OLDWICK, N.J.--(BUSINESS WIRE)-- A.M. Best Co. has assigned a debt rating of "a-" to Lincoln National Corporation's (Lincoln) (Philadelphia, PA) (NYSE: LNC) recent issuance of $500 million 8.75% 10-year senior unsecured notes. The outlook for the rating is negative. The existing financial strength, issuer credit and debt ratings of Lincoln and its life/health insurance subsidiaries are unchanged.

The issuance of these notes is part of Lincoln's recent capital raising initiative, which included a $600 million common share offering as well as the company's intention to issue approximately $950 million of preferred stock pursuant to the U.S. Treasury's Capital Purchase Program (CPP). A.M. Best expects about $1 billion of the debt and equity proceeds to be downstreamed to Lincoln's life/health insurance subsidiaries, with the remainder to be retained at the holding company for financial flexibility. Additionally, in the near term, Lincoln plans to pay down a portion of its outstanding commercial paper and will retire $250 million in floating-rate notes due in March 2010.

While capital has been significantly augmented by these actions, A.M. Best notes that there exists the potential for further capital erosion in the near to medium term. Consistent with many of its peers, Lincoln's investment portfolio is experiencing credit migration, and A.M. Best believes defaults will accelerate within prime, subprime and Alt-A residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), commercial mortgages and high yield bonds, which are likely to result in considerable credit losses. Additionally, the impact of the equity markets on fees and assets under management as well as the recently announced sale of Lincoln's U.K. business (albeit shifting capital to its core U.S. operations) will result in diminished operating earnings for the enterprise in the near term.


Financial leverage at roughly 25% (incorporating equity credit for hybrids) remains adequate for the current rating, though interest coverage is negligible given the recent deterioration in the group's operating performance. Moreover, A.M. Best believes that potential limits on compensation in connection with Lincoln's participation in CPP poses some risk to retaining key management personnel and heightened regulatory oversight on future corporate strategic initiatives.

Going forward, A.M. Best will consider revising the outlook on Lincoln's ratings to stable, if the group's capital and earnings normalize, investment defaults remain sufficiently cushioned by the capital raise and key performance indicators (capital, earnings, revenue, fund flows) exhibit positive trends.

For Best's Credit Ratings, an overview of the rating process and rating methodologies, please visit www.ambest.com/ratings.

The principal methodologies used in determining these ratings, including any additional methodologies and factors that may have been considered, can be found at www.ambest.com/ratings/methodology.

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.



A.M. Best Co.

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Source: A.M. Best Co.