Tuesday, March 31, 2009

Lincoln National (LNC) Implodes ; Principal Financial (PFG) Cutting Salaries

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It was a quite excellent day to be short insurers yesterday as news from Lincoln National (LNC) sunk the sector. We have been focused on Prudential (PRU) which we went short in the teeth of Kool Aid, suffering for a day or two [Mar 25: Short Prudential] but said it was really a coin toss over Hartford Financial (HIG) ... MetLife (MET) was not in very good shape either. (we did cover some Prudential short yesterday) The hilarity of last week was watching Prudential continue to rise despite downgrades in its debt... but when you have shorts on the run, stocks can go up, up, up. Principal Financial (PFG) also was downgraded last week, and late Friday took the steps of cutting pay (oooh, salary deflation) across the board to save costs. I always love those late Friday night announcements when public firms pull these stunts...
  • Principal Financial Group will temporarily reduce salaries of employees, the management and the board by 2%-10% as part of the company's cost-saving effort, according to a company statement sent to MarketWatch on Monday. The company will also scale back personal time off, not fill open positions and suspend some corporate benefits. "These actions are designed to help offset decreased revenues caused by the markets' unprecedented impact on our asset based businesses," Principal Financial said.
  • The pay cuts come two days after Moody's Investors Service cut the company's ratings saying Principal likely will face greater pressure on liquidity and earnings as the economic downturn affects its business.
This is going to be one very interesting sector since the regulators are at the state level, and I believe we have a potential federal level bailout coming (yes dear reader, even MORE of your tax money has a collision course with this sector) Right now the federal government is stalling on this end [Mar 12: WSJ - The Next Big Bailout Choice - Insurers] but if you can imagine the panic nationwide if people suppose the insurance companies don't have the funds necessary to make payments. So while its not within the bounds of federal government to step in, if capital markets don't boom and right quick... they will overstep their bounds (again) since its a "national emergency". But not yet.

This quandry is in fact what caused Lincoln to implode yesterday; it is getting to the point of humor when we hear folks say things are turning back to normal because of an economic report here, or a Citigroup CEO memo there... yet the minute companies fall outside the perceived wingpsan of Nanny State - their fortunes crumble. That sounds like a return to normal to me...
  • Shares of Lincoln National Corp (LNC) lost more than one-third of their value on Monday after the large life insurer withdrew an application for funding guarantees from the U.S. government.
  • Late Friday, Lincoln disclosed it no longer believed it would qualify under the provisions of the Temporary Liquidity Guarantee Program (TLGP) and was voluntarily withdrawing from consideration, according to a filing with the U.S. Securities and Exchange Commission. The TLGP is overseen by the Federal Deposit Insurance Corp (FDIC).
  • Lincoln and a dozen other life insurers applied months ago for government aid, hoping to get help stabilizing balance sheets badly hurt by losses on investments in the last two quarters.
  • "This tension is manageable at present, but could become more challenging if equity and credit markets weaken substantially," Gallagher wrote in a research note.
  • Earlier this month, Moody's Investors Services downgraded Lincoln National, citing concerns over little liquidity at its holding company and current conditions that have made it difficult for the company to issue debt to refinance $500 million in debt that matures in April.
And then after we are done with bailing out the insurers sometime in the next 12 months; we can move on to bailing out the pension benefit guarantee fund. After we're done with that we can begin thinking about the gaping holes in next year's state budgets. Then we can find a home for your tax dollars bailing out.... wait, what am I saying here. The economy will be recovering broadly in "6 months".

Never mind.

Short Prudential in fund and personal account


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