A.M. Best Revises Outlook to Positive for The Phoenix Companies, Inc. and Its Key Life Insurance Entities

A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength rating (FSR) of B+ (Good) and issuer credit ratings (ICR) of "bbb-" of the core life insurance entities of The Phoenix Companies, Inc. (Phoenix) [NYSE: PNX], which includes Phoenix Life Insurance Company (Phoenix Life) and PHL Variable Insurance Company. In addition, A.M. Best has revised the outlook to positive from stable and affirmed the ICR of "bb-" of Phoenix, as well as all the debt ratings on the outstanding securities issued by the group. All companies are headquartered in Hartford, CT. (See below for a detailed listing of the debt ratings.)

The revised outlook reflects the positive actions taken by Phoenix's management in improving the company's strategy, which includes stabilizing Phoenix's balance sheet while transforming its business profile and successfully executing new business growth. Specifically, A.M. Best notes Phoenix's increased capitalization levels, improved revenues and earnings, reduced surrender activity, good expense management and continued de-risking of its investment portfolio. During the last two years, the company has repositioned its annuity line by developing and offering fixed indexed annuities to the middle market. As a result, Phoenix has experienced meaningful top line revenue growth in 2011 with deposits projected to reach approximately $1.2 billion in 2012.

Additionally, Phoenix has expanded its distribution capabilities within its Saybrus subsidiary, which is now expected to be profitable, while continuing to expand its relationships with independent marketing organizations. Surrenders in both the life and annuity businesses have trended positively on a sequential basis as a result of conservation efforts and are now closer to historical norms. Additionally, credit impairments are trending positively and are expected to trend towards long-term historical levels in 2012.

A.M. Best believes the group continues to maintain relatively manageable financial leverage, which is expected to be roughly 27% at year-end 2011, with interest coverage approaching three times, and both are within A.M. Best guidelines for the organization's current ratings. In addition, Phoenix holds additional liquidity at the holding company to cover its fixed charges by two times.

Somewhat offsetting these positive rating factors are the potential for a reversal of the aforementioned positive trends. A.M. Best notes that Phoenix's new business is concentrated around the highly competitive fixed indexed annuity line of business, which requires competitive pricing and ongoing risk management. Also, although surrender activity has slowed, the levels remain above industry norms and can potentially place additional liquidity stress on the company at a time when alternative sources are limited. Risks also remain in the investment portfolio based on the above-average size of below investment grade holdings relative to surplus as well as spread compression due to lower portfolio reinvestment yields. Moreover, although Phoenix Life's risk-adjusted capital level will benefit from a recent reinsurance transaction on a portion of its closed block, A.M. Best views the transaction as financial reinsurance and one-time in nature. Nevertheless, the group has been able to organically grow its regulatory capital ratios year-over-year through statutory operating earnings. A.M. Best believes Phoenix can benefit from additional administrative system consolidations in order to reduce general expenses and continue efforts to broaden the product line while maintaining overall improvements in persistency.

Factors that could lead to positive rating actions include the continuation of positive growth trends in Phoenix's revenues and earnings leading to increased risk-adjusted capital levels, moderating trends in asset impairments, further expense improvements within policyholder administrative platforms and a broadening of Phoenix's business profile.

Factors that could lead to negative rating actions include a return by Phoenix to higher levels of credit risk and investment impairments, increases in surrender activity or other liquidity events, significant decline in regulatory capital ratios or a reversal of the current trend in positive earnings.

Concurrently, A.M. Best has affirmed the FSRs of B+ (Good) and the ICRs of "bbb-" of Phoenix Life and Annuity Company and American Phoenix Life and Reassurance Company. The outlook for both ratings is stable. These two Phoenix subsidiaries are immaterial to the group and are not writing new business.

The following debt ratings have been affirmed: The Phoenix Companies, Inc.-

-- "bb-" on $300 million 7.45% senior unsecured notes, due 2032 Phoenix Life Insurance Company- -- "bb" on $175 million 7.15% surplus notes, due 2034

The principal methodology used in determining these ratings is Best's Credit Rating Methodology -- Global Life and Non-Life Insurance Edition, which provides a comprehensive explanation of A.M. Best's rating process and highlights the different rating criteria employed. Additional key criteria utilized include: "Risk Management and the Rating Process for Insurance Companies"; "A.M. Best's Liquidity Model for U.S. Life Insurers"; "Understanding BCAR for Life/Health Insurers"; "A.M. Best's Ratings & the Treatment of Debt"; and "Rating Members of Insurance Groups." Methodologies can be found at www.ambest.com/ratings/methodology. Founded in 1899, A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com. Copyright © 2012 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.