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

NEW YORK--()--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 reported 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.

LNC reported pre-tax operating earnings of $2 billion in 2014, up from $1.63 billion in 2013, driven primarily by growth in asset-based 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 the company continues to reduce the effects of spread compression from lower portfolio yields through reductions in interest crediting rates.

Fitch considers LNC's reported statutory capital adequacy to be strong and above expectations for the current rating. The company expects to report statutory total adjusted capital (TAC) of $8.8 billion as of year-end 2014, up from $8 billion at year-end 2013. Growth in LNC's TAC has resulted in strong risk-based capital (RBC) ratios, which the company expects at year-end 2014 to be 508% and reported at year-end 2013 at 501%. 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 supports 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 remains concerned about ongoing low interest rates and the effect this has on LNC's reserves, capital and earnings profile. Fitch views LNC as having above-average exposure to interest rates given its market-leading position in universal life (UL) with no-lapse guarantees.

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.

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 $253 billion and common equity of $15.7 billion at Dec. 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 1x 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+'.

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

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (September 2014).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=979541

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Contacts

Fitch Ratings
Primary Analyst
Nelson Ma, CFA
Director
+1 212-908-0273
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Bradley S. Ellis, CFA
Director
+1 312-368-2089
or
Committee Chairperson
Martha L. Butler, CFA
Senior Director
+1 312-368-3191
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Nelson Ma, CFA
Director
+1 212-908-0273
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Bradley S. Ellis, CFA
Director
+1 312-368-2089
or
Committee Chairperson
Martha L. Butler, CFA
Senior Director
+1 312-368-3191
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com