UNITED STATES 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, 1998 Commission file number 1-6028
LINCOLN NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1140070
(State of incorporation) (I.R.S. Employer Identification No.)
200 East Berry Street, Fort Wayne, Indiana 46802-2706
(Address of principal executive offices)
Registrant's telephone number (219) 455-2000
As of April 30, 1998 LNC had 100,455,933 shares of Common Stock outstanding.
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 21
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 December 31
(000's omitted) 1998 1997
--------------- ----------- ------------
ASSETS
Investments:
<S> <C> <C>
Securities available-for-sale, at fair value:
Fixed maturity (cost 1998 - $26,076,376;
1997 - $22,626,036) . . . . . . . . . . . . . . . $27,532,729 $24,066,376
Equity (cost 1998 - $634,039;
1997 - $517,156). . . . . . . . . . . . . . . . . 824,616 660,428
Mortgage loans on real estate . . . . . . . . . . . . 4,556,633 3,288,112
Real estate . . . . . . . . . . . . . . . . . . . . . 567,738 575,956
Policy loans . . . . . . . . . . . . . . . . . . . . 1,404,764 763,148
Other investments . . . . . . . . . . . . . . . . . . 343,471 464,826
----------- -----------
Total Investments . . . . . . . . . . . . . . . . . 35,229,951 29,818,846
Investment in unconsolidated affiliates . . . . . . . . 22,472 20,975
Cash and invested cash . . . . . . . . . . . . . . . . . 2,641,678 3,794,706
Property and equipment . . . . . . . . . . . . . . . . . 191,049 189,811
Deferred acquisition costs . . . . . . . . . . . . . . . 1,695,718 1,623,845
Premiums and fees receivable . . . . . . . . . . . . . . 204,587 197,509
Accrued investment income. . . . . . . . . . . . . . . . 516,799 423,008
Assets held in separate accounts . . . . . . . . . . . . 41,741,338 37,138,845
Amounts recoverable from reinsurers. . . . . . . . . . . 2,290,330 2,350,766
Federal income taxes . . . . . . . . . . . . . . . . . . 78,505 --
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . 1,049,269 457,729
Other intangible assets. . . . . . . . . . . . . . . . . 1,536,562 613,909
Other assets . . . . . . . . . . . . . . . . . . . . . . 686,267 544,759
----------- -----------
Total Assets . . . . . . . . . . . . . . . . . . . . $87,884,525 $77,174,708
See notes to consolidated financial statements on pages 7 - 10.
</TABLE>
<PAGE> 3
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
-CONTINUED-
<TABLE>
<CAPTION>
March 31 December 31
(000's omitted) 1998 1997
--------------- ---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Insurance and Investment Contract Liabilities:
Insurance policy and claim reserves . . . . . . . . . . . . . . $15,899,218 $11,266,272
Contractholder funds. . . . . . . . . . . . . . . . . . . . . . 21,034,215 20,063,393
Liabilities related to separate accounts. . . . . . . . . . . . 41,741,338 37,138,845
----------- -----------
Total Insurance and Investment Contract Liabilities . . . . . 78,674,771 68,468,510
Federal income taxes . . . . . . . . . . . . . . . . . . . . . . -- 487,805
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 364,896 297,208
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . 811,689 511,037
Minority interest - preferred securities
of subsidiary companies. . . . . . . . . . . . . . . . . . . . . 315,000 315,000
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 2,663,928 2,112,233
---------- -----------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . 82,830,284 72,191,793
Shareholders' Equity:
Series A preferred stock-10,000,000 shares authorized
(3/31/98 liquidation value - $2,742). . . . . . . . . . . . . . . 1,126 1,153
Common stock - 800,000,000 shares authorized . . . . . . . . . . . 963,360 966,461
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . 3,562,335 3,533,105
Accumulated Other Comprehensive Income:
Foreign currency translation adjustment . . . . . . . . . . . . . 52,404 46,204
Net unrealized gain (loss) on securities available-for-sale . . 475,016 435,992
----------- -----------
Total Accumulated Other Comprehensive Income. . . . . . . . . 527,420 482,196
----------- -----------
Total Shareholders' Equity. . . . . . . . . . . . . . . . . . 5,054,241 4,982,915
----------- -----------
Total Liabilities and Shareholders' Equity . . . . . . . . . $87,884,525 $77,174,708
See notes to consolidated financial statements on pages 7 - 10.
</TABLE>
<PAGE> 4
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31
(000's omitted, except per share amounts) 1998 1997
----------------------------------------- ---- ----
Revenue:
<S> <C> <C>
Insurance premiums . . . . . . . . . . . . . . . . . . . . . . . $ 347,589 $ 357,011
Insurance fees. . . . . . . . . . . . . . . . . . . . . . . . . . 299,894 193,391
Investment advisory fees . . . . . . . . . . . . . . . . . . . . 57,879 44,343
Net investment income . . . . . . . . . . . . . . . . . . . . . . 658,359 559,360
Equity in earnings of unconsolidated affiliates . . . . . . . . 1,497 849
Realized gain on investments . . . . . . . . . . . . . . . . . . 23,923 12,110
Other revenue and fees . . . . . . . . . . . . . . . . . . . . 58,878 31,007
---------- ----------
Total Revenue . . . . . . . . . . . . . . . . . . . . . . . 1,448,019 1,198,071
Benefits and Expenses:
Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . 784,637 704,322
Underwriting, acquisition,
insurance and other expenses . . . . . . . . . . . . . . . . . 473,601 357,383
Interest and debt expense . . . . . . . . . . . . . . . . . . . 23,368 22,335
---------- ----------
Total Benefits and Expenses . . . . . . . . . . . . . . . . 1,281,606 1,084,040
---------- ----------
Net Income From Continuing Operations
Before Federal Income Taxes . . . . . . . . . . . . . . . 166,413 114,031
Federal income taxes . . . . . . . . . . . . . . . . . . . . . . 44,370 31,011
---------- ----------
Net Income From Continuing Operations . . . . . . . . . . . 122,043 83,020
Discontinued Operations (Net of income taxes):
Net income prior to disposal . . . . . . . . . . . . . . . . . . -- 48,322
Gain on sale . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
---------- ----------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . $ 122,043 $ 131,342
Earnings Per Common Share-Basic: Restated
Net Income From Continuing Operations . . . . . . . . . . . . . $ 1.22 $ .80
Discontinued Operations . . . . . . . . . . . . . . . . . . . . -- .47
------ ------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.22 $ 1.27
Earnings Per Common Share-Diluted:
Net Income From Continuing Operations . . . . . . . . . . . . . $ 1.20 $ .79
Discontinued Operations. . . . . . . . . . . . . . . . . . . . . -- .47
------ ------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.20 $ 1.26
See notes to consolidated financial statements on pages 7 - 10.
</TABLE>
<PAGE> 5
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Three Months Ended March 31
Number of Shares Amounts
(000's omitted from dollar amounts) 1998 1997 1998 1997
----------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Preferred Stock:
Series A Preferred Stock:
Balance at beginning-of-year . . . . . . . . . . 35,091 36,885 $ 1,153 $ 1,212
Conversion into common stock . . . . . . . . . (815) (321) (27) (11)
------------ ------------ ----------- -----------
Balance at March 31 . . . . . . . . . . . . . 34,276 36,564 1,126 1,201
Common Stock:
Balance at beginning-of-year . . . . . . . . . . . 100,859,478 103,658,575 966,461 904,331
Conversion of series A preferred stock . . . . . 6,520 2,568 27 11
Issued for benefit plans . . . . . . . . . . . . . 82,491 123,602 2,844 2,051
Retirement of common stock . . . . . . . . . . . . (623,281) (578,900) (5,972) (5,050)
------------ ------------ ----------- -----------
Balance at March 31 . . . . . . . . . . . . . 100,325,208 103,205,845 963,360 901,343
Retained Earnings:
Balance at beginning-of-year ... . . . . . . . . . . 3,533,105 3,082,368
Comprehensive income. . . . . . . . . . . . . . . . 167,267 (109,925)
Less other comprehensive income (loss):
Foreign currency translation . . . . . . . . . . . . 6,200 (24,432)
Net unrealized gain (loss) on securities
available-for-sale . . . . . . . . . . . . . . . . 39,024 (216,835)
----------- -----------
Net income . . . . . . . . . . . . . . . . . . . 122,043 131,342
Retirement of common stock . . . . . . . . . . . . (40,899) (25,400)
Dividends declared:
Series A preferred ($.75 per share) (26) (20)
Common stock (1998-$.52; 1997-$.49) . . . . . . . . (51,888) (50,482)
----------- -----------
Balance at March 31 . . . . . . . . . . . . . 3,562,335 3,137,808
Foreign Currency Translation Adjustment:
Accumulated adjustment at
beginning-of-year. . . . . . . . . . . . . . . . 46,204 66,454
Change during the period . . . . . . . . . . . . . 6,200 (24,432)
----------- -----------
Balance at March 31 . . . . . . . . . . . . . 52,404 42,022
Net Unrealized Gain (Loss) on
Securities Available-for-Sale:
Balance at beginning-of-year . . . . . . . . . . . 435,992 415,591
Change during the period . . . . . . . . . . . . . 39,024 (216,835)
----------- -----------
Balance at March 31 . . . . . . . . . . . . . 475,016 198,756
Total Shareholders' Equity
at March 31. . . . . . . . . . . . . . . . . $5,054,241 $4,281,130
Common Stock at End of Quarter (assuming
conversion of preferred stock) . . . . . . . . . . . 100,599,416 103,498,357
See notes to consolidated financial statements on pages 7 - 10.
</TABLE>
<PAGE> 6
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31
(000's omitted) 1998 1997
--------------- ----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 122,043 $ 131,342
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . (30,329) (16,211)
Premiums and fees receivable . . . . . . . . . . . . . . . . . . . . . (9,307) (62,389)
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . (16,263) (21,187)
Policy liabilities and accruals . . . . . . . . . . . . . . . . . . . 98,238 (231,288)
Contractholder funds . . . . . . . . . . . . . . . . . . . . . . . . . 153,325 386,011
Amounts recoverable from reinsurers . . . . . . . . . . . . . . . . . 59,914 134,609
Federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 20,004 39,139
Equity in earnings of unconsolidated affiliates . . . . . . . . . . . (1,497) --
Provisions for depreciation . . . . . . . . . . . . . . . . . . . . . 13,610 14,222
Amortization of goodwill and other intangible assets . . . . . . . . . 39,521 34,293
Realized gain on investments . . . . . . . . . . . . . . . . . . . . . (23,923) (12,110)
Other . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . (36,673) (94,236)
----------- ----------
Net Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . 266,620 170,853
----------- ----------
Net Cash Provided by Operating Activities. . . . . . . . . . . . . . 388,663 302,195
Cash Flows from Investing Activities:
Securities-available-for-sale:
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,446,959) (2,828,967)
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,149,815 2,326,648
Maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106,694 468,758
Purchase of other investments . . . . . . . . . . . . . . . . . . . . . . (259,830) (453,959)
Sale or maturity of other investments . . . . . . . . . . . . . . . . . . 448,270 561,181
Purchase of affiliates/blocks of business . . . . . . . . . . . . . . . . (1,426,000) --
Increase in cash collateral on loaned securities . . . . . . . . . . . . . 137,238 84,445
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,653) (6,906)
----------- -----------
Net Cash Provided by (Used in) Investing Activities. . . . . . . . . (1,298,425) 151,200
Cash Flows from Financing Activities:
Principal payments on long-term debt . . . . . . . . . . . . . . . . . . . (17) (758)
Issuance of long-term debt 300,670 146
Net increase in short-term debt . . . . . . . . . . . . . . . . . . . . . 67,688 5,361
Universal life and investment contract deposits . . . . . . . . . . . . . 827,287 505,993
Universal life and investment contract withdrawals . . . . . . . . . . . . (1,342,499) (912,466)
Common stock issued for benefit plans . . . . . . . . . . . . . . . . . . 2,844 2,051
Retirement of common stock . . . . . . . . . . . . . . . . . . . . . . . . (46,871) (32,710)
Dividends paid to shareholders . . . . . . . . . . . . . . . . . . . . . . (52,368) (50,631)
----------- -----------
Net Cash Used in Financing Activities. . . . . . . . . . . . . . . . (243,266) (483,014)
Net Increase (Decrease) in Cash. . . . . . . . . . . . . . . . . . . (1,153,028) (29,619)
Cash at Beginning-of-Year . . . . . . . . . . . . . . . . . . . . . . . . . 3,794,706 1,144,766
----------- -----------
Cash at March 31 . . . . . . . . . . . . . . . . . . . . . . . . . . $2,641,678 $1,115,147
See notes to consolidated financial statements on pages 7 - 10
</TABLE>
<PAGE> 7
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements include Lincoln National
Corporation ("LNC") and its majority-owned subsidiaries. Through subsidiary
companies, LNC operates multiple insurance and investment management businesses.
Operations are divided into four business segments. 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
consolidated financial statements and the accompanying notes included in LNC's
latest annual report on Form 10-K for the year ended December 31, 1997.
Operating results for the three months ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the full year ending December
31, 1998.
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 1998 and 1997 resulted
principally from tax-exempt investment income.
3. Debt
In March, 1998 LNC issued notes of 1) $100 million, 6.5% due 2008 and 2) $200
million, 7% due 2018. The proceeds from these offerings were used to pay off a
portion of LNC's short-term debt and to invest for general corporate purposes,
which could include additional acquisitions of business or companies.
4. Contingencies
Disability Income Claims. The liability for disability income claims net of the
related asset for amounts recoverable from reinsurers at March 31, 1998 and
December 31, 1997 is a net liability of $1.795 billion and $1.654 billion,
respectively, excluding deferred acquisition costs. If incidence levels and/or
claim termination rates fluctuate significantly from the assumptions underlying
the reserves, adjustments to reserves could be required in the future.
Accordingly, this liability may prove to be deficient or excessive. However, it
is management's opinion that such future development will not materially affect
the consolidated financial position of LNC. LNC reviews reserve levels on an
on-going basis.
United Kingdom Pension Products. Operations in the U.K. include the sale of
pension products to individuals. Regulatory agencies have raised questions as to
what constitutes appropriate advice to individuals who bought pension products
as an alternative to participation in an employer sponsored plan. In cases of
inappropriate advice, an extensive investigation may have to be done and the
individuals put in a position similar to what would have been attained if they
had remained in the employer sponsored plan. At March 31, 1998 and December 31,
1997 liabilities of $272.3 million and $291.0 million, respectively, had been
established for this issue. These liabilities, which are net of expected
recoveries, have been established for the estimated cost of this issue following
regulatory guidance as to activities to be undertaken. The expected recoveries
from previous owners of companies acquired over the last few years as specified
in the indemnification clauses of the purchase agreements were $114.6 million
and $113.0 million at March 31, 1998 and December 31, 1997, respectively. These
liabilities and recoveries are based on various estimates that are subject to
considerable uncertainty. Accordingly, these liabilities may prove to be
deficient or excessive. However, it is management's opinion that such future
development will not materially affect the consolidated financial position of
LNC.
<PAGE> 8
Personal Accident Programs. LNC's Reinsurance segment accepts personal accident
reinsurance programs from other insurance companies. Certain excess of loss
personal accident reinsurance programs created in the London market during
1993-1996 are producing much higher claims than expected at the time the
programs were written. The loss reserves for these programs net of related
assets recoverable from reinsurers were $186.3 million at both March 31, 1998
and December 31, 1997. This liability is based on various estimates that are
subject to considerable uncertainty. Accordingly, this liability may prove to be
deficient or excessive. However, it is management's opinion that such future
development will not materially affect the consolidated financial position of
LNC.
Marketing and Compliance Issues. Regulators continue to focus on market conduct
and compliance issues. Under certain circumstances companies operating in the
insurance and financial services markets have been held responsible for
providing incomplete or misleading sales materials and for replacing existing
policies with policies that were less advantageous to the policyholder. LNC's
management continues to monitor the company's sales materials and compliance
procedures and is making an extensive effort to minimize any potential
liability. Due to the uncertainty surrounding such matters, it is not possible
to provide a meaningful estimate of the range of potential outcomes at this
time. However, it is management's opinion that such future development will not
materially affect the consolidated financial position of LNC.
Group Pension Annuities. The liabilities for guaranteed interest and group
pension annuity contracts are supported by a single portfolio of assets that
attempts to match the duration of these liabilities. Due to the 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. Accordingly,
these liabilities may prove to be deficient or excessive. However, it is
management's opinion that such future development will not materially affect the
consolidated financial position of LNC.
Legal Proceedings. LNC and its subsidiaries are involved in various pending or
threatened legal proceedings arising from the conduct of business. Most of this
litigation is routine in the ordinary course of business. LNC maintains
professional liability insurance coverage for claims in excess of $5 million.
The degree of applicability of this coverage will depend on the specific facts
of each proceeding. In some instances, these proceedings include claims for
compensatory and punitive damages and similar types of relief in addition to
amounts for alleged contractual liability or requests for equitable relief.
After consultation with legal counsel and a review of available facts, it is
management's opinion that the ultimate liability, if any, under these suits will
not have a material adverse effect on the consolidated financial condition of
LNC.
Three lawsuits involve alleged fraud in the sale of interest sensitive universal
and whole life insurance policies. These three suits have been filed as class
actions against Lincoln Life, although the court has not certified a class in
any of these cases. Plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. While the relief sought in these
cases is substantial, the cases are in the early stages of litigation, and it is
premature to make assessments about potential loss, if any. Management intends
to defend these suits vigorously. The amount of liability, if any, which may
arise as a result of these suits cannot be reasonably estimated at this time.
<PAGE> 9
5. Segment Disclosures
Financial Accounting Standard No. 131 entitled "Disclosures about Segments of an
Enterprise and Related Information" was adopted in the second quarter of 1997.
All amounts for prior periods have been restated in conformity to the provisions
of this standard. The following tables show financial data by segment:
<TABLE>
<CAPTION>
Three Months
Ended March 31
(in millions) 1998 1997
------------- ---------- ----------
<S> <C> <C>
Revenue:
Life Insurance and Annuities . . . . . . . . . . . . . . . . $ 902.8 $ 679.0
Lincoln UK . . . . . . . . . . . . . . . . . . . . . . . . . 103.5 99.2
Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . 352.8 363.4
Investment Management . . . . . . . . . . . . . . . . . . . 76.7 53.5
Other Operations (includes consolidating adjustments). . . . 12.2 3.0
---------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,448.0 $ 1,198.1
Net income (loss) from continuing
operations before Federal income taxes:
Life Insurance and Annuities . . . . . . . . . . . . . . . . $ 99.2 $ 77.8
Lincoln UK . . . . . . . . . . . . . . . . . . . . . . . . . 26.8 23.6
Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . 44.1 33.8
Investment Management . . . . . . . . . . . . . . . . . . . 8.8 .7
Other Operations (includes interest expense) . . . . . . . . (12.5) (21.9)
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 166.4 $ 114.0
Federal income taxes (credits):
Life Insurance and Annuities . . . . . . . . . . . . . . . . $ 20.9 $ 20.2
Lincoln UK . . . . . . . . . . . . . . . . . . . . . . . . . 9.4 6.7
Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . 15.5 11.3
Investment Management . . . . . . . . . . . . . . . . . . . 4.2 1.4
Other Operations . . . . . . . . . . . . . . . . . . . . . . ( 5.6) (8.6)
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44.4 $ 31.0
Net income (loss) from continuing operations:
Life Insurance and Annuities . . . . . . . . . . . . . . . . $ 78.3 $ 57.6
Lincoln UK . . . . . . . . . . . . . . . . . . . . . . . . . 17.4 16.9
Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . 28.6 22.5
Investment Management . . . . . . . . . . . . . . . . . . . 4.6 (.7)
Other Operations (includes interest expense) . . . . . . . . ( 6.9) (13.3)
---------- ----------
Total Net Income from Continuing Operations . . . . . . . 122.0 83.0
Discontinued Operations . . . . . . . . . . . . . . . . . . -- 48.3
---------- ----------
Total Net Income . . . . . . . . . . . . . . . . . . . . . $ 122.0 $ 131.3
March 31 December 31
(in millions) 1998 1997
------------- ---------- -----------
Assets:
Life Insurance and Annuities . . . . . . . . . . . . . . . . $71,809.3 $60,604.4
Lincoln UK . . . . . . . . . . . . . . . . . . . . . . . . . 8,661.8 7,923.8
Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . 5,813.3 5,540.2
Investment Management . . . . . . . . . . . . . . . . . . . 685.9 697.4
Other Operations . . . . . . . . . . . . . . . . . . . . . . 914.2 2,408.9
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $87,884.5 $77,174.7
Revenue, net income from continuing operations (before and after-tax) and assets
increased in 1998 compared to 1997 due to the addition of a block of individual
life insurance and annuity business (see note 8 on page 10).
</TABLE>
<PAGE> 10
6. Earnings Per Share
Financial Accounting Standard No. 128 entitled "Earnings per Share" was
adopted in the fourth quarter of 1997. All prior period earnings per share
amounts have been restated to conform to the provisions of this standard. Per
share amounts for net income from continuing operations are shown in the income
statement using 1) an earnings per common share basic calculation and 2) an
earnings per common share-assuming dilution calculation. Reconciliations of the
factors used in the two calculations are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1998 1997
------------ -----------
<S> <C> <C> <C>
Numerator: [in millions]
Net income from continuing operations, as used in basic calculation . . . . . $122.0 $83.0
Dividends on convertible preferred stock . . . . . . . . . . . . . . . . . . * *
------ -----
Net income from continuing operations, as used in
diluted calculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . $122.0 $83.0
Denominator: [number of shares]
Weighted average shares, as used in basic calculation . . . . . . . . . . . 100,215,284 102,995,261
Shares to cover conversion of preferred stock. . . . . . . . . . . . . . . . 277,865 294,512
Shares to cover restricted stock . . . . . . . . . . . . . . . . . . . . . . 186,224 215,696
Average stock options outstanding during the period. . . . . . . . . . . . . 3,231,431 3,209,709
Assumed acquisition of shares with assumed proceeds from
exercising stock options (at average market price during the period). . . . (1,859,567) (2,203,493)
------------ ------------
Weighted-average shares, as used in diluted calculation. . . . . . . . 102,051,237 104,511,685
* Less than $100,000.
</TABLE>
7. Discontinued Operations
On June 9, 1997, LNC announced that it agreed to sell its 83.3% ownership in
American States Financial Corporation for $2.65 billion. As this sale resulted
in an exit from the property-casualty business (previously a business segment),
the financial data for periods prior to the closing date related to the units
being sold is shown as discontinued operations in the accompanying consolidated
financial statements. June 9, 1997 is the measurement date for purposes of
reporting the units sold as discontinued operations. The gain on sale of $1.225
billion ($776.9 million after-tax) resulting from the October 1, 1997 closing
was reported with discontinued operations in the fourth quarter of 1997. LNC
used most of the proceeds from this sale to expand its other businesses (see
note 8 below) and repurchased $341.8 million of its own common stock as
authorized by the Board of Directors in June of 1997.
8. Acquisition of Individual Life Insurance and Annuity Business
On January 2, 1998, LNC acquired a block of individual life insurance and
annuity business for $1.414 billion. Additional funds of $228.5 million were
required to cover expenses associated with the purchase and to provide
additional capital for the Life Insurance and Annuities segment to support this
business. This transaction was accounted for using purchase accounting and,
accordingly, operating results generated by this block of business after the
closing date are included in LNC's consolidated financial statements. At the
time of closing this block of business had liabilities, measured on a statutory
basis, of approximately $5.5 billion that became LNC's obligations. LNC also
received assets, measured on a historical statutory basis, equal to the
liabilities. A preliminary application of purchase accounting to this block of
business indicates that goodwill and other intangible assets will be
approximately $600 million and $940 million, respectively. The additional
analysis of this block of business during 1998 may result in a change in the
amounts or the shifting of amounts between goodwill and other intangible assets.
During the first quarter of 1998, in connection with this acquisition, LNC
recorded a charge to its Life Insurance and Annuities segment of $20.0 million
($30.8 million pre-tax). This charge was for certain costs of integrating the
new block of business with existing operations.
<PAGE> 11
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 net income from continuing operations
for the three months ended March 31, 1998 compared to the results for the
three months ended March 31, 1997. As a result of the purchase of a block of
individual life insurance and annuity business (see note 8 on page 10) select
income statements accounts increased in 1998 versus 1997. These increases are
expected to continue for the remainder of 1998.
Life Insurance and Annuity Premiums
Life insurance and annuity premiums for the first three months of 1998 increased
$22.7 million or 12% compared with the first three months of 1997. This increase
is the net result of increases in business volume from the Life Insurance &
Annuities, Lincoln UK and Reinsurance segments. A portion of the increase from
the Life Insurance and Annuities segment is the result of the acquisition of the
block of business described above.
Health Premiums
Health premiums decreased $32.1 million or 18% for the first three months of
1998 compared with the first three months of 1997 as a result of decreased
volumes of business in the Reinsurance segment.
Insurance Fees
Insurance fees in the Life Insurance & Annuities and Lincoln UK segments from
universal life, other interest-sensitive life insurance contracts and variable
life insurance contracts increased $106.5 million or 55% compared with the first
three months of 1997. This increase was the result of increases in the volume of
business and a market-driven increase in the value of existing customer accounts
upon which some of the fees are based.
Investment Advisory Fees
Investment advisory fees increased by $13.5 million or 30% for the first three
months of 1998 as a result of increased volumes of business.
Net Investment Income
Net investment income increased $99.0 million or 18% when compared with the
first three months of 1997. This increase is the net result of a 20% increase in
mean invested assets and a decrease in the overall yield on investments from
7.54% to 7.40% (all calculations on a cost basis). The increase in mean invested
assets is the result of increased volumes of business in the Life Insurance &
Annuities and Reinsurance segments and the acquisition of the block of business
described above.
Realized Gain on Investments
The first three months of 1998 and 1997 had pre-tax realized gain on investments
of $23.9 million and $12.1 million, respectively. These gains, which are net of
related deferred acquisition costs, amounts needed to satisfy policyholder
commitments and capital gains expenses, were the result of net gains on sales of
investments, less some modest write-downs and provisions for losses. Securities
available-for-sale that were deemed to have declines in fair value that are
other than temporary were written down. Also, when the underlying value of the
property is deemed to be less than the carrying value LNC records write-downs
and allowances on select mortgage loans on real estate, real estate and other
investments.
<PAGE> 12
The pre-tax write-down of securities available-for-sale for the first three
months of 1998 and 1997 were $14.3 million and $5.8 million, respectively. 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. During the first three months
of 1998, LNC released $1.0 million in reserves on real estate and mortgage loans
on real estate. There were no write-downs, additions or releases to allowances
for losses in the first three months of 1997.
Other Revenue
Other revenue and fees increased $27.8 million when compared to the first three
months of 1997 as the result of increased volumes of fee income from each of the
business segments.
Life Insurance and Annuity Benefits
Life insurance and annuity benefits increased $106.7 million or 20% when
compared with the first three months of 1997. This increase is the result of
increases in business volume from the Life Insurance & Annuities, Lincoln UK and
Reinsurance segments. A portion of the increase from the Life Insurance and
Annuities segment is the result of the acquisition of the block of business
described above.
Health Benefits
Health benefits decreased $26.3 million or 16% for the first three months of
1998 when compared with the first three months of 1997 as a result of decreased
volumes of business and better claims experience in the Reinsurance segment.
Underwriting, Acquisition, Insurance and Other Expenses
These expenses increased $116.2 million or 33% for the first three months of
1998 compared with the first three months of 1997. The primary driver behind
this increase, beyond the general inflation rate, was the additional expenses
associated with the acquisition of the block of business described above.
Interest and Debt Expense
Interest and debt expense increased $1.0 million or 5% as compared with the
first three months of 1997. This was the net result of the impact of reduced
interest rates being more than offset by higher average debt outstanding.
Federal Income Taxes
Federal income taxes for the first three months of 1998 increased $13.4 million
or 43%. The increase in federal income taxes is a result of an increase in
pre-tax earnings.
Summary
Net income for the first three months of 1998 was $122.0 million or $1.20 per
share compared with $131.3 million or $1.26 per share in the first three months
of 1997. Excluding realized gain on investments, discontinued operations and
restructuring charges, LNC earned $128.1 million for the first three months of
1998 compared with $76.7 million for the first three months of 1997. This
increase was the result of increased earnings from each of the business
segments.
Century Compliance
As indicated within the Management's Discussion and Analysis section of LNC's
Form 10-K for the year ended December 31, 1997, LNC is redirecting a large
portion of its internal information technology efforts and contracting with
outside consultants to update its systems to address year 2000 issues. These
efforts continue along with the development of contingency plans in the event,
despite its best efforts, there are unresolved year 2000 problems. The more
complete disclosure regarding this subject is hereby incorporated by reference
to page 21 of LNC's Form 10-K for the year ended December 31, 1997, filed with
the Commission on March 18, 1998.
<PAGE> 13
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
As the result of the purchase of a block of individual life insurance and
annuity business (see note 8 on page 10) select balance sheet accounts increased
from December 31, 1997 to March 31, 1998.
Investments
The total investment portfolio increased $5.4 billion in the first three months
of 1998. This is the net result of increases from the addition of the $4.8
billion in invested assets related to the block of business acquired on January
2, 1998; purchases of investments from cash flow generated by the business
segments and the increase in the fair value of securities available-for-sale,
being partially offset by fixed annuity contractholders opting to transfer funds
to variable annuity contracts.
The quality of LNC's fixed maturity securities portfolio as of March 31, 1998
was as follows:
Treasuries and AAA 26.7% BBB 30.7%
AA 6.9% BB 4.0%
A 27.8% Less than BB 3.9%
As of March 31, 1998, $2.2 billion or 7.9% of fixed maturity securities was
invested in below investment grade securities (less than BBB). This represents
6.2% 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, 1998, the aggregate cost of such investments purchased
was $613.5 million. Aggregate proceeds from such investments sold were $271.4
million, resulting in a net realized pre-tax gain at the time of sale of $2.3
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.
As of March 31, 1998, mortgage loans on real estate and real estate represented
12.9% and 1.6% of LNC's total investment portfolio. As of March 31, 1998, the
underlying properties supporting the mortgage loans on real estate consisted of
23.3% in commercial office buildings, 36.6% in retail stores, 19.5% in
apartments, 10.6% in industrial buildings, 3.9% in hotels/motels and 6.1% in
other. In addition to the dispersion by property type, the mortgage loan
portfolio is geographically diversified throughout the United States.
Impaired loans along with the related allowance for losses are as follows:
March 31 December 31
(in millions) 1998 1997
------------- -------- -----------
Impaired loans with allowance for losses . . . . $ 35.3 $ 41.2
Allowance for losses . . . . . . . . . . . . . . (4.8) (5.0)
Impaired loans with no allowance for losses . . -- --
-------- ----------
Net Impaired Loans. . . . . . . . . . . . . . $ 30.5 $ 36.2
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 the loan.
<PAGE> 14
A reconciliation of the mortgage loan allowance for losses for these impaired
mortgage loans is as follows:
Three Months
Ended March 31
(in millions) 1998 1997
------------- ----- ------
Balance at beginning of year . . . . . . . . . . . . $5.0 $12.4
Provisions for losses . . . . . . . . . . . . . . . -- (.1)
Releases due to sales . . . . . . . . . . . . . . . (.2) (.8)
Releases due to foreclosures . . . . . . . . . . . . -- --
----- ------
Balance at End of Period . . . . . . . . . . . . . $4.8 $11.5
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) 1998 1997
------------- ----- -----
Average recorded investment in impaired loans. . . . $38.2 $68.0
Interest income recognized on impaired loans . . . . .9 1.3
All interest income on impaired loans was recognized on the cash basis of income
recognition.
As of March 31, 1998 and 1997, LNC had restructured loans of $32.8 million and
$39.4 million, respectively. LNC recorded $.8 million and $1.0 million interest
income on these restructured loans for the three months ended March 31, 1998 and
1997, respectively, as compared to interest income of $.8 million and $1.0
million that would have been recorded according to their original terms.
Fixed maturity securities available-for-sale, mortgage loans on real estate and
real estate that were non-income producing for the three months ended March 31,
1998 were not significant.
Cash and Invested Cash
Cash and invested cash decreased by $1.2 billion in the first three months of
1998. This decrease is the result of paying out funds accumulated in the fourth
quarter of 1997 to purchase a block of individual life and annuity business on
January 2, 1998 (see note 8 on page 10).
Deferred Acquisition Costs
Deferred acquisition costs increased $71.9 million during the first three months
of 1998 as the net result of increases in new business being partially offset by
reductions related to the increase in unrealized gain on securities
available-for-sale.
Premiums and Fees Receivable
Premiums and fees receivable increased $7.1 million in the first three months of
1998 as the net result of increased volumes of business in the Investment
Management and Reinsurance segments.
Assets Held in Separate Accounts
This asset account as well as the corresponding liability account increased by
$4.6 billion in the first three months of 1998, reflecting an increase in
annuity funds under management. This increase resulted from new deposits, market
appreciation and the continuation of fixed annuity contractholders opting to
transfer funds to variable annuity contracts.
Goodwill and Other Intangible Assets
The increase in these amounts is the net result of the additions associated with
the block of individual life insurance and annuity business (see note 8 on page
10) being more than the amortization for the three months ended March 31, 1998.
Other Assets
The increase in other assets of $141.5 million is the result of having a higher
receivable related to investment securities sold in the last few days of the
first quarter of 1998 versus the end of 1997.
<PAGE> 15
Total Liabilities
Total liabilities increased by $10.6 billion in the first three months of 1998.
The primary item underlying this increase is the addition of the block of
individual life insurance and annuity business. Insurance policy reserves and
separate accounts each increased $4.6 billion as a result of the new block of
business and increased levels of business in the Life Insurance and Annuities
segment. The increase in contractholder funds of $970.8 million is the net
result of new deposits and the acquisition of business being partially offset by
the withdrawal upon maturity of guaranteed interest contracts. Total debt
increased $368.3 million. LNC's liabilities includes some contingency items (see
note 4 on page 7).
Shareholders' Equity
Total shareholders' equity increased $71.3 million in the first three months of
1998. Excluding the increase of $39.0 million related to an increase in the
unrealized gains on securities available-for-sale, shareholders' equity
increased $32.3 million. This increase was the net result of increases due to
$122.0 million from net income, $2.9 million from the issuance of common stock
related to benefit plans and an increase of $6.2 million cumulative foreign
currency translation adjustment, being mostly offset by the repurchase of common
shares ($46.9 million), and the declaration of dividends to shareholders ($51.9
million).
Derivatives
As discussed in note 7 to the consolidated financial statements for the year
ended December 31, 1997 (see page 56 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, increased liabilities associated with certain
reinsurance agreements, foreign exchange risks and fluctuations in the FTSE and
S&P indexes. In addition, LNC is subject to risks associated with changes in the
value of its derivatives; however, such changes in value are generally offset by
changes in the value of the items being hedged by such contracts. Modifications
to LNC's derivative strategy are initiated periodically upon review of the
company's overall risk assessment. Select increases in LNC's derivative
positions noted below are the result of derivatives received in conjunction with
the acquisition of a block of individual life insurance and annuity business
(see note 8 on page 10). During the first three months of 1998, LNC's derivative
positions have changed as follows:
1. Increased its use of interest rate cap agreements that are used to hedge
its annuity business from the effect of fluctuating interest rates from
$4.9 billion notional to $5.3 billion notional.
2. Added $218.3 million in notional amount of swaptions. In addition, $21.8
million notional amount of swaptions expired, resulting in a remaining
balance of $1,948.5 million in notional amount of swaptions hedging
various portfolios of interest rate sensitive assets.
3. Increased its use of interest rate swap agreements from $10.0 million
notional to $41.1 million. These interest rate swap agreements are part
of a replication strategy which will result in a higher yield on bonds
held by LNC.
4. Entered into put option agreements with a notional amount of $21.3
million. These put option agreements are part of a replication strategy
which establishes a fixed maturity date for various perpetual bonds owned
by LNC.
5. Decreased its use of foreign exchange forward contracts that are hedging
the foreign currency risk of its portfolio of foreign bonds from $163.1
million notional to $56.7 million notional. The termination of these
foreign exchange forward contracts resulted in the recognition of gains
of $5.2 million.
6. Added foreign currency swap agreements with a notional amount of $39.2
million. These foreign currency swap agreements are part of a replication
strategy. LNC owns various foreign issue bonds. Interest payments from
these bonds are received in a foreign currency and then swapped into U.S.
dollars, replicating a foreign issue, U.S. dollar paying security.
7. Entered into a gold commodity swap agreement with a notional amount of
$8.1 million. This gold commodity swap is part of a replication strategy.
LNC owns a foreign issue bond that makes its coupon payments to its bond
holders in ounces of gold. The gold bullion is then swapped into U.S.
dollars, replicating a foreign issue, U.S. dollar paying security.
<PAGE> 16
8. Increased its use of S&P 500 index options from $5.3 million notional to
$21.7 million notional. These options continue to offset LNC's increased
liabilities resulting from certain reinsurance agreements which guarantee
payment of the appreciation of the S&P 500 index on certain underlying
annuity products.
The following is additional information regarding two new hedging strategies LNC
entered into since year-end 1997:
Put Options. LNC uses put options, combined with various perpetual fixed income
securities, to replicate a fixed income, fixed maturity investment. The put
options give LNC the right, but not the obligation, to sell to the counterparty
of the agreement the specified securities on a specified date at a fixed price.
Commodity Swap. A commodity swap is a contractual agreement to exchange a
certain amount of a particular commodity for a known amount of cash. LNC owns a
fixed income security that meets its coupon payment obligations in gold bullion.
LNC is obligated to pay to the counterparty the gold bullion, and in return,
receives from the counterparty a stream of fixed income payments. The fixed
income payments are the product of the swap notional multiplied by the fixed
rate stated in the swap agreement. The net receipts/payments from commodity
swaps are recorded in net investment income.
LNC is exposed to credit loss in the event of non-performance by counterparties
on interest rate cap agreements, swaptions, spread-lock agreements, interest
rate swaps, put options, foreign exchange forward contracts, foreign currency
options, foreign currency swaps, commodity swaps and call options. However, LNC
does not anticipate non-performance by any of the counter parties. The credit
risk associated with such agreements is minimized by purchasing such agreements
from financial institutions with long-standing superior performance records.
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 $388.7 million during the first three months of
1998. 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 at end of the quarter 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 April 1998, LNC filed a shelf registration for $1.3
billion. The $1.3 billion included an aggregate of $300 million that had not
been utilized from a previously filed shelf registration. The registration
statement provides for the issuance of a variety of securities including debt,
preferred stock, common stock and hybrid securities. As of March 31, 1998 LNC
also had an unused balance of $185 million related to a registration that
included the right to offer various forms of hybrid securities. Finally, cash
funds are available from LNC's revolving credit agreement which provides for
borrowing up to $750 million.
Transactions such as those described in the preceding paragraph that occurred
recently include the issuance of $300 million of debt in March 1998 and the
purchase and retirement of 623,281 shares of common stock at a cost of $46.9
million in the first three months of 1998. The shares purchased in 1998, along
with shares purchased in 1997, have reduced the June 1997 board authorization of
$500 million to $158.2 million at March 31, 1998.
<PAGE> 17
PART II - OTHER INFORMATION AND EXHIBITS
Items 1, 2, 3 and 4 of this Part II are either inapplicable or are answered in
the negative and are omitted pursuant to the instructions to Part II.
Item 5. Other Information
Effective December 22, 1997, First Chicago Trust Company of New York became
Transfer Agent, Registrar, Rights Agent, Dividend Disbursing Agent and
Administrator of Dividend Reinvestment of Lincoln National Corporation common
and series A preferred stock.
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.)
12 Historical Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) During the quarter ended March 31, 1998, a Form 8-K was filed with the
Commission regarding the purchase of a block of individual life insurance
and annuity business. This informational filing (filed under Item 5
"Other Information") which included a copy of the press release
announcing the completion of the purchase of a block of individual life
insurance and annuity business and pro forma statements was filed on
January 13, 1998.
<PAGE> 18
SIGNATURE PAGE
Pursuant to the requirements of the securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LINCOLN NATIONAL CORPORATION
By /S/ Richard C. Vaughan
Richard C. Vaughan,
Executive Vice President and
Chief Financial Officer
/S/ Donald L. Van Wyngarden
Donald L. Van Wyngarden,
Second Vice President and Controller
Date May 6, 1998
<PAGE> 19
LINCOLN NATIONAL CORPORATION
Exhibit Index for the Report on Form 10-Q
for the Quarter Ended March 31, 1998
Exhibit Number Description Page Number
12 Historical Ratio of Earnings to
Fixed Charges 20
27 Financial Data Schedule 21
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
EXHIBIT 12 - HISTORICAL RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Three Months
Ended
March 31 Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
(millions of dollars) 1998 1997 1997(4) 1996 1995 1994 1993
- --------------------- ----- ------ ---- ------ ------ -------- ------
Net Income before Federal
Income Taxes and
Accounting Change . . . . . . . . . 166.4 177.8 1427.1 692.7 626.6 376.3 587.8
Equity Loss (Earnings) in
Unconsolidated Affiliates . . . . . (1.5) -- -- (1.4) (12.4) (14.6) --
Sub-total of Fixed Charges . . . . . 28.9 28.3 113.4 108.6 94.4 66.6 62.9
----- ----- ------ ------- ------- ------- ------
Sub-total of Adjusted
Net Income . . . . . . . . . . . 193.8 206.1 1540.5 799.9 708.6 428.3 650.7
Interest on Annuities &
Financial Products . . . . . . . . . 428.6 384.3 1478.5 1435.6 1400.0 1359.0 1315.8
------ ------ ------ ------- ------- ------- ------
Adjusted Income Base. . . . . . . 622.4 590.4 3019.0 2235.5 2108.6 1787.3 1966.5
Rent Expense . . . . . . . . . . . . . 16.5 18.0 62.7 71.6 65.7 51.3 55.8
Fixed Charges:
Interest and Debt Expense. . . . . . . 23.4 22.3 92.5 84.7 72.5 49.5 44.3
Rent (Pro-rated) . . . . . . . . . . . 5.5 6.0 20.9 23.9 21.9 17.1 18.6
------ ------ ------ ------- ------- ------ ------
Sub-total of Fixed Charges. . . . . 28.9 28.3 113.4 108.6 94.4 66.6 62.9
Interest on Annuities &
Financial Products . . . . . . . . . 428.6 384.3 1478.5 1435.6 1400.0 1359.0 1315.8
------ ------ ------ ------- ------- ------- ------
Sub-total of Fixed Charges . . . . 457.5 412.6 1591.9 1544.2 1494.4 1425.6 1378.7
Preferred Dividends (Pre-tax) . . . . * * .2 .2 13.4 24.2 24.2
------ ------ ------ ------- ------- ------- -------
Total Fixed Charges . . . . . . . 457.5 412.6 1592.1 1544.4 1507.8 1449.8 1402.9
*Less than $100,000.
Ratio of Earnings to Fixed Charges:
Excluding Interest on
Annuities and Financial
Products (1) . . . . . . . . . . . . 6.71 7.28 13.58 7.37 7.51 6.43 10.35
Including Interest on
Annuities and Financial
Products (2) . . . . . . . . . . . . 1.36 1.43 1.90 1.45 1.41 1.25 1.43
Ratio of Earnings to
Combined Fixed Charges
and Preferred Stock
Dividends (3) . . . . . . . . . . . . 1.36 1.43 1.90 1.45 1.40 1.23 1.40
</TABLE>
(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 1) interest and debt expense on short
and long-term debt and distributions to minority interest-preferred
securities of subsidiary companies and 2) the portion of operating leases
that are representative of the interest factor.
(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.
(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.
(4) The coverage ratios for the year 1997 are higher than the historical
periods due to the inclusion of the gain on sale of a major subsidiary
in net income for the year ended December 31, 1997.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated financial statements of Lincoln National Corporation and
is qualified in its entirety by reference to such condensed consolidated
financial statements.
</LEGEND>
<CIK> 0000059558
<NAME> Lincoln National Corporation
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END>
Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Mar-31-1998
<DEBT-HELD-FOR-SALE> 27,532,729,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 824,616,000
<MORTGAGE> 4,556,633,000
<REAL-ESTATE> 567,738,000
<TOTAL-INVEST> 35,229,951,000
<CASH> 2,641,678,000
<RECOVER-REINSURE> 2,290,330,000
<DEFERRED-ACQUISITION> 1,695,718,000
<TOTAL-ASSETS> 87,884,525,000
<POLICY-LOSSES> 15,899,218,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 21,034,215,000
<NOTES-PAYABLE> 1,491,585,000
0
1,126,000
<COMMON> 963,360,000
<OTHER-SE> 4,089,755,000
<TOTAL-LIABILITY-AND-EQUITY> 87,884,525,000
647,483,000
<INVESTMENT-INCOME> 658,359,000
<INVESTMENT-GAINS> 23,923,000
<OTHER-INCOME> 118,254,000
<BENEFITS> 784,637,000
<UNDERWRITING-AMORTIZATION> 121,235,000
<UNDERWRITING-OTHER> 352,366,000
<INCOME-PRETAX> 166,413,000
<INCOME-TAX> 44,370,000
<INCOME-CONTINUING> 122,043,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 122,043,000
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.20
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
