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Phoenix Cos. Drops Bid For Federal Bailout

By DIANE LEVICK

April 21, 2009

The struggling Phoenix Cos. gave up on getting government bailout funds Monday after the ailing bank it planned to buy in order to qualify failed to survive the wait.

The federal Office of Thrift Supervision closed American Sterling Bank of Sugar Creek, Mo., on Friday and appointed the Federal Deposit Insurance Corporation as receiver. The FDIC then got Metcalf Bank of Lee's Summit, Mo., to assume American Sterling's deposits.

Phoenix, a Hartford-based life insurer, said Monday that it will withdraw its application for funds from the federal Capital Purchase Program. The company entered a deal in January to buy American Sterling, contingent on getting CPP funds, but noted the bank can no longer satisfy the closing conditions.

Phoenix, which last week promoted James Wehr as its new CEO, said Monday that it had pursued CPP "for potential additional financial flexibility in this difficult market environment but remains well capitalized." The company wouldn't say what alternatives it might be exploring to boost capital.

"There aren't many attractive options," said Jimmy S. Bhullar, an analyst at J.P. Morgan. A tough credit market makes it difficult for insurers to issue debt, and depressed stock prices make issuing more stock unattractive, too, analysts say.

The company might want to find a strategic investor to provide capital or sell parts of the company, Bhullar said. Phoenix spun off Virtus Investment Partners, its asset management business, to shareholders Dec. 31.

Phoenix, wracked by investment losses and pressures on its variable annuity business, has been struggling with multiple ratings downgrades and the loss of its major distributors. The company is laying off more than 25 percent of its staff and is hoping new businesses and distributors will generate sales.

The Office of Thrift Supervision had found "a critical lack of capital and liquidity issues" at American Sterling last year and said attempts to remedy the problems or complete a sale of the company failed. Phoenix didn't contribute capital to keep the bank afloat, as The Hartford did for the bank that it plans to buy if CPP funds are offered.

Connecticut Insurance Commissioner Thomas R. Sullivan said Monday that his department closely monitors the finances of insurers operating here and with Phoenix. "This case is no different," he said. "We'll continue to do our job to ensure that policyholders' interests are protected."