AM Best Downgrades Credit Ratings of PHL Variable Insurance Company, Revises Outlooks to Negative for Nassau Financial Group, L.P.’s Insurance Subsidiaries

2019 NOV 20 (NewsRx) -- By a News Reporter-Staff News Editor at Mergers & Acquisitions Daily News -- AM Best has downgraded the Financial Strength Rating (FSR) to B (Fair) from B+ (Good) and the Long Term Issuer Credit Rating (Long-Term ICR) to “bb” from “bbb-” of PHL Variable Insurance Company (PHL). The outlook of these Credit Ratings (ratings) has been revised to negative from stable. Concurrently AM Best also has revised the outlooks to negative from stable and affirmed the FSR of B+ (Good) and the Long-Term ICR of “bbb-” of Nassau Life Insurance Company (NNY), Nassau Life and Annuity Company (NLA), Nassau Life Insurance Company of Kansas (Overland Park, KS) and Nassau Life Insurance Company of Texas (Austin, TX). All of the aforementioned entities, including an unrated entity Nassau Re (Cayman) Ltd., which is used for internal reinsurance, are collectively referred to as the Nassau Financial Group (NFG).

In addition, AM Best has revised the outlooks to negative from stable and affirmed the Long-Term ICR of “b+” of The Nassau Companies of New York, Inc. along with its existing Long-Term Issue Credit Ratings (Long-Term IRs). All companies are headquartered in Hartford, CT, unless otherwise specified. (See below for a detailed listing of the Long-Term IRs.)

The ratings of PHL reflect its balance sheet strength, which AM Best categorizes as very weak, as well as its weak operating performance, limited business profile and appropriate enterprise risk management.

The ratings downgrade of PHL reflects that it is no longer considered core to the business and will be managed as a closed block after new product sales were recently discontinued and shifted to NLA. In addition, PHL has experienced higher than expected mortality, which has emerged in recent quarters, primarily from an older age universal life block that is considered to be stranger-owned life insurance (STOLI) policies held by institutional investors. Furthermore, there has been a material decline in risk-adjusted capitalization at PHL, which in A.M. Best’s view will require additional capital infusions in the near term. On a longer term economic basis, the financial condition of PHL will be dependent upon continued capital support by NFG, lapse and mortality experience and additional cost of insurance (COI) increases, should they be needed. AM Best views litigation risk for additional COI increases as high given the prevalence of industry-wide litigation relating to COI increases.

The revised outlooks for the other insurance subsidiaries reflect diminished capital flexibility for NFG overall, given the need to fund PHL and utilization of excess capital for the recently announced acquisition of Foresters Financial Holding Company, Inc. and Foresters Life Insurance and Annuity Company (FLIAC) from The Independent Order of Foresters. This acquisition is subject to customary regulatory approvals. AM Best expects the earnings impact of the acquisition to be modest in the near term, although accretive in the longer term assuming satisfactory execution of strategic plans. Additionally, while the NFG group’s operating results have been positive historically, they have trended downward on a statutory consolidated basis in more recent periods, primarily due to PHL. However, there has also been higher mortality experience at NNY and one-time expense items in the first half of 2019, which have contributed to a decline in net income.

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