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, 1994 Commission File Number 1-6028
LINCOLN NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1140070
(State of incorporation) (I.R.S. Employer Identification No.)
200 East Berry Street, Fort Wayne, Indiana 46802-2706
(Address of principal executive offices)
Registrant's telephone number (219) 455-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange on
Title of each class which registered
Common Stock (Without Par Value) New York, Chicago, Pacific,
London and Tokyo Stock
Exchanges
Common Share Purchase Rights New York, Chicago and Pacific
Stock Exchanges
$3.00 Cumulative Convertible Preferred New York and Chicago Stock
Stock, Series A (Without Par Value) Exchanges
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. [ ]
As of March 3, 1995, 94,505,345 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 nonaffiliates was approximately
$3,803,800,000.
Select materials from the Proxy statement for the Annual meeting of
Shareholders, scheduled for May 11, 1995, have been incorporated by reference
into Part III of this Form 10-K.
The exhibit index to this report is located on page 74.
Page 1 of 247
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PART I
Item 1. Business
Lincoln National Corporation ("LNC") is a holding company. Through subsidiary
companies, LNC operates multiple insurance businesses. Operations have been
divided into four major business segments, 1) Property-Casualty, 2) Life
Insurance and Annuities, 3) Life-Health Reinsurance and 4) Employee
Life-Health Benefits. Following the sale of 71% of its direct writer of
employee life-health coverages in the first quarter of 1994, LNC conducted its
business within three business segments. 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
with its principal office at 200 East Berry Street, Fort Wayne, Indiana 46802-
2706. As of December 31, 1994, there were 220 persons on the staff of LNC.
Total employment of Lincoln National Corporation at December 31, 1994 on a
consolidated basis was 8,995.
Although acquisition and disposition activity has occurred, there has been no
activity of this nature during the past five years involving all or
predominately all of a business segment except as described above.
Numeric presentations showing revenues, pre-tax income, and assets for LNC's
major business segments and other operations in which LNC engages through its
subsidiaries are included in this report as part of the consolidated financial
statements (see note 9 to the consolidated financial statements on page 57).
The LNC "Other Operations" category includes the financial data for an
unconsolidated affiliate (subsequent to the first quarter of 1994) engaged in
the employee life-health benefits business, LNC's investment management
companies, certain other operations that are not directly related to the
business segments and unallocated corporate items (i.e., corporate investment
income, interest expense on short-term and long-term borrowings, and
unallocated corporate overhead expenses).
Following is a brief description of the four major business segments:
1. Property-Casualty
Property-Casualty insurance includes automobile, boiler and machinery,
workers' compensation, fire and allied lines, inland marine, home-owners,
general casualty, special risks and multiple peril insurance. Fidelity and
surety bonds are also included within property-casualty insurance.
Most of LNC's property-casualty business is conducted through American States
Insurance Company and its property-casualty subsidiaries ("American States"),
headquartered in Indianapolis, Indiana. These companies operate a multi-line
property-casualty insurance business in most states of the United States
through 20 semi-autonomous division offices with broad authority for
underwriting, agency contracting, marketing and claims settlement for most
lines of business. The distribution network involves approximately 5,000
independent local agencies.
Other companies within this business segment include Lincoln National
Specialty Insurance Company ("LNSIC") which underwrites select coverages in
the sports and entertainment market and Linsco Reinsurance Company (formerly
Lincoln National Reinsurance Company) which is licensed to write property-
casualty reinsurance. Both of these property-casualty companies are involved
in servicing closed blocks of business.
Approximately 3,780 employees are involved in this business segment.
3
2. Life Insurance and Annuities
The primary company within this business segment is The Lincoln National Life
Insurance Company ("LNL"). Other companies within this business segment
include, First Penn-Pacific Life Insurance Company ("First Penn"), American
States Life Insurance Company ("American States Life"), and Lincoln National
(UK) PLC.
LNL, the 4th largest U.S. stockholder-owned life insurance Company (1993
Fortune Rankings of 50 Largest Life Insurance Companies by Assets) is an
Indiana corporation headquartered in Fort Wayne, Indiana. A network of 36
life insurance agencies, independent life insurance brokers, insurance
agencies located within financial institutions and specifically trained
employees sells fixed annuities, variable annuities, pension products,
universal life, variable universal life, disability income and other
individual insurance coverages in most states of the United States and various
foreign countries including Canada. The distribution network includes
approximately 1,800 career agents, 17,000 brokers and access to 48,000
stockbrokers and financial planners.
First Penn, headquartered in Oakbrook Terrace, Illinois, specializes in the
writing and administration of universal life products through independent
marketing companies and the sale of LNL's annuities through insurance agencies
located within financial institutions in most states of the United States.
American States Life is an Indiana corporation headquartered in Indianapolis,
Indiana. Its products, principally universal life and term insurance, are
marketed through independent local agencies (who also offer property-casualty
insurance) in most states of the United States.
Lincoln National (UK) PLC is a United Kingdom company headquartered in
Uxbridge, England, that is licensed to do business throughout the United
Kingdom. The principal products produced by this operation, unit-linked life
and pension products, are similar to U.S. produced universal life products.
Lincoln National (UK) is the 17th largest writer of unit-linked new business
premiums in the UK as measured in 1993 (Money Management Survey-New Business
Trends, published in June 1994). With the addition of an acquisition
completed in January 1995, Lincoln National (UK) advances to the 15th largest
writer of unit-linked new business premiums and is represented by a sales
force of approximately 1,500.
Approximately 4,115 employees are involved in this business segment.
3. Life-Health Reinsurance
The primary companies within this business segment are Lincoln National Life
Reinsurance Company ("LNLR"), Lincoln National Reassurance Company, ("LNRAC"),
Lincoln National Health & Casualty Insurance Company ("LNH&C") and LNL. These
companies are headquartered in Fort Wayne, Indiana. A broad range of risk
management products and services are offered to insurance companies, HMOs,
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 presented by reinsurance
intermediaries and brokers. The reinsurance organization is the leading
life-health reinsurer worldwide measured on gross premiums, net of ceded (1994
Swiss Re survey).
LNLR, LNRAC and LNL offer reinsurance programs for individual life, group
life, group medical, disability income, long-term care, personal accident and
annuity products to U.S. and International clients. LNH&C offers group
medical products and services on both a direct and reinsurance basis.
Other companies in this business segment include various general business
corporations and foreign insurance companies. The general business
corporations are used to support the segment's sales, service and
administration efforts. The foreign insurance companies provide specialized
reinsurance programs, including financial reinsurance, asset management and
funded covers, to U.S. and international clients.
Approximately 560 employees are involved in this business segment.
4
4. Employee Life-Health Benefits
Prior to the sale of 71% of its direct writer of employee life-health
coverages in 1994, LNC used this segment to manufacture and distribute group
life and health insurance, managed health care, dental, disability products
and flexible benefit administrative services with a primary focus on the small
business market (companies with 2-150 employees). Following the sale, the
earnings from the 29% minority interest were included in Other Operations.
Liabilities for claims and claim expenses for the property-casualty
business segment are estimated at the end of each accounting period using
case-basis evaluations and statistical projections. These liabilities
include estimates for the ultimate cost of claims 1) which have been reported
but not settled and 2) which have been incurred but not yet reported. A
provision for inflation is implicitly considered in the estimated liability as
the development of the estimated liability is based on historical data which
reflects past inflation and on other factors which are judged to be
appropriate modifiers of past experience. Adjustments to previously
established estimates are reflected in current operating results along with
initial estimates for claims arising within the current accounting period.
Since January 1, 1993 such estimates no longer recognize the effects of
reinsurance recoverable because such amounts are now recorded as an asset.
A reconciliation of the beginning of year and end of year liability for claims
and claim expenses is included in this report as part of the financial
statements (see note 5 to the consolidated financial statements on page 46).
The liability for claims and claim expenses included in this report is shown
on a basis prescribed by generally accepted accounting principles ("GAAP").
Such liabilities differ from that reported to state insurance regulators. A
reconciliation of the GAAP liability and the corresponding liability reported
to state insurance regulators is as follows:
December 31 (in millions) 1994 1993
Liability reported to state insurance regulators --- $2,532.1 $2,617.7
Increase (decrease) related to:
Estimated salvage and subrogation recoveries ------- (37.3) (38.3)
Amount recoverable from reinsurers ----------------- 203.1 225.5
Other ---------------------------------------------- 4.6 5.2
Liability reported on a GAAP basis --------------- $2,702.5 $2,810.1
The table on page 5 shows the development of the estimated liability for claim
and claim expenses for the ten year period prior to 1994. Each column shows
the liability as originally estimated and cumulative data on payments and re-
estimated liabilities for that accident year and all prior accident years,
making up that calendar year-end liability; and all amounts are reflected net
of reinsurance recoverable for all years. As noted above, since 1993 the
liability shown in the financial statements no longer reflects the effects of
reinsurance recoverable. The resulting redundancy (deficiency) is also a
cumulative amount for that year and all prior years. Conditions and trends
that have affected the development of these liabilities in the past may not
necessarily recur in the future; therefore, it would not be appropriate to use
this cumulative history in the projection of future performance.
5
Analysis of Combined Property-Casualty Claims and Claim Expense Development.
December 31 (in millions)
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Liability for unpaid claims and claim expenses, net of reinsurance
recoverable:
$760 $1,370 $1,730 $2,020 $2,372 $2,669 $2,246 $2,502 $2,673 $2,585 $2,499
Liability re-estimated as of:
(First column represents number of years later)
1 811 1,410 1,692 1,984 2,347 2,690 2,258 2,549 2,634 2,506 2,499
2 846 1,439 1,753 1,990 2,382 2,718 2,303 2,571 2,607
3 860 1,566 1,790 2,026 2,403 2,767 2,384 2,563
4 973 1,595 1,833 2,054 2,443 2,847 2,403
5 1,009 1,636 1,863 2,104 2,538 2,869
6 1,042 1,672 1,910 2,199 2,551
7 1,078 1,713 2,003 2,210
8 1,108 1,805 2,012
9 1,196 1,813
10 1,202
Cumulative redundancy (deficiency)
(442) (443) (282) (190) (179) (200) (157) (61) 66 79 0
Change in redundancy (deficiency)
(1) 161 92 11 (21) 43 96 127 13 (79)
Cumulative amount of liability paid through:
(First column represents number of years later)
1 333 531 571 649 750 1,430* 809 839 849 728
2 517 842 935 1,012 1,650* 1,862 1,253 1,325 1,294
3 638 1,036 1,160 1,568* 1,875 2,088 1,542 1,596
4 684 1,177 1,508* 1,700 1,996 2,255 1,709
5 721 1,390* 1,593 1,776 2,095 2,355
6 862* 1,450 1,647 1,840 2,154
7 903 1,488 1,694 1,877
8 928 1,525 1,721
9 955 1,546
10 968
*Includes the release of reserves for National Reinsurance Corporation due to
the sale of that company during April 1990. The reserves released for LNC's
period of ownership of National Re were $97 million, $139 million, $241
million, $386 million, $526 million and $665 million in 1984, 1985, 1986,
1987, 1988 and 1989, respectively.
In order to protect itself against losses greater than the amount it is
willing to retain on any one risk or event, LNC's insurance subsidiaries
purchase reinsurance from unaffiliated insurance companies (see note 7 to the
consolidated financial statements on page 51).
In order to maximize returns on its investment portfolio, LNC's investment
personnel continually monitor both current investment income produced by the
portfolio and current market values of the portfolio. The type, maturity,
quality and liquidity of investments selected to place in the segmented
portfolios vary depending on the nature of the underlying liabilities that are
being supported.
All the areas of business activity in which LNC is involved are highly
competitive because of the marketing structure and the large number of
competing companies.
6
At the end of 1993, the latest year for which data is available, there were
approximately 1,200 groups and unaffiliated individual companies selling
property and casualty insurance. LNC's group of companies writing
property-casualty insurance ranked 29th in net written premiums for 1993 (A.M.
Best Aggregates and Averages) among all such groups and companies.
At the end of 1993 there were more than 1,800 life insurance companies in the
United States and LNL was the 12th largest among the stock and mutual life
insurance companies in the United States based on assets and 16th based on
insurance in-force (1993 Fortune Ranking of 50 Largest Life Insurance
Companies by Assets).
The business of LNC's property-casualty, life insurance and annuities and
life-health reinsurance business segments, in common with those of other
insurance companies, is subject to regulation and supervision by the states,
territories and foreign countries in which they are admitted 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, and
regulating the type and amount of investments permitted. The ability to
continue an insurance business is dependent upon the maintenance of the
licenses in the various jurisdictions.
Because of the nature of the insurance business, there is no single customer
or group of customers upon whom the business is dependent. Factors such as
backlog, raw materials, patents (including trademarks, licenses, franchises,
and any other concessions held), seasonality, or environmental impact do not
have a material effect upon such business. However, within LNC's Life-Health
Reinsurance segment, Lincoln National Risk Management, Inc. does hold a patent
for "The Method and Apparatus for Evaluating a Potentially Insurable Risk" and
markets multiple knowledge based underwriting products which rely on this
product. 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 is completed by persons within the business
segments. Expenses related to such activities are not material. Also, sales
are not dependent upon select geographic areas and foreign sales are not
material in relationship to either LNC's total sales or sales of individual
business segments.
Item 2. Properties
LNC and the various operating businesses headquartered in Fort Wayne lease
approximately 1.3 million square feet of office space in the Fort Wayne area.
Approximately 1.5 million square feet of space is owned or leased by operating
businesses headquartered in Indianapolis, Indiana; Oakbrook Terrace, Illinois;
and Uxbridge, London, England. In addition, branch offices owned or leased
for all of the operating businesses referenced above as well as the space for
some smaller operations total approximately 1.0 million square feet. As shown
in the notes to consolidated financial statements (see note 7 to the
consolidated financial statements on page 51), the rental expense on operating
leases for office space and equipment for continuing operations totaled $51.4
million for 1994 of which $45.4 million was for office space. This discussion
regarding properties does not include information on investment properties.
Item 3. Legal Proceedings
LNC and its subsidiaries are involved in various pending or threatened legal
proceedings arising from the conduct of their business. In some instances,
these proceedings include claims for punitive damages and similar types of
relief in unspecified or substantial amounts, in addition to amounts for
alleged contractual liability or requests for equitable relief. After
consultation with 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 statements of LNC.
7
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1994, no matters were submitted to security
holders for a vote.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Stock Market and Dividend Information
Common Stock Data: (per share) 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
1994 Data:
High -------------------------------- $44.375 $43.875 $43.750 $39.250
Low --------------------------------- 38.375 36.750 35.500 34.625
Dividend declared ------------------- $.41 $.41 $.41 $.43
1993 Data:
High -------------------------------- $40.625 $41.813 $47.875 $48.250
Low --------------------------------- 34.688 37.000 37.125 41.000
Dividend declared ------------------- $.38 $.38 $.38 $.41
Notes:
1. At December 31, 1994, the number of shareholders of record of LNC's
Common Stock was 13,730.
2. The payment of dividends to shareholders is subject to the restrictions
described in notes 5, Supplemental Financial Data, and 7, Restrictions,
Commitments and Contingencies to the consolidated financial statements (see
pages 45 and 50) and is discussed in the Management's Discussion and Analysis
of Financial Condition (see page 23).
Exchanges: New York, Chicago, Pacific, London and Tokyo.
Stock Exchange Symbol: LNC
Dividend Guideline:
The dividend on LNC's Common Stock is determined each quarter by the
Corporation's Board of Directors. The Board takes into consideration the
financial condition of the Corporation, including current and expected
earnings, projected cash flows and anticipated financing needs. The Board
also considers the ability to maintain the dividend through bad times as well
as good so that the dividend would need to be reduced only under unusual
circumstances. One guideline that the Board has found useful in recent years
is to consider a dividend approximately equal to five percent of the book
value per share with such book value computed excluding the impact of marking
its securities available-for-sale to fair value.
8
Item 6. Selected Financial Data
(Millions of dollars, except per share data)
Year Ended December 31 1994 1993 1992 1991 1990
Total revenue ------------------ 6,984.4 8,289.8 8,034.1 9,169.0 8,489.5
Income before cumulative effect
of accounting change* --------- 349.9 415.3 359.2 201.9 176.6
Net income* -------------------- 349.9 318.9 359.2 201.9 176.6
Income before cumulative effect
of accounting change per share*- $3.37 $4.06 $3.86 $2.23 $1.97
Net income per share* ----------- $3.37 $3.12 $3.86 $2.23 $1.97
Dividends per common share* ----- $1.66 $1.55 $1.475 $1.385 $1.315
December 31 1994 1993 1992 1991 1990
Assets* ------------------------ 49,330.1 48,380.4 39,547.3 34,013.1 27,597.3
Long-term debt ----------------- 419.6 335.1 423.0 252.6 378.5
Shareholders' equity* ---------- 3,042.1 4,072.3 2,826.9 2,655.8 2,279.5
Market value of Common Stock* -- $35.00 $43.50 $37.00 $27.37 $21.50
*Factors affecting the comparability of income before cumulative effect of
accounting change and net income for the 1990-1994 period are shown below
(see "Supplemental Data"). Assets and shareholders' equity as of December
31, 1994 and 1993 include the effect of carrying securities available-for-
sale at their fair values (see Consolidated Statements of Shareholders'
Equity on page 34). Per share amounts were affected by the issuance in July
1990, May 1991 and February 1993 of 2,201,443 shares of Series E Preferred
Stock, 2,216,454 shares of Series F Preferred Stock and 9,200,000 shares of
Common Stock, respectively, and the retirement of 500,000 shares of Common
Stock in November of 1994.
Supplemental Data
Year Ended December 31 (in millions) 1994 1993 1992 1991 1990
Income from operations* -------------- $389.8 $343.5 $240.6 $177.7 $213.8
Realized gain (loss) on investments,
net of related amortization
and taxes --------------------------- (88.7) 170.3 118.6 113.3 (64.9)
Realized gain (loss) on sale of
subsidiaries, net of taxes ---------- 48.8 (98.5) -- (89.1) 27.7
Cumulative effect of accounting
change (postretirement benefits) ---- -- (96.4) -- -- --
Net Income ------------------------ $349.9 $318.9 $359.2 $201.9 $176.6
*Income from operations is defined as "Net Income" less gain (loss) on
investments, gain (loss) on sale of subsidiaries and cumulative effect of
accounting change, all net of taxes.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The pages to follow review LNC's results of operations and financial condi-
tion. Historical financial information is presented and analyzed. Where
appropriate, factors that may affect future financial performance are
identified and discussed.
On pages 9 through 19, the financial results of our business segments,
investments and other operations are presented and discussed. Within these
business segment discussions reference is made to "Income from Operations"
(see definition in item 6 above). Pages 20 through 29 discuss factors that
have affected specific elements of the consolidated financial statements as
well as information pertaining to LNC as a whole.
This "Management's Discussion and Analysis of Financial Condition and Results
of Operations" should be read in conjunction with the audited financial
statements, including the notes thereto, presented on pages 31 through 59.
9
Review of Operations: Property-Casualty
Year Ended December 31 (in millions) 1994 1993 1992 1991 1990
Financial Results by Source
Underwriting Loss:
Personal Insurance -------------- $(31.8) $(18.4) $(31.8) $(56.7) $(78.7)
Commercial Insurance ------------ (17.9) (63.3) (133.3) (102.1) (49.7)
Reinsurance --------------------- -- -- -- (12.8) (7.1)
Investment Income ----------------- 208.5 217.0 242.4 229.6 221.2
Other ----------------------------- -- (1.4) .3 1.2 4.6
Income from Operations ---------- 158.8 133.9 77.6 59.2 90.3
Realized Gain on Investments* ----- 12.8 91.8 -- -- --
Net Income ---------------------- $171.6 $225.7 $ 77.6 $ 59.2 $ 90.3
Catastrophe Losses $71.9 $ 58.3 $106.9 $ 61.8 $ 70.6
Combined Loss and Expense Ratios**
Personal Insurance --------------- 107.8% 103.0% 105.5% 111.8% 116.3%
Commercial Insurance ------------- 104.4% 110.3% 116.5% 111.0% 105.1%
Reinsurance ---------------------- -- -- -- 124.3% 114.8%
Consolidated Combined Ratio ------ 105.7% 107.5% 112.7% 111.9% 109.2%
Consolidated Combined Ratio
Excluding Catastrophe Losses --- 101.5% 104.3% 107.6% 109.1% 106.1%
*Prior to 1993, all realized gain (loss) on investments was included in
Other Operations (see note 9 to the consolidated financial statements on
page 57).
**The combined loss and expense ratio is the ratio of losses and loss expenses
to earned premiums plus the ratio of underwriting expense to premiums
written.
In 1994, LNC's Property-Casualty segment, which consists primarily of American
States Insurance Company ("American States"), reported its highest annual
earnings since 1988. Income from operations grew by 19% to $158.8 million.
With 1994 the second worst year on record for catastrophe losses, these
earnings results are exceptional. LNC's losses from the January, 1994,
Northridge, California earthquake were $28.5 million, before taxes.
The combined loss and expense ratio decreased nearly 2 points in 1994 to
105.7% from 107.5%, reflecting improvement in commercial lines underwriting
results. Excluding catastrophes, the combined loss and expense ratio
decreased nearly 3 points.
The improvement, which is counter to the property-casualty industry, is most
notable in commercial lines which achieved a $45.4 million improvement in
underwriting income resulting in an after-tax underwriting loss of only $17.9
million. This is the best underwriting performance for commercial lines in
six years. Personal lines had a $31.8 million underwriting loss,
significantly affected by the Northridge earthquake.
Net investment income contributed $208.5 million to the property-casualty
operating earnings, a slight decline from 1993.
Profit Improvement Program
The level of earnings achieved in 1994 can be directly attributed to the
profit improvement program American States embarked upon beginning in the
second half of 1991. At that time, the company took steps counter to the
general industry and introduced an aggressive program focused on account
selection, risk evaluation and the establishment of appropriate premiums.
This included an emphasis on maintaining and, when possible, accumulating
business in those product lines and regions which have historically provided
better than average returns. At the same time, American States de-emphasized
product lines and regions with less profitable experience.
The cost of following this strategy has been a significant reduction in
written premiums, particularly in commercial lines. For 1994, total net
written premiums for the segment declined 29% from 1990 levels and 6% from
1993. This decline in premium, accompanied by an even greater decline in risk
exposure, is directly responsible for the increased earnings American States
has contributed to LNC over the last three years.
10
Personal Lines
The Personal Lines improvement American States gained in 1993 was masked in
1994 by the level of weather related losses and catastrophes, principally the
Northridge earthquake. More than 90% of American States' losses from the
earthquake were in personal lines. While the disaster occurred in January
1994, losses continued to mount during the year as further investigation of
claim sites revealed significant structural damage that was not apparent on
earlier surveys.
For the property-casualty segment, the Personal Lines combined ratio increased
to 107.8% from 103.0%, but excluding catastrophes it was only 1.6 points worse
than in 1993. Personal Lines represents approximately 40% of total net
written premiums, with preferred private passenger automobile and homeowners
representing more than 82% of the personal lines business.
The private passenger automobile market has improved industry-wide in the last
two years, inviting competition to the marketplace. American States will
continue to write its new business in the preferred sector but anticipates a
leveling off of profitability as pricing becomes more competitive.
Homeowners continues to be a significantly underpriced line of business for
American States and the property-casualty industry. American States is now in
its third year of a program to address the profitability issues in the
homeowners line by focusing on the preferred sector, tightening underwriting
and evaluating each homeowners policy to ensure the coverage purchased is
appropriate for the property value.
Commercial Lines
Commercial Lines represents 60% of the property-casualty segment's total net
written premiums. Typical commercial lines business is often described as
"main street", which refers to the type of small and mid-sized commercial
accounts which line the main street of small towns. Most of this business is
actually found in suburban and more urban settings, but it does exhibit the
low hazard characteristics of a more rural orientation.
The combined loss and expense ratio in Commercial Lines improved nearly 6
points to 104.4%. This improvement reflects the success of the pricing and
underwriting actions taken in the last several years. On a product line
basis, workers' compensation and commercial automobile continue to recover
while commercial multi-peril remains profitable.
Distribution Network
American States' structure of 20 divisional offices is designed specifically
to maximize customer service and enhance efficiency across the United States.
Each office is managed by people with market knowledge specific to their
region, familiarity with the local sales force and insight into their states'
regulatory issues. These offices maintain general oversight for
underwriting, agency contracting, marketing and claims settlement within their
regions. This wide-reaching system allows American States to sustain
relationships with approximately 5,000 independent local agencies. American
States continues working toward 100% electronic interface with the agencies.
It is currently introducing a new customer file and a new account billing
system that will generate a single customer statement for all American States'
policies.
Management
American States has offered an enhanced retirement option to 22 executives.
These individuals may have elected to participate before the option expired on
March 1, 1995. We expect at least half of those eligible will take advantage
of the option and retire. The president and executive vice president of
American States are not eligible for this plan. American States has
identified highly qualified internal successors for any of these positions
that are vacated due to this program. As a result of this plan, American
States expects to eliminate some positions and to accelerate the development
of some high potential executives. No adverse business consequences are
expected from these management changes.
11
Outlook
The steps American States has taken have significantly improved its results
compared with the property-casualty industry. Its profit improvement program
is largely completed; the culmination of which is to emphasize growth in those
product lines and regions which promise the best long-term returns. We
anticipate that the decline in written premium will reverse and expect a
small increase for 1995. This growth would be consistent with our outlook for
the industry in those markets which we serve and are now emphasizing. Absent
catastrophes and unusual weather-related losses, 1995 earnings are expected to
continue to increase. Substantial growth in premium volume and significant
improvement in profits beyond 1995 will require improvement in market
conditions.
Review of Operations: Life Insurance and Annuities
Year Ended December 31 (in millions) 1994 1993 1992 1991 1990
Financial Results by Source
Lincoln Life/First Penn - Annuities - $120.0 $ 96.5 $ 73.9 $ 45.5 $ 39.4
Lincoln Life - Pensions ------------- 22.4 30.6 15.5 12.8 15.8
Lincoln Life/First Penn - Insurance - 34.2 37.8 46.8 31.5 25.6
Lincoln Life - Disability Income ---- (14.9) 3.5 (19.6) (1.6) 3.8
American States Life ---------------- 12.4 12.1 11.1 10.2 10.6
Lincoln National (UK) --------------- 17.2 11.8 9.2 14.3 13.3
Security-Connecticut Life ----------- -- 16.6 21.4 16.7 7.9
Other ------------------------------- (5.5) (33.6) (7.4) (11.4) (6.9)
Income from Operations* ----------- 185.8 175.3 150.9 118.0 109.5
Realized Gain (Loss) on Investments** (91.7) 59.3 -- -- --
Net Income* ----------------------- $ 94.1 $234.6 $150.9 $118.0 $109.5
December 31 (in billions) 1994 1993 1992 1991 1990
Account Values:
Lincoln Life/First Penn - Annuities -$23.068 $20.233 $16.120 $12.362 $ 8.576
Lincoln Life - Pensions ------------- 7.323 6.832 6.192 5.455 4.897
Lincoln Life/First Penn - Universal
and Variable Life Insurance ------- 2.348 2.178 1.942 1.757 1.546
American States Life ---------------- .198 .174 .153 .133 .112
Total U.S. Account Values --------- 32.937 29.417 24.407 19.707 15.131
Lincoln National (UK) - Unit-linked-- 1.320 1.235 .652 .669 .588
Total Account Values --------------$34.257 $30.652 $25.059 $20.376 $15.719
*Income from operations and net income of the annuities and pension sub-
segments for 1993 include the impact of a change in estimate of net
investment income (see note 2 to the consolidated financial statement on
page 40).
**Prior to 1993, all realized gain (loss) on investments was included in
Other Operations (see note 9 to the consolidated financial statements on
page 57).
The Life Insurance and Annuities segment reported its fifth consecutive year
of record earnings in 1994. Income from operations increased 6% to $185.8
million, compared with earnings of $175.3 million in 1993. This increase was
fueled by a 14% increase in annuity account values and a 24% increase in
annuity earnings.
Profile
The Life Insurance and Annuities segment includes the direct operations of
Lincoln National Life ("Lincoln Life"), First Penn-Pacific ("First Penn"),
Lincoln National (UK) PLC and American States Life.
The Lincoln National Life Insurance Co. is the 12th largest life insurer in
the United States as measured by assets (Best's Review, Life-Health Edition,
August 1994). Lincoln Life offers a broad range of asset accumulation and
12
income protection products to meet the lifetime needs of its customers. These
products include: fixed and variable annuities, universal and variable
universal life, disability income, long-term care insurance, 401(k) plans and
Guaranteed Interest Contracts. Lincoln Financial Group is a network of 37
regional career agency offices that sells Lincoln Life products through more
than 1,800 career agents. It markets to individual consumers, business
owners, and employees of hospital and educational institutions across 49
states and Guam. Lincoln Life's distribution system also includes 17,000
insurance brokers and more than 48,000 stockbrokers and financial planners.
First Penn is a mid-sized insurance company with specialized skills in
customizing interest sensitive products for its financial services sales
channels. First Penn complements Lincoln Life operations by serving niche
markets and non-traditional distribution channels. This operation sells
universal life, universal life with long-term care riders and fixed annuities.
Its products are marketed to individuals through banks, S&Ls, broker/dealers,
stockbrokers and financial planners.
American States Life sells universal and term life insurance and annuity
products through the American States network of 5,000 independent property-
casualty agencies.
Lincoln National (UK), based in the United Kingdom, is the 15th largest unit-
linked life insurer in the U.K. by 1993 premiums of those companies writing
predominately life and pension business (Money Management New Business Survey,
June 1994). Unit-linked business is comparable to variable life policies in
the United States. Through a network of approximately 1,500 sales
representatives and independent financial advisors, Lincoln National (UK)
sells a variety of life insurance, investment and income protection, and
retirement planning products to individuals across the United Kingdom.
Annuities
Earnings from the combined Lincoln Life and First Penn annuities operations
grew 24% to a record $120 million in 1994. This earnings growth flows from a
14% increase in annuity account values, which reached $23 billion. Annuity
deposits were $3.6 billion, a 3% increase over the prior year. Lincoln Life
was the nation's leading writer of individual annuities in the United States
in 1993 (Best's Review, Life-Health Edition, October 1994).
Lincoln Life's career agents produced 45% of the new annuity deposits in 1994.
Stockbrokers and financial planners, generating 42% of new annuity deposits,
continue to be the dominant distributors of the variable annuity product. In
1994, bank distribution produced 13% of the segment's new annuity deposits.
Distribution through banks and other financial institutions represents a
significant opportunity for growth. We view the January, 1995, U.S. Supreme
Court's decision confirming the authority of banks to market annuities as an
opportunity for future growth of this market.
Pensions
Income from operations in Lincoln Life's Pension business decreased to $22.4
million from $30.6 million in 1993. Pension earnings were up 18% after
excluding the benefit from adjustment of discount amortization on mortgage-
backed securities in 1993 of $9.4 million and a $2.6 million charge in 1994.
Strong sales from Lincoln Life's 401(k) product drove pension account values
to $7.3 billion, a 7% increase over 1993.
Life Insurance
Earnings from the life insurance operations of Lincoln Life and First Penn
were $34.2 million, a slight decrease from 1993 earnings which had also been
positively affected by the mortgage-backed securities adjustment. The sale of
stand alone insurance protection products has been supplemented with products
offering protection with a variable investment component. Lincoln Life and
First Penn's combined universal life and variable universal life account
values increased 8% in 1994 to $2.3 billion. Variable universal life
represents an increasing portion of new sales because it is attractive to
individuals who seek higher returns than those generally available from fixed
income investing.
13
Disability Income
In 1992, following a period of deteriorating disability income claim
experience, management took action to improve experience in this business.
This included pricing increases on new business issued, the establishment of
more restrictive underwriting rules, and an enhanced program to speed the
closure of claims on all business. Profitability returned to this business in
1993.
In 1994, however, the disability income business experienced additional losses
of $14.9 million. As a result of many factors, including the losses
experienced on this business, significant changes were made during the fourth
quarter of 1994 in the disability income product that Lincoln Life will be
selling in the future.
By the end of 1995, Lincoln Life expects most new business will be issued on a
guaranteed renewable basis. Lincoln Life will discontinue selling the non-
cancelable product as the new product is approved for sale by each state. In
addition, several other changes were implemented including a new lower
maximum coverage limit, the elimination of lifetime benefits, the elimination
of the "Own Occupation" definition of disability beyond two years of benefits,
and tighter underwriting.
The existing disability income business is a very long-term business with
coverage extending 30 years or more. The future results of this business are
not currently susceptible to estimation due to the variability of past
experience. The product changes discussed in the previous paragraph will
allow us to go forward with a profitable product that has appeal to a broader
market and is less subject to the degree of variability of results inherent in
the products we have previously sold. Management will continue to closely
track the existing disability income business and take reserve and other
action as deemed necessary.
For more in-depth discussion of the disability income business, see the
discussion in the Life-Health Reinsurance segment on page 16 and note 7 to the
consolidated financial statements on page 51.
American States Life
American States Life reported earnings of $12.4 million in 1994, a slight
increase from 1993 earnings. Account values were up about 14% for the third
year in a row reaching $198 million at December 31, 1994.
Lincoln National (UK)
Income from operations for Lincoln National (UK) grew 46% to $17.2 million in
1994. These strong results reflect a full year of earnings from the Citibank
Life acquisition and a smaller acquisition completed in 1993. In fact, these
earnings would have been $9 million higher except for a provision made for
liabilities established to cover pension transfers and opt-outs. This
provision pertains to pension policies sold following the implementation of
the Social Security Act of 1986 under which it was made unlawful for an
employer in the U.K. to require employees to join their employer sponsored
plans. British insurance companies are now being required to audit these
pension plans sold to individuals and, if it appears that a replacement was
made on the advise of the insurance company which was not in the participant's
best interest, companies must make the participant whole.
In early 1995, Lincoln National (UK) completed the acquisition of Liberty Life
Assurance Company Limited, yet another step in LNC's strategy to build its
position in the U.K. life insurance and pensions market through acquisition.
As a result of the transaction, account values have increased to more than
$1.8 billion and the sales force has expanded to approximately 1,500
representatives.
14
Outlook
Lincoln Life has adopted a new vision statement: To be the best customer-
focused service-led company in the Americas. A number of efforts are underway
to achieve this vision. Every process is being analyzed for its value-added
to the customer relationship. The Lincoln Life of the future will be able to
meet customers changing needs efficiently and at less cost.
In addition, two significant actions were taken during 1994 to bring greater
focus to the identity of Lincoln Life as a brand name. First, the company
began a process to gather its career agency offices under the common banner,
Lincoln Financial Group. Second, it introduced its first national advertising
campaign in more than 15 years to build name recognition and awareness.
These actions support Lincoln Life's renewed efforts to grow its life
insurance operations through increased sales from its career agency network
and its ongoing drive to be a primary provider of annuities and asset
accumulation products.
Continued sales growth is expected in variable annuity, variable universal
life and 401(k) products. Increased sales of fixed annuities distributed
through banks and other financial institutions is also expected. The Lincoln
National (UK) operation should continue to grow through acquisitions as that
market continues to consolidate.
Review of Operations: Life-Health Reinsurance
Year Ended December 31 (in millions) 1994 1993 1992 1991 1990
Financial Results by Source
Individual and Group Markets ------- $50.2 $44.2 $44.4 $22.7 $27.0
International Markets -------------- 12.8 9.9 4.5 5.6 4.1
Financial Reinsurance -------------- 15.5 20.5 16.3 14.4 20.6
Disability Income ------------------ (10.0) (54.0) (7.3) (8.2) 3.9
Other ------------------------------ (1.9) (1.7) .4 (1.5) (3.4)
Income from Operations* ---------- 66.6 18.9 58.3 33.0 52.2
Realized Gain (Loss) on Investments** .5 (1.6) -- -- --
Net Income ----------------------- $67.1 $17.3 $58.3 $33.0 $52.2
Sales and In-Force
Individual Life Sales (in billions) $19.9 $17.3 $14.0 $17.0 $19.1
December 31 (in billions) 1994 1993 1992 1991 1990
Life Insurance In-Force ------------ $125.6 $118.0 $113.6 $102.2 $101.4
*Income from operations and net income for 1993 include the impact of a
change in estimate of the reserve level needed for LNC's reinsurance
disability income business (see note 2 to the consolidated financial
statements on page 40).
**Prior to 1993, all realized gain (loss) on investments was included in
Other Operations (see note 9 to the consolidated financial statements on
page 57).
In 1994, the Lincoln National Reinsurance Cos. ("LNRC") reported record income
from operations of $66.6 million. Favorable mortality and morbidity in the
Individual and Group Markets and growth in the International line contributed
$8.9 million of the $47.7 million increase over 1993 earnings. A year ago,
favorable mortality and morbidity were also present, but were offset by a
reserve strengthening for disability income. Life reinsurance in-force grew
to $125.6 billion, a 6% increase over the prior year representing growth in
both individual and group life.
LNRC Profile
LNRC is currently the leading life-health reinsurer worldwide, based on net
premium income (Swiss Re, Economic Studies, September, 1994). It has built
unique competencies in life/health insurance risk management, knowledge
management and customer focus which enable it to compete on a basis other
than price alone. LNRC manages a portfolio of diversified risks, applies its
competencies to understand the risk management needs of its customers and
responds with unique solutions. LNRC's solutions focus on providing
assistance to clients in managing their risks by risk transfer, capital
management, and the delivery of knowledge and alliance partnerships, all on a
foundation of long-term business relationships.
15
LNRC provides a full range of risk management solutions to insurance companies
in the U.S. and select international markets, health maintenance
organizations, self-funded employer groups with risk management needs, and
other primary risk-accepting organizations. Account executives and sales
specialists distribute LNRC products exclusively with a consultative client
approach. LNRC also accepts business from reinsurance intermediaries in
select specialty markets.
Individual and Group Markets
Individual and Group Markets contributed especially strong operating results
of $50.2 million in 1994. This is the third consecutive year of favorable
mortality and morbidity in these markets. Individual and Group Markets
includes all LNRC's business written in the United States except for Financial
Reinsurance and Disability Income Reinsurance.
Despite an increasingly competitive marketplace, individual life sales volume,
as measured by face amount of new business, grew by 15% to $19.9 billion and
group markets annualized premium increased 28% in 1994.
LNRC continues to differentiate itself in this marketplace by providing
superior customer service, particularly in the area of information flow. For
example, 95% of the cases LNRC underwrote in 1994 were processed on LNRC's
patented Life Underwriting System ("LUS"), resulting in a faster, more
efficient application process for customers. During 1994, LNRC licensed LUS
to eight more life insurance companies, bringing the number who have LUS
licenses to 44.
International Markets
The international markets have been an area of recent growth for LNRC. 1994
operating results increased 29% to $12.8 million. LNRC pursues a niche
marketing strategy globally, leveraging strengths across LNRC and developing
partnerships and alliances as new opportunities are identified. In 1994,
LNRC expanded its personal accident business in the U.K., grew its business
produced through a direct response marketing partnership, and participated in
the emerging pension market in Argentina.
Financial Reinsurance
Financial Reinsurance continues to contribute a significant level of earnings
to LNRC and generated $15.5 million in 1994. Regulatory pressures continue to
suppress demand for new business, but LNRC has persisted in adding new
products and programs. Annuity reinsurance is an area of opportunity where
LNRC is capitalizing on the growth of asset accumulation products in the
direct marketplace.
Disability Income
Within the past several years, the reinsurance industry's profitability in the
disability income business has been adversely affected by several external
factors. These include consolidation among the direct disability income
writers, lower portfolio yields, and the white-collar recession's effect on
the professional market. The key competitive factors which led to problems in
the marketplace became large amounts of monthly income replacement and liberal
benefit definitions for non-cancelable policies which do not provide any means
to correct underpricing.
In 1990, LNRC began to perceive problems developing in the market. LNRC took
action to apply its risk management skills to the aspects of the business it
could positively affect. This included increasing rates and tightening
underwriting standards. One consequence of these actions was a reduction in
new disability income business of 75% since 1990.
Because of the inability to correct pricing on existing in-force business, and
in order to manage its exposure, LNRC expanded its aggressive program to help
client companies with claims management and claims closure.
In the fourth quarter of 1993, management recognized that, despite these
efforts, disability income experience was not improving. At that time, an
in-depth analysis was undertaken of the disability income block of business
within LNRC. Based on this analysis, disability income reserves were
increased $50.5 million, pre-tax.
16
The assumptions underlying these reserves were based on a review of both
long-term historical experience and more recent experience. Termination,
lapse and interest assumptions are consistent with recent experience. The
incidence assumptions are based on a combination of historical and recent
experience. Historical incidence experience is considerably better than
recent experience. If incidence levels do not improve or if claim termination
rates deteriorate, substantial reserve additions may be required in the
future.
A review of experience in 1994 indicated that incidence experience was less
favorable than that assumed in the 1993 reserve strengthening. While the
incidence rates began to stabilize, they did not improve. The fact that
actual incidence experience in 1994 was worse than that assumed in 1993
resulted in an additional loss of $10.0 million reported in 1994.
In the second half of 1994, there were a number of announcements from major
writers of disability income regarding their intentions to significantly
change the kind of products they sell. This adds a significant additional
uncertainty since the policies currently reinsured will be much more difficult
to replace, creating an expectation of greater policy persistency. Higher
persistency in this line can produce improved results under certain
circumstances. However, the current conditions have no clear precedent and it
is far too early to identify any changes in policy persistency trends or
results therefrom.
Small changes in assumptions have significant impacts on expected results of
this business and thus reserves carried on it. This is a very long-term
business, 30 years or more, and we will not know the outcome for many years.
We will continue to monitor the experience of this block of business and take
such action as may be necessary.
Nearly two-thirds of the 1994 disability income premium assumed by LNRC came
from one major writer of disability income insurance. That company is
currently under formal regulatory supervision by the insurance department of
its state of domicile. There is a reasonable possibility that the business
will generate additional future losses but it is not possible to estimate the
amount of those losses at this time.
Outlook
In 1995, LNRC will continue to provide creative solutions to customers'
problems and build long-term relationships. Fee based income is expected to
be enhanced through three initiatives: 1) introduction of a life and
disability income claims management expert system; 2) emphasis on asset
management services to reinsurance customers; and, 3) expansion of
underwriting management fee income in Group Markets and Financial Reinsurance.
Risk based income is expected to grow through expansion of existing customer
relationships and greater penetration in selected foreign markets.
LNRC is an organization of problem solvers for entities that assume primary
life and health insurance risk. As such, it seeks to apply its competencies
of risk management, knowledge management and customer focus to its customers'
problems. LNRC has challenged its organization to broadly and creatively
apply these skills across life-health reinsurance business lines in order to
expand its range of products and services. LNRC expects its strategy of
competing in a broad range of markets with expertise and customer focus will
continue to be a formula for success in 1995 and beyond.
17
Review of Operations: Investment Management
A general discussion of investment results is included within the Review of
Consolidated Operations and Financial Condition on pages 20 to 27. Investment
management is expected to become LNC's fourth business segment during 1995.
Profile
The investment management operations of LNC are represented by Lincoln
National Investment Management Company, Lynch & Mayer and Vantage Global
Advisors. The investment professionals within these organizations provide a
variety of asset management services to LNC and its affiliates as well as to
an increasing number of institutional and retail customers. Our external
clients include other insurance companies, pension plans, college endowment
funds, individuals, and trusts.
Active Management for Total Return
Many insurance companies invest on a buy-and-hold basis and seek to maximize
current income by selecting assets with high nominal yields. We actively
manage our clients' assets and seek to optimize total return on those assets
in relation to the underlying liabilities. We use asset-liability management
techniques to achieve optimum performance of assets in relation to liabilities
while limiting risk.
Investment Markets
In 1994, the financial markets were affected by the U.S. Federal Reserve's
series of interest rate increases, which were largely in response to the Fed's
inflation concerns. Uncertainty about the direction of U.S. interest rates
and inflation dominated the financial markets while the stock market began to
show signs of improved performance in the last six months of 1994. However,
total return in 1994 was markedly lower than in prior years. In 1994, LNC's
fixed maturity securities portfolio produced a total return of -2.85% compared
with the -3.51% return produced by the Lehman Brothers, Government/Corporate
Bond Index, a recognized industry measure. The total return on LNC's entire
portfolio of invested assets was -1.43%.
Tax Loss Program
In 1994, LNC reported $88.7 million of net realized investment losses. An
active total return strategy carries with it a degree of turnover in
investment portfolios as new securities are identified which can better meet
portfolio needs. Significant interest rate changes impact investment
decisions and reported investment results. We would generally expect the
reported results to include more realized gains during periods of falling
interest rates and more realized losses during periods of rising interest
rates. Overlaying our 1994 investment strategy was the fact that by realizing
losses we were able to recover capital gains taxes which had been paid over
the past three years.
Commercial Mortgages and Real Estate
During 1994, LNC completed two bulk sales of performing and non-performing
mortgage loans and real estate holdings. The selling price for these holdings
was $30.6 million in excess of the carrying value. At December 31, 1994,
mortgage loans with more than one payment delinquent were only 2.2% of total
mortgage loans, a notable improvement from the 7.0% delinquency rate at the
end of 1993. Commercial mortgage loans represented 11% of the general
investment portfolio at year end 1994.
Mutual Funds
In 1994, LNC introduced Lincoln Advisor Fund, Inc., a new retail mutual fund
with nine investment portfolio choices available to fundholders. The
portfolios have five equity and four fixed income portfolio options, managed
by specialized investment managers and have flexibility in fee arrangements to
meet customer needs.
18
Acquisition of Delaware Management Holdings, Inc.
In late 1994, LNC announced an agreement to acquire Delaware Management
Holdings, Inc., ("Delaware") one of the nation's premier investment advisers.
Delaware is a "value" investor that concentrates on equities with low
price/earnings ratios and high dividends. LNC's other investment managers use
differing investment strategies. Lincoln National Investment Management
Company is a fixed income investment manager. Lynch & Mayer is predominately
a "growth" equity investor while Vantage Global Advisors selects equities on
quantitative models.
The addition of Delaware will allow us to offer a wider range of investment
skills and strategies to better meet our customers' needs. Delaware also
brings us an international investment capability through their London office,
which currently manages over $2 billion of global equities and debt.
Delaware will operate autonomously from its offices in Philadelphia and
London.
Outlook
We anticipate the acquisition of Delaware will be completed in the second
quarter of 1995, following required approvals. After completion of the
transaction, we plan to report our investment management operations as a
fourth business segment. This new segment will include the results of
Delaware, Lynch & Mayer, Vantage Global Advisors and Lincoln National
Investment Management Co.
We view the investment management business as one with an attractive potential
rate of growth which complements our present businesses and diversifies LNC's
earnings sources. We will explore opportunities to offer Delaware's products
through our distribution systems. LNC will also continue to develop its
international presence through Delaware's strong international asset
management capabilities.
Review of Operations: Employee Life-Health Benefits
Year Ended December 31 (in millions) 1994* 1993 1992 1991 1990
Financial Results by Source
Employers Health Insurance Company $14.1 $54.3 $40.8 $39.5 $34.2
Managed Health Care -------------- -- -- -- 4.0 19.0
Income from Operations --------- 14.1 54.3 40.8 43.5 53.2
Realized Gain on Investments ----- .3 1.0 -- -- --
Net Income --------------------- $14.4 $55.3 $40.8 $43.5 $53.2
*Results for 1994 include operations through the date of the sale of 71% of
its direct writer of employee life-health coverages (see note 11 to the
consolidated financial statements on page 59). Following the sale, the
earnings from the 29% ownership of this company were included in "Other
Operations" (see "Review of Other Operations" on page 19).
19
Review of Other Operations:
Year Ended December 31 (in millions) 1994 1993 1992 1991 1990
Financial Results by Source
Earnings from Unconsolidated Affiliate $ 14.8 $ -- $ -- $ -- $ --
Investment Management ---------------- 7.1 6.1 4.7 2.3 2.9
LNC Financing ------------------------ (31.7) (26.7) (33.8) (34.2) (37.2)
LNC Operations ----------------------- (21.8) (22.3) (18.2) (16.3) (19.5)
Other Corporate ---------------------- (3.9) 4.0 (3.1) 11.8 5.5
Corporate Equity Investments --------- -- -- (36.6) (39.6) (43.1)
Income (Loss) from Operations ------ (35.5) (38.9) (87.0) (76.0) (91.4)
Realized Gain(Loss) on Investments* -- (10.6) 19.8 118.6 113.3 (64.9)
Gain (Loss) on Sale of Subsidiaries -- 48.8 (98.5) -- (89.1) 27.7
Cumulative Effect of Accounting
Change (Postretirement Benefits) ---- -- (96.4) -- -- --
Net Income (Loss) ----------------- $ 2.7 $(214.0) $ 31.6 $(51.8)$(128.6)
*Prior to 1993, all realized gain (loss) on investments was included in
Other Operations (see note 9 to consolidated financial statements on page
57).
The income (loss) from operations shown above includes the earnings from LNC's
investment in an unconsolidated affiliate engaged in the employee life-health
benefits business, earnings from LNC's investment management companies,
certain other operations that are not directly related to the business
segments and unallocated corporate revenues and expenses (i.e., corporate
investment income, interest expense on short-term and long-term borrowings,
and corporate overhead expenses).
The Investment Management operations reported above include Lincoln National
Investment Management Company, Lynch & Mayer, Inc. and Vantage Global
Advisors, Inc. These investment advisors provide investment advisory services
and asset management services to LNC's annuity, pension and insurance
customers as well as for LNC's corporate portfolios. In addition to managing
these accounts, their services are provided to outside, institutional clients
and high net worth individuals.
Corporate interest expense included within the LNC financing line above was
more for 1994 than 1993 as the result of increases in short-term interest
rates and an addition to long-term debt (see liquidity and cash flow
discussion on page 28).
Net income shown above for "Other Operations" includes the items described
above under income from operations plus the cumulative effect of the 1993
accounting change for the consolidated group of companies related to
postretirement benefits, the gain (loss) on sale of subsidiaries (see note 11
to the consolidated financial statements on page 59) and certain realized gain
(loss) on sale of investments.
20
REVIEW OF CONSOLIDATED OPERATIONS AND FINANCIAL CONDITION
Summary Information Increase
(Decrease)
Year Ended December 31 (in millions) 1994 1993 1992 1994 1993
Insurance premiums:
Property-casualty --------------- $1,710.6 $1,841.4 $2,083.0 (7%) (12%)
Health -------------------------- 1,085.7 1,927.0 1,857.7 (44%) 4%
Life and annuity ---------------- 1,647.9 1,588.4 1,358.2 4% 17%
Insurance fees ------------------ 449.6 470.4 409.5 (4%) 15%
Net investment income ----------- 2,011.3 2,146.5 1,987.3 (6%) 8%
Equity in earnings of
unconsolidated affiliates ------ 14.7 -- --
Realized gain (loss)
on investments ----------------- (130.8) 268.4 176.9 52%
Gain (Loss) on sale
of subsidiaries ---------------- 48.8 (98.5) --
Other revenue ------------------- 146.6 146.1 161.5 (10%)
Insurance benefits and expenses:
Property-casualty --------------- 1,262.5 1,406.8 1,717.6 (10%) (18%)
Health -------------------------- 848.9 1,478.6 1,428.6 (43%) 4%
Life and annuity ---------------- 2,737.8 2,742.9 2,554.2 7%
Expenses:
Operating expenses -------------- 1,709.3 2,029.3 1,855.2 (16%) 9%
Interest ------------------------ 49.5 44.3 53.8 12% (18%)
Federal income taxes ------------ 26.4 172.5 65.5
REVIEW OF CONSOLIDATED OPERATIONS
As indicated in the "Notes to Consolidated Financial Statements" (see note 11
on page 59), LNC completed the sale of a life insurance subsidiary and the
sale of 71% of its direct writer of employee life-health coverages in 1994.
As noted in the following "Review of Consolidated Operations" and "Review of
Consolidated Financial Condition" these sales have affected the comparability
of select line items within the Consolidated Statements of Income and
Consolidated Balance sheets.
Insurance Premiums
Property-casualty premiums decreased 7% in 1994 and 12% in 1993. The
decreases in 1994 and 1993 are primarily the result of reevaluating
underwriting actions, focusing on account selection, risk evaluation and the
establishment of appropriate premiums. The volume of premium that this
segment will produce in 1995 is dependent upon whether the pricing within the
property-casualty insurance market place allows price increases that are
necessary to maintain and improve profitability.
Excluding the impact of the subsidiary sold in 1994 (see note 11 to the
consolidated financial statements on page 59), LNC's health premiums,
increased $83.4 million or 12% in 1994 as the result of increased volumes of
business in the Life-Health Reinsurance segment. Health premiums increased
$69.3 million or 4% in 1993 as the result of increased volumes of business and
rate increases implemented in 1993.
Excluding the impact of the subsidiaries sold in 1994 (see note 11 to the
consolidated financial statements on page 59), life and annuity premiums
increased 8% in 1994. This increase is the result of an increase in the
volume of transactions by the Life Insurance and Annuity segment. Life and
annuity premiums increased 17% in 1993. This increase resulted from increases
in the volume of transactions by the Life Insurance and Annuities and Life-
Health Reinsurance segments. Barring the passage of unfavorable tax
legislation that would eliminate the tax-advantages for some of LNC's life and
annuity products, LNC expects life and annuity premium growth in 1995 similar
to the growth for 1994.
21
Insurance Fees
Excluding the impact of the life subsidiary sold in 1994 (see note 11 to the
consolidated financial statements on page 59), insurance fees from the sale of
universal life, other interest-sensitive life insurance contracts and variable
life insurance contracts increased $83.4 million or 22% in 1994. These fees
increased $60.9 million or 15% in 1993. The growth in fees from this business
is expected to continue in 1995.
Net Investment Income
Net investment income decreased $135.2 million or 6% in 1994. This is the net
result of a 4% increase in mean invested assets (on a cost basis) less the
impact of the overall yield on investments dropping from 7.93% to 7.14%. The
increase in mean invested assets is the net result of increased volumes of
business in the Life Insurance and Annuity segment being partially offset by
decreases due to the sale of subsidiaries (see note 11 to the consolidated
financial statements on page 59) and reduced volumes of business in the
Property-Casualty segment. Net investment income increased 8% in 1993 as the
result of a 12% increase in mean invested assets (on a cost basis) being
partially offset by a decrease in the yield on investments from 8.24% to
7.93%. Lower net investment income for 1993 in the Property-Casualty segment,
due to lower volumes of business, was more than offset by increases in the
other business segments.
Equity in Earnings of Unconsolidated Affiliates
This line was added to the statements of income in 1994 to report the
earnings from the remaining 29% ownership following LNC's sale of 71% of the
ownership of its primary writer of employee life-health benefit coverages (see
note 11 to the consolidated financial statements on page 59).
Net Realized Gain (Loss) on Investments
Net realized gain (loss) on investments in 1994 and 1993 was $(130.8) million
and $268.4 million, respectively. The gain (loss) in 1994 and 1993 was
$(88.7) million and $170.3 million, after taxes, respectively. These gains
and losses were the result of the sale of investments, write-downs and
provisions for losses. The losses in 1994 were the result of net realized
investment gains being more than offset by 1) realized investment losses and
2) writedowns of security investments and provisions for losses for mortgage
loans and real estate. The investment losses, primarily in the second and
third quarters, were the result of realizing investment losses to recover
capital gains taxes paid in prior years. The write-downs of fixed maturity
and equity securities were recorded when the securities were deemed to have
declines in value that were other than temporary. The fixed maturity
securities to which these write-downs apply were generally of investment grade
quality at the time of purchase but, with the exception of interest only
mortgage-backed securities, were classified as "below investment grade" at the
time of the write-downs. Provision for losses on 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. The
amount of these write-downs and provisions for losses is disclosed within the
notes to the accompanying financial statements (see note 3 to the consolidated
financial statements on page 43).
During 1994, LNC completed two bulk sales of performing and non-performing
mortgage loan and real estate holdings through a sealed bid process. The
selling price for these holdings was $30.6 million in excess of the carrying
value resulting in a gain on sale.
Gain (Loss) on Sale of Subsidiaries
In 1994, LNC sold 71% of its interest in its primary writer of employee life-
health benefits. In 1993, LNC recorded a provision for loss on the sale of a
life insurance subsidiary. See note 11 to the consolidated financial
statements on page 59 for additional information.
22
Other Revenue
Excluding the impact of the subsidiaries sold in 1994, other revenue increased
16% in 1994. This increase is the result of an increase from the Life
Insurance and Annuity segment. Other revenue decreased 10% in 1993 as a
result of a decrease in the Property-Casualty segment due to the sale of an
agency company that specialized in the sports and entertainment market.
Insurance Benefits and Expenses
Property-casualty benefits decreased by $144.3 million or 10% in 1994 compared
to 1993. This decrease is the net result of reduced volumes of insurance
being partially offset by an increase in catastrophe and storm losses.
Property-casualty benefits decreased by 18% in 1993 compared with 1992. This
decrease was the result of reduced volumes of insurance as indicated by the
reduction in insurance premiums and a decrease in weather-related claims.
Assuming an average catastrophe and storm loss year in 1995, the increase in
property-casualty benefits is expected to be lower than any increase in
property-casualty premiums.
Excluding the impact of the subsidiary sold in 1994 (see note 11 to the
consolidated financial statements on page 59), health benefits increased $65.3
million or 11% in 1994 compared with 1993. This increase was the result of
increased volumes of business in the Life-Health Reinsurance segment. Health
benefits increased 4% in 1993 compared to 1992. This increase was the result
of higher volumes of business and the impact of establishing higher reserve
levels for the Life-Health Reinsurance segment disability income business
being partially offset by moderating claims in the Employee Life-Health
Benefits segment.
Excluding the impact of the life subsidiary sold in 1994 (see note 11 to the
consolidated financial statement on page 59), life and annuity benefits and
settlement expenses increased $168.7 million or 7% in 1994. This increase was
the result of increased volumes of business in the Life Insurance and
Annuities segment. Life and Annuity benefits and settlement expenses
increased 7% in 1993 as the result of increased volumes in the Life Insurance
and Annuities and Life-Health Reinsurance segments. The increase in life and
annuity benefits expense in 1995 is expected to parallel the growth in life
and annuity premiums.
Expenses
Excluding the impact of the various subsidiaries sold, underwriting,
acquisition, insurance and other expenses decreased $35.4 million or 2% in
1994. This decrease was the net result of lower expenses in the Property-
Casualty segment and lower volume related expenses in the Life-Health
Reinsurance segment being partially offset by increases in the Life Insurance
and Annuity segment. In 1993, these expenses increased 9% compared to 1992.
This increase was the result of inflation, higher volumes of insurance and
higher costs for postretirement benefits. In 1995, LNC's segments will
continue to adjust staff levels as appropriate to match business volumes.
Interest expense increased $5.2 million or 12% in 1994 compared to 1993. This
increase was the net result of higher average debt outstanding and higher
interest rates on debt outstanding being partially offset by the reduction in
interest expense which resulted from the calling of the 8% notes (due in 1997)
in March 1994. Interest expense decreased $9.5 million or 18% in 1993
compared to 1992 as a result of decreases in the average debt outstanding.
The average debt was lower due to the use of the proceeds of the February 1993
Common Stock offering to pay down debt (see note 10 to the consolidated
financial statements on page 58). Interest expense is expected to increase in
1995 due to 1)the assumption of debt in connection with the acquisition of an
investment management company (see note 12 to the consolidated financial
statements on page 59 and additional MD&A discussion on page 28) and 2)the
expectation that average interest rates will be higher in 1994 than in 1995.
Federal Income Taxes
LNC's federal income taxes decreased $146.1 million in 1994 compared to 1993.
This decrease is primarily the result of lower pre-tax earnings in 1994 and
the lack of tax expense on the gain on sale of 71% of its direct writer of
employee life-health benefit coverages in 1994. An additional item affecting
this comparison is the fact that LNC did not receive a tax benefit from the
loss on sale of a life insurance subsidiary in 1993. The reduction in pre-tax
earnings is the result of the absence of earnings from subsidiaries sold (see
23
note 11 to the consolidated financial statements on page 59) and the
realization of losses on the sale of investments during 1994 versus the
realization of gains on investments in 1993. The tax benefits from the
realized losses result from the carryback of such losses to realized gains
recognized in prior years. Federal income taxes increased $107.0 million in
1993 compared to 1992. This increase is primarily the result of increased
pre-tax earnings and the lack of any tax benefit on the 1993 loss on sale of a
life insurance subsidiary. This increase was partially offset by an increase
in tax-exempt investment income. The increase in the prevailing Corporate
federal income tax rate from 34% to 35% during 1993 increased 1993 current
taxes by approximately $5 million. However, this increase was offset by a
one-time increase to LNC's deferred tax recoverable (see note 4 to the
consolidated financial statements on page 44).
Summary
Net income for 1994 was $349.9 million compared with $318.9 million in 1993.
Excluding realized gain (loss) on investments, gain (loss) on sale of
subsidiaries and the cumulative effect of implementing the postretirement
accounting change in 1993, all net of taxes, LNC earned $389.8 million for
1994 compared to $343.5 million in 1993. All the business segments
contributed to this increase. Net income for 1993 was $318.9 million compared
with $359.2 million in 1992. Excluding realized gain on investments, loss on
sale of subsidiary and the cumulative effect of the accounting change referred
to above, all net of tax, LNC earned $343.5 million for 1993 compared to
$240.6 million in 1992. All the business segments except for Life-Health
Reinsurance contributed to this increase.
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
Investments
The investment portfolio, excluding cash and invested cash, is comprised of
fixed maturity securities; equities; mortgage loans on real estate; real
estate, either wholly owned or joint ventures; and other long-term
investments. LNC purchases investments which have yield, duration and other
characteristics which take into account the liabilities of the products being
supported. The total investment portfolio decreased $2.8 billion in 1994.
The removal of the investments of the two subsidiaries sold (see note 11 to
the consolidated financial statements on page 59) accounted for $2.1 billion
of this decrease. The remainder of the decrease is the net result of
decreases in the fair value of securities available-for-sale being partially
offset by new purchases of investments from cash flow generated by the
business units.
LNC maintains a high-quality fixed maturity securities portfolio. As of
December 31, 1994, $10.3 billion or 48% of its fixed maturity securities
portfolio had ratings of AA or better and only $1.2 billion or 5.8% had
ratings below investment grade (BB or less) (see note 3 to the consolidated
financial statements on page 42). The below investment grade fixed maturity
securities represent only 4.6% LNC's total investment portfolio. The interest
rates available on these below investment grade securities are significantly
higher than are available on other corporate debt securities. Also, the risk
of loss due to default by the borrower is significantly greater with respect
to such below investment grade securities because these securities are
generally unsecured, often subordinated to other creditors of the issuer and
issued by companies that usually have high levels of indebtedness. LNC
attempts to minimize the risks associated with these below investment grade
securities by limiting the exposure to any one issuer and by closely
monitoring the credit worthiness of such issuers. For the year ended December
31, 1994, the aggregate cost of such investments purchased was $678.5 million.
Aggregate proceeds from such investments sold were $466.6 million, resulting
in a realized pre-tax loss at the time of sale of $2.1 million.
LNC's entire fixed maturity securities portfolio is classified as "available-
for-sale" and is carried at fair value. Equity securities available-for-sale
are also carried at fair value. Changes in fair values, net of related
deferred acquisition costs, amounts required to satisfy policyholder
commitments and taxes (to the extent deemed recoverable through capital loss
carrybacks), are charged or credited directly to shareholders' equity. Note 3
to the Consolidated Financial Statement (see page 41) shows the gross
unrealized gains and losses as of December 31, 1994.
24
LNC's fixed maturity securities available-for-sale includes mortgage-backed
bonds. The mortgage-backed bonds are subject to risks associated with
variable prepayments or delayed repayments. This may result in these
securities having a different actual cash flow and maturity than planned at
the time of purchase. Securities that have an amortized cost greater than par
which are backed by mortgages that prepay faster than expected will incur a
reduction in yield or a loss. Those securities that have an amortized cost
lower than par that prepay faster than expected will generate an increase in
yield or a gain. Repayments occurring slower than expected have the opposite
impact. The degree to which a security is susceptible to either gains or
losses is influenced by the difference between its amortized cost and par, the
relative sensitivity of the underlying mortgages backing the assets to
prepayment or delayed repayments in a changing interest rate environment and
the repayment priority of the securities in the overall securitization
structure.
LNC limits the extent of its risk on mortgage-backed securities by generally
avoiding securities whose cost significantly exceeds par, by purchasing
securities which are 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, 1994, 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-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 42 for additional detail about
the underlying collateral.
Mortgage loans on real estate represented 10.6% of the total investment
portfolio as of December 31, 1994, while real estate owned represented 2.6%.
As of December 31, 1994, the underlying properties supporting the mortgage
loans on real estate consisted of 24% in commercial office buildings, 28% in
retail stores, 19% in apartments, 15% in industrial buildings, 3% in
hotels/motels and 11% in other. In addition to the dispersion by type of
property, the mortgage loan portfolio is geographically diversified throughout
the United States.
Although the deterioration in the commercial mortgage loan market in 1994
slowed versus 1993, LNC continued to add to its provision for mortgage loans
on real estate (see note 3 to the consolidated financial statements on page
43). The reserve level and the ratio of reserves to impaired loans both
decreased in 1994 as the increase in reserves was more than offset by the
removal of amounts associated with two bulk sales of performing and non-
performing mortgage loans and real estate properties in 1994.
Investment in Unconsolidated Affiliates
This line was added to the balance sheet following LNC's sale of 71% of the
ownership of its primary writer of employee life-health coverages (see note 11
to the consolidated financial statements on page 59).
Cash and Invested Cash
Cash and invested cash increased by $331.9 million in 1994. This increase is
primarily the result of the receipts of the proceeds from the sale of
subsidiaries (see note 11 to the consolidated financial statements on page
59). These funds are expected to be used for general corporate purposes which
may include additional investments in existing businesses or financing of
acquisitions.
Assets Held in Separate Accounts
Excluding the December 31, 1993 balance of the subsidiaries that were sold
(see note 11 to the consolidated financial statements on page 59), this asset
account as well as the corresponding liability account increased by $1.9
billion, reflecting a continued increase in annuity and pension funds under
management.
25
Federal Income Taxes
Federal income taxes recoverable at December 31, 1994 of $396.9 million
represents a change of $547.9 million compared to the federal income taxes
payable at December 31, 1993. This is primarily the result of recoverable
deferred taxes applicable to LNC's available-for-sale securities which were in
an unrealized loss position at December 31, 1994 compared to an unrealized
gain position at December 31, 1993. Other factors affecting this change
relate to deferred taxes from life insurance reserve differences, discounting
of unpaid losses, changes in investment reserves and postretirement
obligations, and the current taxes recoverable related to the realization of
losses on securities during 1994. A significant portion of the deferred tax
benefits related to the December 31, 1994, unrealized loss on securities was
not recognized due to the establishment of a valuation allowance (see note 4
to the consolidated financial statements on page 44).
Amount Recoverable from Reinsurers
The increase in amounts recoverable from reinsurers was the result of an
increased volume of business ceded in the Life Insurance and Annuities
segment.
Goodwill
The decrease in goodwill of $82.8 million is primarily the result of the sale
of subsidiaries during 1994 (see note 11 to the consolidated financial
statements on page 59). Goodwill is expected to increase in 1995 due to the
expected acquisition of an investment management company (see note 12 to the
consolidated financial statements on page 59).
Total Liabilities
Excluding the December 31, 1993 balances of the subsidiaries that were sold
(see note 11 to the consolidated financial statements on page 59) of $1.9
billion, total liabilities increased by $3.9 billion in 1994. This increase
reflects 1)an increase in business activity as evidenced by an increase in
policy liabilities and accruals of $143.1 million, an increase of $2.2
billion in contractholder funds, an increase of $1.9 billion in the
liabilities related to separate accounts and 2)an increase in debt of $14.7
million. These increases are partially offset by a decrease in all other
liabilities of $248.1 million.
Policy liabilities at December 31, 1994 and 1993 included liabilities for
environmental claims of $201.0 million and $204.0 million, respectively.
These amounts include approximately $81.0 million and $82.0 million of reserve
for claims that have been incurred but not reported and approximately $37.0
million and $35.0 million of related claim expenses. Because of the limited
coverages that have been written by LNC, these environmental claims represent
only 8% of LNC's total property-casualty policy liabilities (4% based on claim
counts of direct business) and less than 2% of LNC's total policy liabilities.
Paid environmental claims and claim expense totalled approximately $15.0
million in 1994 compared with approximately $12.0 million in 1993.
The percentages and amounts referenced above are at these levels due to LNC's
concentration on writing coverages for small to medium size companies rather
than the larger companies that tend to incur most of the environmental and
product liability claims. LNC's management challenges environmental claims in
cases of questionable liability and reviews the level of the environmental
liabilities on an on-going basis to help insure that the liability maintained
is adequate. Nonetheless, establishing liabilities for environmental claims is
subject to significant uncertainties because of the long reporting delays,
lack of historical data and the unresolved complex legal and regulatory issues
that are involved (see note 7 to the consolidated financial statements on page
50). However, based on available information, it is management's judgement
that the appropriate level of liabilities have been recorded and that any
unrecorded liability would not be material to LNC's future results of
operations, liquidity or financial condition.
The increase in other liabilities relates to an increase in the expected
payouts for security investments purchased in the last few days of 1994 versus
a lower volume of such transactions late in 1993. Debt is expected to
increase in 1995 as a result of the acquisition of an investment management
company (see note 12 to the consolidated financial statements on page 59 and
additional MD&A discussion on page 28).
26
Shareholders' Equity
Total shareholders' equity decreased $1.0 billion during the year ended
December 31, 1994. Excluding the decrease of $1.2 billion related to
unrealized loss on securities available-for-sale, shareholders' equity
increased $195.8 million. This increase was the net result of increases due
to $349.9 million of net income, $30.0 million from the issuance of Common
Stock related to benefit plans, $8.1 million related to an increase in the
accumulated foreign exchange gain and decreases of $174.1 million related to
the declaration of dividends to stockholders and $18.4 million for the
retirement of Common Stock.
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, 1994, statutory-
basis capital for each of LNC's life and property-casualty insurance
subsidiaries was substantially in excess of regulatory action levels of risk-
based capital required by the jurisdiction of domicile except for two
property-casualty companies which are involved in servicing closed blocks of
business.
FAS 115. Effective December 31, 1993, LNC adopted Financial Accounting
Standard 115 ("FAS 115") which results in the inclusion in Shareholders'
Equity of the unrealized gain or loss on fixed-income securities, subject to
certain adjustments. The December 31, 1994 book value of $29.35 per share
included $3.00 of unrealized losses on securities and the December 31, 1993
book value of $39.39 per share included $8.85 of unrealized gains on
securities.
Gains or losses, whether realized or unrealized, on securities that support
long-term life insurance, pension and annuity contracts are expected to be
applied to contract benefits. Net Income and Shareholders' Equity now
include, respectively, realized and unrealized gains and losses on securities,
part of which will be used in determining contract benefits. Current
accounting standards do not require or permit adjustment of policyholder
reserves to recognize the full effect of these realized and unrealized gains
and losses on future benefit payments in the absence of a contractual
obligation requiring their attribution to policyholders.
We believe that an appropriate adjustment of these future benefits would
change policy reserves and increase Shareholders' Equity by $166.6 million or
$1.61 per share at December 31, 1994 compared with a decrease of $665.3
million or $6.45 per share at December 31, 1993. Shareholders' Equity
calculated on this adjusted basis would be $30.96 and $32.94 per share at
December 31, 1994 and December 31, 1993, respectively. These adjustments
reflect the reversal of interest related fixed income unrealized losses and
the deferral and amortization of such unrealized losses from portfolios
supporting life insurance, pension and annuity products.
Derivatives
As indicated in note 7 to the consolidated financial statements (see page 53),
LNC has entered into derivative transactions to reduce its exposure to
interest rate fluctuations, the widening of bond yield spreads over comparable
maturity U.S. Government obligations and foreign exchange risk. LNC has three
significant programs in place primarily within its Life Insurance and Annuity
segment and a fourth program in Other Operations as follows:
1)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,
1994, LNC had agreements with notional amounts of $4.4 billion with cap rates
ranging from 42 to 258 basis points above prevailing interest rates. These
agreements expire in 1997 - 2003. The cap rates in some contracts increase
over time.
27
2)LNC 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. Government obligations. The
actual risk being hedged is the potential widening of bond spreads that would
be caused by widening swap spreads. Under each of these agreements, LNC
assumes the right and the obligation to enter into an interest rate swap at a
future date in which LNC would pay a fixed rate equal to a contractually
specified spread over the yield of a specified U.S. Treasury security and
receive a floating rate. As of December 31, 1994, LNC had spread-lock
agreements with an aggregate notional amount of $1.3 billion with one to ten
months remaining in the exercise periods.
3)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. The short positions in
financial futures contracts obligate LNC to sell a financial instrument at a
specified future date for a specified price and 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 short position in the futures contract at a specific price during a
specific time period. As of December 31, 1994, LNC has financial futures
contracts with aggregate notional amounts of $354.3 million.
4)LNC uses foreign exchange forward contracts to hedge against foreign
exchange risk related to LNC's investment in its foreign subsidiary, Lincoln
National (U.K.). The foreign exchange forward contracts obligate LNC to
deliver a specified amount of currency at a future date at a specified
exchange rate. As of December 31, 1994, LNC had a short position in foreign
exchange forward contracts with a notional amount of $138.3 million.
The first three programs discussed above are designed to help LNC achieve more
stable margins while providing competitive crediting rates to policyholders
during periods when interest rates are rising or corporate bond spreads are
widening. Failure to maintain competitive crediting rates could result in
policyholders withdrawing their funds for placement in more competitive
products.
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 and other over-the-counter derivative products
such as spread-lock agreements and foreign currency exchange contracts. In
order to minimize the risk of default losses, LNC diversifies its exposures
among several dealers and limits the amount of exposure in accordance with the
credit rating of each dealer or its guarantor. At December 31, 1994, the
dealers providing interest rate caps or their guarantors were rated single A
or better by Standard & Poors and Moody's and 80% of the notional amount of
caps were from dealers which, giving effect to guarantees, were rated AA or
better by those agencies.
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.
See note 7 to the consolidated financial statements (see pages 53 and 54) for
a discussion of the effects of changes in interest rates and spreads on its
hedge programs using interest rate cap agreements, spread-lock agreements,
financial futures contracts and options on financial futures, and of changes
in foreign currency exchange rates on its hedge program using foreign exchange
forward contracts.
28
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 36 indicate that operating
activities provided cash of $1.2 billion, $1.0 billion and $870 million in
1994, 1993 and 1992, 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 1994, LNC filed a shelf registration for $500
million with the Securities Exchange Commission that would allow LNC to issue
debt or equity securities. In 1994, LNC issued $200 million of debt pursuant
to this shelf and as of December 31, 1994 has remaining authority to issue up
to $300 million of debt, Preferred Stock, Common Stock or any combination
thereof. Also, cash funds are available from LNC's revolving credit agreement
which provides for borrowing up to $500 million (see note 5 to the
consolidated financial statements on page 47).
Transactions such as those described in the preceding paragraph that occurred
recently included a public stock offering in 1993 which netted $316.1 million
after expenses (see note 10 to the consolidated financial statements on page
58). The proceeds from this offering were used to paydown short-term debt
pending application for general corporate purposes. In another transaction in
March 1994, LNC redeemed its $100 million of 8% notes payable due in 1997.
This redemption was funded with additional short-term debt. Also, as noted in
the previous paragraph, LNC issued $200 million of 9 1/8% debt securities with
and effective date of October 1, 1994 and payable in 2024. Proceeds from this
issue were used to reduce short-term debt with a weighted average interest
rate of 4.82%. Finally, in November 1994, LNC purchased and retired 500,000
shares of Common Stock at a cost of $18.4 million.
The assumption of debt in connection with the expected acquisition of an
investment management company (see note 12 to the consolidated financial
statements on page 59) will add approximately $180 million to LNC's total
long-term debt in 1995. The remainder of the purchase price is expected to be
available at the holding company level as the result of dividends from
existing subsidiaries and/or the sale of holding company assets to the
subsidiaries for cash.
In order to maximize the use of available cash, the holding company (Lincoln
National Corporation) 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 external 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.
29
Holding Company Cash Flow
Year Ended December 31 (in millions) 1994 1993 1992
Dividends from subsidiaries:
American States Insurance ---------------------- $ 215.0 $ 60.0 $ 64.0
Lincoln National Life -------------------------- 125.0 12.0 --
Other ------------------------------------------ 4.5 4.0 12.3
Net investment income ---------------------------- 1.2 4.3 8.0
Operating expenses ------------------------------- (33.7) (19.5) (34.9)
Interest ----------------------------------------- (44.3) (39.0) (43.2)
Net sales (purchases) of investments ------------- (22.1) 31.6 86.5
Increase (decrease) in cash collateral on
loaned securities ------------------------------- 14.3 9.5 (31.7)
Sale of subsidiaries ----------------------------- -- -- 145.3
Pre-closing dividend from subsidiaries sold ------ -- -- 40.9
Additional investment in existing subsidiaries --- (2.7) (105.8) (103.1)
Investment in unconsolidated affiliate ----------- (103.5) -- --
Net increase (decrease) in debt ------------------ 15.9 (207.2) (59.1)
Decrease (increase) in receivables from
subsidiaries ------------------------------------ (3.9) (14.2) 40.7
Increase (decrease) in loans from subsidiaries --- 271.8 (127.6) 113.4
Decrease (increase) in loans to subsidiaries ----- (20.5) 34.7 50.1
Federal income taxes received (paid) ------------- 65.6 (270.0) (171.1)
Net tax receipts from (payments to) subsidiaries - (61.1) 319.8 204.9
Dividends paid to shareholders ------------------- (172.2) (156.2) (139.2)
Public offering of Common Stock ------------------ -- 316.1 --
Retirement of Common Stock ----------------------- (18.4) -- --
Other -------------------------------------------- 20.5 (2.8) (24.2)
Cash and invested cash - December 31 ------------- $ 523.1 $ 271.7 $ 422.0
Other investments - December 31 ------------------ 28.7 43.9 58.4
Debt - December 31 ------------------------------- 1,227.5 939.8 1,274.6
The table above shows the cash flow activity for the holding company from
1992 through 1994. 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.
As of December 31, 1994, $1.0 billion of consolidated shareholders' equity
represents net assets of the consolidated insurance subsidiaries that is
limited as to transfer in the form of dividends, loans or advances to the
holding company (see note 7 to the consolidated financial statements on page
50). However, this restriction poses no short-term liquidity concerns for the
holding company. The financial strength and stability of the subsidiaries
permit ready access to short-term or long-term credit sources for the holding
company.
Effect of Inflation
As indicated earlier in this review of consolidated operations, inflation
affects LNC's revenues and expenses. LNC's insurance affiliates, as well as
other companies in the insurance industry, attempt to minimize the effect of
inflation 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.
30
Item 8. Financial Statements and Supplementary Data
Operating Results by Quarter
(in millions, except per share) 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
1994 Data
Premiums and other considerations --- $1,422.8 $1,118.4 $1,125.8 $1,388.1
Net investment income --------------- 501.8 487.6 510.0 511.9
Realized gain (loss) on investments - 38.1 (66.3) (74.2) (28.4)
Gain on sale of subsidiary ---------- 44.1 4.7 -- --
Net income -------------------------- 151.0 46.8 58.4 93.7
Net income per share ---------------- $1.46 $.45 $ .56 $ .90
1993 Data
Premiums and other considerations --- $1,417.8 $1,332.4 $1,644.0 $1,579.1
Net investment income --------------- 511.8 523.6 521.6 589.5
Realized gain on investments -------- 9.4 45.9 161.8 51.3
Loss on sale of subsidiary ---------- -- -- -- (98.5)
Income before cumulative effect
of accounting change --------------- 69.0 127.2 187.5 31.6
Net income (loss) ------------------- (27.4) 127.2 187.5 31.6
Income before cumulative effect of
accounting change per share -------- $.69 $1.23 $1.82 $.31
Net income (loss) per share --------- (.28) 1.23 1.82 .31
Operating results in the first quarter of 1993 were affected by the adoption
of FAS 106 and FAS 114 (see note 2 to the consolidated financial statements on
pages 39 and 40) and in the fourth quarter of 1993 by a provision for the loss
on sale of a life insurance subsidiary which was completed in February 1994
(see note 11 to the consolidated financial statements on page 59). Income
before cumulative effect of accounting change and net income for the fourth
quarter of 1993 include two changes in estimates which essentially offset each
other (see note 2 to the consolidated financial statements on page 40).
Consolidated Financial Statements
The consolidated financial statements of Lincoln National Corporation and
Subsidiaries follow on pages 31 through 59.
31
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31 (000'S omitted) 1994 1993
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity
(cost: 1994-$22,194,079; 1993-$22,219,285) - $21,644,154 $23,964,335
Equity
(cost: 1994-$948,135; 1993-$896,477) ------- 1,038,617 1,080,301
Mortgage loans on real estate ---------------- 2,853,083 3,300,951
Real estate ---------------------------------- 706,854 633,103
Policy loans --------------------------------- 553,272 595,085
Other investments ---------------------------- 175,121 158,170
Total Investments ------------------------ 26,971,101 29,731,945
Investment in unconsolidated affiliates -------- 97,054 --
Cash and invested cash ------------------------- 1,041,583 709,664
Property and equipment ------------------------- 185,471 233,467
Deferred acquisition costs --------------------- 2,444,215 2,011,131
Premiums and fees receivable ------------------- 564,779 601,883
Accrued investment income ---------------------- 429,059 413,144
Assets held in separate accounts --------------- 14,301,684 12,430,577
Federal income taxes --------------------------- 396,888 --
Amounts recoverable from reinsurers ------------ 2,207,727 1,460,038
Goodwill --------------------------------------- 145,744 228,530
Other assets ----------------------------------- 544,755 559,982
Total Assets ----------------------------- $49,330,060 $48,380,361
See notes to consolidated financial statements on pages 37 - 59.
32
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
-CONTINUED-
December 31 (000's omitted) 1994 1993
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Future policy benefits, claims
and claim expenses ------------------------- $11,216,312 $12,652,036
Unearned premiums --------------------------- 806,987 858,805
Total Policy Liabilities and Accruals ----- 12,023,299 13,510,841
Contractholder funds -------------------------- 17,025,623 14,872,141
Liabilities related to separate accounts ------ 14,301,684 12,430,577
Federal income taxes -------------------------- -- 150,951
Short-term debt ------------------------------- 275,310 351,418
Long-term debt -------------------------------- 419,607 335,097
Other liabilities ----------------------------- 2,242,477 2,657,015
Total Liabilities ------------------------- 46,288,000 44,308,040
Shareholders' Equity:
Series A Preferred Stock
(1994 liquidation value - $3,457) ------------ 1,420 1,553
Series E Preferred Stock
(1994 liquidation value - $151,569) ---------- 151,206 151,206
Series F Preferred Stock
(1994 liquidation value - $158,707) ---------- 158,707 158,707
Common Stock ---------------------------------- 555,382 543,659
Earned surplus -------------------------------- 2,479,532 2,303,731
Foreign currency translation adjustment ------- 6,890 (1,214)
Net unrealized gain (loss) on
securities available-for-sale ---------------- (311,077) 914,679
Total Shareholders' Equity ---------------- 3,042,060 4,072,321
Total Liabilities and
and Shareholders' Equity ----------------- $49,330,060 $48,380,361
See notes to consolidated financial statements on pages 37 - 59.
33
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 (000's omitted) 1994 1993 1992
Revenue:
Insurance premiums ------------------ $4,444,148 $5,356,797 $5,298,892
Insurance fees ---------------------- 449,643 470,395 409,474
Net investment income --------------- 2,011,351 2,146,519 1,987,296
Equity in earnings of
unconsolidated affiliates ---------- 14,652 -- --
Realized gain (loss) on investments - (130,820) 268,422 176,948
Gain (loss) on sale of subsidiaries - 48,842 (98,500) --
Other ------------------------------- 146,534 146,124 161,493
Total Revenue --------------------- 6,984,350 8,289,757 8,034,103
Benefits and Expenses:
Benefits and settlement expenses ---- 4,849,243 5,628,279 5,700,443
Underwriting, acquisition,
insurance and other expenses ------- 1,709,306 2,029,348 1,855,167
Interest expense -------------------- 49,520 44,301 53,794
Total Benefits and Expenses ------- 6,608,069 7,701,928 7,609,404
Income Before Federal Income
Taxes and Cumulative Effect
of Accounting Change ------------- 376,281 587,829 424,699
Federal income taxes ------------------ 26,383 172,546 65,528
Income Before Cumulative Effect
of Accounting Change ------------- 349,898 415,283 359,171
Cumulative effect of accounting
change (postretirement benefits) ----- -- (96,431) --
Net Income ------------------------ $ 349,898 $ 318,852 $ 359,171
Earnings Per Share:
Income before cumulative
effect of accounting change ---------- $3.37 $4.06 $3.86
Cumulative effect of accounting
change (postretirement benefits) ----- -- (.94) --
Net Income ------------------------ $3.37 $3.12 $3.86
See notes to consolidated financial statements on pages 37 - 59.
34
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Year Ended December 31 (000's omitted) 1994 1993 1992
Preferred Stock:
Series A Preferred Stock:
Balance at beginning of year ----------- $ 1,553 $ 1,896 $ 2,208
Conversion into Common Stock ----------- (133) (343) (312)
Balance at End of Year --------------- 1,420 1,553 1,896
Series E Preferred Stock:
Balance at Beginning
and End of Year --------------------- 151,206 151,206 151,206
Series F Preferred Stock:
Balance at Beginning
and End of Year --------------------- 158,707 158,707 158,707
Common Stock:
Balance at beginning of year ------------ 543,659 200,986 179,656
Conversion of Series A Preferred Stock -- 133 343 312
Public offering of Common Stock --------- -- 316,100 --
Issued for benefit plans ---------------- 30,616 26,930 22,095
Shares forfeited under benefit plans ---- (631) (700) (1,077)
Retirement of Common Stock -------------- (18,395) -- --
Balance at End of Year --------------- 555,382 543,659 200,986
Earned Surplus:
Balance at beginning of year ------------ 2,303,731 2,147,691 1,929,263
Net income ------------------------------ 349,898 318,852 359,171
Dividends declared:
Series A Preferred Stock -------------- (134) (146) (181)
Series E Preferred Stock -------------- (8,336) (8,336) (8,336)
Series F Preferred Stock -------------- (8,729) (8,729) (8,729)
Common Stock -------------------------- (156,898) (145,601) (123,497)
Balance at End of Year --------------- 2,479,532 2,303,731 2,147,691
Foreign Currency Translation Adjustment:
Accumulated adjustment at
beginning of year ---------------------- (1,214) 3,643 24,710
Change during the year ------------------ 8,104 (4,857) (21,067)
Balance at End of Year --------------- 6,890 (1,214) 3,643
Net Unrealized Gain (Loss) on Securities
Available-for-sale:
Balance at beginning of year ----------- 914,679 162,742 210,082
Cumulative effect of accounting change - -- 768,419 --
Other change during the year ---------- (1,225,756) (16,482) (47,340)
Balance at End of Year --------------- (311,077) 914,679 162,742
Total Shareholders' Equity
at End of Year ---------------------- $3,042,060 $4,072,321 $2,826,871
See notes to consolidated financial statements on pages 37 - 59.
35
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - continued
Year Ended December 31 (Number of Shares) 1994 1993 1992
Preferred Stock:
(10,000,000 shares authorized)
Series A Preferred Stock:
Balance at beginning of year -------- 47,289 57,716 67,208
Conversion into Common Stock -------- (4,071) (10,427) (9,492)
Balance Issued and Outstanding
at End of Year ------------------- 43,218 47,289 57,716
Series E Preferred Stock:
Balance Issued and Outstanding
at Beginning and End of Year ----- 2,201,443 2,201,443 2,201,443
Series F Preferred Stock:
Balance Issued and Outstanding
at Beginning and End of Year ----- 2,216,454 2,216,454 2,216,454
Common Stock:
(Shares authorized: 1994 - 800,000,000;
1993 and 1992 - 400,000,000)
Balance at beginning of year ---------- 94,183,190 84,142,458 83,174,370
Conversion of Series A Preferred Stock- 32,568 83,416 75,936
Public offering of Common Stock ------- -- 9,200,000 --
Issued for benefit plans -------------- 778,587 786,192 896,350
Shares forfeited under benefit plans -- (16,403) (28,876) (4,198)
Retirement of Common Stock ------------ (500,000) -- --
Balance Issued and Outstanding
at End of Year --------------------- 94,477,942 94,183,190 84,142,458
Common Stock (assuming conversion of
Series A, E and F Preferred Stock):
End of Year -------------------------- 103,659,480 103,397,296 93,439,980
Average for the Year ----------------- 103,863,196 102,307,356 92,977,312
Dividends Per Share:
Series A Preferred Stock -------------- $3.00 $3.00 $3.00
Series E Preferred Stock -------------- 3.79 3.79 3.79
Series F Preferred Stock -------------- 3.94 3.94 3.94
Common Stock -------------------------- 1.66 1.55 1.475
See notes to consolidated financial statements on pages 37 - 59.
36
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 (000's omitted) 1994 1993 1992
Cash Flows from Operating Activities:
Net income ------------------------------ $ 349,898 $ 318,852 $ 359,171
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred acquisition costs ----------- (154,419) (203,661) (146,010)
Premiums and fees receivable --------- 11,223 189,699 134,033
Accrued investment income ------------ (44,671) 23,141 (5,734)
Policy liabilities and accruals ------ (155,813) 361,397 256,237
Contractholder funds ----------------- 1,774,688 1,177,229 636,088
Amounts recoverable from reinsurers--- (776,408) (710,038) --
Federal income taxes ----------------- (59,611) (96,469) (128,074)
Equity in undistributed earnings of
unconsolidated affiliates ----------- 12,408 -- --
Provisions for depreciation ---------- 58,689 58,893 60,142
Realized (gain) loss on investments -- 212,201 (292,153) (176,948)
(Gain) loss on sale of subsidiaries -- (48,842) 98,500 --
Cumulative effect of accounting
change ------------------------------ -- 96,431 --
Other -------------------------------- 6,667 (8,725) (118,406)
Net Adjustments -------------------- 836,112 694,244 511,328
Net Cash Provided by
Operating Activities -------------- 1,186,010 1,013,096 870,499
Cash Flows from Investing Activities:
Securities available-for-sale:
Purchases ----------------------------- (13,383,236) (9,158,159) (8,553,010)
Sales --------------------------------- 10,352,938 8,834,823 8,472,278
Maturities ---------------------------- 1,106,687 45,937 17,645
Fixed maturity securities held for investment:
Purchases ----------------------------- -- (6,626,937) (7,773,996)
Sales --------------------------------- -- 3,205,203 4,245,048
Maturities ---------------------------- -- 1,858,044 1,446,902
Purchase of other investments ----------- (1,694,970) (1,362,579) (1,181,106)
Sale or maturity of other investments --- 1,755,113 733,585 916,652
Sale of subsidiaries -------------------- 417,367 -- 145,270
Increase (decrease) in cash collateral on
loaned securities ---------------------- (149,597) 30,906 275,614
Other ----------------------------------- 72,166 145,343 (159,964)
Net Cash Used in Investing Activities-- (1,523,532) (2,293,834) (2,148,667)
Cash Flows from Financing Activities:
Principal payments on long-term debt ---- (109,552) (2,805) (32,855)
Issuance of long-term debt -------------- 199,382 14,819 204,042
Net decrease in short-term debt --------- (75,155) (181,989) (243,899)
Universal life and investment
contract deposits ---------------------- 2,429,113 2,467,540 3,162,277
Universal life and investment
contract withdrawals ------------------- (1,613,780) (1,509,108) (1,218,461)
Public offering of Common Stock --------- -- 316,100 --
Common Stock issued for benefit plans --- 29,985 26,230 21,018
Retirement of Common Stock -------------- (18,395) -- --
Dividends paid to shareholders ---------- (172,157) (156,235) (139,151)
Net Cash Provided by Financing
Activities --------------------------- 669,441 974,552 1,752,971
Net Increase (Decrease) in Cash ------- 331,919 (306,186) 474,803
Cash at Beginning of Year --------------- 709,664 1,015,850 541,047
Cash at End of Year ------------------- $1,041,583 $ 709,664 $1,015,850
See notes to consolidated financial statements on pages 37 - 59.
37
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. 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 generally accepted accounting
principles.
Investments. Recognizing LNC's need for the ability to respond to changes in
market conditions and tax position, LNC has classified its fixed maturity and
equity securities (common and non-redeemable preferred stocks) 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 actual prepayments differ significantly from anticipated prepayments, 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
since the acquisition of the securities. This adjustment is reflected in net
investment income.
Mortgage loans on real estate are carried at the outstanding principal
balances less unaccrued discounts. Property and equipment owned for company
use are carried at cost less allowances for depreciation. Policy loans are
carried at the aggregate unpaid balances. All such investments are carried
net of reserves for declines in value that are other than temporary. The
change in these reserves is reported as realized gain (loss) on investments.
Investment real estate is carried at cost less allowances for depreciation.
Such real estate is carried net of reserves for declines in value that are
other than temporary. Real estate acquired through foreclosure proceedings
is recorded at fair value at the date of acquisition which establishes a new
cost basis. If a subsequent valuation of a foreclosed property indicates the
fair value less estimated costs to sell is lower than the value at
acquisition, the carrying value is adjusted to the lower amount.
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 are recognized in net income, net of
related amortization of deferred acquisition costs, 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 if these
securities would have been sold at their fair value, and after deferred taxes
or credits to the extent deemed recoverable.
Derivatives. LNC hedges certain portions of its exposure to fluctuations in
interest and foreign exchange risks by entering into derivative transactions.
The premium paid for interest rate caps is deferred and amortized on a
straight-line basis over the term of the interest rate caps against investment
income. Any settlement received in accordance with the terms of the interest
rate caps is recorded as investment income. Spread-lock agreements, interest
rate swaps, mortgage-backed securities total return swaps, financial futures
contracts, options on financial futures, and United Kingdom forward swaps,
which hedge fixed maturity securities available-for-sale, are carried at fair
value with the change in fair value reflected directly in shareholders'
equity. Realized gain (loss) from the settlement of such derivatives are
deferred and amortized over the life of the hedged assets as an adjustment to
the yield. Foreign exchange forward contracts, which hedge LNC's investment
38
in its foreign subsidiary, Lincoln National (UK), are carried at fair value
with the change in fair value and realized gain (loss) on such contracts
reflected directly in the foreign currency translation adjustment component of
stockholders' equity.
Premiums and Fees. Property-casualty and group health premiums are prorated
over the contract term of the policies. Revenue for universal life and other
interest-sensitive life insurance policies consist 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.
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. LNC receives fees for services
performed for these separate accounts. These fees are included in LNC's
consolidated statement of income.
Deferred Acquisition Costs. Commissions and other costs of acquiring
property-casualty insurance, group health insurance, universal and variable
universal life insurance, and traditional life insurance and annuities, which
vary with and are primarily related to the production of new business, have
been deferred to the extent recoverable. Deferred acquisition costs for
property-casualty policies are amortized over the contract term of the
policies; property-casualty acquisition costs that are not recoverable from
future premiums and related investment income are expensed. Acquisition costs
for universal and variable universal life insurance policies 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 (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. The
traditional life-health and annuity acquisition costs are being amortized over
the premium-paying period of the related policies using assumptions consistent
with those used in computing policy reserves.
Expenses. Expenses for universal and variable universal life insurance
policies 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 during 1992 through 1994 ranged from 6.1% to 8.7%.
Intangible Assets. The present value of acquired insurance in-force, which is
classified with other assets on the balance sheet, is amortized over the
premium recognition period of the policies acquired. The costs of acquired
subsidiaries in excess of the fair value of net assets (goodwill) are
amortized using the straight-line method over periods that correspond with the
benefits expected to be derived from the acquisitions (generally over 20-25
years). The carrying value of intangible assets is reviewed regularly for
indicators of impairment in value.
Policy Liabilities and Accruals. The liability for unpaid property-casualty
claims is based on estimates of payments to be made for individual claims
reported and unreported claims, reduced by estimated recoveries from salvage
and subrogation. These estimates are continually reviewed and, as experience
develops and new information becomes known, the liability is adjusted as
necessary; such adjustments are included in current operations. The
liabilities for future policy benefits and expenses 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 policy benefits and expenses for traditional
life-health policies and annuities are computed using a net level premium
method and assumptions for investment yields, mortality, morbidity, and
withdrawals based principally on company experience projected at the time of
policy issue, with provision for possible adverse deviations. Interest
assumptions for traditional direct individual life reserves for all policies
range from 2.3% to 11.7% graded to 5.7% after 30 years depending on time of
policy issue. Interest rate assumptions for reinsurance reserves range from
5.0% to 11.0% graded to 8.0% after 20 years.
39
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 and liabilities from reinsurance
agreements written on a funds withheld basis have been netted on the balance
sheet since there is a right of offset. Assets and liabilities from other
reinsurance agreements are reported on a gross basis. Reinsurance agreements
are reported gross in the accompanying income statement, except that initial
reserves are netted against premiums when an in-force block of business is
reinsured.
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. Effective January 1,
1993, LNC changed its method of accounting for its postretirement medical and
life insurance benefits to the full accrual method (see note 2 below). Prior
to January 1, 1993, LNC accounted for such benefits on a pay-as-you-go method.
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.
2. Changes in Accounting Principles and Changes in Estimates
Postretirement Benefits Other than Pensions. Effective January 1, 1993, LNC
changed its method of accounting for postretirement medical and life insurance
benefits for its eligible employees and agents from a pay-as-you-go method to
a full accrual method in accordance with Financial Accounting Standard No. 106
entitled "Employers' Accounting for Postretirement Benefits Other Than
Pensions" ("FAS 106"). This full accrual method recognizes the estimated
obligation for retired employees and agents and active employees and agents
who are expected to retire in the future. The effect of the change for 1993
was to increase net periodic postretirement benefit cost by $9,200,000 and
decrease income before cumulative effect of accounting change by $6,000,000
($.06 per share). The implementation of FAS 106 resulted in a one-time charge
to first quarter 1993 net income of $96,400,000 ($146,100,000 pre-tax) or $.94
per share for the cumulative effect of the accounting change. Prior year data
has not been restated for the accounting change. See note 6 on page 49 for
additional disclosures regarding postretirement benefits other than pensions.
Accounting by Creditors for Impairment of a Loan. Financial Accounting
Standard No. 114 entitled "Accounting by Creditors for Impairment of a Loan"
(FAS 114") issued in May 1993, was adopted by LNC effective January 1, 1993.
FAS 114 requires that if an impaired mortgage loan's fair value as described
in note 3 on page 42 is less than the recorded investment in the loan, the
difference is recorded in the mortgage loan allowance for losses account. The
adoption of FAS 114 resulted in additions to the mortgage loan allowance for
losses account and reduced first quarter 1993 income before cumulative effect
of accounting change and net income by $42,300,000 or $.41 per share
($64,100,000 pre-tax). See note 3 on page 43 for further mortgage loan
disclosures. Most of the effect of this change in accounting was within the
Life Insurance and Annuities segment.
Accounting for Certain Investments in Debt and Equity Securities. Financial
Accounting Standard No. 115 entitled "Accounting for Certain Investments in
Debt and Equity Securities" ("FAS 115") issued in May 1993, was adopted by LNC
as of December 31, 1993. In accordance with the new rules, the prior year
financial statements have not been restated to reflect the change in
accounting principle. Under FAS 115, securities can be classified as
available-for-sale, trading or held-to-maturity according to the holders
intent. LNC classified its entire fixed maturity securities portfolio as
"available-for-sale." Securities classified as available-for-sale are carried
at fair value and unrealized gains and losses on such securities are carried
as a separate component of shareholders' equity. The ending balance of
40
shareholders' equity was increased by $768,400,000 (net of $384,600,000 of
related adjustments to deferred acquisition costs, $62,900,000 of policyholder
commitments and $412,400,000 in deferred income taxes, all of which would have
been recognized if those securities would have been sold at their fair value,
net of amounts applicable to Security-Connecticut Corporation) to reflect the
net unrealized gain on fixed maturity securities classified as available-for-
sale previously carried at amortized cost. Prior to the adoption of FAS 115,
LNC carried a portion of its fixed maturity securities at fair value with
unrealized gains and losses carried as a separate component of stockholders'
equity. The remainder of such securities were carried at amortized cost.
Change in Estimate for Net Investment Income Related to Mortgage-backed
Securities. At December 31, 1993, LNC had $6,062,000,000 invested in
mortgage-backed securities. As indicated in note 1 on page 37, LNC recognizes
income on these securities using a constant effective yield based on
anticipated prepayments. With the implementation of new investment software
in December 1993, LNC was able to significantly refine its estimate of the
effective yield on such securities to better reflect actual prepayments and
estimates of future prepayments. This resulted in an increase in the
amortization of purchase discount on these securities of $58,600,000 and,
after related amortization of deferred acquisition costs ($18,500,000) and
income taxes ($14,100,000), increased 1993's income before cumulative effect
of accounting change and net income by $26,000,000 or $0.25 per share. Most
of the effect of this change in estimate was within the Life Insurance and
Annuities business segment.
Change in Estimate for Reinsurance Disability Income Reserves. During
December 1993, income before cumulative effect of accounting change and net
income decreased by $32,800,000 or $0.32 per share as the result of
strengthening reinsurance disability income reserves by $50,500,000. The need
for this reserve increase within the Life-Health Reinsurance segment was
identified as the result of management's assessment of current expectations
for morbidity trends and the impact of lower investment income due to lower
interest rates.
3. Investments
The major categories of net investment income are as follows:
Year Ended December 31 (in millions) 1994 1993 1992
Fixed maturity securities --------------------- $1,614.9 $1,757.6 $1,608.6
Equity securities ----------------------------- 29.9 28.9 25.6
Mortgage loans on real estate ----------------- 277.2 297.2 296.6
Real estate ----------------------------------- 104.4 82.3 54.1
Policy loans ---------------------------------- 34.0 37.3 35.2
Invested cash --------------------------------- 55.8 39.6 31.1
Other investments ----------------------------- 54.5 33.4 60.0
Investment revenue -------------------------- 2,170.7 2,276.3 2,111.2
Investment expense ---------------------------- 159.4 129.8 123.9
Net investment income ----------------------- $2,011.3 $2,146.5 $1,987.3
The realized gain (loss) on investments is as follows:
Year Ended December 31 (in millions) 1994 1993 1992
Fixed maturity securities available-for-sale:
Gross gain ------------------------------------ $ 87.8 $142.3 $111.2
Gross loss ------------------------------------ (331.2) (13.3) (45.4)
Equity securities available-for-sale:
Gross gain ------------------------------------ 92.6 225.8 136.2
Gross loss ------------------------------------ (80.8) (69.1) (52.7)
Fixed maturity securities held for investment:
Gross gain ------------------------------------ -- 248.9 210.7
Gross loss ------------------------------------ -- (75.8) (37.5)
Other investments------------------------------ 19.6 (166.7) (145.6)
Related restoration (amortization) of
deferred acquisition costs ------------------- 81.2 (23.7) --
Total -------------------------------------- $(130.8) $268.4 $176.9
41
Provisions for write-downs and provisions for losses, which are included in
the realized gain (loss) on investments shown above, are as follows:
Year Ended December 31 (in millions) 1994 1993 1992
Fixed maturity securities (interest only
mortgage-backed securities ------------------- $ .9 $ 40.6 $ --
Fixed maturity securities (other) ------------- 18.6 19.4 19.4
Equity securities ----------------------------- 8.7 1.6 3.8
Mortgage loans on real estate ----------------- 18.2 140.6 91.9
Real estate ----------------------------------- 14.9 33.4 36.1
Other long-term investments ------------------- 1.7 4.3 20.3
Guarantees ------------------------------------ 2.5 1.4 6.9
Total --------------------------------------- $ 65.5 $241.3 $178.4
The change in unrealized appreciation (depreciation) on investments in fixed
maturity and equity securities is as follows:
Year Ended December 31 (in millions) 1994 1993 1992
Fixed maturity securities available-for-sale - $(2,295.1) $1,717.5 $ (72.0)
Equity securities available-for-sale --------- (93.3) (32.7) (6.7)
Fixed maturity securities held for investment -- (1,130.3) (99.5)
Total -------------------------------------- $(2,388.4) $ 554.5 $(178.2)
The cost, gross unrealized gain and loss and fair value of securities
available-for-sale are as follows:
Fair
December 31 (in millions) Cost Gain Loss Value
1994:
Corporate bonds ------------------- $12,166.7 $170.8 $ 544.9 $11,792.6
U.S. Government bonds ------------- 1,673.1 7.5 47.8 1,632.8
Foreign governments bonds --------- 624.3 6.1 18.5 611.9
Mortgage-backed securities -------- 5,215.5 92.3 201.4 5,106.4
State and municipal bonds --------- 2,386.2 46.2 54.7 2,377.7
Redeemable preferred stocks ------- 128.3 -- 5.6 122.7
Total fixed maturity securities - 22,194.1 322.9 872.9 21,644.1
Equity securities ----------------- 948.1 135.2 44.7 1,038.6
Total --------------------------- $23,142.2 $458.1 $ 917.6 $22,682.7
1993:
Corporate bonds ------------------- $11,688.8 $1,129.5 $ 73.5 $12,744.8
U.S. Government bonds ------------- 1,657.3 48.3 14.3 1,691.3
Foreign governments bonds --------- 493.7 61.9 4.0 551.6
Mortgage-backed securities -------- 5,685.7 453.0 76.7 6,062.0
State and municipal bonds --------- 2,558.2 214.3 .8 2,771.7
Redeemable preferred stocks ------- 135.6 18.0 10.6 143.0
Total fixed maturity securities - 22,219.3 1,925.0 179.9 23,964.4
Equity securities ----------------- 896.5 201.1 17.3 1,080.3
Total --------------------------- $23,115.8 $2,126.1 $197.2 $25,044.7
Future maturities of fixed maturity securities available-for-sale are as
follows:
1994
Fair
December 31 (in millions) Cost Value
Due in one year or less ------------------------------ $ 288.5 $ 291.1
Due after one year through five years ---------------- 4,083.5 4,046.4
Due after five years through ten years --------------- 6,321.3 6,130.0
Due after ten years ---------------------------------- 6,285.3 6,070.2
Subtotal ------------------------------------------- 16,978.6 16,537.7
Mortgage-backed securities --------------------------- 5,215.5 5,106.4
Total ---------------------------------------------- $22,194.1 $21,644.1
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.
42
At December 31, 1994, the current par, amortized cost and estimated fair value
of investments in mortgage-backed securities summarized by interest rates of
the underlying collateral are as follows:
Current Fair
December 31 (in millions) Par Cost Value
Below 7% ------------------------------- $ 94.0 $ 82.8 $ 78.4
7% - 8% -------------------------------- 1,383.1 1,350.5 1,260.0
8% - 9% -------------------------------- 1,744.1 1,682.1 1,632.0
Above 9% ------------------------------- 2,200.0 2,100.1 2,136.0
Total -------------------------------- $5,421.2 $5,215.5 $5,106.4
The fixed maturity securities available-for-sale quality ratings are as
follows:
December 31 1994
Treasuries and AAA ----------------------------------- 37.3%
AA --------------------------------------------------- 10.8
A ---------------------------------------------------- 25.6
BBB -------------------------------------------------- 20.5
BB --------------------------------------------------- 3.3
Less than BB ----------------------------------------- 2.5
100.0%
Mortgage loans on real estate are considered impaired when, based on current
information and events, it is probable that LNC will be unable to collect all
amounts due according to the contractual terms of the loan agreement. When
LNC determines that a loan is impaired a provision for loss is established for
the difference between the carrying value of the mortgage loan and the
estimated value. Estimated value is based on either the present value of
expected future cash flows discounted at the loan's effective interest rate,
the loan's observable market price or the fair value of the collateral. The
provision for losses is reported as realized gain (loss) on investments.
Mortgage loans deemed to be uncollectible are charged against the provision
for losses and subsequent recoveries, if any, are credited to the provision
for losses.
The provision for losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Management's periodic
evaluation of the adequacy of the provision for losses is based on LNC's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay (including the
timing of future payments), the estimated value of the underlying collateral,
composition of the loan portfolio, current economic conditions and other
relevant factors. This evaluation is inherently subjective as it requires
estimating the amounts and timing of future cash flows expected to be received
on impaired loans that may be susceptible to significant change.
Impaired loans included along with the related provision for losses is as
follows:
December 31 (in millions) 1994 1993
Impaired loans with provision for losses --------- $275.8 $726.0
Provision for losses ----------------------------- (62.7) (226.6)
Impaired loans with no provision for losses ------ 2.3 7.8
Net Impaired Loans ----------------------------- $215.4 $507.2
Impaired loans with no provision for losses are a result of direct write-downs
or for collateral dependent loans where the fair value of the collateral is
greater than the recorded investment in loans.
43
A reconciliation of the mortgage loan provision for losses for these impaired
mortgage loans is as follows:
Year Ended December 31 (in millions) 1994 1993 1992
Balance at beginning of year -------------------- $226.6 $134.5 $ 72.0
Provisions for losses --------------------------- 18.2 76.5 91.9
Provision for adoption of FAS 114 --------------- -- 64.1 --
Releases due to sales --------------------------- (163.2) (12.4) (7.0)
Releases due to foreclosures -------------------- (18.9) (36.1) (22.4)
Balance at End of Year ------------------------ $ 62.7 $226.6 $134.5
The average recorded investment in impaired loans and the interest income
recognized on impaired loans were as follows:
Year Ended December 31 (in millions) 1994 1993
Average recorded investment in impaired loans --------- $498.1 $734.4
Interest income recognized on impaired loans ---------- 38.3 48.5
All interest income on impaired loans was recognized on the cash basis of
income recognition.
As of December 31, 1994 and 1993, LNC had restructured loans of $36,200,000
and $88,900,000, respectively. LNC recorded $800,000 and $6,600,000 interest
income on these restructured loans in 1994 and 1993, respectively. Interest
income in the amount of $3,900,000 and $9,600,000 would have been recorded on
these loans according to their original terms in 1994 and 1993, respectively.
As of December 31, 1993, LNC had commitments to lend $132,000 on restructured
loans. No such commitments were outstanding as of December 31, 1994.
As of December 31, 1994, LNC's investment commitments for fixed maturity
securities (primarily private placements), mortgage loans on real estate and
real estate were $327,200,000.
Fixed maturity securities available-for-sale, mortgage loans on real estate
and real estate with a combined carrying value at December 31, 1994 of
$41,200,000 were non-income producing for the year ended December 31, 1994.
The cost information for mortgage loans on real estate, real estate and other
long-term investments are net of provisions for losses. The balance sheet
account for other liabilities includes a reserve for guarantees of third-party
debt. The amount of provisions and reserves for such items is as follows:
December 31 (in millions) 1994 1993
Mortgage loans on real estate ------------------------- $ 62.7 $226.6
Real estate ------------------------------------------- 78.6 121.4
Other long-term investments --------------------------- 23.8 27.2
Guarantees -------------------------------------------- 13.1 18.5
4. Federal Income Taxes
The federal income tax expense (benefit) before cumulative effect of
accounting change is as follows:
Year Ended December 31 (in millions) 1994 1993 1992
Current -------------------------------------- $(93.9) $308.2 $222.9
Deferred ------------------------------------- 120.3 (135.7) (157.4)
Total -------------------------------------- $ 26.4 $172.5 $ 65.5
Cash paid for federal income taxes in 1994, 1993 and 1992 was $70,900,000,
$279,700,000 and $195,300,000 respectively.
44
The Omnibus Reconciliation Act of 1993 ("1993 Act") changed LNC's prevailing
corporate federal income tax rate from 34% to 35% effective January 1, 1993.
The application of this new tax rate to the December 31, 1992 deferred tax
recoverable balance resulted in a decrease in federal income taxes of
$4,900,000 for 1993.
The effective tax rate on pre-tax income before cumulative effect of
accounting change is lower than the prevailing corporate federal income tax
rate. A reconciliation of this difference is as follows:
Year Ended December 31 (in millions) 1994 1993 1992
Tax rate times pre-tax income ----------------- $131.7 $205.7 $144.4
Effect of:
Tax-exempt investment income ------------------ (74.0) (75.8) (59.2)
Loss (gain) on sale of subsidiary ------------- (17.1) 34.5 --
Other items ----------------------------------- (14.2) 8.1 (19.7)
Provision for income taxes ------------------ $ 26.4 $172.5 $ 65.5
Effective tax rate -------------------------- 7% 29% 15%
The federal income tax recoverable (liability) is as follows:
December 31 (in millions) 1994 1993
Current ----------------------------------------------- $ 94.4 $ (83.0)
Deferred ---------------------------------------------- 302.5 (68.0)
Total ----------------------------------------------- $ 396.9 $(151.0)
Significant components of LNC's net deferred tax asset (liability) are as
follows:
December 31 (in millions) 1994 1993
Deferred tax assets:
Policy liabilities and accruals and
contractholder funds --------------------------------- $ 696.2 $ 772.3
Net operating loss ------------------------------------ 143.9 109.3
Loss on investments ----------------------------------- 30.1 149.0
Sale of subsidiaries ---------------------------------- -- 20.1
Net unrealized loss on securities available-for-sale -- 159.3 --
Postretirement benefits other than pensions ----------- 54.6 54.8
Other ------------------------------------------------- 131.3 68.0
Total deferred tax assets --------------------------- 1,215.4 1,173.5
Valuation allowance for deferred tax assets ----------- (135.6) --
Net deferred tax assets ----------------------------- 1,079.8 1,173.5
Deferred tax liabilities:
Deferred acquisition costs ---------------------------- 741.3 520.2
Premiums and fees receivable -------------------------- 32.8 32.7
Net unrealized gain on securities available-for-sale--- -- 656.5
Other ------------------------------------------------- 3.2 32.1
Total deferred tax liabilities ---------------------- 777.3 1,241.5
Net deferred tax asset (liability) ------------------ $ 302.5 $ (68.0)
At December 31, 1994, LNC had net operating loss carryforwards of $411,000,000
for income tax purposes related to its foreign life reinsurance companies that
expire in years 1999 through 2009.
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, 1994,
$159,300,000 of deferred tax assets relating to net unrealized capital losses
on fixed maturity and equity securities available-for-sale were available to
be recorded in shareholders' equity before considering a valuation allowance.
For federal income tax purposes, capital losses may only be used to offset
capital gains in the current year or during a three year carryback and five
year carryforward period. Due to these restrictions, and the uncertainty of
future capital gains, these deferred tax assets have been substantially offset
45
by a valuation allowance of $135,600,000. With the exception of the 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 its deferred tax assets. Accordingly, a valuation
allowance was established in shareholders' equity as of December 31, 1994
relating to unrealized capital losses on available-for-sale securities.
Prior to 1984, a portion of the life companies' current income was not subject
to current income tax, but was accumulated for income tax purposes in a
memorandum account designated as "policyholders' surplus." The total of the
life companies' balances in their respective "policyholders' surplus" accounts
at December 31, 1983 of $222,400,000 was "frozen" by the Tax Reform Act of
1984 and, accordingly, there have been no additions to the accounts after that
date. That portion of current income on which income taxes have been paid
will continue to be accumulated in a memorandum account designated as
"shareholders' surplus," and is available for dividends to shareholders
without additional payment of tax. The December 31, 1994 total of the life
companies' account balances for their "shareholders' surplus" was
$1,551,700,000. Should dividends to shareholders for each life company exceed
its respective "shareholders' surplus," amounts would need to be transferred
from its respective "policyholders' surplus" and would be subject to federal
income tax at that time. In connection with the 1993 sale of a life insurance
affiliate (see note 11 on page 59) $8,800,000 was transferred from
policyholders' surplus to shareholders' surplus and current income tax of
$3,100,000 was paid. Under existing or foreseeable circumstances, LNC neither
expects nor intends that distributions will be made from the remaining balance
in "policyholders' surplus" of $213,600,000 that will result in any such tax.
Accordingly, no provision for deferred income taxes has been provided by LNC
on its "policyholders' surplus" account. In the event that such excess
distributions were made, it is estimated that income taxes of approximately
$74,800,000 would be due.
Undistributed earnings of certain LNC foreign subsidiaries that are considered
to be indefinitely reinvested amounted to approximately $135,000,000 at
December 31, 1994. Accordingly, no provisions for U.S. income taxes have been
provided thereon. Upon distribution of those earnings in the form of
dividends or otherwise, LNC would be subject to both U.S. income taxes
(subject to adjustments for foreign tax credits) and withholding taxes payable
to the applicable foreign countries. Determination of the amount of
unrecognized deferred U.S. income tax liability is not practicable because of
the complexities associated with its hypothetical calculations.
5. Supplemental Financial Data
The balance sheet captions, "Real Estate" and "Property and Equipment," are
shown net of allowances for depreciation as follows:
December 31 (in millions) 1994 1993
Real estate ----------------------------------------- $ 41.9 $ 37.1
Property and equipment ------------------------------ 221.0 252.4
Details underlying the balance sheet caption, "Contractholder Funds," are as
follows:
December 31 (in millions) 1994 1993
Premium deposit funds ------------------------------- $16,757.8 $14,546.8
Undistributed earnings on participating business ---- 63.5 88.0
Other ----------------------------------------------- 204.3 237.3
Total --------------------------------------------- $17,025.6 $14,872.1
46
A reconciliation of the beginning of year and end of year liability for
property-casualty claims and claim expenses is as follows:
Year Ended December 31 (in millions) 1994 1993 1992
Total liability reported at beginning of year --- $2,810.1 $2,672.5 $2,502.4
Reinsurance recoverable following the
adoption of FAS 113 in 1993 -------------------- 225.5 -- --
Liability for claims and claim expenses
at beginning of year, net of reinsurance ---- 2,584.6 2,672.5 2,502.4
Plus:
Provision for claims and claim expenses arising
in the current year, net of reinsurance -------- 1,340.6 1,433.3 1,670.6
Increase (decrease) in estimated claims and
claim expenses arising in prior years,
net of reinsurance ----------------------------- (78.2) (26.5) 47.0
Total incurred claims and claim expenses,
net of reinsurance -------------------------- 1,262.4 1,406.8 1,717.6
Less:
Claims and claim expense payments arising
in the current year, net of reinsurance -------- 619.4 633.5 709.1
Payments for claims and claim expenses
arising in prior years, net of reinsurance ----- 728.2 861.2 838.4
Total payments, net of reinsurance ----------- 1,347.6 1,494.7 1,547.5
Total liability for claims and claim expenses
at end of year, net of reinsurance ---------- 2,499.4 2,584.6 2,672.5
Reinsurance recoverable following the
adoption of FAS 113 in 1993 -------------------- 203.1 225.5 --
Total liability reported at end of year ------ $2,702.5 $2,810.1 $2,672.5
The reconciliation shows an increase (decrease) of $(78,200,000),
($26,500,000), and $47,000,000 million to the December 31, 1993, 1992 and 1991
liability for claims and claim expenses, respectively, arising in prior years.
Such reserve adjustments, which affected current operations during 1994, 1993
and 1992, respectively, resulted from developed claims for prior years being
different than were anticipated when the liabilities for claims and claim
expenses were originally estimated.
Details underlying the balance sheet captions, "Short-term and Long-term
Debt," are as follows:
December 31 (in millions) 1994 1993
Short-term debt:
Commercial paper ------------------------------------ $107.2 $212.7
Other short-term notes ------------------------------ 67.8 37.2
Current portion of long-term debt ------------------- 100.3 101.5
Total short-term debt ----------------------------- $275.3 $351.4
Long-term debt less current portion:
9 3/4% notes payable, due 1995 ---------------------- $ -- 100.3
7 1/8% notes payable, due 1999 ---------------------- 99.2 99.1
7 5/8% notes payable, due 2002 ---------------------- 99.1 98.9
9 1/8% notes payable, due 2024 ---------------------- 199.1 --
Mortgages and other notes payable ------------------- 22.2 36.8
Total long-term debt ------------------------------ $419.6 $335.1
The commercial paper outstanding at December 31, 1994 and 1993, had a weighted
average interest rate of approximately 5.90% and 3.35%, respectively.
Future maturities of long-term debt are as follows (in millions):
1995 - $100.3 1997 - $ .1 1999 - $100.1
1996 - .3 1998 - .1 Thereafter - 319.0
47
LNC has a revolving credit agreement with a group of domestic and foreign
banks in the aggregate amount of $500,000,000. This agreement, which expires
in June 1997, provides for interest on borrowings based on various money
market indices. Under the terms of this agreement, LNC must maintain a
prescribed level of tangible net worth and debt levels below 50% of tangible
net worth, and is restricted in its ability to place additional liens against
LNC's assets. At December 31, 1994, LNC had no outstanding borrowings under
this agreement. During 1994, 1993 and 1992, fees paid under this agreement
amounting to $1,000,000, $1,300,000, and $1,700,000, respectively.
LNC's United Kingdom subsidiary also has a revolving credit agreement with a
United Kingdom bank in an aggregate amount of $117,400,000. This agreement
has outstanding short-term borrowings of $43,800,000 as of December 31, 1994.
Cash paid for interest for 1994, 1993 and 1992 was $47,900,000, $44,200,000,
and $48,500,000, respectively.
Reinsurance transactions included in the income statement caption, "Insurance
Premiums," are as follows:
Year Ended December 31 (in millions) 1994 1993 1992
Reinsurance assumed ------------------------- $1,979.4 $1,895.5 $1,960.2
Reinsurance ceded --------------------------- 482.9 291.1 286.2
Net reinsurance premiums ------------------ $1,496.5 $1,604.4 $1,674.0
The income statement caption, "Benefits and Settlement Expenses," is net of
reinsurance recoveries of $284,700,000, $174,000,000 and $218,200,000 for the
years ended December 31, 1994, 1993 and 1992, respectively.
The income statement caption, "Underwriting, Acquisition, Insurance and Other
Expenses," includes amortization of deferred acquisition costs of
$598,300,000, $571,800,000 and $563,700,000 for the years ended December 31,
1994, 1993 and 1992, respectively. An additional $81,200,000 and
($23,700,000) of deferred acquisition costs was restored (amortized) and
netted against "Realized Gain (Loss) on Investments" for the years ended
December 31, 1994 and 1993, respectively.
6. Employee Benefit Plans
Pensions Plans - U.S. LNC maintains funded defined benefit pension plans for
most of its U.S. employees and, prior to January 1, 1995, full time agents.
The benefits for employees are based on total years of service and the highest
60 months of compensation during the last 10 years of employment. The
benefits for agents were based on a percentage of each agents' yearly
earnings. 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. Plan assets consist principally of listed equity securities and
corporate obligations and Government bonds.
All benefits applicable to the funded defined benefit plan for agents were
frozen as of December 31, 1994. The curtailment of this plan did not have a
significant effect on net pension cost for 1994. Effective January 1, 1995,
pension benefits for agents will be provided by a new defined contribution
plan. Contributions to this plan will be based on 2.3% of an agent's earnings
up to the social security wage base and 4.6% of any excess.
LNC also sponsors three types of unfunded, nonqualified, defined benefit plans
for certain U.S. employees and agents. A supplemental retirement plan
provides 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 retirement plan for directors provides benefits
based on years of service and the amount of the retainer paid during the last
year of service.
48
The status of the funded defined benefit pension plans and the amounts
recognized on the balance sheets are as follows:
December 31 (in millions) 1994 1993
Actuarial present value of benefit obligation:
Vested benefits ---------------------------------------- $(287.9) $(310.5)
Nonvested benefits ------------------------------------- (16.1) (14.7)
Accumulated benefit obligation ----------------------- (304.0) (325.2)
Effect of projected future compensation increases ------ (63.3) (82.7)
Projected benefit obligation ------------------------- (367.3) (407.9)
Plan assets at fair value ------------------------------ 356.1 372.3
Projected benefit obligations in
excess of plan assets ------------------------------- (11.2) (35.6)
Unrecognized transition asset -------------------------- -- (7.6)
Unrecognized net loss ---------------------------------- 6.8 26.1
Unrecognized prior service cost ------------------------ 3.1 8.5
Accrued pension cost included in other liabilities --- $ (1.3) $ (8.6)
The status of the unfunded defined benefit pension plans and the amounts
recognized on the balance sheets are as follows:
December 31 (in millions) 1994 1993
Actuarial present value of benefit obligation:
Vested benefits --------------------------------------- $(18.1) $(18.7)
Nonvested benefits ------------------------------------ (3.1) (3.8)
Accumulated benefit obligation ---------------------- (21.2) (22.5)
Effect of projected future compensation increases ----- (6.7) (5.0)
Projected benefit obligation ------------------------ (27.9) (27.5)
Unrecognized transition obligation -------------------- .3 .7
Unrecognized net loss --------------------------------- 1.7 5.6
Unrecognized prior service cost (reduction in benefits) .5 (3.5)
Accrued pension cost included in other liabilities -- $(25.4) $(24.7)
The determination of the projected benefit obligation for the defined benefit
plans was based on the following assumptions:
December 31 1994 1993 1992
Weighted-average discount rate ---------------------- 8.0% 7.0% 7.5%
Rate of increase in compensation:
Salary continuation plan ---------------------------- 6.5 6.0 6.5
All other plans ------------------------------------- 5.0 5.0 5.5
Expected long-term rate of return on plan assets ---- 9.0 9.0 9.0
The components of net pension cost for the defined benefit pension plans are
as follows:
Year Ended December 31 (in millions) 1994 1993 1992
Service cost-benefits earned during the year -------- $22.1 $20.3 $20.6
Interest cost on projected benefit obligation ------- 30.0 27.9 24.3
Actual return on plan assets ------------------------ 9.7 (42.1) (13.9)
Net amortization (deferral)-------------------------- (40.2) 11.8 (15.1)
Net pension cost ---------------------------------- $21.6 $17.9 $15.9
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, 1994 and
1993, the projected benefit obligation exceeded plan assets by $3,631,000 and
$3,051,000, respectively, and was included with other liabilities in LNC's
balance sheet. Net pension cost for the foreign plans were $633,000,
$1,112,000 and $1,113,000, for 1994, 1993 and 1992, respectively.
49
401k Plan. LNC and its subsidiaries also sponsor contributory defined
contribution plans for eligible U.S. employees and agents. LNC's
contributions to the 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. Expense for these plans amounted to $29,400,000,
$26,300,000 and $15,200,000 in 1994, 1993 and 1992, respectively.
Postretirement Medical and Life Insurance Benefit Plans. LNC sponsors unfunded
defined benefit plans that provide postretirement medical and life insurance
benefits to full-time U.S. employees and agents who, depending on the plan,
have worked for LNC 10 to 15 years and attained age 55 to 60. Medical
benefits are also available to spouses and other dependents of employees and
agents. For medical benefits, limited contributions are required from
individuals 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. The life insurance benefits are
noncontributory, although participants can elect supplemental contributory
benefits.
The status of the postretirement medical and life insurance benefit plans and
the amount recognized on the balance sheet is as follows:
December 31 (in millions) 1994 1993
Accumulated postretirement benefit obligation:
Retirees -------------------------------------------- $ 86.6 $ 91.3
Fully eligible active plan participants ------------- 21.6 25.1
Other active plan participants ---------------------- 34.0 48.2
Accumulated postretirement benefit obligation ----- 142.2 164.6
Unrecognized net gain (loss) ------------------------ 12.6 (8.1)
Accrued plan cost included in other liabilities --- $154.8 $156.5
The components of periodic postretirement benefit cost are as follows:
Year Ended December 31 (in millions) 1994 1993 1992
Service cost ------------------------------------------- $ 4.3 $ 5.0
Interest cost ------------------------------------------ 10.4 10.7
Amortized cost ----------------------------------------- .3 --
Net periodic postretirement benefit cost ------------- $15.0 $15.7 $6.5
The costs for postretirement benefits for year ended December 31, 1992 shown
above is prior to the adoption of FAS 106 (see note 2 on page 39) and,
therefore, represents the total amount of claims and premiums actually paid.
The calculation of the accumulated postretirement benefit 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 1995 gradually
decreasing to 5.5% by 2004 and remaining at that level thereafter. 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
benefit obligation as of December, 1994 and 1993 by $10,300,000 and
$13,600,000, respectively, and the aggregate of the estimated service and
interest cost components of net periodic postretirement benefit cost for the
year ended December 31, 1994 by $1,200,000. The calculation assumes a
long-term rate of increase in compensation of 5.0% for both December 31, 1994
and 1993. The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 8.0% and 7.0% for December
31, 1994 and 1993, respectively.
Incentive Plans. LNC has various incentive plans for key employees of LNC and
its subsidiaries which provides 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 granted under the stock option incentive plans are at the market value
at the date of grant and, subject to termination of employment, expire ten
years from the date of grant. Such options are not transferable other than on
death and are exercisable one year from date of grant for options issued prior
to 1992. Options issued subsequent to 1991 are exercisable in 25% increments
on the option issuance anniversary in the four years following issuance.
Information with respect to the incentive plans involving stock options is as
follows:
Shares Options Outstanding
Available Average
for Grant Shares Option Price
Balance at January 1, 1992 2,539,946 2,657,306 $23.77
Granted ------------------------ (528,500) 528,500 27.74
Exercised ---------------------- -- (996,632) 22.55
Expired ------------------------ 27,540 (38,340)
Restricted stock awarded ------- (50,336) --
Balance at December 31, 1992 - 1,988,650 2,150,834 25.29
Granted ------------------------ (570,600) 570,600 39.75
Exercised ---------------------- -- (260,756) 24.21
Expired ------------------------ 17,826 (18,826)
Restricted stock awarded ------- (144,154) --
Balance at December 31, 1993 - 1,291,722 2,441,852 28.75
Additional authorized ---------- 7,650,000
Granted ------------------------ (442,100) 442,100 39.49
Exercised ---------------------- (122,963) 25.43
Expired ------------------------ 139,099 (88,800)
Restricted stock awarded ------- (215,614) --
Balance at December 31, 1994 - 8,423,107 2,672,189 30.56
Shares under options that were exercisable at December 31, 1994 totaled
1,615,839.
7. Restrictions, Commitments and Contingencies
Shareholders' Equity Restrictions
Generally, the net assets of LNC's insurance subsidiaries available for
transfer to the parent company are limited to the amounts that the insurance
subsidiaries' net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements; however,
payments of such amounts as dividends may be subject to approval by regulatory
authorities. As of December 31, 1994, $1,000,000,000 of consolidated
shareholders' equity represents net assets of the LNC's insurance subsidiaries
that cannot be transferred in the form of dividends, loans or advances to the
parent company without prior approval of such regulatory authorities.
Statutory Information
Net income as determined in accordance with statutory accounting practices for
LNC's insurance subsidiaries was as follows:
Year Ended December 31 (in millions) 1994 1993 1992
Life-health insurance --------------------- $411.7 $229.7 $163.7
Property-casualty insurance --------------- 167.9 247.6 84.1
Life-health insurance statutory net income for 1994, 1993 and 1992, excluding
LNC's foreign life reinsurance companies, was $411,100,000, $267,200,000 and
$202,600,000, respectively.
Shareholders' equity as determined in accordance with statutory accounting
practices for LNC's insurance subsidiaries was as follows:
December 31 (in millions) 1994 1993
Life-health insurance --------------------- $1,966.7 $1,626.7
Property-casualty insurance --------------- 955.7 1,061.7
Estimates Related to Certain Liabilities
The liability for future policy benefits, claims and claim expenses at
December 31, 1994 and 1993 included a liability for environmental losses of
$201,000,000 and $204,000,000, respectively. In establishing liabilities for
claims and claim expenses related to environmental matters, management
considers facts currently known and the current state of the law and coverage
litigation. Liabilities are recognized for known claims (including the cost
51
of related litigation) when sufficient information has been developed to
indicate the involvement of a specific insurance policy and management can
reasonably estimate its liability. In addition, liabilities have been
established to cover additional exposures on both known and unasserted claims.
Estimates of the liabilities are reviewed and updated continually. Developed
case law and adequate claim history do not exist for a portion of LNC's
environmental exposure, especially because significant uncertainty exists
about the outcome of coverage litigation and whether past claims experience
will be representative of future claims experience.
Included in the liability for future policy benefits, claims and claim
expenses and the asset for amounts recoverable from reinsurers at December 31,
1994 and 1993 is a net liability for disability income business of
$730,600,000 and $815,800,000, respectively. If incidence levels do not
improve, or claim termination rates deteriorate, substantial reserve additions
may be required in the future. It is not possible to provide a meaningful
range of estimates of possible additional losses at this time. LNC reviews
and updates the level of these reserves on an on-going basis.
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
as defined in the agreements. In addition, LNC 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 1994, 1993 and 1992 was
$51,400,000, $55,900,000 and $62,300,000, respectively. Future minimum rental
commitments are as follows (in millions):
1995 - $44.9 1997 - $38.9 1999 - $ 33.6
1996 - 43.5 1998 - 35.1 Thereafter - 324.4
Reinsurance Ceded and Assumed
LNC's insurance companies cede reinsurance to other companies. The portion of
risks exceeding each company's retention limit is reinsured with other
insurers. Since 1993, catastrophe reinsurance arrangements for property-
casualty coverages provided for a recovery of an average of approximately 85%
of losses in excess of $30,000,000 up to $180,000,000 per occurrence. The
same limits are in effect for 1994 and 1995 with average recovery of 93% of
losses. Also, LNC seeks reinsurance coverage within the business segments
that sell life insurance that limits its liabilities on an individual insured
to $3,000,000. To cover products other than property-casualty and life
insurance, LNC acquires other reinsurance coverages with retentions and limits
which management believes are appropriate for the circumstances. The
accompanying financial statements reflect premiums, benefits and settlement
expenses and deferred acquisition costs, net of reinsurance ceded (see note 5
on page 47). LNC's insurance companies remain liable if their reinsurers are
unable to meet their contractual obligations under the applicable reinsurance
agreements.
LNC's insurance companies assume reinsurance from other companies. At
December 31, 1994, LNC's insurance companies have granted $776,300,000 of
statutory surplus 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 foreign insurance companies have
obtained letters of credit in favor of various unaffiliated insurance
companies from which LNC assumes business. 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, 1994, there were $638,000,000 of outstanding bank letters of
credit. In exchange for the letters of credits, LNC paid the banks
approximately $1,000,000 in fees in 1994.
52
Other Contingency Matters
LNC and its subsidiaries are involved in various pending or threatened legal
proceedings arising from the conduct of their business. In some instances,
these proceedings include claims for punitive damages and similar types of
relief in unspecified or substantial amounts, in addition to amounts for
alleged contractual liability or requests for equitable relief. After
consultation with 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 statements of LNC.
Operations in the U.K. include the sale of pension products to individuals.
Regulatory agencies have raised questions as to what constitutes appropriate
advice to individuals who bought pension products as an alternative to
participation in an employer sponsored plan. In cases of inappropriate
advice, LNC may have to do extensive investigation and put the individual in a
position similar to what would have been attained if the individual had
remained in the employer sponsored plan. A liability has been established for
the estimated cost of this issue following regulatory guidance as to
activities to be undertaken. Although the provision is based on various
estimates which are subject to considerable uncertainty and, accordingly, may
prove to be deficient or excessive, it is management's opinion that such
future development will not materially affect the consolidated results of
operation.
Tax authorities have recently focused increased attention on compliance of
qualified annuity plans marketed by insurance companies. If sponsoring
employers cannot demonstrate compliance and the insurance company is held
responsible due to its marketing efforts, LNC and other insurers may be
subject to potential liability. It is not possible to provide a meaningful
estimate of the range of possible liability at this time. In addition, LNC is
analyzing the extent to which insurance coverage may offset any liability
which may develop. Management continues to monitor this matter and to take
steps to minimize any potential liability.
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 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 guarantees with off-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) 1994 1993 1994 1994 1993 1993
Industrial revenue bonds ------ $100.9 $130.2 $(13.1)$(12.5)$(16.3) $(12.5)
Real estate partnerships ------ 20.8 43.8 -- -- (2.2) (3.8)
Mortgage loan pass-through
certificates ----------------- 78.2 96.0 -- -- -- --
Total Guarantees ----------- $199.9 $270.0 $(13.1)$(12.5)$(18.5) $(16.3)
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.
53
Derivatives
LNC has derivatives with off-balance-sheet risks whose notional or contract
amounts exceed the credit exposure. LNC has entered into derivative
transactions to reduce its exposure to fluctuations in interest rates and
foreign exchange risks. In addition, LNC is subject to the risks associated
with changes in the value of its derivatives; however, such changes in the
value generally are offset by changes in the value of the items being hedged
by such contracts. Outstanding derivatives with off-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) 1994 1993 1994 1994 1993 1993
Interest Rate Derivatives:
Interest rate cap agreements -- $4,400.0 $3,800.0 $ 23.4 $34.5 $24.4 $ 18.5
Spread-lock agreements -------- 1,300.0 1,700.0 3.2 3.2 -- (5.6)
Financial futures contracts:
Portfolio duration hedges --- 354.3 -- (7.4) (7.4) -- --
Other ----------------------- 28.2 33.1 (.1) (.1) -- --
Interest rate swaps ----------- 5.0 57.0 .2 .2 -- (1.2)
United Kingdom forward swaps -- -- 20.0 -- -- -- .4
Mortgage-backed securities
total return swaps ----------- -- 47.6 -- -- -- .9
Total Derivatives - Interest
Rate Contracts ------------ 6,087.5 5,657.7 19.3 30.4 24.4 13.0
Foreign exchange forward
contract derivatives:
Hedge of foreign subsidiary - 138.3 101.3 (8.7) (8.7) .8 .8
Other ----------------------- 21.2 -- .2 .2 -- --
Total Derivatives --------- $6,247.0 $5,759.0 $ 10.8 $ 21.9 $25.2 $ 13.8
A reconciliation and discussion of the notional or contract amounts for the
significant programs using derivative agreements and contracts is as follows:
Interest
Rate Caps Spread Locks
December 31 (in millions) 1994 1993 1994 1993
Balance at beginning of year -------- $3,800.0 $1,200.0 $1,700.0 $ 600.0
New contracts ----------------------- 600.0 2,600.0 -- 2,000.0
Terminated contracts ---------------- -- -- (400.0) (900.0)
Balance at End of Year ------------ $4,400.0 $3,800.0 $1,300.0 $1,700.0
Foreign
Options on Exchange
Financial Financial Forward
Futures Futures Contracts
December 31 (in millions) 1994 1993 1994 1993 1994 1993
Balance at beginning of year-- $ -- $ -- $ -- $ -- $101.3 $ 43.8
New contracts ---------------- 404.3 -- 308.0 -- 37.0 101.3
Terminated contracts --------- (50.0) -- (308.0) -- -- (43.8)
Balance at End of Year ----- $354.3 $ -- $ -- $ -- $138.3 $101.3
Interest Rate Caps. The interest rate cap agreements, which expire in 1997
through 2003, entitle LNC to receive 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 times 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
fluctuating interest rates. The premium paid for the interest rate caps is
included in other assets ($23,400,000 as of December 31, 1994) and is being
amortized over the terms of the agreements and is included in net investment
income.
54
The revenue that LNC receives from interest rate caps depends on the future
levels of interest rates on U.S. Treasury securities with maturities of two,
five, seven and ten years and on U.S. dollar swap rates for similar
maturities. The table below analyzes the amount of cap revenue LNC would
receive if those rates were 1%, 2% 3%, or 4% higher than they were at December
31, 1994 and remain at those levels throughout the remaining lives of the caps
owned by LNC. In relation to the level of these rates at December 31, 1994,
the cap rates were from .42% to 2.58% out of the money, i.e., higher. Revenue
from interest rate caps under these scenarios is as follows:
Year Ended December 31, (in millions) 1995 1996 1997 1998 1999 Thereafter
No change $ -- $ -- $ -- $ -- $ -- $ --
Up 1% 7.1 4.2 1.5 .5 -- --
Up 2% 30.1 28.3 24.2 15.5 3.7 --
Up 3% 66.5 67.0 62.3 44.2 16.5 6.4
Up 4% 104.8 107.5 102.5 76.4 34.0 17.6
Spread Locks. Spread-lock agreements expire in 1994 and 1995. 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 U.S. Treasury 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 U.S. Treasury security and the price
sensitivity of the swap at that time, expressed in dollars per basis point.
The purpose of LNC's spread-lock program is to protect a portion of its fixed
maturity securities against widening spreads.
Over the past five years, swap spreads have typically traded within an annual
range of 30 basis points, i.e., a range of plus or minus 15 basis points
around the mean level. At December 31, 1994, the cash-settlement value of the
spread locks would have changed by approximately $11,200,000 for each 15 basis
point change in swap spreads.
Financial Futures and Options on Financial Futures. LNC uses exchange-traded
financial futures contracts and options on those financial futures to hedge
against interest rate risks and to manage duration of a portion of its fixed
maturity securities. Short positions in financial futures contracts obligate
LNC to sell a financial instrument at a specified future date for a specified
price and 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. Options on financial futures give LNC the
right, but not the obligation, to assume a short position in the underlying
futures at a specified price during a specified time period.
At December 31, 1994, LNC had short positions in the March 1995 five year
note, ten year note, and bond futures with an aggregate face amount of
$354,300,000. As the yields on the underlying Treasury securities rise
(fall), the value of these short positions to LNC will increase (decrease) by
approximately $2,700,000 million for each 10 basis point parallel shift in the
yield curve.
Foreign Exchange Forward Contracts. LNC uses foreign exchange forward
contracts, which are traded over-the-counter, to hedge the foreign exchange
risk assumed with LNC's investment in its UK subsidiary, Lincoln National
(UK). LNC hedges its exposure to sterling in excess of $100,000,000 of its
investment in Lincoln National (UK). The foreign exchange forward contracts
obligate 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
fluctuate according to the underlying level of exchange rate and interest rate
differentials. Based on LNC's notional amount of contracts in place at
December 31, 1994 of $138,300,000, as the exchange rate on these contracts
rise (fall), assuming no difference in the underlying interest rates, the
value of these contracts to LNC will change by approximately $1,380,000 for
each 1% change in the exchange rate.
55
Additional Derivative Information. Expenses for the agreements and contracts
described above amounted to $7,400,000 and $4,400,000 in 1994 and 1993,
respectively. Deferred losses of $2,700,000 as of December 31, 1994,
resulting from 1)terminated and expired spread-lock agreements 2)financial
futures contracts and 3)options on financial futures, are included with the
related fixed maturity securities to which the hedge applied 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, spread-lock agreements, interest rate swaps,
United Kingdom forward swaps, foreign exchange forward contracts and mortgage-
backed securities total return swaps, but LNC does not anticipate
nonperformance by any of these 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 their replacement cost, which is approximated by
the unrealized gains in such contracts, which was $29,300,000 at December 31,
1994.
At December 31, 1994, LNC did not have a material concentration of financial
instruments in a single investee, industry or geographic location.
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 judgement is required to develop these fair values and,
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 or, in the case of private
placements, 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
rating, maturity and future income when compared to the expected yield for
mortgages having similar characteristics. The rating 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 measured based either on
the present value of expected future cash flows discounted at the loan's
effective interest rate, at the loan's observable market price or 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 sheet approximates their fair value.
Investment Type Insurance Contracts. The balance sheet captions, "Future
Policy Benefits, Claims and Claim Expenses" and "Contractholder 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 based on
interest rates currently being offered on similar contracts with maturities
consistent with those remaining for the contracts being valued.
56
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 in that readers of these
financial statements could draw inappropriate conclusions about LNC's
shareholders' equity determined on a fair value basis 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
estimated using discounted cash flow analysis based on LNC's current
incremental borrowing rate for similar types of borrowing arrangements. For
short-term debt, the carrying value approximates fair value.
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. Fair values for all other guarantees are based
on fees that would be charged currently to enter into similar agreements,
taking into consideration the remaining terms of the agreements and the
counterparties' credit standing.
Derivatives. LNC's derivatives include interest rate cap agreements, spread-
lock agreements, foreign currency exchange contracts, financial futures
contracts, options on financial futures, interest rate swaps, United Kingdom
forward swaps and mortgage-backed securities total return swaps. Fair values
for these contracts is based on current settlement values. The current
settlement values are based on quoted market prices for the foreign currency
exchange contracts, financial future contracts and options on financial
futures, and on brokerage quotes, which utilized pricing models or formulas
using current assumptions, for all other swaps and agreements.
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, which would take into account changes in interest
rates, the counterparties' credit standing and the remaining terms of the
commitments.
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) 1994 1994 1993 1993
Assets (liabilities):
Fixed maturities securities -------- $21,664.1 $21,664.1 $23,964.4 $23,964.4
Equity securities ------------------ 1,038.6 1,038.6 1,080.3 1,080.3
Mortgage loans on real estate ------ 2,853.1 2,776.7 3,301.0 3,466.7
Policy loans ----------------------- 553.3 532.4 595.1 626.4
Other investments ------------------ 175.1 175.1 158.2 158.2
Cash and invested cash ------------- 1,041.6 1,041.6 709.7 709.7
Investment type insurance contracts:
Deposit contracts and certain
guaranteed interest contracts --- (14,294.7)(14,052.5)(12,517.2)(11,960.4)
Remaining guaranteed interest
and similar contracts ----------- (2,485.5) (2,423.9) (2,419.5) (2,564.3)
Short-term debt -------------------- (275.3) (275.3) (351.4) (351.4)
Long-term debt --------------------- (419.6) (408.9) (335.1) (360.6)
Guarantees ------------------------- (13.1) (12.5) (18.5) (16.3)
Derivatives ------------------------ 10.8 21.9 25.2 13.8
Investment commitments ------------- -- (.5) -- (2.4)
57
As of December 31, 1994 and 1993, the carrying value of the deposit contracts
and certain guaranteed contracts is net of deferred acquisition costs of
$399,000,000 and $297,800,000, 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 in order that they be comparable with the fair value basis.
9. Segment Information
LNC has four major business segments: Property-Casualty, Life Insurance and
Annuities, Life-Health Reinsurance and Employee Life-Health Benefits. The
Property-Casualty segment writes both commercial and personal coverages
through a network of independent agents. The Life Insurance and Annuities
segment offers universal life, 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.
Life-Health 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.
Prior to the sale of 71% of the ownership of its primary writer of employee
life-health benefit coverages in 1994 (see note 11 on page 59), the Employee
Life-Health Benefits segment distributed group life and health insurance,
managed health care and other related coverages through career agents and
independent general agencies. Activity which is not included in the major
business segments is shown as "Other Operations."
"Other Operations" includes an unconsolidated affiliate engaged in the
employee life-health benefits business, LNC's investment management companies,
certain other 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). Prior to 1993,
all realized gain (loss) on investments was included in Other Operations and
corporate investment income was net of amounts allocated to the business
segments in lieu of realized gain (loss) on investments.
The revenue, pre-tax income and assets by segment for 1992 through 1994 are as
follows:
Year Ended December 31 (in millions) 1994 1993 1992
Revenue:
Property-Casualty ---------------------- $1,971.4 $2,240.6 $2,408.7
Life Insurance and Annuities ----------- 2,615.4 2,858.3 2,438.7
Life-Health Reinsurance ---------------- 2,001.9 1,930.5 1,781.8
Employee Life-Health Benefits ---------- 314.9 1,297.3 1,241.6
Other Operations ----------------------- 80.8 (36.9) 163.3
Total Revenue ------------------------ $6,984.4 $8,289.8 $8,034.1
Income (loss) before income taxes and
cumulative effect of accounting change:
Property-Casualty ---------------------- $ 177.2 $257.6 $ 22.1
Life Insurance and Annuities ----------- 106.7 344.3 197.0
Life-Health Reinsurance ---------------- 102.9 27.5 84.3
Employee Life-Health Benefits ---------- 22.9 86.0 62.9
Other Operations ----------------------- (33.4) (127.6) 58.4
Total Income Before Income Taxes
and Cumulative Effect of
Accounting Change ------------------- $ 376.3 $587.8 $424.7
December 31 (in millions) 1994 1993 1992
Assets:
Property-Casualty ---------------------- $ 4,966.6 $ 5,550.5 $ 5,101.3
Life Insurance and Annuities ----------- 40,758.4 38,711.7 30,519.6
Life-Health Reinsurance ---------------- 3,118.8 3,227.2 2,402.9
Employee Life-Health Benefits ---------- -- 679.7 558.1
Other Operations ----------------------- 486.3 211.3 965.4
Total Assets ------------------------- $49,330.1 $48,380.4 $39,547.3
Provisions for depreciation and capital additions were not material.
58
10. Shareholders' Equity
LNC's common and preferred stock is without par value.
All of the issued and outstanding Series A Preferred Stock is $3 Cumulative
Convertible and is convertible at any time into shares of Common Stock at a
conversion rate of eight 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 the Corporation at $80 per
share plus accrued and unpaid dividends.
Each share of the Series E and F Preferred Stock is 5 1/2% Cumulative
Convertible Exchangeable Preferred Stock and is convertible into two shares of
LNC's Common Stock. The Series E and Series F Preferred Stock issued at
$68.85 and $71.604 per share, respectively, are owned by Dai-ichi Mutual Life
Insurance Company.
The Series A, E and F Preferred Stock have 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, E and F Preferred Stock will be
entitled to payments of $80.00, $68.85 and $71.604 per share, respectively.
The difference between the aggregate preference on liquidation value and the
financial statement balance for the Series A and E Preferred Stock was
$2,000,000 and $400,000, respectively, at December 31, 1994. Series A, E and
F Preferred Stock have parity with respect to liquidating distributions.
LNC has outstanding one Common Share Purchase Right ("Rights") on each
outstanding share of LNC's Common Stock. A Right will also be issued with
each share of LNC's Common Stock that becomes outstanding prior to the time
the Rights become exercisable or expire. If a person or group acquires
beneficial ownership of 20% or more or announces an offer that would result in
beneficial ownership of 30% or more of LNC's outstanding Common Stock, the
Rights become exercisable and each Right will entitle its holder to purchase
one share of LNC's Common Stock for $75. If LNC is acquired in a business
combination transaction, each Right will entitle its holder to purchase, for
$75, common shares of the acquiring company having a market value of $150.
Alternatively, if a 20% holder were to acquire LNC by means of a reverse
merger in which LNC and its stock survive or were to engage in certain
"self-dealing" transactions, each Right not owned by the 20% holder would
entitle its holder to purchase, for $75, Common Stock of LNC having a market
value of $150. LNC can redeem each Right for one cent at any time prior to
its becoming exercisable. The Rights expire in November 1996. As of December
31, 1994, there were 94,477,942 Rights outstanding.
During February 1993, LNC issued 9,200,000 shares of Common Stock. The
proceeds from this offering, net of issuance and distribution costs, were
$316,100,000. During November 1994, LNC purchased and retired 500,000 shares
of Common Stock at a total cost of $18,400,000.
During May 1994, LNC's Articles of Incorporation were amended to increase the
number of authorized shares of Common Stock from 400,000,000 to 800,000,000.
Earnings per share are computed based on the average number of common shares
outstanding during each year (1994 - 103,863,196; 1993 - 102,307,356; 1992 -
92,977,312) after assuming conversion of the Series A, E and F Preferred
Stock. The effect of stock options is not dilutive in the computation of
earnings per share.
59
Details underlying the balance sheet caption "Net Unrealized Gain (Loss) on
Securities Available-for-Sale," are as follows:
December 31 (in millions) 1994 1993
Fair value of securities available-for-sale ------------- $22,682.7 $25,044.7
Cost of securities available-for-sale ------------------- 23,142.2 23,115.8
Unrealized Gain (Loss) -------------------------------- (459.5) 1,928.9
Adjustments to deferred acquisition costs --------------- 162.1 (429.2)
Amounts required to satisfy policyholder commitments ---- 14.1 (58.3)
Amounts related to disposal of subsidiary included in
other liabilities -------------------------------------- -- (30.1)
Deferred income credits (taxes) ------------------------- 107.8 (496.6)
Valuation allowance for deferred tax assets ------------- (135.6) --
Net Unrealized Gain (Loss) on Securities
Available-for-Sale ----------------------------------- $ (311.1) $ 914.7
Adjustments to deferred acquisition costs and amounts required to satisfy
policyholder commitments are netted against the Deferred Acquisition Costs
asset account and included with the Future Policy Benefits, Claims and Claim
Expenses liability account on the balance sheet, respectively.
11. Sale of Subsidiaries
In December 1993, LNC recorded a provision for loss of $98,500,000 (also
$98,500,000 after-tax) in the "Other Operations" segment for the sale of
Security-Connecticut Corporation ("Security-Connecticut"). The sale was
completed on February 2, 1994 through an initial public offering and LNC
received cash and notes, net of related expenses, totaling $237,700,000. The
loss on sale and disposal expenses did not differ materially from the estimate
recorded in the fourth quarter of 1993. For the years ended December 31, 1993
and 1992, Security-Connecticut, which operated in the Life Insurance and
Annuities segment, had revenues of $274,500,000 and $252,400,000,
respectively, and net income of $24,000,000 and $26,200,000, respectively. As
of December 31, 1993, Security-Connecticut had assets of $1,830,600,000 and
liabilities of $1,504,900,000.
In 1994, LNC completed the sale of 71% of EMPHESYS (parent company of
Employers Health Insurance Company, which comprised LNC's Employee Life-Health
Benefit segment) for $244,700,000 of cash, net of related expenses, and a
$50,000,000 promissory note. A gain on sale of $48,800,000 (also $48,800,000
after-tax) was recognized in 1994 in "Other Operations". For the years ended
December 31, 1993 and 1992, EMPHESYS had revenues of $1,304,700,000 and
$1,247,600,000, and net income of $55,300,000 and $43,900,000, respectively.
EMPHESYS had revenues and net income of $314,900,000 and $14,400,000,
respectively, during the three months of ownership in 1994. As of December
31, 1993, EMPHESYS had assets of $793,700,000 and liabilities of $453,400,000.
12. Subsequent Event
In December 1994, LNC announced that it had signed a definitive agreement to
acquire an investment management company, Delaware Management Holdings, Inc.
("Delaware"). The purchase price, including LNC's expected expenses
associated with the acquisition, is approximately $305,000,000 plus contingent
payments of $22,500,000 which are based on the level of Delaware's future
investment management revenues. Also, the assumption of debt in connection
with this acquisition includes approximately $25,000,000 of short-term debt
and will add $180,000,000 (face amount) to consolidated long-term debt. This
transaction, which is expected to close in the second quarter of 1995, will be
accounted for on the basis of purchase accounting and, accordingly, the
results of their operation will be included in LNC's consolidated financial
statements from the closing date. Although purchase accounting adjustments
have not been finalized, management does not believe that consolidated results
would have been materially different had this acquisition been completed at
the beginning of 1994.
60
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, 1994 and 1993, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1994. 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 generally accepted auditing
standards. 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, 1994 and 1993, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting
principles. 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.
As discussed in note 2 to the consolidated financial statements, in 1993 the
Corporation changed its method for accounting for postretirement benefits
other than pensions, accounting for impairment of loans, and accounting for
certain investments in debt and equity securities.
Ernst & Young LLP
Fort Wayne, Indiana
February 8, 1995
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
There have been no disagreements with LNC's independent auditors which are
reportable pursuant to Item 304 of Regulation S-K.
61
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 11, 1995.
Executive Officers of the Registrant as of December 31, 1994 were as follows:
Name Position with LNC and Business Experience
(Age) During the Past Five Years
Ian M. Rolland Chairman and Director, LNC since 1992.
(61) President and Director, LNC (1975-1991). Chief
Executive Officer, LNC since 1977.
Robert A. Anker President, Chief Operating Officer and Director,
(53) LNC since 1992. President and Chief Executive
Officer, American States* (1990-1991). President
and Chief Operating Officer, American States*
(1985-1990).
Jon A. Boscia President, Chief Operating Officer, LNL* since
(43) May 1994. Executive Vice President, LNC (1991-
May 1994). President, Lincoln National Investment
Management Company ("LNIMC")* (1991-May 1994).
Executive Vice President, LNIMC* (1985-1991).
George E. Davis Senior Vice President, LNC since 1993.
(52) Vice President, Eastman Kodak Co. (1985-1993).
P. Kenneth Dunsire Executive Vice President, LNC since 1986. [Retired
(63) January 1995]
Jack D. Hunter Executive Vice President, LNC since 1986. General
(58) Counsel since 1971.
Barbara S. Kowalczyk Senior Vice President, LNC since May 1994.
(44) Senior Vice President, LNIMC* (1992-May 1994). Vice
President LNIMC* (1985-1992).
F. Cedric McCurley President and Chief Executive Officer, American
(60) States* since 1992. Executive Vice President,
American States* (1986-1991).
H. Thomas McMeekin Executive Vice President, LNC since May 1994.
(41) President, LNIMC* since May 1994. Senior Vice
President, LNC (1992-May 1994). Executive Vice
President, LNIMC* (February 1992-November 1992).
Senior Vice President, LNIMC* (1987-1992).
Richard S. Robertson Executive Vice President, LNC since 1986.
(52)
Gabriel L. Shaheen Executive Vice President, LNL* since May 1994.
(41) Senior Vice President, LNL* 1991-May 1994), Vice
President, LNL* (1987-1991).
Richard C. Vaughan Executive Vice President and Chief Financial
(45) Officer, LNC since January 1995. Senior Vice
President and Chief Financial Officer, LNC (1992-
January 1995). Senior Vice President, LNL* (1990-
1992). Vice President, EQUICOR, Inc. (1988-1990).
Donald L. Van Wyngarden Second Vice President & Controller, LNC since 1975.
(55)
*Denotes a subsidiary of LNC
62
There is no family relationship between any of the foregoing executive
officers, all of whom are elected annually.
Item 11. Executive Compensation
Information for this item is incorporated by reference to the section cap-
tioned "EXECUTIVE COMPENSATION" of LNC's Proxy Statement for the Annual
Meeting scheduled for May 11, 1995.
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 11, 1995.
Item 13. Certain Relationships and Related Transactions
Information for this item is incorporated by reference to the section cap-
tioned "TERMINATION OF EMPLOYMENT ARRANGEMENT" of LNC's Proxy Statement for
the Annual Meeting scheduled for May 11, 1995.
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 Corpora-
tion and subsidiaries are included in Item 8:
Consolidated Balance Sheets - December 31, 1994 and 1993
Consolidated Statements of Income - Years ended December 31, 1994, 1993 and
1992
Consolidated Statements of Shareholders' Equity - Years ended December 31,
1994, 1993 and 1992
Consolidated Statements of Cash Flows - Years ended December 31, 1994, 1993
and 1992
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 and subsidiaries 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
VI - Supplementary Information Concerning Property-Casualty Insurance
Operations
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 have been
omitted.
63
Item 14(a)(3) Listing of Exhibits
The following exhibits of Lincoln National Corporation and subsidiaries are
included in Item 14(c) - (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 May 12,
1994 are incorporated by reference to LNC's Form S-3/A (File No.
33-55379) filed with the Commission on September 15, 1994.
3(b) The Bylaws of LNC as last amended January 1, 1992 are
incorporated by reference to Exhibit 3(b) of LNC's Form 10-K for
the year ended December 31, 1991 filed with the Commission on
March 27, 1992.
4(a) Indenture of LNC dated as of January 15, 1987.
4(b) First Supplemental Indenture dated as of July 1, 1992, to
Indenture of LNC dated as of January 15, 1987, and Specimen
Notes for LNC's 7 1/8% Notes due July 15, 1999 are incorporated
by reference to Annex B and Annex C of LNC's Form 8-K filed with
the Commission on July 7, 1992.
4(c) First Supplemental Indenture dated as of July 1, 1992, to
Indenture of LNC dated as of January 15, 1987, and Specimen
Notes for LNC's 7 5/8% Notes due July 15, 2002 are incorporated
by reference to Annex B and Annex D of LNC's Form 8-K filed
with the Commission on July 7, 1992.
4(d) Fiscal Agency Agreement related to sale of $100,000,000
aggregate principal amount of 9 3/4% Notes of LNC due October 20,
1995 and the specimen of 9 3/4% Notes are incorporated by
reference to Exhibit 4(d) of LNC's Form 10-K for the year ended
December 31, 1993, filed with the Commission on March 30, 1994.
4(e) Rights Agreement dated November 7, 1986.
4(f) Rights Agreement date July 5, 1990 is incorporated by reference
to Exhibit No. 28 of LNC's Registration Statement on Form S-3,
(File No. 33-55652), filed with the Commission on December 11,
1992.
4(g) Indenture for LNC's 9 1/8% Debentures due October 1, 2024 are
incorporated by reference to Exhibits No. 4(c) of LNC's S-3/A
(File No. 33-55379), filed with the Commission on September 15,
1994.
4(h) Specimen Debenture of LNC's 9 1/8% Debentures due October 1, 2024
is incorporated herein by reference to Schedule I of LNC's Form
8-K filed with the Commission on September 29, 1994.
1994.
10(a)* The Lincoln National Corporation 1986 Stock Option Incentive
Plan as last amended and restated is incorporated by reference to
Exhibit No.1 of LNC's Proxy filed with the Commission on March
31, 1994.
10(b)* The Lincoln National Corporation 1982 Stock Option Incentive
Plan as last amended May 7, 1987 is incorporated by reference to
Exhibit 10(b) of LNC's Form 10-K for the year ended December 31,
1993, filed with the Commission on March 30, 1994.
10(c)* The Lincoln National Corporation Executives' Salary Continuation
Plan as last amended January 1, 1992 is incorporated by reference
to Exhibit 10(c) of LNC's Form 10-K for the year ended December
31, 1992, filed with the Commission on March 30, 1993.
64
10(d)* The Lincoln National Corporation Executive Value Sharing Plan is
incorporated by reference to Exhibit No. 4 of LNC's Proxy filed
with the Commission on March 31, 1993.
10(e)* Lincoln National Corporation Executives' Severance Benefit Plan
as last amended January 10, 1990, is incorporated by reference
to Exhibit 10(f) of LNC's Form 10-K for the year ended December
31, 1990, filed with the Commission on March 28, 1991.
10(f)* The Lincoln National Corporation Outside Directors Retirement
Plan as last amended March 15, 1990, is incorporated by reference
to Exhibit 10(g) of LNC's Form 10-K for the year ended December
31, 1990, filed with the Commission on March 28, 1991.
10(g)* The Lincoln National Corporation Outside Directors Benefits Plan
is incorporated by reference to Exhibit 10(h) of LNC's Form 10-K
for the year ended December 31, 1992, filed with the Commission
on March 30, 1993.
10(h)* Descriptions of compensation arrangements with Executive
Officers is incorporated by reference to Exhibit 10(m) of LNC's
Form 10-K for the year ended December 31, 1993, filed with the
Commission on March 30, 1994.
10(i)* The Lincoln National Corporation Executives' Supplemental
Pension Benefit Plan is incorporated by reference to Exhibit
10(n) of LNC's Form 10-K for the year ended December 31, 1992,
filed with the Commission on March 30, 1993.
10(j)* Lincoln National Corporation Executive Savings and Profit
Sharing Plan as amended January 1, 1992 is incorporated by
reference to Exhibit 10(o) of LNC's Form 10-K for the year ended
December 31, 1992, filed with the Commission on March 30, 1993.
10(k)* Lincoln National Corporation 1993 Stock Plan for Non-Employee
Directors is incorporated by reference to Exhibit 10(q) of LNC's
Form 10-K for the year ended December 31, 1993, filed with the
Commission on March 30, 1994.
10(l)* Lincoln National Corporation Executives' Excess Compensation
Benefit Plan is incorporated by reference to Exhibit 10(r) of
LNC's Form 10-K for the year ended December 31, 1993, filed with
the Commission on March 30, 1994.
10(m) Lease and Agreement dated August 1, 1984, with respect to the
American States' Home Office property, is incorporated by
reference to Exhibit 10(i) of LNC's Form 10-K for the year ended
December 31, 1990, filed with the Commission on March 28, 1991.
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, is incorporated by reference to
Exhibit 10(j) of LNC's Form 10-K for the year ended December 31,
1990, filed with the Commission on March 28, 1991.
10(o) Lease and Agreement dated August 1, 1984, with respect to LNL's
Home Office property located at Magnavox Way, Fort Wayne, Indiana
is incorporated by reference to Exhibit No. 10(i) of LNC's Form
10-K for the year ended December 31, 1990, filed with the
Commission March 28, 1991. [Former lessee name was Lincoln
National Pension Insurance Company which was merged with LNL,
effective January 1, 1989.]
65
10(p) Lease and Agreement dated December 1, 1994 with respect to LNC's
Corporate Office located at 200 East Berry Street, Fort Wayne,
Indiana.
*This exhibit is a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this form
pursuant to Item 14(c) of this report.
11 Computation of Per Share Earnings.
21 List of Subsidiaries of LNC.
23 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
28 Information from Reports Furnished to State Insurance.
Regulatory Authorities.
Item 14(b) - During the fourth quarter of the year ended
December 31, 1994, no reports on Form 8-K were
filed with the Commission.
Item 14(c) - The exhibits of Lincoln National Corporation
and subsidiaries are listed in Item 14(a)(3)
above.
Item 14(d) - The financial schedules for Lincoln National
Corporation and subsidiaries follow on pages
through 31-59.
66
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS
IN RELATED PARTIES
December 31, 1994 (000's omitted)
Col. A Col. B Col. C Col. 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 ------------- $ 1,673,071 $ 1,632,779 $ 1,632,779
States, municipalities and
political subdivisions ------ 2,386,211 2,377,707 2,377,707
Mortgage-backed securities --- 5,215,536 5,106,408 5,106,408
Foreign governments ---------- 624,348 611,893 611,893
Public utilities ------------- 2,734,853 2,608,830 2,608,830
Convertibles and bonds
with warrants attached ------ 115,539 117,591 117,591
All other corporate bonds ---- 9,316,299 9,066,223 9,066,223
Redeemable preferred stocks ---- 128,222 122,723 122,723
Total ----------------------- 22,194,079 21,644,154 21,644,154
Equity securities available-for-sale:
Common stocks:
Public utilities ------------- 29,506 29,195 29,195
Banks, trusts and
insurance companies --------- 72,722 110,526 110,526
Industrial, miscellaneous
and all other --------------- 573,344 639,107 639,107
Nonredeemable preferred stocks - 272,563 259,789 259,789
Total Equity Securities ----- 948,135 1,038,617 1,038,617
Mortgage loans on real estate ---- 2,915,758 2,853,083(A)
Real estate:
Investment properties ---------- 571,912 571,912
Acquired in
satisfaction of debt ---------- 213,580 134,942(A)
Policy loans --------------------- 553,272 553,272
Other investments ---------------- 198,897 175,121(A)
Total Investments ----------- $27,595,633 $26,971,101
(A) Investments which are 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.
67
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
Lincoln National Corporation (Parent Company Only)
December 31 (000's omitted) 1994 1993
Assets:
Investments in subsidiaries* ------------------ $3,779,282 $4,870,705
Investments ----------------------------------- 28,726 43,868
Investment in unconsolidated affiliate -------- 114,345 --
Cash and invested cash ------------------------ 523,132 271,721
Property and equipment ------------------------ 9,895 5,941
Accrued investment income --------------------- 211 16
Receivable from subsidiaries* ----------------- 66,724 62,835
Loans to subsidiaries* ------------------------ 36,480 16,025
Dividends receivable from subsidiaries* ------- 45,000 80,000
Goodwill -------------------------------------- 9,355 10,008
Other assets ---------------------------------- 10,184 116,215
Total Assets -------------------------------- $4,623,334 $5,477,334
Liabilities and Shareholders' Equity
Liabilities:
Cash collateral on loaned securities ---------- $ 203,531 $ 189,256
Dividends payable ----------------------------- 40,531 38,591
Short-term debt ------------------------------- 229,444 312,867
Long-term debt -------------------------------- 397,705 298,422
Loans from subsidiaries* ---------------------- 600,308 328,467
Federal income taxes (recoverable) payable ---- (2,387) 30,717
Accrued expenses and other liabilities -------- 112,142 206,693
Total Liabilities --------------------------- 1,581,274 1,405,013
Shareholders' Equity:
Series A Preferred Stock --------------------- 1,420 1,553
Series E Preferred Stock --------------------- 151,206 151,206
Series F Preferred Stock --------------------- 158,707 158,707
Common Stock --------------------------------- 555,382 543,659
Earned surplus ------------------------------- 2,479,532 2,303,731
Foreign currency translation adjustment ------ 6,890 (1,214)
Net unrealized gain (loss) on investment
securities available-for-sale [including
unrealized gain (loss) of subsidiaries:
1994 - (325,366,000), 1993 - $891,971,000] -- (311,077) 914,679
Total Shareholders' Equity ---------------- 3,042,060 4,072,321
Total Liabilities and
Shareholders' Equity --------------------- $4,623,334 $5,477,334
*Eliminated in consolidation.
These condensed financial statements should be read in conjunction with the
consolidated financial statements and accompanying footnotes of Lincoln
National Corporation and subsidiaries (see pages 31 through 59).
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Continued)
STATEMENTS OF INCOME
Lincoln National Corporation (Parent Company Only)
Year Ended December 31 (000's omitted) 1994 1993 1992
Revenue:
Dividends from subsidiaries* --------------- $309,460 $155,980 $ 60,324
Interest from subsidiaries* ---------------- 1,080 1,730 1,799
Pre-closing dividend from subsidiaries sold- -- -- 40,917
Equity in earnings of
unconsolidated affiliate ------------------ 13,119 -- --
Net investment income ---------------------- 20,376 14,634 22,610
Realized gain (loss) on investments -------- (20,016) 27,106 49,807
Other -------------------------------------- 1,373 (61) 1,235
Total Revenue ---------------------------- 325,392 199,389 176,692
Expenses:
Operating and administrative --------------- 40,919 21,682 32,078
Interest-subsidiaries* --------------------- 23,815 13,811 18,246
Interest-other ----------------------------- 45,976 41,136 51,861
Total Expenses --------------------------- 110,710 76,629 102,185
Income before Federal Income Tax benefits,
Equity in Undistributed Net Income of
Subsidiaries and Cumulative Effect
of Accounting Change -------------------- 214,682 122,760 74,507
Federal income tax benefits ------------------ (36,574) (6,032) (7,521)
Income Before Equity in
Undistributed Net Income of
Subsidiaries and Cumulative
Effect of Accounting Change ------------- 251,256 128,792 82,028
Equity in undistributed net income of
subsidiaries -------------------------------- 98,642 286,491 277,143
Income Before Cumulative Accounting
Change ---------------------------------- 349,898 415,283 359,171
Cumulative effect of accounting change:
Parent company ------------------------------ -- (8,006) --
Subsidiaries -------------------------------- -- (88,425) --
Total Accounting Change ------------------ -- (96,431) --
Net Income ------------------------------- $349,898 $318,852 $359,171
*Eliminated in consolidation.
These condensed financial statements should be read in conjunction with the
consolidated financial statements and accompanying footnotes of Lincoln
National Corporation and subsidiaries (see pages 31 through 59).
69
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Continued)
STATEMENTS OF CASH FLOWS
Lincoln National Corporation (Parent Company Only)
Year Ended December 31 (000's omitted) 1994 1993 1992
Cash Flows from Operating Activities:
Net Income ----------------------------------- $349,898 $318,852 $359,171
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income
of subsidiaries* ------------------------- (63,642) (278,065) (264,833)
Equity in undistributed earnings of
unconsolidated affiliate ----------------- (13,119) -- --
Realized (gain) loss on investments ------- 20,016 (27,106) (49,807)
Cumulative effect of accounting change ---- -- 8,006 --
Other ------------------------------------- (32,757) 23,375 10,088
Net Adjustments ------------------------- (89,502) (273,790) (304,552)
Net Cash Provided by
Operating Activities ------------------- 260,396 45,062 54,619
Cash Flows from Investing Activities:
Net sales (purchases) of investments ------- (22,106) 31,648 86,448
Cash collateral on loaned securities ------- 14,275 9,547 (31,746)
Net investment in subsidiaries* ------------ (2,744) (105,846) (103,149)
Sale of subsidiaries ----------------------- -- -- 145,270
Investment in unconsolidated affiliate ----- (103,470) -- --
Net (purchase) sale of property
and equipment ----------------------------- (5,109) (5,563) 5,141
Other -------------------------------------- 7,379 3,147 (24,079)
Net Cash Provided by (Used in)
Investing Activities -------------------- (111,775) (67,067) 77,885
Cash Flows from Financing Activities:
Principal payments on long-term debt ------- (100,717) -- (31,283)
Issuance of long-term debt ----------------- 200,000 -- 197,737
Net decrease in short-term debt ------------ (83,423) (207,231) (225,503)
Increase (decrease) in loans from
subsidiaries* ----------------------------- 271,841 (127,602) 113,436
Decrease (increase) in loans to
subsidiaries* ----------------------------- (20,455) 34,725 50,091
Decrease (increase) in receivables from
subsidiaries* ----------------------------- (3,889) (14,235) 40,735
Public offering of Common Stock ------------ -- 316,100 --
Common Stock issued for benefit plans ------ 29,985 26,230 21,018
Retirement of Common Stock ----------------- (18,395) -- --
Dividends paid to shareholders ------------- (172,157) (156,235) (139,151)
Net Cash Provided by (Used in)
Financing Activities -------------------- 102,790 (128,248) 27,080
Net Increase (Decrease) in Cash ---------- 251,411 (150,253) 159,584
Cash at beginning of year -------------------- 271,721 421,974 262,390
Cash at End of Year ---------------------- $523,132 $271,721 $421,974
*Eliminated in consolidation.
These condensed financial statements should be read in conjunction with the
consolidated financial statements and accompanying footnotes of Lincoln
National Corporation and subsidiaries (see pages 31 through 59).
70
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
Column A Column B Column C Column D Column E Column F Column G
Future Policy Other
Benefits, Policy
Deferred Claims and Claims and Net
Acquisition Claim Unearned Benefits Premium Investment
Segment Costs Expenses(A) Premiums(A) Payable Revenue (B) Income (C)
--------------------------------(000's Omitted)---------------------------------
Year Ended December 31, 1994
Property-Casualty ------------ $ 140,122 $ 2,702,537 $732,101 $ $1,710,563 $ 241,096
Life Insurance and Annuities - 1,638,751 6,357,449 11,201 1,030,010 1,635,891
Life-Health Reinsurance ------ 665,342 2,222,657 65,202 1,853,880 125,447
Employee Life-Health Benefits(D) -- -- -- 299,338 10,838
Other (incl. consol. adj's.) - (66,331) (1,517) (1,921)
Total ---------------------- $2,444,215 $11,216,312 $806,987 $ -- $4,893,791 $2,011,351
Year Ended December 31, 1993
Property-Casualty ------------ $ 153,073 $ 2,810,037 $777,011 $ $1,841,363 $ 250,633
Life Insurance and Annuities - 1,176,852 7,305,262 6,527 969,579 1,717,503
Life-Health Reinsurance ------ 681,206 2,340,654 76,606 1,787,644 124,856
Employee Life-Health Benefits- 320,189 1,228,606 42,931
Other (incl. consol. adj's.) - (124,107) (1,339) 10,596
Total ---------------------- $2,011,131 $12,652,035 $858,805 $ -- $5,827,192 $2,146,519
Year Ended December 31, 1992
Property-Casualty ------------ $ 172,378 $ 2,672,503 $840,349 $ $2,082,953 $ 287,224
Life Insurance and Annuities - 1,430,790 6,617,403 4,587 789,796 1,572,744
Life-Health Reinsurance ------ 509,453 1,497,314 135,543 1,651,166 108,713
Employee Life-Health Benefits- 269,044 13 1,184,183 37,775
Other (incl. consol. adj's.) - 5,275 68,296 5 268 (19,160)
Total ---------------------- $2,117,896 $11,124,560 $980,497 $ -- $5,708,366 $1,987,296
Column A Column H Column I Column J Column K
Amortiza-
Benefits, tion of
Claims, Deferred
and Policy Ac- Other
Claim quisition Operating Premiums
Segment Expenses Costs Expenses (C) Written
----------------------(000's Omitted)-----------------
Year Ended December 31, 1994
Property-Casualty ------------ $1,262,400 $361,195 $ 169,049 $1,664,483
Life Insurance and Annuities - 1,904,352 89,916 514,384
Life-Health Reinsurance ------ 1,463,819 147,226 289,488
Employee Life-Health Benefits(D) 218,672 73,355
Other (incl. consol. adj's.) - 114,213
Total ---------------------- $4,849,243 $598,337 $1,160,489
Year Ended December 31, 1993
Property-Casualty ------------ $1,406,781 $384,185 $ 187,654 $1,766,649
Life Insurance and Annuities - 1,883,656 139,824 371,756
Life-Health Reinsurance ------ 1,421,329 42,549 561,790
Employee Life-Health Benefits- 916,513 294,810
Other (incl. consol. adj's.) - 5,274 85,807
Total ---------------------- $5,628,279 $571,832 $1,501,817
Year Ended December 31, 1992
Property-Casualty ------------ $1,721,802 $435,353 $ 229,426 $2,003,534
Life Insurance and Annuities - 1,723,165 122,652 395,874
Life-Health Reinsurance ------ 1,349,444 (3,955) 352,025
Employee Life-Health Benefits- 902,096 276,616
Other (incl. consol. adj's.) - 3,936 9,621 91,349
Total ---------------------- $5,700,443 $563,671 $1,345,290
(A) Following the adoption of FAS 113 in 1993, the 1993 and 1994 amounts are presented on a gross-of-reinsurance basis;
the 1992 amounts are presented on a net-of-reinsurance basis.
(B) Includes insurance fees on universal life and other interest sensitive products.
(C)
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.
(D) Includes data through the March 21, 1994 date of sale of the direct writer of employee life-health coverages.
71
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE (A)
Column A Column B Column C Column D Column E Column F
Ceded Assumed Percentage of
Gross to Other from Other Net Amount Assumed
Amount Companies Companies Amount to Net
-------------------------(000's Omitted)-----------------------
Year Ended December 31, 1994
Life insurance in force ------------ $93,505,000 $35,366,000 $106,161,000 $164,300,000 64.7%
Premiums:
Property-casualty insurance ------ $1,689,070 $ 78,381 $ 99,874 $1,710,563 5.8%
Life insurance (B) --------------- 1,040,134 47,022 1,104,464 2,097,576 52.7
Health insurance ----------------- 668,091 357,536 775,097 1,085,652 71.4
Total -------------------------- $3,397,295 $482,939 $1,979,435 $4,893,791
Year Ended December 31, 1993
Life insurance in force ------------ $144,054,000 $46,255,000 $89,712,000 $187,511,000 47.8%
Premiums:
Property-casualty insurance ------ $1,760,560 $ 71,472 $ 152,275 $1,841,363 8.3%
Life insurance (B) --------------- 1,086,349 139,013 1,129,235 2,076,571 54.4
Health insurance ----------------- 1,376,038 80,731 613,951 1,909,258 32.2
Total -------------------------- $4,222,947 $291,216 $1,895,461 $5,827,192
Year Ended December 31, 1992
Life insurance in force ------------ $131,104,000 $46,938,000 $86,881,000 $171,047,000 50.8%
Premiums:
Property-casualty insurance ------ $1,954,569 $ 99,858 $ 228,242 $2,082,953 11.0%
Life insurance (B) --------------- 895,004 151,975 1,024,593 1,767,622 58.0
Health insurance ----------------- 1,184,817 34,391 707,365 1,857,791 38.1
Total -------------------------- $4,034,390 $286,224 $1,960,200 $5,708,366
(A) Special-purpose bulk reinsurance transactions have been excluded.
(B) Includes insurance fees on universal life and other interest sensitive
products.
72
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
Col. A Col. B Col. C Col. D Col. E
Additions
Balance at (1) (2) Balance at
Beginning Charged to Charged to Other Deductions- End of
Description of Period Costs & Expenses Accounts-Describe(A) Describe(B) Period
------------------------------(000's Omitted)--------------------------------
Year Ended December 31, 1994
Deducted from Asset Accounts:
Reserve for Mortgage Loans
on Real Estate -------------------- $226,639 $ 18,232 $(182,196) $ 62,675
Reserve for Real Estate ------------ 121,427 14,861 (57,650) 78,638
Reserve for Other Long-term
Investments ----------------------- 27,196 1,726 (5,146) 23,776
Included in Other Liabilities:
Investment Guarantees -------------- 18,535 2,480 (7,939) 13,076
Year Ended December 31, 1993
Deducted from Asset Accounts:
Reserve for Mortgage Loans
on Real Estate -------------------- $134,476 $140,568 $(48,405) $226,639
Reserve for Real Estate ------------ 131,060 33,389 (43,022) 121,427
Reserve for Other Long-term
Investments ----------------------- 40,307 4,321 (17,432) 27,196
Included in Other Liabilities:
Investment Guarantees -------------- 30,033 1,427 (12,925) 18,535
Year Ended December 31, 1992
Deducted from Asset Accounts:
Reserve for Mortgage Loans
on Real Estate -------------------- $ 72,094 $ 91,909 $(22,540) $ (6,987) $134,476
Reserve for Real Estate ------------ 92,000 36,034 22,540 (19,514) 131,060
Reserve for Other Long-term
Investments ----------------------- 23,220 20,341 (3,254) 40,307
Included in Other Liabilities:
Investment Guarantees -------------- 24,950 6,883 (1,800) 30,033
(A) Transfer between investment classifications.
(B) Deductions reflect sales or foreclosures of the underlying holdings.
73
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE VI - SUPPLEMENTARY INFORMATION CONCERNING PROPERTY-CASUALTY
INSURANCE OPERATIONS
Column A Column B Column C Column D Column E Column F Column G
Deferred Reserves for Discount,
Affiliation Policy Unpaid Claims if any Net
with Acquisition and Claim Deducted in Unearned Earned Investment
Registrant Costs Expenses(A) Column C Premiums(A) Premium Income
----------------------------(000's Omitted)-----------------------------------
Consolidated subsidiaries:
Year Ended December 31, 1994 $140,122 $2,702,537 $ -- $732,101 $1,710,563 $241,096
Year Ended December 31, 1993 $153,073 $2,810,037 $ -- $777,011 $1,841,363 $250,633
Year Ended December 31, 1992 $172,378 $2,672,503 $ -- $840,349 $2,082,953 $287,224
Column A Column H Column I Column J Column K
Claims and Claim
Expenses (Credits) Amortization
Incurred Related to of Deferred Paid
Affiliation (1) (2) Policy Claims
with Current Prior Acquisition and Claim Premium
Registrant Year Years Costs Expenses Written
----------------------(000's omitted)--------------------------
Consolidated subsidiaries:
Year Ended December 31, 1994 $1,340,600 $(78,200) $361,195 $1,347,600 $1,664,483
Year Ended December 31, 1993 $1,433,270 $(26,489) $384,185 $1,494,764 $1,766,649
Year Ended December 31, 1992 $1,670,603 $ 46,965 $435,353 $1,547,486 $2,003,534
(A) Following the adoption FAS 113 in 1993, the 1993 and 1994 amounts are presented on a gross-of-reinsurance basis;
the 1992 amounts are presented on a net-of-reinsurance basis.
74
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX FOR THE ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 1994
Exhibit
Number Page
3(a) Articles of Incorporation of LNC as last amended
May 12, 1994.*
3(b) Bylaws of LNC as last amended January 1, 1992.*
4(a) Indenture of LNC due January 15, 1987. 76
4(b) Indenture for 7 1/8% due July 15, 1999 and
Specimen Notes.*
4(c) Indenture for 7 5/8% Notes due July 15, 2002 and
Specimen Notes.*
4(d) Fiscal Agency Agreement for 9 3/4% Notes due
October 30, 1995, and Specimen Notes.*
4(e) Rights Agreement dated November 7, 1986. 110
4(f) Right Agreement date July 5, 1990.*
4(g) Indenture for 9 1/8% Notes due October 1, 2024 and
Specimen Notes.*
4(h) Specimen Debenture for 9 1/8% Notes due October 1, 2024.*
10(a) Lincoln National Corporation 1986 Stock Option
Incentive Plan.*
10(b) Lincoln National Corporation 1982 Stock Option
Incentive Plan.*
10(c) The Lincoln National Corporation Executives'
Salary Continuation Plan.*
10(d) The Lincoln National Corporation Executive Value
Sharing Plan.*
10(e) Lincoln National Corporation Executives' Severance
Benefit Plan as last amended January 10, 1990.*
10(f) The Lincoln National Corporation Outside Directors
Retirement Plan.*
10(g) The Lincoln National Corporation Outside Directors
Benefits Plan.*
10(h) Descriptions of Compensation Arrangements with
Executive Officers.*
10(i) The Lincoln National Corporation Executives'
Supplemental Pension Benefit Plan.*
10(j) The Lincoln National Corporation Executive Savings and
Profit Sharing Plan as last amended January 1, 1992.*
10(k) Lincoln National Corporation 1993 Stock Plan for Non-
Employee Directors.*
10(l) Lincoln National Corporation Executives' Excess
Compensation Benefit Plan.*
10(m) Lease and Agreement dated August 1, 1984, with respect
to the American States' home office property.*
10(n) Lease and Agreement dated August 1, 1984, with respect
to LNL's home office property.*
10(o) Lease and Agreement dated August 1, 1984, with respect
to additional LNL home office property.*
10(p) Lease dated February 14, 1991, with respect to LNC's
Corporate Offices. 145
11 Computation of Per Share Earnings. 169
21 List of Subsidiaries of LNC. 170
23 Consent of Ernst & Young LLP, Independent Auditors. 180
27 Financial Data Schedule. 181
28 Information from Reports Furnished to State Insurance
Regulatory Authorities. [Data shown on this report is on 182
a "Combined" basis and does not include data for
subsidiaries sold.]
*Incorporated by Reference
75
Signature Page
LINCOLN NATIONAL CORPORATION
Pursuant to the requirements
of Section 13 or 15(d) of
the Securities Exchange Act By /s/ Ian M. Rolland March 9, 1995
of 1934, LNC has duly caused Ian M. Rolland,
this report to be signed on (Chairman, Chief Executive Officer and
behalf by the under- Director)
signed, thereunto duly
authorized. By /s/ Robert A. Anker March 9, 1995
Robert A. Anker,
(President, Chief Operating Officer and
Director)
By /s/ Richard C. Vaughan March 9, 1995
Richard C. Vaughan,
(Executive Vice President and Chief
Financial Officer)
By /s/ Donald L. Van Wyngarden March 9, 1995
Donald L. Van Wyngarden
(Second Vice President and Controller)
Pursuant to the requirements By /s/ J. Patrick Barrett March 9, 1995
of the Securities Exchange J. Patrick Barrett
Act of 1934, this report
has been signed below by By /s/ Thomas D. Bell, Jr. March 9, 1995
the following Directors Thomas D. Bell, Jr
of LNC on the date indicated.
By /s/ Daniel R. Efroymson March 9, 1995
Daniel R. Efroymson
By /s/ Harry L. Kavetas March 9, 1995
Harry L. Kavetas
By /s/ M. Leanne Lachman March 9, 1995
M. Leanne Lachman
By /s/ Leo J. McKernan March 9, 1995
Leo J. McKernan
By /s/ Earl L. Neal March 9, 1995
Earl L. Neal
By /s/ John M. Pietruski March 9, 1995
John M. Pietruski
By /s/ Jill S. Ruckelshaus March 9, 1995
Jill S. Ruckelshaus
By /s/ Gordon A. Walker March 9, 1995
Gordon A. Walker
By /s/ Gilbert R. Whitaker,Jr. March 9, 1995
Gilbert R. Whitaker,Jr.