-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, RNa2TYMikb6vOOFkLxY08yqK9cAMZVKUg/bx/V6yZOBmGc+uegBc1+WFOG07SbQD Yo9xF/jGH6JsdxHaFJmZ3Q== 0000059558-94-000057.txt : 19941104 0000059558-94-000057.hdr.sgml : 19941104 ACCESSION NUMBER: 0000059558-94-000057 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941103 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LINCOLN NATIONAL CORP CENTRAL INDEX KEY: 0000059558 STANDARD INDUSTRIAL CLASSIFICATION: 6311 IRS NUMBER: 351140070 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06028 FILM NUMBER: 94557440 BUSINESS ADDRESS: STREET 1: 1300 S CLINTON ST STREET 2: PO BOX 1110 CITY: FORT WAYNE STATE: IN ZIP: 46802 BUSINESS PHONE: 2194552000 10-Q 1 LNC-10-Q 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 September 30, 1994 Commission file number 1-6028 LINCOLN NATIONAL CORPORATION (Exact name of registrant as specified in its charter) Indiana 35-1140070 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 200 East Berry Street, Fort Wayne, Indiana 46802-2706 (Address of Principal Executive Offices) Registrant's telephone number (219) 455-2000 Common Stock Outstanding October 28, 1994 94,970,626 Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] The exhibit index to this report is located on page 17. Page 1 of 19 -2- PART I - FINANCIAL INFORMATION Item 1 Financial Statements
LINCOLN NATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS September 30 December 31 (000'S omitted) 1994 1993 ASSETS Investments: Securities available-for-sale, at fair value: Fixed maturity (cost 1994 - $21,682,034; 1993 - $22,219,285) ------------------ $21,451,998 $23,964,335 Equity (cost 1994 - $950,102; 1993 - $896,477) --------------------- 1,065,997 1,080,301 Mortgage loans on real estate ------------ 2,880,202 3,300,951 Real estate ------------------------------ 679,828 633,103 Policy loans ----------------------------- 547,837 595,085 Other investments ------------------------ 166,190 158,170 Total Investments ---------------------- 26,792,052 29,731,945 Investment in unconsolidated affiliates ---- 94,185 -- Cash and invested cash --------------------- 1,065,623 709,664 Property and equipment --------------------- 189,765 233,467 Deferred acquisition costs ----------------- 2,394,132 2,011,131 Premiums and fees receivable --------------- 722,796 601,883 Accrued investment income ------------------ 422,543 413,144 Assets held in separate accounts ----------- 14,057,051 12,430,577 Federal income taxes ----------------------- 417,171 -- Amounts recoverable from reinsurers -------- 2,183,356 1,460,038 Goodwill ----------------------------------- 146,805 228,530 Other assets ------------------------------- 751,291 559,982 Total Assets ----------------------------- $49,236,770 $48,380,361 See notes to consolidated financial statements on page 7.
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LINCOLN NATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS -CONTINUED- September 30 December 31 (000's omitted) 1994 1993 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Policy liabilities and accruals: Future policy benefits, claims and claim expenses -------------------- $11,400,239 $12,652,036 Unearned premiums ----------------------- 818,335 858,805 Total Policy Liabilities and Accruals - 12,218,574 13,510,841 Contractholder funds ---------------------- 16,532,562 14,872,141 Liabilities related to separate accounts -- 14,057,051 12,430,577 Federal income taxes ---------------------- -- 150,951 Short-term debt --------------------------- 468,544 351,418 Long-term debt ---------------------------- 320,482 335,097 Other liabilities ------------------------- 2,317,567 2,657,015 Total Liabilities ----------------------- 45,914,780 44,308,040 Shareholders' Equity: Series A Preferred Stock (9/30/94 liquidation value - $3,512) ----- 1,442 1,553 Series E Preferred Stock (9/30/94 liquidation value - $151,569) --- 151,206 151,206 Series F Preferred Stock (9/30/94 liquidation value - $158,707) --- 158,707 158,707 Common Stock ------------------------------ 566,347 543,659 Earned surplus ---------------------------- 2,430,601 2,303,731 Foreign currency translation adjustment --- 7,388 (1,214) Net unrealized gain on securities available-for-sale ----------------------- 6,299 914,679 Total Shareholders' Equity -------------- 3,321,990 4,072,321 Total Liabilities and Shareholders' Equity -------------- $49,236,770 $48,380,361 See notes to consolidated financial statements on page 7.
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LINCOLN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME Nine Months Ended Three Months Ended September 30 September 30 (000's omitted) 1994 1993 1994 1993 Revenue: Insurance premiums ---------- $3,223,027 $3,934,254 $ 975,491 $1,485,460 Insurance fees -------------- 329,799 343,947 112,933 118,044 Net investment income ------- 1,499,498 1,556,978 510,045 521,605 Equity in earnings of unconsolidated affiliates - 10,585 -- 4,993 -- Realized gain (loss) on investments --------------- (102,375) 217,097 (74,140) 161,741 Gain on sale of subsidiary -- 48,842 -- -- -- Other ----------------------- 103,593 116,000 32,380 40,509 Total Revenue ----------- 5,112,969 6,168,276 1,561,702 2,327,359 Benefits and Expenses: Benefits and settlement expenses ------------------ 3,553,134 4,120,117 1,102,694 1,500,944 Underwriting, acquisition, insurance and other expenses 1,242,379 1,502,996 387,948 552,319 Interest expense ------------ 34,878 32,761 12,148 10,858 Total Benefits and Expenses ---------- 4,830,391 5,655,874 1,502,790 2,064,121 Income Before Federal Income Taxes and Cumulative Effect of Accounting Change --- 282,578 512,402 58,912 263,238 Federal Income Taxes ---------- 26,409 128,667 530 75,729 Income Before Cumulative Effect of Accounting Change ----- 256,169 383,735 58,382 187,509 Cumulative Effect of Accounting Change ----------- -- (96,431) -- -- Net Income -------------- $ 256,169 $ 287,304 $ 58,382 $ 187,509 Earnings Per Share: Income before cumulative effect of accounting change - $2.47 $3.76 $ .56 $1.82 Cumulative effect of accounting change ----------- -- (.94) -- -- Net Income -------------- $2.47 $2.82 $ .56 $1.82 Cash Dividends Per Share - Common Stock ---------------- $1.23 $1.14 $ .41 $ .38 See notes to consolidated financial statements on page 7.
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LINCOLN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Nine Months Ended September 30 Number of Shares Issued Amounts (000's omitted from dollar amounts) 1994 1993 1994 1993 Preferred Stock: (Shares authorized: 10,000,000) Series A Preferred Stock: Balance at beginning of year -------- 47,289 57,716 $ 1,553 $ 1,896 Conversion into Common Stock ------------- (3,388) (9,027) (111) (294) Balance at September 30 - 43,901 48,689 1,442 1,602 Series E and F Preferred Stock: Balance at beginning and end of period -------- 4,417,897 4,417,897 309,913 309,913 Common Stock: (Shares authorized: 1994 - 800,000,000; 1993 - 400,000,000) Balance at beginning of year - 94,183,190 84,142,458 543,659 200,986 Conversion of Series A Preferred Stock ------------ 27,104 72,216 111 294 Public offering of Common Stock --------------- -- 9,200,000 -- 316,100 Issued for benefit plans ---- 758,732 707,874 22,577 24,047 Balance at September 30 - 94,969,026 94,122,548 566,347 541,427 Earned Surplus: Balance at beginning of year - 2,303,731 2,147,691 Net income ------------------- 256,169 287,304 Cash dividends declared ------ (129,299) (119,953) Balance at September 30 - 2,430,601 2,315,042 Foreign Currency Translation Adjustment: Accumulated adjustment at beginning of year ---------- (1,214) 3,643 Change during period --------- 8,602 (6,071) Balance at September 30 - 7,388 (2,428) Net Unrealized Gain (Loss) on Securities Available-for-Sale: Balance at beginning of year - 914,679 162,742 Change during period --------- (908,380) 45,053 Balance at September 30 - 6,299 207,795 Total Shareholders' Equity at September 30 ------- $3,321,990 $3,373,351 Common Stock (assuming conversion of Series A, E & F Preferred Stock): End of Period ----------- 104,156,028 103,347,854 Average for the Period -- 103,840,927 101,950,144 See notes to consolidated financial statements on page 7.
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LINCOLN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30 (000's omitted) 1994 1993 Operating Activities: Net income ---------------------------------------- $ 256,169 $ 287,304 Adjustments to reconcile net income to net cash provided by operating activities: Deferred acquisition costs -------------------- (151,829) (171,555) Premiums and fees receivable ------------------ (146,793) (68,694) Accrued investment income --------------------- (38,155) 26,879 Policy liabilities and accruals --------------- 114,542 602,860 Contractholder funds -------------------------- 1,370,047 910,595 Amounts recoverable from reinsurers ----------- (752,037) (741,099) Federal income taxes -------------------------- (50,534) (68,849) Provisions for depreciation ------------------- 43,036 42,895 Realized gain (loss) on investments ----------- 179,568 (217,096) Gain on sale of subsidiary -------------------- (48,842) -- Cumulative effect of accounting change -------- -- 96,431 Other ----------------------------------------- 77,190 36,883 Net Adjustments ----------------------------- 596,193 449,250 Net Cash Provided by Operating Activities --- 852,362 736,554 Investing Activities: Securities-available-for-sale: Purchases -------------------------------------- (10,612,797) (7,508,701) Sales ------------------------------------------ 8,028,171 7,151,808 Maturities ------------------------------------- 973,118 8,844 Fixed maturity securities-held for investment: Purchases -------------------------------------- -- (5,042,910) Sales ------------------------------------------ -- 2,060,307 Maturities ------------------------------------- -- 1,277,277 Purchase of other investments -------------------- (938,518) (936,621) Sale or maturity of other investments ------------ 1,263,557 698,999 Sale of subsidiaries ----------------------------- 417,367 -- Increase (decrease) in cash collateral on loaned securities ------------------------------ (176,789) 112,321 Other -------------------------------------------- (86,653) 42,395 Net Cash Used in Investing Activities ------ (1,132,544) (2,136,281) Financing Activities: Principal payments on long-term debt ------------- (9,535) (1,487) Issuance of long-term debt ----------------------- 241 8,653 Net increase (decrease) in short-term debt ------- 118,079 (165,593) Universal life and investment contract deposits -- 1,982,388 1,923,437 Universal life and investment contract withdrawals --------------------------- (1,348,563) (1,061,628) Public offering of Common Stock ------------------ -- 316,100 Common Stock issued for benefit plans ------------ 22,578 24,047 Dividends paid to shareholders ------------------- (129,047) (116,218) Net Cash Provided by Financing Activities -- 636,141 927,311 Net Increase (Decrease) in Cash ------------ 355,959 (472,416) Cash at Beginning of Year -------------------------- 709,664 1,015,850 Cash at September 30 ----------------------- $1,065,623 $ 543,434 See notes to consolidated financial statements on page 7.
-7- LINCOLN NATIONAL CORPORATION NOTES TO CONSOLIDATED STATEMENTS 1. Basis of Presentation The accompanying consolidated financial statements include Lincoln National Corporation ("LNC") and its majority-owned subsidiaries. Less than majority- owned entities in which LNC has at least a 20% interest are reported on the equity basis. These unaudited consolidated statements have been prepared in conformity with generally accepted accounting principles, except that they do not contain complete notes. However, in the opinion of management, these statements include all normal recurring adjustments necessary for a fair presentation of the results. For further information, refer to the consolidated financial statements included in LNC's annual report to shareholders or Form 10-K for the year ended December 31, 1993. Operating results for the nine months ended September 30, 1994 are not necessarily indicative of the results that may be expected for the full year ending December 31, 1994. 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 1993 and 1994 resulted principally from tax-exempt investment income. The nine months ended September 30, 1994 also was affected by the fact that no income taxes were payable on the gain on sale of a subsidiary (see note 4). 3. Earnings Per Share Earnings per share are computed based on the average number of common shares outstanding (103,840,927 and 101,950,144 for the first nine months of 1994 and 1993, respectively) after assuming conversion of the Series A, E and F Preferred Stock. 4. Sale of Subsidiaries On February 2, 1994, LNC completed the sale of Security-Connecticut Corporation through an initial public offering for cash, net of related expenses, totaling $172.7 million and a promissory note from Security- Connecticut Corporation for $65.0 million. The loss on sale and disposal expenses did not differ materially from the estimate recorded in the fourth quarter of 1993. On March 21, 1994, LNC sold 64% of a wholly owned subsidiary, EMPHESYS Financial Group, Inc. ("EMPHESYS"), through an initial public offering. EMPHESYS is the parent company of Employers Health Insurance Company ("Employers Health"). As a result of this transaction, LNC exchanged 64% of the outstanding stock of EMPHESYS for cash, net of related expenses, totaling $220.1 million and a promissory note from EMPHESYS for $50.0 million. This transaction resulted in a gain on sale of $44.1 million (also $44.1 million pre-tax). On April 15, 1994, LNC sold an additional 7% of EMPHESYS. The impact of the combined March 21st and April 15th transactions was that LNC exchanged 71% of the outstanding stock of EMPHESYS for cash, net of related expenses, totaling $244.7 million plus the $50.0 million promissory note. These transactions resulted in a gain on sale of $48.8 million (also $48.8 million pre-tax). For the January 1, 1994 through March 21, 1994 period, Employers Health had revenue of $314.9 million and net income of $14.4 million. For the nine months and quarter ended September 30, 1993, Employers Health had revenues of $959.7 million and $328.1 million and net income of $48.1 million and $22.9 million, respectively. This revenue and net income was recorded within the Employee Life-Health Benefits segment. The gain on sale and the appropriate portion of the equity in the earnings of EMPHESYS after March 21, 1994, recognized in accordance with the equity method of accounting, were reported within "Other Operations". -8- LINCOLN NATIONAL CORPORATION ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION As indicated in the "Notes to Consolidated Statements" (see note 4 on page 7), LNC completed the sale of a subsidiary and the sale of 71% of another subsidiary in 1994. As noted in the following "Review of Consolidated Operations" and "Review of Consolidated Financial Condition," these sales have affected the comparability of select line items within the Consolidated Statements of Income and Consolidated Balance Sheets. REVIEW OF CONSOLIDATED OPERATIONS The discussion that follows focuses on the results for the nine months ended September 30, 1994 compared to the results for the nine months ended September 30, 1993. The factors affecting the current quarter to prior year quarter comparisons are essentially the same as the year-to-date factors, except as noted. Insurance Premiums Property-Casualty premiums decreased by $103.1 million or 7% compared with the nine months ended September 30, 1993 primarily as the result of implementing a more stringent underwriting policy to improve loss experience. The decrease in property-casualty premiums is leveling and this trend is expected to continue into 1995. Excluding the impact of the subsidiary sold in 1994 (see note 4 on page 7), health premiums were $524.9 million for the first nine months of 1994 which is essentially the same as the first nine months of 1993. Excluding the impact of the subsidiary sold in 1994 (see note 4 on page 7), life and annuity premiums increased by $36.7 million or 3% compared to the previous year. This increase was the net result of an increase in the volume of transactions by the Life Insurance and Annuities segment and a small decrease in the Life-Health Reinsurance segment. Insurance Fees Excluding the impact of the subsidiary sold in 1994 (see note 4 on page 7), insurance fees from the sale of universal life and other interest sensitive insurance contracts increased $62.5 million or 23% compared to the first nine months of 1993 as the result of increases in the volume of transactions in the Life Insurance and Annuities segment. Net Investment Income Net investment income decreased $57.5 million or 4% when compared with the first nine months of 1993. This is the net result of a 3% increase in mean invested assets less the impact of the overall yield on investments dropping from 7.79% to 7.13%. The increase in mean invested assets is the net result of increased volumes of business in the Life Insurance and Annuity segment being partially offset by decreases due to the sale of subsidiaries (see note 4 on page 7) and reduced volumes of business in the Property- Casualty segment. Equity in Earnings of Unconsolidated Affiliates This line was added to the statement of income in 1994 following LNC's sale of 71% of its direct writer of health coverages (see note 4 on page 7). The amount shown represents LNC's share of the total earnings of this company for the period after the closing of the sale on March 21, 1994. Gain on Sale of Subsidiary The 1994 amount relates to the sale of 71% of LNC's interest in Employers Health Insurance Company (see note 4 on page 7). -9- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION (continued) REVIEW OF CONSOLIDATED OPERATIONS (continued) Realized Gain (Loss) on Investments The first nine months of 1994 and 1993 had pre-tax realized gain (loss) on investments of $(102.4) million and $217.1 million, respectively. The gains for 1993 were the result of net gains on the sale of investments, less writedowns and provision for losses. The losses in 1994 were the result of net realized investment gains being more than offset by 1) realized investment losses and 2) writedowns of security investments and provisions for losses for mortgage loans and real estate. The investment losses, primarily from the second and third quarters, were the result of repositioning a portion of the investment portfolio during a period of rising interest rates. Fixed maturity and equity securities that were deemed to have declines in fair value that were other than temporary were written down. Provision for losses on mortgage loans on real estate, real estate investments and other investments were established where the underlying value of the property was deemed to be less than the carrying value. The pre-tax writedown of fixed maturity and equity securities for the first nine months of 1994 and 1993 were $18.3 million and $59.2 million, respectively. In recognition of the current and expected interest rate environment, these writedowns include a second quarter 1993 writedown of $33.2 million related to interest only mortgage-backed securities. With the exception of interest only mortgage-backed securities, the fixed maturity securities to which these writedowns apply were generally of investment grade quality at the time of purchase, but were classified as "below investment grade" at the time of the writedowns. The pre-tax additions to provision for losses on mortgage loans on real estate and real estate for the first nine months of 1994 and 1993 were $38.4 million and $128.2 million, respectively, including $64.1 million in 1993 for the adoption of FAS 114. The pre-tax addition to the provision for losses for other investments for the first nine months of 1994 and 1993 were $2.6 million and $6.0 million, respectively. During the third quarter, LNC announced its intention to sell a portion of its mortgage loan and real estate portfolios through a private offering. LNC's original investment in those performing and non-performing holdings was approximately $300 million. This bulk sale, which may close as early as the fourth quarter of 1994, is not expected to result in any significate gain or loss. Other Revenue Excluding the impact of the subsidiaries sold, other revenue increased $6.7 million or 7% when compared to the first nine months of 1993 as the result of an increase in the Life Insurance and Annuities segment. Insurance Benefits and Settlement Expenses Property-Casualty benefits decreased by $99.0 million or 9% when compared with the first nine months of 1993. This decrease was the result of reduced volumes of insurance written. Catastrophe losses and weather related claims were essentially the same for both periods. Excluding the impact of the subsidiary sold in 1994 (see note 4 on page 7), health benefits increased by $8.9 million or 2% when compared to the first nine months of 1993 as a result of increased claims in the Life Insurance and Annuity and Life-Health Reinsurance segment. Excluding the impact of the subsidiary sold in 1994 (see note 4 on page 7), life and annuity benefits and settlement expenses increased $28.5 million or 1.5% when compared to the first nine months of 1993. This increase is the result of increased volumes of business in the Life Insurance and Annuities segment and a small decrease in the Life-Health Reinsurance segment. -10- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION (continued) REVIEW OF CONSOLIDATED OPERATIONS (continued) Underwriting, Acquisition, Insurance and Other Expenses Excluding the impact of the various subsidiaries sold, this expense decreased $48.2 million or 4% for the nine months ended September 30, 1994 as compared to the first nine months of 1993. This decrease was the result of lower expenses in the Property-Casualty segment and lower volume related expenses in the Life-Health Reinsurance being partially offset by increases in the Life Insurance and Annuity segment. The Property-Casualty segment decrease is expected to continue in the near term as this segment continues to adjust staff levels to the current level of business. Interest Expense Interest expense increased $2.1 million or 6% when compared with the first nine months of 1993. This was the net result of increases in the average debt outstanding and increases in short-term interest rates less the impact of changes in the composition of debt outstanding. This increase is expected to continue in the fourth quarter of 1994 due in part to the additional change in the composition of the debt outstanding as discussed within the analysis of "liquidity and cash flow" (see page 14). Federal Income Taxes Federal income taxes decreased from $79.0 million in the first nine months of 1993 to $26.4 million in the first nine months of 1994 as a result of a decrease in pre-tax earnings and the lack of any tax expense on the gain on sale of subsidiary (see note 4 on page 7). The reduction in pre-tax earnings is the result of the absence of earnings from subsidiaries sold (see note 4 on page 7) and the realization of losses on the sale of investments during the 1994 period versus the realization of gains on investment in the 1993 period. The tax credits from the realized losses result from the carryback of such losses to realized gains recognized in prior years. Summary Net income for the first nine months of 1994 was $256.2 million or $2.47 per share compared with $287.3 million or $2.82 per share in the first nine months of 1993. Excluding realized gain (loss) on investments, gain on sale of subsidiary and the after-tax cumulative effect of implementing the postretirement benefit accounting change, LNC earned $278.6 million for the first nine months of 1994 compared with $254.9 million for the first nine months of 1993. This increase was due to increases in earnings from the three business segments being partially offset by the impact of the loss of earnings from subsidiaries sold net of investment income earned on the proceeds from the sales. -11- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION (continued) REVIEW OF CONSOLIDATED FINANCIAL CONDITION Investments The total investment portfolio decreased $2.9 billion in the first nine months of 1994. The removal of the investments of the two subsidiaries sold (see note 4 on page 7) accounted for $2.1 billion of this decrease. The remainder of the decrease is the net result of decreases in the fair value of investment securities during the first nine months of 1994 (primarily due to rising interest rates during that period) being partially offset by new purchases of investments from cash flow generated by the business segments. The quality of LNC's fixed maturity securities portfolio as of September 30, 1994 was as follows: Treasuries and AAA 37.3% BBB 20.0% AA 11.3% BB 3.4% A 25.7% Less than BB 2.3% As of September 30, 1994, $1.222 billion or 5.7% of fixed maturity securities was invested in below investment grade securities (less than BBB). This represents 4.6% of the total investment portfolio. The interest rates available on these below investment grade securities are significantly higher than is 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 nine months ended September 30, 1994, the aggregate cost of such investments purchased was $485.8 million. Aggregate proceeds from such investments sold were $341.3 million, resulting in a realized pre-tax gain of $2.0 million. LNC's entire fixed maturity securities portfolio is classified as "available-for-sale" and is carried at fair value. Equity securities available-for-sale are also carried at fair value. Changes in fair value, net of related deferred acquisition costs, and amounts required to satisfy policyholder commitments and taxes, are charged or credited directly to shareholders' equity. As of September 30, 1994, mortgage loans on real estate and real estate represented 10.8% and 2.5% of LNC's total investment portfolio. As of September 30, 1994, the underlying properties supporting the mortgage loans on real estate consisted of 27% in commercial office buildings, 28% in retail stores, 18% in apartments, 13% in industrial buildings, 3% in hotels/motels and 11% in other. In addition to the dispersion by property type, the mortgage loan portfolio is geographically diversified throughout the United States. Mortgage loans on real estate are actively monitored to identify problem loans. LNC classifies mortgage loans as problem loans if they are non-accrual loans (i.e., principal and interest are 60 days past due), restructured loans (i.e., the terms of the original loan have been modified) or loans not in the first two categories that are considered impaired. LNC considers a mortgage loan impaired when, based on current information and events, it is probable that LNC will be unable to collect all amounts due according to the contractual terms of the loan agreement. In addition, LNC also classifies loans as potential problem loans when available information causes management to be concerned about the borrowers' ability to comply with the present loan terms, including the repayment of outstanding interest and principal. -12- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION (continued) REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued) When LNC determines that a loan is impaired as defined above, a provision for loss is established for the difference between the carrying value of the mortgage loan and the estimated value. Estimated value is based on either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or the fair value of the collateral. Additional amounts were added to the mortgage loan provision for losses during 1993 due to the adoption of FAS 114 (see page 9). When a mortgage loan becomes 60 days past due, all existing accruals for interest due are reversed and interest is recorded on a cash basis until the mortgage loan is brought current. In the first nine months of 1994, LNC continued to add to its provision for losses for mortgage loans on real estate. The reserve level and the ratio of reserves to impaired mortgages both decreased during this period as the increase in reserves was more than offset by the removal of amounts associated with the second quarter 1994 bulk sale of approximately $150 million in commercial real estate.
A summary of LNC's problem mortgage loans on real estate before related provisions for losses and supplemental information with respect to such loans is as follows: September 30 December 31 (in millions) 1994 1993 Problem Loans: Non-accrual loans ----------------------------------- $176.6 $276.3 Restructured loans ---------------------------------- 30.0 59.8 Other problem loans --------------------------------- 327.2 445.2 Total Problem Loans ---------------------------- $533.8 $781.3 Potential problem loans ------------------------------- $ 92.8 $ 92.1
Impaired loans included in the problem loans shown above along with the related provision for losses are as follows: September 30 December 31 (in millions) 1994 1993 Impaired loans ---------------------------------------- $476.6 $725.9 Provision for losses ---------------------------------- 133.0 226.6 Net Impaired loans --------------------------------- $343.6 $499.3
Nine Months Ended September 30 (in millions) 1994 1993 Interest Income from Problem Loans: Amount that would have been recorded under original terms ---------------------- $36.5 $41.3 Interest income actually recorded -------------------- 31.1 31.9 As of September 30, 1994, LNC has a commitment to lend $55,000 on a loan shown within other problem loans above. No other future commitments have been made on non-accrual or restructured loans.
Investment in Unconsolidated Affiliates This line was added to the balance sheet in 1994 to accommodate LNC's 29% equity ownership in EMPHESYS, Financial Group, Inc., following LNC's sale of 71% of this company (see note 4 on page 7). -13- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION (continued) REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued) Cash and Invested Cash Cash and invested cash increased by $356.0 million in the first nine months of 1994. This increase is primarily the result of the receipt of proceeds from the sale of subsidiaries (see note 4 on page 7). These funds are pending application for general corporate purposes which may include additional investments in existing businesses or the financing of acquisitions. Assets Held in Separate Accounts Excluding the December 31, 1993 balance of the subsidiaries that were sold (see note 4 on page 7), this asset account as well as the corresponding liability account increased by $1.6 billion, reflecting an increase in annuity and pension funds under management. Federal Income Taxes Federal income taxes recoverable at September 30, 1994 of $417.2 million represents a change of $568.1 million compared to the federal income taxes payable at December 31, 1993. This is the net result of increases related to recoverable deferred taxes resulting primarily from life insurance reserve differences, discounting of unpaid losses, additions to the investment reserves and postretirement obligations, and the decrease in deferred taxes payable primarily related to the reduction in unrealized gains on securities in the first nine months of 1994. Amounts Recoverable from Reinsurers The increase in amounts recoverable from reinsurers was the result of an increased volume of business ceded in the Life Insurance and Annuities segment. Goodwill The decrease in goodwill of $81.7 million is primarily the result of the sale of subsidiaries during the first quarter of 1994 (see note 4 on page 7). Other Assets The increase in other assets of $191.3 million is the result of having a higher receivable related to investment securities sold in the last few days of the third quarter of 1994 versus the end of 1993. Total Liabilities Excluding the December 31, 1993 liabilities of the subsidiaries that were sold (see note 4 on page 7) of $1.9 billion, total liabilities increased by $3.5 million in the first nine months of 1994. This increase reflects 1) an increased level of business as evidenced by an increase in policy liabilities and accruals of $338.5 million, an increase of $1.7 billion in contractholder funds, an increase of $1.7 billion in the liabilities related to separate accounts, 2) an increase in debt of $108.9 million and 3) a decrease in other liabilities of $283.6 million. -14- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION (continued) REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued) Policyholder liabilities as of September 30, 1994 and December 31, 1993 included liabilities for environmental losses of approximately $223.0 million and $204.0 million respectively. Because of the limited coverages that have been written by LNC, these reserves represent only 8% of LNC's total property- casualty reserves for both periods (4% based on claim counts of direct business). These percentages are at this level due to LNC's concentration of writing coverages for small to medium size companies rather than the larger companies that tend to incur most of the environmental and product liability claims. Establishing reserves for environmental losses is subject to significant uncertainties because of the long reporting delays, lack of historical data and the unresolved complex legal and regulatory issues that are involved. However, based on available information, it is management's judgement that the appropriate level of reserves have been recorded and that any unrecorded liability would not be material to LNC's future results of operations, liquidity or financial condition. The decrease in other liabilities relates to a decrease in the expected payouts for security investments purchased in the last few days of the third quarter of 1994 versus a higher volume of such transactions at the end of 1993. Shareholders' Equity Total shareholders' equity decreased $750.3 million in the first nine months of 1994. Excluding the decrease of $908.4 million related to unrealized gain on securities available-for-sale, shareholders' equity increased $158.1 million. This increase for the first nine months of 1994 was the net result of $256.2 million from net income, $22.6 million from the issuance of Common Stock related to benefit plans, $8.6 million related to an increase in the accumulated foreign exchange gain and a decrease of $129.3 million related to the declaration of dividends to stockholders. Liquidity and Cash Flow In the insurance industry, liquidity generally refers to the ability of an enterprise to generate adequate amounts of cash from its normal operations, including activities in its investment portfolio, to meet its financial commitments. LNC manages its operations, including prudent investment portfolio structuring, to provide for appropriate liquidity levels. The portfolio structuring involves segregating LNC's investments by segments, sub-segments or type of product. The investments selected for each segregated portfolio are based on LNC's desire to match characteristics (e.g., duration and yield) of the underlying liabilities. As indicated by the Consolidated Statements of Cash Flows on page 6, LNC's business operations generated $852.4 million of cash during the first nine months of 1994. Although LNC generates adequate cash flow to meet the needs of its normal operations, periodically LNC may issue debt or equity securities to fund internal expansion, acquisitions, investment opportunities and the retirement of LNC's debt and equity. Such a transaction occurred during February 1993, when LNC received $316.1 million in proceeds from a public offering of 9.2 million shares of its Common Stock. Also, effective October 1, 1994, LNC issued $200.0 million of 9 1/8% debt securities payable in 2024. Proceeds from this issue were used to reduce short-term debt with a weighted average interest rate of 4.82%. As indicated in note 7 to the consolidated financial statements for the year ended December 31, 1993 (see page 49 of LNC's Form 10-K), LNC has entered into derivative transactions to reduce its exposure to interest rate fluctuations and the widening of bond yield spreads over comparable maturity U.S. Government obligations. LNC has two significant programs in place primarily within its Life Insurance and Annuity segment. -15- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION (continued) REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued) First, LNC uses interest rate cap agreements to hedge against the negative impact of a sustained and significant rise in interest rates. Interest rate caps are contracts that require counterparties to pay LNC at specified future dates the amount, if any, by which a specified market interest rate exceeds the cap rate, applied to a notional principal amount. As of September 30, 1994, LNC had notional amounts of $4.4 billion with strike prices ranging from 50 to 343 basis points above prevailing interest rates. These agreements expire in 1997 - 2003. Secondly, LNC uses spread-lock agreements to hedge the value of corporate bonds against the risk of widening in their yield spreads over the yields of comparable maturity U.S. Government obligations. Under these agreements, LNC assumes the right and the obligation to enter into an interest rate swap at a future date in which LNC would pay a fixed rate equal to a contractually specified spread over the then prevailing U.S. Treasury rate and receive a floating rate. As of September 30, 1994, LNC had spread-lock agreements with an aggregate notional amount of $1.6 billion with 1 to 12 months remaining in the exercise periods. As of September 30, 1994, these contracts had unrealized gains of $971,000 and unrealized losses of $929,000. Both of these programs are designed to help ensure LNC's ability to be able to continue to provide competitive crediting rates to policyholders during periods when interest rates are rising or corporate bond spreads are widening. Failure to protect against these two possibilities could result in policyholders withdrawing their funds for placement in more competitive products. LNC purchases both types of derivative products from only highly credit-worthy financial institutions to minimize the possibility of non- performance. As indicated earlier, LNC's primary derivative programs are designed to protect the company against interest rate fluctuations and the widening of bond yield spreads over comparable maturity U.S. Government obligations. LNC expects to continue to hedge against interest rate movements, as appropriate. -16- PART II - OTHER INFORMATION AND EXHIBITS Items 1, 3, 4 and 5 of this Part II are either inapplicable or are answered in the negative and are omitted pursuant to the instructions to Part II. Item 6. Exhibits and Reports on Form 8-K (a) The following Exhibit of the Registrant is included in this report. (Note: The number preceding the exhibit corresponds to the specific number within Item 601 of Regulation S-K.) 11 Computation of Per Share Earnings (b) During the quarter ended September 30, 1994 two Form 8-K's were filed with the Commission in connection with the Registrant's proposed $200.0 million 9 1/8% debt offering. The first filing dated and received on September 22, 1994, contained a pro forma calculation of the ratio of Earnings to Fixed Charges for the year ended December 31, 1993 and six months ended June 30, 1994. The second filing dated September 29, 1994, which received a filing date of September 30, 1994, contained a copy of the Debenture (Schedule I) and Underwriting Agreement (Schedule II). -17- LINCOLN NATIONAL CORPORATION Exhibit Index for the Report on Form 10-Q for the Quarter Ended September 30, 1994 Exhibit Number Description Page Number 11 Computation of Per Share Earnings 19 -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, Senior Vice President and Chief Financial Officer By /S/ Donald L. Van Wyngarden Donald L. Van Wyngarden Second Vice President and Controller Date November 3, 1994 EX-11 2 EXHIBIT
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES EXHIBIT (11) - COMPUTATION OF PER SHARE EARNINGS Nine Months Three Months Ended September 30 Ended September 30 PRIMARY 1994 1993 1994 1993 Average shares outstanding (assuming conversion of Series A, E and F Preferred Stock) ------------- 103,840,927 101,950,144 104,021,332 103,205,610 Net effect of dilutive stock options (based on the treasury stock method using average market price) -- 655,761 823,082 556,973 742,802 Total shares outstanding ----------- 104,496,688 102,773,226 104,578,305 103,948,412 FULLY DILUTED Average shares outstanding (assuming conversion of Series A, E and F Preferred Stock) ------------- 103,840,927 101,950,144 104,021,332 103,205,610 Net effect of dilutive stock options (based on the treasury stock method using the end of period market price, if higher than average market price) -------- 655,761 2,049,802 556,973 1,617,802 Total shares outstanding ----------- 104,496,688 103,999,946 104,578,305 104,823,412 DOLLAR INFORMATION (000's omitted) Income before the cumulative effect of accounting change ------------ $256,169 $383,735 $ 58,382 $187,509 Cumulative effect of accounting change ------------ -- (96,431) -- -- Net Income -------------- $256,169 $287,304 $ 58,382 $187,509 PER SHARE INFORMATION Primary: Income before the cumulative effect of accounting change ---------- $2.45 $3.73 $ .56 $1.80 Cumulative effect of accounting change ---------- -- (93) -- -- Net Income ---------- $2.45 $2.80 $ .56 $1.80 Fully Diluted: Income before the cumulative effect of accounting change ---------- $2.45 $3.69 $ .56 $1.79 Cumulative effect of accounting change ---------- -- (.93) -- -- Net Income ------------ $2.45 $2.76 $ .56 $1.79 Notes: 1. Earnings per share are computed based on the average number of common shares outstanding during each period after assuming conversion of the Series A, E and F Preferred Stock. 2. LNC does not include the dilutive effect of stock options in the computation of the earnings per share information appearing on the consolidated statements of income since it was immaterial.
EX-27 3
7 0000059558 LINCOLN NATIONAL CORPORATION QTR-3 DEC-31-1994 JAN-01-1994 SEP-30-1994 0 0 21,451,998,000 1,065,997,000 2,880,202,000 679,828,000 26,792,052,000 1,065,623,000 2,183,356,000 2,394,132,000 49,236,770,000 11,400,239,000 818,335,000 0 16,532,562,000 789,026,000 566,347,000 0 311,355,000 2,444,288,000 49,236,770,000 3,552,826,000 1,499,498,000 (53,533,000) 10,585,000 3,553,134,000 358,568,000 883,811,000 282,578,000 26,409,000 256,169,000 0 0 0 256,169,000 2.47 2.47 0 0 0 0 0 0 0 -----END PRIVACY-ENHANCED MESSAGE-----