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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark one) ( X )
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2005 OR ( )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission file number 333-87218 PHL VARIABLE INSURANCE COMPANY (Exact name of registrant as specified in its charter) Connecticut 06-1045829 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One American Row, Hartford, Connecticut 06102-5056 (Address of principal executive offices) (Zip Code) Registrants telephone number, including area code (860) 403-5000
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. YES [ ]
NO [ X ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act.
YES [ ] NO [ X ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days. YES [ ]
NO [ X ]
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 registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerate filer or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the
Exchange Act.
Large accelerated filer [ ] Accelerated filer [
] Non-accelerated filer [ X ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). YES [ ] NO [ X ]
PHL Variable Insurance Company is a wholly-owned indirect subsidiary of The
Phoenix Companies, Inc., and there is no market for the registrants common
stock. As of March 31, 2006, there were 500 shares of the registrants
common stock outstanding.
The registrant meets the conditions set forth in General Instruction I(1)(a)
and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format permitted by that General Instruction. 1 TABLE OF CONTENTS Item No.
Description Page
Part I 1 Business 3 1A Risk Factors 7 1B Unresolved Staff Comments 10 2 Properties 10 3 Legal Proceedings 10 4 Submission of Matters to a Vote of Security Holders 11
Part II 5 Market for Registrants Common Equity, Related Stockholder Matters and 12 6 Selected Financial Data 12 7 Managements Discussion and Analysis of Financial Condition and 13 7A Quantitative and Qualitative Disclosures About Market Risk 27 8 Financial Statements and Supplementary Data 30 Report of Independent Registered Public Accounting Firm F-1 Balance Sheet as of December 31, 2005 and 2004 F-2 Statement of Income and Comprehensive Income For the Years Ended F-3 Statement of Cash Flows For the Years Ended December 31, 2005, 2004 and 2003 F-4 Notes to Financial Statements F-5 9 Changes in and Disagreements with Accountants on Accounting and 30 9A Controls and Procedures 31 9B Other Information 31
Part III 10 Directors and Executive Officers of the Registrant 32 11 Executive Compensation 32 12 Security Ownership of Certain Beneficial Owners and Management 32 13 Certain Relationships and Related Transactions 32 14 Principal Accounting Fees and Services 32
Part IV 15 Exhibits, Financial Statement Schedules 34 Signatures 35 Exhibit Index E-1
Supplemental Information
Financial Statements as of December 31, 2004 and 2003 and for the
three years ended December 31, 2004 FA-1 - FA-18
Financial Statements as of December 31, 2003 and 2002 and for the
three years ended December 31, 2003 FB-1 - FB-18
Financial Statements as of December 31, 2002 and 2001 and for the
three years ended December 31, 2002 FC-1 - FC-19
Financial Statements as of December 31, 2001 and 2000 and for the
three years ended December 31, 2001 FD-1 - FD-23
Selected Unaudited Quarterly Information Q-1 - Q-10 2 Unless
otherwise stated, we, our or us means PHL
Variable Insurance Company (the Company or PHL Variable)
and its direct and indirect subsidiaries. Furthermore, Phoenix
Life refers to Phoenix Life Insurance Company and PNX refers
to The Phoenix Companies, Inc. Introduction Due to a mistaken understanding that
our periodic reporting could be suspended when our ultimate parent, PNX, began
filing periodic reports under the Securities Exchange Act of 1934, as amended
(the Exchange Act) after its initial public offering on June 25,
2001, we did not file our quarterly and annual reports under the Exchange Act
from December 31, 2001 through September 30, 2005. We are filing this report on Form
10-K to bring current our filings under the Exchange Act for these periods.
Accordingly, this report includes audited financial statements for the
years ended December 31, 2001, 2002, 2003, 2004 and 2005 and unaudited quarterly
financial data for the fiscal quarter ended December 31, 2001 and for each of
the fiscal quarters in the years ended December 31, 2002, 2003, 2004 and 2005.
PART I Item 1. Business
Description of Business We are a manufacturer of insurance
and annuity products for the accumulation, preservation and transfer of wealth.
We provide products and services to affluent and high-net-worth
individuals through their advisors. We offer a broad range of life
insurance and annuity products and services through a variety of distributors.
The affluent and high-net-worth
market is a growing market with significant demand for customized products and
services. We define affluent as those households with a net worth of $500,000 or
greater, excluding their primary residence. We define high-net-worth, a
subset of the affluent category, as those households that have net worth,
excluding primary residence, of over $1,000,000. Our products and services
are designed to assist advisors and their clients in this target market to
achieve three main goals: ·
the accumulation of wealth, primarily during an
individuals working years; ·
the preservation of income and wealth to provide for a
secure retirement; and ·
the efficient transfer of wealth in a variety of
situations, including through estate planning, business continuation planning
and charitable giving. We distribute our products and
services through various financial intermediaries such as national and regional
broker-dealers, banks, financial planning firms, advisor groups and other
insurance companies. We offer a variety of life insurance
and annuity products through non-affiliated distributors. We believe our
competitive advantage in this segment consists of six main components: ·
our innovative products; ·
our broad asset management capability; ·
our distribution relationships with institutions that have
access to our target market; ·
the value-added our distributors provide those institutions;
·
our ability to combine products and services that distributors
and their clients find attractive; and ·
our underwriting expertise. Products Life Products
Our life insurance products include
variable universal life, universal life, term life and other insurance products.
We offer single life, first-to-die and second-to-die products. Under
first-to-die policies, up to five lives may be insured with the policy proceeds
paid after the death of the first of the five insured lives. Second-to-die
products 3 are
typically used for estate planning purposes and insure two lives rather than
one, with the policy proceeds paid after the death of both insured individuals.
Variable Universal Life.
Variable universal life products provide insurance coverage and give the
policyholder various investment choices, flexible premium payments and coverage
amounts and limited guarantees. The policyholder may direct premiums and
cash value into a variety of separate investment accounts, accounts that are
maintained separately from the other assets of the Company and are not part of
our general account or into the general account. 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 policyholders accounts.
With some variable universal products, by maintaining a certain premium
level the policyholder receives guarantees that protect the policys death
benefit if, due to adverse investment experience, the policyholders
account balance is zero. We retain the right within limits to adjust the
fees we assess for providing administrative services. We also collect fees to
cover mortality costs; these fees may be adjusted by us but may not exceed
contractual limits. Universal Life.
Universal life products provide insurance coverage on the same basis as
variable universal life products, except that premiums, and the resulting
accumulated balances, are allocated only to our general account for investment.
Universal life products may allow the policyholder to increase or decrease the
amount of death benefit coverage over the term of the policy, and also may allow
the policyholder to adjust the frequency and amount of premium payments.
We credit premiums, net of expenses, to an account maintained for the
policyholder. The account earns interest at rates determined by us,
subject to certain minimums. Specific charges are made against the account
for expenses. We also collect fees to cover mortality costs; these fees
may be adjusted by us but may not exceed contractual limits. Some universal life products provide
secondary guarantees that protect the policys death benefit even if there
is insufficient value in the policy to pay the monthly charges and mortality
costs. These secondary guarantees are provided as long as the policyholder
is able to fulfill the premium requirements of the secondary guarantee. Term Life. Term life
insurance provides a guaranteed benefit upon the death of the insured within a
specified time period, in return for the periodic payment of premiums.
Specified coverage periods range from one to 30 years, but not longer than
the period over which premiums are paid. Premiums may be level for the
coverage period or may vary. Term insurance products are sometimes
referred to as pure protection products, in that there are normally no savings
or investment elements. Term contracts generally expire without value at
the end of the coverage period. Our term insurance policies allow
policyholders to convert to permanent coverage, generally without evidence of
insurability. Annuity Products
We offer a variety of variable
annuities to meet the accumulation and preservation needs of the affluent and
high-net-worth market. Deferred annuities, in which funds accumulate for a
number of years before periodic payments begin, enable the contractholder to
save for retirement and also provide options that protect against outliving
assets during retirement. Immediate annuities are purchased by means of a
single lump sum payment and begin paying periodic income immediately. We
believe this product is especially attractive to those affluent and
high-net-worth retirees who are rolling over pension or retirement plan assets
and seek an income stream based entirely or partly on equity market performance.
Variable annuities are separate
account products, which means that the contractholder bears the investment risk
as deposits are directed into a variety of separate investment accounts.
The contractholder typically can also direct funds to a general account
option which earns interest at rates determined by us, subject to certain
minimums. Contractholders also may elect certain enhanced living benefit
guarantees, for which they are assessed a specific charge. For example, in
the fourth quarter of 2005 we introduced an innovative Guaranteed Minimum
Withdrawal Benefit option for our products which guarantees an income stream for
the lifetime of the owner and their spouse. Our major sources of revenues
from annuities are mortality and expense fees charged to the contractholder,
generally determined as a percentage of the market value of any underlying
separate account balances, and the excess of investment income over credited
interest for
funds invested in our general account. 4 Other Products and Services Life and Annuity is focused on the
development of other products and distribution relationships that respond to the
affluent and high-net-worth markets demand for wealth management
solutions. For example, many of our products are
designed to be used by corporations to fund special deferred compensation plans
and benefit programs for key employees, commonly referred to as executive
benefits. We view these products as a source of growing fee-based
business. In addition, our products can be applied to a number of
situations to meet the sophisticated needs of business owners and individuals,
including for charitable giving. Underwriting Insurance underwriting is the process
of examining, accepting or rejecting insurance risks, and classifying those
accepted in order to charge appropriate premiums or mortality charges.
Underwriting also involves determining the amount and type of reinsurance
appropriate for a particular type of risk. We believe we have particular
expertise in evaluating the underwriting risks relevant to our target market.
We believe this expertise enables us to make appropriate underwriting
decisions, including, in some instances, the issuance of policies on more
competitive terms than other insurers would offer. Our underwriting team
includes doctors and other medical staff to ensure, among other things, that we
are focused on current developments in medical technology. Our underwriting standards for life
insurance are intended to result in the issuance of policies that produce
mortality experience consistent with the assumptions used in product pricing.
The overall profitability of our life insurance business depends, to a
large extent, on the degree to which our mortality experience compares to our
pricing assumptions. Our underwriting is based on our historical mortality
experience, as well as on the experience of the insurance industry and of the
general population. We continually compare our underwriting standards to
those of the industry to assist in managing our mortality risk and to stay
abreast of industry trends. Our life insurance underwriters
evaluate policy applications on the basis of the information provided by the
applicant and others. We use a variety of methods to evaluate certain
policy applications, such as those where the size of the policy sought is
particularly large, or where the applicant is an older individual, has a known
medical impairment or is engaged in a hazardous occupation or hobby.
Consistent with industry practice, we require medical examinations and
other tests depending upon the age of the applicant and the size of the proposed
policy. In the executive benefits market, we
issue life policies covering multiple lives on a guaranteed issue basis, within
specified limits per life insured, whereby the amount of insurance issued per
life on a guaranteed basis is related to the total number of lives being covered
and the particular need for which the product is being purchased.
Guaranteed issue underwriting applies to employees actively at work, and
product pricing reflects the additional guaranteed issue underwriting risk. Reserves We establish and report liabilities
for future policy benefits on our balance sheet to reflect the obligations under
our insurance policies and contracts. Our liability for variable universal
life insurance and universal life insurance policies and contracts is equal to
the cumulative account balances, plus additional reserves we establish for
policy riders. Cumulative account balances include deposits plus credited
interest, less expense and mortality charges and withdrawals. Reinsurance While we have underwriting expertise
and have experienced favorable mortality trends, we believe it is prudent to
spread the risks associated with our life insurance products through
reinsurance. As is customary in the life insurance industry, our
reinsurance program is designed to protect us against adverse mortality
experience generally and to reduce the potential loss we might face from a death
claim on any one life. 5 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. Under the terms of our
reinsurance agreements, the reinsurer agrees to reimburse us for the ceded
amount in the event a claim is incurred. However, we remain liable to our
policyholders for ceded insurance if any reinsurer fails to meet its
obligations. Since we bear the risk of nonpayment by one or more of our
reinsurers, we cede business to well-capitalized, highly rated insurers.
While our current retention limit on any one life is $10 million ($12
million on second-to-die cases), we may cede amounts below those limits on a
case-by-case basis depending on the characteristics of a particular risk.
Typically our reinsurance contracts allow us to reassume ceded risks after
a specified period.
This right is valuable where our mortality experience is sufficiently
favorable to make it financially advantageous for us to reassume the risk rather
than continue paying reinsurance premiums. We reinsure up to 90% of the
mortality risk on most new issues. As of December 31, 2005, we had ceded
$30.5 billion in face amount of reinsurance, representing 73% of our total face
amount of $41.7 billion of life insurance in force. On January 1, 1996, we entered into a
reinsurance arrangement that covers 100% of the excess death benefits and
related reserves for most variable annuity policies issued through December 31,
1999, including subsequent deposits. We retain the guaranteed minimum death
benefit risks on the remaining variable deferred annuities in force that are not
covered by this reinsurance arrangement. The following table lists our five
principal life reinsurers, together with the reinsurance recoverables on a
statutory basis as of December 31, 2005, the face amount of life insurance ceded
as of December 31, 2005, and the reinsurers A.M. Best ratings. Reinsurer
Reinsurance
Recoverable
Balances Face
Amount of Life
Insurance Ceded
A.M.
Best
Rating(1) RGA $18,025 $9,026,823 A+ AEGON USA $14,100 $6,464,213 A+ Swiss Re $11,003 $2,465,349 A+ Scottish Re $3,854 $3,920,782 A- Munich Re $1,494 $2,539,140 A+ _______ (1) A.M. Best ratings are as of December 31, 2005. General Development of Business
PHL Variable Insurance Company, or
PHLVIC, was incorporated in Connecticut in 1981. Our principal executive
offices are located at One American Row, Hartford, Connecticut 06102-5056.
Our telephone number is (860) 403-5000. Our website is located at
www.PhoenixWealthManagement.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 website. The information on our
website is not, and is not intended to be, part of this Form 10-K and is not
incorporated into this report by reference.) Our indirect parent, Phoenix Life,
was organized in Connecticut in 1851. In 1992, in connection with its
merger with Home Life Insurance Company, Phoenix Life redomiciled to New York.
On June 25, 2001, the effective date
of its demutualization, Phoenix Life converted from a mutual life insurance
company to a stock life insurance company and became a wholly-owned subsidiary
of The Phoenix Companies, Inc., or PNX. In addition, on June 25, 2001, PNX
completed its initial public offering, or IPO. 6 The following chart illustrates our corporate structure as of December 31, 2005.
Item 1A. Risk Factors Poor performance of the equity
markets could adversely affect sales and assets under management of our variable
universal life and variable annuity products. The United States equity markets can
be volatile and experience both periods of strong growth and of substantial
declines. There are three ways in which equity
market declines and volatility have affected, or have the potential to affect,
us negatively. ·
First, because the fee revenues of our variable products
business are based on the value of assets on deposit in our separate accounts,
poor performance of the equity markets limits our fee revenues by reducing the
value of the assets on deposit. ·
Second, the funding requirements of our parent companys
pension plan are dependent on the performance of the equity markets. As of
December 31, 2005, the portfolio funding the pension plan consisted of 67%
equities. In a severe market decline, the value of the assets supporting the
pension plan would decrease, increasing the requirement for future funding.
This funding requirement would increase the expenses allocated to us and
decrease our earnings. ·
Third, significant market volatility or declines could cause
potential purchasers of our products to refrain from purchasing, and current
owners to withdraw from the markets or reduce their exposure to equity products.
Changes in interest rates could
harm cash flow and profitability in our life and annuity businesses. Our life insurance and annuity
businesses are sensitive to interest rate changes. In periods of
increasing interest rates, life insurance policy loans, surrenders and
withdrawals could increase as policyholders seek investments with higher
perceived returns. This could require us to sell invested assets at a time
when their prices are depressed by the increase in interest rates, which could
cause us to realize investment losses. Conversely, during periods of
declining interest rates, we could experience increased premium payments on
products with flexible premium features, repayment of policy loans and increased
percentages of policies remaining in force. We would obtain lower returns
on investments made with these cash flows. In addition, borrowers may
prepay or redeem mortgages and bonds in our investment portfolio so that we
might have to 7 reinvest
those proceeds in lower yielding investments. As a consequence of these
factors, we could experience a decrease in the spread between the returns on our
investment portfolio and amounts credited to policyholders and contractholders,
which could adversely affect our profitability. We depend on non-affiliated
distribution for our product sales and if our relationships with these
distributors were harmed, we could suffer a loss in revenues. We distribute our products through
non-affiliated advisors, broker-dealers and other financial intermediaries.
There is substantial competition for business within most of these
distributors. We believe that our sales through these distributors depend
on factors such as our financial strength, the quality of our products and on
the services we provide to, and the relationships we develop with, our
distributors. Our largest distributors of life insurance include a
subsidiary of State Farm Mutual Automobile Company, or State Farm, and National
Financial Partners, or NFP. We have had distribution arrangements with
State Farm since the initial public offering of our ultimate parent, The Phoenix
Companies, Inc., or PNX, in 2001 and with NFP since 1995. Our
distributors are generally free to sell products from a variety of providers,
which makes it important for us to continually offer distributors products and
services they find attractive. We may not be able to establish or maintain
satisfactory relationships with distributors if our products or services do not
meet their needs. Accordingly, our revenues and profitability would
suffer. Downgrades to Phoenix Lifes
and PHL Variable Insurance Companys financial strength ratings could
increase policy surrenders and withdrawals, adversely affect relationships with
distributors, reduce new sales and earnings from certain of our life insurance
products and increase our future borrowing costs. Rating agencies assign financial
strength ratings based on their opinions of the relevant companys ability
to meet its financial obligations. Financial strength ratings reflect a
rating agencys view of an insurance companys ability to meet its
obligations to its insureds. These ratings are therefore key factors
underlying the competitive position of life insurers. The current
financial strength ratings are set forth in the chart below.
Financial Strength Ratings of Rating Agency
Phoenix Life and PHL Variable Life A.M. Best
Company, Inc. A
(Excellent) Fitch A+
(Strong) Standard &
Poors A
(Strong) Moodys A3
(Good) Fitch, Standard & Poors and
Moodys each have a stable outlook for our ratings, while A.M. Best had a
negative outlook as of December 31, 2005. On February 27, 2006, A.M. Best
affirmed our A financial strength rating and improved its outlook for Phoenix
Life and the Company to stable from negative. Downgrades could adversely affect our
reputation and, hence, our relationships with existing distributors and our
ability to establish additional distributor relationships. If this were to
occur, we might experience a decline in sales of certain products and the
persistency of existing customers. At this time, we cannot estimate the
impact on sales or persistency. A significant decline in our sales or
persistency could have a material adverse effect on our financial results. Our business operations,
investment returns, and profitability could be adversely impacted 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,
application systems support, certain accounting services, transfer agent and
cash management services, custodial services, records storage management, backup
tape management, security pricing services, medical information, payroll, and
employee 8 benefit
programs. In addition, we maintain contractual relationships with certain
investment advisory and investment management firms to leverage their expertise.
These firms manage select investments or portions of portfolios under
sub-advisory agreements. We periodically negotiate provisions
and renewals of these relationships and there can be no assurance that such
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, potentially, adversely affect our
profitability. 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 professionals such as securities analysts,
portfolio managers, sales personnel and actuaries is generally intense. In
general, our employees are not subject to employment contracts or non-compete
agreements. Any inability to retain our key employees, or attract and
retain additional qualified employees, could have a negative impact on us. We face strong competition in our
businesses from mutual fund companies, banks, asset management firms and other
insurance companies. This competition could impair our ability to retain
existing customers, attract new customers and maintain our profitability.
We face strong competition in each of
our businesses, comprising life insurance and annuities. We believe that
our ability to compete is based on a number of factors, including product
features, investment performance, service, price, distribution capabilities,
scale, commission structure, name recognition and financial strength ratings.
While there is no single company that we identify as a dominant competitor
in our business overall, our actual and potential competitors include a large
number of mutual fund companies, banks, asset management firms and other
insurance companies, many of which have advantages over us in one or more of the
above competitive factors. Recent industry consolidation, including
acquisitions of insurance and other financial services companies in the United
States by international companies, has resulted in larger competitors with
financial resources, marketing and distribution capabilities and brand
identities that
are stronger than ours. Larger firms also may be able to offer, due to
economies of scale, more competitive pricing than we can. In addition,
some of our competitors are regulated differently than we are, which may give
them a competitive advantage; for example, many non-insurance company providers
of financial services are not subject to the costs and complexities of insurance
regulation by multiple states. If we do not compete effectively in this
environment, our profitability and financial condition would be materially
adversely affected. Some of the Bush
administrations legislative proposals would reduce or eliminate the
benefit of deferral of taxation for our insurance and annuity products. In
addition, legislation eliminating or modifying either the federal estate tax or
the federal taxation of investment income could adversely affect sales of and
revenues from our life and annuity products. The attractiveness to our customers
of many of our products is due, in part, to favorable tax treatment.
Current federal income tax laws generally permit the tax-deferred
accumulation of earnings on the premiums paid by the holders of annuities and
life insurance products. Legislative changes that have the effect of
reducing the taxes imposed on investment income could reduce or eliminate the
relative benefit of such deferral of taxation for our insurance and annuity
products. The tax rate on long-term capital gains and certain dividend
income has been reduced until 2008 and President Bushs 2006 budget
proposal would make these rate reductions permanent. If this happens, it
could have a negative impact on our sales and revenues from life and annuity
products. The Presidents Advisory Panel on Federal Tax Reform
recently proposed fundamental changes to the federal income tax law that include
taxation of most inside
build-up on life insurance policies and annuity contracts, enhanced and
simplified alternatives for tax deferred savings for retirement and other
purposes, substantial reductions in federal income taxes on capital gains and
dividend income and other proposals that would tend to reduce or eliminate the
relative tax advantages of our life and annuity products. Other
comprehensive changes to the tax system have been proposed, including the
adoption of a flat tax, value-added tax or similar alternative structure, the
creation of new and expanded vehicles for tax-exempt savings and lower taxes on
investment income. Substantial modifications to Social Security have also been
proposed. The likelihood that any of these proposals would ultimately be
enacted, and the potential impact of these proposals, if enacted, cannot be
reasonably estimated. 9 Some of
our life insurance products are specifically designed and marketed as policies
that help a decedents heirs to pay estate tax. Legislation enacted
in the spring of 2001 increased the size of estates exempt from the federal
estate tax, phased in reductions in the estate tax rate between 2002 and 2009
and repealed the estate tax entirely in 2010. This legislation, despite
its reinstatement of the estate tax in 2011, increased uncertainty in the market
and has had a negative effect on our revenues, from sales of second-to-die life
insurance policies. Second-to-die policies are often purchased by two
people whose assets are largely illiquid, and whose heirs otherwise might have
to attempt to liquidate part of the estate in order to pay the tax.
President Bush and members of Congress have expressed a desire to modify
the existing legislation, which could result in faster or more complete
reduction or
repeal of the estate tax. Changes in insurance and
securities regulation could affect our profitability by imposing further
restrictions on the conduct of our business. Our life insurance and annuity
businesses are subject to comprehensive state regulation and supervision
throughout the United States. State insurance regulators and the National
Association of Insurance Commissioners, or the NAIC, continually reexamine
existing laws and regulations, and may impose changes in the future that put
further regulatory burdens on us, thereby increasing our costs of doing business
or otherwise harm our business. This could have a material adverse effect
on our results of operations and financial condition. The United States federal government
does not directly regulate the insurance business. However, federal
legislation and administrative policies in areas which include employee benefit
plan regulation, financial services regulation and federal taxation and
securities laws could significantly affect each of our businesses, most notably
our costs. We and some of the policies,
contracts and other products that we offer are subject to various levels of
regulation under the federal securities laws administered by the SEC as well as
regulation by those states and foreign countries in which we provide investment
advisory services, offer products or conduct other securities-related
activities. We could be restricted in the conduct of our business for
failure to comply with such laws and regulations. Future laws and
regulations, or the interpretation thereof, could have a material adverse effect
on our results of operations and financial condition by increasing our expenses
in order to comply with these laws and regulations. Item 1B. Unresolved
Staff Comments The registrant has omitted this
information from this report as the registrant is not an accelerated filer or a
large accelerated filer, as defined in Rule 12b-2 of the Exchange Act and is not
a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Item 2. Properties
Our executive headquarters consist of
an office building at One American Row in Hartford, Connecticut owned by our
parent company and space in East Greenbush, New York which is leased by our
parent company. For the use of space in these buildings, we pay rent
through expense allocations from our parent company. We do not own any
real estate. Item 3. Legal
Proceedings General We are regularly involved in
litigation, both as a defendant and as a plaintiff. The litigation naming
us as a defendant ordinarily involves our activities as an insurer, investor or
taxpayer. Several current proceedings are discussed below. In
addition, state regulatory bodies, the Securities and Exchange Commission, or
SEC, the National Association of Securities Dealers, Inc., or NASD, and other
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 and securities laws. 10 For example, during 2003 and 2004,
the SEC conducted examinations of certain Company variable products and certain
affiliated investment advisors and mutual funds. In 2004, the NASD also
commenced examinations of two affiliated broker-dealers; the examinations were
closed in April 2005 and November 2004, respectively. In February 2005,
the NASD notified an affiliate of the Company that it was asserting violations
of trade reporting rules by the affiliate of the Company. The affiliated
company responded to the NASD allegations in May 2005 but has not received any
further inquiries to date. Federal and state regulatory
authorities from time to time make inquiries and conduct examinations regarding
compliance by the Company with securities and other laws and regulations
affecting its registered products. The Company endeavors to respond to
such inquiries in an appropriate way and to take corrective action if warranted.
Recently, 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 late-trading, market timing and
valuation issues. Our products entitle us to impose restrictions on
transfers between separate account sub-accounts associated with our variable
products. In 2004 and 2005, the Boston District
Office of the SEC conducted a compliance examination of certain of the
Companys affiliates that are registered under the Investment Company Act
of 1940 or the Investment Advisers Act of 1940. Following the examination, the
staff of the Boston District Office issued a deficiency letter primarily focused
on perceived weaknesses in procedures for monitoring trading to prevent market
timing activity. The staff requested the Company to conduct an analysis as to
whether shareholders, policyholders and contract holders who invested in the
funds that may have been affected by undetected market timing activity had
suffered harm and to advise the staff whether the Company believes reimbursement
is necessary or appropriate under the circumstances. A third party was
retained to assist the Company in preparing the analysis. Based on the
analysis, the Company advised the SEC that it does not believe that
reimbursement
is appropriate. Over the past two years, a number of
companies have announced settlements of enforcement actions with various
regulatory agencies, primarily the SEC and the New York Attorney Generals
Office. While no such action has been initiated against us, it is possible
that one or more regulatory agencies may pursue this type of action against us
in the future. Financial services companies have
also been the subject of broad industry inquiries by state regulators and
attorneys general which do not appear to be company-specific. In this
regard, in 2004, we received a subpoena from the Connecticut Attorney
Generals office requesting information regarding certain distribution
practices since 1998. Over 40 companies received such a subpoena. We
are cooperating fully and have had no further inquiry since filing our response.
These types of regulatory actions may
be difficult to assess or quantify, may seek recovery of indeterminate amounts,
including punitive and treble damages, and the nature and magnitude of their
outcomes may remain unknown for substantial periods of time. While it is
not feasible to predict or determine the ultimate outcome of all pending
investigations and legal proceedings or to provide reasonable ranges of
potential losses, we believe that their outcomes are not likely, either
individually or in the aggregate, to have a material adverse effect on our
financial condition, or consideration of available insurance and reinsurance and
the provision made in our financial statements. However, given the large
or indeterminate amounts sought in certain of these matters and
litigations inherent unpredictability, it is possible that an adverse
outcome in certain matters could, from time to time, have a material adverse
effect on our results of
operation or cash flows. Item 4. Submission
of Matters to a Vote of Security Holders The registrant has omitted this
information from this report as the registrant meets the conditions set forth in
General Instruction (I)(1)(a) and (b) of Form 10-K and is therefore filing this
Form with the reduced disclosure format permitted by that General Instruction.
11 PART II Item 5. Market for
Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity
Securities Common Stock Shares of our common stock are not
publicly traded and are all owned indirectly by our ultimate parent company, The
Phoenix Companies, Inc. Dividends We did not pay any dividends during
the three years ended December 31, 2005. For a discussion of restrictions
on our ability to pay dividends, see Note 10 to our 2005 financial statements
contained in this Form 10-K. Item 6.
Selected
Financial Data The registrant has omitted this
information from this report as the registrant meets the conditions set forth in
General Instruction (I)(1)(a) and (b) of Form 10-K and is therefore filing this
Form with the reduced disclosure format permitted by that General Instruction.
12 Item 7.
Managements 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. The Company intends these
forward-looking statements to be covered by the safe harbor provisions of the
federal securities laws relating to forward-looking statements. These
include statements relating to trends in, or representing managements
beliefs about, the Companys future strategies, operations and financial
results, as well as other statements including, but not limited to, words such
as anticipate, believe, plan,
estimate, expect, intend, may,
should and other similar expressions. Forward-looking statements are
made based upon managements current expectations and beliefs concerning
trends and future developments and their potential effects on the Company. They
are not guarantees
of future performance. Actual results may differ materially from those
suggested by forward-looking statements as a result of risks and uncertainties
which include, among others: (i) changes in general economic conditions,
including changes in interest rates and the performance of financial markets;
(ii) heightened competition, including with respect to pricing, entry of
new competitors and the development of new products and services by new and
existing competitors; (iii) regulatory, accounting or tax developments that
may affect the Company or the cost of, or demand for, its products or services;
(iv) downgrades in the financial strength ratings of the Company;
(v) discrepancies between actual claims or investment experience and
assumptions used in setting prices for the Companys products and
establishing the Companys liabilities for future policy benefits and
claims relating to such products; (vi) movements in the equity markets that
affect our
investment results, the fees we earn from funds on deposit and the demand for
our variable products; (vii) the Companys continued success in
achieving planned expense reductions; (viii) the effects of closing the
Companys affiliated retail brokerage operations; and (ix) other risks
and uncertainties described in any of the Companys filings with the SEC.
The Company undertakes no obligation to update or revise publicly any
forward-looking statement, whether as a result of new information, future events
or otherwise. 13 MANAGEMENTS NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS This section reviews our results of
operations for the years 2000 through 2005. This discussion should be read
in conjunction with our financial statements in this Form 10-K. Overview We are a manufacturer of insurance
and annuity products for the accumulation, preservation and transfer of wealth.
We provide products and services to affluent and high-net-worth
individuals through their advisors. We offer a broad range of life
insurance and annuity products, including universal, variable universal, term
life insurance, and a range of variable annuity offerings and services through a
variety of distributors. These distributors include independent advisors
and financial services firms who make our products and services available to
their clients. We derive our revenues principally
from: ·
premiums on life insurance; ·
insurance and investment product fees on variable life and
annuity products and universal life products; and ·
net investment income and net realized investment gains.
Under generally accepted accounting
principles, or GAAP, premium and deposit collections for variable life,
universal life and annuity products are not recorded as revenues. These
collections are reflected on our balance sheet as an increase in separate
account liabilities for certain investment options of variable products.
Collections for fixed annuities and certain investment options of variable
annuities are reflected on our balance sheet as an increase in policyholder
deposit funds. Collections for other products are reflected on our balance
sheet as an increase in policy liabilities and accruals. Our expenses consist principally of:
·
insurance policy benefits provided to policyholders, including
interest credited on policies; ·
deferred policy acquisition costs amortization; ·
other operating expenses; and ·
income taxes. Our profitability depends principally
upon: ·
the adequacy of our product pricing, which is primarily a
function of our: ·
ability to select appropriate underwriting risks; ·
mortality experience; ·
ability to generate investment earnings; ·
ability to maintain expenses in accordance with our pricing
assumptions; and ·
policies persistency (the percentage of policies
remaining in force from year to year as measured by premiums); ·
the amount and composition of funds on deposit; ·
the maintenance of our target spreads between the rate of
earnings on our investments and interest rates credited to customers; and
·
our ability to manage expenses. Our sales and financial results over
the last several years have been affected by demographic, industry and market
trends. The baby boom generation has begun to enter its prime savings
years. Americans generally have begun to rely less on defined benefit
retirement plans, social security and other government programs to meet their
postretirement financial needs. Product preferences have shifted between
fixed and variable options depending on market and economic conditions.
Our balanced product portfolio including universal life, variable life and
variable annuity products is well positioned to meet this shifting demand. 14 New
accounting pronouncements In September 2005, the Accounting
Standards Executive Committee, or AcSEC, of the American Institute of Certified
Public Accountants, or AICPA, issued Statement of Position 05-1, Accounting
by Insurance Enterprises for Deferred Acquisition Costs in Connection With
Modifications or Exchanges of Insurance Contracts, or SOP 05-1. SOP
05-1 provides guidance on accounting by insurance enterprises for deferred
acquisition costs on internal replacements of insurance and investment contracts
other than those specifically described in Statement of Financial Accounting
Standards No. 97, or SFAS No. 97. The SOP defines an internal replacement
as a modification in product benefits, features, rights, or coverages that
occurs by the exchange of a contract for a new contract, or by amendment,
endorsement, or rider to a contract, or by the election of a feature or coverage
within a contract. This SOP is effective for internal replacements
occurring
in fiscal years beginning after December 15, 2006. We will adopt SOP 05-1
on January 1, 2007. We are currently assessing the impact of SOP 05-1 on
our financial position and results of operations. Other-Than-Temporary Impairments:
FASB Staff Position Nos. FAS 115-1 and FAS 124-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,
or FSP 115-1, is effective for reporting periods beginning after December 15,
2005. Earlier application is permitted. FSP 115-1 provides guidance
as to the determination of other-than-temporarily impaired securities and
requires certain financial disclosures with respect to unrealized losses.
These accounting and disclosure requirements largely codify our existing
practices as to other-than-temporarily impaired securities and thus, does not
have a material effect on our financial statements. Nontraditional Long-Duration
Contracts and Separate Accounts: Effective January 1, 2004, we adopted
the AICPAs Statement of Position 03-1, Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts, or SOP 03-1. SOP 03-1 provides guidance related to
the accounting, reporting and disclosure of certain insurance contracts and
separate accounts, including guidance for computing reserves for products with
guaranteed benefits such as guaranteed minimum death benefits and for products
with annuitization benefits such as guaranteed minimum income benefits. In
addition, SOP 03-1 addresses the presentation and reporting of separate
accounts, as well as rules concerning the capitalization and amortization of
sales inducements. Since this new accounting standard largely codifies
certain accounting and reserving practices related to applicable nontraditional
long-duration contracts and separate accounts that we already followed, our
adoption did not have a material effect on our financial statements. Securitized Financial Instruments.
Effective April 1, 2001, we adopted Emerging Issues Task Force Issue
No. 99-20, Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets (EITF
99-20). This pronouncement requires investors in certain
asset-backed securities to record changes in their estimated yield on a
prospective basis and to apply specific valuation methods to these securities to
determine of there has been an other-than-temporary decline in value. We
had no change in net income as a result of this accounting change. Derivative Financial Instruments.
Effective January 1, 2001, we adopted Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133), as amended by SFAS
No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities (SFAS 138). As amended, SFAS 133 requires all
derivatives to be recognized on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through
earnings. See our 2001 financial statements in this Form 10-K for more
information on the effect of our adoption of SFAS 133. Business Combinations/Goodwill and
Other Intangible Assets. In June 2001, SFAS No. 141, Business
Combinations (SFAS 141), and SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS 142), were issued. SFAS 141 and SFAS 142 are
effective for July 1, 2001 and January 1, 2002, respectively. SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and separate recognition of
intangible assets apart from goodwill if such intangible assets meet certain
criteria. SFAS 141 also requires that upon adoption of SFAS 142 a company
reclassify the carrying amounts of certain intangible assets into or out of
goodwill, based on certain criteria. SFAS 142 primarily addresses the
accounting for goodwill and intangible assets subsequent to their initial
recognition. Under SFAS 142, amortization of goodwill, including goodwill
and other intangible
assets with indefinite lives recorded in past business combinations, will
discontinue upon adoption of this standard, and reporting units must be
identified for 15 the
purpose of assessing potential future impairments of goodwill. We
recognized $102 thousand in goodwill amortization during 2001 prior to our
adoption of SFAS 142. Critical Accounting Estimates
The discussion and analysis of our
financial condition and results of operations are based upon our financial
statements, which have been prepared in accordance with GAAP. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Critical accounting estimates are
reflective of significant judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain. The
following are areas that we believe require significant judgments, together with
references to the footnote(s) in which each accounting policy is discussed in
relation to our business: ·
Deferred Policy Acquisition Costs and Present Value of
Future Profits The costs of
acquiring new business, principally commissions, underwriting, distribution and
policy issue expenses, all of which vary with and are primarily related to
production of new business, are deferred. In connection with our 2002
acquisition of the variable life and annuity business of Valley Forge Life
Insurance Company, we recognized an asset for the present value of future
profits (PVFP) representing the present value of estimated net cash flows
embedded in the existing contracts acquired. This asset is included in
deferred acquisition costs (DAC). We amortize DAC
and PFVP based on the related policys classification. For term life
insurance policies, DAC is amortized in projected net premiums. For
universal life, variable universal life and accumulation annuities, DAC and PFVP
are amortized in proportion to estimated gross profits. Policies may be
surrendered for value or exchanged for a different one of our products (internal
replacement); The DAC balance associated with the replaced or surrendered
policies is amortized to reflect these surrenders. The amortization
of deferred acquisition costs requires the use of various assumptions, estimates
and judgments about the future. Significant assumptions include those
concerning expenses, investment performance, mortality and policy cancellations
(i.e., lapses, withdrawals and surrenders). These assumptions are reviewed
on a regular basis and are generally based on our past experience, industry
studies, regulatory requirements and judgments about the future. Changes
in estimated gross margins and gross profits based on actual experiences are
reflected as an adjustment to total amortization to date resulting in a charge
or credit to earnings. Finally, analyses are performed periodically to
assess whether there are sufficient gross margins or gross profits to amortize
the remaining deferred acquisition cost balances. We regularly
evaluate our estimated gross profits to determine if actual experience or other
evidence suggests that earlier estimates should be revised. Several
assumptions considered to be significant in the development of estimated gross
profits include separate account fund performance, surrender and lapse rates,
estimated interest spread and estimated mortality. The separate account
fund performance assumption is critical to the development of the estimated
gross profits related to our variable annuity and variable and
interest-sensitive life insurance businesses. The average long-term rate
of assumed separate account fund performance used in estimating gross profits
was 6.0% for the variable annuity business and 6.9% for the variable life
business at December 31, 2005. ·
Policy Liabilities and Accruals See Note 2 to our
financial statements in this Form 10-K for information regarding policy
liabilities and accruals. ·
Valuation of Debt and Equity Securities We classify our
debt and equity securities held in our general account, as well as those pledged
as collateral, as available-for-sale and report them in our balance sheet at
fair value. Fair value is based on quoted market price, where available.
When quoted market prices are not available, we estimate fair value by
discounting debt security cash flows to reflect interest rates currently being
offered on similar terms to borrowers of similar credit quality, by quoted
market prices of comparable instruments and by independent pricing sources or
internally developed pricing models. 16
Fair Value of General Account Fixed Maturity Securities As of December 31, 2005
by Pricing Source: Fixed % of
($ in thousands) Maturities Total at Fair Value Fair Value
Priced via independent market quotations $
2,465,766 89% Priced via matrices 176,390 6% Priced via broker quotations 63,819 2% Priced via other methods 36,408 1% Short-term investments* 47,108 2% Total
$ 2,789,491 100%
*Short-term investments are valued at amortized cost, which approximates fair
value. Investments whose
value, in our judgment, is considered to be other-than-temporarily impaired are
written down to fair value as a charge to realized losses included in our
earnings. The cost basis of these written-down investments is adjusted to
fair value at the date the determination of impairment is made. The new
cost basis is not changed for subsequent recoveries in value. For
mortgage-backed and other asset-backed debt securities, we recognize income
using a constant effective yield based on anticipated prepayments and the
estimated economic lives of the securities. When actual prepayments differ
significantly from anticipated prepayments, the effective yield is recalculated
to reflect actual payments to date and any resulting adjustment is included in
net investment income. For certain asset-backed securities, changes in
estimated yield are recorded on a prospective basis and specific valuation
methods
are applied to these securities to determine if there has been an
other-than-temporary decline in value. See Note 3 to our
financial statements in this Form 10-K for more information. ·
Deferred Income Taxes We account for
income taxes in accordance with SFAS No. 109, Accounting for Income Taxes
.. The deferred tax assets and/or liabilities are determined by multiplying
the differences between the financial reporting and tax reporting bases for
assets and liabilities by the enacted tax rates expected to be in effect when
such differences are recovered or settled. The effect on deferred taxes of
a change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances on deferred tax assets are estimated
based on our assessment of the realizability of such amounts. We have elected
to file a consolidated federal income tax return for 2005 and prior years.
Within the consolidated tax return, we are required by regulations of the
Internal Revenue Service, or the IRS, to segregate our companies into two
groups: life insurance companies and non-life insurance companies. We are
limited as to the amount of any operating losses from one group that can be
offset against taxable income of the other group. These limitations affect the
amount of any operating loss carryforwards that we have recorded in our deferred
tax assets now or in the future. As of December
31, 2005, we had deferred tax assets of $7.9 million related to $22.8 million of
net operating losses for federal income tax purposes. The losses are
scheduled to expire in 2017. We have
determined, based on our earnings and future income, that it is more likely than
not that the deferred income tax assets after valuation allowance already
recorded as of December 31, 2005 and 2004 will be realized. In determining the
adequacy of future income, we have considered projected future income, reversal
of existing temporary differences and available tax planning strategies that
could be implemented, if necessary. Our federal
income tax returns are routinely audited by the IRS and estimated provisions are
routinely provided in the financial statements in anticipation of the results of
these audits. The IRS has examined our consolidated groups federal
income tax returns through 2001. The IRS is currently examining our
federal income tax returns for 2002 and 2003. While it is often difficult to
predict the outcome of these audits, including the timing of any resolution of
any particular tax matter, we believe that our reserves, as recorded in other
liabilities on the balance sheet, are adequate for all open tax years.
Unfavorable resolution of any particular issue could result in additional use of
cash to pay liabilities that would be deemed owed to the IRS. Additionally, any
unfavorable or favorable resolution of any particular issue 17 could result in an increase or decrease, respectively, to our effective income tax rate to the extent that our estimates differ from the ultimate resolution. See Note 5 to our 2005 financial statements in this Form 10-K for more information related to income taxes. Statutory Capital and Surplus and
Risk-Based Capital Connecticut Insurance Law requires
that Connecticut life insurers report their risk-based capital. Risk-based
capital is based on a formula calculated by applying factors to various asset,
premium and statutory reserve items. The formula takes into account the
risk characteristics of the insurer, including asset risk, insurance risk,
interest rate risk and business risk. The Connecticut Insurance Department
has regulatory authority to require various actions by, or take various actions
against, insurers whose Total Adjusted Capital (capital and surplus plus AVR)
does not exceed certain risk-based capital levels. The levels of regulatory action, the
trigger point and the corrective actions required are summarized below: Company Action
Level results when Total Adjusted Capital falls below 200% of
Authorized Control 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 150% of
Authorized Control 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 100% of
Authorized Control Level risk-based capital as defined by the NAIC where in
addition to the above, the insurance regulators are permitted but not required
to place the company under regulatory control; and Mandatory Control
Level results when Total Adjusted Capital falls below 80% of
Authorized Control Level where insurance regulators are required to place the
company under regulatory control. At December 31, 2005, our Total
Adjusted Capital level was in excess of 300% of Company Action Level. See Note 10 to our financial
statements in this Form 10-K regarding our statutory financial information and
regulatory matters. General Account The invested assets in our general
account are generally of high quality and broadly diversified across fixed
income sectors, public and private income securities and individual credits and
issuers. Our investment professionals manage these general account assets
in investment segments that support specific product liabilities. These
investment segments have distinct investment policies that are structured to
support the financial characteristics of the related liabilities within them.
Segmentation of assets allows us to manage the risks and measure returns
on capital for our various products. Separate Accounts Separate account assets are managed
in accordance with the specific investment contracts and guidelines relating to
our variable products. We generally do not bear any investment risk on
assets held in separate accounts. Rather, we receive investment management
fees based on assets under management. Assets held in separate accounts
are not available to satisfy general account obligations. Debt and Equity Securities Held in
General Account Our general account debt securities
portfolio consists primarily of investment-grade publicly traded and privately
placed corporate bonds, residential mortgage-backed securities, commercial
mortgage-backed securities and asset-backed securities. As of December 31,
2005, our general account debt securities, with a carrying value of 18 $2,789.5
million, represented 99.7% of total general account investments. Public
debt securities represented 85.5% of total debt securities, with the remaining
14.5% represented by private debt securities. Each year, the majority of our
general accounts net cash flows are invested in investment grade debt
securities. In addition, we maintain a portfolio allocation of between 6%
and 10% of debt securities in below investment grade rated bonds.
Allocations are based on our assessment of relative value and the
likelihood of enhancing risk-adjusted portfolio returns. The size of our
allocation to below investment grade bonds is also constrained by the size of
our net worth. We are subject to the risk that the issuers of the debt
securities we own may default on principal and interest payments, particularly
in the event of a major economic downturn. Our investment strategy has
been to invest the majority of our below investment grade rated bond exposure in
the BB rating category, which is equivalent to a Securities Valuation Office, or
SVO, securities rating of 3. The BB rating category is the highest quality
tier within the
below investment grade universe, and BB rated securities historically
experienced lower defaults compared to B or CCC rated bonds. As of
December 31, 2005, our total below investment grade securities totaled $221.4
million, or 7.9%, of our total debt security portfolio. Of that amount,
$181.9 million, or 6.5%, of our debt security portfolio was invested in the BB
category. Our debt securities having an increased risk of default (those
securities with an SVO rating of four or greater which is equivalent to B or
below) totaled $39.5 million, or 1.4%, of our total debt security portfolio. Our general account debt and equity
securities are classified as available-for-sale and are reported at fair value
with unrealized gains or losses included in equity. Accordingly, the
carrying value of such securities reflects their fair value at the balance sheet
date. Fair value is based on quoted market price, where available.
When quoted market prices are not available, we estimate fair value for
debt securities by discounting projected cash flows based on market interest
rates currently being offered on similar terms to borrowers of similar credit
quality, by quoted market prices of comparable instruments and by independent
pricing sources or internally developed pricing models. Investments whose
value, in our judgment, is considered to be other-than-temporarily impaired are
written down to fair value as a charge to realized losses included in our
earnings. The cost basis of these written-down investments is adjusted to
fair
value at the date the determination of impairment is made. The new cost
basis is not changed for subsequent recoveries in value.
Debt Securities by Type and Credit Quality: As of December 31, 2005
($ in thousands) Investment Grade Below Investment Grade Fair Value Cost Fair Value Cost
United States government and agency $
124,552 $
125,673 $
-- $
-- State and political subdivision 28,585 28,934 -- -- Foreign government 32,795 32,236 40,617 37,039 Corporate 1,329,770 1,345,901 160,926 164,780 Mortgage-backed 640,224 641,351 7,900 7,995 Other asset-backed 412,161 413,660 11,961 11,974 Total debt securities
$ 2,568,087
$ 2,587,755
$ 221,404
$ 221,788
Percentage of total debt securities 92.1% 92.1% 7.9% 7.9% We manage credit risk through
industry and issuer diversification. Maximum exposure to an issuer is
defined by quality ratings, with higher quality issuers having larger exposure
limits. Our investment approach has been to create a high level of
industry diversification. The top five industry holdings as of December
31, 2005 in our debt securities portfolio are diversified financial services
(5.7%), banking (4.7%), insurance (3.7%), REITs (2.8%),and broker-dealers
(2.6%). Total net unrealized losses on debt
securities were $20.1 million (unrealized losses of $44.2 million less
unrealized gains of $24.1 million). At the end of each reporting period,
we review our security holdings for potential recognition of an
other-than-temporary impairment. We maintain a watch list of securities in
default, near default or otherwise considered by our investment professionals as
being distressed, potentially distressed or requiring a heightened level of
scrutiny. We also identify securities whose carrying value has been below
amortized cost on a continuous basis for zero to six months, greater than six
months to 12 months, greater than 12 months to 24 months and greater than 24
19 months.
This analysis is provided for investment grade and non-investment grade
securities and closed block and outside of closed block securities. Using
this analysis, coupled with our watch list, we review all securities whose fair
value is less than 80% of amortized cost (significant unrealized loss) with
emphasis on below investment grade securities with a continuous significant
unrealized loss in excess of six months. In addition, we review securities
that had experienced lesser percentage declines in value on a more selective
basis to determine if a security is other-than-temporarily impaired. Our assessment of whether an
investment by us in a debt or equity security is other-than-temporarily impaired
includes whether the issuer has: ·
defaulted on payment obligations; ·
declared that it will default at a future point outside the
current reporting period; ·
announced that a restructuring will occur outside the current
reporting period; ·
severe liquidity problems that cannot be resolved; ·
filed for bankruptcy; ·
a financial condition which suggests that future payments are
highly unlikely; ·
deteriorating financial condition and quality of assets;
·
sustained significant losses during the current year;
·
announced adverse changes or events such as changes or planned
changes in senior management, restructurings, or a sale of assets; and/or
·
been affected by any other factors that indicate that the fair
value of the investment may have been negatively impacted. The following table presents certain
information with respect to our gross unrealized losses related to our
investments in general account debt securities. Applicable DAC and
deferred income taxes reduce the effect of these losses on our comprehensive
income.
Duration of Gross Unrealized Losses on
General Account Securities: As of December 31, 2005
($ in thousands) 0 - 6 6 - 12 Over 12 Total Months Months Months
Debt Securities
Total fair value $
1,783,478 $
835,418 $
287,261 $
660,799 Total amortized cost 1,827,666 852,651 295,094 679,921 Unrealized losses $
(44,188) $
(17,233) $
(7,833) $
(19,123) Unrealized losses after offsets $
(4,289) $
(1,105) $
(1,050) $
(2,134) Unrealized losses over 20% of cost $
(1,222) $
(545) $
-- $
(677) Unrealized losses over 20% of cost after offsets $
(169) $
(121) $
-- $
(48)
Investment grade:
Unrealized losses $
(38,633) $
(16,880) $
(5,298) $
(16,455) Unrealized losses after offsets $
(3,515) $
(1,059) $
(627) $
(1,829) Unrealized losses over 20% of cost $
(545) $
(545) $
-- $
-- Unrealized losses over 20% of cost after offsets $
(121) $
(121) $
-- $
--
Below investment grade:
Unrealized losses $
(5,555) $
(353) $
(2,535) $
(2,667) Unrealized losses after offsets $
(774) $
(46) $
(423) $
(305) Unrealized losses over 20% of cost $ (677) $
-- $
-- $
(677) Unrealized losses over 20% of cost after offsets $
(48) $
-- $
-- $
(48) For debt
securities with gross unrealized losses, 87.0% of the unrealized losses after
offsets pertain to investment grade securities and 13.0% of the unrealized
losses after offsets pertain to below investment grade securities at December
31, 2005. 20 In determining that the securities
giving rise to the previously mentioned unrealized losses were not
other-than-temporarily impaired, we evaluated the factors cited above, which we
consider when assessing whether a security is other-than-temporarily impaired.
In making these evaluations, we must exercise considerable judgment.
Accordingly, there can be no assurance that actual results will not differ
from our judgments and that such differences may require the future recognition
of other-than-temporary impairment charges that could have a material affect on
our financial position and results of operations. In addition, the value
of, and the realization of any loss on, a debt security or equity security is
subject to numerous risks, including interest rate risk, market risk, credit
risk and liquidity risk. The magnitude of any loss incurred by us may be
affected by the relative concentration of our investments in any one issuer or
industry. We have established specific policies limiting the concentration of
our investments in any single issuer and industry and believe our investment
portfolio is prudently diversified. Liquidity and Capital Resources
In the normal course of business, we
enter into transactions involving various types of financial instruments such as
debt and equity securities. These instruments have credit risk and also
may be subject to risk of loss due to interest rate and market fluctuations. Our liquidity requirements
principally relate to the liabilities associated with various life insurance and
annuity products and operating expenses. Liabilities arising from life
insurance and annuity products include the payment of benefits, as well as cash
payments in connection with policy surrenders, withdrawals and loans. Historically, we have used cash flow
from operations and investment activities to fund liquidity requirements.
Our principal cash inflows from life insurance and annuities activities
come from premiums, annuity deposits and charges on insurance policies and
annuity contracts. Principal cash inflows from investment activities
result from repayments of principal, proceeds from maturities, sales of invested
assets and investment income. Additional liquidity to meet cash
outflows is available from our portfolio of liquid assets. These liquid
assets include substantial holdings of United States government and agency
bonds, short-term investments and marketable debt and equity securities. A primary liquidity concern with
respect to life insurance and annuity products is the risk of early policyholder
and contractholder withdrawal. We closely monitor our liquidity
requirements in order to match cash inflows with expected cash outflows, and
employ an asset/liability management approach tailored to the specific
requirements of each product line, based upon the return objectives, risk
tolerance, liquidity, tax and regulatory requirements of the underlying
products. In particular, we maintain investment programs generally intended to
provide adequate funds to pay benefits without forced sales of investments.
Products having liabilities with relatively long lives, such as life
insurance, are matched with assets having similar estimated lives, such as
long-term bonds and private placement bonds. Shorter-term liabilities are
matched with investments with short-term and medium-term fixed maturities. Annuity Actuarial Reserves and Deposit Fund Liability Withdrawal Characteristics: As of December 31, ($ in thousands) 2005 2004 Amount(1) Percent Amount(1) Percent
Not subject to discretionary withdrawal provision $
25,639 1% $
44,353 1% Subject to discretionary withdrawal without adjustment 891,259 18% 1,159,526 23% Subject to discretionary withdrawal with market value 654,576 14% 677,221 14% Subject to discretionary withdrawal at contract value
702,492 15% 780,396 16% Subject to discretionary withdrawal at market value 2,470,791 52% 2,314,277 46% Total annuity contract reserves and deposit fund liability
$ 4,744,757 100%
$ 4,975,773 100% _______ (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 21 annuities and deposit funds. These are liabilities in our financial statements prepared in conformity with statutory accounting practices. These amounts are at least equal to the values available to be withdrawn by policyholders. Individual life
insurance policies are less susceptible to withdrawals than annuity contracts
because policyholders may incur surrender charges and be required to undergo a
new underwriting process in order to obtain a new insurance policy. As indicated
in the table above, most of our annuity contract reserves and deposit fund
liabilities are subject to withdrawals. Individual life insurance policies,
other than term life insurance policies, increase in cash values over their
lives. Policyholders have the right to borrow an amount generally up to the cash
value of their policies at any time. As of December 31, 2005, we had
approximately $249.4 million in cash values with respect to which policyholders
had rights to take policy loans. The majority of cash values eligible for
policy loans are at variable interest rates that are reset annually on the
policy anniversary. Policy loans at December 31, 2005 were $8.2 million.
The primary liquidity risks regarding
cash inflows from our investment activities are the risks of default by debtors,
interest rate and other market volatility and potential illiquidity of
investments. We closely monitor and manage these risks. We believe that our current and
anticipated sources of liquidity are adequate to meet our present and
anticipated needs. The Connecticut Insurance Holding
Company Act limits the maximum amount of annual dividends and other
distributions in any 12-month period to stockholders of Connecticut domiciled
insurance companies without prior approval of the Insurance Commissioner.
Under current law, we cannot make any dividend distribution during 2006
without prior approval. Contractual Obligations and
Commercial Commitments
Contractual Obligations and
Commercial Commitments: As of December 31, 2005
($ in thousands) Total 2006 2007 2008 2009 2010 Thereafter
Contractual Obligations
Fixed contractual obligations(1) $
-- $
-- $
-- $
-- $
-- Other long-term liabilities(2) 6,768,014 919,069 1,164,790 850,885 3,833,270 Total contractual obligations
$ 6,768,014
$ 919,069
$ 1,164,790
$ 850,885
$ 3,833,270
Commercial Commitments
Commitments related to private placements $
14,591 $
14,591 $
-- $
-- $
-- Total commercial commitments
$ 14,591
$ 14,591
$ --
$ --
$ -- _______ (1) We have no fixed contractual obligations as all purchases are made by our parent company and the resulting expenses are allocated to us when incurred. (2) Policyholder contractual obligations represent estimated benefit payments, net of reinsurance and offset by expected future deposits and premiums on in-force contracts, from life insurance and annuity contracts issued by us. Future obligations are based on our estimate of future investment earnings, mortality and surrenders. Actual obligations in any single year, or ultimate total obligations, may vary materially from these estimates as actual experience emerges. Because future obligations anticipate future investment earnings, total policyholder contractual obligations exceed policyholder liabilities on our balance sheet at December 31, 2005. 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. Off-Balance Sheet Arrangements
As of December 31, 2005, we did not
have any significant off-balance sheet arrangements as defined by Item
303(a)(4)(ii) of SEC Regulation S-K. 22
Reinsurance We maintain life reinsurance programs
designed to protect against large or unusual losses in our life insurance
business. Based on our review of their financial statements and reputations in
the reinsurance marketplace, we believe that these third-party reinsurers are
financially sound and, therefore, that we have no material exposure to
uncollectible life reinsurance. Results of Operations
($ in thousands) Year Ended December 31, 2005 2004 Change
REVENUES:
Premiums $
9,521 $
7,367 $
2,154 Insurance and investment product fees 109,270 83,300 25,970 Investment income, net of expenses 154,374 143,862 10,512 Net realized investment gains (losses) (10,569) 5,121 (15,690) Total revenues 262,596 239,650 22,946
BENEFITS AND EXPENSES:
Policy benefits 132,849 136,760 (3,911) Policy acquisition cost amortization 80,402 45,027 35,375 Other operating expenses 50,493 35,683 14,810 Total benefits and expenses 263,744 217,470 46,274 Income (loss) before income taxes (1,148) 22,180 (23,328) Applicable income taxes (benefit) (3,700) 5,465 (9,165) Net income
$ 2,552
$ 16,715
$ (14,163) 2005 vs. 2004 Premiums increased 29% in 2005 over
2004 due to higher sales of our term life insurance products. Insurance and investment product fees
increased 31% in 2005 over 2004 due to higher sales of universal life products in 2005. We experienced a
significant increase in large estate and business planning cases, some of which involved the use of
non-recourse premium financing. In the first quarter of 2006 we affirmed our position that we will not
accept sales of policies that employ this type of premium financing and do not contain strong evidence of
insurance need and an insurable interest. We believe our vigilance in monitoring this activity, along
with regulatory developments in this area,may impact sales but expect the overall trend in life sales to remain
positive in 2006. Net realized investment gains
(losses) worsened to a loss of $10,569 thousand in 2005 compared to a gain of $5,121 thousand in 2004 due to
debt impairments and higher realized losses on sales of debt securities, in addition of by lower gains on sales
of debt and equity securities. Amortization of deferred policy
acquisition costs increased 79% in 2005 over 2004 due primarily to higher DAC
balances, improved investment margins for annuities and the effects of an
adjustment or unlocking of assumptions. The unlocking was
driven by revised assumptions regarding mortality experience offset by interest
rate and spread adjustments for annuities. Other operating expenses increased
42% in 2005 over 2004 as a result of higher commissions, expenses and premium
taxes driven by the increase in universal life new business. 23 Results
of Operations
($ in thousands) Year Ended December 31, 2004 2003 Change
REVENUES:
Premiums $
7,367 $
5,829 $
1,538 Insurance and investment product fees 83,300 65,529 17,771 Investment income, net of expenses 143,862 133,531 10,331 Net realized investment gains 5,121 768 4,353 Total revenues 239,650 205,657 33,993
BENEFITS AND EXPENSES:
Policy benefits 136,760 127,311 9,449 Policy acquisition cost amortization 45,027 20,040 24,987 Other operating expenses 35,683 35,288 395 Total benefits and expenses 217,470 182,639 34,831 Income before income taxes 22,180 23,018 (838) Applicable income taxes 5,465 8,369 (2,904) Net income
$ 16,715
$ 14,649
$ 2,066 2004 vs. 2003 Premiums increased 26% in 2004 over
2003 due primarily to higher sales of our term life insurance products. Insurance and investment product fees
increased 27% in 2004 over 2003 primarily due to growth in fee-based funds on
deposit. In addition, fee revenue from our assumed variable universal life
and variable annuity blocks of business increased over the prior year. Net investment income increased 8% in
2004 over 2003 primarily due to an increase in invested assets related to the
guaranteed interest account portion of our annuity business. See policy
benefit discussion below for additional information on average account balances.
Net realized investment gains
increased $4,353 thousand in 2004 over 2003 due primarily to lower offsets from
debt security impairments and higher transaction gains on both debt and equity
securities. Policy benefits increased 7% in 2004
over 2003 primarily due to an increase in net death benefits partially offset by
higher interest credited to funds on deposit. Amortization of deferred policy
acquisition costs increased 125% for 2004 from 2003 primarily due to a larger
block of business in force and adverse market performance. Results of Operations
($ in thousands) Year Ended December 31, 2003 2002 Change
REVENUES:
Premiums $
5,829 $
4,372 $
1,457 Insurance and investment product fees 65,529 46,915 18,614 Investment income, net of expenses 133,531 92,472 41,059 Net realized investment gains (losses) 768 (16,167) 16,935 Total revenues 205,657 127,592 78,065
BENEFITS AND EXPENSES:
Policy benefits 127,311 98,915 28,396 Policy acquisition cost amortization 20,040 23,182 (3,142) Other operating expenses 35,288 27,386 7,902 Total benefits and expenses 182,639 149,483 33,156 Income (loss) before income taxes 23,018 (21,891) 44,909 Applicable income taxes (benefit) 8,369 (8,635) 17,004 Net income (loss)
$ 14,649
$ (13,256)
$ 27,905 24 2003
vs. 2002 Premiums increased 33% in 2003 over
2002 due primarily to higher sales of our term life insurance products. Insurance and investment product fees
increased 40% in 2003 over 2002 primarily due to the increase in universal life
insurance sales. New deposits collected on universal life products increased by
$37.9 million in 2003. In addition, in 2003, fee revenue from our assumed
variable universal life and variable annuity blocks of business increased over
2002. Net investment income increased 44%
in 2003 over 2002 primarily due to an increase in invested assets related to the
guaranteed interest account portion of our annuity business. See policy
benefit discussion below for additional information on average account balances.
Net realized investment gains
improved to a gain of $768 thousand in 2003 from a loss of $16,167 thousand in
2002 due primarily to lower debt security impairments and higher transaction
gains on both debt and equity securities. Policy benefits increased 29% in 2003
over 2002 primarily due to higher interest credited from higher average funds on
deposit in the guaranteed interest account portion of our variable annuity
business. The average guaranteed interest account balances for 2003 and
2002 were $1,874.1 million and $1,367.9 million, respectively. Amortization of deferred policy
acquisition costs decreased 14% in 2003 from 2002. The decrease resulted
from a revision of the long-term market performance assumption and an impairment
charge related to the recoverability of the deferred acquisition cost asset of
the variable annuity business, both of which occurred in 2002 and did not recur
in 2003. This decrease was partially offset by an increase in amortization for
universal life and term business from the growth in life insurance inforce. Other operating expenses increased
29% in 2003 over 2002 due to growth in new business. Results of Operations
($ in thousands) Year Ended December 31, 2002 2001 Change
REVENUES:
Premiums $
4,372 $
5,129 $
(757) Insurance and investment product fees 46,915 32,379 14,536 Investment income, net of expenses 92,472 30,976 61,496 Net realized investment losses (16,167) (1,196) (14,971) Total revenues 127,592 67,288 60,304
BENEFITS AND EXPENSES:
Policy benefits 98,915 39,717 59,198 Policy acquisition cost amortization 23,182 8,477 14,705 Other operating expenses 27,386 15,305 12,081 Total benefits and expenses 149,483 63,499 85,984 Income (loss) before income taxes (21,891) 3,789 (25,680) Applicable income taxes (benefit) (8,635) 539 (9,174) Net income (loss)
$ (13,256)
$ 3,250
$ (16,506) 2002 vs. 2001 Premiums decreased 15% in 2002 over
2001 primarily due to a shift in life insurance sales from term products to
universal life products. The increase in insurance and
investment product fees of 45% in 2002 was primarily due to the increase in
sales of our universal life products. New deposits collected on universal
life products increased by $35.9 million in 2002. Net investment income increased 199%
in 2002 over 2001 due to an increase in invested assets related to the
guaranteed interest account portion of our annuity business. 25 Net
realized investment losses increased $14,971 thousand during 2002 as a result of
debt security impairments recognized during the year. Further, these
higher realized losses were only partially offset by realized gains in our debt
portfolio. The increase in policy benefits of
149% in 2002 is primarily due to higher interest credited, resulting from higher
average funds on deposit in the guaranteed interest account portion of our
variable annuity business. The average guaranteed interest account
balances for 2002 and 2001 were $1,048.5 million and $502.4 million,
respectively. Amortization of deferred policy
acquisition costs increased 173% in 2002 over 2001, due to increased sales in
the annuity block of business and adverse market performance. In addition,
in 2002, there was a revision of the long-term market performance assumption,
and an impairment charge related to the recoverability of the deferred
acquisition cost asset of the variable annuity business. Other operating expenses increased by
79% for 2002. The increase is primarily due to growth in new business and
to lower deferred expenses resulting from lower expected future margins on the
guaranteed interest account portion of our annuity business. Results of Operations
($ in thousands) Year Ended December 31, 2001 2000 Change
REVENUES:
Premiums $
5,129 $
6,168 $
(1,039) Insurance and investment product fees 32,379 30,098 2,281 Investment income, net of expenses 30,976 9,197 21,779 Net realized investment gains (losses) (1,196) 116 (1,312) Total revenues 67,288 45,579 21,709
BENEFITS AND EXPENSES:
Policy benefits 39,717 17,056 22,661 Policy acquisition cost amortization 8,477 15,765 (7,288) Other operating expenses 15,305 14,006 1,299 Total benefits and expenses 63,499 46,827 16,672 Income (loss) before income taxes 3,789 (1,248) 5,037 Applicable income taxes (benefit) 539 (1,263) 1,802 Net income
$ 3,250
$ 15
$ 3,235 2001 vs. 2000 The decrease in premiums of 17% in
2001 was primarily due to a reduction in sales term life insurance products.
This decline reflects the shift of term insurance business from PHL
Variable to another Phoenix insurance subsidiary. Insurance and investment product fees
increased 8% in 2001 over 2000, primarily due to the increase in sales of our
universal life products. New deposits collected on universal life products
increased in 2001 by $9.9 million. The increase in net investment income
of 237% in 2001 over 2000 was primarily due to higher average invested assets
supporting the growth in variable annuity business. The increase in policy benefits of
133% in 2001 over 2000 was primarily due to higher interest credited on the
guaranteed interest account of variable annuities. Amortization of deferred policy
acquisition costs decreased 46% in 2001, primarily due to a non-recurring
adjustment to deferred policy acquisition costs in 2000 related to term
insurance. Other operating expenses increased by
9% in 2001 over 2000. This increase is related to higher sales of our
variable annuity and universal life products. 26 Item 7A. Quantitative
and Qualitative Disclosures About Market Risk Enterprise Risk Management During 2003, PNX implemented a
comprehensive, enterprise-wide risk management program under which PHL
Variables operations are covered. Early in 2004, PNX appointed a
Chief Risk Officer, reporting to the Chief Financial Officer, to oversee all of
our risk management activities. PNX has established an Enterprise Risk
Management Committee, chaired by the Chief Executive Officer of PNX, to ensure
our risk management principles are followed and our objectives are accomplished.
In addition, PNX has established several management committees overseeing
and addressing issues pertaining to all our major risksproduct, market and
operationsand capital management. Operational Risk Operational risk is the risk of loss
resulting from inadequate or failed internal processes, people and systems or
from external events. PNX has established an Operational Risk Committee,
chaired by the Chief Risk Officer, to develop an enterprise-wide framework for
managing and measuring operational risks. This committee meets monthly and
has a membership that represents all significant operating, financial and staff
departments of PNX. 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 investment
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. We measure, manage and monitor market
risk associated with our insurance and annuity business, as part of our ongoing
commitment to fund insurance liabilities. We have developed an integrated
process for managing the interaction between product features and market risk.
This process involves our Corporate Finance, Corporate Portfolio
Management, Life and Annuity Finance, and Life and Annuity Product Development
departments. These areas coordinate with each other and report results and
make recommendations to our Asset-Liability Management Committee, or ALCO,
chaired by the Chief Financial Officer. We also measure, manage and monitor
market risk associated with our general account investments, both backing
insurance liabilities and supporting surplus. This process involves our
Corporate Portfolio Management personnel and Goodwin Capital Advisors, or
Goodwin, the Hartford-based asset management affiliate of PNX. These
organizations work together, make recommendations and report results to our
Investment Policy Committee, chaired by the Chief Investment Officer.
Please refer to the sections that follow, including Debt and Equity
Securities Held in General Account, for more information on our investment
risk exposures. We regularly refine our policies and procedures to
appropriately balance market risk exposure and expected return. Interest Rate Risk Management
Interest rate risk is the risk that
we will incur economic losses due to adverse changes in interest rates.
Our exposure to interest rate changes primarily results from our
interest-sensitive insurance liabilities and from our significant holdings of
fixed rate investments. Our insurance liabilities largely comprise
traditional and universal life policies and annuity contracts. Our fixed
maturity investments include U.S. and foreign government bonds, securities
issued by government agencies, corporate bonds, asset-backed securities,
mortgage-backed securities and mortgage loans, most of which are mainly exposed
to changes in medium-term and long-term U.S. Treasury rates. 27 We manage
interest rate risk as part of our asset-liability management and product
development processes. Asset-liability management strategies include the
segmentation of investments by product line and the construction of investment
portfolios designed to satisfy the projected cash needs of the underlying
product liabilities. All asset-liability strategies are approved by the
ALCO. We manage the interest rate risk in portfolio segments by modeling
and analyzing asset and product liability durations and projected cash flows
under a number of interest rate scenarios. One of the key measures we use to
quantify our interest rate exposure is duration, as 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 with a duration of five years is expected to decrease by
5%. We believe that as of December 31, 2005, our asset and liability
portfolio durations were well matched, especially for our largest and most
interest-sensitive segments. We regularly undertake a sensitivity analysis
that calculates liability durations under various cash flow scenarios. The selection of a 100 basis point
immediate increase or decrease in interest rates at all points on the yield
curve is a hypothetical rate scenario used to demonstrate potential risk.
While a 100 basis point immediate increase or decrease of this type does
not represent our view of future market changes, it is a hypothetical near-term
change that illustrates the potential effect of such events. Although
these fair value measurements provide a representation of interest rate
sensitivity, they are based on our portfolio exposures at a point in time and
may not be representative of future market results. These exposures will
change as a result of on-going portfolio transactions in response to new
business, managements assessment of changing market conditions and
available investment opportunities. To calculate duration, we project
asset and liability cash flows and discount them to a net present value using a
risk-free market rate increased for credit quality, liquidity and any other
relevant specific risks. Duration is calculated by revaluing these cash
flows at an alternative level of interest rates and by determining the
percentage change in fair value from the base case. We also manage interest rate risk by
emphasizing the purchase of securities that feature prepayment restrictions and
call protection. Our product design and pricing strategies include the use
of surrender charges or restrictions on withdrawals in some products. The 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, 2005
($ in thousands) -100 Basis +100 Basis Carrying Point Point Value Change Fair Value Change
Cash and cash equivalents $
25,818 $
25,839 $
25,818 $
25,797 Available-for-sale debt securities 2,789,491 2,866,481 2,789,491 2,712,501 Total
$ 2,815,309
$ 2,892,320
$ 2,815,309
$ 2,738,298 In 1999, we began selling Retirement
Planners Edge, or RPE, a no-load variable annuity. RPE was designed to
attract contributions into variable sub-accounts on which we earn mortality and
expense fees. However, the bulk of the funds were allocated to guaranteed
interest accounts, or GIAs, which offered a 3% guaranteed interest rate.
We anticipated the liabilities would be of a short duration and with the
low level of interest rates, we were unable to invest funds at a rate that
guaranteed a spread that covered commissions and interest credited. In
September 2002, we stopped accepting applications for RPE, although existing
policyholders have the right to make subsequent cumulative gross deposits up to
$1 million per contract. 28
Annuity Deposit Fund Balances: As of December 31,
($ in thousands) 2005 2004
Policyholder Deposit Funds
Retirement Planners Edge GIAs $
783.1 $
1,072.4 Other variable annuity GIAs 558.2 632.6 Variable annuity GIAs 1,341.3 1,705.0 Fixed annuities 894.1 916.8 Total variable annuity GIAs and fixed annuities
$ 2,235.4
$ 2,621.8 The funds in the RPE GIAs decreased
by $289.3 million during 2005. We believe most contract holders currently
view RPE as an alternative to money market investments. Because experience showed that the
duration of the RPE liabilities is longer than we had previously assumed,
beginning in the second quarter of 2004 we extended the duration of the assets.
In the third quarter of 2005, we shortened the duration of the asset
portfolio in response to increasing short-term yields and to higher lapse rates.
The net effect of these changes has been to enhance operating income to
the point where this product essentially breaks even. Credit Risk Management We manage credit risk through the
fundamental analysis of the underlying obligors, issuers and transaction
structures. Through Goodwin, we employ a staff of experienced credit analysts
who review obligors management, competitive position, cash flow, coverage
ratios, liquidity and other key financial and non-financial information.
These analysts recommend the investments needed to fund our liabilities
while adhering to diversification and credit rating guidelines. In
addition, when investing in private debt securities, we rely upon broad access
to management information, negotiated protective covenants, call protection
features and collateral protection. We review our debt security portfolio
regularly to monitor the performance of obligors and assess the stability of
their current credit ratings. We also manage credit risk through
industry and issuer diversification and asset allocation. Maximum exposure
to an issuer or derivatives counterparty is defined by quality ratings, with
higher quality issuers having larger exposure limits. We have an overall limit
on below investment-grade rated issuer exposure. Equity Risk Management Equity risk is the risk that we will
incur economic losses due to adverse changes in equity prices. Our
exposure to changes in equity prices primarily results from our variable annuity
and variable life products, as well as from our holdings of common stocks,
mutual funds and other equities. We manage our insurance liability risks
on an integrated basis with other risks through our liability and risk
management and capital and other asset allocation strategies. We also
manage equity price risk through industry and issuer diversification and asset
allocation techniques. Certain of our annuity products
contain guaranteed minimum death benefits. The guaranteed minimum death
benefit feature provides annuity contract holders 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 guaranteed minimum
death benefit is higher than the current account value at the time of death, we
incur 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, 2005 and 2004,
the difference between the guaranteed minimum death benefit and the current
account
value (net amount at risk) for all existing contracts was $74,857 thousand and
$114,945 thousand, respectively. This is our exposure to loss should all
of our contractholders have died on either December 31, 2005 or 2004. 29
Guaranteed Minimum Death Benefit Exposure:
($ in thousands) 2005 2004
Net amount at risk on minimum guaranteed death benefits (before reinsurance) $
203,657 $
276,435 Net amount at risk reinsured 128,800 161,490 Net amount at risk on minimum guaranteed death benefits (after reinsurance) $
74,857 $
114,945
Weighted-average age of contractholder 61 61
Payments Related to Guaranteed Minimum Death Benefits,
Net of Reinsurance Recoveries: Year Ended December 31,
($ in thousands) 2005 2004 2003
Death claims payments before reinsurance $
2,088 $
3,765 $
4,976 Reinsurance recoveries (802) (1,436) (2,943) Net death claims payments $
1,286 $
2,329 $
2,033 We establish a reserve for guaranteed
minimum death benefits using a methodology consistent with the AICPA SOP No.
03-01, Accounting and Reporting by Insurance Enterprises for Certain
Non-traditional Long Duration Contracts and for Separate Accounts.
This reserve is determined using the net amount at risk taking into
account estimates for mortality, equity market returns, and voluntary
terminations under a wide range of scenarios at December 31, 2005 and 2004.
Reserves Related to Guaranteed Minimum Death Benefits,
Net of Reinsurance Recoverables: As of December 31,
($ in thousands) 2005 2004
Statutory reserve $
11,889 $
12,063 GAAP reserve 9,812 7,783 Certain of our annuity products
contain guaranteed minimum living benefits. These include guaranteed
minimum accumulation, withdrawal, income and payout annuity floor benefits.
We have established a hedging program for managing the risk associated
with our new guaranteed minimum accumulation and withdrawal benefit features.
As of December 31, 2005, sales of these benefits had not yet created a
significant enough exposure to meet our requirement for executing derivative
transactions under that hedge program. We continue to analyze and refine
our strategies for managing risk exposures associated with all our separate
account guarantees. The statutory reserves for these totaled $3,913
thousand and $1,928 thousand at December 31, 2005 and 2004, respectively.
The GAAP reserves totaled $3,484 thousand and $1,393 thousand at December
31, 2005 and 2004, respectively. See Note 2 to our financial
statements in this Form 10-K for more information regarding DAC. Foreign Currency Exchange Risk
Management Foreign currency exchange risk is the
risk that we will incur economic losses due to adverse changes in foreign
currency exchange rates. Our functional currency is the U.S. dollar.
Our exposure to fluctuations in foreign exchange rates against the U.S.
dollar primarily results from our holdings in non-U.S. dollar-denominated debt
and equity securities which are not material to our financial statements at
December 31, 2005. Item 8.
Financial
Statements and Supplementary Data The Financial Statements 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. 30 Item 9A.
Controls and
Procedures Conclusion regarding disclosure
controls and procedures The Company is required to maintain
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, or the Exchange Act, is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms and that such
information is accumulated and communicated to the Companys management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required financial disclosure.
The Companys management, under
the supervision and with the participation of the Companys chief executive
officer and chief financial officer, has evaluated the effectiveness of the
Companys disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act as of December 31, 2005. During this
evaluation, management noted that the Company failed to file periodic reports
under the Exchange Act for the period from October 1, 2001 through September
30, 2005. The Company ceased filing these reports during this period based
on a mistaken view that the Companys Exchange Act periodic reporting could
be suspended when the Companys ultimate parent, PNX, began filing its
periodic reports under the Exchange Act on August 14, 2001. Based on this
evaluation, the Companys Chief Executive Officer and Chief Financial
Officer have concluded that the Companys disclosure controls and
procedures were not adequate and were ineffective as of December 31, 2005.
Changes in internal control over
financial reporting During the year ended December 31,
2005, we implemented the Hyperion Financial Management System for consolidation
and financial reporting. The implementation of this system is intended to
increase operating efficiencies and management believes this system will be an
enhancement to the effectiveness of our internal control over financial
reporting. During 2005, we also implemented a new valuation system for
estimation of policyholder reserves and the amortization of deferred policy
acquisition costs. The implementation of this system is intended to
increase operating efficiencies and management does not expect it to materially
affect the effectiveness of our internal control over financial reporting.
There were no other changes in our internal control over financial
reporting that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. Item 9B.
Other
Information None. 31 PART III Item 10.
Directors
and Executive Officers of the Registrant The registrant has omitted this
information from this report as the registrant meets the conditions set forth in
General Instruction (I)(1)(a) and (b) of Form 10-K and is therefore filing this
Form with the reduced disclosure format permitted by that General Instruction.
Item 11.
Executive
Compensation The registrant has omitted this
information from this report as the registrant meets the conditions set forth in
General Instruction (I)(1)(a) and (b) of Form 10-K and is therefore filing this
Form with the reduced disclosure format permitted by that General Instruction.
Item 12.
Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The registrant has omitted this
information from this report as the registrant meets the conditions set forth in
General Instruction (I)(1)(a) and (b) of Form 10-K and is therefore filing this
Form with the reduced disclosure format permitted by that General Instruction.
Item 13.
Certain
Relationships and Related Transactions The registrant has omitted this
information from this report as the registrant meets the conditions set forth in
General Instruction (I)(1)(a) and (b) of Form 10-K and is therefore filing this
Form with the reduced disclosure format permitted by that General Instruction.
Item 14.
Principal
Accounting Fees and Services The following is a description of the
fees earned by PricewaterhouseCoopers LLP for services rendered to the Company
for each of the six years in the period ended December 31, 2005:
($ in thousands) 2005 2004 2003 2002 2001 2000
Audit fees $
332 $ 369 $ 188 $
170 $
364 $
22
Audit-related fees -- -- -- -- -- -- Tax fees -- -- -- -- -- -- All other fees -- -- --
-- -- Total fees
$ 322
$ 369
$ 188
$ 170
$ 364
$
22 Audit Fees: Audit fees
consist of fees billed for professional service rendered for the annual audits
of the Companys financial statements and the review of the Companys
interim condensed financial statements. Audit fees also include fees for
services that are closely related to the audit, such as consents related to SEC
registration statements and audits of the Companys sponsored separate
accounts. Audit-related Fees:
There were no other audit-related fees incurred during the six years in
the period ended December 31, 2005. All Other Fees: The
Company did not incur any charges from PricewaterhouseCoopers LLP for other
services rendered to the Company for matters such as general consulting for the
six years in the period ended December 31, 2005. Audit Committee: A Special
Meeting of the Board of Directors of the Company was held on December 23, 2005.
The Company recommended and the Board established an Audit Committee.
For the fiscal year ended 32 December 31, 2005, neither the Board of
Directors nor the Audit Committee had preapproved any audit, audit recurring or
non-audit services. At the Special Meeting, the Board
established a policy to assure the independence of its independent registered
public accounting firm. Prior to each fiscal year, the Audit Committee
will receive a written report from PwC describing the elements expected to be
performed in the course of its audit of the Companys 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 Companys internal auditor, accompanied
by approval of the Companys 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. 33 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 and under
Supplemental Information in 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 financial statements
or notes thereto; and 3. Exhibits.
i. Those items
listed in the Exhibit Index in Section E of this report which are marked with an
(*) are filed with this report. * *
* * * We make our periodic and current
reports available, free of charge, on our website, at
www.PhoenixWealthManagement.com, in the Investor Relations section, as soon
as reasonably practicable after the material is electronically filed with, or
furnished to, the SEC. 34 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. PHL Variable Insurance Company (Registrant) Dated: March 31, 2006 By: /s/ Philip K. Polkinghorn
Philip K. Polkinghorn President (Principal Executive Officer) Dated: March 31, 2006 By: /s/ Michael E. Haylon Michael E. Haylon Executive Vice President and Chief
Financial Officer (Principal Financial Officer) Dated: March 31, 2006 By: /s/ Katherine P. Cody Katherine P. Cody 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
31, 2006, by the following persons on behalf of the Registrant and in the
capacities indicated. /s/ Michael E. Haylon /s/ Mitchell R. Katcher Michael E. Haylon, Director Mitchell R. Katcher, Director /s/ Philip K. Polkinghorn /s/ James D. Wehr Philip K. Polkinghorn, Director James D. Wehr, Director 35 EXHIBIT INDEX Exhibit 3.1 Form of Amended and Restated
Certificate of Incorporation (as amended and restated effective May 31, 1994)*
3.2 Bylaws of PHL Variable Life Insurance
Company (as amended and restated effective May 16, 2002)* 10.1 Services Agreement effective as of
January 1, 1995 by and among PHL Variable Insurance Company, Phoenix Life
Insurance Company, American Life and Reassurance Company, Phoenix American Life
Insurance Company and Phoenix Home Life Mutual Insurance Company* 10.2 Investment Management Agreement
effective as of January 1, 1995 by and between PHL Variable Insurance Company
and Phoenix Investment Counsel, Inc.* 10.3 Amendment #1 (effective as of January
1, 1998) to the Investment Management Agreement dated as of January 1, 1995 by
and between PHL Variable Insurance Company and Phoenix Investment Counsel, Inc.*
10.4 Amended and Restated Tax Allocation
Agreement dated as of January 1, 2001 by and among The Phoenix Companies, Inc.
and most of its subsidiaries* 10.5 Amendment #1 (effective as of January
1, 2006) to the Amended and Restated Tax Allocation Agreement dated as of
January 1, 2001 by and among The Phoenix Companies, Inc. and most of its
subsidiaries* 31.1 Certification of Philip K.
Polkinghorn, Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002* 31.2 Certification of Michael E. Haylon,
Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002* 32 Certification by Philip K.
Polkinghorn, Chief Executive Officer and Michael E. Haylon, Chief Financial
Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* * 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. E-1 Report of Independent
Registered Public Accounting Firm To the Board of Directors and
Stockholder of PHL Variable Insurance
Company: In our opinion, the accompanying
balance sheet and the related statements of income, comprehensive income and
changes in stockholders equity and cash flows present fairly, in
all material respects, the financial position of PHL Variable Insurance Company
(the Company) at December 31, 2005 and 2004, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2005 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Companys 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 Hartford, Connecticut February 22, 2006 F-1 PHL Variable Insurance Company Balance Sheet ($ in thousands, except
share data) December 31, 2005 and
2004 2005 2004 ASSETS:
Available-for-sale debt securities, at fair value $ 2,789,491 $ 3,075,379
Available-for-sale equity securities, at fair value -- 261 Policy
loans, at unpaid principal balances 8,171 2,486 Other
invested assets 1,129 4,393 Total
investments 2,798,791 3,082,519 Cash and
cash equivalents 25,818 39,598 Accrued
investment income 30,837 27,353 Deferred
policy acquisition costs 529,315 433,458 Receivable from related parties 31,119 1,559 Other
general account assets 25,354 37,653 Separate
account assets 2,537,685 2,413,571 Total
assets $ 5,978,919
$ 6,035,711
LIABILITIES:
Policyholder deposit funds $ 2,256,129 $ 2,627,920 Policy
liabilities and accruals 490,143 350,851 Deferred
income taxes 72,457 63,402 Payable to related parties 71,629 11,722 Other
general account liabilities 10,284 19,884 Separate
account liabilities 2,537,685 2,413,571 Total
liabilities 5,438,327
5,487,350
CONTINGENT LIABILITIES (Note 11) STOCKHOLDERS EQUITY: Common
stock, $5,000 par value: 1,000 shares authorized; 500 shares issued 2,500 2,500 Additional
paid-in capital 503,234 503,234 Retained
earnings 35,463 32,911 Accumulated
other comprehensive income (loss) (605) 9,716 Total
stockholders equity 540,592 548,361 Total
liabilities and stockholders equity $ 5,978,919
$ 6,035,711
The accompanying notes are an
integral part of these financial statements. F-2 PHL Variable Insurance Company Statement of Income,
Comprehensive Income and Changes in Stockholders Equity ($ in thousands) Years Ended December
31, 2005, 2004 and 2003 2005 2004 2003 REVENUES: Premiums
$ 9,521 $ 7,367 $ 5,829 Insurance
and investment product fees 109,270 83,300 65,529 Investment
income, net of expenses 154,374 143,862 133,531 Net
realized investment gains (losses) (10,569) 5,121 768 Total
revenues 262,596 239,650 205,657 BENEFITS AND EXPENSES: Policy
benefits 132,849 136,760 127,311 Policy
acquisition cost amortization 80,402 45,027 20,040 Other
operating expenses 50,493 35,683 35,288 Total
benefits and expenses 263,744 217,470 182,639 Income (loss)
before income taxes (1,148) 22,180 23,018 Applicable
income taxes (benefit) (3,700) 5,465 8,369 Net
income $ 2,552 $ 16,715 $ 14,649 FEES PAID TO RELATED PARTIES (Notes) COMPREHENSIVE INCOME: Net
income $ 2,552 $ 16,715 $ 14,649 Net
unrealized investment gains (losses) (9,986) (14,802) 2,561 Net
unrealized derivative instruments losses (335) (336) (335) Other
comprehensive income (loss) (10,321) (15,138) 2,226
Comprehensive income (loss) $ (7,769) $ 1,577 $ 16,875 ADDITIONAL PAID-IN CAPITAL:
Capital
contributions from parent $ -- $ 19,000 $ 40,000 RETAINED EARNINGS: Net income
2,552 16,715 14,649 ACCUMULATED OTHER COMPREHENSIVE
INCOME: Other
comprehensive income (loss) (10,321) (15,138) 2,226 Change
in stockholders equity (7,769) 20,577 56,875
Stockholders equity, beginning of year 548,361 527,784 470,909
Stockholders equity, end of year $ 540,592 $ 548,361 $ 527,784 The accompanying notes are an
integral part of these financial statements. PHL Variable Insurance Company Statement of Cash
Flows ($ in thousands) Years Ended December
31, 2005, 2004 and 2003 2005 2004 2003
OPERATING ACTIVITIES: Net income
$ 2,552 $ 16,715 $ 14,649 Net realized investment (gains) losses
10,569 (5,121) (768) Investment (gains) losses
(15,293) (5,634) 6,876 Deferred income taxes
14,613 15,627 15,734 Increase in deferred policy acquisition costs
(56,634) (61,761) (100,542) Increase in policy liabilities and accruals
157,885 135,384 126,059 Other assets and other liabilities change
34,725 (19,262) 32,352 Cash from operating activities
148,417 75,948 94,360 INVESTING ACTIVITIES: Investment
purchases
(1,148,093)
(1,506,835)
(2,068,268) Investment
sales, repayments and maturities
1,357,687
1,503,161
1,338,495 Cash
from (for) investing activities
209,594
(3,674)
(729,773) FINANCING ACTIVITIES:
Policyholder deposit fund deposits 236,099 365,166 928,973
Policyholder deposit fund withdrawals (607,890) (497,814) (725,834) Capital
contributions from parent -- 19,000 40,000 Cash
from (for) financing activities (371,791) (113,648) 243,139 Change
in cash and cash equivalents (13,780) (41,374) (392,274) Cash and
cash equivalents, beginning of year 39,598 80,972 473,246 Cash and
cash equivalents, end of year $ 25,818 $ 39,598 $ 80,972 The accompanying notes are an
integral part of these financial statements. F-4 PHL Variable Insurance Company Notes to Financial
Statements Years Ended December
31, 2005, 2004 and 2003 1.
Organization
and Operations PHL Variable Insurance Company is a
life insurance company offering variable and fixed annuity and non-participating
life insurance products. It is a wholly-owned subsidiary of PM Holdings,
Inc. PM Holdings, Inc. is a wholly-owned subsidiary of Phoenix Life
Insurance Company (Phoenix Life), which is a wholly-owned subsidiary of The
Phoenix Companies, Inc., a New York Stock Exchange listed company. Phoenix
Home Life Mutual Insurance Company demutualized on June 25, 2001 by converting
from a mutual life insurance company to a stock life insurance company, became a
wholly-owned subsidiary of The Phoenix Companies and changed its name to Phoenix
Life Insurance Company. We have reclassified certain amounts for 2004 and 2003
to conform with 2005 presentation. We have prepared these financial
statements in accordance with accounting principles generally accepted in the
United States of America (GAAP). In preparing these financial statements
in conformity with GAAP, we are required to make estimates and assumptions that
affect the reported amounts of assets and liabilities at reporting dates and the
reported amounts of revenues and expenses during the reporting periods.
Actual results will differ from these estimates and assumptions. We
employ significant estimates and assumptions in the determination of deferred
policy acquisition costs; policyholder liabilities and accruals; the valuation
of investments in debt and equity securities, and accruals for deferred taxes.
Significant accounting policies are presented throughout these notes. New accounting pronouncements
In September 2005, the Accounting
Standards Executive Committee, or AcSEC, of the American Institute of Certified
Public Accountants, or AICPA, issued Statement of Position 05-1, Accounting
by Insurance Enterprises for Deferred Acquisition Costs in Connection With
Modifications or Exchanges of Insurance Contracts, or SOP 05-1. SOP
05-1 provides guidance on accounting by insurance enterprises for deferred
acquisition costs on internal replacements of insurance and investment contracts
other than those specifically described in Statement of Financial Accounting
Standards No. 97, or SFAS No. 97. The SOP defines an internal replacement
as a modification in product benefits, features, rights, or coverages that
occurs by the exchange of a contract for a new contract, or by amendment,
endorsement, or rider to a contract, or by the election of a feature or coverage
within a contract. This SOP is effective for internal replacements
occurring
in fiscal years beginning after December 15, 2006. We will adopt SOP 05-1
on January 1, 2007. We are currently assessing the impact of SOP 05-1 on
our financial position and results of operations. Other-Than-Temporary Impairments:
FASB Staff Position Nos. FAS 115-1 and FAS 124-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,
or FSP 115-1, is effective for reporting periods beginning after December 15,
2005. Earlier application is permitted. FSP 115-1 provides guidance
as to the determination of other-than-temporarily impaired securities and
requires certain financial disclosures with respect to unrealized losses.
These accounting and disclosure requirements largely codify our existing
practices as to other-than-temporarily impaired securities and thus, does not
have a material effect on our financial statements. Nontraditional Long-Duration
Contracts and Separate Accounts: Effective January 1, 2004, we adopted
the AICPAs Statement of Position 03-1, Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts, or SOP 03-1. SOP 03-1 provides guidance related to
the accounting, reporting and disclosure of certain insurance contracts and
separate accounts, including guidance for computing reserves for products with
guaranteed benefits such as guaranteed minimum death benefits and for products
with annuitization benefits such as guaranteed minimum income benefits. In
addition, SOP 03-1 addresses the presentation and reporting of separate
accounts, as well as rules concerning the capitalization and amortization of
sales inducements. Since this new accounting standard largely codifies
certain accounting and reserving practices related to applicable nontraditional
long-duration contracts and separate accounts that we already followed, our
adoption did not have a material effect on our financial statements. 2. Operating
Activities Premium and fee revenue and
related expenses Revenues for annuity and universal
life products consist of net investment income and mortality, administration and
surrender charges assessed against the fund values during the period.
Related benefit expenses include universal life benefit claims in excess
of fund values and net investment income credited to fund values. We
recognize premiums for long-duration life insurance products as revenue when due
from policyholders. We recognize life insurance premiums for
short-duration life insurance products as premium revenue pro rata over the
related contract periods. We match benefits, losses and related expenses with
premiums over the related contract periods. Reinsurance We use reinsurance agreements to
provide for greater diversification of business, control exposure to potential
losses arising from large risks and provide additional capacity for growth. We recognize assets and
liabilities related to reinsurance ceded contracts on a gross basis. The
cost of reinsurance related to long-duration contracts is accounted for over the
life of the underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies. 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 us; consequently, estimates are established for
amounts deemed or estimated to be uncollectible. To minimize our exposure
to significant losses from reinsurance insolvencies, we regularly evaluate the
financial condition of our reinsurers. Our reinsurance program varies based
on the type of risk, for example: ·
On direct policies, the maximum of individual life insurance
retained by us on any one life is $10 million for single life and joint
first-to-die policies and $12 million for joint last-to-die policies, with
excess amounts ceded to reinsurers. ·
We reinsure 50% to 90% of the mortality risk for certain issues
of term and universal life policies. ·
We reinsure 100% of the excess death benefits for most variable
annuity policies issued through December 31, 1999, including subsequent
deposits.
Direct Business and Reinsurance: Year Ended December 31,
($ in thousands) 2005 2004 2003
Direct premiums $
55,277 $
43,348 $
30,404 Premiums ceded to reinsurers (45,756) (35,981) (24,575) Premiums
$ 9,521
$ 7,367
$ 5,829
Direct policy benefits incurred $
15,538 $
37,846 $
19,031 Policy benefits assumed from reinsureds 381 286 160 Policy benefits ceded to reinsurers (9,572) (26,767) (12,829) Policy benefits
$ 6,347
$ 11,365
$ 6,362
Direct life insurance in-force $
41,566,483 $
30,623,344 $
20,518,533 Life insurance in-force assumed from reinsureds 135,447 155,964 168,788 Life insurance in-force ceded to reinsurers (30,459,568) (23,057,775) (15,544,504) Life insurance in-force
$ 11,242,362
$ 7,721,533
$ 5,142,817 Percentage of amount assumed to net insurance in-force 1.20% 2.02% 3.28% F-6 The policy
benefit amounts above exclude changes in reserves, interest credited to
policyholders and withdrawals, which total $126.5 million, $125.4 million and
$121.0 million, net of reinsurance, for the years ended December 31, 2005, 2004
and 2003, respectively. Deferred policy acquisition costs
The costs of acquiring new
business, principally commissions, underwriting, distribution and policy issue
expenses, all of which vary with and are primarily related to production of new
business, are deferred. In connection with our 2002 acquisition of the
variable life and annuity business of Valley Forge Life Insurance Company, we
recognized an asset for the present value of future profits (PVFP) representing
the present value of estimated net cash flows embedded in the existing contracts
acquired. This asset is included in deferred acquisition costs (DAC).
We amortize DAC and PVFP based on
the related policys classification. For term life insurance
policies, DAC is amortized in proportion to projected net premiums. For
universal life, variable universal life and accumulation annuities, DAC and PVFP
are amortized in proportion to estimated gross profits. Policies may be
surrendered for value or exchanged for a different one of our products (internal
replacement); the DAC balance associated with the replaced or surrendered
policies is amortized to reflect these surrenders. The amortization process requires
the use of various assumptions, estimates and judgments about the future.
The primary assumptions are expenses, investment performance, mortality
and contract cancellations (i.e., lapses, withdrawals and surrenders).
These assumptions are reviewed on a regular basis and are generally based
on our past experience, industry studies, regulatory requirements and judgments
about the future. Changes in estimated gross profits based on actual
experiences are reflected as an adjustment to total amortization to date
resulting in a charge or credit to earnings. Finally, analyses are
performed periodically to assess whether there are sufficient gross margins or
gross profits to amortize the remaining DAC balances. During 2005, amortization of DAC was
increased by an adjustment, or unlocking of assumptions. The
unlocking was driven by revised assumptions regarding mortality experience
offset by interest rate and spread adjustments for annuities.
Activity in Deferred Policy Acquisition Costs: Year Ended December 31,
($ in thousands) 2005 2004 2003
Direct acquisition costs deferred, excluding acquisitions $
137,036 $
106,788 $
120,582 Recurring costs amortized to expense (86,608) (45,027) (20,040) Credit related to investment gains or losses 6,206 -- -- Offsets to net unrealized investment gains or losses 39,223 (912) 16,390 Change in deferred policy acquisition costs 95,857 60,849 116,932 Deferred policy acquisition costs, beginning of year 433,458 372,609 255,677 Deferred policy acquisition costs, end of year
$ 529,315
$ 433,458
$ 372,609 Policy liabilities and accruals
Future policy benefits are
liabilities for life and annuity products. We establish liabilities in
amounts adequate to meet the estimated future obligations of policies in force.
Future policy benefits for variable universal life, universal life and
annuities in the accumulation phase are computed using the deposit method which
is the sum of the account balance, unearned revenue liability and liability for
minimum policy benefits. Future policy benefits for term and annuities in
the payout phase that have significant mortality risk are computed using the net
level premium method on the basis of actuarial assumptions at the issue date of
these contracts for rates of interest, contract administrative expenses,
mortality and surrenders. We establish 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. Policyholder liabilities are
primarily for universal life products and include deposits received from
customers and investment earnings on their fund balances which range from 3.00%
to 5.25% as of December 31, 2005, less administrative and mortality charges. F-7 Certain of
our annuity products contain guaranteed minimum death benefits. The
guaranteed minimum death benefit feature provides annuity contract holders 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 more typically, the
greatest of these values. As of December 31, 2005 and 2004, the difference
between the guaranteed minimum death benefit and the current account value (net
amount at risk) for all existing contracts was $74.9 million and $114.9 million,
respectively, for which we had established reserves, net of reinsurance
recoverables, of $9.8 million and $7.8 million, respectively. Policyholder deposit funds Policyholder deposit funds consist of
annuity deposits received from customers and investment earnings on their fund
balances, which range from 3.0% to 10.0%, less administrative charges. Fair value of investment contracts
We determine the fair value of
deferred annuities with an interest guarantee of one year or less at the amount
of the policy reserve. In determining the fair value of deferred annuities
with interest guarantees greater than one year, we use a discount rate equal to
the appropriate U.S. Treasury rate plus 150 basis points to determine the
present value of the projected account value of the policy at the end of the
current guarantee period. 3.
Investing
Activities Debt and equity securities We classify our debt and equity
securities as available-for-sale and report them in our balance sheet at fair
value. Fair value is based on quoted market price, where available.
When quoted market prices are not available, we estimate fair value by
discounting debt security cash flows to reflect interest rates currently being
offered on similar terms to borrowers of similar credit quality (private
placement debt securities), by quoted market prices of comparable instruments
(untraded public debt securities) and by independent pricing sources or
internally developed pricing models (equity securities). Fair Value and Cost of Debt Securities: As of December 31, ($ in thousands) 2005 2004 Fair Value Cost Fair Value Cost U.S. government and agency $ 124,552 $ 125,673 $ 65,485 $ 64,850 State and political subdivision 28,585 28,934 45,028 44,717 Foreign government 73,412 69,275 73,572 69,137 Corporate 1,490,696 1,510,681 1,674,157 1,657,987 Mortgage-backed 648,124 649,346 665,778 652,781 Other asset-backed 424,122 425,634 551,359 551,368 Debt securities $ 2,789,491 $ 2,809,543 $ 3,075,379 $ 3,040,840 For mortgage-backed and other
asset-backed debt securities, we recognize income using a constant effective
yield based on anticipated prepayments and the estimated economic lives of the
securities. When actual prepayments differ significantly from anticipated
prepayments, the effective yield is recalculated to reflect actual payments to
date and any resulting adjustment is included in net investment income.
For certain asset-backed securities, changes in estimated yield are
recorded on a prospective basis and specific valuation methods are applied to
these securities to determine if there has been an other-than-temporary decline
in value. We owned no non-income producing debt
securities as of December 31, 2005 or 2004. Fair Value and Cost of Equity Securities: As of December 31, ($ in thousands) 2005 2004 Fair Value Cost Fair Value Cost Mutual fund seed investments $ -- $ -- $ 63 $ 39 Other equity securities -- -- 198 227 Equity securities $ -- $ -- $ 261 $ 266 Gross and Net Unrealized Gains (Losses) from As of December 31, Debt and Equity Securities: 2005 2004 ($ in thousands) Gains Losses Gains Losses
U.S. government and agency $
369 $
(1,490) $
878 $
(243) State and political subdivision 239 (588) 721 (410) Foreign government 4,539 (402) 4,565 (130) Corporate 10,796 (30,781) 30,610 (14,440) Mortgage-backed 6,141 (7,363) 14,805 (1,808) Other asset-backed 2,052 (3,564) 4,660 (4,669) Debt securities gains and losses $
24,136 $
(44,188) $
56,239 $
(21,700) Equity securities gains and losses $
-- $
-- $
24 $
(29) Debt and equity securities net gains (losses)
$ (20,052)
$ 34,534
Aging of Temporarily Impaired General As of December 31, 2005
Account Debt and Equity Securities: Less than 12 months Greater than 12 months Total
($ in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses
Debt Securities
U.S. government and agency $
62,372 $
(714) $
33,369 $
(776) $
95,741 $
(1,490) State and political subdivision 7,854 (15) 16,067 (573) 23,921 (588) Foreign government 14,877 (269) 4,834 (133) 19,711 (402) Corporate 651,536 (18,520) 340,112 (12,261) 991,648 (30,781) Mortgage-backed 245,240 (3,751) 165,412 (3,612) 410,652 (7,363) Other asset-backed 140,801 (1,797) 101,004 (1,767) 241,805 (3,564) Debt securities
$ 1,122,680
$ (25,066)
$ 660,798
$ (19,122)
$ 1,783,478
$ (44,188) Common stock -- -- -- -- -- -- Total temporarily impaired securities
$ 1,122,680
$ (25,066)
$ 660,798
$ (19,122)
$ 1,783,478
$ (44,188)
Below investment grade
$ 72,000
$ (2,888)
$ 40,186
$ (2,667)
$ 112,186
$ (5,555) Below investment grade after offsets
$ (469)
$ (305)
$ (774) All of these securities are
considered to be temporarily impaired at December 31, 2005 as each of these
securities has performed, and is expected to continue to perform, in accordance
with their original contractual terms. F-9
Aging of Temporarily Impaired General As of December 31, 2004 Account Debt and Equity Securities: Less than 12 months Greater than 12 months Total ($ amounts in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses Debt Securities U.S. government and agency $ 29,470 $ (243) $ -- $ -- $ 29,470 $ (243) State and political subdivision 12,280 (227) 4,151 (183) 16,431 (410) Foreign government -- -- 4,833 (130) 4,833 (130) Corporate 484,913 (11,468) 76,796 (2,972) 561,709 (14,440) Mortgage-backed 242,502 (1,689) 18,780 (119) 261,282 (1,808) Other asset-backed 259,871 (2,355) 9,853 (2,314) 269,724 (4,669) Debt securities $ 1,029,036 $ (15,982) $ 114,413 $ (5,718) $ 1,143,449 $ (21,700) Common stock -- -- -- (29) -- (29) Total temporarily impaired securities $ 1,029,036 $ (15,982) $ 114,413 $ (5,747) $ 1,143,449 $ (21,729) Below investment grade $ 36,729 $ (953) $ 10,934 $ (2,325) $ 47,663 $ (3,278) Below investment grade after offsets $ (355) $ (455) $ (810) All of these securities are considered
to be temporarily impaired at December 31, 2004 as each of these securities has
performed, and is expected to continue to perform, in accordance with their
original contractual terms. Policy loans and other invested
assets Policy loans are carried at their
unpaid principal balances and are collateralized by the cash values of the
related policies. For purposes of fair value disclosures, for variable
rate policy loans, we consider the unpaid loan balance as fair value, as
interest rates on these loans are reset annually based on market rates. Other investments primarily include
a partnership interest which we do not control and seed money in separate
accounts. The partnership interest is an investment in a hedge fund of
funds in which we do not have control or a majority ownership interest.
The interest is recorded using the equity method of accounting.
Statutory deposits Pursuant to certain statutory
requirements, as of December 31, 2005 and 2004, we had on deposit securities
with a fair value of $8.4 million and $7.3 million, respectively, in insurance
department special deposit accounts. We are not permitted to remove the
securities from these accounts without approval of the regulatory authority. F-10 Net investment income and net
realized investment gains (losses) We recognize realized investment
gains and losses on asset dispositions on a first-in first-out basis and when
declines in the fair value of debt and equity securities are considered to be
other-than-temporary. The cost basis of these written down investments is
adjusted to fair value at the date the determination of impairment is made and
the new cost basis is not changed for subsequent recoveries in value.
Applicable income taxes, which offset realized investment gains and
losses, are reported separately as components of net income.
Sources of Net Investment Income: Year Ended December 31,
($ in thousands) 2005 2004 2003
Debt securities $ 154,607 $ 145,354 $ 132,101 Equity securities 2 44 478 Other investments 183 178 931 Policy loans 479 122 140 Cash and cash equivalents 1,061 1,000 2,679 Total investment income 156,332 146,698 136,329 Less: Investment expenses 1,958 2,836 2,798 Net investment income $ 154,374 $ 143,862 $ 133,531
Sources of Realized Investment Gains (Losses): Year Ended December 31,
($ in thousands) 2005 2004 2003
Debt security impairments
$ (2,651)
$ --
$ (8,113) Debt security transaction gains 1,764 6,015 9,615 Debt security transaction losses (9,254) (3,581) (2,411) Equity security transaction gains 26 2,286 3,993 Equity security transaction losses (13) -- (1,354) Other investment transaction gains (losses) (441) 402 (960) Cash equivalent transaction losses -- (1) (2) Net transaction gains (losses) (7,918) 5,121 8,881 Net realized investment gains (losses)
$ (10,569)
$ 5,121
$ 768 Unrealized investment gains
(losses) We recognize unrealized investment
gains and losses on investments in debt and equity securities that we classify
as available-for-sale. These gains and losses are reported as a component
of other comprehensive income net of applicable deferred income taxes.
Sources of Net Changes in Unrealized Investment Gains (Losses): Year Ended December 31,
($ in thousands) 2005 2004 2003
Debt securities $ (54,591) $ (19,782) $ (11,311) Equity securities 5 (1,953) 695 Other investments -- (125) (1,833) Net changes in unrealized investment gains (losses) $ (54,586) $ (21,860) $ (12,449)
Net unrealized investment losses $ (54,586) $ (21,860) $ (12,449) Applicable deferred policy acquisition costs (Note 2) (39,223) 912 (16,390) Applicable deferred income taxes (benefit) (5,377) (7,970) 1,380 Offsets to net unrealized investment losses (44,600) (7,058) (15,010) Net changes in unrealized investment gains (losses) included in $ (9,986) $ (14,802) $ 2,561
Investing cash flows Cash and cash equivalents consist
of cash and short-term investments with original maturities of 90 days or less.
Investment Purchases, Sales, Repayments and Maturities: Year Ended December 31,
($ in thousands) 2005 2004 2003
Debt security purchases $
(1,139,974) $
(1,505,651) $
(2,050,231) Equity security purchases -- (40) (8,619) Other invested asset purchases (2,434) (411) (9,000) Policy loan advances, net (5,685) (733) (418) Investment purchases
$ (1,148,093)
$ (1,506,835)
$ (2,068,268)
Debt securities sales $
873,995 $
886,091 $
484,329 Debt securities maturities and repayments 477,568 591,962 817,792 Equity security sales 279 8,798 36,374 Other invested asset sales 5,845 16,310 -- Investment sales, repayments and maturities
$ 1,357,687
$ 1,503,161
$ 1,338,495 The maturities of debt securities, by
contractual sinking fund payment and maturity are summarized in the following
table. 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 may have the right to put or sell the obligations
back to the issuers.
Cost and Fair Value of Debt Securities by Maturity: Cost Fair Value
($ in thousands) as of as of Dec 31, 2005 Dec 31, 2005
Due in one year or less $
174,223 $
173,578 Due after one year through five years 988,445 975,839 Due after five years through ten years 541,851 538,591 Due after ten years 1,105,024 1,101,483 Total
$ 2,809,543
$ 2,789,491 4.
Separate
Account Assets and Liabilities Separate account products are those
for which a separate investment and liability account is maintained on behalf of
the policyholder. Investment objectives for these separate accounts vary
by fund account type, as outlined in the applicable fund prospectus or separate
account plan of operations. Our separate account products include variable
annuities and variable life insurance contracts. Separate account assets and
liabilities are carried at market value. 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 contractholders for management services are
included in revenues when services are rendered. 5.
Income Taxes
We recognize income tax expense or
benefit based upon amounts reported in the financial statements and the
provisions of currently enacted tax laws. We allocate income taxes to
income, other comprehensive income and additional paid-in capital, as
applicable. We recognize current income tax
assets and liabilities for estimated income taxes refundable or payable based on
the current years income tax returns. We recognize deferred income
tax assets and liabilities for the estimated future income tax effects of
temporary differences and carryforwards. Temporary differences are the
differences between the financial statement carrying amounts of assets and
liabilities and their tax bases. 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. F-12
In accordance with an income tax
sharing agreement with The Phoenix Companies, we compute the provision for
federal income taxes as if we were filing a separate federal income tax return,
except that benefits arising from income tax credits and net operating losses
are allocated to those subsidiaries producing such attributes to the extent they
are utilized in The Phoenix Companies consolidated federal income tax
return.
Allocation of Income Taxes: Year Ended December 31,
($ in thousands) 2005 2004 2003
Income tax expense (benefit) attributable to:
Current $
(18,313) $
(10,162) $
(7,366) Deferred 14,613 15,627 15,735 Net income (loss) (3,700) 5,465 8,369 Other comprehensive income (loss) (5,558) (8,151) 1,199 Comprehensive income (loss)
$ (9,258)
$ (2,686)
$ 9,568
Income taxes recovered
$ (14,288)
$ (3,450)
$ (51,107) Reconciliation of Statutory Tax Rate to Effective Tax Rate: Year Ended December 31, ($ in thousands) 2005 2004 2003
Income before income taxes $
(1,148) $
22,180 $
23,018 Income taxes at statutory rate of 35.0% (402) 7,763 8,056 Tax (benefit) attributable to tax-advantaged investment income (2,924) (2,264) 360 Tax interest (378) -- -- Other, net 4 (34) (47) Applicable income taxes (benefit)
$ (3,700)
$ 5,465
$ 8,369 Effective income tax (benefit) rates (332.3)% 24.6% 36.4%
Deferred Income Tax Assets (Liabilities) Attributable to Temporary
Differences: As of December 31,
($ in thousands) 2005 2004
Deferred income tax assets:
Future policyholder benefits $
64,692 $
48,756 Unearned premiums / deferred revenues 7,482 5,983 Net operating loss carryover benefits 7,970 23,618 Other 1,137 1,041 Gross deferred income tax assets 81,281 79,398
Deferred tax liabilities:
Deferred policy acquisition costs 150,281 133,372 Employee benefits 1,907 -- Investments 1,550 9,428 Gross deferred income tax liabilities 153,738 142,800 Deferred income tax liability
$ 72,457
$ 63,402 We are included in the life/non-life
consolidated federal income tax return filed by The Phoenix Companies.
Within the consolidated tax return, The Phoenix Companies is required by
Internal Revenue Service regulations to segregate the entities into two groups:
life insurance companies and non-life insurance companies. There are
limitations as to the amount of any operating losses from the non-life group
that can be offset against taxable income of the life group. These
limitations may affect the amount of any operating loss carryforwards that we
have now or in the future. At December 31, 2005, we had net
operating loss carryforwards of $22.8 million for federal income tax purposes,
which expire in 2017. We believe that the tax benefits of these losses
will be fully realized before their expiration. As a result, no valuation
allowance has been recorded against the deferred income tax asset resulting from
the net operating losses. We have
determined, based on our earnings and projected future taxable income, that it
is more likely than not that deferred income tax assets at December 31, 2005 and
2004 will be realized.
As of December 31, 2005, we had
current taxes payable of $819 thousand. 6.
Related Party Transactions The amounts included in the following
discussion are gross expenses, before deferrals for policy acquisition costs.
Phoenix Life provides services and facilities to us and is reimbursed through a
cost allocation process. The expenses allocated to us were $108,701
thousand, $82,050 thousand and $86,499 thousand for the years ended December 31,
2005, 2004 and 2003, respectively. Amounts payable to Phoenix Life were
$40,838 thousand and $5,432 thousand as of December 31, 2005 and 2004,
respectively.
We provide premium processing services for Phoenix Life, wherein we receive
premium payments on Phoenix Life annuity contracts, and forward those payments
to Phoenix Life. In connection with this service, at December 31, 2005 and
2004, we had premiums due to Phoenix Life of $16,468 thousand and $62 thousand,
respectively. We do not charge any fees for this service.
We also provide premium processing services for Phoenix Life and Annuity, a
wholly-owned indirect subsidiary of Phoenix Life, wherein we receive premium
payments on certain Phoenix Life and Annuity contracts, and forward those
payments to Phoenix Life and Annuity. In connection with this service, at
December 31, 2005 and 2004, we had amounts due to Phoenix Life and Annuity of
$1,235 thousand and $374 thousand, respectively. We do not charge any fees
for this service.
Phoenix Life provides payment processing services to us for life insurance
policies. In connection with this service, at December 31, 2005 and 2004,
we had policy-related receivables of $31,119 thousand and $1,559 thousand,
respectively. Phoenix Life does not charge us for these services.
Phoenix Investment Partners Ltd., an indirect wholly-owned subsidiary of The
Phoenix Companies, through its affiliated registered investment advisors,
provides investment advisory services to us for a fee. Investment advisory
fees incurred by us for management of general account assets under this
arrangement were $2,993 thousand, $2,810 thousand and $2,798 thousand for the
years ended December 31, 2005, 2004 and 2003, respectively. Amounts
payable to the affiliated investment advisors were $0 thousand and $67 thousand,
as of December 31, 2005 and 2004, respectively. Variable product separate
account fees were $697 thousand, $1,120 thousand and $1,661 thousand for 2005,
2004 and 2003, respectively.
Phoenix Equity Planning Corporation (PEPCO), a wholly-owned subsidiary of
Phoenix Investment Partners Ltd., is the principal underwriter of our annuity
contracts. Until May 31, 2004, contracts could be purchased through
registered representatives of our former affiliate, W.S. Griffith Securities,
Inc. (Griffith). Other outside broker-dealers are licensed to sell our
annuity contracts as well. We incurred commissions for contracts
underwritten by PEPCO of $35,422 thousand, $39,491 thousand and $36,247 thousand
for the years ended December 31, 2005, 2004 and 2003, respectively.
Amounts payable to PEPCO were $1,981 thousand and $2,735 thousand as of
December 31, 2005 and 2004, respectively.
Phoenix Life pays commissions to producers who sell our non-registered life and
annuity products. Commissions paid by Phoenix Life on our behalf were
$54,927 thousand, $28,962 thousand and $33,795 thousand for the years ended
December 31, 2005, 2004 and 2003, respectively. Amounts receivable from
Phoenix Life were $11,108 thousand and $3,119 thousand as of December 31, 2005
and 2004, respectively.
Until May 31, 2004, Griffith, formerly an indirect wholly-owned subsidiary of
The Phoenix Companies, sold certain of our non-participating life insurance
products through its insurance agents. Concessions paid by us for products
sold through Griffith were $96 thousand for the five months ended May 31, 2004
and $429 thousand for the year ended December 31, 2003. Effective May 31, 2004, The Phoenix
Companies sold Griffith to an unrelated third party. F-14
7.
Employee
Benefit Plans and Employment Agreements The Phoenix Companies has a
non-contributory, defined benefit pension plan covering substantially all of its
employees and those of its subsidiaries. Retirement benefits are a
function of both years of service and level of compensation. The Phoenix
Companies also sponsors a non-qualified supplemental defined benefit plan to
provide benefits in excess of amounts allowed pursuant to the Internal Revenue
Code. The Phoenix Companies funding policy is to contribute annually
an amount equal to at least the minimum required contribution in accordance with
minimum funding standards established by the Employee Retirement Income Security
Act of 1974 (ERISA). Contributions are intended to provide for benefits
attributable not only to service to date, but to service expected to be
conferred in the future. The
Phoenix Companies sponsors pension and savings plans for its employees, and
employees and agents of its subsidiaries. The qualified plans comply with
requirements established by ERISA and excess benefit plans provide for that
portion of pension obligations, which is in excess of amounts permitted by
ERISA. The Phoenix Companies also provides certain health care and life
insurance benefits for active and retired employees. We incur applicable
employee benefit expenses through the process of cost allocation by The Phoenix
Companies. In addition to its pension plans, The
Phoenix Companies currently provides certain health care and life insurance
benefits to retired employees, spouses and other eligible dependents through
various plans which it sponsors. A substantial portion of The Phoenix
Companies affiliate employees may become eligible for these benefits upon
retirement. The health care plans have varying co-payments and deductibles,
depending on the plan. These plans are unfunded. Applicable information regarding the
actuarial present value of vested and non-vested accumulated plan benefits, and
the net assets of the plans available for benefits is omitted, as the
information is not separately calculated for our participation in the plans.
The Phoenix Companies, the plan sponsor, established an accrued liability
and amounts attributable to us have been allocated. The amount of such
allocated benefits is not significant to the financial statements. 8.
Other
Comprehensive Income We record unrealized gains and
losses on available-for-sale securities and effective portions of the gains or
losses on derivative instruments designated as cash flow hedges in accumulated
other comprehensive income. Unrealized gains and losses on
available-for-sale securities are recorded in other comprehensive income until
the related securities are sold, reclassified or deemed to be impaired.
The effective portions of the gains or losses on derivative instruments
designated as cash flow hedges are reclassified into earnings in the same period
in which the hedged transaction affects earnings. If it is probable that a
hedged forecasted transaction will no longer occur, the effective portions of
the gains or losses on derivative instruments designated as cash flow hedges are
reclassified into earnings immediately. F-15
Sources of Other Comprehensive Income: Year Ended December 31,
($ in thousands) 2005
2004
2003
Gross Net Gross Net Gross Net
Unrealized gains (losses) on
$
(64,713) $
(16,569) $
(17,140) $
(11,734) $
(2,606) $
8,959 Net realized investment losses on
10,127 6,583 (4,720) (3,068) (9,843) (6,398) Net unrealized investment gains (losses)
(54,586) (9,986) (21,860) (14,802) (12,449) 2,561 Net unrealized derivative instruments
(516) (335) (517) (336) (516) (335) Other comprehensive income (loss)
(55,102) $
(10,321) (22,377) $
(15,138) (12,965) $
2,226 Applicable deferred policy acquisition
(39,223)
912
(16,390) Applicable deferred income taxes
(5,558)
(8,151)
1,199 Offsets to other comprehensive income
(44,781)
(7,239)
(15,191) Other comprehensive income (loss)
$ (10,321)
$ (15,138)
$ 2,226
Components of Accumulated As of December 31,
Other Comprehensive Income: 2005 2004
($ in thousands) Gross Net Gross Net
Unrealized gains (losses) on investments $
(17,550) $
(1,412) $
37,036 $
8,573 Unrealized gains on derivative instruments 1,241 807 1,757 1,143 Accumulated other comprehensive income (16,309) $ (605) 38,793 $ 9,716 Applicable deferred policy acquisition costs (15,378)
23,845
Applicable deferred income taxes (326)
5,232
Offsets to other comprehensive income (15,704)
29,077
Accumulated other comprehensive income
$ (605)
$ 9,716
9.
Fair Value of
Financial Instruments and Derivative Instruments Fair value of financial
instruments
Carrying Amounts and Estimated Fair Values As of December 31,
of Financial Instruments: 2005 2004
($ in thousands) Carrying Fair Carrying Fair Value Value Value Value
Cash and cash equivalents $ 25,818 $ 25,818 $ 39,598 $ 39,598 Debt securities 2,789,491 2,789,491 3,075,379 3,075,379 Equity securities -- -- 261 261 Policy loans 8,171 8,171 2,486 2,486 Financial assets $ 2,823,480 $ 2,823,480 $ 3,117,724 $ 3,117,724
Investment contracts $ 2,256,129 $ 2,250,695 $ 2,627,920 $ 2,644,127 Financial liabilities $ 2,256,129 $ 2,250,695 $ 2,627,501 $ 2,643,708 Derivative instruments 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. F-16
All derivative instruments are
recognized on the balance sheet at fair value. Generally, each derivative
is designated according to the associated exposure as either a fair value or
cash flow hedge at its inception as we do not enter into derivative contracts
for trading or speculative purposes. Cash flow hedges are generally
accounted for under the shortcut method with changes in the fair value of
related interest rate swaps recorded on the balance sheet with an offsetting
amount recorded in accumulated other comprehensive income. The effective
portion of changes in fair values of derivatives hedging the variability of cash
flows related to forecasted transactions are reported in accumulated other
comprehensive income and reclassified into earnings in the periods during which
earnings are affected by the variability of the cash flows of the hedged item.
We recognized an after-tax loss of
$0.3 million, $0.3 million and $0.3 million for the years ended December 31,
2005, 2004 and 2003 (reported as other comprehensive income in Statement of
Income, Comprehensive Income and Changes in Stockholders Equity), which
represented the change in fair value of interest rate forward swaps which have
been designated as cash flow hedges of the forecasted purchase of assets.
For changes in the fair value of derivatives that are designated as cash
flow hedges of a forecasted transaction, we recognize the change in fair value
of the derivative in other comprehensive income. Amounts related to cash
flow hedges that are accumulated in other comprehensive income are reclassified
into earnings in the same period or periods during which the hedged forecasted
transaction (the acquired asset) affects earnings. For the years 2005,
2004 and 2003, we reclassified after-tax gains of $0.3 million, $0.3 million and
$0.3 million, respectively, into earnings related to these same derivatives.
We held no
positions in derivative instruments at December 31, 2005 and 2004. 10.
Statutory
Financial Information and Regulatory Matters We are required
to file annual statements with state regulatory authorities prepared on an
accounting basis prescribed or permitted by such authorities. There were
no material practices not prescribed by the State of Connecticut Insurance
Department as of December 31, 2005, 2004 and 2003. Statutory surplus
differs from equity reported in accordance with GAAP primarily because policy
acquisition costs are expensed when incurred, investment reserves are based on
different assumptions, life insurance reserves are based on different
assumptions and income taxes are recorded in accordance with the Statement of
Statutory Accounting Principles No. 10, Income Taxes, which limits
deferred tax assets based on admissibility tests.
Statutory Financial Data: As of or For the Year Ended December 31,
($ in thousands) 2005 2004 2003
Statutory capital and surplus $
264,825 $
245,831 $
240,750 Asset valuation reserve 5,575 7,370 1,249 Statutory capital, surplus and asset valuation reserve
$ 270,400
$ 253,201
$ 241,999 Statutory gain (loss) from operations
$ 12,251
$ (2,574)
$ (37,237) Statutory net income (loss)
$ 12,749
$ (3,254)
$ (37,387) The Connecticut Insurance Holding
Company Act limits the maximum amount of annual dividends and other
distributions in any 12-month period to stockholders of Connecticut domiciled
insurance companies without prior approval of the Insurance Commissioner.
Under current law, we cannot make any dividend distribution during 2006
without prior approval. 11. Contingent
Liabilities We are regularly involved in
litigation and arbitration both as a defendant and as a plaintiff. The
litigation naming us as a defendant ordinarily involves our activities as an
insurer, investor or taxpayer. 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 and securities laws. While it is not feasible to predict or determine
the ultimate outcome of all pending investigations and legal proceedings or to
provide reasonable ranges of potential losses, we believe that their outcomes
are not likely, either individually or in the aggregate, to have a material
adverse effect on our financial condition. However, given the large or
indeterminate amounts sought in certain of these matters and litigations
inherent unpredictability, it is possible that an adverse outcome in certain
matters
could, from time to time, have a material adverse effect on our results of
operations or cash flows. F-17
12.
Other
Commitments During the normal course of business,
we enter into agreements to purchase private placement investments. As of
December 31, 2005, we had committed $14,591 thousand under such investments, all
of which is expected to be disbursed by December 31, 2006. F-18
PHL Variable Insurance Company (a wholly-owned subsidiary of PM Holdings, Inc.) Financial Statements December 31, 2004 and 2003
FA-1 TABLE OF CONTENTS Page Report of
Independent Registered Public Accounting Firm FA-3 Balance
Sheet as of December 31, 2004 and 2003 FA-4 Statement of Income, Comprehensive
Income and Changes in Stockholders Equity FA-5 Statement
of Cash Flows for the years ended December 31, 2004, 2003 and 2002 FA-6 Notes to
Financial Statements FA-7 FA-18 FA-2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and
Stockholder of In our opinion, the accompanying
balance sheet and the related statements of income, comprehensive income and
changes in stockholders equity and of cash flows present
fairly, in all material respects, the
financial position of PHL Variable Insurance Company (the Company) at
December 31, 2004 and 2003, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2004
in conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the
Companys 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 Hartford, Connecticut March 8, 2005 FA-3 PHL VARIABLE INSURANCE COMPANY Balance Sheet ($ amounts in thousands,
except share data) December 31, 2004 and
2003 2004 2003 ASSETS:
Available-for-sale debt securities, at fair value $ 3,075,379 $ 3,087,957
Available-for-sale equity securities, at fair value 261 8,687 Policy
loans, at unpaid principal balances 2,486 1,753 Other
invested assets 4,393 20,314 Total
investments 3,082,519 3,118,711 Cash and
cash equivalents 39,598 80,972 Accrued
investment income 27,353 26,817 Deferred
policy acquisition costs 433,458 372,609 Other
general account assets 37,653 23,611 Separate
account assets 2,413,571 2,010,134 Total
assets $ 6,034,152
$ 5,632,854
LIABILITIES:
Policyholder deposit funds $ 2,627,920 $ 2,760,567 Policy
liabilities and accruals 350,851 235,484 Deferred
income taxes 63,402 55,926 Other
general account liabilities 30,047 42,959 Separate
account liabilities 2,413,571 2,010,134 Total
liabilities 5,485,791
5,105,070
STOCKHOLDERS EQUITY: Common
stock, $5,000 par value: 1,000 shares authorized; 500 shares issued 2,500 2,500 Additional
paid-in capital 503,234 484,234 Retained
earnings 32,911 16,196 Accumulated
other comprehensive income 9,716 24,854 Total
stockholders equity 548,361 527,784 Total
liabilities and stockholders equity $ 6,034,152
$ 5,632,854
The accompanying notes are an
integral part of these financial statements. PHL VARIABLE INSURANCE COMPANY Statement of Income,
Comprehensive Income and Changes in Stockholders Equity ($ amounts in thousands)
Years Ended December
31, 2004, 2003 and 2002 2004 2003 2002 REVENUES: Premiums
$ 7,367 $ 5,829 $ 4,372 Insurance
and investment product fees 83,300 65,529 46,915 Investment
income, net of expenses 143,862 133,531 92,472 Net
realized investment gains (losses) 5,121 768 (16,167) Total
revenues 239,650 205,657 127,592 BENEFITS AND EXPENSES: Policy
benefits 136,760 127,311 98,915 Policy
acquisition cost amortization 45,027 20,040 23,182 Other
operating expenses 35,683 35,288 27,386 Total
benefits and expenses 217,470 182,639 149,483 Income
(loss) before income taxes 22,180 23,018 (21,891) Applicable
income taxes (benefit) 5,465 8,369 (8,635) Net
income (loss) $ 16,715 $ 14,649 $ (13,256) COMPREHENSIVE INCOME: Net
income (loss) $ 16,715 $ 14,649 $ (13,256) Net
unrealized investment gains (losses) (14,802) 2,561 18,522 Net
unrealized derivative instruments gains (losses) (336) (335) 2,147 Other
comprehensive income (loss) (15,138) 2,226 20,669
Comprehensive income $ 1,577 $ 16,875 $ 7,413 ADDITIONAL PAID-IN CAPITAL:
Capital
contributions from parent $ 19,000 $ 40,000 $ 259,370 RETAINED EARNINGS: Net income
(loss) 16,715 14,649 (13,256) ACCUMULATED OTHER COMPREHENSIVE
INCOME: Other
comprehensive income (loss) (15,138) 2,226 20,669 Change
in stockholders equity 20,577 56,875 266,783
Stockholders equity, beginning of year 527,784 470,909 204,126
Stockholders equity, end of year $ 548,361 $ 527,784 $ 470,909 The accompanying notes are an
integral part of these financial statements. PHL Variable Insurance Company Statement of Cash
Flows ($ amounts in thousands)
Years Ended December
31, 2004, 2003 and 2002 2004 2003 2002
OPERATING ACTIVITIES:
Net income (loss)
$ 16,715 $ 14,649 $ (13,256) Net realized investment (gains) losses
(5,121) (768) 16,167 Investment (gains) losses
(5,634) 6,876 22,671 Deferred income taxes
15,627 15,734 438 Increase in deferred policy acquisition costs
(61,761) (100,542) (128,164) Increase in policy liabilities and accruals
135,384 126,059 66,632 Other assets and other liabilities net change
(19,262) 32,352 (63,659) Cash from (for) operating activities
75,948 94,360 (99,171) INVESTING ACTIVITIES: Investment
purchases
(1,506,835)
(2,068,268) (1,753,350) Investment
sales, repayments and maturities
1,503,161
1,338,495 414,195 Cash
(for) investing activities
(3,674)
(729,773) (1,339,155) FINANCING ACTIVITIES:
Policyholder deposit fund deposits 365,166 928,973 2,072,129
Policyholder deposit fund withdrawals (497,814) (725,834) (591,371) Capital
contributions from parent 19,000 40,000 259,370 Cash
from (for) financing activities (113,648) 243,139 1,740,128
Change
in cash and cash equivalents (41,374) (392,274) 301,802 Cash and
cash equivalents, beginning of year 80,972 473,246 171,444 Cash and
cash equivalents, end of year $ 39,598 $ 80,972 $ 473,246 The accompanying notes are an
integral part of these financial statements. PHL VARIABLE INSURANCE COMPANY Notes to Financial
Statements Years Ended December
31, 2004, 2003 and 2002 1.
Organization
and Operations PHL Variable Insurance Company is a
life insurance company offering variable and fixed annuity and non-participating
life insurance products. It is a wholly-owned subsidiary of PM Holdings,
Inc. PM Holdings is a wholly-owned subsidiary of Phoenix Life Insurance
Company (Phoenix Life), which is a wholly-owned subsidiary of The Phoenix
Companies, Inc., a New York Stock Exchange listed company. Phoenix Home
Life Mutual Insurance Company demutualized on June 25, 2001 by converting from a
mutual life insurance company to a stock life insurance company, became a
wholly-owned subsidiary of The Phoenix Companies and changed its name to Phoenix
Life Insurance Company. We have prepared these financial
statements in accordance with accounting principles generally accepted in the
United States of America (GAAP). In preparing these financial statements
in conformity with GAAP, we are required to make estimates and assumptions that
affect the reported amounts of assets and liabilities at reporting dates and the
reported amounts of revenues and expenses during the reporting periods.
Actual results will differ from these estimates and assumptions. We
employ significant estimates and assumptions in the determination of deferred
policy acquisition costs; policyholder liabilities and accruals; the valuation
of investments in debt and equity securities, and accruals for deferred taxes.
Significant accounting policies are presented throughout the notes in
italicized type. New accounting pronouncements
Other-Than-Temporary Impairments:
Portions of Emerging Issues Task Force Abstract EITF 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments, or EITF 03-1, are effective for fiscal periods beginning after
June 15, 2004. EITF 03-1 provides guidance as to the determination of
other-than-temporary impaired securities and requires additional disclosures
with respect to unrealized losses. These accounting and disclosure
requirements largely codify our existing practices and thus, are not anticipated
to have a material effect on our financial statements. The effective date
of certain portions of EITF 03-1 has been delayed pending further interpretive
guidance. Because significant uncertainty remains surrounding what form the
guidance will ultimately take, we cannot predict what effect, if any, adoption
of the pending portions will have on our financial results. Nontraditional Long-Duration
Contracts and Separate Accounts: Effective January 1, 2004, we adopted
the AICPAs Statement of Position 03-1, Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts, or SOP 03-1. SOP 03-1 provides guidance related to
the accounting, reporting and disclosure of certain insurance contracts and
separate accounts, including guidance for computing reserves for products with
guaranteed benefits such as guaranteed minimum death benefits and for products
with annuitization benefits such as guaranteed minimum income benefits. In
addition, SOP 03-1 addresses the presentation and reporting of separate
accounts, as well as rules concerning the capitalization and amortization of
sales inducements. Since this new accounting standard largely codifies
certain accounting and reserving practices related to applicable nontraditional
long-duration contracts and separate accounts that we already followed, our
adoption did not have a material effect on our financial statements. 2. Operating
Activities Premium and fee revenue and
related expenses Revenues for annuity and universal
life products consist of net investment income and mortality, administration and
surrender charges assessed against the fund values during the period.
Related benefit expenses include universal life benefit claims in excess
of fund values and net investment income credited to fund values. We
FA-7
recognize premiums for long-duration life insurance products as revenue when due
from policyholders. We recognize life insurance premiums for
short-duration life insurance products as premium revenue pro rata over the
related contract periods. We match benefits, losses and related expenses with
premiums over the related contract periods. Reinsurance We use reinsurance agreements to
provide for greater diversification of business, control exposure to potential
losses arising from large risks and provide additional capacity for growth. We recognize assets and
liabilities related to reinsurance ceded contracts on a gross basis. The
cost of reinsurance related to long-duration contracts is accounted for over the
life of the underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies. 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 us; consequently, estimates are established for
amounts deemed or estimated to be uncollectible. To minimize our exposure
to significant losses from reinsurance insolvencies, we evaluate the financial
condition of our reinsurers and monitor concentration of credit risk arising
from similar geographic regions, activities, or economic characteristics of the
reinsurers. Our reinsurance program varies based
on the type of risk, for example:
On direct policies, the maximum of individual life insurance
retained by us on any one life is $10 million for single life and joint
first-to-die policies and $12 million for joint last-to-die policies, with
excess amounts ceded to reinsurers.
We reinsure 50% to 90% of the mortality risk for certain issues
of term and universal life policies.
Direct Business and Reinsurance: Year Ended December 31,
($ amounts in thousands) 2004 2003 2002
Direct premiums $
43,348 $
30,404 $
21,283 Premiums ceded to reinsurers (35,981) (24,575) (16,911) Premiums
$ 7,367
$ 5,829
$ 4,372
Direct policy benefits incurred $
37,846 $
19,031 $
13,757 Policy benefits assumed from reinsureds 286 160 197 Policy benefits ceded to reinsurers (26,767) (12,829) (11,378) Policy benefits
$ 11,365
$ 6,362
$ 2,576
Direct life insurance in-force $
30,623,344 $
20,518,533 $
11,999,540 Life insurance in-force assumed from reinsureds 155,964 168,788 215,329 Life insurance in-force ceded to reinsurers (23,057,775) (15,544,504) (9,842,076) Life insurance in-force
$ 7,721,533
$ 5,142,817
$ 2,372,793 Percentage of amount assumed to net insurance in-force 2.02% 3.28% 9.07% The policy benefit amounts above
exclude changes in reserves, interest credited to policyholders and withdrawals,
which total $125.4 million, $121.0 million and $96.3 million, net of
reinsurance, for the years ended December 31, 2004, 2003 and 2002, respectively.
Valley Forge Life Insurance
On July 23, 2002, we acquired the
variable life and variable annuity business of Valley Forge Life Insurance
Company (a subsidiary of CNA Financial Corporation), effective July 1, 2002.
The business acquired had a total account value of $557.0 million at June
30, 2002. This transaction was effected through a combination of
coinsurance and modified coinsurance. FA-8
Deferred policy acquisition costs The costs of acquiring new
business, principally commissions, underwriting, distribution and policy issue
expenses, all of which vary with and are primarily related to production of new
business, are deferred. In connection with our 2002 acquisition of the
variable life and annuity business of Valley Forge Life Insurance Company, we
recognized an asset for the present value of future profits (PVFP) representing
the present value of estimated net cash flows embedded in the existing contracts
acquired. This asset is included in deferred acquisition costs (DAC).
We amortize DAC and PVFP based on
the related policys classification. For term life insurance
policies, DAC is amortized in proportion to projected net premiums. For
universal life, variable universal life and accumulation annuities, DAC and PVFP
are amortized in proportion to estimated gross profits. Policies may be
surrendered for value or exchanged for a different one of our products (internal
replacement); the DAC balance associated with the replaced or surrendered
policies is amortized to reflect these surrenders. The amortization process requires
the use of various assumptions, estimates and judgments about the future.
The primary assumptions are expenses, investment performance, mortality
and contract cancellations (i.e., lapses, withdrawals and surrenders).
These assumptions are reviewed on a regular basis and are generally based
on our past experience, industry studies, regulatory requirements and judgments
about the future. Changes in estimated gross profits based on actual
experiences are reflected as an adjustment to total amortization to date
resulting in a charge or credit to earnings. Finally, analyses are
performed periodically to assess whether there are sufficient gross margins or
gross profits to amortize the remaining DAC balances. In 2002, we revised the long-term
market return assumption for the variable annuity block of business from 8% to
7%. In addition, we recorded an impairment charge related to the
recoverability of our deferred acquisition cost asset related to the variable
annuity business. The revision in long-term market return assumption and
the impairment charge resulted in a $9.9 million pre-tax ($6.4 million after
income taxes) increase in policy acquisition cost amortization expense in 2002.
Activity in Deferred Policy Acquisition Costs: Year Ended December 31,
($ amounts in thousands) 2004 2003 2002
Direct acquisition costs deferred, excluding acquisitions $
106,788 $
120,582 $
102,769 Acquisition costs recognized in Valley Forge Life acquisition -- -- 48,577 Recurring costs amortized to expense (45,027) (20,040) (23,182) (Cost) or credit offsets to net unrealized investment gains or losses (912) 16,390 (37,474) Change in deferred policy acquisition costs 60,849 116,932 90,690 Deferred policy acquisition costs, beginning of year 372,609 255,677 164,987 Deferred policy acquisition costs, end of year
$ 433,458
$ 372,609
$ 255,677 Policy liabilities and accruals
Future policy benefits are
liabilities for life and annuity products. We establish liabilities in
amounts adequate to meet the estimated future obligations of policies in force.
Future policy benefits for variable universal life, universal life and
annuities in the accumulation phase are computed using the deposit method which
is the sum of the account balance, unearned revenue liability and liability for
minimum policy benefits. Future policy benefits for term and annuities in
the payout phase that have significant mortality risk are computed using the net
level premium method on the basis of actuarial assumptions at the issue date of
these contracts for rates of interest, contract administrative expenses,
mortality and surrenders. We establish 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. Policyholder liabilities are
primarily for universal life products and include deposits received from
customers and investment earnings on their fund balances which range from 4.25%
to 5.75% as of December 31, 2004, less administrative and mortality charges. Certain of our annuity products
contain guaranteed minimum death benefits. The guaranteed minimum death
benefit feature provides annuity contract holders with a guarantee that the
benefit received at death will be no less FA-9 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 more typically, the
greatest of these values. As of December 31, 2004 and 2003, the difference
between the guaranteed minimum death benefit and the current account value (net
amount at risk) for all existing contracts was $114.9 million and $171.1
million, respectively, for which we had established reserves, net of reinsurance
recoverables, of $8.5 million and $7.2 million, respectively. Policyholder deposit funds Policyholder deposit funds consist of
annuity deposits received from customers and investment earnings on their fund
balances, which range from 1.6% to 8.25%, less administrative charges. Fair value of investment contracts
We determine the fair value of
deferred annuities with an interest guarantee of one year or less at the amount
of the policy reserve. In determining the fair value of deferred annuities
with interest guarantees greater than one year, we use a discount rate equal to
the appropriate U.S. Treasury rate plus 150 basis points to determine the
present value of the projected account value of the policy at the end of the
current guarantee period. 3.
Investing
Activities Debt and equity securities We classify our debt and equity
securities as available-for-sale and report them in our balance sheet at fair
value. Fair value is based on quoted market price, where available.
When quoted market prices are not available, we estimate fair value by
discounting debt security cash flows to reflect interest rates currently being
offered on similar terms to borrowers of similar credit quality (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 (equity securities). Fair Value and Cost of Available-for-Sale As of December 31, Debt Securities: 2004 2003 $ amounts in thousands) Fair Value Cost Fair Value Cost U.S. government and agency $ 65,485 $ 64,850 $ 58,894 $ 58,166 State and political subdivision 45,028 44,717 48,376 47,621 Foreign government 73,572 69,137 44,918 43,261 Corporate 1,674,157 1,657,987 1,475,398 1,445,360 Mortgage-backed 665,778 652,781 695,425 680,360 Other asset-backed 551,359 551,368 764,946 758,868 Debt securities $ 3,075,379 $ 3,040,840 $ 3,087,957 $ 3,033,636 For mortgage-backed and other
asset-backed debt securities, we recognize income using a constant effective
yield based on anticipated prepayments and the estimated economic lives of the
securities. When actual prepayments differ significantly from anticipated
prepayments, the effective yield is recalculated to reflect actual payments to
date and any resulting adjustment is included in net investment income.
For certain asset-backed securities, changes in estimated yield are
recorded on a prospective basis and specific valuation methods are applied to
these securities to determine if there has been an other-than-temporary decline
in value. We owned no non-income producing debt
securities as of December 31, 2004 or 2003. FA-10 Fair Value and Cost of Equity Securities: As of December 31, ($ amounts in thousands) 2004 2003 Fair Value Cost Fair Value Cost Mutual fund seed investments $ 63 $ 39 $ 8,512 $ 6,510 Other equity securities 198 227 175 229 Equity securities $ 261 $ 266 $ 8,687 $ 6,739 Gross and Net Unrealized Gains (Losses) from As of December 31, Debt and Equity Securities: 2004 2003 ($ amounts in thousands) Gains Losses Gains Losses
U.S. government and agency $
878 $
(243) $
936 $
(208) State and political subdivision 721 (410) 1,107 (352) Foreign government 4,565 (130) 2,451 (794) Corporate 30,610 (14,440) 42,578 (12,540) Mortgage-backed 14,805 (1,808) 16,566 (1,501) Other asset-backed 4,660 (4,669) 10,070 (3,992) Debt securities gains and losses $
56,239 $
(21,700) $
73,708 $
(19,387) Equity securities gains and losses $
24 $
(29) $
2,002 $
(54) Debt and equity securities net gains
$ 34,534
$ 56,269 Aging of Temporarily Impaired General As of December 31, 2004 Account Debt and Equity Securities: Less than 12 months Greater than 12 months Total ($ amounts in thousands) Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses Debt Securities U.S. government and agency $ 29,470 $ (243) $ -- $ -- $ 29,470 $ (243) State and political subdivision 12,280 (227) 4,151 (183) 16,431 (410) Foreign government -- -- 4,833 (130) 4,833 (130) Corporate 484,913 (11,468) 76,796 (2,972) 561,709 (14,440) Mortgage-backed 242,502 (1,689) 18,780 (119) 261,282 (1,808) Other asset-backed 259,871 (2,355) 9,853 (2,314) 269,724 (4,669) Debt securities $ 1,029,036 $ (15,982) $ 114,413 $ (5,718) $ 1,143,449 $ (21,700) Common stock -- -- -- (29) -- (29) Total temporarily impaired securities $ 1,029,036 $ (15,982) $ 114,413 $ (5,747) $ 1,143,449 $ (21,729) Below investment grade $ 36,729 $ (953) $ 10,934 $ (2,325) $ 47,663 $ (3,278) Below investment grade after offsets $ (355) $ (455) $ (810) Below investment grade debt
securities which have been in an unrealized loss for greater than 12 months
consists of six securities, of which only one security, with an unrealized loss
of $1,232 thousand ($801 thousand after offset for taxes) has a fair value less
than 80% of the securitys amortized cost at December 31, 2004. All of these securities are
considered to be temporarily impaired at December 31, 2004 as each of these
securities has performed, and is expected to continue to perform, in accordance
with their original contractual terms. Policy loans and other invested
assets Policy loans are carried at their
unpaid principal balances and are collateralized by the cash values of the
related policies. For purposes of fair value disclosures, for variable rate
policy loans, we consider the unpaid loan balance as fair value, as interest
rates on these loans are reset annually based on market rates. FA-11 Other
investments primarily include a partnership interest which we do not control and
seed money in separate accounts. The partnership interest is an investment in a
hedge fund of funds in which we do not have control or a majority ownership
interest. The interest is recorded using the equity method of accounting.
Net investment income and net
realized investment gains (losses) We recognize realized investment
gains and losses on asset dispositions on a first-in first-out basis and when
declines in the fair value of debt and equity securities are considered to be
other-than-temporary. The cost basis of these written down investments is
adjusted to fair value at the date the determination of impairment is made and
the new cost basis is not changed for subsequent recoveries in value.
Applicable income taxes, which offset realized investment gains and
losses, are reported separately as components of net income.
Sources of Net Investment Income: Year Ended December 31,
($ amounts in thousands) 2004 2003 2002
Debt securities $ 145,354 $ 132,101 $ 88,764 Equity securities 44 478 269 Other investments 178 931 237 Policy loans 122 140 38 Cash and cash equivalents 1,000 2,679 4,891 Total investment income 146,698 136,329 94,199 Less: Investment expenses 2,836 2,798 1,727 Net investment income $ 143,862 $ 133,531 $ 92,472
Sources of Realized Investment Gains (Losses): Year Ended December 31,
($ amounts in thousands) 2004 2003 2002
Debt security impairments
$ --
$ (8,113)
$ (13,207) Debt security transaction gains 6,015 9,615 2,754 Debt security transaction losses (3,581) (2,411) (6,640) Equity security transaction gains 2,286 3,993 -- Equity security transaction losses -- (1,354) (1) Other investment transaction gains (losses) 402 (960) 930 Cash equivalent transaction losses (1) (2) (3) Net transaction gains (losses) 5,121 8,881 (2,960) Net realized investment gains (losses)
$ 5,121
$ 768
$ (16,167) Unrealized investment gains
(losses) We recognize unrealized investment
gains and losses on investments in debt and equity securities that we classify
as available-for-sale. These gains and losses are reported as a component
of other comprehensive income net of applicable deferred income taxes.
Sources of Net Changes in Unrealized Investment Gains (Losses): Year Ended December 31,
($ amounts in thousands) 2004 2003 2002
Debt securities $ (19,782) $ (11,311) $ 62,514 Equity securities (1,953) 695 1,253 Other investments (125) (1,833) 2,203 Net changes in unrealized investment gains (losses) $ (21,860) $ (12,449) $ 65,970
Net unrealized investment gains (losses) $ (21,860) $ (12,449) $ 65,970 Applicable deferred policy acquisition costs (Note 2) 912 (16,390) 37,474 Applicable deferred income taxes (7,970) 1,380 9,974 Offsets to net unrealized investment gains (losses) (7,058) (15,010) 47,448 Net changes in unrealized investment gains (losses) included in $ (14,802) $ 2,561 $ 18,522 FA-12
Investing cash flows Cash and cash equivalents consist
of cash and short-term investments with original maturities of 90 days or less.
Investment Purchases, Sales, Repayments and Maturities: Year Ended December 31,
($ amounts in thousands) 2004 2003 2002
Debt security purchases $
(1,505,651) $
(2,050,231) $
(1,733,608) Equity security purchases (40) (8,619) (9,374) Other invested asset purchases (411) (9,000) (9,929) Policy loan advances, net (733) (418) (439) Investment purchases
$ (1,506,835)
$ (2,068,268)
$ (1,753,350)
Debt securities sales $
886,091 $
484,329 $
94,486 Debt securities maturities and repayments 591,962 817,792 296,625 Equity security sales 8,798 36,374 23,084 Other invested asset sales 16,310 -- -- Investment sales, repayments and maturities
$ 1,503,161
$ 1,338,495
$ 414,195 The maturities of debt securities, by
contractual sinking fund payment and maturity are summarized in the following
table. 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 may have the right to put or sell the obligations
back to the issuers.
Cost of Debt Securities by Maturity: As of Dec 31,
($ amounts in thousands) 2004
Due in one year or less $
69,539 Due after one year through five years 1,114,169 Due after five years through ten years 678,021 Due after ten years 1,179,111 Total
$ 3,040,840 4.
Separate
Account Assets and Liabilities Separate account products are those
for which a separate investment and liability account is maintained on behalf of
the policyholder. Investment objectives for these separate accounts vary
by fund account type, as outlined in the applicable fund prospectus or separate
account plan of operations. Our separate account products include variable
annuities and variable life insurance contracts. Separate account assets and
liabilities are carried at market value. 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 contractholders for management services are
included in revenues when services are rendered. 5.
Income Taxes
We recognize income tax expense or
benefit based upon amounts reported in the financial statements and the
provisions of currently enacted tax laws. We allocate income taxes to
income, other comprehensive income and additional paid-in capital, as
applicable. We recognize current income tax
assets and liabilities for estimated income taxes refundable or payable based on
the current years income tax returns. We recognize deferred income
tax assets and liabilities for the estimated future income tax effects of
temporary differences and carryforwards. 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 FA-13 assets
to amounts that are more likely than not to be realized. We periodically
review the adequacy of these valuation allowances and record any reduction in
allowances through earnings. In accordance with an income tax
sharing agreement with The Phoenix Companies, we compute the provision for
federal income taxes as if we were filing a separate federal income tax return,
except that benefits arising from income tax credits and net operating losses
are allocated to those subsidiaries producing such attributes to the extent they
are utilized in The Phoenix Companies consolidated federal income tax
return.
Allocation of Income Taxes: Year Ended December 31,
($ amounts in thousands) 2004 2003 2002
Income tax expense (benefit) attributable to:
Net income (loss) $
5,465 $
8,369 $
(8,635) Other comprehensive income (loss) (8,151) 1,199 11,129 Comprehensive income (loss)
$ (2,686)
$ 9,568
$ 2,494
Current $
(10,162) $
(7,366) $
(9,073) Deferred 15,627 15,735 438 Income taxes (benefit) applicable to net income 5,465 8,369 (8,635) Deferred income taxes applicable to other comprehensive income (8,151) 1,199 11,129 Income taxes (benefit) applicable to comprehensive income
$ (2,686)
$ 9,568
$ 2,494
Income taxes paid (recovered)
$ (3,450)
$ (51,107)
$ 3,149 Reconciliation of Statutory Tax Rate to Effective Tax Rate: Year Ended December 31, ($ amounts in thousands) 2004 2003 2002
Income (loss) before income taxes $
22,180 $
23,018 $
(21,891) Income taxes (benefit) at statutory rate of 35.0% 7,763 8,056 (7,662) Tax (benefit) attributable to tax-advantaged investment income (2,264) 360 (972) Other, net (34) (47) (1) Applicable income taxes (benefit)
$ 5,465
$ 8,369
$ (8,635) Effective income tax (benefit) rates 24.6% 36.4% 39.4%
Deferred Income Tax Assets (Liabilities) Attributable to Temporary
Differences: As of December 31,
($ amounts in thousands) 2004 2003
Deferred income tax assets:
Future policyholder benefits $
48,756 $
44,815 Unearned premiums / deferred revenues 5,983 4,675 Net operating loss carryover benefits 23,618 29,435 Other 1,041 831 Gross deferred income tax assets 79,398 79,756
Deferred tax liabilities:
Deferred policy acquisition costs 133,372 114,962 Investments 9,428 20,720 Gross deferred income tax liabilities 142,800 135,682 Deferred income tax liability
$ 63,402
$ 55,926 We are included in the life/non-life
consolidated federal income tax return filed by The Phoenix Companies.
Within the consolidated tax return, The Phoenix Companies is required by
Internal Revenue Service regulations to segregate the entities into two groups:
life insurance companies and non-life insurance companies. There are
limitations as to the amount of any operating losses from one group that can be
offset against taxable income of the other group. These limitations affect
the amount of any operating loss carryforwards that we have now or in the
future. At December 31, 2004, we had net
operating loss carryforwards of $67.5 million for federal income tax purposes,
of which $60.1 million expires in 2017 and $7.4 million expires in 2018.
We believe that the tax benefits of these FA-14 losses
will be fully realized before their expiration. As a result, no valuation
allowance has been recorded against the deferred income tax asset resulting from
the net operating losses. We have determined, based on our
earnings and projected future taxable income, that it is more likely than not
that deferred income tax assets at December 31, 2004 and 2003 will be realized.
6.
Related Party Transactions Phoenix Life
provides services and facilities to us and is reimbursed through a cost
allocation process. The expenses allocated to us were $82.0 million, $86.5
million and $64.3 million for the years ended December 31, 2004, 2003 and 2002,
respectively. Amounts payable to Phoenix Life were $5.4 million and $12.2
million as of December 31, 2004 and 2003, respectively. Phoenix
Investment Partners Ltd., an indirect wholly-owned subsidiary of The Phoenix
Companies, through its affiliated registered investment advisors, provides
investment advisory services to us for a fee. Investment advisory fees
incurred by us for management of general account assets under this arrangement
were $2.8 million, $2.8 million and $0.2 million for the years ended December
31, 2004, 2003 and 2002, respectively. Amounts payable to the affiliated
investment advisors were $0.1 million and $1.5 million, as of December 31, 2004
and 2003, respectively. Variable product separate account fees were $1.2
million, $1.6 million and $2.0 million for 2004, 2003 and 2002, respectively.
Phoenix Equity
Planning Corporation (PEPCO), a wholly-owned subsidiary of Phoenix Investment
Partners, is the principal underwriter of our annuity contracts. Contracts
may be purchased through registered representatives of our former affiliate,
W.S. Griffith Securities, Inc. (Griffith), as well as other outside
broker-dealers who are licensed to sell our annuity contracts. We incurred
commissions for contracts underwritten by PEPCO of $39.5 million, $36.2 million
and $30.4 million for the years ended December 31, 2004, 2003 and 2002,
respectively. Amounts payable to PEPCO were $2.7 million and $2.0 million
as of December 31, 2004 and 2003, respectively. Phoenix Life pays commissions to
producers who sell our non-registered life and annuity products.
Commissions paid by Phoenix Life on our behalf were $28.9 million, $33.3
million and $26.1 million for the years ended December 31, 2004, 2003 and 2002,
respectively. Amounts payable to Phoenix Life were $0.9 million and $1.6
million as of December 31, 2004 and 2003, respectively. Griffith,
formerly an indirect wholly-owned subsidiary of The Phoenix Companies, sells and
services certain of our non-participating life insurance products through its
insurance agents. Concessions paid by us for products sold through
Griffith were $0.1 million, $0.4 million and $1.0 million for the years ended
December 31, 2004, 2003 and 2002, respectively. Amounts payable to
Griffith were $0 and $36 thousand, as of December 31, 2004 and 2003,
respectively. Effective May
31, 2004, The Phoenix Companies sold Griffith to an unrelated third party. 7.
Employee
Benefit Plans and Employment Agreements The Phoenix
Companies has a non-contributory, defined benefit pension plan covering
substantially all of its employees and those of its subsidiaries.
Retirement benefits are a function of both years of service and level of
compensation. The Phoenix Companies also sponsors a non-qualified
supplemental defined benefit plan to provide benefits in excess of amounts
allowed pursuant to the Internal Revenue Code. The Phoenix Companies
funding policy is to contribute annually an amount equal to at least the minimum
required contribution in accordance with minimum funding standards established
by the Employee Retirement Income Security Act of 1974 (ERISA).
Contributions are intended to provide for benefits attributable not only
to service to date, but to service expected to be conferred in the future. The Phoenix Companies sponsors
pension and savings plans for its employees, and employees and agents of its
subsidiaries. The qualified plans comply with requirements established by
ERISA and excess benefit plans provide for that portion of pension obligations,
which is in excess of amounts permitted by ERISA. The Phoenix FA-15 Companies
also provides certain health care and life insurance benefits for active and
retired employees. We incur applicable employee benefit expenses through
the process of cost allocation by The Phoenix Companies. In addition to its pension plans, The
Phoenix Companies currently provides certain health care and life insurance
benefits to retired employees, spouses and other eligible dependents through
various plans which it sponsors. A substantial portion of The Phoenix
Companies affiliate employees may become eligible for these benefits upon
retirement. The health care plans have varying co-payments and deductibles,
depending on the plan. These plans are unfunded. Applicable information regarding the
actuarial present value of vested and non-vested accumulated plan benefits, and
the net assets of the plans available for benefits is omitted, as the
information is not separately calculated for our participation in the plans.
The Phoenix Companies, the plan sponsor, established an accrued liability
and amounts attributable to us have been allocated. The amount of such
allocated benefits is not significant to the financial statements. 8.
Other
Comprehensive Income We record unrealized gains and
losses on available-for-sale securities and effective portions of the gains or
losses on derivative instruments designated as cash flow hedges in accumulated
other comprehensive income. Unrealized gains and losses on
available-for-sale securities are recorded in other comprehensive income until
the related securities are sold, reclassified or deemed to be impaired.
The effective portions of the gains or losses on derivative instruments
designated as cash flow hedges are reclassified into earnings in the same period
in which the hedged transaction affects earnings. If it is probable that a
hedged forecasted transaction will no longer occur, the effective portions of
the gains or losses on derivative instruments designated as cash flow hedges are
reclassified into earnings immediately.
Sources of Other Comprehensive Income: Year Ended December 31,
($ amounts in millions) 2004
2003
2002 Gross Net Gross Net Gross Net
Unrealized gains (losses) on
$
(17,140) $
(11,734) $
(2,606) $
8,959 $
62,083 $
15,995 Net realized investment losses on
(4,720) (3,068) (9,843) (6,398) 3,887 2,527 Net unrealized investment gains
(21,860) (14,802) (12,449) 2,561 65,970 18,522 Net unrealized derivative instruments
(517) (336) (516) (335) 3,302 2,147 Other comprehensive income (loss)
(22,377) $
(15,138) (12,965) $
2,226 69,272 $
20,669 Applicable deferred policy acquisition
912
(16,390)
37,474 Applicable deferred income taxes
(8,151)
1,199
11,129 Offsets to other comprehensive income
(7,239)
(15,191)
48,603 Other comprehensive income (loss)
$ (15,138)
$ 2,226
$ 20,669
Components of Accumulated As of December 31,
Other Comprehensive Income: 2004 2003
($ amounts in thousands) Gross Net Gross Net
Unrealized gains on investments
$
37,036 $
8,573 $
58,896 $
23,375 Unrealized gains on derivative instruments
1,757 1,143 2,274 1,479 Accumulated other comprehensive income
38,793
$ 9,716 61,170
$ 24,854 Applicable deferred policy acquisition costs
23,845
22,933
Applicable deferred income taxes
5,232
13,383
Offsets to other comprehensive income
29,077
36,316
Accumulated other comprehensive income
$ 9,716
$ 24,854
FA-16 9. Fair Value of
Financial Instruments and Derivative Instruments Fair value of financial
instruments
Carrying Amounts and Estimated Fair Values As of December 31,
of Financial Instruments: 2004 2003
($ amounts in thousands) Carrying Fair Carrying Fair Value Value Value Value
Cash and cash equivalents $ 39,598 $ 39,598 $ 80,972 $ 80,972 Debt securities 3,075,379 3,075,379 3,087,957 3,087,957 Equity securities 261 261 8,687 8,687 Policy loans 2,486 2,486 1,753 1,753 Financial assets $ 3,117,724 $ 3,117,724 $ 3,179,369 $ 3,179,369
Investment contracts $ 2,627,920 $ 2,644,127 $ 2,760,567 $ 2,797,772 Financial liabilities $ 2,627,920 $ 2,644,127 $ 2,760,567 $ 2,797,772 Derivative instruments 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. All derivative instruments are
recognized on the balance sheet at fair value. Generally, each derivative
is designated according to the associated exposure as either a fair value or
cash flow hedge at its inception as we do not enter into derivative contracts
for trading or speculative purposes. Cash flow hedges are generally
accounted for under the shortcut method with changes in the fair value of
related interest rate swaps recorded on the balance sheet with an offsetting
amount recorded in accumulated other comprehensive income. The effective
portion of changes in fair values of derivatives hedging the variability of cash
flows related to forecasted transactions are reported in accumulated other
comprehensive income and reclassified into earnings in the periods during which
earnings are affected by the variability of the cash flows of the hedged item.
We recognized an after-tax gain
(loss) of $(0.3) million, $(0.3) million and $2.1 million for the years ended
December 31, 2004, 2003 and 2002 (reported as other comprehensive income in
Statement of Income, Comprehensive Income and Changes in Stockholders
Equity), which represented the change in fair value of interest rate forward
swaps which have been designated as cash flow hedges of the forecasted purchase
of assets. For changes in the fair value of derivatives that are
designated as cash flow hedges of a forecasted transaction, we recognize the
change in fair value of the derivative in other comprehensive income.
Amounts related to cash flow hedges that are accumulated in other
comprehensive income are reclassified into earnings in the same period or
periods during which the hedged forecasted transaction (the acquired asset)
affects earnings. For the years 2004, 2003 and 2002, we reclassified
after-tax gains of $0.3 million, $0.3
million and $0.3 million, respectively, into earnings related to these same
derivatives. We held no positions in derivative
instruments at December 31, 2004 and 2003. 10.
Statutory
Financial Information and Regulatory Matters We are required
to file annual statements with state regulatory authorities prepared on an
accounting basis prescribed or permitted by such authorities. There were
no material practices not prescribed by the State of Connecticut Insurance
Department as of December 31, 2004, 2003 and 2002. Statutory surplus
differs from equity reported in accordance with GAAP primarily because policy
acquisition costs are expensed when incurred, investment reserves are based on
different assumptions, life insurance reserves are based on different
assumptions and income taxes are recorded in accordance with the Statement of
Statutory Accounting Principles No. 10, Income Taxes, which limits
deferred tax assets based on admissibility tests. FA-17
Statutory Financial Data: As of or For the Year Ended December 31,
($ amounts in thousands) 2004 2003 2002
Statutory capital and surplus $
245,831 $
240,750 $
215,298 Asset valuation reserve 7,370 1,249 508 Statutory capital, surplus and asset valuation reserve
$ 253,201
$ 241,999
$ 215,806 Statutory (loss) from operations
$ (2,574)
$ (27,237)
$ (133,996) Statutory net (loss)
$ (3,254)
$ (37,387)
$ (146,136) The Connecticut Insurance Holding
Company Act limits the maximum amount of annual dividends and other
distributions in any 12-month period to stockholders of Connecticut domiciled
insurance companies without prior approval of the Insurance Commissioner.
Under current law, we cannot make any dividend distribution during 2005
without prior approval. FA-18
PHL Variable Insurance Company (a wholly-owned subsidiary of PM Holdings, Inc.) Financial Statements December 31, 2003 and 2002
FB-1 TABLE OF CONTENTS Page Report of
Independent Registered Public Accounting Firm FB-3 Balance
Sheet as of December 31, 2003 and 2002 FB-4 Statement of Income, Comprehensive
Income and Changes in Stockholders Equity for the years ended 2003, 2002 and 2001 FB-5 Statement
of Cash Flows for the years ended 2003, 2002 and 2001 FB-6 Notes to
Financial Statements FB-7 FB-18 FB-2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and
Stockholder of PHL
Variable Insurance Company: In our opinion, the accompanying
balance sheet and the related statements of income, comprehensive income and
changes in stockholders equity and cash flows present fairly, in all
material respects, the financial position of PHL Variable Insurance Company (the
Company) at December 31, 2003 and 2002, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2003
in conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the
Companys 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). The standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements ar e 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 Hartford, Connecticut March 9, 2004 FB-3 PHL VARIABLE INSURANCE COMPANY Balance Sheet ($ amounts in thousands,
except per share data) December 31, 2003 and
2002 2003 2002 ASSETS:
Available-for-sale debt securities, at fair value $ 3,087,957 $ 2,388,189 Equity
securities, at fair value 8,687 33,121 Policy
loans, at unpaid principal balances 1,753 1,335 Other
investments 20,314 10,166 Total
investments 3,118,711 2,432,811 Cash and
cash equivalents 80,972 473,246 Accrued
investment income 26,817 18,768 Deferred
policy acquisition costs 372,609 255,677 Other
general account assets 23,611 45,105 Separate
account assets 2,010,134 1,157,913 Total
assets $ 5,632,854
$ 4,383,520
LIABILITIES:
Policyholder deposit funds $ 2,760,567 $ 2,557,428 Policy
liabilities and accruals 235,484 124,925 Deferred
income taxes 55,926 38,993 Other
general account liabilities 42,959 33,352 Separate
account liabilities 2,010,134 1,157,913 Total
liabilities 5,105,070
3,912,611
STOCKHOLDERS EQUITY: Common
stock, $5,000 par value: 1,000 shares authorized; 500 shares issued 2,500 2,500 Additional
paid-in capital 484,234 444,234 Retained
earnings 16,196 1,547 Accumulated
other comprehensive income 24,854 22,628 Total
stockholders equity 527,784 470,909 Total
liabilities and stockholders equity $ 5,632,854
$ 4,383,520
The accompanying notes are an
integral part of these financial statements. FB-4 PHL VARIABLE INSURANCE COMPANY Statement of Income,
Comprehensive Income and Changes in Stockholders Equity ($ amounts in thousands)
Years Ended December
31, 2003, 2002 and 2001 2003 2002 2001 REVENUES: Premiums
$ 5,829 $ 4,372 $ 5,129 Insurance
and investment product fees 65,529 46,915 32,379 Investment
income, net of expenses 133,531 92,472 30,976 Net
realized investment gains (losses) 768 (16,167) (1,196) Total
revenues 205,657 127,592 67,288 BENEFITS AND EXPENSES: Policy
benefits 127,311 98,915 39,717 Policy
acquisition cost amortization 20,040 23,182 8,477 Other
operating expenses 35,288 27,386 15,305 Total
benefits and expenses 182,639 149,483 63,499 Income
(loss) before income taxes 23,018 (21,891) 3,789 Applicable
income taxes (benefit) 8,369 (8,635) 539
Net
income (loss) $ 14,649 $ (13,256) $ 3,250 COMPREHENSIVE INCOME: Net
income (loss) $ 14,649 $ (13,256) $ 3,250 Net
unrealized investment gains 2,561 18,522 2,022 Net
unrealized derivative instruments gains (losses) (335) 2,147 (334) Other
comprehensive income 2,226 20,669 1,688
Comprehensive income $ 16,875 $ 7,413 $ 4,938 ADDITIONAL PAID-IN CAPITAL:
Capital
contributions from parent $ 40,000 $ 259,370 $ 105,000 RETAINED EARNINGS: Net income
(loss) 14,649 (13,256) 3,250 ACCUMULATED OTHER COMPREHENSIVE
INCOME: Other
comprehensive income 2,226 20,669 1,688 Change
in stockholders equity 56,875 266,783 109,938
Stockholders equity, beginning of year 470,909 204,126 94,188
Stockholders equity, end of year $ 527,784 $ 470,909 $ 204,126 The accompanying notes are an
integral part of these financial statements. FB-5 PHL VARIABLE INSURANCE COMPANY Statement of Cash
Flows ($ amounts in thousands)
Years Ended December
31, 2003, 2002 and 2001 2003 2002 2001 OPERATING
ACTIVITIES: Net income
(loss) $ 14,649 $ (13,256) $ 3,250 Net
realized investment (gains) losses (768) 16,167 1,196
Amortization and depreciation -- -- 102 Deferred
income taxes 15,734 438 22,733 Increase in
receivables (4,650) (12,981) (4,406) Increase in
deferred policy acquisition costs (100,542) (128,164) (81,588) Increase in
policy liabilities and accruals 126,059 66,632 23,069 Other
assets and other liabilities net change 43,878 (28,007) (23,609) Cash
(for) from operating activities 94,360 (99,171) (59,253) INVESTING ACTIVITIES: Investment
purchases (2,068,268) (1,753,350) (766,494) Investment
sales, repayments and maturities 1,338,495 414,195 140,835 Cash
(for) from investing activities (729,773) (1,339,155) (625,659) FINANCING ACTIVITIES:
Policyholder deposit fund receipts, net 203,139 1,480,758 670,577 Capital
contributions from parent 40,000 259,370 105,000 Cash
from financing activities 243,139 1,740,128
775,577 Change
in cash and cash equivalents (392,274) 301,802 90,665 Cash and
cash equivalents, beginning of year 473,246 171,444 80,779 Cash and
cash equivalents, end of year $ 80,972 $ 473,246 $ 171,444 The accompanying notes are an
integral part of these financial statements. FB-6 PHL VARIABLE INSURANCE COMPANY Notes to Financial Statements Years Ended December 31, 2003, 2002 and 2001 1.
Organization
and Operations PHL Variable Insurance Company is a
life insurance company offering variable and fixed annuity and non-participating
life insurance products. It is a wholly-owned subsidiary of PM Holdings,
Inc. PM Holdings is a wholly-owned subsidiary of Phoenix Life Insurance
Company (Phoenix Life), which is a wholly-owned subsidiary of The Phoenix
Companies, Inc., a New York Stock Exchange listed company. Phoenix Home
Life Mutual Insurance Company demutualized on June 25, 2001 by converting from a
mutual life insurance company to a stock life insurance company, became a
wholly-owned subsidiary of The Phoenix Companies and changed its name to Phoenix
Life Insurance Company. We have prepared these financial
statements in accordance with generally accepted accounting principles (GAAP).
In preparing these financial statements in conformity with GAAP, we are
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities at reporting dates and the reported amounts of revenues
and expenses during the reporting periods. Actual results will differ from
these estimates and assumptions. We employ significant estimates and
assumptions in the determination of deferred policy acquisition costs;
policyholder liabilities and accruals; the valuation of goodwill, the valuation
of investments in debt and equity securities, and accruals for contingent
liabilities. Significant accounting policies are presented throughout the
notes in italicized type. Effective January 1, 2004, we are
required to adopt the AICPAs Statement of Position 03-1, Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts, or SOP 03-1. SOP 03-1 provides
guidance related to the accounting, reporting and disclosure of certain
insurance contracts and separate accounts, including guidance for computing
reserves for products with guaranteed benefits, such as guaranteed minimum death
benefits, and for products with annuitization benefits such as guaranteed
minimum income benefits. In addition, SOP 03-1 addresses the presentation
and reporting of separate accounts, as well as rules concerning the
capitalization and amortization of sales inducements. This new accounting
standard largely codifies our current accounting and reserving practices related
to our applicable non-traditional long-duration contracts and separate accounts
and thus,
our adoption is not expected to have a material effect on our financial
statements. 2.
Operating
Activities Premium and fee revenue and
related expenses We recognize term insurance
premiums as premium revenue pro rata over the related contract periods. We
match benefits, losses and related expenses with premiums over the related
contract periods. Revenues for universal life products consist of net
investment income and mortality, administration and surrender charges assessed
against the fund values during the period. Related benefit expenses
include universal life benefit claims in excess of fund values and net
investment income credited to universal life fund values. Reinsurance We use reinsurance agreements to
provide for greater diversification of business, which allows us to control
exposure to potential losses arising from large risks and provide additional
capacity for growth. We recognize assets and
liabilities related to reinsurance ceded contracts on a gross basis. The
cost of reinsurance related to long-duration contracts is accounted for over the
life of the underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies. FB-7 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 us;
consequently, estimates are established for amounts deemed or estimated to be
uncollectible. To minimize our exposure to significant losses from
reinsurance insolvencies, we evaluate the financial condition of our reinsurers
and monitor concentration of credit risk arising from similar geographic
regions, activities, or economic characteristics of the reinsurers. Our reinsurance program varies based
on the type of risk, for example:
On direct policies, the maximum of individual life insurance
retained by us on any one life is $10 million for single life and joint
first-to-die policies and $12 million for joint last-to-die policies, with
excess amounts ceded to reinsurers.
We reinsure 50% to 90% of the mortality risk for certain issues
of term and universal life policies. Additional information on direct
business written and reinsurance assumed and ceded for continuing operations for
2003, 2002 and 2001 follows ($ amounts in thousands): 2003 2002 2001
Direct premiums $
30,404 $
21,283 $
20,930 Premiums assumed from reinsureds -- -- -- Premiums ceded to reinsurers (24,575) (16,911) (15,801) Premiums
$ 5,829
$ 4,372
$ 5,129
Direct life insurance in-force $
20,518,533 $
11,999,540 $
10,205,877 Life insurance in-force assumed from reinsureds 168,788 215,329 -- Life insurance in-force ceded to reinsurers (15,544,504) (9,842,076) (9,015,734) Life insurance in-force
$ 5,142,817
$ 2,372,793
$ 1,190,143 Percentage of amount assumed to net insurance in-force 3.28% 9.07% -- Policy benefit costs are net of
benefits ceded of $11.3 million, $8.0 million and $5.0 million for 2003, 2002
and 2001, respectively. Valley Forge Life Insurance
On July 23, 2002, we acquired the
variable life and variable annuity business of Valley Forge Life Insurance
Company (a subsidiary of CNA Financial Corporation), effective July 1, 2002.
The business acquired had a total account value of $557.0 million at June
30, 2002. This transaction was effected through a combination of
coinsurance and modified coinsurance. Deferred policy acquisition costs
The costs of acquiring new
business, principally commissions, underwriting, distribution and policy issue
expenses, all of which vary with and are primarily related to production of new
business, are deferred. In connection with the 2002 acquisition of the
variable life and annuity business of Valley Forge Life Insurance Company, we
recognized an asset for the present value of future profits (PVFP) representing
the present value of estimated net cash flows embedded in the existing contracts
acquired. This asset is included in deferred acquisition costs (DAC).
We amortize DAC and PVFP based on
the related policys classification. For term life insurance
policies, DAC is amortized in proportion to projected net premiums. For
universal life, variable universal life and accumulation annuities, DAC and PVFP
are amortized in proportion to estimated gross profits. Policies may be
surrendered for value or exchanged for a different one of our products (internal
replacement); the DAC balance associated with the replaced or surrendered
policies is amortized to reflect these surrenders. The amortization process requires
the use of various assumptions, estimates and judgments about the future.
The primary assumptions are expenses, investment performance, mortality
and contract cancellations (i.e., lapses, withdrawals and surrenders).
These assumptions are reviewed on a regular basis and are generally based
on our past experience, industry studies, regulatory requirements and judgments
about the future. FB-8 Changes
in estimated gross profits based on actual experiences are reflected as an
adjustment to total amortization to date resulting in a charge or credit to
earnings. Finally, analyses are performed periodically to assess whether
there are sufficient gross margins or gross profits to amortize the remaining
DAC balances. In the third quarter of 2002, we
revised the long-term market return assumption for the variable annuity block of
business from 8% to 7%. In addition, at the quarter-end we recorded an
impairment charge related to the recoverability of our deferred acquisition cost
asset related to the variable annuity business. The revision in long-term
market return assumption and the impairment charge resulted in a $9.9 million
pre-tax ($6.4 million after income taxes) increase in policy acquisition cost
amortization expense in the third quarter of 2002. The activity in deferred policy
acquisition costs for 2003, 2002 and 2001 follows ($ amounts in thousands): 2003 2002 2001
Direct acquisition costs deferred, excluding acquisitions $
120,582 $
102,769 $
90,065 Acquisition costs recognized in Valley Forge Life acquisition -- 48,577 -- Recurring costs amortized to expense (20,040) (23,182) (8,477) (Cost) or credit offsets to net unrealized investment gains or losses 16,390 (37,474) (1,443) Change in deferred policy acquisition costs 116,932 90,690 80,145 Deferred policy acquisition costs, beginning of year 255,677 164,987 84,842 Deferred policy acquisition costs, end of year
$ 372,609
$ 255,677
$ 164,987 Policy liabilities and accruals
Future policy benefits are
liabilities for life and annuity products. We establish liabilities in
amounts adequate to meet the estimated future obligations of policies in-force.
Future policy benefits for variable universal life, universal life and
annuities in the accumulation phase are computed using the deposit-method which
is the sum of the account balance, unearned revenue liability and liability for
minimum policy benefits. Future policy benefits for term and annuities in the
payout phase that have significant mortality risk are computed using the net
level premium method on the basis of actuarial assumptions at the issue date of
these contracts for rates of interest, contract administrative expenses,
mortality and surrenders. We establish 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.
Policyholder liabilities are
primarily for universal life products and include deposits received from
customers and investment earnings on their fund balances which range from 4.7%
to 6% as of December 31, 2003 and 5.3% to 6.5% as of December 31, 2002, less
administrative and mortality charges. Policyholder deposit funds Policyholder deposit funds consist of
annuity deposits received from customers and investment earnings on their fund
balances, which range from 3.0% to 6.5%, less administrative charges. At
December 31, 2003 and 2002, there was $1,158.4 million and $1,303.0 million,
respectively, in policyholder deposit funds with no associated surrender
charges. Fair value of investment contracts
For purposes of fair value
disclosures (Note 9), we determine the fair value of deferred annuities with an
interest guarantee of one year or less at the amount of the policy reserve.
In determining the fair value of deferred annuities with interest
guarantees greater than one year, we used a discount rate equal to the
appropriate U.S. Treasury rate plus 150 basis points to determine the present
value of the projected account value of the policy at the end of the current
guarantee period. FB-9 Funds
under management Activity in annuity funds under
management for the years 2003, 2002 and 2001 follows ($ amounts in millions):
2003 2002 2001
Deposits $ 923.9 $ 1,878.9 $ 1,234.8 Performance 435.3 (121.5) (199.3) Fees (24.7) (23.5) (23.9) Benefits and surrenders (613.0) (404.9) (127.2) Change in funds under management 721.5 1,329.0 884.4 Funds under management, beginning of year 3,727.4 2,398.4 1,514.0 Funds under management, end of year $ 4,448.9 $ 3,727.4 $ 2,398.4 3.
Investing
Activities Debt and equity securities We classify our debt and equity
securities as available-for-sale and report them in our balance sheet at fair
value. Fair value is based on quoted market price, where available.
When quoted market prices are not available, we estimate fair value by
discounting debt security cash flows to reflect interest rates currently being
offered on similar terms to borrowers of similar credit quality (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 (equity securities). Fair value and cost of our
available-for-sale debt securities as of December 31, 2003 and 2002 follow ($
amounts in thousands): 2003 2002 Fair Value Cost Fair Value Cost
U.S. government and agency $ 58,894 $ 58,166 $ 7,343 $ 6,377 State and political subdivision 48,376 47,621 39,213 37,625 Foreign government 44,918 43,261 11,586 11,186 Corporate 1,475,398 1,445,360 791,091 768,126 Mortgage-backed 695,425 680,360 643,147 619,316 Other asset-backed 764,946 758,868 895,809 879,927 Debt securities $ 3,087,957 $ 3,033,636 $ 2,388,189 $ 2,322,557 For mortgage-backed and other
asset-backed debt securities, we recognize income using a constant effective
yield based on anticipated prepayments and the estimated economic lives of the
securities. When actual prepayments differ significantly from anticipated
prepayments, the effective yield is recalculated to reflect actual payments to
date and any resulting adjustment is included in net investment income.
For certain asset-backed securities, changes in estimated yield are
recorded on a prospective basis and specific valuation methods are applied to
these securities to determine if there has been an other-than-temporary decline
in value. We owned no non-income producing debt
securities as of December 31, 2003 or 2002. Fair value and cost of our equity
securities as of December 31, 2003 and 2002 follow ($ amounts in thousands): 2003 2002 Fair Value Cost Fair Value Cost
Mutual fund seed investments $ 8,512 $ 6,510 $ 14,324 $ 13,780 Other equity securities 175 229 18,797 18,088 Equity securities $ 8,687 $ 6,739 $ 33,121 $ 31,868 FB-10 Gross and
net unrealized gains and losses from debt and equity securities as of December
31, 2003 and 2002 follow 2003 2002 Gains Losses Gains Losses
U.S. government and agency $
936 $
(208) $
966 $
-- State and political subdivision 1,107 (352) 1,588 -- Foreign government 2,451 (794) 459 (59) Corporate 42,578 (12,540) 29,834 (6,869) Mortgage-backed 16,566 (1,501) 23,976 (145) Other asset-backed 10,070 (3,992) 17,052 (1,170) Debt securities gains and losses $
73,708 $
(19,387) $
73,875 $
(8,243) Equity securities gains and losses $
2,002 $
(54) $
1,782 $
(529) Debt and equity securities net gains
$ 56,269
$ 66,885
The aging of temporarily impaired
general account debt and equity securities as of December 31, 2003 is as follows
Less than 12 months Greater than 12 months Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses
Debt Securities
U.S. government and agency $
24,639 $
(416) $
-- $
-- $
24,639 $
(416) State and political subdivision 22,834 (368) -- -- 22,834 (368) Foreign government 4,769 (191) -- -- 4,769 (191) Corporate 200,322 (10,317) 17,238 (1,015) 217,560 (11,332) Mortgage-backed 206,036 (1,582) 80 (2) 206,116 (1,584) Other asset-backed 98,773 (1,523) 19,107 (4,059) 117,880 (5,582) Debt securities
$ 557,373
$ (14,397)
$ 36,425
$ (5,076)
$ 593,798
$ (19,473) Common stock -- -- -- -- -- -- Total temporarily
$ 557,373
$ (14,397)
$ 36,425
$ (5,076)
$ 593,798
$ (19,473)
Below investment grade
$ 9,658
$ (222)
$ 25,276
$ (2,432)
$ 34,934
$ (2,654) Below investment grade after offsets
$ (144)
$ (1,581)
$ (1,725) Below investment grade debt
securities which have been in an unrealized loss for greater than 12 months
consists of six securities, of which only one security, with an unrealized loss
of $1,232 thousand ($801 thousand after offset for taxes) has a fair value less
than 80% of the securitys amortized cost at December 31, 2003. All of these securities are
considered to be temporarily impaired at December 31, 2003 as each of these
securities has performed, and is expected to continue to perform, in accordance
with their original contractual terms. Policy loans and other invested
assets Policy loans are carried at their
unpaid principal balances and are collateralized by the cash values of the
related policies. For purposes of fair value disclosures, for variable rate
policy loans, we consider the unpaid loan balance as fair value, as interest
rates on these loans are reset annually based on market rates. Other investments primarily
include a partnership interest which we do not control and seed money in
separate accounts. The partnership interest is an investment in a hedge fund of
funds in which we do not have control or a majority ownership interest. The
interest is recorded using the equity method of accounting. FB-11 Net
investment income and net realized investment gains (losses) We recognize realized investment
gains and losses on asset dispositions when declines in fair value of debt and
equity securities are considered to be other-than-temporarily impaired.
The cost basis of these written down investments is adjusted to fair value
at the date the determination of impairment is made and the new cost basis is
not changed for subsequent recoveries in value. Applicable income taxes,
which offset realized investment gains and losses, are reported separately as
components of net income. Sources of net investment income for
2003, 2002 and 2001 follow ($ amounts in thousands): 2003 2002 2001
Debt securities $ 132,101 $ 88,764 $ 28,436 Equity securities 478 269 -- Other investments 931 237 -- Policy loans 140 38 15 Cash and cash equivalents 2,679 4,891 2,845 Total investment income 136,329 94,199 31,296 Less: investment expenses 2,798 1,727 320 Net investment income $ 133,531 $ 92,472 $ 30,976 Sources of realized investment gains
(losses) for 2003, 2002 and 2001 follow ($ amounts in thousands): 2003 2002 2001
Debt security impairments
$ (8,113)
$ (13,207)
$ -- Debt security transaction gains 9,615 2,754 425 Debt security transaction losses (2,411) (6,640) (213) Equity security transaction gains 3,993 -- -- Equity security transaction losses (1,354) (1) -- Other investment transaction gains (losses) (960) 927 (1,408) Cash equivalent transaction losses (2) -- -- Net transaction gains (losses) 8,881 (2,960) (1,196) Net realized investment gains (losses)
$ 768
$ (16,167)
$ (1,196) Unrealized investment gains
(losses) We recognize unrealized investment
gains and losses on investments in debt and equity securities that we classify
as available-for-sale. These gains and losses are reported as a component
of other comprehensive income net of applicable deferred income taxes. Sources of net unrealized investment
gains (losses) for 2003, 2002 and 2001 follow ($ amounts in thousands): 2003 2002 2001
Debt securities $ (11,311) $ 62,514 $ 2,297 Equity securities 695 1,253 -- Other investments (1,833) 2,203 2,258 Net unrealized investment gains (losses) $ (12,449) $ 65,970 $ 4,555
Net unrealized investment gains (losses) $ (12,449) $ 65,970 $ 4,555 Applicable deferred policy acquisition costs (Note 2) (16,390) 37,474 1,443 Applicable deferred income taxes 1,380 9,974 1,090 Offsets to net unrealized investment gains (losses) (15,010) 47,448 2,533 Net unrealized investment gains $ 2,561 $ 18,522 $ 2,022 FB-12
Investing cash flows Investment purchases, sales,
repayments and maturities for 2003, 2002 and 2001 follow ($ amounts in
thousands): 2003 2002 2001
Debt security purchases $
(2,050,231) $
(1,733,608) $
(765,529) Equity security purchases (8,619) (9,374) -- Other invested asset purchases (9,000) (9,929) (779) Policy loan advances, net (418) (439) (186) Investment purchases
$ (2,068,268)
$ (1,753,350)
$ (766,494)
Debt securities sales $
484,329 $
94,486 $
34,165 Debt securities maturities and repayments 817,792 296,625 106,670 Equity security sales 36,374 23,084 -- Investment sales, repayments and maturities
$ 1,338,495
$ 414,195
$ 140,835 The maturities of debt securities, by
contractual sinking fund payment and maturity, as of December 31, 2003 are
summarized in the following table ($ amounts in thousands). 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 may have the right to put or sell the obligations back to the
issuers. Due in one year or less $
180,809 Due after one year through five years 1,203,219 Due after five years through ten years 565,972 Due after ten years 1,083,636 Total
$ 3,033,636 4.
Separate
Account Assets and Liabilities Separate account products are those
for which a separate investment and liability account is maintained on behalf of
the policyholder. Investment objectives for these separate accounts vary
by fund account type, as outlined in the applicable fund prospectus or separate
account plan of operations. Our separate account products include variable
annuities and variable life insurance contracts. Separate account assets and
liabilities are carried at market value. 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 contractholders for management services are
included in revenues when services are rendered. 5.
Income Taxes
We recognize income tax expense or
benefit based upon amounts reported in the financial statements and the
provisions of currently enacted tax laws. We allocate income taxes to
income, other comprehensive income and additional paid-in capital, as
applicable. We recognize current income tax
assets and liabilities for estimated income taxes refundable or payable based on
the current years income tax returns. We recognize deferred income
tax assets and liabilities for the estimated future income tax effects of
temporary differences and carryforwards. 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 reduction in allowances through
earnings. FB-13 In
accordance with an income tax sharing agreement with The Phoenix Companies, we
compute the provision for federal income taxes as if we were filing a separate
federal income tax return, except that benefits arising from income tax credits
and net operating losses are allocated to those subsidiaries producing such
attributes to the extent they are utilized in The Phoenix Companies
consolidated federal income tax return. The allocation of income taxes to
elements of comprehensive income (loss) and between current and deferred for
2003, 2002 and 2001 follows ($ amounts in thousands): 2003 2002 2001
Net income (loss) $
8,369 $
(8,635) $
539 Other comprehensive income 1,199 11,129 909 Comprehensive income
$ 9,568
$ 2,494
$ 1,448
Current $
(7,366) $
(9,073) $
(22,194) Deferred 15,735 438 22,733 Income taxes (benefit) applicable to net income 8,369 (8,635) 539 Deferred income taxes applicable to other comprehensive income 1,199 11,129 909 Income taxes applicable to comprehensive income
$ 9,568
$ 2,494
$ 1,448
Income taxes paid (recovered)
$ (51,107)
$ 3,149
$ (5,357) For the years 2003, 2002 and 2001,
the effective federal income tax rates applicable to income from continuing
operations differ from the 35.0% statutory tax rate. Items giving rise to
the differences and the effects are as follow ($ amounts in thousands): 2003 2002 2001
Income taxes (benefit) at statutory rate $
8,056 $
(7,662) $
1,326 Tax advantaged investment income 360 (972) (812) Other, net (47) (1) 25 Applicable income taxes (benefit)
$ 8,369
$ (8,635)
$ 539 Effective income tax (benefit) rates 36.4% 39.4% 14.2% Deferred income tax assets
(liabilities) attributable to temporary differences at December 31, 2003 and
2002 follows 2003 2002
Deferred income tax assets:
Future policyholder benefits $
44,815 $
24,858 Unearned premiums / deferred revenues 4,675 2,454 Net operating loss carryover benefits 29,435 32,568 Other 831 810 Gross deferred income tax assets 79,756 60,690
Deferred tax liabilities:
Deferred policy acquisition costs 114,962 84,040 Investments 20,720 15,643 Gross deferred income tax liabilities 135,682 99,683 Deferred income tax liability
$ 55,926
$ 38,993 Commencing with the tax year ended
December 31, 2001, we are included in the life/non-life consolidated federal
income tax return filed by The Phoenix Companies. We had filed separate
company returns for the tax years ended December 31, 1996 through December 31,
2000 as required under Internal Revenue Code Section 1504(c). Within the
consolidated tax return, The Phoenix Companies is required by Internal Revenue
Service regulations to segregate the entities into two groups: life insurance
companies and non-life insurance companies. There are limitations as to
the amount of any operating losses from one group that can be offset against
taxable income of the other group. These limitations affect the amount of
any operating loss carryforwards that we have now or in the future. FB-14 At
December 31, 2003, we had net operating losses of $84 million for federal income
tax purposes of which $13.4 million expires in 2015, $15.6 million expires in
2016 and $55.0 million expires in 2017. We believe that the tax benefits
of these losses will be fully realized before their expiration. As a
result, no valuation allowance has been recorded against the deferred income tax
asset resulting from the net operating losses. We have determined, based on our
earnings and projected future taxable income, that it is more likely than not
that deferred income tax assets at December 31, 2003 and 2002 will be realized.
6. Related Party Transactions Phoenix Life
provides services and facilities to us and is reimbursed through a cost
allocation process. The expenses allocated to us were $128.0 million,
$64.0 million and $47.0 million for the years ended December 31, 2003, 2002 and
2001, respectively. Amounts payable to Phoenix Life were $12.2 million and
$7.5 million as of December 31, 2003 and 2002, respectively. Phoenix
Investment Partners Ltd., an indirect wholly-owned subsidiary of The Phoenix
Companies through its affiliated registered investment advisors, provides
investment services to us for a fee. Investment advisory fees incurred by
us were $1.6 million, $2.0 million and $2.3 million for the years ended December
31, 2003, 2002 and 2001, respectively. Amounts payable to the affiliated
investment advisors were $1.5 million and $40 thousand, as of December 31, 2003
and 2002, respectively. Phoenix Equity
Planning Corporation, a wholly-owned subsidiary of Phoenix Investment Partners,
is the principal underwriter of our annuity contracts. Contracts may be
purchased through registered representatives of a Phoenix affiliate, W.S.
Griffith & Co., Inc., as well as other outside broker-dealers who are
licensed to sell our annuity contracts. We incurred commissions for
contracts underwritten by Phoenix Equity Planning of $35.9 million, $30.3
million and $32.4 million for the years ended December 31, 2003, 2002 and 2001,
respectively. Amounts payable to Phoenix Equity Planning were $2.0 million
and $0.3 million, as of December 31, 2003 and 2002, respectively. Phoenix Life pays commissions to
producers who sell non-registered life and annuity products offered by us.
Commissions paid by Phoenix Life on our behalf were $34.3 million, $28.1 million
and $9.2 million for the years ended December 31, 2003, 2002 and 2001,
respectively. Amounts payable to Phoenix Life were $4.0 million and $2.3
million as of December 31, 2003 and 2002, respectively. WS Griffith
Associates, Inc., an indirect wholly-owned subsidiary of Phoenix Life, sells and
services many of our non-participating life insurance products through its
insurance agents. Concessions paid to WS Griffith Associates were $0.4
million, $1.0 million and $0.7 million for the years ended December 31, 2003,
2002 and 2001, respectively. Amounts payable to WS Griffith Associates were $36
thousand and $124 thousand, as of December 31, 2003 and 2002, respectively. 7.
Employee
Benefit Plans and Employment Agreements The Phoenix
Companies has a non-contributory, defined benefit pension plan covering
substantially all of its employees and those of its subsidiaries.
Retirement benefits are a function of both years of service and level of
compensation. The Phoenix Companies also sponsors a non-qualified
supplemental defined benefit plan to provide benefits in excess of amounts
allowed pursuant to the Internal Revenue Code. The Phoenix Companies
funding policy is to contribute annually an amount equal to at least the minimum
required contribution in accordance with minimum funding standards established
by the Employee Retirement Income Security Act of 1974 (ERISA).
Contributions are intended to provide not only for benefits attributable
to service to date, but also for service expected to be earned in the future.
The Phoenix Companies sponsors
pension and savings plans for its employees, and employees and agents of its
subsidiaries. The qualified plans comply with requirements established by
the ERISA and excess benefit plans provide for that portion of pension
obligations, which is in excess of amounts permitted by ERISA. The Phoenix
Companies also provides certain health care and life insurance benefits for
active and retired employees. We incur applicable employee benefit
expenses through the process of cost allocation by The Phoenix Companies. FB-15 In addition to its pension plans, The Phoenix Companies currently provides certain health care and life insurance benefits to retired employees, spouses and other eligible dependents through various plans which it sponsors. A substantial portion of Phoenix affiliate employees may become eligible for these benefits upon retirement. The health care plans have varying co-payments and deductibles, depending on the plan. These plans are unfunded. Applicable information regarding the
actuarial present value of vested and non-vested accumulated plan benefits, and
the net assets of the plans available for benefits is omitted, as the
information is not separately calculated for our participation in the plans.
The Phoenix Companies, the plan sponsor, established an accrued liability
and amounts attributable to us have been allocated. The amount of such
allocated benefits is not significant to the financial statements. 8.
Other
Comprehensive Income We record unrealized gains and
losses on available-for-sale securities and effective portions of the gains or
losses on derivative instruments designated as cash flow hedges in accumulated
other comprehensive income. Unrealized gains and losses on
available-for-sale securities are recorded in other comprehensive income until
the related securities are sold, reclassified or deemed to be impaired.
The effective portions of the gains or losses on derivative instruments
designated as cash flow hedges are reclassified into earnings in the same period
in which the hedged transaction affects earnings. If it is probable that a
hedged forecasted transaction will no longer occur, the effective portions of
the gains or losses on derivative instruments designated as cash flow hedges are
reclassified into earnings immediately. Components of accumulated other
comprehensive income as of December 31, 2003 and 2002 follow ($ amounts in
thousands): 2003 2002 Gross Net Gross Net Unrealized gains on investments $ 58,896 $ 23,375 $ 71,345 $ 20,814 Unrealized gains on derivative instruments 2,274 1,479 2,790 1,814 Accumulated other comprehensive income 61,170 $ 24,854 74,135 $ 22,628 Applicable deferred policy acquisition costs 22,933 39,323 Applicable deferred income taxes 13,383 12,184 Offsets to other comprehensive income 36,316 51,507 Accumulated other comprehensive income $ 24,854 $ 22,628 9. Fair Value of Financial Instruments and Derivative Instruments Fair value of financial instruments The carrying amounts and estimated fair values of financial instruments as of December 31, 2003 and 2002 follow ($ amounts in thousands): 2003 2002 Carrying Fair Carrying Fair Cash and cash equivalents $ 80,972 $ 80,972 $ 473,246 $ 473,246 Debt securities 3,087,957 3,087,957 2,388,189 2,388,189 Equity securities 8,687 8,687 33,121 33,121 Policy loans 1,753 1,753 1,335 1,335 Financial assets $ 3,179,369 $ 3,179,369 $ 2,895,891 $ 2,895,891 Investment contracts $ 2,760,567 $ 2,797,772 $ 2,557,428 $ 2,627,078 Financial liabilities $ 2,760,567 $ 2,797,772 $ 2,557,428 $ 2,627,078 FB-16
Derivative instruments 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. All derivative instruments are
recognized on the balance sheet at fair value. Generally, each derivative
is designated according to the associated exposure as either a fair value or
cash flow hedge at its inception as we do not enter into derivative contracts
for trading or speculative purposes. Cash flow hedges are generally
accounted for under the shortcut method with changes in the fair value of
related interest rate swaps recorded on the balance sheet with an offsetting
amount recorded in accumulated other comprehensive income. The effective
portion of changes in fair values of derivatives hedging the variability of cash
flows related to forecasted transactions are reported in accumulated other
comprehensive income and reclassified into earnings in the periods during which
earnings are affected by the variability of the cash flows of the hedged item.
We recognized an after-tax gain of
$0.0 million and $2.1 million for the years ended December 31, 2003 and 2002 and
an after-tax loss of $0.3 million for the year ended December 31, 2001 (reported
as other comprehensive income in Statements of Income, Comprehensive Income and
Changes in Stockholders Equity), which represented the change in fair
value of interest rate forward swaps which have been designated as cash flow
hedges of the forecasted purchase of assets. For changes in the fair value
of derivatives that are designated as cash flow hedges of a forecasted
transaction, we recognize the change in fair value of the derivative in other
comprehensive income. Amounts related to cash flow hedges that are
accumulated in other comprehensive income are reclassified into earnings in the
same period or periods during which the hedged forecasted transaction (the
acquired asset) affects earnings. At December 31, 2003, we expect to
reclassify
into earnings over the next twelve months $0.3 million of the deferred after tax
gains on these derivative instruments. For the years 2003, 2002 and 2001,
we reclassified after-tax gains of $0.3 million, $0.3 million and $0.3 million,
respectively, into earnings related to these same derivatives. We held no positions in derivative
instruments at December 31, 2003 and 2002. 10.
Statutory
Financial Information and Regulatory Matters We are required
to file annual statements with state regulatory authorities prepared on an
accounting basis prescribed or permitted by such authorities. There were
no material practices not prescribed by the State of Connecticut Insurance
Department as of December 31, 2003, 2002 and 2001. Statutory surplus
differs from equity reported in accordance with GAAP for life insurance
companies primarily because policy acquisition costs are expensed when incurred,
investment reserves are based on different assumptions, life insurance reserves
are based on different assumptions and income taxes are recorded in accordance
with the Statement of Statutory Accounting Principles No. 10, Income
Taxes, which limits deferred tax assets based on admissibility tests. The following reconciles our
statutory net income as reported to regulatory authorities to GAAP net income as
reported in these financial statements as of December 31, 2003, 2002 and 2001 ($
amounts in thousands): 2003 2002 2001
Statutory net income $ (37,387) $ (146,135) $ (45,648) DAC, net 100,542 110,587 81,588 Future policy benefits (57,367) 1,488 (20,013) Deferred income taxes (15,734) (438) (22,136) Net investment income 19,622 15,531 7,085 Realized gains 912 6,177 2,149 Other, net 4,061 (466) 225 Net income (loss), as reported $ 14,649 $ (13,256) $ 3,250 FB-17 The
following reconciles our statutory surplus and asset valuation reserve (AVR) as
reported to regulatory authorities to GAAP equity as reported in these financial
statements as of December 31, 2003, 2002 and 2001 ($ amounts in thousands): 2003 2002 2001
Statutory surplus and AVR $
241,999 $
215,506 $
102,016 DAC, net 395,543 295,000 166,836 Future policy benefits (100,626) (42,616) (42,885) Investment valuation allowances 26,817 20,715 1,597 Deferred income taxes (55,926) (38,993) (28,756) Deposit funds 22,307 23,167 5,073 Other, net (2,330) (1,870) 245 Stockholders equity, as reported $ 527,784 $ 470,909 $ 204,126 The Connecticut Insurance Holding
Company Act limits the maximum amount of annual dividends and other
distributions in any twelve month period to stockholders of Connecticut
domiciled insurance companies without prior approval of the Insurance
Commissioner to the greater of (1) ten percent of such insurance
companys surplus as of the thirty-first day of December last preceding, or
(2) the net gain from operations of such insurance company, if such company is a
life insurance company, or the net income, if such company is not a life
insurance company, for the twelve-month period ending the thirty-first day of
December last preceding, but shall not include pro rata distributions of any
class of the insurance companys own securities. Under current
law, the maximum dividend distribution that may be made by us during 2002
without prior approval is subject to restrictions relating to statutory surplus.
In 1998, the National Association of
Insurance Commissioners (NAIC) adopted the Codification of Statutory Accounting
Principles guidance, which replaces the current Accounting and Practices and
Procedures manual as the NAICs primary guidance on statutory accounting as
of January 1, 2001. The Codification provides guidance for areas where
statutory accounting has been silent and changes current statutory accounting in
some areas (e.g., deferred income taxes are recorded). The State of Connecticut Insurance
Department adopted the Codification guidance, effective January 1, 2001.
The effect of adoption increased our statutory surplus by $587.8 thousand,
primarily as a result of recording deferred income taxes. FB-18
PHL Variable Insurance Company (a wholly-owned subsidiary of PM Holdings, Inc.) Financial Statements December 31, 2002 and 2001
FC-1 TABLE OF CONTENTS Page
Report of Independent Auditors
FC-3 Balance Sheet as of December 31, 2002 and 2001
FC-4 Statement of Income, Comprehensive Income and Changes in Stockholders Equity for the years
FC-5 Statement of Cash Flows for the years ended 2002, 2001 and 2000
FC-6 Notes to Financial Statements
FC-7 FC-19 FC-2 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and
Stockholder of PHL Variable Insurance Company: In our opinion, the accompanying
balance sheet and the related statements of income, comprehensive income and
changes in stockholders equity and cash flows present fairly, in all
material respects, the financial position of PHL Variable Insurance Company at
December 31, 2002 and 2001, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2002 in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Companys
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 auditing standards generally accepted in the
United States of America, which 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/ Pricewaterhouse Coopers LLP Hartford, Connecticut February 5, 2003 FC-3 PHL VARIABLE INSURANCE COMPANY Balance Sheet ($ amounts in thousands,
except per share data)
December 31, 2002 and 2001
2002 2001 ASSETS:
Available-for-sale debt securities, at fair value $
2,388,189 $
789,380 Equity
securities, at fair value
33,121
- -- Policy
loans, at unpaid principal balances 1,335
896 Other
investments 10,166
2,911 Total
investments 2,432,811
793,187 Cash and
cash equivalents
473,246
171,444 Accrued
investment income
18,768
5,787 Deferred
policy acquisition costs 255,677
164,987 Other
general account assets
45,105
30,343 Separate
account assets 1,157,913
1,539,476 Total
assets
$
4,383,520
$
2,705,224 LIABILITIES:
Policyholder deposit funds $
2,557,428 $
865,970 Policy
liabilities and accruals
124,925
47,131 Deferred
income taxes
38,993
27,426 Other
general account liabilities
33,352
26,226 Separate
account liabilities 1,157,913
1,534,345 Total
liabilities
3,912,611
2,501,098
STOCKHOLDERS EQUITY: Common
stock, $5,000 par value: 1,000 shares authorized; 500 shares issued
2,500
2,500 Additional
paid-in capital
444,234
184,864 Retained
earnings 1,547 14,803 Accumulated
other comprehensive income
22,628
1,959 Total
stockholders equity 470,909
204,126 Total
liabilities and stockholders equity $
4,383,520 $
2,705,224
The accompanying notes are an
integral part of these financial statements. FC-4 PHL VARIABLE INSURANCE COMPANY Statement of Income,
Comprehensive Income and Changes in Stockholders Equity ($ amounts in thousands)
Years Ended December
31, 2002, 2001 and 2000 2002 2001 2000 REVENUES:
Premiums
$
4,372 $
5,129 $ 6,168 Insurance
and investment product fees
46,915
32,379 30,098 Investment
income, net of expenses
92,472
30,976 9,197 Net
realized investment gains (losses)
(16,167)
(1,196) 116 Total
revenues
127,592
67,288 45,579 BENEFITS AND
EXPENSES: Policy
benefits
98,915
39,717 17,056 Policy
acquisition cost amortization
23,182
8,477 15,765 Other
operating expenses
27,386
15,305 14,006 Total
benefits and expenses
149,483
63,499 46,827 Income
(loss) before income taxes
(21,891)
3,789 (1,248) Applicable
income taxes (benefit)
(8,635)
539 (1,263) Net
income (loss) $
(13,256) $
3,250 $ 15 COMPREHENSIVE
INCOME: Net
income (loss) $
(13,256) $
3,250 $ 15 Net
unrealized investment gains
18,522
2,022
984 Net
unrealized derivative instruments gains (losses)
2,147
(334) -- Other
comprehensive income (loss)
20,669
1,688
984
Comprehensive income $
7,413 $
4,938 $ 999 ADDITIONAL
PAID-IN CAPITAL: Capital
contributions from parent $
259,370 $
105,000 $
15,000 RETAINED EARNINGS Net income
(loss)
(13,256)
3,250 15 ACCUMULATED OTHER COMPREHENSIVE
INCOME: Other
comprehensive income
20,669
1,688
984 Change
in stockholders equity
266,783
109,938
15,999
Stockholders equity, beginning of year
204,126
94,188
78,189
Stockholders equity, end of year $
470,909 $
204,126 $
94,188 The accompanying notes are an
integral part of these financial statements FC-5 PHL VARIABLE INSURANCE COMPANY Statement of Cash
Flows ($ amounts in thousands)
Years Ended December
31, 2002, 2001 and 2000 2002 2001 2000
OPERATING ACTIVITIES: Net income (loss)
$ (13,256) $ 3,250 $ 15 Net realized investment (gains) losses
16,167 1,196 (116) Amortization and depreciation
-- 102 102 Deferred income taxes (benefit)
438 22,733 3,045 Increase in receivables
(12,981) (4,406) (595) Deferred policy acquisition costs (increase) decrease
(128,164) (81,588) (23,845) (Increase) decrease in policy liabilities and accruals
66,632 23,069 9,822 Other assets and other liabilities net change
(28,007) (23,609) 9,625 Cash from operating activities
(99,171) (59,253) (1,947) INVESTING
ACTIVITIES: Investment
purchases (1,753,350) (766,494) (119,088) Investment
sales, repayments and maturities 414,195 140,835 29,511 Cash
(for) from investing activities (1,339,155) (625,659) (89,577)
FINANCING ACTIVITIES: Policyholder deposit fund receipts, net
1,480,758 670,577 131,163 Capital contributions from parent
259,370 105,000 15,000 Cash from financing activities
1,740,128
775,577 146,163 Change in cash and cash equivalents
301,802 90,665 54,639 Cash and cash equivalents, beginning of year
171,444 80,779 26,140 Cash and cash equivalents, end of year
$ 473,246 $ 171,444 $ 80,779 The accompanying notes are an
integral part of these financial statements. FC-6 PHL VARIABLE INSURANCE COMPANY Notes to Financial Statements Years Ended December 31, 2002, 2001 and 2000 1. Organization
and Operations PHL Variable Insurance Company is a
life insurance company offering variable and fixed annuity and non-participating
life insurance products. It is a wholly-owned subsidiary of PM Holdings,
Inc. PM Holdings is a wholly-owned subsidiary of Phoenix Life Insurance
Company (Phoenix Life), which is a wholly-owned subsidiary of The Phoenix
Companies, Inc., a New York Stock Exchange listed company. Phoenix Home
Life Mutual Insurance Company demutualized on June 25, 2001 by converting from a
mutual life insurance company to a stock life insurance company, became a
wholly-owned subsidiary of The Phoenix Companies and changed its name to Phoenix
Life Insurance Company. We have prepared these financial
statements in accordance with generally accepted accounting principles (GAAP).
In preparing these financial statements in conformity with GAAP, we are
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities at reporting dates and the reported amounts of revenues
and expenses during the reporting periods. Actual results will differ from
these estimates and assumptions. We employ significant estimates and
assumptions in the determination of deferred policy acquisition costs;
policyholder liabilities and accruals; the valuation of goodwill, investments in
debt and equity securities, pension and other postemployment benefits
liabilities and accruals for contingent liabilities. Significant
accounting policies are presented throughout the notes in italicized type. 2. Operating
Activities Premium and fee revenue and
related expenses We recognize term insurance
premiums as premium revenue pro rata over the related contract periods. We
match benefits, losses and related expenses with premiums over the related
contract periods. Revenues for universal life products consist of net
investment income and mortality, administration and surrender charges assessed
against the fund values during the period. Related benefit expenses
include universal life benefit claims in excess of fund values and net
investment income credited to universal life fund values. Reinsurance We use reinsurance agreements to
provide for greater diversification of business, allow us to control exposure to
potential losses arising from large risks and provide additional capacity for
growth. We recognize assets and
liabilities related to reinsurance ceded contracts on a gross basis. The
cost of reinsurance related to long-duration contracts is accounted for over the
life of the underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies. 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 us; consequently, estimates are established for
amounts deemed or estimated to be uncollectible. To minimize our exposure
to significant losses from reinsurance insolvencies, we evaluate the financial
condition of our reinsurers and monitor concentration of credit risk arising
from similar geographic regions, activities, or economic characteristics of the
reinsurers. FC-7 Our
reinsurance program varies based on the type of risk, for example:
On direct policies, the maximum of individual life insurance
retained by us 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, with
excess amounts ceded to reinsurers.
We reinsure 80% to 90% of the mortality risk on certain new
issues of term, universal life, variable universal life products. Additional information on direct
business written and reinsurance assumed and ceded for continuing operations for
the years 2002, 2001 and 2000 follows (in thousands): 2002 2001 2000
Direct premiums $
21,283 $
20,930 $
21,219 Premiums assumed from reinsureds -- -- -- Premiums ceded to reinsurers (16,911) (15,801) (15,051) Premiums
$ 4,372
$ 5,129
$ 6,168
Direct policy benefits incurred $
39,692 $
19,345 $
17,253 Policy benefits assumed from reinsureds 3,857 -- -- Policy benefits ceded to reinsurers (11,492) (6,987) (7,515) Policy benefits
$ 32,057
$ 12,358
$ 9,738
Direct life insurance in-force $
11,999,540 $
10,205,877 $
9,684,755 Life insurance in-force assumed from reinsureds 215,329 -- -- Life insurance in-force ceded to reinsurers (9,842,076) (9,015,734) (8,672,918) Life insurance in-force
$ 2,372,793
$ 1,190,143
$ 1,011,837 Percentage of amount assumed to net insurance in-force 9.01% -- -- Valley Forge Life Insurance
On July 23, 2002, we acquired the
variable life and variable annuity business of Valley Forge Life Insurance
Company (a subsidiary of CNA Financial Corporation), effective July 1, 2002.
The business acquired had a total account value of $557.0 million at June
30, 2002. This transaction was effected through a combination of
coinsurance and modified coinsurance. The business acquired generated a
loss of $17.2 million ($11.2 million after income taxes) for the year 2002. Deferred policy acquisition costs
The costs of acquiring new
business, principally commissions, underwriting, distribution and policy issue
expenses, all of which vary with and are primarily related to production of new
business, are deferred. We amortize DAC and PVFP based on the related
policys classification. For universal life, variable universal life
and accumulation annuities, DAC and PVFP are amortized in proportion to
estimated gross profits. Policies may be surrendered for value or
exchanged for a different one of our products (internal replacement); the DAC
balance associated with the replaced or surrendered policies is amortized to
reflect these surrenders. The amortization process requires
the use of various assumptions, estimates and judgments about the future.
The primary assumptions are expenses, investment performance, mortality
and contract cancellations (i.e., lapses, withdrawals and surrenders).
These assumptions are reviewed on a regular basis and are generally based
on our past experience, industry studies, regulatory requirements and judgments
about the future. Changes in estimated gross margins and gross profits
based on actual experiences are reflected as an adjustment to total amortization
to date resulting in a charge or credit to earnings. Finally, analyses are
performed periodically to assess whether there are sufficient gross margins or
gross profits to amortize the remaining DAC balances. FC-8 In the
third quarter of 2002, we revised the long-term market return assumption for the
variable annuity block of business from 8% to 7%. In addition, at the
quarter-end we recorded an impairment charge related to the recoverability of
our deferred acquisition cost asset related to the variable annuity business.
The revision in long-term market return assumption and the impairment
charge resulted in a $9.9 million pre-tax ($6.4 million after income taxes)
increase in policy acquisition cost amortization expense in the third quarter of
2002. The activity in deferred policy
acquisition costs for the years 2002, 2001 and 2000 follows (in thousands): 2002 2001 2000
Direct acquisition costs deferred excluding acquisitions $
102,769 $
90,065 $
39,610 Acquisition costs recognized in Valley Forge Life acquisition 48,577 -- -- Recurring costs amortized to expense (23,182) (8,477) (15,765) (Cost) or credit offsets to net unrealized investment gains or losses
(37,474) (1,443) (1,139) Change in deferred policy acquisition costs 90,690 80,145 22,706 Deferred policy acquisition costs, beginning of year 164,987 84,842 62,136 Deferred policy acquisition costs, end of year
$ 255,677
$ 164,987
$ 84,842 Policy liabilities and accruals
Future policy benefits are
liabilities for life and annuity products. We establish liabilities
in amounts adequate to meet the estimated future obligations of policies
in-force. Future policy benefits for variable universal life, universal
life and annuities in the accumulation phase are computed using the
deposit-method which is the sum of the account balance, unearned revenue
liability and liability for minimum policy benefits. Future policy
benefits for term and annuities in the payout phase that have significant
mortality risk are computed using the net premium method on the basis of
actuarial assumptions at the issue date of these contracts for rates of
interest, contract administrative expenses, mortality and surrenders. We
establish 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. Policyholder deposit funds are
primarily for universal life products and include deposits received from
customers and investment earnings on their fund balances which range from 5.3%
to 6.5% at year-end 2002, less administrative and mortality charges. Policyholder deposit funds Policyholder deposit funds primarily
consist of annuity deposits received from customers, dividend accumulations and
investment earnings on their fund balances, which range from 3.0% to 6.5%, less
administrative charges. At year-end 2002 and 2001, there was $1,303.0
million and $359.7 million, respectively, in policyholder deposit funds with no
associated surrender charges. Fair value of investment contracts
For purposes of fair value
disclosures (Note 9), we determine the fair value of deferred annuities with an
interest guarantee of one year or less at the amount of the policy reserve.
In determining the fair value of deferred annuities with interest
guarantees greater than one year, a discount rate equal to the appropriate U.S.
Treasury rate plus 150 basis points to determine the present value of the
projected account value of the policy at the end of the current guarantee
period. FC-9 Funds
under management Activity in annuity funds under
management for the years 2002, 2001 and 2000 (in millions): 2002 2001 2000
Deposits
$
1,854.7 $
1,222.0 $
454.7 Performance
(119.0) (199.3) (151.0) Fees
(23.4) (23.8) (24.9) Benefits and surrenders
(405.3) (127.0) (84.6) Change in funds under management
1,307.0 871.9 194.2 Funds under management, beginning of year 2,385.9 1,514.0 1,319.8 Funds under management, end of year
$ 3,692.9
$ 2,385.9
$ 1,514.0 3. Investing
Activities Debt and equity securities We classify our debt and equity
securities as available-for-sale and report them in our balance sheet at fair
value. Fair value is based on quoted market price, where available.
When quoted market prices are not available, we estimate fair value by
discounting debt security cash flows to reflect interest rates currently being
offered on similar terms to borrowers of similar credit quality (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 (equity securities). Prior to 2001, we
classified private placement debt securities as
held-to-maturity and reported them at amortized cost, less any
impairment. In connection with The Phoenix Companys conversion to a
public company, in 2001 we reclassified these securities, when their carrying
value was $32.0
million, to available-for-sale and recorded a $1.3 million unrealized gain ($0.4
million unrealized gain after offsets for applicable deferred policy acquisition
costs and deferred income taxes) in other comprehensive income. Fair value and cost of our debt
securities at year-end 2002 and 2001 follow (in thousands): For mortgage-backed and other
asset-backed debt securities, we recognize income using a constant effective
yield based on anticipated prepayments and the estimated economic lives of the
securities. When actual prepayments differ significantly from anticipated
prepayments, the effective yield is recalculated to reflect actual payments to
date and any resulting adjustment is included in net investment income.
For certain asset-backed securities, changes in estimated yield are
recorded on a prospective basis and specific valuation methods are applied to
these securities to determine if there has been an other-than-temporary decline
in value. FC-10 We owned
no non-income producing debt securities at year-end 2002 or 2001. Fair value and cost of our equity
securities at year-end 2002 and 2001 follow (in thousands): 2002 2001 Fair Value Cost Fair Value Cost
Mutual fund seed investments $ 14,324 $ 13,780 $ -- $ -- Other equity securities 18,797 18,088 -- -- Equity securities $ 33,121 $ 31,868 $ -- $ -- Gross and net unrealized gains and
losses from debt and equity securities at year-end 2002 and 2001 follow (in
thousands): Policy loans and other invested
assets Policy loans are carried at their
unpaid principal balances and are collateralized by the cash values of the
related policies. For purposes of fair value disclosures (Note 9), for variable
rate policy loans, we consider the unpaid loan balance as fair value, as
interest rates on these loans are reset annually based on market rates. Other investments primarily
include a partnership interest which we do not control, seed money in separate
accounts, and derivative instruments. The partnership interest is an
investment in a hedge fund of funds in which we do not have control or a
majority ownership interest. The interest is recorded using the equity
method of accounting. Our derivative instruments
primarily include interest rate swap agreements. We report these contracts
at fair values, which are based on current settlement values. These values
are determined by brokerage quotes that utilize pricing models or formulas based
on current assumptions for the respective agreements. FC-11 Net
investment income Sources of net investment income for
the years 2002, 2001 and 2000 follow (in thousands): 2002 2001 2000
Debt securities $ 88,764 $ 28,436 $ 7,254 Equity securities 269 -- -- Other invested assets 237 -- -- Policy loans 38 15 12 Cash and cash equivalents 4,891 2,845 2,049 Total investment income 94,199 31,296 9,315 Less: investment expenses 1,727 320 118 Net investment income $ 92,472 $ 30,976 $ 9,197 Net realized investment gains
(losses) We recognize realized investment
gains and losses on asset dispositions, when declines in fair value of debt and
equity securities whose value, in our judgment, is considered to be
other-than-temporarily impaired are written down to fair value as a charge to
realized losses included in net income. The cost basis of these written
down investments is adjusted to fair value at the date the determination of
impairment is made. The new cost basis is not changed for subsequent
recoveries in value. Applicable income taxes are reported separately as
components of net income. Sources and types of net realized
investment gains (losses) for the years 2002, 2001 and 2000 follow (in
thousands): 2002 2001 2000
Impairment losses on debt securities
$ (13,207)
$ --
$ -- Debt securities gains 2,754 425 73 Debt securities losses (6,640) (213) (6) Equity securities losses (1) -- -- Other invested assets 927 (1,408) 49 Net transaction gains (losses) (2,960) (1,196) 116 Net realized investment gains (losses)
$ (16,167)
$ (1,196)
$ 116 Unrealized investment gains
(losses) We recognize unrealized investment
gains and losses on investments in debt and equity securities that we classify
as available-for-sale. These gains and losses are reported as a component
of other comprehensive income net of applicable deferred income taxes. FC-12 Sources of
net unrealized investment gains (losses) for the years 2002, 2001 and 2000
follow (in thousands): 2002 2001 2000
Debt securities $ 62,514 $ 2,297 $ 2,652 Equity securities 1,253 -- -- Other investments 2,203 2,258 -- Net unrealized investment gains $ 65,970 $ 4,555 $ 2,652
Net unrealized investment gains $ 65,970 $ 4,555 $ 2,652 Applicable deferred policy acquisition costs 37,474 1,443 1,139 Applicable deferred income taxes (benefit) 9,974 1,090 529 Offsets to net unrealized investment gains 47,448 2,533 1,668 Net unrealized investment gains (losses)
$ 18,522 $ 2,022 $ 984 Cash flows Investment purchases, sales,
repayments and maturities for the years 2002, 2001 and 2000 follow: 2002
2001
2000
Debt security purchases $
(1,720,008) $
(765,529) $
(118,383) Equity security purchases (9,374) -- -- Other invested asset purchases (9,929) (779) (517) Policy loan advances, net (439) (186) (188) Investment purchases
$ (1,739,750)
$ (766,494)
$ (119,088)
Debt securities sales $
94,486 $
34,165 $
1,513 Debt securities maturities and repayments 296,625 106,670 27,998 Equity security sales 23,084 -- -- Investment sales, repayments and maturities
$ 414,195
$ 140,835
$ 29,511 The maturities of debt securities and
mortgage loans, by contractual sinking fund payment and maturity, at year-end
2002 are summarized in the following table (in thousands). Actual
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties, we may have the right to put or sell the obligations back to the
issuers and mortgage loans may be refinanced. Due in one year or less $
452,931 Due after one year through five years 1,206,211 Due after five years through ten years 407,434 Due after ten years 255,981 Total
$ 2,322,557 4. 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. Our separate account products include variable
annuities and variable life insurance contracts. Separate account assets and
liabilities are primarily carried at market value. Deposits, net
investment income and realized investment gains and losses for these accounts
are excluded from revenues, and the related liability FC-13
increases are excluded from benefits and expenses. Fees assessed to the
contractholders for management services are included in revenues when services
are rendered. 5. Income Taxes
We recognize income tax expense or
benefit based upon amounts reported in the financial statements and the
provisions of currently enacted tax laws. We allocate income taxes to
income, other comprehensive income and additional paid-in capital, as
applicable. We recognize current income tax
assets and liabilities for estimated income taxes refundable or payable based on
the current years income tax returns. We recognize deferred income
tax assets and liabilities for the estimated future income tax effects of
temporary differences and carryforwards. 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 reduction in allowances through
earnings. In accordance with an income tax
sharing agreement with The Phoenix Companies, we compute the provision for
federal income taxes as if we were filing a separate federal income tax return,
except that benefits arising from income tax credits and net operating losses
are allocated to those subsidiaries producing such attributes to the extent they
are utilized in The Phoenix Companies consolidated federal income tax
return. The allocation of income taxes to
elements of comprehensive income (loss) and between current and deferred for the
years 2002, 2001 and 2000 follows (in thousands): 2002 2001 2000
Net income (loss)
$ (8,635)
$ 539
$ (1,263) Other comprehensive income 11,129 909 529 Comprehensive income (loss)
$ 2,494
$ 1,448
$ (734)
Current $
(9,073) $
(22,194) $
(4,308) Deferred 438 22,733 3,045 Income taxes (benefit) applicable to net income (8,635) 539 (1,263) Deferred income taxes applicable to other comprehensive income 11,129 909 529 Income taxes (benefit) applicable to comprehensive income
$ 2,494
$ 1,448
$ (734)
Income taxes paid (recovered)
$ 3,149
$ (5,357)
$ (2,660) For the years 2002, 2001 and 2000,
the effective federal income tax rates applicable to income from continuing
operations differ from the 35.0% statutory tax rate. Items giving rise to
the differences and the effects are as follows (in thousands): 2002 2001 2000
Income taxes (benefit) at statutory rate $
(7,662) $
1,326 $
(437) Tax advantaged investment income (972) (812) (853) Other, net (1) 25 27 Applicable income taxes (benefit)
$ (8,635)
$ 539
$ (1,263) Effective income tax (benefit) rates 39.4% 14.2% 101.2% FC-14 Deferred
income tax assets (liabilities) attributable to temporary differences at
year-end 2002 and 2001 follow (in thousands): 2002 2001
Deferred income tax assets:
Future policyholder benefits $
24,858 $
19,350 Unearned premiums / deferred revenues 2,454 806 Investments -- 243 Net operating loss carryover benefits 32,568 -- Other 810 378 Gross deferred income tax assets 60,690 20,777 Deferred tax liabilities:
Deferred policy acquisition costs 84,040 47,149 Investments 15,643 1,054 Gross deferred income tax liabilities 99,683 48,203 Deferred income tax liability
$ 38,993
$ 27,426 Commencing with the tax year ended
December 31, 2001, we are included in the life/non-life consolidated federal
income tax return filed by The Phoenix Companies. We had filed separate
company returns for the tax years ended December 31, 1996 through December 31,
2000 as required under Internal Revenue Code Section 1504(c). Within the
consolidated tax return, The Phoenix Companies is required by Internal Revenue
Service regulations to segregate the entities into two groups: life insurance
companies and non-life insurance companies. There are limitations as to
the amount of any operating losses from one group that can be offset against
taxable income of the other group. These limitations affect the amount of
any operating loss carryforwards that we have now or in the future. At year-end 2002, we had net
operating losses of $93 million for federal income tax purposes of which $24.6
million expires in 2015, $15.6 million expires in 2016 and $52.8 million expires
in 2017. We believe that the tax benefits of these losses will be fully
realized before their expiration. As a result, no valuation allowance has
been recorded against the deferred income tax asset resulting from the net
operating losses. We have determined, based on our
earnings and projected future taxable income, that it is more likely than not
that deferred income tax assets at year-end 2002 and 2001 will be realized. 6. Related Party
Transactions Phoenix Life
provides services and facilities to us and is reimbursed through a cost
allocation process. The expenses allocated to us were $64.0 million, $47.0
million and $34.3 million for the years ended December 31, 2002, 2001 and 2000,
respectively. Amounts payable to Phoenix Life were $7.5 million and $4.9
million as of December 31, 2002 and 2001, respectively. Phoenix
Investment Partners Ltd., an indirect wholly-owned subsidiary of The Phoenix
Companies, through its affiliated registered investment advisors, provides
investment services to us for a fee. Investment advisory fees incurred by
us were $2.0 million, $2.3 million and $2.1 million for the years ended December
31, 2002, 2001 and 2000, respectively. Amounts payable to the affiliated
investment advisors were $40 thousand and $39 thousand, as of December 31, 2002
and 2001, respectively. Phoenix Equity
Planning Corporation, a wholly-owned subsidiary of Phoenix Investment Partners,
is the principal underwriter of our annuity contracts. Contracts may be
purchased through registered representatives of a Phoenix affiliate, W.S.
Griffith & Co., Inc., as well as other outside broker dealers who are
licensed to sell our annuity contracts. We incurred commissions for
contracts underwritten by Phoenix Equity Planning of $30.3 million, $32.4
million, and $20.0 million for the years ended December 31, 2002, FC-15 2001 and 2000, respectively. Amounts payable to Phoenix Equity Planning were $0.3 million and $1.2 million, as of December 31, 2002 and 2001, respectively. Phoenix Life
pays commissions to producers who sell non-registered life and annuity products
offered by us. Commissions paid by Phoenix Life on our behalf were $28.1
million, $9.2 million and $8.5 million for the years ended December 31, 2002,
2001 and 2000, respectively. Amounts payable to Phoenix Life were $2.3
million and $1.3 million as of December 31, 2002 and 2001, respectively. WS Griffith
Associates, Inc., an indirect wholly-owned subsidiary of Phoenix Life, sells and
services many of our non-participating life insurance products through its
insurance agents. Concessions paid to WS Griffith Associates were $1.0
million, $0.7 million and $2.6 million for the years ended December 31, 2002,
2001 and 2000, respectively. Amounts payable to WS Griffith Associates were $124
thousand and $162 thousand, as of December 31, 2002 and 2001, respectively. 7. Employee
Benefit Plans and Employment Agreements The Phoenix
Companies has a non-contributory, defined benefit pension plan covering
substantially all of its employees and those of its subsidiaries.
Retirement benefits are a function of both years of service and level of
compensation. The Phoenix Companies also sponsors a non-qualified
supplemental defined benefit plan to provide benefits in excess of amounts
allowed pursuant to the Internal Revenue Code. The Phoenix Companys
funding policy is to contribute annually an amount equal to at least the minimum
required contribution in accordance with minimum funding standards established
by the Employee Retirement Income Security Act of 1974 (ERISA).
Contributions are intended to provide not only for benefits attributable
to service to date, but also for service expected to be earned in the future.
The Phoenix
Companies sponsors pension and savings plans for its employees, and employees
and agents of its subsidiaries. The qualified plans comply with
requirements established by the ERISA and excess benefit plans provide for that
portion of pension obligations which is in excess of amounts permitted by ERISA.
The Phoenix Companies also provides certain health care and life insurance
benefits for active and retired employees. We incur applicable employee
benefit expenses through the process of cost allocation by The Phoenix
Companies. In addition to
its pension plans, The Phoenix Companies currently provides certain health care
and life insurance benefits to retired employees, spouses and other eligible
dependents through various plans which it sponsors. A substantial portion
of Phoenix affiliate employees may become eligible for these benefits upon
retirement. The health care plans have varying co-payments and deductibles,
depending on the plan. These plans are unfunded. Applicable information regarding the actuarial present value of vested and non-vested accumulated plan benefits, and the net assets of the plans available for benefits is omitted, as the information is not separately calculated for our participation in the plans. The Phoenix Companies, the plan sponsor, established an accrued liability and the related expense attributable to us has been allocated. The amount of such allocated benefits is not significant to the financial statements. 8. Other
Comprehensive Income We record unrealized gains and
losses on available-for-sale securities and effective portions of the gains or
losses on derivative instruments designated as cash flow hedges in accumulated
other comprehensive income. Unrealized gains and losses on
available-for-sale securities are recorded in other comprehensive income until
the related securities are sold, reclassified or deemed to be impaired. The
effective portions of the gains or losses on derivative instruments designated
as cash flow hedges are reclassified into earnings in the same period in which
the hedged transaction affects earnings. If it is probable that a hedged
forecasted transaction will no longer FC-16 occur,
the effective portions of the gains or losses on derivative instruments
designated as cash flow hedges are reclassified into earnings immediately.
Components of accumulated other
comprehensive income at year-end 2002 and 2001 follows: 9. Fair Value of
Financial Instruments and Derivative Instruments Fair value of financial
instruments The carrying amounts and estimated
fair values of financial instruments at year-end 2002 and 2001 follow (in
thousands): 2002 2001 Carrying Fair Carrying Fair Value Value Value Value
Cash and cash equivalents $ 473,246 $ 473,246 $ 171,444 $ 171,444 Debt securities 2,388,189 2,388,189 789,380 789,380 Equity securities 33,121 33,121 -- -- Policy loans 1,335 1,335 896 896 Financial assets $ 2,895,891 $ 2,895,891 $ 961,720 $ 961,720 Investment contracts $ 2,557,428 $ 2,627,078 $ 865,970 $ 866,465 Derivative financial instruments -- -- 514 514 Financial liabilities $ 2,557,428 $ 2,627,078 $ 866,484 $ 866,979 Derivative instruments 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. All derivative instruments are
recognized on the balance sheet at fair value. Generally, each derivative
is designated according to the associated exposure as either a fair value or
cash flow hedge at its inception as we do not enter into derivative contracts
for trading or speculative purposes. Cash flow hedges are generally
accounted for under the shortcut method with changes in the fair value of
related interest rate swaps recorded on the balance sheet with an offsetting
amount recorded in accumulated other comprehensive income. The effective
portion of changes in fair values of derivatives hedging the variability of cash
flows related to forecasted transactions are reported in accumulated other
comprehensive income and reclassified into earnings in the periods during which
earnings are affected by the variability of the cash flows of the hedged item.
FC-17 We
recognized an after-tax gain of $2.1 million for the year ended December 31,
2002 and an after tax loss of $0.3 million for the year ended December 31, 2001
(reported as other comprehensive income in Statements of Income, Comprehensive
Income and Changes in Stockholders Equity), which represented the change
in fair value of interest rate forward swaps which have been designated as cash
flow hedges of the forecasted purchase of assets. For changes in the fair
value of derivatives that are designated as cash flow hedges of a forecasted
transaction, we recognize the change in fair value of the derivative in other
comprehensive income. Amounts related to cash flow hedges that are
accumulated in other comprehensive income are reclassified into earnings in the
same period or periods during which the hedged forecasted transaction (the
acquired asset) affects earnings. At year-end 2002, we expect to
reclassify
into earnings over the next twelve months $0.3 million of the deferred after tax
gains on these derivative instruments. For the year 2001, we reclassified
an after-tax gain of $0.3 to net realized investment gains related to these same
derivatives. We held the following positions in
derivative instruments at year-end 2002 and 2001 at fair value (in thousands):
2002 2001 Notional Amount Maturity Asset Liability Asset Liability
Interest rate swaps $
50,000 2012 $
-- $
-- $
-- $
514 Total derivative instrument positions
$ 50,000
$ --
$ --
$ --
$ 514 We are exposed to credit risk in the
event of nonperformance by counterparties to these derivative instruments.
We do not expect that counterparties will fail to meet their financial
obligation as we only enter into derivative contracts with a number of highly
rated financial institutions. We did not have any credit exposure related
to these instruments at year-end 2002 and 2001, respectively. 10. Statutory
Financial Information and Regulatory Matters We are required
to file annual statements with state regulatory authorities prepared on an
accounting basis prescribed or permitted by such authorities. There were
no material practices not prescribed by the State of Connecticut Insurance
Department as of December 31, 2002, 2001 and 2000. Statutory surplus
differs from equity reported in accordance with GAAP for life insurance
companies primarily because policy acquisition costs are expensed when incurred,
investment reserves are based on different assumptions, postretirement benefit
costs are based on different assumptions and reflect a different method of
adoption, life insurance reserves are based on different assumptions and income
taxes are recorded in accordance with the Statement of Statutory Accounting
Principles No. 10, Income Taxes, which limits taxes based on
admissibility tests. The following reconciles our
statutory net income as reported to regulatory authorities to GAAP net income as
reported in these financial statements for the years ended December 31 (in
thousands): 2002 2001 2000
Statutory net income $ (146,135) $ (45,648) $ (40,129) DAC, net 110,587 81,588 23,845 Future policy benefits 1,488 (20,013) 19,615 Deferred income taxes (438) (22,136) (3,641) Net investment income 15,531 7,085 -- Realized gains 6,177 2,149 -- Other, net (466) 225 325 Net income (loss), as reported $ (13,256) $ 3,250 $ 15 FC-18 The
following reconciles our statutory surplus and asset valuation reserve
(AVR) as reported to regulatory authorities to GAAP equity as
reported in these financial statements for the years ended December 31, 2002,
2001 and 2000 (in thousands): 2002 2001 2000
Statutory surplus and AVR $ 215,806 $ 102,016 $ 41,847 DAC, net 295,000 166,836 85,247 Future policy benefits (42,616) (42,885) (29,336) Investment valuation allowances 20,715 1,597 459 Deferred income taxes (38,993) (28,756) (4,379) Deposit funds 23,167 5,073 -- Other, net (2,170) 245 350 Stockholders equity, as reported $ 470,909 $ 204,126 $ 94,188 The Connecticut Insurance Holding Act
limits the maximum amount of annual dividends or other distributions available
to stockholders of Connecticut domiciled insurance companies without prior
approval of the Insurance Commissioner. Under current law, the maximum dividend
distribution that may be made by us during 2002 without prior approval is
subject to restrictions relating to statutory surplus. In 1998, the National Association of
Insurance Commissioners (NAIC) adopted the Codification of Statutory Accounting
Principles guidance, which replaces the current Accounting and Practices and
Procedures manual as the NAICs primary guidance on statutory accounting as
of January 1, 2001. The Codification provides guidance for areas where
statutory accounting has been silent and changes current statutory accounting in
some areas (e.g., deferred income taxes are recorded). The State of Connecticut Insurance
Department adopted the Codification guidance, effective January 1, 2001.
The effect of adoption increased our statutory surplus by $587.8 thousand,
primarily as a result of recording deferred income taxes. FC-19
PHL Variable Insurance Company (a wholly-owned subsidiary of PM Holdings, Inc.) Financial Statements December 31, 2001 and 2000 FD-1 PHL Variable Insurance Company
(a wholly-owned subsidiary of PM Holdings, Inc.) Table of Contents
Page Report of Independent Auditors FD-3 Balance Sheets FD-4 Statements of Income, Comprehensive Income and Equity FD-5 Statements of Cash Flows FD-6 Notes to Financial Statements FD-7 - FD-23 FD-2 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and
Stockholder of PHL Variable Insurance Company In our opinion, the accompanying
balance sheets and the related statements of income, comprehensive income and
equity and cash flows present fairly, in all material respects, the financial
position of PHL Variable Insurance Company at December 31, 2001 and 2000, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Companys 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 auditing
standards generally accepted in the United States of America, which 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/ Pricewaterhouse Coopers LLP Hartford, Connecticut February 5, 2002 FD-3
PHL Variable Insurance Company (a wholly-owned
subsidiary of PM Holdings, Inc.) Balance Sheet As of December 31,
2001 2000 (in thousands, Assets: Investments:
Held-to-maturity debt securities, at amortized cost $ - $ 13,697
Available-for-sale debt securities, at fair value 786,266 144,217
Policy loans, at unpaid principal 896 710
Short-term investments, at amortized cost 3,114 -
Other invested assets 2,397 1,618
Total investments 792,673 160,242 Cash and cash equivalents 171,444 80,779 Accrued investment income 5,787 1,381 Deferred policy acquisition costs 164,987 84,842 Deferred and uncollected premiums 7,605 6,790 Other assets 22,491 1,942 Goodwill, net 247 349 Separate account assets 1,539,476 1,321,582
Total assets $ 2,704,710 $ 1,657,907 Liabilities:
Policyholder deposit funds $ 865,970 $ 195,393
Policy liabilities and accruals 47,131 24,062
Deferred income taxes 27,426 3,784
Other liabilities 25,712 18,898
Separate account liabilities 1,534,345 1,321,582
Total liabilities 2,500,584 1,563,719 Commitments and contingencies (Note
13) Equity:
Common stock, $5,000 par value (1,000
shares authorized, 500 shares issued and
outstanding) 2,500 2,500
Additional paid-in capital 184,864 79,864
Retained earnings 14,803 11,553
Accumulated other comprehensive income 1,959 271
Total equity 204,126 94,188
Total liabilities and
equity $ 2,704,710 $ 1,657,907 The accompanying notes
are an integral part of these statements. FD-4 PHL Variable Insurance Company
(a wholly-owned subsidiary of PM Holdings, Inc.) Statements of Income, Comprehensive Income and Equity For the Year Ended
December 31, 2001 2000 1999 (in thousands)
Revenues
Premiums $ 5,129 $ 6,168 $ 9,838
Insurance and investment product fees 32,379 30,098 20,618 Net
investment income 30,976 9,197 3,871 Net
realized investment (losses) gains (1,196) 116 27
Total revenues 67,288 45,579 34,354 Benefits and expenses
Policy benefits and increase in policy liabilities 39,717 17,056 9,248
Amortization of deferred policy acquisition costs 8,477 15,765 4,747
Other operating expenses 15,305 14,006 11,130
Total benefits and
expenses 63,499 46,827 25,125 Income (loss) before income taxes 3,789 (1,248) 9,229 Income tax expense (benefit) 539 (1,263) 3,230 Net income 3,250 15 5,999 Other comprehensive income (loss),
net of income taxes
Unrealized gain on security transfer from
held-to-maturity to available-for-sale 359 - -
Unrealized gains (losses) on securities 2,155 1,002 (915)
Unrealized losses on derivatives (334) - -
Reclassification adjustment for net realized
gains included in net income (492) (18) (5)
Total other comprehensive
income (loss) 1,688 984 (920) Comprehensive income 4,938 999 5,079 Capital contributions 105,000 15,000 29,000 Net increase in equity 109,938 15,999 34,079 Equity, beginning of year 94,188 78,189 44,110 Equity, end of year $ 204,126 $ 94,188 $ 78,189 The
accompanying notes are an integral part of these statements. FD-5 PHL Variable Insurance Company
(a wholly-owned subsidiary of PM Holdings, Inc.) Statements of Cash Flows
For the Year Ended
December 31, 2001 2000 1999 (in thousands)
Cash flows from operating
activities: Net income $ 3,250 $ 15 $ 5,999 Adjustments to reconcile net
income
to net cash used for operating activities: Net realized investment losses
(gains) 1,196 (116) (27) Amortization of goodwill 102 102 102 Deferred income taxes 22,733 3,045 2,883 Increase in accrued investment income
(4,406) (595) (275) Increase in deferred policy
acquisition costs (81,588) (23,845) (23,807) Change in other assets/liabilities
(540) 19,447 8,856 Net cash used for operating
activities (59,253) (1,947) (6,269) Cash flows from investing
activities: Proceeds from sales:
Available-for-sale debt securities 34,165 1,513 5,974 Proceeds from maturities:
Available-for-sale debt securities 7,400 500 5,550
Held-to-maturity debt securities - 1,200 - Proceeds from repayments:
Available-for-sale debt securities 95,307 23,123 140
Held-to-maturity debt securities 3,963 3,175 623 Purchase of available-for-sale debt
securities (740,143) (110,700) (33,397) Purchase of held-to-maturity debt
securities (22,272) (7,683) (7,000) Increase in policy loans (186) (188) (273) Change in short-term investments, net
(3,114) - - Change in other invested assets (779) (517) - Other, net - - (68) Net cash used for investing
activities (625,659) (89,577) (28,451) Cash flows from financing
activities: Capital contributions from parent 105,000 15,000 29,000 Increase in policyholder deposit
funds, net of interest credited 670,577 131,163 24,540 Net cash provided by financing
activities 775,577 146,163 53,540 Net change in cash and cash
equivalents 90,665 54,639 18,820 Cash and cash equivalents, beginning
of year 80,779 26,140 7,320 Cash and cash equivalents, end of
year $ 171,444 $ 80,779 $ 26,140 Supplemental cash flow
information: Income taxes (received) paid, net
$ (5,357) $ (2,660) $ 3,338 The accompanying notes
are an integral part of these statements. FD-6 PHL Variable Insurance Company
(a wholly-owned subsidiary of PM Holdings, Inc.) Notes to Financial Statements
1.
Description of Business PHL Variable Insurance Company (PHL Variable) offers variable, fixed annuity and non-participating life insurance products in the United States of America. PHL Variable is a wholly-owned subsidiary of PM Holdings, Inc. (PM Holdings). PM Holdings is a wholly-owned subsidiary of Phoenix Life Insurance Company (PLIC) (formerly, Phoenix Home Life Mutual Insurance Company). PLIC is a wholly-owned subsidiary of The Phoenix Companies, Inc., a publicly traded company (Phoenix). On June 25, 2001 Phoenix Home Life Mutual Insurance Company converted from a mutual life insurance company to a stock life insurance company and changed its name to PLIC. 2.
Summary of Significant Accounting Policies Basis of Presentation These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates used in determining insurance and contractholder liabilities, related reinsurance recoverables, income taxes and valuation allowances for investment assets are discussed throughout the Notes to Financial Statements. Certain reclassifications have been made to the 1999 and 2000 amounts to conform with the 2001 presentation. Valuation of investments Investments in debt securities include bonds, mortgage-backed and asset-backed securities. PHL Variable classified its debt securities as either held-to-maturity or available-for-sale investments. Prior to 2001, debt securities held-to-maturity consisted of private placement bonds reported at amortized cost, net of impairments, that management intended and had the ability to hold until maturity. Debt securities available-for-sale are reported at fair value with unrealized gains or losses included in equity and consist of public bonds that management may not hold until maturity. Debt securities are considered impaired when a decline in value is considered to be other than temporary. In 2001, management decided, as part of Phoenixs conversion to a public company, that held-to-maturity securities should be reclassified to available-for-sale debt securities. See Note 3 Investments. For the mortgage-backed and asset-backed bond portion of the debt security portfolio, PHL Variable recognizes income using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date and anticipated future payments, and any resulting adjustment is included in net investment income. Policy loans are generally carried at their unpaid principal balances and are collateralized by the cash values of the related contracts. FD-7 PHL Variable Insurance Company
(a wholly-owned subsidiary of PM Holdings, Inc.) Notes to Financial Statements Short-term
investments are carried at amortized cost which approximates fair value.
Short-term investments consist of interest bearing securities that mature
between 91 days and twelve months from date of purchase.
Other invested
assets consist of PHL Variables interest in the separate accounts and
derivatives. Separate account assets are valued at fair value. Derivatives
are valued in accordance with Financial Accounting Standards No. 133. See
recent accounting pronouncements within Note 2.
Realized
investment gains and losses, other than those related to separate accounts for
which PHL Variable does not bear the investment risk, are determined by the
specific identification method and reported as a component of revenue. A
realized investment loss is recorded when an investment valuation reserve is
determined. Valuation reserves are netted against the asset categories to
which they apply and changes in the valuation reserves are included in realized
investment gains and losses. Unrealized investment gains and losses on
debt securities classified as available-for-sale are included as a component of
equity, net of deferred income taxes and the assumed impact of net unrealized
investment gains and losses on the amortization of deferred policy acquisition
costs related to investment contracts. Cash and cash equivalents Cash and cash equivalents include cash on hand and all highly liquid investments with a maturity of 90 days or less when purchased. Certain short-term investments relating to 1999 and 2000 have been reclassified to conform with the 2001 presentation. Deferred policy acquisition costs The costs of
acquiring new business, principally commissions, underwriting, distribution and
policy issue expenses, all of which vary with and are primarily related to the
production of new business, are deferred. Deferred policy acquisition
costs (DAC) are subject to recoverability testing at the time of
policy issue and loss recognition at the end of each accounting period. For universal
life insurance policies and investment type contracts, DAC is amortized in
proportion to historical and estimates of expected gross profits. Gross
profits arise primarily from investment, mortality and expense margins, and
surrender charges based on historical and anticipated experience. These
estimates of expected gross profits are evaluated regularly, and the total
amortization recorded to date is adjusted by a charge or credit to income if
actual experience or other evidence suggest that earlier estimates should be
revised. In addition, analyses are performed periodically to assess whether
there are sufficient estimated future gross profits to support the
recoverability of the remaining DAC balances. Goodwill Goodwill represents the excess of the cost of business acquired over the fair value of net assets. These costs are amortized on a straight-line basis over a period of 10 years, corresponding with the benefits expected to be derived from the acquisition. The propriety of the carrying value of goodwill is periodically reevaluated in accordance with Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-lived Assets and Long-lived Assets to be Disposed Of, by comparing estimates of future undiscounted cash flows to the carrying value of the assets. Assets are considered impaired if the carrying value exceeds the expected future undiscounted cash flows. Analyses are performed at least annually or more frequently if warranted by events and circumstances affecting PHL Variables business. See SFAS No. 142 under recent accounting
pronouncements for change in accounting policy effective January 1, 2002.
FD-8 PHL Variable Insurance Company
(a wholly-owned subsidiary of PM Holdings, Inc.) Notes to Financial Statements Separate accounts Separate account assets and liabilities are funds maintained in accounts to meet specific investment objectives of contractholders who can either choose to bear the full investment risk or can choose guaranteed investment earnings subject to certain conditions. For contractholders who bear the investment risk, investment income and investment gains and losses accrue directly to such contractholders. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of PHL Variable. The assets and liabilities are carried at fair value. 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. Amounts assessed to the contractholders for management services are included in revenues. For Market Value Adjusted separate accounts, contractholders are credited interest at a guaranteed rate if the account is held until the end of the guarantee period. If funds are withdrawn from the account prior to the end of the guarantee period, a market value adjustment is applied, which means that the funds received may be higher or lower than the account value, depending on whether current interest rates are higher, lower or equal to the guaranteed interest rate. In these separate accounts, realized appreciation or depreciation of assets, undistributed net investment income and investment or other sundry expenses are reflected as net income. Unrealized investment gains and losses in these separate accounts are included as a component of equity, net of deferred income taxes. Policy liabilities and accruals Future policy benefits are liabilities for life products. Such liabilities are established in amounts adequate to meet the estimated future obligations of policies in force. Liabilities for universal life policies include deposits received from customers and investment earnings on their fund balances, which range from 5.5% to 6.5%, less administrative and mortality charges in 2001. Liabilities for outstanding claims, losses and loss adjustment expenses are amounts estimated to cover incurred losses. These liabilities are based on individual case estimates for reported losses and estimates of unreported losses based on past experience. Policyholder deposit funds Policyholder deposit funds consist of annuity deposits received from customers and investment earnings on their fund balances, which range from 3.0% to 12.0%, less administrative charges in 2001. Premium and fee revenue and related expenses Term life insurance premiums are recorded as premium revenue pro-rata over the related contract periods. Benefits, losses and related expenses are matched with premiums over the related contract periods. Revenues for investment-related products, included in insurance and investment product fees, consist of net investment income and contract charges assessed against the fund values. Related benefit expenses primarily consist of net investment income credited to the fund values after deduction for investment and risk charges. Revenues for universal life products consist of net investment income and mortality, administration and surrender charges assessed against the fund values during the period. Related benefit expenses include universal life benefit claims in excess of fund values and net investment income credited to universal life fund values. FD-9 PHL Variable Insurance Company
(a wholly-owned subsidiary of PM Holdings, Inc.) Notes to Financial Statements Reinsurance PHL Variable
utilizes reinsurance agreements to provide for greater diversification of
business, allow management to control exposure to potential losses arising from
large risks and provide additional capacity for growth. Assets and
liabilities related to reinsurance ceded contracts are reported on a gross
basis. The cost of reinsurance related to long-duration contracts is
accounted for over the life of the underlying reinsured policies using
assumptions consistent with those used to account for the underlying policies.
Income taxes For the tax year ended December 31, 2001, PHL Variable is included in the life/non-life consolidated federal income tax return filed by Phoenix. PHL Variable had filed separate company returns for the tax years ended December 31, 1996 through December 31, 2000 as required under Internal Revenue Code Section 1504(c). In accordance with an income tax sharing agreement with Phoenix, the provision for federal income taxes is computed as if PHL Variable were filing a separate federal income tax return, except that benefits arising from income tax credits and net operating and capital losses are allocated to those subsidiaries producing such attributes to the extent they are utilized in Phoenixs consolidated federal income tax return. Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their recorded amounts for financial reporting purposes.
These differences result primarily from policy liabilities and accruals,
policy acquisition costs and unrealized gains or losses on investments. Employee benefit plans Phoenix has a
non-contributory, defined benefit pension plan covering substantially all of its
employees. Retirement benefits are a function of both years of service and
level of compensation. Phoenix also sponsors a non-qualified supplemental
defined benefit plan to provide benefits in excess of amounts allowed pursuant
to the Internal Revenue Code. Phoenixs funding policy is to
contribute annually an amount equal to at least the minimum required
contribution in accordance with minimum funding standards established by the
Employee Retirement Income Security Act of 1974 (ERISA).
Contributions are intended to provide not only for benefits attributable
to service to date, but also for service expected to be earned in the future.
Phoenix sponsors
pension and savings plans for its employees and agents, and those of its
subsidiaries. The qualified plans comply with requirements established by
the ERISA and excess benefit plans provide for that portion of pension
obligations which is in excess of amounts permitted by ERISA. Phoenix also
provides certain health care and life insurance benefits for active and retired
employees. PHL Variable incurs applicable employee benefit expenses
through the process of cost allocation by Phoenix. In addition to
Phoenixs pension plans, Phoenix currently provides certain health care and
life insurance benefits to retired employees, spouses and other eligible
dependents through various plans sponsored by Phoenix. A substantial
portion of Phoenixs employees may become eligible for these benefits upon
retirement. The health care plans have varying co-payments and
deductibles, depending on the plan. These plans are unfunded. Applicable
information regarding the actuarial present value of vested and non-vested
accumulated plan benefits, and the net assets of the
plans available for benefits is omitted, as the information is FD-10 PHL Variable Insurance Company
(a wholly-owned subsidiary of PM Holdings, Inc.) Notes to Financial Statements not separately
calculated for PHL Variables participation in the plans. The amount
of such allocated benefits is not significant to the financial statements.
With respect to the pension plan, the total assets of the plan
exceeded the actuarial present value of vested benefits at January 1, 2001, the
date of the most recent actuarial valuation. The other postretirement
benefit plans were unfunded as of December 31, 2001, and in accordance with the
SFAS No. 106, Employers Accounting for Postretirement
Benefits, Phoenix, the plan sponsor, established an accrued liability and
amounts attributable to PHL Variable have been allocated. Recent accounting pronouncements Securitized
Financial Instruments. Effective April 1, 2001, Phoenix adopted
Emerging Issues Task Force Issue No. 99-20, Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets (EITF 99-20). This pronouncement requires
investors in certain asset-backed securities to record changes in their
estimated yield on a prospective basis and to apply specific valuation methods
to these securities to determine if there has been an other-than-temporary
decline in value. PHL Variable had no change in net income as a result of this
accounting change. Derivative
Financial Instruments. Effective January 1, 2001, Phoenix adopted
Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS
133), as amended by SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities (SFAS 138). As
amended, SFAS 133 requires all derivatives to be recognized on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair
value through earnings. PHL Variable
maintains an overall interest rate risk-management strategy that incorporates
the use of derivative financial instruments to manage exposure to fluctuations
in interest rates. PHL Variables exposure to interest rate changes
primarily results from its commitments to fund interest-sensitive insurance
liabilities, as well as from significant holdings of fixed rate investments.
PHL Variable uses interest rate swap agreements as part of its interest
rate risk-management strategy. To reduce counterparty credit risks and
diversify counterparty exposure, PHL Variable enters into derivative contracts
only with a number of highly rated financial institutions. PHL Variable
enters into interest rate swap agreements to reduce market risks from changes in
interest rates. PHL Variable does not enter into interest rate swap
agreements for trading purposes. Under interest rate swap agreements, PHL
Variable exchanges 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 a variable rate that
periodically resets. Generally, no premium is paid to enter into the
contract and neither party makes a payment of principal. The amounts to be
received or paid on these swap agreements are accrued and recognized in net
investment income. PHL Variable also
recognized an after-tax loss of $0.3 million for the year ended December 31,
2001 (reported as other comprehensive income in Statements of Income,
Comprehensive Income and Equity), which represented the change in fair value of
interest rate forward swaps which have been designated as cash flow hedges of
the forecasted purchase of assets. For changes in the fair value of
derivatives that are designated as cash flow hedges of a forecasted transaction,
PHL Variable recognizes the change in fair value of the derivative in other
comprehensive income. Amounts related to cash flow hedges that are
accumulated in other comprehensive income are reclassified as earnings in the
same period or periods during which the hedged forecasted transaction (the
acquired FD-11 PHL Variable Insurance Company
(a wholly-owned subsidiary of PM Holdings, Inc.) Notes to Financial Statements asset) affects
earnings. For the year ended December 31, 2001, PHL Variable also
recognized an after-tax gain of $0.3 million (reported as net realized
investment gains in the Statements of Income, Comprehensive Income and Equity),
which resulted from the termination of interest rate swap contracts designated
as hedges of a forecasted transaction. The interest rate swap contracts
were determined to no longer be effective hedges. In certain
instances, derivative contracts are terminated prior to maturity. These
contracts include, but are not limited to, interest rate and foreign currency
swaps, cap and floor contracts, and payor and receiver swaptions. To the
extent that derivative contracts determined to be effective hedges are
terminated, realized gains and losses are deferred and amortized.
Derivatives associated with hedged items that either no longer exist or
are no longer expected to occur are accounted for as of the relevant change in
status of the hedged items, with gains or losses on such contracts recognized
immediately in net income. Similarly, for derivatives otherwise determined
to no longer be effective hedges, gains or losses as of termination are
recognized immediately in net income. Business
Combinations/Goodwill and Other Intangible Assets. In June 2001, SFAS
No. 141, Business Combinations (SFAS 141), and SFAS No. 142,
Goodwill and Other Intangible Assets (SFAS 142), were issued. SFAS
141 and SFAS 142 are effective for July 1, 2001 and January 1, 2002,
respectively. SFAS 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001 and separate
recognition of intangible assets apart from goodwill if such intangible assets
meet certain criteria. SFAS 141 also requires that upon adoption of SFAS
142 a company reclassify the carrying amounts of certain intangible assets into
or out of goodwill, based on certain criteria. SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
initial recognition. Under SFAS 142, amortization of goodwill, including
goodwill and
other intangible assets with indefinite lives recorded in past business
combinations, will discontinue upon adoption of this standard, and reporting
units must be identified for the purpose of assessing potential future
impairments of goodwill. PHL Variable recognized $102 thousand in goodwill
amortization during 2001. The provisions of
the SFAS 141 and SFAS 142 also apply to equity-method investments made both
before and after June 30, 2001. SFAS 142 prohibits amortization of the
excess of cost over the underlying equity in the net assets of an equity-method
investee that is recognized as goodwill. SFAS 142 requires
that goodwill be tested at least annually for impairment using a two-step
process. The first step is to identify a potential impairment and, in the year
of adoption, this step must be measured as of the beginning of the fiscal year.
The second step of the goodwill impairment test measures the amount of the
impairment loss (measured as of the beginning of the year of adoption), if any,
and must be completed by the end of a companys fiscal year in the year of
adoption. Intangible assets deemed to have an indefinite life will be
tested for impairment using a one-step process which compares the fair value to
the carrying amount of the asset as of the beginning of the fiscal year in the
year of adoption. PHL Variable has prepared a preliminary analysis of the
adoption of SFAS 142, and does not expect to have an impairment charge in 2002.
FD-12 PHL Variable Insurance Company
(a wholly-owned subsidiary of PM Holdings, Inc.) Notes to Financial Statements 3.
Investments Information pertaining to PHL Variables investments, net investment income and realized and unrealized investment gains and losses follows: Debt securities The amortized
cost and fair value of investments in debt securities as of December 31, 2001
were as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (in thousands)
Available-for-sale:
U.S. government and agency bonds $
6,379 $
458 $
- $
6,837
State and political subdivision bonds 37,039 513 (498) 37,054
Corporate securities 181,355 2,669 (1,789) 182,235
Mortgage-backed and
asset-backed securities 558,375 4,316 (2,551) 560,140
Total $
783,148 $
7,956 $
(4,838) $
786,266 The amortized
cost and fair value of investments in debt securities as of December 31, 2000
were as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (in thousands)
Held-to-maturity:
State and political subdivision bonds $
1,860 $
236 $
- $
2,096
Corporate securities 11,837 621 (43) 12,415
Total $
13,697 $
857 $
(43) $
14,511
Available-for-sale:
U.S. government and agency bonds $
6,468 $
366 $
(12) $
6,822
State and political subdivision bonds 10,339 22 (78) 10,283
Corporate securities 25,616 165 (880) 24,901
Mortgage-backed and
asset-backed securities 100,974 1,267 (30) 102,211
Total $
143,397 $
1,820 $
(1,000) $
144,217
FD-13 PHL Variable Insurance Company
(a wholly-owned subsidiary of PM Holdings, Inc.) Notes to Financial Statements The amortized
cost and fair value of debt securities, by contractual sinking fund payment and
maturity, as of December 31, 2001 are shown below. Actual maturity may
differ from contractual maturity because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties, or PHL Variable
may have the right to put or sell the obligations back to the issuers. Available-for-sale Amortized Fair Cost Value (in thousands)
Due in one year or less $
14,845 $
15,048
Due after one year through five years 167,536 167,922
Due after five years through ten years 33,843 34,832
Due after ten years 8,549 8,324
Mortgage-backed and asset-backed securities 558,375 560,140
Total $
783,148 $
786,266 Net investment
income The components of
net investment income for the year ended December 31, were as follows: 2001 2000 1999 (in thousands)
Debt securities $
28,410 $
7,254 $
3,362
Policy loans 15 12 7
Cash, cash equivalents and short-term investments 2,871 2,049 561
Sub-total 31,296 9,315 3,930
Less: investment expenses 320 118 59
Total net investment income $
30,976 $
9,197 $
3,871 Investment
gains and losses Net unrealized
gains (losses) on securities available-for-sale and carried at fair value for
the year ended December 31, were as follows: 2001 2000 1999 (in thousands)
Debt securities $
2,297 $
2,652 $
(2,399)
DAC (1,443) (1,139) 983
Deferred income tax expense (benefit) 299 529 (496)
Net unrealized investment gains (losses)
on securities available-for-sale $
555 $
984 $
(920) FD-14 PHL Variable Insurance Company
(a wholly-owned subsidiary of PM Holdings, Inc.) Notes to Financial Statements The amortized cost of debt securities transferred from held-to-maturity to available-for-sale in 2001 was $32.0 million, which resulted in an unrealized gain of $0.4 million after-tax. Net realized (losses) gains for the year ended December 31, were as follows: 2001 2000 1999 (in thousands)
Debt securities $
215 $
67 $
7 Cash, cash equivalents and short-term investments (3) - - Other invested assets (1,408) 49 20
Net realized investment (losses) gains
on
securities available-for-sale $
(1,196) $
116 $
27 The proceeds from
sales of available-for-sale debt securities for the years ended December 31,
were as follows: 2001 2000 1999 (in thousands)
Proceeds from disposals $
34,165 $
1,513 $
5,974 Gross realized gains on sales $
215 $
21 $
7 4.
Goodwill
PHL Variable was acquired by way of a stock purchase agreement on May 31, 1994 and was accounted for under the purchase method of accounting. The assets and liabilities were recorded at fair value as of the date of acquisition and the goodwill of $1.0 million was pushed down to PHL Variable from PM Holdings. Goodwill was as follows: December 31, 2001 2000 (in thousands)
Goodwill
$ 1,020
$ 1,020 Accumulated amortization (773) (671)
Total goodwill, net
$ 247
$ 349 FD-15
PHL Variable Insurance Company
(a wholly-owned subsidiary of PM Holdings, Inc.) Notes to Financial Statements 5.
Derivative
Instruments Derivative instruments as of December 31, are summarized below: 2001 (dollars in thousands) Asset hedges
Interest rate swap:
Notional
amounts $
50,000
Weighted
average received rate 5.72%
Weighted
average paid rate 1.86%
Fair value $
(514) 6.
Income Taxes
A summary of income tax expense (benefit) applicable to income before income taxes for the year ended December 31, was as follows: 2001 2000 1999 Income taxes: (in thousands)
Current $
(22,194) $
(4,308) $
347
Deferred 22,733 3,045 2,883 Total $
539 $
(1,263) $
3,230 The income taxes attributable to the results of operations are different than the amounts determined by multiplying income before taxes by the statutory income tax rate. The sources of the difference and the income tax effects of each for the year ended December 31, were as follows: 2001 2000 1999 (dollars in thousands) Income tax expense (benefit) at
statutory rate
$
1,326 35% $
(437) 35% $
3,230 35% Dividend received deduction and
tax-exempt
interest (812) (21)% (853) 68% (1) -% Other, net 25 1% 27 (2)% 1 -% Income tax expense (benefit) $
539 15% $
(1,263) 101% $
3,230 35% FD-16 PHL Variable Insurance Company
(a wholly-owned subsidiary of PM Holdings, Inc.) Notes to Financial Statements The net deferred income tax liability represents the income tax effects of temporary differences. The components as of December 31, were as follows: 2001 2000 (in thousands)
DAC $
47,150 $
25,084 Surrender charges (20,034) (14,715) Unearned premium/deferred revenue (806) (296) Investments (1,229) 93 Future policyholder benefits 684 2,033 Net operating loss carryforward - (8,373) Other 607 (187) 26,372 3,639 Net unrealized investment gains 1,054 145
Deferred income tax liability, net $
27,426 $
3,784 Gross deferred income tax assets totaled $22.1 million and $23.6 million at December 31, 2001 and 2000, respectively. Gross deferred income tax liabilities totaled $49.5 million and $27.4 million at December 31, 2001 and 2000, respectively. It is managements assessment, based on PHL Variables earnings and projected future taxable income, that it is more likely than not that the deferred income tax assets at December 31, 2001 and 2000, will be realized. PHL Variables income tax return is not currently being examined; however, income tax years 1998 through 2000 remain open for examination. Management does not believe that there will be a material adverse effect on the financial statements as a result of pending income tax examinations. FD-17 PHL Variable Insurance Company
(a wholly-owned subsidiary of PM Holdings, Inc.) Notes to Financial Statements 7.
Comprehensive
Income The components of, and related income tax effects for, other comprehensive income (loss) for the year ended December 31, were as follows: 2001 2000 1999 (in thousands) Unrealized gains (losses) on securities
available-for-sale:
Before-tax amount $
3,316 $
1,540 $
(1,409) Income tax expense (benefit) 1,161 538 (494) Total 2,155 1,002 (915)
Reclassification adjustment for net gains
realized in
net income:
Before-tax amount (757) (27) (7) Income tax benefit (265) (9) (2) Total (492) (18) (5)
Net unrealized gains (losses) on securities
available-for-sale:
Before-tax amount 2,559 1,513 (1,416) Income tax expense (benefit) 896 529 (496) Total $
1,663 $
984 $
(920)
Unrealized gains on security transfer from
held-to-maturity to available-for-sale:
Before-tax amount $
552 $
- $
- Income tax expense 193 - - Total $
359 $
- $
-
Unrealized losses on derivatives:
Before-tax amount $
(514) $
- $
- Income tax benefit (180) - - Total $
(334) $
- $
- FD-18 PHL Variable Insurance Company
(a wholly-owned subsidiary of PM Holdings, Inc.) Notes to Financial Statements The following table summarizes accumulated other comprehensive income (loss) balances: December 31, 2001 2000 (in thousands)
Accumulated other comprehensive income (loss)
on securities
available-for-sale:
Balance, beginning of year $
271 $
(713) Change during period 1,688 984 Balance, end of year $
1,959 $
271 8.
Reinsurance
PHL Variable cedes reinsurance as a means of diversifying underwriting risk. To the extent that reinsuring companies may not be able to meet their obligations under reinsurance agreements in effect, PHL Variable remains liable. PHL Variable entered into a reinsurance treaty on January 1, 1996 to cover death benefits in excess of account balances on variable contracts. The treaty stopped accepting new business on December 31, 1999. Another reinsurance treaty became effective January 1, 1999 which covered products introduced in 1999. Premiums paid by PHL Variable on the reinsurance contracts were $1,555 thousand, $1,185 thousand and $1,114 thousand, less claims of $1,971 thousand, $188 thousand and $22 thousand for the years ended December 31, 2001, 2000 and 1999, respectively. In connection with PHL Variables life insurance products, automatic treaties have been established with a number of reinsurers and their subsidiaries, covering either 80% or 90% of the net amount at risk, depending on the individual treaty, on a first dollar basis. PHL Variable had approximately $1.2 billion of net insurance in force, including $10.2 billion of direct in force less $9.0 billion of reinsurance ceded as of December 31, 2001. PHL Variable had approximately $1.0 billion of net insurance in force, including $9.7 billion of direct in force less $8.7 billion of reinsurance ceded as of December 31, 2000. Reinsurance recoverables as of December 31, 2001 and 2000 were $1.8 million and $1.3 million, respectively. Approximately $4.3 million and $5.6 million of claims were recovered in 2001 and 2000. For PHL Variables life insurance products, a stop loss treaty between Phoenix and PHL Variable was introduced in 1998. There were no reinsurance recoverables as of December 31, 2001 and 2000. There were no claims recovered as of December 31, 2001 and 2000. 9.
Related Party
Transactions Phoenix provides services and facilities to PHL Variable and is reimbursed through a cost allocation process. The expenses allocated to PHL Variable were $47.0 million, $34.3 million and $22.0 million for the years ended December 31, 2001, 2000 and 1999, respectively. Amounts payable to Phoenix were $4.9 million and $15.8 million as of December 31, 2001 and 2000, respectively. Phoenix Investment Partners Ltd., an indirect wholly-owned subsidiary of Phoenix, through its affiliated registered investment advisors, provides investment services to PHL Variable for a fee. Investment advisory fees incurred by PHL Variable were $2.3 million, $2.1 million and $2.2 million for the years ended December 31, 2001, 2000 and 1999, respectively. Amounts payable to the affiliated FD-19 PHL Variable Insurance Company
(a wholly-owned subsidiary of PM Holdings, Inc.) Notes to Financial Statements investment advisors were $39 thousand and $19 thousand, as of December 31, 2001 and 2000, respectively. Phoenix Equity
Planning Corporation (PEPCO), a wholly-owned subsidiary of Phoenix
Investment Partners, is the principal underwriter of PHL Variables annuity
contracts. Contracts may be purchased through registered representatives
of a Phoenix affiliate, W.S. Griffith & Co., Inc., as well as other outside
broker dealers who are licensed to sell PHL Variable annuity contracts.
PHL Variable incurred commissions for contracts underwritten by PEPCO of
$32.4 million, $20.0 million and $9.8 million for the years ended December 31,
2001, 2000 and 1999, respectively. Amounts payable to PEPCO were $1.2
million and $2.4 million, as of December 31, 2001 and 2000, respectively. Phoenix pays
commissions to producers who sell non-registered life and annuity products
offered by PHL Variable. Commissions paid by Phoenix on behalf of PHL Variable
were $9.2 million, $8.5 million and $6.0 million for the years ended December
31, 2001, 2000 and 1999, respectively. Amounts payable to Phoenix were $1.3
million and $0.3 million as of December 31, 2001 and 2000, respectively. WS Griffith
Associates, Inc., an indirect wholly-owned subsidiary of Phoenix, sells and
services various PHL Variable non-participating life insurance products through
its insurance agents. Concessions paid to PHL Associates were $0.7
million, $2.6 million and $2.6 million for the years ended December 31, 2001,
2000 and 1999, respectively. Amounts payable to PHL Associates were $162
thousand and $41 thousand, as of December 31, 2001 and 2000, respectively. 10.
Deferred Policy
Acquisition Costs The following reflects the amount of policy acquisition costs deferred and amortized for the year ended December 31: 2001 2000 (in thousands)
Balance at beginning of year $
84,842 $
62,136 Acquisition cost deferred 90,065 39,610 Amortized to expense during the year (8,477) (15,765) Adjustment to net unrealized investment
losses
included in other
comprehensive
income (1,443) (1,139)
Balance at end of year $
164,987 $
84,842 11.
Fair Value
Disclosures of Financial Instruments Other than debt securities being held-to-maturity, financial instruments that are subject to fair value disclosure requirements (insurance contracts are excluded) are carried in the financial statements at amounts that approximate fair value. The fair values presented for certain financial instruments are estimates which, in many cases, may differ significantly from the amounts which could be realized upon immediate liquidation. In cases where market prices are not available, estimates of fair value are based on discounted cash flow analyses which utilize current interest rates for similar financial instruments which have comparable terms and credit quality. FD-20 PHL Variable Insurance Company
(a wholly-owned subsidiary of PM Holdings, Inc.) Notes to Financial Statements The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and cash
equivalents The carrying value of cash and cash equivalents approximates fair value. Short-term
investments The carrying value of short-term investments approximates fair value. Debt
securities Fair values are based on quoted market prices, where available, or quoted market prices of comparable instruments. Fair values of private placement debt securities are estimated using discounted cash flows that reflect interest rates currently being offered with similar terms to borrowers of similar credit quality. Derivative
instruments PHL Variables derivative instruments include interest rate swaps. Fair values for these contracts are based on current settlement values. These values are based on brokerage quotes that utilize pricing models or formulas based upon current assumptions for the respective agreements. Policy loans
Fair values are estimated as the present value of loan interest and policy loan repayments discounted at the ten year Treasury rate. Loan repayments were assumed only to occur as a result of anticipated policy lapses, and it was assumed that annual policy loan interest payments were made at the guaranteed loan rate less 17.5 basis points. Discounting was at the ten year Treasury rate, except for policy loans with a variable policy loan rate. Variable policy loans have an interest rate that is periodically reset based upon market rates and, therefore, book value is a reasonable approximation of fair value. Investment
contracts The fair value of deferred accumulation annuities without life contingencies with a guarantee of one year or less than one year is valued at the amount of the policy reserve. In determining the fair value of the contracts with interest guarantees greater than one year, a discount rate equal to the appropriate Treasury rate plus 150 basis points was used to determine the present value of the projected account value of the policy at the end of the guarantee period. FD-21 PHL Variable Insurance Company
(a wholly-owned subsidiary of PM Holdings, Inc.) Notes to Financial Statements Fair value summary The estimated fair values of the financial instruments as of December 31 were as follows: 2001 2000 Carrying Fair Carrying Fair Value Value Value Value (in thousands) Financial assets: Cash and cash equivalents $
171,444 $
171,444 $
80,779 $
80,779 Short-term investments 3,114 3,114 - - Debt securities 786,266 786,266 157,914 158,728 Derivative instruments (514) (514) - - Policy loans 896 896 710 710 Total financial assets $
961,206 $
961,206 $
239,403 $
240,217 Financial liabilities:
Investment contracts $
865,970 $
866,465 $
195,393 $
195,393 Total financial liabilities $
865,970 $
866,465 $
195,393 $
195,393 12.
Statutory
Financial Information The insurance subsidiaries of Phoenix are required to file annual statements with state regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities. There were no material practices not prescribed by the State of Connecticut Insurance Department as of December 31, 2001, 2000 and 1999. Statutory surplus differs from equity reported in accordance with GAAP for life insurance companies primarily because policy acquisition costs are expensed when incurred, investment reserves are based on different assumptions, postretirement benefit costs are based on different assumptions and reflect a different method of adoption, life insurance reserves are based on different assumptions and income taxes are recorded in accordance with the Statement of Statutory Accounting Principles No. 10, Income Taxes, which limits taxes based on admissibility tests. The following reconciles the statutory net income of PHL Variable as reported to regulatory authorities to the net income as reported in these financial statements for the year ended December 31: 2001 2000 1999 (in thousands)
Statutory net income $
(45,648) $
(40,129) $
(1,655) DAC, net 81,589 23,845 24,466 Future policy benefits (20,013) 19,615 (13,826) Deferred income taxes (22,136) (3,641) (2,883) Net investment income 7,085 - - Realized gains 2,149 - - Other, net 224 325 (103)
Net income, as reported $
3,250 $
15 $
5,999 FD-22 PHL Variable Insurance Company
(a wholly-owned subsidiary of PM Holdings, Inc.) Notes to Financial Statements The following reconciles the statutory surplus and asset valuation reserve (AVR) of PHL Variable as reported to regulatory authorities to equity as reported in these financial statements as of December 31: 2001 2000 (in thousands)
Statutory surplus and AVR $
102,016 $
41,847 DAC, net 166,836 85,247 Future policy benefits (42,885) (29,336) Investment valuation allowances 1,597 459 Deferred income taxes (28,756) (4,379) Other, net 5,318 350
Equity, as reported $
204,126 $
94,188 The Connecticut Insurance Holding Act limits the maximum amount of annual dividends or other distributions available to stockholders of Connecticut domiciled insurance companies without prior approval of the Insurance Commissioner. Under current law, the maximum dividend distribution that may be made by PHL Variable during 2001 without prior approval is subject to restrictions relating to statutory surplus. In 1998, the National Association of Insurance Commissioners (NAIC) adopted the Codification of Statutory Accounting Principles guidance, which replaces the current Accounting and Practices and Procedures manual as the NAICs primary guidance on statutory accounting as of January 1, 2001. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas, e.g., deferred income taxes are recorded. The State of Connecticut Insurance Department has adopted the Codification guidance, effective January 1, 2001. The effect of adoption increased PHL Variables statutory surplus by $587.8 thousand, primarily as a result of recording deferred income taxes. 13.
Commitments and
Contingencies In the normal course of its business operations, PHL Variable is involved with litigation from time to time with claimants, beneficiaries and others, and a number of litigation matters were pending as of December 31, 2001. It is the opinion of management, after consultation with counsel, that the ultimate liability with respect to these claims, if any, will not materially affect the financial position or results of operations of PHL Variable. FD-23 Following
is summarized financial data for the quarters ended December 31, 2001 through
December 31, 2005:
Selected Unaudited Quarterly Financial Data: As of
($ in thousands) Mar 31, June 30, Sept 30, Dec 31,
Balance Sheet Data 2005
ASSETS
Available-for-sale debt securities, at fair value $
3,043,403 $
3,018,498 $
2,931,767 $
2,789,491 Available-for-sale equity securities, at fair value 196 189 217 -- Policy loans, at unpaid principal balances 2,613 2,882 3,309 8,171 Other investments 4,332 1,214 1,364 1,129 Total investments 3,050,544 3,022,783 2,936,657 2,798,791 Cash and cash equivalents 18,966 19,171 21,833 25,818 Accrued investment income 29,811 27,652 29,569 30,837 Deferred policy acquisition costs 474,849 435,363 481,100 529,315 Other general account assets 32,922 35,959 16,436 56,473 Separate account assets 2,337,339 2,362,975 2,455,359 2,537,685 Total assets
$ 5,944,431
$ 5,903,903
$ 5,940,954
$ 5,978,919
LIABILITIES
Policyholder deposit funds $
2,568,685 $
2,485,240 $
2,394,904 $
2,256,129 Policy liabilities and accruals 375,448 400,707 435,646 490,143 Deferred income taxes 59,801 61,508 65,652 72,457 Other general account liabilities 57,348 53,485 44,538 81,913 Separate account liabilities 2,337,339 2,362,975 2,455,211 2,537,685 Total liabilities 5,398,621 5,363,915 5,395,951 5,438,327
STOCKHOLDERS EQUITY
Common stock, $5,000 par value; 1,000 shares authorized 2,500 2,500 2,500 2,500 Additional paid-in capital 503,234 503,234 503,234 503,234 Retained earnings 37,587 28,046 37,332 35,463 Accumulated other comprehensive income 2,489 6,208 1,937 (605) Total stockholders equity 545,810 539,988 545,003 540,592 Total liabilities and stockholders equity
$ 5,944,431
$ 5,903,903
$ 5,940,954
$ 5,978,919 Q-1
Selected Unaudited Quarterly Financial Data: Quarter Ended
($ in thousands) Mar 31, June 30, Sept 30, Dec 31,
Income Statement Data 2005
REVENUES
Premiums $
1,352 $
1,539 $
1,595 $
5,035 Insurance and investment product fees 23,625 25,542 26,496 33,607 Investment income, net of expenses 37,788 38,133 38,323 40,130 Net realized investment gains (losses) (590) (1,680) (3,062) (5,237) Total revenues 62,175 63,534 63,352 73,535
BENEFITS AND EXPENSES
Policy benefits 32,957 32,486 32,439 34,967 Policy acquisition cost amortization 14,822 36,494 15,807 13,279 Other operating expenses 7,344 9,374 4,674 29,101 Total benefits and expenses 55,123 78,354 52,920 77,347 Income before income taxes 7,052 (14,820) 10,432 (3,812) Applicable income taxes 2,376 (5,279) 1,149 (1,946) Net income
$ 4,676
$ (9,541)
$ 9,283
$ (1,866)
COMPREHENSIVE INCOME
Net income
$ 4,676
$ (9,541)
$ 9,283
$ (1,866) Net unrealized investment gains (losses) (7,144) 3,803 (4,184) (2,461) Net unrealized derivative instruments losses (83) (84) (84) (84) Other comprehensive income (loss) (7,227) 3,719 (4,268) (2,545) Comprehensive income (loss)
$ (2,551)
$ (5,822)
$ 5,015
$ (4,411)
ADDITIONAL PAID-IN CAPITAL
Capital contribution from parent $
-- $
-- $
-- $
--
RETAINED EARNINGS
Net income 4,676 (9,541) 9,283 (1,866)
OTHER COMPREHENSIVE INCOME
Other comprehensive income (loss) (7,227) 3,719 (4,268) (2,545) Change in stockholders equity (2,551) (5,822) 5,015 (4,411) Stockholders equity, beginning of period 548,361 545,810 539,988 545,003 Stockholders equity, end of period
$ 545,810
$ 539,988
$ 545,003
$ 540,592 Q-2
Selected Unaudited Quarterly Financial Data: As of
($ in thousands) Mar 31, June 30, Sept 30, Dec 31,
Balance Sheet Data 2004
ASSETS
Available-for-sale debt securities, at fair value $
3,143,637 $
2,965,902 $
3,055,501 $
3,075,379 Available-for-sale equity securities, at fair value 8,593 248 255 261 Policy loans, at unpaid principal balances 2,314 2,421 2,473 2,486 Other investments 20,659 11,936 5,475 4,393 Total investments 3,175,203 2,980,507 3,063,704 3,082,519 Cash and cash equivalents 26,902 102,443 77,485 39,598 Accrued investment income 29,361 26,805 29,900 27,353 Deferred policy acquisition costs 385,687 433,432 423,524 433,458 Other general account assets 27,299 58,743 21,881 37,653 Separate account assets 2,172,847 2,212,504 2,172,157 2,413,571 Total assets
$ 5,817,299
$ 5,814,434
$ 5,788,651
$ 6,034,152
LIABILITIES
Policyholder deposit funds $
2,681,714 $
2,665,191 $
2,651,637 $
2,627,920 Policy liabilities and accruals 274,658 291,475 322,250 350,851 Deferred income taxes 84,353 64,106 71,811 63,402 Other general account liabilities 49,904 61,909 20,682 30,047 Separate account liabilities 2,172,847 2,212,504 2,172,157 2,413,571 Total liabilities 5,263,476 5,295,185 5,238,537 5,485,791
STOCKHOLDERS EQUITY
Common stock, $5,000 par value; 1,000 shares authorized 2,500 2,500 2,500 2,500 Additional paid-in capital 493,234 493,234 503,234 503,234 Retained earnings 19,169 20,656 27,256 32,911 Accumulated other comprehensive income 38,920 2,859 17,124 9,716 Total stockholders equity 553,823 519,249 550,114 548,361 Total liabilities and stockholders equity
$ 5,817,299
$ 5,814,434
$ 5,788,651
$ 6,034,152 Q-3
Selected Unaudited Quarterly Financial Data: Quarter Ended
($ in thousands) Mar 31, June 30, Sept 30, Dec 31,
Income Statement Data 2004
REVENUES
Premiums $
1,018 $
1,063 $
1,116 $
4,170 Insurance and investment product fees 18,904 20,224 21,837 22,335 Investment income, net of expenses 34,107 35,433 36,308 38,014 Net realized investment gains (losses) 1,711 3,113 1,021 (724) Total revenues 55,740 59,833 60,282 63,795
BENEFITS AND EXPENSES
Policy benefits 33,761 33,995 35,849 33,155 Policy acquisition cost amortization 6,696 13,363 10,649 14,319 Other operating expenses 10,763 10,244 6,904 7,772 Total benefits and expenses 51,220 57,602 53,402 55,246 Income before income taxes 4,520 2,231 6,880 8,549 Applicable income taxes 1,547 746 280 2,892 Net income
$ 2,973
$ 1,485
$ 6,600
$ 5,657
COMPREHENSIVE INCOME
Net income
$ 2,973
$ 1,485
$ 6,600
$ 5,657 Net unrealized investment gains (losses) 14,066 (35,894) 14,350 (7,324) Net unrealized derivative instruments losses -- (167) (85) (84) Other comprehensive income (loss) 14,066 (36,061) 14,265 (7,408) Comprehensive income (loss)
$ 17,039
$ (34,576)
$ 20,865
$ (1,751)
ADDITIONAL PAID-IN CAPITAL
Capital contribution from parent $
9,000 $
-- $
10,000 $
--
RETAINED EARNINGS
Net income 2,973 1,485 6,600 5,657
OTHER COMPREHENSIVE INCOME
Other comprehensive income (loss) 14,066 (36,061) 14,265 (7,408) Change in stockholders equity 26,039 (34,576) 30,865 (1,751) Stockholders equity, beginning of period 527,784 553,823 519,247 550,112 Stockholders equity, end of period
$ 553,823
$ 519,247
$ 550,112
$ 548,361 Q-4
Selected Unaudited Quarterly Financial Data: As of
($ in thousands) Mar 31, June 30, Sept 30, Dec 31,
Balance Sheet Data 2003
ASSETS
Available-for-sale debt securities, at fair value $
3,044,101 $
3,079,707 $
3,047,139 $
3,087,957 Available-for-sale equity securities, at fair value 32,394 12,715 13,475 8,687 Policy loans, at unpaid principal balances 1,340 1,458 1,659 1,753 Other investments 10,383 19,583 19,787 20,314 Total investments 3,088,218 3,113,463 3,082,060 3,118,711 Cash and cash equivalents 135,328 186,316 234,455 80,972 Accrued investment income 22,747 24,552 27,947 26,817 Deferred policy acquisition costs 280,510 302,001 341,587 372,609 Other general account assets 68,365 30,016 12,738 23,611 Separate account assets 1,395,991 1,639,587 1,763,624 2,010,134 Total assets
$ 4,991,159
$ 5,295,935
$ 5,462,411
$ 5,632,854
LIABILITIES
Policyholder deposit funds $
2,784,395 $
2,843,963 $
2,844,892 $
2,760,567 Policy liabilities and accruals 145,097 161,652 193,057 235,484 Deferred income taxes 37,387 61,018 60,680 55,926 Other general account liabilities 138,412 57,032 70,791 42,959 Separate account liabilities 1,395,992 1,639,587 1,763,624 2,010,134 Total liabilities 4,501,283 4,763,252 4,933,044 5,105,070
STOCKHOLDERS EQUITY
Common stock, $5,000 par value; 1,000 shares authorized 2,500 2,500 2,500 2,500 Additional paid-in capital 469,234 484,234 484,234 484,234 Retained earnings (16) 2,972 6,118 16,196 Accumulated other comprehensive income 18,158 42,977 36,515 24,854 Total stockholders equity 489,876 532,683 529,367 527,784 Total liabilities and stockholders equity
$ 4,991,159
$ 5,295,935
$ 5,462,411
$ 5,632,854 Q-5
Selected Unaudited Quarterly Financial Data: Quarter Ended
($ in thousands) Mar 31, June 30, Sept 30, Dec 31,
Income Statement Data 2003
REVENUES
Premiums $
584 $
345 $
958 $
3,942 Insurance and investment product fees 13,966 14,236 16,978 20,349 Investment income, net of expenses 32,235 32,736 34,486 34,074 Net realized investment gains (losses) (2,744) 1,643 632 1,237 Total revenues 44,041 48,960 53,054 59,602
BENEFITS AND EXPENSES
Policy benefits 32,729 27,642 35,069 31,871 Policy acquisition cost amortization 6,180 8,369 6,504 (1,013) Other operating expenses 7,545 8,635 5,693 13,415 Total benefits and expenses 46,454 44,646 47,266 44,273 Income before income taxes (2,413) 4,314 5,788 15,329 Applicable income taxes (850) 1,326 2,642 5,251 Net income
$ (1,563)
$ 2,988
$ 3,146
$ 10,078
COMPREHENSIVE INCOME
Net income
$ (1,563)
$ 2,988
$ 3,146
$ 10,078 Net unrealized investment gains (losses) (4,387) 24,902 (6,376) (11,578) Net unrealized derivative instruments losses (83) (83) (86) (83) Other comprehensive income (loss) (4,470) 24,819 (6,462) (11,661) Comprehensive income (loss)
$ (6,033)
$ 27,807
$ (3,316)
$ (1,583)
ADDITIONAL PAID-IN CAPITAL
Capital contribution from parent $
25,000 $
15,000 $
-- $
--
RETAINED EARNINGS
Net income (1,563) 2,988 3,146 10,078
OTHER COMPREHENSIVE INCOME
Other comprehensive income (loss) (4,470) 24,819 (6,462) (11,661) Change in stockholders equity 18,967 42,807 (3,316) (1,583) Stockholders equity, beginning of period 470,909 489,876 532,683 529,367 Stockholders equity, end of period
$ 489,876
$ 532,683
$ 529,367
$ 527,784 Q-6
Selected Unaudited Quarterly Financial Data: As of
($ in thousands) Mar 31, June 30, Sept 30, Dec 31,
Balance Sheet Data 2002
ASSETS
Available-for-sale debt securities, at fair value $
1,139,278 $
1,540,855 $
2,390,459 $
2,388,189 Available-for-sale equity securities, at fair value -- -- 45,861 33,121 Policy loans, at unpaid principal balances 895 903 1,322 1,335 Other investments 3,591 2,291 9,972 10,166 Total investments 1,143,764 1,544,049 2,447,614 2,432,811 Cash and cash equivalents 180,051 284,731 347,354 473,246 Accrued investment income 8,797 11,703 20,325 18,768 Deferred policy acquisition costs 187,370 197,479 233,660 255,677 Other general account assets 32,939 37,006 30,497 45,105 Separate account assets 1,591,230 1,514,180 1,098,410 1,157,913 Total assets
$ 3,144,151
$ 3,589,148
$ 4,177,860
$ 4,383,520
LIABILITIES
Policyholder deposit funds $
1,171,591 $
1,643,692 $
2,513,980 $
2,557,428 Policy liabilities and accruals 61,283 74,349 97,463 124,925 Deferred income taxes 29,312 40,839 19,292 38,993 Other general account liabilities 64,874 55,923 62,246 33,352 Separate account liabilities 1,587,988 1,499,088 1,098,416 1,157,913 Total liabilities 2,915,048 3,313,891 3,791,397 3,912,611
STOCKHOLDERS EQUITY
Common stock, $5,000 par value; 1,000 shares authorized 2,500 2,500 2,500 2,500 Additional paid-in capital 209,864 244,864 364,234 444,234 Retained earnings 17,142 17,773 7,664 1,547 Accumulated other comprehensive income (403) 10,120 12,065 22,628 Total stockholders equity 229,103 275,257 386,463 470,909 Total liabilities and stockholders equity
$ 3,144,151
$ 3,589,148
$ 4,177,860
$ 4,383,520 Q-7
Selected Unaudited Quarterly Financial Data: Quarter Ended
($ in thousands) Mar 31, June 30, Sept 30, Dec 31,
Income Statement Data 2002
REVENUES
Premiums $
-- $
716 $
67 $
3,589 Insurance and investment product fees 9,438 10,138 13,250 14,089 Investment income, net of expenses 15,477 21,985 28,236 26,774 Net realized investment gains (losses) 1,004 (2,744) (2,265) (12,162) Total revenues 25,919 30,095 39,288 32,290
BENEFITS AND EXPENSES
Policy benefits 15,845 20,035 34,117 28,918 Policy acquisition cost amortization 1,581 1,835 11,796 7,970 Other operating expenses 4,962 7,318 10,074 5,032 Total benefits and expenses 22,388 29,188 55,987 41,920 Income before income taxes 3,531 907 (16,699) (9,630) Applicable income taxes 1,192 278 (6,592) (3,513) Net income
$ 2,339
$ 629
$ (10,107)
$ (6,117)
COMPREHENSIVE INCOME
Net income
$ 2,339
$ 629
$ (10,107)
$ (6,117) Net unrealized investment gains (losses) (2,422) 10,585 1,943 8,416 Net unrealized derivative instruments losses 60 (60) -- 2,147 Other comprehensive income (loss) (2,362) 10,525 1,943 10,563 Comprehensive income (loss)
$ (23)
$ 11,154
$ (8,164)
$ 4,446
ADDITIONAL PAID-IN CAPITAL
Capital contribution from parent $
25,000 $
35,000 $
119,370 $
80,000
RETAINED EARNINGS
Net income 2,339 629 (10,107) (6,117)
OTHER COMPREHENSIVE INCOME
Other comprehensive income (loss) (2,362) 10,525 1,943 10,563 Change in stockholders equity 24,977 46,154 111,206 84,446 Stockholders equity, beginning of period 204,126 229,103 275,257 386,463 Stockholders equity, end of period
$ 229,103
$ 275,257
$ 386,463
$ 470,909 Q-8
Selected Unaudited Quarterly Financial Data: As of
($ in thousands) Dec 31,
Balance Sheet Data 2001
ASSETS
Available-for-sale debt securities, at fair value $
789,380 Available-for-sale equity securities, at fair value -- Policy loans, at unpaid principal balances 896 Other investments 2,911 Total investments 793,187 Cash and cash equivalents 171,444 Accrued investment income 5,787 Deferred policy acquisition costs 164,987 Other general account assets 30,343 Separate account assets 1,539,476 Total assets
$ 2,705,224
LIABILITIES
Policyholder deposit funds $
865,970 Policy liabilities and accruals 47,131 Deferred income taxes 27,426 Other general account liabilities 26,226 Separate account liabilities 1,534,345 Total liabilities 2,501,098
STOCKHOLDERS EQUITY
Common stock, $5,000 par value; 1,000 shares authorized 2,500 Additional paid-in capital 184,864 Retained earnings 14,803 Accumulated other comprehensive income 1,959 Total stockholders equity 204,126 Total liabilities and stockholders equity
$ 2,705,224 Q-9 Quarter
Selected Unaudited Quarterly Financial Data: Ended
($ in thousands) Dec 31,
Income Statement Data 2001
REVENUES
Premiums $
3,793 Insurance and investment product fees 9,039 Investment income, net of expenses 12,481 Net realized investment gains (losses) (1,303) Total revenues 24,010
BENEFITS AND EXPENSES
Policy benefits 16,529 Policy acquisition cost amortization 4,595 Other operating expenses 2,368 Total benefits and expenses 23,492 Income before income taxes 518 Applicable income taxes 228 Net income
$ 290
COMPREHENSIVE INCOME
Net income
$ 290 Net unrealized investment gains (losses) (2,561) Unrealized gains (losses) on transfer from HTM to AFS 359 Reclass realized gains (losses) (399) Net unrealized derivative instruments losses (334) Other comprehensive income (loss) (2,935) Comprehensive income (loss)
$ (2,645)
ADDITIONAL PAID-IN CAPITAL
Capital contribution from parent $
50,000
RETAINED EARNINGS
Net income 290
OTHER COMPREHENSIVE INCOME
Other comprehensive income (loss) (2,935)
Change in stockholders equity 47,355 Stockholders equity, beginning of period 156,771 Stockholders equity, end of period
$ 204,126 Q-10 Exhibit 3.1 FORM OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF PHL VARIABLE INSURANCE COMPANY
This Amended and Restated Certificate of Incorporation gives effect to the amendment
of the previous Restated Certificate of Incorporation of the corporation and
otherwise purports merely to restate all those provisions already in effect. The amendment portions
of this Certificate have been adopted by unanimous written consent of the Board of Directors and the shareholders.
Section 1. PHL Variable Insurance Company is created a body politic and corporate
and under that name shall have all the powers granted by the general statutes, as now enacted
or hereinafter amended, to corporations formed under the Stock Corporation Act.
Section 2. The Corporation shall have the purposes and powers to write any and all
forms of insurance which any other corporation now or hereafter chartered by Connecticut and
empowered to do an insurance business may now or hereafter lawfully do; to accept and to cede
reinsurance; to issue policies and contracts for any kind or combination of kinds of insurance;
to issue policies or contracts either with or without participation in profits; to acquire and
hold any or all of the shares or other securities of any insurance corporation or any other kind
of corporation; and to engage in any lawful act or activity for which corporations may be formed
under the Stock Corporation Act. The corporation is authorized to exercise the powers herein
granted in any state, territory or jurisdiction of the United States or in any foreign country.
Section 3. The authorized capital shall be five million dollars divided into one thousand
shares of common capital stock with a par value of five thousand dollars each.
Section 4. The corporation shall obtain a license from the insurance commissioner prior to the
commencement of business and shall be subject to all general statutes applicable to insurance companies.
We hereby declare, under the penalties of false statement, that the statements made in the foregoing certificate are true.
Exhibit 3.2 BYLAWS OF PHL VARIABLE INSURANCE COMPANY as amended and restated effective May 16, 2002 Bylaws of PHL Variable Insurance Company ARTICLE I Name Section 1.01 The company shall be named PHL Variable Insurance Company. ARTICLE II Meeting of Shareholders Section 2.01 Annual Meetings. The annual meeting of shareholders for the election of directors and for the transaction of such other business as may properly come before such meeting shall be held at such location, on such day and at such hour, as the Board of Directors may appoint. Section 2.02 Special Meetings. Special meetings of the shareholders may be called at any time by the chairman of the board of directors or the president, or in the absence of both, by any vice president, or as otherwise provided by statute, and shall be so called upon the written request of a majority of the board of directors. Section 2.03 Notice of Meeting. Written notice of every meeting of the shareholders and of the time, place and hour thereof shall be given to an executive officer of the company at least seven days prior to the time appointed for such meeting, which, in the case of a special meeting, shall also state in general terms the purpose or purposes for which the meeting is called. Said requirements of notice shall be deemed to have been lawfully given upon the written waiver signed by the party entitled to notice, whether before or after such meeting, and shall be deemed to have been waived by attendance at such meeting, except when attendance is for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Section 2.04 Quorum. Holders of the majority of the voting power of shares entitled to vote at any meeting of shareholders shall constitute a quorum for such meeting. Section 2.05 Adjournments. In the absence of a quorum, any officer entitled to preside at or act as a secretary of such meeting may adjourn the meeting from time to time until a quorum shall be present. Section 2.06 Number of Votes. Each shareholder entitled to vote shall be entitled to the number of votes equal to the number of shares of the stock of the company he holds. Section 2.07 Conduct of Meetings. At every meeting of the shareholders, the chairman of the board of directors or the president shall serve as chairman of the meeting. A secretary of the company shall keep minutes of the proceedings at said meeting, which minutes shall be made part of the permanent records of the company. Should such officers be absent or otherwise unable to act as chairman and secretary of the meeting, the shareholders shall elect a chairman and a secretary by a voice vote. Section 2.08 Written Consent. Any action required by statute to be taken at an annual or special meeting of the shareholders, or any action which may be taken at any annual or special meeting of the shareholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by all of the persons who would be required to vote upon such action at a meeting at which all shares entitled to vote thereon were present and voted. ARTICLE III Board of Directors Section 3.01 Authority. The management of the property and affairs of the company shall be vested in the board of directors. Section 3.02 Number. The number of directors which shall constitute the whole board of directors shall be fixed from time to time by resolution of the board of directors but shall be no fewer than three nor more than twenty. Directors shall be at least eighteen years of age at the time of their election. Section 3.03 Election and Term of Office. Directors shall be elected at the annual meeting of the shareholders. Each director (whether elected at the annual meeting or to fill a vacancy or otherwise) shall continue in office until his successor shall have been elected and qualified or until his earlier death, resignation or removal in the manner hereinafter provided. Section 3.04 Vacancies and Additional Directorships. If any vacancy shall occur among the directors due to resignation, death or removal, or as the result of an increase in the number of directorships, the directors then in office shall continue to act and may fill any vacancy by a vote of the directors then in office, although less than a quorum. Section 3.05 Meetings. A meeting of the board of directors shall be held for organization, election of officers and the transaction of such other business as may properly come before the meeting, within thirty (30) days after each annual election of directors. The board of directors may, by resolution, provide for the holding of regular meetings and may fix the times and places at which such meetings shall be held. Notice of regular meetings shall not be required to be given, provided that whenever the time and place of regular meeting shall be fixed or changed, notice of such action shall be mailed promptly to each director who shall not have been present at the meeting at which such action was taken, addressed to him at his residence or usual place of business. Special meetings of the board of directors may be called by the president or any two directors. Except as otherwise required by statute, notice of such special meeting shall be mailed to each director, addressed to him at his residence or usual place of business, or shall be sent to him at such place by telegram or cable, or telephoned or delivered to him personally, not later than two days before the time appointed for such meeting. Such notice shall state the time and place of such meeting, but unless otherwise required by statute, the Certificate of Incorporation or these Bylaws, need not state the purposes thereof. In the event of an emergency, a special meeting of directors may be called upon less than two days notice and in such case a secretary or an assistant secretary may give such notice, orally or otherwise, as may be most expedient. The Board of Directors may meet without notice immediately after the adjournment of any annual meeting of the shareholders. The Board of Directors or any committee thereof, may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can participate, provided each participant can hear every other party. Notice of any meeting need not be given to any director who shall attend such meeting in person or who shall waive notice thereof, before or after such meeting, in writing or by telegram or cable. Section 3.06 Quorum. At any meeting of the board of directors, a majority of the directors shall constitute a quorum. In the absence of a quorum, a majority of those present at the time and place of any meeting may adjourn the meeting from time to time until a quorum shall be present and the meeting may be held as adjourned without further notice or waiver. A majority of those present at any meeting at which a quorum is present may decide any question brought before such meeting, except as otherwise provided by statute, the Certificate of Incorporation or these Bylaws. Section 3.07 Written Consent. Any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting if all members of the board of directors or committee thereof, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee. ARTICLE IV Committees Section 4.01 Committees. The board of directors shall be authorized to establish such committees of the board as it shall from time to time determine, and to appoint such persons as members thereof as it shall from time to time determine. All committees shall perform such duties and exercise such powers as may be delegated from time to time by the board of directors. ARTICLE V Officers Section 5.01 General. At the annual meeting, the board of directors shall elect from its members a president, a treasurer and a secretary, but the same person may not serve concurrently as president and secretary. The board may also elect one or more vice presidents. Section 5.02 Election, Term of Office and Qualifications. Each officer shall be elected by the board of directors. Each such officer shall hold his office until the first meeting of the board of directors after the next annual meeting of shareholders and until his successor shall have been qualified and elected, or until his earlier death, resignation or removal. Section 5.03 The President. The president shall preside at all meetings of the board of directors, if present, and shall have general charge of the business, affairs and property of the company and general supervision over its officers and agents. If present, he shall preside at all meetings of shareholders and shall effectuate or cause to be effectuated all orders and resolutions of the board of directors. He may sign, with any other officer thereunto duly authorized, certificates of stock of the company, the issuance of which shall be duly authorized (his signature to which may be a facsimile signature), and may sign and execute in the name of the company deeds, mortgages, bonds, contracts, agreements or other instruments duly authorized by the board of directors except in cases where the signing and execution thereof shall be expressly delegated by the board of
directors to some other officer or agent. From time to time, he shall report to the board of directors all matters within his knowledge which the interests of the company may require to be brought to their attention. He shall also perform such other duties as are given to him by these Bylaws or as from time to time may be assigned to him by the board of directors. Section 5.04 The Vice Presidents. Any vice president may sign and execute in the name of the company deeds, mortgages, bonds and other instruments duly authorized by the board of directors, except in cases where the signing or execution thereof shall be expressly delegated by the board of directors to some other officer or agent. Each vice president shall perform such other duties as are given to him by these Bylaws or as from time to time may be assigned to him by the board of directors or the president. Section 5.05 The Secretary. The secretary shall: (a) record all proceedings of the meetings of the shareholders and the board of directors and all actions of any committees so requesting in a book or books to be kept for that purpose; (b) cause all notices to be duly given in accordance with the provisions of these Bylaws or as required by statute; (c) be custodian of the records of the company; (d) cause to be properly kept and filed the lists, books, reports, statements, certificates and other documents and records required by statute; (e) have charge of the books of the company reflecting shareholder interests, and exhibit such books at such times and to such persons as shall be required by statute or by the board of directors; and (f) in general, perform all duties incident to the office of secretary and such other duties as are given to him by these Bylaws or as from time to time may be assigned by the board of directors or the president. Section 5.06 Assistant Secretaries. At the request of the secretary or in his absence or disability, the assistant secretaries designated by the board of directors or the president shall perform all duties of the secretary and, when so acting, shall have all the powers of and be subject to all restrictions upon the secretary. The assistant secretaries shall perform such other duties as from time to time may be assigned to them respectively by the board of directors or the president. Section 5.07 The Treasurer. The Treasurer shall: (a) have charge of and supervision over and be responsible for the funds, securities, receipts and disbursements of the company; (b) cause the moneys and other valuable effects of the company to be deposited in the name and to the credit of the company in such banks or trust companies or with such bankers or other depositories as shall be selected in accordance with Section 7.03 of these Bylaws or to be otherwise dealt with in such manner as the board of directors may direct; (c) cause the funds of the company to be disbursed by checks or drafts upon the authorized depositories of the company, and cause to be taken and preserved proper vouchers for all moneys disbursed; (d) render to the board of directors or the president, when requested, a statement of the financial condition of the company and of all his transactions as treasurer; (e) cause to be kept at the offices of the company correct books of account of all its business and transactions and such duplicate books of account as he shall determine and upon proper application cause such books or duplicates thereof to be exhibited to any director; (f) be empowered, from time to time, to require from the officers or agents of the company reports or statements giving such information as he may desire with respect to any and all financial transactions of the company; and (g) in general, perform all duties incident to the office of treasurer and such other duties as are given to him by these Bylaws or as from time to time may be assigned to him by the board of directors or the president. Section 5.07 Assistant Treasurers. At the request of the treasurer or in his absence or disability, the assistant treasurers designated by him (or in the absence of such designation, the assistant treasurer designated by the board of directors or the president) shall perform all duties of the treasurer and, when so acting, shall have all the power of and be subject to all restrictions of the treasurer. The assistant treasurers shall perform such other duties as from time to time may be assigned to them respectively by the board of directors, the president or the treasurer. ARTICLE VI Indemnification Section 6.01 Indemnification. Each director, officer or employee of the company, or his heirs, executors or administrators, shall be indemnified or reimbursed by the company for all expenses necessarily incurred by him in connection with the defense or reasonable settlement of any action, suit or proceeding in which he is made a party by reason of his being or having been a director, officer or employee of the company, or of any other company which he was serving as a director or officer at the request of the company, except in relation to matters as to which such director, officer or employee is finally adjudged in such action, suit or proceeding to be liable for negligence or misconduct in the performance of his duties as such director, officer or employee. The foregoing right of indemnification or reimbursement shall not be exclusive of any other rights to which he may be entitled under any statute, bylaw, agreement, vote of shareholders or otherwise. ARTICLE VII Execution of Instruments and Deposit of Corporate Funds Section 7.01 Execution of Instruments Generally. The president, any vice president, the secretary and the treasurer, subject to approval of the board of directors, are each authorized to enter into any contract or execute and deliver any instrument in the name and on behalf of the company. The board of directors may authorize such officer or officers or agent or agents, to enter into any contract or execute and deliver any instrument in the name and on behalf of the company, and such authorization may be general or confined to specific instances. Section 7.02 Execution of Insurance Contracts. All policies of insurance, annuity contracts, policy endorsements and modifications (other than endorsement of the execution of a right or option provided for in the policy) and all contracts incident, related or supplementary to policies of insurance and annuity contracts shall be signed by the president, the vice president, the secretary or an assistant secretary. Such signatures may be facsimile. Section 7.03 Deposits. All funds of the company not otherwise employed shall be deposited from time to time to its credit in such banks or trust companies or with such banks or other depositories as the board of directors may select, or as may be selected by an officer or officers or agent or agents authorized to do so by the board of directors from time to time. Section 7.04 Checks, Drafts, Etc. All checks, drafts or other orders for the payment of money and all notes or other evidences of indebtedness issued in the name of the company shall be signed by such officer or officers or agent or agents of the company and in such manner as from time to time shall be determined by the board of directors. Section 7.05 Dividends. The board of directors may declare such dividends to the shareholders of the companys earnings and surplus as it may deem expedient. ARTICLE VIII Seal, Amendments and Repeal Section 8.01 Seal. The corporate seal shall be circular in form and shall have inscribed thereon the name of the company, the year of its creation and the words Corporate Seal and Connecticut. Section 8.02 Amendment; Repeal. The board of directors may adopt, amend or repeal these bylaws. EXHIBIT 10.1 SERVICES AGREEMENT
THIS SERVICES AGREEMENT, effective as of the 1st day of January, 1995, by
and between Phoenix Home Life Mutual Insurance Company ("PHLMIC"), a
New York mutual life insurance company, and each of its undersigned
subsidiaries. R E C I T A L S:
PHLMIC owns directly, or through subsidiaries, a Controlling Interest in several
insurance companies, each referred to hereinafter as a "Subsidiary".
Although each of such entities has its own officers and directors, each
entity obtains many services from PHLMIC or other Subsidiaries and, in some
instances, PHLMIC obtains services from certain of those entities. In
order to formalize PHLMIC's existing methods of charging each Subsidiary for
such services, PHLMIC and many of its Subsidiaries are entering into this
Agreement. Charges for services provided by any of the Subsidiaries to
each other or to PHLMIC are covered by separate agreements.
NOW THEREFORE, in consideration of the foregoing and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto do hereby agree as follows.
I. DEFINITIONS
The following terms, when capitalized, shall have the meanings set forth
hereinafter, with singular and plural usages having the same meaning.
Agreement shall mean this Services Agreement.
Compensation shall mean and include an allocable share of the following
expenses incurred by PHLMIC: actual gross salaries paid (including federal
and state taxes withheld); cost of benefits; related payroll taxes and
assessments payable for workers' compensation; employee reimbursements; rent;
amortization charges for personalty such as furniture, hardware and equipment;
and all other out-of-pocket expenditures incurred by PHLMIC in connection with
the provision of services hereunder.
Controlling Interest shall mean possession of the right to cast at least
fifty-one percent (51%) of the votes eligible to be cast by equity owners,
whether as a result of a contractual right or as a result of the ownership of
fifty-one percent (51%) or more of the subject's issued and outstanding capital
stock or other equity interests.
Designated Rate shall mean the prime rate in effect at Chase Manhattan Bank,
N.A. as of the first day of the then current calendar quarter.
Employee Benefit Plans shall have the meaning set forth in Section IV
A1c.
Person shall mean an individual, corporation, partnership, association,
joint stock company, governmental entity, business trust, unincorporated
organization or other legal entity.
PHLMIC shall have the meaning set forth in the initial paragraph of this
Agreement.
Subsidiary shall have the meaning set forth in the Recitals. II. TERM
Subject to Article V below, this Agreement shall remain in full force and effect
as to each Subsidiary until that date which is five (5) years from the date
hereof. III. CONSIDERATION A.
General. The consideration payable to PHLMIC by each Subsidiary or by
any party to this Agreement to any other shall be as set forth in Schedule 3
hereto. None of the parties of this Agreement intends that PHLMIC shall
earn a profit on the charges for services provided under this Agreement.
Notwithstanding any other provision of this Agreement, the parties hereto
agree that amounts referred to in this Agreement as "fee(s)",
"compensation", "amounts due", "cost" or
"expenses", all of which amounts are referred to collectively in the
balance of this paragraph as "charge(s)", shall be computed in a
manner that will not result in the imposition of a sales tax under Connecticut
General Statutes Section 12-406 et. seq. or any successor provision.
In the event of a final administrative determination by the Connecticut
Department of Revenue Services that a sales tax is due under Section 12-406
et. seq. or its successor because a taxable service was charged for a
profit, then such charge or charges, to the extent of the profit, shall be
deemed to have been in excess of an allowable charge as of the date of the
charge and shall be promptly refunded to the appropriate Subsidiary. The
refund shall include interest on the amount of such refund from the date of the
charge at a rate of interest equal to the Designated Rate. B.
Amendments. The consideration payable in accordance with this Section
shall be re-evaluated each year with the parties' intent being to compensate
PHLMIC for its services hereunder without generating a profit for it.
Based on such re-evaluation, the parties shall on or before
December 31 of each year affix a new Schedule 3 hereto to reflect all
changes, if any, they have agreed upon, or a confirmation that there will be no
charges in the prior year's schedule. IV. SERVICES A. Obligations of PHLMIC 1.
General. To the extent provided in Schedule 3, as such is amended from
time to time, PHLMIC shall provide each Subsidiary with the following services:
- 2 - a.
Office Space - at an appropriate location, in an amount and of a quality
to accommodate each Subsidiary's operations in a fashion consistent both with
the Subsidiary's past experience and with its current and future plans, as
approved by PHLMIC, along with all services reasonably ancillary thereto with
have been agreed upon by the parties or customarily provided, such as, without
limitation, cleaning and maintenance of the facilities, security, cafeteria
services, appropriate furniture and lighting, electricity, heat or air
conditioning (as needed), parking spaces for employees and other personnel,
including clients and other visitors and hot and cold running water, all of the
foregoing to be provided in a fashion consistent with the quality of the
facilities. b. Personnel. (1)
General. Except for any Subsidiary which hires its own employees,
all personnel required for a Subsidiary will be employees of PHLMIC, which will
charge the Subsidiary for the compensation attributable to those employees who
perform services for such subsidiary, whether full-time or part-time. In
addition, PHLMIC shall make available to each Subsidiary those officers and
directors elected by the Board of Directors of such subsidiaries from among the
employees of PHLMIC authorized by PHLMIC to serve in such capacities. (2)
Special. To the extent any Subsidiary has need of any services of
the types described hereinafter which cannot reasonably be performed by its own
employees or by PHLMIC employees allocated to it, such subsidiary may access
appropriate employees of PHLMIC or any of its Subsidiaries to obtain the
following services. It is understood that PHLMIC retains the discretion to
allocate its limited resources in the fashion it deems appropriate, even if that
means that a Subsidiary will have to wait for requested services, go elsewhere
(with the prior approval of PHLMIC) for such services (including the use of
outside vendors) or do without such services. In each instance, as agreed
by the parties, the services may include any or all of the following:
analysis, consultation and/or implementation. (a)
Accounting - including, without limitation: the maintenance of books
and records; the filing of required regulatory reports of a financial nature;
the preparation of periodic financial reports; the preparation of projections
needed for any business purpose; the preparation of, or assistance in the
preparation of, business plans; the preparation, or assistance in the
preparation, of reports or presentations required for any meeting of a business
purpose (such as with regulators, rating agencies, potential targets potential
clients, etc.); participation in regulatory examination, as needed; customer
billing; the reconciliation of all bank account statements; check writing;
establishment of internal audit controls; arranging for audits by third parties;
and any other matter requiring accounting input or assistance. (b) Legal - including, without limitation, the provision of: assistance in structuring certain complex deals; legal analysis; drafting of legal documents; review of contracts and other legal documents; assistance in or the conduct of negotiations; applicable legal guidelines to follow; - 3 -
the recommendation (from a legal standpoint) of a preferred course of action;
legal compliance assistance; and any other form of assistance requiring the
training or expertise of an attorney or paralegal. (c)
Data Processing - including, without limitation: system development,
modification and correction; mainframe computer functions such as CPU usage,
disk storage for data; printing; back-up and recovery of data and disaster
recovery; technical support for installation of new releases; Information Center
support as described in Clause (d); and establishing network connections. (d)
Information Center - including, without limitation: meeting with users
to configure systems they need, setting PC and LAN standards and equipment
ordering/receiving; dealing with vendors on pricing of hardware and software and
negotiating vendor contracts; PC installation and moves; PC hardware repairs;
software support and formal/informal classroom training; consulting on
developing applications using "shrink" wrapped software with PCs and
servers; operating the help desk for all PC/server hardware and software problem
calls; maintaining central file servers; providing current versions of software
on servers; and providing back-up and recovery support for files of central and
departmental servers. (e)
Human Resources - including, without limitation: assistance in all
aspects of personnel management such as hiring, firing, disciplining,
performance reviews and training; establishment, maintenance and administration
of benefit plans and programs; and establishment and implementation of personnel
policies and programs. (f)
Actuarial - including, without limitation: the provision of an
actuary's assistance in any matter requiring such expertise such as, without
limitation, product development; development and implementation of dividend
policy and practices; regulatory compliance matters (such as compliance with
certain standards); assistance in the development of company plans such as
business plans and projections; and assistance in financial reporting. (g)
Tax Accounting - including, without limitation: the preparation and
maintenance of tax books and records and all supporting documentation therefor;
the preparation and filing of all tax reports and returns, as well as the
tax-related portion of other reports and returns provided to them; development
and implementation of appropriate tax plans and postures; analysis and
ramifications of product or project proposals from a tax perspective;
interfacing with corporate tax counsel on any or all of the above, as well as on
other projects upon request as needed; and interfacing with state and federal
tax authorities as appropriate, including during the conduct of an audit. (h)
Banking - including, without limitation: the establishment and
maintenance of banking contracts and relations; the opening, - 4 -
maintenance and closing of accounts as needed for general or special banking purposes; the review of all records
with respect thereto, including reconciliations; the establishment of borrowing facilities and administration
of borrowed funds; the arranging of fund transfers; the management of cash to maximize the volume of invested
funds subject to needs for liquidity; the establishment and administration of lock-box facilities; and the
tracking and investment of retained asset accounts; (i)
Investment - for those Subsidiaries which are not insurance companies, the
management, in cooperation with PHLMIC's banking personnel, of a Subsidiary's
cash available for investment upon terms and conditions appropriate for the
Subsidiary in light of the nature of its business and its cash flow needs, its
historical needs and goals and the direction, if any, provided by the
Subsidiary's Board of Directors or management; and, for those Subsidiaries which
are insurance companies and whose investment portfolios are not managed by a
PHLMIC Subsidiary, management of such portfolios. (j)
Marketing - for each of those Subsidiaries which is an insurance company,
PHLMIC shall provide a sales force for selling the Subsidiary's products, as
well as administrative and managerial support for the sales force; (k)
Communications/Creative Services - including, without limitation, the
following, whether done internally or obtained from vendors: the
development and implementation of public relations programs, including media
placements and special events and sponsorships; and the design, printing and/or
distribution of materials for advertising, regulatory compliance, presentations,
awards and incentives, advertising specialties or other reasonable business
purpose. (l)
Travel/Convention - including, without limitation: scheduling trips;
securing room, transportation and meal reservations; planning itineraries; and
arranging conventions or other large meetings; (m)
Payroll - including, without limitation: the issuance of payroll
checks or the arranging of direct deposits for all employees of PHLMIC or any of
its Subsidiaries electing such service; the preparation and maintenance of all
records reasonably or statutorily required to support such payments; the
effecting of appropriate amounts of withholding for taxes and authorized
expenditures for each participating individual; the preparation and filing of
all reports required by any regulatory authority; and compliance with all proper
wage executions. (n)
Purchasing - including, without limitation: the purchasing of
equipment, furniture, supplies, building materials and other personalty required
for the operation of PHLMIC or any of its Subsidiaries; the contracting with
suppliers for any of the foregoing, as well as for services, such as cleaning
services, construction services, remodeling or architectural or - 5 - interior design services, and landscaping services; and preparation of requests for bid for any of the foregoing. (o)
Telecommunications - including, without limitation: the selection,
acquisition and installation of telephone equipment, including related hardware
and software; the installation and maintenance of telephone lines for both oral
communication and data transmission; the establishment of methods for video
conferencing and other technological advances; and contracting for all of the
foregoing, as well as handling the bidding process therefor. (p)
Mail and Related Services - including, without limitation: handling
the internal pick-up and delivery of all mail and other deliveries transmitted
through the United States Postal Service or any private carriers; preparation of
materials for mailings; and contracting with private carriers for any of the
foregoing services. (q)
General Management - including, without limitation, all services routinely
provided by PHLMIC, such as: internal consulting, work-flow measurements
and productivity measurements through the Operations Resources Department or its
successor; analysis and related tasks associated with risk management; provision
of a business resumption plan; and general business advice and guidance from
certain senior executives. c.
Benefit Programs. To the extent PHLMIC maintains certain employee
benefit plans, fringe benefit programs and other similar arrangements
(collectively, the "Employee Benefit Plans") for the benefit of its
employees, as well as for the employees of such of its Subsidiaries as PHLMIC's
Board of Directors or Benefit Plans Committee has approved for participation in
the Employee Benefit Plans, the charges therefor shall be borne by the
Subsidiaries in accordance with Schedule 3 hereto. 2.
Special. PHLMIC shall provide a Subsidiary with such additional
services as the parties agree upon from time to time in a writing which is
attached to and forms a part of Schedule 3. 3.
Recordkeeping. All records necessary, proper and customary for
services performed by PHLMIC under this Agreement shall be properly maintained
by PHLMIC for and on behalf of each Subsidiary and shall be the property of the
Subsidiary which is the subject of the records in question. The records
pertaining to each Subsidiary shall be available, upon reasonable notice, for
inspection, audit and other reasonable use by authorized representatives of such
subsidiary. 4. Premium Collections. In the event that at any time or from time to time PHLMIC provides premium collection services for any Subsidiary, PHLMIC shall hold such premiums in a fiduciary capacity and pay them over to the appropriate Subsidiary immediately following collection. - 6 - B.
Obligations of Subsidiary. Except as set forth in this Agreement or
otherwise expressly agreed upon in writing, PHLMIC subsidiaries shall have no
obligations to each other or to PHLMIC other than for the following. 1.
General. Each subsidiary shall cooperate with PHLMIC as long as such
are not contrary to such subsidiary's best interests, inconsistent with the
fiduciary or other legal or contractual obligations of such subsidiary or
inappropriate in light of such subsidiary's own business plans. 2.
Payment. Each Subsidiary shall be obligated to promptly pay PHLMIC for
all sums due and payable under this Agreement. Except as set forth
hereinafter or in Schedule 3, as amended from time to time, no Subsidiary shall
have any obligation to pay for services received from PHLMIC. 3.
Subsidiary Services. a.
Investment Subsidiaries. Upon request by PHLMIC, any investment
Subsidiary shall provide investment advice to PHLMIC or any of its affiliates or
clients upon such terms and conditions as the parties agree. b.
Brokerage Subsidiaries. Upon request by PHLMIC, any brokerage
Subsidiary shall market products of PHLMIC or any of its insurance company
affiliates upon such terms and conditions as the parties agree. V. STANDARD OF CARE
In carrying out their respective obligations hereunder, each of the parties
hereto shall use its best efforts to abide in all material respects with all
applicable Laws. In addition, they shall take all reasonable efforts to
preserve the confidential and proprietary information of each of the parties
hereto. VI. TERMINATION A.
General. Upon the termination of a Subsidiary's status as a Person
controlled by PHLMIC, as to such subsidiary, this Agreement shall terminate
immediately and automatically. For purposes of this provision, control
shall be deemed to have ceased when all of the following have occurred:
(1) PHLMIC, directly or indirectly, owns less than fifty-one percent (51%)
of the Subsidiary's issued and outstanding capital stock; (2) fewer than half of
the members of the Subsidiary's Board of Directors are employees or directors of
PHLMIC or otherwise designated by PHLMIC to sit on such board; and (3) no voting
agreement exists between PHLMIC and such subsidiary. B.
By PHLMIC. PHLMIC shall have the right to terminate this Agreement at
any time, with or without notice. C.
By a Subsidiary. Any Subsidiary may terminate this Agreement as
provided in Section III B2. - 7 - VII. MISCELLANEOUS A.
Governing Law. It is agreed that for all purposes, this Agreement
shall be deemed to have been executed in Connecticut but governed in all
instances by the laws of New York, except those laws governing choice of
law. B.
Notice. Any communications, transmittals, notices, audits and
accounting shall be in writing and shall be effective when received by: 1.
the Subsidiary at its principal office in care of its President; and 2.
PHLMIC in care of its General Counsel. C.
Entire Agreement. This writing, together with the Schedules and
Exhibits hereto, constitutes the entire agreement of the parties with respect to
the subject matter hereof, supersedes all prior agreement and understandings of
the parties with respect to the subject matter hereof and, except as provided in
clause K below, may not be modified, amended or terminated except by a written
agreement specifically referring to this Agreement and signed by all parties
hereto; provided, however, that any Schedule or portion of any Schedule hereto
pertaining only to one Subsidiary may be amended by agreement in writing of only
that Subsidiary and PHLMIC. No party hereto has made any representation,
warranty or covenant in connection with the matters set forth herein except as
expressly stated herein, including the Schedules hereto. D.
Schedules. The Schedules referred to herein and delivered pursuant
hereto shall be deemed part of this Agreement as fully and effectively as if set
forth at length herein. The terms used in such Schedules shall have the
same meanings as such terms have in this Agreement unless a contrary intention
is clearly manifested therein. E.
Binding Effect. This Agreement shall be binding upon and inure to the
benefit of each party hereto and its successors and assigns. Except as
hereafter provided, this Agreement shall not be assigned by any party hereto
without the prior written consent of all other parties, which consent shall not
be unreasonably withheld, and, absent any such consent, any attempted assignment
shall be void. F.
Captions. The article and section headings contained herein are for
the purpose of convenience only and are not intended to define or limit the
contents of said articles or sections. G.
Cooperation. Each party hereto shall cooperate, shall take such
further action and shall execute and deliver such further documents as may be
reasonably requested by any other party in order to carry out the provisions and
purposes of this Agreement. H.
Several Counterparts. This Agreement may be executed simultaneously in
several counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. I.
Severability. Any provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall be ineffective to the extent such
invalidity or unenforceability without invalidating or rendering unenforceable
the remaining provisions hereof, and any such - 8 - invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date set forth above.
AMERICAN PHOENIX LIFE AND REASSURANCE By:
/s/ Fred Sawyer Its:
President
PHOENIX AMERICAN LIFE INSURANCE COMPANY By:
/s/ David W. Searfoss Its:
Executive Vice President
PHOENIX LIFE INSURANCE COMPANY By:
/s/ Fred Sawyer Its: President
PHL VARIABLE INSURANCE COMPANY By:
/s/ Richard H. Booth Its:
Executive Vice President
PHOENIX HOME LIFE MUTUAL INSURANCE COMPANY By:
/s/ Philip R. McLoughlin Its:
Executive Vice President
cam\agrmt\0129.001 EXHIBIT 10.2 INVESTMENT MANAGEMENT AGREEMENT THIS AGREEMENT, effective as of the first day of January, 1995 (the "Effective Date"), by and between the undersigned PHL VARIABLE INSURANCE COMPANY (the "Client") and PHOENIX INVESTMENT COUNSEL, INC. (the "Manager") a corporation organized pursuant to the laws of the Commonwealth of Massachusetts, with its home office at One American Row, Hartford, Connecticut. In consideration of the mutual covenants contained herein, the parties hereto agree as follows: 1. Appointment of Manager
Client hereby engages the Manager and, subject to the oversight of Client's
Board of Directors, delegates to the Manager the power to manage (including the
power to acquire or dispose of), in accordance with the terms and conditions of
this Agreement, the assets of the Account. The "Account" shall mean the assets
of the Client which are acceptable to the Manager and which by notice given or
caused to be given by the Client to the Manager are placed in the control of the
Manager pursuant to this Agreement, and the investments and reinvestments of,
and all income earned by, or distributions received with respect to, any assets
in the Account, subject to the provisions of Section 3 of this Agreement. The
Client may make any addition to or withdrawal from the Account at any time and
in any amount that the Client determines, so long as the Client promptly
notifies the Manager in writing of any addition to the Account and the amount of
the addition, and so long as the Client makes no withdrawal from the Account
without first delivering to the Manager within a reasonable time prior to the
withdrawal, written notice of the intended withdrawal and the amount of the
withdrawal. 2. Acceptance by Manager The Manager hereby acknowledges and agrees to the engagement provided for in Section 1 hereof, and represents and warrants that it is duly registered with the Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940. 3. Investment Direction (a) The Client's fundamental investment policies and any applicable investment guidelines and procedures are set forth in Schedule 3 attached hereto and made a part hereof. Schedule 3 may be amended in a writing delivered to Manager by Client and shall be effective upon receipt by Manager. The Client hereby directs the Manager to select investments for the Account in compliance with such policies and in accordance with such guidelines and procedures. (b) Unless and until notice in writing to the contrary is given or caused to be given by the Client to the Manager, all interest payments and other distributions with respect to any security or other property in the Account shall be reinvested. (c) Upon receiving written notice from the Client that a specified cash amount is required from the Account, the Manager shall liquidate such portion of the Account as may be necessary to provide the specified cash amount. The Manager shall in its sole discretion select the assets of the Account to be liquidated in such event, provided that the investment guidelines set forth in Schedule 3 shall be complied with to the extent possible after giving effect to such liquidation. The directions contained herein may be modified at any time by the Client by notice in writing to the Manager. 4. Custody of Securities The Client will establish and maintain a custody account with a custodian ("Custodian") acceptable to the Manager for all assets in the Account. The Custodian shall be such entity as the Client may designate from time to time by notice given or caused to be given in writing to the Manager. The Client agrees to give the Manager at least thirty days' written notice of any change of Custodian. The Client shall cause the Custodian to inform the Manager promptly of all assets placed in such Account by the Client and to establish reporting and accounting arrangements such that the Manager will be kept advised as to the value of the investments (including cash and cash equivalents) held in the Account. 5. Manager's Authority (a) Subject to the provisions of Sections 1 and 3 and Schedule 3 of this Agreement, the Manager is authorized by the Client to invest, sell and reinvest the assets of the Account as it deems appropriate. The Manager is not authorized to take physical possession of the assets of the Account; and the Custodian shall have sole responsibility for holding and safekeeping the assets. The Custodian shall make settlement of purchases and sales of such assets upon orders placed by the Manager pursuant to the Custodian's established operating procedures. The Manager shall promptly notify the Custodian in writing of any purchase or sale made for the Account. (b) The Manager shall select brokers and dealers for any purchase or sale of assets of the Account. The Manager may, in the allocation of portfolio brokerage business and the payment of brokerage commissions, consider the brokerage and research services furnished the Manager by brokers and dealers, in accordance with the provisions of Section 28(e) of the Securities Exchange Act of 1934, as amended. (c) The Manager will not be required to take any action, or render any advice, with respect to the voting of any of the securities in the Account and Client agrees to be solely responsible for the voting of any such securities and for any required recordkeeping with respect thereto. 6. Documentation to be Furnished (a) The Manager shall keep accurate and detailed accounts of any investments, receipts and disbursements, and other transactions hereunder, and all such accounts and the books and records relating thereto shall be open to inspection at all reasonable times by the Client, Client's representatives or designees, and by any other person entitled by law to inspect such records. (b) Upon written request, the Manager shall make available to the Client any information in the Manager's possession which may be required by the Client in fulfilling any reporting, disclosure, or recordkeeping obligation imposed on the Client by applicable law. 7. Appraisal; Determinations of Value The Manager shall provide the Client with an appraisal of the Account as of the last day of each calendar month on which the New York Stock Exchange is open (the "Appraisal Date") during the term of this Agreement. Such appraisal shall include a written statement of each -2- individual asset held in the Account on the Appraisal Date. Common stock, preferred stock, voting trust certificates, rights, warrants and other similar securities for which market quotations are readily available shall be valued at market value, which is determined using the last reported sale price, or, if no sales are reported, the last reported bid price. Bonds, debentures, notes and other fixed income securities of similar nature, whether or not traded on a national securities exchange, shall be valued in accordance with any reasonable valuation method selected by the Manager and approved by the Client which is based on sales prices of the same or comparable securities on or reasonably preceding the Appraisal Date. Venture capital participations, oil and gas partnerships and leveraged leases shall be valued at book value determined in accordance
with generally accepted accounting principles. Other securities and all other
assets shall be valued at fair market value as determined in good faith by the
Manager and approved by the Client. 8. Compensation to Manager The Manager, as full compensation for services rendered under this Agreement, shall be paid a fee as specified in Schedule 8, as such schedule may be amended by the Manager upon at least thirty (30) days' written notice to the Client. For purposes of the calculation of the fee, the value of the securities in the Account shall be based upon monthly Average Assets Under Management. Average Assets Under Management shall be calculated for each asset class as set forth in Schedule 8 hereto, as the simple average of: (a) the value of the assets in the Account as of the last Appraisal Date in the current calendar month; and (b) the value of the assets in the Account as of the last Appraisal Date in the previous calendar month.
If the Manager serves for less than the whole of any calendar month, its
compensation shall be determined as provided above on the basis of the value of
the assets in the Account on the date of termination and shall be payable on a
pro rata basis for the period of the calendar month for which it has served as
Manager hereunder. The compensation of the Manager shall be paid by the Client
upon receipt of the Manager's statement for such compensation. 9. Assignment No assignment (as the term is defined in the Investment Adviser's Act of 1940) of this Agreement shall be made by the Manager without the written consent of the Client. 10. Initial Term, Renewal and Termination
The initial term of the Agreement shall be for one year from the Effective Date.
This Agreement shall be renewed automatically each year for another year
commencing on the anniversary of the Effective Date unless it is sooner
terminated. This Agreement may be terminated either by the Client or by the
Manager, by written notice given to the other party hereto, effective thirty
(30) days after receipt of such notice. Such termination shall be without
the payment of any penalty and without liability of any party to the others,
except that the party required to pay compensation under Section 8 shall remain
liable for any accrued but unpaid compensation due the Manager as of the date of
termination. In addition, the Client may terminate this Agreement without
advance notice to the Manager if Client pays a termination fee determined as if
the Manager had continued to provide services under this Agreement for a period
of thirty (30) days after the termination date. In such case, the
termination date shall be the Appraisal Date for purposes of computing the
termination fee. Termination by either party -3-
shall not have the effect of canceling orders to deposit or invest cash or to
purchase or sell securities or other property placed prior to the effectiveness
of termination. Termination of this Agreement for any reason shall not relieve
the Manager of liability or responsibility under this Agreement with respect to
the period prior to the effectiveness of the termination. 11. Liability of Manager Client specifically acknowledges and agrees that except for loss resulting from gross negligence, willful misfeasance, bad faith or reckless disregard on the part of the Manager in performance of its duties hereunder, neither the Manager nor any of the Manager's officers, directors, shareholders, agents or employees shall be liable hereunder for any action taken or not taken in providing services hereunder. 12. Other Agreements and Obligations (a)
It is understood that the Manager may have advisory or other contracts with
other persons, firms, or organizations (some of which may have investment
policies similar to those of the Account) and may have other interests and
businesses. In these connections the Manager may acquire information of a
confidential nature. The Client agrees that the Manager shall not be required to
provide investment advice or take any other action on behalf of the Account with
respect to any particular investment if such action by the Manager would involve
a violation of law. All information and advice furnished by either party to this
Agreement shall be treated as confidential and shall not be disclosed to third
parties except as required by law. (b)
The Manager may act as investment adviser to other clients and may give advice,
and take action, with respect to any of those clients that may differ from the
advice given, or the timing or nature of action taken, with respect to the
Account. The Manager shall have no obligation to purchase or sell for Client, or
to recommend for purchase or sale by Client, any security that the Manager, its
principals, affiliates or employees may purchase for themselves or for
any other clients. 13. Notices
All notices and instructions with respect to any matters contemplated by this
Agreement shall be deemed duly given when delivered in writing to the addresses
below or when deposited by first-class mail addressed as follows: (a) To Client: Charles J. Paydos, President PHL VARIABLE INSURANCE COMPANY One American Row Hartford, CT 06115 (b) To Manager: Patricia A Bannan, President PHOENIX INVESTMENT COUNSEL, INC. One American Row Hartford, CT 06115 14. Authority to Perform
Each of the parties to this Agreement hereby represents that it is duly
authorized and empowered to execute, deliver, and perform this Agreement and the
transactions contemplated -4-
hereby, that such action does not conflict with or violate any provision of law,
regulation, or contract, deed of trust, agreement, or other instrument to which
it is a party or by which it is bound or to which it is subject and that no
consent of any person or government regulatory agency to such party's performing
its obligation under this Agreement is required which has not been obtained, and
that this Agreement is a valid and binding obligation upon that party,
enforceable in accordance with its terms. 15. Governing Law
The laws of the State of Connecticut shall control all matters relating to this
Agreement and shall apply to the extent not preempted by Federal law. 16. Miscellaneous (a)
The Client acknowledges receipt of Part II of the Manager's Form ADV as required
by Rule 204-3 under the Investment Adviser's Act of 1940, as amended, more than
forty-eight (48) hours prior to the date of execution of this Agreement. (b)
This Agreement, including the schedules, constitutes the entire agreement
between the parties with respect to management of the assets in the Account and
supersedes all prior agreements between the parties relating to the matters
contained herein. Subject to the terms of Section 3 and 8, this Agreement may
not be amended except by a writing signed by the parties. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above. PHOENIX INVESTMENT COUNSEL, INC. By: /s/ Martin J. Gavin Executive Vice President PHL VARIABLE INSURANCE COMPANY By: /s/ Charles J. Paydos President -5- Exhibit 10.3 AMENDMENT #1 TO INVESTMENT MANAGEMENT AGREEMENT THIS AMENDMENT to the Investment Management Agreement by and between PHL Variable Insurance Company (the Client) and Phoenix Investment Counsel, Inc. (the Manager) (the Agreement) dated January 1, 1995, is effective as of the 1st day of January, 1998. 1. Amendment. Section 8 of the Agreement is amended and restated as follows: (a) The Manager, as full compensation for services rendered under this Agreement, shall be paid a fee as specified in Schedule 8, as such schedule may be amended from time to time. For purposes of the calculation of the fee, the value of the securities in the Account shall be based upon monthly Average Assets Under Management. Average Assets Under Management shall be calculated for each asset class as set forth in Schedule 8 hereto, as the simple average of: (i) the value of the assets in the Account as of the last Appraisal Date in the current calendar month; and (ii) the value of the assets in the Account as of the last Appraisal Date in the previous calendar month. (b) If the Manager serves for less than the whole of any calendar month, its compensation shall be determined as provided above on the basis of the value of the assets in the Account on the date of termination and shall be payable on a pro rata basis for the period of the calendar month for which it has served as Manager hereunder. The compensation of the Manager shall be paid by the Client upon receipt of the Managers statement for such compensation. 2. Reaffirmation. Except as provided above, the Agreement shall remain in full force and effect without amendment. IN WITNESS WHEREOF, the parties hereto have hereby executed this Amendment #1 on this, the 31st day of July, 1998 by their respective undersigned officers. PHOENIX INVESTMENT COUNSEL, INC. By: /s/ Michael E. Haylon Its: President PHL VARIABLE INSURANCE COMPANY By: /s/ David W. Searfoss Its: Executive Vice President cam\agrmt\0374-1.doc Schedule 8 COMPENSATION Class of Assets Management Fee Public Bonds 10 basis points of Average Assets Under Management Private Bonds 12 basis points of Average Assets Under Management Preferred Stocks 10 basis points of Average Assets Under Management Common Stocks 40 basis points of Average Assets Under Management Venture Capital 45 basis points of Average Assets Under Management Other Assets 45 basis points of Average Assets Under Management Cash and Short-Term Securities 5 basis points of Average Assets Under Management cam\agrmt\0374-1.doc Exhibit 10.4
AMENDED and RESTATED
TAX ALLOCATION AGREEMENT
This Agreement, executed as of the 1st day of January, 2001, by and among The Phoenix Companies, Inc. (Parent) and each of its undersigned subsidiaries: WITNESSETH: WHEREAS, the parties hereto are members of an affiliated group (Affiliated Group) as defined in Internal Revenue Code Section 1504(a); WHEREAS, Phoenix Home Life Mutual Insurance Company, a mutual life insurance company, organized under the laws of the State of New York, will convert from a mutual life insurance company into a stock life insurance company pursuant to a Plan of Reorganization under Section 7312 of the New York Insurance Law, as amended and restated on January 26, 2001 (the Plan); WHEREAS, the Affiliated Group of which Phoenix Home Life Mutual Insurance Company is the common parent immediately prior to the consummation of the Plan, will remain in existence after the consummation of the Plan, with The Phoenix Companies, Inc. as the common parent; WHEREAS, federal consolidated income tax returns have been filed by Phoenix Home Life Mutual Insurance Company for taxable years ending December 31, 1992, and for all subsequent taxable periods for which the Affiliated Group had been required to file a consolidated tax return, and the election to file a life-nonlife, consolidated income tax returns pursuant to Section 1504(c) of the Code will remain in effect after consummation of the Plan; and WHEREAS, it is The Phoenix Companies, Inc.s express purpose to comply with the principles of the New York Insurance Departments Circular Letter No. 33 the existing Tax Allocation Agreement by and among Phoenix Home Life Mutual Insurance Company and its affiliated companies dated November 10, 1994 (the Federal Tax Allocation Agreement) is hereby amended and restated effective upon the demutualization of Phoenix Home Life Mutual Insurance Company (the Plan Effective Date); NOW THEREFORE, in consideration of the mutual covenants and promises contained herein, the parties agree as follows: (1) Definitions For purposes of this Agreement, the following terms are defined: (a) Parent: The Phoenix Companies, Inc. Federal EIN: 06-1599088. (b) Affiliated Group: The Affiliated Group of corporations as defined in Section 1504(a) of the Internal Revenue Code of 1986 (the Code), of which The Phoenix Companies, Inc. is the common parent. (2)
Following consummation of the Plan of Reorganization, The Phoenix Companies,
Inc., as the common parent of the Affiliated Group, shall file a federal
consolidated income tax return for each subsequent taxable period as required
under the Code. (3)
Each subsidiary of The Phoenix Companies, Inc. shall execute and file such
consent elections, and other documents that may be required or appropriate for
the proper filing of such returns. If during a consolidated return period
the Parent or any subsidiary acquires or organizes another corporation that is
required to be included in the consolidated return, then such corporation shall
join in and be bound by this Agreement. (4)
To help assure the enforceable right of those members which are insurance
companies domiciled in the State of New York to recoup federal income taxes in
the event of future net losses, Parent shall establish and maintain an escrow
account consisting of assets eligible as an investment for such New York
domestic insurers, which account shall be in an amount equal to the excess of
the amount paid by such domestic insurers to the parent for federal income taxes
over the actual payment made by the Parent to the Internal Revenue Service on
behalf of such insurers. Escrow assets may be released from the escrow
account at such time as the permissible period for loss carrybacks has
elapsed. (5)
The tax liability or tax benefit for each member of the Affiliated Group shall
not be more than it would have paid if such member had filed on a separate
return basis. Each member of the Affiliated Group shall be compensated for
any foreign tax credits, investments credits, losses or any loss carryover
(collectively herein referred to as credits) generated by it to the
extent actually used in the consolidated return. Such compensation, which
shall equal the savings generated by such credits, shall be recorded on the
domestic insurers books as contributed surplus. Once any
member of the Affiliated Group is compensated for its credits, it cannot sue
such credits in the calculation of its tax liability under the separate return
basis. Any members credits which are not used in the consolidated
return and for which such member has not been paid shall be retained by such
member for possible future use. (6)
It is the intent of this Agreement that where state and local income taxes
apply, this Agreement also applies. Where applicable, each party to this
Agreement agrees to join as a member of any state unitary tax filing or state
combined tax filing of the Affiliated Group. Each party to this Agreement
shall also file separate company state tax returns where appropriate. The
total state and local tax return liability or benefit for every member of the
unitary, combined and separate company state tax filings shall be no more than
that it would have been if the member had filed on a separate return basis in
all state and local jurisdictions. Every member of a unitary or combined
state tax filing will be compensated currently for any credits generated by it
to the extent actually utilized in the unitary or combined state tax returns.
Any credits which are not used in a unitary or combined state tax return,
for which a member has not been compensated previously, shall be retained by
such member for possible future use. 2 Cam/Agrmt/0583-1 (7) For any period in which the Affiliated Group incurs an alternative minimum tax liability, each member shall provide for alternative minimum tax as if it were filing on a separate company basis. Members hall be compensated for alternative minimum tax losses to the extent they are used in the consolidated, unitary or combined returns. (8) For the purposes of this Agreement, a separate return is defined as a return completed by a member of the Affiliated Group as if it were and had been filing as a separate individual taxpayer. Intercompany transactions which are deferred under a consolidated tax return filing will be recognized. (9) All settlements under this Agreement shall be made within 30 days of the filing of the applicable estimated or actual consolidated federal corporate income tax return with the Internal Revenue Service or other taxing authority. All settlements shall be in cash or securities eligible as investments for such New York domestic insurers, at fair market value. (10) If taxable income, special deductions or credits reported in a consolidated federal income tax return are revised by the Internal Revenue Service or other appropriate authority, a recalculation of the tax liability for all parties to the Agreement shall be made. (11) A company will be treated as having withdrawn from the Agreement when that company cases to be a member of the Affiliated Group. The Agreement shall be terminated if the Affiliated Group ceases to exist, is terminated for any reason whatsoever, or fails to file a consolidated federal tax return for any taxable year. (12) Notwithstanding the withdrawal of any party to this Agreement, this Agreement shall remain in effect as to such party with respect to all periods prior to such withdrawal where such partys income is required to be included in the Affiliated Groups consolidated returns. (13) In any tax year in which this Agreement is terminated, it shall remain in full force and effect with respect to all periods prior to termination in which the income of the parties was required to be included in a consolidated return. (14) This Agreement shall be binding upon and inure to the benefit of any successor, whether by statutory merger, acquisition of assets or otherwise, to any of the parties hereto, to the same extent as if the successor had been an original party to the Agreement. (15) This Agreement shall not be assignable by any party without the prior written consent of the other parties. (16) Disputes arising in the implementation of the terms and conditions of this Agreement shall be settled by arbitration before a panel of three arbitrators pursuant to the rules of the American Arbitration Association. 3 Cam/Agrmt/0583-1 (17) Notwithstanding its termination, all material including, but not limited to, returns, supporting schedules, workpapers, correspondence and other documents relating to the consolidated return shall be made available to any party to this Agreement during regular business hours. (18) This Agreement supersedes and replaces all prior tax allocation agreements signed by any member of the Affiliated Group for tax periods beginning after the demutualization, or if later, the date the member joined the Affiliated Group. (19) Notwithstanding anything in this Agreement to the contrary, the Federal Tax Allocation Agreement and the Connecticut Tax Allocation Agreement dated August 25, 1993, are each hereby terminated in all respects effective as of the Plan Effective Date, except that such agreements shall remain in full force and effect thereafter with respect to tax periods prior to such date. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives. 238 COLUMBUS BLVD., INC. By: /s/ Philip R. McLoughlin PHOENIX LIFE AND ANNUITY COMPANY By: /s/ David W. Searfoss AMERICAN PHOENIX LIFE AND REASSURANCE COMPANY By: /s/ David R. Pellerin PHOENIX LIFE AND REASSURANCE COMPANY OF NEW YORK By: /s/ David R. Pellerin BOA PROPERTIES, INC. By: /s/ Christopher M. Wilkos PHOENIX NATIONAL INSURANCE COMPANY By: /s/ Gina Colopy OConnell DPCM HOLDINGS, INC. By: /s/ William R. Moyer PHOENIX NEW ENGLAND TRUST HOLDING COMPANY By: /s/ David Weston DUFF & PHELPS INVESTMENT MANAGEMENT CO. By: /s/ William R. Moyer PHOENIX REALTY EQUITY INVESTMENTS, INC. By: /s/ Christopher M. Wilkos 4 Cam/Agrmt/0583-1 EUCLID ADVISERS, LLC By: /s/ William R. Moyer PHOENIX REALTY GROUP, INC. By: /s/ Christopher M. Wilkos HLI MANAGEMENT CORPORATION By: /s/ Gerald Hayes PHOENIX REALTY INVESTORS, INC. By: /s/ Christopher M. Wilkos
PHOENIX REALTY SECURITIES, INC. By: /s/ Christopher M. Wilkos MAIN STREET MANAGEMENT COMPANY By: /s/ Deborah H. Holden PHOENIX STRATEGIC CAPITAL CORPORATION By: /s/ John J. Solan, Jr. PASADENA CAPITAL CORPORATION By: /s/ Malcolm Axon PHOENIX VARIABLE ADVISORS, INC. By: /s/ Simon Y. Tan PHL ASSOCIATES INSURANCE AGENCY OF AL, INC. By: /s/ Joseph E. Kelleher PHOENIX/ZWEIG ADVISERS, LLC By: /s/ William R. Moyer PHL ASSOCIATES INSURANCE AGENCY OF MA, INC. By: /s/ Joseph E. Kelleher PM HOLDINGS, INC. By: /s/ Dona D. Young PHL ASSOCIATES INSURANCE AGENCY OF NM, INC. By: /s/ Joseph E. Kelleher PRACTICARE, INC. By: /s/ Naomi Baline Kleinman
Issuer Purchases of Equity Securities
Results of Operations
December 31, 2005, 2004 and 2003
Financial Disclosure
Managements narrative analysis of the results of
operations is presented in lieu of Managements Discussion and Analysis of
Financial Condition and Results of Operations, pursuant to General Instruction
(I)(2)(a) of Form 10-K.
adjustment
less surrender charge
F-3
F-5
included in other comprehensive income (Note 3)
F-8
for deferred acquisition cost
adjustment and taxes
for deferred acquisition cost
adjustment and taxes
other comprehensive income
F-11
F-13
investments
available-for-sale securities included
in net income
losses
cost amortization
(benefit)
for the
years ended December 31, 2004, 2003 and 2002
PHL Variable Insurance Company:
FA-4
FA-5
FA-6
included in other comprehensive income (Note 3)
for deferred acquisition cost
adjustment and taxes
other comprehensive income
investments
available-for-sale securities included
in net income
gains (losses)
cost amortization
(benefit)
included in other comprehensive income (Note 3)
($ amounts in thousands):
($ amounts in millions):
impaired securities
for deferred acquisition cost
adjustment and taxes
included in other comprehensive income
($ amounts in thousands):
Value
Value
Value
Value
ended 2002, 2001 and 2000
included in other comprehensive income
Included in other comprehensive income
except share data)
INVERNESS MANAGEMENT LLC.By:
5
Cam/Agrmt/0583-1
PHL ASSOCIATES OF OH, INC. By: /s/ Joseph E. Kelleher | PXP INSTITUTIONAL MARKETS GROUP By: /s/ William R. Moyer | |
PHL ASSOCIATES OF TEXAS, INC. By: /s/ Gina Colopy OConnell | QUALITY TRUST By: /s/ Dorothy K. Dropick | |
PHL ASSOCIATES, INC. By: /s/ Joseph E. Kelleher | PXP SECURITIES CORPORATION By: /s/ William R. Moyer | |
PHL VARIABLE INSURANCE COMPANY By: /s/ Simon Y. Tan | ROGER ENGEMANN & ASSOCIATES By: /s/ Malcolm Axon | |
PHOENIX CAPITAL ADVISOR, INC. By: /s/ Michael E. Haylon | ROGER ENGEMANN MANAGEMENT COMPANY, INC. By: /s/ Malcolm Axon | |
PHOENIX CHARTER OAK TRUST COMPANY By: /s/ David Weston | RUTHERFORD FINANCIAL CORPORATION By: /s/ Nancy Engberg | |
PHOENIX DISTRIBUTION HOLDING COMPANY By: /s/ Dona D. Young | THE PHOENIX COMPANIES, INC. By: /s/ David W. Searfoss | |
PHOENIX EQUITY PLANNING CORPORATION By: /s/ William R. Moyer | WS GRIFFITH ADVISORS, INC. By: /s/ Richard Keidan |
6
Cam/Agrmt/0583-1
PHOENIX FOUNDERS, INC. By: /s/ Christopher M. Wilkos | W.S. GRIFFITH INSURANCE AGENCY OF AL, INC. By: /s/ Richard Keidan | |
PHOENIX GLOBAL SOLUTIONS, INC. By: /s/ Richard R. Paton | W.S. GRIFFITH INSURANCE AGENCY OF MA, INC. By: /s/ Richard Keidan | |
PHOENIX HOME LIFE MUTUAL INSURANCE COMPANY By: /s/ Dona D. Young | W.S. GRIFFITH INSURANCE AGENCY OF NM, INC. By: /s/ Richard Keidan | |
PHOENIX INTERNATIONAL CAPITAL CORPORATION By: /s/ Signature Illegible | W.S. GRIFFITH INSURANCE AGENCY OF OH, INC. By: /s/ Richard Keidan | |
PHOENIX INVESTMENT COUNSEL, INC. By: /s/ William R. Moyer | W.S. GRIFFITH INSURANCE AGENCY OF TX, INC. By: /s/ Gina Colopy OConnell | |
PHOENIX INVESTMENT MANAGEMENT COMPANY By: /s/ Dona D. Young | W.S. GRIFFITH & CO., INC. By: /s/ Richard Keidan | |
PHOENIX INVESTMENT PARTNERS, LTD. By: /s/ William R. Moyer |
7
Cam/Agrmt/0583-1
Exhibit 10.5
AMENDMENT #1
to
AMENDED and RESTATED
TAX ALLOCATION AGREEMENT
THIS AMENDMENT, executed as of the 1st day of January, 2006 (the Effective Date) by and among The Phoenix Companies, Inc. (Parent) and each of its undersigned subsidiaries, to the Amended and Restated Tax Allocation Agreement dated as of January 1, 2001 (the Agreement).
WITNESSETH:
WHEREAS, since the date Parent and certain of its subsidiaries entered into the Agreement, some of those subsidiaries have been dissolved, sold or renamed; and
WHEREAS, certain other companies have become subsidiaries of Parent eligible to be part of its consolidated return;
NOW THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows:
The Agreement shall remain in full force and effect in accordance with its terms except that the undersigned parties shall be the sole parties thereto on and after the Effective Date, subject to Section 11 of the Agreement, and subject to the ability of any qualifying subsidiary of Parent to be hereafter added as a party by execution of an addendum substantially in the form attached hereto as Exhibit A.
IN WITNESS WHEREOF, the undersigned parties, through their duly authorized offices, have executed this Amendment, effective as of the Effective date.
AMERICAN PHOENIX LIFE AND REASSURANCE COMPANY By: /s/ Michael E. Haylon | BOA PROPERTIES, INC. By: /s/ John H. Beers | |
DPCM HOLDING, INC. (f/k/a DUFF & PHELPS CAPITAL MARKETS CO.) By: /s/ Glenn H. Pease | DUFF & PHELPS INVESTMENT MANAGEMENT COMPANY By: /s/ Glenn H. Pease | |
ENGEMANN ASSET MANAGEMENT (f/k/a ROGER ENGEMANN & ASSOCIATES, INC. By: /s/ Glenn H. Pease | PASADENA CAPITAL CORPORATION By: /s/ Glenn H. Pease | |
PHL VARIABLE INSURANCE COMPANY By: /s/ Michael E. Haylon | PHOENIX DISTRIBUTION HOLDING COMPANY By: /s/ John H. Beers |
CAM\Agreements\0856 with electronic signatures.doc
PHOENIX EQUITY PLANNING CORPORATION By: /s/ Glenn H. Pease | PHOENIX FOUNDERS, INC. By: /s/ John H. Beers | |
PHOENIX GLOBAL SOLUTIONS, INC. By: /s/ John H. Beers | PHOENIX INTERNATIONAL CAPITAL CORPORATION (formerly, PHOENIX STRATEGIC CAPITAL CORPORATION) By: /s/ John H. Beers | |
PHOENIX INVESTMENT COUNSEL, INC. (f/k/a JOHN P. CHASE, INC.) By: /s/ Glenn H. Pease | PHOENIX INVESTMENT MANAGEMENT COMPANY By: /s/ John H. Beers | |
PHOENIX INVESTMENT PARTNERS, LTD By: /s/ Glenn H. Pease | PHOENIX LIFE AND ANNUITY COMPANY By: /s/ Michael E. Haylon | |
PHOENIX LIFE AND REASSURANCE COMPANY OF NEW YORK By: /s/ Michael E. Haylon | PHOENIX LIFE INSURANCE COMPANY By: /s/ Michael E. Haylon | |
PHOENIX NATIONAL TRUST HOLDING COMPANY By: /s/ John H. Beers | PHOENIX NEW ENGLAND TRUST HOLDING COMPANY By: /s/ John H. Beers | |
PHOENIX REALTY EQUITY INVESTMENTS, INC. By: /s/ John H. Beers | PHOENIX REALTY INVESTORS, INC. By: /s/ John H. Beers | |
PHOENIX VARIABLE ADVISORS, INC. By: /s/ John H. Beers | PM HOLDINGS, INC. By: /s/ Michael E. Haylon | |
PRACTICARE, INC. By: /s/ John H. Beers | PXP INSTITUTIONAL MARKETS GROUP, LTD. By: /s/ Glenn H. Pease |
CAM\Agreements\0856 with electronic signatures.doc
PXP SECURITIES CORP. By: /s/ Glenn H. Pease | THE PHOENIX COMPANIES, INC. By: /s/ Michael E. Haylon | |
RUTHERFORD FINANCIAL CORPORATION By: /s/ Glenn H. Pease | WS GRIFFITH SECURITIES, INC. By: /s/ John H. Beers | |
WS GRIFFITH ADVISORS, INC. By: /s/ John H. Beers |
CAM\Agreements\0856 with electronic signatures.doc
EXHIBIT A
ADDENDUM
THIS ADDENDUM to the Amended and Restated Tax Allocation Agreement dated as of January 1, 2001, (the Agreement) by and among The Phoenix Companies, Inc. (Parent) and other parties to its consolidated return is effective as of _______, 20__ (the Effective Date)
The undersigned subsidiary or affiliate of Parent [becomes] [became] eligible on _____, 2____ to join in Parents consolidated federal tax return. By executing this Addendum, such subsidiary or affiliate, agreeing to be bound by the terms of the Agreement, is made a party thereto effective as of the Effective Date.
IN WITNESS WHEREOF, the undersigned have executed this Addendum by their respective duly authorized officers,
[NEW PARTY]
THE PHOENIX COMPANIES, INC.
By: _______________________
By: /s/ John H. Beers
Its:
Its:
CAM\Agreements\0856 with electronic signatures.doc
EXHIBIT 31.1
CERTIFICATION
I, the Chief Executive Officer of PHL Variable Insurance Company (the registrant), certify that:
1.
I have reviewed this report on Form 10-K of the registrant;
2.
Based on my knowledge, this report 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 period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)
disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5.
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: March 31, 2006 | /s/ Philip K. Polkinghorn | |
Name: Philip K. Polkinghorn | ||
Title: Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION
I, the Chief Financial Officer of PHL Variable Insurance Company (the registrant), certify that:
1.
I have reviewed this report on Form 10-K of the registrant;
2.
Based on my knowledge, this report 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 period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)
disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5.
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: March 31, 2006 | /s/ Michael E. Haylon | |
Name: Michael E. Haylon | ||
Title: Chief Financial Officer |
EXHIBIT 32
CERTIFICATION
The undersigned hereby certify that the Annual Report on Form 10-K for the fiscal year ended December 31, 2005 of PHL Variable Insurance Company (the Company) filed with the Securities and Exchange Commission on the date hereof fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Philip K. Polkinghorn | /s/ Michael E. Haylon | |
Name: Philip K. Polkinghorn | Name: Michael E. Haylon | |
Title: Chief Executive Officer | Title: Chief Financial Officer | |
Date: March 31, 2006 | Date: March 31, 2006 |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to PHL Variable Insurance Company and will be retained by PHL Variable Insurance Company and furnished to the Securities and Exchange Commission or its staff upon request.
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