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Next Stop on the TARP Train: Philadelphia

Posted by Larry Doyle on June 16, 2009 5:57 PM |

A week ago, ten of the larger financial institutions in our country announced they planned on returning billions in TARP funds. At that point, I wrote “Where Will TARP Money Go? Let’s Start in Hartford”:

Recall that Hartford was one of 6 insurance companies that received thrift status by acquiring a controlling stake in a small institution. As such, these firms became eligible for TARP funds. In my opinion, once the TARP dam is broken with one insurance company, the stigma is lessened for others to acquiesce in accepting these funds.

What might be the next stop after Hartford? Perhaps Newark (Prudential Insurance) or Philadelphia (Lincoln Financial). Sense on Cents will monitor where the TARP train moves next.

Well, the next stop on the TARP train is, in fact, Philadelphia as Lincoln Financial announces it will accept TARP funds. Financial Planning reports:

Just days after The Hartford Financial Services Group said it would accept bailout funds, Lincoln National Corp. announced it also will tap the government’s Troubled Asset Relief Program.

Lincoln National said it will accept as much as $950 million in capital as part of the government’s $700 billion program. The insurer previously had received approval to receive up to $2.5 billion from the government. Lincoln said it plans to determine the exact amount of government funds it will receive by the end of June.

The company also announced it will raise $600 million though a common stock offering, and raise $500 million through a senior debt offering.

Additionally, Lincoln said it plans to contribute about $1 billion to its primary insurance subsidiary, The Lincoln National Life Insurance Co. The remaining funds will be held at the holding company for general corporate purposes, including the repayment of short-term debt.

“Lincoln believes that participation in the CPP provides additional capital flexibility,” the insurer said in a statement released on its Web site. “The company expects to repay this financing as soon as practicable, taking into consideration appropriate balance sheet strength and capital markets conditions.”

Lincoln also announced today that it has signed a definitive stock purchase agreement to sell Lincoln National (UK) plc in order to shift capital to core U.S. businesses. SLF of Canada UK Limited will acquire Lincoln UK for an estimated £195 million. The transaction is expected to close on or around Sept. 30, 2009, subject to customary closing conditions.

Some may downplay or overlook Lincoln’s acceptance of a mere $950 million in TARP funds. That said, there is no doubt in my mind that this move by Lincoln – much like the move by Hartford Financial last week – is a clear indication that the insurance ‘dam’ is starting to break. What are the pressures within the insurance industry? Let’s revisit my post from March 12th, “Is My Insurance Insured?”  I wrote:

While the government has already taken an 80% stake in AIG, how do the state insurance commissioners deal with entities like Hartford, Met Life, and others with outsized risks and resulting declining capital cushions? Let’s go visit Uncle Sam!! That’s right, if you thought “bailout nation” was already swamped by banks, automotive companies, and Freddie/Fannie, the fun continues: The Next Big Bailout Decision: Insurers (WSJ).

Fast forward to May 15th when I posted, “Heavy Losses Raining on Insurance, Roll Out the TARP”:

Why do the state insurance commissioners have to go to Washington? What about the reserves at the state level? Well, are you sitting down? Those reserves nationwide total only $8 billion.

Can insurers write enough premiums quickly enough to generate sufficient capital to address the losses? That is the $64 billion question. Actually, it will likely be much larger than that. Why?

As consumers are strapped for liquidity and getting credit lines squeezed – if not totally cut by their banks – they will look to tap the cash value of their insurance at an ever greater rate. If consumers were to triple the rate at which they have tapped these lines, the insurance industry would experience a capital drain of approximately $500 billion. Insurance companies will be forced to raise capital via debt or equity offerings, asset sales, or drawdowns of cash and liquidity reserves. The industry has approximately $450-$500 billion in cash and liquidity reserves.

First stop, Hartford. Now, Philadelphia. Where will the next stop on the TARP train be? Is there truly any doubt that the cash needs within the insurance industry will require this train ride to be anything short of a barnstorming tour?

LD






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