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State Farm Suspends Sales Of Phoenix Cos. Products

DIANE LEVICK

March 05, 2009

The already struggling Phoenix Cos. sustained a stinging blow Wednesday as State Farm — the company it depends on for a big chunk of business — suspended sales of Phoenix insurance policies and annuities.

"The primary reason is the recent financial strength downgrades by rating agencies," said State Farm spokesman Dick Luedke. He said that the halt of sales was for an indefinite time.

State Farm, the largest single distributor of Phoenix products, accounted for 68 percent, or $430 million, of the Hartford-based company's annuity deposits last year — money invested in annuities by new or existing customers. The Bloomington, Ill.-based insurer was responsible for 27 percent, or $91.6 million, of Phoenix's total new life insurance sales in 2008, measured by premiums.

The Phoenix Companies Inc.'s overall sales were already flagging before the latest blow from State Farm. Life insurance sales plummeted 71 percent in the fourth quarter of 2008, and annuity deposits dropped 37 percent.

Asked about Phoenix's future, spokeswoman Alice Ericson would say only that the company is still "financially solid" and "we have our plans we've put forth to deal with the realities of the economy and where we are right now."

The company has 600 employees in Hartford.

Phoenix, suffering from deflated investments, volatile stock markets, and a sagging economy, had a net loss of $378.3 million for the fourth quarter of 2008 and $726 million for the full year.

Phoenix CEO Dona D. Young acknowledged the company's squeeze last Friday when she told analysts, "Phoenix is at a pivotal point in our history, and management is fully cognizant that times are more difficult than any of us have experienced in our lifetimes."

Andrew Kligerman, an analyst at UBS, said that managements at Phoenix and other insurers are putting a higher priority on keeping their balance sheets strong than on bringing in new business.

"If new business is temporarily frozen" at Phoenix, "it's not the end of the world," Kligerman said Wednesday.

State Farm's action, though, highlights the potentially deep impact that ratings downgrades can have on companies such as Phoenix. Agents and brokers, looking to protect themselves and their clients, might recommend policies and annuities of more highly rated companies.

Although State Farm owns just over 5 percent of Phoenix, "that factor had no bearing at all on our decision to indefinitely suspend marketing of their product," Luedke said.

There has been much speculation about whether Phoenix would be sold, but Luedke would not comment on whether State Farm is interested in buying a bigger piece or all of Phoenix.

Standard & Poor's lowered the financial strength ratings of Phoenix's subsidiaries a notch Monday to BBB, which is still in the "good" range. But other companies are still rated A or better.

Phoenix has been selling its products through State Farm companies since 2001, the same year that State Farm bought a stake in Phoenix.

Phoenix spun off its asset management business — Virtus Investment Partners — on Dec. 31 to concentrate on life insurance and annuities. Phoenix had long complained that the asset management operations were dragging down the returns of the whole company, causing pressure on its stock price. Phoenix's stock closed at 44 cents a share Wednesday, up 6 cents in a rising market.

Phoenix, trying to position itself for the future, is seeking new distribution channels for its main products, expanding the range of alternative retirement products it sells and looking for partners for private labeling ventures. In those ventures, Phoenix would design a product for a partner company, which would sell it under its own name. Phoenix would assume some of the financial risk and share in the profits.

Phoenix is also cutting more than 250 jobs, about 25 percent of its 1,100 employees companywide, and eliminating the shareholder dividend. S&P said that the layoffs could reduce the company's ability to bring in new business, "which could put further pressure on its competitive position."

Connecticut Insurance Commissioner Thomas R. Sullivan said Wednesday in an e-mailed statement that the Department of Insurance "continues to closely monitor the financial condition of insurance companies operating here. This case is no different. We'll continue to do our job to ensure that policyholders' interests are protected."