What happened

Most of the market was down in a dreary month of December, but Lincoln National (LNC 2.10%) got hit harder than most. The insurer was down 21.1% in December, according to S&P Global Market Intelligence. The stock is down about 56% over the past one-year period, as of Jan. 4.

Overall, the major indexes were down in December, with the S&P 500 down 5.9%, the Dow Jones Industrial Average off 4.2%, and the Nasdaq Composite dropping 8.7% for the month.

So what

Lincoln National suffered from a couple of key analyst downgrades in December. Both Jefferies and Keefe, Bruyette & Woods lowered their price targets for Lincoln National, with Jefferies also downgrading the stock from hold to underperform.

Suneet Kamath, an analyst with Jefferies, lowered the price target from $40 to $25. Kamath estimates Lincoln's free cash flow at $200 million in 2023 and $400 million to $500 million in 2024. The analyst said this is well below the $900 million level that it had in the prior year. This significant drop in free cash flow drop "leaves little margin for error," Kamath wrote in a research note, reported The Fly.

Lincoln National had a brutal third-quarter earnings report, after which the stock price dropped about 30%. The firm posted a $2.6 billion net loss in the quarter, with a big chunk of it, about $2 billion, coming from an annual review of deferred acquisition costs (DAC) relating to updated guaranteed universal life insurance lapse assumptions.

As a result, CEO Ellen Cooper revealed at the Goldman Sachs U.S. Financial Services Conference in early December that the company was suspending its planned stock buyback program for 2023 to recover its losses. Kamath, the Jefferies analyst, does not expect Lincoln National to resume its share repurchase plan until at least 2025.

Now what

Last year proved to be a good one for the insurance industry, with rising interest rates generally providing a boost for life insurers. While rates will remain elevated in 2023, the industry could be impacted by economic headwinds from a slowing economy.

Lincoln will face additional challenges as it works to get its balance sheet back in order and recover from the $550 million capital impact from the third-quarter loss, which equates to a 22-point decline in the risk-based capital ratio.

Cooper did say the company intends to maintain its dividend. It currently pays a $0.45 quarterly dividend at a yield of 5.8%. It has increased its dividend for 12 straight years, but that streak could be challenged this year. The stock is extremely cheap, with a price-to-earnings ratio of 3.4, but that's not enough to make this stock a buy right now.