OREANDA-NEWS. Fitch Ratings has affirmed Phoenix Life Limited's and Phoenix Life Assurance Limited's Insurer Financial Strength (IFS) ratings at 'A'. They are the main operating companies of Phoenix Group Holdings (Phoenix), whose Issuer Default Rating (IDR) was affirmed at 'A-'. The Outlooks on all ratings are Stable.

Fitch has also affirmed PGH Capital Limited's (PGHCL) GBP300m 5.75% senior notes (XS1081768738) and GBP428m subordinated Tier 2 notes (XS1171593293) ratings of 'BBB+' and 'BBB-', respectively. Both debt issues are guaranteed by Phoenix.

KEY RATING DRIVERS
The ratings reflect Phoenix's strong capitalisation and market position. These positive rating factors are offset by high, but significantly improved, financial leverage and fairly weak fixed-charge coverage.

Fitch views Phoenix's capitalisation as "very strong" based on the agency's Prism FBM capital model. The group's Insurance Groups Directive (IGD) solvency ratio (calculated with the formula for closed book insurers) was 133% at end-1H15 (end-2014: 128%).

Phoenix is the largest consolidator of closed life assurance funds in the UK with total assets of GBP64.7bn (excluding reinsurance assets) at end-1H15 and gross written premiums of GBP981m in 2014. However, as Phoenix's strategy is to acquire run-off portfolios only in the UK and Ireland, the group's geographical diversification is low. This exposes Phoenix to economic and regulatory changes in these two countries.

Phoenix's financial leverage has improved significantly in recent years, to 33% at end-1H15 (2010: 54%). Fitch expects financial leverage to remain stable in the medium term.

Fixed-charge coverage ratios are weak for the ratings, averaging 3.4x between 2010 and 2014. However, coverage was stronger at 5.7x in 2014, benefiting from reduced interest costs, reflecting Phoenix's lower financial leverage, but also from the proceeds of the sale of Phoenix's asset manager Ignis to Standard Life. All else equal, Fitch expects interest coverage to decline below 2014 levels in 2015 due to the absence of the proceeds of the Ignis sale.

RATING SENSITIVITIES
Phoenix's ratings could be upgraded if the group's Prism FBM score improves to "extremely strong" or leverage falls below 30% for a sustained period. Fixed-charge coverage higher than 7x for a sustained period of time could also lead to an upgrade.

A Prism FBM score below "very strong" or financial leverage above 35% could result in a downgrade.