OREANDA-NEWS. Fitch Ratings has affirmed Phoenix Life Limited's and Phoenix Life Assurance Limited's Insurer Financial Strength (IFS) ratings at 'A' with Positive Outlooks. They are the main operating companies of Phoenix Group Holdings (Phoenix). Fitch has also affirmed Phoenix's Issuer Default Rating (IDR) of 'A-' with a Positive Outlook.

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

KEY RATING DRIVERS

The Positive Outlook reflects potential benefits from the proposed acquisition of AXA Wealth's pension and protection business for GBP375m. Phoenix is financing the acquisition through the issuance of GBP194m of new equity and via a bridge loan facility of up to GBP220m. Fitch views the transaction as positive for Phoenix's market position and expects that the transaction will have a favourable impact on the company's capitalisation and financial leverage. Fitch expects that the acquisition will accelerate the release of capital requirements due to increased diversification of life insurance risks because AXA Wealth's pension and protection business has a higher proportion of mortality risk compared to longevity risk than Phoenix's existing business. Phoenix plans to repay the bridge loan within six month of the completion of the acquisition.

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.

We view Phoenix's capitalisation, as measured by our Prism factor-based capital model (Prism FBM), as "extremely strong" based on end-2015 data (end-2014: "very strong"). The group's Insurance Groups Directive coverage ratio was 135% at end-2015 (end-2014: 128%) and its Solvency II coverage ratio was 130%. As the Solvency II ratio is dampened by the inclusion of own funds and solvency capital requirements of with-profit funds and staff pension schemes that are in surplus, Phoenix also reported the ratio excluding these effects, its "shareholder capital coverage" ratio, which was 154%.

Phoenix's financial leverage has improved significantly in recent years, to 31% at end-2015 (2011: 52%). Fitch expects financial leverage to continue to improve in the medium term.

Phoenix's fixed-charge coverage was around 3x in 2015 (2014: around 6x), in line with the 2011-2015 average of around 4x, which is weak for the rating. The decline in 2015 was due to coverage in 2014 being supported by the proceeds of the sale of Phoenix's asset manager Ignis to Standard Life and lower cash generation from Phoenix's operating companies in 2015 reflecting a one-off event to retain capital in the life companies' due to Solvency II.

Phoenix is the largest consolidator of closed life assurance funds in the UK with total assets of GBP60.6bn (excluding reinsurance assets) at end-2015 and gross written premiums of GBP902m in 2015. However, as Phoenix's strategy is to acquire run-off portfolios only in the UK, the group's geographical diversification is limited. This exposes Phoenix to economic and regulatory changes in the UK.

Fitch expects Brexit to drive widespread credit pressure, as life insurers tend to be sensitive to deterioration of the market values of their assets. Sustained economic weakness leading to material deterioration in the market values of assets or lower demand for business could place UK insurers at risk of downgrades.

RATING SENSITIVITIES

The ratings could be upgraded if Phoenix's score in Prism FBM remains "extremely strong" and financial leverage falls below 30% with Fitch expecting it to remain below 30%. Fixed-charge coverage higher than 7x for a sustained period could also lead to an upgrade. An upgrade is subject to evidence of successful integration of Embassy and SunLife into Phoenix's operations.

The Outlook could be revised to Stable if the integration of Embassy and SunLife into Phoenix's operation is not successful or if Prism FBM does not remain "extremely strong" or financial leverage does not fall below 30% in 2017.