Business Context and Reporting Period
Company: Lincoln National Corporation (LNC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2000
Business Overview: LNC operates multiple insurance and investment management businesses under the "Lincoln Financial Group" identity. Operations are divided into five segments: Annuities, Life Insurance, Lincoln UK, Reinsurance, and Investment Management, plus "Other Operations."
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 2000 | Nine Months Ended Sep 30, 1999 | Three Months Ended Sep 30, 2000 | Three Months Ended Sep 30, 1999 |
|---|---|---|---|---|
| Total Revenue | $5,078.0 million | $4,995.8 million | $1,716.1 million | $1,642.1 million |
| Net Income | $472.5 million | $425.7 million | $138.6 million | $132.3 million |
| Net Income Per Share (Diluted) | $2.42 | $2.11 | $0.71 | $0.66 |
| Net Cash Provided by Operating Activities | $817.9 million | $1,704.8 million | Not provided for quarter | Not provided for quarter |
| Total Assets | $103,243.1 million | $103,095.7 million | N/A | N/A |
| Total Shareholders' Equity | $4,538.6 million | $4,263.9 million | N/A | N/A |
| Short-term Debt | $330.3 million | $460.2 million | N/A | N/A |
| Long-term Debt | $712.2 million | $712.0 million | N/A | N/A |
Material Changes vs. Prior Period
- Profitability: Net income increased 11% year-to-date (YTD) and 5% in the third quarter (Q3) compared to the prior year. "Income from Operations" (excluding realized gains/losses and restructuring) increased 22% YTD and 45% in Q3.
- Segment Performance:
- Annuities: Net income rose 23% YTD, driven by fee income growth from variable annuities (account values up 20%).
- Life Insurance: Net income rose 18% YTD, fueled by strong sales growth, particularly in Variable Universal Life (VUL) products.
- Lincoln UK: Net income collapsed 91% YTD and turned to a loss in Q3 due to a $40.5 million after-tax restructuring charge and reduced sales volumes.
- Reinsurance: Net income increased 42% YTD, largely due to a $25.0 million reserve charge taken in Q3 1999 that did not recur.
- Investment Management: Net income decreased 33% YTD due to lower advisory fees from asset outflows and increased compensation expenses.
- Investments: Realized losses on investments were $28.3 million YTD 2000 compared to a gain of $3.3 million in 1999, attributed to rising interest rates and write-downs of securities deemed other-than-temporarily impaired.
- Cash Flow: Net cash provided by operating activities decreased significantly to $817.9 million in 2000 from $1,704.8 million in 1999, primarily due to changes in contractholder funds and amounts recoverable from reinsurers.
Guidance, Outlook, Risks, and Unusual Items
- UK Restructuring: LNC announced the transfer of its UK sales force to Inter-Alliance and a decision to cease writing new business in the UK. Total expected restructuring charges are up to $93 million after-tax. $40.5 million was recorded in Q3 2000, with up to $39 million expected in Q4 2000 and up to $10 million in future quarters.
- Accounting Changes (FAS 133): LNC plans to adopt FAS 133 (Derivatives and Hedging) on January 1, 2001. Management estimates a hypothetical net loss of $9.0 million in net income and a net gain of $29.7 million in equity upon adoption. Future adoption is expected to increase volatility in reported net income.
- Dividend Restrictions: Lincoln National Life Insurance Company (Lincoln Life) has negative statutory earned surplus due to prior acquisitions. It requires Indiana Insurance Commissioner approval to pay dividends to LNC. While $315 million in dividends were paid in the first nine months of 2000, future approvals are not guaranteed.
- Rating Downgrades: In October 2000, Moody's downgraded LNC's senior debt from A2 to A3 and commercial paper from P-1 to P-2. Management believes liquidity will not be adversely impacted, though borrowing costs may rise slightly.
- Contingencies: Significant liabilities exist for UK pension product advice issues ($321 million), disability income claims ($1.324 billion), and personal accident reinsurance programs ($169.6 million). Management believes these will not materially affect the consolidated financial position.
Investor Verification Checklist
- UK Exit Strategy: Verify the finalization of the Inter-Alliance agreement and the actual timing and amount of remaining restructuring charges in Q4 2000.
- FAS 133 Impact: Monitor the actual financial statement impact upon adoption on January 1, 2001, specifically regarding the volatility of net income from derivative fair value changes.
- Dividend Flow: Confirm whether Lincoln Life continues to receive regulatory approval for dividend payments given its negative statutory earned surplus.
- Investment Management Flows: Track net cash flows in the Investment Management segment to determine if performance improvements are reversing the outflow trend.
- Reinsurance Reserves: Review updates on HMO excess-of-loss and group carrier medical reinsurance reserves, which have historically required strengthening.