A.M. Best Downgrades Ratings of The Phoenix Companies, Inc. and Its Subsidiaries; Outlook Negative

OLDWICK, N.J.--()--A.M. Best Co. has downgraded the financial strength rating (FSR) to B++ (Good) from A (Excellent) and issuer credit ratings (ICR) to “bbb+” from “a” of the core life insurance entities of The Phoenix Companies, Inc. (Phoenix) (Hartford, CT) (NYSE: PNX). In addition, A.M. Best has downgraded the ICR to “bb+” from “bbb” of Phoenix, as well as the debt ratings of all outstanding debt securities of Phoenix and Phoenix Life Insurance Company (Phoenix Life) (New York), the group’s lead operating company.

Concurrently, A.M. Best has downgraded the FSRs to B++ (Good) from A- (Excellent) and the ICRs to “bbb” from “a-” of Phoenix Life and Annuity Company (Hartford, CT) and American Phoenix Life and Reassurance Company (Hartford, CT). The outlook for all ratings is negative. (See below for a detailed list of the companies and ratings.)

These rating actions are driven largely by Phoenix’s recent announcement that its top two distributors—State Farm and National Life Group—have suspended sales of Phoenix’s life and annuity products. In 2008, State Farm accounted for approximately 68% of Phoenix’s annuity deposits and 27% of total life premiums, while National Life Group accounted for about 14% of annuity deposits. Accordingly, Phoenix announced a strategic repositioning of its business, shifting the focus of new business development to private labeling and alternative retirement product offerings. A.M. Best believes the contraction in Phoenix’s business profile will be significant as it attempts to develop new distribution channels for its core product offerings in a difficult sales environment for life insurance and variable annuities. Additionally, A.M. Best believes that Phoenix faces execution risk associated with the expense reductions necessary to align its work force with expected future sales levels.

Moreover, A.M. Best is concerned regarding Phoenix’s exposure to securities with emerging risks in the company’s general account investment portfolio. 42% of the bond portfolio is invested in residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS) and financial sector holdings. Furthermore, over 8% of bonds are below investment grade (BIG), with 41% of BIG securities in the lower NAIC Classes (4-6). Phoenix also maintains a general account exposure of approximately 5% to investments in alternative asset classes, such as private equity funds, limited partnership interests and hedge fund-of-funds, which have been adversely affected by the turmoil in the debt and equity markets. A.M. Best notes that Phoenix’s closed block represents about 58% of the company’s invested assets and that generally proportional amounts of its RMBS and CMBS investments are allocated to this block. Nevertheless, Phoenix maintains considerable unrealized losses on investments, which were approximately 40% of reported stockholders’ equity at year-end 2008. Lastly, A.M. Best has concerns over the recent identification by Phoenix’s management of a material weakness in its internal control over financial reporting and will closely monitor the remediation process.

Phoenix’s ratings reflect sufficient (albeit reduced) capitalization at the operating companies, sound liquidity, manageable financial leverage and steady contribution of earnings (about $30-$40 million) from its sizable closed block. A.M. Best notes that Phoenix Life has the capacity to dividend up to $53 million to the holding company for debt service and other expenses and notes Phoenix’s ability to reduce the non-guaranteed policyholder dividend scale.

Additionally, Phoenix has taken steps in this tough economic environment to preserve capital and liquidity by eliminating the annual shareholder dividend and redesigning product offerings to reduce capital requirements. However, A.M. Best notes Phoenix’s reduced overall financial flexibility due to the substantial decline in its stock price as well as a recently completed reinsurance transaction and other capital planning initiatives, which improved capital at year end, but reduce the number of options Phoenix has going forward.

The FSR has been downgraded to B++ (Good) from A (Excellent) and ICRs to “bbb+” from “a” for the following core life insurance entities of The Phoenix Companies, Inc.:

  • Phoenix Life Insurance Company
  • PHL Variable Insurance Company
  • AGL Life Assurance Company

The following debt ratings have been downgraded:

The Phoenix Companies, Inc.—

-- to “bb+” from “bbb” on $300 million 7.45% senior unsecured notes, due 2032
 

Phoenix Life Insurance Company—

-- to “bbb-” from “bbb+” on $175 million 7.15% surplus notes, due 2034

The following indicative debt ratings have been downgraded:

The Phoenix Companies, Inc.—

-- to “bb+” from “bbb” on senior unsecured debt
-- to “bb” from “bbb-” on subordinated debt
-- to “bb-” from “bb+” on preferred stock

For Best’s Debt Ratings, all other Best’s Credit Ratings, an overview of the rating process and rating methodologies, please visit www.ambest.com/ratings.

The principal methodologies used in determining these ratings, including any additional methodologies and factors, which may have been considered, can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.

Contacts

A.M. Best Co.
Analysts:
Thomas Rosendale, 908-439-2200, ext. 5201
thomas.rosendale@ambest.com
or
Andrew Edelsberg, 908-439-2200, ext. 5182
andrew.edelsberg@ambest.com
or
Public Relations:
Jim Peavy, 908-439-2200, ext. 5644
james.peavy@ambest.com
or
Rachelle Morrow, 908-439-2200, ext. 5378
rachelle.morrow@ambest.com

Contacts

A.M. Best Co.
Analysts:
Thomas Rosendale, 908-439-2200, ext. 5201
thomas.rosendale@ambest.com
or
Andrew Edelsberg, 908-439-2200, ext. 5182
andrew.edelsberg@ambest.com
or
Public Relations:
Jim Peavy, 908-439-2200, ext. 5644
james.peavy@ambest.com
or
Rachelle Morrow, 908-439-2200, ext. 5378
rachelle.morrow@ambest.com