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Crisis At Phoenix: Hartford Insurer Fights For Survival

DIANE LEVICK

March 11, 2009

The Phoenix Companies Inc. is waging a fight for its life, trying to reinvent itself amid a barrage of bad news that could signal a downward spiral or, at best, a painful and slow recovery.

The Hartford insurer, pummeled by financial rating downgrades, lost its largest distributors last week — decimating prospects for new sales of life insurance and annuities. In an ominous cycle, three rating agencies downgraded Phoenix again Tuesday because the distributors had fled.

The company also faces a challenge in holding on to the customers it already has, because some are likely to bolt for a healthier insurer, industry experts said.

Phoenix, rocked by investment losses and the markets' impact on its annuity business, said it's still well-capitalized — with a healthy financial cushion — despite a $726 million net loss for 2008. But the company recently announced a survival plan focused on businesses that need less capital and are less sensitive to ratings.

Analysts and industry observers said it's hard to predict whether the company will be sold, hold out long enough to slowly rebuild sales or just wind down its business and eventually disappear.

The company's plan includes expanding sales of a product that attaches to mutual funds or other accounts sold by other companies, and is seeking to design products for other companies that would sell under their own name. Phoenix is also trying to develop new distribution channels for its insurance and annuities.

But even with the new strategy, "The ratings agency actions are going to make it very difficult for Phoenix to execute and grow," said Steven Schwartz, an analyst and senior vice president in equity research at Raymond James & Associates in Chicago.

Rating agencies themselves have doubts about Phoenix's game plan. "Phoenix will be attempting to implement business strategies for which it may have relatively limited expertise and for which there are few successful examples," Moody's said Tuesday.

Phoenix could try, instead, to sell the company, but it won't comment on whether it's currently exploring that option.

At stake is a 158-year-old insurer with 600 employees in Hartford and a tradition of community involvement and charitable giving in the region that current CEO Dona D. Young has continued. A quarter of the 1,100 employees nationwide will be laid off.

Phoenix, which targets very affluent clients, is also handicapped by its small size in its industry — $278 million of life insurance sales last year and $622.5 million of annuity deposits.

Investors have trampled Phoenix's stock to 55 cents a share as of Tuesday, and ratings downgrades have lowered the company's debt to the "junk bond" range. Its subsidiaries are in the "B" ranges of rating agencies — still "good" or "adequate," but lower than many competitors.

"It's really, really bad news because it's like failure in some people's minds," said Yu Lei, assistant professor of insurance at the University of Hartford's Barney School of Business. "Once people lose confidence in you, things go downhill very quickly."

If an insurer fails, Connecticut and other states have guaranty funds to pay life insurance claims and certain annuity amounts.

Damage Control

State Farm and National Life Group of Vermont suspended sales of Phoenix's life insurance and annuities. The two companies accounted for 82 percent of Phoenix's annuity sales last year.

In addition, National Financial Partners — a network of independent financial advisers — confirmed this week that it is no longer selling Phoenix products.

Michael Pariano, managing principal of Highland Capital Brokerage who is based in the national firm's Farmington office, said the wholesaling firm is not issuing price quotes now on Phoenix products.

"We can't dilute our reputation and integrity by representing a company that has a 'B' rating," said Pariano, whose firm belongs to National Financial Partners.

Phoenix is trying to do damage control, reaching out to large distributors and smaller independent ones. A regional director visited Pariano on Friday, stressing Phoenix's claims-paying ability and security of policies.

"These producers are savvy and understand what is happening in the industry and Phoenix, and we are working with them on ways we can continue to support them and their clients in these unprecedented economic times," Phoenix spokeswoman Alice Ericson said.

Some financial advisers are struggling to decide what to do with clients who already have a Phoenix policy or annuity. Some might switch healthy clients to more highly-rated insurers unless there's too large a financial penalty.

That could hasten a downward spiral and leave Phoenix with a larger proportion of unhealthy customers — and, thus, a bigger claim risk — industry insiders said.

Phoenix said that customer surrenders of policies or annuities were in the "normal range" during 2008 and "since then, we have not seen any trends that indicate otherwise." Cashing out of a policy isn't always in a customer's best interests, and "if we identify surrender activity that appears to be driven by inappropriate producer (agent) behavior, we deal aggressively with it," Phoenix warned.

Finding Partners

Phoenix could probably hunker down and last a long time with little new sales, as some companies have done in the past, but it's vulnerable to other insurers raiding its existing clientele, said Joseph M. Belth, Indiana University professor emeritus of insurance and a frequent critic of the life insurance industry.

Phoenix wants to produce private-label products. It would design a product for a partner company, which would sell it under its own name, sharing the risk and profits.

Phoenix has been good at developing products, but "given their ratings, one has to wonder whether another financial services company is going to be willing to take that risk," said analyst Schwartz.

Ericson of Phoenix said, "We are confident that many of the carriers we are talking to about private labeling will conduct their own, more in-depth assessment of Phoenix's financial strength." They'll recognize "we bring strengths to the table that potential partners find attractive, from point-of-sale support, to product innovation and design, to underwriting and new business administration," she added.

Phoenix is also expanding alternative retirement product offerings. For example, it sells a guarantee of lifetime income that wraps around a managed account or mutual funds sold by another company to its own customers.