Fitch Rates LNC's Senior Unsecured Notes 'BBB+'; Affirms Existing Ratings

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a rating of 'BBB+' to Lincoln National Corp.'s (LNC) issuance of $400 million of 10-year senior unsecured notes. At the same time, Fitch 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

Fitch expects proceeds from the debt issuance to be used to finance the partial tender offers of up to $175 million and up to $150 million of LNC's 8.75% senior unsecured notes due 2019 and 6.15% senior unsecured notes due 2036, respectively. Fitch views the tender and new issuance as a net positive given the lower run-rate interest expense and lower near-term refinancing risk which is partially offset by a modest increase in financial leverage.

Today's affirmation of LNC's ratings reflects the company's good 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 equity market performance.

Fitch considers LNC's operating performance track record to be good and within rating expectations. GAAP-based operating ROE was 11% and 12% as of year-end 2015 and for the first nine months 2016 (annualized) respectively. LNC's 2015 earnings were negatively impacted by elevated mortality experience and an unfavorable interest rate related charge to deferred acquisition costs as part of the company's periodic actuarial assumption review. Operating earnings for the first nine months of 2016 were improved over the same period last year as strong performance in the second and third quarters more than offset weak performance in the first quarter. Improvements in investment performance, mortality experience, equity market performance, and group loss ratios after the first quarter 2016 all contributed to improved year-over-year results.

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 4% to approximately $8.8 billion as of Sept. 30, 2016 after a 4% decline in the prior year due to higher dividends paid from the operating insurance entities to the holding company over 2015. The company's reported RBC ratio at year-end 2015 was 487%, 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.

The company's financial leverage was slightly below 25% at Sept. 30, 2016 and within Fitch's expectations for the company's current ratings. As a result of the tender and refinance of existing debt, pro forma financial leverage is expected to increase to slightly above 25%.

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. Fitch remains concerned about capital and earnings volatility for large variable annuity writers in an unexpected, but still plausible, severe stress scenario. Given weakness and volatility in equity market performance this year, Fitch expects moderate pressure on LNC's asset-based fee income to persist in 2017.

RATING SENSITIVITIES

Key rating triggers that may precipitate a rating upgrade include:

--Prolonged strong operating performance generating GAAP Operating ROE in excess of 11%;

--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 Operating ROE below 8% 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 assigned the following rating:

Lincoln National Corporation

--$400 million of 3.625% senior notes due 2026 'BBB+'.

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+'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 15 Sep 2016)

https://www.fitchratings.com/site/re/887191

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015967

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015967

Endorsement Policy

https://www.fitchratings.com/regulatory

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Fitch Ratings
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Nelson Ma, CFA
Director
+1-212-908-0273
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
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Director
+1-312-368-2089
or
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Senior Director
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or
Media Relations:
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Email: [email protected]

Source: Fitch Ratings

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