10-Q: Lincoln National Corporation Reports Mixed Q3 Results Amidst Reinsurance and Market Volatility

Lincoln National Corporation's Q3 2024 results show a net loss, influenced by market volatility and reinsurance impacts, despite growth in some segments.

Summary

• Lincoln National Corporation reported a net loss of $528 million for the third quarter of 2024, a significant downturn compared to a net income of $853 million in the same period last year.
• The company's operating revenues were $4.111 billion, slightly down from $4.203 billion in Q3 2023.
• For the nine months ended September 30, 2024, the company reported a net income of $1.588 billion, compared to $483 million for the same period in 2023.
• The company experienced a realized loss of $431 million in Q3 2024, compared to a loss of $453 million in Q3 2023.
• The company's total assets were $396.840 billion as of September 30, 2024, compared to $372.413 billion as of December 31, 2023.
• The company's total liabilities were $387.827 billion as of September 30, 2024, compared to $365.520 billion as of December 31, 2023.
• The company sold its wealth management business on May 6, 2024, for $723 million in cash, recognizing a $545 million pre-tax gain.
• The company's fixed maturity available-for-sale securities had a fair value of $90.682 billion as of September 30, 2024, with an amortized cost of $97.688 billion.
• The company's mortgage loans on real estate had a carrying value of $20.856 billion as of September 30, 2024.

Sentiment

Score: 4

Explanation: The document presents mixed results with a significant net loss in Q3, offset by some positive developments like the sale of the wealth management business. The overall tone is cautious due to market volatility and legal proceedings.

Positives

• The sale of the wealth management business generated a significant pre-tax gain of $545 million and a statutory capital benefit of approximately $650 million.
• The company's net cash provided by financing activities was $3.339 billion for the nine months ended September 30, 2024.
• The company's total assets increased from $372.413 billion as of December 31, 2023, to $396.840 billion as of September 30, 2024.

Negatives

• The company reported a net loss of $528 million for Q3 2024, a significant decrease from the net income of $853 million in Q3 2023.
• The company's net cash used in operating activities was $2.229 billion for the nine months ended September 30, 2024.
• The company experienced a realized loss of $431 million in Q3 2024.
• The company's fixed maturity AFS securities had gross unrealized losses of $8.269 billion as of September 30, 2024.

Risks

• The company is exposed to credit losses in the event of non-performance by counterparties on derivative contracts.
• The company is involved in various pending or threatened legal or regulatory proceedings, including purported class actions.
• The company's financial results are sensitive to changes in interest rates and equity markets.
• The company's ability to generate and maintain sufficient liquidity depends on the profitability of its businesses, general economic conditions and access to the capital markets.

Future Outlook

The company expects an ongoing unfavorable impact to operating results in future quarters of approximately $25 million to $30 million per quarter as a result of the reinsurance transaction with Fortitude Re.

Management Comments

• Management believes they have the ability to generate adequate amounts of cash from normal operations to meet cash requirements without requiring the sale of impaired securities.
• Management believes that the unrealized losses associated with corporate bond, U.S. government bond, state and municipal bond and foreign government bond securities were attributable primarily to rising interest rates and widening credit spreads since purchase.
• Management believes that as of September 30, 2024, and December 31, 2023, they would have recovered the amortized cost of each corporate bond.

Industry Context

The company's performance is influenced by broader industry trends such as interest rate fluctuations, equity market volatility, and regulatory changes affecting the insurance and financial services sectors.

Comparison to Industry Standards

• The company's fixed maturity AFS securities portfolio is primarily investment grade, with 96.8% rated BBB or higher, which is generally consistent with industry standards for insurance companies.
• The company's use of derivatives for hedging purposes is a common practice in the insurance industry to manage market risks.
• The company's reinsurance agreements are a common strategy in the insurance industry to manage risk and capital requirements.
• The company's reliance on third-party pricing services for valuation of certain assets is a standard practice in the financial industry.

Corporate Governance

Legal Proceedings

• The company is involved in various pending or threatened legal or regulatory proceedings, including purported class actions.
• The company is engaged in litigation relating to cost of insurance rates.
• The company is defending itself in a putative class action related to the sale of misleading insurance products.
• The company is defending itself in a putative class action related to alleged breaches of fiduciary duties.
• The company is defending itself in a putative class action related to alleged violations of the federal securities laws.
• The company is defending itself in a tax assessment proceeding.

Stakeholder Impact

• Shareholders may be concerned about the net loss in Q3 2024 and the volatility in the company's financial results.
• Policyholders may be affected by changes in interest rates and market conditions that impact the value of their policies.
• Employees may be affected by the company's cost-cutting measures and strategic initiatives.
• Creditors may be concerned about the company's debt levels and ability to meet its obligations.

Next Steps

• The company will perform its annual quantitative goodwill impairment test as of October 1, 2024.
• The company will continue to monitor and manage its market risk exposures.
• The company will continue to defend itself in ongoing legal proceedings.

Key Dates

Keywords

financial results, reinsurance, annuities, life insurance, investments, market risk, derivatives, capital, liquidity, mortgage loans