UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarter ended June 30, 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 June 30, 1998 LNC had 100,521,755 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 20.
This 10-Q Amendment is being filed solely for the purpose of submitting
additional information to the beginning of Note 6 on page 7 and to the end of
the Management Discussion and Analysis section entitled Liquidity and Cash Flow
on page 17 of Lincoln National Corporation's 10-Q for the quarter ended June 30,
1998 filed July 27,1998.
Page 1 of 18
<PAGE>
2
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 December 31
(000's omitted) 1998 1997
--------------- ---- ----
<S> <C> <C>
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity (cost 1998 - $26,233,485;
1997 - $22,626,036)......................................... $27,786,933 $24,066,376
Equity (cost 1998 - $528,450;
1997 - $517,156)............................................ 648,873 660,428
Mortgage loans on real estate................................... 4,434,864 3,288,112
Real estate..................................................... 498,985 575,956
Policy loans.................................................... 1,499,597 763,148
Other investments............................................... 402,572 464,826
---------- -----------
Total Investments............................................. 35,271,824 29,818,846
Investment in unconsolidated affiliates........................... 23,143 20,975
Cash and invested cash............................................ 2,414,114 3,794,706
Property and equipment............................................ 191,667 189,811
Deferred acquisition costs........................................ 1,749,263 1,623,845
Premiums and fees receivable...................................... 250,828 197,509
Accrued investment income......................................... 508,029 423,008
Assets held in separate accounts.................................. 42,247,222 37,138,845
Amounts recoverable from reinsurers............................... 2,373,512 2,350,766
Federal income taxes.............................................. 188,888 --
Goodwill.......................................................... 1,168,693 457,729
Other intangible assets........................................... 1,255,007 613,909
Other assets...................................................... 722,430 544,759
----------- -----------
Total Assets.................................................. $88,364,620 $77,174,708
</TABLE>
See notes to consolidated financial statements on pages 7 - 11.
<PAGE>
3
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
-CONTINUED-
<TABLE>
<CAPTION>
June 30 December 31
(000's omitted) 1998 1997
--------------- ---- ----
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Insurance and Investment Contract Liabilities:
Insurance policy and claim reserves.................................. $17,452,405 $11,266,272
Contractholder funds................................................. 19,403,500 20,063,393
Liabilities related to separate accounts ........................... 42,247,222 37,138,845
----------- ----------
Total Insurance and Investment Contract Liabilities............... 79,103,127 68,468,510
Federal income taxes................................................... -- 487,805
Short-term debt........................................................ 277,080 297,208
Long-term debt......................................................... 811,759 511,037
Minority interest - preferred securities
of subsidiary companies.............................................. 315,000 315,000
Other liabilities...................................................... 2,706,807 2,112,233
----------- ----------
Total Liabilities................................................. 83,213,773 72,191,793
Shareholders' Equity:
Series A preferred stock-10,000,000 shares authorized
(6/30/98 liquidation value - $2,729).................................. 1,120 1,153
Common stock - 800,000,000 shares authorized........................... 969,424 966,461
Retained earnings...................................................... 3,658,947 3,533,105
Accumulated Other Comprehensive Income:
Foreign currency translation adjustment.............................. 51,808 46,204
Net unrealized gain on securities available-for-sale................. 469,548 435,992
---------- ----------
Total Accumulated Other Comprehensive Income...................... 521,356 482,196
---------- ----------
Total Shareholders' Equity........................................ 5,150,847 4,982,915
------------ ----------
Total Liabilities and Shareholders' Equity ...................... $88,364,620 $77,174,708
</TABLE>
See notes to consolidated financial statements on pages 7 - 11.
<PAGE>
4
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
(000's omitted, except per share amounts) 1998 1997 1998 1997
----------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Insurance premiums ......................................... $ 721,565 $ 630,414 $ 373,976 $ 273,403
Insurance fees.............................................. 628,301 391,391 328,407 198,000
Investment advisory fees ................................ 117,040 100,463 59,161 56,120
Net investment income....................................... 1,317,079 1,117,185 658,720 557,825
Equity in earnings of unconsolidated affiliates............. 1,538 1,274 41 425
Realized gain on investments ............................ 49,463 14,636 25,540 2,526
Other revenue and fees ................................... 120,526 70,779 61,648 39,772
---------- ---------- ---------- ----------
Total Revenue............................................ 2,955,512 2,326,142 1,507,493 1,128,071
Benefits and Expenses:
Benefits.................................................... 1,583,140 1,419,198 795,903 714,876
Underwriting, acquisition,
insurance and other expenses ............................ 942,274 836,961 471,273 479,578
Interest and debt expense ................................. 51,040 45,534 27,672 23,199
---------- ---------- ---------- ---------
Total Benefits and Expenses ............................ 2,576,454 2,301,693 1,294,848 1,217,653
---------- ----------- ---------- ---------
Net Income (Loss) From Continuing Operations
Before Federal Income Taxes .......................... 379,058 24,449 212,645 (89,582)
Federal income taxes ..................................... 108,336 (10,613) 63,966 (41,624)
--------- ---------- ---------- ---------
Net Income (Loss) From Continuing Operations ......... 270,722 35,062 148,679 (47,958)
Discontinued Operations (Net of income taxes):
Net income prior to disposal................................ -- 88,519 -- 40,197
Gain on sale ............................................. -- -- -- --
--------- ---------- --------- ----------
Net Income (Loss) ...................................... $ 270,722 $ 123,581 $ 148,679 $ (7,761)
Earnings Per Common Share-Basic:
Restated Restated
Net Income (Loss) From Continuing Operations ......... $2.70 $ .34 $1.48 $(.46)
Discontinued Operations..................................... -- .85 -- .39
------ ----- ----- -----
Net Income (Loss) .................................. $2.70 $1.19 $1.48 $(.07)
Earnings Per Common Share-Diluted:
Net Income (Loss) From Continuing Operations ......... $2.66 $ .34 $1.46 $(.46)
Discontinued Operations..................................... -- .84 -- .39
------ ----- ------ -----
Net Income (Loss)........................................ $2.66 $1.18 $1.46 $(.07)
</TABLE>
See notes to consolidated financial statements on pages 7 - 11.
<PAGE>
5
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Six Months Ended June 30
Number of Shares Amounts
(000's omitted from dollar amounts) 1998 1997 1998 1997
----------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Series A Preferred Stock:
Balance at beginning-of-year ................. 35,091 36,885 $ 1,153 $ 1,212
Conversion into common stock ................. (983) (1,154) (33) (38)
------ --------- ---- -------
Balance at June 30....................... 34,108 35,731 1,120 1,174
Common Stock:
Balance at beginning-of-year ................. 100,859,478 103,658,575 966,461 904,331
Conversion of series A preferred stock........ 7,864 9,232 33 38
Issued for benefit plans ................... 277,694 253,878 8,902 5,271
Issued for purchase of subsidiary............. -- 1,320,902 -- 68,688
Retirement of common stock ................... (623,281) (1,232,700) (5,972) (10,760)
------------ ----------- --------- -------
Balance at June 30 ..................... 100,521,755 104,009,887 969,424 967,568
Retained Earnings:
Balance at beginning-of-year.................. 3,533,105 3,082,368
Comprehensive income.......................... 309,882 116,206
Less other comprehensive income (loss):
Foreign currency translation.................. 5,604 (19,480)
Net unrealized gain on securities
available-for-sale........................... 33,556 12,105
-------- ---------
Net Income............................... 270,722 123,581
Retirement of common stock.................... (40,899) (63,219)
Dividends declared:
Series A preferred ($1.50 per share).......... (51) (54)
Common stock (1998-$1.04 1997-$.98)........... (103,930) (101,346)
---------- ---------
Balance at June 30....................... 3,658,947 3,041,330
Foreign Currency Translation Adjustment:
Accumulated adjustment at
beginning-of-year........................... 46,204 66,454
Change during the period...................... 5,604 (19,480)
--------- -------
Balance at June 30....................... 51,808 46,974
Net Unrealized Gain on
Securities Available-for-Sale:
Balance at beginning-of-year.................. 435,992 415,591
Change during the period...................... 33,556 12,105
-------- --------
Balance at June 30....................... 469,548 427,696
Total Shareholders' Equity at June 30.... $5,150,847 $4,484,742
Common Stock at End of Quarter:
Assuming conversion of preferred stock........ 100,794,619 104,295,735
Diluted basis................................. 102,254,815 105,455,162
</TABLE>
See notes to consolidated financial statements on pages 7 - 11.
<PAGE>
6
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30
(000's omitted) 1998 1997
--------------- ---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income.............................................................. $ 270,722 $ 123,581
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred acquisition costs.......................................... (72,684) 46,422
Premiums and fees receivable........................................ (55,548) 29,466
Accrued investment income........................................... (7,492) (17,765)
Policy liabilities and accruals..................................... 192,605 (66,961)
Contractholder funds................................................ 395,020 492,603
Amounts recoverable from reinsurers................................. (23,268) 23,996
Federal income taxes................................................ (92,873) (103,251)
Equity in earnings of unconsolidated affiliates..................... (1,538) (1,274)
Provisions for depreciation ...................................... 29,700 29,034
Amortization of goodwill and other intangible assets................ 63,342 50,327
Realized gain on investments........................................ (49,463) (14,636)
Other............................................................... (33,869) (84,961)
-------- ------
Net Adjustments................................................... 343,932 383,000
------- -------
Net Cash Provided by Operating Activities......................... 614,654 506,581
Cash Flows from Investing Activities:
Securities-available-for-sale:
Purchases............................................................. (5,484,270) (6,010,834)
Sales................................................................. 4,268,177 5,131,987
Maturities............................................................ 1,045,495 759,903
Purchase of other investments........................................... (662,783) (814,069)
Sale or maturity of other investments................................... 873,285 890,332
Purchase of affiliates/blocks of business............................... (1,426,000) --
Increase in cash collateral on loaned securities........................ 110,509 219,108
Other .................................................................. 106,081 273,565
---------- -------
Net Cash Provided by (Used in) Investing Activities............... (1,169,506) 449,992
Cash Flows from Financing Activities:
Principal payments on long-term debt.................................... (74) (113,299)
Issuance of long-term debt.............................................. 300,797 329
Net increase (decrease) in short-term debt.............................. (20,127) 168,474
Universal life and investment contract deposits......................... 492,069 655,465
Universal life and investment contract withdrawals...................... (1,455,908) (1,369,638)
Common stock issued for benefit plans................................... 8,902 5,271
Retirement of common stock.............................................. (46,871) (73,979)
Dividends paid to shareholders.......................................... (104,528) (101,134)
---------- ---------
Net Cash Used in Financing Activities............................. (825,740) (828,511)
Net Increase (Decrease) in Cash................................... (1,380,592) 128,062
Cash at Beginning-of-Year................................................. 3,794,706 1,144,766
---------- ---------
Cash at June 30................................................... $2,414,114 $1,272,828
</TABLE>
See notes to consolidated financial statements on pages 7 - 11.
<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 audited 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 six months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the full year ending December
31, 1998.
2. Accounting for Derivative Instruments and Hedging Activities ("FAS 133")
The Financial Accounting Standards Board issued FAS 133 in June 1998. This
standard indicates that adoption may occur immediately or be delayed to as late
as the first quarter of 2000. While LNC has not completed the analysis necessary
to provide a precise estimate of the effect of this statement or to specify the
quarter in which it plans to adopt the standard, it is not expected to have a
material effect on LNC's financial position or results of operations.
3. Federal Income Taxes
The effective tax rate on net income is lower than the prevailing corporate
federal income tax rate. The difference for both 1998 and 1997 resulted
principally from tax-preferred investment income.
4. 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.
5. Change in Estimate for Disability Income Reserve
During the second quarter of 1997, LNC completed an in-depth review of
experience on its disability income business. As a result of this study, LNC's
Reinsurance segment strengthened its disability income reserve by $92.8 million,
wrote-off deferred acquisition costs of $71.1 million and reduced related assets
by $36.1 million. Combined, these actions reduced net income by $130 million or
$1.25 per diluted share ($200 million pre-tax).
6. Contingencies
Statutory Restriction. LNC's insurance subsidiaries are subject to certain
insurance department regulatory restrictions as to the transfer of funds and
payments of dividends to LNC. Based upon these regulations, and without giving
effect to the 1998 acquisitions, (see note 10 on page 11), LNC's insurance
subsidiaries would have been able to pay dividends to LNC in 1998 of
approximately $396.2 million without obtaining specific approval from the
insurance commissioners. LNC's primary insurance subsidiary, The Lincoln
National Life Insurance Company ("LNL") acquired a block of individual life
insurance and annuity business from CIGNA in January 1998 and anticipates
acquiring a block of individual life insurance from Aetna in the fourth quarter
of 1998. These acquisitions were structured as indemnity reinsurance
transactions. The statutory accounting regulations do not allow goodwill to be
recognized on indemnity reinsurance transactions and therefore, the related
statutory ceding commission flows through the statement of operations as an
expense resulting in a reduction of earned surplus. As a result of these
acquisitions, LNL's earned surplus will be negative and it will be necessary
for LNL to obtain the prior approval of the Indiana Insurance Commissioner
before paying any dividends to LNC until such time as earned surplus is
positive. It is expected that earned surplus will return to a positive position
within two years from the closing of the Aetna transaction described above
assuming a level of statutory earnings coinciding with recent earnings patterns.
If statutory earnings are less than recent patterns due, for example, to
adverse operating conditions or further indemnity reinsurance transactions of
this nature, the earned surplus may not return to a positive position as soon
as expected. Although no assurance can be given, management believes that the
approvals for the payment of dividends in amounts consistent with those paid in
the past can be obtained. In the event such approvals are not obtained,
management believes that LNC can obtain the funds required to satisfy its
obligations from its existing credit facilities and other sources.
Disability Income Claims. The liability for disability income claims net of the
related asset for amounts recoverable from reinsurers at June 30, 1998 and
December 31, 1997 is a net liability of $1.810 billion and $1.654 billion,
respectively, excluding deferred acquisition costs. Both net liability amounts
include the impact of the special addition in the second quarter of 1997 (see
note 5 above). 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.
<PAGE>
8
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 June 30, 1998 and December 31,
1997 liabilities of $244.1 million and $291.0 million, respectively, had been
established for this issue. The decrease in the level of the reserve reflects
the settlement payouts that have occurred during the six months ended June 30,
1998. 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 $114.1 million and
$113.0 million at June 30, 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.
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 at June 30, 1998 and December 31, 1997 were
$182.3 million and $186.3 million, respectively. 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 future developments in these programs 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 future developments related to
marketing and compliance issues 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 the future development in this business 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 involving alleged fraud in the sale of interest sensitive
universal and whole life insurance policies 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
7. Segment Disclosures
The following tables show financial data by segment:
<TABLE>
<CAPTION>
Six Months Three Months
Ended June 30 Ended June 30
(in millions) 1998 1997 1998 1997
------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Life Insurance and Annuities.................................... $1,830.4 $1,360.2 $ 927.6 $ 681.2
Lincoln UK...................................................... 227.7 202.2 124.2 103.0
Reinsurance..................................................... 729.6 649.3 376.8 285.9
Investment Management........................................... 153.0 117.5 76.3 64.1
Other Operations (includes consolidating adjustments)........... 14.8 (3.1) 2.6 (6.1)
--------- --------- -------- --------
Total......................................................... $2,955.5 $2,326.1 $1,507.5 $1,128.1
Net Income (Loss) from Continuing
Operations before Federal Income Taxes:
Life Insurance and Annuities.................................... $261.1 $ 166.5 $ 161.9 $ 88.7
Lincoln UK...................................................... 58.8 48.4 32.0 24.8
Reinsurance..................................................... 79.2 (133.2) 35.1 (167.0)
Investment Management........................................... 19.3 5.0 10.5 4.3
Other Operations (includes interest expense).................... (39.4) (62.2) (26.9) (40.4)
----- ----- -------- ------
Total......................................................... $379.0 $ 24.5 $ 212.6 $(89.6)
Federal Income Taxes (Credits):
Life Insurance and Annuities.................................... $ 64.9 $ 43.3 $ 44.0 $23.1
Lincoln UK...................................................... 24.1 14.1 14.7 7.4
Reinsurance..................................................... 27.8 (47.0) 12.3 (58.3)
Investment Management........................................... 9.0 4.4 4.8 3.0
Other Operations................................................ (17.5) (25.4) (11.9) (16.8)
----- ----- ----- -----
Total......................................................... $108.3 $ (10.6) $ 63.9 $(41.6)
Net Income (Loss) from Continuing Operations:
Life Insurance and Annuities.................................... $196.2 $ 123.2 $117.9 $ 65.6
Lincoln UK...................................................... 34.7 34.3 17.3 17.4
Reinsurance..................................................... 51.4 (86.2) 22.8 (108.7)
Investment Management........................................... 10.3 .6 5.7 1.3
Other Operations (includes interest expense).................... (21.9) (36.8) ( 15.0) (23.6)
----- ---- ------ ------
Total Net Income (Loss ) from Continuing Operations........... 270.7 35.1 148.7 (48.0)
Discontinued Operations......................................... -- 88.5 -- 40.2
-------- ------ ------ ------
Total Net Income (Loss)....................................... $270.7 $ 123.6 $148.7 $ (7.8)
</TABLE>
<TABLE>
<CAPTION>
June 30 December 31
(in millions) 1998 1997
------------- ---- ----
<S> <C> <C>
Assets:
Life Insurance and Annuities.................................... $72,019.4 $60,604.4
Lincoln UK...................................................... 8,700.2 7,923.8
Reinsurance..................................................... 6,052.1 5,540.2
Investment Management........................................... 697.6 697.4
Other Operations................................................ 895.3 2,408.9
--------- ---------
Total......................................................... $88,364.6 $77,174.7
</TABLE>
Reinsurance's net income for the 1997 periods includes a $130.0 million
after-tax ($200.0 million pre-tax) reserve strengthening for its disability
income business. Life Insurance and Annuities' revenue, net income and assets
increased in 1998 compared to 1997 due to the addition of a block of individual
life insurance and annuity business (see note 10 on page 10).
<PAGE>
10
8. 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>
Six Months Ended Three Months Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator: [in millions]
Net income (loss) from continuing operations,
as used in basic calculation........................ $270.6 $123.5 $148.7 $(7.8)
Dividends on convertible preferred stock............. .1 .1 * *
------- --------- -------- ------
Net income (loss) from continuing
operations, as used in diluted calculation...... $270.7 $123.6 $148.7 $(7.8)
Denominator: [number of shares]
Weighted average shares,
as used in basic calculation........................ 100,260,000 103,441,782 100,304,224 103,883,397
Shares to cover conversion of preferred stock........ 275,778 291,408 273,714 288,336
Shares to cover restricted stock..................... 174,622 205,231 163,147 194,880
Average stock options outstanding
during the period................................... 3,209,984 2,949,125 3,214,219 2,859,301
Assumed acquisition of shares with assumed
proceeds from exercising stock options (at
average market price during the period) ........... (1,948,340) (1,950,744) (1,988,039) (1,819,347)
----------- ----------- ----------- -----------
Weighted-average shares, as
used in diluted calculation.................. 101,972,044 104,936,802 101,967,265 105,406,567
</TABLE>
* Less than $100,000.
9. 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 10 below) and repurchased $341.8 million of its own common stock as
authorized by the Board of Directors in June of 1997.
10. 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. The application of purchase accounting to this block of business
indicates that goodwill and other intangible assets will be approximately $725
million and $685 million, respectively. The additional analysis of this block of
business during the remainder of 1998 may result in a change in the amounts or
the shifting of amounts between goodwill and other intangible assets.
<PAGE>
11
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.
On May 21, 1998, LNC announced that it signed a definitive agreement to acquire
a block of individual life business from Aetna, Inc. for $1.0 billion. This
acquisition is expected to involve additional expenditures to cover expenses
associated with the purchase and to provide additional capital to the Life
Insurance and Annuities segment to support this business totaling approximately
$165 million. This transaction will be accounted for using purchase accounting
and, accordingly, the operating results generated by this block of business
after the closing will be included in LNC's consolidated financial statements
from the closing date. As of June 30, 1998, this block of business had
liabilities, measured on a statutory basis, of $3.0 billion. The liabilities as
updated to the closing date will become LNC's obligation at the time of closing.
LNC will also receive assets, measured on a historic statutory basis, equal to
the liabilities. During 1997, this block produced premiums and fees of $277
million and net income of $77 million on the basis of generally accepted
accounting principles (prior to adjustments required by purchase accounting). An
initial application of purchase accounting to this block of business would
indicate that goodwill and other intangible assets will be approximately $300
million and $800 million, respectively. The additional analysis of this block of
business after closing could result in a change in the amounts or the shifting
of amounts between goodwill and other intangible assets. Approximately one-half
of the funding for this acquisition will come from available funds within the
consolidated group. The other half will be obtained from the proceeds of public
securities offerings from available shelf registrations.
11. Subsequent Event
On July 10, 1998 LNC filed a Prospectus Supplement with the Securities and
Exchange Commission for a take-down of $200 million of Series C Trust Originated
Preferred Securities ("Series C TOPrS") from a previously filed shelf
registration. These securities were priced on July 17, 1998 to have a dividend
rate of 7.40% and funds were received on July 24, 1998. As noted above, these
funds will be used to fund a portion of the purchase of a block of individual
life business being acquired from Aetna, Inc.
<PAGE>
12
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 six months ended June 30, 1998 compared to the results for the six months
ended June 30, 1997. The factors affecting the current quarter to prior year
quarter comparisons are essentially the same as the year-to-date factors except
as noted. As a result of the purchase of a block of individual life insurance
and annuity business (see note 10 on page 10) select income statement accounts
increased in 1998 versus 1997. Increases over comparable 1997 periods are
expected to continue for the remainder of 1998.
Life Insurance and Annuity Premiums
Life insurance and annuity premiums for the first six months of 1998 increased
$48.6 million or 14% compared with the first six months of 1997. This increase
is the result of increases in business volume from the Life Insurance &
Annuities 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 increased $42.6 million or 16% for the first six months of 1998
compared with the first six months of 1997 as a result of increased 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 $236.9 million or 61% compared with the first
six months of 1997. This increase was the result of increases in the volume of
business (including the block of business purchased) 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 $16.6 million or 17% for the first six
months of 1998 as a result of increased volumes of business and the increase in
the market value of assets managed.
Net Investment Income
Net investment income increased $199.9 million or 18% when compared with the
first six 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
7.51% to 7.36% (all calculations on a cost basis). The increase in mean invested
assets is the result of increased volumes of business in all the business
segments and funds held in Corporate and Other that will be applied to the
purchase of an additional block of business in the fourth quarter of 1998 (see
note 10 on page 11). The increase in the Life Insurance and Annuity segment
includes the acquisition of the block of business on January 2, 1998 as
described above.
Realized Gain on Investments
The first six months of 1998 and 1997 had pre-tax realized gain on investments
of $49.5 million and $14.6 million, respectively. These gains, which are net of
related deferred acquisition costs and 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>
13
The pre-tax write-downs of securities available-for-sale for the first six
months of 1998 and 1997 were $34.2 million and $13.0 million, respectively. The
fixed maturity securities to which 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 six months of
1998, LNC released $3.5 million in reserves on real estate and mortgage loans on
real estate. During the first six months of 1997, LNC released $4.7 million from
allowances for losses which is net of $1.7 million of additions.
Other Revenue and Fees
Other revenue and fees increased $49.7 million when compared to the first six
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 $252.2 million or 24% when
compared with the first six 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 $88.3 million for the first six months of 1998 when
compared with the first six months of 1997 as a net result of increased volumes
of business and the absence of a special addition to the reserve (see note 5 on
page 7) in the Reinsurance segment.
Underwriting, Acquisition, Insurance and Other Expenses
These expenses increased $105.3 million or 13% for the first six months of 1998
compared with the first six months of 1997. The primary cause of this increase
was the additional expenses associated with the acquisition of the block of
business (see note 10 on page 10).
Interest and Debt Expense
Interest and debt expense increased $5.5 million or 12% as compared with the
first six 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 increased from a tax credit of $10.6 million in the first
six months of 1997 to a tax expense of $108.3 million in the first six months of
1998. The increase in federal income taxes is a result of an increase in pre-tax
earnings. The increase in pre-tax earnings relates to the absense of a special
addition to the health reserve in 1998.
Summary
Net income for the first six months of 1998 was $270.7 million or $2.66 per
diluted share compared with $123.6 million or $1.18 per diluted share in the
first six months of 1997. Excluding realized gain on investments and
restructuring charges, LNC earned $260.3 million for the first six months of
1998 compared with $28.5 million for the first six months of 1997. This increase
was the result of increased earnings from each of the business segments and the
absence of a special addition to the disability income reserve (see note 5 on
page 7).
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 and its operating
subsidiaries are redirecting a large portion of internal information technology
efforts and contracting with outside consultants to update systems to address
year 2000 issues (see page 21 of LNC's Form 10-K for the year ended December 31,
1997, filed with the Commission on March 18, 1998). These efforts continue along
with the development of contingency plans in the event, despite its best
efforts, there are unresolved year 2000 problems. The text to follow is an
update to the year-end disclosure.
Most mission critical systems which had been planned to be remediated are
expected to be remediated by December 31, 1998. However, three mission critical
systems which had originally been planned to be replaced instead will have to be
remediated. These three systems are expected to be remediated by March 31, 1999.
LNC and its operating subsidiaries are heavily involved in the process of
testing mission critical systems. LNC's testing consists of several phases. The
final phases, especially external vendor integration testing and full year 2000
environmental testing will extend into 1999.
<PAGE>
14
The work that has been performed and the additional analysis that has occurred
during the past six months has led to the conclusion that the amount of year
2000 estimated expenditures for the 1998-2000 time frame is expected to increase
by approximately $20 million ($13.7 million after-tax). The primary cause of the
increase is the remediation of the three systems discussed above. The remainder
of the increase is the result of incurring higher costs than anticipated,
especially in the use of outside consultants. Some additional costs will be
added to the expected costs after the completion of the acquisition of a block
of individual life insurance business (see note 10 on page 11).
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
As the result of the purchase of a block of individual life insurance and
annuity business (see note 10 on page 10) select balance sheet accounts
increased from December 31, 1997 to June 30, 1998.
Investments
The total investment portfolio increased $5.5 billion in the first six 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 June 30, 1998 was
as follows:
Treasuries and AAA 26.5% BBB 31.1%
AA 7.2% BB 3.8%
A 28.0% Less than BB 3.4%
As of June 30, 1998, $2.007 billion or 7.2% of fixed maturity securities was
invested in below investment grade securities (less than BBB). This represents
5.7% of the total investment portfolio. The interest rates available on these
below investment grade securities are significantly higher than are available on
other corporate debt securities. Also, the risk of loss due to default by the
borrower is significantly greater with respect to such below investment grade
securities because these securities are generally unsecured, often subordinated
to other creditors of the issuer and issued by companies that usually have high
levels of indebtedness. LNC attempts to minimize the risks associated with these
below investment grade securities by limiting the exposure to any one issuer and
by closely monitoring the credit worthiness of such issuers. During the six
months ended June 30, 1998, the aggregate cost of such investments purchased was
$942.3 million. Aggregate proceeds from such investments sold were $701.0
million, resulting in a net realized pre-tax gain at the time of sale of $13.0
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 June 30, 1998, mortgage loans on real estate and real estate represented
12.6% and 1.4% of LNC's total investment portfolio. As of June 30, 1998, the
underlying properties supporting the mortgage loans on real estate consisted of
22.9% in commercial office buildings, 37.2% in retail stores, 19.0% in
apartments, 11.0% in industrial buildings, 4.0% in hotels/motels and 5.9% 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:
June 30 December 31
(in millions) 1998 1997
------------- ---- ----
Impaired loans with allowance for losses......... $38.0 $41.2
Allowance for losses............................. (4.6) (5.0)
Impaired loans with no allowance for losses...... 2.2 --
----- -----
Net Impaired Loans............................. $35.6 $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>
15
A reconciliation of the mortgage loan allowance for losses for these impaired
mortgage loans is as follows:
Six Months
Ended June 30
(in millions) 1998 1997
------------- ---- ----
Balance at beginning of year................. $5.0 $12.4
Provisions for losses........................ .2 1.6
Releases due to sales........................ (.6) (2.6)
Releases due to foreclosures................. -- (3.4)
---- -----
Balance at End of Period................... $4.6 $8.0
The average recorded investment in impaired loans and the interest income
recognized on impaired loans were as follows:
Six Months
Ended June 30
(in millions) 1998 1997
------------- ---- ----
Average recorded investment in impaired loans... $37.8 $75.2
Interest income recognized on impaired loans ... 1.8 3.5
All interest income on impaired loans was recognized on the cash basis of income
recognition.
As of June 30, 1998 and 1997, LNC had restructured loans of $32.5 million and
$39.2 million, respectively. LNC recorded $1.6 million and $1.9 million of
interest income on these restructured loans for the six months ended June 30,
1998 and 1997, respectively, as compared to interest income of $1.6 million and
$2.0 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 six months ended June 30,
1998 were not significant.
Cash and Invested Cash
Cash and invested cash decreased by $1.4 billion in the first six 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 10 on page 10).
Deferred Acquisition Costs
Deferred acquisition costs increased $125.4 million during the first six 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 $53.3 million in the first six months of
1998 as the net result of increased volumes of business in the Life Insurance &
Annuity, Reinsurance and Investment Management segments.
Assets Held in Separate Accounts
This asset account as well as the corresponding liability account increased by
$5.1 billion in the first six 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 10 on page
10) being more than the amortization for the six months ended June 30, 1998.
Other Assets
The increase in other assets of $177.7 million is the result of having a higher
receivable related to investment securities sold in the last few days of the
second quarter of 1998 versus the end of 1997.
<PAGE>
16
Total Liabilities
Total liabilities increased by $11.0 billion in the first six months of 1998.
The primary item underlying this increase is the addition of the block of
individual life insurance and annuity business described above. Insurance policy
reserves increased $6.2 billion as a result of the new block of business and
increased levels of business in the Life Insurance and Annuities segment. The
decrease in contractholder funds of $659.9 million is the net result of new
deposits and the acquisition of business being more than offset by the
withdrawal upon maturity of guaranteed interest contracts. Liabilities related
to separate accounts increased $5.1 billion as a result of increased levels of
business in the Life Insurance and Annuities segment. Total debt increased
$280.6 million as the result of issuing new debt in the first quarter of 1998
(see note 4 on page 7). LNC's liabilities include some contingency items (see
note 6 on page 7).
Shareholders' Equity
Total shareholders' equity increased $167.9 million in the first six months of
1998. Excluding the increase of $33.6 million related to an increase in the
unrealized gains on securities available-for-sale, shareholders' equity
increased $134.3 million. This increase was the net result of increases due to
$270.7 million from net income, $8.9 million from the issuance of common stock
related to benefit plans and an increase of $5.6 million in the cumulative
foreign currency translation adjustment, being offset by the repurchase of
common shares ($46.9 million), and the declaration of dividends to shareholders
($104.0 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 10 on page 10). During the first six months of 1998, LNC's derivative
positions have changed as follows:
1. Decreased 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 $4.7 billion notional. The decrease in notional
is a result of expirations and therefore no gain or loss has been
recognized.
2. Added $218.3 million in notional amount of swaptions. In addition, $28.8
million notional amount of swaptions expired, resulting in a remaining
balance of $1.9 billion 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 $40.5 million notional. These interest rate swap agreements
are part of a replication strategy which will result in a higher yield on
bonds held by LNC. Also entered into $1.8 billion notional of interest
rate swaps to hedge the anticipated purchase of an individual life
insurance block of business.
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 $41.2 million notional. LNC's decision to terminate
this contract was based on the fact that the U.S. dollar had strengthened
against the foreign currencies hedged.
6. Entered into 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 securities. Interest
payments from these securities 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 gold commodity swap agreements 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>
17
8. Increased its use of S&P 500 index options from $5.3 million notional to
$50.3 million notional. These options continue to offset LNC's increased
liabilities resulting from certain reinsurance agreements which guarantee
payment for a specified portion 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 counterparties. 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 $614.7 million during the first six 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 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 included the right to offer and sell a variety of securities including
debt, preferred stock, common stock and hybrid securities. Also, as of June 30,
1998, LNC had an unused balance of $185 million related to a registration that
included the right to offer and sell various forms of hybrid securities. LNC is
expected to offer securities totaling $450 million in the third quarter of 1998
to pay a portion of the acquisition price of a block of business as described in
notes 10 and 11 on page 11. 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 six 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 June 30, 1998. Within the May announcement
concerning the expected purchase of a block of business (see note 9 on page 10),
LNC indicated it would curtail further share repurchases for the near-term.
Addition to the end of the Management Discussion and Analysis section entitled
Liquidity and Cash Flow on page 17 of Lincoln National Corporation's 10-Q for
the quarter ended June 30, 1998
LNC's insurance subsidiaries are subject to certain insurance department
regulatory restrictions, as to the transfer of funds and payment of dividends to
the holding company (LNC). Generally, these restrictions pose no short-term
liquidity concerns for the holding company. However, as discussed in detail
within note 6 on page 8, the acquisition of two blocks of business in 1998 will
place further restrictions on the ability of LNC's primary insurance subsidiary,
The Lincoln National Life Insurance Company ("LNL"), to declare and pay
dividends from LNC's primary insurance subsidiary. As a result of these
acquisitions, LNL's earned surplus will be negative and it will be necessary for
LNL to obtain the prior approval of the Indiana Insurance Commissioner before
paying any dividends to LNC until such time as earned surplus is positive. It
is expected that earned surplus will return to a positive position within two
years from the the closing of the Aetna transaction assuming the level of
statutory earnings coinciding with recent earnings patterns. If statutory
earnings are less than recent patterns due, for example, to adverse operating
conditions or further indemnity reinsurance transactions of this nature, the
earned surplus may not return to a positive position as soon as expected.
Although no assurance can be given, management believes that the approvals for
the payment of dividends in amounts consistent with those paid in the past can
be obtained. In the event such approvals are not obtained, management believes
that LNC can obtain the funds required to satisfy its obligations from its
existing credit facilities and other sources.
<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
By /S/ Donald L. Van Wyngarden
Donald L. Van Wyngarden,
Second Vice President and Controller
Date August 7, 1998
