Ratings agency A.M. Best has reaffirmed the credit and financial strength ratings (FSR) of Lincoln National Corp. LNC and its subsidiaries, while retaining a stable outlook on all.
A.M. Best asserted its issuer credit ratings (ICR) of “aa-” and FSR of “A+” for The Lincoln National Life Insurance Co. (LNL) and Lincoln Life & Annuity Co. of New York (LLANY) – the major life and health subsidiaries of Lincoln National.
The ratings agency also maintained an ICR of “a-” on the holding company’s long-term debt. Additionally, it kept the ICR and FSR unchanged at “a+” and “A”, respectively, for Lincoln’s separate subsidiary – First Penn-Pacific Life Insurance Co.
Ratings Validation
The rating agency acknowledges the company’s leading market position in the Life and Annuity segments. The company is continuously making an effort in de-risking its product portfolio by curtailing the sales of longer-dated products which exposes the company to involuntary forces such as interest rate or equity market volatility.
Moreover, the company has a strong enterprise risk management practice in place, with respect to its in-force blocks. It manages risk via strong product and investment cash flow hedging along with regular stress testing of risk-adjusted capital. The company also uses external reinsurance for a portion of new variable annuity sales which carry living benefit guarantees.
The company has also been able to maintain its operating strength on regular upgrades in its product portfolio and modifications to its underwriting discipline in accordance with the changing economic and regulatory landscape. Furthermore, Lincoln National’s debt ratios such as financial leverage, operating leverage and interest coverage ratios are within the guidelines of the current rating. Lincoln National also maintains adequate cash holdings and has access to additional cash sources that provide it with financial flexibility.
However, negating the ratings is the company’s exposure to interest rate risk and equity market volatility thanks to its substantial in-force blocks of secondary guarantee universal life, variable annuities with living benefit guarantees, and interest-sensitive fixed annuities.
Moreover, earnings from the company’s Retirement Plan Services and Group Protection segments have remained under pressure due to stiff competition.
Going forward, the rating might get a lift up from if management continues its strategic efforts to further improve its diversified earnings from mortality and morbidity, investment spreads and fees. Also, a decline in products with equity and interest rate volatility should help in rating upgrades.
However, increased financial leverage may hurt the company’s earnings. Moreover, a material increase in long-dated liabilities with high interest and equity market sensitivity could result in a negative rating action.
Zacks Rank
Currently, Lincoln National carries a Zacks Rank #3 (Hold). Some well-placed insurers are Symetra Financial Corporation SYA, Protective American Equity Investment Life Holding Company AEL and Primerica, Inc. PRI, each wiith a Zacks Rank #2 (Buy).
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