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 'BB+' from 'BBB'. The Rating Outlook remains Negative. A full rating list is provided below. Fitch's rating action reflects: 1) its ongoing concerns with respect to PNX's strategic direction and the impact on its credit profile longer term; 2) its view that PNX has limited flexibility to improve capital excluding any regulatory relief; 3) the maintenance of the company's current policyholder dividend scale into 2010, which Fitch considers an important lever for the preservation of capital and has been lowered by many of PNX's peers; and 4) negative credit migration in the company's structured portfolio, which could put further pressure on capital.
In Fitch's view, and consistent with its rating definitions, the combination of these concerns has elevated vulnerability for PNX to cease or interrupt policyholder payments, particularly as the result of adverse economic or market changes over time. However, business or financial alternatives may be available to allow for policyholder and contract obligations to be met in a timely manner.
The 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.
In Fitch's view, the uncertainty of PNX's strategic direction could have a negative long-term impact on its credit profile. Fitch believes the potential income generated by PNX's new distribution company, Saybrus Partners, will not offset the decline in earnings from insurance operations. Fitch expects long-term insurance earnings to diminish more rapidly than original expectations primarily as a result of elevated life and annuity surrenders coupled with the very low sales volume. Although Fitch recognizes that the latter will result in less capital strain in the near term, the negative longer-term implications for earnings growth and statutory capital regeneration is of more concern.
Fitch also believes PNX's capital flexibility is limited and that it will be difficult for the company to meet its stated RBC target of 300% by year-end 2009, excluding regulatory relief. PNX has estimated its RBC to be 243% at the end of the third quarter of 2009 (3Q'09), excluding regulatory relief. Self generation of capital through statutory earnings may be difficult with an estimated net loss of $35 million through 3Q'09. Fitch estimated PNX's total adjusted capital (TAC) to be $778 million at the end of 3Q'09, relatively consistent with second quarter results and down 23% from year-end 2008 ($1,013 million). Approximately 22% of PNX's estimated TAC at Sept. 30, 2009 is made up of surplus notes.
Fitch considers the policyholder dividend one of PNX's most powerful capital management tools. Most companies with significant participating policies lowered their 2010 dividend scale to reflect the difficult economic environment, particularly high credit losses. In September 2009, PNX announced that it would maintain the current policyholder dividend scale effective Jan. 1, 2010 for its participating policies. The amount expected to be paid in 2010 is $300 million.
Ratings migration was meaningful in 3Q'09 with below investment grade (BIG) bonds moving to 11.4% of total fixed income securities up from 10.5% at 2Q'09 and 8.2% at year-end 2008. Negative rating migration coupled with declining statutory capital has caused the BIG-to-TAC ratio to increase from 79% at year-end 2008 to 155% estimated at Sept. 30, 2009. Additionally, the composition of BIG portfolio has also migrated to lower rating levels. Based on the amount and quality of the BIG exposure, Fitch believes PNX is more vulnerable to potential credit losses than considered in the previous rating.
Fitch has downgraded the following ratings:
Phoenix Life Insurance Company
AGL Life Assurance Company
PHL Variable Insurance Company
Phoenix Life and Annuity Company
--IFS to 'BB+' from 'BBB'.
The Outlook remains Negative.
Additional information is available at 'www.fitchratings.com'. The issuer did not participate in the rating process other than through the medium of its public disclosure.
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Fitch Ratings
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