Restatement and Amendment of Previously Reported Financial Information

This Quarterly Report on Form 10-Q for the period ended June 30, 2013 (this “Form 10-Q”) is being filed by the Company (or “PHL Variable”) subsequent to the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the Securities and Exchange Commission (the “SEC”) on August 22, 2014 (the “2013 Form 10-K”). The 2013 Form 10-K contains audited financial statements of the Company for the years ended December 31, 2013, 2012 and 2011 and unaudited financial information presented for each quarter during the fiscal year 2013.

The Company filed a Current Report on Form 8-K with the SEC on September 18, 2012 (as was amended by Forms 8-K/A filed by the Company on November 8, 2012, March 15, 2013 and April 24, 2013, respectively) disclosing its conclusion that certain of its previously issued annual audited and unaudited financial statements contained in its historical Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q should no longer be relied upon and should be restated.

In the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the SEC on April 25, 2014 (the “2012 Form 10-K”), the Company restated and corrected the following financial statements of the Company (the “Restatement”): (i) the audited balance sheet as of December 31, 2011 and statements of income and comprehensive income, statements of cash flows and statements of changes in stockholder’s equity for each of the years ended December 31, 2011 and 2010; and (ii) the unaudited statements of income and comprehensive income, unaudited balance sheets, unaudited statements of cash flows and unaudited statements of changes in stockholder’s equity for the periods ended March 31 and June 30, 2012 and for each of the quarterly periods in fiscal year 2011. In addition, prior periods have been amended for the retrospective adoption of amendments to ASC 944, Financial Services - Insurance (“ASU 2010-26,” Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts) and correction of accounting errors related to the adoption as originally reported in the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2012. The 2012 Form 10-K was filed by the Company in lieu of the Company separately filing with the SEC amendments to its previously filed Annual Reports on Form 10-K for each of the years ended December 31, 2011 and 2010 and its previously filed Quarterly Reports on Form 10-Q for the quarterly periods ended March 31 and June 30, 2012, and March 31, June 30 and September 30, 2011.

The unaudited financial statements for the three and six months ended June 30, 2012 contained in this Form 10-Q are presented on a restated and amended basis, consistent with both the restated and amended financial statements for the year ended December 31, 2012 and the three and six month periods ended June 30, 2012 contained in the 2012 Form 10-K, and reflects corrections that were made during the Restatement process impacting such periods and to amend such unaudited financial statements for the impact of the retrospective adoption of amended accounting guidance. Accordingly and as discussed in the 2012 Form 10-K, the Company has restated and amended its financial statements as of and for the three and six months ended June 30, 2012 to: (i) adjust for impact of these errors; (ii) record previously identified out-of-period errors that were previously determined not to be material individually, or in the aggregate, in the appropriate period; and (iii) amend the financial statements for the impact of the retrospective adoption of amended accounting guidance discussed more fully in the “Revision for the Retrospective Adoption of Amended Accounting Guidance” section below.

The Company has classified the errors that were affected by the Restatement into the following major categories:

1. Actuarial Finance (which includes various subcategories as noted more fully below)

2. Investments (which includes various subcategories as noted more fully below)

3. Reinsurance Accounting

4. Cash Flows and Changes in Classification

In addition to these four categories, there are certain items labeled “other restatement adjustments” which primarily relate to previously recorded out-of-period errors that were previously identified and determined not to be material individually or in the aggregate. The Company considered each of these errors individually or in the aggregate during the course of the Restatement and concluded that certain of these previously identified errors, namely actuarial, would be most appropriately presented within separately identifiable categories as noted in more detail within the “Actuarial Finance” section below, with the remaining errors most appropriately categorized into “other restatement adjustments” rather than any of the four major categories. In an effort to provide greater transparency into these remaining “other restatement adjustments,” the Company has provided additional details underlying select errors for certain financial statement line items, as deemed appropriate. These details are presented in the financial statement tables detailed more fully within this Note below.

Actuarial Finance

The Company determined that there were errors related to the actuarial valuation of insurance liabilities and the amortization of deferred policy acquisition costs (“DAC”). Errors were identified related to data, assumptions and valuation methodologies and separated into the following sub-categories detailed below.

•

Accounting for Certain Universal Life Type Products: Certain of the Company’s universal life products have benefit features that are expected to produce profits in earlier periods followed by losses in later periods. Under generally accepted accounting principles in the United States (“U.S. GAAP”), the Company is required to establish reserves for the anticipated benefits that exceed the projected contract value and arise from these features. The Company did not properly evaluate certain benefit features and, therefore, did not properly establish the required reserves. The resulting changes in the reserve accruals had a secondary impact on gross profits used to amortize deferred acquisition costs and unearned revenue reserves.

In addition, the Company must periodically assess each of its lines of business for a potential premium deficiency including evaluating experience and if the line of business is expected to produce profits in earlier years followed by losses in later years. The Company did not properly assess the universal life or variable universal life lines of businesses for this profits followed by losses condition. Accordingly, the Company accrued additional reserves over the Restatement period to provide for expected losses in the future.

The Company also determined it was using inappropriate approximations of reinsurance that when aggregated did not properly reflect the underlying reinsurance costs accurately within the models it uses to amortize DAC and to value policyholder liabilities. The impact of the correction of this reinsurance modeling error indirectly impacted the balances discussed above.

In addition, the impact of this error indirectly impacted the calculation of the “Shadow Accounting” error which is a separately identifiable component of the actuarial errors and, accordingly, is described within the “Shadow Accounting” section of “Actuarial Finance” directly below.

The impact of the correction of these errors on the unaudited financial statements as of and for the comparative three and six months ended June 30, 2012 is presented in the “Summary of Correction of Actuarial Finance Errors” table within the “Actuarial Finance” section of this Note below.

•

Shadow Accounting: Under U.S. GAAP accounting, assets and liabilities that are backed by a portfolio of assets classified as available-for-sale must be adjusted to reflect the amount of unrealized gains or unrealized losses “as if the amounts were realized” with a corresponding offset to other comprehensive income (loss) in a process commonly referred to as “shadow accounting”. The Company failed to recognize all of the relationships between the available-for-sale assets and the supported assets and liabilities in calculating these adjustments. During the restatement, the shadow accounting policy and valuation process were corrected to ensure all interrelated assets and liabilities were being properly identified and to ensure that the impacts of these unrealized gains or losses were properly recorded. The impact of the correction of these errors on the unaudited financial statements as of and for the comparative three and six months ended June 30, 2012 is presented in the “Summary of Correction of Actuarial Finance Errors” table within the “Actuarial Finance” section of this Note below.

•

Loss Recognition: Under U.S. GAAP accounting, the Company must periodically assess the net liability (net of DAC) to ensure it is sufficient to provide for the expected policyholder benefits and related expenses. Upon analysis, the Company determined that for certain lines of business the “locked-in” historical estimates used to calculate the policyholder liabilities were insufficient prior to, and also as a result of, entering into a new reinsurance treaty (as discussed within the “Reinsurance Accounting” section below) and in light of the current interest rate environment. Upon identification of loss recognition events, the Company reduced its DAC asset and established additional liabilities to rectify the insufficiency in the net liability which was identified for certain lines of business. The impact of the correction of these errors on the unaudited financial statements as of and for the comparative three and six months ended June 30, 2012 is presented in the “Summary of Correction of Actuarial Finance Errors” table within the “Actuarial Finance” section of this Note below.

•

Fixed Indexed Annuities (“FIA”): During the Company’s analysis of the fixed indexed annuity valuation process, errors associated with the actuarial modeling of certain fixed indexed annuity product features which were modeled beginning in 2011 were identified. These errors related to incomplete or inaccurate data and inappropriate approximations of product features which resulted in the incorrect calculation for the policyholder liabilities including the related embedded derivatives associated with certain benefits for the product. The impact of the correction of these errors on the unaudited financial statements as of and for the comparative three and six months ended June 30, 2012 is presented in the “Summary of Correction of Actuarial Finance Errors” table within the “Actuarial Finance” section of this Note below.

•

Other Actuarial Errors: Included within these amounts are all actuarial out-of-period errors as well as other individually immaterial errors which were identified during the restatement process in conjunction with management’s comprehensive balance sheet review and relating to the Company’s actuarial assumptions, approximations and valuation methods/models for its life and annuity business. The impact of the correction of these errors on the unaudited financial statements as of and for the comparative three and six months ended June 30, 2012 is presented in the “Summary of Correction of Actuarial Finance Errors” table within the “Actuarial Finance” section of this Note below.



Increase (decrease)	Summary of Correction of Actuarial Finance Errors – Three months ended June 30, 2012 Income Statement Impacts [1]
($ in millions)	Actuarial Finance
	Accounting for UL Type Products			Shadow Accounting			Loss Recognition			FIA			Other Actuarial			Total Actuarial Finance Errors [2]
REVENUES:
Premiums	$	—		$	—		$	—		$	—		$	(0.1	)	$	(0.1	)
Insurance and investment product fees	(0.2		)	—			—			—			0.5			0.3
Net investment income	—			—			—			—			—			—
Net realized investment gains (losses):
Total OTTI losses	—			—			—			—			—			—
Portion of OTTI gains (losses) recognized in OCI	—			—			—			—			—			—
Net OTTI losses recognized in earnings	—			—			—			—			—			—
Net realized investment gains (losses), excluding OTTI losses	—			—			—			(4.0		)	(1.0		)	(5.0		)
Net realized investment gains (losses)	—			—			—			(4.0		)	(1.0		)	(5.0		)
Total revenues	(0.2		)	—			—			(4.0		)	(0.6		)	(4.8		)

BENEFITS AND EXPENSES:
Policy benefits	23.5			—			0.5			(6.6		)	3.2			20.6
Policy acquisition cost amortization	(0.1		)	—			—			(1.2		)	(1.8		)	(3.1		)
Other operating expenses	—			—			—			—			0.1			0.1
Total benefits and expenses	23.4			—			0.5			(7.8		)	1.5			17.6
Income (loss) from before income taxes	(23.6		)	—			(0.5		)	3.8			(2.1		)	(22.4		)
Income tax expense (benefit)	—			—			—			—			—			—
Net income (loss)	$	(23.6	)	$	—		$	(0.5	)	$	3.8		$	(2.1	)	$	(22.4	)

COMPREHENSIVE INCOME (LOSS):
Net income (loss)	$	(23.6	)	$	—		$	(0.5	)	$	3.8		$	(2.1	)	$	(22.4	)
Other comprehensive income (loss) before income taxes:
Unrealized investment gains (losses), net of related offsets	—			(14.9		)	—			—			—			(14.9		)
Less: Income tax expense (benefit) related to:
Unrealized investment gains (losses), net of related offsets	—			—			—			—			—			—
Other comprehensive income (loss), net of income taxes	—			(14.9		)	—			—			—			(14.9		)
Comprehensive income (loss)	$	(23.6	)	$	(14.9	)	$	(0.5	)	$	3.8		$	(2.1	)	$	(37.3	)

———————


[1]	All amounts are shown before income taxes, unless otherwise noted.


[2]	Amounts represent the total “Summary of Correction of Actuarial Finance Errors” which is further aggregated into the “Summary of Correction of Errors” in the following pages.



Increase (decrease)	Summary of Correction of Actuarial Finance Errors – Six Months Ended June 30, 2012 Income Statement Impacts [1]
($ in millions)	Actuarial Finance
	Accounting for UL Type Products			Shadow Accounting			Loss Recognition			FIA			Other Actuarial			Total Actuarial Finance Errors [2]
REVENUES:
Premiums	$	—		$	—		$	—		$	—		$	(0.1	)	$	(0.1	)
Insurance and investment product fees	0.1			—			—			—			0.4			0.5
Net investment income	—			—			—			—			—			—
Net realized investment gains (losses):
Total OTTI losses	—			—			—			—			—			—
Portion of OTTI gains (losses) recognized in OCI	—			—			—			—			—			—
Net OTTI losses recognized in earnings	—			—			—			—			—			—
Net realized investment gains (losses), excluding OTTI losses	—			—			—			(3.9		)	0.3			(3.6		)
Net realized investment gains (losses)	—			—			—			(3.9		)	0.3			(3.6		)
Total revenues	0.1			—			—			(3.9		)	0.6			(3.2		)

BENEFITS AND EXPENSES:
Policy benefits	36.6			—			0.5			(6.8		)	(2.1		)	28.2
Policy acquisition cost amortization	3.4			—			—			4.4			(6.5		)	1.3
Other operating expenses	—			—			—			—			3.6			3.6
Total benefits and expenses	40.0			—			0.5			(2.4		)	(5.0		)	33.1
Income (loss) from before income taxes	(39.9		)	—			(0.5		)	(1.5		)	5.6			(36.3		)
Income tax expense (benefit)	—			—			—			—			—			—
Net income (loss)	$	(39.9	)	$	—		$	(0.5	)	$	(1.5	)	$	5.6		$	(36.3	)

COMPREHENSIVE INCOME (LOSS):
Net income (loss)	$	(39.9	)	$	—		$	(0.5	)	$	(1.5	)	$	5.6		$	(36.3	)
Other comprehensive income (loss before income taxes:
Unrealized investment gains (losses), net of related offsets	—			(17.7		)	—			—			—			(17.7		)
Less: Income tax expense (benefit) related to:
Unrealized investment gains (losses), net of related offsets	—			—			—			—			—			—
Other comprehensive income (loss), net of income taxes	—			(17.7		)	—			—			—			(17.7		)
Comprehensive income (loss)	$	(39.9	)	$	(17.7	)	$	(0.5	)	$	(1.5	)	$	5.6		$	(54.0	)

———————


[1]	All amounts are shown before income taxes, unless otherwise noted.


[2]	Amounts represent the total “Summary of Correction of Actuarial Finance Errors” which is further aggregated into the “Summary of Correction of Errors” in the following pages.

Investments

The Company determined that there were errors related to investment valuation and the accounting treatment for these investments which are specifically identified errors in the following sub-categories as detailed below.

•

Available-for-Sale Securities – The Company did not have an adequate process over: (1) the valuation and recording of private placement debt, private equity securities, and certain publicly traded securities; and (2) utilizing an appropriate model for identifying impairments related to these securities. The errors identified were related to: (i) inaccurate inputs used in the valuation models; (ii) and inappropriate valuation methodologies used to value certain instruments; and (iii) ineffective review of internally developed (matrix or manual) prices. The Company also failed to maintain an adequate process over the leveling and disclosure of fair value measurements. This resulted in a change in the leveling classification of securities to Level 3 in the fair value hierarchy as disclosed within the 2012 Form 10-K. The classification in Level 3 had no impact on the fair value of these securities.

The impact of the correction of these errors on the unaudited financial statements as of and for the comparative three and six months ended June 30, 2012 is presented in the “Summary of Correction of Investments Errors” table within the “Investments” section of this Note below.

•

Derivative Valuation – The Company did not appropriately apply U.S. GAAP accounting standards regarding the valuation of certain derivative instruments. Specifically, the Company did not properly recognize and measure counterparty non-performance risk on non-collateralized derivative assets. The impact of the correction of these errors on the unaudited financial statements as of and for the comparative three and six months ended June 30, 2012 is presented in the “Summary of Correction of Investments Errors” table within the “Investments” section of this Note below.

•

Structured Securities – The Company did not appropriately maintain a process over the assessment of accounting methodologies used to determine the appropriate interest income models. This resulted in improper income recognition and impairments for certain structured securities. In addition, the Company did not properly assess securitized financial assets for potential embedded derivatives which, when properly assessed, resulted in the reclassification of assets to fair value investments. The reclassification of these assets results in the recognition of the change in fair value of these assets in net investment income. The impact of the correction of these errors on the unaudited financial statements as of and for the comparative three and six months ended June 30, 2012 is presented in the “Summary of Correction of Investments Errors” table within the “Investments” section of this Note below.



Increase (decrease)	Summary of Correction of Investments Errors – Three months ended June 30, 2012 Income Statement Impacts [1]
($ in millions)	Investments
	AFS Valuation			Derivative Valuation			Structured Securities			Total Investment Errors [2]
REVENUES:
Premiums	$	—		$	—		$	—		$	—
Insurance and investment product fees	—			—			—			—
Net investment income	—			—			(0.1		)	(0.1		)
Net realized investment gains (losses):
Total OTTI losses	—			—			—			—
Portion of OTTI gains (losses) recognized in OCI	—			—			—			—
Net OTTI losses recognized in earnings	—			—			—			—
Net realized investment gains (losses), excluding OTTI	—			(1.9		)	—			(1.9		)
Net realized investment gains (losses)	—			(1.9		)	—			(1.9		)
Total revenues	—			(1.9		)	(0.1		)	(2.0		)

BENEFITS AND EXPENSES:
Policy benefits	—			—			—			—
Policy acquisition cost amortization	—			(0.5		)	—			(0.5		)
Other operating expenses	—			—			—			—
Total benefits and expenses	—			(0.5		)	—			(0.5		)
Income (loss) from before income taxes	—			(1.4		)	(0.1		)	(1.5		)
Income tax expense (benefit)	—			—			—			—
Net income (loss)	$	—		$	(1.4	)	$	(0.1	)	$	(1.5	)

COMPREHENSIVE INCOME (LOSS):
Net income (loss)	$	—		$	(1.4	)	$	(0.1	)	$	(1.5	)
Other comprehensive income (loss) before income taxes:
Unrealized investment gains (losses), net of related offsets	(1.9		)	—			0.2			(1.7		)
Less: Income tax expense (benefit) related to:
Unrealized investment gains (losses), net of related offsets	—			—			—			—
Other comprehensive income (loss), net of income taxes	(1.9		)	—			0.2			(1.7		)
Comprehensive income (loss)	$	(1.9	)	$	(1.4	)	$	0.1		$	(3.2	)

———————


[1]	All amounts are shown before income taxes, unless otherwise noted.


[2]	Amounts represent the total “Summary of Correction of Investment Errors” which is further aggregated into the “Summary of Correction of Errors” in the following pages.



Increase (decrease)	Summary of Correction of Investments Errors – Six Months Ended June 30, 2012 Income Statement Impacts [1]
($ in millions)	Investments
	AFS Valuation			Derivative Valuation			Structured Securities			Total Investment Errors [2]
REVENUES:
Premiums	$	—		$	—		$	—		$	—
Insurance and investment product fees	—			—			—			—
Net investment income	—			—			—			—
Net realized investment gains (losses):
Total OTTI losses	—			—			0.4			0.4
Portion of OTTI gains (losses) recognized in OCI	—			—			(0.7		)	(0.7		)
Net OTTI losses recognized in earnings	—			—			(0.3		)	(0.3		)
Net realized investment gains (losses), excluding OTTI	—			2.2			—			2.2
Net realized investment gains (losses)	—			2.2			(0.3		)	1.9
Total revenues	—			2.2			(0.3		)	1.9

BENEFITS AND EXPENSES:
Policy benefits	—			—			—			—
Policy acquisition cost amortization	—			(1.9		)	—			(1.9		)
Other operating expenses	—			—			—			—
Total benefits and expenses	—			(1.9		)	—			(1.9		)
Income (loss) from before income taxes	—			4.1			(0.3		)	3.8
Income tax expense (benefit)	—			—			—			—
Net income (loss)	$	—		$	4.1		$	(0.3	)	$	3.8

COMPREHENSIVE INCOME (LOSS):
Net income (loss)	$	—		$	4.1		$	(0.3	)	$	3.8
Other comprehensive income (loss) before income taxes:
Unrealized investment gains (losses), net of related offsets	(1.9		)	—			0.5			(1.4		)
Less: Income tax expense (benefit) related to:
Unrealized investment gains (losses), net of related offsets	—			—			—			—
Other comprehensive income (loss), net of income taxes	(1.9		)	—			0.5			(1.4		)
Comprehensive income (loss)	$	(1.9	)	$	4.1		$	0.2		$	2.4

———————


[1]	All amounts are shown before income taxes, unless otherwise noted.


[2]	Amounts represent the total “Summary of Correction of Investment Errors” which is further aggregated into the “Summary of Correction of Errors” in the following pages.

Reinsurance Accounting

In 2008 and in 2009, the Company entered into complex reinsurance agreements with one of its third-party reinsurers which resulted in net costs incurred to the Company. Rather than appropriately deferring and amortizing these costs over the life of the underlying business, the Company had previously recognized these costs immediately in net income. In addition, in 2008, the Company separately entered into a related party reinsurance arrangement with its parent company, Phoenix Life, a wholly owned subsidiary of PNX, where the Company inappropriately recorded the ceded reinsurance balances as an offset to the reinsurance recoverable rather than to the appropriate financial statement line item within the statements of income and comprehensive income. For additional information on the related party reinsurance arrangement, refer to “Note 4: Reinsurance.” The impact of the correction of these errors on the unaudited financial statements as of and for the comparative three and six months ended June 30, 2012 is presented in the “Summary of Correction of Errors” table within this Note below.

Upon review of the reinsurance transactions, the Company also determined that loss recognition was appropriate for a portion of the underlying block of business both prior to and subsequent to entering into the reinsurance agreements. The impact of the loss recognition prior to the reinsurance then indirectly impacted the amount of costs deferred at day one. The impact of the reinsurance component of this error on the financial statements as of and for the comparative three and six months ended June 30, 2012 is presented in the “Summary of Correction of Errors” table within this Note below.

In addition, certain errors were identified related to the Company’s net presentation of direct and ceded reinsurance liabilities on the balance sheets. As a result, ceded policy liabilities were reclassified from policy liabilities and accruals to receivables within the balance sheets to correct the error and reflect the proper gross presentation required under U.S. GAAP. See the 2012 Form 10-K for additional information regarding this presentation error.

Cash Flows and Changes in Classifications

•

Statement of Cash Flows – The Company identified errors within its statement of cash flows which primarily consisted of: (i) the incorrect classification of deposits and withdrawals of universal life products as cash flows used for operating activities; (ii) the incorrect classification of capitalized interest on policy loans as an investing activity; (iii) certain other classification errors within cash flows from investing activities primarily related to investment purchases and sales; and (iv) the net impact of all other errors previously and separately described within this Note. The impact of the correction of these errors is summarized below and included in detail within the restated and amended statement of cash flows within this Note.



Increase (decrease)	For the period ended
($ in millions)	June 30,
	2012
Statement of Cash Flows
Cash provided by (used for) operating activities	$	(93.7	)
Cash provided by (used for) investing activities	1.4
Cash provided by (used for) financing activities	89.7

In addition to these errors noted above, the Company made certain changes in presentation to enhance disclosure of certain cash activity within the statement of cash flows. Most significantly: (i) interest credited to policyholder accounts has been separately disclosed within cash flows used for operating activities; and (ii) deposits into and withdrawals from separate accounts have been presented gross, rather than net, within cash flows provided by financing activities which are also reflected in the correction of errors above and within the restated and amended statement of cash flows within this Note. These changes in presentation did not have any impact on total cash flows provided by (used for) operating, investing or financing activities.

•

Changes in Classifications – The Company made certain corrections to: (i) present outstanding checks and cash held as collateral by a third party related to our derivative transactions in order to appropriately reflect the legal right of offset and to properly reclassify certain suspense accounts; (ii) reflect direct and ceded reinsurance liabilities gross in the balance sheets as described above in “Reinsurance Accounting” section; and (iii) reclassify sales inducements assets from DAC to other assets. These corrections had no impact to net income or total stockholder’s equity. See the 2012 Form 10-K for additional information regarding the impact of the changes in classification.

Revision for the Retrospective Adoption of Amended Accounting Guidance

In October 2010, the Financial Accounting Standards Board (the “FASB”) issued amended guidance to ASC 944, Financial Services – Insurance, to address the diversity in practice for accounting for costs associated with acquiring or renewing insurance contracts. The amendment clarifies the definition of acquisition costs (i.e., costs which qualify for deferral) to include only incremental direct costs that result directly from, and are essential to, a contract and would not have been incurred by the insurance entity had the contract transaction not occurred. Therefore, only costs related to successful efforts of acquiring a new, or renewal, contract should be deferred. This guidance was retrospectively adopted on January 1, 2012 and such retrospective adoption results in amendments to previously reported balances as shown in the table below as if the guidance was applied at the inception of all policies in force. The cumulative effect of retrospective adoption reduced DAC and beginning stockholder’s equity by $36.1 million as of January 1, 2012. The adoption resulted in a decrease in amortization of policy acquisition costs due to the reduced DAC asset. Adjustments for the retrospective adoption reflect the impact of the adoption after consideration of correcting the errors associated with the Restatement as noted more fully in the tables reflecting the impact of the retrospective adoption on the unaudited financial statements presented within this Note below.



Increase (decrease)	Summary of Correction of Errors – Three months ended June 30, 2012 Income Statement Impacts [1]
($ in millions)
							Reinsurance Accounting
	Total Actuarial Finance [2]			Total Investments [3]			Third-party reinsurance			Related party reinsurance			Other Restatement Adjustments			Total Correction of Errors [4]
REVENUES
Premiums	$	(0.1	)	$	—		$	—		$	—		$	—		$	(0.1	)
Insurance and investment product fees	0.3			—			—			—			—			0.3
Net investment income	—			(0.1		)	—			—			(0.1		)	(0.2		)
Net realized investment gains (losses):
Total OTTI losses	—			—			—			—			—			—
Portion of OTTI gains (losses) recognized in OCI	—			—			—			—			—			—
Net OTTI losses recognized in earnings	—			—			—			—			—			—
Net realized investment gains (losses), excluding OTTI losses	(5.0		)	(1.9		)	—			—			(0.1		)	(7.0		)
Net realized investment gains (losses)	(5.0		)	(1.9		)	—			—			(0.1		)	(7.0		)
Total revenues	(4.8		)	(2.0		)	—			—			(0.2		)	(7.0		)

BENEFITS AND EXPENSES
Policy benefits	20.6			—			(0.2		)	(6.1		)	0.4			14.7
Policy acquisition cost amortization	(3.1		)	(0.5		)	—			4.1			0.1			0.6
Other operating expenses	0.1			—			—			—			(0.5		)	(0.4		)
Total benefits and expenses	17.6			(0.5		)	(0.2		)	(2.0		)	—			14.9
Income (loss) before income taxes	(22.4		)	(1.5		)	0.2			2.0			(0.2		)	(21.9		)
Income tax expense (benefit)	—			—			—			—			4.2			4.2
Net income (loss)	$	(22.4	)	$	(1.5	)	$	0.2		$	2.0		$	(4.4	)	$	(26.1	)

COMPREHENSIVE INCOME (LOSS)
Net income (loss)	$	(22.4	)	$	(1.5	)	$	0.2		$	2.0		$	(4.4	)	$	(26.1	)
Other comprehensive income (loss) before income taxes: [5]
Unrealized investment gains (losses), net of related offsets [5]	(14.9		)	(1.7		)	—			(2.6		)	—			(19.2		)
Less: Income tax expense (benefit) related to:
Unrealized investment gains (losses), net of related offsets [5]	—			—			—			—			(3.3		)	(3.3		)
Other comprehensive income (loss), net of income taxes	(14.9		)	(1.7		)	—			(2.6		)	3.3			(15.9		)
Comprehensive income (loss)	$	(37.3	)	$	(3.2	)	$	0.2		$	(0.6	)	$	(1.1	)	$	(42.0	)

———————


[1]	All amounts are shown before income taxes, unless otherwise noted.


[2]	Represents “Summary of Correction of Actuarial Finance Errors” from the previous pages of this Note.


[3]	Represents “Summary of Correction of Investments Errors” from the previous pages of this Note.


[4]	Amounts represent total correction of errors which is also presented in the “Statement of Income and Comprehensive Income” reflected in the tables on the following pages.


[5]	In addition to adjustments described within this footnote the correction of errors column contains reclassifications related to changes in presentation of components of other comprehensive income.



Increase (decrease)	Summary of Correction of Errors – Six Months Ended June 30, 2012 Income Statement Impacts [1]
($ in millions)
							Reinsurance Accounting
	Total Actuarial Finance [2]			Total Investments [3]			Third-party reinsurance			Related party reinsurance			Other Restatement Adjustments			Total Correction of Errors [4]
REVENUES
Premiums	$	(0.1	)	$	—		$	—		$	—		$	—		$	(0.1	)
Insurance and investment product fees	0.5			—			—			0.2			(0.1		)	0.6
Net investment income	—			—			—			—			0.1			0.1
Net realized investment gains (losses):
Total OTTI losses	—			0.4			—			—			—			0.4
Portion of OTTI gains (losses) recognized in OCI	—			(0.7		)	—			—			—			(0.7		)
Net OTTI losses recognized in earnings	—			(0.3		)	—			—			—			(0.3		)
Net realized investment gains (losses), excluding OTTI losses	(3.6		)	2.2			—			—			—			(1.4		)
Net realized investment gains (losses)	(3.6		)	1.9			—			—			—			(1.7		)
Total revenues	(3.2		)	1.9			—			0.2			—			(1.1		)

BENEFITS AND EXPENSES
Policy benefits	28.2			—			(0.4		)	(15.6		)	0.6			12.8
Policy acquisition cost amortization	1.3			(1.9		)	—			12.6			0.6			12.6
Other operating expenses	3.6			—			—			—			(0.5		)	3.1
Total benefits and expenses	33.1			(1.9		)	(0.4		)	(3.0		)	0.7			28.5
Income (loss) before income taxes	(36.3		)	3.8			0.4			3.2			(0.7		)	(29.6		)
Income tax expense (benefit)	—			—			—			—			21.9			21.9
Net income (loss)	$	(36.3	)	$	3.8		$	0.4		$	3.2		$	(22.6	)	$	(51.5	)

COMPREHENSIVE INCOME (LOSS)
Net income (loss)	$	(36.3	)	$	3.8		$	0.4		$	3.2		$	(22.6	)	$	(51.5	)
Other comprehensive income (loss) before income taxes: [5]
Unrealized investment gains (losses), net of related offsets [5]	(17.7		)	(1.4		)	—			(3.3		)	0.1			(22.3		)
Less: Income tax expense (benefit) related to:
Unrealized investment gains (losses), net of related offsets [5]	—			—			—			—			(3.7		)	(3.7		)
Other comprehensive income (loss), net of income taxes	(17.7		)	(1.4		)	—			(3.3		)	3.8			(18.6		)
Comprehensive income (loss)	$	(54.0	)	$	2.4		$	0.4		$	(0.1	)	$	(18.8	)	$	(70.1	)

———————


[1]	All amounts are shown before income taxes, unless otherwise noted.


[2]	Represents “Summary of Correction of Actuarial Finance Errors” from the previous pages of this Note.


[3]	Represents “Summary of Correction of Investments Errors” from the previous pages of this Note.


[4]	Amounts represent total correction of errors which is also presented in the “Statement of Income and Comprehensive Income” reflected in the tables on the following pages.


[5]	In addition to adjustments described within this footnote the correction of errors column contains reclassifications related to changes in presentation of components of other comprehensive income.



	Statement of Income and Comprehensive Income
($ in millions)	Three months ended June 30, 2012
	As previously reported			Correction of errors			As restated and amended
REVENUES:
Premiums	$	1.8		$	(0.1	)	$	1.7
Insurance and investment product fees	91.1			0.3			91.4
Net investment income	32.8			(0.2		)	32.6
Net realized investment gains (losses):
Total OTTI losses	(3.0		)	—			(3.0		)
Portion of OTTI gains (losses) recognized in OCI	2.4			—			2.4
Net OTTI losses recognized in earnings	(0.6		)	—			(0.6		)
Net realized investment gains (losses), excluding OTTI losses	(6.4		)	(7.0		)	(13.4		)
Net realized investment gains (losses)	(7.0		)	(7.0		)	(14.0		)
Total revenues	118.7			(7.0		)	111.7

BENEFITS AND EXPENSES:
Policy benefits	76.9			14.7			91.6
Policy acquisition cost amortization	27.0			0.6			27.6
Other operating expenses	24.5			(0.4		)	24.1
Total benefits and expenses	128.4			14.9			143.3
Income (loss) before income taxes	(9.7		)	(21.9		)	(31.6		)
Income tax expense (benefit)	(3.7		)	4.2			0.5
Net income (loss)	$	(6.0	)	$	(26.1	)	$	(32.1	)

COMPREHENSIVE INCOME (LOSS):
Net income (loss)	$	(6.0	)	$	(26.1	)	$	(32.1	)
Other comprehensive income (loss) before income taxes:
Unrealized investment gains (losses), net of related offsets	27.3			(19.2		)	8.1
Less: Income tax expense (benefit) related to:
Unrealized investment gains (losses), net of related offsets	9.6			(3.3		)	6.3
Other comprehensive income (loss), net of income taxes	17.7			(15.9		)	1.8
Comprehensive income (loss)	$	11.7		$	(42.0	)	$	(30.3	)



	Statement of Income and Comprehensive Income
($ in millions)	Six Months Ended June 30, 2012
	As previously reported			Correction of errors			As restated and amended
REVENUES:
Premiums	$	2.5		$	(0.1	)	$	2.4
Insurance and investment product fees	187.6			0.6			188.2
Net investment income	63.1			0.1			63.2
Net realized investment gains (losses):
Total OTTI losses	(4.1		)	0.4			(3.7		)
Portion of OTTI gains (losses) recognized in OCI	2.8			(0.7		)	2.1
Net OTTI losses recognized in earnings	(1.3		)	(0.3		)	(1.6		)
Net realized investment gains (losses), excluding OTTI losses	(13.5		)	(1.4		)	(14.9		)
Net realized investment gains (losses)	(14.8		)	(1.7		)	(16.5		)
Total revenues	238.4			(1.1		)	237.3

BENEFITS AND EXPENSES:
Policy benefits	140.6			12.8			153.4
Policy acquisition cost amortization	55.7			12.6			68.3
Other operating expenses	47.8			3.1			50.9
Total benefits and expenses	244.1			28.5			272.6
Income (loss) before income taxes	(5.7		)	(29.6		)	(35.3		)
Income tax expense (benefit)	(2.6		)	21.9			19.3
Net income (loss)	$	(3.1	)	$	(51.5	)	$	(54.6	)

COMPREHENSIVE INCOME (LOSS):
Net income (loss)	$	(3.1	)	$	(51.5	)	$	(54.6	)
Other comprehensive income (loss) before income tax:
Unrealized investment gains (losses), net of related offsets	39.0			(22.3		)	16.7
Less: Income tax expense (benefit) related to:
Unrealized investment gains (losses), net of related offsets	13.7			(3.7		)	10.0
Other comprehensive income (loss), net of income taxes	25.3			(18.6		)	6.7
Comprehensive income (loss)	$	22.2		$	(70.1	)	$	(47.9	)



	Statement of Cash Flows
($ in millions)	For the period ended June 30, 2012
	As previously reported			Correction of errors			As restated and amended
OPERATING ACTIVITIES:
Net income (loss)	$	(3.1	)	$	(51.5	)	$	(54.6	)
Net realized investment losses	14.8			1.7			16.5
Policy acquisition costs deferred	(52.9		)	9.4			(43.5		)
Amortization of policy acquisition costs	55.7			12.6			68.3
Interest credited	—			122.3			122.3
Equity in earnings of limited partnerships and other investments	(0.1		)	—			(0.1		)
Change in:
Accrued investment income	(3.9		)	(1.6		)	(5.5		)
Deferred income taxes	(17.6		)	11.9			(5.7		)
Receivables [1]	(4.3		)	4.6			0.3
Policy liabilities and accruals	32.0			(203.3		)	(171.3		)
Due to/from affiliate	—			10.9			10.9
Other operating activities, net [1]	(3.5		)	(10.7		)	(14.2		)
Cash provided by (used for) operating activities	17.1			(93.7		)	(76.6		)

INVESTING ACTIVITIES:
Purchases of:
Available-for-sale debt securities [1]	(601.9		)	17.9			(584.0		)
Derivative instruments	(29.2		)	—			(29.2		)
Fair value investments	—			(2.9		)	(2.9		)
Other investments	(0.9		)	0.9			—
Sales, repayments and maturities of:
Available-for-sale debt securities [1]	304.0			(17.2		)	286.8
Derivative instruments	12.1			—			12.1
Fair value investments	—			3.0			3.0
Other investments	0.2			(0.2		)	—
Contributions to limited partnerships	—			(0.9		)	(0.9		)
Distributions from limited partnerships	—			0.2			0.2
Policy loans, net	1.4			1.0			2.4
Other investing activities, net	—			(0.4		)	(0.4		)
Cash provided by (used for) investing activities	(314.3		)	1.4			(312.9		)

FINANCING ACTIVITIES:
Policyholder deposit fund deposits	410.2			130.3			540.5
Policyholder deposit fund withdrawals	(82.8		)	(182.6		)	(265.4		)
Net transfers to/from separate accounts	—			142.0			142.0
Cash provided by (used for) financing activities	327.4			89.7			417.1
Change in cash and cash equivalents	30.2			(2.6		)	27.6
Cash and cash equivalents, beginning of year	67.5			(18.0		)	49.5
Cash and cash equivalents, end of year	$	97.7		$	(20.6	)	$	77.1

Supplemental Disclosure of Cash Flow Information
Income taxes paid (refunded)	$	—		$	22.2		$	22.2

Non-Cash Transactions During the Year
Investment exchanges	$	—		$	14.0		$	14.0

———————


[1]	Certain financial statement lines were separately presented beginning in March 31, 2013 which resulted in the reclassification of all prior year information within the balance sheets and the statements of income and comprehensive income. However, presentation of ‘as restated and amended’ amounts herein has been retained to conform to amounts previously presented in the 2012 Form 10-K.



	Statement of Changes in Stockholder’s Equity
($ in millions)	For the period ended June 30, 2012
	As previously reported			Correction of errors [1]			Adjusted prior to the retrospective adoption			Retrospective adoption [2]			As restated and amended
COMMON STOCK:
Balance, beginning of period	$	2.5		$	—		$	2.5		$	—		$	2.5
Balance, end of period	$	2.5		$	—		$	2.5		$	—		$	2.5

ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period	$	802.2		$	—		$	802.2		$	—		$	802.2
Balance, end of period	$	802.2		$	—		$	802.2		$	—		$	802.2

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance, beginning of period	$	6.2		$	0.2		$	6.4		$	(3.8	)	$	2.6
Other comprehensive income (loss)	25.3			(18.6		)	6.7			—			6.7
Balance, end of period	$	31.5		$	(18.4	)	$	13.1		$	(3.8	)	$	9.3

RETAINED EARNINGS (ACCUMULATED DEFICIT):
Balance, beginning of period	$	(165.1	)	$	(185.9	)	$	(351.0	)	$	(32.3	)	$	(383.3	)
Net income (loss)	(3.1		)	(51.5		)	(54.6		)	—			(54.6		)
Balance, end of period	$	(168.2	)	$	(237.4	)	$	(405.6	)	$	(32.3	)	$	(437.9	)

TOTAL STOCKHOLDER’S EQUITY:
Balance, beginning of period	$	645.8		$	(185.7	)	$	460.1		$	(36.1	)	$	424.0
Change in stockholder’s equity	22.2			(70.1		)	(47.9		)	—			(47.9		)
Balance, end of period	$	668.0		$	(255.8	)	$	412.2		$	(36.1	)	$	376.1

———————


[1]	Adjustments related to the correction of errors reflect amounts prior to the retrospective adoption of amended guidance to ASC 944, Financial Services – Insurance. See footnote 2 below for additional information regarding these amounts and the retrospective adoption.


[2]	Adjustments related to the retrospective adoption of amended guidance to ASC 944, Financial Services – Insurance, have been updated from those originally disclosed in the 2012 first quarter Form 10-Q filing to reflect the correction of errors identified related to the adoption of the amended guidance as well as indirect impact of the correction of errors associated with the Restatement.