2016 ANNUAL REPORT TO SHAREHOLDERS - Lincoln Financial …

Lincoln National Corporation?

2016 ANNUAL REPORT TO SHAREHOLDERS

2016 Annual Letter to Shareholders

Dear Shareholders,

As a leading public life insurance company in the United States, we are committed to creating long-term value for our shareholders. This is enabled by our over 9,000 talented employees delivering products and services that offer financial security and peace of mind to our 17 million customers.

Our business model has a demonstrated track record of stability and financial success. Since 2009, we have grown income from operations per share at a 13% annual rate, improved our operating return on equity by 360 basis points, increased book value per share, excluding accumulated other comprehensive income ("AOCI"), at a 7% annual rate and returned $5 billion of capital to shareholders through share buybacks and dividends.1

Included in this solid long-term performance were strong results in 2016 as we again delivered consistent and profitable growth including: ? Income from operations per share of $6.50, a record and up 19%1 ? Assets under management totaled $229 billion, a year-end record ? Book value per share, excluding AOCI, exceeded $57, up 9%1 ? Operating return on equity, excluding AOCI, was 12%1 ? Capital returned to shareholders remained robust at $1.1 billion or 72% of operating earnings ? Statutory capital as of year-end approached $9 billion, up 5%

We are particularly pleased with this year's results given the backdrop of global economic and political uncertainty. As a company that recently celebrated our 110th anniversary, we have a history of responding and successfully adapting to various environments, including regulatory changes, shifts in consumer preferences and technological advancements. Therefore, we truly believe companies need to stay attuned to cyclical and structural shifts in the marketplace and the impact those shifts have on all stakeholders.

A recent notable shift for us on the regulatory front relates to the Department of Labor ("DOL") Fiduciary Rule. We have supported the intent of the DOL rule and its overarching goal to further ensure that our clients' best interests are served while working to improve parts of the rule. The DOL acknowledged in the final rule that both commissions and fees can be appropriate forms of compensation, and we have moved to refresh and introduce new annuities that maintain invaluable guaranteed lifetime income benefits while providing compensation choice for consumers.

To respond to the rapid pace of technological advancement, we recently hired a Chief Digital Officer and launched another dimension of our technology strategy focused on digitization. The "born digital" companies are raising customer service expectations, and we are moving to meet these expectations. Our primary focus is to improve our customers' experiences and increase our efficiency. We have already seen benefits from leveraging digital and mobile capabilities. For example, in our Retirement Plan Services ("RPS") business, we have enhanced and simplified the web experience for participants with the launch of an easy "click to contribute" feature. Since inception, we have seen more than 19,000 participants better prepare for retirement by increasing contribution rates, securing $45 million in additional retirement savings.

We expect our digital strategy to result in additional successes and further enhance our reputation as a premier provider of products that meet critical consumer needs that are unmet by other industries. Our Life Insurance business enables legacy planning, and last year we paid nearly $2 billion in claims that helped secure families' futures following the passing of a loved one. Our Annuities business has nearly $70 billion of account value in products that offer guaranteed lifetime income, which fills a void from most corporations eliminating defined benefit pensions.

We also recognize the importance of a vibrant workforce. We invest in attracting and developing our workforce to ensure we have a competitive edge from an internal and external perspective. Talent is a key driver at Lincoln. Since 2009, we have increased our employee base and have seen salaries for non-executives increase at a faster rate than the average wages for the United States population. We couple this with a deep commitment to employee development and promotion opportunities, diversity and inclusion, retirement planning and our role in the broader community.

Notably, all Lincoln employees are deeply connected to the communities within the key cities where we operate. Our employees contribute thousands of volunteer hours, and our Lincoln Financial Foundation reinforces our commitment through significant charitable investments to more than 400 nonprofits.

We are investing for long-term growth through approximately $1 billion in annual capital allocated towards writing new business and a commitment to employee enrichment. However, we generate a significant amount of capital, leaving us with excess capital that we have efficiently returned to shareholders. Over the past 6 years the majority, or $4 billion, of capital returned to shareholders has been put towards buybacks, and our share price as of December 31, 2016, was 76% above our average repurchase price over that period.

____________________

1 A reconciliation of non-GAAP measures to their most comparable GAAP measures appears on the next page.

Importantly, our long-term commitments and alignment with all our key stakeholders are rewarding shareholders. In 2016, Lincoln's share price increased 32% -- outperforming our peers, which increased by an average of 18%.2 This marked the fourth consecutive three-year cycle where our total return to shareholders was among the best in the industry. Over this time, our share price increased 138% compared to a 49% gain for our peer group.2

As we look forward, we remain confident that our key strategic objectives ? manufacture only retail products, target the fastest growing segments of the broader U.S. market, maintain industry leading risk management, utilize digitization to drive a differentiated customer experience and actively direct capital to the highest and best uses ? will drive long-term, sustainable growth in our four business segments: Life Insurance, Annuities, RPS and Group Protection.

On a personal note, we want to express our gratitude to William (Billy) Porter Payne, who has announced plans to retire and will not be standing for re-election to our Board of Directors this year. Billy has provided thoughtful counsel and guidance, and we are sincerely appreciative of his many years of dedication and leadership, which resulted in significant contributions to Lincoln.

In closing, on behalf of Lincoln's Board of Directors, management and all our employees, we want to thank you for your continued trust and investment. We are excited about the opportunities ahead and our ability to continue creating long-term value for our shareholders.

Dennis R. Glass President and CEO

William H. Cunningham Chairman of the Board

March 27, 2017

Forward-Looking Statements ? Cautionary Language Statements in this letter that are not historical facts are forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements. See "Forward-Looking Statements ? Cautionary Language" beginning on page 34 and "Risk Factors" beginning on page 16.

Definitions of Non-GAAP Measures Income (loss) from operations, operating revenues and operating return on equity ("ROE") are financial measures we use to evaluate and assess our results. These financial measures are non-GAAP financial measures and do not replace GAAP revenues, net income (loss) and ROE, the most directly comparable GAAP measures.

Income (Loss) from Operations

Income (loss) from operations is GAAP net income excluding the after-tax effects of the following items, as applicable: ? Realized gains and losses associated with the following ("excluded realized gain (loss)"):

Sales or disposals and impairments of securities; Changes in the fair value of derivatives, embedded derivatives within certain reinsurance arrangements and trading securities; Changes in the fair value of the derivatives we own to hedge our guaranteed death benefit ("GDB") riders within our variable

annuities; Changes in the fair value of the embedded derivatives of our guaranteed living benefit ("GLB") riders reflected within variable

annuity net derivative results accounting for at fair value; Changes in the fair value of the derivatives we own to hedge our GLB riders reflected within variable annuity net derivative

results; and Changes in the fair value of the embedded derivative liabilities related to index call options we may purchase in the future to

hedge contract holder index allocations applicable to future reset periods for our indexed annuity products accounted for at fair value;

? Changes in reserves resulting from benefit ratio unlocking on our GDB and GLB riders;

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

? Gains (losses) on early extinguishment of debt;

? Losses from the impairment of intangible assets;

? Income (loss) from discontinued operations; and

? Income (loss) from the initial adoption of new accounting standards.

____________________

2 Lincoln defines its peer group for 2016 as AEGON N.V.; Ameriprise Financial, Inc.; Manulife Financial Corp.; MetLife, Inc.; Principal Financial Group, Inc.; Prudential Financial, Inc.; Sun Life Financial, Inc.; Torchmark Corp.; Unum Group; and Voya Financial, Inc. Prior period performance also includes Genworth Financial; however, it excludes AEGON N.V.; Ameriprise Financial, Inc.; and Voya Financial, Inc., which were not identified as peers in prior year proxy statements.

Operating Revenues

Operating revenues represent GAAP revenues excluding the pre-tax effects of the following items, as applicable: ? Excluded realized gain (loss); ? Revenue adjustments from the initial adoption of new accounting standards; ? Amortization of DFEL arising from changes in GDB and GLB benefit ratio unlocking; and ? Amortization of deferred gains arising from reserve changes on business sold through reinsurance.

Operating ROE

Operating ROE measures how efficiently we generate profits from the resources provided by our net assets. Operating ROE as used herein is calculated by dividing income (loss) from operations by average equity, excluding AOCI.

Book Value Per Share Excluding AOCI

Book value per share excluding AOCI is calculated based upon a non-GAAP financial measure. It is calculated by dividing stockholders' equity excluding AOCI by common shares outstanding. We provide book value per share excluding AOCI to enable investors to analyze the amount of our net worth that is primarily attributable to our business operations. Management believes book value per share excluding AOCI is useful to investors because it eliminates the effect of items that can fluctuate significantly from period to period, primarily based on changes in interest rates. Book value per share is the most directly comparable GAAP measure.

A reconciliation of net income (loss) to income (loss) from operations (in millions of dollars, except per share data) is presented below:

Total Revenues Less:

Excluded realized gain (loss) Amortization of DFEL on benefit ratio unlocking Amortization of deferred gains arising from reserve

changes on business sold through reinsurance Total Operating Revenues

Net Income (Loss) Available to Common Stockholders ? Diluted

Less: Preferred stock dividends and accretion of discount Adjustment for deferred units of LNC stock in our deferred compensation plans (1)

Net Income (Loss) Less (2):

Excluded realized gain (loss) Benefit ratio unlocking Income (loss) from reserve changes (net of related

amortization) on business sold through reinsurance Gain (loss) on early extinguishment of debt Impairment of intangibles Income (loss) from discontinued operations Income (Loss) from Operations

Weighted-Average Shares ? Diluted

Earnings (Loss) Per Common Share ? Diluted Net income (loss) Income (loss) from operations (3)

Average Stockholders' Equity Average equity, including average AOCI Average AOCI

Average equity, excluding AOCI

ROE, Including AOCI Net income (loss)

ROE, Excluding AOCI Income (loss) from operations

For the Years Ended December 31,

2016

2015

2009

$

13,330 $

13,572 $

8,473

(518) 1

(329) (2)

(1,229) (4)

3

3

$

13,844 $

13,900 $

3 9,703

$

1,192 $

1,150 $

(639)

-

-

(34)

1,192

(4) 1,154

(605)

(337) 28

(214) (29)

(800) 90

2

2

(41)

-

-

-

-

-

$

1,540 $

1,395 $

2 42 (710) (73) 844

236.8

254.9

285.6

$

5.03 $

4.51 $

(2.23)

6.50

5.46

2.83

$

15,237 $

15,001 $

8,284

2,427

2,308

(1,717)

$

12,810 $

12,693 $

10,001

7.8%

7.7%

-7.3%

12.0%

11.0%

8.4%

(1) The numerator used in the calculation of our diluted EPS is adjusted to remove the mark-to-market adjustment for deferred units of LNC stock in our deferred compensation plans if the effect of equity classification would result in a more dilutive EPS.

(2) We use our prevailing federal income tax rate of 35% while taking into account any permanent differences for events recognized differently in our financial statements and federal income tax returns when reconciling our non-GAAP measures to the most comparable GAAP measure.

(3) The income used in the 2009 calculation of our diluted EPS is our operating income, reduced by preferred stock dividends and accretion of discount. The compounded annual growth rate ("CAGR") for these periods was 13%.

A reconciliation of book value per share to book value per share excluding AOCI is presented below:

Book value per share, including AOCI Per share impact of AOCI Book value per share, excluding AOCI

As of December 31,

2016

2015

2009

$

63.97 $

55.85 $

34.90

6.92

3.47

0.87

57.05

52.38

35.77

CAGR 2016 - 2009

9%

7%

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