| LINCOLN NATIONAL CORP Item 1ARisk Factors You should carefully consider the risks described below before investing in our securities |
| The risks and uncertainties described below are not the only ones facing our company |
| Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations |
| If any of these risks actually occur, our business, financial condition and results of operations could be materially affected |
| In that case, the value of our securities could decline substantially |
| For additional risks concerning our previously announced merger with Jefferson-Pilot, see Amendment Nodtta 1 to our Form S-4 (Registration Nodtta 333-130226) |
| Risk Factors in connection with Our Business Our reserves for future policy benefits and claims related to our current and future business as well as businesses we may acquire in the future may prove to be inadequate |
| Our reserves for future policy benefits and claims may prove to be inadequate |
| We establish and carry, as a liability, reserves based on estimates of how much we will need to pay for future benefits and claims |
| For our life insurance and annuity products, we calculate these reserves based on many assumptions and estimates, including estimated premiums we will receive over the assumed life of the policy, the timing of the event covered by the insurance policy, the amount of benefits or claims to be paid and the investment returns on the assets we purchase with the premiums we receive |
| The assumptions and estimates we use in connection with establishing and carrying our reserves are inherently uncertain |
| Accordingly, we cannot determine with precision the ultimate amounts that we will pay for, or the timing of payment of, actual benefits and claims or whether the assets supporting the policy liabilities will grow to the level we assume prior to payment of benefits or claims |
| If our actual experience is different from our assumptions or estimates, our reserves may prove to be inadequate in relation to our estimated future benefits and claims |
| Because the equity markets and interest rates impact our profitability, changes in equity markets and interest rates may also negatively affect our business and profitability |
| The fee revenue that we earn on equity-based variable annuities, unit-linked accounts, variable universal life insurance policies and investment advisory business, is based upon account values |
| Because strong equity markets result in higher account values, strong equity markets positively affect our net income through increased fee revenue |
| In addition, the increased fee revenue resulting from strong equity markets increases the expected gross profits (“EGPs”) from variable insurance products |
| As a result, the higher EGPs may result in lower net amortized costs related to deferred acquisition costs (“DAC”), deferred sales inducements (“DSI”), the present value of in-force business (“PVIF”), and deferred front-end sales loads (“DFEL”) associated with those products |
| For more information on DAC, DSI, PVIF and DFEL amortization, see “Critical Accounting Policies” in the MD&A Finally, the amount of reserves related to the GMDB for variable annuities is tied to the difference between the value of the underlying accounts and the guaranteed death benefit, which is a benefit ratio (present value of total expected GMDB payments over the life of the contract divided by the present value of total expected assessments over the life of the contract) |
| Both the level of expected GMDB payments and expected total assessments used in calculating this benefit ratio are affected by the equity markets |
| Accordingly, strong equity markets will decrease the amount of GMDB reserves that we must carry |
| Conversely, a weakening of the equity markets results in lower fee income and, depending upon the significance of the drop in the equity markets, may result in higher net expenses associated with DAC, DSI, PVIF and DFEL Both lower fee income and higher net expenses may have a material adverse effect on our results of operations and capital resources |
| Furthermore, a decrease in the equity markets will increase the net amount at risk under the GMDB benefits we offer as part of our variable annuity products, which has the effect of increasing the amount of GMDB reserves that we must carry |
| As a result, if such reserves are not reasonable in relation to our expected liabilities for GMDB, it would likely result in an increase in GMDB payments and would result in a decrease in the present value of total expected assessments over the life of the contract |
| Such an increase in reserves would result in a charge to our earnings in the quarter in which we increase our reserves to bring them within a reasonable range of our estimated future liabilities related to the GMDB guarantees |
| Because the profitability of our fixed annuity and interest-sensitive whole life, universal life and fixed portion of variable universal life insurance business depends in part on interest rate spreads, interest rate fluctuations could negatively affect our profitability |
| Jefferson-Pilot also offers products the profitability of which depends in part on interest rate spreads |
| Accordingly, our merger with Jefferson-Pilot may exacerbate this risk |
| 24 _________________________________________________________________ Changes in interest rates may reduce both our profitability from spread businesses and our return on invested capital |
| Some of our products, principally fixed annuities and interest-sensitive whole life, universal life and the fixed portion of variable universal life insurance, expose us to the risk that changes in interest rates will reduce our “spread”, or the difference between the amounts that we are required to pay under the contracts and the amounts we are able to earn on our general account investments intended to support our obligations under the contracts |
| Declines in our spread from these products could have a material adverse effect on our businesses or results of operations |
| In periods of increasing interest rates, we may not be able to replace the assets in our general account with higher yielding assets needed to fund the higher crediting rates necessary to keep our interest sensitive products competitive |
| We therefore may have to accept a lower spread and thus lower profitability or face a decline in sales and greater loss of existing contracts and related assets |
| In periods of declining interest rates, we have to reinvest the cash we receive as interest or return of principal on our investments in lower yielding instruments then available |
| Moreover, borrowers may prepay fixed-income securities, commercial mortgages and mortgage-backed securities in our general account in order to borrow at lower market rates, which exacerbates this risk |
| Because we are entitled to reset the interest rates on our fixed rate annuities only at limited, pre-established intervals, and since many of our policies have guaranteed minimum interest or crediting rates, our spreads could decrease and potentially become negative |
| Increases in interest rates may cause increased surrenders and withdrawals of insurance products |
| In periods of increasing interest rates, policy loans and surrenders and withdrawals of life insurance policies and annuity contracts may increase as policyholders seek to buy products with perceived higher returns |
| This process may lead to a flow of cash out of our businesses |
| These outflows may require investment assets to be sold at a time when the prices of those assets are lower because of the increase in market interest rates, which may result in realized investment losses |
| A sudden demand among consumers to change product types or withdraw funds could lead us to sell assets at a loss to meet the demand for funds |
| In addition, unanticipated withdrawals and terminations also may require us to accelerate DAC, DSI, PVIF and DFEL amortization |
| This would increase our current expenses |
| A downgrade in our claims-paying or credit ratings could limit our ability to market products, increase the number or value of policies being surrendered and/or hurt our relationships with creditors |
| Nationally recognized rating agencies rate the financial strength of our principal insurance subsidiaries and the debt of LNC Ratings are not recommendations to buy our securities |
| Please see “Ratings” beginning on page 17 for a complete description of our ratings |
| Our claims-paying ratings, which are intended to measure our ability to meet policyholder obligations, are an important factor affecting public confidence in most of our products and, as a result, our competitiveness |
| The interest rates we pay on our borrowings are largely dependent on our credit ratings |
| Each of the rating agencies reviews its ratings periodically, and our current ratings may not be maintained in the future |
| A downgrade of the financial strength rating of one of our principal insurance subsidiaries could affect our competitive position in the insurance industry and make it more difficult for us to market our products as potential customers may select companies with higher financial strength ratings |
| This could lead to a decrease in fees as outflows of assets increase, and therefore, result in lower fee income |
| Furthermore, sales of assets to meet customer withdrawal demands could also result in losses, depending on market conditions |
| A downgrade of our debt ratings could affect our ability to raise additional debt with terms and conditions similar to our current debt, and accordingly, likely increase our cost of capital |
| In addition, a downgrade of these ratings could make it more difficult to raise capital to refinance any maturing debt obligations, to support business growth at our insurance subsidiaries and to maintain or improve the current financial strength ratings of our principal insurance subsidiaries described above |
| A drop in the rankings of the mutual funds that we manage as well as a loss of key portfolio managers could result in lower advisory fees |
| While mutual funds are not rated, per se, many industry periodicals and services, such as Lipper, provide rankings of mutual fund performance |
| Under “—Investment Management,” we have disclosed the number of our 25 largest retail mutual funds (based on assets under management), as well as all of our retail mutual funds, that rank in the top half of their Lipper category for the one-, three- and five-year periods ended December 31, 2005 |
| These rankings often have an impact on the decisions of customers regarding which mutual funds to invest in |
| If the rankings of the mutual funds for which we provide advisory services decrease materially, the funds’ assets may decrease as customers leave for funds with higher performance rankings |
| Similarly, a loss of our key portfolio managers who manage mutual fund investments could result in poorer fund performance, as well as customers leaving these mutual funds for new mutual funds managed by the portfolio managers |
| Any loss of fund assets would decrease the advisory fees that we earn from such mutual funds, which are generally tied to the amount of fund assets and performance |
| This would have an adverse effect on our results of operations |
| 25 _________________________________________________________________ Our businesses are heavily regulated and changes in regulation may reduce our profitability |
| Our insurance subsidiaries are subject to extensive supervision and regulation in the states in which we do business |
| The supervision and regulation relate to numerous aspects of our business and financial condition |
| The primary purpose of the supervision and regulation is the protection of our insurance policyholders, and not our investors |
| The extent of regulation varies, but generally is governed by state statutes |
| These statutes delegate regulatory, supervisory and administrative authority to state insurance departments |
| This system of supervision and regulation covers, among other things: • standards of minimum capital requirements and solvency, including risk-based capital measurements; • restrictions of certain transactions between our insurance subsidiaries and their affiliates; • restrictions on the nature, quality and concentration of investments; • restrictions on the types of terms and conditions that we can include in the insurance policies offered by our primary insurance operations; • limitations on the amount of dividends that insurance subsidiaries can pay; • the existence and licensing status of the company under circumstances where it is not writing new or renewal business; • certain required methods of accounting; • reserves for unearned premiums, losses and other purposes; and • assignment of residual market business and potential assessments for the provision of funds necessary for the settlement of covered claims under certain policies provided by impaired, insolvent or failed insurance companies |
| The regulations of the state insurance departments may affect the cost or demand for our products and may impede us from taking actions we might wish to take to increase our profitability |
| For example, in July 2005, a committee of the NAIC adopted a change to Actuarial Guideline 38 (also known as “AXXX”), the statutory reserve requirements for UL products with secondary guarantees, such as LNL’s LPR product |
| This proposal was formally adopted by the NAIC in 2005 with an effective date of July 1, 2005 |
| The proposal does not affect business written prior to the effective date of July 1, 2005 |
| We continue to evaluate potential modifications to our universal life products with secondary guarantees that may be made in response to the revised regulation |
| Although the impact of this proposal on future sales of guaranteed no-lapse UL cannot be predicted, it may result in a price increase for such products, and therefore, may lower sales of such products |
| Further, we may be unable to maintain all required licenses and approvals and our business may not fully comply with the wide variety of applicable laws and regulations or the relevant authority’s interpretation of the laws and regulations, which may change from time to time |
| Also, regulatory authorities have relatively broad discretion to grant, renew or revoke licenses and approvals |
| If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or impose substantial fines |
| Further, insurance regulatory authorities have relatively broad discretion to issue orders of supervision, which permit such authorities to supervise the business and operations of an insurance company |
| As of December 31, 2005, no state insurance regulatory authority had imposed on us any substantial fines or revoked or suspended any of our licenses to conduct insurance business in any state or issued an order of supervision with respect to our insurance subsidiaries, which would have a material adverse effect on our results of operations or financial condition |
| In addition, LFA and LFD as well as our variable annuities and variable life insurance products are subject to regulation and supervision by the SEC and the NASD Our Investment Management segment, like other investment management groups, is subject to regulation and supervision by the SEC, NASD, MSRB, the Pennsylvania Department of Banking and jurisdictions of the states, territories and foreign countries in which they are licensed to do business |
| Lincoln UK is subject to regulation by the FSA in the UK These laws and regulations generally grant supervisory agencies and self-regulatory organizations broad administrative powers, including the power to limit or restrict the subsidiaries from carrying on their businesses in the event that they fail to comply with such laws and regulations |
| 26 _________________________________________________________________ Many of the foregoing regulatory or governmental bodies have the authority to review our products and business practices and those of our agents and employees |
| In recent years, there has been increased scrutiny of our businesses by these bodies, which has included more extensive examinations, regular “sweep” inquiries and more detailed review of disclosure documents |
| These regulatory or governmental bodies may bring regulatory or other legal actions against us if, in their view, our practices, or those of our agents or employees, are improper |
| These actions can result in substantial fines, penalties or prohibitions or restrictions on our business activities and could have a material adverse effect on our business, results of operations or financial condition |
| For further information on regulatory matters relating to us, see “Regulatory Matters” above |
| Legal and regulatory actions are inherent in our businesses and could result in financial losses or harm our businesses |
| 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, the 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 |
| In addition, we are, and in the future may be, subject to legal actions in the ordinary course of our insurance and investment management operations, both domestically and internationally |
| Pending legal actions include proceedings relating to aspects of our businesses and operations that are specific to us, and proceedings that are typical of the businesses in which we operate |
| Some of these proceedings have been brought on behalf of various alleged classes of complainants |
| In certain of these matters, the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages |
| Substantial legal liability in these or future legal or regulatory actions could have a material financial effect or cause significant harm to our reputation, which in turn could materially harm our business prospects |
| EGTRRA as well as the 2003 Act contain provisions that will, over time, significantly lower individual tax rates |
| This will have the effect of reducing the benefits of deferral on the build-up of value of annuities and life insurance products |
| EGTRRA also includes provisions that will eliminate, over time, the estate, gift and generation-skipping taxes and partially eliminate the step-up in basis rule applicable to property held in a decedent’s estate |
| The Bush Administration continues to propose that many of the foregoing rate reductions be made permanent, as well as several tax-favored savings initiatives, such as the elimination of the estate tax, that, if enacted by Congress, could also adversely affect the sale of our annuity, life and tax-qualified retirement products and increase the surrender of such products |
| Although we cannot predict the overall effect on the sales of our products of the tax law changes included in these Acts, some of these changes might hinder our sales and result in the increased surrender of insurance products |
| Our risk management policies and procedures may leave us exposed to unidentified or unanticipated risk, which could negatively affect our businesses or result in losses |
| We have devoted significant resources to develop our risk management policies and procedures and expect to continue to do so in the future |
| Nonetheless, our policies and procedures to identify, monitor and manage risks may not be fully effective |
| As a result, these methods may not predict future exposures, which could be significantly greater than the historical measures indicate, such as the risk of pandemics causing a large number of deaths |
| Other risk management methods depend upon the evaluation of information regarding markets, clients, catastrophe occurrence or other matters that is publicly available or otherwise accessible to us, which may not always be accurate, complete, up-to-date or properly evaluated |
| Management of operational, legal and regulatory risks requires, among other things, policies and procedures to record properly and verify a large number of transactions and events, and these policies and procedures may not be fully effective |
| Because we are a holding company with no direct operations, the inability of our subsidiaries to pay dividends to us in sufficient amounts would harm our ability to meet our obligations and pay future dividends |
| We are a holding company, and we have no direct operations |
| Our principal asset is the capital stock of our insurance and investment management subsidiaries |
| Our ability to meet our obligations for payment of interest and principal on 27 _________________________________________________________________ outstanding debt obligations and to pay dividends to shareholders and corporate expenses depends upon the surplus and earnings of our subsidiaries and the ability of our subsidiaries to pay dividends or to advance or repay funds to us |
| Payments of dividends and advances or repayment of funds to us by our subsidiaries are restricted by the applicable laws of their respective jurisdictions, including laws establishing minimum solvency and liquidity thresholds |
| Changes in these laws, such as New York State amendments to its statutory reserve requirements, can constrain the ability of our subsidiaries to pay dividends or to advance or repay funds to us in sufficient amounts and at times necessary to meet our debt obligations and corporate expenses |
| We face a risk of non-collectibility of reinsurance, which could materially affect our results of operations |
| We follow the insurance practice of reinsuring with other insurance and reinsurance companies a portion of the risks under the policies written by our insurance subsidiaries (known as ceding) |
| At the end of 2005, we have ceded approximately dlra256dtta7 billion of life insurance in-force to reinsurers for reinsurance protection |
| Although reinsurance does not discharge our subsidiaries from their primary obligation to pay policyholders for losses insured under the policies we issue, reinsurance does make the assuming reinsurer liable to the insurance subsidiaries for the reinsured portion of the risk |
| As of December 31, 2005, we had dlra6dtta9 billion of reinsurance receivables from reinsurers for paid and unpaid losses, for which they are obligated to reimburse us under our reinsurance contracts |
| Of this amount, dlra4dtta1 billion relates to the sale of our reinsurance business to Swiss Re in 2001 through an indemnity reinsurance agreement |
| During 2004, Swiss Re funded a trust to support this business |
| The balance in the trust changes as a result of ongoing reinsurance activity and was dlra1dtta7 billion at December 31, 2005 |
| In addition, should Swiss Re Life & Health America Inc |
| (“SRLHA”) financial strength ratings drop below either S&P AA- or AM Best A or their NAIC risk based capital ratio fall below 250prca, assets equal to the reserves supporting business reinsured must be placed into a trust according to pre-established asset quality guidelines |
| Furthermore, approximately dlra2dtta0 billion of the Swiss Re treaties are funds-withheld structures where we have a right of offset on assets backing the reinsurance receivables |
| The balance of the reinsurance is due from a diverse group of reinsurers |
| The collectibility of reinsurance is largely a function of the solvency of the individual reinsurers |
| We perform annual credit reviews on our reinsurers, focusing on, among other things, financial capacity, stability, trends and commitment to the reinsurance business |
| We also require assets in trust, letters of credit or other acceptable collateral to support balances due from reinsurers not authorized to transact business in the applicable jurisdictions |
| Despite these measures, a reinsurer’s insolvency, inability or unwillingness to make payments under the terms of a reinsurance contract, especially Swiss Re, could have a material adverse effect on our results of operations and financial condition |
| Significant adverse mortality experience may result in the loss of, or higher prices for, reinsurance |
| We reinsure approximately 85prca to 90prca of the mortality risk on fully underwritten newly issued life insurance contracts |
| Our current policy is to retain no more than dlra5dtta0 million on a single insured life issued on fixed and variable universal life insurance contracts |
| Additionally, the retention per single insured life for term life insurance and for Corporate Owned Life Insurance (COLI) is dlra1 million and dlra2 million, respectively |
| Beginning in September 2005, we changed our reinsurance program for our primary term products from coinsurance to renewable term and from 90prca to 80prca on a first dollar quota share basis |
| In January 2006, we changed this program from 80prca first dollar quota share to an excess of retention program |
| In a coinsurance program, the reinsurer shares proportionately in all financial terms of the reinsured policies, ie premiums, expenses, claims, etc based on their respective quota share of the risk |
| In a renewable term program, the reinsurer is paid a renewable term premium to cover the proportionate share of mortality risk assumed by the reinsurer |
| In a first dollar quota share program, the reinsurer receives a proportionate share of all risks issued based on their respective quota share of the risk |
| In an excess of retention program, the reinsurer assumes a proportionate share of risks that exceed our per life retention |
| These retention limits are reviewed regularly for continued appropriateness and may be changed in the future |
| If we were to experience adverse mortality experience, a significant portion of that would be reimbursed by our reinsurers |
| Prolonged or severe adverse mortality experience could result in increased reinsurance costs and ultimately, reinsurers not willing to offer coverage |
| If we are unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient, we would either have to be willing to accept an increase in our net exposures or revise our pricing to reflect higher reinsurance premiums |
| If this were to occur, we may be exposed to reduced profitability and cash flow strain or we may not be able to price new business at competitive rates |
| We may be unable to attract and retain sales representatives and other employees, particularly financial advisors |
| We compete to attract and retain financial advisors, portfolio managers and other employees, as well as independent distributors of our products |
| Intense competition exists for persons and independent distributors with demonstrated ability |
| 28 _________________________________________________________________ We compete with other financial institutions primarily on the basis of our products, compensation, support services and financial position |
| Sales in our businesses and our results of operations and financial condition could be materially adversely affected if we are unsuccessful in attracting and retaining financial advisors, portfolio managers and other employees, as well as independent distributors of our products |
| For example, in 2005, we changed the compensation structure for LFA’s financial advisors |
| Although we believe the new compensation structure will benefit us, our policyholders and our planners, if a significant number of financial advisors terminate their affiliation with us, it could have a negative impact on our sales and ability to retain existing in-force business |
| During 2005, the number of new planners recruited to LFA was down relative to prior years, which is partially a result of LFA focusing more on recruiting experienced planners than in it had in prior years |
| Our sales representatives are not captive and may sell products of our competitors |
| We sell our annuity and life insurance products through independent sales representatives |
| These representatives are not captive, which means they may also sell our competitors’ products |
| If our competitors offer products that are more attractive than ours, or pay higher commission rates to the sales representatives than we do, these representatives may concentrate their efforts in selling our competitors’ products instead of ours |
| Intense competition could negatively affect our ability to maintain or increase our profitability |
| Our businesses are intensely competitive |
| We compete based on a number of factors including name recognition, service, the quality of investment advice, investment performance, product features, price, perceived financial strength, and claims-paying and credit ratings |
| Our competitors include insurers, broker-dealers, financial advisors, asset managers and other financial institutions |
| A number of our business units face competitors that have greater market share, offer a broader range of products or have higher claims-paying or credit ratings than we do |
| In recent years, there has been substantial consolidation and convergence among companies in the financial services industry resulting in increased competition from large, well-capitalized financial services firms |
| Many of these firms also have been able to increase their distribution systems through mergers or contractual arrangements |
| Furthermore, larger competitors may have lower operating costs and an ability to absorb greater risk while maintaining their financial strength ratings, thereby allowing them to price their products more competitively |
| We expect consolidation to continue and perhaps accelerate in the future, thereby increasing competitive pressure on us |
| Losses due to defaults by others could reduce our profitability or negatively affect the value of our investments |
| Third parties that owe us money, securities or other assets may not pay or perform their obligations |
| These parties include the issuers whose securities we hold, borrowers under the mortgage loans we make, customers, trading counterparties, counterparties under swaps and other derivative contracts, reinsurers and other financial intermediaries |
| These parties may default on their obligations to us due to bankruptcy, lack of liquidity, downturns in the economy or real estate values, operational failure, corporate governance issues or other reasons |
| A downturn in the US and other economies could result in increased impairments |
| Anti-takeover provisions could delay, deter or prevent our change in control even if the change in control would be beneficial to LNC shareholders |
| We are an Indiana corporation subject to Indiana state law |
| Certain provisions of Indiana law could interfere with or restrict takeover bids or other change in control events affecting us |
| Also, provisions in our articles of incorporation, bylaws and other agreements to which we are a party could delay, deter or prevent our change in control, even if a change in control would be beneficial to shareholders |
| In addition, under Indiana law, directors may, in considering the best interests of a corporation, consider the effects of any action on stockholders, employees, suppliers and customers of the corporation and the communities in which offices and other facilities are located, and other factors the directors consider pertinent |
| One statutory provision prohibits, except under specified circumstances, LNC from engaging in any business combination with any shareholder who owns 10prca or more of our common stock (which shareholder, under the statute, would be considered an “interested shareholder”) for a period of five years following the time that such shareholder became an interested shareholder, unless such business combination is approved by the board of directors prior to such person becoming an interested shareholder |
| In addition, our articles of incorporation contain a provision requiring holders of at least three-fourths of our voting shares then outstanding and entitled to vote at an election of directors, voting together, to approve a transaction with an interested shareholder rather than the simple majority required under Indiana law |
| In addition to the anti-takeover provisions of Indiana law, there are other factors that may delay, deter or prevent our change in control |
| As an insurance holding company, we are regulated as an insurance holding company and are subject to 29 _________________________________________________________________ the insurance holding company acts of the states in which our insurance company subsidiaries are domiciled |
| The insurance holding company acts and regulations restrict the ability of any person to obtain control of an insurance company without prior regulatory approval |
| Under those statutes and regulations, without such approval (or an exemption), no person may acquire any voting security of a domestic insurance company, or an insurance holding company which controls an insurance company, or merge with such a holding company, if as a result of such transaction such person would “control” the insurance holding company or insurance company |
| “Control” is generally defined as the direct or indirect power to direct or cause the direction of the management and policies of a person and is presumed to exist if a person directly or indirectly owns or controls 10prca or more of the voting securities of another person |
| Risk Factors in connection with the Jefferson-Pilot Merger The announcement and pendency of the merger with Jefferson-Pilot, whether or not the merger is completed, could cause disruptions in our and Jefferson-Pilot’s businesses, which could have an adverse effect on our business and financial results |
| Whether or not the merger is completed, the announcement and pendency of the merger could cause disruptions in our and Jefferson-Pilot’s businesses |
| Specifically: · current and prospective employees and agents may experience uncertainty about their future roles with the resulting company, which might adversely affect our and Jefferson-Pilot’s ability to retain key managers and other employees and agents; and · the attention of our and Jefferson-Pilot’s management may be directed toward the completion of the merger and not their ongoing businesses |
| The merger is subject to certain closing conditions that, if not satisfied or waived, will result in the merger not being completed, which may cause the market price of our common stock to decline |
| The merger is subject to customary conditions to closing, including the receipt of required regulatory approvals and approvals of our and Jefferson-Pilot’s shareholders |
| If any condition to the merger is not satisfied or waived, to the extent permitted by law or stock exchange rule, the merger will not be completed |
| In addition, we and Jefferson-Pilot may terminate the merger agreement under certain circumstances |
| If we and Jefferson-Pilot do not complete the merger, the market price of our common stock may fluctuate to the extent that the current market prices of those shares reflect a market assumption that the merger will be completed |
| Further, whether or not the merger is completed, we will also be obligated to pay certain investment banking, financing, legal and accounting fees and related expenses in connection with the merger, which could negatively impact results of operations when incurred |
| In addition, neither company would realize any of the expected benefits of having completed the merger |
| If the merger is not completed, we cannot assure our shareholders that additional risks will not materialize or not materially adversely affect our business, financial results, financial condition and stock prices |
| The anticipated benefits of combining Jefferson-Pilot and us may not be realized |
| We and Jefferson-Pilot entered into the merger agreement with the expectation that the merger would result in various benefits including, among other things, benefits relating to enhanced revenues, a strengthened market position for the resulting company in its businesses, cross-selling opportunities, cost savings and operating efficiencies |
| Achieving the anticipated benefits of the merger is subject to a number of uncertainties, including whether we and Jefferson-Pilot are integrated in an efficient and effective manner, and general competitive factors in the marketplace |
| Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy and could materially impact the resulting company’s business, financial condition and operating results |
| We may have difficulty integrating Jefferson-Pilot and may incur substantial costs in connection with the integration |
| We may experience material unanticipated difficulties or expenses in connection with integrating Jefferson-Pilot, especially given the relatively large size of the merger |
| Integrating Jefferson-Pilot with us will be a complex, time-consuming and expensive process |
| Before the merger, we and Jefferson-Pilot operated independently, each with its own business, products, customers, employees, culture and systems |
| 30 _________________________________________________________________ We may face substantial difficulties, costs and delays in integrating Jefferson-Pilot |
| These factors may include: · perceived adverse changes in product offerings available to clients or client service standards, whether or not these changes do, in fact, occur; · conditions imposed by regulators in connection with their decisions whether to approve the merger; · potential charges to earnings resulting from the application of purchase accounting to the transaction; · the retention of existing clients, key portfolio managers, sales representatives and wholesalers of each company; and · retaining and integrating management and other key employees of the resulting company |
| After the merger, we may seek to combine certain operations and functions using common information and communication systems, operating procedures, financial controls and human resource practices, including training, professional development and benefit programs |
| We may be unsuccessful or delayed in implementing the integration of these systems and processes |
| Any one or all of these factors may cause increased operating costs, worse than anticipated financial performance or the loss of clients, employees and agents |