A.M. Best Assigns Initial Debt Ratings to Lincoln National Corp.

Business/Insurance Editors

OLDWICK, N.J.--(BUSINESS WIRE)--August 9, 2000

A.M. Best Co. has assigned a rating of "a" to the senior debt issued by Lincoln National Corp., and a rating of "a-" to the capital securities issued by Lincoln National Capital I-IV.

The group's life/health insurance subsidiaries' A (Excellent) financial strength rating is unaffected.

The ratings reflect Lincoln's strong franchise in variable annuities, leading position in life insurance, multiple distribution channels, sound fixed coverage, sophisticated asset-liability management and good asset quality. Lincoln generates most of its earnings from core life and annuity operations. These earnings are sustainable and, on a stand-alone basis, adequately support the company's long-term debt obligations and moderate financial leverage. A.M. Best believes that Lincoln's broad product portfolio, encompassing both variable and fixed products, combined with its strategy of targeting the upper income market segment, will result in enhanced persistency and help to minimize disintermediation risk.

Lincoln's mix of business allows the company to write both variable and fixed annuities depending on interest rate and equity market conditions. In addition, the company has established a leading position in life insurance through its recent acquisitions of CIGNA's individual life and annuities business and Aetna's domestic individual life operations, which provide Lincoln with increased product breadth, distribution capabilities and earnings potential.

Lincoln employs a highly developed asset-liability management program designed to limit its exposure to interest rate volatility. The company's general account investments are rather conservative and well diversified, with about three-fourths of the portfolio comprising bonds. A.M. Best notes that Lincoln has an above-average exposure to high-yield bonds as well as a higher percentage of mortgage-backed/asset-backed securities as a percent of capital relative to its peers, exposing the company to prepayment risk and potential mismatch of assets and liabilities. However, the company is minimizing prepayment risk by investing in assets with a short duration while maintaining a low tolerance for duration mismatch. Over half of Lincoln's assets are allocated to the separate accounts where market risk is borne by the contract-holder.

Lincoln's strengths are somewhat tempered by its below-average profitability, exposure to potential earnings volatility from its variable annuity business, vulnerability to significant annuity withdrawals and heightened financial leverage. Although earnings from Lincoln's life and annuity operations have been growing steadily, results in Lincoln's Reinsurance and UK segments have been volatile over the last several years. The company's profitability has been impacted significantly by special charges and restructuring costs associated with exited businesses and the streamlining of core operations. While the investment management operations are an important part of the company's growth strategy, they make only a small contribution to the bottom line. Nevertheless, A.M. Best believes that Lincoln's future results will improve as management focuses on the core business of annuity and life products, supplemented by its established reinsurance operations and growing investment management business. Based on this strategy, A.M. Best does not anticipate significant extraordinary charges to recur.

Growth in Lincoln's annuity segment continues to suffer from significant withdrawals as the company experienced net annuity outflows for the last two years. Lincoln's fixed annuity account values have been flat over the past four years while the increase in variable annuity account values was due mostly to stock market appreciation. Also, a sizeable percentage of Lincoln's annuity block is out of the surrender charge period; these accounts are subject to disintermediation risk. However, the company has improved its ability to retain these deposits by expanding its product offerings and has enhanced its growth potential by aligning Lincoln's products and distribution capabilities with its target markets. In addition, the company recently gained approval to sell individual annuity products in New York.

As a result of Lincoln's recent acquisitions, its leverage ratio (debt plus preferreds to total capital) is high relative to the company's historical level and remains slightly above that of its peers. Additionally, these transactions created a sizeable amount of intangibles on Lincoln's GAAP balance sheet and negatively impacted Lincoln National Life's 1998 statutory earnings and surplus. Because the CIGNA and Aetna acquisitions were structured as reinsurance transactions, the related statutory ceding commissions were expensed immediately. Consequently, Lincoln must gain prior approval from the Indiana Insurance Commissioner to upstream dividends from the operating company. To date, the company has not encountered any difficulties with regard to obtaining regulatory approval. A.M. Best believes that the future adverse financial impact from Lincoln's past acquisitions will be minimal, as it is unlikely that the company will make a significant acquisition in the near-term.

Lincoln National Corp., headquartered in Philadelphia, PA, is a publicly traded financial services holding company offering a broad range of products and services, including life insurance, annuities, 401(k) plans, life-health reinsurance, mutual funds, institutional investment management, financial planning and estate planning. Operating under the name Lincoln Financial Group, the group reported consolidated assets and shareholders' equity of $104 billion and $4.2 billion, respectively, as of June 30, 2000.

The following ratings are assigned to existing debt securities:

-- Lincoln National Corp.

-- "a" rating on $200 million 7.25% senior unsecured

debentures, due May 2005;

-- "a" rating on $200 million 9.125% senior unsecured

debentures, due October 2024;

-- "a" rating on $100 million 6.50% senior unsecured notes,

due March 2008;

-- "a" rating on $200 million 7.00% senior unsecured notes,

due March 2018;

-- "a" rating on $100 million 7.625% senior unsecured notes,

due July 2002;

-- Lincoln National Capital I - "a-" rating on $215 million 8.75%

Quarterly Income Preferred Securities (QUIPS), backed by

junior subordinated debentures;

-- Lincoln National Capital II - "a-" rating on $100 million

8.35% Trust Originated Preferred Securities (TOPrS), backed by

junior subordinated debentures;

-- Lincoln National Capital III - "a-" rating on $200 million

7.40% Trust Originated Preferred Securities (TOPrS), backed by

junior subordinated debentures;

-- Lincoln National Capital IV - "a-" rating on $230 million in

capital securities (FELINE PRIDES), guaranteed by Lincoln

National Corp.

The following ratings are assigned to debt securities available under a shelf registration:

-- Lincoln National Corp. - "a" rating on senior debt securities;

-- Lincoln National Capital V and VI - "a-" rating on preferred

stock.

The A (Excellent) financial strength rating of the following members of Lincoln Financial Group is unaffected:

-- Lincoln National Life Insurance Co.;

-- Lincoln Life & Annuity Company of N.Y.;

-- First Penn-Pacific Life Insurance Co.;

-- Lincoln National Reassurance Co.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.