The Phoenix Companies helps its customers find straightforward solutions to often highly complex personal financial and business planning needs through life insurance and annuities. With a history dating to 1851, Phoenix is publicly traded on the New York Stock Exchange under the symbol PNX. The company's products are available through a wide variety of third-party financial professionals and intermediaries.

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AddressOne American Row
Hartford, CT 06102-5056

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The variable annuity industry in the U.S. is highly concentrated.  Ten insurance companies generate roughly 80 percent of industry revenue, and the top 20 companies generate over 90 percent of total sales.

A meaningful signal is sent when five of the top 20 variable annuity companies announce that they are either exiting the business entirely or paring-back existing product lines.

This is exactly what has taken place over the past several months with the following companies dialing down their variable annuity exposure or pulling-out entirely:

Equity market volatility and low interest rates are the common themes running through the most or all of the retrenching decisions.  There are a few way in which high volatility and low interest rates can hurt the companies that provide variable annuities:

  • Poor equity market performance and low interest rates affect the value of guaranteed living benefits which are liabilities for the insurance company.  Poor stock market performance and low rates both increase the amount of the insurance company liability.
  • Higher volatility results in higher hedging costs.
  • Stock market performance affects the value of separate account assets which, in turn, affects fee income related to those assets under management.
  • Many return on equity (ROE) models consider capital market volatility or “beta” as a proxy for risk.  In this context, “extreme” capital market conditions create higher hurdle rates and result in lower return on equity.

MetLife’s recent investor conference call sheds some light on the return on equity issue. During the call, MetLife categorizes its product lines based by level of ROE.  There are three ROE categories: 1) greater than 15 percent; 2) 10 - 15 percent, and; 3) less than 10 percent.

Retail annuities (including variable annuities) are in the less than 10 percent ROE bucket. Included in this less than 10 percent bucket are other capital intensive business lines that require “margin improvement.”

MetLife also alludes to capital intensity and the level of economic capital required in the variable annuity business.  Economic capital refers to the amount of capital that needs to be set aside to deal with the risks in a particular line of business.  Perceived risk is high in the capital markets right now, so economic capital requirements are high as well.

The capital intensity theme was a major factor for The Hartford as well. The argument in favor of leaving the VA business was based on the notion that capital could be allocated to more flexible and less intensive areas such as property and casualty lines.

A point to consider, though, is that all of these value assessments require the assumption that capital market conditions will continue to be as extreme as they have been over the past several years.

MetLife sheds some light on the glass half full perspective when they talk about the potential leverage in their variable annuity business. Some points to consider:

  1. As of March 31, MetLife had total variable annuity liability balances of $152.1 billion.
  2. $99.9 billion of the $152.1 billion had a living benefit rider
  3. Of the $99.9 billion, $78 billion was in the form of a guaranteed minimum income benefit (GMIB) rider.
  4. 17 percent of the GMIB riders were in the money as of March 31.
  5. The GMIB net amount at risk (the additional money MetLife would need to come-up with if everyone annuitized their GMIB contract immediately) as of March 31 was $1.6 billion.
  6. If the S&P 500 were to increase by 10 percent and the yield on 10 year Treasuries increased by 1 percent, MetLife’s net amount at risk and in the money percentage would go “pretty close to 0.”
  7. Only 250 out of the 375,000 ($60 billion worth of revenue) variable annuity contracts sold by MetLife over the past 3 years have a living benefit rider that is in the money today.

It seems that recent market volatility and ultra low interest rates could be distorting the perspectives of variable annuity issuers and the perspectives of certain shareholders of these companies.

Maybe the world has entered a permanent state of high volatility and low interest rates. Then again, maybe it has not.  In any event, there is at least a possibility that current perspectives on the variable annuity business are distorted by an overemphasis on recent experience.

Sources: MetLife

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Life insurance consultancy Saybrus Partners recently landed Wells Fargo Advisors as a new client.

Saybrus is a relatively new venture that was formed with backing from the Phoenix Companies.

Saybrus will be providing specialized consulting services to Wells financial advisors.  The focus will be on determining how to best use life insurance products for existing and prospective wealth management clients.

Saybrus will not be distributing Phoenix products through the relationship--it is intended to be purely consultative.

Source: Wall Street Journal

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The standalone living benefit (“SALB”) is a relatively new and innovative product in the retirement income arena.

A SALB is basically the same thing as the guaranteed lifetime withdrawal benefit (GLWB) that accompanies many variable annuities.  The GLWB feature allows the contract holder to withdraw a fixed percentage of the total annuity premiums each year regardless of market performance.

What makes the standalone living benefit different is that the GLWB has been “stripped away” and can exist independently of the variable annuity.  This allows the owner of the standalone living benefit to receive the guaranteed income and longevity risk protection of the GLWB without having to purchase a variable annuity.  The SALB guarantee is still an annuity and provides insurance—it just does not have to be coupled with a variable annuity.

Standalone living benefits are intended to accompany a pool of money or assets that are being managed.  The owner of a professionally managed private investment account who purchases a SALB would have all the features and protections of the GLWB. 

For example, assume that a person with $350,000 purchases a SALB that pays 5%.  This person would be able to receive the 5% guaranteed income stream for life.  The actual amount of the income stream would be $17,500 ($350,000 x 5%), and this amount would not be affected if the value of the $350,000 portfolio decreases.

There is an annual step-up with SALBs, so income stream in the example above would increase if market conditions are favorable and the value of the $350,000 portfolio increases.  For example, the contract holder’s guaranteed lifetime income would increase to $20,000 per year if the portfolio value increases to $400,000.

The SALB contract holder also has the ability to choose when to apply or remove the guarantee.  SALBs do have a spousal option and there is little to no death benefit.

The cost of a SALB is based on a number of factors—equity market volatility being a fundamental driver of cost.  A very rough cost estimate would range from 75 basis points to 2 percent.  In our example above, a 1 percent fee would equate to $3,500 per year (1% X $350,000).

A higher equity allocation (versus fixed income) in a portfolio likely results in higher costs.  In fact, some insurance companies providing SALBs will limit equity allocations to a certain percentage of overall assets.

In contrast to variable annuities, gains on SALBs are taxed.  On the positive side, though, there are potentially no contingent deferred sales charges with SALBs.

SALBs are not necessarily widely available yet.  The product works best with professionally managed assets that are governed by certain accounting features.  In addition, many SALBs come with minimum asset requirements.

Some of the insurers providing or intending to provide SALBs include Phoenix, Genworth, Nationwide, Allianz and Transamerica.

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