SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended March 31, 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 April 26, 1996 104,265,407
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 31
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PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31 December 31
(000'S omitted) 1996 1995
ASSETS
Investments:
<S> <C> <C>
Securities available-for-sale, at fair value:
Fixed maturity (cost 1996 - $24,347,837;
1995 - $23,935,527) ------------------ $25,215,793 $25,834,476
Equity (cost 1996 - $758,765;
1995 - $936,124) --------------------- 946,798 1,164,844
Mortgage loans on real estate ------------ 3,286,970 3,186,872
Real estate ------------------------------ 742,655 775,912
Policy loans ----------------------------- 604,537 602,573
Other investments ------------------------ 317,814 371,765
Total Investments ---------------------- 31,114,567 31,936,442
Investment in unconsolidated affiliates ---- 19,512 5,562
Cash and invested cash --------------------- 1,340,955 1,572,855
Property and equipment --------------------- 242,032 243,763
Deferred acquisition costs ----------------- 1,886,781 1,436,685
Premiums and fees receivable --------------- 619,957 537,979
Accrued investment income ------------------ 451,270 462,737
Assets held in separate accounts ----------- 24,245,316 22,769,068
Federal income taxes ----------------------- 32,287 --
Amounts recoverable from reinsurers -------- 2,457,656 2,495,189
Goodwill ----------------------------------- 462,431 471,465
Other intangible assets -------------------- 503,186 528,934
Other assets ------------------------------- 887,973 797,054
Total Assets ----------------------------- $64,263,923 $63,257,733
See notes to consolidated financial statements on page 7.
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LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
-CONTINUED-
March 31 December 31
(000's omitted) 1996 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
<S> <C> <C>
Policy liabilities and accruals:
Future policy benefits, claims
and claim expenses -------------------- $12,919,815 $12,922,547
Unearned premiums ----------------------- 800,977 813,380
Total Policy Liabilities and Accruals - 13,720,792 13,735,927
Contractholder funds ---------------------- 18,684,492 18,784,508
Liabilities related to separate accounts -- 24,245,316 22,769,068
Federal income taxes ---------------------- -- 128,426
Short-term debt --------------------------- 430,226 426,848
Long-term debt ---------------------------- 658,894 659,303
Other liabilities ------------------------- 2,378,157 2,375,531
Total Liabilities ----------------------- 60,117,877 58,879,611
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Shareholders' Equity:
<S> <C> <C>
Series A preferred stock
(3/31/96 liquidation value - $3,143) ----- 1,309 1,335
Common stock ------------------------------ 890,970 889,476
Retained earnings ------------------------- 2,867,951 2,775,718
Foreign currency translation adjustment --- 11,523 13,413
Net unrealized gain (loss) on securities
available-for-sale ----------------------- 374,293 698,180
Total Shareholders' Equity -------------- 4,146,046 4,378,122
Total Liabilities
and Shareholders' Equity -------------- $64,263,923 $63,257,733
See notes to consolidated financial statements on page 7.
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LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31
(000's omitted) 1996 1995
Revenue:
<S> <C> <C>
Insurance premiums ----------- $ 775,353 $ 739,716
Insurance fees --------------- 144,203 122,043
Investment advisory fees ----- 49,253 --
Net investment income -------- 571,232 530,147
Equity in earnings of
unconsolidated affiliates -- -- 5,107
Realized gain on investments - 71,258 44,100
Other ------------------------ 29,218 42,617
Total Revenue ------------ 1,640,517 1,483,730
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Benefits and Expenses:
<S> <C> <C>
Benefits and settlement
expenses ------------------- 935,750 887,131
Underwriting, acquisition,
insurance and other expenses 492,384 403,161
Interest expense ------------- 18,494 13,973
Total Benefits
and Expenses ----------- 1,446,628 1,304,265
Net Income Before Federal
Income Taxes ----------- 193,889 179,465
Federal income taxes ----------- 53,865 44,652
Net Income --------------- $ 140,024 $ 134,813
Net Income Per Share ----------- $1.34 $1.30
Cash Dividends Per Share
Common Stock ----------------- $ .46 $ .43
See notes to consolidated financial statements on page 7.
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LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Months Ended March 31
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 ------------- (787) (1,160) (26) (38)
Balance at March 31 ----- 39,859 42,058 1,309 1,382
Series E and F Preferred Stock:
Balance at beginning of year -- 4,417,897 -- 309,913
Conversion into
common stock ------------- -- -- -- --
Balance at March 31 ----- -- 4,417,897 -- 309,913
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 ------------ 6,296 9,280 26 38
Issued for benefit plans ----- 56,338 88,189 1,468 2,165
Balance at March 31 --- 104,247,751 94,575,411 890,970 557,585
Retained Earnings:
Balance at beginning of year - 2,775,718 2,479,532
Net income ------------------- 140,024 134,813
Cash dividends declared ------ (47,791) (44,965)
Balance at March 31 ----- 2,867,951 2,569,380
Foreign Currency Translation Adjustment:
Accumulated adjustment at
beginning of year ---------- 13,413 6,890
Change during period --------- (1,890) 8,454
Balance at March 31 ----- 11,523 15,344
Net Unrealized Gain (Loss) on
Securities Available-for-Sale:
Balance at beginning of year - 698,180 (311,077)
Change during period --------- (323,887) 509,199
Balance at March 31 ----- 374,293 198,122
Total Shareholders' Equity
at March 31 ----------- $4,146,046 $3,651,726
Common Stock (assuming conversion
of series A, E & F preferred stock):
End of Period ----------- 104,566,623 103,747,669
Average for the Period -- 104,532,461 103,678,382
See notes to consolidated financial statements on page 7.
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LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31
(000's omitted) 1996 1995
Operating Activities:
<S> <C> <C>
Net income ---------------------------------------- $ 140,024 $ 134,813
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred acquisition costs -------------------- 42,985 40,803
Premiums and fees receivable ------------------ (82,190) (142,908)
Accrued investment income --------------------- 11,305 (14,700)
Policy liabilities and accruals --------------- (205,729) 137,879
Contractholder funds -------------------------- 577,131 349,840
Amounts recoverable from reinsurers ----------- (24,213) (138,318)
Federal income taxes -------------------------- 7,044 181,598
Equity in undistributed earnings of
unconsolidated affiliates ------------------- -- --
Provisions for depreciation ------------------- 14,186 15,302
Amortization of goodwill and other
intangible assets ---------------------------- 29,975 --
Realized (gain) loss on investments ----------- (71,258) (44,705)
(Gain) loss on sale of affiliate/
operating property -------------------------- -- --
Other ----------------------------------------- (92,593) (37,014)
Net Adjustments ----------------------------- 206,643 347,777
Net Cash Provided by Operating Activities --- 346,667 482,590
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Investing Activities:
<S> <C> <C>
Securities-available-for-sale:
Purchases -------------------------------------- (3,843,320) (4,449,100)
Sales ------------------------------------------ 3,507,420 3,951,078
Maturities ------------------------------------- 238,238 182,774
Purchase of other investments -------------------- (577,470) (301,429)
Sale or maturity of other investments ------------ 475,069 340,700
Sale of affiliates/operating property ------------ -- --
Purchase of affiliates --------------------------- -- --
Increase (decrease) in cash collateral
on loan securities ----------------------------- 145,910 (244,080)
Other -------------------------------------------- (195,147) 111,999
Net Cash Used in Investing Activities ------ (249,300) (408,058)
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Financing Activities:
<S> <C> <C>
Principal payments on long-term debt ------------- (1,561) (455)
Issuance of long-term debt ----------------------- 1,152 1
Net increase in short-term debt ------------------ 3,378 27,466
Universal life and investment contract deposits -- 290,780 786,828
Universal life and investment
contract withdrawals --------------------------- (576,720) (565,451)
Common stock issued for benefit plans ------------ 1,468 2,165
Dividends paid to shareholders ------------------- (47,762) (44,802)
Net Cash Provided by Financing Activities -- (329,265) 205,752
Net Increase in Cash ----------------------- (231,900) 280,284
Cash at Beginning of Year -------------------------- 1,572,855 1,041,583
Cash at March 31 --------------------------- $1,340,955 $1,321,867
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, 1995.
Operating results for the three months ended March 31, 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 (104,532,461 and 103,678,382 for the first three months of 1996
and 1995, respectively) after assuming conversion of the series A, E and F
preferred stock.
4. Potential Sale of Minority Interest in Subsidiary
During the first quarter of 1996, LNC announced that it would be offering up
to 18.7% of its principal subsidiary within its Property-Casualty segment
(American States Insurance Company) to the public in the form of an initial
public offering of its common stock. The filing of a registration statement
with the Securities and Exchange Commission, marketing of the shares and
receiving the necessary approvals is expected to result in a closing of this
transaction in the second quarter of 1996. Following the completion of this
transaction, LNC will continue to fully consolidate this operation within its
financial statements and tax reporting. A minority interest will be
established for the portion of the company that was sold.
<PAGE> -8-
LINCOLN NATIONAL CORPORATION
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
INFORMATION
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.
REVIEW OF CONSOLIDATED OPERATIONS
The discussion that follows focuses on the results for the three months
ended March 31, 1996 compared to the results for the three months ended March
31, 1995.
Insurance Premiums
Life and annuity premiums for the first three months of 1996 increased
$23.2 million or 15% compared with the first three months of 1995. This
increase is the result of increases in business volume from the Life Insurance
and Annuities segment. Health premiums increased $27.1 million or 17% for the
first three months of 1996 compared with the first three months of 1995 as a
result of increased volumes of business in the Reinsurance segment. Property-
casualty premiums decreased by $14.7 million or 3% compared with the three
months ended March 31, 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 $22.2 million or 18% compared to the first three
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."
Net Investment Income
Net investment income increased $41.1 million or 8% when compared with
the first three months of 1995. This increase is the net result of an 11%
increase in mean invested assets and a decrease in the overall yield on
investments from 7.71% to 7.48% (all calculations on a cost basis). Net
investment income for the first three months of 1996 included a charge of $9.2
million versus a benefit of $5.6 million in the first quarter 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 three months ended March 31, 1995 represent 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, no activity is shown in this account
for the three months ended March 31, 1996.
<PAGE> -9-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION
(continued)
REVIEW OF CONSOLIDATED OPERATIONS (continued)
Realized Gain on Investments
The first three months of 1996 and 1995 had pre-tax realized gain on
investments of $71.3 million and $44.1 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 sale 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
three months of 1996 and 1995 was $3.1 million and $4.3 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 three months of 1996 and 1995 were
$8.2 million and $7.3 million, respectively. The pre-tax addition (reduction)
to the allowance for losses for other investments for the first three months
of 1996 and 1995 was $.3 million and $(.6) million, respectively.
Other Revenue
Other revenue decreased $13.4 million when compared to the first three
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 $33.2 million
or 7% when compared to the first three 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 $2.7 million or 2%
when compared to the first three months of 1995 as a net result of increased
volumes of business and decreased claims in the Reinsurance segment. In light
of the reserve strengthening that occurred in 1995 the amount of disability
income claims which is within the health benefits number was higher than
anticipated. An analysis of the disability income claims indicated the first
quarter 1996 claims were at the high end of the expected range of fluctuation.
Property-casualty benefits increased by $12.7 million or 4% when compared with
the first three months of 1995 as a net result of a small decrease in business
being more than offset with increases in catastrophe losses and weather
related claims.
Underwriting, Acquisition, Insurance and Other Expenses
This expense increased $89.2 million or 22% for the three months ended
March 31, 1996 compared to the first three 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 in the second quarter of 1995. These
expenses for the Property-Casualty segment decreased $9.4 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.
<PAGE> -10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION
(continued)
REVIEW OF CONSOLIDATED OPERATIONS (continued)
Interest Expense
Interest expense increased $4.5 million or 32% when compared with the
first three 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. 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 first quarter of 1996.
Federal Income Taxes
Federal income taxes increased $9.2 million when compared to the first
three months of 1995. This is the result of an increase in pre-tax earnings
and a reduction tax-exempt investment income.
Summary
Net income for the first three months of 1996 was $140.0 million or $1.34
per share compared with $134.8 million or $1.30 per share in the first three
months of 1995. Excluding realized gain on investments, LNC earned $95.2
million for the first three months of 1996 compared with $106.5 million for
the first three months of 1995. This decrease was the net result of an
increase in earnings in the Life Insurance and Annuities segment being more
than offset by reductions in earnings from the Reinsurance and Property-
Casualty business segments.
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
Investments
The total investment portfolio decreased $.8 billion in the first three
months of 1996. This decrease is the net result of decreases in the fair
value of securities available-for-sale during the first three months of 1996
being partial 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 March 31,
1996 was as follows:
Treasuries and AAA 33.3% BBB 22.4%
AA 10.9% BB 3.0%
A 27.3% Less than BB 3.0%
As of March 31, 1996, $1.5 billion or 6.0% of fixed maturity securities
was invested in below investment grade securities (less than BBB). This
represents 4.9% of the total investment portfolio. The interest rates
available on these below investment grade securities are significantly higher
than are available on other corporate debt securities. Also, the risk of loss
due to default by the borrower is significantly greater with respect to such
below investment grade securities, because these securities are generally
unsecured, often subordinated to other creditors of the issuer and issued by
companies that usually have high levels of indebtedness. LNC attempts to
minimize the risks associated with these below investment grade securities by
limiting the exposure to any one issuer and by closely monitoring the credit
worthiness of such issuers. During the three months ended March 31, 1996, the
aggregate cost of such investments purchased was $259.6 million. Aggregate
proceeds from such investments sold were $259.7 million, resulting in a net
realized pre-tax loss of $2.2 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 March 31, 1996, mortgage loans on real estate and real estate
represented 10.5% and 2.4% of LNC's total investment portfolio. As of March
31, 1996, the underlying properties supporting the mortgage loans on real
estate consisted of 19.9% in commercial office buildings, 28.8% in retail
stores, 21.4% in apartments, 14.2% in industrial buildings, 6.0% in
hotels/motels and 9.7% 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:
March 31 December 31
(in millions) 1996 1995
Impaired loans with allowance for losses --------- $159.4 $150.9
Allowance for losses ----------------------------- (34.5) (29.6)
Impaired loans with no allowance for losses ------ 8.0 2.2
Net Impaired Loans ----------------------------- $132.9 $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:
Three Months Ended March 31 (in millions) 1996 1995
Balance at beginning of year --------------------- $29.6 $ 62.7
Provisions for losses ---------------------------- 6.1 9.7
Releases due to sales ---------------------------- (.8) (15.7)
Releases due to foreclosures --------------------- (.4) --
Balance at End of Quarter ---------------------- $34.5 $56.7
The average recorded investment in impaired loans and the interest
income recognized on impaired loans were as follows:
Three Months Ended March 31 (in millions) 1996 1995
Average recorded investment in impaired loans ---- $160.3 $251.8
Interest income recognized on impaired loans ----- 4.2 4.8
All interest income on impaired loans was recognized on the cash basis
of income recognition.
As of March 31, 1996 and 1995, LNC had restructured loans of $62.4
million and $42.2 million, respectively. LNC recorded $1.4 million and $.9
million interest income on these restructured loans for the three months ended
March 31, 1996 and 1995, respectively, as compared to interest income of $1.7
million and $1.1 million that would have been recorded according to their
original terms.
As of March 31, 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 March 31, 1996 of
$8.2 million were non-income producing for the three months ended March 31,
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 $231.9 million in the first three
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 $450.0 million during the quarter.
One half of this increase 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 other half 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 quarter.
Premiums and Fee Receivable
Premiums and fees receivable increased $82.0 million in the first three
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 $1.5 billion in the first three months of 1996, reflecting an
increase in annuity and pension funds under management.
Amounts Recoverable from Reinsurers
The decrease in amounts recoverable from reinsurers of $37.5 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 quarter represent amortization for the
quarter.
Other Assets
The increase in other assets of $90.9 million is the result of having a
higher receivable related to investment securities sold in the last few days
of the first quarter of 1996 versus the end of 1995.
Total Liabilities
Total liabilities increased by $1.2 billion in the first three months of
1996. This increase is the result of an increase of $1.5 billion in the
liabilities related to separate accounts being partially 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
Reinsurance and Life Insurance and Annuities segment was 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 value of securities available-for-sale and 2) the
withdrawal of guaranteed interest contract funds because of the decision to
exit this business.
<PAGE> -13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION
(continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued)
Total property-casualty liabilities for unpaid claims and claims expenses
were $2.6 billion at March 31, 1996 and December 31, 1995. These liabilities
include liabilities for environmental claims of $263 million and $256 million
at March 31, 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 at March 31, 1996 and December 31, 1995 is
a net liability of $1,520,000,000 and $1,541,000,000, respectively, excluding
deferred acquisition costs. 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 form 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 which would be recognized
at some future time.
Shareholders' Equity
Total shareholders' equity decreased $232.1 million in the first three
months of 1996. Excluding the decrease of $316.4 million related to
unrealized gains on securities available-for-sale, shareholders' equity
increased $84.3 million. This increase was the net result of $140.0 million
from net income and $1.5 million from the issuance of common stock related to
benefit plans, being partially offset by a decrease in the accumulated foreign
exchange gain of $9.4 million and the declaration of dividends to shareholders
of $47.8 million.
<PAGE> -14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION
(continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued)
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 three
months of 1996, LNC has made changes in its derivative positions as follows:
1. Terminated the $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.
2. 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.
3. Terminated the $106.7 million of long financial futures that were
being used to hedge interest rate risks.
4. Added $2.1 billion 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 in the second half of 1996.
5. Increased foreign currency options by a notional amount of $207.2
million to hedge the currency risk of increased holdings of foreign
bonds.
With the exception of one counterparty that has a Baal rating from one rating
agency all counterparties hold A ratings or above. As of March 31, 1996,
LNC's cap agreements with that counterparty have an aggregate notional amount
of $500 million and an aggregate replacement value of approximately $200,000.
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 Statement of Cash Flows on page 6, indicates that
operating activities provided cash of $346.7 million during the first three
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
<PAGE> -15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION
(continued)
REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued)
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. 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 in debt in May 1995.
Proceeds from this offering were used to pay down short-term debt that had
been incurred in April 1995 related to the acquisition of additional operating
businesses.
As described in note 4 to the accompanying financial statements, LNC is
offering up to 18.7% of its principal subsidiary within the Property-Casualty
segment to the public in the form of an initial public offering of common
stock. In conjunction with this offering this subsidiary will assume $100
million of existing LNC debt and issue $200 million of term debt payable to
LNC. The cash proceeds from the sale of common stock (approximately $225-$275
million) will be used to support the capital base of the property casualty
operations and to meet working capital needs. Prior to closing, this
subsidiary will make a one-time, special dividend distribution of $300 million
to LNC. This distribution will consist primarily of tax-exempt municipal
securities that are currently in the subsidiary's investment portfolio.
Following the completion of the transaction this subsidiary will discontinue
its recent practice of declaring dividends essentially equal to its prior
years statutory earnings and adopt a dividend policy more in line with the
policy followed by other publicly traded property casualty companies.
<PAGE> -16-
PART II - OTHER INFORMATION AND EXHIBITS
Items 1, 2, 3, 4 and 5 of this Part II are either inapplicable or are
answered in the negative and are omitted pursuant to the instructions
to Part II.
Item 6. Exhibits and Reports on Form 8-K
(a) The following Exhibits of the Registrant are included in this report.
(Note: The number preceding the exhibit corresponds to the specific
number within Item 601 of Regulation S-K.)
10(a) Lincoln National Corporation Directors' Value Sharing Plan
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 March
31, 1996.
<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 May 9, 1996
<PAGE> -18-
LINCOLN NATIONAL CORPORATION
Exhibit Index for the Report on Form 10-Q
for the Quarter Ended March 31, 1996
Exhibit Number Description Page Number
10(a) Lincoln National Corporation Directors'
Value Sharing Plan 19
11 Computation of Per Share Earnings 29
12 Historical Ratio of Earnings to
Fixed Charges 30
27 Financial Data Schedule 31
EXHIBIT 10(a) -19-
LINCOLN NATIONAL CORPORATION
DIRECTORS' VALUE SHARING PLAN
ARTICLE I - PURPOSE OF PLAN
1.1 Establishment of Plan. Lincoln National Corporation (the
"Corporation") adopts the Directors' Value Sharing Plan (the "Plan") to
provide the benefits specified in the Plan for members of the Board of
Directors of the Corporation who are not employees of the Corporation or
any of its affiliates or subsidiaries ("Non-Employee Directors").
1.2 Purpose of the Plan. The purpose of the Plan is to provide
Non-Employee Directors with an increased economic interest in the
Corporation in order to attract and retain well-qualified individuals to
serve as Non-Employee Directors and to enhance the identity of interests
between Non-Employee Directors and the shareholders of the Corporation.
The Corporation intends that its Non-Employee Directors' Base
Compensation (i.e., retainer and meeting fees) approximate the median of
that for peer companies within the industry. The Plan is designed to
provide additional compensation to Non-Employee Directors linked to
overall return to the Corporation's shareholders.
The Plan increases the Non-Employee Directors' financial interest in
the Corporation through the payment of stock units based on:
1) Performance of the Corporation's stock relative to a group of
peer companies, and
2) Service on the Board.
ARTICLE II - ELIGIBILITY AND PARTICIPATION
All Non-Employee Directors are eligible and shall participate in the
Plan in accordance with the terms and conditions set forth herein.
ARTICLE III - VALUE SHARING AWARD: STOCK PERFORMANCE
3.1 Stock Units. At the end of (i) the one-year period ending
December 31, 1996; (ii) the two-year period ending December 31, 1997; and
(iii) the three-year period ending December 31, 1998 and each succeeding
three-year period ending annually thereafter (each such period, a
"Performance Cycle"), the Corporation shall award each Non-Employee
Director a whole number of stock units (the "Stock Units"), as determined
<PAGE> -20-
under Section 3.2, in consideration for services rendered as a Non-Employee
Director. Each Stock Unit shall represent an unfunded, unsecured
obligation of the Corporation to pay an amount equal to the fair market
value of a share of common stock of the Corporation ("Stock"), determined
as of any business day by averaging the high and low sales price of the
Stock quoted on the New York Stock Exchange Composite Listing on the
preceding business day on which there were such quotations for the day in
question.
3.2 Calculation of Stock Unit Award. The number of Stock Units
awarded to each Non-Employee Director at the end of each Performance Cycle
shall be based on the total shareholder return on the Stock as compared
with that of the peer companies set forth in Exhibit A (the "Peer
Companies") for that Performance Cycle. For purposes of this Section 3.2,
the Corporation's total shareholder return shall be equal to the sum of
(i) dividends paid on Stock during the Performance Cycle; and (ii) the
appreciation in the value of Stock based on the average closing prices of
Stock on the last trading date for each of the three months prior to the
beginning of the Performance Cycle and the last trading date for each of
the three months prior to the end of the Performance Cycle. The total
shareholder return for the Peer Companies shall be calculated in the same
manner.
For each Performance Cycle, each Director shall be awarded a whole
number of Stock Units having a value as follows:
Performance Relative Value of
to Peer Companies Stock Units
Median $ 0
Top Tier (75th percentile) 16,000
Top Company 41,000
If the Corporation's performance falls between the above referenced
points, the value of the Stock Units awarded will be based on the
interpolation of the value to be awarded between the relevant referenced
points. To the extent that the formula described in this Section 3.2 does
not result in a whole number of Stock Units, the result shall be rounded
<PAGE> -21-
upwards to the next whole number such that no fractional Stock Units shall
be issued under the Plan.
ARTICLE IV - VALUE SHARING AWARD: BOARD SERVICE
4.1 In addition to the awards based on stock performance described
in Article III, the Corporation shall award Stock Units in lieu of
participation in any pension or other retirement program of the
Corporation to each Non-Employee Director who on or before March 31, 1996,
waived any entitlement under (or who never becomes entitled to benefits
under) such a program.
4.2 The number of such Stock Units to be granted each eligible
Director shall be determined by (i) calculating the dollar amount (the
"Level Funding") required to fund in equal quarterly payments over the
Calculation Period (defined below) a notional lump sum amount payable as
of age 70 of .185 of the current annual retainer multiplied by the number
of quarters in the Calculation Period and then (ii) applying the
provisions of 4.3 through 4.9 of this Plan. The Level Funding shall be
calculated assuming such payments were credited at the end of each
calendar quarter commencing on the later of April 1, 1986, or the
beginning of the calendar quarter which includes the date on which the
individual first became a Non-Employee Director and terminating at the end
of the Calculation Period and assuming an effective annual interest rate
of 7.5% during the Calculation Period and during the period from the end
of the Calculation Period to age 70. The Calculation Period shall be a
period equal to the lesser of forty calendar quarters or the number of
calendar quarters commencing with the calendar quarter which includes the
date on which the individual's service as a Non-Employee Director began
<PAGE> -22-
and ending with the calendar quarter immediately preceding the calendar
quarter during which attainment of age 70 occurs. (See Exhibit B.)
4.3 An initial grant of stock units shall be made to each Non-Employee
Director who has waived benefits as provided in 4.1 above by
calculating (i) the dollar amount that would have accumulated had such
Level Funding outlined in 4.2 (i) above taken place during the period
beginning the later of April 1, 1986 or the quarter which includes the
date the individual became a Non-Employee Director and ending on March 31,
1996, including interest at 7.5% and dividing this amount by (ii) the
value of a share of Stock determined in the manner set forth in 3.1 above
(the "Stock Value") on March 31, 1996.
4.4 For an individual who as of March 31, 1996 has served as a Non-
Employee Director for a period equal to or greater than the Calculation
Period, the initial grant as described in 4.3 above shall constitute the
entire basic Board Service Value Sharing Award and shall be supplemented
by additional Board Service grants only as provided in 4.6 below.
4.5 For a Non-Employee Director who as of March 31, 1996 has not
served as a Non-Employee Director for a period equal to or greater than
the Calculation Period, the Corporation shall continue to make grants of
Stock Units at the end of calendar quarters beginning April 1, 1996, and
thereafter equal to the Level Funding amount calculated under 4.2 (i)
divided by the Stock Value as of the date of grant until grants have been
made for each of the remaining quarters in the Calculation Period during
which the individual continues to serve as a Non-Employee Director.
4.6 To the extent that the current annual retainer payable to Non-Employee
Directors is increased in any year, each Non-Employee Director
<PAGE> -23-
serving for such year shall also receive a grant of Stock Units equal to
(i) .185 of the dollar amount of such increase times the number of
quarters (to a maximum of forty) then served as a Non-Employee Director
discounted at 7.5% interest from the Non-Employee Director's age 70 to the
last day of the quarter during which such increase in retainer occurred,
divided by (ii) the Stock Value as of the last day of the quarter in which
such increase in retainer occurred.
4.7 For a Non-Employee Director who, as of the date any increase in
retainer occurs, has not served as a Non-Employee Director for a period
equal to or greater than the Calculation Period, the amount of any
quarterly payment made in quarters following the quarter during which the
increase in retainer occurred will be increased to an amount equal to the
then current quarterly payment times the ratio of the new retainer to the
then current retainer.
4.8 The beneficiary of a Non-Employee Director who dies while
serving as a Non-Employee Director and who prior to March 31, 1996, waived
his or her rights under any pension or retirement plan as provided in 4.1
above shall be entitled to receive an additional amount credited to his or
her Account equal to the amount by which (i) the lump sum death benefit
which would have been payable under the Lincoln National Corporation
Directors' Retirement Plan had the Non-Employee Director continued to
participate in that plan until his or her date of death exceeds (ii) the
value as of the date of his or her death of the Stock Units calculated
under the provisions of 4.2 through 4.7 and the Dividend Equivalent
Payments provided by Article VI attributable to such Stock Units. No
additional amount shall be credited under 4.8 if 4.8(ii) exceeds 4.8(i).
<PAGE> -24-
4.9 In no event shall grants under this Article IV be increased or
decreased to reflect increases or decreases in Stock Value subsequent to
the date of grant.
ARTICLE V - STOCK UNIT TERMS AND CONDITIONS
Stock Units shall be represented by and recorded in a bookkeeping
account set up in each Non-Employee Director's name (the "Account"). The
following terms and conditions shall apply to Stock Units: (i) a Dividend
Equivalent Payment, as defined in Article VI below, shall be credited to
the Account and shall have the same terms and conditions as the Stock
Units; (ii) none of the Stock Units may be sold, transferred, assigned,
pledged, or otherwise encumbered or disposed of and (iii) the Stock Units
and Dividend Equivalent Payments shall vest on the date the Non-Employee
Director ceases to be a Director of the Corporation.
ARTICLE VI - DIVIDEND EQUIVALENT PAYMENTS
As of each dividend payment date with respect to Stock, each Non-Employee
Director shall be awarded a Dividend Equivalent Payment equal to
the product of (i) the per share cash dividend payable with respect to
each share of Stock on such date, and (ii) the total number of Stock Units
and Dividend Equivalent Payments credited to the Non-Employee Director's
Account, as of the record date corresponding to such dividend payment
date, divided by the fair market value. The Dividend Equivalent Payments
are subject to the restrictions specified in Article V.
ARTICLE VII - PAYMENT OF BENEFITS
As soon as practicable following the date the Non-Employee Director
ceases to be a director of the Corporation (the "Date"), the Corporation
shall pay to the Non-Employee Director (or his or her designated
<PAGE> -25-
beneficiary) an amount equal in value to the Stock Units and Dividend
Equivalent Payments credited to his or her Account in a lump sum valued as
of the Date. In lieu of a lump sum, at age 70 or after, a Director who
has so elected may receive payments in annual installments over a 5, 10 or
15 year period.
ARTICLE VIII - ADJUSTMENT UPON CHANGES IN CAPITALIZATION
In the event of a Stock dividend, Stock split or combination,
reclassification, recapitalization or other capital adjustment of shares
of Stock, the number of Stock Units and the amount of Dividend Equivalent
Payments credited to Accounts shall be appropriately adjusted by the Board
of Directors of the Corporation, whose determination shall be final,
binding and conclusive. The award of Stock Units pursuant to this Plan
shall not affect in any way the right or power of the Corporation to issue
additional Stock or other securities, to make adjustments,
reclassification, reorganizations or other changes in its corporate,
capital or business structure, to participate in a merger, consolidation
or share exchange or to transfer its assets or dissolve or liquidate.
ARTICLE IX - TERMINATION OR AMENDMENT OF PLAN
9.1 In General. The Board of Directors of the Corporation may at
any time terminate, suspend or amend this Plan.
9.2 Written Consents. No amendment may, without the written
consent of such Non-Employee Director, adversely affect the right of any
Non-Employee Director to receive any Stock Units or any Dividend
Equivalent Payments previously awarded.
ARTICLE X - GOVERNMENT REGULATIONS
The obligations of the Corporation under this Plan shall be subject
<PAGE> -26-
to all applicable laws, rules and regulations and the obtaining of all
such approvals by government agencies as may be deemed necessary or
appropriate by the Board of Directors of the Corporation.
ARTICLE XI - MISCELLANEOUS
11.1 Unfunded Plan. The Plan shall at all times be entirely
unfunded. Any Account established and maintained under the Plan is solely
for accounting purposes and shall not require a segregation of any assets
of the Corporation. A Non-Employer Director's right to receive any
payment under this Plan shall be no greater than the rights of an
unsecured general creditor of the Corporation.
11.2 Assignment; Encumbrances. Stock Units and Dividend Equivalent
Payments under this Plan are not assignable or transferrable and shall not
be subject to any encumbrances, liens, pledges or charges of the Non-Employee
Director or his or her creditors. Any attempt to assign,
transfer or hypothecate any Stock Units or Dividend Equivalent Payments
shall be void and of no force and effect whatsoever.
11.3 Applicable Law. This Plan shall be governed by the laws of
the State of Indiana to the extent not preempted by Federal law.
11.4 Headings. The headings in this Plan are for reference
purposes only and shall not affect the meaning or interpretation of this
Plan.
ARTICLE XII - EFFECTIVE DATE OF PLAN
This Plan shall become effective as of January 1, 1996.
<PAGE> -27-
EXHIBIT A
Peer Group Designations
The following companies shall compose the Peer Group of companies for the
1996 Performance Cycle:
Allstate Corp. ReliaStar (formerly The NWNL Cos.)
First Colony Corp. Provident Life & Accident Ins. Co.
American General Corp. SAFECO Corp.
Providian Corp. (formerly Capital Holding Corp.)
Torchmark Corp.
CIGNA Corp. Transamerica Corp.
Traveler's Inc. The Equitable Companies, Inc.
USF&G Corp. USLIFE Corp.
Alternates:
1. Equitable of Iowa Companies
2. Reinsurance Group of America, Inc.
3. Western National Corp.
4. SunAmerica, Inc.
If, as a result of a (1) merger, (2) consolidation, (3) liquidation, (4)
similar corporate reorganization or restructuring, (5) insolvency, or
(6) takeover, any of the members of this Peer Group of companies ceases to
exist as a publicly-held corporation or if a Peer Group Company's primary
business changes, the company so affected (the "terminated company") shall
cease to be a member of the Peer Group, effective as of the beginning of the
Performance Period during which such event occurred. In such event, the
First Remaining company contained in the Alternate list shall replace the
terminated company, provided that such designation shall be effective only
with respect to Performance Periods beginning after the Performance Period
during which the terminated company was removed. If it is necessary to
replace more than one company during any Performance Period, a replacement
company is paired with a terminating company based on the first company
available from the Alternate list and the earliest date at which one of the
terminating companies was deemed to cease to exist or changed its primary
business.
<PAGE> -28-
EXHIBIT B
DVSP Board Service Quarterly Contribution
Calculated for $30,000 Retainer at 7.5% Interest
Calculation
Become Period
Director Quarterly
at Age Contribution
69 5,400
68 5,205
67 5,015
66 4,829
65 4,649
64 4,473
63 4,302
62 4,136
61 3,974
60 3,817
59 3,551
58 3,303
57 3,073
56 2,858
55 2,659
54 2,473
53 2,301
52 2,140
51 1,991
50 1,852
49 1,723
48 1,603
47 1,491
46 1,387
45 1,290
44 1,200
43 1,116
42 1,039
41 966
40 899
39 836
38 778
<PAGE> -29-
<TABLE>
<CAPTION>
EXHIBIT 11
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
EXHIBIT (11) - COMPUTATION OF PER SHARE EARNINGS
Three Months
Ended March 31
PRIMARY 1996 1995
<S> <C> <C>
Average shares outstanding
(assuming conversion of
series A, E and F
preferred stock) ---------------------------------104,532,461 103,678,382
Net effect of dilutive
stock options (based on
the treasury stock method
using average market price) --------------------- 1,030,442 550,618
Total shares
outstanding ------------------------------ 105,562,903 104,229,000
</TABLE>
<TABLE>
<CAPTION>
FULLY DILUTED
<S> <C> <C>
Average shares outstanding
(assuming conversion of
series A, E and F
preferred stock) -------------------------------- 104,532,461 103,678,382
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) --------------------------- 1,030,442 624,860
Total shares
outstanding ------------------------------ 105,562,903 104,303,242
</TABLE>
<TABLE>
<CAPTION>
DOLLAR INFORMATION (000's omitted)
<S> <C> <C>
Net Income --------------------------------- $140,024 $134,813
</TABLE>
<TABLE>
<CAPTION>
PER SHARE INFORMATION
Primary:
<S> <C> <C>
Net Income ------------------------------- $1.33 $1.29
Fully Diluted:
Net Income ------------------------------- $1.33 $1.29
<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.
</FN>
</TABLE>
<PAGE> -30-
<TABLE>
<CAPTION>
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
EXHIBIT 12 - HISTORICAL RATIO OF EARNINGS TO FIXED CHARGES
Three Months
Ended
March 31, 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 Taxes and
Accounting Change ---------- 193.9 179.5 626.6 376.3 587.8 424.7 198.8
Less: Equity Earnings in
Unconsolidated Affiliates -- -- 5.1 12.4 14.6 -- (.2) (.3)
Plus: Sub-total of Fixed
Charges -------------------- 23.5 18.5 94.4 66.6 62.9 74.6 90.9
Sub-total of Adjusted
Net Income -------------- 217.4 192.9 708.6 428.3 650.7 499.5 290.0
Interest on Annuities &
Financial Products --------- 341.8 331.8 1400.0 1359.0 1315.8 1261.7 1207.6
Adjusted Income Base ----- 559.2 524.7 2108.6 1787.3 1966.5 1761.2 1497.6
Rent Expense ---------------- 15.0 13.5 65.7 51.3 55.8 67.4 59.1
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Charges:
Interest Expense ------------ 18.5 14.0 72.5 49.5 44.3 53.8 71.2
Rent (Pro-rated) ------------ 5.0 4.5 21.9 17.1 18.6 20.8 19.7
Sub-total of Fixed Charges 23.5 18.5 94.4 66.6 62.9 74.6 90.9
Interest on Annuities &
Financial Products --------- 341.8 331.8 1400.0 1359.0 1315.8 1261.7 1207.6
Sub-total of Fixed Charges 365.3 350.3 1494.4 1425.6 1378.7 1336.3 1298.5
Preferred Dividends (Pre-tax) -- 6.6 8.7 24.2 24.2 20.3 13.4
Total Fixed Charges ------ 365.3 356.9 1503.1 1449.8 1402.9 1356.6 1311.9
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges:
Excluding Interest on
Annuities and Financial
Products (1) --------------- 9.25 10.44 7.51 6.43 10.35 6.69 3.20
Including Interest on
Annuities and Financial
Products (2) --------------- 1.53 1.49 1.41 1.25 1.43 1.32 1.15
Ratio of Earnings to
Combined Fixed Charges
and Preferred Stock
Dividends (3) -------------- 1.53 1.47 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 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 expense on 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 25,215,793,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 946,798,000
<MORTGAGE> 3,286,970,000
<REAL-ESTATE> 742,655,000
<TOTAL-INVEST> 31,114,567,000
<CASH> 1,340,955,000
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0
1,277,000
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968,809,000
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</TABLE>
