AM Best Affirms Credit Ratings of Lincoln National Corporation and Its Subsidiaries

AM Best has affirmed the Financial Strength Rating (FSR) of A (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICRs) of “a+” (Excellent) 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 and annuity insurance subsidiaries of Lincoln National Corporation (LNC) (headquartered in Radnor, PA) and are referred to collectively as Lincoln Financial Insurance Group (Lincoln). The outlook of the FSRs is stable, while the outlook of the Long-Term ICRs is negative.

Concurrently, AM Best has affirmed the FSR of A (Excellent) and the Long-Term ICR of “a” (Excellent) of First Penn-Pacific Life Insurance Company (FPP), a wholly owned non-core subsidiary of LNC that is in run-off. In addition, AM Best has affirmed the Long-Term ICR of “bbb+” (Good) and the Long- and Short-Term Issue Credit Ratings (Long-Term IR; Short-Term IR) of LNC, the ultimate holding company. Please see below for a detailed listing of the Long- and Short-Term IRs. The outlook of these Credit Ratings (ratings) is negative. All companies are domiciled in Fort Wayne, IN, unless otherwise specified.

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

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 and appropriate ERM. The ratings of FPP also reflect implicit support from the greater organization.

The negative outlooks reflect the downward pressure on Lincoln’s balance sheet strength assessment since the group reported a material $2.0 billion GAAP unlocking charge in the third quarter of 2022 after unlocking policyholder lapse assumptions in its universal life with secondary guarantee (ULSG) insurance block of business. In 2023, AM Best expects Lincoln’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), to improve modestly following the reinsurance of approximately $28 billion of permanent life and fixed annuity reserves to a third-party reinsurer in November and other management actions taken during the year.

The ceded business represents a significant portion of Lincoln’s ULSG business and will reduce Lincoln’s balance sheet risk, although AM Best also notes the capital benefit was offset partially by a negative ceding commission of $375 million. The reinsured block consists of approximately $9 billion of ULSG statutory reserves, or approximately 40% of Lincoln’s total in-force ULSG, nearly $12 billion of MoneyGuard statutory reserves, or approximately 80% of Lincoln’s total in-force MoneyGuard, and nearly $8 billion of fixed annuity statutory reserves, or approximately 40% of Lincoln’s total in-force fixed annuities. To ensure a consistent experience for policyowners, Lincoln will continue to service and administer the reinsured policies. AM Best notes that MoneyGuard, the company’s hybrid universal life and long-term care product, continues to be the market leader in sales.

Additionally, management actions taken over the past year include suspending buybacks, maintaining stock dividends at existing levels, shifting the mix of sales to reduce capital strain, and enhancing the group’s hedging program to protect statutory capital. LNC also maintains balance sheet liquidity at the holding company in excess of its $450 million target, with additional financial flexibility available via a contingent capital facility that is undrawn. Management continues to evaluate and implement other strategies to rebuild its RBC ratio to over 400% (company action level) in the near term, and AM Best will continue to closely monitor Lincoln’s ability to execute on its strategic initiatives.

Offsetting factors include Lincoln’s balance sheet maintaining elevated exposure to equity market performance and interest rate sensitivity primarily due to a material variable annuity (VA) block with living benefits. However, Lincoln’s allocation to VAs with living benefits has trended consistently downward and now accounts for less than half of the VA block of business. AM Best’s view on the company’s overall balance sheet strength also is tempered somewhat due to its use of captive and other affiliate reinsurance for its term life, permanent life, and VA reserves, and risk-adjusted capitalization also has been constrained historically by dividend payments from the insurance companies to LNC to fund shareholder dividends and share buybacks. A decline in balance sheet strength metrics including BCAR and financial leverage could result in a negative rating action.

The following Long-Term IRs have been affirmed with negative outlooks:

Lincoln National Corporation—

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

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

-- “bbb+��� (Good) on $500 million 3.8% senior unsecured notes, due 2028

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

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

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

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

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

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

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

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

-- “bbb” (Good) on $562 million LIBOR + 236 basis points (bps) subordinated notes, due 2066

-- “bbb” (Good) on $433 million LIBOR + 204 bps subordinated notes, due 2067

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

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

-- “bbb-” (Good) on $500 million 9.25% non-cumulative preferred stock

-- “bbb-” (Good) on $500 million 9.00% non-cumulative preferred stock

The following Short-Term IR has been affirmed.

Lincoln National Corporation—

--AMB-2 (Satisfactory) on commercial paper

The following indicative Long-Term IRs on securities available under a universal shelf registration have been affirmed with negative outlooks:

Lincoln National Corporation—

-- “bbb+” (Good) on senior unsecured notes

-- “bbb” (Good) on subordinated notes

-- “bbb-” (Good) on junior subordinated notes

-- “bbb-” (Good) on preferred stock

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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