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.