Edgar Filing: LINCOLN NATIONAL CORP

Lincoln 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

_____________________

FORM 10-Q

_____________________

(Mark One)

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

For the quarterly period ended March 31, 2006.

¨ 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.)

1500 Market Street, Suite 3900, Philadelphia, Pennsylvania	19102-2112
(Address of principal executive offices)	(Zip Code)

(215) 448-1400

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, or a non- accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

(Check one): Large accelerated filer x Accelerated filer ¨ Non- accelerated filer ¨

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 April 28, 2006, 281,178,296 shares of common stock of the registrant were outstanding.

Item 1. Financial Statements

LINCOLN NATIONAL CORPORATION

CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2006			2005
	(Unaudited)
	(in millions)
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity (cost: 2006- $32,496; 2005-$32,384)	$	32,893		$	33,443
Equity (cost: 2006- $158; 2005-$137)		176			145
Trading securities		3,190			3,246
Mortgage loans on real estate		3,586			3,663
Real estate		180			183
Policy loans		1,860			1,862
Derivative investments		199			175
Other investments		489			452
Total Investments		42,573			43,169
Cash and invested cash		1,974			2,312
Deferred acquisition costs		4,371			4,092
Premiums and fees receivable		363			343
Accrued investment income		532			526
Amounts recoverable from reinsurers		6,900			6,926
Goodwill		1,194			1,194
Other intangible assets		996			1,013
Other assets		1,507			1,466
Assets held in separate accounts		67,984			63,747
Total Assets	$	128,394		$	124,788

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Insurance and Investment Contract Liabilities:
Insurance policy and claim reserves	$	24,716		$	24,652
Contractholder funds		22,285			22,571
Total Insurance and Investment Contract Liabilities		47,001			47,223
Short-term debt		11			120
Long-term debt		999			999
Junior subordinated debentures issued to affiliated trusts		332			334
Reinsurance related derivative liability		192			292
Funds withheld reinsurance liabilities		2,058			2,012
Other liabilities		2,662			2,841
Deferred gain on indemnity reinsurance		817			836
Liabilities related to separate accounts		67,984			63,747
Total Liabilities		122,056			118,404
Shareholders' Equity:
Series A preferred stock-10,000,000 shares authorized
(2006 liquidation value-$1)		1			1
Common stock-800,000,000 shares authorized		1,818			1,775
Retained earnings		4,236			4,081
Accumulated Other Comprehensive Income:
Net unrealized gain on securities available-for-sale		219			497
Net unrealized gain on derivative instruments		35			7
Foreign currency translation adjustment		89			83
Minimum pension liability adjustment		(60	)		(60	)
Total Accumulated Other Comprehensive Income		283			527
Total Shareholders' Equity		6,338			6,384
Total Liabilities and Shareholders' Equity	$	128,394		$	124,788

See accompanying Notes to the Consolidated Financial Statements.

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended
	March 31,
	2006			2005
	(Unaudited)
	(in millions, except per share amounts)
Revenue:
Insurance premiums	$	78		$	70
Insurance fees		476			419
Investment advisory fees		85			59
Net investment income		678			660
Realized gain (loss) on investments		(1	)		11
Amortization of deferred gain on indemnity reinsurance		19			19
Other revenue and fees		82			75
Total Revenue		1,417			1,313
Benefits and Expenses:
Benefits		584			573
Underwriting, acquisition, insurance and other expenses		496			480
Interest and debt expense		22			22
Total Benefits and Expenses		1,102			1,075
Income before federal income taxes		315			238
Federal income taxes		94			59
Net Income	$	221		$	179

Net Income Per Common Share:
Basic	$	1.27		$	1.03
Diluted	$	1.24		$	1.01

See accompanying Notes to the Consolidated Financial Statements.

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	Three Months Ended March 31,
	Number of Shares						Amounts
	2006			2005			2006			2005
	(Unaudited)						(Unaudited)
	(in millions, except for share amounts)
Series A Preferred Stock:
Balance at beginning-of-year		15,515			16,912		$	1		$	1
Conversion into common stock		(550	)		(616	)		-			-
Balance at March 31		14,965			16,296			1			1
Common Stock:
Balance at beginning-of-year		173,768,078			173,557,730			1,775			1,655
Conversion of series A preferred stock		8,800			9,856			-			-
Stock compensation/issued for benefit plans		1,951,948			822,165			35			38
Deferred compensation payable in stock		155,363			48,192			8			2
Retirement of common stock		-			(755,000	)		-			(7	)
Balance at March 31		175,884,189			173,682,943			1,818			1,688
Retained Earnings:
Balance at beginning-of-year								4,082			3,590
Comprehensive loss								(23	)		(75	)
Less other comprehensive income (loss) (net of
federal income tax):
Net unrealized loss on securities available-
for-sale, net of reclassification adjustment								(278	)		(240	)
Net unrealized gain (loss) on derivative instruments								28			(7	)
Foreign currency translation adjustment								6			(8	)
Minimum pension liability adjustment								-			1
Net Income								221			179
Retirement of common stock								-			(28	)
Dividends declared:
Series A preferred ($0.75 per share)								-			-
Common (2006-$0.38; 2005-$0.365)								(67	)		(64	)
Balance at March 31								4,236			3,677
Net Unrealized Gain on Securities Available-for-Sale:
Balance at beginning-of-year								497			823
Change during the period								(278	)		(240	)
Balance at March 31								219			583
Net Unrealized Gain on Derivative Instruments:
Balance at beginning-of-year								7			14
Change during the period								28			(6	)
Balance at March 31								35			8
Foreign Currency Translation Adjustment:
Accumulated adjustment at beginning-of-year								83			154
Change during the period								6			(8	)
Balance at March 31								89			146
Minimum Pension Liability Adjustment:
Balance at beginning-of-year								(60	)		(61	)
Change during the period								-			1
Balance at March 31								(60	)		(60	)
Total Shareholders' Equity at March 31							$	6,338		$	6,043
Common Stock at End of Quarter:
Assuming conversion of preferred stock								176,123,629			173,943,679
Diluted basis								178,468,931			176,544,131

See accompanying Notes to the Consolidated Financial Statements.

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended
	March 31,
	2006			2005
	(Unaudited)
	(in millions)
Cash Flows from Operating Activities:
Net income	$	221		$	179
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred acquisition costs		(91	)		(71	)
Premiums and fees receivable		(20	)		(66	)
Accrued investment income		(6	)		(33	)
Policy liabilities and accruals		(9	)		341
Contractholder funds		201			223
Net trading purchases, sales, and maturities		(45	)		(22	)
Pension plan contribution		(1	)		(4	)
Gain on reinsurance embedded derivative/trading securities		(6	)		(4	)
Amounts recoverable from reinsurers		27			(269	)
Federal income taxes		68			52
Stock-based compensation expense		9			12
Depreciation		14			12
Amortization of other intangible assets		19			21
Realized loss on investments and derivative instruments		7			7
Gain on sale of subsidiaries/business		-			(14	)
Amortization of deferred gain		(19	)		(19	)
Other		(90	)		(141	)
Net Adjustments		58			25
Net Cash Provided by Operating Activities		279			204
Cash Flows from Investing Activities:
Securities-available-for-sale:
Purchases		(1,836	)		(1,485	)
Sales		1,285			887
Maturities		494			508
Purchase of other investments		(529	)		(233	)
Sale or maturity of other investments		569			242
Proceeds from sale of subsidiaries/business		-			14
Other		(69	)		40
Net Cash Used in Investing Activities		(86	)		(27	)
Cash Flows from Financing Activities:
Net decrease in short-term debt		(109	)		(20	)
Universal life and investment contract deposits		1,179			1,099
Universal life and investment contract withdrawals		(1,139	)		(1,164	)
Investment contract transfers		(432	)		(347	)
Increase in funds withheld liability		46			34
(Increase) decrease in cash collateral on loaned securities		(35	)		123
Common stock issued for benefit plans		18			28
Excess tax benefit on shares issued for benefit plans		8			-
Retirement of common stock		-			(29	)
Dividends paid to shareholders		(67	)		(64	)
Net Cash Used in Financing Activities		(531	)		(340	)
Net Decrease in Cash and Invested Cash		(338	)		(163	)
Cash and Invested Cash at Beginning-of-Year		2,312			1,662
Cash and Invested Cash at March 31	$	1,974		$	1,499

See accompanying Notes to the Consolidated Financial Statements.

LINCOLN NATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	Basis of Presentation

The accompanying Consolidated Financial Statements include Lincoln National Corporation and its majority-owned subsidiaries (“LNC” or the “Company” which also may be referred to as “we” or “us”). Through subsidiary companies, we operate multiple insurance and investment management businesses divided into four business segments (see Note 8). The collective group of companies uses “Lincoln Financial Group” as its marketing identity. We report less than majority-owned entities in which we have at least a 20% interest on the equity basis. These unaudited Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). In the opinion of management, these statements include all normal recurring adjustments necessary for a fair presentation of the results. These financial statements should be read in conjunction with the audited Consolidated Financial Statements and the accompanying notes incorporated by reference into our latest annual report on Form 10-K for the year ended December 31, 2005 (“2005 Form 10-K”).

Operating results for the three months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2006. Certain amounts reported in prior years’ Consolidated Financial Statements have been reclassified to conform to the 2006 presentation. These reclassifications have no effect on net income or shareholders’ equity of the prior years.

2.	Changes in Accounting Principles and Changes in Estimates

SFAS No. 123(r) - Share-Based Payment. In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), which is a revision of SFAS 123, “Accounting for Stock-based Compensation” (“SFAS 123”). SFAS 123(R) requires us to recognize at fair value all costs resulting from share-based payments to employees, except for equity instruments held by employee share ownership plans. Similar to SFAS 123, under SFAS 123(R) the fair value of share-based payments are recognized as a reduction to earnings over the period an employee is required to provide service in exchange for the award. We had previously adopted the retroactive restatement method under SFAS No. 148, “Accounting for Stock-based Compensation - Transition and Disclosure,” and restated all periods presented to reflect stock-based employee compensation cost under the fair value accounting method for all employee awards granted, modified or settled in fiscal years beginning after December 15, 1994.

Effective January 1, 2006, we adopted SFAS 123(R), using the modified prospective transition method. Under that transition method, compensation cost recognized in 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). Results from prior periods have not been restated. The effect of adopting SFAS 123(R) did not have a material effect on our income before Federal income taxes, net income and basic and diluted earnings per share.

SFAS 123(R) eliminates the alternative under SFAS 123 permitting the recognition of forfeitures as they occur. Expected forfeitures, resulting from the failure to satisfy service or performance conditions, must be estimated at the grant date, thereby recognizing compensation expense only for those awards expected to vest. In accordance with SFAS 123(R), we have included estimated forfeitures in the determination of compensation costs for all share-based payments. Estimates of expected forfeitures must be reevaluated at each balance sheet date, and any change in the estimate recognized retrospectively in earnings in the period of the revised estimate.

Prior to the adoption of SFAS 123(R), we presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. SFAS 123(R) requires the cash flows from tax benefits resulting from tax deductions in excess of the compensation costs recognized to be classified as financing cash flows. Our excess tax benefits are classified as financing cash flows, prospectively, and are reported as financing cash flows in our Statement of Cash Flows for the three months ended March 31, 2006.

We issue share-based compensation awards under an authorized plan, subject to specific vesting conditions. Generally, compensation expense is recognized ratably over a three-year vesting period, but recognition may be accelerated upon the occurrence of certain events. For awards that specify an employee will vest upon retirement and an employee retires before the end of the vesting period, we would record any remaining unrecognized compensation expense at the date of retirement eligibility. As a result of adopting SFAS 123(R), we have revised the prior method of recording unrecognized compensation expense

upon retirement and use the non-substantive vesting period approach for all new share-based awards granted after January 1, 2006. Under the non-substantive vesting period approach, we recognize compensation cost immediately for awards granted to retirement-eligible employees, or ratably over a period from the grant date to the date retirement eligibility is achieved. If we would have applied the non-substantive vesting period approach to all share based compensation awards granted prior to January 1, 2006, it would not have a material effect on our results of operations or financial position.

See Note 11 for more information regarding our stock-based compensation plans.

EITF 03-1 - The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. In November 2005, the FASB issued FASB Staff Position (“FSP”) FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP 115-1”). The guidance in FSP 115-1 nullifies the accounting and measurement provisions of EITF 03-1, references existing OTTI guidance, and supersedes EITF Topic No. D-44 “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” FSP 115-1 will apply prospectively and is effective for reporting periods beginning after December 15, 2005. Our existing policies for recognizing OTTIs are consistent with the guidance in FSP 115-1. We adopted FSP 115-1 effective January 1, 2006. The adoption of FSP 115-1 did not have a material effect on our consolidated financial condition or results of operations.

Statement of Position 05-1. In September 2005, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). SOP 05-1 addresses the accounting for Deferred Acquisition Costs (“DAC”) on internal replacements other than those described in SFAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments.” An internal replacement is defined by SOP 05-1 as a modification in product benefits, features, rights or coverages that occurs by (a) exchanging the contract for a new contract, (b) amending, endorsing or attaching a rider to the contract, or (c) electing a feature or coverage within a replaced contract. Contract modifications that result in a substantially unchanged contract will be accounted for as a continuation of the replaced contract. Contract modifications that result in a substantially changed contract should be accounted for as an extinguishment of the replaced contract, and any unamortized DAC, unearned revenue and deferred sales charges must be written-off. SOP 05-1 is to be applied prospectively and is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. We expect to adopt SOP 05-1 effective January 1, 2007. We are currently evaluating the potential effects of SOP 05-1 on our consolidated financial condition and results of operations.

SFAS No. 155 - Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140. In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140” (“SFAS 155”), which permits fair value remeasurement for a hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. Under SFAS 155, an entity may make an irrevocable election to measure a hybrid financial instrument at fair value, in its entirety, with changes in fair value recognized in earnings. SFAS 155 also: (a) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”); (b) eliminates the interim guidance in SFAS 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets,” and establishes a requirement to evaluate beneficial interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; (c) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and, (d) eliminates restrictions on a qualifying special-purpose entity’s ability to hold passive derivative financial instruments that pertain to beneficial interests that are or contain a derivative financial instrument. We expect to adopt SFAS 155 for all financial instruments acquired, issued, or subject to a remeasurement event occurring after January 1, 2007. Upon adoption of SFAS 155, the fair value election may also be applied to hybrid financial instruments that had previously been bifurcated pursuant to SFAS 133. Prior period restatement is not permitted. We are currently evaluating the potential effects of SFAS 155 on our consolidated financial condition and results of operations.

3.	Subsequent Events

On April 3, 2006, we completed our merger with Jefferson-Pilot Corporation (“Jefferson-Pilot”). Jefferson-Pilot’s results of operations will be included in our results of operations beginning with the second quarter of 2006. As a result of the merger, we offer fixed and variable universal life, fixed and equity indexed annuities, variable annuities, mutual funds, 401(k) and 403(b) offerings, and group life, disability and dental insurance products. We also operate television and radio stations.

We paid $1.8 billion in cash and issued approximately 112 million shares of our common stock to the former holders of Jefferson-Pilot common stock in connection with the merger. The purchase price is estimated to be $7.5 billion, including certain purchase price adjustments related to the merger. The estimated fair value of Jefferson-Pilot’s net assets is assumed to be $4.1 billion. Goodwill of $3.4 billion is estimated to result from the excess of purchase price over the estimated fair value of Jefferson-Pilot’s net assets. The final application of purchase-GAAP accounting could result in a materially different amount of goodwill.

We financed the cash portion of the merger consideration by borrowing $1.8 billion under the credit agreement that we entered into with a group of banks in December 2005 (the “bridge facility”). On April 3, 2006, we issued $500 million of Floating Rate Senior Notes due April 6, 2009 (the “Floating Rate Notes”), from which we received net proceeds of approximately $499 million. The Floating Rate Notes bear interest at a rate of three-month LIBOR plus 11 basis points, with quarterly interest payments in April, July, October and January. On April 3, 2006, we also issued $500 million of 6.15% Senior Notes due April 7, 2036 (the “Fixed Rate Notes”), from which we received net proceeds of approximately $492 million. We will pay interest on the Fixed Rate Notes semi-annually in April and October. We may redeem the Fixed Rate Notes at any time subject to a make-whole provision. On April 12, 2006, we issued $275 million of 6.75% junior subordinated debentures due 2066 (the “Capital Securities”), from which we received net proceeds of approximately $266 million. We will pay interest on the Capital Securities quarterly January, April, July and October. We may redeem the capital securities in whole or in part on or after April 20, 2011 (and prior to such date under certain circumstances). We used the net proceeds from the offerings to repay a portion of the outstanding loan balance under the bridge facility.

On April 3, 2006, we entered into an agreement to purchase a variable number of shares of our common stock from a third party broker-dealer, using an accelerated stock buyback program for an aggregate purchase price of $500 million. The number of shares to be repurchased under this agreement will be approximately 8 million but not more than approximately 9 million shares, based on the volume weighted average share price of our common stock over the program’s duration. On April 10, 2006, we funded the agreement by borrowing $500 million under the bridge facility and received approximately 8 million shares of our common stock, which were retired. We expect the program to be completed in the third quarter of 2006. Our Board of Directors had previously authorized total share repurchases of $1.8 billion. After the purchases under this program, the remaining amount of authorized share repurchases will be $1.3 billion.

See our current reports on Form 8-K filed with the SEC on April 3, 2006, April 7, 2006 and April 20, 2006 for additional information regarding the matters described above.

4.	Federal Income Taxes

The effective tax rate on net income is lower than the prevailing corporate Federal income tax rate principally from tax-preferred investment income. LNC earns tax-preferred investment income that does not change proportionately with the overall change in earnings or losses before Federal income taxes.

We are required to establish a valuation allowance for any gross deferred tax assets that are unlikely to reduce taxes payable in future years’ tax returns. At March 31, 2006, we believe that it is more likely than not that all gross deferred tax assets will reduce taxes payable in future years. Our Federal income tax liability at December 31, 2004 included a valuation allowance of $47 million attributable to the net operating losses of our foreign life reinsurance subsidiary domiciled in Barbados. This valuation allowance was reduced to zero as of December 31, 2005, including a reduction of $6 million in the first quarter of 2005.

We are subject to annual tax examinations from the Internal Revenue Service ("IRS"). During the first quarter of 2006, the IRS completed its examination for the tax years 1999 through 2002 with assessments resulting in a payment that was not material to our consolidated results of operations. In addition to taxes assessed and interest, the payment included a deposit relating to a portion of the assessment, which we continue to challenge. We believe this portion of the assessment is inconsistent with existing law, and are protesting it through the established IRS appeals process. We do not anticipate that any adjustments that might result from such audits would be material to our consolidated results of operations or financial condition.

5.	Supplemental Financial Data

A rollforward of DAC on the Consolidated Balance Sheet is as follows:

	Three Months Ended
	March 31,
(in millions)	2006			2005
Balance at beginning-of-year	$	4,092		$	3,445
Deferral		235			204
Amortization		(144	)		(133	)
Adjustment related to realized gains on securities available-for-sale		(11	)		(12	)
Adjustment related to unrealized losses on securities
available-for-sale		194			216
Foreign currency translation adjustment		5			(7	)
Balance at end-of-period	$	4,371		$	3,713

Realized gains and losses on investments and derivative instruments on the Consolidated Statements of Income for the three months ended March 31, 2006 and 2005 are net of amounts amortized against DAC of $11 million and $12 million, respectively. In addition, realized gains and losses for both the three months ended March 31, 2006 and 2005 are net of adjustments made to policyholder reserves of $(2) million. We have either a contractual obligation or a consistent historical practice of making allocations of investment gains or losses to certain policyholders and to certain reinsurance arrangements.

A rollforward of deferred sales inducements, included in other assets on the Consolidated Balance Sheet, is as follows:

	Three Months Ended
	March 31,
(in millions)	2006			2005
Balance at beginning-of-year	$	129		$	86
Capitalized		16			12
Amortization		(5	)		(3	)
Balance at end-of-period	$	140		$	95

Details underlying underwriting, acquisition, insurance and other expenses on the Consolidated Statements of Income are as follows:

	Three Months Ended
	March 31,
(in millions)	2006			2005
Commissions	$	210		$	175
Other volume-related expenses		124			109
Operating and administrative expenses		200			212
Deferred acquisition costs net of amortization		(91	)		(71	)
Other intangibles amortization		19			21
Taxes, licenses and fees		34			32
Restructuring charges		-			2
Total	$	496		$	480

The carrying amount of goodwill by reportable segment as of both March 31, 2006 and December 31, 2005 is as follows:

(in millions)
Life Insurance	$	855
Investment Management		261
Lincoln Retirement		64
Lincoln UK		14
Total	$	1,194

For intangible assets subject to amortization, the total gross carrying amount and accumulated amortization in total and for each major intangible asset class by segment are as follows:

	As of March 31, 2006				As of December 31, 2005
	Gross Carrying		Accumulated		Gross Carrying		Accumulated
(in millions)	Amount		Amortization		Amount		Amortization
Amortized Intangible Assets:
Value of Business Acquired
Lincoln Retirement	$	225	$	152	$	225	$	149
Life Insurance		1,254		602		1,254		589
Lincoln UK *		371		112		368		110
Client lists
Investment Management		92		80		92		78
Total	$	1,942	$	946	$	1,939	$	926

________________________

* The gross carrying amount and accumulated amortization of the value of business acquired for the Lincoln UK segment changed from December 31, 2005 to March 31, 2006, which includes changes due to the translation of the balances from British pounds to U.S. dollars based on the prevailing exchange rate as of the respective balance sheet dates.

The aggregate amortization expense for other intangible assets for the three months ended March 31, 2006 and 2005 was $19 million and $21 million, respectively.

Future estimated amortization of other intangible assets is as follows (in millions):

2006 - $70			2007 - $77			2008 - $75
2009 - $70			2010 - $68			Thereafter - $636

The amount shown above for 2006 is the amortization expected for the remainder of 2006 from March 31, 2006.

A reconciliation of value of business acquired and total other intangible assets is as follows:

	March 31,			December 31,
(in millions)	2006			2005
Balance at beginning of year	$	999		$	1,095
Interest accrued on unamortized balance		15			62
(Interest rates range from 5% to 7%)
Amortization		(32	)		(129	)
Foreign exchange adjustment		2			(29	)
Balance at end-of-period		984			999
Other intangible assets (non-insurance)		12			14
Total other intangible assets at end-of-period	$	996		$	1,013

Details underlying contractholder funds on the Consolidated Balance Sheet are as follows:

	March 31,		December 31,
(in millions)	2006		2005
Premium deposit funds	$	21,449	$	21,714
Undistributed earnings on participating business		89		111
Other		747		746
Total	$	22,285	$	22,571

6.	Insurance Benefit Reserves

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

The following table provides information on the GMDB features outstanding at March 31, 2006 and December 31, 2005. (Note that our variable contracts with guarantees may offer more than one type of guarantee in each contract; therefore, the amounts listed are not mutually exclusive.) The net amount at risk (“NAR”) is defined as the current guaranteed minimum death benefit in excess of the current account balance at the balance sheet date.

	In Event of Death
	March 31,			December 31,
(dollars in billions)	2006			2005
Return of net deposit
Account value	$	33.6		$	31.9
NAR		0.1			0.1
Average attained age of contractholders		53			53
Return of net deposits plus a minimum return
Account value	$	0.3		$	0.3
NAR		-			-
Average attained age of contractholders		66			66
Guaranteed minimum return		5	%		5	%
Highest specified anniversary account value minus
withdrawals post anniversary
Account value	$	19.9		$	18.8
NAR		0.3			0.4
Average attained age of contractholders		63			63

The following summarizes the liabilities for GMDB:

	March 31,			March 31,
(in millions)	2006			2005
Balance at beginning of year	$	15		$	18
Changes in reserves		4			9
Benefits paid		(2	)		(2	)
Balance at end-of-period	$	17		$	25

The changes to the benefit reserves amounts above are reflected in benefits in the Consolidated Statements of Income. Also included in benefits are the results of the hedging program, which included gains (losses) of $(2) million and $4 million for GMDB for the three months ended March 31, 2006 and 2005, respectively.

Approximately $9.6 billion and $8.2 billion of separate account values at March 31, 2006 and December 31, 2005 were attributable to variable annuities with a GMWB feature. This GMWB feature offers the contractholder a guarantee equal to the initial deposit adjusted for any subsequent purchase payments or withdrawals. There are one-year and five-year step-up options, which allow the contractholder to step up the guarantee. GMWB features are considered to be derivatives under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” resulting in the guarantees being recognized at fair value, with changes in fair value being reported in net income.

Approximately $1.5 billion and $1.2 billion of separate account values at March 31, 2006 and December 31, 2005, respectively, were attributable to variable annuities with a GIB feature. All of the outstanding contracts with a GIB feature are still in the accumulation phase.

Separate account balances attributable to variable annuity contracts with guarantees are as follows:

	March 31,			December 31,
(in billions)	2006			2005
Asset Type
Domestic equity	$	34.3		$	32.2
International equity		4.7			4.2
Bonds		5.4			5.1
Total		44.4			41.5
Money market		4.4			4.0
Total	$	48.8		$	45.5
Percent of total variable annuity separate account values		96	%		96	%

7. Restrictions and Contingencies

Statutory Restrictions

Our insurance subsidiaries are subject to certain insurance department regulatory restrictions as to the transfer of funds and payment of dividends to the holding company. Generally, these restrictions pose no short-term liquidity concerns for the holding company. Under Indiana laws and regulations, our Indiana insurance subsidiaries, including our primary insurance subsidiary, LNL, may pay dividends to LNC only from unassigned surplus, without prior approval of the Indiana Insurance Commissioner (the “Commissioner”), or must receive prior approval of the Commissioner to pay a dividend if such dividend, along with all other dividends paid within the preceding twelve consecutive months, would exceed the statutory limitation. The current statutory limitation is the greater of (i) 10% of the insurer’s policyholders’ surplus, as shown on its last annual statement on file with the Commissioner or (ii) the insurer’s statutory net gain from operations for the previous twelve months, but in no event to exceed statutory unassigned surplus. Indiana law gives the Commissioner broad discretion to disapprove requests for dividends in excess of these limits.

LNL is recognized as an accredited reinsurer in the state of New York, which effectively enables it to conduct reinsurance business with unrelated insurance companies that are domiciled within the state of New York. As a result, in addition to regulatory restrictions imposed by the state of Indiana, LNL is also subject to the regulatory requirements that the State of New York imposes upon authorized insurers. These include reserve requirements, which differ from Indiana’s requirements.

The New York regulations require LNL to report more reserves to the state of New York. As a result, the level of statutory surplus that LNL reports to New York is less than the statutory surplus reported to Indiana and the National Association of Insurance Commissioners. If New York requires us to maintain a higher level of capital to remain an accredited reinsurer in New York, LNL’s ability to pay dividends to us could be constrained. However, we do not expect that LNL’s ability to pay dividends during 2006 will be constrained as a result of our status in New York.

Lincoln UK’s operations consist primarily of unit-linked life and pension products, which are similar to U.S. produced variable life and annuity products. Lincoln UK’s insurance subsidiaries are regulated by the U.K. Financial Services Authority (“FSA”) and are subject to capital requirements as defined by the U.K. Capital Resources Requirement (formerly the Required Minimum Solvency Margin). All insurance companies operating in the U.K. have to complete an RBC assessment to demonstrate to the FSA that they hold sufficient capital to cover their risks. RBC requirements in the U.K. are different than the NAIC requirements. In addition, the FSA has imposed certain minimum capital requirements for the combined U.K. subsidiaries. Lincoln UK maintains approximately 1.5 to 2 times the required capital as prescribed by the regulatory margin. As is the case with regulated insurance companies in the U.S., changes to regulatory capital requirements can impact the dividend capacity of the UK insurance subsidiaries and cash flow to us.

Reinsurance

Our amounts recoverable from reinsurers represent receivables from and reserves ceded to reinsurers. We obtain reinsurance from a diverse group of reinsurers and we monitor concentration, as well as financial strength ratings of our principal reinsurers. Our principal reinsurers are strongly rated companies, with Swiss Re representing the largest exposure. In 2001, we sold our reinsurance business to Swiss Re primarily through indemnity reinsurance arrangements. Because we are not relieved of our liability to the ceding companies for this business, the liabilities and obligations associated with the reinsured contracts remain on our Consolidated Balance Sheets with a corresponding reinsurance receivable from the business sold to Swiss Re, which totaled $4.1 billion at March 31, 2006 and December 31, 2005. Swiss Re has funded a trust with a balance of $1.7 billion at March 31, 2006 to support this business. In addition to various remedies that we would have in the event of a default by Swiss Re, we continue to hold assets in support of certain of the transferred reserves. These assets

consist of those reported as trading securities and certain mortgage loans. Our liabilities for funds withheld and embedded derivatives included $2.1 billion and $0.2 billion, respectively, at March 31, 2006 related to the business sold to Swiss Re.

We recorded the gain related to the indemnity reinsurance transactions on the business sold to Swiss Re as deferred gain in the liability section of our Consolidated Balance Sheet in accordance with the requirements of SFAS No. 113, “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts” (“FAS 113”). We amortize the deferred gain into income at the rate that earnings on the reinsured business are expected to emerge, over a period of 15 years.

Because the reserves related to the personal accident business are based upon various estimates that are subject to considerable uncertainty, the reserves carried on the Consolidated Balance Sheet at March 31, 2006 may ultimately prove to be either excessive or deficient. For instance, in the event that future developments indicate that these reserves should be increased, under FAS 113 we would record a current period non-cash charge to record the increase in reserves. Because Swiss Re is responsible for paying the underlying claims to the ceding companies, we would record a corresponding increase in reinsurance recoverable from Swiss Re. However, FAS 113 does not permit us to take the full benefit in earnings for the recording of the increase in the reinsurance recoverable in the period of the change. Rather, we would increase the deferred gain recognized upon the closing of the indemnity reinsurance transaction with Swiss Re and would report a cumulative amortization “catch-up” adjustment to the deferred gain balance as increased earnings recognized in the period of change. Any amount of additional increase to the deferred gain above the cumulative amortization “catch-up” adjustment must continue to be deferred and will be amortized into income in future periods over the remaining period of expected run-off of the underlying business. No cash would be transferred between Swiss Re and us as a result of these developments.

United Kingdom Selling Practices

Various selling practices of the Lincoln UK operations have come under scrutiny by the U.K. regulators. These include the sale and administration of individual pension products and mortgage endowments. Regarding the sale and administration of pension products to individuals, regulatory agencies have raised questions as to what constitutes appropriate advice to individuals who bought pension products as an alternative to participation in an employer-sponsored plan. In cases of alleged inappropriate advice, an extensive investigation has been or is being carried out and the individual put in a position similar to what would have been attained if the individual had remained in an employer-sponsored plan.

At March 31, 2006 and December 31, 2005, the aggregate liability associated with Lincoln UK selling practices was $10 million and $13 million, respectively. On an ongoing basis, Lincoln UK evaluates various assumptions underlying these estimated liabilities, including the expected levels of future complaints and the potential implications with respect to the adequacy of the aggregate liability associated with UK selling practice matters. Any changes in the regulatory position on time limits for making a complaint regarding the sale of mortgage endowment contracts or higher than expected levels of complaints may result in Lincoln UK revising its estimate of the required level of these liabilities. The reserves for these issues are based on various estimates that are subject to considerable uncertainty. Future changes in complaint levels could affect Lincoln UK’s ultimate exposure to mis-selling issues, although we believe that any future change would not materially affect our consolidated financial position.

In addition, we have successfully pursued claims with some of our liability carriers for reimbursement of certain costs incurred in connection with certain United Kingdom selling practices. We are continuing to pursue claims with liability carriers.

Marketing and Compliance Issues

There continues to be a significant amount of federal and state regulatory activity in the industry relating to numerous issues including, but not limited to, market timing and late trading of mutual fund and variable insurance products and broker-dealer access arrangements. Like others in the industry, we have received inquiries including requests for information and/or subpoenas from various authorities including the SEC, National Association of Securities Dealers (“NASD”), and the New York Attorney General, as well as notices of potential proceedings from the SEC and NASD. We are in the process of responding to, and in some cases have settled or are in the process of settling, certain of these inquiries and potential proceedings. We continue to cooperate fully with such authorities.

Regulators also continue to focus on replacement and exchange issues. Under certain circumstances companies have been held responsible for replacing existing policies with policies that were less advantageous to the policyholder. Our management continues to monitor compliance procedures to minimize any potential liability. Due to the uncertainty surrounding all of these matters, it is not possible to provide a meaningful estimate of the range of potential outcomes; however it is management’s opinion that future developments will not materially affect our consolidated financial position.

Other Contingency Matters

We and our 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 ultimately will be resolved without materially affecting our consolidated financial position.

State guaranty funds assess insurance companies to cover losses to policyholders of insolvent or rehabilitated companies. Mandatory assessments may be partially recovered through a reduction in future premium taxes in some states. We have accrued for expected assessments net of estimated future premium tax deductions.

Guarantees

We have guarantees with off-balance-sheet risks having contractual values of $4 million at both March 31, 2006 and December 31, 2005.

Certain of our subsidiaries have sold commercial mortgage loans through grantor trusts, which issued pass-through certificates. These subsidiaries have agreed to repurchase any mortgage loans which remain delinquent for 90 days at a repurchase price substantially equal to the outstanding principal balance plus accrued interest thereon to the date of repurchase. In case of default by the borrowers, we have recourse to the underlying real estate. It is management’s opinion that the value of the properties underlying these commitments is sufficient that in the event of default, the impact would not be material to us. These guarantees expire in 2009.

We guarantee the repayment of operating leases on facilities which we have subleased to third parties, which obligate us to pay in the event the third parties fail to perform their payment obligations under the subleasing agreements. We have recourse to the third parties enabling us to recover any amounts paid under our guarantees. The annual rental payments subject to these guarantees are $15 million and expire in 2009.

Derivative Instruments

We maintain an overall risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate risk, foreign currency risk, equity risk, and credit risk. We assess these risks by continually identifying and monitoring changes in interest rate exposure, foreign currency exposure, equity market exposure, and credit exposure that may adversely impact expected future cash flows and by evaluating hedging opportunities. Derivative instruments that are currently used as part of our interest rate risk management strategy include interest rate swaps, interest rate futures and interest rate caps. Derivative instruments that are used as part of our foreign currency risk management strategy include foreign currency swaps and foreign exchange forwards. Call options on our stock, total return swaps, put options and equity futures are used as part of our equity market risk management strategy. We also use credit default swaps as part of our credit risk management strategy.

By using derivative instruments, we are exposed to credit and market risk. If the counterparty fails to perform, credit risk is equal to the extent of the fair value gain in the derivative. When the fair value of a derivative contract is positive, this generally indicates that the counterparty owes us and, therefore, creates a payment risk for us. When the fair value of a derivative contract is negative, we owe the counterparty and therefore we have no payment risk. We minimize the credit (or payment) risk in derivative instruments by entering into transactions with high quality counterparties that are reviewed regularly by us. We also maintain a policy of requiring that all derivative contracts be governed by an International Swaps and Derivatives Association (“ISDA”) Master Agreement.

LNL and we are required to maintain minimum ratings as a matter of routine practice in negotiating ISDA agreements. Under the majority of ISDA agreements and as a matter of policy, LNL has agreed to maintain financial strength or claims-paying ratings above S&P BBB and Moody’s Baa2. A downgrade below these levels would result in termination of the derivatives contract at which time any amounts payable by us would be dependent on the market value of the underlying derivative contract. In certain transactions, we and the counterparty have entered into a collateral support agreement requiring us to post collateral upon significant downgrade. We are required to maintain long-term senior debt ratings of S&P BBB- and Moody’s Baa3. We also require for our own protection minimum rating standards for counterparty credit protection. LNL is required to maintain financial strength or claims-paying ratings above S&P A- and Moody’s A3 under certain ISDA agreements, which collectively do not represent material notional exposure. We do not believe the inclusion of termination or collateralization events pose any material threat to LNC's liquidity position.

Market risk is the adverse effect that a change in interest rates, currency rates, implied volatility rates, or a change in certain equity indexes or instruments has on the value of a financial instrument. We manage the market risk by establishing and monitoring limits as to the types and degree of risk that may be undertaken.

Our derivative instruments are monitored by our risk management committee as part of that committee’s oversight of our derivative activities. Our derivative instruments committee is responsible for implementing various hedging strategies that are developed through our analysis of financial simulation models and other internal and industry sources. The resulting hedging strategies are then incorporated into our overall risk management strategies.

8.	Segment Information

We have four business segments: Lincoln Retirement, Life Insurance, Investment Management and Lincoln UK. Segment operating revenue and income from operations are internal measures used by our management and Board of Directors to evaluate and assess the results of our segments. Operating revenue excludes realized gains and losses on investments and derivative instruments, gains and losses on reinsurance embedded derivative/trading securities, gains and losses on sale of subsidiaries/businesses and amortization of deferred gain arising from reserve development. Income (loss) from operations is net income (loss) excluding net realized investment gains and losses, losses on early retirement of debt, restructuring charges, reserve development net of related amortization on business sold through reinsurance and cumulative effect of accounting changes. We believe that income (loss) from operations explains the results of our ongoing businesses in a manner that allows for a better understanding of the underlying trends in our current businesses because net realized investment gains and losses, losses on early retirement of debt, restructuring charges, reserve development net of related amortization on business sold through reinsurance and cumulative effect of accounting changes 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.

The following tables show financial data by segment:

	Three Months Ended
	March 31,
(in millions)	2006			2005
Revenue:
Segment Operating Revenue:
Lincoln Retirement	$	586		$	539
Life Insurance		515			484
Investment Management ⁽¹⁾		163			130
Lincoln UK		70			75
Other Operations		249			244
Consolidating adjustments		(165	)		(170	)
Net realized investment results ⁽²⁾		(1	)		11
Total	$	1,417		$	1,313
Net Income:
Segment Operating Income
Lincoln Retirement	$	123		$	99
Life Insurance		82			68
Investment Management		20			7
Lincoln UK		11			10
Other Operations		(14	)		(11	)
Other items ⁽³⁾		-			(1	)
Net realized investment results ⁽⁴⁾		(1	)		7
Net Income	$	221		$	179

(1)	Revenues for the Investment Management segment include inter-segment revenues for asset management services provided to our other segments. These inter-segment revenues totaled $25 million for both the three months ended March 31, 2006 and 2005.

(2)

Includes realized losses on investments of $11 million and $9 million for the three months ended March 31, 2006 and 2005, respectively; realized gains on derivative instruments of $4 million and $2 million for the three months ended March 31, 2006 and 2005, respectively; gain on reinsurance embedded derivative/trading securities of $6 million and

$4 million for the three months ended March 31, 2006 and 2005, respectively; and gain on sale of subsidiaries/businesses of $14 million for the three months ended March 31, 2005.

(3)	Represents restructuring charges.

(4)

Includes realized losses on investments of $7 million and $6 million for the three months ended March 31, 2006 and 2005, respectively; realized gains on derivative instruments of $2 million and $1 million for the three months ended March 31, 2006 and 2005, respectively; gain on reinsurance embedded derivative/trading securities of $4 million and $3 million for the three months ended March 31, 2006 and 2005, respectively; and gain on sale of subsidiaries/businesses of $9 million for the three months ended March 31, 2005.

9.	Earnings Per Share

The income used in the calculation of our diluted earnings per share is net income reduced by minority interest adjustments related to outstanding stock options under the Delaware Investments U.S., Inc. (“DIUS”) stock option incentive plan of less than $1 million for the three months ended March 31, 2006 and 2005.

A reconciliation of the denominator in the calculations of basic and diluted net income and income before cumulative effect of accounting change per share is as follows:

	Three Months Ended
	March 31,
	2006			2005
Denominator: [number of shares]
Weighted-average shares as used in basic calculation		174,577,421			173,695,598
Conversion of preferred stock		243,371			268,895
Non-vested stock		1,560,646			1,159,248
Average stock options outstanding during the period		8,850,988			6,959,159
Assumed acquisition of shares with assumed proceeds and
benefits from exercising stock options		(7,778,439	)		(6,065,796	)
Shares repurchaseable from measured but unrecognized
stock option expense		(824,764	)		(620,946	)
Average deferred compensation shares		1,300,430			1,232,732
Weighted-average shares, as used in diluted calculation		177,929,653			176,628,890

We have stock options outstanding which were issued at prices that are above the current average market price of our common stock. In the event the average market price of our common stock exceeds the issue price of stock options, such options would be dilutive to our earnings per share and will be shown in the table above. Participants in our deferred compensation plans that select our stock for measuring the investment return attributable to their deferral amounts will be paid out in our stock. These deferred compensation plan obligations are dilutive and are shown in the table above.

10.

Pension and Post-Retirement

Components of Net Periodic Pension Cost—U.S. Plans

The components of net periodic benefit expense for our defined benefit pension plans and post-retirement benefit plans are as follows:

							Other Postretirement
	Pension Benefits						Benefits
	Three months ended						Three months ended
	March 31,						March 31,
(in millions)	2006			2005			2006		2005
U.S. Plans:
Service cost	$	5		$	5		$	1	$	1
Interest cost		9			8			1		1
Expected return on plan assets		(11	)		(11	)		-		-
Recognized net actuarial losses		1			1			-		-
Net periodic benefit expense	$	4		$	3		$	2	$	2

Non-U.S. Plans:
Interest cost	$	4		$	4
Expected return on plan assets		(4	)		(3	)
Recognized net actuarial (gains) losses		1			1
Net periodic benefit expense	$	1		$	2

Deferred Compensation Plans

As discussed in Note 8 to the Consolidated Financial Statements in our 2005 Form 10-K, we sponsor deferred compensation plans for certain U.S. employees and agents.

11.

Stock-Based Incentive Compensation Plans

See Note 8 to the Consolidated Financial Statements in our 2005 Form 10-K for a detailed discussion of stock and incentive compensation.

We have various incentive plans for our employees, agents and directors and our subsidiaries that provide for the issuance of stock options, stock incentive awards, stock appreciation rights (“SARs”), restricted stock awards, restricted stock units (“performance shares”), and deferred stock units. DIUS has a separate stock option incentive plan. We have a policy of issuing new shares to satisfy option exercises. Total pre-tax compensation expense (income) for all of our stock-based incentive compensation plans is as follows:

	Three Months Ended
(in millions)	March 31,
	2006		2005
Stock options	$	1	$	1
Shares		4		6
Cash awards		-		1
DIUS stock options		3		3
SARs		1		(1	)
Restricted stock		1		-
Total	$	10	$	10

Recognized tax benefit	$	4	$	4

LNC Stock-Based Incentive Plans

Information with respect to stock option and performance share awards granted under our long-term incentive plans is provided in the table below. There were no awards granted under these plans in the three months ended March 31, 2006.

	March 31,
	2006		2005
Awards
10-year LNC stock options		-		370,646
Performance share units		-		432,561

Outstanding at March 31
10-year LNC stock options		796,548		988,787
Performance share units		935,542		1,647,076

Performance measures for determining the actual amount of stock options and performance share units are established at the beginning of each three-year performance period. Depending on the performance, the actual amount of stock options and performance share units could range from zero to 200% of the granted amount.

The option price assumptions used for our stock option incentive plans were as follows:

	Three Months Ended March 31, 2006
Dividend yield		2.8	%
Expected volatility		26.5	%
Risk-free interest rate		4.4	%
Expected life (in years) ⁽¹⁾		1.2
Weighted-average fair value per option granted	$	5.94

(1) Decrease in expected life due to the number of reloads in the first three months of 2006 with an expected life less than one year.

Expected volatility is measured based on the historical volatility of the LNC stock price for the previous three-year period. The expected term of the options granted represents the weighted-average period of time from the grant date to the exercise date, weighted for the number of shares exercised for an option grant relative to the number of options exercised over the previous three-year period.

As of March 31, 2006, there was $20 million of unrecognized compensation cost related to nonvested awards under these plans. The cost is expected to be recognized over a weighted-average period of 1.3 years. Information with respect to our incentive plans involving stock options is as follows:


						Weighted-
						Average		Aggregate
				Weighted-		Remaining		Intrinsic
				Average		Contractual		Value
Options	Shares			Exercise Price		Term		(in millions)
Outstanding at December 31, 2005		8,917,718		$	44.41
Granted-original		3,017			54.37
Granted-reloads		30,003			55.17
Exercised (includes shares tendered)		(1,412,213	)		43.41
Forfeited or expired		(16,418	)		47.73
Outstanding at March 31, 2006		7,522,107		$	44.64		4.46	$	72
Vested or expected to vest at March 31, 2006 ⁽¹⁾		7,500,355		$	44.64		4.46	$	72
Exercisable at March 31, 2006		6,550,648		$	44.27		3.99	$	65

(1) Includes estimated forfeitures.

The total fair value of options vested during the three months ended March 31, 2006 was $5 million. The total intrinsic value of options exercised during the three months ended March 31, 2006 was $17 million.

At December 31, 2005, there were 1,577,278 performance shares outstanding, 641,736 of the outstanding shares were vested at December 31, 2005 and issued during the first quarter of 2006. There was no other activity related to performance shares in the first quarter of 2006. The 935,542 nonvested performance shares at March 31, 2006 had a weighted-average grant-date fair value of $45.75.

Delaware Stock Option Incentive Plan

The option price assumptions used for the DIUS stock option incentive plans were as follows:

	Three Months Ended March 31, 2006
Dividend yield		1.3	%
Expected volatility		38.0	%
Risk-free interest rate		4.7	%
Expected life (in years)		4.1
Weighted-average fair value per option granted	$	51.35

Expected volatility is measured based on several factors including the historical volatility of the DIUS valuation since the inception of the plan in 2001 and comparisons to other public management companies with similar operating structures. The expected term of the options granted represents the weighted-average period of time from the grant date to the exercise date, based on the historical expected life of DIUS options.

At March 31, 2006, DIUS had 10,139,317 shares of common stock outstanding. Included in other liabilities on our Consolidated Balance Sheet is $48 million related to this plan. Information with respect to the DIUS incentive plan involving stock options is as follows:

						Weighted-
						Average		Aggregate
				Weighted-		Remaining		Intrinsic
				Average		Contractual		Value
Options	Shares			Exercise Price		Term		(in millions)
Outstanding at December 31, 2005		1,469,194		$	128.74
Granted - original		20,000			155.73
Exercised (includes shares tendered)		(51,553	)		114.12
Forfeited or expired		(92,820	)		127.79
Outstanding at March 31, 2006		1,344,821		$	129.77		7.5	$	35
Vested or expected to vest at March 31, 2006 ⁽¹⁾		1,287,430		$	129.45		7.4	$	34
Exercisable at March 31, 2006		654,243		$	119.65		6.2	$	24

(1) Includes estimated forfeitures.

The total fair value of shares that became fully vested during the three months ended March 31, 2006 was $4 million. The total intrinsic value of options exercised during the three months ended March 31, 2006 was $2 million. Unrecognized compensation expense related to nonvested awards under this plan was $22 million as of March 31, 2006. The cost is expected to be recognized over a weighted-average period of 2.7 years. The amount of cash received and the tax benefit realized from stock option exercises under this plan during the three months ended March 31, 2006 was $6 million and $1 million, respectively.

The value of DIUS shares is determined using a market transaction approach based on profit margin, assets under management and revenues. The valuation is performed by an outside appraiser at least semi-annually and reviewed by the Compensation Committee. The last valuation was performed as of December 31, 2005 with a value of $155.73 per share. The value of outstanding shares exercised under this plan and the intrinsic value of vested and partially vested options totaled $48 million at March 31, 2006 and is included in other liabilities on the Consolidated Balance Sheet.

Stock Appreciation Rights Incentive Plan

We recognize compensation expense for SARs based on the fair value method using an option-pricing model. Compensation expense and the related liability are recognized on a straight-line basis over the vesting period of the SARs. The SARs liability is marked-to-market through net income, which causes volatility in net income as a result of changes in the market value of our stock. We hedge this volatility by purchasing call options on LNC stock. Call options hedging vested SARs are also marked-to-market through net income. The mark-to-market gain (loss) recognized through net income on the call options on LNC stock for the three months ended March 31, 2006 and 2005 was $1 million and $(2) million, respectively. The SARs liability at March 31, 2006 and December 31, 2005 was $5 million and $8 million, respectively. As of March 31, 2006, there was $6 million of unrecognized compensation cost related to nonvested awards under this plan excluding the effect of call options. The cost is expected to be recognized over a weighted-average period of 3.7 years.

The option pricing assumptions used for our SAR plan were as follows:

	Three Months Ended March 31, 2006
Dividend yield		2.8	%
Expected volatility		23.0	%
Risk-free interest rate		5.3	%
Expected life (in years)		5.0
Weighted-average fair value per option granted ⁽¹⁾	$	11.06

(1)	Excluding the effect of call options

Expected volatility is measured based on the historical volatility of the LNC stock price. The expected term of the options granted represents time from the grant date to the exercise date.

Information with respect to our SAR plan is as follows:

						Weighted-
						Average		Aggregate
				Weighted-		Remaining		Intrinsic
				Average		Contractual		Value
SARs	Shares			Exercise Price		Term		(in millions)
Outstanding at December 31, 2005		1,098,126		$	44.24
Granted-original		182,550			54.91
Exercised (includes shares tendered)		(321,719	)		43.15
Forfeited or expired		(26,459	)		43.35
Outstanding at March 31, 2006		932,498		$	46.69		2.89	$	7
Vested or expected to vest at March 31, 2006		890,629		$	46.51		2.83	$	7
Exercisable at March 31, 2006		433,604		$	46.04		1.75	$	4

The payment for SARs exercised during the three months ended March 31, 2006 was $4 million.

In addition to the stock-based incentives discussed above, we have awarded restricted shares of our stock (non-vested stock) under the incentive compensation plan, generally subject to a three-year vesting period. Information with respect to our restricted stock at March 31, 2006 is as follows:

				Weighted-Average
				Grant-Date
	Shares			Fair Market Value
Nonvested at December 31, 2005		177,598		$	43.01
Granted		925			50.07
Vested		(41,276	)		39.43
Nonvested at March 31, 2006		137,247		$	44.14

As of March 31, 2006, there was $3 million of unrecognized compensation cost related to nonvested awards under this plan. The cost is expected to be recognized over a weighted-average period of 1.8 years.

12.

Restructuring Charges

2005 Restructuring Plan

During May 2005, LFA implemented a restructuring plan to realign its field management and financial planning support areas. The plan is expected to be completed by the third quarter of 2006, except for lease payments on vacated space which run through 2008. The remaining reserves totaled $2 million at March 31, 2006.

2003 Restructuring Plans

In January 2003, the Life Insurance segment announced that it was realigning its operations in Hartford, Connecticut and Schaumburg, Illinois to enhance productivity, efficiency and scalability while positioning the segment for future growth. The remaining reserves associated with this plan totaled $1 million at March 31, 2006.

In June 2003, we announced that we were combining our retirement and life insurance businesses into a single operating unit focused on providing wealth accumulation and protection, income distribution and wealth transfer products. In August 2003, we announced additional realignment activities, which impact all of our domestic operations. The remaining reserves associated with these plans totaled $1 million at March 31, 2006.

1999 and 2000 Restructuring Plans

During 1999 and 2000, we implemented restructuring plans relating to Lincoln UK’s operations. In addition to various other activities, these plans involved vacating leased facilities. All other plan activities have been completed. The remaining reserves of $6 million at March 31, 2006 relate to future lease payments on exited properties, which expire through 2016.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion of the financial condition of Lincoln National Corporation and its consolidated subsidiaries (“LNC” or the “Company” which also may be referred to as “we” or “us”) as of March 31, 2006 compared with December 31, 2005, and the results of operations of LNC for the three months ended March 31, 2006 compared with the same period last year. The balance sheet information presented below is as of March 31, 2006 and December 31, 2005. The statement of operations information is for the three months ended March 31, 2006 and 2005.

This discussion and analysis should be read in conjunction with our Consolidated Financial Statements and Notes thereto presented in Item 1 (“Consolidated Financial Statements”) and Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in our latest annual report on Form 10-K for the year ended December 31, 2005 (“2005 Form 10-K”). You should also read our discussion below of “Critical Accounting Policies” for an explanation of those accounting estimates that we believe are most important to the portrayal of our financial condition and results of operations and that require our most difficult, subjective and complex judgments. Financial information in the tables that follow is presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”), unless otherwise indicated. Certain reclassifications have been made to prior periods’ financial information to conform to the 2005 presentation.

Forward-Looking Statements—Cautionary Language

Certain statements made in this report and in other written or oral statements made by LNC or on LNC’s behalf are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). A forward-looking statement is a statement that is not a historical fact and, without limitation, includes any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain words like: “believe”, “anticipate”, “expect”, “estimate”, “project”, “will”, “shall” and other words or phrases with similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, operations, trends or financial results. 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:

Problems arising with the ability to successfully integrate our and Jefferson-Pilot Corporation’s (“Jefferson-Pilot”) businesses, which may affect our ability to operate as effectively and efficiently as expected or to achieve the expected synergies from the merger or to achieve such synergies within our expected timeframe;

Legislative, regulatory or tax changes, both domestic and foreign, that affect the cost of, or demand for, LNC’s products, the required amount of reserves and/or surplus, or otherwise affect our ability to conduct business, including changes to statutory reserves and/or risk-based capital requirements related to secondary guarantees under universal life and variable annuity products such as Actuarial Guideline 38; 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: (a) adverse actions related to present or past business practices common in businesses in which LNC and its subsidiaries compete; (b) 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; (c) new decisions that result in changes in law; and (d) 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 fees that LNC charges on various investment and insurance products, an acceleration of amortization of deferred acquisition costs (“DAC”), the value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and deferred front-end loads (“DFEL”) and an increase in liabilities related to guaranteed benefit features of LNC’s variable annuity products;

·	Ineffectiveness of LNC’s various hedging strategies used to offset the impact of declines in the equity markets;

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;

·	Changes in accounting principles generally accepted in the United States (“GAAP”) that may result in unanticipated changes to LNC’s net income;

·	Lowering of one or more of LNC’s debt ratings issued by nationally recognized statistical rating organizations, and the adverse impact such action may have on LNC’s ability to raise capital and on its liquidity and financial condition;

·	Lowering of one or more of the insurer financial strength ratings of LNC’s insurance subsidiaries, and the adverse impact such action may have on the premium writings, policy retention, and profitability of its insurance subsidiaries;

·	Significant credit, accounting, fraud or corporate governance issues that may adversely affect the value of certain investments in the portfolios of LNC’s companies requiring that LNC realize losses on such investments;

·	The impact of acquisitions and divestitures, restructurings, product withdrawals and other unusual items, including LNC’s ability to integrate acquisitions and to obtain the anticipated results and synergies from acquisitions;

·	The adequacy and collectibility of reinsurance that LNC has purchased;

·	Acts of terrorism or war that may adversely affect LNC’s businesses and the cost and availability of reinsurance;

·	Competitive conditions, including pricing pressures, new product offerings and the emergence of new competitors, that may affect the level of premiums and fees that LNC can charge for its products;

·	The unknown impact on LNC’s business resulting from changes in the demographics of LNC’s client base, as aging baby-boomers move from the asset-accumulation stage to the asset-distribution stage of life;

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

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

The risks included here are not exhaustive. Other sections of this report and LNC’s annual reports on Form 10-K, current reports on Form 8-K and other documents filed with the SEC include additional factors which could impact LNC’s business and financial performance. Moreover, LNC operates in a rapidly changing and competitive environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors.

Further, it is not possible to assess the impact of all risk factors on LNC’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undo reliance on forward-looking statements as a prediction of actual results. In addition, LNC disclaims any obligation to update any forward-looking statements to 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 as well as broadcasting and sports programming business 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 annuities, variable annuities, universal life insurance, variable universal life insurance, term life insurance, mutual funds, “529” college savings plans and managed accounts.

Through March 31, 2006, our operations included four business segments: 1) Lincoln Retirement, 2) Life Insurance, 3) Investment Management and 4) Lincoln UK. We also have an “Other Operations” category that includes the financial data for operations of Lincoln Financial Advisors (“LFA”) and Lincoln Financial Distributors (“LFD”), our retail and wholesale distributors, and for operations that are not directly related to the business segments, unallocated corporate items (such as corporate investment income and interest expense on short-term and long-term borrowings) and ongoing amortization of deferred gain on the indemnity reinsurance portion of the sale of the former Reinsurance segment.

Our individual products and services are distributed primarily through brokers, planners, agents and other intermediaries with sales and marketing support provided by LFD, our wholesaling distribution arm. Our group products and services are distributed primarily through financial advisors, employee benefit brokers, third party administrators, and other employee benefit firms with sales support provided by Lincoln’s Employer Markets group and retirement sales specialists. Our retail distribution firm, LFA, offers LNC and non-proprietary products and advisory services through a national network of financial planners, agents and registered representatives.

On April 3, 2006, Jefferson-Pilot, a financial services and broadcasting holding company, merged with and into one of our wholly owned subsidiaries. Jefferson-Pilot, through its subsidiaries, provided products and services in four major businesses: (1) life insurance, (2) annuities and investment products, (3) group life, disability and dental insurance and (4) broadcasting and sports programming production. At March 31, 2006, Jefferson-Pilot had consolidated assets of $35.8 billion and consolidated shareholders’ equity of $3.9 billion. For a detailed description of Jefferson-Pilot’s business, the financial statements of Jefferson-Pilot, and other important information concerning Jefferson-Pilot, please refer to Jefferson-Pilot’s Annual Report on Form 10-K for the year ended December 31, 2005.

We paid $1.8 billion in cash and issued approximately 112 million shares of our common stock to the former holders of Jefferson-Pilot common stock in connection with the merger. We financed the cash portion of the merger consideration through short-term borrowing. Subsequent to the initial financing, we raised approximately $1.3 billion through long-term financings, which was used to repay borrowings under the bridge financing. For additional information on financing activities refer to “Recent Developments” and “Liquidity and Capital Resources” later in the document.

As a result of our merger with Jefferson-Pilot, we provide products and services in five businesses: (1) life insurance, (2) annuities, (3) investment management, (4) group life, disability and dental insurance and (5) media.

See “Recent Developments” below for additional information regarding our merger with Jefferson-Pilot.

Beginning in the second quarter of 2006, we expect to report results through five business units: (1) Individual Markets, (2) Employer Markets, (3) Investment Management, (4) Lincoln UK and (5) Lincoln Financial Media. The following is a brief description of these business units.

Individual Markets. The Individual Markets business unit operates through two segments, Individual Annuities and Individual Life. The Individual Annuities segment provides tax-deferred investment growth and lifetime income opportunities for its clients by offering individual fixed, variable and equity-indexed annuities. The Individual Life segment offers wealth protection and transfer opportunities through both single and survivorship versions of universal life, variable universal life, interest-sensitive whole life, term insurance, as well as a linked-benefit product, which is a universal life insurance policy linked with riders that provide for long-term care costs.

Employer Markets. The Employer Markets business unit operates as a segment and provides products and services to the employer-sponsored marketplace. Employer Markets offers group protection, retirement income, and executive benefits solutions. Products include employer-sponsored variable and fixed annuities, mutual-fund based programs in the 401(k), 403(b), and 457 marketplaces (including the Lincoln Director^SM (“Director”) business reported in the Investment Management segment through the first quarter of 2006), corporate owned life insurance, as well as group life, disability, and dental insurance.

Investment Management. The Investment Management business unit operates as a segment and, through Delaware Investments, provides a broad range of managed accounts and portfolios, mutual funds, subadvised funds, and other investment products to individual investors and to institutional investors such as private and public pension funds, foundations, and endowment funds. Delaware Investments is the marketing name for Delaware Management Holdings, Inc. and its subsidiaries.

Lincoln UK. Lincoln UK is headquartered in Barnwood, Gloucester, England, and is licensed to do business throughout the United Kingdom. Lincoln UK primarily focuses on protecting and enhancing the value of its existing customer base. The segment accepts new deposits from existing relationships into existing and a limited number of new products. Lincoln UK’s product portfolio principally consists of unit-linked life and pension products, which are similar to U.S. produced variable life and annuity products, where the risk associated with the underlying investments is borne by the policyholders.

Lincoln Financial Media. The Lincoln Financial Media business unit operates as a segment and consists of 18 radio and 3 television broadcasting stations located in selected markets in the Southeastern and Western United States and also produces syndicated collegiate basketball and football sports programming.

We view our business similar to a columned structure. The base of the structure is our employees. Overlaying the base is financial and risk management, and operating efficiency which are the cornerstones of our management and business philosophy. Talented employees and strong financial and risk management provide the foundation from which we operate and grow our company. With that as a foundation, there are three pillars that we focus on—product excellence, power of the brand and distribution reach.

Product excellence is one of the pillars of our business. It is important that we continually develop and provide products to the marketplace that not only meet the needs of our customers and compete effectively, but also satisfy our risk profile and meet our profitability standards.

Within the variable annuity arena, our Lincoln Smart Security^SM Advantage, with its one and five-year reset feature, continued to experience significant growth in the first quarter, with elections increasing to 57% of deposits for the first three months of 2006. We believe that as the baby-boomer generation reaches retirement age it will present an emerging opportunity for companies like ours that offer products that allow the baby-boomers to better manage their wealth accumulation, retirement income and wealth transfer needs.

In our Life Insurance segment, we continue to face competitive pressures, especially related to life insurance products with secondary guarantees. For products with lapse protection riders, we remain committed to maintaining appropriate risk management and pricing discipline despite the competitive environment. In addition, we are seeking capital market solutions in response to new regulations requiring increases in statutory reserves for these products.

Our mutual fund offerings have had strong performance over the one-, three-, and five-year performance periods, resulting in strong deposits and net flows and adding to the assets under management for both the retail and institutional products lines in our Investment Management segment. Growth in deposits and net flows have also benefited from changes during 2005 in the management of certain asset category offerings. In addition, Lincoln Director^SM, our defined contribution retirement product, also contributed to the Investment Management segment’s growth in deposits and net flows so far in 2006.

We continue to expect our major challenges in 2006 to include:

·	The successful integration of the Jefferson-Pilot businesses.

·	While recent increases in long-term rates has eased pressure on spreads a continuation of the low interest rate environment creates a challenge for our products that generate investment margin profits, such as fixed annuities and universal life insurance.

·	The continued, successful expansion of our wholesale distribution businesses.

·	The continuation of competitive pressures in the life insurance marketplace.

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

·	Continued focus by the government on tax reform, which may impact our products.

Recent Developments

On April 3, 2006, we completed our merger with Jefferson-Pilot. We paid $1.8 billion in cash and issued approximately 112 million shares of our common stock to the former holders of Jefferson-Pilot common stock in connection with the merger. We financed the cash portion of the merger consideration by borrowing $1.8 billion under the credit agreement that we entered into with a group of banks in December 2005 (the “bridge facility”). As a result of the merger, we offer fixed and variable universal life, fixed and equity indexed annuities, variable annuities, mutual funds, 401(k) and 403(b) offerings, and group life, disability and dental insurance products. We also operate television and radio stations.

On April 3, 2006, we issued $500 million of Floating Rate Senior Notes due April 6, 2009 (the “Floating Rate Notes”), from which we received net proceeds of approximately $499 million. The Floating Rate Notes bear interest at a rate of three-month LIBOR plus 11 basis points, with quarterly interest payments in April, July, October and January. On April 3, 2006, we also issued $500 million of 6.15% Senior Notes due April 7, 2036 (the “Fixed Rate Notes”), from which we received net proceeds of approximately $492 million. We will pay interest on the Fixed Rate Notes semi-annually in April and October. We may redeem the Fixed Rate Notes at any time subject to a make-whole provision. On April 12, 2006, we issued $275 million of 6.75% junior subordinated debentures due 2066 (the “Capital Securities”), from which we received net proceeds of approximately $266 million. We will pay interest on the Capital Securities quarterly January, April, July and October. We may redeem the capital securities in whole or in part on or after April 20, 2011 (and prior to such date under certain circumstances). We used the net proceeds from the offerings to repay a portion of the outstanding loan balance under the bridge facility.

See Note 3 to the Consolidated Financial Statements in this Form 10-Q and our current reports on Form 8-K filed with the SEC on April 3, 2006, April 7, 2006 and April 20, 2006 for additional information.

Critical Accounting Policies

The MD&A included in our 2005 Form 10-K contains a detailed discussion of our critical accounting policies. The following information updates the critical accounting policies provided in the 2005 Form 10-K.

Intangible Assets

Accounting for intangible assets requires numerous assumptions, such as estimates of expected future profitability for our operations and our ability to retain existing blocks of life and annuity business in force. Our accounting policies for the deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and the liability for deferred front-end loads (“DFEL”) impact all four business segments. DAC, VOBA, DSI and DFEL will be referred to hereinafter collectively as DAC, unless otherwise noted.

Acquisition costs for variable annuity contracts, universal and variable universal life insurance policies are amortized over the lives of the contracts in relation to the incidence of estimated gross profits (“EGPs”) derived from the contracts. Acquisition costs are those costs that vary with and are primarily related to new or renewal business. These costs include commissions and other expenses that vary with new business volume. The costs that we defer are recorded as an asset on our balance sheet as DAC for products we sold or VOBA for books of business we acquired. In addition, we defer costs associated with DSI and revenues associated with DFEL. DFEL is a balance sheet liability, and when amortized, increases income.

The table below presents the balances by business segment as of March 31, 2006.

	Lincoln		Life		Investment		Lincoln		Other
March 31, 2006 (in millions)	Retirement		Insurance		Management		UK		Operations		Total
DAC	$	1,614	$	2,102	$	167	$	488	$	-	$	4,371
VOBA		73		652		-		259		-		984
DSI		140		-		-		-		-		140
Total DAC, VOBA and DSI		1,827		2,754		167		747		-		5,495
DFEL		-		363		-		365		-		728
Net DAC, VOBA, DSI and DFEL	$	1,827	$	2,391	$	167	$	382	$	-	$	4,767

_________________

Note: The above table includes DAC and VOBA amortized in accordance with SFAS No. 60, “Accounting and Reporting by Insurance Enterprises.” Under SFAS No. 60, acquisition costs for traditional life insurance products, which include whole life and term life insurance contracts, are amortized over periods of 10 to 30 years on either a straight-line basis or as a level percent of premium of the related policies depending on the block of business. No DAC is being amortized under SFAS No. 60 for fixed and variable payout annuities.

As more fully discussed in our 2005 Form 10-K, beginning in the fourth quarter of 2004, we enhanced our “reversion to the mean” (“RTM”) process, the process we use to compute our best estimate long-term gross growth rate assumption, to evaluate the carrying value of DAC for our variable annuity, annuity-based 401(k) and unit-linked product blocks of business. Under our enhanced RTM process, on each valuation date, future EGPs are projected using stochastic modeling of a large number of future equity market scenarios in conjunction with best estimates of lapse rates, interest margins and mortality to develop a statistical distribution of the present value of future EGPs for each of the blocks of business. The statistical distribution is designed to identify when the equity market return deviations from expected returns have become significant enough to warrant a change of the future equity return EGP assumption.

The stochastic modeling performed for our variable annuity blocks of business is used to develop a range of reasonably possible future EGPs. We compare the range of the present value of the future EGPs from the stochastic modeling to that used in the DAC amortization model. A set of intervals around the mean of these scenarios is utilized to calculate two separate statistical ranges of reasonably possible EGPs. These intervals are compared to the present value of the EGPs used in the DAC amortization model. If the present value of EGP assumptions utilized in the DAC amortization model were to exceed the margin of the reasonable range of statistically calculated EGPs, a revision of the EGPs used to calculate DAC amortization would occur. If a revision is deemed necessary, future EGPs would be re-projected using the current account values at the end of the period during which the revision occurred along with a revised long-term annual equity market gross return assumption such that the re-projected EGPs would be our best estimate of EGPs.

Given where our best estimate of EGPs for the Lincoln Retirement segment was positioned in the range at March 31, 2006, if we were to assume a 9% long-term gross equity market growth assumption from March 31, 2006 forward in determining the revised EGPs, we estimate that it would result in a cumulative decrease to DAC amortization (positive DAC unlocking) of approximately $137 million pre-tax ($89 million after-tax). To further illustrate the position in the range of our best estimate of EGPs for the Lincoln Retirement segment at March 31, 2006, a one-quarter equity market movement of positive 10% would bring us to the first of the two statistical ranges while a one quarter equity market movement of positive 30% would bring us to the second of the two ranges for the Lincoln Retirement segment. Subsequent equity market performance that would keep us at or move us beyond the first statistical range would likely result in positive unlocking. Negative equity market performance would have to be significantly greater than the above percentages for us to exceed the lower end of the two statistical ranges.

For a more detailed discussion of the enhanced RTM process, refer to the discussion in Critical Accounting Policies - Intangible Assets, included in our 2005 Form 10-K.

Guaranteed Minimum Benefits

The Lincoln Retirement segment has a hedging strategy designed to mitigate the risk and income statement volatility caused by changes in the equity markets, interest rates, and volatility associated with the Lincoln Smart Security^SM Advantage guaranteed minimum withdrawal benefit (“GMWB”) and our various guaranteed minimum death benefit (“GMDB”) features available in our variable annuity products. The hedging strategy is designed such that changes in the value of the hedge contracts move in the opposite direction of changes in the value of the embedded derivative of the GMWB or changes in the reserve for GMDB contracts subject to the hedging strategy. Account balances covered in this hedging program combined with account balances for which there is no death benefit represent approximately 94% of total variable annuity account balances, which excludes the Alliance mutual fund business. We have not implemented a hedging strategy for our guaranteed income benefit (“GIB”) feature, as less than 3% of variable annuity account balances are subject to this feature and substantially all of these outstanding contracts are still in the accumulation phase.

The reserves related to the GMDB are based on the application of a benefit ratio to total assessments related to the variable annuity. The level and direction of the change in reserves will vary over time based on the emergence of the benefit ratio (which is based on both historical and projected future level of benefits) and the level of assessments (both historical and projected) associated with the variable annuity. We utilize a delta hedging strategy for variable annuity products with a GMDB feature, which uses futures on U.S.-based equity market indices to hedge against movements in equity markets. Because the GMDB reserves are based upon projected long-term equity market return assumptions, and since the value of the hedging contracts will reflect current capital market conditions, the quarterly changes in values for the GMDB reserves and the hedging contracts may not offset each other on an exact basis. Despite these short-term fluctuations in values, we intend to continue to hedge our long-term GMDB exposure in order to mitigate the risk associated with falling equity markets. Our hedging program covers substantially all exposures for these policies.

We utilize a dynamic hedging strategy for variable annuity products with a GMWB feature, which uses futures on U.S.-based equity indices to hedge against movements in the equity markets, as well as interest rate and equity derivative securities to hedge against changes in reserves associated with changes in interest rates and market implied volatilities. As of March 31, 2006, the notional amounts of the underlying hedge instruments are such that the magnitude of the change in the value of the hedge instruments due to changes in equity markets, interest rates, and implied volatilities is designed to offset the magnitude of the change in the fair value of the GMWB guarantee caused by those same factors. At March 31, 2006, the embedded derivative for GMWB was an asset valued at $38 million. The embedded derivative is an asset at March 31, 2006 as the estimated present value of expected future contract charges is greater than the estimated present value of expected future claims.

As part of our current hedging program, policyholder behavior and equity, interest rate, and volatility market conditions are monitored on a daily basis. We rebalance our hedge positions based upon changes in these factors as needed. While we actively manage our hedge positions, our hedge positions may not be totally effective to offset changes in assets and liabilities caused by movements in these factors due to, among other things, differences in timing between when a market exposure changes and corresponding changes to the hedge positions, extreme swings in the equity markets and interest rates, market volatility, policyholder behavior, divergence between the performance of the underlying funds and the hedging indices, divergence between the actual and expected performance of the hedge instruments, or our ability to purchase hedging instruments at prices consistent with our desired risk and return trade-off.

RESULTS OF CONSOLIDATED OPERATIONS

					Increase
Three Months Ended March 31, (in millions)	2006		2005		(Decrease)
Insurance premiums	$	78	$	70		11	%
Insurance fees		476		419		14	%
Investment advisory fees		85		59		44	%
Net investment income		678		660