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, 1996 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 26, 1996 104,316,268
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 periods 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 22
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PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30 December 31
(000'S omitted) 1996 1995
ASSETS
Investments:
<S> <C> <C>
Securities available-for-sale, at fair value:
Fixed maturity (cost 1996 - $24,359,245;
1995 - $23,935,527) ------------------ $25,022,192 $25,834,476
Equity (cost 1996 - $769,224;
1995 - $936,124) --------------------- 953,308 1,164,844
Mortgage loans on real estate ------------ 3,366,492 3,186,872
Real estate ------------------------------ 789,783 775,912
Policy loans ----------------------------- 618,034 602,573
Other investments ------------------------ 336,954 371,765
Total Investments ---------------------- 31,086,763 31,936,442
Investment in unconsolidated affiliates ---- 21,334 5,562
Cash and invested cash --------------------- 1,351,094 1,572,855
Property and equipment --------------------- 244,969 243,763
Deferred acquisition costs ----------------- 2,030,089 1,436,685
Premiums and fees receivable --------------- 687,630 537,979
Accrued investment income ------------------ 442,482 462,737
Assets held in separate accounts ----------- 25,571,224 22,769,068
Federal income taxes ----------------------- 120,155 --
Amounts recoverable from reinsurers -------- 2,480,798 2,495,189
Goodwill ----------------------------------- 456,967 471,465
Other intangible assets -------------------- 498,215 528,934
Other assets ------------------------------- 1,092,891 797,054
Total Assets ----------------------------- $66,084,611 $63,257,733
See notes to consolidated financial statements on page 7.
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LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
-CONTINUED-
June 30 December 31
(000's omitted) 1996 1995
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
Liabilities:
<S> <C> <C>
Policy liabilities and accruals:
Future policy benefits, claims
and claim expenses -------------------- $12,912,879 $12,922,547
Unearned premiums ----------------------- 808,693 813,380
Total Policy Liabilities and Accruals - 13,721,572 13,735,927
Contractholder funds ---------------------- 18,719,427 18,784,508
Liabilities related to separate accounts -- 25,571,224 22,769,068
Federal income taxes ---------------------- -- 128,426
Short-term debt --------------------------- 460,112 426,848
Long-term debt ---------------------------- 651,508 659,303
Minority interest in consolidated
subsidiaries ---------------------------- 203,993 --
Other liabilities ------------------------- 2,573,751 2,375,531
Total Liabilities ----------------------- 61,901,587 58,879,611
Minority interest - preferred securities
of a subsidiary --------------------------- -- --
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Shareholders' Equity:
<S> <C> <C>
Series A preferred stock
(6/30/96 liquidation value - $3,101) ----- 1,273 1,335
Common stock ------------------------------ 892,528 889,476
Retained earnings ------------------------- 2,965,947 2,775,718
Foreign currency translation adjustment --- 13,197 13,413
Net unrealized gain (loss) on securities
available-for-sale ----------------------- 310,079 698,180
Total Shareholders' Equity -------------- 4,183,024 4,378,122
Total Liabilities, Minority Interest
and Shareholders' Equity -------------- $66,084,611 $63,257,733
See notes to consolidated financial statements on page 7.
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LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended Three Months Ended
June 30 June 30
(000's omitted) 1996 1995 1996 1995
Revenue:
Insurance premiums ----------- $1,568,424 $1,524,889 $ 793,071 $ 785,173
<S> <C> <C> <C> <C>
Insurance fees --------------- 298,622 251,909 154,419 129,866
Investment advisory fees ----- 99,105 42,579 49,852 42,579
Net investment income -------- 1,133,416 1,101,055 562,184 570,908
Equity in earnings of
unconsolidated affiliates -- 291 8,799 291 3,692
Realized gain on investments - 100,787 106,411 29,529 62,311
Other ------------------------ 83,786 94,279 54,568 51,662
Total Revenue ------------ 3,284,431 3,129,921 1,643,914 1,646,191
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<CAPTION>
Benefits and Expenses:
<S> <C> <C> <C> <C>
Benefits and settlement
expenses ------------------- 1,939,974 1,904,281 1,004,224 1,017,150
Underwriting, acquisition,
insurance and other expenses 956,965 857,198 464,581 454,037
Interest and debt expense ---- 37,147 33,947 18,653 19,974
Total Benefits
and Expenses ----------- 2,934,086 2,795,426 1,487,458 1,491,161
Net Income Before Federal
Income Taxes and
Minority Interest ------ 350,345 334,495 156,456 155,030
Federal income taxes ----------- 94,877 81,770 41,012 37,118
Net Income before
Minority Interest ------ 255,468 252,725 115,444 117,912
Minority interest in
consolidated subsidiaries ---- 4,001 -- 4,001 --
Net Income --------------- $ 251,467 $ 252,725 $ 111,443 $ 117,912
Net Income Per Share ----------- $2.40 $2.43 $1.07 $1.13
Cash Dividends Per Share
Common Stock ----------------- $ .92 $ .86 $ .46 $ .43
See notes to consolidated financial statements on page 7.
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LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Six Months Ended June 30
Number of Shares Issued Amounts
(000's omitted from dollar amounts) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Preferred Stock:
(Shares authorized: 10,000,000)
Series A Preferred Stock:
Balance at
beginning of year -------- 40,646 43,218 $ 1,335 $ 1,420
Conversion into
common stock ------------- (1,878) (1,395) (62) (46)
Balance at June 30 ------ 38,768 41,823 1,273 1,374
Series E and F Preferred Stock:
Balance at beginning of year -- 4,417,897 -- 309,913
Conversion into
common stock ------------- -- (4,417,897) -- (309,913)
Balance at June 30 ------ -- -- -- --
Common Stock:
(Shares authorized: 800,000,000)
Balance at beginning of year -104,185,117 94,477,942 889,476 555,382
Conversion of series A
preferred stock ------------ 15,024 11,160 62 46
Conversion of E and F
preferred stock ------------ -- 8,835,794 -- 309,913
Issued for benefit plans ----- 101,134 579,176 2,990 20,772
Balance at June 30 ------104,301,275 103,904,072 892,528 886,113
Retained Earnings:
Balance at beginning of year - 2,775,718 2,479,532
Net income ------------------- 251,467 252,725
Realized gain (loss) on sale
of minority interest
in subsidiary -------------- 34,371 --
Cash dividends declared ------ (95,609) (90,279)
Balance at June 30 ------ 2,965,947 2,641,978
Foreign Currency Translation Adjustment:
Accumulated adjustment at
beginning of year ---------- 13,413 6,890
Change during period --------- (216) 6,000
Balance at June 30 ------ 13,197 12,890
Net Unrealized Gain (Loss) on
Securities Available-for-Sale:
Balance at beginning of year - 698,180 (311,077)
Realized gain (loss) on sale
of minority interest
in subsidiary --------------- (19,101) --
Change during period --------- (369,000) 955,563
Balance at June 30 ------ 310,079 644,486
Total Shareholders' Equity
at June 30 ------------ $4,183,024 $4,186,841
Common Stock (assuming conversion
of series A, E & F preferred stock):
End of Period ----------- 104,611,419 104,238,656
Average for the Period -- 104,563,359 103,844,782
See notes to consolidated financial statements on page 7.
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LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30
(000's omitted) 1996 1995
Operating Activities:
<S> <C> <C>
Net income ---------------------------------------- $ 251,467 $ 252,725
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred acquisition costs -------------------- (14,612) (16,073)
Premiums and fees receivable ------------------ (149,863) (62,189)
Accrued investment income --------------------- 20,093 (34,226)
Policy liabilities and accruals --------------- (273,619) 265,350
Contractholder funds -------------------------- 989,826 520,454
Amounts recoverable from reinsurers ----------- (47,356) (215,239)
Federal income taxes -------------------------- (51,434) 115,834
Equity in undistributed earnings of
unconsolidated affiliates ------------------- (291) (7,495)
Minority interest ----------------------------- 4,001 --
Provisions for depreciation ------------------- 29,057 31,701
Amortization of goodwill and other
intangible assets ---------------------------- 39,297 21,144
Realized (gain) loss on investments ----------- (100,787) (106,411)
(Gain) loss on sale of affiliate/
operating property -------------------------- -- --
Other ----------------------------------------- (144,305) (1,498)
Net Adjustments ----------------------------- 300,007 511,352
Net Cash Provided by Operating Activities --- 551,474 764,077
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<CAPTION>
Investing Activities:
<S> <C> <C>
Securities-available-for-sale:
Purchases -------------------------------------- (7,537,589) (8,355,472)
Sales ------------------------------------------ 6,843,013 7,259,874
Maturities ------------------------------------- 555,571 416,632
Purchase of other investments -------------------- (1,245,004) (670,489)
Sale or maturity of other investments ------------ 1,051,413 634,883
Sale of affiliates/operating property ------------ -- --
Purchase of affiliates --------------------------- -- (772,000)
Increase (decrease) in cash collateral
on loan securities ----------------------------- 123,362 312,511
Other -------------------------------------------- (171,250) (128,948)
Net Cash Used in Investing Activities ------ (380,484) (1,303,009)
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<CAPTION>
Financing Activities:
<S> <C> <C>
Principal payments on long-term debt ------------- (9,447) (528)
Issuance of long-term debt ----------------------- 1,652 202,790
Net increase in short-term debt ------------------ 33,264 140,219
Universal life and investment contract deposits -- 546,882 1,452,756
Universal life and investment
contract withdrawals --------------------------- (1,088,016) (1,116,837)
Common stock issued for benefit plans ------------ 2,990 20,773
Proceeds from sale of minority interest
in subsidiary ----------------------------------- 215,481 --
Dividends paid to shareholders ------------------- (95,557) (89,634)
Net Cash Provided by Financing Activities -- (392,751) 609,539
Net Increase (Decrease) in Cash------------- (221,761) 70,607
Cash at Beginning of Year -------------------------- 1,572,855 1,041,583
Cash at June 30 ---------------------------- $1,351,094 $1,112,190
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 to shareholders for the year ended December 31,
1995.
Operating results for the six months ended June 30, 1996 are not necessarily
indicative of the results that may be expected for the full year ending
December 31, 1996.
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 1995 and 1996 resulted
principally from tax-exempt investment income.
3. Earnings Per Share
Earnings per share are computed based on the average number of common shares
outstanding (104,563,359 and 103,844,782 for the first six months of 1996 and
1995, respectively) after assuming conversion of the series A, E and F
preferred stock.
4. Sale of Minority Interest in Subsidiary
During the first quarter of 1996, LNC announced that it would be offering a
minority interest position in its principal subsidiary within its Property-
Casualty segment (American States Financial Corporation) to the public in the
form of an initial public offering of common stock. During the second quarter
of 1996 1) a registration statement was filed with the Securities and Exchange
Commission, 2) the shares were marketed and 3) the transaction closed. As a
result of this offering, American States Financial Corporation received $215.4
million in cash on May 29, 1996, net of expenses, for the sale of 16.7% of its
common stock. LNC recorded a non-taxable realized gain of $15.3 million
after expenses associated with the sale, directly in shareholders' equity.
LNC continues to fully consolidate this operation within its financial
statements and tax reporting.
<PAGE> -8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
INFORMATION
REVIEW OF CONSOLIDATED OPERATIONS
The pages to follow review LNC's results of consolidated operations and
financial condition. Historical financial information is presented and
analyzed. Where appropriate, factors that may affect future financial
performance are identified and discussed. Actual results could differ
materially from those indicated in forward-looking statements due to, among
other specific changes currently not known, subsequent significant changes in:
the company (e.g. acquisitions and divestitures), financial markets (e.g.
interest rates and securities markets), legislation (e.g. taxes and product
taxation), regulations (e.g. insurance and securities regulations), acts of
God (e.g. hurricanes, earthquakes and storms), other insurance risks (e.g.
policyholder mortality and morbidity) and competition.
The discussion that follows focuses on the results for the six months
ended June 30, 1996 compared to the results for the six months ended June 30,
1995. 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 six months of 1996 increased
$30.4 million or 9% compared with the first six months of 1995. This increase
is the result of increases in business volume from the Reinsurance and Life
Insurance and Annuities segments. Health premiums increased $35.0 million or
10% for the first six months of 1996 compared with the first six months of
1995 as a result of increased volumes of business in the Reinsurance segment.
Property-casualty premiums decreased by $21.9 million or 3% compared with the
six months ended June 30, 1995 due to reduced volumes of business primarily
from workers compensation coverages.
Insurance Fees
Insurance fees in the Life Insurance and Annuities segment from universal
life, other interest-sensitive life insurance contracts and variable life
insurance contracts increased $46.8 million or 19% compared to the first six
months of 1995. This increase was 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.
Investment Advisory Fees
This line was added to the statements of income in the second quarter of
1995 following LNC's purchase of Delaware Management Holdings, Inc. This
acquisition also led to the formation of a new business segment entitled
"Investment Management." Investment advisory fees for the second quarter of
1996 were $7.3 million (17%) higher than the comparable second quarter of 1995
due to increased volumes of business.
Net Investment Income
Net investment income increased $19.6 million or 2% when compared with
the first six months of 1995. This increase is the net result of a 5.5%
increase in mean invested assets and a decrease in the overall yield on
investments from 7.72% to 7.42% (all calculations on a cost basis). Net
investment income for the first six months of 1996 included a charge of $6.2
million versus a benefit of $17.9 million in the first six months of 1995 from
the recurring adjustment of discount on mortgage-backed securities. The
increase in mean invested assets is the result of increased volumes of
business in the Life Insurance and Annuities and Reinsurance segments.
Equity in Earnings of Unconsolidated Affiliates
This line was added to the statements of income in 1994 following LNC's
sale of 71% of its direct writer of health coverages. Most of the amount
shown for the six months ended June 30, 1995 represents LNC's share of the
total earnings of this company. Due to the October 11, 1995 sale of the
remaining 29% ownership in this company, minimal activity is shown in this
account for the six months ended June 30, 1996.
<PAGE> -9-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
INFORMATION (continued)
REVIEW OF CONSOLIDATED OPERATIONS (continued)
Realized Gain on Investments
The first six months of 1996 and 1995 had pre-tax realized gain on
investments of $100.8 million and $106.4 million, respectively. These gains,
which are net of related deferred acquisition costs and amounts needed to
satisfy policyholder commitments, were the result of net gains on sales of
investments, less some modest write-downs and provisions for losses.
Securities available-for-sale, mortgage loans on real estate and real estate
holdings that were deemed to have declines in fair value that were other than
temporary were written down. In addition to the write-downs, LNC established
allowances for losses on select mortgage loans on real estate, real estate
investments and other investments where the carrying value was determined not
to be recoverable.
The pre-tax write-down of securities available-for-sale for the first six
months of 1996 and 1995 was $4.2 million and $11.6 million, respectively.
With the exception of interest only mortgage-backed securities, the fixed
maturity securities to which these write-downs apply were generally of
investment grade quality at the time of purchase, but were classified as
"below investment grade" at the time of the write-downs. The net pre-tax
write-downs and additions to the allowances for losses on real estate and
mortgage loans on real estate for the first six months of 1996 and 1995 were
$5.5 million and $6.0 million, respectively. The pre-tax addition (reduction)
to the allowance for losses for other investments for the first six months of
1996 and 1995 was $(.4) million and $(2.8) million, respectively.
Other Revenue
Other revenue decreased $10.5 million when compared to the first six
months of 1995 as the net result of an increase in the volume of transactions
within the Life Insurance and Annuities business segment being more than
offset by the absence of revenues from the investment management companies
that were being recorded in this account until the start of the new business
segment in the second quarter of 1995.
Insurance Benefits and Settlement Expenses
Life and annuity benefits and settlement expenses increased $34.5 million
or 4% when compared to the first six months of 1995. This increase is the
result of increases in business volume from the Life Insurance and Annuities
segment and average mortality in the Reinsurance segment versus exceptionally
low mortality a year ago. Health benefits increased by $19.2 million or 7%
when compared to the first six months of 1995 as a net result of increased
volumes of business and decreased claims in the Reinsurance segment.
Property-casualty benefits decreased by $18.1 million or 3% when compared with
the first six months of 1995 as a result of a decrease in business.
Underwriting, Acquisition, Insurance and Other Expenses
This expense increased $99.8 million or 12% for the six months ended June
30, 1996 compared to the first six months of 1995. The primary driver behind
this increase, beyond the general inflation rate, was the higher volume
related expenses in the Life Insurance and Annuity and Reinsurance segments
due to the increase in business volumes and the addition of the operating
expenses of the companies acquired early in the second quarter of 1995. These
expenses for the Property-Casualty segment decreased $17.2 million or 6%
compared with a year ago as the impact of consolidating 20 divisional offices
into four regional offices started to be realized and the adjusting of staff
levels to the current level of business continued.
Interest and Debt Expense
Interest and debt expense increased $3.2 million or 9% when compared with
the first six months of 1995. This was the result of increases in the average
debt outstanding and increases in short-term interest rates. Overall debt
levels were higher due to debt related to the acquisitions of additional
companies in the second quarter of 1995.
<PAGE> -10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
INFORMATION (continued)
REVIEW OF CONSOLIDATED OPERATIONS (continued)
Federal Income Taxes
Federal income taxes increased $13.1 million when compared to the first
six months of 1995. This is the result of an increase in pre-tax earnings and
a reduction in tax-exempt investment income.
Minority Interest in Consolidated Subsidiaries
This line was added to the income statement to record the earnings
applicable to the minority shareholders following the sale of 16.7% of LNC's
principal subsidiary within its Property-Casualty segment (see note 4 on page
7).
Summary
Net income for the first six months of 1996 was $251.5 million or $2.40
per share compared with $252.7 million or $2.43 per share in the first six
months of 1995. Excluding realized gain on investments, affiliates and
operating property, LNC earned $189.8 million for the first six months of 1996
compared with $185.0 million for the first six months of 1995. This increase
was the net result of an increase in earnings in the Life Insurance and
Annuities, Property-Casualty and Investment Management segments being
partially offset by reductions in earnings from the Reinsurance segment and
Corporate and Other.
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
Investments
The total investment portfolio decreased $849.7 million in the first six
months of 1996. This decrease is the net result of decreases in the fair
value of securities available-for-sale during the first six months of 1996
being partially offset by increases from the purchases of investments from
cash flow generated by the business segments.
The quality of LNC's fixed maturity securities portfolio as of June 30,
1996 was as follows:
Treasuries and AAA 34.1% BBB 20.8%
AA 10.5% BB 3.3%
A 28.1% Less than BB 3.2%
As of June 30, 1996, $1.6 billion or 6.5% of fixed maturity securities
was invested in below investment grade securities (less than BBB). This
represents 5.3% 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, 1996, the
aggregate cost of such investments purchased was $558.5 million. Aggregate
proceeds from such investments sold were $580.5 million, resulting in a net
realized pre-tax gain of $11.8 million.
LNC's entire fixed maturity and equity securities portfolio is classified
as "available-for-sale" and is carried at fair value. Changes in fair value,
net of related deferred acquisition costs, amounts required to satisfy
policyholder commitments and taxes, are charged or credited directly to
shareholders' equity.
<PAGE> -11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
INFORMATION (continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued)
As of June 30, 1996, mortgage loans on real estate and real estate
represented 10.9% and 2.6% of LNC's total investment portfolio. As of June
30, 1996, the underlying properties supporting the mortgage loans on real
estate consisted of 21.4% in commercial office buildings, 29.0% in retail
stores, 21.1% in apartments, 13.6% in industrial buildings, 5.9% in
hotels/motels and 9.0% in other. In addition to the dispersion by property
type, the mortgage loan portfolio is geographically diversified throughout the
United States.
Impaired loans included along with the related allowance for losses are
as follows: June 30 December 31
(in millions) 1996 1995
Impaired loans with allowance for losses --------- $148.3 $150.9
Allowance for losses ----------------------------- (31.2) (29.6)
Impaired loans with no allowance for losses ------ 7.2 2.2
Net Impaired Loans ----------------------------- $124.3 $123.5
Impaired loans with no allowance 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 allowance for losses for these
impaired mortgage loans is as follows:
Six Months Ended June 30 (in millions) 1996 1995
Balance at beginning of year --------------------- $29.6 $ 62.7
Provisions for losses ---------------------------- 3.5 10.5
Releases due to sales ---------------------------- (1.5) (16.1)
Releases due to foreclosures --------------------- (.4) (4.8)
Balance at End of Quarter ---------------------- $31.2 $52.3
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) 1996 1995
Average recorded investment in impaired loans ---- $161.4 $223.4
Interest income recognized on impaired loans ----- 7.7 9.4
All interest income on impaired loans was recognized on the cash basis
of income recognition.
As of June 30, 1996 and 1995, LNC had restructured loans of $61.5
million and $49.4 million, respectively. LNC recorded $2.7 million and $3.1
million interest income on these restructured loans for the six months ended
June 30, 1996 and 1995, respectively, as compared to interest income of $3.2
million and $2.7 million that would have been recorded according to their
original terms. The $3.1 million recorded for 1995 included $1.0 million in
interest income that was due LNC prior to January 1, 1995.
As of June 30, 1996, LNC did not have any future commitments to lend
funds for non-accrual, restructured or other problem loans.
Fixed maturity securities available-for-sale, mortgage loans on real
estate and real estate with a combined carrying value at June 30, 1996 of $8.3
million were non-income producing for the six months ended June 30, 1996.
<PAGE> -12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
INFORMATION (continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued)
Cash and Invested Cash
Cash and invested cash decreased by $221.8 million in the first six
months of 1996. This decrease is the result of investing a portion of the
operating cash flow that had previously been invested in short-term
investments pending the placement of funds in longer term investments.
Deferred Acquisition Costs
Deferred acquisition costs increased $593.4 million during the six months
ended June 30, 1996. A portion of this increase ($215.3 million) was the
result of a reclassification between deferred acquisitions costs and policy
liabilities and accruals by LNC's United Kingdom subsidiary. This
reclassification was made in order to more closely conform the United Kingdom
classifications to the classifications used by LNC's U.S. life operations.
The remainder of the increase is the result of the growth in business and
increases related to the reduction in the unrealized gain on securities
available-for-sale during the six months ended June 30, 1996.
Premiums and Fee Receivable
Premiums and fees receivable increased $149.7 million in the first six
months of 1996 as the result of increased volumes of business in the
Reinsurance segment.
Assets Held in Separate Accounts
This asset account as well as the corresponding liability account
increased by $2.8 billion in the first six months of 1996, reflecting an
increase in annuity funds under management.
Amounts Recoverable from Reinsurers
The decrease in amounts recoverable from reinsurers of $14.4 million was
the result of decreases in the volume of business ceded in the Life Insurance
and Annuities segment.
Goodwill and Other Intangible Assets
The decreases in the amounts during the six months ended June 30, 1996
represent amortization for the period.
Other Assets
The increase in other assets of $295.8 million is the result of having a
higher receivable related to investment securities sold in the last few days
of the second quarter of 1996 versus the end of 1995.
Total Liabilities
Total liabilities increased by $3.0 billion in the first six months of
1996. This increase is the result of increases of $2.8 billion in the
liabilities related to separate accounts, $204.0 million minority interest in
consolidated subsidiaries and $198.2 million in other liabilities being
partially offset by a reduction in federal income taxes payable and
contractholder funds. An increase in policy liabilities and accruals related
to increased levels of business in the Life Insurance and Annuities and
Reinsurance segments was more than offset by the reclassification discussed
above under the deferred acquisition costs heading. The slight reduction in
contractholder funds is the net result of new deposits being more than a
offset by 1) decreases in account values related to decreases in the fair
<PAGE> -13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
INFORMATION (continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued)
value of securities available-for-sale and 2) the withdrawal of guaranteed
interest contract funds because of the decision to exit this business. During
the second quarter of 1996, a new liability line entitled "Minority Interest
in Consolidated Subsidiaries" was established (see note 4 on page 7). Other
liabilities increased as the result of a higher level of securities purchased
during the last few days of the second quarter of 1996 versus the end of 1995.
Total property-casualty liabilities for unpaid claims and claims expenses
were $2.6 billion at June 30, 1996 and December 31, 1995. These liabilities
include liabilities for environmental claims of $259 million and $256 million
at June 30, 1996 and December 31, 1995, respectively. Because of the limited
coverages that have been written by LNC, these reserves represent only 11% and
10%, respectively, of LNC's total property-casualty liabilities and only 2% of
LNC's total policy liabilities. On a claims count basis these environmental
losses represent only 3% of the direct property-casualty 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. While it is management's judgement that, based on available
information, the appropriate level of liabilities have been recorded, it is
reasonably possible that a change in estimate of the required liability level
could occur in the near term.
The liability for disability income claims net of the related assets for
amounts recoverable from reinsurers was $1.5 billion at both June 30, 1996 and
December 31, 1995. LNC reviews and updates the level of these reserves on an
on-going basis. These reserves were established on the assumption that recent
experience will continue in the future. If incidence levels or claim
termination rates vary significantly from these assumptions, further
adjustments to reserves may be required in the future.
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 liabilities for guaranteed interest and group pension annuity
contracts, which are no longer being sold, are supported by a single portfolio
of assets which attempts to match the duration of these liabilities. Due to
the very long-term nature of group pension annuities and the resulting
inability to exactly match cash flows, a risk exists that future cash flows
from investments will not be reinvested at rates as high as currently earned
by the portfolio. This situation could cause losses in excess of amounts
provided to be recognized at some future time.
Minority Interest - Preferred Securities of a Subsidiary
This line was added to the balance sheet to accommodate the financing
activity described within the Liquidity and Cash Flow section on page 15.
<PAGE> -14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
INFORMATION (continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued)
Shareholders' Equity
Total shareholders' equity decreased $195.1 million in the first six
months of 1996. Excluding the decrease of $369.0 million related to
unrealized gains on securities available-for-sale, shareholders' equity
increased $173.9 million. This increase was the net result of $251.5 million
from net income, $15.3 million from the gain on sale of a minority interest in
a subsidiary and $3.0 million from the issuance of common stock related to
benefit plans, being partially offset by a decrease in the accumulated foreign
exchange gain of $.2 million and the declaration of dividends to shareholders
of $95.6 million.
Derivatives
As indicated in note 7 to the consolidated financial statements for the
year ended December 31, 1995 (see page 58 of LNC's Form 10-K), LNC has entered
into derivative transactions to reduce its exposure to fluctuations in
interest rates, the widening of bond yield spreads over comparable maturity
U.S. Government obligations and foreign exchange risks. In addition, LNC is
subject to the risks associated with changes in the value of its derivatives;
however, such changes in the value generally are offset by changes in the
value of the items being hedged by such contracts. During the first six
months of 1996, LNC has made changes in its derivative positions as follows:
1. Added $300 million notional amount of interest rate caps to protect its
annuity line of business from the effect of fluctuating interest rates.
LNC also added $68 million notional amount of interest rate caps to
hedge a portfolio of interest rate sensitive assets. As a result, LNC
has increased its interest rate cap position from $5.1 billion to $5.4
billion.
2. Terminated $600 million of spread-lock agreements. Gains totalling
$1.6 million resulting from these transactions are being deferred
over the lives of the hedged assets.
3. Entered into a foreign currency spread-lock agreement with a notional
amount of $15 million to hedge against a widening of the spread on two
currencies.
4. Terminated $106.7 million of long financial futures that were being
used to hedge interest rate risks.
5. Added $2.1 billion face amount of long financial futures to hedge the
anticipated purchase of a portfolio of assets to support the group tax-
sheltered annuity business from UNUM Corporation. This transaction is
expected to be consummated sometime in the fourth quarter of 1996.
As of June 30, 1996, losses on these long financial futures totalled
$107 million. These losses are being deferred until the transaction
closes and at that time the losses will be recorded as an adjustment
to the carrying value of the assets acquired.
6. Increased the use of foreign exchange forward contracts to $507.4
million notional from $398.8 million to hedge the company's net
investment in its foreign subsidiary, Lincoln National(UK).
7. Terminated $15.7 million notional amount of foreign exchange forward
contracts that were hedging the foreign currency risk of its
portfolio of foreign bonds.
<PAGE> -15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
INFORMATION (continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued)
8. Increased the use of foreign currency options from $99.2 million to
$548.7 million notional as a hedge of the currency risk of foreign
bonds.
9. Entered into an interest rate swap totalling $140 million notional to
hedge interest rate risk associated with a portfolio of assets.
10. Entered into $327 million notional amount of swaptions to hedge a
portfolio of interest rate sensitive assets.
11. Entered into $703 million notional amount of interest rate floors to
hedge the interest rate risk associated with a portfolio of assets.
With the exception of one counterparty that has a Baal rating from one rating
agency all counterparties hold A ratings or above. As of June 30, 1996, LNC's
cap agreements with that counterparty have an aggregate notional amount of
$500 million and an aggregate replacement value of approximately $900,000.
Liquidity and Cash Flow
Liquidity refers to the ability of an enterprise to generate adequate
amounts of cash from its normal operations to meet cash requirements with a
prudent margin of safety. Because of the interval of time from receipt of a
deposit or premium until payment of benefits or claims, LNC and other insurers
employ investment portfolios as an integral element of operations. By
segmenting its investment portfolios along product lines, LNC enhances the
focus and discipline it can apply to managing the liquidity as well as the
interest rate and credit risk of each portfolio commensurate with the profile
of the liabilities. For example, portfolios backing products with less
certain cash flows and/or withdrawal provisions are kept more liquid than
portfolios backing products with more predictable cash flows.
The consolidated statements of cash flows on page 6, indicates that
operating activities provided cash of $551.5 million during the first six
months of 1996. This statement also classifies the other sources and uses of
cash by investing activities and financing activities and discloses the total
amount of cash available to meet LNC's obligations.
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. In 1995, LNC filed a shelf registration for $600
million with the Securities and Exchange Commission that would allow LNC to
issue debt or equity securities. This registration included an aggregate of
$100 million of securities which had not been utilized from a 1994
registration. In May 1996, LNC filed another shelf registration for $500
million which included the right to offer various forms of hybrid securities
(i.e. securities having a combination of both debt and equity characteristics)
including Quarterly Income Preferred Securities ("QUIPS") on a series of three
newly formed trusts, all of whose common securities are owned by LNC (Lincoln
National Capital I, II and III). Also, cash funds are available from LNC's
revolving credit agreement which provides for borrowing up to $500 million.
Transactions such as those described in the preceding paragraph that
occurred recently included the issuance of $200 million, 7 1/4% debt in May
1995. Proceeds from this offering were used to pay down short-term debt that
had been incurred in 1995 related to the acquisition of additional operating
businesses. On July 2, 1996, LNC closed a transaction involving $215 million,
8 3/4% QUIPS due in 2026 (callable in 2001). The proceeds from this
transaction was also used near term to pay down short-term debt.
<PAGE> -16-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
INFORMATION (continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued)
As described in note 4 to the accompanying financial statements, LNC sold
16.7% of its principal subsidiary within the Property-Casualty segment to the
public in the form of an initial public offering of common stock. The net
cash proceeds after expenses from the sale of common stock in this subsidiary
of $215.4 million is being used to support the capital base of the property
casualty operations and to meet working capital needs of the related holding
company. In conjunction with this offering this subsidiary issued $200
million of term debt payable to LNC plus $100 million, 7 1/8% debt due in
1999. Also, prior to closing, this subsidiary made a one-time, special
dividend distribution of $300 million to LNC. This dividend distribution
consisted primarily of tax-exempt municipal securities that were previously in
the subsidiary's investment portfolio. Following the completion of the
transaction, this subsidiary adopted a policy of declaring regular quarterly
cash dividends, commencing with $.21 per share in the third quarter of 1996.
LNC owns 50,000,000 of the 60,000,000 outstanding shares of this subsidiary.
<PAGE> -17-
PART II - OTHER INFORMATION AND EXHIBITS
Items 1, 2, 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 9, 1996.
(c) At the meeting referred to in (a) above, Shareholders of the
Registrant voted on the election of five directors for three year
terms. The results of the voting was as follows:
J. Patrick Barrett
Votes Cast for = 87,242,585
Votes Withheld = 1,006,624
Thomas D. Bell, Jr.
Votes Cast for = 87,234,230
Votes Withheld = 1,014,979
Daniel R. Efroymson
Votes Cast for = 87,251,198
Votes Withheld = 998,011
Roel Pieper
Votes Cast for = 87,157,678
Votes Withheld = 1,091,531
Ian M. Rolland
Votes Cast for = 87,237,796
Votes Withheld = 1,011,413
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
12 Historical Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended June
30, 1996.
<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 August 1, 1996
<PAGE> -19-
LINCOLN NATIONAL CORPORATION
Exhibit Index for the Report on Form 10-Q
for the Quarter Ended June 30, 1996
Exhibit Number Description Page Number
11 Computation of Per Share Earnings 20
12 Historical Ratio of Earnings to
Fixed Charges 21
27 Financial Data Schedule 22
<PAGE> -20-
<TABLE>
<CAPTION>
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
EXHIBIT (11) - COMPUTATION OF PER SHARE EARNINGS
Six Months Three Months
Ended June 30 Ended June 30
1996 1995 1996 1995
PRIMARY
<S> <C> <C> <C> <C>
Average shares outstanding
(assuming conversion of
series A, E and F
preferred stock) -------------- 104,563,359 103,844,782 104,594,257 104,009,359
Net effect of dilutive
stock options (based on
the treasury stock method
using average market price) --- 962,673 618,763 833,633 706,273
Total shares
outstanding ------------ 105,526,032 104,463,545 105,427,890 104,715,632
</TABLE>
<TABLE>
<CAPTION>
FULLY DILUTED
<S> <C> <C> <C> <C>
Average shares outstanding
(assuming conversion of
series A, E and F
preferred stock) -------------- 104,563,359 103,844,782 104,594,257 104,009,359
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) --------- 962,673 765,705 833,633 750,447
Total shares
outstanding ------------ 105,526,032 104,610,487 105,427,890 104,759,806
</TABLE>
<TABLE>
<CAPTION>
DOLLAR INFORMATION (000's omitted)
<S> <C> <C> <C> <C>
Net Income --------------- 251,467 $252,725 $111,443 $117,912
</TABLE>
<TABLE>
<CAPTION>
PER SHARE INFORMATION
Primary:
<S> <C> <C> <C> <C>
Net Income --------------- 2.38 $2.42 $1.06 $1.13
Fully Diluted:
Net Income --------------- 2.38 $2.42 $1.06 $1.13
<FN>
Notes:
<F1>
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 is immaterial.
</TABLE>
<PAGE> -21-
<TABLE>
<CAPTION>
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
EXHIBIT 12 - HISTORICAL RATIO OF EARNINGS TO FIXED CHARGES
Six Months
Ended
June 30 Year Ended December 31,
(millions of dollars) 1996 1995 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C> <C>
Net Income before Federal
Income Taxes, Minority
Interest and Accounting
Change --------------------- 350.3 334.5 626.6 376.3 587.8 424.7 198.8
Less: Equity Earnings in
Unconsolidated Affiliates -- .3 8.8 12.4 14.6 -- (.2) (.3)
Plus: Sub-total of Fixed
Charges -------------------- 47.1 44.9 94.4 66.6 62.9 74.6 90.9
Sub-total of Adjusted
Net Income -------------- 397.1 370.6 708.6 428.3 650.7 499.5 290.0
Interest on Annuities &
Financial Products --------- 680.2 700.0 1400.0 1359.0 1315.8 1261.7 1207.6
Adjusted Income Base ----1077.3 1070.6 2108.6 1787.3 1966.5 1761.2 1497.6
Rent Expense ---------------- 30.0 32.9 65.7 51.3 55.8 67.4 59.1
</TABLE>
<TABLE>
<CAPTION>
Fixed Charges:
<S> <C> <C> <C> <C> <C> <C> <C>
Interest and Debt Expense --- 37.1 33.9 72.5 49.5 44.3 53.8 71.2
Rent (Pro-rated) ------------ 10.0 11.0 21.9 17.1 18.6 20.8 19.7
Sub-total of Fixed Charges 47.1 44.9 94.4 66.6 62.9 74.6 90.9
Interest on Annuities &
Financial Products --------- 680.2 700.0 1400.0 1359.0 1315.8 1261.7 1207.6
Sub-total of Fixed Charges 727.3 744.9 1494.4 1425.6 1378.7 1336.3 1298.5
Preferred Dividends (Pre-tax) .1 8.7 8.7 24.2 24.2 20.3 13.4
Total Fixed Charges ------ 727.4 753.6 1503.1 1449.8 1402.9 1356.6 1311.9
</TABLE>
<TABLE>
<CAPTION>
Ratio of Earnings to Fixed Charges:
<S> <C> <C> <C> <C> <C> <C> <C>
Excluding Interest on
Annuities and Financial
Products (1) -------------- 8.43 8.25 7.51 6.43 10.35 6.69 3.20
Including Interest on
Annuities and Financial
Products (2) -------------- 1.48 1.44 1.41 1.25 1.43 1.32 1.15
Ratio of Earnings to
Combined Fixed Charges
and Preferred Stock
Dividends (3) ------------- 1.48 1.42 1.40 1.23 1.40 1.30 1.14
<FN>
<F1>
(1) For purposes of determining this ratio, earnings consist of income before
federal income taxes, minority interest and cumulative effect of
accounting change adjusted for the difference between income or losses
from unconsolidated equity investments and cash distributions from such
investments, plus fixed charges. Fixed charges consist of interest and
debt expense on short and long-term debt and the portion of operating
leases that are representative of the interest factor.
<F2>
(2) Same as the ratio of earnings to fixed charges, excluding interest on
annuities and financial products, except fixed charges and earnings
include interest on annuities and financial products.
<F3>
(3) Same as the ratio of earnings to fixed charges, including interest on
annuities and financial products, except that fixed charges include the
pre-tax earnings required to cover preferred stock dividend requirements.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000059558
<NAME> Lincoln National Corporation
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 25,022,192,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 953,308,000
<MORTGAGE> 3,366,492,000
<REAL-ESTATE> 789,783,000
<TOTAL-INVEST> 31,086,763,000
<CASH> 1,351,094,000
<RECOVER-REINSURE> 2,480,798,000
<DEFERRED-ACQUISITION> 2,030,089,000
<TOTAL-ASSETS> 66,084,611,000
<POLICY-LOSSES> 12,912,879,000
<UNEARNED-PREMIUMS> 808,693,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 18,719,427,000
<NOTES-PAYABLE> 1,111,620,000
0
1,273,000
<COMMON> 892,528,000
<OTHER-SE> 3,289,223,000
<TOTAL-LIABILITY-AND-EQUITY> 66,084,611,000
1,568,424,000
<INVESTMENT-INCOME> 1,133,416,000
<INVESTMENT-GAINS> 100,787,000
<OTHER-INCOME> 83,786,000
<BENEFITS> 1,939,974,000
<UNDERWRITING-AMORTIZATION> 373,832,000
<UNDERWRITING-OTHER> 583,133,000
<INCOME-PRETAX> 346,344,000
<INCOME-TAX> 94,877,000
<INCOME-CONTINUING> 251,467,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 251,467,000
<EPS-PRIMARY> 2.40
<EPS-DILUTED> 2.40
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
