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FOR IMMEDIATE RELEASE
OLDWICK, N.J. - APRIL 03, 2006 12:00 AM (EDT)
A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) of the life insurance subsidiaries of Lincoln National Corporation (Lincoln) [NYSE: LNC] (Philadelphia, PA). A.M. Best has also removed from under review and upgraded the various issuer credit ratings (ICR) and securities ratings associated with Lincoln. Additionally, A.M. Best has assigned indicative debt ratings to Lincoln's recently filed shelf registration as follows; "a" on senior debt, "a-" on subordinated debt, "bbb+" on junior subordinated debt and "bbb" on preferred stock. Concurrently, A.M. Best has removed from under review and downgraded the FSR to A+ (Superior) from A++ (Superior) and the ICRs to "aa" from "aa+" of Jefferson-Pilot Corporation's (Jefferson-Pilot) [NYSE: JP] (Greensboro, NC) life/health subsidiaries. The ratings on existing securities issued by Jefferson-Pilot have also have been removed from under review and downgraded reflecting convergence of holding company ICRs at the "a" level. These rating actions follow today's announcement of the completion of the merger of Jefferson-Pilot with and into an acquisition subsidiary of Lincoln. All ratings have a stable outlook. (See link below for a detailed list of ratings.)
Lincoln's shelf registration has an undesignated amount of securities that can be issued in accordance with recently adopted Securities and Exchange Commission rules for seasoned issuers. Under the terms of the shelf, Lincoln may issue an indeterminate number of senior debt securities, subordinated debt securities, preferred stock, depositary shares, common stock, warrants, stock purchase contracts, stock purchase units and trust preferred securities through Lincoln National Capital VII, VIII and IX.
Financing for the transaction, valued at roughly $7.3 billion, will be sourced through a combination of senior unsecured notes, capital securities and the issuance of $5.5 billion Lincoln common stock and $1.8 billion cash to Jefferson-Pilot shareholders. Pro forma adjusted financial leverage is expected to be roughly 24%, incorporating significant equity credit for capital securities anticipated to be issued under the aforementioned shelf. These securities are expected to have significant equity-like features and have been assigned an indicative rating of "bbb+", which reflects their subordination within the capital structure as subordinate to outstanding trust preferred securities but senior to preferred stock. Pro forma interest coverage and cash coverage is expected to be sufficient for the current ratings in the range of 8-9 times and 4-6 times, respectively.
A.M. Best notes that the merger adds scale to Lincoln's life business, particularly in fixed and variable universal life, enhances its earnings diversification, reduces its exposure to equity market volatility and strengthens its overall competitive market position. From a risk management perspective, A.M. Best anticipates a reduction in the overall enterprise risk for the combined entity, given mitigating interest rate, equity market and asset risks as well as the ability to leverage each entity's sophisticated risk management practices. Prospectively, A.M. Best expects the group's GAAP and statutory ROEs to remain in the mid-teens and that cash flows to the holding company will be strengthened by the addition of Jefferson-Pilot's regulated and non-regulated businesses. Moreover, it is anticipated that the combined organization's financial leverage will not increase materially and that strong levels of absolute and risk-adjusted capitalization will be maintained.
As with most mergers and acquisitions, there exists integration risk with respect to the realization of the potential revenue and expense synergies versus those assumed at pricing and administrative challenges from both a systems and personnel perspective. The combined organization will also face several issues related to Regulation XXX and AXXX funding solutions, specifically capital financing risk, LOC rollover risk and possible changes in regulatory reserving methodology. Additionally, the company faces spread compression from its material block of annuities, which is at or near minimum guaranteed rates as well as increasing regulatory uncertainty regarding sales suitability practices associated with indexed annuity products of which Jefferson-Pilot is a top 10 writer. Lincoln's earnings profile still remains subject to equity market volatility from its sizable variable annuity business, although significantly reduced due to the addition of Jefferson-Pilot. A.M. Best notes that the proforma balance sheet reflects a modestly elevated level of intangibles relative to its consolidated GAAP capital base. Finally, the combined organization may be somewhat challenged to retain existing distribution relationships and capitalize on revenue enhancement opportunities created by each company's unique product lines.
For a complete list of Lincoln National Corporation's and Jefferson-Pilot Corporation's FSRs, ICRs and debt ratings, visit Jefferson-Pilot.
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