0001193125-09-093470.txt : 20110310
0001193125-09-093470.hdr.sgml : 20110310
20090430105018
ACCESSION NUMBER: 0001193125-09-093470
CONFORMED SUBMISSION TYPE: CORRESP
PUBLIC DOCUMENT COUNT: 1
FILED AS OF DATE: 20090430
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PHL VARIABLE INSURANCE CO /CT/
CENTRAL INDEX KEY: 0001031223
IRS NUMBER: 000000000
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: CORRESP
BUSINESS ADDRESS:
STREET 1: C/O PHOENIX LIFE INSURANCE COMPANY
STREET 2: ONE AMERICAN ROW
CITY: HARTFORD
STATE: CT
ZIP: 06116
BUSINESS PHONE: 8604035788
MAIL ADDRESS:
STREET 1: ONE AMERICAN ROW
STREET 2: C/O PHOENIX LIFE INSURANCE COMPANY
CITY: HARTFORD
STATE: CT
ZIP: 06116
FORMER COMPANY:
FORMER CONFORMED NAME: PHL VARIABLE SEPARATE ACCOUNT MVA1
DATE OF NAME CHANGE: 19970123
CORRESP
1
filename1.txt
[LOGO] Phoenix Karen A. Peddle, Director
Where Excellence Grows(SM) Life & Annuity, SEC Compliance
One American Row, Hartford, CT
06102-5056
(860) 403-5134
Fax: (860) 403-5296
Toll Free: 1-800-349-9267
Email: karen.peddle@phoenixwm.com
April 30, 2009
Sonny Oh
Attorney
Office of Insurance Products
Division of Investment Management
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-4644
RE: PHL Variable Insurance Company
Post-Effective Amendment No. 7 on Form S-1
File No. 333-87218
Dear Mr. Oh:
Below please find our responses to the staff's comments received on April 28
and 29, 2009 for the referenced filing.
Comment 1. Page 2. "Incorporation by Reference" section. Please include an SEC
file number reference for the Form 10-K that was filed on March 16, 2009.
RESPONSE: We have added the file reference.
Comment 2. Reconcile the "Incorporation by Reference" language in this
registration statement with the "Incorporation by Reference" section contained
in Guaranteed Income Edge, pursuant to the requirements of Item 12(b)(1)(v) of
Form S-1.
RESPONSE: We have revised the disclosure accordingly.
Comment 3. Define all terms the first time they are used. For example, on page
6 in the "Distribution of Contracts" section, "FINRA" is defined on the last
page of the prospectus, rather than there, and "NASD" is not defined at all.
RESPONSE: We have revised the disclosure accordingly.
Comment 4. Explain the basis for deleting three paragraphs at the end of the
text on page 10 that appeared before the section entitled "Policy Liabilities
and Accruals" on page 11.
RESPONSE: For purposes of PHL Variable's Annual Report on Form 10-K, the
information contained in the subject paragraphs was moved to item 7A. Pursuant
to General Instruction VII to Form S-1, PHL Variable's Annual Report on Form
10-K is incorporated by reference into the Post-effective Amendment. However,
we have added the content of item 7 from PHL Variable's Annual Report on Form
10-K to the prospectus for additional disclosure.
Comment 5. Explain the basis for the absence of the section entitled
"Distributor" that is contained in Phoenix Foundations.
RESPONSE: We have changed the title of the MVA section currently entitled
"Distribution of Contracts" to "Distributor" so it is consistent with Phoenix
Foundations.
Comment 6. Confirm that all current exhibits have been provided as required by
Part II of Form S-1.
RESPONSE: We so confirm.
New Comment 7: To the extent you are seeking to rely on the Rule, please
provide an appropriate representation pursuant to Rule 12h-7 under the
Securities Act of 1934.
Response: PHL Variable currently files periodic reports under the Securities
Exchange Act of 1934 and has not yet determined whether it will rely on Rule
12h-7 following the rule's compliance date. Accordingly, we have not included
any prospectus disclosure about reliance on the rule in post-effective
amendment number 7 to the registration statement.
If you should have any questions with regard to this filing, please contact the
undersigned at (860) 403-5134.
Sincerely,
/s/ Karen A. Peddle
----------------------------------------
Karen A. Peddle
Director
Life & Annuity, SEC Compliance
MARKET VALUE ADJUSTED GUARANTEED INTEREST ACCOUNT ANNUITY
Issued by
PHL Variable Insurance Company
PROSPECTUS May 1, 2009
This prospectus describes a Market Value Adjusted Guaranteed Interest Account
Annuity ("MVA"). The MVA is only available for use under certain PHL Variable
Insurance Company's variable accumulation deferred annuity contracts
("Contract"). The MVA and the contracts are available through Phoenix Equity
Planning Corporation ("PEPCO"), the principal underwriter.
The contract prospectus must accompany this prospectus. You should read the
contract prospectus and keep it, and this Prospectus, for future reference.
Neither the Securities and Exchange Commission ("SEC") nor any state securities
commission has approved or disapproved of these securities, or passed upon the
accuracy or adequacy of this Prospectus. Any representation to the contrary is
a criminal offense.
PEPCO is not required to sell any specific number or dollar amount of
securities but will use its best efforts to sell the securities offered.
Your investment in the MVA is subject to possible loss of principal and
earnings, since a surrender charge and market value adjustment may apply to
withdrawals or upon surrender of the contract. Please see the "Risk Factors"
section on page 3.
An investment in the MVA is not:
.. a bank deposit or obligation; or
.. guaranteed by any bank or by the Federal Deposit Corporation or any other
government agency.
If you have any questions, please contact:
[GRAPHIC]
PHL Variable Insurance Company
Annuity Operations Division
PO Box 8027
Boston, MA 02266-8027
[GRAPHIC] Tel. 800/541-0171
1
TABLE OF CONTENTS
Heading Page
------------------------------------------------------------
Special Terms.......................................... 3
Risk Factors........................................... 3
Product Description.................................... 3
The Nature of the Contract and the MVA................ 3
Availability of the MVA............................... 4
The MVA............................................... 4
Market Value Adjustment............................... 4
Setting the Guaranteed Rate........................... 5
Deductions of Surrender Charges on Withdrawals........ 5
Investments by PHL Variable............................ 5
Distributor............................................ 6
Federal Income Taxation Discussion..................... 6
Accounting Practices................................... 6
Description of PHL Variable............................ 6
Overview.............................................. 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 6
Recent Economic Market Conditions and Industry
Trends.............................................. 7
Accounting Change..................................... 8
Impact of New Accounting Standards.................... 8
Accounting Standards Not Yet Adopted.................. 9
Critical Accounting Estimates......................... 10
Results of Operations for the Year Ended December 31,
2008 and 2007....................................... 13
Heading Page
General Account....................................... 13
Separate Accounts..................................... 13
Debt and Equity Securities Held in General Account.... 14
Realized Gains and Losses............................. 16
Other-Than-Temporary Impairments...................... 16
Unrealized Gains and Losses........................... 17
Liquidity and Capital Resources....................... 18
Contractual Obligations and Commercial
Commitments......................................... 19
Off-Balance Sheet Arrangements........................ 20
Reinsurance........................................... 20
Statutory Capital and Surplus and Risk-Based Capital.. 20
Quantitative and Qualitative Disclosures About Market
Risk................................................ 20
Selected Financial Data............................... 23
Supplementary Financial Information................... 24
Executive Compensation and Management Ownership of
PNX Shares.......................................... 27
Summary Compensation Table............................ 27
The Separate Account.................................. 28
Experts................................................ 29
The Phoenix Companies, Inc.--Legal Proceedings about
Company Subsidiaries................................. 29
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" information that we file with
the SEC into this prospectus, which means that incorporated documents are
considered part of this prospectus. We can disclose important information to
you by referring you to those documents. This prospectus incorporates by
reference our Annual Report on Form 10-K (File No. 333-20277) for the year
ended December 31, 2008, and the definitive proxy statement filed by the
Phoenix Companies, Inc. pursuant to Regulation 14A on March 16, 2009.
After the date of this prospectus and before we terminate the offering of the
securities under this prospectus, all documents or reports we file with the SEC
under the Securities Exchange Act of 1934 are also incorporated herein by
reference, which means that they also legally become a part of this prospectus.
Statements in this prospectus, or in documents that we file later with the
SEC and that legally become a part of this prospectus, may change or supersede
statements in other documents that are legally part of this prospectus.
Accordingly, only the statement that is changed or replaced will legally be a
part of this prospectus.
We file our Securities Exchange Act of 1934 documents and reports, including
our annual and quarterly reports on Form 10-K and Form 10-Q, electronically on
the SEC's "EDGAR" system using the identifying number CIK No. 0001031223. The
SEC maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC.
The address of the site is http://www.sec.gov. You also can view these
materials at the SEC's Public Reference Room at 100 F Street NE, Room 1580,
Washington, DC 20549-2001. For more information on the operations of the SEC's
Public Reference Room, call 1-800-SEC-0330.
You may request a copy of any documents incorporated by reference in this
prospectus and any accompanying prospectus supplement (including any exhibits
that are specifically incorporated by reference in them), at no cost, by
writing to the Company at Investor Relations One American Row P.O. Box 5056
Hartford, CT 06102-5056, or telephoning the Company at 800-490-4258. You may
also access the incorporated documents at our website:
http://www.phoenixwm.phl.com/public/products/Regform/index.jsp.
2
Special Terms
--------------------------------------------------------------------------------
As used in this prospectus, the following terms mean:
Contract Value: Prior to the end of the guarantee period, the sum of the values
under a contract of all accumulation units held in the subaccounts of the
Separate Account plus the values held in the Guaranteed Interest Account and in
the MVA.
Current Rate: The guaranteed rate currently in effect for amounts allocated to
the MVA, established from time to time for various guarantee periods.
Death Benefit: An amount payable upon the death of the annuitant or owner, as
applicable, to the named beneficiary.
Expiration Date: The date on which the guarantee period ends.
Guarantee Period: The duration for which interest accrues at the guaranteed
rate on amounts allocated to the MVA.
GIA (Guaranteed Interest Account): An allocation option under which premium
amounts are guaranteed to earn a fixed rate of interest. Excess interest also
may be credited, in the sole discretion of PHL Variable. The GIA is funded by
our general account.
Guaranteed Rate: The effective annual interest rate we use to accrue interest
on amounts allocated to the MVA for a guarantee period. Guaranteed rates are
fixed at the time an amount is credited to the MVA and remain constant
throughout the guarantee period.
MVA (Market Value Adjusted Guaranteed Interest Account Annuity): This is an
account that pays interest at a guaranteed rate if held to the end of the
guarantee period. If such amounts are withdrawn, transferred or applied to an
annuity option before the end of the guarantee period, a market value
adjustment will be made. Assets allocated to the MVA are part of the assets
allocated to PHL Variable Separate Account MVA1.
Market Value Adjustment: An adjustment is made to the amount that a contract
owner receives if money is withdrawn, transferred or applied to an annuity
option from the MVA before the expiration date of the guarantee period.
PHL Variable (Company, We, Us, Our): PHL Variable Insurance Company.
Separate Account: PHL Variable Accumulation Account, a separate account of PHL
Variable Insurance Company which funds the variable annuity contract associated
with the MVA (see "The Nature of the Contract and the MVA" for a description of
the Separate Account).
Risk Factors
--------------------------------------------------------------------------------
.. Investment Risk--Principal and interest when credited are guaranteed by the
company unless you make a withdrawal from or surrender the contract, which
may be subject to a surrender charge and MVA.
.. Loss of Principal Risk--Withdrawals and surrenders from the contract in
excess of the free withdrawal amount, prior to the end of the surrender
charge period, are subject to a surrender charge and market value adjustment
("MVA"). A negative MVA is limited to the contract's interest, therefore,
the application of a negative MVA alone will not result in loss of
principal. However, the combination of the surrender charge and MVA may
result in loss of principal.
Product Description
--------------------------------------------------------------------------------
The Nature of the Contract and the MVA
The investment option described in this prospectus is an MVA available only
under the variable accumulation deferred annuity contracts offered by PHL
Variable. The contract is described in detail in its own prospectus. You should
review the contract prospectus along with this prospectus before deciding to
allocate purchase payments to the MVA.
.. The MVA currently provides four choices of interest rate Guarantee Periods:
. 3 years . 5 years
. 7 years . 10 years
.. Purchase payments can be allocated to one or more of the available MVA
guarantee period options. Allocations may be made at the time you make a
payment or you may transfer amounts held in the subaccounts of the Separate
Account, the GIA or other available MVA guarantee periods. Generally,
amounts allocated to MVA options must be for at least $1,000. We reserve the
right to limit cumulative amounts allocated to the MVA during any one-week
period to not more than $250,000.
.. Amounts may be transferred to or from the MVA according to the transfer
rules under the contract. You may make up to six transfers per year from the
MVA. (See "The Accumulation Period--Transfers" of the Contract prospectus.)
.. Allocations that remain in the MVA until the applicable expiration date will
be equal to the amount originally allocated, multiplied by its guaranteed
rate, which is compounded on an annual basis.
.. A market value adjustment will be made if amounts are withdrawn, transferred
or applied to an annuity option from the MVA before the expiration date.
(See "The MVA.")
.. The contract provides for the accumulation of values before maturity and for
the payment of annuity benefits thereafter. Since MVA values are part of the
contract value, your earnings on allocations to the MVA will affect the
values available at surrender or maturity. No market value adjustment will
be applied to withdrawals to pay Death Benefit proceeds.
.. We may offer additional guarantee periods to certain individuals or groups
of individuals who meet certain minimum premium criteria.
3
We reserve the right to elaborate upon, supplement or alter the terms or
arrangements associated with, or relating to, this prospectus in connection
with the offering of flexible premium accumulation deferred annuity contracts
utilizing market value adjusted guaranteed interest account contracts to
certain institutional investors, provided that such arrangements do not
materially and adversely affect the rights or interests of other investors
hereunder.
Availability of the MVA
The MVA is not available in all states. For information, call our Annuity
Operations Division at 800/541-0171.
The MVA
The MVA is available only during the accumulation phase of your contract. The
MVA option currently offers different guarantee periods, which provide you with
the ability to earn interest at different guaranteed rates on all or part of
your contract value. Each allocation has its own guaranteed rate and expiration
date. Because we change guaranteed rates periodically, amounts allocated to a
guarantee period at different times will have different guaranteed rates and
expiration dates. The applicable guaranteed rate, however, does not change
during the guarantee period.
We will notify you of the expiration of the guarantee period and of your
available options within 30 days of the expiration date. You will have 15 days
before and 15 days following the expiration date ("window period") to notify us
of your election. During this window period, any withdrawals or transfers from
the MVA will not be subject to a market value adjustment. Unless you elect to
transfer funds to a different guarantee period, to the subaccounts of the
Separate Account, to the GIA or elect to withdraw funds, we will begin another
guarantee period of the same duration as the one just ended and credit interest
at the current rate for that new guarantee period. If you chose a guarantee
period that is no longer available or if your original guarantee period is no
longer available, we will use the guarantee period with the next longest
duration.
We reserve the right, at any time, to discontinue guarantee periods or to
offer guarantee periods that differ from those available at the time your
contract was issued. Since guarantee periods may change, please contact us to
determine the current guarantee periods being offered.
Market Value Adjustment
Any withdrawal from the MVA will be subject to a market value adjustment
unless the effective date of the withdrawal is within the window period. For
this purpose, redemptions, transfers and amounts applied to an annuity option
under a contract are treated as withdrawals. The market value adjustment will
be applied to the amount being withdrawn after the deduction of any applicable
administrative charge and before the deduction of any applicable contingent
deferred sales charges (surrender charges). See the contract prospectus for a
description of these charges. The market value adjustment can be positive or
negative. The amount being withdrawn after application of the market value
adjustment can be greater than or less than the amount withdrawn before the
application of the market value adjustment.
A market value adjustment will not be applied upon the payment of the death
benefit.
The market value adjustment will reflect the relationship between the current
rate (defined below) for the amount being withdrawn and the guaranteed rate. It
is also reflective of the time remaining in the applicable guarantee period.
Generally, if the guaranteed rate is equal to or lower than the applicable
current rate, the market value adjustment will result in a lower payment upon
withdrawal. Conversely, if the guaranteed rate is higher than the applicable
current rate, the market value adjustment will produce a higher payment upon
withdrawal.
The market value adjustment which is applied to the amount being withdrawn
is determined by using the following formula:
Market Value Adjustment
= Amount x 1 + i n/12 -1
----------------
[( 1 + j + 0.0025 ) ]
where,
Amount, is the amount being withdrawn less any applicable administrative
charges;
i, is the guaranteed rate being credited to the amount being withdrawn;
j, is the current rate, which is the current interest rate for new deposits
with a guarantee period equal to the number of years remaining in the current
guarantee period, rounded up to the next higher number of complete years;
n, is the number of months rounded up to the next whole number from the date
of the withdrawal or transfer to the end of the current guarantee period.
If the company does not offer a guarantee period equal to the number of years
remaining in the guarantee period, "j" will be determined by interpolation of
the guaranteed rate for the guarantee periods then available.
Examples
The following examples illustrate how the market value adjustment operates:
Example 1
$10,000 is deposited on January 1, 1997, into an MVA with a 5-year guarantee
period. The guaranteed rate for this deposit amount is 5.50%.
If, on January 1, 1999 (2 years after deposit), the full amount is taken from
this MVA segment, the following amount is available:
1.The accumulated amount prior to application of market value adjustment is:
$10,000 x (1.055)/2/ = $11,130.25
4
2.The current rate that would be applied on January 1, 1999 to amounts
credited to a 3-year MVA segment is 6.50%.
3.The number of months remaining in the guarantee period (rounded up to next
whole number) is 36.
4.The market value adjustment equals $-386.43, and is calculated as follows:
$-386.43 = $11,130.25 x 1 + 0.055 36/12 -1
--------------------
[( 1 + 0.065 + 0.0025 ) ]
The market value for the purposes of surrender on
January 1, 1999 is therefore equal to $10,743.82 ($11,130.25 - $386.43).
Example 2
$10,000 is deposited on January 1, 1997, into an MVA with a 5-year guarantee
period. The guaranteed rate for this amount is 5.50%.
If, on January 1, 1999 (2 years from deposit), the full amount is taken from
this MVA segment, the following amount is available:
1.The accumulated amount prior to application of market value adjustment is:
$10,000 x (1.055)/2/ = $11,130.25
2.The current rate being applied on January 1, 1999 to amounts credited to a
3-year MVA segment is 4.50%.
3.The number of months remaining in the guarantee period (rounded up to next
whole number) is 36.
4.The market value adjustment equals $240.79, and is calculated as follows:
$+240.79 = $11,130.25 x 1 + 0.055 36/12 -1
--------------------
[( 1 + 0.045 + 0.0025 ) ]
The market value for the purposes of surrender on
January 1, 1999 is therefore equal to $11,371.04 ($11,130.25 + $240.79).
THE ABOVE EXAMPLES ARE HYPOTHETICAL AND ARE NOT INDICATIVE OF FUTURE OR PAST
PERFORMANCE.
Setting the Guaranteed Rate
We determine guaranteed rates for current and future purchase payments,
transfers or renewals. Although future guaranteed rates cannot be predicted, we
guarantee that the guaranteed rate will never be less than 3% per annum.
Deduction of Surrender Charges on Withdrawals
A market value adjustment will apply if a withdrawal is made before the
expiration date and outside the window period as described above.
Depending on your contract, a full or partial withdrawal of contract value,
including amounts in the MVA, may also be subject to a surrender charge.
Please note that other charges may also be imposed against the contract,
including mortality and expense risk and administrative charges. For a more
detailed explanation of any surrender charge applicable to your contract and of
other applicable charges, please see the "Charges and Deductions" section of
the contract prospectus.
Investments by PHL Variable
--------------------------------------------------------------------------------
Proceeds from purchases of the MVA option will be deposited into the PHL
Variable Separate Account MVA1 ("Separate Account MVA1"), which is a
non-unitized separate account established under Connecticut law. Contract
values attributable to such proceeds are based on the interest rate we credit
to MVA allocations and terms of the contract, and do not depend on the
investment performance of the assets in Separate Account MVA1.
Under Connecticut law, all income, gains or losses of Separate Account MVA1,
whether realized or not, must be credited to or charged against the amounts
placed in Separate Account MVA1, without regard to our other income, gains and
losses. The assets of the Separate Account MVA1 may not be charged with
liabilities arising out of any other business that we may conduct. Obligations
under the contracts are obligations of PHL Variable.
There are no discrete units in Separate Account MVA1. No party with rights
under any contract participates in the investment gain or loss from assets
belonging to Separate Account MVA1. Such gain or loss accrues solely to us. We
retain the risk that the value of the assets in Separate Account MVA1 may drop
below the reserves and other liabilities it must maintain. If the Separate
Account MVA1 asset value drops below the reserve and other liabilities we must
maintain in relation to the contracts supported by such assets, we will
transfer assets from our general account to Separate Account MVA1. Conversely,
if the amount we maintain is too much, we may transfer the excess to our
general account.
In establishing guaranteed rates, we intend to take into account the yields
available on the instruments in which we intend to invest the proceeds from the
contracts. The company's investment strategy with respect to the proceeds
attributable to the contracts generally will be to invest in investment-grade
debt instruments having durations tending to match the applicable guarantee
periods.
Investment-grade debt instruments in which the company intends to invest the
proceeds from the contracts include:
.. Securities issued by the United States government or its agencies or
instrumentalities.
.. Debt securities which have a rating, at the time of purchase, within the
four highest grades assigned by Moody's Investors Services, Inc. (Aaa, Aa, A
or Bb), Standard & Poor's Corporation (AAA, AA, A or BBB) or any other
nationally recognized rating service.
.. Other debt instruments, although not rated by Moody's or Standard & Poor's,
are deemed by the company's management to have an investment quality
comparable to securities described above.
5
While the above generally describes our investment strategy with respect to
the proceeds attributable to the contracts, we are not obligated to invest the
proceeds according to any particular strategy, except as may be required by
Connecticut and other state insurance law.
Distributor
--------------------------------------------------------------------------------
Phoenix Equity Planning Corporation ("PEPCO") acts as the principal
underwriter of the contracts. PEPCO is a registered broker-dealer under the
Securities Exchange Act of 1934 and is a member of the Financial Industry
Regulatory Authority ("FINRA"), formerly known as the National Association of
Securities Dealers ("NASD"). PHL Variable is an indirect, wholly owned
subsidiary of Phoenix Life Insurance Company ("Phoenix"). PEPCO is an indirect,
wholly owned subsidiary of The Phoenix Companies, Inc. and is an affiliate of
the company and of PHL Variable.
PEPCO enters into selling agreements with broker-dealers or entities
registered under or exempt under the Securities Act of 1934 ("selling
brokers"). Contracts with the MVA option are offered in states where we have
received authority and the MVA and the contracts have been approved. The
maximum dealer concession that a selling broker will receive for selling a
contract is 8.00%.
Federal Income Taxation Discussion
--------------------------------------------------------------------------------
Please refer to "Federal Income Taxes" in the contract prospectus for a
discussion of the income tax status of the contract.
Accounting Practices
--------------------------------------------------------------------------------
The information presented below should be read with the audited financial
statements of PHL Variable and other information included elsewhere in this
prospectus.
The financial statements and other financial information included in this
prospectus have been prepared in conformity with accounting principles
generally accepted in the United States.
Description of PHL Variable
--------------------------------------------------------------------------------
Overview
Our executive and administrative office is located at One American Row,
Hartford, Connecticut, 06103-5056.
PHL Variable is a stock life insurance company. It was incorporated in
Connecticut on July 15, 1981 and is a wholly owned subsidiary of Phoenix Life
Insurance Company ("Phoenix") through its holding company, PM Holdings, Inc.
Phoenix is a life insurance company, which is wholly owned by The Phoenix
Companies, Inc. ("PNX"), which is a manufacturer of insurance, annuity and
investment products and services. PNX was organized in Connecticut in 1851. In
1992, in connection with its merger with Home Life Insurance Company, Phoenix
redomiciled to New York.
On June 25, 2001, the effective date of its demutualization, Phoenix
converted from a mutual life insurance company to a stock life insurance
company and became a wholly owned subsidiary of PNX. In addition, on June 25,
2001, PNX completed its initial public offering (IPO).
The following chart illustrates our corporate structure as of December 31,
2008.
[FLOW CHART]
Management's Discussion and Analysis of Financial Condition and Results of
Operations
--------------------------------------------------------------------------------
We provide life insurance and annuity products through a wide variety of
third-party financial professionals and intermediaries, supported by
wholesalers and financial planning specialists employed by us. These products
and services reflect a particular focus on the high-net-worth and affluent
market. Our life and annuity business encompasses a broad range of product
offerings. The principal focus of our life insurance business is on permanent
life insurance (universal and variable universal life) insuring one or more
lives, but we also offer a portfolio of term life insurance products. Our
annuity products include deferred and immediate variable annuities with a
variety of death benefit and guaranteed living benefit options.
Our profitability is driven by interaction of the following elements:
.. Mortality margins in our variable universal and universal life product
lines. We earn cost of insurance (COI) fees based on the difference between
face amounts and the account values (referred to as the net amount at risk
or NAR). We pay policyholder benefits and set up reserves for future benefit
payments on these products. We define mortality margins as the difference
between these fees and benefit costs. Mortality margins are affected by:
. number and face amount of policies sold;
. actual death claims net of reinsurance relative to our assumptions, a
reflection of our underwriting and actuarial pricing discipline, the cost
of reinsurance and the natural volatility inherent in this kind of risk;
and
. the policy funding levels or actual account values relative to our
assumptions, a reflection of policyholder behavior and investment returns.
6
.. Fees on our life and annuity products. Fees consist primarily of asset based
fees (including mortality and expense charges) and premium-based fees which
we charge on our variable life and variable annuity products, and depend on
the premiums collected and account values of those products. Asset-based
fees are calculated as a percentage of assets under management within our
separate accounts. Fees also include surrender charges. Non-asset-based fees
are charged to cover premium taxes and renewal commissions.
.. Interest margins. Net investment income (NII) earned on universal life and
other policyholder funds managed as part of our general account, less the
interest credited to policyholders on those funds.
.. Non-deferred expenses including expenses related to selling and servicing
the various products offered by the Company, dividends to policyholders and
other general business expenses.
.. Deferred policy acquisition cost amortization, which is based on the amount
of expenses deferred, actual results in each quarter and management's
assumptions about the future performance of the business. The amount of
future profit or margin is dependent principally on investment returns in
our separate accounts, investment income in excess of the amounts credited
to policyholders, surrender and lapse rates, death claims and other benefit
payments, premium persistency, funding patterns and expenses. These factors
enter into management's estimates of gross profits or margins, which
generally are used to amortize deferred policy acquisition costs. Actual
equity market movements, net investment income in excess of amounts credited
to policyholders, claims payments and other key factors can vary
significantly from our assumptions, resulting in a misestimate of gross
profits or margins, and a change in amortization, with a resulting impact to
income. In addition, we regularly review and reset our assumptions in light
of actual experience, which can result in material changes in amortization.
.. Net realized investment gains or losses on our general account investments.
Certain of our products include guaranteed benefits. These include guaranteed
minimum death benefits, guaranteed minimum accumulation benefits, guaranteed
minimum withdrawal benefits and guaranteed minimum income benefits. Periods of
significant and sustained downturns in equity markets, increased equity
volatility, or reduced interest rates would result in an increase in the
valuation of the future policy benefit or policyholder account balance
liabilities associated with such products, resulting in a reduction to earnings.
Under accounting principles generally accepted in the United States of
America (GAAP), premiums and deposits for variable life, universal life and
annuity products are not recorded as revenues. For certain investment options
of variable products, deposits are reflected on our balance sheet as an
increase in separate account liabilities. Premiums and deposits for universal
life, fixed annuities and certain investment options of variable annuities are
reflected on our balance sheet as an increase in policyholder deposit funds.
Premiums and deposits for other products are reflected on our balance sheet as
an increase in policy liabilities and accruals.
Recent Economic Market Conditions and Industry Trends
Over the past year, the U.S. economy has experienced unprecedented credit and
liquidity issues and entered into recession. Following several years of rapid
credit expansion, a sharp contraction in mortgage lending coupled with dramatic
declines in home prices, rising mortgage defaults and increasing home
foreclosures, resulted in significant write-downs of asset values by financial
institutions, including government-sponsored entities and major commercial and
investment banks. These write-downs, initially of mortgage-backed securities
but spreading to most sectors of the credit markets, and to credit default
swaps and other derivative securities, have caused many financial institutions
to seek additional capital, to merge with larger and stronger institutions, to
be subsidized by the U.S. government and, in some cases, to fail. Reflecting
concern about the stability of the financial markets generally and the strength
of counterparties, many lenders and institutional investors have reduced and,
in some cases, ceased to provide funding to borrowers, including other
financial institutions. These factors, combined with declining business and
consumer confidence and increased unemployment, have precipitated an economic
slowdown and fears of a prolonged recession.
These extraordinary economic and market conditions have materially and
adversely affected us. It is difficult to predict how long the current economic
and market conditions will continue, whether the financial markets will
continue to deteriorate and which aspects of our products and/or business will
be adversely affected. However, the lack of credit, lack of confidence in the
financial sector, increased volatility in the financial markets and reduced
business activity are likely to continue to materially and adversely affect our
business, financial condition and results of operations.
In response to, and in some cases in addition to, recent economic and market
conditions, we continue to be influenced by a variety of trends that affect the
life insurance industry:
. Statutory capital and surplus and risk-based capital ("RBC")
ratios. Regulated life insurance entities are subject to risk-based
capital requirements which are a function of these entities' statutory
capital and surplus and risk-based capital requirements. The impact of
economic and market environment has both reduced statutory capital and
increased risk-based capital requirements in a variety of ways. For
instance, realized losses reduce available capital and surplus, equity
market declines increase the amount of statutory reserves that insurers
are required to hold for variable annuity guarantees while increasing
risk-based capital requirements and credit downgrades of securities
increase risk-based capital requirements. We
7
have recently taken capital management actions to improve our
capitalization and RBC ratio including, but not limited to, the sale of
certain securities in our portfolio and entry into reinsurance
arrangements. We may take similar actions in the future.
. Debt and Financial Strength Ratings. Recent adverse economic and market
conditions have increased the number of debt and financial strength
ratings for insurance companies being lowered or placed on negative
outlooks. We have recently been downgraded and some of our ratings have
negative outlooks. Please see "Management's Narrative Analysis of the
Results of Operations--Liquidity and Capital Resources." Further
downgrades and outlook changes related to us or the life insurance
industry may occur at any time and without notice by any rating agency.
Downgrades or outlook changes could increase policy surrenders and
withdrawals, adversely affect relationships with distributors, reduce new
sales, reduce our ability to borrow and increase our future borrowing
costs.
. Regulatory Changes. We are subject to extensive laws and regulations.
These laws and regulations are complex and subject to change. This is
particularly the case given recent adverse economic and market
developments. In light of recent events involving certain financial
institutions and the current financial crisis, it is possible that the
U.S. government will heighten its oversight of the financial services
industry, including possibly through a federal system of insurance
regulation. In addition, it is possible that these authorities may adopt
enhanced or new regulatory requirements intended to prevent future crises
in the financial services industry and to assure the stability of
institutions under their supervision. We cannot predict whether this or
other regulatory proposals will be adopted, or what impact, if any, such
regulation could have on our business, consolidated operating results,
financial condition or liquidity.
. Competitive Pressures. Recent domestic and international consolidation in
the financials services industry, driven by regulatory action and other
opportunistic transactions in response to adverse economic and market
developments, has resulted in an environment in which larger competitors
with better financial strength ratings, greater financial resources,
marketing and distribution capabilities may be better positioned
competitively. Larger firms may be better able to withstand further market
disruption, able to offer more competitive pricing and have superior
access to debt and equity capital. We may also be subject to claims by
competitors that our products infringe on their patents. In addition, some
of our competitors are regulated differently than we are, which may give
them a competitive advantage; for example, many non-insurance company
providers of financial services are not subject to the costs and
complexities of insurance regulation by multiple states. If we fail to
compete effectively in this environment, our profitability and financial
condition could be materially and adversely affected.
Accounting Change
Effective April 1, 2008, we changed our method of accounting for the cost of
certain of our long duration reinsurance contracts accounted for in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 113, Accounting
and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts
("SFAS 113"). In conjunction with this change, we also changed our method of
accounting for the impact of reinsurance costs on deferred acquisition costs.
SFAS 113 requires us to amortize the estimated cost of reinsurance over the
life of the underlying reinsured contracts. Under our previous method, we
recognized reinsurance recoveries as part of the net cost of reinsurance and
amortized this balance over the estimated lives of the underlying reinsured
contracts in proportion to estimated gross profits ("EGPs") consistent with the
method used for amortizing deferred policy acquisition costs. Under the new
method, reinsurance recoveries are recognized in the same period as the related
reinsured claim. In conjunction with this change, we also changed our policy
for determining EGPs relating to these contracts to include the effects of
reinsurance, where previously these effects had not been included.
Impact of New Accounting Standards
In January 2009, the Financial Accounting Standards Board ("FASB") issued FSP
No. EITF 99-20-1, which amends the impairment guidance in EITF Issue No. 99-20,
Recognition of Interest Income and Impairment on Purchased Beneficial Interests
and Beneficial Interests That Continue to Be Held by a Transferor in
Securitized Financial Assets ("EITF 99-20-1"). The FSP revises EITF 99-20's
impairment guidance to make it consistent with the requirements of SFAS No. 115
for determining whether an other-than-temporary impairment has occurred. The
FSP is effective for these financial statements. Our adoption of the FSP had no
material effect on our financial statements.
In December 2008, the FASB issued FASB Staff Position No. FAS 140-4 and FIN
46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of
Financial Assets and Interests in Variable Interest Entities, which requires
public entities to provide additional disclosures about transfers of financial
assets. It also requires sponsors that have a variable interest in a variable
interest entity to provide additional disclosures about their involvement with
variable interest entities. The FSP is effective for these financial
statements. Our adoption of the FSP had no material effect on our financial
statements.
On October 10, 2008, the FASB issued FSP No. FAS 157-3 ("FSP FAS 157-3"),
which clarifies the application of SFAS No. 157, Fair Value Measurement ("SFAS
157") in an inactive market. The FSP addresses application issues such as how
management's internal assumptions should be considered when measuring fair
value when relevant
8
observable data do not exist; how observable market information in a market
that is not active should be considered when measuring fair value and how the
use of market quotes should be considered when assessing the relevance of
observable and unobservable data available to measure fair value. FSP FAS 157-3
was effective upon issuance. Our adoption of FSP FAS 157-3 had no material
effect on our financial condition or results of operations.
In September 2008, the FASB issued FSP No. FAS 133-1 and FIN 45-4,
Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of
FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the
Effective Date of FASB Statement No. 161. The FSP introduces new disclosure
requirements for credit derivatives and certain guarantees. The FSP is
effective for these financial statements. Our adoption of the FSP had no
material effect on our financial statements.
On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities ("SFAS 159"), which gives entities
the option to measure eligible financial assets, financial liabilities and firm
commitments at fair value (i.e., the fair value option), on an
instrument-by-instrument basis, that are otherwise not permitted to be
accounted for at fair value under other accounting standards. The election to
use the fair value option is available when an entity first recognizes a
financial asset or financial liability or upon entering into a firm commitment.
Subsequent changes in fair value must be recorded in earnings. Additionally,
SFAS 159 allows for a one-time election for existing positions upon adoption,
with the transition adjustment recorded to beginning retained earnings. We
adopted SFAS 159 as of January 1, 2008 with no effect on our financial
statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements.
SFAS 157 provides guidance on how to measure fair value when required under
existing accounting standards. The statement establishes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure fair value
into three broad levels ("Level 1, 2 and 3"). Level 1 inputs are observable
inputs that reflect quoted prices for identical assets or liabilities in active
markets that we have the ability to access at the measurement date. Level 2
inputs are observable inputs, other than quoted prices included in Level 1, for
the asset or liability. Level 3 inputs are unobservable inputs reflecting our
estimates of the assumptions that market participants would use in pricing the
asset or liability (including assumptions about risk). Quantitative and
qualitative disclosures will focus on the inputs used to measure fair value for
both recurring and non-recurring fair value measurements and the effects of the
measurements in the financial statements. We adopted SFAS 157 effective
January 1, 2008 with no material impact on our financial position and results
of operations.
We adopted the provisions of the Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), on
January 1, 2007. As a result of the implementation of FIN 48, we recognized an
increase in reserves for uncertain tax benefits through a cumulative effect
adjustment of approximately $1,000 thousand, which was accounted for as a
reduction to the January 1, 2007 balance of retained earnings. Including the
cumulative effect adjustment, we had $1,840 thousand of total gross
unrecognized tax benefits as of January 1, 2007. See Note 10 to the financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2008 which Annual Report is incorporated herein by reference.
In September 2006, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements (SAB 108). SAB 108 provides guidance for how errors should be
evaluated to assess materiality from a quantitative perspective. SAB 108
permits companies to initially apply its provisions by either restating prior
financial statements or recording the cumulative effect of initially applying
the approach as adjustments to the carrying values of assets and liabilities as
of January 1, 2006 with an offsetting adjustment to retained earnings. We
adopted SAB 108 on December 31, 2006 with no effect on our financial statements.
In March 2006, the FASB issued Statement of Financial Accounting Standards
No. 156, Accounting for Servicing of Financial Assets, an amendment of FASB
Statement No. 140 (SFAS 156). SFAS 156 provides guidance on recognition and
disclosure of servicing assets and liabilities and was effective beginning
January 1, 2007. We adopted this standard effective January 1, 2007 with no
material impact on our financial position and results of operations.
Accounting Standards Not Yet Adopted
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles ("SFAS 162"). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in
the preparation of GAAP-basis financial statements. The Standard is effective
60 days following SEC approval of the Public Company Accounting Oversight Board
amendments to remove the hierarchy of generally accepted accounting principles
from the auditing standards. SFAS 162 is not expected to have an impact on our
financial position and results of operations.
In December 2007, the FASB issued SFAS No. 141(R), Accounting for Business
Combinations (SFAS 141(R)). SFAS 141(R) requires the acquiring entity in a
business combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction, establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities
assumed and requires the acquirer to disclose all information needed to
evaluate and understand the nature and financial effect of the combination and
is effective beginning for fiscal years beginning after December 15, 2008. We
will adopt this standard effective
9
January 1, 2009 and do not expect it to have a material impact on our financial
position and results of operations.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (SFAS 160). SFAS 160 requires all entities to
report noncontrolling interests in subsidiaries in the same way--as equity in
the consolidated financial statements and requires that associated transactions
be treated as equity transactions--and is effective beginning for fiscal years
beginning after December 15, 2008. We will adopt this standard effective
January 1, 2009 and do not expect it to have a material impact on our financial
position and results of operations.
Critical Accounting Estimates
The analysis of our results of operations is based upon our financial
statements, which have been prepared in accordance with GAAP. GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Critical accounting estimates are reflective of significant judgments, often
as a result of the need to make estimates about the effect of matters that are
inherently uncertain. The following are areas that we believe require
significant judgments:
.. Deferred Policy Acquisition Costs ("DAC")
We amortize DAC based on the related policy's classification. For individual
term life insurance policies, DAC is amortized in proportion to estimated gross
margins. For universal life, variable universal life and accumulation
annuities, DAC is amortized in proportion to estimated gross profits, or EGPs.
Policies may be surrendered for value or exchanged for a different one of our
products (internal replacement). The DAC balance associated with the replaced
or surrendered policies is amortized to reflect these surrenders.
Each year, we develop future EGPs for the products sold during that year. The
EGPs for products sold in a particular year are aggregated into cohorts. Future
EGPs are projected for the estimated lives of the contracts. The amortization
of DAC requires the use of various assumptions, estimates and judgments about
the future. The assumptions, in the aggregate, are considered important in the
projections of EGPs. The assumptions developed as part of our annual process
are based on our current best estimates of future events, which are likely to
be different for each year's cohort. Assumptions considered to be significant
in the development of EGPs include separate account fund performance, surrender
and lapse rates, interest margin, mortality, premium persistency, funding
patterns, expenses and reinsurance costs and recoveries. These assumptions are
reviewed on a regular basis and are based on our past experience, industry
studies, regulatory requirements and estimates about the future.
To determine the reasonableness of the prior assumptions used and their
impact on previously projected account values and the related EGPs, we
evaluate, on a quarterly basis, our previously projected EGPs. Our process to
assess the reasonableness of our EGPs involves the use of internally developed
models, together with studies and actual experience. Incorporated in each
scenario are our current best estimate assumptions with respect to separate
account returns, surrender and lapse rates, interest margin, mortality, premium
persistency, funding patterns, expenses and reinsurance costs and recoveries.
In addition to our quarterly reviews, we complete a comprehensive assumption
study during the fourth quarter of each year. Upon completion of an assumption
study, we revise our assumptions to reflect our current best estimate, thereby
changing our estimate of projected account values and the related EGPs in the
deferred policy acquisition cost and unearned revenue amortization models as
well as SOP 03-1 reserving models. The deferred policy acquisition cost asset,
as well as the unearned revenue reserves and SOP 03-1 reserves are then
adjusted with an offsetting benefit or charge to income to reflect such changes
in the period of the revision, a process known as "unlocking."
Underlying assumptions for future periods of EGPs are not altered unless
experience deviates significantly from original assumptions. For example, when
lapses of our insurance products meaningfully exceed levels assumed in
determining the amortization of DAC, we adjust amortization to reflect the
change in future premiums or EGPs resulting from the unexpected lapses. In the
event that we were to revise assumptions used for prior year cohorts, our
estimate of projected account values would change and the related EGPs in the
DAC amortization model would be unlocked or adjusted, to reflect such change.
Continued favorable experience on key assumptions, which could include
increasing separate account fund return performance, decreasing lapses or
decreasing mortality could result in an unlocking which would result in a
decrease to DAC amortization and an increase in the DAC asset. Finally, an
analysis is performed periodically to assess whether there are sufficient gross
margins or gross profits to amortize the remaining DAC balances.
The separate account fund performance assumption is critical to the
development of the EGPs related to our variable annuity and variable life
insurance businesses. As equity markets do not move in a systematic manner, we
use a mean reversion method (reversion to the mean assumption), a common
industry practice to determine the future equity market growth rate assumption
used for the amortization of DAC. This practice assumes that the expectation
for long-term appreciation is not changed by minor short-term market
fluctuations. The average long-term rate of assumed separate account fund
performance used in estimating gross profits was 6.0% (after fund fees and
mortality and expense charges) for the variable annuity business and 6.9%
(after fund fees and mortality and expense charges) for the variable life
business at both at December 31, 2008 and 2007.
10
.. Policy Liabilities and Accruals
Reserves are liabilities representing estimates of the amounts that will come
due to our policyholders at some point in the future. GAAP prescribes the
methods of establishing reserves, allowing some degree of managerial judgment.
.. Embedded Derivative Liabilities
The fair value of our liability for guaranteed minimum accumulation benefit
("GMAB") and guaranteed minimum withdrawal benefit ("GMWB") riders are
calculated in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), as modified by SFAS No. 157,
Fair Value Measurements ("SFAS 157"). SFAS 157 requires a Credit Standing
Adjustment. The Credit Standing Adjustment reflects the adjustment that market
participants would make to reflect the risk that guaranteed benefit obligations
may not be fulfilled ("nonperformance risk"). SFAS 157 explicitly requires
nonperformance risk to be reflected in fair value. The Company calculates the
Credit Standing Adjustment by applying an average credit spread for companies
similar to Phoenix when discounting the rider cash flows for calculation of the
liability. This average credit spread is recalculated every quarter and so the
fair value will change with the passage of time even in the absence of any
other changes that affect the valuation. For example, the December 31, 2008
fair value of $83,061 thousand would increase to $90,144 thousand if the chosen
spread decreased by 50 basis points. If the chosen spread increased by 50 basis
points the fair value would decrease to $78,569 thousand.
.. Valuation of Debt and Equity Securities
We classify our debt and equity securities held in our general account as
available-for-sale and report them in our balance sheet at fair value. Fair
value is based on quoted market price, where available. When quoted market
prices are not available, we estimate fair value by discounting debt security
cash flows to reflect interest rates currently being offered on similar terms
to borrowers of similar credit quality, by quoted market prices of comparable
instruments and by independent pricing sources or internally developed pricing
models.
Fair Value of General Account Fixed Maturity Securities
by Pricing Source: As of December 31, 2008
($ in thousands) ----------------------------
Fixed % of
Maturities Total
at Fair Value Fair Value
Priced via independent market quotations......... $ 807,087 63%
Priced via matrices.............................. 231,969 18%
Priced via broker quotations..................... 75,595 6%
Priced via other methods......................... 75,676 6%
Short-term investments/(1)/...................... 97,082 7%
-------------- -------------
Total............................................ $ 1,287,409 100%
============== =============
/(1)/ Short-term investments are valued at amortized cost, which approximates
fair value.
.. Other-Than-Temporary Impairments
Investments whose value, in our judgment, are considered to be
other-than-temporarily impaired are written down to fair value as a charge to
realized losses included in our earnings. The assessment of whether impairments
have occurred is based on management's case-by-case evaluation of the
underlying reasons for the decline in fair value. Management considers a wide
range of factors about the security issuer and uses its best judgment in
evaluating the cause of the decline in the estimated fair value of the security
and in assessing the prospects for near term recovery. Inherent in management's
evaluation of the security are assumptions and estimates about the operations
of the issuer and its future earnings potential. Consideration used by the
company in the impairment evaluation process include, but are not limited to:
.. the length of time and the extent to which the market value has been below
cost or amortized cost;
.. the potential for impairments of securities when the issuer is experiencing
significant financial difficulties;
.. the potential for impairments in an entire industry sector or sub-sector;
.. our ability and intent to hold the security for a period of time sufficient
to allow for recovery of its value;
.. unfavorable changes in forecasted cash flows on asset-backed securities; and
.. other subjective factors, including concentrations and information obtained
from regulators and rating agencies.
Historically, for securitized financial asset securities subject to EITF
Issue No. 99-20, we periodically updated our best estimate of cash flows over
the life of the security. In estimating cash flows, we use assumptions based on
current market conditions that we believe market participants would use. If the
fair value was less than amortized cost, or there was an adverse change in the
timing or amount of expected future cash flows since the prior analysis, an
other-than-temporary impairment was recognized. Projections of future cash
flows were subject to change based on new information regarding performance,
data received from third party
11
sources, and internal judgments regarding the future performance of the
underlying collateral.
Beginning in the fourth quarter of 2008, we implemented FSP No. EITF 99-20-1,
Amendments to the Impairment Guidance of EITF Issue No. 99-20. In addition to
relying on our best estimate of cash flows that a market participant would use
in determining fair value, we apply management judgment of the probability of
collecting all amounts due. In making the other-than-temporary impairment
assessment, information such as past events, current conditions, reasonable
forecasts, expected defaults, and relevant market data are considered. Also as
part of this analysis, we assess our intent and ability to retain until
recovery those securities judged to be temporarily impaired.
The cost basis of these written-down investments is adjusted to fair value at
the date the determination of an other-than-temporary impairment is made. The
new cost basis is not changed for subsequent recoveries in value. For
mortgage-backed and other asset-backed debt securities, we recognize income
using a constant effective yield based on anticipated prepayments and the
estimated economic lives of the securities. When actual prepayments differ
significantly from anticipated prepayments, the effective yield is recalculated
to reflect actual payments to date and any resulting adjustment is included in
net investment income. For certain asset-backed securities, changes in
estimated yield are recorded on a prospective basis and specific valuation
methods are applied to these securities to determine if there has been an
other-than-temporary decline in value.
.. Deferred Income Taxes
We account for income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes. The deferred tax assets and/or liabilities are determined by
multiplying the differences between the financial reporting and tax reporting
basis for assets and liabilities by the enacted tax rates expected to be in
effect when such differences are recovered or settled. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date. Valuation allowances on deferred tax assets are
estimated based on our assessment of the realizability of such amounts.
Significant management judgment is required in determining the provision for
income taxes and, in particular, any valuation allowance recorded against our
deferred tax assets. We carried a valuation allowance of $16,000 thousand on
$224,113 thousand of deferred tax assets at December 31, 2008, due to
uncertainties related to our ability to utilize some of the deferred tax assets
that are expected to reverse as capital losses. The amount of the valuation
allowance has been determined based on our estimates of taxable income over the
periods in which the deferred tax assets will be recoverable.
We concluded that a valuation allowance on the remaining $208,113 thousand of
deferred tax assets at December 31, 2008, was not required. Our methodology for
determining the realizability of deferred tax assets involves estimates of
future taxable income from our operations and consideration of available tax
planning strategies and actions that could be implemented, if necessary. These
estimates are projected through the life of the related deferred tax assets
based on assumptions that we believe to be reasonable and consistent with
current operating results. Changes in future operating results not currently
forecasted may have a significant impact on the realization of deferred tax
assets. In concluding that a valuation allowance was not required on the
remaining deferred tax assets, we considered the more likely than not criteria
pursuant to SFAS 109.
We have elected to file a consolidated federal income tax return for 2007 and
prior years. Within the consolidated tax return, we are required by regulations
of the Internal Revenue Service (IRS) to segregate the entities into two
groups: life insurance companies and non-life insurance companies. We are
limited as to the amount of any operating losses from the non-life group that
can be offset against taxable income of the life group. These limitations
affect the amount of any operating loss carryforwards that we have now or in
the future.
Our federal income tax returns are routinely audited by the IRS and estimated
provisions are routinely provided in the financial statements in anticipation
of the results of these audits. Unfavorable resolution of any particular issue
could result in additional use of cash to pay liabilities that would be deemed
owed to the IRS. Additionally, any unfavorable or favorable resolution of any
particular issue could result in an increase or decrease, respectively, to our
effective income tax rate to the extent that our estimates differ from the
ultimate resolution. As of December 31, 2008, we had current taxes payable of
$1,247 thousand, including $52 thousand of unrecognized tax benefits.
12
Results of Operations for the Year Ended December 31, 2008 and 2007
Summary Financial Data: Year Ended Increase (decrease) and
($ in thousands) December 31,
-------------------------- percentage change
2008 2007 2008 vs. 2007
------------ ------------ -------------------------
REVENUES:
Premiums................................ $ 15,098 $ 18,602 $ (3,504) (19%)
Insurance and investment product fees... 361,354 263,298 98,056 37%
Investment income, net of expenses...... 90,963 109,607 (18,644) (17%)
Net realized investment losses.......... (172,055) (7,043) (165,012) 2,343%
------------ ------------ ------------
Total revenues.......................... 295,360 384,464 (89,104) (23%)
============ ============ ============
BENEFITS AND EXPENSES:
Policy benefits......................... 218,415 168,395 50,020 30%
Policy acquisition cost amortization.... 262,132 120,041 142,091 118%
Other operating expenses................ 97,504 83,601 13,903 17%
------------ ------------ ------------
Total benefits and expenses............. 578,051 372,037 206,014 55%
============ ============ ============
Income (loss) before income taxes....... (282,691) 12,427 (295,118) (2,375%)
Applicable income tax (expense) benefit. 87,497 (1,122) 88,619 (7,898%)
------------ ------------ ------------
Net income (loss)....................... $ (195,194) $ 11,305 $ (206,499) (1,827%)
============ ============ ============
Year Ended December 31, 2008 compared to year ended December 31, 2007
Results for the year ended December 31, 2008 reflected negative impacts from
the decline in equity markets and return on variable products. The net loss of
$195,194 thousand in 2008 includes an unlocking of deferred policy acquisition
costs resulting in accelerated amortization of $101,418 thousand as compared to
an unlocking benefit of $1,649 thousand in 2007. It also reflects the adverse
impact of the markets on our investments, specifically overall declines and
credit spread widening, resulting in $172,055 thousand in realized capital
losses including $52,057 thousand of debt security impairments and $118,511
thousand of derivative losses. Derivative losses were driven by increases in
living benefit liabilities on certain of our variable products, which were
fully reinsured by our parent company, Phoenix Life, until December 31, 2008.
Phoenix Life hedged the reinsured liability with derivative assets on which it
recorded realized gains during 2008. Effective December 31, 2008, we recaptured
a portion of the reinsurance and began hedging the portion of the liability
that was recaptured.
Mortality margins in universal life and variable universal life products
increased to $163,077 thousand in 2008, compared to $94,924 thousand in 2007,
or $68,153 thousand. This reflects an $87,709 thousand increase in cost of
insurance fees, partially offset by a $19,556 thousand increase in benefits.
While fluctuations in mortality are inherent in our business, this improvement
primarily reflects growth in the block of business over recent years. Other fee
revenues increased by $9,109 thousand compared to the prior year.
Our universal life interest margins declined to negative $8,531 thousand in
2008, compared to negative $976 thousand in 2007, or $7,555 thousand. Our
annuity interest margin declined to $15,376 thousand in 2008, compared to
$26,514 thousand in 2007, or $18,693 thousand. These declines were primarily
driven by lower yields on debt securities.
Non-deferred expenses increased to $97,505 thousand in 2008, compared to
$83,600 thousand in 2007, or $13,905 thousand, reflecting increased allocations
as the business grows. In addition, higher mortality margins, increasing
in-force blocks, and the effect of a fourth quarter unlocking caused higher
policy acquisition cost amortization of $281,333 thousand, compared to $122,189
thousand in 2007.
General Account
The invested assets in our general account are generally of high quality and
broadly diversified across fixed income sectors, public and private income
securities and individual credits and issuers. Our investment professionals
manage these general account assets in investment segments that support
specific product liabilities. These investment segments have distinct
investment policies that are structured to support the financial
characteristics of the related liabilities within them. Segmentation of assets
allows us to manage the risks and measure returns on capital for our various
products.
Separate Accounts
Separate account assets are managed in accordance with the specific
investment contracts and guidelines relating to our variable products. We
generally do not bear any investment risk on assets held in separate accounts.
Rather, we receive investment management fees based on assets under management.
Assets held in separate accounts are not available to satisfy general account
obligations.
Debt and Equity Securities Held in General Account
Our general account debt securities portfolio consists primarily of
investment-grade publicly traded and privately placed corporate bonds,
residential mortgage-backed securities, commercial mortgage-backed securities
and asset-backed securities. As of December 31, 2008, our general account debt
securities, with a carrying value of $1,287.4 million, represented 90.1% of
total general account investments. Public debt securities represented 78.6% of
total debt securities, with the remaining 21.4% represented by private debt
securities.
13
Each year, the majority of our general account's net cash flows are invested
in investment grade debt securities. In addition, we maintain a portfolio
allocation of between 6% and 10% of debt securities in below investment grade
rated bonds. Allocations are based on our assessment of relative value and the
likelihood of enhancing risk-adjusted portfolio returns. The size of our
allocation to below investment grade bonds is also constrained by the size of
our net worth. We are subject to the risk that the issuers of the debt
securities we own may default on principal and interest payments, particularly
in the event of a major economic downturn. Our investment strategy has been to
invest the majority of our below investment grade rated bond exposure in the BB
rating category, which is equivalent to a Securities Valuation Office, or SVO,
securities rating of 3. The BB rating category is the highest quality tier
within the below investment grade universe, and BB rated securities
historically experienced lower defaults compared to B or CCC rated bonds. As of
December 31, 2008, our total below investment grade securities totaled $129.5
million, or 10.1%, of our total debt security portfolio. Of that amount, $85.4
million, or 6.6%, of our debt security portfolio was invested in the BB
category.
Our debt securities having an increased risk of default (those securities with
an SVO rating of four or greater which is equivalent to B or below) totaled
$44.2 million, or 3.4%, of our total debt security portfolio.
Our general account debt and equity securities are classified as
available-for-sale and are reported at fair value with unrealized gains or
losses included in equity. Accordingly, the carrying value of such securities
reflects their fair value at the balance sheet date. Fair value is based on
quoted market price, where available. When quoted market prices are not
available, we estimate fair value for debt securities by discounting projected
cash flows based on market interest rates currently being offered on similar
terms to borrowers of similar credit quality, by quoted market prices of
comparable instruments and by independent pricing sources or internally
developed pricing models. Investments whose value, in our judgment, is
considered to be other-than-temporarily impaired are written down to fair value
as a charge to realized losses included in our earnings. The cost basis of
these written-down investments is adjusted to fair value at the date the
determination of impairment is made. The new cost basis is not changed for
subsequent recoveries in value.
Debt Securities by Type and Credit Quality: As of December 31, 2008
------------------------------------------------------
($ in thousands) Investment Grade Below Investment Grade
-------------------------- --------------------------
Fair Value Cost Fair Value Cost
------------ ------------ ------------ ------------
United States government and agency...... $ 42,708 $ 43,689 $ -- $ --
State and political subdivision.......... 5,715 6,536 -- --
Foreign government....................... 17,462 16,608 13,625 13,522
Corporate................................ 690,553 812,165 85,429 111,148
Mortgage-backed.......................... 282,782 350,898 4,055 4,055
Other asset-backed....................... 118,647 188,215 26,433 45,392
------------ ------------ ------------ ------------
Total debt securities.................... $ 1,157,867 $ 1,418,111 $ 129,542 $ 174,117
============ ============ ============ ============
Percentage of total debt securities...... 89.9% 89.1% 10.1% 10.9%
============ ============ ============ ============
We manage credit risk through industry and issuer diversification. Maximum
exposure to an issuer is defined by quality ratings, with higher quality
issuers having larger exposure limits. Our investment approach has been to
create a high level of industry diversification. The top five industry holdings
as of December 31, 2008 in our debt securities portfolio were banking (5.7%),
diversified financial services (4.0%), real estate investment trusts
(2.8%), insurance (2.7%) and electric utilities (2.6%).
Residential Mortgage-Backed Securities
The weakness in the U.S. residential real estate markets, increases in
mortgage rates and the effects of relaxed underwriting standards for mortgages
and home equity loans have led to higher delinquency rates and losses for the
residential mortgage-backed securities market. Delinquency rates for all
sectors of the residential mortgage-backed market, including sub-prime, Alt-A
and prime, have increased beyond historical averages.
We invest directly in residential mortgage-backed securities through our
general account. To the extent these assets deteriorate in credit quality and
decline in value for an extended period, we may realize impairment losses. We
have been focused on identifying those securities that can withstand
significant increases in delinquencies and foreclosures in the underlying
mortgage pools before incurring a loss of principal.
Most of our residential mortgage-backed securities portfolio is highly rated.
As of December 31, 2008, 94% of the total residential portfolio was rated AAA
or AA. We have $57,953 thousand of sub-prime exposure, $34,258 thousand of
Alt-A exposure and $108,251 thousand of prime exposure, which combined amount
to 13% of our general account. Substantially all of our sub-prime, Alt-A and
prime exposure is investment grade, with 85% being AAA rated and, another 7% in
AA securities. We have employed a disciplined approach in the analysis and
monitoring of our mortgage-backed securities. Our approach involves a monthly
review of each security.
14
Underlying mortgage data is obtained from the security's trustee and analyzed
for performance trends. A security-specific stress analysis is performed using
the most recent trustee information. This analysis forms the basis for our
determination of whether the security will pay in accordance with the
contractual cash flows.
Year-to-date through December 31, 2008, we have taken impairments of $24,464
thousand on our residential mortgage-backed securities portfolio. This
represents 9.1% of our total residential mortgage-backed securities portfolio
and 1.5% of the general account. The losses consist of $9,096 thousand from
prime, $8,682 thousand from Alt-A and $6,686 thousand from sub-prime.
Residential Mortgage-Backed Securities:
($ in thousands) As of December 31, 2008
----------------------------------------------------------------------------------------
Carrying Market % General BB and
Value Value Account/(1)/ AAA AA A BBB Below
---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
Collateral.....
Agency......... $ 67,316 $ 68,234 4.3% 100.0% 0.0% 0.0% 0.0% 0.0%
Prime.......... 135,456 108,251 6.8% 89.6% 5.5% 0.5% 4.2% 0.2%
Alt-A.......... 49,346 34,258 2.2% 67.1% 12.1% 2.7% 4.4% 13.7%
Sub-prime...... 79,372 57,953 3.7% 88.5% 6.5% 0.0% 4.3% 0.7%
---------- ---------- ----------
Total.......... $ 331,490 $ 268,696 17.0% 89.1% 5.1% 0.6% 3.2% 2.0%
========== ========== ==========
-----------------
/(1)/Percentages based on Market Value.
Prime Mortgage-Backed Securities:
($ in thousands) As of December 31, 2008
----------------------------------------------------------------------------------------
Carrying Market % General 2003 &
Value Value Account/(1)/ 2007 2006 2005 2004 Prior
---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
Rating
AAA............. $ 119,453 $ 96,991 6.1% 1.4% 5.0% 19.8% 38.9% 34.9%
AA.............. 7,570 5,908 0.4% 0.0% 95.8% 0.0% 0.0% 4.2%
A............... 1,073 586 0.0% 0.0% 0.0% 0.0% 0.0% 100.0%
BBB............. 7,155 4,561 0.3% 0.0% 0.0% 17.7% 69.5% 12.8%
BB and below.... 205 205 0.0% 0.0% 0.0% 100.0% 0.0% 0.0%
---------- ---------- ----------
Total........... $ 135,456 $ 108,251 6.8% 1.3% 9.7% 18.7% 37.8% 32.5%
========== ========== ==========
-----------------
/(1)/Percentages based on Market Value.
Alt-A Mortgage-Backed Securities:
($ in thousands) As of December 31, 2008
----------------------------------------------------------------------------------------
Carrying Market % General 2003 &
Value Value Account/(1)/ 2007 2006 2005 2004 Prior
---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
Rating
AAA............. $ 35,217 $ 22,990 1.4% 20.5% 23.1% 28.2% 22.2% 6.0%
AA.............. 5,596 4,139 0.3% 0.0% 91.9% 0.0% 0.0% 8.1%
A............... 1,275 943 0.1% 0.0% 0.0% 0.0% 0.0% 100.0%
BBB............. 1,509 1,509 0.1% 0.0% 0.0% 100.0% 0.0% 0.0%
BB and below.... 5,749 4,677 0.3% 45.1% 54.9% 0.0% 0.0% 0.0%
---------- ---------- ----------
Total........... $ 49,346 $ 34,258 2.2% 19.9% 34.1% 23.3% 14.9% 7.8%
========== ========== ==========
-----------------
/(1)/Percentages based on Market Value.
15
Sub-Prime Mortgage-Backed Securities:
($ in thousands) As of December 31, 2008
----------------------------------------------------------------------------------------
Carrying Market % General 2003 &
Value Value Account/(1)/ 2007 2006 2005 2004 Prior
---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
Rating
AAA............. $ 67,262 $ 51,282 3.3% 32.3% 12.5% 22.1% 24.1% 9.0%
AA.............. 8,324 3,734 0.2% 39.9% 0.0% 24.8% 0.0% 35.3%
A............... -- 4 0.0% 100.0% 0.0% 0.0% 0.0% 0.0%
BBB............. 3,359 2,506 0.2% 0.0% 100.0% 0.0% 0.0% 0.0%
BB and below.... 427 427 0.0% 0.0% 100.0% 0.0% 0.0% 0.0%
---------- ---------- ----------
Total........... $ 79,372 $ 57,953 3.7% 31.2% 16.1% 21.2% 21.3% 10.2%
========== ========== ==========
-----------------
/(1)/Percentages based on Market Value.
Realized Gains and Losses
The following table presents certain information with respect to realized
investment gains and losses including those on debt securities pledged as
collateral, with losses from other-than-temporary impairment charges reported
separately in the table. These impairment charges were determined based on our
assessment of factors enumerated below, as they pertain to the individual
securities determined to be other-than-temporarily impaired.
Sources of Realized Investment Gains (Losses): Year Ended December 31,
----------------------------------
($ in thousands) 2008 2007 2006
---------- ---------- ----------
Debt security impairments.................................... $ (52,057) $ (3,287) $ (411)
---------- ---------- ----------
Debt security transaction gains.............................. 1,550 1,465 2,955
Debt security transaction losses............................. (2,952) (2,827) (7,253)
Other investment transaction gains (losses).................. (85) (51) 526
---------- ---------- ----------
Net transaction losses....................................... (1,487) (1,413) (3,772)
---------- ---------- ----------
Realized gains (losses) on derivative assets and liabilities. (118,511) (2,343) 1,723
---------- ---------- ----------
Net realized investment losses............................... $ (172,055) $ (7,043) $ (2,460)
========== ========== ==========
Other-Than-Temporary Impairments
We employ a comprehensive process to determine whether or not a security is
in an unrealized loss position and are other-than-temporarily impaired. This
assessment is done on a security-by-security basis and involves significant
management judgment, especially given the significant market dislocations.
At the end of each reporting period, we review all securities for potential
recognition of an other-than-temporary impairment. We maintain a watch list of
securities in default, near default or otherwise considered by our investment
professionals as being distressed, potentially distressed or requiring a
heightened level of scrutiny. We also identify all securities whose carrying
value has been below amortized cost on a continuous basis for zero to six
months, six months to 12 months and greater than 12 months. Using this
analysis, coupled with our watch list, we review all securities whose fair
value is less than 80% of amortized cost (significant unrealized loss) with
emphasis on below investment grade securities with a continuous significant
unrealized loss in excess of six months. In addition, we review securities that
experienced lesser declines in value on a more selective basis to determine
whether any are other-than-temporarily impaired.
Our assessment of whether an investment in a debt or equity security is
other-than-temporarily impaired includes whether the issuer has:
. defaulted on payment obligations;
. declared that it will default at a future point outside the current
reporting period;
. announced that a restructuring will occur outside the current reporting
period;
. severe liquidity problems that cannot be resolved;
. filed for bankruptcy;
. a financial condition which suggests that future payments are highly
unlikely;
. a deteriorating financial condition and quality of assets;
. sustained significant losses during the current year;
. announced adverse changes or events such as changes or planned changes in
senior management, restructurings, or a sale of assets; and/or
. been affected by any other factors that indicate that the fair value of
the investment may have been negatively impacted.
A debt security impairment is deemed other-than-temporary if:
. we do not have the ability and intent to hold an investment until a
forecasted recovery of fair value up
16
to (or beyond) the cost of the investment which, in certain cases, may mean
until maturity; or
. it is probable that we will be unable to collect all amounts due according
to the contractual terms of the debt security.
Impairments due to deterioration in credit that result in a conclusion that
non-collection is probable are considered other-than-temporary. Other declines
in fair value (for example, due to interest rate changes, sector credit rating
changes or company-specific rating changes that do not result in a conclusion
that non-collection of contractual principal and interest is probable) may also
result in a conclusion that an other-than-temporary impairment has occurred.
Further, in situations where the Company has asserted its ability and intent
to hold a security to a forecasted recovery, but now no longer has the ability
and intent to hold until recovery, an impairment should be considered
other-than-temporary, even if collection of cash flows is probable. The
determination of the impairment is made when the assertion to hold to recovery
changes, not when the decision to sell is made.
In determining whether collateralized securities are impaired, we obtain
underlying mortgage data from the security's trustee and analyze it for
performance trends. A security-specific stress analysis is performed using the
most recent trustee information. This analysis forms the basis for our
determination of whether the security will pay in accordance with the
contractual cash flows.
Fixed maturity other-than-temporary impairments taken in the later half of
2008 were concentrated in asset-backed securities and in corporate debt of
service companies and financial institutions. These impairments were driven
primarily by significant rating downgrades, bankruptcy or other adverse
financial conditions of respective issuers. In our judgment, these credit
events or other adverse conditions of the respective issuers have caused, or
will lead to, a deficiency in the contractual cash flows related to the
investment and, therefore, resulted in other than temporary impairments. Total
impairments taken in 2008 related to such credit-related circumstances were
$39,268 thousand.
In addition, further impairments were taken as a result of circumstances
where we cannot assert our ability or intent to hold for a period of time to
allow for recovery of value. In certain of these circumstances the decrease in
fair value, at the time the impairment was recorded, was driven primarily by
market or sector credit spread widening or by liquidity concerns and we believe
the recoverable value of the investment based on the expected cash flows is
greater than the current fair value. The amount of impairments taken due to
these factors was $12,789 thousand in 2008.
Given the significant credit spread widening and lack of liquidity in the
current environment, management exercised significant judgment with respect to
certain securities in determining whether impairments were
other-than-temporary. This included securities with $135,402 thousand ($19,863
thousand after offsets) of gross unrealized losses of 50% or more for which no
other-than-temporary impairment was ultimately indicated. In making its
assessments, management used a number of issuer-specific quantitative and
qualitative assessments of the probability of receiving contractual cash flows,
including the issue's implied yields to maturity, cumulative default rate based
on the issue's rating, comparisons of issue specific spreads to industry or
sector spreads, specific trading activity in the issue, other market data such
as recent debt tenders and upcoming refinancing exposure, as well as
fundamentals such as issuer credit and liquidity metrics, business outlook and
industry conditions. In addition to these reviews, management in each case
assessed its ability and intent to hold the securities for an extended time to
recovery, up to and including maturity.
Unrealized Gains and Losses
The following table presents certain information with respect to our gross
unrealized losses related to our investments in general account debt
securities. Applicable deferred policy acquisition costs and deferred income
taxes reduce the effect of these losses on our comprehensive income.
Duration of Gross Unrealized Losses on As of December 31, 2008
--------------------------------------------------------------
General Account Securities: 0 - 6 6 - 12 Over 12
($ in thousands) Total Months Months Months
-------------- -------------- -------------- --------------
Debt Securities
Total fair value.................... $ 942,796 $ 171,389 $ 270,110 $ 501,297
Total amortized cost................ 1,254,592 187,861 323,272 743,459
-------------- -------------- -------------- --------------
Unrealized losses................... $ (311,796) $ (16,472) $ (53,162) $ (242,162)
============== ============== ============== ==============
Unrealized losses after offsets..... $ (46,232) $ (2,755) $ (8,075) $ (35,402)
============== ============== ============== ==============
Number of securities................ 734 128 204 402
============== ============== ============== ==============
Investment grade:
Unrealized losses................... $ (266,696) $ (10,408) $ (42,847) $ (213,441)
============== ============== ============== ==============
Unrealized losses after offsets..... $ (39,309) $ (1,956) $ (6,616) $ (30,737)
============== ============== ============== ==============
Below investment grade:
Unrealized losses................... $ (45,100) $ (6,064) $ (10,315) $ (28,721)
============== ============== ============== ==============
Unrealized losses after offsets..... $ (6,923) $ (7996) $ (1,459) $ (4,665)
============== ============== ============== ==============
17
Total net unrealized losses on debt securities were $304,819 thousand
(unrealized losses of $311,796 thousand less unrealized gains of $6,977
thousand).
For debt securities with gross unrealized losses, 85.0% of the unrealized
losses after offsets for deferred policy acquisition costs and deferred income
taxes pertain to investment grade securities and 15.0% of the unrealized losses
after offsets pertain to below investment grade securities at December 31, 2008.
If we determine that the security is impaired, we write it down to its then
current fair value and record an unrealized loss in that period.
The following table represents those securities whose fair value is less than
80% of amortized cost (significant unrealized loss) that have been at a
significant unrealized loss position on a continuous basis.
Duration of Gross Unrealized Losses on As of December 31, 2008
--------------------------------------------------------------
General Account Securities: 0 - 6 6 - 12 Over 12
($ in thousands) Total Months Months Months
-------------- -------------- -------------- --------------
Debt Securities
Unrealized losses over 20% of cost............... $ (262,187) $ (221,627) $ (38,862) $ (1,798)
============== ============== ============== ==============
Unrealized losses over 20% of cost after offsets. $ (38,512) $ (33,170) $ (5,105) $ (237)
============== ============== ============== ==============
Number of securities............................. 324 285 37 2
============== ============== ============== ==============
Investment grade:
Unrealized losses over 20% of cost............... $ (222,482) $ (186,780) $ (34,847) $ (855)
============== ============== ============== ==============
Unrealized losses over 20% of cost after offsets. $ (32,570) $ (27,868) $ (4,589) $ (113)
============== ============== ============== ==============
Below investment grade:
Unrealized losses over 20% of cost............... $ (39,705) $ (34,847) $ (3,915) $ (943)
============== ============== ============== ==============
Unrealized losses over 20% of cost after offsets. $ (5,942) $ (5,302) $ (516) $ (124)
============== ============== ============== ==============
In determining that the securities giving rise to the previously mentioned
unrealized losses were not other-than-temporarily impaired, we evaluated the
factors cited above. In making these evaluations, we must exercise considerable
judgment. Accordingly, there can be no assurance that actual results will not
differ from our judgments and that such differences may require the future
recognition of other-than-temporary impairment charges that could have a
material affect on our financial position and results of operations. In
addition, the value of, and the realization of any loss on, a debt security or
equity security is subject to numerous risks, including interest rate risk,
market risk, credit risk and liquidity risk. The magnitude of any loss incurred
by us may be affected by the relative concentration of our investments in any
one issuer or industry. We have established specific policies limiting the
concentration of our investments in any single issuer and industry and believe
our investment portfolio is prudently diversified.
Liquidity and Capital Resources
In the normal course of business, we enter into transactions involving
various types of financial instruments such as debt and equity securities.
These instruments have credit risk and also may be subject to risk of loss due
to interest rate and market fluctuations.
Our liquidity requirements principally relate to the liabilities associated
with various life insurance and annuity products and operating expenses.
Liabilities arising from life insurance and annuity products include the
payment of benefits, as well as cash payments in connection with policy
surrenders, withdrawals and loans.
Historically, we have used cash flow from operations and investment
activities and capital contributions from our shareholder to fund liquidity
requirements. Our principal cash inflows from life insurance and annuities
activities come from premiums, annuity deposits and charges on insurance
policies and annuity contracts. Principal cash inflows from investment
activities result from repayments of principal, proceeds from maturities, sales
of invested assets and investment income.
Additional liquidity to meet cash outflows is available from our portfolio of
liquid assets. These liquid assets include substantial holdings of United
States government and agency bonds, short-term investments and marketable debt
and equity securities.
+A primary liquidity concern with respect to life insurance and annuity
products is the risk of early policyholder and contractholder withdrawal. We
closely monitor our liquidity requirements in order to match cash inflows with
expected cash outflows, and employ an asset/liability management approach
tailored to the specific requirements of each product line, based upon the
return objectives, risk tolerance, liquidity, tax and regulatory requirements
of the underlying products. In particular, we maintain investment programs
intended to provide adequate funds to pay benefits without forced sales of
investments. Products having liabilities with relatively long lives, such as
life insurance, are matched with assets having similar estimated lives, such as
long-term bonds and private placement bonds. Shorter-term liabilities are
matched with investments with short-term and medium-term fixed maturities.
18
Annuity Actuarial Reserves and Deposit Fund As of December 31,
---------------------------------------------------------
Liability Withdrawal Characteristics: 2008 2007
---------------------------- ----------------------------
($ in thousands) Amount/(1)/ Percent Amount/(1)/ Percent
-------------- ------------- -------------- -------------
Not subject to discretionary withdrawal provision.................... $ 114,613 3% $ 34,807 1%
Subject to discretionary withdrawal without adjustment............... 467,144 14% 531,863 12%
Subject to discretionary withdrawal with market value adjustment..... 181,411 5% 252,525 6%
Subject to discretionary withdrawal at contract value less surrender
charge............................................................. 200,810 6% 355,558 8%
Subject to discretionary withdrawal at market value.................. 2,364,913 72% 3,279,915 73%
-------------- ------------- -------------- -------------
Total annuity contract reserves and deposit fund liability........... $ 3,328,891 100% $ 4,454,668 100%
============== ============= ============== =============
-----------------
/(1)/Annuity contract reserves and deposit fund liability amounts are reported
on a statutory basis, which more accurately reflects the potential cash
outflows and include variable product liabilities. Annuity contract
reserves and deposit fund liabilities are monetary amounts that an insurer
must have available to provide for future obligations with respect to its
annuities and deposit funds. These are liabilities in our financial
statements prepared in conformity with statutory accounting practices.
These amounts are at least equal to the values available to be withdrawn
by policyholders.
Individual life insurance policies are less susceptible to withdrawals than
annuity contracts because policyholders may incur surrender charges and be
required to undergo a new underwriting process in order to obtain a new
insurance policy. As indicated in the table above, most of our annuity contract
reserves and deposit fund liabilities are subject to withdrawals.
Individual life insurance policies, other than term life insurance policies,
increase in cash values over their lives. Policyholders have the right to
borrow an amount up to a certain percentage of the cash value of their policies
at any time. As of December 31, 2008, we had approximately $491,308 thousand in
cash values with respect to which policyholders had rights to take policy
loans. The majority of cash values eligible for policy loans are at variable
interest rates that are reset annually on the policy anniversary. Policy loans
at December 31, 2008 were $33,852 thousand.
The primary liquidity risks regarding cash inflows from our investment
activities are the risks of default by debtors, interest rate and other market
volatility and potential illiquidity of investments. We closely monitor and
manage these risks.
We believe that our current and anticipated sources of liquidity are adequate
to meet our present and anticipated needs.
19
Contractual Obligations and Commercial Commitments
Contractual Obligations and As of December 31, 2008
Commercial Commitments:/(1)/ ------------------------------------------------------------------
($ in thousands) Total 2009 2010 - 2011 2012 - 2013 Thereafter
------------- ------------ ------------ ------------ -------------
Contractual Obligations............
Fixed contractual obligations/(2)/. $ -- $ -- $ -- $ -- $ --
Other long-term liabilities/(3)/... 18,554,981 666,154 1,239,175 1,270,102 15,379,550
------------- ------------ ------------ ------------ -------------
Total contractual obligations...... $ 18,554,981 $ 666,154 $ 1,239,175 $ 1,270,102 $ 15,379,550
============= ============ ============ ============ =============
-----------------
/(1)/We had no commercial commitments outstanding as of December 31, 2008.
/(2)/We have no fixed contractual obligations as all purchases are made by our
parent company and the resulting expenses are allocated to us when
incurred.
/(3)/Policyholder contractual obligations represent estimated benefits from
life insurance and annuity contracts issued by us. Policyholder
contractual obligations also include separate account liabilities, which
are contractual obligations of the separate account assets established
under applicable state insurance laws and are legally insulated from our
general account assets.
Future obligations are based on our estimate of future investment earnings,
mortality, surrenders and applicable policyholder dividends. Actual
obligations in any single year, or ultimate total obligations, may vary
materially from these estimates as actual experience emerges. As described in
Note 2 to our financial statements in this Form 10-K, policy liabilities and
accruals are recorded on the balance sheet in amounts adequate to meet the
estimated future obligations of the policies in force. The policyholder
obligations reflected in the table above exceed the policy liabilities,
policyholder deposit fund liabilities and separate account liabilities
reported on our December 31, 2008 balance sheet because the above amounts do
not reflect future investment earnings and future premiums and deposits on
those policies. Separate account obligations will be funded by the cash flows
from separate account assets, while the remaining obligations will be funded
by cash flows from investment earnings on general account assets and premiums
and deposits on contracts in force.
Off-Balance Sheet Arrangements
As of December 31, 2008, we did not have any significant off-balance sheet
arrangements as defined by Item 303(a)(4)(ii) of SEC Regulation S-K.
Reinsurance
We maintain life reinsurance programs designed to protect against large or
unusual losses in our life insurance business. We actively monitor the
financial condition and ratings of our reinsurance partners throughout the term
of the reinsurance contract. Due to the recent downgrade of Scottish Re, we
will continue to closely monitor the situation and will reassess the
recoverability of the reinsurance recoverable during the interim reporting
periods of 2009. Based on our review of their financial statements, reputations
in the reinsurance marketplace and other relevant information, we believe that
we have no material exposure to uncollectible life reinsurance.
Statutory Capital and Surplus and Risk-Based Capital
Connecticut Insurance Law requires that Connecticut life insurers report
their risk-based capital. Risk-based capital is based on a formula calculated
by applying factors to various asset, premium and statutory reserve items. The
formula takes into account the risk characteristics of the insurer, including
asset risk, insurance risk, interest rate risk and business risk. The
Connecticut Insurance Department has regulatory authority to require various
actions by, or take various actions against, insurers whose Total Adjusted
Capital (capital and surplus plus AVR) does not exceed certain risk-based
capital levels.
The levels of regulatory action, the trigger point and the corrective actions
required are summarized below:
Company Action Level - results when Total Adjusted Capital falls below 100%
of Company Action Level at which point the company must file a comprehensive
plan to the state insurance regulators;
Regulatory Action Level - results when Total Adjusted Capital falls below 75%
of Company Action Level where, in addition to the above, insurance regulators
are required to perform an examination or analysis deemed necessary and issue a
corrective order specifying corrective actions;
Authorized Control Level - results when Total Adjusted Capital falls below
50% of Company Action Level risk- based capital as defined by the NAIC where,
in addition to the above, the insurance regulators are permitted but not
required to place the company under regulatory control; and
Mandatory Control Level - results when Total Adjusted Capital falls below 35%
of Company Action Level where insurance regulators are required to place the
company under regulatory control.
At December 31, 2008, our Total Adjusted Capital level was in excess of 325%
of Company Action Level.
Quantitative and Qualitative Disclosures About Market Risk
Enterprise Risk Management
PNX has a comprehensive, enterprise-wide risk management program under which
PHL Variable operations are covered. The Chief Risk Officer reports to the
Chief Financial Officer and monitors our risk management activities. We have
established an Enterprise Risk Management Committee, chaired by the Chief
Executive Officer, to establish risk management principles, monitor key risks
and oversee our risk-management practices. Several management committees
oversee and address issues pertaining to all our major risks--operational,
market and product--as well as capital management.
Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed
internal processes, people and systems or from external events. PNX has
established an Operational Risk Committee, chaired by the Chief Risk Officer,
to develop an enterprise-wide framework for managing and measuring operational
risks. This committee generally meets monthly and has a membership that
represents all significant operating, financial and staff departments of PNX.
Among the risks the committee reviews and manages and for which it provides
general oversight are key person dependency risk, business continuity risk,
disaster recovery risk and risks related to information technology systems.
Market Risk
Market risk is the risk that we will incur losses due to adverse changes in
market rates and prices. We have exposure to market risk through both our
investment activities and our insurance operations. Our investment objective is
to maximize after-tax investment return within defined risk parameters. Our
primary sources of market risk are:
.. interest rate risk, which relates to the market price and cash flow
variability associated with changes in market interest rates;
.. credit risk, which relates to the uncertainty associated with the ongoing
ability of an obligor to make timely payments of principal and interest; and
.. equity risk, which relates to the volatility of prices for equity and
equity-like investments, such as venture capital partnerships.
We measure, manage and monitor market risk associated with our insurance and
annuity business, as part of our ongoing commitment to fund insurance
liabilities. We have developed an integrated process for managing the
interaction between product features and market risk. This process involves our
Corporate Finance, Corporate Portfolio Management, Life and Annuity Finance,
and Life and Annuity Product Development departments. These areas coordinate
with each other and report results and make recommendations to our
Asset-Liability Management Committee ("ALCO") chaired by the Chief Financial
Officer.
20
We also measure, manage and monitor market risk associated with our general
account investments, both those backing insurance liabilities and those
supporting surplus. This process involves Corporate Portfolio Management and
Goodwin, the Hartford-based asset management affiliate of PNX. These
organizations work together, make recommendations and report results to our
Investment Policy Committee, chaired by the Chief Investment Officer. Please
refer to "Management's Narrative Analysis of the Results of Operations" for
more information on our investment risk exposures. We regularly refine our
policies and procedures to appropriately balance market risk exposure and
expected return.
Interest Rate Risk Management
Interest rate risk is the risk that we will incur economic losses due to
adverse changes in interest rates. Our exposure to interest rate changes
results primarily from our interest-sensitive insurance liabilities and from
our significant holdings of fixed rate investments. Our insurance liabilities
largely comprise universal life policies and annuity contracts. Our fixed
maturity investments include U.S. and foreign government bonds, securities
issued by government agencies, corporate bonds, asset-backed securities and
mortgage-backed securities, most of which are exposed to changes in medium-term
and long-term U.S. Treasury rates.
We manage interest rate risk as part of our asset-liability management and
product development processes. Asset-liability management strategies include
the segmentation of investments by product line and the construction of
investment portfolios designed to satisfy the projected cash needs of the
underlying product liabilities. All asset-liability strategies are approved by
the ALCO. We manage the interest rate risk in portfolio segments by modeling
and analyzing asset and product liability durations and projected cash flows
under a number of interest rate scenarios.
One of the key measures we use to quantify our interest rate exposure is
duration, a measure of the sensitivity of the fair value of assets and
liabilities to changes in interest rates. For example, if interest rates
increase by 100 basis points, or 1%, the fair value of an asset or liability
with a duration of five is expected to decrease by 5%. We believe that as of
December 31, 2008, our asset and liability portfolio durations were well
matched, especially for our largest and most interest-sensitive segments. We
regularly undertake a sensitivity analysis that calculates liability durations
under various cash flow scenarios. We also calculate key rate durations for
assets and liabilities that show the impact of interest rate changes at
specific points on the yield curve. In addition, we monitor the short- and
medium-term asset and liability cash flows profiles by portfolio to manage our
liquidity needs.
To calculate duration for liabilities, we project liability cash flows under
a number of stochastically-generated interest rate scenarios and discount them
to a net present value using a risk-free market rate increased for our own
credit risk. For interest-sensitive liabilities the projected cash flows
reflect the impact of the specific scenarios on policyholder behavior as well
as the effect of minimum guarantees. Duration is calculated by revaluing these
cash flows at an alternative level of interest rates and by determining the
percentage change in fair value from the base case.
We also manage interest rate risk by emphasizing the purchase of securities
that feature prepayment restrictions and call protection. Our product design
and pricing strategies include the use of surrender charges or restrictions on
withdrawals in some products.
The selection of a 100 basis point immediate increase or decrease in interest
rates at all points on the yield curve is a hypothetical rate scenario used to
demonstrate potential risk. While a 100 basis point immediate increase or
decrease of this type does not represent our view of future market changes, it
is a hypothetical near-term change that illustrates the potential effect of
such events. Although these fair value measurements provide a representation of
interest rate sensitivity, they are based on our portfolio exposures at a point
in time and may not be representative of future market results. These exposures
will change as a result of on-going portfolio transactions in response to new
business, management's assessment of changing market conditions and available
investment opportunities.
The table below shows the estimated interest rate sensitivity of our fixed
income financial instruments measured in terms of fair value.
As of December 31, 2008
Interest Rate Sensitivity of Fixed Income ---------------------------------------------------
Carrying -100 Basis +100 Basis
Financial Instruments: Value Point Change Fair Value Point Change
($ in thousands) ------------ ------------ ------------ ------------
Cash and cash equivalents.............. $ 152,185 $ 152,307 $ 152,185 $ 152,063
Available-for-sale debt securities..... 1,287,409 1,322,866 1,287,409 1,252,316
------------ ------------ ------------ ------------
Total.................................. $ 1,439,594 $ 1,475,173 $ 1,439,594 $ 1,404,379
============ ============ ============ ============
We use derivative financial instruments, primarily interest rate swaps, to
manage our residual exposure to fluctuations in interest rates. We enter into
derivative contracts with a number of highly rated financial institutions, to
both diversify and reduce overall counterparty credit risk exposure.
We enter into interest rate swap agreements to reduce market risks from
changes in interest rates. We do not enter into interest rate swap agreements
for trading purposes. Under interest rate swap agreements, we exchange cash
flows with another party at specified intervals for a set length of
21
time based on a specified notional principal amount. Typically, one of the cash
flow streams is based on a fixed interest rate set at the inception of the
contract and the other is based on a variable rate that periodically resets. No
premium is paid to enter into the contract and neither party makes payment of
principal. The amounts to be received or paid on these swap agreements are
accrued and recognized in net investment income.
The table below shows the interest rate sensitivity of our general account
interest rate derivatives measured in terms of fair value, excluding derivative
liabilities embedded in products. These exposures will change as our insurance
liabilities are created and discharged and as a result of ongoing portfolio and
risk management activities.
As of December 31, 2008
Interest Rate Sensitivity of Derivatives: ---------------------------------------------------------
Weighted-
Average
Notional Term -100 Basis +100 Basis
Amount (Years) Point Change Fair Value Point Change
($ in thousands) ---------- --------- ------------ ---------- ------------
Equity futures.................... $ 129,019 0.2 $ 18,830 $ 18,551 $ 18,272
Interest rate swaps............... 100,000 9.8 25,731 15,839 6,822
Put options....................... 175,000 10.0 66,414 56,265 47,469
Swaptions......................... 190,000 0.9 23,975 10,928 4,501
---------- ---------- ---------- ----------
Totals - general account.......... $ 594,019 $ 134,950 $ 101,583 $ 77,064
========== ========== ========== ==========
Credit Risk Management
We manage credit risk through the fundamental analysis of the underlying
obligors, issuers and transaction structures. Through Goodwin, the asset
management affiliate of PNX, we employ a staff of experienced credit analysts
who review obligors' management, competitive position, cash flow, coverage
ratios, liquidity and other key financial and non-financial information. These
analysts recommend the investments needed to fund our liabilities while
adhering to diversification and credit rating guidelines. In addition, when
investing in private debt securities, we rely upon broad access to management
information, negotiated protective covenants, call protection features and
collateral protection. We review our debt security portfolio regularly to
monitor the performance of obligors and assess the stability of their current
credit ratings.
We also manage credit risk through industry and issuer diversification and
asset allocation. Maximum exposure to an issuer or derivatives counterparty is
defined by quality ratings, with higher quality issuers having larger exposure
limits. We have an overall limit on below investment grade rated issuer
exposure. In addition to monitoring counterparty exposures under current market
conditions, exposures are monitored on the basis of a hypothetical "stressed"
market environment involving a specific combination of declines in stock market
prices and interest rates and a spike in implied option activity.
Equity Risk Management
Equity risk is the risk that we will incur economic losses due to adverse
changes in equity prices. Our exposure to changes in equity prices primarily
results from our variable annuity and variable life products, as well as from
our holdings of mutual funds and other equities. We manage our insurance
liability risks on an integrated basis with other risks through our liability
and risk management and capital and other asset allocation strategies. We also
manage equity price risk through industry and issuer diversification and asset
allocation techniques.
Certain annuity products sold by us contain guaranteed minimum death
benefits. The guaranteed minimum death benefit ("GMDB") feature provides
annuity contract owners with a guarantee that the benefit received at death
will be no less than a prescribed amount. This minimum amount is based on the
net deposits paid into the contract, the net deposits accumulated at a
specified rate, the highest historical account value on a contract anniversary
or, if a contract has more than one of these features, the greatest of these
values. To the extent that the GMDB is higher than the current account value at
the time of death, the Company incurs a cost. This typically results in an
increase in annuity policy benefits in periods of declining financial markets
and in periods of stable financial markets following a decline. As of
December 31, 2008 and 2007, the difference between the GMDB and the current
account value (net amount at risk) for all existing contracts was $674,788
thousand and $42,461 thousand, respectively. This is our exposure to loss
should all of our contract owners have died on either December 31, 2008 or
2007. See Note 7 to the financial statements included in our Annual Report on
Form 10-K for the year ended December 31, 2008, incorporated herein by
reference for more information.
Certain life and annuity products sold by us contain guaranteed minimum
living benefits. These include guaranteed minimum accumulation, withdrawal,
income and payout annuity floor benefits. The guaranteed minimum accumulation
benefit ("GMAB") guarantees a return of deposit to a policyholder after 10
years regardless of market performance. The guaranteed minimum withdrawal
benefit ("GMWB") guarantees that a policyholder can withdraw 5% for life
regardless of market performance. The guaranteed minimum income benefit
("GMIB") guarantees that a policyholder can convert his or her account value
into a guaranteed payout annuity at a guaranteed minimum interest rate and a
guaranteed mortality basis, while also assuming a certain level
22
of growth in the initial deposit. The guaranteed payout annuity floor benefit
("GPAF") guarantees that the variable annuity payment will not fall below the
dollar amount of the initial payment. We have established a hedging program for
managing the risk associated with our guaranteed minimum accumulation and
withdrawal benefit features. We continue to analyze and refine our strategies
for managing risk exposures associated with all our separate account
guarantees. The statutory reserves for these totaled $49,253 thousand and
$11,179 thousand at December 31, 2008 and 2007, respectively. The GAAP reserves
totaled $139,612 thousand and $7,381 thousand at December 31, 2008 and 2007,
respectively.
We perform analysis with respect to the sensitivity of a change in the
separate account performance assumption as it is critical to the development of
the EGPs related to our variable annuity and variable life insurance business.
Equity market movements have a significant impact on the account value of
variable life and annuity products and fees earned. EGPs could increase or
decrease with these movements in the equity market. Sustained and significant
changes in the equity markets could therefore have an impact on deferred policy
acquisition cost amortization. Periodically, we also perform analysis with
respect to the sensitivity of a change in assumed mortality as it is critical
to the development of the EGPs related to our universal life insurance business.
As part of our analysis of separate account returns, we perform two
sensitivity tests. If at December 31, 2008 we had used a 100 basis points lower
separate account return assumption (after fund fees and mortality and expense
charges) for both the variable annuity and the variable life businesses and
used our current best estimate assumptions for all other assumptions to project
account values forward from the current value to reproject EGPs, the estimated
decrease to amortization and increase to net income would be approximately $744
thousand, before taxes.
If, instead, at December 31, 2008 we had used a 100 basis points higher
separate account return assumption (after fund fees and mortality and expense
charges) for both the variable annuity and variable life businesses and used
our current best estimate assumptions for all other assumptions to project
account values forward from the current value to reproject EGPs, the estimated
decrease to amortization and increase to net income would be approximately $982
thousand, before taxes.
Foreign Currency Exchange Risk Management
Foreign currency exchange risk is the risk that we will incur economic losses
due to adverse changes in foreign currency exchange rates. Our functional
currency is the U.S. dollar. Our exposure to fluctuations in foreign exchange
rates against the U.S. dollar primarily results from our holdings in non-U.S.
dollar-denominated debt securities which are not material to our financial
statements at December 31, 2008.
Selected Financial Data
The following selected financial data should be read in conjunction with the
financial statements and notes, which can be found at the end of this
Prospectus.
Annual Data
Year Ended December 31,
($ in thousands) ------------------------------------------------------------------------------
2008 2007 2006 2005 2004
-------------- -------------- -------------- -------------- --------------
REVENUES:
Premiums................................ $ 15,098 $ 18,602 $ 13,575 $ 9,521 $ 7,367
Insurance and investment product fees... 361,354 263,298 180,779 109,270 83,300
Investment income, net of expenses...... 90,963 109,607 129,325 154,374 143,862
Net realized investment gains (losses).. (172,055) (7,043) (2,460) (10,569) 5,121
-------------- -------------- -------------- -------------- --------------
Total revenues.......................... 295,360 384,464 321,219 262,596 239,650
-------------- -------------- -------------- -------------- --------------
BENEFITS AND EXPENSES:
Policy benefits......................... 218,415 168,395 154,951 130,279 136,760
Policy acquisition cost amortization.... 262,132 120,041 93,342 80,402 45,027
Other operating expenses................ 97,504 83,601 65,388 50,493 35,683
-------------- -------------- -------------- -------------- --------------
Total benefits and expenses............. 578,051 372,037 313,681 261,174 217,470
-------------- -------------- -------------- -------------- --------------
Income (loss) before income taxes....... (282,691) 12,427 7,538 1,422 22,180
Applicable income tax (expense) benefit. 87,497 (1,122) (1,070) 2,801 (5,465)
-------------- -------------- -------------- -------------- --------------
Net income (loss)....................... $ (195,194) $ 11,305 $ 6,468 $ 4,223 $ 16,715
============== ============== ============== ============== ==============
December 31,
($ in thousands) ------------------------------------------------------------------------------
2008 2007 2006 2005 2004
-------------- -------------- -------------- -------------- --------------
Total assets............................ $ 5,493,954 $ 6,437,891 $ 5,855,932 $ 5,974,790 $ 6,031,560
============== ============== ============== ============== ==============
23
Supplementary Financial Information
Selected Unaudited Quarterly Financial Data: Quarter Ended
--------------------------------------------------
($ in thousands) Mar 31, June 30, Sept 30, Dec 31,
----------- ----------- ----------- -----------
Income Statement Data 2008
--------------------------------------------------
REVENUES
Premiums..................................... $ (643) $ 5,314 $ 5,423 $ 5,004
Insurance and investment product fees........ 83,866 87,717 93,554 96,218
Investment income, net of expenses........... 24,320 22,990 22,510 21,142
Net realized investment losses............... (20,029) 1,689 (28,390) (125,325)
----------- ----------- ----------- -----------
Total revenues............................... 87,514 117,710 93,097 (2,961)
----------- ----------- ----------- -----------
BENEFITS AND EXPENSES
Policy benefits.............................. 51,015 43,573 51,774 72,053
Policy acquisition cost amortization......... 24,537 38,755 46,533 152,307
Other operating expenses..................... 28,100 25,707 21,117 22,580
----------- ----------- ----------- -----------
Total benefits and expenses.................. 103,652 108,035 119,424 246,940
----------- ----------- ----------- -----------
Income before income taxes................... (16,138) 9,675 (26,327) (249,901)
Applicable income tax (expense) benefit...... 7,108 (3,360) 9,853 73,896
----------- ----------- ----------- -----------
Net income (loss)............................ $ (9,030) $ 6,315 $ (16,474) $ (176,005)
=========== =========== =========== ===========
COMPREHENSIVE INCOME
Net income (loss)............................ $ (9,030) $ 6,315 $ (16,474) $ (176,005)
Net unrealized gains (losses)................ (5,639) (2,620) (6,747) (25,133)
----------- ----------- ----------- -----------
Comprehensive income (loss).................. $ (14,669) $ 3,695 $ (23,221) $ (201,138)
=========== =========== =========== ===========
ADDITIONAL PAID-IN CAPITAL
Capital contribution from parent............. $ 42,000 $ 31,000 $ -- $ 96,934
RETAINED EARNINGS
Adjustment for initial application of FIN 48. --
Net income (loss)............................ (9,030) 6,315 (16,474) (176,005)
OTHER COMPREHENSIVE INCOME
Other comprehensive income (loss)............ (5,639) (2,620) (6,747) (25,133)
----------- ----------- ----------- -----------
Change in stockholder's equity............... 27,331 34,695 (23,221) (104,204)
Stockholder's equity, beginning of period.... 597,840 625,171 659,866 636,645
----------- ----------- ----------- -----------
Stockholder's equity, end of period.......... $ 625,171 $ 659,866 $ 636,645 $ 532,441
=========== =========== =========== ===========
24
Selected Unaudited Quarterly Financial Data: Quarter Ended
------------------------------------------------------
($ in thousands) Mar 31, June 30, Sept 30, Dec 31,
------------ ------------ ------------ ------------
Income Statement Data 2007
------------------------------------------------------
REVENUES
Premiums..................................... $ 3,179 $ 2,882 $ 4,199 $ 8,342
Insurance and investment product fees........ 54,119 59,410 67,356 82,413
Investment income, net of expenses........... 27,894 27,192 27,609 26,912
Net realized investment losses............... (170) 359 (1,987) (5,245)
------------ ------------ ------------ ------------
Total revenues............................... 85,022 89,843 97,177 112,422
------------ ------------ ------------ ------------
BENEFITS AND EXPENSES
Policy benefits.............................. 39,980 36,481 43,141 48,794
Policy acquisition cost amortization......... 23,603 26,923 27,894 41,620
Other operating expenses..................... 17,086 20,423 20,641 25,451
------------ ------------ ------------ ------------
Total benefits and expenses.................. 80,669 83,827 91,676 115,865
------------ ------------ ------------ ------------
Income before income taxes................... 4,353 6,016 5,501 (3,443)
Applicable income tax (expense) benefit...... (1,351) (1,863) 466 1,626
------------ ------------ ------------ ------------
Net income (loss)............................ $ 3,002 $ 4,153 $ 5,967 $ (1,817)
============ ============ ============ ============
COMPREHENSIVE INCOME
Net income (loss)............................ $ 3,002 $ 4,153 $ 5,967 $ (1,817)
Net unrealized gains (losses)................ 935 (5,206) (2,411) (2,413)
------------ ------------ ------------ ------------
Comprehensive income (loss).................. $ 3,937 $ (1,053) $ 3,556 $ (4,230)
============ ============ ============ ============
ADDITIONAL PAID-IN CAPITAL
Capital contribution from parent............. $ -- $ 25,000 $ 24,984 --
RETAINED EARNINGS
Adjustment for initial application of FIN 48. (1,000) -- -- --
Net income (loss)............................ 3,002 4,153 5,967 (1,817)
OTHER COMPREHENSIVE INCOME
Other comprehensive income (loss)............ 935 (5,206) (2,411) (2,413)
------------ ------------ ------------ ------------
Change in stockholder's equity............... 2,937 23,947 28,540 (4,230)
Stockholder's equity, beginning of period.... 546,646 549,583 573,530 602,070
------------ ------------ ------------ ------------
Stockholder's equity, end of period.......... $ 549,583 $ 573,530 $ 602,070 $ 597,840
============ ============ ============ ============
25
Selected Unaudited Quarterly Financial Data: Quarter Ended
------------------------------------------------------
($ in thousands) Mar 31, June 30, Sept 30, Dec 31,
------------ ------------ ------------ ------------
Income Statement Data 2006
------------------------------------------------------
REVENUES
Premiums.................................... $ 2,475 $ 3,219 $ 2,975 $ 4,906
Insurance and investment product fees....... 41,995 41,841 46,015 50,928
Investment income, net of expenses.......... 35,060 33,906 30,404 29,955
Net realized investment losses.............. (4,083) (64) (169) 1,856
------------ ------------ ------------ ------------
Total revenues.............................. 75,447 78,902 79,225 87,645
------------ ------------ ------------ ------------
BENEFITS AND EXPENSES
Policy benefits............................. 43,848 36,640 28,548 45,919
Policy acquisition cost amortization........ 13,057 20,767 27,480 32,036
Other operating expenses.................... 19,512 16,263 14,781 14,830
------------ ------------ ------------ ------------
Total benefits and expenses................. 76,417 73,670 70,809 92,785
------------ ------------ ------------ ------------
Income before income taxes.................. (970) 5,232 8,416 (5,140)
Applicable income tax (expense) benefit..... 228 (1,329) (1,027) 1,057
------------ ------------ ------------ ------------
Net income (loss)........................... $ (742) $ 3,903 $ 7,389 $ (4,083)
============ ============ ============ ============
COMPREHENSIVE INCOME
Net income (loss)........................... $ (742) $ 3,903 $ 7,389 $ (4,083)
Net unrealized gains (losses)............... (4,316) (4,812) 5,881 1,970
Derivatives................................. (83) (65) 785 (1,444)
------------ ------------ ------------ ------------
Comprehensive income (loss)................. $ (5,141) $ (974) $ 14,055 $ (3,557)
============ ============ ============ ============
ADDITIONAL PAID-IN CAPITAL
Capital contribution from parent............ $ -- $ -- $ -- --
RETAINED EARNINGS
Net income (loss)........................... (742) 3,903 7,389 (4,083)
OTHER COMPREHENSIVE INCOME
Other comprehensive income (loss)........... (4,399) (4,877) 6,666 526
------------ ------------ ------------ ------------
Change in stockholder's equity.............. (5,141) (974) 14,055 (3,557)
Stockholder's equity, beginning of period... 542,263 537,122 536,148 550,203
------------ ------------ ------------ ------------
Stockholder's equity, end of period......... $ 537,122 $ 536,148 $ 550,203 $ 545,646
============ ============ ============ ============
Directors and Officers of PHL Variable
Name* Age** Length of Time Served Position
------------------------------------------------------------------------------------------------------------------------
Thomas M. Buckingham 32 Officer since 03/26/09 Senior Vice President
Peter A. Hofmann 52 Officer since 11/23/07 Senior Executive Vice President and Chief Financial Officer and
Treasurer
Gina C. O'Connell 46 Officer since 05/02/2003 Senior Vice President
David R. Pellerin 51 Officer since 11/23/07 Senior Vice President and Chief Accounting Officer
Philip K. Polkinghorn 51 Director since 08/16/2004 Director and President
Officer since 08/16/2004
Zafar Rashid 59 Officer since 8/16/2005 Senior Vice President
Tracy L. Rich 57 Officer since 03/17/2003 Executive Vice President and Assistant Secretary
James D. Wehr 51 Director since 08/16/2004 Director, Executive Vice President and Chief Investment Officer
Officer since 01/01/2004
Christopher M. Wilkos 51 Director since 11/23/2007 Director, Senior Vice President and Corporate Portfolio Manager
Officer since 09/02/1997
* The business address of each individual is One American Row, Hartford, CT
06103-2899
** Ages are as of April 1, 2009
26
Executive Compensation and Management Ownership of PNX Shares
The executive officers of PHL Variable, an indirect subsidiary of PNX,
receive no direct compensation from PHL Variable and do not own any PHL
Variable shares since the stock is wholly owned by a PNX affiliate. Executive
officers of PHL Variable also serve as officers of PNX and own shares of PNX.
Portions of the definitive proxy statement filed by PNX pursuant to Regulation
14A on March 16, 2009 with respect to Peter A. Hofmann, Philip K. Polkinghorn
and James D. Wehr are incorporated by reference into this section of the
prospectus.
Summary Compensation Table for 2008 Fiscal Year
The following table sets forth information concerning the 2008 compensation
of those executives who were our Named Executive Officers ("NEOs") as of
December 31, 2008. For those executives that were also reported in the Summary
Compensation Table for the 2007 fiscal year, 2007 compensation information is
also included. The table includes salary, annual incentives and long-term
incentive compensation. Additional information may be found in the supporting
tables and footnotes that accompany this table.
Change in
Pension Value
and Non-Qualified
Non-Equity Deferred
Stock Option Incentive Plan Compensation
Salary/(1)/ Bonus Awards/(2)/ Awards/(3)/ Compensation/(4)/ Earnings/(5)/
Year $ $ $ $ $ $
Name and Principal Position(a) (b) (c) (d) (e) (f) (g) (h)
------------------------------ ---- ---------- ------ ---------- ---------- ---------------- -----------------
Philip K. Polkinghorn,
President................... 2008 109,234 0 57,379 40,174 0 26,918
2007 92,205 0 102,872 20,091 166,522 10,257
Peter A. Hofmann,
Senior Executive Vice
President and CFO........... 2008 94,645 0 34,863 25,866 0 31,605
2007 37,145 0 31,648 7,628 57,133 2,807
David R Pellerin
Senior Vice President and
Chief Accounting Officer.... 2008 66,809 25,610 11,620 15,356 8,017 59,812
Zafar Rashid,
Senior Vice President....... 2008 78,244 0 8,850 8,233 10,995 14,206
2007 106,730 0 46,963 4,864 88,346 10,527
Christopher M. Wilkos,
Senior Vice President and
Corporate Portfolio
Manager..................... 2008 44,063 0 5,263 5,312 43,118 19,846
All Other
Compensation/(6)/ Total
$ $
Name and Principal Position(a) (i) (j)
------------------------------ ---------------- -------
Philip K. Polkinghorn,
President................... 10,447 244,152
4,969 396,917
Peter A. Hofmann,
Senior Executive Vice
President and CFO........... 5,679 192,658
1,876 138,237
David R Pellerin
Senior Vice President and
Chief Accounting Officer.... 6,130 193,353
Zafar Rashid,
Senior Vice President....... 3,005 123,533
4,289 261,719
Christopher M. Wilkos,
Senior Vice President and
Corporate Portfolio
Manager..................... 3,305 120,906
-----------------
/(1)/Figures are shown for the year earned, and have not been reduced for
deferrals. For 2008, the following NEOs elected to defer a portion of
their salary until following termination of employment: Mr. Polkinghorn
deferred $5,611, Mr. Hofmann deferred $2,606, Mr. Pellerin deferred $935,
Mr. Rashid deferred $1,507 and Mr. Wilkos deferred $378. For 2007, the
following NEOs elected to defer a portion of their salary until following
termination of employment: Mr. Polkinghorn deferred $4,610 and Mr. Hofmann
deferred $690.
/(2)/Represents the expense reflected in our financial statements in 2008 and
2007, as applicable, for all stock awards granted to NEOs (excluding stock
options which are reflected in column (f)) as calculated pursuant to FAS
123R, with the only modification being that the forfeiture assumption for
not meeting vesting service requirements is omitted from the calculation
pursuant to SEC rules. These expenses include awards granted in 2008 and
2007, as applicable, and awards granted in prior years that are subject to
multiple-year service or performance conditions. A summary of the various
awards incorporated in this expense are:
FAS 123R Accounting Expense for NEO RSU Awards
Other Service-
Performance- Vested 2007 Annual
2006 - 2008 2007 - 2009 Contingent RSU Incentive Grand
LTIP Cycle LTIP Cycle RSU Awards Awards Enhancement Total
Name Year ($) ($) ($) ($) ($) ($)
---- ---- ----------- ----------- ------------ -------- ----------- -------
Philip K. Polkinghorn. 2008 (17,323) (18,226) -- 73,761 19,167 57,379
2007 15,368 32,336 -- 48,595 6,574 102,872
Peter A. Hofmann...... 2008 (6,235) (13,412) -- 46,009 8,501 34,863
2007 3,192 13,731 -- 11,677 3,048 31,648
David R Pellerin...... 2008 (2,366) (5,858) -- 17,114 2,729 11,620
Zafar Rashid.......... 2008 (6,881) (6,033) -- 18,024 3,740 8,850
2007 9,783 17,135 -- 16,536 3,488 46,963
Christopher M. Wilkos. 2008 (4,789) (4,199) -- 11,150 3,101 5,263
27
-----------------
/(3)/Represents the expense reflected in our financial statements for 2008 and
2007, as applicable, for all stock option awards granted to NEOs as
calculated pursuant to FAS 123R, with the only modification being that the
forfeiture assumption for not meeting vesting service requirements is
omitted from the calculation pursuant to SEC rules. These expenses include
awards granted in 2008 and 2007, as applicable, and awards granted in
prior years that are subject to multiple-year service conditions. The
various awards incorporated in this expense are:
FAS 123R Accounting Expense for NEO Stock Option Awards
2004 Stock 2005 Stock 2006 Stock 2007 Stock 2008 Stock
Option Awards Option Awards Option Awards Option Awards Option Awards Grand Total
Name Year ($) ($) ($) ($) ($) ($)
---- ---- ------------- ------------- ------------- ------------- ------------- -----------
Philip K. Polkinghorn. 2008 -- -- 18,813 -- 21,360 40,174
2007 3,371 -- 16,720 -- 20,091
Peter A. Hofmann...... 2008 -- -- -- 11,691 14,174 25,866
2007 2,141 -- -- 5,486 7,628
David R Pellerin...... 2008 -- -- 9,353 6,003 15,356
Zafar Rashid.......... 2008 -- -- -- -- 8,233 8,233
2007 4,864 -- -- -- 4,864
Christopher M. Wilkos. 2008 -- -- -- -- 5,312 5,312
-----------------
/(4)/Represents the cash-based incentive earned under The Phoenix
Companies, Inc. Annual Incentive Plan for Executive Officers for the
applicable performance year, paid in March of the following year. For
2008, none of the NEOs deferred any portion of their incentive awards. For
2007, Mr. Polkinghorn elected to defer receipt of 10% ($16,652) of his
incentive until following termination of employment.
/(5)/Represents the increase in the actuarial value of accumulated pension
benefits accrued during the year. For 2008, this represents the change in
value between December 31, 2007 and December 31, 2008. For 2007, this
represents the change in value between December 31, 2006 and December 31,
2007. These benefit accruals pertain solely to benefits accrued under the
Company's pension plans and exclude all account-based plans that NEOs may
participate in, such as The Phoenix Companies, Inc. Savings and Investment
Plan and The Phoenix Companies Inc. Non-Qualified Deferred Compensation
and Excess Investment Plan.
/(6)/All Other Compensation Sub-Table:
Company
Contributions to Reimbursement
401(k) Plan and for Financial Total
Excess Planning and Tax Gross "All Other
Investment Plan Tax Services Ups Travel Other Compensation"
Name Year ($) ($) ($) ($) ($) ($)
---- ---- ---------------- ------------- --------- ------ ----- -------------
Philip K. Polkinghorn. 2008 4,915 1,740 3,792 10,447
2007 3,919 615 435 -- -- 4,969
Peter A. Hofmann...... 2008 5,679 5,679
2007 1,876 -- -- -- -- 1,876
David R Pellerin...... 2008 6,013 6 111 6,130
Zafar Rashid.......... 2008 3,005 3,005
2007 4,269 -- -- -- 20 4,289
Christopher M. Wilkos. 2008 3,305 3,305
The Separate Account
PHL Variable Separate Account MVA1 ("Separate Account") is a non-unitized
separate account established under Connecticut law. Contract values
attributable to the premium allocation and terms of the contract do not depend
of the performance of the assets in the Separate Account.
Under Connecticut law, all income, gains or losses of the Separate Account,
whether realized or not, must be credited to or charged against the amount
placed in the Separate Account without regard to our other income, gains and
losses. The assets of the Separate Account may not be charged with liabilities
arising out of any other business that we may conduct. Obligations under the
contracts are obligations of PHL Variable.
There are no discrete units in the Separate Account. No party with rights
under any contract participates in the investment gain or loss from assets
belonging to the Separate Account. Such gain or loss accrues solely to us. We
retain the risk that the value of the assets in the Separate Account may drop
below the reserves and other liabilities it must maintain. If the Separate
Account asset value drops below the reserve and other liabilities we must
maintain in relation to the contracts supported by such assets, we will
transfer assets from our General Account to the Separate Account. Conversely,
if the amount we maintain is too much, we may transfer the excess to our
General Account.
In establishing guaranteed rates for the Fixed Account, we intend to take
into account the yields available on the instruments in which we intend to
invest the proceeds from the contracts. The company's investment strategy with
respect to the proceeds attributable to the contracts generally will be to
invest in investment-grade debt instruments having durations tending to match
the applicable guarantee periods.
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Investment-grade debt instruments in which the company intends to invest the
proceeds from the contracts include:
.. Securities issued by the United States government or its agencies or
instrumentalities.
.. Debt securities which have a rating, at the time of purchase, within the
four highest grades assigned by Moody's Investors Services, Inc. (Aaa, Aa, A
or Bb), Standard & Poor's Corporation (AAA, AA, A or BBB) or any other
nationally recognized rating service.
.. Other debt instruments, although not rated by Moody's or Standard & Poor's,
are deemed by the company's management to have an investment quality
comparable to securities described above.
While the above generally describes our investment strategy with respect to
the proceeds attributable to the contracts, we are not obligated to invest the
proceeds according to any particular strategy, except as may be required by
Connecticut and other state insurance law.
Experts
--------------------------------------------------------------------------------
The financial statements of PHL Variable Insurance Company incorporated in
this prospectus by reference to the Annual Report on Form 10-K for the year
ended December 31, 2008 have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
given on the authority of said firm as experts in auditing and accounting.
Kathleen A. McGah, Vice President and Counsel, PHL Variable Insurance
Company, Hartford, Connecticut has provided opinions upon legal matters
relating to the validity of the securities being issued. Ms. McGah also has
provided advice on certain matters relating to federal securities and income
tax laws about the contracts.
The Phoenix Companies, Inc.--Legal Proceedings about Company Subsidiaries
--------------------------------------------------------------------------------
We are regularly involved in litigation and arbitration, both as a defendant
and as a plaintiff. The litigation and arbitration naming us as a defendant
ordinarily involves our activities as an insurer, employer, investor or
investment advisor. It is not feasible to predict or determine the ultimate
outcome of all legal or arbitration proceedings or to provide reasonable ranges
of potential losses. Based on current information, we believe that the outcomes
of our litigation and arbitration matters are not likely, either individually
or in the aggregate, to have a material adverse effect on our consolidated
financial condition. However, given the large or indeterminate amounts sought
in certain of these matters and the inherent unpredictability of litigation and
arbitration, it is possible that an adverse outcome in certain matters could,
from time to time, have a material adverse effect on our results of operations
or cash flows in particular quarterly or annual periods.
State regulatory bodies, the Securities and Exchange Commission, or SEC, the
Financial Industry Regulatory Authority, or FINRA, the IRS and other regulatory
bodies regularly make inquiries of us and, from time to time, conduct
examinations or investigations concerning our compliance with laws and
regulations related to, among other things our insurance and broker-dealer
subsidiaries, securities offerings and registered products. We endeavor to
respond to such inquiries in an appropriate way and to take corrective action
if warranted.
For example, in the fourth quarter of 2008, the State of Connecticut
Insurance Department initiated the on-site portion of a routine financial
examination of the Connecticut domiciled life insurance subsidiaries of Phoenix
Life Insurance Company for the five year period ending December 31, 2008.
Regulatory actions may be difficult to assess or quantify, may seek recovery
of indeterminate amounts, including punitive and treble damages, and the nature
and magnitude of their outcomes may remain unknown for substantial periods of
time. It is not feasible to predict or determine the ultimate outcome of all
pending inquiries, investigations, legal proceedings and other regulatory
actions, or to provide reasonable ranges of potential losses. Based on current
information, we believe that the outcomes of our regulatory matters are not
likely, either individually or in the aggregate, to have a material adverse
effect on our financial condition. However, given the large or indeterminate
amounts sought in certain of these actions and the inherent unpredictability of
regulatory matters, it is possible that an adverse outcome in certain matters
could, from time to time, have a material adverse effect on our results of
operation or cash flows in particular quarterly or annual periods.
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