SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1994 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 (I.R.S. Employer
incorporation or organization) Identification No.)
200 East Berry Street, Fort Wayne, Indiana 46802-2706
(Address of Principal Executive Offices)
Registrant's telephone number (219) 455-2000
Common Stock Outstanding April 29, 1994 94,740,371
Indicate by check mark whether 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 for 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 [ ]
The exhibit index to this report is located on page 16.
Page 1 of 17
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2
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
<TABLE>
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LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31 December 31
(000'S omitted) 1994 1993
ASSETS
Investments:
<S> <C> <C>
Securities available-for-sale, at fair value:
Fixed maturity (cost 1994 - $21,053,621;
1993 - $22,219,285) ------------------ $21,585,299 $23,964,335
Equity (cost 1994 - $901,884;
1993 - $896,477) --------------------- 1,039,410 1,080,301
Mortgage loans on real estate ------------ 3,030,970 3,300,951
Real estate ------------------------------ 649,619 633,103
Policy loans ----------------------------- 527,584 595,085
Other investments ------------------------ 158,649 158,170
Total Investments ---------------------- 26,991,531 29,731,945
Investment in unconsolidated affiliates ---- 108,432 --
Cash and invested cash --------------------- 1,001,206 709,664
Property and equipment --------------------- 182,731 233,467
Deferred acquisition costs ----------------- 2,068,023 2,011,131
Premiums and fees receivable --------------- 647,290 601,883
Accrued investment income ------------------ 414,359 413,144
Assets held in separate accounts ----------- 12,667,455 12,430,577
Federal income taxes ----------------------- 200,636 --
Amounts recoverable from reinsurers -------- 1,535,671 1,460,038
Goodwill ------------------------------- 151,081 228,530
Other assets ---------------------------- 773,413 559,982
Total Assets -------------------------- $46,741,828 $48,380,361
See notes to consolidated financial statements on page 7.
</TABLE>
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3
<TABLE>
<CAPTION>
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
-CONTINUED-
March 31 December 31
(000's omitted) 1994 1993
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
<S> <C> <C>
Policy liabilities and accruals:
Future policy benefits and
losses, claims and loss expenses ------ $11,218,248 $12,652,036
Unearned premiums -------------------- 827,635 858,805
Total Policy Liabilities and Accruals - 12,045,883 13,510,841
Contractholder funds -------------------- 15,288,175 14,872,141
Liabilities related to separate accounts -- 12,667,455 12,430,577
Federal income taxes ------------------ -- 150,951
Short-term debt ------------------------ 414,650 351,418
Long-term debt ----------------------- 325,610 335,097
Other liabilities ------------------------- 2,396,843 2,657,015
Total Liabilities -------------------- - 43,138,616 44,308,040
Shareholders' Equity:
Series A Preferred Stock
(3/31/94 liquidation value - $3,698) ----- 1,518 1,553
Series E Preferred Stock
(3/31/94 liquidation value - $151,569) --- 151,206 151,206
Series F Preferred Stock
(3/31/94 liquidation value - $158,707) --- 158,707 158,707
Common Stock ------------------------ 565,136 543,659
Earned surplus --------------------- 2,411,629 2,303,731
Foreign currency translation adjustment --- (453) (1,214)
Net unrealized gain on securities
available-for-sale ------------------ 315,469 914,679
Total Shareholders' Equity -------------- 3,603,212 4,072,321
Total Liabilities
and Shareholders' Equity -------------- $46,741,828 $48,380,361
See notes to consolidated financial statements on page 7.
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4
<TABLE>
<CAPTION>
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31
(000's omitted) 1994 1993
Revenue:
<S> <C> <C>
Insurance premiums --------------------- $1,279,834 $1,266,829
Insurance fees -------------------------- 105,833 111,098
Net investment income ------------------- 501,841 511,834
Equity in earnings of unconsolidated
affiliates ------------------------------- 654 --
Realized gain on investments ---------------- 38,095 9,366
Gain on sale of subsidiary ------------------ 44,058 --
Other --------------------------------- 36,521 39,880
Total Revenue ------------------------ 2,006,836 1,939,007
Benefits and Expenses:
Benefits and settlement expenses ---------- 1,342,759 1,386,795
Underwriting, acquisition,
insurance and other expenses ------------ 470,515 463,927
Interest expense ------------------------- 11,278 11,132
Total Benefits and Expenses ----------- 1,824,552 1,861,854
Income Before Federal Income Taxes and
Cumulative Effect of Accounting Change -- 182,284 77,153
Federal Income Taxes ---------------------- 31,299 8,143
Income Before Cumulative
Effect of Accounting Change ------------- 150,985 69,010
Cumulative Effect of Accounting Change --------- -- (96,431)
Net Income (Loss) --------------------- $ 150,985 $ (27,421)
Earnings Per Share:
Income before cumulative
effect of accounting change ---------------- $1.46 $ .69
Cumulative effect of accounting change ------- -- (.97)
Net Income (Loss) ---------------------- $1.46 $(.28)
Cash Dividends Per Share -
Common Stock --------------------------- $ .41 $ .38
See notes to consolidated financial statements on page 7.
</TABLE>
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5
<TABLE>
<CAPTION>
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Months Ended March 31
1994 1993
Number of Amount Number of Amount
Shares (000's Shares (000's
Issued Omitted) Issued Omitted)
<S> <C> <C> <C> <C>
Preferred Stock:
(10,000,000 shares authorized)
Series A Preferred Stock:
Balance at
beginning of year -------- 47,289 $ 1,553 57,716 $ 1,896
Conversion into
Common Stock ----------- (1,058) (35) (1,701) (56)
Balance at March 31 ----- 46,231 1,518 56,015 1,840
Series E and F Preferred Stock:
Balance at beginning
and end of period ------- 4,417,897 309,913 4,417,897 309,913
Common Stock:
(400,000,000 shares authorized)
Balance at beginning of year - 94,183,190 543,659 84,142,458 200,986
Conversion of Series A
Preferred Stock ------------ 8,464 35 13,608 56
Public offering of
Common Stock --------------- -- -- 9,200,000 316,100
Issued for benefit plans ----- 551,657 21,442 453,432 16,284
Balance at March 31 --- 94,743,311 565,136 93,809,498 533,426
Earned Surplus:
Balance at beginning of year - 2,303,731 2,147,691
Net income (loss) ------------ 150,985 (27,421)
Cash dividends declared ------ (43,087) (39,949)
Balance at March 31 ------ 2,411,629 2,080,321
Foreign Currency Translation Adjustment:
Accumulated adjustment at
beginning of year ---------- (1,214) 3,643
Change during period --------- 761 (1,120)
Balance at March 31 ------ (453) 2,523
Net Unrealized Gain (Loss) on
Securities Available-for-Sale:
Balance at beginning of year - 914,679 162,742
Change during period --------- (599,210) 41,735
Balance at March 31 ----- 315,469 204,447
Total Shareholders' Equity
at March 31 ----------- $3,603,212 $3,132,470
Common Stock (assuming conversion
of Series A, E & F Preferred Stock):
End of Period ----------- 103,948,953 103,093,412
Average for the Period -- 103,541,943 99,476,648
See notes to consolidated financial statements on page 7.
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6
<TABLE>
<CAPTION>
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31
1994 1993
Operating Activities:
<S> <C> <C>
Net income (loss) ---------------------------- $ 150,985 $ (27,421)
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred acquisition costs -------------- (33,215) (21,770)
Premiums and fees receivable ------------- (71,288) (108,683)
Accrued investment income ---------------- (29,971) (44,202)
Policy liabilities and accruals ---------- 91,401 118,524
Contractholder funds --------------------- 381,739 165,250
Amounts recoverable from reinsurers ------- (104,352) (97,601)
Federal income taxes ---------------------- 2,357 (23,731)
Provisions for depreciation ---------------- 15,576 14,673
Realized gain on investments --------------- (28,550) (9,366)
Gain on sale of subsidiary ----------------- (44,058) --
Cumulative effect of accounting change ----- -- 96,431
Other ------------------------------------ (64,675) 205,230
Net Adjustments ------------------- 114,964 294,755
Net Cash Provided by
Operating Activities ---------- 265,949 267,334
Investing Activities:
Securities-available-for-sale:
Purchases ------------------------------- (3,919,428) (2,942,909)
Sales ----------------------------------- 2,741,944 2,962,168
Maturities -------------------------------- 367,186 1,700
Fixed maturity securities-held for investment:
Purchases -------------------------------- -- (1,912,223)
Sales ------------------------------------ -- 573,104
Maturities --------------------------------- -- 482,337
Purchase of other investments ---------------- (291,716) (574,687)
Sale or maturity of other investments -------- 543,781 442,027
Sale of subsidiaries ------------------------ 392,754 --
Increase in cash collateral on
loaned securities ------------------------- 87,852 87,964
Other ------------------------------------- (146,700) (162,363)
Net Cash Used in
Investing Activities --------- (224,327) (1,042,882)
Financing Activities:
Principal payments on long-term debt ------- (4,295) (1,283)
Issuance of long-term debt ----------------- 129 4,377
Net increase (decrease) in short-term debt --- 64,185 (211,510)
Universal life and investment contract deposits - 610,607 753,317
Universal life and investment
contract withdrawals --------------------- (399,290) (335,374)
Public offering of Common Stock ------------- -- 316,100
Common Stock issued for benefit plans ------- 21,442 16,284
Dividends paid to shareholders -------------- (42,858) (36,279)
Net Cash Provided by
Financing Activities --- 249,920 505,632
Net Increase (Decrease) in Cash -- 291,542 (269,916)
Cash at Beginning of Year ----------------------- 709,664 1,015,850
Cash at March 31 ---------------- $1,001,206 $ 745,934
See notes to consolidated financial statements on page 7.
</TABLE>
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7
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements of Lincoln National
Corporation ("LNC") and subsidiaries have been prepared in conformity with
generally accepted accounting principles, except that they do not contain
complete notes. These financial statements are unaudited and include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the results. For further information, refer to the
consolidated financial statements included in LNC's annual report to
shareholders for the year ended December 31, 1993.
Operating results for the three months ended March 31, 1994 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1994.
2. Federal Income Taxes
The effective tax rate on net income is lower than the prevailing corporate
federal income tax rate. The difference for both 1993 and 1994 resulted
principally from tax-exempt investment income. The three months ended March
31, 1994 also was affected by the fact no income taxes were payable on the
gain on sale of a subsidiary (see note 4).
3. Earnings Per Share
Earnings per share are computed based on the average number of common shares
outstanding (103,541,943 and 99,476,648 for the first three months of 1994 and
1993, respectively) after assuming conversion of the Series A, E and F
Preferred Stock.
4. Sale of Subsidiaries
On February 2, 1994, LNC completed the sale of Security-Connecticut
Corporation through an initial public offering for cash, net of related
expenses, totaling $172.7 million and a promissory note from Security-
Connecticut Corporation for $65.0 million. The loss on sale and disposal
expenses did not differ materially from the estimate recorded in the fourth
quarter of 1993.
The preliminary closing for the partial sale of a wholly owned subsidiary,
EMPHESYS Financial Group, Inc. ("EMPHESYS"), through an initial public
offering was completed on March 21, 1994. EMPHESYS is the parent company of
Employers Health Insurance Company ("Employers Health"). As a result of this
transaction, LNC exchanged 64% of the outstanding stock of EMPHESYS for cash,
net of related expenses, totaling $220.1 million and a promissory note from
EMPHESYS for $50.0 million. This transaction resulted in a gain on sale of
$44.1 million (also $44.1 million pre-tax). The final closing of this partial
sale was completed on April 15, 1994. The impact of the combined March 21st
and April 15th transactions was that LNC exchanged 71% of the outstanding
stock of EMPHESYS for cash, net of related expenses, totaling $244.7 million
plus the $50.0 million promissory note. These transactions resulted in a gain
on sale of $48.8 million (also $48.8 million pre-tax). For the January 1,
1994 through March 21, 1994 period, Employers Health had revenue of $314.9
million and net income of $14.4 million. For the three months ended March 31,
1993, Employers Health had revenues of $313.6 million and net income of $10.6
million. This revenue and net income was recorded within the Employee Life-
Health Benefits segment. The gain on sale and the appropriate portion of the
equity in the earnings of EMPHESYS after March 21, 1994 recognized in
accordance with the equity method of accounting were reported within "Other
Operations".
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8
LINCOLN NATIONAL CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION
As indicated in the "Notes to Consolidated Statements" (see note 4 on page 7),
LNC completed the sale of all or part of two of its subsidiaries in the first
quarter of 1994. As noted in the following "Review of Consolidated
Operations" and "Review of Consolidated Financial Condition," these sales have
affected the comparability of select line items within the Consolidated
Statements of Income and Consolidated Balance sheets.
REVIEW OF CONSOLIDATED OPERATIONS
The discussion that follows focuses on the results for the three months
ended March 31, 1994 compared to the results for the three months ended March
31, 1993.
Insurance Premiums
Property-Casualty premiums decreased by $33.2 million or 7% compared
with the three months ended March 31, 1993 primarily as the result of
implementing a more stringent underwriting policy to improve loss experience.
Health premiums were $457.8 million for the first quarter of 1994 which is
essentially the same as the first quarter of 1993. This is the net result of
premium rate increases implemented over the past year less the impact of LNC
selling a majority interest in its direct writer of health coverages on March
21, 1994 (see note 4 on page 7). As a result of the sale of the direct writer
of health coverages, health premiums for future quarters are expected to be
approximately $300 million less each quarter. As noted on page 9, health
benefits and operating expenses will also be reduced in the future. Life and
annuity premiums increased by $47.2 million or 14% compared to the previous
year. This increase resulted from an overall increase in the volume of
transactions by the Life Insurance and Annuities and Life-Health Reinsurance
segments. The increase in the Life Insurance and Annuities segment was the
net result of increases in volume including premiums related to a company
acquired by Lincoln National (UK) less the impact of the sale of Security-
Connecticut Corporation (see note 4 on page 7).
Insurance Fees
Insurance fees from the sale of universal life and other interest
sensitive insurance contracts decreased $5.3 million or 5% compared to the
first three months of 1993 as the result of increases in the volume of
transactions in the Life Insurance and Annuities segment being more than
offset by the impact of the fees previously produced by the Security-
Connecticut Corporation (see note 4 on page 7).
Net Investment Income
Net investment income decreased $10.0 million or 2% when compared with
the first three months of 1993. This is the net result of a 7% increase in
mean invested assets less the impact of the overall yield on investments
dropping from 7.85% to 7.18%.
Equity in Earnings of Unconsolidated Affiliates
This line was added to the statement of income in 1994 following LNC's
partial sale of its direct writer of health coverages (see note 4 on page 7).
The amount shown represents LNC's share of the total earnings of this company
for the period after the closing of the sale on March 21, 1994 through the end
of the quarter.
Gain on Sale of Subsidiary
In March 1994, LNC recorded the partial sale of its interest in Employers
Health Insurance Company (see note 4 on page 7).
<PAGE>
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION (continued)
REVIEW OF CONSOLIDATED OPERATIONS (continued)
Realized Gain on Investments
The first three months of 1994 and 1993 had pre-tax realized gains on
investments of $38.1 million and $9.4 million, respectively. These gains were
the result of net gains on the sale of investments, less writedowns and
provision for losses. Fixed maturity and equity securities that were deemed
to have declines in fair value that were other than temporary were written
down. Provision for losses on mortgage loans on real estate, real estate
investments and other investments were established where the underlying value
of the property was deemed to be less than the carrying value. The provision
for losses on mortgage loans for the first three months of 1993 were also
affected by the adoption of FAS 114. The pre-tax writedown of fixed maturity
and equity securities for the first three months of 1994 and 1993 were $4.8
million and $7.1 million, respectively. With the exception of interest only-
mortgage backed securities, the fixed maturity securities to which these
writedowns apply were generally of investment grade quality at the time of
purchase, but were classified as "below investment grade" at the time of the
writedowns. The pre-tax additions to provision for losses on mortgage loans
on real estate and real estate for the first three months of 1994 and 1993
were $18.6 million and $92.2 million, respectively, including $64.1 million in
the first quarter of 1993 for the adoption of FAS 114. The pre-tax addition
to the provision for losses for other investments for the first three months
of 1994 and 1993 were $.1 million and $1.1 million, respectively. The gain on
the sale of investments in the first three months of 1994 and 1993 were the
result of gains realized on equity securities and fixed maturity securities
plus the release of mortgage loan reserves on select properties where the
estimated fair value had increased since the prior quarter. In the second
quarter, LNC expects to complete a bulk sale of commercial real estate with a
value of approximately $150 million. This sale is not expected to result in
any significant gain or loss as the bids received are approximately equal to
the carrying value.
Other Revenue
Other revenue decreased $3.3 million or 8% when compared to the first
three months of 1993 as a net result of a decrease in the Property-Casualty
segment due to the sale of the agency company that specialized in the sports
and entertainment market and an increase in the Life Insurance and Annuities
segment.
Insurance Benefits and Settlement Expenses
Property-Casualty benefits decreased by $33.1 million or 9% when compared
with the first three months of 1993. This decrease was the result of reduced
volumes of insurance written. Catastrophe losses and weather related claims
were essentially the same for both periods. Health benefits were essentially
the same for the first quarter of 1993 and 1994. This is the net result of
higher volumes of business being partially offset by the impact of LNC selling
a majority interest in its direct writer of health coverages on March 21, 1994
(see note 4 on page 7). LNC's health benefits for future quarters are
expected to be approximately $220 million less each quarter due to the sale of
its direct writer of health coverages. As noted earlier on page 8, we believe
health premiums will also be reduced. Excluding the impact of the sale of
Security-Connecticut Corporation, life and annuity benefits and settlement
expenses increased 4% when compared to the first three months of 1993. This
increase is the result of increased volumes of business and poorer mortality
in the first quarter of 1994 compared to 1993 in the Life Insurance and
Annuities segment.
Underwriting, Acquisition, Insurance and Other Expenses
Excluding the impact of the sale of Security-Connecticut Corporation,
this expense increased 6% for the three months ended March 31, 1994 as
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10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION (continued)
REVIEW OF CONSOLIDATED OPERATIONS (continued)
compared to the first three months of 1993. This increase was the result of
inflation and increased volumes of business in the Life Insurance and
Annuities segment being somewhat offset by lower expenses in the Property-
Casualty segment. The Property-Casualty segment had a decrease in this
expense as it continued to adjust staff levels to the current level of
business.
Interest Expense
This expense was essentially the same for the first quarter of 1993 and
1994. This was the net result of increases in the average debt outstanding,
decreases in short-term interest rates and changes in the composition of debt
outstanding.
Federal Income Taxes
Federal income taxes increased from $8.1 million in the first three
months of 1993 to $31.3 million in the first three months of 1994 as a result
of an increase in pre-tax earnings less some effect of the continued movement
from taxable securities to tax-exempt securities and the lack of any tax
expense on the gain on sale of subsidiary (see note 4 on page 7).
Summary
Net income (loss) for the first three months of 1994 was $151.0 million
or $1.46 per share compared with a loss of $27.4 million or $0.28 per share in
the first three months of 1993. Excluding realized gain on investments, gain
on sale of subsidiary and the after-tax cumulative effect of implementing the
postretirement benefit accounting change in 1993, LNC earned $83.4 million for
the first three months of 1994 compared with $62.7 million for the first three
months of 1993. This increase was due to increases in earnings from all
business segments except life-health reinsurance which had a small decrease.
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
Investments
The total investment portfolio decreased $2.7 billion in the first three
months of 1994. Most of this decrease related to fixed maturity securities.
The removal of the investments of the two subsidiaries sold (see note 4 on
page 7) accounted for $2.1 billion of this decrease. The remainder of the
decrease is the result of new purchases of investments from cash flow being
more than offset by the decrease during the quarter in the fair value of
existing investment securities.
The quality of LNC's fixed maturity securities portfolio as of March 31,
1994 was as follows:
Treasuries and AAA 37.7% BBB 18.1%
AA 14.6% BB 2.8%
A 24.9% Less than BB 1.9%
As of March 31, 1994, $1.021 billion or 4.7% of fixed maturity
securities was invested in below investment grade securities (less than BBB).
This represents 3.8% of the total investment portfolio. The interest rates
available on these below investment grade securities are significantly higher
than is available on other corporate debt securities. Also, the risk of loss
due to default by the borrower is significantly greater with respect to such
below investment grade securities, because these securities are generally
unsecured, often subordinated to other creditors of the issuer and issued by
companies that usually have high levels of indebtedness. LNC attempts to
<PAGE>
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION (continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued)
minimize the risks associated with these below investment grade securities by
limiting the exposure to any one issuer and by closely monitoring the credit
worthiness of such issuers. During the three months ended March 31, 1994, the
aggregate cost of such investments purchased was $170.5 million. Aggregate
proceeds from such investments sold were $115.2 million, resulting in a
realized pre-tax gain of $2.7 million.
LNC's entire fixed maturity securities portfolio is classified as
"available-for-sale" and is carried at fair value. Equity securities
available-for-sale are also carried at fair value. Changes in fair value, net
of related deferred acquisition costs, amounts required to satisfy
policyholder commitments and taxes, are charged or credited directly to
shareholders' equity.
As of March 31, 1994, mortgage loans on real estate and real estate
represented 11.2% and 2.4% of LNC's total investment portfolio. As of March
31, 1994, the underlying properties supporting the mortgage loans on real
estate consisted of 30% in commercial office buildings, 27% in retail stores,
18% in apartments, 11% in industrial buildings, 3% in hotels/motels and 11% in
other. In addition to the dispersion by property type, the mortgage loan
portfolio is distributed regionally throughout the United States.
Mortgage loans on real estate are actively monitored to identify problem
loans. LNC classifies mortgage loans as problem loans if they are non-accrual
loans (i.e., principal and interest are 60 days past due), restructured loans
(i.e., the terms of the original loan have been modified) or all other loans
not in the first two categories that are considered impaired. LNC considers a
mortgage loan impaired when, based on current information and events, it is
probable that LNC will be unable to collect all amounts due according to the
contractual terms of the loan agreement. In addition, LNC also classifies
loans as potential problem loans when available information causes management
to be concerned about the borrowers' ability to comply with the present loan
terms, including the repayment of outstanding interest and principal.
When LNC determines that a loan is impaired as defined above, a provision
for loss is established for the difference between the carrying value of the
mortgage loan and the estimated value. Estimated value is based on either the
present value of expected future cash flows discounted at the loan's effective
interest rate, the loan's observable market price or the fair value of the
collateral. Additional amounts were added to the mortgage loan provision for
losses during 1993 due to the adoption of FAS 114 (see page 9). When a
mortgage loan becomes 60 days past due, all existing accruals for interest due
are reversed and interest is recorded on a cash basis until the mortgage loan
is brought current.
In the first quarter of 1994, LNC continued to strengthen its provision
for losses and as a result increased the reserve level and the ratio of
reserves to impaired mortgages. Net impaired loans as March 31, 1994, totaled
$503.7 million, as compared with $499.3 million as of December 31, 1993. Net
impaired loans were only 1.9% of total investments at March 31, 1994.
<PAGE>
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION (continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued)
A summary of LNC's problem mortgage loans on real estate and supplemental
information with respect to such loans is as follows:
March 31 December 31
(in millions) 1994 1993
Problem Loans:
Non-accrual loans ----------------------------- $317.4 $276.3
Restructured loans ----------------------------- 67.4 59.8
Other problem loans ---------------------------- 391.6 445.2
Total Problem Loans ------------------------ $776.4 $781.3
Potential problem loans -------------------------- $ 52.7 $ 92.1
Total problem loans as of March 31, 1994 of $776.4 million include $719.1
million of impaired loans and accordingly the balance sheet caption "Mortgage
Loans on Real Estate" has been reduced by $215.3 million due to the
establishment of a provision for losses for such loans.
Three Months Ended March 31 (in millions) 1994 1993
Interest Income from Problem Loans:
Amount that would have been
recorded under original terms ---------------- $ 19.0 $13.1
Interest income actually recorded -------------- 13.6 6.0
As of March 31, 1994, LNC has a commitment to lend $132,000 on a
restructured loan and $55,000 on a loan shown within other problem loans
above. No other future commitments have been made on non-accrual or
restructured loans.
Investment in Unconsolidated Affiliates
This line was added to the balance sheet in 1994 to accommodate LNC's
equity ownership in EMPHESYS, Financial Group, Inc., following LNC's partial
sale of this company (see note 4 on page 7).
Cash and Invested Cash
Cash and invested cash increased by $291.5 million in the first three
months of 1994. This increase is the net result of the receipt of proceeds
from the sale of subsidiaries (see note 4 on page 7) less the impact of moving
invested cash to longer term investments.
Assets Held in Separate Accounts
Excluding the December 31, 1993 balance of the subsidiaries that were
sold (see note 4 on page 7), this asset account as well as the corresponding
liability account increased by $250.7 million, reflecting an increase in
pension funds under management.
Federal Income Taxes
Federal income taxes recoverable at March 31, 1994 of $200.6 million
represents a change of $351.6 million compared to the federal income taxes
payable at December 31, 1993. This is the net result of increases related to
recoverable deferred taxes resulting primarily from life insurance reserve
differences, discounting of unpaid losses, additions to the investment
reserves and the postretirement obligations, and the decrease in deferred
taxes payable primarily related to the reduction in unrealized gains on
securities in the first three months of 1994.
Amounts Recoverable from Reinsurers
The increase in amounts recoverable from reinsurers was the result of an
increased volume of transactions in the life insurance and annuity segment.
<PAGE>
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION (continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued)
Goodwill
The decrease in goodwill of $77.4 million is primarily the result of the
sale of subsidiaries during the first quarter of 1994 (see note 4 on page 7).
Other Assets
The increase in other assets of $213.4 million is the result of having a
higher receivable related to the volume of investment security transactions
sold in the last few days of the first quarter of 1994 versus such
transactions at the end of 1993.
Total Liabilities
Excluding the December 31, 1993 liabilities of the subsidiaries that were
sold (see note 4 on page 7) of $1.9 billion, total liabilities increased by
$746.7 million in the first three months of 1994. This increase reflects 1)
an increased level of business as evidenced by an increase of $472.8 million
in contractholder funds, an increase of $250.7 million in the liabilities
related to separate accounts, an increase in the policy liabilities and
accruals of $165.7 million, 2) an increase in debt of $60.2 million and 3) a
decrease in other liabilities of $202.7 million. The decrease in other
liabilities relates to a decrease in the expected payouts for security
investments purchased in the last few days of the first quarter of 1994 versus
a higher volume of such transactions at the end of 1993.
Shareholders' Equity
Total shareholders' equity decreased $469.1 million in the first three
months of 1994. Excluding the decrease of $599.2 million related to
unrealized gain on securities available-for-sale, shareholders' equity
increased $130.1 million. This increase for the first three months of 1994
was the net result $151.0 million from net income, $21.4 million from the
issuance of Common Stock related to benefit plans, and $.8 million related to
an increase in the accumulated foreign exchange gain and a decrease of $43.1
million related to the declaration of dividends to stockholders.
Liquidity and Cash Flow
In the insurance industry, liquidity generally refers to the ability of
an enterprise to generate adequate amounts of cash from its normal operations,
including activities in its investment portfolio, to meet its financial
commitments. LNC manages its operations, including prudent investment
portfolio structuring, to provide for appropriate liquidity levels. The
portfolio structuring involves segregating LNC's investments by segments,
sub-segments or type of product. The investments selected for each segregated
portfolio are based on LNC's desire to match characteristics (e.g. duration,
yield) of the underlying liabilities.
As indicated by the Consolidated Statements of Cash Flows on page 6,
LNC's business operations generated $265.9 million of cash during the first
three months of 1994.
Although LNC generates adequate cash flow to meet the needs of its normal
operations, periodically LNC may issue debt or equity securities to fund
internal expansion, acquisitions, investment opportunities and the retirement
of LNC's debt and equity. A transaction as described in the preceding
sentence occurred during February 1993, when LNC received $316.1 million in
proceeds from a public offering of 9.2 million shares of its Common Stock. In
March 1994, LNC redeemed its $100 million 8% notes payable due in 1997. This
redemption was funded with additional short-term debt.
<PAGE>
14
PART II - OTHER INFORMATION AND EXHIBITS
Items 1, 3, 4 and 5 of this Part II are either inapplicable or
are answered in the negative and are omitted pursuant to the
instructions to Part II.
Item 6. Exhibits and Reports on Form 8-K
(a) The following Exhibit of the Registrant is included in this report.
(Note: The number preceding the exhibit corresponds to the specific
number within Item 601 of Regulation S-K.)
11 Computation of Per Share Earnings
(b) During the first quarter of 1994, a Form 8-K regarding the partial
sale of the outstanding capital stock of EMPHESYS Financial Group,
Inc. was filed with the Commission. This filing dated March 29, 1994
received a filing date of March 31, 1994. A pro forma condensed
consolidated balance sheet and statement of income was filed as a
part of this Form 8-K (Item 7).
<PAGE>
15
SIGNATURE PAGE
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly
authorized.
LINCOLN NATIONAL CORPORATION
By /S/ Richard C. Vaughan
Richard C. Vaughan,
Senior Vice President and
Chief Financial Officer
/S/ Donald L. Van Wyngarden
Donald L. Van Wyngarden,
Second Vice President and Controller
Date May 6, 1994
<PAGE>
16
LINCOLN NATIONAL CORPORATION
Exhibit Index for the Report on Form 10-Q
for the Quarter Ended March 31, 1994
Exhibit Number Description Page Number
11 Computation of Per Share Earnings 17
<TABLE>
<CAPTION>
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
EXHIBIT (11) - COMPUTATION OF PER SHARE EARNINGS
Three Months
Ended March 31
PRIMARY 1994 1993
<S> <C> <C>
Average shares outstanding
(assuming conversion of
Series A, E and F
Preferred Stock) --------------------------------- 103,541,943 99,476,648
Net effect of dilutive
stock options (based on
the treasury stock method
using average market price) ---------------------- 722,145 678,328
Total shares
outstanding ------------------------------- 104,264,088 100,154,976
FULLY DILUTED
Average shares outstanding
(assuming conversion of
Series A, E and F
Preferred Stock) --------------------------------- 103,541,943 99,476,648
Net effect of dilutive
stock options (based on
the treasury stock method
using the end of period
market price, if higher than
average market price) ---------------------------- 722,145 786,804
Total shares
outstanding ------------------------------- 104,264,088 100,263,452
DOLLAR INFORMATION (000's omitted)
Income before the
cumulative effect of
accounting change -------------------------------- $150,985 $ 69,010
Cumulative effect of
accounting change -------------------------------- -- (96,431)
Net Income (Loss) --------------------------- $150,985 $(27,421)
PER SHARE INFORMATION
Primary:
Income before the
cumulative effect of
accounting change ------------------------------ $1.45 $ .69
Cumulative effect of
accounting change ------------------------------ -- (.96)
Net Income (Loss) ------------------------- $1.45 $ .27
Fully Diluted:
Income before the
cumulative effect of
accounting change ------------------------------ $1.45 $ .69
Cumulative effect of
accounting change ------------------------------ -- (.96)
Net Income (Loss) ------------------------- $1.45 $(.27)
Notes: 1. Earnings per share are computed based on the average number of
common shares outstanding during each period after assuming
conversion of the Series A, E and F Preferred Stock.
2. LNC does not include the dilutive effect of stock options in the
computation of the earnings per share information appearing on the
consolidated statements of income since it was immaterial.
</TABLE>
