TEXT-Fitch affirms Lincoln National Corp

Mon Oct 22, 2012 11:24am EDT

Oct 22 - 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 capitalization.

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 conditions;

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

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

--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+'.
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