UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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(Mark one)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM __________ TO __________

Commission File Number: 333-20277

PHL VARIABLE INSURANCE COMPANY

(Exact name of registrant as specified in its charter)

Connecticut	06-1045829
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
One American Row, Hartford, Connecticut	06102-5056
(Address of principal executive offices)	(Zip Code)
(860) 403-5000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   YES ¨    NO þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES ¨    NO þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer þ	Smaller reporting company ¨
		(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   YES ¨    NO þ

PHL Variable Insurance Company is a wholly-owned indirect subsidiary of The Phoenix Companies, Inc., and there is no market for the registrant’s common stock. As of April 29, 2014, there were 500 shares of the registrant’s common stock outstanding.

The registrant is filing this Quarterly Report on Form 10-Q with the reduced disclosure format permitted by General Instruction H(1)(a) and (b) of Form 10-Q.

Explanatory Note

This Quarterly Report on Form 10-Q for the period ended September 30, 2012 (this “Form 10-Q”) is being filed by PHL Variable Insurance Company (“we,” “our,” “us,” the “Company,” or “PHL Variable”) subsequent to the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the Securities and Exchange Commission (the “SEC”) on April 25, 2014 (the “2012 Form 10-K”) to meet the requirements of Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The 2012 Form 10-K contains audited financial statements of the Company for the years ended December 31, 2012, 2011 and 2010 and interim audited financial statements presented for each quarter during the fiscal years 2012 and 2011, which in each case are presented on a restated and amended basis to the extent previously filed in a periodic report by the Company with the SEC. The information contained in this Form 10-Q serves to update the financial statements of the Company for the year ended December 31, 2011 contained in the 2012 Form 10-K but does not serve to update the financial statements of the Company for the year ended December 31, 2012 contained in the 2012 Form 10-K.

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

The 2012 Form 10-K restates and corrects the following financial statements of the Company (the “Restatement”): (i) the audited balance sheet as of December 31, 2011 and statements of comprehensive income, changes in stockholder’s equity and cash flows for each of the years ended December 31, 2011 and 2010; and (ii) the unaudited statements of comprehensive income, unaudited balance sheets, unaudited statements of cash flow and unaudited statements of changes in stockholder’s equity for the quarterly periods ended March 31 and June 30, 2012 and for each of the quarterly periods in fiscal year 2011.

In addition, prior periods have been amended for the retrospective adoption of amendments to ASC 944, Financial Services – Insurance (ASU 2010-26, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts”) and correction of accounting errors related to the adoption as reported in the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2012.

In October 2010, the FASB issued amended guidance to ASC 944, Financial Services – Insurance, to address the diversity in practice for accounting for costs associated with acquiring or renewing insurance contracts. This guidance was retrospectively adopted by the Company on January 1, 2012 and such retrospective adoption resulted in amendments to previously reported balances in all applicable reporting periods as if the guidance was applied at the inception of all policies in force. As a result of the Restatement, the effects of retrospective adoption also reflect the impact of the adoption after consideration of correcting the errors that were corrected by the Restatement and errors in the initial adoption of ASC 944 reported in the Quarterly Report on Form 10-Q for the period ended March 31, 2012.

The interim unaudited financial statements for the three and nine month periods ended September 30, 2011 contained herein are presented on a restated and amended basis, consistent with the restated and amended financial statements for the year ended December 31, 2011 contained in the 2012 Form 10-K, and reflects corrections that were made during the Restatement process impacting such periods and to amend such interim unaudited financial statements for the impact of the retrospective adoption of amended accounting guidance.

For more information on the matters that have led to the Restatement and data previously reported, see Note 2 “Restatement and Amendment of Previously Reported Financial Information” to our financial statements contained herein.

2

TABLE OF CONTENTS
PART I	FINANCIAL INFORMATION	Page
Item 1.	Financial Statements (unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	58
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	74
Item 4.	Controls and Procedures	74
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	76
Item 1A.	Risk Factors	76
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	76
Item 3.	Defaults Upon Senior Securities	76
Item 4.	Mine Safety Disclosures	76
Item 5.	Other Information	77
Item 6.	Exhibits	77
Signature		78

3

PART I. FINANCIAL INFORMATION

Item 1.             FINANCIAL STATEMENTS

PHL VARIABLE INSURANCE COMPANY

Unaudited Balance Sheets

($ in millions)

September 30, 2012 and December 31, 2011

	Sept 30,			Dec 31,
	2012			2011
				As restated and amended
ASSETS:
Available-for-sale debt securities, at fair value (amortized cost of $2,802.5 and $2,460.9)	$	2,966.2		$	2,512.1
Limited partnerships and other investments		6.3			4.7
Policy loans, at unpaid principal balances		60.5			62.5
Derivative investments		185.8			103.8
Fair value investments		44.1			41.8
Total investments		3,262.9			2,724.9
Cash and cash equivalents		117.2			49.5
Accrued investment income		25.9			18.6
Receivables		451.3			413.6
Deferred policy acquisition costs		434.6			489.1
Deferred income taxes, net		18.7			29.4
Receivable from related parties		23.4			4.8
Other assets		145.4			108.6
Separate account assets		2,110.7			2,546.8
Total assets	$	6,590.1		$	6,385.3
LIABILITIES:
Policy liabilities and accruals	$	1,813.7		$	1,601.3
Policyholder deposit funds		2,217.7			1,724.4
Payable to related parties		13.8			30.0
Other liabilities		143.8			58.8
Separate account liabilities		2,110.7			2,546.8
Total liabilities		6,299.7			5,961.3
COMMITMENTS AND CONTINGENT LIABILITIES (Note 13)
STOCKHOLDER’S EQUITY:
Common stock, $5,000 par value: 1,000 shares authorized; 500 shares issued		2.5			2.5
Additional paid-in capital		802.2			802.2
Accumulated other comprehensive income		4.2			2.6
Accumulated deficit		(518.5	)		(383.3	)
Total stockholder’s equity		290.4			424.0
Total liabilities and stockholder’s equity	$	6,590.1		$	6,385.3

The accompanying unaudited notes are an integral part of these financial statements.

4

PHL VARIABLE INSURANCE COMPANY

Unaudited Interim Statements of Comprehensive Income

($ in millions)

Three and Nine Months Ended September 30, 2012 and 2011

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
				As restated and amended						As restated and amended
REVENUES:
Premiums	$	0.8		$	1.1		$	3.2		$	1.4
Insurance and investment product fees		92.3			96.9			280.5			299.8
Net investment income		33.3			25.0			96.5			70.7
Net realized investment gains (losses):
Total other-than-temporary impairment (“OTTI”) losses		(0.7	)		(4.7	)		(4.4	)		(7.0	)
Portion of OTTI losses recognized in     other comprehensive income (“OCI”)		(0.3	)		3.7			1.8			4.7
Net OTTI losses recognized in earnings		(1.0	)		(1.0	)		(2.6	)		(2.3	)
Net realized investment gains (losses), excluding OTTI losses		4.8			(3.2	)		(10.1	)		(5.8	)
Net realized investment gains (losses)		3.8			(4.2	)		(12.7	)		(8.1	)
Total revenues		130.2			118.8			367.5			363.8
BENEFITS AND EXPENSES:
Policy benefits		157.4			93.9			310.8			239.2
Policy acquisition cost amortization		24.3			28.9			92.6			90.3
Other operating expenses		24.8			24.1			75.7			69.7
Total benefits and expenses		206.5			146.9			479.1			399.2
Loss before income taxes		(76.3	)		(28.1	)		(111.6	)		(35.4	)
Income tax expense (benefit)		4.3			(18.0	)		23.6			(16.8	)
Net loss	$	(80.6	)	$	(10.1	)	$	(135.2	)	$	(18.6	)
COMPREHENSIVE INCOME (LOSS):
Net loss	$	(80.6	)	$	(10.1	)	$	(135.2	)	$	(18.6	)
Other comprehensive income (loss), before income taxes:
Net unrealized investment gains (losses), before income taxes		0.3			(5.4	)		14.6			21.5
Non-credit portion of OTTI losses recognized in OCI,    before income taxes		1.7			(3.7	)		4.1			(3.9	)
Other comprehensive income (loss), before income taxes		2.0			(9.1	)		18.7			17.6
Less: Income tax expense (benefit) related to:
Net unrealized investment gains (losses)		6.5			(0.8	)		15.7			5.6
Non-credit portion of OTTI losses recognized in OCI		0.6			(1.3	)		1.4			(1.4	)
Total income tax expense (benefit)		7.1			(2.1	)		17.1			4.2
Other comprehensive income (loss), net of income taxes		(5.1	)		(7.0	)		1.6			13.4
Comprehensive income (loss)	$	(85.7	)	$	(17.1	)	$	(133.6	)	$	(5.2	)

The accompanying unaudited notes are an integral part of these financial statements.

5

PHL VARIABLE INSURANCE COMPANY

Unaudited Interim Statements of Cash Flows

($ in millions)

Nine Months Ended September 30, 2012 and 2011

	Nine Months Ended September 30,
	2012			2011
				As restated and amended
OPERATING ACTIVITIES:
Net loss	$	(135.2	)	$	(18.6	)
Net realized investment losses		12.7			8.1
Policy acquisition costs deferred		(63.7	)		(71.5	)
Amortization of policy acquisition costs deferred		92.6			90.3
Interest credited		49.7			46.5
Equity in earnings of limited partnerships and other investments		(0.1	)		(0.3	)
Change in:
Accrued investment income		(10.6	)		(9.6	)
Deferred income taxes, net		(6.4	)		(6.0	)
Receivables		(37.7	)		16.2
Policy liabilities and accruals		(36.9	)		(111.5	)
Due to/from affiliate		(22.9	)		6.5
Other operating activities, net		(4.5	)		(55.4	)
Cash used for operating activities		(163.0	)		(105.3	)
INVESTING ACTIVITIES:
Purchases of:
Available-for-sale debt securities		(915.7	)		(1,036.7	)
Derivative instruments		(93.3	)		(23.0	)
Fair value investments		(2.9	)		(29.8	)
Sales, repayments and maturities of:
Available-for-sale debt securities		592.9			393.7
Derivative instruments		16.2			50.3
Fair value investments		4.2			6.2
Contributions to limited partnerships		(1.6	)		(0.9	)
Distributions from limited partnerships		0.3			0.1
Policy loans, net		3.7			(3.1	)
Other investing activities, net		(1.0	)		(0.6	)
Cash used for investing activities		(397.2	)		(643.8	)
FINANCING ACTIVITIES:
Policyholder deposit fund deposits		812.3			883.6
Policyholder deposit fund withdrawals		(381.7	)		(357.9	)
Net transfers to/from separate accounts		197.3			242.9
Cash provided by financing activities		627.9			768.6
Change in cash and cash equivalents		67.7			19.5
Cash and cash equivalents, beginning of year		49.5			34.1
Cash and cash equivalents, end of year	$	117.2		$	53.6
Non-Cash Transactions During the Year
Investment exchanges	$	25.6		$	12.0

The accompanying unaudited notes are an integral part of these financial statements.

6

PHL VARIABLE INSURANCE COMPANY

Unaudited Interim Statements of Changes in Stockholder’s Equity

($ in millions)

Nine Months Ended September 30, 2012 and 2011

	Nine Months Ended
	September 30,
	2012			2011
				As restated and amended(1)
COMMON STOCK:
Balance, beginning of period	$	2.5		$	2.5
Balance, end of period	$	2.5		$	2.5
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period	$	802.2		$	802.2
Capital contributions from parent		—			—
Balance, end of period	$	802.2		$	802.2
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance, beginning of period	$	2.6		$	(12.9	)
Other comprehensive income		1.6			13.4
Balance, end of period	$	4.2		$	0.5
ACCUMULATED DEFICIT:
Balance, beginning of period	$	(383.3	)	$	(363.3	)
Net loss		(135.2	)		(18.6	)
Balance, end of period	$	(518.5	)	$	(381.9	)
TOTAL STOCKHOLDER’S EQUITY:
Balance, beginning of period	$	424.0		$	428.5
Change in stockholder’s equity		(133.6	)		(5.2	)
Balance, end of period	$	290.4		$	423.3

(1) Amounts reflect the cumulative impact of the retrospective adoption of amended guidance to ASC 944, Financial Services Insurance (ASU 2010-26), as detailed more fully within Footnote 2 to these financial statements.

The accompanying unaudited notes are an integral part of these financial statements.

7

PHL VARIABLE INSURANCE COMPANY

Notes to Unaudited Interim Financial Statements

Three and Nine Months Ended September 30, 2012 and 2011

1.      Organization and Operation

PHL Variable Insurance Company (“we,” “our,” “us,” “PHL Variable” or the “Company”) is a life insurance company offering variable and fixed annuity and life insurance products. It is a wholly-owned subsidiary of PM Holdings, Inc. and PM Holdings, Inc. is a wholly-owned subsidiary of Phoenix Life Insurance Company (“Phoenix Life”), which is a wholly-owned subsidiary of The Phoenix Companies, Inc. (“PNX” or “Phoenix”), a New York Stock Exchange listed company. Saybrus Partners, Inc. (“Saybrus”), an affiliate, provides dedicated life insurance and other consulting services to financial advisors in partner companies, as well as support for sales of Phoenix’s product line through independent distribution organizations.

2.      Restatement and Amendment of Previously Reported Financial Information

These interim financial statements should be read in conjunction with the restated and amended financial statements for the year ended December 31, 2011 contained in the Company’s 2012 Annual Report on Form 10-K (the “2012 Form 10-K”), which was filed April 25, 2014. As previously presented in the 2012 Form 10-K, during the preparation of the Company’s Form 10-Q for the period ended June 30, 2012, a related party reinsurance error was identified, followed by the identification of certain other errors within the statement of cash flows for the nine months ended September 30, 2012, as well as for previously reported periods. Following the identification of these errors, management initiated a comprehensive internal review of the Company’s historical financial information and identified additional errors. As part of its internal review, the Company evaluated the financial reporting process and the resulting financial statements as well as the appropriateness of prior accounting and reporting decisions in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). As a result, the Company has restated and amended its financial statements as of and for the three and nine months ended September 30, 2011 to: (i) adjust for impact of these errors; (ii) record previously identified out-of-period errors that were previously determined not to be material individually, or in the aggregate, in the appropriate period; and (iii) amend the financial statements for the impact of the retrospective adoption of amended accounting guidance discussed more fully in the “Revision for the Retrospective Adoption of Amended Accounting Guidance” section below.

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

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

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

3.      Reinsurance Accounting (which includes two separate subcategories as noted more fully below)

4.      Cash Flows and Changes in Classification

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

Actuarial Finance

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

8

2.      Restatement and Amendment of Previously Reported Financial Information (continued)

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

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

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

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

The impact of the correction of these errors on the financial statements is presented in the “Summary of Correction of Actuarial Finance Errors” table within the “Actuarial Finance” section of this Note below.

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

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

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

9

2.      Restatement and Amendment of Previously Reported Financial Information (continued)

Other errors related to the FIA products for the 2010 period were previously identified and recorded as out-of-period errors. These errors which resulted in a net loss of $2.4 million are presented, along with all other actuarial out-of-period errors, within the “Other Actuarial Errors” section below.

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

10

2.      Restatement and Amendment of Previously Reported Financial Information (continued)

Increase (decrease)	Summary of Correction of Actuarial Finance Errors – December 31, 2011 Balance Sheet Impacts (1)
($ in millions)	Actuarial Finance
	Accounting for UL Type Products			Shadow Accounting			Loss Recognition			FIA			Other Actuarial			Total Actuarial Finance Errors (2)
ASSETS:
Available-for-sale debt securities, at fair value	$	—		$	—		$	—		$	—		$	—		$	—
Limited partnerships and other investments		—			—			—			—			—			—
Policy loans, at unpaid principal balances		—			—			—			—			—			—
Derivative investments		—			—			—			—			—			—
Fair value investments		—			—			—			—			—			—
Total investments		—			—			—			—			—			—
Cash and cash equivalents		—			—			—			—			—			—
Accrued investment income		—			—			—			—			—			—
Receivables		1.1			—			—			—			1.9			3.0
Deferred policy acquisition costs		70.9			(13.4	)		(1.4	)		(3.4	)		(2.6	)		50.1
Deferred income taxes, net		—			—			—			—			—			—
Receivables from related parties		—			—			—			—			—			—
Other assets		—			—			39.6			—			4.7			44.3
Separate account assets		—			—			—			—			—			—
Total assets	$	72.0		$	(13.4	)	$	38.2		$	(3.4	)	$	4.0		$	97.4
LIABILITIES:
Policy liabilities and accruals	$	195.1		$	(13.6	)	$	10.3		$	—		$	11.3		$	203.1
Deferred income tax, net		—			—			—			—			—			—
Policyholder deposit funds		—			—			—			0.8			2.4			3.2
Deferred income tax, net
Payable to related parties		—			—			—			—			—			—
Other liabilities		—			—			—			—			—			—
Separate account liabilities		—			—			—			—			—			—
Total liabilities		195.1			(13.6	)		10.3			0.8			13.7			206.3
STOCKHOLDER’S EQUITY:
Common stock		—			—			—			—			—			—
Additional paid-in capital		—			—			—			—			—			—
Accumulated other comprehensive loss		4.5			(19.8	)		—			—			—			(15.3	)
Accumulated deficit		(77.8	)		—			(0.8	)		(4.1	)		(12.2	)		(94.9	)
Treasury stock		—			—			—			—			—			—
Total stockholder’s equity (3)		(73.3	)		(19.8	)		(0.8	)		(4.1	)		(12.2	)		(110.2	)
Total stockholder’s equity - cumulative impact (4)		(49.8	)		20.0			28.7			(0.1	)		2.5			1.3
Total stockholder’s equity - impact		(123.1	)		0.2			27.9			(4.2	)		(9.7	)		(108.9	)
Total liabilities and stockholder’s equity	$	72.0		$	(13.4	)	$	38.2		$	(3.4	)	$	4.0		$	97.4

———————

(1)   All amounts are shown before income taxes, unless otherwise noted.

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

(3)   Amounts represent restatement changes made to the 2011 and 2010 periods as presented within the 2012 Form 10-K.

(4)   Amounts represent cumulative impact of restatement changes to periods prior to 2010.

11

2.      Restatement and Amendment of Previously Reported Financial Information (continued)

Increase (decrease)	Summary of Correction of Actuarial Finance Errors – Three months ended September 30, 2011 Income Statement and Comprehensive Income Impacts (1)
($ in millions)	Actuarial Finance
	Accounting for UL Type Products			Shadow Accounting			Loss Recognition			FIA			Other Actuarial			Total Actuarial Finance Errors (2)
REVENUES:
Premiums	$	—		$	—		$	—		$	—		$	—		$	—
Insurance and investment product fees		(2.4	)		—			—			—			(0.6	)		(3.0	)
Net investment income		—			—			—			—			(0.5	)		(0.5	)
Net realized investment gains (losses):
Total OTTI losses		—			—			—			—			—			—
Portion of OTTI losses recognized in OCI		—			—			—			—			—			—
Net OTTI losses recognized in earnings		—			—			—			—			—			—
Net realized investment gains (losses), excluding OTTI losses		—			—			—			—			8.0			8.0
Net realized investment gains (losses)		—			—			—			—			8.0			8.0
Total revenues		(2.4	)		—			—			—			6.9			4.5
BENEFITS AND EXPENSES:
Policy benefits		32.5			—			0.8			4.0			7.2			44.5
Policy acquisition cost amortization		(18.6	)		—			—			1.5			(0.8	)		(17.9	)
Other operating expenses		—			—			—			—			3.7			3.7
Total benefits and expenses		13.9			—			0.8			5.5			10.1			30.3
Income (loss) from before income taxes		(16.3	)		—			(0.8	)		(5.5	)		(3.2	)		(25.8	)
Income tax expense (benefit)		—			—			—			—			—			—
Net income (loss)	$	(16.3	)	$	—		$	(0.8	)	$	(5.5	)	$	(3.2	)	$	(25.8	)
COMPREHENSIVE INCOME (LOSS):
Net income (loss)	$	(16.3	)	$	—		$	(0.8	)	$	(5.5	)	$	(3.2	)	$	(25.8	)
Other comprehensive income (loss) before income taxes:
Net unrealized investment gains before income taxes		0.1			(20.8	)		—			—			—			(20.7	)
Non-credit portion of OTTI losses recognized in OCI before income taxes		—			—			—			—			—			—
Other comprehensive income (loss) before income taxes		0.1			(20.8	)		—			—			—			(20.7	)
Less: Income tax expense (benefit) related to:
Net unrealized investment gains (losses)		—			—			—			—			—			—
Non-credit portion of OTTI losses recognized in OCI		—			—			—			—			—			—
Total income tax expense (benefit)		—			—			—			—			—			—
Other comprehensive income, net of tax		0.1			(20.8	)		—			—			—			(20.7	)
Comprehensive income (loss)	$	(16.2	)	$	(20.8	)	$	(0.8	)	$	(5.5	)	$	(3.2	)	$	(46.5	)

———————

(1)   All amounts are shown before income taxes, unless otherwise noted.

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

12

2.      Restatement and Amendment of Previously Reported Financial Information (continued)

Increase (decrease)	Summary of Correction of Actuarial Finance Errors – Nine months ended September 30, 2011 Income Statement and Comprehensive Income Impacts (1)
($ in millions)	Actuarial Finance
	Accounting for UL Type Products			Shadow Accounting			Loss Recognition			FIA			Other Actuarial			Total Actuarial Finance Errors (2)
REVENUES:
Premiums	$	—		$	—		$	—		$	—		$	—		$	—
Insurance and investment product fees		(1.9	)		—			—			—			(1.4	)		(3.3	)
Net investment income		—			—			—			—			(0.5	)		(0.5	)
Net realized investment gains (losses):
Total OTTI losses		—			—			—			—			—			—
Portion of OTTI losses recognized in OCI		—			—			—			—			—			—
Net OTTI losses recognized in earnings		—			—			—			—			—			—
Net realized investment gains (losses), excluding OTTI losses		—			—			—			—			10.9			10.9
Net realized investment gains (losses)		—			—			—			—			10.9			10.9
Total revenues		(1.9	)		—			—			—			9.0			7.1
BENEFITS AND EXPENSES:
Policy benefits		43.6			—			2.5			4.0			9.4			59.5
Policy acquisition cost amortization		(7.9	)		—			—			2.1			(8.4	)		(14.2	)
Other operating expenses		—			—			—			—			10.5			10.5
Total benefits and expenses		35.7			—			2.5			6.1			11.5			55.8
Income (loss) from before income taxes		(37.6	)		—			(2.5	)		(6.1	)		(2.5	)		(48.7	)
Income tax expense (benefit)		—			—			—			—			—			—
Net income (loss)	$	(37.6	)	$	—		$	(2.5	)	$	(6.1	)	$	(2.5	)	$	(48.7	)
COMPREHENSIVE INCOME (LOSS):
Net income (loss)	$	(37.6	)	$	—		$	(2.5	)	$	(6.1	)	$	(2.5	)	$	(48.7	)
Other comprehensive income (loss) before income taxes:
Net unrealized investment gains before income taxes		(0.4	)		(14.2	)		—			—			—			(14.6	)
Non-credit portion of OTTI losses recognized in OCI before income taxes		—			—			—			—			—			—
Other comprehensive income (loss) before income taxes		(0.4	)		(14.2	)		—			—			—			(14.6	)
Less: Income tax expense (benefit) related to:
Net unrealized investment gains (losses)		—			—			—			—			—			—
Non-credit portion of OTTI losses recognized     in OCI		—			—			—			—			—			—
Total income tax expense (benefit)		—			—			—			—			—			—
Other comprehensive income, net of tax		(0.4	)		(14.2	)		—			—			—			(14.6	)
Comprehensive income (loss)	$	(38.0	)	$	(14.2	)	$	(2.5	)	$	(6.1	)	$	(2.5	)	$	(63.3	)

———————

(1)   All amounts are shown before income taxes, unless otherwise noted.

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

13

2.      Restatement and Amendment of Previously Reported Financial Information (continued)

Investments

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

●   Available-for-Sale Securities – The Company did not have an adequate process over: (1) the valuation and recording of private placement debt, private equity securities, and certain publicly traded securities; and (2) utilizing an appropriate model for identifying impairments related to these securities. The errors identified were related to: (i) inaccurate inputs used in the valuation models; (ii) and inappropriate valuation methodologies used to value certain instruments; and (iii) ineffective review of internally developed (matrix or manual) prices. The Company also failed to maintain an adequate process over the leveling and disclosure of fair value measurements. In the course of correcting these valuation errors, the Company also reassessed the presentation of the fair value hierarchy as disclosed within “Note 10: Fair Value of Financial Instruments.” This resulted in the determination in the leveling classification of $1,296.7 million of securities to Level 3 in the fair value hierarchy. The classification in Level 3 had no impact on the fair value of these securities.

The impact of the correction of these errors on the financial statements is presented in the “Summary of Correction of Investments Errors” table within the “Investments” section of this Note below.

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

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

14

2.      Restatement and Amendment of Previously Reported Financial Information (continued)

Increase (decrease)	Summary of Correction of Investments Errors – December 31, 2011 Balance Sheet Impacts (1)
($ in millions)	Investments
	AFS Valuation			Derivative Valuation			Structured Securities			Total Investment Errors (2)
ASSETS:
Available-for-sale debt securities, at fair value	$	0.9		$	—		$	(35.1	)	$	(34.2	)
Limited partnerships and other investments		—			—			—			—
Policy loans, at unpaid principal balances		—			—			—			—
Derivative investments		—			(9.4	)		—			(9.4	)
Fair value investments		(0.5	)		—			35.1			34.6
Total investments		0.4			(9.4	)		—			(9.0	)
Cash and cash equivalents		—			—			—			—
Accrued investment income		—			—			—			—
Receivables		—			—			—			—
Deferred policy acquisition costs		—			(13.1	)		—			(13.1	)
Deferred income taxes, net		—			—			—			—
Receivables from related parties		—			—			—			—
Other assets		—			—			—			—
Separate account assets		—			—			—			—
Total assets	$	0.4		$	(22.5	)	$	—		$	(22.1	)
LIABILITIES:
Policy liabilities and accruals	$	—		$	—		$	—		$	—
Deferred income taxes, net		—			—			—			—
Policyholder deposit funds		—			—			—			—
Deferred income tax, net		—			—			—			—
Payable to related parties		—			—			—			—
Other liabilities		—			—			—			—
Separate account liabilities		—			—			—			—
Total liabilities		—			—			—			—
STOCKHOLDER’S EQUITY:
Common stock		—			—			—			—
Additional paid-in capital		—			—			—			—
Accumulated other comprehensive loss		14.4			—			(0.4	)		14.0
Accumulated deficit		0.9			(8.0	)		1.1			(6.0	)
Treasury stock		—			—			—			—
Total stockholder’s equity (3)		15.3			(8.0	)		0.7			8.0
Total stockholder’s equity - cumulative impact (4)		(14.9	)		(14.5	)		(0.7	)		(30.1	)
Total stockholder’s equity - impact		0.4			(22.5	)		—			(22.1	)
Total liabilities and stockholder’s equity	$	0.4		$	(22.5	)	$	—		$	(22.1	)

———————

(1)   All amounts are shown before income taxes, unless otherwise noted.

(2)   Amounts represent the total “Summary of Correction of Investments Errors” which is further aggregated into the “Summary of Correction of Errors” in the following pages.

(3)   Amounts represent restatement changes made to the 2011 and 2010 periods as presented within the 2012 Form 10-K.

(4)   Amounts represent cumulative impact of restatement changes made to periods prior to 2010.

15

2.      Restatement and Amendment of Previously Reported Financial Information (continued)

Increase (decrease)	Summary of Correction of Investments Errors – Three months ended September 30, 2011 Income Statement and Comprehensive Income Impacts (1)
($ in millions)	Investments
	AFS Valuation		Derivative Valuation			Structured Securities			Total Investment Errors (2)
REVENUES:
Premiums	$	—	$	—		$	—		$	—
Insurance and investment product fees		—		—			—			—
Net investment income		—		—			(0.1	)		(0.1	)
Net realized investment gains (losses):
Total OTTI losses		—		—			—			—
Portion of OTTI losses recognized in OCI		—		—			—			—
Net OTTI losses recognized in earnings		—		—			—			—
Net realized investment gains (losses), excluding OTTI		—		(5.8	)		(0.4	)		(6.2	)
Net realized investment gains (losses)		—		(5.8	)		(0.4	)		(6.2	)
Total revenues		—		(5.8	)		(0.5	)		(6.3	)
BENEFITS AND EXPENSES:
Policy benefits		—		—			—			—
Policy acquisition cost amortization		—		(0.4	)		—			(0.4	)
Other operating expenses		—		—			—			—
Total benefits and expenses		—		(0.4	)		—			(0.4	)
Income (loss) from before income taxes		—		(5.4	)		(0.5	)		(5.9	)
Income tax expense (benefit)		—		—			—			—
Net income (loss)	$	—	$	(5.4	)	$	(0.5	)	$	(5.9	)
COMPREHENSIVE INCOME (LOSS):
Net income (loss)	$	—	$	(5.4	)	$	(0.5	)	$	(5.9	)
Other comprehensive income (loss) before income taxes:
Net unrealized investment gains before income taxes		—		—			0.5			0.5
Non-credit portion of OTTI losses recognized in OCI before income taxes		—		—			—			—
Other comprehensive income (loss) before income taxes		—		—			0.5			0.5
Less: Income tax expense (benefit) related to:
Net unrealized investment gains		—		—			—			—
Non-credit portion of OTTI losses recognized     in OCI		—		—			—			—
Total income tax expense (benefit)		—		—			—			—
Other comprehensive income, net of tax		—		—			0.5			0.5
Comprehensive income (loss)	$	—	$	(5.4	)	$	—		$	(5.4	)

———————

(1)   All amounts are shown before income taxes, unless otherwise noted.

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

16

2.      Restatement and Amendment of Previously Reported Financial Information (continued)

Increase (decrease)	Summary of Correction of Investments Errors – Nine months ended September 30, 2011 Income Statement and Comprehensive Income Impacts (1)
($ in millions)	Investments
	AFS Valuation		Derivative Valuation			Structured Securities			Total Investment Errors (2)
REVENUES:
Premiums	$	—	$	—		$	—		$	—
Insurance and investment product fees		—		—			—			—
Net investment income		0.2		—			(0.2	)		—
Net realized investment gains (losses):
Total OTTI losses		—		—			—			—
Portion of OTTI losses recognized in OCI		—		—			—			—
Net OTTI losses recognized in earnings		—		—			—			—
Net realized investment gains (losses), excluding OTTI		—		(5.6	)		(0.7	)		(6.3	)
Net realized investment gains (losses)		—		(5.6	)		(0.7	)		(6.3	)
Total revenues		0.2		(5.6	)		(0.9	)		(6.3	)
BENEFITS AND EXPENSES:
Policy benefits		—		—			—			—
Policy acquisition cost amortization		—		(0.4	)		—			(0.4	)
Other operating expenses		—		—			—			—
Total benefits and expenses		—		(0.4	)		—			(0.4	)
Income (loss) from before income taxes		0.2		(5.2	)		(0.9	)		(5.9	)
Income tax expense (benefit)		—		—			—			—
Net income (loss)	$	0.2	$	(5.2	)	$	(0.9	)	$	(5.9	)
COMPREHENSIVE INCOME (LOSS):
Net income (loss)	$	0.2	$	(5.2	)	$	(0.9	)	$	(5.9	)
Other comprehensive income (loss) before income taxes:
Net unrealized investment gains before income taxes		5.4		—			0.9			6.3
Non-credit portion of OTTI losses recognized in OCI before income taxes		—		—			—			—
Other comprehensive income (loss) before income taxes		5.4		—			0.9			6.3
Less: Income tax expense (benefit) related to:
Net unrealized investment gains		—		—			—			—
Non-credit portion of OTTI losses recognized     in OCI		—		—			—			—
Total income tax expense (benefit)		—		—			—			—
Other comprehensive income, net of tax		5.4		—			0.9			6.3
Comprehensive income (loss)	$	5.6	$	(5.2	)	$	—		$	0.4

———————

(1)   All amounts are shown before income taxes, unless otherwise noted.

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

17

2.      Restatement and Amendment of Previously Reported Financial Information (continued)

Reinsurance Accounting

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

Upon review of the reinsurance transactions, the Company also determined that loss recognition was appropriate for a portion of the underlying block of business both prior to and subsequent to entering into the reinsurance agreements. The impact of the loss recognition prior to the reinsurance then indirectly impacted the amount of costs deferred at day one. The impact of the loss recognition error on those costs deferred resulted in a reduction of approximately $38.6 million and is reflected within the “Summary of Correction of Actuarial Finance Errors” table above. The impact of the reinsurance component of this error on the financial statements is presented in the “Summary of Correction of Errors” table within this Note below.

In addition, certain errors were identified related to the Company’s net presentation of direct and ceded reinsurance liabilities on the balance sheets. As a result, ceded policy liabilities were reclassified from policy liabilities and accruals to receivables within the balance sheets to correct the error and reflect the proper gross presentation required under U.S. GAAP. See “Changes in Classifications” below for additional information.

Cash Flows and Changes in Classifications

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

Increase (decrease)	For the period ended
($ in millions)	September 30,
	2011
Statement of Cash Flows
Cash provided by (used for) operating activities		$	(160.0	)
Cash provided by (used for) investing activities			23.4
Cash provided by (used for) financing activities			138.1

18

2.      Restatement and Amendment of Previously Reported Financial Information (continued)

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

●   Changes in Classifications – The Company made certain corrections to: (i) present outstanding checks and cash held as collateral by a third party related to our derivative transactions in order to appropriately reflect the legal right of offset and to properly reclassify certain suspense accounts; (ii) reflect direct and ceded reinsurance liabilities gross in the balance sheets as described above in “Reinsurance Accounting” section; and (iii) reclassify sales inducements assets from deferred policy acquisition costs to other assets. These corrections had no impact to net income or total stockholder’s equity. The impact of the changes in classification are reflected in the correction of errors column in the “Summary of Correction of Errors” table within this Note.

Revision for the Retrospective Adoption of Amended Accounting Guidance

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

19

2.      Restatement and Amendment of Previously Reported Financial Information (continued)

Increase (decrease)	Summary of Correction of Errors – December 31, 2011 Balance Sheet Impacts (1)
						Reinsurance Accounting						Changes in Classification
($ in millions)	Total Actuarial Finance (2)		Total Investments(3)			Third-party reinsurance			Related party reinsurance
												Cash and Suspense			Reinsurance		Sales Inducement			Other Restatement Adjustments
																							Total Correction of Errors (4)
ASSETS:
Available-for-sale   debt securities, at fair value	$	—	$	(34.2	)	$	—		$	—		$	—		$	—	$	—		$	(0.1	)	$	(34.3	)
Limited partnerships and   other investments		—		—			—			—			—			—		—			(0.3	)		(0.3	)
Policy loans,   at unpaid principal balances		—		—			—			—			—			—		—			—			—
Derivative investments		—		(9.4	)		—			—			—			—		—			—			(9.4	)
Fair value investments		—		34.6			—			—			—			—		—			(0.1	)		34.5
Total investments		—		(9.0	)		—			—			—			—		—			(0.5	)		(9.5	)
Cash and cash equivalents		—		—			—			—			(18.0	)		—		—			—			(18.0	)
Accrued investment income		—		—			—			—			—			—		—			—			—
Receivables		3.0		—			—			(40.9	)		9.2			58.1		—			1.8			31.2
Deferred policy acquisition costs		50.1		(13.1	)		—			(3.6	)		—			—		(42.3	)		(0.1	)		(9.0	)
Deferred income taxes, net		—		—			—			—			—			—		—			29.4			29.4
Receivables from related parties		—		—			—			—			—			—		—			—			—
Other assets		44.3		—			(38.6	)		—			9.1			—		42.3			—			57.1
Separate account assets		—		—			—			—			—			—		—			(0.2	)		(0.2	)
Total assets	$	97.4	$	(22.1	)	$	(38.6	)	$	(44.5	)	$	0.3		$	58.1	$	—		$	30.4		$	81.0

———————

(1)   All amounts are shown before income taxes, unless otherwise noted.

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

(3)   Represents “Summary of Correction of Investments Errors" from the previous pages of this Note.

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

20

2.      Restatement and Amendment of Previously Reported Financial Information (continued)

(Continued from previous page)	Summary of Correction of Errors – December 31, 2011 Balance Sheet Impacts (1)
							Reinsurance Accounting						Changes in Classification
Increase (decrease)	Total Actuarial Finance(2)			Total Investments(3)			Third-party reinsurance			Related party reinsurance
($ in millions)													Cash and Suspense		Reinsurance		Sales Inducement		Other Restatement Adjustments			Total Correction of Errors (4)
LIABILITIES:
Policy liabilities and accruals	$	203.1		$	—		$	—		$	37.8		$	—	$	58.1	$	—	$	1.8		$	300.8
Policyholder deposit funds		3.2			—			—			—			—		—		—		—			3.2
Deferred income taxes, net		—			—			—			—			—		—		—		(6.8	)		(6.8	)
Payable to related parties		—			—			—			—			—		—		—		—			—
Other liabilities		—			—			—			—			0.3		—		—		(30.6	)		(30.3	)
Separate account liabilities		—			—			—			—			—		—		—		(0.2	)		(0.2	)
Total liabilities		206.3			—			—			37.8			0.3		58.1		—		(35.8	)		266.7
STOCKHOLDER’S EQUITY:
Common stock		—			—			—			—			—		—		—		—			—
Additional paid-in capital		—			—			—			—			—		—		—		—			—
Accumulated other   comprehensive loss		(15.3	)		14.0			—			—			—		—		—		—			(1.3	)
Accumulated deficit		(94.9	)		(6.0	)		3.0			(40.6	)		—		—		—		12.4			(126.1	)
Treasury stock		—			—			—			—			—		—		—		—			—
Total stockholder’s equity –   periods presented (5)		(110.2	)		8.0			3.0			(40.6	)		—		—		—		12.4			(127.4	)
Total stockholder’s equity –   cumulative impact (6)		1.3			(30.1	)		(41.6	)		(41.7	)		—		—		—		53.8			(58.3	)
Total stockholder’s equity –impact		(108.9	)		(22.1	)		(38.6	)		(82.3	)		—		—		—		66.2			(185.7	)
Total liabilities and   stockholder’s equity	$	97.4		$	(22.1	)	$	(38.6	)	$	(44.5	)	$	0.3	$	58.1	$	—	$	30.4		$	81.0

———————

(1)   All amounts are shown before income taxes, unless otherwise noted.

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

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

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

(5)   Amounts represent restatement changes made to the 2011 and 2010 periods as presented within the 2012 Form 10-K.

(6)   Amounts represent cumulative impact of restatement changes made to periods prior to 2010.

21

2.      Restatement and Amendment of Previously Reported Financial Information (continued)

Increase (decrease)	Summary of Correction of Errors – Three months ended September 30, 2011 Income Statement and Comprehensive Income Impacts (1)
($ in millions)
							Reinsurance Accounting
	Total Actuarial Finance (2)			Total Investments (3)			Third-party reinsurance			Related party reinsurance			Other Restatement Adjustments			Total Correction of Errors (4)
REVENUES
Premiums	$	—		$	—		$	—		$	—		$	—		$	—
Insurance and investment product fees		(3.0	)		—			—			1.8			0.1			(1.1	)
Net investment income		(0.5	)		(0.1	)		—			—			(0.1	)		(0.7	)
Net realized investment gains (losses):
Total OTTI losses		—			—			—			—			(0.2	)		(0.2	)
Portion of OTTI losses recognized in OCI		—			—			—			—			(0.2	)		(0.2	)
Net OTTI losses recognized in earnings		—			—			—			—			(0.4	)		(0.4	)
Net realized investment gains (losses), excluding OTTI losses		8.0			(6.2	)		—			—			0.4			2.2
Net realized investment gains (losses)		8.0			(6.2	)		—			—			—			1.8
Total revenues		4.5			(6.3	)		—			1.8			—			—
BENEFITS AND EXPENSES
Policy benefits		44.5			—			(1.0	)		(12.3	)		—			31.2
Policy acquisition cost amortization		(17.9	)		(0.4	)		—			13.0			(0.2	)		(5.5	)
Other operating expenses		3.7			—			—			—			0.7			4.4
Total benefits and expenses		30.3			(0.4	)		(1.0	)		0.7			0.5			30.1
Income (loss) before income taxes		(25.8	)		(5.9	)		1.0			1.1			(0.5	)		(30.1	)
Income tax expense (benefit)		—			—			—			—			—			—
Net income (loss)	$	(25.8	)	$	(5.9	)	$	1.0		$	1.1		$	(0.5	)	$	(30.1	)
COMPREHENSIVE INCOME (LOSS)
Net income (loss)	$	(25.8	)	$	(5.9	)	$	1.0		$	1.1		$	(0.5	)	$	(30.1	)
Other comprehensive income (loss) before income taxes (5):
Net unrealized investment gains before income taxes (5)		(20.7	)		0.5			—			—			0.1			(20.1	)
Non-credit portion of OTTI losses recognized in OCI before income taxes (5)		—			—			—			—			0.1			0.1
Other comprehensive income (loss) before income taxes		(20.7	)		0.5			—			—			0.2			(20.0	)
Less: Income tax expense (benefit) related to:
Net unrealized investment gains (losses) (5)		—			—			—			—			(15.3	)		(15.3	)
Non-credit portion of OTTI losses recognized     in OCI		—			—			—			—			—			—
Total income tax expense (benefit)		—			—			—			—			(15.3	)		(15.3	)
Other comprehensive income, net of tax		(20.7	)		0.5			—			—			15.5			(4.7	)
Comprehensive income (loss)	$	(46.5	)	$	(5.4	)	$	1.0		$	1.1		$	15.0		$	(34.8	)

———————

(1)   All amounts are shown before income taxes, unless otherwise noted.

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

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

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

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

22

2.      Restatement and Amendment of Previously Reported Financial Information (continued)

Increase (decrease)	Summary of Correction of Errors – Nine months ended September 30, 2011 Income Statement and Comprehensive Income Impacts (1)
($ in millions)
							Reinsurance Accounting
	Total Actuarial Finance (2)			Total Investments (3)			Third-party reinsurance			Related party reinsurance			Other Restatement Adjustments			Total Correction of Errors (4)
REVENUES
Premiums	$	—		$	—		$	—		$	—		$	—		$	—
Insurance and investment product fees		(3.3	)		—			—			1.4			—			(1.9	)
Net investment income		(0.5	)		—			—			—			(0.1	)		(0.6	)
Net realized investment gains (losses):
Total OTTI losses		—			—			—			—			(0.8	)		(0.8	)
Portion of OTTI losses recognized in OCI		—			—			—			—			—			—
Net OTTI losses recognized in earnings		—			—			—			—			(0.8	)		(0.8	)
Net realized investment gains (losses), excluding OTTI losses		10.9			(6.3	)		—			—			0.8			5.4
Net realized investment gains (losses)		10.9			(6.3	)		—			—			—			4.6
Total revenues		7.1			(6.3	)		—			1.4			(0.1	)		2.1
BENEFITS AND EXPENSES
Policy benefits		59.5			—			(4.1	)		(10.2	)		(0.1	)		45.1
Policy acquisition cost amortization		(14.2	)		(0.4	)		—			17.9			(0.1	)		3.2
Other operating expenses		10.5			—			—			—			2.5			13.0
Total benefits and expenses		55.8			(0.4	)		(4.1	)		7.7			2.3			61.3
Income (loss) before income taxes		(48.7	)		(5.9	)		4.1			(6.3	)		(2.4	)		(59.2	)
Income tax expense (benefit)		—			—			—			—			(6.2	)		(6.2	)
Net income (loss)	$	(48.7	)	$	(5.9	)	$	4.1		$	(6.3	)	$	3.8		$	(53.0	)
COMPREHENSIVE INCOME (LOSS)
Net income (loss)	$	(48.7	)	$	(5.9	)	$	4.1		$	(6.3	)	$	3.8		$	(53.0	)
Other comprehensive income (loss) before income taxes (5):
Net unrealized investment gains before income taxes (5)		(14.6	)		6.3			—			—			0.5			(7.8	)
Non-credit portion of OTTI losses recognized in OCI before income taxes (5)		—			—			—			—			(0.2	)		(0.2	)
Other comprehensive income (loss) before income taxes		(14.6	)		6.3			—			—			0.3			(8.0	)
Less: Income tax expense (benefit) related to:
Net unrealized investment gains (losses) (5)		—			—			—			—			(4.7	)		(4.7	)
Non-credit portion of OTTI losses recognized     in OCI		—			—			—			—			(0.2	)		(0.2	)
Total income tax expense (benefit)		—			—			—			—			(4.9	)		(4.9	)
Other comprehensive income, net of tax		(14.6	)		6.3			—			—			5.2			(3.1	)
Comprehensive income (loss)	$	(63.3	)	$	0.4		$	4.1		$	(6.3	)	$	9.0		$	(56.1	)

———————

(1)   All amounts are shown before income taxes, unless otherwise noted.

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

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

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

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

23

2.      Restatement and Amendment of Previously Reported Financial Information (continued)

	Balance Sheet
($ in millions)	As of December 31, 2011
	As previously reported			Correction of errors (1)			Adjusted prior to the Retrospective Adoption			Retrospective Adoption (2)			As restated and amended
ASSETS:
Available-for-sale debt securities, at fair value	$	2,546.4		$	(34.3	)	$	2,512.1		$	—		$	2,512.1
Limited partnerships and other investments		5.0			(0.3	)		4.7			—			4.7
Policy loans, at unpaid principal balances		62.5			—			62.5			—			62.5
Derivative investments		113.2			(9.4	)		103.8			—			103.8
Fair value investments		7.3			34.5			41.8			—			41.8
Total investments		2,734.4			(9.5	)		2,724.9			—			2,724.9
Cash and cash equivalents		67.5			(18.0	)		49.5			—			49.5
Accrued investment income		18.6			—			18.6			—			18.6
Receivables		382.4			31.2			413.6			—			413.6
Deferred policy acquisition costs		576.6			(9.0	)		567.6			(78.5	)		489.1
Deferred income taxes, net		—			29.4			29.4			—			29.4
Receivables from related parties		4.8			—			4.8			—			4.8
Other assets		52.5			57.1			109.6			(1.0	)		108.6
Separate account assets		2,547.0			(0.2	)		2,546.8			—			2,546.8
Total assets	$	6,383.8		$	81.0		$	6,464.8		$	(79.5	)	$	6,385.3
LIABILITIES:
Policy liabilities and accruals (3)	$	1,343.9		$	300.8		$	1,644.7		$	(43.4	)	$	1,601.3
Policyholder deposit funds		1,721.2			3.2			1,724.4			—			1,724.4
Deferred income taxes		6.8			(6.8	)		—			—			—
Payable to related parties		30.0			—			30.0			—			30.0
Other liabilities		89.1			(30.3	)		58.8			—			58.8
Separate account liabilities		2,547.0			(0.2	)		2,546.8			—			2,546.8
Total liabilities		5,738.0			266.7			6,004.7			(43.4	)		5,961.3
STOCKHOLDER’S EQUITY:
Common stock, $5,000 par value:   1,000 shares authorized; 500 shares issued		2.5			—			2.5			—			2.5
Additional paid-in capital		802.2			—			802.2			—			802.2
Accumulated other comprehensive loss		6.2			0.2			6.4			(3.8	)		2.6
Accumulated deficit		(165.1	)		(185.9	)		(351.0	)		(32.3	)		(383.3	)
Total stockholder’s equity		645.8			(185.7	)		460.1			(36.1	)		424.0
Total liabilities and stockholder’s equity	$	6,383.8		$	81.0		$	6,464.8		$	(79.5	)	$	6,385.3

———————

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

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

(3)   Included within policyholder liabilities and accruals is the post-ASU gross profits followed by losses reserve of $207.8 million. The corresponding net post-ASU amount of $193.6 million reported within the financial statements includes $(14.2) million of shadow profits followed by losses, both of which are discussed further within the “Actuarial Finance” section of this Note.

24

2.      Restatement and Amendment of Previously Reported Financial Information (continued)

	Statement of Comprehensive Income
($ in millions)	Three months ended September 30, 2011
							Adjusted
							prior to the
	As previously			Correction			retrospective			Retrospective			As restated
	reported			of errors(1)			adoption			adoption(2)			and amended
REVENUES:
Premiums	$	1.1		$	—		$	1.1		$	—		$	1.1
Insurance and investment product fees		98.0			(1.1	)		96.9			—			96.9
Net investment income		25.7			(0.7	)		25.0			—			25.0
Net realized investment gains (losses):
Total OTTI losses		(4.5	)		(0.2	)		(4.7	)		—			(4.7	)
Portion of OTTI losses recognized in OCI		3.9			(0.2	)		3.7			—			3.7
Net OTTI losses recognized in earnings		(0.6	)		(0.4	)		(1.0	)		—			(1.0	)
Net realized investment gains (losses),     excluding OTTI losses		(5.4	)		2.2			(3.2	)		—			(3.2	)
Net realized investment losses		(6.0	)		1.8			(4.2	)		—			(4.2	)
Total revenues		118.8			—			118.8			—			118.8
BENEFITS AND EXPENSES:
Policy benefits		61.8			31.2			93.0			0.9			93.9
Policy acquisition cost amortization		39.8			(5.5	)		34.3			(5.4	)		28.9
Other operating expenses		19.4			4.4			23.8			0.3			24.1
Total benefits and expenses		121.0			30.1			151.1			(4.2	)		146.9
Income (loss) before income taxes		(2.2	)		(30.1	)		(32.3	)		4.2			(28.1	)
Income tax expense (benefit)		(13.8	)		—			(13.8	)		(4.2	)		(18.0	)
Net income (loss)	$	11.6		$	(30.1	)	$	(18.5	)	$	8.4		$	(10.1	)
COMPREHENSIVE INCOME (LOSS):
Net income (loss)	$	11.6		$	(30.1	)	$	(18.5	)	$	8.4		$	(10.1	)
Other comprehensive income (loss)     before income tax (3):
Net unrealized investment gains before income tax		13.4			(20.1	)		(6.7	)		1.3			(5.4	)
Non-credit portion of OTTI losses recognized     in OCI before income tax		(3.8	)		0.1			(3.7	)		—			(3.7	)
Other comprehensive income (loss)       before income taxes		9.6			(20.0	)		(10.4	)		1.3			(9.1	)
Less: Income tax expense (benefit) related to (3):
Net unrealized investment gains		10.3			(15.3	)		(5.0	)		4.2			(0.8	)
Non-credit portion of OTTI losses recognized     in OCI		(1.3	)		—			(1.3	)		—			(1.3	)
Total income tax expense (benefit)		9.0			(15.3	)		(6.3	)		4.2			(2.1	)
Other comprehensive income, net of tax		0.6			(4.7	)		(4.1	)		(2.9	)		(7.0	)
Comprehensive income (loss)	$	12.2		$	(34.8	)	$	(22.6	)	$	5.5		$	(17.1	)

———————

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

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

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

25

2.      Restatement and Amendment of Previously Reported Financial Information (continued)

	Statement of Comprehensive Income
($ in millions)	Nine months ended September 30, 2011
							Adjusted
							prior to the
	As previously			Correction			retrospective			Retrospective			As restated
	reported			of errors(1)			adoption			adoption(2)			and amended
REVENUES:
Premiums	$	1.4		$	—		$	1.4		$	—		$	1.4
Insurance and investment product fees		301.7			(1.9	)		299.8			—			299.8
Net investment income		71.3			(0.6	)		70.7			—			70.7
Net realized investment gains (losses):
Total OTTI losses		(6.2	)		(0.8	)		(7.0	)		—			(7.0	)
Portion of OTTI losses recognized in OCI		4.7			—			4.7			—			4.7
Net OTTI losses recognized in earnings		(1.5	)		(0.8	)		(2.3	)		—			(2.3	)
Net realized investment gains (losses),     excluding OTTI losses		(11.2	)		5.4			(5.8	)		—			(5.8	)
Net realized investment losses		(12.7	)		4.6			(8.1	)		—			(8.1	)
Total revenues		361.7			2.1			363.8			—			363.8
BENEFITS AND EXPENSES:
Policy benefits		186.3			45.1			231.4			7.8			239.2
Policy acquisition cost amortization		107.8			3.2			111.0			(20.7	)		90.3
Other operating expenses		55.8			13.0			68.8			0.9			69.7
Total benefits and expenses		349.9			61.3			411.2			(12.0	)		399.2
Income (loss) before income taxes		11.8			(59.2	)		(47.4	)		12.0			(35.4	)
Income tax expense (benefit)		(9.2	)		(6.2	)		(15.4	)		(1.4	)		(16.8	)
Net income (loss)	$	21.0		$	(53.0	)	$	(32.0	)	$	13.4		$	(18.6	)
COMPREHENSIVE INCOME (LOSS):
Net income (loss)	$	21.0		$	(53.0	)	$	(32.0	)	$	13.4		$	(18.6	)
Other comprehensive income (loss)     before income tax (3):
Net unrealized investment gains before income tax		25.4			(7.8	)		17.6			3.9			21.5
Non-credit portion of OTTI losses recognized     in OCI before income tax		(3.7	)		(0.2	)		(3.9	)		—			(3.9	)
Other comprehensive income (loss)       before income taxes		21.7			(8.0	)		13.7			3.9			17.6
Less: Income tax expense (benefit) related to (3):
Net unrealized investment gains		8.8			(4.7	)		4.1			1.5			5.6
Non-credit portion of OTTI losses recognized     in OCI		(1.2	)		(0.2	)		(1.4	)		—			(1.4	)
Total income tax expense (benefit)		7.6			(4.9	)		2.7			1.5			4.2
Other comprehensive income, net of tax		14.1			(3.1	)		11.0			2.4			13.4
Comprehensive income (loss)	$	35.1		$	(56.1	)	$	(21.0	)	$	15.8		$	(5.2	)

———————

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

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

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

26

2.      Restatement and Amendment of Previously Reported Financial Information (continued)

	Statement of Cash Flows
($ in millions)	For the period ended September 30, 2011
							Adjusted
							prior to the
	As previously			Correction			retrospective			Retrospective			As restated
	reported			of errors(1)			adoption			adoption(2)			and amended
OPERATING ACTIVITIES:
Net income (loss)	$	21.0		$	(53.0	)	$	(32.0	)	$	13.4		$	(18.6	)
Net realized investment losses		12.7			(4.6	)		8.1			—			8.1
Policy acquisition costs deferred		(3.2	)		(69.2	)		(72.4	)		0.9			(71.5	)
Amortization of policy acquisition costs		—			111.0			111.0			(20.7	)		90.3
Interest credited		—			46.5			46.5			—			46.5
Equity in earnings of   limited partnerships and other investments		—			(0.3	)		(0.3	)		—			(0.3	)
Change in:
Accrued investment income		(7.9	)		(1.7	)		(9.6	)		—			(9.6	)
Deferred income taxes		(0.6	)		(3.9	)		(4.5	)		(1.5	)		(6.0	)
Receivables		0.4			15.8			16.2			—			16.2
Policy liabilities and accruals		36.4			(155.8	)		(119.4	)		7.9			(111.5	)
Due to/from affiliate		—			6.5			6.5			—			6.5
Other operating activities, net		(4.1	)		(51.3	)		(55.4	)		—			(55.4	)
Cash provided by (used for) operating activities		54.7			(160.0	)		(105.3	)		—			(105.3	)
INVESTING ACTIVITIES:
Purchases of:
Available-for-sale debt securities		(2,008.2	)		971.5			(1,036.7	)		—			(1,036.7	)
Derivative instruments		—			(23.0	)		(23.0	)		—			(23.0	)
Fair value investments		—			(29.8	)		(29.8	)		—			(29.8	)
Sales, repayments and maturities of:											—
Available-for-sale debt securities		1,345.7			(952.0	)		393.7			—			393.7
Derivative instruments		—			50.3			50.3			—			50.3
Fair value investments		—			6.2			6.2			—			6.2
Contributions to limited partnerships		—			(0.9	)		(0.9	)		—			(0.9	)
Distributions from limited partnerships		—			0.1			0.1			—			0.1
Policy loans, net		(4.7	)		1.6			(3.1	)		—			(3.1	)
Other investing activities, net		—			(0.6	)		(0.6	)		—			(0.6	)
Cash provided by (used for) investing activities		(667.2	)		23.4			(643.8	)		—			(643.8	)
FINANCING ACTIVITIES:
Policyholder deposit fund deposits		697.7			185.9			883.6			—			883.6
Policyholder deposit fund withdrawals		(67.2	)		(290.7	)		(357.9	)		—			(357.9	)
Net transfers to/from separate accounts		—			242.9			242.9			—			242.9
Cash provided by financing activities		630.5			138.1			768.6			—			768.6
Change in cash and cash equivalents		18.0			1.5			19.5			—			19.5
Cash and cash equivalents, beginning of year		51.1			(17.0	)		34.1			—			34.1
Cash and cash equivalents, end of year	$	69.1		$	(15.5	)	$	53.6		$	—		$	53.6
Non-Cash Transactions During the Year
Investment exchanges	$	—		$	12.0		$	12.0		$	—		$	12.0

———————

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

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

27

2.      Restatement and Amendment of Previously Reported Financial Information (continued)

	Statement of Changes in Stockholder’s Equity
($ in millions)	For the period ended September 30, 2011
							Adjusted
							prior to the
	As previously			Correction			retrospective			Retrospective			As restated
	reported			of errors(1)			adoption			adoption(2)			and amended
COMMON STOCK:
Balance, beginning of period	$	2.5		$	—		$	2.5		$	—		$	2.5
Balance, end of period	$	2.5		$	—		$	2.5		$	—		$	2.5
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period	$	802.2		$	—		$	802.2		$	—		$	802.2
Capital contributions from parent		—			—			—			—			—
Balance, end of period	$	802.2		$	—		$	802.2		$	—		$	802.2
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance, beginning of period	$	(12.5	)	$	7.4		$	(5.1	)	$	(7.8	)	$	(12.9	)
Adjustment for initial application of     accounting changes		—			—			—			—			—
Other comprehensive income		14.1			(3.1	)		11.0			2.4			13.4
Balance, end of period	$	1.6		$	4.3		$	5.9		$	(5.4	)	$	0.5
RETAINED EARNINGS (ACCUMULATED DEFICIT):
Balance, beginning of period	$	(182.1	)	$	(133.8	)	$	(315.9	)	$	(47.4	)	$	(363.3	)
Adjustment for initial application of     accounting changes		—			—			—			—			—
Net income (loss)		21.0			(53.0	)		(32.0	)		13.4			(18.6	)
Balance, end of period	$	(161.1	)	$	(186.8	)	$	(347.9	)	$	(34.0	)	$	(381.9	)
TOTAL STOCKHOLDER’S EQUITY:
Balance, beginning of period	$	610.1		$	(126.4	)	$	483.7		$	(55.2	)	$	428.5
Change in stockholder’s equity		35.1			(56.1	)		(21.0	)		15.8			(5.2	)
Balance, end of period	$	645.2		$	(182.5	)	$	462.7		$	(39.4	)	$	423.3

———————

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

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

28

3.      Basis of Presentation and Significant Accounting Policies

We have prepared these unaudited interim financial statements in accordance with U.S. GAAP which differ materially from the accounting practices prescribed by various insurance regulatory authorities. As of December 31, 2011, the Company changed from the direct to the indirect method of reporting its cash flow statement.

Certain prior period amounts have been reclassified to conform to the current year presentation, primarily as a result of the adoption of new accounting standards as described more fully below. These financial statements include all adjustments (consisting primarily of accruals) considered necessary for the fair statement of the balance sheet, statements of comprehensive income, statements of cash flows and statements of changes in stockholder’s equity for the interim periods. Certain financial information that is not required for interim reporting has been omitted. Financial results for the three and nine months ended September 30, 2012 are not necessarily indicative of full year results.

These interim financial statements should be read in conjunction with the restated and amended financial statements for the year ended December 31, 2011 contained in the 2012 Form 10-K.

Use of estimates

In preparing these financial statements in conformity with U.S. GAAP, we are required 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 periods. Significant estimates and assumptions are made in the determination of EGPs used in the valuation and amortization of assets and liabilities associated with universal life and annuity contracts; policyholder liabilities and accruals; valuation of investments in debt securities; limited partnerships and other investments; valuation of deferred tax assets; and accruals for contingent liabilities. We are also subject to estimates made by our ultimate parent company related to discount rates and other assumptions for our pension and other post-employment benefits expense; and accruals for contingent liabilities. Actual results could differ from these estimates.

Adoption of new accounting standards

Amendments to the Presentation of Comprehensive Income

In June 2011, the FASB issued amended guidance to ASC 220, Comprehensive Income, with respect to the presentation of comprehensive income as part of the effort to establish common requirements between U.S. GAAP and International Financial Reporting Standards (“IFRS”). This amended guidance requires entities to present all non-owner changes in stockholder’s equity either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments do not affect which components of comprehensive income are recognized in net income or comprehensive income, or when an item of other comprehensive income must be classified to net income. The computation and presentation of earnings per share also does not change. This guidance was adopted in the first quarter of 2012. Other than the required changes in presentation and the additional disclosures, adoption of this guidance did not have a material effect on our financial statements.

Amendments to Fair Value Measurement and Disclosure Requirements

In May 2011, the FASB issued amended guidance to ASC 820, Fair Value Measurement, with respect to measuring fair value and related disclosures as part of the effort to establish common requirements in accordance with U.S. GAAP and IFRS. The amended guidance clarifies that the concept of highest and best use should only be used in the valuation of non-financial assets, specifies how to apply fair value measurements to instruments classified in stockholder’s equity and requires that premiums or discounts be applied consistent with what market participants would use absent Level 1 inputs. The amendment also explicitly requires additional disclosures related to the valuation of assets categorized as Level 3 within the fair value hierarchy. Additional disclosures include quantitative information about unobservable inputs, the sensitivity of fair value measurement to changes in unobservable outputs and information on the valuation process used. This guidance was adopted in the first quarter of 2012. Disclosures in Note 10 reflect the prospective adoption of this guidance. Other than additional disclosures, adoption of this guidance did not have a material effect on our financial statements.

Revision for the Retrospective Adoption of Amended Accounting Guidance

In October 2010, the FASB issued amended guidance to ASC 944, Financial Services – Insurance, to address the diversity in practice for accounting for costs associated with acquiring or renewing insurance contracts. The amendment clarifies the definition of acquisition costs (i.e., costs which qualify for deferral) to include only incremental direct costs that result directly from, and are essential to, a contract and would not have been incurred by the insurance entity had the contract transaction not occurred. Therefore, only costs related to successful efforts of acquiring a new, or renewal, contract should be deferred. This guidance was retrospectively adopted on January 1, 2012 and such retrospective adoption results in amendments to previously reported balances as shown in Note 2 as if the guidance was applied at the inception of all policies in force. The cumulative effect of retrospective adoption reduced deferred policy acquisition costs and beginning stockholder’s equity by $36.1 million as of January 1, 2012. In any period, the adoption resulted in a decrease in amortization of policy acquisition costs due to the reduced deferred policy acquisition cost asset.

Accounting standards not yet adopted

Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income

In February 2013, the FASB issued updated guidance regarding the presentation of comprehensive income (ASU 2013-02). Under the guidance, an entity would separately present information about significant items reclassified out of accumulated other comprehensive income by component as well as changes in accumulated other comprehensive income balances by component in either the financial statements or the notes to the financial statements. The guidance does not change the items that are reported in other comprehensive income. The guidance does not change when an item of other comprehensive income must be reclassified to net income and does not amend any existing requirements for reporting net income or other comprehensive income. The guidance is effective for the first interim or annual reporting period beginning after December 15, 2012 and should be applied prospectively. This guidance is not expected to impact the Company’s statements of financial position or cash flows. The Company is currently assessing the impact of this guidance on the Company’s statements of operations and equity and the notes to financial statements.

29

3.      Basis of Presentation and Significant Accounting Policies (continued)

Disclosures about Offsetting Assets and Liabilities

In December 2011, the FASB issued amended guidance to ASC 210, Balance Sheet, with respect to disclosure of offsetting assets and liabilities as part of the effort to establish common requirements in accordance with U.S. GAAP and IFRS. This amended guidance requires the disclosure of both gross information and net information about both financial instruments and derivative instruments eligible for offset in our balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. This guidance is effective for periods beginning on or after January 1, 2013, with respective disclosures required retrospectively for all comparative periods presented. The adoption of this guidance effective January 1, 2013 is not expected to have a material effect on our financial statements.

Significant Accounting Policies

Our significant accounting policies are presented in the notes to our restated and amended financial statements for the year ended December 31, 2011 contained in the 2012 Form 10-K. There have been no significant changes since the filing of the restated year-end December 31, 2011 financial statements discussed above.

4.      Reinsurance

Reinsurance recoverable includes balances due from reinsurers for paid and unpaid losses and is presented net of an allowance for uncollectable reinsurance. The reinsurance recoverable balance is $441.1 million and $401.0 million as of September 30, 2012 and December 31, 2011, respectively, and is recorded within receivables in the balance sheets. Other reinsurance activity is shown below.

Direct Business and Reinsurance:	Three Months Ended						Nine Months Ended
($ in millions)	September 30,						September 30,
	2012			2011			2012			2011
				As restated and amended						As restated and amended
Direct premiums	$	16.7		$	18.0		$	52.8		$	54.1
Premiums ceded to non-affiliate reinsurers(1)		(15.9	)		(16.9	)		(49.6	)		(52.7	)
Premiums	$	0.8		$	1.1		$	3.2		$	1.4
Direct policy benefits incurred	$	75.0		$	28.2		$	214.4		$	117.5
Policy benefits assumed from non-affiliate reinsureds		1.0			0.9			2.5			2.9
Policy benefits ceded to:
Affiliate reinsurers		(6.9	)		—			(9.2	)		(0.3	)
Non-affiliate reinsurers		(20.4	)		(20.2	)		(94.1	)		(60.1	)
Policy benefits ceded to reinsurers		(27.3	)		(20.2	)		(103.3	)		(60.4	)
Premiums paid to:
Affiliate reinsurers		5.5			5.1			15.0			10.9
Non-affiliate reinsurers		18.7			19.4			42.4			28.4
Premiums paid to reinsurers(2)		24.2			24.5			57.4			39.3
Policy benefits(3)	$	72.9		$	33.4		$	171.0		$	99.3

———————

(1)   Primarily represents premiums ceded to reinsurers related to traditional life and term insurance policies.

(2)   For universal life and variable universal life contracts, premiums paid to reinsurers are reflected within policy benefits. See Note 3 to these financial statements for additional information regarding significant accounting policies.

(3)   Policy benefit amounts above exclude changes in reserves, interest credited to policyholders and withdrawals, which total $84.5 million and $60.5 million, net of reinsurance, for the three months ended September 30, 2012 and 2011, respectively, and $139.8 million and $139.9 million, net of reinsurance, for the nine months ended September 30, 2012 and 2011, respectively.

We remain liable to the extent that reinsuring companies may not be able to meet their obligations under reinsurance agreements in effect. Failure of the reinsurers to honor their obligations could result in losses to the Company. Since we bear the risk of nonpayment, on a quarterly basis we evaluate the financial condition of our reinsurers and monitor concentrations of credit risk. Based on our review of their financial statements, reputation in the reinsurance marketplace and other relevant information, we believe that we have no material exposure to uncollectible life reinsurance. At September 30, 2012, five major reinsurance companies account for approximately 74% of the reinsurance recoverable.

30

5.      Deferred Policy Acquisition Costs

On January 1, 2012, the Company adopted the amendments to ASC 944, Financial Services – Insurance (ASU 2010-26) as further discussed in Note 3 to these financial statements. Also refer to Note 3 for discussion of accounting policy related to deferral and amortization of acquisition costs.

The balances of and changes in deferred policy acquisition costs as of and for the periods ended September 30, 2012 and 2011 are as follows:

Deferred Policy Acquisition Costs:	Three Months Ended						Nine Months Ended
($ in millions)	September 30,						September 30,
	2012			2011			2012			2011
				As restated and amended						As restated and amended
Policy acquisition costs deferred	$	20.4		$	31.1		$	63.7		$	71.5
Costs amortized to expenses:
Recurring costs		(5.1	)		(33.8	)		(78.2	)		(94.4	)
Assumption unlocking		(1.2	)		(1.2	)		(1.2	)		(1.2	)
Realized investment gains (losses)		(18.0	)		6.1			(13.2	)		5.3
Offsets to net unrealized investment gains or losses included in AOCI (1)		5.8			(17.7	)		(25.6	)		(30.1	)
Change in deferred policy acquisition costs		1.9			(15.5	)		(54.5	)		(48.9	)
Deferred policy acquisition costs, beginning of period		432.7			501.9			489.1			535.3
Deferred policy acquisition costs, end of period	$	434.6		$	486.4		$	434.6		$	486.4

———————

(1) An offset to deferred policy acquisition costs and accumulated other comprehensive income (“AOCI”) is recorded each period to the extent that, had unrealized holding gains or losses from securities classified as available-for-sale actually been realized, an adjustment to deferred policy acquisition costs amortized using gross profits or gross margins would result.

During the three months and nine months ended September 30, 2012 and 2011, deferred expenses primarily consisted of third-party commissions related to fixed indexed annuity sales.

6.      Sales Inducements

The Company currently offers bonus payments to contract owners on certain of its individual life and annuity products. Expenses incurred related to bonus payments are deferred and amortized over the life of the related contracts in a pattern consistent with the amortization of deferred policy acquisition costs. The Company unlocks the assumption used in the amortization of the deferred sales inducement asset consistent with the unlock of assumptions used in determining EGPs. Deferred sales inducements are included in other assets on the balance sheets and amortization of deferred sales inducements is included in other operating expense on the statements of comprehensive income.

Changes in Deferred Sales Inducement Activity:	Three Months Ended							Nine Months Ended
($ in millions)	September 30,							September 30,
	2012			2011				2012			2011
				As restated and amended							As restated and amended
Deferred asset, beginning of period	$	47.3			$	40.1		$	49.6			$	20.4
Sales inducements deferred		2.9				12.2			12.6				38.1
Amortization charged to income		(2.3	)			(0.5	)		(6.2	)			(6.7	)
Offsets to net unrealized investment gains or losses   included in AOCI		10.2				(11.1	)		2.1				(11.1	)
Deferred asset, end of period	$	58.1			$	40.7		$	58.1			$	40.7

31

7.      Investing Activities

Debt securities

The following tables present the fixed maturity securities available-for-sale by sector held at September 30, 2012 and December 31, 2011, respectively. The unrealized loss amounts presented below include the non-credit loss component of OTTI losses. We classify these investments into various sectors in line with industry conventions.

Fair Value and Cost of Securities:	September 30, 2012
($ in millions)			Gross		Gross					OTTI
	Amortized		Unrealized		Unrealized			Fair		Recognized
	Cost		Gains(1)		Losses			Value		in AOCI(2)
U.S. government and agency	$	168.2	$	5.1	$	(0.4	)	$	172.9	$	—
State and political subdivision		98.7		10.3		(0.6	)		108.4		—
Foreign government		44.4		6.5		—			50.9		—
Corporate		1,605.3		141.6		(26.7	)		1,720.2		(1.5	)
Commercial mortgage-backed (“CMBS”)		245.0		25.9		(1.4	)		269.5		(0.6	)
Residential mortgage-backed (“RMBS”)		442.8		19.1		(10.1	)		451.8		(24.1	)
CDO/CLO		63.5		1.4		(6.0	)		58.9		(6.8	)
Other asset-backed		134.6		5.8		(6.8	)		133.6		1.2
Available-for-sale debt securities	$	2,802.5	$	215.7	$	(52.0	)	$	2,966.2	$	(31.8	)

———————

(1) Net unrealized investment gains and losses on securities classified as available-for-sale and certain other assets are included in our balance sheets as a component of AOCI. The table above presents the special category of AOCI for debt securities that are other-than-temporarily impaired when the impairment loss has been split between the credit loss component (in earnings) and the non-credit component (separate category of AOCI).

(2) Represents the amount of non-credit OTTI losses recognized in AOCI excluding net unrealized gains or losses subsequent to the date of impairment.

Fair Value and Cost of Securities:		December 31, 2011
($ in millions)	As restated and amended
				Gross		Gross					OTTI
		Amortized		Unrealized		Unrealized			Fair		Recognized
		Cost		Gains(1)		Losses			Value		in AOCI(2)
U.S. government and agency		$	162.2	$	12.4	$	(0.5	)	$	174.1		$	—
State and political subdivision			78.3		5.7		(0.5	)		83.5			—
Foreign government			30.5		1.8		(0.4	)		31.9			—
Corporate			1,157.4		84.8		(37.5	)		1,204.7			(1.5	)
CMBS			273.3		12.1		(3.9	)		281.5			(5.1	)
RMBS			538.6		13.3		(20.4	)		531.5			(21.6	)
CDO/CLO			74.0		0.7		(12.2	)		62.5			(8.4	)
Other asset-backed			146.6		3.1		(7.3	)		142.4			0.7
Available-for-sale debt securities		$	2,460.9	$	133.9	$	(82.7	)	$	2,512.1		$	(35.9	)

———————

(1) Net unrealized investment gains and losses on securities classified as available-for-sale and certain other assets are included in our balance sheets as a component of AOCI. The table above presents the special category of AOCI for debt securities that are other-than-temporarily impaired when the impairment loss has been split between the credit loss component (in earnings) and the non-credit component (separate category of AOCI).

(2) Represents the amount of non-credit OTTI losses recognized in AOCI excluding net unrealized gains or losses subsequent to the date of impairment.

Maturities of Debt Securities:	September 30, 2012
($ in millions)	Amortized		Fair
	Cost		Value
Due in one year or less	$	176.0	$	177.0
Due after one year through five years		325.8		349.9
Due after five years through ten years		832.4		905.8
Due after ten years		582.4		619.7
CMBS/RMBS/ABS/CDO/CLO(1)		885.9		913.8
Total	$	2,802.5	$	2,966.2

———————

(1) CMBS, RMBS, ABS, CDO and CLO are not listed separately in the table as each security does not have a single fixed maturity.

32

7.      Investing Activities (continued)

The maturities of debt securities, as of September 30, 2012, are summarized in the table above by contractual maturity. Actual maturities may differ from contractual maturities as certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties, and we have the right to put or sell certain obligations back to the issuers.

The following table depicts the sources of available-for-sale investment proceeds and related investment gains (losses).

Sales of Available-for-Sale Securities:	As of September 30,			As of December 31,
($ in millions)	2012			2011
				As restated and amended
Fixed maturities, available-for-sale
Proceeds from sales	$	344.4			$	325.8
Proceeds from maturities/repayments		275.7				213.8
Gross investment gains from sales, prepayments and maturities		21.4				2.5
Gross investment losses from sales and maturities		(0.2	)			(0.7	)

Aging of Temporarily Impaired	As of September 30, 2012
Debt Securities:	Less than 12 months					Greater than 12 months					Total
($ in millions)	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Debt Securities
U.S. government and agency	$	—	$	—		$	3.5	$	(0.4	)	$	3.5	$	(0.4	)
State and political subdivision		4.8		(0.2	)		1.0		(0.4	)		5.8		(0.6	)
Foreign government		—		—			—		—			—		—
Corporate		49.9		(1.5	)		67.4		(25.2	)		117.3		(26.7	)
CMBS		—		—			13.1		(1.4	)		13.1		(1.4	)
RMBS		16.5		(0.3	)		73.0		(9.8	)		89.5		(10.1	)
CDO/CLO		1.2		(0.1	)		42.4		(5.9	)		43.6		(6.0	)
Other asset-backed		3.2		—			10.7		(6.8	)		13.9		(6.8	)
Total temporarily impaired securities	$	75.6	$	(2.1	)	$	211.1	$	(49.9	)	$	286.7	$	(52.0	)
Below investment grade	$	15.3	$	(1.5	)	$	52.9	$	(29.0	)	$	68.2	$	(30.5	)
Number of securities				24					104					128

Unrealized losses on below-investment-grade debt securities with a fair value depressed by more than 20% of amortized cost totaled $24.9 million at September 30, 2012, of which $24.6 million was depressed by more than 20% of amortized cost for more than 12 months.

These securities were considered to be temporarily impaired at September 30, 2012 because each of these securities had performed, and are expected to perform, in accordance with original contractual terms. In addition, management does not have the intention to sell nor does it expect to be required to sell these securities prior to their recovery.

33

7.      Investing Activities (continued)

Aging of Temporarily Impaired Securities	As of December 31, 2011
($ in millions)	As restated and amended
	Less than 12 months					Greater than 12 months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Debt Securities
U.S. government and agency	$	—	$	—		$	3.5		(0.5	)	$	3.5	$	(0.5	)
State and political subdivision		15.4		—			0.9		(0.5	)		16.3		(0.5	)
Foreign government		7.2		(0.4	)		—		—			7.2		(0.4	)
Corporate		113.4		(3.5	)		69.3		(34.0	)		182.7		(37.5	)
CMBS		50.3		(1.2	)		6.9		(2.7	)		57.2		(3.9	)
RMBS		78.0		(3.3	)		91.1		(17.1	)		169.1		(20.4	)
CDO/CLO		4.8		(0.4	)		40.6		(11.8	)		45.4		(12.2	)
Other asset-backed		24.4		(0.2	)		16.5		(7.1	)		40.9		(7.3	)
Total temporarily impaired securities	$	293.5	$	(9.0	)	$	228.8	$	(73.7	)	$	522.3	$	(82.7	)
Below investment grade	$	25.3	$	(1.6	)	$	74.8	$	(50.2	)	$	100.1	$	(51.8	)
Number of securities				129					139					268

Unrealized losses on below-investment-grade debt securities with a fair value depressed by more than 20% of amortized cost totaled $46.5 million at December 31, 2011, of which $42.5 million was depressed by more than 20% of amortized cost for more than 12 months.

These securities were considered to be temporarily impaired at December 31, 2011 because each of these securities had performed, and are expected to perform, in accordance with original contractual terms. In addition, management does not have the intention to sell nor does it expect to be required to sell these securities prior to their recovery.

Evaluating temporarily impaired available-for-sale securities

In management’s evaluation of temporarily impaired securities, many factors about individual issuers of securities as well as our best judgment in determining the cause of a decline in the estimated fair value are considered in the assessment of potential near-term recovery in the security’s value. Some of those considerations include, but are not limited to: (i) duration of time and extent to which the estimated fair value has been below cost or amortized cost; (ii) for fixed maturity securities, if the Company has the intent to sell or will more likely than not be required to sell a particular security before the decline in estimated fair value below amortized cost recovers; (iii) whether the issuer is experiencing significant financial difficulties and the potential for impairments of that issuer’s securities; (iv) pervasive issues across an entire industry sector/sub-sector; and (v) for structured securities, assessing any changes in the forecasted cash flows, the quality of underlying collateral, expectations of prepayment speeds, loss severity and payment priority of tranches held.

Other-than-temporary impairments

Management assessed all securities in an unrealized loss position in determining whether impairments were temporary or other than temporary. In reaching its conclusions, management exercised significant judgment and used a number of issuer-specific quantitative indicators and qualitative judgments to assess the probability of receiving a given security’s contractual cash flows. This included the issue’s implied yield to maturity, cumulative default rate based on rating, comparisons of issue-specific spreads to industry or sector spreads, specific trading activity in the issue, and other market data such as recent debt tenders and upcoming refinancing requirements. Management also reviewed fundamentals such as issuer credit and liquidity metrics, business outlook and industry conditions. Management maintains a watch list of securities that is reviewed for impairments. Each security on the watch list was evaluated, analyzed and discussed, with the positive and negative factors weighed in the ultimate determination of whether or not the security was other-than-temporarily impaired. For securities for which no OTTI was ultimately indicated at September 30, 2012, management does not have the intention to sell, nor does it expect to be required to sell, these securities prior to their recovery.

34

7.      Investing Activities (continued)

Fixed income OTTIs recorded in the first nine months of 2012 were primarily concentrated in structured securities. These impairments were driven primarily by increased collateral default rates. In our judgment, these credit events or other adverse conditions of the issuers have caused, or will most likely lead to, a deficiency in the contractual cash flows related to the investment. Therefore, based upon these credit events, we have determined that OTTIs exist. Total debt impairments recognized through earnings related to such credit-related circumstances were $1.0 million for the third quarter of 2012 and $1.0 million for the third quarter of 2011 and $2.6 million for the first nine months of 2012 and $2.3 million for the first nine months of 2011. There were no limited partnership and other investment OTTIs for the three and nine months ended September 30, 2012 and 2011.

In addition to these credit-related impairments recognized through earnings, we impaired securities to fair value through other comprehensive loss for any impairments related to non-credit related factors. These types of impairments were driven primarily by market or sector credit spread widening or by a lack of liquidity in the securities. The amount of impairments recognized as an adjustment to other comprehensive loss due to these factors was $(0.3) million for the third quarter of 2012 and $3.7 million for the third quarter of 2011 and $1.8 million for the first nine months of 2012 and $4.7 million for the first nine months of 2011.

The following table presents a roll-forward of pre-tax credit losses recognized in earnings related to debt securities for which a portion of the OTTI was recognized in OCI.

Credit Losses Recognized in Earnings on Debt Securities for	Three Months Ended						Nine Months Ended
which a Portion of the OTTI Loss was Recognized in OCI:	September 30,						September 30,
($ in millions)	2012			2011			2012			2011
				As restated and amended						As restated and amended
Balance, beginning of period	$	(20.0	)	$	(20.0	)	$	(21.3	)	$	(19.9	)
Add: Credit losses on securities not previously impaired (1)		(0.2	)		—			(0.5	)		(0.5	)
Add: Credit losses on securities previously impaired (1)		(0.4	)		(0.7	)		(1.4	)		(0.8	)
Less: Credit losses on securities impaired due to intent to sell		—			—			—			—
Less: Credit losses on securities sold		1.0			0.3			3.6			0.8
Less: Increases in cash flows expected on     previously impaired securities		—			—			—			—
Balance, end of period	$	(19.6	)	$	(20.4	)	$	(19.6	)	$	(20.4	)

———————

(1) Additional credit losses on securities for which a portion of the OTTI loss was recognized in AOCI are included within net OTTI losses recognized in earnings on the statements of comprehensive income.

Limited partnerships and other investments

Limited partnerships and other investments consist of private equity investments of $6.3 million and $4.7 million as of September 30, 2012 and December 31, 2011, respectively.

35

7.      Investing Activities (continued)

Net investment income

Net investment income is comprised primarily of interest income, including amortization of premiums and accretion of discounts on structured securities, based on yields which are changed due to expectations in projected principal and interest cash flows, dividend income from common and preferred stock, gains and losses on securities measured at fair value and earnings from investments accounted for under equity method accounting.

Sources of Net Investment Income:	Three Months Ended					Nine Months Ended
($ in millions)	September 30,					September 30,
	2012		2011			2012		2011
			As restated and amended					As restated and amended
Debt securities	$	31.7	$	25.2		$	92.7	$	68.9
Policy loans		0.7		0.8			2.3		2.3
Limited partnerships and other investments		0.8		(0.3	)		1.8		0.3
Fair value investments		0.4		(0.2	)		0.6		0.4
Cash and cash equivalents		—		—			—		—
Total investment income		33.6		25.5			97.4		71.9
Less: Investment expenses		0.3		0.5			0.9		1.2
Net investment income	$	33.3	$	25.0		$	96.5	$	70.7

Net realized investment gains (losses)

Sources and Types of	Three Months Ended						Nine Months Ended
Net Realized Investment Gains (Losses):	September 30,						September 30,
($ in millions)	2012			2011			2012			2011
				As restated and amended						As restated and amended
Total other-than temporary debt impairment losses	$	(0.7	)	$	(4.7	)	$	(4.4	)	$	(7.0	)
Portion of loss recognized in OCI		(0.3	)		3.7			1.8			4.7
Net debt impairment losses recognized in earnings	$	(1.0	)	$	(1.0	)	$	(2.6	)	$	(2.3	)
Debt security impairments:
U.S. government and agency	$	—		$	—		$	—		$	—
State and political subdivision		—			—			—			—
Foreign government		—			—			—			—
Corporate		—			(0.2	)		—			(0.4	)
CMBS		—			—			(0.1	)		—
RMBS		(0.8	)		(0.8	)		(2.1	)		(1.8	)
CDO/CLO		(0.1	)		—			(0.1	)		—
Other asset-backed		(0.1	)		—			(0.3	)		(0.1	)
Net debt security impairments		(1.0	)		(1.0	)		(2.6	)		(2.3	)
Limited partnerships and other investment impairments		—			—			—			—
Impairment losses		(1.0	)		(1.0	)		(2.6	)		(2.3	)
Debt security transaction gains		20.8			0.2			21.4			2.4
Debt security transaction losses		(0.1	)		—			(0.2	)		(0.6	)
Limited partnerships and other investment transaction gains		—			—			—			0.1
Limited partnerships and other investment transaction losses		(0.3	)		—			(0.4	)		—
Net transaction gains		20.4			0.2			20.8			1.9
Derivative instruments		(18.0	)		34.8			(33.5	)		23.2
Embedded derivatives (1)		6.6			(48.3	)		6.1			(41.0	)
Related party reinsurance derivatives		(4.2	)		10.1			(3.5	)		10.1
Net realized investment gains (losses), excluding impairment losses	$	4.8		$	(3.2	)	$	(10.1	)	$	(5.8	)
Net realized investment gains (losses), including impairment losses	$	3.8		$	(4.2	)	$	(12.7	)	$	(8.1	)

———————

(1) Includes the change in fair value of embedded derivatives associated with variable annuity GMWB, GMAB and COMBO riders. See Note 8 to these financial statements for additional disclosures.

36

7.      Investing Activities (continued)

Unrealized investment gains (losses)

Sources of Changes in	Three Months Ended						Nine Months Ended
Net Unrealized Investment Gains (Losses):	September 30,						September 30,
($ in millions)	2012			2011			2012		2011
				As restated and amended					As restated and amended
Debt securities	$	51.0		$	22.3		$	112.5	$	58.6
Equity securities		—			(0.1	)		—		0.1
Other investments		—			0.1			—		0.1
Net unrealized investment gains	$	51.0		$	22.3		$	112.5	$	58.8
Net unrealized investment gains	$	51.0		$	22.3		$	112.5	$	58.8
Applicable deferred policy acquisition cost		(5.8	)		17.7			25.6		30.1
Applicable other actuarial offsets		54.8			13.7			68.2		11.1
Applicable deferred income tax expense		7.1			(2.1	)		17.1		4.2
Offsets to net unrealized investment gains		56.1			29.3			110.9		45.4
Net unrealized investment gains (losses) included in OCI	$	(5.1	)	$	(7.0	)	$	1.6	$	13.4

Non-consolidated variable interest entities

We hold limited partnership interests with various VIEs primarily as a passive investor in private equity limited partnerships and through direct investments, in which the general partners are not related parties. As the Company is not the general partner in any VIE structures, consolidation is based on evaluation of the primary beneficiary. This analysis includes a review of the VIE’s capital structure, nature of the VIE’s operations and purpose and the Company’s involvement with the entity. When determining the need to consolidate a VIE, the design of the VIE is evaluated as well as any exposed risks of the Company’s investment. As we do not have both: (i) the power to direct the activities of the VIE that most significantly impact the economic performance of the entity; and (ii) the obligation to absorb losses of the entity that could be potentially significant to the VIE or the right to receive benefits from the entity that could be potentially significant, we do not consolidate these VIEs. These investments are accounted for under the equity method of accounting and are included in limited partnerships and other investments on our balance sheets. We reassess our VIE determination with respect to an entity on an ongoing basis.

The carrying value of our investments in non-consolidated VIEs (based upon sponsor values and financial statements of the individual entities) for which we are not the primary beneficiary was $1.5 million and $1.2 million as of September 30, 2012 and December 31, 2011, respectively. The maximum exposure to loss is equal to the carrying amounts plus any unfunded commitments of the Company. Such a maximum loss would be expected to occur only upon bankruptcy of the issuer or investee.

Issuer and counterparty credit exposure

Credit exposure related to issuers and derivatives counterparties is inherent in investments and derivative contracts with positive fair value or asset balances. We manage credit risk through the analysis of the underlying obligors, issuers and transaction structures. We review our debt security portfolio regularly to monitor the performance of obligors and assess the stability of their credit ratings. We also manage credit risk through industry and issuer diversification and asset allocation. Maximum exposure to an issuer or derivative counterparty is defined by quality ratings, with higher quality issuers having larger exposure limits. As of September 30, 2012, we were exposed to the credit concentration risk of one single issuer, Goldman Sachs International, representing 11.7% of stockholder’s equity other than U.S. government and government agencies backed by the faith and credit of the U.S. government. We monitor credit exposures by actively monitoring dollar limits on transactions with specific counterparties. We have an overall limit on below-investment-grade rated issuer exposure. Additionally, the creditworthiness of counterparties is reviewed periodically. We generally use ISDA Master Agreements which include Credit Support Annexes which include collateral provisions to reduce counterparty credit exposures. Included in fixed maturities are below-investment-grade assets totaling $156.3 million and $147.4 million at September 30, 2012 and December 31, 2011, respectively. To further mitigate the risk of loss on derivatives, we only enter into contracts in which the counterparty is a financial institution with a rating of A or higher from at least one Nationally Recognized Statistical Rating Organization.

37

7.      Investing Activities (continued)

As of September 30, 2012, we held derivative assets, net of liabilities, with a fair value of $125.8 million. Derivative credit exposure was diversified with ten different counterparties. We also had debt securities of these issuers with a fair value of $28.8 million as of September 30, 2012. Our maximum amount of loss due to credit risk with these issuers was $154.6 million as of September 30, 2012. See Note 9 to these financial statements for more information regarding derivatives.

8.      Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives

Separate account products are those for which a separate investment and liability account is maintained on behalf of the policyholder. Investment objectives for these separate accounts vary by fund account type, as outlined in the applicable fund prospectus or separate account plan of operations. Our separate account products include variable annuities and variable life insurance contracts. The assets supporting these contracts are carried at fair value and are reported as separate account assets with an equivalent amount reported as separate account liabilities. Amounts assessed against the policyholder for mortality, administration and other services are included within revenue in insurance and investment product fees. For the three and nine months ended September 30, 2012 and 2011, there were no gains or losses on transfers of assets from the general account to a separate account.

Assets with fair value and carrying value of $1.7 billion supporting fixed indexed annuities are maintained in accounts that are legally segregated from the other assets of the company, but policyholders do not direct the investment of those assets and the investment performance does not pass through to the policyholders. These assets supporting fixed indexed annuity contracts are reported within the respective investment line items on the balance sheets.

On May 21, 2012, the employee pension plan surrendered its variable annuity contract with PHL Variable. All assets held within the employee pension plan separate account were subsequently transferred to the direct control of the plan’s trustee. This resulted in a decrease in separate account assets and liabilities of $464.2 million during the quarter ended September 30, 2012.

Separate Account Investments of Account Balances of Variable Annuity Contracts with Guarantees:	Sept 30,		Dec 31,
($ in millions)	2012		2011
			As restated and amended
Debt securities	$	377.6		$	395.5
Equity funds		1,553.9			1,537.7
Other		52.5			58.3
Total	$	1,984.0		$	1,991.5

Death benefits and other insurance benefit features

Variable annuity guaranteed benefits

We establish policy benefit liabilities for minimum death and income benefit guarantees relating to certain annuity policies as follows:

● Liabilities associated with the guaranteed minimum death benefit (“GMDB”) are determined by estimating the expected value of death benefits in excess of the projected account balance and recognizing the excess ratably over the expected life of the contract based on total expected assessments. The assumptions used for calculating the liabilities are consistent with those used for amortizing deferred policy acquisition costs.

● Liabilities associated with the guaranteed minimum income benefit (“GMIB”) are determined by estimating the expected value of the income benefits in excess of the projected account balance at the date of annuitization and recognizing the excess ratably over the accumulation period based on total expected assessments. The assumptions used for calculating such guaranteed income benefit liabilities are generally consistent with those used for amortizing deferred policy acquisition costs.

For variable annuities with GMDB and GMIB, reserves for these guarantees are calculated and recorded in policy liabilities and accruals on our balance sheets. Changes in the liability are recorded in policy benefits on our statements of comprehensive income. We regularly evaluate estimates used and adjust the additional liability balances, with a related charge or credit to benefit expense if actual experience or other evidence suggests that earlier assumptions should be revised.

38

8.      Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives(continued)

Changes in Guaranteed Insurance Benefit Liability Balances:	As of
($ in millions)	September 30, 2012
	Annuity GMDB			Annuity GMIB
Liability balance as of January 1, 2012	$	10.8		$	17.2
Incurred		—			3.6
Paid		(0.9	)		—
Assumption unlocking		—			(0.2	)
Liability balance as of September 30, 2012	$	9.9		$	20.6

Changes in Guaranteed Insurance Benefit Liability Balances:	Year Ended
($ in millions)	December 31, 2011
	As restated and amended
	Annuity GMDB				Annuity GMIB
Liability balance as of January 1, 2011		$	11.2			$	17.5
Incurred			1.5				(0.7	)
Paid			(1.9	)			—
Assumption unlocking			—				0.4
Liability balance as of December 31, 2011		$	10.8			$	17.2

For those guarantees of benefits that are payable in the event of death, the net amount at risk (“NAR”) is generally defined as the benefit payable in excess of the current account balance at the balance sheet date. We have entered into reinsurance agreements to reduce the net amount of risk on certain death benefits. Following are the major types of death benefits currently in-force:

GMDB and GMIB Benefits by Type:			NAR		Average
($ in millions)	Account		after		Attained Age
	Value		Reinsurance		of Annuitant
September 30, 2012
GMDB return of premium	$	776.0	$	7.1		62
GMDB step up		1,444.5		26.0		62
GMDB earnings enhancement benefit (“EEB”)		38.9		0.1		63
GMDB greater of annual step up and roll up		27.5		7.5		66
Total GMDB at September 30, 2012		2,286.9	$	40.7
Less: General account value with GMDB		318.2
Subtotal separate account liabilities with GMDB		1,968.7
Separate account liabilities without GMDB		142.0
Total separate account liabilities	$	2,110.7
GMIB (1) at September 30, 2012	$	413.4				63
December 31, 2011 as restated and amended
GMDB return of premium	$	795.6	$	20.7		61
GMDB step up		1,450.6		91.2		62
GMDB earnings enhancement benefit (“EEB”)		39.7		0.4		62
GMDB greater of annual step up and roll up		27.1		8.8		66
Total GMDB at December 31, 2011		2,313.0	$	121.1
Less: General account value with GMDB		336.9
Subtotal separate account liabilities with GMDB		1,976.1
Separate account liabilities without GMDB		570.7
Total separate account liabilities	$	2,546.8
GMIB (1) at December 31, 2011	$	428.1				63

———————

(1) Policies with a GMIB also have a GMDB. The NAR for each benefit is shown in the table above, however these benefits are not additive. When a policy terminates due to death, any NAR related or GMIB is released. Similarly, when a policy goes into benefit status on a GMIB, its GMDB NAR is released.

39

8.      Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives (continued)

Fixed indexed annuity guaranteed benefits

Many of our fixed indexed annuities contain guaranteed minimum withdrawal and death benefits.

Liabilities associated with the GMWB for the fixed indexed annuities differ from those contained on variable annuities in that the GMWB feature and the underlying contract, exclusive of the equity indexed crediting option, are fixed income instruments. These liabilities are determined by estimating the expected value of the withdrawal benefits in excess of the projected account balance at the date of election and recognizing the excess ratably over the accumulation period based on total expected assessments. The assumptions used for calculating such guaranteed withdrawal benefit liabilities are consistent with those used for amortizing deferred policy acquisition costs. Some of these riders also contain a GMDB or chronic care benefit in addition to the withdrawal benefits.

The GMWB, GMDB and chronic care guarantees are recorded in policy liabilities and accruals on our balance sheets. Changes in the liability are recorded in policy benefits on our statements of comprehensive income. We regularly evaluate estimates used and adjust the additional liability balances, with a related charge or credit to benefit expense if actual experience or other evidence suggests that earlier assumptions should be revised.

Changes in Guaranteed Liability Balances:	Fixed Indexed Annuity
($ in millions)	GMWB & GMDB
	Sept 30,			Dec 31,
	2012			2011
				As restated and amended
Liability balance, beginning of period		$	5.6		$	0.5
Incurred			32.3			5.1
Paid			—			—
Liability balance, end of period		$	37.9		$	5.6

Universal life

Liabilities for universal life contracts, some of which contain secondary guarantees, are generally determined by estimating the expected value of benefits and expenses when claims are triggered and recognizing those benefits and expenses over the accumulation period based on total expected assessments. The assumptions used in estimating these liabilities are consistent with those used for amortizing deferred policy acquisition costs.

Changes in Guaranteed Liability Balances:	Universal Life
($ in millions)	Secondary Guarantees
	Sept 30,				Dec 31,
	2012				2011
					As restated and amended
Liability balance, beginning of period		$	98.2			$	88.5
Incurred			12.4				16.0
Paid			(7.2	)			(6.3	)
Assumption unlocking			—				—
Liability balance, end of period		$	103.4			$	98.2

40

8.      Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives (continued)

Embedded derivatives

Variable annuity embedded derivatives

Certain separate account variable products contain a GMWB, GMAB and/or COMBO rider as defined in the 2012 Form

10-K. These features are accounted for as embedded derivatives as described below.

Non-Insurance Guaranteed Product Features:			Average
($ in millions)	Account		Attained Age
	Value		of Annuitant
September 30, 2012
GMWB	$	559.7		63
GMAB		386.1		58
COMBO		9.8		61
Total at September 30, 2012	$	955.6
December 31, 2011 as restated and amended
GMWB	$	541.9		62
GMAB		374.4		57
COMBO		9.8		60
Total at December 31, 2011	$	926.1

On July 1, 2012 the Company recaptured the business associated with a reinsurance contract with Phoenix Life, whereby we ceded to Phoenix Life certain of the liabilities related to guarantees on our annuity products. This contract qualified as a freestanding derivative and the derivative asset previously reported within receivable from related parties was reversed at the time of recapture. The derivative asset was $3.5 million at December 31, 2011.

The GMWB, GMAB and COMBO represent embedded derivative liabilities in the variable annuity contracts that are required to be reported separately from the host variable annuity contract. These liabilities are recorded at fair value within policyholder deposit funds on the balance sheets with changes in fair value recorded in realized investment gains on the statements of comprehensive income. The fair value of the GMWB, GMAB and COMBO obligation is calculated based on actuarial and capital market assumptions related to the projected cash flows, including benefits and related contract charges, over the lives of the contracts, incorporating expectations concerning policyholder behavior. As markets change, contracts mature and actual policyholder behavior emerges, these assumptions are continually evaluated and may from time to time be adjusted. Embedded derivative liabilities for GMWB, GMAB and COMBO are shown in the table below.

Variable Annuity Embedded Derivative Liabilities:	Sept 30,			Dec 31,
($ in millions)	2012			2011
				As restated and amended
GMWB	$	18.0			$	22.0
GMAB		16.8				24.7
COMBO		(0.4	)			(0.3	)
Total variable annuity embedded derivative liabilities	$	34.4			$	46.4

There were no benefit payments made related to the GMWB and GMAB riders during the nine months ended September 30, 2012 or during the nine months ended September 30, 2011. We have established a risk management strategy under which we hedge our GMAB, GMWB and COMBO exposure using equity index options, equity index futures, equity index variance swaps, interest rate swaps and swaptions.

41

8.      Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives (continued)

Fixed indexed annuity embedded derivatives

Fixed indexed annuities may also contain a variety of index-crediting options: policy credits that are calculated based on the performance of an outside equity market or other index over a specified term. The index options represent embedded derivative liabilities that are required to be reported separately from the host contract. These index options are accounted for at fair value within policyholder deposits within the balance sheets with changes in fair value recorded in realized investment gains, in the statements of comprehensive income. The fair value of these index options is calculated using the budget method. Several additional inputs reflect our internally developed assumptions related to lapse rates and policyholder behavior. The fair value of these embedded derivatives was $48.7 million and $35.9 million as September 30, 2012 and December 31, 2011, respectively. In order to manage the risk associated with these equity indexed-crediting features, we hedge using equity index options as described in Note 7 to these financial statements.

Embedded derivatives realized gains and losses

Changes in the fair value of embedded derivatives associated with variable annuity and fixed indexed annuity contracts are recorded as realized investment gains and losses within the statements of comprehensive income. Embedded derivatives gains and (losses) recognized in earnings for the three and nine months ended September 30, 2012 are $6.6 million and $6.1 million, respectively. Embedded derivatives gains and (losses) recognized in earnings for the three and nine months ended September 30, 2011 are $(48.3) million and $(41.0) million, respectively.

9.      Derivative Instruments

Derivative instruments

We use derivative financial instruments, including options, futures and swaps as a means of hedging exposure to interest rate, equity price change, equity volatility and foreign currency risk. This includes our surplus hedge which utilizes futures and options to hedge against declines in equity markets and the resulting statutory capital and surplus impact. We also use derivative instruments to economically hedge our exposure on living benefits offered on certain of our variable annuity products as well as index credits on our fixed indexed annuity products.

The Company seeks to enter into over-the-counter (“OTC”) derivative transactions pursuant to master agreements that provide for a netting of payments and receipts by counterparty. As of September 30, 2012 and December 31, 2011, $8.5 million and $7.5 million, respectively, of cash and cash equivalents were held as collateral by a third party related to our derivative transactions.

Our derivatives do not qualify for hedge accounting. We do not designate the purchased derivatives related to variable annuity living benefits or fixed indexed annuity index credits as hedges for accounting purposes.

Derivative Instruments:					Fair Value as of
($ in millions)			Notional		September 30, 2012
	Maturity		Amount		Assets		Liabilities (1)
Interest rate swaps		2017-2027	$	180.0	$	16.8	$	8.2
Variance swaps		2015-2017		0.9		—		3.1
Swaptions		2024		25.0		—		—
Put options		2015-2022		391.0		77.4		—
Call options		2012-2017		1,261.6		74.0		48.7
Equity futures		2012		182.1		17.6		—
Total derivative instruments			$	2,040.6	$	185.8	$	60.0

———————

(1) Derivative liabilities are included in other liabilities on the balance sheets.

42

9.      Derivative Instruments (continued)

Derivative Instruments:						Fair Value as of
($ in millions)						December 31, 2011
			Notional			As restated and amended
	Maturity		Amount			Assets			Liabilities (1)
Interest rate swaps		2017-2026		$	101.1		$	9.3		$	3.5
Variance swaps		2015-2017			0.9			2.8			—
Swaptions		2024			25.0			0.2			—
Put options		2015-2022			200.0			47.3			—
Call options		2012-2016			700.4			28.0			19.0
Equity futures		2012			66.3			16.2			—
Total derivative instruments				$	1,093.7		$	103.8		$	22.5

———————

(1) Derivative liabilities are included in other liabilities on the balance sheets.

Derivative Instrument Gains (Losses) Recognized in	Three Months Ended						Nine Months Ended
Realized Investment Gains (Losses):	September 30,						September 30,
($ in millions)	2012			2011			2012			2011
				As restated and amended						As restated and amended
Derivative instruments by type
Interest rate swaps	$	(1.1	)	$	6.3		$	(0.3	)	$	7.1
Variance swaps		(1.8	)		5.1			(6.4	)		3.5
Swaptions		—			(0.4	)		(0.2	)		(0.8	)
Put options		(11.8	)		18.0			(13.7	)		13.3
Call options		7.5			(10.6	)		7.5			(10.5	)
Equity futures		(10.8	)		16.4			(20.4	)		10.6
Embedded derivatives		6.6			(48.3	)		6.1			(41.0	)
Related party reinsurance derivatives		(4.2	)		10.1			(3.5	)		10.1
Total derivative instrument losses recognized in   realized gains (losses)	$	(15.6	)	$	(3.4	)	$	(30.9	)	$	(7.7	)

Interest Rate Swaps

We maintain an overall interest rate risk management strategy that primarily incorporates the use of interest rate swaps as hedges of our exposure to changes in interest rates. Our exposure to changes in interest rates primarily results from our commitments to fund interest-sensitive insurance liabilities, as well as from our significant holdings of fixed rate financial instruments. We use interest rate swaps that effectively convert variable rate cash flows to fixed cash flows in order to hedge the interest rate risks associated with guaranteed minimum living benefit (GMAB/GMWB) rider liabilities.

Interest Rate Options

We use interest rate options, such as swaptions, to hedge against market risks to assets or liabilities from substantial changes in interest rates. An interest rate swaption gives us the right but not the obligation to enter into an underlying swap. Swaptions are options on interest rate swaps. All of our swaption contracts are receiver swaptions, which give us the right to enter into a swap where we will receive the agreed-upon fixed rate and pay the floating rate. If the market conditions are favorable and the swap is needed to continue hedging our in force liability business, we will exercise the swaption and enter into a fixed rate swap. If a swaption contract is not exercised by its option maturity date, it expires with no value.

Exchange Traded Future Contracts

We use equity index futures to hedge the market risks from changes in the value of equity indices, such as S&P 500, associated with guaranteed minimum living benefit (GMAB/GMWB) rider liabilities. Positions are short-dated, exchange-traded futures with maturities of three months.

43

9.      Derivative Instruments (continued)

Equity Index Options

We use equity indexed options to hedge against market risks from changes in equity markets, volatility and interest rates.

An equity index option affords us the right to make or receive payments based on a specified future level of an equity market index. We may use exchange-trade or OTC options.

Generally, we have used a combination of equity index futures, interest rate swaps, variance swaps and long-dated put options to hedge our GMAB and GMWB liabilities and equity index call options to hedge our indexed annuity option liabilities.

Contingent features

Derivative counterparty agreements may contain certain provisions that require our insurance companies’ financial strength rating to be above a certain threshold. If our financial strength ratings were to fall below a specified rating threshold, certain derivative counterparties could request immediate payment or demand immediate and ongoing full collateralization on derivative instruments in net liability positions, or trigger a termination of existing derivatives and/or future derivative transactions.

In certain derivative counterparty agreements, our financial strength ratings are below the specified threshold levels. However, the Company held no derivative instruments as of September 30, 2012 in a net aggregate liability position payable to any counterparty (i.e., such derivative instruments have fair values in a net asset position payable to the Company if such holdings were liquidated).

10.      Fair Value of Financial Instruments

ASC 820-10 defines and establishes the framework for measuring fair value. The framework is based on inputs that are used in the valuation and a fair value hierarchy based on the quality of those inputs. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The input levels are defined as follows:

● Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 1 securities include highly liquid government bonds and exchange-traded equities.

● Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Examples of such instruments include government-backed mortgage products, certain collateralized mortgage and debt obligations and certain high-yield debt securities.

● Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs reflect management’s own assumptions about inputs in which market participants would use in pricing these types of assets or liabilities. Level 3 financial instruments include values which are determined using pricing models and third-party evaluation. Additionally, the determination of some fair value estimates utilizes significant management judgments or best estimates.

44

10.      Fair Value of Financial Instruments (continued)

The following tables present the financial instruments carried at fair value by ASC 820-10 valuation hierarchy (as described above). There were no financial instruments carried at fair value on a non-recurring basis as of September 30, 2012 and December 31, 2011.

Fair Values of Financial Instruments by Level:	As of September 30, 2012
($ in millions)	Level 1		Level 2		Level 3		Total
Assets
Available-for-sale debt securities
U.S. government and agency	$	130.0	$	14.3	$	28.6	$	172.9
State and political subdivision		—		15.0		93.4		108.4
Foreign government		—		43.1		7.8		50.9
Corporate		—		987.5		732.7		1,720.2
CMBS		—		251.5		18.0		269.5
RMBS		—		206.2		245.6		451.8
CDO/CLO		—		—		58.9		58.9
Other asset-backed		—		50.2		83.4		133.6
Derivative assets		17.6		168.2		—		185.8
Related party reinsurance derivative asset		—		—		—		—
Fair value investments		—		15.8		28.3		44.1
Separate account assets		2,110.7		—		—		2,110.7
Total assets	$	2,258.3	$	1,751.8	$	1,296.7	$	5,306.8
Liabilities
Derivative liabilities	$	—	$	60.0	$	—	$	60.0
Embedded derivatives		—		—		83.1		83.1
Total liabilities	$	—	$	60.0	$	83.1	$	143.1

There were no transfers of assets between Level 1 and Level 2 during the quarter ended September 30, 2012.

Fair Values of Financial Instruments by Level:	As of December 31, 2011
($ in millions)	As restated and amended
	Level 1		Level 2		Level 3		Total
Assets
Available-for-sale debt securities
U.S. government and agency	$	96.0	$	46.4	$	31.7	$	174.1
State and political subdivision		—		34.8		48.7		83.5
Foreign government		—		28.8		3.1		31.9
Corporate		—		690.9		513.8		1,204.7
CMBS		—		246.1		35.4		281.5
RMBS		—		263.5		268.0		531.5
CDO/CLO		—		—		62.5		62.5
Other asset-backed		—		61.2		81.2		142.4
Derivative assets		16.2		87.6		—		103.8
Related party reinsurance derivative asset		—		—		3.5		3.5
Fair value investments		—		14.3		27.5		41.8
Separate account assets		2,546.8		—		—		2,546.8
Total assets	$	2,659.0	$	1,473.6	$	1,075.4	$	5,208.0
Liabilities
Derivative liabilities	$	—	$	22.5	$	—	$	22.5
Embedded derivatives		—		—		82.3		82.3
Total liabilities	$	—	$	22.5	$	82.3	$	104.8

There were no transfers of assets between Level 1 and Level 2 during the year ended December 31, 2011.

45

10.      Fair Value of Financial Instruments (continued)

Fair Values of Corporates by Level and Sector:	As of September 30, 2012
($ in millions)	Level 1		Level 2		Level 3		Total
Corporates
Consumer	$	—	$	301.0	$	364.1	$	665.1
Energy		—		66.5		18.9		85.4
Financial services		—		339.4		157.1		496.5
Technical/communications		—		43.1		4.9		48.0
Transportation		—		9.4		25.8		35.2
Utilities		—		119.5		127.2		246.7
Other		—		108.6		34.7		143.3
Total corporates	$	—	$	987.5	$	732.7	$	1,720.2

Fair Values of Corporates by Level and Sector:	As of December 31, 2011
($ in millions)	As restated and amended
	Level 1		Level 2		Level 3		Total
Corporates
Consumer	$	—	$	205.3	$	245.9	$	451.2
Energy		—		29.8		13.2		43.0
Financial services		—		247.5		117.5		365.0
Technical/communications		—		33.4		3.5		36.9
Transportation		—		6.1		25.5		31.6
Utilities		—		111.1		82.0		193.1
Other		—		57.7		26.2		83.9
Total corporates	$	—	$	690.9	$	513.8	$	1,204.7

Level 3 financial assets and liabilities

The following tables set forth a summary of changes in the fair value of our Level 3 financial assets and liabilities. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The securities which were transferred as of the end of each reporting period into Level 3 were due to decreased market observability of similar assets and/or significant inputs and transfers out of Level 3 were due to increased market activity on comparable assets or observability of inputs.

Level 3 Financial Assets:	Three Months Ended September 30, 2012
($ in millions)											Realized &
											unrealized			Unrealized
			Purchases,								gains			gains
	Balance,		sales			Transfers		Transfers			(losses)			(losses)
	beginning		issuances &			into		out of			included			included
	of period		settlements			Level 3		Level 3			in income			in OCI			Total
Assets
Available-for-sale debt securities
U.S. government and agency (1)	$	27.7	$	0.6		$	—	$	—		$	—		$	0.3		$	28.6
State and political subdivision		90.1		4.7			—		—			—			(1.4	)		93.4
Foreign government		7.2		—			—		—			—			0.6			7.8
Corporate		664.5		58.7			—		(6.1	)		—			15.6			732.7
CMBS		17.8		—			—		—			—			0.2			18.0
RMBS		247.3		(5.8	)		—		—			(0.4	)		4.5			245.6
CDO/CLO		57.3		(1.9	)		—		—			0.2			3.3			58.9
Other asset-backed		71.1		0.3			13.2		—			—			(1.2	)		83.4
Related party reinsurance derivative		4.2		—			—		—			(4.2	)		—			—
Fair value investments		28.9		(0.7	)		—		—			0.1			—			28.3
Total assets	$	1,216.1	$	55.9		$	13.2	$	(6.1	)	$	(4.3	)	$	21.9		$	1,296.7

———————

(1) Includes securities whose underlying collateral is an obligation of a U.S. government entity.

46

10.      Fair Value of Financial Instruments (continued)

Level 3 Financial Assets:	Three Months Ended September 30, 2011
($ in millions)	As restated and amended
																Realized &
																unrealized				Unrealized
					Purchases,											gains				gains
	Balance,				sales				Transfers			Transfers				(losses)				(losses)
	beginning				issuances &				into			out of				included				included
	of period				settlements				Level 3			Level 3				in income				in OCI				Total
Assets
Available-for-sale debt securities
U.S. government and agency (1)		$	23.8			$	(0.3	)		$	—		$	—			$	—			$	1.3			$	24.8
State and political subdivision			12.4				—				2.5			—				—				6.4				21.3
Foreign government			2.0				—				—			—				—				(0.5	)			1.5
Corporate			396.0				0.2				24.1			(2.0	)			(0.2	)			22.8				440.9
CMBS			20.5				4.1				—			—				—				(5.5	)			19.1
RMBS			288.2				2.9				—			—				(0.5	)			(16.3	)			274.3
CDO/CLO			57.0				7.8				—			—				—				(11.5	)			53.3
Other asset-backed			84.4				2.8				—			—				0.1				(4.9	)			82.4
Related party reinsurance derivative			(5.5	)			—				—			—				10.1				—				4.6
Fair value investments			25.8				—				—			—				(1.1	)			—				24.7
Total assets		$	904.6			$	17.5			$	26.6		$	(2.0	)		$	8.4			$	(8.2	)		$	946.9

———————

(1) Includes securities whose underlying collateral is an obligation of a U.S. government entity.

Level 3 Financial Assets:	Nine Months Ended September 30, 2012
($ in millions)											Realized &
											unrealized			Unrealized
			Purchases,								gains			gains
	Balance,		sales			Transfers		Transfers			(losses)			(losses)
	beginning		issuances &			into		out of			included			included
	of period		settlements			Level 3		Level 3			in income			in OCI			Total
Assets
Available-for-sale debt securities
U.S. government and agency (1)	$	31.7	$	(1.2	)	$	—	$	—		$	—		$	(1.9	)	$	28.6
State and political subdivision		48.7		19.2			12.9		—			—			12.6			93.4
Foreign government		3.1		3.5			—		—			—			1.2			7.8
Corporate		513.8		208.6			20.0		(14.2	)		—			4.5			732.7
CMBS		35.4		(0.5	)		—		(18.0	)		—			1.1			18.0
RMBS		268.0		(25.6	)		—		—			(0.9	)		4.1			245.6
CDO/CLO		62.5		(3.5	)		—		—			0.2			(0.3	)		58.9
Other asset-backed		81.2		3.6			—		(1.8	)		—			0.4			83.4
Related party reinsurance derivative		3.5		—			—		—			(3.5	)		—			—
Fair value investments		27.5		(0.8	)		—		—			1.6			—			28.3
Total assets	$	1,075.4	$	203.3		$	32.9	$	(34.0	)	$	(2.6	)	$	21.7		$	1,296.7

———————

(1) Includes securities whose underlying collateral is an obligation of a U.S. government entity.

47

10.      Fair Value of Financial Instruments (continued)

Level 3 Financial Assets:	Nine Months Ended September 30, 2011
($ in millions)	As restated and amended
																Realized &
																unrealized				Unrealized
					Purchases,											gains				gains
	Balance,				sales				Transfers			Transfers				(losses)				(losses)
	beginning				issuances &				into			out of				included				included
	of period				settlements				Level 3			Level 3				in income				in OCI				Total
Assets
Available-for-sale debt securities
U.S. government and agency (1)		$	24.0			$	0.4			$	2.0		$	—			$	—			$	(1.6	)		$	24.8
State and political subdivision			13.3				2.9				—			—				—				5.1				21.3
Foreign government			1.4				—				—			—				—				0.1				1.5
Corporate			337.3				97.7				22.8			(14.1	)			(0.9	)			(1.9	)			440.9
CMBS			13.4				0.6				3.7			—				0.1				1.3				19.1
RMBS			216.1				84.3				—			—				(0.6	)			(25.5	)			274.3
CDO/CLO			59.6				(0.7	)			—			—				—				(5.6	)			53.3
Other asset-backed			57.7				26.2				—			(4.8	)			—				3.3				82.4
Related party reinsurance derivative			(5.5	)			—				—			—				10.1				—				4.6
Fair value investments			13.8				10.8				—			—				0.1				—				24.7
Total assets		$	731.1			$	222.2			$	28.5		$	(18.9	)		$	8.8			$	(24.8	)		$	946.9

———————

(1) Includes securities whose underlying collateral is an obligation of a U.S. government entity.

Level 3 Financial Liabilities:	Embedded Derivative Liabilities
($ in millions)	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2012				2011				2012				2011
					As restated and amended								As restated and amended
Balance, beginning of period		$	87.5			$	45.6			$	82.4			$	29.5
Net purchases/(sales)			2.2				(8.9	)			6.8				14.5
Transfers into Level 3			—				—				—				—
Transfers out of Level 3			—				—				—				—
Realized (gains) losses (1)			(6.6	)			48.3				(6.1	)			41.0
Balance, end of period		$	83.1			$	85.0			$	83.1			$	85.0

———————

(1) Realized gains and losses are included in net realized investment gains on the statements of comprehensive income.

Significant unobservable inputs used in the fair value measurement of Level 3 assets are yield, prepayment rate, default rate, recovery rate, and reinvestment spread. Keeping other inputs unchanged, an increase in yield or default rate would decrease the fair value of the asset while an increase in prepayment rate, recovery rate, or reinvestment spread would result in an increase to the fair value of the asset. Yields are a function of the underlying treasury rates and asset spreads, and changes in default and recovery rates are dependent on overall market conditions.

48

10.      Fair Value of Financial Instruments (continued)

The following table presents quantitative estimates about unobservable inputs used in the fair value measurement of significant categories of internally priced assets.

Level 3 Assets: (1)	As of September 30, 2012
($ in millions)
	Fair		Valuation	Unobservable
	Value		Technique(s)	Input	Range (Weighted Average)
U.S. government and   agency	$	28.6	Discounted cash flow	Yield	1.54% - 3.21% (2.40%)
State and political   subdivision	$	35.8	Discounted cash flow	Yield	1.90% - 3.41% (2.73%)
Corporate	$	586.2	Spread matrix	Yield	1.53% - 6.56% (2.99%)
			Discounted cash flow	Yield	1.57% - 6.68% (3.20%)
CDO/CLO	$	3.8	Discounted cash flow	Prepayment rate	20% (CLOs)
				Default rate	2.55% (CLOs)
				Recovery rate	65% (Loans), 35% (High yield bonds),   45% (Investment grade bonds)
				Reinvestment spread	3 mo LIBOR + 400bps (CLOs)
Other asset-backed	$	2.9	Discounted cash flow	Yield	2.53% - 2.54% (2.54%)
			Discounted cash flow	Prepayment rate	5%
				Default rate	2.53% for 48 mos then .33% thereafter
				Recovery rate	10% (TRUPPS)
Fair value   investments	$	0.8	Discounted cash flow	Default rate	0.24%
				Recovery rate	45%

———————

(1) Excludes Level 3 assets which are valued based upon non-binding independent third-party valuations for which unobservable inputs are not reasonably available to us.

Significant unobservable inputs used in the fair value measurement of variable annuity GMAB and GMWB liabilities are equity volatility, swap curve, mortality and lapse rates and an adjustment for non-performance risk. Keeping other inputs unchanged, an increase in the equity volatility would increase the fair value of the liability while an increase in the swap curve or CSA would result in a decrease to the fair value of the liability. The impact of changes in mortality and lapse rates are dependent on overall market conditions. The fair value of fixed indexed annuity and indexed universal life embedded derivative related to index credits is calculated using the swap curve, mortality and lapse rates, as well as an adjustment for non-performance risk. Keeping other inputs unchanged, an increase in any of these significant unobservable inputs would result in a decrease of the fixed indexed annuity embedded derivative liability.

49

10.      Fair Value of Financial Instruments (continued)

The following table presents quantitative estimates about unobservable inputs used in the fair value measurement of internally priced liabilities.

Level 3 Liabilities:	As of September 30, 2012
($ in millions)	Fair Value		Valuation Technique(s)	Unobservable Input	Range
Embedded derivatives	$	48.7	Budget method	Swap curve	0.25% - 2.32%
(EIA VED)				Mortality rate	75% of A2000 basic table
				Lapse rate	1.00% - 35.00%
				CSA	4.75%
Embedded derivatives (GMAB / GMWB)	$	34.4	Risk neutral stochastic   valuation methodology	Volatility surface	11.75% - 48.97%
				Swap curve	0.24% - 2.98%
				Mortality rate	75% of A2000 basic table
				Lapse rate	0.00% - 60.00%
				CSA	4.75%
Total Level 3 liabilities	$	83.1

Level 3 Assets and Liabilities by Pricing Source:	As of September 30, 2012
($ in millions)	Internal(1)		External (2)		Total
Assets
Available-for-sale debt securities
U.S. government and agency (3)	$	28.6	$	—	$	28.6
State and political subdivision		35.8		57.6		93.4
Foreign government		—		7.8		7.8
Corporate		586.2		146.5		732.7
CMBS		—		18.0		18.0
RMBS		—		245.6		245.6
CDO/CLO		3.8		55.1		58.9
Other asset-backed		2.9		80.5		83.4
Fair value investments		0.8		27.5		28.3
Total assets	$	658.1	$	638.6	$	1,296.7
Liabilities
Embedded derivatives	$	83.1	$	—	$	83.1
Total liabilities	$	83.1	$	—	$	83.1

———————

(1) Represents valuations reflecting both internally-derived and market inputs, as well as third-party information or quotes.

(2) Represents unadjusted prices from independent pricing services, third-party financial statements and independent indicative broker quotes where pricing inputs are not readily available.

(3) Includes securities whose underlying collateral is an obligation of a U.S. government entity.

50

10.      Fair Value of Financial Instruments (continued)

Level 3 Assets and Liabilities by Pricing Source:	As of December 31, 2011
($ in millions)	As restated and amended
	Internal(1)		External (2)		Total
Assets
Available-for-sale debt securities
U.S. government and agency (3)	$	31.7	$	—	$	31.7
State and political subdivision		10.4		38.3		48.7
Foreign government		—		3.1		3.1
Corporate		411.6		102.2		513.8
CMBS		—		35.4		35.4
RMBS		—		268.0		268.0
CDO/CLO		61.0		1.5		62.5
Other asset-backed		3.6		77.6		81.2
Related party reinsurance derivative asset		3.5		—		3.5
Fair value investments		10.6		16.9		27.5
Total assets	$	532.4	$	543.0	$	1,075.4
Liabilities
Embedded derivatives	$	82.3	$	—	$	82.3
Total liabilities	$	82.3	$	—	$	82.3

———————

(1) Represents valuations reflecting both internally-derived and market inputs, as well as third-party information or quotes.

(2) Represents unadjusted prices from independent pricing services, third-party financial statements and independent indicative broker quotes where pricing inputs are not readily available.

(3) Includes securities whose underlying collateral is an obligation of a U.S. government entity.

Financial instruments not carried at fair value

The Company is required by U.S. GAAP to disclose the fair value of certain financial instruments including those that are not carried at fair value. The following table discloses the Company’s financial instruments where the carrying amounts and fair values differ:

Carrying Amounts and Fair Values		As of September 30, 2012						As of December 31, 2011
of Financial Instruments:	Fair Value							As restated and amended
($ in millions)	Hierarchy	Carrying			Fair			Carrying			Fair
	Level	Value			Value			Value			Value
Financial assets:
Policy loans	Level 3		$	60.5		$	60.0		$	62.5		$	62.1
Cash and cash equivalent	Level 1		$	117.2		$	117.2		$	49.5		$	49.5
Financial liabilities:
Investment contracts	Level 3		$	2,217.7		$	2,223.5		$	1,724.4		$	1,732.2

Fair value of policy loans

The fair value of fixed rate policy loans is calculated using a discounted cash flow model based upon current U.S. Treasury rates and historical loan repayment patterns. For floating rate policy loans the fair value is the amount due, excluding interest, as of the reporting date.

Fair value of investment contracts

We determine the fair value of guaranteed interest contracts by using a discount rate based upon the appropriate U.S. Treasury rate to calculate the present value of projected contractual liability payments through final maturity. We determine the fair value of deferred annuities and supplementary contracts without life contingencies with an interest guarantee of one year or less at the amount of the policy reserve. In determining the fair value of deferred annuities and supplementary contracts without life contingencies with interest guarantees greater than one year, we use a discount rate based upon the appropriate U.S. Treasury rate to calculate the present value of the projected account value of the policy at the end of the current guarantee period.

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10.      Fair Value of Financial Instruments (continued)

Deposit type funds, including pension deposit administration contracts, dividend accumulations and other funds left on deposit not involving life contingencies, have interest guarantees of less than one year for which interest credited is closely tied to rates earned on owned assets. For these liabilities, we assume fair value to be equal to the stated liability balances.

The fair value of these investment contracts are categorized as Level 3.

11.      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 change in the deferred income taxes and related valuation allowance for the three and nine months ended September 30, 2012 has been computed based on the first nine months of 2012 as a discrete period. Similarly, the tax benefit and expense for the three and nine months ended September 30, 2012, respectively, is determined based upon the first nine months of 2012 as a discrete period.

The tax expense of $4.3 million for the three months ended September 30, 2012 includes $5.0 million of current taxes offset by a benefit of $0.7 million related to the exception to intraperiod allocation rules in accordance with ASC 740-20, Accounting for Income Taxes – Intraperiod Tax Allocation. The tax expense of $23.6 million for the nine months ended September 30, 2012 includes $30.1 million of estimated current taxes offset by a benefit of $6.5 million related to the exception to intraperiod allocation rules in accordance with ASC 740-20, Accounting for Income Taxes – Intraperiod Tax Allocation.

We recorded a deferred tax asset, net of deferred tax liabilities and valuation allowances, of $18.7 million as of September 30, 2012. Consistent with the prior period, the deferred tax asset not offset by a valuation allowance relates to gross unrealized losses on available-for-sale debt securities. For the three months ended September 30, 2012, we recognized a net increase in the valuation allowance of $31.6 million. For the nine months ended September 30, 2012, we recognized a net increase in the valuation allowance of $75.4 million. Accounting guidance requires that changes in the valuation allowance be allocated to various financial statement components of income or loss.

During the first quarter of 2012, the Company generated taxable income sufficient to fully utilize its life group related net operating loss carryforwards; however, due to the limited ability to offset non-life group losses with life group taxable income, significant net operating losses attributable to the non-life group remain. However, as a result of the pre-tax loss in the third quarter of 2012, it is unlikely that a reduction in the existing valuation allowance will occur during the fourth quarter of 2012.

We have concluded that a valuation allowance on the deferred tax assets attributable to available-for-sale debt securities with gross unrealized losses was not required due to our ability and intent to hold these securities until recovery of fair value or contractual maturity, thereby avoiding realization of taxable capital losses. This conclusion is consistent with prior periods.

The Company and its subsidiaries file consolidated, combined, unitary or separate income tax returns in the U.S. federal, various state and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2010.

Based upon the timing and status of our current examinations by taxing authorities, we do not believe that it is reasonably possible that any changes to the balance of unrecognized tax benefits occurring within the next 12 months will result in a significant change to the results of operations, financial condition or liquidity. In addition, we do not anticipate that there will be additional payments made or refunds received within the next 12 months with respect to the years under audit. We do not anticipate any increases to the existing unrecognized tax benefits that would have a significant impact on the financial position of the Company.

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12.      Accumulated Other Comprehensive Income

Changes in each component of AOCI attributable to the Company for the years ended December 31, 2012 and 2011 are as follows below (net of tax):

Accumulated Other Comprehensive Income (Loss)					Non-Credit
($ in millions)	Net				portion of
	unrealized				OTTI losses
	investment gains				recognized
	(losses)				in OCI				Total
As restated and amended (1)
Balance, December 31, 2010		$	6.5			$	(19.4	)		$	(12.9	)
Change in component during the year			15.9				(2.5	)			13.4
Balance, September 30, 2011		$	22.4			$	(21.9	)		$	0.5
Balance, December 31, 2011		$	25.9			$	(23.3	)		$	2.6
Change in component during the year			(1.1	)			2.7				1.6
Balance, September 30, 2012		$	24.8			$	(20.6	)		$	4.2

———————

(1) Except for the change in component during 2012 and the balance as of 2012.

13.      Contingent Liabilities

Litigation and arbitration

The Company is regularly involved in litigation and arbitration, both as a defendant and as a plaintiff. The litigation and arbitration naming the Company as a defendant ordinarily involves our activities as an insurer, employer, investor, investment advisor or taxpayer.

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. It is believed that the outcome of our litigation and arbitration matters are not likely, either individually or in the aggregate, to have a material adverse effect on the financial condition of the Company. 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 the results of operations or cash flows in particular quarterly or annual periods.

SEC Cease-and-Desist Order

On February 12, 2014, PNX and the Company submitted an Offer of Settlement with the SEC pursuant to which PNX and the Company consented to the issuance of the form of an Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (the “Order”). The Order was approved by the SEC on March 21, 2014. Pursuant to the Order, PNX and the Company have been directed to cease and desist from committing or causing any violations and any future violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder and Section 15(d) of the Exchange Act and Rules 15d-1 and 15d-13 thereunder. PNX was required by the Order to file its 2012 Annual Report on Form 10-K with the SEC by March 31, 2014. PNX filed its 2012 Annual Report on Form 10-K before the opening of the market on April 1, 2014. Further, pursuant to the Order, PNX was required to file its Quarterly Report on Form 10-Q for the period ended September 30, 2012 (the “PNX Third Quarter 2012 Form 10-Q”) with the SEC on or before April 15, 2014 and the Company was required to file the 2012 Form 10-K with the SEC on or before April 15, 2014. The PNX Third Quarter 2012 Form 10-Q was filed with the SEC on April 23, 2014. The Company filed its 2012 Form 10-K with the SEC on April 25, 2014. In addition, PNX and the Company agreed to perform certain undertakings, including for the Company to file its Quarterly Report on Form 10-Q for the period ended September 30, 2012 by no later than April 30, 2014 and for PNX and the Company to file their 2013 Forms 10-K by no later than June 4, 2014 and July 3, 2014, respectively. Also pursuant to the undertakings, PNX and  the Company would file their respective 2013 Forms 10-Q after the filing of their 2013 Forms 10-K. PNX intends to become timely with its periodic filings under the Exchange Act with the filing of its Quarterly Report on Form 10-Q for the period ending June 30, 2014. The Company intends to become timely with its periodic filings under the Exchange Act with the filing of its Quarterly Report on Form 10-Q for the period ending September 30, 2014. Finally, PNX and the Company each paid a civil monetary penalty in the amount of $375,000 to the United States Treasury following the entry of the Order.

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13.      Contingent Liabilities (continued)

Cases Brought by Policy Investors

On June 5, 2012, Wilmington Savings Fund Society, FSB, as successor in interest to Christiana Bank & Trust Company and as trustee of 60 unnamed trusts, filed suit against PNX, Phoenix Life and PHL Variable in the United States District Court for the Central District of California; the case was later transferred to the District of Delaware (C.A. No. 13-499-RGA) by order dated March 28, 2013.  After the plaintiffs twice amended their complaint, and dropped PNX as a defendant and dropped one of the plaintiff Trusts, the court issued an order on April 9, 2014 dismissing seven of the ten counts, and partially dismissing two more, with prejudice.  The court dismissed claims alleging that Phoenix Life and PHL Variable committed RICO violations and fraud by continuing to collect premiums while concealing an intent to later deny death claims.  The claims that remain in the case seek a declaration that the policies at issue are valid, and damages relating to cost of insurance increases.  We believe we have meritorious defenses against this lawsuit and we intend to vigorously defend against these claims.  The outcome of this litigation and any potential losses are uncertain.

On August 2, 2012, Lima LS PLC filed a complaint against PNX, Phoenix Life and PHL Variable, James D. Wehr, Philip K. Polkinghorn, Edward W. Cassidy, Dona D. Young and other unnamed defendants in the United States District Court for the District of Connecticut (Case No. CV12-01122).  On July 1, 2013, the defendants' motion to dismiss the complaint was granted in part and denied in part.  Thereafter, on July 31, 2013, the plaintiff served an amended complaint against the same defendants, with the exception that Mr. Cassidy was dropped as a defendant.  The plaintiffs allege that Phoenix Life promoted certain policy sales knowing that the policies would ultimately be owned by investors and then challenging the validity of these policies or denying claims submitted on these policies.  Plaintiffs are seeking damages, including punitive and treble damages, attorneys' fees and a declaratory judgment.  We believe we have meritorious defenses against this lawsuit and we intend to vigorously defend against these claims.  The outcome of this litigation and any potential losses are uncertain.

Cost of Insurance Cases

By order dated July 12, 2013, two separate classes were certified in an action pending in the United States District Court for the Southern District of New York (C.A. No. 1:11-cv-08405-CM-JCF (U.S. Dist. Ct; S.D.N.Y.)) brought by Martin Fleisher and another plaintiff (the “Fleisher Litigation”), on behalf of themselves and others similarly situated, against Phoenix Life. The complaint in the Fleisher Litigation, filed on November 8, 2011, challenges two COI rate adjustments implemented by Phoenix Life, which Phoenix Life maintains were based on policy language permitting such adjustments. The complaint seeks damages for breach of contract. The classes certified in the court’s July 12, 2013 order are limited to holders of Phoenix Life policies issued in New York and subject to New York law.

The Company, a subsidiary of Phoenix Life, has been named as a defendant in four actions challenging its COI rate adjustments implemented concurrently with the Phoenix Life adjustments. These four cases, which are not styled as class actions, have been brought against the Company by (1) Tiger Capital LLC (C.A. No. 1:12-cv- 02939-CM-JCF; U.S. Dist. Ct; S.D.N.Y., complaint filed on March 14, 2012; the “Tiger Capital Litigation”) and (2-4) U.S. Bank National Association, as securities intermediary for Lima Acquisition LP ((2: C.A. No. 1:12-cv-06811-CM-JCF; U.S. Dist. Ct; S.D.N.Y., complaint filed on November 16, 2011; 3: C.A. No. 1:13-cv-01580-CM-JCF; U.S. Dist. Ct; S.D.N.Y., complaint filed on March 8, 2013; collectively, the “U.S. Bank N.Y. Litigations”)); and 4: C.A. No. 1:13-cv-00368-GMS; U.S. Dist. Ct; D. Del., complaint filed on March 6, 2013; the “Delaware Litigation”). The Tiger Capital Litigation and the two U.S. Bank N.Y. Litigations have been assigned to the same judge as the Fleisher Litigation, and discovery in these four actions is being coordinated by the court; the Delaware Litigation is proceeding separately and by order dated April 22, 2014 was transferred to the U.S. District Court for the District of Connecticut. The plaintiffs seek damages and attorneys’ fees for breach of contract and other common law and statutory claims.

Complaints to state insurance departments regarding the Company’s COI rate adjustments have also prompted regulatory inquiries or investigations in several states, with two of such states (California and Wisconsin) issuing letters directing the Company to take remedial action in response to complaints by a single policyholder. The Company disagrees with both states’ positions and, on April 30, 2013, Wisconsin commenced an administrative hearing to obtain a formal ruling on its position, which is pending (OCI Case No. 13- C35362).

The Company and Phoenix Life believe that they have meritorious defenses against all of these lawsuits and regulatory directives and intend to vigorously defend against them. The outcome of these matters is uncertain and any potential losses cannot be reasonably estimated.

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13.      Contingent Liabilities (continued)

Notice of Claim from Reinsurer

On June 6, 2012, one of the reinsurers of the Company provided notice of a claim, seeking relief under two treaties. This matter was settled effective July 1, 2013 and was resolved without material impact on the financial results of the Company.

Regulatory matters

State regulatory bodies, the SEC, the Financial Industry Regulatory Authority, 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 securities offerings and registered products. We endeavor to respond to such inquiries in an appropriate way and to take corrective action if warranted. Further, PNX is providing to the SEC certain information and documentation regarding the Restatement and the staff of the SEC has indicated to PNX that the matter remains subject to further investigation and potential further regulatory action. We cannot predict the outcome of any of such investigations or actions related to these or other matters.

Regulatory actions may be difficult to assess or quantify. 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 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 financial statements in particular quarterly or annual periods.

State Insurance Department Examinations

During 2012 and 2013, the Connecticut Insurance Department conducted its routine financial examination of the Company and two other Connecticut-domiciled insurance affiliates. A report from the Connecticut Insurance Department is expected in 2014.

In 2013, the Connecticut Insurance Department commenced a market conduct examination of  the Company and  two other Connecticut-domiciled insurance affiliates. The report from this examination will also be available in 2014.

Unclaimed Property Inquiries

In late 2012, PNX and the Company and their affiliates received separate notices from Unclaimed Property Clearing House (“UPCH”) and Kelmar Associates, LLC (“Kelmar”) that UPCH and Kelmar  had been authorized  by the unclaimed property administrators in certain states to conduct unclaimed property audits.  The audits began in 2013 and are being conducted on the PNX enterprise with a focus on death benefit payments; however, all amounts owed by any aspect of the PNX enterprise are also a focus.  This includes any payments to vendors, brokers, former employees and shareholders.UPCH represents thirty-three states and the District of Columbia and Kelmar represents six states.

14.      Subsequent Events

Late Filings

On May 10, 2013, we filed a Notification of Late Filing on Form 12b-25 with the SEC disclosing that we would be unable to timely file our First Quarter 2013 Quarterly Report on Form 10-Q with the SEC.

On May 31, 2013, we filed a Current Report on Form 8-K with the SEC disclosing that we had received from the Connecticut Insurance Department, our domiciliary state insurance regulator, a 30-day extension for submission of our audited financial statements prepared in accordance with Statements of Statutory Accounting Principles (“Statutory”) for the year ended December 31, 2012 and the subsequent filing of management’s report on internal control over financial reporting for Phoenix Life. This May 31, 2013 Form 8-K disclosed that we intend to seek further extensions if required.

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14.      Subsequent Events (continued)

On June 28, 2013, we filed a Current Report on Form 8-K with the SEC disclosing that we determined that the completion of our  2012 audited Statutory financial statements is dependent on substantial completion of both the Company’s Restatement and the Phoenix  U.S. GAAP restatement, the evaluation of internal control over financial reporting and the related audit processes, none of which was expected to be completed by the date upon which the Company’s then-current extension for filing the audited Statutory financial statements with our domiciliary state insurance regulator was due to expire.

On August 9, 2013, we filed a Notification of Late Filing on Form 12b-25 with the SEC disclosing that we would be unable to timely file our second quarter 2013 Quarterly Report on Form 10-Q with the SEC.

On November 8, 2013, we filed a Notification of Late Filing on Form 12b-25 with the SEC disclosing that we would be unable to timely file our Third Quarter 2013 Quarterly Report on Form 10-Q with the SEC.

On February 28, 2014, we filed a Notification of Late Filing on Form 12b-25 with the SEC disclosing that we would be unable to timely file our 2013 Annual Report on Form 10-K with the SEC.

On April 25, 2014, we filed our 2012 Annual Report on Form 10-K with the SEC.

Rating Agency Actions

On January 16, 2013, Standard & Poor’s Ratings Services affirmed our “BB-” financial strength ratings for the Company. They also removed the rating from CreditWatch Negative and changed their outlook to stable.

On March 8, 2013, Standard & Poor’s Rating Services placed our “BB-” financial strength ratings for the Company on CreditWatch with negative implications.

On March 20, 2013, Moody’s Investors Service maintained their review for downgrade for our “Ba2” financial strength ratings for the Company.

On April 9, 2013, A.M. Best Co. maintained the Company’s rating and kept it under review with negative implications.

On May 22, 2013, Standard & Poor’s Rating Services affirmed our “BB-” financial strength rating for the Company. They removed the rating from CreditWatch with negative implications and assigned it a negative outlook.

On January 14, 2014, Moody’s Investor Services withdrew the Ba2 financial strength rating of the Company.

Capital Contribution

On December 30, 2013, Phoenix purchased a $30.0 million surplus note from the Company and made a $45.0 million capital contribution to further benefit the Company. The capital provided by Phoenix to the Company was intended to partially offset an anticipated net statutory reserve increase in the fourth quarter of 2013 as a result of the Company’s statutory asset adequacy analysis and to maintain adequate statutory capital.

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14.      Subsequent Events (continued)

On February 12, 2014, PNX and the Company submitted an Offer of Settlement with the SEC pursuant to which PNX and the Company consented to the issuance of the form of an Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (the “Order”). The Order was approved by the SEC on March 21, 2014. Pursuant to the Order, PNX and the Company have been directed to cease and desist from committing or causing any violations and any future violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder and Section 15(d) of the Exchange Act and Rules 15d-1 and 15d-13 thereunder. PNX was required by the Order to file its 2012 Annual Report on Form 10-K with the SEC by March 31, 2014. PNX filed its 2012 Annual Report on Form 10-K before the opening of the market on April 1, 2014. Further, pursuant to the Order, PNX was required to file its Quarterly Report on Form 10-Q for the period ended September 30, 2012 (the “PNX Third Quarter 2012 Form 10-Q”) with the SEC on or before April 15, 2014 and the Company was required to file the 2012 Form 10-K with the SEC on or before April 15, 2014. The PNX Third Quarter 2012 Form 10-Q was filed with the SEC on April 23, 2014. The Company filed its 2012 Form 10-K with the SEC on April 25, 2014. In addition, PNX and the Company agreed to perform certain undertakings, including for the Company to file its Quarterly Report on Form 10-Q for the period ended September 30, 2012 by no later than April 30, 2014 and for PNX and the Company to file their 2013 Forms 10-K by no later than June 4, 2014 and July 3, 2014, respectively. Also pursuant to the undertakings, PNX and  the Company would file their respective 2013 Forms 10-Q after the filing of their 2013 Forms 10-K. PNX intends to become timely with its periodic filings under the Exchange Act with the filing of its Quarterly Report on Form 10-Q for the period ending June 30, 2014. The Company intends to become timely with its periodic filings under the Exchange Act with the filing of its Quarterly Report on Form 10-Q for the period ending September 30, 2014. Finally, PNX and the Company each paid a civil monetary penalty in the amount of $375,000 to the United States Treasury following the entry of the Order.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

The discussion in this Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We intend for these forward-looking statements to be covered by the safe harbor provisions of the federal securities laws relating to forward-looking statements. These forward-looking statements include statements relating to trends in, or representing management’s beliefs about our future transactions, strategies, operations and financial results and often contain words such as “will,” “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “is targeting,” “may,” “should” and other similar words or expressions. Forward-looking statements are made based upon management’s current expectations and beliefs concerning trends and future developments and their potential effects on us. They are not guarantees of future performance. Our actual business, financial condition or results of operations may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties which include, among others: (A) risks related to the Restatement, failure to file timely periodic reports with the SEC and our internal control over financial reporting, which include (i) the potential failure to remediate material weaknesses in our internal control over financial reporting and other material weaknesses may be identified in the future, which would adversely affect the accuracy and timing of our financial reporting; (ii) the extraordinary processes undertaken to effect the Restatement may not have been adequate to identify and correct all errors in our historical financial statements and, as a result, we may discover additional errors and our financial statements remain subject to the risk of future restatement; (iii) our failure to have current financial information available; (iv) the risk of failure to comply with the filing deadlines included in the SEC’s Cease-and-Desist Order, dated March 21, 2014, including that the SEC may seek sanctions against PNX and the Company; (v) the risk of PNX’s failure to file its delayed SEC filings by March 16, 2015, the extended deadline for providing these delayed SEC filings to the bond trustee, as well as the risk associated with seeking additional consents from bondholders of PNX’s outstanding 7.45% Quarterly Interest Bonds Due 2032 regarding these delayed filings; (vi) the outcome of litigation and claims as well as regulatory examinations, investigations, proceedings and orders arising out of the Restatement and the failure by the Company and PNX to file SEC reports on a timely basis; (vii) further downgrades or withdrawals of our debt or financial strength credit ratings, which could increase policy surrenders and withdrawals, adversely affect our relationships with distributors, reduce new sales, limit our ability to trade in derivatives and increase our costs of, or reduce our access to, future borrowings; (viii) our inability to hedge our positions due to our inability to replace hedges as a result of our credit rating; (ix) the incurrence of significant Restatement-related expenses; (x) diversion of management and other human resources attention from the operation of our business; (xi) the risk that the Company’s and Phoenix Life’s restatements, the delay in our filing of periodic reports with the SEC and errors corrected in subsequent statutory financial statement filings with state insurance regulators could result in regulatory investigations, examinations and/or inquiries, which may increase compliance costs and the potential for additional regulatory investigations, proceedings or other claims; and (xiii) risks associated with our failure to file certain reports with state regulatory authorities; (B) risks related to our business, which include (i) unfavorable general economic developments including, but not limited to, specific related factors such as the performance of the debt and equity markets; (ii) the potential adverse effect of interest rate fluctuations on our business and results of operations; (iii) the potential adverse effect of legal actions and proceedings inherent in our business on our results of operations, financial position, business or reputation; (iv) the impact on our results of operations and financial condition of any required increase in our reserves for future policyholder benefits and claims if such reserves prove to be inadequate; (v) the possibility that mortality rates, persistency rates, funding levels or other factors may differ significantly from our assumptions used in pricing products; (vi) limited access to external sources of liquidity and financing; (vii) the effect of guaranteed benefits within our products; (viii) potential exposure to unidentified or unanticipated risk that could adversely affect our businesses or result in losses; (ix) the consequences related to variations in the amount of our statutory capital could adversely affect our business; (x) the possibility that we may not be successful in our efforts to implement a business plan focused on new market segments; (xi) changes in our investment valuations based on changes in our valuation methodologies, estimations and assumptions; (xii) the availability, pricing and terms of reinsurance coverage generally and the inability or unwillingness of our reinsurers to meet their obligations to us specifically; (xiii) our ability to attract and retain key personnel in a competitive environment and while delayed in our SEC reporting obligations; (xiv) our dependence on third parties to maintain critical business and administrative functions; (xv) the strong competition we face in our business from banks, insurance companies and other financial services firms; (xvi) changes in tax law and policy may affect us directly or indirectly through the cost of, the demand for or profitability of our products or services; (xvii) the possibility that federal and state regulation may increase our cost of doing business, impose additional reserve or capital requirements, levy financial assessments or constrain our operating and financial flexibility; (xvii) regulatory actions or examinations may harm our business; and (xviii) changes in accounting standards; and (C) other risks and uncertainties described herein or in any of our filings with the SEC. Certain other factors which may impact our business, financial condition or results of operations or which may cause actual results to differ from such forward-looking statements are discussed or included in our periodic reports filed with the SEC and are available on our website at www.phoenixwm.com under “Investor Relations.” You are urged to carefully consider all such factors. We do not undertake or plan to update or revise forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections, or other circumstances occurring after the date of this Form 10-Q, even if such results changes or circumstances make it clear that any forward-looking information will not be realized. If we make any future public statements or disclosures which modify or impact any of the forward-looking statements contained in or accompanying this Form 10-Q, such statements or disclosures will be deemed to modify or supersede such statements in this Form 10-Q.

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MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS

This section reviews our financial condition as of September 30, 2012 as compared with December 31, 2011; our results of operations for the three and nine months ended September 30, 2012 and 2011; and, where appropriate, factors that may affect our future financial performance. This discussion should be read in conjunction with the unaudited interim financial statements and notes contained in this filing as well as in conjunction with our financial statements in our 2012 Form 10-K.

Subsequent to the Company’s filing of its Form 10-Q for the period ended June 30, 2012, certain errors were identified in the Company’s statement of cash flows for the nine months ended September 30, 2012, as well as for previously reported periods. The Company filed a Current Report on Form 8-K with the SEC on September 18, 2012 (as was amended by Forms 8-K/A filed by the Company on November 8, 2012, March 15, 2013 and April 24, 2013, respectively) disclosing its conclusion that certain of its previously issued annual audited and interim unaudited financial statements contained in its historical Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q should no longer be relied upon and should be restated. During the restatement process, the Company identified and corrected material errors, made certain reclassifications and adjustments to correct previously identified non-material out of period errors and corrected errors in retrospectively adopted amended accounting guidance. The impact of the restatement on the Company’s financial statements is detailed in Note 2 “Restatement and Amendment of Previously Reported Financial Information” to our financial statements and under “Item 8: Financial Statements and Supplementary Data” in the 2012 Form 10-K. As a result of the errors identified during the restatement, management identified material weaknesses in our internal control over financial reporting and concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2012. These weaknesses, an evaluation of the effectiveness of the Company’s disclosure controls and procedures and the Company’s remediation plans are more fully described in “Item 9A: Controls and Procedures” in Part II of the 2012 Form 10-K.

Executive Overview

Business

We provide life insurance and annuity products through independent agents and financial advisors. Our policyholder base includes both affluent and middle market consumers, with our more recent business concentrated in the middle market. Most of our life insurance in force is permanent life insurance (universal life and variable universal life) insuring one or more lives. Our annuity products include fixed and variable annuities with a variety of death benefit and guaranteed living benefit options.

In 2012, 99% of PHL Variable product sales, as defined by total annuity deposits and total life premium, were annuities, and 91% of those sales were fixed indexed annuities.

Saybrus Partners, Inc. (“Saybrus”), an affiliate,  provides dedicated life insurance and other consulting services to financial advisors in partner companies, as well as support for sales of Phoenix’s product line through independent distribution organizations.

Earnings Drivers

Our profitability is driven by interaction of the following elements:

● Fees on life and annuity products consist primarily of: (i) COI charges, which are based on the difference between policy face amounts and the account values (referred to as the NAR); (ii) asset-based fees (including mortality and expense charges for variable annuities) which are calculated as a percentage of assets under management within our separate accounts; (iii) premium-based fees to cover premium taxes and renewal commissions; and (iv) surrender charges.

● Policy benefits includedeath claims net of reinsurance cash flows, including ceded premiums and recoverables, interest credited to policyholders and changes in reserves for future claims payments. Certain universal life reserves are based on management’s assumptions about future COI fees and interest margins which, in turn, are affected by future premium payments, surrenders, lapses and mortality rates. Actual experience can vary significantly from these assumptions, resulting in greater or lesser changes in reserves. In addition, we regularly review and reset our assumptions in light of actual experience, which can result in material changes to these reserves.

59

For fixed indexed annuities, policy benefits include the change in the liability associated with guaranteed minimum withdrawal benefits. The assumptions used to calculate the guaranteed minimum withdrawal liability are consistent with those used for amortizing deferred policy acquisition costs.

Certain of our variable annuity contracts include guaranteed minimum death and income benefits. The change in the liability associated with these guarantees is included in policy benefits. The value of these liabilities is sensitive to changes in equity markets, equity market volatility and interest rates, as well as subject to management assumptions regarding future surrenders, rider utilization rates and mortality.

In addition, the universal life block of business has experience which produces profits in earlier periods followed by losses in later periods for which an additional liability is required to be held above the account value liability. These reserves for future losses are determined by accruing ratably over historical and anticipated positive income. The assumptions used in estimating these liabilities are consistent with those used for amortizing deferred policy acquisition costs and are subject to the same variability and risk, and these factors can vary significantly from period to period.

● Interest margins consist of net investment income earned on universal life, fixed indexed annuities and other policyholder funds, gains on options purchased to fund index credits less the interest or index credits applied to policyholders on those funds. Interest margins also include investment income on assets supporting the Company’s surplus.

● Non-deferred operating expenses are expenses related to servicing policies, premium taxes, reinsurance allowances, non-deferrable acquisition expenses and commissions and general overhead. They also include pension and other benefit costs which involve significant estimates and assumptions.

● Deferred policy acquisition cost amortization 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, interest and default rates, reinsurance costs and recoveries, mortality, surrender rates, premium persistency 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 related to investments and hedging programs include transaction gains and losses, OTTIs and changes in the value of certain derivatives. Certain of our variable and fixed annuity contracts include guaranteed minimum withdrawal and accumulation benefits which are classified as embedded derivatives. The change in fair value related to the embedded derivative liability is also included in net realized gains or losses.  The fair value of the embedded derivative liability is calculated using significant management estimates. Depending on the product, these estimates may include: (i) the expected value of index credits on the next policy anniversary dates; (ii) the interest rate used to project the future growth in the contract liability; (iii) the discount rate used to discount future benefit payments, which includes an adjustment for our credit worthiness; (iv) the expected costs of annual call options that will be purchased in the future to fund index credits beyond the next policy anniversary; and (v) cash flow projections based on actuarial and capital market assumptions, which include benefits and related contract charges, over the lives of the contracts, incorporating expectations concerning policyholder behavior. These factors can vary significantly from period to period.

60

● Income tax expense/benefit consists of both current and deferred tax provisions. The computation of these amounts is a function of pre-tax income and the application of relevant tax law and U.S. GAAP accounting guidance. In assessing the realizability of our deferred tax assets, we make significant judgments with respect to projections of future taxable income, the identification of prudent and feasible tax planning strategies and the reversal pattern of the Company’s book-to-tax differences that are temporary in nature. We also consider the expiration dates and amounts of carryforwards related to net operating losses, capital losses, foreign tax credits and general business tax credits. Based on our assessment, we have recorded a valuation allowance against a significant portion of our deferred tax assets based upon our conclusion that there is insufficient objective positive evidence to overcome the significant negative evidence from our cumulative losses in recent years. This assessment could change in the future, resulting in a release of the valuation allowance and a benefit to income.

Under U.S. GAAP, premiums and deposits for variable life, universal life and annuity products are not immediately recorded as revenues. For certain investment options of variable products, deposits are reflected on our balance sheets as an increase in separate account liabilities. Premiums and deposits for universal life, fixed annuities and certain investment options of variable annuities and variable universal life are reflected on our balance sheets as an increase in policyholder deposit funds. Premiums and deposits for other products are reflected on our balance sheets as an increase in policy liabilities and accruals.

Recent Trends in Earnings Drivers

● Fees on life and annuity products. Fees on our life and annuity products decreased $19.3 million in the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011. Lower fees were primarily a result of a decrease in cost of insurance charges related to declining life insurance in force and a decrease in surrender charges consistent with lower policy surrenders.

● Policy benefits. Policy benefits increased $71.6 million for the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011. The increase in policy benefit expense was driven by adverse mortality and significant claim expenses, primarily related to universal life. Fluctuations in mortality are inherent in our lines of business. Annuity benefits increased due to changes in reserves on fixed indexed annuities associated with minimum death and income benefit guarantees, which were driven by increased annuity sales during the period. Policy benefits expenses incurred during the quarter due to reserve unlocking adjustments as a result of our annual comprehensive review of actuarial assumptions in the third quarter of 2012.

● Interest margins. Universal life interest margins declined slightly in 2012 compared to 2011 primarily as a result of lower interest credited consistent with declining funds under management. Annuity interest margins increased primarily as a result of higher investment income attributable to growth in fixed indexed annuity funds under management.

● Operating expenses. Non-deferred operating expenses increased $6.0 million to $75.7 million in the nine months ended September 30, 2012, compared to $69.7 million in the nine months ended September 30, 2011. The increase in operating expenses was a result of higher professional fees and outside services and an increase in commissions.

● Deferred policy acquisition cost.  Policy acquisition cost amortization increased $2.3 million in the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011. Excluding the impact of the unlocking, amortization related to universal life decreased as a result of negative mortality experience during the year. Amortization related to annuities decreased primarily as a result of improved market performance. This decrease in amortization was partially offset by the unlocking of assumptions as a result the annual comprehensive review of assumptions in the third quarter of 2012.

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● Net realized investment losses. Net realized investment losses of $12.7 million were recognized for the nine months ended September 30, 2012 compared to net realized investment losses of $8.1 million for the nine months ended September 30, 2011. Realized investment losses were due to an impairment loss of $2.6 million on long-term debt securities and a net loss of $27.4 million on derivative assets and embedded derivative liabilities. The derivative loss was attributable to a loss of $21.1 million due to valuation and net transaction losses on derivative positions related to variable annuity and FIA guarantees. An additional $12.4 million loss was related to our surplus hedge which utilizes futures and options to hedge against declines in equity markets and the resulting statutory capital and surplus impact. These derivative losses were offset by gains of $6.1 million on our embedded derivative liabilities associated with variable and fixed indexed annuity guarantees. A loss of $0.7 million related to the non-performance risk factor was included in the total derivative loss.

● Income taxes The Company recorded income tax expense of $23.6 million for the nine months ended September 30, 2012 compared with $16.8 million income tax benefit for the nine months ended September 30, 2011. The decrease was driven by a benefit related to the exception to intraperiod allocation rules in accordance with ASC 740-20, Accounting for Income Taxes – Intraperiod Tax Allocation, partially offset by an increase in current tax expense accrued.

Strategy and Outlook

We are focused on the following key strategic pillars, which have defined our strategy since 2009:

● Balance sheet strength;

● Policyholder service;

● Operational efficiency; and

● Profitable growth.

We believe this strategy has produced a firm foundation and positioned us for continued growth, even as our business remains sensitive to general economic conditions and capital market trends including equity markets and interest rates.

We believe there is significant demand for our products among middle market households seeking to accumulate assets and secure lifetime income during retirement. The current low interest rate environment provides limited opportunities for consumers to protect principal and generate predictable income. Our indexed annuity products are positioned favorably vis-à-vis traditional investments such as bank certificates of deposits.

Recent trends in the life insurance industry may affect our mortality, policy persistency and premium persistency. The evolution of the financial needs of policyholders, the emergence of a secondary market for life insurance, and increased availability and subsequent contraction of premium financing suggest that the reasons for purchasing our products have changed. Deviations in experience from our assumptions have had, and could continue to have, an adverse effect on the profitability of certain universal life products. Most of our current products permit us to increase charges and adjust crediting rates during the life of the policy or contract (subject to guarantees in the policies and contracts). We have made, and may in the future make, such adjustments.

Each year we perform a comprehensive assumption review or an unlocking where we revise our assumptions to reflect the results of recent experience studies, thereby changing our estimate of estimated gross profits (“ EGPs”) in the deferred policy acquisition cost and unearned revenue amortization models, as well as projections within the death benefit and other insurance benefit reserving models as described more fully in Note 3 to our financial statements under “Item 8: Financial Statements and Supplementary Data” in the 2012 Form 10-K. While the final impact of the 2013 annual comprehensive assumption review is not yet complete, preliminary indications suggest an overall improvement in mortality experience and an increase in interest rates, both of which are significant assumptions and a driver of results. However, the ultimate impact of this experience on the annual unlock and on our results of operations has not yet been determined.

The Company incurred $18.6 million in 2013 for audit, financial and actuarial consulting and legal expenses related to the restatement process and preparation of restated financial statements.

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Impact of New Accounting Standards

For a discussion of accounting standards and change in accounting, see Note 3 to our financial statements under “Item 8: Financial Statements and Supplementary Data” in the 2012 Form 10-K.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. GAAP. In preparing these financial statements in conformity with U.S. GAAP, we are required 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 periods. Significant estimates and assumptions are made in the determination of EGPs and estimated gross margins used in the valuation and amortization of assets and liabilities associated with universal life and annuity contracts; policyholder liabilities and accruals; valuation of investments in debt securities: limited partnerships and other investments; valuation of deferred tax assets; and accruals for contingent liabilities. Actual results could differ from these estimates.

A complete description of our critical accounting estimates is set forth in the 2012 Form 10-K. Management believes that those critical accounting estimates as set forth in the 2012 Form 10-K are important to understanding our financial condition and financial statements.

Results of Operations

Summary Financial Data:	Three Months Ended						Increase (decrease) and
($ in millions)	September 30,						percentage change
	2012			2011			2012 vs. 2011
				As restated
				and amended
REVENUES:
Premiums	$	0.8		$	1.1		$	(0.3	)		(27%)
Insurance and investment product fees		92.3			96.9			(4.6	)		(5%)
Net investment income		33.3			25.0			8.3			33%
Net realized investment gains (losses):
Total OTTI losses		(0.7	)		(4.7	)		4.0			85%
Portion of OTTI losses recognized in OCI		(0.3	)		3.7			(4.0	)	NM
Net OTTI losses recognized in earnings		(1.0	)		(1.0	)		—			0%
Net realized investment gains (losses), excluding OTTI losses		4.8			(3.2	)		8.0		NM
Net realized investment gains (losses)		3.8			(4.2	)		8.0		NM
Total revenues		130.2			118.8			11.4			10%
BENEFITS AND EXPENSES:
Policy benefits		157.4			93.9			63.5			68%
Policy acquisition cost amortization		24.3			28.9			(4.6	)		(16%)
Other operating expenses		24.8			24.1			0.7			3%
Total benefits and expenses		206.5			146.9			59.6			41%
Loss before income taxes		(76.3	)		(28.1	)		(48.2	)	NM
Income tax expense (benefit)		4.3			(18.0	)		22.3		NM
Net loss	$	(80.6	)	$	(10.1	)	$	(70.5	)	NM

———————

Not meaningful (NM)

Analysis of Results of Operations

Three months ended September 30, 2012 compared with three months ended September 30, 2011

The Company recorded a net loss of $80.6 million for the three months ended September 30, 2012 compared with a net loss of $10.1 million for the three months ended September 30, 2011. The decrease reflects higher policy benefits and lower investment and product fee income. These declines in results were partially offset by higher realized investment gains and net investment income.

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Insurance and investment product fees on our life and annuity products decreased $4.6 million in the three months ended September 30, 2012 compared with the three months ended September 30, 2011. Lower fees were primarily a result of COI for the third quarter of 2012 charges which decreased due to declining universal life insurance in force. Partially offsetting these declines were higher investment product fees related to an increase in outstanding annuity policies.

Net investment income increased by $8.3 million to $33.3 million for the three months ended September 30, 2012 compared to $25.0 million for the three months ended September 30, 2011. The increase for the third quarter of 2012 was due to higher investment income on long-term debt securities as a result of additional purchases made during the year due to the growth in fixed indexed annuities funds under management.

Net realized investment gains of $3.8 million were recognized for the three months ended September 30, 2012, compared with net realized investment losses of $4.2 million for the three months ended September 30, 2011. Realized investment losses for the 2012 third quarter were due to an impairment loss of $1.0 million on long-term debt securities and a net loss of $25.7 million on derivative assets and embedded derivative liabilities.  These losses were partially offset by net realized gains of $20.7 million on long-term debt securities. The derivative loss was attributable to a loss of $10.1 million on derivative contracts associated with our variable and fixed annuity guarantees and a loss of $7.8 million related to our surplus hedge which utilizes futures and options to hedge against declines in equity markets and the resulting statutory capital and surplus impact.  These derivative losses were offset by gains of $12.5 million on our embedded derivative assets and liabilities associated with variable and fixed indexed annuity guarantees.  A loss of $2.9 million relating to the non-performance risk factor was included in the total derivative loss.

Policy benefits increased $63.5 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The increase in policy benefit expense was driven by adverse mortality and significant claim expenses, primarily related to universal life. Fluctuations in mortality are inherent in our lines of business. Annuity benefits increased due to changes in reserves on fixed indexed annuities associated with minimum death and income benefit guarantees, which were driven by increased annuity sales during the period.  Policy benefits expenses were incurred during the quarter due to reserve unlocking adjustments as a result of our annual comprehensive review of actuarial assumptions in the third quarter of 2012.

The Company recorded an income tax expense of $4.3 million for the quarter ended September 30, 2012 compared with a tax benefit of $18.0 million as of September 30, 2011. The increase for the third quarter of 2012 was driven by a $5.0 million current tax accrued. This benefit was offset by an additional $0.7 million benefit that results from the application of ASC 740 intraperiod allocation rules. These rules allow for the benefiting of current year losses when an increase to the valuation allowance is avoided due to the existence of current year income elsewhere reported in the financial statements (e.g., discontinued operations, other comprehensive income).

64

Summary Financial Data:	Nine Months Ended						Increase (decrease) and
($ in millions)	September 30,						percentage change
	2012			2011			2012 vs. 2011
REVENUES:
Premiums	$	3.2		$	1.4		$	1.8		NM
Insurance and investment product fees		280.5			299.8			(19.3	)		(6%)
Net investment income		96.5			70.7			25.8			36%
Net realized investment gains (losses):
Total OTTI losses		(4.4	)		(7.0	)		2.6			37%
Portion of OTTI losses recognized in OCI		1.8			4.7			(2.9	)		(62%)
Net OTTI losses recognized in earnings		(2.6	)		(2.3	)		(0.3	)		(13%)
Net realized investment gains, excluding OTTI losses		(10.1	)		(5.8	)		(4.3	)		(74%)
Net realized investment losses		(12.7	)		(8.1	)		(4.6	)		(57%)
Total revenues		367.5			363.8			3.7			1%
BENEFITS AND EXPENSES:
Policy benefits		310.8			239.2			71.6			30%
Policy acquisition cost amortization		92.6			90.3			2.3			3%
Other operating expenses		75.7			69.7			6.0			9%
Total benefits and expenses		479.1			399.2			79.9			20%
Loss before income taxes		(111.6	)		(35.4	)		(76.2	)	NM
Income tax expense (benefit)		23.6			(16.8	)		40.4		NM
Net loss	$	(135.2	)	$	(18.6	)	$	(116.6	)	NM

———————

Not meaningful (NM)

Analysis of Results of Operations

Nine months ended September 30, 2012 compared with nine months ended September 30, 2011

The Company recorded a net loss for the nine months ended September 30, 2012 of $135.2 million compared with a net loss of $18.6 million for the nine months ended September 30, 2011. The decrease in results reflects lower insurance and investment product fees and higher policy benefits expenses. These items were partially offset by higher net investment income.

Insurance and investment product fees on our life and annuity products decreased $19.3 million for the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011. Lower fees were primarily a result of a decrease in cost of insurance charges related to declining life insurance in force and a decrease in surrender charges consistent with lower policy surrenders.

Net investment income increased by $25.8 million to $96.5 million for the nine months ended September 30, 2012 compared to $70.7 million for the nine months ended September 30, 2011. The increase was due to higher investment income on long-term debt securities as a result of additional purchases made during the year due to the growth in fixed indexed annuities funds under management.

Net realized investment losses of $12.7 million were recognized for the nine months ended September 30, 2012 compared to net realized investment losses of $8.1 million for the nine months ended September 30, 2011. Realized investment losses were due to an impairment loss of $2.6 million on long-term debt securities and a net loss of $27.4 million on derivative assets and embedded derivative liabilities. The derivative loss was attributable to a loss of $21.1 million due to valuation and net transaction losses on derivative positions related to variable annuity and FIA guarantees. An additional $12.4 million loss was related to our surplus hedge which utilizes futures and options to hedge against declines in equity markets and the resulting statutory capital and surplus impact. These derivative losses were offset by gains of $6.1 million on our embedded derivative liabilities associated with variable and fixed indexed annuity guarantees. A loss of $0.7 million related to the non-performance risk factor was included in the total derivative loss.

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Policy benefits increased $71.6 million for the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011. The increase in policy benefit expense was driven by adverse mortality and significant claim expenses, primarily related to universal life. Fluctuations in mortality are inherent in our lines of business. Annuity benefits increased due to changes in reserves on fixed indexed annuities associated with minimum death and income benefit guarantees, which were driven by increased annuity sales during the period.  Policy benefits expenses incurred during the quarter due to reserve unlocking adjustments as a result of our annual comprehensive review of actuarial assumptions in the third quarter of 2012.

The Company recognized a tax expense of $23.6 million for the nine months ended September 30, 2012 compared with a $16.8 million income tax benefit for the nine months ended September 30, 2011. The current period income tax expense includes $30.1 million of estimated current taxes offset by a benefit of $6.5 million related to the exception to intraperiod allocation rules in accordance with ASC 740-20, Accounting for Income Taxes – Intraperiod Tax Allocation.

Debt Securities

We invest in a variety of debt securities. We classify these investments into various sectors using industry conventions; however, our classifications may differ from similarly titled classifications of other companies. We classify debt securities into investment grade and below-investment-grade securities based on ratings prescribed by the National Association of Insurance Commissioners (“NAIC”). In a majority of cases, these classifications will coincide with ratings assigned by one or more Nationally Recognized Statistical Rating Organizations (“NRSROs”); however, for certain structured securities, the NAIC designations may differ from NRSRO designations based on the amortized cost of the securities in our portfolio.

Our debt securities portfolio consists primarily of investment grade publicly traded and privately placed corporate bonds, residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and other asset-backed securities As of September 30, 2012, our debt securities, with a fair value of $2,966.2 million, represented 90.9% of total investments.

Debt Securities by Type and Credit Quality:	As of September 30, 2012
($ in millions)	Investment Grade				Below Investment Grade
	Fair Value		Cost		Fair Value		Cost
U.S. government and agency	$	172.9	$	168.2	$	—	$	—
State and political subdivision		107.4		97.4		1.0		1.3
Foreign government		43.2		38.1		7.7		6.3
Corporate		1,644.2		1,517.7		76.0		87.6
CMBS		266.0		240.4		3.5		4.6
RMBS		417.1		403.6		34.7		39.2
CDO/CLO		34.0		35.8		24.9		27.7
Other asset-backed		125.1		120.1		8.5		14.5
Total debt securities	$	2,809.9	$	2,621.3	$	156.3	$	181.2
Percentage of total debt securities		94.7%		93.5%		5.3%		6.5%

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 emphasizes a high level of industry diversification. The top five industry holdings as of September 30, 2012 in our debt securities portfolio are electric utilities (5.5%), banking (5.3%), diversified financial services (4.1%), oil (3.7%) and insurance (3.3%).

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Eurozone Exposure

The following table presents exposure to European debt. We have focused on the countries experiencing significant economic, fiscal or political strain that could increase the likelihood of default.

Fair Value of Eurozone Exposure by Country:	As of September 30, 2012
($ in millions)	Sovereign		Financial		All				% of Debt
	Debt		Institutions		Other		Total		Securities
Spain	$	—	$	1.0	$	8.7	$	9.7		0.3	%
Italy		—		—		2.2		2.2		0.1	%
Total		—		1.0		10.9		11.9		0.4	%
All other Eurozone (1)		—		9.5		66.3		75.8		2.6	%
Total	$	—	$	10.5	$	77.2	$	87.7		3.0	%

———————

(1) Includes Finland, France, Germany, Luxembourg and Netherlands.

Residential Mortgage-Backed Securities

We invest directly in RMBS. To the extent these assets deteriorate in credit quality and decline in value for an extended period, we may realize impairment losses. When making investment decisions, we have been focused on identifying those securities that could withstand significant increases in delinquencies and foreclosures in the underlying mortgage pools before incurring a loss of principal.

Most of our RMBS portfolio is highly rated. At September 30, 2012, 92.6% of the total residential portfolio was rated investment grade. We hold $100.6 million of RMBS investments backed by prime rated mortgages, $106.3 million backed by Alt-A mortgages and $47.2 million backed by sub-prime mortgages, which combined amount to 7.5% of our total investments. The majority of our prime, Alt-A, and sub-prime exposure is investment grade, with 66% rated NAIC-1 and 20% rated NAIC-2. 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. 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. RMBS impairments as of September 30, 2012 totaled $2.1 million. These impairments consist of $0.5 million from prime, $0.7 million from Alt-A and $0.9 million from sub-prime securities.

Residential Mortgage-Backed Securities:
($ in millions)	As of September 30, 2012
										NAIC Rating
											1			2			3		4			5			6
										AAA/											CCC			In or
	Amortized			Market			% General			AA/											And			Near
	Cost (1)			Value(1)			Account (2)				A		BBB			BB			B		Below			Default
Collateral
Agency		$	206.7		$	220.0		6.5	%		100.0	%		0.0	%		0.0	%	0.0	%		0.0	%		0.0	%
Prime			99.1			100.6		3.0	%		74.0	%		19.8	%		5.8	%	0.0	%		0.0	%		0.4	%
Alt-A			106.8			106.3		3.1	%		57.9	%		25.9	%		13.8	%	2.4	%		0.0	%		0.0	%
Sub-prime			52.6			47.2		1.4	%		68.9	%		6.7	%		13.3	%	4.3	%		5.6	%		1.2	%
Total		$	465.2		$	474.1		14.0	%		81.9	%		10.7	%		5.6	%	1.0	%		0.6	%		0.2	%

———————

(1) Individual categories may not agree with the Debt Securities by Type table on previous page due to nature of underlying collateral. In addition, RMBS holdings in this exhibit include $22.4M classified as fair value investments on the balance sheet.  For these fair value investments, there is no impact to OCI as carrying value is equal to market value.

(2) Percentages based on market value.

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Prime Mortgage-Backed Securities:
($ in millions)		As of September 30, 2012
											Year of Issue
Rating	S&P Equivalent Designation	Amortized Cost			Market Value			% General Account (1)			Post- 2007			2007			2006			2005			2004			2003 and Prior
NAIC-1	AAA/AA/A		$	73.3		$	74.5		2.2	%		0.0	%		1.2	%		6.3	%		22.3	%		44.2	%		26.0	%
NAIC-2	BBB			19.4			19.9		0.6	%		0.0	%		0.0	%		1.2	%		70.0	%		28.8	%		0.0	%
NAIC-3	BB			5.7			5.8		0.2	%		0.0	%		0.0	%		32.8	%		23.1	%		35.7	%		8.4	%
NAIC-4	B			—			—		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%
NAIC-5	CCC and below			—			—		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%
NAIC-6	In or near default			0.7			0.4		0.0	%		0.0	%		0.0	%		0.0	%		23.3	%		4.5	%		72.2	%
Total			$	99.1		$	100.6		3.0	%		0.0	%		0.9	%		6.8	%		31.8	%		40.4	%		20.1	%

———————

(1) Percentages based on market value

Alt-A Mortgage-Backed Securities:
($ in millions)		As of September 30, 2012
											Year of Issue
Rating	S&P Equivalent Designation	Amortized Cost			Market Value			% General Account (1)			Post- 2007			2007			2006			2005			2004			2003 and Prior
NAIC-1	AAA/AA/A		$	62.6		$	61.6		1.8	%		6.0	%		4.9	%		11.6	%		28.8	%		24.9	%		23.8	%
NAIC-2	BBB			27.5			27.4		0.8	%		0.0	%		0.0	%		0.0	%		31.7	%		56.9	%		11.4	%
NAIC-3	BB			14.3			14.7		0.4	%		0.0	%		0.0	%		0.0	%		0.0	%		79.8	%		20.2	%
NAIC-4	B			2.4			2.6		0.1	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%
NAIC-5	CCC and below			—			—		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%
NAIC-6	In or near default			—			—		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%
Total			$	106.8		$	106.3		3.1	%		3.5	%		2.8	%		6.7	%		24.9	%		40.2	%		21.9	%

———————

(1) Percentages based on market value.

Sub-Prime Mortgage-Backed Securities:
($ in millions)		As of September 30, 2012
											Year of Issue
Rating	S&P Equivalent Designation	Amortized Cost			Market Value			% General Account (1)			Post- 2007			2007			2006			2005			2004			2003 and Prior
NAIC-1	AAA/AA/A		$	33.0		$	32.5		0.9	%		0.0	%		7.2	%		14.9	%		23.9	%		14.7	%		39.3	%
NAIC-2	BBB			3.2			3.2		0.1	%		0.0	%		25.3	%		0.0	%		69.4	%		0.0	%		5.3	%
NAIC-3	BB			9.4			6.3		0.2	%		0.0	%		92.6	%		7.4	%		0.0	%		0.0	%		0.0	%
NAIC-4	B			2.5			2.0		0.1	%		0.0	%		0.0	%		0.0	%		50.4	%		0.0	%		49.6	%
NAIC-5	CCC and below			2.9			2.6		0.1	%		0.0	%		0.0	%		0.0	%		100.0	%		0.0	%		0.0	%
NAIC-6	In or near default			1.6			0.6		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		100.0	%
Total			$	52.6		$	47.2		1.4	%		0.0	%		19.0	%		11.3	%		28.9	%		10.1	%		30.7	%

———————

(1) Percentages based on market value.

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Commercial Mortgage-Backed Securities

We invest directly in CMBS. To the extent these assets deteriorate in credit quality and decline in value for an extended period, we may realize impairment losses. When making investment decisions, we have been focused on identifying those securities that could withstand significant increases in delinquencies and foreclosures in the underlying mortgage pools before incurring a loss of principal.

Commercial Mortgage-Backed Securities:
($ in millions)		As of September 30, 2012
											Year of Issue
	S&P Equivalent	Amortized			Market			% General			Post-												2004 and
Rating	Designation	Cost (1)			Value(1)			Account (2)			2007			2007			2006			2005			Prior
NAIC-1	AAA/AA/A		$	247.1		$	272.8		8.1	%		53.0	%		8.4	%		15.7	%		12.3	%		10.6	%
NAIC-2	BBB			3.4			3.1		0.1	%		0.0	%		0.0	%		86.6	%		13.4	%		0.0	%
NAIC-3	BB			3.6			3.2		0.1	%		0.0	%		51.5	%		48.5	%		0.0	%		0.0	%
NAIC-4	B			—			—		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%
NAIC-5	CCC and below			1.8			1.3		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		100.0	%
NAIC-6	In or near default			0.9			0.3		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		100.0	%
Total			$	256.8		$	280.7		8.3	%		51.6	%		8.7	%		16.8	%		12.1	%		10.8	%

———————

(1) Includes commercial mortgage-backed CDOs with amortized cost and market values of $2.3 million and $1.7 million, respectively.  CMBS holdings in this exhibit include $9.5 million classified as fair value investments on the balance sheet. For these fair value investments, there is no impact to OCI as carrying value is equal to market value.

(2) 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 OTTI 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 and Types of	Three Months Ended						Nine Months Ended
Net Realized Investment Gains (Losses):	September 30,						September 30,
($ in millions)	2012			2011			2012			2011
				As restated and amended						As restated and amended
Total other-than temporary debt impairment losses	$	(0.7	)	$	(4.7	)	$	(4.4	)	$	(7.0	)
Portion of loss recognized in OCI		(0.3	)		3.7			1.8			4.7
Net debt impairment losses recognized in earnings	$	(1.0	)	$	(1.0	)	$	(2.6	)	$	(2.3	)
Debt security impairments:
U.S. government and agency	$	—		$	—		$	—		$	—
State and political subdivision		—			—			—			—
Foreign government		—			—			—			—
Corporate		—			(0.2	)		—			(0.4	)
CMBS		—			—			(0.1	)		—
RMBS		(0.8	)		(0.8	)		(2.1	)		(1.8	)
CDO/CLO		(0.1	)		—			(0.1	)		—
Other asset-backed		(0.1	)		—			(0.3	)		(0.1	)
Net debt security impairments		(1.0	)		(1.0	)		(2.6	)		(2.3	)
Limited partnerships and other investment impairments		—			—			—			—
Impairment losses		(1.0	)		(1.0	)		(2.6	)		(2.3	)
Debt security transaction gains		20.8			0.2			21.4			2.4
Debt security transaction losses		(0.1	)		—			(0.2	)		(0.6	)
Limited partnerships and other investment transaction gains		—			—			—			0.1
Limited partnerships and other investment transaction losses		(0.3	)		—			(0.4	)		—
Net transaction gains		20.4			0.2			20.8			1.9
Derivative instruments		(18.0	)		34.8			(33.5	)		23.2
Embedded derivatives(1)		6.6			(48.3	)		6.1			(41.0	)
Related party reinsurance derivatives		(4.2	)		10.1			(3.5	)		10.1
Net realized investment gains (losses), excluding impairment losses	$	4.8		$	(3.2	)	$	(10.1	)	$	(5.8	)
Net realized investment gains (losses), including impairment losses	$	3.8		$	(4.2	)	$	(12.7	)	$	(8.1	)

———————

(1)   Includes the change in fair value of embedded derivatives associated with variable annuity GMWB, GMAB and COMBO riders. See Note 8 “Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives” to our financial statements contained herein for additional disclosures.

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Other-than-Temporary Impairments

Management assessed all securities in an unrealized loss position in determining whether impairments were temporary or other-than-temporary. In reaching its conclusions, management exercised significant judgment and used a number of issuer-specific quantitative indicators and qualitative judgments to assess the probability of receiving a given security’s contractual cash flows. This included the issue’s implied yield to maturity, cumulative default rate based on rating, comparisons of issue-specific spreads to industry or sector spreads, specific trading activity in the issue and other market data such as recent debt tenders and upcoming refinancing requirements. Management also reviewed fundamentals such as issuer credit and liquidity metrics, business outlook and industry conditions. Management maintains a watch list of securities that is reviewed for impairments. Each security on the watch list was evaluated, analyzed and discussed, with the positive and negative factors weighed in the ultimate determination of whether or not the security was other-than-temporarily impaired. For securities for which no OTTI was ultimately indicated at September 30, 2012, management does not have the intention to sell, nor does it expect to be required to sell, these securities prior to their recovery.

Fixed income OTTIs recorded in the first nine months of 2012 were primarily concentrated in structured securities. These impairments were driven primarily by increased collateral default rates. In our judgment, these credit events or other adverse conditions of the issuers have caused, or will most likely lead to, a deficiency in the contractual cash flows related to the investment. Therefore, based upon these credit events, we have determined that OTTIs exist. Total debt impairments recognized through earnings related to such credit-related circumstances were $1.0 million for the third quarter of 2012 and $1.0 million for the third quarter of 2011 and $2.6 million for the first nine months of 2012 and $2.3 million for the first nine months of 2011. There were no limited partnership and other investment OTTIs for the three and nine months ended September 30, 2012 and 2011.

In addition to these credit-related impairments recognized through earnings, we impaired securities to fair value through other comprehensive loss for any impairments related to non-credit related factors. These types of impairments were driven primarily by market or sector credit spread widening or by a lack of liquidity in the securities. The amount of impairments recognized as an adjustment to other comprehensive loss due to these factors was $(0.3) million for the third quarter of 2012 and $3.7 million for the third quarter of 2011 and $1.8 million for the first nine months of 2012 and $4.7 million for the first nine months of 2011.

The following table presents a roll-forward of pre-tax credit losses recognized in earnings related to debt securities for which a portion of the OTTI was recognized in OCI.

Credit Losses Recognized in Earnings on Debt Securities for	Three Months Ended						Nine Months Ended
which a Portion of the OTTI Loss was Recognized in OCI:	September 30,						September 30,
($ in millions)	2012			2011			2012			2011
				As restated and amended						As restated and amended
Balance, beginning of period	$	(20.0	)	$	(20.0	)	$	(21.3	)	$	(19.9	)
Add: Credit losses on securities not previously impaired (1)		(0.2	)		—			(0.5	)		(0.5	)
Add: Credit losses on securities previously impaired (1)		(0.4	)		(0.7	)		(1.4	)		(0.8	)
Less: Credit losses on securities impaired due to intent to sell		—			—			—			—
Less: Credit losses on securities sold		1.0			0.3			3.6			0.8
Less: Increases in cash flows expected on     previously impaired securities		—			—			—			—
Balance, end of period	$	(19.6	)	$	(20.4	)	$	(19.6	)	$	(20.4	)

———————

(1) Additional credit losses on securities for which a portion of the OTTI loss was recognized in AOCI are included within net OTTI losses recognized in earnings on the statements of comprehensive income.

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Unrealized Gains and Losses

Net unrealized investment gains and losses on securities classified as available-for-sale and certain other assets are included in our balance sheets as a component of AOCI. The table below presents the special category of AOCI for debt securities that are other-than-temporarily impaired when the impairment loss has been split between the credit loss component (in earnings) and the non-credit component (separate category of AOCI).

Fixed Maturity Non-Credit OTTI Losses in AOCI, by Security Type:	Sept 30,			Dec 31,
($ in millions)	2012 (1)			2011 (1)
				As restated and amended
U.S. government and agency	$	—		$	—
State and political subdivision		—			—
Foreign government		—			—
Corporate		(1.5	)		(1.5	)
CMBS		(0.6	)		(5.1	)
RMBS		(24.1	)		(21.6	)
CDO/CLO		(6.8	)		(8.4	)
Other asset-backed		1.2			0.7
Total fixed maturity non-credit OTTI losses in AOCI	$	(31.8	)	$	(35.9	)

———————

(1) Represents the amount of non-credit OTTI losses recognized in AOCI excluding net unrealized gains or losses subsequent to the date of impairment.

The following tables present certain information with respect to our gross unrealized gains and losses related to our investments in debt securities as of September 30, 2012. Applicable deferred policy acquisition costs and deferred income taxes further reduce the effect of unrealized gains and losses on our comprehensive income.

Duration of Gross Unrealized Losses on Securities:	As of September 30, 2012
($ in millions)					0 – 6			6 – 12		Over 12
	Total			Months			Months			Months
Debt securities
Total fair value	$	286.7		$	61.2		$	14.4		$	211.1
Total amortized cost		338.7			62.0			15.7			261.0
Unrealized losses	$	(52.0	)	$	(0.8	)	$	(1.3	)	$	(49.9	)
Number of securities		128			19			5			104
Investment grade:
Unrealized losses	$	(21.5	)	$	(0.5	)	$	(0.1	)	$	(20.9	)
Below investment grade:
Unrealized losses	$	(30.5	)	$	(0.3	)	$	(1.2	)	$	(29.0	)

For debt securities with gross unrealized losses, 41% of the unrealized losses after offsets pertain to investment grade securities and 59% of the unrealized losses after offsets pertain to below-investment-grade securities at September 30, 2012.

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 Securities:	As of September 30, 2012
($ in millions)					0 – 6			6 – 12		Over 12
	Total			Months			Months			Months
Debt securities
Unrealized losses over 20% of cost	$	(38.6	)	$	(0.4	)	$	(2.0	)	$	(36.2	)
Number of securities		27			1			2			24
Investment grade:
Unrealized losses over 20% of cost	$	(13.7	)	$	(0.4	)	$	(1.7	)	$	(11.6	)
Below investment grade:
Unrealized losses over 20% of cost	$	(24.9	)	$	—		$	(0.3	)	$	(24.6	)

Liquidity and Capital Resources

In the normal course of business, we enter into transactions involving various types of financial instruments such as debt securities. These instruments have credit risk and also may be subject to risk of loss due to interest rate and market fluctuations.

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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, investing 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 investing activities result from repayments of principal, proceeds from maturities, sales of invested assets and investment income.

The primary liquidity risks regarding cash inflows from our investing 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.

Ratings

Rating agencies assign financial strength ratings to Phoenix Life and its subsidiaries based on their opinions of the Companies’ ability to meet their financial obligations. A downgrade or withdrawal of any of our credit ratings could negatively impact our liquidity. For additional information regarding certain risks associated with our credit ratings, please see the risk factors under “Risks Related to the Restatement, Failure to File Timely Periodic Reports with the SEC and our Internal Control Over Financial Reporting.” contained in “Item 1A: Risk Factors” in Part I of the 2012 Form 10-K.

On August 28, 2013, A.M. Best Company, Inc. downgraded our financial strength rating from B+ to B.  The rating was also removed from under review with negative implications and assigned a stable outlook. On April 9, 2013, A.M. Best Company, Inc. maintained their under review with negative implications outlook on our financial strength rating of B+. On December 7, 2012, A.M. Best Company, Inc. placed our B+ financial strength rating under review with negative implications. On January 13, 2012, A.M. Best Company, Inc. affirmed our financial strength rating of B+. They changed their outlook from stable to positive. On February 8, 2011, A.M. Best Company, Inc. affirmed our financial strength rating of B+ and changed their outlook from negative to stable. On February 8, 2011, A.M. Best Company, Inc. affirmed our financial strength rating of B+ and changed their outlook from negative to stable.

On January 14, 2014, Moody’s Investor Services withdrew all ratings of The Phoenix Companies, Inc. including the Ba2 financial strength rating of the company's life insurance subsidiaries and the B1 debt rating of Phoenix Life's surplus notes. On September 25, 2013, Moody’s Investor Services maintained the review for downgrade for our Ba2 financial strength rating. On June 21, 2013, Moody’s Investor Services maintained the review for downgrade for our Ba2 financial strength rating. On March 20, 2013, Moody’s Investor Services maintained the review for downgrade for our financial strength rating of Ba2.  On December 12, 2012, Moody’s Investor Services placed our financial strength rating of Ba2 under review for downgrade. On December 16, 2011, Moody’s Investor Services affirmed our financial strength rating of Ba2 and changed their outlook from stable to positive.

On May 22, 2013, Standard & Poor’s affirmed our financial strength rating of BB-. All ratings were removed from CreditWatch with Negative Implications and placed on negative outlook. On March 8, 2013, Standard & Poor’s placed our financial strength rating of BB- on CreditWatch Negative. On January 16, 2013, Standard & Poor’s affirmed our financial strength rating of BB-. They also removed the ratings from CreditWatch Negative and returned the outlook to stable. On December 7, 2012, Standard & Poor’s affirmed our financial strength rating of BB- and placed it on CreditWatch Negative. On April 5, 2012, Standard & Poor’s affirmed our financial strength rating of BB- and maintained their stable outlook on our rating. On March 24, 2011, Standard & Poor’s affirmed our financial strength rating of BB- and changed their outlook from negative to stable.

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The financial strength ratings as of April 22, 2014 were as follows:

	Financial Strength Ratings of
Rating Agency	Phoenix Life and PHL Variable Life	Outlook
A.M. Best Company, Inc.	B	Stable
Standard & Poor’s	BB-	Negative

Reference in this report to any credit rating is intended for the limited purposes of discussing or referring to changes in our credit ratings or aspects of our liquidity or costs of funds. Such reference cannot be relied on for any other purposes, or used to make any inference concerning future performance, future liquidity or any future credit rating.

Contractual Obligations and Commercial Commitments

As of September 30, 2012, there were no significant changes to our outstanding contractual obligations and commercial commitments as disclosed in our 2012 Form 10-K.

Obligations Related to Pension and Postretirement Employee Benefit Plans

Our ultimate parent company provides employees with post-employment benefits that include retirement benefits, through pension and savings plans, and other benefits, including health care and life insurance. This includes three defined benefit pension plans. We incur applicable employee benefit expenses through the process of cost allocation by PNX.

The employee pension plan, covering substantially all employees, provides benefits up to the amount allowed under the Internal Revenue Code. The two supplemental plans provide benefits in excess of the primary plan. Retirement benefits under the plans are a function of years of service and compensation. The employee pension plan is funded with assets held in a trust, while the supplemental plans are unfunded. Effective March 31, 2010, all benefit accruals under our funded and unfunded defined benefit plans were frozen.

Employee benefit expense allocated to us for these benefits totaled $1.0 million and $1.3 million for the three months ended September 30, 2012 and 2011, respectively. Employee benefit expense allocated to us for these benefits totaled $3.1 million and $3.0 million for the nine months ended September 30, 2012 and 2011, respectively. Phoenix Life made contributions to the pension plans in the first quarter, second quarter and third quarter of 2012, of which $1.1 million, $1.2 million and $3.8 million has been allocated to us. By December 31, 2012, Phoenix Life does not expect to make any additional contributions to the pension plans by December 31, 2012. However, on July 6, 2012, the Surface Transportation Extension Act of 2012, Part II, was enacted into law and is effective immediately. The law includes certain pension funding stabilization provisions. Phoenix Life is currently evaluating its impact.

Off-Balance Sheet Arrangements

As of September 30, 2012 and December 31, 2011, 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 use reinsurance agreements to limit potential losses, reduce exposure to larger risks and provide capital relief with regard to certain reserves. We remain liable to the extent that reinsuring companies may not be able to meet their obligations under reinsurance agreements in effect. Failure of the reinsurers to honor their obligations could result in losses to the Company. Since we bear the risk of nonpayment, on a quarterly basis we evaluate the financial condition of our reinsurers and monitor concentrations of credit risk. Based on our review of their financial statements, reputation in the reinsurance marketplace and other relevant information, we believe that we have no material exposure to uncollectible life reinsurance. As such, no allowance has been established. At September 30, 2012, five major reinsurance companies account for approximately 74% of the reinsurance recoverable.

Statutory Capital and Surplus

Our statutory basis capital and surplus (including asset valuation reserve (“AVR”)) increased from $320.1 million at December 31, 2011 to $398.8 million at September 30, 2012. The principal factors resulting in this increase were net income of $102.1 million offset by realized capital losses of $14.0 million and unrealized capital losses of $11.2 million.

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Enterprise Risk Management

Our ultimate parent company, PNX, has an enterprise-wide risk management program under which PHL Variable operations are covered. We have an enterprise-wide risk management program. Our Chief Risk Officer reports to the Chief Executive Officer and monitors our risk management activities. The Chief Risk Officer provides regular reports to the Board without the presence of other members of management. Our risk management governance consists of several management committees to oversee and address issues pertaining to all our major risks—operational, market and product—as well as capital management. In all cases, these committees include one or more of our Chief Executive Officer, Chief Financial Officer, Chief Investment Officer and Chief Risk Officer.

See our 2012 Form 10-K for more information regarding enterprise risk management.

Item 3.             QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information about our management of market risk, see the Enterprise Risk Management section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2012 Form 10-K. There were no material changes in our market risk exposure at September 30, 2012 compared with December 31, 2011.

Item 4.             CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed, in the reports the Company files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company's management, including its President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In connection with the preparation of this Quarterly Report on Form 10-Q, the Company carried out an evaluation under the supervision of and with the participation of the Company’s management, including the President and Chief Financial Officer, as of September 30, 2012, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon this evaluation, the President and Chief Financial Officer concluded that as of September 30, 2012 the Company’s disclosure controls and procedures were not effective because of the material weaknesses in internal control over financial reporting described in Part II, Item 9A of the 2012 Form 10-K. As disclosed in the 2012 Form 10-K, the President and Chief Financial Officer previously concluded that, as of December 31, 2012, the Company’s disclosure controls and procedures were not effective because of the material weaknesses in internal control over financial reporting described in Part II, Item 9A of the 2012 Form 10-K. Management has concluded that the material weaknesses that were present at December 31, 2012 were also present at September 30, 2012. These material weaknesses included deficiencies in the period-end financial reporting process which includes the timely preparation and filing of the Company’s interim financial statements.

To address these material weaknesses, management performed additional analyses and other procedures (as further described under the subheading “Management’s Remediation Initiatives” in the 2012 Form 10-K) to ensure that the Company’s financial statements were prepared in accordance with U.S. GAAP. Accordingly, the Company’s management believes that the financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows for the periods presented and that this Quarterly Report on Form 10-Q does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report.

Previously Identified Material Weaknesses

As previously disclosed in the 2012 Form 10-K, management concluded that, as of December 31, 2012, the Company’s internal control over financial reporting was not effective based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. For a discussion of the material weaknesses in internal control over financial reporting, please see Part II, Item 9A of the 2012 Form 10-K.

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Remediation Status

As disclosed in the 2012 Form 10-K, to remediate the material weaknesses referenced above, the Company has implemented or plans to implement the remediation initiatives described in Part II, Item 9A of the 2012 Form 10-K and will continue to evaluate the remediation and may in the future implement additional measures.

Changes in Internal Control Over Financial Reporting

There were no material changes to the Company’s internal control over financial reporting during the third quarter of 2012.

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PART II. OTHER INFORMATION

Item 1.             Legal Proceedings

The Company is regularly involved in litigation and arbitration, both as a defendant and as a plaintiff. The litigation and arbitration naming the Company as a defendant ordinarily involves our activities as an insurer, employer, investor, investment advisor or taxpayer.

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. It is believed that the outcome of our litigation and arbitration matters are not likely, either individually or in the aggregate, to have a material adverse effect on the financial condition of the Company. 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 the results of operations or cash flows in particular quarterly or annual periods.

For a discussion of legal proceedings as of September 30, 2012, see Item 3, “Legal Proceedings” in Part I, Item 3 of our 2012 Form 10-K.

See Item 1A, “Risk Factors” in Part I, Item 1A of our 2012 Form 10-K and Note 13 to our financial statements in this Form 10-Q for additional information.

Item 1A.            Risk Factors

The Company is subject to risks and uncertainties, any of which could have a significant or material adverse effect on our business, financial condition, liquidity or financial statements. You should carefully consider the risk factors disclosed in Part I, Item 1A of our 2012 Form 10-K. The risks described herein and therein are not the only ones we face. This information should be considered carefully together with the other information contained in this report and the other reports and materials the Company files with the SEC.

As of September 30, 2012, there were no material changes to the Company’s risk factors disclosed in Part I, Item 1A of our 2012 Form 10-K.

Item 2.         Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable.

(b) Not applicable.

(c) Not applicable.

Item 3.       Defaults Upon Senior Securities

Not applicable.

Item 4.       Mine Safety Disclosures

Not applicable.

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Item 5.   Other Information

(a)      Not applicable.

(b)      No material changes.

Item 6.  Exhibits

Exhibit
31.1	Certification of James D. Wehr, President, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Bonnie J. Malley, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification by James D. Wehr, President and Bonnie J. Malley, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

We will furnish any exhibit upon the payment of a reasonable fee, which fee shall be limited to our reasonable expenses in furnishing such exhibit. Requests for copies should be directed to: Corporate Secretary, PHL Variable Insurance Company, One American Row, P.O. Box 5056, Hartford, Connecticut 06102-5056.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PHL VARIABLE INSURANCE COMPANY

(Registrant

Dated: April 30, 2014	By:	/s/ Bonnie J. Malley
	Bonnie J. Malley
	Executive Vice President and Chief Financial Officer (Principal Financial Officer)

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