A.M. Best Removes from Under Review and Takes Various Credit Rating Actions on Insurance Subsidiaries of Nassau Reinsurance Group Holdings, L.P.

OLDWICK, N.J.--(BUSINESS WIRE)-- A.M. Best has removed from under review with developing implications and affirmed the Financial Strength Rating (FSR) of B (Fair) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of “bb+” of the key life/health subsidiaries of The Phoenix Companies, Inc. (Phoenix) (headquartered in Hartford, Connecticut). Additionally, the Long-Term ICR of “b” of Phoenix and its existing Long-Term Issue Credit Ratings (Long-Term IR) have been removed from under review with developing implications and affirmed.

Concurrently, A.M. Best has removed from under review with developing implications and downgraded the FSR to B (Fair) from B++ (Good) and the Long-Term ICR to “bb+” from “bbb” of The Pyramid Life Insurance Company (Pyramid Life) (Overland Park, KS) and also downgraded the FSR to B (Fair) from B+ (Good) and the Long-Term ICR to “bb+” from “bbb-” of Constitution Life Insurance Company (Constitution Life) (Houston, TX).

The outlook assigned to all of these Credit Ratings (ratings) is stable. (See below for a detailed listing of the companies and ratings.)

The ratings of Phoenix and its subsidiaries were placed under review with developing implications in September 2015 following the public announcement by Phoenix that it had entered into a definitive agreement to be acquired by Nassau Reinsurance Group Holdings L.P. (Nassau Re) for $37.50 per share in cash or an aggregate equity purchase price of $217.2 million. The transaction closed in June 2016 with the receipt of insurance regulatory approvals and Phoenix is now a privately held, wholly-owned subsidiary of Nassau Re, serving as its primary U.S. life and annuity platform. Nassau Re was founded in 2015 with an equity seed capital commitment of $750 million provided by Golden Gate Capital, a private investment firm, which owns a majority of Nassau Re through its private funds.

The ratings of Phoenix primarily reflect the historical impact of its one-time expenses tied to the restatement process, as well as other events that include statutory net losses due to reserve charges in its universal life insurance block of business and sizeable charges taken related to the settlement of significant long-running legacy litigation, which have largely been resolved. In addition, Phoenix has also experienced an uptick in mortality in recent periods that has added pressure on earnings.

Overall sales have generally declined in recent periods due to a combination of capital constraints prior to its acquisition by Nassau Re and a transition to a new streamlined product offering. A.M. Best notes that Phoenix has ceded approximately 50% of its inforce fixed-indexed annuity business and will reinsure 50% of new fixed-indexed annuity sales to an unrated affiliated offshore reinsurance company, Nassau Re Cayman, in order to improve capitalization of the domestic companies. While overall capitalization at the company currently remains adequate, any further material “one-time events” could result in a diminished level of risk-adjusted capital. Going forward, A.M. Best will continue to monitor the appropriateness of the risk-adjusted capitalization on an entity level and consolidated basis.

Partially offsetting these negative rating factors is the additional liquidity and financial flexibility provided to Phoenix and its operating subsidiaries by Nassau Re. A.M. Best notes that post-acquisition closing, Nassau Re contributed $100 million of new equity capital into Phoenix. Additionally, Phoenix returned to current filer status on its SEC financial statement filings in November 2014 and has remediated the majority of internal control weaknesses that were identified during the restatement process. Furthermore, while operating results have been significantly impacted by high expenses and several one-time events on both a GAAP and statutory accounting basis, A.M. Best expects a general improvement in the company’s operating performance over the near to medium-term as the new management team implements its new business plan focused on streamlining operations and reducing expenses.

The ratings of Pyramid Life and Constitution Life were placed under review with developing implications in October 2015 following the public announcement that Universal American Corp. (Universal American) had entered into a definitive agreement to sell its traditional insurance business to Nassau Re. The downgrade of both entities reflects the fact that they are now part of a less creditworthy organization. These entities had historically been utilized by Universal American to write Medicare supplement, Medicare Advantage and long-term care insurance, but had not written any new business since June 2012 (December 2004 for long-term care). The companies will continue to operate in run-off under the Constitution Life brand as a privately held, wholly-owned subsidiary of Nassau Re.

A.M. Best notes that both Pyramid Life and Constitution Life maintain just over $200 million of long-term care reserves that have been in run-off since 2004. These products are mostly guaranteed renewable, which allows the company to seek premium increases based on claims experience. Both Pyramid Life and Constitution Life have significant reinsurance on their long-term care business, however, in order to improve capitalization, just under half of the net retained long-term care reserves were ceded to Nassau Re Cayman, along with other individual accident and health business. A.M. Best will monitor the operating/claims experience, capitalization and reserving requirements of this block of business carefully over the near to medium-term for these entities as they operate in run-off.

A.M. Best also notes that the FSR of B (Fair) and the Long-Term ICR of “bb+” of Phoenix Life and Annuity Company have been removed from under review with developing implications and assigned a stable outlook. No new business has been written from this entity for a number of years. Operating results have fluctuated over the past few years due to higher expenses and the need to increase asset adequacy reserves. A.M. Best expects moderate operating results to continue over the near to medium-term as the company continues to operate in run-off.

The FSR of B (Fair) and Long-Term ICR of “bb+” of American Phoenix Life and Reassurance Company (Hartford, CT) have been withdrawn due to this entity being an inactive shell with no business/reserves. This shell was sold on Feb. 1, 2017.

The following ratings have been removed from under review with developing implications and the FSR of B (Fair) and the Long-Term ICRs of “bb+” have been affirmed. A stable outlook has been assigned for the ratings of the following life/health subsidiaries of The Phoenix Companies, Inc.:

• Phoenix Life Insurance Company
• PHL Variable Insurance Company
• Phoenix Life and Annuity Company

The ratings of The Pyramid Life Insurance Company have been removed from under review with developing implications and the FSR has been downgraded to B (Fair) from B++ (Good) and the Long-Term ICR has been downgraded to “bb+” from “bbb”. A stable outlook has been assigned.

The ratings of Constitution Life Insurance Company have been removed from under review with developing implications and the FSR has been downgraded to B (Fair) from B+ (Good) and the Long-Term ICR has been downgraded to “bb+” from “bbb-”. A stable outlook has been assigned.

The following Long-Term IRs have been removed from under review with developing implications and affirmed:

The Phoenix Companies, Inc.—

— “b” on $300 million 7.45% senior unsecured notes, due 2032 (approx. $253 million outstanding)

Phoenix Life Insurance Company

— “b+” on $175 million 7.15% surplus notes, due 2034 (approx. $126 million outstanding)

This press release relates to Credit Ratings that have been published on A.M. Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see A.M. Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Understanding Best’s Credit Ratings.

A.M. Best is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2017 by A.M. Best Rating Services, Inc. and/or its subsidiaries. ALL RIGHTS RESERVED.

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A.M. Best

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Senior Financial Analyst

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Jim Peavy, +1 908-439-2200, ext. 5644

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Source: A.M. Best