Fitch Affirms Phoenix Companies’ Ratings; Maintains Positive Outlook on Holding Company

NEW YORK--(BUSINESS WIRE)-- 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, 2012 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% and 28% as March 31, 2012 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% at year-end and as of March 31, 2012 compared to Fitch's maximum guideline of 15%. 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% as of Dec. 31, 2011, in line with expectations. The RBC is estimated at 371% as of March 31, 2012.

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, 2012.

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% 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%;