Fitch Downgrades Phoenix Life Insurance Company's IFS to 'BBB'; Outlook Negative

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has downgraded the Insurer Financial Strength (IFS) ratings assigned to the life insurance subsidiaries of The Phoenix Companies, Inc. (NYSE:PNX) to 'BBB' from 'BBB+', removed the ratings from Rating Watch Negative, and assigned a Negative Outlook. A full rating list is provided below.

The rating action reflects the deterioration in PNX's statutory capital and risk-based capital (RBC) relative to previous levels and Fitch's expectations. PNX's statutory surplus and asset valuation reserve (AVR) was $619.5 million at the end of the second quarter 2009 versus $853.3 million at year-end 2008 (down 27%). The company's RBC is estimated to have declined to 260% at June 30, 2009, versus 338% at year-end 2008. These declines were primarily a result of: 1) investment impairments; 2) reserve strengthening due to unfavorable mortality in PNX's universal life block and its discontinued accident and health reinsurance business; and 3) unrealized derivative losses relating to variable annuity reserves.

Fitch's Negative Outlook is primarily based on concern over PNX's weak operating earnings profile, very limited financial flexibility, and an expectation of further deterioration in the company's capital position over the near term, driven by credit losses. Additionally, Fitch believes execution risk exists with respect to PNX's new growth strategy, which has been deployed to rebuild a franchise value that Fitch believes is significantly diminished with the loss of its State Farm and National Life Group distribution arrangements. Fitch believes the success of PNX's new strategy for future sales growth is contingent on its focus on private label products and less rating sensitive distribution partners.

Fitch believes pursuit of the new sales strategy should be less intensive to statutory capital over the near term. However, it could also have negative longer-term implications for earnings growth and statutory capital regeneration if unsuccessful.

Fitch believes the primary contributors to future investment impairments are likely to be PNX's corporate bonds and bank collateralized debt obligation (CDO) holdings. However, Fitch recognizes that a mitigating factor to investment impairments is their partial absorption in the policyholder dividend of PNX's closed block.

At this time, Fitch believes PNX's liquidity position is sound at the insurance operating company level. Fitch estimates assets available for policyholder obligations are in excess of required liquidity under a stressed scenario. Given the long duration of the liability characteristics, PNX has the ability to hold investment securities to maturity, in Fitch's opinion, barring an unforeseen accelerated rate of policyholder surrenders for a prolonged period. PNX does not participate in institutional businesses that could put pressure on liquidity.

Fitch views PNX's holding company liquidity as adequate for near-term interest and operating expenses. PNX has $89 million in cash at the holding company level and has no principal debt payments due until 2032. The maximum dividend from the insurance operating subsidiaries in 2009 is $53 million. Fitch believes the capacity for future dividends is uncertain given the decline in capital and statutory earnings, which could put pressure on long-term cash needs at the holding company.

Fitch has downgraded and placed the following ratings on Negative Outlook:

Phoenix Life Insurance Company

AGL Life Assurance Company

PHL Variable Insurance Company

Phoenix Life and Annuity Company

--Insurer financial strength (IFS) to 'BBB' from'BBB+'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The issuer did not participate in the rating process other than through the medium of its public disclosure.





Fitch Ratings

Lauren Kalinowski, CPA, +1-212-908-0524 (New York)

Bruce Cox, +1-312-606-2316 (Chicago)

or

Brian Bertsch, +1-212-908-0549

(Media Relations, New York)

brian.bertsch@fitchratings.com



Source: Fitch Ratings