Fitch Ratings has affirmed Phoenix Companies, Inc.'s (PNX) 'B' holding company Issuer Default Rating (IDR) with a Positive Outlook.

At the same time, Fitch has affirmed the 'BB+' Insurer Financial Strength (IFS) ratings of the group's primary insurance subsidiaries with a Stable Outlook. A full ratings list follows at the end of this release.

These rating actions reflect continued improvement in PNX's GAAP interest coverage as well as good investment results, adequate statutory capitalization and stable financial leverage.

PNX's debt servicing capabilities improved substantially in 2011, and GAAP coverage continued to strengthen in the first quarter of 2012. GAAP EBIT coverage was 3.1x and 2.5 times (x) as of March 31, and Dec. 31, 2011 respectively compared to about 0.6x in 2010. Statutory interest coverage is 3.6x in 2012 based on maximum dividend capacity of $72 million in 2012 and holding company interest expense of $20 million.

PNX's financial leverage ratio (FLR) remains well within expectations for the rating level at 31 percent and 28 percent as March 31, and Dec. 31, 2011. The increase in the first quarter was due to lower equity related to the new DAC accounting rules. There was no increase in debt. The group's total financing and commitments ratio remains at about 0.4x.

PNX's surplus notes in relation to total adjusted capital (TAC) was 18 percent at year-end and as of March 31, compared to Fitch's maximum guideline of 15 percent. For this reason, the surplus notes are rated one notch below standard notching.

Fitch views Phoenix's statutory capitalization as adequate. A significant improvement in 2011 was due in large part to the reinsurance of one-third of the closed block, which resulted in a 53- point increase in the risk-based capital (RBC) ratio. The RBC was 363 percent as of Dec. 31, 2011, in line with expectations. The RBC is estimated at 371 percent as of March 31.

First quarter 2012 statutory earnings improved compared to first quarter 2011 due to a reduction in the policyholder dividend scale and general improvement in policy profitability. Fitch notes the heightened sales levels of annuity products over the past five quarters and believes the company will need to balance top line growth against growing statutory earnings and capital, which in turn affects the company's ability to pay dividends.

Credit-related investment impairments increased modestly in the first quarter, although the trend has generally been favorable. Derivative mark-to-market movements were the biggest component of realized gains and losses in the first quarter. Gross unrealized losses in the fixed income portfolio declined in the first quarter, and the portfolio was in a net unrealized gain position of over $600 million as of March 31.

Fitch's concerns include an underfunded pension liability of $187 million at year-end 2011 and the holding company's need to make annual contributions to keep it 80 percent funded. Phoenix contributed $25 million and $17 million to the pension plan in 2010 and 2011 respectively, and is expected to contribute $16 million in 2012. There is also a supplemental plan with $141 million in unfunded obligations as of year-end 2011. The company would have to fully fund the supplemental plans under any change of control.

The holding company IDR could be upgraded one notch based on the following triggers:

--GAAP interest coverage of 3x or greater on a sustained basis;

--Financial leverage maintained at or below 25 percent;

--Statutory coverage of holding company interest expense maintained at or above 3x;

The surplus note rating could be upgraded one notch to standard notching if the ratio of surplus notes to TAC declines to 15 percent or lower;

Other upgrade triggers include:

--GAAP ROE at or above 5 percent;

--Sustained statutory capital generation resulting in an RBC position at or above 350 percent.

--No significant deterioration in the funded status of the pension liability.

The key rating drivers that could result in a downgrade include:

--An RBC position below 200 percent;

--Investment losses higher than anticipated, particularly within the structured portfolio;

--Financial leverage above 30 percent.

--Significant deterioration in the funded status of the pension liability

PNX is a life and annuity insurance holding company and ultimate parent of Phoenix Life Insurance Company and PHL Variable Insurance Company. It is headquartered in Hartford, Connecticut. PNX had $22 billion in GAAP assets and $948 billion in equity as of March 31.

Fitch affirms the following rating with a Positive Outlook:

Phoenix Companies, Inc

--IDR at 'B'.

Fitch affirms the following ratings with a Stable Outlook:

Phoenix Life Insurance Company

--IFS at 'BB+';

--IDR at 'BB';

--$174 million Surplus note 7.15 percent due Dec. 2034 at 'B+'.

PHL Variable Insurance Company

--IFS at 'BB+'.

Additional information is available at 'fitchratings.com'.

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