Edgar Filing: LINCOLN NATIONAL CORP

Lincoln National Corp--Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2008.

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to .

Commission File Number 1-6028

LINCOLN NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)


Indiana		35-1140070
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

150 N. Radnor Chester Road, Radnor, Pennsylvania		19087
(Address of principal executive offices)		(Zip Code)

(484) 583-1400

Registrant’s telephone number, including area code

1500 Market Street, Suite 3900, Philadelphia, Pennsylvania

Former name, former address and former fiscal year, if changed since last report

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark 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 ¨ Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of May 1, 2008, there were 259,302,945 shares of the registrant’s common stock outstanding.

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

LINCOLN NATIONAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(in millions, except share data)


	As of March 31, 2008			As of December 31, 2007
	(Unaudited)
ASSETS
Investments:
Available-for-sale securities, at fair value:
Fixed maturity (amortized cost: 2008-$56,449; 2007-$56,069)	$	55,624		$	56,276
Equity (cost: 2008-$556; 2007-$548)		474			518
Trading securities		2,714			2,730
Mortgage loans on real estate		7,532			7,423
Real estate		175			258
Policy loans		2,804			2,835
Derivative investments		1,091			807
Other investments		1,141			1,075

Total investments		71,555			71,922
Cash and invested cash		2,447			1,665
Deferred acquisition costs and value of business acquired		9,996			9,580
Premiums and fees receivable		468			401
Accrued investment income		917			843
Reinsurance recoverables		8,407			8,237
Goodwill		4,128			4,144
Other assets		2,728			3,530
Separate account assets		84,703			91,113

Total assets	$	185,349		$	191,435

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Future contract benefits	$	16,501		$	16,007
Other contract holder funds		60,176			59,640
Short-term debt		411			550
Long-term debt		4,627			4,618
Reinsurance related derivative liability		205			220
Funds withheld reinsurance liabilities		2,117			2,117
Deferred gain on indemnity reinsurance		677			696
Payables for collateral under securities loaned and derivatives		1,796			1,135
Other liabilities		3,050			3,621
Separate account liabilities		84,703			91,113

Total liabilities		174,263			179,717

Contingencies and Commitments (See Note 10)
Stockholders’ Equity
Series A preferred stock - 10,000,000 shares authorized		—			—
Common stock - 800,000,000 shares authorized; 259,206,033 and 264,233,303 shares issued and outstanding as of March 31, 2008 and December 31, 2007, respectively		7,075			7,200
Retained earnings		4,333			4,293
Accumulated other comprehensive income (loss)		(322	)		225

Total stockholders’ equity		11,086			11,718

Total liabilities and stockholders’ equity	$	185,349		$	191,435

See accompanying Notes to Consolidated Financial Statements

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(in millions, except per share data)


	For the Three Months Ended March 31,
	2008			2007
	(Unaudited)
Revenues
Insurance premiums	$	509		$	459
Insurance fees		844			779
Investment advisory fees		76			90
Net investment income		968			1,090
Realized gain (loss)		(38	)		26
Amortization of deferred gain on indemnity reinsurance		19			19
Other revenues and fees		146			165

Total revenues		2,524			2,628

Benefits and Expenses
Interest credited		510			605
Benefits		691			589
Underwriting, acquisition, insurance and other expenses		829			815
Interest and debt expense		76			61

Total benefits and expenses		2,106			2,070

Income from continuing operations before taxes		418			558
Federal income taxes		125			170

Income from continuing operations		293			388
Income (loss) from discontinued operations, net of federal incomes taxes		(4	)		8

Net income	$	289		$	396

Earnings Per Common Share - Basic
Income from continuing operations	$	1.13		$	1.41
Income (loss) from discontinued operations		(0.02	)		0.03

Net income	$	1.11		$	1.44

Earnings Per Common Share - Diluted
Income from continuing operations	$	1.12		$	1.39
Income (loss) from discontinued operations		(0.02	)		0.03

Net income	$	1.10		$	1.42

See accompanying Notes to Consolidated Financial Statements

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in millions, except per share data)


	For the Three Months Ended March 31,
	2008			2007
	(Unaudited)
Series A Preferred Stock
Balance at beginning-of-year	$	—		$	1

Balance at end-of-period		—			1

Common Stock
Balance at beginning-of-year		7,200			7,449
Issued for acquisition		—			20
Stock compensation/issued for benefit plans		21			41
Deferred compensation payable in stock		3			3
Retirement of common stock/cancellation of shares		(149	)		(195	)

Balance at end-of-period		7,075			7,318

Retained Earnings
Balance at beginning-of-year		4,293			4,138
Cumulative effect of adoption of SOP 05-1		—			(41	)
Cumulative effect of adoption of FIN 48		—			(15	)
Cumulative effect of adoption of EITF 06-10		(4	)		—
Comprehensive income (loss)		(258	)		442
Less other comprehensive income (loss), net of tax		(547	)		46

Net income		289			396
Retirement of common stock		(137	)		(317	)
Dividends declared: Common (2008-$0.415; 2007-$0.395)		(108	)		(107	)

Balance at end-of-period		4,333			4,054

Net Unrealized Gain on Available-for-Sale Securities
Balance at beginning-of-year		86			481
Change during the period		(538	)		47

Balance at end-of-period		(452	)		528

Net Unrealized Gain on Derivative Instruments
Balance at beginning-of-year		53			51
Change during the period		(9	)		(4	)

Balance at end-of-period		44			47

Foreign Currency Translation Adjustment
Balance at beginning-of-year		175			165
Change during the period		(1	)		3

Balance at end-of-period		174			168

Funded Status of Employee Benefit Plans
Balance at beginning-of-year		(89	)		(84	)
Change during the period		1			—

Balance at end-of-period		(88	)		(84	)

Total stockholders’ equity at end-of-period	$	11,086		$	12,032

See accompanying Notes to Consolidated Financial Statements

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)


	For the Three Months Ended March 31,
	2008			2007
	(Unaudited)
Cash Flows from Operating Activities
Net income	$	289		$	396
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred acquisition costs and value of business acquired deferrals and interest, net of amortization		(181	)		(206	)
Change in premiums and fees receivable		(67	)		(19	)
Change in accrued investment income		(74	)		(53	)
Change in future contract benefits		498			139
Change in other contract holder funds		76			271
Net trading securities purchases, sales and maturities		12			126
Change in amounts recoverable from reinsurers		(170	)		(193	)
Change in federal income tax accruals		(74	)		216
Stock-based compensation expense		12			15
Depreciation, amortization and accretion, net		11			13
Increase in funds withheld liability		—			27
Realized loss (gain) on investments and derivative instruments		41			(26	)
Loss on sale of subsidiaries/businesses and disposals of discontinued operations		9			—
Amortization of deferred gain on indemnity reinsurance		(19	)		(19	)
Change in derivative investments		(169	)		17
Other		(96	)		(235	)

Net adjustments		(191	)		73

Net cash provided by operating activities		98			469

Cash Flows from Investing Activities
Purchases of available-for-sale securities		(1,599	)		(5,017	)
Sales of available-for-sale securities		300			3,705
Maturities of available-for-sale securities		888			972
Purchases of other investments		(713	)		(603	)
Sales or maturities of other investments		596			514
Increase (decrease) in cash collateral on loaned securities and derivatives		661			(288	)
Proceeds from sale of subsidiaries/businesses and disposals of discontinued operations		642			—
Other		(13	)		(124	)

Net cash provided by (used in) investing activities		762			(841	)

Cash Flows from Financing Activities
Payment of long-term debt		(100	)		(314	)
Issuance of long-term debt		—			749
Net increase (decrease) in short-term debt		(54	)		150
Universal life and investment contract deposits		2,403			2,177
Universal life and investment contract withdrawals		(1,434	)		(1,968	)
Investment contract transfers		(509	)		(574	)
Common stock issued for benefit plans and excess tax benefits		12			52
Repurchase of common stock		(286	)		(512	)
Dividends paid to stockholders		(110	)		(109	)

Net cash used in financing activities		(78	)		(349	)

Net increase (decrease) in cash and invested cash		782			(721	)
Cash and invested cash at beginning-of-year		1,665			1,621

Cash and invested cash at end-of-period	$	2,447		$	900

See accompanying Notes to Consolidated Financial Statements

LINCOLN NATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Nature of Operations, Basis of Presentation

Nature of Operations

Lincoln National Corporation and its majority-owned subsidiaries (“LNC” or the “Company,” which also may be referred to as “we,” “our” or “us”) operate multiple insurance and investment management businesses through six business segments, see Note 16. The collective group of businesses uses “Lincoln Financial Group” as its marketing identity. 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, term life insurance, mutual funds and managed accounts.

Basis of Presentation

The accompanying unaudited consolidated financial statements are prepared in accordance with United States of America generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for the Securities and Exchange Commission Quarterly Report on Form 10-Q, including Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Therefore, the information contained in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 (“2007 Form 10-K”) should be read in connection with the reading of these interim unaudited consolidated financial statements.

In the opinion of management, these statements include all normal recurring adjustments necessary for a fair presentation of the Company’s results. Operating results for the three month period ended March 31, 2008 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2008. All material intercompany accounts and transactions have been eliminated in consolidation.

Certain amounts reported in prior periods’ consolidated financial statements have been reclassified to conform to the presentation adopted in the current year. These reclassifications have no effect on net income or stockholders’ equity of the prior periods.

2. New Accounting Standards

Adoption of New Accounting Standards

Statement of Financial Accounting Standards No. 157 – Fair Value Measurements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value under current accounting pronouncements that require or permit fair value measurement and enhances disclosures about fair value instruments. SFAS 157 retains the exchange price notion, but clarifies that exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability (exit price) in the principal market, or the most advantageous market in the absence of a principal market, for that asset or liability, as opposed to the price that would be paid to acquire the asset or receive a liability (entry price). Fair value measurement is based on assumptions used by market participants in pricing the asset or liability, which may include inherent risk, restrictions on the sale or use of an asset or non-performance risk, which would include the reporting entity’s own credit risk. SFAS 157 establishes a three-level fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value. The three-level hierarchy for fair value measurement is defined as follows:

•

Level 1 – inputs to the valuation methodology are quoted prices available in active markets for identical investments as of the reporting date. “Blockage discounts” for large holdings of unrestricted financial instruments where quoted prices are readily and regularly available for an identical asset or liability in an active market is prohibited;

•

Level 2 – inputs to the valuation methodology are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value can be determined through the use of models or other valuation methodologies; and

•

Level 3 – inputs to the valuation methodology are unobservable inputs in situations where there is little or no market activity for the asset or liability and the reporting entity makes estimates and assumptions related to the pricing of the asset or liability, including assumptions regarding risk.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.

We have certain guaranteed benefit features that, prior to January 1, 2008, were recorded using fair value pricing. These benefits will continue to be measured on a fair value basis with the adoption of SFAS 157, utilizing Level 3 inputs and some Level 2 inputs, which are reflective of the hypothetical market participant perspective for fair value measurement, including liquidity assumptions and assumptions regarding the Company’s own credit or non-performance risk. In addition, SFAS 157 expands the disclosure requirements for annual and interim reporting to focus on the inputs used to measure fair value, including those measurements using significant unobservable inputs and the effects of the measurements on earnings. See Note 15 for additional information.

We adopted SFAS 157 effective January 1, 2008 by recording increases (decreases) to the following categories (in millions) on our consolidated financial statements:


Assets
Deferred acquisition costs ("DAC")	$	13
Value of business acquired ("VOBA")		(8	)
Other assets - deferred sales inducements ("DSI")		2

Total assets	$	7

Liabilities
Other contract holder funds:
Remaining guaranteed interest and similar contracts	$	(20	)
Embedded derivative instruments - living benefits liabilities		48
Deferred front-end loads ("DFEL")		3
Other liabilities - income tax liabilities		(8	)

Total liabilities	$	23

Revenues
Insurance fees	$	(3	)

Total revenues		(3	)

Benefits and Expenses
Interest credited		(22	)
Benefits		48
Underwriting, acquisition, insurance and other expenses		(5	)

Total benefits and expenses		21

Loss from continuing operations before taxes		(24	)
Federal income tax benefit		(8	)

Loss from continuing operations	$	(16	)

The impact for the adoption of SFAS 157 to basic and diluted per share amounts was a decrease of $0.06.

FASB Staff Position 157-2 – Effective Date of FASB Statement No. 157

In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Accordingly, we did not apply the provisions of SFAS 157 to nonfinancial assets and nonfinancial liabilities within the scope of FSP 157-2. Examples of items to which the deferral is applicable include, but are not limited to:

•

Nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination or other new basis event, but not measured at fair value in subsequent periods;

•

Reporting units measured at fair value in the goodwill impairment test under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), and indefinite-lived intangible assets measured at fair value for impairment assessment under SFAS 142;

•

Nonfinancial long-lived assets measured at fair value for an impairment assessment under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”;

•

Asset retirement obligations initially measured at fair value under SFAS No. 143, “Accounting for Asset Retirement Obligations”; and

•

Nonfinancial liabilities for exit or disposal activities initially measured at fair value under SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”

SFAS No. 159 – The Fair Value Option for Financial Assets and Financial Liabilities

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”), which allows an entity to make an irrevocable election, on specific election dates, to measure eligible items at fair value. The election to measure an item at fair value may be determined on an instrument by instrument basis, with certain exceptions. If the fair value option is elected, unrealized gains and losses will be recognized in earnings at each subsequent reporting date, and any upfront costs and fees related to the item will be recognized in earnings as incurred. In addition, the presentation and disclosure requirements of SFAS 159 are designed to assist in the comparison between entities that select different measurement attributes for similar types of assets and liabilities. SFAS 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS 157. At the effective date, the fair value option may be elected for eligible items that exist on that date. Effective January 1, 2008, we elected not to adopt the fair value option for any financial assets or liabilities that existed as of January 1, 2008.

Emerging Issues Task Force Issue No. 06-10 – Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements

In March 2007, the FASB Board ratified the consensus reached by the Emerging Issues Task Force (“EITF”) in EITF Issue No. 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements” (“EITF 06-10”). EITF 06-10 requires an employer to recognize a liability related to a collateral assignment split-dollar life insurance arrangement in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” if the employer has agreed to maintain a life insurance policy during the employee’s retirement. In addition, based on the split-dollar arrangement, an asset should be recognized by the employer for the estimated future cash flows to which the employer is entitled. The adoption of EITF 06-10 can be recognized either as a change in accounting principle through a cumulative-effect adjustment to retained earnings or through retrospective application to all prior periods. The consensus is effective for fiscal years beginning after December 15, 2007, including interim periods within those fiscal years.

We maintain collateral assignment split-dollar life insurance arrangements related to frozen policies that are within the scope of EITF 06-10. Effective January 1, 2008, we adopted EITF 06-10 by recording a $4 million cumulative-effect adjustment to the opening balance of retained earnings, offset by an increase to our liability for postretirement benefits. We also recorded notes receivable for the amounts due to us from participants under the split-dollar arrangements. The recording of the notes receivable did not have a material effect on our consolidated financial condition or results of operations.

Derivative Implementation Group Statement 133 Implementation Issue No. E23 – Issues Involving the Application of the Shortcut Method under Paragraph 68

In December 2007, the FASB issued Derivative Implementation Group Statement 133 Implementation Issue No. E23, “Issues Involving the Application of the Shortcut Method under Paragraph 68” (“DIG E23”), which gives clarification to the application of the shortcut method of accounting for qualifying fair value hedging relationships involving an interest-bearing financial instrument and/or an interest rate swap, originally outlined in paragraph 68 in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). DIG E23 clarifies that the shortcut method may be applied to a qualifying fair value hedge when the relationship is designated on the trade date of both the swap and the hedged item (for example, debt), even though the hedged item is not recognized for accounting purposes until the transaction settles (that is, until its settlement date), provided that the period of time between the trade date and the settlement date of the hedged item is within established conventions for that marketplace. DIG E23 also clarifies that Paragraph 68(b) is met for an interest rate swap that has a non-zero fair value at the inception of the hedging relationship provided that the swap was entered into at the hedge’s inception for a transaction price of zero and the non-zero fair value is due solely to the existence of a bid-ask spread in the entity’s principal market (or most advantageous market, as applicable) under SFAS 157. The interest rate swap would be reported at its fair value as determined under SFAS 157. DIG E23 is effective for hedging relationships designated on or after January 1, 2008. We adopted DIG E23 effective January 1, 2008. The adoption did not have a material impact on our consolidated financial condition or results of operations.

Future Adoption of New Accounting Standards

SFAS No. 141(R) – Business Combinations

In December 2007, the FASB issued SFAS No. 141(revised 2007), “Business Combinations” (“SFAS 141(R)”), which is a revision of SFAS No. 141 “Business Combinations” (“SFAS 141”). SFAS 141(R) retains the fundamental requirements of SFAS 141, but establishes principles and requirements for the acquirer in a business combination to recognize and measure the identifiable assets acquired, liabilities assumed and any noncontrolling interests in the acquiree and the goodwill acquired or the gain from a bargain purchase. The revised statement requires, among other things, that assets acquired, liabilities assumed and any noncontrolling interest in the acquiree shall be measured at their acquisition-date fair values. For business combinations completed upon adoption of SFAS 141(R), goodwill will be measured as the excess of the consideration transferred, plus the fair value of any noncontrolling interest in the acquiree, over the fair values of the identifiable net assets acquired. Any contingent consideration shall be recognized at the acquisition-date fair value, which improves the accuracy of the goodwill measurement. Previously under SFAS 141, deferred recognition of pre-acquisition contingencies was permitted. Under SFAS 141(R), contractual pre-acquisition contingencies will be recognized at their acquisition-date fair values and noncontractual pre-acquisition contingencies will be recognized at their acquisition date fair values if it is more likely than not that the contingency gives rise to an asset or liability. Acquisition costs will be expensed in the period the costs are incurred, rather than included in the cost of the acquiree, and disclosure requirements will be enhanced to provide users with information to evaluate the nature and financial effects of the business combination. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period on or after December 15, 2008, with earlier adoption prohibited. We expect to adopt SFAS 141(R) on January 1, 2009 and are currently evaluating the effects of adoption on future acquisitions.

SFAS No. 160 – Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), which aims to improve the relevance, comparability and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards surrounding noncontrolling interests, or minority interests, which are the portions of equity in a subsidiary not attributable, directly or indirectly, to a parent. The ownership interests in subsidiaries held by parties other than the parent shall be clearly identified, labeled and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity. The amount of consolidated net income attributable to the parent and to the noncontrolling interest must be clearly identified and presented on the face of the Consolidated Statements of Income. Changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary must be accounted for consistently as equity transactions. A parent’s ownership interest in a subsidiary changes if the parent purchases additional ownership interests in its subsidiary or sells some of its ownership interests in its subsidiary or if the subsidiary reacquires some of its ownership interests or issues additional ownership interests. When a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary must be initially measured at fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any noncontrolling equity investment rather than the carrying amount of that retained investment. Entities must provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We expect to adopt SFAS 160 effective January 1, 2009 and are currently evaluating the effects of SFAS 160 on our consolidated financial condition and results of operations.

SFAS No. 161 – Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS 161”), which amends and expands current qualitative and quantitative disclosure requirements for derivative instruments and hedging activities. Enhanced disclosures will include: how and why we use derivative instruments; how derivative instruments and related hedged items are accounted for under SFAS 133; and how derivative instruments and related hedged items affect our financial position, financial performance and cash flows. Quantitative disclosures will be enhanced by requiring a tabular format by primary underlying risk and accounting designation for the fair value amount and location of derivative instruments in the financial statements and the amount and location of gains and losses in the financial statements for derivative instruments and related hedged items. The tabular disclosures should improve transparency of derivative positions existing at the period end date and the effect of using derivatives during the reporting period. SFAS 161 also requires the disclosure of credit-risk-related contingent features in derivative instruments and cross-referencing within the notes to the consolidated financial statements to assist users in locating information about derivative instruments. The amended and expanded disclosure requirements

apply to all derivative instruments within the scope of SFAS 133, non-derivative hedging instruments and all hedged items designated and qualifying as hedges under SFAS 133. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We expect to adopt SFAS 161 effective January 1, 2009, and are currently evaluating the effects of SFAS 161 on our financial statement disclosures related to derivative instruments and hedging activities.

FSP SFAS140-3 – Accounting for Transfers of Financial Assets and Repurchase Financing Transactions

In February 2008, the FASB issued FSP 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions” (“FSP 140-3”), regarding the criteria for a repurchase financing to be considered a linked transaction under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.” A repurchase financing is a transaction where the buyer (“transferee”) of a financial asset obtains financing from the seller (“transferor”) and transfers the financial asset back to the seller as collateral until the financing is repaid. Under FSP 140-3, the transferor and the transferee shall not separately account for the transfer of a financial asset and a related repurchase financing unless the two transactions have a valid and distinct business or economic purpose for being entered into separately and the repurchase financing does not result in the initial transferor regaining control over the financial asset. In addition, an initial transfer of a financial asset and a repurchase financing entered into contemporaneously with, or in contemplation of, one another, must meet the criteria identified in FSP 140-3 in order to receive separate accounting treatment. FSP 140-3 is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. FSP 140-3 will be applied prospectively to initial transfers and repurchase financings executed on or after the beginning of the fiscal year in which FSP 140-3 is initially applied. Early application is not permitted. We expect to adopt FSP 140-3 effective January 1, 2009 and are evaluating the effects of FSP 140-3 on our consolidated financial condition and results of operations.

FSP SFAS 142-3 – Determination of the Useful Life of Intangible Assets

In April 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”), which applies to recognized intangible assets accounted for under the guidance in SFAS 142. When developing renewal or extension assumptions in determining the useful life of recognized intangible assets, FSP 142-3 requires an entity to consider its own historical experience in renewing or extending similar arrangements. Absent the historical experience, an entity should use the assumptions a market participant would make when renewing and extending the intangible asset consistent with the highest and best use of the asset by market participants. In addition, FSP 142-3 requires financial statement disclosure regarding the extent to which expected future cash flows associated with the asset are affected by an entity’s intent and/or ability to renew or extend an arrangement. FSP 142-3 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008, with early adoption prohibited. FSP 142-3 should be applied prospectively to determine the useful life of a recognized intangible asset acquired after the effective date. In addition, FSP 142-3 requires prospective application of the disclosure requirements to all intangible assets recognized as of, and subsequent to, the effective date. We expect to adopt FSP 142-3 on January 1, 2009 and are currently evaluating the effects of adoption on our consolidated financial condition and results of operations.

3. Dispositions

Discontinued Media Operations

During the fourth quarter of 2007, we entered into a definitive agreement to sell our television broadcasting, Charlotte radio and sports programming businesses. These businesses were acquired as part of the Jefferson-Pilot merger on April 3, 2006. The sports programming sale closed on November 30, 2007, the Charlotte radio broadcasting sale closed on January 31, 2008 and the television broadcasting sale closed on March 31, 2008. Accordingly, in the periods prior to the closings, the assets and liabilities of these businesses were reclassified as held-for-sale and were reported within other assets and other liabilities on our Consolidated Balance Sheets. The major classes of assets and liabilities held-for-sale (in millions) were as follows:


	As of March 31, 2008		As of December 31, 2007
Goodwill	$	—	$	340
Specifically identifiable intangible assets		—		266
Other		—		146

Total assets held-for-sale	$	—	$	752

Liabilities held-for-sale	$	—	$	354

The results of operations of these businesses were reclassified into income (loss) from discontinued operations on our Consolidated Statements of Income and the amounts (in millions) were as follows:


	For the Three Months Ended March 31,
	2008			2007
Discontinued Operations Before Disposal
Media revenues, net of agency commissions	$	22		$	42

Income from discontinued operations before disposal, before federal income taxes	$	8		$	12
Federal income taxes		3			4

Income from discontinued operations before disposal		5			8

Disposal
Loss on disposal, before federal income taxes		(12	)		—
Federal income tax benefit		(3	)		—

Loss on disposal		(9	)		—

Income (loss) from discontinued operations	$	(4	)	$	8

Fixed Income Investment Management Business

During the fourth quarter of 2007, we sold certain institutional taxable fixed income business to an unaffiliated investment management company. Investment Management transferred $12.3 billion of assets under management as part of this transaction. Based upon the assets transferred as of October 31, 2007, the purchase price is expected to be no more than $49 million. We expect this transaction to decrease income from operations, compared to the corresponding periods in 2007, by approximately $3 million, after-tax, per quarter in 2008.

During the fourth quarter of 2007, we received $25 million of the purchase price, with additional scheduled payments over the next three years. During 2007, we recorded an after-tax loss of $2 million on our Consolidated Statements of Income as a result of the goodwill we attributed to this business. There were certain other pipeline accounts in process at the time of the transaction closing, and any adjustment to the purchase price, if necessary, will be determined at October 31, 2008. During the first quarter of 2008, we recorded an after-tax gain of $2 million on our Consolidated Statements of Income related to this transaction.

4. Investments

Available-for-Sale Securities

The amortized cost, gross unrealized gains and losses and fair value of available-for-sale securities (in millions) were as follows:


	As of March 31, 2008
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
Corporate bonds	$	44,099	$	1,265	$	1,828	$	43,536
U.S. Government bonds		209		23		—		232
Foreign government bonds		981		68		12		1,037
Asset and mortgage-backed securities:
Mortgage pass-through securities		1,405		35		16		1,424
Collateralized mortgage obligations		6,848		123		330		6,641
Commercial mortgage-backed securities		2,636		30		181		2,485
Other asset-backed securities		20		—		1		19
State and municipal bonds		149		4		—		153
Redeemable preferred stocks		102		2		7		97

Total fixed maturity securities		56,449		1,550		2,375		55,624
Equity securities		556		7		89		474

Total available-for-sale securities	$	57,005	$	1,557	$	2,464	$	56,098


	As of December 31, 2007
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
Corporate bonds	$	43,973	$	1,120	$	945	$	44,148
U.S. Government bonds		205		17		—		222
Foreign government bonds		979		67		9		1,037
Asset and mortgage-backed securities:
Mortgage pass-through securities		1,226		24		4		1,246
Collateralized mortgage obligations		6,721		78		130		6,669
Commercial mortgage-backed securities		2,711		49		70		2,690
State and municipal bonds		151		2		—		153
Redeemable preferred stocks		103		9		1		111

Total fixed maturity securities		56,069		1,366		1,159		56,276
Equity securities		548		13		43		518

Total available-for-sale securities	$	56,617	$	1,379	$	1,202	$	56,794

The amortized cost and fair value of fixed maturity available-for-sale securities by contractual maturities (in millions) were as follows:


	As of March 31, 2008
	Amortized Cost		Fair Value
Due in one year or less	$	2,147	$	2,160
Due after one year through five years		12,831		13,204
Due after five years through ten years		15,461		15,036
Due after ten years		15,101		14,655

Subtotal		45,540		45,055
Asset and mortgage-backed securities		10,909		10,569

Total available-for-sale fixed maturity securities	$	56,449	$	55,624

Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations.

The fair value and gross unrealized losses of available-for-sale securities (in millions), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:


	As of March 31, 2008
	Less Than Or Equal to Twelve Months				Greater Than Twelve Months				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Corporate bonds	$	12,929	$	1,136	$	4,157	$	692	$	17,086	$	1,828
Foreign government bonds		164		7		65		5		229		12
Asset and mortgage-backed securities:
Mortgage pass-through securities		242		8		68		7		310		15
Collateralized mortgage obligations		2,052		265		486		65		2,538		330
Commercial mortgage-backed securities		1,005		106		474		76		1,479		182
Other asset-backed securities		—		—		19		1		19		1
State and municipal bonds		1		—		5		—		6		—
Redeemable preferred stocks		59		7		—		—		59		7

Total fixed maturity securities		16,452		1,529		5,274		846		21,726		2,375
Equity securities		397		87		12		2		409		89

Total available-for-sale securities	$	16,849	$	1,616	$	5,286	$	848	$	22,135	$	2,464

Total number of securities in an unrealized loss position												2,555


	As of December 31, 2007
	Less Than Or Equal to Twelve Months				Greater Than Twelve Months				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Corporate bonds	$	11,540	$	679	$	4,467	$	266	$	16,007	$	945
U.S. Government bonds		—		—		3		—		3		—
Foreign government bonds		95		4		51		4		146		8
Asset and mortgage-backed securities:
Mortgage pass-through securities		32		1		193		4		225		5
Collateralized mortgage obligations		1,742		101		1,116		29		2,858		130
Commercial mortgage-backed securities		520		47		562		23		1,082		70
State and municipal bonds		29		—		17		—		46		—
Redeemable preferred stocks		13		1		—		—		13		1

Total fixed maturity securities		13,971		833		6,409		326		20,380		1,159
Equity securities		402		42		8		1		410		43

Total available-for-sale securities	$	14,373	$	875	$	6,417	$	327	$	20,790	$	1,202

Total number of securities in an unrealized loss position												2,441

The fair value, gross unrealized losses (in millions) and number of available-for-sale securities, where the fair value had declined below amortized cost by greater than 20%, were as follows:


	As of March 31, 2008
	Fair Value		Gross Unrealized Losses		Number of Securities
Less than six months	$	100	$	29	28
Six months or greater, but less than nine months		170		52	21
Nine months or greater, but less than twelve months		345		113	58
Twelve months or greater		317		97	76

Total available-for-sale securities	$	932	$	291	183


	As of December 31, 2007
	Fair Value		Gross Unrealized Losses		Number of Securities
Less than six months	$	136	$	49	22
Six months or greater, but less than nine months		427		138	32
Nine months or greater, but less than twelve months		364		110	17
Twelve months or greater		183		81	60

Total available-for-sale securities	$	1,110	$	378	131

As described more fully in Note 1 of our 2007 Form 10-K, we regularly review our investment holdings for other-than-temporary impairments. Based upon this review, the cause of the decline being principally attributable to changes in interest rates and credit spreads during the holding period and our current ability and intent to hold securities in an unrealized loss position for a period of time sufficient for recovery, we believe that these securities were not other-than-temporarily impaired as of March 31, 2008 and December 31, 2007.

Trading Securities

Trading securities at fair value retained in connection with modified coinsurance (“Modco”) and coinsurance with funds withheld (“CFW”) reinsurance arrangements (in millions) consisted of the following:


	As of March 31, 2008		As of December 31, 2007
Corporate bonds	$	1,977	$	1,999
U.S. Government bonds		386		367
Foreign government bonds		46		46
Asset and mortgage-backed securities:
Mortgage pass-through securities		22		22
Collateralized mortgage obligations		153		160
Commercial mortgage-backed securities		101		107
State and municipal bonds		18		19
Redeemable preferred stocks		9		8

Total fixed maturity securities		2,712		2,728
Equity securities		2		2

Total trading securities	$	2,714	$	2,730

The portion of trading losses that relate to trading securities still held as of March 31, 2008 was $10 million for the first quarter of 2008.

Mortgage Loans on Real Estate

Mortgage loans on real estate principally involve commercial real estate. The commercial loans are geographically diversified throughout the United States with the largest concentrations in California and Texas, which accounted for approximately 28% of mortgage loans as of March 31, 2008.

Net Investment Income

The major categories of net investment income (in millions) were as follows:


	For the Three Months Ended March 31,
	2008			2007
Available-for-sale fixed maturity securities	$	859		$	844
Available-for-sale equity securities		9			9
Trading securities		42			45
Mortgage loans on real estate		122			131
Real estate		8			15
Policy loans		45			43
Invested cash		19			18
Change in call option market value		(97	)		1
Alternative investments		(5	)		20
Other investments		1			9

Investment income		1,003			1,135
Investment expense		(35	)		(45	)

Net investment income	$	968		$	1,090

Realized Gains and Losses

The detail of the realized gain (loss) (in millions) was as follows:


	For the Three Months Ended March 31,
	2008			2007
Fixed maturity securities available-for-sale:
Gross gains	$	9		$	55
Gross losses		(100	)		(7	)
Equity securities available-for-sale:
Gross gains		3			2
Gain (loss) on other investments		25			(4	)
Associated amortization of DAC, VOBA, DSI, DFEL and changes in other contract holder funds		25			(20	)

Total realized gain (loss) on investments, excluding trading securities		(38	)		26
Loss on derivative instruments, excluding reinsurance embedded derivatives		(3	)		—

Total realized gain (loss) on investments and derivative instruments		(41	)		26
Gain on sale of subsidiaries/businesses		3			—

Total realized gain (loss)	$	(38	)	$	26

Write-downs for other-than-temporary impairments included in realized loss on investments above	$	(92	)	$	(4	)

Securities Lending

The carrying values of securities pledged under securities lending agreements were $718 million and $655 million as of March 31, 2008 and December 31, 2007, respectively. The fair values of these securities were $692 million and $634 million as of March 31, 2008 and December 31, 2007, respectively.

Reverse Repurchase Agreements

The carrying values of securities pledged under reverse repurchase agreements were $480 million as of March 31, 2008 and December 31, 2007. The fair values of these securities were $505 million and $502 million as of March 31, 2008 and December 31, 2007, respectively.

Investment Commitments

As of March 31, 2008, our investment commitments for fixed maturity securities (primarily private placements), limited partnerships, real estate and mortgage loans on real estate were $1.4 billion, which includes $337 million of standby commitments to purchase real estate upon completion and leasing.

Concentrations of Financial Instruments

As of March 31, 2008 and December 31, 2007, we did not have a significant concentration of financial instruments in a single investee, industry or geographic region of the U.S.

Credit-Linked Notes

As of March 31, 2008 and December 31, 2007, other contract holder funds on our Consolidated Balance Sheets included $1.2 billion outstanding in funding agreements of the Lincoln National Life Insurance Company (“LNL”). LNL invested the proceeds of $850 million received for issuing three funding agreements in 2006 and 2007 into three separate credit-linked notes originated by third party companies and $300 million of such agreements were assumed as a result of the merger of Jefferson-Pilot into LNL. The $850 million of credit-linked notes are classified as asset-backed securities and are included in our fixed maturity securities on our Consolidated Balance Sheets. The $300 million of investments which were assumed as a result of the merger were classified as corporate bonds and are included in our fixed maturity securities on our Consolidated Balance Sheets.

We earn a spread between the coupon received on the credit-linked note and the interest credited on the funding agreement. Our credit linked notes were created using a trust that combines highly rated assets with credit default swaps to produce a multi-class structured security. Our affiliate, Delaware Investments, actively manages the credit default swaps in the underlying portfolios. The high quality asset in two of these transactions is a AAA-rated asset-backed security secured by a pool of credit card receivables. The high quality asset in the third transaction is a guaranteed investment contract issued by MBIA, which is further secured by a pool of high quality assets.

Consistent with other debt market instruments, we are exposed to credit losses within the structure of the credit-linked notes, which could result in principal losses to our investments. However, we have attempted to protect our investments from credit losses through the multi-tiered class structure of the credit-linked note, which requires the subordinated classes of the investment pool to absorb all of the initial credit losses. LNL owns the mezzanine tranche of these investments, which currently carries a mid- or low-AA rating. To date, there have been no defaults in any of the underlying collateral pools. Similar to other debt market instruments our maximum principal loss is limited to our original investment of $850 million as of March 31, 2008.

As in the general markets, spreads on these transactions have widened, causing unrealized losses. As of March 31, 2008, we had unrealized losses of $420 million on the $850 million in credit linked notes. As described more fully in Note 1 of our 2007 Form 10-K, we regularly review our investment holdings for other-than-temporary impairments. Based upon this review, we believe that these securities were not other-than-temporarily impaired as of March 31, 2008 and December 31, 2007.

The following summarizes information regarding our investments in these securities (dollars in millions):


	Amount and Date of Issuance
	$400 December 2006		$200 April 2007		$250 April 2007
Amount of subordination ⁽¹⁾	$	2,184	$	410	$	1,167
Maturity		12/20/16		3/20/17		6/20/17
Current rating of tranche ⁽¹⁾		AA-		Aa2		AA
Number of entities ⁽¹⁾		125		100		102
Number of countries ⁽¹⁾		20		21		14

⁽¹⁾	As of March 31, 2008.

5. DAC, VOBA and DSI

Changes in DAC (in millions) were as follows:


	For the Three Months Ended March 31,
	2008			2007
Balance at beginning-of-year	$	6,510		$	5,116
Cumulative effect of adoption of Statement of Position (“SOP”) 05-1 ("SOP 05-1")		—			(31	)
Deferrals		443			473
Amortization, net of interest:
Initial impact of the adoption of SFAS 157		13			—
Unlocking		3			20
Other amortization		(222	)		(214	)
Adjustment related to realized (gains) losses on available-for-sale securities and derivatives		7			(13	)
Adjustment related to unrealized (gains) losses on available-for-sale securities and derivatives		185			(15	)
Foreign currency translation adjustment		1			2

Balance at end-of-period	$	6,940		$	5,338

Changes in VOBA (in millions) were as follows:


	For the Three Months Ended March 31,
	2008			2007
Balance at beginning-of-year	$	3,070		$	3,304
Cumulative effect of adoption of SOP 05-1		—			(35	)
Business acquired		—			14
Deferrals		13			15
Amortization:
Initial impact of the adoption of SFAS 157		(8	)		—
Unlocking		(5	)		(2	)
Other amortization		(90	)		(123	)
Accretion of interest		34			37
Adjustment related to realized (gains) losses on available-for-sale securities and derivatives		11			(5	)
Adjustment related to unrealized (gains) losses on available-for-sale securities and derivatives		31			(10	)
Foreign currency translation adjustment		—			2

Balance at end-of-period	$	3,056		$	3,197

Changes in DSI (in millions) were as follows:


	For the Three Months Ended March 31,
	2008			2007
Balance at beginning-of-year	$	279		$	194
Cumulative effect of adoption of SOP 05-1		—			(3	)
Deferrals		27			23
Amortization, net of interest:
Initial impact of the adoption of SFAS 157		2			—
Unlocking		1			1
Other amortization		(11	)		(9	)

Balance at end-of-period	$	298		$	206

6. Goodwill

The changes in the carrying amount of goodwill (in millions) by reportable segment were as follows:


	For the Three Months Ended March 31, 2008
	Balance At Beginning-of-Year		Purchase Accounting Adjustments			Foreign Currency Translation Adjustments			Balance At End-of-Period
Individual Markets:
Life Insurance	$	2,201	$	(9	)	$	—		$	2,192
Annuities		1,046		(6	)		—			1,040
Employer Markets:
Retirement Products		20		—			—			20
Group Protection		274		—			—			274
Investment Management		247		1			—			248
Lincoln UK		17		—			(1	)		16
Other Operations		339		(1	)		—			338

Total goodwill	$	4,144	$	(15	)	$	(1	)	$	4,128

The purchase price adjustments above relate to income tax deductions recognized when stock options attributable to mergers were exercised.

See Note 3 for goodwill included within discontinued operations.

7. Guaranteed Benefit Features

We issue variable annuity contracts through our separate accounts for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contract holder (traditional variable annuities). We also issue variable annuity and life contracts through separate accounts that include various types of guaranteed minimum death benefit (“GMDB”), guaranteed minimum withdrawal benefit (“GMWB”) and guaranteed income benefit (“GIB”) features. The GMDB features include those where we contractually guarantee to the contract holder either (a) return of no less than total deposits made to the contract less any partial withdrawals (“return of net deposits”), (b) total deposits made to the contract less any partial withdrawals plus a minimum return (“minimum return”), or (c) the highest contract value on any contract anniversary date through age 80 minus any payments or withdrawals following the contract anniversary (“anniversary contract value”).

Information in the event of death on the GMDB features outstanding (dollars in millions) was as follows (our variable contracts with guarantees may offer more than one type of guarantee in each contract; therefore, the amounts listed are not mutually exclusive):


	As of March 31, 2008			As of December 31, 2007
Return of Net Deposits
Separate account value	$	42,528		$	44,833
Net amount at risk ⁽¹⁾		509			93
Average attained age of contract holders		55 years			55 years
Minimum Return
Separate account value	$	313		$	355
Net amount at risk ⁽¹⁾		44			25
Average attained age of contract holders		68 years			68 years
Guaranteed minimum return		5	%		5	%
Anniversary Contract Value
Separate account value	$	23,711		$	25,537
Net amount at risk ⁽¹⁾		1,804			359
Average attained age of contract holders		64 years			64 years

⁽¹⁾	Represents the amount of death benefit in excess of the current account balance at the end-of-period.

The determination of GMDB liabilities is based on models that involve a range of scenarios and assumptions, including those regarding expected market rates of return and volatility, contract surrender rates and mortality experience. The following summarizes the balances of and changes in the liabilities for GMDB (in millions), which were recorded in future contract benefits on our Consolidated Balance Sheets:


	For the Three Months Ended March 31,
	2008			2007
Balance at beginning-of-year	$	38		$	23
Cumulative effect of adoption of SOP 05-1		—			(4	)
Changes in reserves		14			6
Benefits paid		(7	)		(2	)

Balance at end-of-period	$	45		$	23

The changes to the benefit reserves amounts above are reflected in benefits on our Consolidated Statements of Income.

Also included in benefits are the results of the hedging program, which included gains of $1 million for GMDB for the three months ended March 31, 2008 and a loss of less than $1 million for the same period in 2007.

Account balances of variable annuity contracts with guarantees (in millions) were invested in separate account investment options as follows:


	As of March 31, 2008			As of December 31, 2007
Asset Type
Domestic equity	$	37,325		$	44,982
International equity		11,767			8,076
Bonds		9,277			8,034
Money market		4,793			6,545

Total	$	63,162		$	67,637

Percent of total variable annuity separate account values		98	%		97	%

8. Other Contract Holder Funds

Details of other contract holder funds (in millions) were as follows:


	As of March 31, 2008		As of December 31, 2007
Account values and other contract holder funds	$	58,187	$	57,698
Deferred front-end loads		1,236		1,183
Contract holder dividends payable		521		524
Premium deposit funds		139		140
Undistributed earnings on participating business		93		95

Total other contract holder funds	$	60,176	$	59,640

9. Federal Income Taxes

The effective tax rate was 30% for the first quarters of 2008 and 2007. Differences in the effective rates and the U.S. statutory rate of 35% are the result of certain tax preferred investment income, separate account dividends-received deduction, foreign tax credits and other tax preference items.

Changes to the Internal Revenue Code, administrative rulings or court decisions could increase our effective tax rate. 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. The current separate account deduction for dividends lowered the effective tax rate by approximately 4% for the quarters ended March 31, 2008 and 2007.

We are required to establish a valuation allowance for any gross deferred tax assets that are unlikely to reduce taxes payable in future years’ tax returns. At March 31, 2008, we believe that it is more likely than not that all gross deferred tax assets will reduce taxes payable in future years.

As of March 31, 2008, there have been no material changes to the balance of unrecognized tax benefits reported at December 31, 2007. We anticipate a change to our unrecognized tax benefits within the next 12 months in the range of none to $12 million.

We recognize interest and penalties, if any, accrued related to unrecognized tax benefits as a component of tax expense.

In the normal course of business we are subject to examination by taxing authorities throughout the United States and the United Kingdom. At any given time, we may be under examination by state, local or non-U.S. income tax authorities.

10. Contingencies and Commitments

See “Contingencies and Commitments” in Note 13 to the consolidated financial statements in our 2007 Form 10-K for a discussion of commitments and contingencies, which information is incorporated herein by reference.

Regulatory and Litigation Matters

Federal and state regulators continue to focus on issues relating to fixed and variable insurance products, including, but not limited to, suitability, replacements and sales to seniors. Like others in the industry, we have received inquiries including requests for information regarding sales to seniors from the Financial Industry Regulation Authority. We are in the process of responding to these inquiries. We continue to cooperate fully with such authority.

In the ordinary course of its business, LNC and its subsidiaries are involved in various pending or threatened legal proceedings, including purported class actions, arising from the conduct of business. In some instances, these proceedings include claims for unspecified or substantial punitive damages and similar types of relief in addition to amounts for alleged contractual liability or requests for equitable relief. After consultation with legal counsel and a review of available facts, it is management’s opinion that these proceedings, after consideration of any reserves and rights to indemnification, ultimately will be resolved without materially affecting the consolidated financial position of LNC. However, given the large and indeterminate amounts sought in certain of these proceedings and the inherent difficulty in predicting the outcome of such legal proceedings, including the proceeding described below, it is possible that an adverse outcome in certain matters could be material to our operating results for any particular reporting period.

Transamerica Investment Management, LLC and Transamerica Investments Services, Inc. v. Delaware Management Holdings, Inc. (dba Delaware Investments), Delaware Investment Advisers and certain individuals, was filed in the San Francisco County Superior Court on April 28, 2005. The plaintiffs are seeking substantial compensatory and punitive damages. The complaint alleges breach of fiduciary duty, breach of duty of loyalty, breach of contract, breach of the implied covenant of good faith and fair dealing, unfair competition, interference with prospective economic advantage, conversion, unjust enrichment and conspiracy, in connection with Delaware Investment Advisers’ hiring of a portfolio management team from the plaintiffs. We and the individual defendants dispute the allegations and are vigorously defending these actions.

United Kingdom Selling Practices

Various selling practices of the Lincoln UK operation have come under scrutiny by the U.K. regulators. These include the sale and administration of mortgage endowment products.

In July 2006, we negotiated a memorandum of understanding with certain of our liability carriers, from whom we received a reimbursement during the third quarter of 2006 of $26 million for certain losses incurred in connection with certain U.K. selling practices. The reimbursement was included in net income during the third quarter of 2006 in Other Operations. Although we continue to consider our options against the other liability carriers, we currently believe that it is unlikely that we will receive any future reimbursement from such carriers.

11. Stockholders’ Equity and Shares

Stockholders’ Equity

The changes in our preferred and common stock (number of shares) were as follows:


	For the Three Months Ended March 31,
	2008		2007
Series A Preferred Stock
Balance at beginning-of-year	11,960		12,706
Conversion into common stock	(298	)	(180	)

Balance at end-of-period	11,662		12,526

Common Stock
Balance at beginning-of-year	264,233,303		275,752,668
Conversion of Series A preferred stock	4,768		2,880
Stock compensation/issued for benefit plans	417,962		2,144,891
Retirement of common stock/cancellation of shares	(5,450,000	)	(7,214,917	)

Balance at end-of-period	259,206,033		270,685,522

Common stock at end-of-period:
Assuming conversion of preferred stock	259,392,625		270,885,938
Diluted basis	260,490,490		274,004,126

Earnings Per Share

The income used in the calculation of our diluted earnings per share (“EPS”) is our income before cumulative effect of accounting change and net income, reduced by minority interest adjustments related to outstanding stock options under the Delaware Investments U.S., Inc. (“DIUS”) stock option incentive plan of less than $1 million for the three months ended March 31, 2008 and 2007.

A reconciliation of the denominator (number of shares) in the calculations of basic and diluted net income and income from discontinued operations per share was as follows:


	For the Three Months Ended March 31,
	2008		2007
Weighted-average shares, as used in basic calculation	260,951,566		274,889,645
Shares to cover conversion of preferred stock	189,056		200,960
Shares to cover non-vested stock	239,923		1,148,067
Average stock options outstanding during the period	9,994,302		14,322,952
Assumed acquisition of shares with assumed proceeds and benefits from exercising stock options (at average market price for the year)	(9,824,263	)	(12,137,623	)
Shares repurchaseable from measured but unrecognized stock option expense	(69,606	)	(255,647	)
Average deferred compensation shares	1,283,671		1,308,460

Weighted-average shares, as used in diluted calculation	262,764,649		279,476,814

In the event the average market price of LNC common stock exceeds the issue price of stock options, such options would be dilutive to our EPS and will be shown in the table above. Participants in our deferred compensation plans that select LNC stock for measuring the investment return attributable to their deferral amounts will be paid out in LNC stock. The obligation to satisfy these deferred compensation plan liabilities is dilutive and is shown in the table above.

12. Underwriting, Acquisition, Insurance and Other Expenses

Details underlying underwriting, acquisition, insurance and other expenses (in millions) were as follows:


	For the Three Months Ended March 31,
	2008			2007
Commissions	$	493		$	515
General and administrative expenses		422			409
DAC and VOBA deferrals and interest, net of amortization		(181	)		(206	)
Other intangibles amortization		2			4
Media expenses		16			14
Taxes, licenses and fees		62			65
Merger-related expenses		15			14

Total	$	829		$	815

13. Employee Benefit Plans

Pension and Other Postretirement Benefit Plans

The components of net defined benefit pension plan and postretirement benefit plan expense (in millions) were as follows:


	For the Three Months Ended March 31,
	Pension Benefits						Other Postretirement Benefits
	2008			2007			2008			2007
U.S. Plans
Service cost	$	—		$	9		$	1		$	1
Interest cost		15			16			2			2
Expected return on plan assets		(20	)		(20	)					(1	)
Recognized net actuarial gain		—			—			(1	)		—

Net periodic benefit expense (recovery)	$	(5	)	$	5		$	2		$	2

Non-U.S. Plans
Interest cost	$	5		$	5
Expected return on plan assets		(5	)		(5	)
Recognized net actuarial loss		1			1

Net periodic benefit expense	$	1		$	1

On May 1, 2007, simultaneous with our announcement of the freeze of our primary defined benefit pension plans, we announced a number of enhancements to our employees’ 401(k) plan effective January 1, 2008.

For any additional disclosures and other general information regarding our benefit plans, see note 16 in our 2007 Form 10-K.

14. Stock-Based Incentive Compensation Plans

We sponsor various incentive plans for our employees, agents and directors and our subsidiaries that provide for the issuance of stock options, stock incentive awards, stock appreciation rights, restricted stock awards, restricted stock units (“performance shares”), and deferred stock units. Delaware Investments U.S., Inc. (“DIUS”) has a separate stock-based incentive compensation plan.

In the first quarter of 2008, a performance period from 2008-2010 was approved for our executive officers by the Compensation Committee. Executive officers participating in this performance period received one-half of their award in 10-year LNC or DIUS

restricted stock units, with the remainder of the award in a combination of either: 100% performance shares or 75% performance shares and 25% cash. LNC stock options granted for this performance period vest ratably over the three-year period, based solely on a service condition. DIUS restricted stock units granted for this performance period vest ratably over a four-year period, based solely on a service condition and were granted only to employees of DIUS. Depending on the performance, the actual amount of performance shares could range from zero to 200% of the granted amount. Under the 2008-2010 plan, a total of 1,564,800 LNC stock options were granted; 2,726 DIUS restricted stock units were granted; and 218,308 LNC performance shares were granted during the three months ended March 31, 2008.

In addition to the stock-based grants noted above, various other LNC stock-based awards were granted in the first quarter of 2008, which are summarized in the table below:


		For the Three Months Ended March 31, 2008
Awards
10-year LNC stock options		3,554
Non-employee director stock options		60,489
Non-employee agent stock options		176,131
Restricted stock		144,621
Stock appreciation rights		234,800

15. Fair Value of Financial Instruments, Carried at Fair Value

See “Fair Value of Financial Instruments” in Note 19 to the consolidated financial statements in our 2007 Form 10-K and SFAS No. 157—Fair Value Measurements in Note 2 above for discussions of the methodologies and assumptions used to determine the fair value of our financial instruments.

The following table summarizes our financial instruments carried at fair value (in millions) on a recurring basis by the SFAS 157 fair value hierarchy levels described in Note 2. We did not have any assets or liabilities measured at fair value on a non-recurring basis during the first quarter of 2008 or as of March 31, 2008.


	As of March 31, 2008
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Assets
Investments:
Available-for-sale securities:
Fixed maturities	$	206	$	51,195		$	4,223		$	55,624
Equity		72		367			35			474
Trading securities		4		2,602			108			2,714
Derivative instruments		—		122			969			1,091
Cash and invested cash		—		2,447			—			2,447
Separate account assets		—		84,703			—			84,703

Total assets	$	282	$	141,436		$	5,335		$	147,053

Liabilities
Other contract holder funds:
Remaining guaranteed interest and similar contracts	$	—	$	—		$	(321	)	$	(321	)
Embedded derivative instruments—living benefits liabilities		—		—			(535	)		(535	)
Reinsurance related derivative liability		—		(205	)		—			(205	)

Total liabilities	$	—	$	(205	)	$	(856	)	$	(1,061	)

Our investment securities are valued using market inputs, including benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. In addition, market indicators, industry and economic events are monitored and further market data is acquired if certain triggers are met. For certain security types, additional inputs may be used, or some of the inputs described above may not be applicable. For broker-quoted only securities, quotes from market makers or broker-dealers are obtained from sources recognized to be market participants. In order to validate the pricing information and broker-dealer quotes, we employ, where possible, procedures that include comparisons with similar observable positions, comparisons with subsequent sales, discussions with senior business leaders and brokers as well as observations of general market movements for those asset classes.

The following table summarizes changes to our financial instruments carried at fair value (in millions) and classified within level 3 of the fair value hierarchy. This summary excludes any impact of amortization on DAC, VOBA, DSI and DFEL. When a determination is made to classify an asset or liability within level 3 of the fair value hierarchy, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. Certain securities trade in less liquid or illiquid markets with limited or no pricing information, and the determination of fair value for these securities is inherently more difficult. However, level 3 fair value investments may include, in addition to the unobservable or level 3 inputs, observable components (that is, components that are actively quoted or can be validated to market-based sources). The gains and losses in the table below may include changes in fair value due in part to observable inputs that are a component of the valuation methodology.


	For the Three Months Ended March 31, 2008
	Beginning Fair Value			Items Included in Earnings, Net			Gains (Losses) in OCI			(Sales), Issuances (Maturities), (Settlements), (Calls), Net			Transfers In or Out of Level 3, Net ⁽¹⁾		Ending Fair Value
Investments:
Available-for-sale securities:
Fixed maturities	$	4,420		$	—		$	(399	)	$	(73	)	$	275	$	4,223
Equity		54			—			(19	)		—			—		35
Trading securities		112			(3	)		—			(6	)		5		108
Derivative instruments		767			110			10			82			—		969
Other contract holder funds:
Remaining guaranteed interest and similar contracts		(389	)		62			—			6			—		(321	)
Embedded derivative instruments - living benefits liabilities		(279	)		(256	)		—			—			—		(535	)

Total, net	$	4,685		$	(87	)	$	(408	)	$	9		$	280	$	4,479

⁽¹⁾

Transfers in or out of level 3 for available-for-sale and trading securities are displayed at amortized cost at the beginning of the period. For available-for-sale and trading securities, the difference between beginning of period amortized cost and beginning of period fair value was included in other comprehensive income (“OCI”) and earnings, respectively, in prior periods.

The following table provides the components of the items included in earnings, net, excluding any impact of amortization on DAC, VOBA, DSI and DFEL, (in millions) as reported in the table above:


	For the Three Months Ended March 31, 2008
	(Amortization) Accretion, Net		Other- Than- Temporary Impairment			Gains (Losses) from Sales, Maturities, Settlements, Calls			Unrealized Holding Gains (Losses)			Total
Investments:
Available-for-sale securities:
Fixed maturities ⁽¹⁾	$	2	$	(2	)	$	—		$	—		$	—
Trading securities ⁽¹⁾		1		—			—			(4	)		(3	)
Derivative instruments ⁽²⁾		—		—			(6	)		116			110
Other contract holder funds:
Remaining guaranteed interest and similar contracts ⁽³⁾		—		—			4			58			62
Embedded derivative instruments - living benefits liabilities ⁽⁴⁾		—		—			—			(256	)		(256	)

Total, net	$	3	$	(2	)	$	(2	)	$	(86	)	$	(87	)

⁽¹⁾	Amortization and accretion, net and unrealized holding losses are included in net investment income on our Consolidated Statements of Income. All other amounts are included in realized gain (loss) on our Consolidated Statements of Income.

⁽²⁾

Of the amount reported for unrealized holding gains, items are included in net investment income, benefits expense and realized gain (loss) on our Consolidated Statements of Income. Call options (based on S&P 500 Index^®) are included in net investment income. Call options (based on LNC stock), put options and variance swaps are included in benefits. Total return swaps, equity collars and available-for-sale embedded derivatives are included in realized gain (loss). Losses from sales, maturities, settlements and calls are included in realized gain (loss). For discussion of these derivative instruments, see note 5 “Derivative Instruments” to the consolidated financial statements in our 2007 Form 10-K.

⁽³⁾	Amounts are included in interest credited on our Consolidated Statements of Income.

⁽⁴⁾	Amounts are included in benefits on our Consolidated Statements of Income.

The fair value of available-for-sale fixed maturity securities (in millions) classified within level 3 of the fair value hierarchy was as follows:


	As of March 31, 2008
	Fair Value		% of Total Fair Value
Corporate bonds	$	2,329	55.2	%
Asset-backed securities		861	20.4	%
Commercial mortgage-backed securities		331	7.9	%
Collateralized mortgage obligations		242	5.7	%
Mortgage pass-through securities		27	0.6	%
Municipals		139	3.3	%
Government and government agencies		263	6.2	%
Redeemable preferred stock		31	0.7	%

Total available-for-sale fixed maturity securities	$	4,223	100.0	%


	As of December 31, 2007
	Fair Value		% of Total Fair Value
Corporate bonds	$	2,143	48.5	%
Asset-backed securities		1,113	25.2	%
Commercial mortgage-backed securities		395	8.9	%
Collateralized mortgage obligations		296	6.7	%
Mortgage pass-through securities		31	0.7	%
Municipals		139	3.1	%
Government and government agencies		272	6.2	%
Redeemable preferred stock		31	0.7	%

Total available-for-sale fixed maturity securities	$	4,420	100.0	%

16. Segment Information

We provide products and services in four operating businesses: Individual Markets, Employer Markets, Investment Management and Lincoln UK, and report results through six business segments. We also have Other Operations, which includes the financial data for operations that are not directly related to the business segments. Our reporting segments reflect the manner by which our chief operating decision makers view and manage the business. Other Operations also includes the Institutional Pension business, which was previously reported in Employer Markets – Retirement Products.

Segment operating revenues and income (loss) from operations are internal measures used by our management and Board of Directors to evaluate and assess the results of our segments. Operating revenues are GAAP revenues excluding net realized gains and losses and the amortization of deferred gain arising from reserve development on business sold through reinsurance. Income (loss) from operations is GAAP net income excluding net realized investment gains and losses, losses on early retirement of debt, reserve development net of related amortization on business sold through reinsurance, initial impact of the adoption of changes in accounting principles and income (loss) from discontinued operations. Our management and Board of Directors believe that operating revenues and income (loss) from operations explain the results of our ongoing businesses in a manner that allows for a better understanding of the underlying trends in our current businesses because the excluded items are unpredictable and not necessarily indicative of current operating fundamentals or future performance of the business segments, and in many instances, decisions regarding these items do not necessarily relate to the operations of the individual segments. Operating revenues and income (loss) from operations do not replace revenues and net income as the GAAP measures of our consolidated results of operations.

Segment information (in millions) was as follows:


	For the Three Months Ended March 31,
	2008			2007
Revenues
Operating revenues:
Individual Markets:
Annuities	$	550		$	605
Life Insurance		987			971

Total Individual Markets		1,537			1,576

Employer Markets:
Retirement Products		304			316
Group Protection		399			361

Total Employer Markets		703			677

Investment Management ⁽¹⁾		120			150
Lincoln UK ⁽²⁾		86			91
Other Operations		118			108
Realized gain (loss)		(38	)		26
Amortization of deferred gain on indemnity reinsurance related to reserve developments		1			—
Initial impact of the adoption of SFAS 157		(3	)		—

Total revenues	$	2,524		$	2,628

⁽¹⁾	Revenues for the Investment Management segment included inter-segment revenues for asset management services provided to our other segments. These inter-segment revenues totaled $20 million and $25 million for the three months ended March 31, 2008 and 2007, respectively.

⁽²⁾	Revenues from our Lincoln UK segment represent our revenues from a foreign country.


	For the Three Months Ended March 31,
	2008			2007
Net Income
Operating income (loss):
Individual Markets:
Annuities	$	129		$	121
Life Insurance		145			167

Total Individual Markets		274			288

Employer Markets:
Retirement Products		52			62
Group Protection		26			23

Total Employer Markets		78			85

Investment Management		12			16
Lincoln UK		11			11
Other Operations		(42	)		(29	)
Realized gain (loss)		(24	)		17
Initial impact of the adoption of SFAS 157		(16	)		—

Income from continuing operations		293			388
Income (loss) from discontinued operations		(4	)		8

Net income	$	289		$	396

17. Supplemental Disclosures of Cash Flow Information

The following summarizes our supplemental cash flow data (in millions):


	For the Three Months Ended March 31,
	2008			2007
Significant non-cash investing and financing transactions:
Business combinations:
Fair value of assets acquired (includes cash and invested cash)	$	—		$	86
Fair value of common stock issued and stock options recognized		—			(20	)
Cash paid for common shares		—			(1	)

Liabilities assumed		—			65
Business dispositions:
Assets disposed (includes cash and invested cash)		(732	)		—
Liabilities disposed		127			—
Cash received		647			—

Realized gain on disposal		42			—
Estimated gain on net assets held-for-sale in prior periods		(54	)

Loss on discontinued operations in current period	$	(12	)	$	—

Sale of subsidiaries/businesses:
Proceeds from sale of subsidiaries/businesses, reported as gain on sale of subsidiaries/businesses	$	3		$	—

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the financial condition of Lincoln National Corporation and its consolidated subsidiaries (“LNC,” “Lincoln” or the “Company” which also may be referred to as “we,” “our” or “us”) as of March 31, 2008, compared with December 31, 2007, and the results of operations of LNC for the three months ended March 31, 2008 as compared with the corresponding period in 2007. The MD&A is provided as a supplement to and should be read in conjunction with our consolidated financial statements and the accompanying notes to the consolidated financial statements (“Notes”) presented in “Item 1. Financial Statements” and our Form 10-K for the year ended December 31, 2007 (“2007 Form 10-K”), including the sections entitled “Part I – Item 1A. Risk Factors,” “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II – Item 8. Financial Statements and Supplementary Data.”

In this report, in addition to providing consolidated revenues and net income (loss), we also provide segment operating revenues and income (loss) from operations because we believe they are meaningful measures of revenues and the profitability of our operating segments.

•

Operating revenues are revenues recorded in accordance with United States of America generally accepted accounting principles (“GAAP”) excluding realized gains and losses and the amortization of deferred gains arising from reserve development on business sold through reinsurance.

•

Income (loss) from operations is GAAP net income excluding net realized gains and losses, losses on early retirement of debt, reserve development (net of related amortization) on business sold through reinsurance, discontinued operations and the initial impact of the adoption of changes in accounting principles.

Operating revenues and income (loss) from operations are the financial performance measures we use to evaluate and assess the results of our segments. Accordingly, we report operating revenues and income (loss) from operations by segment in Note 16. Our management and Board of Directors believe that operating revenues and income (loss) from operations explain the results of our ongoing businesses in a manner that allows for a better understanding of the underlying trends in our current businesses because the excluded items are unpredictable and not necessarily indicative of current operating fundamentals or future performance of the business segments, and, in many instances, decisions regarding these items do not necessarily relate to the operations of the individual segments. Operating revenues and income (loss) from operations do not replace revenues and net income as the GAAP measures of our consolidated results of operations.

Certain reclassifications have been made to prior periods’ financial information, including moving our Institutional Pension business results to Other Operations that was previously reported in Employer Markets – Retirement Products, to conform to the 2008 presentation.

FORWARD-LOOKING STATEMENTS – CAUTIONARY LANGUAGE

Certain statements made in this report and in other written or oral statements made by LNC or on LNC’s behalf 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. LNC claims 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:

•

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 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 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 investor-owned life insurance business;

•

Changes in 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, including LNC’s ability to successfully integrate Jefferson-Pilot Corporation (“Jefferson-Pilot”) businesses acquired on April 3, 2006, to achieve the expected synergies from the merger or to achieve such synergies within our expected timeframe;

•

The adequacy and collectibility of reinsurance that LNC has purchased;

•

Acts of terrorism, 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;

•

Loss of key management, portfolio managers in the Investment Management segment, financial planners or wholesalers; and

•

Changes in general economic or business conditions, both domestic and foreign, that may be less favorable than expected and may affect foreign exchange rates, premium levels, claims experience, the level of pension benefit costs and funding and investment results.

The risks included here are not exhaustive. Other sections of this report, our 2007 Form 10-K, 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, including “Item 3. Quantitative and Qualitative Disclosures About Market Risk” and the risk discussions included in this section under “Critical Accounting Policies and Estimates,” “Consolidated Investments” and “Reinsurance,” which are incorporated herein by reference. Moreover, LNC operates in a rapidly changing and competitive environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors.

Further, it is not possible to assess the impact of all risk factors on LNC’s business or the extent to which any factor, or combination of factors, may cause actual results to 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, LNC disclaims any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report.

INTRODUCTION

Executive Summary

We are a holding company that 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”), linked-benefit UL, term life insurance, mutual funds and managed accounts.

We provide products and services in four operating businesses: Individual Markets; Employer Markets; Investment Management; and Lincoln UK, and report results through six business segments: Individual Markets – Annuities; Individual Markets – Life Insurance; Employer Markets – Retirement Products; Employer Markets – Group Protection; Investment Management; and Lincoln UK. These operating businesses and their segments are described in “Part I – Item 1. Business” of our 2007 Form 10-K. We also have Other Operations, which includes the financial data for operations that are not directly related to the business segments.

Current Market Conditions

During the quarter, the capital markets continued to experience high volatility that affected both equity market returns and interest rates. In addition, we also saw the widening of credit spreads across asset classes and reduced liquidity in the credit markets. Due to these challenges, the capital markets had a significant effect on our segment operating income and consolidated net income in the quarter. The markets primarily impact the following areas:

Earnings from Assets Under Management

Our asset gathering segments, Individual Markets – Annuities, Employer Markets – Retirement Products and Investment Management, are sensitive to the equity markets. We discuss the earnings impact of the equity markets on account values, assets under management and the related asset-based fees below in “Item 3. Quantitative and Qualitative Disclosures About Market Risk – Equity Market Risk – Impact of Equity Market Sensitivity.” From December 31, 2007 to March 31, 2008, the daily average value of the Standard & Poor’s (“S&P”) 500 Index^® decreased 10%. Solely as a result of the equity markets, our assets under management as of March 31, 2008, were down $12.2 billion from the end of the year. Because we earn fees on assets under management, the decline in the equity markets reduced fee-based income by approximately $9 million. However, strong deposits over the last year helped to more than offset this impact in the first quarter of 2008 as compared to the same period in 2007.

Alternative Investment Income

We believe that overall market conditions in both the equity and credit markets caused our alternative investments portfolio, which consists mostly of hedge funds and various limited partnership investments, to under-perform relative to our expectations and the prior period. This impact was primarily in our Individual Markets – Life Insurance, Employer Markets – Retirement Products and Individual Markets – Annuities segments. See “Consolidated Investments—Alternative Investments” for additional information on our investment portfolio.

Variable Annuity Living Benefit Hedge Program Results

We offer variable annuity products with living benefit guarantees. These guarantees are considered embedded derivatives and are recorded on our Consolidated Balance Sheets at fair value under Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), and SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). Effective January 1, 2008, we adopted SFAS 157 which affected the valuation of our embedded derivatives. See Note 2 of this report for details on the adoption of SFAS 157. As described below in “Critical Accounting Policies and Estimates – Derivatives – Guaranteed Living Benefits,” we use derivative instruments to hedge our exposure to the risks and earnings volatility that result from the embedded derivatives for living benefits in certain of our variable annuity products. The change in fair value of these instruments tends to move in the opposite direction of the change in fair value of the embedded derivatives. During the first quarter of 2008, the market conditions noted above negatively affected the net result of the change in the fair value of the living benefit embedded derivative and the change in fair value of the hedging derivatives. However, as we finalized our adoption of SFAS 157 during the first quarter, it resulted in a fair value of the embedded derivative that was lower than the fair value of the derivative instruments creating an over-hedged position driving an overall favorable result for the quarter.

Credit Losses, Impairments and Unrealized Losses

Related to the credit markets, we experienced net realized losses of $24 million in the first quarter of 2008, which included gross write-downs of securities for other-than-temporary impairments of $92 million, pre-tax. Widening spreads was the primary cause of an increase in gross unrealized losses of $1.2 billion on investments in our general account in the quarter for our available-for-sale fixed maturity securities. These unrealized losses were concentrated in the investment grade category of investments and demonstrate how reduced liquidity in the credit markets have resulted in a decline in asset values as investors shift their investments to safer government securities such as U.S. Treasuries.

The effect of the negative equity markets on our assets under management in the first quarter of 2008 will continue to dampen our earnings throughout 2008 even if, for the remainder of the year, the equity market returns are consistent with our

long-term assumptions. Accordingly, we may continue to report lower asset-based fees relative to expectations or prior periods. The volatility and uncertainty in the capital markets will also likely result in lower than expected returns on alternative investments. In addition, a continued weakness in the economic environment could lead to increased credit defaults.

In the face of these capital market challenges, we continue to focus on building our businesses through these difficult markets and beyond by developing and introducing high quality products, expanding distribution in new and existing key accounts and channels, targeting market segments that have high growth potential while maintaining a disciplined approach to managing our expenses.

Strategic and Operational Review

Continual product development and distribution expansion are important to our ability to meet the challenges of the competitive marketplace. In February 2008, our Individual Markets – Annuities segment launched a new guaranteed minimum withdrawal benefit (“GMWB”), Lincoln Lifetime Income^SMAdvantage, which includes features such as: a reduced minimum age for lifetime income eligibility; a 5% benefit enhancement in each year an owner does not take a withdrawal; a health care benefit; and a guaranteed minimum accumulation benefit. In our Individual Markets – Life Insurance segment, we intend to launch a variable life insurance product in our unified product portfolio in the second quarter of 2008 after receiving appropriate regulatory approvals. Within the mid-sized market of our Employer Markets – Retirement Products segment, we launched our Lincoln SmartFuture^SM retirement program to fill the gap between our Alliance program and our group variable annuities.

In terms of increasing our distribution breadth, we launched variable annuity products into two large banks and expect to launch into another bank late in the second quarter of 2008. In support of these and other activities, Lincoln Financial Distributors (“LFD”) increased the number of wholesalers by 5% in the first quarter of 2008 with additional increases expected in the remainder of the year.

Challenges and Outlook

For the remainder of 2008, we expect major challenges to include:

•

Continuation of volatility in the equity and credit markets;

•

Continuation of the low interest rate environment, which creates a challenge for our products that generate investment margin profits, such as fixed annuities and UL;

•

Continuation of decline in the economy or a recession;

•

Achieving success in our unified product portfolio and marketplace acceptance of new variable annuity features that will help maintain our competitive position;

•

Continuation of the successful expansion of our wholesale distribution businesses;

•

Ability to improve financial and sales results and increase scale in our Employer Markets and Investment Management businesses;

•

Continuation of focus by the government on tax reform including potential changes in company dividends-received deduction calculations, which may impact our products and overall earnings;

•

Continuation of competitive pressures in the life insurance and annuity marketplace; and

•

Regulatory scrutiny of the life and annuity industry, which may lead to higher product costs and negative perceptions about the industry.

In the face of these challenges, we expect to focus on the following throughout the remainder of 2008:

•

Continue to significantly invest in expanding our distribution in each of our core Individual Markets, Investment Management and Employer Markets businesses;

•

Continue near term product development in our manufacturing units and future product development initiatives in our Retirement Income Security Venture unit related to the evolving retirement income security marketplace;

•

Explore strategies to increase scale in our Employer Markets – Defined Contribution and Investment Management segments;

•

Further embed financial and execution discipline throughout our operations by using technology and making other investments to improve operating effectiveness and lower unit costs; and

•

Substantially complete the remaining platform and system consolidations necessary to achieve the final portion of integration cost saves as well as prepare us for more effective customer interaction in the future.

Critical Accounting Policies and Estimates

The MD&A included in our 2007 Form 10-K contains a detailed discussion of our critical accounting policies and estimates. The following information updates the critical accounting policies and estimates provided in our 2007 Form 10-K and, accordingly, should be read in conjunction with the critical accounting policies and estimates discussed in our 2007 Form 10-K.

Adoption of SFAS No. 157 – Fair Value Measurements

We adopted SFAS 157 for all our financial instruments effective January 1, 2008. For detailed discussions of the methodologies and assumptions used to determine the fair value of our financial instruments and a summary of our financial instruments carried at value as of March 31, 2008, see Notes 2 and 15 of this report and Notes 1 and 19 to the consolidated financial statements in our 2007 Form 10-K.

The adoption of SFAS 157 decreased income from continuing operations by $16 million. The impact to revenues, benefits and expenses and federal income taxes is excluded from our definition of income from operations and is reported as the initial impact of the adoption of SFAS 157. The subsequent changes in the fair value of the other contract holder funds and associated impacts to DAC, VOBA, DSI, income tax liabilities, revenues and expenses are reported in our Individual Markets – Annuities segment. For a detailed description of the impact of adoption on our consolidated financial statements, see Note 2.

We did not make any material changes to valuation techniques or models used to determine the fair value of our assets and liabilities carried at fair value during the first quarter of 2008, subsequent to the adoption of SFAS 157. As part of our on-going valuation process, we assess the reasonableness of all our valuation techniques or models and make adjustments as necessary.

Our investment securities are valued using market inputs, including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. In addition, market indicators and industry and economic events are monitored, and further market data is acquired if certain triggers are met. For certain security types, additional inputs may be used, or some of the inputs described above may not be applicable. For broker-quoted only securities, quotes from market makers or broker-dealers are obtained from sources recognized to be market participants. In order to validate the pricing information and broker/dealer quotes, we employ, where possible, procedures that include comparisons with similar observable positions, comparisons with subsequent sales, discussions with senior business leaders and brokers as well as observations of general market movements for those asset classes. It is possible that different valuation techniques and models could produce materially different estimates of fair values.

Our insurance liabilities that contain embedded derivatives are valued based on a stochastic projection of scenarios of the embedded derivative fees, benefits and expenses. The scenario assumptions, at each valuation date, are those we view to be appropriate for a hypothetical market participant and include capital market assumptions, actuarial lapse, benefit utilization, mortality assumptions, risk margin assumptions, assumptions regarding administrative expenses and a margin for profit. In addition, a non-performance risk component is determined each valuation date that reflects the Company’s own risk of not fulfilling the obligations of the underlying liability. The spread for the non-performance risk is added to the discount rates used in determining the fair value from the net cash flows. We believe these assumptions are consistent with those used by a market participant; however, as the related markets develop we will continue to reassess our assumptions. It is possible that different valuation techniques and assumptions could produce a materially different estimate of fair value.

The adoption of SFAS 157 increased our exposure to earnings volatility from period to period primarily due to the inclusion of the non-performance risk into the calculation of the guaranteed living benefit embedded derivative liability. For additional information, see our discussion in “Individual Markets – Annuities – Benefits” below.

The following summarizes the percentages of our financial instruments carried at fair value on a recurring basis by the SFAS 157 hierarchy levels:


	As of March 31, 2008
	Level 1		Level 2		Level 3		Total Fair Value
Assets	0	%	91	%	9	%	100	%
Liabilities	0	%	19	%	81	%	100	%

Note: The percentages above are calculated excluding separate account assets.

Changes of our financial instruments carried at fair value and classified within level 3 of the fair value hierarchy result from changes

in market conditions, as well as changes in our portfolio mix and increases and decreases in fair values as a result of those classifications. During the quarter ended March 31, 2008, there were no material changes in financial instruments classified as level 3 of the fair value hierarchy. For further detail, see Note 15.

See “Consolidated Investments” below for a summary of our investments in available-for-sale securities backed by pools of residential mortgages.

Derivatives

To protect us from a variety of equity market and interest rate risks that are inherent in many of our life insurance and annuity products, we use various derivative instruments. Assessing the effectiveness of these hedging programs and evaluating the carrying values of the related derivatives often involve a variety of assumptions and estimates. We use derivatives to hedge equity market risks, interest rate risk and foreign currency exposures that are embedded in our annuity and life insurance product liabilities or investment portfolios. Derivatives held as of March 31, 2008, contain industry standard terms and are entered into with financial institutions with long-standing, superior performance records. Our accounting policies for derivatives and the potential impact on interest spreads in a falling rate environment are discussed in “Item 3. Quantitative and Qualitative Disclosures About Market Risk” of this report and “Part II – Item 7A. Quantitative and Qualitative Disclosures About Market Risk” and Note 5 to the consolidated financial statements in our 2007 Form 10-K.

Guaranteed Living Benefits

We have a hedging strategy designed to mitigate the risk and statement of income volatility caused by changes in the equity markets, interest rates and market implied volatilities associated with the Lincoln SmartSecurity^® Advantage GMWB feature and our i4LIFE^® Advantage guaranteed income benefit (“GIB”) feature that is available in our variable annuity products. In the second quarter of 2007, we also began hedging our 4LATER^® Advantage GIB feature available in our variable annuity products. These living benefit features are collectively referred to as guaranteed living benefits (“GLBs”). During 2007, we made adjustments to our hedging program to purchase longer dated volatility protection and increased our hedges related to volatility to better match liability sensitivities under SFAS 157. In addition, in early January 2008, we added the variable annuity business in our New York insurance subsidiary, with total account values of approximately $1.2 billion as of March 31, 2008, to our hedge program. In February 2008, we added our new GMWB Lincoln Lifetime Income^SMAdvantage to our hedging program.

The hedging strategy is designed such that changes in the value of the hedge contracts move in the opposite direction of changes in the value of the embedded derivative of the GMWB and GIB features. This dynamic hedging strategy utilizes options on U.S.-based equity indices, futures on U.S.-based and international equity indices and variance swaps on U.S.-based equity indices, as well as interest rate futures and swaps. The notional amounts of the underlying hedge instruments are such that the magnitude of the change in the value of the hedge instruments due to changes in equity markets, interest rates, and implied volatilities is designed to offset the magnitude of the change in the fair value of the GMWB and GIB guarantees caused by those same factors. As of March 31, 2008, the embedded derivatives for GMWB, the i4LIFE^® Advantage GIB and the 4LATER^® Advantage GIB were liabilities valued at $365 million, $104 million and $66 million, respectively.

Impact of our Guaranteed Benefit Features

The following table shows the favorable (unfavorable) earnings impacts of our guaranteed benefit features related to our variable annuity products (in millions):


	For the Three Months Ended March 31,
	2008			2007			Change
GLB	$	9		$	1		NM
GMDB ⁽¹⁾		(4	)		(1	)	NM

Total	$	5			—		NM

⁽¹⁾	Our reserves related to our guaranteed minimum death benefits (“GMDB”) are not accounted for as derivatives, and, because of this, the quarterly changes in values for our GMDB reserves and the hedging contracts may not offset each other.

NM - Not Meaningful

For additional information on our hedging results, see our discussion in “Individual Markets – Annuities – Benefits” below.

Acquisitions and Dispositions

Dispositions

Media Business

On June 7, 2007, we announced plans to explore strategic options for our former business segment, Lincoln Financial Media. During the fourth quarter of 2007, we decided to divest our television and Charlotte radio broadcasting and sports programming businesses, and, on November 12, 2007, we signed agreements to sell them. The divestiture of the sports programming business closed on November 30, 2007, the Charlotte radio broadcasting business closed on January 31, 2008, and the Television Broadcasting closed on March 31, 2008. Accordingly, we have reported the results of these businesses as discontinued operations on our Consolidated Statements of Income and the assets and liabilities as held for sale on our Consolidated Balance Sheets for all periods presented. We continue to actively manage our investment in our remaining radio clusters to maximize station performance and future valuation, which are now being reported within Other Operations. For additional information, see Note 3.

The proceeds from the sales of the above media properties were used for repurchase of shares, repayment of debt and other strategic initiatives.

The results of operations of these businesses have been reclassified into income from discontinued operations for all periods presented on the Consolidated Statements of Income. The amounts (in millions) related to operations of these businesses, included in income from discontinued operations, were as follows:


	For the Three Months Ended March 31,
	2008			2007		Change
Discontinued Operations Before Disposal
Media revenues, net of agency commissions	$	22		$	42	-48	%

Income from discontinued operations before disposal, before federal income taxes	$	8		$	12	-33	%
Federal income taxes		3			4	-25	%

Income from discontinued operations before disposal		5			8	-38	%

Disposal
Loss on disposal, before federal income taxes		(12	)		—	NM
Federal income tax benefit		(3	)		—	NM

Loss on disposal		(9	)		—	NM

Income (loss) from discontinued operations	$	(4	)	$	8	NM

During the first quarter of 2008, we adjusted our loss on disposal of discontinued media properties due primarily to changes in the net assets disposed of for Television Broadcasting.

Fixed Income Investment Management Business

During the fourth quarter of 2007, we received $25 million of the purchase price, with additional scheduled payments over the next

three years. During 2007, we recorded an after-tax realized loss of $2 million on our Consolidated Statements of Income as a result of goodwill we attributed to this business. There were certain other pipeline accounts in process at the time of the transaction closing, and any adjustment to the purchase price, if necessary, will be determined at October 31, 2008. During the first quarter of 2008, we recorded an after-tax gain of $2 million on the Consolidated Statements of Income related to this transaction.

For additional information about acquisitions and dispositions, See “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Introduction – Acquisition and Dispositions” in our 2007 Form 10-K.

RESULTS OF CONSOLIDATED OPERATIONS

Net Income

Details underlying the consolidated results and assets under management (in millions) were as follows:


	For the Three Months Ended March 31,					Change
	2008			2007		Change
Revenues
Insurance premiums	$	509		$	459	11	%
Insurance fees		844			779	8	%
Investment advisory fees		76			90	-16	%
Net investment income		968			1,090	-11	%
Realized gain (loss)		(38	)		26	NM
Amortization of deferred gain on indemnity reinsurance		19			19	0	%
Other revenues and fees		146			165	-12	%

Total revenues		2,524			2,628	-4	%

Benefits and Expenses
Interest credited		510			605	-16	%
Benefits		691			589	17	%
Underwriting, acquisition, insurance and other expenses		829			815	2	%
Interest and debt expense		76			61	25	%

Total benefits and expenses		2,106			2,070	2	%

Income from continuing operations before taxes		418			558	-25	%
Federal income taxes		125			170	-26	%

Income from continuing operations		293			388	-24	%
Income (loss) from discontinued operations, net of federal incomes taxes		(4	)		8	NM

Net income	$	289		$	396	-27	%


	For the Three Months Ended March 31,
	2008			2007		Change
Revenues
Operating revenues:
Individual Markets:
Annuities	$	550		$	605	-9	%
Life Insurance		987			971	2	%

Total Individual Markets		1,537			1,576	-2	%

Employer Markets:
Retirement Products		304			316	-4	%
Group Protection		399			361	11	%

Total Employer Markets		703			677	4	%

Investment Management		120			150	-20	%
Lincoln UK		86			91	-5	%
Other Operations		118			108	9	%
Realized gain (loss)		(38	)		26	NM
Amortization of deferred gain on indemnity reinsurance related to reserve developments		1			—	NM
Initial impact of the adoption of SFAS 157		(3	)		—	NM

Total revenues	$	2,524		$	2,628	-4	%


	For the Three Months Ended March 31,						Change
	2008			2007			Change
Net Income
Operating income (loss):
Individual Markets:
Annuities	$	129		$	121		7	%
Life Insurance		145			167		-13	%

Total Individual Markets		274			288		-5	%

Employer Markets:
Retirement Products		52			62		-16	%
Group Protection		26			23		13	%

Total Employer Markets		78			85		-8	%

Investment Management		12			16		-25	%
Lincoln UK		11			11		0	%
Other Operations		(42	)		(29	)	-45	%
Realized gain (loss)		(24	)		17		NM
Initial impact of the adoption of SFAS 157		(16	)		—		NM

Income from continuing operations		293			388		-24	%
Income (loss) from discontinued operations		(4	)		8		NM
Net income	$	289		$	396		-27	%


	For the Three Months Ended March 31,						Change
	2008			2007			Change
Deposits
Individual Markets:
Annuities	$	3,025		$	2,821		7	%
Life Insurance		966			1,039		-7	%
Employer Markets:
Retirement Products—Defined Contribution		1,552			1,487		4	%
Retirement Products—Executive Benefits		165			65		154	%
Investment Management		4,724			6,034		-22	%
Consolidating adjustments ⁽¹⁾		(1,586	)		(910	)	-74	%

Total deposits	$	8,846		$	10,536		-16	%

Net Flows
Individual Markets:
Annuities	$	1,181		$	754		57	%
Life Insurance		579			698		-17	%
Employer Markets:
Retirement Products—Defined Contribution		281			221		27	%
Retirement Products—Executive Benefits		71			(75	)	195	%
Investment Management		(1,165	)		(88	)	NM
Consolidating adjustments ⁽¹⁾		(69	)		44		NM

Total net flows	$	878		$	1,554		-44	%

⁽¹⁾	Consolidating adjustments represent the elimination of deposits and net flows on products affecting more than one segment.


	As of March 31,				Change
	2008		2007		Change
Assets Under Management by Advisor
Investment Management:
External assets	$	69,346	$	85,164	-19	%
Inter-segment assets		76,531		80,640	-5	%
Lincoln UK		8,079		8,906	-9	%
Policy loans		2,804		2,767	1	%
Assets administered through unaffiliated third parties		67,965		59,523	14	%

Total assets under management	$	224,725	$	237,000	-5	%

Comparison of the Three Months Ended March 31, 2008 to 2007

Net income decreased due primarily to the following:

•

Lower earnings from our variable annuity and mutual fund products as a result of declines in assets under management caused by unfavorable equity markets;

•

Higher write-downs for other-than-temporary impairments on our available-for-sale securities attributable primarily to unfavorable changes in credit quality and increases in credit spreads;

•

Higher benefits due to growth in business in force;

•

Lower net investment income driven by less favorable results from our alternative investments and prepayment and bond makewhole premiums;

•

The $16 million impact of the initial adoption of SFAS 157 on January 1, 2008;

•

Higher interest and debt expenses from increased debt;

•

Higher underwriting, acquisition, insurance and other expenses due primarily to 401(k) expenses associated with the enhancements made to our employees’ 401(k) plan, effective January 1, 2008; and

•

The first quarter of 2008 adjustment to our loss on disposition of our discontinued operations.

The decrease in net income was partially offset by:

•

Growth in insurance fees driven by increases in life insurance in force as a result of new sales since March 31, 2007 and favorable persistency along with increases in variable account values from positive net flows; and

•

Decrease to benefit expense attributable to the fair value of our embedded derivatives under SFAS 157 being lower than the fair value of the derivatives in our related hedge program.

The foregoing items are discussed in further detail in results of operations by segment discussions below. In addition, for a discussion of the earnings impact of the equity markets, see “Item 3. Quantitative and Qualitative Disclosures About Market Risk – Equity Market Risk – Impact of Equity Market Sensitivity.”

RESULTS OF INDIVIDUAL MARKETS

The Individual Markets business provides its products through two segments: Annuities and Life Insurance. Through its Annuities segment, Individual Markets provides tax-deferred investment growth and lifetime income opportunities for its clients by offering individual fixed annuities, including indexed annuities, and variable annuities. The Life Insurance segment offers wealth protection and transfer opportunities through term insurance, a linked-benefit product (which is a UL policy linked with riders that provide for long-term care costs) and both single and survivorship versions of UL and VUL.

Individual Markets – Annuities

Income from Operations

Details underlying the results for Individual Markets – Annuities (in millions) were as follows:


	For the Three Months Ended March 31,
	2008		2007		Change
Operating Revenues
Insurance premiums	$	32	$	13	146	%
Insurance fees		281		236	19	%
Net investment income		150		266	-44	%
Other revenues and fees		87		90	-3	%

Total operating revenues		550		605	-9	%

Operating Expenses
Interest credited		83		167	-50	%
Benefits		17		21	-19	%
Underwriting, acquisition, insurance and other expenses		277		256	8	%

Total operating expenses		377		444	-15	%

Income from operations before taxes		173		161	7	%
Federal income taxes		44		40	10	%

Income from operations	$	129	$	121	7	%

Comparison of the Three Months Ended March 31, 2008 to 2007

Income from operations for this segment increased due primarily to a reduction in benefits attributable to our variable annuity business. This reduction was primarily a result of the fair value of our embedded derivatives under SFAS 157 being lower than the fair value of the derivatives in our related hedge program.

The increase in income from operations was partially offset by an increase in underwriting, acquisition, insurance and other expenses and a reduction in income from operations due to lower variable account values that were impacted by unfavorable equity markets.

The increase in income from operations is discussed further below.

Insurance Fees

Details underlying insurance fees, account values and net flows (in millions) were as follows:


	For the Three Months Ended March 31,
	2008			2007			Change
Insurance Fees
Mortality, expense and other assessments	$	279		$	233		20	%
Surrender charges		10			10		0	%
DFEL:
Deferrals		(12	)		(10	)	-20	%
Amortization, excluding unlocking		5			4		25	%
Retrospective unlocking		(1	)		(1	)	0	%

Total insurance fees	$	281		$	236		19	%


	As of March 31,						Change
	2008			2007			Change
Account Values
Variable portion of variable annuities	$	54,966		$	50,300		9	%
Fixed portion of variable annuities		3,469			3,476		0	%

Total variable annuities		58,435			53,776		9	%

Fixed annuities, including indexed		14,232			14,663		-3	%
Fixed annuities ceded to reinsurers		(1,306	)		(1,689	)	23	%

Total fixed annuities		12,926			12,974		0	%

Total account values	$	71,361		$	66,750		7	%


	For the Three Months Ended March 31,				Change
	2008		2007		Change
Averages
Daily variable account values	$	55,318	$	49,284	12	%

Daily S&P 500 Index^®		1,349.16		1,424.78	-5	%


	For the Three Months Ended March 31,						Change
	2008			2007			Change
Net Flows
Variable portion of variable annuity deposits	$	1,865		$	2,000		-7	%
Variable portion of variable annuity withdrawals		(1,259	)		(1,179	)	-7	%

Variable portion of variable annuity net flows		606			821		-26	%

Fixed portion of variable annuity deposits		856			535		60	%
Fixed portion of variable annuity withdrawals		(124	)		(151	)	18	%

Fixed portion of variable annuity net flows		732			384		91	%

Total variable annuity deposits		2,721			2,535		7	%
Total variable annuity withdrawals		(1,383	)		(1,330	)	-4	%

Total variable annuity net flows		1,338			1,205		11	%

Fixed indexed annuity deposits		218			160		36	%
Fixed indexed annuity withdrawals		(83	)		(63	)	-32	%

Fixed indexed annuity net flows		135			97		39	%

Other fixed annuity deposits		86			126		-32	%
Other fixed annuity withdrawals		(378	)		(674	)	44	%

Other fixed annuity net flows		(292	)		(548	)	47	%

Total annuity deposits		3,025			2,821		7	%
Total annuity withdrawals		(1,844	)		(2,067	)	11	%

Total annuity net flows	$	1,181		$	754		57	%

Insurance fees include charges on both our variable and fixed annuity products. We charge contract holders with mortality and expense assessments on variable annuity accounts to cover insurance and administrative expenses. These assessments are a function of the rates priced into the product and the average daily variable account values. Average daily account values are driven by net flows and equity markets. Our elective riders for guarantees that we offer, such as GMDB, GMWB and GIB, have additional assessment charges associated with them, which depending on the rider are based on either the account value or the related guarantee amount. Therefore, changes in rider utilization will impact our average assessment rates. In addition, for our fixed annuity contracts and for some variable contracts, we collect surrender charges when contract holders surrender their contracts during their surrender charge periods, to protect us from premature withdrawals.

New deposits are an important component of our effort to grow the annuity business. Although deposits do not significantly impact current period income from operations, they are an important indicator of future profitability.

The other component of net flows relates to the retention of the business. One of the key assumptions in pricing a product is the account persistency, which we refer to as the lapse rate. The lapse rate compares the amount of withdrawals to the retained account values.

Comparison of the Three Months Ended March 31, 2008 to 2007

The growth in expense assessments was attributable to an increase in average variable annuity account values and an increase in average expense assessment rates driven primarily by the increase in account values with elective variable annuity guarantee riders, such as GMDB, GMWB and GIB, which have incremental expense assessment charges associated with them. The increase in account values reflects cumulative positive net flows, which offset the reduction in variable account values from unfavorable equity markets in the first quarter of 2008.

In the past several years, we have concentrated our efforts on expanding both product and distribution breadth. Annuity deposits increased as a result of continued strong sales of products with guaranteed living benefit riders and the expansion of the wholesaling force in LFD.

Overall lapse rates for the first quarter of 2008 were 8% compared to 10% for the same period in 2007.

Net Investment Income and Interest Credited

Details underlying net investment income, interest credited (in millions) and our interest rate spread were as follows:


	For the Three Months Ended March 31,
	2008			2007			Change
Net Investment Income
Fixed maturity securities, mortgage loans on real estate and other, net of investment expenses	$	227		$	237		-4	%
Change in call option market value ⁽¹⁾		(97	)		1		NM
Commercial mortgage loan prepayment and bond makewhole premiums ⁽²⁾		1			1		0	%
Alternative investments ⁽³⁾		—			1		-100	%
Surplus investments ⁽⁴⁾		18			24		-25	%
Broker-dealer		1			2		-50	%

Total net investment income	$	150		$	266		-44	%

Interest Credited
Amount provided to contract holders	$	183		$	184		-1	%
Change in indexed annuity contract liabilities market value ⁽¹⁾		(94	)		(1	)	NM
SFAS 133 forward-starting option ⁽⁵⁾		10			4		150	%
Opening balance sheet adjustment ⁽⁶⁾		—			(4	)	100	%
DSI deferrals		(26	)		(24	)	-8	%

Interest credited before DSI amortization		73			159		-54	%
DSI amortization:
Excluding unlocking		11			9		22	%
Retrospective unlocking		(1	)		(1	)	0	%

Total interest credited	$	83		$	167		-50	%

⁽¹⁾	The change in the call option market value in net investment income largely offsets the change in interest credited caused by fluctuations in the value of our indexed annuity contract liabilities.

⁽²⁾	See “Consolidated Investments – Commercial Mortgage Loan Prepayment and Bond Makewhole Premiums” below for additional information.

⁽³⁾	See “Consolidated Investments – Alternative Investments” below for additional information.

⁽⁴⁾	Represents net investment income on the required statutory surplus for this segment.

⁽⁵⁾

SFAS 133/157 requires that we calculate the fair values of index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods, which we refer to as the SFAS 133/157 forward-starting option liability. This liability represents an estimate of the cost of the options we may purchase in the future less expected charges to contract holders, discounted back to the date of the balance sheet, using current market indicators of volatility and interest rates. The amount reported in this table represents the change in the fair values of this liability, which results in volatility in interest credited. The interest rate assumption used in discounting this liability within the fair value calculation is the primary driver of the change in value.

⁽⁶⁾	Net adjustment to the opening balance sheet of Jefferson-Pilot finalized in 2007.


	For the Three Months Ended March 31,				Basis Point Change
	2008		2007		Basis Point Change
Interest Rate Spread
Fixed maturity securities, mortgage loans on real estate and other, net of investment expenses	5.85	%	5.88	%	(3	)
Commercial mortgage loan prepayment and bond make whole premiums	0.03	%	0.03	%	—
Alternative investments	-0.01	%	0.02	%	(3	)

Net investment income yield on reserves	5.87	%	5.93	%	(6	)

Amount provided to contract holders	3.81	%	3.72	%	9
SFAS 133 forward-starting option	0.24	%	0.10	%	14
Opening balance sheet adjustment	0.00	%	-0.09	%	9

Interest rate credited to contract holders	4.05	%	3.73	%	32

Interest rate spread	1.82	%	2.20	%	(38	)

Note: The yields, rates and spreads above are calculated using whole dollars instead of dollars rounded to millions.


	For the Three Months Ended March 31,					Change
	2008		2007			Change
Average invested assets on reserves	$	15,715	$	16,501		-5	%
Average fixed account values, including the fixed portion of variable		17,315		17,839		-3	%
Net flows for fixed annuities, including the fixed portion of variable		575		(67	)	NM

A portion of our investment income earned is credited to the contract holders of our fixed annuity products, including the fixed portion of variable annuity contracts. We expect to earn a spread between what we earn on the underlying general account investments supporting the fixed annuity product line, including the fixed portion of variable annuity contracts, and what we credit to our fixed annuity contract holders’ accounts, including the fixed portion of variable annuity contracts. The interest rate spread for this segment represents the excess of the yield on invested assets on reserves over the average crediting rate. The yield on invested assets on reserves is calculated as net investment income, excluding the amounts attributable to our surplus investments, reverse repurchase agreement interest expense, inter-segment cash management account interest expense, interest on collateral and the change in the call option fair value, divided by average invested assets on reserves. The average invested assets on reserves is calculated based upon total invested assets, excluding hedge derivatives. The average crediting rate is calculated as interest credited before DSI amortization, plus the immediate annuity reserve change (included within benefits), less the mark-to-market adjustment on the indexed business, divided by the average fixed account values, including the fixed portion of variable, net of coinsured account values. Fixed account values reinsured under modified coinsurance agreements are included in account values for this calculation. Changes in the fair value of call options, commercial mortgage loan prepayments and bond makewhole premiums, alternative investment income, surplus investment income and SFAS 133/157 forward-starting options can vary significantly from period to period due to a number of factors and, therefore, may contribute to investment income results that are not indicative of the underlying trends.

Profitability of indexed annuities is influenced by the management of derivatives to hedge the index performance of the contracts. These contracts permit the holder to elect an interest rate return or an equity market component, where interest credited to the contracts is linked to the performance of the S&P 500 Index^®. Contract holders may elect to rebalance indexed options at renewal dates, either annually or biannually. At each renewal date, we have the opportunity to re-price the equity-indexed component by establishing caps, spreads and participation rates, subject to guarantees.

Comparison of the Three Months Ended March 31, 2008 to 2007

The decrease in fixed maturity securities, mortgage loans on real estate and other net investment income was due primarily to the decrease in fixed account values, including the fixed portion of variable. Interest credited provided to contract holders remained relatively flat as a decline in our fixed, including the fixed portion of variable, business was offset by an elevated rate.

Our fixed annuity business includes products with crediting rates that are reset on an annual basis and are not subject to surrender charges. Account values for these products were $5.2 billion as of March 31, 2008, with 41% already at their minimum guaranteed rates. The average crediting rates for these products were approximately 41 basis points in excess of average minimum guaranteed rates. Our ability to retain annual reset annuities will be subject to current competitive conditions at the time interest rates for these products reset. In addition to the separate items identified in the interest rate spread table above, the other component of the interest rate credited to contract holders decreased due primarily to a roll-off of multi-year guarantee and annual reset annuities with higher interest rates.

We expect to manage the effect of spreads for near-term operating income through a combination of rate actions and portfolio management. Our expectation includes the assumption that there are no significant changes in net flows in or out of our fixed accounts or other changes that may cause interest rate spreads to differ from our expectation. For information on interest rate spreads and the interest rate risk due to falling interest rates, see “Item 3. Quantitative and Qualitative Disclosures About Market Risk.”

Benefits

Details underlying benefits (in millions) were as follows:


	For the Three Months Ended March 31,						Change
	2008			2007			Change
Benefits
Guaranteed living benefits:
Change in reserves	$	256		$	(26	)	NM
Results of hedge program		(289	)		22		NM
Guaranteed death benefits:
Change in reserves		7			4		75	%
Results of hedge program		(1	)		—		NM
Claims paid		7			2		250	%

Total guaranteed benefits		(20	)		2		NM
Other ⁽¹⁾		37			19		95	%

Total benefits	$	17		$	21		-19	%

⁽¹⁾	Composed primarily of changes in reserves on immediate annuity account values driven by premiums.

We have a hedge program that is designed to mitigate the risk and earnings volatility caused by changes in equity markets, interest rates and volatility associated with the guaranteed benefit features of our variable annuity products, including GMDB, GMWB and GIB riders. Our variable annuity products with living benefit guarantees are considered embedded derivatives and are recorded on our Consolidated Balance Sheets at fair value under SFAS 133 and SFAS 157. We use derivative instruments to hedge our exposure to the risks and earnings volatility that result from the embedded derivatives for living benefits in certain of our variable annuity products. The change in fair value of these instruments tends to move in the opposite direction of the change in fair value of the embedded derivatives. In the table above, we have presented the components of our guaranteed benefit results, which can be volatile especially when sudden and significant changes in equity markets and/or interest rates occur. For additional information on our guaranteed benefits, see “Critical Accounting Policies and Estimates – Derivatives – Guaranteed Living Benefits” above.

Comparison of the Three Months Ended March 31, 2008 to 2007

The decrease in benefits was due primarily to the impact of our guaranteed benefit hedge program exceeding the change in reserves and costs, partially offset by an increase in benefits attributable to single premium immediate annuities, which had a corresponding increase in insurance premiums.

The adoption of SFAS 157 resulted in a fair value of the embedded derivative that was lower than the fair value of the derivative instruments. This created an over-hedged position, driving a decline in our guaranteed living benefits for the first quarter of 2008. For a discussion of this fair value determination under SFAS 157, see “Critical Accounting Policies and Estimates” above.

Underwriting, Acquisition, Insurance and Other Expenses

Details underlying underwriting, acquisition, insurance and other expenses (in millions) were as follows:


	For the Three Months Ended March 31,
	2008			2007			Change
Underwriting, Acquisition, Insurance and Other Expenses
Commissions	$	165		$	153		8	%
General and administration expenses		80			69		16	%
Taxes, licenses and fees		8			7		14	%

Total expenses incurred, excluding broker-dealer		253			229		10	%
DAC and VOBA deferrals		(173	)		(158	)	-9	%

Total pre-broker-dealer expenses incurred, excluding amortization, net of interest		80			71		13	%
DAC and VOBA amortization, net of interest:
Retrospective unlocking		(10	)		(10	)	0	%
Other amortization		115			106		8	%
Broker-dealer expenses incurred:
Commissions		67			67		0	%
General and administration expenses		23			20		15	%
Taxes, licenses and fees		2			2		0	%

Total underwriting, acquisition, insurance and other expenses	$	277		$	256		8	%

DAC and VOBA deferrals
As a percentage of sales/deposits		5.7	%		5.6	%

Commissions and other costs, that vary with and are related primarily to the production of new business are deferred to the extent recoverable and are amortized over the lives of the contracts in relation to estimated gross profits (“EGPs”). We have certain trail commissions that are based upon account values that are expensed as incurred rather than being deferred and amortized.

Broker-dealer expenses that vary with and are related to sales are expensed as incurred and not deferred and amortized. These expenses are more than offset by increases to other income.

Comparison of the Three Months Ended March 31, 2008 to 2007

The increase in expenses incurred, excluding broker-dealer, and DAC and VOBA amortization, excluding unlocking, was attributable primarily to growth in account values from sales.

The increase in broker-dealer general and administrative expenses was attributable primarily to increases in personnel costs.

Individual Markets – Life Insurance

Income from Operations

Details underlying the results for Individual Markets – Life Insurance (in millions) were as follows:


	For the Three Months Ended March 31,
	2008		2007		Change
Operating Revenues
Insurance premiums	$	86	$	88	-2	%
Insurance fees		445		419	6	%
Net investment income		447		454	-2	%
Other revenues and fees		9		10	-10	%

Total operating revenues		987		971	2	%

Operating Expenses
Interest credited		258		252	2	%
Benefits		296		246	20	%
Underwriting, acquisition, insurance and other expenses		213		221	-4	%

Total operating expenses		767		719	7	%

Income from operations before taxes		220		252	-13	%
Federal income taxes		75		85	-12	%

Income from operations	$	145	$	167	-13	%

Comparison of the Three Months Ended March 31, 2008 to 2007

Income from operations for this segment decreased due primarily to the following:

•

Higher benefits due to higher mortality and lower benefits in the first quarter of 2007 partially related to a $14 million reduction in benefits related to a purchase accounting adjustment to the opening balance sheet of Jefferson-Pilot;

•

Lower net investment income due to reductions in invested assets caused by a reduction in statutory reserves related to results of the merger of several of our insurance subsidiaries and certain assumption changes in the fourth quarter of 2007 and less favorable results from our alternative investment income and prepayment and bond makewhole premiums; and

•

A decrease attributable to unfavorable retrospective unlocking of DAC and VOBA for the first quarter of 2008 compared to favorable retrospective unlocking for the first quarter of 2007.

The decrease in income from operations was partially offset by the following:

•

Growth in insurance fees driven by an increase in business in force as a result of new sales since March 31, 2007, and favorable persistency, partially offset by the impact on insurance fees from lower sales in the first quarter of 2008 compared to the first quarter of 2007 and adjustments during the second quarter of 2007 resulting from adjusting account values for certain of our life insurance policies and modifying the accounting for certain of our life insurance policies.

The foregoing items are discussed further below.

Insurance Premiums

Insurance premiums relate to traditional products and are a function of the rates priced into the product and the level of insurance in force. Insurance in force, in turn, is driven by sales, persistency and mortality experience.

Comparison of the Three Months Ended March 31, 2008 to 2007

Traditional in-force face amount and thus premiums remained relatively flat.

Insurance Fees

Details underlying insurance fees, sales, net flows, account values and in-force face amount (in millions) were as follows:


	For the Three Months Ended March 31,						Change
	2008			2007			Change
Insurance Fees
Mortality assessments	$	313		$	292		7	%
Expense assessments		164			154		6	%
Surrender charges		16			15		7	%
DFEL:
Deferrals		(88	)		(66	)	-33	%
Amortization, excluding unlocking		36			27		33	%
Retrospective unlocking		4			(3	)	233	%

Total insurance fees	$	445		$	419		6	%


	For the Three Months Ended March 31,		Change
	2008	2007	Change
Sales by Product