10-K 1 phlvic-20141231x10k.htm 10-K PHLVIC-2014.12.31-10K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
—————————
FORM 10-K
—————————
(Mark one)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014

OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________

Commission file number 333-20277

PHL VARIABLE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Connecticut
06-1045829
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
 
One American Row, Hartford, Connecticut
06102-5056
(Address of principal executive offices)
(Zip Code)
 
 
(860) 403-5000
(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   YES þ   NO ¨

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

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

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

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

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

PHL Variable Insurance Company is a wholly owned indirect subsidiary of The Phoenix Companies, Inc., and there is no market for the registrant’s common stock. As of April 6, 2015, there were 500 shares of the registrant’s common stock outstanding.

The registrant is filing this Form 10-K with the reduced disclosure format permitted by General Instruction (I)(1)(a) and (b) of Form 10-K.


Explanatory Note

This Annual Report on Form 10-K for the year ended December 31, 2014 (this “2014 Form 10-K”), being filed by PHL Variable Insurance Company (“we,” “our,” “us,” the “Company” or “PHL Variable”), contains audited financial statements of the Company, prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”), for the years ended December 31, 2014, 2013 and 2012, and unaudited U.S. GAAP quarterly financial statements and financial information of the Company for each of the quarterly periods (including six and nine month periods) of 2014 and 2013, which are presented on a revised basis to the extent contained in a periodic report previously filed by the Company with the Securities and Exchange Commission (the “SEC”), and except as indicated below, generally with the same level of disclosure as would be contained in such periodic reports of the Company, and with appropriate indication of the financial statements being revised (the “Previously Issued Financial Statements”).

This 2014 Form 10-K also corrects the Previously Issued Financial Statements for certain known errors, some of which are recorded in preceding SEC periodic reports as out-of-period adjustments, and includes a note to financial statements regarding the impact of these prior period adjustments.

On March 31, 2015, The Phoenix Companies, Inc. (“Phoenix”), filed with the SEC its Annual Report on Form 10-K for the year ended December 31, 2014 containing audited consolidated financial statements of Phoenix for the years ended December 31, 2014, 2013 and 2012, and unaudited quarterly consolidated financial statements and financial information of Phoenix for each of the quarterly periods (including six and nine month periods) of 2014 and 2013, all of which are presented on a restated or revised basis to the extent contained in a periodic report previously filed by Phoenix with the SEC (the “Phoenix Restatement”).

This 2014 Form 10-K revises the following financial statements and financial information of the Company: (i) the statement of income and comprehensive income, statement of cash flow and statement of changes in stockholders’ equity for the year ended December 31, 2012; (ii) the statement of income and comprehensive income, balance sheet, statement of cash flow and statement of changes in stockholders’ equity for the year ended December 31, 2013; and (iii) the statements of income and comprehensive income for the quarterly and year-to-date periods ending March, June and September of 2013 and 2014, as well as the associated balance sheets, statements of cash flow and statements of changes in stockholders’ equity for each of the respective periods.

This 2014 Form 10-K also includes the following explanatory disclosures: (i) Note 2 “Revision of Previously Reported Financial Information” discussing the cause and impact of the the correction of errors in the periods being revised in the Company’s financial statements; (ii) table headers, where appropriate, indicating the financial information in specified columns is revised; and (iii) controls and procedures disclosures under Part II, Item 9A, describing material weaknesses in internal control over financial reporting identified by the Company and the related plan of remediation.

For more information, see Note 2 “Revision of Previously Reported Financial Information” and Note 26 “Supplemental Unaudited Quarterly Financial Information” in this 2014 Form 10-K.


PHL VARIABLE INSURANCE COMPANY
Annual Report on Form 10-K
For the year ended December 31, 2014

TABLE OF CONTENTS


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



3

PART I

Unless otherwise stated, “we,” “our” or “us” means PHL Variable Insurance Company (the “Company” or “PHL Variable”). Furthermore, “Phoenix Life” refers to Phoenix Life Insurance Company and “PNX” or “Phoenix” refers to The Phoenix Companies, Inc.

Item 1.
Business

Overview

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

In 2014, 99% of PHL Variable product sales, as defined by total annuity deposits and total life premium, were annuities, and 94% of those sales were fixed indexed annuities.

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

Target Market

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

Competition

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

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

Major Products

Annuities

Fixed Indexed Annuities: This product provides single premium deferred annuities that offer a fixed interest account and a variety of indexed accounts that allow contract owners to earn index credits based on the performance of specific equity market or other price indices. Our major source of revenue on these contracts is the excess of investment income earned over interest and index credits, if any. Most contracts allow contract owners to change accounts once a year. One of the most popular indexed accounts credits the contract owners’ accounts with a return equal to the annual appreciation of the S&P 500 index, subject to a specified cap. Caps are changed regularly to reflect current market conditions; during 2014, caps ranged from 2.00% to 5.50%. Certain contracts also provide “premium bonuses,” which we contribute to contract owner account balances at issue and which also earn interest or index credits. Approximately 28% of indexed annuity deposits in 2014 included premium bonuses ranging from 4% to 15% of the initial deposit.


4

Contract owners also may elect a guaranteed minimum withdrawal benefit (“GMWB”), which for a separate fee provides a guaranteed income stream for the lifetime of the contract owners. The amount of income available is based on a separate “benefit base” that increases at a guaranteed rate established when the contract is sold and that is independent of the growth of the account balance. Withdrawals may begin immediately or after several years. Once a contract owner elects to receive income, withdrawals are first made from the account balance. If and when the balance is depleted, we continue to make the guaranteed income payments. In 2014, approximately 90% of all indexed annuity contracts sold included a GMWB. Certain annuities with a GMWB also include an enhanced withdrawal benefit (“EWB”) that allows for an additional amount of guaranteed income if certain qualifying conditions are met (confinement to a nursing care facility and/or inability to perform activities of daily living). In 2014, approximately 18% of all indexed annuity contracts sold included an EWB. Certain fixed indexed annuities include a guaranteed minimum death benefit (“GMDB”), pursuant to which beneficiaries receive an amount in excess of contract value if the annuitant dies in exchange for an additional fee. In 2014, approximately 25% of all indexed annuity contracts sold included a GMDB.

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

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

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

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

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

Life Insurance

Whole Life: This product provides permanent insurance coverage and tax-deferred savings in return for predetermined premium payments. Premiums are invested in our general account.

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

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


5

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

Variable annuities, a limited number of fixed annuities and variable life products offered by the Company are registered under the federal securities laws. The Company has not offered these products to new customers since our audited financial statements for the most recent fiscal year end, in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), have not yet been completed. Existing customers with existing contracts have been able to continue to invest in these products and change investment elections, but certain investment alternatives have closed for new investment.

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

Distribution and Related Services

Independent Producers: We distribute our products through independent producers who serve the middle market and are typically affiliated with one or more independent marketing organizations (“IMOs”). We have established selling agreements with IMOs representing more than 14,000 independent producers. In 2014, nearly 2,800 producers sold our products. Our distribution strategy for IMOs is to continue to expand the number of relationships and producers who do business with us by providing competitive products at competitive commission rates, providing exclusive product designs and features to certain IMOs, and enhancing our servicing and support technology.

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

Investments

Investment activities are an integral part of our business and net investment income is a significant component of our total revenues. We manage investments in our general account to match the durations of our insurance liabilities. We invest primarily in high-grade public and privately placed debt securities, balancing credit risk with investment yield. As of December 31, 2014, 95.6% of our total available-for-sale debt securities portfolio was investment grade. We invest a small percentage of our assets in limited partnerships and other investments that have variable returns. While our returns are more volatile, these asset classes have contributed substantially to our investment returns over time. As of December 31, 2014, 0.3% of cash and total investments were allocated to this asset class.


6

Hedging

Certain features of our variable and indexed annuity products expose us to risks such as equity price risk, equity volatility risk and interest rate risk. We hedge certain of those risks using derivatives. Our focus is on hedging the economic exposure related to potential future claims. For example, we hedge fixed indexed annuity premiums directed into indexed accounts by purchasing options designed to fund the index credits on these accounts. Our hedges generally do not qualify for hedge accounting and may result in significant reported accounting gains or losses. In addition, our hedges may expose us to counterparty credit risk. As of December 31, 2014, our net mark-to-market exposure to derivative counterparties prior to credit valuation adjustment (“CVA”) was $73.1 million, and the post CVA net mark-to-market exposure was $71.9 million. All of our counterparties had a credit rating of A or better with at least one Nationally Recognized Statistical Rating Organization (“NRSRO”). For additional information regarding hedging related business risks, please see the risk factors entitled “We may not be able to hedge our positions due to the inability to replace hedges as a result of our credit rating” and “Guaranteed benefits within our products that protect policyholders against significant downturns in equity markets may decrease our earnings, increase the volatility of our results if hedging strategies prove ineffective, result in higher hedging costs and expose us to increased counterparty risk, which may have a material adverse effect on our results of operations, financial condition and liquidity” contained in “Item 1A: Risk Factors” in Part I of this Form 10-K.

Policy Administration

As of December 31, 2014, we had 58,612 life insurance policies and 61,811 annuity contracts in force. Our Customer Care Center services policies on a number of administrative systems, supporting both policyholders and their advisors or agents. The cost of servicing policies is a significant component of our overall operating expenses. Servicing of some policies is outsourced to vendors who specialize in insurance policy administration.

Reinsurance

We use reinsurance agreements to limit potential losses, reduce exposure to larger risks and provide capital relief with respect to certain statutory requirements. We remain liable to the extent that reinsuring companies may not be able to meet their obligations under reinsurance agreements in effect. Failure of the reinsurers to honor their obligations could result in losses to the Company. Since we bear the risk of nonpayment, on a quarterly basis we evaluate the financial condition of our reinsurers and monitor concentrations of credit risk. Based on our review of their financial statements, reputation in the reinsurance marketplace and other relevant information, we believe that we have no material exposure to uncollectible life reinsurance. At December 31, 2014, five major reinsurance companies, including our affiliate, Phoenix Life, account for approximately 73% of the reinsurance recoverable. Phoenix Life comprised approximately 15%, or $67.2 million, of this total reinsurance recoverable.

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

See Note 4 to our financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information regarding reinsurance.


7

Regulation

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

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

We file regular reports, including detailed annual financial statements, with insurance regulatory authorities and are subject to periodic examination by such authorities. See Note 16 to our financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information.

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

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

As part of their regulatory oversight process, state insurance departments conduct periodic detailed examinations of the books, records, accounts and business practices of insurers domiciled in their states. State insurance departments also have the authority to conduct examinations of non-domiciliary insurers that are licensed in their states. The Connecticut Insurance Department issued a financial examination report on May 28, 2014 and a market conduct examination report on December 29, 2014.

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

PHL Variable reports its risk based capital (“RBC”) based on a formula calculated by applying factors to various risk characteristics of the insurer. The major categories of risks involved are asset risk, insurance risk, interest rate risk, market risk and business risk. The formula is used as an early warning tool by regulators to identify possible inadequately capitalized insurers for purposes of initiating regulatory action and not as a means to rank insurers generally. State insurance laws provide insurance regulators the authority to require various actions by, or take various actions against, insurers whose RBC ratio does not meet or exceed certain levels. As of December 31, 2014, PHL Variable’s RBC ratio was in excess of 200% of Company Action Level, the highest regulatory threshold.

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


8

General Development of Business

PHL Variable 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 web site is located at www.phoenixwm.com. (This and all other URLs included herein are intended to be inactive textual references only. They are not intended to be an active hyperlink to our web site. The information on our web site is not, and is not intended to be, part of this Form 10-K and is not incorporated into this report by reference.)

Our parent company, Phoenix Life, is a wholly owned subsidiary of Phoenix.

The following chart illustrates our corporate structure as of December 31, 2014.

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



9

Item 1A.
Risk Factors

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

We face risks related to the restatement of our prior period financial statements and the restatements of the prior period financial statements of our indirect parent, The Phoenix Companies, Inc.

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”) in the Explanatory Note and in Note 2 to our financial statements under “Item 8: Financial Statements and Supplementary Data” (and as previously reported in our Current Report on Form 8-K filed with the SEC on September 18, 2012, as amended), the Company’s audit committee concluded that certain of the Company’s previously issued U.S. GAAP financial statements should no longer be relied upon and should be restated because of certain errors in those financial statements. On April 25, 2014, we effected this restatement through the filing with the SEC of our 2012 Form 10-K containing our audited financial statements for the years ended December 31, 2012, 2011 and 2010 and interim unaudited financial statements presented for each period during the fiscal years 2012 and 2011, in each case presented on a restated and amended basis to the extent previously filed in a periodic report by the Company with the SEC, and other disclosures regarding this restatement.

As previously reported by our indirect parent, Phoenix, in a Current Report on Form 8-K filed with the SEC on November 8, 2012, as amended, management of Phoenix concluded that certain of it’s previously issued U.S. GAAP financial statements should no longer be relied upon and should be restated because of certain errors in those financial statements. Phoenix effected this restatement on April 1, 2014 through the filing with the SEC of its Annual Report on Form 10-K for the year ended December 31, 2012 containing audited consolidated financial statements for the years ended December 31, 2012, 2011 and 2010 and interim unaudited consolidated financial statements presented for each period during the fiscal years 2012 and 2011, which in each case are presented on a restated and amended basis to the extent previously filed in a periodic report by Phoenix with the SEC, and other disclosures regarding this restatement. In addition, as previously reported in a Phoenix Current Report on Form 8-K filed with the SEC on February 6, 2015, Phoenix concluded that certain of its previously issued U.S. GAAP financial statements should no longer be relied upon and should be restated because of certain errors in those financial statements. Phoenix effected this restatement through the filing with the SEC of its Annual Report on Form 10-K for the year ended December 31, 2014, containing audited consolidated financial statements for the years ended December 31, 2014, 2013 and 2012 and interim unaudited consolidated financial statements presented for each period during the fiscal years 2014 and 2013, which correct the financial statements for the full year ended December 31, 2012, all periods of 2013 and the first three quarters and six and nine month periods of 2014, as well as other disclosures regarding this restatement.

As discussed in the Explanatory Note and in Note 2 to our financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K, we are revising certain financial statements and financial information of the Company.

We resumed our status as a current SEC filer with the November 21, 2014 filing of our Quarterly Report on Form 10-Q for the period ended September 30, 2014, and resumed our timely SEC filer status with the filing of this Form10-K within the extension period afforded under Rule 12b-25 of the Exchange Act. Although the Company is resuming a timely SEC periodic report filing schedule with respect to our SEC periodic reports with the filing of this Form 10-K, the Company expects to continue to face many of the risks and challenges related to the restatements, including the following:

•
In the process of restating our prior period financial statements, we identified material weaknesses in our internal control over financial reporting, which existed as of December 31, 2014 and are reported under Item 9A “Controls and Procedures” in this Form 10-K, and we may fail to remediate these material weaknesses in our internal control over financial reporting and other material weaknesses may be identified in the future, which would adversely affect the accuracy and timing of our financial reporting;
•
The extraordinary processes undertaken to effect the restatements, including restatements of Phoenix’s insurance company subsidiaries, may not have been adequate to identify and correct all errors in our prior period financial statements and, as a result, we may discover additional errors and our financial statements remain subject to the risk of future restatement, which may impact our ability to timely complete our future SEC filings;
•
The outcome of litigation and claims as well as regulatory examinations, investigations, proceedings and orders arising out of the restatements and the failure by the Company and Phoenix to have filed certain previously delayed SEC reports on a timely basis;

10

•
The incurrence of significant expenses, including audit, consulting and other professional fees, related to the restatements, the completion of our financial statements on a timely and accurate basis, and the remediation of weaknesses in our internal control over financial reporting and disclosure controls and procedures;
•
Diversion of management and other human resources attention from the operation of our business associated with the restatements and remediation of our internal controls;
•
Risks associated with the restatements, and our ability to amend and update on a timely basis our existing registration statements, or file new registration statements, under the Securities Act and the Investment Company Act, as well as risks associated with Phoenix Life’s ability to amend and update on a timely basis its existing registration statements, or file new registration statements, under the Securities Act and the Investment Company Act;
•
Risks associated with the ongoing compliance obligations of the Company and Phoenix under the SEC Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order, which was approved by the SEC in March 2014 (the “March 2014 Order”), as was subsequently amended by an amended SEC administrative order approved by the SEC in August 2014 (the March 2014 Order, as amended, the “Amended Order”), and the risk of noncompliance with such Amended Order;
•
The risk that the filing of single, multi-period comprehensive Annual Reports on Form 10-K to effect certain of the restatements did not satisfy our and Phoenix’s obligations to file amended reports to each of the applicable previously filed Forms 10-K and 10-Q. We cannot provide assurance that such comprehensive reports satisfied our filing obligations and, if it is ultimately determined that they did not, we may be required to amend such comprehensive reports and/or file other amended reports. This would require us to devote substantial internal and external resources and cause us to incur significant fees and expenses for additional audit services as well as accounting and other consulting services. These fees and expenses, as well as the substantial time devoted by our management to make such filings with the SEC, could have a material adverse effect on our business, profitability and financial condition; and
•
Risks associated with our and Phoenix Life’s failure to file timely and accurate reports with state regulatory authorities.

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

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

As reported in “Item 9A: Controls and Procedures” of this Form 10-K, we have concluded that there are material weaknesses in our internal control over financial reporting and that our disclosure controls and procedures are ineffective as of December 31, 2014. Some of the interim measures we have taken to address weaknesses in our internal control over financial reporting are manual, which are more time consuming to prepare, more prone to errors than computerized systems, and require more exhaustive audit processes. It is necessary for us to maintain effective internal control over financial reporting to prevent fraud and errors and to maintain effective disclosure controls and procedures so that we can provide timely and reliable financial and other information. A failure to maintain adequate internal controls may adversely affect our ability to provide financial statements that accurately reflect our financial condition and timely report information. This could cause investors to lose confidence in our reported financial and other information and cause an adverse effect on our business and results of operations. A failure to correct material weaknesses in our internal controls and to replace interim measures taken to address weaknesses could result in further restatements of financial statements and correction of other information filed with the SEC or delays in the filing of future SEC reports, and the inability to update or file new registration statements covering the offer and sale of product offerings.

In addition, in May 2013, the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) issued a new version of its internal control framework, which became effective December 15, 2014. We intend to implement the 2013 COSO framework into our assessment of our internal control over financial reporting during 2015, which may reveal other deficiencies in our internal controls that may rise to the level of material weakness. Such an occurrence, or a failure to effectively remedy such a material weakness, could adversely affect investor confidence in the accuracy and timeliness of our financial reports. Failure to implement the 2013 COSO framework in 2015 may subject us to further scrutiny from the SEC.

11

The extraordinary processes undertaken to effect the restatements may not have been adequate to identify and correct all errors in the historical financial statements and, as a result, we may discover additional errors and our financial statements remain subject to the risk of future restatement.

The completion of the restatements involved many months of review and analysis, including highly technical analyses of our contracts and business practices, estimates and assumptions made by management, tax accounting and the proper application of relevant accounting rules and pronouncements. Many of the enhancements and changes to our processes are ongoing as of the filing date of this Form 10-K and we continue to integrate the complex changes we have already made. Given the complexity and scope of these exercises, and notwithstanding the extensive time, effort and expense that went into them, we cannot assure you that these extraordinary processes were adequate to identify and correct all material errors in our historical financial statements or that additional accounting errors will not come to light in the future in these or other areas.

While we have performed additional analyses and other procedures, and either implemented or plan to implement and test remediation measures as of the filing date of this Form 10-K, the previously identified material weaknesses have not been fully addressed and remediated. We continue to improve our internal control over financial reporting and disclosure controls and procedures by, among other things:

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

As a result, we cannot assure you that we will not discover additional errors, that future financial reports will not contain material misstatements or omissions, that future restatements will not be required and that we will be able to timely complete our SEC filings for periods subsequent to this Form 10-K.

The restatements and failure to timely file certain historical SEC periodic reports, as well as reported weaknesses in internal control over financial reporting and the failure to have compliant registration statements under the Securities Act and the Investment Company Act covering certain insurance products offered by the Company and Phoenix Life, may subject the Company, Phoenix Life and Phoenix to a broad range of potential actions that may be taken by the SEC including, but not limited to, SEC cease-and-desist orders, suspension on trading of Phoenix securities, deregistration of Phoenix securities and/or the assessment of possible civil monetary penalties and claims may be brought by other parties based on these and other restatement-related matters.

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

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

We use derivative instruments to hedge the liability exposure and the volatility of earnings associated with certain variable and fixed indexed annuity liabilities. Certain derivative counterparty agreements of certain subsidiaries contain provisions that permit the parties to terminate the agreements upon the occurrence of a default under the Indenture covering Phoenix’s 7.45% Quarterly Interest Bonds due 2032. In addition, certain of these agreements require our financial strength rating to be above a certain threshold. Given that our financial strength ratings are below a specified credit rating threshold in certain of our derivative agreements, the counterparties can request immediate payment, demand immediate and ongoing full collateralization on derivative instruments in net liability positions, or trigger a termination of existing derivatives and/or future derivative transactions. In certain derivative counterparty agreements, our financial strength ratings have been below the specified threshold levels since March 2009 and, when requested, the Company has provided collateralization on those derivative instruments.

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


12

The process of undertaking the restatements, the preparation of previously delayed SEC reports, the efforts otherwise necessary for the Company and Phoenix to become current and timely filers under the Exchange Act and the ongoing remediation of material weaknesses in internal control over financial reporting have diverted, and continue to divert, management and other human resources from the operation of our business.

The Board of Directors, members of management, and the accounting, legal, administrative and other staff of the Company and Phoenix spent significant time on the restatements and continue to spend significant time on the preparation of SEC filings, related disclosures and remediation of disclosure controls and procedures and internal control over financial reporting of the Company and Phoenix’s insurance company subsidiaries, and efforts otherwise necessary for the Company and Phoenix to each become current and timely filers under the Exchange Act. These resources have been, and will likely continue to be, diverted from the strategic and day-to-day management of our business. In addition, current, accurate financial information is essential to the management of our complex business, including controlling the financial risk associated with the products that the Company offers and sells.

The Company and Phoenix Life are delayed in filing with the SEC amendments to existing registration statements, or filing new registration statements, under the Securities Act or the Investment Company Act covering the offer and sale of certain of their respective insurance products, and errors were found in certain audited and unaudited Statutory financial statements of the Company and Phoenix Life, any or all of which may have a material adverse impact on the business and financial condition of the Company and Phoenix.

Phoenix conducts the majority of its business through Phoenix Life and the Company. The Company previously announced that it will continue to not issue any new SEC-registered life insurance and annuity contracts until new registration statements or amendments to existing registration statements covering the offer and sale of these products have been filed with and declared effective by the SEC.

In addition, until the Company and Phoenix Life have filed with the SEC new registration statements or amendments to their existing registration statements covering their products, and those new registration statements or amendments are effective, there will be ongoing uncertainty regarding our ability to continue to accept premiums, or to process certain other investment transaction requests, associated with the outstanding SEC-registered life insurance and annuity contracts of the Company and Phoenix Life. In such an event, these actions may have a material adverse impact on Phoenix’s future revenues, competitive position and consumer perception of Phoenix’s products, and its retention of existing contracts and may result in claims related to these SEC-registered products against us and Phoenix Life, any of which could have a material adverse effect on Phoenix’s business and financial results. In addition, in connection with its product offerings, PHL Variable relies on third-party vendors to supply vendor-generated products. PHL Variable’s failure to file new registration statements or amendments to existing registration statements may cause such vendors to terminate their relationships with PHL Variable, which in turn may cause PHL Variable to terminate many of its product offerings.

As a result of the restatements, certain errors were found in our and Phoenix Life’s financial statements filed with the applicable state insurance regulators. Those errors were corrected in subsequent filings with the applicable state insurance regulators. We do not believe the state insurance regulators will deem it necessary to adjust our or Phoenix Life’s historical unaudited Statutory financial statement filings with the applicable state insurance regulators. However, Phoenix concluded that the audited Statutory financial statements for the year ended December 31, 2012 filed by Phoenix Life with its applicable state insurance regulators, which restate Statutory financial statements for the year ended December 31, 2011, materially differ from the annual unaudited Statutory financial statements for the year ended December 31, 2012 previously filed by Phoenix Life. Also, the fact of our and Phoenix Life’s U.S. GAAP financial statement restatements and the delay in our filing of periodic reports with the SEC could result in various regulatory bodies conducting examinations or investigations and/or making inquiries of us and Phoenix Life concerning compliance with applicable laws and regulations, which may increase our compliance costs and the potential for regulatory investigations or proceedings or other claims. Any existing or future litigation, investigations, proceedings or claims that we, Phoenix and Phoenix Life are or could become involved in, or become the subject of, could have a material adverse effect on the business and financial condition.


13

Our failure to file, or timely file, audited Statutory financial statements with state regulatory authorities may result in, among other things, the imposition of sanctions and penalties against us, which could have a material adverse effect on our financial condition, results of operations and cash flows.

We are required to file audited Statutory financial statements with the applicable regulatory authorities annually. As a result of the U.S. GAAP restatements of prior period financial statements of the Company, Phoenix and Phoenix Life, we filed our audited Statutory financial statements for 2013 and 2012 after the initial due date, but within extensions granted by our domiciliary insurance regulator. Any delays in connection with the filing of audited Statutory financial statements with our applicable state regulatory authorities may result in, among other things, the imposition of sanctions and penalties against us, which could have a material adverse effect on our financial condition, results of operations and cash flows.

Risks Related to Our Business

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

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

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

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


14

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

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

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

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

Low interest rates also have increased the liability of our pension plans and other post-employment benefits. Further declines in interest rates could result in additional increases in these liabilities.
Conversely, if interest rates rise significantly, we could face an increase in unrealized losses in our investment portfolio. At the same time, it could cause life insurance policy loans, surrenders and withdrawals to increase as policyholders seek investments with higher returns. This could require us to sell invested assets at a time when their prices are depressed, which could cause us to realize investment losses.

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

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

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

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


15

Downgrades or withdrawals of debt and financial strength ratings could result in an increase in policy surrenders and withdrawals, adversely affect relationships with distributors, reduce new sales, limit our ability to trade in derivatives and increase our costs of, or reduce our access to, future borrowings.

Rating agencies assign the Company and Phoenix Life financial strength ratings, and assign Phoenix debt ratings, based in each case on their opinions of the ability by the Company, Phoenix and Phoenix Life to meet their respective financial obligations.

Phoenix’s ratings relative to other companies in the industry affect our competitive position. The Company, Phoenix, and Phoenix Life and their securities have been placed on negative credit ratings watch and/or downgraded or withdrawn by certain rating agencies in connection with the events which caused the need for the restatements and the failure to timely file the 2012 Form 10-K, the 2013 Form 10-K and certain of our other previously delayed SEC reports. These developments and any other events that could affect the ability of the Company to pay claims may cause downgrades or withdrawals which may cause reputational damage. This could materially and adversely affect our ability to distribute our products through unaffiliated third parties, new sales of our products, the persistency of existing customers, increase policy surrenders and withdrawals and our ability to borrow. We cannot predict what actions rating agencies may take, or what actions we may take in response. At this time, we cannot estimate the impact of specific future rating agency actions on sales or persistency.

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

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

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

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

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

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


16

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

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

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

We have limited access to external sources of liquidity and financing.

Our current financial strength and credit ratings limit our access to external sources of liquidity and financing. During periods of capital market volatility, this access could be further constrained, and the cost of financing could increase significantly. Our ongoing needs for liquidity include policy claims, surrenders, policy loans, commissions, interest and operating expenses. In addition, we may from time to time have discrete needs for liquidity, such as contributions to our pension plan or legal settlements. Our principal sources of liquidity are insurance premiums, annuity considerations, deposit funds and cash flow from our investment portfolio. Sales of assets that are readily convertible into cash represent an additional source. We do not have in place credit facilities or letters of credit that we could draw upon to meet our liquidity requirements. Without sufficient liquidity, we could be forced to realize investment losses, deplete capital or curtail certain of our operations, which would adversely impact our results of operations and financial condition.

Management targets a minimum company action level risk based capital of 225% at the Company. In 2014 and 2013, The Phoenix Companies, Inc. made capital contributions of $15.0 million and $45.0 million, respectively for our benefit. The Phoenix Companies, Inc. is a holding company and has no operations of its own. Its ability to pay interest and principal on outstanding debt obligations and to pay dividends to shareholders and corporate expenses depends primarily upon the ability of subsidiaries to pay dividends or to advance or repay funds which in some cases are restricted by laws and regulations, including laws establishing minimum solvency and liquidity thresholds. Phoenix Life has made a guarantee that the Company’s capital and surplus will be maintained at Authorized Control Level RBC at 250% (125% Company Action Level). PHL Variable may be unable to maintain its RBC at targeted levels.


17

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

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

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

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

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

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

Accounting standards and statutory capital and reserve requirements for these entities are prescribed by their respective insurance regulators and the National Association of Insurance Commissioners (“NAIC”). In addition, NAIC regulations define minimum risk-based capital (“RBC”) requirements relating to insurance, business, asset and interest rate risks, which are intended to be used by insurance regulators to identify deteriorating or weakly capitalized companies. Separately, some rating agencies have their own capital models that are used to assess capital adequacy as part of the rating process.

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


18

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

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

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

We record debt securities at fair value on our balance sheet. During periods of market disruption, including periods of significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, the valuation of securities may require the adoption of certain estimates and assumptions. In addition, prices provided by independent broker quotes or independent pricing services that are used in the determination of fair value can vary significantly for a particular security. As a result, valuations may include inputs and assumptions that require greater estimation and judgment as well as valuation methods which are more complex. These values may not be ultimately realizable in a market transaction, and may change very rapidly as market conditions change or assumptions are modified. Significant changes in value may have a material adverse effect on our results of operations and financial condition. In addition, a decline in fair value below the amortized cost of a security requires management to assess whether an other-than-temporary impairment (“OTTI”) has occurred. The decision on whether to record an OTTI or write-down is determined in part by our assessment of the financial condition and prospects of a particular issuer, projections of future cash flows and recoverability of the particular security as well as management’s assertion of whether it is more likely than not that we will sell the securities before recovery. See “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates” in this Form 10-K for further information regarding our impairment decision-making process. Management’s determination of whether a decline in value is other-than-temporary includes our analysis of the underlying credit and our intention and ability not to have to sell the security, versus the extent and duration of a decline in value. Our conclusions on such assessments may ultimately prove to be incorrect as facts and circumstances change, which could result in a material adverse effect on our results of operation and financial condition.

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

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

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

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


19

Our business operations and results could be adversely affected by inadequate performance of third-party relationships, including with respect to cyber security.

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

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

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

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

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

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

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

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

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

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


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

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

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

Federal and state regulation may increase our cost of doing business, impose additional reserve or capital requirements, levy financial assessments, or constrain our operating and financial flexibility, any of which could adversely affect our business, results of operations, financial condition or liquidity.

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

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

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


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

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

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

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

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

It is not feasible to predict or determine the ultimate outcome of regulatory proceedings or to provide reasonable ranges of potential losses. We believe that the outcomes of regulatory matters are not likely, either individually or in the aggregate, to have a material adverse effect on our financial condition. However, given the inherent unpredictability of regulatory matters, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on our financial statements in particular quarterly or annual periods.

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

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

It is possible that future accounting standards which we are required to adopt could change the current accounting treatment that we apply to our financial statements and that such changes could significantly affect our reported financial condition and results of operations. See Note 3 to our financial statements under “Item 8: Financial Statements and Supplementary Data - Adoption of New Accounting Standards” in this Form 10-K for additional information.


Item 1B.
Unresolved Staff Comments

As of December 31, 2014, the Company had no unresolved SEC staff comments regarding its periodic or current reports.

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Item 2.
Properties

Our executive headquarters consist of our main office building at One American Row in Hartford, Connecticut, which we own and occupy. As of December 31, 2014, we also leased space in one garage in Hartford, Connecticut for employee parking. Property is also leased for our home office in East Greenbush, New York.


Item 3.
Legal Proceedings

See Note 17 to our financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for a discussion of our legal proceedings, which is incorporated herein by reference.


Item 4.
Mine Safety Disclosures

Not applicable.



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PART II

Item 5.
Market for Registrant’s 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, Phoenix.

Dividends

In 2014, 2013 and 2012, we did not pay any dividends.


Item 6.
Selected Financial Data

We have omitted this information from this report pursuant to General Instructions (I)(1)(a) and (b) of Form 10-K and are filing this Form 10-K with the reduced disclosure format permitted by that General Instruction.



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

Management’s narrative analysis of the results of operations is presented in lieu of Management’s Discussion and Analysis of Financial Condition and Results of Operations, pursuant to General Instruction (I)(2)(a) of Form 10-K.

FORWARD-LOOKING STATEMENTS

The discussion in this Form 10-K may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We intend for these forward-looking statements to be covered by the safe harbor provisions of the federal securities laws relating to forward-looking statements. These forward-looking statements include statements relating to trends in, or representing management’s beliefs about our future transactions, strategies, operations and financial results and often contain words such as “will,” “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “is targeting,” “may,” “should” and other similar words or expressions. Forward-looking statements are made based upon management’s current expectations and beliefs concerning trends and future developments and their potential effects on us. They are not guarantees of future performance. Our actual business, financial condition or results of operations may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties which include, among others: (A) risks related to the restatement of our and Phoenix’s prior period financial statements and our internal control over financial reporting, which include (i) the presence of material weaknesses in our internal control over financial reporting, the potential failure to remediate material weaknesses in our internal control over financial reporting and that other material weaknesses may be identified in the future, which would adversely affect the accuracy and timing of our financial reporting; (ii) the extraordinary processes undertaken to effect the restatements by the Company and Phoenix may not have been adequate to identify and correct all errors in the historical financial statements and, as a result, we may discover additional errors and our financial statements remain subject to the risk of future restatement; (iii) the outcome of litigation and claims as well as regulatory examinations, investigations, proceedings and orders arising out of the restatement by the Company and Phoenix and the failure by the Company and Phoenix to have filed certain previously delayed SEC reports on a timely basis; (iv) our inability to hedge our positions due to our inability to replace hedges as a result of our credit rating; (v) the incurrence of significant restatement-related expenses; (vi) diversion of management and other human resources from the operation of our business; (vii) risks associated with the restatements by the Company and Phoenix and the Company’s ability to amend and update its existing registration statements, or file new registration statements, under the Securities Act and the Investment Company Act of 1940, as amended (the “Investment Company Act”), as well as risks associated with Phoenix Life’s ability to amend and update its existing registration statements, or file new registration statements, under the Securities Act and the Investment Company Act; (viii) risks associated with the ongoing compliance obligations of Phoenix and the Company under the SEC’s Cease-and-Desist Order, dated March 21, 2014, as amended by the Amended Cease-and-Desist Order, dated August 1, 2014; (ix) risk that the filing of single, multi-period comprehensive Annual Reports on Form 10-K to effect certain of the restatements by the Company and Phoenix did not satisfy our filing obligations and that we may be required to file additional reports to effect the restatements; (x) the risk that the Company’s, Phoenix’s and Phoenix Life’s restatements, the delay in filing of certain periodic reports with the SEC and errors corrected in subsequent statutory financial statement filings with state insurance regulators could result in regulatory investigations, examinations and/or inquiries, which may increase compliance costs and the potential for additional regulatory investigations, proceedings or other claims; and (xi) risks associated with our and Phoenix Life’s failure to file timely and accurate reports with state regulatory authorities; (B) risks related to our business, which include (i) unfavorable general economic developments including, but not limited to, specific related factors such as the performance of the debt and equity markets; (ii) the potential adverse effect of interest rate fluctuations on our business and results of operations; (iii) the potential adverse effect of legal actions and proceedings inherent in our business on our results of operations, financial position, business or reputation; (iv) further downgrades or withdrawals of our financial strength credit ratings, which could increase policy surrenders and withdrawals, adversely affect our relationships with distributors, reduce new sales, limit our ability to trade in derivatives and increase our costs of, or reduce our access to, future borrowings; (v)the impact on our results of operations and financial condition of any required increase in our reserves for future policyholder benefits and claims if such reserves prove to be inadequate; (vi) the possibility that mortality rates, persistency rates, funding levels or other factors may differ significantly from our assumptions used in pricing products; (vii) limited access to external sources of liquidity and financing; (viii) the effect of guaranteed benefits within our products; (ix) potential exposure to unidentified or unanticipated risk that could adversely affect our businesses or result in losses; (x) the consequences related to variations in the amount of our statutory capital could adversely affect our business; (xi) the possibility that we may not be successful in our efforts to implement a business plan focused on new market segments; (xii) changes in our investment valuations based on changes in our valuation methodologies, estimations and assumptions; (xiii) the availability, pricing and terms of reinsurance coverage generally and the inability or unwillingness of our reinsurers to meet their obligations to us specifically; (xiv) our ability to attract and retain key personnel in a competitive environment; (xv) our dependence on third parties to maintain critical business and administrative functions; (xvi) the strong competition we face in our business from banks, insurance companies and other financial services firms; (xvii) changes in tax law and policy may affect us directly or indirectly through the cost of, the demand for or profitability of our products or services; (xviii) the possibility that federal and state regulation may increase our cost of doing business, impose additional reserve or capital requirements, levy financial assessments or constrain our operating and financial flexibility; (xix) regulatory actions or examinations may harm our business; and (xx) changes in accounting standards; and (C) other risks and uncertainties described herein or in any of our filings with the SEC. Certain other factors which may impact our business, financial condition or results of operations or which may cause actual results to differ from such forward-looking statements are discussed or included in our periodic reports filed with the SEC and are available on our website at www.phoenixwm.com under “Investor Relations.” You are urged to carefully consider all such factors. We do not undertake or plan to update or revise forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections, or other circumstances occurring after the date of this Form 10-K, even if such results changes or circumstances make it clear that any forward-looking information will not be realized. If we make any future public statements or disclosures which modify or impact any of the forward-looking statements contained in or accompanying this Form 10-K, such statements or disclosures will be deemed to modify or supersede such statements in this Form 10-K.

MANAGEMENT’S DISCUSSION AND ANALYSIS

This section reviews our financial condition at December 31, 2014 and 2013; our results of operations for the years 2014, 2013 and 2012; and, where appropriate, factors that may affect our future financial performance. This discussion should be read in conjunction with our financial statements in this Form 10-K. We define increases or decreases greater than or equal to 200% as “NM” or not meaningful.


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Executive Overview

Business

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

In 2014, 99% of PHL Variable product sales, as defined by total annuity deposits and total life premium, were annuities, and 94% of those sales were fixed indexed annuities.

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

Earnings Drivers

Our profitability is driven by interaction of the following elements:

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

•
Policy benefits include death claims net of reinsurance cash flows, including ceded premiums and recoverables, interest credited to policyholders and changes in policy liabilities and accruals. Certain universal life reserves are based on management’s assumptions about future COI fees and interest margins which, in turn, are affected by future premium payments, surrenders, lapses and mortality rates. Actual experience can vary significantly from these assumptions, resulting in greater or lesser changes in reserves. In addition, we regularly review and reset our assumptions in light of actual experience, which can result in material changes to these reserves. For fixed indexed annuities, policy benefits include the change in the liability associated with guaranteed minimum withdrawal benefits. Certain of our variable annuity contracts include guaranteed minimum death and income benefits. The change in the liability associated with these guarantees is included in policy benefits. The value of these liabilities is sensitive to changes in equity markets, equity market volatility and interest rates, as well as subject to management assumptions regarding future surrenders, rider utilization rates and mortality.

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

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

•
Non-deferred operating expenses are expenses related to servicing policies, premium taxes, reinsurance allowances, non-deferrable acquisition expenses and commissions and general overhead, including professional fees and outside consulting and legal services. They also include pension and other benefit costs which involve significant estimates and assumptions.


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•
Deferred policy acquisition cost (“DAC”) amortization is based on the amount of expenses deferred, actual results in each quarter and management’s assumptions about the future performance of the business. The amount of future profit or margin is dependent principally on investment returns in our separate accounts, interest and default rates, reinsurance costs and recoveries, mortality, surrender rates, premium persistency and expenses. These factors enter into management’s estimates of gross profits or margins, which generally are used to amortize DAC. Actual equity market movements, net investment income in excess of amounts credited to policyholders, claims payments and other key factors can vary significantly from our assumptions, resulting in a change in estimated gross profits or margins, and a change in amortization, with a resulting impact to income. In addition, we regularly review and reset our assumptions in light of actual experience (or “unlock”), which can result in material changes in amortization for the period of the unlock.

•
Net realized investment gains or losses related to investments and hedging programs include transaction gains and losses, OTTIs and changes in the value of certain derivatives and embedded derivatives. Certain of our variable and fixed annuity contracts include guaranteed minimum withdrawal and accumulation benefits which are classified as embedded derivatives. The fair value of the embedded derivative liability is calculated using significant management estimates, including: (i) the expected value of index credits on the next policy anniversary dates; (ii) the interest rate used to project the future growth in the contract liability; (iii) the discount rate used to discount future benefit payments, which includes an adjustment for our credit worthiness; and (iv) the expected costs of annual call options that will be purchased in the future to fund index credits beyond the next policy anniversary. These factors can vary significantly from period to period.

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

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


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Recent Trends in Earnings Drivers

•
Net realized investment gains or losses. Net realized investment gains, excluding OTTI, have been driven primarily by realized gains or losses on both the embedded policy derivatives associated with the fixed indexed annuity and variable annuity guarantees, and the derivative instruments that are used to hedge these businesses. The changes in the fair value of the policy embedded derivatives and the derivative instruments are driven by changes in the equity markets, including interest rates, market volatility, and overall market levels, as well as changes in actual and projected policyholder behavior. In 2014, there were realized losses on the embedded derivatives, while there were gains on the variable annuity embedded derivatives and losses on the fixed indexed annuity embedded derivative in 2013. In 2014, the losses on the embedded derivatives were primarily driven by the continued decline of interest rates and increased volatility in the equity markets.

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

◦
The liability for profits followed by losses (“PFBL”), excluding the impact of unlocking, continues to increase during the periods in which we expect to have gross profits on the business. This long-term liability is sensitive to projected future interest rates, most notably the expected yield on invested assets. The liability increased more significantly in the current year compared to the prior year as a result of decreases in the new money yield for the year, and a change in the slope of the forward curve, which indicates the market expectation of future changes in interest rates.

As part of the annual assumption review and unlock, assumptions used in the calculation of the liability for PFBL are updated. In both 2013 and 2014, updates were made to long-term mortality assumptions that impacted expected future gross profits favorably. These updates resulted in an unlock benefit of $4.5 million for the year ended December 31, 2014 and a benefit of $86.2 million for the year ended December 31, 2013.

◦
Overall, mortality improved in 2013 and has stayed consistent between 2013 and 2014. As a result, policy benefit expenses associated with incurred claims has remained consistent between the periods.

◦
Changes in the liabilities associated with guaranteed benefits are impacted by changes in actual policyholder behavior and expected policyholder behavior, as well as market changes and investment results. The most significant driver of changes in liabilities associated with guaranteed benefits is the fixed indexed annuity business. As a result of realized losses on the investments that are used to hedge this business, the liability accrual for the year ended December 31, 2014 was less than that for the year ended December 31, 2013. Generally, realized losses on the derivatives used to hedge this business will be offset by a benefit to the guaranteed benefit liabilities.

•
Other operating expenses. Other operating expenses have remained at elevated levels and continued to impact our earnings. These expenses are driven primarily by professional fees, including audit, outside consulting and legal services due to the preparation of financial statements and remediation efforts. Audit, other professional fees and outside consulting and legal services continue to be a driver of other operating expenses for the Company.

•
Deferred policy acquisition cost amortization. Policy acquisition cost amortization can fluctuate significantly between periods. The most significant drivers of the changes in policy acquisition cost amortization are due to realized gains / losses on the underlying investment portfolios, and changes due to the annual assumption review and unlock. Realized losses on the derivatives that are used to hedge the fixed indexed annuity business have provided benefits to amortization for the year ended December 31, 2014, while the assumption updates implemented as part of the annual unlock provided a benefit for the year ended December 31, 2013 and a loss for the year ended December 31, 2014.

•
Income taxes. The effective tax rate for 2014 and 2013 was (3.6%) and (62.2%), respectively. The primary drivers of the differences between the effective tax rate and the U.S. statutory rate of 35% in 2014 is the increase in the valuation allowance on the pre-tax loss and the dividends received deduction. The primary drivers of the differences between the effective tax rate and the U.S. statutory rate in 2013 is the decrease in the valuation allowance on the pre-tax income and the dividends received deduction.

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Strategy and Outlook

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

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

Recent trends in the life insurance industry may affect our mortality, policy persistency and premium persistency for certain blocks of in force business. Deviations in experience from our assumptions have had, and could continue to have, an adverse effect on the profitability of certain universal life products. Most of our current products permit us to increase charges and adjust crediting rates during the life of the policy or contract (subject to guarantees in the policies and contracts). We have made, and may in the future make, such adjustments.

Each year we perform a comprehensive assumption review or an unlocking where we revise our assumptions to reflect the results of recent experience studies, thereby changing our estimate of estimated gross profits (“EGPs”) in the DAC and unearned revenue amortization models, as well as projections within the death benefit and other insurance benefit reserving models.

Impact of New Accounting Standards

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

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. GAAP. In preparing these financial statements in conformity with U.S. GAAP, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions are made in the determination of EGPs used in the valuation and amortization of assets and liabilities associated with universal life and annuity contracts; policyholder liabilities and accruals; valuation of investments in debt and equity securities; limited partnerships and other investments; valuation of deferred tax assets; and accruals for contingent liabilities. Actual results could differ from these estimates.

Certain of our critical accounting estimates are as follows:

Deferred Policy Acquisition Costs

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


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

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

The Company has updated a number of assumptions that have resulted in changes to expected future gross profits. The most significant assumption updates made over the last several years resulting in a change to future gross profits and the amortization of DAC, SIA and URR are related to changes in expected premium persistency, the incorporation of a mortality improvement assumption and other updates to mortality based on updated experience. Other of the more significant drivers of changes to expected gross profits over the last several years include changes in expected separate account investment returns due to changes in equity markets; changes in expected future interest rates and default rates based on continued experience and expected interest rate changes; changes in mortality, lapses and other policyholder behavior assumptions that are updated to reflect more recent policyholder and industry experience; and changes in expected policy administration expenses.

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

Policy Liabilities and Accruals

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

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

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

We expect that our universal life block of business will generate profits followed by losses and, therefore, we establish an additional liability (“PFBL”) to accrue for the expected losses over the period of expected profits. The assumptions used in estimating these liabilities are consistent with those used for amortizing deferred policy acquisition costs and are subject to the same variability and risk.

See Note 3 to our financial statements under “Item 8: Financial Statements and Supplementary Data” and the “Enterprise Risk Management” section of “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K for additional information.


30

Embedded Derivative Liabilities

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

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

The CSA is updated every quarter and, therefore, the fair value will change with the passage of time even in the absence of any other changes that would affect the valuation. For example, the December 31, 2014 fair value of $160.3 million would increase to $170.0 million if the spread were decreased by 50 basis points. If the spread were increased by 50 basis points, the fair value would decrease to $151.4 million.

Valuation of Debt and Equity Securities

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

Fair Value of Securities
by Pricing Source: [1]
As of December 31, 2014
($ in millions)
Fixed
Maturities
at Fair Value
 
% of
Total
Fair Value
 
 
 
 
Priced via independent market quotations
$
2,965.5

 
68.9
%
Priced via matrices
1,209.2

 
28.1
%
Priced via broker quotations
15.7

 
0.4
%
Priced via other methods
31.4

 
0.7
%
Short-term investments [2]
79.8

 
1.9
%
Total
$
4,301.6

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

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


31

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

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

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

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

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

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

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

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

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

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

See Note 3 and Note 7 to our financial statements under “Item 8: Financial Statements and Supplementary Data” and the “Debt and Equity Securities” and “Enterprise Risk Management” sections of “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K for more information.

Income Taxes

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

We are included in the consolidated federal income tax return filed by Phoenix and are party to a tax sharing agreement by and among Phoenix and its subsidiaries. In accordance with this agreement, federal income taxes are allocated as if they had been calculated on a separate company basis, except that benefits for any net operating losses or other tax credits generated by the Company will be provided at the earlier of when such loss or credit is utilized in the consolidated federal tax return and when the tax attribute would have otherwise expired.


32

Deferred tax assets and/or liabilities are determined by multiplying the differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled. U.S. GAAP requires an assessment of the realizability of deferred tax assets in order to determine whether a valuation allowance should be recorded. The total deferred tax asset, net of any valuation allowance, represents the deferred tax asset that management estimates to be realizable. The assessment of the realizability of deferred tax assets involves management making assumptions and judgments about all available positive and negative evidence including the reversal of gross deferred tax liabilities, projected future taxable income, prudent and feasible tax planning strategies and recent operating results, including the existence of cumulative income (loss) incurred over the three-year period ended December 31, 2014.

As of December 31, 2014, we concluded that our estimates of future taxable income, certain tax planning strategies and other sources of income did not constitute sufficient positive evidence to assert that it is more likely than not that certain deferred tax assets would be realizable. Accordingly, a valuation allowance of $127.9 million has been recorded on net deferred tax assets of $141.0 million. The valuation allowance recorded constitutes a full valuation allowance on the net deferred tax assets that require future taxable income in order to be realized. The remaining deferred tax asset of $13.1 million attributable to available-for-sale debt securities with gross unrealized losses does not require a valuation allowance due to our ability and intent to hold these securities until recovery of principal value through sale or contractual maturity, thereby avoiding the realization of taxable losses. This conclusion is consistent with prior periods. The impact of the valuation allowance on the allocation of tax to the components of the financial statements included an increase of $43.1 million in net loss and an increase of $14.9 million in OCI-related deferred tax balances.

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

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

See Note 11 to our financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for more information related to income taxes.

Litigation Contingencies

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


33

Results of Operations

Summary Financial Data:
($ in millions)
For the years ended
December 31,
 
Increase (decrease) and
percentage change
 
2014
 
2013
 
2014 vs. 2013
REVENUES:
 
 
 
 
 
 
 
Premiums
$
12.4

 
$
13.9

 
$
(1.5
)
 
(11
%)
Insurance and investment product fees
358.3

 
367.0

 
(8.7
)
 
(2
%)
Net investment income
172.0

 
140.9

 
31.1

 
22
%
Net realized investment gains (losses):
 
 
 
 
 
 
 
Total other-than-temporary impairment (“OTTI”) losses
(1.3
)
 
(0.9
)
 
(0.4
)
 
44
%
Portion of OTTI losses recognized in
  other comprehensive income (“OCI”)
—

 
(0.9
)
 
0.9

 
(100
%)
Net OTTI losses recognized in earnings
(1.3
)
 
(1.8
)
 
0.5

 
(28
%)
Net realized investment gains (losses), excluding OTTI losses
(63.7
)
 
(1.2
)
 
(62.5
)
 
NM

Net realized investment gains (losses)
(65.0
)
 
(3.0
)
 
(62.0
)
 
NM

Total revenues
477.7

 
518.8

 
(41.1
)
 
(8
%)
BENEFITS AND EXPENSES:
 
 
 
 
 
 
 
Policy benefits
397.7

 
277.6

 
120.1

 
43
%
Policy acquisition cost amortization
84.9

 
83.4

 
1.5

 
2
%
Other operating expenses
100.6

 
118.1

 
(17.5
)
 
(15
%)
Total benefits and expenses
583.2

 
479.1

 
104.1

 
22
%
Income (loss) before income taxes
(105.5
)
 
39.7

 
(145.2
)
 
NM

Income tax expense (benefit)
3.8

 
(24.7
)
 
28.5

 
(115
%)
Net income (loss)
$
(109.3
)
 
$
64.4

 
$
(173.7
)
 
NM


Analysis of Results of Operations

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

The decrease in net income of $173.7 million for the year ended December 31, 2014 compared to the year ended December 31, 2013 is primarily due to the following items:

•
The increase in policy benefits expense of $120.1 million for the year ended December 31, 2014 compared to the year ended December 31, 2013 is primarily driven by the following:

◦
A decrease of $87.0 million in the unlock benefit in 2014, which was a benefit of $95.3 million in 2013 and a benefit of $8.3 million in 2014. The unlock benefit in the current year is driven primarily by changes in policyholder behavior assumptions in the universal life business, most significantly mortality and lapses. The benefit in 2013 was driven primarily by the incorporation of a mortality improvement assumption in the universal life business.

◦
An increase of $40.0 million in PFBL, excluding unlock, in 2014 compared to 2013. The increase in PFBL was primarily driven by a decrease in the new money yield for the year and the slope of the forward curve, which indicates the market expectation of future changes in interest rates which reduces expected future profitability and increases the liability.

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


34

•
Realized losses increased by $62.0 million for the year ended December 31, 2014 compared to the year ended December 31, 2013. In 2014, there were realized losses on the embedded derivatives both in the fixed indexed annuity business and the variable annuity business, while there were gains on the variable annuity embedded derivatives and losses on the fixed indexed annuity embedded derivatives in 2013. In 2014, the losses on the embedded derivatives were primarily driven by the continued decline of interest rates and increased volatility in the equity markets. In 2013, the gains were driven primarily by strong equity market performance decreasing the liability associated with the variable annuity guarantees.

•
The income tax expense increased $28.5 million from a benefit of $24.7 million for the year ended December 31, 2013 to an expense of $3.8 million for the year ended December 31, 2014. The increase in 2014 was primarily driven by an increase in current tax expense accrued.

•
Premium revenue decreased $1.5 million for the year ended December 31, 2014 compared with the year ended December 31, 2013 as a result of lower renewal premiums due to declining policies in force.

Partially offsetting the decrease in net income are the following:

•
Net investment income increased $31.1 million for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase in net investment income is driven primarily by continued sales of the fixed indexed annuity business and overall higher asset levels while the yield has remained relatively stable.

•
Other operating expenses decreased $17.5 million for the year ended December 31, 2014 compared to the year ended December 31, 2013. The decrease in other operating expenses is driven primarily by a decrease in the amount of audit fees and other professional services fees that are being allocated to the Company.

Effects of Inflation

For the years 2014, 2013 and 2012, inflation did not have a material effect on our results of operations.

Enterprise Risk Management

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

Operational Risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. As reported in “Item 9A: Controls and Procedures” of this Form 10-K, the Company has concluded that there are material weaknesses in its internal control over financial reporting, which have materially adversely affected its ability to timely and accurately report its results of operations and financial condition, and that its disclosure controls and procedures are ineffective as of December 31, 2014. These material weaknesses have not been fully remediated as of the filing date of this report and the Company cannot assure that other material weaknesses will not be identified in the future. It is necessary for the Company to maintain effective internal control over financial reporting to prevent fraud and errors, and to maintain effective disclosure controls and procedures so that it can provide timely and reliable financial and other information. If the Company fails to maintain an effective system of internal controls, the accuracy and timing of its financial reporting may be adversely affected. Further, the absence of timely and reliable financial and other information about the Company’s business operations may inhibit the Company’s ability to identify operational risk. A failure to correct material weaknesses in our internal controls could result in further restatements of financial statements and correction of other information filed with the SEC. See “Item 1A: Risk Factors” in Part I of this Form 10-K for a description of these and other risks that may impact the Company’s operations. Also see “Item 9A: Controls and Procedures” in Part II of this Form 10-K for more information regarding these weaknesses, an evaluation of the effectiveness of the Company’s disclosure controls and procedures, and the Company’s remediation plans.

35

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

Market Risk

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

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

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

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

Interest Rate Risk Management

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

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

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

One of the key measures we use to quantify our interest rate exposure is duration, a measure of the sensitivity of the fair value of assets and liabilities to changes in interest rates. For example, if interest rates increase by 100 basis points, or 1%, the fair value of an asset or liability with a duration of five is expected to decrease by 5%. We believe that as of December 31, 2014, our asset and liability portfolio durations were reasonably matched.

36

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

Interest Rate Sensitivity of
Fixed Income Financial Instruments:
As of December 31, 2014
($ in millions)
-100 Basis
Point
Change
 
Fair
Value
 
+100 Basis
Point
Change
 
 
 
 
 
 
Cash and short-term investments
$
242.3

 
$
242.1

 
$
241.9

Available-for-sale debt securities
4,479.9

 
4,221.8

 
3,975.2

Available-for-sale equity securities
30.8

 
28.7

 
26.1

Fair value investments [1]
47.4

 
46.7

 
45.6

Totals
$
4,800.4

 
$
4,539.3

 
$
4,288.8

———————
[1]
Includes debt securities where the fair value option has been elected.

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

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

We enter into interest rate swap agreements to reduce market risks from changes in interest rates. We do not enter into interest rate swap agreements for trading purposes. Under interest rate swap agreements, we exchange cash flows with another party at specified intervals for a set length of time based on a specified notional principal amount. Typically, one of the cash flow streams is based on a fixed interest rate set at the inception of the contract and the other is based on a variable rate that periodically resets. No premium is paid to enter into the contract and neither party makes payment of principal. The amounts to be received or paid on these swap agreements are accrued and recognized in net investment income.
The table below shows the interest rate sensitivity of our derivatives measured in terms of fair value, excluding derivative liabilities embedded in products. These exposures will change as our insurance liabilities are created and discharged and as a result of portfolio and risk management activities.

Interest Rate Sensitivity of
Derivatives:
As of December 31, 2014
($ in millions)
Notional
Amount
 
Weighted-
Average Term
(Years)
 
-100 Basis
Point
Change
 
Fair
Value
 
+100 Basis
Point
Change
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
114.0

 
9.9
 
$
17.2

 
7.8

 
$
(0.7
)
Variance swaps
0.9

 
2.0
 
(8.7
)
 
(8.6
)
 
(8.5
)
Swaptions
777.0

 
0.2
 
—

 
0.2

 
8.3

Put options
677.5

 
3.8
 
33.6

 
29.4

 
25.4

Call options [1]
1.5

 
0.9
 
0.8

 
0.9

 
0.9

Equity futures
2.9

 
0.3
 
(0.5
)
 
(0.5
)
 
(0.5
)
Total
$
1,573.8

 
 
 
$
42.4

 
$
29.2

 
$
24.9

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

See Note 9 to our financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information on derivative instruments.


37

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

Liabilities in excess of the policyholder account balance for universal life contracts, some of which contain secondary guarantees, are generally determined by estimating the expected value of benefits and expenses when claims are triggered and recognizing those benefits and expenses over the accumulation period based on total expected assessments. The assumptions used in estimating these liabilities are consistent with those used for amortizing DAC. The universal life block of business has experience which produces profits in earlier periods followed by losses in later periods for which a liability is required to be held in addition to the policy liabilities recorded.

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

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

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

The table below shows the interest rate sensitivity of our deferred policy acquisition costs and policy liabilities.

Interest Rate Sensitivity of
DAC and Policy Liabilities:
As of December 31, 2014
($ in millions)
-100 Basis
Point
Change
 
DAC [1]
 
+100 Basis
Point
Change
 
-100 Basis
Point
Change
 
Policy Liabilities [1]
 
+100 Basis
Point
Change
 
 
 
 
 
 
 
 
 
 
 
 
Universal life PFBL
$
—

 
$
—

 
$
—

 
$
429.9

 
$
352.2

 
$
316.4

Other universal life
146.1

 
152.7

 
155.5

 
153.7

 
154.6

 
154.9

Other life and annuity products [2]
—

 
—

 
—

 
57.3

 
54.1

 
51.4

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

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


38

Guaranteed Minimum Interest Crediting Rates

The primary potential risk to our operations related to guaranteed minimum interest crediting rates could arise mainly in our universal life product since the account values with higher guarantees, primarily 4.0%, are concentrated in this product. Our other annuity products also contain guaranteed minimum interest rates but the aggregate account values or the guaranteed minimum rates are relatively lower compared to universal life. At December 31, 2014, we have approximately $5.4 billion of policyholder insurance liabilities and policyholder deposit funds. Of this amount, approximately $4.1 billion represents contracts with crediting rates that may be adjusted over the life of the contract, subject to certain guaranteed minimums. The table below summarizes the related account values of policies with guaranteed minimum interest rates using ranges indicating the percentage of account values at the guaranteed minimum interest rate range. Our products that do not have an account value with a guaranteed minimum crediting rate are not included in the table below, even though most of our products to some degree are sensitive to interest rates. The table below focuses on products with both an account value and a guaranteed minimum interest rate. See the “Low Interest Rate Environment” section below for further discussion.

Range of Guaranteed Minimum Interest Crediting Rates:
As of December 31, 2014
($ in billions)
Account
Values
 
% of Account
Values at
Guaranteed
Minimum
Crediting Rate
 
 
 
 
Less than 1.5% [1]
$
2.8

 
83.0
%
Equal to or greater than 1.5% but less than 3.5%
0.4

 
82.6
%
Equal to or greater than 3.5% but less than or equal to 4.0%
0.8

 
73.5
%
Greater than 4.0% but less than 5.0%
0.1

 
70.9
%
Total
$
4.1

 
 
———————
[1]
Of the $2.8 billion, $2.7 billion represents account value in fixed indexed annuity products. Most of these contracts have guaranteed minimum interest crediting rates of 0%, or close to 0%.

Credit Risk Management

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

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

Equity Risk Management

Equity risk is the risk that we will incur economic losses due to adverse changes in equity prices. At December 31, 2014, we held certain financial instruments that are sensitive to equity market movements, including available-for-sale equity securities, primarily related to our holdings of common stock and mutual funds, private equity partnership interests and other equities, as well as fair value equity instruments, equity options and other investments. We manage equity price risk through industry and issuer diversification and asset allocation techniques.


39

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

Sensitivity to
Public Equity Market Movements:
As of December 31, 2014
($ in millions)
Balance after
-10% Equity
Price Change
 
Fair
Value
 
Balance after
+10% Equity
Price Change
 
 
 
 
 
 
Limited partnerships and other investments
$
11.3

 
$
12.5

 
$
13.8

Derivative instruments [1]
38.0

 
29.2

 
22.7

———————
[1]
Primarily includes swaptions, put options, call options and equity futures, excluding those associated with the fixed indexed annuity products.

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

Certain variable annuity products sold by us contain GMDBs. The GMDB feature provides annuity contract owners with a guarantee that the benefit received at death will be no less than a prescribed amount. This minimum amount is based on the net deposits paid into the contract, the net deposits accumulated at a specified rate, the highest historical account value on a contract anniversary or, if a contract has more than one of these features, the greatest of these values. To the extent that the GMDB is higher than the current account value at the time of death, the Company incurs a cost. This typically results in an increase in annuity policy benefits in periods of declining financial markets and in periods of stable financial markets following a decline. As of December 31, 2014, the difference between the GMDB and the current account value (NAR) for all existing contracts was $16.8 million. This was our exposure to loss had all contract owners died on December 31, 2014. See Note 8 to our financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information.

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

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


40

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

Equity Risk Sensitivity of
Our Liability Products:
As of December 31, 2014
($ in millions)
Balance after
-10% Equity
Price Change
 
Fair
Value
 
Balance after
+10% Equity
Price Change
 
 
 
 
GMAB [1]
$
1.2

 
$
(0.3
)
 
$
(1.8
)
GMWB [1]
10.5

 
6.9

 
3.5

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

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

Low Interest Rate Environment

As a result of the continuing low interest rate environment, the Company’s current reinvestment yields are generally lower than the current investment portfolio yield, primarily for our investments in fixed income securities. We expect our portfolio income yields to continue to gradually decline in future periods if interest rates remain low. Approximately 80% of the Company’s $5.4 billion total policy liabilities and deposit funds have account values that contain certain guaranteed minimum interest rates, principally universal life, fixed indexed annuities, and the fixed return portion of variable annuities.

For certain products, we guarantee interest rates to our policyholders and primarily invest in fixed rate securities to fund those guaranteed rates. Interest rate spread management could impact the Company most significantly in its universal life policies, since guaranteed interest rates, in some cases, are near or approaching our current reinvestment rate on our related fixed income securities. However, universal life account values represent less than 20.0% of our total policy liabilities, accruals, and deposit funds. The current book yield of the investment portfolio backing our universal life policies was approximately 4.6% for the year ended December 31, 2014 while the guaranteed minimum policyholder crediting rate for these policies was primarily at 4.0%.

While fixed indexed annuities comprise a larger balance of policies with guaranteed minimum interest rates to protect the initial investment, the crediting/guarantee rates on these products adjust more consistently with interest rates so there is a less significant impact to our results of operations.

The Company estimates that the annualized net investment income yield on its fixed income securities was approximately 4.3% during the year ended December 31, 2014. The average investment rate on fixed income securities purchases during the year ended December 31, 2014 was approximately 4.0% on total purchases of approximately $1.1 billion. Management estimates that proceeds from maturities, calls and prepayments of approximately $220 million is expected to be available for reinvestment over the next 12 months, before considering new deposits and premiums and other cash flow uses. Assuming such amounts are reinvested at new money interest rates prevailing at December 31, 2014, we estimate that would reduce net investment income by less than $3 million during the next 12 months. The estimated impact is subject to change as the composition of the portfolio changes through normal portfolio management and other factors.

The low interest rate environment discussion immediately above does not include the additional and interrelated impacts to earnings from the amortization of deferred policy acquisition costs and profits followed by losses which occurs in response to changing estimated gross profits. (See “Enterprise Risk Management - Market Risk - Interest Rate Sensitivity of DAC and Policy Liabilities” discussion above.)


41

Estimated Fair Value Measurement

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

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

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

Debt and Equity Securities

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

Our available-for-sale debt securities portfolio consists primarily of investment grade publicly traded and privately placed corporate bonds, residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and other asset-backed securities (“ABS”). As of December 31, 2014, available-for-sale equity securities include $28.7 million of perpetual preferred securities, of which $6.9 million was below-investment-grade. As of December 31, 2014, our available-for-sale debt securities, with a fair value of $4,221.8 million, represented 91.5% of total investments.

Available-for-Sale Debt Securities Ratings by Percentage:
 
As of December 31, 2014
($ in millions)

NAIC Rating
 
S&P Equivalent Designation
 
Fair
Value
 
% of
Fair
Value
 
Amortized
Cost
 
% of
Amortized
Cost
 
 
 
 
 
 
 
 
 
 
 
1
 
AAA/AA/A
 
$
2,477.2

 
58.7
%
 
$
2,363.8

 
58.2
%
2
 
BBB
 
1,557.8

 
36.9
%
 
1,510.3

 
37.2
%
 
 
Total investment grade
 
4,035.0

 
95.6
%
 
3,874.1

 
95.4
%
3
 
BB
 
133.2

 
3.1
%
 
132.3

 
3.2
%
4
 
B
 
50.0

 
1.2
%
 
51.2

 
1.3
%
5
 
CCC and lower
 
0.6

 
—
%
 
0.6

 
—
%
6
 
In or near default
 
3.0

 
0.1
%
 
2.7

 
0.1
%
 
 
Total available-for-sale debt securities
 
$
4,221.8

 
100.0
%
 
$
4,060.9

 
100.0
%


42

Available-for-Sale Debt Securities by Type:
As of December 31, 2014
($ in millions)
 
 
 
 
Unrealized Gains (Losses)
 
Fair
Value
 
Amortized
Cost
 
Gross
Gains
 
Gross
Losses
 
Net
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
89.3

 
$
82.4

 
$
6.9

 
$
—

 
$
6.9

State and political subdivision
229.2

 
217.2

 
13.6

 
(1.6
)
 
12.0

Foreign government
73.8

 
69.2

 
5.4

 
(0.8
)
 
4.6

Corporate
2,831.9

 
2,730.7

 
128.4

 
(27.2
)
 
101.2

CMBS
255.6

 
236.2

 
19.4

 
—

 
19.4

RMBS
576.4

 
558.9

 
20.9

 
(3.4
)
 
17.5

Collateralized debt obligation (“CDO”) /
  collateralized loan obligation (“CLO”)
83.5

 
84.2

 
0.4

 
(1.1
)
 
(0.7
)
Other ABS
82.1

 
82.1

 
3.8

 
(3.8
)
 
—

Total available-for-sale debt securities
$
4,221.8

 
$
4,060.9

 
$
198.8

 
$
(37.9
)
 
$
160.9


Available-for-Sale Debt Securities by Type and Credit Quality:
As of December 31, 2014
($ in millions)
Investment Grade
 
Below Investment Grade
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
 
 
 
 
 
 
 
U.S. government and agency
$
89.3

 
$
82.4

 
$
—

 
$
—

State and political subdivision
229.2

 
217.2

 
—

 
—

Foreign government
70.4

 
66.2

 
3.4

 
3.0

Corporate
2,669.9

 
2,567.3

 
162.0

 
163.4

CMBS
255.6

 
236.2

 
—

 
—

RMBS
565.0

 
547.7

 
11.4

 
11.2

CDO/CLO
81.4

 
82.4

 
2.1

 
1.8

Other ABS
74.2

 
74.7

 
7.9

 
7.4

Total available-for-sale debt securities
$
4,035.0

 
$
3,874.1

 
$
186.8

 
$
186.8

Percentage of total available-for-sale debt securities
95.6%
 
95.4%
 
4.4%
 
4.6%

We manage credit risk through industry and issuer diversification. Maximum exposure to an issuer is defined by quality ratings, with higher quality issuers having larger exposure limits. Our investment approach emphasizes a high level of industry diversification. The top five industry holdings as of December 31, 2014 in our available-for-sale debt and short-term investment portfolio were banking (7.1%), electrical utilities (6.6%), oil/oil services and equipment (6.0%), diversified financial services (4.4%) and real estate investment trusts (3.8%).


43

Eurozone Exposure

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

Fair Value of Eurozone Exposure by Country
As of December 31, 2014
($ in millions)
Sovereign
Debt
 
Financial
Institutions
 
All Other
 
Total
 
% of Debt
Securities [1]
 
 
 
 
 
 
 
 
 
 
Spain
$
—

 
$
—

 
$
6.9

 
$
6.9

 
0.2
%
Ireland
—

 
—

 
7.1

 
7.1

 
0.2
%
Italy
—

 
—

 
2.3

 
2.3

 
0.1
%
Total
—

 
—

 
16.3

 
16.3

 
0.5
%
All other Eurozone [2]
2.2

 
17.8

 
108.6

 
128.6

 
2.9
%
Total
$
2.2

 
$
17.8

 
$
124.9

 
$
144.9

 
3.4
%
———————
[1]
Inclusive of available-for-sale debt securities and short-term investments.
[2]
Includes Finland, France, Germany, Latvia, Luxembourg and Netherlands.

Residential Mortgage-Backed Securities

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

Most of our RMBS portfolio is highly rated. At December 31, 2014, 98.1% of the total residential portfolio was rated investment grade. We hold $48.8 million of RMBS investments backed by prime rated mortgages, $64.7 million backed by Alt-A mortgages and $43.3 million backed by sub-prime mortgages, which combined amount to 3.2% of our total investments. The majority of our prime, Alt-A, and sub-prime exposure is investment grade, with 79% rated NAIC-1 and 13% rated NAIC-2. We have employed a disciplined approach in the analysis and monitoring of our mortgage-backed securities. Our approach involves a monthly review of each security. Underlying mortgage data is obtained from the security’s trustee and analyzed for performance trends. A security-specific stress analysis is performed using the most recent trustee information. This analysis forms the basis for our determination of whether the security will pay in accordance with the contractual cash flows. There were no RMBS impairments for the year ended December 31, 2014.

Residential Mortgage-Backed Securities:
($ in millions)
As of December 31, 2014
 
 
 
 
 
 
 
NAIC Rating
 
 
 
 
 
 
 
1
 
2
 
3
 
4
 
5
 
6
 
Amortized
Cost [1]
 
Fair
Value [1]
 
% Invested Assets [2]
 
AAA/
AA/
A
 
BBB
 
BB
 
B
 
CCC and
Below
 
In or
Near
Default
Collateral
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
$
427.9

 
$
437.7

 
9.2
%
 
100.0
%
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
Prime
46.3

 
48.8

 
1.0
%
 
72.4
%
 
17.4
%
 
7.6
%
 
2.6
%
 
—
%
 
—
%
Alt-A
62.3

 
64.7

 
1.3
%
 
71.9
%
 
19.5
%
 
8.6
%
 
—
%
 
—
%
 
—
%
Sub-prime
40.5

 
43.3

 
0.9
%
 
98.0
%
 
—
%
 
2.0
%
 
—
%
 
—
%
 
—
%
Total
$
577.0

 
$
594.5

 
12.4
%
 
94.5
%
 
3.6
%
 
1.7
%
 
0.2
%
 
—
%
 
—
%
———————
[1]
Individual categories may not agree with the Available-for-Sale Debt Securities by Type table on previous page due to nature of underlying collateral. In addition, RMBS holdings in this exhibit include $18.1 million classified as fair value investments on the balance sheets. For these fair value investments, there is no impact to OCI as carrying value is equal to fair value.
[2]
Percentages based on fair value of total investments, including cash and cash equivalents.


44

Commercial Mortgage-Backed Securities

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

Commercial Mortgage-Backed Securities:
 
 
 
 
 
 
 
 
 
 
($ in millions)
 
As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
Year of Issue
Rating
 
S&P
Equivalent
Designation
 
Amortized
Cost [1]
 
Fair
Value [1]
 
% Invested Assets [2]
 
Post-
2007
 
2007
 
2006
 
2005
 
2004 and
Prior
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NAIC-1
 
AAA/AA/A
 
$
237.5

 
$
256.9

 
5.4
%
 
70.2
%
 
4.6
%
 
12.3
%
 
10.7
%
 
2.2
%
NAIC-2
 
BBB
 
2.1

 
2.1

 
0.1
%
 
—
%
 
—
%
 
82.8
%
 
17.2
%
 
—
%
NAIC-3
 
BB
 
—

 
—

 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
NAIC-4
 
B
 
—

 
—

 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
NAIC-5
 
CCC and below
 
—

 
—

 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
NAIC-6
 
In or near default
 
1.8

 
1.9

 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
 
100.0
%
Total
 
 
 
$
241.4

 
$
260.9

 
5.5
%
 
69.1
%
 
4.5
%
 
12.8
%
 
10.7
%
 
2.9
%
———————
[1]
Includes commercial mortgage-backed CDOs with amortized cost and fair values of $2.1 million and $2.2 million, respectively. CMBS holdings in this exhibit include $3.1 million classified as fair value investments on the balance sheets. For these fair value investments, there is no impact to OCI as carrying value is equal to fair value.
[2]
Percentages based on fair value of total investments, including cash and cash equivalents.


45

Realized Gains and Losses

The following table presents certain information with respect to realized investment gains and losses including those on debt securities pledged as collateral, with losses from OTTI charges reported separately in the table. These impairment charges were determined based on our assessment of factors enumerated below, as they pertain to the individual securities determined to be other-than-temporarily impaired.

Sources and Types of Net Realized Investment Gains (Losses):
For the years ended December 31,
($ in millions)
2014
 
2013
 
2012
 
 
 
 
 
 
Total other-than-temporary debt impairments
$
(1.3
)
 
$
(0.9
)
 
$
(5.0
)
Portion of losses recognized in OCI
—

 
(0.9
)
 
2.2

Net debt impairments recognized in earnings
$
(1.3
)
 
$
(1.8
)
 
$
(2.8
)
Debt security impairments:
 
 
 
 
 
U.S. government and agency
$
—

 
$
—

 
$
—

State and political subdivision
—

 
—

 
(0.1
)
Foreign government
—

 
—

 
—

Corporate
(1.3
)
 
—

 
—

CMBS
—

 
(0.3
)
 
(0.1
)
RMBS
—

 
(1.3
)
 
(1.9
)
CDO/CLO
—

 
(0.2
)
 
(0.4
)
Other ABS
—

 
—

 
(0.3
)
Net debt security impairments
(1.3
)
 
(1.8
)
 
(2.8
)
Equity security impairments
—

 
—

 
—

Impairment losses
(1.3
)
 
(1.8
)
 
(2.8
)
Debt security transaction gains
6.1

 
11.3

 
22.8

Debt security transaction losses
(2.4
)
 
(0.4
)
 
(0.7
)
Equity security transaction gains
—

 
—

 
—

Equity security transaction losses
(0.1
)
 
—

 
—

Limited partnerships and other investment transaction gains
—

 
—

 
—

Limited partnerships and other investment transaction losses
—

 
—

 
(0.3
)
Net transaction gains (losses)
3.6

 
10.9

 
21.8

Derivative instruments
(21.9
)
 
(23.1
)
 
(49.0
)
Embedded derivatives [1]
(45.4
)
 
11.0

 
4.0

Related party reinsurance derivatives
—

 
—

 
(8.0
)
Net realized investment gains (losses), excluding impairment losses
(63.7
)
 
(1.2
)
 
(31.2
)
Net realized investment gains (losses), including impairment losses
$
(65.0
)
 
$
(3.0
)
 
$
(34.0
)
———————
[1]
Includes the change in fair value of embedded derivatives associated with fixed index annuity indexed crediting feature and variable annuity riders. See Note 8 to our financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional disclosures.


46

Other-than-Temporary Impairments

Management assessed all securities in an unrealized loss position in determining whether impairments were temporary or other-than-temporary. In reaching its conclusions, management exercised significant judgment and used a number of issuer-specific quantitative indicators and qualitative judgments to assess the probability of receiving a given security’s contractual cash flows. This included the issue’s implied yield to maturity, cumulative default rate based on rating, comparisons of issue-specific spreads to industry or sector spreads, specific trading activity in the issue and other market data, such as recent debt tenders and upcoming refinancing requirements. Management also reviewed fundamentals such as issuer credit and liquidity metrics, business outlook and industry conditions. Management maintains a watch list of securities that is reviewed for impairments. Each security on the watch list was evaluated, analyzed and discussed, with the positive and negative factors weighed in the ultimate determination of whether or not the security was other-than-temporarily impaired. For securities for which no OTTI was ultimately indicated at December 31, 2014, management does not have the intention to sell, nor does it expect to be required to sell, these securities prior to their recovery. OTTIs recorded in 2014 were immaterial.

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

Credit Losses Recognized in Earnings on Available-for-Sale Debt Securities
for which a Portion of the OTTI Loss was Recognized in OCI:
As of December 31,
($ in millions)
2014
 
2013
 
2012
 
 
 
 
 
 
Balance, beginning of period
$
(18.5
)
 
$
(17.8
)
 
$
(21.3
)
Add: Credit losses on securities not previously impaired [1]
—

 
(0.3
)
 
(1.4
)
Add: Credit losses on securities previously impaired [1]


 
(0.7
)
 
(1.2
)
Less: Credit losses on securities impaired due to intent to sell
—

 
—

 
—

Less: Credit losses on securities sold
1.4

 
0.3

 
6.1

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

 
—

 
—

Balance, end of period
$
(17.1
)
 
$
(18.5
)
 
$
(17.8
)
———————
[1]
Additional credit losses on securities for which a portion of the OTTI loss was recognized in AOCI are included within net OTTI losses recognized in earnings on the statements of income and comprehensive income.

Unrealized Gains and Losses

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

Available-for-Sale Debt Securities Non-Credit OTTI Losses in AOCI, by Security Type: [1]
As of December 31,
($ in millions)
2014
 
2013
 
 
 
 
U.S. government and agency
$
—

 
$
—

State and political subdivision
(0.2
)
 
(0.2
)
Foreign government
—

 
—

Corporate
(1.5
)
 
(1.5
)
CMBS
—

 
(0.4
)
RMBS
(8.6
)
 
(8.6
)
CDO/CLO
(2.7
)
 
(3.0
)
Other ABS
—

 
—

Total available-for-sale debt securities non-credit OTTI losses in AOCI
$
(13.0
)
 
$
(13.7
)
———————
[1]
Represents the amount of non-credit OTTI losses recognized in AOCI excluding net unrealized gains or losses subsequent to the date of impairment.


47

Duration of Gross Unrealized Losses on Securities:
As of December 31, 2014
($ in millions)
Total
 
0 – 6
Months
 
6 – 12
Months
 
Over 12
Months
Available-for-sale debt securities
 
 
 
 
 
 
 
Total fair value
$
764.4

 
$
311.0

 
$
31.7

 
$
421.7

Total amortized cost
802.3

 
320.3

 
32.9

 
449.1

Unrealized losses
$
(37.9
)
 
$
(9.3
)
 
$
(1.2
)
 
$
(27.4
)
Number of securities
244

 
110

 
11

 
123

Investment grade:
 
 
 
 
 
 
 
Unrealized losses
$
(32.8
)
 
$
(7.0
)
 
$
(1.1
)
 
$
(24.7
)
Below investment grade:
 
 
 
 
 
 
 
Unrealized losses
$
(5.1
)
 
$
(2.3
)
 
$
(0.1
)
 
$
(2.7
)
Available-for-sale equity securities
 
 
 
 
 
 
 
Unrealized losses
$
(0.3
)
 
$
—

 
$
—

 
$
(0.3
)
Number of securities
4

 
—

 
—

 
4


For available-for-sale debt securities with gross unrealized losses, 86.5% of the unrealized losses after offsets pertain to investment grade securities and 13.5% of the unrealized losses after offsets pertain to below-investment-grade securities at December 31, 2014.

The following table represents those securities whose fair value is less than 80% of amortized cost (significant unrealized loss) that have been at a significant unrealized loss position on a continuous basis.

Duration of Gross Unrealized Losses on Securities:
As of December 31, 2014
($ in millions)
Total
 
0 – 6
Months
 
6 – 12
Months
 
Over 12
Months
Available-for-sale debt securities
 
 
 
 
 
 
 
Unrealized losses over 20% of cost
$
(11.4
)
 
$
(1.1
)
 
$
—

 
$
(10.3
)
Number of securities
9

 
2

 
—

 
7

Investment grade:
 
 
 
 
 
 
 
Unrealized losses over 20% of cost
$
(10.5
)
 
$
(0.8
)
 
$
—

 
$
(9.7
)
Below investment grade:
 
 
 
 
 
 
 
Unrealized losses over 20% of cost
$
(0.9
)
 
$
(0.3
)
 
$
—

 
$
(0.6
)
Available-for-sale equity securities
 
 
 
 
 
 
 
Unrealized losses over 20% of cost
$
—

 
$
—

 
$
—

 
$
—

Number of securities
—

 
—

 
—

 
—


Liquidity and Capital Resources

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

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 flows from operations, investing activities and capital contributions from our shareholder to fund liquidity requirements. Our principal cash inflows from life insurance and annuities activities come from premiums, annuity deposits and charges on insurance policies and annuity contracts. Principal cash inflows from investing activities result from repayments of principal, proceeds from maturities, sales of invested assets and investment income.


48

Summary Cash Flows:
For the years ended December 31,
($ in millions)
2014
 
2013
 
 
 
 
Cash provided by (used for) operating activities
$
(83.4
)
 
$
(130.5
)
Cash provided by (used for) investing activities
(657.3
)
 
(487.3
)
Cash provided by (used for) financing activities
722.0

 
715.7

Change in cash and cash equivalents
$
(18.7
)
 
$
97.9


2014 compared to 2013

Cash flows used for operating activities decreased by $47.1 million during the year ended December 31, 2014 compared to the year ended December 31, 2013. This decrease was driven by lower death benefits paid for universal life during 2014 in conjunction with reduced audit and consulting fees related to the restatement of our prior period financial statements. Partially offsetting this decrease was increased commission paid related to higher sales of fixed indexed annuity products.

Cash flows used for investing activities increased $170.0 million during the year ended December 31, 2014 compared to the year ended December 31, 2013 as a result of of an increase in purchases of available-for-sale securities and short-term investments. This change is primarily driven by more cash being provided by operating activities, namely due to a reduction in death benefits and professional fees paid. Partially offsetting this increase were increased sales and maturities of short-term investments during the period.

Cash flows provided by financing activities increased $6.3 million during the year ended December 31, 2014. This was primarily a result of an increase in policyholder deposits of fixed indexed annuity products during 2014. Offsetting this increase were reductions of inflows related to capital contributions and debt issuances.

Annuity Actuarial Reserves and Deposit Fund Liability
Withdrawal Characteristics:
As of December 31,
($ in millions)
2014
 
2013
 
Amount [1]
 
Percent
 
Amount [1]
 
Percent
 
 
 
 
 
 
 
 
Not subject to discretionary withdrawal provision
$
303.4

 
6
%
 
$
177.1

 
4
%
Subject to discretionary withdrawal without adjustment
290.2

 
6
%
 
312.1

 
7
%
Subject to discretionary withdrawal with
  market value adjustment
2,602.3

 
54
%
 
2,078.9

 
46
%
Subject to discretionary withdrawal at contract value
  less surrender charge
0.7

 
—
%
 
29.6

 
1
%
Subject to discretionary withdrawal at market value
1,614.0

 
34
%
 
1,903.2

 
42
%
Total annuity contract reserves and deposit fund liability
$
4,810.6

 
100
%
 
$
4,500.9

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

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

The cash values of certain individual life insurance policies increase over the lives of the policies. Policyholders have the right to borrow an amount up to a certain percentage of the cash value on those policies. As of December 31, 2014, we had approximately $737.7 million in cash values with respect to which policyholders had rights to take policy loans. For eligible policies, the majority of policy loans are at variable interest rates that are reset annually on the policy anniversary. Policy loans at December 31, 2014 were $68.1 million.


49

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

Management targets a minimum risk based capital of 225% at the Company. In 2014 and 2013, The Phoenix Companies, Inc. made capital contributions of $15.0 million and $45.0 million, respectively for our benefit. In 2013, we issued a $30.0 million surplus note which was purchased by The Phoenix Companies, Inc.

We believe that our current and anticipated sources of liquidity are adequate to meet our current and anticipated needs.

Ratings

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

The financial strength ratings as of April 6, 2015 were as follows:

Rating Agency [1]
 
Financial Strength Ratings of
Phoenix Life and PHL Variable
 
Outlook
 
 
 
 
 
A.M. Best Company, Inc.
 
B
 
Stable
Standard & Poor’s
 
B+
 
Negative
———————
[1]
On January 14, 2014, Moody’s Investor Services withdrew all ratings of The Phoenix Companies, Inc. including the Ba2 financial strength rating of the Company’s life insurance subsidiaries and the B1 debt rating of Phoenix Life’s surplus notes.

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


50

Financial Condition

Balance Sheets:
As of December 31,
 
Increase (decrease) and
percentage change
($ in millions)
2014
 
2013
 
2014 vs. 2013
ASSETS
 
 
 
 
 
 
 
Available-for-sale debt securities, at fair value
$
4,221.8

 
$
3,416.1

 
$
805.7

 
24
%
Available-for-sale equity securities, at fair value
28.7

 
11.2

 
17.5

 
156
%
Short-term investments
79.8

 
81.0

 
(1.2
)
 
(1
%)
Limited partnerships and other investments
12.5

 
10.5

 
2.0

 
19
%
Policy loans, at unpaid principal balances
68.1

 
66.1

 
2.0

 
3
%
Derivative instruments
157.5

 
225.3

 
(67.8
)
 
(30
%)
Fair value investments
46.7

 
48.6

 
(1.9
)
 
(4
%)
Total investments
4,615.1

 
3,858.8

 
756.3

 
20
%
Cash and cash equivalents
162.3

 
181.0

 
(18.7
)
 
(10
%)
Accrued investment income
33.2

 
27.3

 
5.9

 
22
%
Reinsurance recoverable
464.6

 
494.3

 
(29.7
)
 
(6
%)
Deferred policy acquisition costs
430.9

 
470.1

 
(39.2
)
 
(8
%)
Deferred income taxes, net
13.1

 
27.8

 
(14.7
)
 
(53
%)
Receivable from related parties
5.5

 
2.6

 
2.9

 
112
%
Other assets
158.3

 
204.1

 
(45.8
)
 
(22
%)
Separate account assets
1,757.5

 
2,052.7

 
(295.2
)
 
(14
%)
Total assets
$
7,640.5

 
$
7,318.7

 
$
321.8

 
4
%
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
Policy liabilities and accruals
$
2,067.0

 
$
1,882.9

 
$
184.1

 
10
%
Policyholder deposit funds
3,306.9

 
2,775.2

 
531.7

 
19
%
Indebtedness due to affiliate
30.0

 
30.0

 
—

 
—
%
Payable to related parties
7.6

 
14.1

 
(6.5
)
 
(46
%)
Other liabilities
167.7

 
182.4

 
(14.7
)
 
(8
%)
Separate account liabilities
1,757.5

 
2,052.7

 
(295.2
)
 
(14
%)
Total liabilities
7,336.7

 
6,937.3

 
399.4

 
6
%
 
 
 
 
 
 
 
 
STOCKHOLDER’S EQUITY
 
 
 
 
 
 
 
Common stock
2.5

 
2.5

 
—

 
—
%
Additional paid in capital
862.2

 
847.2

 
15.0

 
2
%
Accumulated other comprehensive income (loss)
4.0

 
(12.7
)
 
16.7

 
(131
%)
Retained earnings (accumulated deficit)
(564.9
)
 
(455.6
)
 
(109.3
)
 
24
%
Total stockholder’s equity
303.8

 
381.4

 
(77.6
)
 
(20
%)
Total liabilities and stockholder’s equity
$
7,640.5

 
$
7,318.7

 
$
321.8

 
4
%


51

December 31, 2014 compared to December 31, 2013

Assets

Total assets increased $321.8 million from December 31, 2013 to December 31, 2014. The increase is primarily attributable to the following:

•
An increase in available-for-sale debt and equity securities of $823.2 million, which is primarily driven by continued purchases of fixed indexed annuities, for which there were deposits of $713.7 million for the year, and an increase in market value of $136.6 million for the year due to decreases in interest rates.

•
The increase in available-for-sale debt and equity securities is offset by a decrease in derivative assets of $67.8 million for the period, primarily due to the expiration of some of the swaptions and call options in the first quarter of 2014. The decrease is partially offset by a corresponding decrease in derivative liabilities, which are recorded within other liabilities.

The increase in investments is partially offset by the following:

•
A decrease in separate account assets of $295.2 million, primarily due to policyholder withdrawals and other fund withdrawals, which was partially offset by continued deposits on current business inforce and positive market performance during the year.

•
A decrease in the DAC asset of $39.2 million, which is driven primarily by a decrease of $38.0 million in the shadow component from unrealized gains on investments as well as continued amortization of previously deferred costs.

•
A decrease in other assets of $45.8 million, which is driven primarily by a decrease in the current tax receivable due to the Company’s tax sharing agreement, which was a receivable of $26.6 million at December 31, 2013 and was a payable of $22.8 million at December 31, 2014 and is recorded within other liabilities.

•
A decrease in deferred income taxes, net, of $14.7 million driven primarily by a decrease in unrealized losses on available-for-sale debt securities during the period.

Liabilities and Stockholder’s Equity

Total liabilities increased $399.4 million from December 31, 2013 to December 31, 2014. The increase is primarily attributable to the following:

•
An increase in policyholder deposit funds of $531.7 million, which is driven primarily by continued sales of the fixed indexed annuity products, for which there were deposits of approximately $713.7 million during the period.

•
An increase in policy liabilities and accruals of $184.1 million, which is driven primarily by continued increases in the reserves associated with guaranteed benefit liabilities of $88.3 million, as well as an increase in the profits followed by losses reserve on the universal life business of $96.3 million.

•
The increase in liabilities was partially offset by a decrease in separate account liabilities of $295.2 million. The decrease in separate account liabilities was primarily due to policyholder withdrawals and other fund withdrawals, and was partially offset by continued deposits on current business inforce and positive market performance during the year.

Total stockholder’s equity decreased $77.6 million from December 31, 2013 to December 31, 2014. The decrease is primarily attributable to the following:

•
A net loss for 2014 that increased the accumulated deficit by $109.3 million.

•
The increase in the accumulated deficit was partially offset by an increase in accumulated other comprehensive income of $16.7 million. The increase in accumulated other comprehensive income was driven primarily by net unrealized gains on investments, and the related offsetting impacts, due to decreases in interest rates during 2014.


52

Contractual Obligations and Commercial Commitments

Contractual Obligations and Commercial Commitments:
As of December 31, 2014
($ in millions)
Total
 
2015
 
2016-2017
 
2018-2019
 
Thereafter
Contractual Obligations Due
 
 
 
 
 
 
 
 
 
Purchase liabilities [1]
$
2.0

 
$
0.4

 
$
0.8

 
$
0.8

 
$
—

Policyholder contractual obligation [2]
14,235.0

 
858.7

 
1,614.0

 
1,477.0

 
10,285.3

Total contractual obligations [3]
$
14,237.0

 
$
859.1

 
$
1,614.8

 
$
1,477.8

 
$
10,285.3

Commercial Commitment Expirations
 
 
 
 
 
 
 
 
 
Other long-term liabilities [4]
$
60.6

 
$
59.5

 
$
1.1

 
$
—

 
$
—

Total commercial commitments
$
60.6

 
$
59.5

 
$
1.1

 
$
—

 
$
—

———————
[1]
Purchase liabilities relate to open purchase orders and other contractual obligations. This does not include purchases made by our ultimate parent company for which the resulting expenses are allocated to us when incurred.
[2]
Policyholder contractual obligations represent estimated benefits from life insurance and annuity contracts issued by us. Policyholder contractual obligations also include separate account liabilities, which are contractual obligations of the separate account assets established under applicable state insurance laws and are legally insulated from our general account assets.
Future obligations are based on our estimate of future investment earnings, mortality and surrenders. Actual obligations in any single year, or ultimate total obligations, may vary materially from these estimates as actual experience emerges. As described in Note 3 to our financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K, policy liabilities and accruals are recorded on the balance sheets in amounts adequate to meet the estimated future obligations of the policies in force. The policyholder obligations reflected in the table above exceed the policy liabilities, policyholder deposit fund liabilities and separate account liabilities reported on our December 31, 2014 balance sheets because the above amounts do not reflect future investment earnings and future premiums and deposits on those policies. Separate account obligations will be funded by the cash flows from separate account assets, while the remaining obligations will be funded by cash flows from investment earnings on general account assets and premiums and deposits on contracts in force.
[3]
We do not anticipate any increases to unrecognized tax benefits that would have a significant impact on the financial position of the Company. Therefore, no unrecognized tax benefits have been excluded from this table. See Note 11 to our financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information on unrecognized tax benefits.
[4]
Other long-term liabilities relate to agreements to fund venture capital partnerships. The venture capital commitments can be drawn down by private equity funds as necessary to fund their portfolio investments through the end of the funding period as stated in each agreement.

Obligations Related to Pension and Postretirement Employee Benefit Plans

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

Employee benefit expense allocated to us for these benefits totaled $3.8 million, $3.2 million and $4.6 million for 2014, 2013 and 2012, respectively. On August 8, 2014, the Highway and Transportation Funding Act of 2014 was enacted into law, effective immediately. The law extends certain pension funding provisions originally included in the Moving Ahead for Progress in the 21st Century Act (MAP-21). Phoenix Life took advantage of this in the third quarter of 2014 which resulted in no further contributions to the pension plan for the remainder of 2014. Over the next 12 months, Phoenix Life does not expect to make any contributions to the pension plan.

See Note 14 to our financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for more information.

Off-Balance Sheet Arrangements

As of December 31, 2014, we did not have any significant off-balance sheet arrangements as defined by Item 303(a)(4)(ii) of SEC Regulation S-K.


53

Reinsurance

We maintain reinsurance agreements to limit potential losses, reduce exposure to larger risks and provide additional capacity for growth. We remain liable to the extent that reinsuring companies may not be able to meet their obligations under reinsurance agreements in effect. Failure of the reinsurers to honor their obligations could result in losses to the Company. Since we bear the risk of nonpayment, we evaluate the financial condition of our reinsurers and monitor concentrations of credit risk. Based on our review of their financial statements, reputation in the reinsurance marketplace and other relevant information, we believe that we have no material exposure to uncollectible life reinsurance. At December 31, 2014, five major reinsurance companies, including our affiliate, Phoenix Life, account for approximately 73% of the reinsurance recoverable. Phoenix Life comprised approximately 15%, or $67.2 million, of this total reinsurance recoverable.

Statutory Capital and Surplus and Risk-Based Capital

Our statutory basis capital and surplus including asset valuation reserve (“AVR”) decreased from $235.2 million at December 31, 2013 to $213.7 million at December 31, 2014. The principal factor resulting in this decrease was $41.1 million of net losses. This was partially offset by $15.0 million of capital contributions received from PM Holdings, Inc.

Connecticut Insurance Law requires that Connecticut life insurers report their RBC. RBC 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 RBC 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 100% of Company Action Level at which point the Company must file a comprehensive plan to the state insurance regulators;

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

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

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

The RBC of PHL Variable as of December 31, 2014 was in excess of 200% of the Company Action Level.

See Note 16 to our financial statements under “Item 8: Financial Statements and Supplementary Data” in this Form 10-K for additional information.


Item 7A.
Quantitative and Qualitative Disclosures About Market Risk

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


Item 8.
Financial Statements and Supplementary Data

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



54

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

None.


Item 9A.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

In connection with the preparation of this Form 10-K, the Company carried out an evaluation under the supervision of and with the participation of the Company’s management, including the President and Chief Financial Officer, as of December 31, 2014, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon this evaluation, the President and Chief Financial Officer concluded that as of December 31, 2014 the Company’s disclosure controls and procedures were not effective because of the material weaknesses described below under “Management’s Annual Report on Internal Control Over Financial Reporting.” The material weaknesses described below were first identified and reported in the 2012 Form 10-K and have not been fully remediated as of December 31, 2014 due to insufficient time to fully evaluate, implement and assess the design and operating effectiveness of the related controls.

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

Management’s Annual Report on Internal Control Over Financial Reporting

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

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

Management, including the President and Chief Financial Officer, has conducted an assessment, including testing, of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014, based on the criteria in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).


55

A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Management has concluded that as of December 31, 2014, the material weaknesses in internal control over financial reporting described below have not been fully remediated due to insufficient time to fully evaluate, implement and assess the design and operating effectiveness of the related controls.

The material weaknesses included deficiencies in the period-end financial reporting process including the processing of journal entries and the preparation and review of account reconciliations, insufficient complement of personnel with a level of U.S. GAAP accounting knowledge commensurate with the Company’s financial reporting requirements and ineffective monitoring and review activities.

The above material weaknesses also contributed to the following material weaknesses in internal control over financial reporting which have been identified and included in management’s assessment as of December 31, 2014:

1.
Actuarial Finance and Valuation – The Company did not maintain effective controls over the actuarial process. Specifically:
•
The Company did not maintain effective controls to review and approve assumptions and methodologies used in the determination of actuarially derived insurance policy liability estimates.
•
The Company did not maintain effective systems and controls to appropriately measure actuarially derived balances for its fixed indexed annuity products.
•
The Company did not maintain effective controls over key actuarial spreadsheets and certain key reports to ensure the reliability of data, assumptions and valuation calculations.
•
The Company did not maintain effective controls over the application of U.S. GAAP to universal life reserves.

2.
Investments – The Company did not maintain effective controls over certain investment processes. Specifically:
•
The Company did not maintain effective controls over the recognition and measurement of impaired investments.
•
The Company did not maintain effective controls over the recognition and measurement of certain elements of net investment income as well as identifying embedded derivatives related to structured securities.
•
The Company did not maintain effective controls over internally priced securities, including private placement debt securities.
•
The Company did not maintain effective controls over classification in the fair value hierarchy disclosure.
•
The Company did not maintain effective controls to properly recognize and measure counterparty non-performance risk on non-collateralized derivatives.

3.
Reinsurance Accounting – The Company did not maintain effective controls for complex reinsurance treaties. Specifically:
•
The Company did not maintain effective controls to analyze, document and review the U.S. GAAP accounting for such transactions at inception.
•
The Company did not maintain effective controls to analyze, document, review and appropriately account for related party reinsurance transactions including accounting for gains/losses at inception and actuarial valuation of reinsurance balances.

4.
Cash flows and changes in classifications – The Company did not maintain effective controls over the presentation of cash and cash flows. Specifically, the Company did not maintain effective controls over the preparation and review of appropriate detail to support the classification of activity in the statements of cash flows. In addition, there were not effective controls for assessing the classification of cash and related balances for presentation in the balance sheets.

5.
Access to applications and data – The Company did not maintain effective information technology general controls related to restricted access. Specifically, the Company did not maintain effective controls for granting, removing and reviewing access to ensure appropriate segregation of duties and restricted access to programs and data.


56

Each of these control deficiencies contributed to misstatements of the previously mentioned financial statements. Additionally, these control deficiencies could result in a material misstatement to the annual or interim financial statements that would not be prevented or detected. Accordingly, management has concluded that these control deficiencies constitute material weaknesses.

As a result of the material weaknesses in internal control over financial reporting described above, management has concluded that, as of December 31, 2014, the Company’s internal control over financial reporting was not effective based on the criteria established in Internal Control - Integrated Framework (1992) issued by COSO.

Management Changes

Management has made a number of changes in the finance organization with a focus on increasing U.S. GAAP knowledge and improving financial reporting processes in the organization. In 2014, the Company appointed a new Chief Risk Officer, a new head of Internal Audit, a new Chief Accounting Officer and hired additional certified public accountants and actuaries with U.S. GAAP expertise to supplement the staff charged with compiling and filing its U.S. GAAP results. In addition, the Company has established a financial reporting controls committee comprised of members of senior management. The committee was established to provide oversight to the Company’s efforts for ensuring appropriate internal control over financial reporting including, but not limited to, remediation of material weaknesses and other control deficiencies, controls testing, and prioritization and allocation of resources.

Management’s Remediation Initiatives

Since the identification of the material weaknesses, management has taken steps to strengthen its finance skills, capabilities, processes and control environment, and continues to enhance the Company’s financial control governance structure, align its resources and/or hire additional actuarial and accounting resources with the requisite U.S. GAAP experience. Moreover, management has taken steps to strengthen accounting policy documentation for its complex processes and transactions, enhance its documentation and processes related to assumptions underlying the financial statements, and enhance communication and training over all financial reporting processes. As it works towards remediation of the material weaknesses described in “Management’s Annual Report on Internal Control Over Financial Reporting” above, the Company continues to enhance controls over the period-end financial reporting process including the processing of journal entries and preparation and review of account reconciliations.

The Company intends to continue to strengthen monitoring and review activities, including maintaining sufficient personnel with a level of U.S. GAAP accounting knowledge commensurate with the Company’s financial reporting requirements. The Company intends to continue to evaluate and enhance the design and effectiveness of internal controls and enhance and document policies and procedures to improve the effectiveness of our internal control over financial reporting. However, there remains a risk that the transitional procedures on which we currently rely will fail to prevent or detect a material misstatement of the annual or interim 2014 financial statements.

We intend to design, implement and maintain an effective control environment over financial reporting. We have taken, or will take, the following actions:

Actuarial Finance and Valuation
•
Perform a comprehensive risk assessment across all products designed to simplify and streamline processes, map key financial statement risks to existing and newly implemented controls, and control the overall actuarial environment
•
Assess technological solutions designed to simplify and control data and information and appropriately implement methodologies and assumptions used for the purpose of implementing a new Fixed Indexed Annuity valuation system
•
Enhance communication with Corporate Finance, Pricing Actuaries, and Investment Accounting to ensure timely and accurate information is provided and received as it relates to complex transactions, new product development, and the overall accuracy of financial reporting
•
Design and implement new processes and process-level controls, spreadsheet controls, and monitoring/review controls which ensure the reliability of data, assumptions, methodologies, and valuation calculations that are used to measure or determine actuarially determined balances under U.S. GAAP


57

Investments
•
Assess the current state for Derivatives, Other Invested Assets (“OIA”), Public Securities, Private Securities and the financial close process to determine enhancements and/or redesign of each process, process level controls, spreadsheet controls and monitoring/review controls to ensure reliability and accuracy
•
Assess technological solutions designed to simplify and control data in each process
•
Implement an OIA System to streamline, simplify and control information related to these assets types
•
Redesign the business process for receipt of third-party information that would provide improved quality, accuracy timeliness of financial statement disclosures as well as minimize and streamline processes
•
Enhance communication among functions within Corporate Finance as well as with the Investment Department to ensure timely accurate information is provided

Reinsurance Accounting
•
Perform a comprehensive risk assessment to identify key financial statement risks and map to existing and newly designed and implemented controls
•
Design and implement new controls to properly analyze, document, implement and monitor U.S. GAAP accounting standards, specifically as they relate to complex reinsurance treaties
•
Design and implement new controls around data and information used in assessing and accounting for complex reinsurance treaties
•
Enhance communication with Actuarial Finance and Corporate Finance to ensure timely and accurate information is provided and received as it relates to complex treaties, new treaties, and the overall accuracy of the accounting for these treaties

Cash flows and changes in classifications
•
Perform a comprehensive risk assessment to identify the key financial statement risks and map to existing and newly identified controls
•
Design and implement new controls to properly analyze, document, implement and monitor U.S. GAAP accounting standards, specifically as they relate to cash flow presentation
•
Design and implement new controls around data and information used in the presentation of the cash flows

Access to applications and data
•
Complete a review of the controls and narratives to design and implement new controls associated with access to application and data
•
Establish a process for validating provisioning of new and altered provisioning for new hires and consultants
•
Implement a process for test code asset management
•
Finalize the process for validating highly privileged accounts

We anticipate devoting significant resources toward our remediation efforts described above in order to make substantial progress in the remediation of our material weaknesses by the end of 2015. Actuarial Finance and Valuation will take additional time and resources to remediate due to the complexity and nature of the products. While these efforts are underway, we are relying on a comprehensive set of manual procedures to help confirm the proper collection, evaluation, and disclosure of the information included in the financial statements.

Control deficiencies not constituting material weaknesses

In addition to the material weaknesses described in “Management’s Report on Internal Control Over Financial Reporting,” management has identified other deficiencies in internal control over financial reporting that did not constitute material weaknesses as of December 31, 2014. The Company plans to implement various measures to remediate these control deficiencies as part of the remediation efforts noted above.


58

Management’s Conclusions

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

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

Changes in Internal Control Over Financial Reporting

In May 2013, COSO issued a new version of its internal control framework, which became effective December 15, 2014. We are currently evaluating what changes to our control environment, if any, would be needed to successfully implement the 2013 COSO framework during 2015. Until such time as our transition to the 2013 COSO framework is complete, we will continue to use the 1992 framework in connection with our assessment of internal control over financial reporting.

Except for continued improvements resulting from progress made on the above noted remediation efforts, there were no changes to the Company’s internal control over financial reporting during the fourth quarter of 2014 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


Item 9B.
Other Information

None.



59

PART III

Item 10.
Directors, Executive Officers and Corporate Governance

We have omitted this information from this report pursuant to General Instruction (I)(1)(a) and (b) of Form 10-K and are filing this Form 10-K with the reduced disclosure format permitted by that General Instruction.


Item 11.
Executive Compensation

We have omitted this information from this report pursuant to General Instruction (I)(1)(a) and (b) of Form 10-K and are filing this Form 10-K with the reduced disclosure format permitted by that General Instruction.


Item 12.
Security Ownership of Certain Beneficial Owners and Management

We have omitted this information from this report pursuant to General Instruction (I)(1)(a) and (b) of Form 10-K and are filing this Form 10-K with the reduced disclosure format permitted by that General Instruction.


Item 13.
Certain Relationships and Related Transactions, and Director Independence

We have omitted this information from this report pursuant to General Instruction (I)(1)(a) and (b) of Form 10-K and filing this Form 10-K with the reduced disclosure format permitted by that General Instruction.


Item 14.
Principal Accounting Fees and Services

A description of the fees earned by PwC for services rendered to the Company for each of the two years in the period ended December 31, 2014 is provided below. Fees in 2013 primarily relate to additional fees associated with the restatement of the Company’s financial statements billed and allocated in 2013. Amounts recorded within the 2013 financial statements were $12,434,859.

 
2014
 
2013
 
 
 
 
Audit fees
$
2,277,287

 
$
1,610,125

Audit-related fees
—

 
—

Tax fees
—

 
—

All other fees
—

 
—

Total fees
$
2,277,287

 
$
1,610,125


Audit Fees: Audit fees consist of fees billed and allocated for professional service rendered for the annual audits of the Company’s financial statements and the review of the Company’s 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 Company’s sponsored separate accounts.

Audit Committee: Prior to each fiscal year, the Phoenix Audit Committee receives a written report from PwC describing the elements expected to be performed in the course of its audit of the Phoenix consolidated financial statements and those of its insurance company subsidiaries, including PHL Variable, for the coming year. The Phoenix Audit Committee may approve the scope and fees not only for the proposed audit, but also for various recurring audit-related services. For services of its independent registered public accounting firm that are neither audit-related nor recurring, a Company vice president may submit in writing a request to the Company’s internal auditor, accompanied by approval of the Company’s Chief Financial Officer or Chief Accounting Officer. The Phoenix 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 Phoenix Audit Committee may also delegate pre-approval authority to one or more of its members.

60

PART IV

Item 15.
Exhibits, Financial Statement Schedules

(a)
Documents filed as part of this Form 10-K include:

1.
Financial Statements. The financial statements listed in Part II of the Table of Contents to this Form 10-K are filed as part of this Form 10-K;
2.
Financial Statement Schedules. All financial statement schedules are omitted as they are not applicable or the information is shown in the financial statements or notes thereto; and
3.
Exhibits. Those items listed in the Exhibit Index in Section E of this Form 10-K which are marked with an (*) are filed with this Form 10-K.

*    *    *    *    *



61

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:
April 8, 2015
By: /s/ James D. Wehr
 
 
James D. Wehr
 
 
President
 
 
(Principal Executive Officer)
 
 
 
Dated:
April 8, 2015
By: /s/ Bonnie J. Malley
 
 
Bonnie J. Malley
 
 
Executive Vice President and Chief Financial Officer
 
 
(Principal Financial Officer)
 
 
 
Dated:
April 8, 2015
By: /s/ Ernest M. McNeill, Jr.
 
 
Ernest M. McNeill, Jr.
 
 
Senior Vice President and Chief Accounting Officer
 
 
(Principal Accounting Officer)


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below, dated April 8, 2015, by the following persons on behalf of the Registrant and in the capacities indicated.


/s/ Edward W. Cassidy
 
/s/ Christopher M. Wilkos
Edward W. Cassidy, Director
 
Christopher M. Wilkos, Director
 
 
 
/s/ Thomas M. Buckingham
 
 
Thomas M. Buckingham, Director
 
 
 
 
 


62

EXHIBIT INDEX

Exhibit
 
 
 
 
 
3.1

 
Form of Amended and Restated Certificate of Incorporation (as amended and restated effective May 31, 1994) (incorporated herein by reference to Exhibit 3.1 to the PHL Variable Insurance Company’s Form 10-K filed March 31, 2006)
 
 
 
3.2

 
Bylaws of PHL Variable Life Insurance Company (as amended and restated effective May 16, 2002) (incorporated herein by reference to Exhibit 3.2 to the PHL Variable Insurance Company’s Form 10-K filed March 31, 2006)
 
 
 
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 (incorporated herein by reference to Exhibit 10.1 to the PHL Variable Insurance Company’s Form 10-K filed March 31, 2006)
 
 
 
10.2

 
Investment Management Agreement effective as of January 1, 1995 by and between PHL Variable Insurance Company and Phoenix Investment Counsel, Inc. (incorporated herein by reference to Exhibit 10.2 to the PHL Variable Insurance Company’s Form 10-K filed March 31, 2006)
 
 
 
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. (incorporated herein by reference to Exhibit 10.3 to the PHL Variable Insurance Company’s Form 10-K filed March 31, 2006)
 
 
 
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 (incorporated herein by reference to Exhibit 10.4 to the PHL Variable Insurance Company’s Form 10-K filed March 31, 2006)
 
 
 
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 (incorporated herein by reference to Exhibit 10.5 to the PHL Variable Insurance Company’s Form 10-K filed March 31, 2006)
 
 
 
31.1

 
Certification of James D. Wehr, President, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
 
 
 
31.2

 
Certification of Bonnie J. Malley, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
 
 
 
32

 
Certification by James D. Wehr, President and Bonnie J. Malley, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
 
 
 
101.INS

 
XBRL Instance Document*
 
 
 
101.SCH

 
XBRL Taxonomy Extension Schema Document*
 
 
 
101.CAL

 
XBRL Taxonomy Extension Calculation Linkbase Document*
 
 
 
101.LAB

 
XBRL Taxonomy Extension Label Linkbase Document*
 
 
 
101.PRE

 
XBRL Taxonomy Extension Presentation Linkbase Document*
 
 
 
101.DEF

 
XBRL Taxonomy Extension Definition Linkbase Document*

* Filed herewith

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



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 sheets and the related statements of income and comprehensive income, of changes in stockholder's equity, and of cash flows present fairly, in all material respects, the financial position of PHL Variable Insurance Company (“the Company”) at December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As described in Note 12 to the financial statements, the Company has entered into significant transactions with its affiliates.


/s/ PricewaterhouseCoopers, LLP

Hartford, Connecticut
April 8, 2015



F-1

PHL VARIABLE INSURANCE COMPANY
Balance Sheets

 
As of December 31,
($ in millions, except share data)
2014
 
2013
ASSETS:
 
 
 
Available-for-sale debt securities, at fair value (amortized cost of $4,060.9 and $3,390.6)
$
4,221.8

 
$
3,416.1

Available-for-sale equity securities, at fair value (cost of $28.4 and $12.1)
28.7

 
11.2

Short-term investments
79.8

 
81.0

Limited partnerships and other investments
12.5

 
10.5

Policy loans, at unpaid principal balances
68.1

 
66.1

Derivative instruments
157.5

 
225.3

Fair value investments
46.7

 
48.6

Total investments
4,615.1

 
3,858.8

Cash and cash equivalents
162.3

 
181.0

Accrued investment income
33.2

 
27.3

Reinsurance recoverable
464.6

 
494.3

Deferred policy acquisition costs
430.9

 
470.1

Deferred income taxes, net
13.1

 
27.8

Receivable from related parties
5.5

 
2.6

Other assets
158.3

 
204.1

Separate account assets
1,757.5

 
2,052.7

Total assets
$
7,640.5

 
$
7,318.7

 
 
 
 
LIABILITIES:
 
 
 
Policy liabilities and accruals
$
2,067.0

 
$
1,882.9

Policyholder deposit funds
3,306.9

 
2,775.2

Indebtedness due to affiliate
30.0

 
30.0

Payable to related parties
7.6

 
14.1

Other liabilities
167.7

 
182.4

Separate account liabilities
1,757.5

 
2,052.7

Total liabilities
7,336.7

 
6,937.3

 
 
 
 
COMMITMENTS AND CONTINGENT LIABILITIES (Note 17)


 


 
 
 
 
STOCKHOLDER’S EQUITY:
 
 
 
Common stock, $5,000 par value: 1,000 shares authorized; 500 shares issued
2.5

 
2.5

Additional paid-in capital
862.2

 
847.2

Accumulated other comprehensive income (loss)
4.0

 
(12.7
)
Retained earnings (accumulated deficit)
(564.9
)
 
(455.6
)
Total stockholder’s equity
303.8

 
381.4

Total liabilities and stockholder’s equity
$
7,640.5

 
$
7,318.7


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


F-2

PHL VARIABLE INSURANCE COMPANY
Statements of Income and Comprehensive Income

 
For the years ended December 31,
($ in millions)
2014
 
2013
 
2012
REVENUES:
 
 
 
 
 
Premiums
$
12.4

 
$
13.9

 
$
8.5

Insurance and investment product fees
358.3

 
367.0

 
365.2

Net investment income
172.0

 
140.9

 
130.9

Net realized investment gains (losses):
 
 
 
 
 
Total other-than-temporary impairment (“OTTI”) losses
(1.3
)
 
(0.9
)
 
(5.0
)
Portion of OTTI losses recognized in other comprehensive income (“OCI”)
—

 
(0.9
)
 
2.2

Net OTTI losses recognized in earnings
(1.3
)
 
(1.8
)
 
(2.8
)
Net realized investment gains (losses), excluding OTTI losses
(63.7
)
 
(1.2
)
 
(31.2
)
Net realized investment gains (losses)
(65.0
)
 
(3.0
)
 
(34.0
)
Total revenues
477.7

 
518.8

 
470.6

 
 
 
 
 
 
BENEFITS AND EXPENSES:
 
 
 
 
 
Policy benefits
397.7

 
277.6

 
389.3

Policy acquisition cost amortization
84.9

 
83.4

 
100.5

Other operating expenses
100.6

 
118.1

 
102.9

Total benefits and expenses
583.2

 
479.1

 
592.7

Income (loss) before income taxes
(105.5
)
 
39.7

 
(122.1
)
Income tax expense (benefit)
3.8

 
(24.7
)
 
17.0

Net income (loss)
$
(109.3
)
 
$
64.4

 
$
(139.1
)
 
 
 
 
 
 
FEES PAID TO RELATED PARTIES (Note 12)
 
 
 
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
Net income (loss)
$
(109.3
)
 
$
64.4

 
$
(139.1
)
Other comprehensive income (loss) before income taxes:
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
48.6

 
(33.1
)
 
31.9

Less: Income tax expense (benefit) related to:
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
31.9

 
(11.6
)
 
24.3

Other comprehensive income (loss), net of income taxes
16.7

 
(21.5
)
 
7.6

Comprehensive income (loss)
$
(92.6
)
 
$
42.9

 
$
(131.5
)

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


F-3

PHL VARIABLE INSURANCE COMPANY
Statements of Cash Flows
 
For the years ended December 31,
($ in millions)
2014
 
2013
 
2012
OPERATING ACTIVITIES:
 
 
 
 
 
Net income (loss)
$
(109.3
)
 
$
64.4

 
$
(139.1
)
Net realized investment gains / losses
65.0

 
3.0

 
34.0

Policy acquisition costs deferred
(83.7
)
 
(66.7
)
 
(69.8
)
Policy acquisition cost amortization
84.9

 
83.4

 
100.5

Interest credited
104.7

 
91.2

 
69.5

Equity in earnings of limited partnerships and other investments
(2.0
)
 
(0.4
)
 
(0.1
)
Change in:
 
 
 
 
 
Accrued investment income
(15.4
)
 
(7.4
)
 
(8.5
)
Deferred income taxes, net
(17.3
)
 
—

 
(10.9
)
Reinsurance recoverable
29.7

 
(44.6
)
 
(12.1
)
Policy liabilities and accruals
(186.8
)
 
(261.2
)
 
(51.7
)
Due to/from related parties
(9.4
)
 
0.5

 
(7.5
)
Other operating activities, net
56.2

 
7.3

 
(69.7
)
Cash provided by (used for) operating activities
(83.4
)
 
(130.5
)
 
(165.4
)
 
 
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
 
 
Purchases of:
 
 
 
 
 
Available-for-sale debt securities
(1,056.9
)
 
(977.2
)
 
(852.8
)
Available-for-sale equity securities
(17.4
)
 
(8.4
)
 
—

Short-term investments
(704.1
)
 
(324.8
)
 
(574.7
)
Derivative instruments
(55.9
)
 
(89.0
)
 
(98.1
)
Fair value investments
(0.9
)
 
(21.1
)
 
(5.7
)
Sales, repayments and maturities of:
 
 
 
 
 
Available-for-sale debt securities
393.8

 
389.0

 
438.1

Available-for-sale equity securities
1.0

 
—

 
—

Short-term investments
705.4

 
489.8

 
425.8

Derivative instruments
84.6

 
42.9

 
26.7

Fair value investments
3.9

 
10.1

 
12.4

Contributions to limited partnerships and limited liability corporations
(8.9
)
 
(4.3
)
 
(2.1
)
Distributions from limited partnerships and limited liability corporations
1.8

 
7.8

 
0.3

Policy loans, net
0.3

 
(2.8
)
 
3.9

Other investing activities, net
(4.0
)
 
0.7

 
(1.0
)
Cash provided by (used for) investing activities
(657.3
)
 
(487.3
)
 
(627.2
)

(Continued on next page)

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

F-4

(Continued from previous page)
For the years ended December 31,
($ in millions)
2014
 
2013
 
2012
FINANCING ACTIVITIES:
 
 
 
 
 
Policyholder deposits
1,005.4

 
920.8

 
1,074.7

Policyholder withdrawals
(645.6
)
 
(605.2
)
 
(513.8
)
Net transfers (to) from separate accounts
347.2

 
325.1

 
265.3

Capital contributions from parent
15.0

 
45.0

 
—

Debt issued
—

 
30.0

 
—

Cash provided by (used for) financing activities
722.0

 
715.7

 
826.2

Change in cash and cash equivalents
(18.7
)
 
97.9

 
33.6

Cash and cash equivalents, beginning of period
181.0

 
83.1

 
49.5

Cash and cash equivalents, end of period
$
162.3

 
$
181.0

 
$
83.1

 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
 
Income taxes (paid) refunded
$
28.4

 
$
24.9

 
$
(40.9
)
Interest expense on indebtedness paid
$
(3.2
)
 
$
—

 
$
—

 
 
 
 
 
 
Non-Cash Transactions During the Period
 
 
 
 
 
Investment exchanges
$
33.7

 
$
33.4

 
$
28.6


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


F-5

PHL VARIABLE INSURANCE COMPANY
Statements of Changes in Stockholder’s Equity

 
For the years ended December 31,
($ in millions)
2014
 
2013
 
2012
COMMON STOCK:
 
 
 
 
 
Balance, beginning of period
$
2.5

 
$
2.5

 
$
2.5

Balance, end of period
$
2.5

 
$
2.5

 
$
2.5

 
 
 
 
 
 
ADDITIONAL PAID-IN CAPITAL:
 
 
 
 
 
Balance, beginning of period
$
847.2

 
$
802.2

 
$
802.2

Capital contributions from parent
15.0

 
45.0

 
—

Balance, end of period
$
862.2

 
$
847.2

 
$
802.2

 
 
 
 
 
 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
Balance, beginning of period
$
(12.7
)
 
$
8.8

 
$
1.2

Other comprehensive income (loss)
16.7

 
(21.5
)
 
7.6

Balance, end of period
$
4.0

 
$
(12.7
)
 
$
8.8

 
 
 
 
 
 
RETAINED EARNINGS (ACCUMULATED DEFICIT):
 
 
 
 
 
Balance, beginning of period
$
(455.6
)
 
$
(520.0
)
 
$
(380.9
)
Net income (loss)
(109.3
)
 
64.4

 
(139.1
)
Balance, end of period
$
(564.9
)
 
$
(455.6
)
 
$
(520.0
)
 
 
 
 
 
 
TOTAL STOCKHOLDER’S EQUITY:
 
 
 
 
 
Balance, beginning of period
$
381.4

 
$
293.5

 
$
425.0

Change in stockholder’s equity
(77.6
)
 
87.9

 
(131.5
)
Balance, end of period
$
303.8

 
$
381.4

 
$
293.5


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


F-6
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements
For the years ended December 31, 2014, 2013 and 2012





1.
Organization and Operations

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


2.
Revision of Previously Reported Financial Information

During the Company’s annual assumption review (or “Unlock”) which was performed in the fourth quarter of 2014, management observed results in the Company’s Universal Life (“UL”) business that did not align with its expectations and, upon further investigation, determined that certain components of the 2013 Unlock contained errors. These errors were subsequently determined to be material to the full year and three months ended December 31, 2013 for the Company’s parent, Phoenix. In addition, Phoenix also concluded that individually identified immaterial errors relating to Phoenix’s second quarter 2014 financial statements which when aggregated with the previously recorded and disclosed out-of-period adjustments, were determined to be material for the quarter ended June 30, 2014. As a result of these errors and in accordance with ASC 250, “Accounting Changes and Error Corrections,” Phoenix was required to record all out-of-period errors, whether or not previously identified, in the period to which they relate. Accordingly, in the course of correcting for these errors, some of which resided at the PHL Variable level, the Company also revised its financial statements for the impact of the UL Unlock and each of the remaining out-of-period errors identified in the appropriate periods despite the fact that the Company concluded the errors were not material individually or in the aggregate to PHL Variable. The impact of the revisions to the quarters are presented in expanded format within Note 18. Consistent with its parent, Phoenix, the Company has classified the errors into two categories (i) UL Unlock and (ii) Other Adjustments.

UL Unlock

In accordance with U.S. GAAP and our accounting policy, the Company performs an annual assumption review where management makes a determination of the best estimate assumptions to be used based on a comprehensive review of recent experience studies and industry trends each year. In 2013, the Company revised a number of assumptions, the most significant of which resulted in changes to expected premium persistency and incorporation of mortality improvement in its UL business. The incorporation of these changes resulted in manual updates to various models for which certain errors were subsequently identified in the course of performing analysis between the fourth quarter of 2014 and the prior period results. These errors related to inappropriate implementation of data used in the calculation and approximation of certain product features which then resulted in the incorrect calculation of the ultimate impact of the Unlock for the fourth quarter of 2013.

Other Adjustments

Amounts primarily relate to various out-of-period errors identified which were previously determined not to be material individually or in the aggregate. The Company considered the impacts of each of these errors, many of which were previously identified and subsequently recorded as out-of-period adjustments, as well as subsequently identified errors both individually and in the aggregate and concluded that none were significant for individual categorization herein.

The impact of the correction of these errors on the financial statements is presented in the tables within this Note below.


F-7
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
2.    Revision of Previously Reported Financial Information (continued)


($ in millions, except share data)
Balance Sheet
As of December 31, 2013
 
 
 
Correction of errors
 
 
 
As
reported
 
UL
unlock
 
Other
adjustments
 
As
revised
ASSETS:
 
 
 
 
 
 
 
Available-for-sale debt securities, at fair value
$
3,426.3

 
$
—

 
$
(10.2
)
 
$
3,416.1

Available-for-sale equity securities, at fair value
—

 
—

 
11.2

 
11.2

Short-term investments
81.0

 
—

 
—

 
81.0

Limited partnerships and other investments
10.5

 
—

 
—

 
10.5

Policy loans, at unpaid principal balances
66.1

 
—

 
—

 
66.1

Derivative instruments
237.8

 
—

 
(12.5
)
 
225.3

Fair value investments
48.6

 
—

 
—

 
48.6

Total investments
3,870.3

 
—

 
(11.5
)
 
3,858.8

Cash and cash equivalents
181.0

 
—

 
—

 
181.0

Accrued investment income
27.3

 
—

 
—

 
27.3

Reinsurance recoverable
500.6

 
(4.7
)
 
(1.6
)
 
494.3

Deferred policy acquisition costs
462.3

 
3.1

 
4.7

 
470.1

Deferred income taxes, net
28.0

 
—

 
(0.2
)
 
27.8

Receivable from related parties
2.6

 
—

 
—

 
2.6

Other assets [1]
183.4

 
0.1

 
20.6

 
204.1

Separate account assets
2,052.7

 
—

 
—

 
2,052.7

Total assets
$
7,308.2

 
$
(1.5
)
 
$
12.0

 
$
7,318.7

 
 
 
 
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Policy liabilities and accruals
$
1,899.0

 
$
(10.5
)
 
$
(5.6
)
 
$
1,882.9

Policyholder deposit funds
2,762.8

 
—

 
12.4

 
2,775.2

Indebtedness due to affiliate
30.0

 
—

 
—

 
30.0

Payable to related parties
14.1

 
—

 
—

 
14.1

Other liabilities
177.1

 
—

 
5.3

 
182.4

Separate account liabilities
2,052.7

 
—

 
—

 
2,052.7

Total liabilities
6,935.7

 
(10.5
)
 
12.1

 
6,937.3

 
 
 
 
 
 
 
 
COMMITMENTS AND CONTINGENT LIABILITIES (Note 17)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
STOCKHOLDER’S EQUITY:
 
 
 
 
 
 
 
Common stock, $5,000 par value: 1,000 shares authorized; 500 shares issued
2.5

 
—

 
—

 
2.5

Additional paid-in capital
847.2

 
—

 
—

 
847.2

Accumulated other comprehensive income (loss)
(11.9
)
 
0.1

 
(0.9
)
 
(12.7
)
Retained earnings (accumulated deficit)
(465.3
)
 
8.9

 
0.8

 
(455.6
)
Total stockholder’s equity
372.5

 
9.0

 
(0.1
)
 
381.4

Total liabilities and stockholder’s equity
$
7,308.2

 
$
(1.5
)
 
$
12.0

 
$
7,318.7

———————
[1]
Includes receivables which were previously disclosed as a separate line item.


F-8
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
2.    Revision of Previously Reported Financial Information (continued)


($ in millions)
Statement of Income and Comprehensive Income
As of and for the year ended December 31, 2013
 
 
 
Correction of errors
 
 
 
As
reported
 
UL
unlock
 
Other
adjustments
 
As
revised
REVENUES:
 
 
 
 
 
 
 
Premiums
$
13.9

 
$
—

 
$
—

 
$
13.9

Insurance and investment product fees
367.6

 
(0.3
)
 
(0.3
)
 
367.0

Net investment income
140.8

 
—

 
0.1

 
140.9

Net realized investment gains (losses):
 
 
 
 
 
 
 
Total other-than-temporary impairment (“OTTI”) losses
(1.1
)
 
—

 
0.2

 
(0.9
)
Portion of OTTI losses recognized
  in other comprehensive income (“OCI”)
(0.9
)
 
—

 
—

 
(0.9
)
Net OTTI losses recognized in earnings
(2.0
)
 
—

 
0.2

 
(1.8
)
Net realized investment gains (losses), excluding OTTI losses
5.4

 
—

 
(6.6
)
 
(1.2
)
Net realized investment gains (losses)
3.4

 
—

 
(6.4
)
 
(3.0
)
Total revenues
525.7

 
(0.3
)
 
(6.6
)
 
518.8

 
 
 
 
 
 
 
 
BENEFITS AND EXPENSES:
 
 
 
 
 
 
 
Policy benefits
286.5

 
(6.1
)
 
(2.8
)
 
277.6

Policy acquisition cost amortization
88.4

 
(3.0
)
 
(2.0
)
 
83.4

Other operating expenses
116.8

 
(0.1
)
 
1.4

 
118.1

Total benefits and expenses
491.7

 
(9.2
)
 
(3.4
)
 
479.1

Income (loss) before income taxes
34.0

 
8.9

 
(3.2
)
 
39.7

Income tax expense (benefit)
(21.7
)
 
—

 
(3.0
)
 
(24.7
)
Net income (loss)
$
55.7

 
$
8.9

 
$
(0.2
)
 
$
64.4

 
 
 
 
 
 
 
 
FEES PAID TO RELATED PARTIES (Note 12)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
 
 
Net income (loss)
$
55.7

 
$
8.9

 
$
(0.2
)
 
$
64.4

Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
(35.1
)
 
0.1

 
1.9

 
(33.1
)
Less: Income tax expense (benefit) related to:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
(11.8
)
 
—

 
0.2

 
(11.6
)
Other comprehensive income (loss), net of income taxes
(23.3
)
 
0.1

 
1.7

 
(21.5
)
Comprehensive income (loss)
$
32.4

 
$
9.0

 
$
1.5

 
$
42.9



F-9
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
2.    Revision of Previously Reported Financial Information (continued)


($ in millions)
Statement of Income and Comprehensive Income
As of and for the year ended December 31, 2012
 
 
 
Correction of errors
 
 
 
As
reported
 
UL
unlock
 
Other
adjustments
 
As
revised
REVENUES:
 
 
 
 
 
 
 
Premiums
$
8.5

 
$
—

 
$
—

 
$
8.5

Insurance and investment product fees
365.3

 
—

 
(0.1
)
 
365.2

Net investment income
130.9

 
—

 
—

 
130.9

Net realized investment gains (losses):
 
 
 
 
 
 
 
Total other-than-temporary impairment (“OTTI”) losses
(5.0
)
 
—

 
—

 
(5.0
)
Portion of OTTI losses recognized
  in other comprehensive income (“OCI”)
2.2

 
—

 
—

 
2.2

Net OTTI losses recognized in earnings
(2.8
)
 
—

 
—

 
(2.8
)
Net realized investment gains (losses), excluding OTTI losses
(19.5
)
 
—

 
(11.7
)
 
(31.2
)
Net realized investment gains (losses)
(22.3
)
 
—

 
(11.7
)
 
(34.0
)
Total revenues
482.4

 
—

 
(11.8
)
 
470.6

 
 
 
 
 
 
 
 
BENEFITS AND EXPENSES:
 
 
 
 
 
 
 
Policy benefits
396.8

 
—

 
(7.5
)
 
389.3

Policy acquisition cost amortization
103.5

 
—

 
(3.0
)
 
100.5

Other operating expenses
103.6

 
—

 
(0.7
)
 
102.9

Total benefits and expenses
603.9

 
—

 
(11.2
)
 
592.7

Income (loss) before income taxes
(121.5
)
 
—

 
(0.6
)
 
(122.1
)
Income tax expense (benefit)
16.2

 
—

 
0.8

 
17.0

Net income (loss)
$
(137.7
)
 
$
—

 
$
(1.4
)
 
$
(139.1
)
 
 
 
 
 
 
 
 
FEES PAID TO RELATED PARTIES (Note 12)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
 
 
Net income (loss)
$
(137.7
)
 
$
—

 
$
(1.4
)
 
$
(139.1
)
Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
33.7

 
—

 
(1.8
)
 
31.9

Less: Income tax expense (benefit) related to:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
24.9

 
—

 
(0.6
)
 
24.3

Other comprehensive income (loss), net of income taxes
8.8

 
—

 
(1.2
)
 
7.6

Comprehensive income (loss)
$
(128.9
)
 
$
—

 
$
(2.6
)
 
$
(131.5
)


F-10
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
2.    Revision of Previously Reported Financial Information (continued)


($ in millions)
Statement of Cash Flows
As of and for the year ended December 31, 2013
 
As
reported
 
Correction
of errors
 
As
revised
OPERATING ACTIVITIES:
 
 
 
 
 
Net income (loss)
$
55.7

 
$
8.7

 
$
64.4

Net realized investment gains / losses
(3.4
)
 
6.4

 
3.0

Policy acquisition costs deferred
(66.7
)
 
—

 
(66.7
)
Policy acquisition cost amortization
88.4

 
(5.0
)
 
83.4

Interest credited
91.2

 
—

 
91.2

Equity in earnings of limited partnerships and other investments
(0.4
)
 
—

 
(0.4
)
Change in:
 
 
 
 
 
Accrued investment income
(7.2
)
 
(0.2
)
 
(7.4
)
Deferred income taxes, net
—

 
—

 
—

Reinsurance recoverable
(73.5
)
 
28.9

 
(44.6
)
Policy liabilities and accruals
(224.0
)
 
(37.2
)
 
(261.2
)
Due to/from related parties
0.5

 
—

 
0.5

Other operating activities, net [1]
8.9

 
(1.6
)
 
7.3

Cash provided by (used for) operating activities
(130.5
)
 
—

 
(130.5
)
 
 
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
 
 
Purchases of:
 
 
 
 
 
Available-for-sale debt securities
(985.6
)
 
8.4

 
(977.2
)
Available-for-sale equity securities
—

 
(8.4
)
 
(8.4
)
Short-term investments
(324.8
)
 
—

 
(324.8
)
Derivative instruments
(89.0
)
 
—

 
(89.0
)
Fair value investments
(21.1
)
 
—

 
(21.1
)
Sales, repayments and maturities of:
 
 
 
 
 
Available-for-sale debt securities
389.0

 
—

 
389.0

Available-for-sale equity securities
—

 
—

 
—

Short-term investments
489.8

 
—

 
489.8

Derivative instruments
42.9

 
—

 
42.9

Fair value investments
10.1

 
—

 
10.1

Contributions to limited partnerships and limited liability corporations
(4.3
)
 
—

 
(4.3
)
Distributions from limited partnerships and limited liability corporations
7.8

 
—

 
7.8

Policy loans, net
(2.8
)
 
—

 
(2.8
)
Other investing activities, net
0.7

 
—

 
0.7

Cash provided by (used for) investing activities
(487.3
)
 
—

 
(487.3
)

(Continued on next page)


F-11
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
2.    Revision of Previously Reported Financial Information (continued)


(Continued from previous page)
($ in millions)
Statement of Cash Flows
As of and for the year ended December 31, 2013
 
As
reported
 
Correction
of errors
 
As
revised
FINANCING ACTIVITIES:
 
 
 
 
 
Policyholder deposits
920.8

 
—

 
920.8

Policyholder withdrawals
(605.2
)
 
—

 
(605.2
)
Net transfers (to) from separate accounts
325.1

 
—

 
325.1

Capital contributions from parent
45.0

 
—

 
45.0

Debt issued
30.0

 
—

 
30.0

Cash provided by (used for) financing activities
715.7

 
—

 
715.7

Change in cash and cash equivalents
97.9

 
—

 
97.9

Cash and cash equivalents, beginning of period
83.1

 
—

 
83.1

Cash and cash equivalents, end of period
$
181.0

 
$
—

 
$
181.0

 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
 
Income taxes (paid) refunded
$
24.9

 
$
—

 
$
24.9

 
 
 
 
 
 
Non-Cash Transactions During the Period
 
 
 
 
 
Investment exchanges
$
33.4

 
$
—

 
$
33.4

———————
[1]
Includes receivables which were previously disclosed as a separate line item.


F-12
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
2.    Revision of Previously Reported Financial Information (continued)


($ in millions)
Statement of Cash Flows
As of and for the year ended December 31, 2012
 
As
reported
 
Correction
of errors
 
As
revised
OPERATING ACTIVITIES:
 
 
 
 
 
Net income (loss)
$
(137.7
)
 
$
(1.4
)
 
$
(139.1
)
Net realized investment gains / losses
22.3

 
11.7

 
34.0

Policy acquisition costs deferred
(69.2
)
 
(0.6
)
 
(69.8
)
Policy acquisition cost amortization
103.5

 
(3.0
)
 
100.5

Interest credited
69.5

 
—

 
69.5

Equity in earnings of limited partnerships and other investments
(0.1
)
 
—

 
(0.1
)
Change in:
 
 
 
 
 
Accrued investment income
(8.5
)
 
—

 
(8.5
)
Deferred income taxes, net
(13.4
)
 
2.5

 
(10.9
)
Reinsurance recoverable
(26.1
)
 
14.0

 
(12.1
)
Policy liabilities and accruals
(56.4
)
 
4.7

 
(51.7
)
Due to/from related parties
(7.5
)
 
—

 
(7.5
)
Other operating activities, net [1]
(41.8
)
 
(27.9
)
 
(69.7
)
Cash provided by (used for) operating activities
(165.4
)
 
—

 
(165.4
)
 
 
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
 
 
Purchases of:
 
 
 
 
 
Available-for-sale debt securities
(852.8
)
 
—

 
(852.8
)
Available-for-sale equity securities
—

 
—

 
—

Short-term investments
(574.7
)
 
—

 
(574.7
)
Derivative instruments
(98.1
)
 
—

 
(98.1
)
Fair value investments
(5.7
)
 
—

 
(5.7
)
Sales, repayments and maturities of:
 
 
 
 
 
Available-for-sale debt securities
438.1

 
—

 
438.1

Available-for-sale equity securities
—

 
—

 
—

Short-term investments
425.8

 
—

 
425.8

Derivative instruments
26.7

 
—

 
26.7

Fair value investments
12.4

 
—

 
12.4

Contributions to limited partnerships and limited liability corporations
(2.1
)
 
—

 
(2.1
)
Distributions from limited partnerships and limited liability corporations
0.3

 
—

 
0.3

Policy loans, net
3.9

 
—

 
3.9

Other investing activities, net
(1.0
)
 
—

 
(1.0
)
Cash provided by (used for) investing activities
(627.2
)
 
—

 
(627.2
)

(Continued on next page)


F-13
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
2.    Revision of Previously Reported Financial Information (continued)


(Continued from previous page)
($ in millions)
Statement of Cash Flows
As of and for the year ended December 31, 2012
 
As
reported
 
Correction
of errors
 
As
revised
FINANCING ACTIVITIES:
 
 
 
 
 
Policyholder deposits
1,074.7

 
—

 
1,074.7

Policyholder withdrawals
(513.8
)
 
—

 
(513.8
)
Net transfers (to) from separate accounts
265.3

 
—

 
265.3

Capital contributions from parent
—

 
—

 
—

Debt issued
—

 
—

 
—

Cash provided by (used for) financing activities
826.2

 
—

 
826.2

Change in cash and cash equivalents
33.6

 
—

 
33.6

Cash and cash equivalents, beginning of period
49.5

 
—

 
49.5

Cash and cash equivalents, end of period
$
83.1

 
$
—

 
$
83.1

 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
 
Income taxes (paid) refunded
$
(40.9
)
 
$
—

 
$
(40.9
)
Non-Cash Transactions During the Period
 
 
 
 
 
Investment exchanges
$
28.6

 
$
—

 
$
28.6

———————
[1]
Includes receivables which were previously disclosed as a separate line item.


F-14
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
2.    Revision of Previously Reported Financial Information (continued)


($ in millions)
Statement of Changes in Stockholder's Equity
As of and for the year ended December 31, 2013
 
As
reported
 
Correction
of errors
 
As
revised
COMMON STOCK:
 
 
 
 
 
Balance, beginning of period
$
2.5

 
$
—

 
$
2.5

Balance, end of period
$
2.5

 
$
—

 
$
2.5

 
 
 
 
 
 
ADDITIONAL PAID-IN CAPITAL:
 
 
 
 
 
Balance, beginning of period
$
802.2

 
$
—

 
$
802.2

Capital contributions from parent
45.0

 
—

 
45.0

Balance, end of period
$
847.2

 
$
—

 
$
847.2

 
 
 
 
 
 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
Balance, beginning of period
$
11.4

 
$
(2.6
)
 
$
8.8

Other comprehensive income (loss)
(23.3
)
 
1.8

 
(21.5
)
Balance, end of period
$
(11.9
)
 
$
(0.8
)
 
$
(12.7
)
 
 
 
 
 
 
RETAINED EARNINGS (ACCUMULATED DEFICIT):
 
 
 
 
 
Balance, beginning of period
$
(521.0
)
 
$
1.0

 
$
(520.0
)
Net income (loss)
55.7

 
8.7

 
64.4

Balance, end of period
$
(465.3
)
 
$
9.7

 
$
(455.6
)
 
 
 
 
 
 
TOTAL STOCKHOLDER’S EQUITY:
 
 
 
 
 
Balance, beginning of period
$
295.1

 
$
(1.6
)
 
$
293.5

Change in stockholder’s equity
77.4

 
10.5

 
87.9

Balance, end of period
$
372.5

 
$
8.9

 
$
381.4



F-15
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
2.    Revision of Previously Reported Financial Information (continued)


($ in millions)
Statement of Changes in Stockholder's Equity
As of and for the year ended December 31, 2012
 
As
reported
 
Correction
of errors
 
As
revised
COMMON STOCK:
 
 
 
 
 
Balance, beginning of period
$
2.5

 
$
—

 
$
2.5

Balance, end of period
$
2.5

 
$
—

 
$
2.5

 
 
 
 
 
 
ADDITIONAL PAID-IN CAPITAL:
 
 
 
 
 
Balance, beginning of period
$
802.2

 
$
—

 
$
802.2

Capital contributions from parent
—

 
—

 
—

Balance, end of period
$
802.2

 
$
—

 
$
802.2

 
 
 
 
 
 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
Balance, beginning of period
$
2.6

 
$
(1.4
)
 
$
1.2

Other comprehensive income (loss)
8.8

 
(1.2
)
 
7.6

Balance, end of period
$
11.4

 
$
(2.6
)
 
$
8.8

 
 
 
 
 
 
RETAINED EARNINGS (ACCUMULATED DEFICIT):
 
 
 
 
 
Balance, beginning of period
$
(383.3
)
 
$
2.4

 
$
(380.9
)
Net income (loss)
(137.7
)
 
(1.4
)
 
(139.1
)
Balance, end of period
$
(521.0
)
 
$
1.0

 
$
(520.0
)
 
 
 
 
 
 
TOTAL STOCKHOLDER’S EQUITY:
 
 
 
 
 
Balance, beginning of period
$
424.0

 
$
1.0

 
$
425.0

Change in stockholder’s equity
(128.9
)
 
(2.6
)
 
(131.5
)
Balance, end of period
$
295.1

 
$
(1.6
)
 
$
293.5



3.
Basis of Presentation and Significant Accounting Policies

We have prepared these financial statements in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), which differs materially from the accounting practices prescribed by various insurance regulatory authorities. In addition, certain prior year amounts have been reclassified to conform to the current year presentation.

Use of estimates

In preparing these financial statements in conformity with U.S. GAAP, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions are made in the determination of estimated gross profits (“EGPs”) used in the valuation and amortization of assets and liabilities associated with universal life and annuity contracts; policyholder liabilities and accruals; valuation of investments in debt and equity securities; limited partnerships and other investments; valuation of deferred tax assets; and accruals for contingent liabilities. Certain of these estimates are particularly sensitive to market conditions and/or volatility in the debt or equity markets could have a material impact on the financial statements. We are also subject to estimates made by our ultimate parent company related to discount rates and other assumptions for our pension and other post-employment benefits liabilities; and accruals for contingent liabilities. Actual results could differ from these estimates.


F-16
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
3.    Basis of Presentation and Significant Accounting Policies (continued)


Parent companies’ liquidity

Management targets a minimum risk based capital of 225% at the Company. In 2014 and 2013, The Phoenix Companies, Inc. made capital contributions of $15.0 million and $45.0 million, respectively, for our benefit. In 2013, we issued a $30.0 million surplus note which was purchased by The Phoenix Companies, Inc. We may need additional capital contributions from The Phoenix Companies, Inc. and/or Phoenix Life in order to maintain our target risk based capital of 225%.

The Phoenix Companies, Inc. is a holding company and has no operations of its own. Its ability to pay interest and principal on outstanding debt obligations and to pay dividends to shareholders and corporate expenses depends primarily upon the surplus and earnings of Phoenix Life and the ability of subsidiaries to pay dividends or to advance or repay funds. Payments of dividends and advances or repayment of funds by Phoenix Life are restricted by the applicable laws and regulations, including laws establishing minimum solvency and liquidity thresholds. Changes to these laws, the application or implementation of those laws by regulatory agencies or the need for significant additional capital contributions to insurance subsidiaries, including the Company, could constrain the ability of The Phoenix Companies, Inc. to meet its debt obligations and corporate expenses as well as make capital contributions for the benefit of the Company to support the Company’s risk based capital.

As of December 31, 2014, Phoenix Life has a risk based capital ratio in excess of 300% of Company Action Level, the highest regulatory threshold. Phoenix Life has made a guarantee that the Company’s capital and surplus will be maintained at Authorized Control Level RBC at 250% (125% Company Action Level).

The Phoenix Companies, Inc and Phoenix Life have the capacity to provide additional capital to the Company to support its risk based capital ratios over the Company Action Level and regulatory minimum ratios.

Adoption of new accounting standards

Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or Tax Credit Carryforward Exists

In July 2013, the Financial Accounting Standards Board (the “FASB”) issued updated guidance regarding the presentation of unrecognized tax benefits when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. This new guidance was effective for interim or annual reporting periods beginning after December 15, 2013. This new guidance did not have a material impact on the Company’s financial position, results of operations and financial statement disclosures.

Investment Companies: Amendments to the Scope, Measurement and Disclosure Requirements

In June 2013, the FASB issued updated guidance clarifying the characteristics of an investment company and requiring new disclosures. This new guidance was effective for interim or annual reporting periods beginning after December 15, 2013. Under the guidance, all entities regulated under the Investment Company Act of 1940 automatically qualify as investment companies, while all other entities need to consider both the fundamental and typical characteristics of an investment company in determining whether they qualify as investment companies. This new guidance did not have a material impact on the Company’s financial position, results of operations and financial statement disclosures.

Obligations Resulting for Joint and Several Liability Agreements for Which the Total Amount of the Obligation is Fixed at the Reporting Date

In February 2013, the FASB issued new guidance regarding liabilities effective retrospectively for fiscal years beginning after December 15, 2013 and interim periods within those years. The amendments require an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. In addition, the amendments require an entity to disclose the nature and amount of the obligation, as well as other information about the obligation. This new guidance did not have a material impact on the Company’s financial position, results of operations and financial statement disclosures.


F-17
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
3.    Basis of Presentation and Significant Accounting Policies (continued)


Accounting standards not yet adopted

Amendments to Consolidation Guidance

In February 2015, the FASB issued updated consolidation guidance. The amendments revise existing guidance for when to consolidate variable interest entities (“VIEs”) and general partners’ investments in limited partnerships, end the deferral granted for applying the VIE guidance to certain investment companies, and reduce the number of circumstances where a decision maker’s or service provider’s fee arrangement is deemed to be a variable interest in an entity. The updates also modify consolidation guidance for determining whether limited partnerships are VIEs or voting interest entities. This guidance is effective for years beginning after December 31, 2015, and may be applied fully retrospectively or through a cumulative effect adjustment to retain earnings as of the beginning of the year of adoption. The Company is currently assessing the impact of the guidance on its financial position, results of operations and financial statement disclosures.

Income Statement - Extraordinary and Unusual Items

In January 2015, the FASB issued new guidance regarding extraordinary items which eliminates the U.S. GAAP concept of an extraordinary item. As a result, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; and (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. However, the ASU does not affect the reporting and disclosure requirements for an event that is unusual in nature or that occurs infrequently. The ASU is effective for annual periods beginning after December 15, 2015, and interim periods within those annual periods. Early adoption is permitted if the guidance is applied as of the beginning of the annual period of adoption. The Company is currently assessing the impact of the guidance on its financial position, results of operations and financial statement disclosures.

Presentation of Financial Statements - Going Concern

In August 2014, the FASB issued guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The new guidance applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company is currently assessing the impact of the guidance on its financial position, results of operations and financial statement disclosures.

Consolidation - Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity

In August 2014, the FASB issued guidance allowing (i.e., not requiring) a reporting entity to measure the financial assets and financial liabilities of a consolidated collateralized financing entity, within the scope of the new guidance, based on either the fair value of the financial assets or financial liabilities, whichever is more observable (referred to as a “measurement alternative”). The new guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 for public business entities. Early adoption will be permitted. The Company is currently assessing the impact of the guidance on its financial position, results of operations and financial statement disclosures.

Revenue from Contracts with Customers

In May 2014, the FASB issued updated guidance on accounting for revenue recognition. The guidance is based on the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from cost incurred to obtain or fulfill a contract. Revenue recognition for insurance contracts is explicitly scoped out of the guidance. The new guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2016, and must be applied using one of two retrospective application methods. Early adoption is not permitted. The Company is currently assessing the impact of the guidance on its financial position, results of operations and financial statement disclosures.


F-18
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
3.    Basis of Presentation and Significant Accounting Policies (continued)


Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity

In April 2014, the FASB issued updated guidance that changes the criteria for reporting discontinued operations and introduces new disclosures. The new guidance is effective prospectively to new disposals and new classifications of disposal groups as held for sale that occur within annual periods beginning on or after December 15, 2014 and interim periods within those annual periods. Early adoption is permitted for new disposals or new classifications as held for sale that have not been reported in financial statements previously issued. The Company will apply the guidance to new disposals and operations newly classified as held for sale, beginning first quarter of 2015, with no effect on existing reported discontinued operations. This guidance is not expected to have a significant effect on the Company’s financial position, results of operations and financial statement disclosures.

Accounting for Troubled Debt Restructurings by Creditors

In January 2014, the FASB issued updated guidance for troubled debt restructurings clarifying when an in substance repossession or foreclosure occurs, and when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The new guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2014. This guidance can be elected for prospective adoption or by using a modified retrospective transition method. This guidance is not expected to have a significant effect on the Company’s financial position, results of operations and financial statement disclosures.

Accounting for Investments in Qualified Affordable Housing Projects

In January 2014, the FASB issued updated guidance regarding investments in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. Under the guidance, an entity is permitted to make an accounting policy election to amortize the initial cost of its investment in proportion to the tax credits and other tax benefits received and recognize the net investment performance in the statement of operations as a component of income tax expense (benefit) if certain conditions are met. The new guidance is effective for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014, and should be applied retrospectively to all periods presented. This guidance is not expected to have a significant effect on the Company’s financial position, results of operations and financial statement disclosures.

Significant accounting policies

Investments

Debt and Equity Securities

Our debt securities classified as available-for-sale include bonds, structured securities and redeemable preferred stock. These investments, along with certain equity securities, which include common and non-redeemable preferred stocks, are reported on our balance sheets at fair value. Fair value is based on quoted market price, where available. When quoted market prices are not available, we estimate fair value by discounting debt security cash flows to reflect interest rates currently being offered on similar terms to borrowers of similar credit quality (private placement debt securities), by quoted market prices of comparable instruments (untraded public debt securities) and by independent pricing sources or internally developed pricing models. We recognize unrealized gains and losses on investments in debt and equity securities that we classify as available-for-sale. We report these unrealized investment gains and losses as a component of OCI. Realized investment gains and losses are recognized on a first in first out basis.


F-19
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
3.    Basis of Presentation and Significant Accounting Policies (continued)


Limited Partnerships and Other Investments

Limited partnerships, infrastructure funds, hedge funds and joint venture interests in which we do not have voting control or power to direct activities are recorded using the equity method of accounting. These investments include private equity, mezzanine funds, infrastructure funds, hedge funds of funds and direct equity investments. The equity method of accounting requires that the investment be initially recorded at cost and the carrying amount of the investment subsequently adjusted to recognize our share of the earnings or losses. We record our equity in the earnings in net investment income using the most recent financial information received from the partnerships. Recognition of net investment income is generally on a three-month delay due to the timing of the related financial statements. The contributions to and distributions from limited partnerships are classified as investing activities within the statement of cash flows.

The Company routinely evaluates these investments for impairments. For equity method investees, the Company considers financial and other information provided by the investee, other known information and inherent risks in the underlying investments, as well as future capital commitments, in determining whether an impairment has occurred. The Company considers its cost method investments for other-than-temporary impairments (“OTTI”) when the carrying value of such investments exceeds the net asset value (“NAV”). The Company takes into consideration the severity and duration of this excess when determining whether the cost method investment is other-than-temporarily impaired. When an OTTI has occurred, the impairment loss is recorded within net investment gains (losses).

Loans are occasionally restructured in a troubled debt restructuring. These restructurings generally include one or more of the following: full or partial payoffs outside of the original contract terms; changes to interest rates; extensions of maturity; or additions or modifications to covenants. When restructurings occur, they are evaluated individually to determine whether the restructuring or modification constitutes a “troubled debt restructuring” as defined by authoritative accounting guidance. In a troubled debt restructuring where the Company receives assets in full or partial satisfaction of the debt, any specific valuation allowance is reversed and a direct write down of the loan is recorded for the amount of the allowance and any additional loss, net of recoveries, or any gain is recorded for the difference between the fair value of the assets received and the recorded investment in the loan. Any remaining loan is evaluated prospectively for impairment based on the credit review process noted above. When a loan is restructured in a troubled debt restructuring, the impairment of the loan is remeasured using the modified terms and the loan’s original effective yield and the allowance for loss is adjusted accordingly. Subsequent to the modification, income is recognized prospectively based on the modified terms of the loans in accordance with the income recognition policy noted above.

Policy Loans

Policy loans are carried at their unpaid principal balances and are collateralized by the cash values of the related policies. The majority of policy loans are at variable interest rates that are reset annually on the policy anniversary.

Fair Value Instruments

Debt securities held at fair value include securities held for which changes in fair values are recorded in earnings. The securities held at fair value are designated as trading securities, as well as those debt securities for which we have elected the fair value option (“FVO”) and certain available-for-sale structured securities held at fair value. The changes in fair value and any interest income of these securities are reflected in earnings as part of “net investment income.” See Note 10 to these financial statements for additional disclosures related to these securities.

Derivative Instruments

We recognize derivative instruments on the balance sheets at fair value. The derivative contracts are reported as assets in derivative instruments or liabilities in other liabilities on the balance sheets, excluding embedded derivatives. Embedded derivatives, as discussed below, are recorded on the balance sheets bifurcated from the associated host contract.

The Company economically hedges variability of cash flows to be received or paid related to certain recognized assets and/or liabilities. All changes in the fair value of derivatives, including net receipts and payments, are included in net realized investment gains and losses without consideration of changes in the fair value of the economically associated assets or liabilities. We do not designate the purchased derivatives related to living benefits or index credits as hedges for accounting purposes.

F-20
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
3.    Basis of Presentation and Significant Accounting Policies (continued)


Our derivatives are not designated as hedges for accounting purposes. All changes in the fair value, including net receipts and payments, are included in net realized investment gains and losses without consideration of changes in the fair value of the economically associated assets or liabilities.

Short-Term Investments

Short-term investments include securities with a maturity of one year or less but greater than three months at a time of purchase and are stated at estimated fair value or amortized cost, which approximates estimated fair value.

Net Investment Income

For asset-backed and fixed maturity debt securities, we recognize interest income using a constant effective yield based on estimated cash flow timing and economic lives of the securities. For high credit quality asset-backed securities, effective yields are recalculated based on actual payments received and updated prepayment expectations, and the amortized cost is adjusted to the amount that would have existed had the new effective yield been applied since acquisition with a corresponding charge or credit to net investment income. For asset-backed securities that are not high credit quality, effective yields are recalculated and adjusted prospectively based on changes in expected undiscounted future cash flows. For certain credit impaired asset-backed securities, effective yields are recalculated and adjusted prospectively to reflect significant increases in undiscounted expected future cash flows and changes in the contractual benchmark interest rate on variable rate securities. Any prepayment fees on fixed maturities and mortgage loans are recorded when earned in net investment income. We record the net income from investments in partnerships and joint ventures in net investment income.

Other-Than-Temporary Impairments on Available-For-Sale Securities

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

For debt securities, the other-than-temporarily impaired amount is separated into the amount related to a credit loss and is reported as net realized investment losses included in earnings and any amounts related to other factors are recognized in OCI. The credit loss component represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. Any remaining difference between the fair value and amortized cost is recognized in AOCI. Subsequent to the recognition of an OTTI, the impaired security is accounted for as if it had been purchased on the date of impairment at an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. We will continue to estimate the present value of future expected cash flows and, if significantly greater than the new cost basis, we will accrete the difference as investment income on a prospective basis once the Company has determined that the interest income is likely to be collected.

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

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

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

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


F-21
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
3.    Basis of Presentation and Significant Accounting Policies (continued)


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

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

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

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

On a quarterly basis, we evaluate securities in an unrealized loss position for potential recognition of an OTTI. In addition, we maintain a watch list of securities in default, near default or otherwise considered by our investment professionals as being distressed, potentially distressed or requiring a heightened level of scrutiny. We also identify securities whose fair value has been below amortized cost on a continuous basis for zero to six months, six months to 12 months and greater than 12 months.

We employ a comprehensive process to determine whether or not a security in an unrealized loss position is other-than-temporarily impaired. This assessment is done on a security-by-security basis and involves significant management judgment. The assessment of whether impairments have occurred is based on management’s evaluation of the underlying reasons for the decline in estimated fair value. The Company’s review of its fixed maturity and equity securities for impairments includes an analysis of the total gross unrealized losses by severity and/or age of the gross unrealized loss. An extended and severe decline in value on a fixed maturity security may not have any impact on the ability of the issuer to service all scheduled interest and principal payments and the Company’s evaluation of recoverability of all contractual cash flows or the ability to recover an amount at least equal to its amortized cost based on the present value of the expected future cash flows to be collected. In contrast, for certain equity securities, greater weight and consideration are given by the Company to an extended decline in market value and the likelihood such market value decline will recover.

Specifically for structured securities, to determine whether a collateralized security is impaired, we obtain underlying data from the security’s trustee and analyze it for performance trends. A security-specific stress analysis is performed using the most recent trustee information. This analysis forms the basis for our determination of the future expected cash flows to be collected for the security.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, amounts due from banks, money market instruments and other debt instruments with original maturities of three months or less. Negative cash balances are reclassified to other liabilities.

Deferred Policy Acquisition Costs

We defer incremental direct costs related to the successful sale of new or renewal contracts. Incremental direct costs are those costs that result directly from and are essential to the sale of a contract. These costs include principally commissions, underwriting and policy issue expenses, all of which vary with and are primarily related to production of new business.


F-22
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
3.    Basis of Presentation and Significant Accounting Policies (continued)


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

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

The projection of EGPs requires the extensive use of actuarial assumptions, estimates and judgments about the future. Future EGPs are generally projected for the estimated lives of the contracts. Assumptions are set separately for each product and are reviewed at least annually based on our current best estimates of future events. The following table summarizes the most significant assumptions used in the categories set forth below:

Significant Assumption
 
Product
 
Explanation and Derivation
 
 
 
 
 
Separate account investment return
 
Variable Annuities
(7.9% long-term return assumption)
Variable Universal Life
(8.0% long-term return assumption)
 
Separate account return assumptions are derived from the long-term returns observed in the asset classes in which the separate accounts are invested. Short-term deviations from the long-term expectations are expected to revert to the long-term assumption over five years.
 
 
 
 
 
Interest rates and default rates
 
Fixed and Indexed Annuities
Universal Life
 
Investment returns are based on the current yields and maturities of our fixed income portfolio combined with expected reinvestment rates given current market interest rates. Reinvestment rates are assumed to revert to long-term rates implied by the forward yield curve and long-term default rates. Contractually permitted future changes in credited rates are assumed to help support investment margins.
 
 
 
 
 
Mortality / longevity
 
Universal Life
Variable Universal Life
Fixed and Indexed Annuities
 
Mortality assumptions are based on Company experience over a rolling five-year period plus supplemental data from industry sources and trends. A mortality improvement assumption is also incorporated into the overall mortality table. These assumptions can vary by issue age, gender, underwriting class and policy duration.
 
 
 
 
 
Policyholder behavior – policy persistency
 
Universal Life
Variable Universal Life
Variable Annuities
Fixed and Indexed Annuities
 
Policy persistency assumptions vary by product and policy year and are updated based on recently observed experience. Policyholders are generally assumed to behave rationally; hence rates are typically lower when surrender penalties are in effect or when policy benefits are more valuable.
 
 
 
 
 
Policyholder behavior – premium persistency
 
Universal Life
Variable Universal Life
 
Future premiums and related fees are projected based on contractual terms, product illustrations at the time of sale and expected policy lapses without value. Assumptions are updated based on recently observed experience and include anticipated changes in behavior based on changes in policy charges if the Company has a high degree of confidence that such changes will be implemented (e.g., change in cost of insurance (“COI”) charges).
 
 
 
 
 
Expenses
 
All products
 
Projected maintenance expenses to administer policies in force are based on annually updated studies of expenses incurred.
 
 
 
 
 

F-23
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
3.    Basis of Presentation and Significant Accounting Policies (continued)


Significant Assumption
 
Product
 
Explanation and Derivation
 
 
 
 
 
Reinsurance costs / recoveries
 
Universal Life
Variable Universal Life
Variable Annuities
 
Projected reinsurance costs are based on treaty terms currently in force. Recoveries are based on the Company’s assumed mortality and treaty terms. Treaty recaptures are based on contract provisions and management’s intentions.

Annually, we complete a comprehensive assumption review where management makes a determination of best estimate assumptions based on a comprehensive review of recent experience and industry trends. Assumption changes resulting from this review may change our estimates of EGPs in the DAC, SIA, and URR models, as well as projections within the death benefit and other insurance benefit reserving models, the profits followed by losses reserve models, and cost of reinsurance models. Throughout the year, we may also update the assumptions and adjust these balances if emerging data indicates a change is warranted. All assumption changes, whether resulting from the annual comprehensive review or from other periodic assessments, are considered an unlock in the period of revision and adjust the DAC, SIA, URR, death and other insurance benefit reserves, profits followed by losses reserve, and cost of reinsurance balances in the balance sheets with an offsetting benefit or charge to income to reflect such changes in the period of the revision. An unlock that results in an after-tax benefit generally occurs as a result of actual experience or future expectations of product profitability being more favorable than previous estimates. An unlock that results in an after-tax charge generally occurs as a result of actual experience or future expectations of product profitability being less favorable than previous estimates.

Our process to assess the reasonableness of the EGPs uses internally developed models together with consideration of applicable recent experience and analysis of market and industry trends and other events. Actual gross profits that vary from management’s estimates in a given reporting period may also result in increases or decreases in the rate of amortization recorded in the period.

An analysis is performed annually to assess if there are sufficient gross profits to recover the DAC associated with business written during the year. If the estimates of gross profits cannot support the recovery of DAC, the amount deferred is reduced to the recoverable amount.

The Company has updated a number of assumptions that have resulted in changes to expected future gross profits. The most significant assumption updates made over the last several years resulting in a change to future gross profits and the amortization of DAC, SIA and URR, as well as changes in PFBL and guaranteed benefit liabilities, are related to long-term expected mortality improvement; changes in expected premium persistency; changes in expected separate account investment returns due to changes in equity markets; changes in expected future interest rates and default rates based on continued experience and expected interest rate changes; changes in lapses and other policyholder behavior assumptions that are updated to reflect more recent policyholder and industry experience; and changes in expected policy administration expenses.

Sales inducements

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

Separate account assets and liabilities

Separate account assets related to policyholder funds are carried at fair value with an equivalent amount recorded as separate account liabilities. Deposits, net investment income and realized investment gains and losses for these accounts are excluded from revenues and the related liability increases are excluded from benefits and expenses. Fees assessed to the contract owners for management services are included in revenues when services are rendered.


F-24
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
3.    Basis of Presentation and Significant Accounting Policies (continued)


Policy liabilities and accruals

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

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

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

We expect that our universal life block of business will generate profits followed by losses and therefore we establish an additional liability to accrue for the expected losses over the period of expected profits. The assumptions used in estimating these liabilities are consistent with those used for amortizing DAC and are subject to the same variability and risk and the results are very sensitive to interest rates.

The liability for universal life-type contracts primarily includes the balance that accrues to the benefit of the policyholders as of the financial statement date, including interest credited at rates which range from 3.0% to 4.5%, amounts that have been assessed to compensate us for services to be performed over future periods, accumulated account deposits, withdrawals and any amounts previously assessed against the policyholder that are refundable. There may also be a liability recorded for contracts that include additional death or other insurance benefit features as discussed above.

The Company periodically reviews its estimates of actuarial liabilities for policyholder benefits and compares them with its actual experience. Differences between actual experience and the assumptions used in pricing these policies and guarantees, as well as in the establishment of the related liabilities, result in variances in profit and could result in losses.

Policy liabilities and accruals also include liabilities for outstanding claims, losses and loss adjustment expenses based on individual case estimates for reported losses and estimates of unreported losses based on past experience. The Company does not establish claim liabilities until a loss has occurred. However, unreported losses and loss adjustment expenses includes estimates of claims that the Company believes have been incurred but have not yet been reported as of the balance sheet date.

Embedded derivatives

Certain contracts contain guarantees that are accounted for as embedded derivative instruments. These guarantees are assessed to determine if a separate instrument with the same terms would qualify as a derivative and if they are not clearly and closely related to the economic characteristics of the host contract. Contract guarantees that meet these criteria are reported separately from the host contract and reported at fair value.


F-25
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
3.    Basis of Presentation and Significant Accounting Policies (continued)


The guaranteed minimum withdrawal benefit (“GMWB”), guaranteed minimum accumulation benefit (“GMAB”) and combination rider (“COMBO”) represent embedded derivative liabilities in the variable annuity contracts. These liabilities are accounted for at fair value within policyholder deposit funds on the balance sheets with changes in the fair value of embedded derivatives recorded in realized investment gains on the statements of income and comprehensive income. The fair value of the GMWB, GMAB and COMBO obligation is calculated based on actuarial and capital market assumptions related to the projected cash flows, including benefits and related contract charges, over the lives of the contracts, incorporating expectations concerning policyholder behavior. As markets change, contracts mature and actual policyholder behavior emerges, these assumptions are continually evaluated and may from time to time be adjusted.

Fixed indexed annuities offer a variety of index options: policy credits that are calculated based on the performance of an outside equity market or other index over a specified term. The index options represent embedded derivative liabilities accounted for at fair value within policyholder deposit funds on the balance sheets with changes in fair value recorded in realized investment gains and losses in the statements of income and comprehensive income. The fair value of these index options is based on the impact of projected interest rates and equity markets and is discounted using the projected interest rate. Several additional inputs reflect our internally developed assumptions related to lapse rates and policyholder behavior.

See Note 8 to these financial statements for additional information regarding embedded derivatives.

Policyholder deposit funds

Amounts received as payment for certain deferred annuities and other contracts without life contingencies are reported as deposits to policyholder deposit funds. The liability for deferred annuities and other contracts without life contingencies is equal to the balance that accrues to the benefit of the contract owner as of the financial statement date which includes the accumulation of deposits plus interest credited, less withdrawals and amounts assessed through the financial statement date as well as accumulated policyholder dividends and the liability representing the fair value of embedded derivatives associated with those contracts.

Contingent liabilities

Management evaluates each contingent matter separately and in aggregate. Amounts related to contingent liabilities are accrued if it is probable that a liability has been incurred and an amount is reasonably estimable.

Revenue recognition

We recognize premiums for long-duration life insurance products as revenue when due from policyholders. We match benefits, losses and related expenses with premiums over the related contract periods.

Amounts received as payment for interest sensitive life contracts, deferred annuities and contracts without life contingencies are considered deposits and are not included in revenue. Revenues from these products consist primarily of fees assessed during the period against the policyholders’ account balances for mortality charges, policy administration charges and surrender charges. Fees assessed that represent compensation for services to be provided in the future are deferred and amortized into revenue over the life of the related contracts in proportion to EGPs.

Certain variable annuity contracts and fixed index annuity contract riders provide the holder a guarantee that the benefit received upon death or annuitization will be no less than a minimum prescribed amount. These benefits are accounted for as insurance benefits. Certain variable annuity contracts features and fixed index annuity index options are considered embedded derivatives. See Note 8 to these financial statements for additional information.

Reinsurance

Premiums, policy benefits and operating expenses related to our term insurance policies are stated net of reinsurance ceded to other companies, except for amounts associated with certain modified coinsurance contracts which are reflected in the Company’s financial statements based on the application of the deposit method of accounting. Estimated reinsurance recoverables and the net estimated cost of reinsurance are recognized over the life of the reinsured treaty using assumptions consistent with those used to account for the policies subject to the reinsurance.


F-26
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
3.    Basis of Presentation and Significant Accounting Policies (continued)


For universal life and variable universal life contracts, reinsurance premiums and ceded benefits are reflected net within policy benefits. Reinsurance recoverables are recognized in the same period as the related reinsured claim. The net cost or benefit of reinsurance (the present value of all expected ceded premium payments and expected future benefit payments) is recognized over the life of the reinsured treaty using assumptions consistent with those used to account for the policies subject to the reinsurance.

Operating expenses

Operating expenses are recognized on the accrual basis which are allocated to the Company by Phoenix Life. Expenses allocated may not be indicative of a standalone company. See Note 12 to these financial statements for additional information regarding the service agreement.

Income taxes

Income tax expense or benefit is recognized based upon amounts reported in the financial statements and the provisions of currently enacted tax laws. Deferred tax assets and/or liabilities are determined by multiplying the differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled. Valuation allowances on deferred tax assets are recorded to the extent that management concludes that it is more likely than not that an asset will not be realized.

We recognize current income tax assets and liabilities for estimated income taxes refundable or payable based on the income tax returns. We recognize deferred income tax assets and liabilities for the estimated future income tax effects of temporary differences and carryovers. Temporary differences are the differences between the financial statement carrying amounts of assets and liabilities and their tax bases, as well as the timing of income or expense recognized for financial reporting and tax purposes of items not related to assets or liabilities. If necessary, we establish valuation allowances to reduce the carrying amount of deferred income tax assets to amounts that are more likely than not to be realized. We periodically review the adequacy of these valuation allowances and record any increase or reduction in allowances in accordance with intraperiod allocation rules. We assess all significant tax positions to determine if a liability for an uncertain tax position is necessary and, if so, the impact on the current or deferred income tax balances. Also, if indicated, we recognize interest or penalties related to income taxes as a component of the income tax provision.

We are included in the consolidated federal income tax return filed by Phoenix and are party to a tax sharing agreement by and among Phoenix and its subsidiaries. In accordance with this agreement, federal income taxes are allocated as if they had been calculated on a separate company basis, except that benefits for any net operating losses or other tax credits generated by the Company will be provided at the earlier of when such loss or credit is utilized in the consolidated federal tax return and when the tax attribute would have otherwise expired.

Audit fees and other professional services associated with restatement

Professional fees associated with the restatement of our prior period financial statements are being recognized and expensed as incurred. The fees associated with the restatement of the 2012 Form 10-K totaled $0.4 million and $18.6 million in 2014 and 2013, respectively.


4.
Reinsurance

We use reinsurance agreements to limit potential losses, reduce exposure to larger risks and provide capital relief with regard to certain reserves.

The amount of risk ceded depends on our evaluation of the specific risk and applicable retention limits. For business sold prior to December 31, 2010, our retention limit on any one life is $10 million for single life and joint first-to-die policies and $12 million for joint last-to-die policies. Beginning January 1, 2011, our retention limit on new business is $5 million for single life and joint first-to-die policies and $6 million for second-to-die policies. We also assume reinsurance from other insurers.


F-27
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
4.    Reinsurance (continued)


Our reinsurance program cedes various types of risks to other reinsurers primarily under yearly renewable term and coinsurance agreements. Yearly renewable term and coinsurance agreements result in passing all or a portion of the risk to the reinsurer. Under coinsurance agreements on our term insurance policies, the reinsurer receives a proportionate amount of the premiums less an allowance for commissions and expenses and is liable for a corresponding proportionate amount of all benefit payments. Under our yearly renewable term agreements, the ceded premium represents a charge for the death benefit coverage.

During 2008, the Company and Phoenix Life, a related party, entered into a reinsurance agreement. Under this agreement, the Company cedes risk associated with certain universal life contracts and the associated riders to Phoenix Life. The reinsurance transaction between the Company and Phoenix Life is structured as a coinsurance agreement. At the inception of the contract a gain was recognized primarily due to the ceding commission received from Phoenix Life and the difference between the U.S. GAAP and statutory basis reserve balances. The gain on this transaction is being amortized over the remaining life of the reinsured contracts.

Effective October 1, 2009, the Company and Phoenix Life and Annuity Company coinsured all the benefit risks, net of existing reinsurance, on their term life business in force.

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

Trust agreements and irrevocable letters of credit aggregating $25.2 million at December 31, 2014 have been arranged with commercial banks in our favor to collateralize the ceded reserves.


F-28
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
4.    Reinsurance (continued)


Reinsurance recoverable includes balances due from reinsurers for paid and unpaid losses and is presented net of an allowance for uncollectable reinsurance. The reinsurance recoverable balance is $464.6 million and $494.3 million as of December 31, 2014 and 2013, respectively. Other reinsurance activity is shown below.

Direct Business and Reinsurance:
For the years ended December 31,
($ in millions)
2014
 
2013
 
2012
 
 
 
 
 
 
Direct premiums
$
71.1

 
$
80.9

 
$
79.2

Premiums ceded to non-affiliate reinsurers [1]
(58.7
)
 
(67.0
)
 
(70.7
)
Premiums
$
12.4

 
$
13.9

 
$
8.5

 
 
 
 
 
 
Direct policy benefits incurred
$
210.1

 
$
258.5

 
$
281.4

Policy benefits assumed from non-affiliate reinsureds
0.2

 
0.2

 
1.0

Policy benefits ceded to:
 
 
 
 
 
Affiliate reinsurers
(8.4
)
 
(18.0
)
 
(13.7
)
Non-affiliate reinsurers
(82.9
)
 
(119.5
)
 
(114.7
)
Policy benefits ceded to reinsurers
(91.3
)
 
(137.5
)
 
(128.4
)
Premiums paid to:
 
 
 
 
 
Affiliate reinsurers
23.8

 
22.3

 
20.1

Non-affiliate reinsurers
60.4

 
47.4

 
60.3

Premiums paid to reinsurers [2]
84.2

 
69.7

 
80.4

Policy benefits [3]
$
203.2

 
$
190.9

 
$
234.4

 
 
 
 
 
 
Direct life insurance in-force
$
54,528.7

 
$
58,198.8

 
$
62,701.8

Life insurance in-force assumed from reinsureds
87.1

 
93.2

 
78.5

Life insurance in-force ceded to:
 
 
 
 
 
Affiliate reinsurers
(1,495.9
)
 
(1,622.9
)
 
(1,859.3
)
Non-affiliate reinsurers
(39,941.5
)
 
(42,957.9
)
 
(46,950.4
)
Life insurance in-force ceded to reinsurers
(41,437.4
)
 
(44,580.8
)
 
(48,809.7
)
Life insurance in-force
$
13,178.4

 
$
13,711.2

 
$
13,970.6

Percentage of amount assumed to net insurance in-force
0.7%
 
0.7%
 
0.6%
———————
[1]
Primarily represents premiums ceded to reinsurers related to term insurance policies.
[2]
For universal life and variable universal life contracts, premiums paid to reinsurers are reflected within policy benefits. See Note 3 to these financial statements for additional information regarding significant accounting policies.
[3]
Policy benefit amounts above exclude changes in reserves, interest credited to policyholders and other items, which total $194.5 million, $86.7 million and $154.9 million, net of reinsurance, for the years ended December 31, 2014, 2013 and 2012, respectively.

We remain liable to the extent that reinsuring companies may not be able to meet their obligations under reinsurance agreements in effect. Failure of the reinsurers to honor their obligations could result in losses to the Company. Since we bear the risk of nonpayment, on a quarterly basis we evaluate the financial condition of our reinsurers and monitor concentrations of credit risk. Based on our review of their financial statements, reputation in the reinsurance marketplace and other relevant information, we believe that we have no material exposure to uncollectible life reinsurance. At December 31, 2014, five major reinsurance companies, including our affiliate, Phoenix Life, account for approximately 73% of the reinsurance recoverable. Phoenix Life comprised approximately 15%, or $67.2 million, of this total reinsurance recoverable.



F-29
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
 


5.
Deferred Policy Acquisition Costs

The balances of and changes in DAC as of and for the years ended December 31, are as follows:

Changes in Deferred Policy Acquisition Costs:
For the years ended December 31,
($ in millions)
2014
 
2013
 
2012
 
 
 
 
 
 
Balance, beginning of period
$
470.1

 
$
425.5

 
$
488.2

Policy acquisition costs deferred
83.7

 
66.7

 
69.8

Costs amortized to expenses:
 
 
 
 
 
Recurring costs
(91.6
)
 
(76.8
)
 
(101.2
)
Assumption unlocking
(7.7
)
 
4.6

 
(1.7
)
Realized investment gains (losses)
14.4

 
(11.2
)
 
2.4

Offsets to net unrealized investment gains or losses included in AOCI
(38.0
)
 
61.3

 
(32.0
)
Balance, end of period
$
430.9

 
$
470.1

 
$
425.5


During the years ended December 31, 2014, 2013 and 2012, deferred expenses primarily consisted of third-party commissions related to fixed indexed annuity sales.


6.
Sales Inducements

The balances of and changes in sales inducements as of and for the years ended December 31, are as follows:

Changes in Deferred Sales Inducement Activity:
For the years ended December 31,
($ in millions)
2014
 
2013
 
2012
 
 
 
 
 
 
Balance, beginning of period
$
76.9

 
$
63.3

 
$
50.6

Sales inducements deferred
17.4

 
10.7

 
15.4

Amortization charged to income
(7.9
)
 
(8.5
)
 
(5.8
)
Offsets to net unrealized investment gains or losses included in AOCI
(7.5
)
 
11.4

 
3.1

Balance, end of period
$
78.9

 
$
76.9

 
$
63.3



7.
Investing Activities

Debt and equity securities

The following tables present the debt and equity securities available-for-sale by sector held at December 31, 2014 and 2013, respectively. The unrealized loss amounts presented below include the non-credit loss component of OTTI losses. We classify these investments into various sectors in line with industry conventions.


F-30
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
7.    Investing Activities (continued)


Fair Value and Cost of Securities:
As of December 31, 2014
($ in millions)
Amortized
Cost
 
Gross
Unrealized
Gains [1]
 
Gross
Unrealized
Losses [1]
 
Fair
Value
 
OTTI
Recognized
in AOCI [2]
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
82.4

 
$
6.9

 
$
—

 
$
89.3

 
$
—

State and political subdivision
217.2

 
13.6

 
(1.6
)
 
229.2

 
(0.2
)
Foreign government
69.2

 
5.4

 
(0.8
)
 
73.8

 
—

Corporate
2,730.7

 
128.4

 
(27.2
)
 
2,831.9

 
(1.5
)
Commercial mortgage-backed (“CMBS”)
236.2

 
19.4

 
—

 
255.6

 
—

Residential mortgage-backed (“RMBS”)
558.9

 
20.9

 
(3.4
)
 
576.4

 
(8.6
)
Collateralized debt obligation (“CDO”) /
  collateralized loan obligation (“CLO”)
84.2

 
0.4

 
(1.1
)
 
83.5

 
(2.7
)
Other asset-backed (“ABS”)
82.1

 
3.8

 
(3.8
)
 
82.1

 
—

Available-for-sale debt securities
$
4,060.9

 
$
198.8

 
$
(37.9
)
 
$
4,221.8

 
$
(13.0
)
Available-for-sale equity securities
$
28.4

 
$
0.6

 
$
(0.3
)
 
$
28.7

 
$
—

———————
[1]
Net unrealized investment gains and losses on securities classified as available-for-sale and certain other assets are included in our balance sheets as a component of AOCI.
[2]
Represents the amount of non-credit OTTI losses recognized in AOCI excluding net unrealized gains or losses subsequent to the date of impairment. The table above presents the special category of AOCI for debt securities that are other-than-temporarily impaired when the impairment loss has been split between the credit loss component (in earnings) and the non-credit component (separate category of AOCI).

Fair Value and Cost of Securities:
As of December 31, 2013
($ in millions)
Amortized
Cost
 
Gross
Unrealized
Gains [1]
 
Gross
Unrealized
Losses [1]
 
Fair
Value
 
OTTI
Recognized
in AOCI [2]
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
66.1

 
$
3.3

 
$
(0.8
)
 
$
68.6

 
$
—

State and political subdivision
156.2

 
3.8

 
(5.4
)
 
154.6

 
(0.2
)
Foreign government
63.1

 
2.7

 
(0.3
)
 
65.5

 
—

Corporate
2,182.9

 
69.6

 
(55.6
)
 
2,196.9

 
(1.5
)
CMBS
241.9

 
13.0

 
(1.2
)
 
253.7

 
(0.4
)
RMBS
513.7

 
8.1

 
(11.8
)
 
510.0

 
(8.6
)
CDO/CLO
70.6

 
1.7

 
(1.4
)
 
70.9

 
(3.0
)
Other ABS
96.1

 
3.7

 
(3.9
)
 
95.9

 
—

Available-for-sale debt securities
$
3,390.6

 
$
105.9

 
$
(80.4
)
 
$
3,416.1

 
$
(13.7
)
Available-for-sale equity securities
$
12.1

 
$
—

 
$
(0.9
)
 
$
11.2

 
$
—

———————
[1]
Net unrealized investment gains and losses on securities classified as available-for-sale and certain other assets are included in our balance sheets as a component of AOCI.
[2]
Represents the amount of non-credit OTTI losses recognized in AOCI excluding net unrealized gains or losses subsequent to the date of impairment. The table above presents the special category of AOCI for debt securities that are other-than-temporarily impaired when the impairment loss has been split between the credit loss component (in earnings) and the non-credit component (separate category of AOCI).


F-31
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
7.    Investing Activities (continued)


Maturities of Debt Securities:
As of December 31, 2014
($ in millions)
Amortized
Cost
 
Fair
Value
 
 
 
 
Due in one year or less
$
67.3

 
$
68.4

Due after one year through five years
455.1

 
475.3

Due after five years through ten years
1,547.4

 
1,596.9

Due after ten years
1,029.7

 
1,083.6

CMBS/RMBS/ABS/CDO/CLO [1]
961.4

 
997.6

Total
$
4,060.9

 
$
4,221.8

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

The maturities of debt securities, as of December 31, 2014, are summarized in the table above by contractual maturity. Actual maturities may differ from contractual maturities as certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties, and we have the right to put or sell certain obligations back to the issuers.

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

Sales of Available-for-Sale Securities:
As of December 31,
($ in millions)
2014
 
2013
 
2012
Debt securities, available-for-sale
 
 
 
 
 
Proceeds from sales
$
141.0

 
$
90.0

 
$
160.0

Proceeds from maturities/repayments
250.5

 
286.1

 
285.3

Gross investment gains from sales, prepayments and maturities
6.1

 
11.3

 
22.8

Gross investment losses from sales and maturities
(2.4
)
 
(0.4
)
 
(0.7
)
Equity securities, available-for-sale
 
 
 
 
 
Proceeds from sales
$
1.0

 
$
—

 
$
—

Gross investment gains from sales
—

 
—

 
—

Gross investment losses from sales
(0.1
)
 
—

 
—


Aging of Temporarily Impaired Securities:
As of December 31, 2014
($ in millions)
Less than 12 months
 
Greater than 12 months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Debt Securities
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

State and political subdivision
7.0

 
(0.4
)
 
18.7

 
(1.2
)
 
25.7

 
(1.6
)
Foreign government
11.3

 
(0.8
)
 
—

 
—

 
11.3

 
(0.8
)
Corporate
265.4

 
(8.8
)
 
273.1

 
(18.4
)
 
538.5

 
(27.2
)
CMBS
6.3

 
—

 
5.5

 
—

 
11.8

 
—

RMBS
4.6

 
(0.1
)
 
86.7

 
(3.3
)
 
91.3

 
(3.4
)
CDO/CLO
42.3

 
(0.4
)
 
30.2

 
(0.7
)
 
72.5

 
(1.1
)
Other ABS
5.8

 
—

 
7.5

 
(3.8
)
 
13.3

 
(3.8
)
Debt securities
342.7

 
(10.5
)
 
421.7

 
(27.4
)
 
764.4

 
(37.9
)
Equity securities
—

 
—

 
4.2

 
(0.3
)
 
4.2

 
(0.3
)
Total temporarily impaired securities
$
342.7

 
$
(10.5
)
 
$
425.9

 
$
(27.7
)
 
$
768.6

 
$
(38.2
)
Below investment grade
$
42.4

 
$
(2.4
)
 
$
17.1

 
$
(2.7
)
 
$
59.5

 
$
(5.1
)
Number of securities
 
 
121

 
 
 
127

 
 
 
248


F-32
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
7.    Investing Activities (continued)


Unrealized losses on below-investment-grade debt securities with a fair value depressed by more than 20% of amortized cost totaled $0.9 million at December 31, 2014, of which $0.6 million was depressed by more than 20% of amortized cost for more than 12 months.

As of December 31, 2014, available-for-sale securities in an unrealized loss position for over 12 months consisted of 123 debt securities and four equity securities. These debt securities primarily relate to corporate securities and other ABS, which have depressed values due primarily to an increase in interest rates since the purchase of these securities. Unrealized losses were not recognized in earnings on these debt securities since the Company neither intends to sell the securities nor do we believe that it is more likely than not that it will be required to sell these securities before recovery of their amortized cost basis. Additionally, based on a security-by-security analysis, we expect to recover the entire amortized cost basis of these securities. In our evaluation of each security, management considers the actual recovery periods for these securities in previous periods of broad market declines. For securities with significant declines, individual security level analysis was performed, which considered any credit enhancements, expectations of defaults on underlying collateral and other available market data, including industry analyst reports and forecasts. Similarly, for equity securities in an unrealized loss position for greater than 12 months, management performed an analysis on a security-by-security basis. Although there may be sustained losses for greater than 12 months on these securities, additional information was obtained related to company performance which did not indicate that the additional losses were other-than-temporary.

Aging of Temporarily Impaired Securities:
As of December 31, 2013
($ in millions)
Less than 12 months
 
Greater than 12 months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Debt Securities
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
14.5

 
$
(0.8
)
 
$
—

 
$
—

 
$
14.5

 
$
(0.8
)
State and political subdivision
65.3

 
(4.4
)
 
4.0

 
(1.0
)
 
69.3

 
(5.4
)
Foreign government
17.0

 
(0.3
)
 
—

 
—

 
17.0

 
(0.3
)
Corporate
786.0

 
(36.8
)
 
120.5

 
(18.8
)
 
906.5

 
(55.6
)
CMBS
39.4

 
(1.1
)
 
3.0

 
(0.1
)
 
42.4

 
(1.2
)
RMBS
243.5

 
(8.5
)
 
40.3

 
(3.3
)
 
283.8

 
(11.8
)
CDO/CLO
30.5

 
(0.3
)
 
24.1

 
(1.1
)
 
54.6

 
(1.4
)
Other ABS
7.9

 
(0.1
)
 
8.0

 
(3.8
)
 
15.9

 
(3.9
)
Debt securities
1,204.1

 
(52.3
)
 
199.9

 
(28.1
)
 
1,404.0

 
(80.4
)
Equity securities
9.1

 
(0.9
)
 
—

 
—

 
9.1

 
(0.9
)
Total temporarily impaired securities
$
1,213.2

 
$
(53.2
)
 
$
199.9

 
$
(28.1
)
 
$
1,413.1

 
$
(81.3
)
Below investment grade
$
33.7

 
$
(1.9
)
 
$
12.1

 
$
(1.7
)
 
$
45.8

 
$
(3.6
)
Number of securities
 
 
326

 
 
 
79

 
 
 
405


Unrealized losses on below-investment-grade debt securities with a fair value depressed by more than 20% of amortized cost totaled $1.0 million at December 31, 2013, of which $0.8 million was depressed by more than 20% of amortized cost for more than 12 months.

As of December 31, 2013, available-for-sale securities in an unrealized loss position for over 12 months consisted of 79 debt securities and no equity securities. These debt securities primarily relate to corporate securities and other ABS, which have depressed values due primarily to an increase in interest rates since the purchase of these securities. Unrealized losses were not recognized in earnings on these debt securities since the Company neither intends to sell the securities nor do we believe that it is more likely than not that it will be required to sell these securities before recovery of their amortized cost basis. Additionally, based on a security-by-security analysis, we expect to recover the entire amortized cost basis of these securities. In our evaluation of each security, management considers the actual recovery periods for these securities in previous periods of broad market declines. For securities with significant declines, individual security level analysis was performed, which considered any credit enhancements, expectations of defaults on underlying collateral and other available market data, including industry analyst reports and forecasts. Similarly, for equity securities in an unrealized loss position for greater than 12 months, management performed an analysis on a security-by-security basis. Although there may be sustained losses for greater than 12 months on these securities, additional information was obtained related to company performance which did not indicate that the additional losses were other-than-temporary.

F-33
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
7.    Investing Activities (continued)


Evaluating temporarily impaired available-for-sale securities

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

Other-than-temporary impairments

Management assessed all securities in an unrealized loss position in determining whether impairments were temporary or other-than-temporary. In reaching its conclusions, management exercised significant judgment and used a number of issuer-specific quantitative indicators and qualitative judgments to assess the probability of receiving a given security’s contractual cash flows. This included the issue’s implied yield to maturity, cumulative default rate based on rating, comparisons of issue-specific spreads to industry or sector spreads, specific trading activity in the issue and other market data, such as recent debt tenders and upcoming refinancing requirements. Management also reviewed fundamentals such as issuer credit and liquidity metrics, business outlook and industry conditions. Management maintains a watch list of securities that is reviewed for impairments. Each security on the watch list was evaluated, analyzed and discussed, with the positive and negative factors weighed in the ultimate determination of whether or not the security was other-than-temporarily impaired. For securities for which no OTTI was ultimately indicated at December 31, 2014, management does not have the intention to sell, nor does it expect to be required to sell, these securities prior to their recovery. OTTIs recorded in 2014 were immaterial.

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

Credit Losses Recognized in Earnings on Available-for-Sale Debt Securities
for which a Portion of the OTTI Loss was Recognized in OCI:
As of December 31,
($ in millions)
2014
 
2013
 
2012
 
 
 
 
 
 
Balance, beginning of period
$
(18.5
)
 
$
(17.8
)
 
$
(21.3
)
Add: Credit losses on securities not previously impaired [1]
—

 
(0.3
)
 
(1.4
)
Add: Credit losses on securities previously impaired [1]


 
(0.7
)
 
(1.2
)
Less: Credit losses on securities impaired due to intent to sell
—

 
—

 
—

Less: Credit losses on securities sold
1.4

 
0.3

 
6.1

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

 
—

 
—

Balance, end of period
$
(17.1
)
 
$
(18.5
)
 
$
(17.8
)
———————
[1]
Additional credit losses on securities for which a portion of the OTTI loss was recognized in AOCI are included within net OTTI losses recognized in earnings on the statements of income and comprehensive income.

Limited partnerships and other investments

Limited partnerships and other investments consist of private equity investments of $8.4 million and direct equity investments of $4.1 million as of December 31, 2014, and private equity investments of $7.9 million and direct equity investments of $2.6 million as of December 31, 2013.

Statutory deposits

Pursuant to certain statutory requirements, as of December 31, 2014 and 2013, we had on deposit securities with a fair value of $2.4 million and $1.9 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-34
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
7.    Investing Activities (continued)


Net investment income

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

Sources of Net Investment Income:
For the years ended December 31,
($ in millions)
2014
 
2013
 
2012
 
 
 
 
 
 
Debt securities [1]
$
162.5

 
$
134.4

 
$
122.2

Equity securities
1.2

 
0.4

 
0.3

Policy loans
3.2

 
2.9

 
3.1

Limited partnerships and other investments
4.5

 
1.8

 
2.2

Fair value investments
2.1

 
2.9

 
4.0

Total investment income
173.5

 
142.4

 
131.8

Less: Investment expenses
1.5

 
1.5

 
0.9

Net investment income
$
172.0

 
$
140.9

 
$
130.9

———————
[1]
Includes net investment income on short-term investments.


F-35
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
7.    Investing Activities (continued)


Net realized investment gains (losses)

Sources and Types of Net Realized Investment Gains (Losses):
For the years ended December 31,
($ in millions)
2014
 
2013
 
2012
 
 
 
 
 
 
Total other-than-temporary debt impairments
$
(1.3
)
 
$
(0.9
)
 
$
(5.0
)
Portion of losses recognized in OCI
—

 
(0.9
)
 
2.2

Net debt impairments recognized in earnings
$
(1.3
)
 
$
(1.8
)
 
$
(2.8
)
Debt security impairments:
 
 
 
 
 
U.S. government and agency
$
—

 
$
—

 
$
—

State and political subdivision
—

 
—

 
(0.1
)
Foreign government
—

 
—

 
—

Corporate
(1.3
)
 
—

 
—

CMBS
—

 
(0.3
)
 
(0.1
)
RMBS
—

 
(1.3
)
 
(1.9
)
CDO/CLO
—

 
(0.2
)
 
(0.4
)
Other ABS
—

 
—

 
(0.3
)
Net debt security impairments
(1.3
)
 
(1.8
)
 
(2.8
)
Equity security impairments
—

 
—

 
—

Impairment losses
(1.3
)
 
(1.8
)
 
(2.8
)
Debt security transaction gains
6.1

 
11.3

 
22.8

Debt security transaction losses
(2.4
)
 
(0.4
)
 
(0.7
)
Equity security transaction gains
—

 
—

 
—

Equity security transaction losses
(0.1
)
 
—

 
—

Limited partnerships and other investment transaction gains
—

 
—

 
—

Limited partnerships and other investment transaction losses
—

 
—

 
(0.3
)
Net transaction gains (losses)
3.6

 
10.9

 
21.8

Derivative instruments
(21.9
)
 
(23.1
)
 
(49.0
)
Embedded derivatives [1]
(45.4
)
 
11.0

 
4.0

Related party reinsurance derivatives
—

 
—

 
(8.0
)
Net realized investment gains (losses), excluding impairment losses
(63.7
)
 
(1.2
)
 
(31.2
)
Net realized investment gains (losses), including impairment losses
$
(65.0
)
 
$
(3.0
)
 
$
(34.0
)
———————
[1]
Includes the change in fair value of embedded derivatives associated with fixed index annuity indexed crediting feature and variable annuity riders. See Note 8 to these financial statements for additional disclosures.


F-36
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
7.    Investing Activities (continued)


Unrealized investment gains (losses)

Sources of Changes in Net Unrealized Investment Gains (Losses):
For the years ended December 31,
($ in millions)
2014
 
2013
 
2012
 
 
 
 
 
 
Debt securities
$
135.4

 
$
(149.4
)
 
$
123.1

Equity securities
1.2

 
(0.9
)
 
—

Other investments
0.3

 
(0.8
)
 
—

Net unrealized investment gains (losses)
$
136.9

 
$
(151.1
)
 
$
123.1

 
 
 
 
 
 
Net unrealized investment gains (losses)
$
136.9

 
$
(151.1
)
 
$
123.1

Applicable to DAC
38.0

 
(61.3
)
 
32.0

Applicable to other actuarial offsets
50.3

 
(56.7
)
 
59.2

Applicable to deferred income tax expense (benefit)
31.9

 
(11.6
)
 
24.3

Offsets to net unrealized investment gains (losses)
120.2

 
(129.6
)
 
115.5

Net unrealized investment gains (losses) included in OCI
$
16.7

 
$
(21.5
)
 
$
7.6


Non-consolidated variable interest entities

We hold limited partnership interests with various VIEs primarily as a passive investor in private equity limited partnerships and through direct investments, in which the general partners are not related parties. As the Company is not the general partner in any VIE structures, consolidation is based on evaluation of the primary beneficiary. This analysis includes a review of the VIE’s capital structure, nature of the VIE’s operations and purpose and the Company’s involvement with the entity. When determining the need to consolidate a VIE, the design of the VIE is evaluated as well as any exposed risks of the Company’s investment. These investments are accounted for under the equity method of accounting and are included in limited partnerships and other investments on our balance sheets. We reassess our VIE determination with respect to an entity on an ongoing basis.

The carrying value of our investments in non-consolidated VIEs (based upon sponsor values and financial statements of the individual entities) for which we are not the primary beneficiary was $16.1 million and $15.6 million as of December 31, 2014 and 2013, respectively. The maximum exposure to loss is equal to the carrying amounts plus any unfunded commitments of the Company. Such a maximum loss would be expected to occur only upon bankruptcy of the issuer or investee. The Company has not provided nor intends to provide financial support to these entities unless contractually required. We do not have the contractual option to redeem these limited partnership interests but receive distributions based on the liquidation of the underlying assets. The Company must generally request general partner consent to transfer or sell its fund interests. The Company performs ongoing qualitative analysis of its involvement with VIEs to determine if consolidation is required.

In addition, the Company makes passive investments in structured securities issued by VIEs, for which the Company is not the manager, which are included in CMBS, RMBS, CDO/CLO and other ABS within available-for-sale debt securities, and in fair value investments, in the balance sheets. The Company has not provided financial or other support with respect to these investments other than its original investment. For these investments, the Company determined it is not the primary beneficiary due to the size of our investment relative to the structured securities issued by the VIE, the level of credit subordination which reduces the Company’s obligation to absorb losses or right to receive benefits, and the Company’s lack of power over the activities that most significantly impact the economic performance of the VIEs. The Company’s maximum exposure to loss on these investments is limited to the amount of our investment.


F-37
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
7.    Investing Activities (continued)


Issuer and counterparty credit exposure

Credit exposure related to issuers and derivatives counterparties is inherent in investments and derivative contracts with positive fair value or asset balances. We manage credit risk through the analysis of the underlying obligors, issuers and transaction structures. We review our debt security portfolio regularly to monitor the performance of obligors and assess the stability of their credit ratings. We also manage credit risk through industry and issuer diversification and asset allocation. Included in fixed maturities are below-investment-grade assets totaling $186.8 million and $137.7 million at December 31, 2014 and 2013, respectively. Maximum exposure to an issuer or derivative counterparty is defined by quality ratings, with higher quality issuers having larger exposure limits. As of December 31, 2014, we were not exposed to the credit concentration risk of any issuer representing exposure greater than 10% of stockholder’s equity other than U.S. government and government agencies backed by the faith and credit of the U.S. government. We monitor credit exposures by actively monitoring dollar limits on transactions with specific counterparties. We have an overall limit on below-investment-grade rated issuer exposure. Additionally, the creditworthiness of counterparties is reviewed periodically. We generally use ISDA Master Agreements which include Credit Support Annexes which include collateral provisions to reduce counterparty credit exposures. To further mitigate the risk of loss on derivatives, we only enter into contracts in which the counterparty is a financial institution with a rating of A or higher from at least one Nationally Recognized Statistical Rating Organization.

As of December 31, 2014, we held derivative assets, net of liabilities, with a fair value of $71.9 million. Derivative credit exposure was diversified with 11 different counterparties. We also had investments of these issuers with a fair value of $75.9 million as of December 31, 2014. Our maximum amount of loss due to credit risk with these issuers was $147.8 million as of December 31, 2014. See Note 9 to these financial statements for additional information regarding derivatives.


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

Separate accounts

Separate account products are those for which a separate investment and liability account is maintained on behalf of the policyholder. Investment objectives for these separate accounts vary by fund account type, as outlined in the applicable fund prospectus or separate account plan of operations. We have variable annuity and variable life insurance contracts that are classified as separate account products. The assets supporting these contracts are carried at fair value and are reported as separate account assets with an equivalent amount reported as separate account liabilities. Amounts assessed against the policyholder for mortality, administration and other services are included within revenue in fee income. In 2014 and 2013, there were no gains or losses on transfers of assets from the general account to a separate account.

Assets with fair value and carrying value of $2.6 billion and $2.0 billion at December 31, 2014 and 2013, respectively, supporting fixed indexed annuities are maintained in accounts that are legally segregated from the other assets of the Company, but policyholders do not direct the investment of those assets and the investment performance does not pass through to the policyholders. These assets supporting fixed indexed annuity contracts are reported within the respective investment line items on the balance sheets.

Separate Account Investments of Account Balances of Variable Annuity Contracts
with Insurance Guarantees:
As of December 31,
($ in millions)
2014
 
2013
 
 
 
 
Debt securities
$
276.0

 
$
322.1

Equity funds
1,303.1

 
1,538.7

Other
35.5

 
47.4

Total
$
1,614.6

 
$
1,908.2



F-38
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
8.    Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives (continued)


Death benefits and other insurance benefit features

Variable annuity guaranteed benefits

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

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

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

Changes in Variable Annuity Guaranteed Insurance Benefit
Liability Balances:
For the year ended
December 31, 2014
($ in millions)
Annuity
GMDB
 
Annuity
GMIB
 
 
 
 
Balance, beginning of period
$
17.0

 
$
9.5

Incurred
2.1

 
2.0

Paid
(3.0
)
 
(0.2
)
Change due to net unrealized gains or losses included in AOCI
—

 
(0.1
)
Assumption unlocking
0.2

 
5.2

Balance, end of period
$
16.3

 
$
16.4


Changes in Variable Annuity Guaranteed Insurance Benefit
Liability Balances:
For the year ended
December 31, 2013
($ in millions)
Annuity
GMDB
 
Annuity
GMIB
 
 
 
 
Balance, beginning of period
$
10.8

 
$
20.9

Incurred
2.0

 
(3.4
)
Paid
(2.7
)
 
—

Change due to net unrealized gains or losses included in AOCI
—

 
(0.1
)
Assumption unlocking
6.9

 
(7.9
)
Balance, end of period
$
17.0

 
$
9.5



F-39
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
8.    Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives (continued)


Changes in Variable Annuity Guaranteed Insurance Benefit
Liability Balances:
For the year ended
December 31, 2012
($ in millions)
Annuity
GMDB
 
Annuity
GMIB
 
 
 
 
Balance, beginning of period
$
10.8

 
$
17.0

Incurred
1.0

 
3.8

Paid
(1.0
)
 
—

Change due to net unrealized gains or losses included in AOCI
—

 
0.3

Assumption unlocking
—

 
(0.2
)
Balance, end of period
$
10.8

 
$
20.9


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

GMDB and GMIB Benefits by Type:
December 31, 2014
($ in millions)
Account
Value
 
NAR
before
Reinsurance
 
NAR
after
Reinsurance
 
Average
Attained Age
of Annuitant
 
 
 
 
 
 
 
 
GMDB return of premium
$
626.6

 
$
1.4

 
$
1.4

 
63
GMDB step up
1,200.7

 
65.7

 
10.6

 
64
GMDB earnings enhancement benefit (“EEB”)
29.1

 
—

 
—

 
65
GMDB greater of annual step up and roll up
22.7

 
4.8

 
4.8

 
69
Total GMDB at December 31, 2014
1,879.1

 
$
71.9

 
$
16.8

 
 
Less: General account value with GMDB
270.7

 
 
 
 
 
 
Subtotal separate account liabilities with GMDB
1,608.4

 
 
 
 
 
 
Separate account liabilities without GMDB
149.1

 
 
 
 
 
 
Total separate account liabilities
$
1,757.5

 
 
 
 
 
 
GMIB [1] at December 31, 2014
$
308.4

 
 
 
 
 
65
 
 
 
 
 
 
 
 
GMDB and GMIB Benefits by Type:
December 31, 2013
($ in millions)
Account
Value
 
NAR
before
Reinsurance
 
NAR
after
Reinsurance
 
Average
Attained Age
of Annuitant
 
 
 
 
 
 
 
 
GMDB return of premium
$
728.8

 
$
1.8

 
$
1.8

 
63
GMDB step up
1,401.0

 
66.7

 
7.0

 
63
GMDB earnings enhancement benefit (“EEB”)
35.9

 
0.1

 
0.1

 
64
GMDB greater of annual step up and roll up
26.7

 
4.8

 
4.8

 
68
Total GMDB at December 31, 2013
2,192.4

 
$
73.4

 
$
13.7

 
 
Less: General account value with GMDB
294.7

 
 
 
 
 
 
Subtotal separate account liabilities with GMDB
1,897.7

 
 
 
 
 
 
Separate account liabilities without GMDB
155.0

 
 
 
 
 
 
Total separate account liabilities
$
2,052.7

 
 
 
 
 
 
GMIB [1] at December 31, 2013
$
385.7

 
 
 
 
 
64
———————
[1]
Policies with a GMIB also have a GMDB, however these benefits are not additive. When a policy terminates due to death, any NAR related to GMIB is released. Similarly, when a policy goes into benefit status on a GMIB, its GMDB NAR is released.


F-40
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
8.    Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives (continued)


Return of Premium: The death benefit is the greater of current account value or premiums paid (less any adjusted partial withdrawals).

Step Up: The death benefit is the greater of current account value, premiums paid (less any adjusted partial withdrawals) or the annual step up amount prior to the oldest original owner attaining a certain age. On and after the oldest original owner attains that age, the death benefit is the greater of current account value or the death benefit at the end of the contract year prior to the oldest original owner’s attaining that age plus premium payments (less any adjusted partial withdrawals) made since that date.

Earnings Enhancement Benefit: The death benefit is the greater of the premiums paid (less any adjusted partial withdrawals) or the current account value plus the EEB. The EEB is an additional amount designed to reduce the impact of taxes associated with distributing contract gains upon death.

Greater of Annual Step Up and Annual Roll Up: The death benefit is the greatest of premium payments (less any adjusted partial withdrawals), the annual step up amount, the annual roll up amount or the current account value prior to the oldest original owner attaining age 81. On and after the oldest original owner attained age 81, the death benefit is the greater of current account value or the death benefit at the end of the contract year prior to the oldest original owner’s attained age of 81 plus premium payments (less any adjusted partial withdrawals) made since that date.

GMIB: The benefit is a series of monthly fixed annuity payments paid upon election of the rider. The monthly benefit is based on the greater of the sum of premiums (less any adjusted partial withdrawals) accumulated at an effective annual rate on the exercise date or 200% of the premiums paid (less any adjusted partial withdrawals) and a set of annuity payment rates that vary by benefit type and election age.

Fixed indexed annuity guaranteed benefits

Many of our fixed indexed annuities contain guaranteed benefits. We establish policy benefit liabilities for minimum death and minimum withdrawal benefit guarantees relating to these policies as follows:

•
Liabilities associated with the GMWB and Chronic Care guarantees are determined by estimating the value of the withdrawal benefits expected to be paid after the projected account value depletes and recognizing the value ratably over the accumulation period based on total expected assessments. Liabilities associated with the GMWB for the fixed indexed annuities differ from those contained on variable annuities in that the GMWB feature and the underlying contract, exclusive of the equity index crediting option, are fixed income instruments.
•
Liabilities associated with the GMDB are determined by estimating the expected value of death benefits in excess of the projected account balance and recognizing the excess ratably over the expected life of the contract based on total expected assessments.

The assumptions used for calculating GMWB, GMDB and Chronic Care guarantees are generally consistent with those used for amortizing DAC. We regularly evaluate estimates used and adjust the additional liability balances, with a related charge or credit to benefit expense if actual experience or other evidence suggests that earlier assumptions should be revised. The GMWB, GMDB and Chronic Care guarantees on fixed indexed annuities are recorded in policy liabilities and accruals on our balance sheets.


F-41
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
8.    Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives (continued)


Changes in Fixed Indexed Annuity Guaranteed
Liability Balances:
Fixed Indexed Annuity
GMWB and GMDB
($ in millions)
For the years ended December 31,
 
2014
 
2013
 
2012
 
 
 
 
 
 
Balance, beginning of period
$
85.4

 
$
102.1

 
$
5.6

Incurred
33.4

 
60.8

 
37.2

Paid
(0.3
)
 
(0.3
)
 
—

Change due to net unrealized gains or losses included in AOCI
35.9

 
(58.5
)
 
59.3

Assumption unlocking
(7.4
)
 
(18.7
)
 
—

Balance, end of period
$
147.0

 
$
85.4

 
$
102.1


Universal life

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

Changes in Universal Life Guaranteed
Liability Balances:
Universal Life
Secondary Guarantees
($ in millions)
For the years ended December 31,
 
2014
 
2013
 
2012
 
 
 
 
 
 
Balance, beginning of period
$
145.8

 
$
118.0

 
$
98.5

Incurred
35.0

 
33.6

 
21.1

Paid
(14.8
)
 
(14.3
)
 
(9.5
)
Change due to net unrealized gains or losses included in AOCI
2.1

 
(2.1
)
 
2.1

Assumption unlocking
(1.8
)
 
10.6

 
5.8

Balance, end of period
$
166.3

 
$
145.8

 
$
118.0


In addition, the universal life block of business has experience which produces profits in earlier periods followed by losses in later periods for which additional reserves are required to be held above the account value liability. These reserves are accrued ratably over historical and anticipated positive income to offset the future anticipated losses. The assumptions used in estimating these liabilities are generally consistent with those used for amortizing DAC. The most significant driver of the positive 2014 unlock results in these reserves was the extension of mortality improvement for an additional year, which reduced overall expected mortality expense.

Changes in Universal Life Additional
Liability Balances:
Universal Life
Profits Followed by Losses
($ in millions)
For the years ended December 31,
 
2014
 
2013
 
2012
 
 
 
 
 
 
Balance, beginning of period
$
270.3

 
$
302.6

 
$
212.0

Incurred
93.2

 
53.2

 
35.1

Change due to net unrealized gains or losses included in AOCI
7.6

 
0.7

 
15.9

Assumption unlocking
(4.5
)
 
(86.2
)
 
39.6

Balance, end of period
$
366.6

 
$
270.3

 
$
302.6



F-42
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
8.    Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives (continued)


Embedded derivatives

Variable annuity embedded derivatives

Certain separate account variable products may contain a GMWB, GMAB and/or COMBO rider. These features are accounted for as embedded derivatives as described below.

Variable Annuity Embedded Derivatives Non-Insurance Guaranteed Product Features:
As of December 31, 2014
($ in millions)
Account
Value
 
Average
Attained Age
of Annuitant
 
 
 
 
GMWB
$
471.3

 
65
GMAB
305.8

 
59
COMBO
6.9

 
64
Balance, end of period
$
784.0

 
 
 
 
 
 
Variable Annuity Embedded Derivatives Non-Insurance Guaranteed Product Features:
As of December 31, 2013
($ in millions)
Account
Value
 
Average
Attained Age
of Annuitant
 
 
 
 
GMWB
$
551.1

 
64
GMAB
370.9

 
59
COMBO
7.0

 
63
Balance, end of period
$
929.0

 
 

The GMWB rider guarantees the contract owner a minimum amount of withdrawals and benefit payments over time, regardless of the investment performance of the contract, subject to an annual limit. Optional resets are available. In addition, these contracts have a feature that allows the contract owner to receive the guaranteed annual withdrawal amount for as long as they are alive.

The GMAB rider provides the contract owner with a minimum accumulation of the contract owner’s purchase payments deposited within a specific time period, adjusted for withdrawals, after a specified amount of time determined at the time of issuance of the variable annuity contract.

The COMBO rider includes either the GMAB or GMWB rider as well as the GMDB rider at the contract owner’s option.

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

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


F-43
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
8.    Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives (continued)


Variable Annuity Embedded Derivative Liabilities:
December 31,
($ in millions)
2014
 
2013
 
 
 
 
GMWB
$
6.9

 
$
(5.1
)
GMAB
(0.3
)
 
1.4

COMBO
(0.2
)
 
(0.4
)
Total variable annuity embedded derivative liabilities
$
6.4

 
$
(4.1
)

There were no benefit payments made for the GMWB and GMAB during 2014 and 2013. We have established a risk management strategy under which we hedge our GMAB, GMWB and COMBO exposure using equity index options, equity index futures, equity index variance swaps, interest rate swaps and swaptions.

Fixed indexed annuity embedded derivatives

Fixed indexed annuities may also contain a variety of index-crediting options: policy credits that are calculated based on the performance of an outside equity market or other index over a specified term. These index options are embedded derivative liabilities that are required to be reported separately from the host contract. These index options are accounted for at fair value and recorded in policyholder deposits within the balance sheets with changes in fair value recorded in realized investment gains, in the statements of income and comprehensive income. The fair value of these index options is calculated using the budget method. See Note 10 to these financial statements for additional information. Several additional inputs reflect our internally developed assumptions related to lapse rates and other policyholder behavior. The fair value of these embedded derivatives was $153.9 million and $91.9 million as of December 31, 2014 and 2013, respectively. In order to manage the risk associated with these equity indexed-crediting features, we hedge using equity index options. See Note 9 to these financial statements for additional information.

Embedded derivatives realized gains and losses

Changes in the fair value of embedded derivatives associated with variable annuity and fixed indexed annuity contracts are recorded as realized investment gains and losses within the statements of income and comprehensive income. Embedded derivatives gains and (losses) recognized in earnings are $(45.4) million and $11.0 million for the years ended December 31, 2014 and 2013, respectively.


9.
Derivative Instruments

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

The Company seeks to enter into over-the-counter (“OTC”) derivative transactions pursuant to master agreements that provide for a netting of payments and receipts by counterparty. As of December 31, 2014 and 2013, $16.0 million and $25.6 million, respectively, of cash and cash equivalents were held as collateral by a third party related to our derivative transactions.

Our derivatives are not designated as hedges for accounting purposes.


F-44
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
9.    Derivative Instruments (continued)


Derivative Instruments:
Maturity
 
Notional
Amount
 
Fair Value as of
December 31, 2014
($ in millions)
 
 
Assets
 
Liabilities [1]
 
 
 
 
 
 
 
 
Interest rate swaps
2016 - 2029
 
$
114.0

 
$
9.7

 
$
1.9

Variance swaps
2015 - 2017
 
0.9

 
—

 
8.6

Swaptions
2024 - 2025
 
777.0

 
0.2

 
—

Put options
2015 - 2022
 
677.5

 
29.4

 
—

Call options
2015 - 2019
 
2,019.2

 
118.2

 
74.6

Equity futures
2015
 
2.9

 
—

 
0.5

Total derivative instruments
 
 
$
3,591.5

 
$
157.5

 
$
85.6

———————
[1]
Derivative liabilities are included in other liabilities on the balance sheets.

Derivative Instruments:
Maturity
 
Notional
Amount
 
Fair Value as of
December 31, 2013
($ in millions)
 
 
Assets
 
Liabilities [1]
 
 
 
 
 
 
 
 
Interest rate swaps
2016 - 2027
 
$
139.0

 
$
3.9

 
$
6.8

Variance swaps
2015 - 2017
 
0.9

 
—

 
7.9

Swaptions
2024 - 2025
 
3,902.0

 
30.7

 
—

Put options
2015 - 2022
 
391.0

 
29.5

 
—

Call options
2014 - 2018
 
1,701.6

 
161.2

 
96.1

Equity futures
2014
 
159.7

 
—

 
5.3

Total derivative instruments
 
 
$
6,294.2

 
$
225.3

 
$
116.1

———————
[1]
Derivative liabilities are included in other liabilities on the balance sheets.

Derivative Instrument Gains (Losses) Recognized in
Realized Investment Gains (Losses):
For the years ended December 31,
($ in millions)
2014
 
2013
 
2012
 
 
 
 
 
 
Interest rate swaps
$
11.0

 
$
(11.4
)
 
$
(1.7
)
Variance swaps
(0.7
)
 
(3.6
)
 
(7.9
)
Swaptions
(30.5
)
 
17.3

 
(0.2
)
Put options
(4.9
)
 
(40.7
)
 
(20.9
)
Call options
18.8

 
60.1

 
0.9

Equity futures
(15.6
)
 
(44.8
)
 
(19.2
)
Embedded derivatives
(45.4
)
 
11.0

 
4.0

Related party reinsurance derivatives
—

 
—

 
(8.0
)
Total derivative instrument gains (losses) recognized in
  realized investment gains (losses)
$
(67.3
)
 
$
(12.1
)
 
$
(53.0
)

Interest Rate Swaps

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


F-45
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
9.    Derivative Instruments (continued)


Interest Rate Options

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

Exchange Traded Future Contracts

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

Equity Index Options

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

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

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


F-46
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
9.    Derivative Instruments (continued)


Offsetting of Derivative Assets/Liabilities

The Company may enter into netting agreements with counterparties that permit the Company to offset receivables and payables with such counterparties. The following tables present the gross fair value amounts, the amounts offset and net position of derivative instruments eligible for offset in the Company’s balance sheets that are subject to an enforceable master netting arrangement upon certain termination events, irrespective of whether they are offset in the balance sheet.

Offsetting of
Derivative Assets/Liabilities:
As of December 31, 2014
($ in millions)
Gross
amounts
recognized [1]
 
Gross
amounts
offset in the
balance sheet
 
Net amounts
presented in the
balance sheet
 
Gross amounts not offset
in the balance sheet
 
Net amount
 
 
 
 
Financial
instruments
 
Cash collateral
pledged [2]
 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivative assets
$
157.5

 
$
—

 
$
157.5

 
$
(82.6
)
 
$
—

 
$
74.9

Total derivative liabilities
$
(85.6
)
 
$
—

 
$
(85.6
)
 
$
82.6

 
$
3.0

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
Offsetting of
Derivative Assets/Liabilities:
As of December 31, 2013
($ in millions)
Gross
amounts
recognized [1]
 
Gross
amounts
offset in the
balance sheet
 
Net amounts
presented in the
balance sheet
 
Gross amounts not offset
in the balance sheet
 
Net amount
 
 
 
 
Financial
instruments
 
Cash collateral
pledged [2]
 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivative assets
$
225.3

 
$
—

 
$
225.3

 
$
(110.2
)
 
$
—

 
$
115.1

Total derivative liabilities
$
(116.1
)
 
$
—

 
$
(116.1
)
 
$
110.2

 
$
5.9

 
$
—

———————
[1]
Amounts include all derivative instruments, irrespective of whether there is a legally enforceable master netting arrangement in place.
[2]
Cash collateral pledged with derivative counterparties is recorded within other assets on the balance sheets. The Company pledges cash collateral to offset certain individual derivative liability positions with certain counterparties. Cash collateral of $13.0 million and $19.7 million as of December 31, 2014 and 2013, respectively, that exceeds the net liability resulting from the aggregate derivative positions with a corresponding counterparty is excluded.

Contingent features

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

In certain derivative counterparty agreements, our financial strength ratings are below the specified threshold levels. However, the Company held no derivative instruments as of December 31, 2014 in a net aggregate liability position payable to any counterparty (i.e., such derivative instruments have fair values in a net asset position payable to the Company if such holdings were liquidated).


10.
Fair Value of Financial Instruments

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


F-47
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
10.    Fair Value of Financial Instruments (continued)


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

•
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 1 securities include highly liquid government bonds and exchange-traded equities.
•
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Examples of such instruments include government-backed mortgage products, certain collateralized mortgage and debt obligations and certain high-yield debt securities.
•
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs reflect management’s own assumptions about inputs in which market participants would use in pricing these types of assets or liabilities. Level 3 financial instruments include values which are determined using pricing models and third-party evaluation. Additionally, the determination of some fair value estimates utilizes significant management judgments or best estimates.

Investments for which fair value is based upon unadjusted quoted market prices are reported as Level 1. The number of quotes the issuer obtains per instrument will vary depending on the security type and availability of pricing data from independent third-party, nationally recognized pricing vendors. The Company has defined a pricing hierarchy among pricing vendors to determine ultimate value used and also reviews significant discrepancies among pricing vendors to determine final value used. Prices from pricing services are not adjusted, but the Company may obtain a broker quote or use an internal model to price a security if it believes vendor prices do not reflect fair value. When quoted prices are not available, we use these pricing vendors to give an estimated fair value. If quoted prices, or an estimated price from our pricing vendors are not available or we determine that the price is based on disorderly transactions or in inactive markets, fair value is based upon internally developed models or obtained from an independent third-party broker. We primarily use market-based or independently sourced market parameters, including interest rate yield curves, option volatilities and currency rates. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, our own creditworthiness, liquidity and unobservable parameters that are applied consistently over time.

Management is responsible for the fair value of investments and the methodologies and assumptions used to estimate fair value. The fair value process is evaluated quarterly by the Pricing Committee, which is comprised of the Chief Investment Officer, Chief Accounting Officer and the Head of Investment Accounting. The purpose of the committee is to ensure the Company follows objective and reliable valuation practices, as well as approving changes to valuation methodologies and pricing sources. Using professional judgment and experience, we evaluate and weigh the relevance and significance of all readily available market information to determine the best estimate of fair value.

The fair values of Level 2 investments are determined by management after considering prices from our pricing vendors. Fair values for debt securities are primarily based on yield curve analysis along with ratings and spread data. Other inputs may be considered for fair value calculations including published indexed data, sector specific performance, comparable price sources and similar traded securities. Management reviews all Level 2 and Level 3 market prices on a quarterly basis.

The following is a description of our valuation methodologies for assets and liabilities measured at fair value. Such valuation methodologies were applied to all of the assets and liabilities carried at fair value in each respective classification.


F-48
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
10.    Fair Value of Financial Instruments (continued)


Debt securities

We use pricing vendors to estimate fair value for the majority of our public debt securities. The pricing vendors’ estimates are based on market data and use pricing models that vary by asset class and incorporate available trade, bid and other market information. The methodologies used by these vendors are reviewed and understood by management through discussion with and information provided by these vendors. The Company assesses the reasonableness of individual security values received from valuation pricing vendors through various analytical techniques. Management also assesses whether the assumptions used appear reasonable and consistent with the objective of determining fair value. When our pricing vendors are unable to obtain evaluations based on market data, fair value is determined by obtaining a direct broker quote. Management reviews these broker quotes and valuation techniques to determine whether they are appropriate and consistently applied. Broker quotes are evaluated based on the Company’s assessment of the broker’s knowledge of, and history in trading, the security and the Company’s understanding of inputs used to derive the broker quote. Management also assesses reasonableness of individual security values similar to the vendor pricing review noted above.

For our private placement investments, we estimated fair value using internal models. Private placement securities are generally valued using a matrix pricing approach which categorizes these securities into groupings using remaining average life and credit rating as the two criteria to determine a grouping. The Company obtains current credit spread information from private placement dealers based on the criteria described and adds that spread information to U.S. Treasury rates corresponding to the life of each security to determine a discount rate for pricing. A small number of private placement securities are internally valued using models or analyst judgment. Fair values determined internally are also subject to management review to ensure that valuation models and inputs appear reasonable.

U.S. Government and Agency Securities

We value public U.S. government and agency debt by obtaining fair value estimates from our pricing vendors. For our private placement government and agency debt, our fair value is based on internal models using either a discounted cash flow or spread matrix which incorporates U.S. Treasury yields, market spreads and average life calculations. For short-term investments, we equate fair value to amortized cost due to their relatively short duration and limited exposure to credit risk.

State and Political Subdivisions

Public state and political subdivision debt is valued by obtaining fair value estimates from our pricing vendors. For our private placement debt securities, our fair value is based on internal models using either a discounted cash flow or spread matrix which incorporates U.S. Treasury yields, market spreads and average life calculations.

Foreign Government

We obtain fair value estimates from our pricing vendor to value foreign government debt.

Corporate Bonds

For the majority of our public corporate debt, we obtain fair value estimates from our pricing vendors. For public corporate debt in which we cannot obtain fair value estimates from our pricing vendors, we receive a direct quote from a broker. In most cases, we will obtain a direct broker quote from the broker that facilitated the deal. For our private placement debt securities, our fair value is based on internal models using either a discounted cash flow or spread matrix which incorporates U.S. Treasury yields, market spreads and average life calculations. For private fixed maturities, fair value is determined using a discounted cash flow model, which utilizes a discount rate based upon the average of spread surveys collected from private market intermediaries who are active in both primary and secondary transactions and takes into account, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. In determining the fair value of certain debt securities, the discounted cash flow model may also use unobservable inputs, which reflect the Company’s own assumptions about the inputs market participants would use in pricing the security.


F-49
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
10.    Fair Value of Financial Instruments (continued)


RMBS, CMBS, CDO/CLO and Other ABS

For structured securities, the majority of the fair value estimates are provided by our pricing vendors. When a fair value estimate is not available from the pricing vendors, we estimate fair value using direct broker quotes or internal models which use a discounted cash flow technique. These models consider the best estimate of cash flows until maturity to determine our ability to collect principal and interest and compare this to the anticipated cash flows when the security was purchased. In addition, management judgment is used to assess the probability of collecting all amounts contractually due to us. After consideration is given to the available estimates relevant to assessing the collectibility, including historical events, current conditions and reasonable forecasts, an estimate of future cash flows is determined. This includes evaluating the remaining payment terms, prepayment speeds, the underlying collateral, expected defaults using current default data and the financial condition of the issuer. Other factors considered are composite credit ratings, industry forecast, analyst reports and other relevant market data, similar to those the Company believes market participants would use.

Equity securities

Private Equity Investments

The fair value of non-public private equity is estimated using the valuation of the lead investor (“sponsor value”), typically a general partner of an investment in a limited partnership in which we invest. The sponsors, or lead investors/underwriters of these investments, account for them on an equity basis. The Company will then obtain securities fair value from these sponsors to infer the appropriate fair value for its holdings in the same or similar investment. If we cannot determine a price using the sponsor value, we estimate the fair value using management’s professional judgment. Management evaluates many inputs including, but not limited to, current operating performance, future expectations of the investment, industry valuations of comparable public companies and changes in market outlook and third-party financing environment over time. Financial information for these investments is reported on a three-month delay due to the timing of financial statements as of the current reporting period.

Public Equity

Our publicly held common equity securities are generally obtained through the initial public offering of privately-held equity investments and are reported at the estimated fair value determined based on quoted prices in active markets. To the extent these securities have readily determinable exchange based prices, the securities are categorized as Level 1 of our hierarchy. If management determines there are liquidity concerns or exchange based information for the specific securities in our portfolio is not available, the securities are categorized as Level 2. For our preferred equity securities, we obtain fair value estimates from our pricing vendors. In addition, management will consistently monitor these holdings and prices will be modified for any pertinent and/or significant events that would result in a valuation adjustment, including an analysis for potential credit-related events or impairments.

Limited partnerships and other investments

Our limited partnerships are accounted for using equity method accounting. We carry these investments on the balance sheets at the capital value we obtain from the financial statement we received from the general partner. Typically, our carrying value is based on a financial statement one quarter in arrears to accommodate the timing of receipt of financial statements. These financial statements are generally audited annually. Generally the information received is deemed an appropriate approximation of the fair value of these fund investments and no adjustments are made to the financial statements received. Management also has open communication with each fund manager and generally views the information reported from the underlying funds as the best information available to record its investments.


F-50
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
10.    Fair Value of Financial Instruments (continued)


Separate account assets

Our separate account assets consist of mutual funds that are frequently traded. Since 2003, investments owned by The Phoenix Companies, Inc. Employee Pension Plan (the “Plan”) Trust were sold to PHL Variable and the investments converted to ownership by the Trust to the Employee Pension Separate Account (“EPP SA”). The Plan’s Trust purchased a group flexible premium variable accumulation deferred annuity contract. As of May 21, 2012, the Plan surrendered the EPP SA contract for full value and the Plan’s underlying investments are no longer held in the separate account. Certain investments related to fixed income, equities and foreign securities were transferred to Mercer Trust Company for investment management purposes in a group trust investment arrangement. The remaining investments continued with their respective investment managers. These securities are valued using the market approach in which unadjusted market quotes are used. We include these securities in Level 1 of our hierarchy.

Derivatives

Exchange-traded derivatives are valued using quoted prices and are classified within Level 1 of the valuation hierarchy. However, few classes of derivative contracts are listed on an exchange. Therefore, the majority of our derivative positions are OTC derivative financial instruments, valued using third-party vendor derivative valuation systems that use as their basis readily observable market parameters, such as swap rates and volatility assumptions. These positions are classified within Level 2 of the valuation hierarchy. Such OTC derivatives include vanilla interest rate swaps, equity index options, swaptions, variance swaps and cross currency swaps. Nevertheless, we review and validate the resulting fair values against those provided to us monthly by the derivative counterparties for reasonableness.

Fair values for OTC derivative financial instruments, mostly options and swaps, represent the present value of amounts estimated to be received from or paid to a marketplace participant in exchange of these instruments (i.e., the amount we would expect to receive in a derivative asset assignment or would expect to pay to have a derivative liability assumed). These derivatives are valued using third-party derivative valuation models which take into account the net present value of estimated future cash flows and capital market assumptions which are derived from directly observable prices from other OTC trades and exchange-traded derivatives. Such assumptions include swap rates and swaption volatility obtained from Bloomberg, as well as equity index volatility and dividend yields provided by OTC derivative dealers.

The fair value of OTC derivative financial instruments is also adjusted for the credit risk of the counterparty in cases in which there are no collateral offsets. To estimate the impact on fair value of a market participant’s view of counterparty non-performance risk we use a credit default swap (“CDS”) based approach in measuring this counterparty non-performance risk by looking at the cost of obtaining credit protection in the CDS market for the aggregate fair value exposure amount over the remaining life of derivative contracts, given the counterparty’s rating. The resulting upfront CDS premium, calculated using Bloomberg analytics, serves as a reasonable estimate of the default provision for the non-performance risk or counterparty valuation adjustment to the fair valuation of non-collateralized OTC derivative financial instruments.

Certain new and/or complex instruments may have immature or limited markets or require more sophistication in derivative valuation methodology. As a result, the pricing models used for valuation of these instruments often incorporate significant estimates and assumptions that market participants would use in pricing the instrument, which may impact the results of operations reported in the financial statements. Hence, instead of valuing these instruments using third-party vendor valuation systems, we rely on the fair market valuations reported to us monthly by the derivative counterparties. Fair values for OTC derivatives are verified using observed estimates about the costs of hedging the risk and other trades in the market. As the markets for these products develop, we continually refine our pricing models to correlate more closely to the market risk of these instruments.


F-51
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
10.    Fair Value of Financial Instruments (continued)


Valuation of embedded derivatives

We make guarantees on certain variable annuity contracts, including those with GMAB, GMWB and COMBO riders. We also provide credits based on the performance of certain indices (“index credits”) on our fixed indexed annuity contracts. Both contract types have features that meet the definition of an embedded derivative. The GMAB, GMWB and COMBO embedded derivative liabilities associated with our variable annuity contracts are accounted for at fair value using a risk neutral stochastic valuation methodology with changes in fair value recorded in realized investment gains. The inputs to our fair value methodology include estimates derived from the asset derivatives market, including equity volatilities and the swap curves. Several additional inputs are not obtained from independent sources, but instead reflect our internally developed assumptions related to mortality rates, lapse rates and other policyholder behavior.

The fair value of the embedded derivative liabilities associated with the index credits on our fixed indexed annuity contracts is calculated using the budget method with changes in fair value recorded in realized investment gains. Under the budget method, the value of the initial index option is based on the fair value of the option purchased to hedge the index. The value of the index credits paid in future years is estimated to be the annual budgeted amount. Budgeted amounts are estimated based on available investment income using assumed investment returns and projected liability values. As there are significant unobservable inputs included in our fair value methodology for these embedded derivative liabilities, we consider the methods as described above as a whole to be Level 3 within the fair value hierarchy.

Our fair value calculation of embedded derivative liabilities includes a credit standing adjustment (the “CSA”). The CSA represents the adjustment that market participants would make to reflect the risk that guaranteed benefit obligations may not be fulfilled (“non-performance risk”). We estimate our CSA using the credit spread (based on publicly available credit spread indices) for financial services companies similar to the Company’s life insurance subsidiaries. The CSA is updated every quarter and, therefore, the fair value will change with the passage of time even in the absence of any other changes that would affect the valuation.

The following tables present the financial instruments carried at fair value on a recurring basis by ASC 820-10 valuation hierarchy (as described above). There were no financial instruments carried at fair value on a non-recurring basis as of December 31, 2014 and 2013, respectively.


F-52
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
10.    Fair Value of Financial Instruments (continued)


Fair Values of Financial Instruments by Level:
As of December 31, 2014
($ in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
 
 
U.S. government and agency [1]
$
—

 
$
9.1

 
$
80.2


$
89.3

State and political subdivision
—

 
35.9

 
193.3

 
229.2

Foreign government
—

 
57.7

 
16.1

 
73.8

Corporate
—

 
1,414.7

 
1,417.2

 
2,831.9

CMBS
—

 
191.0

 
64.6

 
255.6

RMBS
—

 
424.8

 
151.6

 
576.4

CDO/CLO
—

 
—

 
83.5

 
83.5

Other ABS
—

 
4.2

 
77.9

 
82.1

Total available-for-sale debt securities
—

 
2,137.4

 
2,084.4

 
4,221.8

Available-for-sale equity securities
—

 
—

 
28.7

 
28.7

Short-term investments
79.8

 
—

 
—

 
79.8

Derivative assets
—

 
157.5

 
—

 
157.5

Fair value investments
—

 
13.0

 
33.7

 
46.7

Separate account assets
1,757.5

 
—

 
—

 
1,757.5

Total assets
$
1,837.3

 
$
2,307.9

 
$
2,146.8

 
$
6,292.0

Liabilities
 
 
 
 
 
 
 
Derivative liabilities
$
0.5

 
$
85.1

 
$
—

 
$
85.6

Embedded derivatives
—

 
—

 
160.3

 
160.3

Total liabilities
$
0.5

 
$
85.1

 
$
160.3

 
$
245.9

———————
[1]
Level 3 includes securities whose underlying collateral is an obligation of a U.S. government entity.

There were no transfers of assets between Level 1 and Level 2 during the year ended December 31, 2014.


F-53
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
10.    Fair Value of Financial Instruments (continued)


Fair Values of Financial Instruments by Level:
As of December 31, 2013
($ in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
 
 
U.S. government and agency [1]
$
—

 
$
9.8

 
$
58.8

 
$
68.6

State and political subdivision
—

 
20.8

 
133.8

 
154.6

Foreign government
—

 
62.2

 
3.3

 
65.5

Corporate
—

 
1,105.0

 
1,091.9

 
2,196.9

CMBS
—

 
221.8

 
31.9

 
253.7

RMBS
—

 
333.9

 
176.1

 
510.0

CDO/CLO
—

 
—

 
70.9

 
70.9

Other ABS
—

 
13.6

 
82.3

 
95.9

Total available-for-sale debt securities
—

 
1,767.1

 
1,649.0

 
3,416.1

Available-for-sale equity securities
—

 
—

 
11.2

 
11.2

Short-term investments
80.0

 
1.0

 
—

 
81.0

Derivative assets
—

 
225.3

 
—

 
225.3

Fair value investments
—

 
13.0

 
35.6

 
48.6

Separate account assets
2,052.7

 
—

 
—

 
2,052.7

Total assets
$
2,132.7

 
$
2,006.4

 
$
1,695.8

 
$
5,834.9

Liabilities
 
 
 
 
 
 
 
Derivative liabilities
$
5.3

 
$
110.8

 
$
—

 
$
116.1

Embedded derivatives
—

 
—

 
87.8

 
87.8

Total liabilities
$
5.3

 
$
110.8

 
$
87.8

 
$
203.9

———————
[1]
Level 3 includes securities whose underlying collateral is an obligation of a U.S. government entity.

There were no transfers of assets between Level 1 and Level 2 during the year ended December 31, 2013.

The following tables present corporates carried at fair value and on a recurring basis by sector.

Fair Values of Corporates by Level and Sector:
As of December 31, 2014
($ in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Corporates
 
 
 
 
 
 
 
Consumer
$
—

 
$
219.9

 
$
362.6

 
$
582.5

Energy
—

 
181.6

 
163.1

 
344.7

Financial services
—

 
574.6

 
321.5

 
896.1

Capital goods
—

 
142.0

 
125.3

 
267.3

Transportation
—

 
30.5

 
114.9

 
145.4

Utilities
—

 
117.9

 
219.3

 
337.2

Other
—

 
148.2

 
110.5

 
258.7

Total corporates
$
—

 
$
1,414.7

 
$
1,417.2

 
$
2,831.9



F-54
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
10.    Fair Value of Financial Instruments (continued)


Fair Values of Corporates by Level and Sector:
As of December 31, 2013
($ in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Corporates
 
 
 
 
 
 
 
Consumer
$
—

 
$
288.9

 
$
367.9

 
$
656.8

Energy
—

 
137.7

 
135.3

 
273.0

Financial services
—

 
440.3

 
238.0

 
678.3

Capital goods
—

 
62.6

 
55.6

 
118.2

Transportation
—

 
25.0

 
85.1

 
110.1

Utilities
—

 
83.6

 
154.3

 
237.9

Other
—

 
66.9

 
55.7

 
122.6

Total corporates
$
—

 
$
1,105.0

 
$
1,091.9

 
$
2,196.9


Level 3 financial assets and liabilities

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

Level 3 Financial Assets:
As of December 31, 2014
($ in millions)
Balance,
beginning
of period
 
Purchases
 
Sales
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Realized and
unrealized
gains
(losses)
included in
income [1]
 
Unrealized
gains
(losses)
included
in OCI
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency [2]
$
58.8

 
$
24.2

 
$
(7.5
)
 
$
—

 
$
—

 
$
—

 
$
4.7

 
$
80.2

State and political subdivision
133.8

 
51.2

 
(2.2
)
 
—

 
—

 
—

 
10.5

 
193.3

Foreign government
3.3

 
2.2

 
—

 
10.7

 
—

 
—

 
(0.1
)
 
16.1

Corporate
1,091.9

 
335.0

 
(64.6
)
 
68.5

 
(44.3
)
 
(0.9
)
 
31.6

 
1,417.2

CMBS
31.9

 
8.1

 
(6.5
)
 
33.8

 
(6.9
)
 
0.3

 
3.9

 
64.6

RMBS
176.1

 
2.3

 
(20.2
)
 
—

 
(4.3
)
 
0.3

 
(2.6
)
 
151.6

CDO/CLO
70.9

 
35.2

 
(20.1
)
 
—

 
—

 
0.6

 
(3.1
)
 
83.5

Other ABS
82.3

 
13.7

 
(17.3
)
 
1.0

 
—

 
0.1

 
(1.9
)
 
77.9

Total available-for-sale
  debt securities
1,649.0

 
471.9

 
(138.4
)
 
114.0

 
(55.5
)
 
0.4

 
43.0

 
2,084.4

Available-for-sale equity securities
11.2

 
17.2

 
—

 
—

 
—

 
—

 
0.3

 
28.7

Fair value investments
35.6

 
1.0

 
(2.3
)
 
—

 
—

 
(0.6
)
 
—

 
33.7

Total assets
$
1,695.8

 
$
490.1

 
$
(140.7
)
 
$
114.0

 
$
(55.5
)
 
$
(0.2
)
 
$
43.3

 
$
2,146.8

———————
[1]
Reflected in realized investment gains and losses for all assets except fair value investments which are included in net investment income.
[2]
Includes securities whose underlying collateral is an obligation of a U.S. government entity.


F-55
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
10.    Fair Value of Financial Instruments (continued)


Level 3 Financial Assets:
As of December 31, 2013
($ in millions)
Balance,
beginning
of period
 
Purchases
 
Sales
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Realized and
unrealized
gains
(losses)
included in
income [1]
 
Unrealized
gains
(losses)
included
in OCI
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency [2]
$
25.9

 
$
44.3

 
$
(9.1
)
 
$
—

 
$
—

 
$
—

 
$
(2.3
)
 
$
58.8

State and political subdivision
116.1

 
47.8

 
(1.5
)
 
—

 
—

 
—

 
(28.6
)
 
133.8

Foreign government
8.0

 
—

 
—

 
1.6

 
(6.1
)
 
—

 
(0.2
)
 
3.3

Corporate
797.9

 
356.4

 
(57.0
)
 
41.6

 
(10.9
)
 
0.7

 
(36.8
)
 
1,091.9

CMBS
19.3

 
19.3

 
(1.7
)
 
—

 
(1.5
)
 
(0.2
)
 
(3.3
)
 
31.9

RMBS
223.3

 
1.3

 
(36.4
)
 
5.1

 
—

 
(0.5
)
 
(16.7
)
 
176.1

CDO/CLO
56.8

 
36.6

 
(10.6
)
 
—

 
—

 
(0.3
)
 
(11.6
)
 
70.9

Other ABS
80.1

 
13.4

 
(10.2
)
 
—

 
—

 
—

 
(1.0
)
 
82.3

Total available-for-sale
  debt securities
1,327.4

 
519.1

 
(126.5
)
 
48.3

 
(18.5
)
 
(0.3
)
 
(100.5
)
 
1,649.0

Available-for-sale equity securities
3.6

 
8.4

 
—

 
—

 
—

 
—

 
(0.8
)
 
11.2

Fair value investments
22.7

 
21.1

 
(8.3
)
 
—

 
—

 
0.1

 
—

 
35.6

Total assets
$
1,353.7

 
$
548.6

 
$
(134.8
)
 
$
48.3

 
$
(18.5
)
 
$
(0.2
)
 
$
(101.3
)
 
$
1,695.8

———————
[1]
Reflected in realized investment gains and losses for all assets except fair value investments which are included in net investment income.
[2]
Includes securities whose underlying collateral is an obligation of a U.S. government entity.

Level 3 Financial Liabilities:
Embedded Derivatives
($ in millions)
For the years ended December 31,
 
2014
 
2013
 
 
 
 
Balance, beginning of period
$
87.8

 
$
86.8

Net purchases/(sales)
27.1

 
12.0

Transfers into Level 3
—

 
—

Transfers out of Level 3
—

 
—

Realized (gains) losses [1]
45.4

 
(11.0
)
Balance, end of period
$
160.3

 
$
87.8

———————
[1]
Realized gains and losses are included in net realized investment gains on the statements of income and comprehensive income.


F-56
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
10.    Fair Value of Financial Instruments (continued)


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

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

Level 3 Assets: [1]
As of December 31, 2014
($ in millions)
Fair
Value
 
Valuation
Technique(s)
 
Unobservable
Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
U.S. government and agency
$
80.2

 
Discounted cash flow
 
Yield
 
1.02% - 3.64% (2.75%)
State and political subdivision
$
65.9

 
Discounted cash flow
 
Yield
 
2.34% - 4.50% (3.33%)
Corporate
$
1,053.3

 
Discounted cash flow
 
Yield
 
0.93% - 6.88% (3.35%)
Other ABS
$
9.8

 
Discounted cash flow
 
Yield
 
1.83% - 3.01% (2.01%)
Fair value investments
$
1.0

 
Discounted cash flow
 
Default rate
 
0.17%
 
 
 
 
 
Recovery rate
 
44.00%
———————
[1]
Excludes Level 3 assets which are valued based upon non-binding independent third-party valuations or third-party price information for which unobservable inputs are not reasonably available to us.

Level 3 Assets: [1]
As of December 31, 2013
($ in millions)
Fair
Value
 
Valuation
Technique(s)
 
Unobservable
Input
 
Range
(Weighted Average)
 
 
 
 
 
 
 
 
U.S. government and agency
$
58.8

 
Discounted cash flow
 
Yield
 
1.07% - 5.00% (3.18%)
State and political subdivision
$
45.4

 
Discounted cash flow
 
Yield
 
2.44% - 5.79% (3.88%)
Corporate
$
874.8

 
Discounted cash flow
 
Yield
 
1.06% - 6.75% (3.82%)
Other ABS
$
11.3

 
Discounted cash flow
 
Yield
 
2.10% - 3.41% (2.30%)
 
 
 
 
 
Prepayment rate
 
2.00%
 
 
 
 
 
Default rate
 
2.53% for 48 mos then 0.37% thereafter
 
 
 
 
 
Recovery rate
 
10.00% (TRUPS)
Fair value investments
$
0.8

 
Discounted cash flow
 
Default rate
 
0.25%
 
 
 
 
 
Recovery rate
 
45.00%
———————
[1]
Excludes Level 3 assets which are valued based upon non-binding independent third-party valuations or third-party price information for which unobservable inputs are not reasonably available to us.


F-57
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
10.    Fair Value of Financial Instruments (continued)


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

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

Level 3 Liabilities:
As of December 31, 2014
($ in millions)
Fair
Value
 
Valuation
Technique(s)
 
Unobservable
Input
 
Range
 
 
 
 
 
 
 
 
Embedded derivatives (FIA)
$
153.9

 
Budget method
 
Swap curve
 
0.24% -2.55%
 
 
 
 
 
Mortality rate
 
105% or 97% 2012 IAM basic table
with scale G2
 
 
 
 
 
Lapse rate
 
0.04% - 46.44%
 
 
 
 
 
CSA
 
3.08%
Embedded derivatives
(GMAB / GMWB / COMBO)
$
6.4

 
Risk neutral stochastic
  valuation methodology
 
Volatility surface
 
9.89% - 67.34%
 
 
 
 
 
Swap curve
 
0.21% - 2.76%
 
 
 
 
 
Mortality rate
 
105% 2012 IAM basic table
with scale G2
 
 
 
 
 
Lapse rate
 
0.00% - 40.00%
 
 
 
 
 
CSA
 
3.08%

Level 3 Liabilities:
As of December 31, 2013
($ in millions)
Fair
Value
 
Valuation
Technique(s)
 
Unobservable
Input
 
Range
 
 
 
 
 
 
 
 
Embedded derivatives (FIA)
$
91.9

 
Budget method
 
Swap curve
 
0.19% - 3.79%
 
 
 
 
 
Mortality rate
 
103% or 97% 2012 IAM basic table
with scale G2
 
 
 
 
 
Lapse rate
 
0.02% - 47.15%
 
 
 
 
 
CSA
 
3.23%
Embedded derivatives
(GMAB / GMWB / COMBO)
$
(4.1
)
 
Risk neutral stochastic
  valuation methodology
 
Volatility surface
 
10.85% - 46.33%
 
 
 
 
 
Swap curve
 
0.15% - 4.15%
 
 
 
 
 
Mortality rate
 
105% 2012 IAM basic table
with scale G2
 
 
 
 
 
Lapse rate
 
0.00% - 40.00%
 
 
 
 
 
CSA
 
3.23%


F-58
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
10.    Fair Value of Financial Instruments (continued)


Level 3 Assets and Liabilities by Pricing Source:
As of December 31, 2014
($ in millions)
Internal [1]
 
External [2]
 
Total
Assets
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
U.S. government and agency [3]
$
80.2

 
$
—

 
$
80.2

State and political subdivision
65.9

 
127.4

 
193.3

Foreign government
—

 
16.1

 
16.1

Corporate
1,053.3

 
363.9

 
1,417.2

CMBS
—

 
64.6

 
64.6

RMBS
—

 
151.6

 
151.6

CDO/CLO
—

 
83.5

 
83.5

Other ABS
9.8

 
68.1

 
77.9

Total available-for-sale debt securities
1,209.2

 
875.2

 
2,084.4

Available-for-sale equity securities
—

 
28.7

 
28.7

Fair value investments
1.0

 
32.7

 
33.7

Total assets
$
1,210.2

 
$
936.6

 
$
2,146.8

Liabilities
 
 
 
 
 
Embedded derivatives
$
160.3

 
$
—

 
$
160.3

Total liabilities
$
160.3

 
$
—

 
$
160.3

———————
[1]
Represents valuations reflecting both internally-derived and market inputs, as well as third-party information or quotes.
[2]
Represents unadjusted prices from independent pricing services, third-party financial statements and independent indicative broker quotes where pricing inputs are not readily available.
[3]
Includes securities whose underlying collateral is an obligation of a U.S. government entity.

Level 3 Assets and Liabilities by Pricing Source:
As of December 31, 2013
($ in millions)
Internal [1]
 
External [2]
 
Total
Assets
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
U.S. government and agency [3]
$
58.8

 
$
—

 
$
58.8

State and political subdivision
45.4

 
88.4

 
133.8

Foreign government
—

 
3.3

 
3.3

Corporate
874.8

 
217.1

 
1,091.9

CMBS
—

 
31.9

 
31.9

RMBS
—

 
176.1

 
176.1

CDO/CLO
—

 
70.9

 
70.9

Other ABS
11.3

 
71.0

 
82.3

Total available-for-sale debt securities
990.3

 
658.7

 
1,649.0

Available-for-sale equity securities
—

 
11.2

 
11.2

Fair value investments
0.8

 
34.8

 
35.6

Total assets
$
991.1

 
$
704.7

 
$
1,695.8

Liabilities
 
 
 
 
 
Embedded derivatives
$
87.8

 
$
—

 
$
87.8

Total liabilities
$
87.8

 
$
—

 
$
87.8

———————
[1]
Represents valuations reflecting both internally-derived and market inputs, as well as third-party information or quotes.
[2]
Represents unadjusted prices from independent pricing services, third-party financial statements and independent indicative broker quotes where pricing inputs are not readily available.
[3]
Includes securities whose underlying collateral is an obligation of a U.S. government entity.


F-59
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
10.    Fair Value of Financial Instruments (continued)


Financial instruments not carried at fair value

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

Carrying Amounts and Fair Values
of Financial Instruments:
 
 
As of December 31,
($ in millions)
 
 
2014
 
2013
 
Fair Value
Hierarchy Level
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Financial assets:
 
 
 
 
 
 
 
 
 
Policy loans
Level 3
 
$
68.1

 
$
67.6

 
$
66.1

 
$
65.6

Cash and cash equivalents
Level 1
 
$
162.3

 
$
162.3

 
$
181.0

 
$
181.0

Financial liabilities:
 
 
 
 
 
 
 
 
 
Investment contracts
Level 3
 
$
3,306.9

 
$
3,308.6

 
$
2,775.2

 
$
2,776.2

Surplus notes
Level 3
 
$
30.0

 
$
30.0

 
$
30.0

 
$
30.0


Fair value of policy loans

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

Fair value of investment contracts

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

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

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

Indebtedness

The fair value of surplus notes is determined with reference to the fair value of Phoenix’s senior unsecured bonds including consideration of the different features in the two securities. See Note 12 to these financial statements for additional information.



F-60
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
 


11.
Income Taxes

Phoenix and PHL Variable file a consolidated U.S. Federal income tax return. The Company also files combined, unitary and separate income tax returns in various states.

Significant Components of Income Taxes:
For the years ended December 31,
($ in millions)
2014
 
2013
 
2012
Income tax expense (benefit) attributable to:
 
 
 
 
 
Current
$
21.1

 
$
(24.7
)
 
$
27.9

Deferred
(17.3
)
 
—

 
(10.9
)
Income tax expense (benefit)
$
3.8

 
$
(24.7
)
 
$
17.0


Reconciliation of Effective Income Tax Rate:
For the years ended December 31,
($ in millions)
2014
 
2013
 
2012
 
 
 
 
 
 
Income (loss) before income taxes
$
(105.5
)
 
$
39.7

 
$
(122.1
)
Income tax expense (benefit) at statutory rate of 35.0%
(36.9
)
 
13.9

 
(42.7
)
Dividend received deduction
(2.0
)
 
(1.2
)
 
(1.5
)
Valuation allowance increase (release)
43.1

 
(36.8
)
 
61.3

Other, net
(0.4
)
 
(0.6
)
 
(0.1
)
Income tax expense (benefit)
$
3.8

 
$
(24.7
)
 
$
17.0

Effective income tax rates
(3.6%)
 
(62.2%)
 
(13.9%)

Allocation of Income Taxes:
For the years ended December 31,
($ in millions)
2014
 
2013
 
2012
 
 
 
 
 
 
Income tax expense (benefit)
$
3.8

 
$
(24.7
)
 
$
17.0

Income tax from OCI:
 
 
 
 
 
Unrealized investment (gains) losses
31.9

 
(11.6
)
 
24.3

Income tax related to cumulative effect of change in accounting guidance
—

 
—

 
—

Total income tax recorded to all components of income
$
35.7

 
$
(36.3
)
 
$
41.3


Deferred Income Tax Balances Attributable to Temporary Differences:
As of December 31,
($ in millions)
2014
 
2013
Deferred income tax assets
 
 
 
Future policyholder benefits
$
309.2

 
$
264.3

Available-for-sale debt securities
13.1

 
27.8

Alternative minimum tax credits
2.1

 
2.1

Other
2.1

 
0.2

Subtotal
326.5

 
294.4

Valuation allowance
(127.9
)
 
(69.9
)
Total deferred income tax assets, net of valuation allowance
198.6

 
224.5

Deferred income tax liabilities
 
 
 
DAC
92.3

 
104.4

Investments
81.1

 
70.1

Other
12.1

 
22.2

Gross deferred income tax liabilities
185.5

 
196.7

Net deferred income tax assets
$
13.1

 
$
27.8


F-61
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
11.    Income Taxes (continued)


As of December 31, 2014, we performed our assessment of the realization of deferred tax assets. This assessment included consideration of all available evidence – both positive and negative – weighted to the extent the evidence was objectively verifiable. In performing this assessment, the Company considered the existence of cumulative losses in the three most recent years, which has been considered significant negative evidence in our assessment.

With the existence of PHL Variable and parent company life subgroup taxable profits in recent years, the Company has experienced some utilization of its tax loss carryovers and incurred current federal income tax. Under U.S. federal tax law, taxes paid by PHL Variable and the life subgroup are available for recoupment in the event of future losses. Under GAAP, the ability to carryback losses and recoup taxes paid can be considered as a source of income when assessing the realization of deferred tax assets. The Company believes that it is reasonably possible the consolidated return will experience taxable losses in the near term, however projecting such losses is subject to a number of estimates and assumptions including future impacts on market and actuarial assumptions. Actual results may vary from projections and, due to the uncertainty of these estimates, we do not believe significant weight can be placed on the assumption that taxes paid in the current and prior years will be recouped. Accordingly, management has not deemed the PHL Variable taxes paid in current and prior tax years as a viable source of income when performing its valuation allowance assessment.

Further, we believe that the continued existence of significant negative evidence illustrated by a three year cumulative loss before tax is significant enough to overcome any positive evidence. This is further supported by the continued costs associated with the restatement and downgrades of financial strength credit ratings which may adversely impact the Company’s future earnings.

Due to the application of our tax sharing agreement, positive and negative evidence at both the parent and subsidiary levels have been considered in our assessment of deferred tax asset realizability at the subsidiary level. Due to the significance of the negative evidence at both the parent and subsidiary levels, as well as the weight given to the objective nature of the cumulative losses in recent years, and after consideration of all available evidence, we concluded that our estimates of future taxable income, timing of the reversal of existing taxable temporary differences and certain tax planning strategies did not provide sufficient positive evidence to assert that it is more likely than not that certain deferred tax assets would be realizable. To the extent either PHL Variable or Phoenix can demonstrate the ability to generate sustained profitability in the future, the valuation allowance could potentially be reversed resulting in a benefit to income tax expense.

As of December 31, 2014, we concluded that our estimates of future taxable income, certain tax planning strategies and other sources of income did not constitute sufficient positive evidence to assert that it is more likely than not that certain deferred tax assets would be realizable. Accordingly, a valuation allowance of $127.9 million has been recorded on net deferred tax assets of $141.0 million. The valuation allowance recorded constitutes a full valuation allowance on the net deferred tax assets that require future taxable income in order to be realized. The remaining deferred tax asset of $13.1 million attributable to available-for-sale debt securities with gross unrealized losses does not require a valuation allowance due to our ability and intent to hold these securities until recovery of principal value through sale or contractual maturity, thereby avoiding the realization of taxable losses. This conclusion is consistent with prior periods. The impact of the valuation allowance on the allocation of tax to the components of the financial statements included an increase of $43.1 million in net loss and an increase of $14.9 million in OCI-related deferred tax balances.

As of December 31, 2014, we had deferred income tax assets of $2.1 million related to alternative minimum tax credit carryovers which do not expire.

The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2011. The 2011 and 2012 tax years remain under examination; however, no material unanticipated assessments have been identified, and we believe no adjustment to our liability for uncertain tax positions is required.

There were no unrecognized tax benefits for the years ended December 31, 2014, 2013 and 2012.

Management believes that adequate provisions have been made in the financial statements for any potential assessments that may result from tax examinations and other tax related matters for all open tax years. Based upon the timing and status of our current examinations by taxing authorities, we do not believe that it is reasonably possible that any changes to the balance of unrecognized tax benefits occurring within the next 12 months will result in a significant change to the results of operations, financial condition or liquidity.


F-62
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
11.    Income Taxes (continued)


The Company has no interest and penalties as income tax expense and no accrued interest and penalties in the related income tax liability for the years ended December 31, 2014 and 2013.


12.
Related Party Transactions

Capital contributions

During the years ended December 31, 2014 and 2013, we received $15.0 million and $45.0 million, respectively, in capital contributions from PM Holdings, Inc.

Related party transactions

The amounts included in the following discussion are gross expenses, before deferrals for policy acquisition costs.

Service agreement

The Company has entered into an agreement with Phoenix Life to provide substantially all general insurance expenses related to the Company, including rent and employee benefit plan expenses. Expenses are allocated to the Company using specific identification or activity-based costing. The expenses allocated to us were $69.3 million, $91.5 million and $71.4 million for the years ended December 31, 2014, 2013 and 2012, respectively. Amounts payable to Phoenix Life were $4.4 million and $6.3 million as of December 31, 2014 and 2013, respectively.

See Note 14 to these financial statements for additional information on related party transactions.

Reinsurance agreements

The Company cedes risk associated with certain universal life contracts and the associated riders to Phoenix Life. The reinsurance transaction between the Company and Phoenix Life is structured as a coinsurance agreement.

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

See Note 4 to these financial statements for additional information on related party transactions.

Underwriting agreements

1851 Securities Inc. (“1851”), a wholly owned subsidiary of PM Holdings, Inc., is the principal underwriter of the Company’s variable life insurance policies and variable annuity contracts. Phoenix Life reimburses 1851 for commissions incurred on our behalf and we, in turn, reimburse Phoenix Life. Commissions incurred were $6.5 million, $6.4 million and $6.5 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Sales agreements

Phoenix Life pays commissions to producers who sell our non-registered life and annuity products. Commissions paid by Phoenix Life on our behalf were $78.6 million, $65.4 million and $73.3 million for the years ended December 31, 2014, 2013 and 2012, respectively. Amounts payable to Phoenix Life were $2.1 million and $1.3 million as of December 31, 2014 and 2013, respectively.

Saybrus, a majority-owned subsidiary of Phoenix, provides life insurance and annuity wholesaling services. Commissions paid by Saybrus were $11.5 million, $9.2 million and $11.3 million as of December 31, 2014, 2013 and 2012, respectively. Commission amounts payable to Saybrus were $0.9 million and $0.7 million as of December 31, 2014 and 2013, respectively.


F-63
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)

 
12.    Related Party Transactions (continued)


Saybrus Equity Services, Inc. (“Saybrus Equity”), a wholly owned subsidiary of Saybrus, provides wholesaling services to various third-party distributors and affiliates of variable life insurance and variable annuities. Commissions paid by Saybrus Equity on our behalf were immaterial as of December 31, 2014, 2013 and 2012, respectively. Commission amounts payable to Saybrus Equity were immaterial as of December 31, 2014 and 2013, respectively.

Processing service agreements

We provide payment processing services for Phoenix Life, wherein we receive deposits on Phoenix Life annuity contracts, and forward those payments to Phoenix Life. In connection with this service, we had a net amount due from Phoenix Life of $4.5 million as of December 31, 2014 and a net amount due to Phoenix Life of $2.6 million as of December 31, 2013. We do not charge any fees for this service.

We also provide payment processing services for Phoenix Life and Annuity Company (“Phoenix Life and Annuity”), a wholly owned indirect subsidiary of Phoenix Life, wherein we receive deposits on certain Phoenix Life and Annuity annuity contracts, and forward those payments to Phoenix Life and Annuity. In connection with this service, we had amounts due from Phoenix Life and Annuity of $0.9 million as of December 31, 2014 and a net amount due to Phoenix Life and Annuity of $0.5 million as of December 31, 2013. We do not charge any fees for this service.

Indebtedness due to affiliate

PHL Variable issued $30.0 million surplus notes on December 30, 2013 which were purchased by Phoenix. The notes are due on December 30, 2043. Interest is paid annually at a rate of 10.5% and requires the prior approval of the Insurance Commissioner of the State of Connecticut. Payments may be made only out of surplus funds as defined under applicable law and regulations of the State of Connecticut. Upon approval by the Insurance Commissioner, the notes may be redeemed at any time, either in whole or in part, at a redemption price of 100% plus accrued interest to the date set for the redemption. Connecticut Law provides that the notes are not part of the legal liabilities of PHL Variable. The Company incurred interest expense of $3.2 million related to these notes for the year ended December 31, 2014.


13.
Accumulated Other Comprehensive Income

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

Accumulated Other Comprehensive Income (Loss):
($ in millions)

Net
Unrealized
Gains / (Losses)
on Investments
where
Credit-related
OTTI was
Recognized
 
Net
Unrealized
Gains / (Losses)
on All Other
Investments [1]
 
Total
 
 
 
 
 
 
Balance as of December 31, 2012
$
(1.3
)
 
$
10.1

 
$
8.8

Change in component during the period before reclassifications
3.8

 
(19.4
)
 
(15.6
)
Amounts reclassified from AOCI
0.5

 
(6.4
)
 
(5.9
)
Balance as of December 31, 2013
3.0

 
(15.7
)
 
(12.7
)
Change in component during the period before reclassifications
2.2

 
15.9

 
18.1

Amounts reclassified from AOCI
(0.8
)
 
(0.6
)
 
(1.4
)
Balance as of December 31, 2014
$
4.4

 
$
(0.4
)
 
$
4.0

———————
[1]
See Note 7 to these financial statements for additional information regarding offsets to net unrealized investment gains and losses which include policyholder dividend obligation, DAC and other actuarial offsets, and deferred income tax expense (benefit).


F-64
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
13.    Accumulated Other Comprehensive Income (continued)


Reclassifications from AOCI consist of the following:

AOCI
 
Amounts Reclassified from AOCI
 
Affected Line Item in the
Statements of Income and Comprehensive Income
($ in millions)
 
For the years ended December 31,
 
 
 
 
2014
 
2013
 
2012
 
 
Net unrealized gains / (losses) on investments where
  credit-related OTTI was recognized:
 
 
 
 
 
 
 
 
Available-for-sale securities
 
$
1.2

 
$
(0.7
)
 
$
(1.9
)
 
Net realized capital gains (losses)
 
 
1.2

 
(0.7
)
 
(1.9
)
 
Total before income taxes
 
 
0.4

 
(0.2
)
 
(0.7
)
 
Income tax expense (benefit)
 
 
$
0.8

 
$
(0.5
)
 
$
(1.2
)
 
Net income (loss)
Net unrealized gains / (losses) on
  all other investments:
 
 
 
 
 
 
 
 
Available-for-sale securities
 
$
1.1

 
$
9.8

 
$
21.2

 
Net realized capital gains (losses)
 
 
1.1

 
9.8

 
21.2

 
Total before income taxes
 
 
0.5

 
3.4

 
7.4

 
Income tax expense (benefit)
 
 
$
0.6

 
$
6.4

 
$
13.8

 
Net income (loss)
Total amounts reclassified from AOCI
 
$
1.4

 
$
5.9

 
$
12.6

 
Net income (loss)


14.
Employee Benefit Plans and Employment Agreements

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

The employee pension plan provides benefits up to the amount allowed under the Internal Revenue Code. The two supplemental plans provide benefits in excess of the primary plan. Retirement benefits under the plans are a function of years of service and compensation. Effective March 31, 2010, all benefit accruals under all of our funded and unfunded defined benefit plans were frozen. This change was announced in 2009 and a curtailment was recognized at that time for the reduction in the expected years of future service.

Our ultimate parent company has historically provided employees with other post-employment benefits that include health care and life insurance. In December 2009, Phoenix announced the decision to eliminate retiree medical coverage for current employees whose age plus years of service did not equal at least 65 as of March 31, 2010. Employees who remain eligible must still meet all other plan requirements to receive benefits. In addition, the cap on the Company’s contribution to pre-65 retiree medical costs per participant was reduced beginning with the 2011 plan year.

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. Phoenix, the plan sponsor, established an accrued liability and amounts attributable to us have been allocated.

Employee benefit expense allocated to us for these benefits totaled $3.8 million, $3.2 million and $4.6 million for 2014, 2013 and 2012, respectively. On August 8, 2014, the Highway and Transportation Funding Act of 2014 was enacted into law, effective immediately. The law extends certain pension funding provisions originally included in the Moving Ahead for Progress in the 21st Century Act (MAP-21). Phoenix Life took advantage of this in September of 2014, which resulted in no further contributions to the pension plan for the remainder of 2014. Over the next 12 months, Phoenix Life does not expect to make any contributions to the pension plan.



F-65
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
 


15.
Share-Based Payments

The Phoenix has a share-based compensation to certain employees and non-employee directors. The Company is included in these plans and has been allocated compensation expense of $0.7 million, $1.3 million and $1.1 million for the years ended December 31, 2014, 2013 and 2012, respectively. The Company’s income tax benefit recognized for stock-based compensation plans was $(0.2) million, $(0.5) million and $(0.4) million for the years ended December 31, 2014, 2013 and 2012, respectively. The Company did not capitalize the cost of stock-based compensation.


16.
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. The State of Connecticut Insurance Department (the “Department”) has adopted the National Association of Insurance Commissioners’ (the “NAIC’s”) Accounting Practices and Procedures manual effective January 1, 2001 (“NAIC SAP”) as a component of its prescribed or permitted statutory accounting practices. As of December 31, 2014, 2013 and 2012, the Department has not prescribed or permitted us to use any accounting practices that would materially deviate from NAIC SAP. Statutory surplus differs from equity reported in accordance with U.S. GAAP primarily because policy acquisition costs are expensed when incurred, life insurance reserves are based on different assumptions and deferred tax assets are limited to amounts reversing in a specified period with an additional limitation based upon 10% or 15% of statutory surplus, dependent on meeting certain risk-based capital (“RBC”) thresholds.

Connecticut Insurance Law requires that Connecticut life insurers report their RBC. RBC is based on a formula calculated by applying factors to various assets, 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. Connecticut Insurance Law gives the Connecticut Commissioner of Insurance explicit regulatory authority to require various actions by, or take various actions against, insurers whose total adjusted capital does not exceed certain RBC levels. Our RBC was in excess of 200% of Company Action Level (the level where a life insurance enterprise must submit a comprehensive plan to state insurance regulators) as of December 31, 2014 and 2013.

The information below is taken from the PHL Variable annual statement filed with state regulatory authorities.

Statutory Financial Data: [1]
As of or for the years ended December 31,
($ in millions)
2014
 
2013
 
2012
 
 
 
 
 
 
Statutory capital and surplus
$
198.6

 
$
222.9

 
$
313.5

Asset valuation reserve
15.1

 
12.3

 
7.5

Statutory capital, surplus and asset valuation reserve
$
213.7

 
$
235.2

 
$
321.0

Statutory net gain (loss) from operations
$
(37.5
)
 
$
(67.6
)
 
$
61.9

Statutory net income (loss)
$
(41.1
)
 
$
(86.1
)
 
$
49.7

———————
[1]
Amounts in statements filed with state regulatory authorities may differ from audited financial statements.

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 2015 without prior approval.


17.
Contingent Liabilities

Litigation and arbitration

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

F-66
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
17.    Contingent Liabilities (continued)

It is not feasible to predict or determine the ultimate outcome of all legal or arbitration proceedings or to provide reasonable ranges of potential losses. Management of the Company believes that the outcome of our litigation and arbitration matters are not likely, either individually or in the aggregate, to have a material adverse effect on the financial condition of the Company. However, given the large or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation and arbitration, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on the results of operations or cash flows in particular quarterly or annual periods.

SEC Cease-and-Desist Order

Phoenix and the Company are subject to a Securities and Exchange Commission (the “SEC”) Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order, which was approved by the SEC in March 2014 (the “March 2014 Order”) and was subsequently amended by an amended SEC administrative order approved by the SEC in August 2014 (the March 2014 Order, as amended, the “Amended Order”). The Amended Order and the March 2014 Order (collectively, the “Orders”), directed Phoenix and the Company to cease and desist from committing or causing any violations and any future violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder and Section 15(d) of the Exchange Act and Rules 15d-1 and 15d-13 thereunder. Phoenix and the Company remain subject to these obligations. Pursuant to the Orders, Phoenix and the Company were required to file certain periodic SEC reports in accordance with the timetables set forth in the Orders. All of such filings have been made. Phoenix and the Company paid civil monetary penalties to the SEC in the aggregate amount of $1.1 million pursuant to the terms of the Orders.

Cases Brought by Policy Investors

On June 5, 2012, Wilmington Savings Fund Society, FSB, as successor in interest to Christiana Bank & Trust Company and as trustee of 60 unnamed trusts, filed suit against Phoenix, Phoenix Life and the Company in the United States District Court for the Central District of California; the case was later transferred to the District of Delaware (C.A. No. 13-499-RGA) by order dated March 28, 2013. After the plaintiffs twice amended their complaint, and dropped Phoenix as a defendant and dropped one of the plaintiff Trusts, the court issued an order on April 9, 2014 dismissing seven of the ten counts, and partially dismissing two more, with prejudice. The court dismissed claims alleging that Phoenix Life and the Company committed RICO violations and fraud by continuing to collect premiums while concealing an intent to later deny death claims. The claims that remain in the case seek a declaration that the policies at issue are valid, and damages relating to cost of insurance increases. This case has been settled, and the settlement does not have a material impact on the Company’s financial statements.

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

Cost of Insurance Cases

On November 18, 2011, Martin Fleisher and another plaintiff (the “Fleisher Litigation”), on behalf of themselves and others similarly situated, filed suit against Phoenix Life in the United States District Court for the Southern District of New York (C.A. No. 1:11-cv-08405-CM-JCF (U.S. Dist. Ct; S.D.N.Y.)) challenging COI rate adjustments implemented by Phoenix Life in 2010 and 2011, which Phoenix Life maintains were based on policy language permitting such adjustments. By order dated July 12, 2013, two separate classes were certified in the Fleisher Litigation; by subsequent order dated August 26, 2013, the court decertified one of the classes. The complaint seeks damages for breach of contract. The class certified in the court’s July 12, 2013 order, as limited by the court’s August 26, 2013 order, is limited to holders of Phoenix Life policies issued in New York subject to New York law and subject to Phoenix Life’s 2011 COI rate adjustment. By order dated April 29, 2014, the court denied Martin Fleisher’s motion for summary judgment in the Fleisher Litigation in its entirety, while granting in part and denying in part Phoenix Life’s motion for summary judgment.


F-67
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
17.    Contingent Liabilities (continued)

The Company, a subsidiary of Phoenix Life, has been named as a defendant in six actions challenging its COI rate adjustments implemented concurrently with the Phoenix Life adjustments. Five cases have been brought against the Company, while one case has been brought against the Company and Phoenix Life. These six cases, only one of which is styled as a class action, have been brought by (1) Tiger Capital LLC (C.A. No. 1:12-cv- 02939-CM-JCF; U.S. Dist. Ct; S.D.N.Y., complaint filed on March 14, 2012; the “Tiger Capital Litigation”); (2-5) U.S. Bank National Association, as securities intermediary for Lima Acquisition LP ((2: C.A. No. 1:12-cv-06811-CM-JCF; U.S. Dist. Ct; S.D.N.Y., complaint filed on November 16, 2011; 3: C.A. No. 1:13-cv-01580-CM-JCF; U.S. Dist. Ct; S.D.N.Y., complaint filed on March 8, 2013; collectively, the “U.S. Bank N.Y. Litigations”); (4: C.A. No. 3:14-cv-00555-WWE; U.S. Dist. Ct; D. Conn., complaint originally filed on March 6, 2013, in the District of Delaware and transferred by order dated April 22, 2014, to the District of Connecticut; and 5: C.A. No. 3:14-cv-01398-WWE, U.S. Dist. Ct; D. Conn., complaint filed on September 23, 2014, and amended on October 16, 2014, to add Phoenix Life as a defendant (collectively the “U.S. Bank Conn. Litigations”)); and (6) SPRR LLC (C.A. No. 1:14-cv-8714; U.S. Dist. Ct.; S.D.N.Y., complaint filed on October 31, 2014; the “SPRR Litigation”). SPRR LLC filed suit against the Company, on behalf of itself and others similarly situated, challenging COI rate adjustments implemented by the Company in 2011.

The Tiger Capital Litigation and the two U.S. Bank N.Y. Litigations were assigned to the same judge as the Fleisher Litigation, and discovery in these four actions has concluded. By orders in both U.S. Bank N.Y. Litigations dated May 23, 2014, the court denied U.S. Bank’s motions for summary judgment in their entirety, while granting in part and denying in part the Company’s motions for summary judgment. U.S. Bank moved for reconsideration of the court’s summary judgment decisions in the U.S. Bank N.Y. Litigations, which the court denied by orders dated June 4, 2014. By order in the Tiger Capital Litigation dated July 23, 2014, the court denied Tiger Capital’s motion for summary judgment in its entirety, while granting in part and denying in part the Company’s motion for summary judgment. Plaintiff in the Tiger Capital Litigation seeks damages for breach of contract. Plaintiff in the U.S. Bank N.Y. Litigations and the U.S. Bank Conn. Litigations seeks damages and attorneys’ fees for breach of contract and other common law and statutory claims. The plaintiff in the SPRR Litigation seeks damages for breach of contract for a nationwide class of policyholders.

The Fleisher Litigation, the U.S. Bank N.Y. Litigations and the Tiger Capital Litigation are scheduled for consecutive trials commencing on June 15, 2015.

Complaints to state insurance departments regarding the Company’s COI rate adjustments have also prompted regulatory inquiries or investigations in several states, with two of such states (California and Wisconsin) issuing letters directing the Company to take remedial action in response to complaints by a single policyholder. The Company disagrees with both states’ positions. On March 23, 2015, an Administrative Law Judge (“ALJ”) in Wisconsin ordered PHL Variable to pay restitution to current and former owners of seven policies and imposed a fine on PHL Variable which, in a total amount, does not have a material impact on PHL Variable’s financial position (Office of the Commissioner of Insurance Case No. 13- C35362). PHL Variable disagrees with the ALJ’s determination and intends to appeal the order.

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

Regulatory matters

State regulatory bodies, the SEC, the Financial Industry Regulatory Authority (“FINRA”), the IRS and other regulatory bodies regularly make inquiries of us and, from time to time, conduct examinations or investigations concerning our compliance with laws and regulations related to, among other things, our insurance and broker-dealer subsidiaries, securities offerings and registered products. We endeavor to respond to such inquiries in an appropriate way and to take corrective action if warranted. Further, Phoenix is providing to the SEC certain information and documentation regarding the restatement of its prior period financial statements and the staff of the SEC has indicated to Phoenix that the matter remains subject to further investigation and potential further regulatory action. We cannot predict the outcome of any of such investigations or actions related to these or other matters.


F-68
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
17.    Contingent Liabilities (continued)

Regulatory actions may be difficult to assess or quantify. The nature and magnitude of their outcomes may remain unknown for substantial periods of time. It is not feasible to predict or determine the ultimate outcome of all pending inquiries, investigations, legal proceedings and other regulatory actions, or to provide reasonable ranges of potential losses. Based on current information, we believe that the outcomes of our regulatory matters are not likely, either individually or in the aggregate, to have a material adverse effect on our financial condition. However, given the inherent unpredictability of regulatory matters, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on our financial statements in particular quarterly or annual periods.

State Insurance Department Examinations

During 2012 and 2013, the Connecticut Insurance Department conducted its routine financial and market conduct examination of the Company and two other Connecticut-domiciled insurance affiliates. The Connecticut Insurance Department released its financial examination report for the Company on May 28, 2014 and its market conduct examination report on December 29, 2014.

Unclaimed Property Inquiries

In late 2012, Phoenix and the Company and their affiliates received separate notices from Unclaimed Property Clearing House (“UPCH”) and Kelmar Associates, LLC (“Kelmar”) that UPCH and Kelmar had been authorized by the unclaimed property administrators in certain states to conduct unclaimed property audits. The audits began in 2013 and are being conducted on the Phoenix enterprise with a focus on death benefit payments; however, all amounts owed by any aspect of the Phoenix enterprise are also a focus. This includes any payments to vendors, brokers, former employees and shareholders. UPCH represents 31 states and the District of Columbia and Kelmar represents seven states.


18.
Supplemental Unaudited Quarterly Financial Information

The following tables reflect unaudited summarized quarterly financial results during the years ended December 31, 2014 and 2013.

Summarized Selected Quarterly Financial Data:
Quarter ended 2014
($ in millions)
Mar 31,
 
June 30,
 
Sept 30,
 
Dec 31,
 
 
 
 
 
 
 
 
Revenues
$
96.7

 
$
133.1

 
$
130.0

 
$
117.9

 
 
 
 
 
 
 
 
Benefits and expenses
$
112.3

 
$
131.5

 
$
137.0

 
$
202.4

 
 
 
 
 
 
 
 
Income tax expense (benefit)
$
(0.4
)
 
$
5.6

 
$
(11.8
)
 
$
10.4

 
 
 
 
 
 
 
 
Net income (loss)
$
(15.2
)
 
$
(4.0
)
 
$
4.8

 
$
(94.9
)
 
 
 
 
 
 
 
 
Less: Net (income) loss attributable to noncontrolling interests
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
Net income (loss) attributable to PHL Variable Insurance Company
$
(15.2
)
 
$
(4.0
)
 
$
4.8

 
$
(94.9
)


F-69
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


Summarized Selected Quarterly Financial Data:
Quarter ended 2013
($ in millions)
Mar 31,
 
June 30,
 
Sept 30,
 
Dec 31,
 
 
 
 
 
 
 
 
Revenues
$
110.0

 
$
134.9

 
$
128.0

 
$
145.9

 
 
 
 
 
 
 
 
Benefits and expenses
$
137.4

 
$
147.3

 
$
141.0

 
$
53.4

 
 
 
 
 
 
 
 
Income tax expense (benefit)
$
(1.9
)
 
$
(16.9
)
 
$
1.2

 
$
(7.1
)
 
 
 
 
 
 
 
 
Net income (loss)
$
(25.5
)
 
$
4.5

 
$
(14.2
)
 
$
99.6

 
 
 
 
 
 
 
 
Less: Net (income) loss attributable to noncontrolling interests
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
Net income (loss) attributable to PHL Variable Insurance Company
$
(25.5
)
 
$
4.5

 
$
(14.2
)
 
$
99.6



F-70
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


Quarterly Financial Data
Page
 
 
2014 Balance Sheet as of:
 
March 31, 2014, as revised
June 30, 2014, as revised
September 30, 2014, as revised
 
 
2014 Statement of Income and Comprehensive Income for the three months ended:
 
March 31, 2014, as revised
June 30, 2014, as revised
September 30, 2014, as revised
 
 
2014 Statement of Income and Comprehensive Income for the period ended:
 
June 30, 2014, as revised
September 30, 2014, as revised
 
 
2014 Statement of Cash Flows for the period ended:
 
March 31, 2014, as revised
June 30, 2014, as revised
September 30, 2014, as revised
 
 
2014 Statement of Changes in Stockholders’ Equity for the period ended:
 
March 31, 2014, as revised
June 30, 2014, as revised
September 30, 2014, as revised
 
 
2013 Balance Sheet as of:
 
March 31, 2013, as revised
June 30, 2013, as revised
September 30, 2013, as revised
 
 
2013 Statement of Income and Comprehensive Income for the three months ended:
 
March 31, 2013, as revised
June 30, 2013, as revised
September 30, 2013, as revised
 
 
2013 Statement of Income and Comprehensive Income for the period ended:
 
June 30, 2013, as revised
September 30, 2013, as revised
 
 
2013 Statement of Cash Flows for the period ended:
 
March 31, 2013, as revised
June 30, 2013, as revised
September 30, 2013, as revised
 
 
2013 Statement of Changes in Stockholders’ Equity for the period ended:
 
March 31, 2013, as revised
June 30, 2013, as revised
September 30, 2013, as revised


F-71
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions, except share data)
Balance Sheet
As of March 31, 2014
 
 
 
Correction of errors
 
 
 
As
reported
 
UL
unlock
 
Other
adjustments
 
As
revised
ASSETS:
 
 
 
 
 
 
 
Available-for-sale debt securities, at fair value
$
3,589.1

 
$
—

 
$
(11.1
)
 
$
3,578.0

Available-for-sale equity securities, at fair value
—

 
—

 
11.6

 
11.6

Short-term investments
190.9

 
—

 
—

 
190.9

Limited partnerships and other investments
10.7

 
—

 
—

 
10.7

Policy loans, at unpaid principal balances
67.3

 
—

 
—

 
67.3

Derivative instruments
167.6

 
—

 
(10.9
)
 
156.7

Fair value investments
48.2

 
—

 
—

 
48.2

Total investments
4,073.8

 
—

 
(10.4
)
 
4,063.4

Cash and cash equivalents
140.9

 
—

 
—

 
140.9

Accrued investment income
32.0

 
—

 
—

 
32.0

Reinsurance recoverable
472.3

 
(4.8
)
 
0.3

 
467.8

Deferred policy acquisition costs
446.2

 
3.0

 
5.6

 
454.8

Deferred income taxes, net
17.9

 
—

 
—

 
17.9

Receivable from related parties
5.6

 
—

 
7.6

 
13.2

Other assets
160.3

 
—

 
21.1

 
181.4

Separate account assets
1,979.3

 
—

 
—

 
1,979.3

Total assets
$
7,328.3

 
$
(1.8
)
 
$
24.2

 
$
7,350.7

 
 
 
 
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Policy liabilities and accruals
$
1,947.3

 
$
(11.2
)
 
$
(10.0
)
 
$
1,926.1

Policyholder deposit funds
2,875.6

 
—

 
15.3

 
2,890.9

Indebtedness due to affiliate
30.0

 
—

 
—

 
30.0

Payable to related parties
3.2

 
—

 
7.6

 
10.8

Other liabilities
140.1

 
—

 
8.7

 
148.8

Separate account liabilities
1,979.3

 
—

 
—

 
1,979.3

Total liabilities
6,975.5

 
(11.2
)
 
21.6

 
6,985.9

 
 
 
 
 
 
 
 
STOCKHOLDER’S EQUITY:
 
 
 
 
 
 
 
Common stock, $5,000 par value: 1,000 shares authorized; 500 shares issued
2.5

 
—

 
—

 
2.5

Additional paid-in capital
847.2

 
—

 
—

 
847.2

Accumulated other comprehensive income (loss)
(14.8
)
 
0.4

 
0.3

 
(14.1
)
Retained earnings (accumulated deficit)
(482.1
)
 
9.0

 
2.3

 
(470.8
)
Total stockholder’s equity
352.8

 
9.4

 
2.6

 
364.8

Total liabilities and stockholder’s equity
$
7,328.3

 
$
(1.8
)
 
$
24.2

 
$
7,350.7



F-72
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions)
Statement of Income and Comprehensive Income
For the three months ended March 31, 2014
 
 
 
Correction of errors
 
 
 
As
reported
 
UL
unlock
 
Other
adjustments
 
As
revised
REVENUES:
 
 
 
 
 
 
 
Premiums
$
2.8

 
$
—

 
$
—

 
$
2.8

Insurance and investment product fees
88.8

 
—

 
0.2

 
89.0

Net investment income
40.0

 
—

 
—

 
40.0

Net realized investment gains (losses):
 
 
 
 
 
 
 
Total other-than-temporary impairment (“OTTI”) losses
—

 
—

 
—

 
—

Portion of OTTI losses recognized in other comprehensive income (“OCI”)
—

 
—

 
—

 
—

Net OTTI losses recognized in earnings
—

 
—

 
—

 
—

Net realized investment gains (losses), excluding OTTI losses
(33.9
)
 
—

 
(1.2
)
 
(35.1
)
Net realized investment gains (losses)
(33.9
)
 
—

 
(1.2
)
 
(35.1
)
Total revenues
97.7

 
—

 
(1.0
)
 
96.7

 
 
 
 
 
 
 
 
BENEFITS AND EXPENSES:
 
 
 
 
 
 
 
Policy benefits
76.1

 
(0.2
)
 
(3.8
)
 
72.1

Policy acquisition cost amortization
16.3

 
0.1

 
0.3

 
16.7

Other operating expenses
24.0

 
—

 
(0.5
)
 
23.5

Total benefits and expenses
116.4

 
(0.1
)
 
(4.0
)
 
112.3

Income (loss) before income taxes
(18.7
)
 
0.1

 
3.0

 
(15.6
)
Income tax expense (benefit)
(1.9
)
 
—

 
1.5

 
(0.4
)
Net income (loss)
$
(16.8
)
 
$
0.1

 
$
1.5

 
$
(15.2
)
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
 
 
Net income (loss)
$
(16.8
)
 
$
0.1

 
$
1.5

 
$
(15.2
)
Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
11.1

 
0.3

 
1.6

 
13.0

Less: Income tax expense (benefit) related to:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
14.0

 
—

 
0.4

 
14.4

Other comprehensive income (loss), net of income taxes
(2.9
)
 
0.3

 
1.2

 
(1.4
)
Comprehensive income (loss)
$
(19.7
)
 
$
0.4

 
$
2.7

 
$
(16.6
)


F-73
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions)
Statement of Cash Flows
For the period ended March 31, 2014
 
As
reported
 
Other
adjustments
 
As
revised
OPERATING ACTIVITIES:
 
 
 
 
 
Net income (loss)
$
(16.8
)
 
$
1.6

 
$
(15.2
)
Net realized investment gains / losses
33.9

 
1.2

 
35.1

Policy acquisition costs deferred
(16.9
)
 
—

 
(16.9
)
Policy acquisition cost amortization
16.3

 
0.4

 
16.7

Interest credited
23.8

 
—

 
23.8

Equity in earnings of limited partnerships and other investments
(0.8
)
 
—

 
(0.8
)
Change in:
 
 
 
 
 
Accrued investment income
(5.9
)
 
—

 
(5.9
)
Deferred income taxes, net
(3.9
)
 
(0.5
)
 
(4.4
)
Reinsurance recoverable
28.3

 
(1.8
)
 
26.5

Policy liabilities and accruals
(78.3
)
 
(2.4
)
 
(80.7
)
Due to/from related parties
(13.9
)
 
—

 
(13.9
)
Other operating activities, net [1]
16.2

 
1.5

 
17.7

Cash provided by (used for) operating activities
(18.0
)
 
—

 
(18.0
)
 
 
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
 
 
Purchases of:
 
 
 
 
 
Available-for-sale debt securities
(151.4
)
 
—

 
(151.4
)
Available-for-sale equity securities
—

 
—

 
—

Short-term investments
(209.8
)
 
—

 
(209.8
)
Derivative instruments
(17.7
)
 
—

 
(17.7
)
Fair value investments
—

 
—

 
—

Sales, repayments and maturities of:
 
 
 
 
 
Available-for-sale debt securities
65.1

 
—

 
65.1

Available-for-sale equity securities
—

 
—

 
—

Short-term investments
99.9

 
—

 
99.9

Derivative instruments
30.1

 
—

 
30.1

Fair value investments
0.9

 
—

 
0.9

Contributions to limited partnerships and limited liability corporations
(0.5
)
 
—

 
(0.5
)
Distributions from limited partnerships and limited liability corporations
0.7

 
—

 
0.7

Policy loans, net
(0.7
)
 
—

 
(0.7
)
Other investing activities, net
(1.8
)
 
—

 
(1.8
)
Cash provided by (used for) investing activities
(185.2
)
 
—

 
(185.2
)

(Continued on next page)


F-74
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


(Continued from previous page)
($ in millions)
Statement of Cash Flows
For the period ended March 31, 2014
 
As
reported
 
Other
adjustments
 
As
revised
 
 
 
 
 
 
FINANCING ACTIVITIES:
 
 
 
 
 
Policyholder deposits
230.4

 
—

 
230.4

Policyholder withdrawals
(164.4
)
 
—

 
(164.4
)
Net transfers (to) from separate accounts
97.1

 
—

 
97.1

Cash provided by (used for) financing activities
163.1

 
—

 
163.1

Change in cash and cash equivalents
(40.1
)
 
—

 
(40.1
)
Cash and cash equivalents, beginning of period
181.0

 
—

 
181.0

Cash and cash equivalents, end of period
$
140.9

 
$
—

 
$
140.9

 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
 
Income taxes (paid) refunded
$
14.5

 
$
—

 
$
14.5

 
 
 
 
 
 
Non-Cash Transactions During the Period
 
 
 
 
 
Investment exchanges
$
8.9

 
$
—

 
$
8.9

———————
[1]
Includes receivables which were previously disclosed as a separate line item.


F-75
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions)
Statement of Changes in Stockholder's Equity
For the period ended March 31, 2014
 
As
reported
 
Correction
of errors
 
As
revised
COMMON STOCK:
 
 
 
 
 
Balance, beginning of period
$
2.5

 
$
—

 
$
2.5

Balance, end of period
$
2.5

 
$
—

 
$
2.5

 
 
 
 
 
 
ADDITIONAL PAID-IN CAPITAL:
 
 
 
 
 
Balance, beginning of period
$
847.2

 
$
—

 
$
847.2

Balance, end of period
$
847.2

 
$
—

 
$
847.2

 
 
 
 
 
 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
Balance, beginning of period
$
(11.9
)
 
$
(0.8
)
 
$
(12.7
)
Other comprehensive income (loss)
(2.9
)
 
1.5

 
(1.4
)
Balance, end of period
$
(14.8
)
 
$
0.7

 
$
(14.1
)
 
 
 
 
 
 
ACCUMULATED DEFICIT:
 
 
 
 
 
Balance, beginning of period
$
(465.3
)
 
$
9.7

 
$
(455.6
)
Net income (loss)
(16.8
)
 
1.6

 
(15.2
)
Balance, end of period
$
(482.1
)
 
$
11.3

 
$
(470.8
)
 
 
 
 
 
 
TOTAL STOCKHOLDER’S EQUITY:
 
 
 
 
 
Balance, beginning of period
$
372.5

 
$
8.9

 
$
381.4

Change in stockholder’s equity
(19.7
)
 
3.1

 
(16.6
)
Balance, end of period
$
352.8

 
$
12.0

 
$
364.8



F-76
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions, except share data)
Balance Sheet
As of June 30, 2014
 
 
 
Correction of errors
 
 
 
As
reported
 
UL
unlock
 
Other
adjustments
 
As
revised
ASSETS:
 
 
 
 
 
 
 
Available-for-sale debt securities, at fair value
$
3,840.9

 
$
—

 
$
(11.3
)
 
$
3,829.6

Available-for-sale equity securities, at fair value
—

 
—

 
11.9

 
11.9

Short-term investments
189.8

 
—

 
—

 
189.8

Limited partnerships and other investments
10.9

 
—

 
—

 
10.9

Policy loans, at unpaid principal balances
66.3

 
—

 
—

 
66.3

Derivative instruments
170.0

 
—

 
(10.7
)
 
159.3

Fair value investments
47.6

 
—

 
—

 
47.6

Total investments
4,325.5

 
—

 
(10.1
)
 
4,315.4

Cash and cash equivalents
154.9

 
—

 
—

 
154.9

Accrued investment income
29.5

 
—

 
—

 
29.5

Reinsurance recoverable
455.3

 
(4.8
)
 
1.0

 
451.5

Deferred policy acquisition costs
435.6

 
3.2

 
2.7

 
441.5

Deferred income taxes, net
11.1

 
—

 
—

 
11.1

Receivable from related parties
6.3

 
—

 
7.3

 
13.6

Other assets
156.8

 
—

 
17.2

 
174.0

Separate account assets
1,951.0

 
—

 
—

 
1,951.0

Total assets
$
7,526.0

 
$
(1.6
)
 
$
18.1

 
$
7,542.5

 
 
 
 
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Policy liabilities and accruals
$
1,969.5

 
$
(11.3
)
 
$
(0.6
)
 
$
1,957.6

Policyholder deposit funds
3,004.6

 
—

 
14.7

 
3,019.3

Indebtedness due to affiliate
30.0

 
—

 
—

 
30.0

Payable to related parties
8.0

 
—

 
7.3

 
15.3

Other liabilities
175.0

 
—

 
3.8

 
178.8

Separate account liabilities
1,951.0

 
—

 
—

 
1,951.0

Total liabilities
7,138.1

 
(11.3
)
 
25.2

 
7,152.0

 
 
 
 
 
 
 
 
STOCKHOLDER’S EQUITY:
 
 
 
 
 
 
 
Common stock, $5,000 par value: 1,000 shares authorized; 500 shares issued
2.5

 
—

 
—

 
2.5

Additional paid-in capital
847.2

 
—

 
—

 
847.2

Accumulated other comprehensive income (loss)
17.5

 
0.1

 
(2.0
)
 
15.6

Retained earnings (accumulated deficit)
(479.3
)
 
9.6

 
(5.1
)
 
(474.8
)
Total stockholder’s equity
387.9

 
9.7

 
(7.1
)
 
390.5

Total liabilities and stockholder’s equity
$
7,526.0

 
$
(1.6
)
 
$
18.1

 
$
7,542.5



F-77
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions)
Statement of Income and Comprehensive Income
For the three months ended June 30, 2014
 
 
 
Correction of errors
 
 
 
As
reported
 
UL
unlock
 
Other
adjustments
 
As
revised
REVENUES:
 
 
 
 
 
 
 
Premiums
$
4.7

 
$
—

 
$
—

 
$
4.7

Insurance and investment product fees
88.3

 
—

 
—

 
88.3

Net investment income
42.0

 
—

 
—

 
42.0

Net realized investment gains (losses):
 
 
 
 
 
 
 
Total other-than-temporary impairment (“OTTI”) losses
—

 
—

 
—

 
—

Portion of OTTI losses recognized in other comprehensive income (“OCI”)
—

 
—

 
—

 
—

Net OTTI losses recognized in earnings
—

 
—

 
—

 
—

Net realized investment gains (losses), excluding OTTI losses
(2.1
)
 
—

 
0.2

 
(1.9
)
Net realized investment gains (losses)
(2.1
)
 
—

 
0.2

 
(1.9
)
Total revenues
132.9

 
—

 
0.2

 
133.1

 
 
 
 
 
 
 
 
BENEFITS AND EXPENSES:
 
 
 
 
 
 
 
Policy benefits
81.0

 
(0.4
)
 
4.3

 
84.9

Policy acquisition cost amortization
16.4

 
(0.2
)
 
4.0

 
20.2

Other operating expenses
26.8

 
—

 
(0.4
)
 
26.4

Total benefits and expenses
124.2

 
(0.6
)
 
7.9

 
131.5

Income (loss) before income taxes
8.7

 
0.6

 
(7.7
)
 
1.6

Income tax expense (benefit)
5.9

 
—

 
(0.3
)
 
5.6

Net income (loss)
$
2.8

 
$
0.6

 
$
(7.4
)
 
$
(4.0
)
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
 
 
Net income (loss)
$
2.8

 
$
0.6

 
$
(7.4
)
 
$
(4.0
)
Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
38.7

 
(0.3
)
 
(1.8
)
 
36.6

Less: Income tax expense (benefit) related to:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
6.4

 
—

 
0.5

 
6.9

Other comprehensive income (loss), net of income taxes
32.3

 
(0.3
)
 
(2.3
)
 
29.7

Comprehensive income (loss)
$
35.1

 
$
0.3

 
$
(9.7
)
 
$
25.7



F-78
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions)
Statement of Income and Comprehensive Income
For the six months ended June 30, 2014
 
 
 
Correction of errors
 
 
 
As
reported
 
UL
unlock
 
Other
adjustments
 
As
revised
REVENUES:
 
 
 
 
 
 
 
Premiums
$
7.5

 
$
—

 
$
—

 
$
7.5

Insurance and investment product fees
177.1

 
—

 
0.2

 
177.3

Net investment income
82.0

 
—

 
—

 
82.0

Net realized investment gains (losses):
 
 
 
 
 
 
 
Total other-than-temporary impairment (“OTTI”) losses
—

 
—

 
—

 
—

Portion of OTTI losses recognized in other comprehensive income (“OCI”)
—

 
—

 
—

 
—

Net OTTI losses recognized in earnings
—

 
—

 
—

 
—

Net realized investment gains (losses), excluding OTTI losses
(36.0
)
 
—

 
(1.0
)
 
(37.0
)
Net realized investment gains (losses)
(36.0
)
 
—

 
(1.0
)
 
(37.0
)
Total revenues
230.6

 
—

 
(0.8
)
 
229.8

 
 
 
 
 
 
 
 
BENEFITS AND EXPENSES:
 
 
 
 
 
 
 
Policy benefits
157.1

 
(0.6
)
 
0.5

 
157.0

Policy acquisition cost amortization
32.7

 
(0.1
)
 
4.3

 
36.9

Other operating expenses
50.8

 
—

 
(0.9
)
 
49.9

Total benefits and expenses
240.6

 
(0.7
)
 
3.9

 
243.8

Income (loss) before income taxes
(10.0
)
 
0.7

 
(4.7
)
 
(14.0
)
Income tax expense (benefit)
4.0

 
—

 
1.2

 
5.2

Net income (loss)
$
(14.0
)
 
$
0.7

 
$
(5.9
)
 
$
(19.2
)
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
 
 
Net income (loss)
$
(14.0
)
 
$
0.7

 
$
(5.9
)
 
$
(19.2
)
Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
49.8

 
—

 
(0.2
)
 
49.6

Less: Income tax expense (benefit) related to:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
20.4

 
—

 
0.9

 
21.3

Other comprehensive income (loss), net of income taxes
29.4

 
—

 
(1.1
)
 
28.3

Comprehensive income (loss)
$
15.4

 
$
0.7

 
$
(7.0
)
 
$
9.1



F-79
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions)
Statement of Cash Flows
For the period ended June 30, 2014
 
As
reported
 
Correction
of errors
 
As
revised
OPERATING ACTIVITIES:
 
 
 
 
 
Net income (loss)
$
(14.0
)
 
$
(5.2
)
 
$
(19.2
)
Net realized investment gains / losses
36.0

 
1.0

 
37.0

Policy acquisition costs deferred
(37.2
)
 
(1.1
)
 
(38.3
)
Policy acquisition cost amortization
32.7

 
4.2

 
36.9

Interest credited
46.7

 
—

 
46.7

Equity in earnings of limited partnerships and other investments
(1.3
)
 
—

 
(1.3
)
Change in:
 
 
 
 
 
Accrued investment income
(6.1
)
 
—

 
(6.1
)
Deferred income taxes, net
(3.6
)
 
(1.1
)
 
(4.7
)
Reinsurance recoverable
45.3

 
(2.5
)
 
42.8

Policy liabilities and accruals
(138.4
)
 
2.1

 
(136.3
)
Due to/from related parties
(9.8
)
 
—

 
(9.8
)
Other operating activities, net [1]
21.7

 
2.6

 
24.3

Cash provided by (used for) operating activities
(28.0
)
 
—

 
(28.0
)
 
 
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
 
 
Purchases of:
 
 
 
 
 
Available-for-sale debt securities
(375.6
)
 
—

 
(375.6
)
Available-for-sale equity securities
—

 
—

 
—

Short-term investments
(449.6
)
 
—

 
(449.6
)
Derivative instruments
(26.3
)
 
—

 
(26.3
)
Fair value investments
—

 
—

 
—

Sales, repayments and maturities of:
 
 
 
 
 
Available-for-sale debt securities
138.3

 
—

 
138.3

Available-for-sale equity securities
—

 
—

 
—

Short-term investments
340.8

 
—

 
340.8

Derivative instruments
42.3

 
—

 
42.3

Fair value investments
1.8

 
—

 
1.8

Contributions to limited partnerships and limited liability corporations
(7.1
)
 
—

 
(7.1
)
Distributions from limited partnerships and limited liability corporations
0.9

 
—

 
0.9

Policy loans, net
0.8

 
—

 
0.8

Other investing activities, net
(4.1
)
 
—

 
(4.1
)
Cash provided by (used for) investing activities
(337.8
)
 
—

 
(337.8
)

(Continued on next page)


F-80
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


(Continued from previous page)
($ in millions)
Statement of Cash Flows
For the period ended June 30, 2014
 
As
reported
 
Other
adjustments
 
As
revised
FINANCING ACTIVITIES:
 
 
 
 
 
Policyholder deposits
483.3

 
—

 
483.3

Policyholder withdrawals
(324.2
)
 
—

 
(324.2
)
Net transfers (to) from separate accounts
180.6

 
—

 
180.6

Cash provided by (used for) financing activities
339.7

 
—

 
339.7

Change in cash and cash equivalents
(26.1
)
 
—

 
(26.1
)
Cash and cash equivalents, beginning of period
181.0

 
—

 
181.0

Cash and cash equivalents, end of period
$
154.9

 
$
—

 
$
154.9

 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
 
Income taxes (paid) refunded
$
14.5

 
$
—

 
$
14.5

 
 
 
 
 
 
Non-Cash Transactions During the Period
 
 
 
 
 
Investment exchanges
$
8.9

 
$
—

 
$
8.9

———————
[1]
Includes receivables which were previously disclosed as a separate line item.


F-81
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions)
Statement of Changes in Stockholder's Equity
For the period ended June 30, 2014
 
As
reported
 
Correction
of errors
 
As
revised
COMMON STOCK:
 
 
 
 
 
Balance, beginning of period
$
2.5

 
$
—

 
$
2.5

Balance, end of period
$
2.5

 
$
—

 
$
2.5

 
 
 
 
 
 
ADDITIONAL PAID-IN CAPITAL:
 
 
 
 
 
Balance, beginning of period
$
847.2

 
$
—

 
$
847.2

Balance, end of period
$
847.2

 
$
—

 
$
847.2

 
 
 
 
 
 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
Balance, beginning of period
$
(11.9
)
 
$
(0.8
)
 
$
(12.7
)
Other comprehensive income (loss)
29.4

 
(1.1
)
 
28.3

Balance, end of period
$
17.5

 
$
(1.9
)
 
$
15.6

 
 
 
 
 
 
ACCUMULATED DEFICIT:
 
 
 
 
 
Balance, beginning of period
$
(465.3
)
 
$
9.7

 
$
(455.6
)
Net income (loss)
(14.0
)
 
(5.2
)
 
(19.2
)
Balance, end of period
$
(479.3
)
 
$
4.5

 
$
(474.8
)
 
 
 
 
 
 
TOTAL STOCKHOLDER’S EQUITY:
 
 
 
 
 
Balance, beginning of period
$
372.5

 
$
8.9

 
$
381.4

Change in stockholder’s equity
15.4

 
(6.3
)
 
9.1

Balance, end of period
$
387.9

 
$
2.6

 
$
390.5



F-82
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions, except share data)
Balance Sheet
As of September 30, 2014
 
 
 
Correction of errors
 
 
 
As
reported
 
UL
unlock
 
Other
adjustments
 
As
revised
ASSETS:
 
 
 
 
 
 
 
Available-for-sale debt securities, at fair value
$
4,076.2

 
$
—

 
$
(26.9
)
 
$
4,049.3

Available-for-sale equity securities, at fair value
—

 
—

 
27.7

 
27.7

Short-term investments
—

 
—

 
—

 
—

Limited partnerships and other investments
10.9

 
—

 
—

 
10.9

Policy loans, at unpaid principal balances
67.5

 
—

 
—

 
67.5

Derivative instruments
144.8

 
—

 
(9.9
)
 
134.9

Fair value investments
47.1

 
—

 
—

 
47.1

Total investments
4,346.5

 
—

 
(9.1
)
 
4,337.4

Cash and cash equivalents
206.1

 
—

 
—

 
206.1

Accrued investment income
34.7

 
—

 
—

 
34.7

Reinsurance recoverable
456.6

 
(4.8
)
 
0.8

 
452.6

Deferred policy acquisition costs
445.0

 
2.9

 
3.6

 
451.5

Deferred income taxes, net
12.8

 
—

 
—

 
12.8

Receivable from related parties
2.0

 
—

 
4.4

 
6.4

Other assets
193.1

 
—

 
11.0

 
204.1

Separate account assets
1,816.3

 
—

 
—

 
1,816.3

Total assets
$
7,513.1

 
$
(1.9
)
 
$
10.7

 
$
7,521.9

 
 
 
 
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Policy liabilities and accruals
$
1,988.1

 
$
(11.5
)
 
$
(1.8
)
 
$
1,974.8

Policyholder deposit funds
3,164.1

 
—

 
17.1

 
3,181.2

Indebtedness due to affiliate
30.0

 
—

 
—

 
30.0

Payable to related parties
11.3

 
—

 
—

 
11.3

Other liabilities
120.8

 
—

 
(0.9
)
 
119.9

Separate account liabilities
1,816.3

 
—

 
—

 
1,816.3

Total liabilities
7,130.6

 
(11.5
)
 
14.4

 
7,133.5

 
 
 
 
 
 
 
 
STOCKHOLDER’S EQUITY:
 
 
 
 
 
 
 
Common stock, $5,000 par value: 1,000 shares authorized; 500 shares issued
2.5

 
—

 
—

 
2.5

Additional paid-in capital
847.2

 
—

 
—

 
847.2

Accumulated other comprehensive income (loss)
8.8

 
0.1

 
(0.2
)
 
8.7

Retained earnings (accumulated deficit)
(476.0
)
 
9.5

 
(3.5
)
 
(470.0
)
Total stockholder’s equity
382.5

 
9.6

 
(3.7
)
 
388.4

Total liabilities and stockholder’s equity
$
7,513.1

 
$
(1.9
)
 
$
10.7

 
$
7,521.9



F-83
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions)
Statement of Income and Comprehensive Income
For the three months ended September 30, 2014
 
 
 
Correction of errors
 
 
 
As
reported
 
UL
unlock
 
Other
adjustments
 
As
revised
REVENUES:
 
 
 
 
 
 
 
Premiums
$
3.0

 
$
—

 
$
—

 
$
3.0

Insurance and investment product fees
88.6

 


 
0.1

 
88.7

Net investment income
44.1

 
—

 
—

 
44.1

Net realized investment gains (losses):
 
 
 
 
 
 
 
Total other-than-temporary impairment (“OTTI”) losses
(0.5
)
 
—

 
—

 
(0.5
)
Portion of OTTI losses recognized in other comprehensive income (“OCI”)
—

 
—

 
—

 
—

Net OTTI losses recognized in earnings
(0.5
)
 
—

 
—

 
(0.5
)
Net realized investment gains (losses), excluding OTTI losses
(2.7
)
 
—

 
(2.6
)
 
(5.3
)
Net realized investment gains (losses)
(3.2
)
 
—

 
(2.6
)
 
(5.8
)
Total revenues
132.5

 
—

 
(2.5
)
 
130.0

 
 
 
 
 
 
 
 
BENEFITS AND EXPENSES:
 
 
 
 
 
 
 
Policy benefits
96.9

 
(0.3
)
 
(1.0
)
 
95.6

Policy acquisition cost amortization
19.7

 
0.3

 
—

 
20.0

Other operating expenses
28.1

 
—

 
(6.7
)
 
21.4

Total benefits and expenses
144.7

 
—

 
(7.7
)
 
137.0

Income (loss) before income taxes
(12.2
)
 
—

 
5.2

 
(7.0
)
Income tax expense (benefit)
(15.5
)
 
—

 
3.7

 
(11.8
)
Net income (loss)
$
3.3

 
$
—

 
$
1.5

 
$
4.8

 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
 
 
Net income (loss)
$
3.3

 
$
—

 
$
1.5

 
$
4.8

Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
(6.2
)
 
(0.1
)
 
0.2

 
(6.1
)
Less: Income tax expense (benefit) related to:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
2.5

 
—

 
(1.7
)
 
0.8

Other comprehensive income (loss), net of income taxes
(8.7
)
 
(0.1
)
 
1.9

 
(6.9
)
Comprehensive income (loss)
$
(5.4
)
 
$
(0.1
)
 
$
3.4

 
$
(2.1
)


F-84
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions)
Statement of Income and Comprehensive Income
For the nine months ended September 30, 2014
 
 
 
Correction of errors
 
 
 
As
reported
 
UL
unlock
 
Other
adjustments
 
As
revised
REVENUES:
 
 
 
 
 
 
 
Premiums
$
10.5

 
$
—

 
$
—

 
$
10.5

Insurance and investment product fees
265.7

 
—

 
0.3

 
266.0

Net investment income
126.1

 
—

 
—

 
126.1

Net realized investment gains (losses):
 
 
 
 
 
 
 
Total other-than-temporary impairment (“OTTI”) losses
(0.5
)
 
—

 
—

 
(0.5
)
Portion of OTTI losses recognized in other comprehensive income (“OCI”)
—

 
—

 
—

 
—

Net OTTI losses recognized in earnings
(0.5
)
 
—

 
—

 
(0.5
)
Net realized investment gains (losses), excluding OTTI losses
(38.7
)
 
—

 
(3.6
)
 
(42.3
)
Net realized investment gains (losses)
(39.2
)
 
—

 
(3.6
)
 
(42.8
)
Total revenues
363.1

 
—

 
(3.3
)
 
359.8

 
 
 
 
 
 
 
 
BENEFITS AND EXPENSES:
 
 
 
 
 
 
 
Policy benefits
254.0

 
(0.9
)
 
(0.5
)
 
252.6

Policy acquisition cost amortization
52.4

 
0.2

 
4.3

 
56.9

Other operating expenses
78.9

 
—

 
(7.6
)
 
71.3

Total benefits and expenses
385.3

 
(0.7
)
 
(3.8
)
 
380.8

Income (loss) before income taxes
(22.2
)
 
0.7

 
0.5

 
(21.0
)
Income tax expense (benefit)
(11.5
)
 
—

 
4.9

 
(6.6
)
Net income (loss)
$
(10.7
)
 
$
0.7

 
$
(4.4
)
 
$
(14.4
)
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
 
 
Net income (loss)
$
(10.7
)
 
$
0.7

 
$
(4.4
)
 
$
(14.4
)
Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
43.6

 
(0.1
)
 
—

 
43.5

Less: Income tax expense (benefit) related to:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
22.9

 
—

 
(0.8
)
 
22.1

Other comprehensive income (loss), net of income taxes
20.7

 
(0.1
)
 
0.8

 
21.4

Comprehensive income (loss)
$
10.0

 
$
0.6

 
$
(3.6
)
 
$
7.0



F-85
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions)
Statement of Cash Flows
For the period ended September 30, 2014
 
As
reported
 
Correction
of errors
 
As
revised
OPERATING ACTIVITIES:
 
 
 
 
 
Net income (loss)
$
(10.7
)
 
$
(3.7
)
 
$
(14.4
)
Net realized investment gains / losses
39.2

 
3.6

 
42.8

Policy acquisition costs deferred
(61.2
)
 
(2.1
)
 
(63.3
)
Policy acquisition cost amortization
52.4

 
4.5

 
56.9

Interest credited
78.2

 
—

 
78.2

Equity in earnings of limited partnerships and other investments
(1.9
)
 
—

 
(1.9
)
Change in:
 
 
 
 
 
Accrued investment income
(14.2
)
 
—

 
(14.2
)
Deferred income taxes, net
(7.8
)
 
0.7

 
(7.1
)
Reinsurance recoverable
44.0

 
(2.3
)
 
41.7

Policy liabilities and accruals
(189.2
)
 
0.6

 
(188.6
)
Due to/from related parties
(2.2
)
 
—

 
(2.2
)
Other operating activities, net [1]
1.7

 
(1.3
)
 
0.4

Cash provided by (used for) operating activities
(71.7
)
 
—

 
(71.7
)
 
 
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
 
 
Purchases of:
 
 
 
 
 
Available-for-sale debt securities
(822.9
)
 
17.2

 
(805.7
)
Available-for-sale equity securities
—

 
(17.2
)
 
(17.2
)
Short-term investments
(624.3
)
 
—

 
(624.3
)
Derivative instruments
(44.6
)
 
—

 
(44.6
)
Fair value investments
—

 
—

 
—

Sales, repayments and maturities of:
 
 
 
 
 
Available-for-sale debt securities
284.4

 
(1.0
)
 
283.4

Available-for-sale equity securities
—

 
1.0

 
1.0

Short-term investments
705.4

 
—

 
705.4

Derivative instruments
61.8

 
—

 
61.8

Fair value investments
2.5

 
—

 
2.5

Contributions to limited partnerships and limited liability corporations
(7.2
)
 
—

 
(7.2
)
Distributions from limited partnerships and limited liability corporations
1.5

 
—

 
1.5

Policy loans, net
0.3

 
—

 
0.3

Other investing activities, net
(4.1
)
 
—

 
(4.1
)
Cash provided by (used for) investing activities
(447.2
)
 
—

 
(447.2
)

(Continued on next page)


F-86
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


(Continued from previous page)
($ in millions)
Statement of Cash Flows
For the period ended September 30, 2014
 
As
reported
 
Other
adjustments
 
As
revised
FINANCING ACTIVITIES:
 
 
 
 
 
Policyholder deposits
759.9

 
—

 
759.9

Policyholder withdrawals
(480.1
)
 
—

 
(480.1
)
Net transfers (to) from separate accounts
264.2

 
—

 
264.2

Cash provided by (used for) financing activities
544.0

 
—

 
544.0

Change in cash and cash equivalents
25.1

 
—

 
25.1

Cash and cash equivalents, beginning of period
181.0

 
—

 
181.0

Cash and cash equivalents, end of period
$
206.1

 
$
—

 
$
206.1

 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
 
Income taxes (paid) refunded
$
1.8

 
$
—

 
$
1.8

 
 
 
 
 
 
Non-Cash Transactions During the Period
 
 
 
 
 
Investment exchanges
$
8.9

 
$
—

 
$
8.9

———————
[1]
Includes receivables which were previously disclosed as a separate line item.


F-87
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions)
Statement of Changes in Stockholder's Equity
For the period ended September 30, 2014
 
As
reported
 
Correction
of errors
 
As
revised
COMMON STOCK:
 
 
 
 
 
Balance, beginning of period
$
2.5

 
$
—

 
$
2.5

Balance, end of period
$
2.5

 
$
—

 
$
2.5

 
 
 
 
 
 
ADDITIONAL PAID-IN CAPITAL:
 
 
 
 
 
Balance, beginning of period
$
847.2

 
$
—

 
$
847.2

Balance, end of period
$
847.2

 
$
—

 
$
847.2

 
 
 
 
 
 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
Balance, beginning of period
$
(11.9
)
 
$
(0.8
)
 
$
(12.7
)
Other comprehensive income (loss)
20.7

 
0.7

 
21.4

Balance, end of period
$
8.8

 
$
(0.1
)
 
$
8.7

 
 
 
 
 
 
ACCUMULATED DEFICIT:
 
 
 
 
 
Balance, beginning of period
$
(465.3
)
 
$
9.7

 
$
(455.6
)
Net income (loss)
(10.7
)
 
(3.7
)
 
(14.4
)
Balance, end of period
$
(476.0
)
 
$
6.0

 
$
(470.0
)
 
 
 
 
 
 
TOTAL STOCKHOLDER’S EQUITY:
 
 
 
 
 
Balance, beginning of period
$
372.5

 
$
8.9

 
$
381.4

Change in stockholder’s equity
10.0

 
(3.0
)
 
7.0

Balance, end of period
$
382.5

 
$
5.9

 
$
388.4



F-88
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions, except share data)
Balance Sheet
As of March 31, 2013
 
 
 
Correction of errors
 
 
 
As
reported
 
UL
unlock
 
Other
adjustments
 
As
revised
ASSETS:
 
 
 
 
 
 
 
Available-for-sale debt securities, at fair value
$
3,054.7

 
$
—

 
$
(4.8
)
 
$
3,049.9

Available-for-sale equity securities, at fair value
—

 
—

 
5.6

 
5.6

Short-term investments
224.9

 
—

 
—

 
224.9

Limited partnerships and other investments
5.7

 
—

 
—

 
5.7

Policy loans, at unpaid principal balances
61.5

 
—

 
—

 
61.5

Derivative instruments
186.6

 
—

 
(10.8
)
 
175.8

Fair value investments
46.5

 
—

 
—

 
46.5

Total investments
3,579.9

 
—

 
(10.0
)
 
3,569.9

Cash and cash equivalents
116.2

 
—

 
—

 
116.2

Accrued investment income
29.0

 
—

 
—

 
29.0

Reinsurance recoverable
444.1

 
—

 
0.6

 
444.7

Deferred policy acquisition costs
433.6

 
—

 
(3.0
)
 
430.6

Deferred income taxes, net
13.4

 
—

 
—

 
13.4

Receivable from related parties
—

 
—

 
—

 
—

Other assets
172.0

 
—

 
11.7

 
183.7

Separate account assets
2,109.5

 
—

 
—

 
2,109.5

Total assets
$
6,897.7

 
$
—

 
$
(0.7
)
 
$
6,897.0

 
 
 
 
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Policy liabilities and accruals
$
1,930.8

 
$
—

 
$
(4.4
)
 
$
1,926.4

Policyholder deposit funds
2,468.1

 
—

 
6.1

 
2,474.2

Indebtedness due to affiliate
—

 
—

 
—

 
—

Payable to related parties
15.5

 
—

 
—

 
15.5

Other liabilities
115.1

 
—

 
0.8

 
115.9

Separate account liabilities
2,109.5

 
—

 
—

 
2,109.5

Total liabilities
6,639.0

 
—

 
2.5

 
6,641.5

 
 
 
 
 
 
 
 
STOCKHOLDER’S EQUITY:
 
 
 
 
 
 
 
Common stock, $5,000 par value: 1,000 shares authorized; 500 shares issued
2.5

 
—

 
—

 
2.5

Additional paid-in capital
802.2

 
—

 
—

 
802.2

Accumulated other comprehensive income (loss)
(4.6
)
 
—

 
0.9

 
(3.7
)
Retained earnings (accumulated deficit)
(541.4
)
 
—

 
(4.1
)
 
(545.5
)
Total stockholder’s equity
258.7

 
—

 
(3.2
)
 
255.5

Total liabilities and stockholder’s equity
$
6,897.7

 
$
—

 
$
(0.7
)
 
$
6,897.0



F-89
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions)
Statement of Income and Comprehensive Income
For the three months ended March 31, 2013
 
 
 
Correction of errors
 
 
 
As
reported
 
UL
unlock
 
Other
adjustments
 
As
revised
REVENUES:
 
 
 
 
 
 
 
Premiums
$
3.1

 
$
—

 
$
—

 
$
3.1

Insurance and investment product fees
90.1

 
—

 
—

 
90.1

Net investment income
33.0

 
—

 
0.2

 
33.2

Net realized investment gains (losses):
 
 
 
 
 
 
 
Total other-than-temporary impairment (“OTTI”) losses
(0.3
)
 
—

 
0.1

 
(0.2
)
Portion of OTTI losses recognized in other comprehensive income (“OCI”)
(0.7
)
 
—

 
—

 
(0.7
)
Net OTTI losses recognized in earnings
(1.0
)
 
—

 
0.1

 
(0.9
)
Net realized investment gains (losses), excluding OTTI losses
(16.4
)
 
—

 
0.9

 
(15.5
)
Net realized investment gains (losses)
(17.4
)
 
—

 
1.0

 
(16.4
)
Total revenues
108.8

 
—

 
1.2

 
110.0

 
 
 
 
 
 
 
 
BENEFITS AND EXPENSES:
 
 
 
 
 
 
 
Policy benefits
88.5

 
—

 
2.2

 
90.7

Policy acquisition cost amortization
14.0

 
—

 
2.3

 
16.3

Other operating expenses
28.6

 
—

 
1.8

 
30.4

Total benefits and expenses
131.1

 
—

 
6.3

 
137.4

Income (loss) before income taxes
(22.3
)
 
—

 
(5.1
)
 
(27.4
)
Income tax expense (benefit)
(1.9
)
 
—

 
—

 
(1.9
)
Net income (loss)
$
(20.4
)
 
$
—

 
$
(5.1
)
 
$
(25.5
)
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
 
 
Net income (loss)
$
(20.4
)
 
$
—

 
$
(5.1
)
 
$
(25.5
)
Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
(13.3
)
 
—

 
3.5

 
(9.8
)
Less: Income tax expense (benefit) related to:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
2.7

 
—

 
—

 
2.7

Other comprehensive income (loss), net of income taxes
(16.0
)
 
—

 
3.5

 
(12.5
)
Comprehensive income (loss)
$
(36.4
)
 
$
—

 
$
(1.6
)
 
$
(38.0
)


F-90
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions)
Statement of Cash Flows
For the period ended March 31, 2013
 
As
reported
 
Correction
of errors
 
As
revised
OPERATING ACTIVITIES:
 
 
 
 
 
Net income (loss)
$
(20.4
)
 
$
(5.1
)
 
$
(25.5
)
Net realized investment gains / losses
17.4

 
(1.0
)
 
16.4

Policy acquisition costs deferred
(17.2
)
 
—

 
(17.2
)
Policy acquisition cost amortization
14.0

 
2.3

 
16.3

Interest credited
18.4

 
—

 
18.4

Equity in earnings of limited partnerships and other investments
0.8

 
—

 
0.8

Change in:
 
 
 
 
 
Accrued investment income
(6.8
)
 
(0.2
)
 
(7.0
)
Deferred income taxes, net
—

 
—

 
—

Reinsurance recoverable
(17.0
)
 
22.0

 
5.0

Policy liabilities and accruals
(55.5
)
 
(19.7
)
 
(75.2
)
Due to/from related parties
4.5

 
—

 
4.5

Other operating activities, net [1]
10.0

 
1.7

 
11.7

Cash provided by (used for) operating activities
(51.8
)
 
—

 
(51.8
)
 
 
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
 
 
Purchases of:
 
 
 
 
 
Available-for-sale debt securities
(155.0
)
 
2.0

 
(153.0
)
Available-for-sale equity securities
—

 
(2.0
)
 
(2.0
)
Short-term investments
(224.8
)
 
—

 
(224.8
)
Derivative instruments
(35.1
)
 
—

 
(35.1
)
Fair value investments
(9.8
)
 
—

 
(9.8
)
Sales, repayments and maturities of:
 
 
 
 
 
Available-for-sale debt securities
73.4

 
—

 
73.4

Available-for-sale equity securities
—

 
—

 
—

Short-term investments
244.9

 
—

 
244.9

Derivative instruments
7.7

 
—

 
7.7

Fair value investments
1.7

 
—

 
1.7

Contributions to limited partnerships and limited liability corporations
(0.3
)
 
—

 
(0.3
)
Distributions from limited partnerships and limited liability corporations
—

 
—

 
—

Policy loans, net
0.2

 
—

 
0.2

Other investing activities, net
0.1

 
—

 
0.1

Cash provided by (used for) investing activities
(97.0
)
 
—

 
(97.0
)

(Continued on next page)


F-91
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


(Continued from previous page)
($ in millions)
Statement of Cash Flows
For the period ended March 31, 2013
 
As
reported
 
Correction
of errors
 
As
revised
FINANCING ACTIVITIES:
 
 
 
 
 
Policyholder deposits
247.2

 
—

 
247.2

Policyholder withdrawals
(135.3
)
 
—

 
(135.3
)
Net transfers (to) from separate accounts
70.0

 
—

 
70.0

Cash provided by (used for) financing activities
181.9

 
—

 
181.9

Change in cash and cash equivalents
33.1

 
—

 
33.1

Cash and cash equivalents, beginning of period
83.1

 
—

 
83.1

Cash and cash equivalents, end of period
$
116.2

 
$
—

 
$
116.2

 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
 
Income taxes (paid) refunded
$
3.7

 
$
—

 
$
3.7

 
 
 
 
 
 
Non-Cash Transactions During the Period
 
 
 
 
 
Investment exchanges
$
19.0

 
$
—

 
$
19.0

———————
[1]
Includes receivables which were previously disclosed as a separate line item.


F-92
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions)
Statement of Changes in Stockholder's Equity
For the period ended March 31, 2013
 
As
reported
 
Correction
of errors
 
As
revised
COMMON STOCK:
 
 
 
 
 
Balance, beginning of period
$
2.5

 
$
—

 
$
2.5

Balance, end of period
$
2.5

 
$
—

 
$
2.5

 
 
 
 
 
 
ADDITIONAL PAID-IN CAPITAL:
 
 
 
 
 
Balance, beginning of period
$
802.2

 
$
—

 
$
802.2

Balance, end of period
$
802.2

 
$
—

 
$
802.2

 
 
 
 
 
 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
Balance, beginning of period
$
11.4

 
$
(2.6
)
 
$
8.8

Other comprehensive income (loss)
(16.0
)
 
3.5

 
(12.5
)
Balance, end of period
$
(4.6
)
 
$
0.9

 
$
(3.7
)
 
 
 
 
 
 
ACCUMULATED DEFICIT:
 
 
 
 
 
Balance, beginning of period
$
(521.0
)
 
$
1.0

 
$
(520.0
)
Net income (loss)
(20.4
)
 
(5.1
)
 
(25.5
)
Balance, end of period
$
(541.4
)
 
$
(4.1
)
 
$
(545.5
)
 
 
 
 
 
 
TOTAL STOCKHOLDER’S EQUITY:
 
 
 
 
 
Balance, beginning of period
$
295.1

 
$
(1.6
)
 
$
293.5

Change in stockholder’s equity
(36.4
)
 
(1.6
)
 
(38.0
)
Balance, end of period
$
258.7

 
$
(3.2
)
 
$
255.5



F-93
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions, except share data)
Balance Sheet
As of June 30, 2013
 
 
 
Correction of errors
 
 
 
As
reported
 
UL
unlock
 
Other
adjustments
 
As
revised
ASSETS:
 
 
 
 
 
 
 
Available-for-sale debt securities, at fair value
$
3,162.2

 
$
—

 
$
(7.4
)
 
$
3,154.8

Available-for-sale equity securities, at fair value
—

 
—

 
7.8

 
7.8

Short-term investments
165.0

 
—

 
—

 
165.0

Limited partnerships and other investments
7.2

 
—

 
—

 
7.2

Policy loans, at unpaid principal balances
62.8

 
—

 
—

 
62.8

Derivative instruments
199.3

 
—

 
(15.7
)
 
183.6

Fair value investments
48.8

 
—

 
—

 
48.8

Total investments
3,645.3

 
—

 
(15.3
)
 
3,630.0

Cash and cash equivalents
123.9

 
—

 
—

 
123.9

Accrued investment income
25.7

 
—

 
—

 
25.7

Reinsurance recoverable
455.5

 
—

 
0.6

 
456.1

Deferred policy acquisition costs
463.1

 
—

 
(1.2
)
 
461.9

Deferred income taxes, net
25.5

 
—

 
—

 
25.5

Receivable from related parties
6.0

 
—

 
—

 
6.0

Other assets
191.0

 
—

 
15.3

 
206.3

Separate account assets
2,021.3

 
—

 
—

 
2,021.3

Total assets
$
6,957.3

 
$
—

 
$
(0.6
)
 
$
6,956.7

 
 
 
 
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Policy liabilities and accruals
$
1,926.5

 
$
—

 
$
(2.8
)
 
$
1,923.7

Policyholder deposit funds
2,566.5

 
—

 
8.1

 
2,574.6

Indebtedness due to affiliate
—

 
—

 
—

 
—

Payable to related parties
18.3

 
—

 
—

 
18.3

Other liabilities
161.4

 
—

 
—

 
161.4

Separate account liabilities
2,021.3

 
—

 
—

 
2,021.3

Total liabilities
6,694.0

 
—

 
5.3

 
6,699.3

 
 
 
 
 
 
 
 
STOCKHOLDER’S EQUITY:
 
 
 
 
 
 
 
Common stock, $5,000 par value: 1,000 shares authorized; 500 shares issued
2.5

 
—

 
—

 
2.5

Additional paid-in capital
802.2

 
—

 
—

 
802.2

Accumulated other comprehensive income (loss)
(4.6
)
 
—

 
(1.7
)
 
(6.3
)
Retained earnings (accumulated deficit)
(536.8
)
 
—

 
(4.2
)
 
(541.0
)
Total stockholder’s equity
263.3

 
—

 
(5.9
)
 
257.4

Total liabilities and stockholder’s equity
$
6,957.3

 
$
—

 
$
(0.6
)
 
$
6,956.7



F-94
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions)
Statement of Income and Comprehensive Income
For the three months ended June 30, 2013
 
 
 
Correction of errors
 
 
 
As
reported
 
UL
unlock
 
Other
adjustments
 
As
revised
REVENUES:
 
 
 
 
 
 
 
Premiums
$
5.1

 
$
—

 
$
—

 
$
5.1

Insurance and investment product fees
87.2

 
—

 
—

 
87.2

Net investment income
34.1

 
—

 
(0.1
)
 
34.0

Net realized investment gains (losses):
 
 
 
 
 
 
 
Total other-than-temporary impairment (“OTTI”) losses
—

 
—

 
—

 
—

Portion of OTTI losses recognized in other comprehensive income (“OCI”)
(0.2
)
 
—

 
—

 
(0.2
)
Net OTTI losses recognized in earnings
(0.2
)
 
—

 
—

 
(0.2
)
Net realized investment gains (losses), excluding OTTI losses
10.9

 
—

 
(2.1
)
 
8.8

Net realized investment gains (losses)
10.7

 
—

 
(2.1
)
 
8.6

Total revenues
137.1

 
—

 
(2.2
)
 
134.9

 
 
 
 
 
 
 
 
BENEFITS AND EXPENSES:
 
 
 
 
 
 
 
Policy benefits
91.4

 
—

 
(1.4
)
 
90.0

Policy acquisition cost amortization
26.6

 
—

 
(0.6
)
 
26.0

Other operating expenses
31.4

 
—

 
(0.1
)
 
31.3

Total benefits and expenses
149.4

 
—

 
(2.1
)
 
147.3

Income (loss) before income taxes
(12.3
)
 
—

 
(0.1
)
 
(12.4
)
Income tax expense (benefit)
(16.9
)
 
—

 
—

 
(16.9
)
Net income (loss)
$
4.6

 
$
—

 
$
(0.1
)
 
$
4.5

 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
 
 
Net income (loss)
$
4.6

 
$
—

 
$
(0.1
)
 
$
4.5

Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
(12.1
)
 
—

 
(2.5
)
 
(14.6
)
Less: Income tax expense (benefit) related to:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
(12.1
)
 
—

 
0.1

 
(12.0
)
Other comprehensive income (loss), net of income taxes
—

 
—

 
(2.6
)
 
(2.6
)
Comprehensive income (loss)
$
4.6

 
$
—

 
$
(2.7
)
 
$
1.9



F-95
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions)
Statement of Income and Comprehensive Income
For the six months ended June 30, 2013
 
 
 
Correction of errors
 
 
 
As
reported
 
UL
unlock
 
Other
adjustments
 
As
revised
REVENUES:
 
 
 
 
 
 
 
Premiums
$
8.2

 
$
—

 
$
—

 
$
8.2

Insurance and investment product fees
177.3

 
—

 
—

 
177.3

Net investment income
67.1

 
—

 
0.1

 
67.2

Net realized investment gains (losses):
 
 
 
 
 
 
 
Total other-than-temporary impairment (“OTTI”) losses
(0.3
)
 
—

 
0.1

 
(0.2
)
Portion of OTTI losses recognized in other comprehensive income (“OCI”)
(0.9
)
 
—

 
—

 
(0.9
)
Net OTTI losses recognized in earnings
(1.2
)
 
—

 
0.1

 
(1.1
)
Net realized investment gains (losses), excluding OTTI losses
(5.5
)
 
—

 
(1.2
)
 
(6.7
)
Net realized investment gains (losses)
(6.7
)
 
—

 
(1.1
)
 
(7.8
)
Total revenues
245.9

 
—

 
(1.0
)
 
244.9

 
 
 
 
 
 
 
 
BENEFITS AND EXPENSES:
 
 
 
 
 
 
 
Policy benefits
179.9

 
—

 
0.8

 
180.7

Policy acquisition cost amortization
40.6

 
—

 
1.7

 
42.3

Other operating expenses
60.0

 
—

 
1.7

 
61.7

Total benefits and expenses
280.5

 
—

 
4.2

 
284.7

Income (loss) before income taxes
(34.6
)
 
—

 
(5.2
)
 
(39.8
)
Income tax expense (benefit)
(18.8
)
 
—

 
—

 
(18.8
)
Net income (loss)
$
(15.8
)
 
$
—

 
$
(5.2
)
 
$
(21.0
)
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
 
 
Net income (loss)
$
(15.8
)
 
$
—

 
$
(5.2
)
 
$
(21.0
)
Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
(25.4
)
 
—

 
1.0

 
(24.4
)
Less: Income tax expense (benefit) related to:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
(9.4
)
 
—

 
0.1

 
(9.3
)
Other comprehensive income (loss), net of income taxes
(16.0
)
 
—

 
0.9

 
(15.1
)
Comprehensive income (loss)
$
(31.8
)
 
$
—

 
$
(4.3
)
 
$
(36.1
)


F-96
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions)
Statement of Cash Flows
For the period ended June 30, 2013
 
As
reported
 
Correction
of errors
 
As
revised
OPERATING ACTIVITIES:
 
 
 
 
 
Net income (loss)
$
(15.8
)
 
$
(5.2
)
 
$
(21.0
)
Net realized investment gains / losses
6.7

 
1.1

 
7.8

Policy acquisition costs deferred
(33.5
)
 
—

 
(33.5
)
Policy acquisition cost amortization
40.6

 
1.7

 
42.3

Interest credited
40.1

 
—

 
40.1

Equity in earnings of limited partnerships and other investments
(0.1
)
 
—

 
(0.1
)
Change in:
 
 
 
 
 
Accrued investment income
(3.7
)
 
(0.2
)
 
(3.9
)
Deferred income taxes, net
—

 
—

 
—

Reinsurance recoverable
(28.4
)
 
22.1

 
(6.3
)
Policy liabilities and accruals
(59.5
)
 
(21.2
)
 
(80.7
)
Due to/from related parties
1.3

 
—

 
1.3

Other operating activities, net [1]
3.2

 
1.7

 
4.9

Cash provided by (used for) operating activities
(49.1
)
 
—

 
(49.1
)
 
 
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
 
 
Purchases of:
 
 
 
 
 
Available-for-sale debt securities
(429.8
)
 
4.4

 
(425.4
)
Available-for-sale equity securities
—

 
(4.4
)
 
(4.4
)
Short-term investments
(224.8
)
 
—

 
(224.8
)
Derivative instruments
(50.1
)
 
—

 
(50.1
)
Fair value investments
(14.6
)
 
—

 
(14.6
)
Sales, repayments and maturities of:
 
 
 
 
 
Available-for-sale debt securities
151.3

 
—

 
151.3

Available-for-sale equity securities
—

 
—

 
—

Short-term investments
304.8

 
—

 
304.8

Derivative instruments
15.8

 
—

 
15.8

Fair value investments
3.7

 
—

 
3.7

Contributions to limited partnerships and limited liability corporations
(0.4
)
 
—

 
(0.4
)
Distributions from limited partnerships and limited liability corporations
0.1

 
—

 
0.1

Policy loans, net
(0.6
)
 
—

 
(0.6
)
Other investing activities, net
0.1

 
—

 
0.1

Cash provided by (used for) investing activities
(244.5
)
 
—

 
(244.5
)

(Continued on next page)


F-97
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


(Continued from previous page)
($ in millions)
Statement of Cash Flows
For the period ended June 30, 2013
 
As
reported
 
Correction
of errors
 
As
revised
FINANCING ACTIVITIES:
 
 
 
 
 
Policyholder deposits
469.9

 
—

 
469.9

Policyholder withdrawals
(280.0
)
 
—

 
(280.0
)
Net transfers (to) from separate accounts
144.5

 
—

 
144.5

Cash provided by (used for) financing activities
334.4

 
—

 
334.4

Change in cash and cash equivalents
40.8

 
—

 
40.8

Cash and cash equivalents, beginning of period
83.1

 
—

 
83.1

Cash and cash equivalents, end of period
$
123.9

 
$
—

 
$
123.9

 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
 
Income taxes (paid) refunded
$
9.0

 
$
—

 
$
9.0

 
 
 
 
 
 
Non-Cash Transactions During the Period
 
 
 
 
 
Investment exchanges
$
29.6

 
$
—

 
$
29.6

———————
[1]
Includes receivables which were previously disclosed as a separate line item.


F-98
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions)
Statement of Changes in Stockholder's Equity
For the period ended June 30, 2013
 
As
reported
 
Correction
of errors
 
As
revised
COMMON STOCK:
 
 
 
 
 
Balance, beginning of period
$
2.5

 
$
—

 
$
2.5

Balance, end of period
$
2.5

 
$
—

 
$
2.5

 
 
 
 
 
 
ADDITIONAL PAID-IN CAPITAL:
 
 
 
 
 
Balance, beginning of period
$
802.2

 
$
—

 
$
802.2

Balance, end of period
$
802.2

 
$
—

 
$
802.2

 
 
 
 
 
 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
Balance, beginning of period
$
11.4

 
$
(2.6
)
 
$
8.8

Other comprehensive income (loss)
(16.0
)
 
0.9

 
(15.1
)
Balance, end of period
$
(4.6
)
 
$
(1.7
)
 
$
(6.3
)
 
 
 
 
 
 
ACCUMULATED DEFICIT:
 
 
 
 
 
Balance, beginning of period
$
(521.0
)
 
$
1.0

 
$
(520.0
)
Net income (loss)
(15.8
)
 
(5.2
)
 
(21.0
)
Balance, end of period
$
(536.8
)
 
$
(4.2
)
 
$
(541.0
)
 
 
 
 
 
 
TOTAL STOCKHOLDER’S EQUITY:
 
 
 
 
 
Balance, beginning of period
$
295.1

 
$
(1.6
)
 
$
293.5

Change in stockholder’s equity
(31.8
)
 
(4.3
)
 
(36.1
)
Balance, end of period
$
263.3

 
$
(5.9
)
 
$
257.4



F-99
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions, except share data)
Balance Sheet
As of September 30, 2013
 
 
 
Correction of errors
 
 
 
As
reported
 
UL
unlock
 
Other
adjustments
 
As
revised
ASSETS:
 
 
 
 
 
 
 
Available-for-sale debt securities, at fair value
$
3,252.1

 
$
—

 
$
(6.3
)
 
$
3,245.8

Available-for-sale equity securities, at fair value
—

 
—

 
7.3

 
7.3

Short-term investments
55.0

 
—

 
—

 
55.0

Limited partnerships and other investments
10.3

 
—

 
—

 
10.3

Policy loans, at unpaid principal balances
65.6

 
—

 
—

 
65.6

Derivative instruments
190.7

 
—

 
(15.3
)
 
175.4

Fair value investments
53.1

 
—

 
—

 
53.1

Total investments
3,626.8

 
—

 
(14.3
)
 
3,612.5

Cash and cash equivalents
218.1

 
—

 
—

 
218.1

Accrued investment income
29.7

 
—

 
—

 
29.7

Reinsurance recoverable
484.8

 
—

 
0.5

 
485.3

Deferred policy acquisition costs
458.5

 
—

 
(0.2
)
 
458.3

Deferred income taxes, net
25.8

 
—

 
(0.1
)
 
25.7

Receivable from related parties
2.0

 
—

 
0.1

 
2.1

Other assets
204.7

 
—

 
17.4

 
222.1

Separate account assets
2,049.5

 
—

 
—

 
2,049.5

Total assets
$
7,099.9

 
$
—

 
$
3.4

 
$
7,103.3

 
 
 
 
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Policy liabilities and accruals
$
1,974.9

 
$
—

 
$
(4.0
)
 
$
1,970.9

Policyholder deposit funds
2,660.9

 
—

 
10.4

 
2,671.3

Indebtedness due to affiliate
—

 
—

 
—

 
—

Payable to related parties
12.6

 
—

 
0.2

 
12.8

Other liabilities
143.7

 
—

 
1.1

 
144.8

Separate account liabilities
2,049.5

 
—

 
—

 
2,049.5

Total liabilities
6,841.6

 
—

 
7.7

 
6,849.3

 
 
 
 
 
 
 
 
STOCKHOLDER’S EQUITY:
 
 
 
 
 
 
 
Common stock, $5,000 par value: 1,000 shares authorized; 500 shares issued
2.5

 
—

 
—

 
2.5

Additional paid-in capital
802.2

 
—

 
—

 
802.2

Accumulated other comprehensive income (loss)
5.6

 
—

 
(1.1
)
 
4.5

Retained earnings (accumulated deficit)
(552.0
)
 
—

 
(3.2
)
 
(555.2
)
Total stockholder’s equity
258.3

 
—

 
(4.3
)
 
254.0

Total liabilities and stockholder’s equity
$
7,099.9

 
$
—

 
$
3.4

 
$
7,103.3



F-100
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions)
Statement of Income and Comprehensive Income
For the three months ended September 30, 2013
 
 
 
Correction of errors
 
 
 
As
reported
 
UL
unlock
 
Other
adjustments
 
As
revised
REVENUES:
 
 
 
 
 
 
 
Premiums
$
3.1

 
$
—

 
$
—

 
$
3.1

Insurance and investment product fees
94.0

 
—

 
—

 
94.0

Net investment income
36.3

 
—

 
—

 
36.3

Net realized investment gains (losses):
 
 
 
 
 
 
 
Total other-than-temporary impairment (“OTTI”) losses
(0.2
)
 
—

 
—

 
(0.2
)
Portion of OTTI losses recognized in other comprehensive income (“OCI”)
—

 
—

 
—

 
—

Net OTTI losses recognized in earnings
(0.2
)
 
—

 
—

 
(0.2
)
Net realized investment gains (losses), excluding OTTI losses
(2.6
)
 
—

 
(2.6
)
 
(5.2
)
Net realized investment gains (losses)
(2.8
)
 
—

 
(2.6
)
 
(5.4
)
Total revenues
130.6

 
—

 
(2.6
)
 
128.0

 
 
 
 
 
 
 
 
BENEFITS AND EXPENSES:
 
 
 
 
 
 
 
Policy benefits
91.8

 
—

 
(1.3
)
 
90.5

Policy acquisition cost amortization
22.2

 
—

 
(0.7
)
 
21.5

Other operating expenses
29.2

 
—

 
(0.2
)
 
29.0

Total benefits and expenses
143.2

 
—

 
(2.2
)
 
141.0

Income (loss) before income taxes
(12.6
)
 
—

 
(0.4
)
 
(13.0
)
Income tax expense (benefit)
2.6

 
—

 
(1.4
)
 
1.2

Net income (loss)
$
(15.2
)
 
$
—

 
$
1.0

 
$
(14.2
)
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
 
 
Net income (loss)
$
(15.2
)
 
$
—

 
$
1.0

 
$
(14.2
)
Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
9.9

 


 
0.7

 
10.6

Less: Income tax expense (benefit) related to:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
(0.3
)
 


 
0.1

 
(0.2
)
Other comprehensive income (loss), net of income taxes
10.2

 
—

 
0.6

 
10.8

Comprehensive income (loss)
$
(5.0
)
 
$
—

 
$
1.6

 
$
(3.4
)


F-101
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions)
Statement of Income and Comprehensive Income
For the nine months ended September 30, 2013
 
 
 
Correction of errors
 
 
 
As
reported
 
UL
unlock
 
Other
adjustments
 
As
revised
REVENUES:
 
 
 
 
 
 
 
Premiums
$
11.3

 
$
—

 
$
—

 
$
11.3

Insurance and investment product fees
271.3

 
—

 
—

 
271.3

Net investment income
103.4

 
—

 
0.1

 
103.5

Net realized investment gains (losses):
 
 
 
 
 
 
 
Total other-than-temporary impairment (“OTTI”) losses
(0.5
)
 
—

 
0.1

 
(0.4
)
Portion of OTTI losses recognized in other comprehensive income (“OCI”)
(0.9
)
 
—

 
—

 
(0.9
)
Net OTTI losses recognized in earnings
(1.4
)
 
—

 
0.1

 
(1.3
)
Net realized investment gains (losses), excluding OTTI losses
(8.1
)
 
—

 
(3.8
)
 
(11.9
)
Net realized investment gains (losses)
(9.5
)
 
—

 
(3.7
)
 
(13.2
)
Total revenues
376.5

 
—

 
(3.6
)
 
372.9

 
 
 
 
 
 
 
 
BENEFITS AND EXPENSES:
 
 
 
 
 
 
 
Policy benefits
271.7

 
—

 
(0.5
)
 
271.2

Policy acquisition cost amortization
62.8

 
—

 
1.0

 
63.8

Other operating expenses
89.2

 
—

 
1.5

 
90.7

Total benefits and expenses
423.7

 
—

 
2.0

 
425.7

Income (loss) before income taxes
(47.2
)
 
—

 
(5.6
)
 
(52.8
)
Income tax expense (benefit)
(16.2
)
 
—

 
(1.4
)
 
(17.6
)
Net income (loss)
$
(31.0
)
 
$
—

 
$
(4.2
)
 
$
(35.2
)
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
 
 
Net income (loss)
$
(31.0
)
 
$
—

 
$
(4.2
)
 
$
(35.2
)
Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
(15.5
)
 
—

 
1.7

 
(13.8
)
Less: Income tax expense (benefit) related to:
 
 
 
 
 
 
 
Unrealized investment gains (losses), net of related offsets
(9.7
)
 
—

 
0.2

 
(9.5
)
Other comprehensive income (loss), net of income taxes
(5.8
)
 
—

 
1.5

 
(4.3
)
Comprehensive income (loss)
$
(36.8
)
 
$
—

 
$
(2.7
)
 
$
(39.5
)


F-102
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions)
Statement of Cash Flows
For the period ended September 30, 2013
 
As
reported
 
Correction
of errors
 
As
revised
OPERATING ACTIVITIES:
 
 
 
 
 
Net income (loss)
$
(31.0
)
 
$
(4.2
)
 
$
(35.2
)
Net realized investment gains / losses
9.5

 
3.7

 
13.2

Policy acquisition costs deferred
(49.6
)
 
—

 
(49.6
)
Policy acquisition cost amortization
62.8

 
1.0

 
63.8

Interest credited
64.0

 
—

 
64.0

Equity in earnings of limited partnerships and other investments
(0.3
)
 
—

 
(0.3
)
Change in:
 
 
 
 
 
Accrued investment income
(8.5
)
 
(0.2
)
 
(8.7
)
Deferred income taxes, net
—

 
—

 
—

Reinsurance recoverable
(57.7
)
 
22.2

 
(35.5
)
Policy liabilities and accruals
(70.7
)
 
(22.7
)
 
(93.4
)
Due to/from related parties
(0.4
)
 
—

 
(0.4
)
Other operating activities, net [1]
9.3

 
0.2

 
9.5

Cash provided by (used for) operating activities
(72.6
)
 
—

 
(72.6
)
 
 
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
 
 
Purchases of:
 
 
 
 
 
Available-for-sale debt securities
(672.3
)
 
4.4

 
(667.9
)
Available-for-sale equity securities
—

 
(4.4
)
 
(4.4
)
Short-term investments
(224.8
)
 
—

 
(224.8
)
Derivative instruments
(62.7
)
 
—

 
(62.7
)
Fair value investments
(21.1
)
 
—

 
(21.1
)
Sales, repayments and maturities of:
 
 
 
 
 
Available-for-sale debt securities
261.2

 
—

 
261.2

Available-for-sale equity securities
—

 
—

 
—

Short-term investments
414.8

 
—

 
414.8

Derivative instruments
27.4

 
—

 
27.4

Fair value investments
5.7

 
—

 
5.7

Contributions to limited partnerships and limited liability corporations
(3.5
)
 
—

 
(3.5
)
Distributions from limited partnerships and limited liability corporations
0.4

 
—

 
0.4

Policy loans, net
(2.7
)
 
—

 
(2.7
)
Other investing activities, net
0.1

 
—

 
0.1

Cash provided by (used for) investing activities
(277.5
)
 
—

 
(277.5
)

(Continued on next page)


F-103
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


(Continued from previous page)
($ in millions)
Statement of Cash Flows
For the period ended September 30, 2013
 
As
reported
 
Correction
of errors
 
As
revised
FINANCING ACTIVITIES:
 
 
 
 
 
Policyholder deposits
690.7

 
—

 
690.7

Policyholder withdrawals
(434.6
)
 
—

 
(434.6
)
Net transfers (to) from separate accounts
229.0

 
—

 
229.0

Cash provided by (used for) financing activities
485.1

 
—

 
485.1

Change in cash and cash equivalents
135.0

 
—

 
135.0

Cash and cash equivalents, beginning of period
83.1

 
—

 
83.1

Cash and cash equivalents, end of period
$
218.1

 
$
—

 
$
218.1

 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
 
Income taxes (paid) refunded
$
25.5

 
$
—

 
$
25.5

 
 
 
 
 
 
Non-Cash Transactions During the Period
 
 
 
 
 
Investment exchanges
$
30.5

 
$
—

 
$
30.5

———————
[1]
Includes receivables which were previously disclosed as a separate line item.



F-104
PHL VARIABLE INSURANCE COMPANY
Notes to Financial Statements (continued)
 
18.    Supplemental Unaudited Quarterly Financial Information (continued)


($ in millions)
Statement of Changes in Stockholder's Equity
For the period ended September 30, 2013
 
As
reported
 
Correction
of errors
 
As
revised
COMMON STOCK:
 
 
 
 
 
Balance, beginning of period
$
2.5

 
$
—

 
$
2.5

Balance, end of period
$
2.5

 
$
—

 
$
2.5

 
 
 
 
 
 
ADDITIONAL PAID-IN CAPITAL:
 
 
 
 
 
Balance, beginning of period
$
802.2

 
$
—

 
$
802.2

Balance, end of period
$
802.2

 
$
—

 
$
802.2

 
 
 
 
 
 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
Balance, beginning of period
$
11.4

 
$
(2.6
)
 
$
8.8

Other comprehensive income (loss)
(5.8
)
 
1.5

 
(4.3
)
Balance, end of period
$
5.6

 
$
(1.1
)
 
$
4.5

 
 
 
 
 
 
ACCUMULATED DEFICIT:
 
 
 
 
 
Balance, beginning of period
$
(521.0
)
 
$
1.0

 
$
(520.0
)
Net income (loss)
(31.0
)
 
(4.2
)
 
(35.2
)
Balance, end of period
$
(552.0
)
 
$
(3.2
)
 
$
(555.2
)
 
 
 
 
 
 
TOTAL STOCKHOLDER’S EQUITY:
 
 
 
 
 
Balance, beginning of period
$
295.1

 
$
(1.6
)
 
$
293.5

Change in stockholder’s equity
(36.8
)
 
(2.7
)
 
(39.5
)
Balance, end of period
$
258.3

 
$
(4.3
)
 
$
254.0



19.
Subsequent Events

Late Filings

On February 6, 2015, we filed a Notification of Late Filing on Form 12b-25 with the SEC disclosing that our inability to file the 2014 Form 10-K on or before the prescribed due date and our expectation that it will be filed within the extension period afforded under Rule 12b-25 of the Securities Exchange Act of 1934, as amended, on or before April 15, 2015.

Restatement

Phoenix filed a Current Report on Form 8-K with the SEC on February 6, 2015 disclosing that Phoenix’s Audit Committee concluded that Phoenix’s previously issued audited consolidated financial statements for the year ended December 31, 2013 and unaudited interim consolidated financial statements for the three months ended December 31, 2013 included in Phoenix’s Annual Report on Form 10-K for the year ended December 31, 2013 and Phoenix’s previously issued unaudited interim consolidated financial statements for the three months ended June 30, 2014 included in Phoenix’s Quarterly Report on Form 10-Q for the period ended June 30, 2014 filed with the SEC should no longer be relied upon and should be restated because of certain material errors identified in such financial statements. In addition, as required by applicable accounting standards, Phoenix will adjust the financial statements for all known errors, some of which were already recorded and disclosed in prior SEC reports as out-of-period adjustments. Phoenix filed its Annual Report on Form 10-K for the year ended December 31, 2014 containing the restated information on March 31, 2015.



F-105