On June 22, A.M. Best Co. allotted a debt rating of “a-" to the senior unsecured notes of Lincoln National Corporation (LNC), keeping the outlook stable. In conjunction with assigning ratings, A.M. Best changed Lincoln’s outlook to stable from negative, reiterating the financial strength rating (FSR), issuer credit rating (ICR) and long term debt ratings.
The stable outlook reflected that Lincoln has managed to maintain a solid liquidity position besides improving its operating cash flows and capital, and reducing its investment risk and reliance on short-term funding.
The company has also raised significant capital in the past year, refinanced its bank credit facility and fulfilled the reserves funding requirements. However, Lincoln faces ongoing risks related to variable annuities and exposure to commercial mortgages and unrealized loss positions within certain asset classes.
Yet, A.M. Best believes that Lincoln has the potential to keep more-than-sufficient risk-adjusted capital levels. In addition, the rating agency also expects Lincoln’s financial leverage and interest coverage to be satisfactory, which would improve by year end 2010.
The debt rating was assigned to the $750 million senior notes, which were issued in two parts consisting of $250 million of 4.3% senior notes due 2015 and $500 million of 7% senior notes due 2040.
Besides issuing senior notes on June 14, Lincoln sold $335 million of common stock of about 12.3 million at a purchase price of $27.25 per share, to raise more than $1 billion in an attempt to fund its buyback of the government’s $950 million of preferred shares, which were issued to the US Treasury under its Capital Purchase Program in July 2009.
Accordingly, the proceeds from the sale of shares, $250 million from the notes offering and additional cash resources at the holding company were utilized for the repurchase of preferred shares.
Further, the proceeds from the notes offering of $500 million will be used as part of a long-term financing plan to support reserves for the life insurance policies issued by its insurance subsidiaries.
Other than Lincoln, peer Hartford Financial Services Group Inc. (HIG) has completed its Troubled Asset Relief Program (TARP) repayment. American International Group Inc. (AIG) is the only insurer not to have repaid its TARP funds.
In addition to A.M. Best, Fitch has upgraded the long-term outlook on June 4 and Moody’s Investors Service revised Lincoln’s outlook on May 27.
We believe that the new debt securities, along with the equity offering and repayment of preferred shares are expected to slightly impact the financial leverage and fixed charge coverage of Lincoln. Also, we expect strong liquidity in the holding company in the long run, along with debt maturities over the next 2-3 years to remain at roughly $550 million in aggregate.
In addition, the company’s exit from the federal TARP program would eliminate restrictions on compensation and dividend payments.
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