premiums of companies that write predominantly unit-linked life insurance and pension business (Money Management, June 1996). Unit-linked policies are similar to variable life insurance policies in the United States.
Lincoln Life Transformation A major transformation of processes begun in 1995 is designed to create major improvements in service, products and expense levels at Lincoln Life. As part of this transformation effort, Lincoln Life is narrowing its focus to four target markets: small-to medium-sized businesses; not-for-profit organizations; retirees with investable assets and individuals with high net worth. Expenses for transformation efforts reduced operating earnings $18.5 million, after-tax, in 1996. The initial phase of these efforts is scheduled to be completed by the end of 1997, after which the related expenses are expected to decline.
$79.4 million in 1995. Across the industry, there was a greater frequency of weather-related property-casualty insurance claims in 1996 than in any previous year (American Insurance Services Group study, Wall Street Journal, Jan. 15, 1997).
States is reducing its overall homeowners' exposure, which represents 27% of its net written premium in personal lines. At the same time, American States is seeking modest growth in homeowners' business in the handful of states where this coverage is profitable.
Insurance Premiums Life and annuity premiums increased $14.9 million or 2% in 1996 compared to 1995 as the result of increased volumes of business in the Reinsurance segment being partially offset by a decrease in premium in the Life Insurance and Annuities segment. Life and annuity premiums decreased $144.1 million or 16% in 1995 compared with 1994. This decrease is the net result of an increase in business volume from the Reinsurance segment (9% increase) being more than offset by a decrease in volume from the U.S. portion of the Life Insurance and Annuities segment (10% decrease) and a decrease from the United Kingdom component of the Life Insurance and Annuities segment (51% decrease). This decrease in the United Kingdom component was the net result of: 1) increases from the premiums generated by the newly acquired U.K. companies (see note 12 to the consolidated financial statements on page 67) and; 2) decreases due to modifying, on a prospective basis, the classification of premiums associated with unit-linked transactions within Lincoln National (UK) to more closely conform to the classification used for universal life transactions within the U.S. operations. As noted below, there is a corresponding decrease in life and annuity benefits. Prior period data was not reclassified because the amounts involved are not material to consolidated revenue. 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 1997.
were essentially the same as 1994, as staff levels were adjusted to the current level of business. In 1997, all business segments will continue to adjust staff levels as appropriate to match business volumes.
Year Ended December 31 (in millions) 1996 1995 1994 Dividends from subsidiaries: Lincoln Life ------------------------------------ $ 135.0 $ 310.0 $ 125.0 American States --------------------------------- 74.7 199.0 215.0 Other ------------------------------------------- 96.4 29.5 4.5 Net investment income ----------------------------- 4.3 2.9 1.2 Operating expenses -------------------------------- (44.6) (41.7) (33.7) Interest ------------------------------------------ (67.8) (57.3) (44.3) Net sales (purchases) of investments -------------- 91.2 16.6 (22.1) Increase (decrease) in cash collateral on loaned securities -------------------------------- (53.4) (4.5) 14.3 Additional investment in subsidiaries ------------- 217.8 (697.1) (2.7) (Investment in) sale of unconsolidated affiliates - (16.0) 194.0 (103.5) Net increase (decrease) in debt ------------------- (178.5) 217.1 15.9 Increase in receivables from subsidiaries --------- (36.0) (.3) (3.9) Increase (decrease) in loans from subsidiaries ---- 28.2 (42.4) 271.8 Decrease (increase) in loans to subsidiaries ------ (303.5) (107.0) (20.5) Federal income taxes received (paid) -------------- (143.8) (38.3) 65.6 Net tax receipts from (payments to) subsidiaries -- 122.3 61.5 (61.1) Dividends paid to shareholders -------------------- (191.2) (178.8) (172.2) Common stock issued for benefit plans ------------- (0.2) 24.1 30.0 Retirement of common stock ------------------------ (32.7) -- (18.4) Other --------------------------------------------- (35.2) 56.4 20.5
Balance at beginning-of-year ----------- 698,180 (311,077) 914,679 Realized gain (loss) on sale of minority interest in subsidiary ------ (19,101) -- -- Change during the year ----------------- (263,488) 1,009,257 (1,225,756) Balance at End-of-Year --------------- 415,591 698,180 (311,077)
Common Stock (assuming conversion of series A, E and F preferred stock):
Hedge accounting is applied as indicated above after LNC determines that the items to be hedged expose LNC to interest rate fluctuations, the widening of bond yield spreads over comparable maturity U.S. Government obligations, fluctuations in the FTSE index and foreign exchange risk. Moreover, the derivatives used are designated as a hedge and reduce the indicated risk by having a high correlation of changes in the value of the derivatives and the items being hedged at both the inception of the hedge and throughout the hedge period. Should such criteria not be met, the change in value of the derivatives is included in net income.
Less: Claims and claim expense payments arising in the current year, net of reinsurance ------- 654.0 613.2 619.4 Payments for claims and claim expenses arising in prior years, net of reinsurance ---- 648.9 689.4 728.2 Total payments, net of reinsurance ---------- 1,302.9 1,302.6 1,347.6
Long-term debt less current portion: 7 1/8% notes payable, due 1999 ---------------------- $ 99.5 $ 99.4 7 5/8% notes payable, due 2002 ---------------------- 99.3 99.2 7 1/4% notes payable, due 2005 ---------------------- 199.1 199.0 9 1/8% notes payable, due 2024 ---------------------- 199.1 199.1 Mortgages and other notes payable ------------------- 29.3 62.6 Total long-term debt ------------------------------ $626.3 $659.3
The components of net pension cost for the defined benefit pension plans are as follows:
Environmental Losses Total property-casualty liabilities for unpaid claims and claim expenses were $2,486,000,000 and $2,595,000,000 at December 31, 1996 and 1995, respectively. These liabilities include amounts for environmental losses of $265,000,000 and $256,000,000, 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 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. Liabilities also 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. Accordingly, although management believes the estimated reserve provided for environmental losses is adequate,
segment in April 1995 with the acquisition of Delaware Management Holdings, Inc. (see note 12 on page 67).
Liabilities: Life Insurance and Annuities ----------- $58,075.6 $49,485.4 $38,823.2 Reinsurance ---------------------------- 4,454.8 4,673.3 2,259.8 Property-Casualty ---------------------- 3,622.8 3,516.2 3,552.3 Investment Management ------------------ 106.6 59.4 -- Other Operations ----------------------- 668.6 1,145.3 1,187.4 Total -------------------------------- $66,928.4 $58,879.6 $45,822.7