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 June 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 July 28, 1995 103,923,782
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 18.
Page 1 of 20
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<TABLE>
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30 December 31
(000'S omitted) 1995 1994
ASSETS
Investments:
<S> <C> <C>
Securities available-for-sale, at fair value:
Fixed maturity (cost 1995 - $23,581,978;
1994 - $21,438,155) ------------------ $24,744,950 $21,644,154
Equity (cost 1995 - $863,106;
1994 - $913,442) --------------------- 1,047,684 1,038,617
Mortgage loans on real estate ------------ 2,869,753 2,853,083
Real estate ------------------------------ 732,145 706,854
Policy loans ----------------------------- 580,364 550,672
Other investments ------------------------ 226,786 175,121
Total Investments ---------------------- 30,201,682 26,968,501
Investment in unconsolidated affiliates ---- 105,257 97,054
Cash and invested cash --------------------- 1,112,190 1,041,583
Property and equipment --------------------- 283,877 185,471
Deferred acquisition costs ----------------- 1,603,145 2,069,975
Premiums and fees receivable --------------- 585,081 551,679
Accrued investment income ------------------ 455,695 428,959
Assets held in separate accounts ----------- 19,646,053 14,301,684
Federal income taxes ----------------------- 53,257 396,888
Amounts recoverable from reinsurers -------- 2,274,652 2,152,327
Goodwill ----------------------------------- 478,636 145,844
Other intangible assets -------------------- 402,465 42,773
Other assets ------------------------------- 945,970 482,022
Total Assets ----------------------------- $58,147,960 $48,864,760
</TABLE>
See notes to consolidated financial statements on page 7.
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LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
-CONTINUED-
<TABLE>
June 30 December 31
(000's omitted) 1995 1994
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
<S> <C> <C>
Future policy benefits, claims
and claim expenses -------------------- $11,603,967 $10,536,512
Unearned premiums ----------------------- 830,090 804,987
Total Policy Liabilities and Accruals - 12,434,057 11,341,499
Contractholder funds ---------------------- 18,072,575 17,250,423
Liabilities related to separate accounts -- 19,646,053 14,301,684
Short-term debt --------------------------- 378,643 275,310
Long-term debt ---------------------------- 621,868 419,607
Other liabilities ------------------------- 2,807,923 2,234,177
Total Liabilities ----------------------- 53,961,119 45,822,700
</TABLE>
<TABLE>
Shareholders' Equity:
<S> <C> <S> <C> <C>
Series A preferred stock
(6/30/95 liquidation value - $3,346) ----- 1,374 1,420
Series E preferred stock ------------------ -- 151,206
Series F preferred stock ------------------ -- 158,707
Common stock ------------------------------ 886,113 555,382
Earned surplus ---------------------------- 2,641,978 2,479,532
Foreign currency translation adjustment --- 12,890 6,890
Net unrealized gain (loss) on securities
available-for-sale ----------------------- 644,486 (311,077)
Total Shareholders' Equity -------------- 4,186,841 3,042,060
Total Liabilities
and Shareholders' Equity -------------- $58,147,960 $48,864,760
</TABLE>
See notes to consolidated financial statements on page 7.
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<TABLE>
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended Three Months Ended
June 30 June 30
(000's omitted) 1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenue:
Insurance premiums -----------$1,524,889 $1,845,036 $ 785,173 $ 767,802
Insurance fees --------------- 251,909 216,866 129,866 111,033
Net investment income -------- 1,113,855 989,453 583,708 487,612
Investment advisory fees ----- 42,579 -- 42,579 --
Equity in earnings of
unconsolidated affiliates -- 8,799 5,592 3,692 4,938
Realized gain (loss) on
investments ---------------- 106,411 (28,235) 62,311 (66,330)
Gain on sale of subsidiary --- -- 48,842 -- 4,784
Other ------------------------ 81,479 75,913 38,862 37,892
Total Revenue ------------ 3,129,921 3,153,467 1,646,191 1,347,731
Benefits and Expenses:
Benefits and settlement
expenses ------------------- 1,904,281 2,117,240 1,017,150 942,781
Underwriting, acquisition,
insurance and other expenses 857,198 789,831 454,037 352,116
Interest expense ------------- 33,947 22,730 19,974 11,452
Total Benefits
and Expenses ----------- 2,795,426 2,929,801 1,491,161 1,306,349
Net Income Before Federal
Income Taxes 334,495 223,666 155,030 41,382
Federal Income Taxes (credits) - 81,770 25,879 37,118 (5,420)
Net Income $ 252,725 $ 197,787 $ 117,912 $ 46,802
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Net Income Per Share ----------- $2.43 $1.91 $1.13 $ .45
Cash Dividends Per Share
Common Stock ----------------- $ .86 $ .82 $ .43 $ .41
</TABLE>
See notes to consolidated financial statements on page 7.
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LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
Six Months Ended June 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 ------------- (1,395) (1,723) (46) (57)
Balance at June 30 ------ 41,823 45,566 1,374 1,496
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 June 30 ------ -- 4,417,897 -- 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 ------------ 11,160 13,784 46 57
Conversion of series E and F
preferred stock ------------ 8,835,794 -- 309,913 --
Issued for benefit plans ----- 579,176 577,666 20,772 22,386
Balance at June 30 ------103,904,072 94,774,640 886,113 566,102
Earned Surplus:
Balance at beginning of year - 2,479,532 2,303,731
Net income ------------------- 252,725 197,787
Cash dividends declared ------ (90,279) (86,189)
Balance at June 30 ------ 2,641,978 2,415,329
Foreign Currency Translation Adjustment:
Accumulated adjustment at
beginning of year ---------- 6,890 (1,214)
Change during period --------- 6,000 5,764
Balance at June 30 ------ 12,890 4,550
Net Unrealized Gain (Loss) on
Securities Available-for-Sale:
Balance at beginning of year - (311,077) 914,679
Change during period --------- 955,563 (863,093)
Balance at June 30 ------ 644,486 51,586
Total Shareholders' Equity
at June 30 ------------ $4,186,841 $3,348,976
</TABLE>
<TABLE>
<S> <C> <C>
Common Stock (assuming conversion
of series A, E & F preferred stock):
End of Period ----------- 104,238,656 103,974,962
Average for the Period -- 103,844,782 103,749,231
</TABLE>
See notes to consolidated financial statements on page 7.
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<TABLE>
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30
(000's omitted) 1995 1994
Operating Activities:
<S> <C> <C>
Net income ---------------------------------------- $ 252,725 $ 197,787
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred acquisition costs -------------------- 11,440 (87,251)
Premiums and fees receivable ------------------ (62,189) (71,300)
Accrued investment income --------------------- (34,226) (43,001)
Policy liabilities and accruals --------------- 265,350 46,180
Contractholder funds -------------------------- 520,454 805,374
Amounts recoverable from reinsurers ----------- (215,239) (426,373)
Federal income taxes -------------------------- 115,834 (46,112)
Equity in undistributed earnings of
unconsolidated affiliates ------------------- (7,495) (4,931)
Provisions for depreciation ------------------- 31,701 28,442
Realized (gain) loss on investments ----------- (133,924) 61,513
Gain on sale of subsidiary -------------------- -- (48,842)
Other ----------------------------------------- 19,646 172,728
Net Adjustments ----------------------------- 511,352 386,427
Net Cash Provided by Operating Activities --- 764,077 584,214
</TABLE>
<TABLE>
Investing Activities:
<S> <C> <C>
Securities-available-for-sale:
Purchases -------------------------------------- (8,355,472) (6,769,656)
Sales ------------------------------------------ 7,259,874 4,846,477
Maturities ------------------------------------- 416,632 719,355
Purchase of other investments -------------------- (670,489) (595,107)
Sale or maturity of other investments ------------ 634,883 973,163
Sale (purchase) of subsidiaries ------------------ (772,000) 417,367
Increase in cash collateral on loan securities --- 312,511 108,417
Other -------------------------------------------- (128,948) (49,420)
Net Cash Used in Investing Activities ------ (1,303,009) (349,404)
</TABLE>
<TABLE>
Financing Activities:
<S> <C> <C>
Principal payments on long-term debt ------------- (528) (9,495)
Issuance of long-term debt ----------------------- 202,790 311
Net increase in short-term debt ------------------ 140,219 123,567
Universal life and investment contract deposits -- 1,452,756 1,203,505
Universal life and investment
contract withdrawals --------------------------- (1,116,837) (829,169)
Common stock issued for benefit plans ------------ 20,773 22,386
Dividends paid to shareholders ------------------- (89,634) (84,344)
Net Cash Provided by Financing Activities -- 609,539 426,761
Net Increase in Cash ----------------------- 70,607 661,571
Cash at Beginning of Year -------------------------- 1,041,583 709,664
Cash at June 30 ---------------------------- $1,112,190 $1,371,235
</TABLE>
See notes to consolidated financial statements on page 7.
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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. 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 six months ended June 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 both 1994 and 1995 resulted
principally from tax-exempt investment income. The six months ended June 30,
1994 was also affected 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 (103,844,782 and 103,749,231 for the first six 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 year period. The results of
Laurentian's operations are included in LNC's consolidated financial
statements from April 25, 1995.
5. Conversion of Series E and F Preferred Stock
On June 30, 1995, the owners of LNC's series E and F preferred stock (Dia-ichi
Mutual Life Insurance Company) converted their entire holding of series E and
series F preferred stock to LNC common stock. Based on a conversion rate of
two shares of common stock for each share of series E and F preferred stock,
2,201,443 shares of series E and 2,216,454 shares of series F were converted
into 8,835,794 shares of common stock. This conversion does not impact the
"Earnings Per Share" calculation (see note 3) as the calculation has
historically assumed conversion of preferred stock.
<PAGE>
-8-
LINCOLN NATIONAL CORPORATION
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
INFORMATION
During the six months ended June 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 six months
ended June 30, 1995 compared to the results for the six months ended June 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 decreased by $47.3 million or 12% 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 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 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 $51.7 million
or 17% for the first six months of 1995 compared with the first six months of
1994 as a result of increased volumes of business in the Life-Health
Reinsurance segment. Property casualty premiums decreased by $31.9 million or
4% compared with the six months ended June 30, 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.
Insurance Fees
Insurance fees from the sale of universal life and other interest
sensitive insurance contracts increased $35.0 million or 16% compared to the
first six 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 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).
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
INFORMATION (continued)
REVIEW OF CONSOLIDATED OPERATIONS (continued)
Net Investment Income
Net investment income increased $124.4 million or 13% when compared with
the first six months of 1994. This is the result of a 14% increase in mean
invested assets and an increase in the overall yield on investments from 7.11%
to 7.30%. Net investment income for the six months ended June 30, 1995
include a benefit of $10.3 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 six
months ended June 30, 1994 was a charge of $7.5 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 and reduced
volumes of business in the Property-Casualty segment.
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.
Gain on Sale of Subsidiary
In the first six months of 1994 LNC recorded the gain on sale of a
portion of its direct writer of health coverages.
Realized Gain (Loss) on Investments
The first six months of 1995 and 1994 had pre-tax realized gain (loss) on
investments of $106.4 million and $(28.2) 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 six months of 1995 and 1994 were $11.6 million and $7.3 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 six months of 1995 and 1994 were $6.0 million and $23.6
million, respectively. The pre-tax addition (reduction) to the provision for
losses for other investments for the first six months of 1995 and 1994 were
$(2.8) million and $5.6 million, respectively.
Other Revenue
Other revenue increased $5.6 million or 7% when compared to the first six
months of 1994 as the result of an increase in the volume of transactions
within each of the business segments.
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
INFORMATION (continued)
REVIEW OF CONSOLIDATED OPERATIONS (continued)
Insurance Benefits and Settlement Expenses
Life and annuity benefits and settlement expenses decreased $32.4 million
or 3% when compared to the first six 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. Excluding the impact of the subsidiary
sold in 1994, health benefits increased by $52.7 million or 23% when compared
to the first six months of 1994 as a result of increased volumes of business
and increased claims in the Life Insurance and Annuity and Life-Health
Reinsurance segment. Property-Casualty benefits decreased by $17.0 million or
3% when compared with the first six months of 1994 as a net result of
reductions in the volume of insurance written and an increase in catastrophe
losses and weather related claims. 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.
Underwriting, Acquisition, Insurance and Other Expenses
Excluding the impact of the subsidiary sold in 1994, this expense
increased $140.5 million or 20% for the six months ended June 30, 1995
compared to the first six 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). 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 $11.2 million when compared with the first six
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 quarter of 1995 ($19.9 million) 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 quarter of 1995.
Federal Income Taxes
Federal income taxes increased $55.9 million when compared to the first
six 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 six months of 1995 was $252.7 million or $2.43
per share compared with $197.8 million or $1.91 per share in the first six
months of 1994. Excluding realized gain (loss) on investments and gain on
sale of subsidiary, LNC earned $185.0 million for the first six months of 1995
compared with $170.9 million for the first six months of 1994. This increase
was the result of the weather related decrease in earnings from the property-
casualty segment and 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.
<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 $3.2 billion in the first six
months of 1995. This increase is the result of increases in the fair value of
securities available-for-sale during the first six 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 June 30,
1995 was as follows:
Treasuries and AAA 35.8% BBB 21.7%
AA 10.8% BB 2.8%
A 26.4% Less than BB 2.5%
As of June 30, 1995, $1.3 billion or 5.3% of fixed maturity securities
was invested in below investment grade securities (less than BBB). This
represents 4.3% 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 six months ended June 30, 1995, the
aggregate cost of such investments purchased was $405.5 million. Aggregate
proceeds from such investments sold were $350.9 million, resulting in a net
realized pre-tax loss of $2.4 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 June 30, 1995, mortgage loans on real estate and real estate
represented 9.5% and 2.4% of LNC's total investment portfolio. As of June 30,
1995, the underlying properties supporting the mortgage loans on real estate
consisted of 22.9% in commercial office buildings, 28.6% in retail stores,
19.7% in apartments, 14.8% in industrial buildings, 2.6% in hotels/motels and
11.4% 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>
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:
June 30 December 31
(in millions) 1995 1994
Impaired loans with provision for losses --------- $219.0 $275.8
Provision for losses ----------------------------- (52.3) (62.7)
Impaired loans with no provision for losses ------ 2.3 2.3
Net Impaired Loans ----------------------------- $169.0 $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:
Six Months Ended June 30 (in millions) 1995 1994
Balance at beginning of year --------------------- $62.7 $226.6
Provisions for losses ---------------------------- 10.5 19.5
Releases due to sales ---------------------------- (16.1) (98.4)
Releases due to foreclosures --------------------- (4.8) (9.4)
Balance at End of Quarter ---------------------- $52.3 $138.3
The average recorded investment in impaired loans and the interest income
recognized on impaired loans were as follows:
Six Months Ended June 30 (in millions) 1995 1994
Average recorded investment in impaired loans ---- $223.4 $617.9
Interest income recognized on impaired loans ----- 9.4 22.2
All interest income on impaired loans was recognized on the cash basis of
income recognition.
As of June 30, 1995 and 1994, LNC had restructured loans of $49.4 million and
$31.1 million, respectively. LNC recorded $3.1 million (including $1.0
million in interest income that was due LNC prior to January 1, 1995) and $1.3
million interest income on these restructured loans for the six months ended
June 30, 1995 and 1994, respectively, as compared to interest income of $2.7
million and $1.6 million that would have been recorded according to their
original terms.
Mortgage loans on real estate with a combined carrying value at June 30, 1995
of $31.2 million were non-income producing for the six months ended June 30,
1995.
<PAGE>
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
INFORMATION (continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued)
In the first six 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 six 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 June 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 $70.6 million in the first six
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 $466.9 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 $33.4 million in the first six
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 $5.3 billion in the first six months of 1995, reflecting an
increase in annuity and pension funds under management.
Federal Income Taxes
Federal income taxes recoverable decreased $343.6 million in the first
six 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 $122.3 million was
the result of increased volumes of business ceded in the Life Insurance and
Annuities segment.
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 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 $463.9 million is the result of having a
higher receivable related to investment securities sold in the last few days
of the second quarter of 1995 versus the end of 1994.
<PAGE>
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
INFORMATION (continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued)
Total Liabilities
Total liabilities increased by $8.1 billion in the first six months of
1995. This increase reflects 1) an increased level of business as evidenced
by an increase in policy liabilities and accruals of $1.1 billion, an increase
of $.8 billion in contractholder funds, an increase of $5.3 billion in the
liabilities related to separate accounts, 2) an increase in debt of $305.6
million and 3) an increase in other liabilities of $573.7 million.
Policyholder liabilities as of June 30, 1995 and December 31, 1994
included liabilities for environmental losses of $201.7 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 (3% and 4%, respectively, 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 second
quarter of 1995 versus a lower volume of such transactions at the end of 1994.
Shareholders' Equity
Total shareholders' equity increased $1.1 billion in the first six months
of 1995. Excluding the increase of $955.6 million related to unrealized gain
on securities available-for-sale, shareholders' equity increased $189.2
million. This increase was the net result of $252.7 million from net income,
$20.8 million from the issuance of common stock related to benefit plans, $6.0
million related to an increase in the accumulated foreign exchange gain, and a
decrease of $90.3 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.
<PAGE>
-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
INFORMATION (continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued)
As indicated by the Consolidated Statements of Cash Flows on page 6,
LNC's business operations generated $764.1 million of cash during the first
six 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 $200.0 million of 7 1/4% debt securities payable in 2005 from its
previously registered 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.
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 six 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. 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. Used $200.0 million face amount of financial futures within the second
quarter to hedge against adverse interest rate movements in connection
with the 7 1/4%, $200.0 million debt offering referenced above.
5. Increased the use of financial futures for hedging pension commitments to
$41.0 million from $28.2 million.
6. Increased the use of foreign exchange forward contracts to hedge the
currency risk of foreign bonds to $60.2 million from $21.5 million.
7. Used $37.1 million of foreign currency options as an additional hedge of
the currency risk of foreign bonds.
8. Increased the use of foreign exchange contracts to hedge the currency risk
of investing in additional funds in a UK subsidiary to $360.3 million from
$138.2 million.
In the second 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 $400,000. The
remaining $4.6 billion notional amount of caps are with counterparties rated
<PAGE>
-16-
A3/A- or better by both major rating agencies.
PART II - OTHER INFORMATION AND EXHIBITS
Items 1, 3 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 4. Submission of Matters to Vote to Securityholders
(a) The matter discussed in (c) below was submitted to a vote at the
Annual Meeting of Shareholders of the Registrant on May 11, 1995.
(c) At the meeting referred to in (a) above, Shareholders of the
Registrant voted on the election of four directors for three year
terms. The results of the voting was as follows:
Earl L. Neal
Votes Cast For = 81,076,685
Votes Withheld = 357,740
John M. Pietruski
Votes Cast For = 81,142,409
Votes Withheld = 292,016
Gordon A. Walker
Votes Cast For = 81,045,827
Votes Withheld = 388,598
Gilbert R. Whitaker, Jr.
Votes Cast For = 81,130,021
Votes Withheld = 304,404
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) During the quarter ended June 30, 1995 a Form 8-K was filed with the
Commission as follows:
Issuance of Debentures
Filing dated and received May 17, 1995 was in connection with the
Registrant's proposed offering of $200.0 million 7 1/4% Debentures
due May 15, 2005. This filing contained pro forma calculations of
the ratio of earnings to fixed charges for the year ended December
31, 1994 and three months ended March 31, 1995 (Schedule I); form of
Pricing Agreement (Schedule II); and form of Debenture (Schedule
III).
<PAGE>
-17-
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 August 9, 1995
<PAGE>
-18-
LINCOLN NATIONAL CORPORATION
Exhibit Index for the Report on Form 10-Q
for the Quarter Ended June 30, 1995
Exhibit Number Description Page Number
11 Computation of Per Share Earnings 19
27 Financial Data Schedule 20
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
EXHIBIT (11) - COMPUTATION OF PER SHARE EARNINGS
<TABLE>
Six Months Three Months
Ended June 30 Ended June 30
PRIMARY 1995 1994 1995 1994
<S> <C> <C> <C> <C>
Average shares outstanding
(assuming conversion of
Series A, E and F
Preferred Stock) ------------- 103,844,782 103,749,231 104,009,359 103,954,236
Net effect of dilutive
stock options (based on
the treasury stock method
using average market price) -- 618,763 696,669 706,273 663,047
Total shares
outstanding ----------- 104,463,545 104,445,900 104,715,632 104,617,283
</TABLE>
<TABLE>
FULLY DILUTED
<S> <C> <C> <C> <C>
Average shares outstanding
(assuming conversion of
Series A, E and F
Preferred Stock) ------------- 103,844,782 103,749,231 104,009,359 103,954,236
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) -------- 765,705 761,544 750,447 747,263
Total shares
outstanding ----------- 104,610,487 104,510,775 104,759,806 104,701,499
</TABLE>
<TABLE>
DOLLAR INFORMATION (000's omitted)
<S> <C> <C> <C> <C>
Net Income -------------- $252,725 $197,787 $117,912 $46,802
</TABLE>
PER SHARE INFORMATION
<TABLE>
Primary:
<S> <C> <C> <C> <C>
Net Income -------------- $2.42 $1.89 $1.13 $ .45
Fully Diluted:
Net Income -------------- $2.42 $1.89 $1.13 $ .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.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000059558
<NAME> LINCOLN NATIONAL CORPORATION
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> APR-01-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 24,744,950,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,047,684,000
<MORTGAGE> 2,869,753,000
<REAL-ESTATE> 732,145,000
<TOTAL-INVEST> 30,201,682,000
<CASH> 1,112,190,000
<RECOVER-REINSURE> 2,274,652,000
<DEFERRED-ACQUISITION> 1,603,145,000
<TOTAL-ASSETS> 58,147,960,000
<POLICY-LOSSES> 11,603,967,000
<UNEARNED-PREMIUMS> 830,090,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 19,646,053,000
<NOTES-PAYABLE> 1,000,511,000
<COMMON> 886,113,000
0
1,374,000
<OTHER-SE> 3,299,354,000
<TOTAL-LIABILITY-AND-EQUITY> 58,147,960,000
1,776,798,000
<INVESTMENT-INCOME> 1,113,855,000
<INVESTMENT-GAINS> 106,411,000
<OTHER-INCOME> 90,278,000
<BENEFITS> 1,904,281,000
<UNDERWRITING-AMORTIZATION> 342,207,000
<UNDERWRITING-OTHER> 514,991,000
<INCOME-PRETAX> 334,495,000
<INCOME-TAX> 81,770,000
<INCOME-CONTINUING> 252,725,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 252,725,000
<EPS-PRIMARY> 2.43
<EPS-DILUTED> 2.43
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
