What happened

Lincoln National (LNC 3.19%) had a bumpy ride in November, falling 27.7% in the month, according to S&P Global Market Intelligence. It was well off the pace of the Dow Jones Industrial Average, which was up 5.7% in November, and the S&P 500, which gained 5.4% last month.

The insurance and investment firm is down about 45% year to date, trading at just over $37 per share as of Dec. 5.

So what

Lincoln National's stock price crashed on Nov. 3, the day it released its third-quarter earnings. The disastrous earnings report precipitated a decline from about $52 per share on Nov. 2 to around just over $34 per share by market close on Nov. 3. During the trading day on Nov. 3, the stock was down as much as 32%.  

Lincoln National badly missed earnings estimates with a net loss of $2.6 billion, or -$15.17 per diluted share, compared to a net income of $318 million, or $1.68 per diluted share, in the third quarter of 2021.

The adjusted loss from operations was $1.7 billion, or -$10.23 per diluted share, which was more than $12 per share lower than the consensus $1.97 EPS predicted by analysts.

Revenue was down about 8.4% to $4.8 billion year over year, but the major culprit for the EPS drop was "unfavorable notable items" totaling $2 billion, or $11.62 per share. The $2 billion in charges stemmed from the company's annual review of deferred acquisition costs and reserve assumptions, relating primarily to updated guaranteed universal life insurance lapse assumptions. This will result in an estimated fourth-quarter statutory capital impact of $550 million, equaling a 22-point decline in the risk-based capital ratio.

"The significant charge we recorded during the third quarter and the statutory capital impact to be booked at the end of 2022 resulted from our annual assumption review primarily due to policyholder lapsation behavior in our guaranteed universal life insurance block and will contribute to a decline in our RBC ratio," said Ellen Cooper, president and CEO of Lincoln Financial Group. "We are confident we have ample capital to effectively operate the business as we replenish statutory capital back to our targeted level."

Separately, Lincoln incurred a $634 million goodwill impairment to the life insurance business.

Now what

The bad earnings report prompted several investment banks to downgrade Lincoln, including Bank of America (BAC 1.35%). Analyst Joshua Shanker downgraded it to neutral with a price target of $40, down from $78.

However, some analysts were recommending the beaten-down stock. Alex Scott with Goldman Sachs (GS 0.66%) upgraded it to a buy and set a price target of $46, saying it should be able to rebuild its capital base faster than investors may expect with its "relatively strong" underlying capital generation.

While this was a massive earnings miss, the market may have overreacted given the one-off nature of the charges. However, the charges are expected to result in a drag on run rate earnings. The stock is cheap, but probably not cheap enough to warrant a buy right now.