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Rating Action:

Moody's reviews Lincoln National (A3 senior) for possible downgrade

10 Feb 2009

Approximately $4.8 billion of securities affected.

New York, February 10, 2009 -- Moody's Investors Service has placed Lincoln National Corp. (LNC - NYSE: LNC -- senior debt at A3) and the Aa3 insurance financial strength ratings of its key insurance subsidiaries under review for possible downgrade.

The review follows the company's fourth quarter earnings release in which it announced a $506 million net loss, including realized capital losses on investments of $283 million, compared to the year ago quarter's net income of $113 million. For the full year, LNC reported net income of $57 million, down 95% from the $1.2 billion of net income in 2007, primarily because of realized capital losses and goodwill/intangible write-downs.

Moody's said the review for downgrade will focus on the following: 1) the extent to which the company's earnings capacity and capitalization are hurt by additional investment losses and the impact of lower equity markets on its significant variable annuity and asset management businesses, and 2) the company's liquidity profile and financial flexibility in light of the constrained earnings and an upcoming debt maturity at the holding company.

Moody's said it expects higher levels of economic losses on LNC's real-estate and structured securities (e.g. RMBS, CMBS, CDOs, commercial mortgage loans) given the rating agency's revised losses for these asset classes, as well as rising corporate default rates as a result of the recession. Although many of these investments have a large unrealized loss content and are largely illiquid in today's market, the company's stable liability profile should limit the risk that it will need to sell these assets at a loss.

LNC's underlying earnings capacity remains good. However, the company's substantial variable annuities with guarantees and its pension and asset management businesses are highly sensitive to equity market risk and to the weakening economy.

Moody's Senior Credit Officer Ann Perry adds: "The company's run-rate of earnings will be hurt for these businesses and there could be additional impairments of goodwill and intangibles, as we saw in the fourth quarter."

Moody's noted positively that LNC's regulatory risk-based capital is less sensitive to further declines in the equity markets compared to other large variable annuity writers.

Finally, Moody's warned that LNC maintains relatively little liquidity at its holding company. With an upcoming debt maturity of $500 million in April and dividend capacity from the operating company constrained, the holding company's primary liquidity sources are its committed bank credit facilities (which have no material adverse change (MAC) language), and access to borrowing funds from its operating companies. Other potential sources of meaningful liquidity such as the sale of businesses or assets have relatively high execution risk in this environment. While LNC has applied for TARP capital, there is still uncertainty regarding the outcome and timing of its application.

"The company's recent reduction in its shareholder dividends will lessen the cash burden at the holding company," Moody's Perry said, "but LNC's debt burden is relatively high." Its earnings and cash flow coverage metrics will weaken as profitability and capitalization continue to come under pressure in this stressful environment, she concluded

The following ratings were placed on review for downgrade:

Lincoln National Corporation -- senior unsecured debt at A3, junior subordinate debt at Baa2, senior unsecured shelf at (P)A3, junior subordinated shelf at (P)Baa1, and preferred stock shelf at (P)Baa2;

Lincoln National Life Insurance Company -- insurance financial strength rating at Aa3;

First Penn-Pacific Life Insurance Company -- insurance financial strength rating at A1;

Lincoln Life & Annuity Company of NY (formerly JPLA) -- insurance financial strength rating at Aa3;

Lincoln National Capital I, II & VI -- backed preferred stock at Baa1;

Lincoln National Capital VII, VIII, & IX -- preferred shelf at (P)Baa1;

General Repackaging ACES SPC 2006-1, General Repackaging ACES SPC 2007-1 -- funding agreement-backed senior secured debt rating at Aa3.

The following rating was affirmed with a stable outlook:

Lincoln National Corporation -- short-term rating for commercial paper at Prime -2.

Lincoln National, through its businesses in wealth accumulation, retirement income, and wealth protection, provides annuities, life insurance, 401(k) and 403(b) plans, savings plans, mutual funds, managed accounts, institutional investments, and comprehensive financial planning and advisory services. On December 31, 2008, the company reported total consolidated assets of approximately $162 billion and consolidated shareholders' equity of $7.9 billion. Lincoln National is headquartered in Philadelphia, PA.

The last rating action was on December 16, 2008, when the ratings of LNC and its affiliates were affirmed, but the outlook was changed to negative from stable.

The principal methodology used in rating LNC was Moody's Global Rating Methodology for Life Insurers, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.

Moody's insurance financial strength ratings are opinions of the ability of insurance companies to punctually pay senior policyholder claims and obligations.

For more information please visit Moody's website at www.moodys.com/insurance.

New York
Robert Riegel
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Ann G. Perry
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's reviews Lincoln National (A3 senior) for possible downgrade
No Related Data.
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