Lincoln Faces Rising Stress as Its Debt Comes Due

By SCOTT PATTERSON Lincoln National Corp., one of several life insurers struggling amid rough markets, is taking steps to stave off a liquidity crunch. Monday, Lincoln will have to pay down $500 million in debt. The company has said it will pay its obligation in full with internal cash. But it's due to pay off another $375 million in commercial paper debt due in May. Thanks to a string of credit-rating-agency downgrades, Lincoln isn't eligible for the Treasury Department's commercial-paper funding program. Lincoln says it has planned for tough times by shoring up cash through dividend cuts and staff reductions, among other things. "We have readied internal resources to handle near-term debt maturity but also any potential disruption in the commercial-paper market," said Lincoln Chief Financial Officer Fred Crawford. Analysts harbor concerns. "That's cash going out the door," Citigroup analyst Colin Devine said in an interview, referring to the debt payments. He cut his rating on Lincoln to "sell" from "buy" last week. Mr. Devine expects Lincoln to report a loss of $5.17 a share when it releases its first-quarter results next month. That would be the biggest quarter loss in its history. In his report, Mr. Devine walked through scenarios if Lincoln were to fail, an outcome he said was unlikely. "We consider Lincoln's capital and liquidity position to be vulnerable and believe that the company's fate is now essentially in the hands of the direction of equity and credit markets," he wrote. In a liquidity crunch, Lincoln could be pressed to take extreme measures to raise funds, such as issuing more shares -- diluting current shareholders -- or tapping its $1 billion credit line. However, there wouldn't be an immediate risk to policyholders, who generally get paid before creditors and who also are protected thanks both to the cash reserves insurers are required to maintain and to state guaranty funds. For now, state regulators say they aren't on high alert. "We are not concerned at all about the financial stability of Lincoln National Life," said Connie Ridinger, chief financial examiner of the Indiana Department of Insurance, which oversees the company's Lincoln National Life Insurance Co. unit and whose focus is the protection of policyholders. Lincoln's shares have fallen 91% from their all-time high of about $75 reached in May 2007, and are down 63% this year, though they gained 6% on Friday. The cost of protection against default of Lincoln's debt, as seen in prices of derivatives known as credit-default swaps, has soared in recent weeks. That indicates credit investors are worried about the company's ability to pay its debt. The woes mark a big change for one of the nation's largest insurers. Lincoln, founded as a life insurer in 1905, became an industry powerhouse in July 2006, when it purchased Jefferson-Pilot Corp., a Greensboro, N.C., life insurer, for $7.5 billion. Lincoln was the fifth biggest issuer of variable annuities in 2008, with $11.1 billion in sales, according to Limra International, an industry research group. It's also a big player in life insurance, consistently ranking in the top 10 sellers of life insurance policies. But, as it competed with other life insurers in a race to provide more tempting annuity guarantees to consumers, it put itself in a vulnerable position. When the stock market plunged, the gap between what it had promised consumers and the value of the stocks it held widened sharply. The company has also taken a hit in its investment portfolio. At the end of 2008, it held $9.9 billion in residential mortgage-backed securities, 14% of its overall investment portfolio, one of the highest among the large publicly traded insurers, according to CreditSights. Of those bonds, $1.1 billion are alt-A, an risky variety between prime and subprime, according to Citigroup. Most other publicly traded life-insurance companies have been struggling, faced with a slumping economy and a slew of ratings downgrades. Friday, Moody's Investors Service downgraded the debt rating of Genworth Financial Inc. to Baa3, one notch above speculative grade, from Baa1, citing losses in its investment portfolio. A Genworth spokesman declined to comment. If the market stabilizes, Lincoln and other insures' woes may subside. The industry is also waiting to see whether it will be eligible for funds from the government's Troubled Asset Relief Program. In November, Lincoln purchased an Indiana savings and loan to qualify for funds. Write to Scott Patterson at scott.patterson@wsj.com