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, 19931994 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. [X][ ]
As of March 4, 1994, 94,217,4273, 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
$3,827,600,000.$3,803,800,000.
Select materials from the Proxy statement for the Annual meeting of
Shareholders, scheduled for May 12, 1994,11, 1995, have been incorporated by reference
into Part III of this Form 10-K.
The exhibit index to this report is located on page 69.74.
Page 1 of 167247
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*PART2
PART I
Item 1. Business
Lincoln National Corporation ("LNC") is a holding company. Through subsidiary
companies, LNC operates multiple insurance businesses. Operations arehave 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 46802-2706.46802-
2706. As of December 31, 1993,1994, there were 215220 persons on the staff of LNC.
Total employment of Lincoln National Corporation at December 31, 19931994 on a
consolidated basis was 11,890.8,995.
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.segment except as described above.
Numeric presentations showing revenues, pre-tax income, and assets for LNC's
four
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 89 to the consolidated financial statements on page 54)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 including(i.e., corporate investment
income, interest expense on short-term and long-term borrowings, and
unallocated corporate overhead expenses.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,
and its property-casualty subsidiaries.Indiana. These companies operate a multi-line
property-casualty insurance business in most states of the United States
through 2220 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 CompanyCompany) which is alicensed to write property-
casualty reinsurance. Both of these property-casualty company that iscompanies are involved
in servicing a closed blockblocks of reinsurance business.
Approximately 3,9003,780 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, Security-Connecticut Life Insurance Company ("Security-
Connecticut"), First Penn-Pacific Life Insurance Company ("First Penn"), American
States Life Insurance Company ("American States Life"), and Lincoln National
(UK) PLC.
LNL, the 6th4th largest U.S. stockholder-owned life insurance Company (1992(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 1,9001,800 career agents, 13,00017,000 brokers and access to 42,00048,000
stockbrokers and financial planners. -3-
Security-Connecticut is a Connecticut corporation headquartered in Avon,
Connecticut. It specializes in writing universal life and term insurance
through independent general agencies in most states of the United States. A
wholly owned subsidiary of Security-Connecticut, Lincoln Security Life
Insurance Company, operates in the state of New York. In January 1993, LNC
announced it would seek a buyer for Security-Connecticut. The sale of the
common stock of Security-Connecticut Corporation (a recently formed holding
company to which ownership of the operating companies was transferred prior to
the sale) was completed on February 2, 1994 through an Initial Public Offering
(IPO).
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
Wembley,Uxbridge, England, that is licensed to do business throughout the United
Kingdom. The principal products produced by this operation, known as unit-
linked assetsunit-linked life
and pension products, are similar to U.S. produced universal life products.
This
company was previously named Cannon Assurance Limited, but was renamed
following the acquisition and merger of another UK company that previously
operated as Citibank Life (UK). Lincoln National (UK) is the 16th17th largest writer of unit-linked new business
premiums in the UK as measured in 19921993 (Money Management Survey-New Business
Trends, published in June 1993.)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 4,3254,115 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 onethe leading
life-health reinsurer worldwide measured on gross premiums, net of the
largest life-health reinsurers worldwide (Swissceded (1994
Swiss Re survey, May 1993)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 accident and healthgroup
medical products and services on both a direct and reinsurance basis.
Other companies in this business segment include various general business
corporations and foreign reinsuranceinsurance companies. The general business
corporations are used to support the segment's sales, service and
administration efforts. One of the general business corporations, Lincoln
National Risk Management Inc. has developed and patented a knowledge based
underwriting system ("Life Underwriting System") which it is marketing to
other insurance companies. The foreign insurance companies provide specialized
reinsurance corporations are usedprograms, including financial reinsurance, asset management and
funded covers, to support LNC's U.S. companies through reinsuring select business.and international clients.
Approximately 575560 employees are involved in this business segment.
4
4. Employee Life-Health Benefits
This segment's business is conducted through Employers Health Insurance
Company ("Employers Health"), a Wisconsin Corporation, headquarteredPrior to the sale of 71% of its direct writer of employee life-health
coverages in Green
Bay, Wisconsin. Employers Health manufactures1994, LNC used this segment to manufacture and distributesdistribute 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). It also provides
administrative services to medium and large self-funded accounts in Wisconsin
and is extending such services to other core market areas for self-funded
groups of 100 - 1,000 lives. Employers Health has a strong market position in
the Midwest, California, Texas, Colorado, Georgia, Tennessee, Maryland and
Virginia, representing approximately 80 percent of its in-force business. In
December 1993, LNC announced it would attempt to sell a portion of its
-4-
ownership in Employers Health through an initial public offering (IPO) of
Common Stock in a newly formed holding company known as EMPHESYS Financial
Group, Inc. In March 1994, this IPO was completed and resulted inFollowing the sale, of
64% of the
company.
Approximately 2,590 employees are involvedearnings from the 29% minority interest were included in this segment.Other Operations.
Liabilities for lossesclaims and loss adjustmentclaim expenses ("LAE") for the property-
casualtyproperty-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.
Further, beginning inSince January 1, 1993 such estimates no longer recognize the effects of
reinsurance recoverable because such amounts are now recorded as an asset withasset.
A reconciliation of the adoptionbeginning of FAS 113year and end of year liability for claims
and claim expenses is included in this report as part of the financial
statements (see note 25 to the consolidated financial statements on page 38)46).
A reconciliation of the beginning of year and end of year liability for losses
and LAE is as follows:
Year Ended December 31 (in millions) 1993 1992 1991
Liability for losses and LAE at beginning of year $2,672.5 $2,502.4 $2,246.4
Plus:
Provision for losses and LAE for claims
arising in the current year ------------------- 1,433.3 1,670.6 1,824.6
Increase (decrease) in estimated losses and LAE
for claims arising in prior years ------------- (26.5) 47.0 12.3
Total incurred losses and LAE --------------- 1,406.8 1,717.6 1,836.9
Less:
Losses and LAE payments arising in the
current year ---------------------------------- 633.5 709.1 771.4
Losses and LAE payments arising in prior year --- 861.2 838.4 809.5
Total payments ------------------------------ 1,494.7 1,547.5 1,580.9
Total liability for losses and LAE at end
of year net of reinsurance ---------------- 2,584.6 2,672.5 2,502.4
Reinsurance recoverable related to adoption of
FAS 113 in 1993 ------------------------------- 225.5 -- --
Total liability reported on a GAAP basis ---- $2,810.1 $2,672.5 $2,502.4
The reconciliation shows an increase (decrease) of ($26.5) million, $47.0
million, and $12.3 million to the December 31, 1992, 1991 and 1990 liability for lossesclaims and LAE, respectively, for claims arisingclaim expenses included in prior years. Such
reserve adjustments, which affected current operations during 1993, 1992 and
1991, respectively, resulted from developed losses for prior years being
different than were anticipated when the liabilities for losses and LAE were
originally estimated.
The liability for losses and LAE shown above and within the data to follow arethis 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 1992
Liability reported to state insurance regulators --- $2,532.1 $2,617.7 $2,707.8
Increase (decrease) related to:
Estimated salvage and subrogation recoveries ------------ (37.3) (38.3) (35.9)
Amount recoverable from reinsurers related
to adoption of FAS 113 in 1993 ----------------- 203.1 225.5
--
Other ------------------------------------------------------------------------------------------ 4.6 5.2 .6
Liability reported on a GAAP basis -------------------------- $2,702.5 $2,810.1 $2,672.5
-5-
The following table on page 5 shows the development of the estimated liability for lossclaim
and LAEclaim expenses for the ten year period prior to 1993.1994. 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 a result of adopting FAS 113 innoted above, since 1993 the
1993 liability is $225 million less than reportedshown in the financial statements.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. The reserves include an estimated
liability for unreported environmental losses. Prior to 1993, this liability
was generally recognized in the more recent accident years and allocated to
the appropriate accident year when reported. In 1993, this estimated
liability for unreported environmental losses was reallocated to more
appropriate accident years and as a result increased the deficiency for the
period 1983 and prior. Beginning in 1986, the overall reserves were
strengthened and this action has been maintained as evidenced by the
cumulative development reported for 1987 through 1993. 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
Analysis
Liability re-estimated as of:
(First column represents number of Combined Property-Casualty Losses and LAE Development
December 31 (in millions)
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
Liability for unpaid losses and LAE, net of reinsurance recoverableyears later)
$479 $760 $1,370 $1,730 $2,020 $2,372 $2,669 $2,246 $2,502 $2,673 $2,585
Liability re-estimated as of:
(First column represents number of years later)
1 514 811 1,410 1,692 1,984 2,347 2,690 2,258 2,549 2,634 2,5852,506 2,499
2 503 846 1,439 1,753 1,990 2,382 2,718 2,303 2,571 2,607
3 523 860 1,566 1,790 2,026 2,403 2,767 2,384 2,563
4 540 973 1,595 1,833 2,054 2,443 2,847 2,403
5 591 1,009 1,636 1,863 2,104 2,538 2,869
6 611 1,042 1,672 1,910 2,199 2,551
7 637 1,078 1,713 2,003 2,210
8 667 1,108 1,805 2,012
9 695 1,196 1,813
10 780
Cumulative redundancy (deficiency)
(301) (436) (435) (273) (179) (166) (178) (138) (69) 39 0
Change in redundancy (deficiency)
(135) 1 162 94 13 (12) 40 69 108 (39)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)
1 219 333 531 571 649 750 1,430* 809 839 849 728
2 310 517 842 935 1,012 1,650* 1,862 1,253 1,325 1,294
3 376 638 1,036 1,160 1,568* 1,875 2,088 1,542 1,596
4 426 684 1,177 1,508* 1,700 1,996 2,255 1,709
5 468 721 1,390* 1,593 1,776 2,095 2,355
6 479 862* 1,450 1,647 1,8901,840 2,154
7 504 903 1,488 1,694 1,877
8 531 928 1,525 1,721
9 551 955 1,546
10 571
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 50)51). -6-
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 1992,1993, 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 25th29th in net written premiums for 19921993 (A.M.
Best Aggregates and Averages) among all such groups and companies.
At the end of 19921993 there were more than 2,1001,800 life insurance companies in the
United States and LNL was the 13th12th largest among the stock and mutual life
insurance companycompanies in the United States based on assets and 15th16th based on
insurance in-force (1992(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 and employee life-health benefits 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 own thehold a patent
for "The Method and Apparatus for Evaluating a Potentially Insurable Risk" and
markets multiple knowledge based underwriting system known as "Life Underwriting
System."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 1.01.5 million square feet of space is owned or leased by operating
businesses headquartered in Indianapolis, Indiana; Oakbrook Terrace, Illinois;
Green Bay, Wisconsin; and Wembley,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 1.21.0 million square feet. As shown
in the notes to consolidated financial statements (see note 7 to the
consolidated financial statements on page 49)51), the rental expense on operating
leases for office space and equipment for continuing operations totaled $55.9$51.4
million for 19931994 of which $49.6$45.4 million was for office space. This discussion
regarding properties does not include information on investment properties. -7-
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 1993,1994, 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
19931994 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 ------------------- $.380 $.380 $.380 $.410
1992 Data:
High -------------------------------- $30.500 $31.125 $33.563 $38.063
Low --------------------------------- 26.813 25.250 30.125 31.875
Dividend declared ------------------- $.365 $.365 $.365 $.380$.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 rate 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.
Notes:
1. The data for 1992 and the first quarter of 1993 has been adjusted to
reflect the effects of a June 1993 two-for-one split of LNC's Common Stock.
2. At December 31, 1993, the number of shareholders of record of LNC's
Common Stock was 13,600.
3. 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 48) and is discussed in the Management's Discussion and Analysis
of Financial Information (see page 28).
-8-8
Item 6. Selected Financial Data
(Millions of dollars, except per share data)
Year Ended December 31 1994 1993 1992 1991 1990 1989
Total revenue ------------------------------------- 6,984.4 8,289.8 8,034.1 9,169.0 8,489.5 8,081.1
Income before cumulative effect
of accounting change* ----------------- 349.9 415.3 359.2 201.9 176.6
256.1
Net income* ----------------------------------------- 349.9 318.9 359.2 201.9 176.6 256.1
Income before cumulative effect
of accounting change per share*- $3.37 $4.06 $3.86 $2.23 $1.97 $2.88
Net income per share* ----------- $3.37 $3.12 $3.86 $2.23 $1.97 $2.88
Dividends per common share* ----- $1.550$1.66 $1.55 $1.475 $1.385 $1.315
$1.255
December 31 1994 1993 1992 1991 1990
1989
Assets* ----------------------------------------------- 49,330.1 48,380.4 39,547.3 34,013.1 27,597.3
25,070.1
Long-term obligations ---------debt ----------------- 419.6 335.1 423.0 252.6 378.5
378.8
Shareholders' equity* ------------------- 3,042.1 4,072.3 2,826.9 2,655.8 2,279.5 2,292.4
Market value of Common Stock* - $43.500 $37.000 $27.375 $21.500 $30.438
*Income-- $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 1993
includes two changes in estimate which essentially offset each other (see
note 2 to the consolidated financial statements on page 38). Other factors
affecting the comparability of net income for the 1989-19931990-1994 period are shown below
(see "Supplemental Data"). Prior year data (1989-1992) has been
restated for the adoption of FAS 109 (see note 2 to the consolidated
financial statements on page 38). Shareholders'Assets and shareholders' equity as of December
31, 1994 and 1993 includesinclude the effect of the adoptioncarrying securities available-for-
sale at their fair values (see Consolidated Statements of FAS 115 (see note 2 to the
consolidated financial statementsShareholders'
Equity on page 39)34). Per share amounts were affected by the 1993 two-for-one split of LNC's Common Stock (see note 9 to
consolidated financial statements on page 52) and 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.
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 1989
Income from operations* -------------- $389.8 $343.5 $240.6 $177.7 $213.8 $195.6
Realized gain (loss) on investments,
net of related amortization
and taxes ----------------------------------------------------- (88.7) 170.3 118.6 113.3 (64.9) 60.5
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), net of taxes ------------ ---- -- (96.4) -- -- -- --
Net Income ---------------------------------------------- $349.9 $318.9 $359.2 $201.9 $176.6 $256.1
*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 22,19, 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 2320 through 2829 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 3031 through 54.59.
-9-9
Review of Operations: Property-Casualty
Year Ended December 31 (in millions) 1994 1993 1992 1991 1990 1989
Financial Results by Source
Underwriting Income (Loss):
Financial Results by Source
Underwriting Loss:
Personal Insurance -------------- $(31.8) $(18.4) $(31.8) $(56.7) $(78.7)
$(66.2)
Commercial Insurance ------------ (17.9) (63.3) (133.3) (102.1) (49.7)
(29.7)
Reinsurance --------------------- -- -- -- (12.8) (7.1) (19.0)
Investment Income ----------------- 208.5 217.0 242.4 229.6 221.2
244.5
Other ----------------------------- -- (1.4) .3 1.2 4.6
4.6
Income from Operations ---------------- 158.8 133.9 77.6 59.2 90.3
134.2
Realized Gain on Investments*------ ----- 12.8 91.8 -- -- -- --
Net Income ---------------------------------------- $171.6 $225.7 $ 77.6 $ 59.2 $ 90.3
$134.2
Catastrophe Losses $71.9 $ 58.3 $106.9 $ 61.8 $ 70.6
$118.6
Combined Loss and Expense Ratios**
Personal Insurance ------------------------------- 107.8% 103.0% 105.5% 111.8% 116.3%
113.4%
Commercial Insurance --------------------------- 104.4% 110.3% 116.5% 111.0% 105.1%
103.1%
Reinsurance --------------------------------------------- -- -- -- 124.3% 114.8%
109.2%
Consolidated Combined Ratio ------------- 105.7% 107.5% 112.7% 111.9% 109.2% 106.7%
Consolidated Combined Ratio
Excluding Catastrophe Losses ------- 101.5% 104.3% 107.6% 109.1% 106.1% 101.6%
*Prior to 1993, all realized gain (loss) on investments was included in
Other Operations (see note 89 to the consolidated financial statements on
page 51)57).
**The combined loss and expense ratio is the ratio of losses and loss expenses
to earned premiums plus the ratio of losses and loss expenses
to earned premiums plus the ratio of underwriting expense to premiums
written.
In 1993, the1994, LNC's Property-Casualty segment, which consists primarily of American
States Insurance Companies, producedCompany ("American States"), reported its second consecutive year of improving profitability
and its best results in four years.highest annual
earnings since 1988. Income from operations increased
substantiallygrew by 19% to $133.9$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, from $77.6 million a year ago.before taxes.
The combined loss and expense ratio improved 5.2decreased nearly 2 points in 1994 to
107.5%105.7% from 107.5%, reflecting improvement in commercial lines underwriting
results. Excluding catastrophes, the segment's 1992
experiencecombined 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 112.7%. More than halfonly $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 this improvement isearnings achieved in 1994 can be directly attributed to the
ongoing recovery in underwriting results. The programs implemented in
recent years to counteract the uncertainties of a changing market have firmly
taken hold. Fewer catastrophe losses during the year forprofit improvement program American States account forembarked upon beginning in the
remaindersecond half of 1991. At that time, the combined ratio improvement.
American States' favorable financial performance in 1993 resulted from a
combination of being able to sustain strong results on its preferred book of
personal lines business while making significant progress to improve results
on its high quality book of small commercial business. The company is
focused on specializing in these areas and continues to provide significant
value for customers, shareholders and agents.
Return to Profitability
In the last few years, industry observers have watched for traditional signs
marking the beginning of a cycle upturn. American States' management decided
several years ago it would no longer wait for a general industry recovery and
took purposeful measures,steps counter to the
general industry to bring itsand 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 back
to profitability. The company began a process of focusing underwriting
efforts onin those geographies and product lines and regions which have historically provided
better than average returns while de-emphasizing thosereturns. At the same time, American States de-emphasized
product lines and areas ofregions with less profitable experience.
AsThe cost of following this strategy has been a result of these activities,
American States' profitability has returned to levels superior to the general
property-casualty industry.
The aggressive restructuring of the book of business did result in a moderatesignificant reduction in
premium volume. For 1993, direct written premiums, decreased 12%.
While we're currently continuing to see a reductionparticularly in the commercial lines
premium volume, we have relative stability in premium volume in the personal
lines business. We anticipate there will be an aggregate positive change in
premium volume in the latter part of 1994.
-10-
Restructuring
In 1993, LNC divested two minor operations in an effort to streamline and
focus its resources on those businesses that have the greatest potential for
profitable growth. The business of the American Union, a small property-
casualty reinsurance affiliate, was unable to contribute to earnings in a
significant manner because the company lacked substantial size. K&K
Insurance Group, Inc., a specialty risk insurer, did not strategically fit
LNC's underwriting approach nor its definition of "main street" business
risks.
Personal Lines
American States' personal lines business continued to show strong improvement
in 1993. The combined ratio improved to 103.0% from 105.5% a year ago.
Approximately 40% of the company'slines. For 1994, total net
written premiums arefor 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 business. Thelines. 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
markets represent 86%representing more than 82% of the personal lines business.
Over the last five years, the company worked to improveThe private passenger automobile pricing and profitability by writing allmarket 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. This strategy has been successful, returning thissector 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 a position of profitability.
Inaddress the profitability issues in the
homeowners line American States also continues to emphasizeby focusing on the preferred sector, oftightening underwriting
and evaluating each homeowners policy to ensure the market. While standard homeowners business is still
written, an increasing percentage of new premium written in 1993 was in the
preferred sector. Homeowners has been a troubled line for the industry
because of the mismatch between coverage purchased and actual replacement
costs. American States undertook an aggressive program to improveis
appropriate for the
profitability of this business line over the last two years. Each homeowners
policy has been evaluated to ensure that the amount of insurance purchased
does indeed correlate to the current property value.
Commercial Lines
InCommercial Lines represents 60% of the property-casualty segment's total net
written premiums. Typical commercial lines American Statesbusiness is focused on serving those markets
where it can deliver to its customer base the greatest service levels and
efficiencies its automated systems can provide. American States defines this
marketoften described as small-to-medium-sized commercial
"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 risks.
Selected larger accounts with low-hazard riskis
actually found in suburban and more urban settings, but it does exhibit the
low hazard characteristics are also amongof 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' currentstructure of 20 divisional offices is designed specifically
to maximize customer service and potential client base.
The commercial lines combined ratio improved to 110.3% in 1993 from 116.5% in
1992. The 6.2 points of total improvement is the result of 4.6 points of
basic underlying improvement with the remainder attributable to fewer
catastrophic losses. Management anticipates more selective underwriting,
geographic repositioning of exposures and a continuation of overall pricing
increases will result in greater profitability and a slowing and subsequent
reversal of the decline in premium levels.
Product Distribution
American States distributes its products through a unique network of 22
semi-autonomous division officesenhance 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 which maintainto sustain
relationships with approximately 5,000 independent local agencies. This
"multi-regional" structure allows each division office to function as an
independent operation with broad authority for underwriting, agency
contracting, marketing and claims settlement. Nearly all of the agencies are
electronically interfaced with the division offices. 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 realize one22 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 lowestoption and retire. The president and executive vice president of
American States are not eligible for this plan. American States has
identified highly qualified internal expense ratiossuccessors 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 industry while at the same time providing distinctive levels of underwriting
and claims service.
Investment Income
Parallelingbest long-term returns. We
anticipate that the decline in investment income throughoutwritten premium will reverse and expect a
small increase for 1995. This growth would be consistent with our outlook for
the property-casualty
industry American States' net investment income after taxes fellin those markets which we serve and are now emphasizing. Absent
catastrophes and unusual weather-related losses, 1995 earnings are expected to $217.0
million in 1993 versus $242.4 million in 1992. As premium levels declined,
the amount of funds available for new investment also decreased. In addition,
the general decline in interest rates during 1993 has resulted in lower
investment yields.
-11-
Outlook
In early 1994, the property-casualty industry experienced two significant
catastrophic events: the Southern California earthquake and the Eastern and
Midwestern winter freeze. Based on information currently available,
American States estimates it will pay approximately $15 million, pre-tax, for
claims on the earthquake, while the freeze will result in claims of about $18
million, pre-tax. The industry currently estimates property-casualty claims
from both catastrophes may reach more than $3 billion.
American States is optimistic that its methodology for operating in a
changing environment will
continue to yield stronger profitabilityincrease. Substantial growth in premium volume and opportunities for growth. Absent further unusually severe catastrophic
losses, we expect that 1994significant
improvement in profits beyond 1995 will be our third consecutive year of increased
property-casualty earnings.require improvement in market
conditions.
Review of Operations: Life Insurance and Annuities
Year Ended December 31 (in millions) 1994 1993 1992 1991 1990 1989
Financial Results by Source
Financial Results by Source
Lincoln NationalLife/First Penn - Annuities - $120.0 $ 96.5 $ 73.9 $ 45.5 $ 39.4
Lincoln Life (Annuities) --- $ 79.2 $ 61.3 $ 40.6 $ 38.8 $ 30.3
Lincoln National Life (Pensions) ----- Pensions ------------- 22.4 30.6 15.5 12.8 15.8
14.0Lincoln 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 (Life-Health) - 31.4 22.0 24.5 23.9 27.0
Security-Connecticut (Life) -------------------- -- 16.6 21.4 16.7 7.9
12.1
American States Life (Life) --------- 12.1 11.1 10.2 10.6 6.3
First Penn-Pacific (Life) ----------- 9.9 5.2 5.4 5.5 5.7
First Penn-Pacific (Annuities) ------ 17.3 12.6 4.9 .6 -
Lincoln National (U.K.) PLC --------- 11.8 9.2 14.3 13.3 10.5
Other ------------------------------- (5.5) (33.6) (7.4) (11.4) (6.9)
(1.6)
Income from Operations* ------------------ 185.8 175.3 150.9 118.0 109.5
104.3
Realized Gain (Loss) on Investments**------- (91.7) 59.3 -- -- --
--
Net Income*-------------------- $234.6 $150.9 $118.0 $109.5 $104.3 ----------------------- $ 94.1 $234.6 $150.9 $118.0 $109.5
December 31 (in billions) 1994 1993 1992 1991 1990
1989
Annuity and Pension Assets
Under Management
Account Values:
Lincoln NationalLife/First Penn - Annuities -$23.068 $20.233 $16.120 $12.362 $ 8.576
Lincoln Life (Annuities) -- $18.400 $14.467 $11.209 $ 8.420 $ 6.648
Lincoln National Life (Pensions) ---- Pensions ------------- 7.323 6.832 6.192 5.455 4.897
4.220
Lincoln Life/First Penn-Pacific (Annuities) ----- 1.833 1.653 1.153 .156 .027
Total AnnuityPenn - Universal
and Pension
Assets Under Management ----- $27.065 $22.312 $17.817 $13.473 $10.895
UniversalVariable Life Account Values
Lincoln National Life(Life-Health) - $1.586 $1.419 $1.308 $1.184 $1.057
Security-Connecticut (Life) -------- .667 .620 .583 .534 .474
First Penn-Pacific (Life) ---------- .592 .523 .449 .362 .296Insurance ------- 2.348 2.178 1.942 1.757 1.546
American States Life (Life) ------------------------ .198 .174 .153 .133 .112
.092
Total Universal LifeU.S. Account Values ------------- $3.019 $2.715 $2.473 $2.192 $1.919
Unit-linked Assets--------- 32.937 29.417 24.407 19.707 15.131
Lincoln National (U.K.) PLC -------- $1.235 $(UK) - Unit-linked-- 1.320 1.235 .652 $ .669 $ .588
Total Account Values --------------$ .569
34.257 $30.652 $25.059 $20.376 $15.719
*Income from operations and net income of the annuities and pensionspension sub-
segments for 1993 include the impact of a change in estimate of net
investment income (see note 2 to the consolidated financial statementsstatement on
page 39)40).
**Prior to 1993, all realized gain (loss) on investments was included in
Other Operations (see note 89 to the consolidated financial statements on
page 51)57).
The Life Insurance and Annuities segment produced an all time high incomereported 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 16%14% increase over 1992. This reflects
record results in the majority of operations that comprise the business
segment. Earnings were affected by an unusually large charge of $20.5
million, after-tax, for guaranty fund assessments. This is $16.3 million
greater than the previous year's assessment. In addition, there was an
unusually large $23.2 million, after-tax, credit arising from an accelerated
amortization of discount on mortgage-backed securities caused by interest
rate declines.
-12-
Our strategy with respect to mortgage-backed securities has included the
purchase of securities with lower underlying interest rates, atannuity account values and a discount.
The accounting for such securities provides that the discount is to be
amortized over the expected life of the investment to produce an estimated
constant effective yield. However, even on the lower interest rate
securities, repayments generally24% increase and the expected duration of the
investment shortens. This releases additional discount and increases
investment income. The significant change in
interest rates in 1993 coupled
with the implementation of new investment computer software in the fourth
quarter released the $23.2 million of additional discount into investment
income. The new software allows us to calculate more accurately the
estimated constant effective yields on these securities.
Lincoln Life Progressannuity earnings.
Profile
The Life Insurance and Annuities segment made substantial progressincludes 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
1993
toward its goal of comprehensively streamlining and integrating the various
units selling products under theUnited States as measured by assets (Best's Review, Life-Health Edition,
August 1994). Lincoln Life banner. These actions are
aimed at transforming an already substantial operation withoffers a widebroad range of asset accumulation and
12
income protection products into one with sustainable
profitability, well above-average growth potential,to meet the lifetime needs of its customers. These
products include: fixed and benchmark productvariable annuities, universal and service capabilities.
During the year,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 our flagship lifeproducts 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 completed
a progressive analytical effort. The goal of this self-analysis was to
re-examine all tasks and functions and to determine the value each function
adds to customer service andwith specialized skills in
customizing interest sensitive products for its financial services sales
efforts. This analysis resulted in a
clearer vision of Lincoln Life's strengths and capabilities and a reinforced
commitment to increase the market visibility of the Lincoln Life brand name.
Security-Connecticut Divested
In early 1993, LNC announced that as part of the restructuring of thechannels. First Penn complements Lincoln Life operations it would consider divesting Security-Connecticut
Corporation, an affiliate specializing in sales ofby 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 insurance brokers. With the decision to
rebuild the visibility of the Lincoln Life brand name, Security-Connecticut's
distribution system no longer fit with Lincoln Life's distribution strategy.
In October, LNC filed a registration statement for an initial public offering
of 8.5 million shares of Security-Connecticut common stock, representing 100%
of Lincoln Life's interest in this affiliate. The offering was completed at
$22 per share on February 2, 1994. Please refer to "Other Operations" on page
32 for more detail on how the sale affected LNC's net income.
Going forward, the proceeds from the sale will be reinvested in Lincoln Life
to support growth of its life insurance and annuities operations. Lincoln
Life agents will have the ability to continue selling Security-Connecticut
term life insurance products for at least two years.property-
casualty agencies.
Lincoln National UK Positioned for Growth
In another restructuring move, LNC completed its first strategic acquisition
in six years. Cannon-Lincoln, its life insurance affiliate(UK), based in the United Kingdom, consolidated with Citibank Life UK following LNC's acquisitionis the 15th largest unit-
linked life insurer in the U.K. by 1993 premiums of that companythose companies writing
predominately life and pension business (Money Management New Business Survey,
June 1994). Unit-linked business is comparable to formvariable life policies in
the United States. Through a network of approximately 1,500 sales
representatives and independent financial advisors, Lincoln National (UK)
PLC. This acquisition effectively
doubled the size of LNC's United Kingdom operations. The acquisition is part
of LNC's corporate strategy to grow its UK operations to ensure that it
continues to besells a significant player in the UK life and pension markets.
Lincoln National, is the 16th largest writer of unit-linked new business
premiums in the UK as measured in 1992. (Money Management Survey-New
Business Trends, published June 1993).
Distribution
Lincoln Life's core strengths are the variety of markets it serveslife insurance, investment and the
expansive portfolio of products it offers. Unlike many of its single-
product, single-channel competitors, Lincoln Life offers a portfolio of
insuranceincome protection, and
retirement planning products through multiple distributors. It
sells life insurance through approximately 1,900 career agents and 13,000
independent agents and wholesalers. It sells annuities, not just through
these channels, but also through 42,000 stockbrokers, financial planners and
a wide range of financial institutions. In general, Lincoln Life's products
and services are engineered to meetindividuals across the financial security needs of middle-
to-upper income professionals and small-business owners.
-13-United Kingdom.
Annuities
Earnings from the combined Lincoln Life Annuities
Lincoln Life'sand First Penn annuities operation produced another year ofoperations
grew 24% to a record earnings.
Income$120 million in 1994. This earnings growth flows from operations increased 29% to $79.2 million anda
14% increase in annuity assets
under management grew 27% to $18.4account values, which reached $23 billion. Maintaining excellent services
for contractholders and delivering attractive investment returns in an
environment of lower interest rates played an important part in this
performance. Measured by individual annuityAnnuity
deposits in 1992,were $3.6 billion, a 3% increase over the prior year. Lincoln Life
was recognized as being the nation's leading sellerwriter of individual annuities in the United States
in 1993 (Best's Review, Life-Health Edition, November 1993)October 1994).
Another of
Lincoln Life's unique marketing advantages is its ability and
commitment to continually improve the service it provides to the distributors
and owners of its annuities. In 1993, the company established electronic
interfaces to transmit applications to and from manycareer agents produced 45% of the broker/dealers,
simplifyingnew annuity deposits in 1994.
Stockbrokers and increasingfinancial planners, generating 42% of new annuity deposits,
continue to be the speeddominant distributors of the application process.variable annuity product. In
1994, the operation will enhance its annuity products with additional fund
alternatives and options, including a wider selection of outside investment
managers. New product development remains active in order to meet the
changing needsbank distribution produced 13% of the marketplace.
Lincoln Life Pensions
Lincoln Life's pension operations hadsegment's new annuity deposits.
Distribution through banks and other financial institutions represents a
banner year, earning a record $30.6
million and increasing assets under management by 10%significant opportunity for growth. We view the January, 1995, U.S. Supreme
Court's decision confirming the authority of banks to $6.8 billion. Among
the pension products the company sells, the 401(k) product continues to be in
great demand among employers who wish to provide their employees the option of
a contributory retirement savings benefit in addition to or in place of a
defined benefit upon retirement. Lincoln Life introduced a new version of the
401(k) product in 1993 with new fund options to meet the needsmarket annuities as an
opportunity for future growth of this growing
employer market.
Opportunistic sales in Guaranteed Interest Contracts (GICs) continue as a
steady source of pension earnings. Low acquisition costs and an integrated
investment strategy give the GIC unit the flexibility to bid on contracts
selectively, when adequate profit margins are available.
Lincoln Life -- Life/Health
Lincoln Life's life/health operations sell a wide range of life insurance
products including universal life, variable universal life, disability income
and long-term care products.Pensions
Income from operations increasedin Lincoln Life's Pension business decreased to $31.4$22.4
million from $30.6 million in 1993. Variable universal lifePension 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 increased by 75% in 1993.
The variable universal lifefrom Lincoln Life's 401(k) product has been increasingly attractive to
individuals seeking returns greater than those generally available in the
current low interest rate environment. Universal lifedrove pension account values
including both the variable and fixed products, increased more than 11% to $1.6$7.3 billion, duringa 7% increase over 1993.
In recent years, disability income claim experience had been deteriorating.
By 1992, it had become clear that additional reserves were needed to avoid
future losses from this product, and such reserving action was taken at that
time. In addition, new management with disability income experience was
brought into the product line. Other corrective actions included modifying
the design of the product's basic underwriting and benefit structure,
strengthening claims administration and tracking procedures, and increasing
rates. These actions were completed while maintaining the marketplace
competitiveness of the product. As a result of these changes, the disability
income product returned to profitability in 1993.
American States
Life Insurance Company
American States Life contributed a record $12.1 million to 1993 income from
operations. This affiliate sells universal life, term life insurance and
annuity products, distributing them through the American States property-
casualty independent agency network. Sales remained level in 1993 and in-
force business grew by 5% despite actions related to our property-casualty
operations which reduced the number of independent agents distributing the
product.
-14-
First Penn-Pacific
First Penn-Pacific posted a sizeable increase in income from operations as
increased investment income contributed to record earnings in both the life
insurance and annuities units.
Earnings from the life insurance unit also
benefitted from improved mortality as income from operations nearly doubled
to $9.9 million. Annuity earnings increased 37% to $17.3 million as annuity
assets, after coinsurance, grew to $1.8 billion.of Lincoln Life and First Penn
underwriteswere $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
distributesFirst Penn's combined universal life through independent marketing companies and administersvariable 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 distributes annuities,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 National Life annuities, throughwill 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 institutions.
Lincoln National UK PLCstatements 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)
PLC, formerly Cannon-Lincoln, produced earnings of
$11.8Income from operations for Lincoln National (UK) grew 46% to $17.2 million in
1993,1994. These strong results reflect a 28% increase in incomefull year of earnings from operations. These
results primarily reflect the successful consolidation with the Citibank
Life operations.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 markets life and pension products, similar(UK) completed the acquisition of Liberty Life
Assurance Company Limited, yet another step in LNC's strategy to variable universal life policies, through more than 1,700 career agents across
the United Kingdom.
FAS 115
Effective December 31, 1993, LNC adopted Financial Accounting Standard 115
(FAS 115), which resultsbuild its
position in the inclusion in Shareholders' Equity of the
unrealized gain or loss on fixed-income securities, subject to certain
adjustments. The December 31, 1993 book value of $39.39 per share includes
$8.85 of unrealized gains on securities.
Gains, whether realized or unrealized, on securities that support long-termU.K. life insurance and annuity contractspensions 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 expectedunderway
to be usedachieve this vision. Every process is being analyzed for its value-added
to support life
insurance and annuity benefits. If there are losses, those losses would
generally be recovered from reducedthe customer relationship. The Lincoln Life of the future insurance and annuity payments.
Net Income and Shareholders' Equity now include realized and unrealized,
respectively, gains and losses on securities, part of which will be neededable to
support insurancemeet customers changing needs efficiently and annuity benefits.
Current accounting standards do not require or permit adjustment of insurance
and annuity reservesat less cost.
In addition, two significant actions were taken during 1994 to recognize the full effect of these realized and
unrealized gains and losses on future benefit payments, unless there is a
contractual obligation which requires the attribution of these gains or losses
to policyholders.
We believe that an appropriate adjustment for these future benefits as of
December 31, 1993 would increase policy reserves and reduce Shareholders'
Equity by $665.3 million, net of taxes, or $6.45 per share. If Shareholders'
Equity were calculated on this adjusted basis, it would be $32.94 per share.
These adjustments reflect the reversal of interest related fixed income
unrealized gains and the deferral and amortization of such realized gains from
portfolios supporting life and annuity products.
Outlook
In 1994, efforts will continue to streamline and bring greater
focus to the identity of Lincoln Life andas a brand name. First, the company
began a process to gather its nationwide network of agencies. One
strategy that will be implemented during the year will involve gathering our
life insurancecareer agency offices under athe common banner. They will all be
members of thebanner,
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 will continueLife's renewed efforts to find opportunities to apply its knowledge of
the retirement marketplace and the investment markets to continue growinggrow its life
insurance operations through increased sales from its career agency network
and its ongoing drive to be a primary provider of annuities operations. In 1994, Lincoln Life's agency
system will be the primary distributor for LNC's new family of mutual funds,
the Lincoln Advisor Funds.
We are encouraged by theand 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
Life's life insurance
products. It appears that this growth is continuing into 1994. We
anticipate that annuity assets willNational (UK) operation should continue to grow near the high rate of
recent years.
-15-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 1989
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* ------------ $18.9 $58.3 $33.0 $52.2 $48.5---------- 66.6 18.9 58.3 33.0 52.2
Realized LossGain (Loss) on Investments** ----- $(1.6) --.5 (1.6) -- -- --
Net Income* ---------------- $17.3 $58.3 $33.0 $52.2 $48.5Income ----------------------- $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
$25.0
December 31 (in billions) 1994 1993 1992 1991 1990
1989
Life Insurance In-Force ------------ $125.6 $118.0 $113.6 $102.2 $101.4 $98.7
*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 39)40).
**Prior to 1993, all realized gain (loss) on investments was included in
Other Operations (see note 89 to the consolidated financial statements on
page 51)57).
The Life-Health Reinsurance segment, comprised ofIn 1994, the Lincoln National Reinsurance Cos. (LNRC),("LNRC") reported 1993record income
from operations of $18.9$66.6 million. This includedFavorable 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
loss of $51.0 million fromreserve 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 reinsurance, largely from reserve strengthening. Reinsurance products(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 disability income produced earningsprice alone. LNRC manages a portfolio of $69.9 million. Thus, strong
performancesdiversified 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 individual life, groupdelivery of knowledge and international linesalliance partnerships, all on a
foundation of long-term business were overshadowed by the poor results in the disability income
reinsurance area. In 1992, the segment earnings of $58.3 million included a
loss from disability income of $8.7 million.
Customer Focusrelationships.
15
LNRC provides a full range of risk management products and consulting
servicessolutions to four primary customer groups: insurance companies
in the United
StatesU.S. and selectedselect international markets, health maintenance
organizations,
(HMOs), self-funded employer groups with risk management needs, and
other primary risk-accepting organizations. An exclusive network of accountAccount executives and sales
specialists distributesdistribute LNRC products exclusively with a consultative client
approach. Based uponLNRC 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 competitive analysis of premium volume for
the year ended December 31, 1992, it is clear that the long-term business relationships and the value added in providing unique client solutions
continue to position LNRC as the leading life-health reinsurerwritten in the United States.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 includedinclude consolidation among the direct disability income
writers, lower interest
rates,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 then the largest reinsurer of disability income, began to perceive problems developing in the market. The companyLNRC took
action to apply its risk management skills to thosethe 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 by 67%of 75% since 1990. -16-
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, wemanagement recognized that, despite ourthese
efforts, ourdisability income experience was not improving. This ledAt 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 further strengthening reserves to
recognize expected future losses.stabilize, they did not improve. The adequacyfact 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 dependent on future morbiditya 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 other factors which are
subject to substantial variability. Accordingly, we cannottake
such action as may be assurednecessary.
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 willbut it is not emerge.
Individual Life
Onepossible to estimate the
amount of the primary reasons for LNRC's strong earnings of the last two years
was favorable mortality on Individual Life reinsurance. Individual life
sales increased 24% in 1993.
Group Markets
Group Reinsurance has experienced favorable morbidity in the last two years,
contributing to the strong earnings reported. Competition has intensified in
the HMO market, one of LNRC's primary group market customers. As HMO's move
to a broader spectrum of products, LNRC is prepared to provide market
knowledge and ancillary products such as short-term disability, accidental
death and dismemberment, and group life.
There are still many uncertainties surrounding national health care reform.
Whatever the outcome, LNRC is well positioned to follow the risk to design and
provide products and services to meet risk management needs.
Life Underwriting System
The essence of the partnership and integration between an insurer and
reinsurer is moving to new, more sophisticated levels. Today, strategic
relationships are developed around the flow of information. Companies are
migrating to electronic commerce where billing, underwriting and other risk
management functions are increasingly shared with their reinsurer in a direct
electronic interface. LNRC's Life Underwriting System (LUS), a patented
state-of-the-art risk management tool, provides decision support to the
underwriter, improving service and reducing insurers' expenses.those losses at this time.
Outlook
In addition to
the LUS, a new risk management product, Datalliance, has been delivered to
the marketplace. Both products were developed by LNRC. Datalliance provides
an electronic interchange of information between parties sharing in the risk
management process. These products provide the foundation for insurance
companies to re-engineer their internal processes and interactions with their
risk management partners.
Outlook1995, LNRC will continue to closely monitor theprovide 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 situationclaims management expert system; 2) emphasis on asset
management services to reinsurance customers; and, as
always, take necessary actions3) expansion of
underwriting management fee income in Group Markets and Financial Reinsurance.
Risk based income is expected to protect the fundamental earnings strengthgrow through expansion of existing customer
relationships and greater penetration in our other reinsurance operations. The company expects 1994 reinsurance
earningsselected foreign markets.
LNRC is an organization of problem solvers for entities that assume primary
life and health insurance risk. As such, it seeks to recover and believes over the long-term LNRC will continue to
contribute a steady and significant streamapply its competencies
of earnings to LNC.
LNRC's ongoing strategy will be to make the best use of its unique
competencies to design customer focused, custom-made, total risk management, solutions forknowledge management and customer focus to its clients.customers'
problems. LNRC willhas challenged its organization to broadly and creatively
apply these skills across life-health reinsurance business lines in order to
expand theits 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 offered to maintainLNC and its positionaffiliates 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 premier life-health
reinsurerunderlying 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 United States.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.
-17-18
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 1989
Financial Results by Source
Financial Results by Source
Employers Health Insurance Company $14.1 $54.3 $40.8 $39.5 $34.2 $5.2
Managed Health Care -------------- -- -- -- 4.0 19.0 (.6)
Income from Operations -------------- 14.1 54.3 40.8 43.5 53.2
4.6
Realized Gain on Investments*Investments ----- .3 1.0 -- -- -- --
Net Income -------------------------------------- $14.4 $55.3 $40.8 $43.5 $53.2
$4.6*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 Information
Premiums ----------------------- $1,228.6 $1,184.0 $2,436.9 $2,260.3 $2,076.4
Equivalents -------------------- 217.3 195.5 841.3 707.6 648.5Operations" on page 19).
19
Review of Other Operations:
Year Ended December 31 (in thousands of lives)millions) 1994 1993 1992 1991 1990
1989
Health-Individual Enrollees
Employers Health Insurance Company - 1,030 926 996 879 811
Managed Health Care
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 --------- -- -- 2,679 2,865 2,834
Total Enrollees -------------- 1,030 926 3,675 3,744 3,645
(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 89 to the consolidated financial statements on page
51)57).
Employers Health InsuranceThe 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, produced recordLynch & 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 of
$54.3 million in 1993 versus $40.8 million in 1992. A reduction in medical
cost trends contributed to this earnings improvement.
Forplus the year, the company's health insurance premium reached $1.2 billion.
Employers Health is ranked as the 12th largest U.S. group health insurer
based on 1992 annual statutory premiums (The National Underwriter, June
1993). In 1993, in-force members grew by 11% over the previous year,
bringing total members to more than 1 million.
Employers Health is a single source provider of a broad line of managed care
products and employee benefit products for small businesses. The company has
focused primarily on employer groups of 2 to 150 lives and also offers
administrative services for larger groups in selected markets.
Employers Health distributes managed care medical insurance products, as well
as non-medical specialty products and administrative services through more
than 40,000 independent agents. While it writes business in 40 states, the
company has managed care geographic concentration, with more than 75% of its
medical membership concentrated in 10 states. Employers Health offers
Preferred Provider Organizations (PPOs) and Health Maintenance Organizations
(HMOs) services through wholly or partially owned plans and through alliances
and contractual relationships with other managed care organizations.
In July 1993, Employers Health began providing allcumulative effect of the marketing and
administrative services1993
accounting change for the Health Insurance Planconsolidated group of California,companies related to
postretirement benefits, the
nation's first state sponsored purchasing pool. A purchasing pool enables
employers to group together for combined purchasing power and administrative
efficiencies.
Outlook
In December 1993, LNC, through its wholly-owned subsidiary Lincoln National
Life Insurance Company, announced it would sell, through a public offering,
approximately 60% or 10.5 million shares of EMPHESYS Financial Group, Inc.
EMPHESYS is a holding company created by Lincoln Life which owns the stock of
Employers Health. Depending on market demand, Lincoln Life may sell more
than 60% of the company.
LNC has decided to divest a majority interest of Employers Health in order to
devote more of its resources to its primary businesses and further reduce its
investment in the group health business. LNC intends to use the proceeds from
the sale for further growth. At the time of this writing, LNC anticipates the
sale will close in March 1994.
-18-
Discussion and Analysis of Investments
December 31 (in billions) 1993 1992 1991 1990 1989
Total Invested Assets*----------- $29.7 $25.5 $23.0 $19.1 $17.8
Year Ended December 31 (in millions) 1993 1992 1991 1990 1989
Net Investment Income**---------- $2,146.5 $1,987.3 $1,799.3 $1,653.4 $1,580.2
Net Realized Gain (Loss)
on Investments ---------------- 268.4 176.9 163.1 (103.0) 86.7
*Effective December 31, 1993, with the adoption of FAS 115, all fixed
maturity securities are carried at fair values.
**Net investment income for 1993 includes a change in estimate of income from
mortgage-backed bonds (see note 2 to the consolidated financial statements
on page 39).
Net realized gain (loss) on investments in 1993 and 1992 was $268.4 million
($170.3 million after taxes) and $176.9 million ($118.6 million after taxes),
respectively. These gains were the result of the sale of investments, less
write-downs and allowances for losses. The write-downs of fixed maturity and
equity securities were recorded when the securities were deemed to have
declines in market value that were other than temporary. With the exception
of interest only mortgage-backed securities, the fixed maturity securities to
which these write-downs apply were generally of investment grade quality at
the time of purchase, but were classified as "below investment grade" at the
time of the write-downs. Provision for losses were established for mortgage
loans on real estate and real estate where the underlying value of the
property was deemed to be less than the carrying value. The provision for
losses in 1993 includes $64.1 million for the adoption of FAS 114subsidiaries (see note 211
to the consolidated financial statements on page 38). The amount59) 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 write-downs and provisions for losses is disclosedsales have affected the comparability
of select line items within the notesConsolidated 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 accompanying financial statementsimpact of the subsidiary sold in 1994 (see note 311 to the
consolidated financial statements on page 40)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 (cost(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, werewas 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 incomegains 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 19921993 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 a 13%increased volumes in the Life Insurance
and Annuities and Life-Health Reinsurance segments. The increase in invested
assetslife 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 a decreaseincreases in the yieldLife 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 8.38%the calling of the 8% notes (due in 1997)
in March 1994. Interest expense decreased $9.5 million or 18% in 1993
compared to 8.24%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 dominanttotal investment held is fixed maturity securities which
represents 81%portfolio decreased $2.8 billion in 1994.
The removal of the investment portfolio. A $3.6investments of the two subsidiaries sold (see note 11 to
the consolidated financial statements on page 59) accounted for $2.1 billion
increaseof this decrease. The remainder of the decrease is the net result of
decreases in the fixed maturity portfolio, including increases related tofair value of securities available-for-sale being partially
offset by new purchases of investments from cash flow generated by the
adoption of FAS
115, accounted for most of the $4.2 billion increase in the investment
portfolio in 1993.
Fixed Maturity Securities
In 1993, LNC's fixed maturity portfolio produced a return of 12.7% compared to
an industry recognized index (Lehman Brothers, Government/Corporate Bond
Index) which produced 11.0%business units.
LNC maintains a high-quality fixed maturity securities portfolio. As of
December 31, 1993, $11.81994, $10.3 billion or 53%48% of theits fixed maturity securities
in the portfolio were ratedhad ratings of AA or better and $956.9 milliononly $1.2 billion or 4.3% of the portfolio was
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invested in5.8% had
ratings below investment grade (BB or less) securities (see note 3 to the consolidated
financial statements on page 41)42). The below investment grade fixed maturity
securities represent 3.2% of theonly 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, 1993,1994, the aggregate cost of such investments purchased was $391.4$678.5 million.
Aggregate proceeds from such investments sold were $283.2$466.6 million, resulting
in a realized pre-tax gainloss at the time of sale of $17.4$2.1 million.
As of December 31, 1993, LNC adopted FAS 115 and reclassified itsLNC's entire fixed maturity securities portfolio is classified as "available-for-sale." With such
reclassification, the fixed maturity securities are"available-
for-sale" and is carried at current fair value and changesvalue. 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 (see note 2equity. Note 3
to the consolidated
financial statements onConsolidated Financial Statement (see page 39). As41) shows the gross
unrealized gains and losses as of December 31, 1993, LNC's fixed
maturity securities were comprised of securities with gross unrealized gains
of $1,925.0 million and gross unrealized losses of $179.9 million.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.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 these risksits 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 bonds.securities. At selected times, higher-risk
securities may be purchased if they do not compromise the safety of the
general portfolio. At December 31, 1993,1994, LNC did not have a significant
amount of higher-risk mortgage-backed bonds.securities. There are negligible
default risks in the mortgage-backed bondsecurities portfolio as a whole as the
vast majority of the assets are either guaranteed by U.S. government-
sponsoredgovernment-sponsored
entities or are supported in the securitization structure by junior securities
enabling the assets to achieve high investment grade status.
At December 31, 1993, the current par, amortized cost and estimated fair value
of investments in mortgage-backed bonds summarized by interest rates of the
underlying collateral are as follows:
Current Fair
December 31 (in millions) Par Cost Value
Below 7% ------------------------------- $ 269.1 $ 271.7 $ 272.2
7% - 8% -------------------------------- 1,296.5 1,271.2 1,298.0
8% - 9% -------------------------------- 1,378.6 1,319.8 1,427.0
Above 9% ------------------------------- 2,933.8 2,823.0 3,064.8
Total $5,878.0 $5,685.7 $6,062.0
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Equities
The equity securities portion ofSee note 3 to
the investment portfolio produced a realized
pre-tax gain of $156.7 million in 1993 as compared with $83.5 million in 1992.
This continued strong performance reflectsconsolidated financial statements on page 42 for additional detail about
the success of LNC's two affiliates
(Lynch & Mayer and Vantage Global Advisors, Inc). These advisors manage
equity funds for Lincoln National. While the stock market, as measured by the
S&P 500, had an investment return of 10.1% for the year, the combined return
on assets managed by Lynch & Mayer and Vantage Global Advisors, Inc. was
14.6%.
Total Return
While many insurance companies invest to maximize current income, we follow a
total return strategy that focuses the change in market value of our assets in
addition to current income. This approach permits us to be more effective in
our asset liability management efforts, since decisions can be made based upon
the true economic value of assets and true economic costs of liabilities.
Total return requires that we evaluate the risk and expected return of each
asset.
Mortgage Loans and Real Estateunderlying collateral.
Mortgage loans on real estate represented 11.1%10.6% of the total investment
portfolio as of December 31, 1993,1994, while real estate owned represented 2.1%2.6%.
In January 1994, LNC announced its intention to sell approximately $300
million in performing and non-performing mortgage loans and real estate
holdings through a sealed bid process. If the transaction is consummated, the
selling price is expected to approximate the carrying value.
As of December 31, 1993,1994, the underlying properties supporting the mortgage
loans on real estate consisted of 29%24% in commercial office buildings, 27%28% in
retail stores, 19% in apartments, 12%15% in industrial buildings, 3% in
hotels/motels and 10%11% in other. In addition to the dispersion by type of
property, the mortgage loan portfolio is distributed regionallygeographically diversified throughout
the United States.
MortgageAlthough 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 are actively monitored to identify problem
loans. LNC classifies mortgage loans as problem loans if they are non-accrual
loans (i.e., principal and interest are 60 days past due), restructured loans
(i.e., the terms of the original loan have been modified) or all other loans
not in the first two categories that are considered impaired. LNC considers a
mortgage loan impaired when, based on current information and events, it is
probable that LNC will be unable to collect all amounts due according to the
contractual terms of the loan agreement. In addition, LNC also classifies
loans as potential problem loans when available information causes management
to be concerned about the borrowers' ability to comply with the present loan
terms, including the repayment of outstanding interest and principal.
When LNC determines that a loan is impaired as defined above, a provision for
loss is established for the difference between the carrying value of the
mortgage loan and the estimated value. Estimated value is based on either the
present value of expected future cash flows discounted at the loan's effective
interest rate, the loan's observable market price or the fair value of the
collateral. Additional amounts were added to the mortgage loan provision for
losses during 1993 due to the adoption of FAS 114 (see note 23 to the consolidated financial statements on page
38)43). When a mortgage loan becomes
60 days past due, all existing accruals for interest due are reversed and
interest is recorded on a cash basis until the mortgage loan is brought
current.
The commercial mortgage loan market deteriorated throughout the nation in 1992
and 1993. Lincoln National, like many other insurers, did not escape an
increase in impaired loans. We continued to strengthen our provision for
losses throughout 1992 and 1993, increasing the reserve level and the ratio of reserves to impaired mortgages. Net impaired loans both
decreased in 1994 as the increase in reserves was more than offset by the
removal of December 31, 1993,
totaled $554.7 million, as comparedamounts associated with $421.7 million astwo bulk sales of December 31,
1992. Net impairedperforming and non-
performing mortgage loans were only 1.9% of total investments at December 31,
1993.
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A summary of LNC's problem mortgage loans on real estate and supplemental
information with respect to such loans is as follows:
December 31 (in millions) 1993 1992
Problem Loans:
Non-accrual loans -------------------------------- $276.3 $338.2
Restructured loans ------------------------------- 59.8 90.2
Other problem loans ------------------------------ 445.2 127.8
Total Problem Loans ------------------------ $781.3 $556.2
Potential problem loans -------------------------- $ 92.1 $ 69.3
Total problem loans as of December 31, 1993 and 1992 of $781,300,000 and
$556,200,000, respectively, include $684,500,000 and $356,300,000,
respectively, of impaired loans and, accordingly, a provision for losses of
$226,600,000 and $134,500,000 for 1993 and 1992, respectively, have been
provided for such loans.
Year Ended December 31 (in millions) 1993 1992
Interest Income from Problem Loans:
Amount that would have been
recorded under original terms ------------------ $76.5 $54.6
Interest income recorded during the period ------- 52.3 33.8
LNC has a commitment to lend $132,000 on a restructured loan. No other future
commitments have been made on non-accrual or restructured loans.
Outlook
Entering 1994, the market consensusand real estate properties in 1994.
Investment in Unconsolidated Affiliates
This line was for slightly higher inflation than
last year and moderate improvement in the economy.
The current consensus view and market focus are on much stronger economic
growth and increasing inflationary pressures. Much of this focus could be
attributedadded to the unusually high fourth quarter Gross Domestic Product report
and potential inflationary findings in the Purchasing Manager's Report. This
has resulted in further declines in bond and stock prices.
We are not as concerned with inflation versus the market at this time. While
interest rates may be expected to continue to rise in the short term, we
believe they are likely to fall in the second halfbalance sheet following LNC's sale of this year.
We made a strong commitment to the international equity market last year and
continue to pursue this strategy. The returns for both domestic fixed-income
and equity instruments will not approach that71% of the
decadeownership of the 1980's but
should result in real returns closer to historical averages.
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Review of Other Operations:
Year Ended December 31 (in millions) 1993 1992 1991 1990 1989
Financial Results by Source
Investment Management -------------- $ 9.7 $ 9.2 $ 4.6 $ 2.9 $ 1.9
LNC Financing ---------------------- (26.7) (33.8) (34.2) (37.2) (41.7)
LNC Operations --------------------- (22.3) (18.2) (16.3) (19.5) (21.3)
Other Corporate* ------------------- .4 (7.6) 9.5 5.5 (1.8)
Corporate Equity Investments -- (36.6) (39.6) (43.1) (33.1)
Income (Loss) from Operations (38.9) (87.0) (76.0) (91.4) (96.0)
Realized Gain(Loss)on Investments**- 19.8 118.6 113.3 (64.9) 60.5
Gain(Loss)on Sale of Subsidiaries -- (98.5) -- (89.1) 27.7 --
Cumulative Effect of Accounting
Change (Postretirement Benefits)*** (96.4) -- -- -- --
Net Income (Loss) ------------ $(214.0) $ 31.6 $(51.8) $(128.6) $(35.5)
*Prior year data (1989-1992) has been restated for the adoption of FAS 109
(see note 2 to the consolidated financial statements on page 38).
**Prior to 1993, all realized gain (loss) on investments was included in
Other Operations (see note 8 to consolidated financial statements on page
51).
***This accounting change relates to the adoption of FAS 106 (see note 2 to
the consolidated financial statements on page 38).
The income (loss) from operations shown above for "Other Operations"
represents unallocated revenues and expenses including LNC's investment
management companies, corporate investment income, interest expense on short-
term and long-term borrowings, corporate overhead expenses and certain other
operations that are not directly related to the four business segments.
The Investment Management operations reported above include Lincoln National
Investment Management Company, Lynch & Mayer 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
less for 1993 than 1992 due to the useits primary writer of proceeds from a Common Stock
offeringemployee life-health coverages (see note 911
to the consolidated financial statements on page 52) to
pay down corporate debt.
Net income shown above for "Other Operations" includes the items described
above under income from operations plus the cumulative effect of the
accounting change for the consolidated group of companies related to
postretirement benefits, the gain (loss) on sale of subsidiaries (see note 10
to the consolidated financial statements on page 53) and certain realized gain
(loss) on sale of investments.
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REVIEW OF CONSOLIDATED OPERATIONS AND FINANCIAL CONDITION
Summary Information
Increase
(Decrease)
Year Ended December 31 (in millions) 1993 1992 1991 1993 1992
Insurance premiums:
Property-casualty ------------ $1,841.4 $2,083.0 $2,242.0 (12%) (7%)
Health ----------------------- 1,927.0 1,857.7 3,106.3 4% (40%)
Life and annuity ------------- 1,588.4 1,358.2 1,381.8 17% (2%)
Insurance fees ----------------- 470.4 409.5 357.5 15% 15%
Net investment income ---------- 2,146.5 1,987.3 1,799.3 8% 10%
Realized gain on investments --- 268.4 176.9 163.1 52% 8%
Loss on sale of subsidiaries --- (98.5) -- (135.0)
Other revenue ------------------ 146.1 161.5 254.0 (10%) (36%)
Insurance benefits and expenses:
Property-casualty ------------- 1,406.8 1,717.6 1,844.9 (18%) (7%)
Health ------------------------ 1,478.6 1,428.6 2,396.5 4% (40%)
Life and annuity -------------- 2,742.9 2,554.2 2,645.4 7% (3%)
Expenses:
Operating expenses ------------ 2,029.3 1,855.2 2,012.2 9% (8%)
Interest ---------------------- 44.3 53.8 71.2 (18%) (24%)
Federal income taxes (credits)* - 172.5 65.5 (3.1)
*Prior year data (1992-1991) has been restated for the adoption of FAS 109
(see note 2 to the consolidated financial statements on page 38)59).
REVIEW OF CONSOLIDATED OPERATIONS
Consolidated operations are reviewed below except for Net Investment Income
and Realized Gain on Investments which are reviewed in the preceding
Discussion and Analysis of Investments section. Revenue and expenses
associated with the portion of the Employee Life-Health Benefits segment
which was sold have been excluded from the 1993 and 1992 operating results as
the estimated cost of the run-off of such operations was included in the loss
on sale of subsidiaries recorded in the fourth quarter of 1991.
Insurance Premiums
Property-casualty premiums decreased 12% in 1993 and 7% in 1992. The decrease
in 1993 and 1992 is primarily the result of implementing a more stringent
underwriting policy to improve loss experience. The volume of premium that
this segment will produce in 1994 is dependent upon whether the pricing within
the property-casualty insurance market place allows price increases that are
necessary to maintain and improve profitability.
Health premiums increased $69.3 million or 4% in 1993 as the result of
increased volumes of business and rate increases implemented over the past
year. Health premiums decreased $1.2 billion in 1992. Excluding the 1991
impact of the portion of the Employee Life-Health Benefits segment which was
sold in 1992, health premiums decreased $22.2 million or 1%. This decrease
was due to premium rate increases on business retained being more than offset
by lower volumes of business. The premium rate increases and the lower volume
resulted from holding healthcare trend factors at a high level for new and
renewal business quotes. If LNC consummates the sale of its primary direct
writer of health coverages (see note 10 to the consolidated financial
statements on page 53) health premiums will be approximately 50% lower in
1994.
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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. Life and annuity premiums decreased 2%
in 1992. Excluding the 1991 impact of the portion of the Employee Life-Health
Benefits segment which was sold in 1992, life and annuity premiums increased
4% primarily as the result of an increase in the volume of transactions in the
Life-Health Reinsurance segment. 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 1994 similar
to the growth for 1993.
Insurance Fees
Insurance fees from universal life and other interest-sensitive life insurance
contracts increased 15% in 1993 and 1992. The growth in fees from this
business is expected to continue in 1994.
Loss on Sale of Subsidiaries
In December 1993, LNC recorded a provision for loss on the sale of its
Security-Connecticut subsidiary (see note 10 to the consolidated financial
statements on page 56). In December 1991, LNC recorded a loss on the
anticipated sale of a portion of the Employee Life-Health Benefits segment
(see note 10 to the consolidated financial statements on page 53).
Other Revenue
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. Excluding the 1991 impact of a portion of
the Employee Life-Health Benefits segment which was sold in 1992, other
revenue increased 20% in 1992. This increase is the result of increased
revenues from fees in the Life Insurance and Annuities segment.
Insurance Benefits and Expenses
Property-casualty benefits decreased by 18% 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. Property-
casualty benefits decreased by 7% as compared with 1991. This decrease was
the net result of reduced volumes of insurance in-force and an increase in
weather-related claims. The 1991-1993 period had above average catastrophe
and storm losses. Assuming an average catastrophe and storm loss year in
1994, the property-casualty benefits will likely parallel the change in
property-casualty premiums.
Health benefits increased 4% in 1993 compared to 1992. This increase was the
result of higher volumes of business and the impact of a change in estimate of
the reserve level needed for the Life-Health Reinsurance segments disability
income business (see note 2 to the consolidated financial statements on page
42) being partially offset by moderating claims in the Employee Life-Health
Benefits segment. Health benefits, excluding the 1991 impact of the portion
of the Employee Life-Health Benefits segment which was sold in 1992, were
$12.6 million or 7% more in 1992 than in 1991. This is the net result of
lower volumes of business and inflation in the cost of providing health care
in the Life-Health Reinsurance and Employee Life-Health Benefits segments. As
noted within the insurance premium section, if LNC consummates the partial
sale of its primary direct writer of health coverages (see note 10 to the
consolidated financial statements on page 53) the volume of health business
will decrease by about 50% in 1994. Health benefits are also expected to
decrease by approximately 50%.
-25-
Life and annuity benefits and settlement expenses increased 7% in 1993
compared to 1992. This increase was the result of increased volumes of
business in the Life Insurance and Annuities and Life-Health Reinsurance
segments. Life and Annuity benefits and settlement expenses, excluding the
1991 impact of the portion of the Employee Life-Health Benefits segment which
was sold in 1992, increased by 9%, primarily as a result of increased business
in 1992 in the Life-Health Reinsurance segment and more favorable mortality
than in 1991. The increase in life and annuity benefits expense in 1994 is
expected to parallel the growth in life and annuity premiums.
Expenses
Underwriting, Acquisition, Insurance and Other expenses increased 9% in 1993
compared to 1992. This increase was the result of inflation, higher volumes
of insurance and higher costs for postretirement benefits. Excluding the 1991
impact of the portion of the Employee Life-Health Benefits segment which was
sold in 1992, underwriting, acquisition, insurance and other expenses
increased $232.9 million or 14% in 1992. This increase was the result of
inflation and an increase in the volume of insurance except in the
Property-Casualty segment. In 1994, LNC's segments will continue to adjust
staff levels as appropriate to match business volumes.
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 9 to the consolidated financial statements
on page 52). Interest expense decreased $17.4 million in 1992 as the result
of decreases in the average debt outstanding, decreases in short-term interest
rates and changes in the composition of debt outstanding. The average debt
level for 1994 is expected to be lower than 1993 due to cash available at the
holding company from subsidiary dividends being used to reduce debt
outstanding. In addition, the 8% notes due in 1997 were called in March 1994.
Federal Income Taxes (Credits)
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 loss on sale of subsidiary (due to federal income tax
regulations) being 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 42). As restated for the effect of FAS 109 (see note 2 to the
consolidated financial statements on page 38), federal income taxes increased
from the tax credit of $3.1 million in 1991 to a tax charge of $65.5 million
in 1992. This increase resulted primarily from an increase in pre-tax
earnings.
Summary
Net income for 1993 was $318.9 million compared with $359.2 million in 1992.
The 1992 amount has been restated for the effect of FAS 109 (see note 2 to the
consolidated financial statements on page 38). Excluding realized gain on
investments, loss on sale of subsidiary and the cumulative effect of
implementing FAS 106, 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. Net income for 1993
includes two changes in estimates which essentially offset each other (see
note 2 to the consolidated financial statements on pages 39). As restated,
net income for 1992 was $359.2 million compared with $201.9 million in 1991.
Excluding net realized gains on investments net of taxes and the 1991 impact
of the $89.1 million after-tax ($135.0 million pre-tax) loss on sale of
subsidiaries, LNC earned $240.6 million in 1992 compared to $177.7 million in
1991. All the business segments contributed to this increase.
-26-
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
Consolidated financial condition is reviewed below except for Investments
which are reviewed in the preceding Discussion and Analysis of Investments
section.
Cash and Invested Cash
Cash and invested cash decreasedincreased by $306.2$331.9 million in 1993 as1994. This increase is
primarily the result of moving invested cashthe receipts of the proceeds from the sale of
subsidiaries (see note 11 to longer term investments.
Variable Life and Annuity and Segregated Pension Funds
Thisthe 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 $4.1$1.9
billion, reflecting a continued increase in annuity and pension funds under
management.
25
Federal Income Taxes
Federal Income Taxes increased $261.3income 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
1993an 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 restated basisvaluation allowance (see note 24
to the consolidated financial statements on page 38)44).
Amount Recoverable from Reinsurers
The increase in amounts recoverable from reinsurers was the result of an
increased $149.3volume of business ceded in the Life Insurance and Annuities
segment.
Goodwill
The decrease in goodwill of $82.8 million in 1992. These increases resulted fromis primarily the net effectresult of increases in discountingthe sale
of insurance reserves, deferred acquisition costs and
investment reserve additions; and in 1993 due to the effect of implementing
FAS 115subsidiaries during 1994 (see note 211 to the consolidated financial
statements on page 39)59). Amount Recoverable from Reinsurers
This balance sheet account was addedGoodwill is expected to increase in 1993 as1995 due to the
resultexpected acquisition of the adoption of
FAS 113an investment management company (see note 212 to the
consolidated financial statements on page 38)59).
These amounts were previously netted against policy liabilities and accruals.
Other Assets
The decrease in other assets relates to a decrease in expected proceeds from
sales of security investments in the last few days of 1993 versus a higher
volume of such transactions late in 1992.
Total Liabilities
TotalExcluding 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 $7.6$3.9 billion in 1993.1994. This increase
reflects 1)an increase in business activity as evidenced by an increase in
policy liabilities and accruals of $2.1$143.1 million, an increase of $2.2
billion in contractholder funds, an increase of $4.1$1.9 billion in the
liability
for variable lifeliabilities related to separate accounts and annuity and segregated pension funds and 2)an increase in the policy liabilities and accruals of $1.4 billion; 2)a decrease in debt of $169.9 million; and 3)an increase$14.7
million. These increases are partially offset by a decrease in all other
liabilities of $.2$248.1 million.
The increase inPolicy 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 accruals includes $900less than 2% of LNC's total policy liabilities.
Paid environmental claims and claim expense totalled approximately $15.0
million relatedin 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 adoptionlarger companies that tend to incur most of FAS 113the 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 27 to the consolidated financial statements on page
38)50). PolicyHowever, based on available information, it is management's judgement
that the appropriate level of liabilities for both December 31, 1993have been recorded and December 31, 1992 included athat any
unrecorded liability for environmental losseswould not be material to LNC's future results of
approximately $204.0 million.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 19931994 versus
a lower volume of such transactions late in 1992.
Shareholders' Equity
The1993. Debt is expected to
increase in Shareholders' Equity1995 as a result of $1.2 billion compared to the restated
December 31, 1992 balanceacquisition of an investment management
company (see note 212 to the consolidated financial statements on page 38),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 of $316.1 million from the public
stock offering (see note 9due
to the consolidated financial statements on page
52), $318.9$349.9 million of net income, $26.2$30.0 million from the issuance of Common
Stock related to benefit plans, and $768.4$8.1 million related to the cumulative
effect of accounting change for debt and equity securities (see note 2 to the
consolidated financial statements on page 39) being partially offset by $162.8
million in dividends to stockholders, $16.5 million related to the change in
net unrealized gain (loss) on trading and equity securities and a $4.8 million
reductionan increase in the
accumulated foreign exchange gain.
-27-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 measurementmeasure used by insurance regulators to
determine the financial stability of an insurance company. New risk-basedIn the U.S., risk-
based capital guidelines developedare used by the National Association of Insurance
Commissioners became effective in 1993 for life insurance companies. The
risk-based capital formula is designed to analytically determinebased on the
level of insurance and investment risks of individual companies,the amount of capital that represents minimum
acceptable operating amounts related to theseinsurance and investment risks.
Regulatory action is triggered when an insurer's statutory-basis capital falls
below the formula-produced capital level. Similar guidelines
for property-casualty insurance companies were adopted for 1994. At December 31, 1993, statutory-basis1994, statutory-
basis capital for each of LNC's life and property casualtyproperty-casualty insurance
subsidiaries was substantially in excess of regulatory action levels of risk-basedrisk-
based capital (usingrequired 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 formulabook 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 property-casualty)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
In the insurance industry, liquidity generallyLiquidity refers to the ability of an enterprise to generate adequate amounts
of cash from its normal operations including activities into 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 to meet its financial
commitments. LNC manages its operations, including prudent investment
portfolio structuring, to provide for appropriate liquidity levels. The
portfolio structuring involves segregating LNC's investments by segment,
sub-segment or type of product. The investments selected for each segregated
portfolio are based on LNC's desire to matchcommensurate with the characteristics (e.g.
duration and yield)profile of the
underlying 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 3836 indicate that operating
activities provided cash of $1.2 billion, $1.0 billion and $870 million in
1994, 1993 and $1.3 billion in
1993, 1992, and 1991, 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. AdditionalIn 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 agreementsagreement
which provides for borrowing up to $550$500 million (see note 5 to the
consolidated financial statements on page 45)47).
Transactions such as those described in the preceding paragraph that occurred
during 1993recently included a public stock offering in 1993 which netted $316.1 million
after expenses (see note 910 to the consolidated financial statements on page
52)58). The proceeds from this offering were used to paydown short-term debt
pending application for general corporate purposes, which may include further
investmentpurposes. In another transaction in existing insurance businesses or to finance acquisitions. In
March 1994, LNC redeemed its $100 million of 8% notes payable due in 1997.
TheThis 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.
-28-29
Holding Company Cash Flow
Year Ended December 31 (in millions) 1994 1993 1992 1991
Dividends from subsidiaries:
American States Insurance ---------------------- $ 215.0 $ 60.0 $ 64.0
Lincoln National Life -------------------------- $125.0 12.0 $ -- $ 15.0
American States Insurance ---------------------- 60.0 64.0 --
Other ------------------------------------------ 4.5 4.0 12.3 18.5
Net investment income ---------------------------- 1.2 4.3 8.0 7.8
Operating expenses ------------------------------- (33.7) (19.5) (34.9)
(30.9)
Interest ----------------------------------------- (44.3) (39.0) (43.2) (62.9)
Net sales (purchases) of investments ------------- (22.1) 31.6 86.5 (5.4)
Increase (decrease) in cash collateral on
loaned securities ------------------------------------------------------------- 14.3 9.5 (31.7) 54.8
Sale of subsidiaries ----------------------------- -- -- 145.3 --
Pre-closing dividend from subsidiaries sold ------ -- -- 40.9 --
Additional investment in existing subsidiaries --- (2.7) (105.8) (103.1)
(154.6)Investment in unconsolidated affiliate ----------- (103.5) -- --
Net increase (decrease) in debt ------------------ 15.9 (207.2) (59.1) 195.8
Decrease (increase) in receivables from
subsidiaries ----------------------------------------------------------------------- (3.9) (14.2) 40.7 (9.8)
Increase (decrease) in loans from subsidiaries --- 271.8 (127.6) 113.4 (108.8)
Decrease (increase) in loans to subsidiaries ----- (20.5) 34.7 50.1 (64.1)
Federal income taxes paid ------------------------received (paid) ------------- 65.6 (270.0) (171.1) (108.8)
Net tax receipts from (payments to) subsidiaries ---------------- (61.1) 319.8 204.9 119.0
Dividends paid to shareholders ------------------- (172.2) (156.2) (139.2) (126.0)
Issuance of Series F Preferred Stock ------------- -- -- 158.7
Public offering of Common Stock ------------------ -- 316.1 --
Retirement of Common Stock ----------------------- (18.4) -- --
Other -------------------------------------------- 20.5 (2.8) (24.2) 6.7
Cash and invested cash - December 31 ------------- $ 523.1 $ 271.7 $ 422.0 $ 262.4
Other investments - December 31 ------------------ 28.7 43.9 58.4 72.0
Debt - December 31 ------------------------------- 1,227.5 939.8 1,274.6 1,220.2
The table above shows the cash flow activity for the holding company from
19911992 through 1993.1994. 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 orand capital loss.
LNC's insurance subsidiaries are subject to assessments by state guaranty
funds to cover losses to policyholders of insolvent or rehabilitated companies
(see note 7 to the consolidated financial statements on page 51). LNC
believes that it is unlikely that any such payments required to be made in
1994 could have a material negative effect on LNC's liquidity and cash flows.losses.
As of December 31, 1993, $2.31994, $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
48)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.
-29-30
Item 8. Financial Statements and Supplementary Data
Operating Results by Quarter
(in millions, except per share) 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
19931994 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
1992 Data
Premiums and other considerations --- $1,392.8 $1,431.0 $1,537.1 $1,509.0
Net investment income --------------- 472.7 483.8 513.0 517.8
Realized gain on investments -------- 59.4 28.7 87.4 1.4
Net income -------------------------- 100.4 68.9 113.7 76.2
Net income(loss) per share ---------------- $1.08 $.74 $1.22 $.82--------- (.28) 1.23 1.82 .31
Applicable 1992 data has been restated for the adoption of FAS 109 (see note 2
to the consolidated financial statements on page 38) and the 1993 two-for-one
split of LNC's Common Stock (see note 9 to the consolidated financial
statements on page 52).
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
page 38)pages 39 and 40) and in the fourth quarter of 1993 by a provision for the loss
on sale of Security-Connecticut Corporationa life insurance subsidiary which was completed in February 1994
(see note 1011 to the consolidated financial statements on page 53)59). Income
before cumulative effect of accounting change and net income for the fourth
quarter of 1993 include two changes in estimateestimates which essentially offset each
other (see note 2 to the consolidated financial statements on page 39). Per share amounts were
affected by the February 1993 issuance of 9,200,000 shares of Common Stock
(see note 9 to the consolidated financial statements on page 52)40).
Consolidated Financial Statements
The consolidated financial statements of Lincoln National Corporation and
Subsidiaries follow on pages 3031 through 54.59.
-30-31
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31 (000'S omitted) 1994 1993 1992
(Restated)
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity
(cost: 1994-$22,194,079; 1993-$22,219,285;
1992-$1,951,277) -------------------------22,219,285) - $21,644,154 $23,964,335 $ 1,978,845
Equity
(cost: 1994-$948,135; 1993-$896,477; 1992
$706,939) --------------------------------896,477) ------- 1,038,617 1,080,301 923,419
Fixed maturity securities held for
investment, at amortized cost
(fair value: 1992-$19,482,614) ------------- -- 18,352,318
Mortgage loans on real estate ---------------- 2,853,083 3,300,951 3,135,075
Real estate ---------------------------------- 706,854 633,103 400,687
Policy loans --------------------------------- 553,272 595,085 563,532
Other investments ---------------------------- 175,121 158,170 171,037
Total Investments ---------------------------------------------- 26,971,101 29,731,945
25,524,913Investment in unconsolidated affiliates -------- 97,054 --
Cash and invested cash ------------------------- 1,041,583 709,664 1,015,850
Property and equipment ------------------------- 185,471 233,467 192,744
Deferred acquisition costs --------------------- 2,444,215 2,011,131 2,117,896
Premiums and fees receivable ------------------- 564,779 601,883 791,582
Accrued investment income ---------------------- 429,059 413,144
436,286
Variable life and annuity
and segregated pension funds -----------------Assets held in separate accounts --------------- 14,301,684 12,430,577 8,368,108
Federal income taxes --------------------------- 396,888 -- 110,324
Amounts recoverable from reinsurers ------------ 2,207,727 1,460,038 --
Goodwill --------------------------------------- 145,744 228,530 261,894
Other assets ----------------------------------- 544,755 559,982 727,698
Total Assets -------------------------------------------------------- $49,330,060 $48,380,361 $39,547,295
See notes to consolidated financial statements on pages 36 - 53.
See notes to consolidated financial statements on pages 37 - 59.
-31-32
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
-CONTINUED-
December 31 (000's omitted) 1994 1993 1992
(Restated)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Future policy benefits, and
losses, claims
and lossclaim expenses ----------------------------------- $11,216,312 $12,652,036 $11,124,560
Unearned premiums --------------------------- 806,987 858,805 980,497
Total Policy Liabilities and Accruals ------------------------------ 12,023,299 13,510,841 12,105,057
Contractholder funds -------------------------- 17,025,623 14,872,141
12,849,280
Variable life and annuity
and segregated pension funds ----------------Liabilities related to separate accounts ------ 14,301,684 12,430,577 8,368,108
Federal income taxes -------------------------- -- 150,951 --
Short-term debt ------------------------------- 275,310 351,418 433,407
Long-term debt -------------------------------- 419,607 335,097 423,034
Other liabilities ----------------------------- 2,242,477 2,657,015 2,541,538
Total Liabilities ----------------------------------------------- 46,288,000 44,308,040 36,720,424
Shareholders' Equity:
Series A Preferred Stock
(1993(1994 liquidation value - $3,783) -----------$3,457) ------------ 1,420 1,553 1,896
Series E Preferred Stock
(1993(1994 liquidation value - $151,569) ------------------- 151,206 151,206
Series F Preferred Stock
(1993(1994 liquidation value - $158,707) ------------------- 158,707 158,707
Common Stock ---------------------------------- 555,382 543,659 200,986
Earned surplus -------------------------------- 2,479,532 2,303,731 2,147,691
Foreign currency translation adjustment ------- 6,890 (1,214) 3,643
Net unrealized gain (loss) on
securities available-for-sale ------------------------------- (311,077) 914,679 162,742
Total Shareholders' Equity ----------------------------- 3,042,060 4,072,321 2,826,871
Total Liabilities and
and Shareholders' Equity ------------------------------ $49,330,060 $48,380,361 $39,547,295
See notes to consolidated financial statements on pages 3637 - 53.59.
-32-33
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 (000's omitted) 1994 1993 1992 1991
(Restated) (Restated)
Revenue:
Insurance premiums ------------------ $4,444,148 $5,356,797 $5,298,892 $6,730,157
Insurance fees ---------------------- 449,643 470,395 409,474 357,485
Net investment income --------------- 2,011,351 2,146,519 1,987,296
1,799,348Equity in earnings of
unconsolidated affiliates ---------- 14,652 -- --
Realized gain (loss) on investments --------- (130,820) 268,422 176,948
163,119
LossGain (loss) on sale of subsidiaries --------- 48,842 (98,500) --
(135,000)
Other ------------------------------- 146,534 146,124 161,493
253,938
Total Revenue ---------------------------------------- 6,984,350 8,289,757 8,034,103 9,169,047
Benefits and Expenses:
Benefits and settlement expenses ---- 4,849,243 5,628,279 5,700,443 6,886,818
Underwriting, acquisition,
insurance and other expenses ------------- 1,709,306 2,029,348 1,855,167 2,012,257
Interest expense -------------------- 49,520 44,301 53,794 71,202
Total Benefits and Expenses ------------ 6,608,069 7,701,928 7,609,404
8,970,277
Income beforeBefore Federal Income
Taxes and Cumulative Effect
of Accounting Change ----------------------- 376,281 587,829 424,699 198,770
Federal income taxes (credits) -------------------------- 26,383 172,546 65,528
(3,190)
Income beforeBefore Cumulative Effect
of Accounting Change ----------------------- 349,898 415,283 359,171 201,960
Cumulative effect of accounting
change (postretirement benefits) --------- -- (96,431) -- --
Net Income ---------------------------------------------- $ 349,898 $ 318,852 $ 359,171 $ 201,960
Earnings Per Share:
Income before cumulative
effect of accounting change ------------------- $3.37 $4.06 $3.86 $2.23
Cumulative effect of accounting
change (postretirement benefits) --------- -- (.94) -- --
Net Income ---------------------------------------------- $3.37 $3.12 $3.86 $2.23
See notes to consolidated financial statements on pages 3637 - 53.59.
-33-34
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Year Ended December 31 (000's omitted) 1994 1993 1992 1991
(Restated) (Restated)
Preferred Stock:
Series A Preferred Stock:
Balance at beginning of year --------------------- $ 1,553 $ 1,896 $ 2,208
$ 2,490
Conversion into Common Stock --------------------- (133) (343) (312) (282)
Balance at End of Year ---------------------------- 1,420 1,553 1,896 2,208
Series E Preferred Stock:
Balance at beginningBeginning
and endEnd of yearYear --------------------- 151,206 151,206 151,206
Series F Preferred Stock:
Balance at beginning of year ---------- 158,707 158,707 --
Issuance of shares -------------------- -- -- 158,707
Balance atBeginning
and End of Year ---------------------------------- 158,707 158,707 158,707
Common Stock:
Balance at beginning of year ------------ 543,659 200,986 179,656
177,306
Conversion of seriesSeries A Preferred Stock -- 133 343 312 282
Public offering of Common Stock --------- -- 316,100 -- --
Issued for benefit plans ---------------- 30,616 26,930 22,095 2,571
Shares forfeited under benefit plans ---- (631) (700) (1,077)
(503)Retirement of Common Stock -------------- (18,395) -- --
Balance at End of Year ---------------------------- 555,382 543,659 200,986 179,656
Earned Surplus:
Balance at beginning of year as previously reported ---------------- 2,272,055 2,049,937 1,969,645
Retroactive adjustment for the
new method of accounting for
income taxes -------------------------- (124,364) (120,674) (114,226)
Balance at Beginning of
Year, as Restated ---------------------------- 2,303,731 2,147,691 1,929,263 1,855,419
Net income ------------------------------ 349,898 318,852 359,171 201,960
Dividends declared:
Series A Preferred Stock -------------- (134) (146) (181) (211)
Series E Preferred Stock -------------- (8,336) (8,336) (8,336)
Series F Preferred Stock -------------- (8,729) (8,729) (4,486)(8,729)
Common Stock -------------------------- (156,898) (145,601) (123,497) (115,083)
Balance at End of Year ---------------------------- 2,479,532 2,303,731 2,147,691 1,929,263
Foreign Currency Translation Adjustment:
Accumulated adjustment at
beginning of year ------------------------------------------- (1,214) 3,643 24,710 26,660
Change during the year ------------------ 8,104 (4,857) (21,067) (1,950)
Balance at End of Year ---------------------------- 6,890 (1,214) 3,643 24,710
Net Unrealized Gain (Loss) on Securities
Available-for-sale:
Balance at beginning of year ----------------------- 914,679 162,742 210,082 66,346
Cumulative effect of accounting change - -- 768,419 -- --
Other change during the year ---------------------- (1,225,756) (16,482) (47,340) 143,736
Balance at End of Year ---------------------------- (311,077) 914,679 162,742 210,082
Total Shareholders' Equity
at End of Year ----------------------------------------- $3,042,060 $4,072,321 $2,826,871 $2,655,832
See notes to consolidated financial statements on pages 3637 - 53.59.
-34-35
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - continued
Year Ended December 31 (Number of Shares) 1994 1993 1992 1991
Preferred Stock:
(10,000,000 shares authorized)
Series A Preferred Stock:
Balance at beginning of year -------- 47,289 57,716 67,208 75,801
Conversion into Common Stock -------- (4,071) (10,427) (9,492) (8,593)
Balance Issued and Outstanding
at End of Year ------------------------------------- 43,218 47,289 57,716 67,208
Series E Preferred Stock:
Balance issuedIssued and outstandingOutstanding
at beginningBeginning and endEnd of year -------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 -------- 2,216,454 2,216,454---------- 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 ------- -- Issuance9,200,000 --
Issued for benefit plans -------------- 778,587 786,192 896,350
Shares forfeited under benefit plans -- (16,403) (28,876) (4,198)
Retirement of shares ------------------Common Stock ------------ (500,000) -- -- 2,216,454
Balance Issued and Outstanding
at End of Year ------------------ 2,216,454 2,216,454 2,216,454
Common Stock:
(400,000,000 shares authorized)
Balance at beginning of year ---------- 84,142,458 83,174,370 82,991,938
Conversion of series A Preferred Stock- 83,416 75,936 68,744
Public offering of Common Stock ------- 9,200,000 -- --
Issued for benefit plans -------------- 786,192 896,350 129,736
Shares forfeited under benefit plans -- (28,876) (4,198) (16,048)
Balance Issued and Outstanding
at End of Year --------------------------------------- 94,477,942 94,183,190 84,142,458 83,174,370
Common Stock (assuming conversion of
Series A, E and F Preferred Stock):
End of Year ------------------------------------------------ 103,659,480 103,397,296 93,439,980 92,547,828
Average for the Year ------------------------------ 103,863,196 102,307,356 92,977,312 90,658,726
Dividends Per Share:
Series A Preferred Stock -------------- $ 3.00 $ 3.00 $ 3.00$3.00 $3.00 $3.00
Series E Preferred Stock -------------- 3.79 3.79 3.79
Series F Preferred Stock -------------- 3.94 3.94 2.023.94
Common Stock -------------------------- 1.5501.66 1.55 1.475 1.385
See notes to consolidated financial statements on pages 3637 - 53.59.
-35-36
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 (000's omitted) 1994 1993 1992 1991
(Restated) (Restated)
Cash Flows from Operating Activities:
Net income ----------------------------------------------------------- $ 349,898 $ 318,852 $ 359,171 $ 201,960
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred acquisition costs -------------------- (154,419) (203,661) (146,010) (378,118)
Premiums and fees receivable ---------------- 11,223 189,699 134,033 82,391
Accrued investment income ---------------------- (44,671) 23,141 (5,734) (79,622)
Policy liabilities and accruals ---------- (155,813) 361,397 256,237
909,927
Contractholder funds -------------------------------- 1,774,688 1,177,229 636,088 688,916
Amounts recoverable from reinsurers-reinsurers--- (776,408) (710,038) -- --
Federal income taxes -------------------------------- (59,611) (96,469) (128,074)
(148,901)Equity in undistributed earnings of
unconsolidated affiliates ----------- 12,408 -- --
Provisions for depreciation ------------------ 58,689 58,893 60,142
60,944
Realized gain(gain) loss on investments --------- 212,201 (292,153) (176,948)
(163,119)
Loss(Gain) loss on sale of subsidiaries --------- (48,842) 98,500 -- 135,000
Cumulative effect of accounting
change --------------------------------------------------------- -- 96,431 --
--
Other -------------------------------------------------------------- 6,667 (8,725) (118,406)
40,124
Net Adjustments -------------------------------------- 836,112 694,244 511,328 1,147,542
Net Cash Provided by
Operating Activities ------------------------- 1,186,010 1,013,096 870,499 1,349,502
Cash Flows from Investing Activities:
Securities available-for-sale:
Purchases --------------------------------------------------------- (13,383,236) (9,158,159) (8,553,010)
(803,882)
Sales ----------------------------------------------------------------- 10,352,938 8,834,823 8,472,278
736,549
Maturities ------------------------------------------------------- 1,106,687 45,937 17,645 --
Fixed maturity securities held for investment:
Purchases --------------------------------------------------------- -- (6,626,937) (7,773,996)(14,826,510)
Sales ----------------------------------------------------------------- -- 3,205,203 4,245,048
10,709,786
Maturities ------------------------------------------------------- -- 1,858,044 1,446,902 732,106
Purchase of other investments --------------------- (1,694,970) (1,362,579) (1,181,106) (773,634)
Sale or maturity of other investments ----- 1,755,113 733,585 916,652 744,806
Sale of subsidiaries --------------------------------------- 417,367 -- 145,270
--
Increase (decrease) in cash collateral on
loaned securities ------------------------------------------ (149,597) 30,906 275,614
59,894
Other --------------------------------------------------------------------- 72,166 145,343 (159,964) 72,248
Net Cash Used in Investing Activities-Activities-- (1,523,532) (2,293,834) (2,148,667) (3,348,637)
Cash Flows from Financing Activities:
Principal payments on long-term debt ------- (109,552) (2,805) (32,855) (11,283)
Issuance of long-term debt --------------------------- 199,382 14,819 204,042
375
Net increase (decrease)decrease in short-term debt ------------------------------- (75,155) (181,989) (243,899) 190,922
Universal life and investment
contract deposits ------------------------------------------ 2,429,113 2,467,540 3,162,277 2,658,161
Universal life and investment
contract withdrawals ------------------------------------ (1,613,780) (1,509,108) (1,218,461) (1,124,020)
Public offering of Common Stock ----------------- -- 316,100 -- --
Issuance of Series F Preferred Stock --- -- -- 158,707
Common Stock issued for benefit plans ----- 29,985 26,230 21,018
2,068Retirement of Common Stock -------------- (18,395) -- --
Dividends paid to shareholders ------------------- (172,157) (156,235) (139,151) (125,956)
Net Cash Provided by Financing
Activities ---------------------------------------------------- 669,441 974,552 1,752,971 1,748,974
Net Increase (Decrease) in Cash ------------- 331,919 (306,186) 474,803 (250,161)
Cash at Beginning of Year ----------------------------- 709,664 1,015,850 541,047 791,208
Cash at End of Year ------------------------------------- $1,041,583 $ 709,664 $1,015,850 $ 541,047
See notes to consolidated financial statements on pages 3637 - 53.59.
-36-37
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation. The accompanying consolidated financial statements
ofinclude Lincoln National Corporation ("LNC") and its majority owned subsidiariesmajority-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. As of December 31, 1993,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 are
classified based on management's current intent(common and non-redeemable preferred stocks) as available-for-saleavailable-
for-sale and, accordingly, such securities are carried at fair value (see note 2 on page 42).value. The
cost of fixed maturity securities areis adjusted for amortization of premiums and
discounts. Equity securities (common and non-redeemable preferred stocks) are
carried at fair value. Securities designated asThe cost of fixed maturity-trading
accountmaturity and equity as of December 31, 1992, have been reclassified for the
1993 balance sheet as securities available-for-sale since their accounting
treatment is the same as the securities designated as such as of December 31,
1993. Prior to December 31, 1993, LNC classified fixed maturity securities in
accordance with existing accounting standards and, accordingly, selected those
fixed maturity securities that were not intended to be held to maturity and
designated them as a trading account. These securities were carried at fair
value. Other fixed maturity securities were carried at cost, adjusted for
amortization of premium or discount, since LNC had both the ability and intent
to hold such securities until maturity.declines in value that are other than temporary.
For the mortgage-backed bondsecurities 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. Investment real estate and propertyProperty 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 and carrying
value approximates fair value.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 tax effects.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 gross 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.
-37-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 life and other
interest-sensitivevariable
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.deferred to the extent recoverable. Deferred acquisition costs for
property-
casualtyproperty-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 life and other interest-sensitivevariable 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 life and other interest-sensitivevariable 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 for these productsassociated with funds invested in the insurance
company's general account during 19911992 through 19931994 ranged from 6.25%6.1% to 9.10%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 a 20periods that correspond with the
benefits expected to 40 year period.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 losses,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 life and other interest-sensitivevariable
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 a 2.25% level2.3% to a 14.5% level11.7% 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 on page 38)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.
-38-
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 the Financial Accounting Standards
Board statementStandard 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
thatwho 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 4749 for
furtheradditional disclosures regarding postretirement benefits other than pensions
disclosures.
Accounting for Income Taxes. Effective January 1, 1993, LNC changed its
method of accounting for income taxes in accordance with the Financial
Accounting Standards Board statement entitled "Accounting for Income Taxes"
("FAS 109"). Under FAS 109, the liability method is used in accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws.
Prior to the adoption of FAS 109, income tax expense was determined using the
deferred method. Deferred tax expense was based on items of income and
expense that were reported in different years in the financial statements and
tax returns and were measured at the tax rate in effect in the year the
differences originated.
The implementation of FAS 109 resulted in the restatement of the 1992 and 1991
financial statements. Net income for the years ended December 31, 1992 and
1991 decreased by $3,700,000 ($.04 per share) and $6,500,000 ($.07 per share),
respectively. The cumulative effect of adopting FAS 109 as of December 31,
1990, decreased 1991's beginning earned surplus by $114,200,000. See note 4
on page 45 for further income tax disclosures.
Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts. Effective January 1, 1993, LNC adopted the Financial Accounting
Standards Board statement entitled "Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts" ("FAS 113"). Under FAS 113,
all assets and liabilities related to reinsurance ceded contracts are reported
on a gross basis rather than the previous practice of reporting such assets
and liabilities net of reinsurance. The effect of adopting FAS 113 was to
increase both assets and liabilities by $900,000,000. All amounts recoverable
from reinsurers are now classified separately on the balance sheet. As
permitted under the new rules, the prior year's balance sheet has not been
restated to the gross basis.pensions.
Accounting by Creditors for Impairment of a Loan. Financial Accounting
Standards Board statementStandard No. 114 entitled "Accounting by Creditors for Impairment of a Loan"
("FAS(FAS 114") issued in May 1993, was adopted by LNC during the second
quarter of 1993. LNC adopted this statement with an effective date of January 1, 1993 by restating its first quarter 1993 financial statements.1993.
FAS 114 requires that if an impaired mortgage loan's fair value be 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. If the fair
value of the mortgage loan as described
abovein 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 change in the mortgage loan allowance for
losses account is reported with realized gain (loss) on investments. 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 4143 for further mortgage loan
disclosures. Most of the effect of this change in accounting was within the
Life Insurance and Annuities segment.
-39-
Accounting for Certain Investments in Debt and Equity Securities. Financial
Accounting Standards Board statementStandard No. 115 entitled "Accounting for Certain Invest-
mentsInvestments 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
Bonds.Securities. At December 31, 1993, LNC had $6,062,000,000 invested in
mortgage-backed bonds.securities. As indicated in note 1 on page 36,37, 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
3. Investments
The major categories of net investment income are as follows:
Year Ended December 31 (in millions) 1994 1993 1992 1991
Fixed maturity securities --------------------- $1,614.9 $1,757.6 $1,608.6 $1,374.5
Equity securities ----------------------------- 29.9 28.9 25.6 29.3
Mortgage loans on real estate ----------------- 277.2 297.2 296.6 304.6
Real estate ----------------------------------- 104.4 82.3 54.1 38.5
Policy loans ---------------------------------- 34.0 37.3 35.2 33.0
Invested cash --------------------------------- 55.8 39.6 31.1 61.9
Other investments ----------------------------- 54.5 33.4 60.0 73.5
Investment revenue -------------------------- 2,170.7 2,276.3 2,111.2 1,915.3
Investment expense ---------------------------- 159.4 129.8 123.9 116.0
Net investment income ----------------------- $2,011.3 $2,146.5 $1,987.3 $1,799.3
-40-
The realized gain (loss) on investments is as follows:
Year Ended December 31 (in millions) 1994 1993 1992 1991
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 ------------------------------------ 92.6 225.8 136.2 176.2
Gross loss ------------------------------------ (80.8) (69.1) (52.7) (26.8)
Fixed maturity securities held for investment:
Gross gain ------------------------------------ -- 248.9 210.7 209.0
Gross loss ------------------------------------ -- (75.8) (37.5)
(92.4)
Other investments------------------------------ 19.6 (166.7) (145.6)
(102.9)
Related amortizationrestoration (amortization) of
deferred acquisition costs ---------------------------------------------- 81.2 (23.7) --
--
Total ------------------------------------------------------------------------ $(130.8) $268.4 $176.9 $163.1
41
Provisions for write-downs and allowancesprovisions 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 1991
Fixed maturity securities (interest only
mortgage-backed bonds) ----------------------securities ------------------- $ 40.6.9 $ --40.6 $ --
Fixed maturity securities (other) ------------- 18.6 19.4 19.4 14.7
Equity securities ----------------------------- 8.7 1.6 3.8 1.0
Mortgage loans on real estate ----------------- 18.2 140.6 91.9 49.1
Real estate ----------------------------------- 14.9 33.4 36.1 34.4
Other long-term investments ------------------- 1.7 4.3 20.3
16.8
Guarantees ------------------------------------ 2.5 1.4 6.9
15.9
Total -------------------------------------------------------------------------- $ 65.5 $241.3 $178.4 $131.9
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 1991
Fixed maturity securities available-for-sale - $(2,295.1) $1,717.5 $ (72.0) $ 99.5
Equity securities available-for-sale --------- (93.3) (32.7) (6.7) 124.3
Fixed maturity securities held for investment -- (1,130.3) (99.5)
1,166.1
Total -------------------------------------- $(2,388.4) $ 554.5 $(178.2) $1,389.9
The cost, gross unrealized gain and loss and fair value of securities
available-for-sale and securities held for investment are as follows:
Fair
December 31 (in millions) Cost Gain Loss Value
Securities available-for-sale1994:
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 bonds -------------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
Securities available-for-sale 1992:
U.S. government bonds ------------- $1,544.8 $ 29.3 $ 3.2 $1,570.9
Mortgage-backed bonds ------------- 406.5 2.7 1.2 408.0
Total fixed maturity securities - 1,951.3 32.0 4.4 1,978.9
Equity securities ----------------- 706.9 233.9 17.4 923.4
Total --------------------------- $2,658.2 $265.9 $21.8 $2,902.3
Securities held for investment 1992:
Corporate bonds ------------------- $ 9,466.2 $ 653.5 $ 57.2 $10,062.5
U.S. Government bonds ------------- 41.2 6.3 -- 47.5
Foreign governments bonds --------- 574.4 30.9 12.9 592.4
Mortgage-backed bonds ------------- 5,684.4 435.9 38.7 6,081.6
State and municipal bonds --------- 2,346.4 111.6 5.7 2,452.3
Redeemable preferred stocks ------- 239.7 10.9 4.3 246.3
Total --------------------------- $18,352.3 $1,249.1 $118.8 $19,482.6
-41-
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.
Future maturities of fixed maturity securities available-for-sale are as
follows:
19931994
Fair
December 31 (in millions) Cost Value
Due in one year or less ------------------------------ $ 286.4288.5 $ 294.7291.1
Due after one year through five years ---------------- 2,561.2 2,725.64,083.5 4,046.4
Due after five years through ten years --------------- 6,327.0 6,819.46,321.3 6,130.0
Due after ten years ---------------------------------- 7,359.0 8,062.76,285.3 6,070.2
Subtotal ------------------------------------------- 16,533.6 17,902.416,978.6 16,537.7
Mortgage-backed bonds -------------------------------- 5,685.7 6,062.0securities --------------------------- 5,215.5 5,106.4
Total ---------------------------------------------- $22,219.3 $23,964.4
$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 19931994
Treasuries and AAA ----------------------------------- 39.2%37.3%
AA --------------------------------------------------- 14.010.8
A ---------------------------------------------------- 24.525.6
BBB -------------------------------------------------- 18.020.5
BB --------------------------------------------------- 2.53.3
Less than BB ----------------------------------------- 1.82.5
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
$147,300,000$41,200,000 were non-income producing for the year ended December 31, 1993.1994.
The cost information for fixed maturity securities available-for-sale, held
for investment, equity securities, mortgage loans on real estate, real estate and other
long-term investments are net of writedowns and 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 1992
Fixed maturity securities:
Available-for-sale------------------------------ $ 60.5 $ --
Held for investment ---------------------------- -- 47.7
Equity securities -------------------------------- 6.0 4.8
Mortgage loans on real estate -------------------- 226.6 134.5------------------------- $ 62.7 $226.6
Real estate --------------------------------------------------------------------------------- 78.6 121.4 131.1
Other long-term investments ------------------------------------------------- 23.8 27.2
40.3
Guarantees ----------------------------------------------------------------------------------- 13.1 18.5 30.0
LNC has estimated the fair value of its investment in mortgage loans on real
estate to be $3,466,700,000 at December 31, 1993 and $3,252,400,000 at
December 31, 1992. These estimates were 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. Impaired mortgage loan's fair values
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
-42-
market price or the fair value of the collateral if the loan is collateral
dependent. If the fair value of the mortgage loan as described above is less
than the recorded investment in the loan, the difference is recorded in the
mortgage loan provision for losses account. The change in the mortgage loan
provision for losses account is reported with realized gain (loss) on invest-
ments.
LNC's recorded investment in impaired mortgage loans was $584,500,000 and
$365,300,000 for December 31, 1993 and December 31, 1992, respectively. A
reconciliation of the mortgage loan provision for losses for these impaired
mortgage loans is as follows:
Year Ended December 31 (in millions) 1993 1992 1991
Balance at beginning of year -------------------- $134.5 $ 72.0 $31.8
Provisions for losses --------------------------- 76.5 91.9 49.1
Provision for adoption of FAS 114 --------------- 64.1 -- --
Releases due to sales --------------------------- (12.4) (7.0) (4.9)
Releases due to foreclosures -------------------- (36.1) (22.4) (4.0)
Balance at End of Year ----------------------- $226.6 $134.5 $72.0
LNC has estimated the fair value of its investments in policy loans to be
$626,400,000 at December 31, 1993 and $582,200,000 at December 31, 1992. This
estimate 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.
The carrying value for assets classified as other investments in the
accompanying balance sheet approximates their fair value.
As of December 31, 1993, LNC's commitments to make investments in fixed
maturity securities (primarily private placements), mortgage loans on real
estate and real estate were $256,700,000. At December 31 1993, the $2,400,000
net fair value of the liability for these commitments, was based on the
difference between the value of the committed investments as of this date and
the commitment date, which would take into account changes in interest rates,
the counterparties' credit standing and the remaining terms of the commit-
ments.
4. Federal Income Taxes
The federal income tax expense (credit)(benefit) before cumulative effect of
accounting change is as follows:
Year Ended December 31 (in millions) 1994 1993 1992 1991
Current -------------------------------------- $(93.9) $308.2 $222.9
$112.5
Deferred ------------------------------------- 120.3 (135.7) (157.4)
(115.6)
Total -------------------------------------- $ 26.4 $172.5 $ 65.5
$ (3.1)Cash paid for federal income taxes in 1994, 1993 and 1992 was $70,900,000,
$279,700,000 and $195,300,000 respectively.
Cash paid for federal income taxes in 1993, 1992 and 1991 was $279,700,000,
$195,300,000, and $123,400,000 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
$4.9
million$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 1991
Tax rate times pre-tax income ----------------- $131.7 $205.7 $144.4 $67.6
Effect of:
Tax-exempt investment income ------------------ (74.0) (75.8) (59.2)
(57.1)
Loss (gain) on sale of subsidiary --------------------------------- (17.1) 34.5 -- --
Other items ----------------------------------- (14.2) 8.1 (19.7) (13.6)
Provision for income taxes (credits) -------------------------- $ 26.4 $172.5 $ 65.5 $(3.1)
Effective tax rate -------------------------- 7% 29% 15% (2%)
-43-
The federal income tax liability (recoverable)recoverable (liability) is as follows:
December 31 (in millions) 1994 1993 1992
Current ----------------------------------------------- $ 83.094.4 $ 57.5(83.0)
Deferred ---------------------------------------------- 68.0 (167.8)302.5 (68.0)
Total ----------------------------------------------- $151.0 $(110.3)$ 396.9 $(151.0)
Significant components of LNC's net deferred tax asset (liability) are as
follows:
December 31 (in millions) 1994 1993 1992
Deferred tax assets:
Policy liabilities and accruals and
contractholder funds ----------------------------------------------------------------- $ 696.2 $ 772.3 $629.4
Net operating loss ------------------------------------ 143.9 109.3 148.6
Loss on investments ----------------------------------- 30.1 149.0 132.0
Sale of subsidiaries ---------------------------------- -- 20.1
25.0Net unrealized loss on securities available-for-sale -- 159.3 --
Postretirement benefits other than pensions ----------- 54.6 54.8 --
Other ------------------------------------------------- 131.3 68.0 83.2
Total deferred tax assets --------------------------- 1,215.4 1,173.5
1,018.2Valuation allowance for deferred tax assets ----------- (135.6) --
Net deferred tax assets ----------------------------- 1,079.8 1,173.5
Deferred tax liabilities:
Deferred acquisition costs ---------------------------- 680.1 721.0741.3 520.2
Premiums and fees receivable -------------------------- 32.8 32.7 3.7
Net unrealized gain on securities available-for-sale--- 496.6 81.3
Tax over book depreciation ---------------------------- 13.2 11.2-- 656.5
Other ------------------------------------------------- 18.9 33.23.2 32.1
Total deferred tax liabilities ---------------------- 777.3 1,241.5 850.4
Net deferred tax asset (liability) asset ------------------ $ 302.5 $ (68.0) $167.8
At December 31, 1993,1994, LNC had net operating loss carryforwards of $312,100,000$411,000,000
for income tax purposes related to its foreign life reinsurance companies that
expire in years 1999 through 2008.2009.
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 asset thatassets relating to unrealized capital losses on available-for-sale
securities, management believes will not be realized. In the
opinion of management it is more likely than not that LNC will
realize the benefit of theits deferred tax asset and therefore noassets. Accordingly, a valuation
allowance has
been established. Of the total deferred tax asset, $548,800,000 is realizablewas established in shareholders' equity as a carrybackof December 31, 1994
relating to prior years income. The remaining amounts will be realized
as they reverse against future income over the fifteen year carryforward
period. Basedunrealized capital losses on LNC's historical taxable income record, future income should
be more than sufficient to absorb the reversal of the deferred tax asset.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, 19931994 total of the life
companies' account balances for their respective "shareholders' surplus" was
$1,560,500,000.$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 Security-Connecticuta life insurance
affiliate (see note 1011 on page 53)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 LNC'scertain LNC foreign subsidiaries that are considered
to be indefinitely reinvested amounted to approximately $135,000,000 at
December 31, 1993.1994. Accordingly, no provisions for U.S. income taxes have been
provided -44- 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 adjust-
mentsadjustments 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"Equipment," are
shown net of allowances for depreciation as follows:
December 31 (in millions) 1994 1993 1992
Real estate ----------------------------------------- $ 37.141.9 $ 31.637.1
Property and equipment ------------------------------ 221.0 252.4 168.0
Prior to January 1, 1993, the balance sheet caption, "Other Assets," includes
amounts recoverable from other insurers for claims paid by LNC's insurance
subsidiaries and the balance sheet caption, "Policy Liabilities and Accruals,"
has been reduced for reinsurance ceded as follows (see note 2 on page 46):
December 31 (in millions) 1992
Amounts recoverable from other insurers ------------- $ 48.8
Reinsurance ceded ----------------------------------- 599.3
Details underlying the balance sheet caption, "Contractholder Funds," are as
follows:
December 31 (in millions) 1994 1993 1992
Premium deposit funds ------------------------------- $16,757.8 $14,546.8 $12,530.9
Undistributed earnings on participating business ---- 63.5 88.0 68.5
Other ----------------------------------------------- 204.3 237.3 249.9
Total --------------------------------------------- $14,872.1 $12,849.3$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 balance sheet captions, "Future Policy Benefitsreconciliation shows an increase (decrease) of $(78,200,000),
($26,500,000), and Losses, Claims and
Loss Expense" and "Contractholder Funds," include investment type insurance
contracts (i.e. deposit contracts and guaranteed interest contracts). As of$47,000,000 million to the December 31, 1993, 1992 and 1992, the deposit contracts,1991
liability for claims and claim expenses, respectively, arising in prior years.
Such reserve adjustments, which do not have defined
maturities, have a carrying value of $10,756,100,000 and $8,919,200,000,
respectively, (net of deferred acquisition costs of $636,700,000 and
$552,000,000, respectively) and a corresponding fair value of $10,557,000,000
and $8,782,800,000, respectively. The fair values for the deposit contracts
are based on their approximate surrender values. As of December 31,affected current operations during 1994, 1993
and 1992, guaranteed interestrespectively, resulted from developed claims for prior years being
different than were anticipated when the liabilities for claims and similar contracts have a carrying value of
$3,824,400,000 and $3,506,900,000, respectively (net of deferred acquisition
costs of $17,300,000 and $30,900,000, respectively), and a corresponding fair
value of $3,967,700,000 and $3,696,600,000, respectively. The fair values for
the guaranteed interest and similar contracts are estimated using principally
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. The carrying value of the investment type
insurance contracts is stated net of deferred acquisition costs in order that
they be comparable with the fair value basis.
The remainder of the balance sheet captions, "Future Policy Benefits and
Losses, Claims and Loss Expense" 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 the 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.
-45-claim
expenses were originally estimated.
Details underlying the balance sheet captions, "Short-term and Long-term
Debt," are as follows:
Carrying Fair Carrying Fair
Value Value Value Value
December 31 (in millions) 1994 1993
1993 1992 1992
Short-term debt:
Commercial paper ---------------------------------------------------------- $107.2 $212.7 $212.7 $416.4 $416.4
Other short-term notes ---------------------------------------------- 67.8 37.2 37.2 11.3 11.3
Current portion of long-term debt ------------------------ 100.3 101.5 101.5 5.7 5.7
Total short-term debt -------------------------------------------- $275.3 $351.4 $351.4 $433.4 $433.4
Long-term debt less current portion:
9 3/4% notes payable, due 1995 -------- $100.3 $108.4 $100.5 $110.1
8% notes payable, due 1997 ---------------------------------- $ -- -- 100.0 103.8100.3
7 1/8% notes payable, due 1999 ------------------------------ 99.2 99.1 105.2 98.9 98.8
7 5/8% notes payable, due 2002 ------------------------------ 99.1 98.9
107.6 98.8 99.89 1/8% notes payable, due 2024 ---------------------- 199.1 --
Mortgages and other notes payable ------------------------ 22.2 36.8 39.4 24.8 27.3
Total long-term debt ---------------------------------------------- $419.6 $335.1 $360.6 $423.0 $439.8
The 8% notes were called in Marchcommercial paper outstanding at December 31, 1994 and therefore, are classified as
"current portion1993, had a weighted
average interest rate of long-term debt."approximately 5.90% and 3.35%, respectively.
Future maturities of long-term debt are as follows (in millions):
19941995 - $101.5$100.3 1997 - $ .1 1999 - $100.1
1996 - $1.6.3 1998 - $ 1.6
1995 - 101.6 1997 - 1.5.1 Thereafter - 228.8
Fair values for long-term debt 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 approxi-
mates fair value.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 July 1995,June 1997, provides for interest on borrowings based on various bases, including
prime rates and certificate of deposit rates.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
CorporateLNC's assets. LNC has an additional
$50,000,000 revolving credit agreement with a bank. At December 31, 1993,1994, LNC had no outstanding borrowings under
these agreements.this agreement. During 1994, 1993 1992 and 1991,1992, fees paid under these agreementsthis agreement
amounting to $1,000,000, $1,300,000, and $1,700,000, and $518,000, respectively.
AtLNC'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, 1993 and 1992, the $250,000 and
$1,100,000 fair value, respectively, for these unexercised revolving credit
agreements are based on fees LNC has paid to enter into these agreements or
will pay prior to maturity after taking into account the remaining term of the
agreements and LNC's credit standing.1994.
Cash paid for interest for 1994, 1993 and 1992 was $47,900,000, $44,200,000,
and 1991 was $44,200,000, $48,500,000,
and $73,300,000, respectively.
Reinsurance transactions included in the income statement caption, "Insurance
Premiums," are as follows:
Year Ended December 31 (in millions) 1994 1993 1992 1991
Reinsurance assumed ------------------------- $1,979.4 $1,895.5 $1,960.2 $2,048.2
Reinsurance ceded --------------------------- 482.9 291.1 286.2 442.1
Net reinsurance premiums ------------------ $1,496.5 $1,604.4 $1,674.0 $1,606.1
The income statement caption, "Benefits and Settlement Expenses," is net of
reinsurance recoveries of $274,000,000,$284,700,000, $174,000,000 and $218,200,000 and $348,400,000 for the
years ended December 31, 1994, 1993 and 1992, and 1991, respectivelyrespectively.
The income statement caption, "Underwriting, Acquisition, Insurance and Other
Expenses," includes amortization of deferred acquisition costs of
$598,300,000, $571,800,000 $563,700,000 and $588,200,000$563,700,000 for the years ended December 31,
1994, 1993 1992 and 1991,1992, respectively. An additional $23,700,000$81,200,000 and
($23,700,000) of deferred acquisition costs was amortizedrestored (amortized) and
netted against "Realized Gain (Loss) on Investments" for the yearyears ended
December 31, 1993.
-46-1994 and 1993, respectively.
6. Employee Benefit Plans
Pensions Plans. Eligible employees and full-time agents ofPlans - U.S. LNC and its
principal subsidiaries are covered by tax-qualifiedmaintains funded defined benefit pension plans.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 arewere 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 U.S. 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.plans
for certain U.S. employees and agents. A supplemental retirement plan
provides employees and agents 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
1992
Actuarial present value of benefit obligation:
Vested benefits ------------------------------------------------------------------------------- $(287.9) $(310.5) $(250.9)
Nonvested benefits ------------------------------------------------------------------------- (16.1) (14.7) (15.7)
Accumulated benefit obligation --------------------------------------------- (304.0) (325.2) (266.6)
Effect of projected future compensation increases ----------- (63.3) (82.7) (81.5)
Projected benefit obligation ------------------------------------------------- (367.3) (407.9) (348.1)
Plan assets at fair value ----------------------------------------------------------- 356.1 372.3 339.3
Projected benefit obligations in
excess of plan assets ------------------------------------------------------------- (11.2) (35.6) (8.8)
Unrecognized transition asset --------------------------------------------------- -- (7.6) (15.1)
Unrecognized net loss ------------------------------------------------------------------- 6.8 26.1 13.7
Unrecognized prior service cost ----------------------------------------------- 3.1 8.5
21.0
PrepaidAccrued pension asset (accrued pension cost)cost included in other assets and
other liabilities respectively ----------------------- $ (1.3) $ (8.6) $ 10.8
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 1992
Actuarial present value of benefit obligation:
Vested benefits --------------------------------------- $(18.1) $(18.7) $(14.3)
Nonvested benefits ------------------------------------ (3.1) (3.8) (2.7)
Accumulated benefit obligation ---------------------- (21.2) (22.5) (17.0)
Effect of projected future compensation increases ----- (6.7) (5.0) (6.8)
Projected benefit obligation ------------------------ (27.9) (27.5) (23.8)
Unrecognized transition obligation -------------------- .3 .7 1.2
Unrecognized net loss --------------------------------- 1.7 5.6 5.8
Unrecognized prior service cost (reduction in benefits) .5 (3.5) (4.0)
Accrued pension cost included in other liabilities -- $(25.4) $(24.7) $(20.8)
Determination of the projected benefit obligation for the defined benefit
plans was based on an assumed discount rate of 7.0% and 7.5% for December 31,
1993 and 1992, respectively. The assumed long-term rate of increase in
compensation was 5.0% and 5.5% (6.0% and 6.5% for the salary continuation
plan) for December 31, 1993 and 1992, respectively. The assumed long-term
rate of return on plan assets was 9.0% for 1993, 1992 and 1991.
-47-
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 1991
Service cost-benefits earned during the year --------------- $22.1 $20.3 $20.6 $17.1
Interest cost on projected benefit obligation ------------- 30.0 27.9 24.3 20.9
Actual return on plan assets ----------------------------------------------- 9.7 (42.1) (13.9)
(61.3)
Net amortization (deferral)--------------------------------------------------- (40.2) 11.8 (15.1) 34.5
Net pension cost ------------------------------------------------------------------- $21.6 $17.9 $15.9 $11.2
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 the 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 $7,000,000 in 1993, 1992, and 1991, 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 1992
Accumulated postretirement benefit obligation:
Retirees -------------------------------------------- $ 91.386.6 $ 87.491.3
Fully eligible active plan participants ------------- 21.6 25.1 19.2
Other active plan participants ---------------------- 34.0 48.2 39.5
Accumulated postretirement benefit obligation------obligation ----- 142.2 164.6 146.1
Unrecognized net loss -------------------------------gain (loss) ------------------------ 12.6 (8.1) --
Unrecognized transition obligation ------------------ -- (146.1)
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
1991
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 $5.6
The costs for postretirement benefits for yearsyear ended December 31, 1992 and
1991 shown
above areis prior to the adoption of FAS 106 (see note 2 on page 41)39) and,
therefore, representrepresents 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 13.5%10.0% for 19941995 gradually
decreasing to 5.5% by 2004 and remaining at that level thereafter. The health
care cost trend rate assumption has a significant affecteffect 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
1992 by $13,600,000, and
$13,000,000, respectively, and the aggregate of the estimated service and
interest cost components of net periodic postretirement benefit cost for the
year ended December 31, 19931994 by $1,500,000.$1,200,000. The calculation assumes a
long-term rate of increase in compensation of 5.0% and 5.5% for both December 31, 19931994
and 1992, respectively.1993. The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 7.0%8.0% and 7.5%7.0% for December
31, 1994 and 1993, and 1992, respectively.
-48-
Stock Option Plan.Incentive Plans. LNC has a stock optionvarious incentive planplans 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 planstock 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 option planoptions is as
follows:
Shares Options Outstanding
Available Average
for Grant Shares Option Price
Balance at January 1, 1991 2,996,846 2,412,588 $23.28
Granted ------------------------ (554,700) 554,700 24.99
Exercised ---------------------- -- (159,582) 19.32
Expired ------------------------ 107,400 (150,400)
Restricted stock awarded ------- (9,600) --
Balance at December 31, 1991 -1992 2,539,946 2,657,306 $23.77
Granted ------------------------ (528,500) 528,500 $27.7427.74
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 $25.2925.29
Granted ------------------------ (570,600) 570,600 $39.7539.75
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 $28.7528.75
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, 19931994 totaled
1,497,502.1,615,839.
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, 1993, $2,300,000,0001994, $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 1991
Life-health insurance --------------------- $411.7 $229.7 $163.7 $240.8
Property-casualty insurance --------------- 167.9 247.6 84.1 54.4
Life-health insurance statutory net income for 1994, 1993 1992 and 1991,1992, excluding
LNC's foreign life reinsurance companies, was $411,100,000, $267,200,000 $202,600,000 and
$259,600,000,$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 1992
Life-health insurance --------------------- $1,966.7 $1,626.7 $1,474.6
Property-casualty insurance --------------- 955.7 1,061.7 1,040.8
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 -49-
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 1991 was
$55,900,000, $62,300,000, and $78,700,000, respectively. Future minimum rental
commitments are as follows (in millions):
19941995 - $51.8$44.9 1997 - $38.9 1999 - $ 33.6
1996 - $42.843.5 1998 - $ 33.4
1995 - 47.1 1997 - 37.835.1 Thereafter - 378.6
Rental expense excludes324.4
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 previously reservedare 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 as partthe 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
portionposition 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 Employee Life-Health Benefit segment (see noterange of possible liability at this time. In addition, LNC is
analyzing the extent to 10 on page
53);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 minimum rental commitments includepremium 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
applicable to such
businesses.
LNC has financial instruments with off-balance-sheet risks. These includerepresent credit exposure. Outstanding guarantees whose contractual amounts represent credit exposure and derivatives
whose notional or contract amounts exceed the credit exposure. LNC has
entered into derivative transactions to reduce its exposure to fluctuations in
interest and foreign exchange risks. Outstanding financial instruments 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 19921994 1994 1993 1993 1992 1992
Guarantees:
Industrial revenue bonds ------ $ 130.2 $ 134.3 $ (16.3)$100.9 $130.2 $(13.1)$(12.5)$(17.2) $(21.9)(16.3) $(12.5)
Real estate partnerships ------ 20.8 43.8 66.5-- -- (2.2) (3.8) (12.8) (18.5)
Mortgage loan pass-through
certificates ----------------- 78.2 96.0 131.8 -- -- -- --
Derivatives:
Foreign currency exchange
contracts -------------------- 101.3 43.8 .8 .8 7.9 7.9
Financial futures contracts --- 33.1 78.5 -- -- -- (.5)
Interest rate swapsTotal Guarantees ----------- 57.0 46.8 -- (1.2) -- (1.9)
United Kingdom forward swaps -- 20.0 20.0 -- .4 -- (.1)
Interest rate cap agreements -- 3,800.0 1,200.0 24.4 18.5 13.3 8.1
Spread-lock agreements -------- 1,700.0 600.0 -- (5.6) -- (.1)
Mortgage-backed securities
total return swaps ----------- 47.6 -- -- .9 -- --$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.
-50-
LNC has entered intoDerivatives. LNC's derivatives include interest rate cap agreements, spread-
lock agreements, foreign currency exchange contracts, to sell foreign
currencies at future dates and at specific prices. LNC has also entered intofinancial futures
contracts, options on financial futures, interest rate swaps, United Kingdom
forward swaps interest rate cap
agreements, spread-lock agreements,and mortgage-backed securities total return swaps and purchased financial future contracts. LNC is subject to the risk
that the counterparties to these contracts will fail to perform and the risks
associated with changes in the value of underlying securities; however, such
changes in the value generally are offset by changes in the value of the items
being hedged by such contracts.swaps. Fair values
for these contracts areis based on current settlement values. The current
settlement values are based on quoted market prices for the foreign currency
exchange contracts, and 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.
A reconciliation
The carrying values and estimated fair values of the notional or contract amounts for the interest rate cap
and spread lock agreements isLNC's financial instruments
are as follows:
Interest Rate Caps Spread LocksCarrying Fair Carrying Fair
Value Value Value Value
December 31 (in millions) 1994 1994 1993 1992 1993
1992Assets (liabilities):
Balance at beginning of year ------- $1,200.0 $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 ------------- -- $ 600.0 $(.5) -- New contracts ---------------------- 2,600.0 1,200.0 2,000.0 900.0
Terminated contracts --------------- -- -- (900.0) (300.0)
Balance at End of Year ----------- $3,800.0 $1,200.0 $1,700.0 $ 600.0(2.4)
The spread-lock agreements expire in
57
As of December 31, 1994 and 19951993, the carrying value of the deposit contracts
and the interest rate cap
agreements expire in 1997 through 2003. No realized gains or losses from
these agreements have been deferred. Expense for these agreements amounted to
$3,600,000 and $1,200,000 in 1993 and 1992, respectively.
At December 31, 1993, LNC did not have a material concentrationcertain guaranteed contracts is net of financial
instruments in a single investee, industry or geographic location.
LNC's insurance companies both cede and assume reinsurance from other
companies. That portion of risks exceeding each company's retention limit is
reinsured with other insurers. During 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 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 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 reinsurance ceded (see note 5 on page 48). Prior to January 1, 1993,
policy liabilities and accruals were also net of reinsurance ceded (see note 2
on page 38). LNC's insurance companies remain liable if their reinsurers are
unable to meet their contractual obligations under the applicable reinsurance
agreements.
For financial reinsurance assumed, reserve charges are netted against premiums
and substantially all assets and liabilities are netted due to a right of
offset. At December 31, 1993, LNC's insurance companies have granted
$767,000,000 of statutory surplus to other insurance companies under these
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 riskdeferred acquisition
costs in order that the
ceding company may become insolvent and the right of offset would notthey be permitted.
Associatedcomparable with these transactions, LNC's foreign reinsurance 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 financial reinsurance agree-
ments. At December 31, 1993, there were $928,800,000 of outstanding bank
letters of credit. In exchange for the letters of credits, LNC paid the banks
$2,255,000 in fees. Since substantially all the fees were based on rates
effective December 31, 1993, such fees approximate the fair value of LNC's
asset for the letters of credit as of December 31, 1993.
-51-
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.
The increase in the number of insurance companies that are under regulatory
supervision has resulted and is expected to continue to result in an increase
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 these assessments net of estimated future premium tax deductions.
8.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.
ThePrior 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 distributesdistributed 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 four 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 including(i.e., corporate investment income, interest
expense on corporate debt and unallocated overhead expenses.expenses). Prior to 1993,
all realized gain (loss) on investments werewas 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 19911992 through 19931994 are as
follows:
Year Ended December 31 (in millions) 1994 1993 1992 1991
Revenue:
Revenue:
Property-Casualty ---------------------- $1,971.4 $2,240.6 $2,408.7 $2,558.9
Life Insurance and Annuities ----------- 2,615.4 2,858.3 2,438.7 2,233.4
Life-Health Reinsurance ---------------- 2,001.9 1,930.5 1,781.8 1,710.4
Employee Life-Health Benefits ---------- 314.9 1,297.3 1,241.6 2,646.3
Other Operations ----------------------- 80.8 (36.9) 163.3 20.0
Total Revenue ------------------------ $6,984.4 $8,289.8 $8,034.1 $9,169.0
Income (loss) before income taxes and
cumulative effect of accounting change:
Property-Casualty ---------------------- $ 177.2 $257.6 $ 22.1 $ 26.3
Life Insurance and Annuities ----------- 106.7 344.3 197.0 155.1
Life-Health Reinsurance ---------------- 102.9 27.5 84.3 48.7
Employee Life-Health Benefits ---------- 22.9 86.0 62.9 66.8
Other Operations ----------------------- (33.4) (127.6) 58.4 (98.1)
Total Income Before Income Taxes
and Cumulative Effect of
Accounting Change ------------------- $587.8 $424.7 $198.8$ 376.3 $587.8 $424.7
December 31 (in millions) 1994 1993 1992
1991
Assets:
Property-Casualty ---------------------- $ 4,966.6 $ 5,550.5 $ 5,101.3 $ 5,035.1
Life Insurance and Annuities ----------- 40,758.4 38,711.7 30,519.6 24,728.0
Life-Health Reinsurance ---------------- 3,118.8 3,227.2 2,402.9 2,160.4
Employee Life-Health Benefits ---------- -- 679.7 558.1 1,298.0
Other Operations ----------------------- 486.3 211.3 965.4 791.6
Total Assets ------------------------- $49,330.1 $48,380.4 $39,547.3 $34,013.1
Provisions for depreciation and capital additions were not material.
-52-
9.58
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 (issued during May 1991)
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
$2,200,000$2,000,000 and $400,000, respectively, at December 31, 1993.1994. 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, 1993,1994, there were 94,183,19094,477,942 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 May 1993, LNC's Board of Directors approved a two-for-one stock split
for its Common Stock. The record date for the stock split was June 4, 1993November 1994, LNC purchased and the additional shares were distributed to shareholders on June 25, 1993.
Following this Common Stock split the conversion rate of LNC's Preferred Stock
Series A changed from fourretired 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 eightincrease the
number of authorized shares of Common Stock for each Series A Preferred Stock. The conversion rate of LNC's
Preferred Stock Series E and F changed from one share of Common Stock400,000,000 to two
shares of Common Stock for each share of Series E and F Preferred Stock. The
consolidated financial statements have been adjusted to reflect the effects of
the common stock split for all periods presented.800,000,000.
Earnings per share are computed based on the average number of common shares
outstanding during each year (1993(1994 - 103,863,196; 1993 - 102,307,356; 1992 -
92,977,312; 1991 -
90,658,726)92,977,312) after assuming conversion of the Series A, E and F Preferred
Stock
and the retroactive effect of the 1993 two-for-one stock split.Stock. The effect of stock options is not dilutive in the computation of
earnings per share.
-53-59
Details underlying the balance sheet caption "Net Unrealized Gain (Loss) on
Securities Available-for-Sale," are as follows:
December 31 (in millions) 1994 1993 1992
Fair value of securities available-for-sale ------------- $22,682.7 $25,044.7 $2,902.3
Cost of securities available-for-sale ------------------- (23,115.8) (2,658.2)23,142.2 23,115.8
Unrealized gain ---------------------------------------Gain (Loss) -------------------------------- (459.5) 1,928.9 244.1
Adjustments to deferred acquisition costs --------------- 162.1 (429.2) --
Amounts required to satisfy policyholder commitments ---- 14.1 (58.3) (.1)
Amounts related to disposal of subsidiary included in
other liabilities -------------------------------------- -- (30.1) --
Deferred income taxes -----------------------------------credits (taxes) ------------------------- 107.8 (496.6)
(81.3)Valuation allowance for deferred tax assets ------------- (135.6) --
Net unrealized gainUnrealized Gain (Loss) on securities
available-for-saleSecurities
Available-for-Sale ----------------------------------- $ 914.7(311.1) $ 162.7914.7
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, and Losses, Claims and LossClaim
Expenses liability account on the balance sheet, respectively.
10.11. Sale of Subsidiaries
LNC decided to substantially exit certain businesses that made up its Employee
Life-Health Benefits segment by selling the third party administrator
operations and the health maintenance organizations along with certain related
group life and health policies, and to allow the remaining group life and
health operations conducted within the Lincoln National Life Insurance Company
to run off, except for certain small group business, which was to be
transferred to a subsidiary. In December 1991, the estimated pre-tax loss
from these planned transactions of $135,000,000 ($89,100,000, after-tax) was
charged to loss on sale of subsidiaries. This loss, which affected "Other
Operations", included the estimated cost of operating these entities to the
date of sale in May 1992, and the estimated cost of the run-off of the group
life and health operations and downsizing LNC's related management staff and
service operation, less the estimated gain from the sale of the business
described above. During 1992, LNC completed the sale and received cash of
$145,300,000. The 1992 gain from the sale and the disposal expenses have not
differed materially from the 1991 estimate. The after-tax income from
operations for these businesses for the year ended December 31, 1991 was
$200,000. The revenues for these businesses for the year ended December 31,
1991 was $1,461,000,000.
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
1992 and 1991,1992, Security-Connecticut, which operated in the Life Insurance and
Annuities segment, had revenues of $274,500,000 $252,400,000 and $243,600,000,$252,400,000,
respectively, and net income of $24,000,000 $26,200,000 and $29,400,000,$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 filed a registration statement in December 1993 withcompleted the Securities
Exchange Commission involving an initial public offeringsale of stock71% of its
subsidiaryEMPHESYS (parent company of
Employers Health Insurance Company, ("Employers Health"), which comprises thecomprised LNC's Employee Life-Health
Benefits segment. Should the initial
public offering be consummated, it is anticipated that LNC will retainBenefit segment) for $244,700,000 of cash, net of related expenses, and a
less
than 50% equity ownership interest in Employers Health and that a$50,000,000 promissory note. A gain on sale will beof $48,800,000 (also $48,800,000
after-tax) was recognized in 1994. The amount of gain cannot be determined until the
pricing of the offering has been completed.1994 in "Other Operations". For the years ended
December 31, 1993 and 1992, and 1991, Employers HealthEMPHESYS had revenues of $1,304,700,000 $1,247,600,000 and
$1,184,100,000, respectively,$1,247,600,000, and net income of $55,300,000 and $43,900,000, respectively.
EMPHESYS had revenues and $43,700,000, respectively.net income of $314,900,000 and $14,400,000,
respectively, during the three months of ownership in 1994. As of December
31, 1993, Employers HealthEMPHESYS 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.
-54-60
Report of Ernst and& 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, 19931994 and 1992,1993, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1993.1994. 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, 19931994 and 1992,1993, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1993,1994, 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 offor accounting for postretirement benefits
other than pensions, accounting for income taxes, accounting for impairment of loans, and accounting for
certain investments in debt and equity securities.
Ernst & Young LLP
Fort Wayne, Indiana
February 10, 19948, 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.
-55-61
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" and, "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 12, 1994.11, 1995.
Executive Officers of the Registrant as of December 31, 19931994 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,
(52)(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 since 1991.
(42)(1991-
May 1994). President, Lincoln National Investment
Management Company* since 1991. SeniorCompany ("LNIMC")* (1991-May 1994).
Executive Vice President, LNL*LNIMC* (1985-1991).
George E. Davis Senior Vice President, LNC since March 1993.
(51)(52) Vice President, Eastman Kodak Co. (1985-March 1993)(1985-1993).
P. Kenneth Dunsire Executive Vice President, LNC since 1986. (62)[Retired
(63) January 1995]
Jack D. Hunter Executive Vice President, LNC since 1986. General
(57)(58) Counsel since 1971.
William J. Lawson President and Chief Executive, Officer, Employers
(54) Health* since 1988.Barbara S. Kowalczyk Senior Vice President, LNL*
(1984-1988)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
(59)(60) States* since 1992. Executive Vice President,
American States* (1986-1991).
H. Thomas McMeekin IIIExecutive Vice President, LNC since May 1994.
(41) President, LNIMC* since May 1994. Senior Vice
President, LNC since 1992.
(40)(1992-May 1994). Executive Vice
President, Lincoln National
Investment Management Company*LNIMC* (February 1992-November 1992).
Senior Vice President, LNIMC* (1987-1992).
Richard S. Robertson Executive Vice President, LNC since 1986.
(51)
Ian M. Rolland Chairman and Director, LNC(52)
Gabriel L. Shaheen Executive Vice President, LNL* since 1992.
(60)May 1994.
(41) Senior Vice President, LNL* 1991-May 1994), Vice
President, LNL* (1987-1991).
Richard C. Vaughan Executive Vice President and Director, LNC (1975-1991). Chief ExecutiveFinancial
(45) Officer, LNC since 1977.
Richard C. VaughanJanuary 1995. Senior Vice
President and Chief Financial Officer, (44) LNC since 1992.(1992-
January 1995). Senior Vice President, LNL* since
1990.(1990-
1992). Vice President, EQUICOR, Inc. (1988-1990).
Donald L. Van Wyngarden Second Vice President and& Controller, LNC since (54) 1975.
Thomas M. West Executive Vice President, LNL* since 1981.
(53)(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. -56-
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 12, 1994.11, 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 12, 1994.11, 1995.
Item 13. Certain Relationships and Related Transactions
Information for this item is incorporated by reference to the section cap-
tioned "TERMINATION OF EMPLOYMENT ARRANGEMENTS"ARRANGEMENT" of LNC's Proxy Statement for
the Annual Meeting scheduled for May 12, 1994.11, 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, 19931994 and 19921993
Consolidated Statements of Income - Years ended December 31, 1994, 1993 1992
and
19911992
Consolidated Statements of Shareholders' Equity - Years ended December 31,
1994, 1993 1992 and 19911992
Consolidated Statements of Cash Flows - Years ended December 31, 1994, 1993
1992 and 19911992
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
IIIII - Condensed Financial Information of Registrant
VIII - Supplementary Insurance Information
VIIV - Reinsurance
VII - Guarantees of Securities of Other Issuers
VIIIV - Valuation and Qualifying Accounts
IX - Short-term Borrowings
XVI - 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.
-57-63
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 24,
199112,
1994 are incorporated by reference to Exhibit 3(a) of LNC's Form 10-K for the year ended December 31, 1991S-3/A (File No.
33-55379) filed with the Commission on March 27, 1992.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 for 8% Notes of LNC due Marchdated as of January 15, 1997 and the
specimen Notes is incorporated by reference to Exhibit 4(b) of
LNC's Form 10-K for the year ended December 31, 1991, filed with
the Commission on March 27, 1992.1987.
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.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 May 13, 1993.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, 1987.1987 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 10(d)No. 4 of LNC's Form 10-K
for the year ended December 31, 1992,Proxy filed
with the Commission on March 30,31, 1993.
10(e)* The Lincoln National Corporation Management Incentive Plan II as
last amended August 1, 1989, is incorporated by reference to
Exhibit 10(e) of LNC's Form 10-K for the year ended December 31,
1989, filed with the Commission on March 29, 1990.
10(f)* 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(g)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(h)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.
-58-
10(i) Lease and Agreement dated August 1, 1984,10(h)* Descriptions of compensation arrangements with respect to the
American States' home office property,Executive
Officers is incorporated by reference to Exhibit 10(i)10(m) of LNC's
Form 10-K for the year ended December 31, 1990,1993, filed with the
Commission on March 28, 1991.
10(j) Lease and Agreement dated August 1, 1984, with respect to LNL's
home office property, 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(k) Lease and Agreement dated August 1, 1984, with respect to
Lincoln National Pension Insurance Company's ("LNP") home office
property, is incorporated by reference to Exhibit 10(k) of LNC's
Form 10-K for the year ended December 31, 1990, filed with the
Commission on March 28, 1991. [LNP was merged into its parent,
LNL, effective January 1, 1989.]
10(l) Lease dated March 1, 1984, with respect to Security-
Connecticut's home office property, is incorporated by reference
to Exhibit 10(l) of LNC's Form 10-K for the year ended December
31, 1990, filed with the Commission on March 28, 1991.
10(m)* Descriptions of compensation arrangements with Executive
Officers.
10(n)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(o)10(j)* Lincoln National Corporation Executive Savings and Profit
Sharing Plan as amended as of 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(p) Lease dated February 14, 1991, with respect to property occupied
by select Fort Wayne operations of the Registrant10(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, 19911993, filed with the
Commission on March 27,
1992.
10(q)* Lincoln National Corporation 1993 Stock Plan for Non-Employee
Directors.
10(r)30, 1994.
10(l)* Lincoln National Corporation Executives' Excess Compensation
Benefit Plan.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 EarningsEarnings.
21 The List of Subsidiaries of LNC.
23 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
28 Information from Reports Furnished to State InsuranceInsurance.
Regulatory Authorities.
Item 14(b) - During the fourth quarter of the year ended
December 31, 1993,1994, 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
59 through 68.31-59.
-59-66
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS
IN RELATED PARTIES
December 31, 19931994 (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 ------------------------- $ 1,657,2551,673,071 $ 1,691,2611,632,779 $ 1,691,2611,632,779
States, municipalities and
political subdivisions ----- 2,558,205 2,771,654 2,771,654------ 2,386,211 2,377,707 2,377,707
Mortgage-backed bonds -------- 5,685,674 6,061,996 6,061,996securities --- 5,215,536 5,106,408 5,106,408
Foreign governments ---------- 493,716 551,567 551,567624,348 611,893 611,893
Public utilities ------------- 3,167,517 3,421,002 3,421,0022,734,853 2,608,830 2,608,830
Convertibles and bonds
with warrants attached ----- 143,869 158,199 158,199------ 115,539 117,591 117,591
All other corporate bonds ---- 8,377,453 9,165,616 9,165,6169,316,299 9,066,223 9,066,223
Redeemable preferred stocks ---- 135,596 143,040 143,040128,222 122,723 122,723
Total -------------------- 22,219,285 23,964,335 23,964,335----------------------- 22,194,079 21,644,154 21,644,154
Equity securities available-for-sale:
Common stocks:
Public utilities ------------- 23,139 31,686 31,68629,506 29,195 29,195
Banks, trusts and
insurance companies -------- 94,228 159,284 159,284--------- 72,722 110,526 110,526
Industrial, miscellaneous
and all other -------------- 559,142 648,639 648,639--------------- 573,344 639,107 639,107
Nonredeemable preferred stocks - 219,968 240,692 240,692272,563 259,789 259,789
Total Equity Securities -- 896,477 1,080,301 1,080,301----- 948,135 1,038,617 1,038,617
Mortgage loans on real estate ---- 3,527,590 3,300,951(A)2,915,758 2,853,083(A)
Real estate:
Investment properties ---------- 469,913 469,913571,912 571,912
Acquired in
satisfaction of debt ---------- 284,617 163,190(A)213,580 134,942(A)
Policy loans --------------------- 595,085 595,085553,272 553,272
Other investments ---------------- 185,366 158,170(A)198,897 175,121(A)
Total Investments -------- $28,178,333 $29,731,945----------- $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.
-60-67
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE IIIII - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
Lincoln National Corporation (Parent Company Only)
December 31 (000's omitted) 1994 1993 1992
(Restated)
Assets:
Investments in subsidiaries* ------------------ $3,779,282 $4,870,705 $3,833,654
Investments ----------------------------------- 28,726 43,868
58,361Investment in unconsolidated affiliate -------- 114,345 --
Cash and invested cash ------------------------ 523,132 271,721 421,974
Property and equipment ------------------------ 9,895 5,941 1,419
Accrued investment income --------------------- 211 16 65
Receivable from subsidiaries* ----------------- 66,724 62,835 48,600
Loans to subsidiaries* ------------------------ 36,480 16,025 50,750
Dividends receivable from subsidiaries* ------- 45,000 80,000 --
Goodwill -------------------------------------- 9,355 10,008 11,015
Other assets ---------------------------------- 10,184 116,215 17,638
Total Assets ---------------------------------------------------- $4,623,334 $5,477,334 $4,443,476
Liabilities and Shareholders' Equity
Liabilities:
Cash collateral on loaned securities ---------- $ 189,256203,531 $ 179,709189,256
Dividends payable ----------------------------- 40,531 38,591 32,014
Short-term debt ------------------------------- 229,444 312,867 420,232
Long-term debt -------------------------------- 397,705 298,422 398,288
Loans from subsidiaries* ---------------------- 600,308 328,467 456,069
Federal income taxes (recoverable) payable (receivable) --------- (2,387) 30,717 (4,907)
Accrued expenses and other liabilities -------- 112,142 206,693 135,200
Total Liabilities --------------- $1,405,013 $1,616,605--------------------------- 1,581,274 1,405,013
Shareholders' Equity:
Series A Preferred Stock --------------------- 1,420 1,553 1,896
Series E Preferred Stock --------------------- 151,206 151,206
Series F Preferred Stock --------------------- 158,707 158,707
Common Stock --------------------------------- 555,382 543,659 200,986
Earned surplus ------------------------------- 2,479,532 2,303,731 2,147,691
Foreign currency translation adjustment ------ 6,890 (1,214) 3,643
Net unrealized gain (loss) on investment
securities available-for-sale [including
unrealized gain (loss) of subsidiaries:
1994 - (325,366,000), 1993 - $891,997,000, 1992 - $133,945,000]$891,971,000] -- (311,077) 914,679 162,742
Total Shareholders' Equity --------------------- 3,042,060 4,072,321 2,826,871
Total Liabilities and
Shareholders' Equity ------------------------------- $4,623,334 $5,477,334 $4,443,476
*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 3031 through 54)59).
-61-
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE IIIII - 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 1991
(Restated)(Restated)
Revenue:
Dividends from subsidiaries* --------------- $309,460 $155,980 $ 60,324 $ 49,524
Interest from subsidiaries* ---------------- 1,080 1,730 1,799 2,743
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 37,834
Realized gain (loss) on investments -------- (20,016) 27,106 49,807
(2,753)
Loss on sale of subsidiaries --------------- -- -- (90,274)
Other -------------------------------------- 1,373 (61) 1,235
1,063
Total Revenue ------------------------------------------------------ 325,392 199,389 176,692 (1,863)
Expenses:
Operating and administrative --------------- 40,919 21,682 32,078
31,811
Interest-subsidiaries* --------------------- 23,815 13,811 18,246
36,436
Interest-other ----------------------------- 45,976 41,136 51,861
62,033
Total Expenses ---------------------------------------------------- 110,710 76,629 102,185 130,280
Income before Federal Income Tax (Credits),benefits,
Equity in Undistributed Net Income of
Subsidiaries and Cumulative Effect
of Accounting Change -------------------------------------- 214,682 122,760 74,507 (132,143)
Federal income tax expense (credits) ---------benefits ------------------ (36,574) (6,032) (7,521)
(65,966)
Income (Loss) Before Equity in
Undistributed Net Income of
Subsidiaries and Cumulative
Effect of Accounting Change ------------------------ 251,256 128,792 82,028 (66,177)
Equity in undistributed net income of
subsidiaries -------------------------------- 98,642 286,491 277,143 268,137
Income Before Cumulative Accounting
Change ------------------------------------------------------------------ 349,898 415,283 359,171 201,960
Cumulative effect of accounting change:
Parent company ------------------------------------------------------------- -- (8,006) --
Subsidiaries -------------------------------- -- Subsidiaries --------------------------------- (88,425) -- --
Total Accounting Change ---------------------------------- -- (96,431) -- --
Net Income ------------------------------------------------------------ $349,898 $318,852 $359,171
$201,960
*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 3031 through 54)59).
-62-69
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE IIIII - 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 1991
(Restated)(Restated)
Cash Flows from Operating Activities:
Net Income ----------------------------------- $349,898 $318,852 $359,171 $201,960
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income
of subsidiaries * ------------------------subsidiaries* ------------------------- (63,642) (278,065) (264,833)
(290,585)Equity in undistributed earnings of
unconsolidated affiliate ----------------- (13,119) -- --
Realized (gain) loss on investments ------- 20,016 (27,106) (49,807) 2,753
Loss on sale of subsidiaries -------------- -- -- 90,274
Cumulative effect of accounting change ---- -- 8,006 -- --
Other ------------------------------------- (32,757) 23,375 10,088 (49,259)
Net Adjustments ------------------------- (89,502) (273,790) (304,552) (246,817)
Net Cash Provided by
(Used in)
Operating Activities ------------------- 260,396 45,062 54,619 (44,857)
Cash Flows from Investing Activities:
PurchaseNet sales (purchases) of investments ---------------------- (414) (6,915) (14,250)
Sale or maturity of investments -------------- 32,062 93,363 8,865------- (22,106) 31,648 86,448
Cash collateral on loaned securities ---------------- 14,275 9,547 (31,746) 54,799
Net investment in consolidated subsidiaries* ------------- (2,744) (105,846) (103,149) (154,593)
Sale of subsidiaries ------------------------------------------------ -- -- 145,270
Investment in unconsolidated affiliate ----- (103,470) -- --
Net (purchase) sale of property
and equipment-equipment ----------------------------- (5,109) (5,563) 5,141
(1,002)
Other ------------------------------------------------------------------------------ 7,379 3,147 (24,079) 8,258
Net Cash Provided by (Used in)
Investing Activities --------------------------------------- (111,775) (67,067) 77,885 (97,923)
Cash Flows from Financing Activities:
Principal payments on long-term debt ---------------- (100,717) -- (31,283) (10,585)
Issuance of long-term debt ------------------------------------ 200,000 -- 197,737
--
Net increase (decrease)decrease in short-term debt --------------- (83,423) (207,231) (225,503) 206,396
Issuance of Series F Preferred Stock --------- -- -- 158,707
Increase (decrease) in loans from
subsidiaries* ------------------------------------------------------------ 271,841 (127,602) 113,436 (108,848)
Decrease (increase) in loans to
subsidiaries*- ----------------------------- (20,455) 34,725 50,091 (64,146)
Decrease (increase) in receivables from
subsidiaries* ------------------------------------------------------------ (3,889) (14,235) 40,735 (9,835)
Public offering of Common Stock -------------------------- -- 316,100 -- --
Common Stock issued for benefit plans -------------- 29,985 26,230 21,018
2,068Retirement of Common Stock ----------------- (18,395) -- --
Dividends paid to shareholders ---------------------------- (172,157) (156,235) (139,151) (125,956)
Net Cash Provided by (Used in)
Financing Activities --------------------------------------- 102,790 (128,248) 27,080 47,801
Net Increase (Decrease) in Cash ------------------- 251,411 (150,253) 159,584 (94,979)
Cash at beginning of year -------------------- 271,721 421,974 262,390 357,369
Cash at End of Year ------------------------------------------- $523,132 $271,721 $421,974
$262,390
*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 3031 through 54)59).
-63-70
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE VIII - SUPPLEMENTARY INSURANCE INFORMATION
Column A Column B Column C Column D Column E Column F Column G
Future Policy Other
Benefits, Policy
Deferred Losses, Claims and Claims and Net
Acquisition and LossClaim Unearned Benefits Premium Investment
Segment Costs Expenses PremiumsExpenses(A) Premiums(A) Payable Revenue (B) Income(A)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
Year Ended December 31, 1991
Property-Casualty ------------ $ 194,242 $ 2,502,421 $919,007 $ $2,242,009 $ 276,992
Life Insurance and Annuities - 1,278,993 6,078,897 2,809 805,426 1,378,980
Life-Health Reinsurance ------ 483,756 1,393,569 41,089 1,600,730 94,204
Employee Life-Health Benefits- 14,895 500,739 6,945 2,436,929 72,263
Other (incl. consol. adj's.) - (17,816) 2,548 (23,091)
Total ------------- $1,971,886 $10,457,810 $969,850 $ -- $7,087,642 $1,799,348$5,708,366 $1,987,296
Column A Column H Column I Column J Column K
Amortiza-
Benefits, tion of
Claims, Deferred
Lossess and Policy Ac- Other
SettlementClaim quisition Operating Premiums
Segment Expenses Costs Expenses (A)(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
Year Ended December 31, 1991
Property-Casualty ------------ $1,844,892 $456,706 $ 229,557 $2,242,692
Life Insurance(A) Following the adoption of FAS 113 in 1993, the 1993 and Annuities - 1,655,770 102,040 318,933
Life-Health Reinsurance ------ 1,465,148 26,013 170,447
Employee Life-Health Benefits- 1,919,470 3,481 654,438
Other (incl. consol. adj's.) - 1,538 53,653
Total ------------- $6,886,818 $588,240 $1,427,028
(A)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.
(B)(D) Includes insurance fees on universal life and other interest sensitive products.
data through the March 21, 1994 date of sale of the direct writer of employee life-health coverages.
-64-71
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE VIIV - 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$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
Life insurance (B) -------------- 1,086,349 139,013 1,129,235 2,076,571 54.4
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
Life insurance (B) -------------- 895,004 151,975 1,024,593 1,767,622 58.0
Total ------------------------------------------- $4,034,390 $286,224 $1,960,200 $5,708,366
Year Ended December 31, 1991
Life insurance in force ------------ $158,185,000 $48,580,000 $ 97,372,000 $206,977,000 47.0%
Premiums:
Property-casualty insurance ----- $2,078,083 $ 88,970 $ 252,896 $2,242,009 11.3%
Health insurance ---------------- 2,419,096 52,683 739,914 3,106,327 23.8
Life insurance (B) -------------- 984,384 300,415 1,055,337 1,739,306 60.7
Total ----------------- $5,481,563 $442,068 $2,048,147 $7,087,642
(A) Special-purpose bulk reinsurance transactions have been excluded.
(B) Includes insurance fees on universal life and other interest sensitive
products.
-65-
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE VII - GUARANTEES OF SECURITIES OF OTHER ISSUERS
December 31, 1993
Column A Column B Column C Column D Column E Column F Column G
Amount Amount
Title of Guaranteed Amount in
Name of Issuer of Securities Issue and Owned Treasury Nature of Nature of
Guaranteed Guaranteed Outstanding by LNC of Issuer Guarantee Default
Industrial Revenue Bonds:
Econ. Devel. Corp of the Var. Rev. Bonds $ 6,050,000 Principal/Int. None
City of Troy
City of Waterloo, Iowa IRB Floating Rate 8,000,000 Principal/Int. None
Monthly Demand Note
St. Louis City - IRB Var. Rev. Bond 7,800,000 Principal/Int. None
LA Public Facilities Auth. 3.25% Tax Exempt Bds 9,400,000 Principal/Int. None
Oakland Cty, MI. Econ. Devel. Corp. 6.00% Tax Exempt 1,505,000 Principal/Int. None
Bonds
City of Clayton, MO IRB Var. 1st Mort.IRB 8,600,000 Principal/Int. None
Charter Township of Pittsfield 6.4% Rev. Bonds 6,500,000 Principal/Int. None
Chester City. PA Econ. Devel. Floating Rate 5,200,000 Principal/Int. None
Corp. Monthly Demand Note
City of Oak Ridge, TN Indus. Variable Rate 2,650,000 Principal/Int. None
Devel. Board Rev. Bonds
Fulton Cty, GA Housing Auth. Var. Flexible 18,000,000 Principal/Int. None
Demand Multi-Family
Housing Rev. Bds
Village of Schaumburg, IL Var. Multi-Family 9,500,000 Principal/Int. None
Housing Rev. Bds
LA Public Facilities 5.25% Rev. Bonds 8,000,000 Principal/Int. None
FL State Housing Auth. Var. Tax Exempt 9,350,000 Principal/Int. None
Housing Auth. Bd
City of Plymouth, MN 6.75% Multi-Family 9,500,000 Principal/Int. None
Housing Rev. Bds
FL State Housing Finance Var. Rate Multi- 9,500,000 Principal/Int. None
Agency Family Housing
Rev. Bonds
City of Fort Wayne, IN Floating Rate 10,700,000 Principal/Int. None
Rev. Bond
Rounding (55,000)
Total Industrial Revenue
Bond Guarantees 130,200,000
Other Real Estate Guarantees:
National Westminster Constr. Loan 2,339,430 Principal/Int. None
Constr. Loan 4,290,111 Principal/Int. None
Constr. Loan 4,027,545 Principal/Int. None
Constr. Loan 5,127,516 Principal/Int. None
Var. Rate Loan 3,275,000 Principal/Int. None
National Westminster PLC Adj. Rate Loan 5,000,000 Principal/Int. None
Adj. Rate Loan 5,200,000 Principal/Int. None
Citizens & Peoples
National Bank Line of Credit 200,000 Principal/Int. None
Chase Manhattan Bank Var. Mortgage Loan 6,200,000 Principal/Int. None
LaSalle National Bank Var. Rate Loan 570,000 Principal/Int. None
Banc Boston Mortgage Corporation Var. Rate Mortgage 7,578,060 Principal/Int. None
Rounding (7,662)
Total Other Real Estate
Guarantees 43,800,000
Total Guarantees $174,000,000
-66-
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE VIII72
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------------------------------(000's Omitted)--------------------------------
Year Ended December 31, 19931994
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) $(6,987)$ (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
Year Ended December 31, 1991
Deducted from Asset Accounts:
Reserve for Mortgage Loans
on Real Estate -------------------- $ 31,814 $ 49,078 $ (3,928) (4,870) $ 72,094
Reserve for Real Estate ------------ 59,065 34,429 3,928 (5,422) 92,000
Reserve for Other Long-term
Investments ----------------------- 9,092 16,762 (2,000) (634) 23,220
Included in Other Liabilities:
Investment Guarantees -------------- 13,290 15,860 2,000 (6,200) 24,950
(A) Transfer between investment classifications.
(B) Deductions reflect sales or foreclosures of the underlying holdings.
-67-73
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE IX - SHORT-TERM BORROWINGS
Col. A Col. B Col. C Col. D Col. E Col. F
Maximum Average Weighted
Weighted Amount Amount Average
Balance Average Outstanding Outstanding Interest Rate
Category of Aggregate at End Interest During the During the During the
Short-Term Borrowings of Period Rate Period Period (C) Period (D)
(000's Omitted) ----------- -(000's Omitted)-----------------
Year Ended December 31, 1993
Commercial paper (A) ---------------- $212,700 3.35% $416,430 $184,945 2.75%
Notes payable (B) ------------------- 37,255 6.27% 110,865 64,822 4.31%
Current portion of long-term debt --- 101,463
Total ----------------------------- $351,418
Year Ended December 31, 1992
Commercial paper (A) ---------------- $416,430 3.58% $494,621 $316,280 4.11%
Notes payable (B) ------------------- 11,320 6.59% 100,362 41,887 6.27%
Current portion of long-term debt --- 5,657
Total ----------------------------- $433,407
Year Ended December 31, 1991
Commercial paper (A) ---------------- $494,621 5.09% $613,180 $471,967 5.83%
Notes payable (B) ------------------- 67,607 6.50% 127,637 51,655 8.08%
Current portion of long-term debt --- 115,078
Total ---------------------------- $677,306
Notes: (A) Commercial paper matures generally within three months from date of
issue with no provision for the
extension of its maturity.
(B) Notes payable represents unsecured term loans having a fixed maturity of
one year or less with no
provision for renewal.
(C) The average amount outstanding during the period was computed by
averaging the total of month-end
outstanding principal balances.
(D) The weighted average interest rate during the period was computed by
dividing the actual interest
expense by the average amount outstanding as computed in (C).
-68-
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE XVI - SUPPLEMENTARY INFORMATION CONCERNING PROPERTY-CASUALTY
INSURANCE OPERATIONS
Column A Column B Column C Column D Column E Column F Column G
Deferred Reserves for
Deferred Unpaid Claims Discount,
Affiliation Policy and ClaimUnpaid Claims if any Net
with Acquisition Adjustmentand Claim Deducted in Unearned Earned Investment
Registrant Costs ExpensesExpenses(A) Column C PremiumsPremiums(A) Premium Income
----------------------------(000's Omitted)----
- ------------------------------------------------------------------
Consolidated subsidiaries:
Year Ended December 31, 1993 $153,073 $2,810,0371994 $140,122 $2,702,537 $ -- $777,011 $1,841,363 $250,633$732,101 $1,710,563 $241,096
Year Ended December 31, 1992 $172,378 $2,672,5031993 $153,073 $2,810,037 $ -- $840,349 $2,082,953 $287,224$777,011 $1,841,363 $250,633
Year Ended December 31, 1991 $194,242 $2,502,4211992 $172,378 $2,672,503 $ -- $919,007 $2,242,009 $276,992$840,349 $2,082,953 $287,224
Column A Column H Column I Column J Column K
Claims and Claim
Adj Expenses(Credits)Expenses (Credits) Amortization Paid
Incurred Related to of Deferred ClaimsPaid
Affiliation (1) (2) Policy and ClaimClaims
with Current Prior Acquisition Adjustmentand 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
Year Ended December 31, 1991 $1,824,662 $ 12,266 $456,706 $1,580,911 $2,242,692(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.
-69-74
LINCOLN NATIONAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX FOR THE ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 19931994
Exhibit
Number Page
3(a) Articles of Incorporation of LNC as last amended
May 24, 1991.12, 1994.*
3(b) Bylaws of LNC as last amended January 1, 1992.*
4(a) Indenture for 8% Notesof LNC due MarchJanuary 15, 1997 and
Specimen Notes.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. 71*
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. 101*
10(b) Lincoln National Corporation 1982 Stock Option
Incentive Plan. 110*
10(c) The Lincoln National Corporation Executives'
Salary Continuation Plan.*
10(d) The Lincoln National Corporation Executive Value
Sharing Plan.*
10(e) The Lincoln National Corporation Management Incentive
Plan II.*
10(f) Lincoln National Corporation Executives' Severance
Benefit Plan as last amended January 10, 1990.*
10(g)10(f) The Lincoln National Corporation Outside Directors
Retirement Plan.*
10(h)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(j)10(n) Lease and Agreement dated August 1, 1984, with respect
to LNL's home office property.*
10(k)10(o) Lease and Agreement dated August 1, 1984, with respect
to LNP'sadditional LNL home office property.*
10(l) Lease dated March 1, 1984, with respect to the
Security-Connecticut's home office property.*
10(m) Descriptions of Compensation Arrangements with
Executive Officers. 118
10(n) The Lincoln National Corporation Executives'
Supplemental Pension Benefit Plan.*
10(o) The Lincoln National Corporation Executive Savings and
Profit Sharing Plan as last amended January 1, 1992.*
10(p) Lease dated February 14, 1991, with respect to select
Fort Wayne business operation's office space.*
10(q) Lincoln National Corporation 1993 Stock Plan for Non-
Employee Directors. 120
10(r) Lincoln National Corporation Executives' Excess
Compensation Benefit Plan. 125LNC's
Corporate Offices. 145
11 Computation of Per Share Earnings. 128169
21 List of Subsidiaries of LNC. 129170
23 Consent of Ernst & Young LLP, Independent Auditors. 135180
27 Financial Data Schedule. 181
28 Information from Reports Furnished to State Insurance
Regulatory Authorities. P 136[Data shown on this report is on 182
a "Combined" basis and does not include data for
subsidiaries sold.]
*Incorporated by Reference
-70-75
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 10, 19949, 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 10, 19949, 1995
Robert A. Anker,
(President, Chief Operating Officer and
Director)
By /s/ Richard C. Vaughan March 10, 19949, 1995
Richard C. Vaughan,
(Senior(Executive Vice President and Chief
Financial Officer)
By /s/ Donald L. Van Wyngarden March 10, 19949, 1995
Donald L. Van Wyngarden
(Second Vice President and Controller)
Pursuant to the requirements By /s/ J. Patrick Barrett March 10, 19949, 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 10, 19949, 1995
the following Directors Thomas D. Bell, Jr
of LNC on the date indicated.
By /s/ Daniel R. Efroymson March 10, 19949, 1995
Daniel R. Efroymson
By /s/ Harry L. Kavetas March 10, 19949, 1995
Harry L. Kavetas
By /s/ M. Leanne Lachman March 10, 19949, 1995
M. Leanne Lachman
By /s/ Leo J. McKernan March 10, 19949, 1995
Leo J. McKernan
By /s/ Earl L. Neal March 10, 19949, 1995
Earl L. Neal
By /s/ John M. Pietruski March 10, 19949, 1995
John M. Pietruski
By /s/ Jill S. Ruckelshaus March 10, 19949, 1995
Jill S. Ruckelshaus
By /s/ Gordon A. Walker March 10, 19949, 1995
Gordon A. Walker
By /s/ Gilbert R. Whitaker,Jr. March 10, 19949, 1995
Gilbert R. Whitaker,Jr.