10-Q 1 phlv10q111401.txt PHLV 10-Q 3RDQ 2001 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (MARK ONE) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ Commission file number 333-55240 --------- PHL VARIABLE INSURANCE COMPANY ------------------------------ (Exact name of registrant as specified in its charter) Connecticut 06-1045829 ----------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One American Row, Hartford, Connecticut 06102-5056 (800) 447-4312 (Address, including zip code, and telephone number, including area code, of principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X. No__. - As of November 9, 2001, there were outstanding 500 shares of common stock, $5,000 par value per share, of the registrant, all of which were directly owned by PM Holdings, Inc. The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format. PHL Variable Insurance Company TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements Page ------- Unaudited Balance Sheets as of September 30, 2001 and December 31, 2000..................... 1 Unaudited Statements of Income,Comprehensive Income and Stockholder's Equity for the quarter and nine months ended September 30, 2001 and 2000................................... 2 Unaudited Statements of Cash Flows for the nine months ended September 30, 2001 and 2000.... 3 Notes to Unaudited Financial Statements..................................................... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 5 Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 6 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................................................... 6 Item 2. Changes in Securities and Use of Proceeds....................................................... 6 Item 3. Defaults Upon Senior Securities................................................................. 6 Item 4. Submission of Matters to a Vote of Security Holders............................................. 6 Item 5. Other Information............................................................................... 6 Item 6. Exhibits and Reports on Form 8-K................................................................ 6 Signature................................................................................................... 7
PART I. FINANCIAL INFORMATION Item 1. Financial Statements PHL Variable Insurance Company (a wholly-owned subsidiary of PM Holdings, Inc.) Unaudited Balance Sheets ------------------------------------------------------------------------------------------------------------------------------------ As of As of September 30, December 31, 2001 2000 ---- ---- ASSETS (in thousands, except share data) Investments: Held-to-maturity debt securities, at amortized cost........... $ 25,646 $ 13,697 Available-for-sale debt securities, at fair value............. 330,200 144,217 Policy loans.................................................. 850 710 Other invested assets......................................... 6,334 1,618 Short-term investments........................................ 6,395 72,375 Total investments.......................................... 369,425 232,617 Cash and cash equivalents......................................... 141,193 8,404 Accrued investment income......................................... 3,230 1,381 Deferred policy acquisition costs................................. 133,708 84,842 Deferred and uncollected premiums................................. 5,141 6,790 Other assets...................................................... 4,494 1,942 Goodwill, net..................................................... 272 349 Separate account assets........................................... 1,361,155 1,321,582 --------- --------- Total assets.................................................. $ 2,018,618 $ 1,657,907 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Policyholder deposit funds..................................... $ 401,990 $ 194,690 Policy liabilities and accruals................................ 56,922 24,765 Deferred income taxes.......................................... 16,538 3,784 Other liabilities.............................................. 30,595 18,898 Separate account liabilities................................... 1,355,802 1,321,582 --------- --------- Total liabilities............................................. $ 1,861,847 $ 1,563,719 =========== =========== Stockholder's Equity: Common stock ($5,000 par value, 1,000 shares authorized; 500 shares issued and outstanding)............................. 2,500 2,500 Additional paid-in capital..................................... 134,864 79,864 Retained earnings.............................................. 14,513 11,553 Accumulated other comprehensive income......................... 4,894 271 Total stockholder's equity................................. 156,771 94,188 ------- ------ Total liabilities and stockholder's equity................. $ 2,018,618 $ 1,657,907 =========== =========== (The accompanying notes are an integral part of these unaudited financial statements.)
-1- PHL Variable Insurance Company (a wholly-owned subsidiary of PM Holdings, Inc.) Unaudited Statements of Income, Comprehensive Income and Stockholder's Equity ------------------------------------------------------------------------------------------------------------------------------------ For the Three Months For the Nine Months Ended September 30, Ended September 30, ---------------------------- ------------------------ 2001 2000 2001 2000 ------------- ----------- ------------- --------- Revenues: (in thousands) --------- Premiums........................................................... $ (539) $ (63) $ 1,336 $ 3,057 Insurance and investment product fees.............................. 7,930 7,677 23,340 22,161 Net investment income.............................................. 8,747 2,420 18,495 5,966 Net realized investment gains (losses)............................. 395 (80) 107 (42) --- --- --- --- Total revenues.................................................. 16,533 9,954 43,278 31,142 ------ ----- ------ ------ Benefits and Expenses: Policy benefits and increase in policy liabilities................. 11,075 4,222 23,188 15,145 Amortization of deferred policy acquisition costs.................. 1,041 1,401 3,882 6,111 Other operating expenses........................................... 4,639 3,171 12,937 5,446 ----- ----- ------ ----- Total benefits and expenses..................................... 16,755 8,794 40,007 26,702 ------ ----- ------ ------ (Loss) income before income tax (benefit) expense..................... (222) 1,160 3,271 4,440 Income tax (benefit) expense.......................................... (799) 406 311 1,553 ---- --- --- ----- Net income............................................................ 577 754 2,960 2,887 --- --- ----- ----- Other comprehensive income, net of income taxes Unrealized gains on securities..................................... 4,429 255 4,716 359 Reclassification adjustment for net realized (gains) losses included in net income.......................................... (61) 15 (93) 15 --- -- --- -- Total other comprehensive income................................... 4,368 270 4,623 374 ----- --- ----- --- Comprehensive income.................................................. 4,945 1,024 7,583 3,261 Capital contribution.................................................. 20,000 -- 55,000 15,000 ------ ----- ------ ------ Net increase in stockholder's equity.................................. 24,945 1,024 62,583 18,261 Stockholder's equity, beginning of period............................. 131,826 95,426 94,188 78,189 ------- ------ ------ ------ Stockholder's equity, end of period................................... $ 156,771 $96,450 $156,771 $ 96,450 ========= ======= ======== ======== (The accompanying notes are an integral part of these unaudited financial statements.)
-2- PHL Variable Insurance Company (a wholly-owned subsidiary of PM Holdings, Inc.) Unaudited Statements of Cash Flows ------------------------------------------------------------------------------------------------------------------------------------ For the Nine Months Ended September 30, --------------------------- 2001 2000 ------------ ----------- (in thousands) Cash flows from operating activities: Net income ........................................................... $ 2,960 $ 2,887 Adjustments to reconcile net income to net cash used for operating activities: Net realized investment (gains) losses................................ (107) 42 Amortization of goodwill.............................................. 77 102 Deferred income taxes................................................. 10,265 4,231 Increase in accrued investment income................................. (1,849) (506) Increase in deferred policy acquisition costs......................... (52,077) (13,180) Change in other assets/other liabilities.............................. 24,959 (6,227) ------ ------ Net cash used for operating activities................................ (15,772) (12,651) ------- ------- Cash flows from investing activities: Proceeds from the sales, maturities or repayments of available-for-sale debt securities................................. 96,325 10,759 Proceeds from maturities or repayments of held-to-maturity debt securities......................................................... 1,630 4,235 Purchase of available-for-sale debt securities........................ (257,776) (58,923) Purchase of held-to-maturity debt securities.......................... (13,424) (6,483) Change in short-term investments, net................................. 65,980 -- Investment in separate accounts....................................... (6,334) (175) Increase in policy loans.............................................. (140) -- ---- ---- Net cash used for investing activities................................ (113,739) (50,587) -------- ------- Cash flows from financing activities: Capital contribution from parent...................................... 55,000 15,000 Increase in policyholder deposit funds, net of interest credited...... 207,300 66,907 ------- ------ Net cash provided by financing activities................................. 262,300 81,907 ------- ------ Net change in cash and cash equivalents................................... 132,789 18,669 Cash and cash equivalents, beginning of period............................ 8,404 23,039 ----- ------ Cash and cash equivalents, end of period.................................. $141,193 $41,708 ======== ======= Supplemental cash flow information: Income taxes received, net................................................ $ (132) $ -- (The accompanying notes are an integral part of these unaudited financial statements.)
-3- PHL Variable Insurance Company (a wholly-owned subsidiary of PM Holdings, Inc.) Notes to Condensed Financial Statements ------------------------------------------------------------------------------- 1. Organization and Description of Business PHL Variable Insurance Company (PHL Variable) offers variable annuity and non-participating life insurance products in the United States of America. PHL Variable is a wholly-owned subsidiary of PM Holdings, Inc. (PM Holdings). PM Holdings is a wholly-owned subsidiary of the former Phoenix Home Life Mutual Insurance Company which was renamed Phoenix Life Insurance Company (Phoenix) as a result of the reorganization and initial public offering. See Note 3 - "Reorganization." 2. Basis of presentation The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The State of Connecticut Insurance Department (the Insurance Department) recognizes only statutory accounting practices for determining and reporting the financial condition and results of operations of an insurance company for determining solvency under the Connecticut State Insurance Law. No consideration is given by the Insurance Department to financial statements prepared in accordance with GAAP in making such determination. In the opinion of management, adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation, have been included. Operating results for the nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. These unaudited financial statements should be read in conjunction with the financial statements of PHL Variable for the year ended December 31, 2000. 3. Reorganization Under the terms of the plan of reorganization, which the board of directors of Phoenix unanimously adopted on December 18, 2000 and amended and restated on January 26, 2001, on June 25, 2001, the effective date of demutualization, Phoenix Home Life Mutual Insurance Company (the mutual company) converted from a mutual life insurance company to a stock life insurance company and became a wholly owned subsidiary of The Phoenix Companies, Inc. At that time, the mutual company changed its name to Phoenix Life Insurance Company. 4. Income Taxes The effective tax rate for the quarter and nine months ended September 30, 2001 was 360.0% and 9.5 %, respectively, compared to a rate of 35% for the comparable periods in 2000. This was primarily due to a favorable permanent adjustment attributable to a dividend received deduction on separate accounts being projected for the current year which was not included in the prior year. 5. Commitments and Contingencies In the normal course of its business operations, PHL Variable is involved with litigation from time to time with claimants, beneficiaries and others; however, there were no litigation matters pending as of September 2001. -4- Item 2. Management's Discussion and Analysis of Results of Operations PHL Variable Insurance Company (a wholly-owned subsidiary of PM Holdings, Inc.) Management's Discussion and Analysis ------------------------------------------------------------------------------- Results of Operations --------------------- Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30, 2000 Premiums, net of reinsurance ceded, were $1.3 million for the nine months ended September 30, 2001, a decrease of $1.8 million, or 58%, from $3.1 million for the comparable period in 2000. This decrease is primarily a result of shifting new term business to another subsidiary. No new premiums were billed for the nine months ended September 30, 2001, compared to $8.4 million billed for the nine months ended September 30, 2000. Net investment income was $18.5 million for the nine months ended September 30, 2001, an increase of $12.5 million, or 208% increase from $6.0 million for the comparable period in 2000. This increase was primarily the result of higher average invested assets supporting a growing business. The yield on average invested assets was 6.8% for the nine months ended September 30, 2001 compared to 6.4% for the comparable period in 2000. Policy benefits and increase in policy liabilities was $23.2 million for the nine months ended September 30, 2001, a increase of $8.1 million, or 53%, from $15.1 million for the comparable period in 2000. This increase is primarily due to the higher interest credited on the guaranteed interest account of variable annuities, offset by slower reserve growth for term life insurance. Amortization of deferred policy acquisition costs was $3.9 million for the nine months ended September 30, 2001, a decrease of $2.2 million, or 36%, from $6.1 million for the comparable period in 2000. This decrease is primarily due to lower estimated gross margins resulting from unfavorable market performance Other operating expenses were $12.9 million for the nine months ended September 30, 2001, an increase of $7.5 million, or 139%, from $5.4 million for the comparable period in 2000. This increase is due in part to an increase in the sales of our variable annuity and universal life products, offset by decreases in sales of our term products. In addition, in the fourth quarter of 2000, it was determined PHL Variable should have been allocated more expenses from the parent company to support a growing business. As a result, operating expenses for the nine months ended September 30, 2000 were low with respect to the volume of business. An adjustment was made in the fourth quarter of year 2000 to reflect a more appropriate level of expenses Liquidity and Capital Resources ------------------------------- PHL Variable's liquidity requirements are met by anticipating and managing the timing of cash uses and sources provided by insurance operations, investing activities and capital contributions from the parent. The growth in sales has created a need for additional cash in order to cover the acquisition costs incurred in operating activities. Those liquidity requirements are currently being met through investing activities and capital contributed by the parent. PM Holdings has made capital contributions of $20.0 million in September 2001, $15.0 million in June 2001, $20.0 million in February 2001 and $15.0 million in 2000. -5- Item 3. Quantitative and Qualitative Disclosures About Market Risk. Not applicable. PART II. OTHER INFORMATION Item 1. Legal Proceedings. There were no significant items. Item 2. Changes in Securities and Use of Proceeds. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. Not applicable. -6- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHL VARIABLE INSURANCE COMPANY By /s/Simon Y. Tan ------------------ Simon Y. Tan, President November 13, 2001 -7-