-----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, NxVItv1wcDppPYZ726oEtWQIuEqxfAFk1mVuA00JiOhfjrvSXFWonzxKj/uOurn2 lWBmP0kHqLiw9CikqEJ2iA== 0000059558-95-000050.txt : 19950517 0000059558-95-000050.hdr.sgml : 19950516 ACCESSION NUMBER: 0000059558-95-000050 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950512 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LINCOLN NATIONAL CORP CENTRAL INDEX KEY: 0000059558 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [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: 95538144 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 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 1995 Commission file number 1-6028 LINCOLN NATIONAL CORPORATION (Exact name of registrant as specified in its charter) Indiana 35-1140070 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 200 East Berry Street, Fort Wayne, Indiana 46802-2706 (Address of Principal Executive Offices) Registrant's telephone number (219) 455-2000 Common Stock Outstanding April 28, 1995 94,582,742 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 19. Page 1 of 21 -2- PART I - FINANCIAL INFORMATION
Item 1 Financial Statements LINCOLN NATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS March 31 December 31 (000'S omitted) 1995 1994 ASSETS Investments: Securities available-for-sale, at fair value: Fixed maturity (cost 1995 - $22,784,254; 1994 - $22,194,079) ------------------ $22,950,184 $21,644,154 Equity (cost 1995 - $805,764; 1994 - $948,135) --------------------- 937,109 1,038,617 Mortgage loans on real estate ------------ 2,785,097 2,853,083 Real estate ------------------------------ 699,841 706,854 Policy loans ----------------------------- 557,112 550,672 Other investments ------------------------ 216,314 175,121 Total Investments ---------------------- 28,145,657 26,968,501 Investment in unconsolidated affiliates ---- 103,146 97,054 Cash and invested cash --------------------- 1,321,867 1,041,583 Property and equipment --------------------- 208,996 185,471 Deferred acquisition costs ----------------- 1,913,339 2,107,915 Premiums and fees receivable --------------- 665,800 551,679 Accrued investment income ------------------ 426,466 428,959 Assets held in separate accounts ----------- 16,079,256 14,301,684 Federal income taxes ----------------------- 172,523 396,888 Amounts recoverable from reinsurers -------- 2,197,731 2,152,327 Goodwill ----------------------------------- 143,532 145,844 Other assets ------------------------------- 951,789 486,855 Total Assets ----------------------------- $52,330,102 $48,864,760 See notes to consolidated financial statements on pages 7 - 8.
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LINCOLN NATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS -CONTINUED- March 31 December 31 (000's omitted) 1995 1994 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Policy liabilities and accruals: Future policy benefits, claims and claim expenses -------------------- $10,889,800 $10,536,512 Unearned premiums ----------------------- 802,154 804,987 Total Policy Liabilities and Accruals - 11,691,954 11,341,499 Contractholder funds ---------------------- 17,752,612 17,250,423 Liabilities related to separate accounts -- 16,079,256 14,301,684 Short-term debt --------------------------- 302,776 275,310 Long-term debt ---------------------------- 419,152 419,607 Other liabilities ------------------------- 2,432,626 2,234,177 Total Liabilities ----------------------- 48,678,376 45,822,700
Shareholders' Equity: Series A Preferred Stock (3/31/95 liquidation value - $3,365) ----- 1,382 1,420 Series E Preferred Stock (3/31/95 liquidation value - $151,569) --- 151,206 151,206 Series F Preferred Stock (3/31/95 liquidation value - $158,707) --- 158,707 158,707 Common Stock ------------------------------ 557,585 555,382 Earned surplus ---------------------------- 2,569,380 2,479,532 Foreign currency translation adjustment --- 15,344 6,890 Net unrealized gain (loss) on securities available-for-sale ----------------------- 198,122 (311,077) Total Shareholders' Equity -------------- 3,651,726 3,042,060 Total Liabilities and Shareholders' Equity -------------- $52,330,102 $48,864,760 See notes to consolidated financial statements on pages 7 - 8.
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LINCOLN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31 (000's omitted) 1995 1994 Revenue: Insurance premiums --------------------------------- $ 739,716 $1,077,234 Insurance fees ------------------------------------- 122,043 105,833 Net investment income ------------------------------ 530,147 501,841 Equity in earnings of unconsolidated affiliates ------------------------ 5,107 654 Realized gain (loss) on investments -------------------------------------- 44,100 38,095 Gain on sale of subsidiary ------------------------- -- 44,058 Other ---------------------------------------------- 42,617 38,021 Total Revenue ---------------------------------- 1,483,730 1,805,736 Benefits and Expenses: Benefits and settlement expenses ----------------------------------------- 887,131 1,174,459 Underwriting, acquisition, insurance and other expenses --------------------- 403,161 437,715 Interest expense ----------------------------------- 13,973 11,278 Total Benefits and Expenses -------------------- 1,304,265 1,623,452 Net Income Before Federal Income Taxes --------------------------------- 179,465 182,284 Federal Income Taxes --------------------------------- 44,652 31,299 Net Income ------------------------------------- $ 134,813 $ 150,985 Net Income Per Share --------------------------------- $1.30 $1.46 Cash Dividends Per Share of Common Stock --------------------------------------- $ .43 $ .41 See notes to consolidated financial statements on pages 7 - 8.
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LINCOLN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Three Months Ended March 31 Number of Shares Issued Amounts (000's omitted from dollar amounts) 1995 1994 1995 1994 Preferred Stock: (Shares authorized: 10,000,000) Series A Preferred Stock: Balance at beginning of year -------- 43,218 47,289 $ 1,420 $ 1,553 Conversion into Common Stock ------------- (1,160) (1,058) (38) (35) Balance at March 31 ----- 42,058 46,231 1,382 1,518 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 - 94,477,942 94,183,190 555,382 543,659 Conversion of Series A Preferred Stock ------------ 9,280 8,464 38 35 Issued for benefit plans ----- 88,189 551,657 2,165 21,442 Balance at March 31 ----- 94,575,411 94,743,311 557,585 565,136 Earned Surplus: Balance at beginning of year - 2,479,532 2,303,731 Net income ------------------- 134,813 150,985 Cash dividends declared ------ (44,965) (43,087) Balance at March 31 ----- 2,569,380 2,411,629 Foreign Currency Translation Adjustment: Accumulated adjustment at beginning of year ---------- 6,890 (1,214) Change during period --------- 8,454 761 Balance at March 31 ----- 15,344 (453) Net Unrealized Gain (Loss) on Securities Available-for-Sale: Balance at beginning of year - (311,077) 914,679 Change during period --------- 509,199 (599,210) Balance at March 31 ----- 198,122 315,469 Total Shareholders' Equity at March 31 ----------- $3,651,726 $3,603,212 Common Stock (assuming conversion of Series A, E & F Preferred Stock): End of Period ----------- 103,747,669 103,948,953 Average for the Period -- 103,678,382 103,541,943 See notes to consolidated financial statements on pages 7 - 8.
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LINCOLN NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31 (000's omitted) 1995 1994 Operating Activities: Net income ---------------------------------------- $ 134,813 $ 150,985 Adjustments to reconcile net income to net cash provided by operating activities: Deferred acquisition costs -------------------- 40,803 (36,415) Premiums and fees receivable ------------------ (142,908) (31,488) Accrued investment income --------------------- (14,700) (31,171) Policy liabilities and accruals --------------- 137,879 (32,399) Contractholder funds -------------------------- 349,840 359,039 Amounts recoverable from reinsurers ----------- (138,318) (104,352) Federal income taxes -------------------------- 181,598 2,357 Equity in undistributed earnings of unconsolidated affiliates ------------------- -- -- Provisions for depreciation ------------------- 15,302 15,576 Realized (gain) loss on investments ----------- (44,705) (28,550) Gain on sale of subsidiary -------------------- -- (44,058) Other ----------------------------------------- (37,014) 19,425 Net Adjustments ----------------------------- 347,777 87,964 Net Cash Provided by Operating Activities --- 482,590 238,949 Investing Activities: Securities-available-for-sale: Purchases -------------------------------------- (4,449,100) (3,919,428) Sales ------------------------------------------ 3,951,078 2,741,944 Maturities ------------------------------------- 182,774 367,186 Purchase of other investments -------------------- (301,429) (291,716) Sale or maturity of other investments ------------ 340,700 543,781 Sale of subsidiaries ----------------------------- -- 392,754 Increase (decrease) in cash collateral on loaned securities ------------------------------ (244,080) 87,852 Other -------------------------------------------- 111,999 (119,800) Net Cash Used in Investing Activities ------ (408,058) (197,427) Financing Activities: Principal payments on long-term debt ------------- (455) (4,295) Issuance of long-term debt ----------------------- 1 229 Net increase in short-term debt ------------------ 27,466 64,185 Universal life and investment contract deposits -- 786,828 610,607 Universal life and investment contract withdrawals --------------------------- (565,451) (399,290) Common Stock issued for benefit plans ------------ 2,165 21,442 Dividends paid to shareholders ------------------- (44,802) (42,858) Net Cash Provided by Financing Activities -- 205,752 250,020 Net Increase (Decrease) in Cash ------------ 280,284 291,542 Cash at Beginning of Year -------------------------- 1,041,583 709,664 Cash at March 31 --------------------------- $1,321,867 $1,001,206 See notes to consolidated financial statements on pages 7 - 8.
-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. 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, 1994. Operating results for the three months ended March 31, 1995 are not necessarily indicative of the results that may be expected for the full year ending December 31, 1995. 2. Reclassifications During the first quarter of 1995, in accordance with management's current judgement of the economic effect of certain reinsurance contracts which grant statutory surplus to other insurance companies, changes have been made in the classification of assets, liabilities, revenues, and total benefits and expenses to reflect deposit accounting for such contracts. Amounts for prior periods have been reclassified to conform to the 1995 presentation. Net income and shareholders' equity are not affected by these reclassifications. Shown below, for the last three years (1992-1994) and 1994 by quarter, are the effects of the reclassifications which reduced assets/liabilities and revenues/total benefits and expenses (in millions). Full Year 1994 by Quarter 1992 1993 1994 1st 2nd 3rd 4th Revenues/Expenses $766.4 $897.0 $804.5 $201.1 $196.7 $195.1 $211.6 Assets/Liabilities 505.1 555.3 465.3 674.8 758.6 637.6 465.3 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 1994 and 1995 resulted principally from tax-exempt investment income. The three months ended March 31, 1994 was also affected by the fact that no income taxes were payable on the gain on sale of a subsidiary (see note 5). 4. Earnings Per Share Earnings per share are computed based on the average number of common shares outstanding (103,678,382 and 103,541,943 for the first three months of 1995 and 1994, respectively) after assuming conversion of the Series A, E and F Preferred Stock. -8- 5. Sale of Subsidiary On March 21, 1994, LNC sold 64% of a wholly owned subsidiary, EMPHESYS Financial Group, Inc. ("EMPHESYS"), through an initial public offering. 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. 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". 6. Subsequent Events On April 3, 1995, LNC completed the acquisition of Delaware Management Holdings, Inc. ("Delaware") as described in note 12 to LNC's financial statements for the year ended December 31, 1994. This acquisition resulted in goodwill of approximately $350 million and other intangible assets of $125 million. Goodwill and the other intangible assets will be amortized on a straight-line basis over 25 years and 5 to 14 years, respectively. The results of Delaware's operations will be included in LNC's consolidated financial statements from the date of close. On April 25, 1995, LNC completed the acquisition of Laurentian Financial Group plc. This acquisition involved a purchase price of $237 million including debt assumption of $44 million. Although purchase accounting adjustments have not been finalized, management does not believe that consolidated results on a proforma basis would have been materially different for the three months ended March 31, 1995 and 1994. -9- LINCOLN NATIONAL CORPORATION Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION As indicated in the "Notes to Consolidated Financial Statements" (see note 5 on page 8), LNC completed the sale of 64%, of its primary direct writer of employee life-health benefit coverages subsidiary in the first quarter of 1994. As noted in the following "Review of Consolidated Operations" the sale has affected the comparability of select line items within the Consolidated Statements of Income. REVIEW OF CONSOLIDATED OPERATIONS The discussion that follows focuses on the results for the three months ended March 31, 1995 compared to the results for the three months ended March 31, 1994. Insurance Premiums Property casualty premiums decreased by $24.6 million or 1% compared with the three months ended March 31, 1994 primarily as the result of reevaluating underwriting actions, focusing on account selection, risk evaluation and the establishment of appropriate premiums. The decrease in property-casualty premiums is leveling and is expected to continue to level for the remainder of 1995. Excluding the impact of the subsidiary sold in 1994 (see note 5 on page 8), health premiums increased $19.1 million or 14% for the first three months of 1995 compared with the first three months of 1994 as a result of increased volumes of business in the Life-Health Reinsurance segment. Life and annuity premiums decreased by $39.4 million or 20% compared to the previous year. This decrease is the net result of increases in business volume from the Life-Health Reinsurance segment and the U.S. portion of the Life Insurance and Annuities segment being more than offset by a decrease from the United Kingdom component of the Life Insurance and Annuities segment. This decrease was the result of modifying the classification for premiums for unit-linked transactions within Lincoln National (UK) on a prospective basis to more closely conform to the classification used for universal life transactions within the U.S. operations. As noted below, there is a corresponding decrease in life and annuity benefits. Prior period data was not reclassified due to the amounts involved not being material to consolidated revenue. Insurance Fees Insurance fees from the sale of universal life and other interest sensitive insurance contracts increased $16.2 million or 15% compared to the first three months of 1994 as the result of increases in the volume of transactions in the Life Insurance and Annuities segment. Net Investment Income Net investment income increased $28.2 million or 6% when compared with the first three months of 1994. This is the result of a 4% increase in mean invested assets and an increase in the overall yield on investments from 7.18% to 7.28%. The increase in mean invested assets is the net result of increased volumes of business in the Life Insurance and Annuity and Life-Health Reinsurance segment being partially offset by decreases due to the sale of a subsidiary (see note 5 on page 8) and reduced volumes of business in the Property-Casualty segment. -10- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION (continued) REVIEW OF CONSOLIDATED OPERATIONS (continued) Equity in Earnings of Unconsolidated Affiliates This line was added to the statement of income in 1994 following LNC's sale of 64% of its direct writer of health coverages (see note 5 on page 8). For the three months ended March 31, 1994, the amount shown represents LNC's 36% share of the total earnings of this company for the period after the closing of the sale on March 21, 1994. The amount for the three months ended March 31, 1995 represents LNC's 29% share of this company's earnings for the full three months. Gain on Sale of Subsidiary The 1994 amount is the gain on LNC's sale of 64% of its primary direct writer of employee life-health coverages (see note 5 on page 8). Realized Gain (Loss) on Investments The first three months of 1995 and 1994 had pre-tax realized gain on investments of $44.1 million and $38.1 million, respectively. The gains for 1994 were the result of net gains on the sale of investments, less writedowns and provision for losses. 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 to the extent the carrying value was determined not to be recoverable. The pre-tax writedown of fixed maturity and equity securities for the first three months of 1995 and 1994 were $4.3 million and $4.8 million, respectively. 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 net pre-tax additions to provision for losses on mortgage loans on real estate and real estate for the first three months of 1995 and 1994 were $7.3 million and $18.6 million, respectively. Other Revenue Other revenue increased $4.6 million or 12% when compared to the first three months of 1994 as the result of an increase in the volume of transactions within each of the business segments. Insurance Benefits and Settlement Expenses Property-Casualty benefits decreased by $56.9 million or 16% when compared with the first three months of 1994 as a result of reductions in the volume of insurance written and catastrophe losses and weather related claims. Excluding the impact of the subsidiary sold in 1994 (see note 5 on page 8), health benefits increased by $20.6 million or 20% when compared to the first three months of 1994 as a result of increased volumes of business and increased claims in the Life Insurance and Annuity and Life-Health Reinsurance -11- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION (continued) REVIEW OF CONSOLIDATED OPERATIONS (continued) segment. Life and annuity benefits and settlement expenses decreased $60.9 million or 26% when compared to the first three months of 1994. This decrease is the net result of increases in business volume from the Life-Health Reinsurance segment and the U.S. portion of the Life Insurance and Annuity segment being more than offset by a decrease from the United Kingdom component of the Life Insurance and Annuities segment. This decrease relates to the decrease in life and annuity premiums noted above. Underwriting, Acquisition, Insurance and Other Expenses Excluding the impact of the subsidiary sold in 1994 (see note 5 on page 8), this expense increased $38.9 million or 11% for the three months ended March 31, 1995 compared to the first three months of 1994. The primary driver behind this increase beyond the general inflation rate was the higher volume related expenses in the Life-Health Reinsurance and Life Insurance and Annuity segments due to the increase in business volumes. The expenses for Property- Casualty segment were essentially flat with a year ago as staff levels were adjusted to the current level of business. Interest Expense Interest expense increased $2.7 million or 24% when compared with the first three months of 1994. This was the 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. Interest expense is expected to increase in the second quarter of 1995 due to an increase in debt related to the acquisitions of additional companies (see note 6 on page 8). The additional leverage created by these acquisitions resulted in a one step downgrade in two of LNC's debt ratings. Standard and Poor's changed its rating from A+ (Exceptional or Superior) to A (Excellent) and Moody's changed its rating from A1 to A2 (both Very Good, Strong or High). Federal Income Taxes Federal income taxes increased $13.3 million when compared to the first three months of 1994. This is the net result of a small decrease in pre-tax earnings being more than offset by the lack of any tax expense on the 1994 gain on sale of subsidiary (see note 5 on page 8). Summary Net income for the first three months of 1995 was $134.8 million or $1.30 per share compared with $151.0 million or $1.46 per share in the first three months of 1994. Excluding realized gain (loss) on investments and gain on sale of subsidiary, LNC earned $106.5 million for the first three months of 1995 compared with $83.4 million for the first three months of 1994. 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 a subsidiary sold net of investment income earned on the proceeds from the sale. -12- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION (continued) REVIEW OF CONSOLIDATED FINANCIAL CONDITION Investments The total investment portfolio increased $1.2 billion in the first three months of 1995. This increase is the result of increases in the fair value of securities available-for-sale during the first three months of 1995 and new purchases of investments from cash flow generated by the business segments. The quality of LNC's fixed maturity securities portfolio as of March 31, 1995 was as follows: Treasuries and AAA 36.3% BBB 21.3% AA 10.6% BB 2.7% A 26.7% Less than BB 2.4% As of March 31, 1995, $1.162 billion or 5.1% of fixed maturity securities was invested in below investment grade securities (less than BBB). This represents 4.1% of the total investment portfolio. The interest rates available on these below investment grade securities are significantly higher than are available on other corporate debt securities. Also, the risk of loss due to default by the borrower is significantly greater with respect to such below investment grade securities, because these securities are generally unsecured, often subordinated to other creditors of the issuer and issued by companies that usually have high levels of indebtedness. LNC attempts to minimize the risks associated with these below investment grade securities by limiting the exposure to any one issuer and by closely monitoring the credit worthiness of such issuers. During the three months ended March 31, 1995, the aggregate cost of such investments purchased was $135.9 million. Aggregate proceeds from such investments sold were $144.1 million, resulting in a realized pre-tax loss of $6.8 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 March 31, 1995, mortgage loans on real estate and real estate represented 9.9% and 2.5% of LNC's total investment portfolio. As of March 31, 1995, the underlying properties supporting the mortgage loans on real estate consisted of 22% in commercial office buildings, 28% in retail stores, 20% in apartments, 15% in industrial buildings, 3% in hotels/motels and 12% 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 impaired loans. Mortgage loans on real estate are considered 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. When LNC determines that a loan is impaired 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. The provision for losses is reported as realized gain (loss) on investments. Mortgage loans deemed to be uncollectible are charged against the provision for losses and subsequent recoveries, if any, are credited to the provision for losses. -13- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION (continued) REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued) The provision for losses is maintained at a level believed adequate by management to absorb estimated probable credit losses. Management's periodic evaluation of the adequacy of the provision for losses is based on LNC's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay (including the timing of future payments), the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires estimating the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.
Impaired loans included along with the related provision for losses are as follows: March 31 December 31 (in millions) 1995 1994 Impaired loans with provision for losses --------- $223.4 $275.8 Provision for losses ----------------------------- (56.7) (62.7) Impaired loans with no provision for losses ------ 2.2 2.3 Net Impaired Loans ----------------------------- $168.9 $215.4 Impaired loans with no provision for losses are a result of 1)direct write- downs or 2)collateral dependent loans where the fair value of the collateral is greater than the recorded investment in loans.
A reconciliation of the mortgage loan provision for losses for these impaired mortgage loans is as follows: Three Months Ended March 31 (in millions) 1995 1994 Balance at beginning of year --------------------- $62.7 $226.6 Provisions for losses ---------------------------- 9.7 15.4 Releases due to sales ---------------------------- (15.7) (23.2) Releases due to foreclosures --------------------- 0.0 (3.5) Balance at End of Quarter ---------------------- $56.7 $215.3
The average recorded investment in impaired loans and the interest income recognized on impaired loans were as follows: Three Months Ended March 31 (in millions) 1995 1994 Average recorded investment in impaired loans ---- $251.8 $730.3 Interest income recognized on impaired loans ----- 4.8 12.6 All interest income on impaired loans was recognized on the cash basis of income recognition.
As of March 31, 1995 and 1994, LNC had restructured loans of $42.2 million and $69.3 million, respectively. LNC recorded $.9 million and $1.6 million interest income on these restructured loans for the quarter ended March 31, 1995 and 1994, respectively, as compared to interest income of $1.1 million and $1.8 million that would have been recorded according to their original terms. Mortgage loans on real estate with a combined carrying value at March 31, 1995 of $48.3 million were non-income producing for the quarter ended March 31, 1995. -14- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION (continued) REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued) In the first three months of 1995, LNC continued to add to its provision for losses for mortgage loans on real estate. The amount of such provisions for losses were lower in this first quarter as compared to the previous quarters because of bulk sale transactions in 1994 of performing and non- performing properties. These bulk sales also caused a decease in the ratio of reserves to impaired loans at December 31, 1994 and March 31, 1995 as compared to quarters ended prior to December 31, 1994. As of March 31, 1995, LNC did not have any future commitments to lend funds for non-accrual, restructured or other problem loans. Cash and Invested Cash Cash and invested cash increased by $280.3 million in the first three months of 1995. Most of this increase related to a planned build-up of cash to cover a portion of the purchase price of the companies acquired in April, 1995 (see note 6 on page 8). Deferred Acquisition Costs The decrease in deferred acquisition costs of $195.5 million is the net result of the growth in business being more than offset by a reduction in deferred acquisition costs related to the change in unrealized gain on securities available-for-sale. Premiums and Fee Receivable Premiums and fees receivable increased $114.4 million as the result of increased volumes of business in the Life-health Reinsurance segments. Assets Held in Separate Accounts This asset account as well as the corresponding liability account increased by $1.8 billion in the first three months of 1995, reflecting an increase in annuity and pension funds under management. Federal Income Taxes Federal income taxes recoverable decreased $224.4 million in the first three months of 1995. This decrease is the net result of 1)an increase in deferred tax related to the increase in unrealized gains on available-for-sale securities and 2)a tax refund of approximately $150 million which resulted from the realization of capial gains in 1994 to recover capital gains taxes paid in prior years being partially offset by increases related to recoverable deferred taxes from life insurance reserve differences, discounting of unpaid losses and additions to the investment reserves. Amounts Recoverable from Reinsurers The increase in amounts recoverable from reinsurers was the result of increased volumes of business ceded in the Life Insurance and Annuities segment. Goodwill Goodwill is expected to increase in the second quarter of 1995 due to the acquisition of an investment management company (see note 6 on page 8). -15- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION (continued) REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued) Other Assets The increase in other assets of $464.9 million is the result of having a higher receivable related to investment securities sold in the last few days of the first quarter of 1995 versus the end of 1994. Total Liabilities Total liabilities increased by $2.9 billion in the first three months of 1995. This increase reflects 1) an increased level of business as evidenced by an increase in policy liabilities and accruals of $350.4 million, an increase of $502.2 million in contractholder funds, an increase of $1.8 billion in the liabilities related to separate accounts, 2) an increase in debt of $27.0 million and 3) an increase in other liabilities of $198.4 million. Policyholder liabilities as of March 31, 1995 and December 31, 1994 included liabilities for environmental losses of $200.2 million and $201.0 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 and amounts are at these levels due to LNC's concentration on writing coverages for small to medium size companies rather than the larger companies that tend to incur most of the environmental and product liability claims. LNC's management challenges environmental claims in cases of questionable liability and reviews the level of environmental liability on an on-going basis to help insure that the liability maintained is adequate. Nonetheless, establishing reserves for environmental losses is subject to significant uncertainties because of the long reporting delays, lack of historical data and the unresolved complex legal and regulatory issues that are involved. 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. Tax authorities continue to focus on compliance of qualified annuity plans marketed by insurance companies. If sponsoring employers cannot demonstrate compliance and the insurance company is held responsible due to its marketing efforts, LNC and other insurers may be subject to potential liability. It is not possible to provide a meaningful estimate of the range of possible liability at this time. Management continues to monitor this matter and to take steps to minimize any potential liability. The increase in other liabilities relates to an increase in the expected payouts for security investments purchased in the last few days of the first quarter of 1995 versus a lower volume of such transactions at the end of 1994. Shareholders' Equity Total shareholders' equity increased $609.7 million in the first three months of 1995. Excluding the increase of $509.2 million related to unrealized gain on securities available-for-sale, shareholders' equity increased $100.5 million. This increase was the net result of $134.8 million from net income, $2.2 million from the issuance of Common Stock related to benefit plans, $8.5 million related to an increase in the accumulated foreign exchange gain, and a decrease of $45.0 million related to the declaration of dividends to shareholders. -16- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION (continued) REVIEW OF CONSOLIDATED FINANCIAL CONDITION (continued) Liquidity and Cash Flow In the businesses in which LNC operates, 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 $482.6 million of cash during the first three months of 1995. This amount includes a federal tax refund of approximately $150 million which resulted from the realization of capital losses in 1994 to recover capital gains taxes paid in prior years. 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 effective October 1, 1994 when LNC issued $200.0 million of 9 1/8% debt securities payable in 2024. As indicated in note 7 to the consolidated financial statements for the year ended December 31, 1994 (see page 53 of LNC's Form 10-K), LNC has entered into derivative transactions to reduce its exposure to fluctuations in interest rates and foreign exchange risks. During the first quarter of 1995, LNC has made changes to its derivative exposures as follows: 1. Added $700 million notional amount of interest rate caps, increasing the notional amount of interest rate cap agreements to $5.1 billion from $4.4 billion. 2. Terminated $700 million of maturing spread-lock agreements, reducing the outstanding contract amounts to $600 million from $1.3 billion. 3. Removed the $354.3 million of short financial futures that were being used at December 31, 1994 to hedge interest rate risks and to manage duration of a portion of the fixed maturity securities. 4. Increased the use of financial futures for hedging pension commitments to $123.1 million from $28.2 million. 5. Increased the use of foreign exchange forward contracts to hedge the currency risk of foreign bonds, to $53.8 million from $21.2 million. After the end of the first quarter of 1995, a major rating agency downgraded the debt rating of a cap agreement counterparty to Baa1 from A3; that counterparty continues to hold an A rating from another major rating agency. LNC's cap agreements with that counterparty have an aggregate notional amount of $500 million and an aggregate replacement value of approximately $1.0 million. The remaining $4.6 billion notional amount of caps are with counterparties rate A3/A- or better by both major rating agencies. -17- 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 Exhibits of the Registrant are included in this report. (Note: The number preceding the exhibit corresponds to the specific number within Item 601 of Regulation S-K.) 11 Computation of Per Share Earnings 27 Financial Data Schedule (b) No reports on Form 8-K were filed during the quarter ended March 31, 1995. -18- SIGNATURE PAGE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LINCOLN NATIONAL CORPORATION By /S/ Richard C. Vaughan Richard C. Vaughan, Executive Vice President and Chief Financial Officer /S/ Donald L. Van Wyngarden Donald L. Van Wyngarden, Second Vice President and Controller Date May 8, 1995 -19- LINCOLN NATIONAL CORPORATION Exhibit Index for the Report on Form 10-Q for the Quarter Ended March 31, 1995 Exhibit Number Description Page Number 11 Computation of Per Share Earnings 20 27 Financial Data Schedule 21 EX-11 2 EXHIBIT
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES EXHIBIT (11) - COMPUTATION OF PER SHARE EARNINGS Three Months Ended March 31 PRIMARY 1995 1994 Average shares outstanding (assuming conversion of Series A, E and F Preferred Stock) --------------------------------------- 103,678,382 103,541,943 Net effect of dilutive stock options (based on the treasury stock method using average market price) ---------------------------- 550,618 722,145 Total shares outstanding ------------------------------------- 104,229,000 104,264,088 FULLY DILUTED Average shares outstanding (assuming conversion of Series A, E and F Preferred Stock) --------------------------------------- 103,678,382 103,541,943 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) ---------------------------------- 624,860 722,145 Total shares outstanding ------------------------------------- 104,303,242 104,264,088 DOLLAR INFORMATION (000's omitted) Net Income ---------------------------------------- $134,813 $150,985 PER SHARE INFORMATION Primary: Net Income -------------------------------------- $1.29 $1.45 Fully Diluted: Net Income -------------------------------------- $1.29 $1.45 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 EXHIBIT
7 0000059558 Lincoln National Corporation 1 3-MOS DEC-31-1995 JAN-01-1995 MAR-31-1995 22,950,184,000 0 0 937,109,000 2,785,097,000 699,841,000 28,145,657,000 1,321,867,000 2,197,731,000 1,913,339,000 52,330,102,000 10,889,800,000 802,154,000 0 17,752,612,000 721,928,000 557,585,000 0 311,295,000 2,782,846,000 52,330,102,000 861,759,000 530,147,000 44,100,000 47,724,000 887,131,000 242,026,000 161,135,000 179,465,000 44,652,000 134,813,000 0 0 0 134,813,000 1.30 1.30 0 0 0 0 0 0 0
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