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 March 31, 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 April 28, 1995 94,582,742
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 21
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PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1 Financial Statements
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31 December 31
(000'S omitted) 1995 1994
ASSETS
Investments:
<S> <C> <C>
Securities available-for-sale, at fair value:
Fixed maturity (cost 1995 - $22,784,254;
1994 - $22,194,079) ------------------ $22,950,184 $21,644,154
Equity (cost 1995 - $805,764;
1994 - $948,135) --------------------- 937,109 1,038,617
Mortgage loans on real estate ------------ 2,785,097 2,853,083
Real estate ------------------------------ 699,841 706,854
Policy loans ----------------------------- 557,112 550,672
Other investments ------------------------ 216,314 175,121
Total Investments ---------------------- 28,145,657 26,968,501
Investment in unconsolidated affiliates ---- 103,146 97,054
Cash and invested cash --------------------- 1,321,867 1,041,583
Property and equipment --------------------- 208,996 185,471
Deferred acquisition costs ----------------- 1,913,339 2,107,915
Premiums and fees receivable --------------- 665,800 551,679
Accrued investment income ------------------ 426,466 428,959
Assets held in separate accounts ----------- 16,079,256 14,301,684
Federal income taxes ----------------------- 172,523 396,888
Amounts recoverable from reinsurers -------- 2,197,731 2,152,327
Goodwill ----------------------------------- 143,532 145,844
Other assets ------------------------------- 951,789 486,855
Total Assets ----------------------------- $52,330,102 $48,864,760
See notes to consolidated financial statements on pages 7 - 8.
</TABLE>
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<TABLE>
<CAPTION>
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
-CONTINUED-
March 31 December 31
(000's omitted) 1995 1994
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
<S> <C> <C>
Policy liabilities and accruals:
Future policy benefits, claims
and claim expenses -------------------- $10,889,800 $10,536,512
Unearned premiums ----------------------- 802,154 804,987
Total Policy Liabilities and Accruals - 11,691,954 11,341,499
Contractholder funds ---------------------- 17,752,612 17,250,423
Liabilities related to separate accounts -- 16,079,256 14,301,684
Short-term debt --------------------------- 302,776 275,310
Long-term debt ---------------------------- 419,152 419,607
Other liabilities ------------------------- 2,432,626 2,234,177
Total Liabilities ----------------------- 48,678,376 45,822,700
</TABLE>
<TABLE>
<CAPTION>
Shareholders' Equity:
<S> <C> <C>
Series A Preferred Stock
(3/31/95 liquidation value - $3,365) ----- 1,382 1,420
Series E Preferred Stock
(3/31/95 liquidation value - $151,569) --- 151,206 151,206
Series F Preferred Stock
(3/31/95 liquidation value - $158,707) --- 158,707 158,707
Common Stock ------------------------------ 557,585 555,382
Earned surplus ---------------------------- 2,569,380 2,479,532
Foreign currency translation adjustment --- 15,344 6,890
Net unrealized gain (loss) on securities
available-for-sale ----------------------- 198,122 (311,077)
Total Shareholders' Equity -------------- 3,651,726 3,042,060
Total Liabilities
and Shareholders' Equity -------------- $52,330,102 $48,864,760
See notes to consolidated financial statements on pages 7 - 8.
</TABLE>
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<TABLE>
<CAPTION>
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31
(000's omitted) 1995 1994
Revenue:
<S> <C> <C>
Insurance premiums --------------------------------- $ 739,716 $1,077,234
Insurance fees ------------------------------------- 122,043 105,833
Net investment income ------------------------------ 530,147 501,841
Equity in earnings of
unconsolidated affiliates ------------------------ 5,107 654
Realized gain (loss) on
investments -------------------------------------- 44,100 38,095
Gain on sale of subsidiary ------------------------- -- 44,058
Other ---------------------------------------------- 42,617 38,021
Total Revenue ---------------------------------- 1,483,730 1,805,736
Benefits and Expenses:
Benefits and settlement
expenses ----------------------------------------- 887,131 1,174,459
Underwriting, acquisition,
insurance and other expenses --------------------- 403,161 437,715
Interest expense ----------------------------------- 13,973 11,278
Total Benefits and Expenses -------------------- 1,304,265 1,623,452
Net Income Before Federal
Income Taxes --------------------------------- 179,465 182,284
Federal Income Taxes --------------------------------- 44,652 31,299
Net Income ------------------------------------- $ 134,813 $ 150,985
Net Income Per Share --------------------------------- $1.30 $1.46
Cash Dividends Per Share of
Common Stock --------------------------------------- $ .43 $ .41
See notes to consolidated financial statements on pages 7 - 8.
</TABLE>
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<TABLE>
<CAPTION>
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Months Ended March 31
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 ------------- (1,160) (1,058) (38) (35)
Balance at March 31 ----- 42,058 46,231 1,382 1,518
Series E and F Preferred Stock:
Balance at beginning
and end of period -------- 4,417,897 4,417,897 309,913 309,913
Common Stock:
(Shares authorized:
1994 - 800,000,000;
1993 - 400,000,000)
Balance at beginning of year - 94,477,942 94,183,190 555,382 543,659
Conversion of Series A
Preferred Stock ------------ 9,280 8,464 38 35
Issued for benefit plans ----- 88,189 551,657 2,165 21,442
Balance at March 31 ----- 94,575,411 94,743,311 557,585 565,136
Earned Surplus:
Balance at beginning of year - 2,479,532 2,303,731
Net income ------------------- 134,813 150,985
Cash dividends declared ------ (44,965) (43,087)
Balance at March 31 ----- 2,569,380 2,411,629
Foreign Currency Translation Adjustment:
Accumulated adjustment at
beginning of year ---------- 6,890 (1,214)
Change during period --------- 8,454 761
Balance at March 31 ----- 15,344 (453)
Net Unrealized Gain (Loss) on
Securities Available-for-Sale:
Balance at beginning of year - (311,077) 914,679
Change during period --------- 509,199 (599,210)
Balance at March 31 ----- 198,122 315,469
Total Shareholders' Equity
at March 31 ----------- $3,651,726 $3,603,212
Common Stock (assuming conversion
of Series A, E & F Preferred Stock):
End of Period ----------- 103,747,669 103,948,953
Average for the Period -- 103,678,382 103,541,943
See notes to consolidated financial statements on pages 7 - 8.
</TABLE>
<PAGE>
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<TABLE>
<CAPTION>
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31
(000's omitted) 1995 1994
Operating Activities:
<S> <C> <C>
Net income ---------------------------------------- $ 134,813 $ 150,985
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred acquisition costs -------------------- 40,803 (36,415)
Premiums and fees receivable ------------------ (142,908) (31,488)
Accrued investment income --------------------- (14,700) (31,171)
Policy liabilities and accruals --------------- 137,879 (32,399)
Contractholder funds -------------------------- 349,840 359,039
Amounts recoverable from reinsurers ----------- (138,318) (104,352)
Federal income taxes -------------------------- 181,598 2,357
Equity in undistributed earnings of
unconsolidated affiliates ------------------- -- --
Provisions for depreciation ------------------- 15,302 15,576
Realized (gain) loss on investments ----------- (44,705) (28,550)
Gain on sale of subsidiary -------------------- -- (44,058)
Other ----------------------------------------- (37,014) 19,425
Net Adjustments ----------------------------- 347,777 87,964
Net Cash Provided by Operating Activities --- 482,590 238,949
Investing Activities:
Securities-available-for-sale:
Purchases -------------------------------------- (4,449,100) (3,919,428)
Sales ------------------------------------------ 3,951,078 2,741,944
Maturities ------------------------------------- 182,774 367,186
Purchase of other investments -------------------- (301,429) (291,716)
Sale or maturity of other investments ------------ 340,700 543,781
Sale of subsidiaries ----------------------------- -- 392,754
Increase (decrease) in cash collateral on
loaned securities ------------------------------ (244,080) 87,852
Other -------------------------------------------- 111,999 (119,800)
Net Cash Used in Investing Activities ------ (408,058) (197,427)
Financing Activities:
Principal payments on long-term debt ------------- (455) (4,295)
Issuance of long-term debt ----------------------- 1 229
Net increase in short-term debt ------------------ 27,466 64,185
Universal life and investment contract deposits -- 786,828 610,607
Universal life and investment
contract withdrawals --------------------------- (565,451) (399,290)
Common Stock issued for benefit plans ------------ 2,165 21,442
Dividends paid to shareholders ------------------- (44,802) (42,858)
Net Cash Provided by Financing Activities -- 205,752 250,020
Net Increase (Decrease) in Cash ------------ 280,284 291,542
Cash at Beginning of Year -------------------------- 1,041,583 709,664
Cash at March 31 --------------------------- $1,321,867 $1,001,206
See notes to consolidated financial statements on pages 7 - 8.
</TABLE>
<PAGE>
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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. For further information, refer to the
consolidated financial statements included in LNC's annual report to
shareholders or Form 10-K for the year ended December 31, 1994.
Operating results for the three months ended March 31, 1995 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 1995.
2. Reclassifications
During the first quarter of 1995, in accordance with management's current
judgement of the economic effect of certain reinsurance contracts which grant
statutory surplus to other insurance companies, changes have been made in the
classification of assets, liabilities, revenues, and total benefits and
expenses to reflect deposit accounting for such contracts. Amounts for prior
periods have been reclassified to conform to the 1995 presentation. Net
income and shareholders' equity are not affected by these reclassifications.
Shown below, for the last three years (1992-1994) and 1994 by quarter, are the
effects of the reclassifications which reduced assets/liabilities and
revenues/total benefits and expenses (in millions).
Full Year 1994 by Quarter
1992 1993 1994 1st 2nd 3rd 4th
Revenues/Expenses $766.4 $897.0 $804.5 $201.1 $196.7 $195.1 $211.6
Assets/Liabilities 505.1 555.3 465.3 674.8 758.6 637.6 465.3
3. Federal Income Taxes
The effective tax rate on net income is lower than the prevailing corporate
federal income tax rate. The difference for both 1994 and 1995 resulted
principally from tax-exempt investment income. The three months ended March
31, 1994 was also affected by the fact that no income taxes were payable on
the gain on sale of a subsidiary (see note 5).
4. Earnings Per Share
Earnings per share are computed based on the average number of common shares
outstanding (103,678,382 and 103,541,943 for the first three months of 1995
and 1994, respectively) after assuming conversion of the Series A, E and F
Preferred Stock.
<PAGE>
-8-
5. Sale of Subsidiary
On March 21, 1994, LNC sold 64% of a wholly owned subsidiary, EMPHESYS
Financial Group, Inc. ("EMPHESYS"), through an initial public offering. 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). On April 15,
1994, LNC sold an additional 7% of EMPHESYS. 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. 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".
6. Subsequent Events
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. This acquisition resulted in
goodwill of approximately $350 million and other intangible assets of $125
million. Goodwill and the other intangible assets will be amortized on a
straight-line basis over 25 years and 5 to 14 years, respectively. The
results of Delaware's operations will be included in LNC's consolidated
financial statements from the date of close.
On April 25, 1995, LNC completed the acquisition of Laurentian Financial Group
plc. This acquisition involved a purchase price of $237 million including
debt assumption of $44 million. Although purchase accounting adjustments have
not been finalized, management does not believe that consolidated results on a
proforma basis would have been materially different for the three months ended
March 31, 1995 and 1994.
<PAGE>
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LINCOLN NATIONAL CORPORATION
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
INFORMATION
As indicated in the "Notes to Consolidated Financial Statements" (see note 5
on page 8), LNC completed the sale of 64%, of its primary direct writer of
employee life-health benefit coverages subsidiary in the first quarter of
1994. As noted in the following "Review of Consolidated Operations" the 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 three months
ended March 31, 1995 compared to the results for the three months ended March
31, 1994.
Insurance Premiums
Property casualty premiums decreased by $24.6 million or 1% compared
with the three months ended March 31, 1994 primarily as the result of
reevaluating underwriting actions, focusing on account selection, risk
evaluation and the establishment of appropriate premiums. The decrease in
property-casualty premiums is leveling and is expected to continue to level
for the remainder of 1995. Excluding the impact of the subsidiary sold in
1994 (see note 5 on page 8), health premiums increased $19.1 million or 14%
for the first three months of 1995 compared with the first three months of
1994 as a result of increased volumes of business in the Life-Health
Reinsurance segment. Life and annuity premiums decreased by $39.4 million or
20% compared to the previous year. This decrease is the net result of
increases in business volume from the Life-Health Reinsurance segment and the
U.S. portion of the Life Insurance and Annuities segment being more than
offset by a decrease from the United Kingdom component of the Life Insurance
and Annuities segment. This decrease was the result of modifying the
classification for premiums for 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. 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.
Insurance Fees
Insurance fees from the sale of universal life and other interest
sensitive insurance contracts increased $16.2 million or 15% compared to the
first three months of 1994 as the result of increases in the volume of
transactions in the Life Insurance and Annuities segment.
Net Investment Income
Net investment income increased $28.2 million or 6% when compared with
the first three months of 1994. This is the result of a 4% increase in mean
invested assets and an increase in the overall yield on investments from 7.18%
to 7.28%. 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 (see note 5 on page 8) and reduced volumes of business in the
Property-Casualty segment.
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
INFORMATION (continued)
REVIEW OF CONSOLIDATED OPERATIONS (continued)
Equity in Earnings of Unconsolidated Affiliates
This line was added to the statement of income in 1994 following LNC's
sale of 64% of its direct writer of health coverages (see note 5 on page 8).
For the three months ended March 31, 1994, the amount shown represents LNC's
36% share of the total earnings of this company for the period after the
closing of the sale on March 21, 1994. The amount for the three months ended
March 31, 1995 represents LNC's 29% share of this company's earnings for the
full three months.
Gain on Sale of Subsidiary
The 1994 amount is the gain on LNC's sale of 64% of its primary direct
writer of employee life-health coverages (see note 5 on page 8).
Realized Gain (Loss) on Investments
The first three months of 1995 and 1994 had pre-tax realized gain on
investments of $44.1 million and $38.1 million, respectively. The gains for
1994 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 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 three months of 1995 and 1994 were $4.3 million and $4.8 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 mortgage loans on real estate and real
estate for the first three months of 1995 and 1994 were $7.3 million and $18.6
million, respectively.
Other Revenue
Other revenue increased $4.6 million or 12% when compared to the first
three 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
Property-Casualty benefits decreased by $56.9 million or 16% when
compared with the first three months of 1994 as a result of reductions in the
volume of insurance written and catastrophe losses and weather related claims.
Excluding the impact of the subsidiary sold in 1994 (see note 5 on page 8),
health benefits increased by $20.6 million or 20% when compared to the first
three months of 1994 as a result of increased volumes of business and
increased claims in the Life Insurance and Annuity and Life-Health Reinsurance
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
INFORMATION (continued)
REVIEW OF CONSOLIDATED OPERATIONS (continued)
segment. Life and annuity benefits and settlement expenses decreased $60.9
million or 26% when compared to the first three months of 1994. This decrease
is the net result of increases in business volume 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 relates to the
decrease in life and annuity premiums noted above.
Underwriting, Acquisition, Insurance and Other Expenses
Excluding the impact of the subsidiary sold in 1994 (see note 5 on page
8), this expense increased $38.9 million or 11% for the three months ended
March 31, 1995 compared to the first three months of 1994. The primary driver
behind this increase beyond the general inflation rate was the higher volume
related expenses in the Life-Health Reinsurance and Life Insurance and Annuity
segments due to the increase in business volumes. The expenses for Property-
Casualty segment were essentially flat with a year ago as staff levels were
adjusted to the current level of business.
Interest Expense
Interest expense increased $2.7 million or 24% when compared with the
first three 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 is expected
to increase in the second quarter of 1995 due to an increase in debt related
to the acquisitions of additional companies (see note 6 on page 8). The
additional leverage created by these acquisitions resulted in a one step
downgrade in two of LNC's debt ratings. Standard and Poor's changed its
rating from A+ (Exceptional or Superior) to A (Excellent) and Moody's changed
its rating from A1 to A2 (both Very Good, Strong or High).
Federal Income Taxes
Federal income taxes increased $13.3 million when compared to the first
three months of 1994. This is the net result of a small decrease in pre-tax
earnings being more than offset by the lack of any tax expense on the 1994
gain on sale of subsidiary (see note 5 on page 8).
Summary
Net income for the first three months of 1995 was $134.8 million or $1.30
per share compared with $151.0 million or $1.46 per share in the first three
months of 1994. Excluding realized gain (loss) on investments and gain on
sale of subsidiary, LNC earned $106.5 million for the first three months of
1995 compared with $83.4 million for the first three months of 1994. This
increase was due to increases in earnings from the three business segments
being partially offset by the impact of the loss of earnings from a subsidiary
sold net of investment income earned on the proceeds from the sale.
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
INFORMATION (continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
Investments
The total investment portfolio increased $1.2 billion in the first three
months of 1995. This increase is the result of increases in the fair value of
securities available-for-sale during the first three 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 March 31,
1995 was as follows:
Treasuries and AAA 36.3% BBB 21.3%
AA 10.6% BB 2.7%
A 26.7% Less than BB 2.4%
As of March 31, 1995, $1.162 billion or 5.1% of fixed maturity securities
was invested in below investment grade securities (less than BBB). This
represents 4.1% 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 three months ended March 31, 1995, the
aggregate cost of such investments purchased was $135.9 million. Aggregate
proceeds from such investments sold were $144.1 million, resulting in a
realized pre-tax loss of $6.8 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 March 31, 1995, mortgage loans on real estate and real estate
represented 9.9% and 2.5% of LNC's total investment portfolio. As of March
31, 1995, the underlying properties supporting the mortgage loans on real
estate consisted of 22% in commercial office buildings, 28% in retail stores,
20% in apartments, 15% in industrial buildings, 3% in hotels/motels and 12% 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.
<PAGE>
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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.
<TABLE>
<CAPTION>
Impaired loans included along with the related provision for losses are as
follows:
March 31 December 31
(in millions) 1995 1994
<S> <C> <C>
Impaired loans with provision for losses --------- $223.4 $275.8
Provision for losses ----------------------------- (56.7) (62.7)
Impaired loans with no provision for losses ------ 2.2 2.3
Net Impaired Loans ----------------------------- $168.9 $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.
</TABLE>
<TABLE>
<CAPTION>
A reconciliation of the mortgage loan provision for losses for these impaired
mortgage loans is as follows:
Three Months Ended March 31 (in millions) 1995 1994
<S> <C> <C>
Balance at beginning of year --------------------- $62.7 $226.6
Provisions for losses ---------------------------- 9.7 15.4
Releases due to sales ---------------------------- (15.7) (23.2)
Releases due to foreclosures --------------------- 0.0 (3.5)
Balance at End of Quarter ---------------------- $56.7 $215.3
</TABLE>
<TABLE>
<CAPTION>
The average recorded investment in impaired loans and the interest income
recognized on impaired loans were as follows:
Three Months Ended March 31 (in millions) 1995 1994
<S> <C> <C>
Average recorded investment in impaired loans ---- $251.8 $730.3
Interest income recognized on impaired loans ----- 4.8 12.6
All interest income on impaired loans was recognized on the cash basis of
income recognition.
</TABLE>
As of March 31, 1995 and 1994, LNC had restructured loans of $42.2 million and
$69.3 million, respectively. LNC recorded $.9 million and $1.6 million
interest income on these restructured loans for the quarter ended March 31,
1995 and 1994, respectively, as compared to interest income of $1.1 million
and $1.8 million that would have been recorded according to their original
terms.
Mortgage loans on real estate with a combined carrying value at March 31, 1995
of $48.3 million were non-income producing for the quarter ended March 31,
1995.
<PAGE>
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
INFORMATION (continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued)
In the first three 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 quarter as compared to the previous
quarters because of bulk sale transactions in 1994 of performing and non-
performing properties. These bulk sales also caused a decease in the ratio of
reserves to impaired loans at December 31, 1994 and March 31, 1995 as compared
to quarters ended prior to December 31, 1994.
As of March 31, 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 $280.3 million in the first three
months of 1995. Most of this increase related to a planned build-up of cash
to cover a portion of the purchase price of the companies acquired in April,
1995 (see note 6 on page 8).
Deferred Acquisition Costs
The decrease in deferred acquisition costs of $195.5 million is the net
result of the growth in business being more than offset by a reduction in
deferred acquisition costs related to the change in unrealized gain on
securities available-for-sale.
Premiums and Fee Receivable
Premiums and fees receivable increased $114.4 million 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 $1.8 billion in the first three months of 1995, reflecting an
increase in annuity and pension funds under management.
Federal Income Taxes
Federal income taxes recoverable decreased $224.4 million in the first
three 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 which resulted
from the realization of capial gains 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 was the result of
increased volumes of business ceded in the Life Insurance and Annuities
segment.
Goodwill
Goodwill is expected to increase in the second quarter of 1995 due to the
acquisition of an investment management company (see note 6 on page 8).
<PAGE>
-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
INFORMATION (continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued)
Other Assets
The increase in other assets of $464.9 million is the result of having a
higher receivable related to investment securities sold in the last few days
of the first quarter of 1995 versus the end of 1994.
Total Liabilities
Total liabilities increased by $2.9 billion in the first three months of
1995. This increase reflects 1) an increased level of business as evidenced
by an increase in policy liabilities and accruals of $350.4 million, an
increase of $502.2 million in contractholder funds, an increase of $1.8
billion in the liabilities related to separate accounts, 2) an increase in
debt of $27.0 million and 3) an increase in other liabilities of $198.4
million.
Policyholder liabilities as of March 31, 1995 and December 31, 1994
included liabilities for environmental losses of $200.2 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 (4% based on claim counts of direct business).
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.
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 security investments purchased in the last few days of the first
quarter of 1995 versus a lower volume of such transactions at the end of 1994.
Shareholders' Equity
Total shareholders' equity increased $609.7 million in the first three
months of 1995. Excluding the increase of $509.2 million related to
unrealized gain on securities available-for-sale, shareholders' equity
increased $100.5 million. This increase was the net result of $134.8 million
from net income, $2.2 million from the issuance of Common Stock related to
benefit plans, $8.5 million related to an increase in the accumulated foreign
exchange gain, and a decrease of $45.0 million related to the declaration of
dividends to shareholders.
<PAGE>
-16-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION (continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued)
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 $482.6 million of cash during the first
three months of 1995. This amount includes a federal tax refund of
approximately $150 million 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 effective October 1,
1994 when LNC issued $200.0 million of 9 1/8% debt securities payable in 2024.
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 quarter 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, reducing the
outstanding contract amounts to $600 million from $1.3 billion.
3. Removed the $354.3 million 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.
4. Increased the use of financial futures for hedging pension commitments to
$123.1 million from $28.2 million.
5. Increased the use of foreign exchange forward contracts to hedge the
currency risk of foreign bonds, to $53.8 million from $21.2 million.
After the end of the first quarter of 1995, 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.
LNC's cap agreements with that counterparty have an aggregate notional amount
of $500 million and an aggregate replacement value of approximately $1.0
million. The remaining $4.6 billion notional amount of caps are with
counterparties rate A3/A- or better by both major rating agencies.
<PAGE>
-17-
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 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 March 31,
1995.
<PAGE>
-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 May 8, 1995
<PAGE>
-19-
LINCOLN NATIONAL CORPORATION
Exhibit Index for the Report on Form 10-Q
for the Quarter Ended March 31, 1995
Exhibit Number Description Page Number
11 Computation of Per Share Earnings 20
27 Financial Data Schedule 21
<TABLE>
<CAPTION>
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
EXHIBIT (11) - COMPUTATION OF PER SHARE EARNINGS
Three Months
Ended March 31
PRIMARY 1995 1994
<S> <C> <C>
Average shares outstanding
(assuming conversion of
Series A, E and F
Preferred Stock) --------------------------------------- 103,678,382 103,541,943
Net effect of dilutive
stock options (based on
the treasury stock method
using average market price) ---------------------------- 550,618 722,145
Total shares
outstanding ------------------------------------- 104,229,000 104,264,088
FULLY DILUTED
Average shares outstanding
(assuming conversion of
Series A, E and F
Preferred Stock) --------------------------------------- 103,678,382 103,541,943
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) ---------------------------------- 624,860 722,145
Total shares
outstanding ------------------------------------- 104,303,242 104,264,088
DOLLAR INFORMATION (000's omitted)
Net Income ---------------------------------------- $134,813 $150,985
PER SHARE INFORMATION
Primary:
Net Income -------------------------------------- $1.29 $1.45
Fully Diluted:
Net Income -------------------------------------- $1.29 $1.45
<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
<MULTIPLIER> 1
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<DEBT-HELD-FOR-SALE> 22,950,184,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 937,109,000
<MORTGAGE> 2,785,097,000
<REAL-ESTATE> 699,841,000
<TOTAL-INVEST> 28,145,657,000
<CASH> 1,321,867,000
<RECOVER-REINSURE> 2,197,731,000
<DEFERRED-ACQUISITION> 1,913,339,000
<TOTAL-ASSETS> 52,330,102,000
<POLICY-LOSSES> 10,889,800,000
<UNEARNED-PREMIUMS> 802,154,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 17,752,612,000
<NOTES-PAYABLE> 721,928,000
<COMMON> 557,585,000
0
311,295,000
<OTHER-SE> 2,782,846,000
<TOTAL-LIABILITY-AND-EQUITY> 52,330,102,000
861,759,000
<INVESTMENT-INCOME> 530,147,000
<INVESTMENT-GAINS> 44,100,000
<OTHER-INCOME> 47,724,000
<BENEFITS> 887,131,000
<UNDERWRITING-AMORTIZATION> 242,026,000
<UNDERWRITING-OTHER> 161,135,000
<INCOME-PRETAX> 179,465,000
<INCOME-TAX> 44,652,000
<INCOME-CONTINUING> 134,813,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 134,813,000
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.30
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
