S&P Cuts Rtgs on Lincoln Assurance To BBB; Outlook Neg.

LONDON--(BUSINESS WIRE)--Standard & Poor's CreditWire 10/16/98-- Standard & Poor's today lowered to triple-'B' from single-'A' its counterparty credit and insurer financial strength ratings on Lincoln Assurance Ltd. (LAL), the main operating company of Lincoln National (UK) PLC (LNUK; --/--/'A-1'). At the same time, the commercial paper rating of LNUK is affirmed at 'A-1' as it is guaranteed by U.S. parent, Lincoln National Corp. (LNC; single-'A'/Negative/A-1'). The outlook is negative.

The downgrade reflects Standard & Poor's view that LNUK is no longer strategically important to the parent. In addition, on a stand-alone basis, the company's position has weakened, with capitalization and financial flexibility impacted significantly by the pensions mis-selling review, combined with longer-term strains on profitability. The negative outlook reflects Standard & Poor's belief that the company's market position could be eroded owing to its high-cost distribution base, and recognizes continued strains on capitalization and financial flexibility.

MAJOR RATING FACTORS:

-- LAL is the U.K. life operation of the U.S. insurance group, LNC. However, Standard & Poor's believes the impact of pensions mis-selling at the U.K. and U.S. level, together with pressures in LNC's home market, could weaken its long-term commitment to the U.K. operations. Standard & Poor's also believes LAL consistently will fail to meet earnings and new business targets set by the parent. Consequently, Standard & Poor's does not view LAL as strategically important to LNC and has removed the support this provided to the rating. As a result, the rating is assessed on a stand-alone basis.

-- LAL sells to the mass market, focusing on unit-linked products sold through a direct salesforce. New business growth was impressive in 1997, with new annual premium equivalent sales of UK74 million ($122 million), up 22%. This growth was achieved through strong sales of the company's pension contracts. However, Standard & Poor's feels that LAL's modest market position will be eroded by low cost competitors, with well-respected brands and direct customer access. In addition, LAL's high product charges and poor investment performance are not well suited to market developments -- including the introduction of the Investment Savings Account (ISA) -- and this could be a disadvantage in marketing products on the mass market.

-- LAL continues to demonstrate good underlying profitability, but has failed to make progress in reducing its high expense levels. A new management team in the U.K. and U.S. will continue to take steps to reduce the expense base, but the ability to achieve marked savings in the short term remains uncertain. Although posting a loss for 1997, adjusting for increased reserves for pensions mis-selling, underlying profitability was UK42 million, representing a 0.9% return on assets. However, profitability largely is attributable to very high policy charges. LAL remains a high-cost producer, with expenses representing 3.2% of assets. Standard & Poor's believes profit growth over the long term will be constrained by poor productivity of the salesforce, reduced margins, and unimpressive premium persistency.

-- Standard & Poor's considers capitalization to be aggressive. Coverage of the required minimum margin fell to 1.7 times (x) in 1997 from 1.9x in 1996 (including credit for certain indemnities held in respect of pensions mis-selling) as a result of significant reserve strengthening for pensions mis-selling. The LNC group has provided reinsurance financing to protect the capital base of LAL and is likely to support the company to a limited degree in the future.

-- Financial flexibility remains weak as the bulk of profits are expected to be upstreamed to the holding company to redeem debt, subject to an adequate level of solvency (1.5x) being maintained in the operating company. Standard & Poor's believes it will be harder to obtain parental funding.

OUTLOOK: NEGATIVE

The negative outlook is owed to the following:

-- Continuing need for management time and expense regarding pensions mis-selling;

-- Continuing pressure on capitalization, although solvency will be maintained at 1.5x the required minimum margin;

-- Continuing good profitability in the short term, despite high expense levels and poor persistency; and

-- Declining market share as more efficient competitors continue to grow, Standard & Poor's said.---CreditWire