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Author: hmartin

Lincoln National Update Following $2.6 Billion Quarterly Loss

On November 2, 2022, Lincoln National Corporation (LNC) announced a $2.6 billion GAAP1 net loss for
the third quarter 2022, which followed its annual review of reserve assumptions and deferred acquisition
costs (DAC). The loss included the following:

U.S. Life Insurers’ Bermuda Reinsurance Exposure

The U.S. Life Insurance Industry has long utilized foreign reinsurance as part of its risk and capital
management strategies. In recent years the use of Bermuda reinsurance in particular has become
increasingly common among life insurers (especially for individual annuities), raising some concerns
among industry participants.

Below Investment Grade Bond Exposure for Life Insurers

Below Investment Grade (BIG) bonds consist of all bonds rated BB+/Ba1 or lower by public rating agencies.
In the statutory financial statement, there are four different “Classes” of BIG bonds (and their S&P ratings):

Florida Domestic Insurer Market Update

It is fitting to be updating this Florida Domestic Insurer market review in 2022, a year which marks the 30th anniversary of Hurricane Andrew. This storm, which made landfall as a category 5 hurricane, wreaked extensive property damage in Homestead and surrounding environs, but more importantly upended the personal and commercial property insurance market in the entire Sunshine State. (Re)insurers realized all at once that their rates were wholly inadequate for the exposure to potential catastrophic wind losses. Carriers began exiting the market en masse, resulting in a coverage crisis.

Mortgage Loan Exposure for Life Insurers

Mortgage loans have long been an important asset class for life insurers. These assets involve the insurer
making a loan directly to a real estate developer or other property owner, rather than an investment in real
estate via less direct methods such as commercial mortgage-backed securities (CMBS), real estate
investment trusts (REITs), joint venture real estate assets, or the debt securities of real estate related firms.

BBB-rated Bond Exposure for Life Insurers

Life insurers significantly increased their holdings of NAIC Class 2 bonds (bonds with BBB/Baa ratings
public rating agencies) in the years since the financial crisis of 2008-2009.

U.S. Life Insurer Exposure to Less Liquid Bonds

Life insurers have long held a mix of assets with various liquidity profiles, from the very liquid to the
nearly illiquid. Investments with the highest liquidity include investment grade bonds (especially
government bonds), securities with a short remaining duration, and cash and cash equivalents.