AM Best Downgrades Credit Ratings of Lincoln National Corporation and its Subsidiaries

AM Best has downgraded the Financial Strength Rating (FSR) to A (Excellent) from A+ (Superior) and the Long-Term Issuer Credit Ratings (Long-Term ICR) to “a+” (Excellent) from “aa-” (Superior) of The Lincoln National Life Insurance Company and its wholly owned subsidiary, Lincoln Life & Annuity Company of New York (Syracuse, NY). These companies are the key life/health insurance subsidiaries of Lincoln National Corporation (LNC) (headquartered in Radnor, PA) [NYSE: LNC] and are referred to collectively as Lincoln Financial Group (Lincoln). The outlook of the Long-Term ICR has been revised to negative from stable, while the outlook of the FSR is stable.

Additionally, AM Best has downgraded the Long-Term ICR to “bbb+” (Good) from “a-” (Excellent) of LNC. The outlook of these ratings has been revised to negative from stable.

Lastly, AM Best has downgraded the Long-Term ICR to “a” (Excellent) from “a+” (Excellent) and affirmed the FSR of A (Excellent) of First Penn-Pacific Life Insurance Company (FPP). The outlook of these ratings was revised to negative from stable. (Please see below for a detailed listing of the Long-and Short-Term IRs.)

The ratings of Lincoln reflect its balance sheet strength, which AM Best currently assesses as very strong, as well as its strong operating performance, favorable business profile and appropriate enterprise risk management (ERM).

The ratings downgrade of Lincoln reflects a reduction in its ERM assessment to appropriate from very strong due to the recent volatility in capital, as well as the reactive nature of the company’s capital maintenance initiatives. AM Best believes that the revised ERM assessment is indicative of the company’s elevated risk profile, which requires an enhanced level of risk management capabilities. AM Best notes that Lincoln continues to maintain an extensive risk management framework with a focus on stress testing and operational risks and will be upgrading its hedging program to better protect statutory capital during stressed market environments.

The negative outlook reflects pressure on Lincoln’s balance sheet strength position due to a change in assumptions in the company’s universal life (UL) insurance block of business; this resulted in a significant GAAP unlocking charge in third-quarter 2022 and a goodwill write-down of approximately $634 million related to its variable UL block of business. In addition, risk-adjusted capital, as measured by Best’s Capital Adequacy Ratio (BCAR), has declined due to an expected statutory capital charge of approximately $550 million to be recorded during fourth-quarter 2022 as part of the company’s UL assumption update. In addition, risk-adjusted capital was negatively impacted from equity market volatility over the past year.

AM Best will continue to monitor Lincoln’s ability to execute on its capital management initiatives designed to rebuild its capital position. These initiatives include several opportunities such as a potential block reinsurance transaction, indefinitely pausing its share-buyback program, as well as a preferred equity capital raise. A failure to execute on these initiatives may result in a negative rating action.

Lincoln’s operating performance remains within the strong assessment category and AM Best notes that the unlocking charge also adversely impacted earnings, resulting in a significant third-quarter operating loss. The company has experienced favorable premium growth in recent periods and earnings are expected to benefit from a rising interest rate environment. However, earnings may continue to be pressured by a volatile equity market, which has reduced the level of fee income from assets under management in recent periods. The ratings of FPP reflect its balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, limited business profile, its appropriate ERM and the benefits it receives as a subsidiary of LNC. The downgrade and negative outlook reflect the reduced financial strength of its parent. AM Best notes that FPP’s liability profile primarily consists of term life and current assumption UL policies and believes that FPP will continue to contribute a moderate amount of earnings to Lincoln over the near to medium-term as it continues to operate in run-off.

The following Long-Term IRs have been downgraded with the outlooks revised to negative from stable:

Lincoln National Corporation—

— to “bbb” (Good) from “bbb+” (Good) on $562,034,000 million LIBOR + 236 bps subordinated notes, due 2066

— to “bbb” (Good) from “bbb+” (Good) on $432,743,000 million LIBOR + 204 bps subordinated notes, due 2067

The following Long-Term IRs have been downgraded with the outlooks revised to negative from stable:

Lincoln National Corporation—

— to “bbb+” (Good) from “a-” (Excellent) on $500 million 4.00% senior unsecured notes, due 2023

— to “bbb+” (Good) from “a-” (Excellent) on $300 million 3.35% senior unsecured notes, due 2025

— to “bbb+” (Good) from “a-” (Excellent) on $400 million 3.625% senior unsecured notes, due 2026

— to “bbb+” (Good) from “a-” (Excellent) on $500 million 3.8% senior unsecured notes, due 2028

— to “bbb+” (Good) from “a-” (Excellent) on $500 million 3.05% senior unsecured notes, due 2030

— to “bbb+” (Good) from “a-” (Excellent) on $500 million 3.40% senior unsecured notes, due 2031

— to “bbb+” (Good) from “a-” (Excellent) on $300 million 3.40% senior unsecured notes, due 2032

— to “bbb+” (Good) from “a-” (Excellent) on $500 million 6.15% senior unsecured notes, due 2036

— to “bbb+” (Good) from “a-” (Excellent) on $375 million 6.30% senior unsecured notes, due 2037

— to “bbb+” (Good) from “a-” (Excellent) on $500 million 7.00% senior unsecured notes, due 2040

— to “bbb+” (Good) from “a-” (Excellent) on $450 million 4.35% senior unsecured notes, due 2048

— to “bbb+” (Good) from “a-” (Excellent) on $300 million 4.375% senior unsecured notes, due 2050

— to “bbb-” (Good) from “bbb” (Good) on $800 million LIBOR + 236 bps junior subordinated capital securities, due 2066 ($160 million outstanding)

— to “bbb-” (Good) from “bbb” (Good) on $500 million LIBOR + 204 bps junior subordinated capital securities, due 2067 ($58 million outstanding)

The following Short-Term IR has been downgraded:

Lincoln National Corporation—

— to AMB-2 (Satisfactory) from AMB-1 (Outstanding) on commercial paper

The following indicative Long-Term IRs on securities available under a universal shelf registration have been downgraded with the outlooks revised to negative from stable:

Lincoln National Corporation—

— to “bbb+” (Good) from “a-” (Excellent) on senior unsecured notes

— to “bbb” (Good) from “bbb+” (Good) on subordinated notes

— to “bbb-” (Good) from “bbb” (Good) on preferred stock

— to “bbb-” (Good) from “bbb” (Good) on junior subordinated notes

This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best's Credit Ratings. For information on the proper use of Best’s Credit Ratings, Best’s Performance Assessments, Best’s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best’s Ratings & Assessments.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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