A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of “aa-” of the key life/health subsidiaries of Lincoln National Corporation (Lincoln) (headquartered in Radnor, PA) [NYSE: LNC], consisting of The Lincoln National Life Insurance Company and its wholly owned subsidiary, Lincoln Life & Annuity Company of New York (New York, NY) (together known as LNL). Concurrently, A.M. Best has affirmed the ICR of “a-” as well as the existing debt ratings of Lincoln. Additionally, A.M. Best has downgraded the FSR to A (Excellent) from A+ (Superior) and ICR to “a+” from “aa-” of Lincoln’s stand-alone subsidiary, First Penn-Pacific Life Insurance Company. The rating downgrades reflect the company’s limited new business profile while incorporating its continued relevance to Lincoln and LNL. The outlook for all ratings is stable. All companies are domiciled in Fort Wayne, IN, unless otherwise specified. (See link below for a detailed listing of the companies and ratings.) The ratings of LNL primarily reflect its leadership position across various lines of business, diverse distribution channels, improved investment performance and solid level of risk-adjusted capital. A.M. Best notes LNL’s proactive efforts in managing both its universal life with secondary guarantees (ULSG) and variable annuity living benefit liabilities. A.M. Best believes that enterprise risk management is a core strength for Lincoln that is further evidenced by active interest rate management across its product lines and investment portfolio. Overall, A.M. Best believes LNL’s capital level adequately supports its current balance sheet risks under most stress scenarios. Operating earnings have benefitted from improved underwriting, lower but solid investment returns and a significant decline in credit impairments. In addition, operating results have been supported by an increase in separate accounts during 2012, driven by positive net flows from both the individual variable annuity and group retirement businesses, along with generally favorable performance of the U.S. equity markets. LNL has successfully enacted a pivot strategy to adjust to changing market dynamics and has relied on its strong and diversified distribution platform to record favorable sales results throughout the period. Additionally, the company has continued to implement price and benefit changes to its products to maintain competitiveness while reducing overall risk.
LNL’s investment portfolio continues to perform well and is considered a strength, incorporating the expectation for a minor shift in allocation to higher yielding assets. A.M. Best believes the organization’s exposure to riskier structured securities and commercial mortgages is manageable. Moreover, Lincoln currently maintains excess liquidity throughout, which acts as a buffer for any potential adverse experience.A.M. Best notes that overall direct premiums have declined over the most recent period due primarily to pricing actions in the ULSG and fixed indexed annuity product lines. Moreover, sales of its core MoneyGuard product also have moderated from the prior year. LNL continues to face ongoing challenges from competition in its core businesses in addition to market volatility due to its high proportion of interest and equity sensitive liabilities. Although LNL utilizes a robust hedging strategy, the legacy books of ULSG and variable annuities continue to provide a source of risk with respect to ongoing reserve funding and overall operating volatility. LNL also retains a substantial amount of life insurance and annuity account values with credited rates that are currently close to or at minimum guarantees. As with some of Lincoln’s publicly-traded peers, the organization relies on the use of captives to fund Regulation XXX and Guideline AXXX (AG38) reserves and to help smooth earnings volatility driven by its hedging activity. Lincoln’s leverage and coverage ratios remain within A.M. Best’s expectations for its current ratings and its overall financial flexibility is good. A.M. Best notes that the persistent low rate environment continues to negatively impact pretax operating earnings, but this headwind is somewhat mitigated by the current level of excess cash maintained at the holding company (approximately $600 million at September 30, 2012). A.M. Best believes Lincoln and its subsidiaries are well positioned at their current rating level. Negative rating actions could result from a material decline in risk-adjusted capital within the group, deteriorating operating results due to negative market impacts on spreads and/or minimum guarantees or a material increase in overall investment risk.
For a complete listing of Lincoln National Corporation and its subsidiaries’ FSRs, ICRs and debt ratings, please visit www.ambest.com/press/113010lincoln.pdf.The methodology used in determining these ratings is Best’s Credit Rating Methodology , which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology. Founded in 1899, A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com. Copyright © 2012 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.