(LNC) Lincoln National Rating Action

Lincoln National Corp. (LNC) experienced ratings actions on its freshly issued senior unsecured notes from both Moody’s Investors Service of Moody’s Corp. (MCO) and A.M. Best.

Accordingly, Moody’s has denoted these notes with a “Baa2” rating, while also promoted Lincoln’s debt outlook to positive from stable. In May last year, the rating agency had revised its outlook on Lincoln and its operating subsidiaries to stable from negative.

On the other hand, A.M. Best revealed that it has put an “a-” rating on Lincoln’s long-term unsecured senior notes worth $300 million, which carry interest of 4.85% and are scheduled to expire on June 24, 2021. The outlook for this debt rating is assigned as stable.

Meanwhile, A.M. best also reaffirmed all the debt ratings of Lincoln and its subsidiaries. In November last year, the rating agency had affirmed its financial strength rating (FSR) of “A+” (Superior) and issuer credit ratings (ICR) of “aa-” for the major subsidiaries of Lincoln, thereby validating a stable outlook.

Lincolnaims to redeem all of its outstanding 6.75% capital securities worth $275 million that were due 2066. These capital securities were issued by Lincoln National Corp. These securities were issued on April 20, 2006 and were redeemable at Lincoln’s discretion on or after April 20, 2011. The early redemption reflects the company’s fair liquidity and payment capability along with a solid balance sheet.

The company’s restructuring initiatives have been paying off well. Further, by renewing the $2 billion credit facility, which was secured in the second quarter of 2010, Lincoln has established a long-term solution to finance its statutory reserves and shore up its life insurance operations, thereby enjoying additional capital buffer and modest accretion in return on equity.

Over the last few quarters, Lincoln has significantly reduced its credit impairments, which could otherwise adversely impact the company’s capital position. These efforts have also improved Lincoln’s financial leverage and interest coverage ratios, which are within the rating agencies’ risk-free zone.

Moreover, eliminating debt significantly while strengthening its reserve levels and returning value to shareholders has further provided its investors with the much needed assurance that the company is taking positive measures in order to improve its long-term capital and operating leverage. Stability in ratings at this point acts as an icing on the cake.

Thus, this is a major turning point in Lincoln’s growth phase that reflects its ability to rebound with the gradual equity market appreciation coupled with narrowing credit spreads. The overall positive impact has also helped generate long-term growth backed by its defined contribution operations, increased fee income and strong balance sheet.

However, Lincoln’s exposure to individual variable annuities with living benefits and no-lapse guarantee universal life policies leaves room for some concern since such guarantees are exposed to sufficient equity market risk and the low interest rate environment.

Nevertheless, Lincoln has adopted strong asset and liability management practices, including equity and interest rate hedging programs, which would partially mitigate such risk exposures. We believe that Lincoln’s comprehensive capital plan is firm enough to mitigate credit and interest rate risk, while providing liquidity cushion to its growth strategy in the long run.

LINCOLN NATL-IN (LNC): Free Stock Analysis Report

MOODYS CORP (MCO): Free Stock Analysis Report

Zacks Investment Research

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