By early 2009, financial analysts and ratings agencies were expressing doubts about Phoenix’s financial well-being. The stock price dropped to a tiny fraction of what it had been just six months before. Wealthy customers who invested their money in Phoenix annuities and life insurance were fleeing.

The Hartford-based life insurer that had endured since 1851 was in a tenuous position as people speculated that it might be sold, or worse.

Then, the company was dealt a seeming death blow on March 4, 2009. State Farm, the channel through which Phoenix sold most of its annuities, said that it would no longer offer Phoenix products. The next day, Phoenix lost its next biggest distributor, Vermont-based National Life Group.

State Farm and National Life had accounted for 82 percent of Phoenix’s new sales of annuities in 2008. The company’s stock hit a record low of 21 cents three trading days after State Farm and the National Life Group pulled out, down from a high the year before of $13.98 on Sept. 19.

“Had they debt coming due, they probably would have had to declare bankruptcy,” said Steven Schwartz, a senior financial analyst who covers Phoenix for Raymond James & Associates Inc.

Phoenix CEO James D. Wehr said in a recent interview that the decision by State Farm and National Life was not unexpected. Phoenix’s sales had already fallen off with a 37 percent decline in annuity deposits and a 71 percent drop in life insurance sales in the last three months of 2008.

A little more than a month after State Farm’s announcement, CEO Dona D. Young retired, ending a 29-year career at Phoenix. Wehr, who was the company’s chief investment officer, was appointed CEO.

Two years later, the 160-year-old company headquartered in the distinctive Boat Building downtown has stabilized with a much smaller staff, but its future remains uncertain. Phoenix still gets the bulk of its revenue from existing, or in-force, life insurance policies and annuities that it sold before the near-meltdown — a book of business that dwindles over time as people cash out.

Investment gains since the stock markets bottomed out two years ago have kept Phoenix afloat, along with an uptick in new annuity sales as the market recovers. Shares were trading at $2.52 Monday in midday trading on the New York Stock Exchange.

“Basically, what’s happened is the premium and fee income associated with a block of business that has shrunk over time has been offset by increase in investment income as the markets have come back,” Wehr said.

How To Generate Sales?

To calm the nerves of customers and investors, Phoenix stayed on its message in 2009 that it had enough money to cover its obligations — life insurance claims and annuity payouts — and it didn’t have any major debt due in the near future.

The company makes money in three basic ways: through life insurance premiums, fees on life and annuity products and investment income. However, it can’t sell life insurance to the customers that it has traditionally served — clientele with high net worth. The company’s ratings are too weak to allow Phoenix to sell life insurance through large distributors such as State Farm, although all three ratings agencies have changed the company’s outlook since 2009 — to “stable,” rather than negative.

Phoenix is undergoing a metamorphosis, though, after it recognized two years ago that it had to find other ways to make money to survive.

“We weren’t a single-A, high-net-worth, life insurance company anymore,” Wehr said of the company. “The ratings told us that, and State Farm told us that explicitly. So, we had to figure out . . . how are we going to generate sales given our ratings?”

The company created a new subsidiary, Saybrus Partners Inc., using its existing sales and marketing employees to provide consulting services to financial services firms that sell other insurers’ products. Phoenix has traditional expertise in selling life insurance products to high-net-worth clients, people with $1 million or more, and since its sales to that slice of the market have dropped off, it’s helping other firms sell theirs.

For example, Saybrus helps Edward Jones sell John Hancock Life and Pacific Life products.

Saybrus, however, is a small part of Phoenix’s revenue. Last year, Saybrus generated $6 million in revenue — $3.3 million earned from consulting services with partner companies and $2.7 million from sales of Phoenix life insurance and annuities. The $6 million from Saybrus is a small fraction of Phoenix’s $2.1 billion in revenue last year.

Phoenix also is slowly building a new network of distributors, selling its products through independent marketing organizations, or IMOs, which are a consortium of independent insurance agents. It’s not nearly the reach that State Farm had, but it’s a growing network as Phoenix contracts with new IMOs.

‘Jury Still Out’

The company has shifted its focus — along with many other life insurers — from the wealthy to middle-income people, which is generally defined as households earning between $35,000 and $125,000 a year. Those customers are using indexed annuities as relatively secure investments, particularly with policy add-ons that guard against losses in the market, or that use annuities as supplemental income for retirees.

The annuity business has shown promise across the life insurance industry, which has benefited Phoenix as well. For several years, the company had more money leaving than coming in. Last year, the trend changed course. The outflow diminished in the first three quarters and turned positive in the fourth quarter of 2010. The company’s annuity total deposits were $136 million for the last three months of 2010, compared with $12.5 million during the same period in 2009.

The new target customer fits with Phoenix’s use of independent agents through IMOs, and there are more middle-income people than people who have $1 million or more.

“Now, a much broader market for us is the middle-market, and it bodes well for the distribution outlets that we have, that we’re working with,” said Mark S. Fitzgerald, national sales manager for Saybrus Partners.

Of course, it takes many more middle-income people to equal the deposit of a wealthy person.

Phoenix still has a major problem — it’s a life insurer that is not selling new policies. New sales, measured in annualized premium, brought in $2.7 million last year, down from $278.2 million in 2008.

As of Dec. 31, the Phoenix workforce was 625, including 375 in Connecticut — down from a total of 1,575, and 855 in the home state, three years earlier.

But the decline wasn’t all through layoffs and attrition. Phoenix also sold or spun off several businesses.

Phoenix Investment Partners, the company’s asset-management business, which accounted for 3 percent of revenue in 2007, was spun off in 2008 and renamed Virtus Investment Partners. Last year, Phoenix sold Philadelphia Financial, a company that had $3.5 billion in assets under management at the time and which focuses on ultra-high-net-worth customers.

Schwartz, the Raymond James analyst, said that the invention of Saybrus was an inspired idea, and that Phoenix is making progress to recover. However, there’s ultimately the question of whether the company will be able to survive on annuities, investments, consulting and all other new products — rather than selling life insurance — until a time when its ratings are back up.

Wehr admits that selling life insurance again will take years. Phoenix has to make enough money to counter what it is losing by people cashing out.

“You’ve got this block of business that is running off, albeit slowly, and can they make up the difference?” Schwartz said. “I would say the jury remains out.”
 

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