OREANDA-NEWS. S&P Global Ratings said today that it raised its long-term counterparty credit and financial strength ratings on The Phoenix Cos. Inc.'s operating subsidiaries Phoenix Life Insurance Co. and PHL Variable Insurance Co. (all core entities to the Nassau Reinsurance Group) to 'BB-' from 'B+'. At the same time, we affirmed our 'B-' issuer credit rating on the nonoperating holding company The Phoenix Cos. Inc. The outlook is positive.

"The upgrade of The Phoenix Cos.' core operating subsidiaries reflects our view of the company's continued improvement and progression of its enterprise risk management (ERM) framework and improvements to its risk-based capital metrics as a result of the infusions made upon merging with Nassau Re," said S&P Global Ratings credit analyst Anthony Beato. We now assess the group's consolidated ERM capabilities as adequate, a revision from our prior view of weak. This is predicated on Phoenix and Nassau Re's significant effort to better understand the organization's risk profile while building an infrastructure of controls and governance to prohibit future material weaknesses and breakdowns. Historically, the lack of risk controls and governance across the enterprise caused a long-dated financial restatement and significant strain on the holding company's liquidity. We believe the new management team and the many strategic initiatives underway will focus the enterprise on better mitigating its diverse set of risks. The company also understands that its success will depend on the continued strength and development of its risk management program, especially as Nassau Re begins to undertake complicated liability risks such as long-term care with relatively small experience in the segment.

We assess Phoenix's group status to Nassau Re as core, as this is Nassau Re's largest acquisition, and Phoenix is the flagship entity of the new enterprise. Through its acquisition, Nassau injected approximately $180 million into Phoenix and its reinsurance affiliate Cayman Re's operations as of second-quarter 2016. $100 million is earmarked by order of the New York and Connecticut regulatory bodies for capital support and infusion into Phoenix's operations from its nonoperating holding company. This will happen if Phoenix does not meet minimum risk-based capital ratios and other items set forth in the order between the regulatory bodies and Nassau Re. This infusion continues to improve the overall representativeness of our modeling and the outcome of our consolidated capitalization analysis as Phoenix closes in on the 'BBB' ratings threshold in our risk-based capital model.

The positive outlook reflects our expectation that Phoenix will continue to improve its financial risk profile through accretive earnings affecting the risk-based capitalization of its operating subsidiaries and in turn its financial flexibility metrics. We expect Phoenix to continue to execute on higher-margin sales across the enterprise, focused on individual life and fixed-indexed annuities, albeit at a slower pace due to the level of capital consumption associated with these products. We expect Phoenix through the additional levels of capitalization to maintain risk-based capital ratios in excess of 300% as a consolidated enterprise and ample holding company liquidity to meet immediate needs.

We could affirm the current ratings on Phoenix if it cannot make continued progress toward profitability, and if it maintains heightened levels of expense within its operations. This would be exhibited by continued operating losses on GAAP and statutory bases that would immediately affect capital accretion and not showcase continued progress toward the 'BBB' ratings level as measured by our risk-based capital model. We could also affirm the current ratings if the organization were to become aggressive from a capital-management perspective and begin to take outsize dividends from its operations or increase the risk tolerances associated with its investment portfolio. We could also affirm the current ratings if Phoenix's financial leverage and fixed-charge coverage deteriorate to beyond 70% and (1.0)x, respectively.

We could raise our ratings on Phoenix if the company were to increase its operating performance as measured on both GAAP and statutory bases. This would be evidenced by profitable growth in its GAAP metrics and statutory adjusted EBIT figures on a consolidated basis in excess of $75 million annually. However, our potential upgrade would not be predicated solely on the absolute level of operating earnings growth, but also on the level of retained earnings that affect its capitalization ratios, which would need to exceed the 'BBB' ratings level as measured by our risk-based capital model. De-leveraging efforts and improvements in fixed-charge coverage metrics that better align with Phoenix's peer group--while remaining above 0.5x—would also factor into a potential upgrade.