A.M. Best Affirms Ratings of Lincoln National Corporation and Its Key Subsidiaries
December 10, 2013 by A.M. Best Co.
OLDWICK, N.J., Nov 22, 2013 (BUSINESS WIRE) — 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 and 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 affirmed the FSR of A (Excellent) and ICR of “a+” of Lincoln’s stand-alone subsidiary, First Penn-Pacific Life Insurance Company. The outlook for all ratings is stable. All companies are domiciled in Fort Wayne, IN, unless otherwise specified. (Please see link below for a detailed listing of the companies and ratings.)
The ratings of LNL primarily reflect its leadership position across its various business segments, strong and diverse distribution capabilities, good investment performance and solid level of risk-adjusted capital. A.M. Best notes LNL’s overall record in recent years of sustaining and improving profitability, including its continued favorable performance in managing both its universal life with secondary guarantees (ULSG) and variable annuity living benefit liabilities. In addition, LNL’s consistent presence in the variable annuity space has brought some stability to its liability profile as has the increased use of managed risk strategies in the product. A.M. Best believes that the company’s above-average enterprise risk management capabilities are further evidenced through active interest rate management across its product lines and investment portfolio. Overall, A.M. Best believes LNL’s risk-adjusted capital level adequately supports its current balance sheet risks under several stress scenarios.
A.M. Best notes that LNL’s operating results remain favorable in 2013 as increased earnings in the variable annuity line has offset both an increase in mortality in the ordinary life insurance line as well as the impact of the low interest rate environment on its spread-based businesses. Additionally, LNL’s operating results have been supported by rising equity markets and an uptick in interest rates. While the company’s overall sales remain solid, sales of its core MoneyGuard product have moderated. 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. Moreover, although the company utilizes a robust hedging strategy, its 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 retains a substantial amount of life insurance and annuity account values with credited rates that are currently close to or at minimum guarantees. A.M. Best notes that the organization continues to utilize captives to fund Regulation XXX and Guideline AXXX (AG38) reserves and to help smooth earnings volatility driven by its hedging activity for variable annuities. LNL’s group protection and retirement plans services segments continue to provide only modest contributions to consolidated earnings, although the segments are profitable and provide some diversification to the enterprise.
A.M. Best notes the continued favorable performance of LNL’s investment portfolio despite the slight shift in allocation to higher-yielding assets. A.M. Best believes the organization’s exposure to riskier structured securities and commercial mortgages remains manageable. Moreover, LNL currently maintains excess liquidity throughout its organization, which acts as a buffer for any potential adverse experience.
Lincoln’s financial leverage and interest 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 interest rate environment continues to impact pre-tax operating earnings, but this headwind is somewhat mitigated by the current level of excess cash maintained at the holding company–approximately $500 million, net of a prefunded early 2014 debt maturity.
A.M. Best believes the ratings for Lincoln and its subsidiaries are well positioned for the foreseeable future. Future negative rating actions could result from a substantial decline in the group’s risk-adjusted capital, deteriorating operating results 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/112204lincoln.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 .
A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com .
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SOURCE: A.M. Best Co.
