Income Taxes

Phoenix and PHL Variable file a consolidated U.S. Federal income tax return. The Company also files combined, unitary and separate income tax returns in various states.


10.	Income Taxes (continued)



Significant Components of Income Taxes:	Years Ended December 31,
($ in millions)	2013			2012			2011
Income tax expense (benefit) attributable to:
Current	$	(21.7	)	$	27.7		$	0.6
Deferred	—			(11.5		)	(6.9		)
Income tax expense (benefit)	$	(21.7	)	$	16.2		$	(6.3	)



Reconciliation of Effective Income Tax Rate:	Years Ended December 31,
($ in millions)	2013			2012			2011

Income (loss) before income taxes	$	34.0		$	(121.5	)	$	(26.3	)
Income tax expense (benefit) at statutory rate of 35.0%	11.9			(42.5		)	(9.2		)
Dividend received deduction	(1.2		)	(1.5		)	(2.0		)
Valuation allowance increase (release)	(31.7		)	60.2			4.1
Other, net	(0.7		)	—			0.8
Income tax expense (benefit)	$	(21.7	)	$	16.2		$	(6.3	)
Effective income tax rates	(63.8%)			(13.3%)			23.9%



Allocation of Income Taxes:	Years Ended December 31,
($ in millions)	2013			2012		2011

Income tax expense (benefit)	$	(21.7	)	$	16.2	$	(6.3	)
Income tax from OCI:
Unrealized investment (gains) losses	(11.8		)	24.9		4.2
Pension	—			—		—
Policy dividend obligation and deferred policy acquisition cost	—			—		—
Other	—			—		—
Income tax related to cumulative effect of change in accounting	—			—		—
Total income tax recorded to all components of income	$	(33.5	)	$	41.1	$	(2.1	)



Deferred Income Tax Balances Attributable to Temporary Differences:	As of December 31,
($ in millions)	2013			2012
Deferred income tax assets
Future policyholder benefits	$	270.0		$	276.7
Unearned premiums / deferred revenues	—			—
Investments	—			—
Net operating and capital loss carryover benefits	—			1.7
Other	0.8			0.2
Available-for-sale debt securities	28.0			16.2
Alternative minimum tax credits	2.1			1.8
Subtotal	300.9			296.6
Valuation allowance	(74.2		)	(105.4		)
Total deferred income tax assets, net of valuation allowance	226.7			191.2
Deferred income tax liabilities
Deferred policy acquisition costs	(101.7		)	(92.2		)
Investments	(78.7		)	(77.8		)
Other	(18.3		)	(5.0		)
Gross deferred income tax liabilities	(198.7		)	(175.0		)
Net deferred income tax assets	$	28.0		$	16.2


10.	Income Taxes (continued)

As of December 31, 2013, we performed our assessment of the realization of deferred tax assets. This assessment included consideration of all available evidence – both positive and negative – weighted to the extent the evidence was objectively verifiable. In performing this assessment, the Company considered the existence of 2013 GAAP pre-tax income of $34.0 million driven primarily by gains on guaranteed insurance benefit liabilities and actuarial assumption changes. Although this GAAP income does allow for realization of some deferred tax assets, Management, does not view this pre-tax income to be indicative of sustainable core earnings and accordingly, does not view this income as a substantial form of positive evidence because this income did not arise until the fourth quarter of 2013.

With the existence of PHL Variable and parent company life subgroup taxable profits in recent years, the Company has experienced some utilization of its tax loss carryovers and incurred current federal income tax. Under U.S. federal tax law, taxes paid by PHL Variable and the life subgroup are available for recoupment in the event of future losses. Under GAAP, the ability to carryback losses and recoup taxes paid can be considered as a source of income when assessing the realization of deferred tax assets. The Company believes that the consolidated return will remain taxable in the near term and as such, we do not believe the taxes paid in the current and prior years will be recouped. Accordingly, management has not deemed the PHL Variable taxes paid in current and prior tax years as a viable source of income when performing its valuation allowance assessment.

Further, we believe that the continued existence of significant negative evidence illustrated by a three year cumulative loss before tax is significant enough to overcome any positive evidence that exists with respect to the 2013 pretax operating results. Further additional negative evidence, includes but is not limited to, material weaknesses in internal controls over financial reporting which adversely affect the accuracy of the Company’s financial data, continued costs associated with the financial restatement, risk of failure to comply with the filing deadlines expressed by the SEC, and downgrades of financial strength credit ratings which have the potential to increase policy surrenders and withdrawals.

Due to the application of our tax sharing agreement, positive and negative evidence at both the parent and subsidiary levels have been considered in our assessment of deferred tax asset realizability at the subsidiary level. Due to the significance of the negative evidence at both the parent and subsidiary levels, as well as the weight given to the objective nature of the cumulative losses in recent years, and after consideration of all available evidence, we concluded that our estimates of future taxable income, timing of the reversal of existing taxable temporary differences and certain tax planning strategies did not provide sufficient positive evidence to assert that it is more likely than not that certain deferred tax assets would be realizable. To the extent either PHL Variable or PNX can demonstrate the ability to generate sustained profitability in the future, the valuation allowance could potentially be reversed resulting in a benefit to income tax expense.

As of December 31, 2013, we concluded that our estimates of future taxable income, certain tax planning strategies and other sources of income did not constitute sufficient positive evidence to assert that it is more likely than not that certain deferred tax assets would be realizable. Accordingly, a valuation allowance of $74.2 million has been recorded on net deferred tax assets of $102.2 million. The valuation allowance recorded constitutes a full valuation allowance on the net deferred tax assets that require future taxable income in order to be realized. The remaining deferred tax asset of $28.0 million attributable to available-for-sale debt securities with gross unrealized losses do not require a valuation allowance due to our ability and intent to hold these securities until recovery of fair or principle value through sale or contractual maturity, thereby avoiding the realization of taxable losses. This conclusion is consistent with prior periods. The impact of the valuation allowance on the allocation of tax to the components of the financial statements included a decrease of $31.7 million in net loss and an increase of $0.5 million in OCI-related deferred tax balances.

As of December 31, 2013, we had deferred tax assets of $2.1 million related to alternative minimum tax credit carryovers which do not expire.

The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2011. During 2012, the Company resolved examination issues for tax years 2010 which resulted in adjustments to tax attribute carryforwards. No material unanticipated assessments were incurred, and no adjustment to our liability for uncertain tax positions was required.

There were no unrecognized tax benefits for the years ended December 31, 2013, 2012 and 2011.


10.	Income Taxes (continued)

Management believes that adequate provisions have been made in the financial statements for any potential assessments that may result from tax examinations and other tax related matters for all open tax years. Based upon the timing and status of our current examinations by taxing authorities, we do not believe that it is reasonably possible that any changes to the balance of unrecognized tax benefits occurring within the next 12 months will result in a significant change to the results of operations, financial condition or liquidity.

The Company has no interest and penalties as income tax expense and no accrued interest and penalties in the related income tax liability for the years ended December 31, 2013 and December 31, 2012.