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)

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

For the quarterly period ended June 30, 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

Not Applicable

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 August 1, 2008, there were 256,827,934 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 June 30, 2008			As of December 31, 2007
	(Unaudited)
ASSETS
Investments:
Available-for-sale securities, at fair value:
Fixed maturity (amortized cost: 2008 - $56,553; 2007 - $56,069)	$	54,518		$	56,276
Equity (cost: 2008 - $617; 2007 - $548)		464			518
Trading securities		2,550			2,730
Mortgage loans on real estate		7,678			7,423
Real estate		136			258
Policy loans		2,802			2,835
Derivative investments		890			807
Other investments		1,163			1,075

Total investments		70,201			71,922
Cash and invested cash		1,921			1,665
Deferred acquisition costs and value of business acquired		10,608			9,580
Premiums and fees receivable		399			401
Accrued investment income		876			843
Reinsurance recoverables		8,220			8,237
Goodwill		4,045			4,144
Other assets		2,716			3,530
Separate account assets		85,295			91,113

Total assets	$	184,281		$	191,435

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Future contract benefits	$	16,218		$	16,007
Other contract holder funds		60,363			59,640
Short-term debt		900			550
Long-term debt		4,102			4,618
Reinsurance related derivative liability		112			220
Funds withheld reinsurance liabilities		2,069			2,117
Deferred gain on indemnity reinsurance		658			696
Payables for collateral under securities loaned and derivatives		1,490			1,135
Other liabilities		2,576			3,621
Separate account liabilities		85,295			91,113

Total liabilities		173,783			179,717

Contingencies and Commitments (See Note 9)
Stockholders’ Equity
Series A preferred stock - 10,000,000 shares authorized		—			—
Common stock - 800,000,000 shares authorized; 256,801,622 and 264,233,303 shares issued and outstanding as of June 30, 2008, and December 31, 2007, respectively		7,023			7,200
Retained earnings		4,283			4,293
Accumulated other comprehensive income (loss)		(808	)		225

Total stockholders’ equity		10,498			11,718

Total liabilities and stockholders’ equity	$	184,281		$	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 June 30,					For the Six Months Ended June 30,
	2008			2007		2008			2007
	(Unaudited)
Revenues
Insurance premiums	$	530		$	489	$	1,039		$	948
Insurance fees		842			742		1,654			1,506
Investment advisory fees		76			93		152			183
Net investment income		1,077			1,133		2,142			2,223
Realized gain (loss)		(108	)		7		(143	)		41
Amortization of deferred gain on business sold through reinsurance		19			26		38			45
Other revenues and fees		146			181		292			346

Total revenues		2,582			2,671		5,174			5,292

Benefits and Expenses
Interest credited		613			606		1,225			1,206
Benefits		684			651		1,362			1,244
Underwriting, acquisition, insurance and other expenses		847			816		1,656			1,625
Interest and debt expense		65			73		140			135
Impairment of intangibles		173			—		173			—

Total benefits and expenses		2,382			2,146		4,556			4,210

Income from continuing operations before taxes		200			525		618			1,082
Federal income taxes		75			155		200			324

Income from continuing operations		125			370		418			758
Income (loss) from discontinued operations, net of federal incomes taxes		—			6		(4	)		14

Net income	$	125		$	376	$	414		$	772

Earnings Per Common Share – Basic
Income from continuing operations	$	0.48		$	1.37	$	1.61		$	2.78
Income (loss) from discontinued operations		—			0.02		(0.02	)		0.05

Net income	$	0.48		$	1.39	$	1.59		$	2.83

Earnings Per Common Share – Diluted
Income from continuing operations	$	0.48		$	1.35	$	1.60		$	2.74
Income (loss) from discontinued operations		—			0.02		(0.02	)		0.05

Net income	$	0.48		$	1.37	$	1.58		$	2.79

See accompanying Notes to Consolidated Financial Statements

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in millions, except per share data)


	For the Six Months Ended June 30,
	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		41			85
Deferred compensation payable in stock		3			4
Retirement of common stock/cancellation of shares		(221	)		(195	)

Balance at end-of-period		7,023			7,363

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)		(619	)		308
Less other comprehensive loss, net of tax		(1,033	)		(464	)

Net income		414			772
Retirement of common stock		(205	)		(317	)
Dividends declared: Common (2008 - $.83; 2007 - $ .79)		(215	)		(214	)

Balance at end-of-period		4,283			4,323

Net Unrealized Gain on Available-for-Sale Securities
Balance at beginning-of-year		86			493
Change during the period		(1,025	)		(476	)

Balance at end-of-period		(939	)		17

Net Unrealized Gain on Derivative Instruments
Balance at beginning-of-year		53			39
Change during the period		(12	)		(4	)

Balance at end-of-period		41			35

Foreign Currency Translation Adjustment
Balance at beginning-of-year		175			165
Change during the period		2			16

Balance at end-of-period		177			181

Funded Status of Employee Benefit Plans
Balance at beginning-of-year		(89	)		(84	)
Change during the period		2			—

Balance at end-of-period		(87	)		(84	)

Total stockholders’ equity at end-of-period	$	10,498		$	11,836

See accompanying Notes to Consolidated Financial Statements

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)


	For the Six Months Ended June 30,
	2008			2007
	(Unaudited)
Cash Flows from Operating Activities
Net income	$	414		$	772
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		(357	)		(484	)
Trading securities purchases, sales and maturities, net		96			218
Change in derivative investments		(7	)		(8	)
Change in premiums and fees receivable		2			(76	)
Change in accrued investment income		(33	)		5
Change in reinsurance recoverables		17			(120	)
Change in future contract benefits		223			196
Change in other contract holder funds		183			895
Change in funds withheld reinsurance liability		(48	)		61
Change in federal income tax accruals		(230	)		295
Change in net periodic benefit accruals		—			(4	)
Realized (gain) loss		143			(41	)
Loss on disposal of discontinued operations		12			—
Impairment of intangibles		173			—
Amortization of deferred gain on business sold through reinsurance		(38	)		(45	)
Stock-based compensation expense		19			29
Depreciation, amortization and accretion, net		24			15
Other		(142	)		(319	)

Net adjustments		37			617

Net cash provided by operating activities		451			1,389

Cash Flows from Investing Activities
Purchases of available-for-sale securities		(3,615	)		(7,995	)
Sales of available-for-sale securities		1,014			5,206
Maturities of available-for-sale securities		1,924			2,125
Purchases of other investments		(1,213	)		(1,251	)
Sales or maturities of other investments		914			1,157
Increase (decrease) in payables for collateral under securities loaned and derivatives		355			(132	)
Proceeds from sale of subsidiaries/businesses and disposal of discontinued operations		644			—
Other		(53	)		10

Net cash used in investing activities		(30	)		(880	)

Cash Flows from Financing Activities
Payment of long-term debt, including current maturities		(100	)		(553	)
Issuance of long-term debt		—			750
Issuance (decrease) in commercial paper		(65	)		30
Deposits of fixed account values, including the fixed portion of variable		4,913			4,500
Withdrawals of fixed account values, including the fixed portion of variable		(2,787	)		(4,071	)
Transfers to and from separate accounts, net		(1,233	)		(1,131	)
Maturities of funding agreements		(300	)		—
Common stock issued for benefit plans and excess tax benefits		25			62
Repurchase of common stock		(401	)		(512	)
Dividends paid to stockholders		(217	)		(216	)

Net cash used in financing activities		(165	)		(1,141	)

Net increase (decrease) in cash and invested cash		256			(632	)
Cash and invested cash at beginning-of-year		1,665			1,621

Cash and invested cash at end-of-period	$	1,921		$	989

See accompanying Notes to Consolidated Financial Statements

LINCOLN NATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Nature of Operations and 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 (“SEC”) 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 and six month periods ended June 30, 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.

We have reclassified the results of certain derivatives and embedded derivatives to realized gain (loss), which were previously reported within insurance fees, net investment income, interest credited or benefits. The associated amortization expense of deferred acquisition costs (“DAC”) and value of business acquired (“VOBA”) (previously reported within underwriting, acquisition, insurance and other expenses), deferred sales inducements (“DSI”) (previously reported within interest credited), deferred front-end loads (“DFEL”) (previously reported within insurance fees) and changes in contract holder funds (previously reported within benefits) have also been reclassified to realized gain (loss).

The detail of the reclassifications from what was previously reported in prior period financial statements (in millions) was as follows:


	For the Three Months Ended						For the Six Months Ended June 30, 2007
	March 31, 2008			June 30, 2007			For the Six Months Ended June 30, 2007
Realized gain (loss), as previously reported	$	(38	)	$	(5	)	$	22
Effect of reclassifications to:
Insurance fees		32			16			31
Net investment income		(97	)		37			36
Interest credited		102			(25	)		(30	)
Benefits		(13	)		(5	)		(1	)
Underwriting, acquisition, insurance and other expenses		(21	)		(11	)		(17	)

Realized gain (loss), as adjusted	$	(35	)	$	7		$	41

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 are 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 within our annuity products 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
DAC	$	13
VOBA		(8	)
Other assets – DSI		2

Total assets	$	7

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

Total liabilities	$	23

Revenues
Realized loss	$	(24	)
Federal income tax benefit		(8	)

Loss from continuing operations	$	(16	)

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

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

In February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 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 to fiscal years beginning after November 15, 2008, 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 (“DIG”) 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”). We adopted DIG E23 effective January 1, 2008, for hedging relationships designated on or after that date. 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, in excess of 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. Under SFAS 141(R), contractual pre-acquisition contingencies will be recognized at their acquisition-date fair values and non-contractual 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. Deferred recognition of pre-acquisition contingencies will no longer be permitted. 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 will adopt SFAS 141(R) for acquisitions occurring after January 1, 2009.

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, sells some of its ownership interests in its subsidiary, the subsidiary reacquires some of its ownership interests or the subsidiary 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 will adopt SFAS 160 effective January 1, 2009, and do not expect the adoption will have a material impact on our consolidated financial condition and results of operations.

FSP FAS No. 140-3 – Accounting for Transfers of Financial Assets and Repurchase Financing Transactions

In February 2008, the FASB issued FSP FAS No. 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 will adopt FSP 140-3 effective January 1, 2009, and do not expect the adoption will have a material impact 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 end of the reporting period 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 will adopt SFAS 161 effective January 1, 2009, at which time we will include these required enhanced disclosures related to derivative instruments and hedging activities in our financial statements.

FSP FAS No. 142-3 – Determination of the Useful Life of Intangible Assets

In April 2008, the FASB issued FSP FAS 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 will adopt FSP 142-3 on January 1, 2009 and do not expect the adoption will have a material impact on our consolidated financial condition and results of operations.

SFAS No. 163 – Accounting for Financial Guarantee Insurance Contracts – an Interpretation of FASB Statement No. 60

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts – an interpretation of FASB Statement No. 60” (“SFAS 163”), which applies to financial guarantee insurance and reinsurance contracts not accounted for as derivative instruments, and issued by entities within the scope of SFAS No. 60, “Accounting and Reporting by Insurance Enterprises.” SFAS 163 changes current accounting practice related to the recognition and measurement of premium revenue and claim liabilities such that premium revenue recognition is linked to the amount of insurance protection and the period in which it is provided, and a claim liability is recognized when it is expected that a claim loss will exceed the unearned premium revenue. In addition, SFAS 163 expands disclosure requirements to include information related to the premium revenue and claim liabilities, as well as information related to the risk-management activities used to evaluate credit deterioration in insured financial obligations. SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years; early application is not permitted. However, the disclosure requirements related to risk-management activities are effective in the first period (including interim periods) beginning after May 2008. We will adopt SFAS 163 effective January 1, 2009, except for the disclosure requirements which, if applicable, will be provided in the third quarter of 2008. Since we do not hold a significant amount of financial guarantee insurance and reinsurance contracts, we expect the adoption of SFAS 163 will not be material to our consolidated financial condition or results of operations.

EITF No. 07-5 – Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock

In June 2008, the FASB issued EITF No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 provides guidance to determine whether an instrument (or an embedded feature) is indexed to an entity’s own stock when evaluating the instrument as a derivative under SFAS 133. An instrument that is both indexed to an entity’s own stock and classified in stockholders’ equity in the entity’s statement of financial position is not considered a derivative for the purposes of applying the guidance in SFAS 133. EITF 07-5 provides a two-step process to determine whether an equity-linked instrument (or embedded feature) is indexed to its own stock first by evaluating the instrument’s contingent exercise provisions, if any, and second, by evaluating the instrument’s settlement provisions. EITF 07-5 is applicable to outstanding instruments as of the beginning of the fiscal year in which the issue is adopted and is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We will adopt EITF 07-5 on January 1, 2009, and do not expect the adoption will be material to 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 June 30, 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 June 30,				For the Six Months Ended June 30,
	2008		2007		2008			2007
Discontinued Operations Before Disposal
Media revenues, net of agency commissions	$	—	$	29	$	22		$	71

Income from discontinued operations before disposal, before federal income taxes	$	—	$	10	$	8		$	22
Federal income taxes		—		4		3			8

Income from discontinued operations before disposal		—		6		5			14

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

Loss on disposal		—		—		(9	)		—

Income (loss) from discontinued operations	$	—	$	6	$	(4	)	$	14

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. Any adjustment to the purchase price, if necessary, will be determined at October 31, 2008. During the three and six months ended June 30, 2008, we recorded an after-tax gain of $1 million and $3 million, respectively, 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 June 30, 2008
	Amortized Cost		Gross Unrealized				Fair Value
	Amortized Cost		Gains		Losses		Fair Value
Corporate bonds	$	44,160	$	675	$	2,216	$	42,619
U.S. Government bonds		191		13		1		203
Foreign government bonds		887		43		23		907
Asset and mortgage-backed securities:
Mortgage pass-through securities		1,712		17		24		1,705
Collateralized mortgage obligations		6,730		64		418		6,376
Commercial mortgage-backed securities		2,628		21		182		2,467
State and municipal bonds		142		1		2		141
Redeemable preferred stocks		103		2		5		100

Total fixed maturity securities		56,553		836		2,871		54,518
Equity securities		617		39		192		464

Total available-for-sale securities	$	57,170	$	875	$	3,063	$	54,982


	As of December 31, 2007
	Amortized Cost		Gross Unrealized				Fair Value
	Amortized Cost		Gains		Losses		Fair 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 June 30, 2008
	Amortized Cost		Fair Value
Due in one year or less	$	1,893	$	1,901
Due after one year through five years		12,993		13,049
Due after five years through ten years		15,715		14,916
Due after ten years		14,882		14,104

Subtotal		45,483		43,970
Asset and mortgage-backed securities		11,070		10,548

Total fixed maturity available-for-sale securities	$	56,553	$	54,518

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 June 30, 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	$	17,482	$	945	$	6,742	$	1,271	$	24,224	$	2,216
U.S. Government bonds		37		1		—		—		37		1
Foreign government bonds		274		8		98		15		372		23
Asset and mortgage-backed securities:
Mortgage pass-through securities		664		16		67		8		731		24
Collateralized mortgage obligations		2,024		159		896		259		2,920		418
Commercial mortgage-backed securities		1,082		51		647		131		1,729		182
State and municipal bonds		55		2		5		—		60		2
Redeemable preferred stocks		60		5		1		—		61		5

Total fixed maturity securities		21,678		1,187		8,456		1,684		30,134		2,871
Equity securities		350		190		15		2		365		192

Total available-for-sale securities	$	22,028	$	1,377	$	8,471	$	1,686	$	30,499	$	3,063

Total number of securities in an unrealized loss position												3,320


	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 June 30, 2008
	Fair Value		Gross Unrealized Losses		Number of Securities
Less than six months	$	198	$	102	59
Six months or greater, but less than nine months		354		255	27
Nine months or greater, but less than twelve months		225		128	38
Twelve months or greater		1,512		981	255

Total available-for-sale securities	$	2,289	$	1,466	379


	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 $1.9 billion increase in our gross unrealized losses for the six months ended June 30, 2008, was attributable primarily to the combination of reduced liquidity in several market segments, deterioration in credit fundamentals and an increase in treasury rates. We believe that the securities in an unrealized loss position as of June 30, 2008 were not other-than-temporarily impaired due to our ability and intent to hold for a period of time sufficient for recovery.

Trading Securities

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


	As of June 30, 2008		As of December 31, 2007
Corporate bonds	$	1,850	$	1,999
U.S. Government bonds		376		367
Foreign government bonds		39		46
Asset and mortgage-backed securities:
Mortgage pass-through securities		21		22
Collateralized mortgage obligations		137		160
Commercial mortgage-backed securities		99		107
State and municipal bonds		17		19
Redeemable preferred stocks		9		8

Total fixed maturity securities		2,548		2,728
Equity securities		2		2

Total trading securities	$	2,550	$	2,730

The portion of trading losses that relate to trading securities still held as of June 30, 2008, was $91 million for the second 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 29% of mortgage loans as of June 30, 2008.

Net Investment Income

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


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2008			2007			2008			2007
Fixed maturity available-for-sale securities	$	855		$	845		$	1,713		$	1,689
Equity available-for-sale securities		8			12			17			20
Trading securities		42			44			85			90
Mortgage loans on real estate		129			132			250			262
Real estate		6			13			14			28
Policy loans		43			44			88			87
Invested cash		15			17			34			36
Alternative investments		13			70			8			90
Other investments		(3	)		3			(2	)		12

Investment income		1,108			1,180			2,207			2,314
Investment expense		(31	)		(47	)		(65	)		(91	)

Net investment income	$	1,077		$	1,133		$	2,142		$	2,223

Realized Gain (Loss) Related to Investments

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


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2008			2007			2008			2007
Fixed maturity available-for-sale securities:
Gross gains	$	22		$	26		$	31		$	82
Gross losses		(138	)		(46	)		(238	)		(53	)
Equity available-for-sale securities:
Gross gains		—			4			3			6
Gross losses		(7	)		—			(7	)		—
Gain on other investments		3			5			28			1
Associated amortization expense of DAC, VOBA, DSI and DFEL and changes in other contract holder funds		24			(2	)		49			(22	)

Total realized gain (loss) on investments, excluding trading securities		(96	)		(13	)		(134	)		14
Gain (loss) on certain derivative instruments		(29	)		4			(32	)		4

Total realized gain (loss) on investments and certain derivative instruments, excluding trading securities	$	(125	)	$	(9	)	$	(166	)	$	18

Write-downs for other-than-temporary impairments included in realized loss on available-for-sale securities above	$	(120	)	$	(30	)	$	(211	)	$	(34	)

See Note 11 for a comprehensive listing of realized gain (loss).

Securities Lending

The carrying values of securities pledged under securities lending agreements were $602 million and $655 million as of June 30, 2008, and December 31, 2007, respectively. The fair values of these securities were $578 million and $634 million as of June 30, 2008, and December 31, 2007, respectively.

Reverse Repurchase Agreements

The carrying values of securities pledged under reverse repurchase agreements were $480 million as of June 30, 2008, and December 31, 2007. The fair values of these securities were $508 million and $502 million as of June 30, 2008, and December 31, 2007, respectively.

Investment Commitments

As of June 30, 2008, our investment commitments for fixed maturity securities (primarily private placements), limited partnerships, real estate and mortgage loans on real estate were $1.2 billion, which includes $337 million of standby commitments to purchase real estate upon completion and leasing.

Concentrations of Financial Instruments

As of June 30, 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 June 30, 2008, and December 31, 2007, other contract holder funds on our Consolidated Balance Sheets included $850 million and $1.2 billion outstanding in funding agreements of the Lincoln National Life Insurance Company (“LNL”), respectively. 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. These credit-linked notes are classified as asset-backed securities and are

included in our fixed maturity securities on our Consolidated Balance Sheets. An additional $300 million funding agreement was assumed as a result of the merger of Jefferson-Pilot, but was not invested into credit-linked notes. This $300 million funding agreement matured on June 2, 2008.

We earn a spread between the coupon received on the credit-linked notes 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 June 30, 2008.

As in the general markets, spreads on these transactions have widened, causing unrealized losses. We had unrealized losses of $390 million and $190 million on the $850 million in credit-linked notes as of June 30, 2008, and December 31, 2007, respectively. 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 June 30, 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		A-
Number of entities ⁽¹⁾		125		100		102
Number of countries ⁽¹⁾		20		21		14

⁽¹⁾	As of June 30, 2008.

5. DAC, VOBA, DSI and DFEL

Changes in DAC (in millions) were as follows:


	For the Six Months Ended June 30,
	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		896			968
Amortization, net of interest:
Unlocking		(10	)		31
Other amortization		(403	)		(385	)
Adjustment related to realized gains on available-for-sale securities and derivatives		(10	)		(27	)
Adjustment related to unrealized losses on available-for-sale securities and derivatives		332			188
Foreign currency translation adjustment		1			13

Balance at end-of-period	$	7,316		$	5,873

Changes in VOBA (in millions) were as follows:


	For the Six Months Ended June 30,
	2008			2007
Balance at beginning-of-year	$	3,070		$	3,304
Cumulative effect of adoption of SOP 05-1		—			(35	)
Business acquired		—			14
Deferrals		26			24
Amortization:
Unlocking		(20	)		9
Other amortization		(199	)		(233	)
Accretion of interest		67			70
Adjustment related to realized (gains) losses on available-for-sale securities and derivatives		13			(11	)
Adjustment related to unrealized losses on available-for-sale securities and derivatives		334			78
Foreign currency translation adjustment		1			8

Balance at end-of-period	$	3,292		$	3,228

Changes in DSI (in millions) were as follows:


	For the Six Months Ended June 30,
	2008			2007
Balance at beginning-of-year	$	279		$	194
Cumulative effect of adoption of SOP 05-1		—			(3	)
Deferrals		52			51
Amortization, net of interest:
Unlocking		1			2
Other amortization		(15	)		(16	)
Adjustment related to realized gains on available-for-sale securities and derivatives		(3	)		(3	)

Balance at end-of-period	$	314		$	225

Changes in DFEL (in millions) were as follows:


	For the Six Months Ended June 30,
	2008			2007
Balance at beginning-of-year	$	1,183		$	977
Cumulative effect of adoption of SOP 05-1		—			(2	)
Deferrals		206			203
Amortization, net of interest:
Unlocking		(14	)		9
Other amortization		(95	)		(90	)
Adjustment related to realized (gains) losses on available-for-sale securities and derivatives		1			(1	)
Foreign currency translation adjustment		1			10

Balance at end-of-period	$	1,282		$	1,106

6. Goodwill and Specifically Identifiable Intangibles

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


	For the Six Months Ended June 30, 2008
	Balance At Beginning- of-Year		Purchase Accounting Adjustments			Impairment			Foreign Currency Translation Adjustment		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		—			—			—		17
Other Operations		339		(2	)		(83	)		—		254

Total goodwill	$	4,144	$	(16	)	$	(83	)	$	—	$	4,045

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

As a result of declines in current and forecasted advertising revenue for the entire radio market, we updated our intangible impairment review in the second quarter of 2008, which was outside of our annual process normally completed as of October 1 each year. This impairment test showed the implied fair value of our remaining radio properties were lower than their carrying amounts, therefore we recorded non-cash impairments of goodwill (set forth above) and specifically identifiable intangible (set forth below), based upon the guidance of SFAS 142. The impairment of goodwill did not have any offsetting tax benefit; therefore, our effective tax rate for the three and six months ended June 30, 2008, was elevated over the corresponding periods in 2007.

The gross carrying amounts and accumulated amortization (in millions) for each major specifically identifiable intangible asset class by reportable segment were as follows:


	As of June 30, 2008				As of December 31, 2007
	Gross Carrying Amount		Accumulated Amortiza- tion		Gross Carrying Amount		Accumulated Amortiza- tion
Individual Markets – Life Insurance:
Sales force	$	100	$	9	$	100	$	7
Employer Markets – Retirement Products:
Mutual fund contract rights ⁽¹⁾		3		—		3		—
Investment Management:
Client lists		92		91		92		90
Other ⁽¹⁾		4		—		3		—
Other Operations:
FCC licenses ^{(1) (2)}		294		—		384		—
Other		4		3		4		3

Total	$	497	$	103	$	586	$	100

⁽¹⁾	No amortization recorded as the intangible asset has indefinite life.

⁽²⁾	We recorded FCC licenses impairment of $90 million during the second quarter of 2008, as discussed above.

See Note 3 for goodwill and specifically identifiable intangibles included within discontinued operations.

7. Other Contract Holder Funds

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


	As of June 30, 2008		As of December 31, 2007
Account values and other contract holder funds	$	58,337	$	57,698
Deferred front-end loads		1,282		1,183
Contract holder dividends payable		519		524
Premium deposit funds		133		140
Undistributed earnings on participating business		92		95

Total other contract holder funds	$	60,363	$	59,640

8. Federal Income Taxes

The effective tax rate was 38% and 30% for the three months ended June 30, 2008 and 2007, respectively. The effective tax rate for the six months ended June 30, 2008 and 2007 was 32% and 30%, respectively. Differences in the effective rates and the U.S. statutory rate of 35% in 2008 were the result of certain tax preferred investment income, separate account dividends-received deduction (“DRD”), foreign tax credits, other tax preference items and the impact of the goodwill impairment related to media operations, which did not have a corresponding tax effect. See Note 6 for additional information.

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 that purports, among other things, to modify the calculation of the separate account DRD 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 DRD lowered the effective tax rate by approximately 12% and 4% for the three months ended June 30, 2008 and 2007, respectively, and 7% and 4% for the six months ended June 30, 2008 and 2007, respectively. The separate account deduction for dividends was relatively flat compared to prior quarters; however, its impact to the effective tax rate was the result of lower pre-tax income for the three months ended June 30, 2008.

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. As of June 30, 2008, we believed that it was more likely than not that all gross deferred tax assets will reduce taxes payable in future years.

As of June 30, 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 U.S. and the U.K. At any given time, we may be under examination by state, local or non-U.S. income tax authorities.

9. 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 Regulatory Authority, and we have responded 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.

10. 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 June 30,				For the Six Months Ended June 30,
	2008		2007		2008		2007
Series A Preferred Stock
Balance at beginning-of-period	11,662		12,526		11,960		12,706
Conversion into common stock	—		(165	)	(298	)	(345	)

Balance at end-of-period	11,662		12,361		11,662		12,361

Common Stock
Balance at beginning-of-period	259,206,033		270,685,522		264,233,303		275,752,668
Conversion of Series A preferred stock	—		2,640		4,768		5,520
Stock compensation ⁽¹⁾	300,262		734,675		691,644		2,838,673
Deferred compensation payable in stock	17,725		25,929		67,079		69,161
Retirement of common stock by repurchase/cancellation of shares	(2,722,398	)	(7,153	)	(8,195,172	)	(7,224,409	)

Balance at end-of-period	256,801,622		271,441,613		256,801,622		271,441,613

Common stock at end-of-period:
Assuming conversion of preferred stock	256,988,214		271,639,389		256,988,214		271,639,389
Diluted basis	257,825,399		274,489,187		257,825,399		274,489,187

⁽¹⁾	Amount includes non stock option awards issued, including issuances for benefit plans and stock options exercised.

Earnings Per Share

The income used in the calculation of our diluted earnings per share (“EPS”) is our income from continuing operations 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 all periods presented, and preferred dividends declared and payable. 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 June 30,				For the Six Months Ended June 30,
	2008		2007		2008		2007
Weighted-average shares, as used in basic calculation	257,785,473		270,566,521		259,368,519		272,716,140
Shares to cover conversion of preferred stock	186,592		199,012		187,824		199,980
Shares to cover non-vested stock	273,307		354,054		256,615		751,427
Average stock options outstanding during the period	9,199,383		13,307,765		9,596,842		13,815,359
Assumed acquisition of shares with assumed proceeds and benefits from exercising stock options (at average market price for the year)	(8,998,441	)	(11,111,321	)	(9,411,397	)	(11,613,259	)
Shares repurchasable from measured but unrecognized stock option expense	(100,707	)	(257,704	)	(85,157	)	(256,675	)
Average deferred compensation shares	1,271,413		1,345,246		1,277,542		1,326,853

Weighted-average shares, as used in diluted calculation	259,617,020		274,403,573		261,190,788		276,939,825

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.

11. Realized Gain (Loss)

Details underlying realized gain (loss) (in millions) were as follows:


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2008			2007			2008			2007
Total realized gain (loss) on investments and certain derivative instruments, excluding trading securities ⁽¹⁾	$	(125	)	$	(9	)	$	(166	)	$	18
Gain (loss) on certain reinsurance derivative/trading securities ⁽²⁾		1			4			2			4
Indexed annuity net derivative results ⁽³⁾:
Gross		3			13			11			11
Associated amortization expense of DAC, VOBA, DSI and DFEL		(1	)		(6	)		(6	)		(6	)
Guaranteed living benefits ⁽⁴⁾:
Gross		20			12			38			30
Associated amortization expense of DAC, VOBA, DSI and DFEL		(8	)		(6	)		(27	)		(15	)
Guaranteed death benefits ⁽⁵⁾:
Gross		—			(2	)		2			(2	)
Associated amortization expense of DAC, VOBA, DSI and DFEL		—			1			(1	)		1
Gain on sale of subsidiaries/businesses		2			—			4			—

Total realized gain (loss)	$	(108	)	$	7		$	(143	)	$	41

⁽¹⁾	See Note 4 “Realized Gain (Loss) Related to Investments” for detail.

⁽²⁾

Represents changes in the fair value of total return swaps (embedded derivatives) related to various modified coinsurance and coinsurance with funds withheld reinsurance arrangements that have contractual returns related to various assets and liabilities associated with these arrangements. Changes in the fair value of these derivatives are offset by the change in fair value of trading securities in the portfolios that support these arrangements.

⁽³⁾

Represents the net difference between the change in the fair value of the Standard & Poor’s (“S&P”) 500 Index^® call options that we hold and the change in the fair value of the embedded derivative liabilities of our indexed annuity products along with changes in the fair value of embedded derivative liabilities related to index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products as required under SFAS 133 and 157. The six months ended June 30, 2008, includes a $10 million gain from the initial impact of adopting SFAS 157.

⁽⁴⁾

Represents the net difference in the change in fair value of the embedded derivative liabilities of our guaranteed living benefit (“GLB”) products and the change in the fair value of the derivative instruments we own to hedge, including the cost of purchasing the hedging instruments. The six months ended June 30, 2008, includes a $34 million loss from the initial impact of adopting SFAS 157.

⁽⁵⁾	Represents the change in the fair value of the derivatives used to hedge our guaranteed death benefit (“GDB”) riders.

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 GDB, guaranteed withdrawal benefit (“GWB”) and guaranteed income benefit (“GIB”) features. The GDB features include those where we contractually guarantee to the contract holder either: return of no less than total deposits made to the contract less any partial withdrawals (“return of net deposits”); total deposits made to the contract less any partial withdrawals plus a minimum return (“minimum return”); or the highest contract value on any contract anniversary date through age 80 minus any payments or withdrawals following the contract anniversary (“anniversary contract value”).

These guarantees are considered embedded derivatives and are recorded in future contract benefits on our Consolidated Balance Sheets at fair value under SFAS 133 and 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. 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. The net impact of these changes is reported as GLB, which is a component of realized gain (loss) discussed above.

Information in the event of death on the GDB 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 June 30, 2008			As of December 31, 2007
Return of Net Deposits
Variable annuity account value	$	43,337		$	44,833
Net amount at risk ⁽¹⁾		701			93
Average attained age of contract holders		56 years			55 years
Minimum Return
Variable annuity account value	$	297		$	355
Net amount at risk ⁽¹⁾		46			25
Average attained age of contract holders		68 years			68 years
Guaranteed minimum return		5	%		5	%
Anniversary Contract Value
Variable annuity account value	$	23,625		$	25,537
Net amount at risk ⁽¹⁾		2,104			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 GDB 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 GDB (in millions), which were recorded in future contract benefits on our Consolidated Balance Sheets:


	For the Six Months Ended June 30,
	2008			2007
Balance at beginning-of-year	$	38		$	23
Cumulative effect of adoption of SOP 05-1		—			(4	)
Changes in reserves		25			10
Benefits paid		(11	)		(3	)

Balance at end-of-period	$	52		$	26

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

The results of the hedging program are included in realized gain (loss), which included gains of less than $1 million and $2 million for GDB for the three months and six months ended June 30, 2008, respectively, and losses of $1 million and $2 million for the three and six months ended June 30, 2007, respectively.

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


	As of June 30, 2008			As of December 31, 2007
Asset Type
Domestic equity	$	37,447		$	44,982
International equity		11,899			8,076
Bonds		9,740			8,034
Money market		4,831			6,545

Total	$	63,917		$	67,637

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

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 June 30,						For the Six Months Ended June 30,
	2008			2007			2008			2007
Commissions	$	499		$	536		$	992		$	1,050
General and administrative expenses		422			452			844			863
DAC and VOBA deferrals and interest, net of amortization		(156	)		(272	)		(357	)		(484	)
Other intangibles amortization		2			3			3			5
Media expenses		15			15			31			30
Taxes, licenses and fees		49			52			112			117
Merger-related expenses		16			30			31			44

Total	$	847		$	816		$	1,656		$	1,625

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 June 30,
	Pension Benefits						Other Postretirement Benefits
	2008			2007			2008			2007
U.S. Plans
Service cost	$	—		$	7		$	1		$	1
Interest cost		15			14			2			2
Expected return on plan assets		(20	)		(20	)		—			—
Amortization of prior service cost		—			(1	)		—			—
Recognized net actuarial gain		—			—			(1	)		(1	)

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

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

Net periodic benefit expense	$	2		$	1


	For the Six Months Ended June 30,
	Pension Benefits						Other Postretirement Benefits
	2008			2007			2008			2007
U.S. Plans
Service cost	$	—		$	16		$	1		$	2
Interest cost		30			30			4			4
Expected return on plan assets		(39	)		(40	)		(1	)		(1	)
Amortization of prior service cost		—			(1	)		—			—
Recognized net actuarial gain		1			—			(1	)		(1	)

Net periodic benefit expense (recovery)	$	(8	)	$	5		$	3		$	4

Non-U.S. Plans
Service cost	$	1		$	1
Interest cost		10			9
Expected return on plan assets		(11	)		(10	)
Recognized net actuarial loss		2			2

Net periodic benefit expense	$	2		$	2

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. Consequently, we are no longer accruing service costs in our U.S. pension plans.

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, 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. DIUS has a separate stock-based incentive compensation plan, which has DIUS stock underlying the awards.

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 six months ended June 30, 2008.

In addition to the stock-based grants noted above, various other LNC stock-based awards were granted in the three and six months ended June 30, 2008, which are summarized in the table below:


	For the Three Months Ended June 30, 2008	For the Six Months Ended June 30, 2008
Awards
10-year LNC stock options	10,772	14,326
Non-employee director stock options	—	60,489
Non-employee agent stock options	20,982	197,113
Restricted stock	18,776	163,397
Stock appreciation rights	—	234,800

15. 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 second quarter of 2008 or as of June 30, 2008.


	As of June 30, 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	$	234	$	50,053		$	4,231		$	54,518
Equity		66		252			146			464
Trading securities		5		2,444			101			2,550
Derivative instruments		—		24			866			890
Cash and invested cash		—		1,921			—			1,921
Separate account assets		—		85,295			—			85,295

Total assets	$	305	$	139,989		$	5,344		$	145,638

Liabilities
Other contract holder funds:
Remaining guaranteed interest and similar contracts	$	—	$	—		$	(298	)	$	(298	)
Embedded derivative instruments – living benefits liabilities		—		—			(335	)		(335	)
Reinsurance related derivative liability		—		(112	)		—			(112	)

Total liabilities	$	—	$	(112	)	$	(633	)	$	(745	)

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 tables summarize 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 June 30, 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	$	4,223		$	(13	)	$	(22	)	$	133		$	(90	)	$	4,231
Equity		35			(6	)		50			67			—			146
Trading securities		108			(6	)		—			(1	)		—			101
Derivative instruments		969			(118	)		(5	)		20			—			866
Other contract holder funds:
Remaining guaranteed interest and similar contracts		(321	)		21			—			2			—			(298	)
Embedded derivative instruments – living benefits liabilities		(535	)		2			234			(36	)		—			(335	)

Total, net	$	4,479		$	(120	)	$	257		$	185		$	(90	)	$	4,711


	For the Six Months Ended June 30, 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		$	(15	)	$	(428	)	$	62		$	192	$	4,231
Equity		54			(6	)		31			67			—		146
Trading securities		112			(8	)		—			(8	)		5		101
Derivative instruments		767			(8	)		5			102			—		866
Other contract holder funds:
Remaining guaranteed interest and similar contracts		(389	)		47			—			44			—		(298	)
Embedded derivative instruments – living benefits liabilities		(279	)		4			9			(69	)		—		(335	)

Total, net	$	4,685		$	14		$	(383	)	$	198		$	197	$	4,711

⁽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 tables provide the components of the items included in earnings, net, excluding any impact of amortization on DAC, VOBA, DSI and DFEL and changes in other contract holder funds, (in millions) as reported in the table above:


	For the Three Months Ended June 30, 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⁾	$	1	$	(14	)	$	—	$	—		$	(13	)
Equity		—		(6	)		—		—			(6	)
Trading securities ⁽¹⁾		1		(7	)		—		—			(6	)
Derivative instruments ⁽²⁾		—		—			4		(122	)		(118	)
Other contract holder funds:
Remaining guaranteed interest and similar contracts⁽²⁾		—		—			6		15			21
Embedded derivative instruments – living benefits liabilities ⁽²⁾		—		—			—		2			2

Total, net	$	2	$	(27	)	$	10	$	(105	)	$	(120	)


	For the Six Months Ended June 30, 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⁾	$	1	$	(16	)	$	—		$	—		$	(15	)
Equity		—		(6	)		—			—			(6	)
Trading securities ⁽¹⁾		1		(7	)		—			(2	)		(8	)
Derivative instruments ⁽²⁾		—		—			(23	)		15			(8	)
Other contract holder funds:
Remaining guaranteed interest and similar contracts ⁽²⁾		—		—			10			37			47
Embedded derivative instruments – living benefits liabilities ⁽²⁾		—		—			—			4			4

Total, net	$	2	$	(29	)	$	(13	)	$	54		$	14

⁽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⁾	All amounts are included in realized gain (loss) 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 June 30, 2008
	Fair Value		% of Total Fair Value
Corporate bonds	$	2,327	55.0	%
Asset-backed securities		807	19.1	%
Commercial mortgage-backed securities		360	8.5	%
Collateralized mortgage obligations		223	5.3	%
Mortgage pass-through securities		105	2.5	%
Municipals		129	3.0	%
Government and government agencies		249	5.9	%
Redeemable preferred stock		31	0.7	%

Total available-for-sale fixed maturity securities	$	4,231	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

As of June 30, 2008, we provided 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. Other Operations also includes the Institutional Pension business, which was previously reported in Employer Markets – Retirement Products.

On July 21, 2008, we announced the realignment of our segments under our former Employer Markets and Individual Markets operating businesses into two new operating businesses – Retirement Solutions and Insurance Solutions. We believe the new structure more closely aligns with consumer needs and should lead to more coordinated product development and greater effectiveness across the enterprise. The only change to our current segment reporting will be to report the results of the Executive Benefits business, which as of June 30, 2008, was part of the Retirement Products segment, in the Life Insurance segment. Accordingly, for the third quarter of 2008, we will provide products and services in four operating business and report results through six segments as follows:


Business		Corresponding Segments

Retirement Solutions		Annuities
		Defined Contribution (formerly Retirement Products)

Insurance Solutions		Life Insurance (including Executive Benefits business)
		Group Protection

Investment Management		Investment Management

Lincoln UK		Lincoln UK

These changes to the Retirement Products and the Life Insurance segments are in accordance with the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” and reflect the manner in which we are organized for purposes of making operating decisions and assessing performance. Our segment results will be reported under this new structure beginning in the third quarter of 2008, and we will restate results from prior periods in a consistent manner. We view the changes to the existing segments as immaterial.

Beginning with the quarter ended June 30, 2008, we changed our definitions of segment operating revenues and income from operations to better reflect: the underlying economics of our variable and indexed annuities that employ derivative instruments to hedge policy benefits and the manner in which management evaluates that business. Our change in the definition of income from operations is primarily the result of our adoption of SFAS 157 during the first quarter of 2008. See Note 2. Under SFAS 157’s fair value calculation, we are required to fair value these annuities from an “exit value” perspective, (i.e., what a market participant or willing buyer would charge to assume the liability). We, therefore, must include margins that a market participant buyer would require as well as a factor for non-performance risk related to our credit quality. We do not believe that these factors relate to the economics of the underlying business and do not reflect the manner in which management evaluates the business. The items that are now excluded from our operating results that were previously included are as follows: GLB net derivatives results; indexed annuity forward-starting option; and GDB derivatives results. See Note 11 for more information about these items.

We continue to exclude the effects of any realized gain (loss) on investments from segment operating revenues and income from operations as we believe that such items are 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.

We believe that our new definitions of operating revenues and income (loss) from operations will provide investors with a more valuable measure of our performance because it better reveals trends in our business.

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. Income (loss) from operations is GAAP net income excluding the after-tax effects of the following items, as applicable:

•

Realized gains and losses associated with the following (“excluded realized gain (loss)”):

•

Sale or disposal of securities;

•

Impairments of securities;

•

Change in the fair value of embedded derivatives within certain reinsurance arrangements and the change in the fair value of related trading securities;

•

Change in the fair value of the embedded derivatives of our GLBs within our variable annuities net of the change in the fair value of the derivatives we own to hedge the changes in the embedded derivative;

•

Net difference between the benefit ratio unlocking of SOP No. 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” reserves on our GDB riders within our variable annuities and the change in the fair value of the derivatives excluding our expected cost of purchasing the hedging instruments; and

•

Income (loss) from the initial adoption of changes in accounting principles;

•

Income (loss) from reserve changes (net of related amortization) on business sold through reinsurance;

•

Losses on early retirement of debt, including subordinated debt;

•

Losses from the impairment of intangible assets; and

•

Income (loss) from discontinued operations.

Operating revenues represent GAAP revenues excluding the pre-tax effects of the following items, as applicable:

•

Excluded realized gain (loss);

•

Amortization of deferred gains arising from the reserve changes on business sold through reinsurance; and

•

Revenue adjustments from the initial impact of the adoption of changes in accounting principles.

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 June 30,					For the Six Months Ended June 30,
	2008			2007		2008			2007
Revenues
Operating revenues:
Individual Markets:
Annuities	$	618		$	624	$	1,241		$	1,214
Life Insurance		1,021			957		2,008			1,929

Total Individual Markets		1,639			1,581		3,249			3,143

Employer Markets:
Retirement Products		304			318		608			634
Group Protection		425			391		824			751

Total Employer Markets		729			709		1,432			1,385

Investment Management ⁽¹⁾		125			151		245			301
Lincoln UK ⁽²⁾		98			93		183			183
Other Operations		110			123		229			233
Excluded realized gain (loss), pre-tax		(120	)		6		(166	)		39
Amortization of deferred gain arising from reserve changes on business sold through reinsurance, pre-tax		1			8		2			8

Total revenues	$	2,582		$	2,671	$	5,174		$	5,292

⁽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 $21 million and $19 million for the three months ended June 30, 2008 and 2007, respectively, and $41 million and $44 million for the six months ended June 30, 2008 and 2007, respectively.

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


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2008			2007			2008			2007
Net Income
Income (loss) from operations:
Individual Markets:
Annuities	$	116		$	123		$	234		$	240
Life Insurance		153			176			298			343

Total Individual Markets		269			299			532			583

Employer Markets:
Retirement Products		52			58			104			120
Group Protection		32			29			58			52

Total Employer Markets		84			87			162			172

Investment Management		15			11			27			28
Lincoln UK		18			12			29			23
Other Operations		(44	)		(35	)		(86	)		(65	)
Excluded realized gain (loss), after-tax		(78	)		4			(108	)		25
Income (loss) from reserve changes (net of related amortization) on business sold through reinsurance, after-tax		—			(8	)		1			(8	)
Impairment of intangibles, after-tax		(139	)		—			(139	)		—

Income from continuing operations, after-tax		125			370			418			758
Income (loss) from discontinued operations, after-tax		—			6			(4	)		14

Net income	$	125		$	376		$	414		$	772

17. Supplemental Disclosures of Cash Flow and Fair Value of Financial Instruments Information

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


	For the Six Months Ended June 30,
	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	$	5		$	—

The carrying values and estimated fair values of our debt financial instruments (in millions) were as follows:


	As of June 30, 2008						As of December 31, 2007
	Carrying Value			Fair Value			Carrying Value			Fair Value
Short-term debt	$	(900	)	$	(896	)	$	(550	)	$	(550	)
Long-term debt		(4,102	)		(3,817	)		(4,618	)		(4,511	)

18. Subsequent Event

During July 2008, we borrowed $200 million under a new $200 million borrowing facility. The facility expires, and all outstanding loans under the facility mature, on July 18, 2013. Proceeds from this borrowing were used for general corporate purposes and to repay maturing debt.

On July 21, 2008, we announced the realignment of our Employer Markets and Individual Markets businesses into two new businesses – Retirement Solutions and Insurance Solutions. Our other businesses, including Investment Management, Lincoln UK and Other Operations, remain unchanged. The new structure is more closely aligned with consumer needs and will lead to more coordinated product development and greater effectiveness across the enterprise. Our segment results will be reported under this new structure beginning in the third quarter of 2008, and we will restate results from prior periods in a consistent manner. For more information regarding the realignment, see Note 16.

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 June 30, 2008, compared with December 31, 2007, and the results of operations of LNC for the three and six months ended June 30, 2008, as compared with the corresponding periods 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. Income (loss) from operations is net income recorded in accordance with United States of America generally accepted accounting principles (“GAAP”) excluding the after-tax effects of the following items, as applicable:

•

Realized gains and losses associated with the following (“excluded realized gain (loss)”):

•

Sale or disposal of securities;

•

Impairments of securities;

•

Change in the fair value of embedded derivatives within certain reinsurance arrangements and the change in the fair value of related trading securities;

•

Change in the fair value of the embedded derivatives of our guaranteed living benefits (“GLB”) within our variable annuities net of the change in the fair value of the derivatives we own to hedge the changes in the embedded derivative;

•

Net difference between the benefit ratio unlocking of Statement of Position (“SOP”) No. 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (“SOP 03-1”) reserves on our guaranteed death benefit (“GDB”) riders within our variable annuities and the change in the fair value of the derivatives excluding our expected cost of purchasing the hedging instruments; and

•

Changes in the fair value of the embedded derivative liabilities related to index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products as required under Statements 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”).

•

Income (loss) from the initial adoption of changes in accounting principles;

•

Income (loss) from reserve changes (net of related amortization) on business sold through reinsurance;

•

Losses on early retirement of debt, including subordinated debt;

•

Losses from the impairment of intangible assets; and

•

Income (loss) from discontinued operations.

Operating revenues represent GAAP revenues excluding the pre-tax effects of the following items, as applicable:

•

Excluded realized gain (loss);

•

Amortization of deferred gains arising from the reserve changes on business sold through reinsurance; and

•

Revenue adjustments from 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.

willing buyer would charge to assume the liability). We, therefore, must include margins that a market participant buyer would require as well as a factor for non-performance risk related to our credit quality. We do not believe that these factors relate to the economics of the underlying business and do not reflect the manner in which management evaluates the business. The items that are now excluded from our operating results that were previously included are as follows: GLB net derivatives results; indexed annuity forward-starting option; and GDB derivatives results. For more information regarding this change, see our current report on Form 8-K dated July 16, 2008.

Certain reclassifications have been made to prior periods’ financial information. Included in these reclassifications is the change in our definition of segment operating revenues and income (loss) from operations as discussed above. In addition, we have reclassified the results of certain derivatives and embedded derivatives to realized gain (loss), which were previously reported within insurance fees, net investment income, interest credited or benefits. The associated amortization expense of deferred acquisition costs (“DAC”) and value of business acquired (“VOBA”) (previously reported within underwriting, acquisition, insurance and other expenses), deferred sales inducements (“DSI”) (previously reported within interest credited), deferred front-end loads (“DFEL”) (previously reported within insurance fees) and changes in contract holder funds (previously reported within benefits) have also been reclassified to realized gain (loss). See Note 1 for additional information.

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 businesses, 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 (“RBC”) requirements related to secondary guarantees under universal life and variable annuity products such as Actuarial Guideline VACARVM (“VACARVM”); restrictions on revenue sharing and 12b-1 payments; and the potential for U.S. Federal tax reform;

•

The initiation of legal or regulatory proceedings against LNC or its subsidiaries, and the outcome of any legal or regulatory proceedings, such as: adverse actions related to present or past business practices common in businesses in which LNC and its subsidiaries compete; adverse decisions in significant actions including, but not limited to, actions brought by federal and state authorities and extra-contractual and class action damage cases; new decisions that result in changes in law; and unexpected trial court rulings;

•

Changes in interest rates causing a reduction of investment income, the margins of LNC’s fixed annuity and life insurance businesses and demand for LNC’s products;

•

A decline in the equity markets causing a reduction in the sales of LNC’s products, a reduction of asset-based fees that LNC charges on various investment and insurance products, an acceleration of amortization of DAC, VOBA, DSI and DFEL and an increase in liabilities related to guaranteed benefit features of LNC’s variable annuity products;

•

Ineffectiveness of LNC’s various hedging strategies used to offset the impact of changes in the value of liabilities due to changes in the level and volatility of the equity markets and interest rates;

•

A deviation in actual experience regarding future persistency, mortality, morbidity, interest rates or equity market returns from LNC’s assumptions used in pricing its products, in establishing related insurance reserves and in the amortization of intangibles that may result in an increase in reserves and a decrease in net income, including as a result of stranger-originated life insurance business;

•

Changes in GAAP that may result in unanticipated changes to LNC’s net income, including the impact of SFAS 157 and SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”;

•

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;

•

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; and

•

Continued economic declines and credit market volatility that could cause us to realize additional impairments on investments and certain intangible assets and dampen future earnings.

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.

As of June 30, 2008, we provided products and services in four operating businesses: Individual Markets, Employer Markets, Investment Management and Lincoln UK, and reported 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. Other Operations also includes the Institutional Pension business, which was previously reported in Employer Markets – Retirement Products.


Business		Corresponding Segments

Retirement Solutions		Annuities
Retirement Solutions		Defined Contribution (formerly Retirement Products)

Insurance Solutions		Life Insurance (including Executive Benefits business)
Insurance Solutions		Group Protection

Investment Management		Investment Management

Lincoln UK		Lincoln UK

Current Market Conditions

During the first half of the year, 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. Earnings in the second half of 2008 will be unfavorably impacted by the significant decline in the Standard & Poor’s (“S&P”) 500 Index^® during June. While the average S&P 500 Index^® for second quarter was higher than first quarter, the S&P 500 Index^® ended June at a lower level than the average because favorable equity market performance in April and May was largely offset by unfavorable performance in June. Due to these challenges, the capital markets had a significant effect on our segment operating income and consolidated net income for the three and six months ended June 30, 2008. The markets impact primarily 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 the end of 2007 to June 30, 2008, the daily average value of the S&P 500 Index^® decreased 7%. Solely as a result of the equity markets, our assets under management as of June 30, 2008, were down $14.1 billion from the end of the year. Strong deposits over the last year helped to more than offset this impact for the three and six months ended June 30, 2008, compared to the same periods in 2007.

Investment Income on Alternative Investments

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 long-term expectations and the prior periods. 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 SFAS 133 and 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. For the three and six months ended June 30, 2008, the market conditions noted above negatively affected the net result of the change in the fair value of the living benefit embedded derivative, excluding the effect of a change in our non-performance risk factor, and the change in fair value of the hedging derivatives. The change in our non-performance risk factor used in the calculation of the embedded derivative liability had a favorable effect resulting in an overall positive outcome. These results are excluded from operating revenues and income (loss) from operations.

Credit Losses, Impairments and Unrealized Losses

Related to the our investments in fixed income and equity securities, we experienced net realized losses of $125 million and $166 million for the three and six months ended June 30, 2008, which included gross write-downs of securities for other-than-temporary impairments of $120 million and $211 million, respectively. Widening spreads was the primary cause of an increase in gross unrealized losses of $1.7 billion on investments in our general account for the six months ended June 30, 2008, 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.

We recorded $139 million, after-tax, of impairment of goodwill and our Federal Communications Commission (“FCC”) license intangible assets on our remaining radio clusters attributable primarily to declines in advertising revenues for the entire radio market.

The effect of the negative equity markets on our assets under management in the first six months 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 and 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 withdrawal benefit (“GWB”), 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 the third quarter of 2008 after receiving appropriate regulatory approvals. Within the mid-sized market of our Employer Markets – Retirement Products segment, in the first quarter 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 three large banks during the first half of 2008. In support of these and other activities, Lincoln Financial Distributors (“LFD”) increased the number of wholesalers by 9% since the end of 2007 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 challenges in the economy or a recession;

•

Achieving success in our portfolio of products 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 – Defined Contribution 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 Retirement Solutions, Insurance Solutions and Investment Management 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 businesses;

•

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 fair value as of June 30, 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 revenue is reported in realized gain (loss) and such amount along with the associated federal income taxes is excluded from income from operations of our segments. 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 three and six months ended June 30, 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 assumptions for capital markets, actuarial lapse, benefit utilization, mortality, risk margin, administrative expenses and a margin for profit. In addition, a non-performance risk component is determined each valuation date that reflects our 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 that would be 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 due primarily to the inclusion of the non-performance risk into the calculation of the GLB embedded derivative liability. For additional information, see our discussion in “Realized Gain (Loss)” 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 June 30, 2008
	Level 1		Level 2		Level 3		Total Fair Value
Assets	1	%	90	%	9	%	100	%
Liabilities	0	%	15	%	85	%	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 three and six months ended June 30, 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 June 30, 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 income statement volatility caused by changes in the equity markets, interest rates and market implied volatilities associated with the Lincoln SmartSecurity^® Advantage GWB 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 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 June 30, 2008, to our hedge program. In February 2008, we also added our new GWB Lincoln Lifetime Income^SM Advantage 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 GWB 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 GWB and GIB guarantees caused by those same factors. As of June 30, 2008, the embedded derivatives for GWB, the i4LIFE^® Advantage GIB and the 4LATER^® Advantage GIB were liabilities valued at $220 million, $74 million and $41 million, respectively.

For additional information on our hedging results, see our discussion in “Realized Gain (Loss)” 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 business 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, which are now being reported within Other Operations, to maximize station performance and future valuation. 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 June 30,				Change		For the Six Months Ended June 30,					Change
	2008		2007		Change		2008			2007		Change
Discontinued Operations Before Disposal
Media revenues, net of agency commissions	$	—	$	29	-100	%	$	22		$	71	-69	%

Income from discontinued operations before disposal, before federal income taxes	$	—	$	10	-100	%	$	8		$	22	-64	%
Federal income taxes		—		4	-100	%		3			8	-63	%

Income from discontinued operations before disposal		—		6	-100	%		5			14	-64	%

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

Loss on disposal		—		—	NM			(9	)		—	NM

Income (loss) from discontinued operations	$	—	$	6	-100	%	$	(4	)	$	14	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 the television broadcasting business.

Fixed Income Investment Management Business

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 three and six months ended June 30, 2008, we recorded an after-tax gain of $1 million and $3 million, respectively, on our 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 June 30,					Change		For the Six Months Ended June 30,					Change
	2008			2007		Change		2008			2007		Change
Revenues
Insurance premiums	$	530		$	489	8	%	$	1,039		$	948	10	%
Insurance fees		842			742	13	%		1,654			1,506	10	%
Investment advisory fees		76			93	-18	%		152			183	-17	%
Net investment income		1,077			1,133	-5	%		2,142			2,223	-4	%
Realized gain (loss)		(108	)		7	NM			(143	)		41	NM
Amortization of deferred gain on business sold through reinsurance		19			26	-27	%		38			45	-16	%
Other revenues and fees		146			181	-19	%		292			346	-16	%

Total revenues		2,582			2,671	-3	%		5,174			5,292	-2	%

Benefits and Expenses
Interest credited		613			606	1	%		1,225			1,206	2	%
Benefits		684			651	5	%		1,362			1,244	9	%
Underwriting, acquisition, insurance and other expenses		847			816	4	%		1,656			1,625	2	%
Interest and debt expense		65			73	-11	%		140			135	4	%
Impairment of intangibles		173			—	NM			173			—	NM

Total benefits and expenses		2,382			2,146	11	%		4,556			4,210	8	%

Income from continuing operations before taxes		200			525	-62	%		618			1,082	-43	%
Federal income taxes		75			155	-52	%		200			324	-38	%

Income from continuing operations		125			370	-66	%		418			758	-45	%
Income (loss) from discontinued operations, net of federal incomes taxes		—			6	-100	%		(4	)		14	NM

Net income	$	125		$	376	-67	%	$	414		$	772	-46	%


	For the Three Months Ended June 30,				Change		For the Six Months Ended June 30,				Change
	2008		2007		Change		2008		2007		Change
Revenues
Operating revenues:
Individual Markets:
Annuities	$	618	$	624	-1	%	$	1,241	$	1,214	2	%
Life Insurance		1,021		957	7	%		2,008		1,929	4	%

Total Individual Markets		1,639		1,581	4	%		3,249		3,143	3	%