Fitch Affirms Lincoln National Corp.'s Ratings; Outlook Remains Negative

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Lincoln National Corporation (LNC) and its insurance operating subsidiaries. The Rating Outlook remains Negative. (A full list of rating actions follows at the end of this release.). Key affirmations include the following:

--LNC Issuer Default Rating (IDR) at 'BBB+';

--LNC senior debt at 'BBB';

--LNC junior subordinated debt at 'BB+';

--LNC Commercial Paper (CP) at 'F2';

--Lincoln National Life Ins. Co Insurer Financial Strength (IFS) rating at 'A+'.

Fitch believes that the company has taken initiatives that have enhanced near-term financial flexibility in a period of challenging capital markets access. Specifically, Fitch views positively management's initiatives to adjust to the current uncertain operating environment and bolster statutory capital, which is estimated at 450% of NAIC Risk-Based Capital at year-end 2009. Management's actions include the negotiation of a 10-year $550 million letter of credit (LOC) that resulted in $400 million of XXX reserve relief, $690 million common stock issuance, $800 million senior note issuances ($300 million of which was raised to pre-fund a $250 million maturity coming due in the first quarter of 2010), $950 million preferred stock issuance under the U.S. Treasury's Capital Purchase Program (CPP), sale of Lincoln UK and Delaware, a reduction of its common stock dividend and other cost savings initiatives. While LNC continues to face considerable challenges, primarily related to asset risk, refinancing risk and operating performance, these actions, which have resulted in over $1 billion in cash at the holding company, could ultimately help stabilize ratings.

However, Fitch expects the effects of ongoing difficult economic conditions and capital market turmoil to continue to pressure LNC and its peers, and this expectation is reflected in LNC's current ratings and Negative Outlook. The Negative Outlook also reflects Fitch's view that near-term adverse financial market and challenging economic conditions could continue for an extended period. As a result, Fitch believes LNC could experience higher-than-expected volatility in financial results and capital, including further investment and goodwill impairments. Additionally, Fitch notes that there is execution risk associated with LNC's ability to refinance approximately $2.1 billion of LOCs which, assuming LNC exercises its option to extend the maturity for a year, will ultimately expire in the first quarter of 2012. Inability to refinance these existing LOC facilities, which currently support additional life insurance reserves, could have a material negative impact on the statutory capital levels of certain of LNC's domestic life insurance subsidiaries.

Fitch's ratings on LNC are supported by the company's longstanding strong competitive position in the life insurance and annuity market, strong and diverse distribution network, strong management team and historically solid operating performance. These positives are tempered somewhat by the current weak economic and capital market conditions, as well as challenges LNC faces with respect to strong competition in the life insurance and asset accumulation sectors, particularly in the affluent market segment that LNC has targeted, and the degree to which the company's earnings continue to be leveraged to the equity markets.

Additionally, Fitch believes LNC has an above average Total Financings and Commitments ratio (TFC) at 1.1 times when excluding goodwill, which is a non-risk-based leverage measure that expands on Fitch's traditional debt-to-equity calculations. The ratio is driven largely by the company's outstanding debt and financings for life reserves. Fitch generally views these activities as well managed, and related risks are captured in LNC's ratings and Outlook.

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's consolidated assets were $177.4 billion, and common equity was $11.7 billion at year-end 2009.

Fitch affirms the ratings of LNC and its insurance operating subsidiaries as follows:

Lincoln National Corporation

--Long-term IDR at 'BBB+';

--Short-term IDR at 'F2';

--CP at 'F2';

--Floating rate senior notes due April 20, 2010 at 'BBB';

--6.2% senior notes due Dec. 15, 2011 at 'BBB';

--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';

--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';

--6.15% senior notes due April 7, 2036 at 'BBB';

--6.3% senior notes due Oct. 9, 2037 at 'BBB';

--6.75% junior subordinated debentures due April 20, 2066 at 'BB+';

--7% junior subordinated debentures due May 17, 2066 at 'BB+';

--6.05% junior subordinated debentures due April 20, 2067 at 'BB+';

--Preferred stock at 'BB+'.

Lincoln National Capital VI

--Trust preferred securities at 'BB+'.

Lincoln National Life Insurance Company

Lincoln Life & Annuity Company of New York

First Penn-Pacific Life Insurance Company

--IFS at 'A+'.

The Rating Outlook remains Negative.

These rating actions reflect the application of Fitch's current criteria which is available on Fitch's web site at 'www.fitchratings.com' and specifically includes:

--'Insurance Rating Methodology', dated Dec. 29, 2009;

--'Life Insurance Ratings Criteria', dated March 2, 2007.

Additional information is available at 'www.fitchratings.com'.

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