TEXT-Fitch affirms Lincoln National Corp ratings
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+'.