A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and the issuer credit ratings (ICR) of "aa" of the key life/health insurance subsidiaries of Lincoln National Corporation (Lincoln) (Philadelphia, PA) [NYSE: LNC]. Additionally, A.M. Best has affirmed the debt ratings on the group's existing debt securities.
Concurrently, A.M. Best has assigned a debt rating of "a" to Lincoln's newly issued $375 million 6.30% senior unsecured notes due 2037. The outlook for all ratings is stable. (Please see link below for a detailed listing of the companies and ratings.)
Lincoln intends to use the net proceeds to fund a new wholly owned insurance subsidiary to reinsure a portion of statutory reserves required under Actuarial Guideline 38 (also known as Regulation AXXX). The transaction is expected to release approximately $300 million of statutory capital, which will be used for general corporate purposes, including share repurchase and support of future business growth.
For analytical purposes, A.M. Best views these notes as operating leverage. Consequently, the impact on Lincoln's financial leverage ratio (roughly 20% incorporating equity credit for hybrids), interest coverage (about nine times) and cash coverage (approximately five times) is negligible and remains within A.M. Best's guidelines for Lincoln's current ratings.
The ratings reflect the organization's prominent position in the wealth management and asset accumulation marketplace, strong operating and business profile, prudent approach to enterprise risk management, as well as its diversified sources of revenue, earnings and cash flows. Lincoln's trends in variable annuity net flows continue to be favorable, and operating results from its life insurance and employer markets remain strong. In addition, A.M. Best believes Lincoln's creditworthiness is enhanced by its investment management and broadcasting businesses, which are steady sources of earnings and unregulated cash flows to the holding company.
As a top-five seller of variable annuities, Lincoln's earnings profile is highly correlated to equity market performance, though overall equity market volatility has been reduced with the addition of Jefferson-Pilot Corporation. Also, while Lincoln's asset management business remains a competitive strength, both its retail and institutional businesses recently experienced a decline in net flows. Moreover, while Lincoln continues to grow its employer markets segment, A.M. Best believes its business profile is still developing as it faces significant competition from other major players in this arena.
A.M. Best expects Lincoln's fixed charge coverage to decline slightly in the near term. However, coverage should improve upon completion of the remaining integration tasks and future realization of expense synergies related to the Jefferson-Pilot Corporation merger, as well as organic earnings growth.
A.M. Best believes Lincoln's current capitalization is sound, but will likely moderate as earnings are utilized for significant share buybacks. The company recently repurchased roughly $600 million of common shares and has authority to repurchase an additional $2.1 billion in securities over the next three years.
For a complete listing of Lincoln National Corporation's FSRs, ICRs and debt ratings, please visit www.ambest.com/press/100503lincoln.pdf.
Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.