5. Demutualization and Closed Block

9 Months Ended

Sep. 30, 2012

Notes to Financial Statements

Note 5 - Demutualization and Closed Block

In 1999, we began the process of reorganizing and demutualizing our then principal operating company, Phoenix Home Life. We completed the process in June 2001, when all policyholder membership interests in this mutual company were extinguished and eligible policyholders of the mutual company received shares of common stock of The Phoenix Companies, Inc., together with cash and policy credits, as compensation. To protect the future dividends of these policyholders, we also established a closed block for their existing policies.

Because closed block liabilities exceed closed block assets, we have a net closed block liability at September 30, 2012 and December 31, 2011. This net liability represents the maximum future earnings contribution to be recognized from the closed block and the change in this net liability each period is in the earnings contribution recognized from the closed block for the period. To the extent that actual cash flows differ from amounts anticipated, we may adjust policyholder dividends. If the closed block has excess funds, those funds will be available only to the closed block policyholders. However, if the closed block has insufficient funds to make policy benefit payments that are guaranteed, the payments will be made from assets outside of the closed block.

Closed Block Assets and Liabilities as of:	Sept 30,			Dec 31,
($ in millions)	2012			2011			Inception
				As restated and amended
Debt securities	$	6,424.1		$	6,323.5		$	4,773.1
Equity securities		9.4			12.6			—
Limited partnerships and other investments		342.3			338.0			399.0
Policy loans		1,249.6			1,280.4			1,380.0
Fair value investments		33.0			27.8			—
Total closed block investments		8,058.4			7,982.3			6,552.1
Cash and cash equivalents		30.8			15.1			—
Accrued investment income		91.1			94.2			106.8
Receivables		74.0			68.8			35.2
Deferred income taxes		231.2			226.8			389.4
Other closed block assets		49.3			39.2			6.2
Total closed block assets		8,534.8			8,426.4			7,089.7
Policy liabilities and accruals		8,487.2			8,680.4			8,301.7
Policyholder dividends payable		235.1			241.0			325.1
Policy dividend obligation		755.8			511.5			—
Other closed block liabilities		63.8			41.0			12.3
Total closed block liabilities		9,541.9			9,473.9			8,639.1
Excess of closed block liabilities over closed block assets(1)	$	1,007.0		$	1,047.5		$	1,549.4
Less: Excess of closed block assets over closed block liabilities   attributable to noncontrolling interests		(4.1	)		(1.4	)
Excess of closed block liabilities over closed block assets   attributable to The Phoenix Companies, Inc.	$	1,011.2		$	1,048.9

———————

(1)   The maximum future earnings summary to inure to the benefit of the stockholders is represented by the excess of closed block liabilities over closed block assets. All unrealized investment gains (losses), net of income tax, have been allocated to the policyholder dividend obligation.

Closed Block Revenues and Expenses and Changes in	Three Months Ended						Nine Months Ended
Policyholder Dividend Obligations:	September 30,						September 30,
($ in millions)	2012			2011			2012			2011
				As restated and amended						As restated and amended
Closed block revenues
Premiums	$	89.5		$	100.5		$	270.1		$	298.0
Net investment income		115.7			113.2			343.5			358.2
Net realized investment gains (losses)		7.5			(4.3	)		9.4			(1.6	)
Total revenues		212.7			209.4			623.0			654.6
Policy benefits, excluding dividends		120.1			143.6			364.8			415.4
Other operating expenses		1.3			1.5			3.6			4.4
T     Total benefits and expenses, excluding policyholder dividends		121.4			145.1			368.4			419.8
Closed block contribution to income before dividends and income taxes		91.3			64.3			254.6			234.8
Policyholder dividends		(80.9	)		(53.6	)		(221.6	)		(198.8	)
Closed block contribution to income before income taxes		10.4			10.7			33.0			36.0
Applicable income tax expense		3.6			3.8			11.5			12.6
Closed block contribution to income		6.8			7.0			21.5			23.5
Less: Closed block contribution to income attributable to   noncontrolling interests		0.4			(0.2	)		0.4			(0.2	)
Closed block contribution to income attributable to   The Phoenix Companies, Inc.	$	6.4		$	7.2		$	21.1		$	23.7

Closed Block Policyholder Dividend Obligation as of:	Sept 30,			Dec 31,
($ in millions)	2012			2011
				As restated and amended
Policyholder dividend obligation
Policyholder dividends provided through earnings	$	221.6		$	258.7
Policyholder dividends provided through OCI		171.5			158.6
Additions to policyholder dividend liabilities		393.1			417.3
Policyholder dividends paid		(154.7	)		(251.3	)
Increase in policyholder dividend liabilities		238.4			166.0
Policyholder dividend liabilities, beginning of period		752.5			586.5
Policyholder dividend liabilities, end of period		990.9			752.5
Policyholder dividends payable, end of period		(235.1	)		(241.0	)
Policyholder dividend obligation, end of period	$	755.8		$	511.5

The policyholder dividend obligation includes approximately $153.0 million and $72.4 million, respectively, for cumulative closed block earnings in excess of expected amounts calculated at the date of demutualization as of September 30, 2012 and December 31, 2011 respectively. These closed block earnings will not inure to stockholders, but will result in additional future dividends to closed block policyholders unless otherwise offset by future performance of the closed block that is less favorable than expected. If actual cumulative performance is less favorable than expected, only actual earnings will be recognized in net income. As of September 30, 2012 and December 31, 2011, the policyholder dividend obligation also includes $602.8 million and $439.1 million, respectively, of net unrealized gains on investments supporting the closed block liabilities.