TEXT-Fitch affirms Lincoln National Corp ratings

Fri Jun 29, 2012 1:10pm EDT

June 29 - 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. 

Fitch's rating actions reflect LNC's good overall operating performance, solid 
risk-adjusted capitalization, strong 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 294 million for full year 2011, and $245 million in 
the first quarter of 2012. Profitability in 2011 was adversely affected by a 
$650 million goodwill impairment in LNC's life insurance segment and a $97 
million goodwill impairment in its media operations. The large impairment in the
company's life insurance segment was driven by product changes that the company 
was implementing, which management anticipated would have an adverse effect on 
future sales levels in the unit. Despite the goodwill impairment, operating 
performance in recent years has benefited from increasing asset-based fee 
revenue. However, Fitch expects near-term operating results to face pressure 
from persistently low interest rates, which are driving spread compression in 
LNC's large 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. Total adjusted statutory 
capital 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 
capitalization.

Fitch's concern about LNC's significant equity market exposure reflects above 
average exposure to the variable annuity business. While LNC has in place a 
hedging program that has been effective in mitigating the risk associated its 
variable annuity business, Fitch remains concerned about capital and earnings 
volatility in an unexpected, but still plausible, severe stress scenario. 

Fitch also remains concerned about LNC's reserve funding challenges and pricing 
risk associated with its exposure to no lapse guarantee universal life (UL) 
insurance. However, LNC has taken meaningful steps that Fitch believes have 
partially mitigated its exposure to this issue. 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. LNC also introduced in 2010 new 
secondary guarantee UL products that are designed to be more capital efficient. 
Fitch would view positively continued substantive progress in LNC's ability to 
implement long-term solutions for reserve financing that more closely align 
asset/liability duration and reduce refinancing risks. 

Fitch considers LNC's current financial leverage to be high relative to rating 
expectations. As of March 31, 2012, Lincoln's financial leverage stood at 31%, 
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 $208 billion, and common equity was $13.3 billion at March 31, 2012. 

Key rating triggers that may precipitate a rating upgrade include:

--Capital and earnings above current expectations for a prolonged period;

--Trend of holding company liquidity managed at 12-18 months of debt service and
common stock dividends;

--Trend of leverage maintained between 20-25% with EBIT coverage in the range of
8x-10x.

Conversely, key rating triggers that may lead to a rating downgrade include:

--Capital and earnings below expectations for a prolonged period. Fitch would 
expect RBC of 400% under normal conditions and 325% under stressed conditions;

--Leverage maintained above 30% and Total Financing and Commitments ratio above 
1.5x;

--Cash coverage at hold co below 1.0x interest/dividend needs;

--Reputational or legal issues, due to sales misconduct, for example, that could
materially affect the company's competitive position;

--Industry wide negative tax or regulatory changes that materially affect LNC's 
operating profitability or competitiveness;

-- LNC's GAAP-based interest coverage remains below 5x for an extended period of
time;

--LNC triggers a debt covenant.

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';
--5.65% senior notes due Aug. 27, 2012 at 'BBB+';
--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+'.
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