration No. 333-32667,
333-124976 and 333-142871 (the “Prior Registration Statements”). This
Registration Statement also constitutes the second post-effective amendment to
the Prior Registration Statements. Such post-effective amendment shall hereafter
become effective concurrently with the effectiveness of this Registration
Statement in accordance with Section 8(a) of the Securities Act of 1933. The
aggregate amount of Common Stock eligible to be sold and not previously sold
under the Prior Registration Statements prior to the effective date of this
Registration Statement shall be carried forward to this Registration Statement.
LNC previously paid a registration fee to the SEC in connection with those
securities. The amount of securities being registered, together with the
remaining securities registered under the Prior Registration Statement,
represents the maximum amount of securities that are expected to be offered for
sale.
PROSPECTUS
44,126,512
Shares
LINCOLN
NATIONAL CORPORATION
COMMON
STOCK
(No Par
Value)
Offered
as set forth in this Prospectus pursuant to the
LINCOLN
NATIONAL CORPORATION
2009
AMENDED AND RESTATED
INCENTIVE
COMPENSATION PLAN
This
Prospectus relates to shares of our Common Stock to be issued under the Lincoln
National Corporation 2009 Amended and Restated Incentive Compensation Plan, or
the Plan, to high-quality executives, employees and other persons who provide
services to us or our subsidiaries or to eligible persons holding either agents'
or brokers' contracts with one of our subsidiaries.
Our
Common Stock is listed on The New York Stock Exchange and the Chicago Stock
Exchange under the symbol “LNC.” The last reported sale price on May 14, 2009
was $16.24 per share.
Investing
in our Common Stock involves risks. See “Risk Factors” beginning on page 3 of
this prospectus.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
You
should rely only on the information contained in or incorporated by reference in
this prospectus. We have not authorized anyone to provide you with information
that is different. We are not making an offer of these securities in any state
or jurisdiction where the offer is not permitted. The information contained or
incorporated by reference in this prospectus is accurate only as of the
respective dates of such information. Our business, financial condition, results
of operations and prospects may have changed since those dates.
The date
of this Prospectus is May 15, 2009.
TABLE OF
CONTENTS
|
|
Page
|
|
The Company
|
1
|
|
|
Forward-Looking Statements
|
1
|
|
|
Risk Factors - Cautionary
Language
|
3
|
|
|
Summary of the Plan
|
24
|
|
|
1. Purpose of the
Plan
|
24
|
|
|
2. Types of
Awards
|
24
|
|
|
3. Shares Subject to the 2009 Amended
and Restated Plan;
|
|
|
|
Annual Per Person
Limitations
|
24
|
|
|
4. Eligibility
|
26
|
|
|
5.
Administration
|
26
|
|
|
6. Stock Options and
SARS
|
26
|
|
|
7. Restricted Stock, Restricted Stock
Units and Deferred Stock Units
|
27
|
|
|
8. Bonus Stock and Awards in Lieu of
Cash Obligations
|
27
|
|
|
9. Other Stock-Based
Awards
|
27
|
|
|
10. Performance Awards, Including Annual Incentive
Awards
|
27
|
|
|
11. Other Terms of Awards; No
Repricing
|
28
|
|
|
12. Acceleration of Vesting
|
29
|
|
|
13. Amendment and Termination of the 2009 Amended
and Restated Plan
|
29
|
|
|
14. Federal Income Tax Implications of the 2009
Amended and Restated Plan
|
30
|
|
|
15. Miscellaneous
|
31
|
|
|
Where You Can Find More
Information
|
31
|
|
|
Documents Incorporated by
Reference
|
31
|
|
|
Experts
|
32
|
|
|
Legal Matters
|
32
|
|
|
|
|
|
It is
important for you to read and consider all information contained in this
prospectus in making your investment decision. You should also read and consider
the additional information under the caption “Where You Can Find More
Information.”
Unless
otherwise indicated, all references in this prospectus to “LNC,” “we,” “our,”
“us,” or similar terms refer to Lincoln National Corporation together with its
subsidiaries.
REQUIRED
DISCLOSURE FOR NORTH CAROLINA RESIDENTS
THE
COMMISSIONER OF INSURANCE OF THE STATE OF NORTH CAROLINA HAS NOT APPROVED OR
DISAPPROVED OF THIS OFFERING NOR HAS THE COMMISSIONER PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS.
THE
COMPANY
LNC is a
holding company, which operates multiple insurance and investment management
businesses through subsidiary companies. Through our business
segments, we sell a wide range of wealth protection, accumulation and retirement
income products and solutions. These products include institutional
and/or retail fixed and indexed annuities, variable annuities, universal life
insurance (“UL”), variable universal life insurance (“VUL”), term life
insurance, mutual funds and managed accounts. LNC was organized under
the laws of the state of Indiana in 1968. We currently maintain our
principal executive offices at 150 N. Radnor Chester Road, Radnor,
Pennsylvania. “Lincoln Financial Group” is the marketing name for LNC
and its subsidiary companies. As of March 31, 2009, LNC had
consolidated assets of $157.4 billion and consolidated stockholders’ equity of
$7.3 billion.
We provide products and services in
four operating businesses and report results through six business segments, as
follows:
|
|
Business
|
Corresponding
Segments
|
|
| |
|
|
|
|
|
Retirement
Solutions
|
Annuities
and Defined Contribution
|
|
|
|
|
|
|
|
|
Insurance
Solutions
|
Life
Insurance and Group Protection
|
|
|
|
|
|
|
|
|
Investment
Management
|
Investment
Management
|
|
|
|
|
|
|
|
|
Lincoln
UK
|
Lincoln
UK
|
|
We also
have Other Operations, which includes our run-off institutional pension
business, financial data for operations that are not directly related to the
business segments, unallocated corporate items and the ongoing amortization of
deferred gain on the indemnity reinsurance portion of the sale of our former
reinsurance segment to Swiss Re Life & Health America Inc. (“Swiss Re”) in
the fourth quarter of 2001. Unallocated corporate items include
investment income on investments related to the amount of statutory surplus in
our insurance subsidiaries that is not allocated to our business units and other
corporate investments, interest expense on short-term and long-term borrowings
and certain expenses, including restructuring and merger-related
expenses.
The following description of the Plan
is a summary of its key terms and provisions. The statements contained in this
prospectus concerning the Plan are qualified in their entirety by reference to
the terms of the Plan itself, which is the legally controlling document.
Eligible participants and their beneficiaries may obtain copies of the Plan upon
request, or review them at our principal executive office.
FORWARD
LOOKING STATEMENTS – CAUTIONARY LANGUAGE
Certain
statements made in this prospectus supplement are “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of 1995
(“PSLRA”). A forward-looking statement is a statement that is not a
historical fact and, without limitation, includes 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 in connection with a discussion of future operating or financial
performance. In particular, these include statements relating to
future actions, trends in our business, prospective services or products, future
performance or financial results and the outcome of contingencies, such as legal
proceedings. We claim the protection afforded by the safe harbor for
forward-looking statements provided by the PSLRA.
Forward-looking
statements involve risks and uncertainties that may cause actual results to
differ materially from the results contained in the forward-looking
statements. Risks and uncertainties that may cause actual results to
vary materially, some of which are described within the forward-looking
statements, include, among others:
|
·
|
Continued
deterioration in general economic and business conditions, both domestic
and foreign, that may affect foreign exchange rates, premium levels,
claims experience, the level of pension benefit costs and funding and
investment results;
|
|
·
|
Continued
economic declines and credit market illiquidity could cause us to realize
additional impairments on investments and certain intangible assets
including goodwill and a valuation allowance against deferred tax assets,
which may reduce future earnings and/or affect our financial condition and
ability to raise additional capital or refinance existing debt as it
matures;
|
|
·
|
Uncertainty
about the impact of the U.S. Treasury’s Troubled Asset Relief Program on
the economy; and Lincoln’s ability to participate in the
program;
|
|
·
|
Legislative,
regulatory or tax changes, both domestic and foreign, that affect the cost
of, or demand for, LNC’s products, the required amount of reserves and/or
surplus, or otherwise affect our ability to conduct business, including
changes to statutory reserves and/or risk-based capital (“RBC”)
requirements related to secondary guarantees under universal life and
variable annuity products such as Actuarial Guideline VACARVM (“VACARVM”);
restrictions on revenue sharing and 12b-1 payments; and the potential for
U.S. Federal tax reform;
|
|
·
|
The
initiation of legal or regulatory proceedings against LNC or its
subsidiaries, and the outcome of any legal or regulatory proceedings, such
as: adverse actions related to present or past business
practices common in businesses in which LNC and its subsidiaries compete;
adverse decisions in significant actions including, but not limited to,
actions brought by federal and state authorities and extra-contractual and
class action damage cases; new decisions that result in changes in law;
and unexpected trial court rulings;
|
|
·
|
Changes
in interest rates causing a reduction of investment income, the margins of
LNC’s fixed annuity and life insurance businesses and demand for LNC’s
products;
|
|
·
|
A
decline in the equity markets causing a reduction in the sales of LNC’s
products, a reduction of asset-based fees that LNC charges on various
investment and insurance products, an acceleration of amortization of
deferred acquisition costs (“DAC”), value of business acquired (“VOBA”),
deferred sales inducements (“DSI”) and deferred front-end sales loads
(“DFEL”) and an increase in liabilities related to guaranteed benefit
features of LNC’s variable annuity
products;
|
|
·
|
Ineffectiveness
of LNC’s various hedging strategies used to offset the impact of changes
in the value of liabilities due to changes in the level and volatility of
the equity markets and interest
rates;
|
|
·
|
A
deviation in actual experience regarding future persistency, mortality,
morbidity, interest rates or equity market returns from LNC’s assumptions
used in pricing its products, in establishing related insurance reserves
and in the amortization of intangibles that may result in an increase in
reserves and a decrease in net income, including as a result of
stranger-originated life insurance
business;
|
|
·
|
Changes
in generally accepted accounting principles (“GAAP”) that may result in
unanticipated changes to LNC’s net
income;
|
|
·
|
Lowering
of one or more of LNC’s debt ratings issued by nationally recognized
statistical rating organizations and the adverse impact such action may
have on LNC’s ability to raise capital and on its liquidity and financial
condition;
|
|
·
|
Lowering
of one or more of the insurer financial strength ratings of LNC’s
insurance subsidiaries and the adverse impact such action may have on the
premium writings, policy retention and profitability of its insurance
subsidiaries;
|
|
·
|
Significant
credit, accounting, fraud or corporate governance issues that may
adversely affect the value of certain investments in the portfolios of
LNC’s companies requiring that LNC realize losses on such
investments;
|
|
·
|
The
impact of acquisitions and divestitures, restructurings, product
withdrawals and other unusual items, including LNC’s ability to integrate
acquisitions and to obtain the anticipated results and synergies from
acquisitions;
|
|
·
|
The
adequacy and collectibility of reinsurance that LNC has
purchased;
|
|
·
|
Acts
of terrorism, a pandemic, war or other man-made and natural catastrophes
that may adversely affect LNC’s businesses and the cost and availability
of reinsurance;
|
|
·
|
Competitive
conditions, including pricing pressures, new product offerings and the
emergence of new competitors, that may affect the level of premiums and
fees that LNC can charge for its
products;
|
|
·
|
The
unknown impact on LNC’s business resulting from changes in the
demographics of LNC’s client base, as aging baby-boomers move from the
asset-accumulation stage to the asset-distribution stage of life;
and
|
|
·
|
Loss
of key management, portfolio managers in the Investment Management
segment, financial planners or
wholesalers.
|
The risks included here are not
exhaustive. “Risk Factors” below as well as LNC’s annual report on
Form
10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and other documents
filed with the Securities and Exchange Commission (“SEC”) include additional
factors that could impact LNC’s business and financial performance, which are
incorporated herein by reference. Moreover, we operate 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 our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements. Given these
risks and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results. In
addition, we disclaim any obligation to update any forward-looking statements to
reflect events or circumstances that occur after the date of this prospectus
supplement.
RISK
FACTORS
You should carefully consider the
risks described below and those incorporated by reference into this prospectus
supplement before making an investment decision in the Plan generally, or in the
LNC Common Stock Account specifically. The risks and uncertainties
described below and incorporated by reference into this prospectus supplement
are not the only ones facing our company. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also impair our business operations. If any of these risks actually
occur, our business, financial condition and results of operations could be
materially affected. In that case, the value of our Common Stock
could decline substantially. In addition, there are risks in
investing your money in the investment choices offering under the
Plan. These risks are discussed with the description of each
investment option.
Adverse
capital and credit market conditions may significantly affect our ability to
meet liquidity needs, access to capital and cost of capital.
The
capital and credit markets have been experiencing extreme volatility and
disruption for more than twelve months. In some cases, the markets have exerted
downward pressure on availability of liquidity and credit capacity for certain
issuers.
We
maintain an investment portfolio of various holdings, types and maturities.
These investments are subject to general credit, liquidity, market and interest
rate risks. An extended disruption in the credit and capital markets could
adversely affect LNC and its subsidiaries’ ability to access sources of
liquidity, and there can be no assurance that additional financing will be
available to us on favorable terms, or at all, in the current market
environment. In addition, further other-than-temporary impairments could reduce
our statutory surplus, leading to lower RBC ratios and potentially reducing
future dividend capacity from our insurance subsidiaries.
We need
liquidity to pay our operating expenses, interest on our debt and dividends on
our capital stock, to maintain our securities lending activities and to replace
certain maturing liabilities. Without sufficient liquidity, we will be forced to
curtail our operations, and our business will suffer. As a holding company with
no direct operations, our principal asset is the capital stock of our insurance
and investment management subsidiaries. Our ability to meet our obligations for
payment of interest and principal on outstanding debt obligations and to pay
dividends to shareholders and corporate expenses depends significantly upon the
surplus and earnings of our subsidiaries and the ability of our subsidiaries to
pay dividends or to advance or repay funds to us. Payments of dividends and
advances or repayment of funds to us by our insurance subsidiaries are
restricted by the applicable laws and regulations of their respective
jurisdictions, including laws establishing minimum solvency and liquidity
thresholds. Changes in these laws could constrain the ability of our
subsidiaries to pay dividends or to advance or repay funds to us in sufficient
amounts and at times necessary to meet our debt obligations and corporate
expenses. For our insurance and other subsidiaries, the principal sources of our
liquidity are insurance premiums and fees, annuity considerations, investment
advisory fees, and cash flow from our investment portfolio and assets,
consisting mainly of cash or assets that are readily convertible into cash. At
the holding company level, sources of liquidity in normal markets also include a
variety of short- and long-term instruments, including credit facilities,
commercial paper and medium- and long-term debt.
In the
event that current resources do not satisfy our needs, we may have to seek
additional financing. The availability of additional financing will depend on a
variety of factors such as market conditions, the general availability of
credit, the volume of trading activities, the overall availability of credit to
the financial services industry, our credit ratings and credit capacity, as well
as the possibility that customers or lenders could develop a negative perception
of our long- or short-term financial prospects if we incur large investment
losses or if the level of our business activity decreases due to a market
downturn. Similarly, our access to funds may be impaired if regulatory
authorities or rating agencies take negative actions against us as has happened
recently. Please see “Part I - Item 1.Business – Ratings” in LNC’s
Annual Report on Form 10-K for the year ended December 31, 2008, and Part I –
Item 2. Management’s Discussion and Analysis of Financial Condition and Results
of Operation – Introduction – Executive Summary – Ratings” in LNC’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 (as each may
be updated in subsequent periodic and current reports filed with the SEC and
incorporated herein by reference) for a complete description of our ratings and
ratings outlook. Our internal sources of liquidity may prove to be
insufficient, and in such case, we may not be able to successfully obtain
additional financing on favorable terms, or at all.
Disruptions,
uncertainty or volatility in the capital and credit markets may also limit our
access to capital required to operate our business, most significantly our
insurance operations. Such market conditions may limit our ability to replace,
in a timely manner, maturing liabilities; satisfy statutory capital
requirements; generate fee income and market-related revenue to meet liquidity
needs; and access the capital necessary to grow our business. As such, we may be
forced to delay raising capital, issue shorter term securities than we prefer,
or bear an unattractive cost of capital which could decrease our profitability
and significantly reduce our financial flexibility. Recently, our credit spreads
have widened considerably, which increases the interest rate we must pay on any
new debt obligation we may issue. Our results of operations, financial
condition, cash flows and statutory capital position could be materially
adversely affected by disruptions in the financial markets.
Difficult
conditions in the global capital markets and the economy generally may
materially adversely affect our business and results of operations and we do not
expect these conditions to improve in the near future.
Our
results of operations are materially affected by conditions in the global
capital markets and the economy generally, both in the U.S. and elsewhere around
the world. The stress experienced by global capital markets that began in the
second half of 2007, substantially increased during the second half of 2008 and
continued through the first quarter of 2009. Recently, concerns over
unemployment, the availability and cost of credit, the U.S. mortgage market and
a declining real estate market in the U.S. have contributed to increased
volatility and diminished expectations for the economy and the markets going
forward. These factors, combined with volatile oil prices and declining business
and consumer confidence, have precipitated a recession. In addition, the
fixed-income markets are experiencing a period of extreme volatility, which has
negatively impacted market liquidity conditions. Initially, the concerns on the
part of market participants were focused on the subprime segment of the
mortgage-backed securities market. However, these concerns have since expanded
to include a broad range of mortgage- and asset-backed and other fixed income
securities, including those rated investment grade, the U.S. and international
credit and interbank money markets generally, and a wide range of financial
institutions and markets, asset classes and sectors. As a result, the market for
fixed income instruments has experienced decreased liquidity, increased price
volatility, credit downgrade events and increased probability of default.
Securities that are less liquid are more difficult to value and may be hard to
sell, if desired. Domestic and international equity markets have also been
experiencing heightened volatility and turmoil, with issuers (such as our
company) that have exposure to the real estate, mortgage and credit markets
particularly affected. These events and the continuing market upheavals may have
an adverse effect on us, in part because we have a large investment portfolio
and are also dependent upon customer behavior. Our revenues are likely to
decline in such circumstances and our profit margins could erode. In addition,
in the event of extreme prolonged market events, such as the global credit
crisis, we could incur significant losses. Even in the absence of a market
downturn, we are exposed to substantial risk of loss due to market
volatility.
Factors
such as consumer spending, business investment, government spending, the
volatility and strength of the capital markets and inflation all affect the
business and economic environment and, ultimately, the amount and profitability
of our business. In an economic downturn characterized by higher unemployment,
lower family income, lower corporate earnings, lower business investment and
lower consumer spending, the demand for our financial and insurance products
could be adversely affected. In addition, we may experience an elevated
incidence of claims and lapses or surrenders of policies. Our policyholders may
choose to defer paying insurance premiums or stop paying insurance premiums
altogether. Adverse changes in the economy could affect earnings negatively and
could have a material adverse effect on our business, results of operations and
financial condition. The current mortgage crisis has also raised the possibility
of future legislative and regulatory actions in addition to the recent
enactments of the EESA and the ARRA that could further impact our business. We
cannot predict whether or when such actions may occur, or what impact, if any,
such actions could have on our business, results of operations and financial
condition. A continuation of current economic conditions may require us to raise
additional capital or consider other transactions to manage our capital position
or our liquidity.
If
our businesses do not perform well and/or the price of our common stock does not
increase, we may be required to recognize an impairment of our goodwill or to
establish a valuation allowance against the deferred income tax asset, which
could have a material adverse effect on our results of operations and financial
condition.
Goodwill
represents the excess of the purchase price incurred to acquire subsidiaries and
other businesses over the fair value of their net assets as of the date of
acquisition. As of March 31, 2009, we had a total of $3.3 billion of
goodwill on our Consolidated Balance Sheets, of which $2.2 billion related
to our Insurance Solutions — Life Insurance segment and $440 million
related to our Retirement Solutions — Annuities segment. We test goodwill at
least annually for indications of value impairment, with consideration given to
financial performance and other relevant factors. In addition,
certain events, including a significant and adverse change in legal factors or
the business climate, an adverse action or assessment by a regulator or
unanticipated competition, would cause us to review the carrying amounts of
goodwill for impairment. Impairment testing is performed based upon estimates of
the fair value of the “reporting unit” to which the goodwill relates. The
reporting unit is the operating segment or a business one level below that
operating segment if discrete financial information is prepared and regularly
reviewed by management at that level. If the implied fair value of
the reporting unit’s goodwill is lower than its carrying amount, goodwill is
impaired and written down to its fair value, and a charge is reported in
impairment of intangibles on our Consolidated Statements of
Income. For the year ended December 31, 2008, we took total
pre-tax impairment charges of $176 million, primarily related to our media
business, and for the quarter ended March 31, 2009, we took a $603 million
pre-tax impairment charge primarily related to our annuities
business.
Subsequent
reviews of goodwill could result in additional impairment of goodwill during
2009, and such write downs could have a material adverse effect on our results
of operations or financial position, but will not affect the statutory capital
of our insurance subsidiaries. For more information on goodwill,
please see Note 8 and Management’s Discussion & Analysis included in LNC’s
Annual Report on Form 10-K for the year ended December 31, 2008, and Note 8 and
Management’s Discussion & Analysis included in LNC’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2009 (as each may be updated in
subsequent period and current reports filed with the SEC and incorporated herein
by reference).
Deferred
income tax represents the tax effect of the differences between the book and tax
basis of assets and liabilities. Deferred tax assets are assessed periodically
by management to determine if they are realizable. Factors in management’s
determination include the performance of the business, including the ability to
generate capital gains from a variety of sources and tax planning strategies.
If, based on available information, it is more likely than not that the deferred
income tax asset will not be realized, then a valuation allowance must be
established with a corresponding charge to net income. Such valuation allowance
could have a material adverse effect on our results of operations and financial
position, but will not affect the statutory capital of our insurance
subsidiaries.
Because
we are a holding company with no direct operations, the inability of our
subsidiaries to pay dividends to us in sufficient amounts would harm our ability
to meet our obligations.
We are a
holding company, and we have no direct operations. Our principal
assets are the capital stock of our insurance subsidiaries.
At the
holding company level, sources of liquidity in normal markets include a variety
of short- and long-term instruments, including credit facilities, commercial
paper and medium- and long-term debt. However, our ability to meet
our obligations for payment of interest and principal on outstanding debt
obligations and to pay dividends to shareholders, repurchase our securities and
pay corporate expenses depends primarily on the ability of our subsidiaries to
pay dividends or to advance or repay funds to us. Under Indiana laws
and regulations, our Indiana insurance subsidiaries, including our primary
insurance subsidiary, The Lincoln National Life Insurance Company (“LNL”), may
pay dividends to us without prior approval of the Indiana Insurance Commissioner
(the “Commissioner”) up to a certain threshold, or must receive prior approval
of the Commissioner to pay a dividend if such dividend, along with all other
dividends paid within the preceding twelve consecutive months exceed the
statutory limitation. The current Indiana statutory limitation is the greater of
10% of the insurer’s contract holders’ surplus, as shown on its last annual
statement on file with the Commissioner or the insurer’s statutory net gain from
operations for the prior calendar year.
In
addition, payments of dividends and advances or repayment of funds to us by our
insurance subsidiaries are restricted by the applicable laws of their respective
jurisdictions requiring that our insurance subsidiaries hold a specified amount
of minimum reserves in order to meet future obligations on their outstanding
policies. These regulations specify that the minimum reserves shall be
calculated to be sufficient to meet future obligations, giving consideration for
required future premiums to be received, are based on certain
specified mortality and morbidity tables, interest rates and methods of
valuation, which are subject to change. In order to meet their
claims-paying obligations, our insurance subsidiaries regularly monitor their
reserves to ensure we hold sufficient amounts to cover actual or expected
contract and claims payments. At times, we may determine that
reserves in excess of the minimum may be needed to ensure
sufficiency.
Changes
in these laws can constrain the ability of our subsidiaries to pay dividends or
to advance or repay funds to us in sufficient amounts and at times necessary to
meet our debt obligations and corporate expenses. For example, in September of
2008, the National Association of Insurance Commissioners adopted a new
statutory reserving method known as VACARVM, which will be effective as of
December 31, 2009. VACARVM has the potential to require statutory reserves well
in excess of current levels for certain variable annuity riders sold by
us. Requiring our insurance subsidiaries to hold additional reserves
will constrain their ability to pay dividends to the holding
company.
Assets in
the investment general accounts of our insurance subsidiaries support their
reserve liabilities. At March 31, 2009, 74.6% of investment general account
assets are AFS fixed maturity securities of various holdings, types and
maturities. These investments are subject to general credit, liquidity, market
and interest rate risks. Beginning in 2008 and continuing into 2009,
the capital and credit markets have experienced an unusually high degree of
volatility. As a result, the market for fixed income securities has
experienced illiquidity, increased price volatility, credit downgrade events and
increased expected probability of default. Securities that are less
liquid are more difficult to value and may be hard to sell, if
desired. These market disruptions have led to increased impairments
of securities in the general accounts of our insurance subsidiaries, thereby
reducing contract holders’ surplus.
The
earnings of our insurance subsidiaries also impact contract holders’ surplus.
Principal sources of earnings are insurance premiums and fees, annuity
considerations, investment advisory fees, and income from our investment
portfolio and assets, consisting mainly of cash or assets that are readily
convertible into cash. Recent economic conditions have resulted in
lower earnings in our insurance subsidiaries. Lower earnings
constrain the growth in the insurance subsidiaries’ capital, and therefore, the
payment of dividends and advances or repayment of funds to us.
In
addition, the amount of surplus that our insurance subsidiaries could pay as
dividends is constrained by the amount of surplus they hold to maintain their
financial strength ratings, to provide an additional layer of margin for risk
protection and for future investment in our
businesses. Notwithstanding the foregoing, we believe that our
insurance subsidiaries have sufficient liquidity to meet their policy holder
obligations and maintain their operations.
The
result of the difficult economic and market conditions in reducing the contract
holders’ surplus of our insurance subsidiaries has affected our ability to pay
shareholder dividends and to engage in share repurchases. We have
taken actions to reduce the holding company’s liquidity needs, including
reducing our quarterly common dividend to $0.01 per share and retiring long-term
debt and outstanding commercial paper in order to reduce our short-term
borrowing needs. Notwithstanding that the contract holders’ surplus
of our insurance subsidiaries may limit the amount of dividends and funds they
can transfer to the holding company, we believe that the holding company’s
ongoing cash needs will continue to be met with a combination of commercial
paper as available and a contractual inter-company borrowing facility of up to
$1 billion as well as access, if necessary, to $1 billion in bank credit lines,
none of which are currently drawn. However, a further downgrade of
our short-term credit ratings by Standard & Poor’s, Moody’s or Fitch may
limit our ability to access the commercial paper market and cause us to lean
more heavily on our inter-company borrowing facility and to access our bank
credit lines. In the event that current resources do not satisfy our
current needs, we may have to seek additional financing, which may not be
available or only available with unfavorable terms and
conditions. For a further discussion of liquidity, see “Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Review of Consolidated Financial Condition – Liquidity
and Capital Resources” of LNC’s Annual Report on Form 10-K for the year ended
December 31, 2008 (as may be updated in subsequent periodic and current reports
filed with the SEC and incorporated herein by reference).
There
can be no assurance that actions of the U.S. Government, Federal Reserve and
other governmental and regulatory bodies for the purpose of stabilizing the
financial markets will achieve the intended effect.
In
response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, on October 3, 2008, the Emergency Economic Stabilization Act
of 2008 (“EESA”) was signed into law and on February 17, 2009, the American
Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into law. The federal
government, Federal Reserve and other governmental and regulatory bodies have
taken or are considering taking other actions to address the financial crisis.
There can be no assurance as to what impact such actions will have on the
financial markets, including the extreme levels of volatility currently being
experienced.
The
difficulties faced by other financial institutions could adversely affect
us.
We have
exposure to many different industries and counterparties, and routinely execute
transactions with counterparties in the financial services industry, including
brokers and dealers, commercial banks, investment banks and other institutions.
Many of these transactions expose us to credit risk in the event of default of
our counterparty. In addition, with respect to secured transactions, our credit
risk may be exacerbated when the collateral held by us cannot be realized upon
or is liquidated at prices not sufficient to recover the full amount of the loan
or derivative exposure due to it. We also may have exposure to these financial
institutions in the form of unsecured debt instruments, derivative transactions
and/or equity investments. There can be no assurance that any such losses or
impairments to the carrying value of these assets would not materially and
adversely affect our business and results of operations.
Furthermore,
we distribute a significant amount of our insurance, annuity and mutual fund
products through large financial institutions. We believe that the mergers of
several of these entities, as well as the negative impact of the markets on
these entities, has disrupted and may lead to further disruption of their
businesses, which may have a negative effect on our production
levels.
Our
participation in a securities lending program and a reverse repurchase program
subjects us to potential liquidity and other risks.
We
participate in a securities lending program for our general account whereby
fixed income securities are loaned by our agent bank to third parties, primarily
major brokerage firms and commercial banks. The borrowers of our securities
provide us with collateral, typically in cash, which we separately maintain. We
invest such cash collateral in other securities, primarily in commercial paper
and money market or other short term funds. Securities with a cost or amortized
cost of $430 million and a fair value of $410 million were on loan
under the program as of December 31, 2008. Securities loaned under such
transactions may be sold or repledged by the transferee. We were liable for cash
collateral under our control of $427 million as of December 31,
2008.
We
participate in a reverse repurchase program for our general account whereby we
sell fixed income securities to third parties, primarily major brokerage firms,
with a concurrent agreement to repurchase those same securities at a determined
future date. The borrowers of our securities provide us with cash collateral
which is typically invested in fixed maturity securities. The fair value of
securities pledged under reverse repurchase agreements was $496 million as
of December 31, 2008.
As of
December 31, 2008, substantially all of the securities on loan under the
program could be returned to us by the borrowers at any time. Collateral
received under the reverse repurchase program cannot be returned prior to
maturity, however, market conditions on the repurchase date may limit our
ability to enter into new agreements. The return of loaned securities or our
inability to enter into new reverse repurchase agreements would require us to
return the cash collateral associated with such securities. In addition, in some
cases, the maturity of the securities held as invested collateral (i.e.
securities that we have purchased with cash received from the third parties) may
exceed the term of the related securities and the market value may fall below
the amount of cash received as collateral and invested. If we are required to
return significant amounts of cash collateral on short notice and we are forced
to sell securities to meet the return obligation, we may have difficulty selling
such collateral that is invested in securities in a timely manner, we may be
forced to sell securities in a volatile or illiquid market for less than we
otherwise would have been able to realize under normal market conditions, or
both. In addition, under stressful capital market and economic conditions, such
as those conditions we have experienced recently, liquidity broadly
deteriorates, which may further restrict our ability to sell
securities.
Our
reserves for future policy benefits and claims related to our current and future
business as well as businesses we may acquire in the future may prove to be
inadequate.
We
establish and carry, as a liability, reserves based on estimates of how much we
will need to pay for future benefits and claims. For our life insurance and
annuity products, we calculate these reserves based on many assumptions and
estimates, including estimated premiums we will receive over the assumed life of
the policy, the timing of the event covered by the insurance policy, the lapse
rate of the policies, the amount of benefits or claims to be paid and the
investment returns on the assets we purchase with the premiums we receive. The
assumptions and estimates we use in connection with establishing and carrying
our reserves are inherently uncertain. In addition, the sensitivity of our
statutory reserves and surplus established for our variable annuity base
contracts and riders to changes in the equity markets will vary depending on the
magnitude of the decline. The sensitivity will be affected by the level of
account values relative to the level of guaranteed amounts, product design and
reinsurance. Statutory reserves for variable annuities depend upon the
cumulative equity market impacts on the business in force, and therefore, result
in non-linear relationships with respect to the level of equity market
performance within any reporting period. Accordingly, we cannot determine with
precision the ultimate amount or the timing of the payment of actual benefits
and claims or whether the assets supporting the policy liabilities will grow to
the level we assume prior to payment of benefits or claims. If our actual
experience is different from our assumptions or estimates, our reserves may
prove to be inadequate in relation to our estimated future benefits and claims.
As a result, we would incur a charge to our earnings in the quarter in which we
increase our reserves.
Because
the equity markets and other factors impact the profitability and expected
profitability of many of our products, changes in equity markets and other
factors may significantly affect our business and profitability.
The fee
revenue that we earn on equity-based variable annuities, unit-linked accounts,
VUL insurance policies and investment advisory business is based upon account
values. Because strong equity markets result in higher account values, strong
equity markets positively affect our net income through increased fee revenue.
Conversely, a weakening of the equity markets results in lower fee income and
may have a material adverse effect on our results of operations and capital
resources.
The
increased fee revenue resulting from strong equity markets increases the
expected gross profits (“EGPs”) from variable insurance products as do better
than expected lapses, mortality rates and expenses. As a result, higher EGPs may
result in lower net amortized costs related to DAC, DSI, VOBA, DFEL and changes
in future contract benefits. However, a decrease in the equity markets, as well
as worse than expected increases in lapses, mortality rates and expenses,
depending upon their significance, may result in higher net amortized costs
associated with DAC, DSI, VOBA, DFEL and changes in future contract benefits and
may have a material adverse effect on our results of operations and capital
resources. For example in the fourth quarter of 2008, we reset our
baseline of account values from which EPGs are projected. As a result
of this and the impact of the volatile capital market conditions on our annuity
reserves, we had a cumulative unfavorable prospective unlocking of $223 million,
after tax.
Changes
in the equity markets, interest rates and/or volatility affect the profitability
of our products with guaranteed benefits; therefore, such changes may have a
material adverse effect on our business and profitability.
Certain
of our variable annuity products include guaranteed benefit riders. These
include guaranteed death benefit (“GDB”), guaranteed withdrawal benefit (“GWB”)
and guaranteed income benefit (“GIB”) riders. Our GWB, GIB and 4LATER® (a form
of GIB rider) features have elements of both insurance benefits accounted for
under Statement of Position 03-1 (“SOP 03-1”) and embedded derivatives accounted
for under SFAS No. 133 “Accounting for Derivative Instruments and Hedging
Activities” and SFAS No. 157, “Fair Value Measurements, (“SFAS 157”). The
SOP 03-1 component is calculated in a manner consistent with our GDB, as
described below. We weight the reserves based on the significance of their
features. The amount of reserves related to GDB for variable annuities is tied
to the difference between the value of the underlying accounts and the GDB,
calculated using a benefit ratio approach. The GDB reserves take into account
the present value of total expected GDB payments, the present value of total
expected GDB assessments over the life of the contract, claims paid to date and
assessments to date. Reserves for our GIB and certain GWB with lifetime benefits
are based on a combination of fair value of the underlying benefit and a benefit
ratio approach that is based on the projected future payments in excess of
projected future account values. The benefit ratio approach takes into account
the present value of total expected GIB payments, the present value of total
expected GIB assessments over the life of the contract, claims paid to date and
assessments to date. The amount of reserves related to those GWB that do not
have lifetime benefits is based on the fair value of the underlying
benefit.
Both the
level of expected payments and expected total assessments used in calculating
the benefit ratio are affected by the equity markets. The liabilities related to
fair value are impacted by changes in equity markets, interest rates and
volatility. Accordingly, strong equity markets will decrease the amount of
reserves that we must carry, and strong equity markets, increases in interest
rates and decreases in volatility will generally decrease the reserves
calculated using fair value. Conversely, a decrease in the equity markets will
increase the expected future payments used in the benefit ratio approach, which
has the effect of increasing the amount of reserves. Also, a decrease in the
equity market along with a decrease in interest rates and an increase in
volatility will generally result in an increase in the reserves calculated using
fair value, which are the conditions we have experienced recently.
Increases
in reserves would result in a charge to our earnings in the quarter in which the
increase occurs. Therefore, we maintain a customized dynamic hedge program that
is designed to mitigate the risks associated with income volatility around the
change in reserves on guaranteed benefits. However, the hedge positions may not
be effective to exactly offset the changes in the carrying value of the
guarantees due to, among other things, the time lag between changes in their
values and corresponding changes in the hedge positions, high levels of
volatility in the equity markets and derivatives markets, extreme swings in
interest rates, contract holder behavior different than expected and divergence
between the performance of the underlying funds and hedging indices. For
example, for the years ended December 31, 2008 and 2007, we experienced a
breakage on our guaranteed living benefits net derivatives results of
$51 million and $(136) million, pre-DAC, pre-tax. Breakage is defined as
the difference between the change in the value of the liabilities, excluding the
amount related to the non-performance risk component, and the change in the fair
value of the derivatives. The non-performance risk factor is required under SFAS
157, which requires us to consider our own credit standing, which is not hedged,
in the valuation of certain of these liabilities. A decrease in our own credit
spread could cause the value of these liabilities to increase, resulting in a
reduction to net income. Conversely, an increase in our own credit spread could
cause the value of these liabilities to decrease, resulting in an increase to
net income.
In
addition, we remain liable for the guaranteed benefits in the event that
derivative counterparties are unable or unwilling to pay, and we are also
subject to the risk that the cost of hedging these guaranteed benefits
increases, resulting in a reduction to net income. These, individually or
collectively, may have a material adverse effect on net income, financial
condition or liquidity.
Changes
in interest rates may cause interest rate spreads to decrease and may result in
increased contract withdrawals.
Because
the profitability of our fixed annuity and interest-sensitive whole life, UL and
fixed portion of VUL insurance business depends in part on interest rate
spreads, interest rate fluctuations could negatively affect our profitability.
Changes in interest rates may reduce both our profitability from spread
businesses and our return on invested capital. Some of our products, principally
fixed annuities, interest-sensitive whole life, UL and the fixed portion of VUL
insurance, have interest rate guarantees that expose us to the risk that changes
in interest rates will reduce our “spread,” or the difference between the
amounts that we are required to pay under the contracts and the amounts we are
able to earn on our general account investments intended to support our
obligations under the contracts. Declines in our spread or instances where the
returns on our general account investments are not enough to support the
interest rate guarantees on these products could have a material adverse effect
on our businesses or results of operations.
In
periods of increasing interest rates, we may not be able to replace the assets
in our general account with higher yielding assets needed to fund the higher
crediting rates necessary to keep our interest-sensitive products competitive.
We therefore may have to accept a lower spread and thus lower profitability or
face a decline in sales and greater loss of existing contracts and related
assets. In periods of declining interest rates, we have to reinvest the cash we
receive as interest or return of principal on our investments in lower yielding
instruments then available. Moreover, borrowers may prepay fixed-income
securities, commercial mortgages and mortgage-backed securities in our general
account in order to borrow at lower market rates, which exacerbates this risk.
Because we are entitled to reset the interest rates on our fixed rate annuities
only at limited, pre-established intervals, and since many of our contracts have
guaranteed minimum interest or crediting rates, our spreads could decrease and
potentially become negative. Increases in interest rates may cause increased
surrenders and withdrawals of insurance products. In periods of increasing
interest rates, policy loans and surrenders and withdrawals of life insurance
policies and annuity contracts may increase as contract holders seek to buy
products with perceived higher returns. This process may lead to a flow of cash
out of our businesses. These outflows may require investment assets to be sold
at a time when the prices of those assets are lower because of the increase in
market interest rates, which may result in realized investment losses. A sudden
demand among consumers to change product types or withdraw funds could lead us
to sell assets at a loss to meet the demand for funds.
Our
requirements to post collateral or make payments related to declines in market
value of specified assets may adversely affect our liquidity and expose us to
counterparty credit risk.
Many of
our transactions with financial and other institutions, including settling
futures positions, specify the circumstances under which the parties are
required to post collateral. The amount of collateral we may be required to post
under these agreements may increase under certain circumstances, which could
adversely affect our liquidity. In addition, under the terms of some of our
transactions, we may be required to make payments to our counterparties related
to any decline in the market value of the specified assets.
Losses
due to defaults by others could reduce our profitability or negatively affect
the value of our investments.
Third
parties that owe us money, securities or other assets may not pay or perform
their obligations. These parties include the issuers whose securities we hold,
borrowers under the mortgage loans we make, customers, trading counterparties,
counterparties under swaps and other derivative contracts, reinsurers and other
financial intermediaries. These parties may default on their obligations to us
due to bankruptcy, lack of liquidity, downturns in the economy or real estate
values, operational failure, corporate governance issues or other reasons. A
further downturn in the U.S. and other economies could result in increased
impairments.
Defaults
on our mortgage loans and volatility in performance may adversely affect our
profitability.
Our
mortgage loans face default risk and are principally collateralized by
commercial properties. Mortgage loans are stated on our balance sheet at unpaid
principal balance, adjusted for any unamortized premium or discount, deferred
fees or expenses, and are net of valuation allowances. We establish valuation
allowances for estimated impairments as of the balance sheet date based on
information, such as the market value of the underlying real estate securing the
loan, any third party guarantees on the loan balance or any cross collateral
agreements and their impact on expected recovery rates. As of December 31,
2008, no loans were in default for our mortgage loan investments. The
performance of our mortgage loan investments, however, may fluctuate in the
future. In addition, some of our mortgage loan investments have balloon payment
maturities. An increase in the default rate of our mortgage loan investments
could have a material adverse effect on our business, results of operations and
financial condition.
Further,
any geographic or sector exposure in our mortgage loans may have adverse effects
on our investment portfolios and consequently on our consolidated results of
operations or financial condition. While we seek to mitigate this risk by having
a broadly diversified portfolio, events or developments that have a negative
effect on any particular geographic region or sector may have a greater adverse
effect on the investment portfolios to the extent that the portfolios are
exposed.
Our
investments are reflected within our consolidated financial statements utilizing
different accounting bases, and, accordingly, we may not have recognized
differences, which may be significant, between cost and fair value in our
consolidated financial statements.
Our
principal investments are in fixed maturity and equity securities, mortgage
loans on real estate, policy loans, short-term investments, derivative
instruments, limited partnerships and other invested assets. The carrying value
of such investments is as follows:
|
·
|
Fixed
maturity and equity securities are classified as available-for-sale,
except for those designated as trading securities, and are reported at
their estimated fair value. The difference between the estimated fair
value and amortized cost of such securities (i.e. unrealized investment
gains and losses) are recorded as a separate component of other
comprehensive income or loss, net of adjustments to DAC, policyholder
related amounts and deferred income
taxes;
|
|
·
|
Fixed
maturity and equity securities designated as trading securities, which
support certain reinsurance arrangements, are recorded at fair value with
subsequent changes in fair value recognized in realized gain (loss).
However, offsetting the changes to fair value of the trading securities
are corresponding changes in the fair value of the embedded derivative
liability associated with the underlying reinsurance arrangement. In other
words, the investment results for the trading securities, including gains
and losses from sales, are passed directly to the reinsurers through the
contractual terms of the reinsurance
arrangements;
|
|
·
|
Short-term
investments include investments with remaining maturities of one year or
less, but greater than three months, at the time of acquisition and are
stated at amortized cost, which approximates fair
value;
|
|
|
Mortgage
loans are stated at unpaid principal balance, adjusted for any unamortized
premium or discount, deferred fees or expenses, net of valuation
allowances;
|
|
|
Policy
loans are stated at unpaid principal
balances;
|
|
|
Real
estate joint ventures and other limited partnership interests are carried
using the equity method of accounting;
and
|
|
·
|
Other
invested assets consist principally of derivatives with positive fair
values. Derivatives are carried at fair value with changes in fair value
reflected in income from non-qualifying derivatives and derivatives in
fair value hedging relationships. Derivatives in cash flow hedging
relationships are reflected as a separate component of other comprehensive
income or loss.
|
Investments
not carried at fair value in our consolidated financial statements —
principally, mortgage loans, policy loans and real estate — may have fair values
which are substantially higher or lower than the carrying value reflected in our
consolidated financial statements. In addition, unrealized losses are not
reflected in net income unless we realize the losses by either selling the
security at below amortized cost or determine that the decline in fair value is
deemed to be other-than-temporary (i.e. impaired). Each of such asset classes is
regularly evaluated for impairment under the accounting guidance appropriate to
the respective asset class.
Our
valuation of fixed maturity, equity and trading securities may include
methodologies, estimations and assumptions which are subject to differing
interpretations and could result in changes to investment valuations that may
materially adversely affect our results of operations or financial
condition.
Fixed
maturity, equity and trading securities and short-term investments, which are
reported at fair value on our Consolidated Balance Sheets, represented the
majority of our total cash and invested assets. Pursuant to SFAS 157, we have
categorized these securities into a three-level hierarchy, based on the priority
of the inputs to the respective valuation technique. The fair value hierarchy
gives the highest priority to quoted prices in active markets for identical
assets or liabilities (Level 1) and the lowest priority to unobservable inputs
(Level 3).
The
determination of fair values in the absence of quoted market prices is based on:
valuation methodologies; securities we deem to be comparable; and assumptions
deemed appropriate given the circumstances. The fair value estimates are made at
a specific point in time, based on available market information and judgments
about financial instruments, including estimates of the timing and amounts of
expected future cash flows and the credit standing of the issuer or
counterparty. Factors considered in estimating fair value include coupon rate,
maturity, estimated duration, call provisions, sinking fund requirements, credit
rating, industry sector of the issuer and quoted market prices of comparable
securities. The use of different methodologies and assumptions may have a
material effect on the estimated fair value amounts.
During
periods of market disruption, including periods of significantly
increasing/decreasing or high/low interest rates, rapidly widening credit
spreads or illiquidity, it may be difficult to value certain of our securities,
if trading becomes less frequent and/or market data becomes less observable.
There may be certain asset classes that were in active markets with significant
observable data that become illiquid due to the current financial environment.
In such cases, more securities may fall to Level 3 and thus require more
subjectivity and management judgment. As such, valuations may include inputs and
assumptions that are less observable or require greater estimation, as well as
valuation methods which are more sophisticated or require greater estimation,
thereby resulting in values which may be less than the value at which the
investments may be ultimately sold. Further, rapidly changing and unprecedented
credit and equity market conditions could materially impact the valuation of
securities as reported within our consolidated financial statements and the
period-to-period changes in value could vary significantly. Decreases in value
may have a material adverse effect on our results of operations or financial
condition.
Some
of our investments are relatively illiquid and are in asset classes that have
been experiencing significant market valuation fluctuations.
We hold
certain investments that may lack liquidity, such as privately placed fixed
maturity securities, mortgage loans, policy loans and other limited partnership
interests. These asset classes represented 25% of the carrying value of our
total cash and invested assets as of December 31, 2008. Even some of our very
high quality assets have been more illiquid as a result of the recent
challenging market conditions.
If we
require significant amounts of cash on short notice in excess of normal cash
requirements or are required to post or return collateral in connection with our
investment portfolio, derivatives transactions or securities lending activities,
we may have difficulty selling these investments in a timely manner, be forced
to sell them for less than we otherwise would have been able to realize, or
both.
The
reported value of our relatively illiquid types of investments, our investments
in the asset classes described in the paragraph above and, at times, our high
quality, generally liquid asset classes, do not necessarily reflect the lowest
current market price for the asset. If we were forced to sell certain of our
assets in the current market, there can be no assurance that we would be able to
sell them for the prices at which we have recorded them and we might be forced
to sell them at significantly lower prices.
We invest
a portion of our invested assets in investment funds, many of which make private
equity investments. The amount and timing of income from such investment funds
tends to be uneven as a result of the performance of the underlying investments,
including private equity investments. The timing of distributions from the
funds, which depends on particular events relating to the underlying
investments, as well as the funds’ schedules for making distributions and their
needs for cash, can be difficult to predict. As a result, the amount of income
that we record from these investments can vary substantially from quarter to
quarter. Recent equity and credit market volatility may reduce investment income
for these types of investments.
In
addition, other external factors may cause a drop in value of investments, such
as ratings downgrades on asset classes. For example, Congress has proposed
legislation to amends the U.S. Bankruptcy Code to permit bankruptcy courts to
modify mortgages on primary residences, including an ability to reduce
outstanding mortgage balances. Such actions by bankruptcy courts may impact the
ratings and valuation of our residential mortgage-backed investment
securities.
The
determination of the amount of allowances and impairments taken on our
investments is highly subjective and could materially impact our results of
operations or financial position.
The
determination of the amount of allowances and impairments varies by investment
type and is based upon our periodic evaluation and assessment of known and
inherent risks associated with the respective asset class. Such evaluations and
assessments are revised as conditions change and new information becomes
available. Management updates its evaluations regularly and reflects changes in
allowances and impairments in operations as such evaluations are revised. There
can be no assurance that our management has accurately assessed the level of
impairments taken and allowances reflected in our financial statements.
Furthermore, additional impairments may need to be taken or allowances provided
for in the future. Historical trends may not be indicative of future impairments
or allowances.
We
adopted FSP FAS No. 115-2 and 124-2, “Recognition and Presentation of
Other-Than-Temporary-Impairments” (“FSP FAS 115-2”) for our debt securities
effective January 1, 2009. The adoption of FSP FAS 115-2 required
that an OTTI loss be separated into the amount representing the decrease in cash
flows expected to be collected (“credit loss”), which is recognized in earnings,
and the amount related to all other factors (“noncredit loss”), which is
recognized in other comprehensive income (“OCI”). In addition, FSP
115-2 replaces the requirement for management to assert that it has the intent
and ability to hold an impaired security until recovery with the requirement
that management assert that it does not have the intent to sell the security and
that it is more likely than not that it will not have to sell the security
before recovery of its cost basis.
We
regularly review our AFS securities for declines in fair value that we determine
to be other-than-temporary. For an equity security, if we do not have
the ability and intent to hold the security for a sufficient period of time to
allow for a recovery in value, we conclude that an OTTI has occurred, and the
amortized cost of the equity security is written down to the current fair value,
with a corresponding change to realized gain (loss) on our Consolidated
Statements of Income. When assessing our ability and intent to hold
the equity security to recovery, we consider, among other things, the severity
and duration of the decline in fair value of the equity security as well as the
cause of decline, a fundamental analysis of the liquidity, business prospects
and overall financial condition of the issuer.
For a
debt security, if we intend to sell a security or it is more likely than not we
will be required to sell a debt security before recovery of its amortized cost
basis and the fair value of the debt security is below amortized cost, we
conclude than an OTTI has occurred and the amortized cost is written down to
current fair value, with a corresponding charge to realized gain (loss) on our
Consolidated Statements of Income. If we do not intend to sell a debt
security or it is not more likely than not we will be required to sell a debt
security before recovery of its amortized cost basis but the present value of
the cash flows expected to be collected is less than the amortized cost of the
debt security (referred to as the credit loss), we conclude that an OTTI has
occurred and the amortized cost is written down to the estimated recovery value
with a corresponding charge to realized gain (loss) on our Consolidated
Statements of Income, as this is also deemed the credit portion of the
OTTI. The remainder of the decline to fair value is recorded to OCI
to unrealized OTTI loss on AFS securities on our Consolidated Statements of
Stockholders’ Equity, as this is considered a noncredit (i.e., recoverable)
impairment.
We
recognized an OTTI loss of $139 million for the three months ended March 31,
2009, of which $81 million was recognized in net income on our Consolidated
Statements of Income related to credit losses and $58 million was recognized in
OCI on our Consolidated Statements of Stockholders’ Equity related to noncredit
losses. For additional details on OTTI, see Notes 2 and 5 and
Management’s Discussion & Analysis – “Critical Accounting Policies and
Estimates” and “Investments” included in LNC’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2009 (as may be updated in subsequent period and
current reports filed with the SEC and incorporated herein by
reference).
Related
to our unrealized losses, we establish deferred tax assets for the tax benefit
we may receive in the event that losses are realized. The realization
of significant realized losses could result in an inability to recover the tax
benefits and may result in the establishment of valuation allowances against our
deferred tax assets. Realized losses or impairments may have a material adverse
impact on our results of operation and financial position.
We
will be required to pay interest on our capital securities with proceeds from
the issuance of qualifying securities if we fail to achieve capital adequacy or
net income and stockholders’ equity levels.
We have
approximately $1.5 billion in principal amount of capital securities
outstanding. All of the capital securities contain covenants that require us to
make interest payments in accordance with an alternative coupon satisfaction
mechanism (“ACSM”) if we determine that one of the following triggers exists as
of the 30 th day prior to an interest payment date (“determination
date”):
|
1.
|
LNL’s
RBC ratio is less than 175% (based on the most recent annual financial
statement filed with the State of Indiana);
or
|
|
2.
|
(i) The
sum of our consolidated net income for the four trailing fiscal quarters
ending on the quarter that is two quarters prior to the most recently
completed quarter prior to the determination date is zero or negative, and
(ii) our consolidated stockholders’ equity (excluding accumulated
other comprehensive income and any increase in stockholders’ equity
resulting from the issuance of preferred stock during a quarter)
(“adjusted stockholders’ equity”) as of (x) the most recently
completed quarter and (y) the end of the quarter that is two quarters
before the most recently completed quarter, has declined by 10% or more as
compared to the quarter that is ten fiscal quarters prior to the last
completed quarter (the “benchmark
quarter”).
|
The ACSM
would generally require us to use commercially reasonable efforts to satisfy our
obligation to pay interest in full on the capital securities with the net
proceeds from sales of our common stock and warrants to purchase our common
stock with an exercise price greater than the market price. We would have to
utilize the ACSM until the trigger events above no longer existed, and, in the
case of test 2 above, our adjusted stockholders’ equity amount has increased or
has declined by less than 10% as compared to the adjusted stockholders’ equity
at the end of the benchmark quarter for each interest payment date as to which
interest payment restrictions were imposed by test 2 above.
As a
result of our consolidated net loss of $579 million for the three months ended
March 31, 2009, we had a trailing four quarter consolidated net loss of $811
million. Accordingly, we have triggered test 2(i) looking forward to
the quarter ending September 30, 2009. Also, looking forward to the
quarter ending September 30, 2009, we have triggered test 2(ii)(y) above as our
adjusted shareholders’ equity as of March 31, 2009, as compared to the benchmark
quarter (March 31, 2007) has declined by 10% or more. If our adjusted
shareholders’ equity as of September 30, 2009, increases by less than $29
million or further declines, then we would also trigger test 2(ii)(x) above,
which would trigger the ACSM for at least our interest payments due on November
17, 2009, and January 20, 2010, of approximately $33 million.
If we
were required to utilize the ACSM and were successful in selling sufficient
common shares or warrants to satisfy the interest payment, we would dilute the
current holders of our common stock. Furthermore, while a trigger event is
occurring and if we do not pay accrued interest in full, we may not, among other
things, pay dividends on or repurchase our capital stock. Our failure to pay
interest pursuant to the ACSM will not result in an event of default with
respect to the capital securities, nor will a nonpayment of interest, unless it
lasts for ten consecutive years, although such breaches may result in monetary
damages to the holders of the capital securities.
The
calculations of RBC, net income (loss) and adjusted stockholders’ equity
are subject to adjustments and the capital securities are subject to additional
terms and conditions as further described in supplemental indentures filed as
exhibits to our Forms 8-K filed on March 13, 2007, May 17, 2006, and
April 20, 2006.
A
decrease in the capital and surplus of our insurance subsidiaries may result in
a downgrade to our credit and insurer financial strength ratings.
In any
particular year, statutory surplus amounts and RBC ratios may increase or
decrease depending on a variety of factors — the amount of statutory income or
losses generated by our insurance subsidiaries (which itself is sensitive to
equity market and credit market conditions), the amount of additional capital
our insurance subsidiaries must hold to support business growth, changes in
reserving requirements, such as VACARVM and principles based reserving, our
inability to secure capital market solutions to provide reserve relief, such as
issuing letters of credit to support captive reinsurance structures, changes in
equity market levels, the value of certain fixed-income and equity securities in
our investment portfolio, the value of certain derivative instruments that do
not get hedge accounting, changes in interest rates and foreign currency
exchange rates, as well as changes to the NAIC RBC formulas. The RBC ratio is
also affected by the product mix of the in-force book of business (i.e. the
amount of business without guarantees is not subject to the same level of
reserves as the business with guarantees). Most of these factors are outside of
our control. Our credit and insurer financial strength ratings are significantly
influenced by the statutory surplus amounts and RBC ratios of our insurance
company subsidiaries. The RBC ratio of LNL is an important factor in the
determination of the credit and financial strength ratings of LNC and its
subsidiaries. In addition, rating agencies may implement changes to their
internal models that have the effect of increasing or decreasing the amount of
statutory capital we must hold in order to maintain our current ratings. In
addition, in extreme scenarios of equity market declines, the amount of
additional statutory reserves that we are required to hold for our variable
annuity guarantees may increase at a rate greater than the rate of change of the
markets. Increases in reserves reduce the statutory surplus used in calculating
our RBC ratios. To the extent that our statutory capital resources are deemed to
be insufficient to maintain a particular rating by one or more rating agencies,
we may seek to raise additional capital through public or private equity or debt
financing, which may be on terms not as favorable as in the past. Alternatively,
if we were not to raise additional capital in such a scenario, either at our
discretion or because we were unable to do so, our financial strength and credit
ratings might be downgraded by one or more rating agencies. For more information
on risks regarding our ratings, see “A downgrade in our financial strength or
credit ratings could limit our ability to market products, increase the number
or value of policies being surrendered and/or hurt our relationships with
creditors” below.
A
downgrade in our financial strength or credit ratings could limit our ability to
market products, increase the number or value of policies being surrendered
and/or hurt our relationships with creditors.
Nationally
recognized rating agencies rate the financial strength of our principal
insurance subsidiaries and rate our debt. Ratings are not recommendations to buy
our securities. Each of the rating agencies reviews its ratings periodically,
and our current ratings may not be maintained in the future. In late September
and early October of 2008, A.M. Best, Fitch, Moody’s and S&P each revised
their outlook for the U.S. life insurance sector from stable to
negative. We believe that the rating agencies may heighten the level
of scrutiny that they apply to such institutions, may increase the frequency and
scope of their credit reviews, may request additional information from the
companies that they rate and may adjust upward the capital and other
requirements employed in the rating agency models for maintenance of certain
ratings levels. In addition, actions we take to access third-party financing may
in turn cause rating agencies to reevaluate our ratings.
Our
financial strength ratings, which are intended to measure our ability to meet
contract holder obligations, are an important factor affecting public confidence
in most of our products and, as a result, our competitiveness. A downgrade of
the financial strength rating of one of our principal insurance subsidiaries
could affect our competitive position in the insurance industry by making it
more difficult for us to market our products as potential customers may select
companies with higher financial strength ratings and by leading to increased
withdrawals by current customers seeking companies with higher financial
strength ratings.
This
could lead to a decrease in fees as net outflows of assets increase, and
therefore, result in lower fee income. Furthermore, sales of assets to meet
customer withdrawal demands could also result in losses, depending on market
conditions. The interest rates we pay on our borrowings are largely dependent on
our credit ratings. The recent downgrades and future downgrades of our debt
ratings could affect our ability to raise additional debt, including bank lines
of credit, with terms and conditions similar to our current debt, and
accordingly, likely increase our cost of capital. In addition, the recent
downgrades and future downgrades of these ratings could make it more difficult
to raise capital to refinance any maturing debt obligations, to support business
growth at our insurance subsidiaries and to maintain or improve the current
financial strength ratings of our principal insurance subsidiaries. Additional
future downgrades of one or more of our ratings have become more likely as
several of the ratings agencies have negative outlooks on our credit and insurer
financial strength ratings. Please see “Item 1. Business – Ratings”
in LNC’s Annual Report on Form 10-K for the year ended December 31, 2008 (as may
be updated in subsequent periodic and current reports filed with the SEC and
incorporated herein by reference) for a complete description of our ratings and
ratings outlook. Since the filing of our 10-K, Moody’s, on April 15,
2009 downgraded our long-term credit rating to Baa2 (9th of 21) and also
downgraded the financial strength ratings of LNL, Lincoln Life and Annuity
Company of New York (“LLANY”) and First Penn-Pacific Life Insurance Company
(“FPP”) to A2/A2/A2 (6th of 21), respectively. All ratings are
currently under review for possible downgrade, which indicates that our ratings
could be affirmed or lowered in the near term based on developments in financial
market conditions and/or our business performance or financial
measures. On April 16, 2009, Fitch downgraded our short-term debt
ratings to F-2 (3rd of 7) and our long-term debt ratings to BBB (9th of 21) and
also downgraded the financial strength ratings of LNL, LLANY and FPP to A+/A+/A+
(5th of 21), respectively. Fitch’s outlook on all of our ratings
remained negative. In addition, on May 6, 2009, Standard & Poor’s
(“S&P”) revised its outlook for the holding company and insurance
subsidiaries to negative from stable and affirmed all ratings.
As a result of S&Pֹs
downgrade of LNC’s short-term credit rating to A-2, we are not currently
eligible to issue new commerical paper under the Federal Reserve’s Commercial
Paper Funding Facility (“CPFF”), which we believe will make it more
expensive to sell additional commercial paper, and it may make it more likely
that we will have to utilize other sources of liquidity, including our credit
facilities, for liquidity purposes. Prior to the downgrade, we were eligible to
sell up to a maximum of $575 million to the CPFF.
Certain
blocks of our insurance business purchased from third-party insurers under
indemnity reinsurance agreements may require us to place assets in trust, secure
letters of credit or return the business, if the financial strength ratings
and/or capital ratios of certain insurance subsidiaries are not maintained at
specified levels.
Under
certain indemnity reinsurance agreements, one of our insurance subsidiaries,
LLANY, provides 100% indemnity reinsurance for the business assumed, however,
the third-party insurer (the “cedent”) remains primarily liable on the
underlying insurance business. Under these types of agreements, at
December 31, 2008, we held statutory reserves of approximately
$3.5 billion. These indemnity reinsurance arrangements require that our
subsidiary, as the reinsurer, maintain certain insurer financial strength
ratings and capital ratios. If these ratings or capital ratios are not
maintained, depending upon the reinsurance agreement, the cedent may recapture
the business, or require us to place assets in trust or provide letters of
credit at least equal to the relevant statutory reserves. Under the largest
indemnity reinsurance arrangement, we held approximately $2.4 billion of
statutory reserves at December 31, 2008. LLANY must maintain an A.M. Best
financial strength rating of at least B+, an S&P financial strength rating
of at least BB+ and a Moody’s financial strength rating of at least Ba1, as well
as maintain a RBC ratio of at least 160% or an S&P capital adequacy ratio of
100%, or the cedent may recapture the business. Under two other arrangements, by
which we established approximately $1 billion of statutory reserves, LLANY
must maintain an A.M. Best financial strength rating of at least B++, an S&P
financial strength rating of at least BBB- and a Moody’s financial strength
rating of at least Baa3. One of these arrangements also requires LLANY to
maintain an RBC ratio of at least 185% or an S&P capital adequacy ratio of
115%. Each of these arrangements may require LLANY to place assets in trust
equal to the relevant statutory reserves. As of December 31, 2008, LLANY’s
RBC ratio exceeded 500%. Please see “Item 1.Business – Ratings” in
LNC’s Annual Report on Form 10-K for the year ended December 31, 2008 (as may be
updated in subsequent periodic and current reports filed with the SEC and
incorporated herein by reference) for a complete description of our ratings and
ratings outlook.
If the
cedent recaptured the business, LLANY would be required to release reserves and
transfer assets to the cedent. Such a recapture could adversely impact our
future profits. Alternatively, if LLANY established a security trust for the
cedent, the ability to transfer assets out of the trust could be severely
restricted, thus negatively impacting our liquidity.
Our
businesses are heavily regulated and changes in regulation may reduce our
profitability.
Our
insurance subsidiaries are subject to extensive supervision and regulation in
the states in which we do business. The supervision and regulation relate to
numerous aspects of our business and financial condition. The primary purpose of
the supervision and regulation is the protection of our insurance contract
holders, and not our investors. The extent of regulation varies, but generally
is governed by state statutes. These statutes delegate regulatory, supervisory
and administrative authority to state insurance departments. This system of
supervision and regulation covers, among other things:
|
·
|
Standards
of minimum capital requirements and solvency, including RBC
measurements;
|
|
·
|
Restrictions
of certain transactions between our insurance subsidiaries and their
affiliates;
|
|
·
|
Restrictions
on the nature, quality and concentration of
investments;
|
|
·
|
Restrictions
on the types of terms and conditions that we can include in the insurance
policies offered by our primary insurance
operations;
|
|
·
|
Limitations
on the amount of dividends that insurance subsidiaries can
pay;
|
|
·
|
The
existence and licensing status of the company under circumstances where it
is not writing new or renewal
business;
|
|
·
|
Certain
required methods of accounting;
|
|
·
|
Reserves
for unearned premiums, losses and other purposes;
and
|
|
·
|
Assignment
of residual market business and potential assessments for the provision of
funds necessary for the settlement of covered claims under certain
policies provided by impaired, insolvent or failed insurance
companies.
|
We may be
unable to maintain all required licenses and approvals and our business may not
fully comply with the wide variety of applicable laws and regulations or the
relevant authority’s interpretation of the laws and regulations, which may
change from time to time. Also, regulatory authorities have relatively broad
discretion to grant, renew or revoke licenses and approvals. If we do not have
the requisite licenses and approvals or do not comply with applicable regulatory
requirements, the insurance regulatory authorities could preclude or temporarily
suspend us from carrying on some or all of our activities or impose substantial
fines. Further, insurance regulatory authorities have relatively broad
discretion to issue orders of supervision, which permit such authorities to
supervise the business and operations of an insurance company. As of
December 31, 2008, no state insurance regulatory authority had imposed on
us any substantial fines or revoked or suspended any of our licenses to conduct
insurance business in any state or issued an order of supervision with respect
to our insurance subsidiaries, which would have a material adverse effect on our
results of operations or financial condition.
In
addition, Lincoln Financial Network and Lincoln Financial Distributors, as well
as our variable annuities and variable life insurance products, are subject to
regulation and supervision by the SEC and the Financial Industry Regulation
Authority (“FINRA”). Our Investment Management segment is subject to regulation
and supervision by the SEC, the FINRA, the Municipal Securities Rulemaking
Board, the Pennsylvania Department of Banking and jurisdictions of the states,
territories and foreign countries in which they are licensed to do business.
Lincoln UK is subject to regulation by the FSA in the U.K. LNC, as a savings and
loan holding company and Newton County Loan and Savings, FSB, are subject to
regulation and supervision by the Office of Thrift Supervision. These laws and
regulations generally grant supervisory agencies and self-regulatory
organizations broad administrative powers, including the power to limit or
restrict the subsidiaries from carrying on their businesses in the event that
they fail to comply with such laws and regulations. Finally, our radio
operations require a license, subject to periodic renewal, from the Federal
Communications Commission to operate. While management considers the likelihood
of a failure to renew remote, any station that fails to receive renewal would be
forced to cease operations.
Many of
the foregoing regulatory or governmental bodies have the authority to review our
products and business practices and those of our agents and employees. In recent
years, there has been increased scrutiny of our businesses by these bodies,
which has included more extensive examinations, regular “sweep” inquiries and
more detailed review of disclosure documents. These regulatory or governmental
bodies may bring regulatory or other legal actions against us if, in their view,
our practices, or those of our agents or employees, are improper. These actions
can result in substantial fines, penalties or prohibitions or restrictions on
our business activities and could have a material adverse effect on our
business, results of operations or financial condition.
Attempts
to mitigate the impact of Regulation XXX and Actuarial Guideline 38 may
fail in whole or in part resulting in an adverse effect on our financial
condition and results of operations.
The Model
Regulation entitled “Valuation of Life Insurance Policies,” commonly known as
“Regulation XXX” or “XXX,” requires insurers to establish additional statutory
reserves for term life insurance policies with long-term premium guarantees and
UL policies with secondary guarantees. In addition, Actuarial Guideline 38
(“AG38”) clarifies the application of XXX with respect to certain UL insurance
policies with secondary guarantees. Virtually all of our newly issued term and
the great majority of our newly issued UL insurance products are now affected by
XXX and AG38.
As a
result of this regulation, we have established higher statutory reserves for
term and UL insurance products and changed our premium rates for term life
insurance products. We also have implemented reinsurance and capital management
actions to mitigate the capital impact of XXX and AG38, including the use of
letters of credit to support the reinsurance provided by a captive reinsurance
subsidiary. However, we cannot provide assurance that there will not be
regulatory, rating agency or other challenges to the actions we have taken to
date. The result of those potential challenges could require us to increase
statutory reserves or incur higher operating and/or tax costs. Any change to or
repeal of XXX or AG38 could reduce the competitive advantage of our reinsurance
and capital management actions and could adversely affect our market position in
the life insurance market. In addition, as a result of current capital market
conditions and disruption in the credit markets, our ability to secure
additional letters of credit or to secure them at current costs may impact the
profitability of term and UL insurance products. Please see “Part II
- Item 7. Managements Discussion & Analysis of Financial Condition and
Results of Operations – Liquidity and Capital Resources – Sources of Liquidity
and Cash Flow – Subsidiaries” in LNC’s Annual Report on Form 10-K for the year
ended December 31, 2008 (as may be updated in subsequent periodic and current
reports filed with the SEC and incorporated herein by reference) for a further
discussion of our capital management in connection with XXX.
In light
of the current downturn in the credit markets and the increased spreads on
asset-backed debt securities, we also cannot provide assurance that we will be
able to continue to implement actions to mitigate the impact of XXX or AG38 on
future sales of term and UL insurance products. If we are unable to continue to
implement those actions, we may be required to increase statutory reserves,
incur higher operating costs and lower returns on products sold than we
currently anticipate or reduce our sales of these products. We also may have to
implement measures that may be disruptive to our business. For example, because
term and UL insurance are particularly price-sensitive products, any increase in
premiums charged on these products in order to compensate us for the increased
statutory reserve requirements or higher costs of reinsurance may result in a
significant loss of volume and adversely affect our life insurance
operations.
A
drop in the rankings of the mutual funds that we manage, as well as a loss of
key portfolio managers, could result in lower advisory fees.
While
mutual funds are not rated, per se, many industry periodicals and services, such
as Lipper, provide rankings of mutual fund performance. These rankings often
have an impact on the decisions of customers regarding which mutual funds to
invest in. If the rankings of the mutual funds for which we provide advisory
services decrease materially, the funds’ assets may decrease as customers leave
for funds with higher performance rankings. Similarly, a loss of our key
portfolio managers who manage mutual fund investments could result in poorer
fund performance, as well as customers leaving these mutual funds for new mutual
funds managed by the portfolio managers. Any loss of fund assets would decrease
the advisory fees that we earn from such mutual funds, which are generally tied
to the amount of fund assets and performance. This would have an adverse effect
on our results of operations.
Changes
in accounting standards issued by the Financial Accounting Standards Board or
other standard-setting bodies may adversely affect our financial
statements.
Our
financial statements are subject to the application of GAAP, which is
periodically revised and/or expanded. Accordingly, from time to time we are
required to adopt new or revised accounting standards or guidance issued by
recognized authoritative bodies, including the Financial Accounting Standards
Board. It is possible that future accounting standards we are required to adopt
could change the current accounting treatment that we apply to our consolidated
financial statements and that such changes could have a material adverse effect
on our financial condition and results of operations.
Legal
and regulatory actions are inherent in our businesses and could result in
financial losses or harm our businesses.
We are,
and in the future may be, subject to legal actions in the ordinary course of our
insurance and investment management operations, both domestically and
internationally. Pending legal actions include proceedings relating to aspects
of our businesses and operations that are specific to us and proceedings that
are typical of the businesses in which we operate. Some of these proceedings
have been brought on behalf of various alleged classes of complainants. In
certain of these matters, the plaintiffs are seeking large and/or indeterminate
amounts, including punitive or exemplary damages. Substantial legal liability in
these or future legal or regulatory actions could have a material financial
effect or cause significant harm to our reputation, which in turn could
materially harm our business prospects. For more information on
pending material legal proceedings, please see Note 14 of the Consolidated
Financial Statements included in Item 8 of LNC’s Annual Report on Form 10-K for
the year ended December 31, 2008 (as may be updated in subsequent periodic and
current reports filed with the SEC and incorporated herein by reference) for a
description of our reportable litigation.
Changes
in U.S. federal income tax law could increase our tax costs.
Changes
to the Internal Revenue Code, administrative rulings or court decisions could
increase our effective tax rate and lower our net income. In this regard, on
August 16, 2007, the Internal Revenue Service (“IRS”) issued a revenue
ruling which purports, among other things, to modify the calculation of separate
account deduction for dividends received by life insurance companies.
Subsequently, the IRS issued another revenue ruling that suspended the
August 16, 2007, ruling and announced a new regulation project on the
issue. Our income tax provision for the year ended December 31, 2008,
included a separate account dividend received deduction benefit of
$81.6 million.
Our
risk management policies and procedures may leave us exposed to unidentified or
unanticipated risk, which could negatively affect our businesses or result in
losses.
We have
devoted significant resources to develop our risk management policies and
procedures and expect to continue to do so in the future. Nonetheless, our
policies and procedures to identify, monitor and manage risks may not be fully
effective. Many of our methods of managing risk and exposures are based upon our
use of observed historical market behavior or statistics based on historical
models. As a result, these methods may not predict future exposures, which could
be significantly greater than the historical measures indicate, such as the risk
of pandemics causing a large number of deaths. Other risk management methods
depend upon the evaluation of information regarding markets, clients,
catastrophe occurrence or other matters that is publicly available or otherwise
accessible to us, which may not always be accurate, complete, up-to-date or
properly evaluated. Management of operational, legal and regulatory risks
requires, among other things, policies and procedures to record properly and
verify a large number of transactions and events, and these policies and
procedures may not be fully effective.
We
face a risk of non-collectibility of reinsurance, which could materially affect
our results of operations.
We follow
the insurance practice of reinsuring with other insurance and reinsurance
companies a portion of the risks under the policies written by our insurance
subsidiaries (known as ceding). As of December 31, 2008, we have ceded
approximately $347 billion of life insurance in force to reinsurers for
reinsurance protection. Although reinsurance does not discharge our subsidiaries
from their primary obligation to pay contract holders for losses insured under
the policies we issue, reinsurance does make the assuming reinsurer liable to
the insurance subsidiaries for the reinsured portion of the risk. As of
December 31, 2008, we had $8.5 billion of reinsurance receivables from
reinsurers for paid and unpaid losses, for which they are obligated to reimburse
us under our reinsurance contracts. Of this amount, $4.5 billion relates to
the sale of our reinsurance business to Swiss Re in 2001 through an indemnity
reinsurance agreement. Swiss Re has funded a trust to support this business. The
balance in the trust changes as a result of ongoing reinsurance activity and was
$1.9 billion as of December 31, 2008. In addition, should Swiss Re’s
financial strength ratings drop below either S&P AA- or A.M. Best A, or
their NAIC RBC ratio fall below 250%, assets equal to the reserves supporting
business reinsured must be placed into a trust according to pre-established
asset quality guidelines. Furthermore, approximately $2.0 billion of the
Swiss Re treaties are funds withheld structures where we have a right of offset
on assets backing the reinsurance receivables.
The
balance of the reinsurance is due from a diverse group of reinsurers. The
collectibility of reinsurance is largely a function of the solvency of the
individual reinsurers. We perform annual credit reviews on our reinsurers,
focusing on, among other things, financial capacity, stability, trends and
commitment to the reinsurance business. We also require assets in trust, letters
of credit or other acceptable collateral to support balances due from reinsurers
not authorized to transact business in the applicable jurisdictions. Despite
these measures, a reinsurer’s insolvency, inability or unwillingness to make
payments under the terms of a reinsurance contract, especially Swiss Re, could
have a material adverse effect on our results of operations and financial
condition.
Significant
adverse mortality experience may result in the loss of, or higher prices for,
reinsurance.
We
reinsure a significant amount of the mortality risk on fully underwritten, newly
issued, individual life insurance contracts. We regularly review retention
limits for continued appropriateness and they may be changed in the future. If
we were to experience adverse mortality or morbidity experience, a significant
portion of that would be reimbursed by our reinsurers. Prolonged or severe
adverse mortality or morbidity experience could result in increased reinsurance
costs, and ultimately, reinsurers not willing to offer coverage. If we are
unable to maintain our current level of reinsurance or purchase new reinsurance
protection in amounts that we consider sufficient, we would either have to be
willing to accept an increase in our net exposures or revise our pricing to
reflect higher reinsurance premiums. If this were to occur, we may be exposed to
reduced profitability and cash flow strain or we may not be able to price new
business at competitive rates.
Catastrophes
may adversely impact liabilities for contract holder claims and the availability
of reinsurance.
Our
insurance operations are exposed to the risk of catastrophic mortality, such as
a pandemic, an act of terrorism or other event that causes a large number of
deaths or injuries. Significant influenza pandemics have occurred three times in
the last century, but the likelihood, timing or severity of a future pandemic
cannot be predicted. In our group insurance operations, a localized event that
affects the workplace of one or more of our group insurance customers could
cause a significant loss due to mortality or morbidity claims. These events
could cause a material adverse effect on our results of operations in any period
and, depending on their severity, could also materially and adversely affect our
financial condition.
The
extent of losses from a catastrophe is a function of both the total amount of
insured exposure in the area affected by the event and the severity of the
event. Pandemics, hurricanes, earthquakes and man-made catastrophes, including
terrorism, may produce significant damage in larger areas, especially those that
are heavily populated. Claims resulting from natural or man-made catastrophic
events could cause substantial volatility in our financial results for any
fiscal quarter or year and could materially reduce our profitability or harm our
financial condition. Also, catastrophic events could harm the financial
condition of our reinsurers and thereby increase the probability of default on
reinsurance recoveries. Accordingly, our ability to write new business could
also be affected.
Consistent
with industry practice and accounting standards, we establish liabilities for
claims arising from a catastrophe only after assessing the probable losses
arising from the event. We cannot be certain that the liabilities we have
established or applicable reinsurance will be adequate to cover actual claim
liabilities, and a catastrophic event or multiple catastrophic events could have
a material adverse effect on our business, results of operations and financial
condition.
We
may be unable to attract and retain sales representatives and other employees
and independent contractors, particularly financial advisors.
We
compete to attract and retain financial advisors, wholesalers, portfolio
managers and other employees and independent contractors, as well as independent
distributors of our products. Intense competition exists for persons and
independent distributors with demonstrated ability. We compete with other
financial institutions primarily on the basis of our products, compensation,
support services and financial position. Sales in our businesses and our results
of operations and financial condition could be materially adversely affected if
we are unsuccessful in attracting and retaining financial advisors, wholesalers,
portfolio managers and other employees, as well as independent distributors of
our products.
Our
sales representatives are not captive and may sell products of our
competitors.
We sell
our annuity and life insurance products through independent sales
representatives. These representatives are not captive, which means they may
also sell our competitors’ products. If our competitors offer products that are
more attractive than ours, or pay higher commission rates to the sales
representatives than we do, these representatives may concentrate their efforts
in selling our competitors’ products instead of ours.
We
may not be able to protect our intellectual property and may be subject to
infringement claims.
We rely
on a combination of contractual rights and copyright, trademark, patent and
trade secret laws to establish and protect our intellectual property. Although
we use a broad range of measures to protect our intellectual property rights,
third parties may infringe or misappropriate our intellectual property. We may
have to litigate to enforce and protect our copyrights, trademarks, patents,
trade secrets and know-how or to determine their scope, validity or
enforceability, which represents a diversion of resources that may be
significant in amount and may not prove successful. The loss of intellectual
property protection or the inability to secure or enforce the protection of our
intellectual property assets could have a material adverse effect on our
business and our ability to compete.
We also
may be subject to costly litigation in the event that another party alleges our
operations or activities infringe upon another party’s intellectual property
rights. Third parties may have, or may eventually be issued, patents that could
be infringed by our products, methods, processes or services. Any party that
holds such a patent could make a claim of infringement against us. We may also
be subject to claims by third parties for breach of copyright, trademark, trade
secret or license usage rights. Any such claims and any resulting litigation
could result in significant liability for damages. If we were found to have
infringed a third-party patent or other intellectual property rights, we could
incur substantial liability, and in some circumstances could be enjoined from
providing certain products or services to our customers or utilizing and
benefiting from certain methods, processes, copyrights, trademarks, trade
secrets or licenses, or alternatively could be required to enter into costly
licensing arrangements with third parties, all of which could have a material
adverse effect on our business, results of operations and financial
condition.
Intense
competition could negatively affect our ability to maintain or increase our
profitability.
Our
businesses are intensely competitive. We compete based on a number of factors,
including name recognition, service, the quality of investment advice,
investment performance, product features, price, perceived financial strength
and claims-paying and credit ratings. Our competitors include insurers,
broker-dealers, financial advisors, asset managers and other financial
institutions. A number of our business units face competitors that have greater
market share, offer a broader range of products or have higher financial
strength or credit ratings than we do.
In recent
years, there has been substantial consolidation and convergence among companies
in the financial services industry resulting in increased competition from
large, well-capitalized financial services firms. Many of these firms also have
been able to increase their distribution systems through mergers or contractual
arrangements. Furthermore, larger competitors may have lower operating costs and
an ability to absorb greater risk while maintaining their financial strength
ratings, thereby allowing them to price their products more competitively. We
expect consolidation to continue and perhaps accelerate in the future, thereby
increasing competitive pressure on us.
Anti-takeover
provisions could delay, deter or prevent our change in control, even if the
change in control would be beneficial to LNC shareholders.
We are an
Indiana corporation subject to Indiana state law. Certain provisions of Indiana
law could interfere with or restrict takeover bids or other change in control
events affecting us. Also, provisions in our articles of incorporation, bylaws
and other agreements to which we are a party could delay, deter or prevent our
change in control, even if a change in control would be beneficial to
shareholders. In addition, under Indiana law, directors may, in considering the
best interests of a corporation, consider the effects of any action on
stockholders, employees, suppliers and customers of the corporation and the
communities in which offices and other facilities are located, and other factors
the directors consider pertinent. One statutory provision prohibits, except
under specified circumstances, LNC from engaging in any business combination
with any shareholder who owns 10% or more of our common stock (which
shareholder, under the statute, would be considered an “interested shareholder”)
for a period of five years following the time that such shareholder became an
interested shareholder, unless such business combination is approved by the
board of directors prior to such person becoming an interested shareholder. In
addition, our articles of incorporation contain a provision requiring holders of
at least three-fourths of our voting shares then outstanding and entitled to
vote at an election of directors, voting together, to approve a transaction with
an interested shareholder rather than the simple majority required under Indiana
law.
In
addition to the anti-takeover provisions of Indiana law, there are other factors
that may delay, deter or prevent our change in control. As an insurance holding
company, we are regulated as an insurance holding company and are subject to the
insurance holding company acts of the states in which our insurance company
subsidiaries are domiciled. The insurance holding company acts and regulations
restrict the ability of any person to obtain control of an insurance company
without prior regulatory approval. Under those statutes and regulations, without
such approval (or an exemption), no person may acquire any voting security of a
domestic insurance company, or an insurance holding company which controls an
insurance company, or merge with such a holding company, if as a result of such
transaction such person would “control” the insurance holding company or
insurance company. “Control” is generally defined as the direct or indirect
power to direct or cause the direction of the management and policies of a
person and is presumed to exist if a person directly or indirectly owns or
controls 10% or more of the voting securities of another person. Similarly, as a
result of its ownership of Newton County Loan & Savings, FSB, LNC is
considered to be a savings and loan holding company. Federal banking laws
generally provide that no person may acquire control of LNC, and gain indirect
control of Newton County Loan & Savings, FSB, without prior regulatory
approval. Generally, beneficial ownership of 10% or more of the voting
securities of LNC would be presumed to constitute control.
SUMMARY
OF THE PLAN
The
Lincoln National Corporation 1997 Incentive Compensation Plan (the "Plan") was
established by our Board of Directors on May 13, 1997, subject to shareholder
approval, and approved by our shareholders at their Annual Meeting held on May
15, 1997. The Plan was subsequently amended and restated as approved by
shareholders at their Annual Meetings on May 10, 2001, May 12, 2005, May 10,
2007 and May 14, 2009. The last version of the Plan is referred to below as the
2009 Amended and Restated Plan.
Described
below are the major features of the 2009 Amended and Restated Plan. The
statements contained in this prospectus concerning the Plan are brief summaries,
qualified in their entirety by reference to the terms of the 2009 Amended and
Restated Plan itself. Eligible participants and their beneficiaries may examine
copies of the Plan upon request at our principal executive offices.
1. Purpose of the Plan. Our Board of Directors
believes that attracting and retaining key employees is essential to our growth
and success. In addition, the Board believes that our long-term success is
enhanced by a competitive and comprehensive compensation program, which may
include tailored incentives designed to motivate and reward such persons for
outstanding service, including awards that link compensation to applicable
measures of our performance and the creation of shareholder value. These awards
will enable us to attract and retain key employees and enable such persons to
acquire and/or increase their proprietary interest in us and thereby align their
interests with the interests of our shareholders. In addition, the Board has
concluded that the Compensation Committee, or Committee, of the Board should be
given sufficient flexibility to provide for annual and long-term incentive
awards contingent on performance.
2. Types of Awards. The terms of the 2009
Amended and Restated Plan provide for grants of stock options, stock
appreciation rights (“SARs”), restricted stock, restricted stock units, deferred
stock units, other stock-related awards, and performance or annual incentive
awards that may be settled in cash, stock, or other property
(“Awards”).
3. Shares Subject to the 2009 Amended and Restated Plan;
Annual Per-Person Limitations.
Under the
2009 Amended and Restated Plan, the total number of shares of our Common Stock
reserved and available for delivery to participants in connection with Awards is
44,126,512 of which 34,960,549 shares were either issued or reserved for
issuance under outstanding Awards at December 31, 2008. Shares that may be
issued in payment of Awards, other than Options and SARs,
granted on or after May 14, 2009 shall be counted against the remaining shares
at a ratio of 1.63-to-1. The total number of shares of Common Stock with respect
to which incentive stock options (“ISOs”), none of which are currently
outstanding, may be granted shall not exceed 2,000,000. The shares available for
issuance under the 2009 Amended and Restated Plan will vary at any point in time
due to new Award grants and expirations, forfeitures and cancellations of
outstanding Awards as discussed in the following paragraph. Any
shares of Common Stock delivered under the 2009 Amended and Restated Plan shall
consist of authorized and unissued shares.
The
2009 Amended and Restated Plan contains rules to permit all awards to be
properly counted and not counted twice. These rules will apply to shares
previously authorized under any other plan at the time they become subject to
the 2009 Amended and Restated Plan. Forfeited, terminated or expired awards of
shares, as well as awards settled in cash without issuing any shares, will
become available for future awards using the same counting formula described
above depending on their date of grant. With respect to stock settled SARS and
options, the full issuance of shares to settle such Awards will count against
shares available under the 2009 Amended and Restated Plan, that is at a ratio of
1-to-1.
In
addition, the 2009 Amended and Restated Plan imposes individual limitations on
the amount of certain Awards in order to comply with Section 162(m) of the Code.
Under these limitations, during any fiscal year the number of options, SARs,
shares of restricted stock, units of deferred stock, shares of Common Stock
issued as a bonus or in lieu of other obligations, and other stock-based Awards
granted to any one participant shall not exceed 2,000,000 shares for each type
of such Award, subject to adjustment in certain circumstances. The maximum
amount that may be earned as an annual incentive award or other cash Award
(payable currently or on a deferred basis) in any fiscal year by any one
participant is $8,000,000, and the maximum amount that may be earned as a
performance award or other cash Award (payable currently or on a deferred basis)
in respect of a performance period by any one participant is
$8,000,000.
The
Committee is authorized to adjust the number and kind of shares subject to the
aggregate share limitations and annual limitations under the 2009 Amended and
Restated Plan and subject to outstanding Awards (including adjustments to
exercise prices and number of shares of options and other affected terms of
Awards) in the event that a dividend or other distribution (whether in cash,
shares, or other property), recapitalization, forward or reverse split,
reorganization, merger, consolidation, spin-off, combination, repurchase, or
share exchange, or other similar corporate transaction or event affects the
Common Stock so that an adjustment is appropriate. The Committee is also
authorized to adjust performance conditions and other terms of Awards in
response to these kinds of events or in response to changes in applicable laws,
regulations, or accounting principles.
Except as
described under “Restricted Stock Awards” below, the 2009 Amended and Restated
Plan does not impose any restriction on the resale of shares of our Common Stock
acquired pursuant to a grant under the 2009 Amended and Restated Plan. However,
any of our “affiliates” (defined in Rule 405 under the Securities Act of 1933,
as amended (the “1933 Act”) to include persons who directly or indirectly,
through one or more intermediaries, control, or are controlled by, or are under
common control with, us) may not use this Prospectus to offer and sell shares of
Common Stock they acquire under the 2009 Amended and Restated Plan. They may,
however, sell such shares:
|
(1)
|
pursuant
to an effective registration statement under the 1933
Act;
|
|
(2)
|
in
compliance with Rule 144 under the 1933 Act;
or
|
|
(3)
|
in
a transaction otherwise exempt from the registration requirements of that
1933 Act.
|
Each
participant who is the beneficial owner of at least 10% of the outstanding
shares of the our Common Stock and each participant who is one of our directors
or policy-making officers subject to Section 16(b) of the Securities Exchange
Act of 1934, as amended (the “1934 Act”), which requires such persons to
disgorge to us any “profits” resulting from a certain non-exempt sales and
purchases (or purchases and sales) of shares of the Common Stock within a
six-month period. For such participants, sales of shares of Common Stock
occurring within six months of the grant of an option or the grant of a
restricted stock award may result in such Section 16(b) liability, unless one or
both of those transactions are exempt, as described below in more
detail.
Pursuant
to Rule 16b-3 of the 1934 Act, provided the committee that administers the 2009
Amended and Restated Plan consists solely of at least two “Non-Employee
Directors” (as defined in rules promulgated under Section 16), the grant of an
option, a stock appreciation right, a restricted stock award, or other award to
a participant subject to Section 16(b) will not be deemed, for purposes of
Section 16(b), to be a purchase of the shares that underlie the option, award or
right for purposes of determining whether a participant is liable to the us for
any profits derived from the purchase and sale of Common Stock.
In
addition, if at least six months have elapsed between the award of an option, a
stock appreciation right, a restricted stock award, or other award, and the
disposition of the underlying Common Stock, no purchase of Common Stock would be
deemed to have occurred under Section 16(b) for purposes of determining whether
a participant is liable to us for any profits derived from the purchase and sale
of Common Stock.
It is our
intent that the grant of any Awards to or other transaction by a participant who
is subject to Section 16 of the Exchange Act shall be exempt under Rule 16b-3
(except for transactions acknowledged in writing to be non-exempt by such
participant). Accordingly, if any provision of the 2009 Amended and Restated
Plan or any Award agreement does not comply with the requirements of Rule 16b-3
as then applicable to any such transaction, unless the participant shall have
acknowledged in writing that a transaction pursuant to such provision is to be
non-exempt, such provision shall be construed or deemed amended to the extent
necessary to conform to the applicable requirements of Rule 16b-3 so that such
participant shall avoid liability under Section 16(b) of the Exchange
Act.
However,
even if a transaction is exempt under Section 16(b), the general prohibition of
federal and state securities laws on trading securities while in possession of
material non-public information concerning the issuer shall continue to
apply.
4. Eligibility. Our executive officers and
other officers and employees, agents and brokers, and those of our subsidiaries,
including any such person who may also be one of our directors, are eligible to
be granted Awards under the 2009 Amended and Restated Plan. Certain United
Kingdom directors and officers who are employed by any corporate entity,
including Lincoln National (UK) PLC, which is under our control, may also be
selected by the Committee to participate in the 2009 Amended and Restated Plan.
Stock options granted to and Common Stock issued to United Kingdom officers and
directors shall be granted or issued subject to applicable United Kingdom laws
and regulations. The terms and conditions of stock options or Common Stock so
granted or issued, and the tax consequences of such grant or issuance, may vary
from those relating to United States persons described below. PARTICIPATING
UNITED KINGDOM OFFICERS AND DIRECTORS ARE ESPECIALLY URGED TO CONSULT THEIR OWN
LEGAL AND TAX ADVISORS.
5. Administration . The 2009 Amended and
Restated Plan will be administered by the Committee. Subject to the terms and
conditions of the 2009 Amended and Restated Plan, the Committee is authorized to
interpret the provisions of the plan, select participants, determine the type
and number of Awards to be granted and the number of shares of Common Stock to
which Awards will relate, specify times at which Awards will be exercisable or
settleable (including performance conditions that may be required as a condition
thereof), set other terms and conditions of such Awards, prescribe forms of
Award agreements, adopt, amend and rescind rules and regulations relating to the
2009 Amended and Restated Plan, and make all other determinations that may be
necessary or advisable for the administration of the 2009 Amended and Restated
Plan. The Committee may, in its discretion, convert any Award or the value of
any Award under the 2009 Amended and Restated Plan, subject to applicable laws
and regulations, into Deferred Stock Units which will be administered under our
plans relating to deferred compensation. The 2009 Amended and Restated Plan
provides that Committee members shall not be personally liable, and shall be
fully indemnified, in connection with any action, determination, or
interpretation taken or made in good faith under the 2009 Amended and Restated
Plan.
6. Stock Options and SARs. The Committee is
authorized to grant stock options, including both ISOs (as defined below) that
can result in potentially favorable tax treatment to the participant and
non-qualified stock options ( i.e. , options not qualifying
as ISOs), and SARs entitling the participant to receive the excess of the fair
market value of a share of Common Stock on the date of exercise over the grant
price of the SAR. The exercise price per share subject to an option and the
grant price of a SAR is determined by the Committee, but must not be less than
the fair market value of a share of Common Stock on the date of grant. Under the
2009 Amended and Restated Plan, unless otherwise determined by the Committee,
the fair market value of the Common Stock is the closing price of a share of
Common Stock, as quoted on the composite transactions table on the NYSE, on the
date of grant.
Incentive
Stock Options or ISO means any option intended to be and designated as an
incentive stock option within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the “Code”) or any successor provision thereto. The
terms of any ISO granted under the 2009 Amended and Restated Plan is intended to
comply in all respects with the provisions of Code Section 422. No term of the
2009 Amended and Restated Plan relating to ISOs (including any SAR in tandem
therewith) may be interpreted, amended or altered, nor may any discretion or
authority granted under the 2009 Amended and Restated Plan be exercised so as to
disqualify either the Plan or any ISO under Code Section 422, unless the
Participant has first requested the change that will result in the
disqualification.
The
maximum term of each option or SAR, the times at which each option or SAR will
be exercisable, and provisions requiring forfeiture of unexercised options or
SARs at or following termination of employment generally are fixed by the
Committee, except no option or SAR may have a term exceeding ten years. Options
may be exercised by payment of the exercise price in cash, Common Stock or
outstanding Awards having a fair market value equal to the exercise price, as
the Committee may determine from time to time. Methods of exercise and
settlement and other terms of the SARs are determined by the Committee. To date,
we have only granted SARs settleable exclusively in cash. The Committee may
include a provision in an option permitting the grant of a new option when
payment of the exercise price of an option is made in shares of Common Stock.
However, as discussed below, the exercise price of an option may not be reduced
(except as a result of a change in our capitalization) without shareholder
approval. See “Other Terms of Awards; No Repricing,” below.
7. Restricted Stock, Restricted Stock
Units and Deferred Stock
Units. The Committee is authorized to grant restricted stock, restricted
stock units and deferred stock units. Restricted stock is a grant of Common
Stock which may not be sold or disposed of, and which may be forfeited in the
event of certain terminations of employment and/or failure to meet certain
performance requirements, prior to the end of a restricted period specified by
the Committee. A participant granted restricted stock generally has all of the
rights of a shareholder, including the right to vote the shares and to receive
dividends thereon, unless otherwise determined by the Committee. A restricted
stock unit, or RSU, represents a phantom share of our common stock that does not
include the right to vote the shares or receive dividends thereon. An
Award of deferred stock units is credited to a bookkeeping reserve account in
accordance with the terms of the Company’s plans relating to deferred
compensation. Once credited to the account, deferred stock units are governed by
the terms of the plans relating to deferred compensation or any successor plan.
Such an Award confers upon a participant the right to receive shares at the end
of a specified deferral period, subject to possible forfeiture of the Award in
the event of certain terminations of employment and/or failure to meet certain
performance requirements prior to the end of a specified restricted period
(which restricted period need not extend for the entire duration of the deferral
period). Prior to settlement, an Award of RSUs or deferred stock units carries
no voting or dividend rights or other rights associated with share ownership,
although dividend equivalents may be granted, which are paid out only upon
settlement of the award.
8. Bonus Stock and Awards in Lieu of Cash
Obligations. The Committee is authorized to grant shares as a bonus free
of restrictions, or to grant shares or other Awards in lieu of obligations to
pay cash under other plans or compensatory arrangements, subject to such terms
as the Committee may specify.
9. Other Stock-Based Awards. The 2009
Amended and Restated Plan authorizes the Committee to grant Awards that are
denominated or payable in, valued by reference to, or otherwise based on or
related to shares. Such Awards might include convertible or exchangeable debt
securities, other rights convertible or exchangeable into shares, purchase
rights for shares, Awards with value and payment contingent upon our performance
or any other factors designated by the Committee, and Awards valued by reference
to the book value of shares or the value of securities of or the performance of
specified subsidiaries. The Committee determines the terms and conditions of
such Awards, including consideration to be paid to exercise Awards in the nature
of purchase rights, the period during which Awards will be outstanding, and
forfeiture conditions and restrictions on Awards.
10. Performance Awards, Including Annual Incentive
Awards. The right of a participant to exercise or receive a grant or
settlement of an Award, and the timing thereof, may be subject to such
performance conditions as may be specified by the Committee. In addition, the
2009 Amended and Restated Plan authorizes specific annual incentive awards,
which represent a conditional right to receive cash, shares or other Awards upon
achievement of pre-established performance goals during a specified one-year
period. Performance awards and annual incentive awards granted to persons the
Committee expects will, for the year in which a deduction arises, be among our
executive officers named in our proxy statement, will, if so intended by the
Committee, be subject to provisions that should qualify such Awards as
“performance-based compensation” not subject to the limitation on tax
deductibility by us under Code Section 162(m).
The
performance goals to be achieved as a condition of payment or settlement of a
performance award or annual incentive award will consist of (i) one or more
business criteria and (ii) a targeted level or levels of performance with
respect to each such business criterion. In the case of performance awards
intended to meet the requirements of Code Section 162(m), the business criteria
used must be one of those specified in the 2009 Amended and Restated Plan,
although for other participants the Committee may specify any other criteria.
The business criteria specified in the 2009 Amended and Restated Plan are, as
defined by the Committee: (1) earnings (total or per share ); (2) revenues or
growth in revenues; (3) cash flow or cash flow return on investment; (4) assets,
return on assets, growth in assets, return on investment, capital or return on
capital, return on equity, or shareholder equity (total or per share); (5)
economic value added or insurance-imbedded value added; (6) operating margin;
(7) net income or growth in net income (total or per share), pretax earnings or
growth in pretax earnings (total or per share), pretax earnings before interest,
depreciation and amortization, pretax operating earnings after interest expense
and before incentives, and extraordinary or special items; (8) operating
earnings or income from operations; (9) statutory income; (10) total shareholder
return; (11) profit margins; (12) premiums and fees, or growth in premiums and
fees, including service fees; (13) book value; (14) membership and growth in
membership; (15) market share or change in market share; (16) stock price or
change in stock price; (17) market capitalization, change in market
capitalization, or return on market value; (18) economic value added or market
value added; (19) cash flow or change in cash flow; (20) expense ratios, expense
savings, budgets, product cost reduction through advanced technology, or other
expense management measures; (21) productivity ratios or other measures of
operating efficiency or effectiveness; (22) risk based capital ratio; (23) ratio
of claims or loss costs to revenues; (24) satisfaction measures: customer,
provider, or employee; (25) implementation or completion of critical projects or
processes; (26) product development, product release schedules, new product
innovation, brand recognition/acceptance; (27) any of the above goals as
compared to Standard & Poor’s 500 Stock Index or a group of comparator
companies; and (28) any criteria comparable to those listed above, including
metrics designed to measure progress toward achieving the company’s strategic
intent of becoming the retirement income security company of choice for its
clients, that shall be approved by the Committee.
In
granting annual incentive or performance awards, the Committee may establish
unfunded award “pools,” the amounts of which will be based upon the achievement
of a performance goal or goals using one or more of the business criteria
described in the preceding paragraph. During the first 90 days of a fiscal year
or performance period, the Committee will determine who will potentially receive
annual incentive or performance awards for that fiscal year or performance
period, either out of the pool or otherwise. After the end of each fiscal year
or performance period, the Committee will determine the amount, if any, of the
pool, the maximum amount of potential annual incentive or performance awards
payable to each participant in the pool, and the amount of any potential annual
incentive or performance award otherwise payable to a participant. The Committee
may, in its discretion, determine that the amount payable as an annual incentive
or performance award will be increased or reduced from the amount of any
potential Award, but may not exercise discretion to increase any such amount
intended to qualify as performance-based compensation under Code Section
162(m).
Subject
to the requirements of the 2009 Amended and Restated Plan, the Committee will
determine other performance award and annual incentive award terms, including
the required levels of performance with respect to the business criteria, the
corresponding amounts payable upon achievement of such levels of performance,
termination and forfeiture provisions, and the form of settlement. Because of
the discretionary nature of the awards that may be made under the 2009 Amended
and Restated Plan, the benefits available under the 2009 Amended and Restated
Plan are not readily determinable. However, the Awards that may be
made under the 2009 Amended and Restated Plan are subject to the limitations
discussed above under “Shares Subject to the 2009 Amended and Restated Plan;
Annual Per Person Limitations.”
11. Other Terms of Awards; No Repricing. In
general, Awards may be settled in the form of cash, Common Stock, other Awards,
or other property, in the discretion of the Committee. The Committee may require
or permit participants to defer the settlement of all or part of an Award in
accordance with such terms and conditions as the Committee may establish,
including payment or crediting of interest or dividend equivalents on deferred
amounts, and the crediting of earnings, gains, and losses based on deemed
investment of deferred amounts in specified investment vehicles. The Committee
is authorized to place cash, shares, or other property in trusts or make other
arrangements to provide for payment of our obligations under the 2009 Amended
and Restated Plan. The Committee may condition any payment relating to an Award
on the withholding of taxes and may provide that a portion of any shares or
other property to be distributed will be withheld (or previously acquired shares
or other property surrendered by the participant) to satisfy withholding and
other tax obligations. Awards granted under the 2009 Amended and Restated Plan
generally may not be pledged or otherwise encumbered and are not transferable
except by will or by the laws of descent and distribution, or to a designated
beneficiary upon the participant’s death, except that the Committee may, in its
discretion, permit transfers for estate planning or other purposes.
Awards
under the 2009 Amended and Restated Plan are generally granted without a
requirement that the participant pay consideration in the form of cash or
property for the grant (as distinguished from the exercise), except to the
extent required by law. The Committee may, however, grant Awards in exchange for
other Awards under the 2009 Amended and Restated Plan, awards under our other
plans, or other rights to payment from us, and may grant Awards in addition to
and in tandem with such other Awards, awards, or rights as well.
Unless
the Award agreement specifies otherwise, the Committee may cancel or rescind
Awards if the participant fails to comply with certain noncompetition,
confidentiality or intellectual property covenants. For instance, Awards may be
canceled or rescinded if the participant engages in competitive activity while
employed by us or within a specified period following termination of employment.
We may, in our discretion, in any individual case provide for waiver in whole or
in part of compliance with the noncompetition, confidentiality or intellectual
property covenants.
Notwithstanding
any other provision of the 2009 Amended and Restated Plan, no option that has
been granted under the 2009 Amended and Restated Plan may be repriced, replaced
or regranted through cancellation, including in exchange for cash, or otherwise
modified without shareholder approval (except in connection with adjustments
permitted under the 2009 Amended and Restated Plan), if the effect would be to
reduce the exercise price for the shares underlying the option.
12. Acceleration of Vesting. The Committee
may, in its discretion, accelerate the exercisability, the lapsing of
restrictions, or the expiration of deferral or vesting periods of any Award, and
such accelerated exercisability, lapse, expiration and vesting will occur
automatically in the case of a change in control of us, except to the extent
otherwise determined by the Committee at the date of grant. In
addition, the Committee may provide that the performance goals relating to any
performance-based award will be deemed to have been met upon the occurrence of
any change of control. Upon the occurrence of a change of control, except to the
extent set forth in the Award agreement, options will become fully vested and
exercisable and restrictions on restricted stock and deferred stock units will
lapse. “Change of Control” is defined to include a variety of events, including
the acquisition by certain individuals or entities of twenty percent or more of
our outstanding Common Stock, significant changes in our board of directors,
certain reorganizations, mergers and consolidations involving us, and the sale
or disposition of all or substantially all of our consolidated
assets.
13. Amendment and Termination of the Amended and
Restated Plan. The Board of Directors, or the Committee acting pursuant
to authority delegated to it by the Board, may amend, alter, suspend,
discontinue, or terminate the 2009 Amended and Restated Plan or the Committee’s
authority to grant Awards without further shareholder approval, except
shareholder approval must be obtained for any amendment or alteration if
required by law or regulation or under the rules of any stock exchange or
automated quotation system on which the shares are then listed or quoted.
Shareholder approval will not be deemed to be required under laws or
regulations, such as those relating to ISOs, that condition favorable treatment
of participants on such approval, although the Board may, in its discretion,
seek shareholder approval in any circumstance in which it deems such approval
advisable. Thus, shareholder approval will not necessarily be required for
amendments that might increase the cost of the 2009 Amended and Restated Plan or
broaden eligibility. Unless earlier terminated by the Board, the 2009 Amended
and Restated Plan will terminate at such time as no shares remain available for
issuance under the 2009 Amended and Restated Plan, and we have no further rights
or obligations with respect to outstanding Awards under the 2009 Amended and
Restated Plan.
14. Federal Income Tax Implications of the Amended and
Restated Plan.
The
following is a brief description of the federal income tax consequences
generally arising with respect to Awards under the Amended and Restated Plan. In
view of the individual nature of tax consequences, each participant should
consult his or her tax advisor for more specific information, including the
effect of applicable federal, state and other tax laws.
Under
present law the federal income tax consequences of grants and awards under the
Amended and Restated Plan are generally as follows:
Non-Qualified Stock
Options. The grant of a non-qualified stock option should not result in
taxable income to the participant at the time of grant. On exercise of a
non-qualified stock option, the participant will normally realize taxable
ordinary income equal to any excess of the fair market value of the shares at
the time of exercise over the option price of the shares. At the time this
ordinary income is recognized by the participant, we will be entitled to a
corresponding deduction. Upon the disposition of the shares acquired upon
exercise of a non-qualified stock option, the difference between the amount
received for the shares and the basis (i.e., fair market value of the shares on
exercise of the option) will be treated as long-term or short-term capital gain
or loss, depending on the holding period.
ISOs. The tax
treatment of ISOs is complex. We have not granted any ISOs in over 10 years.
Should we grant ISOs, we will provide affected optionees with a summary of the
federal tax implications.
SARs. The grant of a
SAR should not result in taxable income to the participant at the time of grant.
On exercise of a SAR, the participant will realize taxable ordinary income equal
to the cash and fair market value of any shares received. At the time the
participant recognizes ordinary income on the exercise of a SAR, we will be
entitled to a corresponding deduction. Upon the disposition of any shares
acquired under a SAR, the difference between the amount received for the shares
and the fair market value of the shares as of the date of exercise of the SAR
will be treated as long-term or short-term capital gain or loss, depending on
the holding period.
Restricted Stock. The
grant of restricted stock should not automatically result in taxable income to
the participant. Instead, the participant will normally realize taxable ordinary
income when the restrictions on the shares lapse in an amount equal to the fair
market value of the shares on that date. Notwithstanding the foregoing, a
participant may elect (pursuant to Section 83(b) of the Code), within 30 days of
the date of a restricted stock grant, to be taxed on the value of the shares as
of the date of grant. If the participant subsequently forfeits the shares, the
participant will not be entitled to a deduction. At the time the participant
recognizes ordinary income with respect to restricted stock, we will be entitled
to a corresponding deduction. Upon disposition of the shares after restrictions
lapse, the difference between the amount received and the fair market value of
the shares on the vesting date (or on the date of grant if the participant made
the election described above) will be treated as long-term or short-term capital
gain or loss, depending on the holding period.
Dividends
paid on restricted stock received by the participant prior to the lapse of
restrictions will be taxable as ordinary income to the participant, and we will
be allowed a corresponding deduction unless the participant made the Section
83(b) election described above. If the election was made, dividends actually
paid on restricted stock will be taxable as dividends and we will not be allowed
a corresponding deduction.
Unrestricted Stock Grants
including Long Term Incentive Program Payouts. Generally, a participant
will be subject to tax, and we will receive a corresponding deduction, with
respect to a distribution of an unrestricted stock grant or Long Tern Incentive
Program payout when the Common Stock and any cash are paid to the participant.
The amount of taxable income a participant recognizes and our deduction will
equal the amount of cash and the fair market value of the Common Stock paid
out.
Code Section 409A .
To the extent that any Award under the Plan is considered a deferral of
compensation subject to Code section 409A, the Plan shall be construed and
administered in accordance with Code section 409A and in compliance with the
applicable IRS guidance, including good faith compliance with any proposed IRS
rules.
PARTICIPANTS
ELECTING TO SATISFY A WITHHOLDING OBLIGATION BY SURRENDERING SHARES OF COMPANY
COMMON STOCK ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS.
15. Miscellaneous. The 2009 Amended and
Restated Plan is not qualified under Section 401(a) of the Internal Revenue Code
and is not subject to any of the provisions of the Employee Retirement Income
Security Act of 1974, as amended.
WHERE YOU CAN FIND MORE
INFORMATION
We
file annual, quarterly and current reports, proxy statements and other
information and documents with the Securities and Exchange Commission, or SEC.
You may read and copy any document we file with the SEC at:
|
·
|
public
reference room maintained by the SEC in: Washington, D.C. (450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549). Copies of such materials
can be obtained from the SEC’s public reference section at prescribed
rates. You may obtain information on the operation of the public reference
rooms by calling the SEC at (800) SEC-0330,
or
|
|
·
|
the
SEC website located at www.sec.gov.
|
This
Prospectus is one part of a Registration Statement filed on Form S-3 with the
SEC under the Securities Act. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules to the Registration Statement. For further information concerning us
and the securities, you should read the entire Registration Statement and the
additional information described under “Documents Incorporated By Reference”
below. The registration statement has been filed electronically and may be
obtained in any manner listed above. Any statements contained herein concerning
the provisions of any document are not necessarily complete, and, in each
instance, reference is made to the copy of such document filed as an exhibit to
the Registration Statement or otherwise filed with the SEC. Each such statement
is qualified in its entirety by such reference.
Information
about us is also available on our web site at www.lfg.com. This URL and the
SEC’s URL above are intended to be inactive textual references only. Such
information on our or the SEC’s web site is not a part of this
Prospectus.
DOCUMENTS
INCORPORATED BY REFERENCE
The
following documents have been filed with the SEC in accordance with the
provisions of the Securities and Exchange Act of 1934, as amended (the “Exchange
Act”), and are incorporated by reference in this prospectus:
|
·
|
Our
Annual Report on Form 10-K for the fiscal year ended December 31,
2008;
|
|
·
|
Our
Quarterly Report on Form 10-Q for the quarter ended March 31,
2009;
|
|
·
|
Our
Current Reports on Form 8-K filed with the SEC on January 13, March 19,
March 27, and March 30, 2009;
|
|
·
|
The
description of our Common Stock contained in Form 10 filed with the SEC on
April 28, 1969 (File No. 1-6028), including any amendments or reports
filed for the purpose of updating that description;
and
|
|
·
|
The
description of our Common Stock purchase rights contained in our
Registration Statement on Form 8-A/A, Amendment No. 1, filed with the SEC
on December 2, 1996 (File No. 1-6028), including any amendments or reports
filed for the purpose of updating that
description.
|
Each
document filed subsequent to the date of this Registration Statement pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act, prior to the filing of
a post-effective amendment which indicates that all securities offered have been
sold or which deregisters all securities then remaining unsold, shall be deemed
to be incorporated by reference in this Registration Statement and to be a part
hereof from the date of the filing of such documents. Any statement contained in
a document incorporated or deemed to be incorporated herein by reference shall
be deemed to be modified or superseded for purposes of this Registration
Statement to the extent that a statement contained herein (or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein) modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute part of this Registration Statement.
We will
provide without charge to each person to whom this prospectus is delivered,
including any beneficial owner, upon the written or oral request of such person,
a copy of the documents incorporated by reference as described above (other than
exhibits to such documents unless such exhibits are specifically incorporated by
reference into such documents), copies of all documents constituting part of the
prospectus for the Plan, and copies of the Plan. Please direct your oral or
written request to:
C.
Suzanne Womack
2 nd Vice
President & Secretary
Lincoln
National Corporation
150 N.
Radnor Chester Road
Radnor,
PA 19087
484-583-1400
EXPERTS
The
consolidated financial statements of Lincoln National Corporation appearing in
Lincoln National Corporation’s Annual Report on Form 10-K for the year ended
December 31, 2008 (including schedules included therein) and the effectiveness
of Lincoln National Corporation’s internal control over financial reporting as
of December 31, 2008, have been audited by Ernst & Young LLP, independent
registered public accounting firm, as set forth in their reports thereon,
included therein, and incorporated herein by reference. Such consolidated
financial statements are incorporated herein by reference in reliance upon such
reports given on the authority of such firm as experts in accounting and
auditing.
LEGAL
MATTERS
The
validity of the securities offered hereby will be passed upon for us by Dennis
L. Schoff, Esq., Senior Vice President and General Counsel of Lincoln National
Corporation. As of the date of this Registration Statement, Mr. Schoff
beneficially owns approximately 226,470 shares of our Common Stock
including options exercisable within sixty (60) days of the date of the
Registration Statement.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
14. Other Expenses of Issuance and Distribution
Set forth
below are estimates of all expenses incurred or to be incurred by us in
connection with the issuance and distribution of our Common Stock to be
registered, other than underwriting discounts and commissions of which there are
none.
|
Registration
fees
|
|
$
|
5,464
|
|
|
Photocopying
and Printing
|
|
|
5,000
|
|
|
Accounting
fees
|
|
|
10,000
|
|
|
State
blue sky fees and expenses
|
|
|
-0-
|
|
|
TOTAL
|
|
$
|
20,464
|
|
Item
15. Indemnification of Directors and Officers
Our
bylaws, pursuant to authority contained in the Indiana Business Corporation Law
and the Indiana Insurance Law, respectively, provide for the indemnification of
our officers, directors and employees against the following:
|
·
|
reasonable
expenses (including attorneys’ fees) incurred by them in connection with
the defense of any action, suit or proceeding to which they are made or
threatened to be made parties (including those brought by, or on
behalf of us) if they are successful on the merits or otherwise in the
defense of such proceeding except with respect to matters as to which they
are adjudged liable for negligence or misconduct in the performance of
duties to their respective
corporations.
|
|
·
|
reasonable
costs of judgments, settlements, penalties, fines and reasonable expenses
(including attorneys’ fees) incurred with respect to, any action, suit or
proceeding, if the person’s conduct was in good faith and the person
reasonably believed that his/her conduct was in our best interest. In the
case of a criminal proceeding, the person must also have reasonable cause
to believe his/her conduct was
lawful.
|
Indiana
Law requires that a corporation, unless limited by its articles of
incorporation, indemnify its directors and officers against reasonable expenses
incurred in the successful defense of any proceeding arising out of their
serving as a director or officer of the corporation.
No
indemnification or reimbursement will be made to an individual judged liable to
us, unless a court determines that in spite of a judgment of liability to the
corporation, the individual is reasonably entitled to indemnification, but only
to the extent that the court deems proper. Additionally, if an officer, director
or employee does not meet the standards of conduct described above, such
individual will be required to repay us for any advancement of expenses it had
previously made.
In the
case of directors, a determination as to whether indemnification or
reimbursement is proper will be made by a majority of the disinterested
directors or, if it is not possible to obtain a quorum of directors not party to
or interested in the proceeding, then by a committee thereof or by special legal
counsel. In the case of individuals who are not directors, such determination
will be made by the chief executive officer of the respective corporation, or,
if the chief executive officer so directs, in the manner it would be made if the
individual were a director of the corporation.
Such
indemnification may apply to claims arising under the Securities Act of 1933, as
amended. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted for our directors, officers or controlling persons pursuant
to the foregoing provisions, we have been informed that in the opinion of the
SEC such indemnification is against public policy as expressed in the Securities
Act and therefore unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by us of expenses incurred or
paid by one of our directors, officers or controlling persons in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, we
will, unless in the opinion of our counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of the issue by the court.
We
maintain a program of insurance under which our directors and officers are
insured, subject to specified exclusions and deductible and maximum amounts,
against actual or alleged errors, misstatements, misleading statements, acts or
omissions, or neglect or breach of duty while acting in their respective
capacities for us.
The
indemnification and advancement of expenses provided for in our bylaws does not
exclude or limit any other rights to indemnification and advancement of expenses
that a person may be entitled to other agreements, shareholders’ and board
resolutions and our articles of incorporation.
Item
16. Exhibits.
The
exhibits filed with this Registration Statement are listed in the Exhibit Index,
which is incorporated herein by reference.
Item
17. Undertakings.
The
undersigned Registrant hereby undertakes:
(a)
To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
|
(i)
|
To
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933;
|
|
(ii)
|
To
reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement.
|
|
|
Notwithstanding
the foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimate maximum offering range may be reflected in the form of prospectus
filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
maximum aggregate offering price set forth in the “Calculation of
Registration Fee” table in the effective registration statement;
and
|
|
(iii)
|
To
include any material information with respect to the plan of distribution
not previously disclosed in the registration statement or any material
change to such information in the registration
statement;
|
Provide, however , that
paragraphs (a)(i), (a)(ii) and (a)(iii) do not apply if the information required
to be included in a post-effective amendment by those paragraphs is contained in
reports filed with or furnished to the SEC by the Registrant pursuant to Section
13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the registration statement, or is contained in a form of
prospectus filed pursuant to Rule 424(b) that is part of the registration
statement.
(b)
That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time be deemed to be the initial bona fide offering
thereof.
(c)
To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(d) That,
for the purpose of determining liability under the Securities Act to any
purchaser:
|
|
(i)
|
Each
prospectus filed by a Registrant pursuant to Rule 424(b)(3) shall be
deemed to be part of the registration statement as of the date the filed
prospectus was deemed part of and included in the registration statement;
and
|
|
|
(ii)
|
Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5) or
(b)(7) as part of a registration statement in reliance on Rule 430B
relating to an offering made pursuant to Rule 415(a)(1)(i), (vii) or
(x) for the purpose of providing the information required by
Section 10(a) of the Securities Act shall be deemed to be part of and
included in the registration statement as of the earlier of the date such
form of prospectus is first used after effectiveness or the date of the
first contract of sale of securities in the offering described in the
prospectus. As provided in Rule 430B, for liability purposes of the issuer
and any person that is at that date an underwriter, such date shall be
deemed to be a new effective date of the registration statement relating
to the securities in the registration statement to which the prospectus
relates, and the offering of such securities at that time shall be deemed
to be the initial bona
fide offering thereof. Provided, however, that
no statement made in a registration statement or prospectus that is part
of the registration statement or made in a document incorporated or deemed
incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a
time of contract of sale prior to such effective date, supersede or modify
any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document
immediately prior to such effective
date.
|
(e)
That, for the purpose of determining liability of a Registrant under the
Securities Act of 1933 to any purchaser in the initial distribution of the
securities, each undersigned Registrant undertakes that in a primary offering of
securities of an undersigned Registrant pursuant to this registration statement,
regardless of the underwriting method used to sell the securities to the
purchaser, if the securities are offered or sold to such purchaser by means of
any of the following communications, the undersigned Registrant will be a seller
to the purchaser and will be considered to offer or sell such securities to such
purchaser:
|
(i)
|
Any
preliminary prospectus or prospectus of an undersigned Registrant relating
to the offering required to be filed pursuant to Rule
424;
|
|
(ii)
|
Any
free writing prospectus relating to the offering prepared by or on behalf
of an undersigned Registrant or used or referred to by an undersigned
Registrant;
|
|
(iii)
|
The
portion of any other free writing prospectus relating to the offering
containing material information about an undersigned Registrant or its
securities provided by or on behalf of an undersigned Registrant;
and
|
|
(iv)
|
Any
other communication that is an offer in the offering made by an
undersigned Registrant to the
purchaser.
|
(f)
That, for purposes of determining any liability under the Securities Act
of 1933, each filing of Registrant’s annual report pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing
of and employee benefit plan’s annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(g)
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
each Registrant pursuant to the foregoing provisions, or otherwise, each
Registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by a Registrant of expenses incurred or
paid by a director, officer or controlling person of a Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, that Registrant will, unless in the opinion of its counsel that has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final jurisdiction of such issue.
(h) Each
undersigned Registrant hereby undertakes that:
|
|
(i)
|
For
purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrants pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall
be deemed to be part of this registration statement as of the time it was
declared effective.
|
|
|
(ii)
|
The
purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering
thereof.
|
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant certifies that
it has reasonable grounds to believe that it meets all of the requirements for
filing on Form S-3, and has duly caused this Registration Statement on Form S-3
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Radnor, Commonwealth of Pennsylvania, on the 15th day of
May, 2009.
|
|
LINCOLN
NATIONAL CORPORATION
|
|
|
|
|
|
|
By:
|
/s/
Frederick J. Crawford
|
|
|
|
Frederick
J. Crawford, Executive Vice
|
|
|
|
President
and Chief Financial Officer
|
Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed below by the following persons in the capacities and on the
dates indicated.
|
Signature
|
Title
|
Date
|
|
|
|
|
|
Dennis R.
Glass*
Dennis
R. Glass
|
President
and Chief Executive Officer
(Principal
Executive Officer) and a Director
|
May
15, 2009
|
|
|
|
|
|
/s/ Frederick J.
Crawford
Frederick
J. Crawford
|
Executive
Vice President and
Chief
Financial Officer
(Principal
Financial Officer)
|
May
15, 2009
|
|
|
|
|
|
/s/Douglas N. Miller
Douglas
N. Miller
|
Vice
President and Chief Accounting
Officer
(Principal Accounting Officer)
|
May
15, 2009
|
|
|
|
|
|
William J.
Avery*
|
Director
|
May
15, 2009
|
|
|
|
|
|
William H.
Cunningham*
|
Director
|
May
15, 2009
|
|
|
|
|
|
George W. Henderson,
III*
|
Director
|
May
15, 2009
|
|
|
|
|
|
Eric G.
Johnson*
|
Director
|
May
15, 2009
|
|
|
|
|
|
M. Leanne
Lachman*
|
Director
|
May
15, 2009
|
|
|
|
|
|
Michael F.
Mee*
|
Director
|
May
15, 2009
|
|
|
|
|
|
William Porter
Payne*
|
Director
|
May
15, 2009
|
|
|
|
|
|
Patrick S.
Pittard*
|
Director
|
May
15, 2009
|
|
|
|
|
|
David A. Stonecipher
*
|
Director
|
May
15, 2009
|
|
|
|
|
|
Isaiah
Tidwell*
|
Director
|
May
15, 2009
|
|
|
|
|
*By: /s/ Dennis L. Schoff
Dennis L.
Schoff, Attorney-in-Fact
(Pursuant
to Powers of Attorney)
INDEX
TO EXHIBITS
|
3.1
|
The
Restated Articles of Incorporation of LNC as last amended effective May
11, 2007 are incorporated by reference to Exhibit 3.1 of LNC’s Form 8-K
(File No. 1-6028) filed with the SEC on May 10, 2007.
|
|
3.2
|
Amended
and Restated Bylaws of LNC (effective November 6, 2008) are incorporated
by reference to Exhibit 3.1 of LNC’s Form 10-Q (File No. 1-6028) for the
quarter ended September 30, 2008.
|
|
10.1
|
Lincoln
National Corporation 2009 Amended and Restated Incentive Compensation Plan
(effective May 14, 2009) is incorporated by reference to Exhibit 4 to
LNC’s Proxy Statement (File No. 1-6028) filed with the SEC on April 9,
2009.
|
|
|
|
|
|
|
|
23.2
|
Consent
of Dennis L Schoff, Esq., is contained in Exhibit 5 (included in Exhibit
5).
|
|
|
|