LINCOLN NATIONAL CORPORATION
Fitch Ratings has affirmed the 'A+' (Strong) Insurer Financial Strength (IFS) rating of
Fitch has also affirmed LNC's 'A-' Long-Term Issuer Default Rating (IDR) and 'BBB+' senior unsecured debt rating. The Rating Outlook for LNC and its insurance operating subsidiaries remains Negative.
Today's rating affirmation reflects yesterday's announcement that LNC has entered into a reinsurance agreement with
Fitch considers the agreement to be a net credit positive for LNC, as it reduces the company's long-standing exposure to ULSG, but also reduces anticipated future income from a more stable block of fixed annuities. The transaction is expected to satisfy previously established rating sensitivities associated with revising the Outlook on LNC's ratings to Stable from Negative. Accordingly, upon completion, Fitch expects to revise its Outlook on LNC's ratings to Stable, subject to continued satisfaction of rating sensitivities stated at the end of this release.
Key Rating Drivers
Historically Strong Operating Performance: Pre-pandemic, LNC's operating performance generally exceeded rating expectations, driven primarily by stable in-force mortality experience and growing asset-based fee income. However, performance was adversely affected in recent years by the pandemic, including higher mortality and morbidity, and annual DAC and reserve assumption reviews, which largely reflected the impact of persistently lower interest rates.
The company's most recent assumption review resulted in a material GAAP unlocking charge exceeding
Weakened Balance Sheet Fundamentals: The 2022 unlocking charge had a significant adverse impact on LNC's balance sheet, resulting in financial leverage above Fitch's expectations for the company's current ratings. Although the impact of the charge on the company's statutory capitalization was significantly lower, other factors, including poor capital market performance in 2022, combined to result in a significant weakening of LNC's statutory capitalization during the year to a level below management's target and Fitch's expectation.
Favorable Business Profile: LNC's favorable business profile reflects its strong brand name and market position, very strong distribution capabilities, operating scale efficiencies and good business diversification. Fitch's view of the business profile also considers the company's higher exposure to equity markets given the company's asset-based fee revenues and exposure to variable annuity (VA) guarantees, as well as continued exposure to interest rate risk associated with universal life insurance policies with secondary guarantees (ULSG). Fitch notes that the magnitude of the risk associated with the ULSG block will be partially mitigated as a result of the reinsurance transaction announced yesterday.
Above-Average Investment Quality: Fitch considers LNC's investment portfolio to reflect above-average credit quality and favorable liquidity compared with similarly rated peers. The portfolio tends to have a higher allocation to corporate bonds and lower allocation to structured securities and equities relative to the industry.
Macroeconomic Uncertainty: Following a protracted period of low interest rates, rates have risen and could potentially increase further, which is beneficial for all major product lines and is expected to improve margins on spread-based exposure for LNC and its peers. However, heightened macroeconomic volatility and geopolitical uncertainty pose risks to LNC and other life insurers, and could have a material negative effect on earnings and capital in a severe, albeit unexpected, scenario.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to an Outlook revision back to Stable:
Fitch Prism capital model score maintained within the 'Strong' category and reported RBC ratio above 385%;
Financial Leverage Ratio (FLR) below 31% and clear path for a return to a level below 30%.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
FLR maintained above 30% and a total financing and commitments ratio above 1.5x;
Fixed-charge interest coverage remaining below 5x for an extended period of time;
A Fitch Prism capital model score sustained within the 'Adequate' category or reported RBC ratio maintained below 385%;
A material reserve increase or impairment.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Sustained strong operating performance as demonstrated by meaningful contributions from all business lines generating GAAP operating ROE in excess of 11% and fixed-charge interest coverage of 9.5x;
A Fitch Prism capital model score solidly within the 'Strong' category and reported RBC ratio above 450%;
Leverage maintained below 25%.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
RATING ACTIONS
Entity / Debt
Rating
Prior
LT IFS
A+
Affirmed
A+
senior unsecured
LT
BBB+
Affirmed
BBB+
LT IFS
A+
Affirmed
A+
LT IFS
A+
Affirmed
A+
LT IDR
A-
Affirmed
A-
ST IDR
F2
Affirmed
F2
senior unsecured
LT
BBB+
Affirmed
BBB+
junior subordinated
LT
BBB-
Affirmed
BBB-
preferred
LT
BBB-
Affirmed
BBB-
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VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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