SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended September 30, 1995 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 September 30, 1995 103,961,313
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 19.
Page 1 of 20
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<TABLE>
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30 December 31
(000'S omitted) 1995 1994
ASSETS
<S> <C> <C>
Investments:
Securities available-for-sale, at fair value:
Fixed maturity (cost 1995 - $24,005,053;
1994 - $21,438,155) ------------------ $25,233,712 $21,644,154
Equity (cost 1995 - $887,029;
1994 - $913,442) --------------------- 1,116,366 1,038,617
Mortgage loans on real estate ------------ 2,907,756 2,853,083
Real estate ------------------------------ 753,680 706,854
Policy loans ----------------------------- 598,352 550,672
Other investments ------------------------ 252,803 175,121
Total Investments ---------------------- 30,862,669 26,968,501
Investment in unconsolidated affiliates ---- 114,247 97,054
Cash and invested cash --------------------- 1,339,707 1,041,583
Property and equipment --------------------- 277,338 185,471
Deferred acquisition costs ----------------- 1,599,860 2,069,975
Premiums and fees receivable --------------- 665,956 551,679
Accrued investment income ------------------ 458,216 428,959
Assets held in separate accounts ----------- 21,474,760 14,301,684
Federal income taxes ----------------------- 11,287 396,888
Amounts recoverable from reinsurers -------- 2,394,518 2,152,327
Goodwill ----------------------------------- 467,919 145,844
Other intangible assets--------------------- 397,508 42,773
Other assets ------------------------------- 613,542 482,022
Total Assets ----------------------------- $60,677,527 $48,864,760
<FN>
See notes to consolidated financial statements on page 7.
</FN>
</TABLE>
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<TABLE>
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
-CONTINUED-
September 30 December 31
(000's omitted) 1995 1994
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Policy liabilities and accruals:
Future policy benefits, claims
and claim expenses -------------------- $12,281,658 $10,536,512
Unearned premiums ----------------------- 867,379 804,987
Total Policy Liabilities and Accruals - 13,149,037 11,341,499
Contractholder funds ---------------------- 18,201,503 17,250,423
Liabilities related to separate accounts -- 21,474,760 14,301,684
Short-term debt --------------------------- 323,443 275,310
Long-term debt ---------------------------- 621,997 419,607
Other liabilities ------------------------- 2,557,499 2,234,177
Total Liabilities ----------------------- 56,328,239 45,822,700
Shareholders' Equity:
Series A preferred stock
(9/30/95 liquidation value - $3,292) ----- 1,352 1,420
Series E preferred stock ------------------ -- 151,206
Series F preferred stock ------------------ -- 158,707
Common stock ------------------------------ 886,294 555,382
Earned surplus ---------------------------- 2,748,315 2,479,532
Foreign currency translation adjustment --- 16,583 6,890
Net unrealized gain (loss) on securities
available-for-sale ----------------------- 696,744 (311,077)
Total Shareholders' Equity -------------- 4,349,288 3,042,060
Total Liabilities
and Shareholders' Equity -------------- $60,677,527 $48,864,760
<FN>
See notes to consolidated financial statements on page 7.
</FN>
</TABLE>
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<TABLE>
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended Three Months Ended
September 30 September 30
(000's omitted) 1995 1994 1995 1994
Revenue:
<S> <C> <C> <C> <C>
Insurance premiums -----------$2,325,231 $2,623,127 $ 800,342 $ 778,091
Insurance fees --------------- 387,062 329,799 135,153 112,933
Net investment income -------- 1,681,555 1,499,498 567,700 510,045
Investment advisory fees ----- 90,277 -- 47,697 --
Equity in earnings of
unconsolidated affiliates -- 13,455 10,585 4,656 4,993
Realized gain (loss) on
investments ---------------- 174,473 (102,375) 68,062 (74,140)
Gain on sale of subsidiary/
unconsolidated affiliate --- -- 48,842 -- --
Other ------------------------ 126,326 110,593 44,848 34,680
Total Revenue ------------ 4,798,379 4,520,069 1,668,458 1,366,602
Benefits and Expenses:
Benefits and settlement
expenses ------------------- 2,892,186 3,058,335 987,906 941,095
Underwriting, acquisition,
insurance and other expenses 1,314,851 1,144,278 457,653 354,447
Interest expense ------------- 53,441 34,878 19,493 12,148
Total Benefits
and Expenses ----------- 4,260,478 4,237,491 1,465,052 1,307,690
Net Income Before Federal
Income Taxes 537,901 282,578 203,406 58,912
Federal Income Taxes ----------- 130,851 26,409 49,081 530
Net Income $ 407,050 $ 256,169 $ 154,325 $ 58,382
Net Income Per Share ----------- $3.91 $2.47 $1.48 $ .56
Cash Dividends Per Share
Common Stock ----------------- $1.29 $1.23 $ .43 $ .41
<FN>
See notes to consolidated financial statements on page 7.
</FN>
</TABLE>
-5-
<TABLE>
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Nine Months Ended September 30
Number of Shares Issued Amounts
(000's omitted from dollar amounts) 1995 1994 1995 1994
<S> <C> <C> <C> <C>
Preferred Stock:
(Shares authorized: 10,000,000)
Series A Preferred Stock:
Balance at
beginning of year -------- 43,218 47,289 $ 1,420 $ 1,553
Conversion into
common stock ------------- (2,072) (3,388) (68) (111)
Balance at September 30 - 41,146 43,901 1,352 1,442
Series E and F Preferred Stock:
Balance at beginning of year 4,417,897 4,417,897 309,913 309,913
Conversion into
common stock ------------- (4,417,897) -- (309,913) --
Balance at September 30 - -- 4,417,897 -- 309,913
Common Stock:
(Shares authorized: 800,000,000)
Balance at beginning of year - 94,477,942 94,183,190 555,382 543,659
Conversion of series A
preferred stock ------------ 16,576 27,104 68 111
Conversion of series E and F
preferred stock ------------ 8,835,794 -- 309,913 --
Issued for benefit plans ----- 631,001 758,732 20,931 22,577
Balance at September 30 -103,961,313 94,969,026 886,294 566,347
Earned Surplus:
Balance at beginning of year - 2,479,532 2,303,731
Net income ------------------- 407,050 256,169
Cash dividends declared ------ (138,267) (129,299)
Balance at September 30 - 2,748,315 2,430,601
Foreign Currency Translation Adjustment:
Accumulated adjustment at
beginning of year ---------- 6,890 (1,214)
Change during period --------- 9,693 8,602
Balance at September 30 - 16,583 7,388
Net Unrealized Gain (Loss) on
Securities Available-for-Sale:
Balance at beginning of year - (311,077) 914,679
Change during period --------- 1,007,821 (908,380)
Balance at September 30 - 696,744 6,299
Total Shareholders' Equity
at September 30 ------- $4,349,288 $3,321,990
Common Stock (assuming conversion
of series A, E & F preferred stock):
End of Period ----------- 104,290,481 104,156,028
Average for the Period -- 103,986,236 103,840,927
<FN>
See notes to consolidated financial statements on page 7.
</FN>
</TABLE>
-6-
<TABLE>
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30
(000's omitted) 1995 1994
Operating Activities:
<S> <C> <C>
Net income ---------------------------------------- $ 407,050 $ 256,169
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred acquisition costs -------------------- 6,409 (156,229)
Premiums and fees receivable ------------------ (143,065) (132,693)
Accrued investment income --------------------- (36,746) (40,455)
Policy liabilities and accruals --------------- 904,160 57,042
Contractholder funds -------------------------- 751,652 1,360,747
Amounts recoverable from reinsurers ----------- (335,104) (752,037)
Federal income taxes -------------------------- 133,580 (50,534)
Equity in undistributed earnings of
unconsolidated affiliates ------------------- (11,493) (9,183)
Provisions for depreciation ------------------- 46,365 43,036
Realized (gain) loss on investments ----------- (225,340) 179,568
Gain on sale of subsidiary/unconsolidated
affiliate ----------------------------------- -- (48,842)
Other ----------------------------------------- 128,949 151,890
Net Adjustments ----------------------------- 1,219,367 602,310
Net Cash Provided by Operating Activities --- 1,626,417 858,479
Investing Activities:
Securities-available-for-sale:
Purchases -------------------------------------- (12,647,232)(10,612,797)
Sales ------------------------------------------ 10,913,583 8,028,171
Maturities ------------------------------------- 688,757 973,118
Purchase of other investments -------------------- (1,072,918) (938,318)
Sale or maturity of other investments ------------ 952,208 1,263,557
Sale (purchase) of subsidiaries/
unconsolidated affiliate ----------------------- (772,000) 417,367
Increase (decrease) in cash collateral
on loan securities ----------------------------- 132,016 (176,789)
Other -------------------------------------------- 26,193 (93,070)
Net Cash Used in Investing Activities ------ (1,779,393) (1,138,761)
Financing Activities:
Principal payments on long-term debt ------------- (399) (9,535)
Issuance of long-term debt ----------------------- 202,790 341
Net increase in short-term debt ------------------ 85,019 118,079
Universal life and investment contract deposits -- 1,854,514 1,982,388
Universal life and investment
contract withdrawals --------------------------- (1,578,373) (1,348,563)
Common stock issued for benefit plans ------------ 21,756 22,578
Dividends paid to shareholders ------------------- (134,207) (129,047)
Net Cash Provided by Financing Activities -- 451,100 636,241
Net Increase in Cash ----------------------- 298,124 355,959
Cash at Beginning of Year -------------------------- 1,041,583 709,664
Cash at September 30 ----------------------- $1,339,707 $1,065,623
<FN>
See notes to consolidated financial statements on page 7.
</FN>
</TABLE>
-7-
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements include Lincoln National
Corporation ("LNC") and its majority-owned subsidiaries. Less than majority-
owned entities in which LNC has at least a 20% interest are reported on the
equity basis. These unaudited consolidated statements have been prepared in
conformity with generally accepted accounting principles,except that they do not
contain complete notes. However, in the opinion of management, these statements
include all normal recurring adjustments necessary for a fair presentation of
the results. These financial statements should be read in conjunction with the
financial statements and the related notes included in LNC's latest annual
report on Form 10-K for the year ended December 31, 1994.
Operating results for the nine months ended September 30, 1995 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 1995.
2. Federal Income Taxes
The effective tax rate on net income is lower than the prevailing corporate
federal income tax rate. The difference for 1995 resulted principally from
tax-exempt investment income, less the effect of the non-deductible
amortization of goodwill. The difference for the nine months ended September
30, 1994 was also affected by tax-exempt investment income and by the fact
that no income taxes were payable on the gain on sale of a subsidiary.
3. Earnings Per Share
Earnings per share are computed based on the average number of common shares
outstanding (103,986,236 and 103,840,927 for the first nine months of 1995 and
1994, respectively) after assuming conversion of the series A, E and F
preferred stock.
4. Purchase of Subsidiaries
On April 3, 1995, LNC completed the acquisition of Delaware Management
Holdings, Inc. ("Delaware") as described in note 12 to LNC's financial
statements for the year ended December 31, 1994. Delaware provides a variety
of asset management services through its operating companies. This
acquisition resulted in goodwill of $339.9 million and other intangible
assets of $131.5 million. Goodwill and the other intangible assets are being
amortized on a straight-line basis over 25 years and 5 to 14 years,
respectively. The results of Delaware's operations are included in LNC's
consolidated financial statements from April 3, 1995.
On April 25, 1995, LNC completed the acquisition of Laurentian Financial Group
plc ("Laurentian"). Laurentian is a United Kingdom company that provides
unit-linked life and pension products. This acquisition involved a purchase
price of $237 million including assumption of $44 million of debt. This
acquisition resulted in other intangible assets of $218.4 million which are
being written-off in proportion to the present value of gross profits that
are expected to emerge from the business acquired. It is expected that most
of this asset will be written-off over a three to five year period. The
results of Laurentian's operations are included in LNC's consolidated
financial statements from April 25, 1995.
5. Subsequent Event
As a result of a public tender after offer by Humana on October 11, 1995, LNC
completed the sale of its 29% ownership in EMPHESYS Financial Group Inc. This
transaction resulted in cash of $187.0 million and produced a fourth quarter
gain on sale of subsidiaries/unconsolidated affiliate of $58.4 million after
tax.
-8-
LINCOLN NATIONAL CORPORATION
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
INFORMATION
During the nine months ended September 30, 1994, LNC completed the sale of
71% of its subsidiary involved in the writing of life-health benefit
coverages on a direct basis. As noted in the following "Review of
Consolidated Operations," this sale has affected the comparability of select
line items within the Consolidated Statements of Income.
REVIEW OF CONSOLIDATED OPERATIONS
The discussion that follows focuses on the results for the
nine months ended September 30, 1995 compared to the results for
the nine months ended September 30, 1994. The factors affecting
the current quarter to prior year quarter comparisons are
essentially the same as the year-to-date factors, except as noted.
Insurance Premiums
Life and annuity premiums for the first nine months of 1995
were $528.8 million which is $64.7 or 10.9% less than the first
nine months of 1994. This decrease is the net result of increases
in business volume from the Life-Health Reinsurance segment being
more than offset by decreases from the United Kingdom component of
the Life Insurance and Annuities segment. This decrease in the
United Kingdom component was the net result of 1)decreases due to
modifying the classification of premiums associated with unit-linked
transactions within Lincoln National (UK) on a prospective
basis to more closely conform to the classification used for
universal life transactions within the U.S. operations and
2)increases from the premiums generated by the sales personnel
associated with the newly acquired U.K. company (see note 4 on page
7). As noted below, there is a corresponding decrease in life and
annuity benefits. Prior period data was not reclassified due to
the amounts involved not being material to consolidated revenue.
Excluding the impact of the subsidiary sold in 1994, health
premiums increased $81.4 million or 18% for the first nine months
of 1995 compared with the first nine months of 1994 as a result of
increased volumes of business in the Life-Health Reinsurance
segment. Property-casualty premiums decreased by $21.9 million or
2% compared with the nine months ended September 30, 1994 primarily
as the result of reevaluating underwriting actions, focusing on
account selection, risk evaluation and the establishment of
appropriate premiums. Property-casualty premiums for the third
quarter of 1995 increased $10.0 million or 2% versus the comparable
quarter in the 1994 and are also expected to increase slightly in
the fourth quarter.
Insurance Fees
Insurance fees from universal life and other interest
sensitive insurance contracts increased $57.2 million or 17%
compared to the first nine months of 1994 as the result of
increases in the volume of transactions and a market-driven
increase in the value of existing customer accounts upon which some
of the fees are based in the Life Insurance and Annuities segment.
Investment Advisory Fees
This line was added to the statement of income in the second
quarter of 1995 following LNC's purchase of Delaware Management
Holdings, Inc. (see note 4 on page 7).
Net Investment Income
Net investment income increased $182.1 million or 12% when
compared with the first nine months of 1994. This increase is the
result of a 17% increase in mean invested assets and an overall
yield on investments that was 7.14% for both 1995 and 1994. Net
investment income for the nine months ended September 30, 1995
include a benefit of $11.4 million from the recurring adjustment of
discount on mortgage-backed securities that was triggered by
significant declines in interest rates during the period. The
mortgage-backed adjustment for the nine
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION
(continued)
REVIEW OF CONSOLIDATED OPERATIONS (continued)
months ended September 30, 1994 was a charge of $9.0 million. The
increase in mean invested assets is the net result of increased
volumes of business in the Life Insurance and Annuity and Life-Health
Reinsurance segment being partially offset by decreases due
to the sale of a subsidiary in 1994.
Equity in Earnings of Unconsolidated Affiliates
This line was added to the statement of income in 1994
following LNC's sale of 71% of its direct writer of health
coverages. The amounts shown represent LNC's share of the total
earnings of this company after the closing of the sale on March 21,
1994. Due to the October 11, 1995 sale of the remaining 29%
ownership in this company, no significant further activity is
expected in this account in 1995 (see note 5 on page 7).
Gain on Sale of Subsidiary/Unconsolidated Affiliates
In the first nine months of 1994, LNC recorded the gain on
sale of 71% of its direct writer of health coverages. The fourth
quarter of 1995 will include the gain on sale of the remaining 29%
ownership in this company (see note 5 on page 7). The proceeds
from this sale will be invested in securities available-for-sale.
Realized Gain (Loss) on Investments
The first nine months of 1995 and 1994 had pre-tax realized
gain (loss) on investments of $174.4 million and $(102.4) million,
respectively. The gains for 1995 were the result of net gains on
sale of investments, less some modest writedowns and provisions for
losses. The losses for 1994 were the result of net losses on sale
of investments and some modest writedowns and provisions 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 to the extent the carrying value was determined not to
be recoverable.
The pre-tax writedown of fixed maturity and equity securities
for the first nine months of 1995 and 1994 were $17.3 million and
$18.3 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 net pre-tax additions to
provision for losses on real estate and mortgage loans on real
estate for the first nine months of 1995 and 1994 were $5.2 million
and $38.4 million, respectively. The pre-tax addition (reduction)
to the provision for losses for other investments for the first
nine months of 1995 and 1994 were $(4.1) million and $2.6 million,
respectively.
Other Revenue
Other revenue increased $15.7 million or 14% when compared to
the first nine months of 1994 as the result of an increase in the
volume of transactions within each of the business segments.
Insurance Benefits and Settlement Expenses
Life and annuity benefits and settlement expenses decreased
$15.7 million or 1% when compared to the first nine months of 1994.
This decrease is the net result of increases from the Life-Health
Reinsurance segment and the U.S. portion of the Life Insurance and
Annuity segment being more than offset by a decrease from the
United Kingdom component of the Life Insurance and Annuities
segment. This decrease in the United Kingdom component relates to
the decrease in life and annuity premiums noted above. Excluding
the impact of the subsidiary sold in 1994, health benefits
increased by $80.3 million or 23% when compared to the first nine
months of 1994 as a result of increased volumes of business in the
Life-Health Reinsurance segment and increased
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION
(continued)
REVIEW OF CONSOLIDATED OPERATIONS (continued)
claims in the Life Insurance and Annuity and Life-Health
Reinsurance segments. Property-casualty benefits decreased by
$18.6 million or 2% when compared with the first nine months of
1994 as a result of reductions in the volume of insurance written.
Although the quarterly pattern for Catastrophe losses and weather
related claims has differed for the 1995 and 1994 quarters, the
total for the nine months for both years is essentially the same.
The weather related claims were significantly larger in the second
quarter of 1995 than a normal quarter due to wind, hail and tornado
losses in Texas, Oklahoma, Kansas, Missouri and Arkansas.
Catastrophe losses and weather related claims will be higher in the
fourth quarter of 1995 versus the fourth quarter of 1994 due to
losses of approximately $20.0 million from Hurricane Opal in
October of 1995.
Underwriting, Acquisition, Insurance and Other Expenses
Excluding the impact of the subsidiary sold in 1994, this
expense increased $243.9 million or 23% for the nine months ended
September 30, 1995 compared to the first nine months of 1994. The
primary driver behind this increase beyond the general inflation
rate was the higher volume related expenses in the Life Insurance
and Annuity and Life-Health Reinsurance segments due to the
increase in business volumes and the addition of the companies
acquired (see note 4 or page 7). These expenses for the Property-
Casualty segment only increased 3% compared with a year ago as
staff levels were adjusted to the current level of business.
Interest Expense
Interest expense increased $18.5 million when compared with the
first nine months of 1994. This was the result of increases in the
average debt outstanding and increases in short-term interest rates
less the impact of changes in the composition of debt outstanding.
Interest expense was higher in the second and third quarter of 1995
($19.9 million and $19.5 million, respectively) than in the first
quarter of 1995 ($14.0 million) due to an increase in debt related
to the acquisitions of additional companies (see note 4 on page 7).
While a portion of the interest expense is dependent upon future
short-term borrowing rates, in the near term the total interest
expense per quarter is expected to somewhat parallel the interest
expense for the second and third quarter of 1995.
Federal Income Taxes
Federal income taxes increased $104.5 million when compared to
the first nine months of 1994. This is the net result of an
increase in pre-tax earnings and the lack of any tax expense on the
1994 gain on sale of subsidiary.
Summary
Net income for the first nine months of 1995 was $407.1
million or $3.91 per share compared with $256.2 million or $2.47
per share in the first nine months of 1994. Excluding realized
gain (loss) on investments and gain on sale of subsidiary, LNC
earned $297.1 million for the first nine months of 1995 compared
with $278.6 million for the first nine months of 1994. This
increase was net the result of the impact of the loss of earnings
from a subsidiary sold in 1994, net of investment income earned on
the proceeds from the sale, being more than offset by increases in
earnings from the Life Insurance and Annuities and Investment
Management business segments.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION
(continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
Investments
The total investment portfolio increased $3.9 billion in the
first nine months of 1995. This increase is the result of
increases in the fair value of securities available-for-sale
during the first nine months of 1995 and new purchases of
investments from cash flow generated by the business segments.
The quality of LNC's fixed maturity securities portfolio as of
September 30, 1995 was as follows:
Treasuries and AAA 36.6% BBB 22.2%
AA 10.6% BB 3.0%
A 24.8% Less than BB 2.8%
As of September 30, 1995, $1.5 billion or 5.8% of fixed
maturity securities was invested in below investment grade
securities (less than BBB). This represents 4.7% of the total
investment portfolio. The interest rates available on these below
investment grade securities are significantly higher than are
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 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 nine months ended September
30, 1995, the aggregate cost of such investments purchased was
$717.6 million. Aggregate proceeds from such investments sold were
$576.5 million, resulting in a net realized pre-tax loss of $12.5
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,
and amounts required to satisfy policyholder commitments and taxes,
are charged or credited directly to shareholders' equity.
As of September 30, 1995, mortgage loans on real estate and
real estate represented 9.4% and 2.4% of LNC's total investment
portfolio. As of September 30, 1995, the underlying properties
supporting the mortgage loans on real estate consisted of 22.7% in
commercial office buildings, 28.1% in retail stores, 20.0% in
apartments, 15.2% in industrial buildings, 3.3% in hotels/motels
and 10.7% in other. In addition to the dispersion by property
type, the mortgage loan portfolio is geographically diversified
throughout the United States.
Mortgage loans on real estate are actively monitored to
identify impaired loans. Mortgage loans on real estate are
considered 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. When LNC
determines that a loan is impaired 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. The provision for
losses is reported as realized gain (loss) on investments.
Mortgage loans deemed to be uncollectible are charged against the
provision for losses and subsequent recoveries, if any, are
credited to the provision for losses.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION
(continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued)
The provision for losses is maintained at a level believed
adequate by management to absorb estimated probable credit losses.
Management's periodic evaluation of the adequacy of the provision
for losses is based on LNC's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay (including the timing of future
payments), the estimated value of the underlying collateral,
composition of the loan portfolio, current economic conditions and
other relevant factors. This evaluation is inherently subjective
as it requires estimating the amounts and timing of future cash
flows expected to be received on impaired loans that may be
susceptible to significant change.
Impaired loans included along with the related provision for
losses are as follows:
September 30 December 31
(in millions) 1995 1994
Impaired loans with provision for losses --------- $158.7 $275.8
Provision for losses ----------------------------- (43.3) (62.7)
Impaired loans with no provision for losses ------ -- 2.3
Net Impaired Loans ----------------------------- $115.4 $215.4
Impaired loans with no provision for losses are a result of
1)direct write-downs or 2)collateral dependent loans where the fair
value of the collateral is greater than the recorded investment in
loans.
A reconciliation of the mortgage loan provision for losses
for these impaired mortgage loans is as follows:
Nine Months Ended September 30 (in millions) 1995 1994
Balance at beginning of year --------------------- $62.7 $226.6
Provisions for losses ---------------------------- 12.9 22.7
Releases due to sales ---------------------------- (24.0) (102.6)
Releases due to foreclosures --------------------- (8.3) (13.7)
Balance at End of Quarter ---------------------- $43.3 $133.0
The average recorded investment in impaired loans and the
interest income recognized on impaired loans were as follows:
Nine Months Ended September 30 (in millions) 1995 1994
Average recorded investment in impaired loans ---- $201.9 $571.5
Interest income recognized on impaired loans ----- 12.8 32.3
All interest income on impaired loans was recognized on the
cash basis of income recognition.
As of September 30, 1995 and 1994, LNC had restructured loans
of $61.9 million and $39.1 million, respectively. LNC recorded
$4.4 million (including $1.0 million in interest income that was
due LNC prior to January 1, 1995) and $2.4 million interest income
on these restructured loans for the nine months ended September 30,
1995 and 1994, respectively, as compared to interest income of $4.9
million and $3.2 million that would have been recorded according to
their original terms.
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION
(continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued)
Mortgage loans on real estate with a combined carrying value
at September 30, 1995 of $32.8 million were non-income producing
for the nine months ended September 30, 1995.
In the first nine months of 1995, LNC continued to add to its
provision for losses for mortgage loans on real estate. The amount
of such provisions for losses were lower in this first nine months
of 1995 as compared to the previous year because of bulk sale
transactions in 1994 of performing and non-performing properties.
These bulk sales also caused a decrease in the ratio of reserves to
impaired loans at December 31, 1994 and thereafter, as compared to
quarters ended prior to December 31, 1994.
As of September 30, 1995, LNC did not have any future
commitments to lend funds for non-accrual, restructured or other
problem loans.
Cash and Invested Cash
Cash and invested cash increased by $298.1 million in the
first nine months of 1995. This increase is the result of a
portion of the operating cash flow being invested temporarily in
short-term investments pending the placement of funds in longer
term investments.
Deferred Acquisition Costs
The decrease in deferred acquisition costs of $470.1 million
is the net result of the growth in business being more than offset
by a reduction in deferred acquisition costs related to realized
gain on investments and the change in unrealized gain on securities
available-for-sale.
Premiums and Fee Receivable
Premiums and fees receivable increased $114.3 million in the
first nine months of 1995 as the result of increased volumes of
business in the Life-Health Reinsurance segments.
Assets Held in Separate Accounts
This asset account as well as the corresponding liability
account increased by $7.2 billion in the first nine months of 1995,
reflecting an increase in annuity and pension funds under
management.
Federal Income Taxes
Federal income taxes recoverable decreased $385.6 million in
the first nine months of 1995. This decrease is the net result of
1)an increase in deferred tax related to the increase in unrealized
gains on available-for-sale securities and 2)a tax refund of
approximately $150 million in the first quarter of 1995, which
resulted from the realization of capital losses in 1994 to recover
capital gains taxes paid in prior years, being partially offset by
increases related to recoverable deferred taxes from life insurance
reserve differences, discounting of unpaid losses and additions to
the investment reserves.
Amounts Recoverable from Reinsurers
The increase in amounts recoverable from reinsurers of $242.2
million was the result of increased volumes of business ceded in
the Life Insurance and Annuities segment.
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION
(continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued)
Goodwill
Goodwill increased in the second quarter of 1995 due to the
acquisition of an investment management company (see note 4 on page 7).
Other Intangible Assets
This line was added to the balance sheet in the second quarter
of 1995 to accommodate the amounts related to LNC's purchase of
additional subsidiaries (see note 4 on page 7). The prior period
amount was previously included in other assets.
Other Assets
The increase in other assets of $131.5 million is the result
of having a higher receivable related to investment securities sold
in the last few days of the third quarter of 1995 versus the end of
1994.
Total Liabilities
Total liabilities increased by $10.5 billion in the first nine
months of 1995. This increase reflects 1) an increased level of
business as evidenced by an increase in policy liabilities and
accruals of $1.8 billion, an increase of $1.0 billion in
contractholder funds, an increase of $7.2 billion in the
liabilities related to separate accounts, 2) an increase in debt of
$250.5 million and 3) an increase in other liabilities of $323.3
million.
Policyholder liabilities as of September 30, 1995 and December
31, 1994 included liabilities for environmental losses of $201.5.
million and $201.0 million respectively. Because of the limited
coverages that have been written by LNC, these reserves represent
only 8% of LNC's total property-casualty reserves for both periods.
On a claims count basis these environmental losses represent only
3% and 4%, respectively, of the direct business written. These
percentages and amounts are at these levels due to LNC's
concentration on writing coverages for small to medium size
companies rather than the larger companies that tend to incur most
of the environmental and product liability claims. LNC's
management challenges environmental claims in cases of questionable
liability and reviews the level of environmental liability on an
on-going basis to help insure that the liability maintained is
adequate. Nonetheless, establishing reserves for environmental
losses is subject to significant uncertainties because of the long
reporting delays, lack of historical data and the unresolved
complex legal and regulatory issues that are involved. However,
based on available information, it is management's judgement that
the appropriate level of reserves have been recorded and that any
unrecorded liability would not be material to LNC's future results
of operations, liquidity or financial condition.
As indicated in note 7 to the consolidated financial
statements for the year ended December 31, 1994 (see page 46 of
LNC's 10-K), LNC's December 31, 1994 balance sheet included a
liability for future policy benefits, claims and claim expenses and
an asset for amounts recoverable from reinsurers for its disability
income business that netted to a liability of $815.8 million as of
December 31, 1994. Principally due to the assumption of a large
block of disability claim reserves and related assets through a
reinsurance contract during the first nine months of 1995, the
comparable net liability as of September 30, 1995 is $1.4 billion.
-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION
(continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued)
If recent disability income incidence levels do not improve or if
claim termination rates deteriorate on existing contracts,
substantial reserve additions and/or accelerated amortization or
write-off of existing deferred acquisition costs may be required.
Another in-depth review of the experience of the existing direct
and reinsurance books of disability income business is expected to
be completed in the fourth quarter of 1995 and deferred acquisition
costs and reserve levels will be adjusted, if appropriate.
Tax authorities continue to focus on compliance of qualified
annuity plans marketed by insurance companies. If sponsoring
employers cannot demonstrate compliance and the insurance company
is held responsible due to its marketing efforts, LNC and other
insurers may be subject to potential liability. It is not possible
to provide a meaningful estimate of the range of possible liability
at this time. Management continues to monitor this matter and to
take steps to minimize any potential liability.
The increase in other liabilities relates to an increase in
the expected payouts for securities purchased in the last few days
of the third quarter of 1995 versus a lower volume of such
transactions at the end of 1994.
Shareholders' Equity
Total shareholders' equity increased $1.3 billion in the first
nine months of 1995. Excluding the increase of $1.0 billion
related to unrealized gains on securities available-for-sale,
shareholders' equity increased $299.4 million. This increase was
the net result of $407.1 million from net income, $20.9 million
from the issuance of common stock related to benefit plans, $9.7
million related to an increase in the accumulated foreign exchange
gain, and a decrease of $138.3 million related to the declaration
of dividends to shareholders.
Liquidity and Cash Flow
In the businesses in which LNC operates, 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 and yield) of the underlying
liabilities.
As indicated by the Consolidated Statements of Cash Flows on
page 6, LNC's business operations generated $1.6 billion of cash
during the first nine months of 1995. This amount includes a
federal tax refund of approximately $150 million in the first
quarter of 1995 which resulted from the realization of capital
losses in 1994 to recover capital gains taxes paid in prior years.
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. Such a
transaction occurred in May 1995 when LNC issued $200 million of 7
1/4% debt securities payable in 2005 from its previously filed
shelf registration. This issuance left LNC with remaining
authority from the existing shelf registration to issue $100
million in debt securities, preferred stock, common stock or any
combination thereof. On June 1, 1995 LNC filed a shelf
registration statement with the Securities and Exchange Commission
("SEC") for potential public offerings of an additional $500
million of debt securities, preferred stock, common stock or
combination thereof. This registration went effective on June 30, 1995.
-16-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION
(continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued)
As indicated in note 7 to the consolidated financial
statements for the year ended December 31, 1994 (see page 53 of
LNC's Form 10-K), LNC has entered into derivative transactions to
reduce its exposure to fluctuations in interest rates and foreign
exchange risks. During the first nine months of 1995, LNC has made
changes to its derivative exposures as follows:
1. Added $700 million notional amount of interest rate caps, increasing the
notional amount of interest rate cap agreements to $5.1 billion from $4.4
billion.
2. Terminated $700 million of maturing spread-lock agreements and added $500
million of new agreements. These transactions resulted in a net reduction
in the outstanding contract amounts from $1.3 billion to $1.1 billion.
3. In the first quarter, removed the $354.3 million face amount
of short financial futures that were being used at December
31, 1994 to hedge interest rate risks and to manage duration
of a portion of the fixed maturity securities. During the
third quarter, added $66.9 million face amount of long
futures to hedge these same risks.
4. Used $200 million face amount of financial futures within the second
quarter to hedge against adverse interest rate movements in connection
with the 7 1/4%, $200 million debt offering referenced above.
5. Terminated the $28.2 million face amount of financial futures
for hedging pension commitments.
6. Increased the use of foreign exchange forward contracts to hedge the
currency risk of foreign bonds to $41.3 million from $21.5 million.
7. Increased the use of foreign exchange futures contracts to hedge the
currency risk of additional funds invested in a UK subsidiary to $358.3
million from $138.2 million.
8. Established $142.1 million notional of foreign currency options as an
additional hedge of the currency risk of foreign bonds.
9. Added $15 million notional of a foreign currency swap to convert the
foreign currency cash flows associated with a foreign bond into U.S.
dollars.
During the second quarter, a major rating agency downgraded the
debt rating of a cap agreement counterparty to Baa1 from A3; that
counterparty continues to hold an A rating from another major
rating agency. As of September 30, 1995, LNC's cap agreements with
that counterparty have an aggregate notional amount of $500 million
and an aggregate replacement value of approximately $200,000. The
remaining $4.6 billion notional amount of caps are with
counterparties rated A3/A- or better by two major rating agencies.
-17-
PART II - OTHER INFORMATION AND EXHIBITS
Items 1, 2, 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 Exhibits of the Registrant are 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
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended September
30, 1995.
18
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,
Executive Vice President and
Chief Financial Officer
/S/ Donald L. Van Wyngarden
Donald L. Van Wyngarden,
Second Vice President and Controller
Date October 26, 1995
-19-
LINCOLN NATIONAL CORPORATION
Exhibit Index for the Report on Form 10-Q
for the Quarter Ended September 30, 1995
Exhibit Number Description Page
Number
11 Computation of Per Share Earnings 20
27 Financial Data Schedule 21
<TABLE>
-20-
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
EXHIBIT (11) - COMPUTATION OF PER SHARE EARNINGS
Nine Months Three Months
Ended September 30 Ended September 30
PRIMARY 1995 1994 1995 1994
<S> <C> <C> <C> <C>
Average shares outstanding
(assuming conversion of
series A, E and F
preferred stock) ------------- 103,986,236 103,840,927 104,264,528 104,021,332
Net effect of dilutive
stock options (based on
the treasury stock method
using average market price) -- 696,562 655,761 656,614 556,973
Total shares
outstanding ----------- 104,682,798 104,496,688 104,921,142 104,578,305
FULLY DILUTED
Average shares outstanding
(assuming conversion of
series A, E and F
preferred stock) ------------- 103,986,236 103,840,927 104,264,528 104,021,332
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) -------- 862,617 655,761 836,759 556,973
Total shares
outstanding ----------- 104,848,853 104,496,688 105,101,287 104,578,305
DOLLAR INFORMATION (000's omitted)
Net Income -------------- $407,050 $256,169 $154,325 $ 58,382
PER SHARE INFORMATION
Primary:
Net Income -------------- $3.89 $2.45 $1.47 $ .56
Fully Diluted:
Net Income -------------- $3.88 $2.45 $1.47 $ .56
<FN>
<F1>
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.
<F2>
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>
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000059558
<NAME> Lincoln National Corporation
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-START> Jul-01-1995
<PERIOD-END> Sep-30-1995
<DEBT-HELD-FOR-SALE> 25,233,712,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,116,366,000
<MORTGAGE> 2,907,756,000
<REAL-ESTATE> 753,680,000
<TOTAL-INVEST> 30,862,669,000
<CASH> 1,339,707,000
<RECOVER-REINSURE> 2,394,518,000
<DEFERRED-ACQUISITION> 1,599,860,000
<TOTAL-ASSETS> 60,677,527,000
<POLICY-LOSSES> 12,281,658,000
<UNEARNED-PREMIUMS> 867,379,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 18,201,503,000
<NOTES-PAYABLE> 945,440,000
<COMMON> 886,294,000
0
1,352,000
<OTHER-SE> 3,461,642,000
<TOTAL-LIABILITY-AND-EQUITY> 60,677,527,000
2,712,293,000
<INVESTMENT-INCOME> 1,681,555,000
<INVESTMENT-GAINS> 174,473,000
<OTHER-INCOME> 126,326,000
<BENEFITS> 2,892,186,000
<UNDERWRITING-AMORTIZATION> 88,759,000
<UNDERWRITING-OTHER> 1,226,092,000
<INCOME-PRETAX> 537,901,000
<INCOME-TAX> 130,851,000
<INCOME-CONTINUING> 407,050,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 407,050,000
<EPS-PRIMARY> $3.91
<EPS-DILUTED> $3.91
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
