Life Industry A Victim Of Its Recapitalization Success

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February 12, 2010 Friday

619 words

Life industry a victim of its recapitalization success

R.J. Lehmann

Life insurers may have overshot in their efforts to shore up shaky capital positions, but it is a better problem than the alternative, Lincoln Financial's CFO says.

U.S. life insurers may have been unprepared for the degree to which their efforts to recapitalize and earn regulatory relief would be successful, with many now left to ponder how to deploy capital in such a low-yield environment, according to Lincoln National Corp. CFO Frederick Crawford.

Although the industry is grateful to no longer be facing the credit losses and liquidity concerns that had dogged it through 2008 and most of 2009, Crawford noted the difficulties companies have faced in devising capital strategies and determining how much would be enough.

"You had a lot of things fall net favorable for the industry and for Lincoln relative to capital, and it was very difficult to estimate," Crawford told a Feb. 11 investor conference.

For Lincoln, 2009 featured a $690 million common stock offering in June, $800 million offered through two separate senior debt offerings and $950 million from the company's decision to participate in the U.S. Treasury Department's Capital Purchase Program. The company also completed the $321 million sale of its U.K. business to Sun Life Financial Inc. and the $428 million sale of Delaware Management Holdings Inc. to Macquarie Group Ltd.

Crawford estimated that the company's insurance subsidiaries ended the year with $6.7 billion in tangible capital and a risk-based capital ratio of 450%. But he noted that "a lot that went on really in the closing weeks of the year," with the company even now still "settling into an understanding of our true capital position and any margin of excess that we have in that capital position."

Among the loose ends the company was able to tie up late in the year was the securitization of life reserves that contributed approximately 25 points to its risk-based capital ratio, Crawford said, adding that there continues to be "a lot of execution risk on life securitizations."

"We need to ready our capital structure for the notion that there could be disruption," Crawford said. "We may need to be more patient. We may need to time it differently. For the same reason we couldn't be sure what the year-end capital would be, we also need to carry that excess as we go forward."

The company also estimates it received about 20 points of risk-based capital benefit from the re-ratings of insurer-held RMBS conducted by Allianz SE unit Pacific Investment Management Co. LLC on behalf of the NAIC, results not made public until early January.

Although the company "had a sense that there was going to be some relief provided" by the re-rating process, Crawford noted that it came only after Lincoln already had suffered $1 billion in capital impact from ratings migration, with about 40% driven by ratings changes on RMBS.

He also noted the NAIC's decision to allow insurers to admit greater levels of deferred tax assets to their statutory base, made in December 2009, was combined with requirements that firms hold more capital against that asset, noting "it is very difficult to plan for some of these externally driven events."

Holding excess capital within the insurance subsidiaries should stave off the ratings downgrade risks that previously plagued the industry and could lead to rounds of ratings upgrades, but insurers now face difficulties related to spread compression, Crawford said, adding that it is "very difficult to find yield right now."

"You may have some challenges right now if the economy throws you a curve ball, but you've got the excess capital to handle that," he said. "Now you concentrate on the holding company, and I've got excess liquidity. I've got a refinancing to do. I need to do some level of deleveraging as part of that. That will naturally take place, and that's philosophically how we're heading at it."

February 18, 2010