10-Q: Lincoln National Reports Q2 Net Loss Amidst Volatile Markets, Boosted by Strategic Capital Infusion and Operational Gains

Lincoln National Corporation reported a net loss for the first half of 2025, primarily due to market volatility impacting annuity product features and investments, but saw improvements in operating income across most segments and secured a significant capital raise.

Summary

• Lincoln National Corporation reported a net loss of $23 million for the six months ended June 30, 2025, a significant decrease compared to a net income of $2,116 million in the same period of 2024.
• Total revenues for the first half of 2025 decreased to $8,735 million from $9,269 million in the prior year, while total expenses increased to $8,836 million from $6,644 million.
• Operating income improved across several key segments for the six months ended June 30, 2025: Annuities increased to $577 million (from $556 million), Life Insurance improved to $16 million (from a loss of $70 million), and Group Protection rose to $274 million (from $210 million).
• Cash provided by operating activities significantly improved to $741 million for the first half of 2025, compared to cash used of $2,202 million in the same period of 2024.
• The company completed a stock sale transaction on June 5, 2025, issuing 18,759,497 common shares to Bain Capital Prairie, LLC for an aggregate consideration of $825 million.
• Gross unrealized losses on fixed maturity available-for-sale (AFS) securities decreased to $9,979 million as of June 30, 2025, from $11,005 million at December 31, 2024.
• A pre-tax gain of $94 million was recognized on the early extinguishment of debt, resulting from repurchasing $519 million in principal for $421 million.
• Total stockholders' equity increased to $9,548 million as of June 30, 2025, from $8,269 million at December 31, 2024.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the reported net loss for the six-month period and the significant increase in total expenses. While there are positives such as improved operating cash flow, segment-level operating income improvements, and a successful capital raise, the overall profitability decline is a major concern. The volatility in market-sensitive items continues to impact reported earnings.

Positives

• Operating income showed improvement in Annuities ($577 million vs. $556 million), Life Insurance ($16 million vs. -$70 million), and Group Protection ($274 million vs. $210 million) for the six months ended June 30, 2025.
• Cash provided by operating activities significantly improved to $741 million for the six months ended June 30, 2025, compared to cash used of $2,202 million in the prior year period.
• Successfully raised $825 million through a common stock issuance to Bain Capital, enhancing the company's capital position.
• Realized a pre-tax gain of $94 million from the early extinguishment of debt.
• Gross unrealized losses on fixed maturity AFS securities decreased by $1.0 billion for the six months ended June 30, 2025, indicating some recovery in investment values.
• The company's total stockholders' equity increased to $9,548 million, reflecting capital strengthening efforts.
• A significant legal matter, Glover v. Connecticut General Life Insurance Company, received final approval for a provisional settlement of $147.5 million pre-tax cash payment, and Conestoga Trust matter was concluded.
• The tax assessment proceeding, Lincoln National Life Insurance Company v. Township of Radnor, resulted in a judgment in favor of LNL.

Negatives

• Reported a net loss of $23 million for the six months ended June 30, 2025, a substantial decline from a net income of $2,116 million in the comparable prior year period.
• Total revenues decreased to $8,735 million for the six months ended June 30, 2025, from $9,269 million in the prior year.
• Total expenses significantly increased to $8,836 million for the six months ended June 30, 2025, from $6,644 million in the prior year, largely due to market risk benefit (gain) loss and changes in fair value of reinsurance-related embedded derivatives.
• Net annuity product features resulted in a pre-tax loss of $687 million for the six months ended June 30, 2025, compared to a gain of $1,702 million in the prior year, driven by capital market impacts.
• Investment gains (losses) resulted in a pre-tax loss of $183 million for the six months ended June 30, 2025, compared to a loss of $311 million in the prior year, still a negative contribution.
• Allowance for credit losses on fixed maturity AFS securities increased to $85 million as of June 30, 2025, from $46 million at December 31, 2024.
• Allowance for credit losses on mortgage loans on real estate increased to $162 million as of June 30, 2025, from $152 million at December 31, 2024.
• Retirement Plan Services segment experienced a slight decrease in operating income to $71 million for the six months ended June 30, 2025, from $76 million in the prior year, partly due to higher commissions and lower other revenues from a plan termination.
• Net outflows from the oldest blocks of annuities business in Retirement Plan Services continue to negatively affect net flows.

Risks

• Weak general economic and business conditions may affect demand for products, account balances, investment results, guaranteed benefit liabilities, premium levels, and claims experience.
• Adverse global capital and credit market conditions may affect the ability to raise capital, cause impairments on investments and intangible assets, and reduce future earnings or financial condition.
• Inability of subsidiaries to pay sufficient dividends to the holding company could harm the holding company's ability to meet its obligations.
• Legislative, regulatory, or tax changes could affect product costs, demand, required reserves/surplus, business conduct, affiliate reinsurance, and distribution fees.
• Changes in tax law or interpretation could impact tax costs and product sales.
• New and emerging rules/regulations related to privacy, cybersecurity, and artificial intelligence may lead to increased compliance costs, reputation risk, and changes in business practices.
• Increasing scrutiny and evolving expectations regarding environmental, social, and governance matters may adversely affect reputation and investment portfolio.
• Actions by reinsurers to raise rates on in-force business.
• Declines in or sustained low interest rates causing a reduction in investment income, interest margins, and product demand.
• Rapidly increasing or sustained high interest rates negatively affecting profitability, investment portfolio value, capital position, and potentially causing policyholder surrenders and realized investment losses.
• Ineffectiveness of risk management policies and procedures, including hedging strategies, particularly for variable annuity guaranteed benefit riders.
• Deviation in actual experience regarding future policyholder behavior, mortality, morbidity, interest rates, or equity market returns from assumptions used in pricing products and establishing reserves.
• Lowering of debt or insurer financial strength ratings could adversely affect capital raising, liquidity, premium writings, policy retention, and profitability.
• Significant credit, accounting, fraud, corporate governance, or other issues may adversely affect financial asset values and counterparties, leading to losses.
• Interruption or failure of telecommunication, information technology, or other operational systems, including cyberattacks or security breaches.
• Inability to realize anticipated benefits from acquisitions and dispositions, or potential operating difficulties and unforeseen liabilities related to them.
• Inability to realize or sustain benefits from strategic initiatives, or greater than expected investments in them.
• Adequacy and collectability of reinsurance obtained.
• Pandemics, acts of terrorism, war, or other catastrophes may adversely impact policyholder claims liabilities and reinsurance cost/availability.
• Competitive conditions, including pricing pressures, new product offerings, and new competitors, may affect premiums and fees.
• Unknown effect on businesses from evolving market preferences and changing client demographics.
• Unanticipated loss of key management or wholesalers.

Future Outlook

The company expects to deploy the capital raised from the Bain Capital transaction towards strategic priorities including growing spread-based earnings, advancing portfolio management and asset sourcing capabilities, and optimizing its legacy life portfolio. The company also anticipates managing the effects of spreads on near-term income from operations through portfolio management and crediting rate actions, assuming no significant changes in net flows or other factors affecting interest rate spreads. The company will continue to reassess assumptions for market risk benefits as related markets develop.

Management Comments

• Management believes the company has the ability to generate adequate amounts of cash from normal operations to meet cash requirements with a prudent margin of safety without requiring the sale of impaired securities.
• Management believes the assumptions used for fair value measurements of market risk benefits are consistent with those that would be used by a market participant.
• Management does not believe that the ongoing legal cases are likely to have a material impact on the consolidated financial statements, based on currently known information.

Industry Context

The financial results reflect the ongoing impact of capital market volatility, particularly on annuity product features and investment valuations. The company's strategy to grow spread-based earnings and optimize its legacy life portfolio aligns with broader industry trends among insurers seeking to enhance profitability and manage interest rate risk in a dynamic economic environment. The capital raise and debt management actions indicate a proactive approach to strengthening the balance sheet amidst market uncertainties.

Comparison to Industry Standards

• NA

Corporate Governance

Legal Proceedings

• Glover v. Connecticut General Life Insurance Company and The Lincoln National Life Insurance Company: Court granted final approval of the $147.5 million pre-tax provisional settlement on June 16, 2025, and dismissed the case on June 18, 2025. This settlement encompasses policies in Iwanski, TVPX ARS INC., and Vida cases. The settlement is subject to appeal, with plaintiffs in Iwanski, TVPX ARS INC., and Vida cases appealing to the U.S. Court of Appeals for the Second Circuit on July 16, 2025.
• Conestoga Trust, et al, v. Lincoln National Corp., et al.: The company entered into a full and final settlement agreement on April 2, 2025, concluding this matter.
• Donald C. Meade v. Lincoln National Corporation, Ellen Cooper, Dennis Glass, and Randal Freitag: The court granted defendants' motion to dismiss the amended complaint without prejudice on July 24, 2025. Plaintiff has 14 days to file a second amended complaint. This is a putative class action alleging materially false/misleading statements regarding Guaranteed Universal Life policies and lapse rates.
• Lincoln National Life Insurance Company v. Township of Radnor: The court entered judgment in favor of LNL on July 16, 2025, regarding a tax assessment proceeding for additional business privilege tax.
• Angus v. The Lincoln National Life Insurance Company: An ongoing putative class action alleging breach of contract due to excessive non-guaranteed cost of insurance charges. The company is vigorously defending this matter.
• EFG Bank AG, Cayman Branch, et al. v. The Lincoln National Life Insurance Company, Brighton Trustees, LLC, et al. v. The Lincoln National Life Insurance Company, Ryan K. Crayne v. The Lincoln National Life Insurance Company, and Wells Fargo Bank, N.A. v. The Lincoln National Life Insurance Company: Consolidated civil actions alleging breach of contract due to increased non-guaranteed cost of insurance rates starting in 2016/2017. The company is vigorously defending these matters.
• Henry Morgan et al. v. Lincoln National Corporation d/b/a Lincoln Financial Group, et al.: A putative class action alleging misleading and deceptive insurance products (Lincoln OptiBlend) with investment attributes. Plaintiffs seek damages for missed investment returns and mitigation damages. Motions to dismiss are pending. The company is vigorously defending this matter.
• In Re Lincoln National Corporation Stockholder Derivative Litigation (Hollin and Wiersum cases): Consolidated derivative actions alleging breaches of fiduciary duties and violations of federal securities laws due to allegedly false/misleading statements in SEC filings, particularly concerning Guaranteed Universal Life policies and lapse rates. Proceedings are stayed pending resolution of the Meade matter. The individual defendants are vigorously defending these matters.
• In Re Lincoln National Corporation Shareholder Derivative Litigation (Anthony Morgan and Harry Rosenthal cases): Consolidated derivative actions alleging breaches of fiduciary duties for failing to comply with federal securities laws and issuing allegedly false/misleading statements, including overstating goodwill and outdated policy lapse assumptions. Proceedings are stayed pending resolution of the Meade matter. The individual defendants are vigorously defending this matter.
• Kelly Grink v. Virtua Health and Lincoln National Corporation et al.: A putative class action alleging breach of fiduciary duty by Virtua Health and prohibited transactions by Lincoln defendants related to a fixed annuity option in defined contribution plans. The Lincoln defendants filed a motion to dismiss. The company is vigorously defending this matter.

Stakeholder Impact

• Shareholders: Experienced a net loss for the six-month period, but saw an increase in total stockholders' equity due to a significant capital raise. The stock repurchase program remains authorized but no shares were repurchased. Legal proceedings, particularly class actions, pose potential financial liabilities and reputational risks.
• Employees: The Severance Plan for Officers was amended and restated, impacting severance benefits for eligible officers. Severance expense related to workforce realignment initiatives was incurred.
• Customers (Policyholders): The company's ability to meet future obligations is supported by its investment portfolio and capital position. Changes in policyholder account balances and market risk benefits directly impact customers. Legal proceedings related to cost of insurance rates and product features could affect policyholder benefits or charges.
• Creditors: The company successfully extinguished debt early, reducing future interest obligations. The issuance of new senior notes and facility agreements impacts the debt structure. Financial strength and credit ratings are crucial for relationships with creditors, and potential downgrades could trigger derivative contract terminations or affect repurchase agreements.
• Regulatory Bodies: The company is subject to ongoing inquiries, examinations, investigations, and audits related to compliance with insurance, securities, and tax laws. Legal proceedings also involve regulatory matters.

Next Steps

• The company expects to deploy the $825 million capital from the Bain Capital transaction towards strategic priorities, including growing spread-based earnings, advancing portfolio management efforts, and optimizing its legacy life portfolio.
• The company will continue to manage the effects of spreads on near-term income from operations through portfolio management and crediting rate actions.
• The company will continue to reassess assumptions for market risk benefits as related markets develop.
• Plaintiff in the Donald C. Meade v. Lincoln National Corporation case has 14 days from July 24, 2025, to file a second amended complaint after the court granted the defendants' motion to dismiss without prejudice.
• The provisional settlement in the Glover class action and related cases is subject to the outcome of the appeal filed on July 16, 2025, by plaintiffs in the Iwanski, TVPX ARS INC., and Vida cases.

Key Dates

Recommendation

The company reported a significant net loss for the first half of 2025, primarily driven by volatile market-sensitive items like annuity product features and investment gains/losses. This is a major concern for investors. However, there are offsetting positives: a substantial improvement in cash flow from operating activities, a successful $825 million capital raise from Bain Capital, and operational income improvements in core segments (Annuities, Life Insurance, Group Protection). The company also proactively managed its debt by extinguishing some early. While the net loss indicates underlying challenges, the strategic capital actions and operational improvements suggest management is taking steps to stabilize the business. Given the mixed financial performance and ongoing legal uncertainties, a 'hold' recommendation is appropriate. Investors should monitor the company's ability to sustain operational improvements, effectively deploy the new capital, and manage market volatility and legal risks to return to profitability.

Keywords

Lincoln National Corporation, LNC, 10-Q, Quarterly Report, Financial Results, Net Loss, Operating Income, Annuities, Life Insurance, Group Protection, Retirement Plan Services, SEC Filing, Insurance, Financial Services, Capital Raise, Bain Capital, Debt Extinguishment, Investment Portfolio, Unrealized Losses, Credit Losses, Legal Proceedings, Market Risk Benefits, Hedging, Shareholder Equity, Cash Flow