Fitch Affirms Lincoln National Corp.'s IDR at 'A-'; Outlook Stable

Fri May 2, 2014 2:48pm EDT

(The following statement was released by the rating agency) CHICAGO, May 02 (Fitch) 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. KEY RATING DRIVERS 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 and above-average financial leverage. LNC reported operating earnings of $1.38 billion in 2013, up from $1.28 billion in 2012. For the first quarter of 2014, operating earnings were $365 million, up from $285 million for the same period in 2013 driven primarily by growing fee income due to higher account values. The company's account values have benefited in recent years from a combination of strong equity market performance and robust net flows. LNC's operating performance continues to be constrained by persistently low interest rates, but recent increases in rates have begun to reduce the effects of spread compression in the company's large block of spread-based business. Lower spreads have been offset over the past year by strong sales and equity market performance, which have bolstered asset-based fee income on rising account values. Fitch considers LNC's statutory capital adequacy to be strong and above expectations for the company's current rating. Statutory total adjusted capital (TAC) of LNC's insurance operating subsidiaries was $8.0 billion at Dec. 31, 2013, up from $7.6 billion at Dec. 31, 2012. Reported risk-based capital (RBC) ratio of 501% at year-end 2013 was up from 488% at year-end 2012. 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. These benefits continue to be 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 for large variable annuity writers 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 recent years 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. As of Dec. 31, 2013, Lincoln's financial leverage stood at 29%, which was near the high end of Fitch's expectation of between 25% and 30% for the company's current rating level. Following the repayment of $500 million in debt maturities in the first quarter 2014, financial leverage declined to 26% at March 31, 2014. Fitch anticipates that LNC will continue to 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 $242 billion and common equity of $14.5 billion at March 31, 2014. RATING SENSITIVITIES 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'; --Commercial Paper at 'F2'; --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+'; --4.00% senior notes due Sept. 1, 2023 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+'. Contact: Primary Analyst Bradley S. Ellis, CFA Director +1-312-368-2089 Fitch Ratings, Inc., 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Douglas L. Meyer, CFA Managing Director +1-312-368-2061 Committee Chairperson Martha L. Butler, CFA Senior Director +1-312-368-3191 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Insurance Rating Methodology' (November 2013). Applicable Criteria and Related Research: Insurance Rating Methodology here Additional Disclosure Solicitation Status null/gws/en/disclosure/solicitation?pr_id=828612 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. 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