Fitch Affirms Lincoln National Corp.'s IDR at 'A-'; Outlook Stable
CHICAGO -- October 22, 2012
Fitch Ratings has affirmed Lincoln National Corporation's (LNC) Long-term
Issuer Default Rating (IDR) at 'A-', and the Insurer Financial Strength (IFS)
ratings of LNC's insurance operating subsidiaries at 'A+'. The Rating Outlook
is Stable. A full list of rating actions follows at the end of this release.
Today's rating actions reflect LNC's solid overall operating performance,
strong risk-adjusted capitalization, excellent competitive position, diverse
distribution network and capable management team. LNC's ratings also reflect
the above-average exposure of its earnings and capital to interest rates and
the performance of equity markets, above-average financial leverage, and
longer-term issues around funding the growth in reserves associated with
secondary guarantees on universal life policies.
LNC reported net income of $569 million for the first half of 2012, down from
$617 million for the comparable period in 2012. Profitability through the
first half of 2012 was adversely affected by spread compression-driven reduced
alternative investment income, modestly higher net investment losses, and a
significant increase in commissions and administrative expenses tied to
technology enhancements and management efforts to expand distribution. Fitch
expects near-term operating results to continue to face pressure from
persistently low interest rates, which are driving spread compression in LNC's
large block of spread-based business.
Fitch considers LNC's statutory capital adequacy to be strong and modestly
above Fitch's expectations for the company's current rating. The reported
statutory total adjusted capital (TAC) of LNC's insurance operating
subsidiaries increased by 7.3% in 2011, to $7.6 billion. Growth in LNC's
statutory capital has been key to an improvement in its reported risk-based
capital (RBC) ratio, which improved from 491% of the company action level at
Dec. 31, 2010, to 505% at Dec. 31, 2011. The use of captive reinsurance
associated with LNC's excess life reserves and variable annuity guarantees
benefits the level of reported RBC in the case of excess life reserves, and
benefits the stability of reported RBC in the case of variable annuity
guarantees. This has been factored into Fitch's view of LNC's statutory
Fitch's concern about LNC's significant equity market exposure reflects
above-average exposure to variable annuity business. While LNC has in place a
hedging program that has been effective in mitigating the risk associated with
this business, Fitch remains concerned about capital and earnings volatility
in an unexpected, but still plausible, severe stress scenario.
Fitch also remains concerned about the reserve funding challenges and pricing
risk LNC will continue to face in connection with its exposure to no-lapse
guarantee universal life (UL) insurance. However, Fitch notes that LNC has
made considerable progress in lengthening the term of financing used to back
these reserves. Currently, LNC uses a combination of letter of
credit-supported reserve financing provided by affiliated reinsurance
companies and other structured solutions supported by LNC's issuance of
long-term senior notes.
Fitch considers LNC's current financial leverage to be high relative to rating
expectations. As of June 30, 2012, Lincoln's financial leverage stood at 30%,
which is above Fitch's expectation of 25% for the current rating level. The
company's financial leverage increased in the first quarter of 2012 due to its
adoption of the FASB's Accounting Standards Update concerning accounting for
costs associated with acquiring and renewing insurance contracts, as well as
its issuance of $300 million in new senior notes to prefund an August 2012
maturity of equal amount. Fitch anticipates that LNC will reduce its financial
leverage over the next 12-18 months through a combination of the repayment of
maturing debt, growth in shareholders' equity, and other strategies to lower
its interest expense.
Lincoln National Corp., headquartered in Radnor, PA, markets a broad range of
insurance and asset accumulation products and financial advisory services
primarily to the affluent market segment. The company reported consolidated
assets of $211 billion, and common equity was $14.2 billion at June 30, 2012.
Key rating triggers that may precipitate a rating upgrade include:
--Prolonged strong operating performance generating EBIT interest coverage in
excess of 10x;
--Reported RBC above 450%;
--Trend of holding company liquidity managed at 12-18 months of debt service
and common stock dividends;
--Leverage maintained below 25%.
Conversely, key rating triggers that may lead to a rating downgrade include:
--Capital below expectations for a prolonged period. Fitch would expect
reported RBC of 400% under normal conditions and 325% under stressed
--Leverage maintained above 30% and Total Financing and Commitments ratio
-- LNC's GAAP-based interest coverage remains below 5x for an extended period
--Cash coverage at holding company below 1.0x interest/dividend needs;
--A material reserve increase or impairment of intangibles.
Fitch has affirmed the following ratings with a Stable Outlook:
Lincoln National Corporation
--Long-term IDR at 'A-';
--Short-term IDR at 'F2';
--CP at 'F2';
--4.75% senior notes due Jan. 27, 2014 at 'BBB+';
--4.75% senior notes due Feb. 15, 2014 at 'BBB+';
--4.30% senior notes due June. 15, 2015 at 'BBB+';
--7% senior notes due March 15, 2018 at 'BBB+';
--8.75% senior notes due July 1, 2019 at 'BBB+';
--6.25% senior notes due Feb. 15, 2020 at 'BBB+';
--4.85% senior notes due June 24, 2021 at 'BBB+
--4.20% senior notes due March 15, 2022 at 'BBB+';
--6.15% senior notes due April 7, 2036 at 'BBB+';
--6.3% senior notes due Oct. 9, 2037 at 'BBB+';
--7% senior notes due June. 15, 2040 at 'BBB+';
--7% junior subordinated debentures due May 17, 2066 at 'BBB-';
--6.05% junior subordinated debentures due April 20, 2067 at 'BBB-'.
Lincoln National Life Insurance Company
Lincoln Life & Annuity Company of New York
First Penn-Pacific Life Insurance Company
--IFS at 'A+'.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Oct. 18, 2012)
--'Lincoln National Corporation (and Insurance Operating Subsidiaries)' (Jan.
--'Lincoln National Corporation and Insurance Operating Subsidiaries' (Sept.
Applicable Criteria and Related Research:
Insurance Rating Methodology ￢ﾀﾔ Amended
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Bradley S. Ellis, CFA, +1 312-368-2089
70 W. Madison Street
Chicago, IL 60602
Douglas L. Meyer, CFA, +1 312-368-2061
Martha L. Butler, CFA, +1 312-368-3191
Brian Bertsch, +1 212-908-0549
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