<ins>
Lincoln National Corporation 10-K
</ins>UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 19981999 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
| Indiana | 35-1140070 |
|---|
| (State of Incorporation) | (I.R.S. Employer Identification
No.) |
1500 Market Street, Fort Wayne, Indiana 46802-2706
(AddressSuite 3900, Philadelphia, Pennsylvania
19102-2112
(Address of principal executive offices)
Registrant's telephone number (219) 455-2000
(215) 448-1400
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Exchanges on which registered
- ------------------- -----------------------------
|
|---|
| Common Stock | New York, Chicago and Pacific |
| Common Share Purchase Rights | New York, Chicago and Pacific
$3.00 |
| $3.00 Cumulative Convertible Preferred Stock, Series
A | New York and Chicago |
| 8.75% Cumulative Quarterly Income Preferred Securities,
Series A* | New York |
| 8.35% Trust Originated Preferred Securities, Series
B* | New York |
| 7.40% Trust Originated Preferred Securities, Series
C* | New York |
| 7.75% FELINE PRIDES, Series D* | New York, Chicago and Pacific |
* Issued by Lincoln National Capital I, Lincoln National Capital II, Lincoln National Capital III and Lincoln National Capital IV, respectively. Payments of distributions and payments on liquidation or redemption are guaranteed by Lincoln National
Corporation.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the 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 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ x ]
As of February 26, 1999, 101,245,20525, 2000, 194,693,465 shares of common stock were outstanding. The aggregate market value of such shares (based upon the closing price of these shares on the New York Stock Exchange) held by nonaffiliatesnon-affiliates was approximately $9,586,700,000.$5,524,427,000.
Select materials from the Proxy Statement for the Annual Meeting of Shareholders, scheduled for May 13, 199911, 2000 have been incorporated by reference into Part III of this Form 10-K.
The exhibit index to this report is located on page 80.
Page 1 of 218
2
90.
Lincoln National Corporation
Table of Contents
Item Page
| Item | | | Page |
|---|
| PART I |
| 1. | Business |
| A. | Business Overview | | 3 |
| B. | Description of Business Segments: |
| | 1. | Life Insurance and Annuities | | 3 |
| | 2. | Lincoln UK | | 4 |
| | 3. | Reinsurance | | 4 |
| | 4. | Investment Management | | 4 |
| C. | Other Matters: |
| | 1. | Regulatory | | 5 |
| | 2. | Miscellaneous | | 5 |
| 2. | Properties | | 6 |
| 3. | Legal Proceedings | | 6 |
| 4. | Submission of Matters to a Vote of Security
Holders | | 6 |
| PART II |
| 5. | Market for Registrant's Common Equity and
Related Stockholder Matters | | 6 |
| 6. | Selected Financial Data | | 7 |
| 7. | Management's Discussion and Analysis | | 8 |
| 7A. | Quantitative and Qualitative Disclosures
About Market Risk | | 29 |
| 8. | Financial Statements and Supplementary
Data | | 37 |
| 9. | Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures | | 77 |
| PART III |
| 10. | Directors and Executive Officers of the
Registrant | | 78 |
| 11. | Executive Compensation | | 79 |
| 12. | Security Ownership of Certain Beneficial
Owners and Management | | 79 |
| 13. | Certain Relationships and Related Transactions | | 79 |
| PART IV |
| 14. | Exhibits, Financial Statement Schedules
and Reports on Form 8-K | | 79 |
| Index to Exhibits | | 90 |
| Signatures | | 91 |
PART I
1. Business
A. General Description.......................................... 3
B. Description of Business Segments:
Life Insurance and Annuities.............................. 3
Lincoln UK................................................ 4
Reinsurance .............................................. 4
Investment Management..................................... 4
C. Other Matters:
Regulation................................................ 5
Miscellaneous............................................. 5
2. Properties....................................................... 5
3. Legal Proceedings................................................ 6
4. Submission of Matters to a Vote of Security Holders.............. 6
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 6
6. Selected Financial Data.......................................... 7
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
7A. Quantitative and Qualitative Disclosures About Market Risk....... 28
8. Financial Statements and Supplementary Data...................... 35
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures.................................... 67
PART III
10. Directors and Executive Officers of the Registrant............... 68
11. Executive Compensation........................................... 69
12. Security Ownership of Certain Beneficial Owners and Management... 69
13. Certain Relationships and Related Transactions................... 69
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 69
Index to Exhibits............................................... 80
Signatures...................................................... 81
3
PART I
Item 1. Business
A. Business Overview
Lincoln National Corporation ("LNC") is a holding company. Through subsidiary companies, LNC operates multiple insurance and investment management businesses. During 1998, theThe collective group of companies adopteduses "Lincoln Financial Group" as its marketing identity. LNC
is the 39th32nd largest (based on assets) U.S. corporation (1997(1998 Fortune 500, Largest U.S. Corporations, April 1998)1999). Operations are divided into four business segments: 1) Life Insurance and Annuities, 2) Lincoln UK, 3) Reinsurance and 4) Investment Management. Over the past five years, segments have been
redefined as noted below. Prior to 1997, LNC had a Property-Casualty segment. This segment was sold in 1997 and the related segment information was reclassified to discontinued operations (see noteNote 11 to the consolidated financial statements on page 65)statements). The Lincoln
UK segment, which was added in 1997, was included in the Life Insurance and Annuities segment prior to the adoption of Financial Accounting Standard No. 131. The Investment Management segment was added in April of 1995 following the acquisition of
Delaware Management Holdings, Inc. Prior to the sale of 71% of its direct writer
of employee life-health coverages in the first quarter of 1994, LNC operated a
business segment entitled Employee Life-Health Benefits. After the sale, the
earnings from the 29% minority interest retained were included in "Other
Operations" as described below. Although one of the subsidiaries held by LNC was formed as early as 1905, LNC itself was formed in 1968. LNC is an Indiana corporation withbut maintains its principal officeoffices at 200 East Berry1500 Market Street, Fort Wayne,
Indiana 46802-2706.Suite 3900, Philadelphia,
Pennsylvania 19102-2112. As of December 31, 1998,1999, there were 21060 persons oninvolved with the staffgovernance of the LNC holding company. Once the organizational/expense review discussed in
note 11 to the consolidated financial statements on page 67 is fully
implemented, the governance of the holding company will be under the direction
of a staff of approximately 65 persons. Total employment of Lincoln National Corporation at December 31, 19981999 on a consolidated basis was 8,015.7,960.
Revenues, pre-tax income and assets for LNC's major business segments and other operations are shown in this Form 10-K report as part of the consolidated financial statements (see noteNote 9 to the consolidated financial statements on
page 62)statements). The LNC "Other
Operations" category includes the financial data for an
unconsolidated affiliate (subsequent to the first quarter of 1994 and prior to
the sale of this unit in October of 1995) engaged in the employee life-health
benefits business, an investment management company that services LNC's business
segments, certain other operations that are not directly related to the business segments and unallocated corporate items (i.e., corporate investment income and interest expense on short-term and long-term borrowings and unallocated
corporate overhead expenses)borrowings).
Following is a brief description
B. Description of the four business segments:
Business Segments
1. Life Insurance and Annuities
The primary companies within this business segment are Lincoln National Life Insurance Company ("Lincoln Life"); First Penn-Pacific Life Insurance Company ("First Penn"); Lincoln Life && Annuity Company of New York ("LLANY"Lincoln Life New York") and;
AnnuityNet, Inc.; Lincoln Financial Advisors ("LFA") and Sagemark Consulting, Inc. ("Sagemark").
Lincoln Life, an Indiana corporation headquartered in Fort Wayne, Indiana with significant operations in Hartford, Connecticut, is the 10th8th largest U.S. stockholder-owned life insurance company, based on revenues (1997(1998 Fortune Rankings of Largest Life
Insurance Companies by Revenues, April 1998)1999) and the 13th7th largest based onlife insurer in the U.S. when measured by assets (Best's(Best's Review Life-Health Edition, July 1998)1999). A network of 5847 life insurance agencies, independent life insurance brokers, insurance agencies located within financial
institutions and specifically trained employees sell fixed annuities, variable annuities, pension products,
universal life insurance, variable universal life insurance, term life insurance and other individual insurance coverages in most states of the United States. The
distribution network includes approximately 2,0502,100 career agents, 34,50035,000 brokers, 4,5007,600 bank agents and access to 75,00060,000 stockbrokers and financial planners.
First Penn is an Indiana Corporationcorporation headquartered in Oakbrook Terrace, Illinois. Its universal life, term life and deferred annuity products are distributed through stockbrokers, financial planners, banks and personal producing general agents. It also
manufactures universal life, term life and deferred annuity products for Lincoln Life for distribution through its career agents and banks. These products are marketed in most states of the United States.
LLANY
Lincoln Life New York is a New York company headquartered in Syracuse, New York. This company
was formed in connection with the acquisition of the tax-qualified annuity
business from UNUM Corporation's affiliates in 1996 (see note 11 to the
consolidated financial statements on page 65). LLANY alsoLincoln Life New York offers fixed annuities, variable annuities, universal life, variable universal life, term life and other types of
annuities, pension andindividual life insurance products within the
state of New York.
4York utilizing the distribution networks described above for Lincoln Life and First Penn.
LFA is aand Sagemark are securities broker/dealerdealers and a registered investment advisoradvisors that offersoffer a full range of financial and estate planning. LFAplanning services. They also offersoffer access to annuities, 401(k) plans, pensions, universal life insurance and other wealth
accumulation and protection products and services. Both companies are headquartered in Hartford, Connecticut and have offices throughout the United States.
Other companies within this segment include various general business corporations that support the segment's sales, service and administrative efforts.
Approximately 4,2854,270 employees are involved in this business segment.
2. Lincoln UK
Business in this segment is conducted through a series of operating companies owned by Lincoln National (UK) plc.plc ("Lincoln UK"). Lincoln UK is headquartered in Gloucester, England, and is licensed to do business throughout the United Kingdom.Kingdom ("UK"). The
principal products produced by this operation, unit-linked life and pension products, are similar to U.S. produced variable life and annuity products. The distribution network includes approximately, 1,6301,450 sales representatives and tied agents. Lincoln National (UK)UK
was the 12th18th largest writer of unit-linked new business premiums in the UK for 1997 (Money1998 (Money Management Magazine-New Business Trends, June 1998)1999).
Approximately 1,4001,270 employees are involved in this business segment.
3. Reinsurance
The primary companies within this business segment are Lincoln National Reassurance Company ("LNRAC"), Lincoln National Health && Casualty Insurance Company ("LNH&C"&C"), Lincoln Life, Lincoln National Reinsurance Company Ltd, (Bermuda), Old Fort Insurance
Company Ltd (Bermuda) and Lincoln National Reinsurance Company Ltd (Barbados). LNRAC and Lincoln Life offer reinsurance programs for individual life, group life, group medical disability income,
personal accident and annuity products to U.S. and international clients. LNH&C&C offers group medical
products and services on both a direct and reinsurance basis as well as personal accident reinsurance.basis. The insurance companies in Bermuda and Barbados offer specialized reinsurance programs for life, health and annuity business. They also offer funded cover programs to property-casualty carriers
in the U.S. and select international markets.
This segment provides a broad range of risk management products and services to insurance companies, Health Maintenance Organizations, self-funded employers and other primary market risk accepting organizations throughout the United States and economically attractive international
markets. Marketing efforts are conducted primarily through the efforts of a reinsurance sales staff. Some business is generated through reinsurance intermediaries and brokers. The reinsurance organization is one of the leading life-health reinsurers
worldwide measured on gross premiums, net of ceded (Business(Business Insurance, August 1998)1999).
Other companies in this business segment include various general business corporations that support the segment's sales, service and administration efforts.
Approximately 840910 employees are involved in this business segment.
4. Investment Management
The primary companies within this business segment include Lincoln National Investments, Inc. ("LNI"), Lincoln National Investment Companies, Inc. ("LNIC"), Delaware Management Holdings, Inc. ("Delaware"), Lynch && Mayer, Inc. ("L&M"Lynch & Mayer"),
Vantage Global Advisors, Inc. ("Vantage") and VantageLincoln Investment Advisors ("Vantage").Management. LNI and LNIC are intermediate level holding companies that own the operating companies within this segment. The operating companies provide a variety of asset management services
to institutional and retail customers including pension plans, endowment funds, individuals and trusts. These companies serve as investment advisor to approximately 455365 pension funds and other institutional accounts; act as investment manager/national
distributor and/or shareholder services agent for 11498 open-end funds; and serve as investment manager for 10 closed-end funds. Lincoln Investment Management provides investment advisory services for LNC's corporate portfolios as well as entities not owned
by LNC.
Approximately 1,0451,450 employees are involved in this business segment.
5
LNC's insurance subsidiaries protect themselves against losses greater than the
amount they are willing to retain on any one risk or event by purchasing
reinsurance from unaffiliated insurance companies (see note 7 to the
consolidated financial statements on page 55.
All businesses LNC is involved in are highly competitive due to the market
structure and the large number of competitors. At the end of 1997, the latest
year for which data is available, there were more than 1,700 life insurance
companies in the United States. Lincoln Life is the 10 largest stock and mutual
life insurance company in the United States based on revenues (1997 Fortune
Ranking of Largest Life Insurance Companies by Revenues, April 1998). LNC's
investment management companies were the 35th largest U.S. investment management
group at the end of 1997 (1997 Institutional Investor 300 Money Managers, July
1998).C. Other Matters
1. Regulatory
LNC's Life Insurance &and Annuities, Lincoln UK and Reinsurance business segments, in common with those of other insurance companies, are subject to regulation and supervision by the states, territories and countries in which they are licensed to do
business. The laws of these jurisdictions generally establish supervisory agencies with broad administrative powers relative to granting and revoking licenses to transact business, regulating trade practices, licensing agents, prescribing and approving
policy forms, regulating premium rates for some lines of business, establishing reserve requirements, regulating competitive matters, prescribing the form and content of financial statements and reports, regulating the type and amount of investments
permitted and prescribing minimum levels of capital. The ability to continue an insurance business is dependent upon the maintenance of the licenses in the various jurisdictions.
LNC's Investment Management segment, in common with other investment management groups, is subject to regulation and supervision by the Securities and Exchange Commission, National Association of Securities Dealers, the Investment Management Regulatory
Organization ("IMRO"), the Pennsylvania Department of Banking and jurisdictions of the states, territories and foreign countries in which they are licensed to do business.
2. Miscellaneous
LNC's insurance subsidiaries protect themselves against losses greater than the amount they are willing to retain on any one risk or event by purchasing reinsurance from unaffiliated insurance companies (see Note 7 to the consolidated financial
statements).
All businesses LNC is involved in are highly competitive due to the market structure and the large number of competitors. At the end of 1998, the latest year for which data is available, there were approximately 1,550 life insurance companies in the
United States. Lincoln Life is the 8th largest stockholder-owned life insurance company in the United States based on revenues (1998 Fortune Ranking of Largest Life Insurance Companies by Revenues, April 1999). LNC's investment management companies were the 39th largest U.S. investment management group at the end of 1998 (1998 Institutional Investor 300 Money Managers,
July 1999). Also, many of the products offered by LNC's operating companies are similar to products offered by non-insurance financial services companies, such as banks. The Financial Services Modernization Act was passed in November 1999 and repeals the
Glass-Steagall Act of 1933 and expands the Bank Holding Company Act of 1956. This new act allows cross-ownership by banks, securities firms and insurance companies. As a result, there is speculation that there will be business combinations among banks,
securities firms and insurance companies.
Because of the nature of the insurance and investment management businesses, there is no single customer or group of customers upon whom the business is dependent. Factors such as backlog, raw materials, seasonality, patents (including trademarks,
licenses, franchises and any other concessions held) or environmental impact do not have a material effect upon such businesses. However, within LNC's Reinsurance segment, Lincoln National Risk Management, Inc. ("LNRM") does hold patents for "The Method
and Apparatus for Evaluating a Potentially Insurable Risk," and "Automated Decision-making Arrangements."Arrangements". LNRM markets multiple knowledge-based underwriting products that rely on these products.patents.
LNC does not have a separate unit that conducts market research. Research activities related to new products or services, or the improvement of existing products or services, are conducted within the business segments. Expenses related to such activities
are not material. Also, sales are not dependent upon select geographic areas. LNC has foreign operations that are significant in relationship to the consolidated group (see noteNote 9 to the consolidated financial statements on page 63)statements).
Item 2. Properties
LNC and the various Fort Wayne operating businesses own or lease approximately 1.64.0 million square feet of office space. The governance group for LNC and the Investment Management segment lease 0.3 million square feet of office space in Philadelphia, Pennsylvania.
The operating units in the Fort Wayne, area. BusinessesIndiana area own or lease 1.6 million square feet. Also, businesses operating in suburban Chicago, Illinois; Philadelphia, Pennsylvania; Hartford, Connecticut and the United Kingdom own or lease another 1.21.1 million square feet of office space.
An additional 1.11.0 million square feet of office space is owned or leased in other U.S. cities and foreign countries for branch offices and other smaller operations. LNC expects to move its corporate headquarters from
Fort Wayne to Philadelphia in mid-1999. The future lease commitments shown
within note 7 includes a commitment for 30,000 square feet in Philadelphia for
LNC's headquarters. As shown in the notes to the consolidated financial statements (see noteNote 7 to the
consolidated financial statements on page 55)statements), the rental expense on operating leases for office space and equipment for continuing operations totaled $81.3$81.5 million for 1998.1999. Office space rent expense accounts for $63.2$61.8 million of this total. This discussion
regarding properties does not include information on investment properties.
6
Item 3. Legal Proceedings
LNC and its subsidiaries are involved in various pending or threatened legal proceedings arising from the conduct of business. In some instances, these proceedings include claims for unspecified or substantial 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 these proceedings ultimately will be resolved without
materially affecting the consolidated financial position of LNC.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1998,1999, no matters were submitted to securityholderssecurity holders for a vote.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Stock Market and Dividend Information
The dividend on LNC's common stock is declared each quarter by LNC's Board of Directors. In determining dividends, the Board takes into consideration items such as LNC's financial condition, including current and expected earnings, projected cash flows
and anticipated financing needs. The range of market prices and cash dividends declared by calendar quarter for the past two years are as follows:
Common Stock Data: (per share) 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
- ------------------------------------------------------------------------------------------
1999
High $50.250 $53.438 $57.500 $48.313
Low 39.281 45.688 36.000 36.500
Dividend Declared $.275 $.275 $.275 $.290
1998
High $43.250 $47.063 $49.438 $43.344
Low 36.125 41.844 41.125 33.500
Dividend Declared $.260 $.260 $.260 $.275
Notes:
Common Stock Data: (per share) 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
- ------------------------------------------------------------------------------------------------------------------
| (1) | The data for 1998 High...................................................... $86.500 $94.125 $98.875 $86.688
Low....................................................... 72.250 83.688 82.250 67.000
Dividend declared......................................... $.52 $.52 $.52 $.55
1997
High...................................................... $61.625 $68.625 $73.000 $78.125
Low....................................................... 51.375 49.000 63.813 64.625
Dividend declared......................................... $.49 $.49 $.49 $.52and the first quarter of 1999 have been adjusted to reflect the effects of a June 1999 two-for-one split of LNC's common stock. |
Notes:
(1) At December 31, 1998, the number of shareholders of record of LNC's common
stock was 12,025.
(2) The payment of dividends to shareholders is subject to the restrictions
described in note 7 to the consolidated financial statements (see page 54)
and is discussed in the Management's Discussion and Analysis of Financial
Condition (see page 28)| (2) |
At December 31, 1999, the number of shareholders of record
of LNC's common stock was 11,646.
|
| (3) | The payment of dividends to shareholders is subject to the restrictions described in Note 7 to the consolidated financial statements and is discussed in the Management's Discussion and Analysis of "Liquidity and Cash Flow".
|
Exchanges: New York, Chicago and Pacific.
Stock Exchange Symbol: LNC
7Item 6. Selected Financial Data
(in millions, except per share data)
Year Ended December 31 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Total revenue $6,803.7 $6,087.1 $4,898.5 $4,733.6 $4,586.5
Net income from continuing
operations (1) 460.4 509.8 22.2 356.4 301.4
Net income from discontinued
operations -- -- 134.9 157.2 180.8
Gain on sale of discontinued
operations -- -- 776.9 -- --
----------- --------- --------- --------- ---------
Net income (1) $460.4 $509.8 $934.0 $513.6 $482.2
Per Share Data (2):
Net income from continuing
operations $2.30 $2.51 $0.11 $1.69 $1.44
Net income from discontinued
operations -- -- 0.65 0.75 0.86
Gain on sale of discontinued
operations -- -- 3.73 -- --
----------- --------- --------- --------- ---------
Net Income-Diluted $2.30 $2.51 $4.49 $2.44 $2.30
Net Income-Basic $2.33 $2.54 $4.56 $2.47 $2.39
Common stock dividends $1.115 $1.055 $0.995 $0.935 $0.875
(in millions, except per share data)
December 31 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Assets
$103,095.7 $93,836.3 $77,174.7 $71,713.4 $63,257.7
Long-term debt 712.0 712.2 511.0 626.3 659.3
Company-obligated mandatorily
redeemable preferred
securities of subsidiary
trusts holding solely junior
subordinated debentures 745.0 745.0 315.0 315.0 --
Shareholders' equity 4,263.9 5,387.9 4,982.9 4,470.0 4,378.1
Per Share Data: (2)
Shareholders' equity
(Securities at market) $21.76 $26.59 $24.63 $21.50 $20.95
Shareholders' equity
(Securities at cost) 24.14 23.86 22.48 19.51 17.61
Market value of common stock $40.00 $40.91 $39.07 $26.25 $26.88
Item 6. Selected Financial Data
(millions| (1) | Factors affecting the comparability
of dollars, except per share data)
Year Ended December 31 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Total revenue.................................... 6,087.1 4,898.5 4,733.6 4,586.5 3,932.7
Netnet income from continuing operations (1)........ 509.8 22.2 356.4 301.4 165.5
Net income from discontinued operations.......... -- 134.9 157.2 180.8 184.4
Gain on sale of discontinued operations.......... -- 776.9 -- -- --
-------- ----- -------- -------- --------
Net Income (1)............................... 509.8 934.0 513.6 482.2 349.9
Per Share Data: (2)
Netand net income from continuing
operations............ $5.02 $ .21 $3.38 $2.88 $1.59
Net income from discontinued operations.......... -- 1.30 1.49 1.72 1.76
Gainoperations for the 1995-1999 period are shown on salepage 8 (see "Supplemental
Data"). Other factors affecting comparability are shown within the results
of discontinued operations.......... -- 7.47 -- -- --
-------- ---- ----- ------ -------
Net Income-Diluted........................... $5.02 $8.98 $4.87 $4.60 $3.35
Net Income-Basic............................. $5.08 $9.11 $4.95 $4.78 $3.52
Common stock dividends........................... $2.11 $1.99 $1.87 $1.75 $1.66operations by segment (see pages 10 through 23). |
(millions| (2) | Per share amounts and number
of dollars, except per share data)
December 31shares repurchased were also affected by the 1999 two-for-one split of
LNC's common stock (see Note 10 to the consolidated financial statements)
and by the issuance of 2,796,224 shares of common stock in 1997 and the
retirement of 7,675,000; 1,246,562; 9,897,800 and 1,238,164 shares of common
stock in 1999, 1998, 1997 and 1996, 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Assets........................................... 93,836.3 77,174.7 71,713.4 63,257.7 48,864.8
Long-term debt................................... 712.2 511.0 626.3 659.3 474.2
Minority interest-preferred securities of
subsidiary companies............................ 745.0 315.0 315.0 -- --
Shareholders' equity............................. 5,387.9 4,982.9 4,470.0 4,378.1 3,042.1
Per Share Data: (2)
Shareholders' equity (Securities at market)...... $53.18 $49.27 $43.00 $41.89 $29.35
Shareholders' equity (Securities at cost)........ 47.73 44.96 39.03 35.21 32.35
Market value of common stock..................... 81.81 78.13 52.50 53.75 35.00respectively. |
(1) Factors affecting the comparability of net income from continuing operations
and net income from continuing operations for the 1994- 1998 period are
shown on page 8 (see "Supplemental Data"). Other factors affecting
comparability are shown within the review of operations for each segment
(see pages 9-18).
(2) Per share amounts were also affected by the issuance of 9,200,000 and
1,398,112 shares of common stock in 1993 and 1997, respectively, and the
retirement of 500,000; 694,582; 4,948,900 and 623,281 shares of common stock
in 1994, 1996; 1997 and 1998 respectively.
8
Supplemental Data
The following table presents a reconciliation of "Income (Loss) from Continuing Operations" to "Net Income (Loss) from Continuing Operations" determined in accordance with generally accepted accounting principles. Income (Loss) from Continuing Operations is
LNC's alternative measure of operating performance which excludes the after-tax realized gain (loss) on investments and associated items, gain (loss) on sale of subsidiaries and restructuring charges.
Year Ended December 31 (in millions) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations (1) $475.5 $530.4 $(50.7) $298.8 $140.9
Realized gain (loss) on
investments, net of
associated amortization of
deferred policy acquisition
costs, provision for
policyholder commitments,
investment expenses and
income taxes 3.8 13.7 72.9 57.6 102.2
Gain (loss) on sale of
subsidiary, net of income
taxes -- -- -- -- 58.3
Restructuring charges, net of
income taxes (18.9) (34.3) -- -- --
----------- --------- --------- --------- ---------
Net Income from Continuing
Operations $460.4 $509.8 $22.2 $356.4 $301.4
Year Ended December 31 (in millions) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
| (1) | Income (loss) from continuing
operations (1)......... $530.4 $(50.7) $298.8 $140.9 $218.6
Realized gain (loss) on investments, netfor 1999 includes changes in estimates of associated amortizationreserves for 1) Lincoln
UK' s pension business of deferred policy
acquisition costs, investment expenses$126.1 million, after-tax and income taxes.................................... 13.7 72.9 57.6 102.2 (101.9)
Gain (loss) on sale2) Reinsurance's
HMO excess-of-loss reinsurance programs of subsidiary, net$25.0 million, after-tax and
workers' compensation carve-out business underwritten by Unicover Managers,
Inc. of taxes...... -- -- -- 58.3 48.8
Restructuring charges................................ (34.3) -- -- -- --
------- -------- -------- --------- --------
Net Income from Continuing Operations............. $509.8 $ 22.2 $356.4 $301.4 $165.5
|
(1) Income (loss) from continuing operations for 1997$40.4 million, after-tax; and 1995 includes a tax benefit of $42.1 million
relating to the decision to explore exiting the UK insurance market. Also,
1997 and 1995 include the impact of the changes in estimate of the reserve level needed for LNC's
disability income business ($130.0 million and $121.6 million, after-tax,
respectively). Also 1997 includes a change in estimate of the reserve
level needed for LNC's disability income business ($130.0 million and $121.6
million, after-tax, respectively). Finally, 1997 includes changes in estimates
for reserves for 1) Lincoln UK's pension business of $174.9 million, after-tax
and 2) Reinsurance's personal accident programs of $113.7 million, after-tax.
Item 7. Management's Discussion and Analysis
of Results of Operations and
Financial Condition
Forward Looking Statements -- Cautionary Language
The pages tothat follow review LNC's results of operations and financial condition.condition including liquidity and cash flows, and capital resources. Historical financial information is presented and analyzed. Where appropriate, factors that may affect future
financial performance are identified and discussed. ActualCertain statements made in this report are "forward-looking statements" within the meaning of the Securities Litigation Reform Act of 1995 (the "Act"). Forward-looking statements include, without
limitation, any statement that may predict, forecast, indicate or imply future results, couldperformance or achievements, and may contain words like: "believe", "anticipate", "expect", "estimate", "project", "will", "shall" and other words or phrases with
similar meaning. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from those indicated inthe forward-looking statements due to,statements. These risks and uncertainties include, among other specific changes currently not
known,others: subsequent significant changes in:in the
company (e.g., acquisitions and divestitures), financial markets (e.g., interest rates and securities markets), legislation (e.g., taxes and product taxation), generally accepted accounting principles, regulations (e.g., insurance and securities
regulations), debt and claims paying ratings issued by nationally recognized statistical rating organizations or A.M. Best Company, Inc., acts of God (e.g., hurricanes, earthquakes and storms), stability of foreign governments in countries that LNC does
business, other insurance risks (e.g., policyholder mortality and morbidity) and competition.
The risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely impact LNC's business and financial performance. Moreover, LNC operates in a rapidly changing and competitive environment. New
risk factors emerge from time to time and it is not possible for management to predict all such risk factors. Further, it is not possible to assess the impact of all risk factors on LNC's business or the extent to which any factor or combination of
factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undo reliance on forward-looking statements as a prediction of actual results.
In addition, LNC disclaims any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report.
On pages 9 through 18,23, the financial results of operations of LNC consolidated, LNC's four business segments and other operations are presented and discussed. Within these business segment
discussions of the results of operations, reference is made to "Income from Operations". This
alternative measure of earnings is defined as "Net income less realized gain (loss) on sale of investments, gain (loss) on sale of subsidiaries and restructuring charges, all net of taxes." Page 19 discusses factors affectingPages 24 through 26 discuss LNC's consolidated investment performance.investments. Pages
2026 through 3428 discuss factors that have affected
specific elements of theLNC's consolidated financial statements as well as
information pertaining to LNC as a whole.condition including liquidity and cash flows, and capital resources.
This "Management's Discussion and Analysis of Results of Operations and
Financial Condition"Analysis" should be read in conjunction with the audited consolidated financial statements and accompanying notes presented on pages 3638 through 67.
9
Review of76.
OVERVIEW: RESULTS OF CONSOLIDATED OPERATIONS
Summary Information
Increase
(Decrease)
Year Ended December 31 (in millions) 1999 1998 1997 1999 1998
- ------------------------------------------------------------------------------------------------------
Continuing Operations:
Life insurance and annuity
premiums $ 1,183.0 $985.6 $756.2 20% 30%
Health premiums 698.5 635.1 572.5 10% 11%
Insurance fees 1,537.6 1,274.6 832.2 21% 53%
Investment advisory fees 223.8 227.1 204.9 (1%) 11%
Net investment income 2,807.5 2,681.4 2,250.8 5% 19%
Equity in earnings of
unconsolidated affiliates 5.8 3.3 2.1
Realized gain on investments 3.0 19.0 122.6
Other revenue and Annuities
Year Ended December 31 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Financial Results by Source (in millions)
Annuities......................................... $257.6 $203.0 $165.0 $149.3 $120.0
Insurance......................................... 147.0 36.1 36.4 31.1 34.2
Pensions.......................................... 10.4 6.3 2.9 22.1 22.4
Disability Income (1)............................. -- -- -- (18.3) (14.9)
Other............................................. (10.4) 10.4 8.2 8.5 (5.5)
----- ---- ---- ----- -----
Income from Operations......................... 404.6 255.8 212.5 192.7 156.2
Realized Gain (Loss) on Investments............... 2.9 47.5 38.5 81.3 (93.4)
Restructuring charge.............................. (20.0) -- --- -- --
----- ------ ------ ------ -------
Net Income..................................... $387.5 $303.3 $251.0 $274.0 $ 62.8
Sales - Face Amount (in billions)
Term Insurance.................................... $27.6 $16.2 $13.3 $2.2 $ .3
Universal Life and Other.......................... 9.0 2.2 2.9 2.8 3.2
December 31 (in billions) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Account Values
Annuities........................................ $51.5 $44.6 $38.0 $30.3 $24.6
Reinsurance Ceded - Annuities..................... (1.6) (1.8) (1.8) (1.7) (1.5)
Universal and Variable Life Insurance............. 7.4 3.0 2.9 2.6 2.4
Interest Sensitive Whole Life..................... 1.8 -- -- -- --
401(k) Retirement Plans........................... 3.7 3.4 2.9 2.4 1.9
Other Pensions.................................... 3.6 4.5 4.9 5.6 5.5
----- --- ---- ---- ----
Total Account Values........................... $66.4 $53.7 $46.9 $39.2 $32.9
In Force - Face Amount
Universal Life and Others......................... $107.6 $32.8 $32.9 $32.2 $32.1
Term Insurance.................................... 54.3 30.3 16.3 3.8 1.9
(1) Lincoln stopped writing disabilityfees 344.5 261.0 157.2 32% 66%
Life insurance and annuity
benefits 3,145.3 2,762.0 2,358.7 14% 17%
Health benefits 659.7 566.9 833.1 16% (32%)
Underwriting, acquisition,
insurance and other expenses 2,295.0 1,943.7 1,579.3 18% 23%
Interest and debt expenses 133.7 117.1 92.5 14% 27%
Federal income coveragestaxes 109.6 187.6 12.7
----------- --------- ---------
Net Income from Continuing
Operations 460.4 509.8 22.2
Discontinued Operations:
Income prior to disposal -- -- 134.9
Gain on a direct basis at the
end of March 1996. The administration of this business was moveddisposal -- -- 776.9
----------- --------- ---------
Net Income $460.4 $509.8 $934.0
Discontinued Operations
In 1997, lines were added to the Reinsurance segment atincome statement to accommodate the end of September 1995.
The Life Insuranceoperating activity and Annuities segment reported record income from operations
of $404.6 milliongain on sale associated with LNC's decision to sell its 83.3% ownership in 1998, a 58% increase over the $255.8 million reported in
1997. Continuing double-digit growth in the annuity business, plus the added
earnings from the blocks of business acquired from CIGNA and Aetna during 1998American States Financial Corporation (see noteNote 11 to the consolidated financial
statementsstatements).
Summary
Net income for 1999 was $460.4 million compared with $509.8 million in 1998. Excluding after-tax realized gain on investments, restructuring charges, 1999 special additions to HMO excess-of-loss and UK pension product reserves, a charge for estimated
settlement costs for participation in workers' compensation carve-out business and a 1999 tax benefit related to the decision to explore exiting the UK insurance market, LNC earned $624.9 million for 1999 compared to $530.4 million in 1998. This increase
was the result of increased earnings in the Life Insurance and Annuities, Reinsurance and Investment Management segments. Net income for 1998 was $509.8 million compared with $934.0 million in 1997. Excluding after-tax realized gain on investments, gain
on sale of subsidiaries, restructuring charges, discontinued operations and the 1997 special additions to the disability income, personal accident programs and UK pension product reserves, LNC earned $530.4 million for 1998 compared to $368.0 million in
1997. This increase was the result of increased earnings from each of the business segments. In the fourth quarter of 1997, Other Operations benefited from earnings on proceeds from discontinued operations. This benefit did not continue into 1998 as most
of these funds were used to purchase a block of individual life and annuity business on January 2, 1998 (see Note 11 to the consolidated financial statements). For further discussion of the results of operations, see the discussion of the results of
operations by segment starting on page 66)10.
Restructuring Charges
During 1998, LNC implemented a restructuring plan relating to the integration of existing life and annuity operations with the new business operations acquired from CIGNA Corporation ("CIGNA"). A second restructuring plan relating to the streamlining of
LNC's corporate center operations was also implemented during 1998. The aggregate charges associated with these two unrelated restructuring plans totaled $34.3 million after-tax ($52.8 million pre-tax). The restructuring plan relating to the integration
of existing life and annuity operations with the new business operations acquired from CIGNA is expected to be completed in early 2000 and the restructuring plan relating to the streamlining of LNC's corporate center is expected to be completed by the end
of 2000 except for rents on abandoned facilities which are expected to be completed by the end of 2004. Actual pre-tax costs totaling $50.0 million have been expended or written off for both plans through December 31, 1999. The remaining aggregate reserve
balance of $4.7 million for the restructuring plan relating to LNC's corporate center is anticipated to be utilized in the completion of this restructuring plan. (See Note 12 to the consolidated financial statements for details regarding both of these
restructuring plans.)
During 1999, LNC implemented restructuring plans relating to 1) the downsizing and consolidation of the operations of Lynch & Mayer, Inc., were2) the primary factorsdiscontinuance of HMO excess-of-loss reinsurance programs and 3) the streamlining of Lincoln UK's
operations. The aggregate charges associated with these three unrelated restructuring plans totaled $21.8 million after-tax ($31.8 million pre-tax). The component elements of these aggregate pre-tax costs include $8.3 million for employee severance and
termination benefits, write-off of impaired assets of $9.8 million, and other costs of $13.7 million. During the fourth quarter of 1999, $3.0 million (pre-tax) of the original charge recorded for the Lynch & Mayer, Inc. restructuring plan was reversed
due primarily to a change in this segment's earnings performance.
estimate for space cost. In addition, during the fourth quarter of 1999, $1.5 million (pre-tax) associated with lease terminations was released into income. Details of each of these three restructuring plans are discussed in
the results of operations for the Investment Management, Reinsurance and Lincoln UK segments, respectively, and in Note 12 to the consolidated financial statements.
Trends in the United Kingdom
As a result of trends in the UK for pension and life insurance businesses, management has engaged outside advisors to explore the exit of the UK insurance market. This process will include a review of a range of strategic options including the potential
sale of the Lincoln UK insurance business.
National Branding Campaign
Through targeted advertising and special sponsorships, Lincoln Financial Group ("LFG"), the marketing name for LNC, continued building its brand on a national basis using print, cable and interactive media. In addition, LNC continued its branding campaign
in the UK to develop brand awareness in the UK.
As part of its branding strategy, LNC created a new web site, www.lfg.com, with consumer-friendly features that set it apart from its competitors. The age-based planning tool and easy-to-understand terms and concepts help to demystify the process
of financial planning and empower consumers to take the steps necessary to achieve financial success.
Reorganization of Reporting Segments
In December 1999, management initiated a plan to change the structure of LNC's internal organization in a manner that, beginning in 2000, will cause the composition of its reportable segments to change. During the first quarter of 2000, execution of the
planned changes will be finalized so that for the quarter ending March 31, 2000, decisions about resource allocation and performance assessment will be made separately for a Life Insurance Segment and an Annuities Segment. As of March 31, 2000, financial
reporting for the two separate segments will be presented and the corresponding information for earlier periods will be restated to reflect the new segment reporting structure.
RESULTS OF OPERATIONS BY SEGMENT
Life Insurance and Annuities
Profile: LNC's Life Insurance and Annuities segment is composed of Lincoln National Life Insurance Company ("Lincoln Life"), First Penn-Pacific Life Insurance Company ("First Penn"), Lincoln Life && Annuity Company of New York ("LLANY"Lincoln Life New
York") and, AnnuityNet, Inc., Lincoln Financial Advisors Corporation ("LFA") and Sagemark Consulting, Inc. ("Sagemark").
As shown above, account values
for this segment's annuities, life insurance, 401(k) retirement plans and other
pensions totaled $66.4 billion as of December 31, 1998. Life insurance in force
for these companies as of December 31,1998, totaled $161.9 billion, an increase
of 157% in comparison with $63.1 billion as of December 31, 1997.
Lincoln Life, which is based in Fort Wayne, Indiana, is the 13th7th largest life insurer in the United States when measured by assets (Best's(Best's Review, Life/Health Edition, July 1998)1999). First Penn, which is headquartered in Oakbrook Terrace, Illinois,
is recognized for product innovations. One unique product is
MoneyGuard (Registered Trade Mark), a policy that links the benefits of
universalmarkets life and long-term care insurance in one. LLANY,annuity products through broker/dealers and banks. Lincoln Life New York, which is based in Syracuse, New York, provides group tax-qualified annuities and other insurance products in the state of New York. LFA and Sagemark, which are
based in Hartford, Connecticut provide financial and estate planning services.
Lincoln Life, First Penn and LLANYLincoln Life New York earned charter memberships in the Insurance Marketplace Standards Association ("IMSA"), an independent, voluntary organization created by the American Council of Life Insurance. IMSA membership
demonstrates a company's commitment to honesty, fairness and integrity in all customer contacts involving sales and service of individual life and annuity products.
10
National Branding Campaign: As partResults of our strategyOperations (1): The Life Insurance and Annuities segment's financial results, sales, first year premiums, account values and in-force were as follows:
Year Ended December 31 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Financial Results by Source (in millions)
Annuities $312.3 $257.6 $203.0 $165.0 $149.3
Insurance 230.3 147.0 36.1 36.4 31.2
Disability Income (2) -- -- -- -- (18.3)
Other (42.2) 0.6 23.4 20.4 34.5
----------- --------- --------- --------- ---------
Income from Operations 500.4 405.2 262.5 221.8 196.7
Realized Gain on Investments 4.0 2.6 44.0 37.4 78.8
Restructuring Charge -- (20.0) -- -- --
----------- --------- --------- --------- ---------
Net Income $504.4 $387.8 $306.5 $259.2 $275.5
Sales -- Face Amount (in billions)
Term Insurance $24.5 $27.6 $16.2 $13.3 $2.2
Universal Life and Other 12.2 9.0 2.2 2.9 2.8
First Year Premiums (in millions) $569.7 $406.3 $205.3 $216.3 $166.5
December 31 (in billions) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Annuity and Insurance Account Values
Annuities $59.7 $51.5 $44.6 $38.0 $30.3
Reinsurance Ceded -- Annuities (1.4) (1.6) (1.8) (1.8) (1.7)
Universal and Variable Life Insurance 8.4 7.4 3.0 2.9 2.6
Interest-Sensitive Whole Life 2.0 1.8 -- -- --
----------- --------- --------- --------- ---------
Total Account Values $68.7 $59.1 $45.8 $39.1 $31.2
In Force -- Face Amount
Universal Life and Other $109.9 $105.8 $32.8 $32.9 $32.2
Term Insurance 85.7 67.1 30.3 16.3 3.8
| (1) | The 1995-1998 data was
restated from the prior year as follows: a) the 401(k) portion of a subsegment
(Pensions) previously included in this segment was moved under the direction
of the Investment Management segment and b) the remaining portion of this
subsegment (Pensions) which is business that is in run-off has been moved
to other operations. |
| (2) | Lincoln stopped writing
disability income coverages on a direct basis at the end of March 1996.
The administration of this business was moved to the Reinsurance segment
at the end of September 1995. |
The Life Insurance and Annuities segment reported net income of $504.4 million in 1999, $387.8 million in 1998 and $306.5 million in 1997. The Life Insurance and Annuities segment reported record income from operations of $500.4 million in 1999, $405.2
million in 1998 and $262.5 million in 1997.
The 23% increase in income from operations in 1999 was due to gain name recognition on
a national level, we kicked off an aggressive branding campaign where we
introduced our new marketing name, Lincoln Financial Group. Print ads
emphasizing our ability to provide "clear and understandable solutionscontinued double-digit growth in a
complex world," appeared in high profile business and lifestyle publications.
Also, part of our strategic targeting was our participation with other
nationally branded companies in an ESPN cable "Sports Century" sponsorship, an
18-month long special series of programs commemorating highlights in sports
duringearnings from both the past century.
Acquisitions/Divestitures: LNC completed the acquisition of a block of
individual life insurance business (57%) and annuities business (21%). The 54% increase in income from operations in 1998 was due to growth in
earnings from both the life insurance business (307%) and annuities business (27%).
Life Insurance: Life insurance results for 1999 were driven by increased premiums from universal life and variable life products, and increased investment margins and insurance fee income attributable to increased account values. The increased
sales volume (premiums and deposits) was a result of expanded distribution channels along with new product introductions. Distribution capacity was bolstered by the business acquired from CIGNA and Aetna, Inc. on January 2, 1998 from CIGNA
Corporation, adding a career agency system of 600 producers; aand October 1, 1998,
respectively.
Life insurance first year premiums increased by $163.4 million or 40% over 1998 and deposits in the universal life, brokerage
operation; an annuity distribution system;variable life and $37 billion of individualinterest-sensitive life insurance products were $1.7 billion in force.1999, a 42% increase over the 1998 deposits of $1.2
billion. Investment margins and insurance fee income increase proportionately with the increase in account values for universal life, variable life and interest-sensitive life products. Account values for these insurance products increased $1.2 billion or
13% over 1998 due to net deposits of $247 million and investment growth.
Life insurance results for 1998 were driven by increased sales volume of universal life and variable life insurance products which drove higher investment margins and fee income attributable to increased account values of universal life, variable life and
interest-sensitive life insurance contracts. The increase in sales volume, investment margins and fee income was primarily due to the acquisitions noted above. These acquisitions enabled LNC to improve scale significantly from 1997 (see Note 11 to the
consolidated financial statements for further discussion of the acquisitions). Life insurance first year premiums increased $201 million or 98% from 1997 and deposits in universal life, variable life and interest-sensitive life insurance contracts
increased $824 million or 215% from 1997. It should be noted that interest-sensitive life insurance products were acquired as part of the CIGNA acquisition in 1998 and accounted for $340 million of another blockthe increase in deposits noted above.
Annuities: Annuities' results for 1999 and 1998 were primarily driven by growth in separate account fee income from variable annuities, along with improved investment spreads on fixed annuity accounts. Separate account fee income generated from
variable annuities consists of mortality and expense assessments. Separate account fee income increases proportionately with the growth in the underlying market value of separate account assets. The growth in market value of separate account assets
results from variable annuity cash flows (deposits net of withdrawals), market appreciation and investment income associated with the underlying separate account assets. In 1999, the growth in the market value of separate account assets was due primarily
to stock market appreciation partially offset by net withdrawals. In 1998, the growth in market value was due primarily to stock market appreciation bolstered by modest net deposits.
In reviewing the results of fixed annuities, investment spread is a key performance measure. LNC defines investment spread as the difference between the average net investment income earned on the underlying investment portfolio and the average crediting
rates paid on the fixed annuity accounts. Net investment income includes investment management expenses, default costs and portfolio risk management expenses. The investment spreads on fixed annuities were 1.62%, 1.54% and 1.31% in 1999, 1998 and 1997,
respectively, an increase of eight basis points and 23 basis points from 1998 and 1997, respectively.
Key to sustaining profitable future earnings growth for both fixed and variable annuity products is the ability to attract new deposits and to retain existing accounts. For 1999, total annuity deposits were $4.7 billion and withdrawals were $5.9
billion, resulting in a net cash outflow of $1.2 billion. In 1998, annuity deposits totaled $3.9 billion and withdrawals were $5.1 billion, for a net cash outflow of $1.2 billion. In 1997, deposits and withdrawals were both about $4 billion, resulting in
a net cash inflow of $0.1 billion. The 21% growth rate in 1999 annuity deposits reflects LNC's strong mix of product and distribution networks; this bodes well for future profitability.
In looking at the trend of annuity withdrawals, it is important to look beyond the mere total dollar amount of withdrawals and assess how total withdrawals compare to total retained account values. These measures of account persistency are referred to as
lapse rates, which are key elements to assessing underlying profitability. By comparing actual lapse rates to the rates assumed by LNC's pricing actuaries in designing the annuity product, it is possible to gauge whether performance is better or worse
than expected. In the aggregate, the lapse rates for 1999, 1998 and 1997 have been more favorable than expected in pricing assumptions. This has been a contributing factor in the strong earnings growth for these years.
Another important aspect of analyzing the impact of net cash flows is to review the underlying number of new accounts compared to the number of accounts leaving. Because a typical account leaving LNC has grown over time, due to the strong performance of
the financial markets, the trend in the number of annuity accounts cannot be measured by just looking at net cash flows. Here again, LNC's experience has been favorable, with the number of new annuity accounts established in 1999 significantly exceeding
the number of accounts exiting.
Despite the fact that persistency has been favorable relative to product pricing and the total number of accounts is increasing, LNC is concerned with the growing levels of withdrawals. LNC was an early entrant into the variable annuity business and has a
seasoned book of business. Consequently, LNC has many annuity accounts that are out of the surrender charge period, which is the period during which a policyholder must pay a surrender charge to terminate the account. These seasoned accounts are
potentially more vulnerable to competitors that may offer customers products with financial incentives designed to increase market share.
LNC is addressing this matter on a number of fronts. To help retain existing business, LNC is providing broker/dealer compliance officers and individual brokers with enhanced persistency data for their accounts to help ensure that only suitable
replacement activity occurs. LNC is also working with these firms to develop solutions to reduce the volume of replacements occurring and to identify opportunities where assets may be retained within an alternative Lincoln product.
From a product design perspective, LNC continues to develop incentive programs that promote annuity persistency, particularly on business beyond the surrender charge period, both at the individual producer and sales management levels. Changes in
producers' compensation structures that are aligned with persistency goals are important to effectively manage these issues. In addition, LNC is evaluating a variety of policyholder incentives that are designed to attract new deposits. Other design
enhancements to existing products are constantly being made, many of which also improve persistency. LNC has also developed new, more competitive products for use in the large case employer market. Overall, these efforts represent a balanced approach to
responding to competitive pressures, while maintaining appropriate profitability levels and ensuring that the product serves the long-term needs of LNC's annuity account holders.
Other: Other had an increase in loss from operations of $42.8 million in 1999 and a decrease in income from operations of $22.8 million in 1998. The results for 1999 and 1998 were due primarily to increased expenses for Y2K, branding and other
general administrative expenses that were not allocated to the life insurance business on October 1, 1998, from Aetna, Inc. added 30 life brokerage
managers, 30 managing general agent relationships, a corporate-owned life
insurance sales force, access to more than 30,000 independent agents and a total
of $42 billion of individual life insurance in force. A block of
employer-sponsored life insurance business acquired in connection with the Aetna
businesses was sold to Protective Life Corp. In addition, an agreement was
reached with Allstate Life under which they would reinsure and administer a
variable annuity portfolio acquired in connection with the CIGNAor annuities business.
In order to eliminate redundancies and capitalize on newly acquired competencies
and existing efficiencies, Hartford, Connecticut, became the platform for
operating the segment's life insurance business, while the annuities operation
remained in Fort Wayne, Indiana.
Varied Distribution: Products from the companies in this segment are sold through multiple distribution channels, reflecting a marketplace where consumers increasingly want to do business on their own terms. These distribution channels areinclude
career agents, independent agencies, insurance brokers, banks, stockbrokers, financial planners and the Internet.
Lincoln Life's and LLANY'sLincoln Life New York's wealth accumulation and wealth protection products include:include fixed variable and tax-deferred annuities; term, whole life, universal and variable annuities; universal, variable universal, term and whole life insurance; and employer sponsoredemployer-sponsored retirement plans. These products are
sold in 50 states through the 58 regional offices of LFA aand Sagemark, securities broker/dealer that serves approximately 2,050dealers, and the life brokerage system. Combined, these distribution networks include more than 2,100 career agents, 34,50035,000 life insurance brokers and 4,5007,600 bank
agents as well as through 75,00060,000 stockbrokers and financial planners. Annuity products are also sold through American Funds Distributors ("AFD") and Delaware Distributors, L.P.
LFA includesand Sagemark have a network of regional financial planning offices that serve as the preferred distributor of Lincoln Life products. LFA offersand Sagemark offer a full range of financial planning services and investments and each is a securities
broker/dealer and registered investment advisor.
Lincoln Life
As part of LFA's commitment to capitalize on opportunities in the employer-sponsored market, the Fringe Benefit Division was formed in 1999. This group consists of 240 financial planners from the LFA career system and provides a strategic alliance with BDO Seidman, LLP, onespecialized marketing
focus at a lower distribution cost -- two critical success factors in this evolving market.
The life brokerage system, a network of the top
10 accountinglife insurance wholesalers, has access to targeted distribution channels through managing general agents; national broker/dealers; and consulting firms serving the dynamic entrepreneurial business
market. Through this alliance, LFAindependent financial planners, will offer estate planning, business
continuity planning, investment management servicesbrokers and financial planningdealers. The life brokerage system
currently has access to
BDO Seidman's client base at more than 40 offices36,000 life insurance brokers across the country. In 1999, this distribution channel generated $200 million of first year premiums which was three times the amount generated in 1998.
First Penn offers linked benefit, universal and term life insurance and fixed
annuities through stockbrokers, financial planners, banks, independent agents and LFA. Life products are available for individual and worksitework-site markets. First Penn designs, managersmanages distribution and
administers fixed annuities sold through banks for Lincoln Life.
Product Development
Life Insurance: Ranking 9th in new annualized premiums (Life Insurance Marketing Resource Association, U.S. Individual Life Insurance Sales, Fourth Quarter 1999), Lincoln Life continued to successfully build its life insurance platform,
leveraging its expertise in serving the super-affluent market. Combined universal life, variable life and interest-sensitive whole life insurance account values were $10.4 billion at December 31, 1999. As noted above, first year premiums, a key indicator
of growth, increased 40% for the year to $570 million.
Lincoln Life introduced two new variable universal life products in 1999. The first, Lincoln Variable Universal Life ("LVUL"), targets the younger, middle-aged, emerging affluent customer whose goal is wealth accumulation. This product offers 30 funds
from 12 well-known fund managers and an interest bearing account. The Lincoln VUL db was the second product launched and was designed for older individuals seeking low premiums and a high death benefit. As a result of these new product innovations,
Lincoln Life experienced rapid sales momentum for variable life products in the latter part of 1999 (50% of variable life sales occurred in the fourth quarter of 1999).
Annuities: Lincoln Life is a leading writer of annuities in the United States, (National Underwriter, August 1998)ranking 9th in individual variable annuity sales (VARDS Industry Sales and Asset Survey, 1999). Annuity earningsAs noted previously, total annuity deposits in this segment increased
27%1999 were $4.7
billion.
The initiatives undertaken in 1998 reachingrelated to marketing the American Legacy product line paid off in 1999. Deposits for the American Legacy variable annuity products reached a record $257.6 million. Ashigh of December 31, 1998, annuity
account values were $51.5 billion, up from $44.6 billion the year before.
Variable annuity account values at year-end were $33.4 billion, while fixed
annuities represented $18.1 billion.
Annuity deposits in 1998 were $3.9 billion. Annuity deposits sold through
producers were $2.0 billion while annuity deposits sold through stockbrokers
were $1.4 billion.
11in 1999. The growth was primarily due to product
enhancements and Lincoln is workingLife's strong partnership with American Funds Distributors ("AFD") on a number of
initiatives aimed at further strengthening sales.AFD, the nation's third largest mutual fund company. The American Legacy variable
annuity products are marketed to stockbrokers by AFD and to banksAFD. Plans for 2000 include the introduction of a new American Legacy
variable annuity product in New York through Lincoln Financial Institutions Group, a strategic business unit of First Penn.
As a result of restructuring its wholesaler network, AFD has broadened its
distribution capabilities and its wholesalers now market both mutual funds and
annuities. Today,Life New York.
Lincoln Life also introduced the American Legacy Shareholder's Advantage, a new "A" share product, on a limited basis in 1999. Shareholder's Advantage was specifically designed for the long-term investor who is concentrating on retirement savings. The
product has one of the potentiallowest annual expenses of being
marketed by three times as many wholesalers as in the past. Lincoln also is
supporting the wholesaler network by providing its own American Legacy sales
support team to assist in sales promotion and stockbroker training programs.
Product improvements, including the expansion of fund offerings, are being made
to American Legacy.
In response to the increased demand for multi-manager products, Lincoln
introduced the Delaware Lincoln ChoicePlus (Service Mark)any variable annuity currently sold by financial professionals.
The Delaware-Lincoln ChoicePlusSM variable annuity product was introduced in the fourth quarter of 1998. This1998 and generated sales of more than $500 million in its first year on the market. Plans for 2000 include the addition of new funds offered by
the product contains 30 variable investment
options in addition to a number of fixed account options. Delaware Distributors
LP wholesalesand introducing the Delaware Lincoln ChoicePlus variable annuity.
During 1998, Lincoln also introduced two new multi-manager products in the
employer-sponsored market. Lincoln Alliance gives an employer more choices by
offering a solid, fixed annuity foundation, combined with a vast array of mutual
funds. In addition, the Lincoln/Delaware Advantage product offers the investment
stability of a Lincoln Life fixed annuity and the investment performance and
diversity available through the Delaware family of funds. The product is
targeted at the mid- to large-size employer in the health care industry.
Finally, eAnnuity (Trade Mark), the first variable annuity targeted to the
self-directed investor and sold completely online, was also launched.
Life Insurance: In 1998, Lincoln began building a life insurance platform that
allowed the company to quickly achieve scale, deliver higher growth and better
financial performance, as well as leverage its expertise in serving the super
affluent market. Operating income from life insurance was $147.0 million as of
December 31, 1998, four times higher than 1997, as a result of the businesses
acquired from CIGNA and Aetna. Combined universal life, whole life, variable
life and interest sensitive whole life insurance account values tripled in 1998
to $9.2 billion. Individual life insurance sales, as measured by face amount of
in force, nearly doubled for the year to $36.6 billion.
All CIGNA products were duplicated within Lincoln Life within four months after
the transaction closed. In addition, Lincoln introduced three new universal life
products, two of which provide second-to-die coverage, for estate protection.
One also offers the opportunity for equity returns on account values. All three
offer lifetime death benefit guarantees, including a Survivor Variable Universal
Life I and a Survivor Universal Life II product in 1998.
Pensions: This segment's pension business is focused on 401(k) retirement plans
for businesses with fewer than 200 employees. Account values for these plans
were $3.7 billion as of December 31, 1998, a 9% increase over 1997. To better
service the retirement services market and to achieve economies of scale,
Lincoln Life's 401(k) retirement plans were combined with the Investment
Management segment's defined contributions effective January 1999.
New York.
Outlook: The Life Insurance and Annuities segment has laid the foundation for increased sales in the future. With the kickoff of an aggressive national
branding campaign, were moving forwardfuture growth. New product introductions, enhancements to build national brand recognition. In
addition,existing products, a well-balanced distribution system coupled with product
improvements, new product introductions and strategic partnerships will helpare all critical factors in
strengthening our market presenceLNC's goal to place its life insurance and will be the driving forces in placing our
annuities and life insurance operations among the top five.
12
Reviewfive in the industry. Barring a major drop in the overall stock market, LNC expects the Life Insurance and Annuities segment to generate revenues in future years in excess of
Operations: Lincolnrevenues produced for the year ended December 31, 1999.
LINCOLN UK (1)
Year Ended December 31 (in millions) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
Financial Results
Income (Loss) from Operations (1)..................... $70.9 $(108.3) $66.1 $45.9 $17.2
Realized Gain (Loss) on Investments................... .8 1.5 (.1) (.2) 1.3
----- ------ ----- ----- -----
Net Income (Loss) (1)............................. $71.7 $(106.8) $66.0 $45.7 $18.5
Net Initial Commission Value (2)....................... $54.9 $55.4 $47.2 $39.4 $32.1
December 31 (in billions) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
Unit-Linked Assets..................................... $6.265 $5.643 $5.074 $4.307 $1.320
Individual Life Insurance
In Force - Face Amount................................ $25.002 $25.026 $23.835 $23.509 $9.412
Exchange Rate Ratio - U.S. Dollars to Pounds Sterling
Average for the Year................................... 1.658 1.644 1.567 1.582 1.536
End of Year............................................ 1.660 1.651 1.713 1.553 1.565
(1) Income (loss) from operations and net income (loss) for 1997 include a
charge of $174.9 million ($199.4 million pre-tax) for a change in estimate
of the cost of settling pension mis-selling liabilities (see note 2 to the
consolidated financial statements on page 45).
(2) Net Initial Commissions is a measure used by Lincoln UK to measure sales
progress and future profitability.
LNC's Lincoln UK segment, conducted through Lincoln National (UK) plc and its
operating subsidiaries reported record income from operations of $70.9 million
in 1998 compared with $66.6 million in 1997, excluding a special charge noted
above.
Profile: Lincoln UK offers life, investment, protection and retirement planning products primarily through 1,6301,450 direct sales representatives and tied agents. Lincoln UK sells predominantly unit-linked products where the investment risk is borne by
the policyholder. These products are similar to the variable life products sold in the United States. Home office operations are divided between Uxbridge, Middlesex and Barnwood, Gloucester, England.
Product Development:
Results of Operations: Lincoln UK's financial results, net initial commission value, account values, in-force and exchange rates were as follows:
Year Ended December 31 (in millions) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Financial Results
Income (Loss) from Operations (1) $(13.9) $70.9 $(108.3) $66.1 $45.9
Realized Gain (Loss) on Investments 2.2 0.8 1.5 (0.1) (0.2)
Restructuring Charge (6.5) -- -- -- --
----------- --------- --------- --------- ---------
Net Income (Loss) (1) $(18.2) $71.7 $(106.8) $66.0 $45.7
Net Initial Commission Value (2) $51.4 $54.9 $55.4 $47.2 $39.4
December 31 (in billions) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Unit-Linked Assets $7.2 $6.3 $5.6 $5.1 $4.3
Individual Life Insurance In-Force $25.7 $25.0 $25.0 $23.8 $23.5
Exchange Rate Ratio -- U.S. Dollars to Pounds Sterling
Average for the Year 1.617 1.658 1.644 1.567 1.582
End of Year 1.615 1.660 1.651 1.713 1.553
| (1) | Income (loss) from operations
and net income (loss) for 1999 and 1997 include charges of $126.1 million
($194.0 million pre-tax) and $174.9 million ($199.4 million pre-tax) for
changes in estimate of the cost of settling pension mis-selling liabilities
and 1999 includes a tax benefit of $42.1 million relating to the decision
to explore exiting the UK insurance market (see below for discussion of
these special items in 1999). |
| (2) | Net Initial Commission
Value is a measure used by Lincoln UK to measure sales progress and future
profitability. |
The Lincoln UK relaunched Financial Foundations, its flagshipsegment reported net income (loss) of $(18.2) million in 1999, $71.7 million in 1998 and $(106.8) million in 1997. Income (loss) from operations was $(13.9) million in 1999, $70.9 million in 1998 and $(108.3) million in 1997. Income from
operations excluding special charges in 1999 and 1997 for changes in estimate of the cost of settling pension mis-selling liabilities and the 1999 tax benefit relating to the decision to explore exiting the UK insurance market was $70.1 million in 1999,
$70.9 million in 1998 and $66.6 million in 1997.
The $0.8 million decrease in income from operations excluding above special items of $84.0 million ($126.1 million pension mis-selling costs less $42.1 million tax benefit) in 1999 was due primarily to relatively flat operating revenues and increased
expenses. Operating revenues increased $5.0 million or 1% in 1999 due primarily to an increase in revenues generated by the increase in unit-linked assets of $0.9 billion or 14% between years. This was partially offset by a decrease in life insurance and
annuity premiums on non-linked business caused by an industry-wide decrease in demand for pension products and product with improved features allowing itrepricing. The increase in the unit-linked assets was mainly due to market appreciation. The industry-wide decrease in demand for
pension products was due to the advent of the Stakeholder Pension to be much
more competitivelaunched in 2001. Benefits expense excluding the reserve strengthening noted above was flat between years. Underwriting, acquisition, insurance and other expenses increased by $23.1
million or 13% due primarily to the costs related to the strategic review process initiated in 1999 (see below for further discussion of this item).
The increase in 1998 income from operations of $179.2 million or 165% from 1997 was due primarily to the special charge of $174.9 million that was recorded in 1997 for reserve strengthening related to the UK pension product mis-selling. The remaining
increase resulted from higher sales volumes due to product enhancements.
United Kingdom Pension Product Mis-selling: During the fourth quarter of 1999, LNC took a charge of $126.1 million after-tax or $0.64 per share ($194.0 million pre-tax) to further strengthen its reserve for pension mis-selling in the marketplace. SinceUK. This
additional reserve strengthening was made following: 1) the mandate issued by the Financial Services Authority, the UK regulating body, for the use of more up to date mortality rates in determining redress and reduced interest rate assumptions to be used
in calculating redress, thereby causing the amount of redress to increase and 2) the change to guidance that would have allowed a simplified process for the calculation and payment of redress for certain policy groups and 3) the inclusion of redress
relating to additional voluntary contributions made to pension plans by individuals, retroactive to 1988.
Tax Benefit Relating to Decision to Explore Exit of UK Insurance Market: When LNC decided to explore exiting the UK insurance market, LNC was required to change its relaunchmethod of accounting for Lincoln UK's taxes. In the fourth quarter of 1999, LNC
recorded a $42.1 million tax benefit relating to this matter.
Product Development: Lincoln UK's product development initiatives focused on enhancing products to achieve the following objectives: 1) to offer the customer good value and provide products with a wider range of benefits; 2) to lower charges; 3) to
provide a broader range of products which would not necessarily be manufactured internally; and 4) to provide more helpful and informative marketing and sales literature to help customers choose. With the achievement of these objectives, Lincoln UK's
management expects to be in mid-1998, sales are
20% aheadthe first or top of the same period last year, and now represent over 25%second quartile, in terms of new
business. In response to aproduct offering, for life insurance companies in the UK.
During 1999, Lincoln UK government promotional program on individual
savings, plans also are under way to relaunch a wide range of medium- to
long-term savings products this year, including a new tax preferredlaunched its Individual Savings Account (ISA) product.
National Branding Campaign: During 1998, Lincoln UK took major steps to develop
its brand awareness("ISA"), a government promoted product which features tax benefits and low charges aimed at encouraging savings in the UK with two key initiatives -lower earning sector of the Company's first
ever integrated television and print advertising campaign, as well as
participation in top level sports sponsorship.
The advertising campaign was held during April and May in Scotland, using
creative concepts adapted from Lincoln's corporate campaign in the U.S.
Subsequent research indicated that awareness was raised throughout Scotland and
that the campaign had a positive effect on product sales.market. Lincoln UK also participatedrevamped its pension
product line in 1999 in response to the sponsorshipgovernment's planned introduction of the Rugby League Test Series
between Great Britain and New Zealand, two of the top three leadersStakeholder Pension in Rugby
League football in the world. The three matches were played during October and
November 1998 and received wide media coverage, on television and radio, and in
the national and local press.
The sponsorship was widely acclaimed by the public, sales advisors and members
of staff as one of the most positive name awareness promotions ever to have been
undertaken by Lincoln UK.
13
City Financial Partners Ltd ("CFPL"): Lincoln UK's largest tied agent, CFPL, was
acquired at the end of 1997 and is now a wholly-owned subsidiary. Its
integration into the organization was successfully completed in 1998, a year in
which CFPL agents produced 45% of Lincoln UK's new business.
Markets: Account values in the unit-linked asset business were $6.3 billion as
of December 31, 1998, an increase of 11% over the year before. Net initial
commission values were $54.9 million, slightly lower than the $55.4 million in
1997. Individual life insurance in force as of December 31, 1998, was $25.0
billion.
April 2001.
Exchange Rates: LNC's subsidiary in the United Kingdom,UK, as with subsidiaries in other foreign countries, has its balance sheet accountssheets and income statements translated at the current spot exchange rate as of the year end and average spot exchange ratesrate for the year,
respectively.
The average exchange rate
Strategic Review: Trends in the UK for 1998pension and life insurance businesses are changing rapidly, due in large part to government mandated product design changes that are expected to be imposed upon the industry within the next year or two. In
anticipation of these marketplace changes, a review of strategic alternatives for Lincoln UK was $1.658 per British pound
sterling. Thisinitiated in early 1999. From this review, it was 1% higher thandetermined that significant changes in Lincoln UK's operations are necessary to enable Lincoln UK to have
continued growth in the 1997 average exchange rateUK marketplace.
External consultants were engaged to assist in the process and significant internal resources were devoted to implementing this transformation program that encompassed Lincoln UK's markets and products, distribution, investment performance and cost
structure. In the fourth quarter of $1.644 per
British pound.
Pension Product Mis-selling: A1999, Lincoln UK implemented a restructuring plan and signed an investment management outsourcing agreement with Goldman Sachs Asset Management International ("GSAM").
In addition to embarking upon the transformation program to improve Lincoln UK's operational performance, the results of this strategic review and the unfavorable regulatory developments relating to pension product mis-selling matters led LNC to conclude
that a reassessment of the long-term strategic fit of this business segment was appropriate. Accordingly, LNC has engaged outside advisors to assist on a range of strategic options for Lincoln UK including a possible sale of the business.
Restructuring Charge: During the fourth quarter of 1999, LNC recorded a restructuring charge in its Lincoln UK segment of $174.9$6.5 million after-tax ($10.0 million pre-tax). The objective of this restructuring plan is to reduce operating costs by
consolidating and eliminating redundant staff functions and facilities. This charge was takenincluded in Underwriting, Acquisition, Insurance and Other Expenses on the Consolidated Statement of Income for the year ended December 31, 1999. The restructuring
plan identified the following activities and associated costs to achieve the objectives of the restructuring plan: (1) severance and termination benefits of $3.9 million related to the elimination of 119 positions and (2) other costs of $6.1 million
primarily related to the remaining lease payments on closed facilities. Expenditures and write-offs under the restructuring plan began in the fourth quarter of 19971999 and are expected to increase reserves for liabilities in the so-called
"pension mis-selling" situation in the United Kingdom. Regulatory agencies
raised questions as to whether individuals who bought pensions in the UK and
exited employer plans were given appropriate advice by insurance agents and
brokers. The regulatory agencies asked the insurance companies to review their
cases and to provide redress to those individuals harmedbe complete by the activitiessecond quarter of agents or brokers. As a result of what the government viewed as a slow response
by the insurance industry, regulators have set targets, publicly named companies
that it sees as tardy in their resolution of cases and taken disciplinary
actions.
Lincoln UK is committed to completing its review as quickly as possible so that
appropriate action can be taken. The regulatory agency deadline for Lincoln UK
to complete phase one of its review was December 31, 1998. The achievement of
this target was a critical milestone for the company. Lincoln has made offers of
redress, or provided reassurance that redress is not required to all its
priority policyholders. The segment has also obtained acceptance of offers or,
in accordance with the regulatory agency requirements, believe they can
demonstrate that every effort to obtain their acceptance has been made. Nearly
11,000 cases have been assessed by a dedicated team of 170 full-time staff at
four locations. The company is well positioned to deal with phase two of the
review, which began on January 4, 1999. This will entail the review of the
balance of policyholders who took out personal pensions between April 1988 and
June 1994 and have not had their cases reviewed under phase one.2001. As of December 31, 19981999,
$1.2 million (pre-tax) has been expended or written-off under this restructuring plan and December 31, 1997, the balance in the liability
account established for this matter was $202.1 million and $291.0 million,
respectively. These liabilities, which are net35 positions have been eliminated.
Outsourcing of expected recoveries, were
established for the estimated cost of this issue following regulatory guidance
asInvestment Management to activities to be undertaken. These liabilities are net of expected
recoveries of $84.9 million and $113.0 million, respectively, from previous
owners of companies acquired over the last few years as specified in the
indemnification clauses of the purchase agreements.
Outlook: By the end ofGoldman Sachs: In October 1999, Lincoln UK announced the appointment of GSAM to manage its unit-linked and unit trust investment funds which had assets at December 31, 1999 of $5.3 billion. The transition of
the management of the assets to GSAM will have made substantialbe completed in early 2000. GSAM is a globally recognized investment manager with over $190 billion in assets under management. GSAM will manage portfolios in UK, European and Japanese common stock and balanced
products. The strength of this union lies in GSAM's strong, risk-managed investment philosophy combined with Lincoln UK's wide distribution network.
Outlook: During 2000, Lincoln UK will continue to progress towards the achievement of its strategic review initiatives. Despite the challenging regulatory environment and the uncertainty surrounding LNC's ownership of Lincoln UK, Lincoln UK's
management believes that its revamped product offerings place it in a strong position versus the pensions reviewcompetition and expects a stable earnings picturewill provide its highly trained sales force with some growth going
forward.the tools to better service their clients. Also, Lincoln UK anticipates growing faster than the rest of the U.K. life
insurance industry throughthat its outsourcing
agreement with GSAM will not only enhance product performance, but will provide marketing opportunities and increased access to retail distribution a superior trained sales
force, improved products and investment performance.
14
Review of Operations: Reinsurance
Year Ended December 31 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
Financial Results by Source (in millions)
Individual Markets................................... $ 83.5 $ 71.9 $49.9 $43.4 $41.4
Group Markets (1).................................... 2.7 (103.3) 19.0 25.2 21.6
Financial Reinsurance................................ 15.2 14.4 16.4 10.2 5.5
Other................................................ (1.3) (.3) (.2) .7 (1.9)
---- ------ ----- ------ ---
Income (Loss) from Operations,
excluding Disability Income..................... 100.1 (17.3) 85.1 79.5 76.6
Disability Income (1)................................ 1.4 (134.3) (11.1) (132.2) (10.0)
------ ----- ----- ----- ----
Income (Loss) from Operations (1)................ 101.5 (151.6) 74.0 (52.7) 66.6
Realized Gain on Investments......................... .7 15.2 11.7 10.7 .5
------- ----- ----- ---- ----
Net Income (Loss) (1)............................ $102.2 $(136.4) $85.7 $(42.0) $67.1
Individual Life Sales -
Face Amount (in billions)............................ $78.1 $39.5 $26.6 $22.7 $19.9
December 31 (in billions) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Individual and Group Life Insurance
In Force Face Amount................................ $250.3 $183.5 $160.9 $142.8 $125.6
(1) Income (loss) from operations and net income (loss) for 1997 and 1995
include the impact of a change in estimate of the reserve level needed for
LNC's disability income business ($130.0 million, and $121.6 million
after-tax, respectively). Also, income (loss) from operations and net income
(loss) for 1997 include a charge of $113.7 million after-tax for the impact
of a change in estimate of the reserve level needed for personal accident
programs.channels.
REINSURANCE
Profile: LNC's Reinsurance segment ("Lincoln Re"), reported record income from operations
of $101.5 million in 1998, exceeding its $100 million target established a few
years ago. This compares with $92.1 million in 1997, excluding special charges.
As of December 31, 1998, Lincoln Re's individual and group life business in
force was $250.3 billion, an increase of 36% over the prior year.
Profile: One is one of the leading life-health reinsurers in the world,world. Lincoln Re reported consolidated, worldwide net premium income of $2.1$2.8 billion in 1998.1999. This compares with $1.7$2.1 billion of net premium
income reported in 1997.1998. Lincoln Re maintains offices in a number of U.S. cities and has offices in Toronto, Brussels, Buenos Aires, London, Mexico City, Manila, Singapore, and Singapore.Tokyo. In addition, Lincoln Re also is charged with managing LNC's activities in several emerging
markets, including LNC's joint venture, Seguros Serfin Lincoln, which sells
insurance products through Banca Serfin, Mexico's oldest and third largest bank.
Lincoln Re also maintains representative offices in China
(Beijing, Shanghai and Guangzhou) and, in 1998, signed a letter of intent with Ping An, the largest private insurance company in the People's Republic of China with a national charter, to work towardtowards creating a joint venture that will sell life insurance.reinsurance
products and services.
Lincoln Re's approachmarket positioning strategy is to distinguish itself from competitors that thepursue traditional risk-transfer commodity business is in decline and that today's reinsurer must provideby providing innovative, tailored programs. As a result,programs to its clients. To this end, Lincoln Re uses a mass customization
approach. This involves packaging and distributing modular pricing, underwriting, systems, alliance resources, marketing consultation, product development and claims management components to meet the needs of client companies.
It has
Lincoln Re uses a current
client base of more than 1,700 U.S. and 350 international companies, and a
client retention rate of more than 95%.
Lincoln Re's intellectual capital is critical to its success and its systems are
used throughout the insurance industry. Its knowledge-based approach to reinsurance continues to distinguish itselfthat distinguishes it as a leader in an increasingly competitive marketplace, allowing formarketplace. Systems developed by Lincoln Re are used throughout the insurance industry. This approach to deploying Lincoln Re's
intellectual capital promotes customer retention and to buildthe development of new customer relationships on a global basis.
15globally.
Foremost among theseLincoln Re's proprietary systems is Lincoln National Risk Management's ("LNRM") patented Life Underwriting System, a state-of-the-art risk management technology
now licensed to more than 50 insurers. Further, nearly 30 %technology. Direct life insurance companies who license the system represent a significant portion
of newthe total life business
written during 1998 can be attributed to companies that have utilizedinsurance sold in the Lincoln Mortality System (Trade Mark), a system which helps design new preferred
term insurance products.U.S. In 1998, Lincoln Re was granted a second patent to protect its Lincoln Mortality System™ and other automated decision-making systems. Other proprietary systems assist health insurers, claims processors and
agents. Datalliance (Registered Trade Mark)™, is an electronic data interchange that can link agents, insurers, information sources, medical labs and reinsurers.
In 1998,
Lincoln Re introduced the industry's first browser-based life
underwriting manual on CD-ROM to its reinsurance clients, enabling faster, more
efficient underwriting of life insurance policies. Lincoln Re also entered into
aRe's strategic alliance with Cybertek, a major developer of administrative
solutions in the life insurance business. Cybertek is working to incorporate the
Lincoln Underwriting System into its base product.
Lincoln Re's approach also involves the capabilities of more than 40 alliance partners. These include direct marketers, medical equipment suppliers, electronic information providers, specialized legal firms, accountants and variable life and
annuity administrators, all ready to form a "virtual organization" to help Lincoln ReRe's clients do business.
Results of Operations (1): Lincoln Re's financial results, sales and in-force were as follows:
Year Ended December 31 (in millions) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Financial Results by Source
Individual Markets $91.9 $83.5 $71.9 $49.9 $43.4
Group Markets (1.6) 1.6 3.4 10.2 10.5
Financial Reinsurance 21.7 17.1 15.5 17.5 11.0
Other (1.5) (0.9) (0.3) (0.3) 0.7
----------- --------- --------- --------- ---------
Income from Operations,
excluding Exited Businesses 110.5 101.3 90.5 77.3 65.6
Exited Businesses (2) (72.2) 0.2 (242.1) (3.3) (118.3)
----------- --------- --------- --------- ---------
Income (Loss) from Operations (2) 38.3 101.5 (151.6) 74.0 (52.7)
Realized Gain (Loss) on Investments (1.4) 0.7 15.2 11.7 10.7
Restructuring Charge (3.2) -- -- -- --
----------- --------- --------- --------- ---------
Net Income (Loss) (2) $33.7 $102.2 $(136.4) $85.7 $(42.0)
Individual Life Sales --
Face Amount (in billions) $116.9 $78.1 $39.5 $26.6 $22.7
December 31 (in billions) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Individual and Group Life
Insurance In-Force Face Amount $340.8 $250.3 $183.5 $160.9 $142.8
| (1) | The 1995-1998 data was
restated from prior year to identify exited businesses including carrier
medical, HMO excess-of-loss reinsurance and personal accident programs previously
reported in Group Markets, Seguros Serfin Lincoln previously reported in
Other and Disability Income. |
| (2) | Exited businesses, income
(loss) from operations and net income (loss) for 1999 include the impact
of changes in estimates of reserves for HMO excess-of-loss reinsurance programs
of $25.0 million, after-tax and workers' compensation carve-out business
underwritten by Unicover Managers, Inc. of $40.4 million, after-tax. Also,
exited businesses, income (loss) from operations and net income (loss) for
1997 and 1995 include the impact of the changes in estimate of the reserve
level needed for LNC's disability income business ($130.0 million and $121.6
million, after-tax, respectively). Finally, exited businesses, income (loss)
from operations and net income (loss) for 1997 include the impact of a change
in estimate of the reserve level needed for personal accident programs of
$113.7 million, after-tax. |
Lincoln Re reported net income (loss) of $33.7 million in 1999, $102.2 million in 1998 and $(136.4) million in 1997. In 1999, Lincoln Re reported income from operations of $103.7 million exclusive of special charges totaling $65.4 million (after-tax)
reported in exited businesses for reserve strengthening for the HMO excess-of-loss programs and settlement costs associated with the workers' compensation carve-out business underwritten by Unicover Managers, Inc. This compares with $101.5 million in 1998
and $92.1 million in 1997 exclusive of special charges totaling $243.7 million (after-tax) reported in exited businesses for reserve strengthening in the disability income and personal accident businesses.
The increase in income from operations (exclusive of special charges) of $2.2 million or 2.2% in 1999 was the result of increased sales volumes in the individual life reinsurance and financial reinsurance businesses offset by losses in the group markets
business and exited businesses. Individual life revenues increased $180.5 million or 28% from 1998 as a result of record sales in 1999, but increases in benefits payments and operating expenses resulting from the addition of $90.5 billion of in-force
(face amount) business resulted in only an $8.4 million or 10% increase in income from operations for the individual life business. Financial reinsurance revenues increased $65.2 million or 23% from 1998 and income from operations kept pace by increasing
$4.6 million or 27% from 1998. Group markets had an increased loss of $3.2 million over 1998 and exited businesses had an increased loss of $7.0 million (exclusive of special charges) over 1998 due to higher benefit expenses and operating expenses in 1999.
The increase in income from operations (exclusive of special charges in 1997) of $9.4 million or 10% in 1998 was the result of increased sales volumes in the individual life reinsurance business offset by flat sales volumes and increased benefits
payments in the group markets business. The individual life business experienced a $129.7 million or 26% increase in revenues and $11.6 million or 16% increase in earnings from 1997. The group markets business had a decrease in earnings of $1.8 million or
53% from 1997.
Individual Markets: Strong sales in recent years contributed to record income from operations for individual markets in 1998.1999. Income from operations was $83.5$91.9 million, a 16% increaseup nearly 10 percent over 1997. Very favorable1998. Favorable life mortality throughout the year was
an integral factor in the strong performance. Sales volume, measured by face amount of new business, was a record $78.1$116.9 billion in 1998, nearly doublefor the amount of lastyear, up 50 percent over 1998. Life insurance in-force reached a record $340.8 billion, a 36 percent increase over the
prior year.
Group Markets: During 1999, LNC conducted a comprehensive review of the group markets business. This comprehensive review led to a decision to re-focus its activity on employer stop-loss and group life businesses. As a result of this decision, LNC
announced its exit from the HMO excess-of-loss and group carrier medical reinsurance businesses and announced the acquisition of the John Alden employer stop-loss business. The decision to exit the HMO excess-of-loss and group carrier medical reinsurance
businesses, represents a sharpened focus on the lower-volatility, mortality-based businesses which plays to LNC's strength and in which LNC has experienced far more consistent earnings growth.
The John Alden employer medical stop-loss business, which was acquired in November 1999 for $41.5 million, solidified Lincoln Re's position as a leader in the employer stop-loss market.
Financial Reinsurance: Income from operations in 1998 in group marketsfor financial reinsurance was $2.7 million.
This compares with $10.4a record $21.7 million in 1997, excluding the special charge for
personal accident programs. Total annualized premium of $248.4 million
representsor an increase of 23%27% over the $202.2 million in 1997.
Financial Reinsurance: Income from operations was $15.2 million, slightly higher
than income from operations of $14.4$17.1 million in 1997.
Disability Income: The1998. This business continues to report steady earnings growth.
Exited Businesses: Exited businesses include lines that Lincoln Re is no longer growing, but continues to manage. These businesses include group carrier medical reinsurance, HMO excess-of-loss reinsurance, personal accident which also includes
Unicover workers' compensation programs, direct and reinsurance disability income businesses and investment in Seguros Serfin Lincoln. Significant developments with respect to these exited businesses are discussed below.
HMO Excess-of-Loss Reinsurance Programs: During the third quarter of 1999, reported claims experience for certain HMO excess-of-loss reinsurance programs deteriorated causing loss ratios to significantly exceed pricing assumptions. The unfavorable
loss ratio development related primarily to business has provedwritten in 1998 and 1997. Time lags in the reporting of claims experience to Lincoln Re by clients and larger than anticipated costs for prescription drugs were significant factors that led to losses
exceeding pricing assumptions. As a result of these developments, the reserve level for these programs was deemed inadequate to meet future obligations. Consequently, Lincoln Re took a charge in the third quarter of 1999 of $25.0 million after-tax or
$0.12 per share ($38.5 million pre-tax) to strengthen reserves for claims on the HMO excess-of-loss reinsurance programs.
As a result of the decision to exit the HMO excess-of-loss business, LNC recorded a charge in the Reinsurance segment of $3.2 million after-tax ($4.9 million pre-tax) for employee severance and other costs related to the discontinuance of this business.
The restructuring plan identified the following activities and associated costs to achieve the objectives of the restructuring plan: (1) severance and termination benefits of $2.4 million related to the elimination of 71 positions and (2) other costs of
$2.5 million. This charge was included in Underwriting, Acquisition, Insurance and Other Expenses on the Consolidated Statement of Income for the year ended December 31, 1999. Activities under the restructuring plan began in the third quarter of 1999 with
expenditures expected to be onepaid out under this restructuring plan as the discontinuance of this line of business is completed. As of December 31, 1999, $0.9 million (pre-tax) has been expended under this restructuring plan and 16 positions have been
eliminated.
Personal Accident Programs: During the most difficult forfourth quarter of 1999, LNC conducted an in-depth review of its exposure related to its participation in workers' compensation carve-out (i.e., life and health risks associated with workers' compensation
coverage) programs managed by Unicover Managers, Inc. As a result of this review as well as settlement proceedings conducted to resolve this issue, LNC took a net charge of $40.4 million after-tax or $0.20 per share ($62.2 million pre-tax) in the industry in this decade.fourth
quarter of 1999.
Disability Income: Lincoln Life the largest
company in LNC's Life Insurance and Annuities segment, withdrew from thediscontinued writing disability income marketinsurance in 1996 and itsearly 1996. The block of business was subsequently transferred to Lincoln Re where it has been managed along with a block of reinsurance disability income business.
In May 1999, LNC announced an agreement to transfer a block of direct individual disability income business to MetLife. The transaction, which was completed in the fourth quarter of 1995, LNC took a $121.61999, freed up approximately $100 million after-tax charge
against earningsin capital required to strengthen reservessupport
this business. Under the agreement, MetLife will provide administrative services and assume liability under an indemnity reinsurance agreement for the direct and reinsuranceapproximately $65 million of annual disability income premium. Lincoln Re transferred to MetLife cash of
$490.4 million equal to statutory reserves, net of purchase price consideration. A gain on sale of $56.7 million was deferred and will be recognized in future periods over the premium-paying period of the business.
These reserves were established assuming that the
current experience would continue.
Seguros Serfin Lincoln: In the second quarter ofDecember 1997, LNC invested $85 million for a 49% share of Seguros Serfin Lincoln ("SSL"), a Mexican bancassurance company, that sells life, auto and homeowners insurance to the customers of Banca Serfin. Grupo Financiero
Serfin S.A. ("GFS") owns 51% of SSL and 100% of Banca Serfin. On July 8, 1999, the private shareholders of GFS declined to contribute additional capital to Banca Serfin as required by the Mexican Government. Accordingly, the Bank Savings Protection
Institute ("IPAB"), a government agency, took control of GFS. IPAB has injected capital into Banca Serfin and has indicated its intent to place GFS up for sale.
Under the terms of the Shareholders Agreement with GFS, LNC had the right to put its investment in SSL to GFS for an additional after-tax chargeamount equal to LNC's initial investment in SSL plus a 7% annual return. LNC has given GFS notice of $130 million against earnings whenits decision to exercise its put.
Given these contractual rights and the status of ongoing discussions with GFS and IPAB concerning these matters, LNC believes that it obtained
new information indicatingwill recover the value of its investment in SSL along with a 7% annual return on that experience had deteriorated further.
investment.
Outlook: Lincoln Re continues to enhance its reputation as a leading life-health reinsurer in the world withworld. Life mortality management is its core strength and is the development of new knowledge-based tools and
marketing methods. It continues to build partnerships inside and outside the
traditional insurance marketplace.
16
Review of Operations:foundation for future growth.
INVESTMENT MANAGEMENT
Profile: The Investment Management (1)
Year Ended December 31 (in millions) 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
Financial Results
Fees:
Investment Advisory Fees........................................... $244.2 $219.6 $190.4 $130.1
Other Revenue and Fees............................................. 57.1 38.1 24.6 18.7
Income:
Income from Operations............................................. $20.8 $4.5 $10.2 $13.3
Realized Gain on Investments....................................... .7 3.3 5.2 4.3
----- --- ---- -----
Net Income..................................................... $21.5 $7.8 $15.4 $17.6
Income from Operations-Excluding
Amortization of Intangibles....................................... $49.6 $31.6 $34.1 $28.1
December 31 (in billions) 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
Assets Under Management
Retail-Fixed....................................................... $ 7.1 $ 6.9 $ 4.6 $ 4.8
Retail-Equity...................................................... 19.5 15.6 11.5 8.8
---- ---- ---- ---
Total Retail.................................................. 26.6 22.5 16.1 13.6
Institutional-Fixed................................................ 6.9 5.7 3.6 3.0
Institutional-Equity............................................... 25.3 25.8 23.5 22.1
---- ---- ---- ----
Total Institutional............................................ 32.2 31.5 27.1 25.1
Total Assets Under Management.................................. $58.8 $54.0 $43.2 $38.7
(1) Data shown in the 1995 column is for a partial year, as this segment was
added in April 1995 following the acquisition ofincludes Delaware Management Holdings, Inc. LNC's Investment Management segment reported record income from operations of
$20.8 million in 1998, compared with $4.5 million in 1997. The segment's 1998
operating income, excluding amortization of goodwill and other intangible
assets, was $49.6 million. The improvement was driven by increased revenues due
to record levels of inflows, higher net sales and the impact of the market
levels during the year.
LNIC's assets under management at December 31, 1998 were $58.8 billion, an
increase of $4.8 billion or 9% from December 31, 1997 assets of $54.0 billion,
primarily due to the upward trend of the market during the year. LNIC had record
levels of retail sales ($4.2 billion for 1998) and institutional inflows ($6.2
billion for 1998). In addition, LNIC's net retail cash flows were $2.0 billion
for the year versus $0.6 billion for 1997.
Domestic institutional assets represent $21.5 billion of the Investment
Management segment's total assets under management, while domestic retail assets
were $25.2 billion. International equity and global bond assets managed by
Delaware International Advisers, Ltd. account for $12.1 billion ($10.7 billion
institutional, $1.4 billion retail).
Profile: The companies that comprise this segment are: Delaware Management
Holdings, Inc.("Delaware"); Lynch && Mayer, Inc. ("Lynch & Mayer"); Vantage Global Advisors, Inc. ("Vantage") and VantageLincoln Investment Advisors.Management. Delaware has its
headquarters in Philadelphia, with affiliatesoffices in London, Denver and Minneapolis. Lynch && Mayer and Vantage each maintain separate headquarters in New York. Although investment managementLincoln Investment Management has long been an area of expertise within LNC,
the addition of Delawareits headquarters in 1995 signaled LNC's intention to expand its role as
a money manager and meet its objective of becoming a force in the financial
services industry.Fort Wayne, Indiana. During 1998, two external transactions positively affected the retail business
of LNIC: the acquisition of CIGNA's ACCRU business and the sale of Delaware's
Unit Investment Trust business to Nike Securities. These transactions reinforced
Delaware's market focus on core retail products, (i.e., mutual funds, variable
annuities and participant directed retirement plans) and strengthened Delaware's
retail distribution by the addition of the former CIGNA ACCRU wholesalers.
17
Delaware Investments' defined contribution area performed well in 1998, growing
to $5.9 billion in assets under management as of December 31, 1998. In the first
quarter of 1999, there was a reorganization at Lynch & Mayer that involved the appointment of a new Chief Investment Officer and the combination of the back-office operations with Delaware's (see further discussion of this under "Lynch & Mayer
Restructuring Charge" on page 22). During the first quarter of 2000, it is anticipated that Lynch & Mayer will merge its remaining operations with Delaware.
In 1999, the Investment Management segment was reorganized as follows: 1) LNC's internal investment advisor, Lincoln Investment Management, was moved from Other Operations to this segment and 2) Lincoln Life's 401(k) business was moved from the Life
Insurance and Annuities segment to this segment.The integration of the 401(k) businesses resulted in combined retirement area was combined under Delaware,
resulting in an organization with $9.6assets of $9.8 billion in retirement assets.at year end. This combination shouldwill result in a broader product range that is better serviced and more profitable overhas the
long term, with consistent asset growth because
retirement plans tend to bepotential for better long-term relationships with continuing cash flow.
performance.
Complementary Approaches: Delaware, Lynch & Mayer and Vantage are encouraged to
preserve their complementary and distinctive investment styles. Diversity of investment styles, as well as diversity of clients served, are prudent ways to diversify risk in varying market environments. Delaware, is bestlong known for a conservative, "value" equity investment style that
focuses on stocks with above average dividend yields. It is alsohas
increasingly been recognized for expertise in the small-cap and mid-cap growth"growth" styles and in municipal and high-yield bonds. Delaware International Advisers, Ltd. in London providesbond investing. The company also has significant global and international equity and fixed income investment expertise.
Lynch & Mayer pursues a "growth" investment style and specializes in mid-cap and
large-cap equities.
Vantage invests in undervalued companies that have strong potential for above-average growth. It employs a disciplined, systematic, risk-controlled investment approach, which deliversseeks to deliver growth at a reasonable price (GARP)(an investment style abbreviated
as "GARP"). Vantage is especially well known for its expertise in socially responsible investing,
expertise, the practice of aligning investment objectives with social concerns in one investment portfolio.
Results of Operations (1): The Investment Management segment's financial results and assets under management were as follows:
Year Ended December 31 (in millions) 1999 1998 1997 1996 1995 (2)
- ------------------------------------------------------------------------------------------------------
Financial Results
Revenues:
Investment Advisory Fees $248.6 $249.0 $229.9 $199.8 $134.7
Investment Advisory Fees At Cost (3) 37.7 47.9 46.2 43.7 32.2
Other Revenue and Fees 117.0 102.6 78.9 60.1 38.5
Income:
Income (Loss) from Operations $34.6 $20.9 $(0.8) $2.3 $10.7
Realized Gain (Loss) on Investments (0.8) 1.1 6.9 6.3 6.7
Restructuring Charge (9.2) -- -- -- --
----------- --------- --------- --------- ---------
Net Income 24.6 22.0 6.1 8.6 17.4
Income from Operations -- Excluding
Amortization of Intangibles $62.3 $49.6 $26.3 $26.2 $25.5
December 31 (in billions) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Assets Under Management
Regular Operations:
Retail-Equity $23.4 $22.1 $17.8 $13.1 $10.0
Retail-Fixed 7.4 8.2 8.1 5.9 6.1
----------- --------- --------- --------- ---------
Total Retail 30.8 30.3 25.9 19.0 16.1
Institutional-Equity 23.6 24.2 24.9 22.9 21.6
Institutional-Fixed 7.0 7.0 5.7 3.6 3.0
----------- --------- --------- --------- ---------
Total Institutional 30.6 31.2 30.6 26.5 24.6
Total Retail and Institutional 61.4 61.5 56.5 45.5 40.7
At Cost Operations 35.9 39.4 35.6 37.4 36.4
----------- --------- --------- --------- ---------
Total Assets Under Management $97.3 $100.9 $92.1 $82.9 $77.1
| (1) | The 1995-1998 data was
restated from prior year as follows: a) LNC's internal investment advisor
was moved from Other Operations to this segment and b) Lincoln Life's 401(k)
business was moved from the Life Insurance and Annuities segment to this
segment due to changes in reporting relationship for these units. |
| (2) | Data shown in the 1995
column is for a partial year, as this segment was added in April 1995 following
the acquisition of Delaware Management Holdings, Inc. |
| (3) | Fees "at cost" are calculated
on an expense-sharing basis and do not include a profit margin. |
The Investment Management segment reported net income of $24.6 million in 1999, $22.0 million in 1998 and $6.1 million in 1997. Income (loss) from operations was $34.6 million for 1999, $20.9 million for 1998 and $(0.8) million for 1997.
The growth in income from operations of $13.7 million or 66% in 1999 was primarily attributable to cost savings related to the downsizing of Lynch & Mayer and the integration of the Lincoln Life 401(k) business into Delaware and an increase in other
revenue and fees. Other revenue and fees increased due to an increase in Delaware's accounting and record-keeping fees resulting from an increase in accounts being serviced and an increase in distribution income resulting from higher retail sales by
Delaware over 1998.
Investment advisory fees for the segment were relatively flat from 1998 because of a slight overall decrease in external assets under management (retail and institutional). External assets under management were $61.4 billion at December 31, 1999, $61.5
billion at December 31, 1998 and $56.5 billion at December 31, 1997. The change in assets under management of $(0.1) billion from 1998 was attributed to net cash outflows of $4.3 billion partially offset by $4.2 billion in market appreciation. The net
cash outflows for the segment were primarily due to Delaware's value style being out of favor, as well as investment performance issues in the institutional accounts and domestic mutual funds. The primary performance issues centered around all of Lynch
& Mayer's portfolios and Delaware's value portfolios, which under performed the S&P 500 and Russell 1000 Value indices, respectively, in 1999.
Although the overall net cash flows were negative, the international business had net inflows of $2.8 billion. The international net inflows were the result of an industry-wide trend toward the globalization of pension investments. In addition, Delaware's
domestic retail growth funds and institutional growth accounts experienced significant asset growth during 1999. Delaware's retail growth assets under management increased $2.2 billion or 129% to $3.9 billion at December 31, 1999 from $1.7 billion at
December 31, 1998 and its institutional growth assets grew 103% to $0.9 billion. These increases in the growth assets were the result of positive cash flows and strong performance experienced in this area.
The growth in income from operations of $21.7 million in 1998 was due primarily to an increase in investment advisory fees, distribution income and other fees associated with the growth of external assets under management and an increase in retail sales.
The change in external assets under management of $5.0 billion or 9% was caused by market appreciation of $5.8 billion, which was slightly offset by net cash outflows of $0.8 billion. The net cash outflows consisted of net institutional outflows of $2.7
billion offset by net retail inflows of $1.9 billion. The institutional net outflows were a result of poor investment performance and a move to indexing by pension funds. Delaware's value and Lynch & Mayer's growth investment styles under performed
the Russell 1000 Value and S&P 500 indices, respectively, in 1998. Retail sales in 1998 were bolstered by expanded wholesaling capabilities and product enhancements.
Distribution: Multiple distribution channels enableallow the businesses in the Investment Management segment to deliver their broad range of products to an expanding community of retail and institutional investors. Delaware markets itsretail mutual funds
through regional and national broker/dealers, financial planners,
banks, and insurance agents, including those associated with the regional marketing offices of Lincoln Life.LFA and banks. Institutional products are marketed primarily by each company's individual sales force
throughin conjunction with pension consultants and directlyconsultants. They also are offered to defined benefit and defined contribution plan sponsors, endowments, foundations and insurance companies.
Retail Mutual Funds: The Investment Management segment's retail mutual fund, annuity, and wrap fee assets totaled $26.6$30.8 billion at December 31, 1998, an 18% increase from
$22.51999 and $30.3 billion at December 31, 1997.1998. Annuity assets for the Investment Management segment were $15.5
billion and $14.3 billion at the end of 1999 and 1998, respectively. Delaware, offerswhich manages the retail mutual funds, offered 74 open-end retail mutual funds and 8 closed-end funds withat the end of 1999, compared to 69 and 8, respectively, at the end of
1998. These Delaware funds had assets under management of $13.2 billion, an
increase of 7% over the $12.3$13.8 billion at December 31, 1997.the end of both 1999 and 1998. Delaware's wrap assets increased 43% to $1.0 billion in 1999 from $0.7 billion in 1998. The remaining $13.4retail assets were wrap assets and mutual funds
totaling $0.5 billion was from wrap-fee business and retail mutual funds$1.5 billion for 1999 and 1998, respectively, managed by Lynch && Mayer and Vantage.
The acquisition and integrationaddition of CIGNA's ACCRU business increased the number
of retail wholesalers to 51 as of December 31, 1998 from 37 as of December 31,
1997, strengthening Delaware's retail sales presence. The multi-manager ACCRUDelaware-Lincoln ChoicePlusSM variable annuity product which was re-launched in the 4th quarter oflate 1998 under
the name Delaware-Lincoln ChoicePlus (Service Mark), has further broadened and diversified Delaware's product line.line, while the expansion of the wholesaling group has enabled Delaware to strengthen
its retail sales presence.
Delaware continues to strengthen the foundation of its customer service in order to consistently achieve exceptional customer service. Delaware received excellent ratings in the 1998 Dalbar1999 DALBAR Broker/Dealer Survey that rates the quality of marketing and
service of approximately 25 large mutual fund complexes. Delaware is the 4th highest ranked firm in the Main Office Operations
category, up from 8th last year. In addition, financial advisors ranked Delaware
2nd in Wholesaler Support and 1st in Dedicated Marketing Support. High ratings are important because quality service is a key factor in growingobtaining shelf space with brokers and retaining
assets.
Improved performance andother investment professionals. In DALBAR 1999 Broker/Dealer Survey, Delaware captured
the prestigious DALBAR Pyramid award for outstanding service contributedprovided by its main office operations. Delaware's main office operations ranked number one in nine of ten categories when compared to Delaware increasing its retail
non-money market salesfirms of similar size. These high rankings illustrate the
firm's continuing commitment to $3.1 billion in 1998, up 55% in comparison with $2.0
billion for 1997. In addition, Delaware's net retail cash flows were $1.5
billion for 1998 versus $0.1 billion for 1997.
exceeding customer expectations.
Institutional Investments: The institutional investment management business had assets under management of $32.2$30.6 billion at December 31, 1999, compared with $31.2 billion at December 31, 1998. The decrease of 2% was primarily caused by investment
performance problems, as well as Delaware's value style being out of favor. Institutional inflows for the Investment Management segment were $7.3 billion for 1999, which was 22% higher than the $6.0 billion in 1998. Net outflows were $2.2 billion for 1999
and $2.7 billion for 1998. The net outflows in 1999 and 1998 were largely due to a combination of under performance in Lynch & Mayer's mid-cap and large-cap growth products and Delaware's domestic value style being out of favor.
Lynch & Mayer Restructuring Charge: During the first quarter of 1999, LNC recorded a restructuring charge in its Investment Management segment of $12.1 million after-tax ($16.9 million pre-tax). The objective of this restructuring plan is to
downsize and consolidate the back office operations of Lynch & Mayer into Delaware, in order to reduce ongoing operating costs and eliminate redundant facilities within this business segment. This charge was included in Underwriting, Acquisition,
Insurance and Other Expenses on the Consolidated Statement of Income for the year ended December 31, 1999. The restructuring plan identified the following activities and associated costs to achieve the objectives of the restructuring plan: (1) severance
and termination benefits of $2.8 million related to the elimination of 34 positions, (2) write-off of impaired assets of $9.8 million and (3) other costs of $4.3 million. Expenditures and write-offs under the restructuring plan began in the first quarter
of 1999.
During the fourth quarter of 1999, LNC determined that part of rent expense related to abandoned office space included in (3) above would not be incurred due to the landlord allowing Lynch & Mayer to surrender the lease, rather than to sublease the
space. As a result, the original estimate was reduced by $3.0 million (pre-tax). This reduction was recorded in the fourth quarter of 1999 as a reversal to the restructuring charge and related reserve. All expenditures under this restructuring plan are
expected to be completed by the second quarter of 2000. As of December 31, 1999, $13.4 million (pre-tax) has been expended or written-off under this restructuring plan and all 34 positions have been eliminated. In addition, during the fourth quarter of
1999, $1.5 million (pre-tax) associated with lease terminations was released into income.
Investment Performance: As of December 31, 1999, Delaware had 13 funds whose A shares had received four- and five-star rankings by Morningstar, Inc., (a service that assigns rankings to mutual funds according to their investment styles with one
star as the lowest to five stars as the highest), compared to 16 four- and five-star funds as of December 31, 1998, compared with
$31.5 billion at December 31, 1997. LNIC's institutional inflows of $6.2 billion
for 1998, were 22% higher than the $5.1 billion in 1997. Institutional net cash
flows, however, declined slightly to ($2.2) billion for 1998 versus ($2.0)
billion for 1997, largely due to client losses resulting from underperformance
in Lynch & Mayer's mid- and large-cap growth products.
Investment Performance:1998. As of December 31, 1998,1999, four-and-five-star ranked A shares at Delaware had 16 funds,
representing 28%represented 19% of the company'sall its mutual fund assets under management, rankedA shares.
In the international equity category, Delaware's return of 17.40% for 1999 trailed the 29.96% return for its comparative Morgan Stanley Capital International Europe, Australia and Far East (EAFE) Index. For the five-year period ending December 31, 1999,
Delaware's return was 14.68%, compared to 12.83% for the EAFE Index over the same period of time. This equity performance is the performance, before deduction of investment advisory fees, of one or more fully discretionary Delaware Investment Advisors
Limited equity client accounts. Future returns will be reduced as four-a result of those advisory fees and five-star funds by Morningstar, Inc.,any other expenses that may be incurred in connection with the account.
Among institutional investment managers, Delaware's All-Cap Growth Equity composite provided the firm's best performance for 1999. The All-Cap Growth product's net return of 79.4% for the year ending December 31, 1999 was significantly higher than the
return of 33.82% for the benchmark Russell 3000 Index. Delaware's Large-Cap Value Equity composite in the large cap value equity category had a service that assigns
risk-adjusted performance ratings tonet return of (1.91%) for the year ending December 31, 1999. This return trailed the benchmark S&P/Barra
Value Index return for 1999 of 12.73%.
Composite returns for Delaware All-Cap Growth Equity are derived from no-load, open-end mutual funds. One starThe Large-Cap Value Equity composite consists of all fully discretionary separate accounts in this style. Performance results for these composites are
shown as total returns, presented after deduction of Delaware's investment advisory fees, and are computed on a dollar-weighted rate-of-return basis. Past performance may not be indicative of future results.
In what was acknowledged by many observers to be a difficult year for fixed-income investments, Delaware's one-year performance in the Aggregate Fixed-Income category was (1.17%) after fees, compared to performance of (0.82%) for the Lehman Brothers
Aggregate Bond Index. Its five-year Aggregate Fixed-Income performance was 7.47% after fees, slightly below the Lehman Brothers Aggregate Bond Index return of 7.73%. The after-fees performance of Delaware's Aggregate Fixed-Income category is based on the
lowest
rating;fees for Delaware Balanced and Delaware Global mutual funds, which are higher than the fees for Delaware Aggregate Fixed-Income separately managed accounts. If Delaware Aggregate Fixed-Income account fees were used instead, after-fees returns would be
higher for one year (1.06%) and for five
18
is the highest. High Morningstar ratings are significant because virtually all
equity net inflows are directed into funds with high risk-adjusted ratings.years 7.64%.
Vantage manages the Lincoln Life MultiFund (Registered Trade Mark)Multi-Fund Social Awareness subaccount. The Fundsubaccount, which has performed exceptionally well over the long term. For the five10 years ended December 31, 1998,1999, the Fund's annualized return was 17.34%, ahead of the 16.59% return for the top
quartile variable annuity subaccount in the Morningstar Large Cap Blend category. This performance earned Vantage 30tha 12th place ranking among 572147 variable annuity funds.
Among U.S. institutional investment managers, Delaware produced strong resultssubaccounts in that Morningstar category for 10 years.
Outlook: Although the Investment Management segment has experienced double-digit growth in income from operations over the last three years, this trend is not expected to continue in 2000 in part because there is uncertainty about the retention and
growth of assets. The maintenance and/or growth of revenue levels depend on continued growth of the equity markets and retention and growth of assets under management. Revenues are generally a percentage of the market value of the assets under management.
In a severe market decline, revenues would not only be reduced by a market reduction, but also by customer redemptions and withdrawals. In addition, expenses are expected to increase in 2000 due to LNC's intention to invest in the value equity category, with a returnInvestment Management
segment to achieve better relative performance and better cash flows.
OTHER OPERATIONS
Results of 11.19% for the year endedOperations (1): Other Operations' financial results were as follows:
Year Ended December 31 (in millions) 1999 1998 that qualified as second quartile performance as measured1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Financial Results by Callan's Yield Universe.
Underperformance in Lynch & Mayer's mid-cap growth product resultedSource
LNC Financing $(83.5) $(52.5) $(31.9) $(49.7) $(52.7)
LNC Operations -- (18.5) (18.4) (14.8) (19.5)
Other Corporate (0.4) 2.9 (2.2) (0.9) (1.5)
Earnings from Unconsolidated Affiliate -- -- -- -- 13.7
----------- --------- --------- --------- ---------
Loss from Operations (83.9) (68.1) (52.5) (65.4) (60.0)
Realized Gain (Loss) on Investments (0.2) 8.5 5.4 2.2 6.1
Gain on Sale of Subsidiaries -- -- -- -- 58.3
Restructuring Charge -- (14.3) -- -- --
----------- --------- --------- --------- ---------
Net Income (Loss) $(84.1) $(73.9) $(47.1) $(63.2) $4.4
| (1) | Data for LNC's internal
investment advisor for 1995-1998 was moved from Other Operations to the
Investment Management segment due to a change in the reporting relationship. |
The loss
of clients and a decline in institutional assets under management from $4.5
billion at December 31, 1997 to $2.8 billion at December 31, 1998. This issue
was addressed during 1998 and a restructured investment team is in place with a
mandate to improve performance.
Outlook: The rapid growth of Delaware's retail mutual fund business, both
through internal efforts and selective acquisitions, continues to be an
essential component of LNC's long-term strategy. Given the improvements realized
in 1998, LNC is well positioned for accelerating this growth.
Review of Other Operations:
Year Ended December 31 (in millions) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Financial Results by Source
Lincoln Investment Management............................. $ .7 $ 1.4 $ 1.5 $ 1.7 $ 7.1
LNC Financing............................................. (52.5) (31.9) (49.7) (52.7) (31.7)
LNC Operations............................................ (18.5) (18.4) (14.8) (19.5) (21.8)
Other Corporate........................................... 2.9 (2.2) (.9) (1.5) (3.9)
Earnings from Unconsolidated Affiliate.................... -- -- -- 13.7 14.8
----- ------ ----- ----- -----
Income (Loss) from Operations......................... (67.4) (51.1) (63.9) (58.3) (35.5)
Realized Gain (Loss) on Investments....................... 8.6 5.4 2.2 6.1 (10.6)
Gain (Loss) on Sale of Subsidiaries....................... -- -- -- 58.3 48.8
Restructuring Charge...................................... (14.3) -- -- -- --
----- ------ ------ ------ ------
Net Income (Loss)..................................... $(73.1) $(45.7) $(61.7) $ 6.1 $ 2.7
The income (loss) from operations shown above includes the earnings from Lincoln
Investment Management, certain other operations that are not directly related to the business segments and unallocated corporate revenues and expenses, such as corporate investment income, interest expense on short-term and
long-term borrowings, and corporate overhead expenses. PriorStarting in 1999, 100% of "LNC Operations" was allocated to the date of sale in
October 1995, Other Operations also include LNC's investment in an
unconsolidated affiliate engaged in the employee life-health benefits business.
Lincoln Investment Management provides investment advisory services and asset
management services for LNC's Corporate portfolios as well as entities not owned
by LNC.business units.
Corporate interest expense reported within the LNC financing line above was greater for 1995 and 1996more in 1999 than years prior1998 due to 1995 as the result of additions to
long-termhigher average debt and minority interest-preferred securities of subsidiary
companies. Theoutstanding. Corporate interest expense in 1997 amount was less than 1995 and 1996the other years shown due to reduced interest expense and
investment earnings in the fourth quarter of 1997 that resulted from the use of proceeds from the sale of discontinued operations (see liquidity"Liquidity and cash flowCash Flow" discussion on page 34)for further details). This benefit did not continue into 1998 as most of these
funds were used to purchase blocks of individual life insurance and annuity business in January and October of 1998 (see noteNote 11 to the consolidated financial statements on page 66)statements).
Net income (loss) shown above for "Other Operations" includes the items described above under loss from operations plus the realized gain (loss) on sale of certain investments, the gain (loss) on sale of subsidiaries (see note 11 to
the consolidated financial statements on page 65) and a restructuring charge.charges. The 1998
restructuring charge iswas the result of an organizational/expense review and represents severance pay and space abandonment charges because of staff reductions in the parent and other select companies.
19
Discussioncompanies (see Note 12 to the consolidated financial statements).
Consolidated Investments
The consolidated investments on the balance sheet classified by investment advisor, mean invested assets, net investment income and Analysisinvestment yield are as follows:
December 31 (in billions) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Assets Managed by Advisor
Investment Management Segment (1):
External Assets $61.4 $61.5 $56.5 $45.5 $40.7
Internal Assets 35.9 39.4 35.6 37.4 36.4
Lincoln UK 8.6 7.6 6.8 6.1 5.3
Within Business Units (Policy Loans) 1.9 1.8 0.8 0.8 0.6
Non-LNC Affiliates 32.7 23.5 19.4 15.3 11.8
----------- --------- --------- --------- ---------
Total Assets Managed $140.5 $133.8 $119.1 $105.1 $94.8
Mean Invested Assets $39.03 $36.50 $30.34 $27.91 $25.89
Adjusted Net Investment Income (2) $2.82 $2.69 $2.26 $2.10 $1.98
Investment Yield (ratio of Consolidated Investmentsnet investment
income to mean invested assets) 7.21% 7.36% 7.46% 7.52% 7.67%
December 31 (in billions) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
Assets Managed (by advisor)| (1) | See Investment Management
Segment (1)......................... $ 58.8 $ 54.0 $ 43.2 $38.7 $ --
Lincoln Investment Management:
Regular Fees............................................ 1.9 2.9 8.2 4.2 11.8
At Cost For Business Units.............................. 38.7 33.9 30.6 33.3 36.3
Lincoln UK................................................ 7.6 6.8 6.1 5.3 1.0
Within Business Units (Policy Loans)...................... 1.8 .8 .8 .6 .6
Non-LNC Affiliates........................................ 25.2 20.7 16.2 12.7 9.4
----- ----- ----- ---- ----
Total Assets Managed.................................. $134.0 $119.1 $105.1 $94.8 $59.1segment data starting on page 19 for additional detail. |
(1) See| (2) | Includes tax-exempt income. |
Investment Objective: Invested assets are an integral part of the Life Insurance and Annuities, Lincoln UK and Reinsurance segments' operations. For discussion of external assets under management, i.e. retail and institutional assets, see the
Investment Management segment datadiscussion starting on page 16 for additional detail.
The following discussion covers select general investment matters. The review of
consolidated operations, which begins on page 20, includes the fact that LNC's
net investment income for the year ended December 31, 1998 was $2.7 billion, an
increase of 17% over 1997. Also, this discussion indicates that during 1998 net
gains on investments totaling $19 million were realized. The review of
consolidated financial condition begins on page 24 and discusses the composition
and quality of the LNC portfolio.
Investment Objective:19. LNC follows a balanced approach of investing for both current income and total return,prudent risk management, with an emphasis on generating sufficient current income to meet LNC's obligations. This
approach requires the evaluation of risk and expected return of each asset class utilized, while still meeting the income objectives of LNC. This approach also permits LNC to be more effective in its asset-liability management, since decisions can be made
based upon both the economic and current investment income considerations affecting assets and liabilities.
Asset
Investment Portfolio Composition and Diversification: Fundamental to LNC's investment policy is diversification across asset classes. LNC's investment portfolio, excluding cash and invested cash, is composed of fixed maturity securities; equities; mortgage
loans on real estate; real estate either wholly owned or in joint ventures and other long-term investments. LNC purchases investments that have yield, duration and other
characteristics which take into account the liabilities of the products being
supported. The dominant investment held is fixed maturity securities, which
represent approximately 80% of the investment portfolio.
Fixed Maturity Performance: In 1998, the LNC fixed maturity portfolio produced a
return of 7.57%, compared to the Lehman Brothers Government/Corporate index (68%
government bonds, 32% corporate bonds) which produced 9.47%. The
underperformance relative to the index during 1998 is due to the investment
strategy of investing in bonds with sufficient spread to support long-term
insurance liabilities. During 1998, LNC experienced extreme spread widening in
all sectors which had the effect of reducing returns. The spread widening was
caused by the Emerging Markets crisis and the subsequent flight to high quality
U.S. treasury bonds by global investors. The government bond component of the
index performed very well relative to corporate bonds.
Use of Derivatives: The primary use of derivatives at LNC is to hedge interest
rate risk that is embedded in either life insurance and annuity product
liabilities or investment portfolios. To a lesser extent, derivatives are also
used to hedge exposures to foreign currency and equity market risks.
20
REVIEW OF CONSOLIDATED OPERATIONS AND FINANCIAL CONDITION
Summary Information Increase
(Decrease)
Year Ended December 31 (in millions) 1998 1997 1996 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Continuing Operations:
Life insurance and annuity premiums.................... $ 985.6 $ 756.2 $ 728.7 30% 4%
Health premiums........................................ 635.1 572.5 790.5 11% (28%)
Insurance fees......................................... 1,274.6 832.2 713.5 53% 17%
Investment advisory fees............................... 227.1 204.9 180.8 11% 13%
Net investment income.................................. 2,681.4 2,250.8 2,087.9 19% 8%
Equity in earnings of
unconsolidated affiliates............................. 3.3 2.1 1.4
Realized gain (loss) on investments.................... 19.0 122.6 92.5
Other revenue and fees................................. 261.0 157.2 138.3 14%
Life insurance and annuity benefits ................... 2,762.0 2,358.7 2,036.3 17% 16%
Health benefits........................................ 566.9 833.1 673.6 (32%) 24%
Underwriting, acquisition, insurance
and other expenses.................................... 1,943.7 1,579.3 1,434.9 23% 10%
Interest and debt expenses............................. 117.1 92.5 84.7 27% 9%
Federal income taxes................................... 187.6 12.7 147.7
------- ------- ------
Net Income from Continuing Operations............. 509.8 22.2 356.4
Discontinued Operations:
Income prior to disposal............................... -- 134.9 157.2
Gain on disposal....................................... -- 776.9 --
------- ----- -------
Net Income....................................... $ 509.8 $ 934.0 $ 513.6
REVIEW OF CONSOLIDATED OPERATIONS
Some of the increases shown above are the result of the purchase of two blocks
of individual life insurance and annuity business in January and October of 1998
(see note 11 to the consolidated financial statements on page 66).
Life Insurance and Annuity Premiums
Life insurance and annuity premiums increased $229.4 million or 30% in 1998 and
$27.5 million or 4% in 1997 as the result of increases in volumes of business in
the Life Insurance & Annuities and Reinsurance segments. A portion of the
increase from the Life Insurance and Annuities segment in 1998 is the result of
the acquisition of the blocks of business. Barring the passage of unfavorable
tax legislation that would eliminate the tax-advantages for some of LNC's life
and annuity products, LNC expects growth in life insurance and annuity premiums
in 1999.
Health Premiums
Health premiums within the Reinsurance segment increased $62.6 million or 11% in
1998 after decreasing $218.0 million or 28% in 1997. The 1997 reduction included
planned cut backs in the level of business.
Insurance Fees
Insurance fees from universal life, other interest-sensitive life insurance
contracts and variable life insurance contracts increased $442.4 million or 53%
in 1998 and $118.7 million or 17% in 1997. These increases are the result of an
increase in the volume of transactions (including the addition of two blocks of
business in 1998 as described in note 11 to the consolidated financial
statements on page 66) and a market-driven increase in the value of existing
customer accounts upon which some of the fees are based in the Life Insurance &
Annuities and Lincoln UK segments. The growth in fees from this business is
expected to continue in 1999.
Investment Advisory Fees
Investment advisory fees increased $22.2 million or 11 % in 1998 and $24.1
million or 13% in 1997. These increases were the result of increased volumes of
business and an increase in the market value of customer accounts. The increased
volumes were the result of increasing the number of wholesalers and products,
including the addition of wholesalers in the bank market.
21
Net Investment Income
Net investment income increased $430.6 million or 19% in 1998 as the net result
of a 21% increase in mean invested assets, a decrease in the yield on
investments from 7.46% to 7.36% (all calculations on a cost basis). This
increase in mean invested assets is the result of increased volumes of business
in all the business segments and funds held in Other Operations that were
applied toward the purchase of a block of business in October of 1998 (see note
11 to the consolidated financial statements on page 66). The increase in the
Life Insurance and Annuities segment includes the impact of the acquisition of
the blocks of business in 1998 (see note 11 to the consolidated financial
statements on page 66). Net investment income increased $162.9 million or 8% in
1997 as a net result of a 9% increase in mean invested assets, a decrease in the
yield on investments from 7.52% to 7.46% (all calculations on a cost basis) and
a benefit of a reduction in the recurring adjustment of discount on
mortgage-backed securities. In 1997, this adjustment was a charge of $.4 million
versus a charge of $7.6 million in 1996. The increase in mean invested assets in
1997 was the result of increased volumes of business in the Life Insurance and
Annuities segment.
Realized Gain on Investments
The pre-tax realized gain on investments, net of related amortization and
expenses, was $19.0 million, $122.6 million and $92.5 million in 1998, 1997 and
1996, respectively. The after-tax gain in 1998, 1997 and 1996 was $13.7 million,
$72.9 million and $57.6 million, respectively. These gains were primarily the
result of the sale of investments. Write-downs and provisions for losses offset
a portion of the realized gains. During 1996, LNC completed a bulk sale of
performing and non-performing mortgage loans and real estate holdings through a
sealed bid process. The selling price for these holdings was $6.1 million in
excess of the carrying value, resulting in a gain on sale.
Securities available-for-sale, mortgage loans on real estate and real estate
that were deemed to have declines in fair value that were other than temporary
were written down. The fixed maturity securities to which these write-downs
apply were generally of investment grade quality at the time of purchase but
were classified as "below-investment-grade" at the time of the write-downs.
Also, write-downs and allowances for losses on select mortgage loans on real
estate, real estate and other investments were established when the underlying
value of the property was deemed to be less than the carrying value. These
write-downs and provisions for losses are disclosed within the notes to the
accompanying financial statements (see note 3 to the consolidated financial
statements on page 46).
Other Revenue and Fees
Other revenue and fees increased $103.8 million in 1998 and $18.9 million in
1997 as the result of increases in the volume of transactions in each of the
business segments.
Total Revenue
The level of revenue produced for select revenues listed above, primarily the
fee based revenues, such as insurance fees and investment advisory fees,
fluctuates from year to year because of changes in the equity investment
markets. For example, a 1% change in the equity investment market, as
represented by a measure such as the S&P 500, increases or decreases total
revenue by approximately $4.5 million based on the business currently managed.
Although the impact is not dollar for dollar because of the impact of Federal
income taxes, such changes in revenues also increases or decreases LNC's
earnings. Barring a major drop in the equity markets, LNC expects to produce
revenues in future years in excess of the revenues produced for the year ended
December 31, 1998.
Life Insurance and Annuity Benefits
Life insurance and annuity benefits increased $403.3 million or 17% in 1998 as
compared to 1997. This increase was the net result of increases of $470.8
million in the Life Insurance and Annuities segment (includes the addition of
two blocks of individual life insurance and annuity business as described in
note 11 to the consolidated financial statements on page 66) and increases in
the Reinsurance segment of $122.5 million being partially offset by a decrease
in the Lincoln UK segment of $190.0 million due to the absence of special
charges in 1998. Life insurance and annuity benefits in 1997 increased $322.4
million or 16% as compared to 1996. This increase was the result of increases of
$89.4 million or 6% from the Life Insurance and Annuities segment, $25.6 million
or 7% from the Reinsurance segment and $207.1 million from the Lincoln UK
segment. The Lincoln UK increase includes a change in estimate for its pension
mis-selling liability (see note 2 to the consolidated financial statements on
page 45).
Health Benefits
Health benefits increased $108.8 million or 24% in 1998 compared to 1997 health
benefits, excluding the 1997 special additions to the disability income and
personal accident programs reserves ($130.0 million and $113.7 million,
respectively) as the result of increased volumes of business. See note 2 to the
consolidated financial
22
statements on page 45. Health benefits increased $159.5 million in 1997 as the
net result of decreased volumes of business being more than offset by additions
to the reserves for disability income business and personal accident programs
within the Reinsurance segment.
Underwriting, Acquisition, Insurance and Other Expenses
These expenses increased $364.4 million or 23% in 1998 as the result of
increased business volumes in all business segments, the addition of the
operating costs associated with the block of business acquired in January 1998
and increased expenditures related to Year 2000 issues. Underwriting,
Acquisition, Insurance and other expenses increased $144.4 million or 10% in
1997. The primary drivers behind this increase beyond the general inflation rate
was increased business volumes in the various segments due to general growth and
the one-time and on-going costs associated with the acquisition of the two
blocks of business (see note 11 to the consolidated financial statements on page
66) and the write-off of deferred acquisition costs associated with the
disability income business (see note 2 to the consolidated financial statements
on page 45). In 1999, all business segments will continue to adjust staff levels
as appropriate to match business volumes.
Due to LNC's change in its business focus during the last few years (i.e.,
exited property-casualty business, added emphasis on annuities, life insurance
and investment management) as well as the on-going and increasing competitive
pressures within the business LNC operates in, the decision was made in 1998 to
initiate an organizational/expense review. This review, which was completed in
the fourth quarter of 1998, resulted in a one-time restructuring charge to
earnings. The amount of the pre-tax charge was $22.0 million and the estimate of
the reduction in future expenses once implementation is complete is $15-$20
million per year.
Interest and Debt Expense
Interest and debt expense increased $24.6 million or 27% in 1998 and $7.8
million or 9% in 1997. These increases were the result of increases in the
average debt outstanding and the impact of changes in the composition of debt
outstanding (see page 32). During 1998, Moody's re-affirmed LNC's debt ratings
as A2 ("Very Good, Strong or High"), Standard and Poor's changed its rating from
A to A- ("both Very Good, Strong or High") and Duff & Phelps changed its rating
from AA- ("Excellent") to A+ ("Very Good, Strong or High").
Federal Income Taxes
Federal income taxes increased $174.9 million in 1998 as the result of an
increase in the pre-tax earnings. Federal income taxes decreased from $147.7
million in 1996 to $12.7 million in 1997 as the result of a decrease in pre-tax
earnings.
Discontinued Operations
In 1997, lines were added to the income statement to accommodate the operating
activity and gain on sale associated with LNC's decision to sell its 83.3%
ownership in American States Financial Corporation (see note 11 to the
consolidated financial statements on page 65.
Summary
Net income for 1998 was $509.8 million compared with $934.0 million in 1997.
Excluding realized gain (loss) on investments, gain (loss) on sale of
subsidiaries, restructuring charges, discontinued operations and the 1997
special additions to the disability income, personal accident programs and UK
pension product reserves, all net of taxes, LNC earned $530.4 million for 1998
compared to $368.0 million in 1997. This increase is the result of increased
earnings from each of the business segments. In the fourth quarter of 1997 Other
Operations benefited from earnings on proceeds from discontinued operations.
This benefit did not continue into 1998 as most of these funds were used to
purchase a block of individual life and annuity business on January 2, 1998 (see
note 11 to the consolidated financial statements on page 66). Net income for
1997 was $934.0 million compared with $513.6 million in 1996. Excluding realized
gain (loss) on investments, gain on sale of subsidiaries, discontinued
operations and the 1997 special additions to reserves, LNC earned $368.0 million
for 1997 compared to $298.8 million in 1996. This increase is the result of
increased earnings in the Life Insurance & Annuities, Lincoln UK and Reinsurance
segments.
Century Compliance
The Year 2000 issue is pervasive and complex and affects virtually every aspect
of LNC's businesses. LNC's computer systems and interfaces with the computer
systems of vendors, suppliers, customers and business partners are particularly
vulnerable. LNC and its operating subsidiaries have been redirecting a large
portion of internal Information Technology ("IT") efforts and contracting with
outside consultants to update systems to address Year 2000 issues. Experts have
been engaged to assist in developing work plans and cost estimates and to
complete remediation activities.
23
For the year ended December 31, 1998, LNC identified expenditures of $37.5
million ($24.4 million after-tax) to address this issue. This brings the
expenditures for 1996-1998 to $48.5 million ($31.5 million after-tax). LNC's
financial plans for 1999-2000 include expected expenditures of an additional
$44.4 million ($28.9 million after-tax) bringing estimated overall Year 2000
expenditures to $92.9 million ($60.4 million after-tax). Because updating
systems and procedures is an integral part of LNC's on-going operations,
approximately 50% of expenditures shown above are expected to continue after all
Year 2000 issues have been resolved. Actual Year 2000 expenditures through
December 31, 1998 and future Year 2000 expenditures are expected to be funded
from operating cash flows. The anticipated cost of addressing Year 2000 issues
is based on management's current best estimates which were derived utilizing
numerous assumptions of future events, including the continued availability of
certain resources, third party modification plans and other factors. Such costs
will be monitored closely by management. Nevertheless, there can be no guarantee
that actual costs will not be higher than these estimated costs. Specific
factors that might cause such differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer problems and other uncertainties.
The current scope of the overall Year 2000 program includes the following four
major project areas: 1) addressing the readiness of business applications,
operating systems and hardware on mainframe, personal computer and Local Area
Network platforms (IT); 2) addressing the readiness of non-IT embedded software
and equipment (non-IT); 3) addressing the readiness of key business partners and
4) establishing year 2000 contingency plans.
The projects to address IT and non-IT readiness have four major phases. Phase
one involves raising awareness and creating an inventory of all IT and non-IT
assets. The second phase consists of assessing all items inventoried to
initially determine whether they are affected by the Year 2000 issue and
preparing general plans and strategies. The third phase entails the detailed
planning and remediation of affected systems and equipment. The last phase
consists of testing to verify Year 2000 readiness.
LNC has completed these four phases for over two-thirds of its high priority IT
systems, including those provided by software vendors. While LNC's year 2000
program for nearly all high priority IT systems is expected to be completed in
the first quarter of 1999, phase four, for a small but important subset of these
systems, will continue through the end of the second quarter 1999. As of
December 31, 1998 the status of projects addressing readiness of IT assets is:
100% of IT assets have been inventoried (Phase 1) and assessed (Phase 2); 97% of
IT projects have been through the remediation phase (Phase 3) with the last
project scheduled for completion by the end of March 1999; and 71% of IT
projects have completed the testing phase (Phase 4) with the last project
scheduled to finish testing by the end of June 1999. A portion of the effort
that extends into 1999 is dependent on outside third parties and is behind the
original schedule. LNC is working with these parties to modify the completion
schedule.
As of December 31, 1998 the status of projects that address readiness of high
priority non-IT assets, is:100% of non-IT assets have been inventoried (Phase 1)
and assessed (Phase 2); 72% of non-IT projects addressing remediation (Phase 3)
have been completed and 23% of non-IT projects have completed the testing phase
(Phase 4). LNC expects to have all phases related to high priority non-IT
completed by the end of October 1999.
Concurrent with the IT and non-IT projects, the readiness of key business
partners is being reviewed and Year 2000 contingency plans are being developed.
The most significant categories of key business partners are financial
institutions, software vendors, and utility providers (gas, electric and
telecommunications). Surveys have been mailed to these key business partners.
Based on responses received, current levels of readiness are being assessed,
follow-up contacts are underway, alternative strategies are being developed and
testing is being scheduled where feasible. This effort is expected to continue
well into 1999. As noted above, software vendor assessments are considered part
of the IT projects and, therefore, would follow the schedule shown above for
such projects.
While LNC is working to meet the schedules outlined above, some uncertainty
remains. Specific factors that give rise to this uncertainty include a possible
loss of technical resources to perform the work, failure to identify all
susceptible systems, non-compliance by third parties whose systems and
operations impact LNC and other similar uncertainties.
A worst case scenario might include LNC's inability to achieve Year 2000
readiness with respect to one or more of LNC's significant policyholder systems,
resulting in a material disruption to LNC's operations. Specifically, LNC could
experience an interruption in its ability to collect and process premiums or
deposits,
24
process claim payments, accurately maintain policyholder information, accurately
maintain accounting records, and/or perform adequate customer service. Should
the worst case scenario occur, it could, depending on its duration, have a
material impact on LNC's results of operations and financial position. Simple
failures can be repaired and returned to production within a matter of hours
with no material impact. Unanticipated failures with a longer service disruption
period would have a more serious impact. For this reason, LNC is placing
significant emphasis on risk management and Year 2000 contingency planning. LNC
is in the process of modifying its contingency plans to address potential year
2000 issues. Where these efforts identify high risks due either to unacceptable
work around procedures or significant readiness risks, appropriate risk
management techniques are being defined. These techniques, such as resource
shifting or use of alternate providers, will be employed to provide stronger
assurances of readiness. LNC has gone through exercises to identify worst case
scenario failures. At this time, LNC believes its plans are sufficient to
mitigate identified worst case scenarios.
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
Some of the increases in the balance sheet accounts described below are a result
of the purchase of two blocks of individual life insurance and annuity business
in January and October of 1998 (see note 11 to the consolidated financial
statements on page 66).
Investments
The investment portfolio, excluding cash and invested cash, is comprised of
fixed maturity and equity securities; mortgage loans on real estate; real
estate, either wholly owned or joint ventures; and other long-term investments.
LNC purchases investments for its segmented portfolios withthat have yield, duration and other characteristics that take into account the liabilities
of the products being supported. The dominant investments held are fixed maturity securities, which represent approximately 78% of the investment portfolio. The total investment portfolio decreased $2.4 billion in 1999 and increased $8.1 billion in 1998.
ThisThe decrease from 1998 was due to the decrease in fair value of fixed maturity securities available-for-sale due to a rising interest rate environment in 1999 and the continuation of the transfer of funds by fixed annuity contractholders to variable
annuity contracts offset by the new purchases of investments from cash flow generated by the business units. The increase from 1997 was the net result of increases from 1) the addition of $7.7$8.8 billion in invested assets related to the two blocks of
business acquired in 1998, 2) the increase in fair value of securities available-for-sale and 3) the
new purchases of investments from cash flow generated by the business units being partially offset by the continuation of the transfer of funds by fixed
annuity contractholders
opting to transfer funds to variable annuity contracts.Fixed Maturity Security Ratings: LNC maintains a high-quality fixed maturity securities portfolio. As of December 31, 1998, $9.91999, $8.3 billion or 32.7%29.8% of its fixed maturity securities portfolio had ratings of AA or better. Fixed maturity securities with
below- investment-gradebelow-investment-grade ratings (BB or less) were $2.1$2.2 billion or 7.0%7.9% of the total fixed maturity securities portfolio (see noteNote 3 to the consolidated financial statements on
page 47)statements). The below-investment-grade fixed maturity securities represent 5.6%6.1% of LNC's
total investment portfolio. The interest rates available on these below-
investment-gradebelow-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. For the year ended December 31, 1998,1999, the aggregate cost of below
investment grade securities purchased was $1.6 billion.$624.5 million. Aggregate proceeds from such investments sold were $1.1 billion,$569.8 million, resulting in a realized pre-tax loss at the time of sale of $55.2$53.6 million.
Securities Available-for-Sale: LNC's entire fixed maturity and equity securities portfolio is classified as "available-for-sale" and is carried at fair value. Changes in fair values, netvalue on its balance sheet. Because the general intent of the "available-for-sale" accounting
rules is to reflect shareholders' equity as if unrealized gains and losses were actually recognized, it is necessary for LNC to consider all related accounting adjustments that would occur upon such a hypothetical recognition of unrealized gains and
losses. Such related balance sheet effects include adjustments to the balances of deferred acquisition costs, amounts required to satisfy policyholder commitments and taxesdeferred income taxes. Adjustments to each of these balances are charged or credited directly to shareholders'
equity.equity as part of LNC's "available-for-sale" accounting. For instance, deferred acquisition costs are adjusted upon the recognition of unrealized gains or losses since the amortization of deferred acquisition costs is based upon an assumed emergence of
gross profits on certain insurance business. In a similar manner, adjustments to the balances of policyholder reserves or commitments are made because LNC has either a contractual obligation or has a consistent historical practice of making allocations of
investment gains or losses to certain policyholders. Deferred income tax balances are also adjusted, since unrealized gains or losses do not affect actual taxes currently paid. See Note 3 to the consolidated financial statements on page 46 showsfor details of the gross
unrealized gains and losses as of December 31, 1998.1999.
Mortgage-Backed Securities: LNC's fixed maturity securities available-for-sale include mortgage-backed securities. The mortgage-backed securities included in LNC's investment portfolio are subject to risks associated with variable prepayments. This
may result in these securities having a different actual cash flow and maturity than plannedexpected at the time of purchase. Securities that have an amortized cost greater than par and are backed by mortgages that prepay faster than expected will incur a
reduction in yield or a loss. Those securities with an amortized cost lower than par that prepay faster than expected will generate an increase in yield or a gain. In addition, LNC may incur reinvestment risks if market yields are lower than the book
yields earned on the securities. Prepayments occurring slower than expected have the opposite impact. LNC may incur disinvestment risks if market yields are higher than the book yields earned on the securities and LNC is forced to sell the securities. The
degree to which a security is susceptible to either gains or losses is influenced by 1) the difference between its amortized cost and par, 2) the relative sensitivity of the underlying mortgages backing the assets to
25
prepayment in a changing interest rate
environment and 3) the repayment priority of the securities in the overall securitization structure.
LNC limits the extent of its risk on mortgage-backed securities by prudently limiting exposure to the asset class, by generally avoiding the purchase of securities with a cost that significantly exceeds par, by purchasing securities backed by stable
collateral, and by concentrating on securities with enhanced priority in their trust structure. Such securities with reduced risk typically have a lower yield (but higher liquidity) than higher-risk mortgage-backed securities. At selected times,
higher-risk securities may be purchased if they do not compromise the safety of the general portfolio. At December 31, 1998,1999, LNC did not have a significant amount of higher-risk mortgage-backed securities. There are negligible default risks in the
mortgage-backed securities portfolio as a whole as the vast majority of the assets are either guaranteed by U.S. government- sponsoredgovernment-sponsored entities or are supported in the securitization structure by junior securities enabling the assets to achieve high
investment grade status. See Note 3 to the consolidated financial statements on page 48 showsfor additional detail about the underlying collateral.
Mortgage Loans on Real Estate and Real Estate:As of December 31, 1998,1999, mortgage loans on real estate and investments in real estate represented 11.5%13.3% and 1.3%0.7% of the total investment portfolio. As of December 31, 1998,1999, the underlying properties
supporting the mortgage loans on real estate consisted of 25.4%31.0% in retail stores, 27.9% in commercial office buildings, 33.5% in retail
stores, 18.8%17.5% in apartments, 12.6%13.3% in industrial buildings, 4.0%5.4% in hotels/motels and 5.7%4.9% in other. In addition to the dispersion by type of
property, the mortgage loan portfolio is geographically diversified throughout the United States.
Cash
Fixed Maturity Performance: In 1999, the performance of LNC's fixed maturity portfolio was measured against investment income and Invested Cash
Cash and invested cash decreasedrisk management measures. The portfolios have exceeded the investment income benchmark by $1.4 billion in 1998. This decrease$87.6 million. The
investment income measure is a forecasted investment income target based upon the result of paying out the funds that had been accumulatedassets at the end of 1997 in
anticipationbeginning of the purchaseyear, expected new investment spreads, and adjusted for interest rate movements during the year. The portfolios' performance exceeded the risk
management measure by 89 basis points in 1999. The risk management measure is a weighted composite benchmark, constructed from thirteen industry calculated asset class indices. The indices are related to each of a block of individual life and annuity business
on January 2, 1998 (see note 11the major asset classes utilized by Lincoln
Investment Management. The performance relative to the consolidated financial statements on page
66).
Deferred Acquisition Costs
Deferred acquisition costsincome measure was exceeded due to a number of factors, primarily asset allocation strategies, credit spread widening and interest rate increases. The risk management measure was exceeded due to
maintenance of strong underwriting guidelines in asset selection and the contributions of the strong U.S. economy.
Net Investment Income: Net investment income increased $340.6$126.1 million or 4.7% in 1998. This1999 due to a 6.9% increase was
the net result of an increase related to the growth in business being partiallymean invested assets offset by reductions relateda decrease in the yield on investments from 7.36% to the7.21% (all calculations on a cost basis). The
increase in unrealized gain on securities
available-for-sale.
Premiums and Fees Receivable
Premiums and fees receivablemean invested assets in 1999 was due to increased $48.7 million in 1998 as the result of
increased volumes of business in the Life Insurance & Annuities and Reinsurance
segments.
Assets Held in Separate Accounts
This asset account, as well as the corresponding liability account, increased by
$6.3 billion in 1998 as a result of increases in annuity and pension 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.
Amounts Recoverable from Reinsurers
The increase of $776.3 million in amounts recoverable from reinsurers was the
result of an increased volume of business ceded in the Life Insurance and
Annuities segment.
Goodwill and Other Intangible Assets
The increase of $1.0 billion and $1.2 billion, respectively, is the net result
of additions related to business acquired (see note 11 to the consolidated
financial statements on page 66) being more than the on-going amortization.
Other Assets
The decrease in other assets of $76.8 million is the result of having a lower
receivable related to investment securities sold in the last few days of 1998
versus the end of 1997.
Total Liabilities
Total liabilities increased by $16.3 billion in 1998. The primary item
underlying this increase is the addition of the blocks of individual life and
annuity business described above. Insurance policy reserves increased $8.9
billion as a result of the new blocks of business and increased levels of business in the Life Insurance and Annuities segment. Contractholder fundsNet investment income increased $689.7$430.6 million which isor 19% in 1998 as the net result of additions relateda 20% increase in mean invested assets offset
by a decrease in the yield on investments from 7.46% to 7.36% (all calculations on a cost basis). The increase in mean invested assets was the result of increased volumes of business in all the business segments and funds held in Other Operations that
were applied toward the purchase of a block of business acquired and new deposits being partially offset by the
withdrawal upon maturity of guaranteed interest contracts. Liabilities related
to separate accounts increased $6.3 billion (see discussion of Assets Held in Separate Accounts above). Total debt increased $648.5 million as the result of
26
issuing new debt in the first and third quartersOctober of 1998 (see note 5Note 11 to the consolidated financial statements on page 51)statements). The decrease in the remaining
liabilities of $225.4 is the net amount from an increase in the expected payouts
for securities purchasedLife Insurance and Annuities segment includes the impact of the acquisition of the blocks of business
in the last few days of 1998 versus a lower volume of
such transactions late in 1997 being more than offset by the Federal income tax
decrease.
While it is management's judgement that, based on available information, the
appropriate level of liabilities have been recorded, LNC has areas where changes
in estimates of related liabilities required could occur in the near term. These
areas include claims for disability income coverages, liabilities and recoveries
related to inappropriate selling of products in the United Kingdom, liabilities
for personal accident programs, liabilities for marketing and compliance issues
and the reserve for the run-off of group pension annuities (see note 7Note 11 to the consolidated financial statementsstatements).
Realized Gain on page 54).
Shareholders' Equity
Total shareholders' equity increased $405.0Investments: The pre-tax realized gain on investments, net of associated amortization of deferred acquisition costs and expenses, was $3.0 million, during$19.0 million and $122.6 million in 1999, 1998 and 1997, respectively. The
after-tax gain in 1999, 1998 and 1997 was $3.8 million, $13.7 million and $72.9 million, respectively. These gains were primarily the year ended
December 31, 1998. Excluding the increase of $116.4 million related to an
increase in the unrealized gain (loss) on securities available-for- sale,
shareholders' equity increased $288.6 million. This increase in shareholders'
equity was the net result of increases duethe sale of investments. Write-downs and provisions for losses offset a portion of the realized gains.
Write-Downs and Allowance for Losses: Securities available-for-sale, mortgage loans on real estate and real estate that were deemed to $509.8 millionhave declines in fair value that were other than temporary were written down. The fixed maturity securities to
which these write-downs apply were generally of net income,
$48.7 million frominvestment grade quality at the issuancetime of common stock relatedpurchase, but were classified as "below-investment-grade" at the time of the write-downs. Also, write-downs and allowances for losses on select mortgage loans on real
estate, real estate and other investments were established when the underlying value of the property was deemed to benefit plansbe less than the carrying value. These write-downs and $3.8 million related to an increase inprovisions for losses are disclosed within the accumulated foreign exchange gain
being offset by $211.8 million relatednotes to the declarationaccompanying consolidated
financial statements (see Note 3 to the consolidated financial statements).
Use of dividendsDerivatives: The primary use of derivatives at LNC is to shareholders, $14.8 million of issuance costs related to an offering of FELINE
PRIDES and $46.9 million for the retirement of common stock.
Capital adequacyhedge interest rate risk that is a primary measure used by insurance regulators to determine
the financial stability of an insurance company. In the U.S., risk-based capital
guidelines are used by the National Association of Insurance Commissioners to
determine the amount of capital that represents minimum acceptable operating
amounts related toembedded in either life insurance and annuity product liabilities or investment portfolios. To a lesser extent, derivatives are also used to hedge
exposures to foreign currency and equity market risks.
Regulatory action is
triggered when an insurer's statutory- basis capital falls below the
formula-produced capital level. At December 31, 1998, statutory-basis capital
for each of LNC's U.S. insurance subsidiaries was substantially in excess of
regulatory action levels of risk- based capital required by the jurisdiction of
domicile.
As noted above, shareholders' equity includes net unrealized gain (loss) on
securities available-for-sale. At December 31, 1998, the book value of $53.18
per share included $5.45 of unrealized gains on securities and at December 31,
1997, the book value of $49.27 per share included $4.31 of unrealized gains on
securities.
A significant portion of both realized and unrealized gains or losses on
investments that support long-term life insurance, pension and annuity contracts
are expected to be applied to contract benefits. These realized and unrealized
gains or losses are included in net income and shareholders' equity,
respectively. Current accounting standards do not require or permit adjustment
of policyholder reserves to recognize the full effect of these realized and
unrealized gains or losses on future benefit payments in the absence of a
contractual obligation requiring their attribution to policyholders.
Review Of Consolidated Financial Condition
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 3941 indicate that operating activities provided cash of $1.3$1.6 billion, $1.1$1.2 billion and $1.4$1.0 billion in 1999, 1998 1997 and 1996,1997, respectively. This statement also classifies the other sources and uses of cash by
investing activities and financing activities and discloses the amount of cash available at the end of the year 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 which included the right to offer regular debt, preferred stock, common
stock or various forms of hybrid securities. This $1.3 billion filing included
an aggregate of $300 million that had not been utilized from a previously filed
shelf registration. In December, 1998 LNC combined the unused portion of another
previously filed shelf
27
registration. The combination of these two filings, less securities offered in
1998 (see below), resulted in an unused balance as of December 31, 19981999 of $825 million on its existing shelf registration filed in April, 1998, that would allow LNC to issue various securities. The hybrid securities
offerings utilize six subsidiaries (Lincoln National Capital I, II, III,
IV, V and VI) which were formed for the specific purpose of issuing such securities. All of these subsidiaries' common securities are owned by LNC. Cash funds are also available from LNC's revolving credit agreement, which provides for borrowing up to
$750 million (see noteNote 5 to the consolidated financial statements on page 52)statements).
In 1998, LNC issued $300 million of long-term debt, $200 million of Series C Trust Originated Preferred Securities and $230 million of FELINE PRIDES. Also, LNC issued 2,796,224 shares of LNC common stock for $74.4 million in 1997 to purchase subsidiary
companies. Finally, LNC purchased and retired; 623,281; 4,948,900retired 7,675,000, 1,246,562 and 694,5829,897,800 shares of common stock at a cost of $377.7 million, $46.9 million;million and $325.3 million in 1999, 1998 and $35.01997, respectively. In May 1999, the LNC board authorized $500 million
to repurchase shares of common stock. The shares repurchased in 1998, 1997 and
1996, respectively. The 5,572,181 shares purchased in 1997 - 1998 includes
4,993,2811999 include 4,875,600 shares at a cost of $341.8$ 236.6 million that have been purchased since the June 1997May 1999 board authorization to repurchase up to $500 million of common stock.authorization. This leaves a Board authorization to repurchase an additional
$158.2$263.4 million of LNC's common stock as of December 31, 1998. Also LNC issued 1,323,144 shares of
LNC common stock in 1997 to purchase subsidiary companies.1999.
Another transaction that occurred in 1997 that had a major impact on LNC's cash flow was the sale of a subsidiary for $2.65 billion (see noteNote 11 to the consolidated financial statements on page 65)statements). LNC used these proceeds to 1) repurchase $341.8 million of its own
common stock, 2) retire $86.7 million in long-term debt, 3) fund the purchase of a 49% interest in Seguros Serfin Lincoln for $85.0 million, 4) pay the $447.6 million of taxes related to the gain on sale of discontinued operations and 5) purchase a block
of individual life insurance and annuity business for $1.4 billion (see noteNote 11 to the consolidated financial statements on page 66)statements). The remaining balance was initially applied to pay off a portion of LNC's short-term debt and invested for general corporate
purposes, then later used to fund a portion of the purchase of another block of individual life insurance business.
In order to maximize the use of available cash, the holding company (Lincoln
National Corporation)(LNC) maintains a facility where subsidiaries can borrow from the holding company to meet their short-term needs and can invest their short-term funds with the holding company. Depending
on the overall cash availability or need, the holding company invests excess cash in short-term investments or borrows funds in the financial markets. In addition to facilitating the management of cash, the holding company receives dividends from its
subsidiaries, invests in operating companies, maintains an investment portfolio and pays shareholder dividends and certain corporate expenses.
Holding Company Cash Flow
Year Ended December 31 (in millions) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Dividends from subsidiaries:
Lincoln Life.................................................. $ 220.0 $ 150.0 $ 135.0
American States (subsidiary subsequently
transferred to discontinued operations ).................... -- 24.7 74.7
Other......................................................... 54.8 63.2 96.4
Net investment income........................................... 7.0 10.7 4.3
Operating expenses.............................................. (25.7) (36.9) (44.6)
Interest........................................................ (95.1) (84.1) (67.8)
Net sales (purchases) of investments............................ 188.9 4.2 91.2
Increase (decrease) in cash collateral on
loaned securities.............................................. (73.1) (21.9) (53.4)
Decrease (increase) in investment in subsidiaries............... (159.5) (116.8) 217.8
Sale of subsidiary (discontinued operations).................... (124.2) 822.5 --
(Investment in) sale of unconsolidated affiliates............... -- (69.0) (16.0)
Net increase (decrease) in debt................................. 268.6 (72.7) (178.5)
Decrease (increase) in receivables from subsidiaries............ 280.3 (23.0) (36.0)
Increase in loans from subsidiaries............................. 251.3 454.3 28.2
Decrease (increase) in loans to subsidiaries.................... (1,272.7) 414.7 (303.5)
Federal income taxes paid....................................... (374.3) (158.0) (143.8)
Net tax receipts from subsidiaries.............................. 354.7 206.8 122.3
Dividends paid to shareholders.................................. (209.0) (201.9) (191.2)
Common stock issued for benefit plans........................... 48.7 33.2 (0.2)
Retirement of common stock...................................... (46.9) (327.6) (32.7)
Other........................................................... (28.4) 24.0 (35.2)
The table above shows the cash flow activity for the holding company from 1996
through 1998. The line, "net tax receipts from (payments to) subsidiaries",
recognizes that the holding company receives tax payments from subsidiaries,
pays the consolidated tax liability and reimburses subsidiaries for the tax
effect of any taxable operating and capital losses.
28
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. Generally, these restrictions pose no short-term liquidity concerns for the
holding company. However, as discussed in detail within noteNote 7 on page 54,to the consolidated financial statements, the acquisition of two blocks of business in 1998 will placeplaced further restrictions on the ability of LNC's primary insurance subsidiary, Lincoln National Life, Insurance Company ("Lincoln Life"), to
declare and pay dividends. As a result of these acquisitions and dividends declared, Lincoln Life's statutory earned surplus will
be negative and it will beis negative. It is necessary for Lincoln Life to obtain the prior approval of the Indiana Insurance Commissioner before paying any
dividends to LNC until such time its statutory earned surplus is positive. It is expected
thatThe time frame for statutory earned surplus willto return to a positive position within two to
three years from the closing of the Aetna transaction assuming a level ofis dependent upon future 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
statutory earned surplus may not return to a positive position as soon as
expected.and dividends paid by Lincoln Life. Although no assurance
can be given management believes that the
approvals for the payment ofadditional dividends in amounts consistent with thosewill be approved, during 1999, Lincoln Life received regulatory approval and paid in
the past can be obtained.extraordinary dividends totaling $530 million to LNC. 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.
As of December 31, 1999, LNC's senior debt ratings included Moody's at A2 ("Very Good, Strong or High"), Standard and Poor's A- ("Very Good, Strong or High") and Duff & Phelps at A+ ("Very Good, Strong or High") and LNC's commercial paper ratings
included Moody's at P-1 ("Superior"), Standard and Poor's at A-2 ("Strong") and Duff & Phelps at D-1 ("High Grade"). During November of 1999, Standard and Poor's affirmed its senior debt rating and lowered its commercial paper rating from A-1
("Superior") to A-2 ("Strong"). In December 1999, Moody's put LNC's senior debt and commercial paper ratings under review for possible downgrade. Although the short-term borrowing rate on the issuance of commercial paper will increase approximately 0.10%
per annum as a result of the noted events, management believes that liquidity will not be adversely impacted.
During November of 1999, Standard and Poor's also lowered its commercial paper rating for Lincoln National (UK) PLC from A-1 ("Superior") to A-2 ("Strong"). Management believes that given the reduced number of investors for commercial paper with ratings
below A-1 and the regular liquidity problems around the time of the UK's Monetary Policy Committee meeting, it will on occasion be difficult for Lincoln National (UK) PLC to issue commercial paper and it will therefore have to draw upon alternative
short-term borrowing facilities in the form of bank loans. When this occurs, it is likely to cause an increase in its borrowing rate of approximately 0.20% per annum, but management believes that liquidity will not be adversely impacted.
Effect of Inflation
LNC's insurance affiliates, as well as other companies in the insurance industry, attempt to minimize the effect of inflation on their revenues and expenses by anticipating inflationary trends in the pricing of their products. Inflation, except for
changes in interest rates, does not have a significant effect on LNC's balance sheet due to the minimal amount of dollars invested in property, plant and equipment and the absence of inventories.
CAPITAL RESOURCES
Total shareholders' equity decreased $1.1 billion during the year ended December 31, 1999. Excluding the decrease of $1.0 billion related to the decrease in the unrealized gain (loss) on securities available-for-sale, shareholders' equity decreased $106
million. This decrease in shareholders' equity was the net result of decreases of $20 million related to a decrease in the accumulated foreign exchange gain, $219 million related to the declaration of dividends to shareholders, $378 million for the
retirement of common stock and $3 million for shares forefeited under benefit plans partially offset by increases due to $460 million of net income, $51 million from the issuance of common stock related to benefit plans and $3 million from the issuance of
common stock related to purchase of subsidiary companies.
During May 1999, LNC's Board of Directors approved a two-for-one stock split for its common stock. The record date for the stock split was June 4, 1999 and the additional shares were distributed to shareholders on June 21, 1999.
Capital adequacy is a primary measure used by insurance regulators to determine the financial stability of an insurance company. In the U.S., risk-based capital guidelines are used by the National Association of Insurance Commissioners to determine the
amount of capital that represents minimum acceptable operating amounts related to insurance and investment risks. Regulatory action is triggered when an insurer's statutory-basis capital falls below the formula-produced capital level. At December 31,
1999, statutory-basis capital for each of LNC's U.S. insurance subsidiaries was in excess of regulatory action levels of risk-based capital required by the jurisdiction of domicile.
As noted above, shareholders' equity includes net unrealized gain (loss) on securities available-for-sale. At December 31, 1999, the book value of $21.76 per share included $2.38 of unrealized losses on securities and at December 31, 1998, the book value
of $26.59 per share included $2.73 of unrealized gains on securities.
A significant portion of both realized and unrealized gains or losses on investments that support long-term life insurance, pension and annuity contracts are expected to be applied to contract benefits. These realized and unrealized gains or losses are
included in net income and shareholders' equity, respectively. Current accounting standards do not require or permit adjustment of policyholder reserves to recognize the full effect of these realized and unrealized gains or losses on future benefit
payments in the absence of a contractual obligation requiring their attribution to policyholders.
CONTINGENCIES
See Note 7 to the consolidated financial statements for information regarding claims for disability income coverages, liabilities and recoveries related to inappropriate selling of products in the UK, liabilities for personal accident reinsurance
programs, liabilities for marketing and compliance issues, the reserve for the run-off of group pension annuities and other contingency matters.
CENTURY COMPLIANCE
The Year 2000 issue was complex and affected many aspects of LNC's businesses. LNC was particularly concerned with Year 2000 issues that related to LNC's computer systems and interfaces with the computer systems of vendors, suppliers, customers and
business partners. From 1996 1999, LNC and its operating subsidiaries redirected a large portion of internal Information Technology ("IT") efforts and contracted with outside consultants to update systems to address Year 2000 issues. Experts were
engaged to assist in developing work plans and cost estimates and to complete remediation activities.
For the year ended December 31, 1999, LNC identified expenditures of $44.5 million ($28.9 million after-tax) to address this issue. This brings the expenditures for 1996-1999 to $91.6 million ($59.5 million after-tax). Because updating systems and
procedures is an integral part of LNC's on-going operations, most of the expenditures shown above for 1999 are expected to continue after all Year 2000 issues have been resolved. All Year 2000 expenditures have been funded from operating cash flows.
The scope of the overall Year 2000 program included the following four major project areas: 1) addressing the readiness of business applications, operating systems and hardware on mainframe, personal computer and local area network platforms (IT); 2)
addressing the readiness of non-IT embedded software and equipment (non-IT); 3) addressing the readiness of key business partners and 4) establishing year 2000 contingency plans. LNC companies completed these projects prior to year-end.
LNC businesses have not identified any major problems in their business processing. Minor problems have been resolved quickly. LNC businesses have not experienced any significant interruption in service to clients or business partners or in reporting to
regulators.
LEGISLATION
The Financial Services Modernization Act was passed in November 1999 and repeals the Glass-Steagall Act of 1933 and expands the Bank Holding Company Act of 1956. This new act allows cross-ownership by banks, securities firms and insurance companies. As a
result, there is speculation that there will be business combinations among banks, securities firms and insurance companies.
Tax legislation could reduce tax-advantages for some of LNC's life and annuity products. LNC continues to support reductions in the tax burden imposed on its businesses, employees and policyholders.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Exposures of Financial Instruments
LNC analyzes and manages the risks arising from market exposures of financial instruments, as well as other risks, in an integrated asset-liability management process that takes diversification into account. By aggregating the potential effect of market
and other risks of the entire enterprise, LNC estimates, reviews and in some cases manages the risk to its earnings and shareholder value. LNC has material exposures to several market risks including interest rate, default risk, foreign currency exchange
and equity price risks.
The exposures of financial instruments to market risks, and the related risk management processes, are most important in the Life Insurance and Annuities segment. This segment is where most of the invested assets support accumulation and investment
oriented insurance products. As an important element of its integrated asset-liability management process, LNC uses derivatives to minimize the effects of changes in interest rate levels and the shape of the yield curve. In this context, derivatives are
designated as a hedge and serve to reduce interest rate risk by mitigating the effect of large rises in interest rates on LNC's stream of earnings. Additional market exposures exist in LNC's other general account insurance products and in its debt
structure and derivatives positions. The primary sources of market risk are: 1) substantial, relatively rapid and sustained increases or decreases in interest rates, 2) fluctuations in currency exchange rates or 3) a sharp drop in equity market values.
Each of these market risks are discussed in detail in the following pages.
1) Interest Rate Risk
Accumulation and Investment Oriented Insurance Products. General account assets supporting accumulation and investment oriented insurance products total $24.2 billion or 68% and $26.0 billion or 69% and $22.4 billion or 75% of total invested assets at December 31, 19981999 and
1997,1998, respectively. Fixed maturity and equity securities are held at fair value on the balance sheet, mortgage loans on real estate are held at amortized cost and real estate is held at cost less depreciation while liabilities are generally held at
account values less surrender charges (see noteNote 1 to the consolidated financial statements on page 42)statements). The fair values for mortgage loans on real estate and guaranteed interest rate contracts are calculated on a discounted cash flow basis while fixed annuities and
other deposit liabilities are at policy cash surrender value (see noteNote 8 to the consolidated financial statements on page 60)statements).
With respect to these products, LNC seeks to earn a stable and profitable spread between investment income and interest credited to account values. If LNC has adverse experience on investments that cannot be passed onto customers, its spreads are reduced.
Alternatively, LNC may seek to maintain spreads and this may result in crediting rates that are not competitive in the market place. This strategy could result in adverse surrender experience on policies and could force LNC to liquidate a portion of its
portfolio to fund excess cash surrender value benefits.
29
LNC does not view the near term risk to spreads over the next twelve months to be material. The combination of a probable range of interest rate changes over the next twelve months, asset-liability management strategies, flexibility in adjusting policy
crediting rate levels and protection afforded by policy surrender charges and other switching costs all work together to minimize this risk. The interest rate scenarios of concern are those in which there is a substantial, relatively rapid increase or
decrease in interest rates that is then sustained over a long period.
Fixed Deferred Annuities. Assets of $17.2$16.8 billion and $15.6$17.2 billion at December 31, 1999 and 1998, and 1997, respectively, supportssupport the biggest category of accumulation and investment oriented insurance products, fixed deferred annuities. For these products,
LNC may adjust renewal crediting rates monthly or annually,quarterly, subject to guaranteed minimums ranging from 3% to 5%. The higher minimums apply to in-force blocks of older products that no longer are sold. Annuity insurance customers have the right to
surrender their policies at account value less a surrender charge that grades to zero over periods ranging from 5 to 10 years from policy issue date or, in some cases, the date of each premium received. Due to LNC's ability to change crediting rates to
reflect investment experience, the underlying assets are assumed to be a good proxy for the interest rate risk inherent in these liabilities. This assumption is appropriate for probable movements in interest rates over the next 12 months. This assumption
may not be appropriate for a substantial, relatively rapid increase or decrease in interest rates that is then sustained over a long period.
Universal Life. LNC had $6.1$5.4 billion and $3.4$6.1 billion in assets at December 31, 19981999 and 1997,1998, respectively, supporting universal life insurance on which it has the right to adjust renewal crediting rates subject to guaranteed minimums ranging from
4% to 6% at December 31, 1998.1999. Similar to annuities, universal life insurance customers have the right to surrender their policies at account value less a surrender charge that grades to zero over periods ranging from 10 to 20 years from policy issue date
or, in some cases, the date of each premium received.
Guaranteed Interest Contracts and Group Pension Annuities. LNC had assets totaling $2.7$2.0 billion and $3.4$2.7 billion at December 31, 19981999 and 1997,1998, respectively, that support guaranteed interest contracts, group pension annuities and immediate
annuities. Generally, the cash flows expected on these liabilities do not vary with fluctuations in market interest rates and are not adjustable by LNC. Accordingly, if experience on the assets supporting these products is more adverse than the
assumptions used in pricing the products, spreads will tend to be below expectations. LNC limits exposure to interest rate risk by managing the duration and maturity structure of each investment portfolio in relation to the liabilities it supports.
Other General Account Insurance Products. LNC had $11.9$11.4 billion and $7.4$11.9 billion of assets at December 31, 19981999 and 1997,1998, respectively, supporting general account products, including disability income and term life insurance. For these products,
the liability cash flows may have actuarial uncertainty. However, their amounts and timing do not vary significantly with interest rates. LNC limits interest rate risk by analyzing the duration of the projected cash flows and structuring investment
portfolios with similar durations.
Interest Rate Risk--FallingRisk -- Falling Rates. Interest rates fell in 1995, rose again in 1996, and declined in 1997 and 1998.1998 and rose again in 1999. For example, the five-year Treasury yield declined from 7.8% in 1994 to 5.4% at the end of 1995, increased to
6.2% by the end of 1996, decreased to 5.7% by the end of 1997, and decreased to 4.5% by the end of 1998.1998 and increased to 6.3% by the end of 1999. Under scenarios in which interest rates fall and remain at levels significantly lower than those prevailing at
December 31, 1998,1999, minimum guarantees on annuity and universal life insurance policies (generally 3% to 5% or an average of approximately 4%) could cause the spread between the yield on the portfolio and the interest rate credited to policyholders to
deteriorate. Select contracts that specify these minimum guarantees can be amended periodically to reflect current interest rate conditions. The earned rate on the annuity and universal life insurance portfolios averaged 8%7.7% and 7.7%,7.6% respectively, for
the year ended December 31, 1998,1999, providing a cushion for furthera decline before the earned rates would be insufficient to cover minimum guaranteed rates plus the target spread. The maturity structure and call provisions of the related portfolios are structured
to afford protection against erosion of this cushion for a period of time. However, spreads would be at risk if interest rates continued to fall and remained lower for a long period. LNC manages these exposures by maintaining a suitable maturity structure
and by limiting its exposure to call risk in each respective investment portfolio.
LNC believes that the portfolios supporting its accumulation and investment oriented insurance products have a prudent degree of call protection individually and on a consolidated basis. As of December 31, 19981999, the mortgage-backed securities ("MBS") and
asset-backed securities ("ABS") portion of the portfolio represented a total of $5.1$4.4 billion or 20%18% of the $26.0$24.2 billion of general account assets supporting such products. Of this
30
portfolio, 15%13% of general account assets or $4.0$3.1 billion is subject to
residential prepayment risk from investments made in Collateralized Mortgage Obligations ("CMOs"), mortgage pass-throughs, manufactured housing and home equity loans. As of December 31, 19971998, the MBS and ABS portion of the portfolio represented a total of
$4.5$5.1 billion or 20% of the $22.4$26.0 billion of general account assets supporting such products. LNC's MBS portfolio has equal to or slightly less prepayment risk than the MBS pass-through market in general primarily due to holding more seasoned securities in
the portfolio. Due to the
combination of recent lower interest rates and increased efficiency by mortgage-holders in exercising their prepayment options, the riskiness of these securities has increased over the last few years without a compensating adjustment to risk premiums. This trend has also reduced
the degree of protection provided by the purchase of protected amortization class CMOs. As a result, LNC has reduced its exposure to the MBS asset class in recent years.
Interest Rate Risk--RisingRisk -- Rising Rates. For both annuities and universal life insurance, a rapid and sustained rise in interest rates poses risks of deteriorating spreads and high surrenders. The portfolios supporting these products have fixed-rate
assets laddered over maturities generally ranging from one to ten years or more. Accordingly, the earned rate on each portfolio lags behind changes in market yields. As rates rise, the lag may be increased by slowing MBS prepayments. The greater and
faster the rise in interest rates, the more the earned rate will tend to lag behind market rates. If LNC sets renewal crediting rates to earn the desired spread, the gap between its renewal crediting rates and competitors' new money rates may be wide
enough to cause increased surrenders. If LNC credits more competitive renewal rates to limit surrenders, its spreads will narrow. LNC devotes extensive effort to evaluating these risks by simulating asset and liability cash flows for a wide range of
interest rate scenarios. Such analysis has led to adjustments in the target maturity structure and to hedging the risk of rising rates by buying out-of-the-money interest rate cap agreements and swaptions (see discussion below). With this hedge, the
potential adverse impact of a rapid and sustained rise in rates is kept within corporate risk tolerances. LNC believes that the risks of rising interest rates are also mitigated by its emphasis on periodic premium products.
Debt. As of December 31, 1999, LNC had short-term debt, long-term debt and company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures totaling $1.92 billion ($1.46 billion with
fixed rates and $0.46 billion with floating rates). As of December 31, 1998, LNC had short-term debt, long-term debt and minority interest-preferred securities of subsidiary companies totaling $1.8$1.77 billion ($1.61.56 billion with fixed rates and $214.4 million with floating rates).
As of December 31, 1997, LNC had short-term debt, long-term debt and minority,
interest- preferred securities of subsidiary companies totaling $1.1$0.21
billion
($835.6 million with fixed rates and $287.6 million with floating rates). LNC manages the timing of maturities and the mixture of fixed-rate and floating-rate debt as part of the process of integrated management of interest rate risk for the entire enterprise.
Derivatives. As indicated in noteNote 7 to the consolidated financial statements, on
page 57, LNC has entered into derivative transactions to reduce its exposure to rapid rises in interest rates. The four programs discussed below are used to help LNC achieve more
stable margins while providing competitive crediting rates to policyholders during periods when interest rates are rising. Failure to maintain competitive crediting rates could cause policyholders to withdraw their funds and place them in more competitive
products.
LNC uses interest rate cap agreements to hedge against the negative impact of a significant and sustained 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 stated in the agreements, applied to a notional amount. As of December 31, 1999 and 1998, LNC had agreements with notional amounts of $2.5 billion and $4.1 billion, withrespectively. At December 31,
1999, the agreements had cap rates ranging from 25050 to 800550 basis points above prevailing interest rates. The cap rates in some contracts increase over time. These agreements expire in 19992000 through 2006.
LNC also uses swaptions to hedge against the negative impact of a significant and sustained rise in interest rates. Swaptions are options to enter into a swap at a specified future date. If the option is exercised at expiration, the option is either
settled in cash or exercised into a swap agreement. LNC purchases swaptions to be settled in cash. At expiration, the counterparty is required to pay LNC the amount, if any, of the present value of the difference between the fixed rate on a market rate
swap and the strike rate stated in the agreement, applied to a notional amount. As of December 31, 1999 and 1998, LNC had agreements with notional amounts of $1.8 billion and $1.9 billion, withrespectively. At December 31, 1999, the agreements had strike
rates ranging from 350200 to 900450 basis points above prevailing interest rates. These agreements expire in 19992000 through 2003.
Notional for interest rate caps and swaptions decreased by $1.6 billion and $0.1 billion, respectively, as a result of expirations. Interest rate caps and swaptions were not purchased during the year, reflecting declining fixed annuity sales and no
significant change in fixed annuity account values.
For future periods, the fair value of LNC's interest rate caps and swaptions depends on the levels of interest rates on U.S. Treasury securities with maturities of two, five, seven and ten years and U.S. dollar swap rates with five, seven and ten year
maturities. The table below analyzes fair value levels at December 31, 19981999 and for the next five years if the rates were 2%, 4%, 6%, 8%,10% or 12% higher than they were at December 31, 31, 1998.1999. In relation to the level of these rates at December 31, 1998,1999,
the cap and swaption rates were from 2.5%0.5% to 9.0%5.5% out-of-the-money, i.e., higher. The table below shows the fair value levels of interest rate caps and swaptions under these scenarios.
Year Ended December 31, 1998 (in millions) 1998 1999 2000 2001 2002 2003
- -------------------------------------------------------------------------------------------------------------------
No change........................................ 3.4 1.6 .5 .1 -- --
Up 2%.......................................... 30.1 20.4 9.4 3.4 1.1 0.5
Up 4%.......................................... 111.3 93.1 62.9 38.6 15.1 4.6
Up 6%.......................................... 267.1 286.9 249.6 137.8 86.8 47.3
Up 8%.......................................... 466.0 412.2 346.8 278.7 203.8 130.7
Up 10%........................................... 666.5 592.6 513.7 429.0 330.0 239.6
Up 12%........................................... 856.5 770.7 683.6 587.4 474.8 367.4
scenarios based on notional amounts outstanding at the year-end given.
Year Ended December 31, 1999 (in millions) 1999 2000 2001 2002 2003 2004
- ------------------------------------------------------------------------------------------------------------------
No change 14.0 6.8 2.4 0.8 0.3 0.1
Up 2% 79.2 53.7 29.4 12.1 4.2 1.6
Up 4% 210.7 171.7 124.5 80.6 48.5 29.6
Up 6% 374.9 316.1 248.6 178.8 124.2 88.8
Up 8% 539.0 463.9 380.2 289.4 214.4 165.4
Up 10% 695.4 610.5 513.8 406.4 315.0 253.5
Up 12% 843.3 754.0 648.3 528.2 423.2 352.1
LNC uses exchange-traded financial futures contracts and options on financial futures to hedge against interest rate risks and to manage duration of a portion of its fixed maturity securities. Financial futures contracts obligate LNC to buy or sell a
financial instrument at a specified future date for a specified price. They may be settled in cash or through delivery of the financial instrument. Cash settlements on the change in market values of financial futures contracts are made daily. Put options on a financial futures contract give LNC
the right, but not the obligation, to assume a long or short position in the
underlying futures contract at a specified price during a specified time period.
As of
December 31, 1998,1999, LNC did not have any open futures or options on
futures.
LNC uses interest rate swap agreements to hedge its exposure to floating rate bond coupon payments, replicating a fixed rate bond. An interest rate swap is a contractual agreement to exchange payments at one or more times based on the actual or expected
price, level, performance or value of one or more underlying interests. LNC is required to pay the counterparty the stream of variable interest payments based on the coupon payments generated from the hedged bonds, and in turn, receives a fixed payment from the
counterparty, at a predetermined interest rate. LNC also uses interest rate swap agreements to hedge its exposure to interest rate fluctuations related to the anticipated purchase of assets that support newly acquired blocks of business.business or to extend the
duration of certain portfolios of assets. As of December 31, 1999 and 1998, LNC had swap agreements with a notional amount of $630.9 million and $258.3 million, that expiresrespectively. The agreements expire in 2000 through 2009.2010. Notional for interest rate swaps
increased $372.6 million during 1999 primarily as a result of purchasing interest rate swaps to lengthen the duration of a certain portfolio of assets and to hedge variable interest on certain interest-only certificates.
In addition to continuing existing programs, LNC may use derivative products in other strategies to limit risk and enhance returns, particularly in the management of investment spread businesses. LNC has established policies, guidelines and internal
control procedures for the use of derivatives as tools to enhance management of the overall portfolio of risks assumed in LNC's operations.
Table of Significant Exposures. The table below provides a general measure of LNC's significant interest rate risk (principal amounts are shown by year of maturity and include amortization of premiums and discounts)discounts; notional amounts for interest
rate caps and swaptions are shown by amount outstanding at the year-end given) as of December 31, 1998.
There- Fair
(in millions of dollars) 1999 2000 2001 2002 2003 after Total Value
- --------------------------------------------------------------------------------------------------------------------
Rate Sensitive Assets:
Fixed maturity securities....... 915 975 1,308 1,309 1,752 25,543 31,802 30,233
Average interest rate............ 7.48% 7.21% 7.43% 7.95% 7.32% 7.65% 7.61%
Mortgage loans................... 246.4 316.9 221.5 590.4 250.8 2,752.1 4,378.1 4,580.4
Average interest rate............ 8.91% 9.04% 8.62% 8.44% 8.35% 8.30% 8.41%
Rate Sensitive Liabilities:
Guaranteed Interest Contracts:
Interest paid out annually....... 133.0 103.0 236.0 247.0
Average interest rate............ 7.23% 6.96% 7.11%
Interest paid at maturity........ 133.0 132.0 38.0 1.0 16.0 39.0 359.0 375.0
Average interest rate............ 6.93% 7.18% 8.15% 6.18% 10.67% 10.71% 7.72%
Investment type insurance
contracts, excluding
guaranteed interest
contracts (1)................... 731 820 1,066 1,135 1,134 13,755 18,641 19,232
Average interest rate............ 7.62% 7.66% 7.44% 7.83% 7.47% 7.88% 7.81%
Debt (2)......................... 314.6 .1 230.4 100.0 -- 1,128.3 1,773.4 1,807.7
Average interest rate............ 6.81% 7.75% 7.63% 7.75% 7.58%
32
There- Fair
(in millions of dollars) 1999 2000 2001 2002 2003 after Total Value
- -------------------------------------------------------------------------------------------------------------------
Rate Sensitive Derivative
Financial Instruments:
Interest Rate and Foreign
Currency Swaps:
Pay variable/receive fixed....... 2.4 10.0 49.6 26.2 50.1 167.2 305.5 10.2
Average pay rate................. 4.79% 5.11% 5.14% 5.12% 5.28% 5.37% 5.29%
Average receive rate............. 8.13% 6.36% 6.00% 6.97% 5.32% 6.51% 6.28%
Interest Rate Caps and
Swaptions: (3)
Outstanding cap notional.........2,511.1 2,741.5 3,216.3 2,542.3 659.3 613.7 3.4
Average strike rate (4).......... 9.3% 9.0% 8.9% 8.9% 8.4% 8.4%
Forward CMT curve (5)............ 4.6% 4.7% 4.6% 4.6% 4.8% 5.1%
1999.
There- Fair
(in millions) 2000 2001 2002 2003 2004 after Total Value
- ------------------------------------------------------------------------------------------------------------------------------
Rate Sensitive Assets:
Fixed interest rate securities 883.8 1,146.7 1,290.5 1,702.4 1,582.8 23,376.6 29,982.8 26,876.2
Average interest rate 7.20% 7.52% 7.57% 7.59% 7.72% 7.93% 7.84%
Variable interest rate securities -- -- 56.5 -- 3.6 1,460.2 1,520.3 812.6
Average interest rate 17.30% 8.28% 9.25% 9.78%
Mortgage loans 254.5 187.9 556.5 266.2 643.3 2,821.4 4,729.8 4,615.5
Average interest rate 9.02% 8.31% 8.33% 8.17% 7.73% 7.92% 8.03%
Rate Sensitive Liabilities:
Guaranteed Interest Contracts:
Interest paid out annually 94.0 -- -- -- -- -- 94.0 98.0
Average interest rate 7.02% 7.02%
Interest paid at maturity 87.0 41.0 2.0 17.0 26.0 17.0 190.0 196.0
Average interest rate 7.38% 8.15% 6.18% 10.67% 10.71% 10.72% 8.61%
Investment type insurance
contracts, excluding
guaranteed interest contracts (1) 786.8 921.9 1,236.2 1,168.7 1,250.9 15,730.6 21,095.1 19,065.2
Average interest rate 7.41% 7.59% 7.70% 7.42% 7.55% 7.97% 7.86%
Debt (2) 460.1 230.0 100.0 -- -- 1,128.3 1,918.4 1,806.5
Average interest rate 5.80% 7.75% 7.63% 7.75% 7.27%
Rate Sensitive Derivative
Financial Instruments:
Interest Rate and Foreign
Currency Swaps:
Pay variable/receive fixed 10.0 49.6 26.2 48.4 5.0 535.9 675.1 (20.0)
Average pay rate 6.5% 6.5% 6.6% 7.0% 7.0% 7.2% 7.1%
Average receive rate 6.4% 6.0% 7.0% 5.3% 5.9% 6.8% 6.6%
Interest Rate Caps and
Swaptions: (3)
Outstanding notional 2,966.4 3,232.2 2,542.3 659.3 250.0 250.0 14.0
Average strike rate (4) 9.0% 8.9% 8.9% 8.4% 8.4% 8.4%
Forward CMT curve (5) 6.5% 6.6% 6.6% 6.5% 6.5% 6.7%
The table below shows the principal amountamounts and fair value for LNC'svalues of assets, liabilities and derivatives having significant interest rate risks as of December 31, 1997.1998.
Principal Fair
(in millions) Amount Value
- -------------------------------------------------------------------------------
Fixed interest rate securities $30,414.5 $29,449.4
Variable interest rate securities 1,387.7 783.5
Mortgage loans 4,378.1 4,580.4
Guaranteed interest contracts 595.0 622.0
Investment type insurance contracts (1) 18,641.0 19,232.0
Debt (2) 1,773.4 1,807.7
Interest rate and foreign currency swaps -- 10.2
Interest rate caps and swaptions (3) -- 3.4
Principal
(in millions| (1) | The information shown is
for the fixed maturity securities and mortgage loans that support these
insurance contracts. |
| (2) | Includes minority interest
preferred securities of dollars) Amount Fair Value
- ---------------------------------------------------------------------------------------------------------------
Fixedsubsidiary companies. |
| (3) | Swaptions notional is shown
converted to cap equivalent. |
| (4) | The indexes are a mixture
of five-year and ten-year Constant Maturity Treasury ("CMT") and Constant
Maturity Swap ("CMS"). |
| (5) | The CMT curve is the five-year
constant maturity securities............................................. 25,373.0 24,066.4
Mortgage loans........................................................ 3,294.8 3,473.5
Guaranteed interest contracts......................................... 1,139.0 1,169.9
Investment type insurance contracts (1)............................... 17,632.7 18,329.8
Debt.................................................................. 1,126.2 1,161.8
Interest rate caps and swaptions (notional) (3)....................... 7.8treasury forward curve. |
(1) The information shown is for the fixed maturity securities and mortgage
loans that support these insurance contracts.
(2) Includes minority
interest - preferred securities of subsidiary companies.
(3) Swaptions notional is shown converted to cap equivalent.
(4) The indexes are a mixture of five-year and ten-year Constant Maturity
Treasury ("CMT") and Constant Maturity Swap ("CMS").
(5) The CMT curve is
the five-year constant maturity treasury forward curve.
2) Foreign Currency Risk
Foreign Currency Denominated Investments. LNC invests in foreign currency securities for incremental return and risk diversification relative to United States Dollar-Denominated ("USD") securities.securities and to hedge foreign insurance liabilities. The
fair value of foreign securities, which are denominated in sixfive different foreign currencies, totaled $166.8$141.3 million as of December 31, 1998.1999. LNC periodically uses a combination of foreign exchange forward contracts, foreign currency options, and foreign
currency swaps to hedge some of the foreign exchange risk related to its investments in securities denominated in foreign currencies. The currency risk is hedged using foreign currency derivatives of the same currency as the bonds. Unhedged, a 10% adverse move in the currency would create a $16.7 million
pre-tax loss. The aggregate USD equivalent of forward currency positions hedging
the portfolio was $47.4 million; the unhedged amount of the portfolio was $119.4
million. A 10% adverse currency move has thus been reduced to $11.9 million
pre-tax through hedging. This number is approximate because not all foreign
currency derivatives are struck at the current spot rate. The table below shows
LNC's exposure to foreign currency securities. Also included is the relevant information relating to the foreign currency derivatives that are hedging the currency risk of these securities. The table below presents the principal (notional) amount in U.S.
dollar equivalents by expected maturity for LNC's foreign currency denominated investments as of December 31, 1998.
There- Fair
(in millions of dollars) 1999 2000 2001 2002 2003 after Total Value
- ---------------------------------------------------------------------------------------------------------------
Currencies
Canadian Dollar............ 16.3 .6 9.4 10.6 9.8 59.2 105.9 114.0
Interest Rate............ 9.50% 5.57% 8.29% 7.67% 7.15% 6.22% 7.13%
British Pound.............. 6.5 15.6 22.1 25.9
Interest Rate............ 5.07% 10.07% 8.54%
Argentine Peso............. 10.0 7.0 17.0 14.0
Interest Rate............ 11.54% 11.70% 11.61%
All Other Currencies....... 8.1 .5 5.2 13.8 12.9
Interest Rate............ 19.54% 14.73% 12.40% 16.94%
------ ------ ----- ------ ----- ------ ------ -----
Total Currencies.... 24.4 1.1 15.9 20.6 9.8 87.0 158.8 166.8
Derivatives
Forwards................. 1.5 -- -- -- -- -- 1.5 .004
Swaps.................... 2.4 -- 9.6 8.3 -- 26.9 47.2 .4
331999.
There- Fair
(in millions) 2000 2001 2002 2003 2004 after Total Value
- ------------------------------------------------------------------------------------------------------------------------------
Currencies:
Canadian Dollar $0.6 $10.0 $11.3 $10.3 $8.3 $54.3 $94.8 $95.3
Interest Rate 5.57% 8.29% 7.68% 7.15% 5.61% 6.31% 6.71%
British Pound -- 6.3 -- -- -- 15.1 21.4 23.1
Interest Rate 4.18% 10.07% 8.30%
Argentine Peso -- -- 10.0 -- -- 7.0 17.0 15.1
Interest Rate 11.54% 11.70% 11.61%
All Other Currencies 2.2 2.0 -- -- -- 4.1 8.3 7.8
Interest Rate 14.49% 12.42% 7.96% 11.09%
Total Currencies 2.8 18.3 21.3 10.3 8.3 80.5 141.5 141.3
Derivatives:
Swaps -- 9.6 8.3 -- -- 26.3 44.2 (0.4)
The table below presents the principal (notional) amount in U.S. dollar equivalents as of December 31, 1997.
Fair
(in millions) Principal Value
- -------------------------------------------------------------------------------------------------------------------
Currencies:
Canadian Dollar............................................................... $ 83.5 $ 91.2
British Pound................................................................. 78.3 90.0
Japanese Yen.................................................................. 65.1 73.6
German Mark................................................................... 62.1 67.3
Italian Lira.................................................................. 44.9 54.8
All other currencies.......................................................... 134.9 142.9
----- -----
Total Currencies........................................................ $468.8 $519.8
Derivatives:
Forwards...................................................................... $163.1 $ 5.4
Swaps......................................................................... 15.0 (2.1)
1998.
Fair
(in millions) Principal Value
- ----------------------------------------------------------------------
Currencies:
Canadian Dollar $105.9 $114.0
British Pound 22.1 25.9
Argentine Peso 17.0 14.0
All other currencies 13.8 12.9
----------- ---------
Total Currencies $158.8 $166.8
Derivatives:
Forwards $1.5 $0.004
Swaps 47.2 0.4
Foreign Currency Forward Contracts. LNC uses foreign currency forward contracts to hedge some of the foreign exchange risk related to its investments in fixed maturity securities denominated in foreign currencies. LNC typically engages in
short-term currency forward contracts of less than six months and actively monitors currency markets in determining those currencies to hedge, the duration of the hedge and the nominal amount to hedge. A foreign currency forward contract obligates LNC to
deliver a specified amount of currency at a future date at a specified exchange rate. The value of the foreign exchange forward contracts at any given point fluctuates according to the underlying level of exchange rate and interest rate differentials.
Foreign Currency Swaps. A foreign currency swap is a contractual agreement to exchange the currencies of two different countries at a fixed rate of exchange in the future. LNC periodically uses foreign exchange forward contractscurrency swaps to hedge againstconvert the cash flow of foreign exchange risk relatedcurrency
securities to LNC's investment in its British subsidiary, Lincoln National (UK). As of
December 31, 1998, LNC did not have any open foreign exchange forward contracts
related to its investment in Lincoln National (UK).
U.S. dollars.
Foreign Currency Options. A foreign currency option gives LNC the right, but not the obligation, to buy or sell a foreign currency at a specific exchange rate during a specified time period. LNC has historically used options that were slightly
"out-of-the-money" resulting in a "corridor" of currency risk assumed, but limited the risk above the strike price. At December 31, 1998,1999, LNC did not have any open positions in foreign currency options.
Foreign Currency Swaps. A foreign currency swap is a contractual agreement to
exchange the currencies of two different countries pursuant to an agreement to
re-exchange the two currencies at the same rate of exchange at a specified
future date. LNC uses foreign currency swaps to convert the cash flow of foreign
currency securities to U.S. dollars. LNC had foreign currency swaps with a total
notional amount of $47.2 million and $15.0 million for December 31, 1998 and
1997, respectively.
3) Equity Market Exposures
LNC's revenues, assets, liabilities and derivatives are exposed to equity market risk.
Fee Revenues. The fee revenues of LNC's Investment Management segment and fees earned from variable annuities are exposed to the risk of a decline in equity market values. These fees are generally a fixed percentage of the market value of assets
under management. In a severe equity market decline, fee income could be reduced by not only reduced market valuations but also by customer withdrawals.withdrawals and redemptions. Such withdrawals and redemptions from equity funds and accounts might be partially
offset by transfers to LNC's fixed-income accounts and the transfer of funds to LNC by its competitors' customers.
Assets. While LNC invests in equity assets with the expectation of achieving higher returns than would be available in its core fixed-income investments, the returns on, and values of, these equity investments are subject to somewhat greater market
risk than its fixed income investments. These investments, however, add diversification benefits to LNC's fixed income investments. The table below shows the sensitivity of price changes to LNC's equity assets owned.
------------ December 31, 1998 --------------- --December 31, 1997--
10% Fair 10% Fair
Carrying Fair Value Value Carrying Fair
(in millions) Value Value Increase Decrease Value Value
- ------------------------------------------------------------------------------------------------------------------
U.S. Equities....................... 231.3 231.3 254.4 208.2 498.1 498.1
Foreign Equities..................... 276.5 276.5 304.2 248.8 157.7 157.7
Emerging Market Equities............. 35.0 35.0 38.5 31.5 4.6 4.6
------ ------ ------ ------ ------- -------
Sub-Total....................... 542.8 542.8 597.1 488.5 660.4 660.4
Real Estate.......................... 488.7 536.0 589.6 482.4 576.0 621.3
Other Equity Interests............... 312.5 356.9 392.6 321.2 202.1 245.5
------- ------- ------- ------- ------- --------
Total........................... $1,344.0 $1,435.7 $1,579.3 $1,292.1 $1,438.5 $1,527.2
34
December 31, 1999 December 31, 1998
----------------------------------------------- ---------------------
10% Fair 10% Fair
Carrying Fair Value Value Carrying Fair
(in millions) Value Value Increase Decrease Value Value
- ------------------------------------------------------------------------------------------------------
U.S. Equities $189.4 $189.4 $208.3 $170.5 $231.3 $231.3
Foreign Equities 401.6 401.6 441.8 361.4 276.5 276.5
Emerging Market Equities 13.0 13.0 14.3 11.7 35.0 35.0
----------- --------- --------- --------- --------- ---------
Subtotal 604.0 604.0 664.4 543.6 542.8 542.8
Real Estate 256.2 291.0 320.1 261.9 488.7 536.0
S&P 500 Index Call Options 24.8 24.8 30.4 20.6 23.1 23.1
Other Equity Interests 329.4 359.4 395.3 323.5 312.5 356.9
----------- --------- --------- --------- --------- ---------
Total $1,214.4 $1,279.2 $1,410.2 $1,149.6 $1,367.1 $1,458.8
Liabilities. LNC has an exposure to foreign currency equity risk with respect to unit-linkedvarious annuity policies issued in the UK. The aggregate U.S. dollar equivalent amount of account value was $11.1$8.6 million and $14.1$11.7 million at December 31, 19981999 and
1997,1998, respectively. LNC also has exposure to U.S. equity markets through reinsurance contracts that reinsure equity-indexed annuities. The aggregate amount of account value of these annuities is $89.4$24.8 million and $6.6$23.1 million at December 31, 19981999 and
1997,1998, respectively. These risks are being hedged with equity derivatives as discussed below.
Derivatives Hedging Equity Risks. LNC has two programs hedging equity market risk in annuities issued in the U.K.UK and U.S. that contain equity features.
LNC uses Over-the-Counter ("OTC") foreign currency equity call options to hedge against the foreign equity market risk component contained in its U.K.UK unit-linked annuities which are a function of the Financial Times Stock Exchange ("FTSE") index. These
call options require the counterparties to pay LNC at specified future expiration dates the amount, if any, of the percentage increase in the FTSE index over the strike price defined in the contract, applied to a notional amount. LNC had agreements with
notional amounts of $11.1$4.3 million and $14.1$11.1 million at December 31, 19981999 and 1997,1998, respectively. The call options expirations are matched to the liabilities and expire in 19992000 through 2001.
LNC uses OTC equity call options on the S&P&P 500 index to hedge against the increase in its liabilities resulting from certain reinsurance agreements which guarantee payment of the appreciation of the S&P&P 500 index on certain underlying annuity
products. These call options require the counterparty to pay LNC at specified future expiration dates the amount, if any, of the percentage increase in the S&P&P 500 index over the strike price defined in the contract, applied to the notional amount.
The reinsurance agreement then requires LNC to pay any appreciation on the S&P&P 500 index to the reinsurance client. LNC had agreements with notional amounts of $79.9$129.6 million and $5.3$79.9 million for December 31, 19981999 and 1997,1998, respectively. The call
options expirations are matched to the liabilities and expire in 2000 through 2007. Notional for the call options increased by $49.7 million during 1999 through 2006.
as a result of purchasing additional options to support additional business assumed under the
reinsurance agreement.
Default Risk. In assessing the risk that the rate of default losses for each
category of asset may be higher than the rates assumed in pricing its products,
LNC considers the entire $37.9 billion LNC's portfolio of invested assets was $35.6 billion as of December 31, 1998, taking diversification into account.1999. Of this total, $22.5$21.1 billion consists of corporate bonds and $4.4$4.7 billion consists of commercial mortgages. LNC manages the risk of adverse default
experience on these investments by applying disciplined credit evaluation and underwriting standards, prudently limiting allocations to lower-quality, higher-yielding investments, and diversifying exposures by issuer, industry, region and property type.
For each counterparty or borrowing entity and its affiliates, LNC's exposures from all transactions are aggregated and managed in relation to formal limits set by rating quality and industry group. LNC remains exposed to occasional adverse cyclical
economic downturns during which default rates may be significantly higher than the long-term historical average used in pricing. As of December 31, 1997,1998, LNC had a portfolio of invested assets of $29.8$37.9 billion.
LNC is depending on the ability of derivative product dealers and their guarantors to honor their obligations to pay the contract amounts under interest
rate cap agreements, swaptions, spread-lock agreements, interest rate swaps,
commodity swaps, call options, put options foreign currency exchange contracts,
foreign currency options and foreign currency swaps.various derivatives agreements. In order to minimize the risk of default losses, LNC diversifies its exposures
among several dealers and limits the amount of exposure to each in accordance with the credit rating of each dealer or its guarantor. LNC generally limits its selection of counterparties that are obligated under these derivative contracts to those with an
A credit rating or above.
Credit-Related Derivatives. LNC periodically uses spread-lock agreements to hedge a portion of the value of its fixed maturity securities against the risk of widening in the spreads between their yields and the yields of comparable maturity U.S. or
other Government obligations. As of December 31, 1998,1999, LNC did not have any open spread-lock agreements. LNC uses put options, combined with various perpetual fixed-income securities and interest rate swaps to replicate fixed-income, fixed-maturity
investments. The risk being hedged is a drop in bond prices due to credit concerns with the international bond issuers. The put options allow LNC to put the bonds back to the counterparties at original par. As of December 31, 1998,1999, LNC had put options
with a notional amount of $21.3 million that expire in 2007.
35
Item 8. Financial Statements and Supplementary Data
(in millions, except per share data)
Operating Results by Quarter 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
- ------------------------------------------------------------------------------------------
1999 Data
Premiums and other considerations $963.9 $981.5 $939.7 $1,108.1
Net investment income 709.5 700.8 697.1 700.1
Realized gain (loss) on investments 1.9 (4.0) 5.4 (0.3)
Net income (1) 145.1 148.4 132.3 34.6
Net income per diluted share (2) $0.71 $0.73 $0.66 $0.18
1998 Data
Premiums and other considerations $765.7 $823.2 $794.7 $1,003.0
Net investment income 658.4 658.7 649.6 714.7
Realized gain (loss) on investments 23.9 25.5 (26.7) (3.7)
Net income $122.0 $148.7 $113.5 $125.6
Net income per diluted share (2) $0.60 $0.73 $0.56 $0.62
(in millions, except per share)
Operating Results by Quarter 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
- -------------------------------------------------------------------------------------------------------------
1998 Data
Premiums| (1) | Net income for the third
and other considerations .................. $765.7 $823.3 $794.7 $1,003.0
Net investment income................................ 658.4 658.7 649.6 714.7
Realized gain (loss) on investments.................. 23.9 25.5 (26.7) (3.7)
Net income........................................... $122.0 $ 148.7 $113.5 $ 125.6
Netfourth quarters of 1999 includes special charges for changes in estimates
of reserves and the fourth quarter includes a charge for estimated settlement
costs for participation in workers' compensation carve-out business and
a tax benefit related to the release of a tax valuation allowance. |
| (2) | The net income per diluted
share......................... $ 1.20 $ 1.46 $ 1.11 $ 1.24
1997 Data
Premiumsshare amounts for 1998 and other considerations.................... $626.6 $567.8 $661.5 $ 669.2
Net investment income................................ 559.4 557.8 548.5 585.1
Realized gain on investments......................... 12.1 2.5 57.0 51.0
Net income (loss) from continuing operations (1)..... $ 83.0 $(48.0) $124.9 $ (137.7)
Discontinued operations (1).......................... 48.3 40.2 46.4 776.9
----- ----- ----- ------
Net Income (Loss)................................. $131.3 $ (7.8) $171.3 $ 639.2
Net income from continuing
operations per diluted share........................ $ .79 $ (.46) $ 1.20 $ (1.34)
Discontinued operations per share.................... .47 .39 .45 7.55
----- --- ---- -----
Net Income (Loss) Per Diluted Share.............. $ 1.26 $ (.07) $ 1.65 $ 6.21the first quarter of 1999 have been adjusted
to reflect the effects of the two-for-one stock split of LNC's common stock
which was effective June, 1999. |
(1)Net income (loss) from continuing operations for the second and fourth
quarters of 1997 include special charges for changes in estimates on
reserves.Consolidated Financial Statements
The discontinued operations amount for the fourth quarter of 1997
includes the gain on sale of the discontinued operations. See notes 2 and 11
to the consolidated financial statements on pages 45 and 65, respectively.
Consolidated Financial Statements
Thenotes to consolidated financial statements of Lincoln National Corporation and Subsidiaries follow on pages 3638 through 67.
36
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31 (000s omitted) 1998 1997
- ----------------------------------------------------------------------------------------------------------
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity
(cost: 1998-$28,639,558; 1997-$22,626,036)............. $30,232,892 $24,066,376
Equity
(cost: 1998-$436,718; 1997-$517,156)................... 542,843 660,428
Mortgage loans on real estate............................ 4,393,082 3,288,112
Real estate.............................................. 488,722 575,956
Policy loans............................................. 1,839,970 763,148
Other investments........................................ 431,964 464,826
----------- -----------
Total Investments..................................... 37,929,473 29,818,846
Investment in unconsolidated affiliates................... 18,811 20,975
Cash and invested cash.................................... 2,433,350 3,794,706
Property and equipment.................................... 174,762 189,811
Deferred acquisition costs................................ 1,964,366 1,623,845
Premiums and fees receivable.............................. 246,203 197,509
Accrued investment income................................. 528,500 423,008
Assets held in separate accounts.......................... 43,408,858 37,138,845
Federal income taxes...................................... 204,075 --
Amounts recoverable from reinsurers....................... 3,127,093 2,350,766
Goodwill.................................................. 1,484,343 457,729
Other intangible assets................................... 1,848,442 613,909
Other assets.............................................. 467,984 544,759
----------- ------------
Total Assets.......................................... $93,836,260 $77,174,708
37
December 31 (000s omitted) 1998 1997
- --------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Insurance and Investment Contract Liabilities:
Insurance policy and claim reserves................................ $20,139,982 $11,266,272
Contractholder funds............................................... 20,753,064 20,063,393
Liabilities related to separate accounts........................... 43,408,858 37,138,845
---------- ----------
Total Insurance and Investment Contract Liabilities............. 84,301,904 68,468,510
Federal income taxes............................................... -- 487,805
Short-term debt.................................................... 314,610 297,208
Long-term debt..................................................... 712,171 511,037
Minority interest - preferred securities of
subsidiary companies.............................................. 745,000 315,000
Other liabilities.................................................. 2,374,634 2,112,233
---------- ----------
Total Liabilities............................................. 88,448,319 72,191,793
Shareholders' Equity:
Series A preferred stock - 10,000,000 shares authorized
(1998 liquidation value - $2,637)................................. 1,083 1,153
Common stock - 800,000,000 shares authorized...................... 994,472 966,461
Retained earnings.................................................. 3,790,038 3,533,105
Accumulated Other Comprehensive Income:
Foreign currency translation adjustment............................ 49,979 46,204
Net unrealized gain (loss) on securities available-for-sale........ 552,369 435,992
---------- ----------
Total Accumulated Other Comprehensive Income................... 602,348 482,196
---------- ----------
Total Shareholders' Equity..................................... 5,387,941 4,982,915
---------- ----------
Total Liabilities and Shareholders' Equity..................... $93,836,260 $77,174,708
76.
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31 (000s omitted) 1999 1998
- --------------------------------------------------------------------------------------
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity
(cost: 1999-$28,357,057; 1998-$28,639,558) $ 27,688,613 $ 30,232,892
Equity
(cost: 1999-$481,531; 1998-$436,718) 603,954 542,843
Mortgage loans on real estate 4,735,397 4,393,082
Real estate 256,202 488,722
Policy loans 1,892,392 1,839,970
Other investments 401,826 431,964
------------- -----------
Total Investments 35,578,384 37,929,473
Investment in unconsolidated affiliates 25,825 18,811
Cash and invested cash 1,895,883 2,433,350
Property and equipment 203,753 174,762
Deferred acquisition costs 2,800,290 1,964,366
Premiums and fees receivable 259,630 246,203
Accrued investment income 533,183 528,500
Assets held in separate accounts 53,654,223 43,408,858
Federal income taxes 345,010 204,075
Amounts recoverable from reinsurers 3,954,345 3,127,093
Goodwill 1,423,039 1,484,343
Other intangible assets 1,746,499 1,848,442
Other assets 675,669 467,984
------------- -----------
Total Assets $103,095,733 $ 93,836,260
December 31 (000s omitted) 1999 1998
- ----------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Insurance and Investment Contract Liabilities:
Insurance policy and claim reserves $ 20,924,768 $ 20,139,982
Contractholder funds 20,228,753 20,753,064
Liabilities related to separate accounts 53,654,223 43,408,858
------------- -----------
Total Insurance and Investment Contract Liabilities 94,807,744 84,301,904
Short-term debt 460,153 314,610
Long-term debt 711,963 712,171
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debentures 745,000 745,000
Other liabilities 2,107,005 2,374,634
------------- -----------
Total Liabilities 98,831,865 88,448,319
Shareholders' Equity:
Series A preferred stock - 10,000,000 shares authorized
(1999 liquidation value - $2,309) 948 1,083
Common stock - 800,000,000 shares authorized 1,007,099 994,472
Retained earnings 3,691,470 3,790,038
Accumulated Other Comprehensive Income (Loss):
Foreign currency translation adjustment 30,049 49,979
Net unrealized gain (loss) on securities available-for-sale (465,698) 552,369
------------- -----------
Total Accumulated Other Comprehensive Income (Loss) (435,649) 602,348
------------- -----------
Total Shareholders' Equity 4,263,868 5,387,941
------------- -----------
Total Liabilities and Shareholders' Equity $103,095,733 $ 93,836,260
See notes to the consolidated financial statements on pages 42-67.
3844 through 76.
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(000s omitted except for
Year Ended December 31 per share amounts) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
Revenue:
Insurance premiums $1,881,515 $1,620,629 $1,328,735
Insurance fees 1,537,605 1,274,569 832,153
Investment advisory fees 223,803 227,059 204,926
Net investment income 2,807,512 2,681,406 2,250,764
Equity in earnings of unconsolidated affiliates 5,797 3,336 2,081
Realized gain on investments 2,955 19,034 122,570
Other revenue and fees 344,513 261,030 157,250
---------- ---------- ----------
Total Revenue 6,803,700 6,087,063 4,898,479
Benefits and Expenses:
Benefits 3,805,024 3,328,865 3,191,733
Underwriting, acquisition,
insurance and other expenses 2,295,015 1,943,749 1,579,341
Interest and debt expense 133,697 117,051 92,524
---------- ---------- ----------
Total Benefits and Expenses 6,233,736 5,389,665 4,863,598
---------- ---------- ----------
Net Income from Continuing Operations
Before Federal Income Taxes 569,964 697,398 34,881
Federal Income Taxes 109,610 187,623 12,651
---------- ---------- ----------
Net Income from Continuing Operations 460,354 509,775 22,230
Discontinued Operations (net of income taxes):
Net income prior to disposal -- -- 134,886
Gain on disposal -- -- 776,872
---------- ---------- ----------
Net Income $ 460,354 $ 509,775 $ 933,988
Earnings Per Common Share-Basic (1):
Net Income from Continuing Operations $2.33 $2.54 $0.11
Discontinued Operations -- -- 4.45
---------- ---------- ----------
Net Income $2.33 $2.54 $4.56
Earnings Per Common Share-Diluted (1):
Net Income from Continuing Operations $2.30 $2.51 $0.11
Discontinued Operations -- -- 4.38
---------- ---------- ----------
Net Income $2.30 $2.51 $4.49
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 (000s omitted) | (1) | 1998 and 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Revenue:
Insurance premiums..................................... $1,620,629 $1,328,735 $1,519,169
Insurance fees......................................... 1,274,569 832,153 713,519
Investment advisory fees............................... 227,059 204,926 180,792
Net investment income.................................. 2,681,406 2,250,764 2,087,946
Equity in earningsamounts have
been restated to reflect the two-for-one stock split of unconsolidated affiliates....... 3,336 2,081 1,416
Realized gain (loss) on investments.................... 19,034 122,570 92,520
Other revenue and fees................................. 261,030 157,250 138,246
--------- --------- ---------
Total Revenue....................................... 6,087,063 4,898,479 4,733,608
Benefits and Expenses:
Benefits............................................... 3,328,865 3,191,733 2,709,881
Underwriting, acquisition,
insurance and other expenses......................... 1,943,749 1,579,341 1,434,948
Interest and debt expense.............................. 117,051 92,524 84,721
--------- ---------- ----------
Total Benefits and Expenses.......................... 5,389,665 4,863,598 4,229,550
--------- --------- ---------
Net Income from Continuing Operations
Before Federal Income Taxes......................... 697,398 34,881 504,058
Federal income tax expense............................... 187,623 12,651 147,669
--------- -------- ---------
Net Income from Continuing Operations................ 509,775 22,230 356,389
Discontinued Operations (Net of income taxes):
Income prior to disposal .............................. -- 134,886 157,169
Gain on disposal ...................................... -- 776,872 --
------------- --------- --------------
Net Income........................................... $ 509,775 $ 933,988 $ 513,558
Earnings Per Common Share-Basic:
Net Income from Continuing Operations.................. $5.08 $ .22 $3.43
Discontinued Operations................................ -- 8.89 1.52
------- ---- ----
Net Income.......................................... $5.08 $9.11 $4.95
Earnings Per Common Share-Diluted:
Net Income from Continuing Operations.................. $5.02 $ .21 $3.38
Discontinued Operations................................ -- 8.77 1.49
------- ---- ----
Net Income........................................... $5.02 $8.98 $4.87LNC's common stock
which was effective June, 1999. |
See notes to the consolidated financial statements on pages 42-67.
39
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 (000s omitted) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income.................................................... $ 509,775 $ 933,988 $ 513,558
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred acquisition costs................................. (226,253) (23,519) 34,471
Premiums and fees receivable............................... 3,151 39,836 (77,379)
Accrued investment income.................................. (101,555) (5,426) (22,079)
Policy liabilities and accruals............................ 1,055,277 540,676 71,471
Contractholder funds....................................... 800,678 636,600 1,280,205
Amounts recoverable from reinsurers........................ (775,064) (22,252) (128,538)
Federal income taxes....................................... (205,198) 255,105 30,418
Equity in undistributed earnings of
unconsolidated affiliates................................. (1,636) (2,081) (1,428)
Provisions for depreciation................................ 58,070 58,136 51,328
Amortization of goodwill and other intangible assets....... 183,756 82,396 70,748
Realized (gain) loss on investments........................ (19,034) (122,570) (92,520)
Gain on sale of subsidiaries/discontinued operations....... -- (1,192,226) --
Other...................................................... 47,905 (65,857) (356,819)
--------- ----------- --------
Net Adjustments......................................... 820,097 178,818 859,878
--------- ---------- ---------
Net Cash Provided by Operating Activities............... 1,329,872 1,112,806 1,373,436
Cash Flows from Investing Activities:
Securities available-for-sale:
Purchases................................................... (11,780,821) (10,740,292) (15,661,295)
Sales....................................................... 9,278,969 10,098,697 12,135,338
Maturities.................................................. 1,987,506 1,461,390 981,264
Purchase of other investments................................. (2,922,984) (2,128,852) (2,450,400)
Sale or maturity of other investments......................... 1,831,412 1,961,551 2,187,615
Sale of subsidiary/discontinued operations.................... -- 2,650,000 --
Purchase of affiliates/business............................... (2,285,081) (11,847) (71,593)
Cash acquired from purchase of affiliates/business............ 2,323,220 -- 2,650,733
Increase (decrease) in cash collateral on
loaned securities............................................ 274,426 353,550 (97,257)
Other......................................................... (481,137) 121,065 (146,768)
--------- --------- --------
Net Cash Provided by (Used in) Investing Activities....... (1,774,490) 3,765,262 (472,363)
Cash Flows from Financing Activities:
Decrease in long-term debt (includes payments and
transfers to short-term debt)................................ (99,977) (116,942) (35,074)
Issuance of long-term debt.................................... 299,198 -- --
Net increase (decrease) in short-term debt.................... 17,402 108,248 (237,888)
Issuance of preferred securities of subsidiary companies...... 430,000 -- 315,000
Issuance costs related to FELINE PRIDES....................... (14,834) -- --
Universal life and investment contract deposits............... 1,314,301 986,541 1,125,532
Universal life and investment contract withdrawals............ (2,655,688) (2,709,662) (2,366,725)
Common stock issued for benefit plans......................... 48,747 33,199 (565)
Retirement of common stock.................................... (46,871) (327,585) (32,716)
Proceeds from sale of minority interest in subsidiary......... -- -- 215,182
Dividends paid to shareholders................................ (209,016) (201,927) (191,223)
------- -------- --------
Net Cash Provided by (Used in) Financing Activities........ (916,738) (2,228,128) (1,208,477)
----------- ----------- ---------
Net Increase (Decrease) in Cash............................ (1,361,356) 2,649,940 (307,404)
Cash and Invested Cash at Beginning-of-Year................... 3,794,706 1,144,766 1,452,170
--------- --------- ---------
Cash and Invested Cash at End-of-Year......................44 through 76.
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 (000s omitted) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 460,354 $ 509,775 $ 933,988
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred acquisition costs (309,318) (208,150) 1,754
Premiums and fees receivable (14,817) 3,151 39,836
Accrued investment income (4,683) (101,555) (5,426)
Policy liabilities and accruals 443,713 1,055,277 540,676
Contractholder funds 918,762 800,678 636,600
Amounts recoverable from reinsurers (316,982) (775,064) (22,252)
Federal income taxes 40,410 (205,198) 255,105
Equity in undistributed earnings of
unconsolidated affiliates (5,797) (1,636) (2,081)
Provisions for depreciation 57,169 58,070 58,136
Amortization of goodwill and other intangible assets 167,173 137,508 82,396
Realized (gain) loss on investments (2,955) (19,034) (122,570)
Gain on sale of subsidiaries/discontinued operations -- -- (1,192,226)
Other 202,294 (4,660) (169,362)
---------- --------- ----------
Net Adjustments 1,174,969 739,387 100,586
---------- --------- ----------
Net Cash Provided by Operating Activities 1,635,323 1,249,162 1,034,574
Cash Flows from Investing Activities:
Securities-available-for-sale:
Purchases (6,255,493) (11,780,821) (10,740,292)
Sales 4,210,498 9,278,969 10,098,697
Maturities 2,279,680 1,987,506 1,461,390
Purchase of other investments (1,948,818) (2,922,984) (2,128,852)
Sale or maturity of other investments 1,812,079 1,865,874 2,039,783
Sale of subsidiary/blocks of business and
discontinued operations (490,381) -- 2,650,000
Purchase of affiliates/business 11,086 (2,285,081) (11,847)
Cash acquired from purchase of affiliates/business -- 2,323,220 --
Increase (decrease) in cash collateral on
loaned securities (485,792) 274,426 353,550
Other (271,992) (434,889) 121,065
---------- ---------- ----------
Net Cash Provided by (Used in) Investing Activities (1,139,133) (1,693,780) 3,843,494
Cash Flows from Financing Activities:
Decrease in long-term debt (includes payments and
transfers to short-term debt) (476) (99,977) (116,942)
Issuance of long-term debt -- 299,198 --
Net increase in short-term debt 145,543 17,402 108,248
Issuance of preferred securities of subsidiary companies -- 430,000 --
Issuance costs related to FELINE PRIDES -- (14,834) --
Universal life and investment contract deposits 1,837,769 1,314,301 986,541
Universal life and investment contract withdrawals (2,468,354) (2,655,688) (2,709,662)
Common stock issued for benefit plans 48,014 48,747 33,199
Retirement of common stock (377,719) (46,871) (327,585)
Dividends paid to shareholders (218,434) (209,016) (201,927)
---------- ---------- ----------
Net Cash Used in Financing Activities (1,033,657) (916,738) (2,228,128)
---------- ---------- ----------
Net Increase (Decrease) in Cash and
Invested Cash (537,467) (1,361,356) 2,649,940
Cash and Invested Cash at Beginning-of-Year 2,433,350 3,794,706 1,144,766
---------- ---------- ----------
Cash and Invested Cash at End-of-Year $1,895,883 $2,433,350 $3,794,706 $1,144,766
See notes to the consolidated financial statements on pages 42-67.
4044 through 76.
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(000s omitted except for
Year Ended December 31 per share amounts) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
Series A Preferred Stock:
Balance at beginning-of-year $ 1,083 $ 1,153 $ 1,212
Conversion into common stock (135) (70) (59)
---------- ---------- ----------
Balance at End-of-Year 948 1,083 1,153
Common Stock:
Balance at beginning-of-year 994,472 966,461 904,331
Conversion of series A
preferred stock 135 70 59
Issued for benefit plans 51,288 50,666 34,592
Shares forfeited under benefit
plans (3,274) (1,919) (1,393)
Issued for acquisition of
subsidiaries 2,793 -- 74,390
Retirement of common stock (38,315) (5,972) (45,518)
Issuance costs related to
FELINE PRIDES -- (14,834) --
---------- ---------- ----------
Balance at End-of-Year 1,007,099 994,472 966,461
Retained Earnings:
Balance at beginning-of-year 3,790,038 3,533,105 3,082,368
Comprehensive income (loss) (577,643) 629,927 934,139
Less other comprehensive income
(loss):
Foreign currency translation gain (loss), net (19,930) 3,775 (20,250)
Net unrealized gain (loss) on securities
available-for-sale, net (1,018,067) 116,377 20,401
---------- ---------- ----------
Net Income 460,354 509,775 933,988
Retirement of common stock (339,404) (40,919) (279,808)
Dividends declared:
Series A, preferred ($3.00 per
share) (89) (100) (106)
Common (1) (1999-$1.115;
1998-$1.055; 1997-$0.995) (219,429) (211,823) (203,337)
---------- ---------- ----------
Balance at End-of-Year 3,691,470 3,790,038 3,533,105
Foreign Currency Translation
Adjustment:
Accumulated adjustment at
beginning-of-year 49,979 46,204 66,454
Change during the year (19,930) 3,775 (20,250)
---------- ---------- ----------
Balance at End-of-Year 30,049 49,979 46,204
Net Unrealized Gain (Loss) on
Securities
Available-for-Sale:
Balance at beginning-of-year 552,369 435,992 415,591
Removal of discontinued
operations -- -- (176,603)
Other change during the year (1,018,067) 116,377 197,004
---------- ---------- ----------
Balance at End-of-Year (465,698) 552,369 435,992
---------- ---------- ----------
Total Shareholders' Equity at
End-of-Year $4,263,868 $5,387,941 $4,982,915
Year Ended December 31 (Number of Shares) 1999 1998(1) 1997(1)
- ------------------------------------------------------------------------------------------------------
Series A Preferred Stock:
Balance at beginning-of-year 32,959 35,091 36,885
Conversion into common stock (4,102) (2,132) (1,794)
------------- ----------- ---------
Balance at End-of-Year 28,857 32,959 35,091
Common Stock:
Balance at beginning-of-year 202,111,174 201,718,956 207,317,150
Conversion of series A preferred stock 65,632 34,112 28,704
Issued for benefit plans 1,026,130 1,651,554 1,518,660
Shares forfeited under benefit plans (100,933) (46,886) (43,982)
Issued for purchase of subsidiaries 67,895 -- 2,796,224
Retirement of common stock (7,675,000) (1,246,562) (9,897,800)
------------- ----------- ---------
Balance Issued and Outstanding at End-of-Year 195,494,898 202,111,174 201,718,956
Common Stock at End-of-Year:
Assuming conversion of preferred stock 195,956,610 202,638,518 202,280,412
Diluted basis 197,003,999 203,395,433 204,726,230
. LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Year Ended December 31 (000s omitted) | (1) | 1998 and 1997 1996
--------------------------------------------------------------------------------------------------------------
Series A Preferred Stock:
Balance at beginning-of-year................................ $ 1,153 $ 1,212 $ 1,335
Conversion intoamounts have
been restated to reflect the two-for-one stock split of LNC's common stock................................ (70) (59) (123)
----- ----- ----
Balance at End-of-Year................................... 1,083 1,153 1,212
Common Stock:
Balance at beginning-of-year................................ 966,461 904,331 907,432
Conversion of series A preferred stock...................... 70 59 123
Issued for benefit plans.................................... 50,666 34,592 7,597
Shares forfeited under benefit plans........................ (1,919) (1,393) (4,771)
Issued for purchase of subsidiaries......................... -- 74,390 --
Retirement of common stock.................................. (5,972) (45,518) (6,050)
Issuance costs related to FELINE PRIDES .................... (14,834) -- --
------- ------- -------
Balance at End-of-Year.................................... 994,472 966,461 904,331
Retained Earnings:
Balance at beginning-of-year................................ 3,533,105 3,082,368 2,757,762
Comprehensive income........................................ 629,927 934,139 284,010
Less other comprehensive income (loss):
Foreign currency translation............................... 3,775 (20,250) 53,041
Net unrealized gain (loss) on securities
available-for-sale....................................... 116,377 20,401 (282,589)
------- ------- -------
Net Income........................................... 509,775 933,988 513,558
Realized gain (loss) on sale of minority
interest in subsidiary..................................... -- -- 34,121
Retirement of common stock.................................. (40,899) (279,808) (28,925)
Dividends declared:
Series A Preferred ($3.00 per share)........................ (100) (106) (112)
Common stock
(1998 - $2.11;
1997 - $1.99; 1996 - $1.87)................................ (211,823) (203,337) (194,036)
------- ------- -------
Balance at End-of-Year.................................. 3,790,038 3,533,105 3,082,368
Foreign Currency Translation Adjustment:
Accumulated adjustment at beginning-of-year................. 46,204 66,454 13,413
Change during the year...................................... 3,775 (20,250) 53,041
------- ------- -------
Balance at End-of-Year.................................. 49,979 46,204 66,454
Net Unrealized Gain (Loss) on Securities
Available-for-sale:
Balance at beginning-of-year................................ 435,992 415,591 698,180
Realized gain (loss) on sale of
minority interest in subsidiary............................ -- -- (19,101)
Removal of discontinued operations.......................... -- (176,603) --
Other change during the year................................ 116,377 197,004 (263,488)
--------- --------- ---------
Balance at End-of-Year.................................. 552,369 435,992 415,591
--------- --------- ---------
Total Shareholders' Equity at End-of-Year............... $5,387,941 $4,982,915 $4,469,956which was effective June, 1999. |
41
Year Ended December 31 (Number of Shares) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Series A Preferred Stock:
Balance at beginning-of-year................................. 35,091 36,885 40,646
Conversion into common stock................................. (2,132) (1,794) (3,761)
------ ----- ------
Balance Issued and Outstanding at End-of-Year............. 32,959 35,091 36,885
Common Stock:
Balance at beginning-of-year................................ 100,859,478 103,658,575 104,185,117
Conversion of series A preferred stock...................... 17,056 14,352 30,088
Issued for benefit plans.................................... 825,777 759,330 250,072
Shares forfeited under benefit plans........................ (23,443) (21,991) (112,120)
Issued for purchase of subsidiaries......................... -- 1,398,112 --
Retirement of common stock.................................. (623,281) (4,948,900) (694,582)
----------- ----------- ------------
Balance Issued and Outstanding at End-of-Year............. 101,055,587 100,859,478 103,658,575
Common Stock at End-of-Year:
Assuming conversion of preferred stock.................... 101,319,259 101,140,206 103,953,655
Diluted basis............................................. 101,697,717 102,363,115 104,766,000
See notes to the consolidated financial statements on pages 42-67.
42
44 through 76.
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
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. During 1998, thebusinesses divided into four business segments (see Note 9). The collective group of companies adopteduses "Lincoln Financial Group" as its marketing identity. Operations are
divided into four business segments (see note 9 on page 62). Less than majority-owned entities in which LNC has at least a 20% interest are reported on the equity
basis. These consolidated financial statements have been prepared in conformity with accounting principles generally accepted accounting principles.
in the United States.
Use of Estimates. The nature of the insurance and investment management businesses requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
Investments. LNC classifies its fixed maturity and equity securities as available-for-sale and, accordingly, such securities are carried at fair value. The cost of fixed maturity securities is adjusted for amortization of premiums and discounts.
The cost of fixed maturity and equity securities is adjusted for declines in value that are other than temporary.
For the mortgage-backed securities portion of the fixed maturity securities portfolio, LNC recognizes income using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. When estimates of prepayments
change, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The net investment in the securities is adjusted to the amount that would have existed had the new effective yield been applied at the time of
acquisition. This adjustment is reflected in net investment income.
Mortgage loans on real estate are carried at the outstanding principal balances less unaccruedunamortized discounts. Investment real estate is carried at cost less allowances foraccumulated depreciation. The cost for both mortgage loans andon real estate and investment real estate
is adjusted for declines in value that are other than temporary. Also, allowances for losses are established, as appropriate, for real estate holdings that are in the process of being sold. Real estate acquired through foreclosure proceedings is recorded
at fair value on the settlement date which establishes a new cost basis. If a subsequent periodic review of a foreclosed property indicates the fair value, less estimated costs to sell, is lower than the carrying value at the settlement date, the carrying
value is adjusted to the lower amount. Any changes to the reserves for mortgage loans on real estate and real estate are reported as realized gain (loss) on investments.
Policy loans are carried at aggregate unpaid balances.
Cash and invested cash are carried at cost and include all highly liquid debt instruments purchased with a maturity of three months or less.
Realized gain (loss) on investments is recognized in net income, net of associated amortization of deferred acquisition costs and capital gainsinvestment expenses, using the specific identification method. Changes in the fair values of securities carried at fair value
are reflected directly in shareholders' equity, after deductions for related adjustments for deferred acquisition costs and amounts required to satisfy policyholder commitments that would have been recorded had these securities been sold at their fair
value, and after deferred taxes or credits to the extent deemed recoverable.
Realized gain (loss) on sale of subsidiaries, net of taxes, is recognized in net income. Realized gain (loss) on sale of minority interests in subsidiaries is reflected directly in shareholders' equity net of deferred taxes, if any.
Derivatives.
Derivatives. For the years ended December 31, 1999, 1998 and 1997, LNC hedgeshedged certain portions of its exposure to interest rate fluctuations, the widening of bond yield spreads over comparable maturity U.S. Government obligations, credit risk,
foreign exchange risk, commodity risk credit risk,and fluctuations in certain stock indices increased liabilities associated with certain reinsurance
agreements and foreign exchange risk by entering into derivative transactions. A description of LNC's accounting for its hedging of such risks is discussed in the following two paragraphs.
43
Derivative balances are carried in other investments. The premiums paid for interest rate caps swaptions, put options and S&P call
optionsswaptions are deferred and amortized to net investment income on a straight-line basis over the term of the respective derivative. Interest rate caps that
hedge interest credited on fixed annuity liabilities are carried at amortized cost. Any settlement received in accordance with the terms of the interest rate caps is also recorded as net investment income. Realized gain (loss) from the termination of the
interest rate caps is included in net income. Settlements received on swaptions are
deferred and amortized over the life of the hedged assets as an adjustment to
yield. Swaptions, put options, spread-lock agreements, interest rate swaps, commodity swaps and financial futures that hedge fixed maturity securities available-for-sale are carried at fair value. The change in fair
value is reflected directly in shareholders' equity. Settlements on interest rate swaps and commodity swaps are recognized in net investment income. Realized gain (loss) from the settlementtermination of such derivatives isswaptions, put options, spread-lock agreements, interest rate
swaps, commodity swaps and financial futures are deferred and amortized over the life of the hedged assets as an adjustment to the yield. Over-the-counter call options which hedge liabilities tied to certain stock indices are carried at fair value. The
change in fair value is reflected directly in shareholders' equity. Anynet income. Settlements received and gain (loss) realized upon termination of these call options is included in net income. Foreign exchange forward contracts, which
hedge LNC's investment in its British subsidiary, Lincoln National (UK), are
carried at fair value. The change in fair value and realized gain (loss) on such
contracts is reflected directly in the foreign currency translation adjustment
component of shareholders' equity. Foreign exchange forward contracts, foreign currency options and foreign currency
swaps, which hedge some of the foreign exchange risk of investments in fixed maturity securities denominated in foreign currencies, are carried at fair value. The change in fair value is included in shareholders' equity. RealizedSettlements received and realized
gain (loss) from the settlementtermination of such derivatives is included in net income.
Hedge accounting is applied as indicated above after LNC determines that the items to be hedged expose LNC to interest rate fluctuations, the widening of bond yield spreads over comparable maturity U.S. Government obligations, fluctuations in certain
stock indices increased liabilities associated with
certain reinsurance agreements andor foreign exchange risk. Moreover, the derivatives used to hedge these exposures are designated as a hedgehedges and reduce the indicated risk by havingdemonstrating a high correlation between changes in the value of the derivatives and the items being
hedged at both the inception of the hedge and throughout the hedge period. Should such criteria not be met or if the hedged items have been sold, terminated or matured, the change in value of the derivatives is included in net income.
Loaned Securities. Securities loaned are treated as collateralized financing transactions and a liability is recorded equal to the repurchase price. Itcash collateral received which is LNC's policy to take possessiontypically greater than the market value of the related securities loaned. In other
instances, LNC will hold as collateral securities with a market value at least equal to the securities loaned. Securities loanedheld as collateral are not recorded at fair value as long
as the value of the related collateral is sufficient.in LNC's balance sheet in accordance with accounting guidance for secured borrowings and
collateral. LNC's agreements with third parties generally contain contractual provisions to allow for additional collateral to be obtained when necessary. LNC values collateral daily and obtains additional collateral when deemed appropriate.
Property and Equipment. Property and equipment owned for company use is carried at cost less allowances for depreciation.
Premiums and Fees. Revenue for universal life and other interest-sensitive insurance policies consists of policy charges for the cost of insurance, policy initiation and administration, and surrender charges that have been assessed. Traditional
individual life-health and annuity premiums are recognized as revenue over the premium-paying period of the policies. Group health premiums are prorated over the contract term of the policies.
Investment Advisory Fees. As specified in the investment advisory agreements with the mutual funds, fees are determined and recognized as revenues monthly, based on the average daily net assets of the mutual funds managed. Investment advisory
contracts generally provide for the determination and payment of advisory fees based on market values of managed portfolios at the end of a calendar month or quarter. Investment management and advisory contracts typically are renewable annually with
cancellation clauses ranging from 30up to 90 days.
Assets Held in Separate Accounts/Liabilities Related to Separate Accounts. These assets and liabilities represent segregated funds administered and invested by LNC's insurance subsidiaries for the exclusive benefit of pension and variable life and
annuity contractholders. Both the assets and liabilities are carried at fair value. The fees earned by LNC's insurance subsidiaries for administrative and contractholder maintenance services performed for these separate accounts are included in insurance
fee revenue.
Deferred Acquisition Costs. Commissions and other costs of acquiring universal life insurance, variable universal life insurance, unit-linked products, traditional life insurance, annuities and group health insurance which vary with and are
primarily related to the production of new business, have been deferred to the extent recoverable. Acquisition costs for universal and variable universal life insurance policies and unit-linked products are being amortized over the lives of the policies in
relation to the incidence of estimated gross profits from surrender charges and investment, mortality, and expense margins and actual realized gain
44 (loss) on investments. That amortization is adjusted retrospectively when estimates of current or future gross
profits to be realized from a group of products are revised. Traditional life acquisition costs are being amortized over periods of 10 to 30 years on either a straight-line basis or as a level percent of premium of the related policies depending on the
block of business. Annuity acquisition costs are amortized over a period of 15 years for more recently issued policies, and over the surrender charge period for all other policies. For all policies, amortization is based on assumptions consistent with
those used in the development of the underlying policy form adjusted for emerging experience.
Benefits and Expenses. Benefits and expenses for universal life-type and variable universalother interest-sensitive life insurance policiesproducts include interest credited to policy account balances and benefit claims incurred during the period in excess of policy account
balances. Interest crediting rates associated with funds invested in the insurance
company's general account of LNC's insurance subsidiaries during 19961997 through 19981999 ranged from 5.80%4.50% to 7.05%7.50%. For traditional life, group health and disability income products, benefits and
expenses, other than deferred acquisition costs, are recognized when incurred in a manner consistent with the related premium recognition policies.
Interest and debt expense includes interest on Minority Interest-Preferred
Securitiescompany-obligated mandatorily redeemable preferred securities of Subsidiary Companies.
subsidiary trusts holding solely junior subordinated debentures.
Goodwill and Other Intangible Assets. The Goodwill, as measured by the excess of the cost of acquired insurance
subsidiaries or blocks of business in excess ofbusinesses over the fair value of net assets (goodwill)acquired, is amortized using the straight-line method over periods of 20 to 40 years which correspondsin
accordance with the benefits expected to be derived from the acquisitions.
Insurance businesses typically produce ongoing profit streams from expected new business generation that extend significantly beyond the maximum 40-year period allowed for goodwill amortization. Accordingly, for acquired insurance businesses where
financial modeling indicates that anticipated new business benefits will extend for 40 years or longer, goodwill is amortized over a 40-year period.
Other intangible assets for acquired insurance businesses consist of the non-insurancevalue of existing blocks of business (referred to as the "present value of future profits"). The present value of future profits is amortized over the expected lives of the block of
insurance business in relation to the incidence of estimated profits expected to be generated on investment type products acquired, (i.e. variable products) and over the premium paying period for insurance products acquired, (i.e. traditional life
insurance products). Amortization is based upon assumptions used in pricing the acquisition of the block of business and is adjusted for emerging experience. Accordingly, amortization periods and methods of amortization for present value of future profits
vary depending upon the particular characteristics of the underlying blocks of acquired insurance business.
Goodwill relating to acquisitions of investment management subsidiaries (i.e.,is amortized on a straight-line method, over a 25 year period. Other intangible assets relating to these acquisitions include institutional customer relationships, covenants not to
compete and mutual fund customer relationships) have been recorded in connection with the acquisition of asset
management services companies.relationships. These assets are amortized on a straight-line basis over periods ranging from 6 to 15 years.years depending upon the characteristics of the particular underlying relationships for the intangible asset.
The carrying valuevalues of goodwill and other intangible assets isare reviewed periodically for indicators of impairment in value.
value and are adjusted as necessary.
Insurance and Investment Contract Liabilities. The liabilities for future policy and claim reserves for universal and variable universal life insurance policies consist of policy account balances that accrue to the benefit of the policyholders,
excluding surrender charges. The liabilities for future insurance policy and claim reserves for traditional life policies are computed using assumptions for investment yields, mortality and withdrawals based principally on generally accepted actuarial
methods and assumptions at the time of policy issue. Interest assumptions for traditional direct individual life reserves for all policies range from 2.5%2.25% to 7.0%7.50% depending on the time of policy issue. Interest rate assumptions for reinsurance reserves
range from 5.0% to 11.0% graded to a range of 5.5% to 8.0% after a minimum of 20 years. The interest assumptions for immediate and deferred paid-up annuities range from 4.5%2.25% to 7.75%14.50%.
With respect to its insurance and investment contract liabilities, LNC continually reviews its: 1) overall reserve position; 2) reserving techniques and 3) reinsurance arrangements. As experience develops and new information becomes known, liabilities are
adjusted as deemed necessary. The effects of changes in estimates are included in the operating results for the period in which such changes occur.
Reinsurance. LNC's insurance companies enter into reinsurance agreements with other companies in the normal course of their business. LNC's insurance subsidiaries may assume reinsurance from unaffiliated companies and/or cede reinsurance to such
companies. Assets/liabilities and premiums/benefits from certain reinsurance contracts that grant statutory surplus to other insurance companies have been netted on the balance sheets and income statements, respectively, since there is a right of offset.
All other reinsurance agreements are reported on a gross basis.
Depreciation. Provisions for depreciation of investment real estate and property and equipment owned for company use are computed principally on the straight-line method over the estimated useful lives of the assets.
Postretirement Medical and Life Insurance Benefits. LNC accounts for its postretirement medical and life insurance benefits using the full accrual method.
Stock Options. LNC recognizes compensation expense for its stock option incentive plans using the intrinsic value method of accounting. Under the terms of the intrinsic value method, compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date, or other measurement date, over the amount an employee must pay to acquire the stock.
Foreign Exchange. LNC's foreign subsidiaries' balance sheet accounts and income statement items are translated at the current exchange and average exchange rates for the year, respectively. Resulting translation adjustments are reported as a
component of shareholders' equity. Other translation adjustments for foreign currency transactions that affect cash flows are reported in earnings.
45
Earnings per Share. Basic earnings per share is computed by dividing earnings available to common shareholders by the average common shares outstanding. Diluted earnings per share is computed assuming the conversion or exercise of dilutive
convertible preferred securities, non-vested stock, stock options and deferred compensation shares outstanding during the year.
Reclassifications. Certain amounts reported in prior years' consolidated financial statements have been reclassified to conform with the presentation adopted in the current year. These reclassifications have no effect on net income or shareholders'
equity of the prior years.
2. Changes in Estimates and Changes in Accounting Principles and Change in Estimates
Change in Estimate for Disability Income Reserve. During the second quarter of 1997, LNC conducted an additional in-depth review of loss experience on its disability income business. As a result of this study, the reserve level was deemed to be inadequate to
meet future obligations if current incidence levels were to continue in the future. In order to address this situation, LNC's Reinsurance segment strengthened its disability income reserve by $92,800,000,$92.8 million, wrote-off deferred acquisition costs of $71,100,000$71.1
million and reduced related assets by $36,100,000.$36.1 million. Combined these actions reduced net income in the second quarter of 1997 by $130,000,000$130.0 million or $1.23$0.62 per share ($200,000,000200.0 million pre-tax).
Change in Estimate for United Kingdom Pension Mis-selling. During the fourth quarter of 1997, an in-depth review was completed of the United KingdomUK regulatory environment, settlements to date and the remaining liability established to settle claims associated
with this business. As a result of this study, the Lincoln UK segment strengthened its liabilityreserve by $199,400,000$199.4 million reducing net income in the fourth quarter of 1997 by $174,900,000$174.9 million after-tax or $1.70$0.85 per share.
During the fourth quarter of 1999, LNC recorded a charge of $126.1 million after-tax or $0.64 per share ($194.0 million pre-tax) to further strengthen its reserve for pension mis-selling in the UK. The additional reserve strengthening was made following:
1) the mandate issued by the Financial Services Authority, the UK regulating body, for the use of more up to date mortality rates in determining redress and reduced interest rate assumptions to be used in calculating redress, thereby causing the amount of
redress to increase and 2) the change to guidance that would have allowed a simplified process for the calculation and payment of redress for certain policy groups and the inclusion of redress relating to additional voluntary contributions made to pension
plans by individuals, retroactive to 1988.
Change in Estimate for Personal Accident Programs. During the fourth quarter of 1997, an in-depth review was completed of certain excess-of-loss personal accident reinsurance programs written by LNC's Reinsurance segment. Based on a concern that
these programs were generating claims substantially in excess of expectations, an investigation and audit was conducted covering all such programs. While LNC continues to investigate the manner in which these programs were designed and all legal remedies
available, it has beenwas determined that the incurred but not reported reserve liability related to this business should be strengthened. Accordingly, a charge of $175,000,000$175.0 million ($113,700,000113.7 million after-tax or $1.11$0.55 per share) was taken in the fourth quarter of
1997.
During the fourth quarter of 1999, LNC's Reinsurance segment conducted an in-depth review of its exposure related to its participation in workers' compensation carve-out (i.e., life and health risks associated with workers' compensation coverage) programs
managed by Unicover Managers, Inc. As a result of this review as well as settlement proceedings conducted to resolve this issue, LNC took a net charge of $40.4 million after-tax or $0.20 per share ($62.2 million pre-tax) in the fourth quarter of 1999.
Change in Estimate for HMO Excess-of-Loss Reinsurance Programs. During the third quarter of 1999, reported claims experience for certain HMO excess-of-loss reinsurance programs deteriorated causing loss ratios to significantly exceed pricing
assumptions. The unfavorable loss ratio development related primarily to business written in 1998 and 1997. Time lags in the reporting of claims experience to Lincoln Re by clients and larger than anticipated costs for prescription drugs were significant
factors that led to losses exceeding pricing assumptions. As a result of these developments, the reserve level for these programs was deemed inadequate to meet future obligations. Consequently, Lincoln Re took a charge in the third quarter of 1999 of
$25.0 million after-tax or $0.12 per share ($38.5 million pre-tax) to strengthen reserves for claims on the HMO excess-of-loss reinsurance programs.
Accounting for Derivative Instruments and Hedging Activities. In June 1998, the Financial Accounting Standards Board ("FASB"), issued an accounting standard entitledStatement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("FAS 133"). This
standard indicates thatIn July 1999, the FASB issued Statement of Financial Accounting Standard No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133" ("FAS 137"), which delays the effective
date of FAS 133 one year (i.e., adoption may occur at the beginning of any fiscal
quarter butrequired no later than the first quarter of 2000.2001). Due to the complexity of FAS 133 and the uncertainty of authoritative guidance of several issues including assessing the effectiveness of a hedge, LNC has not completedbeen
able to finalize the analysis necessary to provide a precisereliable estimate of the effecteffects of this statement
orimplementing the Standard. Management is in the process of evaluating the various hedge programs and will finalize the analysis when authoritative guidance becomes
available. Because these ongoing changes to specify the quarter in whichimplementation guidance have required LNC to re-assess several complex implementation decisions, it plans tois not likely that LNC will adopt the standard.
standard prior to the first quarter of 2001.
Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. On January 1, 1999, LNC implemented the Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use". SOP 98-1 defines internal use software and when the costs associated with internal use software should be capitalized. The implementation did not have a material impact on LNC's consolidated financial statements.
3. Investments
The amortized cost, gross unrealized gains and losses, and fair value of securities available-for-sale are as follows:
Amortized Fair
December 31 (in millions) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------
1999:
Corporate bonds $21,760.2 $ 272.3 $ (913.0) $21,119.5
U.S. Government bonds 552.5 29.8 (44.0) 538.3
Foreign government bonds 1,383.8 88.1 (24.5) 1,447.4
Asset and mortgage-backed securities:
Mortgage pass-through securities 1,043.9 6.8 (31.4) 1,019.3
Collateralized mortgage obligations 2,015.0 39.1 (46.6) 2,007.5
Other asset-backed securities 1,415.7 14.7 (53.2) 1,377.2
State and municipal bonds 15.3 -- (0.6) 14.7
Redeemable preferred stocks 170.7 2.8 (8.8) 164.7
--------- -------- --------- ---------
Total fixed maturity securities 28,357.1 453.6 (1,122.1) 27,688.6
Equity securities 481.5 151.4 (28.9) 604.0
--------- -------- --------- ---------
Total $28,838.6 $ 605.0 $(1,151.0) $28,292.6
1998:
Corporate bonds $21,289.6 $1,350.2 $ (134.6) $22,505.2
U.S. Government bonds 1,043.9 94.3 (3.6) 1,134.6
Foreign government bonds 1,240.1 127.5 (46.4) 1,321.2
Asset and mortgage-backed securities:
Mortgage pass-through securities 1,176.6 34.6 (0.9) 1,210.3
Collateralized mortgage obligations 2,532.9 120.7 (5.4) 2,648.2
Other asset-backed securities 1,170.0 54.1 (2.1) 1,222.0
State and municipal bonds 15.9 0.9 -- 16.8
Redeemable preferred stocks 170.6 7.4 (3.4) 174.6
--------- -------- --------- ---------
Total fixed maturity securities 28,639.6 1,789.7 (196.4) 30,232.9
Equity securities 436.7 141.2 (35.1) 542.8
--------- -------- --------- ---------
Total $29,076.3 $1,930.9 $ (231.5) $30,775.7
Future maturities of fixed maturity securities available-for-sale are as follows:
Amortized Fair
December 31, 1999 (in millions) Cost Value
- ------------------------------------------------------------------------------
Due in one year or less $871.7 $871.5
Due after one year through five years 5,506.4 5,452.7
Due after five years through ten years 8,365.3 8,093.0
Due after ten years 9,139.1 8,867.4
--------- ---------
Subtotal 23,882.5 23,284.6
Asset and mortgage-backed securities 4,474.6 4,404.0
--------- ---------
Total $28,357.1 $27,688.6
The foregoing data is based on stated maturities. Actual maturities will differ in some cases because borrowers may have the right to call or pre-pay obligations.
Par value, amortized cost and estimated fair value of investments in asset and mortgage-backed securities summarized by interest rates of the underlying collateral are as follows:
Par Amortized Fair
December 31, 1999 (in millions) Value Cost Value
- -----------------------------------------------------------------------------------------------
Below 7% $890.8 $341.7 $338.8
7% - 8% 2,454.8 2,438.4 2,349.7
8% - 9% 1,117.8 1,082.0 1,082.3
Above 9% 622.6 612.5 633.2
-------- -------- ---------
Total $5,086.0 $4,474.6 $4,404.0
The quality ratings for fixed maturity securities available-for-sale are as follows:
December 31 1999
- -------------------------------------------------------------
Treasuries and AAA 22.8%
AA 7.0
A 29.8
BBB 32.5
BB 4.9
Less than BB 3.0
-------------
100.0%
The major categories of net investment income are as follows:
Year Ended December 31 (in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Fixed maturity securities...................................... $2,065.8 $1,832.1 $1,690.1
Equity securities.............................................. 22.9 19.2 14.4
Mortgage loans on real estate ................................. 383.6 279.2 292.7
Real estate.................................................... 86.8 99.4 125.4
Policy loans . . . . . . . . . . . . . . . . . . . . . . . .... 99.5 44.5 40.7
Invested cash.................................................. 156.7 102.4 69.2
Other investments.............................................. 88.4 20.6 14.7
-------- -------- --------
Investment revenue.......................................... 2,903.7 2,397.4 2,247.2
Investment expense............................................. 222.3 146.6 159.3
------- ------- --------
Net investment income....................................... $2,681.4 $2,250.8 $2,087.9
Year Ended December 31 (in millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------
Fixed maturity securities $2,232.9 $2,065.8 $1,832.1
Equity securities 20.1 22.9 19.2
Mortgage loans on real estate 369.2 383.6 279.2
Real estate 64.1 86.8 99.4
Policy loans 116.5 99.5 44.5
Invested cash 110.2 156.7 102.4
Other investments 51.8 88.4 20.6
-------- -------- --------
Investment revenue 2,964.8 2,903.7 2,397.4
Investment expense 157.3 222.3 146.6
-------- -------- --------
Net investment income $2,807.5 $2,681.4 $2,250.8
The realized gain (loss) on investments is as follows:
Year Ended December 31 (in millions) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
Fixed maturity securities available-for-sale:
Gross gain.................................................... $211.7 $240.0 $209.5
Gross loss.................................................... (211.2) (91.5) (202.6)
Equity securities available-for-sale:
Gross gain.................................................... 107.8 136.8 152.7
Gross loss.................................................... (50.4) (41.8) (37.8)
Other investments.............................................. 11.9 (32.3) 40.4
Amortization of deferred acquisition costs,
provision for policyholder commitments and
capital gains expenses........................................ (50.8) (88.6) (69.7)
------ ------ -----
Total....................................................... $ 19.0 $122.6 $ 92.5
46
Year Ended December 31 (in millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------
Fixed maturity securities available-for-sale:
Gross gain $129.1 $211.7 $240.0
Gross loss (251.7) (211.2) (91.5)
Equity securities available-for-sale:
Gross gain 97.0 107.8 136.8
Gross loss (36.5) (50.4) (41.8)
Other investments 49.3 11.9 (32.3)
Associated amortization of deferred acquisition
costs, provision for policyholder commitments
and investment expenses 15.8 (50.8) (88.6)
------ ------ ------
Total $ 3.0 $ 19.0 $122.6
Provisions (credits) for write-downs and net changes in allowances for loss, which are included in the realized gain (loss) on investments shown above, are as follows:
Year Ended December 31 (in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Fixed maturity securities..................................... $60.0 $13.1 $12.3
Equity securities............................................. 3.4 .3 3.2
Mortgage loans on real estate................................. (.2) (8.9) 3.1
Real estate................................................... (7.2) (13.6) 4.6
Other long-term investments................................... 5.4 (6.5) (.8)
Guarantees.................................................... (.5) -- .2
------- ----- ----
Total...................................................... $60.9 $(15.6) $22.6
Year Ended December 31 (in millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------
Fixed maturity securities $17.2 $60.0 $ 13.1
Equity securities (4.4) 3.4 0.3
Mortgage loans on real estate (0.1) (0.2) (8.9)
Real estate -- (7.2) (13.6)
Other long-term investments (7.6) 5.4 (6.5)
Guarantees -- (0.5) --
----- ----- -------
Total $ 5.1 $60.9 $(15.6)
The change in unrealized appreciation (depreciation) on investments in fixed maturity and equity securities available-for-sale is as follows:
Year Ended December 31 (in millions) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31 (in millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------
Fixed maturity securities available-for-sale.................. $152.9 $549.0 $(735.5)
Equity securities available-for-sale.......................... (37.1) 20.2 (42.1)
------ ------ -------
Total..................................................... $115.8 $569.2 $(777.6)
The amortized cost, gross unrealized gain and loss, and fair value of securities
available-for-sale are as follows:
Amortized Fair
December 31 (in millions) Cost Gain Loss Value
- --------------------------------------------------------------------------------------------------------------
1998:
Corporate bonds............................ $21,289.6 $1,350.2 $134.6 $22,505.2
U.S. Government bonds...................... 1,043.9 94.3 3.6 1,134.6
Foreign governments bonds.................. 1,240.1 127.5 46.4 1,321.2
Asset/mortgage-backed securities:
Mortgage pass-through securities......... 1,176.6 34.6 .9 1,210.3
Collateralized mortgage obligations...... 2,532.9 120.7 5.4 2,648.2
Asset-backed securities.................. 1,170.0 54.1 2.1 1,222.0
State and municipal bonds.................. 15.9 .9 -- 16.8
Redeemable preferred stocks................ 170.6 7.4 3.4 174.6
--------- --------- ------ ---------
Total fixed maturity securities........ 28,639.6 1,789.7 196.4 30,232.9
Equity securities.......................... 436.7 141.2 35.1 542.8
--------- -------- ------ ---------
Total.................................. $29,076.3 $1,930.9 $231.5 $30,775.7
1997:
Corporate bonds............................ $15,622.9 $ 1,077.2 $ 66.8 $16,633.3
U.S. Government bonds...................... 591.9 70.7 .2 662.4
Foreign governments bonds.................. 1,683.4 129.0 7.9 1,804.5
Asset/mortgage-backed securities:
Mortgage pass-through securities......... 952.5 34.8 2.6 984.7
Collateralized mortgage obligations...... 2,522.0 170.9 3.4 2,689.5
Asset-backed securities.................. 818.0 26.9 .9 844.0
Other mortgage-backed securities......... 11.1 -- -- 11.1
State and municipal bonds.................. 236.1 5.3 -- 241.4
Redeemable preferred stocks................ 188.1 8.0 .6 195.5
--------- --------- ------ --------
Total fixed maturity securities........ 22,626.0 1,522.8 82.4 24,066.4
Equity securities.......................... 517.2 163.9 20.7 660.4
--------- ------- ----- ---------
Total.................................. $23,143.2 $1,686.7 $103.1 $24,726.8
Future maturities of fixed maturity securities available-for-sale are as
follows:
Amortized Fair
December 31, 1998 (in millions) Cost Value
- ---------------------------------------------------------------------------------------------------------------
Due in one year or less....................................................... $ 909.8 $ 916.7
Due after one year through five years......................................... 5,112.4 5,283.7
Due after five years through ten years........................................ 7,989.4 8,274.7
Due after ten years........................................................... 9,748.5 10,677.3
-------- --------
Subtotal.................................................................. 23,760.1 25,152.4
Asset/mortgage-backed securities.............................................. 4,879.5 5,080.5
-------- ---------
Total..................................................................... $28,639.6 $30,232.9
47
The foregoing data is based on stated maturities. Actual maturities will differ
in some cases because borrowers may have the right to call or pre-pay
obligations.
Par value, amortized cost and estimated fair value of investments in
asset/mortgage-backed$(2,261.8) $152.9 $549.0
Equity securities summarized by interest rates of the underlying
collateral are as follows:
Par Amortized Fair
December 31, 1998 (in millions) Value Cost Value
- --------------------------------------------------------------------------------------------------------------
Below 7%....................................................... $ 594.2 $ 318.1 $ 339.8
7% - 8%........................................................ 2,450.5 2,430.8 2,492.6
8% - 9%........................................................ 1,241.3 1,198.7 1,255.7
Above 9%....................................................... 950.2 931.9 992.4
------- ------- -------
Total...................................................... $5,236.2 $4,879.5 $5,080.5
The quality ratings of fixed maturity securities available-for-sale are as
follows:
December 31 1998
- --------------------------------------------------------------------------------
Treasuries and AAA............................................. 25.6%
AA............................................................. 7.0
A.............................................................. 27.5
BBB............................................................ 32.9
BB............................................................. 4.3
Less than BB................................................... 2.7
-----
100.0%16.4 (37.1) 20.2
--------- ------ ------
Total $(2,245.4) $115.8 $569.2
During the second quarter of 1998, LNC purchased twothree bonds issued with offsetting interest rate characteristics. Subsequent to the purchase of these bonds, interest rates increased and the value of one of these bonds decreased. This bond was sold at the
end of the second quarter 1998 and a realized loss of $20.0$28.8 million ($13.018.7 million after-tax) was recorded. The other bond istwo bonds are still owned by LNC and isare producing net investment income on an annual basis of $10.0$9.9 million ($6.56.4 million after-tax).
Subsequent to these transactions being recorded, the Emerging Issues Task Force of the Financial Accounting Standards Board reached consensus with regard to accounting for this type of investment strategy. LNC is not required to apply the new accounting
rules, however, if such rules were applied, the realized loss on the sale of $20.0$28.8 million ($13.018.7 million after-tax) on one of these bonds recorded at the end of the second quarter of 1998 would be reversedreduced to $8.8 million ($5.7 million after-tax) and the
amountdifference would be applied as a change in the carrying amount of the bondtwo bonds that remainsremain in LNC's portfolio. Also, net investment income for the year ended December 31, 1999 and 1998 would be less than reported by $5.0$2.3 million ($3.31.5 million after-tax).
and $1.9 million ($1.2 million after-tax), respectively.
The balance sheet captions, "Real Estate" and "Property and Equipment," are shown net of allowances for depreciation as follows:
December 31 (in millions) 1999 1998
1997
- --------------------------------------------------------------------------------------------------------------------------------------------------------------
Real estate......................................... $ 51.0 $ 50.2estate $40.3 $51.0
Property and equipment..............................equipment 238.1 222.1
155.9
Mortgage loans on real estate which are primarily held in the Life Insurance and Annuities segment 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, the cost is adjusted or a provision for loss is established equal to the difference between the initial cost of the mortgage loan and the estimated value. Estimated
value is based on: 1) the present value of expected future cash flows discounted at the loan's effective interest rate; 2) the loan's observable market price or;price; or 3) 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 allowance for losses and subsequent recoveries, if any, are credited to the allowance for losses.
The allowance 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 allowance 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.
48
Impaired mortgage loans along with the related allowance for losses are as follows:
December 31 (in millions) 1999 1998
1997
- --------------------------------------------------------------------------------------------------------------------------------------------------------------
Impaired loans with allowance for losses.........losses $35.1 $37.0 $41.2
Allowance for losses.............................losses (4.7) (4.8) (5.0)
Impaired loans with no allowance for losses......losses -- 2.2
--
------ ----------- -----
Net impaired loans...............................loans $30.4 $34.4
$36.2
Impaired mortgage loans with no allowance for losses are a result of: 1) direct write-downs or;write-downs; or 2) collateral dependent loans where the fair value of the collateral is greater than the recorded investment in the loan.
A reconciliation of the mortgage loan allowance for losses for these impaired mortgage loans is as follows:
Year Ended December 31 (in millions) 1999 1998 1997
1996
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance at beginning-of-year............beginning-of-year $4.8 $5.0 $12.4
$29.6
Provisions for losses................... .7 .8 3.1losses 0.8 0.7 0.8
Releases due to write-downs............. -- -- --principal paydowns (0.9) (0.9) (4.8)
Releases due to sales................... (.9) (4.8) (19.9)
Releases due to foreclosures............foreclosures -- -- (3.4)
(.4)
---- --------- -----
Balance at end-of-year..............end-of-year $4.7 $4.8 $ 5.0
$12.4
The average recorded investment in impaired mortgage loans and the interest income recognized on impaired mortgage loans were as follows:
Year Ended December 31 (in millions) 1999 1998 1997
1996
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Average recorded investment in impaired loans..$33.4loans $29.6 $33.4 $74.9 $139.6
Interest income recognized on impaired loans...loans 2.9 3.5 7.0
12.7
All interest income on impaired mortgage loans was recognized on the cash basis of income recognition.
As of December 31, 19981999 and 1997,1998, LNC had restructured mortgage loans of $32,000,000$3.3 million and $38,500,000,$32.0 million, respectively. LNC recorded $3,100,000$0.3 million and $3,800,000$3.1 million of interest income on these restructured mortgage loans in 19981999 and 1997,1998, respectively.
Interest income in the amount of $3,200,000$0.4 million and $3,900,000$3.2 million would have been recorded on these mortgage loans according to their original terms in 19981999 and 1997,1998, respectively. As of December 31, 19981999 and December 31, 1997,1998, LNC had no outstanding
commitments to lend funds on restructured mortgage loans.
An investment in real estate is considered impaired when the projected undiscounted cash flow from the investment is less than the carrying value. When LNC determines that an investment in real estate is impaired, it is written-down to reduce the carrying
value to the estimated value.
As of December 31, 1998,1999, LNC's investment commitments for fixed maturity securities (primarily private placements), mortgage loans on real estate and real estate were $487,800,000.$619.9 million. This includes $175.5 million of standby commitments to purchase real
estate upon completion and leasing.
For the year ended December 31, 1998,1999, fixed maturity securities available-for-sale, mortgage loans on real estate and real estate investments which were non-income producing were not significant.
The cost information for mortgage loans on real estate, real estate and other long-term investments areis net of allowances for losses. The balance sheet account for other liabilities includes a reserve for guarantees of third-party debt. The amount of
allowances and reserves for such items is as follows:
December 31 (in millions) 1999 1998
1997
- --------------------------------------------------------------------------------------------------------------------------------------------------------------
Mortgage loans on real estate.......................estate $4.7 $4.8
$ 5.0
Real estate.........................................estate -- 1.5
Guarantees.......................................... .3 .8
49
--
Guarantees 0.3 0.3
4. Federal Income Taxes
The Federal income tax expense (benefit) is as follows:
Year Ended December 31 (in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Current........................................................... $(37.0) $137.4 $129.8
Deferred.......................................................... 224.6 (124.7) 17.9
----- ------ -----
Total for continuing operations............................... $187.6 $ 12.7 $147.7
Year Ended December 31 (in millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------
Current $(55.5) $(37.0) $137.4
Deferred 165.1 224.6 (124.7)
------ ------ ------
Total for continuing operations $109.6 $187.6 $ 12.7
The effective tax rate on pre-tax income is lower than the prevailing corporate Federal income tax rate. A reconciliation of this difference is as follows:
Year Ended December 31 (in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Tax rate times pre-tax income from continuing operations.......... $244.1 $12.2 $176.4
Effect of:
Tax-preferred investment income................................... (51.1) (34.8) (25.6)
Change in valuation allowance..................................... (5.3) 43.5 --
Other items....................................................... (.1) (8.2) (3.1)
------ ----- -----
Provision for income taxes.................................... $187.6 $12.7 $147.7
----- ---- -----
Effective tax rate............................................ 27% 36% 29%
Year Ended December 31 (in millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------
Tax rate times pre-tax income
from continuing operations $199.5 $244.1 $12.2
Effect of:
Tax-preferred investment income (47.7) (51.1) (34.8)
Change in valuation allowance (38.2) (5.3) 43.5
Other items (4.0) (0.1) (8.2)
------ ------ -----
Provision for income taxes $109.6 $187.6 $12.7
Effective tax rate 19% 27% 36%
The Federal income tax recoverable asset (liability) is as follows:
December 31 (in millions) 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Current.......................................................................... $ (6.3) $(431.8)
Deferred......................................................................... 210.4 (56.0)
------ -----
Total Federal income tax recoverable (liability)............................. $204.1 $(487.8)
December 31 (in millions) 1999 1998
- ------------------------------------------------------------------------------
Current $ 15.4 $ (6.3)
Deferred 329.6 210.4
------ ------
Total Federal income tax asset $345.0 $204.1
Significant components of LNC's net deferred tax asset (liability) for
continuing operations are as follows:
December 31 (in millions) 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Insurance and investment contract liabilities.................................... $1,386.3 $ 914.3
Net operating loss............................................................... 103.1 66.3
Postretirement benefits other than pensions...................................... 39.9 39.4
Other............................................................................ 147.3 102.9
-------- --------
Total deferred tax assets.................................................... 1,676.6 1,122.9
Valuation allowance for deferred tax assets...................................... 38.2 43.5
-------- --------
Net deferred tax asset....................................................... 1,638.4 1,079.4
Deferred tax liabilities:
Deferred acquisition costs....................................................... 214.9 271.2
Premiums and fees receivable..................................................... 11.6 3.9
Net unrealized gain on securities available-for-sale............................. 542.0 520.0
Present value of business in-force............................................... 625.9 211.2
Other............................................................................ 33.6 129.1
-------- --------
Total deferred tax liabilities................................................ 1,428.0 1,135.4
------- -------
Net deferred tax asset (liability)............................................ $ 210.4 $ (56.0)
LNC's Lincoln UK segment has incurred
December 31 (in millions) 1999 1998
- --------------------------------------------------------------------------------------------
Deferred tax assets:
Insurance and investment contract liabilities $1,252.8 $1,386.3
Net operating loss 186.7 103.1
Postretirement benefits other than pensions 46.5 39.9
Compensation related 74.4 48.7
Net unrealized loss on securities available-for-sale 232.3 --
Other 76.2 98.6
-------- --------
Total deferred tax assets 1,868.9 1,676.6
Valuation allowance for deferred tax assets 229.0 38.2
-------- --------
Net deferred tax assets 1,639.9 1,638.4
Deferred tax liabilities:
Deferred acquisition costs 572.3 214.9
Premiums and fees receivable 23.4 11.6
Investments related 66.2 24.8
Net unrealized gain on securities available-for-sale -- 542.0
Present value of business in-force 473.7 625.9
Other 174.7 8.8
-------- --------
Total deferred tax liabilities 1,310.3 1,428.0
-------- --------
Net deferred tax asset $ 329.6 $ 210.4
Cash paid for Federal income taxes in 1999, 1998 and 1997 was $70.6 million, $379.6 million and $158.0 million, respectively.
LNC is required to establish a valuation allowance for any portion of its deferred tax assets which are unlikely to be realized. At December 31, 1999, $ 232.3 million of gross deferred tax assets relating to net unrealized capital losses on fixed maturity
and equity securities available-for-sale were recorded in its pension business which under
United Kingdomshareholders' equity. In evaluating whether a tax law canvaluation allowance is necessary to reduce these gross deferred tax assets to a level that is more likely than not to be realized, LNC considered
the federal income tax restrictions on the use of corporate capital losses. Under the corporate income tax rules, capital losses may only be utilized against its future pension business
earnings.used to offset capital gains. A three-year carryback and a five-year carryforward of unused capital losses to
offset capital gains generated within these years are also permitted. Due to these restrictions, LNC determined that a valuation allowance of $229 million was necessary. This valuation allowance was established in shareholders' equity at December 31,
1999. With this exception for the gross deferred tax assets relating to unrealized capital losses on available-for-sale securities, management believes it is more likely than not that LNC will realize the benefit of all other gross deferred tax assets.
At December 31, 1998, LNC held a $38.2 million tax valuation allowance relating to the Lincoln UK segment. When LNC management announced its intention to explore exiting the UK insurance market, LNC was required to change its method of accounting for
Lincoln UK's taxes. Previously, taxes were computed based upon LNC's intention to permanently reinvest earnings in the UK subsidiaries. Under this approach, Lincoln UK was unable to recognize UK tax benefits for a portion of the pension mis-selling losses
recorded in 1997 since UK tax law restricted the use of these losses. However, when the decision was made in the fourth quarter of 1999 that earnings would no longer be permanently reinvested, U.S. tax rules rather than UK tax rules became the primary
factor in determining the overall deferred taxes for the segment. LNC was required to adjust the level of deferred taxes based upon U.S. tax rules, under the new operating assumption that earnings from Lincoln UK will ultimately be repatriated to LNC.
Accordingly, LNC eliminated the $38.2 million valuation allowance and 1997 thereduced its deferred tax asset relatedliabilities by another $3.9 million in the fourth quarter of 1999. A tax benefit of $42.1 million was reported by LNC in the fourth quarter relating to these
pension businessmatters.
At December 31, 1999, LNC had net operating losses was $86,700,000for Federal income tax purposes of: $374.2 million for foreign life reinsurance companies that expire in years 2007 through 2014; $79.1 million for Delaware Management Holdings, Inc. ("Delaware") that
expire in years 2003 through 2008 and $92,000,000, respectively. The
valuation allowances shown$80.4 million for Lincoln Life & Annuity Company of New York ("Lincoln Life New York") that expire in the table above reflect managements assessment,
based upon all available information,year 2013. The majority of these tax net operating loss carryovers relate to LNC's foreign life reinsurance
operations. These companies will utilize their respective tax net operating losses as the reinsurance business on their books runs off. Thus, although these net operating losses are generally subject to limitations that require the companies generating
the loss to have future taxable income, LNC has determined that it is more likely than not that a
portion of this deferred tax asset will not be realized. Adjustment to the
valuation allowancethese net operating losses will be made if there is a change in management's assessment
offully utilized within the amount ofallowable carryforward period. Because the deferred tax asset that is realizable.
Cash paid for Federal income taxes in 1998, 1997Delaware and 1996 was $379,600,000,
$158,000,000 and $143,800,000 respectively.
At December 31, 1998, LNC hadLincoln Life New York net operating loss carryforwards of $257,000,000
for Federal incomelosses
can be used in future consolidated tax purposes related to its foreign life reinsurance
companiesreturns with LNC, management also concluded that expire in years 2006 through 2018. Delaware Management Holdings,
Inc. ("Delaware"), acquired in 1995, hasit is more likely than not that these net operating loss carryforwards for
Federal
50
income tax purposes of $79,100,000 at December 31, 1998, which expire inlosses will also be fully utilized within the years 2003 through 2008. These carryforwards will only be available to reduce
the respective taxable income of the foreign life reinsurance companies and
Delaware.allowable carryforward period.
Under prior Federal income tax law, one-half of the excess of a life insurance company's income from operations over its taxable investment income was not taxed, but was set aside in a special tax account designated as "Policyholders' Surplus."Surplus". At
December 31, 1999, LNC has approximately $196,000,000$196.0 million of untaxed "Policyholders' Surplus" on which no payment of Federal income taxes will be required unless it is distributed as a dividend, or under other specified conditions. Barring the passage of
unfavorable tax legislation, LNC does not believe that any significant portion of the account will be taxed in the foreseeable future andfuture. Accordingly, no related deferred tax liability has been recognized.recognized relating to LNC's Policyholders' Surplus balance. If the
entire Policyholders' Surplus balance of
account became taxable underat the current Federal rate, the tax would be approximately $68,600,000.
LNC has declared its intention to reinvest the undistributed earnings of Lincoln
UK and will not provide U.S. income tax on these undistributed earnings. At
December 31, 1998, for the years covered by this declaration there was a deficit
in earnings for Lincoln UK.
$68.6 million.
5. Supplemental Financial Data
Reinsurance transactions included in the income statement captions, "Insurance Premiums" and "Insurance Fees,"Fees", are as follows:
Year Ended December 31 (in millions) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Insurance assumed................................................. $1,259.8 $1,079.1 $1,201.0
Insurance ceded................................................... 695.4 315.0 168.6
--------- ----- -----
Net reinsurance premiums....................................... $ 564.4 $ 764.1 $1,032.4
Year Ended December 31 (in millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------
Insurance assumed $1,509.3 $1,259.8 $1,079.1
Insurance ceded 621.0 695.4 315.0
-------- -------- --------
Net reinsurance premiums $ 888.3 $ 564.4 $ 764.1
The income statement caption, "Benefits,""Benefits", is net of reinsurance recoveries of $1,056,800,000; $393,000,000$0.825 billion; $1.057 billion and $250,100,000$0.393 billion for the years ended December 31, 1999, 1998 and 1997, respectively.
Details underlying the income statement caption, "Underwriting, Acquisition, Insurance and Other Expenses", are as follows:
Year Ended December 31 (in millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------
Commissions $ 961.0 $ 740.1 $ 575.3
Other volume related expenses 205.5 150.7 72.8
Operating and 1996, respectively.administrative expenses 1,156.9 995.8 832.5
Deferred acquisition costs net of amortization (309.3) (208.2) 1.8
Restructuring charges 27.3 52.8 --
Other 253.6 212.5 96.9
-------- -------- --------
Total $2,295.0 $1,943.7 $1,579.3
The income statement caption, "Underwriting, Acquisition, Insurance and Other Expenses,"Expenses", includes amortization of deferred acquisition costs of $440,000,000;
$468,000,000$307.3 million; $403.9 million and $428,500,000$388.4 million for the years ended December 31, 1999, 1998 1997 and 1996,1997,
respectively. An additional $(34,500,000); $(78,200,000)$26.9 million; $(34.5) million and $(65,200,000)$(78.2) million of deferred acquisition costs was restored (amortized) and netted against "Realized Gain (Loss) on Investments" for the years ended December 31, 1999, 1998 and 1997,
and 1996, respectively.
A reconciliation of the present value of insurance business in-force for LNC's insurance
subsidiariesacquired included in other intangible assets is as follows:
December 31 (in millions) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
Balance at beginning-of-year..................................... $ 501.3 $602.4 $407.4
Acquisitions of insurance companies/business..................... 1,323.2 22.0 163.5
Interest accrued on unamortized balance.......................... 44.4 36.9 37.9
(Interest rates range from 5% to 7%)
Balance sheet reclassification related to Lincoln UK............. -- (94.8) --
Amortization..................................................... (117.4) (48.1) (47.6)
Foreign exchange adjustment...................................... 1.8 (17.1) 41.2
--------- ----- -----
Balance at end-of-year........................................ 1,753.3 501.3 602.4
Other intangible assets (non-insurance).......................... 95.1 112.6 106.0
-------- ----- -----
Total other intangible assets at end-of-year.................. $1,848.4 $613.9 $708.4
December 31 (in millions) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
Balance at beginning of year $1,753.3 $501.3 $602.4
Adjustments to balance 3.4 1,323.2 22.0
Interest accrued on unamortized balance
(Interest rates range from 5% to 7%) 69.9 44.4 36.9
Balance sheet reclassifications related to Lincoln UK -- -- (94.8)
Amortization (163.7) (117.4) (48.1)
Foreign exchange adjustment (8.7) 1.8 (17.1)
-------- -------- ------
Balance at end-of-year 1,654.2 1,753.3 501.3
Other intangible assets (non-insurance) 92.3 95.1 112.6
-------- -------- ------
Total other intangible assets at end-of-year $1,746.5 $1,848.4 $613.9
Future estimated amortization of the present value ofinsurance business in-forceacquired net of interest on unamortized balance for LNC's insurance subsidiaries is as follows (in millions):
1999
2000 - $112.2$89.6 2002 - $88.1 2004 - $81.5
2001 - $115.188.3 2003 - $ 109.7
2000 - 113.0 2002 - 112.484.7 Thereafter - 1,190.91,222.0
Details underlying the balance sheet caption, "Contractholder Funds,"Funds", are as follows:
December 31 (in millions) 1999 1998
1997
- --------------------------------------------------------------------------------------------------------------------------------------------------------------
Premium deposit funds..................................funds $19,624.1 $20,171.9 $19,803.0
Undistributed earnings on participating business.......business 132.0 142.8
79.8
Other..................................................Other 472.7 438.4 180.6
--------- ---------
Total...............................................Total $20,228.8 $20,753.1
$20,063.4
51
Details underlying the balance sheet captions related to total debt are as follows:
December 31 (in millions) 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Short-term debt:
Commercial paper.................................................................... $ 214.4 $ 286.3
Other short-term notes.............................................................. -- 1.3
Current portion of long-term debt................................................... 100.2 9.6
----- -------
Total short-term debt........................................................... 314.6 297.2
Long-term debt less current portion:
7.125% notes payable, due 1999...................................................... -- 99.7
7.625% notes payable, due 2002...................................................... 99.8 99.4
7.250% notes payable, due 2005...................................................... 191.6 191.4
6.500% notes payable, due 2008...................................................... 100.2 --
7% notes payable, due 2018.......................................................... 200.3 --
9.125% notes payable, due 2024...................................................... 119.8 119.8
Mortgages and other notes payable................................................... .5 .7
------- -------
Total long-term debt............................................................ 712.2 511.0
Minority interest - preferred securities of subsidiary companies:
8.75% Quarterly Income Preferred Securities......................................... 215.0 215.0
8.35% Trust Originated Preferred Securities......................................... 100.0 100.0
7.40% Trust Originated Preferred Securities......................................... 200.0 --
7.75% FELINE PRIDES................................................................. 230.0 --
------- --------
Total.......................................................................... 745.0 315.0
Total debt..................................................................... $1,771.8 $1,123.2
December 31 (in millions) 1999 1998
- ------------------------------------------------------------------------------------------------------
Short-term debt:
Commercial paper $ 414.0 $ 214.4
Other short-term notes 45.6 --
Current portion of long-term debt 0.5 100.2
-------- --------
Total short-term debt 460.1 314.6
Long-term debt less current portion:
7.625% notes payable, due 2002 99.9 99.8
7.250% notes payable, due 2005 191.8 191.6
6.500% notes payable, due 2008 100.2 100.2
7% notes payable, due 2018 200.3 200.3
9.125% notes payable, due 2024 119.8 119.8
Mortgages and other notes payable -- 0.5
-------- --------
Total long-term debt 712.0 712.2
Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely junior subordinated debentures:
8.75% Quarterly Income Preferred Securities 215.0 215.0
8.35% Trust Originated Preferred Securities 100.0 100.0
7.40% Trust Originated Preferred Securities 200.0 200.0
7.75% FELINE PRIDES 230.0 230.0
-------- --------
Total 745.0 745.0
-------- --------
Total Debt $1,917.1 $1,771.8
The combined U.S. and U.K. commercial paper outstanding at December 31, 19981999 and 1997,1998, had a blended weighted average interest rate of approximately 6.67%5.77% and 7.03%6.67%, respectively.
Future maturities of long-term debt are as follows (in millions):
1999
2000 - $100.2 2001$0.5 2002 - $ .4 2003$100.0 2004 - $ --
20002001 - .1 2002-- 2003 - 100.0-- Thereafter - 613.3613.0
LNC also has access to capital from minority interest in preferred securities of subsidiary companies. In May 1996, LNC filed a shelf registration with the Securities and Exchange Commission that would allow LNC to offer and sell up to $500,000,000$500 million of
various forms of hybrid securities. These securities, which combine debt and equity characteristics, are offered through a series of three subsidiaries (Lincoln National Capital I, II and III). These subsidiaries were formed solely for the purpose of
issuing preferred securities and lending the proceeds to LNC. The common securities of these subsidiaries are owned by LNC. The only assets of Lincoln National Capital I, II and III are the notes receivable from LNC for such loans. Distributions are paid
by these subsidiaries to the preferred securityholders on a quarterly basis. The principal obligations of these subsidiaries are irrevocably guaranteed by LNC. Upon liquidation of these subsidiaries, the holders of the preferred securities would be
entitled to a fixed amount per share plus accumulated and unpaid distributions. LNC reserves the right to: 1) redeem the preferred securities at a fixed price plus accumulated and unpaid distributions and; 2) extend the stated redemption date up to 19
years if certain conditions are met.
In April 1998, LNC filed a shelf registration with the Securities and Exchange Commission, that would allow LNC to offer and sell up to $1,300,000,000$1.3 billion of various securities, including regular debt, preferred stock, common stock or hybrid securities. This
filing included an aggregate of $300,000,000$300 million from a previous filing that had not been utilized. In conjunction with this shelf registration, three additional subsidiaries were added (Lincoln National Capital IV, V and VI) to accommodate the issuance of
additional preferred securities. The purpose and terms of these new subsidiaries essentially parallel Lincoln National Capital I, II and III.
In July 1996, Lincoln National Capital I issued 8,600,000 shares or $215,000,000,$215 million, 8.75% Quarterly Income Preferred Securities ("QUIPS"). In August 1996, Lincoln National Capital II issued 4,000,000 shares or $100,000,000,$100 million, 8.35% Trust Originated Preferred
Securities ("TOPrS"). Both issues mature in 2026 at $25 per share and are redeemable in whole or in part at LNC's option any time after 2001. In March 1998, LNC issued notes of 1) $100,000,000,$100 million, 6.5% due 2008 and 2) $200,000,000,$200 million, 7% due 2018. In July 1998,
Lincoln National Capital III issued 8,000,000 shares or $200,000,000$200 million of 7.4% TOPrS which mature in 2028 at $25 per share and are redeemable in whole or in part at LNC's option anytime after July 2003. In August 1998, Lincoln National Capital IV issued
9,200,000 shares or $230,000,000$230 million of 7.75% FELINE PRIDES (service
52
mark of Merrill Lynch && Co. Inc.). The purchasers of such securities were also provided stock purchase contract agreements that indicate they will receive a specified amount of LNC
common stock on or before the August 2001 maturity date of the FELINE PRIDES. A portion of the issuance costs associated with this offering along with the present value of the payments associated with the stock purchase agreements were charged to the
common stock line within shareholders' equity. In December 1998, LNC filed a shelf registration with the Securities Exchange Commission that combines unused portions of the April 1998 registration ($640,000,000)640 million) and the May 1996 registration ($185,000,000)185
million) resulting in an active shelf registration allowing LNC to sell up to an additional $825,000,000$825 million of securities.
The funds raised in 1998 from the various public offerings of hybrid securities described above were used to acquire a block of individual life insurance business from Aetna (see note 11 on page 66)Note 11).
Finally, LNC maintains a revolving credit agreement with a group of domestic and foreign banks in the aggregate amount of $750,000,000.$750 million. This agreement, which expires in October 2001, provides for interest on borrowings based on various money market
indices. Under the terms of this agreement, LNC must maintain a prescribed level of adjusted consolidated net worth. At December 31, 1998,1999, LNC had no outstanding borrowings under this agreement. During 1999, 1998 1997 and 1996,1997, fees paid for maintaining
revolving credit agreements amounted to $662,000;$633,000, $662,000 and $670,000, and $715,000, respectively.
Cash paid for interest for 1999, 1998 and 1997 was $132.2 million; $108.3 million and 1996 was $108,300,000; $96,000,000 and
$83,200,000,$96.0 million, respectively.
6. Employee Benefit Plans
Pension and Other Postretirement Benefit Plans -- U.S. LNC maintains funded defined benefit pension plans for most of its U.S. employees, and prior to January 1, 1995, most full-time agents. Benefits for employees are based on total years of
service and the highest 60 months of compensation during the last 10 years of employment. All benefits applicable to the funded defined benefit plan for agents were frozen as of December 31, 1994. The plans are funded by contributions to tax-exempt
trusts. LNC's funding policy is consistent with the funding requirements of Federal law and regulations. Contributions are intended to provide not only the benefits attributed to service to date, but also those expected to be earned in the future.
Effective January 1, 1998, the defined benefit pension plans were amended to increase benefits for certain retired individuals. The effect of this amendment was to increase the pension benefit obligation by $10.7 million.
LNC sponsors three types of unfunded, nonqualified, defined benefit plans for certain U.S. employees and agents. Supplemental retirement plans provide defined benefit pension benefits in excess of limits imposed by Federal tax law. A salary continuation
plan provides certain officers of LNC defined pension benefits based on years of service and final monthly salary upon death or retirement. A supplemental executive retirement plan effective January 1, 1998 provides defined pension benefits for certain
executives who became employees of LNC as a result of the acquisition of a block of individual life insurance and annuity business from CIGNA Corporation ("CIGNA"). Benefits payable under this plan are based on years of service and the highest 36
consecutive months of compensation and are reduced by the benefit payable to the employee from the CIGNA plan. The adoption of this plan resulted in an increase in the pension benefits obligation of $8.4 million during the year ended December 31, 1998.
LNC also sponsors unfunded defined benefit plans that provide postretirement medical, dental and life insurance benefits to full-time U.S. employees and agents who, depending on the plan, have worked for LNC 10 years and attained age 55 to 60. Medical and
dental benefits are also available to spouses and other dependents of employees and agents. For medical and dental benefits, limited contributions are required from individuals who retired prior to November 1, 1988. Contributions for later retirees, which
can be adjusted annually, are based on such items as years of service at retirement and age at retirement. Life insurance benefits are noncontributory; however, participants can elect supplemental contributory life benefits up to age 70. Effective July 1,
1999, the agents' postretirement plan was changed to require agents retiring on or after that date to pay the full premium costs. This change in the plan resulted in a one-time curtailment gain of $10.2 million.
As a result of the acquisitions of a block of individual life insurance and annuity business from CIGNA and a block of individual life insurance business from Aetna, Inc. ("Aetna"), former CIGNA and Aetna employees became LNC employees and entered the
employees' defined benefit pension and postretirement benefit plans effective January 1, 1998 and January 1, 1999, respectively. The plans were amended as of those dates to approve the entrance of these participants, to provide these participants with
credit for past service for benefit purposes, and to specify that the accrued pension benefits determined by the plan benefit formula are to be offset by the benefits accrued in the CIGNA or Aetna plans, as applicable. This resulted in increases in the
pension benefits obligation and the postretirement benefits obligation of $17.3 million and $8.1 million, respectively during the year ended December 31, 1998, and $5.2 million and $2.0 million, respectively during the year ended December 31, 1999.
Information with respect to defined benefit plan asset activity and defined benefit plan obligations is as follows:
Other
Postretirement
Pension Benefits Benefits
----------------------- ------------------------
Year Ended December 31 (in millions) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $362.4 $ 336.3 $ -- $ --
Actual return on plan assets 41.6 40.9 -- --
Company contributions -- 6.6 -- --
Administrative expenses (0.3) (0.3) -- --
Benefits paid (13.6) (21.1) -- --
------ ------- ------- -------
Fair value of plan assets at end of year $390.1 $ 362.4 $ -- $ --
Change in benefit obligation:
Benefit obligation at beginning of year $485.9 $ 390.6 $ 111.1 $ 90.0
Plan amendments -- 10.7 -- --
Acquisitions 5.2 25.7 2.0 8.1
Service cost 19.2 16.1 3.6 3.6
Interest cost 30.2 27.7 6.6 6.5
Plan participants' contributions -- -- 1.3 1.0
Plan curtailment gain -- -- (10.2) --
Actuarial (gains) losses (89.2) 38.0 0.1 6.7
Benefits paid (16.6) (22.9) (6.5) (4.8)
------ ------- ------- -------
Benefit obligation at end of year $434.7 $ 485.9 $ 108.0 $ 111.1
Funded (underfunded) status of the plans $(44.6) $(123.5) $(108.0) $(111.1)
Unrecognized net actuarial (gains) losses (54.3) 45.4 -- --
Unrecognized prior service cost 8.2 9.3 3.3 3.4
------ ------- ------- -------
Prepaid (accrued) benefit cost $(90.7) $(68.8) $(104.7) $(107.7)
Weighted-average assumptions
as of December 31:
Weighted-average discount rate 7.75% 6.25% 7.75% 6.25%
Expected return on plan assets 9.00% 9.17% -- --
Rate of increase in compensation:
Salary continuation plan 5.50% 5.50% -- --
All other plans 4.50% 4.50% 4.50% 4.50%
The funded status amounts in the pension benefits columns above combine plans with projected benefit obligations in excess of plan assets and plans with plan assets in excess of projected benefit obligations. For plans that have projected benefit
obligations in excess of plan assets, the aggregate projected benefit obligations were $67.6 million and $408.6 million at December 31, 1999 and 1998, respectively, the aggregate accumulated benefit obligations were $50.1 million and $313.2 million at
December 31, 1999 and 1998, respectively, and the aggregate fair value of plan assets was $0 and $283.4 million at December 31, 1999 and 1998, respectively.
Plan assets for both the funded employees and agents plans consist principally of listed equity securities, corporate obligations and government bonds.
The components of net defined benefit pension plan and postretirement benefit plan costs are as follows:
Other Postretirement
Pension Benefits Benefits
--------------------------------------- ---------------------------------------
Year Ended December 31 (in millions) 1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------------
Service cost $19.5 $16.4 $11.4 $ 3.6 $3.6 $2.3
Interest cost 30.2 27.7 23.6 6.6 6.5 5.4
Actual return on plan assets (32.6) (29.3) (26.6) -- -- --
Amortization of prior service cost 1.0 1.1 0.8 -- -- --
Recognized net actuarial
(gains) losses 1.6 0.6 0.4 0.3 (0.2) (0.8)
----- ----- ----- ----- ---- ----
Net periodic benefit cost $19.7 $16.5 $ 9.6 $10.5 $9.9 $6.9
The calculation of the accumulated postretirement benefits obligation assumes a weighted-average annual rate of increase in the per capita cost of covered benefits (i.e. health care cost trend rate) of 10.0% for 2000. It further assumes the rate will
gradually decrease to 5.0% by 2010 and remain at that level. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point each year
would increase the accumulated postretirement benefits obligation as of December 1999 and 1998 by $8.6 million and $9.7 million, respectively. The aggregate of the estimated service and interest cost components of net periodic postretirement benefits cost
for the year ended December 31, 1999 would increase by $0.9 million.
Effective January 1, 1995, LNC established a defined contribution plan for its U.S. agents. Contributions to this plan are based on a percentage of the agents' annual compensation as defined in the plan. Expense for this plan amounted to $2.1 million,
$1.9 million and $1.8 million in 1999, 1998 and 1997, respectively.
Pension Plan -- Non U.S. The employees of LNC's primary foreign subsidiary are covered by a defined benefit pension plan. The plan provides death and pension benefits based on final pensionable salary. At December 31, 1999 and 1998, plan assets
were in excess of or (under) the projected benefit obligations by $(0.8) million and $(12.4) million, respectively, and were included in other liabilities in LNC's balance sheet. Net pension costs for the foreign plan were $3.6 million, $2.9 million and
$2.0 million for 1999, 1998 and 1997, respectively.
401(k) and Profit Sharing Plans. LNC also sponsors contributory defined contribution plans for eligible U.S. employees and agents. These plans include 401(k) plans and a profit sharing plan for eligible employees of Delaware Management Holdings,
Inc. ("DMH"). LNC's contributions to the 401(k) plans are equal to a participant's pre-tax contribution, not to exceed 6% of base pay, multiplied by a percentage, ranging from 25% to 150%, which varies according to certain incentive criteria as determined
by LNC's Board of Directors. LNC's contributions to the profit sharing plan of DMH is equal to an amount, if any, determined in accordance with a resolution of the Board of Directors. Each plan year's contribution is allocated in the proportion that the
plan compensation of each eligible participant bears to the total plan compensation of all eligible participants for such plan year. Compensation is defined as all of an eligible participant's plan year earnings and is subject to the limitation of Section
401(a) of the Internal Revenue Code of 1986, as amended. In 1999, 1998 and 1997, the Board of Directors issued a resolution authorizing a 15% contribution. Expense for the 401(k) and profit sharing plans amounted to $29.0 million, $18.8 million and $17.6
million in 1999, 1998 and 1997, respectively.
Effective January 1, 1998, LNC assumed the liabilities for a non-contributory defined contribution plan covering certain highly compensated former CIGNA agents and employees. Contributions for this plan are made annually based upon varying percentages of
annual eligible earnings as defined in the plan. Expense for this plan amounted to $1.7 million and $0.9 million in 1999 and 1998, respectively.
Deferred Compensation Plans. LNC sponsors contributory deferred compensation plans for certain U.S. employees and agents. Plan participants may elect to defer payment of a portion of their compensation, as defined by the plans. At this point, LNC
has not chosen to fund these plans. Plan participants may select from a variety of alternative measures for purposes of calculating the investment return considered attributable to their deferral. Under the terms of these plans, LNC agrees to pay out
amounts based upon the alternative measure selected by the participant. Plan participants who are also participants in an LNC 401(k) plan and who have reached the contribution limit for that plan may also elect to defer the additional amounts into the
deferred compensation plan. LNC makes matching contributions to these plans based upon amounts placed into the deferred compensation plans by individuals who have reached the contribution limit under the 401(k) plan. The amount of LNC's contribution is
calculated in a manner similar to the employer match calculation described in the 401(k) plans section above. Expense for these plans amounted to $10.6 million, $11.5 million and $11.4 million in 1999, 1998 and 1997, respectively. These expenses reflect
both LNC's employer matching contributions, as well as changes in the measurement of LNC's liabilities under these plans.
In the fourth quarter of 1999, LNC modified the terms of the deferred compensation plans to provide that plan participants that selected LNC stock as the measure for their investment return would receive shares of LNC stock in satisfaction of this portion
of their deferral. In addition, participants were precluded from diversifying any portion of their deferred compensation plan account that is measured by LNC's stock performance. As a result of these modifications to the plans, ongoing changes in value of
LNC's stock no longer affect the expenses associated with this portion of the deferred compensation plans.
In connection with the acquisition of the block of individual life insurance and annuity business from CIGNA, LNC assumed the liability for an unfunded contributory deferred compensation plan covering certain former CIGNA employees and agents. These
participants became immediately eligible for the LNC contributory deferred compensation plans, and therefore this plan was frozen as to future deferrals as of January 1, 1998. Expense for this plan amounted to $1.1 million and $2.0 million in 1999 and
1998, respectively.
The total liabilities associated with these plans were $119.3 million and $104.4 million at December 31, 1999 and 1998, respectively.
Incentive Plans. LNC has various incentive plans for key employees, agents and directors of LNC and its subsidiaries that provide for the issuance of stock options, stock appreciation rights, restricted stock awards and stock incentive awards. These
plans are comprised primarily of stock option incentive plans. Stock options grantedawarded under the stock option incentive plans are atgranted with an exercise price equal to the market value of LNC stock at the date of grant and, subject to termination of
employment, expire 10 years from the date of grant. Such options are transferable only upon death anddeath. Options granted prior to 1992 are exercisable one year fromafter the date of grant forand options issued prior to 1992.
Options issued subsequent to 1991 arebecome exercisable in 25% increments
onover the four year period following the option issuancegrant anniversary in the four years following issuance.date. A "reload option" feature was added on May 14, 1997. In most cases, persons exercising an option after that date have been granted new options in an amount equal to the number of
matured shares tendered.tendered to exercise the original option award. The reload options are granted for the remaining term of the related original option and have an exercise price equal to the market value of LNC stock at the date of the reload award. Reload
options can be exercised two years after the grant date if the value of the new option has appreciated by at least 25%.
As a result of pending changes in the interpretation of the existing accounting rules for stock options, LNC has decided not to continue issuing stock options to agents that do not meet the stringent definition of a common law employee that is expected to
be included in this new accounting guidance. In the fourth quarter of 1999, LNC decided to design a stock appreciation right program as a replacement to the existing agent stock option program. This new stock appreciation right program is expected to be
adopted in early 2000, with the first awards under the program expected to be made in the first quarter of 2000.
Information with respect to incentive plan stock options outstanding at December 31, 19981999 is as follows:
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Number Weighted-
Range of Number Out- Remaining Average Exercisable Average
Exercise standing at Contractual Exercise at Exercise
Prices Dec 31, 1998 Life (Years) Price Dec 31, 1998 Price
- -------------------------------------------------------------------------------------------------------------------
$21 - $ 35 388,895 2.65 $26.53 387,645 $26.50
36 - 50 1,360,963 6.18 42.64 1,037,211 41.96
51 - 65 979,856 8.35 58.84 278,569 58.54
66 - 80 359,279 9.04 78.14 69,772 77.49
81 - 95 2,303,372 9.37 90.45 25,276 89.86
96 - 110 61 9.59 96.41 --
--------- ---------
$21 - $110 5,392,426 1,798,473
Options Outstanding Options Exercisable
------------------------------------------------ -------------------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Prices Dec. 31, 1999 Life (Years) Price Dec. 31, 1999 Price
- ----------------------------------------------------------------------------------------------------------------
$10 - $20 1,302,788 3.16 $17.54 1,302,788 $17.54
21 - 30 3,143,934 6.70 26.00 2,291,189 25.19
31 - 40 208,281 8.21 37.41 76,158 35.49
41 - 50 4,860,753 8.40 44.77 1,323,367 44.86
51 - 60 4,148,679 9.36 50.85 147,936 50.88
-------------- -----------
$10 - $60 13,664,435 5,141,438
LNC recognizes compensation expense for its stock option incentive plans using the intrinsic value based method of accounting (see note 1 on page 44)Note 1) and provides the required pro forma information for stock options granted after December 31, 1994. Accordingly, no
compensation expense has been recognized for stock option incentive plans. Had compensation expense for LNC's stock option incentive plans for options granted after December 31, 1994 been determined based on the estimated fair value at the grant dates for awards under those plans, LNC's pro forma
net income and earnings per share for the last three years (1998, 1997(1999, 1998 and 1996)1997) would have been $500,984,000$443.0 million ($4.932.21 per diluted share); $930,538,000$501.0 million ($8.952.46 per diluted share) and $511,253,000$930.5 million ($4.854.47 per diluted share), respectively (a decrease of
$8,791,000$17.4 million or $.09 per diluted share; $3,450,000$8.8 million or $.03$.04 per diluted share and $2,305,000$3.5 million or $.02 per diluted share, respectively). These effects on pro forma net income and earnings per share of expensing the estimated fair value of stock options
are not necessarily representative of the effects on reported net income for future years due to factors such as the vesting period of the stock options and the potential for issuance of additional stock options in future years.
53
The fair value of options granted after December 31, 1994, used as a basis for the pro formaproforma disclosures, shown above, was estimated as of the date of grant using a Black-Scholes option pricing model.
The option price assumptions used were as follows:
Year Ended December 31 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Dividend yield.................................................... 3.6% 3.8% 4.1%
Expected volatility............................................... 20.4% 19.0% 18.0%
Risk-free interest rate........................................... 5.6% 6.6% 6.5%
Expected life (in years).......................................... 6 6 5
Weighted-average fair values per option granted................... $18.15 $11.24 $7.35
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------------------------
Dividend yield 2.7% 3.6% 3.8%
Expected volatility 29.7% 20.4% 19.0%
Risk-free interest rate 5.4% 5.6% 6.6%
Expected life (in years) 5.5 6.1 6.0
Weighted-average fair values per option granted $14.31 $9.08 $5.62
Restricted stock (non-vested stock) awarded from 19961997 through 19981999 was as follows:
Year Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Restricted stock (number of shares)................................... 438,003 118,836 55,538
Weighted-average price per share at time of grant..................... $ 82.50 $61.98 $46.16
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------------------------
Restricted stock (number of shares) 57,012 876,006 237,672
Weighted-average price per share at time of grant $43.91 $41.25 $30.99
Information with respect to the incentive plans involving stock options is as follows:
Options Outstanding Options Exercisable
Weighted- Weighted-
Shares Average Average
Available Exercise Exercise
for Grant Shares Price Shares Price
____________________________________________________________________________________________________________________
Balance at January 31, 1996................ 7,747,911 2,832,280 $33.21 1,647,872 $28.56
Granted.................................... (636,500) 636,500 45.69
Exercised.................................. -- (273,967) 26.68
Expired.................................... (1,600) (1,000) 27.75
Forfeited.................................. 151,818 (38,650) 36.03
Restricted stock awarded........................ (55,538)
--------- ---------
Balance at December 31, 1996................ 7,206,091 3,155,163 36.29 1,833,269 31.22
Additional authorized. . . . . . . . . . . ..... 5,493,909
Granted-original. . . . . . . . .. . . . . . ... (1,047,200) 1,047,200 60.05
Granted-reloads................................. (47,029) 47,029 68.41
Exercised (includes shares tendered)............ 149,139 (903,407) 31.67
Expired......................................... -- (783) 71.07
Forfeited....................................... 60,797 (44,316) 46.43
Restricted stock awarded........................ (118,836)
------- ---------
Balance at December 31, 1997................. 11,696,871 3,300,886 45.08 1,601,972 35.81
Granted-original................................ (2,605,875) 2,605,875 89.19
Granted-reloads................................. (43,725) 43,725 89.41
Exercised (includes shares tendered)............ 97,862 (488,441) 36.22
Forfeited....................................... 71,287 (69,619) 71.89
Restricted stock awarded........................ (438,003)
-------- ----------
Balance at December 31, 1998................. 8,778,417 5,392,426 67.21 1,798,473 43.25
Other Benefit Plans. LNC maintains defined benefit pension plans
Options Outstanding Options Exercisable
------------------------------- --------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------
Balance at January 1, 1997 6,310,326 $18.15 3,666,538 $15.61
Granted-original 2,094,400 30.03
Granted-reloads 94,058 34.21
Exercised (includes shares tendered) (1,806,814) 15.84
Expired (1,566) 35.54
Forfeited (88,632) 23.22
-------------
Balance at December 31, 1997 6,601,772 22.54 3,203,944 17.91
Granted-original 5,211,750 44.60
Granted-reloads 87,450 44.71
Exercised (includes shares tendered) (976,882) 18.11
Forfeited (139,238) 35.95
-------------
Balance at December 31, 1998 10,784,852 33.61 3,596,946 21.63
Granted-original 4,445,316 50.51
Granted-reloads 104,422 49.32
Exercised (includes shares tendered) (1,216,263) 48.68
Forfeited (453,892) 44.90
-------------
Balance at December 31, 1999 13,664,435 39.59 5,141,438 29.21
The number of shares and the per share data for its U.S.
and U.K. employees and a defined contribution plan for its U.S. agents. LNC
also maintains 401(k) Plans, deferred compensation plans and postretirement
medical and life insurance plans for its U.S. employees and agents. The
aggregate expenses and accumulated obligations for these plans are not materialprior years throughout this note has been restated to LNC's consolidated statements of income or financial position for anyreflect the impact of the periods shown in the accompanying consolidated financial statements.
1999 two-for-one stock split (see Note 10).
7. Restrictions, Commitments and Contingencies
Statutory Information and Restrictions
Net income (loss) as determined in accordance with statutory accounting practices for LNC's insurance subsidiaries was $(1,452,400,000); $345,200,000$(0.375) billion, $(1.452) billion and $384,600,000$0.345 billion for 1998,1999,1998 and 1997, and 1996, respectively. The 1998 amounts includes the statutory
ceding commissions associated with the acquisition of two blocks
54 of business as described below. Excluding the impact of these acquisitions, net income for 1998 would have been $545,900,000.$0.546 billion. Statutory net income (loss) for 1999, 1998 1997 and 1996,1997, excluding
LNC's foreign life reinsurance companies, was $(1,397,600,000); $299,100,000$0.447 billion, $(1.398) billion and $342,700,000,$0.299 billion, respectively.
Shareholders' equity as determined in accordance with statutory accounting practices for LNC's insurance subsidiaries was $2,952,500,000$1.809 billion and $2,660,900,000$2.953 billion for December 31, 1999 and 1998, and 1997, respectively.
The
In 1998, the National Association of Insurance Commissioners is involved in a multi-year
project to examine and challenge the appropriateness of currentadopted codified statutory accounting practices. This project could result inprinciples (the "Codification"). The Codification is effective on January 1, 2001 and the first statement to be reported on a Codification basis will be the
March 31, 2001 statement. Management believes that the changes to statutory accounting practices that couldresulting from the Codification will not cause material changes to the statutory net income and shareholders' equity data shown above.
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 11 on page 66), LNC's insurance subsidiaries would have
been able to pay dividends to LNC in 1999 of approximately $603,400,000 without
obtaining specific approval from the insurance commissioners.
LNC's primary insurance subsidiary, Lincoln National Life Insurance Company ("Lincoln Life") acquired a block of individual life insurance and annuity business from CIGNA in January 1998 and a block of individual life insurance from Aetna Inc. in October
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 statutory earned surplus. As a result of these acquisitions, Lincoln Life's statutory earned surplus is negative and itnegative. It is necessary for Lincoln Life to obtain the prior approval
of the Indiana Insurance Commissioner before paying any dividends to LNC until such time as statutory earned surplus is positive. It
is expected thatThe time frame for statutory earned surplus willto return to a positive position within two-three years from the closing of the Aetna transaction described above
assuming a level ofis dependent upon future 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 or ifand
dividends are approved or paid at amounts higher than recent
history, the statutory earned surplus may not return to a positive position as
soon as expected.by Lincoln Life. Although no assurance can be given management believes that the approvals for the payment ofadditional dividends in amounts consistent with thoseto LNC will be approved, during 1999, Lincoln Life received regulatory approval and paid in the past can be obtained.extraordinary dividends totaling $530 million to LNC. In the event such
approvals are not obtained in the future, 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 liabilityliabilities for disability income claims net of the related assetassets for amounts recoverable from reinsurers at December 31, 1999 and 1998 were $1.316 billion and 1997 is a net liability of
$1,813,400,000 and $1,654,000,000,$1.813 billion, respectively, excluding deferred acquisition costs. ThisThe liability is based
on the assumption that recent experience will continue in the future. If incidence levels and/or claim termination rates fluctuate significantly from the assumptions underlying the reserves, adjustments to reserves could be required in the future.
Accordingly, this liability may prove to be deficient or excessive. However, it is management's opinion that such future development will not materially affect the consolidated financial position of LNC.
LNC reviews reserve levels on an on-going basis.
United Kingdom Pension Products
Operations in the U.K.UK 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 has to be done and the individual put in a position similar to what would have been attained if the individual had remained in the employer sponsored plan. At December 31, 19981999
and 1997,1998, liabilities of $202,100,000,$294.4 million and $291,000,000,$202.1 million, respectively, had been established for this issue. The decreaseDecember 31, 1999 amount includes a change in the level of the reserve reflects the settlement payouts
that occurred during 1998.estimate for this liability (see Note 2). 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 fewin past years as specified in the indemnification
clauses of the purchase agreements at December 31, 1999 and 1998 were $99.7 million and 1997 were $84,900,000 and $113,000,000, respectively .$84.9 million, respectively. These liabilities and recoveries are based on various estimates that are subject to considerable uncertainty. Also, there is further uncertainty from the regulator perspective
as additional guidelines were issued in December of 1998 that extended the
review to a wider range client population. These guidelines specify actions
expected from the companies that issued such products. Accordingly, these liabilitiesestimates
may prove to be deficient or excessive. However, it is management's opinion that such future developmentdevelopments will not materially affect the consolidated financial position of LNC.
55
United Kingdom Strategic Review
Trends in the UK for pension and life insurance businesses are changing rapidly, due in large part to government mandated product design changes that are expected to be imposed upon the industry within the next year or two. The ever changing regulatory
environment has and is continuing to cause great volatility in the Lincoln UK segment. In anticipation of these marketplace changes, a review of strategic alternatives for Lincoln UK was initiated earlier this year. In the fourth quarter of 1999, as a
result of this review and in response to this current business environment, management decided to explore the exit of the UK market. This process will include the review of a range of strategic options including the potential sale of the Lincoln UK
insurance business.
Personal Accident Programs
In the past, LNC's Reinsurance segment acceptsaccepted personal accident reinsurance programs from other insurance companies. Most of these programs arewere presented to the Reinsurance segment by independent brokers who represent the ceding companies. Certain
excess of lossexcess-of-loss personal accident reinsurance programs created in the London market during 1993-1996from 1993 to 1996 have produced and have potential to produce significant losses. AtThe liabilities for these programs, net of related assets recoverable from reinsurers,
were $174.7 million and $177.4 million at December 31, 1999 and 1998, respectively.
Settlement activities relating to LNC's participation in workers' compensation carve-out (i.e., life and 1997, liabilitieshealth risks associated with workers' compensation coverage) programs managed by Unicover Managers, Inc. have allowed LNC to evaluate the possibility
of $177,400,000settlements and $186,300,000, respectively hadto estimate its potential costs to settle Unicover-related exposures. As of December 31, 1999, a liability of $62.2 million has been established for suchthe settlement of LNC's exposure to the Unicover programs.
This
reserve is
These amounts are based on various estimates that are subject to considerable uncertainty. Accordingly, thisthe liabilities 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.
HMO Excess-of-Loss Reinsurance Programs
The liability for HMO claims, net of the related assets for amounts recoverable from reinsurers, was $101.9 million and $55.9 million at December 31, 1999 and 1998. LNC reviews reserve levels on an ongoing basis. The liability is based on the assumption
that recent experience will continue in the future. If claims and loss ratios fluctuate significantly from the assumptions underlying the reserves, adjustments to reserves could be required in the future. Accordingly, the liability may prove to be
deficient or excessive. However, it is management's opinion that such future developmentdevelopments will not materially affect the consolidated financial position of LNC.
In light of the continued volatility of this line of business, LNC continues to investigate its personal accidentdiscontinued writing new HMO excess-of-loss reinsurance programs in the third quarter of 1999. Consequently, during the third quarter of 1999, LNC recorded a charge in the Reinsurance
segment of $3.2 million after-tax ($4.9 million pre-tax) for employee severance and other costs related to determine if there are additional programs including certain workers
compensation programs which may produce losses. At this time LNC 1) does not
have sufficient information to determine whether or not it is probable that
additional losses have been incurred and 2) can not accurately estimate the ultimate cost or timingdiscontinuance of the outcome on these programs.
business (see Note 12).
Marketing and Compliance Issues
Regulators continue to focus on market conduct and compliance issues. Under certain circumstances, companies operating in the insurance and financial services markets have been held responsible for providing incomplete or misleading sales materials and
for replacing existing policies with policies that were less advantageous to the policyholder. LNC's management continues to monitor the company's sales materials and compliance procedures and is making an extensive effort to minimize any potential
liability. Due to the uncertainty surrounding such matters, it is not possible to provide a meaningful estimate of the range of potential outcomes at this time; however, it is management's opinion that such future development will not materially affect
the consolidated financial position of LNC.
A UK regulatory review of Lincoln UK selling practices outside of the pension product mis-selling investigations has been completed, with a final report issued in February of 2000. The finalization of this review had no effect on Lincoln UK's 1999 income
from operations. Although some modifications of sales practices will be necessary, Lincoln UK does not expect these changes to adversely affect its future financial results.
UK regulators continue to focus on industry-wide marketing and compliance issues. Under certain circumstances companies operating in the insurance and financial services markets may be held responsible for providing incomplete or misleading sales
materials and information when selling endowment polices. As no official pronouncement regarding an investigation into mis-selling of endowments has been made, it is not possible to provide a meaningful estimate of the potential outcome of this matter at
the present time. However, it is management's opinion that the resolution of this matter will not materially affect the consolidated financial position of LNC.
Group Pension Annuities
The liabilities for guaranteed interest and group pension annuity contracts are supported by a single portfolio of assets that attempts to match the duration of these liabilities. Due to the long-term nature of group pension annuities and the resulting
inability to exactly match cash flows, a risk exists that future cash flows from investments will not be reinvested at rates as high as currently earned by the portfolio. Accordingly, these liabilities may prove to be deficient or excessive. However, it
is management's opinion that such future development will not materially affect the consolidated financial position of LNC.
Seguros Serfin Lincoln
In December 1997, LNC invested $85 million for a 49% share of Seguros Serfin Lincoln ("SSL"), a Mexican bancassurance company, that sells life, auto and homeowners insurance to the customers of Banca Serfin. Grupo Financiero Serfin S.A. ("GFS") owns 51%
of SSL and 100% of Banca Serfin. On July 8, 1999, the private shareholders of GFS declined to contribute additional capital to Banca Serfin as required by the Mexican Government. Accordingly, the Bank Savings Protection Institute ("IPAB"), a government
agency, took control of GFS. IPAB has injected capital into Banca Serfin and has indicated its intent to place GFS up for sale.
Under the terms of the Shareholders Agreement with GFS, LNC had the right to put its investment in SSL to GFS for an amount equal to the LNC's initial investment in SSL plus a 7% annual return. LNC has given GFS notice of its decision to exercise its put.
Given these contractual rights and the status of ongoing discussions with GFS and IPAB concerning these matters, LNC believes that it will recover the value of its investment in SSL along with a 7% annual return on that investment.
Euro Conversion
LNC owns operating companies in Europe and conducts business with companies located within Europe. LNC has modified its systems, financial activities and currency risk exposures to align with the first phase of the European union'sUnion's conversion to a new
common currency (the euro)Euro) that was adopted January 1, 1999. It is management's opinion that the additional phases of this conversion, which will be implemented during the next few years, will not materially affect the consolidated financial conditionposition of
LNC.
Leases
Certain of LNC's subsidiaries lease their home office properties through sale-leaseback agreements. The agreements provide for a 25 year lease period with options to renew for six additional terms of five years each. The agreements also provide LNC with
the right of first refusal to purchase the properties during the term of the lease, including renewal periods, at a price defined in the agreements. LNC also has the option to purchase the leased properties at fair market value as defined in the
agreements on the last day of the initial 25-year lease period ending in 2009 or the last day of any of the renewal periods.
Total rental expense on operating leases in 1999, 1998 and 1997 was $81.5 million, $81.3 million and 1996 was $81,300,000,
$62,500,000 and $54,500,000,$62.5 million, respectively. Future minimum rental commitments are as follows (in millions):
1999
2000 - $55.0$60.3 2002 - $51.1 2004 - $43.5
2001 - $48.258.2 2003 - $ 36.1
2000 - 51.6 2002 - 41.944.4 Thereafter - 217.1
221.1
Information Technology Commitment
In February 1998, Lincoln Life signed a seven-year contract with IBM Global Services for information technology services for the Fort Wayne operations. Annual costs are dependent on usage but are expected to range from $33,600,000$33.6 million to $56,800,000.
$56.8 million.
Insurance Ceded and Assumed
LNC's insurance companies cede insurance to other companies. The portion of risks exceeding each company's retention limit is reinsured with other insurers. LNC seeks reinsurance coverage within the
56
business segmentsbusinesses that sell life insurance to limit its
liabilities. As of December 31, 1998,1999, LNC's maximum retention was $10,000,000$10.0 million on a single insured. Portions of LNC's deferred annuity business have also been co-insured with other companies to limit LNC's exposure to interest rate risks. At December 31,
1998,1999, the reserves associated with these reinsurance arrangements totaled $1,608,500,000.$1,422.8 million. To cover products other than life insurance, LNC acquires other insurance coverages with retentions and limits that management believes are appropriate for the
circumstances. The accompanying financial statements reflect premiums, benefits and deferred acquisition costs, net of insurance ceded (see note 5 on page 49)Note 5). LNC's insurance companies remain liable if their reinsurers are unable to meet contractual obligations
under applicable reinsurance agreements.
Certain LNC insurance companies assume insurance from other companies. At December 31, 1998,1999, LNC's insurance companies have provided $228,800,000$386.8 million of statutory surplus relief to other insurance companies under reinsurance transactions. Generally, such
amounts are offset by corresponding receivables from the ceding company, which are secured by future profits on the reinsured business. However, LNC's insurance companies are subject to the risk that the ceding company may become insolvent and the right
of offset would not be permitted.
Associated with these transactions, LNC's insurance companies have obtained letters of credit in favor of various insurance companies. This allows the ceding companies to take statutory reserve credit. The letters of credit issued by the banks represent a
guarantee of performance under the reinsurance agreements. At December 31, 1998,1999, there was a total of $656,200,000$1.1 billion in outstanding bank letters of credit. In exchange for the letters of credit, LNC paid the banks approximately $1,637,000$1.7 million in fees in 1998.
1999.
Vulnerability from Concentrations
At December 31, 1998,1999, LNC did not have a material concentration of financial instruments in a single investee, industry or geographic location. Also at December 31, 1998,1999, LNC did not have a concentration of: 1) business transactions with a particular
customer, lender or distributor; 2) revenues from a particular product or service; 3) sources of supply of labor or services used in the business or; 4) a market or geographic area in which business is conducted that makes it vulnerable to an event that
is at least reasonably possible to occur in the near term and which could cause a severe impact to LNC's financial condition.
position.
Other Contingency Matters
LNC and its subsidiaries are involved in various pending or threatened legal proceedings arising from the conduct of business. Most of these proceedings are 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 suitsproceedings will not have a material adverse effect on the consolidated financial conditionposition of LNC.
Four lawsuits involving alleged
With the recent filing of a lawsuit alleging fraud in the sale of interest sensitiveinterest-sensitive universal life and whole life insurance have been filed as class actions againstpolicies, Lincoln Life althoughnow has three such actions pending. While each of these lawsuits seeks class action status, the court has not
certified a class in any of them. In each of these cases. Plaintiffslawsuits, plaintiffs seek unspecified damages and penalties for themselves and on behalf of the putative class. While the relief sought in these caseslawsuits is substantial, they are in the discovery stages
of litigation, and it is premature to make assessments about the potential loss, if any, because the status of the cases ranges from the early stages of litigation
to the dismissal and appeals stage.any. Management intends to defend these suitslawsuits vigorously. The amount of liability, if any, which may arise as a result of these suitslawsuits cannot be reasonably estimated at
this time. UK regulatory authorities have completedIn a review of Lincoln UK selling
practices. This review does not include matters related tofourth lawsuit, a settlement has been preliminarily approved by the pension product
mis-selling investigations. Management is currently working with the regulators
to address compliance issues thatcourt and a class has been conditionally certified for settlement purposes. Two prior similar lawsuits have been raised in the course of this review.
The extent of corrective measurespreviously resolved and potential disciplinary actions, if any,
that may result from this review are actively being discussed with the
regulatory authorities. It is not possible to provide a meaningful estimate of
the potential outcome of this matter at the present time. However, it is
management's opinion that the resolution of these matters will not materially
affect the consolidated financial position of LNC.dismissed.
The number of insurance companies that are under regulatory supervision has resulted, and is expected to continue to result, in assessments by state guaranty funds to cover losses to policyholders of insolvent or
57
rehabilitated companies. Mandatory
assessments may be partially recovered through a reduction in future premium taxes in some states. LNC has accrued for expected assessments net of estimated future premium tax deductions.
Guarantees
LNC has guarantees with off-balance-sheet risks whose contractual amounts represent credit exposure. Outstanding guaranteesGuarantees with off-balance-sheet risks shown in notional or contract amounts along with their carrying valuehaving contractual values of $52.3 million and estimated fair values, are as follows:
Assets (Liabilities)
Notional or Carrying Fair Carrying Fair
Contract Amounts Value Value Value Value
December 31 (in millions) 1998 1997 1998 1998 1997 1997
- ------------------------------------------------------------------------------------------------------------------
Industrial revenue bonds.......................... $27.1 $27.9 -- -- $(.8) $ --
Real estate partnerships.......................... -- 2.9 -- -- -- --
Mortgage loan pass-through certificates........... 30.9 41.6 -- -- -- --
---- ---- ------ ------ --- -----
Total guarantees............................. $58.0 $72.4 -- -- $(.8) $ --
$58.0 million were outstanding at December 31, 1999 and 1998,
respectively.
Certain subsidiaries of LNC have invested in real estate partnerships which use industrial revenue bonds to finance their projects. LNC has guaranteed the repayment of principal and interest on these bonds. Certain subsidiaries of LNC are also involved in
other real estate partnerships that use conventional mortgage loans. In some cases, the terms of these arrangements involve guarantees by each of the partners to indemnify the mortgagor in the event a partner is unable to pay its principal and interest
payments. In addition, certain subsidiaries of LNC have sold commercial mortgage loans through grantor trusts which issued pass-through certificates. These subsidiaries have agreed to repurchase any mortgage loans which remain delinquent for 90 days at a
repurchase price substantially equal to the outstanding principal balance plus accrued interest thereon to the date of repurchase. It is management's opinion that the value of the properties underlying these commitments is sufficient that in the event of
default the impact would not be material to LNC.
Derivatives
LNC has derivatives with off-balance-sheet risks whose notional or contract amounts exceed the credit exposure. For the years ended December 31, 1999, 1998 and 1997, 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, Commodity
risk, credit risk, increased liabilities associated with certain reinsurance
agreements,commodity risk, foreign exchange risksrisk and fluctuations in the FTSE and S&P&P indexes. In addition, LNC is subject to the risks
associated with changes in the value of its derivatives; however, such changes in value generally are offset by changes in the value of the items being hedged by such contracts. Outstanding derivatives with off- balance-sheetoff-balance-sheet risks, shown in notional or
contract amounts along with their carrying value and estimated fair values, are as follows:
Assets (Liabilities)
Notional or Carrying Fair Carrying Fair
Contract Amounts Value Value Value Value
December 31 (in millions) 1998 1997 1998 1998 1997 1997
- ------------------------------------------------------------------------------------------------------------------
Interest rate derivatives:
Interest rate cap agreements.............. $4,108.8 $4,900.0 $ 9.3 $ .9 $13.9 $ .9
Swaptions................................. 1,899.5 1,752.0 2.5 2.5 6.9 6.9
Interest rate swap agreements............. 258.3 10.0 9.9 9.9 .2 .2
Put options............................... 21.3 -- 2.2 2.2 -- --
--------- -------- ----- ----- ----- -----
Total interest rate derivatives........ 6,287.9 6,662.0 23.9 15.5 21.0 8.0
Foreign currency derivatives:
Forward exchange forward contracts:
Foreign investments..................... 1.5 163.1 * * 5.4 5.4
Foreign currency swaps.................... 47.2 15.0 .3 .3 (2.1) (2.1)
---- ------ ----- ----- --- ---
Total foreign currency derivatives..... 48.7 178.1 .3 .3 3.3 3.3
Commodity derivatives:
Commodity swap............................ 8.1 -- 2.4 2.4 -- --
Equity indexed derivatives:
Call options (based on FTSE).............. 11.1 14.1 11.7 11.7 13.5 13.5
Call options (based on S&P)............... 79.9 5.3 23.1 23.1 1.1 1.1
Total derivatives...................... $6,435.7 $6,859.5
Assets (Liabilities)
--------------------------------------------
Notional or Carrying Fair Carrying Fair
Contract Amounts Value Value Value Value
-------------------- ----- ----- ----- -----
December 31 (in millions) 1999 1998 1999 1999 1998 1998
- ---------------------------------------------------------------------------------------------------------------
Interest rate derivatives:
Interest rate cap agreements $2,508.8 $4,108.8 $ 5.2 $ 3.2 $ 9.3 $ 0.9
Swaptions 1,837.5 1,899.5 10.8 10.8 2.5 2.5
Interest rate swap agreements 630.9 258.3 (19.5) (19.5) 9.9 9.9
Put options 21.3 21.3 1.9 1.9 2.2 2.2
-------- -------- ----- ----- ----- -----
Total interest rate derivatives 4,998.5 6,287.9 (1.6) (3.6) 23.9 15.5
Foreign currency derivatives:
Foreign exchange forward contracts -- 1.5 -- -- * *
Foreign currency swaps 44.2 47.2 (0.4) (0.4) 0.3 0.3
-------- -------- ----- ----- ----- -----
Total foreign currency derivatives 44.2 48.7 (0.4) (0.4) 0.3 0.3
Commodity derivatives:
Commodity swap -- 8.1 -- -- 2.4 2.4
Equity indexed derivatives:
Call options (based on FTSE) 4.3 11.1 8.6 8.6 11.7 11.7
Call options (based on S&P) 129.6 79.9 24.8 24.8 23.1 23.1
-------- -------- ----- ----- ----- -----
Total equity indexed derivatives 133.9 91.0 33.4 33.4 34.8 34.8
-------- -------- ----- ----- ----- -----
Total derivatives $5,176.6 $6,435.7 $31.4 $29.4 $61.4 $53.0 $38.9 $25.9
*Less than $100,000.
58
*Less than $100,000.
A reconciliation of the notional or contract amounts for the significant programs using derivative agreements and contracts is as follows:
Interest Rate Spread-Lock
Cap Agreements Swaptions Agreements
December 31 (in millions) 1998 1997 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------
Balance at beginning-of-year............ $4,900.0 $5,500.0 $1,752.0 $ 672.0 $ -- $ --
New contracts........................... 708.8 -- 218.3 1,080.0 -- 50.0
Terminations and maturities............. (1,500.0) (600.0) (70.8) -- -- (50.0)
------- -------- ------ -------- --- ----
Balance at end-of-year............... $4,108.8 $4,900.0 $1,899.5 $1,752.0 $ -- $
Interest Rate
Cap Agreements Swaptions
-------------------- --------------------
December 31 (in millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------
Balance at beginning-of-year $4,108.8 $4,900.0 $1,899.5 $1,752.0
New contracts --
Financial
Futures Interest Rate
Contracts Swap Agreements Put Options
December 31 (in millions) 1998 1997 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Balance at beginning-of-year............ $ -- $ 147.7708.8 -- 218.3
Terminations and maturities (1,600.0) (1,500.0) (62.0) (70.8)
-------- -------- -------- --------
Balance at end-of-year $2,508.8 $4,108.8 $1,837.5 $1,899.5
Interest Rate
Swap Agreements Put Options
-------------------- --------------------
December 31 (in millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------
Balance at beginning-of-year $258.3 $ 10.0 $ -- $ -- $ --
New contracts........................... -- 88.3 2,226.6 10.0 21.3 --
Terminations and maturities............. -- (236.0) (1,978.3) -- -- --
--- ------ ------- ----- ----- ---
Balance at end-of-year................ $ -- $ -- $ 258.3 $10.0 $21.3 $ --
Foreign Currency Derivatives (Foreign Investments)
Foreign Exchange Foreign Foreign
Forward Currency Currency
Contracts Options Swaps
December 31 (in millions) 1998 1997 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------
Balance at beginning-of-year............ $ 163.1 $ 251.6 $ -- $ 50.2 $15.0 $15.0
New contracts........................... 419.8 833.1 -- -- 39.2 --
Terminations and maturities............. (581.4) (921.6) -- (50.2) (7.0) --
----- ------- ---- ----- ---- ------
Balance at end-of-year............... $ 1.5 $ 163.1 $ -- $New contracts 482.4 2,226.6 -- 21.3
Terminations and maturities (109.8) (1,978.3) -- --
------ -------- ----- -----
Balance at end-of-year $630.9 $ 258.3 $21.3 $21.3
Foreign Currency Derivatives
-----------------------------------------
Foreign Exchange Foreign Currency
Forward Contracts Swaps
----------------- -----------------
December 31 (in millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------
Balance at beginning-of-year $ 1.5 $163.1 $47.2 $15.0
Commodity Call Options Call Options
Swap (Based on FSTE) (Based on S&P)
December 31 (in millions) 1998 1997 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Balance at beginning-of-year............ $ -- $ -- $14.1 $14.7 $ 5.3 $ --
New contracts........................... 8.1 -- -- -- 74.6 5.3
Terminations and maturities............. -- -- (3.1) -- -- --
Foreign exchange adjustment............. -- -- .1 (.6) -- --
---- --- ----- ---- ----- ----
Balance at end-of-year............... $8.1 $ -- $11.1 $14.1 $79.9 $5.3
New contracts 42.7 419.8 -- 39.2
Terminations and maturities (44.2) (581.4) (3.0) (7.0)
----- ------ ----- -----
Balance at end-of-year $ -- $ 1.5 $44.2 $47.2
Commodity Call Options Call Options
Swaps (Based on FTSE) (Based on S&P)
----------------- ----------------- ------------------
December 31 (in millions) 1999 1998 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Balance at beginning-of-year $ 8.1 $-- $11.1 $14.1 $ 79.9 $ 5.3
New contracts -- 8.1 -- -- 52.9 74.6
Terminations and maturities (8.1) -- (6.6) (3.1) (3.2) --
Foreign exchange adjustment -- -- (0.2) 0.1 -- --
----- ---- ----- ----- ------ -----
Balance at end-of-year $ -- $8.1 $ 4.3 $11.1 $129.6 $79.9
Interest Rate Cap Agreements. the The interest rate cap agreements, which expire in 19992000 through 2006, entitle LNC to receive quarterly payments from the counterparties on specified future reset dates, contingent on future interest rates. For each cap,
the amount of such quarterly payments, if any, is determined by the excess of a market interest rate over a specified cap rate multiplied by the notional amount divided by four. The purpose of LNC's interest rate cap agreement program is to protect its
annuity line of business from the effect of rising interest rates. The premium paid for the interest rate caps is included in other investments ($9,300,000(amortized cost of $5.2 million as of December 31, 1998)1999) and is being amortized over the terms of the
agreements. This amortization is included in net investment income.
Swaptions. Swaptions, which expire in 19992000 through 2003, entitle LNC to receive settlement payments from the counterparties on specified expiration dates, contingent on future interest rates. For each swaption, the amount of such settlement
payments, if any, is determined by the present value of the difference between the fixed rate on a market rate swap and the strike rate multiplied by the notional amount. The purpose of LNC's swaption program is to protect its annuity line of business
from the effect of rising interest rates. The premium paid for the swaptions is included in other investments (amortized cost of $16,200,000$12.2 million as of December 31, 1998)1999) and is being amortized over the terms of the agreements. This amortization is included
in net investment income.
Spread-Lock Agreements. Spread-lock agreements provide for a lump sum payment to or by LNC, depending on whether the spread between the swap rate and a specified Government note is larger or smaller than a contractually specified spread. Cash
payments are based on the product of the notional amount, the spread between the swap rate and the yield of an equivalent maturity Government security, and the price sensitivity of the swap at that time. The purpose of LNC's spread-lock program is to
protect a portion of its fixed maturity securities against widening spreads.
59
While spreadlocks are used periodically, there are no spreadlock agreements outstanding at December 31, 1999.
Financial Futures Contracts. LNC uses exchange-traded financial futures contracts to hedge against interest rate risks and to manage duration of a portion of its fixed maturity securities. Financial futures contracts obligate LNC to buy or sell a
financial instrument at a specified future date for a specified price. They may be settled in cash or through delivery of the financial instrument. Cash settlements on the change in market values of financial futures contracts are made daily. Financial
futures contracts were terminated in 1997.
Interest Rate Swap Agreements. LNC uses interest rate swap agreements to hedge its exposure to floating rate bond coupon payments, replicating a fixed rate bond. An interest rate swap is a contractual agreement to exchange payments at one or more
times based on the actual or expected price level, performance or value of one or more underlying interestsinterest rates. LNC is required to pay the counterparty to the agreements the stream of variable interest payments based on the coupon payments generated
from the
hedged bonds, and in turn, receives a fixed payment from the counterpart,counterparty, at a predetermined interest rate. The net receipts/payments from interest rate swaps are recorded in net investment income. LNC also uses interest rate swap agreements to hedge its
exposure to interest rate fluctuations related to the anticipated purchase of assets to support newly acquired blocks of business.business or to extend the duration of certain portfolios of assets. Once the assets are purchased, the gains (losses) resulting from
the termination of the swap agreements will be applied to the basis of the assets. The gains (losses) will be recognized in earnings over the life of the assets. The anticipated purchase of assets to support newly acquired blocks of business was completed
in 1999. The anticipated purchase of assets related to extending the duration of certain portfolios of assets is expected to be completed in 2000.
Put Options. LNC uses put options, combined with various perpetual fixed incomefixed-income securities and interest rate swaps to replicate a fixed income, fixed maturity investment.investments. The risk being hedged is a drop in bond prices due to credit concerns with
international bond issuers. The put options giveallow LNC to put the right, but not the obligation, to sellbonds back to the counterparty of the agreement the specified securities on a specified
datecounterparties at a fixed price.
original par.
Foreign Currency Derivatives (Foreign Investments).Derivatives. LNC uses a combination of foreign exchange forward contracts, foreign currency options and foreign currency swaps, all of which are traded over-the-counter, to hedge some of the foreign exchange risk of investments in
fixed maturity securities denominated in foreign currencies. The foreign currency forward contracts obligate LNC to deliver a specified amount of currency at a future date at a specified exchange rate. Foreign currency options give LNC the right, but not
the obligation, to buy or sell a foreign currency at a specified exchange rate during a specified time period. Foreign currency options were terminated in 1997. A foreign currency swap is a contractual agreement to exchange the currencies of two different
countries pursuant to an agreement to re-exchange
the two currencies at the samea fixed rate of exchange at a specified future date.
Foreign Exchange Forward Contracts (Foreign Subsidiary).in the future.
Commodity Swap. LNC has used foreign
exchange forward contracts, which are traded over-the-counter, to hedge the
foreign exchange risk assumed with its investment in its U.K. subsidiary,
Lincoln National (UK). The foreign exchange forward contracts obligated LNC to
deliver a specified amount of currency at a future date at a specified exchange
rate.
Commodity Swap. LNC uses a commodity swap to hedge its exposure to fluctuations in the price of gold, which is the underlying variable in determining the
periodic interest payments associated with a fixed income security.gold. A commodity swap is a contractual agreement to exchange a certain amount of a particular commodity for a fixed amount of cash. LNC ownsowned a fixed
income security that meetsmet its coupon payment obligations in gold bullion. LNC iswas obligated to pay to the counterparty the gold bullion, and in return receivesreceive from the counterparty a stream of fixed income payments. The fixed income payments arewere the
product of the swap notional multiplied by the fixed rate stated in the swap agreement. The net receipts/payments from the commodity swaps areswap were recorded in net investment income. The fixed income security was called in the third quarter of 1999 and the
commodity swap expired.
Call Options. LNC uses both FTSE index and S&P&P 500 index call options. Call options, which expire in 19992000 through 2006,2007, provide LNC with settlement payments from the counterparties on specified expiration dates. The payment, if any, is the
percentage increase in the index, over the strike price defined in the contract, applied to the notional amount. The purpose of LNC's FTSE call option program is to offset the cost of increases in the liabilities of certain single premium investment
contracts whichthat are tied to the FTSE index. The purpose of LNC's S&P&P 500 call option program is to offset the increase in its liabilities resulting from certain reinsurance agreements which guarantee payment of the appreciation of the S&P&P 500 index
on certain underlying annuity products.
The
premium paid for the S&P 500 index call options is included in other assets
($16,800,000 as of December 31, 1998) and is being amortized over the terms of
the agreements. This amortization is included in net investment income.
Additional Derivative Information. Expenses for the agreements and contracts described above amounted to $11,600,000$9.9 million, $11.6 million and $10,000,000$10.0 million in 1999, 1998 and 1997, respectively. Deferred gains of $64,800,000$0.1 million as of December 31, 1998,1999 were
the result of: 1)of terminated and expired spread-lock agreements and; 2) terminated
60 interest rate swaps. These gains are included with the related fixed maturity securities to which the hedge applied or as deferred liabilities and are being amortized over the life of such securities.
LNC is exposed to credit loss in the event of nonperformance by counterparties on interest rate cap agreements, swaptions, spread-lock agreements, interest
rate swaps, commodity swaps, call options, put options, foreign exchange forward
contracts, foreign currency options and foreign currency swaps.various derivative contracts. However, LNC does not anticipate nonperformance 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. The amount of such exposure is essentially the net replacement cost or market value less collateral held for such agreements with each counterparty if
the net market value is in LNC's favor. At December 31, 1998,1999, the exposure was $53,000,000.
$19.7 million.
8. Fair Value of Financial Instruments
The following discussion outlines the methodologies and assumptions used to determine the estimated fair value of LNC's financial instruments. Considerable judgment is required to develop these fair values. Accordingly, the estimates shown are not
necessarily indicative of the amounts that would be realized in a one-time, current market exchange of all of LNC's financial instruments.
Fixed Maturity and Equity Securities. Fair values for fixed maturity securities are based on quoted market prices, where available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent
pricing services. In the case of private placements, fair values are estimated by discounting expected future cash flows using a current market rate applicable to the coupon rate, credit quality and maturity of the investments. The fair values for equity
securities are based on quoted market prices.
Mortgage Loans on Real Estate. The estimated fair value of mortgage loans on real estate was established using a discounted cash flow method based on credit rating, maturity and future income. The ratings for mortgages in good standing are based on
property type, location, market conditions, occupancy, debt service coverage, loan to value, caliber of tenancy, borrower and payment record. Fair values for impaired mortgage loans are based on: 1) the present value of expected future cash flows
discounted at the loan's effective interest rate; 2) the loan's market price or; 3) the fair value of the collateral if the loan is collateral dependent.
Policy Loans. The estimated fair value of investments in policy loans was calculated on a composite discounted cash flow basis using Treasury interest rates consistent with the maturity durations assumed. These durations were based on historical
experience.
Other Investments, and Cash and Invested Cash. The carrying value for assets classified as other investments, and cash and invested cash in the accompanying balance sheets approximates their fair value.
Investment Type Insurance Contracts. The balance sheet captions, "Future Policy Benefits, Claims and Claim Expenses" and "Contractholder Funds,"Funds", include investment type insurance contracts (i.e. deposit contracts and guaranteed interest contracts).
The fair values for the deposit contracts and certain guaranteed interest contracts are based on their approximate surrender values. The fair values for the remaining guaranteed interest and similar contracts are estimated using discounted cash flow
calculations. These calculations are based on interest rates currently offered on similar contracts with maturities that are consistent with those remaining for the contracts being valued.
The remainder of the balance sheet captions "Future Policy Benefits, Claims and Claim Expenses" and "Contractholder Funds" that do not fit the definition of "investment type insurance contracts" are considered insurance contracts. Fair value disclosures
are not required for these insurance contracts and have not been determined by LNC. It is LNC's position that the disclosure of the fair value of these insurance contracts is important because readers of these financial statements could draw inappropriate
conclusions about LNC's shareholders' equity determined on a fair value basis. It could be misleading if only the fair value of assets and liabilities defined as financial instruments are disclosed. LNC and other companies in the insurance industry are
monitoring the related actions of the various rule-making bodies and attempting to determine an appropriate methodology for estimating and disclosing the "fair value" of their insurance contract liabilities.
Short-term and Long-term Debt. Fair values for long-term debt issues are based on quoted market prices or estimated using discounted cash flow analysis based on LNC's current incremental borrowing rate for
61
similar types of borrowing arrangements
where quoted prices are not available. For short-term debt, the carrying value approximates fair value.
Minority Interest -Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Companies.Trusts Holding Solely Junior Subordinated Debentures. Fair values for minority interest-company-obligated mandatorily redeemable preferred securities of subsidiary companiestrusts holding solely
junior subordinated debentures are based on quoted market prices less the unamortized cost of issue.
Guarantees. LNC's guarantees include guarantees related to industrial revenue bonds, real estate partnerships and mortgage loan pass-through certificates. Based on historical performance where repurchases have been negligible and the current
status, which indicates none of the loans are delinquent, the fair value liability for the guarantees related to the mortgage loan pass-through certificates is insignificant.
Derivatives. LNC employs several different methods for determining the fair value of its derivative instruments. Fair values for these contracts are based on current settlement values. These values are based on: 1) quoted market prices for foreign
currency exchange contracts and financial futures contracts 2) industry standard models that are commercially available for interest rate cap agreements, swaptions, spread-lock agreements, interest rate swaps, commodity swaps and put options. 3) Monte
Carlo techniques are used for the exotic equity call options. These techniques project cash flows of the derivatives using current and implied future market conditions. The cash flows are then present valued to arrive at the derivatives current fair
market value. 4) Black-Scholes pricing methodology for standard European equity call options.
Investment Commitments. Fair values for commitments to make investments in fixed maturity securities (primarily private placements), mortgage loans on real estate and real estate are based on the difference between the value of the committed
investments as of the date of the accompanying balance sheets and the commitment date. These estimates would take into account changes in interest rates, the counterparties' credit standing and the remaining terms of the commitments.
Separate Accounts. Assets held in separate accounts are reported in the accompanying consolidated balance sheets at fair value. The related liabilities are also reported at fair value in amounts equal to the separate account assets.
The carrying values and estimated fair values of LNC's financial instruments are as follows:
Carrying Fair Carrying Fair
Value Value Value Value
December 31 (in millions) 1998 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------
Assets (liabilities):
Fixed maturities securities........................ $30,232.9 $30,232.9 $24,066.4 $24,066.4
Equity securities.................................. 542.8 542.8 660.4 660.4
Mortgage loans on real estate...................... 4,393.1 4,580.4 3,288.1 3,473.5
Policy loans....................................... 1,840.0 1,938.4 763.1 754.4
Other investments.................................. 432.0 432.0 464.8 464.8
Cash and invested cash............................. 2,433.4 2,433.4 3,794.7 3,794.7
Investment type insurance contracts:
Deposit contracts and certain
guaranteed interest contracts.................. (18,746.3) (18,419.8) (17,844.6) (17,489.1)
Remaining guaranteed interest
and similar contracts........................... (1,444.9) (1,433.8) (2,032.0) (2,010.0)
Short-term debt.................................... (314.6) (314.6) (297.2) (297.2)
Long-term debt..................................... (712.2) (748.7) (511.0) (541.7)
Minority interest-preferred
securities of subsidiary companies................ (745.0) (744.4) (315.0) (322.9)
Guarantees......................................... -- -- (.8) --
Derivatives........................................ 61.4 53.0 38.9 25.9
Investment commitments............................. -- .1 -- .3
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- ----------
December 31 (in millions) 1999 1999 1998 1998
- ---------------------------------------------------------------------------------------
Assets (liabilities):
Fixed maturities securities $27,688.6 $27,688.6 $30,232.9 $30,232.9
Equity securities 604.0 604.0 542.8 542.8
Mortgage loans on real estate 4,735.4 4,615.4 4,393.1 4,580.4
Policy loans 1,892.4 2,024.8 1,840.0 1,938.4
Other investments 401.8 401.8 432.0 432.0
Cash and invested cash 1,895.9 1,895.9 2,433.4 2,433.4
Investment type insurance contracts:
Deposit contracts and certain
guaranteed interest contracts (18,601.5) (18,267.5) (18,746.3) (18,419.8)
Remaining guaranteed interest
and similar contracts (1,129.8) (1,091.7) (1,444.9) (1,433.8)
Short-term debt (460.1) (460.1) (314.6) (314.6)
Long-term debt (712.0) (690.7) (712.2) (748.7)
Company-obligated mandatorily
redeemable preferred securities of
subsidiary trusts holding solely junior
subordinated debentures (745.0) (655.7) (745.0) (744.4)
Guarantees (0.3) -- (0.3) --
Derivatives 31.4 29.4 61.4 53.0
Investment commitments -- (3.5) -- 0.1
As of December 31, 19981999 and 1997,1998, the carrying value of the deposit contracts and certain guaranteed contracts is net of deferred acquisition costs of $52,600,000$58.0 million and $96,400,000,$52.6 million, respectively, excluding adjustments for deferred acquisition costs
applicable to changes in fair value of securities. The carrying values of these contracts are stated net of deferred acquisition costs so that they are comparable with the fair value basis.
62
9. Segment Information
LNC has four business segments: Life Insurance and Annuities, Lincoln UK, Reinsurance and Investment Management. The Life Insurance and Annuities segment offers annuities, universal life insurance, pension products and other individual coverages through a network
of career agents, independent general agencies, and insurance agencies located within a variety of financial institutions. These products are sold throughout the United States. The Lincoln UK segment offers similar products within the United KingdomUK through sales
representatives. Reinsurance sells reinsurance products and services to insurance companies,
HMOs, self-funded employers and other primary risk accepting organizations in the U.S. and economically attractive international markets. The Investment Management
segment offers a variety of asset management services to institutional and retail customers primarily throughout the United States. It also includes activity of LNC's internal investment advisor, Lincoln Investment Management. Activity which is not
included in the major business segments is shown as "Other Operations."
"Other Operations" includes operations not directly related to the business segments and unallocated corporate items (i.e., corporate investment income, interest expense on corporate debt and unallocated overhead expenses).
LNC's
other operations also includes data for its investment management company that
services LNC's business segments.
Financial data by segment for 19961997 through 19981999 is as follows:
Year Ended December 31 (in millions) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
Revenue, Excluding Net Investment Income and Realized
Gain (Loss) on Investments and Subsidiaries:
Life Insurance and Annuities..................................... $1,495.6 $ 867.0 $ 755.9
Lincoln UK....................................................... 350.8 340.1 311.4
Reinsurance...................................................... 1,267.5 1,073.7 1,279.2
Investment Management............................................ 301.3 257.7 215.0
Other Operations (includes consolidating adjustments)............ (28.5) (13.4) (8.3)
-------- -------- -------
Total........................................................ $3,386.7 $2,525.1 $2,553.2
Net Investment Income:
Life Insurance and Annuities..................................... $2,249.0 $1,842.4 $1,741.7
Lincoln UK....................................................... 87.9 85.1 82.0
Reinsurance...................................................... 307.8 284.4 263.7
Investment Management............................................ .2 .5 .7
Other Operations................................................. 36.5 38.4 (.2)
-------- -------- -------
Total........................................................ $2,681.4 $2,250.8 $2,087.9
Realized Gain (Loss) on Investments and Subsidiaries:
Life Insurance and Annuities..................................... $ 6.7 $ 82.1 $65.5
Lincoln UK....................................................... 1.1 2.1 (.2)
Reinsurance...................................................... 1.5 23.6 18.1
Investment Management............................................ 1.2 5.9 8.1
Other Operations................................................. 8.5 8.9 1.0
----- ------ -----
Total........................................................ $19.0 $122.6 $92.5
Net Income (Loss) from Continuing Operations
before Federal Income Taxes:
Life Insurance and Annuities..................................... $518.9 $397.3 $346.7
Lincoln UK....................................................... 106.9 (96.8) 101.5
Reinsurance...................................................... 156.7 (210.2) 131.1
Investment Management............................................ 39.4 20.9 32.4
Other Operations (includes interest expense)..................... (124.5) (76.3) (107.6)
----- ------- ------
Total........................................................ $697.4 $ 34.9 $504.1
63
Year Ended December 31 (in millions) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Income Tax Expense (Benefit):
Life Insurance and Annuities..................................... $131.4 $ 94.0 $ 95.7
Lincoln UK....................................................... 35.2 10.0 35.5
Reinsurance...................................................... 54.5 (73.8) 45.4
Investment Management............................................ 17.9 13.1 17.0
Other Operations................................................. (51.4) (30.6) (45.9)
----- ---- -----
Total........................................................ $187.6 $ 12.7 $147.7
Net Income (Loss) from Continuing Operations:
Life Insurance and Annuities..................................... $387.5 $303.3 $251.0
Lincoln UK....................................................... 71.7 (106.8) 66.0
Reinsurance...................................................... 102.2 (136.4) 85.7
Investment Management............................................ 21.5 7.8 15.4
Other Operations (includes interest expense)..................... (73.1) (45.7) (61.7)
----- ------- ------
Total Net Income from Continuing Operations.................. 509.8 22.2 356.4
Discontinued Operations.......................................... -- 911.8 157.2
------ ------- ------
Total Net Income............................................. $509.8 $934.0 $513.6
December 31 (in millions) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Assets:
Life Insurance and Annuities..................................... $77,797.9 $60,604.4 $53,089.3
Lincoln UK....................................................... 8,757.3 7,923.8 7,331.8
Reinsurance...................................................... 6,408.0 5,540.2 5,196.1
Investment Management............................................ 698.3 697.4 623.4
Other Operations................................................. 174.8 2,408.9 (9.9)
--------- --------- ---------
Sub-total..................................................... 93,836.3 77,174.7 66,230.7
Discontinued Operations.......................................... -- -- 5,482.7
--------- ---------- ---------
Total......................................................... $93,836.3 $77,174.7 $71,713.4
Substantially all
Year Ended December 31 (in millions) 1999 1998 1997
- -------------------------------------------------------------------------------------------------
Revenue, Excluding Net Investment Income and Realized
Gain (Loss) on Investments and Subsidiaries:
Life Insurance and Annuities $1,778.1 $1,450.2 $826.3
Lincoln UK 368.3 350.7 340.0
Reinsurance 1,509.6 1,267.5 1,073.7
Investment Management 403.2 399.5 355.0
Other Operations (includes
consolidating adjustments) (66.0) (81.2) (69.9)
-------- -------- --------
Total $3,993.2 $3,386.7 $2,525.1
Net Investment Income:
Life Insurance and Annuities $2,356.4 $2,184.3 $1,770.8
Lincoln UK 75.3 87.9 85.2
Reinsurance 310.3 307.8 284.4
Investment Management 56.9 65.4 72.3
Other Operations 8.6 36.0 38.1
-------- -------- --------
Total $2,807.5 $2,681.4 $2,250.8
Realized Gain (Loss) on Investments and Subsidiaries:
Life Insurance and Annuities $ 5.0 $ 6.2 $ 76.7
Lincoln UK 3.0 1.1 2.1
Reinsurance (2.1) 1.5 23.6
Investment Management (1.1) 1.8 11.3
Other Operations (1.8) 8.4 8.9
-------- -------- --------
Total $ 3.0 $ 19.0 $ 122.6
Net Income (Loss) from Continuing Operations
before Federal Income Taxes:
Life Insurance and Annuities $ 705.0 $ 520.6 $ 403.5
Lincoln UK (100.1) 106.9 (96.8)
Reinsurance 49.2 156.7 (210.2)
Investment Management 40.6 38.8 16.9
Other Operations (includes interest expense) (124.7) (125.6) (78.5)
-------- -------- --------
Total $ 570.0 $ 697.4 $ 34.9
Income Tax Expense (Benefit):
Life Insurance and Annuities $ 200.6 $ 132.8 $ 97.0
Lincoln UK (81.9) 35.2 10.0
Reinsurance 15.5 54.5 (73.8)
Investment Management 16.0 16.8 10.8
Other Operations (40.6) (51.7) (31.3)
-------- -------- --------
Total $ 109.6 $ 187.6 $ 12.7
Net Income (Loss) from Continuing Operations:
Life Insurance and Annuities $ 504.4 $ 387.8 $ 306.5
Lincoln UK (18.2) 71.7 (106.8)
Reinsurance 33.7 102.2 (136.4)
Investment Management 24.6 22.0 6.1
Other Operations (includes interest expense) (84.1) (73.9) (47.2)
-------- -------- --------
Total Net Income from
Continuing Operations 460.4 509.8 22.2
Discontinued Operations -- -- 911.8
-------- -------- --------
Total Net Income $ 460.4 $ 509.8 $ 934.0
Year Ended December 31 (in millions) 1999 1998 1997
- -------------------------------------------------------------------------------------------------
Assets:
Life Insurance and Annuities $ 81,299.1 $73,966.1 $57,070.5
Lincoln UK 9,712.8 8,757.3 7,923.8
Reinsurance 6,766.1 6,408.0 5,540.2
Investment Management 1,484.1 1,622.6 1,756.7
Other Operations (includes interest expense) 3,833.6 3,082.3 4,883.5
---------- --------- ---------
Total $103,095.7 $93,836.3 $77,174.7
Select data shown above for 1998 and 1997 for the Life Insurance & Annuities segment, Investment Management segment and Other Operations has been reclassified due to a change in the reporting relationship for LNC's internal investment advisor and
401(k) pension operations.
In December 1999, management initiated a plan to change the structure of LNC's internal organization in a manner that, beginning in 2000, will cause the composition of its reportable segments to change. During the first quarter of 2000, execution of the
planned changes will be finalized so that for the quarter ending March 31, 2000, decisions about resource allocation and performance assessment will be made separately for a Life Insurance Segment and an Annuities Segment. As of March 31, 2000, financial
reporting for the two separate segments will be presented and the corresponding information for earlier periods will be restated to reflect the new segment reporting structure.
Most of LNC's foreign operations are conducted by Lincoln National
(UK) plc,UK, a United KingdomUK company. The data for this company is shown above under the Lincoln UK segment heading. The other segments have non-U.S. operations. Foreign intracompany revenue isrevenues are not significant.
All earnings from LNC's U.K. operations have been retained inFinancial data for Lincoln UK and the U.K.
other non-U.S. units is as follows:
Year Ended December 31 (in millions) 1999 1998 1997
- ---------------------------------------------------------------------------
Revenue $ 572.4 $ 606.3 $ 576.3
Net Income (Loss) before
Federal Income Taxes (60.4) 134.0 (69.1)
Income Tax Expense (Benefit) (56.6) 45.2 21.2
-------- -------- --------
Net Income (Loss) $ (3.8) $ 88.8 $ (90.3)
Assets (at end of year) $9,820.0 $9,164.2 $8,173.0
10. Shareholders' Equity
LNC's common and series A preferred stock is without par value.
All of the issued and outstanding series A preferred stock is $3 Cumulative
Convertiblecumulative convertible and is convertible at any time into shares of common stock. The conversion rate is eightsixteen shares of common stock for each share of series A preferred stock, subject
to adjustment for certain events. The series A preferred stock is redeemable at the option of LNC at $80 per share plus accrued and unpaid dividends. Outstanding series A preferred stock has full voting rights, subject to adjustment if LNC is in default
as to the payment of dividends. If LNC is liquidated or dissolved, holders of series A preferred stock will be entitled to payments of $80.00$80 per share. The difference between the aggregate preference on liquidation value and the financial statement balance
for the series A preferred stock was $1,554,000$1.4 million at December 31, 1998.1999.
LNC has outstanding one common share purchase right ("Right") on each outstanding share of LNC's common stock. A Right will also be issued with each share of LNC's common stock that is issued before the Rights become exercisable or expire. If a person or
group announces an offer that would result in beneficial ownership of 15% or more of LNC's common stock, the Rights will become exercisable and each Right will entitle its holder to purchase one share of LNC's common stock for $200.$100. Upon the acquisition
of 15% or more of LNC's common stock, each holder of a Right (other than the person acquiring the 15% or more) will have the right to acquire the number of shares of LNC common stock that have a market value of two times the exercise price of the Right.
If LNC is acquired in a business combination transaction in which LNC does not survive, each holder of a Right (other than the acquiring person) will have the right to acquire common stock of the acquiring person having a market value of two times the
exercise price of the Right. LNC can redeem each Right for one cent at any time prior to the tenth day after a person or group has acquired 15% or more of LNC's common stock. The Rights expire on November 14, 2006. As of December 31, 1998,1999, there were
101,055,587195,494,898 Rights outstanding.
64
During 1999, 1998 1997 and 1996,1997, LNC purchased and retired 623,281; 4,948,9007,675,000, 1,246,562 and 694,5829,897,800 shares, respectively, of its common stock at a total cost of $46,900,000; $325,300,000$377.7 million, $46.9 million and $35,000,000,$325.3 million, respectively. The common stock account was reduced for
these purchases in proportion to the percentage of shareshares acquired. The remainder of the purchase price was charged to retained earnings.
During May 1999, LNC's Board of Directors approved a two-for-one stock split for its common stock. The record date for the stock split was June 4, 1999 and the additional shares were distributed to shareholders on June 21, 1999. The consolidated financial
statements including per share disclosures in these notes, have been adjusted to reflect the effects of the common stock split for all periods presented.
Per share amounts for net income from continuing operations are shown on the income statement using 1) an earnings per common share basic calculation and 2) an earnings per common share-assuming dilution calculation. A reconciliation of the factors used
in the two calculations are as follows:
Year Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Numerator: [in millions]
Net income from continuing operations,
as used in basic calculation................................. $509.7 $22.1 $356.3
Dividends on convertible preferred stock...................... .1 .1 .1
----- ---- -----
Net income from continuing operations,
as used in diluted calculation......................... $509.8 $22.2 $356.4
Denominator: [number of shares]
Weighted average shares, as used in basic calculation......... 100,357,079 102,495,557 103,828,451
Shares to cover conversion of preferred stock................. 271,019 287,077 307,784
Shares to cover restricted stock.............................. 228,288 208,664 423,112
Average stock options outstanding during the year............. 3,195,155 3,199,539 2,979,244
Assumed acquisition of shares with assumed proceeds
and tax benefits from exercising stock options
(at average market price during the year).................... (2,420,314) (2,194,950) (2,167,199)
--------- --------- ---------
Weighted-average shares, as used
in diluted calculation.................................. 101,631,227 103,995,887 105,371,392
Year Ended December 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Numerator: [millions]
Net income as used in basic calculation $ 460.3 $ 509.7 $ 22.1
Dividends on convertible preferred stock 0.1 0.1 0.1
------ ------ -----
$ 460.4 $ 509.8 $ 22.2
Denominator: [number of shares]
Weighted-average shares, as used in basic calculation 197,817,053 200,714,158 204,991,114
Shares to cover conversion of preferred stock 491,014 542,038 574,154
Shares to cover non-vested stock 347,145 456,576 417,328
Average stock options outstanding during the period 8,464,229 6,390,310 6,399,078
Assumed acquisition of shares with assumed proceeds
and benefits from exercising stock options (at average
market price for the year). (6,796,998) (4,840,628) (4,389,900)
Average deferred compensation shares 95,236 -- --
----------- ----------- -----------
Weighted-average shares, as
used in diluted calculation 200,417,679 203,262,454 207,991,774
LNC has stock options outstanding which were issued at prices that are above the current average market price of LNC common stock. In the event the average market price of LNC's common stock exceeds the issue price of stock options, such options would be
dilutive to LNC's earnings per share and will be shown in the table above. During 1999, LNC changed its deferred compensation plans so that participants selecting LNC stock for measuring the investment return attributable to their deferral amounts will be
paid out in LNC stock. The obligation to satisfy these deferred compensation plan liabilities is dilutive and is shown in the table above. Also, LNC has purchase contracts outstanding which require the holder to purchase LNC common stock by August 16,
2001. These purchase contracts were issued in conjunction with the FELINE PRIDES financing. The common shares involved are not currently dilutive to LNC's earnings per share and will not be dilutive in the future except during periods when the average
market price of LNC's common stock exceeds a stated threshold price of $111.45$55.725 per share.
Details underlying the balance sheet caption "Net Unrealized Gain (Loss) on Securities Available-for-Sale," are as follows:
December 31 (in millions) 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Fair value of securities available-for-sale............................. $30,775.7 $24,726.8
Cost of securities available-for-sale................................... 29,076.3 23,143.2
-------- ----------
Unrealized gain.................................................... 1,699.4 1,583.6
Adjustments to deferred acquisition costs............................... (244.6) (355.9)
Amounts required to satisfy policyholder commitments.................... (665.0) (571.1)
Deferred income credits (taxes).......................................... (251.1) (207.6)
----- ---------
Net unrealized gain on securities
available-for-sale for continuing operations...................... 538.7 449.0
Change in fair value of derivatives designated as a hedge
(classified as other investment)....................................... 13.7 (13.0)
-------- ----------
Net unrealized gain on securities available for sale............... $ 552.4 $ 436.0
December 31 (in millions) 1999 1998
- ---------------------------------------------------------------------------------------------
Fair value of securities available-for-sale $28,292.6 $30,775.7
Cost of securities available-for-sale 28,838.6 29,076.3
--------- ---------
Unrealized gain (loss) (546.0) 1,699.4
Adjustments to deferred acquisition costs 257.3 (243.8)
Amounts required to satisfy policyholder commitments (84.3) (646.2)
Deferred income credits (taxes) (79.7) (261.0)
--------- ---------
Net unrealized gain (loss) on securities
available-for-sale for continuing operations (452.7) 548.4
Change in fair value of derivatives designated as a
hedge (classified as other investments) (13.0) 4.0
--------- ---------
Net unrealized gain (loss) on securities
available-for-sale $ (465.7) $ 552.4
Adjustments to deferred acquisition costs and amounts required to satisfy policyholder commitments are netted against the Deferred Acquisition Costs asset line and included within the Insurance Policy and Claim Reserves line on the balance sheet,
respectively.
65
The "Net Unrealized
Details underlying "Unrealized Gain (Loss) on Securities Available-for-Sale"Available-for-Sale, Net of Reclassification Adjustment" shown aboveon the Consolidated Statements of Shareholders' Equity are as follows:
Year Ended December 31 (in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------
Unrealized gains (losses) on securities
available-for-sale arising during the year $(1,202.4) $210.7 $426.5
Less: reclassification adjustment for gains
(losses) included in net income (1) (3.0) 50.9 158.3
Less: Federal income tax
expense (benefit) (181.3) 43.4 71.2
--------- ------- -------
Unrealized gains (losses) on securities
available-for-sale, net of reclassification
and Federal income tax expense (benefit) $(1,018.1) $116.4 $197.0
| (1) | The reclassification adjustment
for gains (losses) does not include the impact of associated adjustments
to deferred acquisition costs and amounts required to satisfy policyholder
commitments. |
The "Foreign Currency Translation" component of other comprehensive income shown on the Consolidated Statements of Shareholders' Equity is net of realized gain (loss) on investments. Following is the detailFederal income tax expense (benefit) of the
realized gain (loss) on investments$(10.7) million, $2.0 million and gross unrealized gain (loss) on
securities available-for-sale:
Year Ended December 31 (in millions) 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Continuing operations:
Pre-tax realized gain (loss) on securities available-for-sale................ $ 19.0 $112.2
Federal income taxes @ 35%................................................... 6.7 39.3
---- -----
Realized gain (loss) on securities available-for-sale................... $ 12.3 $ 72.9
Discontinued operations:
Pre-tax realized gain (loss) on securities available-for-sale................ $ -- $ 38.2
Federal income taxes @ 35%................................................... -- 13.4
------ ----
Realized gain (loss) on securities available-for-sale.................... $ -- $ 24.8
Previously unrealized gains on securities that became realized at time of sale
of discontinued operations:
Pre-tax...................................................................... $ -- $271.7
After-tax.................................................................... -- 176.6
Gross unrealized gain (loss) on securities available- for-sale arising during
the year:
Pre-tax...................................................................... $179.1 $256.9
After-tax.................................................................... 116.4 197.0
$(10.9) million for 1999, 1998 and
1997, respectively.
11. Acquisitions/Sales of Subsidiaries,Acquisitions, Divestitures and Discontinued Operations and
Organizational Review
In May 1996, 16.7% of American States Financial Corporation ("ASFC"), the
holding company of LNC's principal property-casualty subsidiary, was sold to the
public in the form of an initial public offering of its common stock. ASFC
received net proceeds of $215,200,000 from the sale of this 16.7% minority
interest and LNC recorded a non-taxable realized gain, net of expenses, directly
in shareholders' equity of $15,000,000. LNC continued to fully consolidate this
operation within its financial statements and tax reporting until the sale of
the remaining 83.3% (see below).
In October 1996, LNC purchased a block of group tax-qualified annuity business
from UNUM Corporation's affiliates. The bulk of the transaction was completed in
the form of a reinsurance transaction, which resulted in a ceding commission of
$71,800,000. The ceding commission, along with $67,000,000 to cover expenses
associated with the purchase, represents the present value of business in-force
and accordingly has been classified as an intangible asset. LNC's assets and
liabilities increased $3,200,000,000 as a result of this transaction.
In April 1997, LNC completed the acquisition of Voyageur Fund Managers, Inc. ("Voyageur") for $74,000,000.$74.0 million. While this includes cash paid out for expenses associated with the purchase, the bulk of the purchase price was covered by the issuance of
1,323,1442,646,288 shares of LNC common stock to the previous owners of Voyageur. Purchase accounting has been applied to this acquisition resulting in intangible assets of $78,900,000.$78.9 million. Voyageur's operating results are included in LNC's consolidated financial
statements from the closing date.
On June 9, 1997, LNC announced that it agreed to sell its 83.3% ownership in American States Financial Corporation for $2,650,000,000.$2.650 billion. As this sale resulted in an exit from the property-casualty business (previously a business segment), the financial data
from the units being sold are shown as discontinued operations in the accompanying financial statements. June 9, 1997, is the measurement date for purposes of discontinued operations. Following the closing of this transaction on October 1, 1997, the gain
on sale of $776,900,000$776.9 million ($1,224,500,0001.225 billion pre-tax) was recorded within discontinued operations. LNC used these proceeds to repurchase $341,800,000,$341.8 million, (4,993,281 shares) of its own common stock, retire $86,700,000$86.7 million of long-term debt, purchase a 49%
ownership in Seguros Serfin Lincoln for $85,000,000$85.0 million, pay income taxes of $447,600,000$447.6 million related to the sale of discontinued operations and purchase a block of individual life insurance and annuity business for $1,642,500,000$1.643 billion (see below). The remainder
was used to pay off a portion of LNC's short-term debt and to invest for general corporate purposes, then later used to fund a portion of the purchase of another block of individual life insurance business.
66
Net Income from discontinued operations was as follows:
Nine Months Year Ended
Ended
September December 3130,
(in millions) 30, 1997
1996
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenue . . . . . . . . . . . . . . . . . $1,538.5 $1,987.7
Benefits and expenses....................expenses 1,363.6
1,799.0
------- ---------------
Pre-tax net income....................income 174.9 188.7
Federal income taxes......................taxes 40.0 31.5
--------
--------
Net income............................income from discontinued
operations $ 134.9
$ 157.2
On January 2, 1998, LNC acquired of a block of individual life insurance and annuity business from CIGNA Corporation for $1,414,000,000.$1.414 billion. Additional funds ($228,500,000)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 and to cover expenses
associated with the purchase.business. Funding used to complete this acquisition was from the proceeds of the sale of the property-casualty business in 1997 (see note 11
on page 65)previous paragraph). 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 $5,500,000,000$5.5 billion that became LNC's obligation.obligations. LNC also received assets measured on a historical statutory basis, equal to the liabilities. Subsequent to this acquisition, LNC announced that it had reached an agreement to sell the
administration rights to a variable annuity portfolio that had been acquired as part of the block of business acquired on January 2, 1998. This sale closed on October 12, 1998 with an effective date of AugustSeptember 1, 1998. TheAs of December 31, 1999, the
application of purchase accounting to this block of business, net of the administration rights sold and amortization, resulted in goodwill and other intangible assets of $807,000,000$718.6 million and $464,000,000,$433.7 million, respectively. PursuantThe goodwill amount shown includes
adjustments to the termsamount shown at December 31, 1998. These first quarter 1999 adjustments resulted from reaching final agreement with the seller as to the statutory accounting basis of the acquisition agreement
LNC and CIGNA are in the final stages of agreeing to the value of these assets and liabilities. Any changesliabilities transferred to these values that may occur in future periods
will not be material to LNC's financial position. In connection with the
completion of this acquisition, LNC recorded a charge to its Life Insurance and
Annuities segment during the first quarter of 1998 of $20,000,000 ($31,000,000
pre-tax). This restructuring charge covered certain costs of integrating the
existing operations with the new block of business.LNC.
On October 1, 1998, LNC acquired a block of individual life insurance from Aetna Inc for $1,000,000,000.$1.0 billion. Funding used to complete this acquisition was primarily from public securities offered in 1998 (see note 5 on page 51)Note 5). This transaction was accounted for using
purchase accounting and, accordingly, the 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 $3,300,000,000 that$3.3 billion. These liabilities became LNC's obligation.obligations at the time of closing. At closing, LNC also received assets, measured on a historical statutory basis, equal to the liabilities. InOn August of7, 1998, LNC announced that it had reached
an agreement to sell the sponsored life business acquired as part of the Aetna block of business. ThisThe sale closed on October 14, 1998 with an effective date of October 1, 1998 at a sales price of $99,500,000.$99.5 million. During 1997, after deducting the sponsored
life income statement amounts, the Aetna block produced premiums and fees of $227,800,000$227.8 million and earningsnet income of $65,000,000$65.0 million on athe basis of generally accepted accounting principles (prior to adjustments required by purchase accounting). The initialAs of December 31,
1999 the application of purchase accounting to this block of business, net of the sponsored life business and amortization, resulted in goodwill and other intangibles of $220,000,000$225.6 million and $871,000,000,$775.2 million, respectively.
Additional analysis of this block of business may
result in a change in the amounts or the shifting of amounts between goodwill
and other intangible assets.
The consolidated proforma results of operations shown below assumes that the two blocks of business described in the preceding paragraphs were purchased on January 1, 1997.
(unaudited)
Year Ended December 31 (in millions, except per share data) 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... $6,469.4 $6,366.4
Net income from continuing operations........................................... 547.3 145.5
Net income...................................................................... 547.3 1,057.3
Net income from continuing operation per diluted share.......................... $ 5.38 $ 1.40
Net income per diluted share.................................................... 5.38 10.17
Approximately one-half of the funding for this acquisition came from available
funds within the consolidated group. The other half was from the proceeds of the third quarter 1998 public securities offerings from available shelf registrations.
Year Ended December 31 (in millions, except per share data) 1998 1997
- -------------------------------------------------------------------------------------
Revenue $6,469.4 $6,366.4
Income from continuing operations 547.3 145.5
Net income 547.3 1,057.3
Income from continuing operations per diluted share $ 2.69 $ 0.70
Net income per diluted share 2.69 5.09
This proforma financial information is not necessarily indicative of the actual results that would have occurred had the purchases been made on January 1, 1997 or of the results which may occur in the future.
67
As
For the 1998 acquisitions noted above, LNC has been involved in a seriesother intangible assets represent the present value of divestituresfuture profits on the blocks of acquired insurance business. Goodwill is amortized over 40 years and acquisitions duringother intangible assets are amortized over the last few years. These changes, along with on-going and
increasing competitive pressures withinexpected
lives of the business acquired.
On November 1, 1999, LNC operatesclosed its previously announced agreement to transfer a block of disability income business to MetLife. Under this indemnity reinsurance agreement, LNC transferred $490.4 million of cash to MetLife representing the statutory
reserves transferred on this business, net of $18.5 million of purchase price consideration. A gain on sale of $56.7 million was deferred and will be recognized in ledfuture periods over the premium-paying period of the business.
On September 13, 1999, LNC announced that it had reached an agreement to purchase Alden Risk Management Services, the employer medical stop-loss business of the John Alden Life Insurance Company for $41.5 million in cash. The agreement also includes the
purchase of a decisionblock of group life and accidental death and dismemberment business. The purchase closed on November 1, 1999. As of December 31, 1999, the application of purchase accounting to initiatethis block of business resulted in goodwill of $34.1 million and
other intangible assets (i.e. present value of future service rights) of $13.7 million.
12. Restructuring Charges
During 1998, LNC implemented a restructuring plan relating to the integration of existing life and annuity operations with the new business operations acquired from CIGNA, and a second restructuring plan related to downsizing LNC's corporate center
operations. The aggregate charges associated with these two unrelated restructuring plans totaled $34.3 million after-tax ($52.8 million pre-tax). These aggregate pre-tax costs include $19.6 million for employee severance and termination benefits, $9.9
million for asset impairments and $23.3 million for costs relating to exiting business activities. As of December 31, 1999, actual pre-tax costs of $50.0 million have been expended or written-off under these restructuring plans and a balance of $4.7
million pre-tax related to the downsizing of LNC's corporate center operations remains in the restructuring reserves for these 1998 plans. LNC anticipates that the remaining reserves will be utilized in completing this restructuring plan. Details of each
of these 1998 restructuring plans are provided below.
During the first quarter of 1998, the operations of the Life Insurance and Annuities segment were restructured to downsize and integrate existing operations with the new business operations acquired from CIGNA. LNC recorded a charge of $30.8 million
(pre-tax) related to this restructuring plan. This charge was included in Underwriting, Acquisition, Insurance and Other Expenses on the Consolidated Statement of Income for the year ended December 31, 1998. The overall objective of this restructuring
plan is to downsize the existing life insurance operations in Fort Wayne, Indiana and to move the platform for these operations to Hartford, Connecticut. The restructuring plan identified $10.7 million (pre-tax) for severance and employee termination
costs related to the elimination of 211 positions and $20.1 million (pre-tax) for the merging and closing of field offices and for the merging and reduction of duplicative policyholder administrative systems. These actions were required as part of this
restructuring plan in order to eliminate redundancies in existing operations resulting from the acquisition of the CIGNA block of business. These restructuring activities are expected to be completed in early 2000. As of December 31, 1999, $32.7 million
(pre-tax) was expended or written-off under this restructuring plan and all 211 positions have been eliminated. The amount of $1.9 million (pre-tax) that was expended in excess of the restructuring charge of $30.8 million pre-tax was expensed as incurred
and reduced 1999 income from operations. Any additional expenditures made in 2000 will be expensed as incurred.
During the fourth quarter of 1998, LNC completed an organizational/organizational expense review. This review whichthat centered around the size and make-up of the parent company, was completed in the
fourth quarter of 1998. As a result,company. LNC recorded a restructuring charge of $14,300,000$22 million (pre-tax) relating to the restructuring plan that
resulted from this review. This charge was included in Underwriting, Acquisition, Insurance and Other Expenses on the Consolidated Statement of Income for the year ended December 31, 1998. The objectives of this restructuring plan are to realign the
activities and functions conducted within the parent company, in light of the series of acquisitions and divestitures that LNC executed in recent years, and to reduce overall costs in response to increasing competitive pressures in the businesses that LNC
operates. To achieve these objectives, the restructuring plan includes reductions in the number of corporate center employees along with a reduction in the size of LNC's facilities. The following activities and associated costs are included in this
restructuring plan: (1) $8.9 million for severance and termination benefits related to the elimination of 143 positions, (2) $9.9 million for the write-off of leasehold improvements related to abandoned facilities and other impaired assets, and (3) $3.2
million for rents on abandoned facilities. All expenditures for severance and termination benefits under the plan are expected to be complete by the end of 2000. Expenditures for rents on abandoned facilities are expected to be complete by the end of 2004
consistent with the remaining lease commitment. As of December 31, 1999, $17.3 million (pre-tax) has been expended or written-off under this restructuring plan and 101 positions have been eliminated. LNC estimated a reduction in future expenses of $15
million to $20 million per year after the plan was fully implemented. The total annualized cost reduction achieved through December 31, 1999 was $19.5 million.
In 1999, LNC implemented three different restructuring plans relating to 1) the downsizing and consolidation of the operations of Lynch & Mayer, Inc., 2) the discontinuance of HMO excess-of-loss reinsurance programs and 3) the streamlining of Lincoln
UK's operations. The aggregate charges associated with these three unrelated restructuring plans totaled $21.8 million after-tax ($22,000,00031.8 million pre-tax). These aggregate pre-tax costs include $8.3 million for employee severance and termination benefits,
$9.8 million for asset impairments and $13.7 million for costs relating to exiting business activities. As of December 31, 1999, actual pre-tax costs of $15.5 million have been expended or written-off under these restructuring plans. During the fourth
quarter of 1999, $3.0 million (pre-tax) of the original charge recorded for the Lynch & Mayer, Inc. restructuring plan was reversed due primarily to a change in estimate for space cost. This reversal reduced the reported fourth quarter 1999
restructuring charges. In addition, during the fourth quarter of 1999, $1.5 million (pre-tax) associated with lease terminations was released into income. As of December 31, 1999, a balance of $13.3 million (pre-tax) remains in the restructuring reserves
for these 1999 plans. LNC anticipates that the remaining reserves will be utilized in completing these restructuring plans. Details of each of these 1999 restructuring plans are provided below.
During the first quarter of 1999, LNC recorded a restructuring charge in its Investment Management segment of $12.1 million after-tax ($16.9 million pre-tax). The objective of this restructuring plan is to downsize and consolidate the back office
operations of Lynch & Mayer, Inc. into Delaware Management Holdings, Inc., in order to reduce ongoing operating costs and eliminate redundant facilities within this business segment. This charge was included in Underwriting, Acquisition, Insurance and
Other Expenses on the Consolidated Statement of Income for the year ended December 31, 1999. The restructuring plan identified the following activities and associated costs to achieve the objectives of the restructuring plan: (1) severance and termination
benefits of $2.8 million related to the elimination of 34 positions, (2) write-off of impaired assets of $9.8 million and (3) other costs of $4.3 million. Expenditures and write-offs under the restructuring plan began in the first quarter of 1999. During
the fourth quarter of 1999, LNC determined that part of rent expense related to abandoned office space included in (3) above would not be incurred due to the landlord allowing Lynch & Mayer to surrender the lease, rather than to sublease the space. As
a result, the original estimate was reduced by $3.0 million (pre-tax). This reduction was recorded in the fourth quarter of 19981999 as a reversal to providethe restructuring charge and related reserve. All remaining expenditures under this restructuring charge are
expected to be complete by the second quarter of 2000. As of December 31, 1999, $13.4 million (pre-tax) has been expended or written-off under this restructuring plan and all 34 positions have been eliminated under the restructuring plan. In addition,
during the fourth quarter of 1999, $1.5 million (pre-tax) associated with lease terminations was released into income.
LNC discontinued writing new HMO excess-of-loss reinsurance programs in the third quarter of 1999. Consequently, during the third quarter of 1999, LNC recorded within its Reinsurance segment a charge of $3.2 million after-tax ($4.9 million pre-tax) for
employee severance and termination benefits, and other costs related to the discontinuance of the business. The restructuring plan identified the following activities and associated costs to achieve the objectives of the restructuring plan: (1) severance
and termination benefits of $2.4 million related to the elimination of 71 positions and (2) other costs of $2.5 million. This charge was included in Underwriting, Acquisition, Insurance and Other Expenses on the Consolidated Statement of Income for the
personnel that were eliminatedyear ended December 31, 1999. Activities under the restructuring plan began in the third quarter of 1999 with expenditures expected to be paid out under this restructuring plan as the discontinuance of this line of business is completed. As of December
31, 1999, $0.9 million (pre-tax) has been expended under this restructuring plan and 16 positions have been eliminated.
During the fourth quarter of 1999, LNC recorded a restructuring charge in its Lincoln UK segment of $6.5 million after-tax ($10.0 million pre-tax). The objective of this restructuring plan is to coverreduce operating costs by consolidating and eliminating
redundant staff functions and facilities. This charge was included in Underwriting, Acquisition, Insurance and Other Expenses on the Consolidated Statement of Income for the year ended December 31, 1999. The restructuring plan identified the following
activities and associated withcosts to achieve the resulting excess office spaceobjectives of the restructuring plan: (1) severance and equipment.
termination benefits of $3.9 million related to the elimination of 119 positions and (2) other costs of $6.1 million primarily related to the remaining
lease payments on closed facilities. Expenditures and write-offs under the restructuring plan began in the fourth quarter of 1999 and are expected to be complete by the second quarter of 2001. As of December 31, 1999, $1.2 million (pre-tax) has been
expended or written-off under this restructuring plan and 35 positions have been eliminated.
Report of Ernst && Young LLP, Independent Auditors
Board of Directors
Lincoln National Corporation
We have audited the accompanying consolidated balance sheets of Lincoln National Corporation as of December 31, 19981999 and 1997,1998, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1998.1999. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted auditing
standards.in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lincoln National Corporation at December 31, 19981999 and 1997,1998, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998,1999, in conformity with accounting principles generally accepted accounting principles.in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to
the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
Ernst && Young LLP
Fort Wayne, Indiana
February 1, 1999
Philadelphia, Pennsylvania
January 31, 2000
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
There have been no disagreements with LNC's independent auditors which are reportable pursuant to Item 304 of Regulation S-K.
68
PART III
Item 10. Directors and Executive Officers of the Registrant
Information for this item relating to directors of LNC is incorporated by reference to the sections captioned "NOMINEES FOR DIRECTOR", "DIRECTORS CONTINUING IN OFFICE" and "COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES AND EXCHANGE ACT OF 1934", of
LNC's Proxy Statement for the Annual Meeting scheduled for May 13, 1999.11, 2000.
Executive Officers of the Registrant as of March 1, 2000 were as follows:
Executive Officers of the Registrant as of March 1, 1999 were as follows:
| Name | Age** | Position with LNC and Business Experience During
the Past Five Years |
Jon A. Boscia 47 | | 48 | President, Chief Executive Officer and Director,
LNC (since November
1998). President and Director, LNC (since January 1998). Chief Executive Officer, Lincoln Life* (1996 - January, 1998)-1998). President,
Chief Operating Officer, Lincoln Life* (1994-1996). Executive Vice President,
LNC (1991-1994). President, Lincoln National Investment Companies
("LNIC")* (1991-1994).
|
Bernard G. Brown 48 | | 49 | Managing Director, Lincoln National (UK)* (since January
1998). Operations Director, Lincoln National (UK)* (1995 - January 1998)(1995-1998).
Managing Director, Liberty Life Assurance Company, Ltd. (1992- 1995).
|
George E. Davis 56 | | 57 | Senior Vice President, LNC (since 1993). |
| John H. Gotta | | 50 | Chief Executive Officer - Life Insurance, Lincoln
Life* (since 1999). Senior Vice President, Lincoln Life* (1998-1999). |
| Charles E. Haldeman | | 51 | President, Chief Executive Officer and Director,
LNIC and President and Chief Executive Officer, Delaware (since 2000). |
Jack D. Hunter 62 | | 63 | Executive Vice President, LNC (since 1986). General
Counsel (since 1971). |
Barbara S. Kowalczyk 48 | | 49 | Senior Vice President, LNC (since 1994). |
| Stephen H. Lewis | | 56 | Chief Executive Officer - Annuities, Lincoln Life*
(since 1999). Senior Vice President, LNIC* (1992-1994)Lincoln Life* (1995-1999). President,
First Penn (1987-1995). |
H. Thomas McMeekin 46 | | 47 | Executive Vice President, LNC (since 1994). President,
LNIC* (1994-
1996). Senior Vice President, LNC (1992-1994).
Jeffrey J. Nick 46 LNIC (1994-1996), |
| Lawrence T. Rowland | | 48 | President and Chief Executive Officer, LNI* (since 1996). Managing
Director, Lincoln National (UK)* (1992-1996).
Lawrence T. Rowland 47 President and Chief Executive Officer, Lincoln National Reassurance
Company*LNRAC and
other Lincoln Re affiliates* (since 1996). Senior Vice President, LNRC*LNRAC
(1995-1996). |
| Casey J. Trumble | | 46 | Senior Vice President and Chief Accounting Officer,
LNC (since November 1998). Vice President, Lincoln Re* (1991-
1994).
Gabriel L. Shaheen 45 President and Chief Executive Officer, Lincoln Life* (since JanuaryLNC (1994-November 1998).
Managing Director, Lincoln National (UK)* (1996 - January 1998).
President and Chief Executive Officer, Lincoln Re* (1994-1996). Senior
Vice President, Lincoln Life* (1991-1994).
Donald L. Van Wyngarden 59 Second Vice President and Controller, LNC (since 1975).
|
Richard C. Vaughan 49 | | 50 | Executive Vice President and Chief Financial Officer,
LNC (since 1995).
Senior Vice President and Chief Financial Officer, LNC (1992-1994). |
* Denotes a subsidiary of LNCLNC.
** Age shown is based on nearest birthdate to March 1, 1999.2000.
There is no family relationship between any of the foregoing executive officers, all of whom are elected annually.
69
Item 11. Executive Compensation
Information for this item is incorporated by reference to the section captioned "EXECUTIVE COMPENSATION" of LNC's Proxy Statement for the Annual Meeting scheduled for May 13, 1999.
11, 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information for this item is incorporated by reference to the sections captioned "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" and "SECURITY OWNERSHIP OF DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS" of LNC's Proxy Statement for the Annual Meeting
scheduled for May 13, 1999.
11, 2000.
Item 13. Certain Relationships and Related Transactions
Information for this item is incorporated by reference to the section captioned "TERMINATION OF EMPLOYMENT ARRANGEMENT" of LNC's Proxy Statement for the Annual Meeting scheduled for May 13, 1999.
11, 2000.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Item 14(a)(1) Financial Statements
The following consolidated financial statements of Lincoln National Corporation are included in Item 8:
Consolidated Balance Sheets - December 31, 1999 and 1998
and 1997
Consolidated Statements of Income - Years ended December 31, 1999, 1998 and 1997
and
1996
Consolidated Statements of Shareholders' Equity - Years ended December 31, 1999, 1998 and 1997
and 1996
Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998 and 1997
and 1996
Notes to Consolidated Financial Statements
Report of Ernst && Young LLP, Independent Auditors
Item 14(a)(2) Financial Statement Schedules
The following consolidated financial statement schedules of Lincoln National Corporation are included in Item 14(d):
I - Summary of Investments - Other than Investments in Related Parties
II - Condensed Financial Information of Registrant
III - Supplementary Insurance Information
IV - Reinsurance
V - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the required information is included in the
consolidated financial statements, and therefore omitted.
70
Item 14(a)(3) Listing of Exhibits
The following exhibits of Lincoln National Corporation are included in Item 14 - Note: The numbers preceding the exhibits correspond to the specific numbers within Item 601 of Regulation S-K.):
3(a) The Articles of Incorporation of LNC as last amended effective May
12, 1994.
3(b) The Bylaws of LNC as last amended January 14, 1998 is incorporated by
reference to Exhibit 3(b) of LNC's Form 10-K for the year ended
December 31, 1997, filed with the Commission on March 18, 1998.
4(a) Indenture of LNC dated as of January 15, 1987 is incorporated by
reference to Exhibit 4(a) of LNC's Form 10-K for the year ended
December 31, 1994, filed with the Commission on March 27, 1995.
4(b) First Supplemental Indenture dated as of July 1, 1992, to Indenture
of LNC dated as of January 15, 1987 is incorporated by reference to
Exhibit 4(b) of LNC's Form 10-K for the year ended December 31, 1996,
filed with the Commission on March 13, 1997.
4(c) Specimen Notes for 7 1/8% Notes due July 15, 1999 and for 7 5/8%
Notes due July 15, 2002 are incorporated by reference to Exhibit 4(c)
of LNC's Form 10-K for the year ended December 31, 1996, filed with
the Commission on March 13, 1997.
4(d) Rights Agreement of LNC as last amended November 14, 1996 is
incorporated by reference to LNC's Form 8-K filed with the Commission
on November 22, 1996.
4(e) Indenture of LNC dated as of September 15, 1994, between LNC and The
Bank of New York, as Trustee.
4(f) Form of Note is incorporated by reference to Exhibit No.4(d) to LNC's
Registration Statement on Form S-3/A (Commission File No. 33-55379),
filed with the Commission on September 15, 1994.
4(g) Form of Zero Coupon Security is incorporated by reference to Exhibit
No. 4(f) of LNC's Registration Statement on Form S-3/A (Commission
File No. 33-55379), filed with the Commission on September 15, 1994.
4(h) Specimen of LNC's 9 1/8% Debentures due October 1, 2024 is
incorporated by reference to Schedule I of LNC's Form 8-K filed with
the Commission on September 29, 1994.
4(I) Specimen of LNC's 7 1/4% Debenture due May 15, 2005 is incorporated
by reference to Schedule III of LNC's Form 8-K filed with the
Commission on May 17, 1995.
4(j) Junior Subordinated Indenture dated as of May 1, 1996 between LNC and
The First National Bank of Chicago is incorporated by reference to
Exhibit 4(j) of LNC's Form 10-K for the year ended December 31, 1996,
filed with the Commission on March 13, 1997.
4(k) Guarantee Agreement for Lincoln National Capital I is incorporated by
reference to Exhibit 4(k) of LNC's Form 10-K for the year ended
December 31, 1996, filed with the Commission on March 13, 1997.
4(l) Guarantee Agreement for Lincoln National Capital II is incorporated
by reference to Exhibit 4(l) of LNC's form 10-K for the year ended
December 31, 1996, filed with the Commission on March 13, 1997.
4(m) Form of Lincoln National Capital I 8.75% Cumulative Quarterly Income
Preferred Securities, Series A (Commission File No. 333-04133) is
incorporated by reference to Exhibit 4(m) to LNC's Form 10- K for the
year ended December 31, 1996, filed with the Commission on March 13,
1997.
4(n) Form of Lincoln National Capital II 8.35% Trust Originated Preferred
Securities, Series B (Commission File No. 333-04133) is incorporated
by reference to Exhibit 4(n) to LNC's Form 10-K for the year ended
December 31, 1996, filed with the Commission on March 13, 1997.
71
4(o) Form of Amended and Restated Declaration of Trust for Lincoln
National Capital I and Lincoln National Capital II between LNC, as
depositor, The First National Bank of Chicago, as property trustee,
First Chicago Delaware, Inc., as Delaware trustee, and certain
administrative trustees is incorporated by reference to Exhibit 4(o)
of LNC's Registration Statement (Commission File No.
333-4133) filed with the commission on May 21, 1996.
4(p) Specimen of 6 1/2% Notes due March 15, 2008 incorporated by reference
to Exhibit 4.1 LNC's Form 8-K filed with the commission on March 24,
1998.
4(q) Specimen of 7% Notes due March 15, 2018 incorporated by reference to
Exhibit 4.2 of LNC's Form 8-K filed with the Commission on March 24,
1998.
4(r) Amended and Restated Trust Agreement for Lincoln National Capital III
between LNC, as depositor, The First National Bank of Chicago, as
property trustee, First Chicago Delaware, Inc. as Delaware trustee,
and the administrative trustees is incorporated by reference to
Exhibit 4.1 of LNC's Form 8-K filed with the Commission on July 30,
1998.
4(s) Form of 7.40% Trust Originated Preferred Securities, Series C, of
Lincoln National Capital III is incorporated by reference to Exhibit
4.2 of LNC's Form 8-K filed with the Commission on July 30, 1998.
4(t) Guarantee Agreement for Lincoln National Capital III is incorporated
by reference to Exhibit 4.4 of LNC's Form 8-K filed with the
Commission on July 30, 1998.
4(u) Amended and Restated Trust Agreement for Lincoln National Capital IV
between LNC, as depositor, The First National Bank of Chicago, a
property trustee, First Chicago Delaware Inc., as Delaware trustee,
and the administrative trustees is incorporated by reference to
Exhibit 4.1 of LNC's Form 8-K filed with the Commission on August 27,
1998.
4(v) Form of Income Prides Certificate of Lincoln National Capital IV is
incorporated by reference to Exhibit 4.7 of LNC's Form 8-K filed with
the Commission on August 27, 1998.
4(w) Form of Growth Prides Certificates of Lincoln National Capital IV is
incorporated by reference to Exhibit 4.8 of LNC's Form 8-K filed with
the Commission on August 27, 1998.
4(x) Guarantee Agreement for Lincoln National Capital IV is incorporated
by reference to Exhibit 4.5 of LNC's Form 8-K filed with the
Commission on August 27, 1998.
4(y) Purchase Contract Agreement between LNC and The First National Bank
of Chicago, as Purchase Contract Agent, relating to Lincoln National
Capital IV is incorporated by reference to Exhibit 4.6 of LNC's Form
8-K filed with the Commission on August 27, 1998.
4(z) Pledge Agreement among LNC, The Chase Manhattan Bank, as agent, and
The First National Bank of Chicago, as Purchase Agent, relating to
Lincoln National Capital IV is incorporated by reference to Exhibit
4.9 of LNC's Form 8-K filed with the Commission on August 27, 1998.
| 3(a) | The Articles of Incorporation
of LNC as last amended effective May 12, 1994 is incorporated by reference
to Exhibit 3(a) of LNC's Form 10-K for the year ended December 31, 1998,
filed with the Commission on March 11, 1999. |
| 3(b) | The Bylaws of LNC as last
amended January 13, 2000. |
| 4(a) | Indenture of LNC dated
as of January 15, 1987 is incorporated by reference to Exhibit 4(a) of LNC's Form 10-K for the year ended December 31, 1994, filed with the Commission March 27, 1995. |
| 4(b) | First Supplemental Indenture
dated as of July 1, 1992, to Indenture of LNC dated as of January 15, 1987
is incorporated by reference to Exhibit 4(b) of LNC's Form 10-K for the
year ended December 31, 1996, filed with the Commission on March 13, 1997. |
| 4(c) | Specimen Notes for 7 1/8%
Notes due July 15, 1999 and for 7 5/8% Notes due July 15, 2002 are incorporated
by reference to Exhibit 4(c) of LNC's Form 10-K for the year ended December
31, 1996, filed with the Commission on March 13, 1997. |
| 4(d) | Rights Agreement of LNC
as last amended November 14, 1996 is incorporated by reference to LNC's
Form 8-K filed with the Commission on November 22, 1996. |
| 4(e) | Indenture of LNC dated
as of September 15, 1994, between LNC and The Bank of New York, as Trustee
is incorporated by reference to Exhibit 4(e) of LNC's Form 10-K for the
year ended December 31, 1998, filed with the Commission on March 11, 1999. |
| 4(f) | Form of Note is incorporated by reference to Exhibit 4(d) to LNC's Registration Statement on FormS-3/A (commission File No. 33-55379), filed with the Commission on September 15, 1994. |
| 4(g) | Form of Zero Coupon Security
4(d) to LNC's Registration Statement on Form S-3/A (Commission File No. 33-55379), filed with the Commission on September 15, 1994. |
| 4(h) | Specimen of LNC's 9 1/8%
Debentures due October 1, 2024 is incorporated by reference to Schedule I of LNC's Form 8-K filed with the commission on September 29, 1994. |
| 4(i) | Specimen of LNC's 7 1/4%
Debenture due May 15, 2005 is incorporated by reference to Schedule III
of LNC's Form 8-K filed with the Commission on May 17, 1995. |
| 4(j) | Junior Subordinated Indenture
dated as of May 1, 1996 between LNC and The First National Bank of Chicago
is incorporated by reference to Exhibit 4(j) of LNC's Form 10-K for the
year ended December 31, 1996, filed with the Commission on March 13, 1997. |
| 4(k) | Guarantee Agreement for
Lincoln National Capital i is incorporated by reference to Exhibit 4(k)
of LNC's Form 10-K for the year ended December 31, 1996, filed with the
Commission on March 13, 1997. |
| 4(l) | Guarantee Agreement for
Lincoln National Capital II is incorporated by reference to Exhibit 4(l)
of LNC's form 10-K for the year ended December 31, 1996, filed with the
Commission on March 13, 1997. |
| 4(m) | Form of Lincoln National
Capital I 8.75% Cumulative Quarterly Income Preferred Securities, Series
A (Commission File No. 333-04133) is incorporated by reference to Exhibit
4(m) to LNC's Form 10-K for the year ended December 31, 1996, filed with
the Commission on March 13, 1997. |
| 4(n) | Form of Lincoln National
Capital II 8.35% Trust Originated Preferred Securities, Series B (Commission
File No. 333-04133) is incorporated by reference to Exhibit 4(n) to LNC's
Form 10-K for the year ended December 31, 1996, filed with the Commission
on March 13, 1997. |
| 4(o) | Form of Amended and Restated
Declaration of Trust for Lincoln National Capital I and Lincoln National
Capital II between LNC, as depositor, The First National Bank of Chicago,
as property trustee, First Chicago Delaware, Inc., as Delaware trustee,
and certain administrative trustees is incorporated by reference to Exhibit
4(o) of LNC's Registration Statement (Commission File No. 333-4133) filed
with the commission on May 21, 1996. |
| 4(p) | Specimen of 6 1/2% Notes
due March 15, 2008 incorporated by reference to Exhibit 4.1 LNC's Form 8-K
filed with the commission on March 24, 1998. |
| 4(q) | Specimen of 7% Notes due
March 15, 2018 incorporated by reference to Exhibit 4.2 of LNC's Form 8-K
filed with the Commission on March 24, 1998. |
| 4(r) | Amended and Restated Trust
Agreement for Lincoln National Capital III between LNC, as depositor, The
First National Bank of Chicago, as property trustee, First Chicago Delaware,
Inc. as Delaware trustee, and the administrative trustees is incorporated
by reference to Exhibit 4.1 of LNC's Form 8-K filed with the Commission
on July 30, 1998. |
| 4(s) | Form of 7.40% Trust Originated
Preferred Securities, Series C, of Lincoln National Capital III is incorporated
by reference to Exhibit 4.2 of LNC's Form 8-K filed with the Commission
on July 30, 1998. |
| 4(t) | Guarantee Agreement for
Lincoln National Capital III is incorporated by reference to Exhibit 4.4
of LNC's Form 8-K filed with the Commission on July 30, 1998. |
| 4(u) | Amended and Restated Trust
Agreement for Lincoln National Capital IV between LNC, as depositor, The
First National Bank of Chicago, a property trustee, First Chicago Delaware
Inc., as Delaware trustee, and the administrative trustees is incorporated
by reference to Exhibit 4.1 of LNC's Form 8-K filed with the Commission
on August 27, 1998. |
| 4(v) | Form of Income Prides Certificate
of Lincoln National Capital IV is incorporated by reference to Exhibit 4.7
of LNC's Form 8-K filed with the Commission on August 27, 1998. |
| 4(w) | Form of Growth Prides Certificates
of Lincoln National Capital IV is incorporated by reference to Exhibit 4.8
of LNC's Form 8-K filed with the Commission on August 27, 1998. |
| 4(x) | Guarantee Agreement for
Lincoln National Capital IV is incorporated by reference to Exhibit 4.5
of LNC's Form 8-K filed with the Commission on August 27, 1998. |
| 4(y) | Purchase Contract Agreement
between LNC and The First National Bank of Chicago, as Purchase Contract
Agent, relating to Lincoln National Capital IV is incorporated by reference
to Exhibit 4.6 of LNC's Form 8-K filed with the Commission on August 27,
1998. |
| 4(z) | Pledge Agreement among
LNC, The Chase Manhattan Bank, as agent, and The First National Bank of
Chicago, as Purchase Agent, relating to Lincoln National Capital IV is incorporated
by reference to Exhibit 4.9 of LNC's Form 8-K filed with the Commission
on August 27, 1998. |
| 10(a)* | The Lincoln National Corporation
1986 Stock Option Incentive Plan is incorporated by reference to Exhibit
10(a) of LNC's Form 10-K for the year ended December 31, 1998, filed with
the Commission on March 11, 1999. |
| 10(b)* | The Lincoln National Corporation
Executives' Salary Continuation Plan as last amended January 1, 1992 is
incorporated by reference to Exhibit 10(c) LNC's Form 10-K for the year
ended December 31, 1997, filed with the Commission on March 18, 1998. |
| 10(c)* | The Lincoln National Corporation
Executive Value Sharing Plan as Amended and Restated effective January 1,
1994 is incorporated by reference to Exhibit 10(c) of LNC's Form 10-K for
the year ended December 31, 1998, filed with the Commission on March 11,
1999. |
| 10(d)* | Lincoln National Corporation
Executives' Severance Benefit Plan as Amended and Restated effective November
9, 1995 is incorporated by reference to Exhibit 10(e) of LNC's Form 10-K
for the year ended December 31, 1995, filed with the Commission on March
27, 1996. |
| 10(e)* | The Lincoln National Corporation
Outside Directors Retirement Plan as last amended effective March 15, 1990
is incorporated by reference to Exhibit 10(f) of LNC's Form 10-K for the
year ended December 31, 1995, filed with the Commission on March 27, 1996. |
| 10(f)* | The Lincoln National Corporation
Outside Directors Benefits Plan is incorporated by reference to Exhibit
10(g) of LNC's Form 10-K for the year ended December 31, 1997, filed with
the Commission on March 18, 1998. |
| 10(g)* | Lincoln National Corporation
Directors' Value Sharing Plan as last amended effective May 14, 1998 is
incorporated by reference to Exhibit 10(a) of LNC's Form 10-Q for the quarter
ended September 30, 1999, filed with the Commission on November 3, 1999. |
| 10(h)* | Lincoln National Corporation
Executive Deferred Compensation Plan for Employees (Commission File No.
33-51721) as last amended effective February 16, 1998 is incorporated by
reference to Exhibit 10(i) of LNC's Form 10-K for the year ended December
31, 1997, filed with the Commission on March 18, 1998. |
| 10(i)* | Lincoln National Corporation
1993 Stock Plan for Non-Employee Directors (Commission File No. 33-58113)
as last amended effective November 11, 1998 is incorporated by reference
to Exhibit 10(i) of LNC's Form 10-K for the year ended December 31, 1998,
filed with the Commission on March 11, 1999. |
| 10(j)* | Lincoln National Corporation
Executives' Excess Compensation Benefit Plan is incorporated by reference
to Exhibit 10(j) of LNC's Form 10-K for the year ended December 31, 1998,
filed with the Commission on March 11, 1999. |
| 10(k) | First Amendment to Lincoln
National Corporation Executives' Excess Compensation Benefit Plan effective
December 22, 1999. |
| 10(l)* | Lincoln National Corporation
1997 Incentive Compensation Plan as last amended effective May 13, 1999
is incorporated by reference to Exhibit 10(a) of LNC's Form 10-Q for the
quarter ended June 30, 1999, filed with the Commission on August 4, 1999. |
| 10(m) | Descriptions of compensation
arrangements with Executive Officers - Agreement, Waiver and General Release
- Gabriel L. Shaheen dated December 15, 1999. |
| 10(n) | Lease and Agreement dated
August 1, 1984, with respect to LNL's Home Office property located at Magnavox
Way, Fort Wayne, Indiana are incorporated by reference to Exhibit 10(m)
of LNC's Form 10-K for the year ended December 31, 1995, filed with the
Commission on March 27, 1996. |
| 10(o) | Lease and Agreement dated
August 1, 1984, with respect to LNL's Home Office properties located at
Clinton Street and Harrison Street, Fort Wayne, Indiana are incorporated
by reference to Exhibit 10(n) of LNC's Form 10-K for the year ended December
31, 1995, filed with the Commission on March 27, 1996. |
| 10(p) | Form of Lease and Agreement
dated March 1, 1999, with respect to LNC's Corporate Office located at Centre
Square West, 1500 Market Street, Suite 3900, Philadelphia, Pennsylvania. |
| 10(q) | Agreement of Lease dated
February 17, 1998, with respect to Lincoln Life's life products headquarters
located at 350 Church Street, Hartford, Connecticut is incorporated by reference
to Exhibit 10(q) of LNC's Form 10-K for the year ended December 31, 1997,
filed with the Commission on March 18, 1998. |
| 10(r) | Lease and Agreement dated
December 10, 1999 with respect to Delaware Management Holdings, Inc. for
Home Office property located at One Commerce Square, Philadelphia, Pennsylvania. |
| 10(s) | Sublease and Agreement
dated December 10, 1999 by and between Delaware Management Holdings, Inc.
and New York Central Lines LLC for property located at Two Commerce Square,
Philadelphia, Pennsylvania. |
| 10(t) | Consent to Sublease dated
December 10, 1999 with respect to Delaware Management Holdings, Inc. for
property located at Two Commerce Square and Philadelphia Plaza Phase II,
Philadelphia, Pennsylvania. |
* The Lincoln National Corporation 1986 Stock Option Incentive Plan.
10(b)* The Lincoln National Corporation Executives' Salary Continuation Plan
as last amended January 1, 1992 is incorporated by reference to
Exhibit 10(c) LNC's Form 10-K for the year ended December 31, 1997,
filed with the Commission on March 18, 1998.
10(c)* The Lincoln National Corporation Executive Value Sharing Plan as
Amended and Restated effective January 1, 1994.
10(d)* Lincoln National Corporation Executives' Severance Benefit Plan as
Amended and Restated effective November 9, 1995 is incorporated by
reference to Exhibit 10(e) of LNC's Form 10-K for the year ended
December 31, 1995, filed with the Commission on March 27, 1996.
10(e)* The Lincoln National Corporation Outside Directors Retirement Plan as
last amended effective March 15, 1990 is incorporated by reference to
Exhibit 10(f) of LNC's Form 10-K for the year ended December 31,
1995, filed with the Commission on March 27, 1996.
10(f)* The Lincoln National Corporation Outside Directors Benefits Plan is
incorporated by reference to Exhibit 10(g) of LNC's Form 10-K for the
year ended December 31, 1997, filed with the Commission on March 18,
1998.
72
10(g)* Lincoln National Corporation Directors' Value Sharing Plan as last
amended effective May 14, 1998 is incorporated by reference to
Exhibit 10(6) of LNC's Form 10-Q for the quarter ended June 30, 1998,
filed with the Commission on July 27, 1998.
10(h)* Lincoln National Corporation Executive Deferred Compensation Plan for
Employees (Commission File No. 33-51721) as last amended effective
February 16, 1998 is incorporated by reference to Exhibit 10(I) of
LNC's Form 10-K for the year ended December 31, 1997, filed with the
Commission on March 18, 1998.
10(I)* Lincoln National Corporation 1993 Stock Plan for Non-Employee
Directors (Commission File No.33-58113) as last amended effective
November 11, 1998.
10(j)* Lincoln National Corporation Executives' Excess Compensation Benefit
Plan.
10(k)* Lincoln National Corporation 1997 Incentive Compensation Plan as last
amended effective May 14, 1998 is incorporated by reference to
Exhibit 10(a) of LNC's Form 10-Q for the quarter ended June 30, 1998,
filed with the Commission on July 27, 1998.
10(l)* Descriptions of compensation arrangements with Executive Officers.
10(m) Lease and Agreement dated August 1, 1984, with respect to LNL's Home
Office property located at Magnavox Way, Fort Wayne, Indiana are
incorporated by reference to Exhibit 10(m) of LNC's Form 10-K for the
year ended December 31, 1995, filed with the Commission on March 27,
1996.
10(n) Lease and Agreement dated August 1, 1984, with respect to LNL's Home
Office properties located at Clinton Street and Harrison Street, Fort
Wayne, Indiana are incorporated by reference to Exhibit 10(n) of
LNC's Form 10-K for the year ended December 31, 1995, filed with the
Commission on March 27, 1996.
10(o) Lease and Agreement dated December 1, 1994, with respect to LNC's
Corporate Office located at 200 East Berry Street, Fort Wayne,
Indiana, are incorporated by reference to Exhibit 10(p) of LNC's Form
10-K for the year ended December 31, 1994, filed with the Commission
on March 27, 1995.
10(p) Agreement of Lease dated February 17, 1998, with respect to Lincoln
Life's life products headquarters located at 350 Church Street,
Hartford, Connecticut is incorporated by reference to Exhibit 10(q)
of LNC's Form 10-K for the year ended December 31, 1997, filed with
the Commission on March 18, 1998.
*ThisThis exhibit is a management contract or compensatory plan
or arrangement required to be filed as an exhibit to this form pursuant to Item
14 of this report.
12 Historical Ratio of Earnings to Fixed Charges.
21 List of Subsidiaries of LNC.
23 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
Item 14(b)
During the fourth quarter of 1998, LNC filed a1999, no reports on Form 8-K and Form 8-K/Awere filed with the Commission regarding LNC's acquisition of a block of individual life insurance
from Aetna, Inc. These filings which were dated October 14, 1998 and December
14, 1998 include pro forma information and audited statements covering the
business acquired.
Commission.
Item 14(c)
The exhibits of Lincoln National Corporation are listed in Item 14(a)(3) above.
Item 14(d)
The financial statement schedules for Lincoln National Corporation follow on pages 7383 through 79.
73
89.
LINCOLN NATIONAL CORPORATION
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS
IN
RELATED PARTIES
December 31, 1999 (000s omitted)
- ------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D
- ------------ ----------- ----------- -------------
Amount
at Which
Shown in the
Type of Investment Cost Value Balance Sheet
- ------------------------ ----------- ----------- -------------
Fixed maturity securities available-for-sale:
Bonds:
United States government and government
agencies and authorities $ 552,451 $ 538,281 $ 538,281
States, municipalities and political subdivisions 15,258 14,677 14,677
Asset/Mortgage-backed securities 4,474,556 4,403,950 4,403,950
Foreign governments 1,383,897 1,447,531 1,447,531
Public utilities 3,132,050 3,051,712 3,051,712
Convertibles and bonds with warrants attached 38,241 38,528 38,528
All other corporate bonds 18,589,882 18,029,219 18,029,219
Redeemable preferred stocks 170,722 164,715 164,715
----------- ----------- -----------
Total 28,357,057 27,688,613 27,688,613
Equity securities available-for-sale:
Common stocks:
Public Utilities 7,951 13,865 13,865
Banks, trusts and insurance companies 24,382 22,812 22,812
Industrial, miscellaneous and all other 347,694 477,817 477,817
Nonredeemable preferred stocks 101,504 89,460 89,460
----------- ----------- -----------
Total Equity Securities 481,531 603,954 603,954
Mortgage loans on real estate: 4,740,088 4,735,397
Real estate:
Investment properties 246,290 246,290
Acquired in satisfaction of debt 9,912 9,912
Policy Loans 1,892,392 1,892,392
Other investments 401,826 401,826
----------- -----------
Total Investments $36,129,096 $35,578,384
December 31, 1998 (000s omitted)
Column A Column B Column C Column D
Amount
at Which
Shown| (1) | Investments deemed to have declines
in value that are other than temporary are written down or reserved for
to reduce the Type of Investment Cost Value Balance Sheet
Fixed maturity securities available-for-sale:
Bonds:
United States Government and government
agencies and authorities.............................. $1,043,850 $1,134,614 $1,134,614
States, municipalities and political subdivisions....... 15,871 16,738 16,738
Asset/Mortgage-backed securities........................ 4,879,524 5,080,535 5,080,535
Foreign governments..................................... 1,240,113 1,321,175 1,321,175
Public utilities........................................ 3,130,998 3,325,448 3,325,448
Convertibles and bonds with warrants attached........... 25,214 24,325 24,325
All other corporate bonds............................... 18,133,334 19,155,425 19,155,425
Redeemable preferred stocks............................... 170,654 174,632 174,632
----------- ----------- -----------
Total................................................. 28,639,558 30,232,892 30,232,892
Equity securities available-for-sale:
Common stocks:
Public utilities........................................ 20,913 24,466 24,466
Banks, trusts and insurance companies................... 37,777 41,990 41,990
Industrial, miscellaneous and all other................. 296,287 396,614 396,614
Nonredeemable preferred stocks.......................... 81,741 79,773 79,773
----------- ---------- ----------
Total Equity Securities................................ 436,718 542,843 542,843
Mortgage loans on real estate............................... 4,397,876 4,393,082(1)
Real estate:
Investment properties................................... 470,095 470,095
Acquired in satisfaction of debt........................ 18,627 18,627
Policy loans................................................ 1,839,970 1,839,970
Other investments........................................... 431,964 431,964
----------- -----------
Total Investments...................................... $36,234,808 $37,929,473carrying value to their estimated realizable value. |
(1) Investments deemed to have declines in value that are other than temporary
are written down or reserved for to reduce their carrying value to their
estimated realizable value.
74
LINCOLN NATIONAL CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
Lincoln National Corporation (Parent Company Only)
December 31 (000's omitted) 1999 1998
- ------------------------------------------------------------------------
Assets:
Investments in subsidiaries * $4,585,327 $5,642,793
Investments 134,444 35,717
Investment in unconsolidated affiliate 25,824 18,811
Cash and invested cash ** 349,477 495,612
Property and equipment 2,928 4,437
Accrued investment income 1,020 1,774
Receivable from subsidiaries * 223,000 153,300
Dividends receivable from subsidiaries * 20,500 6,500
Loans to subsidiaries * 1,405,533 1,305,028
Goodwill 62,447 65,217
Federal income taxes recoverable 82,311 31,365
Other assets 77,732 80,079
---------- ----------
Total Assets $6,970,543 $7,840,633
Liabilities and Shareholders' Equity
Liabilities:
Cash collateral on loan securities $ 186,447 $ 50,625
Dividends payable 56,157 55,074
Short-term debt 272,451 149,956
Long-term debt 711,939 711,671
Loans from subsidiaries * 1,318,867 1,291,714
Federal income taxes payable -- --
Accrued expenses and other liabilities 160,814 193,652
---------- ----------
Total Liabilities 2,706,675 2,452,692
Shareholders' Equity
Series A preferred stock 948 1,083
Common stock 1,007,099 994,472
Retained earnings 3,691,470 3,790,038
Foreign currency translation adjustment 30,049 49,979
Net unrealized gain (loss) on securities
available-for-sale [including unrealized
gain (loss) of subsidiaries and discontinued
operations: 1999 - $(477,359);
1998 - $531,138] (465,698) 552,369
---------- ----------
Total Shareholders' Equity 4,263,868 5,387,941
---------- ----------
Total Liabilities and Shareholders' Equity $6,970,543 $7,840,633
Lincoln National Corporation (Parent Company Only)
December 31 (000s omitted) 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Assets:
Investments| * | Eliminated in subsidiaries*........................................... $5,642,793 $5,341,786
Investments........................................................... 35,717 231,931
Investmentconsolidation. |
| ** | Includes short-term funds invested in
unconsolidated affiliate................................ 18,811 18,500
Cash and invested cash**.............................................. 495,612 1,230,180
Property and equipment................................................ 4,437 10,316
Accrued investment income............................................. 1,774 4,071
Receivable from subsidiaries*......................................... 153,300 433,580
Dividends receivable from subsidiaries*............................... 6,500 12,875
Loans to subsidiaries*................................................ 1,305,028 32,299
Goodwill.............................................................. 65,217 66,500
Federal income taxes recoverable...................................... 31,365 --
Other assets.......................................................... 80,079 48,470
---------- --------
Total Assets........................................................ $7,840,633 $7,430,508
Liabilities and Shareholders' Equity
Liabilities:
Cash collateralbehalf on loaned securities.................................. $50,625 $ 123,688
Dividends payable..................................................... 55,074 52,167
Short-term debt....................................................... 149,956 82,767
Long-term debt........................................................ 711,671 510,301
Loans from subsidiaries*.............................................. 1,291,714 1,040,431
Federal income taxes payable ......................................... -- 418,783
Accrued expenses and other liabilities................................ 193,652 219,456
--------- ---------
Total Liabilities................................................... 2,452,692 2,447,593
Shareholders' Equity
Series A preferred stock.............................................. 1,083 1,153
Common stock.......................................................... 994,472 966,461
Retained earnings..................................................... 3,790,038 3,533,105
Foreign currency translation adjustment............................... 49,979 46,204
Net unrealized gain on securities available-for-sale
[including unrealized gain of subsidiaries and
discontinued operations: 1998 - $531,138; 1997 - $410,281]........... 552,369 435,992
---------- ----------
Total Shareholders' Equity......................................... 5,387,941 4,982,915
--------- ---------
Total Liabilities and Shareholders' Equity......................... $7,840,633 $7,430,508LNC's subsidiaries. |
*Eliminated in consolidation.
**Includes short-term funds invested in behalf of LNC's subsidiaries. These condensed financial statements should be read in conjunction with the
consolidated financial statements and accompanying footnotes of Lincoln National
Corporation (see pages 3638 through 67)76).
75
LINCOLN NATIONAL CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Continued)
STATEMENTS OF INCOME
Lincoln National Corporation (Parent Company Only)
Year Ended December 31 (000s omitted) 1999 1998 1997
- ------------------------------------------------------------------------------------------------
Revenue:
Dividends from subsidiaries* $584,226 $268,454 $250,725
Interest from subsidiaries* 80,395 44,068 22,807
Equity in earnings of unconsolidated affiliate 3,807 1,636 --
Net investment income 28,689 48,597 38,108
Realized gain (loss) on investments 13,311 1,001 (1,403)
Gain on sale of subsidiaries and
discontinued operations -- -- 1,192,226
Other 5,760 2,202 1,180
-------- -------- --------
Total Revenue 716,188 365,958 1,503,643
Expenses:
Operating and administrative 15,090 41,922 36,540
Interest-subsidiaries* 23,820 32,251 25,703
Interest-other 117,941 106,059 85,512
-------- -------- --------
Total Expenses 156,851 180,232 147,755
-------- -------- --------
Income before Federal Income Tax Expense
(Benefit), Equity in Income of Subsidiaries
and Discontinued Operations, Less Dividends 559,337 185,726 1,355,888
Federal income tax expense (benefit) (16,899) (28,891) 389,791
-------- -------- --------
Income Before Equity in Income of Subsidiaries
and Discontinued Operations, Less Dividends 576,236 214,617 966,097
Equity in income of subsidiaries and
discontinued operations, less dividends (115,882) 295,158 (32,109)
-------- -------- --------
Net Income $460,354 $509,775 $933,988
Lincoln National Corporation (Parent Company Only)
Year Ended December 31 (000s omitted) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Revenue:
Dividends from subsidiaries*.................................. $268,454 $ 250,725 $601,701
Interest from subsidiaries*................................... 44,068 22,807 18,945
Equity in earnings of unconsolidated affiliate................ 1,636 -- 1,428
Net investment income......................................... 48,597 38,108 21,790
Realized gain (loss) on investments........................... 1,001 (1,403) (432)
Gain on sale of subsidiaries and
discontinued operations..................................... -- 1,192,226 --
Other......................................................... 2,202 1,180 1,127
-------- ----------- --------
Total Revenue............................................... 365,958 1,503,643 644,559
Expenses:
Operating and administrative.................................. 41,922 36,540 36,275
Interest-subsidiaries*........................................ 32,251 25,703 23,529
Interest-other................................................ 106,059 85,512 72,086
-------- -------- --------
Total Expenses.............................................. 180,232 147,755 131,890
------- ------- -------
Income before Federal Income Tax Expense
(Benefit), Equity in Income of Subsidiaries
and Discontinued Operations, Less Dividends................ 185,726 1,355,888 512,669
Federal income tax expense (benefit)............................ (28,891) 389,791 (34,157)
------- --------- -------
Income Before Equity in Income of Subsidiaries
and Discontinued Operations, Less Dividends................ 214,617 966,097 546,826
Equity in income of subsidiaries and
discontinued operations, less dividends....................... 295,158 (32,109) (33,268)
------- --------- --------
Net Income.................................................. $509,775 $ 933,988 $513,558
*Eliminated| * | Eliminated in consolidation. |
These condensed financial statements should be read in conjunction with the
consolidated financial statements and accompanying footnotes of Lincoln National
Corporation (see pages 3638 through 67)76).
76
LINCOLN NATIONAL CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Continued)
STATEMENTS OF CASH FLOWS
Lincoln National Corporation (Parent Company Only)
Year Ended December 31 (000s omitted) 1999 1998 1997
- ------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Income $460,354 $ 509,775 $ 933,988
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in income of subsidiaries and
discontinued operations less than
(greater than) distributions* 103,060 (288,784) 18,950
Equity in undistributed earnings of
unconsolidated affiliates (3,807) (1,636) --
Realized (gain) loss on investments 13,311 (1,001) 1,403
Gain on sale of subsidiaries/
discontinued operations -- -- (1,192,226)
Tax on sale of discontinued operations -- -- 415,354
Other (3,381) (66,445) 26,038
-------- ---------- ----------
Net Adjustments 109,183 (357,866) (730,481)
-------- ---------- ----------
Net Cash Provided by Operating Activities 569,537 151,909 203,507
Cash Flows from Investing Activities:
Net sales (purchases) of investments (113,449) 188,938 4,157
Cash collateral on loaned securities 135,822 (73,063) (21,906)
Decrease (increase) in investment
in subsidiaries* (75,242) (159,458) (116,824)
Sale of (investment in) unconsolidated affiliate (7,013) -- (68,959)
Sale of discontinued operations -- (124,151) 822,500
Net (purchase) sale of property and equipment 1,620 (256) (1,417)
Other (88,982) (36,831) (1,096)
-------- ---------- ----------
Net Cash Provided by (Used in) Investing Activities (147,244) (204,821) 616,455
Cash Flows from Financing Activities:
Decrease in long-term debt (includes payments and
(transfer to short-term debt) -- (99,737) (86,338)
Issuance of long-term debt 268 299,198 --
Net increase (decrease) in short-term debt 122,495 67,189 13,056
Increase in loans from subsidiaries* 27,153 251,283 454,311
Decrease (increase) in loans to subsidiaries* (100,505) (1,272,729) 414,669
Decrease (increase) in receivables from
subsidiaries (69,700) 280,280 (23,000)
Common stock issued for benefit plans 48,015 48,747 33,199
Retirement of common stock (377,719) (46,871) (327,585)
Dividends paid to shareholders (218,435) (209,016) (201,927)
-------- ---------- ----------
Net Cash Provided by (Used in) Financing Activities (568,428) (681,656) 276,385
-------- ---------- ----------
Net Increase (Decrease) in Cash (146,135) (734,568) 1,096,347
Cash and Invested Cash at beginning-of-year 495,612 1,230,180 133,833
-------- ---------- ----------
Cash and Invested Cash at End-of-Year $349,477 $ 495,612 $1,230,180
Lincoln National Corporation (Parent Company Only)
Year Ended December 31 (000's omitted) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income........................................................ $ 509,775 $ 933,988 $ 513,558
Adjustments to reconcile net income to net cash provided by
(used in) operating
activities:
Equity| * | Eliminated in income of subsidiaries and discontinued
operations less than (greater than) distributions*............ (288,784) 18,950 (262,268)
Equity in undistributed earnings of unconsolidated affiliate... (1,636) -- (1,428)
Realized (gain) loss on investments............................ (1,001) 1,403 432
Gain on sale of subsidiaries and discontinued operations....... -- (1,192,226) --
Tax on sale of discontinued operations......................... -- 415,354 --
Other.......................................................... (66,445) 26,038 (80,715)
-------- ------- -------
Net Adjustments.............................................. (357,866) (730,481) (343,979)
------- --------- -------
Net Cash Provided by Operating Activities.................... 151,909 203,507 169,579
Cash Flows from Investing Activities:
Net sales (purchases) of investments............................ 188,938 4,157 91,161
Cash collateral on loaned securities............................ (73,063) (21,906) (53,406)
Decrease (increase) in investment in subsidiaries*.............. (159,458) (116,824) 217,844
Sale of (investment in) unconsolidated affiliate................ -- (68,959) (16,041)
Sale of discontinued operations................................. (124,151) 822,500 --
Net (purchase) sale of property and equipment................... (256) (1,417) (790)
Other........................................................... (36,831) (1,096) (26,883)
------- -------- -------
Net Cash Provided by (Used in) Investing Activities........... (204,821) 616,455 211,885
Cash Flows from Financing Activities:
Decrease in long-term debt (includes payments and
transfers to short-term debt).................................. (99,737) (86,338) --
Issuance of long-term debt...................................... 299,198 -- --
Net increase (decrease) in short-term debt...................... 67,189 13,056 (179,033)
Increase in loans from subsidiaries*............................ 251,283 454,311 28,224
Decrease (increase) in loans to subsidiaries*................... (1,272,729) 414,669 (303,506)
Decrease (increase) in receivables from subsidiaries*........... 280,280 (23,000) (36,000)
Common stock issued for benefit plans........................... 48,747 33,199 (153)
Retirement of common stock...................................... (46,871) (327,585) (32,716)
Dividends paid to shareholders.................................. (209,016) (201,927) (191,223)
-------- --------- -------
Net Cash Provided by (Used in) Financing Activities........... (681,656) 276,385 (714,407)
-------- ------- -------
Net Increase (Decrease) in Cash............................... (734,568) 1,096,347 (332,943)
Cash and invested cash at beginning-of-year....................... 1,230,180 133,833 466,776
--------- ------- --------
Cash and Invested Cash at End-of-Year......................... $ 495,612 $1,230,180 $ 133,833consolidation. |
*Eliminated in consolidation. These condensed financial statements should be read in conjunction with the
consolidated financial statements and accompanying footnotes of Lincoln National
Corporation (see pages 3638 through 67)76).
77
LINCOLN NATIONAL CORPORATION
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
Column A Column B Column C Column D Column E Column F
-------- ------------ ------------ ------------ ------------ ------------
Insurance Other Policy
Deferred Policy and Claims and
Acquisition Claim Unearned Benefits Premium
Segment Costs Reserves Premiums Payable Revenue (1)
-------- ------------ ------------ ------------ ------------ ------------
Year Ended December 31, 1999
Life Insurance and Annuities $1,715,787 $15,016,751 $ -- $ -- $1,575,876
Lincoln UK 679,709 1,642,891 -- -- 354,525
Reinsurance 331,268 4,392,121 -- -- 1,439,177
Investment Management -- -- -- -- --
Other (incl. consol. adj's.) 73,526 (126,995) -- -- 49,542
---------- ----------- ---------- ---------- ----------
Total $2,800,290 $20,924,768 $ -- $ -- $3,419,120
Year Ended December 31, 1998
Life Insurance and Annuities $ 961,617 $14,511,011 $ -- $ -- $1,285,232
Lincoln UK 636,254 1,498,821 -- -- 339,518
Reinsurance 315,477 4,238,609 -- -- 1,224,887
Investment Management -- -- -- -- --
Other (incl. consol. adj's.) 51,018 (108,459) -- -- 45,561
---------- ----------- ---------- ---------- ----------
Total $1,964,366 $20,139,982 $ -- $ -- $2,895,198
Year Ended December 31, 1997
Life Insurance and Annuities $ 736,762 $ 6,418,417 $ -- $ -- $ 747,244
Lincoln UK 563,080 1,442,768 -- -- 336,721
Reinsurance 281,062 3,513,311 -- -- 1,036,126
Investment Management -- -- -- -- --
Other (incl. consol. adj's.) 42,941 (108,224) -- -- 40,797
---------- ----------- ---------- ---------- ----------
Total $1,623,845 $11,266,272 $ -- $ -- $2,160,888
Column G Column H Column I Column J Column K Column L
-------- ------------ ------------ ------------ ------------ ------------
Amortization of
Net Deferred Policy Other
Investment Acquisition Operating Premiums
Segment Income (2) Benefits Costs Expenses (2) Written
-------- ------------ ------------ ------------ ------------ ------------
Year Ended December 31, 1999
Life Insurance and Annuities $2,356,387 $2,223,410 $187,679 $1,023,333 $ --
Lincoln UK 75,257 306,221 74,599 165,853 --
Reinsurance 310,326 1,231,327 36,990 500,265 --
Investment Management 56,868 -- -- 418,325 --
Other (incl. consol. adj's.) 8,674 44,066 8,070 13,598 --
---------- ---------- -------- ---------- ----------
Total $2,807,512 $3,805,024 $307,338 $2,121,374 $ --
Year Ended December 31, 1998
Life Insurance and Annuities $2,184,334 $2,063,600 $197,786 $ 858,684 $ --
Lincoln UK 87,930 150,963 130,815 51,087 --
Reinsurance 307,784 1,059,796 64,788 295,593 --
Investment Management 65,385 -- -- 427,882 --
Other (incl. consol. adj's.) 35,973 54,506 10,490 23,675 --
---------- ---------- -------- ---------- ----------
Total $2,681,406 $3,328,865 $403,879 $1,656,921 $ --
Year Ended December 31, 1997
Life Insurance and Annuities $1,770,784 $1,585,598 $176,218 $ 508,428 $ --
Lincoln UK 85,132 339,637 134,677 49,797 --
Reinsurance 284,430 1,205,515 67,224 319,211 --
Investment Management 72,333 -- -- 421,742 --
Other (incl. consol. adj's.) 38,085 60,983 10,271 (15,703) --
---------- ---------- -------- ---------- ----------
Total $2,250,764 $3,191,733 $388,390 $1,283,475 $ --
Column A Column B Column C Column D Column E Column F
-------- ---------- ---------- ---------- ---------- --------
Insurance Other Policy
Deferred Policy| (1) | Includes insurance fees
on universal life and Claims and
Acquisition Claim Unearned Benefits Premium
Segment Costs Reserves Premiums Payable Revenue(1)
Year Ended December 31, 1998 ------------------------------------(000s Omitted)-------------------------
Life Insurance and Annuities......... $1,012,635 $14,511,012 $ $ $ 1,330,793
Lincoln UK........................... 636,254 1,498,820 339,518
Reinsurance.......................... 315,477 4,238,609 1,224,887
Investment Management................
Other (incl. consol. adj's.)......... (108,459)
---------- ----------- --------- ----------- ----------
Total.............................. $1,964,366 $20,139,982 $ -- $ -- $ 2,895,198
Year Ended December 31, 1997
Life Insurance and Annuities......... $ 779,703 $ 6,418,417 $ $ $ 788,040
Lincoln UK........................... 563,080 1,442,768 336,721
Reinsurance.......................... 281,062 3,513,311 1,036,127
Investment Management................
Other (incl. consol. adj's.)......... (108,224)
--------- --------- -------- -------- -----------
Total.............................. $1,623,845 $11,266,272 $ -- $ -- $ 2,160,888
Year Ended December 31, 1996
Life Insurance and Annuities......... $ 926,593 $ 6,180,970 $ $ $ 676,047
Lincoln UK........................... 440,414 1,252,276 306,238
Reinsurance.......................... 322,709 3,144,785 1,250,403
Investment Management................
Other (incl. consol. adj's.)......... (120,135)
---------- ---------- -------- -------- -----------
Total.............................. $1,689,716 $10,457,896 $ -- $ -- $ 2,232,688other interest sensitive products |
Column A Column G Column H Column I Column J Column K
-------- -------- -------- --------- ---------- --------
Amortization| (2) | The allocation of Net Deferred Policy Other
Investment Acquisition Operating Premiums
Segment Income (2) Benefits Costs Expenses( 2) Written
Year Ended December 31, 1998 --------------------------------------(000s Omitted)---------------------
Life Insuranceexpenses
between investments and Annuities......... $2,248,946 $2,118,107 $368,290 $ 746,104 $
Lincoln UK........................... 87,930 150,962 26,252 155,651
Reinsurance.......................... 307,784 1,059,796 45,477 314,903
Investment Management................ 232 263,275
Other (incl. consol. adj's.)......... 36,514 140,848
---------- ----------- -------- --------- -------
Total.............................. $2,681,406 $3,328,865 $440,019 $1,620,781 $ --
Year Ended December 31, 1997
Life Insuranceother operations are based on a number of assumptions
and Annuities......... $1,842,351 $1,646,581 $316,346 $ 431,301 $
Lincoln UK........................... 85,132 339,637 4,342 180,132
Reinsurance.......................... 284,430 1,205,515 147,300 239,135
Investment Management................ 457 243,206
Other (incl. consol. adj's.)......... 38,394 110,103
---------- ----------- -------- -------- ------
Total.............................. $2,250,764 $3,191,733 $467,988 $1,203,877 $ --
Year Ended December 31, 1996
Life Insurance and Annuities......... $1,741,649 $1,562,087 $266,343 $ 388,020 $
Lincoln UK........................... 81,955 133,927 157,732
Reinsurance.......................... 263,870 1,013,867 162,150 253,880
Investment Management................ 701 191,416
Other (incl. consol. adj's).......... (229) 100,128
---------- ---------- ---------- ---------- ------
Total.............................. $2,087,946 $2,709,881 $428,493 $1,091,176 $ --estimates. Results would change if different methods were applied. |
(1) Includes insurance fees on universal life and other interest sensitive
products.
(2) The allocation of expenses between investments and other operations are
based on a number of assumptions and estimates. Results would change if
different methods were applied.
78
LINCOLN NATIONAL CORPORATION
SCHEDULE IV - REINSURANCE
Column A Column B Column C Column D Column E Column F
- ----------- ------------- ------------- ------------- ------------- -------------
Percentage
Ceded Assumed of Amount
Gross to Other from Other Assumed
Description Amount Companies Companies Net Amount to Net
- ----------- ------------- ------------- ------------- ------------- -------------
(000s omitted)
-------------------------------------------------------------------------
Year Ended December 31, 1999
Individual life insurance in force $221,300,000 $171,100,000 $295,300,000 $345,500,000 85.5%
Premiums:
Life insurance and annuities (1) $ 2,363,373 $ 458,798 $ 816,046 $ 2,720,621 30.0%
Health insurance 167,489 162,202 693,212 698,499 99.2%
------------- ------------- ------------- -------------
Total $ 2,530,862 $ 621,000 $ 1,509,258 $ 3,419,120
Year Ended December 31, 1998
Individual life insurance in force $197,900,000 $108,100,000 $203,700,000 $293,500,000 69.4%
Premiums:
Life insurance and annuities (1) $ 2,182,847 $ 573,532 $ 650,807 $ 2,260,122 28.8%
Health insurance 147,940 121,848 608,984 635,076 95.9%
------------- ------------- ------------- -------------
Total $ 2,330,787 $ 695,380 $ 1,259,791 $ 2,895,198
Year Ended December 31, 1997
Individual life insurance in force $125,800,000 $ 37,300,000 $124,000,000 $212,500,000 58.4%
Premiums:
Life insurance and annuities (1) $ 1,235,085 $ 196,929 $ 550,173 $ 1,588,329 34.6%
Health insurance 161,693 118,083 528,949 572,559 92.4%
------------- ------------- ------------- -------------
Total $ 1,396,778 $ 315,012 $ 1,079,122 $ 2,160,888
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
Percentage
Ceded Assumed of Amount
Gross to Other from Other Net Assumed
Amount Companies Companies Amount to Net
--------------------------(000s Omitted)----------------------------------
Year Ended December 31, 1998
Individual| (1) | Includes insurance fees
on universal life insurance in force... $187,100,000 $108,100,000 $213,700,000 $292,700,000 73.0%
Premiums:
Life insurance and annuities (1)... $ 2,182,847 $ 573,532 $ 650,807 $ 2,260,122 28.8%
Health insurance................... 147,940 121,848 608,984 635,076 95.9%
--------- ------- --------- ----------
Total............................ $ 2,330,787 $ 695,380 $ 1,259,791 $ 2,895,198
Year Ended December 31, 1997
Individual life insurance in force .. $125,800,000 $ 37,300,000 $124,000,000 $212,500,000 58.4%
Premiums:
Life insurance and annuities (1)... $ 1,235,085 $196,929 $ 550,173 $ 1,588,329 34.6%
Health insurance................... 161,693 118,083 528,949 572,559 92.4%
------- ---------- ------- --------
Total............................ $ 1,396,778 $ 315,012 $ 1,079,122 $ 2,160,888
Year Ended December 31, 1996
Individual life insurance in force... $110,700,000 $37,600,000 $130,400,000 $203,500,000 64.0%
Premiums:
Life insurance and annuities (1).... $ 1,031,740 $ 96,999 $ 507,512 $1,442,253 35.2%
Health insurance................... 168,545 71,636 693,526 790,435 87.7%
--------- ------ -------- --------
Total............................ $ 1,200,285 $168,635 $1,201,038 $2,232,688other interest-sensitive products. |
(1) Includes insurance fees on universal life and other interest sensitive
products.
79
LINCOLN NATIONAL CORPORATION
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- ----------- ------------- ---------------------------- ------------- -------------
Additions
Charged to
Balance at Charged to Other Balance
Beginning Costs Accounts- Deductions- at End
Description of Period Expenses (1) Describe Describe (2) of Period
- ----------- ------------- ------------- ------------- ------------- -------------
(000s omitted)
-------------------------------------------------------------------------
Year Ended December 31, 1999
Deducted from Asset Accounts:
Reserve for Mortgage Loans on real estate $ 4,794 $ 807 $-- $ (910) $4,691
Reserve for Real Estate -- -- -- -- --
Included in Other Liabilities:
Investment Guarantees 323 -- -- -- 323
Year Ended December 31, 1998
Deducted from Asset Accounts:
Reserve for Mortgage Loans
on real estate $5,019 $675 $-- $ (900) $4,794
Reserve for Real Estate 1,500 -- -- (1,500) --
Included in Other Liabilities:
Investment Guarantees 790 -- -- (467) 323
Year Ended December 31, 1997
Deducted from Asset Accounts:
Reserve for Mortgage Loans
on real estate $12,385 $1,778 $-- $(9,144) $5,019
Reserve for Real Estate 3,000 -- -- (1,500) 1,500
Included in Other Liabilities:
Investment Guarantees 1,775 -- -- (985) 790
Column A Column B Column C Column D Column E
----------- ---------- ---------------- --------- --------
Additions
Charged
Balance at Charged to Other Balance at
Description Beginning to Costs Accounts- Deductions- End| (1) | Excludes charges for the
direct write-offs of assets. |
| (2) | Deductions reflect sales or foreclosures of Period Expenses(1) Describe Describe(2) Period
---------------------------(000's Omitted)----------------------
Year Ended December 31, 1998
Deducted from Asset Accounts:
Reserve for Mortgage Loans
on Real Estate.............................. $5,019 $ 675 $(900) $4,794
Reserve for Real Estate...................... 1,500 (1,500) --
Included in Other Liabilities:
Investment Guarantees........................ 790 (467) 323
Year Ended December 31, 1997
Deducted from Asset Accounts:
Reserve for Mortgage Loans
on Real Estate.............................. $12,385 $1,778 $(9,144) $5,019
Reserve for Real Estate...................... 3,000 (1,500) 1,500
Included in Other Liabilities:
Investment Guarantees........................ 1,775 (985) 790
Year Ended December 31, 1996
Deducted from Asset Accounts:
Reserve for Mortgage Loans
on Real Estate.............................. $29,592 $3,136 $(20,343) $12,385
Reserve for Real Estate...................... 58,029 3,000 $(51,517) (6,512) 3,000
Reserve for Other Long-term,
Investments................................. 13,644 (388) (12,971) (285) --
Included in Other Liabilities:
Investment Guarantees........................ 7,099 (886) (4,438) 1,775the underlying holdings. |
(1) Excludes charges for the direct write-offs of assets. The negative amounts
shown in the additions columns represent improvement in the underlying
assets and guarantees for which valuation accounts had previously been
established.
(2) Deductions reflect sales or foreclosures of the underlying holdings.
80
LINCOLN NATIONAL CORPORATION
EXHIBIT INDEX FOR THE ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 1999
For the Year Ended December 31, 1998
| Exhibit |
| Number | | | Page |
| 3(a) | Articles of Incorporation dated as of May
12, 1994. 82
* |
| 3(b) | Bylaws of LNC as last amended May 15, 1997.*
January 13,
2000. | 92 |
| 4(a) | Indenture of LNC dated as of January 15,
1987.* |
| 4(b) | LNC First Supplemental Indenture dated
July 1, 1992, to |
| | Indenture of LNC dated as of January 15, 1987.* |
| 4(c) | Specimen Notes for 7 1/8% Notes due July
15, 1999 and |
| | 7 5/8% Notes due July 15, 2002.* |
| 4(d) | Rights Agreement dated November 14, 1996.* |
| 4(e) | Indenture of LNC dated as of September
15, 1994. 120
* |
| 4(f) | Form of Note dated as of September 15,
1994.* |
| 4(g) | Form of Zero Coupon Security dated as of
September 15, 1994.* |
| 4(h) | Specimen Debenture for 9 1/8% Notes due
October 1, 2024.*
4(I) |
| 4(i) | Specimen of 7 1/4% Debenture due May 15,
2005.* |
| 4(j) | Junior Subordinated Indenture of LNC as
of May 1, 1996.* |
| 4(k) | Guarantee Agreement for Lincoln National
Capital I.* |
| 4(l) | Guarantee Agreement for Lincoln National
Capital II.* |
| 4(m) | Form of Lincoln National Capital Ii Preferred
Securities, Series A.* |
| 4(n) | Form of Lincoln National Capital II Preferred
Securities, Series B.* |
| 4(o) | Declaration of Trust for Lincoln National
Capital I.* |
| 4(p) | Specimen Notes for 6 1/2% Notes due March
15, 2008.* |
| 4(q) | Specimen Notes for 7% Notes due March 15,
2018.* |
| 4(r) | Trust Agreement for Lincoln National Capital
III.* |
| 4(s) | Form of Lincoln National Capital III Preferred
Securities, Series C.* |
| 4(t) | Guarantee Agreement for Lincoln National
Capital III.* |
| 4(u) | Trust Agreement for Lincoln National Capital
IV.* |
| 4(v) | Form of Lincoln National Capital IV Income
Prides Certificates.* |
| 4(w) | Form of Lincoln National Capital IV Growth
Pride Certificates.* |
| 4(x) | Guarantee Agreement for Lincoln National
Capital IV.* |
| 4(y) | Purchase Contract Agreement for Lincoln
National Capital IV.* |
| 4(z) | Pledge Agreement for Lincoln National Capital
IV.* |
| 10(a) | LNC 1986 Stock Option Plan. 150
* |
| 10(b) | The LNC Executives' Salary Continuation
Plan.* |
| 10(c) | LNC Executive Value Sharing Plan 165
Plan* |
| 10(d) | LNC Executives' Severance Benefit Plan.* |
| 10(e) | The LNC Outside Directors Retirement Plan.* |
| 10(f) | The LNC Outside Directors Benefits Plan.* |
| 10(g) | LNC Directors' Value Sharing Plan.* |
| 10(h) | The LNC Executive Deferred Compensation
Plan for Employees.* |
| 10(i) | LNC 1993 Stock Plan for Non-Employee Directors. 171
* |
| 10(j) | LNC Executives' Excess Compensation Benefit
Plan. 177
* |
| 10(k) | First Amendment to LNC Executives' Excess
Compensation Benefit Plan dated |
| December 22, 1999. | 103 |
| 10(l) | LNC 1997 Incentive Compensation Plan.*
10(l) |
| 10(m) | Description of compensation arrangements
with Executive Officers. 181
10(m) | 105 |
| 10(n) | Lease and Agreement-Lincoln Life's home
office property.*
10(n) |
| 10(o) | Lease and Agreement-additional Lincoln
Life home office property.*
10(o) |
| 10(p) | Form of Lease-LNC's Corporate Offices.*
10(p) Offices dated
March 14, 1999. | 114 |
| 10(q) | Lease and Agreement-additional Lincoln
Life headquarter property.* |
| 10(r) | Form of Delaware's Lease and Agreement
for One Commerce Square Property. | 184 |
| 10(s) | Form of Delaware's Sublease for Two Commerce
Square Property. | 254 |
| 10(t) | Form of Delaware's Consent to Sublease
for Philadelphia Plaza II Property. | 323 |
| 12 | Historical Ratio of Earnings to Fixed Charges. 205
Charges | 339 |
| 21 | List of Subsidiaries of LNC. 206
| 340 |
| 23 | Consent of Ernst && Young LLP, Independent
Auditors. 217
| 351 |
| 27 | Financial Data Schedule. 218 | 352 |
*Incorporated by Reference
81
Signature Page
LINCOLN NATIONAL CORPORATION
| * | Incorporated by Reference |
Signature Page
LINCOLN NATIONAL CORPORATION
| Pursuant to the requirements |
| of Section 13 or 15(d) of |
| the Securities Exchange Act | By /s/ Jon A. Boscia | March 11, 1999
-------------------------------------------------
9, 2000 |
of 1934, LNC has duly caused Jon A. Boscia
| | ---------------------------------------------------------- |
this report to be signed on (President, Chief Executive Officer and
| | Jon A. Boscia |
its behalf by the under- Director)
| | (President, Chief Executive Officer and |
| signed, thereunto duly | | Director) |
| authorized. |
| By /s/ Richard C. Vaughan | March 11, 1999
-------------------------------------------------
9, 2000 |
| | ---------------------------------------------------------- |
| | Richard C. Vaughan (Executive |
| | (Executive Vice President and Chief |
| | Financial Officer) |
| By /s/ Donald L. Van Wyngarden Casey J. Trumble | March 11, 1999
-------------------------------------------------
Donald L. Van Wyngarden
(Second9, 2000 |
| | ---------------------------------------------------------- |
| | Casey J. Trumble |
| | (Senior Vice President and Controller)
Chief |
| | Accounting Officer) |
|
| Pursuant to the requirements | By /s/ J. Patrick Barrett | March 11, 1999
-------------------------------------------------
9, 2000 |
of the Securities Exchange J. Patrick Barrett
| | ---------------------------------------------------------- |
| Act of 1934, this report | | J. Patrick Barrett |
| has been signed below by |
| the following Directors | By /s/ Thomas D. Bell, Jr. | March 11, 1999
-------------------------------------------------
the following Directors Thomas D. Bell, Jr
9, 2000 |
of LNC on the date indicated.
By /s/ Daniel R. Efroymson March 11, 1999
-------------------------------------------------
Daniel R. Efroymson
| | ---------------------------------------------------------- |
| | | Thomas D. Bell, Jr |
| |
| By /s/ Eric G. Johnson | March 11, 1999
-------------------------------------------------
9, 2000 |
| | ---------------------------------------------------------- |
| | Eric G. Johnson
By /s/ Harry L. Kavetas March 11, 1999
-------------------------------------------------
Harry L. Kavetas
|
| By /s/ M. Leanne Lachman | March 11, 1999
-------------------------------------------------
9, 2000 |
| | ---------------------------------------------------------- |
| | M. Leanne Lachman
By /s/ Roel Pieper March 11, 1999
-------------------------------------------------
Roel Pieper
|
| By /s/ John M. Pietruski | March 11, 1999
-------------------------------------------------
9, 2000 |
| | ---------------------------------------------------------- |
| | John M. Pietruski |
| By /s/ Ian M. Rolland Ron J. Ponder | March 11, 1999
-------------------------------------------------
Ian M. Rolland
9, 2000 |
| | ---------------------------------------------------------- |
| | Ron J. Ponder |
| By /s/ Jill S. Ruckelshaus | March 11, 1999
-------------------------------------------------
9, 2000 |
| | ---------------------------------------------------------- |
| | Jill S. Ruckelshaus |
| By /s/ Gilbert R. Whitaker,Jr. | March 11, 1999
-------------------------------------------------
9, 2000 |
| | ---------------------------------------------------------- |
| | Gilbert R. Whitaker,Jr. |