Monday, March 8, 2010

Phoenix Details Impact of Secondary Market on Cost of Insurance

Deviations in pricing assumptions from actual experience in its life insurance products have adversely affected profitability and will result in an increase in the cost of insurance rates for certain universal life policies effective April 1, 2010, Phoenix Cos., Hartford, Conn., states in a March 2, 2010 10K filing with the Securities and Exchange Commission, Washington.

The filing states that these deviations could continue in the future. The company says that the adjustment on April 1 and any other permitted adjustments “may not be sufficient to maintain profitability.”

Phoenix also notes that “In addition, increasing charges on in-force policies or contracts may adversely affect our relationships with distributors, future sales and surrenders and may result in claims against us by policyholders. Furthermore, some of our in-force business consists of products that do not permit us to adjust the charges and credited rates of in force policies or contracts.

Phoenix explained that among the assumptions factored into pricing is persistency and that “recent trends in the life insurance industry” include “the evolution of the financial needs of policyholders and the emergence of a secondary market for life insurance” as well as increased availability of premium financing. In short, according to the 10K, “the reasons for purchasing our products are changing.” The company also notes an increase in sales of policies to older individuals.

Consequently, according to the Phoenix 10K, in spite of controls it says it instituted, “We believe that our sales of universal life products include sales of policies to third party investors who, at the time of policy origination, had no insurable interest in the insured. The effect that these changes may have on our actual experience and profitability will emerge over time.”

In addition to changes in cost of insurance rates, according to Phoenix, deviations in actual experience from pricing assumptions may result in an increase in the amortization of deferred policy acquisition costs, which would negatively impact results of operations.

Recently, Phoenix has received the attention of rating agencies. On Feb. 12, Standard & Poor’s Ratings Services, New York, lowered the company’s counterparty credit rating to ‘CCC+’ from ‘B-‘ and lowered the counterparty credit and financial strength ratings of the companies operating subsidiaries including Phoenix Life Insurance Co. to ‘BB-‘ from ‘BB.’

"The downgrade follows Phoenix's release of its fourth-quarter 2009 results, which showed that its statutory surplus and asset valuation reserve decreased by $26.2 million in the quarter, or a 4% decline, and $279.1 million for the full year, or a 33% drop," said Standard & Poor's credit analyst Adrian Pask. "The company also reported a GAAP operating loss of $34.2 million."

"The decline in surplus stemmed from increases in reserves for discontinued group accident and health business and credit losses."

In September 2009, Moody’s Investors Service, New York, rated the carrier’s financial strength ratings a ‘Ba1.’

In its rating explanation, Moody’s stated that “The life insurance company investment portfolio has incurred substantial realized and unrealized losses, and contains a significant unrealized loss position relative to the company's statutory surplus. Capital of the life insurance business has declined materially in 2008 and again in 2009, despite efforts to stabilize the company's capital position, including transactions designed to specifically improve Phoenix Life's risk-based capital (RBC) ratio. Operating earnings of the insurance operations have been depressed--impacted by the difficult market impacting the rest of the life industry--and the company's financial flexibility is constrained.”

Moody’s added that “Major distributors that had previously marketed Phoenix's products through their affiliated producers have indefinitely suspended sales of Phoenix's products since 2009Q1 because of their credit concerns with Phoenix. As a result, Phoenix's 2009 product sales will be substantially lower than those in 2008, and Moody's believes there is little likelihood that they will return to meaningful levels in the near to intermediate term.”

However, Moody’s did note strengths including “a lLarge existing block of permanent life insurance to affluent individuals and businesses, very long term maturity of its debt obligations and modest cash needs at the holding company.”

On January 13, 2010, A.M. Best Company, Inc., Oldwick, N.J., downgraded the company’s financial strength rating from to ‘B+’ from ‘B++’ and downgraded our senior debt rating to ‘bb-‘ from ‘bb+.’ Best maintains a negative outlook on the company’s ratings.

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