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A.M. Best Affirms Ratings of The Phoenix Companies, Inc. and Its Subsidiaries

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A.M. Best has affirmed the financial strength ratings (FSR) of B (Fair) and issuer credit ratings (ICR) of “bb+” for the insurance subsidiaries of The Phoenix Companies, Inc. (Phoenix) [NYSE:PNX]. Concurrently, A.M. Best has affirmed the ICR and senior debt rating of “b” of Phoenix. The FSRs continue to have a stable outlook, and the ICRs retain a negative outlook. All companies are headquartered in Hartford, CT.

The actions reflect the inherent uncertainty related to Phoenix’s efforts to complete its prolonged restatement and filing catch-up process, which commenced in late 2012. A.M. Best anticipates that the process is likely to continue until at least December of 2014, when the last required statement is scheduled to be filed with the Securities and Exchange Commission (SEC), making the company a “current filer.” To date, Phoenix has been successful in meeting the SEC-stated deadlines for the majority of its filings. Additionally, related to its outstanding bonds due 2032, Phoenix obtained three covenant waivers and extended its filing deadline with the bond trustee under the indenture to March 2015. Moreover, in conjunction with the restatement, the company has publicly stated that it has identified material weakness in its internal control over financial reporting. As such, Phoenix has begun implementation and execution of its remediation plan.

Since A.M. Best’s last rating review, Phoenix filed both its 2012 and 2013 Forms 10-K with the SEC, as well as 2012 and 2013 audited statutory statements with the applicable state insurance regulators. 2012 restated GAAP results included a consolidated net loss of $168.5 million, which reflected the impact of increases in universal life (UL) reserves largely driven by the low interest rate environment, and increases in fixed indexed annuity reserves for future guaranteed withdrawal benefits. Consequently, as of year-end 2012, GAAP stockholders’ equity had declined materially to $510.5 million, due primarily to accounting errors and the retrospective adoption of amended accounting guidance related to deferred acquisition costs. On a statutory basis, consolidated 2012 net income for the insurance subsidiaries was favorable at $205.9 million, reflecting good underwriting results, including the impact of reinsurance and the modest reduction in the dividend scale on participating policies in the closed block.

Conversely, 2013 consolidated statutory results reflected a material net loss, driven primarily by realized capital losses related to taxes paid as a result of hedges initiated in 2013 to protect against the impact of rising interest rates and position the holding company to utilize tax benefits. Additionally, PHL Variable Life Insurance Company (PHL Variable) reported a net loss reflecting material reserve strengthening as a result of asset adequacy analysis. Although Phoenix’s capital position adequately absorbed these losses, A.M. Best acknowledges the potential for additional cash flow testing reserves going forward. The regulatory risk-based capital ratio for Phoenix’s consolidated statutory entities as of year-end 2013 was sound at approximately 337% of the company action level.

Audited GAAP results for 2013, made public on August 6, 2014, reflected modest net income of $5.1 million, driven primarily by the positive impact of improved mortality assumptions arising from Phoenix’s annual actuarial assumption review. This was partially offset by restatement expenses and audit fees of $88.6 million. As the restatement and catch-up process continues in concert with remediation, A.M. Best expects Phoenix to incur a comparable amount of expenses during 2014 and likely a lower but still elevated level in 2015. A.M. Best notes that GAAP equity reported as of year-end 2013 increased to $583.7 million, and consolidated financial leverage was calculated to be approximately 33%.

Phoenix’s distribution subsidiary, Saybrus Partners, Inc. (Saybrus), continues to be a key component of the group’s strategy to provide annuity and life insurance products to Phoenix’s target middle market. Saybrus is a fee-based business driven by the commission revenue earned on consultation services provided to partner companies, as well as on sales of Phoenix Life Insurance Company and PHL Variable product lines. A.M. Best views favorably Saybrus’ growing contributions to the group’s overall earnings.

While the organization’s sales are primarily fixed indexed annuities, Phoenix continues to invest in the growth of its life products, including several new product launches during 2014. The company has been active in the review of underwriting assumptions and has effectively made adjustments to crediting rates and commission structures as needed. Additionally, Phoenix’s closed block of participating policies continues to report favorable trends related to mortality and surrender activity; A.M. Best monitors the cash flows of this block of business given its sensitivity to interest rates. Moreover, while the company has generally reported good statutory and GAAP metrics over the past few years, A.M. Best remains concerned with Phoenix’s ability to achieve its sales and earnings targets while at the same time strengthening its risk management practices and internal controls.

A revision of the issuer credit rating outlook to stable may occur upon the filing of up-to-date audited GAAP and statutory financials if results do not materially impact the group’s capitalization. Future positive rating actions could result if A.M. Best becomes comfortable that any and all identified internal control weaknesses in financial reporting or operations have been remediated. Conversely, if A.M. Best observes uneven or poor trends in earnings, sales, risk-adjusted capital or investment portfolio losses, negative rating actions are probable. A negative rating action may also transpire if materially adverse results are reported.

For a complete listing of The Phoenix Companies, Inc. and its subsidiaries’ FSRs, ICRs and debt ratings, please visit The Phoenix Companies, Inc.

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Key insurance criteria reports utilized include:

o A.M. Best’s Liquidity Model for U.S. Life Insurers

o Analyzing Insurance Holding Company Liquidity

o Evaluating U.S. Surplus Notes

o Insurance Holding Company and Debt Ratings

o Rating Members of Insurance Groups

o Risk Management and the Rating Process for Insurance Companies

o Understanding BCAR for Life/Health Insurers

A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright (c) 2014 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

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