Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—E.D. Pa.: Shareholders failed to show Lincoln National’s statements about insurance lapse rates were misleading, (Jul 25, 2025)

By Rebecca E. Hoffman, J.D.

The fact that an industry study caused Prudential to increase its reserves does not warrant an inference that the Lincoln should also have acted on the basis of the study.

An insurance company that suffered a $2.6 billion net loss in Q3 of 2022 halted the ensuing shareholder class action in federal district court, overcoming claims of securities fraud based on allegedly misleading statements about insurance policy lapse rates (Meade v. Lincoln National Corp., No. 2:24-cv-01704-JFM (E.D. Pa. July 24, 2025)).

Insurance companies increase reserves if they predict lower lapse rates, since this means they must pay out on more policies. During the relevant period, lead plaintiff Local 295 IBT Employer Group Pension Trust Fund alleged that based on industry information, Lincoln’s principals were reckless in making statements indicating that lapse rates, which had lowered as a result of the Covid-19 pandemic, were coming back up. The court disagreed and granted Lincoln’s motion to dismiss, with leave to amend.

Lapse and interest rates. The court explained that “guaranteed universal life insurance policies” promise a death benefit, so long as premiums are paid, but if the policyholder lapses, there is no payout, and therefore “[t]he higher the lapse rate, the greater the insurer’s financial gain.” If lapse rates drop, the company will have higher reserve obligations. Lincoln also has “no-lapse” policies, and when interest rates are high, they earn more from investing the premiums. Life insurance companies, therefore, keep their eye on interest rates and lapse rates to determine reserve requirements. They conduct “assumption reviews” to determine whether they should increase reserves.

Lincoln’s executives made several allegedly misleading statements between December 2021 and November 2022, such as: “‘[p]eople are concerned that people will pay more premium for longer than what the pricing assumed. We don’t think so, but we’ll have to see how that plays out over time,’” and “‘we’ve sort of come out of the negative situation and we’ve built up some level of sufficiency … I feel good about the sufficiency.” The plaintiff alleged that the company had information about anticipated lower lapse rates but kept it from shareholders.

Prudential increased its reserves in August 2022 after its assumption review, at least in part based on an industry study. Some of Lincoln’s alleged misleading statements referenced the study. According to Local 295, Lincoln had a duty to disclose the study and the fact that its assumptions had become inadequate as a result. In November 2022, Lincoln “took a charge,” increasing its reserves by over $2 billion in response to lapse rates. The shareholders brought this action against Lincoln and three executives, and the defendants moved to dismiss.

Misleading? Local 295 attempted to show that Lincoln had information showing that lapse rates were trending downward for older policyholders, and fraudulently “downplayed the significance of the trend and misrepresented the strength of its reserves and capital position to investors.” But the court found that the plaintiff failed to show that the information Lincoln possessed demanded action.

The plaintiff does not know when Lincoln possessed the lapse rate information and does not have the data. Therefore, the court said, the plaintiff failed to plead with particularity why the statements are misleading. If it did not have the study at the time of the statements, it cannot be liable for statements contradicting it, the court reasoned. Furthermore, the plaintiff failed to convince the court that the data, if known at the time, would have compelled the company to act.

Scienter. The plaintiff also failed to show scienter with the requisite particularity, by putting forth an inference at least as compelling as any opposing inference. It is more likely that Lincoln did not have the information at the time of the statements than that they recklessly disregarded it. Prudential’s actions also do not help the plaintiff, because the study was only one factor contributing to Prudential’s decision. “And even if we assumed that the industry study was dire and dispositive for Prudential,” the court added, “we do not know why it would necessarily be dire and dispositive for Lincoln too,” especially since other competitors took no action.

“Taken together, the allegations more plausibly support the inference that Lincoln was still conducting its own assumption review at the time of each alleged statement and did not yet have dispositive information on whether it would take a charge,” the court concluded.

The case is No. 2:24-cv-01704-JFM.

Judge: Murphy, J.

Attorneys: Lee Albert (Glancy Prongay & Murray LLP) for Donald C. Meade. Timothy D. Katsiff (Faegre Drinker Biddle & Reath LLP) and Alex G. Romain (Jenner & Block LLP) for Lincoln National Corp.

Companies: Lincoln National Corp.

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