23923_COV_BC.qxp 3/22/2007 7:18 AM Page 1 Lincoln Financial Group® Hello future.SM Lincoln National Corporation 2006 Annual Report to Shareholders To Our Shareholders: The Year in Review In a year marked by exciting challenges and new opportunities, Lincoln Financial Group demonstrated its ability to grow and achieve great success. Our employees worked diligently to integrate two great companies, create new reporting structures and align all our businesses under a single guiding strategy. All this was accomplished while delivering uninterrupted performance across our retail product lines, reaching our major integration milestones, and reporting record earnings per share. Strong Financial Performance • Net income of $1.32 billion, or a record $5.13 per diluted share • $29.1 billion in consolidated retail deposits • Consolidated retail net flows of $6.3 billion • $15.1 billion and $8.0 billion in full-year institutional deposits and net flows, respectively • $234 billion consolidated assets under management • Total shareholder return approaches 30 percent and surpasses the S&P 500 by more than 10 percentage points Our strong earnings and capital position allowed us to return $1.4 billion of capital to shareholders in 2006 through stock repurchase activity and dividend payments. Merger Integration Update We began our merger integration with Jefferson-Pilot Financial and in the process lived up to our promises to investors. The merger increased our distribution breadth throughout our retail distribution channels. In addition, the merger has expanded our life and annuity product offerings available to our existing channels, and increased our capital position to support growth. We added more scale to our operations, and positioned ourselves for growth in the future. As evidenced by this past year, the growth in net income was positively impacted by the merger, which closed on April 3, 2006. Since the merger, our leadership presence in the life insurance industry has increased in all the channels we serve. Our key integration accomplishments include appointing our highly experienced leadership team; creating a comprehensive cost system that provided a financial map of our businesses; developing a uniform and coordinated planning and budgeting process; and beginning to harmonize compensation and benefits programs. Retirement Income Security At Lincoln Financial Group we recognize that individuals go through distinct phases once they “retire.” It is our intent to help clients do more than create wealth; we provide solutions that give them the means and confidence to embrace their future through all life’s later transitions. This, we believe, is the greatest opportunity for sustainable, profitable growth for Lincoln and its advisors. This strategic intent has been embedded into all of our businesses. The Retirement Income Security Ventures group was established in 2006 to collaborate across all Lincoln business units to align products, services and other solutions to address the needs of clients, particularly our target audience of mass affluent boomers. Led by Heather Dzielak, senior vice president, the group is also engaged in research and development to understand the customer experience. Branding continues as a key element of our strategy. Our efforts are focused primarily on financial intermediaries and affluent customers, and this year we recognize the critical importance of building an internal brand culture to ensure that customer- facing employees deliver the brand experience. We are looking at all our touchpoints to make certain they drive a consistent brand experience for all employees, intermediaries and customers. Key Accomplishments Our corporate strategy was designed to propel the strategies of our business segments and, in turn, drive performance and leverage the strengths of the merged organization. Lincoln participates in many markets with multiple products and services. We aim to add market share in each of these, a goal that was advanced in 2006. Lincoln also laid the groundwork for a larger, more powerful unified product suite to come in 2007. Lincoln Financial Distributors (LFD) Terry Mullen was named president of LFD in December. Previously, he was senior vice president and head of Sales for LFD. LFD just keeps getting bigger and stronger. With the successful closing of the merger, LFD combined its distribution forces with 277 external and 202 internal wholesalers. Fifty percent of the 479 wholesalers have more than two years of tenure, which helps build momentum and create success. Generally, the longer a wholesaler is with one firm, the more productive they become. We strongly believe that LFD will continue to be the engine of growth for Lincoln. We expect the consistent success of our unique solutions-based distribution model to drive further gains in market share across all product categories. Additionally, we will continue to invest in wholesaler expansion to foster business growth and our goal to be the number one distribution firm in the industry as we deliver on our Retirement Income Security brand promise to all our customers. Individual Markets Individual Markets provides individual annuity and life products through two business segments, both led by Mark Konen. On the annuity side the product suite includes fixed, indexed, and variable annuities that are used as wealth accumulation and protection vehicles. The Life Insurance segment offers wealth protection and transfer opportunities through term insurance, a linked-benefit product, which is a universal life insurance policy linked with riders that provide for long-term costs, and both single and survivorship versions of universal life and variable universal life. This product balance addresses the various phases of the retirement wealth cycle and positions Lincoln to provide comprehensive solutions. Individual Annuities In 2006, we continued to experience success with our first wave of industry-leading Retirement Income Security products. One clear measure is the elections of the i4LIFE® benefit, which in 2005 surpassed the $1 billion mark, and our 2006 results were up more than 50 percent. In addition, our Smart Security Advantage gained market acceptance, with elections of this rider totaling 46% of individual variable annuity deposits in 2006. Individual Life Insurance In a product line heavily impacted by integration efforts, our distribution and manufacturing organizations remained focused on new business as illustrated by life insurance sales increasing 9% above combined Lincoln and Jefferson-Pilot results in 2005. We remain committed to maintaining appropriate risk management and pricing discipline despite the competitive environment that existed in 2006. Employer Markets In conjunction with integrating Lincoln and Jefferson-Pilot, we created a new Employer Markets business unit under the leadership of Wes Thompson who was named president. He was formerly the chief executive officer and president of LFD. The creation of this business unit allows us to better capitalize on the success we have already achieved in this marketplace, including more than $35 billion in assets under management and administration, and on trends in defined benefit plans. These trends include a decline in defined benefit pension plans and an increase in voluntary defined contribution plans, such as 401(k)s and 403(b)s, and similar trends toward voluntary group life and disability, giving way to a convergence of distribution strategies. During 2006, we saw positive flows in the defined contribution arena. Also, the leadership team sought opportunities to capitalize on revenue synergies by leveraging our group life, disability and dental business products with our defined contribution platform for a single employer solution. We also believe that the provisions in the Pension Protection Act of 2006 will also add growth opportunities for Employer Markets. Lincoln is committed to investing in this high-potential business to capitalize on these opportunities. Lincoln Financial Network (LFN) Bob Dineen continues as president of LFN. The structure he developed after the merger was announced – with emphasis on growth and recruiting, service and value of affiliation, and risk management – is a success as LFN has emerged with a larger, more diverse and powerful producer force of 4,000 and relationships with more than 10,000 general agents around the country. Building upon the foundation of a strong unified product portfolio, tremendous advisor support and continued investment for growth, LFN is well-positioned for a successful 2007. Investment Management The Investment Management segment has experienced exceptional momentum during the past few years, and 2006 was no exception. The segment experienced strong deposits and net flows, despite the closing of two highly successful strategies early in 2006 due to capacity constraints. Total net flows at year-end 2006 as a percentage of assets under management at the beginning of the year were 12%, among the highest in the industry. Patrick Coyne, a 17-year veteran of Delaware Investments with expertise in managing both fixed income and equity teams and portfolios, was named president of Delaware Investments in 2006. Pat has been an integral part of attracting many new investment teams to Delaware Investments throughout the past few years. In 2006, we expanded our in-house capabilities with a new Emerging Markets team. Delaware Investments is attracting a great deal of attention from the industry as one of the top managers of retail