in the past six months, US life insurer Lincoln National
Corporation’s (LNC) share price came in for renewed punishment
during March, a month in which the US equity market recorded solid
gains. The S&P500 index, for example, gained almost 9 percent
in March.
The first wave of selling of shares in the
US’ 10th-largest life insurer (based on 2007 revenue) followed an
announcement by rating agency Moody’s that it had downgraded LFC’s
senior debt rating to Baa1 from A3. LNC’s share price lost 15
percent on 19 March, the day of the announcement.
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Moody’s explained that the downgrade was
primarily driven by LNC’s reduced financial flexibility, weakened
profitability, expected further investment losses and lower
statutory capitalisation. LNC is under review for a possible
further downgrade.
The market dished out even harsher punishment
following LNC’s announcement that it had withdrawn its application
to participate in the Federal Deposit Corporation’s Temporary
Liquidity Guarantee Program (TLGP).
This triggered a sell-off that left LNC’s
share price down over 38 percent by the end of the 30 March trading
session which also saw by far the highest volume of LFC shares
traded in one day in over five years. Overall, LNC’s share price
lost 22 percent of its value in March.
In a filing with the Securities and Exchange
Commission, LNC stated that did not believe that it would be
eligible for assistance under the TLGP.
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By GlobalDataMore bad news was not what investors wanted to
hear following LNC’s announcement of its 2008 results – a net loss
of $506 million in the fourth quarter and a minimal net profit of
$57 million for the full year. In 2007 LNC reported a net profit of
$1.22 billion.
One element of LNC’s current strategy is to
cut costs with staff, capital and discretionary spending reductions
anticipated to result in total annual savings of about $250 million
by the end of 2009.
LNC has also acted to bolster its capital by
way of a reinsurance agreement with Commonwealth Annuity and Life
Insurance (CALI), a wholly-owned unit of investment bank Goldman
Sachs.
Under the agreement CALI will provide 55
percent quota share coinsurance and Lincoln National Life (LNL),
LFC’s largest operating unit, will reinsure about $1.5 billion in
estimated reserves to CALI of a closed block of life policies.
Including release of capital required to
support the block of business, LNC estimates the transaction will
provide about $240 million in statutory capital relief, resulting
in a risk-based capital ratio benefit of about 20 percentage points
for LNL. The transaction is estimated to reduce LNC’s annual net
income by about $20 million.
On steps such as cost reductions and the
reinsurance agreement LNC’s president and CEO Dennis Glass
commented: “We have additional securitisation and reinsurance
options and are also very fortunate to have a number of valuable
assets that could be monetised to raise additional capital should
the need arise.”
April brought some relief for LNC’s investors
with the announcement that it had paid a $500 million debt maturity
in full, on schedule on 6 April. The repayment was made with
internal cash resources with no external financing from private or
federal sources.
LNC has a further $375 million of commercial
paper outstanding under the Federal Reserve Board’s Commercial
Paper Funding Facility.
This paper matures in May and will be repaid
with internal cash and issuance of commercial paper without
government guarantees, noted LNC.
Should problems be experienced in issuing
commercial paper LNC has a $1 billion line of credit to fall back
on, added the insurer.
Despite reassuring comment from LNC, investors
are clearly jittery as indicated by LNC’s longest-dated bond, a 7
percent coupon issue maturing in May 2066 currently trading at a
yield to maturity of over 33 percent.
