Delaware
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001-16517
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06-1599088
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(State or other jurisdiction
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(Commission File Number)
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(IRS Employer
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of incorporation)
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Identification No.)
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One American Row, Hartford, CT
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06102 -5056
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(Address of Principal Executive Offices)
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(Zip Code)
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Registrant’s telephone number, including area code:
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(860) 403-5000
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NOT APPLICABLE
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(Former name or former address, if changed since last report)
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¨
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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
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¨
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
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¨
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
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¨
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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Accounting for Reserves for Certain Universal Life Products. Certain of the Company’s Universal Life ("UL") products have benefit features or have experience that produce profits in earlier periods followed by losses in later periods. Under U.S. GAAP accounting, the Company is required to establish reserves for benefit features that result in future benefits that exceed the projected contract value. In addition, the Company should periodically assess the GAAP liability for a line of business to ensure it is sufficient when compared to future margins and evaluate whether the line of business is expected to produce profits in earlier years followed by losses in later years. The Company misapplied U.S. GAAP in defining and evaluating benefit features and did not assess the line of business for the profits followed by losses condition. Accordingly, the Company corrected the resulting errors and recorded additional reserves over the restatement period to cover expected GAAP losses that otherwise would have been recorded in future periods. These errors were not a result of any changes in assumptions or errors in data or modeling. In addition, the ultimate experience of the line of business is reflected in the statutory reserves and the errors did not impact the previously reported statutory financial results.
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Loss Recognition: Under U.S. GAAP accounting, the Company must periodically assess the net GAAP liability (net of deferred policy acquisition costs) to ensure it is sufficient when compared to a gross premium valuation in a process known as loss recognition testing. Upon analysis, the Company determined that the “locked-in” historical estimates used to calculate the policyholder liabilities were insufficient prior to and also as a result of entering into a new reinsurance treaty (as discussed within the “Reinsurance Accounting” section below) and the interest rate environment. Established U.S. GAAP compliant methods require that upon identification of loss recognition events, the Company reduce its deferred policy acquisition cost asset and establish additional liabilities to rectify the insufficiency identified for certain blocks of business.
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Reinsurance Modeling: The Company used approximations of reinsurance treaty provisions that when aggregated did not properly reflect the underlying reinsurance treaty provisions within its valuation models for deferred policy acquisition costs and policyholder liabilities.
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Shadow Accounting: Under U.S. GAAP accounting, intangible assets and liabilities that are backed by a portfolio of assets classified as available for sale are required to reflect the amount of unrealized gains or unrealized losses “as if the amounts were realized.” The Company failed to recognize all of the relationships between the available-for-sale assets and the supported intangible assets and liabilities in calculating amounts necessary for this shadow accounting. During the restatement, the shadow accounting valuation process is being enhanced to ensure all interrelated intangible assets and liabilities including reinsurance and long duration liabilities is being properly evaluated and to ensure that the impacts of these unrealized gains or losses are properly recorded.
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Traditional Product Revenue Recognition: The Company did not properly recognize the timing of revenue related to traditional participating life insurance contracts. In conjunction with correcting this error, the Company revised the projected income from inception of the closed block to properly capture the revised timing of revenue recognition. The correction of these errors is expected to have no material impact on annual net income or stockholders’ equity, as the cumulative impact of the error is expected to be substantially offset by the policyholder dividend obligation included within policy liabilities and accruals on the consolidated balance sheets.
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Liability for the Future Cost of a Settlement Agreement: The Company did not properly record the incremental liability for the future costs related to a settlement in the class action Michels, et al. v. Phoenix Home Life Mutual Insurance Company (Sup. Ct Albany Co. Index No. 5318-95), which was reached in August, 1996, prior to demutualization for its participating business. The Company was required to reimburse certain customers for supplemental premium payments. However, no liability was initially established for these future reimbursements within the consolidated financial statements. The calculation of liability involves estimates of future policy lapses and policyholder mortality that are consistent with the assumptions used to estimate other policy liabilities.
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Fixed Indexed Annuities: During the Company’s analysis of the equity index valuation process, errors associated with the actuarial modeling of the product features used to calculate policyholder liabilities for the fixed indexed annuity product were identified. These errors included incomplete or inaccurate data and inappropriate approximations of product features, which resulted in the incorrect calculation for the policyholder liabilities and embedded derivative associated with guaranteed minimum withdrawal benefits. Further review and testing identified additional errors related to programmed assumptions and census inputs.
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Other Actuarial Errors: Out-of-period errors that were previously determined not to be material individually, or in the aggregate, were recorded to the appropriate reporting period. In addition, this sub-category includes other immaterial adjustments, which were identified in conjunction with management’s comprehensive balance sheet review relating to the Company’s actuarial assumptions, approximations and valuation methods/models for its life and annuity businesses.
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In 2008, the Company entered into a complex reinsurance agreement with one of its reinsurers. In accordance with its original accounting policy, the Company calculated the estimated net cost of reinsurance, which resulted in a day one loss and recognized this loss immediately in net income rather than deferring and amortizing the loss over the life of the underlying business.
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Upon review of the reinsurance transaction, the Company also determined that loss recognition had been triggered for a portion of the underlying block of business both prior to and subsequent to entering into the reinsurance agreement. The impact of the loss recognition prior to the reinsurance then indirectly impacted the amount of losses deferred at day one.
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In addition, certain errors were identified related to the Company’s presentation of direct and ceded reinsurance liabilities on its consolidated balance sheets. As a result, ceded policy liabilities are expected to be reclassified from policy liabilities and accruals to receivables within the consolidated balance sheets to correct the error and reflect the proper gross presentation required under U.S. GAAP.
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1.
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Cash and Cash Flow Reporting – The Company did not maintain effective controls over the presentation of cash and cash flows. Specifically, the Company did not maintain effective controls over the preparation and review of appropriate detail to support the classification of activity in the consolidated statements of cash flows. In addition, there were not effective controls for assessing the classification of cash and related balances for presentation in the consolidated balance sheets.
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2.
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Reinsurance Accounting – The Company did not maintain effective controls over the application of U.S. GAAP at the inception of complex reinsurance treaties. Specifically, the Company did not maintain effective controls to analyze, document and review the appropriate accounting for such transactions at inception.
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3.
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Actuarial Finance and Valuation – The Company did not design or maintain effective controls over the actuarial process. Specifically:
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● | The Company did not maintain effective controls to review and approve assumptions and methodologies used in the determination of actuarially derived insurance policy liability estimates. | |
● | The Company did not design and operate effective systems and controls to appropriately measure actuarially derived balances for its fixed indexed annuity products. | |
● | The Company did not maintain effective controls over key actuarial spreadsheets to ensure the reliability of data, assumptions and valuation calculations. | |
● | The Company did not maintain effective controls over the application of U.S. GAAP to universal life reserves and traditional product revenue recognition and reserve methodology. |
4.
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Private Placement Investments – The Company did not maintain effective controls over the valuation of private placement debt securities. Specifically, the Company did not have effective controls to ensure that: (i) accurate inputs were used in the valuation models used to value private placement debt; (ii) an appropriate valuation methodology was used to value certain private placement debt instruments; and (iii) an effective review of internally developed (matrix or manual) prices was performed prior to entry to the general ledger.
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5.
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Derivative Valuation – The Company did not maintain effective controls over the valuation of certain derivative instruments. Specifically, the Company did not maintain effective controls to properly recognize and measure counterparty non-performance risk on non-collateralized derivatives.
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6.
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OIA –The Company did not design and maintain effective controls over accounting for OIA. Specifically, the Company did not have effective controls over determining the appropriate accounting method for OIA at acquisition or as a result of subsequent activity.
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7.
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OIA Taxable Income Reporting – The Company did not maintain effective controls over the completeness and accuracy of taxable income reporting for its OIA portfolio, resulting in the exclusion of material balances from its tax provisions during the period from 2008 through 2012.
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THE PHOENIX COMPANIES, INC.
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Date: January 17, 2014
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By:
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/s/ Bonnie J. Malley | |
Name: Bonnie J. Malley | |||
Title: Executive Vice President and Chief Financial Officer | |||
N E W S R E L E A SE
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For Immediate Release
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One American Row
PO Box 5056
Hartford CT 06102-5056
www.phoenixwm.com
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Contacts:
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Media Relations
Alice S. Ericson, 860-403-5946
alice.ericson@phoenixwm.com
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Investor Relations
Naomi Baline Kleinman, 860-403-7100
pnx.ir@phoenixwm.com
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Phoenix Cos. (NYSE:PNX) Announces GAAP Restatement Impact, Expected Filing Dates, Other Updates | ||
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Unaudited estimated pre-tax decrease of $250M to stockholders’ equity reported at 6/30/12
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● | 3/31/14 filing date for 2012 10-K; timely filing expected with 2Q14 10-Q |
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Recording previously identified, non-material, out-of-period errors in the appropriate historical periods.
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Correcting additional errors affecting prior periods, including the following items:
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o
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actuarial valuation of certain insurance liabilities and deferred policy acquisition cost assets, including accounting for reserves for certain UL contracts;
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o
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accounting for complex reinsurance transactions;
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o
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valuation of certain private debt securities and derivative instruments;
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o
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accounting for other invested assets; and
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o
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pension valuation.
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Adjusting the retrospective adoption of new accounting guidance for deferred acquisition costs to reflect the impact of the correction of the errors associated with the restatement on the adoption.
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The estimated pre-tax impact of the restatement on total stockholders’ equity reported at June 30, 2012 is a decrease of $250 million, primarily driven by a $204 million decrease resulting from the UL reserve error described more fully below. Prior to announcing the restatement, Phoenix reported $946.6 million in total stockholders’ equity at June 30, 2012, on an after-tax basis. |
Correction of Errors
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Period
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As Reported
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ASU 2010.26
Adoption as
Disclosed1
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As Amended for
ASU 2010.261
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UL Reserve Error
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All Other Errors
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As Restated and Amended
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Year Ending 12/31/2010
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$(35)
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$51
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$16
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$(60)
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$(11)
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$(55)
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Year Ending 12/31/2011
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$32
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$40
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$72
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$(28)
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$(25)
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$19
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Year-to-Date 6/30/2012
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$(1)
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n/a
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$(1)
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$(53)
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$13
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$(41)
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1 As previously disclosed in its first quarter 2012 Form 10-Q, Phoenix retrospectively adopted new accounting guidance for deferred acquisition costs (ASU 2010.26: FASB amended guidance to ASC 944, Financial Services – Insurance) effective Jan. 1, 2012.
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● | a $25.0 million dividend paid by PLIC; | |
● | the purchase of a $30.0 million surplus note from PHL Variable, a PLIC subsidiary; and | |
● | a $45.0 million capital contribution to further benefit PHL Variable. |