Fitch Affirms Ratings on Lincoln National (LNC) Following Recent Review

Fitch Ratings has affirmed Lincoln National Corporation's (NYSE: 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 good 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 to the performance of equity markets.

Fitch considers LNC's operating performance track record to be good. In recent years, earnings growth has been driven primarily by increased asset-based fee income due to higher account values. The company's account values have benefited from a combination of strong equity market performance and robust net flows. However, earnings declined in the first nine months of 2015 due to elevated mortality experience and an unfavorable interest rate related charge to deferred acquisition costs (DAC), which negatively affected earnings primarily from the Life Insurance segment. The charge to DAC was associated with the company's annual third quarter review of actuarial assumptions.

Aside from the elevated mortality and DAC charge, operating performance was as expected, including improvement in the group protection segment over the second and third quarters of 2015, which has had varied results in the past. Fitch expects earnings for FY 2016 to improve from 2015 levels given more normalized performance in life insurance and continued improvement in group protection. LNC's operating performance continues to be pressured 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.

LNC's interest coverage metrics have generally improved over the past several years. Statutory interest coverage improved to 5.4x in 2015 from 3.1x in 2014. GAAP interest coverage also improved to 9.9x in 2014 compared to 8.7x and 7.4x in 2013 and 2012, respectively. GAAP interest coverage decreased to 8.0x for the first three quarters of 2015 due to elevated mortality and the charge to DAC as mentioned above. Fitch considers the decline in 2015 to be non-recurring and expects GAAP interest coverage levels to improve assuming more normalized mortality experience in 2016.

Fitch considers LNC's reported statutory capital adequacy to be strong and above expectations for the current rating. Total adjusted statutory capital of LNC's insurance operating subsidiaries increased approximately 10% in 2014 to approximately $8.8 billion. Growth in LNC's statutory capital has been key to an improvement in its reported RBC ratio over 2013 to 2014, which improved from 501% of the company action level at year-end 2013 to 541% at year-end 2014. As of third quarter 2015, statutory capital declined 6% to $8.3 billion primarily as a result of higher dividends paid from the operating insurance entities to the holding company. The company continues to remain well above its target RBC ratio of 400% under a stressed scenario.

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 their effect 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 and associated guarantees. However, Fitch believes that LNC has established a strong track record of effectively managing this business, and has generated consistently favorable results relative to peers. The company's results have benefited from relatively conservative product design and pricing, and a comprehensive hedging program that has effectively mitigated reserve volatility. Fitch remains concerned about capital and earnings volatility for large variable annuity writers in an unexpected, but still plausible, severe stress scenario. Given recent weakness in equity market performance, Fitch expects moderate pressure on LNC's asset-based fee income in 2016.

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 $250 billion and common equity of $14.4 billion at Sep. 30, 2015.

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;
--GAAP-based interest coverage remaining 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';
--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+';
--3.35% senior notes due March 9, 2025 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 'BB+';
--6.05% junior subordinated debentures due April 20, 2067 at 'BB+'.

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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