10-K 1 pnx-20151231x10k.htm 10-K 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

OR
o
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 001-16517
THE PHOENIX COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
06-1599088
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
One American Row, Hartford, Connecticut
06102-5056
(Address of principal executive offices)
(Zip Code)
(860) 403-5000
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common stock, $.01 par value
New York Stock Exchange
7.45% Quarterly Interest Bonds, due 2032
New York Stock Exchange
 
 
Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   YES o    NO þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   YES o    NO þ

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 12 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 þ    NO o

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 þ    NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Annual Report on Form 10-K or any amendment to this Annual Report on Form 10-K.  o

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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o
Smaller reporting company o
 
 
(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 Exchange Act).   YES o    NO þ

As of June 30, 2015, the aggregate market value of voting common equity held by non-affiliates of the registrant was approximately $0.1 billion based on the last reported sale price of $18.24 per share of the common stock on the New York Stock Exchange on that date. On March 11, 2016, the registrant had 5.8 million shares of common stock outstanding; it had no non-voting common equity.




THE PHOENIX COMPANIES, INC.
Annual Report on Form 10-K
For the year ended December 31, 2015

TABLE OF CONTENTS

Part I
 
Page
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
Part II
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
Part III
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
Part IV
 
 
 
 
 
Item 15.
 
 
 
 

2

PART I

Item 1.    Business

Overview

The Phoenix Companies, Inc. (“we,” “our,” “us,” the “Company,” “PNX” or “Phoenix”) is a holding company incorporated in Delaware. Our operating subsidiaries provide life insurance and annuity products through independent agents and financial advisors. Our principal insurance company subsidiaries are Phoenix Life Insurance Company (“Phoenix Life”), domiciled in New York, and PHL Variable Insurance Company (“PHL Variable”), domiciled in Connecticut. Collectively with Phoenix Life and Annuity Company (“PLAC”) and American Phoenix Life and Reassurance Company (“APLAR”), both domiciled in Connecticut, they are our “Life Companies.” 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 (whole life, 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. As of December 31, 2015, we had $91.5 billion of gross life insurance in force and $5.6 billion of annuity funds under management.

On September 29, 2015, the Company announced the signing of a definitive agreement in which Nassau Reinsurance Group Holdings L.P. (“Nassau”) has agreed to acquire the Company for $37.50 per share in cash, representing an aggregate purchase price of $217.2 million. Founded in April 2015, Nassau is a privately held insurance and reinsurance business focused on acquiring and operating entities in the life, annuity and long-term care sectors. On December 17, 2015 the merger was approved by Phoenix shareholders. The transaction remains subject to regulatory approvals and the satisfaction of other closing conditions. After completion of the transaction, Nassau will contribute $100 million in new equity capital into the Company. After completion of the transaction, Phoenix will be a privately held, wholly-owned subsidiary of Nassau.

In 2015, 97% of Phoenix product sales, as defined by total annuity deposits and total life premium, were annuities, and 96% of those sales were fixed indexed annuities. In addition, we have expanded sales of other insurance companies’ policies through our distribution subsidiary, Saybrus Partners, Inc. (“Saybrus”).

We operate two businesses segments: Life and Annuity and Saybrus. The Life and Annuity segment includes individual life insurance and annuity products, including our closed block. Saybrus 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.

Target Market

Our current target market consists of middle market and mass affluent families and individuals planning for or living in retirement. This market has a variety of financial planning needs, such as tax-deferred savings, safety of principal, guaranteed income during retirement, income replacement and death benefits. Our target customer is age 50 or older with investable assets of $500,000 or less. Historically, our marketing strategies focused on high-net-worth and affluent households with sophisticated estate planning and other financial needs, and the majority of our life insurance and annuities in force reflects this market focus.

Competition

We operate in a highly competitive industry. While there is no single company that we identify as a dominant competitor in our business, many of our competitors are substantially larger, have better financial strength ratings, more financial resources and greater marketing and distribution capabilities. Our products compete with similar products sold by other insurance companies and also with savings and investment products offered by banks, asset managers and broker-dealers.

We believe our competitive strengths include product features, underwriting and mortality risk management expertise, partnering capabilities and value-added support provided to our distributors. Our ability to compete is based on these as well as other factors, including investment performance, service, price, distribution capabilities, scale, commission structure, brand recognition and financial strength ratings.


3

Major Products

Annuities

Fixed Indexed Annuities: This product provides single premium deferred annuities that offer a fixed interest account and a variety of indexed accounts. Indexed accounts allow contract owners to earn index credits based on the performance of specific equity market or other price indices. Our major source of revenue on these contracts is the excess of investment income earned over interest and index credits, if any. Most contracts allow contract owners to change accounts once a year. One of the most popular indexed accounts credits the contract owners’ accounts with a return equal to the annual appreciation of the S&P 500 index, subject to a specified cap. Caps are changed regularly to reflect current market conditions; for new contracts sold during 2015, caps on the S&P 500 annual point-to-point account ranged from 1.75% to 4.00%. Certain contracts also provide “premium bonuses,” which we contribute to contract owner account balances at issue and which also earn interest or index credits. Approximately 20% of indexed annuity deposits in 2015 included premium bonuses ranging from 4% to 15% of the initial deposit.

Contract owners also may elect a guaranteed minimum withdrawal benefit (“GMWB”), which for a separate fee provides a guaranteed income stream for the lifetime of the contract owners. The amount of income available is based on a separate “benefit base” that increases at a guaranteed rate established when the contract is sold and that is independent of the growth of the account balance. Withdrawals may begin immediately or after several years. Once a contract owner elects to receive income, withdrawals are first made from the account balance. If and when the balance is depleted, we continue to make the guaranteed income payments. In 2015, approximately 93% of all indexed annuity contracts sold included a GMWB. Certain annuities with a GMWB also include an enhanced withdrawal benefit (“EWB”) that allows for an additional amount of guaranteed income if certain qualifying conditions are met (confinement to a nursing care facility and/or inability to perform activities of daily living). In 2015, approximately 24% of all indexed annuity contracts sold included an EWB. Certain fixed indexed annuities include a guaranteed minimum death benefit (“GMDB”), pursuant to which beneficiaries receive an amount in excess of contract value if the annuitant dies in exchange for an additional fee. In 2015, approximately 25% of all indexed annuity contracts sold included a GMDB.

Fixed Annuities: This product meets the needs of clients who want a guaranteed rate of return over a specified period. The contract owner receives a guaranteed rate of return over the initial interest rate guarantee period and has the option to elect a new guarantee period at the end of the initial term, at then-current rates, subject to certain minimums.

Single Premium Immediate Annuities: This product provides guaranteed income beginning immediately, including one product that is designed for use in elder-care planning in conjunction with government benefits.

Variable Annuities: This product allows contract owners to direct deposits into a variety of separate investment accounts (accounts that are maintained separately from the other assets of the Life Companies) or into the general accounts of the Life Companies. Deposits allocated to the general account earn interest at a specified rate of return determined by us, subject to certain minimums. In the separate investment accounts, the contract owner bears the risk of investment results. We credit to the separate investment accounts the return on the underlying investments in the separate account specified net of specified fees and charges.

We collect fees for the management of these various investment accounts and assess charges against these accounts for the administrative services we provide. Our major sources of revenue from variable annuities are mortality and expense fees charged to the contract owner, generally determined as a percentage of the market value of any underlying separate account balances and a portion of the fees we collect for the management of the various investment accounts.

Many of our variable annuities include guaranteed minimum death (“GMDB”), accumulation (“GMAB”), withdrawal (“GMWB”) and income (“GMIB”) benefits.

Life Insurance
Whole Life: This product provides permanent insurance coverage and tax-deferred savings in return for predetermined premium payments. Premiums are invested in our general account. For whole life policies in our closed block (see Note 4 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K), policies typically provide a participation feature in the form of dividends. Policyholders may receive dividends in cash or apply them to increase death benefits, provide for paid-up additional insurance or reduce the premiums required.

4

Universal Life: This product provides permanent insurance coverage with a tax deferred savings element. It allows the policyholder to adjust the frequency and amount of premium payments subject to certain limitations. Premiums, net of cost of insurance charges and administrative expenses, are invested in our general account and are credited interest at rates determined by us, subject to certain minimums. We retain the right, within limits, to adjust the fees we assess for providing administrative services and the rate we charge for the cost of insurance; these may be adjusted by us, but may not exceed guaranteed contractual limits. Some universal life products provide secondary guarantees that protect the policy’s death benefit even if there is insufficient value in the policy to pay the monthly deduction.

Indexed Universal Life: This product is a type of universal life where premiums may be allocated to a fixed interest account and/or a variety of indexed accounts that allow policyholders to earn index credits based on the performance of specific equity market or other price indices.

Variable Universal Life: This product is similar to universal life, except that premiums may be directed into a variety of separate investment accounts (accounts that are maintained separately from the other assets of the Life Companies) or into the general accounts of the Life Companies. In separate investment accounts, the policyholder bears the entire risk of the investment results. We collect fees for the management of these various investment accounts and the net return is credited directly to the policyholder’s accounts. Account balances invested in the general account earn interest at rates determined by us, subject to certain minimums. Specific charges are made against the accounts for administrative expenses and cost of insurance charges. We retain the right, within limits, to adjust the fees we assess for providing administrative services and the rate we charge for the cost of insurance; these may be adjusted by us, but may not exceed guaranteed contractual limits. With some variable universal products, maintaining a certain premium level provides the policyholder with guarantees that protect the policy’s death benefit if, due to adverse investment experience, the policyholder’s account balance is zero.

Variable annuities, a limited number of fixed annuities and variable life products offered by the life insurance subsidiaries of the Company are registered under the federal securities laws. The Company does not offer these products to new customers. Existing customers with existing contracts are able to continue to invest in these products and change investment elections, but certain investment alternatives have closed for new investment.

Term: This product provides insurance coverage for a temporary period of time in return for predetermined premium payments. After the level term period ends, coverage may be renewable annually at higher premium rates. Premiums are invested in our general account.

Distribution and Related Services

Independent Producers: We distribute our products through independent producers who serve the middle market and are typically affiliated with one or more independent marketing organizations (“IMOs”). We have established selling agreements with IMOs representing more than 17,100 independent producers. In 2015, nearly 4,200 producers sold Phoenix products. Our distribution strategy for IMOs is to continue to expand the number of relationships and producers who do business with us by providing competitive products at competitive commission rates, providing exclusive product designs and features to certain IMOs and enhancing our servicing and support technology.

Saybrus Partners, Inc.: Saybrus, Phoenix’s distribution company, sells Phoenix products through selected independent producers and IMOs and provides consulting services to partner firms in support of policies written by companies other than Phoenix. Saybrus’ revenues consist of commissions based on successful sales.

Saybrus’ partner firms include institutional firms, banks, insurance retailers and broker/dealers. It brings expertise to help these firms’ financial professionals address clients’ needs with insurance solutions for basic protection as well as income, estate and business planning. Saybrus offers solutions for the middle, affluent and high-net-worth markets and customizes its services to best fit its partners’ businesses with capabilities ranging from traditional wholesaling to comprehensive consultation and point of sale support.


5

Investments

Investment activities are an integral part of our business and net investment income is a significant component of our total revenues. We manage investments in our general account to match the durations of our insurance liabilities. We invest primarily in high-grade public and privately placed debt securities, balancing credit risk with investment yield. As of December 31, 2015, 93.5% of our total available-for-sale debt securities portfolio was investment grade. We invest a small percentage of our assets in limited partnerships and other investments that have variable returns. While our returns are more volatile, these asset classes have contributed substantially to our investment returns over time. As of December 31, 2015, 3.2% of cash and total investments were allocated to this asset class.

Hedging

Certain features of our variable and indexed annuity products expose us to risks such as equity price risk, equity volatility risk and interest rate risk. We hedge certain of those risks using derivatives. Our focus is on hedging the economic exposure related to potential future claims. For example, we hedge fixed indexed annuity premiums directed into indexed accounts by purchasing options designed to fund the index credits on these accounts. Our hedges generally do not qualify for hedge accounting and may result in significant reported accounting gains or losses. In addition, our hedges may expose us to counterparty credit risk. As of December 31, 2015, our net mark-to-market exposure to derivative counterparties prior to credit valuation adjustment (“CVA”) was $53.2 million, and the post CVA net mark-to-market exposure was $52.7 million. All of our counterparties had a credit rating of A or better with at least one Nationally Recognized Statistical Rating Organization (“NRSRO”). For additional information regarding hedging related business risks, please see the risk factors entitled “We may not be able to hedge our positions due to the inability to replace hedges as a result of our credit rating” and “Guaranteed benefits within our products that protect policyholders against significant downturns in equity markets may decrease our earnings, increase the volatility of our results if hedging strategies prove ineffective, result in higher hedging costs and expose us to increased counterparty risk, which may have a material adverse effect on our results of operations, financial condition and liquidity” contained in “Item 1A: Risk Factors” in Part I of this Form 10-K.

Policy Administration

As of December 31, 2015, we had more than 300,000 life insurance policies and more than 75,000 annuity contracts in force. Our Customer Care Center services policies on a number of administrative systems, supporting both policyholders and their advisors or agents. The cost of servicing policies is a significant component of our overall operating expenses. Servicing of some policies is outsourced to vendors who specialize in insurance policy administration.

Reinsurance

We use reinsurance agreements to limit potential losses, reduce exposure to larger risks and provide capital relief with respect to certain statutory requirements. 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 December 31, 2015, five major reinsurance companies account for approximately 68% of the reinsurance recoverable.

We cede risk to other insurers under various agreements that cover individual life insurance policies. The amount of risk ceded depends on our evaluation of the specific risk and applicable retention limits. For business sold prior to December 31, 2010, our retention limit on any one life is $10 million for single life and joint first-to-die policies and $12 million for joint last-to-die policies. Beginning January 1, 2011, our retention limit on new business is $5 million for single life and joint first-to-die policies and $6 million for second-to-die policies. We also assume reinsurance from other insurers. Typically our reinsurance contracts allow us to recapture ceded policies after a specified period. This right is valuable in the event our mortality experience is sufficiently favorable to make it financially advantageous for us to reassume the risk rather than continue paying reinsurance premiums.

Effective October 1, 2011, Phoenix Life entered into an agreement that provides modified coinsurance for approximately one-third of the closed block policies. This contract did not meet the requirements of risk transfer in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), and, therefore, deposit accounting is applied.


6

See Note 3 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information regarding reinsurance.

Regulation

Our Life Companies are subject to regulation and supervision in each jurisdiction where they conduct business. Areas of regulation include the following:

•
Financial considerations, including standards of solvency, statutory reserves, reinsurance and capital adequacy;
•
Trade practices, market conduct and licensing of companies and agents;
•
Mandating certain insurance benefits and regulating certain premium rates;
•
Approval of policy forms and certain other related materials;
•
Permitted types and concentration of investments;
•
Permitted dividends or other distributions, as well as transactions between affiliates and changes in control; and
•
Approval of interest payments on surplus notes.

Our Life Companies file regular reports, including detailed annual financial statements, with insurance regulatory authorities and are subject to periodic examination by such authorities. See Note 20 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information.

The National Association of Insurance Commissioners (“NAIC”) provides standardized insurance industry accounting and reporting guidance. However, statutory accounting principles continue to be established by individual state laws, regulations and permitted practices.

Most of the jurisdictions in which our Life Companies are admitted to transact business require us to participate in guaranty associations, which are organized to pay certain contractual insurance benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers. These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer is engaged.

As part of their regulatory oversight process, state insurance departments conduct periodic detailed examinations of the books, records, accounts and business practices of insurers domiciled in their states. State insurance departments also have the authority to conduct examinations of non-domiciliary insurers that are licensed in their states. Phoenix Life underwent the New York Department of Financial Services (the “NYDFS”) quinquennial market conduct examination. The NYDFS issued the financial examination portion of its report for Phoenix Life on June 26, 2014 and we expect the market conduct portion of its report to be finalized in 2016. The Connecticut Insurance Department issued a financial examination report for PHL Variable on May 28, 2014 and a market conduct examination report for PHL Variable and Phoenix Life on December 29, 2014.

Annually, our Life Companies are required to conduct an analysis of the adequacy of all statutory reserves. In each case, a qualified actuary must submit an opinion which states that the statutory reserves, when considered in light of the assets held with respect to such reserves, make good and sufficient provision for the associated contractual obligations and related expenses of the insurer. If such an opinion cannot be provided, the insurer must set up additional reserves by moving funds from surplus. The most recent opinions were provided on a timely basis.

Each of our Life Companies reports its risk based capital (“RBC”) based on a formula calculated by applying factors to various risk characteristics of the insurer. The major categories of risks involved are asset risk, insurance risk, interest rate risk, market risk and business risk. The formula is used as an early warning tool by regulators to identify possible inadequately capitalized insurers for purposes of initiating regulatory action and not as a means to rank insurers generally. State insurance laws provide insurance regulators the authority to require various actions by, or take various actions against, insurers whose RBC ratio does not meet or exceed certain levels. As of December 31, 2015, all of our insurance subsidiaries had RBC ratios of at least 200% of Company Action Level, the highest regulatory threshold.


7

Most states, including New York and Connecticut, have enacted legislation or adopted administrative regulations affecting the acquisition of control of insurance companies, as well as transactions between insurance companies and persons controlling them. Most states require administrative approval of the direct or indirect acquisition of 10% or more of the outstanding voting securities of an insurance company incorporated in the state.

Employees

At December 31, 2015, we employed approximately 630 people. We have experienced no work stoppages or strikes and consider our relations with our employees to be good. None of our employees are represented by a union.


General Development of Business

With roots dating to 1851, Phoenix was incorporated in Delaware in 2000. Our principal executive offices are located at One American Row, Hartford, Connecticut 06102-5056. Our telephone number is (860) 403-5000. Our web site is located at www.phoenixwm.com. (This and all other URLs included herein are intended to be inactive textual references only. They are not intended to be an active hyperlink to our web site. The information on our web site is not, and is not intended to be, part of this Form 10-K and is not incorporated into this report by reference.)

As a result of discussions with its regulators related to the execution of an intercompany reinsurance treaty between Phoenix Life and PHL Variable in the second quarter of 2015, the Company’s operating subsidiaries were de-stacked, effective July 1, 2015, making PHL Variable, PLAC and APLAR direct subsidiaries of the holding company.

The following chart illustrates our corporate structure as of December 31, 2015.

 
 
 
The Phoenix Companies, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
100%
 
100%
 
 
85%
 
100%
 
 
 
 
 
 
 
 
 
 
 
 
Phoenix Life
Insurance Company
 
PHL Variable Insurance
Company
 
 
Saybrus Partners, Inc.
 
Other Subsidiaries
 
 
 
 
 
 
 
 
 
 
 
100%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PM Holdings, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
100%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Subsidiaries
 
 
 
 
 
 
 
 
 
 

Executive Officers of the Registrant

See Part III, Item 10 herein.

8

Available Information

We make available free of charge on or through our Internet web site (http://www.phoenixwm.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.


Item 1A.    Risk Factors

Risks Related to the Merger

As described in our Current Report on Form 8-K filed with the SEC on September 30, 2015, we have entered into a merger agreement (the “Merger Agreement”), which, subject to various closing conditions, would result in our being acquired by Nassau Reinsurance Group Holdings L.P. (“Nassau”). Pursuant to the Merger Agreement, Davero Merger Sub Corp., a direct wholly owned subsidiary of Nassau, will be merged with and into the Company, with the Company continuing as the surviving corporation and a direct wholly owned subsidiary of Nassau (the “Merger”). There are a number of risks and uncertainties relating to the Merger.

The Merger may not be completed in the timeframe or manner currently anticipated, or at all, which could have a material adverse effect on our business, financial condition, results of operations and stock price.

Although the Company has received approval of the Merger from our shareholders, the Merger remains subject to various closing conditions, including the receipt of approvals from Connecticut and New York insurance regulators and the termination or expiration of applicable waiting periods under the rules and regulations of the Financial Industry Regulatory Authority, among other closing conditions. It is possible that a government entity may prohibit, delay or refuse to grant approval for the completion of the Merger. If any condition to the closing of the Merger is neither satisfied nor waived, the Merger may not be completed. In addition, satisfying the conditions to the closing of the Merger may take longer than we currently expect. There can be no assurance that any of the remaining conditions to closing will be satisfied or waived or that other events will not intervene, delay or result in a failure to complete the Merger. If the Merger is not completed, or it is not completed in the anticipated timeframe, we will be subject to several additional risks that could negatively affect our business, financial condition, results of operations and stock price, including:

•
the price of our common stock may decline, to the extent that the current market price reflects an assumption that the Merger will be completed for the merger consideration;
•
investor confidence may decline;
•
we would not realize any of the anticipated benefits of having completed the Merger; and
•
we may be required under certain circumstances to pay a termination fee to Nassau of $10.3 million, or reimburse Nassau for out-of-pocket expenses of up to $2 million (provided that, if the expense reimbursement is made, it will reduce any subsequent termination fee if that were also to become payable).

In the event that Nassau fails to complete the Merger as and when required by the Merger Agreement, or for any or no reason Nassau breaches the terms of the Merger Agreement by failing to perform any of its covenants under the Merger Agreement or otherwise, whether intentionally or unintentionally, the Company may terminate the Merger Agreement, if Nassau has not otherwise done so, and may seek monetary damages against Nassau in an amount not to exceed an aggregate of $20 million. If the actual damages incurred by us materially exceed this amount, the Company’s financial condition and results of operation may be negatively affected.

Shareholders will receive $37.50 in cash per share of our common stock despite changes in the market value of our common stock.

Under the terms of the Merger Agreement, the amount of the per share of merger consideration to be paid in cash is fixed and will not be increased for changes in our business, assets, liabilities, prospects, outlook, financial condition or results of operation or in the event of any change in the market price of, analyst estimates of, or projections relating to, our common stock. Therefore, the market value of our common stock may vary significantly from the value on the date the Merger Agreement was executed or at other later dates.

9

The pendency of the Merger, the related diversion of management’s attention from the operation of our business and other expenses incurred in connection with the Merger may materially and adversely affect our business and results of operations.

Our management and board of directors have devoted and will continue to devote a significant amount of time, attention and resources in an effort to complete the Merger. In addition, we have incurred and will continue to incur various expenses to complete the Merger, which may be payable even if the Merger is not completed, and which could prove to be significant. As a result, our business and operating and financial results may be materially and adversely affected by the diversion of management’s time, attention and resources and the considerable expenses incurred in connection with efforts towards completing the Merger.

The announcement of the Merger could disrupt our relationships with our employees, customers, suppliers and others, as well as disrupt our operating results and business generally.

In connection with the Merger, current and prospective employees of the Company may experience uncertainty about their future roles with us, which may materially and adversely affect our ability to attract and retain key employees. Similarly, it is possible that some customers, distributors, suppliers and other persons with whom we have business relationships may experience uncertainty about our future and may delay or defer certain business decisions, seek alternative relationships with other parties, or decide to seek to terminate, change or renegotiate their relationship with us, any of which could negatively impact our revenues, earnings and cash flows, as well as the market price of our common stock, regardless of whether the Merger is completed. Further, any delay in closing or failure to complete the Merger could exacerbate any negative impact on our relationships with such persons or negatively impact our ability to implement alternative business plans with such persons.

Further, the Merger Agreement restricts us from taking certain actions without Nassau’s consent while the Merger is pending. These restrictions may, among other matters, prevent us from pursuing otherwise attractive business opportunities, making certain investments or acquisitions, selling assets, engaging in capital expenditures in excess of certain agreed limits, incurring certain indebtedness or making certain other changes to our business pending the closing of the Merger. These restrictions could have an adverse effect on our business, financial condition and results of operations.

The Merger Agreement contains restrictions on our ability to seek other strategic alternatives.

Pursuant to the Merger Agreement, subject to certain exceptions, the Company has agreed not to solicit acquisition proposals or, subject to certain exceptions, to enter into any negotiations in connection with alternative transactions. In addition, pursuant to the Merger Agreement, our board of directors may not, subject to certain exceptions, withdraw or change its recommendation in favor of approval and adoption of the Merger Agreement. In addition, we may be required to pay Nassau a termination fee of $10.3 million if the Merger Agreement is terminated in certain circumstances. These provisions could discourage a potential third-party acquirer that might have an interest in acquiring all or a significant portion of the Company from proposing any such acquisition and the required payment of the termination fee could further affect the structure, pricing and terms proposed by a potential third-party acquirer and could deter such third party from making a competing transaction proposal even if it were prepared to pay consideration with a higher cash or market value than the value proposed to be received or realized in the Merger.

If the Merger is not completed and we are not otherwise acquired, we may then consider other strategic alternatives, which may subject us to additional risks and uncertainties.

If for any reason the Merger is not completed, our management and board of directors may review and consider the various alternatives available to us, including, among others, continuing as a public company with no material changes to our business or capital structure or merging with, or being acquired by, another public or private company. These alternative transactions or initiatives may involve various risks to our business, including, among others, distraction of our management team, as described above, and the incurrence of additional expenses in connection with considering alternatives. In addition, our ability to consummate any alternative transaction or execute any alternative initiative could be subject to several uncertainties. All of the foregoing could adversely affect our results of operations or financial condition.


10

A lawsuit has been filed against the Company challenging the Merger, and an adverse ruling may prevent the Merger from being completed.

The Company and members of its board of directors have been named as defendants in a class action lawsuit, in which the named plaintiff is a purported shareholder of the Company, challenging the board of directors’ actions in connection with the Merger Agreement and seeking, among other things, monetary damages and injunctive relief to enjoin the defendants from completing the Merger on the agreed-upon terms. One of the conditions to the closing of the Merger is that no law, statute, rule, regulation, executive order, decree, ruling, injunction or other order (whether temporary, preliminary or permanent) shall have been enacted, entered into, promulgated or enforced by any supranational, federal, state or local court or other governmental entity which in effect makes illegal, prohibits, restrains or otherwise enjoins the completion of the Merger. Consequently, if the plaintiffs secure injunctive or other relief prohibiting, delaying or otherwise adversely affecting our ability to complete the Merger, then such injunctive or other relief may prevent the Merger from becoming effective within the expected time frame or at all.

The parties to the litigation have entered into a Memorandum of Understanding (“MOU”) providing for the settlement of the litigation, subject to certain confirmatory discovery by the plaintiffs in the litigation and subject to the approval of the Superior Court of the State of Connecticut (the “Superior Court”), among other things. The parties to the MOU will seek to enter into a stipulation of settlement, which will provide for, among other things, the conditional certification of the litigation as a non opt-out class action and the release of any and all claims arising from the Merger, subject to approval by the Superior Court. There can be no assurance that the settling parties will ultimately enter into a stipulation of settlement or that the Superior Court will approve the settlement even if the settling parties were to enter into the stipulation. In such event, or if the Merger is not consummated for any reason, the proposed settlement will be null and void and of no force and effect. For a more detailed discussion of this litigation, please refer to the discussion under “Item 3: Legal Proceedings” of this Form 10-K.

Risks Related to the Restatements of Prior Period Financial Statements and
our Internal Control Over Financial Reporting

We face risks related to the restatements of our prior period financial statements and the prior period financial statements of our principal insurance company subsidiaries.

We have restated certain of our previously issued financial statements, including those of our principal insurance company subsidiaries, which are described in our Annual Reports on Form 10-K for the years ended December 31, 2012 and December 31, 2014, as well as in the Annual Report on Form 10-K of our insurance company subsidiary PHL Variable Insurance Company (“PHL Variable”) for the year ended December 31, 2012.

The Company is now current and timely in its SEC periodic reports, and PHL Variable became current and timely in its SEC periodic reports prior to ceasing filing periodic and other reports with the SEC, effective September 25, 2015, pursuant to Exchange Act Section 15(d). The Company expects to continue to face many of the risks and challenges related to the restatements, including the following:

•
In the process of restating our prior period financial statements, we identified material weaknesses in our internal control over financial reporting, some of which existed as of December 31, 2015 and are reported under “Item 9A: Controls and Procedures” in this Form 10-K, and we may fail to remediate these 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;
•
The extraordinary processes undertaken to effect the restatements, including restatements of our insurance company subsidiaries, may not have been adequate to identify and correct all errors in our prior period financial statements and, as a result, we may discover additional errors, and our financial statements remain subject to the risk of future restatement, which may impact our ability to timely complete future SEC filings;
•
The outcome of litigation and claims as well as regulatory examinations, investigations, proceedings and orders arising out of the restatements and the failure by the Company and PHL Variable to have filed certain previously delayed SEC reports on a timely basis;
•
The incurrence of significant expenses, including audit, consulting and other professional fees, related to the restatements, the completion of our financial statements on a timely and accurate basis and the remediation of weaknesses in our internal control over financial reporting and disclosure controls and procedures and the negative impact of those expenses on the financial resources of the holding company and its ability to meet its obligations;

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•
Diversion of management and other human resources attention from the operation of our business associated with the remediation of our internal controls;
•
Risks associated with our insurance company subsidiaries’ ability to amend and update on a timely basis registration statements filed under the Securities Act and the Investment Company Act; and
•
Risks associated with our ongoing compliance obligations under the SEC 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, which was approved by the SEC in March 2014 (the “March 2014 Order”), as was subsequently amended by an amended SEC administrative order approved by the SEC in August 2014 (the March 2014 Order, as amended, the “Amended Order”), and the risk of noncompliance with such Amended Order.

We cannot assure that all of the risks and challenges described above will be eliminated and that lost business opportunities can be recaptured or that general reputational harm will not persist. If one or more of the foregoing risks or challenges persist, our business, operations and financial condition are likely to be materially and adversely affected.

We have concluded that there are material weaknesses in our internal control over financial reporting, which have not been fully remediated as of the filing date of this Form 10-K and we cannot assure you that other material weaknesses will not be identified in the future. If we fail to maintain an effective system of internal controls, the accuracy and timing of our financial reporting may be adversely affected.

As reported in “Item 9A: Controls and Procedures” of this Form 10-K, we have concluded that there are material weaknesses in our internal control over financial reporting and that our disclosure controls and procedures are ineffective as of December 31, 2015. While we have performed additional analyses and other procedures, and either implemented or plan to implement and test remediation measures as of the filing date of this Form 10-K, certain of the previously identified material weaknesses have not been fully addressed and remediated. We continue to improve our internal control over financial reporting and disclosure controls and procedures by, among other things:

•
enhancing our existing accounting policies and procedures;
•
implementing changes in our finance and accounting organization;
•
adopting new accounting and reporting processes and procedures; and
•
introducing new or enhanced accounting systems and processes.

Some of the interim measures we have taken to address weaknesses in our internal control over financial reporting are manual, which are more time consuming to prepare, more prone to errors than computerized systems, and require more exhaustive audit processes. It is necessary for us to maintain effective internal control over financial reporting to prevent fraud and errors and to maintain effective disclosure controls and procedures so that we can provide timely and reliable financial and other information. A failure to maintain adequate internal controls may adversely affect our ability to provide financial statements that accurately reflect our financial condition and timely report information. This could cause investors to lose confidence in our reported financial and other information, cause our securities to trade at a decreased price and cause an adverse effect on our business and results of operations. A failure to correct material weaknesses in our internal controls and to replace interim measures taken to address weaknesses could result in further restatements of financial statements and correction of other information filed with the SEC or delays in the filing of future SEC reports, the inability to update or file new registration statements covering the offer and sale of product offerings of our insurance company subsidiaries and the ability to access public markets for the offer and sale of our securities.

Any orders, actions or rulings relating to any of the foregoing that are not in our favor could have a material adverse effect on our financial condition, liquidity or results of operations.


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Risks Related to Our Business

Our business, financial condition and results of operations could be materially and adversely affected by unfavorable economic developments and the performance of the debt and equity markets.

Economic and market conditions materially and adversely affected us in the last recession. The economy may once again deteriorate. The resulting lack of credit, increase in defaults, lack of confidence in the financial sector, volatility in the financial markets and reduced business activity could materially and adversely affect our business, financial condition and results of operations.

These effects include, but are not limited to, the following:

•
Lower fee revenue and higher expenses. Significant declines in equity markets would decrease assets in our variable annuity and variable life product lines, resulting in lower fee income and increased amortization of deferred policy acquisition costs.
•
Realized and unrealized losses in our fixed income portfolio. The value of the portfolio would be depressed by general interest rate increases or credit spread widening, as well as by illiquidity and by changes in assumptions we use to estimate the fair value of securities. Bonds supported by residential and commercial mortgages could experience losses if the delinquency rates of the underlying mortgage loans increase.
•
Realized and unrealized losses in alternative asset classes. We invest in private equity funds, mezzanine funds, and other limited partnerships, which generate returns that are more volatile than other asset classes and are relatively illiquid and, therefore, may be harder to value or sell in adverse market conditions.
•
Higher statutory reserve and capital requirements. Certain regulatory reserve and capital requirements incorporate actual and expected future capital market conditions and could increase materially in the event of significant equity market declines or changes in interest rates, credit spreads and credit default rates.
•
Losses due to changes in accounting estimates. Significant accounting estimates may be materially affected by the equity and debt markets and their impact on expected customer behavior. For example, in setting amortization schedules for our deferred policy acquisition costs, we make assumptions about future market performance, interest rates and policyholder behavior.
•
Increased funding requirements for our pension plan. Future market declines could result in additional funding requirements. Also, the funding requirements of our pension plan are sensitive to interest rate changes. Should interest rates decrease materially, the plan liabilities would increase.
•
Hedging losses or increased reserve requirements in our variable annuity business. We use derivatives to hedge the value of certain guaranteed benefits. These hedges and other management procedures could prove ineffective, especially during times of significant market volatility. For benefits that are not hedged, such as minimum death benefits and minimum income benefits we could be required to increase reserves in the event of a significant decline in the equity markets.

Persistent low interest rates or significant increases in interest rates could adversely affect our business and results of operations.

Our products expose us to significant interest rate risk. A substantial portion of our business is spread-based, meaning that profitability depends on our ability to invest premiums at yields in excess of the rates we credit to policyholders. The current low interest rate environment has meant that we have invested or reinvested cash flows at substantially lower yields than our existing portfolio yield, while our ability to reduce credited rates has been limited by contractual minimums. Persistent low interest rates could compound this spread compression. In addition, they could cause additional premium payments on products with flexible premium features, repayment of policy loans and lower policy surrenders.

Persistent low interest rates may also result in higher GAAP insurance liabilities. The long-term liability for profits followed by losses on the universal life business is particularly sensitive to interest rates.

Persistent low interest rates could also result in higher statutory reserve and capital requirements. Our insurance company subsidiaries are subject to annual asset adequacy testing, which requires additional reserves to be posted if projected asset cash flows and future premiums are not able to support future policy claims and surrenders under a range of possible scenarios.


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Low interest rates also have increased the liability of our pension plans and other post-employment benefits. Further declines in interest rates could result in additional increases in these liabilities.

Conversely, if interest rates rise significantly, we could face an increase in unrealized losses in our investment portfolio. At the same time, it could cause life insurance policy loans, surrenders and withdrawals to increase as policyholders seek investments with higher returns. This could require us to sell invested assets at a time when their prices are depressed, which could cause us to realize investment losses.

Legal actions and proceedings are inherent in our businesses and could adversely affect our results of operations or financial position or harm our businesses or reputation.

We are regularly involved in litigation and arbitration, both as a defendant and as a plaintiff. In addition, various regulatory bodies regularly make inquiries of us and, from time to time, conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws, laws governing the activities of broker-dealers and other laws and regulations affecting our registered products. We are, and in the future may be, subject to and involved in legal actions and proceedings in the ordinary course of our businesses. Some of these proceedings have been brought, and may be brought in the future, on behalf of various alleged classes of complainants. In certain of these matters, the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages. Furthermore, certain institutional investors have purchased, or may purchase in the future, large numbers of life insurance policies in the secondary market and have asserted, or may assert, claims against us before regulatory agencies and in litigations. Substantial legal liability in these or future legal actions could have an adverse effect on us or cause us reputational harm, which in turn could, among other items, harm our business prospects, result in regulatory or legislative responses and have an adverse effect on our consolidated financial statements.

In addition to potential for legal actions and proceedings related to the ordinary course of our business, there is a risk of litigation and other claims as well as regulatory examinations, investigations, proceedings and orders arising out of the restatements and the failure by the Company to file SEC reports on a timely basis and the failure by our insurance company subsidiaries to have compliant registration statements covering certain insurance products offered and sold by them. The Company is providing information to the staff of the SEC in connection with the restatements, which may result in further regulatory actions by the SEC. The potential outcomes and claims are unpredictable and any orders, actions or rulings not in our favor could have a material adverse effect on our financial condition, liquidity or results of operations.

It is difficult to predict or determine the ultimate outcome of legal or regulatory proceedings or to provide reasonable ranges of potential losses. We believe that the outcomes of our litigation and regulatory matters are not likely, either individually or in the aggregate, to have a material adverse effect on our consolidated financial statements. However, given the large or indeterminate amounts and/or other remedies sought in certain of these matters and the inherent unpredictability of litigation and regulatory matters, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on the way we conduct our business and our financial condition, liquidity or consolidated financial statements in particular quarterly or annual periods. For a more detailed discussion of certain current litigation and other proceedings please refer to the discussion under “Item 3: Legal Proceedings” of this Form 10-K.

Downgrades or withdrawals of debt and financial strength ratings could result in an increase in policy surrenders and withdrawals, adversely affect 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.

Rating agencies assign Phoenix Life and our other insurance company subsidiaries’ financial strength ratings, and assign us debt ratings, based in each case on their opinions of the Company’s or its insurance company subsidiaries’ ability to meet their respective financial obligations.


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Our ratings relative to other companies in the industry affect our competitive position. The Company, its insurance company subsidiaries and their securities have been placed under review with developing implications and positive outlook pending completion of the Merger. A number of events including insufficient progress on remediation, weaknesses in our internal control over financial reporting and disclosure controls and procedures, the Merger not being completed, and any other events that could affect the ability of the Company to pay claims may cause downgrades or withdrawals which may cause reputational damage. This could materially and adversely affect our ability to distribute our products through unaffiliated third parties, new sales of our products, the persistency of existing customers, increase policy surrenders and withdrawals and our ability to borrow. We cannot predict what actions rating agencies may take, or what actions we may take in response. At this time, we cannot estimate the impact of specific future rating agency actions on sales or persistency.

In light of the difficulties experienced by many financial institutions, including insurance companies, rating agencies have increased the frequency and scope of their credit reviews and requested additional information from the companies that they rate, including us. They may also adjust upward the capital and other requirements employed in the rating agency models for maintenance of certain ratings levels.

We may not be able to hedge our positions due to the inability to replace hedges as a result of our credit rating.

We use derivative instruments to hedge the liability exposure and the volatility of earnings associated with certain variable and fixed indexed annuity liabilities. Certain derivative counterparty agreements of certain subsidiaries contain provisions that permit the parties to terminate the agreements upon the occurrence of a default under the indenture covering our 7.45% Quarterly Interest Bonds due 2032. In addition, certain of these agreements require our insurance companies’ financial strength rating to be above a certain threshold. Given that our financial strength ratings are below a specified credit rating threshold in certain of our derivative agreements, the counterparties can request immediate payment, 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 have been below the specified threshold levels since March 2009 and, when requested, the Company has provided collateralization on certain of its derivative instruments.

If we are forced to terminate any derivative agreements, we may be unable to replace the derivative positions, thereby increasing our exposure to periods of significant and sustained downturns in equity markets, increased equity volatility, or reduced interest rates, which could result in an increase in the valuation of the future policy benefit associated with such products and result in a material adverse effect on our earnings and financial condition.

Our actuarial reserve calculations, particularly for universal life death benefits and guaranteed annuity benefits, require many assumptions and significant management judgment, which, if incorrect, could adversely affect our results of operations and financial condition.

We establish reserves to pay future policyholder benefits and claims. A significant proportion of our reserves do not represent policyholder funds but rather are actuarial estimates based on assumptions that include future benefits, claims, expenses, interest credits, investment results (including equity market returns), mortality, morbidity, and premium and policy persistency. As a result, we cannot be certain that the assets supporting our policy liabilities, together with future premiums, will be sufficient for payment of benefits and claims. If, in the future, we determine this to be the case, we would need to increase our reserves in the period in which we make the determination, which would adversely affect our results of operations and financial condition.

We may experience losses if capital market conditions, mortality or longevity experience, policyholder behavior (e.g., premium and policy persistency, benefit utilization rates) or other factors differ significantly from the assumptions that we used in pricing products or that are reflected in our current financial results.

We set prices for our insurance and annuity products based upon capital market assumptions, expected mortality or longevity and expected policyholder behavior. For capital market assumptions such as equity market returns and investment portfolio yields we use current market observations, historical information and management judgment. For mortality and longevity rates we use standard actuarial tables, company experience and management judgment. For policyholder behavior assumptions we use available industry and company data. Assumptions used in pricing our products generally are consistent with assumptions used to initially determine the amortization of deferred policy acquisition costs. Adverse experience relative to these assumptions could have a material adverse effect on our results from operations and financial condition.


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Recent trends in the life insurance industry may affect our mortality, premium and policy persistency, and investment earnings. The evolution of the financial needs of policyholders and the emergence of a secondary market for life insurance and increased availability and subsequent contraction of premium financing suggest that the reasons for some purchases of our products changed. At the same time, prior to 2009, we experienced an increase in life insurance sales to older individuals. While we instituted certain controls and procedures to screen applicants, we believe that our sales of universal life products include sales of policies to third-party investors who, at the time of policy origination, had no insurable interest in the insured.

Deviations in experience from our pricing 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). However, most of our contracts are currently at or close to their minimum guaranteed crediting rates. In 2011 and 2010, we implemented increases in the cost of insurance (“COI”) rates for certain universal life policies. However, these and any other permitted adjustments do not allow us to recoup past losses and may not be sufficient to maintain profitability in the future. In addition, increasing charges on in force policies or contracts may adversely affect our relationships with distributors, future sales and surrenders. Furthermore, some of our in force business consists of products that do not permit us to adjust the charges and credited rates of in force policies or contracts.

Our fixed indexed annuity products have required us to make pricing assumptions about the behavior of policyholders in a market segment with which we are not historically familiar and for product features for which there is limited long-term industry experience. In particular, if our pricing assumptions with respect to persistency and benefit utilization in the future prove inaccurate, we may experience an adverse impact on our results of operations or financial condition.

Adverse experience relative to our pricing assumptions could also result in higher amortization of deferred policy acquisition costs. The recovery of deferred policy acquisition costs is dependent upon the future profitability of the related business. See “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates” in this Form 10-K. If our estimates of future gross profits or margins cannot support the continued amortization or recovery of deferred policy acquisition costs the amortization of such costs is accelerated in the period in which the pricing assumptions are changed, resulting in an “unlocking” charge to income. Such adjustments may in the future have a material adverse effect on our results of operations or financial condition.

Guaranteed benefits within our products that protect policyholders against significant downturns in equity markets may decrease our earnings, increase the volatility of our results if hedging strategies prove ineffective, result in higher hedging costs and expose us to increased counterparty risk, which may have a material adverse effect on our results of operations, financial condition and liquidity.

Certain of our products include guaranteed benefits. These include GMDBs, GMABs, GMWBs and GMIBs. Periods of significant and sustained downturns in equity markets, increased equity volatility or reduced interest rates could result in an increase in the valuation of the future policy benefit associated with such products, resulting in a reduction to earnings. We use derivative instruments to hedge the liability exposure and the volatility of earnings associated with some of these liabilities and, even when these and other actions would otherwise successfully mitigate the risks related to these benefits, we remain liable for the guaranteed benefits in the event that derivative counterparties are unable or unwilling to pay. In addition, we are subject to the risk that hedging and other management procedures prove ineffective or that unanticipated policyholder behavior, including lower withdrawals or mortality, combined with adverse market events, produces economic losses beyond the scope of the risk management techniques employed. Hedging instruments we hold to manage product and other risks have not, and may continue to not, perform as intended or expected, resulting in higher realized losses. Market conditions can also result in losses on product related hedges and such losses may not be recovered in the pricing of the underlying products being hedged. These factors, individually or collectively, may adversely affect our profitability, financial condition or liquidity.


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Our risk management policies and procedures may leave us exposed to unidentified or unanticipated risk, which could adversely affect our businesses or result in losses.

We have devoted significant resources to develop and periodically update our risk management policies and procedures to reflect our ongoing review of our risks. However, our policies and procedures to monitor and manage risks may not be fully effective and may leave us exposed to unidentified and unanticipated risks. We use models in many aspects of our operations, including but not limited to the pricing of products, estimation of actuarial reserves, amortization of deferred policy acquisition costs and the valuation of certain other assets and liabilities. These models rely on assumptions and projections that are inherently uncertain. In addition, the risk of a natural or man-made catastrophe, pandemic, malicious act, terrorist act, or the occurrence of climate change, could adversely affect mortality, morbidity, or other relevant factors and, as a result, have a significant negative impact on our business. Our risk management efforts and other precautionary plans and activities may not adequately predict the impact on our business from such events.

Management of operational, legal and regulatory risks requires, among other things, policies and procedures to record properly and verify a large number of transactions and events, and these policies and procedures may not be fully effective. Past or future misconduct by our employees or employees of our vendors could result in violations of law by us, regulatory sanctions and/or serious reputational or financial harm and the precautions we take to prevent and detect this activity may not be effective in all cases. A failure of our computer systems or a compromise of their security could also subject us to regulatory sanctions or other claims, harm our reputation, interrupt our operations and adversely affect our business, results of operations or financial condition.

Our statutory capital could decrease or our capital requirements could increase and adversely affect our business.

We conduct the majority of our business through Phoenix Life and PHL Variable. Accounting standards and statutory capital and reserve requirements for these entities are prescribed by their respective insurance regulators and the NAIC. In addition, NAIC regulations define minimum RBC requirements relating to insurance, business, asset and interest rate risks, which are intended to be used by insurance regulators to identify deteriorating or weakly capitalized companies. Separately, some rating agencies have their own capital models that are used to assess capital adequacy as part of the rating process.

Statutory surplus and regulatory or capital requirements may increase or decrease due to a variety of factors, including but not limited to the following: the amount of statutory income generated by our insurance company subsidiaries, changes in interest rates and equity market levels, unrealized gains or losses on equity and certain fixed income holdings, unrealized gains or losses on derivatives, changes in the credit quality of our fixed income investments, changes in policy reserves, funding requirements of our pension plan, additional reserve requirements as a result of annually required asset adequacy testing, capital strain from the issuance of new business, changes in the capital models or applicable risk factors and changes in statutory accounting rules or regulatory determinations. Most of these factors are outside of our control. One or more of these factors could significantly decrease statutory surplus or increase required RBC. If so, we could experience downgrades, loss of distribution relationships, higher surrenders and increased regulatory supervision.

We may be unsuccessful in our efforts to generate earnings growth in new market segments, particularly the sale of fixed indexed annuities to middle market customers.

We are implementing a business plan that leverages existing product manufacturing strengths and partnering capabilities to focus new business development in areas that are less capital intensive and appeal to distributors with middle market clients. We have limited experience in the middle market and in the design and sale of fixed indexed annuities. These products have required us to institute new processes for ensuring product suitability, executing hedges using derivatives and processing transactions. In addition, the ultimate profitability of these products is significantly influenced by future investment earnings, policy holder behavior and estimates of longevity. If the new risk management processes we designed prove inadequate, or if future investment earnings, policyholder behavior or longevity differs significantly from expectations, our results from operations may be adversely affected and our growth may not be sustained.


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Our valuation of debt securities and equity securities may include methodologies, estimations and assumptions that are subject to differing interpretations and could result in changes to investment valuations that may materially and adversely affect our results of operations and financial condition.

We record debt and equity securities at fair value on our consolidated balance sheets. During periods of market disruption, including periods of significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, the valuation of securities may require the adoption of certain estimates and assumptions. In addition, prices provided by independent broker quotes or independent pricing services that are used in the determination of fair value can vary significantly for a particular security. As a result, valuations may include inputs and assumptions that require greater estimation and judgment as well as valuation methods which are more complex. These values may not be ultimately realizable in a market transaction and may change very rapidly as market conditions change or assumptions are modified. Significant changes in value may have a material adverse effect on our results of operations and financial condition.

In addition, a decline in fair value below the amortized cost of a security requires management to assess whether an other-than-temporary impairment (“OTTI”) has occurred. The decision on whether to record an OTTI or write-down is determined in part by our assessment of the financial condition and prospects of a particular issuer, projections of future cash flows and recoverability of the particular security as well as management’s assertion of whether it is more likely than not that we will sell the securities before recovery. See “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates” in this Form 10-K for further information regarding our impairment decision-making process. Management’s determination of whether a decline in value is other-than-temporary includes our analysis of the underlying credit and our intention and ability not to have to sell the security, versus the extent and duration of a decline in value. Our conclusions on such assessments may ultimately prove to be incorrect as facts and circumstances change, which could result in a material adverse effect on our results of operation and financial condition.

We may incur losses if our reinsurers are unwilling or unable to meet their obligations under reinsurance agreements. The availability, pricing and terms of reinsurance may not be sufficient to protect us against losses.

We use reinsurance agreements to limit potential losses, reduce exposure to larger risks and provide capital relief with regard to certain reserves. Under these reinsurance arrangements, other insurers assume a portion of our losses and related expenses; however, we remain liable as the direct insurer on all risks reinsured. Consequently, reinsurance arrangements do not eliminate our obligation to pay claims and we assume credit risk with respect to our ability to recover amounts due from our reinsurers. Although we regularly evaluate the financial condition of our reinsurers, the inability or unwillingness of any reinsurer to meet its financial obligations could negatively affect our operating results. In addition, market conditions beyond our control determine the availability and cost of reinsurance. No assurances can be made that reinsurance will remain available to the same extent and on the same terms and rates as have been historically available. If we are unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient and at prices that we consider acceptable, we would have to either accept an increase in our net exposure or develop other alternatives to reinsurance. Any of these alternatives may adversely affect our business, financial condition or operating results.

We might be unable to attract or retain personnel who are key to our business.

The success of our business is dependent to a large extent on our ability to attract and retain key employees. Competition in the job market for senior executives and professionals such as sales personnel, technology professionals, finance, actuaries and investment professionals can be intense. In general, our employees are not subject to employment contracts or non-compete agreements. Difficulty in attracting and retaining employees could have a negative impact on us.

Our business operations and results could be adversely affected by inadequate performance of third-party relationships.

We are dependent on certain third-party relationships to maintain essential business operations. These services include, but are not limited to, information technology infrastructure including cyber security, application systems support, transfer agent and cash management services, custodial services, records storage management, backup tape management, security pricing services, medical information, payroll and employee benefit programs.

We periodically negotiate provisions and renewals of these agreements and there can be no assurance that their terms will remain acceptable to such third parties or us. An interruption in our continuing relationship with certain of these third parties or any material delay or inability to deliver essential services could materially affect our business operations and adversely affect our results of operations.

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The occurrence of unanticipated events or a failure in cyber or other information security systems could result in a loss or disclosure of confidential information and impact the availability of our systems, all of which may adversely affect our results of operations or harm our business reputation.

We transmit, receive, process and retain customer and Company data on our computer systems, and we rely on sophisticated technologies for a variety of functions, including processing claims and applications, providing information to customers, business partners and employees, performing actuarial analyses and maintaining financial records. Although we attempt to protect personal, confidential and proprietary information, our computer systems may be subject to computer viruses or other malicious codes, unauthorized access, cyber-attacks or other computer-related penetrations that may render this data susceptible to breach. While, to date, the Company is not aware of a material breach of its cybersecurity, administrative or technical controls, the preventive actions we take to reduce the risk of cyber-incidents and protect our information technology may be insufficient to prevent future physical and electronic break-ins, cyber-attacks or other security breaches to our computer systems. The number and complexity of cyber-related threats continue to increase over time.

Systems failures or outages could compromise our ability to perform our business functions in a timely manner, which could hurt our relationships with customers and business partners. In the event of a disaster such as a natural catastrophe, a pandemic, an industrial accident, a blackout, a terrorist attack, computer virus or cyber war, the systems upon which we rely may be inaccessible to our customers, business partners or employees for an extended period of time, which could materially and adversely impact our ability to conduct business, particularly if the problem affects our data processing, transmission, storage or retrieval systems, destroys valuable data or hinders the ability of employees to perform their job responsibilities or suppliers to provide goods or services.

The failure of our computer systems for any reason could significantly impede or interrupt our business operations and could result in compromised security, confidentiality or privacy of sensitive data, including personal information relating to our customers and business partners, as well as high remediation costs, loss of revenue or customers, legal liability or regulatory action imposed by U.S. federal or state government or reputational harm.

While we maintain cyber liability insurance, it may not be sufficient to protect against all loss.

We face strong competition in our businesses from insurance companies and other financial services firms. If we are unable to price our products competitively or provide competitive service we could lose existing customers or fail to attract new customers.

We operate in a highly competitive industry. While there is no single company that we identify as a dominant competitor in our business, many of our competitors are substantially larger and enjoy better financial strength ratings, more financial resources and greater marketing and distribution capabilities. Our products compete with similar products sold by other insurance companies and also with savings and investment products offered by banks, asset managers, and broker-dealers. Larger competitors with better financial strength ratings, greater financial resources, marketing and distribution capabilities are better positioned competitively. Larger firms are also able to better withstand market disruption, offer more competitive pricing and more effectively access debt and equity capital. Moreover, a significant proportion of sales in the life insurance and annuity industries represent exchanges from one company’s to another company’s products. To the extent that a more competitive product alternative with better product features is offered by another company, we could experience higher policy surrenders.

If we fail to compete effectively in this environment, our results of operations and financial condition could be materially and adversely affected.

As a holding company, The Phoenix Companies, Inc., depends on the ability of its subsidiaries to transfer funds to meet its obligations and pay shareholder dividends.

The Phoenix Companies, Inc. is a holding company and has no operations of its own. Its ability to pay interest and principal on outstanding debt obligations and to pay dividends to shareholders and corporate expenses depends primarily upon the surplus and earnings of Phoenix Life and the ability of this subsidiary to pay dividends or to advance or repay funds. Payments of dividends and advances or repayment of funds by Phoenix Life are restricted by the applicable laws and regulations, including laws establishing minimum solvency and liquidity thresholds. Changes to these laws or the application or implementation of those laws by regulatory agencies could constrain the ability of the holding company to meet its debt obligations and corporate expenses.


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In 2013, 2014 and 2015, The Phoenix Companies, Inc. made capital contributions for the benefit of PHL Variable Insurance Company and incurred significant restatement expenses related to audit, consulting and legal fees. The need for additional capital contributions to operating subsidiaries or an inability to reduce expenses at the holding company could constrain the ability of the holding company to meet its debt obligations.

Phoenix may not have sufficient capital resources available to fund PHL Variable’s operations and capital needs.

Substantially all new insurance products sold by Phoenix are sold through its subsidiary, PHL Variable. As a holding company with no business operations independent of the business conducted through its operating subsidiaries, Phoenix primarily relies on dividends from its subsidiaries to provide capital to PHL Variable as and when needed for its capital requirements and business operations, which include maintenance of its regulatory capital ratios, the writing of new life insurance and annuity products, cash flow needs, and the satisfaction of its obligations for payment of interest and principal on outstanding debt and other expenses.

As a result of discussions with its regulators related to an intercompany reinsurance treaty between Phoenix Life and PHL Variable, effective June 30, 2015, Phoenix completed a de-stacking of its insurance company subsidiaries, effective July 1, 2015. Further, Phoenix agreed with its New York regulator that it would not use any future dividends paid by Phoenix Life to meet the capital needs of PHL Variable. Upon the effectiveness of the de-stacking, each of the Company’s insurance company subsidiaries became a direct subsidiary of Phoenix. As a result of the de-stacking, an existing commitment by Phoenix Life to maintain the risk-based capital of PHL Variable at 125% Company Action Level was extinguished.

Phoenix’s holding company cash and non-affiliated securities at December 31, 2015 and other capital sources, such as dividends from operating subsidiaries other than Phoenix Life and external financing, are available to assist PHL Variable, if necessary, and together with PHL Variable’s own capital, are believed to be sufficient to meet PHL Variable’s anticipated operating and capital needs. However there can be no assurance that the combination of Phoenix’s assistance and PHL Variable’s own resources will be adequate to meet PHL Variable’s future operating and capital needs or to grow its business. The restriction on the use of Phoenix Life dividends and the extinguishment of Phoenix Life’s commitment to maintain the risk-based capital of PHL Variable may adversely affect PHL Variable’s ability to meet its cash and debt obligations, which may slow or cease its ability to write new life insurance and annuity business. If PHL Variable is unable to meet its capital needs either by itself or with assistance from Phoenix, PHL Variable could become subject to increased regulatory oversight by its domestic insurance regulator or to other regulatory actions including rehabilitation, any of which may materially adversely affect our business, financial conditions or results of operation.

We might need to fund deficiencies in our closed block, which would adversely impact results of operations and could also result in a reduction in investments in our ongoing business.

We have allocated assets to our closed block to produce cash flows that, together with additional revenues from the closed block policies, are reasonably expected to support our obligations relating to these policies. Our allocation of assets to the closed block was based on actuarial assumptions about the performance of policies in the closed block and the continuation of the non-guaranteed policyholder dividend scales in effect for 2000, as well as assumptions about the investment earnings the closed block assets will generate over time. Since actual performance is likely to be different from these assumptions, it is possible that the cash flows generated by the closed block assets and the anticipated revenues from the policies included in the closed block will prove insufficient to provide for the benefits guaranteed under these policies even if the non-guaranteed policyholder dividend scale were to be reduced. If this were to occur, we would have to fund the resulting shortfall from assets outside of the closed block, which could adversely affect our results of operations and reduce our ability to invest in other ongoing businesses.

Tax law and policy are frequently reviewed and changed by the Internal Revenue Service and Congress and future changes in laws or regulations could unfavorably affect our tax costs and tax assets or make some of our products less attractive to consumers.

Significant and fundamental changes in U.S. federal income tax laws, U.S. Treasury and other regulations have been made in recent years and additional changes are likely. Any such change may affect us and the products we offer. Moreover, judicial decisions, regulations or administrative pronouncements could unfavorably affect our tax costs and tax assets or make certain of our products less attractive to consumers.


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Certain products we offer, primarily life insurance and annuities, receive favorable tax treatment under current federal and state tax law. This favorable treatment may be considered as providing certain of our products a competitive tax advantage over non-insurance products. In particular, for individual owners of life insurance policies and annuity contracts, earnings credited to these policies and contracts generally are tax-deferred until such time as the amounts are withdrawn from the policies or contracts. This differs from the treatment of dividend or interest earnings on other investments. Moreover, for life insurance, the death benefit proceeds are often received tax-free. While an increasing proportion of our annuity contracts are issued in connection with Individual Retirement Accounts (“IRAs”), for which the tax-deferral benefit is the same regardless of whether the IRA is in connection with an annuity, annuities in IRAs often provide lifetime payout guarantees not offered by other IRA investments.

The tax consequences associated with our products could be altered at any time by legislative, judicial, or administrative action. Any such action that increases the taxation on our products or reduces the taxation on competing products could lessen the advantage or create a disadvantage for certain of our products making them less competitive.

In the recent past, there have been proposals to modify the tax treatment of IRAs, including one that would result in more rapid taxation of after-death distributions. These proposals do not target annuities in IRAs, but would impact all IRAs to the same extent. As a result, many of the competing IRA investment options would also be impacted.

With respect to life insurance company taxation, the administration’s budget proposals in recent years have included changes in the computation of the dividends received deduction relative to both general account and separate account dividends. If enacted, these actions could increase our taxable income and unfavorably impact our tax provision allocated to continuing operations, which would reduce our consolidated net income. The current administration has proposed certain other changes which, if adopted, could have a material adverse effect on our financial position and our ability to sell our products and could result in the surrender of some existing contracts and policies.

We also benefit from certain tax provisions available to most insurance corporations, including but not limited to, tax-exempt bond interest, dividends-received deductions, tax credits (such as foreign tax credits) and insurance reserve deductions. Congress, as well as foreign, state and local governments, also considers from time to time legislation that could modify or eliminate these benefits, as well as other corporate tax provisions, thereby increasing our tax costs. If such legislation were to be adopted, our consolidated balance sheet and results of operations could be adversely impacted.

We cannot predict whether any relevant tax legislation will be enacted, what the impact of such legislation would be on our tax costs and sales of our products, what the specific terms of any such legislation will be or whether any such legislation would have a material adverse effect on our financial condition and results of operations.

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, any of which could adversely affect our business, results of operations, financial condition or liquidity.

We are subject to extensive laws and regulations administered and enforced by a number of different governmental authorities including state insurance regulators, state securities administrators, the SEC, the New York Stock Exchange, the Financial Industry Regulatory Authority, the U.S. Department of Justice, state attorneys general and foreign regulators. In light of recent events involving certain financial institutions and the last recession, the U.S. government has heightened its oversight of the financial services industry. In addition, it is possible that these authorities may adopt enhanced or new regulatory requirements intended to prevent future crises in the financial services industry and to assure the stability of institutions under their supervision. We cannot estimate whether such regulatory proposals will be adopted, or what impact, if any, such regulation could have on our business, consolidated operating results, financial condition or liquidity.

Each of the authorities that regulates us exercises a degree of interpretive latitude. Consequently, we are subject to the risk that compliance with any particular regulator’s or enforcement authority’s interpretation of a legal issue may not result in compliance with another regulator’s or enforcement authority’s interpretation of the same issue, particularly when compliance is judged in hindsight. In addition, there is risk that any particular regulator’s or enforcement authority’s interpretation of a legal issue may change over time to our detriment, or that changes in the overall legal environment may, even absent any particular regulator’s or enforcement authority’s interpretation of a legal issue changing, cause us to change our views regarding the actions we need to take from a legal risk management perspective, thus necessitating changes to our practices that may, in some cases, limit our ability to grow and improve the profitability of our business.


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On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which implements significant changes in the financial regulatory landscape and will impact institutions operating in many segments of the financial services industry, including the Company. Although certain provisions became effective immediately, many of the Dodd-Frank Act’s provisions require adoption of rules that will govern implementation. The Dodd-Frank Act may, among other things, increase our regulatory compliance burden by requiring us to invest management attention and resources to evaluate and make necessary changes to our policies and procedures and the manner in which we conduct our business. The U. S. government has created the Federal Insurance Office (“FIO”) under the Dodd-Frank Act as a branch of the U. S. Treasury Department. Under its charge to improve consumer protection, the FIO may regulate actual product design and mandate additional disclosure rules. We are uncertain as to the impact that this new legislation and regulatory guidance will have on the Company and cannot assure that it will not adversely affect our financial condition and results of operations.

State insurance laws regulate most aspects of our U.S. insurance businesses, and our insurance subsidiaries are regulated by the insurance departments of the states in which they are domiciled and licensed. State insurance regulators and the NAIC regularly re-examine existing laws and regulations applicable to insurance companies and their products. State laws in the U.S. grant insurance regulatory authorities broad administrative powers with respect to, among other things:

•
Financial considerations, including standards of solvency, statutory reserves, reinsurance and capital adequacy;
•
Trade practices, market conduct and licensing of companies and agents;
•
Mandating certain insurance benefits and regulating certain premium rates;
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Approval of policy forms and certain other related materials;
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Permitted types and concentration of investments;
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Permitted dividends or other distributions, as well as transactions between affiliates and changes in control; and
•
Approval of interest payments on surplus notes.

Changes in these laws and regulations, or in interpretations thereof, are often made for the benefit of the consumer at the expense of the insurer and thus could have a material adverse effect on our business, consolidated operating results, financial condition and liquidity. Compliance with these laws and regulations is also time consuming and personnel-intensive, and changes in these laws and regulations may increase our direct and indirect compliance costs and other expenses of doing business, thus having an adverse effect on our business, consolidated operating results, financial condition and liquidity.

We may be subject to regulation by the Department of Labor (“DOL”) in connection to providing annuity products to IRA participants.

In April 2015, the DOL released a notice of proposed rulemaking to modify and expand the ERISA conflict of interest rules. These rules could be finalized in 2016, with an effective date in 2017. The proposed rules would impose fiduciary duties on anyone getting paid for advice related to a retirement investment decision, which would include insurance agents selling Individual Retirement Annuities. As current DOL rules do not cover IRAs, the expansion could have a new impact on our sales. While the proposed rules continue to permit commission-based annuity sales, there would be additional requirements on insurance agents and producers regarding the information to be provided to IRA participants as well as the standards that must be met for agents and producers in connection with such sales. It is unclear as to the extent that these new rules will impact agents and producers selling Phoenix fixed indexed annuities.

We cannot predict whether the proposed DOL rule will ultimately be adopted, what changes may be made to it prior to adoption, or how the rule would impact our business if it were adopted.


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Regulatory actions or examinations could result in financial losses or harm to our businesses.

Various regulatory bodies regularly make inquiries of us and, from time to time, conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws and laws governing the activities of broker-dealers. During the past several years, there has been a significant increase in federal and state regulatory activity relating to financial services companies, with a number of recent regulatory inquiries focusing on valuation, COI increase issues and market conduct. Financial services companies also have been the subject of broad industry inquiries by state regulators and attorneys general which do not appear to be company-specific, such as business practices upon notification of death. We continue to cooperate with the applicable regulatory authorities in these matters. We may be subject to further related or unrelated inquiries or actions in the future. In light of recent events involving certain financial institutions, the U.S. government has heightened its oversight of the financial services industry in general and of the insurance industry in particular. Further, recent adverse economic and market events may have the effect of encouraging litigation, arbitration and regulatory action in response to the increased frequency and magnitude of investment losses, which may result in unfavorable judgments, awards and settlements, regulatory fines and an increase in our related legal expenses.

It is not feasible to predict or determine the ultimate outcome of regulatory proceedings or to provide reasonable ranges of potential losses. We believe that the outcomes of regulatory matters are not likely, either individually or in the aggregate, to have a material adverse effect on our consolidated 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 consolidated financial statements in particular quarterly or annual periods.

We could have material losses in the future from our discontinued reinsurance business.

In 1999, we discontinued our reinsurance operations through a combination of sale, reinsurance and placement of certain retained group accident and health reinsurance business into run-off. We adopted a formal plan to stop writing new contracts covering these risks and to end the existing contracts as soon as those contracts would permit. However, we remain liable for claims under contracts which have not been commuted.

We have established reserves for claims and related expenses that we expect to pay on our discontinued group accident and health reinsurance business. These reserves are based on currently known facts and estimates about, among other things, the amount of insured losses and expenses that we believe we will pay, the period over which they will be paid, the amount of reinsurance we believe we will collect from our retrocessionaires and the likely legal and administrative costs of winding down the business.

We expect our reserves and reinsurance to cover the run-off of the business; however, the nature of the underlying risks is such that the claims may take years to reach the reinsurers involved. Therefore, we expect to pay claims out of existing estimated reserves as the level of business diminishes. In addition, unfavorable or favorable claims and/or reinsurance recovery experience is reasonably possible and could result in our recognition of additional losses or gains in future years. In establishing our reserves described above for the payment of insured losses and expenses on this discontinued business, we have made assumptions about the likely outcome of the disputes referred to above, including an assumption that substantial recoveries would be available from our reinsurers on all of our discontinued reinsurance business. However, the inherent uncertainty of arbitrations and lawsuits, including the uncertainty of estimating whether any settlements we may enter into in the future would be on favorable terms, makes it hard to predict outcomes with certainty. Given the need to use estimates in establishing loss reserves, our actual net ultimate exposure likely will differ from our current estimate. If future facts and circumstances differ significantly from our estimates and assumptions about future events with respect to our discontinued reinsurance business, our current reserves may need to be increased materially, with a resulting material adverse effect on our results of operations and financial condition.

Changes in accounting standards issued by the Financial Accounting Standards Board or other standard-setting bodies may adversely affect our financial statements.

Our financial statements are subject to the application of U.S. GAAP, which is periodically revised and/or expanded. Accordingly, from time to time we are required to adopt new or revised accounting standards or guidance issued by recognized authoritative bodies, including the Financial Accounting Standards Board.


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It is possible that future accounting standards which we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could significantly affect our reported financial condition and results of operations. See Note 2 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data - Adoption of New Accounting Standards” in this Form 10-K for additional information.


Item 1B.    Unresolved Staff Comments

As of December 31, 2015, the Company had no unresolved SEC staff comments regarding its periodic or current reports.


Item 2.    Properties

Our executive headquarters consist of our main office building at One American Row in Hartford, Connecticut, which we own and occupy. As of December 31, 2015, we also leased space in one garage in Hartford, Connecticut for employee parking. Property is also leased for our home office in East Greenbush, New York.


Item 3.    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. Management of the Company believes that the ultimate 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 beyond the amounts already reported in these financial statements. 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

Phoenix and PHL Variable are subject to a Securities and Exchange Commission (the “SEC”) 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, which was approved by the SEC in March 2014 (the “March 2014 Order”) and was subsequently amended by an amended SEC administrative order approved by the SEC in August 2014 (the March 2014 Order, as amended, the “Amended Order”). The Amended Order and the March 2014 Order (collectively, the “Orders”), directed Phoenix and PHL Variable 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. Phoenix and PHL Variable remain subject to these obligations. Pursuant to the Orders, Phoenix and PHL Variable were required to file certain periodic SEC reports in accordance with the timetables set forth in the Orders. All of such filings have been made. Phoenix and PHL Variable paid civil monetary penalties to the SEC in the aggregate amount of $1.1 million pursuant to the terms of the Orders in 2014.

Cases Brought by Policy Investors

On August 2, 2012, Lima LS PLC filed a complaint against Phoenix, Phoenix Life, 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 and PHL Variable 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.

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Cost of Insurance Cases

On November 18, 2011, Martin Fleisher and another plaintiff (the “Fleisher Litigation”), on behalf of themselves and others similarly situated, filed suit against Phoenix Life 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.)) challenging COI rate adjustments implemented by Phoenix Life in 2010 and 2011 in certain universal life insurance policies. The complaint sought damages for breach of contract. The class certified by the court was limited to holders of Phoenix Life policies issued in New York subject to New York law and subject to Phoenix Life’s 2011 COI rate adjustment.

PHL Variable has been named as a defendant in six actions challenging its COI rate adjustments in certain universal life insurance policies implemented concurrently with the Phoenix Life adjustments. Phoenix Life and PHL Variable are referred to as the “Phoenix Life Companies.” Five cases have been brought against PHL Variable, while one case has been brought against both PHL Variable and Phoenix Life. These six cases, only one of which is styled as a class action, have been brought 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”); (2-5) 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”); (4: C.A. No. 3:14-cv-00555-WWE; U.S. Dist. Ct; D. Conn., complaint originally filed on March 6, 2013, in the District of Delaware and transferred by order dated April 22, 2014, to the District of Connecticut; and 5: C.A. No. 3:14-cv-01398-WWE, U.S. Dist. Ct; D. Conn., complaint filed on September 23, 2014, and amended on October 16, 2014, to add Phoenix Life as a defendant, and consolidated with No. 3:14-cv-00555-WWE (collectively the “U.S. Bank Conn. Litigations”)); and (6) SPRR LLC (C.A. No. 1:14-cv-8714-CM; U.S. Dist. Ct.; S.D.N.Y., complaint filed on October 31, 2014; the “SPRR Litigation”). SPRR LLC filed suit against PHL Variable, on behalf of itself and others similarly situated, challenging COI rate adjustments implemented by PHL Variable in 2011.

The Tiger Capital Litigation, the two U.S. Bank N.Y. Litigations and the SPRR Litigation were assigned or reassigned to the same judge as the Fleisher Litigation. The plaintiff in the Tiger Capital Litigation sought damages for breach of contract and declaratory relief. The plaintiff in the U.S. Bank N.Y. Litigations and the U.S. Bank Conn. Litigations sought damages and attorneys’ fees for breach of contract and other common law and statutory claims. The plaintiff in the SPRR Litigation sought damages for breach of contract for a nationwide class of policyholders.

The Phoenix Life Companies reached an agreement as of April 30, 2015, memorialized in a formal settlement agreement executed on May 29, 2015, with SPRR, LLC, Martin Fleisher, as trustee of the Michael Moss Irrevocable Life Insurance Trust II, and Jonathan Berck, as trustee of the John L. Loeb, Jr. Insurance Trust (collectively, the SPRR Litigation and the Fleisher Litigation plaintiffs referred to as the “Plaintiffs”), to resolve the Fleisher Litigation and SPRR Litigation (the “Settlement”). A motion for preliminary approval of the Settlement was filed with the United States District Court for the Southern District of New York on May 29, 2015 and on June 3, 2015, the court granted preliminary approval of the Settlement and ordered notice be given to class members. The proposed Settlement class consists of all policyholders that were subject to the 2010 or 2011 COI rate adjustments (collectively, the “Settlement Class”), including the policies within the above-named COI cases. The Phoenix Life Companies agreed to pay a total of $48.5 million, as reduced for any opt-outs, in connection with the Settlement. The Phoenix Life Companies agreed not to impose additional increases to COI rates on policies participating in the Settlement Class through the end of 2020, and not to challenge the validity of policies participating in the Settlement Class for lack of insurable interest or misrepresentations in the policy applications. Under the Settlement, policyholders are members of the Settlement Class, including those which have filed individual actions relating to COI rate adjustments, may opt out of the Settlement and separately litigate their claims. The opt-out period expired on July 17, 2015 and opt-out notices have been received by the Phoenix Life Companies, including from U.S. Bank, a party to four COI cases. On September 9, 2015, the judge in the Fleisher and SPRR Litigations entered an order approving of the Settlement and final judgment was entered on December 9, 2015.

On June 3, 2015, the parties to the Tiger Capital Litigation advised the court of a settlement of the Tiger Capital Litigation, which includes Tiger Capital, LLC’s participation in the class Settlement. The settlement of the Tiger Capital Litigation was on a basis that will not have a material impact on the Company’s financial statements. The Tiger Capital Litigation was closed by the court on October 21, 2015.


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On September 28, 2015, the Plaintiff in the U.S. Bank N.Y. Litigations and PHL Variable filed a joint stipulation of dismissal of the U.S. Bank N.Y. Litigations with prejudice pursuant to an agreement to settle. The U.S. Bank Conn. Litigations are proceeding, and the Plaintiff seeks damages and attorney’s fees for breach of contract and other common law and statutory claims.

During the third quarter, the Company recorded additional litigation charges related to these matters. In addition, the Company has adjusted its actuarial reserves to reflect the estimated impact on future revenues of these settlement activities.

Complaints to state insurance departments regarding PHL Variable’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 PHL Variable to take remedial action in response to complaints by a single policyholder. PHL Variable disagrees with both states’ positions. On March 23, 2015, an Administrative Law Judge (“ALJ”) in Wisconsin ordered PHL Variable to pay restitution to current and former owners of seven policies and imposed a fine on PHL Variable which, in a total amount, does not have a material impact on PHL Variable’s financial position (Office of the Commissioner of Insurance Case No. 13- C35362). PHL Variable disagrees with the ALJ’s determination and has appealed the order.

For any cases or regulatory directives not resolved by the Settlement, Phoenix Life and PHL Variable believe that they have meritorious defenses against all of these lawsuits and regulatory directives and intend to vigorously defend against them, including by appeal if necessary. For any matters not resolved by the Settlement, the outcome is uncertain and any potential losses cannot be reasonably estimated.

Cases Brought by Policyholders

On October 30, 2009, Brian S. Shevlin, Keith P. Shevlin, and Erin Taylor (the “Shevlins” or “Plaintiffs”) brought a purported class action suit against Phoenix Life and Phoenix (collectively “Defendants”) in the Superior Court of New Jersey, Mercer County, Brian S. Shevlin at al. v. Phoenix Life Insurance et al., Docket No. MER-L-2792-09. The Shevlins, on behalf of themselves and a class of owners of closed block policies established upon the demutualization of Phoenix Life in 2001, challenged the reduction of dividends on those policies following 2006 and 2009 dividend scale changes. Defendants removed the suit to the United States District Court for the District of New Jersey (Case No. 09-cv-06323). On August 24, 2010, the District Court partially granted and partially denied Defendants’ motion to dismiss, and shortly thereafter Plaintiffs filed a Second Amended Complaint. Plaintiffs allege that the reduction of dividends breached the terms of their policies with Phoenix Life, and unjustly enriched Phoenix. On June 30, 2014, the court denied Phoenix’s motion for summary judgment, and instructed the parties to proceed to brief class certification. On February 9, 2016, the court denied the pending motion for class certification without prejudice to renew it if a planned mediation was unsuccessful in resolving the action. Following a mediation session that did not resolve the action, the plaintiffs refiled their motion for class certification. The Company believes that it has meritorious defenses to the plaintiffs’ claims and intends to defend this matter vigorously. The outcome of this litigation and any potential award of damages are uncertain.


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Shareholder Litigation

On September 28, 2015, Phoenix entered into a definitive merger agreement to be acquired by Nassau. On October 26, 2015, a putative class action lawsuit was filed by a purported shareholder of Phoenix in the Superior Court of the State of Connecticut challenging the proposed merger transaction. The lawsuit alleges that the individual members of Phoenix’s Board of Directors breached their fiduciary duties to the Phoenix shareholder by agreeing to the proposed merger transaction for inadequate consideration and through an allegedly flawed sales process, and that the defendant companies – Phoenix, Nassau and Davero Merger Sub Corp. (a wholly owned subsidiary of Nassau) – aided and abetted such alleged breaches. The plaintiff in the action, which was styled Thomas White v. The Phoenix Companies, Inc., et. al., No. HHD-CV15--6063180-S (Conn. Super. Ct., Hartford), sought, among other things, an order enjoining the merger and, in the event the merger is completed, rescission and/or damages as a result of the alleged violations of law, as well as fees and costs. From late November to early December 2015, Phoenix and the plaintiff engaged in arm’s-length negotiations for the expedited production of certain documents. On December 10, 2015, Phoenix and the other defendants executed a MOU with the plaintiff providing for settlement of the suit based on certain supplemental disclosures to be released to Phoenix shareholders in advance of the December 17, 2015 shareholder vote. The settlement reflected in the MOU is subject to certain confirmatory discovery by the plaintiffs in the litigation and subject to the approval of the Court, among other things. The defendants have vigorously denied, and continue vigorously to deny, that they have committed any violation of law or engaged in any of the wrongful acts that were alleged in the litigation. The MOU outlines the terms of the agreement in principle to settle and release all claims which were or could have been asserted in the litigation. The parties to the MOU will seek to enter into a stipulation of settlement that will be presented to the Court for final approval. The stipulation of settlement will be subject to customary conditions, including approval by the Court, which will consider the fairness, reasonableness and adequacy of the settlement. The stipulation of settlement will provide for, among other things, the conditional certification of the Litigation as a non opt-out class action. The stipulation of settlement will provide for the release of any and all claims arising from the merger, subject to approval by the Court. The release will not become effective until the stipulation of settlement is approved by the Court. In connection with the settlement, subject to the ultimate determination of the Court, counsel for plaintiff may receive an award of reasonable fees. Neither this payment nor the settlement will affect the consideration to be received by Phoenix stockholders in the merger or the timing of the anticipated closing of the merger. There can be no assurance that the settling parties will ultimately enter into a stipulation of settlement or that the Court will approve the settlement even if the settling parties were to enter into the stipulation. In such event, or if the merger is not consummated for any reason, the proposed settlement will be null and void and of no force and effect. In January 2016, named-plaintiff, Thomas White, and non-party, Stephen Bushansky, a member of the putative class, moved to substitute Stephen Bushansky as plaintiff, which motion was granted.

Consent Solicitation Litigation

On February 8, 2016, plaintiff Kenneth Roth filed a putative class action complaint (“Complaint”) in New York Supreme Court (New York County) (the “Court”) against The Phoenix Companies, Inc. (“Phoenix”) and U.S. Bank National Association in its capacity as indenture trustee (the “Trustee”), Index No. 650634/2016 (the “Litigation”), relating to a January 7, 2016 consent solicitation launched by Phoenix in connection with its 7.45% Quarterly Interest Bonds due 2032 (the “Consent Solicitation”).

The Complaint asserts claims against Phoenix for breach of contract, breach of the covenant of good faith and fair dealing, negligent misrepresentation, a temporary restraining order, a preliminary and permanent injunction, and a declaratory judgment. In addition to damages, costs, and attorneys’ fees, the Complaint asks the Court to temporarily restrain, and preliminarily and permanently enjoin the Consent Solicitation or, alternatively, declare that the proposed supplemental indenture is null and void. The Complaint further alleges that the Trustee breached its fiduciary duty to bondholders by, inter alia, allowing the Consent Solicitation to be issued.

Phoenix believes that the lawsuit is without merit and that no additional or amended disclosure is required to supplement the Consent Solicitation, and that no changes to the proposed supplemental indenture are required, under applicable laws; however, to eliminate the burden, expense and uncertainties inherent in such litigation, and without admitting any liability or wrongdoing, Phoenix agreed, pursuant to the terms of a MOU, to: (a) revise the proposed Fourth Supplemental Indenture to make available to bondholders certain information in connection with Phoenix’s reporting obligations under Section 704, as amended by the Fourth Supplemental Indenture, (b) make available financial statements and related information of Phoenix not only to current bondholders but also to prospective bondholders, securities analysts and market makers, as detailed in the supplemental disclosures to the Consent Solicitation, and (c) make certain other supplemental disclosures to the Consent Solicitation.


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On February 24, 2016, the parties to the Litigation (the “Settling Parties”) entered into the MOU providing for the settlement of the Litigation, subject to the approval of the Court, among other things. The defendants have vigorously denied, and continue vigorously to deny, that they have committed any violation of law or engaged in any of the wrongful acts that were alleged in the Litigation. The MOU outlines the terms of the Settling Parties’ agreement in principle to settle and release all claims which were or could have been asserted in the Litigation. The parties to the MOU will seek to enter into a stipulation of settlement that will be presented to the Court for final approval. The stipulation of settlement will be subject to customary conditions, including approval by the Court, which will consider the fairness, reasonableness and adequacy of the settlement. The stipulation of settlement will provide for, among other things, the release of any and all claims arising from or relating to the Consent Solicitation, subject to approval by the Court. The release will not become effective until the stipulation of settlement is approved by the Court. In connection with the settlement, subject to the ultimate determination of the Court, counsel for plaintiff may receive an award of reasonable fees. Neither this payment nor the settlement will affect the consent fee to be received by consenting Phoenix bondholders in the Consent Solicitation. There can be no assurance that the Settling Parties will ultimately enter into a stipulation of settlement or that the Court will approve the settlement even if the Settling Parties were to enter into the stipulation. In such event the proposed settlement will be null and void and of no force and effect.


Item 4.    Mine Safety Disclosures

Not applicable.



28

PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market

Shares of our common stock trade on the New York Stock Exchange under the ticker symbol “PNX”. As of March 11, 2016, there were 88,662 registered holders of our common stock.

Unregistered Shares

We issued the following shares of common stock to eligible policyholders of Phoenix Life, effective as of June 25, 2001, in connection with Phoenix Life’s demutualization on that date: 2,808,719 shares in 2001 and 275 shares in the 14 years ended December 31, 2015. We issued these shares in exchange for their membership interests without registration in reliance on an applicable exemption from registration under the Securities Act of 1933, as amended (the “Securities Act”).

Throughout 2015, we issued an aggregate of 23,782 restricted stock units (“RSUs”) to eight of our nine independent directors who served during the year in lieu of current compensation as elected by the directors, without registration in reliance on an applicable exemption from registration under Section 4(2) and Regulation D of the Securities Act. Each of the RSUs is potentially convertible into one share of our common stock.

Securities Authorized for Issuance Under Equity Compensation Plans

The Company has compensation plans under which equity securities of the Company are authorized for issuance. See “Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in this Form 10-K.

Stock Price

The following table presents the intraday high and low per share prices for our common stock on the New York Stock Exchange for each fiscal quarter during the years 2015 and 2014. The closing price of our common stock was $37.04 per share at December 31, 2015.

 
2015
 
2014
 
High
 
Low
 
High
 
Low
First Quarter
$
70.72

 
$
45.20

 
$
61.40

 
$
41.22

Second Quarter
$
49.18

 
$
15.90

 
$
56.61

 
$
38.07

Third Quarter
$
34.76

 
$
11.12

 
$
64.89

 
$
46.47

Fourth Quarter
$
37.86

 
$
32.31

 
$
70.92

 
$
51.45


Dividends

In 2015, 2014 and 2013, we did not pay any stockholder dividends.

Stock Performance

The following graph compares the cumulative total return on PNX Common Stock with the cumulative total returns of the Standard & Poor’s 500 Stock Index and the Standard & Poor’s 500 Life and Health Insurance Index for the period December 31, 2010 through December 31, 2015.


29

The indices assume that $100 was invested on December 31, 2010, with dividends being reinvested.



Item 6.    Selected Financial Data

Our selected historical consolidated financial data as of and for each of the five years in the period ended December 31, 2015 is reflected in the schedule that follows. We obtained the balance sheet data for the years ended December 31, 2015 and 2014 and the income statement data for the years ended December 31, 2015, 2014 and 2013 from our audited consolidated financial statements in this Form 10-K. The selected consolidated financial data as of and for the years ended December 31, 2012 and 2011 has been obtained from our consolidated financial statements which are not contained in this report. Our historical results should not be viewed as indicative of results expected for any future period.

We prepared the following financial data, other than statutory data, in conformity with U.S. GAAP. We derived the statutory data from the Annual Statements of our Life Companies as filed with state insurance regulatory authorities and prepared it in accordance with statutory accounting practices prescribed or permitted by state insurance regulators, which vary in certain material respects from U.S. GAAP.

The following should be read in conjunction with “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements in this Form 10-K.


30

Selected Financial Data:
For the years ended December 31,
($ in millions, except per share data)
2015
 
2014
 
2013
 
2012
 
2011
Income Statement Data [1]
 
 
 
 
 
 
 
 
 
Premiums
$
349.1

 
$
332.1

 
$
351.6

 
$
402.3

 
$
449.4

Fee income
543.6

 
545.1

 
550.3

 
556.0

 
596.9

Net investment income
834.9

 
830.9

 
789.7

 
827.8

 
824.0

Net realized investment gains (losses):
 
 
 
 
 
 
 
 
 
Total OTTI losses
(20.8
)
 
(7.7
)
 
(7.0
)
 
(50.8
)
 
(65.8
)
Portion of OTTI losses recognized in
  other comprehensive income (“OCI”)
(2.0
)
 
(0.4
)
 
(4.8
)
 
22.9

 
38.5

Net OTTI losses recognized in earnings
(22.8
)
 
(8.1
)
 
(11.8
)

(27.9
)

(27.3
)
Net realized investment gains (losses),
  excluding OTTI losses
(10.0
)
 
(33.1
)
 
27.8

 
11.1

 
(5.3
)
Net realized investment gains (losses)
(32.8
)
 
(41.2
)
 
16.0


(16.8
)

(32.6
)
Gain on debt repurchase
—

 
—

 
—

 
11.9

 
0.2

Total revenues
$
1,694.8

 
$
1,666.9

 
$
1,707.6


$
1,781.2


$
1,837.9

Total benefits and expenses
$
1,854.1

 
$
1,862.1

 
$
1,669.5

 
$
1,934.7

 
$
1,843.3

 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(125.0
)
 
$
(205.7
)
 
$
29.6

 
$
(148.8
)
 
$
(17.8
)
Loss from discontinued operations,
  net of income taxes
(2.0
)
 
(3.5
)
 
(2.9
)
 
(15.6
)
 
(21.6
)
Net income (loss)
(127.0
)
 
(209.2
)
 
26.7


(164.4
)

(39.4
)
Less: Net income (loss) attributable to
  noncontrolling interests
6.7

 
4.0

 
0.7

 
0.6

 
(0.5
)
Net income (loss) attributable to
  The Phoenix Companies, Inc.
$
(133.7
)
 
$
(213.2
)
 
$
26.0


$
(165.0
)

$
(38.9
)
 
 
 
 
 
 
 
 
 
 
Basic Income (Loss) Per Share
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(22.90
)
 
$
(36.48
)
 
$
5.04

 
$
(25.90
)
 
$
(2.98
)
Net income (loss) attributable to
  The Phoenix Companies, Inc.
$
(23.25
)
 
$
(37.09
)
 
$
4.53

 
$
(28.60
)
 
$
(6.69
)
Diluted Income (Loss) Per Share
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(22.90
)
 
$
(36.48
)
 
$
5.01

 
$
(25.90
)
 
$
(2.98
)
Net income (loss) attributable to
  The Phoenix Companies, Inc.
$
(23.25
)
 
$
(37.09
)
 
$
4.51

 
$
(28.60
)
 
$
(6.69
)
 
 
 
 
 
 
 
 
 
 
Dividends per share
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data
 
 
 
 
 
 
 
 
 
Cash and investments
$
16,334.5

 
$
16,750.1

 
$
16,083.1

 
$
16,228.7

 
$
15,294.7

Total assets
$
21,091.9

 
$
21,745.9

 
$
21,641.1

 
$
21,634.9

 
$
21,491.9

Indebtedness
$
378.9

 
$
378.9

 
$
378.8

 
$
378.8

 
$
426.9

Total liabilities
$
20,918.1

 
$
21,399.3

 
$
21,039.8

 
$
21,123.5

 
$
20,800.5

Total stockholders’ equity
$
173.8

 
$
346.6

 
$
601.3

 
$
511.4

 
$
691.4

 
 
 
 
 
 
 
 
 
 
Statutory Data [2]
 
 
 
 
 
 
 
 
 
Statutory capital, surplus and AVR
 
 
 
 
 
 
 
 
 
Phoenix Life [3][4]
$
535.3

 
$
752.2

 
$
735.2

 
$
922.5

 
$
845.7

PHL Variable
$
209.3

 
$
213.7

 
$
235.2

 
$
321.0

 
$
320.1

Statutory net income (loss)
 
 
 
 
 
 
 
 
 
Phoenix Life [5]
$
(660.7
)
 
$
132.5

 
$
(21.0
)
 
$
156.2

 
$
95.0

PHL Variable
$
(14.0
)
 
$
(41.1
)
 
$
(86.1
)
 
$
49.7

 
$
61.4

———————
[1]
The reclassification of PFG and PLARNY to discontinued operations has been reflected for all years.
[2]
Amounts in statements filed with state regulatory authorities differ from audited financial statements.
[3]
As a result of discussions with its regulators related to the intercompany reinsurance treaty between Phoenix Life and PHL Variable executed in the second quarter of 2015, the Company’s operating subsidiaries were de-stacked, effective July 1, 2015. The impact of the de-stack on Phoenix Life’s capital and surplus was $262.2 million. Prior to the effective date, Phoenix Life’s capital and surplus included the capital and surplus of its subsidiaries.
[4]
In accordance with accounting practices prescribed by the NYDFS, Phoenix Life’s capital and surplus includes $126.2 million, $126.2 million, $126.1 million, $126.1 million and $174.2 million of surplus notes outstanding at December 31, 2015, 2014, 2013, 2012 and 2011, respectively.
[5]
Phoenix Life’s 2015 statutory net loss includes $687.9 million of realized losses relating to the de-stacking of Phoenix Life’s life subsidiaries. There was an offsetting unrealized capital gain for the same amount, resulting in no impact to capital and surplus.



31

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

The discussion in this Form 10-K 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 regulatory approvals and the expected timing, completion and effects of the merger, as well as other statements representing management’s beliefs about future events, transactions, strategies, operations and financial results . Such forward-looking statements often contain words such as “will,” “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “is targeting,” “may,” “should” and other similar words or expressions or the negative thereof or other variations thereon. Forward-looking statements are made based upon management’s current expectations and beliefs concerning trends and future developments and their potential effects on us and 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 merger, which include: (i) the merger may not be completed in the timeframe or manner currently anticipated, or at all, which could have a material adverse effect on our business, financial condition, results of operations and stock price;(ii) shareholders will receive $37.50 in cash per share of our common stock despite changes in market value; (iii) the pendency of the merger, the related diversion of management’s attention from the operation of our business and other expenses incurred in connection with the merger may materially and adversely affect our business and results of operations;(iv) announcement of the merger could disrupt our relationships with our employees, customers, suppliers and others, as well as disrupt our operating results and business generally; (v) the Merger Agreement restricts our ability to seek other strategic alternatives; (vi) if the merger is not completed and we are not otherwise acquired, we may then consider other strategic alternatives, which may subject us to additional risks and uncertainties; and (vii) an adverse ruling in the lawsuit challenging the merger may prevent the merger from being completed; (B) risks related to the Company’s financial statement restatements, failure to file timely periodic reports with the SEC and our internal control over financial reporting, which include (i) the presence of material weaknesses in our internal control over financial reporting, the potential failure to remediate material weaknesses in our internal control over financial reporting and that other material weaknesses may be identified in the future, which would adversely affect the accuracy and timing of our financial reporting; (C) 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) the effect of guaranteed benefits within our products; (vii) potential exposure to unidentified or unanticipated risk that could adversely affect our businesses or result in losses; (viii) the consequences related to variations in the amount of our statutory capital could adversely affect our business; (ix) the possibility that we may not be successful in our efforts to implement a business plan focused on new market segments; (x) changes in our investment valuations based on changes in our valuation methodologies, estimations and assumptions; (xi) the availability, pricing and terms of reinsurance coverage generally and the inability or unwillingness of our reinsurers to meet their obligations to us specifically; (xii) our ability to attract and retain key personnel in a competitive environment; (xiii) our dependence on third parties to maintain critical business and administrative functions; (xiv) the strong competition we face in our business from banks, insurance companies and other financial services firms; (xv) our reliance, as a holding company, on dividends and other payments from our subsidiaries to meet our financial obligations and pay future dividends, particularly since our insurance subsidiaries’ ability to pay dividends is subject to regulatory restrictions; (xvi) the potential need to fund deficiencies in our closed block; (xvii) 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; (xviii) 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; (xix) regulatory actions or examinations may harm our business; (xx) potential future material losses from our discontinued reinsurance business; and (xxi) changes in accounting standards; and (D) 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-K, 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-K, such statements or disclosures will be deemed to modify or supersede such statements in this Form 10-K.

MANAGEMENT’S DISCUSSION AND ANALYSIS

This section reviews our consolidated financial condition at December 31, 2015 and 2014; our consolidated results of operations for the years 2015, 2014 and 2013; and, where appropriate, factors that may affect our future financial performance. This discussion should be read in conjunction with “Item 6: Selected Financial Data” and our consolidated financial statements in this Form 10-K. We define increases or decreases greater than or equal to 200% as “NM” or not meaningful.


32

Overview

Business

The Phoenix Companies, Inc. (“we,” “our,” “us,” the “Company,” “PNX” or “Phoenix”) is a holding company incorporated in Delaware. Our operating subsidiaries 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 (whole life, 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.

We believe our competitive strengths include:

•
competitive and innovative products;
•
underwriting and mortality risk management expertise;
•
ability to develop business partnerships; and
•
value-added support provided to distributors by our wholesalers and operating personnel.

In 2015, 97% of Phoenix product sales, as defined by total annuity deposits and total life premium, were annuities, and 96% of those sales were fixed indexed annuities. In addition, we have expanded sales of other insurance companies’ policies through our distribution subsidiary, Saybrus Partners, Inc. (“Saybrus”).

We operate two business segments: Life and Annuity and Saybrus. The Life and Annuity segment includes individual life insurance and annuity products, including our closed block. Saybrus 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.

As a result of discussions with its regulators related to the execution of an intercompany reinsurance treaty between Phoenix Life and PHL Variable during the second quarter of 2015, Phoenix de-stacked its insurance company subsidiaries making PHL Variable, PLAC and APLAR direct subsidiaries of the holding company.

On September 29, 2015, the Company announced the signing of a definitive agreement in which Nassau Reinsurance Group Holdings L.P. (“Nassau”) has agreed to acquire the Company for $37.50 per share in cash, representing an aggregate purchase price of $217.2 million. Founded in April 2015, Nassau is a privately held insurance and reinsurance business focused on acquiring and operating entities in the life, annuity and long-term care sectors. On December 17, 2015 the merger was approved by Phoenix shareholders. The transaction remains subject to regulatory approvals and the satisfaction of other closing conditions. After completion of the transaction, Nassau will contribute $100 million in new equity capital into the Company. After completion of the transaction, Phoenix will be a privately held, wholly-owned subsidiary of Nassau.

Earnings Drivers

A gradually declining amount of our Life and Annuity segment earnings are derived from the closed block, which consists primarily of participating life insurance policies sold prior to our demutualization and initial public offering in 2001. We do not expect the net income contribution from the closed block to deviate materially from its actuarially projected path as long as actual cumulative earnings continue to meet or exceed expected cumulative earnings. See Note 4 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information on the closed block.


33

Our Life and Annuity segment’s 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 net amount at risk or “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 include death claims net of reinsurance cash flows, including ceded premiums and recoverables, interest credited to policyholders and changes in policy liabilities and accruals. 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. For fixed indexed annuities, policy benefits include the change in the liability associated with guaranteed minimum withdrawal benefits. 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 subject to the same variability and risk, and these factors can vary significantly from period to period, particularly the impact from changes in interest rates.

•
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, including professional fees and outside consulting and legal services. They also include pension and other benefit costs which involve significant estimates and assumptions.

•
Deferred policy acquisition cost (“DAC”) 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 DAC. 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 change in estimated 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 (or “unlock”), which can result in material changes in amortization for the period of the unlock.

•
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 and embedded derivatives. Certain of our variable and fixed annuity contracts include guaranteed minimum withdrawal and accumulation benefits which are classified as embedded derivatives. The fair value of the embedded derivative liability is calculated using significant management estimates, including: (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; and (iv) the expected costs of annual call options that will be purchased in the future to fund index credits beyond the next policy anniversary. These factors can vary significantly from period to period.


34

•
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. 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 recorded as revenues. Premiums and deposits for variable life and universal life are reflected on our consolidated balance sheets as an increase in policy liabilities and accruals, and premiums and deposits for fixed annuities and certain investment options of variable annuities are reflected as an increase in policyholder deposit funds.

Saybrus is a fee-based business driven by the commission revenue earned on consultation services provided to partner companies as well as on sales of Phoenix Life and PHL Variable product lines. These fees are offset by compensation-related expenses attributable to our sales force.

Recent Trends in Earnings Drivers

•
Policy benefits. The most significant drivers of policy benefits expense are claims incurred in the period net of reinsurance, changes in the liability for profits followed by losses on the universal life business, and changes in liabilities associated with guaranteed benefits. Recent trends in these drivers are as follows:

◦
The liability for profits followed by losses (“PFBL”), excluding the impact of unlocking, continues to increase during the periods in which we expect to have gross profits on the business. This long-term liability is sensitive to projected future interest rates, most notably the expected yield on invested assets. While the liability continued to accrue in the current year, the increase in the accrual was not as significant as the prior year as a result of less significant changes in interest rates and worse than expected mortality.

As part of the annual assumption review and unlock, assumptions used in the calculation of the liability for PFBL are updated. Updates in the current year were driven primarily by changes to the projected yield on investments and lower lapses, while updates in the prior year were driven primarily by mortality expected improvement. These updates resulted in an unlock charge of $19.7 million for the year ended December 31, 2015 and an unlock benefit of $13.0 million for the year ended December 31, 2014.

◦
The impact on earnings is driven by mortality outside of the closed block, as any earnings in the closed block inure to the policyholders through changes in the expected policyholder dividends. Mortality outside of the closed block was worse in 2015 than in 2014, resulting in higher benefit expenses for the year. Including the closed block, mortality was worse than expected in 2015 and was better than expected in 2014. While actual mortality experience was worse than expected in 2015, our experience over longer periods supports our longer term assumptions for improved mortality.

◦
Changes in the liabilities associated with guaranteed benefits are impacted by changes in actual policyholder behavior and expected policyholder behavior, as well as market changes and investment results. We continue to accrue the liabilities primarily for the guaranteed death benefit and withdrawal features on the fixed indexed annuity block as it continues to grow and age, as well as the universal life block as it continues to age. Increases in the guaranteed benefit liabilities were $57.5 million for the year ended December 31, 2015 compared to $54.6 million for the year ended December 31, 2014.


35

As part of the annual assumption review and unlock, assumptions used in the calculation of the liabilities for guaranteed benefits are updated. Updates in the current year were driven primarily by increases in the lapse rates in the fixed indexed annuity business and changes in the projected yield on investments in the variable annuity business. Updates to the guaranteed benefit liabilities resulted in an unlock benefit of $10.5 million for the year ended December 31, 2015 and an unlock benefit of $3.1 million for the year ended December 31, 2014.

•
Other operating expenses. Other operating expenses have remained at elevated levels and have significantly impacted our earnings. These expenses are driven primarily by higher professional fees, including audit, outside consulting and legal services due to the preparation of financial statements and remediation efforts. Audit, other professional fees and outside consulting and legal services continue to be a significant driver of other operating expenses for the Company. In addition, in connection with the settlement agreement reached to resolve the Cost of Insurance Cases, the Company recorded an accrual in the amount of $48.5 million in the three months ended March 31, 2015.

•
Deferred policy acquisition cost amortization. Policy acquisition cost amortization (“DAC amortization”) can fluctuate significantly between periods. The most significant drivers of the changes in policy acquisition cost amortization are due to realized gains and losses on the underlying investment portfolios, and changes from the annual assumption review and unlock. Deferred policy acquisition cost amortization decreased for the year ended December 31, 2015 compared to the year ended December 31, 2014 primarily driven by overall worse than expected gross profits in the universal life business in 2015 compared to 2014.

As part of the annual assumption review and unlock, assumptions used in the calculation deferred policy acquisition costs are updated. Updates in the current year resulted in a benefit to DAC amortization of $9.7 million and were driven primarily by lower lapse rates in variable universal life.

•
Net realized investment gains or losses. Net realized investment gains and losses have been driven primarily by realized gains or losses on both the embedded policy derivatives associated with the fixed indexed annuity and variable annuity guarantees, and the derivative investments that are used to hedge these businesses. The changes in the fair value of the policy embedded derivatives and the derivative investments are driven by changes in the equity markets, including interest rates, market volatility, and overall market levels, as well as changes in actual and projected policyholder behavior. In both periods losses were primarily driven by changes in interest rates and significant volatility in the equity markets, and higher OTTI in 2015 was driven by credit deterioration in the energy and mining sectors.

•
Income taxes. The effective tax rate for 2015 and 2014 was 21.5% and (5.4)% respectively. The primary drivers of the differences between the effective tax rate and the U.S. tax statutory rate of 35.0% in 2015 and 2014 are increases in the valuation allowance on the pre-tax losses, expired tax attribute carryforwards and the dividends received deduction. The fluctuation of the rate between 2015 and 2014 primarily relates to the amount of valuation allowance increases in each year, as compared to the pre-tax losses recorded.

Since its formation in 2009, Saybrus’ results of operations have steadily improved as revenue has increased. Inclusive of intercompany transactions, revenue in 2015 was $43.3 million, compared with $37.5 million in 2014. Of these amounts, revenue of $12.6 million and $11.5 million was earned from the sales of Phoenix life and annuity products in 2015 and 2014, respectively. Operating expenses increased to $35.2 million in 2015 from $31.3 million in 2014. The change was primarily driven by an increase in compensation related expenses.

Strategy and Outlook

Since 2009, we have pursued a strategy focused on balance sheet strength, policyholder service, operational efficiency and profitable growth. Within the growth portion of the strategy, we shifted our target market to middle market and mass affluent families and individuals planning for or living in retirement and focused the majority of our efforts on building and distributing a competitive portfolio of fixed indexed annuity products. On a smaller scale, we developed life insurance products for the same target market. In addition, we established a distribution company to sell Phoenix products through independent marketing organizations and producers and provide consulting services to partner firms in support of policies written by companies other than Phoenix. These efforts have produced a firm foundation for continued growth, even as our business remains sensitive to general economic conditions and capital market trends including equity markets and interest rates.


36

We believe there is significant demand for our products among middle market and mass affluent households, which have a variety of financial planning needs, such as tax-deferred savings, safety of principal, guaranteed income during retirement, income replacement and death benefits. The current low interest rate environment provides limited opportunities for consumers to protect principal and generate predictable income. Our fixed indexed annuity products are positioned favorably vis-à-vis traditional investments such as conventional fixed annuities and bank certificates of deposits since they offer principal protection, lifetime income options and earnings potential tied to stock market indices.

Recent trends in the life insurance industry may affect our mortality, policy persistency and premium persistency for certain blocks of in force business. 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 DAC and unearned revenue amortization models, as well as projections within the death benefit and other insurance benefit reserving models.

Impact of New Accounting Standards

For a discussion of accounting standards and changes in accounting, see Note 2 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. In preparing these consolidated 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 consolidated 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 (“EGMs”) 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 and equity securities; limited partnerships and other investments; valuation of deferred tax assets; pension and other post-employment benefits liabilities; and accruals for contingent liabilities. Actual results could differ from these estimates.

Certain of our critical accounting estimates are as follows:

Deferred Policy Acquisition Costs

We amortize DAC based on the related policy’s classification. For individual participating life insurance policies, deferred policy acquisition costs are amortized in proportion to EGMs arising principally from investment results, mortality, dividends to policyholders and expense margins. For universal life, variable universal life and deferred annuities, deferred policy acquisition costs are amortized in proportion to EGPs discussed more fully below. EGPs are also used to amortize other assets and liabilities in the Company’s consolidated balance sheets, such as sales inducement assets (“SIA”) and unearned revenue reserves (“URR”). Components of EGPs are used to determine reserves for universal life and fixed indexed and variable annuity contracts with death and other insurance benefits such as guaranteed minimum death and guaranteed minimum income benefits. Both EGMs and EGPs are based on historical and anticipated future experience which is updated periodically.

DAC is adjusted through OCI each period as a result of unrealized gains or losses on securities classified as available-for-sale in a process commonly referred to as shadow accounting. This adjustment is required in order to reflect the impact of these unrealized amounts as if these unrealized amounts had been realized.

The projection of EGPs and EGMs requires the extensive use of actuarial assumptions, estimates and judgments about the future. Future EGPs and EGMs are generally projected for the estimated lives of the contracts. Assumptions are set separately for each product and are reviewed at least annually based on our current best estimates of future events.


37

The Company has updated a number of assumptions that have resulted in changes to expected future gross profits. The most significant assumption updates made over the last several years resulting in a change to future gross profits and the amortization of DAC, SIA and URR are related to changes in expected premium persistency, the incorporation of a mortality improvement assumption, and other updates to mortality based on updated experience. Other of the more significant drivers of changes to expected gross profits over the last several years include changes in expected separate account investment returns due to changes in equity markets; changes in expected future interest rates and default rates based on continued experience and expected interest rate changes; changes in mortality, lapses and other policyholder behavior assumptions that are updated to reflect more recent policyholder and industry experience; and changes in expected policy administration expenses. In addition to DAC, SIA and URR amortization, the assumption updates also impact the PFBL liability, the reserves for guaranteed benefits and the embedded derivative liabilities. The unlock provided a benefit of approximately $3.8 million for the year ended December 31, 2015 and a benefit of $4.0 million for the year ended December 31, 2014.

See Note 2 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information related to DAC.

Policy Liabilities and Accruals

Future policy benefits are generally payable over an extended period of time and related liabilities are calculated recognizing future expected benefits, expenses and premiums. Such liabilities are established based on methods and underlying assumptions in accordance with U.S. GAAP and applicable actuarial standards. Principal assumptions used in the establishment of liabilities for future policy benefits are mortality, morbidity, policyholder behavior, investment returns, inflation, expenses and other contingent events as appropriate. These assumptions are intended to estimate the experience for the period the policy benefits are payable. Utilizing these assumptions, liabilities are established on a cohort basis, as appropriate. If experience is less favorable than assumed, additional liabilities may be established, resulting in a charge to policyholder benefits and claims.

Additional policyholder liabilities for guaranteed benefits on variable annuity and on fixed index annuity contracts are based on estimates of the expected value of benefits in excess of the projected account balance, recognizing the excess over the accumulation period based on total expected assessments. Because these estimates are sensitive to capital market movements, amounts are calculated using multiple future economic scenarios.

Additional policyholder liabilities are established for certain contract features that could generate significant reductions to future gross profits (e.g., death benefits when a contract has zero account value and a no-lapse guarantee). The liabilities are accrued over the lifetime of the block based on assessments. The assumptions used in estimating these liabilities are consistent with those used for amortizing deferred policy acquisition costs, and are, thus, subject to the same variability and risk. The assumptions of investment performance and volatility for variable and equity index products are consistent with historical experience of the appropriate underlying equity indices.

We expect that our universal life block of business will generate profits followed by losses and, therefore, we establish an additional liability (“PFBL”) to accrue for the expected losses over the period of expected profits. 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.

See Note 2 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” and the “Enterprise Risk Management” section of “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K for additional information.


38

Embedded Derivative Liabilities

We make guarantees on certain variable annuity contracts, including GMAB, GMWB and combination rider (“COMBO”) as well as provide credits based on the performance of certain indices (“index credits”) on our fixed indexed annuity contracts that meet the definition of an embedded derivative. The GMAB, GMWB and COMBO embedded derivative liabilities associated with our variable annuity contracts are accounted for at fair value, using a risk neutral stochastic valuation methodology with changes in fair value recorded in realized investment gains. The inputs to our fair value methodology include estimates derived from the asset derivatives market, including the equity volatility and the swap curve. Several additional inputs are not obtained from independent sources, but instead reflect our internally developed assumptions related to mortality rates, lapse rates and policyholder behavior. The fair value of the embedded derivative liabilities associated with the index credits on our fixed indexed annuity contracts is calculated using the budget method with changes in fair value recorded in realized investment gains. The initial value under the budget method is established based on the fair value of the options used to hedge the liabilities. The value of the index credits in future years is estimated to be the budgeted amount. The budget amount is based on the impact of projected interest rates on the discounted liabilities. Several additional inputs reflect our internally developed assumptions related to lapse rates and policyholder behavior. As there are significant unobservable inputs included in our fair value methodology for these embedded derivative liabilities, we consider the above-described methodology as a whole to be Level 3 within the fair value hierarchy.

Our fair value calculation of embedded derivative liabilities includes a credit standing adjustment (the “CSA”). The CSA represents the adjustment that market participants would make to reflect the risk that guaranteed benefit obligations may not be fulfilled (“non-performance risk”). We estimate our CSA using the credit spread (based on publicly available credit spread indices) for financial services companies similar to the Life Companies.

The CSA is updated every quarter and, therefore, the fair value will change with the passage of time even in the absence of any other changes that would affect the valuation. For example, the December 31, 2015 fair value of $165.9 million would increase to $175.0 million if the spread were decreased by 50 basis points. If the spread were increased by 50 basis points, the fair value would decrease to $157.4 million.

Valuation of Debt and Equity Securities

We classify our debt and equity securities as available-for-sale and report them in our consolidated balance sheets at fair value. Fair value is based on quoted market price or external third-party information, where available. When quoted market prices are not available, we estimate fair value by discounting debt security cash flows to reflect interest rates currently being offered on similar terms to borrowers of similar credit quality, by quoted market prices of comparable instruments and by independent pricing sources or internally developed pricing models.

Fair Value of Securities
by Pricing Source: [1]
As of December 31, 2015
($ in millions)
Fixed
Maturities at
Fair Value
 
% of
Total
Fair Value
 
 
 
 
Priced via independent market quotations
$
8,076.6

 
65.4
%
Priced via matrices
3,813.4

 
30.9
%
Priced via broker quotations
29.4

 
0.2
%
Priced via other methods
271.3

 
2.2
%
Short-term investments [2]
164.8

 
1.3
%
Total
$
12,355.5

 
100.0
%
———————
[1]
Inclusive of short-term investments.
[2]
Short-term investments are valued at amortized cost, which approximates fair value.

See Note 12 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional disclosures of our fair value methodologies.


39

Other-than-Temporary Impairments on Available-for-Sale Securities

We recognize realized investment losses when declines in fair value of debt and equity securities are considered to be an OTTI.

In evaluating whether a decline in value is other-than-temporary, we consider several factors including, but not limited to, the following:

•
the extent and the duration of the decline;
•
the reasons for the decline in value (credit event, interest related or market fluctuations);
•
our intent to sell the security, or whether it is more likely than not that we will be required to sell it before recovery; and
•
the financial condition and near term prospects of the issuer.

An impairment of a debt security, or certain equity securities with debt-like characteristics, is deemed other-than-temporary if:

•
we either intend to sell the security, or it is more likely than not that we will be required to sell the security before recovery; or
•
it is probable we will be unable to collect cash flows sufficient to recover the amortized cost basis of the security.

Impairments due to deterioration in credit that result in a conclusion that the present value of cash flows expected to be collected will not be sufficient to recover the amortized cost basis of the security are considered other-than-temporary. Other declines in fair value (for example, due to interest rate changes, sector credit rating changes or company-specific rating changes) that result in a conclusion that the present value of cash flows expected to be collected will not be sufficient to recover the amortized cost basis of the security may also result in a conclusion that an OTTI has occurred.

An equity security impairment is deemed other-than-temporary if:

•
the security has traded at a significant discount to cost for an extended period of time; or
•
we determined we may not realize the full recovery on our investment.

Equity securities are determined to be other-than-temporarily impaired based on management judgment and the consideration of the issuer’s financial condition along with other relevant facts and circumstances. Those securities which have been in a continuous decline for over twelve months and declines in value that are severe and rapid are considered for reasonability of whether the impairment would be temporary. Although there may be sustained losses for over twelve months or losses that are severe and rapid, additional information related to the issuer performance may indicate that such losses are not other-than-temporary.

The closed block policyholder dividend obligation, applicable deferred policy acquisition costs and applicable, which offset realized investment gains and losses and OTTIs, are each reported separately as components of net income.

See Notes 2 and 7 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” and the “Debt and Equity Securities” and “Enterprise Risk Management” sections of “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K for additional information.


40

Income Taxes

We account for income taxes in accordance with ASC 740, Accounting for Income Taxes.

Deferred tax assets and/or liabilities are determined by multiplying the differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled. U.S. GAAP requires an assessment of the realizability of deferred tax assets in order to determine whether a valuation allowance should be recorded. The total deferred tax asset, net of any valuation allowance, represents the deferred tax asset that management estimates to be realizable. The assessment of the realizability of deferred tax assets involves management making assumptions and judgments about all available positive and negative evidence including the reversal of gross deferred tax liabilities, projected future taxable income, prudent and feasible tax planning strategies and recent operating results, including the existence of cumulative income (loss) incurred over the three-year period ended December 31, 2015.

As of December 31, 2015, we concluded that our estimates of future taxable income, certain tax planning strategies and other sources of income did not constitute sufficient positive evidence to assert that it is more likely than not that certain deferred tax assets would be realizable. Accordingly, a valuation allowance of $599.7 million has been recorded on net deferred tax assets of $705.2 million. The remaining deferred tax asset of $105.5 million attributable to available-for-sale debt securities with gross unrealized losses does not require a valuation allowance due to our ability and intent to hold these securities until recovery of principal value through sale or contractual maturity, thereby avoiding the realization of taxable losses. This conclusion is consistent with prior periods. The impact of the valuation allowance on the allocation of tax to the components of the financial statements included an increase of $21.3 million in continuing operations, a decrease of $35.2 million in OCI-related deferred tax balances and an increase of $0.6 million recorded in discontinued operations.

The calculation of tax liabilities involves uncertainties in applying certain tax laws. ASC 740 provides that a tax benefit that arises from an uncertain tax position that is more likely than not to be upheld upon IRS examination shall be recognized in the financial statements. The more likely than not threshold requires judgments made by management and the related tax liability is adjusted accordingly as new information becomes available. Due to the complexities of such uncertainties, tax payments made upon IRS examination may be materially different from the current estimate of tax liabilities. The impact of payments that differ from the recognized liability are reflected in the period in which the examinations are completed.

The Company has minimal uncertain tax positions and accordingly, the liability for uncertain tax positions is not material to the financial statements.

See Note 13 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information related to income taxes.

Pension and Other Post-Employment Benefits

We have three defined benefit pension plans. The employee pension plan provides benefits not to exceed 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. Effective March 31, 2010, all benefit accruals under all of our funded and unfunded defined benefit plans were frozen.

The net periodic costs for the plans consider an assumed discount (interest) rate, an expected rate of return on plan assets and trends in health care costs. Of these assumptions, our expected rate of return assumptions, and to a lesser extent our discount rate assumptions, have historically had the most significant effect on our net period costs associated with these plans. The Company uses a building block approach in estimating the long-term rate of return for plan assets by asset class. The historical relationships between equities, fixed income and other asset classes are reviewed. We apply long-term asset return estimates to the plan’s target asset allocation to determine the weighted-average long-term return. Our long-term asset allocation was determined through modeling long-term returns and asset return volatilities. Our assumed long-term rate of return for 2015 was 7.50% for our pension plan. Given the amount of plan assets as of December 31, 2014, the beginning of the measurement year, if we had assumed an expected rate of return for our pension that was 100 basis points higher or 100 basis points lower than the rates we assumed, the change in our net periodic costs would have been a decrease of $5.2 million and an increase of $5.2 million, respectively. These amounts consider only changes in our assumed long-term rate of return given the level and mix of invested assets at the beginning of the measurement year, without consideration of possible changes in any of the other assumptions described above that could ultimately accompany any changes in our assumed long-term rate of return.


41

We determine our discount rate, used to value the pension and post-employment benefit obligations, based upon rates commensurate with current yields on high quality corporate bonds. Our assumed discount rate for 2015 was 4.10% for our pension plan, 3.97% for the supplemental retirement plan and 3.62% for our other post-employment benefit plan. Given the amount of pension and post-employment obligations as of December 31, 2014, the beginning of the measurement year, if we had assumed a discount rate for our pension plans and our other post-employment benefit plan that was 100 basis points higher or 100 basis points lower than the rates we assumed, the change in our net periodic costs would have been as shown in the table below. These amounts consider only changes in our assumed discount rate without consideration of possible changes in any of the other assumptions described above that could ultimately accompany any changes in our assumed discount rate.

Net Periodic Costs:
For the year ended December 31, 2015
($ in millions)
Balance after
-100 Basis
Point Change
 
Net
Pension
Expense
 
Balance after
+100 Basis
Point Change
 
 
 
 
 
 
Pension plan
$
0.9

 
$
1.0

 
$
0.2

Supplemental plan
9.0

 
9.0

 
9.0

Other post-employment
(9.3
)
 
(9.4
)
 
(9.4
)

As of December 31, 2015, the projected benefit obligation for the Company’s pension plan, supplemental plan and other post-employment plan were $672.5 million, $142.7 million and $22.9 million, respectively.

Our assumed discount rate as of December 31, 2015 was 4.54% for our pension plan, 4.43% for the supplemental retirement plan and 4.10% for our other post-employment benefit plan. Given the amount of pension and post-employment obligations as of December 31, 2015, if we had assumed a discount rate for our pension plans and our other post-employment benefit plan that was 100 basis points higher or 100 basis points lower than the rates we assumed, the change in projected benefit obligation would have been as shown in the table below.

Projected Benefit Obligations:
As of December 31, 2015
($ in millions)
Balance after
-100 Basis
Point Change
 
Projected
Benefit
Obligation
 
Balance after
+100 Basis
Point Change
 
 
 
 
 
 
Pension plan
$
763.6

 
$
672.5

 
$
592.3

Supplemental plan
159.2

 
142.7

 
127.9

Other post-employment
24.7

 
22.9

 
21.1


The assumptions used may differ materially from actual results due to, among other factors, changing market and economic conditions and changes in participant demographics. These differences may have a significant effect on the Company’s consolidated financial statements and liquidity. See Note 15 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K information on these and other assumptions used in measuring liabilities relating to the Company’s pension and other post-employment benefits.

See Note 15 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information on our pension and other post-employment benefits.

Litigation Contingencies

The Company is a party to legal actions and is involved in regulatory investigations. Given the inherent unpredictability of these matters, it is difficult to estimate the impact on our financial position. Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. On a quarterly and annual basis, the Company reviews relevant information with respect to liabilities for litigation, regulatory investigations, and litigation-related contingencies to be reflected in the Company’s consolidated financial statements. It is possible that an adverse outcome in certain of the Company’s litigation or the use of different assumptions in the determination of amounts recorded could have a material effect upon the Company’s consolidated net income or cash flows in particular quarterly or annual periods.


42

Consolidated Results of Operations

Summary Consolidated Financial Data:
For the years ended December 31,
 
Increase (decrease) and percentage change
($ in millions)
2015
 
2014
 
2013
 
2015 vs. 2014
 
2014 vs. 2013
REVENUES
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums
$
349.1

 
$
332.1

 
$
351.6

 
$
17.0

 
5
%
 
$
(19.5
)
 
(6
%)
Fee income
543.6

 
545.1

 
550.3

 
(1.5
)
 
—
%
 
(5.2
)
 
(1
%)
Net investment income
834.9

 
830.9

 
789.7

 
4.0

 
—
%
 
41.2

 
5
%
Net realized gains (losses):
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other-than-temporary impairment
  (“OTTI”) losses
(20.8
)
 
(7.7
)
 
(7.0
)
 
(13.1
)
 
170
%
 
(0.7
)
 
10
%
Portion of OTTI losses recognized
  in other comprehensive income (“OCI”)
(2.0
)
 
(0.4
)
 
(4.8
)
 
(1.6
)
 
NM

 
4.4

 
(92
%)
Net OTTI losses recognized in earnings
(22.8
)
 
(8.1
)
 
(11.8
)
 
(14.7
)
 
181
%
 
3.7

 
(31
%)
Net realized gains (losses),
  excluding OTTI losses
(10.0
)
 
(33.1
)
 
27.8

 
23.1

 
(70
%)
 
(60.9
)
 
NM

Net realized gains (losses)
(32.8
)
 
(41.2
)
 
16.0

 
8.4

 
(20
%)
 
(57.2
)
 
NM

Total revenues
1,694.8

 
1,666.9

 
1,707.6

 
27.9

 
2
%
 
(40.7
)
 
(2
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BENEFITS AND EXPENSES
 
 
 
 
 
 
 
 
 
 
 
 
 
Policy benefits
1,186.6

 
1,119.2

 
965.1

 
67.4

 
6
%
 
154.1

 
16
%
Policyholder dividends
211.5

 
244.8

 
235.9

 
(33.3
)
 
(14
%)
 
8.9

 
4
%
Policy acquisition cost amortization
77.8

 
119.6

 
103.1

 
(41.8
)
 
(35
%)
 
16.5

 
16
%
Interest expense on indebtedness
28.3

 
28.3

 
28.3

 
—

 
—
%
 
—

 
—
%
Other operating expenses
349.9

 
350.2

 
337.1

 
(0.3
)
 
—
%
 
13.1

 
4
%
Total benefits and expenses
1,854.1

 
1,862.1

 
1,669.5

 
(8.0
)
 
—
%
 
192.6

 
12
%
Income (loss) from continuing operations
  before income taxes
(159.3
)
 
(195.2
)
 
38.1

 
35.9

 
(18
%)
 
(233.3
)
 
NM

Income tax expense (benefit)
(34.3
)
 
10.5

 
8.5

 
(44.8
)
 
NM

 
2.0

 
24
%
Income (loss) from continuing operations
(125.0
)
 
(205.7
)
 
29.6

 
80.7

 
(39
%)
 
(235.3
)
 
NM

Income (loss) from discontinued operations,
  net of income taxes
(2.0
)
 
(3.5
)
 
(2.9
)
 
1.5

 
(43
%)
 
(0.6
)
 
21
%
Net income (loss)
(127.0
)
 
(209.2
)
 
26.7

 
82.2

 
(39
%)
 
(235.9
)
 
NM

Less: Net income (loss) attributable to
  noncontrolling interests
6.7

 
4.0

 
0.7

 
2.7

 
68
%
 
3.3

 
NM

Net income (loss) attributable to
  The Phoenix Companies, Inc.
$
(133.7
)
 
$
(213.2
)
 
$
26.0

 
$
79.5

 
(37
%)
 
$
(239.2
)
 
NM


Analysis of Consolidated Results of Operations

Year ended December 31, 2015 compared to year ended December 31, 2014

The decrease in net loss of $79.5 million for the year ended December 31, 2015 compared to the year ended December 31, 2014 is primarily due to the following items:

•
Realized losses decreased by $8.4 million for the year ended December 31, 2015 compared to the year ended December 31, 2014 but outside of the closed block realized losses decreased $20.2 million driven primarily by lower realized losses on derivatives that were partially offset by higher OTTI. Realized losses on derivatives decreased by $32.5 million for the year ended December 31, 2015 compared to the year ended December 31, 2014. The most significant drivers of the losses in 2015 were significant volatility in the equity markets and interest rates, and reductions in the credit spread adjustment used in valuation of the embedded derivatives. The most significant driver of the losses in 2014 was the expiration of swaptions that generated losses that did not recur. Outside of the closed block, OTTI resulted in realized losses of $12.6 million and $4.0 million for the years ended December 31, 2015 and December 31, 2014, respectively. Higher OTTI losses in 2015 were driven by exposure to the energy and mining sectors.


43

•
Operating expenses decreased by $0.3 million for the year ended December 31, 2015 compared to the year ended December 31, 2014. While the decline overall is not significant, there were declines in professional services and outside consulting expenses that were offset by a charge of $48.5 million during the first quarter of 2015 when the Company entered into a settlement agreement to resolve the COI cases.

•
Policy acquisition cost amortization decreased by $41.8 million for the year ended December 31, 2015 compared to the year ended December 31, 2014. Excluding the impact of the unlock, the decrease in amortization is driven by a decrease in amortization of $38.1 million in the universal life business, which is primarily due to worse than expected mortality experience in 2015 compared to 2014. In addition to the reduction in amortization in the universal life business, the annual assumption unlock resulted in a benefit of $9.7 million driven primarily by lower lapses in variable universal life.

•
Income tax benefit increased $44.8 million for the year ended December 31, 2015 compared with the year ended December 31, 2014 as a result of taxable losses in the insurance subsidiaries that was generated in 2015. These losses generate a refund of historically paid income tax expense.

The closed block contributed $25.0 million to net income for the year ended December 31, 2015 compared to $24.7 million for the year ended December 31, 2014. The closed block contribution to net income remains in line with its actuarially projected path that will continue to gradually decline as the inforce in the closed block declines. Any closed block earnings that are in excess of expected amounts are offset by policyholder dividend expense.

Partially offsetting the decrease in net loss are the following:

•
The increase in policy benefits expense of $67.4 million for the year ended December 31, 2015 compared to the year ended December 31, 2014 is primarily driven by the following:

◦
Overall, mortality was unfavorable compared with expectations in 2015 in both the open and the closed block, while overall mortality was favorable compared with expectations in 2014. The impact of mortality on earnings is driven by mortality outside of the closed block, as any earnings in the closed block inure to the policyholders through changes in policyholder dividends. Net death claims were $783.0 million and $550.6 million for the years ended December 31, 2015 and 2014, respectively, with net claims outside of the closed block of $366.9 million and $266.4 million for the same periods. The worse mortality outside of the closed block was primarily in the universal life business, where our long-term assumptions are supported by mortality experience observed over longer periods.

◦
The PFBL liability continued to accrue in 2015 with an increase of $31.5 million, excluding unlock, compared to an increase of $106.4 million in 2014, a difference of $74.9 million. The liability continues to increase during the periods in which we expect to have gross profits on the business, however the liability accrued at a lower rate in 2015 as a result of worse than expected mortality in the universal life business, and accrued at a higher rate in 2014 as a result of significant declines in interest rates and the slope of the forward curve. A change in our long-term interest rate assumptions during the first quarter 2015 unlock results in less volatility from interest rates in the PFBL liability.

◦
In connection with the assumption unlocks in 2015, assumption changes resulted in a charge of $19.7 million driven by lower lapse experience in the universal life block and changes in expected future interest rates. In the prior year, an unlock benefit of $13.0 million was driven primarily by long-term expected improvements in mortality. In addition to the PFBL, the annual assumption unlock resulted in reductions in the reserves for guaranteed death and other insurance benefit features of $10.5 million primarily driven by higher lapse assumptions in some portions of the fixed indexed annuity business as well as an increase in the projected yield on investments for the annuitization benefits on variable annuities with guaranteed minimum income benefits.


44

Year ended December 31, 2014 compared to year ended December 31, 2013

The decrease in net income of $239.2 million for the year ended December 31, 2014 compared to the year ended December 31, 2013 is primarily due to the following items:

•
Realized losses increased by $57.2 million for the year ended December 31, 2014 compared to the year ended December 31, 2013. In 2014, there were realized losses on the embedded derivatives both in the fixed indexed annuity business and the variable annuity business, while there were gains on the variable annuity embedded derivatives and losses on the fixed indexed annuity embedded derivative in 2013. In 2014, the losses on the embedded derivatives were primarily driven by the continued decline of interest rates and increased volatility in the equity markets. In 2013, the gains were driven primarily by strong equity market performance decreasing the liability associated with the variable annuity guarantees.

•
The increase in policy benefits expense of $154.1 million for the year ended December 31, 2014 compared to the year ended December 31, 2013 is primarily driven by the following:

◦
A decrease of $121.4 million in the unlock benefit in 2014 related to PFBL and liabilities for guaranteed benefits for which the impact is recorded within policy benefits. In 2013, the benefit recorded was $137.5 million while the benefit recorded in 2014 was $16.1 million. The unlock benefit in the current year is driven primarily by changes in policyholder behavior assumptions in the universal life business, most significantly positive impacts from improved mortality. The benefit in 2013 was driven primarily by the incorporation of a mortality improvement assumption in the universal life business.

◦
An increase of $40.2 million in PFBL, excluding unlock, in 2014 compared to 2013. The increase in PFBL was primarily driven by a decrease in the new money yield for the year and the slope of the forward curve, which indicates the market expectation of future changes in interest rates which reduces expected future profitability and increases the liability.

◦
While overall mortality is better in 2014 than in 2013, mortality outside of the closed block was worse in 2014, resulting in higher policy benefit expense for the year ended December 31, 2014 compared to the year ended December 31, 2013. While the worse mortality in 2014 was in the universal life business, our long-term assumptions for improved mortality continue to result in benefits through the unlocks. The better mortality in the closed block is offset by policyholder dividend expense.

◦
The guaranteed liability for the fixed indexed annuity GMWB and GMDB increased in both periods, excluding unlock, but increased $33.1 million for the year ended December 31, 2014 and increased $60.5 million for the year ended December 31, 2013. The reduction in the current year expense is primarily driven by realized capital losses on the derivative investments used to hedge this business, which generally positively impact the guaranteed benefit liabilities.

•
Operating expenses increased by $13.1 million for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase in operating expenses is primarily due to higher professional fees, including audit, outside consulting and legal expenses in the first quarter of 2014 primarily as a result of the preparation of restated financial statements.

The closed block contributed $24.7 million to net income for the year ended December 31, 2014 compared to $24.8 million for the year ended December 31, 2013. The closed block contribution to net income remains in line with its actuarially projected path that will continue to gradually decline as the inforce in the closed block declines. Any closed block earnings that are in excess of expected amounts are offset by policyholder dividend expense.

Partially offsetting the decrease in net income are the following:

•
Net investment income increased $41.2 million for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase in net investment income is primarily driven by higher asset levels in the fixed indexed annuity business as the business continues to grow, as well as higher net investment income associated with limited partnerships and other alternative investments due to the increase in value of the underlying funds.


45

Effects of Inflation

For the years 2015, 2014 and 2013, inflation did not have a material effect on our consolidated results of operations.

Enterprise Risk Management

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.

Operational Risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. As reported in “Item 9A: Controls and Procedures” of this Form 10-K, the Company has concluded that there are material weaknesses in its internal control over financial reporting, which have materially adversely affected its ability to timely and accurately report its results of operations and financial condition, and that its disclosure controls and procedures are ineffective as of December 31, 2015. These material weaknesses have not been fully remediated as of the filing date of this report and the Company cannot assure that other material weaknesses will not be identified in the future. It is necessary for the Company to maintain effective internal control over financial reporting to prevent fraud and errors, and to maintain effective disclosure controls and procedures so that it can provide timely and reliable financial and other information. If the Company fails to maintain an effective system of internal controls, the accuracy and timing of its financial reporting may be adversely affected. Further, the absence of timely and reliable financial and other information about the Company’s business operations may inhibit the Company’s ability to identify operational risk. A failure to correct material weaknesses in our internal controls could result in further restatements of financial statements and correction of other information filed with the SEC. See “Item 1A: Risk Factors” in Part I of this Form 10-K for a description of these and other risks that may impact the Company’s operations. Also see “Item 9A: Controls and Procedures” in Part II of this Form 10-K for more information regarding these weaknesses, an evaluation of the effectiveness of the Company’s disclosure controls and procedures, and the Company’s remediation plans.

The Operational Risk Committee, chaired by the Chief Risk Officer, develops an enterprise-wide framework for managing operational risks. This committee meets periodically and includes membership that represents all significant operating, financial and staff departments of the Company. Among the risks the committee reviews and manages and for which it provides general oversight are business continuity risk, disaster recovery risk and risks related to the Company’s information technology systems.

Market Risk

Market risk is the risk that we will incur losses due to adverse changes in market rates and prices. We have exposure to market risk through both our investment activities and our insurance operations. Our investment objective is to maximize after-tax investment return within defined risk parameters. Our primary sources of market risk are:

•
interest rate risk, which relates to the market price and cash flow variability associated with changes in market interest rates;
•
credit risk, which relates to the uncertainty associated with the ongoing ability of an obligor to make timely payments of principal and interest; and
•
equity risk, which relates to the volatility of prices for equity and equity-like investments, such as limited partnerships.

We measure, manage and monitor market risk associated with our insurance and annuity business as part of our ongoing commitment to fund insurance liabilities. We have developed an integrated process for managing the interaction between product features and market risk. This process involves our Corporate Finance, Corporate Portfolio Management and Life and Annuity Product Development departments. These areas coordinate with each other and report results and make recommendations to our Asset-Liability Management Committee (“ALCO”) chaired by the Chief Risk Officer.


46

We also measure, manage and monitor market risk associated with our investments, both those backing insurance liabilities and those supporting surplus. This process primarily involves Corporate Portfolio Management. This organization makes recommendations and reports results to our Investment Policy Committee, chaired by the Chief Investment Officer. Please refer to the sections that follow, including “Debt and Equity Securities,” following this discussion of Enterprise Risk Management, for more information on our investment risk exposures. Within the parameters specified in our investment policy, we regularly refine our allocations based on factors including ratings, duration and type of fixed income security to appropriately balance market risk exposure and expected return.

Interest Rate Risk Management

Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. Our debt security investments include U.S. and foreign government bonds, securities issued by government agencies, corporate bonds, asset-backed securities and mortgage-backed securities, most of which are exposed to changes in medium-term and long-term U.S. Treasury rates. Our exposure to interest rate changes results primarily from our significant holdings of fixed rate investments and our interest-sensitive insurance liabilities. Our insurance liabilities largely comprise dividend-paying individual whole life and universal life policies and annuity contracts.

We manage interest rate risk as part of our asset-liability management and product development processes. Asset-liability management strategies include the segmentation of investments by product line and the construction of investment portfolios designed to satisfy the projected cash needs of the underlying product liabilities. All asset-liability strategies are approved by the ALCO. We manage the interest rate risk in portfolio segments by modeling and analyzing asset and product liability durations and projected cash flows under a number of interest rate scenarios.

We also manage interest rate risk by purchasing securities that feature prepayment restrictions and call protection. Our product design and pricing strategies include the use of surrender charges or restrictions on withdrawals in some products. We regularly undertake a sensitivity analysis that calculates liability durations under various cash flow scenarios. In addition, we monitor the short- and medium-term asset and liability cash flows profiles by portfolio to manage our liquidity needs.

One of the key measures we use to quantify our interest rate exposure is duration, a measure of the sensitivity of the fair value of assets and liabilities to changes in interest rates. For example, if interest rates increase by 100 basis points, or 1%, the fair value of an asset or liability with a duration of five is expected to decrease by 5%. We believe that as of December 31, 2015, our asset and liability portfolio durations were reasonably matched.

The Company uses an industry recognized analytic model to calculate the fair value of its fixed income portfolio. The Company’s interest rate sensitivity analysis reflects the change in market value assuming a +/-100 basis point parallel shift in the yield curve. The 100 basis point downward shift has a floor of zero to prevent rates from becoming negative. The table below shows the estimated interest rate sensitivity of our fixed income financial instruments measured in terms of fair value.

Interest Rate Sensitivity of
Fixed Income Financial Instruments:
As of December 31, 2015
($ in millions)
-100 Basis
Point
Change
 
Fair
Value
 
+100 Basis
Point
Change
 
 
 
 
 
 
Cash and short-term investments
$
792.7

 
$
792.1

 
$
791.4

Available-for-sale debt securities
12,921.0

 
12,190.7

 
11,505.4

Available-for-sale equity securities [1]
127.0

 
116.3

 
105.6

Fair value investments [2]
59.8

 
59.0

 
58.0

Totals
$
13,900.5

 
$
13,158.1

 
$
12,460.4

———————
[1]
Fair value of available-for-sale equity securities excludes $65.7 million of common stock securities, which are not directly related to interest rates.
[2]
Includes debt securities where the fair value option has been elected.

See Note 12 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information on fair value instruments.


47

We also use derivative financial instruments, primarily interest rate swaps, to manage our residual exposure to fluctuations in interest rates. We enter into derivative contracts with a number of highly rated financial institutions, to both diversify and reduce overall counterparty credit risk exposure.

We enter into interest rate swap agreements to reduce market risks from changes in interest rates. We do not enter into interest rate swap agreements for trading purposes. Under interest rate swap agreements, we exchange cash flows with another party at specified intervals for a set length of time based on a specified notional principal amount. Typically, one of the cash flow streams is based on a fixed interest rate set at the inception of the contract and the other is based on a variable rate that periodically resets. No premium is paid to enter into the contract and neither party makes payment of principal. The amounts to be received or paid on these swap agreements are accrued and recognized in net investment income.

The table below shows the interest rate sensitivity of our derivatives measured in terms of fair value, excluding derivative liabilities embedded in products. These exposures will change as our insurance liabilities are created and discharged and as a result of portfolio and risk management activities.

Interest Rate Sensitivity of
Derivatives:
As of December 31, 2015
($ in millions)
Notional
Amount
 
Weighted-
Average Term
(Years)
 
-100 Basis
Point
Change
 
Fair
Value
 
+100 Basis
Point
Change
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
159.0

 
12.1
 
$
13.9

 
$
2.3

 
$
(7.9
)
Variance swaps
0.7

 
1.5
 
(6.5
)
 
(6.5
)
 
(6.4
)
Swaptions
2,790.0

 
1.0
 
9.8

 
6.8

 
35.4

Put options
800.4

 
2.6
 
28.7

 
25.3

 
22.2

Call options [1]
14.9

 
0.7
 
0.4

 
0.4

 
0.4

Cross currency swaps
10.0

 
0.5
 
1.5

 
1.5

 
1.5

Equity futures
31.8

 
0.3
 
(0.3
)
 
(0.4
)
 
(0.4
)
Total
$
3,806.8

 
 
 
$
47.5

 
$
29.4

 
$
44.8

———————
[1]
Excludes call options used to hedge fixed indexed annuity products.

See Note 11 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information on derivative instruments.

To calculate duration for liabilities, we project liability cash flows under a number of stochastically generated interest rate scenarios and discount them to a net present value using a risk-free market rate increased for CSA. For interest-sensitive liabilities the projected cash flows reflect the impact of the specific scenarios on policyholder behavior as well as the effect of minimum guarantees. Duration is calculated by revaluing these cash flows at an alternative level of interest rates and by determining the percentage change in fair value from the base case.

Liabilities in excess of the policyholder account balance 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 DAC. The universal life block of business has experience which produces profits in earlier periods followed by losses in later periods for which a liability is required to be held in addition to the policy liabilities recorded.

See the “Critical Accounting Estimates” section above for more information on DAC and policy liabilities and accruals.

To estimate the impact of a 100 basis point increase or decrease in interest rates, the Company revised estimated future new money yields thereby modifying future expected portfolio returns. These shocks resulted in higher or lower investment margins and discount rates for products subject to loss recognition and profits followed by losses. All material, interest sensitive blocks of business were considered; the most significant of which is universal life. We measured the impact upon deferred policy acquisition costs and policy liabilities.


48

The selection of a 100 basis point immediate increase or decrease in interest rates at all points on the yield curve is a hypothetical rate scenario used to demonstrate potential risk. While a 100 basis point immediate increase or decrease of this type does not represent our view of future market changes, it is a hypothetical near-term change that illustrates the potential effect of such events. Although these measurements provide a representation of interest rate sensitivity, they are based on our exposures at a point in time and may not be representative of future market results. These exposures will change as a result of new business, management’s assessment of changing market conditions and available investment opportunities.

The table below shows the interest rate sensitivity of components of our deferred policy acquisition costs and policy liabilities that are more sensitive to interest rate changes.

Interest Rate Sensitivity of
DAC and Policy Liabilities:
As of December 31, 2015
($ in millions)
-100 Basis
Point
Change
 
Fair
Value [1]
 
+100 Basis
Point
Change
Assets
 
 
 
 
 
Universal life DAC
$
276.1

 
$
280.6

 
$
285.2

Liabilities
 
 
 
 
 
Profits followed by losses
407.8

 
387.0

 
366.7

Other [2]
212.8

 
210.9

 
210.9

———————
[1]
The values below represent changes to balances before adjustment for unrealized gains/losses.
[2]
Includes term life and payout annuity products subject to loss recognition.

The profits followed by losses reserve is, as indicated above, particularly sensitive to interest rate changes. Investment earnings on the portfolio backing these policies as well as the discount rate on the liability are based on assumptions regarding the portfolio earned rates, both in the near term as well as the ultimate long-term earned rate. The long-term earned rate is reviewed annually as part of the unlock. Near term portfolio yields are assumed to revert to the long-term yield based on market implied forward rates. This analysis is updated quarterly and can result in volatility in net income during periods in which forward rates change significantly.

Guaranteed Minimum Interest Crediting Rates

The primary potential risk to our operations related to guaranteed minimum interest crediting rates could arise mainly in our universal life product since the account values with higher guarantees, primarily 4.0%, are concentrated in this product. Our other annuity products also contain guaranteed minimum interest rates but the aggregate account values or the guaranteed minimum rates are relatively lower compared to universal life. At December 31, 2015, we have approximately $16.7 billion of policyholder insurance liabilities and policyholder deposit funds. Of this amount, approximately $5.6 billion represents contracts with crediting rates that may be adjusted over the life of the contract, subject to certain guaranteed minimums. The table below summarizes the related account values of policies with guaranteed minimum interest rates using ranges indicating the percentage of account values at the guaranteed minimum interest rate range. Our products that do not have an account value with a guaranteed minimum crediting rate are not included in the table below, even though most of our products to some degree are sensitive to interest rates. The table below focuses on products with both an account value and a guaranteed minimum interest rate. See the “Low Interest Rate Environment” section below for further discussion.


49

Range of Guaranteed Minimum Interest Crediting Rates:
As of December 31, 2015
($ in billions)
Account
Values
 
% of Account
Values at
Guaranteed Minimum
Crediting Rate
 
 
 
 
Less than 1.5% [1]
$
3.2

 
84.5
%
Equal to or greater than 1.5% but less than 3.5%
0.5

 
75.6
%
Equal to or greater than 3.5% but less than or equal to 4.0%
1.5

 
83.6
%
Greater than 4.0% but less than 5.0%
0.3

 
79.5
%
Equal to or greater than 5.0%
0.1

 
59.8
%
Total
$
5.6

 
 
———————
[1]
Of the $3.2 billion, $3.1 billion represents account value in fixed indexed annuity products. Most of these contracts have guaranteed minimum interest crediting rates of 0%, or close to 0%.

Credit Risk Management

We manage credit risk through the fundamental analysis of the underlying obligors, issuers and transaction structures. Through internal staff and an outsource relationship, we employ experienced credit analysts who review obligors’ management, competitive position, cash flow, coverage ratios, liquidity and other key financial and non-financial information. These analysts recommend the investments needed to fund our liabilities while adhering to diversification and credit rating guidelines. In addition, when investing in private debt securities, we rely upon broad access to management information, negotiated protective covenants, call protection features and collateral protection. We review our debt security portfolio regularly to monitor the performance of obligors and assess the stability of their current credit ratings.

We also manage credit risk through industry and issuer diversification and asset allocation. Maximum exposure to an issuer or derivatives counterparty is defined by quality ratings, with higher quality issuers having larger exposure limits. We have an overall limit on below-investment-grade rated issuer exposure. In addition to monitoring counterparty exposures under current market conditions, exposures are monitored on the basis of a hypothetical “stressed” market environment involving a specific combination of declines in stock market prices and interest rates and a spike in implied option activity.

Equity Risk Management

Equity risk is the risk that we will incur economic losses due to adverse changes in equity prices. At December 31, 2015, we held certain financial instruments that are sensitive to equity market movements, including available-for-sale equity securities, primarily related to our holdings of common stock and mutual funds, private equity partnership interests and other equities, as well as fair value equity instruments, equity options and other investments. We manage equity price risk through industry and issuer diversification and asset allocation techniques.


50

The table below shows the sensitivity of our investments that are sensitive to public equity market movements measured in terms of their fair value.

Sensitivity to
Public Equity Market Movements:
As of December 31, 2015
($ in millions)
Balance after
-10% Equity
Price Change
 
Fair
Value
 
Balance after
+10% Equity
Price Change
 
 
 
 
 
 
Available-for-sale equity securities [1]
$
59.1

 
$
65.7

 
$
72.3

Limited partnerships and other investments [2]
271.7

 
301.9

 
332.1

Derivative instruments [3]
39.8

 
29.4

 
21.8

Fair value equity investments [4]
16.9

 
18.8

 
20.7

———————
[1]
Available-for-sale equity securities excludes $116.3 million of perpetual preferred equity securities.
[2]
Includes private equity funds. The value of private equity investments are not highly correlated to public equity markets, because of their liquidity and valuation methodologies. Direct private equity investments have been included in the sensitivity because they are a significant equity exposure for the Company.
[3]
Primarily includes swaptions, put options, call options and equity futures, excluding those associated with the fixed indexed annuity products.
[4]
Includes equity securities backing our deferred compensation liabilities.

Certain liabilities are sensitive to equity market movements. Our exposure to changes in equity prices primarily results from our variable annuity and variable life products. We manage our insurance liability risks on an integrated basis with other risks through our liability and risk management and capital and other asset allocation strategies.

Certain variable annuity products sold by our Life Companies contain GMDBs. The GMDB feature provides annuity contract owners with a guarantee that the benefit received at death will be no less than a prescribed amount. This minimum amount is based on the net deposits paid into the contract, the net deposits accumulated at a specified rate, the highest historical account value on a contract anniversary or, if a contract has more than one of these features, the greatest of these values. To the extent that the GMDB is higher than the current account value at the time of death, the Company incurs a cost. This typically results in an increase in annuity policy benefits in periods of declining financial markets and in periods of stable financial markets following a decline. As of December 31, 2015, the difference between the GMDB and the current account value (NAR) for all existing contracts was $58.1 million. This was our exposure to loss had all contract owners died on December 31, 2015. See Note 10 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information.

Certain variable annuity products sold by our Life Companies contain guaranteed minimum living benefits. These include guaranteed minimum accumulation, withdrawal, income and payout annuity floor benefits. The GMAB guarantees a return of deposit to a policyholder after 10 years regardless of market performance. The GMWB guarantees that a policyholder can withdraw a certain percentage for life regardless of market performance. The GMIB guarantees that a policyholder can convert his or her account value into a guaranteed payout annuity at a guaranteed minimum interest rate and a guaranteed mortality basis, while also assuming a certain level of growth in the initial deposit. We also offer a combination rider that offers both GMAB and GMDB benefits. We have established a hedging program for managing the risk associated with our guaranteed minimum accumulation and withdrawal benefit features. We continue to analyze and refine our strategies for managing risk exposures associated with all our separate account guarantees.

See Note 5 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information regarding DAC.


51

The table below shows the estimated equity risk sensitivity of our liability products that are sensitive to equity market movements measured in terms of their fair value.

Equity Risk Sensitivity of
Our Liability Products:
As of December 31, 2015
($ in millions)
Balance after
-10% Equity
Price Change
 
Fair
Value
 
Balance after
+10% Equity
Price Change
 
 
 
 
 
 
GMAB [1]
$
1.5

 
$
0.2

 
$
(1.0
)
GMWB [1]
13.5

 
9.0

 
4.7

COMBO [1]
(0.1
)
 
(0.1
)
 
(0.2
)
———————
[1]
The values above represent changes to balances before adjustment for unrealized gains/losses.

The selection of a 10% increase or decrease in equity prices is a hypothetical rate scenario used to demonstrate potential risk. While a 10% increase or decrease does not represent our view of future market changes, it is a hypothetical near-term change that illustrates the potential effect of such events. Although these fair value measurements provide a representation of equity market sensitivity, they are based on our exposures at a point in time and may not be representative of future market results. These exposures will change as a result of new business, management’s assessment of changing market conditions and available investment opportunities.

We sponsor defined benefit pension plans for our employees. For U.S. GAAP accounting purposes, we assumed a 7.5% long-term rate of return on plan assets in the most recent valuations, performed as of December 31, 2015. To the extent there are deviations in actual returns, there will be changes in our projected expense and funding requirements. As of December 31, 2015, the projected benefit obligation for our funded and unfunded defined benefit plans was in excess of plan assets by $179.1 million and $142.7 million, respectively. We made contributions totaling $0.0 million and $11.8 million to the pension plans during 2015 and 2014, respectively. We expect to make no contributions over the next 12 months.

Effective March 31, 2010, all benefit accruals under all of our funded and unfunded defined benefit plans were frozen.

See Note 15 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information on our employee benefit plans.

Low Interest Rate Environment

As a result of the continuing low interest rate environment, the Company’s current reinvestment yields are generally lower than the current investment portfolio yield, primarily for our investments in fixed income securities. We expect our portfolio income yields to continue to gradually decline in future periods if interest rates remain low. Approximately 35.0% of the Company’s $16.7 billion total policy liabilities and deposit funds have account values that contain certain guaranteed minimum interest rates, principally universal life, fixed indexed annuities, and the fixed return portion of variable annuities.

For certain products, we guarantee interest rates to our policyholders and primarily invest in fixed rate securities to fund those guaranteed rates. Interest rate spread management could impact the Company most significantly in its universal life policies, since guaranteed interest rates, in some cases, are near or approaching our current reinvestment rate on our related fixed income securities. At approximately $2.0 billion, universal life account values represent less than 15.0% of our total policy liabilities, accruals, and deposit funds. The current book yield of the investment portfolio backing our universal life policies was approximately 4.8% at December 31, 2015 while the guaranteed minimum policyholder crediting rate for these policies was primarily at 4.0%.

While fixed indexed annuities comprise a larger balance of policies with guaranteed minimum interest rates to protect the initial investment, the crediting / guarantee rates on these products adjust more consistently with interest rates so there is a less significant impact to our results of operations. Our traditional products, such as whole-life and term, may also have a reducing impact on net income resulting from the underlying assets that may have to be reinvested at interest rates that are lower than the current portfolio rates. However, our traditional products do not have account values with stated guaranteed minimum interest rates.


52

The Company estimates that the annualized net investment income yield on its fixed income securities, excluding the closed block, was approximately 4.4% during the year ended December 31, 2015. The average investment rate on fixed income securities purchases, excluding the closed block, during the year ended December 31, 2015 was approximately 4.2% on total purchases of approximately $1.5 billion. Management estimates that proceeds from maturities, calls and prepayments of approximately $495 million is expected to be available for reinvestment over the next 12 months, before considering new deposits and premiums and other cash flow uses. The reinvestment of those funds at new money rates is not expected to have a significant impact on net investment income over the next 12 months. The estimated impact is subject to change as the composition of the portfolio changes through normal portfolio management and other factors.

The low interest rate environment discussion immediately above does not include the additional and interrelated impacts to earnings from the amortization of deferred policy acquisition costs and profits followed by losses which occurs in response to changing estimated gross profits. (See “Enterprise Risk Management - Market Risk - Interest Rate Sensitivity of DAC and Policy Liabilities” discussion above.) Also, as noted previously, the low interest rate environment impacts the pension plan assets and the discount on the liabilities. (See “Critical Accounting Estimates - Pension and Other Post-Employment Benefits” discussion above.)

The Company’s closed block could also be impacted by the low interest rate environment, but to a lesser degree than the items described above. The closed block was established to benefit the policyholders at the time of demutualization utilizing assets that were allocated to the closed block. Closed block earnings will not inure to the Company’s stockholders, and closed block policyholder dividends could be adjusted if investment income is substantially lower than initially projected. If interest rates are very low for a prolonged period of time, or mortality changes dramatically, or both, and the Company has insufficient funds to make policy benefit payments that are guaranteed, the Company’s earnings could be impacted since such payments may need to be made from assets outside of the closed block. See Note 4 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information on the closed block.

Estimated Fair Value Measurement

Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, or are based on disorderly transactions or inactive markets, fair value is based upon internally developed models that use primarily market-based or independently sourced market parameters, including interest rate yield curves, option volatilities and currency rates. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, our own creditworthiness, liquidity and unobservable parameters that are applied consistently over time.

Using professional judgment and experience, we evaluate and weigh the relevance and significance of all readily available market information to determine the best estimate of fair value. The fair value investments with unobservable inputs are determined by management after considering prices from our pricing vendors. Fair values for debt securities are primarily based on yield curve analyses along with ratings and spread data. Other inputs may be considered for fair value calculations including published indexed data, sector specific performance, comparable price sources and similar traded securities.

See Note 12 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information regarding the estimated fair value of investments.

Debt and Equity Securities

We invest in a variety of debt and equity 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.


53

Our available-for-sale 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 (“ABS”). As of December 31, 2015, available-for-sale equity securities include $116.3 million of perpetual preferred securities, of which $47.9 million was below-investment-grade. As of December 31, 2015, our available-for-sale debt securities, with a fair value of $12,190.7 million, represented 77.6% of total investments.

Available-for-Sale Debt Securities Ratings by Percentage:
 
As of December 31, 2015
($ in millions)

NAIC Rating
 
S&P Equivalent Designation
 
Fair
Value
 
% of
Fair
Value
 
Amortized
Cost
 
% of
Amortized
Cost
 
 
 
 
 
 
 
 
 
 
 
1
 
AAA/AA/A
 
$
7,000.2

 
57.4
%
 
$
6,726.4

 
56.1
%
2
 
BBB
 
4,392.3

 
36.1
%
 
4,406.8

 
36.7
%
 
 
Total investment grade
 
11,392.5

 
93.5
%
 
11,133.2

 
92.8
%
3
 
BB
 
561.3

 
4.5
%
 
603.5

 
5.0
%
4
 
B
 
165.9

 
1.4
%
 
180.1

 
1.5
%
5
 
CCC and lower
 
63.2

 
0.5
%
 
70.2

 
0.6
%
6
 
In or near default
 
7.8

 
0.1
%
 
6.6

 
0.1
%
 
 
Total available-for-sale debt securities
 
$
12,190.7

 
100.0
%
 
$
11,993.6

 
100.0
%

Available-for-Sale Debt Securities by Type:
As of December 31, 2015
($ in millions)
 
 
 
 
Unrealized Gains (Losses)
 
Fair
Value
 
Amortized
Cost
 
Gross
Gains
 
Gross
Losses
 
Net
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
589.6

 
$
542.0

 
$
48.2

 
$
(0.6
)
 
$
47.6

State and political subdivision
537.4

 
510.4

 
33.7

 
(6.7
)
 
27.0

Foreign government
242.9

 
224.0

 
20.8

 
(1.9
)
 
18.9

Corporate
8,342.2

 
8,295.0

 
311.3

 
(264.1
)
 
47.2

CMBS
684.1

 
656.6

 
30.4

 
(2.9
)
 
27.5

RMBS
1,246.2

 
1,213.8

 
45.1

 
(12.7
)
 
32.4

Collateralized debt obligation (“CDO”) /
  collateralized loan obligation (“CLO”)
309.5

 
316.3

 
1.3

 
(8.1
)
 
(6.8
)
Other ABS
238.8

 
235.5

 
7.7

 
(4.4
)
 
3.3

Total available-for-sale debt securities
$
12,190.7

 
$
11,993.6

 
$
498.5

 
$
(301.4
)
 
$
197.1

Available-for-sale debt securities
  outside closed block
 
 
 
 
 
 
 
 
 
Unrealized gains
$
4,162.9

 
$
3,957.8

 
$
205.1

 
$
—

 
$
205.1

Unrealized losses
2,742.4

 
2,933.7

 
—

 
(191.3
)
 
(191.3
)
Total outside the closed block
6,905.3

 
6,891.5

 
205.1

 
(191.3
)
 
13.8

Available-for-sale debt securities
  in closed block
 
 
 
 
 
 
 
 
 
Unrealized gains
4,003.5

 
3,710.1

 
293.4

 
—

 
293.4

Unrealized losses
1,281.9

 
1,392.0

 
—

 
(110.1
)
 
(110.1
)
Total in the closed block
5,285.4

 
5,102.1

 
293.4

 
(110.1
)
 
183.3

Total available-for-sale debt securities
$
12,190.7

 
$
11,993.6

 
$
498.5

 
$
(301.4
)
 
$
197.1



54

Available-for-Sale Debt Securities by Type and Credit Quality:
As of December 31, 2015
($ in millions)
Investment Grade
 
Below Investment Grade
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
 
 
 
 
 
 
 
U.S. government and agency
$
589.6

 
$
542.0

 
$
—

 
$
—

State and political subdivision
537.4

 
510.4

 
—

 
—

Foreign government
210.4

 
193.9

 
32.5

 
30.1

Corporate
7,614.0

 
7,501.2

 
728.2

 
793.8

CMBS
681.8

 
654.3

 
2.3

 
2.3

RMBS
1,236.6

 
1,204.0

 
9.6

 
9.8

CDO/CLO
303.9

 
311.3

 
5.6

 
5.0

Other ABS
218.8

 
216.1

 
20.0

 
19.4

Total available-for-sale debt securities
$
11,392.5

 
$
11,133.2

 
$
798.2

 
$
860.4

Percentage of total available-for-sale debt securities
93.5%
 
92.8%
 
6.5%
 
7.2%

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 December 31, 2015 in our available-for-sale debt and short-term investment portfolio were electric utilities (7.6%), banking (6.9%), oil/oil services and equipment (6.4%), insurance (3.7%) and hospital management and services (3.6%).


55

Realized Gains and Losses

The following table presents certain information with respect to realized 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 Net Realized Gains (Losses):
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
 
 
 
 
 
 
Total other-than-temporary debt impairments
$
(12.0
)
 
$
(5.6
)
 
$
(7.0
)
Portion of losses recognized in OCI
(2.0
)
 
(0.4
)
 
(4.8
)
Net debt impairments recognized in earnings
$
(14.0
)
 
$
(6.0
)
 
$
(11.8
)
Debt security impairments:
 
 
 
 
 
U.S. government and agency
$
—

 
$
—

 
$
—

State and political subdivision
—

 
—

 
—

Foreign government
—

 
—

 
—

Corporate
(13.8
)
 
(6.0
)
 
(3.8
)
CMBS
—

 
—

 
(2.7
)
RMBS
(0.2
)
 
—

 
(4.3
)
CDO/CLO
—

 
—

 
(1.0
)
Other ABS
—

 
—

 
—

Net debt security impairments
(14.0
)
 
(6.0
)
 
(11.8
)
Equity security impairments
(8.8
)
 
(2.1
)
 
—

Limited partnerships and other investment impairments
—

 
—

 
—

Impairment losses
(22.8
)
 
(8.1
)
 
(11.8
)
Debt security transaction gains
42.5

 
41.8

 
45.3

Debt security transaction losses
(5.0
)
 
(17.7
)
 
(2.2
)
Equity security transaction gains
1.7

 
10.4

 
4.2

Equity security transaction losses
—

 
(1.0
)
 
(3.8
)
Limited partnerships and other investment transaction gains
—

 
—

 
0.8

Limited partnerships and other investment transaction losses
(7.1
)
 
(0.7
)
 
(4.6
)
Net transaction gains (losses)
32.1

 
32.8

 
39.7

Derivative instruments
(31.1
)
 
(20.8
)
 
(27.7
)
Embedded derivatives [1]
(3.1
)
 
(45.9
)
 
12.2

Assets valued at fair value
(7.9
)
 
0.8

 
3.6

Net realized gains (losses), excluding impairment losses
(10.0
)
 
(33.1
)
 
27.8

Net realized gains (losses), including impairment losses
$
(32.8
)
 
$
(41.2
)
 
$
16.0

———————
[1]
Includes the change in fair value of embedded derivatives associated with fixed index annuity indexed crediting feature and variable annuity riders. See Note 10 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional disclosures.


56

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 December 31, 2015, management does not have the intention to sell, nor does it expect to be required to sell, these securities prior to their recovery.

OTTIs recorded on available-for-sale debt and equity securities were $22.8 million in 2015, $8.1 million in 2014 and $11.8 million in 2013. The impairments were driven primarily by deterioration in issuer credit and liquidity metrics, and business outlook.

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

Credit Losses Recognized in Earnings on Available-for-Sale Debt Securities
for which a Portion of the OTTI Loss was Recognized in OCI:
As of December 31,
($ in millions)
2015
 
2014
 
2013
 
 
 
 
 
 
Balance, beginning of period
$
(52.4
)
 
$
(71.4
)
 
$
(72.6
)
Add: Credit losses on securities not previously impaired [1]
(3.4
)
 
—

 
(1.1
)
Add: Credit losses on securities previously impaired [1]
(2.3
)
 
—

 
(4.1
)
Less: Credit losses on securities impaired due to intent to sell
—

 
—

 
—

Less: Credit losses on securities sold
12.5

 
19.0

 
6.4

Less: Increases in cash flows expected on previously impaired securities
—

 
—

 
—

Balance, end of period
$
(45.6
)
 
$
(52.4
)
 
$
(71.4
)
———————
[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 consolidated statements of operations and comprehensive income.


57

Unrealized Gains and Losses

The following tables present certain information with respect to our gross unrealized gains and losses related to our investments in debt securities as of December 31, 2015. We separately present information that is applicable to unrealized losses both outside and inside the closed block. See Note 7 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information regarding the closed block. Applicable DAC and deferred income taxes further reduce the effect of unrealized gains and losses on our comprehensive income.

Net unrealized investment gains and losses on securities classified as available-for-sale and certain other assets are included in our consolidated 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).

Available-for-Sale Debt Securities Non-Credit OTTI Losses in AOCI, by Security Type: [1]
As of December 31,
($ in millions)
2015
 
2014
 
 
 
 
U.S. government and agency
$
—

 
$
—

State and political subdivision
(1.1
)
 
(1.1
)
Foreign government
—

 
—

Corporate
(6.3
)
 
(8.3
)
CMBS
—

 
(1.2
)
RMBS
(25.4
)
 
(25.5
)
CDO/CLO
(4.5
)
 
(13.9
)
Other ABS
(0.6
)
 
(1.8
)
Total available-for-sale debt securities non-credit OTTI losses in AOCI
$
(37.9
)
 
$
(51.8
)
———————
[1]
Represents the amount of non-credit OTTI losses recognized in AOCI excluding net unrealized gains or losses subsequent to the date of impairment.

Duration of Gross Unrealized Losses on
Securities Outside Closed Block:
As of December 31, 2015
($ in millions)
Total
 
0 – 6
Months
 
6 – 12
Months
 
Over 12
Months
Available-for-sale debt securities outside closed block
 
 
 
 
 
 
 
Total fair value
$
2,742.4

 
$
1,244.0

 
$
971.7

 
$
526.7

Total amortized cost
2,933.7

 
1,278.6

 
1,034.9

 
620.2

Unrealized losses
$
(191.3
)
 
$
(34.6
)
 
$
(63.2
)
 
$
(93.5
)
Number of securities [1]
753

 
362

 
237

 
154

Investment grade:
 
 
 
 
 
 
 
Unrealized losses
$
(154.9
)
 
$
(25.7
)
 
$
(57.5
)
 
$
(71.7
)
Below investment grade:
 
 
 
 
 
 
 
Unrealized losses
$
(36.4
)
 
$
(8.9
)
 
$
(5.7
)
 
$
(21.8
)
Available-for-sale equity securities outside closed block
 
 
 
 
 
 
 
Unrealized losses
$
(0.4
)
 
$
(0.2
)
 
$
(0.2
)
 
$
—

Number of securities [1]
8

 
4

 
4

 
—

———————
[1]
Certain securities are held in both the open and closed blocks.

For available-for-sale debt securities outside of the closed block with gross unrealized losses, 81.0% of the unrealized losses after offsets pertain to investment grade securities and 19.0% of the unrealized losses after offsets pertain to below-investment-grade securities at December 31, 2015.


58

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 Outside Closed Block:
As of December 31, 2015
($ in millions)
Total
 
0 – 6
Months
 
6 – 12
Months
 
Over 12
Months
Available-for-sale debt securities outside closed block
 
 
 
 
 
 
 
Unrealized losses over 20% of cost
$
(85.1
)
 
$
(51.9
)
 
$
(2.8
)
 
$
(30.4
)
Number of securities [1]
57

 
46

 
3

 
8

Investment grade:
 
 
 
 
 
 
 
Unrealized losses over 20% of cost
$
(61.5
)
 
$
(30.9
)
 
$
(2.8
)
 
$
(27.8
)
Below investment grade:
 
 
 
 
 
 
 
Unrealized losses over 20% of cost
$
(23.6
)
 
$
(21.0
)
 
$
—

 
$
(2.6
)
Available-for-sale equity securities outside closed block
 
 
 
 
 
 
 
Unrealized losses over 20% of cost
$
(0.3
)
 
$
(0.1
)
 
$
(0.2
)
 
$
—

Number of securities [1]
5

 
1

 
4

 
—

———————
[1]
Certain securities are held in both the open and closed blocks.

Duration of Gross Unrealized Losses on
Securities Inside Closed Block:
As of December 31, 2015
($ in millions)
Total
 
0 – 6
Months
 
6 – 12
Months
 
Over 12
Months
Available-for-sale debt securities inside closed block
 
 
 
 
 
 
 
Total fair value
$
1,281.9

 
$
556.9

 
$
404.7

 
$
320.3

Total amortized cost
1,392.0

 
581.3

 
433.7

 
377.0

Unrealized losses
$
(110.1
)
 
$
(24.4
)
 
$
(29.0
)
 
$
(56.7
)
Number of securities [1]
386

 
176

 
121

 
89

Investment grade:
 
 
 
 
 
 
 
Unrealized losses
$
(73.3
)
 
$
(16.2
)
 
$
(22.9
)
 
$
(34.2
)
Below investment grade:
 
 
 
 
 
 
 
Unrealized losses
$
(36.8
)
 
$
(8.2
)
 
$
(6.1
)
 
$
(22.5
)
Available-for-sale equity securities inside closed block
 
 
 
 
 
 
 
Unrealized losses
$
(0.7
)
 
$
(0.3
)
 
$
(0.4
)
 
$
—

Number of securities [1]
10

 
6

 
4

 
—

———————
[1]
Certain securities are held in both the open and closed blocks.


59

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 Inside Closed Block:
As of December 31, 2015
($ in millions)
Total
 
0 – 6
Months
 
6 – 12
Months
 
Over 12
Months
Available-for-sale debt securities inside closed block
 
 
 
 
 
 
 
Unrealized losses over 20% of cost
$
(48.4
)
 
$
(43.9
)
 
$
(2.8
)
 
$
(1.7
)
Number of securities [1]
34

 
30

 
2

 
2

Investment grade:
 
 
 
 
 
 
 
Unrealized losses over 20% of cost
$
(24.9
)
 
$
(20.4
)
 
$
(2.8
)
 
$
(1.7
)
Below investment grade:
 
 
 
 
 
 
 
Unrealized losses over 20% of cost
$
(23.5
)
 
$
(23.5
)
 
$
—

 
$
—

Available-for-sale equity securities inside closed block
 
 
 
 
 
 
 
Unrealized losses over 20% of cost
$
(0.7
)
 
$
(0.5
)
 
$
(0.2
)
 
$
—

Number of securities [1]
6

 
3

 
3

 
—

———————
[1]
Certain securities are held in both the open and closed blocks.

Liquidity and Capital Resources

Liquidity refers to the ability of a company to generate sufficient cash flow to meet its cash requirements. Capital refers to the long-term financial resources available to support the operations of our business, fund business growth and provide a cushion to withstand adverse circumstances. Our ability to generate and maintain sufficient liquidity and capital depends on the profitability of our business, general economic conditions and our access to the capital markets and alternate sources of liquidity and capital. We believe that cash flows from the sources of funds available to us are sufficient to satisfy the current liquidity requirements, including under reasonably foreseeable stress scenarios.

The following discussion includes both liquidity and capital resources as these subjects are interrelated.

The Phoenix Companies, Inc. (consolidated)

Summary Consolidated Cash Flows:
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
 
 
 
 
 
 
Cash provided by (used for) operating activities
$
(616.5
)
 
$
(500.5
)
 
$
(446.6
)
Cash provided by (used for) investing activities
151.3

 
(244.8
)
 
65.3

Cash provided by (used for) financing activities
644.3

 
700.1

 
632.0

Change in cash and cash equivalents
$
179.1

 
$
(45.2
)
 
$
250.7


2015 compared to 2014

Cash used for operating activities primarily consists of cash used for operating expenses and death claim payments. Cash used for operating activities increased $116.0 million during the year ended December 31, 2015 compared to the year ended December 31, 2014. This increase was primarily a result of an increase in death benefits on universal life and traditional life products. Partially offsetting this increase was lower audit and consulting fees related to the preparation of financial statements.

Cash used for investing activities decreased $396.1 million during the year ended December 31, 2015 compared to the year ended December 31, 2014. This decrease was primarily a result of increased sales of available-for-sale debt securities, driven by an increase in death benefits on universal life and traditional life products. Partially offsetting this decrease was an increase in purchases of short-term investments.


60

Cash provided by financing activities decreased $55.8 million during the year ended December 31, 2015 compared to the year ended December 31, 2014. This decrease was primarily a result of a decrease in policyholder deposits and an increase in policyholder withdrawals related to fixed index annuity products. Partially offsetting this decrease was an increase in policyholder deposits related to universal life products.

2014 compared to 2013

Cash used for operating activities primarily consists of cash used for operating expenses and death claim payments. Cash used for operating activities increased $53.9 million during the year ended December 31, 2014 compared to the twelve months ended December 31, 2013. This increase was driven by an increase in audit and consulting fees related to the preparation of financial statements and lower renewal premiums on traditional life products. Partially offsetting this increase was lower death benefits paid on traditional life products.

Cash provided by investing activities decreased $310.1 million during the year ended December 31, 2014 compared to the twelve months ended December 31, 2013 as a result of increased purchases of short-term investments offset by increased sales and maturities of short-term investments. Driving the increase in purchases were deposits into fixed indexed annuity products, which were invested.

Cash provided by financing activities increased $68.1 million during the year ended December 31, 2014. This increase was primarily a result of an increase in policyholder deposits and a decrease in policyholder withdrawals related to fixed index annuities products, when compared to 2013. Partially offsetting this increase was a decrease in policyholder deposits related to universal life products when compared to 2013.

The Phoenix Companies, Inc. Sources and Uses of Cash (parent company only)

The Phoenix Companies, Inc. serves as the holding company for our insurance subsidiaries and does not have any significant operations of its own. As of December 31, 2015 and 2014, liquidity (cash, short-term investments, available-for-sale debt securities and other near-cash assets, net of contributions payable to subsidiaries) totaled $65.8 million and $78.3 million, respectively.

Sources of Cash

Dividends to Phoenix from its insurance subsidiaries are restricted by insurance regulation. The payment of dividends by Phoenix Life is limited under the insurance company laws of New York, and the payment of dividends by PHL Variable is limited under the insurance company laws of Connecticut. In addition to the statutory limitations on paying dividends, the Company also considers the level of statutory capital and RBC of the entity and other liquidity requirements.

In addition to existing cash and securities, our primary source of liquidity consists of dividends from Phoenix Life. New York Insurance Law allows a domestic stock life insurer to distribute an ordinary dividend where the aggregate amount of such dividend in any calendar year does not exceed the greater of 10% of its surplus to policyholders as of the immediately preceding calendar year or its net gain from operations for the immediately preceding calendar year, not including realized capital gains, not to exceed 30% of its surplus to policyholders as of the immediately preceding calendar year. The foregoing ordinary dividend can only be paid out of earned surplus, which is defined as an insurer’s positive unassigned funds, excluding 85% of the change in net unrealized gains or losses less capital gains tax for the preceding year. Under this section, an insurer cannot distribute an ordinary dividend in the calendar year immediately following a calendar year for which the insurer’s net gain from operations, not including realized capital gains, was negative. If a company does not have sufficient positive earned surplus to pay an ordinary dividend, an ordinary dividend can still be paid where the aggregate amount is the lesser of 10% of its surplus to policyholders as of the immediately preceding calendar year or its net gain from operations for the immediately preceding calendar year, not including realized capital gains. Based on this calculation, Phoenix Life would be able to pay a dividend of $37.2 million in 2016. During the year ended December 31, 2015, Phoenix Life declared and paid $59.9 million in dividends. Phoenix Life may have less flexibility to pay dividends to the parent company if we experience declines in either statutory earnings, capital or RBC ratio in the future.


61

In Connecticut, without prior approval by the insurance commissioner, the aggregate amount of dividends during any twelve month period shall not exceed the greater of (i) 10% of surplus to policyholders for the preceding calendar year or (ii) net gain from operations for such year. Connecticut law states that no dividend or other distribution exceeding an amount equal to an insurance company’s earned surplus may be paid without prior approval of the insurance commissioner. Based on this calculation, PHL Variable has no dividend capacity in 2016.

As of December 31, 2015, Phoenix Life and PHL Variable had $535.3 million and $209.3 million, respectively, of statutory capital, surplus and AVR. Our RBC ratio was in excess of 400% at Phoenix Life and 200% at PHL Variable. Also, during the year ended December 31, 2015, APLAR paid $10.0 million to the holding company consisting of an extraordinary dividend and a redemption of common stock.

See Notes 20 and 26 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information on Phoenix Life statutory financial information, regulatory matters and dividends to the parent.

Uses of Cash

Our principal needs at the holding company level are debt service, income taxes and certain operating expenses.

•
Interest paid on senior unsecured bonds for the years ended December 31, 2015, 2014 and 2013 was $20.0 million, $20.0 million and $20.0 million, respectively. As of December 31, 2015, future minimum annual principal payments on senior unsecured bonds are $268.6 million in 2032. See Note 8 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information.

•
The holding company and its subsidiaries have a tax sharing agreement whereby the subsidiaries reimburse the holding company for tax payments made on their behalf. As part of the agreement, the holding company is required to hold funds in escrow for the benefit of Phoenix Life in the event Phoenix Life incurs future taxable losses. As of December 31, 2015, the Company funded the escrow with $76.2 million of assets, including treasury stock, a surplus note issued by PHL Variable and $23.8 million of cash.

•
Holding company operating expenses for the years ended December 31, 2015, 2014 and 2013 were $30.6 million, $102.6 million and $70.7 million. The expenses in 2014 and 2013 were due primarily to audit, consulting and legal expenses associated with prior restatements of the Company’s financial statements. There are expense sharing arrangements in place among the holding company and its operating subsidiaries. However, given unique circumstances regarding the historical restatement of the Company’s financial statements, management determined it was in the best interest of the Company that the majority of these costs be borne by the holding company.

The holding company also provides capital support to its operating subsidiaries. PHL Variable’s statutory capital and surplus reflects the benefit of $33.1 million and $15.0 million of capital contributions in 2015 and 2014, respectively, and Phoenix may need to make additional capital contributions in the future. The need for significant additional capital contributions to operating subsidiaries or an inability to reduce expenses at the holding company could constrain the ability of the holding company to meet its debt obligations. Based on management’s review of the holding company’s liquidity position, we believe it can continue to meet its liquidity obligations through 2016 and beyond.

In 2015, 2014 and 2013, the Company did not pay any stockholder dividends.

We sponsor post-employment benefit plans through pension and savings plans for employees of Phoenix Life. Funding of the majority of these obligations is provided by Phoenix Life on a 100% cost reimbursement basis through administrative services agreements with the holding company. See Note 15 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information.


62

The Phoenix Companies, Inc. Summary Cash Flows (parent company only)

Summary Cash Flows:
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
 
 
 
 
 
 
Cash provided by (used for) operating activities
$
(61.5
)
 
$
(143.5
)
 
$
19.8

Cash provided by (used for) investing activities
77.3

 
119.3

 
(11.6
)
Cash provided by (used for) financing activities
—

 
—

 
—

Change in cash and cash equivalents
$
15.8

 
$
(24.2
)
 
$
8.2


2015 compared to 2014

Cash used for operating activities for the year ended December 31, 2015 decreased $82.0 million compared to the year ended December 31, 2014. This decrease was primarily a result of lower audit and consulting fees related to the preparation of financial statements.

Cash provided by investing activities for the year ended December 31, 2015 decreased $42.0 million compared to the year ended December 31, 2014. This decrease was primarily a result of a decrease in sales of short-term investments. Partially offsetting this decrease was an increase in dividends received from subsidiaries.

There was no cash provided by or used for financing activities in either 2015 or 2014.

2014 compared to 2013

Cash provided by operating activities for the year ended December 31, 2014 decreased $163.3 million compared to the year ended December 31, 2013 due mainly to an increase in net payments to/from subsidiaries. These payments were driven by increased audit and consulting expenses related to the 2012 and 2013 audits that were completed during 2014.

Cash used for investing activities for the year ended December 31, 2014 decreased $130.9 million compared to the year ended December 31, 2013, driven by an increase in sales, repayments and maturities of short term investments and a reduction in purchases of available-for-sale debt securities.

There was no cash provided by or used for financing activities in either 2014 or 2013.

Life Companies

The Life Companies’ liquidity requirements principally relate to the payment of: liabilities associated with our insurance products, such as policy benefits, surrenders, withdrawals and loans; dividends by Phoenix Life to the parent company; operating expenses; and principal and interest by Phoenix Life on its outstanding debt obligation.

Historically, our Life Companies have used cash flows from operations and investing activities to fund liquidity requirements. Their principal cash inflows from insurance activities come from premiums, 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.


63

Annuity Actuarial Reserves and Deposit Liabilities
As of December 31,
Withdrawal Characteristics:
2015
 
2014
($ in millions)
Amount [1]
 
Percent
 
Amount [1]
 
Percent
 
 
 
 
 
 
 
 
Not subject to discretionary withdrawal provision
$
413.8

 
7
%
 
$
465.3

 
7
%
Subject to discretionary withdrawal without adjustment
918.9

 
15
%
 
894.6

 
15
%
Subject to discretionary withdrawal with market value adjustment
2,989.7

 
50
%
 
2,646.0

 
44
%
Subject to discretionary withdrawal at contract value
  less surrender charge
0.4

 
—
%
 
0.7

 
—
%
Subject to discretionary withdrawal at market value
1,673.8

 
28
%
 
2,065.6

 
34
%
Total annuity contract reserves and deposit fund liability
$
5,996.6

 
100
%
 
$
6,072.2

 
100
%
———————
[1]
Annuity contract reserves and deposit fund liability amounts are reported on a statutory basis, which more accurately reflects the potential cash outflows and include variable product liabilities. Annuity contract reserves and deposit fund liabilities are monetary amounts that an insurer must have available to provide for future obligations with respect to its annuities and deposit funds. These are liabilities in our financial statements prepared in conformity with statutory accounting practices. These amounts are at least equal to the values available to be withdrawn by policyholders.

Individual life insurance policies are less susceptible to withdrawals than annuity contracts because policyholders may incur surrender charges and be required to undergo a new underwriting process in order to obtain a new insurance policy. As indicated in the table above, most of our annuity contract reserves and deposit fund liabilities are subject to withdrawals at market value.

The cash values of certain individual life insurance policies increase over the lives of the policies. Policyholders have the right to borrow an amount up to a certain percentage of the cash value on those policies. As of December 31, 2015, our Life Companies had approximately $10.3 billion in cash values with respect to which policyholders had rights to take policy loans. For eligible policies, the majority of policy loans are at variable interest rates that are reset annually on the policy anniversary. Policy loans at December 31, 2015 were $2.4 billion.

Aggregate life surrenders in 2015 were 3.8% of related reserves, compared to 4.3% in 2014. Liquid assets consisting of cash, cash equivalents, short-term investments, treasuries and agency mortgage-backed securities accounted for 10.7% of fixed income investments at year end 2015, compared to 12.7% at year end 2014. A strong liquidity profile remains a priority for the Company, but as financial markets and the economy continue to improve the size and composition of this liquid asset portfolio will change to better meet the needs of the Company. These actions, along with resources the Company devotes to monitoring and managing surrender activity, are key components of liquidity management within the Company.

The primary liquidity risks regarding cash inflows from the investing activities are default by debtors, interest rate and other market volatility and potential illiquidity of investments. We closely monitor and manage these risks.

Phoenix Life has $126.7 million principal of surplus notes outstanding due December 15, 2034. Interest payments are at an annual rate of 7.15%, require the prior approval of the NYDFS, and may be made only out of surplus funds which the NYDFS determines to be available for such payments under New York insurance law.

We believe that the existing and expected sources of liquidity for our Life Companies are adequate to meet both current and anticipated needs.

Capital Management Program

During the second quarter of 2015, the Company’s subsidiaries, Phoenix Life and PHL Variable, executed an intercompany reinsurance treaty to optimize the statutory capital deployment of its operating subsidiaries. As a result of discussions with its regulators related to the treaty, the Company completed a de-stacking of its insurance company subsidiaries effective July 1, 2015. As a result of the de-stacking, an existing commitment by Phoenix Life to keep PHL Variable’s capital and surplus at Authorized Control Level RBC of 250% (125% Company Action Level) was extinguished. Further, Phoenix agreed it will not use any future dividends paid by Phoenix Life to meet the operating needs of PHL Variable. The Company believes it has adequate capital resources to meet PHL Variable’s currently anticipated capital needs.


64

The Company is authorized to repurchase up to an aggregate amount of $25.0 million (not including fees and expenses) of the Company’s outstanding shares of common stock. Under the stock repurchase program, purchases may be made from time to time in the open market, in accelerated stock buyback arrangements, in privately negotiated transactions or otherwise, subject to market prices and other conditions. There is no time limit placed on the duration of the program, which may be modified, extended or terminated by the Board of Directors (the “Board”) at any time. There were no shares repurchased under this authorization.

Ratings

Rating agencies assign Phoenix Life financial strength ratings and assign the holding company debt ratings based in each case on their opinions of the relevant company’s ability to meet its 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 Restatements of Prior Period Financial Statements and our Internal Control Over Financial Reporting” contained in “Item 1A: Risk Factors” in Part I of this Form 10-K.

The financial strength and debt ratings as of March 11, 2016 were as follows:

Rating Agency [1]
 
Financial Strength Rating
of Phoenix Life [2]
 
Outlook
 
Senior Debt Rating
of Phoenix
 
Outlook
 
 
 
 
 
 
 
 
 
A.M. Best Company, Inc.
 
B
 
Under review with developing implications
 
b
 
Under review with developing implications
Standard & Poor’s
 
B+
 
Positive
 
B-
 
Positive
———————
[1]
On January 14, 2014, Moody’s Investor Services withdrew all ratings of Phoenix including the Caa1 senior debt rating of Phoenix and the Ba2 financial strength rating of the Company’s life insurance subsidiaries and the B1 (hyb) debt rating of Phoenix Life’s surplus notes.
[2]
PHL Variable is also rated by A.M. Best Company, Inc. and Standard & Poor’s. Phoenix Life and Annuity Company and American Phoenix Life and Reassurance Company are only rated by A.M. Best Company, Inc. All subsidiaries have the same rating as Phoenix Life.

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.


65

Consolidated Financial Condition

Consolidated Balance Sheets:
As of December 31,
 
Increase (decrease) and
percentage change
($ in millions)
2015
 
2014
 
2015 vs. 2014
ASSETS
 
 
 
 
 
 
 
Available-for-sale debt securities, at fair value
$
12,190.7

 
$
12,679.3

 
$
(488.6
)
 
(4
%)
Available-for-sale equity securities, at fair value
182.0

 
179.5

 
2.5

 
1
%
Short-term investments
164.8

 
149.7

 
15.1

 
10
%
Limited partnerships and other investments
518.7

 
542.8

 
(24.1
)
 
(4
%)
Policy loans, at unpaid principal balances
2,382.5

 
2,352.1

 
30.4

 
1
%
Derivative instruments
103.5

 
161.3

 
(57.8
)
 
(36
%)
Fair value investments
165.0

 
235.4

 
(70.4
)
 
(30
%)
Total investments
15,707.2

 
16,300.1

 
(592.9
)
 
(4
%)
Cash and cash equivalents
627.3

 
450.0

 
177.3

 
39
%
Accrued investment income
179.2

 
176.7

 
2.5

 
1
%
Reinsurance recoverable
590.7

 
559.1

 
31.6

 
6
%
Deferred policy acquisition costs
941.1

 
848.6

 
92.5

 
11
%
Deferred income taxes, net
105.5

 
34.2

 
71.3

 
NM

Other assets
361.7

 
311.3

 
50.4

 
16
%
Discontinued operations assets
42.8

 
45.2

 
(2.4
)
 
(5
%)
Separate account assets
2,536.4

 
3,020.7

 
(484.3
)
 
(16
%)
Total assets
$
21,091.9

 
$
21,745.9

 
$
(654.0
)
 
(3
%)
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
Policy liabilities and accruals
$
12,342.7

 
$
12,417.6

 
$
(74.9
)
 
(1
%)
Policyholder deposit funds
4,333.2

 
3,955.0

 
378.2

 
10
%
Dividend obligations
716.8

 
916.8

 
(200.0
)
 
(22
%)
Indebtedness
378.9

 
378.9

 
—

 
—
%
Pension and post-employment liabilities
361.6

 
380.0

 
(18.4
)
 
(5
%)
Other liabilities
210.7

 
289.8

 
(79.1
)
 
(27
%)
Discontinued operations liabilities
37.8

 
40.5

 
(2.7
)
 
(7
%)
Separate account liabilities
2,536.4

 
3,020.7

 
(484.3
)
 
(16
%)
Total liabilities
20,918.1

 
21,399.3

 
(481.2
)
 
(2
%)
 
 
 
 
 
 
 
 
STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
Common stock
0.1

 
0.1

 
—

 
—
%
Additional paid in capital
2,632.9

 
2,632.8

 
0.1

 
—
%
Accumulated other comprehensive income (loss)
(266.2
)
 
(234.4
)
 
(31.8
)
 
14
%
Retained earnings (accumulated deficit)
(2,022.7
)
 
(1,889.0
)
 
(133.7
)
 
7
%
Treasury stock
(182.9
)
 
(182.9
)
 
—

 
—
%
Total The Phoenix Companies, Inc. stockholders’ equity
161.2

 
326.6

 
(165.4
)
 
(51
%)
Noncontrolling interests
12.6

 
20.0

 
(7.4
)
 
(37
%)
Total stockholders’ equity
173.8

 
346.6

 
(172.8
)
 
(50
%)
Total liabilities and stockholders’ equity
$
21,091.9

 
$
21,745.9

 
$
(654.0
)
 
(3
%)


66

December 31, 2015 compared to December 31, 2014

Assets

Total assets decreased $654.0 million from December 31, 2014 to December 31, 2015. The decrease is primarily attributable to a decrease in invested assets driven by the following:

•
A decrease in available-for-sale debt securities of $488.6 million, which is driven by a decrease in market value of $504.2 million for the year primarily due to an increase in interest rates. There continue to be outflows associated with withdrawals and claim payments, that were offset by purchases from continued sales of fixed indexed annuities.

•
A decrease in derivative assets of $57.8 million for the period, primarily due to the expiration of derivatives as well as changes in the market value. The corresponding decrease in derivative liabilities is recorded within other liabilities.

•
A decrease in fair value securities of $70.4 million, primarily driven by significant disposals of investments.

•
A decrease in separate account assets of $484.3 million, primarily due to policyholder withdrawals and other fund withdrawals on existing business with insignificant market performance during the year.

The decrease in assets is partially offset by the following:

•
An increase in cash and cash equivalents of $177.3 million, which is driven by sales of investments close to the end of the year.

•
An increase in other assets of $50.4 million, which is driven primarily by a tax receivable of $23.0 million that was a payable of $16.4 million at December 31, 2014 recorded within other liabilities.

•
An increase in the DAC asset of $92.5 million, which is driven primarily by an increase of $82.9 million in the shadow component from unrealized losses on investments in the period. The following table illustrates DAC by product for the comparable periods:

Composition of Deferred Policy Acquisition Costs
by Product:
As of December 31,
 
Increase (decrease) and
percentage change
($ in millions)
2015
 
2014
 
2015 vs. 2014
 
 
 
 
 
 
 
 
Variable universal life
$
117.9

 
$
120.3

 
$
(2.4
)
 
(2
%)
Universal life
140.4

 
129.0

 
11.4

 
9
%
Variable annuities
61.2

 
62.4

 
(1.2
)
 
(2
%)
Fixed annuities
286.6

 
220.9

 
65.7

 
30
%
Traditional life
335.0

 
316.0

 
19.0

 
6
%
Total deferred policy acquisition costs
$
941.1

 
$
848.6

 
$
92.5

 
11
%

Liabilities and Stockholders’ Equity

Total liabilities decreased $481.2 million from December 31, 2014 to December 31, 2015. The decrease is primarily attributable to the following:

•
A decrease in policy liabilities and accruals of $74.9 million, which is driven primarily by a decrease in reserves in the closed block as the block continues to decline and a decrease in the shadow liabilities from unrealized losses on investments in the period that were both offset by continued increases in the PFBL liability and higher levels of outstanding claims at the end of the period as a result of worse mortality.

•
A decrease in dividend obligations of $200.0 million, which is driven primarily by a reduction of $241.4 million in the unrealized gains on the assets supporting the closed block, which are included in the dividend obligation.


67

•
A decrease in other liabilities of $79.1 million, which is driven primarily by a decrease of $36.3 million in derivative liabilities consistent with the decrease in derivative assets, and a decrease in taxes payable which were $16.4 million at December 31, 2014 and were a receivable of $23.0 million at December 31, 2015 and recorded in other assets.

•
A decrease in separate account liabilities of $484.3 million, consistent with the decrease in separate account assets.

The decrease in liabilities is partially offset by the following:

•
An increase in policyholder deposit funds of $378.2 million, which is driven primarily by continued sales of the fixed indexed annuity products as illustrated in the table in the next section entitled “Annuity Funds on Deposit.”

Total stockholder’s equity decreased $172.8 million from December 31, 2014 to December 31, 2015. The decrease is primarily attributable to the following:

•
A net loss for 2015 that increased the accumulated deficit by $133.7 million.

•
An increase in accumulated other comprehensive loss (“AOCI”) of $31.8 million. The loss is driven by unrealized losses on investments during the period.

Funds on Deposit

Annuity Funds on Deposit:
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
 
 
 
 
 
 
Balance, beginning of period
$
5,674.5

 
$
5,502.4

 
$
5,042.1

Deposits
703.9

 
770.9

 
682.9

Performance and interest credited
44.0

 
213.5

 
525.4

Fees
(74.6
)
 
(72.1
)
 
(70.5
)
Benefits and surrenders
(708.5
)
 
(740.2
)
 
(677.5
)
Balance, end of period
$
5,639.3

 
$
5,674.5

 
$
5,502.4


2015 compared to 2014

Annuity funds on deposit decreased $35.2 million during the year ended December 31, 2015 compared to an increase of $172.1 million for the year ended December 31, 2014. The reduction was driven primarily by continued surrenders and worse market performance in the variable annuity products, and lower fixed indexed annuity deposits.

2014 compared to 2013

Annuity funds on deposit increased $172.1 million during the year ended December 31, 2014 compared to an increase of $460.3 million for the year ended December 31, 2013. For the year ended December 31, 2014, deposits increased as a result of stronger sales of the fixed indexed annuity products, which was offset by higher surrenders and worse market performance due to less significant gains in the equity markets in 2014 compared to 2013.


68

Variable Universal Life Funds on Deposit:
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
 
 
 
 
 
 
Balance, beginning of period
$
1,062.6

 
$
1,089.3

 
$
1,014.3

Deposits
67.0

 
70.1

 
75.4

Performance and interest credited
(3.8
)
 
59.9

 
182.5

Fees and COI
(68.9
)
 
(70.7
)
 
(74.4
)
Benefits and surrenders
(82.7
)
 
(86.0
)
 
(108.5
)
Balance, end of period
$
974.2

 
$
1,062.6

 
$
1,089.3


2015 compared to 2014

Variable universal life funds on deposit decreased $88.4 million for the year ended December 31, 2015 compared to an increase of $26.7 million for the year ended December 31, 2014. The decrease is driven primarily by worse market performance in 2015 compared to 2014. Benefits and surrenders, fees and COIs, and deposits remain consistent for the comparable periods.

2014 compared to 2013

Variable universal life funds on deposit decreased $26.7 million for the year ended December 31, 2014 compared to an increase of $75.0 million for the year ended December 31, 2013. The decrease in 2014 is driven primarily by worse market performance due to less significant gains in the equity markets in 2014 compared to 2013. Benefits and surrenders, fees and COIs, and deposits remain consistent for the comparable periods.

Universal Life Funds on Deposit:
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
 
 
 
 
 
 
Balance, beginning of period
$
1,781.9

 
$
1,818.2

 
$
1,837.9

Deposits
372.7

 
338.7

 
361.5

Interest credited
71.1

 
71.0

 
75.2

Fees and COI
(347.2
)
 
(348.9
)
 
(356.0
)
Benefits and surrenders
(100.7
)
 
(97.1
)
 
(100.4
)
Balance, end of period
$
1,777.8

 
$
1,781.9

 
$
1,818.2


2015 compared to 2014

Universal life funds on deposit decreased $4.1 million during the year ended December 31, 2015 compared to a decrease of $36.3 million for the year ended December 31, 2014. The decrease year over year is driven primarily by overall inforce declines. Benefits and surrenders, fees and COIs, and interest credited remain consistent for the comparable periods.

2014 compared to 2013

Universal life funds on deposit decreased $36.3 million during the year ended December 31, 2014 compared to a decrease of $19.7 million for the year ended December 31, 2013. The decrease year over year is driven primarily by the continued decline in deposits as the overall inforce declines. Benefits and surrenders, fees and COIs, and interest credited remain consistent for the comparable periods.


69

Contractual Obligations and Commercial Commitments

Contractual Obligations and Commercial Commitments:
As of December 31, 2015
($ in millions)
Total
 
2016
 
2017-2018
 
2019-2020
 
Thereafter
Contractual Obligations Due
 
 
 
 
 
 
 
 
 
Indebtedness, including interest payments
$
857.5

 
$
27.9

 
$
55.8

 
$
55.8

 
$
718.0

Operating lease obligations
6.0

 
0.8

 
1.7

 
0.8

 
2.7

Other purchase liabilities [1]
116.4

 
50.3

 
59.7

 
5.2

 
1.2

Policyholder contractual obligation [2]
40,248.0

 
2,122.9

 
4,044.5

 
3,902.4

 
30,178.2

Total contractual obligations [3]
$
41,227.9

 
$
2,201.9

 
$
4,161.7

 
$
3,964.2

 
$
30,900.1

Commercial Commitment Expirations
 
 
 
 
 
 
 
 
 
Other commercial commitments [4]
$
459.0

 
$
217.5

 
$
123.1

 
$
97.8

 
$
20.6

Total commercial commitments
$
459.0

 
$
217.5

 
$
123.1

 
$
97.8

 
$
20.6

———————
[1]
Other purchase liabilities relate to open purchase orders and other contractual obligations. This amount includes no expected pension contribution in 2016. See Note 15 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information on pension and other post-employment benefits.
[2]
Policyholder contractual obligations represent estimated benefits from life insurance and annuity contracts issued by our life insurance subsidiaries. Policyholder contractual obligations also include separate account liabilities, which are contractual obligations of the separate account assets established under applicable state insurance laws and are legally insulated from our general account assets.
Future obligations are based on our estimate of future investment earnings, mortality, surrenders and applicable policyholder dividends. Included in the amounts above are policyholder dividends generated by estimated favorable future investment and mortality, in excess of guaranteed amounts for our closed block. Actual obligations in any single year, or ultimate total obligations, may vary materially from these estimates as actual experience emerges. As described in Note 2 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K, policy liabilities and accruals are recorded on the consolidated balance sheets in amounts adequate to meet the estimated future obligations of the policies in force. The policyholder obligations reflected in the table above exceed the policy liabilities, policyholder deposit fund liabilities and separate account liabilities reported on our December 31, 2015 consolidated balance sheets because the above amounts do not reflect future investment earnings and future premiums and deposits on those policies. Separate account obligations will be funded by the cash flows from separate account assets, while the remaining obligations will be funded by cash flows from investment earnings on general account assets and premiums and deposits on contracts in force.
[3]
We do not anticipate any increases to unrecognized tax benefits that would have a significant impact on the financial position of the Company. Therefore, no unrecognized tax benefits have been excluded from this table. See Note 13 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information on unrecognized tax benefits.
[4]
Other commercial commitments relate to agreements to fund limited partnerships and private placement investments. These commitments can be drawn down by private equity funds as necessary to fund their portfolio investments through the end of the funding period as stated in each agreement.

Obligations Related to Pension and Post-Employment Employee Benefit Plans

We provide our employees with post-employment benefits that include retirement benefits, through pension and savings plans, and other benefits, including health care and life insurance. Employee benefit expense related to these plans totaled $5.0 million, $14.1 million and $14.4 million for 2015, 2014 and 2013, respectively.

We have three defined benefit plans. The employee pension plan (“Employee Plan”) provides benefits not to exceed the amount allowed under the Internal Revenue Code. Two supplemental plans (“Supplemental Plans”) provide benefits in excess of the Employee Plan. Retirement benefits under the plans are a function of years of service and compensation. Effective March 31, 2010, all benefit accruals under these defined benefit plans were frozen.

We have historically provided certain health care, dental and life insurance benefits (“Other Post-Employment Benefits Plan”) for eligible retired employees. In December 2009, we announced the decision to eliminate retiree medical coverage for active employees whose age plus years of service did not equal at least 65 as of March 31, 2010. Employees who remain eligible must still meet certain other defined criteria to receive benefits.

In addition, the cap on the Company’s contribution of retiree medical costs for retirees under the age of 65 was reduced beginning with the 2011 plan year. In October 2012, we announced that effective January 1, 2013, the Company’s contribution for pre-65 retiree medical and for post-65 retiree medical was reduced per covered member.


70

In October 2015, we announced that retiree medical benefits were eliminated for grandfathered active employees who had not met the criteria to retire as of March 31, 2016. In addition, we announced that effective January 1, 2016, the Company’s contribution for pre-65 retiree medical and for post-65 medical was further reduced per covered member.

These decisions affected retiree medical contributions for both past service and active employees. Curtailments and plan amendments were recognized as a result of the plan changes.

Employee Pension Plan

The employee pension plan is a qualified plan that is funded with assets held in a trust. It is the Company’s practice to make contributions to the qualified pension plan at least sufficient to avoid benefit restrictions under funding requirements of the Pension Protection Act of 2006. This generally requires the Company to maintain assets that are at least 80% of the plan’s liabilities as calculated under the applicable regulations at the end of the prior year. Under these regulations, the qualified pension plan is currently funded above 80% of the funding target liabilities as of December 31, 2015.

The funded status of the qualified pension plan based on the projected benefit obligations for the years ended December 31, 2015 and 2014 are summarized in the following table:

Qualified Employee Pension Plan Funded Status:
As of December 31,
($ in millions)
2015
 
2014
 
 
 
 
Fair value of plan assets, end of period
$
493.4

 
$
540.4

Benefit obligation, end of period
672.5

 
714.9

Benefit obligations, end of period
$
(179.1
)
 
$
(174.5
)

To meet the above funding objectives, we made contributions to the pension plan totaling $0 and $11.8 million during 2015 and 2014, respectively. On August 8, 2014, the Highway and Transportation Funding Act of 2014 was enacted into law, effective immediately. The law extends certain pension funding provisions originally included in the Moving Ahead for Progress in the 21st Century Act (MAP-21). The Company took advantage of this in September of 2014, which resulted in the Company not making any further contributions for the remainder of 2014. We expect to make no contributions over the next 12 months.

The changes in the projected benefit obligations of the employee plan at December 31, 2015 as compared to December 31, 2014 were principally the result of actuarial gains due to assumption changes.

Supplemental Plans

The Supplemental Plans are unfunded and represent general obligations of the Company. We fund periodic benefit payments to retirees as they become due under these plans from cash-flow from operations. The projected benefit obligations as of December 31, 2015 and 2014 were $142.7 million and $153.7 million, respectively.

The changes in the projected benefit obligations of the supplemental plans at December 31, 2015 as compared to December 31, 2014 were principally the result of actuarial gains due to assumption changes.

Other Post-Employment Benefit Plan

The Post-Employment Benefit Plan is unfunded and had projected benefit obligations of $22.9 million and $33.4 million as of December 31, 2015 and 2014, respectively. We fund periodic benefit payments under this plan from cash flows from operations as they become due.

The changes in the benefit obligation were principally due to the curtailment and plan amendment.


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We have entered into agreements with certain key executives of the Company that will, in certain circumstances, provide separation benefits upon the termination of the executive’s employment by the Company for reasons other than death, disability, cause or retirement, or by the executive for “good reason,” as defined in the agreements. The agreements provide this protection only if the termination occurs following (or is effectively connected with) the occurrence of a change of control, as defined in the agreements. As soon as reasonably possible upon a change in control, as so defined, we are required to make an irrevocable contribution to a trust in an amount sufficient to pay benefits due under these agreements. See Note 15 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information on our pension and other post-employment benefits.

We have agreements with certain of our employees that provide for additional retirement benefits. In the year ended December 31, 2015, the estimated liability for these benefits was $16.9 million.

Off-Balance Sheet Arrangements

We do not have any significant off-balance sheet arrangements that are reasonably likely to have a material effect on the financial condition, results of operations, liquidity or capital resources of the Company. The Company does have unfunded commitments to purchase investments in limited partnerships and private placements and a commitment for infrastructure services which are disclosed in Note 23 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K.

Reinsurance

We maintain reinsurance agreements to limit potential losses, reduce exposure to larger risks and provide additional capacity for growth. 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, 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 December 31, 2015, five major reinsurance companies account for approximately 68% of the reinsurance recoverable.

Statutory Capital and Surplus and Risk-Based Capital

As a result of discussions with its regulators related to the intercompany reinsurance treaty between Phoenix Life and PHL Variable executed in the second quarter of 2015, the Company’s operating subsidiaries were de-stacked, effective July 1, 2015. The impact of the de-stack on Phoenix Life’s capital and surplus was $262.2 million, which included $228.2 million for the reduction in subsidiary investment and $34.0 million for the related decrease in admitted deferred tax assets.

Phoenix Life’s statutory basis capital and surplus (including AVR) decreased from $752.2 million at December 31, 2014 to $535.3 million at December 31, 2015. Prior to the de-stacking, Phoenix Life’s surplus decreased as a result of the $48.5 million COI settlement in the first quarter of 2015, and increased $153.5 million as a result of the execution of an intercompany reinsurance treaty in the second quarter of 2015. In the third quarter, Phoenix Life’s surplus decreased by $262.2 million as a result of the de-stacking. During 2015, Phoenix Life also declared and paid $59.9 million of dividends to Phoenix.

PHL Variable’s statutory basis capital and surplus decreased from $213.7 million at December 31, 2014 to $209.3 million at December 31, 2015. Reductions in surplus were driven primarily by worse than expected mortality in the universal life business and the impact of PHL Variable’s $36.4 million portion of the COI settlements in the first quarter of 2015. The reductions in PHL Variable’s surplus were partially offset by the increase in surplus of $52.5 million as a result of the execution of the intercompany reinsurance treaty in the second quarter and $33.1 million in capital contributions from Phoenix.

The Company’s insurance companies’ states of domicile require reporting of RBC. RBC is based on a formula calculated by applying factors to various assets, premium and statutory reserve items taking into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk and business risk. The insurance laws give the states explicit regulatory authority to require various actions by, or take various actions against, insurers whose total adjusted capital does not exceed certain RBC levels.


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The levels of regulatory action, the trigger point and the corrective actions required are summarized below:

Company Action Level – results when Total Adjusted Capital falls below 100% of Company Action Level at which point the Company must file a comprehensive plan to the state insurance regulators;

Regulatory Action Level – results when Total Adjusted Capital falls below 75% of Company Action Level where in addition to the above, insurance regulators are required to perform an examination or analysis deemed necessary and issue a corrective order specifying corrective actions;

Authorized Control Level – results when Total Adjusted Capital falls below 50% of Company Action Level RBC as defined by the NAIC where in addition to the above, the insurance regulators are permitted but not required to place the Company under regulatory control; and

Mandatory Control Level – results when Total Adjusted Capital falls below 35% of Company Action Level where insurance regulators are required to place the Company under regulatory control.

All of the Company’s statutory subsidiaries had RBC ratios in excess of the minimum levels required by the applicable insurance regulations. As of December 31, 2015 and 2014, Phoenix Life’s RBC was in excess of 400% of Company Action Level (“CAL” or the level where a life insurance enterprise must submit a comprehensive plan to state insurance regulators), PHL Variable RBC was 200% of CAL, and each of its other insurance subsidiaries were at least 200%.
See Note 20 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K regarding the Life Companies’ statutory financial information and regulatory matters.


Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

For information about our management of market risk, see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K under the heading “Enterprise Risk Management.”


Item 8.    Financial Statements and Supplementary Data

The Financial Statements and Supplementary Data required by this item are presented beginning on page F-1.


Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.


Item 9A.    Controls and Procedures

(a)    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 Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.


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In connection with the preparation of this Form 10-K, the Company carried out an evaluation under the supervision of and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as of December 31, 2015, 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 Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2015 the Company’s disclosure controls and procedures were not effective because of the material weaknesses described below under “Management’s Annual Report on Internal Control Over Financial Reporting.”

To address the material weaknesses described below, the Company performed additional analysis and other procedures to ensure that the Company’s consolidated financial statements were prepared in accordance with U.S. GAAP. Accordingly, the Company’s management believes that the consolidated financial statements included in this Form 10-K fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows for the periods presented and that this Form 10-K 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.

(b)    Management’s Annual Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is defined as a process designed by or under the supervision of the Company’s principal executive and principal financial officers or persons performing similar functions, and effected by the Company’s Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with U.S. GAAP. Internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company to provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company, and to provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management, including the Chief Executive Officer and Chief Financial Officer, has conducted an assessment, including testing, of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015, based on the criteria in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Management has concluded that as of December 31, 2015, the material weaknesses in internal control over financial reporting described below have not been fully remediated due to insufficient time to fully implement and assess the design and operating effectiveness of the related controls.

The Company did not maintain effective controls in the financial reporting process related to the communication of information relevant to, and the formal documentation of the Company’s accounting policies. In addition, the following material weaknesses in internal control over financial reporting have been identified and included in management’s assessment as of December 31, 2015:

1.
Actuarial Finance and Valuation - The Company did not maintain effective controls over the actuarial process. Specifically:
•
The Company did not maintain effective controls over key actuarial models, spreadsheets and certain key reports to ensure the reliability of data, assumptions and valuation calculations.
•
The Company did not maintain effective systems and controls to appropriately measure actuarially derived balances for its fixed indexed annuity products.

74

2.
Investments - The Company did not maintain effective controls over certain investment processes. Specifically:
•
The Company did not maintain effective controls over internally priced securities, including private placement debt and equity securities.
•
The Company did not maintain effective controls over determining the appropriate accounting method for other invested assets (“OIA”), including limited partnerships and limited liability company investments, or for determining the appropriate accounting for investee transactions.

As a result of the material weaknesses in internal control over financial reporting described above, management has concluded that, as of December 31, 2015, the Company’s internal control over financial reporting was not effective based on the criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

The Company’s independent registered public accounting firm, KPMG LLP, who audited the consolidated financial statements included in this Annual Report on Form 10-K, has issued a report on the effectiveness of management’s internal control over financial reporting as of December 31, 2015. This report states that internal control over financial reporting was not effective and appears on page 80 of this Annual Report on Form 10-K.

(c)    Changes in Internal Control Over Financial Reporting

The Company has made significant improvements related to internal control over financial reporting. These improvements include strengthened financial skills and capabilities, enhanced risk assessment procedures, strengthened financial control governance, improved procedures over financial reporting and disclosures, and improved monitoring functions such as Internal Audit.

As of December 31, 2015, the Company completed its remediation initiatives related to the following previously identified material weaknesses in the below list of categories:

Financial Reporting
•
Ineffective controls over the processing of journal entries and the preparation and review of account reconciliations. Principally, the remediation efforts included:
◦
Completed the risk assessment process whereby the relevant financial statement assertions and risks were identified, gaps were assessed, and new controls were designed and implemented to ensure that the relevant risks are addressed by the controls in the process.
◦
Designed and implemented new controls and enhanced existing controls in multiple processes that are part of the financial close and recording of journal entries that include levels of review at the appropriate precision and by personnel with the appropriate experience.
◦
The Company made revisions to the balance sheet account reconciliation policy to better align the reconciliation controls with the risks that the Company identified both in the financial statements and the reconciliation process.
•
Insufficient complement of personnel with a level of U.S. GAAP accounting knowledge commensurate with the Company’s financial reporting requirements. Principally, the remediation efforts included:
◦
The Company has hired both staff and management within Corporate Finance and other parts of the organization that have background and experience in U.S. GAAP accounting, life insurance accounting, and SEC financial reporting requirements.
◦
Implemented controls to periodically assess the sufficiency of GAAP resources commensurate with the Company’s financial reporting requirements.

Actuarial Finance and Valuation
•
Ineffective controls over the review and approval of assumptions used in the determination of actuarially derived insurance policy liability estimates. Principally, the remediation efforts included:
◦
Designed and implemented controls over the assumption setting process, including risk assessment, peer review and governance controls.
◦
Designed and implemented controls over the reliability of data used in the assumption setting process.

75

◦
Designed and implemented review and approval controls for the assumptions used in the determination of actuarially derived insurance policy liability estimates. Ineffective controls over the application of U.S. GAAP to universal life reserves. Principally, the remediation efforts included:
◦
Documented critical accounting policies as well as designed and implemented controls over changes to those policies relative to the application of U.S. GAAP for its universal life reserves.

Investments
•
Ineffective controls over the recognition and measurement of impaired investments. Principally, the remediation efforts included:
◦
Implemented controls over identification and measurement of impaired investments.
◦
Enhanced communication between Corporate Finance and the Investment Department in order to facilitate accurate and timely impairment analysis.
◦
Implemented controls to address the completeness and accuracy of cash flows projections and private securities watch list.
•
Ineffective controls over the recognition and measurement of certain elements of net investment income as well as identifying embedded derivatives related to structured securities. Principally, the remediation efforts included:
◦
Implemented additional process level controls to address net investment income recognition and measurement.
◦
Established process level controls to identify and evaluate securities with attributes of embedded derivatives.
•
Ineffective controls over classification in the fair value hierarchy disclosure. Principally, the remediation efforts included:
◦
Enhanced accounting policy to define the application of the fair value hierarchy.
◦
Implemented controls to evaluate the inputs, assumptions and valuation techniques for investment valuation received from third party pricing services.
◦
Implemented controls to review the compilation of fair value hierarchy disclosures in compliance with the accounting policy.
•
Ineffective controls over the recognition and measurement of counterparty non-performance risk on non-collateralized derivatives. Principally, the remediation efforts included:
◦
Established an accounting policy to reflect the risk of counterparty non-performance in the Company’s estimates of derivative fair value.
◦
Implemented controls over the inputs, methodology, and calculation of the valuation adjustment for counterparty non-performance risk.

Reinsurance Accounting
•
Ineffective controls over the analysis, documentation and review of the U.S. GAAP accounting for complex reinsurance transactions at inception. Principally, the remediation efforts included:
◦
Completed the risk assessment and designed and implemented new controls over the appropriate accounting treatment for new reinsurance treaties.

Pensions
•
Ineffective controls over the valuation of pension assets and liabilities, including oversight of third-party vendors, and the completeness and accuracy of census data. Principally, the remediation efforts included:
◦
Completed the risk assessment and designed and implemented new controls around the reconciliation of pension assets and valuation of the liabilities, enhanced the design of controls over the census data files to operate at appropriate precision and designed and implemented new controls around information provided to and received from third-party vendors.


76

Limited Partnerships and Other Investments Taxable Income Reporting
•
Ineffective controls over the completeness and accuracy of taxable income reporting for limited partnership and other investments:
◦
Completed the risk assessment and designed and implemented new controls around the completeness and accuracy of taxable income reporting for limited partnership and other investments.
◦
Enhanced review procedures related to partnership K-1s, including controls designed and implemented to detect the omission of taxable income from the partnership and other invested asset portfolio.

Cash flows and changes in classifications
•
Ineffective controls over the presentation of cash and cash flows. Principally, the remediation efforts included:
◦
Completed the risk assessment and designed and implemented controls that operate at appropriate precision and are performed by individuals with the appropriate level of experience.
◦
The Company designed and implemented controls over the accuracy and completeness of data sources that are used as inputs to the statement of cash flows.

Access to applications and data
•
Ineffective controls over the granting, removing and reviewing access to ensure appropriate segregation of duties and restricted access to programs and data. Principally, the remediation efforts included:
◦
Enhanced internal control over the request and approval of system access to key applications and system infrastructure.
◦
Implemented monitoring controls to validate appropriate granting and removal of access.
◦
Enhanced the Company’s annual access review controls.

(d)    Management’s Remediation Initiatives

In addition to the items noted above, there were other continued improvements resulting from progress made on remediation efforts related to Financial Reporting, Actuarial Finance and Valuation, and Investments. These changes to the Company’s internal control over financial reporting are in progress and as of the fourth quarter of 2015 did not materially affect, or are not reasonably likely to materially affect, the Company’s internal control over financial reporting.

Since the identification of the material weaknesses, management has taken steps to strengthen its finance skills, capabilities, processes and control environment. As it works towards remediation of the material weaknesses described in “Management’s Annual Report on Internal Control Over Financial Reporting” above, the Company continues to strengthen its internal controls around financial reporting processes.

The Company has planned and will implement significant measures in an effort to remediate its material weaknesses that remain as of December 31, 2015; each designed to address key risks within the organization and remediate the root cause of the identified deficiencies. We have taken, or will take, the following actions:

Financial Reporting
•
Took action to design and implement controls to facilitate timely communication between different areas of the organization, including investments, tax, actuarial, reinsurance and financial reporting.
•
The Company will further enhance the design of these controls to formalize the communication of information relevant to the Company’s accounting policies and the controls around the documentation of the relevant accounting policy conclusions.

Actuarial Finance and Valuation
•
Developed a cross-functional team which partners Actuarial Valuation with Actuarial Accounting and hired or repositioned key accounting and actuarial personnel with extensive U.S. GAAP and public accounting and controls experience to assist in valuation, performance and ongoing training of actuarial related control activities and to lead remediation initiatives.

77

•
The Company has performed a comprehensive risk assessment across all products and in aggregate across the Company, based on materiality and other qualitative factors, and will either (i) redesign the process and the associated controls or (ii) identify additional process-level controls in place to mitigate financial statement risks and control the overall actuarial environment.
•
The Company continues to assess technological solutions and/or upgrade technology designed to simplify and control data and information and appropriately implement methodologies and assumptions specifically for the following:
◦
Ongoing implementation of a new fixed indexed annuity valuation and projection system,
◦
Planning and assessing the implementation of new valuation and projection systems for each of the Company’s product lines,
◦
Redesigning certain highly manual processes to ensure adequacy of controls and sustainability,
◦
Automation and movement of certain controls from within the business to Information Technology.
•
The Company will further enhance communication with Corporate Finance, Pricing Actuaries, Investment Accounting and Information Technology to ensure timely and accurate information is provided and received as it relates to complex transactions, new product development, and the overall accuracy of financial reporting.
•
The Company has partially designed and is in the process of implementing new policies and/or governance controls, including change management, data/models and spreadsheets.
•
The Company has partially designed and is in the process of implementing process-level and monitoring/review controls including the design or redesign of analytics which ensure the reliability of key data, assumptions, methodologies, and valuation calculations.

Investments
•
Assessed the current state for internally priced securities and accounting for other invested assets. The Company took action to design new processes and controls to address deficiencies, including strengthening the close process, enhancing validation of valuation inputs, and improving oversight of third-party information.
Internally priced securities
◦
Designed and implemented certain controls over internally priced private placement debt, including review of the accuracy of pricing matrix model inputs, pricing inputs received from third parties, and internally developed credit ratings.
◦
Designed and implemented certain controls to review and analyze valuation from direct investment sponsor funds.
◦
The Company will further evaluate the design of controls as well as consider the implementation of additional controls over private valuation inputs to address unremediated risks and demonstrate consistent performance of those controls.
Other Invested Assets
◦
Designed a new process to evaluate accounting for new OIA investments and implemented enhanced review controls over the resulting accounting conclusions.
◦
The Company will further evaluate the design of controls over accounting for OIA investments as well as consider the implementation of additional controls to address unremediated risks and demonstrate consistent performance of those controls.

We anticipate devoting significant resources toward our remediation efforts described above in order to make substantial progress in the remediation of our material weaknesses. Actuarial Finance and Valuation will take additional time and resources to remediate due to the complexity and nature of the products. While these efforts are underway, we are relying on a comprehensive set of manual procedures to help confirm the proper collection, evaluation, and disclosure of the information included in the consolidated financial statements.


78

Management has developed a plan for the implementation of the foregoing remediation efforts and will monitor the implementation. In addition, under the direction of the financial reporting controls committee as well as the Audit and Finance Committee of the Board, management will continue to review and make necessary changes to the overall design of the Company’s internal control environment, as well as to policies and procedures to improve the overall effectiveness of internal control over financial reporting. Management believes the efforts discussed above will remediate the material weaknesses. As the Company continues to evaluate and work to improve its internal control over financial reporting, management may determine to take additional measures to address control deficiencies or determine to modify the remediation plan described above.

No system of controls, no matter how well designed and operated, can provide absolute assurance that the objectives of the system of controls will be met, and no evaluation of controls can provide absolute assurance that all control deficiencies or material weaknesses have been or will be detected. As described above and in “Item 1A: Risk Factors”, these material weaknesses have not been fully remediated as of the filing date of this Form 10-K. If the Company’s remediation efforts do not prove effective and control deficiencies and material weaknesses persist or occur in the future, the accuracy and timing of our financial reporting may be adversely affected.



79




Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
The Phoenix Companies, Inc.:


We have audited The Phoenix Companies Inc. and subsidiaries (the Company) internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control ‑ Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses related to the communication of information relevant to, and the formal documentation of the Company’s accounting policies, ineffective controls over the actuarial process, and ineffective controls over certain investment processes have been identified and included in management’s assessment. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2015, and the related consolidated statements of operations and comprehensive income, changes in stockholders’ equity, and cash flows for the year ended December 31, 2015 of The Phoenix Companies, Inc. and subsidiaries. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2015 consolidated financial statements, and this report does not affect our report dated March 15, 2016, which expressed an unqualified opinion on those consolidated financial statements.

In our opinion, because of the effect of the aforementioned material weaknesses on the achievement of the objectives of the control criteria, The Phoenix Companies, Inc. and subsidiaries has not maintained effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).


80

We do not express an opinion or any other form of assurance on management’s statements referring to corrective actions taken after December 31, 2015, relative to the aforementioned material weaknesses in internal control over financial reporting.


/s/ KPMG LLP

Hartford, Connecticut
March 15, 2016


81

Item 9B.
Other Information

None.



82

PART III

Item 10.
Directors, Executive Officers and Corporate Governance

Board of Directors of the Registrant

The following individuals serve as directors of the Company. All ages are as of March 15, 2016.

Martin N. Baily
Age: 71
Director since: 2005
Committees: Finance/Investment/Policyholder Affairs Committees (Chair); Executive Committee; Governance/Nominating Committee
Experience: Mr. Baily has been a Senior Fellow at the Brookings Institution since 2007. He also has been a Senior Advisor to McKinsey & Company since 2002. He also has been a Senior Advisor to Albright Stonebridge Group since 2013. He was a Senior Fellow at the Peterson Institute for International Economics from 2001 to 2007, Chairman and a Cabinet Member of the President’s Council of Economic Advisors from 1999 to 2001, and a Principal of McKinsey & Company from 1996 to 1999.
Qualifications: Mr. Baily holds a Ph.D. in economics from Massachusetts Institute of Technology and has expertise in the field of finance through work in the private sector and government.

Arthur P. Byrne
Age: 70
Director since: 2000 (for Phoenix Life since 1997)
Committees: Audit Committee; Compensation/Human Resources Committee
Experience: Mr. Byrne has been an operating partner of J.W. Childs Associates, L.P., a private equity fund based in Boston, Massachusetts, since 2002. He also has served as Chairman of The Esselte Corporation since 2002 and Chairman of W/S Packaging Inc. since 2006. He was President, Chief Executive Officer and Chairman of The Wiremold Company from 1991 to 2002.
Qualifications: Mr. Byrne has many years of prior experience as a chief executive officer and significant experience in the areas of finance, acquisitions and strategic planning.

Sanford Cloud Jr., Esq.
Age: 71
Director since: 2001
Committees: Compensation/Human Resources Committee (Chair); Executive Committee; Governance/Nominating Committee
Experience: Mr. Cloud has served as Chairman of the Board of Directors of the UConn Health Center since 2011 and a member of the Board of Trustees of the University of Connecticut also since 2011. He also has served as Chairman and Chief Executive Officer of The Cloud Company, LLC since 2005, Chairman of The Connecticut Health Foundation since 2010 and a Trustee of Eversource Energy since 2000. Previously, Mr. Cloud served as non-executive Chairman of Ironwood Mezzanine Fund L.P, President and Chief Executive Officer of The National Conference for Community and Justice from 1994 through 2004, a partner at the law firm of Robinson & Cole LLP from 1993 to 1994, a Vice President at Aetna, Inc. from 1986 to 1992, and a Connecticut State Senator from 1977 to 1980.
Qualifications: Mr. Cloud is an attorney who has worked in private practice, as in-house counsel, served in the state legislature, and served as a senior officer of a major insurance company and as a chief executive officer of a large not-for-profit organization.


83

John H. Forsgren
Age: 69
Director since: 2005
Committees: Audit Committee; Executive Committee (Chair); Compensation/Human Resources Committee
Experience: Mr. Forsgren has served as Chairman of the Board of the Company since July 2013; director of Trident Resources Corp. since 2007, Port Townsend Paper Co. since 2008, and Duke Energy Corporation since August 2009. Mr. Forsgren also serves on the board of several privately held companies. Previously, he served as a director of NEON Communications Group, Inc. from 1998 to 2007 and CuraGen Corporation from 2002 to 2009, serving as Executive Chairman during 2009. Mr. Forsgren held the positions of Vice Chairman, Executive Vice President and Chief Financial Officer of Northeast Utilities from 2001 through 2004, and Executive Vice President and Chief Financial Officer from 1996 to 2001. He was Managing Director of Chase Manhattan Bank from 1995 to 1996, Executive Vice President of Sun International Investments, Ltd. from 1994 to 1995, Senior Vice President and Chief Financial Officer of Euro Disney (a subsidiary of The Walt Disney Company) from 1990 to 1994, and Vice President and Treasurer of The Walt Disney Company from 1986 to 1990.
Qualifications: Mr. Forsgren served as chief financial officer of a public company, served in financial functions in a variety of different businesses and has experience in accounting, finance and investments.

Ann Maynard Gray
Age: 70
Director since: 2002
Committees: Finance/Investment/Policyholder Affairs Committees; Executive Committee; Governance/Nominating Committee (Chair)
Experience: Ms. Gray has served as a director of Duke Energy Corporation since 1994 and as chairman from 2014 to 2015. She was President of the Diversified Publishing Group of Capital Cities/ABC, Inc. from 1991 to 1998.
Qualifications: Ms. Gray has many years of experience in finance and marketing functions, as well as the experience of having presided over a major division of a public company.

Andrew J. McMahon
Age: 48
Director since: 2015
Committees: Audit Committee; Finance/Investment/Policyholder Affairs Committees
Experience: Mr. McMahon founded Vitae Analytics, Inc., a big data analytics firm focused on insurance and asset management domains, in 2014. Previously, he was with AXA from 2005 to 2013, including as president and a board member of AXA Equitable Life Insurance Company, an AXA Global Life and Savings Board member, head of the Wealth Management and Financial Protection Businesses, chairman of AXA Advisors, and head of the Strategic Initiatives Group. Earlier in his career, he was principal at McKinsey & Company, Inc. from 1997 to 2005 and held various roles at General Electric Company from 1989 to 1996. Mr. McMahon has been a member of the Fairfield University Board of Trustees since 2010.
Qualifications: Mr. McMahon spent several years of his career in the life insurance industry and has many years of experience in finance.

Westley V. Thompson
Age: 61
Director since: 2014
Committees: Finance/Investment/Policyholder Affairs Committees; Audit Committee
Experience: Mr. Thompson was employed by Sun Life Financial U.S. from 2008 to April 2014, serving as President from January 2010 to April 2014 and President of Sun Life U.S. Operations from October 2008 to January 2010. Prior to joining Sun Life Financial U.S., Mr. Thompson worked for Lincoln Financial Group from January 1998 to September 2008.
Qualifications: Mr. Thompson spent his entire career in the life insurance industry. Over the course of his career, he has worked in and with city and state government.


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James D. Wehr
Age: 58
Director since: 2009
Committees: Executive Committee
Experience: Mr. Wehr has served as President and Chief Executive Officer (“CEO”) of The Phoenix Companies, Inc. since 2009. He was Senior Executive Vice President and Chief Investment Officer from 2007 to 2009, Executive Vice President and Chief Investment Officer from 2005 to 2007, Senior Vice President and Chief Investment Officer of the Company and Phoenix Life from 2004 to 2005, and Senior Managing Director and Portfolio Manager at Phoenix Investment Partners (now Virtus Investment Partners, Inc.) from 1995 through 2003. Mr. Wehr joined Phoenix in 1981 and held a series of increasingly senior investment positions, including credit research, trading and portfolio management prior to 1995.
Qualifications: Mr. Wehr has investment management expertise and served in several executive roles prior to becoming a chief executive officer.

Arthur F. Weinbach
Age: 72
Director since: 2008
Committees: Audit Committee (Chair); Compensation/Human Resources Committee; Executive Committee
Experience: Mr. Weinbach has served as Chairman of CA Technologies since 2010 and as Director since 2008. He was Chairman of Broadridge Financial Solutions, Inc. from 2010 until he retired in 2011 and was executive Chairman from 2007 to 2010. He also was associated with Automatic Data Processing, Inc. (ADP) from 1980-2007, serving as Chairman and Chief Executive Officer, retiring as Chief Executive Officer in 2006 and retiring as Chairman in 2007.

Board Composition Changes

On May 4, 2015, Augustus K. Oliver, II, who served as a director of the Company since 2008, withdrew his name as a nominee for election as a director at the 2015 Annual Meeting of Shareholders held on May 14, 2015. Mr. Oliver served as a director, member of the Audit Committee and Executive Committee and Chairman of the Finance Committee until the 2015 Annual Meeting.

On July 15, 2015, The Phoenix Companies, Inc. Board of Directors (the “Board”) elected Mr. Andrew J. McMahon as a director of the Company, effective July 16, 2015. Mr. McMahon was appointed to serve on the Board’s Audit Committee and Finance Committee.

Executive Officers of the Registrant

Set forth below is a description of the business positions held during at least the past five years by the current executive officers of Phoenix. All ages are as of March 15, 2016.

JAMES D. WEHR, age 58, has been President and CEO since April 2009. Previously, Mr. Wehr served as Senior Executive Vice President and Chief Investment Officer of the Company since February 2007, Executive Vice President and Chief Investment Officer of the Company since February 2005 and as Senior Vice President and Chief Investment Officer of the Company and Phoenix Life since January 1, 2004. Prior to that, Mr. Wehr was Senior Managing Director and Portfolio Manager at Phoenix Investment Partners (now Virtus Investment Partners, Inc.) from 1995 through 2003. Mr. Wehr joined the Company in 1981 and held a series of increasingly senior investment positions prior to 1995.

JODY A. BERESIN, age 58, has been Executive Vice President and Chief Administrative Officer since July 2014 and is responsible for Human Resources, Corporate Communications, Information Technology and Corporate Services. Previously, Ms. Beresin served as Senior Vice president, Administration, since November, 2012. She assumed leadership in Human Resources in January 2004 after serving as a Vice President, Corporate Communications, since February 2003. Ms. Beresin joined the Company in 1994 as Director of Corporate Communications and served in increasingly senior positions that included public relations, internal communications, marketing and advertising.


85

THOMAS M. BUCKINGHAM, age 39, has been Executive Vice President, Product and Operations since November 2012. Mr. Buckingham is responsible for all product- and service-related functions including product development, implementation and management as well as operations. Mr. Buckingham joined Phoenix as an actuarial assistant in 1999 and served in increasingly senior corporate, product development and operational positions. He also has worked in Strategic Development and as Chief of Staff to the CEO. He served as Senior Vice President, Product Implementation and Operations, prior to being promoted to his current role.

EDWARD W. CASSIDY, age 55, has been Executive Vice President, Distribution since May 2007, and the Managing Principal of Saybrus Partners, Inc., a Phoenix subsidiary, since 2009. Prior to joining the Company in 2006, Mr. Cassidy had been Senior Vice President of Principal Financial Group with responsibility for the oversight of the individual life insurance business, including product development, marketing, underwriting and risk management. Prior to that, Mr. Cassidy spent 15 years at Travelers Life and Annuity Company, where he held a variety of senior distribution positions and, ultimately, as president of Travelers Life Division.

BONNIE J. MALLEY, age 55, has been Executive Vice President and Chief Financial Officer (“CFO”) since November 2012. Previously, Ms. Malley served as Executive Vice President and Chief Administrative Officer of the Company since 2008. Prior to that, Ms. Malley served as the head of Human Resources since August 2002 and, in the ensuing years, added other administrative functions. Ms. Malley served as Senior Vice President and Chief Accounting Officer since 2001 and Vice President, Corporate Finance since 1998. Ms. Malley joined the Company in 1985 as a staff auditor within the securities accounting and investment accounting functions.

ERNEST M. MCNEILL JR., age 51, has been Senior Vice President and Chief Accounting Officer since August 2014. Mr. McNeill is responsible for a number of Corporate Finance functions including GAAP Accounting, Expense Management, Statutory Accounting, Accounting Operations, Corporate Tax, and Investment Accounting. Prior to joining Phoenix, he most recently served as senior vice president, Corporate Accounting, for the financial services businesses of Fidelity Investments. Previously, he held various senior finance roles at The Hartford Financial Services Group including serving as chief accounting officer, Hartford Life, Inc., and as vice president and director, The Hartford Investment Management Company.

JOHN T. MULRAIN, age 66, has been Executive Vice President, General Counsel and Secretary since February 2011. Previously, Mr. Mulrain served as Senior Vice President, General Counsel and Secretary of the Company since June 2009 with responsibility for all legal functions, including corporate compliance and corporate secretary duties. Prior to that Mr. Mulrain served as Vice President and Counsel, focusing primarily on legal issues relating to investments and portfolio management. Prior to joining the Company, he was counsel at Connecticut Mutual Life and a partner at the law firm of Shipman & Goodwin.

CHRISTOPHER M. WILKOS, age 58, has been Executive Vice President and Chief Investment Officer since April 2009. Previously, Mr. Wilkos served as Senior Vice President of Corporate Portfolio Management since March 2001 and Vice President of Corporate Portfolio Management since January 1998. Prior to that, he was Director of Corporate Portfolio Management since March 1997. Prior to joining the Company, Mr. Wilkos was Vice President, Portfolio Strategy, at Connecticut Mutual Life.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than 10% of a registered class of our equity securities, to file with the SEC reports of ownership and changes in ownership of our Common Stock. Based on our records and on information provided by our directors and our executive officers, we believe that during the fiscal year ending December 31, 2015, all of our directors and executive officers timely met such filing requirement, except that one Form 4 reporting an exempt grant of restricted stock units (“RSUs”) was not timely filed during such period for James Wehr, Bonnie Malley, Christopher Wilkos, Edward Cassidy, Thomas Buckingham, John Mulrain, Ernest McNeill, and Jody Beresin, each of whom is a current executive officer of the Company, and for Peter Hofmann and Mark Griffin, each of whom is no longer an executive officer or employee of the Company. All such Forms 4 for our current executive officers were filed promptly upon learning of this error.


86

Code of Ethics

We have adopted a written Code of Conduct that is applicable to all our Company directors and employees, including our principal executive officer, principal financial officer and principal accounting officer. The Code of Conduct governs and strengthens our commitment to our shareholders, customers, corporate citizenship and employees, and to ethics and compliance. The Company is committed to the highest standards of legal and ethical conduct in all of our business dealings, and the Code of Conduct represents a compilation of certain key policies, standards and guidelines which guide our business activities to ensure we uphold these standards. The Code of Conduct covers all areas of professional conduct, including, among others, conflicts of interest, corporate opportunities, insider trading (including hedging and pledging of Company securities (see Anti-Hedging Policy and Anti-Pledging Policy for more detail on the policies), confidentiality, protection and use of Company property, customer complaints, fraud, compliance with legal and regulatory requirements, equal opportunity, sexual harassment, workplace safety and code compliance. All of our directors, officers and employees are required to abide by our Code of Conduct. Employees are required to report suspected violations of the Code of Conduct. The Code of Conduct is available on our web site at www.phoenixwm.com in the Investor Relations section, under the heading “Corporate Governance.” We intend to post any amendments to, or waivers of, the Code of Conduct applicable to our principal executive officer, principal financial officer or principal accounting officer on our web site. Copies of our Code of Conduct may also be obtained without charge by sending a request either by mail to: Corporate Secretary, The Phoenix Companies, Inc., One American Row, P.O. Box 5056, Hartford, Connecticut 06102-5056, or by e-mail to: corporate.secretary@phoenixwm.com.

Corporate Governance - Audit Committee

The Company has a separately designated Audit Committee established in accordance with the Exchange Act. The Audit Committee is comprised of Arthur F. Weinbach (Chair), Arthur P. Byrne, John H. Forsgren, Andrew J. McMahon and Westley V. Thompson. Mr. Oliver served on the Audit Committee until his Board service ended on May 14, 2015.

The Board has determined that all of the members of the Audit Committee are “financially literate” within the meaning of the listing standards of the New York Stock Exchange (“NYSE”). The Board has further determined that Mr. Arthur P. Byrne has qualified as an “audit committee financial expert” within the meaning of the SEC’s regulations and that Mr. Byrne is independent, as independence for audit committee members is defined in applicable NYSE rules.


Item 11.
Executive Compensation

COMPENSATION DISCUSSION AND ANALYSIS

Executive Summary

This Compensation Discussion and Analysis (the “CD&A”) provides an overview of our executive compensation programs, describes the material factors underlying the 2015 compensation provided to our named executive officers (the “NEOs”), and explains the information presented in the tables that follow this CD&A.

The NEOs for fiscal 2015 were:
•
James D. Wehr, President and CEO
•
Bonnie J. Malley, Executive Vice President and CFO
•
Thomas M. Buckingham, Executive Vice President, Product and Operations
•
Edward W. Cassidy, Executive Vice President, Distribution
•
Christopher M. Wilkos, Executive Vice President and Chief Investment Officer
•
Peter A. Hofmann, Former Executive Vice President, Strategy and Business Development (see Note 13 in Summary Compensation Table)


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Business and Organizational Background

Phoenix is a holding company incorporated in Delaware. Our operating subsidiaries provide life insurance and annuity products through independent agents and financial advisors. Our principal insurance company subsidiaries are Phoenix Life, domiciled in New York, and PHL Variable, domiciled in Connecticut. 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 (whole life, 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. As of December 31, 2015, we had $91.5 billion of gross life insurance in force and $5.6 billion of annuity funds under management.

In 2015, 97% of Phoenix product sales, as defined by total annuity deposits and total life premium, were annuities, and 96% of those sales were fixed indexed annuities. In addition, we have expanded sales of other insurance companies’ policies through our distribution subsidiary, Saybrus.

We operate two businesses segments: Life and Annuity and Saybrus. The Life and Annuity segment includes individual life insurance and annuity products, including our closed block. Saybrus 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.

On September 29, 2015, the Company announced the signing of a definitive agreement in which Nassau has agreed to acquire the Company for $37.50 per share in cash, representing an aggregate purchase price of $217.2 million. Founded in April 2015, Nassau is a privately held insurance and reinsurance business focused on acquiring and operating entities in the life, annuity and long-term care sectors. On December 17, 2015 the merger was approved by Phoenix shareholders. The transaction remains subject to regulatory approvals and the satisfaction of other closing conditions. After completion of the transaction, Nassau will contribute $100 million in new equity capital into the Company. After completion of the transaction, Phoenix will be a privately held, wholly-owned subsidiary of Nassau.

Compensation Overview for 2015

Our philosophy and approach to executive compensation is to strongly align pay with performance. In 2015, the Committee approved financial measures used in our annual and long-term plans that best focus executives and employees on key business priorities aligned with shareholder interests.

The financial measures used in our 2015 annual incentive plan represent a balanced scorecard approach with emphasis on sustainable growth and a healthy balance sheet. These financial measures included:

•
Change in Surplus, an earnings measure widely viewed as an indicator of financial strength and flexibility;
•
Adjusted Risk Based Capital (“RBC”), an important measure of capital adequacy used by regulators and rating agencies;
•
Saybrus EBITDA, a profitability and growth measure for a key business priority area;
•
Contribution Dollars, a measure of new business profitability; and
•
Expense Management, a new measure for the 2015 plan and a key area of focus for 2015.

The measures used in our 2015-2017 long-term incentive plan (“LTI”) align incentive compensation with a common set of performance measures focused on driving profitable growth, maintaining a healthy balance sheet and creating shareholder value.

•
Relative Total Shareholder Return (“rTSR”), a comprehensive measure of the Company’s ability to generate returns for shareholders, relative to other companies.
•
Two financial measures also used in the 2015 annual incentive plan, Change in Surplus and Adjusted RBC.
•
Time-vested RSUs designed to pay out in actual shares of stock.


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Summary of 2015 Changes to Compensation Levels

Pay Adjustments

Our CEO’s and other NEOs’ target compensation levels, except for Mr. Cassidy’s, were unchanged from 2014 levels.

Mr. Cassidy’s target total direct compensation for 2015 was 8% higher than for 2014. This was due to increases in his targets for sales commissions and Saybrus Profit Sharing due to projected growth in sales and EBITDA. Mr. Cassidy’s base salary, Phoenix Profitability Incentive, and LTI target were unchanged in 2015. For more information on Mr. Cassidy’s elements of compensation, see 2015 Saybrus Annual Incentive Plan and Grants of Plan-Based Awards.

Objectives of Executive Compensation Program

The design and objectives of our executive compensation program are based on a pay for performance philosophy in which variable, performance-based incentives directly align with our strategic goals and represent a significant component of an executive’s compensation opportunity.

•
Link compensation to performance results. The program is weighted in favor of incentive pay, in the form of annual and long-term performance incentives, to motivate and reward the creation of shareholder value.
•
Align the interests of our NEOs and shareholders. The program is designed to reward our NEOs when their performance produces profitable growth and improved returns. The business goals used for determining annual and long-term incentive awards are based on financial and operational measures directly aligned with the business strategy. These measures of success create a close alignment between the interests of our NEOs and our shareholders.
•
Attract, motivate, and retain high caliber leadership by providing competitive compensation opportunities. The program assesses total compensation opportunities against peer companies to attract and retain executives with the experience and talent required to achieve our strategic objectives.

2015 Say on Pay Vote

At the 2015 Annual Meeting held on May 14, 2015, shareholders had the opportunity to vote, on a nonbinding, advisory basis, on the compensation of our NEOs as disclosed in our April 2, 2015 Proxy Statement (“Say on Pay”). At that time, 77% of votes cast by shareholders were in favor of our Say on Pay resolution. The Compensation Committee considers shareholder feedback as it designs compensation programs.

Effective Corporate Governance Practices
 
WHAT WE DO
WHAT WE DO NOT DO
 
- Pay for performance
- Provide employment agreements to NEOs
 
- Maintain performance-based variable compensation
- Permit hedging or pledging of Company securities
 
- Maintain stock ownership guidelines
- Reprice equity awards
 
- Limit perquisites
- Gross up for excise taxes upon a change-in-control
 
- Apply clawback policy to broader group and all incentive plans
- Gross up for income taxes on executive perquisites or benefits
 
 
- Utilize double-trigger change-in-control provisions
 
 
- Engage an independent compensation consulting firm
 
- Maintain dialog with shareholders and consider feedback into incentive plan design

Pay Mix

We heavily weight the compensation for NEOs, who bear the most responsibility for our performance, toward at-risk variable compensation (annual and long-term incentives). Actual amounts earned by NEOs may differ from targeted amounts based upon the Company’s actual performance as it compares to multiple performance measures that are closely aligned with our business objectives. In 2015, pay mix consisted of base salary, an annual incentive award or awards and an LTI grant.


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The annual incentives and LTI grants, which are performance-based and subject to the achievement of pre-defined performance targets, made up 75% of our CEO’s target pay, and, on average, 63% of the target pay of our other NEOs in 2015.

Process for Determining NEO Compensation

Board of Directors and Compensation Committee

The Board is responsible for reviewing the performance of, and approving compensation awarded to, the CEO. This process is conducted annually, or whenever a CEO change occurs, based in part upon recommendations from the Compensation Committee.

The Compensation Committee is responsible for reviewing the performance of, and approving compensation awarded to, all other NEOs. This assessment is done annually, or whenever changes in NEO leadership occur, based in part upon recommendations from the CEO.

Compensation Consultant

The Compensation Committee has retained an independent compensation consultant, Semler Brossy Consulting Group, LLC (“Semler Brossy”), for advice on executive and director compensation matters. The chair of the Compensation Committee oversees the consultant’s work. Management does not retain its own consultant for executive compensation matters and did not use any consulting services from Semler Brossy in 2015. The Compensation Committee has conducted an assessment of its relationship with Semler Brossy pursuant to SEC and NYSE rules regarding advisor independence, and has not identified any issues with independence or conflicts of interest at this time.

During 2015, Semler Brossy advised the Compensation Committee on emerging best compensation practices and assisted the Compensation Committee in its review and analysis of executive and director compensation.

Role of Management

The Company’s Human Resources department supports the Compensation Committee in the execution of its responsibilities. The Company’s head of Human Resources supervises the development of materials for each Compensation Committee meeting. The CEO and the CFO collaborate with the head of Human Resources in providing recommendations related to performance measures and metrics, in certain cases taking into account insights of executive officers.

Compensation Determinations

On an annual basis, or when changes in NEO leadership occur, the CEO recommends, and the Compensation Committee reviews and approves, NEO target pay opportunities, except for the CEO. The Compensation Committee takes a multi-faceted approach to determining compensation for NEOs. Without prescribing particular weighting to any one factor, the Compensation Committee takes into account the following factors:

•
Relative strategic value of role.
•
Individual performance.
•
Change in responsibilities, if applicable.
•
Experience in role, if applicable.
•
Current compensation relative to competitive market references.
•
Current compensation relative to internal peers.

The Compensation Committee takes a similar approach to evaluating the CEO’s compensation in making its recommendation to the Board.


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Assessing Competitiveness of Compensation

As noted in the Objectives of Executive Compensation Program section, the Compensation Committee seeks to provide competitive pay opportunities in order to attract, motivate and retain high caliber leadership. In assessing the appropriateness of each NEO’s compensation, the Compensation Committee considers, as one of many inputs, total compensation relative to market. The Compensation Committee adopted its current approach to compensation market assessments in 2014, based on feedback received from shareholders. Our Competitive Assessment process is outlined below:
 
Competitive Assessment
Peer Group
Includes 14 public life and health insurance companies and financial services companies of similar size to Phoenix in terms of assets.

These companies share many business model characteristics with the Phoenix and some of the peers are direct business competitors. Phoenix’s direct business competitors also include larger life insurance companies that are not included in this compensation peer group given the differences in relative size and scale.
Use of Proxy Data from Peer Group
Use Peer Group proxy data to evaluate NEOs when sufficient data is available for the position (e.g., provides primary comparison data for the CEO and CFO). Peer Group proxy data may not be used for all other NEOs because of a lack of relevant matches.
Use of Survey Data
Use survey data as a secondary comparison for CEO and CFO and as a primary comparison for all other NEOs for whom proxy data is insufficient or unavailable.

The primary factors in selecting peer companies were comparability of business and asset size. The Company believes screening peers based on assets identifies companies with comparable organizational complexity better than screenings based on revenue or market cap.

Compilation of Peer Group:

The peer group consists of 14 similarly-sized publicly traded life insurance and financial services companies that potentially compete with the Company for business and executive talent. For determining 2015 target compensation levels, the Company used proxy data from the Peer Group as a primary source for competitive data, and the 2014 edition of each of the surveys referenced below as an additional source of competitive data. The peer group is reviewed annually to ensure continued relevance.

The following companies comprise the proxy data Peer Group:
American Equity Investment Life Holding Company
American Financial Group Inc
American National Insurance Company
CNO Financial Group Inc
FBL Financial Group
Independence Holding Company
Kansas City Life Insurance Company
National Western Life Insurance Company
Primerica, Inc.
Protective Life Corp.
StanCorp Financial Group, Inc.
Symetra Financial Corporation
Torchmark Corporation
Unum Group


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Survey data:

For the CEO and CFO positions, Peer Group proxy data is the primary source for comparison data. For all NEOs, the Compensation Committee referenced industry-specific and general industry compensation data from the 2014 US Mercer Benchmark Database (“Mercer”) and the 2014 Towers Watson Diversified Insurance Study of Executive Compensation (“Towers Watson DIS”).
Survey Name
Description
Mercer
Provides data from 203 insurance companies with median assets of about $13 billion(1).
- Because the Company was larger than the median, we referenced the 50th to 75th percentile of the compensation reported by the companies in this survey.
Towers Watson DIS
Provides data from the smaller half of the survey, representing 12 insurance companies with assets under $125 billion, and median assets of about $61 billion.
- Because the Company was so much smaller than the median, we referenced the 10th to 25th percentiles of the compensation reported by the companies in this survey.
(1) 
Insurance company-specific data was not available for a Mr. Buckingham’s position. For his market analysis, the Company instead utilized general industry data on executive positions based on input from over 3,000 organizations, with median revenue of about $1 billion.

The following tables describe the methodology for assessing total compensation relative to market during 2014.

CEO and CFO
Source Priority
Reference
Referenced Size
Compensation
Reference Range
(Percentile)
Primary
Proxy Peer Group
$22 billion assets (median)
25th - 50th
Secondary
Towers Watson DIS
$36 billion assets (25th percentile)
10th - 25th

Other NEOs
Source Priority
Reference
Referenced Size
Compensation
Reference Range (Percentile)
Primary
Mercer Insurance
$13 billion assets(1) (median)
50th - 75th
Secondary
Towers Watson DIS
$36 billion assets (25th percentile)
10th -25th
(1) 
For Buckingham, Mercer Insurance industry data was not available. The larger group of over 3,000 companies with median revenues of $1 billion was referenced instead, at the 50th - 75th percentile range.

Elements of Compensation

Salary

Salaries are reviewed annually as a component of total direct compensation targets. Salaries and adjustments, if any, are based upon an evaluation of market data, nature and scope of responsibilities, and current compensation relative to internal peers, as well as each NEO’s level of responsibility, experience and expertise. None of our NEOs received an increase in salary in 2015.


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Annual Incentives

All Company employees, including the NEOs, have the opportunity to earn cash incentive awards for achievement of predetermined performance objectives for the year, which are approved by the Compensation Committee and, for our CEO, by the Board. Our NEOs participate in one or a combination of two annual incentive plans, based on their roles. In each case, the Compensation Committee (and, in the case of the CEO, the Board) has the authority to exercise discretion to reduce an NEO’s award based on circumstances related to the Company or the NEO.
Name
Annual Incentive Plan
Performance Incentive Plan
Saybrus Annual Incentive Plans
Investment Incentive Plan
James D. Wehr
x
 
 
Bonnie J. Malley
x
 
 
Thomas M. Buckingham
x
 
 
Edward W. Cassidy(1)
 
x
 
Christopher M. Wilkos(2)
x
 
x
Peter A. Hofmann
x
 
 
(1)
Mr. Cassidy participates in the Saybrus Partners, Inc. Profit Sharing Plan, Profitability Incentive and Sales Commissions (see descriptions below).
(2) 
Mr. Wilkos participates in the PIP (50%) and the Investment Incentive Plan (50%).

Annual Incentive Plan for Executive Officers

The Company has a 162(m) shareholder-approved plan designed to preserve the tax deductibility of payments. The plan allows for the payment of annual bonuses based on the achievement of performance objectives established by the Compensation Committee from among various performance criteria identified in the Annual Incentive Plan for Executive Officers (the “Annual Incentive Plan”). The performance objective for 2015 was the Company’s achievement of Adjusted RBC of 250%. Performance against this objective establishes the maximum payout level for the Annual Incentive Plan(s) in which they participate, which are detailed on the following pages.

2015 Performance Incentive Plan

The majority of employees, including those NEOs noted in the chart above, participate in the Performance Incentive Plan (“PIP”), which is based on overall Phoenix performance. The Saybrus Partners, Inc. Profit Sharing Plan and the Investment Incentive Plan are described separately below.

Each year, the Company funds an aggregate award pool for all participants based upon Company performance against pre-established metrics for certain financial and operating measures, described for 2015 in the 2015 Performance Incentive Plan Results table.

The performance metrics for each measure, as well as the relative weights of each measure, are based upon the Company’s strategic and financial plans that are reviewed by the Board at the beginning of the year. The five measures chosen for the 2015 PIP provide a diversified set of measures, and 70% are related to growth or profitability (Change in Surplus, Contribution Dollars and Saybrus EBITDA).


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Although the maximum performance of each individual measure is 200% as noted below, payout for the 2015 PIP as a whole is capped at 150% of an individual’s incentive target.
2015 Performance Incentive Plan
Performance Measures
($ shown in millions)
Weight
Threshold (50%)
Target (100%)
Maximum (200%)
Actual Results
Percentage of Target Earned
Change in Surplus
50%
$25.5
$91.0
$156.5
$67.6
82%
Adjusted RBC
20%
322%
362%
402%
349%
84%
Contribution Dollars from 2015 Business
10%
$0.0
$5.2
$15.6
$17.1
200%
Saybrus EBITDA
10%
$6.3
$7.1
$8.7
$8.1
163%
Expense Management
10%
$273.1
$229.7
$212.5
$234.5
94%
Total
104%

2015 Investment Incentive Plan

Mr. Wilkos, our Chief Investment Officer, has an annual incentive target that is equally weighted between the PIP and the Investment Incentive Plan (“IIP”). The IIP is designed to reward superior returns for the Company’s investment portfolio. The IIP Goals and Results are shown below.
2015 Investment Incentive Plan
Performance Measures
Weight
Threshold
(50%)
Target
(100%)
Maximum (200%)
Actual Results
Percentage of Target Earned
New Money Spread
50%
Target Spread
Target + 35bps
Target + 90bps
+67bps
158%
Phoenix Public Corporate Bond Credit Losses(1)
15%
100% of 12-Month Corporate Bond Default Losses
80% of 12-Month Corporate Bond Default Losses
50% of 12-Month Corporate Bond Default Losses
88%

 
80%
Phoenix Private Corporate Bond Credit Losses(1)
15%
100% of 12-Month Corporate Bond Default Losses
80% of 12-Month Corporate Bond Default Losses
50% of 12-Month Corporate Bond Default Losses
16
%
 
200%
Phoenix Structured Bond Credit Losses(1)
15%
100% of 12-Month Structured Bond Default Losses
80% of 12-Month Structured Bond Default Losses
50% of 12-Month Structured Bond Default Losses
(29)%

(2) 
200%
Phoenix Portfolio CLO/CDO Credit Losses(1)
5%
100% of 12-Month CLO/CDO Bond Default Losses
80% of 12-Month CLO/CDO Bond Default Losses
50% of 12-Month CLO/CDO Bond Default Losses
N/A

(3) 
200%
Total
161%
(1)  
Credit losses compare actual credit losses in each category during 2015 to the market credit losses for that year.
(2)  
Net credit gains occurred. Impairment losses were more than offset by credit gains on sale or redemption of impaired securities.
(3)  
The ratio of actual to market credit losses cannot be expressed as a percent, because market credit losses were zero. The actual result is therefore at the Maximum level of performance for this measure.

2015 Saybrus Annual Incentive Plan

Mr. Cassidy participates in the Saybrus Partners, Inc. Profit Sharing Plan and additional sales and profitability incentives, in lieu of the PIP. The Profit Sharing Plan is funded at 15% of Saybrus EBITDA and pays out to individuals who attain a certain annual performance rating specified under the Company performance management program. Mr. Cassidy and other Saybrus principals are allocated a defined percentage of the pool. Mr. Cassidy’s additional incentives are based upon specific sales and profitability measures related to the Saybrus business segment. Incentives related to sales measures are determined based on sales volumes and commission rates that vary by product and distribution channel. Incentives related to profitability measures are based on the contribution margins associated with new life and annuity sales.


94

2015 Annual Incentive Plan Results
Name
Position
Annual
Incentive Target
Payout Results
James D. Wehr
President and CEO
$700,000
$728,000
Bonnie J. Malley
Executive Vice President and Chief Financial Officer
335,000
348,400
Thomas M. Buckingham
Executive Vice President, Product and Operations
250,000
260,000
Edward W. Cassidy(1)
Executive Vice President, Distribution
915,390
1,038,942
Christopher M. Wilkos(2)
Executive Vice President and Chief Investment Officer
335,000
443,875
Peter A. Hofmann(3)
Former Executive Vice President, Strategy and Business Development
350,000
195,463
(1)
Mr. Cassidy participates in the Saybrus Partners, Inc. Profit Sharing Plan, Profitability Incentive and Sales Commissions.
(2)  
Mr. Wilkos participates in the PIP (50%) and the Investment Incentive Plan (50%).
(3)  
Mr. Hofmann left the company effective July 15, 2015. His payout result is prorated for time employed during 2015.

Long-Term Incentives

LTI awards are designed to drive results over time and encourage retention of participants. Typically, LTI awards are granted on an annual basis and cover a three-year period or plan cycle (“LTIP cycle”) with target awards determined at the beginning of the cycle. Awards are paid at the end of the cycle, contingent upon achievement of certain performance criteria and Compensation Committee approval of those results.

2014-2016 Long-Term Incentive Grant A Plan Results

No 2013-2015 LTI was rolled out due to limited visibility in setting three-year goals as a result of the prior restatement of previously issued financial statements that were included in the 2012 Form 10-K filed on April 1, 2014 and the resulting lack of U.S. GAAP information. The 2014-2016 LTIP cycle Grant A (“Grant A”) was designed to recognize performance in two of the three years (2014 and 2015) that a 2013-2015 LTI grant would have covered, and to pay out in 2016 when a 2013-2015 LTI grant would have paid out, to align participants with shareholders in the long term and reduce retention risk.


95

Grant A is a performance cash award with five performance measures. Cash was selected as the vehicle for Grant A due to constraints on granting equity in 2014 due to the Company’s SEC filing status. Results as shown below will be paid out in 2016. They are included in the Summary Compensation Table and described for each individual NEO in footnote 7.
Grant A
Performance Measures
($ shown in millions)
Weight
Threshold (50%)
Target (100%)
Maximum (200%)
Actual Results
Percentage of Target Earned
2014 & 2015 Change in Surplus(1)
45%
$68.8
$177.4
$286.0
$111.8
70%
2015 Year-End Adjusted RBC(2)
20%
331%
381%
431%
349%
68%
2014 & 2015 Contribution Dollars(3)
15%
$3.0
$12.0
$21.0
$22.3
200%
2014 & 2015 Saybrus EBITDA(4)
10%
$7.7
$15.4
$23.1
$14.4
94%
2015 Business Conservation(5)
10%
7.5%
6.5%
5.5%
5.7%
180%
Total
102%
(1)
Change in surplus over 2014 and 2015, excluding the impact of capital contributions, distributions, dividends to the holding company, surplus note issuance and dividend scale changes, and the impact of the insurance subsidiaries de-stacking.
(2)  
Statutory capital divided by risk based required capital adjusted by excess holding company capital above $50 million, excluding any Board-approved capital management actions, as of 2015 year-end. Reported as a combined Life Companies result.
(3) 
Present-day valuation of future statutory profits associated with new life and annuity sales from 2014 and 2015.
(4) 
Earnings before interest, taxes, depreciation and amortization for 2014 and 2015.
(5) 
Persistency of the in-force block of business--statutory surrender benefits and withdrawals divided by average assets as of 2015 year-end.

2015-2017 Long-Term Incentive Awards

The 2015-2017 LTIP cycle aligns incentive compensation with a combination of performance measures and time-vested RSUs focused on driving profitable growth, maintaining a healthy balance sheet and creating shareholder value. Any payout earned is anticipated to be paid on March 15, 2018.

The 2015-2017 grant has two performance measure components, with a combined weight of 80%. Payouts for both of these performance measures will be in cash. Cash was selected as the vehicle for this portion of the award due to the size of the available share pool at the time of grant.

•
rTSR, weighted at 40%, is a comprehensive measure of the Company’s ability to generate returns for shareholders, relative to other companies.
•
A set of two financial measures with a combined weight of 40%, Change in Surplus and Adjusted RBC are each weighted at 20%.
2015-2017 Performance Measures
($ shown in millions)
Weight
Threshold(1)(2)
Target (100%)
Maximum(1)(2)
rTSR(1)
40%
15th Percentile
50th Percentile
100th Percentile
Change in Surplus(2)
20%
$83.3
$206.5
$329.8
Adjusted RBC(2)
20%
294%
344%
394%
(1)
Threshold performance for rTSR will pay at 15% of Target. Maximum performance will pay at 200% of Target.
(2)  
Threshold performance for Change in Surplus and Adjusted RBC will pay at 50% of Target. Maximum performance will pay at 200% of Target, but the cumulative result of these two measures is capped at 150%.

The 2015-2017 grant also includes a time vesting measure in the form of RSUs, weighted at 20% of the target grant value. This portion of the 2015-2017 was designed to pay out in actual shares of stock.


96

The following changes would take place in the event of a change of control before the end of the 2015-2017 performance cycle:

•
All performance measures for the cash-based awards under the plan are deemed to be achieved at target levels; however, vesting remains subject to continued employment through the award payment date of March 15, 2018. If there is a qualifying termination under the executive’s change-in-control agreement and the executive severance agreement during the performance cycle, but before final vesting, the executive officer will receive his or her pro rata cash-based award determined as if target performance results were achieved.
•
Any RSUs awarded under the plan will fully vest upon a change in control.

Other Elements and Policies of NEO Compensation

Non-Qualified Deferred Compensation

We maintain non-qualified deferred compensation plans that allow NEOs and select employees to defer a portion of their salary and associated tax payments and, through 2015, receive Company matching contributions on their cash compensation in excess of the Internal Revenue Code limits on compensation in place under our tax qualified 401(k) Plan. The Company eliminated the matching contributions beginning January 1, 2016. For more information about the non-qualified deferred compensation benefits provided to NEOs in 2015, see Summary Compensation Table.

Supplemental Retirement Benefits

The Supplemental Executive Retirement Plans (“SERPs”) are non-qualified defined benefit pension plans that provide supplemental retirement income to our NEOs and select employees. Benefit accruals under the Company’s SERPs were frozen at the close of business on March 31, 2010. The SERPs provided the same benefits as those provided under the broad-based Employee Pension Plan, which was also frozen as of March 31, 2010, except that the benefit limitations imposed by the Internal Revenue Code, and the exclusion of annual incentive compensation in the definition of earnings under the Employee Pension Plan formula prior to July 1, 2007 were not taken into account. Accordingly, when in effect, the SERPs permitted us to provide participants with retirement benefits on the same basis as other similarly situated employees without reduction due to the limits of the Internal Revenue Code and the exclusion of their annual incentive awards. For more detailed information about the SERPs’ benefit, see Summary Compensation Table.

Change-in-Control Agreements

During change-in-control events, the Board considers maintaining a sound management team that exercises judgment without bias due to personal concerns to be essential to protecting and enhancing the best interests of the Company and our shareholders. To that end, we afford certain change-in-control benefits to certain executives, including our NEOs, because they hold critical positions within the Company and would be integral to effectuating a corporate transaction. In 2015, the Compensation Committee engaged Semler Brossy to conduct a review of our change-in-control agreements and found them to be generally consistent with market practices and aligned with current best practices:

•
Both cash and performance equity payments are “double trigger,” meaning that the additional benefits set forth in the agreements will not be paid upon a change-in-control unless the NEO’s employment is terminated involuntarily (other than for cause) or for good reason within a specified period following the transaction.
•
Benefits are capped at 2.99 times average annual compensation and no 280G gross-ups are provided.
•
There are no retirement enhancements.
•
In order to receive payments, the CEO must comply with non-compete restrictions.

The change-in-control and post-termination arrangements are described in Change-in-Control Agreements.


97

Severance

Severance benefits are provided to the NEOs in circumstances outside of a change-in-control through The Phoenix Companies, Inc. Executive Severance Allowance Plan or the Saybrus Partners, Inc. Executive Severance Allowance Plan (the “Executive Severance Allowance Plans”) if the NEO is terminated without cause. The Executive Severance Allowance Plans apply to all NEOs and to any other employee that the CEO determines to be integral to the formulation or execution of our business strategy.

Four of our five active NEOs are covered under the Phoenix Executive Severance Allowance Plan and are eligible for, subject to certain conditions, severance equal to monthly salary and the average of the last two annual incentive awards already paid as of the termination date for a specified number of months based on years of service. The benefits are tiered based on years of service; the minimum payment is nine months of severance and the maximum is 18 months of severance. In addition, the NEOs are paid a prorated portion of their annual and long-term incentives based on actual plan results and the date of termination under the Executive Severance Allowance Plan.

Mr. Cassidy is covered under the Saybrus Executive Severance Allowance Plan which provides for benefits to certain executives of Saybrus and its affiliates who meet the eligibility requirements when their employment is involuntarily terminated by Saybrus. The Severance Amount equals (a) the executive’s salary for the one-year period prior to the executive’s separation date plus (b) the two-year average of the executive’s Saybrus annual variable compensation amount and profit sharing plan amount for the immediate two years prior to the executive’s separation date.

An employee who is covered by a change-in-control agreement and an Executive Severance Allowance Plan can receive only the benefits of one of the coverages in the event of a termination.

Perquisites

We provide perquisites to our NEOs as an incremental benefit to recognize their position within the Company. Perquisites are not a material part of our executive compensation. Available perquisites include:

•
Annual preventative medical care reimbursement of up to $500.
•
Annual reimbursement for financial planning and tax services of up to $3,000.
•
Travel expense reimbursement for expenses associated with spousal business travel when such attendance is expected.
•
Relocation assistance.

For information about perquisites provided to NEOs in 2015, see Note 5 of the Summary Compensation Table.

Equity Grant Procedures

When utilized, stock options and RSUs are granted to both executive and non-executive employees pursuant to our equity grant policy. Under this policy:

•
Equity awards made as part of a recurring compensation program, such as LTI awards to NEOs, will be approved and granted at a meeting of the Compensation Committee or, for the CEO, the Board, that occurs within 20 days after the Company’s earnings release for the prior fiscal year.
•
All other stock options and RSUs are generally granted on four scheduled grant dates each year, which occur on the fifth calendar day after the filing deadline for our Form 10-K or Form 10-Q, as applicable.
•
Neither the CEO, the Board nor the Compensation Committee may take any action with respect to any stock option that would be treated as a “repricing” of such stock option.
•
The Compensation Committee may, in its discretion, approve and grant equity awards at other times, if it determines that such action is in the best interests of shareholders.

We do not consider material inside information in determining award amounts or grant dates, and our policy reinforces this practice by intentionally selecting grant dates when decision makers are the least likely to be in possession of material inside information.


98

Share Ownership and Retention Guidelines Restrictions on Trading

To facilitate stock ownership by our NEOs, we adopted the following ownership and retention guidelines. For NEOs, the guidelines call for each executive to accumulate ownership of our Common Stock (including, for these purposes, RSUs) at a specified multiple of base salary. The CEO has a target ownership of five times base salary, and target ownership for other executive ranges from one to three times base salary. As of December 31, 2015, none of our active NEOs had met target ownership levels.

Instead of a fixed timeframe for attaining these levels of ownership, executives must retain a portion of the equity received from stock-based benefit and compensation plans. When the specific ownership thresholds are met, as measured using the current fair market value of our Common Stock, the retention ratios for future grants are reduced. The initial retention ratio is 75% for the CEO and 25% to 40% for other executives.

Restrictions on Trading

The Company’s policy on insider trading permits executives to engage in transactions involving the Company’s equity securities only (1) during “trading windows” of limited duration following the issuance of periodic earnings releases and (2) following a determination by the Company that the executive is not in possession of material non-public information. In addition, the Company has the ability under its insider trading policy to suspend trading by executives in its equity securities.

Anti-Hedging Policy

An Anti-Hedging Policy, which is included in our insider trading policy, for all directors and employees of the Company has been adopted as part of its Code of Conduct. The policy provides that all employees and directors are prohibited from engaging in any hedging transactions against the Company’s securities and any derivative securities of the Company. Such transactions include, but are not limited to, short selling, trading input and call options, and forward sales contracts.

Anti-Pledging Policy

An Anti-Pledging Policy, which is included in our insider trading policy, for all directors and employees of the Company has been adopted as part of our Code of Conduct. The policy provides that all employees and directors are prohibited from holding the Company’s securities in a margin account or pledging the Company’s securities as collateral for a loan. Securities held in a margin account may be sold by the broker without the pledgor’s consent if the pledgor fails to meet a margin call. Similarly, securities pledged as collateral for a loan may be sold in foreclosure if the pledgor defaults on the loan. A margin sale or foreclosure sale may occur at a time when the pledgor is aware of material nonpublic information or otherwise is not permitted to trade in Company securities with potential for such margin sale or foreclosure sale to violate the securities laws.

Clawback Policy

The Company enhanced its Clawback Policy in 2013 to make it broader than the Sarbanes-Oxley requirements. The definition of covered employee has been expanded beyond the CEO and CFO and includes the entire executive team, individuals who provide certifications to the CEO and CFO for regulatory filings, LTIP participants and individuals in other key roles as determined by the Board. The policy allows the Board greater discretion in the use of clawbacks, such that the Compensation Committee determines when to apply the clawback, how to apply it, and to whom. The policy provides the Compensation Committee with the ability to claw back compensation under a wide range of circumstances, including fraud, misconduct, financial restatement, and the restatement of performance results. We believe this better aligns with shareholder interests by allowing the recovery of compensation overpayments that were based upon results that are later found to have been inaccurate. We also believe the new policy protects the Company in the event of a restatement while maintaining the integrity of the compensation program by being fair to those executives not directly involved in any misstatement.

The Dodd-Frank Act may require us to adopt a broader, less discretionary policy. When the SEC and NYSE provide mandatory guidance to implement the Dodd-Frank Act clawback requirement, the Board will consider the guidance and make revisions to our policy as necessary.


99

Tax and Accounting Considerations

Internal Revenue Code Section 162(m) disallows a tax deduction to public corporations for compensation over $1 million paid to certain NEOs. However, performance-based compensation is exempt from the deduction limit if certain requirements are met. The Compensation Committee intends to structure certain compensation to take advantage of this exemption under Internal Revenue Code Section 162(m), as appropriate, in light of its compensation objectives. However, the Compensation Committee may elect to provide compensation outside those requirements when necessary to achieve its compensation objectives. Our 2015 annual incentive plans were designed in a manner to allow the Compensation Committee to award compensation intended to qualify as performance-based compensation under Internal Revenue Code Section 162(m). Internal Revenue Code Section 409A imposes certain requirements on deferred compensation. If these requirements are not met, employees may be subject to an additional income tax and interest penalties. It is our intent that our non-qualified deferred compensation plans and other compensation covered by Internal Revenue Code Section 409A be operated and administered to meet these requirements. Accounting considerations also play a role in designing the compensation programs made available to our NEOs. Principal among these is Financial Accounting Standards Board Statement of Financial Accounting Standards Codification Topic No. 718, Compensation - Stock Compensation (“ASC 718”), which addresses the accounting treatment of certain equity-based compensation. The Compensation Committee regularly considers the accounting implications of our long-term incentive awards, including the variable accounting treatment of the current program.

REPORT OF THE COMPENSATION COMMITTEE

The Compensation Committee has submitted the following report for inclusion in this Form 10-K:

Our Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this Form 10-K with management. Based on our review and discussion with management, we have recommended to the Board that Compensation Discussion and Analysis be included in this Form 10-K for filing with the SEC. The report is submitted as of March 10, 2016 by the following directors, who constitute the Compensation Committee:

Sanford Cloud Jr., Esq., Chair
Arthur P. Byrne
John H. Forsgren
Arthur F. Weinbach

The foregoing report of the Compensation Committee of the Board of Directors shall be deemed furnished with this report and not filed under the Securities Act of 1933 or the Securities Exchange Act of 1934, or incorporated by reference in any documents so filed.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

None of the members of the Compensation Committee during 2015 or through the date of this Form 10-K is or has been an officer or employee of the Company and no executive officer or director of the Company served on the Compensation Committee or board of any company that employed any member of the Compensation Committee or Board.

RISK ASSESSMENT

On an annual basis, we conduct a risk assessment of our compensation policies and practices in response to current public and regulatory concern about the link between incentive compensation and excessive risk taking. Based upon the assessment conducted, we have concluded that our compensation program does not motivate imprudent risk taking and that any risks involved in compensation are not reasonably likely to have a material adverse effect on the Company. Included in the analysis were such factors as the behaviors being induced by our fixed and variable pay components, the balance of annual and long-term performance goals in our incentive compensation system, the established limits on permissible incentive award levels, the oversight of the Compensation Committee in the operation of our incentive plans and the high level of Board involvement in approving material transactions and providing governance over the Company’s affairs. Management presented the results of this assessment to the Compensation Committee for its review as part of its obligation to oversee our compensation risk assessment process. Due to the restatement of previously issued financial statements that were included in the 2012 Form 10-K filed on April 1, 2014, and resulting lack of U.S. GAAP information, the rollout of the annual and long-term incentive plans for 2015 was delayed. The risk assessment was conducted after these plans were rolled out.


100

EXECUTIVE COMPENSATION

Summary Compensation Table

This table summarizes the total compensation paid or earned by the NEOs for the fiscal years ended December 31, 2013, 2014, and 2015. The table reflects total compensation paid or earned beginning in the later of the fiscal year ended December 31, 2013 or the year an individual first became a CEO, CFO or NEO.
Name and Principal
Position
(a)
Year
(b)
Salary(1)
(c)
Bonus
(d)
Stock
Awards(2)
(e)
Option
Awards (2)
(f)
Non-Equity
Incentive Plan
Compensation(3)
(g)
Change in
Pension Value
and Non-Qualified
Deferred
Compensation
Earnings(4)
(h)
All Other
Compensation(5)
(i)
Total
(j)
James D. Wehr
President and Chief
Executive Officer
2015
$
700,000

—

 
$
768,634

(6) 
$
—

$
2,156,000

(7) 
—

$
69,470

$
3,694,104

2014
700,000

—

 
534,380

(8) 
—

658,000

 
1,052,799

67,645

$
3,012,824

2013
700,000

—

 
—

(9) 
—

203,000

 
—

68,095

$
971,095

Bonnie J. Malley
Executive Vice President and
Chief Financial Officer
2015
385,000

—

 
181,178

(6) 
—

685,000

(7) 
—

38,050

1,289,228

2014
385,000

262,500

(10) 
125,961

(8) 
—

314,900

 
506,008

37,200

1,631,569

2013
385,000

—

 
—

(9) 
—

97,150

 
—

34,650

516,800

Thomas M. Buckingham
Executive Vice President, Product and Operations
2015
360,000

75,000

(10) 
137,256

(6) 
—

464,000

(7) 
—

35,050

1,071,306

Edward W. Cassidy
Executive Vice President, Distribution
2015
410,000

—

 
153,727

(6) 
—

1,324,542

(7)(12) 
—

24,600

1,912,869

2014
410,000

—

 
106,876

(8)(11) 
—

925,953

(12) 
41,593

24,600

1,509,022

2013
410,000

—

 
—

(9) 
—

736,651

(12) 
—

24,600

1,171,251

Christopher M. Wilkos
Executive Vice President and Chief Investment Officer
2015
385,000

—

 
181,178

(6) 
—

780,475

(7) 
—

37,300

1,383,953

2014
385,000

175,000

(10) 
125,961

(8) 
—

443,875

 
191,482

37,200

1,358,518

2013
385,000

—

 
—

(9) 
—

353,425

 
—

34,650

773,075

Peter A. Hofmann
Former Executive Vice President, Strategy and Business Development(13)
2015
230,208

—

 
150,982

(6)(13) 
—

411,026

(7) 
—

823,692

1,615,908

2014
425,000

—

 
104,968

(8) 
—

329,000

 
133,567

34,425

1,026,960

2013
425,000

—

 
—

(9) 
—

101,500

 
—

31,875

558,375

(1) 
Figures are shown for the year earned, and have not been reduced for deferrals. For 2015, each of the NEOs elected to defer a portion of their salary until following termination of employment or, in certain circumstances, such earlier specified date elected by the NEO: Mr. Wehr deferred $85,500, Ms. Malley deferred $34,200, Mr. Buckingham deferred $24,600, Mr. Cassidy deferred $29,200, Mr. Wilkos deferred $31,500, and Mr. Hofmann deferred $19,847.
(2) 
Represents the grant date fair market value for respective years for all stock-based awards/stock option awards granted to NEOs as calculated pursuant to ASC 718, excluding the effect of estimated forfeitures. Additional detail is provided in the Grants of Plan-Based Awards table. The assumptions used for determining this value are stated in Note 16 of the Company’s financial statements included in this 2015 Form 10-K and Note 17 of the Company’s financial statements included in the 2013 and 2014 Forms 10-K.
(3) 
Except as otherwise noted below, represents the cash-based incentive earned under The Phoenix Companies, Inc. Annual Incentive Plan for Executive Officers for the applicable performance year, as described under Annual Incentives.
(4) 
Represents the change in the actuarial value of accumulated pension benefits accrued during the year. Negative values are shown as zero. For 2015, 2014, and 2013, this represents the change in value between December 31, 2014 and December 31, 2015; December 31, 2013 and December 31, 2014; and December 31, 2012 and December 31, 2013, respectively; determined using where applicable, the discount rates disclosed in the Form 10-K for those years and based on the other actuarial assumptions described in Note 2 to the Pension Benefits table for each applicable year. These changes in value pertain solely to benefits accrued under the Company’s pension plans and exclude all account-based plans that NEOs may participate in, such as The Phoenix Companies, Inc. Savings and Investment Plan and The Phoenix Companies, Inc. Non-Qualified Excess Investment Plan. Since the pension plans were frozen on March 31, 2010, the primary drivers of the 2014 change in value were the updated mortality projection scale assuming increased longevity, and the associated decrease in discount rates from 2013 to 2014.

101

(5) 
All Other Compensation sub-table:
Name
Year
Company Contributions to 401(k) Plan
and Excess Investment Plan
Reimbursement for Financial Planning and Tax Services
Anniversary Award
Severance
Value of
Director Life Insurance Premiums and Charitable Gifts paid by the Company
Total
James D. Wehr
2015
$
65,875

$
1,000

$
—

$
—

$
2,595

$
69,470

2014
65,550

—

—

—

2,095

67,645

2013
63,000

3,000

—

—

2,095

68,095

Bonnie J. Malley
2015
37,300

—

750

—

—

38,050

2014
37,200

—

—

—

—

37,200

2013
34,650

—

—

—

—

34,650

Thomas M. Buckingham
2015
35,050

—

—

—

—

35,050

Edward W. Cassidy
2015
24,600

—

—

—

—

24,600

2014
24,600

—

—

—

—

24,600

2013
24,600

—

—

—

—

24,600

Christopher M. Wilkos
2015
37,300

—

—

—

—

37,300

2014
37,200

—

—

—

—

37,200

2013
34,650

—

—

—

—

34,650

Peter A. Hofmann
2015
23,379

—

—

800,313

—

823,692

2014
34,425

—

—

—

—

34,425

2013
31,875

—

—

—

—

31,875

(6) 
A portion of the 2015-2017 LTI grant is tied to rTSR which is based primarily on a comparison of stock price plus dividends to a broad external index. Although it is paid in cash, the stock price component makes it a stock award, the value of which is calculated pursuant to ASC 718, in addition to the portion of the grant which is denominated in RSUs.
(7) 
Represents the sum of cash-based awards associated with the 2015 annual incentives shown in 2015 Annual Incentive Plan Results, and cash-based awards associated with 2014-2016 LTI Grant A, which was based on 2014 and 2015 performance and will be paid out in 2016. Value of awards for 2014-2016 LTI Grant A at target and actual are as follows:
Name
Potential Award at Target: 2015 Annual Incentives
Actual
Award
Earned:
2015
Annual Incentives
Potential Award at Target: 2014-2016
LTI Grant A
Actual
Award
Earned:
2014-2016
LTI Grant A
Total Actual
Cash Awards
based on 2015
performance measures, to be
paid in 2016
James D. Wehr
$700,000
$728,000
$1,400,000
$1,428,000
$2,156,000
Bonnie J. Malley
335,000
348,400
330,000
336,600
685,000
Thomas M. Buckingham
250,000
260,000
200,000
204,000
464,000
Edward W. Cassidy
915,390
1,038,942
280,000
285,600
1,324,542
Christopher M. Wilkos
335,000
443,875
330,000
336,600
780,475
Peter A. Hofmann
350,000
195,463
275,000
215,563
411,026
(8) 
A portion of Grant B is tied to rTSR which is based primarily on a comparison of stock price plus dividends to a broad external index. Although it is paid in cash, the stock price component makes it considered to be a stock award, the value of which is calculated pursuant to ASC 718.
(9) 
No LTI awards (equity or cash) were granted in 2013.
(10) 
Represents special supplemental bonus awards granted in 2014. Ms. Malley’s and Mr. Wilkos’s awards paid out fully in 2014. Mr. Buckingham’s award is paid in three installments, the second of which was paid in 2015.
(11) 
Includes shares of restricted stock of Saybrus Partners, Inc., a majority owned subsidiary of the Company, granted under the Saybrus Partners, Inc. 2010 Equity Incentive Plan. In 2014, Mr. Cassidy received shares valued at $0.
(12) 
In lieu of the PIP, Mr. Cassidy participates in the Saybrus Partners, Inc. Profit Sharing Plan and additional incentives based on specific sales and profitability measures related to the Saybrus business segment. His awards received by plan are as follows:

102

Year
Saybrus Sales Incentives
Phoenix Profitability Incentive
Saybrus Profit Sharing Plan
Total: Non-Equity Incentive Plan Compensation
2015
$
547,879

$
144,000

$
347,063

$
1,038,942

2014
551,165

105,750

269,038

925,953

2013
385,025

200,000

151,626

736,651

(13) 
Mr. Hofmann left the Company effective July 15, 2015. The amounts shown for him for 2015 reflect prorated salary and incentives, as well as severance. The Stock Awards shown in the table reflect what was granted to him in 2015, but later forfeited upon his termination of employment.

Salary and Incentive as a Percentage of Total Compensation

In 2015, the proportion of salary and incentives reflected in columns (c) through (g) of the Summary Compensation Table to total compensation as reflected in column (j) of that table ranged from 48% to 99%. For 2014, it ranged from 63% to 96%. For 2013, it ranged from 60% to 98%.

Grants of Plan-Based Awards

The following table supplements the information provided in the Summary Compensation Table concerning 2015 awards granted to NEOs, including the range of compensation opportunities under our 2015 annual incentive plans if specified pre-determined performance goals are met.
Name
(a)
Grant Date
(Equity)(b)
Estimated Future Payouts
Under Non-Equity Incentive Plan Awards(1)
Estimated Future Payouts
Under Equity Incentive Plan Awards(2)
All Other Stock Awards:
Number
of Shares
of Stock
or Units
(i)
All Other
Option
Awards:
Number of
Securities
Underlying
Options
(j)
Exercise
or Base
Price of
Option
Awards
($/Sh)
(k)
Grant  Date Fair Value of Stock and Option Awards
(l)
Threshold
(c)
Target
(d)
Maximum
(e)
Threshold
(# of  shares)
(f)
Target
(# of shares)
(g)
Maximum
(# of shares)
(h)
James D.
Wehr
N/A
$
350,000

 
$
700,000

 
$
1,050,000

 
—

—

—

—

—

$
—

$
—

5/15/2015
280,000

(3) 
560,000

(3) 
840,000

(3) 
16,509

27,722

40,914

—

—

—

768,634

Bonnie J. Malley
N/A
167,500

 
335,000

 
502,500

 
—

—

—

—

—

—

—

5/15/2015
66,000

(3) 
132,000

(3) 
198,000

(3) 
3,891

6,535

9,644

—

—

—

181,178

Thomas M. Buckingham
N/A
125,000

 
250,000

 
375,000

 
—

—

—

—

—

—

—

5/15/2015
50,000

(3) 
100,000

(3) 
150,000

(3) 
2,948

4,951

7,306

—

—

—

137,256

Edward W. Cassidy
N/A
N/A

(4) 
840,390

(4) 
N/A

(4) 
—

—

—

—

—

—

—

N/A
37,500

(5) 
75,000

(5) 
200,000

(5) 
—

—

—

—

—

—

—

5/15/2015
56,000

(3) 
112,000

(3) 
168,000

(3) 
3,302

5,544

8,183

—

—

—

153,727

Christopher M. Wilkos
N/A
167,500

(6) 
335,000

(6) 
586,250

(6) 
—

—

—

—

—

—

—

5/15/2015
66,000

(3) 
132,000

(3) 
198,000

(3) 
3,891

6,535

9,644

—

—

—

181,178

Peter A. Hofmann(7)
N/A
93,973

 
187,945

 
281,918

 
—

—

—

—

—

—

 
5/15/2015
55,000

(3) 
110,000

(3) 
165,000

(3) 
3,243

5,445

8,037

 
 
 
150,982

(1) 
Except as otherwise noted below, the data for each NEO represents the incentives under the Annual Incentive Plan for Executive Officers for the 2015 performance period, as described in Annual Incentives. Awards are funded when the Company meets established performance thresholds. Actual amounts payable in respect of these awards are included in column (g) of the Summary Compensation Table.
(2) 
Represents both RSUs and cash-based awards subject to an rTSR measure under the 2015-2017 LTI cycle, as described in 2015-2017 Long-Term Incentive Awards. The RSUs are time-vested. The cash-based portion of the award which is subject to an rTSR measure is shown above in stock equivalents, based on the December 31, 2015 closing price of $37.04.
(3) 
Represents the portion of 2015-2017 LTI that is denominated in cash, and not subject to the rTSR, as described in 2015-2017 Long-Term Incentive Awards.
(4) 
Represents Mr. Cassidy’s participation in the Saybrus Partners, Inc. Profit Sharing Plan and commission-based Saybrus sales incentives. These awards have no threshold or maximum assigned.
(5) 
Represents Mr. Cassidy’s Phoenix Profitability Incentive.
(6) 
As described in the Investment Incentive Plan section, 50% of Mr. Wilkos’ annual incentive award for 2015 was determined under the 2015 PIP and the remaining 50% was determined under the IIP.

103

(7) 
Mr. Hofmann left the Company effective July 15, 2015. The table above shows what was granted to him in 2015, but all components of the 2015-2017 LTI were later forfeited upon his termination.

Estimated Future Payouts Under Non-Equity Incentive Plan Awards

The annual incentive awards for NEOs are provided under The Phoenix Companies, Inc. Annual Incentive Plan for Executive Officers. The Annual Incentive Plan for Executive Officers is designed to accomplish the objectives described under Annual Incentives, and allows us to structure awards in a manner intended to maximize our tax deductions on performance-based pay, if desirable, as described under Tax and Accounting Considerations. To accomplish each of these objectives, maximum awards for each NEO must be first determined as provided in the plan, and then may be reduced to any amount, including zero, based on any factor(s) deemed appropriate by the Compensation Committee. In the 2015 plan, the maximum payout opportunity for NEOs was 150% of target. See the 2015 annual incentive financial goals and results under Annual Incentives.

Stock Option Plan

In 2001, the Compensation Committee adopted The Phoenix Companies, Inc. Stock Incentive Plan to align the interests of our NEOs and other employees with those of shareholders. This plan allows the Compensation Committee to grant incentive stock options, which qualify for certain tax advantages as provided under Internal Revenue Code Section 422, and non-statutory stock options for the purchase of Common Stock to our employees. Depending on the Company’s incentive design for a given year, stock options may be used as part of the Company’s long-term incentive program. We may also use stock option awards to recognize promotions, to reward significant individual contributions or extraordinary efforts that may not be reflected in other incentive plan awards and as part of employment offers for certain positions.

When awarded, all options are granted at the grant date fair market value of our Common Stock on the date the award is approved or, if later, effective. Generally, all awards have been subject to a three-year graded vesting schedule, and recipients have a maximum of 10 years to exercise the option. Upon termination of employment, stock options generally must be exercised within 30 days following termination of employment. In cases of termination due to death, disability or retirement under the Employee Pension Plan, as described in the notes and narrative to the Pension Benefits table, options must be exercised at the earlier of five years from the date of termination of employment or the option’s expiration date. For termination of employment in connection with a qualifying business disposal or divestiture, the Compensation Committee may allow options to be exercised within three years from the date of termination of employment or divestiture. In the case of terminations due to cause, all outstanding options expire immediately. No stock options were granted under this plan in 2014 or 2015.

Restricted Stock Unit Plan

In 2003, shareholders approved The Phoenix Companies, Inc. 2003 Restricted Stock, Restricted Stock Unit, and Long-Term Incentive Plan to align the interests of our NEOs and other employees with those of shareholders. The plan allows the Compensation Committee to grant both performance-based incentive awards and service-vested awards. The type of awards granted to NEOs in a given year is determined based on the Company’s compensation philosophy and strategy.

Saybrus Partners, Inc. 2010 Equity Incentive Plan

The Saybrus Partners, Inc. 2010 Equity Incentive Plan is designed to aid Saybrus in attracting and retaining key employees and to more directly align the employees with the success of Saybrus. The plan allows the Saybrus Board to grant both performance-based incentive awards and service-based equity awards. No awards were granted under this plan in 2015.


104

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth information concerning stock options and non-vested RSU and restricted stock awards held by the NEOs as of December 31, 2015.
 
Option Awards
Stock Awards
Name
(a)
Number of Securities Underlying Unexercised Options Exercisable
(b)
Number of Securities Underlying Unexercised Options Unexercisable
(c)
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options
(d)
Option Exercise Price
(e)
Option Grant Date
(f)
Option Expiration Date
(g)
Number of Shares or Units of Stock That Have Not Vested(1)
(h)
Market Value of Shares or Units of Stock That Have Not Vested(2)
(i)
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested(1) 
(j)
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested(2)
(k)
James D. Wehr
3,433

—

—

$
56.80

3/8/2010
3/8/2020
14,530

(3) 
$
538,191

 
—

 
$
—

 
2,175

—

—

196.80

2/13/2008
2/13/2018
—

 
—

 
—

 
—

 
Bonnie J. Malley
566

—

—

56.80

3/8/2010
3/8/2020
3,425

(3) 
126,862

 
—

 
—

 
1,946

—

—

196.80

2/13/2008
2/13/2018
—

 
—

 
—

 
—

 
1,450

—

—

250.80

2/8/2007
2/8/2017
—

 
—

 
—

 
—

 
1,160

—

—

250.00

2/2/2006
2/2/2016
—

 
—

 
—

 
—

 
Thomas M. Buckingham
312

—

—

56.80

3/8/2010
3/8/2020
2,595

(3) 
96,119

 
—

 
—

 
779

—

—

196.80

2/13/2008
2/13/2018
—

 
—

 
—

 
—

 
1,160

—

—

190.60

3/5/2008
3/5/2018
—

 
—

 
—

 
—

 
Edward W. Cassidy
740

—

—

56.80

3/8/2010
3/8/2020
2,906

(3) 
107,638

 
 
 
 
 
1,450

—

—

190.60

3/5/2008
3/5/2018
2,500

(4) 
52,950

 
2,500

(4) 
52,950

 
2,998

—

—

196.80

2/13/2008
2/13/2018
 
 
 
 
 
 
 
 
870

—

—

250.80

2/8/2007
2/8/2017
—

 
—

 
—

 
—

 
Christopher M. Wilkos
832

—

—

56.80

3/8/2010
3/8/2020
3,425

(3) 
126,862

 
—

 
—

 
1,374

—

—

196.80

2/13/2008
2/13/2018
—

 
—

 
—

 
—

 
Peter A. Hofmann(5)
—

—

—

—

N/A
N/A
—

 
—

 
—

 
—

 
(1) 
Figures are rounded to the nearest whole number. Each RSU is convertible into one share of our Common Stock; each RSA is convertible into one share of Saybrus Restricted Stock.
(2) 
Based on either the December 31, 2015 closing price of our Common Stock of $37.04 or the $21.18 price of Saybrus Restricted Stock, as applicable.
(3) 
Represents a grant of Phoenix RSUs as part of the 2015-2017 LTIP. These are scheduled to vest on December 31, 2017, but will fully vest upon the Nassau merger if earlier.
(4) 
Represents a grant of Saybrus RSAs. These are scheduled to vest on June 1, 2016.
(5) 
Mr. Hofmann left the Company effective July 15, 2015. His outstanding RSUs were forfeited as of that date, and his stock options expired effective August 15, 2015.


105

Option Exercises and Stock Vested

The following table sets forth information concerning the vesting of RSAs that occurred during 2015. None of the NEOs exercised any stock options in 2015.
Name
(a)
Option Awards
Stock Awards
Number of Shares Acquired on Exercise
(b)
Value
Realized on Exercise
(c)
Number of Shares Acquired on Vesting(1)
(d)
Value Realized
on Vesting (2) 
(e)
James D. Wehr
—

—

—

 
$
—

 
Bonnie J. Malley
—

—

—

 
—

 
Thomas M. Buckingham
—

—

—

 
—

 
Edward W. Cassidy
—

—

9,000

(3) 
112,890

(4) 
Christopher M. Wilkos
—

—

—

 
—

 
Peter A. Hofmann
—

—

—

 
—

 
(1) 
These figures, which are rounded to the nearest whole number, represent the number of awards which vested in 2015 prior to any reduction for tax withholding.
(2) 
Represents the market value on the vesting date.
(3) 
Represents grants of Saybrus RSAs. Four thousand of these vested on March 15, 2015. Five thousand vested on June 1, 2015.
(4) 
The March vestings were at $11.91 per share, and the June vestings were at $13.05 per share.

Pension Benefits

The following table sets forth information concerning NEO pension benefits. The table reflects the present value of the accumulated pension benefits that each NEO earned between his or her respective hire date and December 31, 2015. Benefit accruals were frozen in the Employee Pension Plan and SERPs as of March 31, 2010. Although these figures illustrate the value of these benefits as if they were to be paid in the form of a lump sum payment, actual benefits will be paid in the form of an annuity or, effective January 1, 2009 for SERPs benefits, the present value in three annual installments at the applicable commencement date following termination of employment. However, NEOs may elect to receive the portion of the pension benefit payable under the pension equity formula in a lump sum. Additional information concerning these benefits may be found in the narrative that accompanies this table.


106

Name
Plan Name
(b)
Number of Years Credited Service(1)
(c)
Present Value of Accumulated Benefit(2)
(d)
Payments During Last Fiscal Year
(e)
James D. Wehr
Employee Pension Plan
 
 
 
 
Pension Equity Formula
2.75

 
$
89,705

—

Formula Prior to July 1, 2007
22.83

 
1,352,475

—

Total Employee Pension Plan Benefit
25.58

 
$
1,442,180

—

SERP
 
 
 
 
Pension Equity Formula
2.75

 
$
314,301

—

Formula Prior to July 1, 2007
25.83

(3) 
7,341,523

—

Total SERP Benefit
28.58

 
$
7,655,824

—

Bonnie J. Malley
Employee Pension Plan
 
 
 
 
Pension Equity Formula
2.75

 
$
89,705

—

Formula Prior to July 1, 2007
22.42

 
1,236,474

—

Total Employee Pension Plan Benefit
25.17

 
$
1,326,179

—

SERP
 
 
 
 
Pension Equity Formula
2.75

 
$
116,663

—

Formula Prior to July 1, 2007
22.42

 
2,110,456

—

Total SERP Benefit
25.17

 
$
2,227,119

—

Thomas M. Buckingham
Employee Pension Plan
 
 
 
 
Pension Equity Formula
2.75

 
$
23,292

—

Formula Prior to July 1, 2007
8.08

 
190,216

—

Total Employee Pension Plan Benefit
10.83

 
$
213,508

—

SERP
 
 
 
 
Pension Equity Formula
2.75

 
$
3,111

—

Formula Prior to July 1, 2007
8.08

 
69,297

—

Total SERP Benefit
10.83

 
$
72,408

—

Edward W. Cassidy
Employee Pension Plan
 
 
 
 
Pension Equity Formula
2.75

 
$
12,749

—

Formula Prior to July 1, 2007
1.25

 
45,249

—

Total Employee Pension Plan Benefit
4.00

 
$
57,998

—

SERP
 
 
 
 
Pension Equity Formula
2.75

 
$
31,201

—

Formula Prior to July 1, 2007
1.25

 
136,893

—

Total SERP Benefit
4.00

 
$
168,094

—

Christopher M. Wilkos
Employee Pension Plan
 
 
 
 
Pension Equity Formula
2.75

 
$
36,115

—

Formula Prior to July 1, 2007
10.33

 
599,762

—

Total Employee Pension Plan Benefit
13.08

 
$
635,877

—

SERP
 
 
 
 
Pension Equity Formula
2.75

 
$
53,158

—

Formula Prior to July 1, 2007
10.33

 
967,464

—

Total SERP Benefit
13.08

 
$
1,020,622

—

(1) 
In connection with the redesign of our retirement program, the years of credited service were frozen on June 30, 2007 for purposes of determining benefits under the formula in effect prior to July 1, 2007, although final average earnings continued to change through March 31, 2010. The restructuring of the retirement program and the grandfathering provisions are described in Retirement Plans below. Years of credited service under the pension equity formula of both the Employee Pension Plan and the SERP are determined for eligible participants from July 1, 2007, when such formula went into effect for these participants through March 31, 2010, when the plan was frozen. The annual credit percentage used to calculate these benefits is determined based on total years of service under the plans, including years of service prior to July 1, 2007, as described in Pension Equity Formula.
(2) 
With respect to the benefits from the formula in effect prior to July 1, 2007, the Present Value of Accumulated Benefit determined as of December 31, 2015 (March 31, 2010 frozen accrued benefit) is the greater of the present value of the accrued benefit deferred to normal retirement age and the present value of the accrued benefit deferred to early retirement age using the following assumptions for all NEOs: discount rate (without cost of living adjustment, or “COLA”) of 4.54% and 4.43% for the Employee Pension Plan and SERP, respectively; mortality table is the MRP-2007; postretirement COLA of 1.00%; if the years of vesting service is equal to or greater than 10 as of December 31, 2015, the normal retirement age is 62 and the early retirement age is 55, but if the years of vesting service is less than 10 as of December 31, 2015, the normal retirement age is 65 and there is no early retirement age.
(3) 
Pursuant to the terms of the SERP, Mr. Wehr has been credited with an additional three years of benefit accrual service attributable to the period of January 1, 1997 through December 31, 1999 when he served as an officer of a designated subsidiary that was not an adopting employer to the Employee Pension Plan. These three years are not treated as benefit accrual service under the Employee Pension Plan.

107

Retirement Plans

Effective April 1, 2010, the Employee Pension Plan and SERPs were amended to cease further benefit accruals after March 31, 2010. The discussion that follows reflects how benefits were calculated through March 31, 2010.

Employee Pension Plan

The Employee Pension Plan provided benefits based on its formulas up to the amount allowed under the Internal Revenue Code. The Employee Pension Plan is funded with assets held in a trust. Normal retirement age is 62 with 10 years of vesting service or age 65 with at least three years of participation. As of December 31, 2015, Messrs. Wehr and Wilkos were eligible for early retirement under the plan (age 55 with at least 10 years of vesting service). Unless an optional form of benefit payment is elected, the normal form of benefit is a 50% joint and survivor annuity for married participants and a single life annuity for other participants.

The Employee Pension Plan was redesigned to include pension equity accruals after June 30, 2007, for all participants except grandfathered participants. None of the current NEOs were grandfathered.

Pension Equity Formula

The pension equity formula applies to all eligible non-grandfathered employees, grandfathered employees who elected the pension equity formula effective July 1, 2007 and eligible new hires after June 30, 2007 and before April 1, 2010. The pension equity formula expresses an employee’s benefit as a lump sum amount that is equal to the product of the accumulated annual credit percentages (tiered by years of service) times final average earnings (highest five consecutive years of earnings out of the last 10 years) prior to April 1, 2010. The definition of earnings is based on base salary plus eligible incentives, rather than base salary under the formula prior to July 1, 2007. The tiered annual credit percentages table is as follows:

Years of Service
on January 1
Annual Credit Percentage
Earned, Used to Calculate
Lump Sum Benefit
Up to 4 years
2%
5 to 9 years
4%
10 to 14 years
6%
15 to 19 years
10%
20 years or more
14%

Employees who participate in the pension equity formula have their June 30, 2007 accrued benefit frozen as to years of service, but their final average earnings under the formula prior to July 1, 2007 continued to change until the earlier of March 31, 2010 and the date they either became ineligible under the plan or terminated employment.

Traditional Formula (Formula Prior to July 1, 2007)

The annual normal retirement benefit is generally a function of years of service and compensation, i.e., 2% of final average earnings (average of last three consecutive years of base salary) prior to April 1, 2010 times years of benefit accrual service up to 25, plus 1% times final average earnings times years of benefit accrual service over 25 (up to 10 years), minus 2% times participant’s projected primary insurance amount (Social Security benefit payable at Social Security retirement age) times years of benefit accrual service (up to 25). No more than 50% of normal retirement benefit is offset by Social Security.

SERPS

The SERPs provide benefits in excess of the Employee Pension Plan, whether due to the benefit limitations imposed by the Internal Revenue Code or the exclusion of compensation other than base salary under the Employee Pension Plan. To comply with the full implementation of Internal Revenue Code Section 409A as of January 1, 2009, the SERPs were amended to de-link the choice of the normal and optional forms of distribution from the Employee Pension Plan and all participants are required to delay receipt of benefit payments until at least six months after their separation from service. The Traditional Formula permits distributions in actuarially equivalent annuity payments or short-term installment payments; the Pension Equity Formula permits distributions in actuarially equivalent annuity payments or a lump sum payment.


108

Pension Equity Formula

Retirement benefits are based on the pension equity formula contained in the Employee Pension Plan, described in the preceding section, and are expressed as a lump sum amount that is equal to the product of the accumulated annual credit percentages (tiered by years of service) times final average earnings (highest five consecutive years of earnings out of the last 10 years) prior to April 1, 2010, without the Internal Revenue Code limitations/exclusions noted in the preceding paragraph. The definition of earnings is based on base salary plus eligible incentives.

Traditional Formula (Formula Prior to July 1, 2007)

Retirement benefits are based on the final pay formula in effect prior to July 1, 2007 under the Employee Pension Plan, described in the preceding section, and are a function of years of service and final average compensation, without the Internal Revenue Code limitations/exclusions noted in the Employee Pension Plan. The definition of earnings includes amounts payable under designated incentive programs that are excluded from the calculation of benefits under the Employee Pension Plan; and the final average earnings determination for these incentives is based on the average of any three full calendar years within the last seven consecutive full calendar years prior to April 1, 2010 that produce the highest average.

Non-Qualified Deferred Compensation

The following table sets forth information concerning NEO participation in deferred compensation plans, excluding the 401(k) Plan. The table includes 2015 compensation deferrals, Company contributions, earnings, withdrawal activity, total balances as of December 31, 2015 and the portion of the aggregate balances as of December 31, 2015 that have been reported in prior years’ Summary Compensation Tables (“SCTs”).
Name
(a)
Deferral Type
(b)
Executive Contributions
in 2015(1)
(c)
Company Contributions
in 2015(2)
(d)
Aggregate Earnings in 2015(3)
(e)
Aggregate Withdrawals/
Distributions
(f)
Aggregate Balance as of December 31, 2015
(g)
Portion of Aggregate Balance at December 31, 2015 Reported in Prior SCTs(h)
James D. Wehr
Excess Investment Plan
$
67,500

$
39,375

$
29,174

$
—

$
1,127,538

$
823,412

Bonnie J. Malley
Excess Investment Plan
16,200

10,800

5,722

—

268,548

110,321

Thomas M. Buckingham
Excess Investment Plan
6,600

8,550

1,199

—

61,666

—

Edward W. Cassidy
Excess Investment Plan
11,200

8,700

9,056

—

399,803

94,550

Deferred RSUs
—

—

(17,977
)
—

20,919

—

Deferred Dividend Equivalents
—

—

102

—

5,741

—

Christopher M. Wilkos
Excess Investment Plan
13,500

10,800

(1,871
)
—

173,278

112,273

Peter A. Hofmann
Excess Investment Plan
1,847

854

(486
)
—

265,235

184,575

Total
$
115,000

$
78,225

$
25,405

$
—

$
2,057,493

$
1,140,556

(1) 
These figures represent voluntary deferrals of 2015 salary into the Excess Investment Plan as described in the following narrative. The salary figures reported in the SCT include these deferral amounts.
(2) 
These figures represent the 2015 non-qualified Company matching contributions made in the Excess Investment Plan and reported in the All Other Compensation column of the SCT.
(3) 
Represents the change in account value between December 31, 2014 and December 31, 2015, less any executive or Company contributions, plus any account distributions. With respect to deferred RSUs, these figures reflect the change in account value attributable to appreciation/depreciation in our Common Stock price. With respect to deferred dividend equivalents, these figures reflect the dividend equivalents attributable to deferred RSUs and the value of interest credits paid thereon.


109

The Phoenix Companies, Inc. Non-Qualified Excess Investment Plan

Certain of our employees, including our NEOs, can elect to defer up to 60% of their base pay. Base pay deferrals commence when year-to-date base pay exceeds the Internal Revenue Code limitation on qualified plan compensation, which was $265,000 in 2015. With respect to base pay deferrals only, we made a corresponding Company match credit in 2015 using the same formula as provided in our 401(k) Plan. For the NEOs, they were eligible for a Company match contribution in the 401(k) Plan and Excess Investment Plan, based on tiered years of service as described in the following table:
Years of Service on
January 1
Company Match Formula for All NEOs
Maximum
Company Match Rate
as a Percentage of
Base Pay
Up to 4 years
100% on first 3% of pay deferred; 50% on next 3%
4.5%
5 to 9 years
100% on first 6% of pay deferred
6.0%
10 to 14 years
100% on first 3% of pay deferred; 150% on next 3%
7.5%
15 years or more
150% on first 6% of pay deferred
9.0%

Based on these schedules, the maximum Company match rate for 2015, as a percentage of base pay for our NEOs, was:
Name
Maximum Company Match Rate
James D. Wehr
9.0%
Bonnie J. Malley
9.0%
Thomas M. Buckingham
9.0%
Edward W. Cassidy
6.0%
Christopher M. Wilkos
9.0%
Peter A. Hofmann
7.5%
The Excess Investment Plan provides participants with a choice of mutual fund offerings similar to those funds made available to employees under the 401(k) Plan. There are no above-market or guaranteed returns in the Excess Investment Plan. Participants can modify their investment selections at any time under the Excess Investment Plan. Deferrals are credited to the funds selected by the participants and based on the market price for such funds on the date such compensation would otherwise have been paid.


110

The following table sets forth the list of the mutual fund choices under the Excess Investment Plan and each fund’s total return for 2015.
Name of Fund
2015 Total Return Percentage (1)
Name of Fund
2015 Total Return
Percentage (1)
Allianz NFJ Small Cap Value Fund Institutional Class
(7.93)%
Fidelity Freedom K® 2055 Fund
(0.11)%
American Beacon Stephens Small Cap Growth Fund Institutional Class
(4.74)%
Fidelity Freedom K® 2060 Fund
(0.16)%
American Funds EuroPacific Growth Fund Class R-6
(0.48)%
Fidelity Freedom K® Income Fund
(0.32)%
American Funds New Perspective Fund Class R-6
5.63%
Fidelity® Contrafund® - Class K
6.55%
Artisan Mid Cap Fund Institutional Class
2.42%
Fidelity® Growth Company Fund - Class K
7.94%
Fidelity Freedom K® 2005 Fund
(0.17)%
Fidelity® Low-Priced Stock Fund - Class K
(0.45)%
Fidelity Freedom K® 2010 Fund
(0.23)%
Fidelity® Money Market Trust Retirement Government Money Market II Portfolio
0.02%
Fidelity Freedom K® 2015 Fund
(0.22)%
Managed Income Portfolio Class 1
1.16%
Fidelity Freedom K® 2020 Fund
(0.14)%
MFS Value Fund Class R4
(0.54)%
Fidelity Freedom K® 2025 Fund
(0.15)%
Spartan® 500 Index – Institutional Class
1.36%
Fidelity Freedom K® 2030 Fund
(0.13)%
Spartan® U.S. Bond Index Fund – Fidelity Advantage Class
0.59%
Fidelity Freedom K® 2035 Fund
(0.13)%
Virtus Contrarian Value Fund Class I
(17.48)%
Fidelity Freedom K® 2040 Fund
(0.12)%
Virtus Multi-Sector Intermediate Bond Fund Class I
(1.60)%
Fidelity Freedom K® 2045 Fund
(0.14)%
Virtus Multi-Sector Short Term Bond Fund Class I
0.59%
Fidelity Freedom K® 2050 Fund
(0.15)%
Virtus Real Estate Securities Fund Class I
2.38%
(1) 
Total return includes change in share value and reinvestment of dividends and capital gains, if any.

Account balances under the Excess Investment Plan, reflecting cumulative appreciation/depreciation and interest credits (depending on the investment fund(s) chosen by the participant), are paid to participants, based on their election made prior to deferral, in lump sum or annual installments following the termination of services with the Company or such earlier specified date elected by the participant. In-service withdrawals may only be taken in the case of severe financial hardship caused by an unforeseeable emergency as permitted under Internal Revenue Code Section 409A, and any other applicable laws. Loans are not permitted under this plan.

All balances under this plan are unfunded general obligations of the Company, which the Company, at its discretion, may hedge in full or in part by making contributions to a trust subject to the claims of our creditors in certain circumstances. Currently, we hedge 100% of this obligation by making investments in the same funds and in the same amounts as participants have elected.


111

RSU Deferrals

Certain employees of the Company, including the NEOs, may elect to defer up to 100% of their equity LTIP awards, and other RSU awards until following termination of employment or such earlier specified date elected by the participant, if the deferral opportunity is offered by the Company. Participants do not have any voting rights with respect to deferred RSUs. Voting rights become applicable only when the RSUs convert to Common Stock following termination of employment or in the event the Company chooses to hedge its RSU obligations by holding Common Stock in a Rabbi trust subject to the claims of creditors in certain circumstances. Deferred RSUs were credited with dividend equivalents, which are equal to the cash dividends that the Company may have paid on its Common Stock, multiplied by the number of shares of Common Stock underlying each deferred RSU.

Dividend equivalents were credited to a book entry account on behalf of participants. These dividend equivalents accrued interest credits at a rate determined and updated each August 1, based on the mid-term applicable federal rate (as determined under Internal Revenue Code Section 1274(d)) as published by the Internal Revenue Service for the immediately preceding month. Accumulated dividend equivalents and the corresponding interest credits are paid at the same time that the underlying RSUs convert to Common Stock. We have stopped crediting dividend equivalents and interest to new RSU deferrals. All RSUs, dividend equivalents, and interest credits under this program are unfunded general obligations of the Company, for which the Company, at its discretion, may hedge in full or in part by making contributions to a Rabbi trust subject to the claims of our creditors in certain circumstances.

Change-in-Control Agreements

Any capitalized terms that appear in this section that are not defined otherwise can be found in Definitions.

We have entered into certain agreements and maintain certain plans that will require us to provide compensation to the NEOs in the event of a termination of employment, including termination of employment in connection with a Change-in-Control. The amounts payable to each NEO are estimated in the tables provided in this section. No incremental benefits are provided under these programs in the event of a voluntary termination by the NEO without good reason or by the Company for Cause.

In 2015, the Company conducted a comprehensive review of its Change-in-Control agreements that were made effective in 2016. The current agreements are in effect through the earlier of December 31, 2016 or a Change-in-Control.

Upon a qualifying termination of employment within two years of a Change-in-Control, all NEOs will receive their vested benefits under the Employee Pension Plan and 401(k)  Plan; benefits and conversion rights under the Consolidated Omnibus Budget and Reconciliation Act (“COBRA”), if applicable; and the non-qualified plans’ benefits pursuant to the terms of the plans. See the Pension Benefits table and the Non-Qualified Deferred Compensation table.

The protections provided under the agreements can only be triggered by termination of employment either (i) by the Company for reasons other than death, disability (as defined in the agreements), Cause or retirement, or (ii) by the executive for good reason, provided such termination occurs following, or is effectively connected with, the occurrence of a Change-in-Control. These agreements each have an initial term of two years with provisions for automatic renewals for successive one-year periods, unless either party provides to the other party written notice at least 60 days prior to the end of the initial term or any renewal term that the Company or NEO does not want the term so extended. These agreements do not provide any participant with the right to receive a tax gross-up in respect of any parachute payments.


112

Generally, the change-in-control agreements entered into with our NEOs provide:

•
no gross-up for excise tax purposes in that the aggregate value of Covered Payments, as defined in the agreement, is limited to an amount equal to 2.99 times the NEO’s average annual compensation calculated in accordance with Internal Revenue Code Section 280G;
•
non-compete restrictions for executives determined by the Compensation Committee and, in the case of our CEO, the Board, for a period of up to 18 months and in consideration provide for a lump sum payment of the salary and target bonus opportunity that would have been paid or made available over a corresponding period of continued employment;
•
in lieu of severance benefits payable under other plans, severance benefits are calculated at a multiple of 1.0 or 2.0 times salary and target annual incentive for NEOs;
•
a protection period running from 90 to 180 days before a change-in-control and two years following a change-in-control;
•
welfare benefits for a period equivalent to the applicable Internal Revenue Code Section 409A period following a termination after a change-in-control;
•
outplacement services commensurate with the NEO’s position; for those executives who are subject to non-compete covenants, outplacement services will be provided for a period of up to 12 months following the end of the non-compete period, limited pursuant to Internal Revenue Code Section 409A requirements;
•
non-solicitation restrictions;
•
an amount equal to a pro-rata portion of the annual incentive award earned for the year in which termination occurs (or target incentive, if greater) and a pro-rata portion of long-term awards for each then open cycle at target; and
•
vesting of benefits under equity compensation plans;
•
no additional service and vesting credit under the Company’s defined benefit pension plans because the pension plans have been frozen since April 1, 2010;
•
that unvested stock options are subject to double trigger vesting provisions wherein both a change-in-control and an executive’s termination of employment within certain prescribed periods must occur for the stock options to vest; and
•
that, with respect to the determination of performance-based long-term incentive awards, where a change-in-control occurs after the performance period but before the vesting date, the pro rata award payments will be based on the actual results, not the target amount.

These agreements terminate automatically upon the NEO’s death, termination due to disability (as defined in the agreements), termination for Cause or voluntary retirement. In such cases, the Company will pay, pursuant to payroll practice and the terms of the applicable plans and programs, the NEO’s base salary through the date of termination; any vested amounts or benefits under applicable employee benefit plans, agreements and programs, as well as any accrued vacation pay not yet paid; and any other benefits payable in such situation under the plans, agreements, policies or programs of the Company.


113

The following table summarizes the value of the compensation and benefits that the NEOs would have received if their employment had been terminated involuntarily (other than for Cause) or if the NEO had terminated employment for Good Reason in connection with a Change-in-Control as of December 31, 2015.
Change-in-Control Payments
 
James D.
Wehr
Bonnie J. Malley
Thomas M. Buckingham
Edward W. Cassidy
Christopher M.
Wilkos
Base Severance
Base Salary Component(1)
$
700,000

$
770,000

$
720,000

$
820,000

$
770,000

Annual Incentive Target Component
700,000

670,000

500,000

1,597,980

670,000

Accrued Obligations and Additional Benefits
2015 Annual Incentive(2)
700,000

335,000

250,000

798,990

335,000

2015-2017 LTIP Cycle(3)
917,868

216,358

163,919

183,574

216,358

2014-2016 LTIP Cycle Grant B(4)
727,559

171,496

129,921

145,512

171,496

2014-2016 LTIP Cycle Grant A(5)
1,400,000

330,000

200,000

280,000

330,000

Deemed Vesting for Other Equity Awards(6)
—

—

—

93,750

—

Continuation of Health & Welfare Benefits(7)
18,203

28,871

137

28,871

28,871

Outplacement Services
9,895

9,895

9,895

9,895

9,895

SUBTOTAL
5,173,525

2,531,620

1,973,872

3,958,572

2,531,620

280G Cut-Back(8)
—

(237,441
)
—

(223,878
)
—

Provision for Restrictive
Covenants(9)
2,100,000

—

—

—

—

TOTAL
$
7,273,525

$
2,294,179

$
1,973,872

$
3,734,694

$
2,531,620

(1) 
Mr. Wehr’s Base Salary Component reflects one times annual base salary, whereas all other NEOs reflect two times annual base salary. Mr. Wehr would also receive financial consideration for restrictive covenants equivalent to one and a half times the sum of annual base salary plus the PIP target award opportunity for that year (see Provision for Restrictive Covenants row in the table above).
(2) 
Represents 2015 Annual Incentive at target, because the performance cycle results were not yet determinable as of December 31, 2015.
(3) 
Represents prorated 2015 portion of 2015-2017 LTIP at target, because the performance cycle was not yet complete as of December 31, 2015. The value of the RSUs is included at $37.50 each, as laid out in the Nassau merger agreement.
(4) 
Represents prorated 2015 portion of Grant B at target, because the performance cycle was not yet complete as of December 31, 2015.
(5) 
Represents prorated 2015 portion of Grant A at target, because the performance cycle results were not yet determinable as of December 31, 2015.
(6) 
Represents the cash value of unvested equity awards which would have accelerated vesting and become payable at target amounts. For Mr. Cassidy, this represents Saybrus RSAs which are payable in cash in three annual installments following his termination.
(7) 
Reflects estimated Company cost of continuing to subsidize certain health and welfare benefits for the NEOs for two years.
(8) 
Based on the value of parachute payments and other calculations as required under IRS Code Section 280G.
(9) 
Represents payment related to non-compete restrictions contained in Mr. Wehr’s Change-in-Control agreement.


114

Definitions

“Cause” is defined as:

(i)
the Executive’s conviction or plea of nolo contendere to a felony (other than with respect to a traffic violation or an incident of vicarious liability);
(ii)
an act of willful misconduct (including, without limitation, a willful material violation of the Company’s Code of Conduct) on the Executive’s part with regard to the Company or its affiliates having a material adverse impact on the Company or its affiliates; or
(iii)
the Executive’s failure in good faith to attempt or refusal to perform legal directives of the Board or executive officers of the Company, as applicable, which directives are consistent with the scope and nature of the Executive’s employment duties and responsibilities and which failure or refusal is not remedied by the Executive within 30 days after notice of such non-performance is given to the Executive. For purposes of clause (ii) of this definition, no act, or failure to act, on the Executive’s part shall be deemed “willful” unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive’s act, or failure to act, was in the best interest of the Company and its subsidiaries.

“Change-in-Control” is defined as the first occurrence of:

(i)
any person acquires “beneficial ownership” (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended), directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company’s securities;
(ii)
within any 24-month period, the persons who were directors of the Company at the beginning of such period (the “Incumbent Directors”) shall cease to constitute at least a majority of the Board or the board of directors of any successor to the Company; provided that any director elected or nominated for election to the Board by a majority of the Incumbent Directors then still in office shall be deemed to be an Incumbent Director for purposes of this sub clause (ii);
(iii)
the effective date of any merger, consolidation, share exchange, division, sale or other disposition of all or substantially all of the assets of the Company which is consummated (a “Corporate Event”), if immediately following the consummation of such Corporate Event the shareholders of the Company immediately prior to such Corporate Event do not hold, directly or indirectly, a majority of the voting power, in substantially the same proportion as prior to such Corporate Event, of (x) in the case of a merger or consolidation, the surviving or resulting corporation or (y) in the case of a division or a sale or other disposition of assets, each surviving, resulting or acquiring corporation which, immediately following the relevant Corporate Event, holds more than 35% of the consolidated assets of the Company immediately prior to such Corporate Event;
(iv)
the approval by shareholders of the Company of a plan of liquidation with respect to the Company; or
(v)
any other event occurs which the Board declares to be a Change-in-Control.

“Good Reason” is defined as the occurrence after the effective date of a Change-in-Control of any of the following, without the express written consent of the executive and which occurrence is not remedied by the Company within 30 days after notice of such occurrence is given to the Company:

(i)
the material reduction in the executive’s title, position, duties or responsibilities from the title, position, duties or responsibilities held or exercised by the executive prior to the effective date of a Change-in-Control;
(ii)
any requirement by the Company that the executive change the location where the executive regularly provides services to the Company to a location that is more than 35 miles from downtown Hartford;
(iii)
a reduction by the Company of the executive’s base salary or total incentive compensation opportunity or a reduction in the employee benefits provided to the executive under the Company’s employee benefit plans (unless the executive is provided with substantially equivalent replacement benefits); or
(iv)
any failure to obtain the assumption and agreement to perform the Change-in-Control Agreement by a successor as contemplated in the Change-in-Control Agreement.


115

DIRECTOR COMPENSATION

Director Compensation Philosophy

The Company’s philosophy with respect to Board compensation is to:

•
provide competitive levels of pay to attract and retain a high quality Board
•
differentiate compensation based on workload
•
align Board members’ compensation with shareholder interests by requiring share ownership for all directors

Elements of Director Compensation

For 2015, Board compensation for our Non-Employee Directors consisted of a flat retainer of $125,000 per year for each Non-Employee Director, an additional retainer for the non-executive Chairman of $85,000, additional retainers to all committee chairs, except the Chair of the Executive Committee, and a meeting fee in the amount of $1,500 per meeting for attendance at each Board and/or Committee meeting held in excess of the number of meetings anticipated for any calendar year. The schedule of additional annual retainers for Committee Chairs is as follows:
Committee Position
Additional
Annual Retainer
Chairs of the Audit and Compensation Committees
$20,000
Chairs of the Finance and Governance Committees
$15,000

All retainers were paid quarterly in advance. Both retainers and meeting fees are paid in cash (either current or deferred), but Non-Employee Directors may elect to defer all or a portion of their cash retainers and fees into RSUs under the Company’s Directors Equity Deferral Plan. Non-Employee Directors also have the option to defer receipt of cash compensation into investment options available under the Company’s Directors Cash Deferral Plan. The following is a description of our non-qualified deferred compensation programs for our Non-Employee Directors:

•
In 2015, non-Employee Directors could elect to defer all or a portion of their cash compensation into RSUs under The Phoenix Companies, Inc. Directors Equity Deferral Plan. The number of RSUs credited upon deferral, including fractional RSUs, was equal to the cash amount that would otherwise be paid, divided by the closing price of our Common Stock on the date of payment (generally, the first business day of each calendar quarter). The Common Stock underlying each RSU, together with a cash payment equal to the cumulative dividend equivalents and interest, will be paid to the director following his or her termination of services as a director with the Company or, in certain circumstances, such earlier specified date elected by the director. All RSUs, dividend equivalents, and interest credits under this Plan are unfunded general obligations of the Company, for which the Company, at its discretion, may hedge in full or in part by making contributions to a trust. The Company hedged part of this obligation by making investments in its Common Stock. For 2016, this deferral option was not offered.
•
Non-Employee Directors may elect to defer all or a portion of their cash compensation under The Phoenix Companies, Inc. Directors Cash Deferral Plan. This Plan provides directors with the same choice of mutual fund offerings provided to employee participants in The Phoenix Companies, Inc., Non-Qualified Excess Investment Plan. See the fund listing in Non-Qualified Deferred Compensation. Directors can modify their investment elections at any time under the Plan. Deferrals are credited to the funds selected by the participants and based on the market price for such funds on the date such compensation would otherwise have been paid (generally, the first business day of each calendar quarter). Account balances under the Plan, reflecting cumulative appreciation/depreciation, dividends and interest credits (depending on the investment fund(s) chosen by the director) are paid to directors, based on the election made at the time of deferral, in lump sum or annual installments following the termination of services with the Company or, in certain circumstances, such earlier specified date elected by the director. All balances credited under this program are unfunded general obligations of the Company, for which the Company, at its discretion, may hedge in full or in part by making contributions to a trust. The Company currently hedges 100% of this obligation by making investments in the same funds and in the same amounts as participants have elected.


116

The Company also offers $100,000 of life insurance to each director, including our CEO who serves as a member of the Board. The cost to the Company of providing this insurance is nominal. Each director may also participate in a matching charitable gift program to qualified educational and other charitable institutions. Currently, the maximum match for each director is $2,500. Directors can also recommend that the Company make a grant of up to $2,000 annually to an eligible charitable organization chosen by the director.

Share Ownership Guidelines and Restrictions on Trading

The Board has established share ownership guidelines for each director to accumulate shares of our Common Stock (including, for these purposes, RSUs) equal to three times the director annual retainer. Each Non-Employee Director must hold such stock until the end of his or her service as a director. The accumulation period to reach the guidelines for those directors who were Board members on July 12, 2012 is December 31, 2015. New members of the Board after July 12, 2012 must satisfy the guidelines within five years of joining the Board. These guidelines were revised in 2012 from a share-based minimum to a value-based minimum, resulting in additional shares being needed to meet the guidelines. As of December 31, 2015, five of our eight Non-Employee Directors had met the target ownership level. Two of the remaining Non-Employee Director are within the first five years of service, and both have made progress toward meeting their ownership guidelines.

The Company’s policy on insider trading permits directors to engage in transactions involving the Company’s equity securities only (1) during “trading windows” of limited duration following the issuance of periodic earnings releases and following a determination by the Company that the director is not in possession of material non-public information or (2) pursuant to a Company-approved Rule 10b5-1 plan. In addition, the Company has the ability under its insider trading policy to suspend trading by directors in its equity securities.

Director Compensation Review

The Compensation Committee is required by its charter to review Board compensation every two years. The Committee conducted a review in 2015 based on an analysis prepared by management that was also reviewed by the Committee’s compensation consultant.

Market data utilized in the review is from the National Association of Corporate Directors Director Compensation Report: 2014-2015. This report reflects practices of 1,400 companies from 24 industries, with revenues of $50 million and up.

Management also referenced data from a set of 13 smaller public insurance companies listed in the table below.
Company Name
American Equity Investment Life Holding Company
National Western Life Insurance Company
American Financial Group Inc.
Primerica, Inc.
American National Insurance Company
StanCorp Financial Group, Inc.
CNO Financial Group Inc.
Symetra Financial Group, Inc.
FBL Financial Group
Torchmark Corporation
Independence Holding Company
Unum Group
Kansas City Life Insurance Company
 

In its competitive review, the Compensation Committee took into account the following factors:

•
Total compensation per director relative to market
•
Aggregate cost of Board compensation
•
Mix of Board fees and committee fees
•
Share ownership guidelines


117

As a result of this review, no changes were made to the current director compensation package for 2016 and 2017:

•
a flat retainer of $125,000 per year for each Non-Employee Director
•
an additional retainer for the non-executive Chairman of $85,000
•
additional retainers to all committee chairs, except the Chair of the Executive Committee:
Committee Position
Additional
Annual Retainer
Chairs of the Audit and Compensation Committees
$20,000
Chairs of the Finance and Governance Committees
$15,000
•
a meeting fee in the amount of $1,500 per meeting for attendance at each Board and/or Committee meeting held in excess of the number of meetings anticipated for any calendar year

Director Summary Compensation Table

The following table sets forth information concerning the 2015 compensation of our Non-Employee Directors.
Name
Retainer Fees
Additional Meeting Fees
Total Fees Earned
or Paid in Cash
All Other
Compensation(1)
Total
Martin N. Baily(2)(3)
$134,375
$16,500
$150,875
$2,410
$153,285
Arthur P. Byrne(2)
125,000
13,500
138,500
2,404
140,904
Sanford Cloud, Jr.(2)
145,000
15,000
160,000
4,016
164,016
John H. Forsgren(2)
210,000
15,000
225,000
2,304
227,304
Ann Maynard Gray
140,000
15,000
155,000
5,465
160,465
Andrew J. McMahon(2)(3)
57,292
4,500
61,792
6,077
67,869
Augustus K. Oliver, II(2)(3)
70,000
—
70,000
2,013
72,013
Westley V. Thompson(2)
125,000
15,000
140,000
2,602
142,602
Arthur F. Weinbach(2)
145,000
15,000
160,000
2,734
162,734
(1) 
Represents amounts paid by the Company for life insurance premiums and charitable gifts, as applicable. No tax gross-up is paid on these benefits.
(2) 
These directors elected to convert all or a portion of their cash compensation into deferred RSUs, subject to the same terms and conditions as their other RSUs. These RSUs were expensed and accounted for pursuant to ASC 718. The following table sets forth information concerning the 2014 RSUs voluntarily elected to be received in lieu of cash and the total outstanding RSU awards held by the Non-Employee Directors as of December 31, 2015. Figures are rounded to the nearest whole share.
Name
Number of RSUs
Received in 2015
in Lieu of Cash
Total Number of
RSUs Outstanding
Martin N. Baily
2,358
11,922
Arthur P. Byrne
4,210
23,320
Sanford Cloud, Jr.
2,433
13,249
John H. Forsgren
1,716
11,383
Ann Maynard Gray
—
5,355
Andrew J. McMahon
2,701
2,701
Augustus K. Oliver, II
1,248
—
Westley V. Thompson
4,251
5,023
Arthur F. Weinbach
4,865
27,071
For 2015, there were no cash deferrals by any of the directors

(3) 
Retainer is prorated to reflect period of service on the Board. Mr. Baily became the Finance Committee Chair on May 14, 2015. Mr. McMahon was appointed to the Board of Directors effective July 16, 2015. Mr. Oliver’s Board service ended on May 14, 2015.

118

Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information as of the end of the Company’s 2015 fiscal year with respect to compensation plans under which equity securities of the Company are authorized for issuance.

 
(A)
(B)
(C)
Plan Category
Number of securities to be
issued upon exercise
of outstanding options,
warrants and rights
Weighted-average
issue price of
outstanding options,
warrants and rights [1]
Number of securities
remaining available for
future issuance under
equity compensation plans,
excluding securities
reflected in Column (A)
Equity compensation plans approved by
  the Company’s shareholders:
 
 
 
 
– 2003 Restricted Stock, Restricted Stock Unit
   and Long-Term Incentive Plan [2]
50,122

[3]
N/A

38,997

Equity compensation plans not approved by
  the Company’s shareholders:
 
 
 
 
– Stock Incentive Plan [4]
34,410

[5]
$
180.16

181,801

– Directors Stock Plan [6]
—

 
N/A

50,389

– Directors Equity Deferral Plan [7]
90,055

 
N/A

—

Total plans not approved by shareholders
124,465

 
$
180.16

232,190

Total
174,587

 
$
180.16

271,187

———————
[1]
Does not take any of the RSUs listed in column (A) into account. All RSUs outstanding under the Directors Equity Deferral Plan were issued in respect of the voluntary deferral by a Director of compensation otherwise payable in cash in an amount equal to the fair market value of the underlying common stock at the date the RSUs were credited to the Director’s account under such Deferral Plan. All RSUs outstanding under the 2003 Restricted Stock, Restricted Stock Unit and Long-Term Incentive Plan were issued solely in consideration of the recipient’s services.
[2]
A copy of the 2003 Restricted Stock, Restricted Stock Unit and Long-Term Incentive Plan was filed as Exhibit 10.22 to our first quarter 2008 Form 10-Q filed by the Company with the SEC on May 8, 2008.
[3]
This figure consists of the shares which underlie the RSUs. They are subject to no contingencies but are not currently convertible.
[4]
A copy of the Stock Incentive Plan was filed as Exhibit 10.2 to the first quarter 2008 Form 10-Q filed by the Company with the SEC on May 8, 2008. The first amendment to the Stock Incentive Plan was filed as Exhibit 10.2 to our 2008 Annual Report on Form 10-K filed by the Company with the SEC on March 5, 2009. The Stock Incentive Plan was adopted as part of our plan of demutualization, which was approved in its entirety by our policyholders of record at that time, and became effective June 26, 2001. As the Stock Incentive Plan was adopted both prior to the time at which the Company’s stock became registered to trade under the Securities Exchange Act of 1934, as amended (the “1934 Act”), and prior to the effective date of the NYSE corporate governance rules pertaining to equity compensation plans, shareholder approval of the Plan is not required under such NYSE rules. The following summary of the material features of the plan is qualified in its entirety by reference to the full text of the plan, which is hereby incorporated by reference.
Under the Company’s Stock Incentive Plan, the Compensation Committee (or if the committee delegates such authority to the CEO) (the “Committee”) may grant stock options to officers and employees of the Company and its subsidiaries. The maximum number of shares issuable under the plan with respect to officers and employees of the Company is the aggregate of 5% (approximately 5.25 million prior to adjustment for the spin-off of Virtus) of the shares outstanding on June 26, 2001 (approximately 105 million shares) reduced by the shares issuable pursuant to options or other awards granted under the Company’s Directors Stock Plan. During any five-year period, no participant may be granted options in respect of more than 5% of the shares available for issuance under the plan. The Board may terminate or amend the plan, but such termination or amendment may not adversely affect any outstanding stock options without the consent of the affected participant. The plan will continue in effect until it is terminated by the Board or until no more shares are available for issuance.
The exercise price per share subject to an option will not be less than the fair market value of such share on the option’s grant date. Each option will generally become exercisable in equal installments on each of the first three anniversaries of the grant date, except that no option may be exercised after the tenth anniversary of its grant date. Options may not be transferred by the grantee, except in the event of death or, if the Committee permits, the transfer of non-qualified stock options by gift or domestic relations order to the grantee’s immediate family members. Upon a grantee’s death, any outstanding options previously granted to such grantee will be exercisable by the grantee’s designated beneficiary until the earlier of the expiration of the option or five years following the grantee’s death. If the grantee terminates employment by reason of disability or retirement, any outstanding option will continue to vest as if the grantee’s service had not terminated and the grantee may exercise any vested option until the earlier of five years following termination of employment or the expiration of the option. If the grantee’s employment is terminated for cause, the grantee will forfeit any outstanding options. If the grantee’s employment terminates in connection with a divestiture of a business unit or subsidiary or similar transaction, the Committee may provide that all or some outstanding options will continue to become exercisable and may be exercised at any time prior to the earlier of the expiration of the term of the options and the third anniversary of the grantee’s termination of service. If the grantee terminates employment for any other reason, any vested options held by the grantee at the date of termination will remain exercisable for a period of 30 days and any then unvested options will be forfeited.

119

Generally, upon a change of control (as defined in the plan), each outstanding option will become fully exercisable. Alternatively, the Committee may: (i) require that each option be canceled in exchange for a payment in an amount equal to the excess, if any, of the price paid in connection with the change of control over the exercise price of the option; or (ii) if the Committee determines in good faith that the option will be honored or assumed by, or an alternative award will be issued by, the acquirer in the change of control, require that each option remain outstanding without acceleration of vesting or exchanged for such alternative award.
[5]
This figure consists of the shares which underlie the options issued under the Stock Incentive Plan (all of which are fully vested).
[6]
A copy of the Directors Stock Plan was filed as Exhibit 10.6 to the 2008 Form 10-Q filed by the Company on May 8, 2008. The Directors Stock Plan was initially adopted as part of our plan of demutualization, which was approved in its entirety by our policyholders of record at that time, and became effective June 26, 2001. As the Directors Stock Plan was adopted both prior to the time at which the Company’s stock became registered to trade under the 1934 Act and prior to the effective date of the NYSE corporate governance rules pertaining to equity compensation plans, shareholder approval of the Plan is not required under such NYSE rules. The following summary of the material features of the plan is qualified in its entirety by reference to the full text of the plan, which is hereby incorporated by reference.
Under the Directors Stock Plan, the Board of Directors may grant options to outside directors, provided that the aggregate number of shares issuable pursuant to options will not exceed 0.5% of the total shares outstanding on June 26, 2001, or 26,242 shares. Each option entitles the holder to acquire one share of our Common Stock at the stated exercise price. The exercise price per share will not be less than the fair market value of a share on the day such option is granted and the option will be exercisable from the day the option is granted until the earlier of the tenth anniversary of such grant date or the third anniversary of the day the outside director ceases to provide services for the Company. All options that have been issued pursuant to the Directors Stock Plan have either been exercised or lapsed unexercised in accordance with their terms. Under the Directors Stock Plan, the Board of Directors may require the outside directors to receive up to one-half of their directors fees in shares instead of cash and the outside directors may elect to receive any portion of such fees in shares instead of cash. The aggregate number of shares that may also be issued in lieu of cash fees may not exceed 26,202 shares, bringing the total available under this plan to 52,444 shares. However, any stock grants made to Directors prior to June 16, 2009 were effected under the 2003 Restricted Stock, Restricted Stock Unit and Long-Term Incentive Plan and not the Directors Stock Plan. No awards have been made under the Directors Stock Plan since June 16, 2009, when the Company modified its director compensation program to offer stock based compensation opportunities entirely on an elective basis pursuant to the Directors Equity Deferral Plan.
[7]
A copy of the Directors Equity Deferral Plan was filed as Exhibit 10.37 to the 2008 Form 10-Q filed by the Company on May 8, 2008. As the Directors Equity Deferral Plan allows Directors electively to acquire interests in our stock at the then fair market value thereof by deferring amounts that would otherwise have been payable to them currently in cash, the Directors Equity Deferral Plan is not an equity compensation plan that is subject to shareholder approval under the NYSE corporate governance requirements. The following summary of the material features of the plan is qualified in its entirety by reference to the full text of the plan, which is hereby incorporated by reference.
Under the Directors Equity Deferral Plan, non-employee members of the Board may voluntarily defer all or a portion of the cash portion of any fees and payments to the Directors attributable to their service as a member of the Board into RSUs. The RSUs will be converted into shares of Company common stock when the Directors separate from service as a member of the Board and will be distributed within a certain period after such separation. No specific number of shares are reserved for issuance in respect of the Directors Equity Deferral Plan, as all of the shares to be issued thereunder are issued in respect of a Director’s decision to exchange cash otherwise payable currently for services as Director for the receipt of shares of stock at a later date on a tax deferred basis, based on the fair market value of the underlying stock at the time of the exchange. The shares of common stock that are issuable under the Plan are exempt from registration pursuant to Regulation D, and a Form D has been filed reflecting the use of such exemption.
All Directors RSUs credited since June 16, 2009 have been issued pursuant to the terms of this Deferral Plan.

INFORMATION ON STOCK OWNERSHIP

Directors and Executive Officers

The table below shows the beneficial ownership of our Common Stock by each director, and by each of the executive officers in the Summary Compensation Table, and by all directors, director nominees and executive officers as a group. Unless otherwise indicated in a note, each person listed in the table owns the shares shown directly with sole voting and investment power.

The table also details ownership of RSUs whose conversion into shares is not contingent upon any performance-based criteria, including RSUs elected to be received in lieu of cash and RSUs elected or required to be deferred until following termination of employment. For information about RSUs, see column (h) of the Outstanding Equity Awards at Fiscal Year-End table. Since neither the directors nor the officers have power to vote the shares underlying their RSUs (unless the shares underlying the RSUs are held in a Rabbi trust) or power to sell, transfer or encumber their RSUs (except in some cases, for transfers to immediate family members or to a trust for those members’ benefit), for purposes of this table, no RSU is counted as beneficially owned by such director or officer.

120

Name of Beneficial Owner
Shares
Beneficially
Owned [1][2]
Options
Exercisable Within
60 Days [1][3]
Restricted
Stock
Units [1][4]
Total [1][5]
Percentage of
Common
Stock [6]
Martin N. Baily
14,136

 
—

—

14,136

*
Arthur P. Byrne
33,036

 
—

—

33,036

*
Sanford Cloud Jr.
15,577

 
—

—

15,577

*
John H. Forsgren
11,583

 
—

—

11,583

*
Ann Maynard Gray
8,105

 
—

—

8,105

*
Andrew J. McMahon
2,701

 
—

—

2,701

*
Augustus K. Oliver, II
19,547

 
—

—

19,547

*
Westley V. Thompson
5,023

 
—

—

5,023

*
Arthur F. Weinbach
27,071

 
—

—

27,071

*
Thomas M. Buckingham [7]
2,844

 
2,251

2,595

7,690

*
Edward W. Cassidy [8]
9,812

 
6,058

3,471

19,341

*
Bonnie J. Malley [9]
5,653

 
5,122

3,425

14,200

*
James D. Wehr [10]
37,672

 
5,608

14,530

57,810

*
Christopher M. Wilkos [11]
9,041

 
2,206

3,425

14,672

*
All directors, director nominees and
executive officers as a group (18 people) [12]
192,616

[13]
22,128

33,738

248,482

3.73%
*
Less than one percent

[1]
With the exception of Messr. Oliver, all holdings are stated as of December 31, 2015, and are rounded to the nearest whole number. Mr. Oliver’s holdings are stated as of April 2, 2015, which is the date of the latest Form 4 filed with the SEC and other information available to Phoenix.
[2]
In the case of the executive officers, the figures include share equivalents held in the 401(k) Plan. In the case of the directors, the figures include vested RSUs with associated shares of common stock held in a Rabbi trust with pass through voting rights.
[3]
Reflects the number of shares that could be acquired under options exercisable within 60 days of December 31, 2015.
[4]
Reflects those RSUs outstanding whose conversion into shares is not contingent upon any performance-based criteria. Except as noted in footnote 2 above, directors and officers do not have the power to vote the shares underlying the RSUs.
[5]
Represents the sum of the total shares beneficially owned, the shares underlying options exercisable within 60 days of December 31, 2015 and the shares into which the RSUs will be converted if the applicable service-based conditions for vesting and issuance are met.
[6]
Reflects, as a percentage of our outstanding Common Stock (5,750,880 shares as of December 31, 2015), the total of the first two columns.
[7]
Includes 972 share equivalents held in the 401(k) Plan.
[8]
Includes 4,949 share equivalents held in the 401(k) Plan.
[9]
Includes 1,721 share equivalents held in the 401(k) Plan.
[10]
Includes 4,602 share equivalents held in the 401(k) Plan.
[11]
Includes 2,454 share equivalents held in the 401(k) Plan.
[12]
Messr. Oliver’s numbers are not reflected in the total row (last row in the table) because he was no longer serving as an officer or director on December 31, 2015.
[13]
Includes 15,383 share equivalents held in the 401(k) Plan.


121

Certain Shareholders

The following table lists the beneficial owners known to the Company as of March 14, 2016 of more than 5% of our Common Stock. In furnishing the information below, the Company has relied on information filed with the SEC by the beneficial owners reflecting beneficial ownership as of December 31, 2015.

Name and Address of Beneficial Owner
Amount and
Nature of
Beneficial Ownership
Percentage of
Common Stock
Toscafund Asset Management LLP
90 Long Acre, 7th Floor
London, England WC2E 9RA
440,392
[1]
7.60%
[1]
Morgan Stanley and Morgan Stanley Capital Services, LLC
1585 Broadway
New York, NY 10036
346,907
[2]
6.00%
[2]
Dimensional Fund Advisors LP
Building One
6300 Bee Cave Road
Austin, TX 78746
304,409
[3]
5.25%
[3]
[1]
Based on a Schedule 13G/A filed with the SEC on February 4, 2016 by Toscafund Asset Management LLP.
[2]
Based on a Schedule 13G/A filed with the SEC on February 5, 2016 by Morgan Stanley and Morgan Stanley Capital Services, LLC.
[3]
Based on a Schedule 13G/A filed with the SEC on February 9, 2016 by Dimensional Fund Advisors LP.


Item 13.
Certain Relationships and Related Transactions and Director Independence

Certain Relationships and Related Person Transactions

On November 2, 2006, the Board adopted a written Policy Regarding Transactions with Related Persons (the “Related Person Policy”). The Related Person Policy provides that any Related Person (as defined by Item 404(a) of Regulation S-K) must promptly report to the Company’s General Counsel any direct or indirect material interest in any transaction that is reportable by the Company in its Proxy Statement pursuant to Item 404(a) of Regulation S-K (each, a “Related Person Transaction”), that is, any transaction in which the Company was or is to be a participant, the amount involved exceeds $120,000 and any Related Person had or will have a direct or indirect material interest. The General Counsel will promptly communicate such information to the Audit Committee. No Related Person Transaction may be consummated or shall continue without the approval or ratification of the Audit Committee and any director that is a party to a Related Person Transaction shall recuse himself or herself from any such vote.

On November 6, 2015, State Farm Mutual Automobile Insurance Company (“State Farm”) filed a Schedule 13G which indicated that they no longer owned any of our outstanding common stock. In 2015, 2014 and 2013, we incurred $3.0 million, $2.7 million and $2.6 million, respectively, as compensation costs for the sale of our insurance and annuity products by entities that were either subsidiaries of State Farm or owned by State Farm agents.

On January 7, 2016, we announced a solicitation seeking consent of holders of our 7.45% Quarterly Interest Bonds due 2032 to amend the indenture governing the bonds. In connection with this consent solicitation, we have retained Morgan Stanley & Co. LLC to serve as our solicitation agent. Morgan Stanley currently owns of record approximately 6.0% of our outstanding common stock. In 2015, 2014 and 2013, we incurred $0, $1.1 million and $2.1 million, respectively, for fees associated with bondholder solicitations seeking consent to amend the indenture governing our 7.45% senior unsecured bonds.

See Note 8 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information.

All Related Person Transactions have been approved or ratified by the Audit Committee in compliance with the Related Person Policy.


122

Independent Directors

A majority of the directors of the Board must meet the criteria for independence established by the Board in accordance with the NYSE rules. Under these rules, a director will not qualify as independent unless the Board affirmatively determines that the director has no material relationship with the Company. As permitted by the NYSE rules, the Governance Committee has recommended, and the Board has adopted, a set of categorical standards (the “Categorical Independence Standards”) to assist the Board in making independence determinations. These Categorical Independence Standards may be found on our web site at www.phoenixwm.com, in the Investor Relations section, under the heading “Corporate Governance.” In March 2016, the Governance Committee and the Board evaluated the independence of each director other than our CEO, who is a Company employee, in accordance with the provisions of the Categorical Independence Standards and the NYSE rules. As a result of this evaluation, the Governance Committee has recommended, and the Board has affirmatively determined, that all members of the Board other than the CEO, including each member of the Audit, Compensation and Governance Committees, are independent under both the Categorical Independence Standards and applicable NYSE rules.


Item 14.
Principal Accounting Fees and Services

The Board has a policy to assure the independence of its independent registered public accounting firm. Prior to each fiscal year, the Audit Committee receives a written report from the Company’s auditor describing the elements expected to be performed in the course of its audit of the Company’s financial statements for the coming year. The Audit Committee may approve the scope and fees not only for the proposed audit, but also for various recurring audit-related services. For services of its independent registered public accounting firm that are neither audit-related, nor recurring, a Company vice president may submit in writing a request to the Company’s internal auditor accompanied by approval of the Company’s Chief Financial Officer or Chief Accounting Officer. The Audit Committee may pre-approve the requested service as long as it is not a prohibited non-audit service and the performance of such service would be consistent with all applicable rules on auditor independence. The Audit Committee may also delegate pre-approval authority to one or more of its members. All services performed for us by our auditors in 2015 were pre-approved by the Audit Committee pursuant to the policy described above.

On June 11, 2015, the company announced the appointment of KPMG LLP (“KPMG”) to serve as the company’s principal independent registered public accounting firm, replacing PricewaterhouseCoopers, LLP (“PwC”). The transition became effective on June 11, 2015. The Audit Committee of the Board approved the transition from PwC to KPMG after completing the request for proposal process disclosed on March 31, 2015.

The services performed by our auditors in 2015 and 2014 are described below. The auditors do not provide any services to us prohibited under applicable laws and regulations. To the extent our auditor provides us with consulting services, those services are closely monitored and controlled by both management and the Audit Committee to ensure that their nature and extent do not interfere with the auditor’s independence. The independence of the auditor is also considered annually by our Board.

PwC amounts invoiced within the 2015 and 2014 financial statements were $777,984 and $52,301,380, respectively. These amounts include the audit fees referenced in the following table plus additional fees associated with the restatements of the Company’s financial statements.

PwC Fees:
2015
 
2014
Audit fees [1]
$
678,770

 
$
33,800,000

Audit-related fees [2]
—

 
2,847

Tax fees
—

 
—

All other fees [3]
99,214

 
4,379

Total fees
$
777,984

 
$
33,807,226

[1]
Amounts represent fees for the annual audits of our financial statements and internal controls, reviews of our financial statements for interim periods, audits of statutory and other regulatory filings and audits of our internal control over financial reporting. In addition, these amounts include fees for consents and other assistance related to documents filed with the SEC.
[2]
Amounts represent fees for control reviews and the performance of agreed upon procedures.
[3]
Amounts represent fees for research and regulatory reporting compliance software as well as auditor workpaper review.


123

KPMG Fees:
2015
 
2014
Audit fees [1]
$
19,000,000

 
$
—

Audit-related fees
—

 
—

Tax fees
—

 
—

All other fees
—

 
—

Total fees
$
19,000,000

 
$
—

[1]
Amounts represent fees for the annual audits of our financial statements and internal controls, reviews of our financial statements for interim periods, audits of statutory and other regulatory filings and audits of our internal control over financial reporting. In addition, these amounts include fees for consents and other assistance related to documents filed with the SEC.



124

PART IV

Item 15.
Exhibits, Financial Statement Schedules

(a)
Documents filed as part of this Form 10-K include:

1.
Financial Statements. The financial statements listed in Part II of the Table of Contents to this Form 10-K are filed as part of this Form 10-K;
2.
Financial Statement Schedules. All financial statement schedules are omitted as they are not applicable or the information is shown in the consolidated financial statements or notes thereto; and
3.
Exhibits. The exhibits listed under the caption “Exhibit Index” herein are filed as part of this Form 10-K. Exhibit numbers 10.1 through 10.69 are management contracts or compensatory plans or arrangements.

In reliance upon Item 601(b)(4)(iii) of Regulation S-K, we hereby give notice that, in connection with the filing of this Form 10-K, we do not intend to file as exhibits copies of our instruments with respect to long-term debt where the total amount of securities authorized thereunder does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. We hereby agree to furnish a copy of any such instrument to the SEC upon request.



125

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

 
 
 
THE PHOENIX COMPANIES, INC.
 
 
 
(Registrant)
 
 
 
 
Dated:
March 15, 2016
 
By:
/s/ James D. Wehr
 
 
 
James D. Wehr
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
Dated:
March 15, 2016
 
By:
/s/ Bonnie J. Malley
 
 
 
Bonnie J. Malley
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
(Principal Financial Officer)
 
 
 
 
Dated:
March 15, 2016
 
By:
/s/ Ernest M. McNeill, Jr.
 
 
 
Ernest M. McNeill, Jr.
 
 
 
Senior Vice President and Chief Accounting Officer
 
 
 
(Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below, dated March 15, 2016, by the following persons on behalf of the Registrant and in the capacities indicated.

*
 
*
Martin N. Baily, Director
 
Andrew J. McMahon, Director
 
 
 
*
 
*
Arthur P. Byrne, Director
 
Westley V. Thompson, Director
 
 
 
*
 
/s/ James D. Wehr
Sanford Cloud, Jr., Director
 
James D. Wehr, Director
 
 
 
*
 
*
John H. Forsgren, Chairman
 
Arthur F. Weinbach, Director
 
 
 
*
 
 
Ann Maynard Gray, Director
 
 
 
 
 
*By:  /s/ John T. Mulrain
 
 
John T. Mulrain
 
 
Attorney-in-Fact
 
 


126








Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
The Phoenix Companies, Inc.:


We have audited the accompanying consolidated balance sheet of The Phoenix Companies, Inc. and subsidiaries (the Company) as of December 31, 2015, and the related consolidated statements of operations and comprehensive income, changes in stockholders’ equity, and cash flows for the year ended December 31, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Phoenix Companies, Inc. and subsidiaries as of December 31, 2015, and the results of their operations and their cash flows for the year ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The Phoenix Companies Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2016 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.


/s/ KPMG LLP

Hartford, Connecticut
March 15, 2016


F-1







Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of The Phoenix Companies, Inc.:

In our opinion, the consolidated balance sheet as of December 31, 2014 and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for each of two years in the period ended December 31, 2014 present fairly, in all material respects, the financial position of The Phoenix Companies, Inc. and its subsidiaries at December 31, 2014, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
March 15, 2016



F-2

THE PHOENIX COMPANIES, INC.
Consolidated Statements of Operations and Comprehensive Income

 
For the years ended December 31,
($ in millions, except per share data)
2015
 
2014
 
2013
REVENUES:
 
 
 
 
 
Premiums
$
349.1

 
$
332.1

 
$
351.6

Fee income
543.6

 
545.1

 
550.3

Net investment income
834.9

 
830.9

 
789.7

Net realized gains (losses):
 
 
 
 
 
Total other-than-temporary impairment (“OTTI”) losses
(20.8
)
 
(7.7
)
 
(7.0
)
Portion of OTTI losses recognized in other comprehensive income (“OCI”)
(2.0
)
 
(0.4
)
 
(4.8
)
Net OTTI losses recognized in earnings
(22.8
)
 
(8.1
)
 
(11.8
)
Net realized gains (losses), excluding OTTI losses
(10.0
)
 
(33.1
)
 
27.8

Net realized gains (losses)
(32.8
)
 
(41.2
)
 
16.0

Total revenues
1,694.8

 
1,666.9

 
1,707.6

BENEFITS AND EXPENSES:
 
 
 
 
 
Policy benefits
1,186.6

 
1,119.2

 
965.1

Policyholder dividends
211.5

 
244.8

 
235.9

Policy acquisition cost amortization
77.8

 
119.6

 
103.1

Interest expense on indebtedness
28.3

 
28.3

 
28.3

Other operating expenses
349.9

 
350.2

 
337.1

Total benefits and expenses
1,854.1

 
1,862.1

 
1,669.5

Income (loss) from continuing operations before income taxes
(159.3
)
 
(195.2
)
 
38.1

Income tax expense (benefit)
(34.3
)
 
10.5

 
8.5

Income (loss) from continuing operations
(125.0
)
 
(205.7
)
 
29.6

Income (loss) from discontinued operations, net of income taxes
(2.0
)
 
(3.5
)
 
(2.9
)
Net income (loss)
(127.0
)
 
(209.2
)
 
26.7

Less: Net income (loss) attributable to noncontrolling interests
6.7

 
4.0

 
0.7

Net income (loss) attributable to The Phoenix Companies, Inc.
$
(133.7
)
 
$
(213.2
)
 
$
26.0

COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
Net income (loss) attributable to The Phoenix Companies, Inc.
$
(133.7
)
 
$
(213.2
)
 
$
26.0

Net income (loss) attributable to noncontrolling interests
6.7

 
4.0

 
0.7

Net income (loss)
(127.0
)
 
(209.2
)
 
26.7

Other comprehensive income (loss) before income taxes:
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
(107.7
)
 
66.5

 
(62.7
)
Net pension liability adjustment
4.6

 
(80.2
)
 
101.0

Other comprehensive income (loss) before income taxes
(103.1
)
 
(13.7
)
 
38.3

Less: Income tax expense (benefit) related to:
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
(71.3
)
 
35.7

 
(20.5
)
Net pension liability adjustment
—

 
—

 
—

Total income tax expense (benefit)
(71.3
)
 
35.7

 
(20.5
)
Other comprehensive income (loss), net of income taxes
(31.8
)
 
(49.4
)
 
58.8

Comprehensive income (loss)
(158.8
)
 
$
(258.6
)
 
$
85.5

Less: Comprehensive income (loss) attributable to noncontrolling interests
6.7

 
4.0

 
0.7

Comprehensive income (loss) attributable to The Phoenix Companies, Inc.
$
(165.5
)
 
$
(262.6
)
 
$
84.8


(Continued on next page)

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

F-3

THE PHOENIX COMPANIES, INC.
Consolidated Statements of Operations and Comprehensive Income

(Continued from previous page)
For the years ended December 31,
($ in millions, except per share data)
2015
 
2014
 
2013
EARNINGS (LOSS) PER SHARE:
 
 
 
 
 
Income (loss) from continuing operations – basic
$
(22.90
)
 
$
(36.48
)
 
$
5.04

Income (loss) from continuing operations – diluted
$
(22.90
)
 
$
(36.48
)
 
$
5.01

Income (loss) from discontinued operations – basic
$
(0.35
)
 
$
(0.61
)
 
$
(0.51
)
Income (loss) from discontinued operations – diluted
$
(0.35
)
 
$
(0.61
)
 
$
(0.50
)
Net income (loss) attributable to The Phoenix Companies, Inc. – basic
$
(23.25
)
 
$
(37.09
)
 
$
4.53

Net income (loss) attributable to The Phoenix Companies, Inc. – diluted
$
(23.25
)
 
$
(37.09
)
 
$
4.51

Basic weighted-average common shares outstanding (in thousands)
5,751

 
5,748

 
5,735

Diluted weighted-average common shares outstanding (in thousands)
5,751

 
5,748

 
5,764


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


F-4

THE PHOENIX COMPANIES, INC.
Consolidated Balance Sheets

 
As of December 31,
($ in millions, except share data)
2015
 
2014
ASSETS:
 
 
 
Available-for-sale debt securities, at fair value (cost of $11,993.6 and $11,978.0)
$
12,190.7

 
$
12,679.3

Available-for-sale equity securities, at fair value (cost of $154.6 and $156.0)
182.0

 
179.5

Short-term investments
164.8

 
149.7

Limited partnerships and other investments
518.7

 
542.8

Policy loans, at unpaid principal balances
2,382.5

 
2,352.1

Derivative instruments
103.5

 
161.3

Fair value investments
165.0

 
235.4

Total investments
15,707.2

 
16,300.1

Cash and cash equivalents
627.3

 
450.0

Accrued investment income
179.2

 
176.7

Reinsurance recoverable
590.7

 
559.1

Deferred policy acquisition costs
941.1

 
848.6

Deferred income taxes, net
105.5

 
34.2

Other assets
361.7

 
311.3

Discontinued operations assets
42.8

 
45.2

Separate account assets
2,536.4

 
3,020.7

Total assets
$
21,091.9

 
$
21,745.9

 
 
 
 
LIABILITIES:
 
 
 
Policy liabilities and accruals
$
12,342.7

 
$
12,417.6

Policyholder deposit funds
4,333.2

 
3,955.0

Dividend obligations
716.8

 
916.8

Indebtedness
378.9

 
378.9

Pension and post-employment liabilities
361.6

 
380.0

Other liabilities
210.7

 
289.8

Discontinued operations liabilities
37.8

 
40.5

Separate account liabilities
2,536.4

 
3,020.7

Total liabilities
20,918.1

 
21,399.3

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Notes 21, 22 and 23)


 


 
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
Common stock, $.01 par value: 5.8 million and 5.8 million shares outstanding
0.1

 
0.1

Additional paid-in capital
2,632.9

 
2,632.8

Accumulated other comprehensive income (loss)
(266.2
)
 
(234.4
)
Retained earnings (accumulated deficit)
(2,022.7
)
 
(1,889.0
)
Treasury stock, at cost: 0.7 million and 0.7 million shares
(182.9
)
 
(182.9
)
Total The Phoenix Companies, Inc. stockholders’ equity
161.2

 
326.6

Noncontrolling interests
12.6

 
20.0

Total stockholders’ equity
173.8

 
346.6

Total liabilities and stockholders’ equity
$
21,091.9

 
$
21,745.9


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


F-5

THE PHOENIX COMPANIES, INC.
Consolidated Statements of Cash Flows

 
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
OPERATING ACTIVITIES:
 
 
 
 
 
Net income (loss)
$
(133.7
)
 
$
(213.2
)
 
$
26.0

Net realized gains / losses
31.0

 
40.5

 
(20.4
)
Policy acquisition costs deferred
(87.4
)
 
(72.9
)
 
(58.4
)
Policy acquisition cost amortization
77.8

 
119.6

 
103.1

Amortization and depreciation
5.5

 
6.0

 
8.2

Interest credited
137.4

 
151.5

 
139.0

Equity in earnings of limited partnerships and other investments
(55.1
)
 
(59.7
)
 
(58.9
)
Change in:
 
 
 
 
 
Accrued investment income
(112.4
)
 
(109.2
)
 
(86.0
)
Reinsurance recoverable
(27.7
)
 
39.1

 
(8.4
)
Policy liabilities and accruals
(445.3
)
 
(430.9
)
 
(591.8
)
Dividend obligations
41.3

 
72.4

 
57.1

Pension and post-employment liabilities
(13.8
)
 
(13.3
)
 
(14.1
)
Impact of operating activities of consolidated investment entities, net
15.6

 
(33.8
)
 
(2.1
)
Other operating activities, net
(49.7
)
 
3.4

 
60.1

Cash provided by (used for) operating activities
(616.5
)
 
(500.5
)
 
(446.6
)
 
 
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
 
 
Purchases of:
 
 
 
 
 
Available-for-sale debt securities
(2,196.9
)
 
(2,272.6
)
 
(2,460.7
)
Available-for-sale equity securities
(22.5
)
 
(53.6
)
 
(59.6
)
Short-term investments
(763.2
)
 
(1,794.4
)
 
(1,559.7
)
Derivative instruments
(35.5
)
 
(62.7
)
 
(101.9
)
Fair value and other investments
(1.3
)
 
(2.7
)
 
(27.0
)
Sales, repayments and maturities of:
 
 
 
 
 
Available-for-sale debt securities
2,238.3

 
1,651.9

 
2,130.7

Available-for-sale equity securities
19.6

 
21.4

 
13.4

Short-term investments
748.4

 
2,005.9

 
1,909.2

Derivative instruments
21.2

 
96.2

 
49.5

Fair value and other investments
55.1

 
23.8

 
26.6

Contributions to limited partnerships and limited liability corporations
(106.1
)
 
(84.2
)
 
(72.4
)
Distributions from limited partnerships and limited liability corporations
143.4

 
157.1

 
146.8

Policy loans, net
50.4

 
78.0

 
80.8

Impact of investing activities of consolidated investment entities, net
—

 
—

 
—

Other investing activities, net
0.4

 
(8.9
)
 
(10.4
)
Cash provided by (used for) investing activities
151.3

 
(244.8
)
 
65.3


(Continued on next page)

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

F-6

THE PHOENIX COMPANIES, INC.
Consolidated Statements of Cash Flows

(Continued from previous page)
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
FINANCING ACTIVITIES:
 
 
 
 
 
Policyholder deposits
1,456.4

 
1,457.2

 
1,355.0

Policyholder withdrawals
(1,140.6
)
 
(1,200.6
)
 
(1,140.4
)
Net transfers (to) from separate accounts
342.7

 
439.4

 
412.9

Impact of financing activities of consolidated investment entities, net
(14.2
)
 
4.1

 
4.5

Cash provided by (used for) financing activities
644.3

 
700.1

 
632.0

Change in cash and cash equivalents
179.1

 
(45.2
)
 
250.7

Change in cash included in discontinued operations assets
(1.8
)
 
(1.2
)
 
(0.7
)
Cash and cash equivalents, beginning of period
450.0

 
496.4

 
246.4

Cash and cash equivalents, end of period
$
627.3

 
$
450.0

 
$
496.4

Supplemental Disclosure of Cash Flow Information
 
 
 
 
 
Income taxes (paid) refunded
$
(4.8
)
 
$
(0.2
)
 
$
(5.4
)
Interest expense on indebtedness paid
$
(27.9
)
 
$
(27.9
)
 
$
(27.9
)
Non-Cash Transactions During the Period
 
 
 
 
 
Investment exchanges
$
89.4

 
$
93.3

 
$
98.8


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


F-7

THE PHOENIX COMPANIES, INC.
Consolidated Statements of Changes in Stockholders’ Equity

 
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
COMMON STOCK:
 
 
 
 
 
Balance, beginning of period
$
0.1

 
$
0.1

 
$
0.1

Balance, end of period
$
0.1

 
$
0.1

 
$
0.1

 
 
 
 
 
 
ADDITIONAL PAID-IN CAPITAL:
 
 
 
 
 
Balance, beginning of period
$
2,632.8

 
$
2,633.1

 
$
2,633.1

Issuance of shares and compensation expense on stock compensation awards
0.1

 
(0.3
)
 
—

Balance, end of period
$
2,632.9

 
$
2,632.8

 
$
2,633.1

 
 
 
 
 
 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
Balance, beginning of period
$
(234.4
)
 
$
(185.0
)
 
$
(243.8
)
Other comprehensive income (loss)
(31.8
)
 
(49.4
)
 
58.8

Balance, end of period
$
(266.2
)
 
$
(234.4
)
 
$
(185.0
)
 
 
 
 
 
 
RETAINED EARNINGS (ACCUMULATED DEFICIT):
 
 
 
 
 
Balance, beginning of period
$
(1,889.0
)
 
$
(1,675.8
)
 
$
(1,701.8
)
Net income (loss)
(133.7
)
 
(213.2
)
 
26.0

Balance, end of period
$
(2,022.7
)
 
$
(1,889.0
)
 
$
(1,675.8
)
 
 
 
 
 
 
TREASURY STOCK, AT COST:
 
 
 
 
 
Balance, beginning of period
$
(182.9
)
 
$
(182.9
)
 
$
(182.9
)
Treasury shares purchased
—

 
—

 
—

Balance, end of period
$
(182.9
)
 
$
(182.9
)
 
$
(182.9
)
 
 
 
 
 
 
TOTAL STOCKHOLDERS’ EQUITY ATTRIBUTABLE TO
THE PHOENIX COMPANIES, INC.:
 
 
 
 
 
Balance, beginning of period
$
326.6

 
$
589.5

 
$
504.7

Change in stockholders’ equity attributable to The Phoenix Companies, Inc.
(165.4
)
 
(262.9
)
 
84.8

Balance, end of period
$
161.2

 
$
326.6

 
$
589.5

 
 
 
 
 
 
NONCONTROLLING INTERESTS:
 
 
 
 
 
Balance, beginning of period
$
20.0

 
$
11.8

 
$
6.7

Net income (loss) attributable to noncontrolling interests
6.7

 
4.0

 
0.7

Contributions to noncontrolling interests
0.8

 
4.2

 
4.6

Distributions from noncontrolling interests
(14.9
)
 
—

 
(0.2
)
Balance, end of period
$
12.6

 
$
20.0

 
$
11.8

 
 
 
 
 
 
TOTAL STOCKHOLDERS’ EQUITY:
 
 
 
 
 
Balance, beginning of period
$
346.6

 
$
601.3

 
$
511.4

Change in stockholders’ equity
(172.8
)
 
(254.7
)
 
89.9

Balance, end of period
$
173.8

 
$
346.6

 
$
601.3


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

F-8
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements
($ in millions, except per share and per unit data)
For the years ended December 31, 2015, 2014 and 2013




1.
Organization and Description of Business

The Phoenix Companies, Inc. is a holding company for its insurance and financial services subsidiaries, principally Phoenix Life Insurance Company (“Phoenix Life”) and PHL Variable Insurance Company (“PHL Variable”) that provide life insurance and annuity products to both affluent and middle market consumers. Phoenix Life and PHL Variable, collectively with Phoenix Life and Annuity Company (“PLAC”) and American Phoenix Life and Reassurance Company (“APLAR”), are our Life Companies (collectively, with the holding company, “we,” “our,” “us,” the “Company,” “PNX” or “Phoenix”). Our products are distributed through independent agents and financial advisors. Most of our life insurance in force is permanent life insurance insuring one or more lives and our annuity products include fixed and variable annuities with a variety of death benefit and guaranteed living benefit options.

We operate two businesses segments: Life and Annuity and Saybrus Partners, Inc. (“Saybrus”). The Life and Annuity segment includes individual life insurance and annuity products, including our closed block. Saybrus 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.

As a result of discussions with its regulators related to the execution of an intercompany reinsurance treaty between Phoenix Life and PHL Variable during the second quarter of 2015, Phoenix de-stacked its insurance company subsidiaries making PHL Variable, PLAC and APLAR direct subsidiaries of the holding company.

On September 29, 2015, the Company announced the signing of a definitive agreement in which Nassau Reinsurance Group Holdings L.P. (“Nassau”) has agreed to acquire the Company for $37.50 per share in cash, representing an aggregate purchase price of $217.2 million. Founded in April 2015, Nassau is a privately held insurance and reinsurance business focused on acquiring and operating entities in the life, annuity and long-term care sectors. On December 17, 2015 the merger was approved by Phoenix shareholders. The transaction remains subject to regulatory approvals and the satisfaction of other closing conditions. After completion of the transaction, Nassau will contribute $100 million in new equity capital into the Company. After completion of the transaction, Phoenix will be a privately held, wholly-owned subsidiary of Nassau.


2.
Basis of Presentation and Significant Accounting Policies

We have prepared these consolidated financial statements in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), which differs materially from the accounting practices prescribed by various insurance regulatory authorities. Our consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidating these financial statements.

Use of estimates

In preparing these consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions are made in the determination of estimated gross profits (“EGPs”) and estimated gross margins (“EGMs”) 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 and equity securities; limited partnerships and other investments; valuation of deferred tax assets; pension and other post-employment benefits liabilities; and accruals for contingent liabilities. Certain of these estimates are particularly sensitive to market conditions and/or volatility in the debt or equity markets which could have a material impact on the consolidated financial statements. Actual results could differ from these estimates.


F-9
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)

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


Holding company liquidity

The Phoenix Companies, Inc. serves as the holding company for our insurance subsidiaries and does not have any significant operations of its own. As of December 31, 2015 and 2014, liquidity (cash, short-term investments, available-for-sale debt securities and other near-cash assets, net of contributions payable to subsidiaries) totaled $65.8 million and $78.3 million, respectively.

In addition to existing cash and securities, the holding company’s primary source of liquidity consists of dividends from Phoenix Life. Dividends from Phoenix Life are limited under the insurance company laws of New York. See Note 20 to these consolidated financial statements for additional information. As a result of the execution of an intercompany reinsurance treaty between Phoenix Life and PHL Variable during the second quarter of 2015, Phoenix agreed it will not use any future dividends paid by Phoenix Life to meet the operating needs of PHL Variable, including $30.0 million of dividends declared subsequent to June 30, 2015. In 2016, Phoenix Life is permitted to pay dividends of $37.2 million. During the year ended December 31, 2015, Phoenix Life declared and paid $59.9 million in dividends. PHL Variable does not have any dividend capacity in 2016.

Our principal needs at the holding company level are debt service, income taxes and certain operating expenses.

•
We pay interest on senior unsecured bonds. Interest paid on senior unsecured bonds for the years ended December 31, 2015, 2014 and 2013 was $20.0 million, $20.0 million and $20.0 million, respectively. As of December 31, 2015, future minimum annual principal payments on senior unsecured bonds are $268.6 million in 2032. See Note 8 to these consolidated financial statements for additional information.
•
The holding company and its subsidiaries have a tax sharing agreement. The subsidiaries compute their provision for federal income taxes as if they were filing a separate federal income tax return. There are quarterly settlements among the companies representing both the subsidiaries estimated separate company tax liability for the current tax year and any amount that such subsidiaries overpaid to the holding company for a taxable year. As part of the intercompany tax sharing agreement, the holding company is required to hold funds in escrow for the benefit of Phoenix Life in the event Phoenix Life incurs future taxable losses. In accordance with its regulatory obligation, in October 2015, the Company funded the escrow with $76.2 million of assets, including treasury stock, a surplus note issued by PHL Variable and $23.8 million of cash from the holding company.
•
The holding company pays operating expenses associated with its operation. It has also paid the majority of the expenses associated with prior restatements of the Company’s financial statements. Holding company operating expenses for the years ended December 31, 2015, 2014 and 2013 were $30.6 million, $102.6 million and $70.7 million, respectively. There are expense sharing arrangements in place among the holding company and its operating subsidiaries. However, given unique circumstances regarding the historical restatements of the Company’s financial statements, management determined it was in the best interest of the Company that the majority of these costs be borne by the holding company.

The holding company also provides capital support to its operating subsidiaries. Management targets a minimum Company Action Level risk-based capital (“RBC”) ratio of 200% (Authorized Control Level ratio of 400%) at PHL Variable. As of December 31, 2015, PHL Variable had an RBC ratio of 200%, compared with 218% as of December 31, 2014. As a result of the de-stacking, an existing commitment by Phoenix Life to keep PHL Variable’s capital and surplus at 250% of Authorized Control Level RBC (125% Company Action Level) was extinguished. PHL Variable’s statutory capital and surplus reflects the benefit of $33.1 million and $15.0 million of capital contributions in 2015 and 2014, respectively, and Phoenix may need to make additional capital contributions in the future.

The need for additional capital contributions to operating subsidiaries or an inability to reduce expenses at the holding company could constrain the ability of the holding company to meet its debt obligations. Based on management’s review of the holding company’s liquidity position, we believe it can continue to meet its liquidity obligations in the holding company through 2016 and beyond.


F-10
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)

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


Adoption of new accounting standards

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity

In April 2014, the Financial Accounting Standards Board (the “FASB”) issued updated guidance that changes the criteria for reporting discontinued operations and introduces new financial statement disclosures. The new guidance is effective prospectively to new disposals and new classifications of disposal groups as held for sale that occur within annual periods beginning on or after December 15, 2014 and interim periods within those annual periods. This new guidance did not have any impact on the Company’s consolidated financial position, results of operations and financial statement disclosures.

Accounting for Troubled Debt Restructurings by Creditors

In January 2014, the FASB issued updated guidance for troubled debt restructurings clarifying when an in substance repossession or foreclosure occurs, and when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The new guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. This new guidance did not have a material impact on the Company’s consolidated financial position, results of operations and financial statement disclosures.

Accounting for Investments in Qualified Affordable Housing Projects

In January 2014, the FASB issued updated guidance regarding investments in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. Under the guidance, an entity is permitted to make an accounting policy election to amortize the initial cost of its investment in proportion to the tax credits and other tax benefits received and recognize the net investment performance in the statement of operations as a component of income tax expense (benefit) if certain conditions are met. The new guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. This new guidance did not have a material impact on the Company’s consolidated financial position, results of operations and financial statement disclosures.

Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or Tax Credit Carryforward Exists

In July 2013, the Financial Accounting Standards Board (the “FASB”) issued updated guidance regarding the presentation of unrecognized tax benefits when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. This new guidance was effective for interim or annual reporting periods beginning after December 15, 2013. This new guidance did not have a material impact on the Company’s consolidated financial position, results of operations and financial statement disclosures.

Investment Companies: Amendments to the Scope, Measurement and Disclosure Requirements

In June 2013, the FASB issued updated guidance clarifying the characteristics of an investment company and requiring new disclosures. This new guidance was effective for interim or annual reporting periods beginning after December 15, 2013. Under the guidance, all entities regulated under the Investment Company Act of 1940 automatically qualify as investment companies, while all other entities need to consider both the fundamental and typical characteristics of an investment company in determining whether they qualify as investment companies. This new guidance did not have a material impact on the Company’s consolidated financial position, results of operations and financial statement disclosures.


F-11
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)

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


Obligations Resulting for Joint and Several Liability Agreements for Which the Total Amount of the Obligation is Fixed at the Reporting Date

In February 2013, the FASB issued new guidance regarding liabilities effective retrospectively for fiscal years beginning after December 15, 2013 and interim periods within those years. The amendments require an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. In addition, the amendments require an entity to disclose the nature and amount of the obligation, as well as other information about the obligation. This new guidance did not have a material impact on the Company’s consolidated financial position, results of operations and financial statement disclosures.

Accounting standards not yet adopted

Leases

In February 2016, the FASB issued updated guidance to improve financial reporting about leasing transactions. The guidance requires lessees to recognize the assets and liabilities arising from leases on the balance sheet. For public business entities, the guidance is effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within the annual reporting period. The Company is currently assessing the impact of the guidance on its consolidated financial position, results of operations and financial statement disclosures.

Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued updated guidance affecting the accounting for equity investments, financial liabilities under the fair value options, and the presentation and disclosure requirements for financial instruments. In addition, the update clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. This new guidance may impact our ability to consider our existing deferred tax assets realizable. The impact will depend on the composition of the Company’s investment portfolio in the future and changes in fair value of the Company’s investments. For public business entities, the amendments in the update are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim period within those annual periods. The Company is currently assessing the impact of the guidance on its consolidated financial position, results of operations and financial statement disclosures.

Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments

In September 2015, the FASB issued guidance that eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The guidance requires that an entity present separately on the face of the income statements, or disclose in the notes, the portion of the amount recorded in current period earnings by line item that would have been recorded in previous reporting periods if the adjustment to provisional amounts had been recognized as of the acquisition date.

For public business entities, the guidance is effective for annual reporting periods beginning after December 15, 2015, including interim reporting periods within the annual reporting period. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The Company is currently assessing the impact of the guidance on its consolidated financial position, results of operations and financial statement disclosures.


F-12
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)

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


Disclosures about Short-Duration Contracts

In May 2015, the FASB issued guidance which requires enhanced disclosure requirements for insurers relating to short-duration insurance contracts including claims and the unpaid claims liability rollforward to interim periods. For public business entities, the guidance is effective for annual reporting periods beginning after December 15, 2015 and interim reporting periods within the annual reporting period beginning after December 15, 2016. Early adoption is permitted. The Company is currently assessing the impact of the guidance on its consolidated financial position, results of operations and financial statement disclosures.

Fair Value Measurement: Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent)

In May 2015, the FASB issued guidance for investments measured at net asset value (“NAV”), as a practical expedient for fair value, to be excluded from the fair value hierarchy. The new guidance requires reporting entities to reconcile the fair value hierarchy disclosure to the balance sheet by disclosing the amount of investments measured using the practical expedient and to make certain disclosures about the nature and risks of those investments. If the NAV is actually at fair value, then a reporting entity would continue to include the investment in the fair value hierarchy and make all required fair value disclosures. For public business entities, the guidance is effective for annual reporting periods beginning after December 31, 2015, including interim reporting periods within the annual reporting period. The new guidance is retrospective to all periods presented and early adoption is permitted. The Company is currently assessing the impact of the guidance on its consolidated financial position, results of operations and financial statement disclosures.

Customer’s Accounting for Fees Paid in a Cloud Computing Agreement

In April 2015, the FASB issued new guidance on a customer’s accounting for fees paid in a cloud computing arrangement (“CCA”). Under the new guidance, customers will apply the same criteria as vendors to determine whether a CCA contains a software license or is solely a service contract. The new guidance provides guidance on which existing accounting model should be applied. For public business entities, the guidance is effective for annual reporting periods beginning after December 15, 2015, including interim reporting periods within the annual reporting period. Early adoption is permitted. The Company is currently assessing the impact of the guidance on its consolidated financial position, results of operations and financial statement disclosures.

Retirement Benefits - Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Assets

In April 2015, the FASB issued guidance for a practical expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Assets. For an entity with a fiscal year-end that does not coincide with a month-end, the new guidance provides for a practical expedient that permits the entity to measure defined benefit assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. In addition, for a significant event such as a plan amendment, settlement or curtailment, the new guidance provides for a practical expedient that permits the entity to remeasure the defined benefit plan assets and obligations using the month-end that is closest to the date of the significant event. An entity is required to disclose the accounting policy election and the date used to measure the defined benefit assets and obligations in accordance with this new guidance. For public business entities, the guidance is effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods within the annual reporting period. Early adoption is permitted and the new guidance should be applied prospectively. The Company is currently assessing the impact of the guidance on its consolidated financial position, results of operations and financial statement disclosures.

Interest - Imputation of Interest (Simplifying the Presentation of Debt Issuance Costs)

In April 2015, the FASB issued guidance that changes the presentation of debt issuance costs in financial statements. Under the new guidance, a company would present debt issuance costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. The recognition and measurement of debt issuance costs is not affected by the new guidance. For revolving debt arrangements, this guidance allows an entity to continue deferring and presenting such costs as an asset and subsequently amortizing them ratably over the term of the revolving debt arrangement.


F-13
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)

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


For public entities, this guidance is effective for annual reporting periods beginning after December 15, 2015, including interim reporting periods within the annual reporting period. Early adoption is allowed for all entities for financial statements that have not been previously issued. Entities would apply the new guidance retrospectively to all prior periods. The Company is currently assessing the impact of the guidance on its consolidated financial position, results of operations and financial statement disclosures.

Amendments to Consolidation Guidance

In February 2015, the FASB issued updated consolidation guidance. The amendments revise existing guidance for when to consolidate variable interest entities (“VIEs”) and general partners’ investments in limited partnerships, end the deferral granted for applying the VIE guidance to certain investment companies, and reduce the number of circumstances where a decision maker’s or service provider’s fee arrangement is deemed to be a variable interest in an entity. The updates also modify consolidation guidance for determining whether limited partnerships are VIEs or voting interest entities. This guidance is effective for years beginning after December 31, 2015, and may be applied fully retrospectively or through a cumulative effect adjustment to retain earnings as of the beginning of the year of adoption. The Company is currently assessing the impact of the guidance on its consolidated financial position, results of operations and financial statement disclosures.

Income Statement - Extraordinary and Unusual Items

In January 2015, the FASB issued new guidance regarding extraordinary items which eliminates the U.S. GAAP concept of an extraordinary item. As a result, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; and (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. However, the ASU does not affect the reporting and disclosure requirements for an event that is unusual in nature or that occurs infrequently. The ASU is effective for annual periods beginning after December 15, 2015, and interim periods within those annual periods. Early adoption is permitted if the guidance is applied as of the beginning of the annual period of adoption. The Company is currently assessing the impact of the guidance on its consolidated financial position, results of operations and financial statement disclosures.

Presentation of Financial Statements - Going Concern

In August 2014, the FASB issued guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The new guidance applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company is currently assessing the impact of the guidance on its consolidated financial position, results of operations and financial statement disclosures.

Consolidation - Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity

In August 2014, the FASB issued guidance allowing (i.e., not requiring) a reporting entity to measure the financial assets and financial liabilities of a consolidated collateralized financing entity, within the scope of the new guidance, based on either the fair value of the financial assets or financial liabilities, whichever is more observable (referred to as a “measurement alternative”). The new guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 for public business entities. Early adoption will be permitted. The Company is currently assessing the impact of the guidance on its consolidated financial position, results of operations and financial statement disclosures.

Revenue from Contracts with Customers

In May 2014, the FASB issued updated guidance on accounting for revenue recognition. The guidance is based on the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from cost incurred to obtain or fulfill a contract. Revenue recognition for insurance contracts is explicitly scoped out of the guidance.

F-14
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)

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


In August 2015, the FASB issued guidance which defers the effective date for Revenue from Contracts with Customers for all entities. For public business entities, the guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within the annual reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently assessing the impact of the guidance on its consolidated financial position, results of operations and financial statement disclosures.

Significant accounting policies

Investments

Debt and Equity Securities

Our debt securities classified as available-for-sale include bonds, structured securities and redeemable preferred stock. These investments, along with certain equity securities, which include common and non-redeemable preferred stocks, are reported on our consolidated balance sheets at fair value. Fair value is based on quoted market price, where available. When quoted market prices are not available, we estimate fair value by discounting debt security cash flows to reflect interest rates currently being offered on similar terms to borrowers of similar credit quality (private placement debt securities), by quoted market prices of comparable instruments (untraded public debt securities) and by independent pricing sources or internally developed pricing models. We recognize unrealized gains and losses on investments in debt and equity securities that we classify as available-for-sale. We report these unrealized investment gains and losses as a component of OCI. Realized investment gains and losses are recognized on a first in first out basis.

Limited Partnerships and Other Investments

Limited partnerships including private equity and mezzanine funds, infrastructure funds, hedge funds, joint venture interests and direct equity investments in which we do not have voting control or power to direct activities are recorded using the equity method of accounting. The equity method of accounting requires that the investment be initially recorded at cost and the carrying amount of the investment subsequently adjusted to recognize our share of the earnings or losses. We record our equity in the earnings in net investment income using the most recent financial information received from the partnerships. Recognition of net investment income is generally on a three-month delay due to the timing of the related financial statements. The contributions to and distributions from limited partnerships and other investments are classified as investing activities within the statement of cash flows.

The Company routinely evaluates these investments for impairments. For equity method investees, the Company considers financial and other information provided by the investee, other known information and inherent risks in the underlying investments, as well as future capital commitments, in determining whether an impairment has occurred. When an other-than-temporary impairment (“OTTI”) has occurred, the impairment loss is recorded within net investment gains (losses).

Other investments also include leveraged lease investments which represent the net amount of the estimated residual value of the lease assets, rental receivables and unearned and deferred income to be allocated over the lease term. Prior to the fourth quarter of 2015, it further included investments in life settlement contracts accounted for under the investment method under which the Company recognizes its initial investment in life settlement contracts at the transaction price plus all initial direct external costs. Continuing costs to keep the policy in force comprising mainly life insurance premiums, increase the carrying value of the investment while income on individual life settlement contracts are recognized when the insured dies, at an amount equal to the excess of the contract proceeds over the carrying amount of the contract at that time. Contracts were reviewed annually for indications that the expected future proceeds from the contract would not be sufficient to recover estimated future carrying amount of the contract (current carrying amount for the contract plus anticipated undiscounted future premiums and other capitalizable future costs.) Any such contracts identified are written down to estimated fair value. During the second quarter of 2015, as a result of plans to sell or liquidate the life settlement contracts, the Company recorded the life settlement contracts at fair value. In December 2015, the life settlement contracts were sold. See Note 7 to these consolidated financial statements for additional information.


F-15
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)

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


Loans are occasionally restructured in a troubled debt restructuring. These restructurings generally include one or more of the following: full or partial payoffs outside of the original contract terms; changes to interest rates; extensions of maturity; or additions or modifications to covenants. When restructurings occur, they are evaluated individually to determine whether the restructuring or modification constitutes a “troubled debt restructuring” as defined by authoritative accounting guidance. In a troubled debt restructuring where the Company receives assets in full or partial satisfaction of the debt, any specific valuation allowance is reversed and a direct write down of the loan is recorded for the amount of the allowance and any additional loss, net of recoveries, or any gain is recorded for the difference between the fair value of the assets received and the recorded investment in the loan. Any remaining loan is evaluated prospectively for impairment based on the credit review process noted above. When a loan is restructured in a troubled debt restructuring, the impairment of the loan is remeasured using the modified terms and the loan’s original effective yield and the allowance for loss is adjusted accordingly. Subsequent to the modification, income is recognized prospectively based on the modified terms of the loans in accordance with the income recognition policy noted above.

The consolidated financial statements include investments in limited partnerships, certain of which qualify as VIEs. We consolidate those limited partnerships which were determined to be VIEs when we are the primary beneficiary.

See Note 7 to these consolidated financial statements for additional information regarding VIEs.

Policy Loans

Policy loans are carried at their unpaid principal balances and are collateralized by the cash values of the related policies. The majority of policy loans are at variable interest rates that are reset annually on the policy anniversary.

Fair Value Instruments

Debt securities held at fair value include securities held for which changes in fair values are recorded in earnings. The securities held at fair value are designated as trading securities, as well as those debt securities for which we have elected the fair value option (“FVO”) and certain available-for-sale structured securities held at fair value. The changes in fair value and any interest income of these securities are reflected in earnings as part of “net investment income.” See Note 12 to these consolidated financial statements for additional disclosures related to these securities.

Derivative Instruments

We recognize derivative instruments on the consolidated balance sheets at fair value. The derivative contracts are reported as assets in derivative instruments or liabilities in other liabilities on the consolidated balance sheets, excluding embedded derivatives. Embedded derivatives, as discussed below, are recorded on the consolidated balance sheets bifurcated from the associated host contract.

The Company economically hedges variability of cash flows to be received or paid related to certain recognized assets and/or liabilities. All changes in the fair value of derivatives, including net receipts and payments, are included in net realized investment gains and losses without consideration of changes in the fair value of the economically associated assets or liabilities. We do not designate the purchased derivatives related to living benefits or index credits as hedges for accounting purposes.

Short-Term Investments

Short-term investments include securities with a maturity of one year or less but greater than three months at a time of purchase and are stated at estimated fair value or amortized cost, which approximates estimated fair value.


F-16
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)

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


Net Investment Income

For asset-backed and fixed maturity debt securities, we recognize interest income using a constant effective yield based on estimated cash flow timing and economic lives of the securities. For high credit quality asset-backed securities, effective yields are recalculated based on actual payments received and updated prepayment expectations, and the amortized cost is adjusted to the amount that would have existed had the new effective yield been applied since acquisition with a corresponding charge or credit to net investment income. For asset-backed securities that are not high credit quality, effective yields are recalculated and adjusted prospectively based on changes in expected undiscounted future cash flows. For certain credit impaired asset-backed securities, effective yields are recalculated and adjusted prospectively to reflect significant increases in undiscounted expected future cash flows and changes in the contractual benchmark interest rate on variable rate securities. Any prepayment fees on fixed maturities and mortgage loans are recorded when earned in net investment income. We record the net income from investments in partnerships and joint ventures in net investment income.

Other-Than-Temporary Impairments on Available-For-Sale Securities

We recognize realized investment losses when declines in fair value of debt and equity securities are considered to be an OTTI.

For debt securities, the other-than-temporarily impaired amount is separated into the amount related to a credit loss and is reported as net realized investment losses included in earnings and any amounts related to other factors are recognized in OCI. The credit loss component represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. Any remaining difference between the fair value and amortized cost is recognized in AOCI. Subsequent to the recognition of an OTTI, the impaired security is accounted for as if it had been purchased on the date of impairment at an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. We will continue to estimate the present value of future expected cash flows and, if significantly greater than the new cost basis, we will accrete the difference as investment income on a prospective basis once the Company has determined that the interest income is likely to be collected.

In evaluating whether a decline in value is other-than-temporary, we consider several factors including, but not limited to, the following:

•
the extent and the duration of the decline;
•
the reasons for the decline in value (credit event, interest related or market fluctuations);
•
our intent to sell the security, or whether it is more likely than not that we will be required to sell it before recovery; and
•
the financial condition and near term prospects of the issuer.

An impairment of a debt security, or certain equity securities with debt-like characteristics, is deemed other-than-temporary if:

•
we either intend to sell the security, or it is more likely than not that we will be required to sell the security before recovery; or
•
it is probable we will be unable to collect cash flows sufficient to recover the amortized cost basis of the security.

An equity security impairment is deemed other-than-temporary if:

•
the security has traded at a significant discount to cost for an extended period of time; or
•
we determined we may not realize the full recovery on our investment.

Equity securities are determined to be other-than-temporarily impaired based on management judgment and the consideration of the issuer’s financial condition along with other relevant facts and circumstances. Those securities which have been in a continuous decline for over twelve months and declines in value that are severe and rapid are considered for reasonability of whether the impairment would be temporary. Although there may be sustained losses for over twelve months or losses that are severe and rapid, additional information related to the issuer performance may indicate that such losses are not other-than-temporary.


F-17
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)

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


Impairments due to deterioration in credit that result in a conclusion that the present value of cash flows expected to be collected will not be sufficient to recover the amortized cost basis of the security are considered other-than-temporary. Other declines in fair value (for example, due to interest rate changes, sector credit rating changes or company-specific rating changes) that result in a conclusion that the present value of cash flows expected to be collected will not be sufficient to recover the amortized cost basis of the security may also result in a conclusion that an OTTI has occurred.

On a quarterly basis, we evaluate securities in an unrealized loss position for potential recognition of an OTTI. In addition, we maintain a watch list of securities in default, near default or otherwise considered by our investment professionals as being distressed, potentially distressed or requiring a heightened level of scrutiny. We also identify securities whose fair value has been below amortized cost on a continuous basis for zero to six months, six months to 12 months and greater than 12 months.

We employ a comprehensive process to determine whether or not a security in an unrealized loss position is other-than-temporarily impaired. This assessment is done on a security-by-security basis and involves significant management judgment. The assessment of whether impairments have occurred is based on management’s evaluation of the underlying reasons for the decline in estimated fair value. The Company’s review of its fixed maturity and equity securities for impairments includes an analysis of the total gross unrealized losses by severity and/or age of the gross unrealized loss. An extended and severe decline in value on a fixed maturity security may not have any impact on the ability of the issuer to service all scheduled interest and principal payments and the Company’s evaluation of recoverability of all contractual cash flows or the ability to recover an amount at least equal to its amortized cost based on the present value of the expected future cash flows to be collected. In contrast, for certain equity securities, greater weight and consideration are given by the Company to an extended decline in market value and the likelihood such market value decline will recover.

Specifically for structured securities, to determine whether a collateralized security is impaired, we obtain underlying data from the security’s trustee and analyze it for performance trends. A security-specific stress analysis is performed using the most recent trustee information. This analysis forms the basis for our determination of the future expected cash flows to be collected for the security.

The closed block policyholder dividend obligation, applicable DAC and applicable income taxes, which offset realized investment gains and losses and OTTIs, are each reported separately as components of net income.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, amounts due from banks, money market instruments and other debt instruments with original maturities of three months or less. Negative cash balances are reclassified to other liabilities.

Deferred Policy Acquisition Costs

We defer incremental direct costs related to the successful sale of new or renewal contracts. Incremental direct costs are those costs that result directly from and are essential to the sale of a contract. These costs include principally commissions, underwriting and policy issue expenses, and certain other expenses that are directly related to successfully issued contracts.

We amortize DAC based on the related policy’s classification. For individual participating life insurance policies, DAC is amortized in proportion to EGMs arising principally from investment results, mortality, dividends to policyholders and expense margins. For universal life, variable universal life and deferred annuities, DAC is amortized in proportion to EGPs as discussed more fully below. EGPs are also used to amortize other assets and liabilities in the Company’s consolidated balance sheets, such as sales inducement assets (“SIA”) and unearned revenue reserves (“URR”). Components of EGPs are used to determine reserves for universal life and fixed, indexed and variable annuity contracts with death and other insurance benefits such as guaranteed minimum death and guaranteed minimum income benefits. Both EGMs and EGPs are based on historical and anticipated future experience which is updated periodically.

In addition, DAC is adjusted through OCI each period as a result of unrealized gains or losses on securities classified as available-for-sale in a process commonly referred to as shadow accounting. This adjustment is required in order to reflect the impact of these unrealized amounts as if these unrealized amounts had been realized.


F-18
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)

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


The projection of EGPs and EGMs requires the extensive use of actuarial assumptions, estimates and judgments about the future. Future EGPs and EGMs are generally projected for the estimated lives of the contracts. Assumptions are set separately for each product and are reviewed at least annually based on our current best estimates of future events. The following table summarizes the most significant assumptions used in the categories set forth below:

Significant Assumption
 
Product
 
Explanation and Derivation
 
 
 
 
 
Separate account investment return
 
Variable Annuities
(7.7% long-term return assumption)
Variable Universal Life
(7.9% long-term return assumption)
 
Separate account return assumptions are derived from the long-term returns observed in the asset classes in which the separate accounts are invested. Short-term deviations from the long-term expectations are expected to revert to the long-term assumption over five years.
 
 
 
 
 
Interest rates and default rates
 
Fixed and Indexed Annuities
Universal Life
Participating Life
 
Investment returns are based on the current yields and maturities of our fixed income portfolio combined with expected reinvestment rates from current market rates. Reinvestment rates are assumed to revert to long-term rates and long-term default rates over the mean reversion period. Contractually permitted future changes in credited rates are assumed to help support investment margins.
 
 
 
 
 
Mortality / longevity
 
Universal Life
Variable Universal Life
Fixed and Indexed Annuities
Participating Life
 
Mortality assumptions are based on Company experience over a rolling five-year period plus supplemental data from industry sources and trends. A mortality improvement assumption is also incorporated into the overall mortality table. These assumptions can vary by issue age, gender, underwriting class and policy duration.
 
 
 
 
 
Policyholder behavior – policy persistency
 
Universal Life
Variable Universal Life
Variable Annuities
Fixed and Indexed Annuities
Participating Life
 
Policy persistency assumptions vary by product and policy year and are updated based on recently observed experience. Policyholders are generally assumed to behave rationally; hence rates are typically lower when surrender penalties are in effect or when policy benefits are more valuable.
 
 
 
 
 
Policyholder behavior – premium persistency
 
Universal Life
Variable Universal Life
 
Future premiums and related fees are projected based on contractual terms, product illustrations at the time of sale and expected policy lapses without value. Assumptions are updated based on recently observed experience and include anticipated changes in behavior based on changes in policy charges if the Company has a high degree of confidence that such changes will be implemented (e.g., change in cost of insurance (“COI”) charges).
 
 
 
 
 
Expenses
 
All products
 
Projected maintenance expenses to administer policies in force are based on annually updated studies of expenses incurred.
 
 
 
 
 
Reinsurance costs / recoveries
 
Universal Life
Variable Universal Life
Variable Annuities
Participating Life
 
Projected reinsurance costs are based on treaty terms currently in force. Recoveries are based on the Company’s assumed mortality and treaty terms. Treaty recaptures are based on contract provisions and management’s intentions.


F-19
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)

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


Annually, we complete a comprehensive assumption review where management makes a determination of best estimate assumptions based on a comprehensive review of recent experience and industry trends. Assumption changes resulting from this review may change our estimates of EGPs in the DAC, SIA, and URR models, as well as projections within the death benefit and other insurance benefit reserving models, the profits followed by losses reserve models, and cost of reinsurance models. Throughout the year, we may also update the assumptions and adjust these balances if emerging data indicates a change is warranted. All assumption changes, whether resulting from the annual comprehensive review or from other periodic assessments, are considered an unlock in the period of revision and adjust the DAC, SIA, URR, death and other insurance benefit reserves, profits followed by losses reserve, and cost of reinsurance balances in the consolidated balance sheets with an offsetting benefit or charge to income to reflect such changes in the period of the revision. An unlock that results in an after-tax benefit generally occurs as a result of actual experience or future expectations of product profitability being more favorable than previous estimates. An unlock that results in an after-tax charge generally occurs as a result of actual experience or future expectations of product profitability being less favorable than previous estimates.

Our process to assess the reasonableness of the EGPs uses internally developed models together with consideration of applicable recent experience and analysis of market and industry trends and other events. Actual gross profits that vary from management’s estimates in a given reporting period may also result in increases or decreases in the rate of amortization recorded in the period.

An analysis is performed annually to assess if there are sufficient gross profits to recover the DAC associated with business written during the year. If the estimates of gross profits cannot support the recovery of DAC, the amount deferred is reduced to the recoverable amount.

The Company has updated a number of assumptions that have resulted in changes to expected future gross profits. The most significant assumption updates made over the last several years resulting in a change to future gross profits and the amortization of DAC, SIA and URR, as well as changes in PFBL and guaranteed benefit liabilities, are related to long-term expected mortality improvement; changes in expected premium persistency; changes in expected separate account investment returns due to changes in equity markets; changes in expected future interest rates and default rates based on continued experience and expected interest rate changes; changes in lapses and other policyholder behavior assumptions that are updated to reflect more recent policyholder and industry experience; and changes in expected policy administration expenses.

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 DAC. The Company unlocks the assumptions used in the amortization of the deferred sales inducement assets consistent with the unlock of assumptions used in determining EGPs. Deferred sales inducements are included in other assets on the consolidated balance sheets and amortization of deferred sales inducements is included in other operating expense on the consolidated statements of operations and comprehensive income.

Premises and equipment

Premises and equipment, consisting primarily of our main office building, are stated at cost less accumulated depreciation and amortization and are included in other assets. We depreciate the building on the straight-line method over 39 years and equipment on the straight-line method over three to seven years. We amortize leasehold improvements over the terms of the related leases or the useful life of the improvement, whichever is shorter.

Separate account assets and liabilities

Separate account assets related to policyholder funds are carried at fair value with an equivalent amount recorded as separate account liabilities. Deposits, net investment income and realized investment gains and losses for these accounts are excluded from revenues and the related liability increases are excluded from benefits and expenses. Fees assessed to the contract owners for management services are included in revenues when services are rendered.


F-20
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)

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


Policy liabilities and accruals

Policy liabilities and accruals include future benefit liabilities for certain life and annuity products. We establish liabilities in amounts adequate to meet the estimated future obligations of policies in force. Future benefit liabilities for traditional life insurance are computed using the net level premium method on the basis of actuarial assumptions as to mortality rates guaranteed in calculating the cash surrender values described in such contracts, contractual guaranteed rates of interest which range from 2.3% to 6.0% and morbidity. Participating insurance represented 20.3% and 20.7% of direct individual life insurance in force at December 31, 2015 and 2014, respectively.

Generally, future policy benefits are payable over an extended period of time and related liabilities are calculated recognizing future expected benefits, expenses and premiums. Such liabilities are established based on methods and underlying assumptions in accordance with U.S. GAAP and applicable actuarial standards. Principal assumptions used in the establishment of liabilities for future policy benefits are mortality, morbidity, policyholder behavior, investment returns, inflation, expenses and other contingent events as appropriate. These assumptions are intended to estimate the experience for the period the policy benefits are payable. Utilizing these assumptions, liabilities are established on a cohort basis, as appropriate. If experience is less favorable than assumed, additional liabilities may be established, resulting in a charge to policyholder benefits and claims.

Additional policyholder liabilities for guaranteed benefits on variable annuity and on fixed index annuity contracts are based on estimates of the expected value of benefits in excess of the projected account balance, recognizing the excess over the accumulation period based on total expected assessments. Because these estimates are sensitive to capital market movements, amounts are calculated using multiple future economic scenarios.

Additional policyholder liabilities are established for certain contract features on universal life and variable universal life products that could generate significant reductions to future gross profits (e.g., death benefits when a contract has zero account value and a no-lapse guarantee). The liabilities are accrued over the lifetime of the block based on assessments. The assumptions used in estimating these liabilities are consistent with those used for amortizing DAC and are, thus, subject to the same variability and risk. The assumptions of investment performance and volatility for variable and equity index products are consistent with historical experience of the appropriate underlying equity indices.

We expect that our universal life block of business will generate profits followed by losses and therefore we establish an additional liability to accrue for the expected losses over the period of expected profits. The assumptions used in estimating these liabilities are consistent with those used for amortizing DAC and are subject to the same variability and risk and the results are very sensitive to interest rates.

The liability for universal life-type contracts primarily includes the balance that accrues to the benefit of the policyholders as of the financial statement date, including interest credited at rates which range from 3.0% to 4.5%, amounts that have been assessed to compensate us for services to be performed over future periods, accumulated account deposits, withdrawals and any amounts previously assessed against the policyholder that are refundable. There may also be a liability recorded for contracts that include additional death or other insurance benefit features as discussed above.

The Company periodically reviews its estimates of actuarial liabilities for policyholder benefits and compares them with its actual experience. Differences between actual experience and the assumptions used in pricing these policies and guarantees, as well as in the establishment of the related liabilities, result in variances in profit and could result in losses.

Policy liabilities and accruals also include liabilities for outstanding claims, losses and loss adjustment expenses based on individual case estimates for reported losses and estimates of unreported losses based on past experience. The Company does not establish claim liabilities until a loss has occurred. However, unreported losses and loss adjustment expenses includes estimates of claims that the Company believes have been incurred but have not yet been reported as of the balance sheet date.

Embedded derivatives

Certain contracts contain guarantees that are accounted for as embedded derivative instruments. These guarantees are assessed to determine if a separate instrument with the same terms would qualify as a derivative and if they are not clearly and closely related to the economic characteristics of the host contract. Contract guarantees that meet these criteria are reported separately from the host contract and reported at fair value.


F-21
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)

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


The guaranteed minimum withdrawal benefit (“GMWB”), guaranteed minimum accumulation benefit (“GMAB”) and combination rider (“COMBO”) represent embedded derivative liabilities in the variable annuity contracts. These liabilities are accounted for at fair value within policyholder deposit funds on the consolidated balance sheets with changes in the fair value of embedded derivatives recorded in realized investment gains on the consolidated statements of operations and 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.

Fixed indexed annuities offer a variety of index 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 accounted for at fair value within policyholder deposit funds on the consolidated balance sheets with changes in fair value recorded in realized investment gains and losses in the consolidated statements of operations and comprehensive income. The fair value of these index options is based on the impact of projected interest rates and equity markets and is discounted using the projected interest rate. Several additional inputs reflect our internally developed assumptions related to lapse rates and policyholder behavior.

See Note 10 to these consolidated financial statements for additional information regarding embedded derivatives.

Policyholder deposit funds

Amounts received as payment for certain deferred annuities and other contracts without life contingencies are reported as deposits to policyholder deposit funds. The liability for deferred annuities and other contracts without life contingencies is equal to the balance that accrues to the benefit of the contract owner as of the financial statement date which includes the accumulation of deposits plus interest credited, less withdrawals and amounts assessed through the financial statement date as well as accumulated policyholder dividends and the liability representing the fair value of embedded derivatives associated with those contracts.

Contingent liabilities

Management evaluates each contingent matter separately and in aggregate. Amounts related to contingent liabilities are accrued if it is probable that a liability has been incurred and an amount is reasonably estimable.

Demutualization and closed block

The closed block assets, including future assets from cash flows generated by the assets and premiums and other revenues from the policies in the closed block, will benefit only holders of the policies in the closed block. The principal cash flow items that affect the amount of closed block assets and liabilities are premiums, net investment income, investment purchases and sales, policyholder benefits, policyholder dividends, premium taxes and income taxes. The principal income and expense items excluded from the closed block are management and maintenance expenses, commissions, investment income and realized investment gains and losses on investments held outside the closed block that support the closed block business. All of these excluded income and expense items enter into the determination of EGMs of closed block policies for the purpose of amortization of DAC.

In our financial statements, we present closed block assets, liabilities, revenues and expenses together with all other assets, liabilities, revenues and expenses. Within closed block liabilities, we have established a policyholder dividend obligation to record an additional liability to closed block policyholders for cumulative closed block earnings in excess of expected amounts calculated at the date of demutualization. These closed block earnings will not inure to shareholders, but will result in additional future dividends to closed block policyholders unless otherwise offset by future performance of the closed block that is less favorable than expected.

Revenue recognition

We recognize premiums for participating life insurance products and other life insurance products as revenue when due from policyholders. We match benefits, losses and related expenses with premiums over the related contract periods.


F-22
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)

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


Amounts received as payment for universal life, variable universal life and other investment-type contracts are considered deposits and are not included in premiums. Revenues from these products consist primarily of fees assessed during the period against the policyholders’ account balances for mortality charges, policy administration charges and surrender charges. Fees assessed that represent compensation for services to be provided in the future are deferred and amortized into revenue over the life of the related contracts in proportion to EGPs.

Certain variable annuity contracts and fixed index annuity contract riders provide the holder a guarantee that the benefit received upon death or annuitization will be no less than a minimum prescribed amount. The fee for these riders is recorded in fee income. These benefits are accounted for as insurance benefits. Certain variable annuity contracts features and fixed index annuity index options are considered embedded derivatives. See Note 10 to these consolidated financial statements for additional information.

Reinsurance

Premiums, policy benefits and operating expenses related to our traditional life and term insurance policies are stated net of reinsurance ceded to other companies, except for amounts associated with certain modified coinsurance contracts which are reflected in the Company’s financial statements based on the application of the deposit method of accounting. Estimated reinsurance recoverables and the net estimated cost of reinsurance are recognized over the life of the reinsured treaty using assumptions consistent with those used to account for the policies subject to the reinsurance.

For universal life and variable universal life contracts, reinsurance premiums and ceded benefits are reflected net within policy benefits. Reinsurance recoverables are recognized in the same period as the related reinsured claim. The net cost or benefit of reinsurance (the present value of all expected ceded premium payments and expected future benefit payments) is recognized over the life of the reinsured treaty using assumptions consistent with those used to account for the policies subject to the reinsurance.

Income taxes

Income tax expense or benefit is recognized based upon amounts reported in the financial statements and the provisions of currently enacted tax laws. Deferred tax assets and/or liabilities are determined by multiplying the differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled. Valuation allowances on deferred tax assets are recorded to the extent that management concludes that it is more likely than not that an asset will not be realized.

We recognize current income tax assets and liabilities for estimated income taxes refundable or payable based on the income tax returns. We recognize deferred income tax assets and liabilities for the estimated future income tax effects of temporary differences and carryovers. Temporary differences are the differences between the financial statement carrying amounts of assets and liabilities and their tax bases, as well as the timing of income or expense recognized for financial reporting and tax purposes of items not related to assets or liabilities. If necessary, we establish valuation allowances to reduce the carrying amount of deferred income tax assets to amounts that are more likely than not to be realized. We periodically review the adequacy of these valuation allowances and record any increase or reduction in allowances in accordance with intraperiod allocation rules. We assess all significant tax positions to determine if a liability for an uncertain tax position is necessary and, if so, the impact on the current or deferred income tax balances. Also, if indicated, we recognize interest or penalties related to income taxes as a component of the income tax provision.

Pension and other post-employment benefits

We recognize pension and other post-employment benefit costs and obligations over the employees’ expected service periods by discounting an estimate of aggregate benefits. We estimate aggregate benefits by using assumptions for rates of return on pension plan assets and future health care costs. We recognize an expense for differences between actual experience and estimates exceeding a corridor over the average future lifetime of participants. We recognize an expense for our contributions to employee and agent savings plans at the time employees and agents make contributions to the plans. We also recognize the costs and obligations of severance, disability and related life insurance and health care benefits to be paid to inactive or former employees after employment but before retirement.


F-23
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)

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


Audit fees and other professional fees

Professional fees associated with the restatement of our prior period financial statements were recognized and expensed as incurred. The fees associated with the restatement of the 2012 Form 10-K totaled $44.0 million and $62.9 million in 2014 and 2013, respectively.


3.
Reinsurance

We use reinsurance agreements to limit potential losses, reduce exposure to larger risks and provide capital relief with regard to certain reserves.

The amount of risk ceded depends on our evaluation of the specific risk and applicable retention limits. For business sold prior to December 31, 2010, our retention limit on any one life is $10 million for single life and joint first-to-die policies and $12 million for joint last-to-die policies. Beginning January 1, 2011, our retention limit on new business is $5 million for single life and joint first-to-die policies and $6 million for second-to-die policies. We also assume reinsurance from other insurers.

Our reinsurance program cedes various types of risks to other reinsurers primarily under yearly renewable term and coinsurance agreements. Yearly renewable term and coinsurance agreements result in passing all or a portion of the risk to the reinsurer. Under coinsurance agreements on our traditional and term insurance policies, the reinsurer receives a proportionate amount of the premiums less an allowance for commissions and expenses and is liable for a corresponding proportionate amount of all benefit payments. Under our yearly renewable term agreements, the ceded premium represents a charge for the death benefit coverage.

Effective October 1, 2009, PHL Variable and Phoenix Life and Annuity Company coinsured all the benefit risks, net of existing reinsurance, on their term insurance business in force.

Trust agreements and irrevocable letters of credit aggregating $46.7 million at December 31, 2015 have been arranged with commercial banks in our favor to collateralize the ceded reserves. This includes $4.4 million of irrevocable letters of credit related to our discontinued group accident and health reinsurance operations.

We assume and cede business related to our discontinued group accident and health reinsurance operations. While we are not writing any new contracts, we are contractually obligated to continue to assume and cede premiums related to existing contracts. See Note 22 to these consolidated financial statements for additional information.

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 $590.7 million and $559.1 million as of December 31, 2015 and 2014, respectively. Other reinsurance activity is shown below.


F-24
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
3.    Reinsurance (continued)


Direct Business and Reinsurance in Continuing Operations:
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
 
 
 
 
 
 
Direct premiums
$
454.1

 
$
473.2

 
$
501.8

Premiums assumed
8.7

 
9.7

 
11.8

Premiums ceded [1]
(113.7
)
 
(150.8
)
 
(162.0
)
Premiums
$
349.1


$
332.1


$
351.6

Percentage of amount assumed to net premiums
2.5%
 
2.9%
 
3.4%
 
 
 
 
 
 
Direct policy benefits incurred
$
1,020.8

 
$
785.3

 
$
819.1

Policy benefits assumed
41.9

 
42.5

 
22.7

Policy benefits ceded
(235.1
)
 
(241.9
)
 
(265.4
)
Premiums paid [2]
97.3

 
95.8

 
83.1

Policy benefits [3]
$
924.9


$
681.7


$
659.5

 
 
 
 
 
 
Direct life insurance in force
$
91,469.3

 
$
95,811.4

 
$
102,405.6

Life insurance in force assumed
1,771.1

 
1,721.0

 
1,678.2

Life insurance in force ceded
(51,064.8
)
 
(58,022.4
)
 
(62,553.8
)
Life insurance in force
$
42,175.6


$
39,510.0


$
41,530.0

Percentage of amount assumed to net insurance in force
4.2%
 
4.4%
 
4.0%
———————
[1]
Primarily represents premiums ceded to reinsurers related to traditional whole 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 2 to these consolidated financial statements for additional information regarding significant accounting policies.
[3]
Policy benefit amounts above exclude changes in reserves, interest credited to policyholders and other items, which total $261.7 million, $437.5 million and $305.6 million, net of reinsurance, for the years ended December 31, 2015, 2014 and 2013, 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 December 31, 2015, five major reinsurance companies account for approximately 68% of the reinsurance recoverable.


4.
Demutualization and Closed Block

In 1999, we began the process of reorganizing and demutualizing our then principal operating company, Phoenix Home Life. We completed the process in June 2001, when all policyholder membership interests in this mutual company were extinguished and eligible policyholders of the mutual company received shares of PNX common stock, together with cash and policy credits, as compensation. To protect the future dividends of these policyholders, we also established a closed block for their existing policies.

Because closed block liabilities exceed closed block assets, we have a net closed block liability at December 31, 2015 and 2014, respectively. This net liability represents the maximum future earnings contribution to be recognized from the closed block and the change in this net liability each period is in the earnings contribution recognized from the closed block for the period. To the extent that actual cash flows differ from amounts anticipated, we may adjust policyholder dividends. If the closed block has excess funds, those funds will be available only to the closed block policyholders. However, if the closed block has insufficient funds to make policy benefit payments that are guaranteed, the payments will be made from assets outside of the closed block.


F-25
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
4.    Demutualization and Closed Block (continued)


Closed Block Assets and Liabilities:
As of December 31,
 
 
($ in millions)
2015
 
2014
 
Inception
 
 
 
 
 
 
Available-for-sale debt securities
$
5,285.4

 
$
5,877.0

 
$
4,773.1

Available-for-sale equity securities
90.1

 
91.7

 
—

Short-term investments
25.0

 
—

 
—

Limited partnerships and other investments
352.7

 
343.4

 
399.0

Policy loans
1,121.0

 
1,159.1

 
1,380.0

Fair value investments
53.1

 
59.8

 
—

Total closed block investments
6,927.3

 
7,531.0

 
6,552.1

Cash and cash equivalents
290.8

 
89.6

 
—

Accrued investment income
75.5

 
80.7

 
106.8

Reinsurance recoverable
30.0

 
19.1

 
—

Deferred income taxes, net
278.7

 
290.3

 
389.4

Other closed block assets
53.7

 
67.4

 
41.4

Total closed block assets
7,656.0

 
8,078.1

 
7,089.7

Policy liabilities and accruals
7,816.5

 
8,058.2

 
8,301.7

Policyholder dividends payable
191.1

 
201.9

 
325.1

Policy dividend obligation
525.5

 
714.8

 
—

Other closed block liabilities
46.6

 
48.0

 
12.3

Total closed block liabilities
8,579.7

 
9,022.9

 
8,639.1

Excess of closed block liabilities over closed block assets [1]
923.7

 
944.8

 
$
1,549.4

Less: Excess of closed block assets over closed block liabilities
  attributable to noncontrolling interests
(8.1
)
 
(11.8
)
 
 
Excess of closed block liabilities over closed block assets attributable to
  The Phoenix Companies, Inc.
$
931.8

 
$
956.6

 
 
———————
[1]
The maximum future earnings summary to inure to the benefit of the stockholders is represented by the excess of closed block liabilities over closed block assets. All unrealized investment gains (losses), net of income tax, have been allocated to the policyholder dividend obligation.

F-26
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
4.    Demutualization and Closed Block (continued)


Closed Block Revenues and Expenses and
Changes in Policyholder Dividend Obligations:
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
Closed block revenues
 
 
 
 
 
Premiums
$
309.2

 
$
301.8

 
$
317.8

Net investment income
395.0

 
411.1

 
409.6

Net realized gains (losses)
1.0

 
12.8

 
16.6

Total revenues
705.2

 
725.7

 
744.0

Policy benefits
447.3

 
438.4

 
464.5

Other operating expenses
3.7

 
2.7

 
5.3

Total benefits and expenses
451.0

 
441.1

 
469.8

Closed block contribution to income before dividends and income taxes
254.2

 
284.6

 
274.2

Policyholder dividends
(212.2
)
 
(244.6
)
 
(235.7
)
Closed block contribution to income before income taxes
42.0

 
40.0

 
38.5

Applicable income tax expense
13.5

 
13.3

 
13.4

Closed block contribution to income
28.5

 
26.7

 
25.1

Less: Closed block contribution to income attributable to noncontrolling interests
3.5

 
2.0

 
0.3

Closed block contribution to income attributable to
  The Phoenix Companies, Inc.
$
25.0

 
$
24.7

 
$
24.8

 
 
 
 
 
 
Policyholder dividend obligation
 
 
 
 
 
Policyholder dividends recorded through earnings
$
212.2

 
$
244.6

 
$
235.7

Policyholder dividends recorded through OCI
(241.4
)
 
138.8

 
(308.4
)
Additions to (reductions of) policyholder dividend liabilities
(29.2
)
 
383.4

 
(72.7
)
Policyholder dividends paid
(170.9
)
 
(172.2
)
 
(178.6
)
Increase (decrease) in policyholder dividend liabilities
(200.1
)
 
211.2

 
(251.3
)
Policyholder dividend liabilities, beginning of period
916.7

 
705.5

 
956.8

Policyholder dividend liabilities, end of period
716.6

 
916.7

 
705.5

Policyholder dividends payable, end of period
(191.1
)
 
(201.9
)
 
(207.8
)
Policyholder dividend obligation, end of period
$
525.5

 
$
714.8

 
$
497.7


The policyholder dividend obligation includes approximately $329.3 million and $277.9 million, respectively, for cumulative closed block earnings in excess of expected amounts calculated at the date of demutualization as of December 31, 2015 and 2014, respectively. These closed block earnings will not inure to stockholders, but will result in additional future dividends to closed block policyholders unless otherwise offset by future performance of the closed block that is less favorable than expected. If actual cumulative performance is less favorable than expected, only actual earnings will be recognized in net income. As of December 31, 2015 and 2014, the policyholder dividend obligation also includes $196.2 million and $436.9 million, respectively, of net unrealized gains on investments supporting the closed block liabilities.



F-27
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
 


5.
Deferred Policy Acquisition Costs

The balances of and changes in DAC as of and for the years ended December 31, are as follows:

Changes in Deferred Policy Acquisition Costs:
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
 
 
 
 
 
 
Balance, beginning of period
$
848.6

 
$
947.8

 
$
898.1

Policy acquisition costs deferred
87.4

 
72.9

 
58.4

Costs amortized to expenses:
 
 
 
 
 
Recurring costs
(86.6
)
 
(129.5
)
 
(117.9
)
Assumption unlocking
9.7

 
(4.4
)
 
25.4

Realized investment gains (losses)
(0.9
)
 
14.3

 
(10.6
)
Offsets to net unrealized investment gains or losses included in AOCI
82.9

 
(52.5
)
 
94.4

Balance, end of period
$
941.1

 
$
848.6

 
$
947.8


During the years ended December 31, 2015, 2014 and 2013, deferred expenses primarily consisted of third-party commissions related to fixed indexed annuity sales.


6.
Sales Inducements

The balances of and changes in sales inducements as of and for the years ended December 31, are as follows:

Changes in Deferred Sales Inducement Activity:
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
 
 
 
 
 
 
Balance, beginning of period
$
79.4

 
$
77.4

 
$
63.9

Sales inducements deferred
13.4

 
17.5

 
10.6

Amortization charged to income
(9.6
)
 
(8.0
)
 
(8.5
)
Offsets to net unrealized investment gains or losses included in AOCI
7.9

 
(7.5
)
 
11.4

Balance, end of period
$
91.1

 
$
79.4


$
77.4



7.
Investing Activities

Debt and equity securities

The following tables present the debt and equity securities available-for-sale by sector held at December 31, 2015 and 2014, 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.


F-28
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
7.    Investing Activities (continued)


Fair Value and Cost of Securities:
As of December 31, 2015
($ in millions)
Amortized
Cost
 
Gross
Unrealized
Gains [1]
 
Gross
Unrealized
Losses [1]
 
Fair
Value
 
OTTI
Recognized
in AOCI [2]
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
542.0

 
$
48.2

 
$
(0.6
)
 
$
589.6

 
$
—

State and political subdivision
510.4

 
33.7

 
(6.7
)
 
537.4

 
(1.1
)
Foreign government
224.0

 
20.8

 
(1.9
)
 
242.9

 
—

Corporate
8,295.0

 
311.3

 
(264.1
)
 
8,342.2

 
(6.3
)
Commercial mortgage-backed (“CMBS”)
656.6

 
30.4

 
(2.9
)
 
684.1

 
—

Residential mortgage-backed (“RMBS”)
1,213.8

 
45.1

 
(12.7
)
 
1,246.2

 
(25.4
)
Collateralized debt obligations (“CDO”) /
  collateralized loan obligations (“CLO”)
316.3

 
1.3

 
(8.1
)
 
309.5

 
(4.5
)
Other asset-backed (“ABS”)
235.5

 
7.7

 
(4.4
)
 
238.8

 
(0.6
)
Available-for-sale debt securities
$
11,993.6

 
$
498.5

 
$
(301.4
)
 
$
12,190.7

 
$
(37.9
)
Amounts applicable to the closed block
$
5,102.1

 
$
293.4

 
$
(110.1
)
 
$
5,285.4

 
$
(8.8
)
Available-for-sale equity securities
$
154.6

 
$
28.5

 
$
(1.1
)
 
$
182.0

 
$
—

Amounts applicable to the closed block
$
77.2

 
$
13.6

 
$
(0.7
)
 
$
90.1

 
$
—

———————
[1]
Net unrealized investment gains and losses on securities classified as available-for-sale and certain other assets are included in our consolidated balance sheets as a component 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. 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).

Fair Value and Cost of Securities:
As of December 31, 2014
($ in millions)
Amortized
Cost
 
Gross
Unrealized
Gains [1]
 
Gross
Unrealized
Losses [1]
 
Fair
Value
 
OTTI
Recognized
in AOCI [2]

 
 
 
 
 
 
 
 
 
U.S. government and agency
$
388.3

 
$
55.2

 
$
(0.1
)
 
$
443.4

 
$
—

State and political subdivision
518.3

 
42.1

 
(2.5
)
 
557.9

 
(1.1
)
Foreign government
205.8

 
26.5

 
(1.4
)
 
230.9

 
—

Corporate
7,942.7

 
530.0

 
(74.6
)
 
8,398.1

 
(8.3
)
CMBS
602.9

 
48.4

 
(0.1
)
 
651.2

 
(1.2
)
RMBS
1,862.5

 
81.6

 
(11.9
)
 
1,932.2

 
(25.5
)
CDO/CLO
197.5

 
2.7

 
(3.3
)
 
196.9

 
(13.9
)
Other ABS
260.0

 
13.4

 
(4.7
)
 
268.7

 
(1.8
)
Available-for-sale debt securities
$
11,978.0

 
$
799.9

 
$
(98.6
)
 
$
12,679.3

 
$
(51.8
)
Amounts applicable to the closed block
$
5,451.3

 
$
458.1

 
$
(32.4
)
 
$
5,877.0

 
$
(14.7
)
Available-for-sale equity securities
$
156.0

 
$
25.1

 
$
(1.6
)
 
$
179.5

 
$
—

Amounts applicable to the closed block
$
80.5

 
$
12.3

 
$
(1.1
)
 
$
91.7

 
$
—

———————
[1]
Net unrealized investment gains and losses on securities classified as available-for-sale and certain other assets are included in our consolidated balance sheets as a component 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. 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).

F-29
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
7.    Investing Activities (continued)


Maturities of Debt Securities:
As of December 31, 2015
($ in millions)
Amortized
Cost
 
Fair
Value

 
 
 
Due in one year or less
$
464.3


$
470.3

Due after one year through five years
1,868.9


1,932.2

Due after five years through ten years
3,603.2


3,563.0

Due after ten years
3,635.0


3,746.6

CMBS/RMBS/ABS/CDO/CLO [1]
2,422.2


2,478.6

Total
$
11,993.6

 
$
12,190.7

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

The maturities of debt securities, as of December 31, 2015, 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 December 31,
($ in millions)
2015
 
2014
 
2013
Debt securities, available-for-sale
 
 
 
 
 
Proceeds from sales
$
1,021.4

 
$
446.1

 
$
532.2

Proceeds from maturities/repayments
1,183.3

 
1,225.3

 
1,544.0

Gross investment gains from sales, prepayments and maturities
42.5

 
41.6

 
45.1

Gross investment losses from sales and maturities
(4.7
)
 
(17.6
)
 
(2.2
)
Equity securities, available-for-sale
 
 
 
 
 
Proceeds from sales
$
16.8

 
$
24.2

 
$
12.7

Gross investment gains from sales
1.7

 
10.4

 
4.2

Gross investment losses from sales
—

 
(1.0
)
 
(3.8
)


F-30
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
7.    Investing Activities (continued)


Aging of Temporarily Impaired Securities:
As of December 31, 2015
($ in millions)
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
$
73.8


$
(0.6
)

$
0.9


$
—


$
74.7

 
$
(0.6
)
State and political subdivision
62.1


(4.1
)

36.5


(2.6
)

98.6

 
(6.7
)
Foreign government
26.0


(1.9
)

—


—


26.0

 
(1.9
)
Corporate
2,499.3


(135.5
)

545.2


(128.6
)

3,044.5

 
(264.1
)
CMBS
131.7


(2.9
)

2.3


—


134.0

 
(2.9
)
RMBS
138.0


(1.6
)

174.2


(11.1
)

312.2

 
(12.7
)
CDO/CLO
207.4


(4.4
)

80.7


(3.7
)

288.1

 
(8.1
)
Other ABS
39.0


(0.2
)

7.2


(4.2
)

46.2

 
(4.4
)
Debt securities
3,177.3

 
(151.2
)
 
847.0

 
(150.2
)
 
4,024.3

 
(301.4
)
Equity securities
4.1


(1.1
)

2.6


—


6.7

 
(1.1
)
Total temporarily impaired securities
$
3,181.4

 
$
(152.3
)
 
$
849.6

 
$
(150.2
)
 
$
4,031.0

 
$
(302.5
)
Amounts inside the closed block
$
963.9


$
(54.1
)

$
321.6


$
(56.7
)

$
1,285.5

 
$
(110.8
)
Amounts outside the closed block
$
2,217.5


$
(98.2
)

$
528.0


$
(93.5
)

$
2,745.5

 
$
(191.7
)
Debt securities outside the closed block
  that are below investment grade
$
120.5


$
(14.6
)

$
77.3


$
(21.8
)

$
197.8

 
$
(36.4
)
Number of securities
 
 
627

 
 
 
178

 
 
 
805


Unrealized losses on debt securities outside the closed block and inside the closed block with a fair value depressed by more than 20% of amortized cost totaled $85.1 million and $48.4 million, respectively, at December 31, 2015, of which $30.4 million and $1.7 million, respectively, were depressed by more than 20% of amortized cost for more than 12 months.

As of December 31, 2015, available-for-sale securities in an unrealized loss position for over 12 months consisted of 172 debt securities and 6 equity securities. These debt securities primarily relate to corporate securities, RMBS and other ABS, which have depressed values due primarily to an increase in interest rates and credit spreads since the purchase of these securities. Unrealized losses were not recognized in earnings on these debt securities since the Company neither intends to sell the securities nor do we believe that it is more likely than not that it will be required to sell these securities before recovery of their amortized cost basis. Additionally, based on a security-by-security analysis, we expect to recover the entire amortized cost basis of these securities. In our evaluation of each security, management considers the actual recovery periods for these securities in previous periods of broad market declines. For securities with significant declines, individual security level analysis was performed, which considered any credit enhancements, expectations of defaults on underlying collateral and other available market data, including industry analyst reports and forecasts. Similarly, for equity securities in an unrealized loss position for greater than 12 months, management performed an analysis on a security-by-security basis. Although there may be sustained losses for greater than 12 months on these securities, additional information was obtained related to company performance which did not indicate that the additional losses were other-than-temporary.


F-31
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
7.    Investing Activities (continued)


Aging of Temporarily Impaired Securities:
As of December 31, 2014
($ in millions)
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
$
—

 
$
—

 
$
2.7

 
$
(0.1
)
 
$
2.7

 
$
(0.1
)
State and political subdivision
11.6

 
(0.6
)
 
31.1

 
(1.9
)
 
42.7

 
(2.5
)
Foreign government
15.7

 
(1.4
)
 
—

 
—

 
15.7

 
(1.4
)
Corporate
643.0

 
(23.5
)
 
654.3

 
(51.1
)
 
1,297.3

 
(74.6
)
CMBS
12.6

 
—

 
10.9

 
(0.1
)
 
23.5

 
(0.1
)
RMBS
8.4

 
(0.2
)
 
226.7

 
(11.7
)
 
235.1

 
(11.9
)
CDO/CLO
57.9

 
(0.5
)
 
96.3

 
(2.8
)
 
154.2

 
(3.3
)
Other ABS
13.8

 
(0.1
)
 
16.0

 
(4.6
)
 
29.8

 
(4.7
)
Debt securities
763.0

 
(26.3
)
 
1,038.0

 
(72.3
)
 
1,801.0

 
(98.6
)
Equity securities
5.6

 
(0.7
)
 
15.2

 
(0.9
)
 
20.8

 
(1.6
)
Total temporarily impaired securities
$
768.6

 
$
(27.0
)
 
$
1,053.2

 
$
(73.2
)
 
$
1,821.8

 
$
(100.2
)
Amounts inside the closed block
$
266.8

 
$
(11.7
)
 
$
387.8

 
$
(21.8
)
 
$
654.6

 
$
(33.5
)
Amounts outside the closed block
$
501.8

 
$
(15.3
)
 
$
665.4

 
$
(51.4
)
 
$
1,167.2

 
$
(66.7
)
Debt securities outside the closed block
  that are below investment grade
$
84.2

 
$
(4.1
)
 
$
50.4

 
$
(6.6
)
 
$
134.6

 
$
(10.7
)
Number of securities
 
 
158

 
 
 
211

 
 
 
369


Unrealized losses on below-investment-grade debt securities outside the closed block and inside the closed block with a fair value depressed by more than 20% of amortized cost totaled $3.2 million and $1.7 million, respectively, at December 31, 2014, of which $2.1 million and $0.1 million, respectively, were depressed by more than 20% of amortized cost for more than 12 months.

As of December 31, 2014, available-for-sale securities in an unrealized loss position for over 12 months consisted of 201 debt securities and 10 equity securities. These debt securities primarily relate to corporate securities, RMBS and other ABS, which have depressed values due primarily to an increase in interest rates since the purchase of these securities. Unrealized losses were not recognized in earnings on these debt securities since the Company neither intends to sell the securities nor do we believe that it is more likely than not that it will be required to sell these securities before recovery of their amortized cost basis. Additionally, based on a security-by-security analysis, we expect to recover the entire amortized cost basis of these securities. In our evaluation of each security, management considers the actual recovery periods for these securities in previous periods of broad market declines. For securities with significant declines, individual security level analysis was performed, which considered any credit enhancements, expectations of defaults on underlying collateral and other available market data, including industry analyst reports and forecasts. Similarly, for equity securities in an unrealized loss position for greater than 12 months, management performed an analysis on a security-by-security basis. Although there may be sustained losses for greater than 12 months on these securities, additional information was obtained related to company performance which did not indicate that the additional losses were other-than-temporary.

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 debt 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.


F-32
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
7.    Investing Activities (continued)


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 December 31, 2015, management does not have the intention to sell, nor does it expect to be required to sell, these securities prior to their recovery.

OTTIs recorded for available-for-sale debt and equity securities totaled $22.8 million in 2015, $8.1 million in 2014 and $11.8 million in 2013. The impairments were driven primarily by deterioration in issuer credit and liquidity metrics, and business outlook.

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

Credit Losses Recognized in Earnings on Available-for-Sale Debt Securities
for which a Portion of the OTTI Loss was Recognized in OCI:
As of December 31,
($ in millions)
2015
 
2014
 
2013
 
 
 
 
 
 
Balance, beginning of period
$
(52.4
)
 
$
(71.4
)
 
$
(72.6
)
Add: Credit losses on securities not previously impaired [1]
(3.4
)
 
—

 
(1.1
)
Add: Credit losses on securities previously impaired [1]
(2.3
)
 
—

 
(4.1
)
Less: Credit losses on securities impaired due to intent to sell
—

 
—

 
—

Less: Credit losses on securities sold
12.5

 
19.0

 
6.4

Less: Increases in cash flows expected on previously impaired securities
—

 
—

 
—

Balance, end of period
$
(45.6
)
 
$
(52.4
)
 
$
(71.4
)
———————
[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 consolidated statements of operations and comprehensive income.


F-33
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
7.    Investing Activities (continued)


Limited partnerships and other investments

Limited Partnerships and Other Investments:
As of December 31,
($ in millions)
2015
 
2014
Limited partnerships
 
 
 
Private equity funds
$
257.0

 
$
241.1

Mezzanine funds
159.6

 
162.4

Infrastructure funds
35.8

 
38.9

Hedge funds
9.9

 
10.7

Mortgage and real estate funds
4.6

 
3.7

Leveraged leases
4.7

 
11.8

Direct equity investments
44.9

 
49.6

Life settlements
—

 
22.4

Other alternative assets
2.2

 
2.2

Limited partnerships and other investments
$
518.7

 
$
542.8

Amounts applicable to the closed block
$
352.7

 
$
343.4


Equity method investees

The Company uses equity method accounting when it has more than a minor interest or influence of the partnership’s or limited liability company’s (“LLCs”) operations but does not have a controlling interest. Equity method income is recognized as earned by the investee. Management views the information reported from the underlying funds as the best information available to record its investments. Further, management is in direct communication with the fund managers to ensure accuracy of ending capital balances.

The following tables present the aggregated summarized financial information of certain equity method investees in limited partnerships and LLCs. For all three periods, the equity in earnings that we record through net investment income of these equity method investees in aggregate exceeds 10% of the Company’s income from continuing operations before income taxes.

Aggregated Summarized Balance Sheet Information of Equity Method Investees:
As of December 31,
($ in millions)
2015
 
2014
 
 
 
 
Total assets
$
53,961.0

 
$
58,694.1

Total liabilities
$
2,165.3

 
$
1,630.2


Aggregated Net Investment Income:
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
 
 
 
 
 
 
Total investment revenues
$
2,386.2

 
$
2,329.9

 
$
2,759.7

Net income
$
5,391.6

 
$
5,869.2

 
$
9,297.3


Summarized financial information for these equity method investees is reported on a three-month delay due to the timing of financial statements as of the current reporting period.

Leveraged leases

The Company records its investment in a leveraged lease net of the nonrecourse debt. The Company recognizes income on the leveraged leases by applying the estimated rate of return to the net investment in the lease. The Company regularly reviews the estimated residual values and, if necessary, impairs them to expected values.


F-34
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
7.    Investing Activities (continued)


Investment in leveraged leases, included in limited partnerships and other investments, consisted of the following:

Investment in Leveraged Leases:
($ in millions)
2015
 
2014
 
 
 
 
Rental receivables, net
$
2.1

 
$
4.9

Estimated residual values
3.0

 
7.3

Unearned income
(0.4
)
 
(0.4
)
Investment in leveraged leases
$
4.7

 
$
11.8


Rental receivables are generally due in periodic installments. The payments are made semi-annually and range from three to five years. For rental receivables, the primary credit quality indicator is whether the rental receivable is performing or non-performing, which is assessed at least annually. The Company defines non-performing rental receivables as those that are 90 days or more past due. At December 31, 2015 and 2014, all rental receivables were performing. The deferred income tax liability related to leveraged leases was $6.2 million and $9.5 million at December 31, 2015 and 2014, respectively.

Direct equity investments

Direct equity investments are equity interests in LLCs entered into on a co-investment basis with sponsors of private equity funds for strategic and capital appreciation purposes and are accounted for under the equity method. The Company records its share of earnings on a three-month delay when timely financial information is not available and the delivery of investee’s financial reporting occurs after the end of the current reporting period. Further, management has open communication with each fund manager and, to the extent financial information is available, receives quarterly statements from the underlying funds. Management also performed an analysis on the funds’ financial statements to assess reasonableness of information provided by third parties. Income recognized from our other direct equity investments was $(4.0) million, $7.8 million and $7.0 million for the years ended December 31, 2015, 2014 and 2013, respectively. We consolidate those direct equity investments which were determined to be VIE’s when we are the primary beneficiary. Any future investment in these structures is discretionary.

The following table presents the carrying value and change in investment balance of non-consolidated direct equity investments:

Carrying Value and Change in Investment Balance of
Non-Consolidated Direct Equity Investments:
 
($ in millions)
 
 
 
Balance as of December 31, 2013
$
44.5

Net contributions (distributions)
(2.7
)
Net income (loss)
7.8

Balance as of December 31, 2014
49.6

Net contributions (distributions)
(0.7
)
Net income (loss)
(4.0
)
Balance as of December 31, 2015
$
44.9


Life settlements

During 2015, 2014 and 2013, income (losses) recognized on life settlement contracts were $0, $0 and $0.7 million, respectively. These amounts are included in net investment income in the consolidated statements of operations and comprehensive income. During the second quarter of 2015, as a result of plans to sell or liquidate the life settlement contracts, the Company recorded the life settlement contracts at fair value. The initial reduction of carrying value to fair value and subsequent changes in fair value recorded through income resulted in a loss of $4.9 million for the year ended December 31, 2015. During December 2015, the Company sold all of its life settlement contracts to an unrelated third party for a purchase price, net of related costs, of $11.4 million. The transaction resulted in a realized loss of $7.1 million.


F-35
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
7.    Investing Activities (continued)


Prior to the Company’s plans to sell the life settlement contracts they were accounted for under the investment method and monitored for impairment on a contract-by-contract basis annually. An investment in a life settlement contract is considered impaired if the undiscounted cash flows from the expected proceeds from the insurance policy are less than the carrying amount of the investment plus the expected costs to keep the policy in force. If an impairment loss is recognized, the investment is written down to fair value. Anticipated policy cash flows are based on the Company’s latest mortality assumptions. Impairment charges on life settlement contracts included in net realized capital gains (losses) totaled $0, $0 and $0 in 2015, 2014 and 2013, respectively.

Statutory deposits

Pursuant to certain statutory requirements, as of December 31, 2015 and 2014, our Life Companies had on deposit securities with a fair value of $29.1 million and $30.5 million, respectively, in insurance department special deposit accounts. Our Life Companies are not permitted to remove the securities from these accounts without approval of the regulatory authority.

Net investment income

Net investment income is comprised primarily of interest income, including amortization of premiums and accretion of discounts, based on yields which are changed due to expectations in projected 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:
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
 
 
 
 
 
 
Debt securities [1]
$
595.1

 
$
581.6

 
$
565.0

Equity securities
6.9

 
9.2

 
7.2

Limited partnerships and other investments
58.1

 
65.3

 
58.3

Policy loans
170.7

 
167.4

 
160.0

Fair value investments
30.3

 
25.4

 
14.1

Total investment income
861.1

 
848.9

 
804.6

Less: Discontinued operations
1.4

 
1.1

 
1.3

Less: Investment expenses
24.8

 
16.9

 
13.6

Net investment income
$
834.9

 
$
830.9

 
$
789.7

Amounts applicable to the closed block
$
395.0

 
$
411.1

 
$
409.6

———————
[1]
Includes net investment income on short-term investments.


F-36
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
7.    Investing Activities (continued)


Net realized gains (losses)

Sources and Types of Net Realized Gains (Losses):
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
 
 
 
 
 
 
Total other-than-temporary debt impairments
$
(12.0
)
 
$
(5.6
)
 
$
(7.0
)
Portion of losses recognized in OCI
(2.0
)
 
(0.4
)
 
(4.8
)
Net debt impairments recognized in earnings
$
(14.0
)
 
$
(6.0
)
 
$
(11.8
)
Debt security impairments:
 
 
 
 
 
U.S. government and agency
$
—

 
$
—

 
$
—

State and political subdivision
—

 
—

 
—

Foreign government
—

 
—

 
—

Corporate
(13.8
)
 
(6.0
)
 
(3.8
)
CMBS
—

 
—

 
(2.7
)
RMBS
(0.2
)
 
—

 
(4.3
)
CDO/CLO
—

 
—

 
(1.0
)
Other ABS
—

 
—

 
—

Net debt security impairments
(14.0
)
 
(6.0
)
 
(11.8
)
Equity security impairments
(8.8
)
 
(2.1
)
 
—

Limited partnerships and other investment impairments
—

 
—

 
—

Impairment losses
(22.8
)
 
(8.1
)
 
(11.8
)
Debt security transaction gains
42.5

 
41.8

 
45.3

Debt security transaction losses
(5.0
)
 
(17.7
)
 
(2.2
)
Equity security transaction gains
1.7

 
10.4

 
4.2

Equity security transaction losses
—

 
(1.0
)
 
(3.8
)
Limited partnerships and other investment transaction gains
—

 
—

 
0.8

Limited partnerships and other investment transaction losses
(7.1
)
 
(0.7
)
 
(4.6
)
Net transaction gains (losses)
32.1

 
32.8

 
39.7

Derivative instruments
(31.1
)
 
(20.8
)
 
(27.7
)
Embedded derivatives [1]
(3.1
)
 
(45.9
)
 
12.2

Assets valued at fair value
(7.9
)
 
0.8

 
3.6

Net realized gains (losses), excluding impairment losses
(10.0
)
 
(33.1
)
 
27.8

Net realized gains (losses), including impairment losses
$
(32.8
)
 
$
(41.2
)
 
$
16.0

———————
[1]
Includes the change in fair value of embedded derivatives associated with fixed index annuity indexed crediting feature and variable annuity riders. See Note 10 to these consolidated financial statements for additional disclosures.


F-37
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
7.    Investing Activities (continued)


Unrealized gains (losses)

Sources of Changes in Net Unrealized Gains (Losses):
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
 
 
 
 
 
 
Debt securities
$
(504.2
)
 
$
311.3

 
$
(538.1
)
Equity securities
3.9

 
4.8

 
2.7

Other investments
(2.3
)
 
(4.1
)
 
0.6

Net unrealized investment gains (losses)
$
(502.6
)
 
$
312.0

 
$
(534.8
)
 
 
 
 
 
 
Net unrealized investment gains (losses)
$
(502.6
)
 
$
312.0

 
$
(534.8
)
Applicable to closed block policyholder dividend obligation
(241.4
)
 
138.8

 
(308.4
)
Applicable to DAC
(82.9
)
 
52.5

 
(94.4
)
Applicable to other actuarial offsets
(70.6
)
 
54.2

 
(69.3
)
Applicable to deferred income tax expense (benefit)
(71.3
)
 
35.7

 
(20.5
)
Offsets to net unrealized investment gains (losses)
(466.2
)
 
281.2

 
(492.6
)
Net unrealized gains (losses) included in OCI
$
(36.4
)
 
$
30.8

 
$
(42.2
)

Consolidated variable interest entities

The Company regularly invests in private equity type fund structures which are VIEs. Entities which do not have sufficient equity at risk to allow the entity to finance its activities without additional financial support or in which the equity investors, as a group, do not have the characteristic of a controlling financial interest are referred to as VIEs. We perform ongoing assessments of our investments in VIEs to determine if we are the primary beneficiary. When we are the primary beneficiary of the entity we consolidate the VIE. The consolidated entities are all investment company-like structures which follow specialized investment company accounting and record underlying investments at fair value. The nature of the consolidated VIEs’ operations and purpose are private equity limited partnerships, single asset LLCs and a fund of fund investment structure and have investments in homogeneous types of assets. We consolidate these VIEs using the most recent financial information received from the partnerships. Recognition of operating results is generally on a three-month delay due to the timing of the related financial statements.

The following table presents the total assets and total liabilities relating to consolidated VIEs at December 31, 2015 and 2014.

Carrying Value of Assets and Liabilities for
Consolidated Variable Interest Entities:
December 31, 2015
 
December 31, 2014
($ in millions)
Assets
 
Liabilities
 
Maximum
Exposure
to Loss [1]
 
Assets
 
Liabilities
 
Maximum
Exposure
to Loss [1]
 

 
 
 

 

 
 
 

Debt securities, at fair value [2]
$
14.7

 
$
—

 
$
10.4

 
$
5.5

 
$
—

 
$
5.1

Equity securities, at fair value [2]
63.0

 
—

 
56.9

 
35.0

 
—

 
30.0

Cash and cash equivalents
6.9

 
—

 
6.7

 
9.4

 
—

 
9.3

Investment in partnership interests [2]
—

 
—

 
—

 
—

 
—

 
—

Investment in single asset LLCs [2]
3.9

 
—

 
2.8

 
50.6

 
—

 
36.6

Other assets
5.4

 
—

 
4.3

 
0.6

 
—

 
0.5

Total assets of consolidated VIEs
$
93.9

 
$
—

 
$
81.1

 
$
101.1

 
$
—

 
$
81.5

Total liabilities of consolidated VIEs
$
—

 
$
1.1

 
$
—

 
$
—

 
$
0.6

 
$
0.5

———————
[1]
Creditors or beneficial interest holders of the consolidated VIEs have no recourse to our general credit. Our obligation to the VIEs is limited to the amount of our committed investment. We have not provided material financial or other support that was not contractually required to these VIEs. The maximum exposure to loss above at December 31, 2015 and 2014 excludes unfunded commitments of $6.5 million and $11.9 million, respectively.
[2]
Included in fair value investments on the consolidated balance sheets.


F-38
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
7.    Investing Activities (continued)


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. These investments are accounted for under the equity method of accounting and are included in limited partnerships and other investments on our consolidated balance sheets. We reassess our VIE determination with respect to an entity on an ongoing basis. The following table presents the carrying value of assets and liabilities and the maximum exposure to loss relating to significant VIEs for which we are not the primary beneficiary.

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 $97.2 million and $151.5 million as of December 31, 2015 and 2014, 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. The Company has not provided nor intends to provide material financial support to these entities unless contractually required. We do not have the contractual option to redeem these limited partnership interests but receive distributions based on the liquidation of the underlying assets. The Company must generally request general partner consent to transfer or sell its fund interests. The Company performs ongoing qualitative analysis of its involvement with VIEs to determine if consolidation is required.

Carrying Value of Assets and Liabilities
and Maximum Exposure Loss Relating
to Variable Interest Entities:
December 31, 2015
 
December 31, 2014
($ in millions)
Assets
 
Liabilities
 
Maximum
Exposure
to Loss [1]
 
Assets
 
Liabilities
 
Maximum
Exposure
to Loss [1]
 
 
 
 
 
 
 
 
 
 
 
 
Limited partnerships
$
83.8

 
$
—

 
$
132.0

 
$
106.0

 
$
—

 
$
157.8

LLCs
13.4

 
—

 
13.4

 
45.5

 
—

 
45.5

Total
$
97.2

 
$
—

 
$
145.4

 
$
151.5

 
$
—

 
$
203.3

———————
[1]
Creditors or beneficial interest holders of the VIEs have no recourse to our general credit. Our obligation to the VIEs is limited to the amount of our committed investment. We have not provided material financial or other support that was not contractually required to these VIEs.

In addition, the Company makes passive investments in structured securities issued by VIEs, for which the Company is not the manager, which are included in CMBS, RMBS, CDO/CLO and other ABS within available-for-sale debt securities, and in fair value investments, in the consolidated balance sheets. The Company has not provided financial or other support with respect to these investments other than its original investment. For these investments, the Company determined it is not the primary beneficiary due to the size of our investment relative to the structured securities issued by the VIE, the level of credit subordination which reduces the Company’s obligation to absorb losses or right to receive benefits, and the Company’s lack of power over the activities that most significantly impact the economic performance of the VIEs. The Company’s maximum exposure to loss on these investments is limited to the amount of our investment.


F-39
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
7.    Investing Activities (continued)


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. 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. Included in fixed maturities are below-investment-grade assets totaling $798.2 million and $848.8 million at December 31, 2015 and 2014, respectively. Maximum exposure to an issuer or derivative counterparty is defined by quality ratings, with higher quality issuers having larger exposure limits. As of December 31, 2015, we were exposed to the credit concentration risk of 127 issuers, each representing exposure greater than 10% of stockholders’ equity other than U.S. government and government agencies backed by the faith and credit of the U.S. government. The top five largest exposures were Bank of America Corporation, General Electric Company, Berkshire Hathaway Inc., The Bank of New York Mellon Corporation and BB&T Corporation. 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 use ISDA Master Agreements with derivative counterparties which may include Credit Support Annexes with collateral provisions to reduce counterparty credit exposures. 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.

As of December 31, 2015, we held derivative assets, net of liabilities, with a fair value of $54.2 million. Derivative credit exposure was diversified with 10 different counterparties. We also had investments in these issuers with a fair value of $203.8 million as of December 31, 2015. Our maximum amount of loss due to credit risk with these issuers was $258.0 million as of December 31, 2015. See Note 11 to these consolidated financial statements for additional information regarding derivatives.


8.
Financing Activities

Indebtedness

The carrying value of our debt was as follows:

Indebtedness at Carrying Value:
As of December 31,
($ in millions)
2015
 
2014
 
 
 
 
7.15% surplus notes, due 2034
$
126.2

 
$
126.2

7.45% senior unsecured bonds, due 2032
252.7

 
252.7

Total indebtedness
$
378.9

 
$
378.9


We incurred interest expense of $28.3 million, $28.3 million and $28.3 million for the years ended December 31, 2015, 2014 and 2013, respectively.

7.15% surplus notes

Our 7.15% surplus notes are an obligation of Phoenix Life. Interest payments are at an annual rate of 7.15%, require the prior approval of the New York Department of Financial Services (“NYDFS”) and may be made only out of surplus funds which the NYDFS determines to be available for such payments under New York Insurance Law. New York Insurance Law provides that the notes are not part of the legal liabilities of Phoenix Life.


F-40
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
8.    Financing Activities (continued)


7.45% senior unsecured bonds

The indenture governing our 7.45% senior unsecured bonds requires us to file with U.S. Bank, National Association, as trustee, within 15 days after we are required to file with the Securities and Exchange Commission (“SEC”), copies of the annual reports and of the information, documents and other reports that we are required to file with the SEC pursuant to Section 13 or Section 15(d) of the Exchange Act of 1934, as amended (“Exchange Act”). In connection with a restatement of our prior period financial statements, we were unable to file with the SEC certain of our periodic reports and meet the requirement to timely deliver a copy of such reports to the trustee.

On February 21, 2014, we executed a supplemental indenture that provided a waiver to extend the date for providing the trustee with the Company’s Quarterly Report on Form 10-Q for the third quarter of 2012, the 2012 Form 10-K, our Quarterly Reports on Form 10-Q for the first, second and third quarters of 2013, the 2013 Form 10-K and our Quarterly Reports on Form 10-Q for the first, second and third quarters of 2014 to March 16, 2015. As a result, any and all defaults and events of default, including the delayed filing of such reports, occurring under the indenture prior to the supplemental indenture were waived. We completed the filing of these reports on November 21, 2014.

See Note 26 to these consolidated financial statements for additional information.


9.
Common Stock and Stock Repurchase Program

We have authorization for the issuance of 50 million shares of our common stock.

Through December 31, 2015, we have issued 6.4 million common shares (2.8 million shares to our policyholders in exchange for their interests in the mutual company and 3.6 million shares in sales to the public and to settle share-based compensation awards). As of December 31, 2015, shares issued and outstanding include 0.1 million shares held in a Rabbi Trust to fund equity awards on which recipients are allowed to vote their shares. As of December 31, 2015, we also had 0.3 million shares reserved for issuance under our stock option plans and 0.1 million shares reserved for issuance under our restricted stock unit (“RSU”) plans.

The Company is authorized to repurchase up to an aggregate amount of $25.0 million (not including fees and expenses) of the Company’s outstanding shares of common stocks. Under the stock repurchase program, purchases may be made from time to time in the open market, in accelerated stock buyback arrangements, in privately negotiated transactions or otherwise, subject to market prices and other conditions. There is no time limit placed on the duration of the program, which may be modified, extended or terminated by the Board of Directors at any time. There were no shares repurchased under this authorization.

In 2015, 2014 and 2013, we did not pay any stockholder dividends.

On November 6, 2015, State Farm Mutual Automobile Insurance Company (“State Farm”) filed a Schedule 13G which indicated that they no longer owned any of our outstanding common stock. In 2015, 2014 and 2013, we incurred $3.0 million, $2.7 million and $2.6 million, respectively, as compensation costs for the sale of our insurance and annuity products by entities that were either subsidiaries of State Farm or owned by State Farm agents.



F-41
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
 


10.
Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives

Separate accounts

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. We have variable annuity and variable life insurance contracts that are classified as separate account products. 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 fee income.

Assets with fair value and carrying value of $2.8 billion and $2.6 billion at December 31, 2015 and 2014, respectively, 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 consolidated balance sheets.

Separate Account Investments of Account Balances of Variable Annuity Contracts
with Insurance Guarantees:
As of December 31,
($ in millions)
2015
 
2014
 
 
 
 
Debt securities
$
300.5

 
$
375.9

Equity funds
1,325.6

 
1,638.6

Other
43.7

 
49.9

Total
$
1,669.8

 
$
2,064.4


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 generally consistent with those used for amortizing DAC.
•
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 DAC.

For variable annuities with GMDB and GMIB, reserves for these guarantees are calculated and recorded in policy liabilities and accruals on our consolidated balance sheets. Changes in the liability are recorded in policy benefits on our consolidated statements of operations and 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.


F-42
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
10.    Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives (continued)


Changes in Guaranteed Insurance Benefit
Liability Balances:
For the year ended
December 31, 2015
($ in millions)
Annuity
GMDB
 
Annuity
GMIB
 
 
 
 
Balance, beginning of period
$
21.4

 
$
17.1

Incurred
0.9

 
(0.9
)
Paid
(2.7
)
 
(0.6
)
Assumption unlocking
0.6

 
(6.7
)
Change due to net unrealized gains or losses included in AOCI
—

 
—

Balance, end of period
$
20.2


$
8.9


Changes in Guaranteed Insurance Benefit
Liability Balances:
For the year ended
December 31, 2014
($ in millions)
Annuity
GMDB
 
Annuity
GMIB
 
 
 
 
Balance, beginning of period
$
22.7

 
$
9.8

Incurred
1.8

 
2.1

Paid
(3.7
)
 
(0.2
)
Assumption unlocking
0.5

 
5.4

Change due to net unrealized gains or losses included in AOCI
0.1

 
—

Balance, end of period
$
21.4

 
$
17.1


Changes in Guaranteed Insurance Benefit
Liability Balances:
For the year ended
December 31, 2013
($ in millions)
Annuity
GMDB
 
Annuity
GMIB
 
 
 
 
Balance, beginning of period
$
15.9

 
$
21.7

Incurred
2.1

 
(3.6
)
Paid
(3.7
)
 
—

Assumption unlocking
8.4

 
(8.2
)
Change due to net unrealized gains or losses included in AOCI
—

 
(0.1
)
Balance, end of period
$
22.7

 
$
9.8



F-43
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
10.    Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives (continued)


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 our 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:
December 31, 2015
($ in millions)
Account
Value
 
NAR
before
Reinsurance
 
NAR
after
Reinsurance
 
Average
Attained Age
of Annuitant
 
 
 
 
 
 
 
 
GMDB return of premium
$
527.5

 
$
1.7

 
$
1.7

 
64
GMDB step up
1,453.7

 
146.5

 
47.7

 
65
GMDB earnings enhancement benefit (“EEB”)
24.0

 
2.6

 
2.6

 
65
GMDB greater of annual step up and roll up
19.6

 
6.1

 
6.1

 
70
Total GMDB at December 31, 2015
2,024.8

 
$
156.9

 
$
58.1

 
 
Less: General account value with GMDB
360.8

 
 
 
 
 
 
Subtotal separate account liabilities with GMDB
1,664.0

 
 
 
 
 
 
Separate account liabilities without GMDB
872.4

 
 
 
 
 
 
Total separate account liabilities
$
2,536.4

 
 
 
 
 
 
GMIB [1] at December 31, 2015
$
253.8

 
 
 
 
 
66
 
 
 
 
 
 
 
 
GMDB and GMIB Benefits by Type:
December 31, 2014
($ in millions)
Account
Value
 
NAR
before
Reinsurance
 
NAR
after
Reinsurance
 
Average
Attained Age
of Annuitant
 
 
 
 
 
 
 
 
GMDB return of premium
$
661.5

 
$
1.6

 
$
1.6

 
63
GMDB step up
1,723.2

 
112.2

 
13.4

 
64
GMDB earnings enhancement benefit (“EEB”)
29.1

 
—

 
—

 
65
GMDB greater of annual step up and roll up
22.7

 
4.8

 
4.8

 
69
Total GMDB at December 31, 2014
2,436.5

 
$
118.6


$
19.8

 
 
Less: General account value with GMDB
378.6

 
 
 
 
 
 
Subtotal separate account liabilities with GMDB
2,057.9

 
 
 
 
 
 
Separate account liabilities without GMDB
962.8

 
 
 
 
 
 
Total separate account liabilities
$
3,020.7

 
 
 
 
 
 
GMIB [1] at December 31, 2014
$
319.6

 
 
 
 
 
65
———————
[1]
Policies with a GMIB also have a GMDB, however these benefits are not additive. When a policy terminates due to death, any NAR related to GMIB is released. Similarly, when a policy goes into benefit status on a GMIB, its GMDB NAR is released.

Return of Premium: The death benefit is the greater of current account value or premiums paid (less any adjusted partial withdrawals).

Step Up: The death benefit is the greater of current account value, premiums paid (less any adjusted partial withdrawals) or the annual step up amount prior to the oldest original owner attaining a certain age. On and after the oldest original owner attains that age, the death benefit is the greater of current account value or the death benefit at the end of the contract year prior to the oldest original owner’s attaining that age plus premium payments (less any adjusted partial withdrawals) made since that date.

Earnings Enhancement Benefit: The death benefit is the greater of the premiums paid (less any adjusted partial withdrawals) or the current account value plus the EEB. The EEB is an additional amount designed to reduce the impact of taxes associated with distributing contract gains upon death.


F-44
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
10.    Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives (continued)


Greater of Annual Step Up and Annual Roll Up: The death benefit is the greatest of premium payments (less any adjusted partial withdrawals), the annual step up amount, the annual roll up amount or the current account value prior to the oldest original owner attaining age 81. On and after the oldest original owner attained age 81, the death benefit is the greater of current account value or the death benefit at the end of the contract year prior to the oldest original owner’s attained age of 81 plus premium payments (less any adjusted partial withdrawals) made since that date.

GMIB: The benefit is a series of monthly fixed annuity payments paid upon election of the rider. The monthly benefit is based on the greater of the sum of premiums (less any adjusted partial withdrawals) accumulated at an effective annual rate on the exercise date or 200% of the premiums paid (less any adjusted partial withdrawals) and a set of annuity payment rates that vary by benefit type and election age.

Fixed indexed annuity guaranteed benefits

Many of our fixed indexed annuities contain guaranteed benefits. We establish policy benefit liabilities for minimum death and minimum withdrawal benefit guarantees relating to these policies as follows:

•
Liabilities associated with the GMWB and Chronic Care guarantees are determined by estimating the value of the withdrawal benefits expected to be paid after the projected account value depletes and recognizing the value ratably over the accumulation period based on total expected assessments. 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 index crediting option, are fixed income instruments.
•
Liabilities associated with the 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 GMWB, GMDB and Chronic Care guarantees are generally consistent with those used for amortizing DAC. 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. The GMWB, GMDB and Chronic Care guarantees on fixed indexed annuities are recorded in policy liabilities and accruals on our consolidated balance sheets.

Changes in Guaranteed
Liability Balances:
Fixed Indexed Annuity
GMWB and GMDB
($ in millions)
For the years ended December 31,
 
2015
 
2014
 
2013
 
 
 
 
 
 
Balance, beginning of period
$
147.0

 
$
85.4

 
$
102.1

Incurred
54.1

 
33.4

 
60.8

Paid
(0.4
)
 
(0.3
)
 
(0.3
)
Assumption unlocking
(5.1
)
 
(7.4
)
 
(18.7
)
Change due to net unrealized gains or losses included in AOCI
(42.8
)
 
35.9

 
(58.5
)
Balance, end of period
$
152.8

 
$
147.0

 
$
85.4



F-45
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
10.    Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives (continued)


Universal life

Liabilities for universal life contracts in excess of the account balance, 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 generally consistent with those used for amortizing DAC.

Changes in Guaranteed
Liability Balances:
Universal Life
Secondary Guarantees
($ in millions)
For the years ended December 31,
 
2015
 
2014
 
2013
 
 
 
 
 
 
Balance, beginning of period
$
195.8

 
$
170.6

 
$
138.5

Incurred
45.5

 
39.9

 
37.9

Paid
(27.9
)
 
(15.3
)
 
(14.3
)
Assumption unlocking
0.7

 
(1.6
)
 
10.9

Change due to net unrealized gains or losses included in AOCI
(4.0
)
 
2.2

 
(2.4
)
Balance, end of period
$
210.1

 
$
195.8

 
$
170.6


In addition, the universal life block of business has experience which produces profits in earlier periods followed by losses in later periods for which additional reserves are required to be held above the account value liability. These reserves are accrued ratably over historical and anticipated positive income to offset the future anticipated losses. The assumptions used in estimating these liabilities are generally consistent with those used for amortizing DAC.

Changes in Additional
Liability Balances:
Universal Life
Profits Followed by Losses
($ in millions)
For the years ended December 31,
 
2015
 
2014
 
2013
 
 
 
 
 
 
Balance, beginning of period
$
351.5

 
$
249.1

 
$
311.7

Incurred
31.5

 
106.4

 
66.2

Assumption unlocking
19.7

 
(13.0
)
 
(129.9
)
Change due to net unrealized gains or losses included in AOCI
(12.1
)
 
9.0

 
1.1

Balance, end of period
$
390.6

 
$
351.5

 
$
249.1



F-46
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
10.    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 may contain a GMWB, GMAB and/or COMBO rider. These features are accounted for as embedded derivatives as described below.

Embedded Derivatives Non-Insurance Guaranteed Product Features:
As of December 31, 2015
($ in millions)
Account
Value
 
Average
Attained Age
of Annuitant
 
 
 
 
GMWB
$
385.1


66
GMAB
223.5


60
COMBO
4.9


65
Balance, end of period
$
613.5

 

 

 

Embedded Derivatives Non-Insurance Guaranteed Product Features:
As of December 31, 2014
($ in millions)
Account
Value
 
Average
Attained Age
of Annuitant
 
 
 
 
GMWB
$
496.8

 
65
GMAB
315.6

 
59
COMBO
7.1

 
65
Balance, end of period
$
819.5

 
 

The GMWB rider guarantees the contract owner a minimum amount of withdrawals and benefit payments over time, regardless of the investment performance of the contract, subject to an annual limit. Optional resets are available. In addition, these contracts have a feature that allows the contract owner to receive the guaranteed annual withdrawal amount for as long as they are alive.

The GMAB rider provides the contract owner with a minimum accumulation of the contract owner’s purchase payments deposited within a specific time period, adjusted for withdrawals, after a specified amount of time determined at the time of issuance of the variable annuity contract.

The COMBO rider includes either the GMAB or GMWB rider as well as the GMDB rider at the contract owner’s option.


F-47
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
10.    Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives (continued)


The GMWB, GMAB and COMBO features 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 consolidated balance sheets with changes in fair value recorded in realized investment gains on the consolidated statements of operations and 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.

Embedded Derivative Liabilities:
As of December 31,
($ in millions)
2015
 
2014
 
 
 
 
GMWB
$
9.0

 
$
7.3

GMAB
0.2

 
(0.3
)
COMBO
(0.1
)
 
(0.2
)
Total embedded derivative liabilities
$
9.1

 
$
6.8


There were no benefit payments made for the GMWB and GMAB during 2015 and 2014. 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.

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. These index options are embedded derivative liabilities that are required to be reported separately from the host contract. These index options are accounted for at fair value and recorded in policyholder deposit funds within the consolidated balance sheets with changes in fair value recorded in realized investment gains, in the consolidated statements of operations and comprehensive income. The fair value of these index options is calculated using the budget method. See Note 12 to these consolidated financial statements for additional information. Several additional inputs reflect our internally developed assumptions related to lapse rates and other policyholder behavior. The fair value of these embedded derivatives was $156.8 million and $153.9 million as of December 31, 2015 and 2014, respectively. In order to manage the risk associated with these equity indexed-crediting features, we hedge using equity index options. See Note 11 to these consolidated financial statements for additional information.

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 consolidated statements of operations and comprehensive income. Embedded derivatives gains and (losses) recognized in earnings are $(3.1) million, $(45.9) million and $12.2 million for the years ended December 31, 2015, 2014 and 2013, respectively.


11.
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 surplus hedging as well as hedging of our fixed indexed annuity (“FIA”) exposure. From time to time, the Company uses forward starting swaps to lock-in interest rates on future bond purchases. 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 FIA products.


F-48
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
11.    Derivative Instruments (continued)


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. Counterparties or central clearinghouses may require cash to be posted as collateral or margin. As of December 31, 2015 and 2014, $20.6 million and $18.6 million respectively, of cash and cash equivalents were held as collateral by a third party related to our derivative transactions.

Our derivatives are not designated as hedges for accounting purposes.

The following tables summarize the balance sheet classification of the Company’s gross derivative asset and liability fair value amounts. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and is presented in the tables below to quantify the volume of the Company’s derivative activity.

Derivative Instruments:
Maturity
 
Notional
Amount
 
Fair Value as of
December 31, 2015
($ in millions)
 
 
Assets
 
Liabilities [1]
 
 
 
 
 
 
 
 
Interest rate swaps
2018 - 2035
 
$
159.0

 
$
2.8

 
$
0.5

Variance swaps
2016 - 2017
 
0.7

 
—

 
6.5

Swaptions
2016
 
2,790.0

 
10.4

 
3.6

Put options
2016 - 2022
 
800.4

 
31.3

 
6.0

Call options [2]
2016 - 2020
 
2,502.1

 
57.5

 
32.3

Cross currency swaps
2016
 
10.0

 
1.5

 
—

Equity futures
2016
 
31.8

 
—

 
0.4

Total derivative instruments
 
 
$
6,294.0

 
$
103.5

 
$
49.3

———————
[1]
Derivative liabilities are included in other liabilities on the consolidated balance sheets.
[2]
Includes a contingent receivable of $1.5 million.

Derivative Instruments:
Maturity
 
Notional
Amount
 
Fair Value as of
December 31, 2014
($ in millions)
Assets
 
Liabilities [1]
 
 
 
 
 
 
 
 
Interest rate swaps
2016 - 2029
 
$
114.0

 
$
9.7

 
$
1.9

Variance swaps
2015 - 2017
 
0.9

 
—

 
8.6

Swaptions
2024 - 2025
 
777.0

 
0.1

 
—

Put options
2015 - 2022
 
692.5

 
31.1

 
—

Call options [2]
2015 - 2019
 
2,019.2

 
119.8

 
74.6

Cross currency swaps
2016
 
10.0

 
0.6

 
—

Equity futures
2015
 
4.1

 
—

 
0.5

Total derivative instruments
 
 
$
3,617.7

 
$
161.3

 
$
85.6

———————
[1]
Derivative liabilities are included in other liabilities on the consolidated balance sheets.
[2]
Includes a contingent receivable of $1.5 million.


F-49
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
11.    Derivative Instruments (continued)


Derivative Instrument Gains (Losses) Recognized in
Realized Investment Gains (Losses):
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
 
 
 
 
 
 
Interest rate swaps
$
4.8

 
$
11.0

 
$
(11.4
)
Variance swaps
(0.9
)
 
(0.7
)
 
(3.6
)
Swaptions
(4.1
)
 
(30.6
)
 
17.3

Put options
(9.2
)
 
(4.8
)
 
(42.3
)
Call options
(22.2
)
 
18.5

 
59.3

Cross currency swaps
0.8

 
1.3

 
(0.5
)
Equity futures
(0.3
)
 
(15.5
)
 
(46.5
)
Embedded derivatives
(3.1
)
 
(45.9
)
 
12.2

Total derivative instrument gains (losses) recognized in
  realized investment gains (losses)
$
(34.2
)
 
$
(66.7
)
 
$
(15.5
)

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.

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.

Cross Currency Swaps

We use cross currency swaps to hedge against market risks from changes in foreign currency exchange rates. Currency swaps are used to swap bond asset cash flows denominated in a foreign currency back to U.S. dollars. Under foreign currency swaps, we agree with another party (referred to as the counterparty) to exchange principal and periodic interest payments denominated in foreign currency for payments in U.S. dollars.


F-50
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
11.    Derivative Instruments (continued)


Offsetting of Derivative Assets/Liabilities

The Company may enter into netting agreements with counterparties that permit the Company to offset receivables and payables with such counterparties. The following tables present the gross fair value amounts, the amounts offset and net position of derivative instruments eligible for offset in the Company’s consolidated balance sheets that are subject to an enforceable master netting arrangement upon certain termination events, irrespective of whether they are offset in the balance sheet.

Offsetting of
Derivative Assets/Liabilities:
As of December 31, 2015
($ in millions)
Gross
amounts
recognized [1]
 
Gross
amounts
offset in the
balance sheet
 
Net amounts
presented in the
balance sheet
 
Gross amounts not offset
in the balance sheet
 
Net amount
 
 
 
 
Financial
instruments
 
Cash collateral
pledged [2]
 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivative assets
$
103.5

 
$
—

 
$
103.5

 
$
(47.4
)
 
$
—

 
$
56.1

Total derivative liabilities
$
(49.3
)
 
$
—

 
$
(49.3
)
 
$
47.4

 
$
1.9

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
Offsetting of
Derivative Assets/Liabilities:
As of December 31, 2014
($ in millions)
Gross
amounts
recognized [1]
 
Gross
amounts
offset in the
balance sheet
 
Net amounts
presented in the
balance sheet
 
Gross amounts not offset
in the balance sheet
 
Net amount
 
 
 
 
Financial
instruments
 
Cash collateral
pledged [2]
 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivative assets
$
161.3

 
$
—

 
$
161.3

 
$
(82.5
)
 
$
—

 
$
78.8

Total derivative liabilities
$
(85.6
)
 
$
—

 
$
(85.6
)
 
$
82.5

 
$
3.1

 
$
—

———————
[1]
Amounts include all derivative instruments, irrespective of whether there is a legally enforceable master netting arrangement in place.
[2]
Cash collateral pledged with derivative counterparties is recorded within other assets on the consolidated balance sheets. The Company pledges cash collateral to offset certain individual derivative liability positions with certain counterparties. Cash collateral of $18.7 million and $15.5 million as of December 31, 2015 and 2014, respectively, that exceeds the net liability resulting from the aggregate derivative positions with a corresponding counterparty is excluded.

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 December 31, 2015 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).


12.
Fair Value of Financial Instruments

U.S. GAAP 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.


F-51
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
12.    Fair Value of Financial Instruments (continued)


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.

Investments for which fair value is based upon unadjusted quoted market prices are reported as Level 1. The number of quotes the issuer obtains per instrument will vary depending on the security type and availability of pricing data from independent third-party, nationally recognized pricing vendors. The Company has defined a pricing hierarchy among pricing vendors to determine ultimate value used and also reviews significant discrepancies among pricing vendors to determine final value used. Prices from pricing services are not adjusted, but the Company may obtain a broker quote or use an internal model to price a security if it believes vendor prices do not reflect fair value. When quoted prices are not available, we use these pricing vendors to give an estimated fair value. If quoted prices, or an estimated price from our pricing vendors are not available or we determine that the price is based on disorderly transactions or in inactive markets, fair value is based upon internally developed models or obtained from an independent third-party broker. We primarily use market-based or independently sourced market parameters, including interest rate yield curves, option volatilities and currency rates. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, our own creditworthiness, liquidity and unobservable parameters that are applied consistently over time.

Management is responsible for the fair value of investments and the methodologies and assumptions used to estimate fair value. The fair value process is evaluated quarterly by the Pricing Committee, which is comprised of the Chief Investment Officer, Chief Accounting Officer and the Head of Investment Accounting. The purpose of the committee is to ensure the Company follows objective and reliable valuation practices, as well as approving changes to valuation methodologies and pricing sources. Using professional judgment and experience, we evaluate and weigh the relevance and significance of all readily available market information to determine the best estimate of fair value. Management reviews all Level 2 and Level 3 market prices on a quarterly basis.

During the fourth quarter of 2015, management implemented new diligence procedures to evaluate the pricing inputs and methodologies used by the primary pricing vendors. This analysis allowed the Company to conclude that fair value estimates received from these pricing vendors are derived from observable inputs. As a result, investments recorded using these vendor’s prices are included in Level 2. Prior to implementing these diligence procedures, the Company included many of these investments within Level 3. This enhancement to our pricing process resulted in the large transfers of investments from Level 3 to Level 2 shown in the tables below. As part of this policy refinement, the Company also reassessed the classification of short-term investments previously classified in Level 1. The Company determined that, while pricing inputs are observable and these securities are highly liquid, the comparability to peer companies’ disclosure is maximized by assigning the short-term investments to Level 2.

The following is a description of our valuation methodologies for assets and liabilities measured at fair value. Such valuation methodologies were applied to all of the assets and liabilities carried at fair value in each respective classification.


F-52
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
12.    Fair Value of Financial Instruments (continued)


Debt securities

We use pricing vendors to estimate fair value for the majority of our public debt securities. The pricing vendors’ estimates are based on market data and use pricing models that vary by asset class and incorporate available trade, bid and other market information. The methodologies used by these vendors are reviewed and understood by management through discussion with and information provided by these vendors. The Company assesses the reasonableness of individual security values received from valuation pricing vendors through various analytical techniques. Management also assesses whether the assumptions used appear reasonable and consistent with the objective of determining fair value. When our pricing vendors are unable to obtain evaluations based on market data, fair value is determined by obtaining a direct broker quote. Management reviews these broker quotes and valuation techniques to determine whether they are appropriate and consistently applied. Broker quotes are evaluated based on the Company’s assessment of the broker’s knowledge of, and history in trading, the security and the Company’s understanding of inputs used to derive the broker quote. Management also assesses reasonableness of individual security values similar to the vendor pricing review noted above.

For our private placement investments, we estimated fair value using internal models. Private placement securities are generally valued using a matrix pricing approach which categorizes these securities into groupings using remaining average life and credit rating as the two criteria to determine a grouping. The Company obtains current credit spread information from private placement dealers based on the criteria described and adds that spread information to U.S. Treasury rates corresponding to the life of each security to determine a discount rate for pricing. A small number of private placement securities are internally valued using models or analyst judgment. Fair values determined internally are also subject to management review to ensure that valuation models and inputs appear reasonable.

U.S. Government and Agency Securities

We value public U.S. government and agency debt by obtaining fair value estimates from our pricing vendors. For our private placement government and agency debt, our fair value is based on internal models using either a discounted cash flow or spread matrix which incorporates U.S. Treasury yields, market spreads and average life calculations. For short-term investments, we equate fair value to amortized cost due to their relatively short duration and limited exposure to credit risk.

State and Political Subdivisions

Public state and political subdivision debt is valued by obtaining fair value estimates from our pricing vendors. For our private placement debt securities, our fair value is based on internal models using either a discounted cash flow or spread matrix which incorporates U.S. Treasury yields, market spreads and average life calculations.

Foreign Government

We obtain fair value estimates from our pricing vendor to value foreign government debt.

Corporate Bonds

For the majority of our public corporate debt, we obtain fair value estimates from our pricing vendors. For public corporate debt in which we cannot obtain fair value estimates from our pricing vendors, we receive a direct quote from a broker. In most cases, we will obtain a direct broker quote from the broker that facilitated the deal. For our private placement debt securities, our fair value is based on internal models using either a discounted cash flow or spread matrix which incorporates U.S. Treasury yields, market spreads and average life calculations. For private fixed maturities, fair value is determined using a discounted cash flow model, which utilizes a discount rate based upon the average of spread surveys collected from private market intermediaries who are active in both primary and secondary transactions and takes into account, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. In determining the fair value of certain debt securities, the discounted cash flow model may also use unobservable inputs, which reflect the Company’s own assumptions about the inputs market participants would use in pricing the security.


F-53
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
12.    Fair Value of Financial Instruments (continued)


RMBS, CMBS, CDO/CLO and Other ABS

For structured securities, the majority of the fair value estimates are provided by our pricing vendors. When a fair value estimate is not available from the pricing vendors, we estimate fair value using direct broker quotes or internal models which use a discounted cash flow technique. These models consider the best estimate of cash flows until maturity to determine our ability to collect principal and interest and compare this to the anticipated cash flows when the security was purchased. In addition, management judgment is used to assess the probability of collecting all amounts contractually due to us. After consideration is given to the available estimates relevant to assessing the collectibility, including historical events, current conditions and reasonable forecasts, an estimate of future cash flows is determined. This includes evaluating the remaining payment terms, prepayment speeds, the underlying collateral, expected defaults using current default data and the financial condition of the issuer. Other factors considered are composite credit ratings, industry forecast, analyst reports and other relevant market data, similar to those the Company believes market participants would use.

Equity securities

Private Equity Investments

The fair value of non-public private equity is estimated using the valuation of the lead investor (“sponsor value”), typically a general partner of an investment in a limited partnership in which we invest. The sponsors, or lead investors/underwriters of these investments, account for them on an equity basis. The Company will then obtain securities fair value from these sponsors to infer the appropriate fair value for its holdings in the same or similar investment. If we cannot determine a price using the sponsor value, we estimate the fair value using management’s professional judgment. Management evaluates many inputs including, but not limited to, current operating performance, future expectations of the investment, industry valuations of comparable public companies and changes in market outlook and third-party financing environment over time. Financial information for these investments is reported on a three-month delay due to the timing of financial statements as of the current reporting period.

Public Equity

Our publicly held common equity securities are generally obtained through the initial public offering of privately-held equity investments and are reported at the estimated fair value determined based on quoted prices in active markets. To the extent these securities have readily determinable exchange based prices, the securities are categorized as Level 1 of our hierarchy. If management determines there are liquidity concerns or exchange based information for the specific securities in our portfolio is not available, the securities are categorized as Level 2. For our preferred equity securities, we obtain fair value estimates from our pricing vendors. In addition, management will consistently monitor these holdings and prices will be modified for any pertinent and/or significant events that would result in a valuation adjustment, including an analysis for potential credit-related events or impairments.

Separate account assets

Our separate account assets consist primarily of mutual funds that are frequently traded. These securities are valued using the market approach in which unadjusted market quotes are used. We include these securities in Level 1 of our hierarchy.

Derivatives

Exchange-traded derivatives are valued using quoted prices and are classified within Level 1 of the valuation hierarchy. However, few classes of derivative contracts are listed on an exchange. Therefore, the majority of our derivative positions are OTC derivative financial instruments, valued using third-party vendor derivative valuation systems that use as their basis readily observable market parameters, such as swap rates and volatility assumptions. These positions are classified within Level 2 of the valuation hierarchy. Such OTC derivatives include vanilla interest rate swaps, equity index options, swaptions, variance swaps and cross currency swaps. Nevertheless, we review and validate the resulting fair values against those provided to us monthly by the derivative counterparties for reasonableness.


F-54
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
12.    Fair Value of Financial Instruments (continued)


Fair values for OTC derivative financial instruments, mostly options and swaps, represent the present value of amounts estimated to be received from or paid to a marketplace participant in exchange of these instruments (i.e., the amount we would expect to receive in a derivative asset assignment or would expect to pay to have a derivative liability assumed). These derivatives are valued using third-party derivative valuation models which take into account the net present value of estimated future cash flows and capital market assumptions which are derived from directly observable prices from other OTC trades and exchange-traded derivatives. Such assumptions include swap rates and swaption volatility obtained from Bloomberg, as well as equity index volatility and dividend yields provided by OTC derivative dealers.

The fair value of OTC derivative financial instruments is also adjusted for the credit risk of the counterparty in cases in which there are no collateral offsets. To estimate the impact on fair value of a market participant’s view of counterparty non-performance risk we use a credit default swap (“CDS”) based approach in measuring this counterparty non-performance risk by looking at the cost of obtaining credit protection in the CDS market for the aggregate fair value exposure amount over the remaining life of derivative contracts, given the counterparty’s rating. The resulting upfront CDS premium, calculated using Bloomberg analytics, serves as a reasonable estimate of the default provision for the non-performance risk or counterparty valuation adjustment to the fair valuation of non-collateralized OTC derivative financial instruments.

Certain new and/or complex instruments may have immature or limited markets or require more sophistication in derivative valuation methodology. As a result, the pricing models used for valuation of these instruments often incorporate significant estimates and assumptions that market participants would use in pricing the instrument, which may impact the results of operations reported in the consolidated financial statements. Hence, instead of valuing these instruments using third-party vendor valuation systems, we rely on the fair market valuations reported to us monthly by the derivative counterparties. Fair values for OTC derivatives are verified using observed estimates about the costs of hedging the risk and other trades in the market. As the markets for these products develop, we continually refine our pricing models to correlate more closely to the market risk of these instruments.

Valuation of embedded derivatives

We make guarantees on certain variable annuity contracts, including those with GMAB, GMWB and COMBO riders. We also provide credits based on the performance of certain indices (“index credits”) on our fixed indexed annuity contracts. Both contract types have features that meet the definition of an embedded derivative. The GMAB, GMWB and COMBO embedded derivative liabilities associated with our variable annuity contracts are accounted for at fair value using a risk neutral stochastic valuation methodology with changes in fair value recorded in realized investment gains. The inputs to our fair value methodology include estimates derived from the asset derivatives market, including equity volatilities and the swap curves. Several additional inputs are not obtained from independent sources, but instead reflect our internally developed assumptions related to mortality rates, lapse rates and other policyholder behavior.

The fair value of the embedded derivative liabilities associated with the index credits on our fixed indexed annuity contracts is calculated using the budget method with changes in fair value recorded in realized investment gains. Under the budget method, the value of the initial index option is based on the fair value of the option purchased to hedge the index. The value of the index credits paid in future years is estimated to be the annual budgeted amount. Budgeted amounts are estimated based on available investment income using assumed investment returns and projected liability values. As there are significant unobservable inputs included in our fair value methodology for these embedded derivative liabilities, we consider the methods as described above as a whole to be Level 3 within the fair value hierarchy.

Our fair value calculation of embedded derivative liabilities includes a credit standing adjustment (the “CSA”). The CSA represents the adjustment that market participants would make to reflect the risk that guaranteed benefit obligations may not be fulfilled (“non-performance risk”). We estimate our CSA using the credit spread (based on publicly available credit spread indices) for financial services companies similar to the Company’s life insurance subsidiaries. The CSA is updated every quarter and, therefore, the fair value will change with the passage of time even in the absence of any other changes that would affect the valuation.


F-55
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
12.    Fair Value of Financial Instruments (continued)


The following tables present the financial instruments carried at fair value on a recurring basis 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 December 31, 2015 and 2014, respectively.

Fair Values of Financial Instruments by Level:
As of December 31, 2015
($ in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
 
 
U.S. government and agency [1]
$
—

 
$
128.7

 
$
460.9

 
$
589.6

State and political subdivision
—

 
357.5

 
179.9

 
537.4

Foreign government
—

 
234.5

 
8.4

 
242.9

Corporate
—

 
4,933.6

 
3,408.6

 
8,342.2

CMBS
—

 
662.1

 
22.0

 
684.1

RMBS
—

 
1,223.9

 
22.3

 
1,246.2

CDO/CLO
—

 
308.3

 
1.2

 
309.5

Other ABS
—

 
161.5

 
77.3

 
238.8

Total available-for-sale debt securities
—

 
8,010.1

 
4,180.6

 
12,190.7

Available-for-sale equity securities
—

 
97.2

 
84.8

 
182.0

Short-term investments
—

 
159.8

 
5.0

 
164.8

Derivative assets
—

 
103.5

 
—

 
103.5

Fair value investments [2]
18.8

 
57.9

 
88.3

 
165.0

Separate account assets
2,536.4

 
—

 
—

 
2,536.4

Total assets
$
2,555.2

 
$
8,428.5

 
$
4,358.7

 
$
15,342.4

Liabilities
 
 
 
 
 
 
 
Derivative liabilities
$
0.4

 
$
48.9

 
$
—

 
$
49.3

Embedded derivatives
—

 
—

 
165.9

 
165.9

Total liabilities
$
0.4

 
$
48.9

 
$
165.9

 
$
215.2

———————
[1]
Level 3 includes securities whose underlying collateral is an obligation of a U.S. government entity.
[2]
Fair value investments at December 31, 2015 include $59.0 million of debt securities recorded at fair value. In addition, we have also elected the fair value option for equity securities backing our deferred compensation liabilities at $18.8 million, which are Level 1 securities. Changes in the fair value of these assets are recorded through net investment income. Additionally, $87.2 million of assets relate to investment holdings of consolidated VIEs held at fair value.

All short-term investments were transfered from Level 1 to Level 2 in the fourth quarter of 2015. There were no other transfers of assets between Level 1 and Level 2 during the year ended December 31, 2015.


F-56
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
12.    Fair Value of Financial Instruments (continued)


Fair Values of Financial Instruments by Level:
As of December 31, 2014
($ in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
 
 
U.S. government and agency [1]
$
—

 
$
81.2

 
$
362.2

 
$
443.4

State and political subdivision
—

 
157.7

 
400.2

 
557.9

Foreign government
—

 
177.3

 
53.6

 
230.9

Corporate
—

 
3,994.2

 
4,403.9

 
8,398.1

CMBS
—

 
498.4

 
152.8

 
651.2

RMBS
—

 
1,461.9

 
470.3

 
1,932.2

CDO/CLO
—

 
—

 
196.9

 
196.9

Other ABS
—

 
23.6

 
245.1

 
268.7

Total available-for-sale debt securities
—

 
6,394.3

 
6,285.0

 
12,679.3

Available-for-sale equity securities
—

 
—

 
179.5

 
179.5

Short-term investments
149.7

 
—

 
—

 
149.7

Derivative assets
—

 
161.3

 
—

 
161.3

Fair value investments [2]
32.4

 
13.0

 
190.0

 
235.4

Separate account assets
3,020.7

 
—

 
—

 
3,020.7

Total assets
$
3,202.8

 
$
6,568.6

 
$
6,654.5

 
$
16,425.9

Liabilities
 
 
 
 
 
 
 
Derivative liabilities
$
0.5

 
$
85.1

 
$
—

 
$
85.6

Embedded derivatives
—

 
—

 
160.7

 
160.7

Total liabilities
$
0.5

 
$
85.1

 
$
160.7

 
$
246.3

———————
[1]
Level 3 includes securities whose underlying collateral is an obligation of a U.S. government entity.
[2]
Fair value investments at December 31, 2014 include $111.9 million of debt securities recorded at fair value. In addition, we have also elected the fair value option for equity securities backing our deferred compensation liabilities at $23.5 million as of December 31, 2014. Changes in the fair value of these assets are recorded through net investment income. Additionally, $100.0 million of assets relate to investment holdings of consolidated VIEs held at fair value, $8.8 million of which are Level 1 securities.

There were no transfers of assets between Level 1 and Level 2 during the year ended December 31, 2014.

Available-for-sale debt securities as of December 31, 2015 and 2014, respectively, are reported net of $28.2 million and $27.8 million of Level 2 investments included in discontinued operations assets on the consolidated balance sheets.

The following tables present corporates carried at fair value and on a recurring basis by sector.

Fair Values of Corporates by Level and Sector:
As of December 31, 2015
($ in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Corporates
 
 
 
 
 
 
 
Consumer
$
—

 
$
895.6

 
$
1,249.6

 
$
2,145.2

Energy
—

 
636.4

 
293.2

 
929.6

Financial services
—

 
1,773.8

 
354.0

 
2,127.8

Capital goods
—

 
521.2

 
262.8

 
784.0

Transportation
—

 
175.9

 
284.5

 
460.4

Utilities
—

 
417.5

 
700.1

 
1,117.6

Other
—

 
513.2

 
264.4

 
777.6

Total corporates
$
—

 
$
4,933.6

 
$
3,408.6

 
$
8,342.2


F-57
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
12.    Fair Value of Financial Instruments (continued)


Fair Values of Corporates by Level and Sector:
As of December 31, 2014
($ in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Corporates
 
 
 
 
 
 
 
Consumer
$
—

 
$
593.0

 
$
1,266.6

 
$
1,859.6

Energy
—

 
534.6

 
472.8

 
1,007.4

Financial services
—

 
1,617.3

 
967.9

 
2,585.2

Capital goods
—

 
398.1

 
384.8

 
782.9

Transportation
—

 
104.7

 
305.8

 
410.5

Utilities
—

 
348.1

 
683.4

 
1,031.5

Other
—

 
398.4

 
322.6

 
721.0

Total corporates
$
—

 
$
3,994.2

 
$
4,403.9

 
$
8,398.1


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. Transfers in and out of Level 3 occur at the beginning of each period. The securities which were transferred into Level 3 for the years ended December 31, 2015 and 2014 were due to decreased market observability of similar assets and/or changes to significant inputs. Transfers out of Level 3 for the year ended December 31, 2015 were due to the implementation of due diligence procedures which allowed for a refinement of the analysis of observable inputs as described in more detail above. Transfers out of Level 3 for the year ended December 31, 2014 were due to increased market activity for comparable instruments or observability of inputs.

Level 3 Financial Assets:
As of December 31, 2015
($ in millions)
Balance,
beginning
of period
 
Purchases
 
Sales
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Realized and
unrealized
gains
(losses)
included in
income [1]
 
Unrealized
gains
(losses)
included
in OCI
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency [2]
$
362.2

 
$
25.1

 
$
(23.8
)
 
$
117.0

 
$
(6.3
)
 
$
2.3

 
$
(15.6
)
 
$
460.9

State and political subdivision
400.2

 
41.1

 
(14.1
)
 
—

 
(238.7
)
 
2.7

 
(11.3
)
 
179.9

Foreign government
53.6

 
—

 
(0.3
)
 
14.8

 
(61.0
)
 
(0.3
)
 
1.6

 
8.4

Corporate
4,403.9

 
690.4

 
(532.9
)
 
354.0

 
(1,328.3
)
 
(48.1
)
 
(130.4
)
 
3,408.6

CMBS
152.8

 
30.1

 
(5.6
)
 
25.6

 
(176.8
)
 
0.2

 
(4.3
)
 
22.0

RMBS
470.3

 
0.7

 
(73.8
)
 
—

 
(368.7
)
 
(1.1
)
 
(5.1
)
 
22.3

CDO/CLO
196.9

 
166.2

 
(58.2
)
 
—

 
(304.5
)
 
0.2

 
0.6

 
1.2

Other ABS
245.1

 
4.5

 
(27.6
)
 
—

 
(139.8
)
 
(0.1
)
 
(4.8
)
 
77.3

Total available-for-sale
  debt securities
6,285.0

 
958.1

 
(736.3
)
 
511.4

 
(2,624.1
)
 
(44.2
)
 
(169.3
)
 
4,180.6

Available-for-sale equity securities
179.5

 
20.2

 
(14.9
)
 
—

 
(92.6
)
 
(9.5
)
 
2.1

 
84.8

Short-term investments
—

 
5.0

 
—

 
—

 
—

 
—

 
—

 
5.0

Fair value investments
190.0

 
11.7

 
(79.4
)
 
—

 
(44.9
)
 
10.9

 
—

 
88.3

Total assets
$
6,654.5

 
$
995.0

 
$
(830.6
)
 
$
511.4

 
$
(2,761.6
)
 
$
(42.8
)
 
$
(167.2
)
 
$
4,358.7

———————
[1]
Reflected in realized investment gains and losses for all assets except fair value investments which are included in net investment income.
[2]
Includes securities whose underlying collateral is an obligation of a U.S. government entity.

F-58
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
12.    Fair Value of Financial Instruments (continued)


Level 3 Financial Assets:
As of December 31, 2014
($ in millions)
Balance,
beginning
of period
 
Purchases
 
Sales
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Realized and
unrealized
gains
(losses)
included in
income [1]
 
Unrealized
gains
(losses)
included
in OCI
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency [2]
$
327.2

 
$
40.0

 
$
(26.7
)
 
$
—

 
$
—

 
$
—

 
$
21.7

 
$
362.2

State and political subdivision
269.1

 
106.5

 
(6.5
)
 
11.3

 
—

 
—

 
19.8

 
400.2

Foreign government
15.9

 
7.4

 
—

 
28.5

 
—

 
—

 
1.8

 
53.6

Corporate
3,893.8

 
710.9

 
(428.9
)
 
244.0

 
(97.9
)
 
4.6

 
77.4

 
4,403.9

CMBS
113.7

 
25.1

 
(36.6
)
 
71.1

 
(30.4
)
 
1.4

 
8.5

 
152.8

RMBS
552.7

 
3.1

 
(75.5
)
 
—

 
(4.3
)
 
3.1

 
(8.8
)
 
470.3

CDO/CLO
224.1

 
41.4

 
(61.6
)
 
—

 
—

 
2.7

 
(9.7
)
 
196.9

Other ABS
247.7

 
26.1

 
(40.0
)
 
17.6

 
—

 
1.7

 
(8.0
)
 
245.1

Total available-for-sale
debt securities
5,644.2

 
960.5

 
(675.8
)
 
372.5

 
(132.6
)
 
13.5

 
102.7

 
6,285.0

Available-for-sale equity securities
135.2

 
65.0

 
(21.2
)
 
—

 
—

 
3.7

 
(3.2
)
 
179.5

Short-term investments
0.9

 
—

 
(0.5
)
 
—

 
—

 
(0.4
)
 


 
—

Fair value investments
169.9

 
14.4

 
(22.2
)
 
—

 
—

 
27.9

 
—

 
190.0

Total assets
$
5,950.2

 
$
1,039.9

 
$
(719.7
)
 
$
372.5

 
$
(132.6
)
 
$
44.7

 
$
99.5

 
$
6,654.5

———————
[1]
Reflected in realized investment gains and losses for all assets except fair value investments which are included in net investment income.
[2]
Includes securities whose underlying collateral is an obligation of a U.S. government entity.

Level 3 Financial Liabilities:
Embedded Derivatives
($ in millions)
For the years ended December 31,
 
2015
 
2014
 
 
 
 
Balance, beginning of period
$
160.7

 
$
87.8

Net purchases / settlements
2.1

 
27.1

Transfers into Level 3
—

 
—

Transfers out of Level 3
—

 
—

Realized (gains) losses
3.1

 
45.8

Balance, end of period
$
165.9

 
$
160.7



F-59
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
12.    Fair Value of Financial Instruments (continued)


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

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

Level 3 Assets: [1]
As of December 31, 2015
($ in millions)
Fair
Value
 
Valuation
Technique(s)
 
Unobservable
Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
U.S. government and agency
$
459.9

 
Discounted cash flow
 
Yield
 
1.44% - 4.83% (3.52%)
State and political subdivision
$
179.9

 
Discounted cash flow
 
Yield
 
2.04% - 14.79% (4.14%)
Foreign government
$
4.1

 
Discounted cash flow
 
Yield
 
2.06%
Corporate
$
3,135.8

 
Discounted cash flow
 
Yield
 
1.11% - 11.20% (3.75%)
Other ABS
$
34.4

 
Discounted cash flow
 
Yield
 
1.07% - 3.20% (2.14%)
Fair value investments
$
6.6

 
Discounted cash flow
 
Default rate
 
0.15%
 
 
 
 
 
Recovery rate
 
43.00%
———————
[1]
Excludes Level 3 assets which are valued based upon non-binding independent third-party valuations or third-party price information for which unobservable inputs are not reasonably available to us.

Level 3 Assets: [1]
As of December 31, 2014
($ in millions)
Fair
Value
 
Valuation
Technique(s)
 
Unobservable
Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
U.S. government and agency
$
362.2

 
Discounted cash flow
 
Yield
 
0.99% - 4.27% (3.17%)
State and political subdivision
$
159.1

 
Discounted cash flow
 
Yield
 
2.15% - 4.50% (3.22%)
Corporate
$
3,116.6

 
Discounted cash flow
 
Yield
 
0.93% - 6.88% (3.24%)
Other ABS
$
39.3

 
Discounted cash flow
 
Yield
 
0.60% - 4.00% (1.92%)
Fair value investments
$
6.3

 
Discounted cash flow
 
Default rate
 
0.17%
 
 
 
 
 
Recovery rate
 
44.00%
———————
[1]
Excludes Level 3 assets which are valued based upon non-binding independent third-party valuations or third-party price information for which unobservable inputs are not reasonably available to us.


F-60
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
12.    Fair Value of Financial Instruments (continued)


Significant unobservable inputs used in the fair value measurement of variable annuity (“VA”) GMAB and GMWB type 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 credit standing adjustment (“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, future option budget, 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.

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

Level 3 Liabilities:
As of December 31, 2015
($ in millions)
Fair
Value
 
Valuation
Technique(s)
 
Unobservable
Input
 
Range
 
 
 
 
 
 
 
 
Embedded derivatives (FIA)
$
156.8

 
Budget method
 
Swap curve
 
0.55% - 2.46%
 
 
 
 
 
Mortality rate
 
100% or 90% 2012 IAM basic table
with scale G2
 
 
 
 
 
Lapse rate
 
0.50% - 32.50%
 
 
 
 
 
CSA
 
4.45%
Embedded derivatives
(GMAB / GMWB / COMBO)
$
9.1

 
Risk neutral stochastic
  valuation methodology
 
Volatility surface
 
4.80% - 72.02%
 
 
 
 
 
Swap curve
 
0.57% - 2.68%
 
 
 
 
 
Mortality rate
 
110% 2012 IAM basic table
with scale G2
 
 
 
 
 
Lapse rate
 
0.00% - 53.00%
 
 
 
 
 
CSA
 
4.45%

Level 3 Liabilities:
As of December 31, 2014
($ in millions)
Fair
Value
 
Valuation
Technique(s)
 
Unobservable
Input
 
Range
 
 
 
 
 
 
 
 
Embedded derivatives (FIA)
$
153.9

 
Budget method
 
Swap curve
 
0.24% - 2.55%
 
 
 
 
 
Mortality rate
 
105% or 97% 2012 IAM basic table
with scale G2
 
 
 
 
 
Lapse rate
 
0.04% - 46.44%
 
 
 
 
 
CSA
 
3.08%
Embedded derivatives
(GMAB / GMWB / COMBO)
$
6.8

 
Risk neutral stochastic
  valuation methodology
 
Volatility surface
 
9.89% - 67.34%
 
 
 
 
 
Swap curve
 
0.21% - 2.76%
 
 
 
 
 
Mortality rate
 
105% 2012 IAM basic table
with scale G2
 
 
 
 
 
Lapse rate
 
0.00% - 40.00%
 
 
 
 
 
CSA
 
3.08%


F-61
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
12.    Fair Value of Financial Instruments (continued)


Level 3 Assets and Liabilities by Pricing Source:
As of December 31, 2015
($ in millions)
Internal [1]
 
External [2]
 
Total
Assets
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
U.S. government and agency [3]
$
459.9

 
$
1.0

 
$
460.9

State and political subdivision
179.9

 
—

 
179.9

Foreign government
4.1

 
4.3

 
8.4

Corporate
3,135.8

 
272.8

 
3,408.6

CMBS
—

 
22.0

 
22.0

RMBS
—

 
22.3

 
22.3

CDO/CLO
—

 
1.2

 
1.2

Other ABS
34.4

 
42.9

 
77.3

Total available-for-sale debt securities
3,814.1

 
366.5

 
4,180.6

Available-for-sale equity securities
—

 
84.8

 
84.8

Short-term investments
—

 
5.0

 
5.0

Fair value investments
6.6

 
81.7

 
88.3

Total assets
$
3,820.7

 
$
538.0

 
$
4,358.7

Liabilities
 
 
 
 
 
Embedded derivatives
$
165.9

 
$
—

 
$
165.9

Total liabilities
$
165.9

 
$
—

 
$
165.9

———————
[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.

Level 3 Assets and Liabilities by Pricing Source:
As of December 31, 2014
($ in millions)
Internal [1]
 
External [2]
 
Total
Assets
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
U.S. government and agency [3]
$
362.2

 
$
—

 
$
362.2

State and political subdivision
159.1

 
241.1

 
400.2

Foreign government
—

 
53.6

 
53.6

Corporate
3,116.6

 
1,287.3

 
4,403.9

CMBS
—

 
152.8

 
152.8

RMBS
—

 
470.3

 
470.3

CDO/CLO
—

 
196.9

 
196.9

Other ABS
39.3

 
205.8

 
245.1

Total available-for-sale debt securities
3,677.2

 
2,607.8

 
6,285.0

Available-for-sale equity securities
—

 
179.5

 
179.5

Short-term investments
—

 
—

 
—

Fair value investments
6.3

 
183.7

 
190.0

Total assets
$
3,683.5

 
$
2,971.0

 
$
6,654.5

Liabilities
 
 
 
 
 
Embedded derivatives
$
160.7

 
$
—

 
$
160.7

Total liabilities
$
160.7

 
$
—

 
$
160.7

———————
[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.

F-62
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
12.    Fair Value of Financial Instruments (continued)


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
of Financial Instruments:
 
 
As of December 31,
($ in millions)
Fair Value
Hierarchy
Level
 
2015
 
2014
 
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Financial assets:
 
 
 
 
 
 
 
 
 
Policy loans
Level 3
 
$
2,382.5

 
$
2,368.7

 
$
2,352.1

 
$
2,339.2

Life settlements
Level 3
 
$
—

 
$
—

 
$
22.4

 
$
17.4

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
Investment contracts
Level 3
 
$
4,333.2

 
$
4,334.6

 
$
3,955.0

 
$
3,957.3

7.15% Surplus notes
Level 3
 
$
126.2

 
$
91.4

 
$
126.2

 
$
95.8

7.45% Senior unsecured bonds
Level 2
 
$
252.7

 
$
206.1

 
$
252.7

 
$
248.0


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 life settlements

The fair value of life settlement contracts is determined based on the discounted cash flows from the expected proceeds from the insurance policies less the cash flows of the expected costs to keep the policies in force. These cash flows are discounted using a market rate.

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.

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.

Indebtedness

Fair value of our senior unsecured bonds is based upon quoted market prices. The fair value of surplus notes is determined with reference to the fair value of our senior unsecured bonds including consideration of the different features in the two securities.



F-63
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
 


13.
Income Taxes

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

Significant Components of Income Taxes from Continuing Operations:
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
Current
 
 
 
 
 
U.S.
$
(34.3
)
 
$
10.5

 
$
8.5

Foreign
—

 
—

 
—

Deferred
 
 
 
 
 
U.S.
—

 
—

 
—

Foreign
—

 
—

 
—

Total income tax expense (benefit)
$
(34.3
)
 
$
10.5

 
$
8.5


Reconciliation of Effective Income Tax Rate:
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
Income (loss) from continuing operations before income taxes:
 
 
 
 
 
U.S.
$
(159.3
)
 
$
(195.2
)
 
$
38.1

Foreign
—

 
—

 
—

Total
$
(159.3
)
 
$
(195.2
)
 
$
38.1

 
 
 
 
 
 
Income tax expense (benefit) at statutory rate of 35%
$
(55.8
)
 
$
(68.3
)
 
$
13.3

Dividend received deduction
(3.5
)
 
(3.0
)
 
(2.3
)
Expiration of tax attribute carryovers
12.9

 
7.4

 
4.5

Impact of deferred tax validation
—

 
0.5

 
—

Noncontrolling interest
(2.4
)
 
(1.4
)
 
(0.2
)
Valuation allowance increase (release)
21.3

 
79.3

 
(4.1
)
State income taxes (benefit)
(5.3
)
 
(4.3
)
 
(2.8
)
Other, net
(1.5
)
 
0.3

 
0.1

Income tax expense (benefit) applicable to continuing operations
$
(34.3
)
 
$
10.5

 
$
8.5

Effective income tax rates
21.5%
 
(5.4%)
 
22.3%

Allocation of Income Taxes:
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
 
 
 
 
 
 
Income tax expense (benefit) from continuing operations
$
(34.3
)
 
$
10.5

 
$
8.5

Income tax from OCI:
 
 
 
 
 
Unrealized investment (gains) losses
(71.3
)
 
35.7

 
(20.5
)
Pension
—

 
—

 
—

Policy dividend obligation and DAC
—

 
—

 
—

Other
—

 
—

 
—

Income tax benefit from discontinued operations
(0.1
)
 
(0.4
)
 
(0.3
)
Total income tax recorded to all components of income
$
(105.7
)
 
$
45.8

 
$
(12.3
)


F-64
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)

 
13.    Income Taxes (continued)


Deferred Income Tax Balances Attributable to Temporary Differences:
As of December 31,
($ in millions)
2015
 
2014
Deferred income tax assets
 
 
 
Future policyholder benefits
$
748.1

 
$
792.0

Employee benefits
128.9

 
124.4

Net operating and capital loss carryover benefits
222.4

 
198.5

Foreign tax credits carryover benefits
1.6

 
2.3

Alternative minimum tax credits
12.9

 
12.9

General business tax credits
35.4

 
17.7

Other
9.9

 
32.8

Available-for-sale debt securities
105.5

 
34.2

Subtotal
1,264.7

 
1,214.8

Valuation allowance
(599.7
)
 
(613.0
)
Total deferred income tax assets, net of valuation allowance
665.0

 
601.8

Deferred tax liabilities
 
 
 
DAC
227.4

 
188.1

Investments
181.1

 
241.7

Accrued liabilities
151.0

 
137.8

Gross deferred income tax liabilities
559.5

 
567.6

Net deferred income tax assets
$
105.5

 
$
34.2


As of December 31, 2015, we performed our assessment of the realization of deferred tax assets. This assessment included consideration of all available evidence - both positive and negative - weighted to the extent the evidence was objectively verifiable. In performing this assessment, management considered tax law which generally requires the Company to compute taxable income separately for its life and non-life entities. This guidance impacts our ability to use tax loss carryovers.

As part of this assessment, the Company considered the existence of cumulative GAAP pre-tax losses in both the life and non-life subgroups. Management considers this significant negative evidence in its assessment of the realization of deferred tax assets.

Due to the significance of the negative evidence as well as the weight given to the objective nature of the cumulative losses in recent years, and after consideration of all available evidence, we concluded that our estimates of future taxable income, timing of the reversal of existing taxable temporary differences and certain tax planning strategies did not provide sufficient positive evidence to assert that it is more likely than not that certain deferred tax assets would be realizable. To the extent the Company can demonstrate the ability to generate sustained profitability in the future, the valuation allowance could potentially be reversed resulting in a benefit to income tax expense.

Accordingly, a valuation allowance of $599.7 million has been recorded on net deferred tax assets of $705.2 million. The remaining deferred tax asset of $105.5 million attributable to available-for-sale debt securities with gross unrealized losses does not require a valuation allowance due to our ability and intent to hold these securities until recovery of principal value through sale or contractual maturity, thereby avoiding the realization of taxable losses. This conclusion is consistent with prior periods. The impact of the valuation allowance on the allocation of tax to the components of the financial statements included an increase of $21.3 million in continuing operations, a decrease of $35.2 million in OCI-related deferred tax balances and an increase of $0.6 million recorded to discontinued operations.

The tax provision reported in continuing operations of $34.3 million consists primarily of a current tax benefit related to the taxable losses recorded by the life group in 2015.

As of December 31, 2015, the Company has $222.4 million of net operating loss carryovers. Of this amount, $201.2 million related to $574.9 million of federal net operating losses that are scheduled to expire between the years 2021 and 2035. The remaining amount of $21.2 million is attributable to state income tax net operating losses.


F-65
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)

 
13.    Income Taxes (continued)


As of December 31, 2015, we had deferred income tax assets of $35.4 million related to general business tax credit carryovers, which are expected to expire between the years 2022 and 2031. Additionally, we had deferred income tax assets of $12.9 million related to alternative minimum tax credit carryovers which do not expire.

The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2013. The IRS audit for 2011 and 2012 tax years closed in 2015. The Company believes no material unanticipated assessments have been identified, and we believe no adjustment to our liability for uncertain tax positions for prior year periods is required.

There were no unrecognized tax benefits for the years ended December 31, 2015, 2014 and 2013.

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

The Company has recorded $1.0 million and $0 of interest for the years ended December 31, 2015 and 2014. No penalties have been paid or accrued for the years ended December 31, 2015 and 2014.

As part of the intercompany tax sharing agreement, the holding company is required to hold funds in escrow for the benefit of Phoenix Life in the event Phoenix Life incurs future taxable losses. In accordance with its regulatory obligation, the Company funded the escrow with $76.2 million of assets including treasury stock, a surplus note issued by PHL Variable and $23.8 million of cash from the holding company in the fourth quarter of 2015. The escrow amount is primarily attributable to cash due to the holding company for losses utilized and benefited in the 2013 tax return.


14.
Accumulated Other Comprehensive Income

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

Accumulated Other Comprehensive Income (Loss)
Attributable to The Phoenix Companies, Inc.:
($ in millions)
Net
Unrealized
Gains / (Losses)
on Investments
where
Credit-related
OTTI was
Recognized
 
Net
Unrealized
Gains / (Losses)
on All Other
Investments [1]
 
Net
Pension
Liability
Adjustments
 
Total
 
 
 
 
 
 
 
 
Balance as of December 31, 2013
$
7.0

 
$
26.9

 
$
(218.9
)
 
$
(185.0
)
Change in component during the period
  before reclassifications
9.5

 
37.9

 
(84.8
)
 
(37.4
)
Amounts reclassified from AOCI
(6.6
)
 
(10.0
)
 
4.6

 
(12.0
)
Balance as of December 31, 2014
9.9

 
54.8

 
(299.1
)
 
(234.4
)
Change in component during the period
  before reclassifications
(10.4
)
 
(15.3
)
 
(1.8
)
 
(27.5
)
Amounts reclassified from AOCI
4.8

 
(15.5
)
 
6.4

 
(4.3
)
Balance as of December 31, 2015
$
4.3

 
$
24.0

 
$
(294.5
)
 
$
(266.2
)
———————
[1]
See Note 7 to these consolidated financial statements for additional information regarding offsets to net unrealized investment gains and losses which include policyholder dividend obligation, DAC and other actuarial offsets, and deferred income tax expense (benefit).


F-66
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)

 
14.    Accumulated Other Comprehensive Income (continued)


Reclassifications from AOCI consist of the following:

AOCI
 
Amounts Reclassified from AOCI
 
Affected Line Item in the
Consolidated Statements of Operations and Comprehensive Income
($ in millions)
 
For the years ended December 31,
 
 
 
 
2015
 
2014
 
2013
 
 
Net unrealized gains / (losses) on investments where
  credit-related OTTI was recognized:
 
 
 
 
 
 
 
 
Available-for-sale securities
 
$
(7.4
)
 
$
10.1

 
$
(5.3
)
 
Net realized capital gains (losses)
 
 
(7.4
)
 
10.1

 
(5.3
)
 
Total before income taxes
 
 
(2.6
)
 
3.5

 
(1.8
)
 
Income tax expense (benefit)
 
 
$
(4.8
)
 
$
6.6

 
$
(3.5
)
 
Net income (loss)
Net unrealized gains / (losses) on
  all other investments:
 
 
 
 
 
 
 
 
Available-for-sale securities
 
$
23.8

 
$
15.3

 
$
37.0

 
Net realized capital gains (losses)
 
 
23.8

 
15.3

 
37.0

 
Total before income taxes
 
 
8.3

 
5.3

 
12.9

 
Income tax expense (benefit)
 
 
$
15.5

 
$
10.0

 
$
24.1

 
Net income (loss)
Net pension liability adjustments:
 
 
 
 
 
 
 
 
Amortization of actuarial gains (losses)
 
$
(11.1
)
 
$
(8.2
)
 
$
(11.5
)
 
Other operating expense
Amortization of prior service costs
 
1.2

 
1.1

 
1.2

 
Other operating expense
 
 
(9.9
)
 
(7.1
)
 
(10.3
)
 
Total before income taxes
 
 
(3.5
)
 
(2.5
)
 
(3.6
)
 
Income tax expense (benefit)
 
 
$
(6.4
)
 
$
(4.6
)
 
$
(6.7
)
 
Net income (loss)
Total amounts reclassified from AOCI
 
$
4.3

 
$
12.0

 
$
13.9

 
Net income (loss)


15.
Employee Benefit Plans and Employment Agreements

Pension and other post-employment benefits

We provide our employees with post-employment benefits that include retirement benefits, through pension and savings plans, and other benefits, including health care and life insurance.

We have three defined benefit plans. The employee pension plan (“Employee Plan”) provides benefits not to exceed the amount allowed under the Internal Revenue Code. Two supplemental plans (“Supplemental Plans”) provide benefits in excess of the Employee Plan. Retirement benefits under the plans are a function of years of service and compensation. Effective March 31, 2010, all benefit accruals under these defined benefit plans were frozen.

We have historically provided certain health care, dental and life insurance benefits (“Other Post-Employment Benefits Plan”) for eligible retired employees. In December 2009, we announced the decision to eliminate retiree medical coverage for active employees whose age plus years of service did not equal at least 65 as of March 31, 2010. Employees who remain eligible must still meet certain other defined criteria to receive benefits.

In addition, the cap on the Company’s contribution of retiree medical costs for retirees under the age of 65 was reduced beginning with the 2011 plan year. In October 2012, we announced that effective January 1, 2013, the Company’s contribution for pre-65 retiree medical and for post-65 retiree medical was reduced per covered member.

In October 2015, we announced that retiree medical benefits were eliminated for grandfathered active employees who had not met the criteria to retire as of March 31, 2016. In addition, we announced that effective January 1, 2016, the Company’s contribution for pre-65 retiree medical and for post-65 medical was further reduced per covered member.


F-67
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
15.    Employee Benefit Plans and Employment Agreements (continued)


These decisions affected retiree medical contributions for both past service and active employees. Curtailments and plan amendments were recognized as a result of the plan changes.

Assumptions Related to Pension and Other Post-Employment Employee Benefit Plans

Pursuant to accounting principles related to the Company’s pension and other post-employment obligations to employees under its various benefit plans, the Company is required to make assumptions in order to calculate the related liabilities and expenses each period. The two economic assumptions that have the most impact on pension and other post-employment expense are the weighted-average discount rate and the expected long-term rate of return on plan assets.

The weighted-average discount rate assumption is developed using a yield curve approach based upon future pension and other post-employment obligations and currently available market and industry data. The yield curve utilized is comprised of bonds rated Aa/AA or higher by Moody’s Investor Services, Standard & Poor’s and Fitch Ratings Ltd. with maturities between one and fifteen or more years.

We use a building block approach in estimating the expected long-term rate of return for plan assets. Historical returns are determined by asset class. The historical relationships between equities, fixed income and other asset classes are reviewed. We apply long-term asset return estimates to the Employee Plan’s target asset allocation to determine the weighted-average long-term return. The Company applied a consistent approach to the determination of the expected rate of return for 2016. The expected rate of return for 2016 is 7.5% for the Employee Plan. Our long-term asset allocation was determined through modeling long-term returns and asset return volatilities. The allocation reflects proper diversification and was reviewed against other corporate pension plans for reasonability and appropriateness.

We use a December 31 measurement date for our pension and other post-employment benefits.

The weighted-average assumptions used in calculating the benefit obligations and the net amount recognized for the years ended December 31, 2015, 2014 and 2013 are presented in the following tables.

Principal Rates and Assumptions:
For the years ended December 31,
 
2015
 
2014
 
2013
Assumptions Used to Determine Benefit Obligations
 
 
 
 
 
Discount rate – Employee Plan
4.54
%
 
4.10
%
 
4.84
%
Discount rate – Supplemental Plans
4.43
%
 
3.97
%
 
4.69
%
Discount rate – Other Post-Employment Benefits Plan
4.10
%
 
3.62
%
 
4.21
%
Future compensation increase rate
N/A [1]

 
N/A [1]

 
N/A [1]

Deferred investment gain/loss amortization corridor – Employee Plan
5.00
%
 
5.00
%
 
5.00
%
Deferred investment gain/loss amortization corridor – Supplemental Plans
5.00
%
 
5.00
%
 
5.00
%
Deferred investment gain/loss amortization corridor – Other Post-Employment Benefits Plan
10.00
%
 
10.00
%
 
10.00
%
 
 
 
 
 
 
Assumptions Used to Determine Benefit Expense
 
 
 
 
 
Discount rate – Employee Plan
4.10
%
 
4.84
%
 
3.98
%
Discount rate – Supplemental Plans
3.97
%
 
4.69
%
 
3.81
%
Discount rate – Other Post-Employment Benefits Plan
3.62
%
 
4.21
%
 
3.37
%
Future compensation increase rate
N/A [1]

 
N/A [1]

 
N/A [1]

Expected long-term rate of return - Employee Plan
7.50
%
 
7.50
%
 
7.75
%
Deferred investment gain/loss amortization corridor – Employee Plan
5.00
%
 
5.00
%
 
5.00
%
Deferred investment gain/loss amortization corridor – Supplemental Plans
5.00
%
 
5.00
%
 
5.00
%
Deferred investment gain/loss amortization corridor – Other Post-Employment Benefits Plan
10.00
%
 
10.00
%
 
10.00
%
———————
[1]
The Employee Plan was frozen effective March 31, 2010. For periods subsequent to the plan freeze, salary scale is not applicable.


F-68
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
15.    Employee Benefit Plans and Employment Agreements (continued)


The change in health care cost trend rate does not affect the liabilities or expense associated with retiree medical (due to the cap) or life insurance plans. A one-percentage point change in the dental trend rate would have an insignificant effect on the dental liabilities or expenses.

Employee Plan

The following tables set forth a reconciliation of beginning and ending balances of the benefit obligation and fair value of plan assets, as well as the funded status and AOCI of the Company’s Employee Plan, for the years ended December 31, 2015 and 2014.

Obligations and Funded Status:
Employee Plan
($ in millions)
For the years ended December 31,
 
2015
 
2014
Change in Benefit Obligation
 
 
 
Benefit obligation, beginning of period
$
714.9

 
$
638.5

Service cost
3.0

 
2.3

Interest cost
28.7

 
30.1

Net actuarial (gain) loss
(37.3
)
 
79.7

Benefits paid
(36.8
)
 
(35.7
)
Benefit obligation, end of period
672.5

 
714.9

Change in Plan Assets
 
 
 
Fair value of plan assets, beginning of period
540.4

 
516.5

Plan assets’ actual return
(10.2
)
 
47.8

Employer contributions
—

 
11.8

Benefits paid
(36.8
)
 
(35.7
)
Fair value of plan assets, end of period
493.4

 
540.4

Under funded status, end of period [1]
$
(179.1
)
 
$
(174.5
)
AOCI
 
 
 
Net actuarial gain (loss)
$
(240.2
)
 
$
(236.4
)
AOCI before income taxes
$
(240.2
)
 
$
(236.4
)
Accumulated benefit obligation
$
672.5

 
$
714.9

———————
[1]
Funded status as recognized in the consolidated balance sheets.

The Employee Plan is a qualified plan that is funded with assets held in a trust. It is the Company’s practice to make contributions to the qualified pension plan at least sufficient to avoid benefit restrictions under funding requirements of the Pension Protection Act of 2006. This generally requires the Company to maintain assets that are at least 80% of the plan’s liabilities as calculated under the applicable regulations at the end of the prior year. Under these regulations, the qualified pension plan is currently funded above 80% of the funding target liabilities as of December 31, 2015.

To meet the above funding objectives, we made contributions to the pension plan totaling $0 and $11.8 million during 2015 and 2014, respectively. On August 8, 2014, the Highway and Transportation Funding Act of 2014 was enacted into law, effective immediately. The law extends certain pension funding provisions originally included in the Moving Ahead for Progress in the 21st Century Act (MAP-21). The Company took advantage of this in September of 2014, which resulted in the Company not making any further contributions for the remainder of 2014 and 2015. We expect to make no contributions over the next 12 months.


F-69
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
15.    Employee Benefit Plans and Employment Agreements (continued)


The components of net periodic benefit costs and other changes in plan assets and benefit obligations recognized in OCI were as follows:

Components of Pension Benefit Expense:
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
Net periodic benefit costs
 
 
 
 
 
Service cost
$
3.0

 
$
2.3

 
$
2.1

Interest cost
28.7

 
30.1

 
27.0

Plan assets expected return
(39.0
)
 
(37.5
)
 
(36.1
)
Net loss amortization
8.3

 
5.9

 
8.6

Net periodic benefit costs (credit)
1.0

 
0.8

 
1.6

Other changes in plan assets and benefit obligations recognized in OCI
 
 
 
 
 
Deferrals for the period – net actuarial (gain) loss
11.9

 
69.7

 
(77.7
)
Amortization for the period – net actuarial gain (loss)
(8.3
)
 
(5.9
)
 
(8.6
)
Total recognized in OCI
3.6

 
63.8

 
(86.3
)
Total recognized in net periodic benefit costs and OCI
$
4.6

 
$
64.6

 
$
(84.7
)

The estimated net actuarial loss that will be expected to be recognized from AOCI into net periodic benefit cost during 2016 is $8.8 million.

Employee Plan Assets

Our investment policy and strategy employs a total return approach combining equities, fixed income, real estate and other assets to maximize the long-term return of the plan assets for a prudent level of risk. Risk tolerance is determined based on consideration of plan liabilities and plan-funded status. The investment portfolio contains a diversified blend of equity, fixed income, real estate and alternative investments. The equity investments are diversified across domestic and foreign markets, across market capitalizations (large, mid and small cap), as well as growth, value and blend. Derivative instruments are not typically used for implementing asset allocation decisions and are not used in conjunction with leverage. Investment performance is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurement and periodic presentations by asset managers included in the plan.

Employee Plan Asset Allocation:
As of December 31,
 
2015
 
2014
Asset Category
 
 
 
Equity securities
53
%
 
52
%
Debt securities
40
%
 
40
%
Real estate
—
%
 
2
%
Other
7
%
 
6
%
Total
100
%
 
100
%

See Note 12 to these consolidated financial statements for a discussion of the methods employed by us to measure the fair value of invested assets. The following discussion of fair value measurements applies exclusively to our Employee Plan assets.

The valuation of the Mercer Group Trust and the Virtus Real Estate Investment Trust are valued based upon the net asset value of the trusts. These investments are classified as Level 2.

The valuation of the limited partnerships and real estate investments is based upon the capital value we obtain from the financial statements we receive from the general partner which is deemed an appropriate approximation of the fair value as described in Note 12. These significant valuation inputs are unobservable and these investments are classified as Level 3.


F-70
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
15.    Employee Benefit Plans and Employment Agreements (continued)


The following tables present the level within the fair value hierarchy at which the financial assets of the Employee Plan are measured on a recurring basis at December 31, 2015 and 2014.

Fair Value of Assets by Type and Level:
As of December 31, 2015
($ in millions)
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
Mercer Group Trust
$
—

 
$
440.9

 
$
—

 
$
440.9

Virtus Real Estate Securities Trust
—

 
14.7

 
—

 
14.7

Limited partnerships and real estate investments
—

 
—

 
33.3

 
33.3

Total assets at fair value [1]
$
—

 
$
455.6

 
$
33.3

 
$
488.9

———————
[1]
Excludes $4.5 million in other assets.

Fair Value of Assets by Type and Level:
As of December 31, 2014
($ in millions)
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
Mercer Group Trust
$
—

 
$
464.0

 
$
—

 
$
464.0

Virtus Real Estate Securities Trust
—

 
14.3

 
—

 
14.3

Limited partnerships and real estate investments
—

 
—

 
57.6

 
57.6

Total assets at fair value [1]
$
—

 
$
478.3

 
$
57.6

 
$
535.9

———————
[1]
Excludes $4.5 million in other assets.

Level 3 Financial Assets:
For the years ended December 31,
($ in millions)
2015
 
2014
 
 
 
 
Balance, beginning of period
$
57.6

 
$
55.3

Purchases
4.3

 
3.4

Sales
(34.4
)
 
(4.2
)
Net appreciation on limited partnerships
5.8

 
3.1

Balance, end of period
$
33.3

 
$
57.6


Supplemental Plans

The Company also has two supplemental plans that provide benefits to certain executives in excess of the Employee Plan. These plans are unfunded and represent general obligations of the Company. We fund periodic benefit payments under these plans from cash flow from operations as they become due.


F-71
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
15.    Employee Benefit Plans and Employment Agreements (continued)


The following tables set forth a reconciliation of beginning and ending balances of the benefit obligation, as well as the funded status and AOCI of the Company’s Supplemental Plans, for the years ended December 31, 2015 and 2014.

Obligations and Funded Status:
Supplemental Plans
($ in millions)
For the years ended December 31,
 
2015
 
2014
Change in Benefit Obligation
 
 
 
Benefit obligation, beginning of period
$
153.7

 
$
137.4

Interest cost
5.9

 
6.4

Net actuarial (gain) loss
(7.7
)
 
18.6

Benefits paid
(9.2
)
 
(8.7
)
Benefit obligation, end of period
$
142.7

 
$
153.7

Under funded status, end of period [1]
$
(142.7
)
 
$
(153.7
)
AOCI
 
 
 
Net actuarial gain (loss)
$
(68.7
)
 
$
(79.5
)
AOCI before income taxes
$
(68.7
)
 
$
(79.5
)
Accumulated benefit obligation
$
142.7

 
$
153.7

———————
[1]
Funded status as recognized in the consolidated balance sheets.

The components of net periodic benefit costs and other changes in benefit obligations recognized in OCI were as follows:

Components of Supplemental Plans Benefit Expense:
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
Net periodic benefit costs
 
 
 
 
 
Service cost
$
—

 
$
—

 
$
—

Interest cost
5.9

 
6.4

 
5.6

Plan assets expected return
—

 
—

 
—

Net loss amortization
3.1

 
2.6

 
2.9

Prior service cost amortization
—

 
—

 
—

Net periodic benefit costs (credit)
9.0

 
9.0

 
8.5

Other changes in benefit obligations recognized in OCI
 
 
 
 
 
Deferrals for the period – net actuarial (gain) loss
(7.7
)
 
18.6

 
(10.8
)
Amortization for the period – net actuarial gain (loss)
(3.1
)
 
(2.6
)
 
(2.9
)
Total recognized in OCI
(10.8
)
 
16.0

 
(13.7
)
Total recognized in net periodic benefit costs and OCI
$
(1.8
)
 
$
25.0

 
$
(5.2
)

The estimated net actuarial loss that will be expected to be recognized from AOCI into net periodic benefit cost during 2016 is $2.7 million.

Other Post-Employment Benefits Plan

We have historically provided our employees with certain health care, dental and life insurance benefits under the plan. The plan is unfunded and represents general obligations of the Company. We fund periodic benefit payments under this plan from cash flow from operations as they become due.


F-72
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
15.    Employee Benefit Plans and Employment Agreements (continued)


The following tables set forth a reconciliation of beginning and ending balances of the benefit obligation, as well as the funded status and AOCI of the Company’s Other Post-Employment Benefit Plan, for the years ended December 31, 2015 and 2014.

Obligations and Funded Status:
Other Post-Employment Benefit Plan
($ in millions)
For the years ended December 31,
 
2015
 
2014
Change in Benefit Obligation
 
 
 
Benefit obligation, beginning of period
$
33.4

 
$
36.5

Service and interest cost
1.2

 
1.5

Net actuarial (gain) loss
(1.6
)
 
(0.7
)
Benefits paid
(3.4
)
 
(3.9
)
Plan amendments
(6.1
)
 
—

Curtailment
(0.6
)
 
—

Benefit obligation, end of period
$
22.9

 
$
33.4

Under funded status, end of period [1]
$
(22.9
)
 
$
(33.4
)
AOCI
 
 
 
Net actuarial gain (loss)
$
8.2

 
$
6.9

Prior service credit (cost)
6.1

 
9.7

AOCI before income taxes
$
14.3

 
$
16.6

Accumulated benefit obligation
$
22.9

 
$
33.4

———————
[1]
Funded status as recognized in the consolidated balance sheets.

The components of net periodic benefit costs and other changes in benefit obligations recognized in OCI were as follows:

Components of Other Post-Employment Benefits Expense:
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
Net periodic benefit costs
 
 
 
 
 
Service cost
$
0.1

 
$
0.1

 
$
0.2

Interest cost
1.1

 
1.4

 
1.3

Net gain amortization
(0.3
)
 
(0.3
)
 
—

Prior service cost amortization
(1.2
)
 
(1.1
)
 
(1.2
)
Curtailment
(9.1
)
 
—

 
—

Net periodic benefit costs (credit)
(9.4
)
 
0.1

 
0.3

Other changes in benefit obligations recognized in OCI
 
 
 
 
 
Deferrals for the period – net actuarial (gain) loss
(1.6
)
 
(0.7
)
 
(2.2
)
Amortization for the period – net actuarial gain (loss)
0.3

 
0.3

 
—

Deferrals for prior service credit (cost)
(6.1
)
 
—

 
—

Amortization for prior service credit (cost)
9.6

 
1.1

 
1.2

Total recognized in OCI
2.2

 
0.7

 
(1.0
)
Total recognized in net periodic benefit costs and OCI
$
(7.2
)
 
$
0.8

 
$
(0.7
)

The estimated net gain that will be expected to be recognized from AOCI into net periodic benefit cost during 2016 is $1.0 million, of which $0.5 million relates to prior service cost and $0.5 million relates to net actuarial gain (loss).


F-73
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
15.    Employee Benefit Plans and Employment Agreements (continued)


Benefit Payments

The following table sets forth amounts of benefits expected to be paid over the next ten years from the Company’s Employee Plan, Supplemental Plans and Other Post-Employment Benefit Plan as of December 31, 2015:

10-Year Benefit Payout Projection:
($ in millions)
Employee
Plan
 
Supplemental
Plans
 
Other
Post-Employment
Benefit Plan
 
Total
 
 
 
 
 
 
 
 
2016
$
36.4

 
$
9.5

 
$
2.5

 
$
48.4

2017
36.7

 
9.6

 
2.3

 
48.6

2018
37.2

 
9.6

 
2.2

 
49.0

2019
37.7

 
9.6

 
2.1

 
49.4

2020
38.3

 
9.4

 
2.0

 
49.7

2021 to 2025
204.0

 
46.9

 
8.1

 
259.0


401(k) Plan

The Company’s employees are eligible to participate in a 401(k) plan. Under this plan, employees may contribute up to 60% of eligible base salary, and then the Company matches employee’s contributions at certain percentage levels based on years of service. Certain employees can elect to defer a certain percentage of their base pay into the Company’s Non-Qualified Excess Investment Plan and receive a Company match based upon the same formula in our 401(k) plan. All balances under this plan are unfunded general obligations of the Company, which the Company hedges by making contributions to a trust subject to the claims of our creditors in certain circumstances.

Expense recognized related to the 401(k) plan was $4.4 million, $4.3 million and $4.0 million in 2015, 2014 and 2013, respectively.

Additional Retirement Benefits

We have agreements with certain of our employees that provide for additional retirement benefits. As of December 31, 2015 and 2014, the estimated liability for these agreements was $16.9 million and $18.1 million, respectively. We fund periodic benefit payments under this plan from cash flows from operations as they become due.

Employment Agreements

We have entered into agreements with certain key executives of the Company that will, in certain circumstances, provide separation benefits upon the termination of the executive’s employment by the Company for reasons other than death, disability, cause or retirement, or by the executive for “good reason,” as defined in the agreements. The agreements provide this protection only if the termination occurs following (or is effectively connected with) the occurrence of a change of control, as defined in the agreements. As soon as reasonably possible upon a change in control, as so defined, we are required to make an irrevocable contribution to a trust in an amount sufficient to pay benefits due under these agreements.


16.
Share-Based Payments

We provide share-based compensation to certain of our employees and non-employee directors, as further described below. The compensation cost that has been charged against income for these plans is summarized in the following table:

Share-Based Compensation Plans:
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
 
 
 
 
 
 
Compensation cost charged to income from continuing operations
$
2.8

 
$
3.0

 
$
4.6

Income tax expense (benefit) before valuation allowance
$
(1.0
)
 
$
(1.0
)
 
$
(1.6
)

F-74
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued


16.    Share-Based Payments (continued)


We did not capitalize any cost of stock-based compensation during the three years ended December 31, 2015.

Stock options

Under its Stock Incentive Plan, the Company is authorized to issue share options equal to approximately 315,000 shares of common stock to officers and employees, less the number of share options issuable under the Directors’ Stock Plan. The Directors’ Stock Plan authorizes the issuance of share options equal to approximately 51,250 shares of common stock. Each option, once vested, entitles the holder to purchase one share of our common stock. The employees’ options vest over a three-year period while the directors’ options vest immediately. Once vested, options become exercisable. For stock options awarded, we recognize expense over the vesting period equal to their fair value at issuance. We calculate the fair value of options using the Black-Scholes option valuation model.

A summary of the stock option activity as of and for the year ended December 31, 2015 is as follows:

Summary of Stock Option Activity:
For the years ended December 31, 2015
($ in millions, except share data)
Common
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
 
 
 
 
 
 
 
 
Outstanding, beginning of period
50,367

 
$
187.38

 
2.52

 
$
0.10

Granted
—

 
—

 
—

 
—

Exercised
—

 
—

 
—

 
—

Forfeited
—

 
—

 
—

 
—

Canceled/expired
(15,957
)
 
202.94

 
—

 
—

Outstanding, end of period
34,410

 
$
180.17

 
2.13

 
$
—

Vested and exercisable, end of period
34,410

 
$
180.17

 
2.13

 
$
—


We did not grant any options for the years ended December 31, 2015, 2014 and 2013 and all options outstanding at December 31, 2015 and 2014 were previously vested.

There were 0, 1,472 and 0 options exercised for the years ended December 31, 2015, 2014 and 2013, respectively.

As of December 31, 2015, there were no unrecognized compensation costs related to non-vested stock options.

Restricted stock units and Restricted stock

We have restricted stock plans under which we grant RSUs to employees and non-employee directors. RSUs granted to employees are performance-vested, time-vested or a combination thereof. Each RSU, once vested, entitles the holder to one share of our common stock when the restriction expires. We recognize compensation expense over the vesting period of the RSUs, which is generally three years for each award.


F-75
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued


16.    Share-Based Payments (continued)


A summary of the RSU activity as of and for the year ended December 31, 2015 is as follows:

Summary of RSU Activity:
For the years ended
December 31, 2015
 
Time-Vested
 
Number
 
Weighted-
Average
Grant Date
Fair Value
 
 
 
 
Outstanding, beginning of period
96,087

 
$
49.25

Awarded
68,506

 
24.00

Adjustment for performance results
—

 
—

Conversion of performance-contingent awards
—

 
—

Converted to common shares
(19,278
)
 
41.93

Forfeited
(5,137
)
 
19.23

Outstanding, end of period
140,178

 
$
39.01


The shares underlying these awards will be issued upon vesting unless the participant elects to defer receipt. Deferred awards will be issued on each employee’s and each director’s respective termination or retirement.

RSUs Awarded:
For the years ended December 31,
 
2015
 
2014
 
2013
 
Number
 
Weighted-
Average
Grant Date
Fair Value
 
Number
 
Weighted-
Average
Grant Date
Fair Value
 
Number
 
Weighted-
Average
Grant Date
Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
Time-vested RSUs awarded
68,506

 
$
24.00

 
13,063

 
$
55.81

 
18,251

 
$
33.76


RSU Values:
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
 
 
 
 
 
 
Intrinsic value of RSUs converted
$
0.3

 
$
0.2

 
$
2.3

Total grant date fair value of RSUs vested converted to common shares
$
0.8

 
$
0.2

 
$
3.6


There are no RSUs subject to future issuance based on the achievement of market criteria established under certain of our incentive plans.

Liability Awards

The Company issues cash-settled awards with payouts linked to the performance of the Company’s stock to certain employees and executive officers. Each recipient is granted a base cash payout that is adjusted according to a formula that measures the performance of the Company’s stock relative to the performance of a specified benchmark index over the measurement period. The fair value of the unsettled liability awards is remeasured at each reporting date with changes in fair value recognized as expense ratably over the measurement period.

As of December 31, 2015 and 2014, a liability of $2.6 million and $1.4 million, respectively, was accrued for these awards. Cash payments of $0 and $4.7 million were made related to these awards for the years ended December 31, 2015 and 2014, respectively.

F-76
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
 


17.
Earnings Per Share

The following table presents a reconciliation of shares used in calculating basic earnings (loss) per common share to those used in calculating diluted earnings (loss) per common share.

Shares Used in Calculation of Earnings Per Share:
For the years ended December 31,
(shares in thousands)
2015
 
2014
 
2013
 
 
 
 
 
 
Weighted-average common shares outstanding
5,751

 
5,748

 
5,735

Weighted-average effect of dilutive potential common shares:
 
 
 
 
 
Restricted stock units
26

 
5

 
27

Employee stock options
—

 
2

 
2

Potential common shares
26

 
7

 
29

Less: Potential common shares excluded from calculation due to net losses
(26
)
 
(7
)
 
—

Dilutive potential common shares
—

 
—

 
29

Weighted-average common shares outstanding,
  including dilutive potential common shares
5,751

 
5,748

 
5,764


As a result of the net loss from continuing operations for the years ended December 31, 2015 and 2014, we are required to use basic weighted average common shares outstanding in the calculation of diluted earnings per share for those periods, since the inclusion of shares of RSUs and options would have been anti-dilutive to the earnings per share calculation. During 2013, we reported net income from continuing operations and included all potentially dilutive common shares in the calculation of diluted earnings per share.


18.
Segment Information

Life and Annuity derives revenue from premiums, fee income and cost of insurance (“COI”) charges, net investment income and realized gains (losses). Saybrus derives revenue primarily from fees collected for advisory and distribution services.

Segment Information on Revenues:
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
 
 
 
 
 
 
Life and Annuity
$
1,664.1

 
$
1,640.8

 
$
1,689.6

Saybrus Partners [1]
43.3

 
37.5

 
26.8

Less: Intercompany revenues [2]
12.6

 
11.4

 
8.8

Total revenues
$
1,694.8

 
$
1,666.9

 
$
1,707.6

———————
[1]
Includes intercompany commission revenue of $12.6 million, $11.5 million and $9.2 million for the years ended December 31, 2015, 2014 and 2013.
[2]
All intercompany balances are eliminated in consolidating the financial statements.

Operating income is a non-U.S. GAAP financial measure. Management believes that these measures provide additional insight into the underlying trends in our operations however, our non-U.S. GAAP financial measures should not be considered as substitutes for net income or measures that are derived from or incorporate net income and may be different from similarly titled measures of other companies. Investors should evaluate both U.S. GAAP and non-U.S. GAAP financial measures when reviewing our performance. Operating income is calculated by excluding realized investment gains (losses) as their amount and timing may be subject to management’s investment decisions.


F-77
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
18.    Segment Information (continued)


Results of Operations by Segment as Reconciled to Consolidated Net Income (Loss):
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
 
 
 
 
 
 
Life and Annuity operating income (loss)
$
(134.8
)
 
$
(160.2
)
 
$
19.0

Saybrus Partners operating income (loss)
8.3

 
6.2

 
3.1

Less: Applicable income tax expense (benefit)
(34.3
)
 
10.5

 
8.5

Income (loss) from discontinued operations, net of income taxes
(2.0
)
 
(3.5
)
 
(2.9
)
Net realized investment gains (losses)
(32.8
)
 
(41.2
)
 
16.0

Less: Net income (loss) attributable to noncontrolling interests
6.7

 
4.0

 
0.7

Net income (loss)
$
(133.7
)
 
$
(213.2
)
 
$
26.0


We have not provided asset information for the segments. The assets attributable to Saybrus are not significant relative to the assets of our consolidated balance sheets and are not utilized by the chief operating decision maker. All third-party interest revenue and interest expense of the Company reside within the Life and Annuity segment.


19.
Discontinued Operations

Discontinued Reinsurance Operations

In 1999, we discontinued our reinsurance operations through a combination of sale, reinsurance and placement of certain retained group accident and health reinsurance business into run-off. We adopted a formal plan to stop writing new contracts covering these risks and to end the existing contracts as soon as those contracts would permit. However, we remain liable for claims under contracts which have not been commuted.

We have established reserves for claims and related expenses that we expect to pay on our discontinued group accident and health reinsurance business. These reserves are based on currently known facts and estimates about, among other things, the amount of insured losses and expenses that we believe we will pay, the period over which they will be paid, the amount of reinsurance we believe we will collect from our retrocessionaires and the likely legal and administrative costs of winding down the business. Our total policy liabilities and accruals were $35.9 million and $39.3 million as of December 31, 2015 and 2014, respectively. Our total amounts recoverable from retrocessionaires related to paid losses were $0.7 million and $0.1 million as of December 31, 2015 and 2014, respectively. Losses of $1.8 million in 2015, $3.4 million in 2014 and $1.9 million in 2013 were recognized primarily related to adverse developments which occurred during these respective years. See Note 22 to these consolidated financial statements for additional discussion on remaining liabilities of our discontinued reinsurance operations.


20.
Statutory Financial Information and Regulatory Matters

Our insurance subsidiaries are required to file, with state regulatory authorities, annual statements prepared on an accounting basis prescribed or permitted by such authorities.

As of December 31, 2015, statutory surplus differs from equity reported in accordance with U.S. GAAP for life insurance companies primarily as follows:

•
policy acquisition costs are expensed when incurred;
•
surplus notes are included in surplus rather than debt;
•
post-employment benefit expense allocated to Phoenix Life relate only to vested participants and expense is based on different assumptions and reflect a different method of adoption;
•
life insurance reserves are based on different assumptions; and
•
deferred tax assets are limited to amounts reversing in a specified period with an additional limitation based upon 10% or 15% of statutory surplus, dependent on meeting certain risk-based capital (“RBC”) thresholds.


F-78
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
20.    Statutory Financial Information and Regulatory Matters (continued)


The information below is taken from the annual statement filed with state regulatory authorities.

Statutory Financial Data: [1]
As of or for the years ended December 31,
($ in millions)
2015
 
2014
 
2013
Statutory capital, surplus and AVR
 
 
 
 
 
Phoenix Life [2][4]
$
535.3

 
$
752.2

 
$
735.2

PHL Variable [5]
209.3

 
213.7

 
235.2

Other
27.3

 
37.5

 
37.5

Total statutory capital, surplus and AVR
$
771.9

 


 


 
 
 
 
 
 
Statutory net income (loss)
 
 
 
 
 
Phoenix Life [3][4]
$
(660.7
)
 
$
132.5

 
$
(21.0
)
PHL Variable [5]
(14.0
)
 
(41.1
)
 
(86.1
)
Other
(0.2
)
 
(0.3
)
 
(1.0
)
Total statutory net income (loss)
$
(674.9
)
 
$
91.1

 
$
(108.1
)
———————
[1]
Amounts in statements filed with state regulatory authorities differ from audited financial statements.
[2]
Prior to July 1, 2015, the effective date of the de-stack, Phoenix Life’s capital and surplus included the capital and surplus of its subsidiaries.
[3]
Phoenix Life’s 2015 statutory net loss includes $687.9 million of realized losses relating to the de-stacking of Phoenix Life’s life subsidiaries. There was an offsetting unrealized capital gain for the same amount, resulting in no impact to capital and surplus.
[4]
Statutory capital, surplus and AVR reflected in the annual audited financial statements for Phoenix Life for the years ended December 31, 2014 and December 31, 2013 was $666.6 million and $713.2 million, and statutory net income (loss) for those same periods was $116.3 million and $(17.8) million. The primary difference between the annual statement filed and the audited financial statements in 2014 was the impact of the COI settlement, which due to the timing of the settlement in the second quarter of 2015 was not reflected in the annual statement filed with the state regulatory authorities but was recorded in the audited financial statements.
[5]
Statutory capital, surplus and AVR reflected in the annual audited financial statements for PHL Variable for the years ended December 31, 2014 and December 31, 2013 was $156.5 million and $259.9 million, and statutory net income (loss) for those same periods was $(88.3) million and $(65.4) million. The primary difference between the annual statement filed and the audited financial statements in 2014 was the impact of the COI settlement, which due to the timing of the settlement in the second quarter of 2015 was not reflected in the annual statement filed with the state regulatory authorities but was recorded in the audited financial statements

As a result of discussions with its regulators related to the intercompany reinsurance treaty between Phoenix Life and PHL Variable executed in the second quarter of 2015, the Company’s operating subsidiaries were de-stacked, effective July 1, 2015. The impact of the de-stack on Phoenix Life’s capital and surplus was $262.2 million, which included $228.2 million for the reduction in subsidiary investment and $34.0 million for the related decrease in admitted deferred tax assets.

Phoenix Life’s statutory basis capital and surplus (including AVR) decreased from $752.2 million at December 31, 2014 to $535.3 million at December 31, 2015. Prior to the de-stacking, Phoenix Life’s surplus decreased as a result of the $48.5 million COI settlement in the first quarter of 2015, and increased $153.5 million as a result of the execution of an intercompany reinsurance treaty in the second quarter. In the third quarter, Phoenix Life’s surplus decreased by $262.2 million as a result of the de-stacking. During 2015, Phoenix Life also declared and paid $59.9 million of dividends to Phoenix.

PHL Variable’s statutory basis capital and surplus decreased from $213.7 million at December 31, 2014 to $209.3 million at December 31, 2015. Reductions in surplus were driven primarily by worse than expected mortality in the universal life business and the impact of PHL Variable’s $36.4 million portion of the COI settlement in the first quarter of 2015. The reductions in PHL Variable’s surplus were partially offset by the increase in surplus of $52.5 million as a result of the execution of the intercompany reinsurance treaty in the second quarter and $33.1 million in capital contributions from Phoenix.


F-79
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
20.    Statutory Financial Information and Regulatory Matters (continued)


Regulatory Capital Requirements

The Company’s insurance companies’ states of domicile require reporting of RBC. RBC is based on a formula calculated by applying factors to various assets, premium and statutory reserve items taking into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk and business risk. The insurance laws give the states explicit regulatory authority to require various actions by, or take various actions against, insurers whose total adjusted capital does not exceed certain RBC levels. All of the Company’s statutory subsidiaries had RBC ratios in excess of the minimum levels required by the applicable insurance regulations. As of December 31, 2015 and 2014, Phoenix Life’s RBC was in excess of 400% of Company Action Level (“CAL” or the level where a life insurance enterprise must submit a comprehensive plan to state insurance regulators), PHL Variable RBC was 200% of CAL, and each of its other insurance subsidiaries were at least 200%.

Dividend Restrictions

Dividends to Phoenix from its insurance subsidiaries are restricted by insurance regulation. The payment of dividends by Phoenix Life is limited under the insurance company laws of New York, and the payment of dividends by PHL Variable is limited under the insurance company laws of Connecticut. In addition to the statutory limitations on paying dividends, the Company also considers the level of statutory capital and RBC of the entity and other liquidity requirements.

New York Insurance Law allows a domestic stock life insurer to distribute an ordinary dividend where the aggregate amount of such dividend in any calendar year does not exceed the greater of 10% of its surplus to policyholders as of the immediately preceding calendar year or its net gain from operations for the immediately preceding calendar year, not including realized capital gains, not to exceed 30% of its surplus to policyholders as of the immediately preceding calendar year. The foregoing ordinary dividend can only be paid out of earned surplus, which is defined as an insurer’s positive unassigned funds, excluding 85% of the change in net unrealized gains or losses less capital gains tax for the preceding year. Under this section, an insurer cannot distribute an ordinary dividend in the calendar year immediately following a calendar year for which the insurer’s net gain from operations, not including realized capital gains, was negative. If a company does not have sufficient positive earned surplus to pay an ordinary dividend, an ordinary dividend can still be paid where the aggregate amount is the lesser of 10% of its surplus to policyholders as of the immediately preceding calendar year or its net gain from operations for the immediately preceding calendar year, not including realized capital gains. Based on this calculation, Phoenix Life would be able to pay a dividend of $37.2 million in 2016. During the year ended December 31, 2015, Phoenix Life declared and paid $59.9 million in dividends. Phoenix Life may have less flexibility to pay dividends to the parent company if we experience declines in either statutory capital or RBC in the future. As of December 31, 2015, we had $535.3 million of statutory capital, surplus and AVR.

In Connecticut, without prior approval by the insurance commissioner, the aggregate amount of dividends during any twelve month period shall not exceed the greater of (i) 10% of surplus to policyholders for the preceding calendar year or (ii) net gain from operations for such year. Connecticut law states that no dividend or other distribution exceeding an amount equal to an insurance company’s earned surplus may be paid without prior approval of the insurance commissioner. Based on this calculation, PHL Variable has no dividend capacity in 2016.


21.
Premises and Equipment

Premises and equipment are included in other assets in our consolidated balance sheets.

Cost and Carrying Value of Premises and Equipment:
As of December 31,
($ in millions)
2015
 
2014
 
Cost
 
Carrying
Value
 
Cost
 
Carrying
Value
 
 
 
 
 
 
 
 
Real estate
$
100.5

 
$
31.7

 
$
99.8

 
$
32.6

Equipment and software
76.1

 
11.5

 
73.8

 
12.2

Leasehold improvements
3.0

 
2.8

 
0.4

 
0.2

Premises and equipment cost and carrying value
179.6

 
$
46.0

 
174.0

 
$
45.0

Accumulated depreciation and amortization
(133.6
)
 
 
 
(129.0
)
 
 
Premises and equipment
$
46.0

 
 
 
$
45.0

 
 

F-80
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
21.    Premises and Equipment (continued)


Depreciation and amortization expense for premises and equipment for 2015, 2014 and 2013 totaled $5.5 million, $6.0 million and $8.2 million, respectively.

Rental expenses for operating leases, principally with respect to buildings, amounted to $0.8 million, $0.6 million and $0.6 million in 2015, 2014 and 2013, respectively. Future minimum rental payments under non-cancelable operating leases were $6.0 million as of December 31, 2015, payable as follows: in 2016, $0.8 million; in 2017, $0.8 million; in 2018, $0.8 million; in 2019, $0.5 million; in 2020, $0.3 million and thereafter, $2.8 million. All future obligations for leased property of our discontinued operations were assumed by the buyer upon the completion of the sale on June 23, 2010. See Note 19 to these consolidated financial statements for additional information.


22.
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. Management of the Company believes that the ultimate 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 beyond the amounts already reported in these financial statements. 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

Phoenix and PHL Variable are subject to a Securities and Exchange Commission (the “SEC”) 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, which was approved by the SEC in March 2014 (the “March 2014 Order”) and was subsequently amended by an amended SEC administrative order approved by the SEC in August 2014 (the March 2014 Order, as amended, the “Amended Order”). The Amended Order and the March 2014 Order (collectively, the “Orders”), directed Phoenix and PHL Variable 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. Phoenix and PHL Variable remain subject to these obligations. Pursuant to the Orders, Phoenix and PHL Variable were required to file certain periodic SEC reports in accordance with the timetables set forth in the Orders. All of such filings have been made. Phoenix and PHL Variable paid civil monetary penalties to the SEC in the aggregate amount of $1.1 million pursuant to the terms of the Orders in 2014.

Cases Brought by Policy Investors

On August 2, 2012, Lima LS PLC filed a complaint against Phoenix, Phoenix Life, 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 and PHL Variable 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.


F-81
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
22.    Contingent Liabilities (continued)


Cost of Insurance Cases

On November 18, 2011, Martin Fleisher and another plaintiff (the “Fleisher Litigation”), on behalf of themselves and others similarly situated, filed suit against Phoenix Life 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.)) challenging COI rate adjustments implemented by Phoenix Life in 2010 and 2011 in certain universal life insurance policies. The complaint sought damages for breach of contract. The class certified by the court was limited to holders of Phoenix Life policies issued in New York subject to New York law and subject to Phoenix Life’s 2011 COI rate adjustment.

PHL Variable has been named as a defendant in six actions challenging its COI rate adjustments in certain universal life insurance policies implemented concurrently with the Phoenix Life adjustments. Phoenix Life and PHL Variable are referred to as the “Phoenix Life Companies.” Five cases have been brought against PHL Variable, while one case has been brought against both PHL Variable and Phoenix Life. These six cases, only one of which is styled as a class action, have been brought 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”); (2-5) 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”); (4: C.A. No. 3:14-cv-00555-WWE; U.S. Dist. Ct; D. Conn., complaint originally filed on March 6, 2013, in the District of Delaware and transferred by order dated April 22, 2014, to the District of Connecticut; and 5: C.A. No. 3:14-cv-01398-WWE, U.S. Dist. Ct; D. Conn., complaint filed on September 23, 2014, and amended on October 16, 2014, to add Phoenix Life as a defendant, and consolidated with No. 3:14-cv-00555-WWE (collectively the “U.S. Bank Conn. Litigations”)); and (6) SPRR LLC (C.A. No. 1:14-cv-8714-CM; U.S. Dist. Ct.; S.D.N.Y., complaint filed on October 31, 2014; the “SPRR Litigation”). SPRR LLC filed suit against PHL Variable, on behalf of itself and others similarly situated, challenging COI rate adjustments implemented by PHL Variable in 2011.

The Tiger Capital Litigation, the two U.S. Bank N.Y. Litigations and the SPRR Litigation were assigned or reassigned to the same judge as the Fleisher Litigation. The plaintiff in the Tiger Capital Litigation sought damages for breach of contract and declaratory relief. The plaintiff in the U.S. Bank N.Y. Litigations and the U.S. Bank Conn. Litigations sought damages and attorneys’ fees for breach of contract and other common law and statutory claims. The plaintiff in the SPRR Litigation sought damages for breach of contract for a nationwide class of policyholders.

The Phoenix Life Companies reached an agreement as of April 30, 2015, memorialized in a formal settlement agreement executed on May 29, 2015, with SPRR, LLC, Martin Fleisher, as trustee of the Michael Moss Irrevocable Life Insurance Trust II, and Jonathan Berck, as trustee of the John L. Loeb, Jr. Insurance Trust (collectively, the SPRR Litigation and the Fleisher Litigation plaintiffs referred to as the “Plaintiffs”), to resolve the Fleisher Litigation and SPRR Litigation (the “Settlement”). A motion for preliminary approval of the Settlement was filed with the United States District Court for the Southern District of New York on May 29, 2015 and on June 3, 2015, the court granted preliminary approval of the Settlement and ordered notice be given to class members. The proposed Settlement class consists of all policyholders that were subject to the 2010 or 2011 COI rate adjustments (collectively, the “Settlement Class”), including the policies within the above-named COI cases. The Phoenix Life Companies agreed to pay a total of $48.5 million , as reduced for any opt-outs, in connection with the Settlement. The Phoenix Life Companies agreed not to impose additional increases to COI rates on policies participating in the Settlement Class through the end of 2020, and not to challenge the validity of policies participating in the Settlement Class for lack of insurable interest or misrepresentations in the policy applications. Under the Settlement, policyholders are members of the Settlement Class, including those which have filed individual actions relating to COI rate adjustments, may opt out of the Settlement and separately litigate their claims. The opt-out period expired on July 17, 2015 and opt-out notices have been received by the Phoenix Life Companies, including from U.S. Bank, a party to four COI cases. On September 9, 2015, the judge in the Fleisher and SPRR Litigations entered an order approving of the Settlement and final judgment was entered on December 9, 2015.

On June 3, 2015, the parties to the Tiger Capital Litigation advised the court of a settlement of the Tiger Capital Litigation, which includes Tiger Capital, LLC’s participation in the class Settlement. The settlement of the Tiger Capital Litigation was on a basis that will not have a material impact on the Company’s financial statements. The Tiger Capital Litigation was closed by the court on October 21, 2015.


F-82
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
22.    Contingent Liabilities (continued)


On September 28, 2015, the Plaintiff in the U.S. Bank N.Y. Litigations and PHL Variable filed a joint stipulation of dismissal of the U.S. Bank N.Y. Litigations with prejudice pursuant to an agreement to settle. The U.S. Bank Conn. Litigations are proceeding, and the Plaintiff seeks damages and attorney’s fees for breach of contract and other common law and statutory claims.

During the third quarter, the Company recorded additional litigation charges related to these matters. In addition, the Company has adjusted its actuarial reserves to reflect the estimated impact on future revenues of these settlement activities.

Complaints to state insurance departments regarding PHL Variable’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 PHL Variable to take remedial action in response to complaints by a single policyholder. PHL Variable disagrees with both states’ positions. On March 23, 2015, an Administrative Law Judge (“ALJ”) in Wisconsin ordered PHL Variable to pay restitution to current and former owners of seven policies and imposed a fine on PHL Variable which, in a total amount, does not have a material impact on PHL Variable’s financial position (Office of the Commissioner of Insurance Case No. 13- C35362). PHL Variable disagrees with the ALJ’s determination and has appealed the order.

For any cases or regulatory directives not resolved by the Settlement, Phoenix Life and PHL Variable believe that they have meritorious defenses against all of these lawsuits and regulatory directives and intend to vigorously defend against them, including by appeal if necessary. For any matters not resolved by the Settlement, the outcome is uncertain and any potential losses cannot be reasonably estimated.

Cases Brought by Policyholders

On October 30, 2009, Brian S. Shevlin, Keith P. Shevlin, and Erin Taylor (the “Shevlins” or “Plaintiffs”) brought a purported class action suit against Phoenix Life and Phoenix (collectively “Defendants”) in the Superior Court of New Jersey, Mercer County, Brian S. Shevlin at al. v. Phoenix Life Insurance et al., Docket No. MER-L-2792-09. The Shevlins, on behalf of themselves and a class of owners of closed block policies established upon the demutualization of Phoenix Life in 2001, challenged the reduction of dividends on those policies following 2006 and 2009 dividend scale changes. Defendants removed the suit to the United States District Court for the District of New Jersey (Case No. 09-cv-06323). On August 24, 2010, the District Court partially granted and partially denied Defendants’ motion to dismiss, and shortly thereafter Plaintiffs filed a Second Amended Complaint. Plaintiffs allege that the reduction of dividends breached the terms of their policies with Phoenix Life, and unjustly enriched Phoenix. On June 30, 2014, the court denied Phoenix’s motion for summary judgment, and instructed the parties to proceed to brief class certification. On February 9, 2016, the court denied the pending motion for class certification without prejudice to renew it if a planned mediation was unsuccessful in resolving the action. Following a mediation session that did not resolve the action, the plaintiffs refiled their motion for class certification. The Company believes that it has meritorious defenses to the plaintiffs’ claims and intends to defend this matter vigorously. The outcome of this litigation and any potential award of damages are uncertain.


F-83
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
22.    Contingent Liabilities (continued)


Shareholder Litigation

On September 28, 2015, Phoenix entered into a definitive merger agreement to be acquired by Nassau. On October 26, 2015, a putative class action lawsuit was filed by a purported shareholder of Phoenix in the Superior Court of the State of Connecticut challenging the proposed merger transaction. The lawsuit alleges that the individual members of Phoenix’s Board of Directors breached their fiduciary duties to the Phoenix shareholder by agreeing to the proposed merger transaction for inadequate consideration and through an allegedly flawed sales process, and that the defendant companies – Phoenix, Nassau and Davero Merger Sub Corp. (a wholly owned subsidiary of Nassau) – aided and abetted such alleged breaches. The plaintiff in the action, which was styled Thomas White v. The Phoenix Companies, Inc., et. al., No. HHD-CV15--6063180-S (Conn. Super. Ct., Hartford), sought, among other things, an order enjoining the merger and, in the event the merger is completed, rescission and/or damages as a result of the alleged violations of law, as well as fees and costs. From late November to early December 2015, Phoenix and the plaintiff engaged in arm’s-length negotiations for the expedited production of certain documents. On December 10, 2015, Phoenix and the other defendants executed a Memorandum of Understanding (“MOU”) with the plaintiff providing for settlement of the suit based on certain supplemental disclosures to be released to Phoenix shareholders in advance of the December 17, 2015 shareholder vote. The settlement reflected in the MOU is subject to certain confirmatory discovery by the plaintiffs in the litigation and subject to the approval of the Court, among other things. The defendants have vigorously denied, and continue vigorously to deny, that they have committed any violation of law or engaged in any of the wrongful acts that were alleged in the litigation. The MOU outlines the terms of the agreement in principle to settle and release all claims which were or could have been asserted in the litigation. The parties to the MOU will seek to enter into a stipulation of settlement that will be presented to the Court for final approval. The stipulation of settlement will be subject to customary conditions, including approval by the Court, which will consider the fairness, reasonableness and adequacy of the settlement. The stipulation of settlement will provide for, among other things, the conditional certification of the Litigation as a non opt-out class action. The stipulation of settlement will provide for the release of any and all claims arising from the merger, subject to approval by the Court. The release will not become effective until the stipulation of settlement is approved by the Court. In connection with the settlement, subject to the ultimate determination of the Court, counsel for plaintiff may receive an award of reasonable fees. Neither this payment nor the settlement will affect the consideration to be received by Phoenix stockholders in the merger or the timing of the anticipated closing of the merger. There can be no assurance that the settling parties will ultimately enter into a stipulation of settlement or that the Court will approve the settlement even if the settling parties were to enter into the stipulation. In such event, or if the merger is not consummated for any reason, the proposed settlement will be null and void and of no force and effect. In January 2016, named-plaintiff, Thomas White, and non-party, Stephen Bushansky, a member of the putative class, moved to substitute Stephen Bushansky as plaintiff, which motion was granted.

Consent Solicitation Litigation

On February 8, 2016, plaintiff Kenneth Roth filed a putative class action complaint (“Complaint”) in New York Supreme Court (New York County) (the “Court”) against The Phoenix Companies, Inc. (“Phoenix”) and U.S. Bank National Association in its capacity as indenture trustee (the “Trustee”), Index No. 650634/2016 (the “Litigation”), relating to a January 7, 2016 consent solicitation launched by Phoenix in connection with its 7.45% Quarterly Interest Bonds due 2032 (the “Consent Solicitation”).

The Complaint asserts claims against Phoenix for breach of contract, breach of the covenant of good faith and fair dealing, negligent misrepresentation, a temporary restraining order, a preliminary and permanent injunction, and a declaratory judgment. In addition to damages, costs, and attorneys’ fees, the Complaint asks the Court to temporarily restrain, and preliminarily and permanently enjoin the Consent Solicitation or, alternatively, declare that the proposed supplemental indenture is null and void. The Complaint further alleges that the Trustee breached its fiduciary duty to bondholders by, inter alia, allowing the Consent Solicitation to be issued.

Phoenix believes that the lawsuit is without merit and that no additional or amended disclosure is required to supplement the Consent Solicitation, and that no changes to the proposed supplemental indenture are required, under applicable laws; however, to eliminate the burden, expense and uncertainties inherent in such litigation, and without admitting any liability or wrongdoing, Phoenix agreed, pursuant to the terms of a MOU, to: (a) revise the proposed Fourth Supplemental Indenture to make available to bondholders certain information in connection with Phoenix’s reporting obligations under Section 704, as amended by the Fourth Supplemental Indenture, (b) make available financial statements and related information of Phoenix not only to current bondholders but also to prospective bondholders, securities analysts and market makers, as detailed in the supplemental disclosures to the Consent Solicitation, and (c) make certain other supplemental disclosures to the Consent Solicitation.


F-84
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
22.    Contingent Liabilities (continued)


On February 24, 2016, the parties to the Litigation (the “Settling Parties”) entered into the MOU providing for the settlement of the Litigation, subject to the approval of the Court, among other things. The defendants have vigorously denied, and continue vigorously to deny, that they have committed any violation of law or engaged in any of the wrongful acts that were alleged in the Litigation. The MOU outlines the terms of the Settling Parties’ agreement in principle to settle and release all claims which were or could have been asserted in the Litigation. The parties to the MOU will seek to enter into a stipulation of settlement that will be presented to the Court for final approval. The stipulation of settlement will be subject to customary conditions, including approval by the Court, which will consider the fairness, reasonableness and adequacy of the settlement. The stipulation of settlement will provide for, among other things, the release of any and all claims arising from or relating to the Consent Solicitation, subject to approval by the Court. The release will not become effective until the stipulation of settlement is approved by the Court. In connection with the settlement, subject to the ultimate determination of the Court, counsel for plaintiff may receive an award of reasonable fees. Neither this payment nor the settlement will affect the consent fee to be received by consenting Phoenix bondholders in the Consent Solicitation. There can be no assurance that the Settling Parties will ultimately enter into a stipulation of settlement or that the Court will approve the settlement even if the Settling Parties were to enter into the stipulation. In such event the proposed settlement will be null and void and of no force and effect.

Regulatory matters

State regulatory bodies, the SEC, the Financial Industry Regulatory Authority (“FINRA”), the Internal Revenue Service (“IRS”) and other regulatory bodies regularly make inquiries of us and, from time to time, conduct examinations or investigations concerning our compliance with laws and regulations related to, among other things, our insurance and broker-dealer subsidiaries, securities offerings and registered products. We endeavor to respond to such inquiries in an appropriate way and to take corrective action if warranted. Further, the Company is providing to the SEC certain information and documentation regarding the restatements of its prior period financial statements and the staff of the SEC has indicated to the Company 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 consolidated 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 consolidated financial statements in particular quarterly or annual periods.

State Insurance Department Examinations

During 2012 and 2013, the NYDFS conducted its routine quinquennial financial and market conduct examination covering the period ended December 31, 2012 of Phoenix Life. The Connecticut Insurance Department conducted its routine financial examination of PHL Variable, and two other Connecticut-domiciled insurance subsidiaries. The NYDFS issued the final examination portion of its report for Phoenix Life on June 26, 2014. The Connecticut Insurance Department released its financial examination report for PHL Variable on May 28, 2014 and its market conduct examination on December 29, 2014.

Unclaimed Property Inquiries

On July 5, 2011, the NYDFS issued a letter (“308 Letter”) requiring life insurers doing business in New York to use data available on the U.S. Social Security Administration’s Death Master File or a similar database to identify instances where death benefits under life insurance policies, annuities and retained asset accounts are payable, to locate and pay beneficiaries under such contracts and to report the results of the use of the data. Additionally, the insurers are required to report on their success in finding and making payments to beneficiaries or escheatment of funds deemed abandoned under state laws. We have substantially completed the work associated with this matter and the remaining amount of claim and interest payments to beneficiaries or state(s) has been recorded in policy liabilities and accruals. In addition, 39 states have indicated their intent to perform an unclaimed property audit of funds deemed abandoned under state laws. The audits are in process.


F-85
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
22.    Contingent Liabilities (continued)


Discontinued Reinsurance Operations

In 1999, Phoenix Life discontinued reinsurance operations through a combination of sale, reinsurance and placement of certain retained group accident and health reinsurance business into run-off. A formal plan was adopted to stop writing new contracts covering these risks and to end existing contracts as soon as those contracts would permit. However, Phoenix Life remains subject to claims under contracts that have not been commuted. Certain discontinued group accident and health reinsurance business was the subject of disputes concerning the placement of the business with reinsurers and the recovery of reinsurance. These disputes have been substantially resolved or settled.

We have established reserves for claims and related expenses that we expect to pay on our discontinued group accident and health reinsurance business. These reserves are based on currently known facts and estimates about, among other things, the amount of insured losses and expenses that we believe we will pay, the period over which they will be paid, the amount of reinsurance we believe we will collect from our retrocessionaires and the likely legal and administrative costs of winding down the business.

Phoenix Life expects reserves and reinsurance to cover the run-off of the business; however, unfavorable or favorable claims and/or reinsurance recovery experience are reasonably possible and could result in our recognition of additional losses or gains in future years. Management believes, based on current information and after consideration of the provisions made in these consolidated financial statements, that any future adverse or favorable development of recorded reserves and/or reinsurance recoverables will not have a material adverse effect on its financial position. Nevertheless, it is possible that future developments could have a material adverse effect on our results of operations.

See Note 19 to these consolidated financial statements for additional information regarding discontinued operations.


23.
Other Commitments

We have an agreement with HP Enterprise Services related to the management of our infrastructure services which expires in 2018. As of December 31, 2015, the Company had remaining commitments of $38.6 million.

As part of its normal investment activities, the Company enters into agreements to fund limited partnerships that make debt and equity investments. As of December 31, 2015, the Company had unfunded commitments of $308.2 million under such agreements, of which $66.7 million is expected to be funded by December 31, 2016. See Note 7 to these consolidated financial statements for additional information on VIEs.

On January 5, 2015, the Company committed to purchase $100.0 million in investment grade rated infrastructure bonds through an outside investment advisor. These purchases are expected to be made over 24 months. The arrangement may be terminated prior to funding the committed amount at the discretion of the Company subject to certain standard provisions for notice and immaterial fees. The debt will be held as available-for-sale debt securities on the consolidated balance sheets. As of December 31, 2015, $13.5 million has been funded.

In addition, the Company enters into agreements to purchase private placement investments. As of December 31, 2015, the Company had open commitments of $150.8 million under such agreements which are expected to be funded by August 15, 2017.



F-86
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
 


24.
Condensed Financial Information of The Phoenix Companies, Inc., and Other Supplementary Data

A summary of The Phoenix Companies, Inc. (parent company only) financial information is presented below. See Notes 8 and 15 to these consolidated financial statements for additional information regarding indebtedness and accrued pension and post-employment benefits, respectively.

Parent Company Financial Position:
As of December 31,
($ in millions)
2015
 
2014
Assets
 
 
 
Available-for-sale debt securities, at fair value
$
1.9

 
$
5.1

Affiliate securities
30.0

 
30.0

Short-term investments
34.9

 
49.9

Fair value investments
18.8

 
23.5

Cash and cash equivalents
27.0

 
11.2

Investments in subsidiaries
724.0

 
880.8

Advances to subsidiaries
10.0

 
—

Other assets
30.1

 
30.7

Total assets
$
876.7

 
$
1,031.2

Liabilities and Stockholders’ Equity
 
 
 
Indebtedness (Note 8)
$
268.6

 
$
268.6

Accrued pension and post-employment benefits (Note 15)
361.6

 
380.0

Due to subsidiaries
3.2

 
7.3

Capital contribution payable
23.1

 
—

Other liabilities
59.0

 
48.7

Total liabilities
715.5

 
704.6

Total stockholders’ equity
161.2

 
326.6

Total liabilities and stockholders’ equity
$
876.7

 
$
1,031.2


Parent Company Results of Operations:
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
Revenues
 
 
 
 
 
Equity in undistributed income (loss) of subsidiaries
$
(71.3
)
 
$
(99.0
)
 
$
44.1

Investment income
3.6

 
4.5

 
1.2

Net realized investment gains (losses)
(1.0
)
 
0.6

 
3.6

Total revenues
(68.7
)
 
(93.9
)
 
48.9

Interest expense
20.4

 
20.4

 
20.4

Other operating expenses
30.6

 
102.6

 
70.7

Total expenses
51.0

 
123.0

 
91.1

Income (loss) before income taxes
(119.7
)
 
(216.9
)
 
(42.2
)
Income tax expense (benefit)
14.0

 
(3.7
)
 
(68.7
)
Income (loss) from continuing operations
(133.7
)
 
(213.2
)
 
26.5

Income (loss) from discontinued operations of subsidiaries
—

 
—

 
(0.5
)
Net income (loss)
(133.7
)
 
(213.2
)
 
26.0

Less: Income (loss) attributable to noncontrolling interests
—

 
—

 
—

Net income (loss)
$
(133.7
)
 
$
(213.2
)
 
$
26.0



F-87
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
24.    Condensed Financial Information of The Phoenix Companies, Inc., and Other Supplementary Data (continued)


Parent Company Cash Flows:
For the years ended December 31,
($ in millions)
2015
 
2014
 
2013
Operating Activities
 
 
 
 
 
Interest income received
$
3.3

 
$
3.7

 
$
0.9

Interest paid
(20.0
)
 
(20.0
)
 
(20.0
)
Taxes paid
(3.6
)
 
—

 
(2.2
)
Taxes received
—

 
—

 
3.5

Payments to/from subsidiaries
(27.4
)
 
(113.4
)
 
52.5

Other operating activities, net
(13.8
)
 
(13.8
)
 
(14.9
)
Cash provided by (used for) operating activities
(61.5
)
 
(143.5
)
 
19.8

Purchases of available-for-sale debt securities
—

 
—

 
(30.0
)
Purchases of short-term investments
(144.6
)
 
(589.4
)
 
(579.5
)
Purchases of derivative instruments
(0.9
)
 
—

 
—

Sales, repayments and maturities of available-for-sale debt securities
3.2

 
5.0

 
1.0

Sales, repayments and maturities of short-term investments
159.7

 
659.4

 
564.7

Subsidiary loan payments received
—

 
3.3

 
3.0

Dividends received from subsidiaries
69.9

 
56.0

 
74.2

Capital contributions to subsidiaries
(10.0
)
 
(15.0
)
 
(45.0
)
Cash provided by (used for) investing activities
77.3

 
119.3

 
(11.6
)
Cash provided by (used for) financing activities
—

 
—

 
—

Change in cash and cash equivalents
15.8

 
(24.2
)
 
8.2

Cash and cash equivalents, beginning of period
11.2

 
35.4

 
27.2

Cash and cash equivalents, end of period
$
27.0

 
$
11.2

 
$
35.4


Other supplementary data related to investments, insurance information, reinsurance, and valuation and qualifying accounts are presented in various locations within the consolidated financial statements and related notes.

•
Investment information including the amortized cost and fair value of investments is provided in Note 7, Investing Activities, and Note 11, Derivative Instruments. The Company’s invested assets did not include related party investments as of December 31, 2015.
•
The Company manages its business by segregating its operations into two reporting segments: Life and Annuity and Saybrus. All insurance information disclosed within the consolidated balance sheets, the consolidated statements of operations and comprehensive income and Note 5, Deferred Policy Acquisition Costs, is applicable to the Life and Annuity segment. Unearned premiums included in policy liabilities and accruals were $77.1 million and $84.8 million as of December 31, 2015 and 2014, respectively. Saybrus, the Company’s non-insurance segment, had operating expenses of $35.2 million, $31.2 million and $23.3 million for the years ended December 31, 2015, 2014 and 2013, respectively. Saybrus did not have any insurance information or investment income as of, and for the years ended December 31, 2015, 2014 and 2013.
•
Information related to reinsurance, including gross, ceded and assumed balances for premiums, policy benefits and life insurance inforce, is provided in Note 3, Reinsurance.
•
Information about the valuation allowance established for certain deferred tax assets is provided in Note 13, Income Taxes.



F-88
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
 


25.
Supplemental Unaudited Quarterly Financial Information

The following tables reflect unaudited summarized quarterly financial results during the years ended December 31, 2015 and 2014.

Summarized Selected Quarterly Financial Data:
Quarter ended 2015
($ in millions, except per share amounts)
Mar 31,
 
June 30,
 
Sept 30,
 
Dec 31,
 
 
 
 
 
 
 
 
Revenues
$
405.4

 
$
422.0

 
$
437.1

 
$
430.3

 
 
 
 
 
 
 
 
Benefits and expenses
$
480.1

 
$
456.8

 
$
464.2

 
$
453.0

 
 
 
 
 
 
 
 
Income tax expense (benefit)
$
(2.2
)
 
$
(13.0
)
 
$
(17.0
)
 
$
(2.1
)
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(72.5
)
 
$
(21.8
)
 
$
(10.1
)
 
$
(20.6
)
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations
$
(0.5
)
 
$
(0.6
)
 
$
(0.1
)
 
$
(0.8
)
 
 
 
 
 
 
 
 
Net income (loss)
$
(73.0
)
 
$
(22.4
)
 
$
(10.2
)
 
$
(21.4
)
 
 
 
 
 
 
 
 
Less: Net (income) loss attributable to noncontrolling interests
$
1.0

 
$
0.2

 
$
5.5

 
$
—

 
 
 
 
 
 
 
 
Net income (loss) attributable to The Phoenix Companies, Inc.
$
(74.0
)
 
$
(22.6
)
 
$
(15.7
)
 
$
(21.4
)
 
 
 
 
 
 
 
 
Net income (loss) attributable to The Phoenix Companies, Inc. per share:
 
 
 
 
 
 
 
  Basic
$
(12.87
)
 
$
(3.93
)
 
$
(2.73
)
 
$
(3.72
)
  Diluted
$
(12.87
)
 
$
(3.93
)
 
$
(2.73
)
 
$
(3.72
)

Summarized Selected Quarterly Financial Data:
Quarter ended 2014
($ in millions, except per share amounts)
Mar 31,
 
June 30,
 
Sept 30,
 
Dec 31,
 
 
 
 
 
 
 
 
Revenues
$
399.0

 
$
413.1

 
$
414.4

 
$
440.4

 
 
 
 
 
 
 
 
Benefits and expenses
$
431.4

 
$
454.5

 
$
434.0

 
$
542.2

 
 
 
 
 
 
 
 
Income tax expense (benefit)
$
(4.8
)
 
$
(19.6
)
 
$
2.6

 
$
32.3

 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(27.6
)
 
$
(21.8
)
 
$
(22.2
)
 
$
(134.1
)
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations
$
(0.6
)
 
$
(0.6
)
 
$
(0.3
)
 
$
(2.0
)
 
 
 
 
 
 
 
 
Net income (loss)
$
(28.2
)
 
$
(22.4
)
 
$
(22.5
)
 
$
(136.1
)
 
 
 
 
 
 
 
 
Less: Net income (loss) attributable to noncontrolling interests
$
(0.1
)
 
$
—

 
$
(0.1
)
 
$
4.2

 
 
 
 
 
 
 
 
Net income (loss) attributable to The Phoenix Companies, Inc.
$
(28.1
)
 
$
(22.4
)
 
$
(22.4
)
 
$
(140.3
)
 
 
 
 
 
 
 
 
Net income (loss) attributable to The Phoenix Companies, Inc. per share:
 
 
 
 
 
 
 
  Basic
$
(4.89
)
 
$
(3.90
)
 
$
(3.90
)
 
$
(24.40
)
  Diluted
$
(4.89
)
 
$
(3.90
)
 
$
(3.90
)
 
$
(24.40
)

F-89
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements (continued)
 
 


26.
Subsequent Events

Bond Consent Solicitations

On January 7, 2016, we commenced a Consent Solicitation of bondholders (“Holders”) of our 7.45% Quarterly Interest Bonds due 2032 (CUSIP 71902E 20 8) (NYSE: PFX) (“Bonds”) to amend the indenture governing the bonds (the “Indenture”) in connection with the Company’s previously announced agreement to be acquired by Nassau and become its privately held, wholly owned subsidiary. On March 4, 2016, we announced the success of our Consent Solicitation. The consents received represented approximately 72.9% of the outstanding principal amount. On March 9, 2016, the Company and the Trustee executed a fourth supplemental indenture (the “Fourth Supplemental Indenture”) amending the Indenture effective as of such date.

During the course of the Consent Solicitation, plaintiff Kenneth Roth filed a putative class action complaint (“Complaint”) in New York Supreme Court (the “Court”) against the Company and the Trustee, Index No. 650634/2016 (the “Litigation”), relating to the Consent Solicitation. On February 24, 2016, the parties to the Litigation (the “Settling Parties”) entered into the Memorandum of Understanding (“MOU”) providing for the settlement of the Litigation, subject to the approval of the Court, among other things. See Note 22 to these consolidated financial statements for a more detailed discussion regarding the consent solicitation litigation.

Capital Contributions

On February  25, 2016, PHL Variable received approval from the Connecticut Insurance Department to admit $23.1 million of receivables from the Company as an additional capital contribution on its balance sheet as of December 31,2015. On February 26, 2016, the Company made a capital contribution of $23.1 million to PHL Variable.

Dividends

On March 10, 2016, Phoenix Life declared a $20.0 million dividend to Phoenix.


F-90

EXHIBIT INDEX

Exhibit
 
 
 
 
 
2.1

 
Plan of Reorganization (incorporated herein by reference to Exhibit 2.1 to The Phoenix Companies, Inc. Registration Statement on Form S-1 (Registration No. 333-55268), filed February 9, 2001, as amended)
 
 
 
2.2

 
Agreement and Plan of Merger, dated as of September 28, 2015, among Nassau Reinsurance Group Holdings, L.P., Davero Merger Sub Corp. and The Phoenix Companies, Inc. (incorporated herein by reference to Exhibit 2.1 to The Phoenix Companies, Inc. Current Report on Form 8-K filed on September 30, 2015)
 
 
 
3.1

 
Amended and Restated Certificate of Incorporation of The Phoenix Companies, Inc., as amended August 10, 2012 (incorporated herein by reference to Exhibit 3.1(a) to The Phoenix Companies, Inc. Annual Report on Form 10-K filed April 1, 2014)
 
 
 
3.2

 
Amended and Restated By-Laws of The Phoenix Companies, Inc., adopted September 28, 2015 (incorporated herein by reference to Exhibit 3.1 to The Phoenix Companies, Inc. Current Report on Form 8-K filed September 30, 2015)
 
 
 
4.1

 
Indenture dated as of December 27 2001, between The Phoenix Companies, Inc. and SunTrust Bank, as Trustee (incorporated herein by reference to Exhibit 4.1 to The Phoenix Companies, Inc. Annual Report on Form 10-K filed March 27, 2002)
 
 
 
4.2

 
Specimen of Global Bond dated as of December 27, 2001, issued by The Phoenix Companies, Inc. (incorporated herein by reference to Exhibit 4.2 to The Phoenix Companies, Inc. Annual Report on Form 10-K filed March 27, 2002)
 
 
 
4.3

 
First Supplemental Indenture dated as of January 18, 2013, to the Indenture incorporated by reference as Exhibit 4.1 hereto, between the Company and U.S. Bank National Association, as successor trustee to SunTrust Bank, as Trustee (incorporated herein by reference to Exhibit 4.1 to The Phoenix Companies, Inc. Current Report on Form 8-K filed January 18, 2013)
 
 
 
4.4

 
Second Supplemental Indenture dated as of May 23, 2013, to the Indenture incorporated by reference as Exhibit 4.1 hereto, between the Company and U.S. Bank National Association, as successor trustee to SunTrust Bank, as Trustee (incorporated herein by reference to Exhibit 4.1 to The Phoenix Companies, Inc. Current Report on Form 8-K filed May 24, 2013)
 
 
 
4.5

 
Third Supplemental Indenture dated as of February 21, 2014, to the Indenture incorporated by reference as Exhibit 4.1 hereto, between the Company and U.S. Bank National Association, as successor trustee to SunTrust Bank, as Trustee (incorporated herein by reference to Exhibit 4.1 to The Phoenix Companies, Inc. Current Report on Form 8-K filed February 21, 2014)
 
 
 
4.6

 
Fourth Supplemental Indenture dated as of March 9, 2016, to the Indenture incorporated by reference as Exhibit 4.1 hereto, between the Company and U.S. Bank National Association, as successor trustee to SunTrust Bank, as Trustee (incorporated herein by reference to Exhibit 4.1 to The Phoenix Companies, Inc. Current Report on Form 8-K filed March 9, 2016)
 
 
 
10.1

 
The Phoenix Companies, Inc. Stock Incentive Plan, as amended and restated (incorporated herein by reference to Exhibit 10.2 to The Phoenix Companies, Inc. Quarterly Report on Form 10-Q filed May 8, 2008; SEC File Number 001-16517)
 
 
 
10.2

 
First Amendment to The Phoenix Companies, Inc. Stock Incentive Plan, as amended and restated (incorporated herein by reference to Exhibit 10.2 to The Phoenix Companies, Inc. Annual Report on Form 10-K filed March 5, 2009)
 
 
 
10.3

 
Second Amendment to The Phoenix Companies, Inc. Stock Incentive Plan, as amended and restated (incorporated herein by reference to Exhibit 10.2 to The Phoenix Companies, Inc. Quarterly Report on Form 10-Q filed May 7, 2012)
 
 
 
10.4

 
Third Amendment to The Phoenix Companies, Inc. Stock Incentive Plan, as amended and restated (incorporated herein by reference to Exhibit 10.4 to The Phoenix Companies, Inc. Annual Report on Form 10-K filed April 1, 2014)
 
 
 
10.5

 
Fourth Amendment to The Phoenix Companies, Inc. Stock Incentive Plan, as amended and restated*
 
 
 
10.6

 
Form of Incentive Stock Option Agreement under The Phoenix Companies, Inc. Stock Incentive Plan (incorporated herein by reference to Exhibit 10.3 to The Phoenix Companies, Inc. Annual Report on Form 10-K filed March 11, 2005; SEC File Number 001-16517)
 
 
 

E-1

10.7

 
Form of Non-Qualified Stock Option Agreement under The Phoenix Companies, Inc. Stock Incentive Plan (incorporated herein by reference to Exhibit 10.4 to The Phoenix Companies, Inc. Annual Report on Form 10-K filed March 11, 2005; SEC File Number 001-16517)
 
 
 
10.8

 
Form of Non-Qualified Stock Option Agreement (Performance and Service-Vesting Awards) (incorporated herein by reference to Exhibit 10.2 to The Phoenix Companies, Inc. Current Report on Form 8-K filed May 4, 2009)
 
 
 
10.9

 
The Phoenix Companies, Inc. Directors Stock Plan, as amended and restated (incorporated herein by reference to Exhibit 10.6 to The Phoenix Companies, Inc. Quarterly Report on Form 10-Q filed May 8, 2008; SEC File Number 001-16517)
 
 
 
10.10

 
First Amendment to The Phoenix Companies, Inc. Directors Stock Plan, as amended and restated*
 
 
 
10.11

 
The Phoenix Companies, Inc. Excess Benefit Plan, as amended and restated (incorporated herein by reference to Exhibit 10.9 to The Phoenix Companies, Inc. Quarterly Report on Form 10-Q filed May 8, 2008; SEC File Number 001-16517)
 
 
 
10.12

 
First Amendment to The Phoenix Companies, Inc. Excess Benefit Plan, as amended and restated (incorporated herein by reference to Exhibit 10.8 to The Phoenix Companies, Inc. Quarterly Report on Form 10-Q filed May 10, 2010)
 
 
 
10.13

 
The Phoenix Companies, Inc. Non-Qualified Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.13 to The Phoenix Companies, Inc. Quarterly Report on Form 10-Q filed May 8, 2008) (merged into The Phoenix Companies, Inc. Non-Qualified Excess Investment Plan, effective September 1, 2009)
 
 
 
10.14

 
First Amendment to The Phoenix Companies, Inc. Non-Qualified Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.8 to The Phoenix Companies, Inc. Quarterly Report on Form 10-Q filed November 6, 2009) (merged into The Phoenix Companies, Inc. Non-Qualified Excess Investment Plan, effective September 1, 2009)
 
 
 
10.15

 
The Phoenix Companies, Inc. Non-Qualified Excess Investment Plan amended and restated as of September 1, 2009 (incorporated herein by reference to Exhibit 10.10 to The Phoenix Companies, Inc. Quarterly Report on Form 10-Q filed November 6, 2009)
 
 
 
10.16

 
First Amendment to The Phoenix Companies, Inc. Non-Qualified Excess Investment Plan amended and restated as of September 1, 2009 (incorporated herein by reference to Exhibit 10.14 to The Phoenix Companies, Inc. Quarterly Report on Form 10-Q filed May 10, 2010)
 
 
 
10.17

 
Second Amendment to The Phoenix Companies, Inc. Non-Qualified Excess Investment Plan amended and restated as of September 1, 2009 (incorporated herein by reference to Exhibit 10.15 to The Phoenix Companies, Inc. Annual Report on Form 10-K filed April 1, 2014)
 
 
 
10.18

 
Third Amendment to The Phoenix Companies, Inc. Non-Qualified Excess Investment Plan amended and restated as of September 1, 2009 (incorporated herein by reference to Exhibit 10.1 to The Phoenix Companies, Inc. Current Report on Form 8-K filed March 12, 2012)
 
 
 
10.19

 
Fourth Amendment to The Phoenix Companies, Inc. Non-Qualified Excess Investment Plan amended and restated as of September 1, 2009 (incorporated herein by reference to Exhibit 10.17 to The Phoenix Companies, Inc. Annual Report on Form 10-K filed April 1, 2014)
 
 
 
10.20

 
Fifth Amendment to The Phoenix Companies, Inc. Non-Qualified Excess Investment Plan amended and restated as of September 1, 2009 (incorporated herein by reference to Exhibit 10.1 to The Phoenix Companies, Inc. Current Report on Form 8-K filed December 11, 2015; SEC File Number 001-16517)
 
 
 
10.21

 
The Phoenix Companies, Inc. Nonqualified Supplemental Executive Retirement Plan, as amended and restated (incorporated herein by reference to Exhibit 10.9 to The Phoenix Companies, Inc. Annual Report on Form 10-K filed March 5, 2009)
 
 
 
10.22

 
First Amendment to The Phoenix Companies, Inc. Nonqualified Supplemental Executive Retirement Plan, as amended and restated (incorporated herein by reference to Exhibit 10.17 to The Phoenix Companies, Inc. Quarterly Report on Form 10-Q filed May 10, 2010)
 
 
 
10.23

 
Second Amendment to The Phoenix Companies, Inc. Nonqualified Supplemental Executive Retirement Plan, as amended and restated (incorporated herein by reference to Exhibit 10.20 to The Phoenix Companies, Inc. Annual Report on Form 10-K filed April 1, 2014)
 
 
 
10.24

 
Third Amendment to The Phoenix Companies, Inc. Nonqualified Supplemental Executive Retirement Plan, as amended and restated*
 
 
 

E-2

10.25

 
The Phoenix Companies, Inc. Nonqualified Supplemental Executive Retirement Plan B, as amended and restated (incorporated herein by reference to Exhibit 10.10 to The Phoenix Companies, Inc. Annual Report on Form 10-K filed March 5, 2009)
 
 
 
10.26

 
First Amendment to The Phoenix Companies, Inc. Nonqualified Supplemental Executive Retirement Plan B, as amended and restated (incorporated herein by reference to Exhibit 10.20 to The Phoenix Companies, Inc. Quarterly Report on Form 10-Q filed May 10, 2010)
 
 
 
10.27

 
Second Amendment to The Phoenix Companies, Inc. Nonqualified Supplemental Executive Retirement Plan B, as amended and restated (incorporated herein by reference to Exhibit 10.23 to The Phoenix Companies, Inc. Annual Report on Form 10-K filed April 1, 2014)
 
 
 
10.28

 
Third Amendment to The Phoenix Companies, Inc. Nonqualified Supplemental Executive Retirement Plan B, as amended and restated*
 
 
 
10.29

 
The Phoenix Companies, Inc. 2003 Restricted Stock, Restricted Stock Unit and Long-Term Incentive Plan, as amended and restated (incorporated herein by reference to Exhibit 10.22 to The Phoenix Companies, Inc. Quarterly Report on Form 10-Q filed May 8, 2008; SEC File Number 001-16517)
 
 
 
10.30

 
First Amendment to The Phoenix Companies, Inc. 2003 Restricted Stock, Restricted Stock Unit and Long-Term Incentive Plan, as amended and restated (incorporated herein by reference to Exhibit 10.25 to The Phoenix Companies, Inc. Annual Report on Form 10-K filed April 1, 2014)
 
 
 
10.31

 
Second Amendment to The Phoenix Companies, Inc. 2003 Restricted Stock, Restricted Stock Unit and Long-Term Incentive Plan, as amended and restated*
 
 
 
10.32

 
Form of Award Letter under The Phoenix Companies, Inc. 2003 Restricted Stock, Restricted Stock Unit and Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.1 to The Phoenix Companies, Inc. Current Report on Form 8-K filed February 8, 2006; SEC File Number 001-16517)
 
 
 
10.33

 
Form of Description of Long-Term Incentive Cycle under The Phoenix Companies, Inc. 2003 Restricted Stock, Restricted Stock Unit and Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.2 to The Phoenix Companies, Inc. Current Report on Form 8-K filed February 8, 2006; SEC File Number 001-16517)
 
 
 
10.34

 
Form of Restricted Stock Units Agreement of The Phoenix Companies, Inc. (incorporated herein by reference to Exhibit 10.27 to The Phoenix Companies, Inc. Quarterly Report on Form 10-Q filed May 10, 2006; SEC File Number 001-16517)
 
 
 
10.35

 
Form of Restricted Stock Units Agreement for Individual Performance-Based Incentive Grants (incorporated herein by reference to Exhibit 10.1 to The Phoenix Companies, Inc. Current Report on Form 8-K filed February 28, 2007; SEC File Number 001-16517)
 
 
 
10.36

 
Form of Restricted Stock Units Agreement for Cliff Vested Grants (incorporated herein by reference to Exhibit 10.21 to The Phoenix Companies, Inc. Annual Report on Form 10-K filed March 1, 2007; SEC File Number 001-16517)
 
 
 
10.37

 
Form of Restricted Stock Units Agreement for Performance-Based Grants Tied to Business Line Metrics (incorporated herein by reference to Exhibit 10.22 to The Phoenix Companies, Inc. Quarterly Report on Form 10-Q filed May 9, 2007; SEC File Number 001-16517)
 
 
 
10.38

 
Form of Restricted Stock Units Agreement for 3-Year Performance-Based Long-Term Incentive Cycles (incorporated herein by reference to Exhibit 10.23 to The Phoenix Companies, Inc. Quarterly Report on Form 10-Q filed May 9, 2007; SEC File Number 001-16517)
 
 
 
10.39

 
Form of Restricted Stock Units Agreement (Performance and Service-Vesting Awards) (incorporated herein by reference to Exhibit 10.1 to The Phoenix Companies, Inc. Current Report on Form 8-K filed May 4, 2009)
 
 
 
10.40

 
Form of Cash Agreement for Long-Term Incentive Cycle Performance-Based Grants with Post-Performance Service-Vesting Criteria (incorporated herein by reference to Exhibit 10.1 to The Phoenix Companies, Inc. Current Report on Form 8-K filed April 24, 2009)
 
 
 
10.41

 
The Phoenix Companies, Inc. Executive Severance Allowance Plan, as amended and restated (incorporated herein by reference to Exhibit 10.33 to The Phoenix Companies, Inc. Quarterly Report on Form 10-Q filed May 8, 2008; SEC File Number 001-16517)
 
 
 
10.42

 
First Amendment to The Phoenix Companies, Inc. Executive Severance Allowance Plan, as amended and restated (incorporated herein by reference to Exhibit 10.36 to The Phoenix Companies, Inc. Annual Report on Form 10-K filed April 1, 2014)
 
 
 
10.43

 
First Amendment to The Phoenix Companies, Inc. Executive Severance Allowance Plan, as amended and restated*

E-3

 
 
 
10.44

 
The Phoenix Companies, Inc. Annual Incentive Plan for Executive Officers, as amended and restated (incorporated herein by reference to Exhibit 10.35 to The Phoenix Companies, Inc. Quarterly Report on Form 10-Q filed May 8, 2008; SEC File Number 001-16517)
 
 
 
10.45

 
First Amendment to The Phoenix Companies, Inc. Annual Incentive Plan for Executive Officers, as amended and restated (incorporated herein by reference to Exhibit 10.38 to The Phoenix Companies, Inc. Annual Report on Form 10-K filed April 1, 2014)
 
 
 
10.46

 
The Phoenix Companies, Inc. Equity Deferral Plan (incorporated herein by reference to Exhibit 10.36 to The Phoenix Companies, Inc. Quarterly Report on Form 10-Q filed May 8, 2008; SEC File Number 001-16517)
 
 
 
10.47

 
First Amendment to The Phoenix Companies, Inc. Equity Deferral Plan (incorporated herein by reference to Exhibit 10.40 to The Phoenix Companies, Inc. Annual Report on Form 10-K filed April 1, 2014)
 
 
 
10.48

 
Second Amendment to The Phoenix Companies, Inc. Equity Deferral Plan*
 
 
 
10.49

 
The Phoenix Companies, Inc. Directors Equity Deferral Plan (incorporated herein by reference to Exhibit 10.37 to The Phoenix Companies, Inc. Quarterly Report on Form 10-Q filed May 8, 2008; SEC File Number 001-16517)
 
 
 
10.50

 
First Amendment to The Phoenix Companies, Inc. Directors Equity Deferral Plan*
 
 
 
10.51

 
The Phoenix Companies, Inc. Directors Cash Deferral Plan (incorporated herein by reference to Exhibit 10.38 to The Phoenix Companies, Inc. Quarterly Report on Form 10-Q filed May 8, 2008; SEC File Number 001-16517)
 
 
 
10.52

 
First Amendment to The Phoenix Companies, Inc. Directors Cash Deferral Plan*
 
 
 
10.53

 
Form of Change in Control Agreement (incorporated herein by reference to Exhibit 10.1 to The Phoenix Companies, Inc. Current Report on Form 8-K filed December 13, 2013)
 
 
 
10.54

 
Offer Letter dated February 9, 2004 by The Phoenix Companies, Inc. to Philip K. Polkinghorn (incorporated herein by reference to Exhibit 10.50 to The Phoenix Companies, Inc. Annual Report on Form 10-K filed March 22, 2004; SEC File Number 001-16517)
 
 
 
10.55

 
Discussion of compensation of James D. Wehr (incorporated herein by reference to The Phoenix Companies, Inc. Current Report on Form 8-K filed May 4, 2009)
 
 
 
10.56

 
Fiscal Agency Agreement dated as of December 15, 2004 between Phoenix Life Insurance Company and The Bank of New York (incorporated herein by reference to Exhibit 10.38 to The Phoenix Companies, Inc. Annual Report on Form 10-K filed March 11, 2005; SEC File Number 001-16517)
 
 
 
10.57

 
Investment and Contribution Agreement, dated as of October 30, 2008, by and among The Phoenix Companies, Inc., Phoenix Investment Management Company, Virtus Holdings, Inc. and Harris Bankcorp, Inc. (incorporated herein by reference to Exhibit 10.1 to The Phoenix Companies, Inc. Current Report on Form 8-K filed November 5, 2008; SEC File Number 001-16517)
 
 
 
10.58

 
Separation Agreement, Plan of Reorganization and Distribution by and between The Phoenix Companies, Inc. and Virtus Investment Partners, Inc. dated as of December 18, 2008 (incorporated herein by reference to Exhibit 10.1 to The Phoenix Companies, Inc. Current Report on Form 8-K filed December 23, 2008; SEC File Number 001-16517)
 
 
 
10.59

 
Transition Services Agreement by and between The Phoenix Companies, Inc. and Virtus Investment Partners, Inc. dated as of December 18, 2008 (incorporated herein by reference to Exhibit 10.2 to The Phoenix Companies, Inc. Current Report on Form 8-K filed December 23, 2008; SEC File Number 001-16517)
 
 
 
10.60

 
Tax Separation Agreement by and between The Phoenix Companies, Inc. and Virtus Investment Partners, Inc. dated as of December 18, 2008 (incorporated herein by reference to Exhibit 10.3 to The Phoenix Companies, Inc. Current Report on Form 8-K filed December 23, 2008; SEC File Number 001-16517)
 
 
 
10.61

 
Amendment to Tax Separation Agreement by and between The Phoenix Companies, Inc. and Virtus Investment Partners, Inc. dated as of April 8, 2009 (incorporated herein by reference to Exhibit 10.39 to The Phoenix Companies, Inc. Quarterly Report on Form 10-Q filed May 8, 2009)
 
 
 
10.62

 
Employee Matters Agreement by and between The Phoenix Companies, Inc. and Virtus Investment Partners, Inc. dated as of December 18, 2008 (incorporated herein by reference to Exhibit 10.4 to The Phoenix Companies, Inc. Current Report on Form 8-K filed December 23, 2008; SEC File Number 001-16517)
 
 
 
10.63

 
Amended and Restated Technology Services Agreement by and among Phoenix Life Insurance Company and Electronic Data Systems, LLC dated January 1, 2009 (incorporated herein by reference to Exhibit 10.1 to The Phoenix Companies, Inc. Current Report on Form 8-K filed January 6, 2009; SEC File Number 001-16517)
 
 
 

E-4

10.64

 
Letter from The Phoenix Companies, Inc. to the Chief Financial Officer dated April 3, 2014 (incorporated by reference to Exhibit 10.1 to The Phoenix Companies, Inc. Current Report on Form 8-K filed April 4, 2014)
 
 
 
10.65

 
Letter from The Phoenix Companies, Inc. to the Chief Investment Officer dated July 15, 2014 (incorporated by reference to Exhibit 10.1 to The Phoenix Companies, Inc. Current Report on Form 8-K filed July 18, 2014)
 
 
 
10.66

 
Modification of Award Conditions to the Chief Financial Officer dated December 12, 2014 (incorporated by reference to Item 5.02 of The Phoenix Companies, Inc. Current Report on Form 8-K filed December 18, 2014)
 
 
 
10.67

 
Settlement Agreement between Martin Fleisher, as trustee of the Michael Moss Irrevocable Life Insurance Trust II and Jonathan Berck, as trustee of the John L. Loeb, Jr. Insurance Trust, and Phoenix Life Insurance Company and between SPRR LLC and PHL Variable Insurance Company dated May 29, 2015 (incorporated by reference to Exhibit 10.1 to The Phoenix Companies, Inc. Current Report on Form 8-K filed June 3, 2015)
 
 
 
10.68

 
Severance Agreement and Release, dated July 2, 2015, between The Phoenix Companies, Inc. and Peter A. Hofmann (incorporated by reference to Exhibit 10.1 to The Phoenix Companies, Inc. Current Report on Form 8-K filed July 6, 2015)
 
 
 
10.69

 
Consulting Services Agreement, dated July 2, 2015, between The Phoenix Companies, Inc. and Peter A. Hofmann (incorporated by reference to Exhibit 10.2 to The Phoenix Companies, Inc. Current Report on Form 8-K filed July 6, 2015)
 
 
 
12

 
Ratio of Earnings to Fixed Charges*
 
 
 
16

 
Letter from PricewaterhouseCoopers LLP to the Securities and Exchange Commission, dated June 11, 2015, regarding change in independent registered public accounting firm (incorporated by reference to Exhibit 16 to The Phoenix Companies, Inc. Current Report on Form 8-K filed June 11, 2015)
 
 
 
21

 
Subsidiaries of The Phoenix Companies, Inc.*
 
 
 
23.1

 
Consent of KPMG LLP*
 
 
 
23.2

 
Consent of PricewaterhouseCoopers LLP*
 
 
 
24

 
Power of Attorney*
 
 
 
31.1

 
Certification of James D. Wehr, Chief Executive Officer, 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, Chief Executive Officer 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*
 
 
 
*

 
Filed herewith

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, The Phoenix Companies, Inc., One American Row, P.O. Box 5056, Hartford, Connecticut 06102-5056.


E-5