Income Taxes

9 Months Ended

Sep. 30, 2011

Notes to Financial Statements

Income Taxes

Income Taxes

It is our policy to estimate taxes for interim periods based on estimated annual effective tax rates which are derived, in part, from expected annual pre-tax income. However, the federal income tax expense for the three and nine months ended September 30, 2011 has been computed based on the first nine months of 2011 as a discrete period due to the uncertainty regarding our ability to reliably estimate pre-tax income for the remainder of the year. Due to this uncertainty, we are unable to develop a reasonable estimate of the annual effective tax rate for the full year 2011.

As of September 30, 2011, we performed our assessment of net deferred tax assets. Significant management judgment is required in determining the provision for income taxes and, in particular, any valuation allowance recorded against our deferred tax assets. For the three and nine months ended September 30, 2011, we recognized a decrease in the valuation allowance of $5,700 thousand and $10,800 thousand, respectively. Accounting guidance requires that this change be allocated to the various financial statement components of income or loss. The net decrease to the valuation allowance for the three months ended September 30, 2011 corresponds to a decrease of $11,300 thousand in income statement related deferred tax balances offset by an increase of $5,600 thousand in OCI related deferred tax balances. The decrease to the valuation allowance for the nine months ended September 30, 2011 corresponds to a decrease of $10,800 thousand in income statement related deferred tax balances.

Tax benefit of $13,780 thousand and $9,115 thousand was recognized in the income statement for the three and nine months ended September 30, 2011, respectively. The tax benefit for the three and nine months ended September 30, 2011 was primarily related to the valuation allowance movement in the income statement related deferred tax balances.

We have concluded that a valuation allowance on $139,780 thousand of gross deferred tax assets at September 30, 2011 was not required. Our methodology for determining the realizability of deferred tax assets considers estimates of future taxable income from our operations and consideration of available tax planning strategies and actions that could be implemented, if necessary. We also considered future reversals of existing taxable temporary differences. In concluding that a valuation allowance was not required on the deferred tax assets, we considered the more likely than not criteria pursuant to ASC 740, Accounting for Income Taxes.

We are included in the consolidated federal income tax return filed by PNX and are party to a tax sharing agreement by and among PNX and its subsidiaries. In accordance with this agreement, federal income taxes are allocated as if they had been calculated on a separate company basis, except that benefits for any net operating losses or other tax credits used to offset a tax liability of the consolidated group will be provided to the extent such loss or credit is utilized in the consolidated federal tax return.

Within the consolidated tax return, we are required by regulations of the Internal Revenue Service (the “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 may affect the amount of any operating loss carryovers that we have now or in the future.

The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2008.

In accordance with the tax sharing agreement, we had an intercompany current tax receivable of $9,607 thousand as of September 30, 2011 and an intercompany current tax payable of $5,800 thousand as of December 31, 2010.

To the extent required under the relevant tax law, we recognize interest and penalties related to amounts accrued on uncertain tax positions and amounts paid or refunded from federal and state income tax authorities in tax expense. The interest and penalties recorded during the three month period ending September 30, 2011 were not material.