S&P Places Counterparty Credit Ratings of Phoenix Cos. (PNX) on CreditWatch Negative

Standard & Poor's Ratings Services said today that it placed its 'B-' long-term counterparty credit rating on Phoenix Cos. (NYSE: PNX) (Phoenix's non-operating holding company) and its 'B+' long-term counterparty credit and financial strength ratings on PHL Variable Insurance Co. (PHLVIC) on CreditWatch with negative implications. At the same time, we placed our 'B+' long-term counterparty credit and financial strength ratings on Phoenix Life Insurance Co. (PLIC) on CreditWatch with developing implications.

Phoenix announced various capital-management actions to improve risk-based capitalization (RBC) at its operating subsidiaries PLIC and PHLVIC while streamlining the organization's regulatory operating environment by de-stacking its insurance operating subsidiaries. This includes an intercompany reinsurance transaction between PLIC (NY-domiciled) and PHLVIC (CT-domiciled) on a modified coinsurance basis to move more-profitable business to the less-capitalized Connecticut-based subsidiary. This transaction, which was effective June 30, 2015, allows PLIC to retrocede on a modified coinsurance basis the liabilities of a number of corporate-owned life insurance blocks of business to PHLVIC. The immediate effects of this transaction will be positive to both the RBC and surplus of each operating subsidiary based primarily on the diversification benefit afforded to PHLVIC through the addition of more-permanent profitable life business. It will also help mitigate the nearer-term need for additional reserve-strengthening requirements, bringing profitable business into the operating subsidiary that is not as sensitive to interest rates. The immediate impact to PLIC's RBC and surplus also will be positive, reducing risk-based charges used in the calculation of its RBC ratio.

In tandem with the reinsurance transaction, Phoenix announced prospective plans to de-stack its insurance operating subsidiaries in an effort to create a more streamlined regulatory structure while improving capital fungibility among its insurance entities. This proposed plan is to be completed by July 31, 2015, and is subject to regulatory approval by Phoenix's domiciled regulators (PLIC: New York; PHLVIC: Connecticut). Upon review of the proposed streamlining, the New York Department of Financial Services and Phoenix both agreed that Phoenix will not use any future dividends paid from PLIC to its non-operating holding company to meet the capital needs of PHLVIC. This unique clause leaves Phoenix with approximately $83 million in cash and marketable securities as of first-quarter 2015 at its non-operating holding company, which we view as being ample to meet at least two years' of fixed charges and debt service.

This proposed structural change has altered our view of the organization's credit fundamentals, which can affect our financial strength ratings. Our opinion is primarily predicated on our forward-looking view of the group status of each of Phoenix's operating subsidiaries, along with our prospective view of capitalization, the availability of liquidity under unforeseeable circumstances, and the importance of each operating subsidiary to the organization's future strategy, to name a few. Therefore, we believe this structural change may exacerbate financial challenges surrounding the viability and organic capital generation capabilities of PHLVIC. At the same time, this change could erode the small base of cash and marketable securities at Phoenix's non-operating holding company, as future dividends from PLIC to the holding company can no longer be utilized for its PHLVIC subsidiary. These challenges coupled with an increase in life sales--while no longer providing financial support to PHLVIC--may affect PLIC's stand-alone credit profile.

We expect that after this transaction and restructuring capitalization will improve slightly at Phoenix's operating subsidiaries, with PLIC maintaining an RBC ratio between 300% and 350% and PHLVIC between 175% and 200%. We also expect the organization to restructure its operating subsidiaries while operationalizing these complex transactions successfully.

The CreditWatch Negative placement of Phoenix Cos. and PHLVIC reflects that we could downgrade the organization if we do not have clarity surrounding potential cash flow testing reserve strengthening and/or capital infusions from the non-operating holding company. This could affect capitalization or the holding company's future fixed-charge paying ability. Concerns also remain surrounding PHLVIC's self-sustainability without dividend capabilities from PLIC, and the potential for one-time event risk that can damage PHLVIC or the Phoenix Cos. non-operating holding company.

The CreditWatch Developing implication placement of PLIC primarily reflects our belief that there could be positive, neutral, or negative rating implications for this subsidiary. This placement also reflects the organization's prospective improvement in capitalization as a result of reduced risk charges and lack of future support to PHLVIC by way of capital infusions.

In line with our assumptions, we will need to evaluate further the impact of these changes on the organization. We expect to resolve the CreditWatch within the next few months as we gain additional clarity on Phoenix's management plans.

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