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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
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 333-55268
THE PHOENIX COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1599088
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One American Row, Hartford, Connecticut 06102-5056
(860) 403-5000
----------------------------------------------------
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
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 X. No__.
Indicated by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Yes X. No__.
On April 30 2004, the registrant had 94,600,151 shares of common stock outstanding.
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1
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet at March 31, 2004 (unaudited) and December 31, 2003............... 3
Consolidated Statement of Income and Comprehensive Income for the three months
ended March 31, 2004 and 2003 (unaudited).................................................. 4
Consolidated Statement of Cash Flows for the three months ended March 31, 2004
and 2003 (unaudited)....................................................................... 5
Consolidated Statement of Changes in Stockholders' Equity for the three months ended
March 31, 2004 and 2003 (unaudited)........................................................ 6
Notes to Consolidated Financial Statements for the three months ended March 31, 2004
and 2003 (unaudited)....................................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........32
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................67
Item 4. Controls and Procedures........................................................................71
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................72
Item 2. Changes in Securities and Use of Proceeds......................................................73
Item 3. Defaults Upon Senior Securities................................................................73
Item 4. Submission of Matters to a Vote of Security Holders............................................74
Item 5. Other Information..............................................................................74
Item 6. Exhibits and Reports on Form 8-K...............................................................74
Signature...................................................................................................80
2
PART I.
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
THE PHOENIX COMPANIES, INC.
Consolidated Balance Sheet
($ amounts in millions, except per share data)
March 31, 2004 (unaudited) and December 31, 2003
2004 2003
--------------- ---------------
ASSETS:
Available-for-sale debt securities, at fair value............................. $ 13,631.0 $ 13,273.0
Available-for-sale equity securities, at fair value........................... 338.9 312.0
Mortgage loans, at unpaid principal balances.................................. 271.5 284.1
Venture capital partnerships, at equity in net assets......................... 249.5 234.9
Affiliate equity securities, at equity in net assets.......................... 49.3 47.5
Policy loans, at unpaid principal balances.................................... 2,239.4 2,227.8
Other investments............................................................. 414.3 402.0
--------------- ---------------
17,193.9 16,781.3
Available-for-sale debt and equity securities pledged as collateral,
at fair value. 1,389.2 1,350.0
--------------- ---------------
Total investments............................................................. 18,583.1 18,131.3
Cash and cash equivalents..................................................... 321.7 447.9
Accrued investment income..................................................... 232.3 222.3
Receivables................................................................... 167.3 224.9
Deferred policy acquisition costs............................................. 1,358.5 1,367.7
Deferred income taxes......................................................... 24.8 58.7
Intangible assets with definite lives......................................... 255.3 261.8
Goodwill and other indefinite-lived intangible assets......................... 491.1 493.2
Other assets.................................................................. 261.1 268.2
Separate account assets....................................................... 6,461.6 6,083.2
--------------- ---------------
Total assets.................................................................. $ 28,156.8 $ 27,559.2
=============== ===============
LIABILITIES:
Policy liabilities and accruals............................................... $ 13,335.3 $ 13,088.6
Policyholder deposit funds.................................................... 3,556.4 3,642.7
Stock purchase contracts...................................................... 145.1 128.8
Indebtedness.................................................................. 666.8 639.0
Other general account liabilities............................................. 519.0 525.7
Non-recourse collateralized obligations....................................... 1,445.0 1,472.0
Separate account liabilities.................................................. 6,461.6 6,083.2
--------------- ---------------
Total liabilities............................................................. 26,129.2 25,580.0
--------------- ---------------
MINORITY INTEREST:
Minority interest in net assets of consolidated subsidiaries.................. 30.4 31.4
--------------- ---------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value 106,376,363 and 106,376,363 shares issued........ 1.0 1.0
Additional paid-in capital.................................................... 2,428.9 2,428.8
Deferred compensation on restricted stock units............................... (3.2) (3.6)
Accumulated deficit........................................................... (336.1) (352.7)
Accumulated other comprehensive income........................................ 93.8 63.7
Treasury stock, at cost: 11,796,366 and 11,930,647 shares.................... (187.2) (189.4)
--------------- ---------------
Total stockholders' equity.................................................... 1,997.2 1,947.8
--------------- ---------------
Total liabilities, minority interest and stockholders' equity................. $ 28,156.8 $ 27,559.2
=============== ===============
The accompanying notes are an integral part of these financial statements.
3
THE PHOENIX COMPANIES, INC.
Consolidated Statement of Income and Comprehensive Income
($ amounts in millions, except per share data)
Three Months Ended March 31, 2004 and 2003 (unaudited)
2003
2004 Restated
--------------- ---------------
REVENUES:
Premiums...................................................................... $ 232.7 $ 246.1
Insurance and investment product fees......................................... 160.4 136.1
Investment income, net of expenses............................................ 278.2 291.1
Net realized investment gains (losses)........................................ 2.5 (14.1)
--------------- ---------------
Total revenues................................................................ 673.8 659.2
--------------- ---------------
BENEFITS AND EXPENSES:
Policy benefits, excluding policyholder dividends............................. 345.6 350.8
Policyholder dividends........................................................ 105.9 116.5
Policy acquisition cost amortization.......................................... 22.6 28.0
Intangible asset amortization................................................. 8.3 8.4
Interest expense on indebtedness.............................................. 9.8 9.8
Interest expense on non-recourse collateralized obligations................... 8.9 13.3
Other operating expenses...................................................... 145.4 130.3
--------------- ---------------
Total benefits and expenses................................................... 646.5 657.1
--------------- ---------------
Income from continuing operations before income taxes and minority interest... 27.3 2.1
Applicable income tax (benefit)............................................... 7.3 (2.4)
--------------- ---------------
Income from continuing operations before minority interest.................... 20.0 4.5
Minority interest in net income of consolidated subsidiaries.................. (3.7) (2.8)
--------------- ---------------
Income from continuing operations............................................. 16.3 1.7
Income (loss) from discontinued operations.................................... 0.3 (0.4)
--------------- ---------------
Net income.................................................................... $ 16.6 $ 1.3
=============== ===============
EARNINGS PER SHARE:
Income from continuing operations - basic..................................... $ 0.17 $ 0.02
Income from continuing operations - diluted................................... $ 0.16 $ 0.02
=============== ===============
Net income - basic............................................................ $ 0.18 $ 0.01
Net income - diluted.......................................................... $ 0.16 $ 0.01
=============== ===============
Basic weighted-average common shares outstanding (in thousands)............... 94,512 94,046
Diluted weighted-average common shares outstanding (in thousands)............. 102,008 95,014
=============== ===============
COMPREHENSIVE INCOME:
Net income.................................................................... $ 16.6 $ 1.3
--------------- ---------------
Net unrealized investment gains............................................... 38.4 1.4
Net unrealized foreign currency translation adjustment........................ 2.6 (1.0)
Net unrealized derivative instruments gains (losses).......................... (10.9) 11.1
--------------- ---------------
Other comprehensive income.................................................... 30.1 11.5
--------------- ---------------
Comprehensive income.......................................................... $ 46.7 $ 12.8
=============== ===============
The accompanying notes are an integral part of these financial statements.
4
THE PHOENIX COMPANIES, INC.
Consolidated Statement of Cash Flows
($ amounts in millions)
Three Months Ended March 31, 2004 and 2003 (unaudited)
2003
2004 Restated
--------------- ---------------
OPERATING ACTIVITIES:
Premiums collected............................................................ $ 236.0 $ 249.0
Insurance and investment product fees collected............................... 166.8 138.7
Investment income collected................................................... 241.7 242.8
Policy benefits paid, excluding policyholder dividends........................ (261.0) (267.7)
Policyholder dividends paid................................................... (91.7) (93.9)
Policy acquisition costs paid................................................. (47.0) (44.0)
Interest expense on indebtedness paid......................................... (6.3) (5.5)
Interest expense on collateralized obligations paid........................... (8.9) (13.2)
Other operating expenses paid................................................. (175.3) (172.2)
Income taxes refunded......................................................... 6.7 15.8
--------------- ---------------
Cash from continuing operations............................................... 61.0 49.8
Discontinued operations, net.................................................. (14.4) (17.1)
--------------- ---------------
Cash from operating activities................................................ 46.6 32.7
--------------- ---------------
INVESTING ACTIVITIES:
Investment purchases (Note 5)................................................. (940.7) (1,825.8)
Investment sales, repayments and maturities (Note 5).......................... 934.8 1,080.1
Debt and equity securities pledged as collateral purchases.................... (30.7) (4.5)
Debt and equity securities pledged as collateral sales........................ -- --
Subsidiary purchases.......................................................... (29.2) --
Premises and equipment additions.............................................. (2.7) (2.1)
Discontinued operations, net.................................................. 1.4 (6.7)
--------------- ---------------
Cash for investing activities................................................. (67.1) (759.0)
--------------- ---------------
FINANCING ACTIVITIES:
Policyholder deposit fund receipts (repayments), net.......................... (86.3) 283.3
Other indebtedness proceeds................................................... 25.0 --
Collateralized obligations proceeds (repayments), net......................... (38.2) (26.0)
Common stock dividends paid................................................... -- --
Minority interest distributions............................................... (6.2) (7.0)
--------------- ---------------
Cash from (for) financing activities.......................................... (105.7) 250.3
--------------- ---------------
Change in cash and cash equivalents........................................... (126.2) (467.0)
Cash and cash equivalents, beginning of period................................ 447.9 1,110.5
--------------- ---------------
Cash and cash equivalents, end of period...................................... $ 321.7 $ 634.5
=============== ===============
Included in cash and cash equivalents above is cash pledged as collateral of $2.1 million and $26.5 million at
March 31, 2004 and 2003, respectively.
The accompanying notes are an integral part of these financial statements.
5
THE PHOENIX COMPANIES, INC.
Consolidated Statement of Changes in Stockholders' Equity
($ amounts in millions, except share and per share data)
Three Months Ended March 31, 2004 and 2003 (unaudited)
2003
2004 Restated
--------------- ---------------
COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL:
Additional common shares issued in demutualization (0 and 1,073 shares)....... $ -- $ --
Restricted stock units awarded as compensation (46,073 and 394,737 units)..... 0.7 3.0
Stock options awarded as compensation (130,000 and 0 options)................. 0.2
Excess of cost over fair value of common shares contributed to
employee savings plan....................................................... (0.3) (0.3)
DEFERRED COMPENSATION ON RESTRICTED STOCK UNITS:
Compensation expense deferred on restricted stock units awarded............... (0.5) (3.0)
Compensation expense recognized on restricted stock units..................... 0.4 0.2
RETAINED EARNINGS (ACCUMULATED DEFICIT):
Net income.................................................................... 16.6 1.3
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Other comprehensive income.................................................... 30.1 11.5
TREASURY STOCK:
Common shares contributed to employee savings plan (134,281 and
42,333 shares).............................................................. 2.2 0.7
--------------- ---------------
Change in stockholders' equity................................................ 49.4 13.4
Stockholders' equity, beginning of period..................................... 1,947.8 1,826.8
--------------- ---------------
Stockholders' equity, end of period........................................... $ 1,997.2 $ 1,840.2
=============== ===============
The accompanying notes are an integral part of these financial statements.
6
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2004 and 2003 (unaudited)
1. Organization and Operations
Our consolidated financial statements include the accounts of The Phoenix Companies, Inc., its subsidiaries and
certain sponsored collateralized obligation trusts as described in Note 7. The Phoenix Companies, Inc. is a
holding company and our operations are conducted through subsidiaries, the principal ones of which are Phoenix
Life Insurance Company, or Phoenix Life, and Phoenix Investment Partners, Ltd., or PXP. We have eliminated
significant intercompany accounts and transactions in consolidating these financial statements. We have
restated certain 2003 amounts on our Consolidated Statement of Income and Comprehensive Income, our
Consolidated Statement of Cash Flows and our Consolidated Statement of Changes in Stockholders' Equity, as
further described below. Also, we have reclassified certain amounts for 2003 to conform with 2004 presentation.
We have prepared these financial statements in accordance with generally accepted accounting principles, or
GAAP. In preparing these financial statements in conformity with GAAP, we are required to make estimates and
assumptions that affect the reported amounts of assets and liabilities at reporting dates and the reported
amounts of revenues and expenses during the reporting periods. Actual results will differ from these estimates
and assumptions. We employ significant estimates and assumptions in the determination of: deferred policy
acquisition costs; policyholder liabilities and accruals; the valuation of intangible assets; the valuation of
investments in debt and equity securities and venture capital partnerships; the valuation of deferred tax
assets; pension and other post-employment benefits liabilities; and accruals for contingent liabilities. Our
significant accounting policies are presented in the notes to our consolidated financial statements in our 2003
Annual Report on Form 10-K.
Our interim financial statements do not include all of the disclosures required by GAAP for annual financial
statements. In our opinion, we have included all adjustments, consisting of normal, recurring adjustments,
considered necessary for a fair statement of the results for the interim periods. Financial results for the
three-month period in 2004 are not necessarily indicative of the results that may be expected for the year
2004. These unaudited consolidated financial statements should be read in conjunction with our consolidated
financial statements in our 2003 Annual Report on Form 10-K.
Accounting changes and restatement of prior periods
Post-retirement Benefits: On January 12, 2004, the Financial Accounting Standards Board, or the FASB, issued
FASB Staff Position No. FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003, or the FSP. The FSP permitted employers that sponsor
post-retirement benefit plans, or plan sponsors that provide prescription drug benefits to retirees, to defer
accounting for any effects of the anticipated federal tax subsidy related to those drug benefits. We have
elected to defer the associated accounting. Accordingly, the accumulated post-retirement benefit obligation and
net periodic post-retirement benefit cost reflected in our financial statements and accompanying notes do not
reflect the effects of any anticipated federal tax subsidy. In accordance with the FSP, our deferral must
remain in effect until the earlier of: (a) the issuance of guidance by the FASB on how to account for the
federal subsidy to be provided to plan sponsors under the Act or (b) the remeasurement of plan assets and
obligations subsequent to January 31, 2004.
Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when
issued, could require us to change amounts reported herein as of March 31, 2004 and for the three months then
ended.
7
Nontraditional Long-Duration Contracts and Separate Accounts: Effective January 1, 2004, we adopted the AICPA's
Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts, or SOP 03-1. SOP 03-1 provides guidance related to the
accounting, reporting and disclosure of certain insurance contracts and separate accounts, including guidance
for computing reserves for products with guaranteed benefits such as guaranteed minimum death benefits and for
products with annuitization benefits such as guaranteed minimum income benefits. In addition, SOP 03-1
addresses the presentation and reporting of separate accounts, as well as rules concerning the capitalization
and amortization of sales inducements. Since this new accounting standard largely codifies certain accounting
and reserving practices related to applicable nontraditional long-duration contracts and separate accounts that
we already followed, our adoption did not have a material effect on our consolidated financial statements.
Variable Interest Entities: In January 2003, a new accounting standard was issued, FASB Interpretation No. 46,
or FIN 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, that interprets the
existing standards on consolidation. FIN 46 was subsequently reissued as FIN 46-R in December 2003, with FIN
46-R providing additional interpretation as to existing standards on consolidation. FIN 46-R clarifies the
application of standards of consolidation to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from other parties (variable interest
entities). Variable interest entities are required to be consolidated by their primary beneficiaries if they do
not effectively disperse risks among all parties involved. The primary beneficiary of a variable interest
entity is the party that absorbs a majority of the entity's expected losses, receives a majority of its
expected residual returns, or both, as a result of holding variable interests. As required under the original
standard, on February 1, 2003, we adopted the new standard for variable interest entities created after January
31, 2003 and for variable interest entities in which we obtain an interest after January 31, 2003. In addition,
as required by the revised standard, on December 31, 2003 we adopted FIN 46-R for Special Purpose Entities, or
SPEs, in which we hold a variable interest that we acquired prior to February 1, 2003. FIN 46-R requires our
application of its provisions to non-SPE variable interest entities for periods ending after March 15, 2004.
The adoption of FIN 46-R for our non-SPE variable interest entities did not have a material effect on our
consolidated financial statements at March 31, 2004.
Stock-based Compensation: A new standard by the FASB was issued in December 2002 which amends an existing
standard on accounting for stock-based compensation. The new standard provides methods of transition for a
voluntary change to fair value accounting for stock-based compensation. We adopted fair value accounting for
stock-based compensation in 2003 using the prospective method of transition provided by the new standard, which
results in expense recognition for stock options awarded after December 31, 2002. See Note 9 for additional
information.
Consolidated Collateralized Obligation Trusts: We have restated certain 2003 amounts on our Consolidated
Statement of Income and Comprehensive Income and our Consolidated Balance Sheet with respect to our method of
consolidation for several of our sponsored collateralized obligation trusts, as further described in our 2003
Annual Report on Form 10-K.
8
Originally reported and restated amounts for the quarter ended March 31, 2003 follow:
Revised and Originally Reported Select Financial Components: Three Months Ended
($ amounts in millions, except per share data) March 31, 2003
---------------------------------
As Restated As Reported
--------------- ----------------
Income statement data
Insurance and investment product fees.................................... $ 136.1 $ 136.5
Investment income, net of expenses....................................... 291.1 276.6
Realized investment losses............................................... (14.1) (12.3)
Interest expense on non-recourse collateralized obligations.............. 13.3 --
Net income from continuing operations.................................... 1.7 3.6
Net income............................................................... $ 1.3 $ 3.2
Earnings per share data
Income from continuing operations - basic................................ $ 0.02 $ 0.04
Income from continuing operations - diluted.............................. 0.02 0.04
Net income - basic....................................................... 0.01 0.03
Net income - diluted..................................................... $ 0.01 $ 0.03
Business combinations and divestitures
In 2002, we acquired a 60% interest in Kayne Anderson Rudnick Investment Management, LLC, or Kayne Anderson
Rudnick, for $102.4 million; management of the company retained the remaining ownership interest. In addition
to the initial cost of the purchase, we made a subsequent payment, during the three months ended March 31,
2004, of $30.1 million, based upon growth in management fee revenue for the purchased business through the end
of 2003. This payment had been accrued for by PXP as goodwill as of December 31, 2003. In January 2004, one
member of Kayne Anderson Rudnick accelerated his put/call agreement at which time we acquired an additional
0.3% of Kayne Anderson Rudnick. We are also obligated to purchase an additional 14.7% interest in the company
by 2007.
We acquired the remaining minority interest in Walnut Asset Management LLC and Rutherford Brown & Catherwood,
LLC in March 2004 for $2.1 million as a result of the management members exercising their put/call agreements.
This additional purchase price was allocated by PXP to goodwill and definite-lived intangible assets.
On March 31, 2004, we completed the previously announced sale of 100% of the common stock held by us in Phoenix
National Trust Company. The effect of this transaction is immaterial to our consolidated financial statements.
Phoenix National Trust Company is presented as a discontinued operation in our consolidated financial
statements for all periods presented.
On March 22, 2004, we entered into a definitive agreement to sell our retail broker-dealer operations to
Linsco/Private Ledger Financial Services, or LPL. As part of the transaction, advisors affiliated with WS
Griffith Securities, Inc., or Griffith, and Main Street Management Company, or Main Street, will transition to
LPL as independent registered representatives. The transaction, which is subject to regulatory approvals and
other customary closing conditions, is expected to close on or about June 1, 2004. The expected proceeds and
related net gain on the sale of Griffith and Main Street is not material to our consolidated financial
statements.
We incurred a $3.6 million net of tax charge, recorded as a realized investment loss, related to Main Street
and a $0.6 million net of tax charge for severance during the first quarter of 2004 related to this pending
divestiture.
On May 7, 2004, we signed a definitive agreement to sell Phoenix Global Solutions, Inc., our India-based
information technology subsidiary, to Tata Consultancy Services, a division of Tata Sons Ltd. This transaction,
which is not material to our consolidated financial statements, is subject to regulatory approval and is
expected to close during the second quarter of 2004.
9
2. Business Segments
We are a manufacturer of insurance, annuity and asset management products for the accumulation, preservation
and transfer of wealth. We provide products and services to affluent and high-net-worth individuals through
their advisors and to institutions directly and through consultants. We offer a broad range of life insurance,
annuity and asset management products through a variety of distributors. These products are managed within two
operating segments -- Life and Annuity and Asset Management. We report our remaining activities in two
non-operating segments -- Venture Capital and Corporate and Other.
The Life and Annuity segment includes individual life insurance and annuity products including participating
whole life, universal life, variable life, term life and variable annuities. The Asset Management segment
includes private client and institutional investment management and distribution, including managed accounts,
open-end mutual funds and closed-end funds. We provide more information on the Life and Annuity and Asset
Management operating segments in Note 3 and Note 4, respectively.
The Venture Capital segment includes our equity share in the operating income and the realized and unrealized
investment gains of our venture capital partnership investments held in the general account of Phoenix Life,
but outside the closed block. We provide more information on this segment in Note 5. The Corporate and Other
segment includes all interest expense, as well as several smaller subsidiaries and investment activities which
do not meet the thresholds of reportable segments. These include international operations and the run-off of
our group pension and guaranteed investment contract businesses.
We evaluate segment performance on the basis of segment income. Realized investment gains and losses and some
non-recurring items are excluded because we do not consider them when evaluating the financial performance of
the segments. The size and timing of realized investment gains and losses are often subject to our discretion.
The non-recurring items are removed from segment after-tax operating income if, in our opinion, they are not
indicative of overall operating trends. While some of these items may be significant components of net income,
we believe that segment income is an appropriate measure that represents the earnings attributable to the
ongoing operations of the business.
The criteria used to identify an item that will be excluded from segment income include: whether the item is
infrequent and is material to the segment's income; or whether it results from a business restructuring, or a
change in regulatory requirements, or relates to other unusual circumstances (e.g., non-routine litigation). We
include information on other items allocated to our segments in their respective notes for information only.
Items excluded from segment income may vary from period to period. Because these items are excluded based on
our discretion, inconsistencies in the application of our selection criteria may exist. Segment income is not a
substitute for net income determined in accordance with GAAP and may be different from similarly titled
measures of other companies.
We allocate indebtedness and related interest expense to our Corporate and Other segment. We allocate capital
to our Life and Annuity segment based on risk-based capital, or RBC, for our insurance products. We used 300%
of RBC levels for 2004 and 2003. Capital within our life insurance companies that is unallocated is included in
our Corporate and Other segment. We allocate capital to our Asset Management segment on the basis of the
historical capital within that segment. We allocate net investment income based on the assets allocated to the
segments. We allocate certain costs and expenses to the segments based on a review of the nature of the costs,
time studies and other methodologies. Investment income on debt and equity securities pledged as collateral as
well as interest expense on non-recourse collateralized obligations, both related to three consolidated
collateralized obligation trusts we sponsor, are included in the Corporate and Other segment. Excess investment
income on debt and equity securities pledged as collateral represent investment advisory fees earned by our
asset management subsidiary and are allocated to the Asset Management segment as investment product fees for
segment reporting purposes only.
10
Segment Information on Assets:
($ amounts in millions) Mar 31, 2004 Dec 31, 2003
--------------- ---------------
Segment assets
Life and annuity segment...................................................... $ 24,832.4 $ 24,219.5
Asset management segment...................................................... 830.4 851.2
--------------- ---------------
Operating segment assets...................................................... 25,662.8 25,070.7
Venture capital segment....................................................... 202.2 196.3
Corporate and other segment................................................... 2,264.5 2,264.0
--------------- ---------------
Total segment assets.......................................................... 28,129.5 27,531.0
Net assets of discontinued operations......................................... 27.3 28.2
--------------- ---------------
Total assets.................................................................. $ 28,156.8 $ 27,559.2
=============== ===============
Three Months Ended
March 31,
--------------------------------
Segment Information on Revenues and Income: 2003
($ amounts in millions) 2004 Restated
--------------- ---------------
Segment revenues
Life and annuity segment...................................................... $ 572.1 $ 572.5
Asset management segment...................................................... 70.2 57.4
Elimination of inter-segment revenues......................................... 0.8 (1.2)
--------------- ---------------
Operating segment revenues.................................................... 643.1 628.7
Venture capital segment....................................................... 11.6 23.9
Corporate and other segment................................................... 16.6 21.2
--------------- ---------------
Total segment revenues........................................................ 671.3 673.8
Net realized investment gains (losses)........................................ 2.5 (14.1)
Other......................................................................... -- (0.5)
--------------- ---------------
Total revenues................................................................ $ 673.8 $ 659.2
=============== ===============
Segment income
Life and annuity segment...................................................... $ 25.8 $ 18.0
Asset management segment...................................................... 0.1 (5.8)
--------------- ---------------
Operating segment pre-tax income.............................................. 25.9 12.2
Venture capital segment....................................................... 11.6 23.9
Corporate and other segment................................................... (12.7) (11.4)
--------------- ---------------
Total segment income before income taxes...................................... 24.8 24.7
Applicable income taxes....................................................... 7.3 7.5
--------------- ---------------
Total segment income.......................................................... 17.5 17.2
Gain (loss) from discontinued operations, net of income taxes................. 0.3 (0.4)
Net realized investment gains (losses), net of income taxes and other offsets. 0.8 (14.3)
Restructuring costs, net of income taxes...................................... (2.0) (2.5)
Other income, net of income taxes............................................. -- 1.3
--------------- ---------------
Net income.................................................................... $ 16.6 $ 1.3
=============== ===============
In the second quarter of 2003, we transferred our equity investment in Aberdeen Asset Management PLC, or
Aberdeen, from our Asset Management segment to the Corporate and Other segment. As a result, we have
reclassified prior year information for consistency.
11
3. Life and Annuity Segment
The Life and Annuity segment includes individual life insurance and annuity products of Phoenix Life and
certain of its subsidiaries and affiliates (together, our Life Companies), including universal life, variable
universal life, term life and fixed and variable annuities. It also includes the results of our closed block,
which consists primarily of participating whole life products. Segment information on assets, segment income
and deferred policy acquisition costs follows:
Life and Annuity Segment Assets:
($ amounts in millions)
Mar 31, 2004 Dec 31, 2003
--------------- ---------------
Segment assets
Investments................................................................... $ 16,562.5 $ 16,203.3
Cash and cash equivalents..................................................... 200.7 250.5
Receivables................................................................... 224.4 228.1
Deferred policy acquisition costs............................................. 1,358.5 1,367.7
Deferred income taxes......................................................... 11.6 40.2
Goodwill and other intangible assets.......................................... 7.2 15.3
Other general account assets.................................................. 174.2 204.1
Separate accounts............................................................. 6,293.3 5,910.3
--------------- ---------------
Total segment assets.......................................................... $ 24,832.4 $ 24,219.5
=============== ===============
Life and Annuity Segment Income: Three Months Ended
($ amounts in millions) March 31,
--------------------------------
2004 2003
--------------- ---------------
Segment income
Premiums...................................................................... $ 232.7 $ 246.1
Insurance and investment product fees......................................... 89.5 78.1
Net investment income......................................................... 249.9 248.3
--------------- ---------------
Total segment revenues........................................................ 572.1 572.5
--------------- ---------------
Policy benefits, including policyholder dividends............................. 449.0 455.3
Policy acquisition cost amortization.......................................... 22.2 27.5
Other operating expenses...................................................... 75.1 71.7
--------------- ---------------
Total segment benefits and expenses........................................... 546.3 554.5
--------------- ---------------
Segment income before income taxes............................................ 25.8 18.0
Allocated income taxes........................................................ 7.2 4.0
--------------- ---------------
Segment income................................................................ 18.6 14.0
Net realized investment losses, net of income taxes and other offsets......... (3.5) (1.3)
Restructuring charges, after income taxes..................................... (0.8) --
--------------- ---------------
Segment net income............................................................ $ 14.3 $ 12.7
=============== ===============
Three Months Ended
March 31,
Deferred Policy Acquisition Costs: --------------------------------
($ amounts in millions) 2004 2003
--------------- ---------------
Policy acquisition costs deferred............................................. $ 47.0 $ 56.6
Costs amortized to expenses:
Recurring costs related to segment income................................... (22.2) (27.5)
Decrease related to realized investment gains or losses..................... (0.4) (0.5)
Offsets to net unrealized investment gains or losses included in other
comprehensive income........................................................ (33.6) 7.3
--------------- ---------------
Change in deferred policy acquisition costs................................... (9.2) 35.9
Deferred policy acquisition costs, beginning of period........................ 1,367.7 1,234.1
--------------- ---------------
Deferred policy acquisition costs, end of period.............................. $ 1,358.5 $ 1,270.0
=============== ===============
12
We have included in deferred policy acquisition costs the present value of future profits from two major
reinsurance assumed transactions and the purchase of the minority interest in a subsidiary. The amounts
included at March 31, 2004 and December 31, 2003 follow: Confederation Life ($27.1 million and $36.0 million,
respectively), Valley Forge Life ($36.1 million and $37.4 million, respectively) and PFG Holdings ($9.6 million
and $9.7, respectively).
Policy liabilities and accruals
Policyholder liabilities are primarily for participating life insurance policies and universal life insurance
policies. For universal life, this includes deposits received from customers and investment earnings on their
fund balances, which range from 4.0% to 6.0% at March 31, 2004 and 4.0% to 6.25% at December 31, 2003, less
administrative and mortality charges.
Policyholder deposit funds
Policyholder deposit funds primarily consist of annuity deposits received from customers, dividend
accumulations and investment earnings on their fund balances, which range from 1.1% to 12.3% at March 31, 2004
and 1.0% to 12.3% at December 31, 2003, less administrative charges.
Participating life insurance
Participating life insurance in-force was 37.8% and 38.8% of the face value of total individual life insurance
in-force at March 31, 2004 and December 31, 2003, respectively. The premiums on participating life insurance
policies were 54.9% and 68.9% of total individual life insurance premiums for the three months ended March 31,
2004 and 2003, respectively.
Annuity funds under management
Three Months Ended
March 31,
Annuity Funds Under Management: --------------------------------
($ amounts in millions) 2004 2003
--------------- ---------------
Deposits...................................................................... $ 215.0 $ 425.7
Performance................................................................... 211.2 20.2
Fees.......................................................................... (15.3) (11.5)
Benefits and surrenders....................................................... (218.6) (254.2)
--------------- ---------------
Change in funds under management.............................................. 192.3 180.2
Funds under management, beginning of period................................... 7,143.8 5,833.4
--------------- ---------------
Annuity funds under management, end of period................................. $ 7,336.1 $ 6,013.6
=============== ===============
Closed block
In December 1999, we began the process of reorganizing and demutualizing our then principal operating company,
Phoenix Home Life Mutual Insurance Company. 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. Summary financial data for the closed block follows:
13
Closed Block Assets and Liabilities: Inception
($ amounts in millions) Mar 31, 2004 Dec 31, 2003 (Dec 31, 1999)
--------------- --------------- ----------------
Debt securities............................................. $ 7,135.8 $ 6,906.4 $ 4,773.1
Equity securities........................................... 84.5 82.9 --
Mortgage loans.............................................. 218.2 228.5 399.0
Venture capital partnerships................................ 47.3 38.6 --
Policy loans................................................ 1,393.0 1,386.8 1,380.0
Other invested assets....................................... 50.8 46.7 --
--------------- --------------- ----------------
Total closed block investments.............................. 8,929.6 8,689.9 6,552.1
Cash and cash equivalents................................... 43.0 40.5 --
Accrued investment income................................... 120.4 120.2 106.8
Receivables................................................. 41.4 43.0 35.2
Deferred income taxes....................................... 378.2 377.0 389.4
Other closed block assets................................... 37.3 62.3 6.2
--------------- --------------- ----------------
Total closed block assets................................... 9,549.9 9,332.9 7,089.7
--------------- --------------- ----------------
Policy liabilities and accruals............................. 9,752.0 9,723.1 8,301.7
Policyholder dividends payable.............................. 377.1 369.8 325.1
Policyholder dividend obligation............................ 686.1 519.2 --
Other closed block liabilities.............................. 65.8 63.0 12.3
--------------- --------------- ----------------
Total closed block liabilities.............................. 10,881.0 10,675.1 8,639.1
--------------- --------------- ----------------
Excess of closed block liabilities over closed block assets. $ 1,331.1 $ 1,342.2 $ 1,549.4
=============== =============== ================
Closed Block Revenues and Expenses and Changes
in Policyholder Dividend Obligations: Three Months Ended,
($ amounts in millions) Cumulative March 31,
from ---------------------------------
Inception 2004 2003
--------------- --------------- ----------------
Closed block revenues
Premiums.................................................... $ 4,462.7 $ 224.6 $ 238.7
Net investment income....................................... 2,358.8 147.6 146.0
Net realized investment gains (losses)...................... (91.0) (1.9) 11.5
--------------- --------------- ----------------
Total revenues.............................................. 6,730.5 370.3 396.2
--------------- --------------- ----------------
Policy benefits, excluding dividends........................ 4,605.5 245.0 254.2
Other operating expenses.................................... 51.6 2.6 2.7
--------------- --------------- ----------------
Total benefits and expenses, excluding policyholder
dividends................................................. 4,657.1 247.6 256.9
--------------- --------------- ----------------
Closed block contribution to income before dividends and
income taxes.............................................. 2,073.4 122.7 139.3
Policyholder dividends...................................... 1,701.8 105.5 116.5
--------------- --------------- ----------------
Closed block contribution to income before income taxes..... 371.6 17.2 22.8
Applicable income taxes..................................... 130.6 6.1 8.0
--------------- --------------- ----------------
Closed block contribution to income......................... $ 241.0 $ 11.1 $ 14.8
=============== =============== ================
Policyholder dividend obligation
Policyholder dividends provided through earnings............ $ 1,747.0 $ 105.5 $ 116.5
Policyholder dividends provided through other
comprehensive income...................................... 592.7 160.0 3.5
--------------- --------------- ----------------
Additions to policyholder dividend liabilities.............. 2,339.7 265.5 120.0
Policyholder dividends paid................................. (1,601.6) (91.3) (93.7)
--------------- --------------- ----------------
Increase in policyholder dividend liabilities............... 738.1 174.2 26.3
Policyholder dividend liabilities, beginning of period...... 325.1 889.0 910.5
--------------- --------------- ----------------
Policyholder dividend liabilities, end of period............ 1,063.2 1,063.2 936.8
Less: policyholder dividends payable, end of period......... 377.1 377.1 374.6
--------------- --------------- ----------------
Policyholder dividend obligation, end of period............. $ 686.1 $ 686.1 $ 562.2
=============== =============== ================
14
4. Asset Management Segment
We conduct activities in Asset Management with a focus on two customer groups -- private client and
institutional. Through our private client group, we provide asset management services principally on a
discretionary basis, with products consisting of open-end mutual funds, closed-end funds and managed accounts.
Managed accounts include intermediary programs sponsored and distributed by non-affiliated broker-dealers and
direct managed accounts which are sold and administered by us. Our private client business also provides
transfer agency, accounting and administrative services to most of our open-end mutual funds.
Through our institutional group, we provide discretionary and non-discretionary asset management services
primarily to corporations, multi-employer retirement funds and foundations, as well as to endowment and special
purpose funds. In addition, we manage alternative financial products, including structured finance products.
Structured finance products include collateralized obligations backed by portfolios of public high yield bonds,
emerging markets bonds, commercial mortgage-backed and asset-backed securities or bank loans. See Note 7 for
additional information.
We offer asset management services through our affiliated asset managers. We provide these affiliated asset
managers with a consolidated platform of distribution and administrative support, thereby allowing each manager
to devote a high degree of focus to investment management activities. On an ongoing basis, we monitor the
quality of the affiliates' products by assessing their performance, style consistency and the discipline with
which they apply their investment process. Segment information on assets, segment income and intangible assets
and goodwill follows:
Asset Management Segment Assets:
($ amounts in millions) Mar 31, 2004 Dec 31, 2003
--------------- ---------------
Segment assets
Investments................................................................... $ 12.0 $ 11.8
Cash and cash equivalents..................................................... 35.4 39.6
Receivables................................................................... 31.1 36.0
Intangible assets with definite lives......................................... 255.3 261.8
Goodwill and other indefinite-lived intangible assets......................... 483.9 481.4
Other assets.................................................................. 12.7 20.6
--------------- ---------------
Total segment assets.......................................................... $ 830.4 $ 851.2
=============== ===============
Three Months Ended
March 31,
Asset Management Segment Income: --------------------------------
($ amounts in millions) 2004 2003
--------------- ---------------
Segment income
Investment product fees....................................................... $ 70.1 $ 57.2
Net investment income......................................................... 0.1 0.2
--------------- ---------------
Total segment revenues........................................................ 70.2 57.4
--------------- ---------------
Intangible asset amortization................................................. 8.3 8.4
Other operating expenses...................................................... 58.1 52.0
--------------- ---------------
Total segment expenses........................................................ 66.4 60.4
--------------- ---------------
Segment income (loss) before income taxes and minority interest............... 3.8 (3.0)
Allocated income taxes (benefit).............................................. 0.4 (2.1)
--------------- ---------------
Segment income (loss) before minority interest................................ 3.4 (0.9)
Minority interest in segment income of consolidated subsidiaries.............. 3.7 2.8
--------------- ---------------
Segment loss.................................................................. (0.3) (3.7)
Restructuring charges, net of income taxes.................................... -- (3.0)
Realized investment gains, net of income taxes................................ 1.4 --
Other......................................................................... (0.1) 1.3
--------------- ---------------
Segment net income (loss)..................................................... $ 1.0 $ (5.4)
=============== ===============
15
Beginning in 2004, trailing commissions related to mutual funds are classified as operating expenses, whereas
in prior years, trailing commissions were presented as a deduction to investment product fees. The Asset
Management segment charges investment management fees, on a cost recovery basis, to the Life Companies for
managing their general account assets. Beginning in 2004, these fees, as well as the associated expenses, have
been eliminated. This treatment has no effect on the segment's net income. Prior year amounts have been
reclassified to conform to current year presentation.
Intangible assets and goodwill
Carrying Amounts of Intangible Assets and Goodwill:
($ amounts in millions) Mar 31, 2004 Dec 31, 2003
--------------- ---------------
Asset management contracts with definite lives................................ $ 396.2 $ 396.1
Less: accumulated amortization................................................ 140.9 134.3
--------------- ---------------
Intangible assets with definite lives......................................... $ 255.3 $ 261.8
=============== ===============
Goodwill...................................................................... $ 410.6 $ 408.1
Asset management contracts with indefinite lives.............................. 73.3 73.3
--------------- ---------------
Goodwill and other indefinite-lived intangible assets......................... $ 483.9 $ 481.4
=============== ===============
Activity in Intangible Assets and Goodwill: Three Months Ended
($ amounts in millions) March 31,
--------------------------------
2004 2003
--------------- ---------------
Intangible assets with definite lives
Asset purchases............................................................... $ 1.8 $ --
Asset amortization............................................................ (8.3) (8.4)
--------------- ---------------
Change in intangible assets with definite lives............................... (6.5) (8.4)
Balance, beginning of period.................................................. 261.8 291.7
--------------- ---------------
Balance, end of period........................................................ $ 255.3 $ 283.3
=============== ===============
Goodwill and other indefinite-lived intangible assets
Asset purchases............................................................... $ 2.5 $ --
--------------- ---------------
Change in goodwill and other indefinite-lived intangible assets............... 2.5 --
Balance, beginning of period.................................................. 481.4 448.9
--------------- ---------------
Balance, end of period........................................................ $ 483.9 $ 448.9
=============== ===============
Upon acquisition, we calculate and record the fair value of definite-lived intangible assets based on their
discounted cash flows. To conduct subsequent tests for impairments, we calculate the current fair value of the
asset, compare it to the recorded value, and record an impairment if warranted. For purposes of our testing for
goodwill and indefinite-lived intangible asset impairments, we calculate the fair value of each reporting unit
based on the sum of a multiple of revenue and the fair value of the unit's tangible net assets.
The estimated aggregate intangible asset amortization expense in future periods is: nine months ended December
31, 2004 - $24.8 million, 2005 - $32.3 million, 2006 - $27.3 million, 2007 - $26.2 million, 2008 - $26.5
million, 2009 - $24.9 million and thereafter - $93.3 million. At March 31, 2004, the remaining weighted-average
amortization period for definite-lived intangible assets is 8.8 years.
16
5. Investing Activities
Debt and equity securities
Fair Value and Cost of Debt March 31, 2004 December 31, 2003
and Equity Securities: --------------------------------- --------------------------------
($ amounts in millions) Fair Value Cost Fair Value Cost
--------------- --------------- --------------- ---------------
U.S. government and agency................. $ 780.9 $ 704.5 $ 757.0 $ 714.5
State and political subdivision............ 515.0 462.7 510.3 468.4
Foreign government......................... 274.0 245.2 260.4 239.0
Corporate.................................. 7,167.7 6,689.4 6,765.8 6,412.4
Mortgage-backed............................ 3,094.2 2,910.5 3,097.5 2,963.4
Other asset-backed......................... 1,799.2 1,771.9 1,882.0 1,863.6
--------------- --------------- --------------- ---------------
Debt securities............................ $ 13,631.0 $ 12,784.2 $ 13,273.0 $ 12,661.3
=============== =============== =============== ===============
Amounts applicable to the
closed block............................. $ 7,135.8 $ 6,542.3 $ 6,906.4 $ 6,471.1
=============== =============== =============== ===============
Hilb, Rogal and Hamilton, or HRH,
common stock............................. $ 138.1 $ 42.2 $ 116.2 $ 42.2
Lombard International Assurance, S.A....... 42.1 42.1 41.1 41.1
Other equity securities.................... 158.7 140.9 154.7 139.1
--------------- --------------- --------------- ---------------
Equity securities.......................... $ 338.9 $ 225.2 $ 312.0 $ 222.4
=============== =============== =============== ===============
Amounts applicable to the
closed block............................. $ 84.5 $ 76.6 $ 82.9 $ 75.0
=============== =============== =============== ===============
Our holdings in HRH common stock as of March 31, 2004 are available to be used in November 2005 to settle stock
purchase contracts issued by us. Upon settlement of such stock purchase contracts, we will recognize a gross
investment gain of $91.8 million ($32.4 million net of offsets for applicable deferred acquisition costs and
deferred income taxes). See Note 6 for additional information.
Gross and Net Unrealized Gains and
Losses from General Account Debt March 31, 2004 December 31, 2003
and Equity Securities: --------------------------------- --------------------------------
($ amounts in millions) Gains Losses Gains Losses
--------------- --------------- --------------- ---------------
U.S. government and agency................. $ 76.6 $ (0.2) $ 44.0 $ (1.5)
State and political subdivision............ 52.4 (0.1) 43.5 (1.6)
Foreign government......................... 29.0 (0.2) 23.2 (1.8)
Corporate.................................. 510.1 (31.8) 400.4 (47.0)
Mortgage-backed............................ 185.6 (1.9) 143.4 (9.3)
Other asset-backed......................... 62.1 (34.8) 55.6 (37.2)
--------------- --------------- --------------- ---------------
Debt securities gains (losses)............. $ 915.8 $ (69.0) $ 710.1 $ (98.4)
=============== =============== =============== ===============
Debt securities net gains.................. $ 846.8 $ 611.7
=============== ===============
Hilb, Rogal and Hamilton common stock...... $ 95.9 $ -- $ 74.0 $ --
Other equity securities.................... 20.3 (2.5) 17.4 (1.8)
--------------- --------------- --------------- ---------------
Equity securities gains (losses)........... $ 116.2 $ (2.5) $ 91.4 $ (1.8)
=============== =============== =============== ===============
Equity securities net gains................ $ 113.7 $ 89.6
=============== ===============
17
Mortgage loans
Carrying Values of Investments March 31, 2004 December 31, 2003
in Mortgage Loans: ----------------------------- ----------------------------
($ amounts in millions) Carrying Carrying
Value Fair Value Value Fair Value
-------------- ------------- ------------- -------------
Property type
Apartment buildings.......................... $ 103.8 $ 105.4 $ 105.1 $ 106.7
Office buildings............................. 41.1 41.6 49.0 49.7
Retail stores................................ 107.9 109.6 109.0 110.7
Industrial buildings......................... 30.1 30.5 33.7 34.2
Other........................................ 0.1 0.1 0.1 0.1
-------------- ------------- ------------- -------------
Subtotal..................................... 283.0 287.2 296.9 301.4
Less: valuation allowances................... 11.5 -- 12.8 --
-------------- ------------- ------------- -------------
Mortgage loans............................... $ 271.5 $ 287.2 $ 284.1 $ 301.4
============== ============= ============= =============
Amounts applicable to the
closed block............................... $ 218.2 $ 231.5 $ 228.5 $ 242.4
============== ============= ============= =============
March 31, 2004
Aging of Temporarily ----------------------------------------------------------------------
Impaired General Account Debt Less than 12 months Greater than 12 months Total
and Equity Securities ----------------------- ----------------------- ----------------------
($ amounts in millions) Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------- ----------- ----------- ----------- ----------- ----------
Debt securities
U.S. government and agency....... $ 5.9 $ (0.2) $ 0.1 $ -- $ 6.0 $ (0.2)
State and political subdivision.. 19.9 (0.1) -- -- 19.9 (0.1)
Foreign government............... 11.0 (0.2) -- -- 11.0 (0.2)
Corporate........................ 583.1 (16.0) 185.7 (15.8) 768.8 (31.8)
Mortgage-backed.................. 276.0 (1.8) 14.4 (0.1) 290.4 (1.9)
Other asset-backed............... 198.9 (6.8) 121.3 (28.0) 320.2 (34.8)
----------- ----------- ----------- ----------- ----------- -----------
Debt securities.................. $ 1,094.8 $ (25.1) $ 321.5 $ (43.9) $ 1,416.3 $ (69.0)
Common stock..................... 25.4 (2.2) 0.9 (0.3) 26.3 (2.5)
----------- ----------- ----------- ----------- ----------- -----------
Total temporarily impaired
securities..................... $ 1,120.2 $ (27.3) $ 322.4 $ (44.2) $ 1,442.6 $ (71.5)
=========== =========== =========== =========== =========== ===========
Amounts inside the closed
block.......................... $ 530.1 $ (15.0) $ 131.4 $ (12.8) $ 661.5 $ (27.8)
=========== =========== =========== =========== =========== ===========
Amounts outside the closed
block.......................... $ 590.1 $ (12.3) $ 191.0 $ (31.4) $ 781.1 $ (43.7)
=========== =========== =========== =========== =========== ===========
Amounts outside the closed
block that are below
investment grade............... $ 65.1 $ (4.0) $ 46.8 $ (7.9) $ 111.9 $ (11.9)
=========== =========== =========== =========== =========== ===========
After offsets for deferred
acquisition cost adjustment
and taxes...................... $ (1.6) $ (3.0) $ (4.6)
=========== =========== ===========
Below investment grade debt securities outside the closed block with a fair value less than 80% of the
security's amortized cost totals $7.0 million at March 31, 2004, $4.3 million ($1.6 million after offsets for
taxes and deferred policy acquisition cost amortization) of which has been in an unrealized loss for greater
than 12 months.
Below investment grade debt securities held in the closed block with a fair value of less than 80% of the
securities' amortized cost totals $9.0 million at March 31, 2004, $4.9 million ($0 after offsets for change in
policy dividend obligation) of which has been in an unrealized loss for greater than 12 months.
These securities are considered to be temporarily impaired at March 31, 2004 as each of these securities has
performed, and is expected to continue to perform, in accordance with their original contractual terms.
18
Venture capital partnerships
Three Months Ended
Components of Net Investment Income Related to Venture Capital March 31,
Partnerships: --------------------------------
($ amounts in millions) 2004 2003
--------------- ---------------
Net realized losses on partnership cash and stock distributions.......... $ (3.7) $ (1.1)
Net unrealized gains on partnership investments.......................... 22.2 30.9
Partnership operating expenses........................................... (0.9) (0.9)
--------------- ---------------
Net investment income.................................................... $ 17.6 $ 28.9
=============== ===============
Amounts applicable to the closed block................................... $ 6.0 $ 5.0
=============== ===============
Amounts applicable to the venture capital segment........................ $ 11.6 $ 23.9
=============== ===============
The effect of our adjusting estimated partnership results to actual results reflected in partnership financial
statements was to increase net investment income as follows:
Three Months Ended
Effect of Adjustment from Estimated Partnership Results to March 31,
Actual Partnership Financial Statements: --------------------------------
($ amounts in millions) 2004 2003
--------------- ---------------
Closed block............................................................. $ 4.7 $ --
Venture capital segment.................................................. 9.2 30.5
--------------- ---------------
Total.................................................................... $ 13.9 $ 30.5
=============== ===============
Three Months Ended
March 31,
Investment Activity in Venture Capital Partnerships: --------------------------------
($ amounts in millions) 2004 2003
--------------- ---------------
Contributions............................................................ $ 11.8 $ 12.9
Equity in earnings of partnerships....................................... 17.6 28.9
Distributions............................................................ (14.8) (3.1)
Proceeds from sale of partnership interests.............................. -- (26.1)
Realized loss on sale of partnership interests........................... -- (13.8)
--------------- ---------------
Change in venture capital partnerships................................... 14.6 (1.2)
Venture capital partnership investments, beginning of period............. 234.9 228.6
--------------- ---------------
Venture capital partnership investments, end of period................... $ 249.5 $ 227.4
=============== ===============
Unfunded Commitments and Investments in Venture
Capital Partnerships:
($ amounts in millions) Mar 31, 2004 Dec 31, 2003
--------------- ---------------
Unfunded commitments
Closed block............................................................. $ 50.6 $ 48.3
Venture capital segment.................................................. 69.0 76.7
--------------- ---------------
Total unfunded commitments............................................... $ 119.6 $ 125.0
=============== ===============
Venture capital partnerships
Closed block............................................................. $ 47.3 $ 38.6
Venture capital segment.................................................. 202.2 196.3
--------------- ---------------
Total venture capital partnerships....................................... $ 249.5 $ 234.9
=============== ===============
Affiliate equity securities
The fair value of our investment in Aberdeen common stock, based on the London Stock Exchange closing price at
May 6, 2004, March 31, 2004 and December 31, 2003, was $56.0 million, $65.5 million and $54.4 million,
19
respectively. The carrying value of our investment in Aberdeen on the equity method of accounting totaled $39.6
million and $38.3 million at March 31, 2004 and December 31, 2003, respectively.
Net investment income
Three Months Ended
March 31,
--------------------------------
Sources of Net Investment Income: 2003
($ amounts in millions) 2004 Restated
--------------- ---------------
Debt securities............................................................ $ 192.1 $ 187.2
Equity securities.......................................................... 0.4 1.3
Mortgage loans............................................................. 5.9 12.1
Venture capital partnerships............................................... 17.6 28.9
Affiliate equity securities................................................ 0.3 0.2
Policy loans............................................................... 42.2 42.6
Other investments.......................................................... 12.1 4.3
Cash and cash equivalents.................................................. 0.7 3.3
--------------- ---------------
Total investment income.................................................... 271.3 279.9
Less: investment expenses.................................................. 3.2 2.9
--------------- ---------------
Net investment income, general account investments......................... 268.1 277.0
Debt and equity securities pledged as collateral (Note 7).................. 10.1 14.1
--------------- ---------------
Net investment income...................................................... $ 278.2 $ 291.1
=============== ===============
Amounts applicable to the closed block..................................... $ 147.6 $ 146.0
=============== ===============
Net realized investment gains (losses) Three Months Ended
March 31,
--------------------------------
Sources and Types of Net Realized Investment Gains (Losses): 2003
($ amounts in millions) 2004 Restated
--------------- ---------------
Debt security impairments.................................................. $ (2.8) $ (22.5)
Mortgage loan impairments.................................................. -- (0.4)
Venture capital partnership impairments.................................... -- (4.3)
Other invested asset impairments........................................... (3.3) (8.7)
Debt and equity securities pledged as collateral impairments............... (4.7) (4.9)
--------------- ---------------
Impairment losses.......................................................... (10.8) (40.8)
--------------- ---------------
Debt security transaction gains............................................ 10.2 53.6
Debt security transaction losses........................................... (3.2) (12.3)
Equity security transaction gains.......................................... 2.6 0.4
Equity security transaction losses......................................... (0.4) (2.6)
Mortgage loan transaction gains (losses)................................... 0.2 (0.4)
Venture capital partnership transaction gains (losses)..................... -- (9.5)
Other invested asset transaction gains (losses)............................ 3.9 (2.5)
--------------- ---------------
Net transaction gains...................................................... 13.3 26.7
--------------- ---------------
Net realized investment gains (losses)..................................... $ 2.5 $ (14.1)
--------------- ---------------
Net realized investment gains (losses)..................................... $ 2.5 $ (14.1)
--------------- ---------------
Applicable closed block policyholder dividend obligation................... 0.1 8.5
Applicable deferred policy acquisition costs............................... 0.4 0.5
Applicable deferred income taxes (benefit)................................. 1.2 (8.9)
--------------- ---------------
Offsets to realized investment gains....................................... 1.7 0.1
--------------- ---------------
Net realized investment gains (losses) included in net income.............. $ 0.8 $ (14.2)
=============== ===============
20
Unrealized investment gains (losses)
Three Months Ended
March 31,
Sources of Changes in Net Unrealized Investment Gains (Losses): --------------------------------
($ amounts in millions) 2003
2004 Restated
--------------- ---------------
Debt securities............................................................ $ 235.1 $ (25.5)
Equity securities.......................................................... 24.1 (28.1)
Debt and equity securities pledged as collateral........................... (4.7) 31.5
Other investments ......................................................... 1.9 1.3
--------------- ---------------
Net unrealized investment gains (losses)................................... $ 256.4 $ (20.8)
=============== ===============
Net unrealized investment gains (losses)................................... $ 256.4 $ (20.8)
--------------- ---------------
Applicable closed block policyholder dividend obligation................... 160.0 3.6
Applicable deferred policy acquisition costs (benefit)..................... 33.6 (7.3)
Applicable deferred income taxes (benefit)................................. 24.4 (18.5)
--------------- ---------------
Offsets to net unrealized investment gains (losses)........................ 218.0 (22.2)
--------------- ---------------
Net unrealized investment gains (losses) included in
other comprehensive income............................................... $ 38.4 $ 1.4
=============== ===============
6. Financing Activities
Stock purchase contracts and indebtedness
Carrying value and fair value of our stock purchase contracts and indebtedness as of March 31, 2004 and
December 31, 2003 follows:
March 31, 2004 December 31, 2003
----------------------------- ----------------------------
Stock Purchase Contracts: Carrying Fair Carrying Fair
($ amounts in millions) Value Value Value Value
------------- ------------- ------------- -------------
Stock purchase contracts stated amount......... $ 143.4 $ 145.1 $ 144.2 $ 128.8
Settlement amount adjustment................... 1.7 -- (15.4) --
------------- ------------- ------------- -------------
Stock Purchase Contracts....................... $ 145.1 $ 145.1 $ 128.8 $ 128.8
============= ============= ============= =============
In November 2002, we issued stock purchase contracts in a public offering. The stock purchase contracts are
prepaid forward contracts issued by us that will be settled in shares of Hilb, Rogal and Hamilton Company, or
HRH, common stock. Upon issuance of the stock purchase contracts, we designated the embedded derivative
instrument as a hedge of the forecasted sale of our investment in HRH, whose shares underlie the stock purchase
contracts. All changes in the fair value of the embedded derivative instrument are recorded in other
comprehensive income. For the three months ended March 31, 2004 and 2003, we recognized an increase (decrease)
in the fair value of the embedded derivative instrument of $(17.1) million ($(11.1) million after income taxes)
and $18.4 million ($12.0 million after income taxes), respectively, in other comprehensive income. These
changes in the fair value of the embedded derivative are primarily due to fluctuations in the quoted market
price of HRH common stock during the respective quarters ended March 31, 2004 and 2003. The quoted market price
of HRH common stock, which was $38.10 at March 31, 2004, was equal to the price that we received at issuance of
the stock purchase contracts. For more information, see Notes 5 and 6 to our consolidated financial statements
in our 2003 Annual Report on Form 10-K.
21
March 31, 2004 December 31, 2003
--------------------------------- --------------------------------
Indebtedness: Carrying Fair Carrying Fair
($ amounts in millions) Value Value Value Value
--------------- --------------- --------------- ---------------
Surplus notes............................. $ 175.0 $ 185.9 $ 175.0 $ 188.8
Equity units.............................. 153.7 254.9 153.7 232.1
Senior unsecured bonds.................... 300.0 311.9 300.0 311.2
Revolving credit facility................. 25.0 25.0 -- --
Interest rate swap........................ 13.1 13.1 10.3 10.3
--------------- --------------- --------------- ---------------
Total indebtedness........................ $ 666.8 $ 790.8 $ 639.0 $ 742.4
=============== =============== =============== ===============
On December 22, 2003, we closed on a new $150.0 million unfunded, unsecured senior revolving credit facility to
replace our $100 million credit facility, which expired on that date. This new facility consists of two
tranches: a $112.5 million, 364-day revolving credit facility and a $37.5 million, three-year revolving credit
facility. Under the 364-day facility, we have the ability to extend the maturity date of any outstanding
borrowings for one year from the termination date. Potential borrowers on the new credit line are the holding
company, Phoenix Life and PXP. Financial covenants require the maintenance at all times of: consolidated
stockholders' equity of $1,775.0 million, stepping up by 50% of quarterly positive net income and 100% of
equity issuances; a maximum consolidated debt-to-capital ratio of 30%; a minimum consolidated fixed charge
coverage ratio (as defined in the credit agreement) of 1.25:1; and, for Phoenix Life, a minimum risk-based
capital ratio of 250% and a minimum A.M. Best Financial Strength Rating of A-. On March 15, 2004, PXP borrowed
$25.0 million from the $37.5 million three-year tranche of our $150.0 million senior revolving credit facility
to fulfill an obligation related to the Kayne Anderson Rudnick acquisition as further described in Note 1 of
these consolidated financial statements. We were in compliance with all credit facility covenants at March 31,
2004.
On April 16, 2004, we executed a technical amendment to the credit agreement, effective as of December 31,
2003, to: (1) exclude the accounting effects of FIN 46-R from the definition of shareholders' equity and (2)
clarify that the lenders did no intend to treat CDOs as indebtedness, for purposes of calculating financial
covenant compliance.
Three Months Ended
Interest Expense on Indebtedness, including Amortization of Debt Issuance March 31,
Costs: --------------------------------
($ amounts in millions) 2004 2003
--------------- ---------------
Stock purchase contract adjustment payments.................................. $ 2.0 $ 2.0
=============== ===============
Surplus notes................................................................ $ 3.1 $ 3.1
Equity units................................................................. 3.0 3.0
Senior unsecured bonds....................................................... 3.6 3.7
Bank credit facility and other............................................... 0.1 --
--------------- ---------------
Total interest expense on indebtedness....................................... $ 9.8 $ 9.8
=============== ===============
Stock purchase contract adjustment payments are included in other operating expenses.
Common stock dividends
On April 29, 2004, we declared a cash dividend of $0.16 per share, payable July 12, 2004 to shareholders of
record on June 14, 2004. In the prior year, we declared a dividend of $0.16 per share on April 28, 2003 to our
shareholders of record on June 13, 2003; we paid that dividend on July 11, 2003.
22
7. Investments Pledged as Collateral and Non-recourse Collateralized Obligations
We are involved with various entities in the normal course of business that may be deemed to be variable
interest entities and, as a result, we may be deemed to hold interests in those entities. We serve as the
investment advisor to eight collateralized obligation trusts that were organized to take advantage of bond
market arbitrage opportunities, including the three in the table below. These eight collateralized obligation
trusts are investment trusts with aggregate assets of $3.1 billion that are primarily invested in a variety of
fixed income securities acquired from third parties. These collateralized obligation trusts, in turn, issued
tranched collateralized obligations and residual equity securities to third parties, as well as to our
principal life insurance subsidiary's general account. Our asset management affiliates earned advisory fees of
$1.4 million and $1.0 million for the quarters ended March 31, 2004 and 2003, respectively, which are either
recorded as investment product fees for unconsolidated trusts or reflected as investment income on debt and
equity securities pledged as collateral, net of interest expense on collateralized obligations and applicable
minority interest for consolidated trusts on our consolidated statement of income. The collateralized
obligation trusts reside in bankruptcy remote SPEs in which we provide neither recourse nor guarantees.
Accordingly, our sole financial exposure to these collateralized obligation trusts stems from life insurance
subsidiary's general account direct investment in certain debt or equity securities issued by these
collateralized obligation trusts. Our maximum exposure to loss with respect to our life insurance subsidiary's
direct investment in the eight collateralized obligation trusts is $76.1 million at March 31, 2004 ($27.0
million of which relate to trusts that are consolidated). Of that exposure, $49.1 million ($20.0 million of
which relate to trusts that are consolidated) relates to investment grade debt securities and loss of
management fees.
We consolidated three collateralized obligation trusts as of March 31, 2004 and 2003. As of March 31, 2004, our
direct investment in the three consolidated collateralized obligation trusts is $27.0 million, $20.0 million of
which is an investment grade debt security as of March 31, 2004. We recognized investment income on debt and
equity securities pledged as collateral, net of interest expense on collateralized obligations and applicable
minority interest of $0.9 million and $0.3 million for the quarters ended March 31, 2004 and 2003,
respectively, related to these three consolidated collateralized obligation trusts.
Five variable interest entities not consolidated by us under FIN 46-R represent collateralized obligation
trusts with approximately $1.7 billion of investment assets pledged as collateral. Our general account direct
investment in these unconsolidated variable interest entities is $49.1 million, $34.1 million of which are
investment grade debt securities at March 31, 2004. We recognized investment advisory fee revenues related to
the five unconsolidated variable interest entities of $0.1 million and $0.3 million for the quarters ended
March 31, 2004 and 2003, respectively.
Consolidated Variable Interest Entities:
($ amounts in millions)
Mar 31, 2004 Dec 31, 2003
--------------- ---------------
Assets Pledged as Collateral, at Fair Value
Phoenix CDO I................................................................ $ 114.9 $ 148.8
Phoenix CDO II............................................................... 327.7 332.6
Phoenix-Mistic 2002-1 CDO, Ltd............................................... 970.6 963.4
--------------- ---------------
Total........................................................................ $ 1,413.2 $ 1,444.8
=============== ===============
Non-recourse Collateralized Obligations
Phoenix CDO I (March 2011 maturity).......................................... $ 151.0 $ 183.2
Phoenix CDO II (December 2012 mandatorily redeemable)........................ 374.5 375.6
Phoenix-Mistic 2002-1 CDO, Ltd. (September 2014 maturity).................... 919.5 913.2
--------------- ---------------
Total........................................................................ $ 1,445.0 $ 1,472.0
=============== ===============
Assets pledged as collateral are comprised of available-for-sale debt and equity securities at fair value of
$1,389.2 million and $1,350.0 million at March 31, 2004 and December 31, 2003, respectively. In addition, cash
and
23
accrued investment income of $24.0 million and $94.8 million are included in these amounts at March 31, 2004
and December 31, 2003, respectively.
Non-recourse collateralized obligations are comprised of callable collateralized obligations of $1,304.9
million and $1,344.3 million at March 31, 2004 and December 31, 2003, respectively, and non-recourse derivative
cash flow hedge liabilities of $140.1 million (notional amount of $1,145.1 million with maturities of
2005-2013) and $127.8 million (notional amount of $1,211.3 million with maturities of 2005-2013) at March 31,
2004 and December 31, 2003, respectively. Minority interest liabilities related to third-party equity
investments in the consolidated variable interest entities is $24.2 million and $22.3 million at March 31, 2004
and December 31, 2003, respectively.
Fair Value and Cost of Debt and Equity Securities March 31, 2004 December 31, 2003
Pledged as Collateral: -------------------------- -------------------------
($ amounts in millions) Fair Value Cost Fair Value Cost
----------- ------------ ------------ -----------
Debt securities pledged as collateral.................. $ 1,388.3 $ 1,268.0 $ 1,348.8 $ 1,247.4
Equity securities pledged as collateral................ 0.9 0.7 1.2 0.7
----------- ------------ ------------ -----------
Total debt and equity securities
pledged as collateral................................ $ 1,389.2 $ 1,268.7 $ 1,350.0 $ 1,248.1
=========== ============ ============ ===========
Gross and Net Unrealized Gains and Losses from March 31, 2004 December 31, 2003
Debt and Equity Securities Pledged as Collateral: -------------------------- -------------------------
($ amounts in millions) Gains Losses Gains Losses
----------- ------------ ------------ -----------
Debt securities pledged as collateral.................. $ 150.0 $ (29.8) $ 129.7 $ (28.3)
Equity securities pledged as collateral................ 0.6 (0.3) 0.7 (0.2)
----------- ------------ ------------ -----------
Total.................................................. $ 150.6 $ (30.1) $ 130.4 $ (28.5)
=========== ============ ============ ===========
Net unrealized gains................................... $ 120.5 $ 101.9
=========== ============
As of March 31, 2004
---------------------------------------------------------------------
Aging of Temporarily Impaired Debt and Less than 12 months Greater than 12 months Total
Equity Securities Pledged as Collateral: ----------------------- ---------------------- ----------------------
($ amounts in millions) Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
---------- ------------ ---------- ----------- ---------- -----------
Debt securities pledged as collateral
by type
Corporate................................. $ 8.9 $ (1.3) $ 48.6 $ (6.3) $ 57.5 $ (7.6)
Mortgage-backed........................... 13.6 (1.8) 26.9 (12.5) 40.5 (14.3)
Other Asset-backed........................ -- -- 37.6 (7.9) 37.6 (7.9)
---------- ------------ ---------- ----------- ---------- -----------
Debt securities........................... $ 22.5 $ (3.1) $ 113.1 $ (26.7) $ 135.6 $ (29.8)
Equity securities pledged as collateral... -- (0.1) -- (0.2) -- (0.3)
---------- ------------ ---------- ----------- ---------- -----------
Total temporarily impaired securities
pledged as collateral................... $ 22.5 $ (3.2) $ 113.1 $ (26.9) $ 135.6 $ (30.1)
========== ============ ========== =========== ========== ===========
Gross unrealized losses related to debt securities pledged as collateral whose fair value is less than the
security's amortized cost totals $30.1 million at March 31, 2004. Debt securities with a fair value less than
80% of the security's amortized totaled $19.3 million at March 31, 2004. The majority of these debt securities
are investment grade issues that continue to perform to their original contractual terms at March 31, 2004.
We recognized a $4.7 million and a $4.9 million charge to earnings in the quarters ended March 31, 2004 and
2003, respectively, related to the other-than-temporary impairment of debt securities pledged as collateral.
$3.7 million and $3.1 million of the 2004 and 2003 charge, respectively, relate to our direct investment in
these consolidated trusts.
24
The effect of the method of consolidation of theses three collateralized debt obligation trusts was to decrease
our net income $1.0 million and $1.8 million for the three months ended March 31, 2004 and 2003, respectively,
and to decrease our stockholders' equity by $79.4 million and $77.3 million as of March 31, 2004 and December
31, 2003, respectively.
The above non-cash charges to earnings and stockholders' equity primarily relate to realized investment and
unrealized investment and derivative cash flow gains (losses) within the collateralized obligation trusts,
which will ultimately be borne by third-party investors in the non-recourse collateralized obligations.
Accordingly, these losses and any future gains or losses under this method of consolidation will ultimately
reverse upon the deconsolidation, maturity or other liquidation of the non-recourse collateralized obligations.
GAAP requires us to consolidate all the assets and liabilities of these collateralized obligation trusts, which
results in the recognition of realized and unrealized losses even though we have no legal obligation to fund
such losses in the settlement of the collateralized obligations. The FASB continues to evaluate, through the
issuance of FASB staff positions, the various technical implementation issues related to consolidation
accounting. We will continue to assess the impact of any new implementation guidance issued by the FASB as well
as evolving interpretations among accounting professionals. Additional guidance and interpretations may affect
our application of consolidation accounting in future periods.
The amount of derivative cash flow hedge ineffectiveness recognized for the three months ended March 31,
2004 and 2003 is not material to our consolidated financial statements.
8. Income Taxes
Three Months Ended
March 31,
--------------------------------
Income Taxes (Benefit) Applicable to Comprehensive Income (Loss): 2003
($ amounts in millions) 2004 Restated
--------------- ---------------
Income taxes (benefit) applicable to:
Continuing operations........................................................ $ 7.3 $ (2.4)
Discontinued operations...................................................... (1.1) (0.1)
--------------- ---------------
Net income (loss)............................................................ 6.2 (2.5)
Other comprehensive income (loss)............................................ 19.7 (11.9)
--------------- ---------------
Comprehensive income (loss).................................................. $ 25.9 $ (14.4)
=============== ===============
Current...................................................................... $ (8.0) $ 10.2
Deferred..................................................................... 33.9 (24.6)
--------------- ---------------
Income taxes (benefit) applicable to comprehensive income (loss)............. $ 25.9 $ (14.4)
=============== ===============
25
For the three months ended March 31, 2004 and 2003, the effective income tax rates applicable to income from
continuing operations differ from the 35.0% U.S. federal statutory tax rate. Items giving rise to the
differences and the effects are as follows:
Three Months Ended
March 31,
--------------------------------
Analysis of Effective Income Tax Rates: 2003
($ amounts in millions) 2004 Restated
--------------- ---------------
Income taxes at statutory rate............................................... $ 9.6 $ 0.7
Tax advantaged investment income............................................. (1.3) (1.5)
Non-taxable minority interest income......................................... (1.3) (1.0)
Other, net................................................................... 0.3 (0.6)
--------------- ---------------
Income taxes (benefit) applicable to continuing operations................... $ 7.3 $ (2.4)
=============== ===============
Effective income tax (benefit) rates......................................... 26.7% (114.3)%
=============== ===============
9. Employee Benefits
Pension and other post-retirement benefits
We provide our employees with post-employment benefits that include retirement benefits, through pension and
savings plans, and other benefits, including health care and life insurance. The components of pension and
post-retirement benefit costs follow:
Three Months Ended
March 31,
Components of Pension Benefit Costs: --------------------------------
($ amounts in millions) 2004 2003
--------------- ---------------
Service cost................................................................. $ 3.3 $ 3.4
Interest cost................................................................ 8.0 8.0
Expected return on plan assets............................................... (8.1) (6.7)
Net (gain) loss amortization................................................. 1.2 1.2
Prior service cost amortization.............................................. 0.3 0.5
Net transition asset amortization............................................ (0.6) (0.6)
--------------- ---------------
Pension benefit cost......................................................... $ 4.1 $ 5.8
=============== ===============
Components of Other Post-retirement Benefit Costs:
($ amounts in millions)
Service cost................................................................. $ 0.5 $ 0.6
Interest cost................................................................ 1.1 1.5
Net gain amortization........................................................ -- (0.2)
Prior service cost amortization.............................................. (0.7) (0.1)
--------------- ---------------
Other post-retirement benefit cost........................................... $ 0.9 $ 1.8
=============== ===============
As previously disclosed in our consolidated financial statements for the year ended December 31, 2003, we
expect to contribute $107.8 million to the employee pension plan through 2008, including $7.2 million during
2004. A quarterly estimated contribution of $2.5 million was made to the pension plan in April 2004.
We are currently evaluating our required pension funding, taking into consideration the effects of the Pension
Funding Equity Act of 2004, as well as the pending sale of Griffith and Main Street. In addition, we will be
revaluing our employee benefit assets and liabilities on the date of sale of Griffith and Main Street, which is
26
expected to be during the second quarter of 2004. We expect to recognize a curtailment gain during the second
quarter of 2004 as a result of the revaluation.
Savings plans
During the three months ended March 31, 2004 and 2003, we incurred costs of $1.9 million and $1.6 million,
respectively, for contributions to our employer-sponsored savings plans.
Our contributions to sponsored savings plans may be in the form of common stock or cash. During the three
months ended March 31, 2004 and 2003, we contributed 134,281 and 42,333 treasury shares, respectively, to fund
the employer match for our saving and investment benefit plans. These shares had a cost basis of $2.1 million
and $0.7 million (weighted average cost of $15.87 per share for both periods) and an aggregate market value of
$1.8 million and $0.4 million for the three months ended March 31, 2004 and 2003, respectively.
Stock-based compensation
Three Months Ended March 31,
-------------------------------------------------------------------
Stock Option Activity: 2004 2003
--------------------------------- --------------------------------
Weighted- Weighted-
Number Average Number Average
of Exercise of Exercise
Common Shares Price Common Shares Price
--------------- --------------- --------------- ---------------
Outstanding, beginning of period.......... 4,627,856 $ 15.45 4,409,558 $ 16.20
Granted................................... 130,000 13.00 -- --
Canceled.................................. (73,909) 16.20 -- --
Forfeited................................. (134,258) 15.48 (21,139) 16.20
--------------- ---------------
Outstanding, end of period................ 4,549,689 $ 15.37 4,388,419 $ 16.20
=============== =============== =============== ===============
Pro forma earnings and earnings per share, as if we had applied the fair value method of accounting for all
stock-based compensation, follow:
Three Months Ended
March 31,
--------------------------------
Pro Forma Net Income and Earnings Per Share: 2003
($ amounts in millions, except per share data) 2004 Restated
--------------- ---------------
Net income, as reported...................................................... $ 16.6 $ 1.3
Add: Employee stock option compensation expense included in net income,
net of applicable income taxes............................................. 0.2 --
Deduct: Employee stock option compensation expense determined under
fair value accounting for all awards, net of applicable income taxes....... (1.3) (1.1)
--------------- ---------------
Pro forma net income......................................................... $ 15.5 $ 0.2
=============== ===============
Basic earnings per share:
As reported.............................................................. $ 0.18 $ 0.01
Pro forma................................................................ $ 0.16 $ --
Diluted earnings per share:
As reported.............................................................. $ 0.16 $ 0.01
Pro forma................................................................ $ 0.15 $ --
During the first quarter of 2004, we granted 130,000 stock options which vest over three years. The options had
a weighted-average fair value of $4.84 per option ($0.6 million aggregate) which we are expensing over their
three-year vesting period. No options were granted during the first quarter of 2003.
27
Restricted stock units (RSUs)
Three Months Ended March 31,
RSU Activity at Weighted-average Exercise Price: --------------------------------------------------------------
($ amounts in millions, except exercise price) 2004 2003
------------------------------- -----------------------------
Exercise Exercise
RSUs Price RSUs Price
-------------- -------------- -------------- --------------
Outstanding, beginning of period.............. 1,436,843 $ 10.47 573,477 $ 13.95
Awarded to officers and directors............. 46,073 14.03 394,737 7.60
-------------- --------------
Outstanding, end of period.................... 1,482,916 $ 10.58 968,214 $ 11.36
============== ============== ============== ==============
Generally, the shares underlying these awards which are or become vested will be issued on the later of June
26, 2006 or each employee's and each director's respective termination or retirement.
10. Earnings Per Share
Three Months Ended
March 31,
Shares Used in Calculation of Basic and Diluted Earnings Per Share: -----------------------------
(in thousands) 2004 2003
------------- --------------
Weighted average common shares outstanding....................................... 94,512 94,046
------------- --------------
Effect of potential common shares:
Equity units................................................................... 5,884 --
Restricted stock units......................................................... 1,456 968
Director and employee stock options............................................ 156 --
------------- --------------
Potential common shares.......................................................... 7,496 968
Less: anti-dilutive potential common shares...................................... -- --
------------- --------------
Dilutive potential common shares................................................. 7,496 968
------------- --------------
Weighted average common shares outstanding and dilutive potential common shares.. 102,008 95,014
============= ==============
Employee Stock Options and Equity Units excluded from Calculation Due to
Anti-Dilutive Exercise Prices (i.e., in excess of average common share market prices):
Stock options................................................................ 3,996 4,387
Equity units................................................................. -- 17,424
Treasury stock
During the three months ended March 31, 2004 and 2003, we made no purchases of our common stock in the market.
11. Contingent Liabilities
In 1999, we discontinued our reinsurance operations through a combination of sale, reinsurance and placement of
certain retained group accident and health reinsurance business into run-off. We adopted a formal plan to stop
writing new contracts covering these risks and to end the existing contracts as soon as those contracts would
permit. However, we remain liable for claims under those contracts. We also purchased finite aggregate
excess-of-loss reinsurance, or finite reinsurance, to further protect us from unfavorable results from this
discontinued business.
We have established reserves for claims and related expenses that we expect to pay on our discontinued group
accident and health reinsurance business. These reserves are a net present value amount that is based on
currently known facts and estimates about, among other things, the amount of insured losses and expenses that
we believe
28
we will pay, the period over which they will be paid, the amount of reinsurance we believe we will collect
under our finite reinsurance, the amounts we believe we will collect from our retrocessionaires and the likely
legal and administrative costs of winding down the business.
Our total reserves, including coverage available from our finite reinsurance and reserves for amounts
recoverable from retrocessionaires, were $165.0 million as of March 31, 2004. Our total amounts recoverable
from retrocessionaires related to paid losses were $155.0 million as of March 31, 2004. We did not recognize
any gains or losses during the three months ended March 31, 2004.
We expect our reserves and reinsurance to cover the run-off of the business; however, the nature of the
underlying risks is such that the claims may take years to reach the reinsurers involved. Therefore, we expect
to pay claims out of existing estimated reserves for up to ten years as the level of business diminishes. In
addition, unfavorable claims experience is possible and could result in additional future losses. Given the
uncertainty associated with litigation and other dispute resolution proceedings, as described below, our
estimated amount of the loss on disposal of reinsurance discontinued operations may differ from actual results.
However, it is our opinion, based on current information and after consideration of the provisions made in
these consolidated financial statements, as described above, that future developments will not have a material
effect on our financial position.
Unicover Managers, Inc.
A significant portion of the claims arising from our discontinued group accident and health reinsurance
business arises from the activities of Unicover Managers, Inc., or Unicover. Unicover organized and managed a
group, or pool, of insurance companies, or Unicover pool, and two other facilities, or Unicover facilities,
which reinsured the life and health insurance components of workers' compensation insurance policies issued by
various property and casualty insurance companies. We were a member of the Unicover pool but terminated our
participation in the pool effective March 1, 1999.
We are involved in disputes relating to the activities of Unicover. Under Unicover's underwriting authority,
the Unicover pool and Unicover facilities wrote a dollar amount of reinsurance coverage that was many times
greater than originally estimated. As a member of the Unicover pool, we were involved in several proceedings in
which the pool members asserted that they could deny coverage to certain insurers that claimed that they
purchased reinsurance coverage from the pool. Those matters were settled. Also, the pool members are currently
involved in proceedings arising from business ceded to the London market. Those proceedings are in the
preliminary stages.
Further, we were, along with Sun Life Assurance of Canada, or Sun Life, and Cologne Life Reinsurance Company,
or Cologne Life, a retrocessionaire (meaning a reinsurer of other reinsurers) of the Unicover pool and two
other Unicover facilities, providing the pool and facility members with reinsurance of the risks that the pool
and facility members had assumed. In September 1999, we joined an arbitration proceeding that Sun Life had
begun against the members of the Unicover pool and the Unicover facilities. In this arbitration, we and Sun
Life sought to cancel our retrocession agreements on the grounds that material misstatements and nondisclosures
were made to us about, among other things, the amount of risks we would be reinsuring. The arbitration
proceeded only with respect to the Unicover pool because we, Sun Life and Cologne Life reached settlement with
the two Unicover facilities in the first quarter of 2000. In October 2002, the arbitration panel issued its
decision that the agreement by which we provided retrocessional reinsurance to the pool was valid only to the
extent of business bound or renewed to that agreement on or before August 31, 1998. This decision had the
effect of granting us a substantial discount on our potential liabilities, because most of the business was
bound or renewed to the agreement after August 31, 1998. In a clarification dated January 4, 2003, the
arbitration panel confirmed its decision. A significant portion of our remaining potential liabilities as a
retrocessionaire of the pool may be recovered from our retrocessionaires.
In one of the Unicover facilities' settlements, the Reliance facility settlement of January 2000, we paid a
settlement amount of $97.9 million and were released from all of our obligations as a retrocessionaire of the
29
facility. Subsequently, we were reimbursed by one of our retrocessionaires for $38.8 million of the amount we
paid under the settlement. A significant portion of the remainder of the settlement payment may be recovered
from certain of our other retrocessionaires.
In the other Unicover facilities' settlement, the Lincoln facility settlement of March 2000, we paid a
settlement amount of $11.6 million and were released from all of our obligations as a retrocessionaire of the
facility. A significant portion of the settlement payment may be recovered from certain of our
retrocessionaires.
The likelihood of obtaining the additional recoveries from our retrocessionaires cannot be estimated with a
reliable degree of certainty at this stage of our recovery efforts. This is due in part to the lack of
sufficient claims information (which has resulted from disputes among ceding reinsurers leading to delayed
processing, reporting blockages and standstill agreements among reinsurers) and, in part, to the matters
discussed below under "Related Proceedings."
The amounts paid and the results achieved in the above settlements and arbitration decision are reflected in
our consolidated financial statements. As we believe the amounts previously reserved for these matters are
sufficient, we have established no additional reserves with respect to these settlements and arbitration
decision.
Related Proceedings
In our capacity as a retrocessionaire of the Unicover business, we had an extensive program of our own
reinsurance in place to protect us from financial exposure to the risks we had assumed. Currently, we are
involved in separate arbitration proceedings with three of our own retrocessionaires, which have sought on
various grounds to avoid paying any amounts to us or have reserved rights. Because the same retrocession
program that covers our Unicover business covers a significant portion of our other remaining group accident
and health reinsurance business, we could have additional material losses if one or more of our
retrocessionaires successfully avoids its obligations.
With one of those retrocessionaires, we had three disputes. One concerns an agreement under which the
retrocessionaire reinsures us for up to $45 thousand per loss in excess of a $5 thousand retention. In June
2003, the arbitration panel issued its decision, which upheld in all material respects the retrocessional
obligations to us. The decision is the subject of a pending appeal only with respect to the Unicover business.
The other two disputes were settled in March 2004 and did not have a material effect on our reinsurance
recoverable balances. As of March 31, 2004, the reinsurance recoverable balance from this retrocessionaire
related to paid losses was $57.0 million, subject to further development.
The dispute with another retrocessionaire, which sought to avoid an excess-of-loss retrocession agreement, a
surplus share retrocession agreement and a quota share retrocession agreement, was the subject of an
arbitration in November 2003. In December 2003, the arbitration panel issued its interim decision, which is
confidential. The financial implications of the interim decision are consistent with our current financial
provisions. In March 2004, this retrocessionaire made an interim payment of $6.0 million. As of March 31, 2004,
the reinsurance recoverable balance from this retrocessionaire related to paid losses was $1.0 million, subject
to further development.
The dispute with the third retrocessionaire is the subject of arbitration proceedings that we initiated in
December 2003. The purpose of the arbitration proceedings is to confirm the validity and enforce the terms of
the retrocessional contracts. We had previously entered into a standstill agreement with this retrocessionaire
under which both parties had agreed not to commence any proceedings against the other without providing written
notice within a specified period. The purpose of the agreement was to allow the parties to investigate the
existence and extent of their contractual obligations to each other. As of December 31, 2003, the reinsurance
recoverable balance from this retrocessionaire related to paid losses was $86.0 million, subject to further
development.
30
At this stage, we cannot predict the outcome of the above matters, nor can we estimate the amount at risk with
a reliable degree of certainty. This is due, in part, to our lack of sufficient claims information (which has
resulted from disputes among ceding reinsurers that have led to delayed processing, reporting blockages, and
standstill agreements among reinsurers). These circumstances apply with regard both to business related to
Unicover and to business not related to Unicover.
Other Proceedings
Another set of disputes involves personal accident business that was reinsured in the mid-1990s in the London
reinsurance market in which we participated. These disputes involve multiple layers of reinsurance and
allegations that the reinsurance program created by the brokers involved in placing those layers was
interrelated and devised to disproportionately pass losses to a top layer of reinsurers. Many companies who
participated in this business are involved in litigation or arbitration in attempts to avoid their obligations
on the basis of misrepresentation. Because of the complexity of the disputes and the reinsurance arrangements,
many of these companies are currently participating in negotiations of the disputes for certain contract years,
and we believe that similar discussions will follow for the remaining years. Although we are vigorously
defending our contractual rights, we are actively involved in the attempt to reach negotiated business
solutions. At this stage, we cannot predict the outcome, nor can we estimate the amount at risk, with a
reliable degree of certainty. This is due, in part, to our lack of sufficient claims information (which has
resulted from disputes among ceding reinsurers that have led to delayed processing, reporting blockages, and
standstill agreements among reinsurers).
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENT
The following discussion may contain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. The company intends these forward-looking statements to be covered by
the safe harbor provisions of the federal securities laws relating to forward-looking statements. These include
statements relating to trends in, or representing management's beliefs about, the company's future strategies,
operations and financial results, as well as other statements including words such as "anticipate," "believe,"
"plan," "estimate," "expect," "intend," "may," "should" and other similar expressions. Forward-looking
statements are made based upon management's current expectations and beliefs concerning trends and future
developments and their potential effects on the company. They are not guarantees of future performance. Actual
results may differ materially from those suggested by forward-looking statements as a result of risks and
uncertainties which include, among others: (i) changes in general economic conditions, including changes in
interest and currency exchange rates and the performance of financial markets; (ii) heightened competition,
including with respect to pricing, entry of new competitors and the development of new products and services by
new and existing competitors; (iii) the company's primary reliance, as a holding company, on dividends and
other payments from its subsidiaries to meet debt payment obligations, particularly since the company's
insurance subsidiaries' ability to pay dividends is subject to regulatory restrictions; (iv) regulatory,
accounting or tax changes that may affect the cost of, or demand for, the products or services of the company's
subsidiaries; (v) downgrades in the financial strength ratings of the company's subsidiaries or in the
company's credit ratings; (vi) discrepancies between actual claims experience and assumptions used in setting
prices for the products of insurance subsidiaries and establishing the liabilities of such subsidiaries for
future policy benefits and claims relating to such products; (vii) movements in the equity markets that affect
our investment results, including those from venture capital, the fees we earn from assets under management and
the demand for our variable products; (viii) the company's continued success in achieving planned expense
reductions; and (ix) other risks and uncertainties described in any of the company's filings with the SEC. The
company undertakes no obligation to update or revise publicly any forward-looking statement, whether as a
result of new information, future events or otherwise.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations reviews our consolidated
financial condition as of March 31, 2004 as compared to December 31, 2003; our consolidated results of
operations for the three months ended March 31, 2004 and 2003; and, where appropriate, factors that may affect
our future financial performance. This discussion should be read in conjunction with the unaudited interim
financial statements and notes contained in this filing as well as in conjunction with our consolidated
financial statements for the year ended December 31, 2003 in our 2003 Annual Report on Form 10-K.
32
Overview
We are a manufacturer of insurance, annuity and asset management products for the accumulation, preservation
and transfer of wealth. We provide products and services to affluent and high-net-worth individuals through
their advisors and to institutions directly and through consultants. We offer a broad range of life insurance,
annuity and asset management products and services through a variety of distributors. These distributors
include affiliated and non-affiliated advisors and financial services firms who make our products and services
available to their clients.
We manufacture our products through two operating segments -- Life and Annuity and Asset Management -- which
include three product lines -- life insurance, annuities and asset management. Through Life and Annuity we
offer a variety of life insurance and annuity products, including universal, variable universal, whole and term
life insurance, a range of variable annuity offerings and other products and services, including executive
benefits and private placement life and annuity products. Asset Management comprises two lines of business --
private client and institutional.
Through our private client line of business, we provide investment management services principally on a
discretionary basis, with products consisting of open-end mutual funds and managed accounts. Managed accounts
include intermediary programs sponsored and distributed by non-affiliated broker-dealers and direct managed
accounts sold and administered by us. These two types of managed accounts generally require minimum investments
of $100,000 and $1 million, respectively. Our private client business also provides transfer agency, accounting
and administrative services to most of our open-end mutual funds.
Through our institutional group, we provide discretionary and non-discretionary investment management services
primarily to corporations, multi-employer retirement funds and foundations, as well as to endowments and
special purpose funds. In addition, we manage closed-end funds and alternative financial products such as
structured finance products. Structured finance products include collateralized obligations such as
collateralized debt obligations, or CDOs, backed by portfolios of public high yield bonds, emerging markets
bonds, commercial mortgage-backed or asset-backed securities.
We report our remaining activities in two non-operating segments -- Venture Capital and Corporate and Other.
Venture Capital includes limited partnership interests in venture capital funds, leveraged buyout funds and
other private equity partnerships sponsored and managed by third parties. These assets are investments of the
general account of our Life Companies. Corporate and Other includes: indebtedness; unallocated assets,
liabilities and expenses; and certain businesses not of sufficient scale to report independently. These
non-operating segments are significant for financial reporting purposes, but do not contain products or
services relevant to our core manufacturing operations.
We derive our revenues principally from:
• premiums on whole life insurance;
• insurance and investment product fees on variable life and annuity products and universal life
products;
• investment management and related fees; and
• net investment income and net realized investment gains.
Under GAAP, premium and deposit collections for variable life, universal life and annuity products are not
recorded as revenues. These collections are reflected on our balance sheet as an increase in separate account
liabilities for certain investment options of variable products. Collections for fixed annuities and certain
investment options of variable annuities are reflected on our balance sheet as an increase in policyholder
deposit funds. Collections for other products are reflected on our balance sheet as an increase in policy
liabilities and accruals.
33
Our expenses consist principally of:
• insurance policy benefits provided to policyholders, including interest credited on policies;
• policyholder dividends;
• deferred policy acquisition costs amortization;
• intangible assets amortization;
• interest expense;
• other operating expenses; and
• income taxes.
Our profitability depends principally upon:
• the adequacy of our product pricing, which is primarily a function of our:
• ability to select underwriting risks;
• mortality experience;
• ability to generate investment earnings;
• ability to maintain expenses in accordance with our pricing assumptions; and
• policies' persistency (the percentage of policies remaining inforce from year to year as
measured by premiums);
• the amount and composition of assets under management;
• the maintenance of our target spreads between the rate of earnings on our investments and dividend
and interest rates credited to customers; and
• our ability to manage expenses.
Prior to Phoenix Life's demutualization, we focused on participating life insurance products, which pay
policyholder dividends. As of December 31, 2003, 74% of our life insurance reserves were for participating
policies. As a result, a significant portion of our expenses consists, and will continue to consist, of such
policyholder dividends. Our net income is reduced by the amounts of these dividends. Policyholder dividends
expense was $418.8 million during 2003 and $401.8 million during 2002.
Our sales and financial results over the last several years have been affected by demographic, industry and
market trends. The baby boom generation has begun to enter its prime savings years. Americans generally have
begun to rely less on defined benefit retirement plans, social security and other government programs to meet
their post-retirement financial needs. Product preferences have shifted between fixed and variable options
depending on market and economic conditions. These factors have had a positive effect on sales of our balanced
product portfolio including universal life, variable life and variable annuity products, as well as a broad
array of mutual funds and managed accounts.
Discontinued Operations
On March 31, 2004, we completed the previously announced sale of 100% of the common stock held by us in Phoenix
National Trust Company. The effect of this transaction is immaterial to our consolidated financial statements.
Phoenix National Trust Company is presented as a discontinued operation in our consolidated financial
statements for all periods presented.
During 1999, we discontinued the operations of several businesses that did not align with our business strategy
including reinsurance, group life and health and real estate management operations. See Note 11 to our
consolidated financial statements in this Form 10-Q for detailed information regarding our discontinued
operations.
34
Other Recent Acquisitions and Divestitures
Life and Annuity
On March 22, 2004, we entered into a definitive agreement to sell our retail broker-dealer operations to
Linsco/Private Ledger Financial Services, or LPL. As part of the transaction, advisors affiliated with WS
Griffith Securities, Inc., or Griffith, and Main Street Management Company, or Main Street, will cease to be
affiliated with Phoenix but will have the opportunity to transition to LPL as independent registered
representatives. The transaction, which is subject to regulatory approvals and other customary closing
conditions, is expected to close on or about June 1, 2004. We expect to realize an annualized pre-tax earnings
benefit of $10 million or more, which is comprised of expense savings, net of reduced broker-dealer revenues
and increased policy acquisition cost amortization expense. As a result of this transaction, we may experience
a temporary increase in surrender or lapse rates related to life and annuity inforce previously sold through
Main Street or Griffith, resulting in an increase in policy acquisition cost amortization expense in future
periods. In addition, we may experience a temporary reduction in life and annuity sales as a result of the
transition of the affiliated advisors to LPL and other broker-dealers.
We incurred a $3.6 million net of tax impairment charge, recorded as a realized investment loss related to Main
Street, and a $0.6 million after-tax charge for severance costs during the first quarter of 2004 related to
this pending divestiture. We expect to incur an additional estimated $4.0 million after-tax charge during the
second and third quarters of 2004 for additional severance costs, lease termination and other exit costs,
partially offset by a net realized gain on the sale of Griffith, and a gain related to the curtailment of
certain employee benefit plans.
On May 7, 2004, we signed a definitive agreement to sell Phoenix Global Solutions, Inc., our India-based
information technology subsidiary, to Tata Consultancy Services, a division of Tata Sons Ltd. This transaction,
which is not material to our consolidated financial statements, is subject to regulatory approval and is
expected to close during the second quarter of 2004.
In May 2003, we acquired the remaining interest in PFG Holdings, Inc., or PFG, the holding company for our
private placement operation, not already owned by us for initial consideration of $16.7 million. Under the
terms of the purchase agreement, we may be obligated to pay additional consideration of up to $89.0 million to
the selling shareholders, including $13.0 million during the remainder of 2004 through 2007 based on certain
financial performance targets being met, and the balance in 2008 based on the appraised value of PFG as of
December 31, 2007. No such consideration was paid during the three months ended March 31, 2004.
Asset Management
In 2002, we acquired a 60% interest in Kayne Anderson Rudnick Investment Management, LLC, or Kayne Anderson
Rudnick, for $102.4 million; management of the company retained the remaining ownership interest. In addition
to the initial cost of the purchase, we made a subsequent payment, during the three months ended March 31,
2004, of $30.1 million, based upon growth in management fee revenue for the purchased business through the end
of 2003. This payment had been accrued for as goodwill as of December 31, 2003. In January 2004, one member of
Kayne Anderson Rudnick accelerated his put/call agreement at which time we acquired an additional 0.3% of Kayne
Anderson Rudnick. We are also obligated to purchase an additional 14.7% interest in the company by 2007.
We acquired the remaining minority interest in Walnut Asset Management LLC and Rutherford Brown & Catherwood,
LLC in March 2004 for $2.1 million as a result of the management members exercising their put/call agreements.
This additional purchase price was allocated by PXP to goodwill and definite-lived intangible assets.
The Demutualization
Phoenix Home Life demutualized on June 25, 2001 by converting from a mutual life insurance company to a stock
life insurance company, became a wholly-owned subsidiary of The Phoenix Companies and changed its name to
Phoenix Life Insurance Company, or Phoenix Life. See Note 3 to our consolidated financial statements in this
Form 10-Q for detailed information regarding the demutualization and closed block.
35
Recently Issued Accounting Standards
Post-retirement Benefits: On January 12, 2004, the Financial Accounting Standards Board, or the FASB,
issued FASB Staff Position No. FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003, or the FSP. The FSP permitted employers that
sponsor post-retirement benefit plans, or plan sponsors that provide prescription drug benefits to retirees, to
defer accounting for any effects of the anticipated federal tax subsidy related to those drug benefits. We have
elected to defer the associated accounting. Accordingly, the accumulated post-retirement benefit obligation and
net periodic post-retirement benefit cost reflected in our financial statements and accompanying notes do not
reflect the effects of any anticipated federal tax subsidy. In accordance with the FSP, our deferral must
remain in effect until the earlier of: (a) the issuance of guidance by the FASB on how to account for the
federal subsidy to be provided to plan sponsors under the Act or (b) the remeasurement of plan assets and
obligations subsequent to January 31, 2004.
Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when
issued, could require us to change amounts reported herein as of March 31, 2004 and for the three months then
ended.
Accounting Changes and Restatement of Prior Period
Nontraditional Long-Duration Contracts and Separate Accounts: Effective January 1, 2004, we adopted the
AICPA's Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts, or SOP 03-1. SOP 03-1 provides guidance
related to the accounting, reporting and disclosure of certain insurance contracts and separate accounts,
including guidance for computing reserves for products with guaranteed benefits such as guaranteed minimum
death benefits and for products with annuitization benefits such as guaranteed minimum income benefits. In
addition, SOP 03-1 addresses the presentation and reporting of separate accounts, as well as rules concerning
the capitalization and amortization of sales inducements. Since this new accounting standard largely codifies
certain accounting and reserving practices related to applicable nontraditional long-duration contracts and
separate accounts that we already followed, our adoption did not have a material effect on our consolidated
financial statements.
Variable Interest Entities: In January 2003, a new accounting standard was issued, FASB Interpretation
No. 46, or FIN 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, that
interprets the existing standards on consolidation. FIN 46 was subsequently reissued as FIN 46-R in December
2003, with FIN 46-R providing additional interpretation as to existing standards on consolidation. FIN 46-R
clarifies the application of standards of consolidation to certain entities in which equity investors do not
have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial support from other parties (variable
interest entities). Variable interest entities are required to be consolidated by their primary beneficiaries
if they do not effectively disperse risks among all parties involved. The primary beneficiary of a variable
interest entity is the party that absorbs a majority of the entity's expected losses, receives a majority of
its expected residual returns, or both, as a result of holding variable interests. As required under the
original standard, on February 1, 2003, we adopted the new standard for variable interest entities created
after January 31, 2003 and for variable interest entities in which we obtain an interest after January 31,
2003. In addition, as required by the revised standard, on December 31, 2003 we adopted FIN 46-R for Special
Purpose Entities, or SPEs, in which we hold a variable interest that we acquired prior to February 1, 2003. FIN
46-R requires our application of its provisions to non-SPE variable interest entities for periods ending after
March 15, 2004. The adoption of FIN 46-R for our non-SPE variable interest entities was immaterial to our
consolidated financial statements at March 31, 2004.
Stock-based Compensation: A new standard was issued by the FASB in December 2002 which amends an existing
standard on accounting for stock-based compensation. The new standard provides methods of transition for a
voluntary change to fair value accounting for stock-based compensation. We adopted fair value accounting
36
for stock-based compensation in 2003 using the prospective method of transition provided by the new standard,
which results in expense recognition for stock options awarded after December 31, 2002. See Note 9 to our
consolidated financial statements in this Form 10-Q for additional disclosure on the requirements of the new
standard as it relates to our business.
Collateralized Obligation Trusts: In 2003, we revised our method of consolidation for the years 2003,
2002 and 2001 for three collateralized obligation trusts for which we serve as investment advisor. Under the
new method, the applicable assets, liabilities, revenues, expenses and minority interest are presented on a
disaggregated basis and investments pledged as collateral are recorded at fair value with unrealized gains or
losses recorded as a component of accumulated other comprehensive income, other-than-temporary impairment of
investments are recorded as a charge to earnings, and non-recourse collateralized obligations are recorded at
unpaid principal balance. Prior to our revision of previously reported 2003, 2002 and 2001 amounts, investments
pledged as collateral were recorded at fair value with asset valuation changes directly offset by changes in
the corresponding liabilities in a manner similar to separate accounts.
The effect of the consolidation of these three collateralized debt obligation trusts was to decrease our net
income $1.0 million and $1.8 million for the three months ended March 31, 2004 and 2003, respectively, and to
decrease our stockholders' equity by $79.4 million and $77.3 million as of March 31, 2004 and December 31,
2003, respectively.
These non-cash charges to earnings and stockholders' equity primarily relate to realized and unrealized
investment losses within the collateralized obligation trusts, which losses will ultimately be borne by
third-party investors in the non-recourse collateralized obligations. Accordingly, both these losses and any
future gains or losses under this method of consolidation will ultimately reverse upon the maturity or other
liquidation of the non-recourse collateralized obligations.
GAAP requires us to consolidate all the assets and liabilities of these collateralized obligation trusts, which
results in the recognition of realized and unrealized investment losses even though we have no legal obligation
to fund such losses in the settlement of the collateralized obligations. The FASB continues to evaluate,
through the issuance of FASB staff positions, the various technical implementation issues related to
consolidation accounting. We will continue to assess the impact of any new implementation guidance issued by
the FASB as well as evolving interpretations among accounting professionals. Additional guidance and
interpretations may affect our application of consolidation accounting in future periods.
See Notes 1 and 7 to our consolidated financial statements in this Form 10-Q for additional information on
these revisions to our 2003 first quarter financial statements and see our 2003 Annual Report on Form 10-K for
additional information on these revisions to our 2002 and 2001 financial statements and our consolidated
collateralized obligation trusts and other variable interest entities.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with GAAP. GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Critical accounting estimates are reflective of significant judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain. See our 2003 Annual Report on Form 10-K
for a description of our critical accounting estimates.
37
Consolidated Results of Operations
Summary Consolidated Financial Data: Three Months Ended
($ amounts in millions) March 31,
--------------------------------
2003
2004 Restated Change
--------------- --------------- ---------------
REVENUES:
Premiums..................................................... $ 232.7 $ 246.1 $ (13.4)
Insurance and investment product fees........................ 160.4 136.1 24.3
Investment income, net of expenses........................... 278.2 291.1 (12.9)
Net realized investment gains (losses)....................... 2.5 (14.1) 16.6
--------------- --------------- ---------------
Total revenues............................................... 673.8 659.2 14.6
--------------- --------------- ---------------
BENEFITS AND EXPENSES:
Policy benefits, excluding policyholder dividends............ 345.6 350.8 (5.2)
Policyholder dividends....................................... 105.9 116.5 (10.6)
Policy acquisition cost amortization......................... 22.6 28.0 (5.4)
Intangible asset amortization................................ 8.3 8.4 (0.1)
Interest expense on indebtedness............................. 9.8 9.8 --
Interest expense on non-recourse collateralized obligations.. 8.9 13.3 (4.4)
Other operating expenses..................................... 145.4 130.3 15.1
--------------- --------------- ---------------
Total benefits and expenses.................................. 646.5 657.1 (10.6)
--------------- --------------- ---------------
Income before income taxes and minority interest............. 27.3 2.1 25.2
Applicable income taxes (benefit)............................ 7.3 (2.4) 9.7
--------------- --------------- ---------------
Income before minority interest.............................. 20.0 4.5 15.5
Minority interest in net income of subsidiaries.............. 3.7 2.8 0.9
--------------- --------------- ---------------
Income from continuing operations............................ 16.3 1.7 14.6
Income (loss) from discontinued operations................... 0.3 (0.4) 0.7
--------------- --------------- ---------------
Net income................................................... $ 16.6 $ 1.3 $ 15.3
=============== =============== ===============
Three months ended March 31, 2004 vs. March 31, 2003
Premium revenue decreased $13.4 million, or 5%, in 2004 from the comparable period in 2003, primarily due to a
continued shift in sales from participating life to universal life and variable universal life products as well
as to a continued decline of the participating life inforce business. Compared to 2003, 2004 premium revenue
for participating life policies decreased by $14.2 million. Since our 2001 demutualization, we no longer sell
participating life policies resulting in a decline in renewal participating life premiums and related inforce.
Insurance and investment product fees increased $24.3 million, or 18%, in 2004 over the comparable period in
2003, due to higher fees in Life and Annuity primarily from higher fees for universal life insurance from
growing inforce and higher attained age, higher fees for annuities from higher funds under management, and
higher third-party revenues from our affiliated broker-dealer plus higher Asset Management investment product
fees, from increased billable assets under management.
Net investment income decreased $12.9 million, or 4%, in 2004 from the comparable period in 2003, primarily due
to a decrease in earnings from venture capital. Equity in earnings on venture capital investments decreased
$11.3 million to $17.6 million in the first quarter of 2004 from $28.9 million. In addition, investment income
from our debt securities pledged as collateral related to our consolidated collateralized debt obligation
trusts, or CDOs, decreased $4.2 million from the 2003 quarter, primarily due to decreased asset levels from
paydowns and defaults.
Net realized investment gains (losses) improved by $16.6 million to a $2.5 million net gain in the first
quarter of 2004 from a net realized loss of $14.1 million in the 2003 quarter, primarily due to lower
impairments from improved credit market conditions, partially offset by lower net transaction related gains.
The first quarter of 2003 also included a net realized loss of $13.8 million related to the sale of a 50% of
our interest in certain
38
venture capital partnerships to an outside third-party and the transfer of the remaining 50% of our interest in
those partnerships to our closed block. Net realized investment gains in the first quarter of 2004 included a
$3.4 million after-tax charge for the impairment of investments pledged as collateral, $2.4 million of which
relate to our general account direct investment in one of the related consolidated CDOs. In addition, net
realized gains includes a $3.0 million after-tax gain on the redemption of a $260 million unconsolidated
sponsored CDO and a $3.6 million after-tax charge related to the pending sale of Main Street.
Policy benefits decreased $5.2 million, or 1%, in 2004 from the comparable period in 2003, primarily due to
lower annuity benefits from lower guaranteed minimum death benefit (GMDB) exposure, lower interest credited
costs for annuities from lower spread based funds under management and lower crediting rates, and modestly
lower death benefits partially offset by higher benefits for universal life and variable universal life
insurance. Universal life benefits were higher due to one large claim while variable life benefits were higher
due to increased reinsurance costs in 2004 and very favorable mortality in 2003.
Policyholder dividends decreased $10.6 million, or 9%, in 2004 from the comparable period in 2003, primarily
due to the affect of lower investment earnings on the policyholder dividend obligation combined with slightly
lower statutory dividend expense in 2004 compared to 2003.
Policy acquisition cost amortization decreased $5.4 million, or 19%, in 2004 from the comparable period in
2003, primarily due to lower amortization for annuities and variable universal life insurance from improved
persistency in 2004 over 2003. Also, amortization was higher in 2003 for variable universal life due to very
favorable mortality.
Interest expense on non-recourse collateralized debt obligations decreased $4.4 million, or 33%, in 2004 from
the comparable period in 2003, primarily due to reduced investment income received by the consolidated CDOs, as
discussed above, resulting in lower distributions to investment holders.
Other operating expenses, which included non-deferrable policy acquisition costs, broker-dealer commissions,
finders fees, formulaic compensation related to asset management revenue growth and other segment and
administrative expenses, increased $15.1 million, or 12%, in 2004 over the comparable period in 2003. This
increase is principally due to: a $5.2 million increase on broker-dealer commission expense driven by higher
sales at Griffith and Main Street; a $2.1 million increase in asset management mutual fund trailing commission
and finders fee expense related to higher mutual fund sales; a $6 million increase in asset management
formulaic compensation expense tied to management fee revenues; and a $6.3 million increase in short and
long-term incentive compensation accruals due to a return to more normalized incentive compensation accrual
levels, offset by a $9.8 million reduction in general and administrative expenses.
Our income taxes increased $9.7 million, in 2004 over the comparable period in 2003, primarily due to the $25.2
million increase in income before income tax and minority interest. Our 2004 effective tax rate of 26.7%
reflects the benefit of tax-advantaged investment holdings.
Results of Operations by Segment
We evaluate segment performance on the basis of segment income. Realized investment gains and losses and
certain other items are excluded because we do not consider them when evaluating the financial performance of
the segments. The size and timing of realized investment gains and losses are often subject to our discretion.
Certain items are removed from segment after-tax income if, in our opinion, they are not indicative of overall
operating trends. While some of these items may be significant components of net income reported in accordance
with GAAP, we believe that segment income is an appropriate measure that represents the earnings attributable
to the ongoing operations of the business. Investment income on debt and equity securities pledged as
collateral as well as interest expense on non-recourse collateralized obligations, both related to three
consolidated collateralized obligation trusts we sponsor, are included in the Corporate and Other segment.
Excess investment income on debt and equity securities pledged as collateral represents investment advisory
fees earned by our asset
39
management subsidiary and are allocated to the Asset Management segment as investment product fees for segment
reporting purposes only. Also, all interest expense is included in the Corporate and Other segment, as are
several smaller subsidiaries and investment activities which do not meet the thresholds of reportable segments.
These include our remaining international operations and the run-off of our group pension and guaranteed
investment contract businesses.
The criteria used to identify an item that will be excluded from segment income include: whether the item is
infrequent and is material to the segment's income; or whether it results from a business restructuring or a
change in the regulatory requirements, or relates to other unusual circumstances (e.g., non-routine
litigation). We include information on other items allocated to our segments in their respective notes for
information only. Items excluded from segment income may vary from period to period. Because these items are
excluded based on our discretion, inconsistencies in the application of our selection criteria may exist.
Segment income is not a substitute for net income determined in accordance with GAAP and may be different from
similarly titled measures of other companies.
Three Months Ended
Amounts Included in Income from Continuing Operations March 31,
Excluded from Operating Segment Results: --------------------------------
($ amounts in millions) 2004 2003 Change
--------------- --------------- ---------------
Net realized investment gains (losses), after income taxes... $ 0.8 $ (14.3) $ 15.1
Restructuring charges, after income taxes.................... (2.0) (2.5) 0.5
Other income, after income taxes............................. -- 1.3 (1.3)
--------------- --------------- ---------------
Total........................................................ $ (1.2) $ (15.5) $ 14.3
=============== =============== ===============
Net realized investment gains (losses) of $0.8 million and $(14.3) million for the three months ended March 31,
2004 and 2003, respectively, are net of offsets for policy dividend obligation, deferred policy acquisition
costs and taxes as further detailed in Note 5 of our consolidated financial statements contained in this Form
10-Q.
2004 management restructuring charges relate to severance costs, including severance associated with the
pending sale of Griffith and Main Street. 2003 management structuring charges relate to severance costs
associated with the restructure of certain PXP operations.
Segment Allocations
We allocate capital to our Life and Annuity segment based on risk-based capital, or RBC, for our insurance
products. We used 300% RBC levels for 2004 and 2003. Capital within our Life Companies that is unallocated is
included in our Corporate and Other segment. We allocate capital to our Asset Management segment on the basis
of the historical capital within that segment. We allocate net investment income based on the assets allocated
to the segments. We allocate tax benefits related to tax-advantaged investments to the segment that holds the
investment. We allocate certain costs and expenses to the segments based on a review of the nature of the
costs, time studies and other methodologies.
40
Life and Annuity Segment
Summary Life and Annuity Financial Data: Three Months Ended
($ amounts in millions) March 31,
--------------------------------
2004 2003 Change
--------------- --------------- ---------------
Results of operations
Premiums............................................... $ 232.7 $ 246.1 $ (13.4)
Insurance and investment product fees.................. 89.5 78.1 11.4
Net investment income.................................. 249.9 248.3 1.6
--------------- --------------- ---------------
Total segment revenues................................. 572.1 572.5 (0.4)
--------------- --------------- ---------------
Policy benefits, including policyholder dividends...... 449.0 455.3 (6.3)
Policy acquisition cost amortization................... 22.2 27.5 (5.3)
Other operating expenses............................... 75.1 71.7 3.4
--------------- --------------- ---------------
Total segment benefits and expenses.................... 546.3 554.5 (8.2)
--------------- --------------- ---------------
Segment income......................................... 25.8 18.0 7.8
Allocated income taxes................................. 7.2 4.0 3.2
--------------- --------------- ---------------
Segment income......................................... 18.6 14.0 4.6
Net realized investment losses, net of income taxes
and other offsets.................................... (3.5) (1.3) (2.2)
Restructuring charges, after income taxes.............. (0.8) -- (0.8)
--------------- --------------- ---------------
Segment net income..................................... $ 14.3 $ 12.7 $ 1.6
=============== =============== ===============
Three months ended March 31, 2004 vs. March 31, 2003
Premium revenue decreased $13.4 million, or 5%, in 2004 from the comparable period in 2003, primarily due to a
continued shift in sales from participating life to universal life and variable universal life products as well
as to a continued decline of the participating life inforce business. Compared to 2003, 2004 premium revenue
for participating life policies decreased by $14.2 million. Since our 2001 demutualization, we no longer sell
participating life policies resulting in a decline in renewal participating life premiums and related inforce.
Insurance and investment product fees increased $11.4 million, or 15%, in 2004 over the comparable period in
2003, due to: higher fees for life insurance from growing inforce and higher fee-based funds; higher fees for
annuities from higher funds under management; and higher third-party revenues from our affiliated
broker-dealer.
Policy benefits and dividends decreased $6.3 million, or 1%, in 2004 from the comparable period in 2003,
primarily due to: lower annuity benefits from lower guaranteed minimum death benefit (GMDB) exposure; lower
interest credited costs for annuities from lower spread based funds under management and lower crediting rates
in 2004; and modestly lower death benefits and dividends for participating life insurance, partially offset by
higher benefits for universal life and variable universal life insurance. Universal life benefits were higher
due to one large claim, while variable life benefits increased due to higher reinsurance costs in 2004 and very
favorable mortality in 2003 compared to relatively higher mortality in 2004.
Policy acquisition cost amortization decreased $5.3 million, or 19%, in 2004 from the comparable period in
2003, primarily due to lower amortization for annuities and variable universal life insurance from improved
persistency in 2004 over 2003. Also, amortization was higher in 2003 for variable universal life due to very
favorable mortality.
Other operating expenses, which included non-deferrable policy acquisition costs, broker-dealer commissions
related to Griffith and Main Street and general and administrative costs, increased $3.4 million, or 5%, in
2004 over the comparable period in 2003. This increase is principally due to a $5.2 million increase in
broker-dealer commissions driven by higher Griffith and Main Street sales and a $2.5 million increase in
incentive compensation accruals due to a return to more normalized incentive compensation accrual levels,
partially offset by a $6.0 million reduction in general and administrative costs.
41
Allocated income taxes increased $3.2 million in 2004 over the comparable period in 2003, primarily due to the
increase in segment income before income taxes and minority interest.
Composition of Life and Annuity Segment Revenues by Product: Three Months Ended
($ amounts in millions) March 31,
--------------------------------
2004 2003 Change
--------------- --------------- ---------------
Life and annuity segment revenues by product
Variable universal life insurance...................... $ 29.2 $ 28.3 $ 0.9
Universal life insurance............................... 50.8 48.2 2.6
Term life insurance.................................... 3.2 3.1 0.1
Other life insurance................................... 38.6 33.4 5.2
--------------- --------------- ---------------
Total non-participating life insurance................. 121.8 113.0 8.8
Participating Life insurance........................... 398.3 411.0 (12.7)
--------------- --------------- ---------------
Total life insurance................................... 520.1 524.0 (3.9)
Annuities.............................................. 52.0 48.5 3.5
--------------- --------------- ---------------
Segment revenues...................................... $ 572.1 $ 572.5 $ (0.4)
=============== =============== ===============
Three months ended March 31, 2004 vs. March 31, 2003
Universal life insurance revenue increased $2.6 million, or 5%, in 2004 over the comparable period in 2003,
primarily due to higher cost of insurance charges from a growing inforce and higher attained age of
contractholders, partially offset by lower investment earnings.
Other life insurance revenue increased $5.2 million, or 16%, in 2004 over the comparable period in 2003,
primarily due to higher third-party revenue for our broker-dealer subsidiaries.
Annuity revenue increased $3.5 million, or 7%, in 2004 over the comparable period in 2003, primarily due to
higher fees from increased funds under management and increased investment earnings, partially offset by lower
surrender charges.
Composition of Life and Annuity Segment Income
Before Income Taxes by Product: Three Months Ended
($ amounts in millions) March 31,
--------------------------------
2004 2003 Change
--------------- --------------- ---------------
Life and annuity segment income by product
Variable universal life insurance.................. $ 8.2 $ 6.3 $ 1.9
Universal life insurance........................... 1.9 4.7 (2.8)
Term life insurance................................ 0.3 0.4 (0.1)
Other life insurance............................... 3.7 3.1 0.6
--------------- --------------- ---------------
Total non-participating life insurance............. 14.1 14.5 (0.4)
Participating Life insurance....................... 8.9 8.8 0.1
--------------- --------------- ---------------
Total life insurance............................... 23.0 23.3 (0.3)
Annuities.......................................... 2.8 (5.3) 8.1
--------------- --------------- ---------------
Segment income before income taxes................. $ 25.8 $ 18.0 $ 7.8
=============== =============== ===============
Three months ended March 31, 2004 vs. March 31, 2003
Variable Universal Life pre-tax income increased $1.9 million, or 30%, in 2004 over the comparable period in
2003, primarily due to increased revenue, as discussed above, combined with lower expense levels and lower
amortization of policy acquisition costs. Amortization of policy acquisition costs was higher in 2003 compared
with 2004 due to very favorable mortality and higher surrenders in 2003.
Universal Life pre-tax income decreased $2.8 million, or 60%, in 2004 from the comparable period in 2003,
primarily due to higher benefit costs from a $5.0 million death claim ($3.9 million after offset for deferred
acquisition costs), partially offset by increased revenues, as discussed above.
42
Annuity pre-tax income increased $8.1 million, or 153%, in 2004 over the comparable period in 2003, primarily
due to increased revenues, as discussed above, lower benefit costs from lower GMDB exposure and lower
reinsurance costs, lower interest credited costs from lower spread type funds under management and lower
crediting rates and lower amortization of policy acquisition costs from improved persistency and fund
performance.
Asset Management Segment
Summary Asset Management Financial Data: Three Months Ended
($ amounts in millions) March 31,
-----------------------------
2004 2003 Change
-------------- -------------- --------------
Results of operations
Investment product fees.......................................... $ 70.1 $ 57.2 $ 12.9
Net investment income............................................ 0.1 0.2 (0.1)
-------------- -------------- --------------
Total segment revenues........................................... 70.2 57.4 12.8
-------------- -------------- --------------
Intangible asset amortization.................................... 8.3 8.4 (0.1)
Other operating expenses......................................... 58.1 52.0 6.1
-------------- -------------- --------------
Total segment expenses........................................... 66.4 60.4 6.0
-------------- -------------- --------------
Segment income (loss) before income taxes and minority interest.. 3.8 (3.0) 6.8
Allocated income taxes (benefit)................................. 0.4 (2.1) 2.5
-------------- -------------- --------------
Segment income (loss) before minority interest................... 3.4 (0.9) 4.3
Minority interest in segment income.............................. 3.7 2.8 0.9
-------------- -------------- --------------
Segment loss..................................................... $ (0.3) $ (3.7) $ 3.4
Restructuring charges, net of income taxes....................... -- (3.0) 3.0
Realized investment gains, net of income taxes................... 1.4 -- 1.4
Other............................................................ (0.1) 1.3 (1.4)
-------------- -------------- --------------
Segment net income (loss)........................................ $ 1.0 $ (5.4) $ 6.4
============== ============== ==============
Three months ended March 31, 2004 vs. March 31, 2003
Investment product fees increased $12.9 million, or 23%, in 2004 from the comparable period in 2003. Private
client and institutional investment product fees increased $7.6 million and $4.7 million, respectively, as a
result of increased billable assets under management. Approximately 58% of our management fee revenues are
based on assets as of the beginning of a quarter, which causes fees to lag behind changes in assets under
management.
Assets under management, excluding the general account of our Life Companies, were $46.7 billion, $40.3
billion, and $46.3 billion, at March 31, 2004 and 2003, and at December 31, 2003, respectively. The increase in
assets under management since March 31, 2003 and December 31, 2003 is primarily due to positive investment
performance of $8.1 billion and $0.9 billion, respectively. Sales of private client products for the
three-month period in 2004 were $1.3 billion, an increase of 39% from the same period in 2003. Redemptions from
existing accounts for the three-month period in 2004 were $1.5 billion, an increase of 32% from the same period
in 2003. Sales of institutional accounts for the three-month period in 2004 were $0.6 billion, a decrease of
25% from the same period in 2003. Lost accounts and withdrawals from existing accounts for the three-month
period in 2004 were $0.8 billion, which includes $0.3 billion as a result of the Company's decision to redeem
one sponsored CDO during the first quarter of 2004 which resulted in a $4.6 million realized investment gain in
the Corporate Segment, an increase of 25% from the same period in 2003.
Other operating expenses increased $6.1 million, or 12%, in 2004 over the comparable period in 2003, of which
$5.5 million related to compensation expense and $0.6 million related to other non-compensation related
operating expenses. The increase in compensation expense was primarily the result of a $5.4 million increase in
incentive compensation, which resulted from higher bonus pools. The increase in bonus pools is the result of
increased earnings and revenues at certain of our partner firms that have formula-based incentives. The
increase in non-compensation related operating expenses was primarily the result of increased trailing
commissions and
43
finders fees offset, in part, by a decrease in computer services charges. These increases were partially offset
by an approximate $2.0 million decrease in employment and other operating expenses.
Allocated income taxes increased $2.5 million, or 119%, in 2004 over the comparable period in 2003, primarily
as a result of segment income in 2004 compared to segment losses in 2003.
Venture Capital Segment
Our venture capital investments are limited partnership interests in venture capital funds, leveraged buyout
funds and other private equity partnerships sponsored and managed by third parties. We record our investments
in venture capital partnerships in accordance with the equity method of accounting. (See Venture Capital
Partnerships in the Critical Accounting Estimates section of Management's Discussion and Analysis of Financial
Condition and Results of Operations.) Venture capital investments are investments of the general account of
Phoenix Life.
During the first quarter of 2003, we sold 50% of our interest in certain venture capital partnerships to an
outside party and transferred the remaining 50% interest in those partnerships to our closed block. The
carrying value of the partnerships sold and transferred totaled $52.2 million after realizing a loss of $19.4
million ($5.1 million recorded in 2002 and $14.3 million recorded in 2003). The unfunded commitments of the
partnerships sold and transferred totaled $27.2 million; the outside party and the closed block are each
funding half of these commitments. At the time of transfer, the partnerships transferred to the closed block
constituted less than 0.5% of the assets of the closed block.
Three Months Ended
March 31,
Summary Venture Capital Segment Financial Data: ------------------------------
($ amounts in millions) 2004 2003 Change
------------- ------------- -------------
Net realized losses on partnership cash and stock distributions.. $ (3.4) $ (6.2) $ 2.8
Net unrealized gains on partnership investments.................. 15.7 31.0 (15.3)
Partnership operating expenses................................... (0.7) (0.9) 0.2
------------- ------------- -------------
Segment net investment income.................................... 11.6 23.9 (12.3)
Applicable income taxes.......................................... 4.1 8.4 (4.3)
------------- ------------- -------------
Segment net income............................................... $ 7.5 $ 15.5 $ (8.0)
============= ============= =============
Three months ended March 31, 2004 vs. March 31, 2003
Net investment income decreased $12.3 million, in 2004 from the comparable period in 2003, due primarily to the
true-up to the partnerships' audited financial statements from estimated amounts as of December 31, 2003. The
true-up to the partnerships' audited financial statements reflected in the first quarter 2004 results was $21.3
million lower than the true-up recognized in the first quarter of 2003. This decrease was partially offset by
higher gains realized on cash and stock distributions in the first quarter of 2004 and the effect of overall
improved equity market conditions.
Our accounting methodology makes downward adjustments based on public market indices, but limits upward
adjustments to the amounts previously reported by the partnerships. Accordingly, we do not record gains until
they are reported by the partnerships. As a result, the effect of our adjusting estimated partnership results
to actual results increased investment income by $9.2 million and $30.5 million for the three months ended
March 31, 2004 and 2003, respectively.
44
Three Months Ended
March 31,
Activity in Venture Capital Segment Investments: --------------------------------
($ amounts in millions) 2004 2003 Change
--------------- --------------- --------------
Contributions (dollars invested).............................. $ 7.9 $ 11.6 $ (3.7)
Equity in earnings of partnerships............................ 11.6 23.9 (12.3)
Distributions................................................. (13.6) (3.0) (10.6)
Proceeds from sale of partnership interests and transfer to
closed block................................................ -- (52.2) 52.2
Realized loss on sale of partnership interests and transfer to
closed block................................................ -- (13.8) 13.8
--------------- --------------- --------------
Change in venture capital investments......................... 5.9 (33.5) 39.4
Venture capital segment investments, beginning of period...... 196.3 227.8 (31.5)
--------------- --------------- --------------
Venture capital segment investments, end of period............ $ 202.2 $ 194.3 $ 7.9
=============== =============== ==============
Three months ended March 31, 2004 vs. March 31, 2003
Venture capital investments increased $39.4 million, in 2004 compared to the change for 2003, primarily due to
proceeds from, and realized losses on, the sale of partnership interests and transfer to the closed block in
2003, which reduced the venture capital investments balance by $66.0 million in the first quarter of 2003. This
change was partially offset by a decrease in equity in earnings of $12.3 million and venture capital
distributions, which increased $10.6 million over the first quarter of 2003.
Segment Investments in Segment Venture Capital Partnerships by Type:
($ amounts in millions) Mar 31, 2004 Dec 31, 2003
--------------- ---------------
Technology................................................................... $ 32.6 $ 36.8
Telecommunications........................................................... 13.2 13.3
Biotechnology................................................................ 16.7 16.3
Health care.................................................................. 7.7 8.2
Consumer and business products and services.................................. 35.2 29.6
Financial services........................................................... 29.1 28.5
Other........................................................................ 53.3 44.9
--------------- ---------------
Private holdings............................................................. 187.8 177.6
Public holdings.............................................................. 12.6 11.3
Cash and cash equivalents.................................................... 1.4 5.5
Other........................................................................ 0.4 1.9
--------------- ---------------
Venture capital partnerships................................................. $ 202.2 $ 196.3
=============== ===============
Unfunded commitments......................................................... $ 69.0 $ 76.7
=============== ===============
See Note 5 to our consolidated financial statements in this Form 10-Q for more information regarding our
Venture Capital segment.
45
Corporate and Other Segment
Three Months Ended
March 31,
Summary Corporate and Other Financial Data: --------------------------------
($ amounts in millions) 2003
2004 Restated Change
--------------- --------------- ---------------
Corporate investment income............................ $ 0.9 $ 0.5 $ 0.4
Investment income from collateralized obligations...... 10.1 14.1 (4.0)
Interest expense on indebtedness....................... (9.8) (9.8) --
Interest expense on non-recourse collateralized
obligations.......................................... (8.9) (13.3) 4.4
Corporate expenses..................................... (3.9) 0.1 (4.0)
International.......................................... -- (1.3) 1.3
Other.................................................. (1.1) (1.7) 0.6
--------------- --------------- ---------------
Segment loss, before income taxes...................... (12.7) (11.4) (1.3)
Allocated income tax (benefit)......................... (4.4) (2.8) (1.6)
--------------- --------------- ---------------
Segment loss........................................... $ (8.3) $ (8.6) $ 0.3
Net realized investment losses, net of income
taxes and other offsets.............................. 2.9 (13.0) 15.9
Restructuring charges, after income taxes.............. (1.1) 0.5 (1.6)
--------------- --------------- ---------------
Segment net loss..................................... $ (6.5) $ (21.1) $ 14.6
=============== =============== ===============
Three months ended March 31, 2004 vs. March 31, 2003
Investment income from debt and equity securities pledged as collateral related to our consolidated CDOs
decreased $4.0 million, or 28%, in 2004 from the comparable period in 2003, primarily due to decreased asset
levels from paydowns and defaults.
Interest expense on non-recourse collateralized obligations decreased $4.4 million, or 33%, in 2004 from the
comparable period in 2003, due to reduced investment income received by the CDOs, as discussed above, resulting
in lower distributions to investment holders.
Corporate expenses increased $4.0 million, in 2004 over the comparable period in 2003, primarily due to a
return to more normalized incentive compensation accruals.
International results improved by $1.3 million, in 2004 from the comparable period in 2003, primarily due to
improved results from our Argentine financial services and our India-based software services subsidiaries.
General Account
The invested assets in the Life Companies' general account are generally of high quality and broadly
diversified across asset classes, sectors and individual credits and issuers. Our asset management
professionals manage these general account assets in investment segments that support specific product
liabilities. These investment segments have distinct investment policies that are structured to support the
financial characteristics of the related liabilities within them. Segmentation of assets allows us to manage
the risks and measure returns on capital for our various businesses and products.
Separate Accounts
Separate account assets are managed in accordance with the specific investment contracts and guidelines
relating to our variable products. We generally do not bear any investment risk on assets held in
separate accounts. Rather, we receive investment management fees based on assets under management.
Assets held in separate accounts are not available to satisfy general account obligations.
46
Debt and Equity Securities Pledged as Collateral and Non-recourse Collateralized Obligations
Investments pledged as collateral are assets held for the benefit of those institutional clients, which have
investments in structured bond products offered and managed by our asset management subsidiary.
See Note 7 to our consolidated financial statements in this Form 10-Q and our 2003 Annual Report on Form 10-K
for more information.
Asset/Liability and Risk Management
Our primary investment objective is to maximize after-tax investment return within defined risk
parameters. Our primary sources of investment risk are:
• credit risk, which relates to the uncertainty associated with the ongoing ability of an obligor
to make timely payments of principal and interest;
• interest rate risk, which relates to the market price and cash flow variability associated with
changes in market interest rates; and
• equity risk, which relates to the volatility of prices for equity and equity-like investments,
such as venture capital partnerships.
We manage credit risk through the fundamental analysis of the underlying obligors, issuers and transaction
structures. We employ a staff of experienced credit analysts who review obligors' management, competitive
position, cash flow, coverage ratios, liquidity and other key financial and non-financial information. These
analysts recommend the investments needed to fund our liabilities while adhering to diversification and credit
rating guidelines. In addition, when investing in private debt securities, we rely upon broad access to
management information, negotiated protective covenants, call protection features and collateral protection. We
review our debt security portfolio regularly to monitor the performance of obligors and assess the stability of
their current credit ratings.
We manage interest rate risk as part of our asset/liability management process and product design procedures.
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
liabilities. We identify potential interest rate risk in portfolio segments by modeling asset and liability
durations and cash flows under current and projected interest rate scenarios. We use these projections to
assess and control interest rate risk.
We offer a variety of variable annuities to meet the accumulation and preservation needs of the affluent and
high-net-worth market. Our major sources of revenues from separate account variable annuities are mortality and
expense fees charged to the contractholder, generally determined as a percentage of the market value of the
underlying assets under management. Our major source of profit from fixed annuities and general account
variable annuities is from the interest rate spread, or the excess of investment income earned over interest
credited.
Annuity Deposit Fund Balances
($ amounts in millions)
Mar 31, 2004 Dec 31, 2003
--------------- ---------------
Policyholder deposit funds
Retirement Planners Edge GIAs................................................ $ 1,170.2 $ 1,209.4
Other variable annuity GIAs.................................................. 830.2 858.0
--------------- ---------------
Variable annuity GIAs........................................................ 2,000.4 2,067.4
Fixed annuities.............................................................. 1,055.0 1,056.9
--------------- ---------------
Total variable annuity GIAs and fixed annuities.............................. $ 3,055.4 $ 3,124.3
=============== ===============
47
We also manage interest rate risk by emphasizing the purchase of securities that feature prepayment
restrictions and call protection. Our product design and pricing strategies include the use of surrender
charges or restrictions on withdrawals in some products. In addition, we selectively apply derivative
instruments, primarily interest rate swaps, to reduce the interest rate risk inherent in our portfolios. These
derivatives are transacted with highly rated counterparties and monitored for effectiveness on an ongoing
basis. We use derivatives exclusively for hedging purposes.
We manage credit risk through industry and issuer diversification and asset allocation. Maximum exposure to an
issuer 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.
For further information about our management of interest rate risk and equity risk, see Management's Discussion
and Analysis of Financial Condition and Results of Operations--Quantitative and Qualitative Information About
Market Risk.
Debt and Equity Securities Held in Our General Account
Our general account debt securities portfolios consist primarily of investment-grade publicly traded and
privately placed corporate bonds, residential mortgage-backed securities, commercial mortgage-backed securities
and asset-backed securities. As of March 31, 2004, our general account held debt securities with a carrying
value of $13,631.0 million, representing 79.3% of total general account investments. Public debt securities
represented 78.9% of total debt securities, with the remaining 21.1% represented by private debt securities.
On our consolidated balance sheet we consolidate debt and equity securities that are pledged as collateral for
the settlement of collateralized obligation liabilities related to three collateralized obligation trusts we
sponsor. See Note 7 of our consolidated financial statements in this Form 10-Q for additional information on
these debt and equity securities pledged as collateral.
Each year, the majority of our general account net cash flows are invested in investment grade debt securities.
In addition, we maintain a portfolio allocation of between 6% and 10% of debt securities in below investment
grade rated bonds. Allocations are based on our assessment of relative value and the likelihood of enhancing
risk-adjusted portfolio returns. The size of our allocation to below investment grade bonds is also constrained
by the size of our net worth. We are subject to the risk that the issuers of the debt securities we own may
default on principal and interest payments, particularly in the event of a major economic downturn. Our
investment strategy has been to invest the majority of our below investment grade rated bond exposure in the BB
rating category, which is equivalent to a Securities Valuation Office, or SVO, securities rating of 3. The BB
rating category is the highest quality tier within the below investment grade universe, and BB rated securities
historically experienced lower defaults compared to B or CCC rated bonds. As of March 31, 2004, our total below
investment grade securities totaled $1,115.4 million, or 8.2%, of our total debt security portfolio. Of that
amount, $828.7 million, or 6.1%, of our debt security portfolio was invested in the BB category. Our debt
securities having an increased risk of default (those securities with an SVO rating of four or greater, which
is equivalent to B or below) totaled $286.7 million, or 2.1%, of our total debt security portfolio.
Our general account debt and equity securities are classified as available-for-sale and are reported at fair
value with unrealized gains or losses included in equity. Accordingly, the carrying value of such securities
reflects their fair value at the balance sheet date. Fair value is based on quoted market price, where
available. When quoted market prices are not available, we estimate fair value for debt securities by
discounting projected cash flows based on market interest rates currently being offered on similar terms to
borrowers of similar credit quality, by quoted market prices of comparable instruments and by independent
pricing sources or internally developed pricing models. Investments whose value, in our judgment, is considered
to be other-than-temporarily impaired are written down to fair value as a charge to realized losses included in
our earnings. The cost basis of these written-down investments is adjusted to fair value at the date the
determination of impairment is made. The new cost basis is not changed for subsequent recoveries in value.
48
General Account Debt Security Portfolios at Fair Value by Rating:
($ amounts in millions)
SVO S&P Equivalent Total Debt Securities Public Debt Securities Private Debt Securities
------------------------- ------------------------- --------------------------
Mar 31, Dec 31, Mar 31, Dec 31, Mar 31, Dec 31,
Rating Designation 2004 2003 2004 2003 2004 2003
- -------- ---------------------------------- ------------ ------------ ------------ ------------ -------------
1 AAA/AA/A............ $ 8,895.3 $ 8,821.2 $ 7,456.2 $ 7,442.1 $ 1,439.1 $ 1,379.1
2 BBB................. 3,620.3 3,350.8 2,389.0 2,160.6 1,231.3 1,190.2
------------ ------------ ------------ ------------ ------------ -------------
Total investment grade 12,515.6 12,172.0 9,845.2 9,602.7 2,670.4 2,569.3
3 BB.................. 828.7 764.9 705.6 635.5 123.1 129.4
4 B................... 200.2 218.9 154.7 157.8 45.5 61.1
5 CCC and lower....... 67.6 94.6 31.3 53.7 36.3 40.9
6 In or near default.. 18.9 22.6 15.3 19.0 3.6 3.6
------------ ------------ ------------- ------------ ------------ -------------
Total debt securities $ 13,631.0 $ 13,273.0 $ 10,752.1 $ 10,468.7 $ 2,878.9 $ 2,804.3
============ ============ ============= ============ ============ =============
The following tables present our general account debt security portfolios by investment type, along with a
breakout of credit quality based on equivalent S&P rating agency designation.
As of March 31, 2004
-------------------------------------------------------------------------
Unrealized Gains (Losses)
-------------------------------------------
Debt Securities by Type: Fair Gross Gross
($ amounts in millions) Value Cost Gains Losses Net
------------- ------------- ------------- ------------- -------------
U.S. government and agency........... $ 780.9 $ 704.5 $ 76.6 $ (0.2) $ 76.4
State and political subdivision...... 515.0 462.7 52.4 (0.1) 52.3
Foreign government................... 274.0 245.2 29.0 (0.2) 28.8
Corporate............................ 7,167.7 6,689.4 510.1 (31.8) 478.3
Mortgage-backed...................... 3,094.2 2,910.5 185.6 (1.9) 183.7
Other asset-backed................... 1,799.2 1,771.9 62.1 (34.8) 27.3
------------- ------------- ------------- ------------- -------------
Total debt securities................ $ 13,631.0 $ 12,784.2 $ 915.8 $ (69.0) $ 846.8
============= ============= ============= ============= =============
Debt securities outside closed block:
Unrealized gains................. $ 5,715.3 $ 5,419.7 $ 295.6 $ -- $ 295.6
Unrealized losses................ 779.9 822.2 -- (42.3) (42.3)
------------- ------------- ------------- ------------- -------------
Total outside the closed block... 6,495.2 6,241.9 295.6 (42.3) 253.3
------------- ------------- ------------- ------------- -------------
Debt securities in closed block:
Unrealized gains................. 6,490.7 5,870.5 620.2 -- 620.2
Unrealized losses................ 645.1 671.8 -- (26.7) (26.7)
------------- ------------- ------------- ------------- -------------
Total in the closed block........ 7,135.8 6,542.3 620.2 (26.7) 593.5
------------- ------------- ------------- ------------- -------------
Total debt securities................ $ 13,631.0 $ 12,784.2 $ 915.8 $ (69.0) $ 846.8
============= ============= ============= ============= =============
49
As of March 31, 2004
-------------------------------------------------------------------
Debt Securities by Type and Credit Quality: Investment Grade Below Investment Grade
($ amounts in millions) --------------------------------- --------------------------------
Fair Value Cost Fair Value Cost
--------------- --------------- --------------- ---------------
U.S. government and agency................. $ 780.9 $ 704.5 $ -- $ --
State and political subdivision............ 515.0 462.7 -- --
Foreign government......................... 150.0 136.0 124.0 109.2
Corporate.................................. 6,359.7 5,908.8 808.0 780.6
Mortgage-backed............................ 3,030.2 2,855.9 64.0 54.6
Other asset-backed......................... 1,679.8 1,642.9 119.4 129.0
--------------- --------------- --------------- ---------------
Total debt securities...................... $ 12,515.6 $ 11,710.8 $ 1,115.4 $ 1,073.4
=============== =============== =============== ===============
Percentage of total debt securities........ 91.8% 91.6% 8.2% 8.4%
=============== =============== =============== ===============
Investment Grade Debt Securities (Fair Value): As of March 31, 2004
($ amounts in millions) --------------------------------------------------
Total AAA/AA/A BBB
--------------- --------------- ---------------
U.S. government and agency................................ $ 780.9 $ 780.9 $ --
State and political subdivision........................... 515.0 501.3 13.7
Foreign government........................................ 150.0 42.4 107.6
Corporate................................................. 6,359.7 3,359.9 2,999.8
Mortgage-backed........................................... 3,030.2 2,840.1 190.1
Other asset-backed........................................ 1,679.8 1,370.7 309.1
--------------- --------------- ---------------
Total debt securities..................................... $ 12,515.6 $ 8,895.3 $ 3,620.3
=============== =============== ===============
Percentage of total debt securities....................... 91.8% 65.3% 26.5%
=============== =============== ===============
As of March 31, 2004
-------------------------------------------------------------------------
Below Investment Grade In or Near
Debt Securities at Fair Value: Total BB B CC or Lower Default
($ amounts in millions) ------------- ------------- ------------- ------------- -------------
Foreign government................... $ 124.0 $ 124.0 $ -- $ -- $ --
Corporate............................ 808.0 604.7 155.6 44.1 3.6
Mortgage-backed...................... 64.0 63.7 -- 0.2 0.1
Other asset-backed................... 119.4 36.3 44.6 23.3 15.2
------------- ------------- ------------- ------------- -------------
Total debt securities................ $ 1,115.4 $ 828.7 $ 200.2 $ 67.6 $ 18.9
============= ============= ============= ============= =============
Percentage of total debt securities.. 8.2% 6.1% 1.5% 0.5% 0.1%
============= ============= ============= ============= =============
We manage credit risk through industry and issuer diversification. Maximum exposure to an issuer is defined by
quality ratings, with higher quality issuers having larger exposure limits. Our investment approach has been to
create a high level of industry diversification. The top five industry holdings as of March 31, 2004 in our
debt securities portfolios are banking (4.5%), insurance (3.0%), electrical utilities (2.7%), diversified
financial services (2.6%) and broker-dealers (2.6%).
Our corporate bond exposure to recently troubled industries, including telecommunication equipment, telephone
utilities, airlines, media, publishing and broadcasting, comprises 5.1% of our debt securities portfolios at
March 31, 2004. In addition, within the asset-backed securities sector, our exposure to securitized aircraft
receivable securities comprise approximately 1.0% of our debt securities portfolios, with slightly more than
one-third of that exposure rated below investment grade at March 31, 2004.
50
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 other-than-temporary impairment 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.
Three Months Ended
March 31,
----------------------------
Sources and Types of Net Realized Investment Gains (Losses) in General Account: 2003
($ amounts in millions) 2004 Restated
------------- -------------
Debt and equity security impairments............................................ $ (2.8) $ (22.5)
Debt securities pledged as collateral impairments............................... (4.7) (4.9)
Other investment impairments.................................................... (3.3) (13.4)
------------- -------------
Impairment losses............................................................... (10.8) (40.8)
------------- -------------
Debt and equity security transaction gains...................................... 12.8 54.0
Debt and equity security transaction losses..................................... (3.6) (14.9)
Other investments transaction gains (losses).................................... 4.1 (12.4)
------------- -------------
Net transaction gains........................................................... 13.3 26.7
------------- -------------
Net realized investment gains (losses).......................................... 2.5 (14.1)
------------- -------------
Applicable closed block policyholder dividend obligation........................ 0.1 8.5
Applicable deferred policy acquisition costs.................................... 0.4 0.5
Applicable deferred income tax (benefit)........................................ 1.2 (8.9)
------------- -------------
Offsets to realized investment losses........................................... 1.7 0.1
------------- -------------
Net realized investment gains (losses) included in net income................... $ 0.8 $ (14.2)
============= =============
Realized impairment losses on debt and equity securities pledged as collateral relating to our direct
investments in the consolidated collateralized obligation trusts are $3.7 million and $3.1 million for the
three months ended March 31, 2004 and 2003, respectively.
51
Gross and Net Unrealized Gains (Losses)
from General Account Debt and Equity As of March 31, 2004
Securities: -------------------------------------------------------------------
($ amounts in millions) Total Outside Closed Block Closed Block
---------------------- --------------------- ----------------------
Gains Losses Gains Losses Gains Losses
---------- ----------- ---------- ---------- ---------- -----------
Debt securities
Number of positions........................ 2,063 313 856 188 1,207 125
---------- ----------- ---------- ---------- ---------- -----------
Unrealized gains (losses).................. $ 915.8 $ (69.0) $ 295.6 $ (42.3) $ 620.2 $ (26.7)
---------- ----------- ---------- ---------- ---------- -----------
Applicable policyholder dividend
obligation (reduction)................... 620.2 (26.7) -- -- 620.2 (26.7)
Applicable deferred policy acquisition
costs (benefit).......................... 144.5 (19.4) 144.5 (19.4) -- --
Applicable deferred income taxes (benefit). 52.9 (8.0) 52.9 (8.0) -- --
---------- ----------- ---------- ---------- ---------- -----------
Offsets to net unrealized gains (losses)... 817.6 (54.1) 197.4 (27.4) 620.2 (26.7)
---------- ----------- ---------- ---------- ---------- -----------
Unrealized gains (losses) after offsets.... $ 98.2 $ (14.9) $ 98.2 $ (14.9) $ -- $ --
========== =========== ========== ========= ========== ===========
Net unrealized gains after offsets......... $ 83.3 $ 83.3 $ --
========== ========== ==========
Equity securities
Number of positions........................ 308 73 162 29 146 44
---------- ----------- ---------- ---------- ---------- -----------
Unrealized gains (losses).................. $ 116.2 $ (2.5) $ 107.4 $ (1.4) $ 8.8 $ (1.1)
---------- ----------- ---------- ---------- ---------- -----------
Applicable policyholder dividend
obligation (reduction)................... 8.8 (1.1) -- -- 8.8 (1.1)
Applicable deferred income taxes (benefit). 37.6 (0.5) 37.6 (0.5) -- --
---------- ----------- ---------- ---------- ---------- -----------
Offsets to net unrealized gains (losses)... 46.4 (1.6) 37.6 (0.5) 8.8 (1.1)
---------- ----------- ---------- ---------- ---------- -----------
Unrealized gains (losses) after offsets.... $ 69.8 $ (0.9) $ 69.8 $ (0.9) $ -- $ --
========== =========== ========== ========= ========== ===========
Net unrealized gains after offsets......... $ 68.9 $ 68.9 $ --
========== ========== ==========
Total net unrealized gains on debt and equity securities were $960.5 million (unrealized gains of $1,032.0 less
unrealized losses of $71.5). Of that net amount, $359.3 million was outside the closed block ($152.3 million
after applicable deferred policy acquisition costs and deferred income taxes) and $601.2 million was in the
closed block ($0.0 million after applicable policyholder dividend obligation).
At the end of each reporting period, we review all securities for potential recognition of an
other-than-temporary impairment. We maintain a watch list of securities in default, near default or otherwise
considered by our investment professionals as being distressed, potentially distressed or requiring a
heightened level of scrutiny. We also identify securities whose carrying value has been below amortized cost on
a continuous basis for zero to six months, greater than six months to 12 months, greater than 12 months to 24
months and greater than 24 months. This analysis is provided for investment grade and non-investment grade
securities and closed block and outside of closed block securities. Using this analysis, coupled with our watch
list, we review all securities whose fair value is less than 80% of amortized cost (significant unrealized
loss) with emphasis on below investment grade securities with a continuous significant unrealized loss in
excess of six months. In addition, we review securities that had experienced lesser percentage declines in
value on a more selective basis to determine if a security is other-than-temporarily impaired.
52
Our assessment of whether an investment by us in a debt or equity security is other-than-temporarily
impaired includes whether the issuer has:
• defaulted on payment obligations;
• declared that it will default at a future point outside the current reporting period;
• announced that a restructuring will occur outside the current reporting period;
• severe liquidity problems that cannot be resolved;
• filed for bankruptcy;
• a financial condition which suggests that future payments are highly unlikely;
• deteriorating financial condition and quality of assets;
• sustained significant losses during the current year;
• announced adverse changes or events such as changes or planned changes in senior management,
restructurings, or a sale of assets; and/or
• been affected by any other factors that indicate that the fair value of the investment may have
been negatively impacted.
The following tables present certain information with respect to our gross unrealized losses with respect to
our investments in general account debt securities, both outside and inside the closed block, as of March 31,
2004. In the tables, we separately present information that is applicable to unrealized losses both outside and
inside the closed block. We believe it is unlikely that there would be any effect on our net income related to
the realization of investment losses inside the closed block due to the current sufficiency of the policyholder
dividend obligation liability in the closed block. See Note 3 to our consolidated financial statements in this
Form 10-Q for more information regarding the closed block. Applicable deferred policy acquisition costs and
income taxes further reduce the effect on our comprehensive income.
53
Gross Unrealized Losses On General As of March 31, 2004
Account Debt and Equity Securities -------------------------------------------------------------------
by Duration of Unrealized Loss: 0 - 6 6 - 12 12 - 24 Over 24
($ amounts in millions) Total Months Months Months Months
------------ ------------ ------------ ------------ -----------
Debt securities outside closed block
Number of positions....................... 188 119 22 23 24
------------ ------------ ------------ ------------ -----------
Total fair value.......................... $ 779.9 $ 511.1 $ 75.0 $ 73.6 $ 120.2
Total amortized cost...................... 822.2 520.4 76.8 84.7 140.3
------------ ------------ ------------ ------------ -----------
Unrealized losses......................... $ (42.3) $ (9.3) $ (1.8) $ (11.1) $ (20.1)
============ ============ ============ ============ ===========
Unrealized losses after offsets........... $ (14.9) $ (3.6) $ (0.7) $ (2.8) $ (7.8)
============ ============ ============ ============ ===========
Unrealized losses over 20% of cost........ $ (26.8) $ (2.7) $ -- $ (7.2) $ (16.9)
============ ============ ============ ============ ===========
Unrealized losses over 20% of cost
after offsets........................... $ (10.1) $ (1.0) $ -- $ (2.7) $ (6.4)
============ ============ ============ ============ ===========
Investment grade:
Number of positions....................... 146 99 21 15 11
------------ ------------ ------------ ------------ -----------
Unrealized losses......................... $ (30.4) $ (5.5) $ (1.6) $ (9.4) $ (13.9)
============ ============ ============ ============ ===========
Unrealized losses after offsets........... $ (10.2) $ (1.9) $ (0.6) $ (2.2) $ (5.5)
============ ============ ============ ============ ===========
Unrealized losses over 20% of cost........ $ (19.8) $ -- $ -- $ (7.2) $ (12.6)
============ ============ ============ ============ ===========
Unrealized losses over 20% of cost
after offsets........................... $ (7.5) $ -- $ -- $ (2.7) $ (4.8)
============ ============ ============ ============ ===========
Below investment grade:
Number of positions....................... 42 20 1 8 13
------------ ------------ ------------ ------------ -----------
Unrealized losses......................... $ (11.9) $ (3.8) $ (0.2) $ (1.7) $ (6.2)
============ ============ ============ ============ ===========
Unrealized losses after offsets........... $ (4.6) $ (1.6) $ (0.1) $ (0.6) $ (2.3)
============ ============ ============ ============ ===========
Unrealized losses over 20% of cost........ $ (7.0) $ (2.7) $ -- $ -- $ (4.3)
============ ============ ============ ============ ===========
Unrealized losses over 20% of cost
after offsets........................... $ (2.6) $ (1.0) $ -- $ -- $ (1.6)
============ ============ ============ ============ ===========
Equity securities outside closed block
Number of positions....................... 29 24 -- 2 3
------------ ------------ ------------ ------------ -----------
Unrealized losses......................... $ (1.4) $ (1.1) $ -- $ (0.2) $ (0.1)
============ ============ ============ ============ ===========
Unrealized losses after offsets........... $ (0.9) $ (0.7) $ -- $ (0.1) $ (0.1)
============ ============ ============ ============ ===========
Unrealized losses over 20% of cost........ $ (1.2) $ (1.0) $ -- $ (0.1) $ (0.1)
============ ============ ============ ============ ===========
Unrealized losses over 20% of cost
after offsets........................... $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ===========
For debt securities outside of the closed block with gross unrealized losses, 71.9% of the unrealized losses
after offsets pertains to investment grade securities and 28.1% of the unrealized losses after offsets pertains
to below investment grade securities.
Of the 146 investment grade debt securities held outside the closed block with unrealized losses, 120 have been
in an unrealized loss position for 12 months or less at March 31, 2004 (all of which have unrealized losses of
less than 20% of cost). Of the remaining 26 security positions, 15 have been in an unrealized loss position for
12 to 24 months (including 13 that have unrealized losses of less than 20% of cost) and 11 have been in an
unrealized loss position for over 24 months (including eight that have unrealized losses of less than 20% of
cost).
54
Of the 42 below investment grade debt security positions held outside the closed block with unrealized losses,
21 have been in an unrealized loss position for 12 months or less at March 31, 2004 (including 18 that have
unrealized losses of less than 20% of cost). Of the remaining 21 security positions, eight have been in an
unrealized loss position for 12 to 24 months (all that have unrealized losses of less than 20% of cost) and 13
have been in an unrealized loss position for over 24 months (including two that have unrealized losses of less
than 20% of cost).
Of the eight below investment grade debt security positions held outside the closed block with gross
unrealized losses greater than 20% of cost at March 31, 2004, four have been in an unrealized position of
greater than 20% of cost for 12 months or less at March 31, 2004. Of the remaining four positions, none
have been in an unrealized loss position greater than 20% of cost for 12 to 24 months and four have been
in an unrealized loss position greater than 20% of cost for over 24 months with an unrealized loss of less
than $(4.3) million.
Of the 29 equity securities held outside the closed block with unrealized losses, 24 have been in an unrealized
loss position for 12 months or less at March 31, 2004 (including 20 that have unrealized losses of less than
20% of cost). Of the remaining five securities, two have been in an unrealized loss position for 12 to 24
months (including one that has unrealized losses less of than 20% of cost) and three have been in an unrealized
loss position for over 24 months (including one that has unrealized losses of less than 20% of cost).
55
Gross Unrealized Losses on General
Account Debt and Equity Securities by As of March 31, 2004
Duration of Unrealized Loss: ---------------------------------------------------------------------
($ amounts in millions) 0 - 6 6 - 12 12 - 24 Over 24
Total Months Months Months Months
------------ ------------ ------------ ------------ ------------
Debt securities inside closed block
Number of positions..................... 125 73 17 20 15
------------ ------------ ------------ ------------ ------------
Total fair value....................... $ 645.1 $ 385.5 $ 128.2 $ 52.1 $ 79.3
Total amortized cost.................... 671.8 396.2 131.4 55.2 89.0
------------ ------------ ------------ ------------ ------------
Unrealized losses....................... $ (26.7) $ (10.7) $ (3.2) $ (3.1) $ (9.7)
============ ============ ============ ============ ============
Unrealized losses after offsets......... $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
Unrealized losses over 20% of cost...... $ (9.3) $ (4.1) $ -- $ -- $ (5.2)
============ ============ ============ ============ ============
Unrealized losses over 20% of cost
after offsets......................... $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
Investment grade:
Number of positions..................... 96 58 16 14 8
------------ ------------ ------------ ------------ ------------
Unrealized losses....................... $ (11.5) $ (5.1) $ (3.0) $ (1.5) $ (1.9)
============ ============ ============ ============ ============
Unrealized losses after offsets......... $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
Unrealized losses over 20% of cost...... $ (0.3) $ -- $ -- $ -- $ (0.3)
============ ============ ============ ============ ============
Unrealized losses over 20% of cost
after offsets......................... $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
Below investment grade:
Number of positions..................... 29 15 1 6 7
------------ ------------ ------------ ------------ ------------
Unrealized losses....................... $ (15.2) $ (5.6) $ (0.2) $ (1.6) $ (7.8)
============ ============ ============ ============ ============
Unrealized losses after offsets......... $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
Unrealized losses over 20% of cost...... $ (9.0) $ (4.1) $ -- $ -- $ (4.9)
============ ============ ============ ============ ============
Unrealized losses over 20% of cost
after offsets......................... $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
Equity securities inside closed block
Number of positions..................... 44 44 -- -- --
------------ ------------ ------------ ------------ ------------
Unrealized losses....................... $ (1.1) $ (1.1) $ -- $ -- $ --
============ ============ ============ ============ ============
Unrealized losses after offsets......... $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
Unrealized losses over 20% of cost...... $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
Unrealized losses over 20% of cost
after offsets......................... $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
For debt securities in the closed block with gross unrealized losses, 43% of the unrealized losses pertains to
investment grade securities and 57% of the unrealized losses pertains to below investment grade securities.
Of the 96 investment grade debt securities held in the closed block with unrealized losses, 74 have been in an
unrealized loss position for 12 months or less at March 31, 2004 (all of which have unrealized losses of less
than 20% of cost). Of the remaining 22 security positions, eight have been in an unrealized loss position for
over 24 months (including seven that have unrealized losses of less than 20% of cost).
Of the 29 below investment grade debt security positions held in the closed block with unrealized losses, 16
have been in an unrealized loss position for 12 months or less at March 31, 2004 (including 14 that have
unrealized losses of less than 20% of cost). Of the remaining 13 positions, six have been in an unrealized loss
position for 12
56
to 24 months (all of which have unrealized losses of less than 20% of cost) and seven have been in an
unrealized loss position for over 24 months (including four that have unrealized losses of less than 20% of
cost).
Of the five below investment grade debt security positions held in the closed block with gross unrealized
losses greater than 20% of cost at March 31, 2004, two have been in an unrealized loss position of greater than
20% of cost for 12 months or less at March 31, 2004. Of the remaining three positions, all have been in an
unrealized position greater than 20% of cost for greater than 24 months. None of these securities were
considered to be other-than-temporarily impaired at March 31, 2004. Each security has performed, and is
expected to continue to perform, in accordance with its original contractual terms. Two issues are
collateralized airplane leases related holdings that have declined in fair value due to airline bankruptcies,
reduced travel and higher risk premiums required for aircraft related investments. The unrealized loss on these
securities at March 31, 2004 was $(3.6) million. The other issue is an energy/power generation related holding
that has declined in fair value due to downgrades, bankruptcies and weakness in the energy market. The
unrealized loss on this security at March 31, 2004 was $(1.3) million, or 26.4%, of its amortized cost.
Of the 44 equity securities held inside the closed block with unrealized losses, all have been in an unrealized
loss position for 6 months or less as of March 31, 2004.
In determining that the securities giving rise to the previously mentioned unrealized losses were not
other-than-temporarily impaired, we evaluated the factors cited above, which we consider when assessing whether
a security is other-than-temporarily impaired. In making these evaluations, we must exercise considerable
judgment. Accordingly, there can be no assurance that actual results will not differ from our judgments and
that such differences may require the future recognition of other-than-temporary impairment charges that could
have a material effect on our financial position and results of operations. In addition, the value of, and the
realization of any loss on, a debt security or equity security is subject to numerous risks, including
interest rate risk, market risk, credit risk and liquidity risk. The magnitude of any loss incurred by us may
be affected by the relative concentration of our investments in any one issuer or industry. We have established
specific policies limiting the concentration of our investments in any single issuer and industry and believe
our investment portfolio is prudently diversified.
Aberdeen Asset Management PLC
As of March 31, 2004 and December 31, 2003, we owned $27.5 million of Aberdeen 7.5% convertible subordinated
notes. The 7.5% convertible subordinated notes were originally issued in 1996 at 7%, with a maturity of March
29, 2003, subject to four six-month extensions at Aberdeen's option with increasing interest rates. In March
2003, these notes were partially paid down by $5.0 million, with the remainder extended, subject to a rate
increase to 7.5% and a maturity of September 29, 2003. The maturity on these notes was extended again to March
29, 2004 with a partial payout of $5.0 million received in November 2003 at an interest rate of 7.5%. In March
2004, these notes were extended subject to a rate increase to 8% and a maturity of September 29, 2004. Prior to
the fourth quarter of 2003, we owned $19.0 million of 5.875% convertible bonds, which were issued in 2002 and
mature in 2007. During the fourth quarter of 2003, we sold the Aberdeen 5.875% bonds and realized a gain of
$0.7 million.
Prior to October 24, 2003, our ownership of Aberdeen common stock included 22% of the company's outstanding
common shares that we purchased in between 1996 and 2001 for $109.1 million. As of June 30, 2003, we concluded
that our equity investment in Aberdeen, accounted for under the equity method of accounting, was
other-than-temporarily impaired resulting in an $89.1 million pre-tax, non-cash charge to earnings during the
quarter ended June 30, 2003. The carrying value of our equity investment in Aberdeen was $39.6 million and
$38.3 million at March 31, 2004 and December 31, 2003, respectively. The fair value, based on the quoted market
price of underlying shares and foreign currency exchange rate, of our equity investment in Aberdeen was $56.0
million, $65.5 million and $54.4 million at May 6, 2004, March 31, 2004, December 31, 2003, respectively.
57
On October 24, 2003, Aberdeen completed the acquisition of 100% of the outstanding common stock of
Edinburgh Fund Managers Group plc, an Edinburgh Scotland based asset manager, for (pound)36 million through the
issuance of 58.9 million shares of Aberdeen common stock. As a result of this acquisition, as of December
31, 2003 our percentage ownership in Aberdeen's common stock was diluted from approximately 22% to 16.2%,
although our representation on Aberdeen's Board of Directors remained at two seats out of 12 seats. Based
on our continued substantial ownership position and related board representation, we believe that, in our
judgement, we continue to have the ability to significantly influence the operations of Aberdeen and,
therefore, we continue to account for our investment using the equity method of accounting subsequent to
October 24, 2003.
On April 5, 2004, Aberdeen signed a conditional agreement to dispose of its UK and Continental European
property investment management business to an unrelated party for consideration of up to (pound)50 million for
a realized gain of up to (pound)7 million. This transaction is subject to shareholder approval scheduled for
May 14, 2004 and is expected to close in the second quarter of 2004.
Hilb, Rogal & Hamilton Company
We own shares of common stock in HRH, a Virginia-based property and casualty insurance and employee benefit
products distributor. See Notes 5 and 6 to our consolidated financial statements in this Form 10-Q for detailed
information regarding our investment in HRH.
Liquidity and Capital Resources
In the normal course of business, we enter into transactions involving various types of financial instruments
such as debt and equity securities. These instruments have credit risk and also may be subject to risk of loss
due to interest rate and market fluctuations.
Liquidity refers to the ability of a company to generate sufficient cash flow to meet its cash requirements.
The following discussion includes both liquidity and capital resources as these subjects are interrelated.
The Phoenix Companies, Inc. (consolidated)
Three Months Ended
March 31,
-------------------------------- ---------------
Summary Consolidated Cash Flow Data: 2003
($ amounts in millions) 2004 Restated Change
--------------- --------------- ---------------
Cash from continuing operations............................ $ 61.0 $ 49.8 $ 11.2
Cash for discontinued operations........................... (14.4) (17.1) 2.7
Cash for continuing operations investing activities........ (68.5) (752.3) 683.8
Cash from discontinued operations investing activities..... 1.4 (6.7) 8.1
Cash from financing activities............................. (105.7) 250.3 (356.0)
Three months ended March 31, 2004 vs. March 31, 2003
Cash from continuing operations increased $11.2 million, or 22%, over the comparable period in 2003, primarily
due to higher revenues received and lower benefits paid, partially offset by lower income taxes refunded.
Cash for continuing operations investing activities decreased $683.8 million, or 91%, from the comparable
period in 2003, primarily due to lower cash from financing in 2004 and higher cash balances at the beginning of
2003 that were invested during the first quarter of 2003.
58
Cash from financing activities decreased $356.0 million, or 142%, due to net reductions in policyholder deposit
funds of $86.3 million in 2004 compared to a net increase of $283.3 million in 2003. This decline is due to
withdrawals from variable annuity guaranteed interest sub-accounts.
On April 30, 2004, The Phoenix Companies, Inc. received a $69.7 million dividend from Phoenix Life.
On April 29, 2004, we declared a cash dividend of $0.16 per share, payable July 12, 2004 to shareholders of
record on June 14, 2004.
On December 22, 2003, we closed on a new $150.0 million unfunded, unsecured senior revolving credit facility to
replace our $100 million credit facility, which expired on that date. This new facility consists of two
tranches: a $112.5 million, 364-day revolving credit facility and a $37.5 million, three-year revolving credit
facility. Under the 364-day facility, we have the ability to extend the maturity date of any outstanding
borrowings for one year from the termination date. Potential borrowers on the new credit line are the holding
company, Phoenix Life and PXP. Financial covenants require the maintenance at all times of: consolidated
stockholders' equity of $1,775.0 million, stepping up by 50% of quarterly positive net income and 100% of
equity issuances; a maximum consolidated debt-to-capital ratio of 30%; a minimum consolidated fixed charge
coverage ratio (as defined in the credit agreement) of 1.25:1; and, for Phoenix Life, a minimum risk-based
capital ratio of 250% and a minimum A.M. Best Financial Strength Rating of A-. On March 15, 2004 we drew $25.0
million of our $37.5 million, three-year revolving credit facility tranche to fund a $30.1 million payment
related to our acquisition of Kayne Anderson Rudnick as further described in Notes 1 and 6 of our consolidated
financial statements in this Form 10-Q.
On April 16, 2004, we executed a technical amendment to the credit agreement, effective as of December 31,
2003, to: (1) exclude the accounting effects of FIN 46-R from the definition of shareholders' equity and (2)
clarify that the lenders did no intend to treat CDOs as indebtedness, for purposes of calculating financial
covenant compliance.
Life Companies
The Life Companies' liquidity requirements principally relate to: the liabilities associated with various life
insurance and annuity products; the payment of dividends by Phoenix Life to The Phoenix Companies, Inc.;
operating expenses; contributions to subsidiaries; and payment of principal and interest by Phoenix Life on its
outstanding debt obligations. 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. The Life
Companies also have liabilities arising from the runoff of the remaining group accident and health reinsurance
discontinued operations.
Historically, our Life Companies have used cash flow from operations and investment activities to fund
liquidity requirements. Their principal cash inflows from life insurance and annuities activities come from
premiums, annuity deposits and charges on insurance policies and annuity contracts. In the case of Phoenix
Life, cash inflows also include dividends, distributions and other payments from subsidiaries. Principal cash
inflows from investment activities result from repayments of principal, proceeds from maturities, sales of
invested assets and investment income. The principal cash inflows from our discontinued group accident and
health reinsurance operations come from our finite reinsurance, recoveries from other retrocessionaires and
investment activities. See Note 11 to our consolidated financial statements in this Form 10-Q for additional
information.
Additional liquidity to meet cash outflows is available from our Life Companies' portfolios of liquid assets.
These liquid assets include substantial holdings of U.S. government and agency bonds, short-term investments
and marketable debt and equity securities.
Phoenix Life's current sources of liquidity also include the revolving credit facility, discussed above, under
which Phoenix Life has direct borrowing rights, subject to our unconditional guarantee. Since the
demutualization, Phoenix Life's access to the cash flows generated by the closed block assets has been
restricted to funding the closed block.
59
A primary liquidity concern with respect to life insurance and annuity products is the risk of early
policyholder and contractholder withdrawal. Our Life Companies closely monitor their liquidity requirements in
order to match cash inflows with expected cash outflows, and employ an asset/liability management approach
tailored to the specific requirements of each product line, based upon the return objectives, risk tolerance,
liquidity, tax and regulatory requirements of the underlying products. In particular, our Life Companies
maintain investment programs generally intended to provide adequate funds to pay benefits without forced sales
of investments. Products having liabilities with relatively long lives, such as life insurance, are matched
with assets having similar estimated lives, such as long-term bonds, private placement bonds and mortgage
loans. Shorter-term liabilities are matched with investments with short-term and medium-term fixed maturities.
Annuity Actuarial Reserves and Deposit Liabilities March 31, 2004 December 31, 2003
Withdrawal Characteristics: ------------------------ -----------------------
($ amounts in millions) Amount(1) Percent Amount(1) Percent
------------ ----------- ------------ ----------
Not subject to discretionary withdrawal provision........... $ 217.3 3% $ 220.8 3%
Subject to discretionary withdrawal without adjustment...... 1,877.8 26% 1,967.2 28%
Subject to discretionary withdrawal with market value
adjustment................................................ 802.3 11% 811.6 11%
Subject to discretionary withdrawal at contract value less
surrender charge.......................................... 898.2 12% 869.8 12%
Subject to discretionary withdrawal at market value......... 3,433.7 48% 3,294.0 46%
------------ ----------- ------------ ----------
Total annuity contract reserves and deposit fund liability.. $ 7,229.3 100% $ 7,163.4 100%
============ =========== ============ ==========
- -------
(1) 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 on the balance sheet of financial statements prepared in conformity with statutory
accounting practices. These amounts are at least equal to the values available to be withdrawn by
policyholders.
Individual life insurance policies are less susceptible to withdrawals than annuity contracts because
policyholders may incur surrender charges and be required to undergo a new underwriting process in order to
obtain a new insurance policy. As indicated in the table above, most of our annuity contract reserves and
deposit fund liabilities are subject to withdrawals.
Individual life insurance policies, other than term life insurance policies, increase in cash values over their
lives. Policyholders have the right to borrow an amount generally up to the cash value of their policies at any
time. As of March 31, 2004, our Life Companies had approximately $11.6 billion in cash values with respect to
which policyholders had rights to take policy loans. The majority of cash values eligible for policy loans are
at variable interest rates that are reset annually on the policy anniversary. Policy loans at March 31, 2004
were $2.2 billion.
The primary liquidity risks regarding cash inflows from the investment activities of our Life Companies are the
risks of default by debtors, interest rate and other market volatility, and potential illiquidity of
investments. We closely monitor and manage these risks.
We believe that the current and anticipated sources of liquidity for our Life Companies are adequate to meet
their present and anticipated needs.
On April 30, 2004, Phoenix Life paid a $69.7 million dividend to The Phoenix Companies, Inc.
Phoenix Investment Partners, Ltd. (PXP)
PXP's liquidity requirements are primarily to fund operating expenses and pay its debt and interest
obligations. PXP also would require liquidity to fund the costs of any contingent payments for previous
acquisitions, as well
60
as any potential acquisitions. Historically, PXP's principal source of liquidity has been cash flows from
operations. We expect that cash flow from operations will continue to be PXP's principal source of working
capital. PXP's current sources of liquidity also include the revolving credit facility, discussed above, under
which PXP has direct borrowing rights subject to the unconditional guarantee of The Phoenix Companies, Inc. We
believe that PXP's current and anticipated sources of liquidity are adequate to meet its present and
anticipated needs. See Note 6 to our consolidated financial statements in this Form 10-Q for further details on
our financing activities. In March 2004, PXP borrowed $25.0 million against the credit facility to fulfill an
obligation related to the Kayne Anderson Rudnick acquisition. See Commitments Related to Recent Business
Combinations and Note 4 to our consolidated financial statements in this Form 10-Q for additional information.
Consolidated Financial Condition
Consolidated Balance Sheet:
($ amounts in millions) Mar 31, 2004 Dec 31, 2003 Change
------------- ------------- ------------
ASSETS:
Available-for-sale debt securities, at fair value................... $ 13,631.0 $ 13,273.0 $ 358.0
Available-for-sale equity securities, at fair value................. 338.9 312.0 26.9
Mortgage loans, at unpaid principal balances........................ 271.5 284.1 (12.6)
Venture capital partnerships, at equity in net assets............... 249.5 234.9 14.6
Affiliate equity securities, at equity in net assets................ 49.3 47.5 1.8
Policy loans, at unpaid principal balances.......................... 2,239.4 2,227.8 11.6
Other investments................................................... 414.3 402.0 12.3
------------- ------------- ------------
17,193.9 16,781.3 412.6
Available-for-sale debt and equity securities pledged as collateral,
at fair value..................................................... 1,389.2 1,350.0 39.2
------------- ------------- ------------
Total investments................................................... 18,583.1 18,131.3 451.8
Cash and cash equivalents........................................... 321.7 447.9 (126.2)
Accrued investment income and receivables........................... 399.6 447.2 (47.6)
Deferred policy acquisition costs................................... 1,358.5 1,367.7 (9.2)
Deferred income taxes............................................... 24.8 58.7 (33.9)
Goodwill and other intangible assets................................ 746.4 755.0 (8.6)
Other general account assets........................................ 261.1 268.2 (7.1)
Separate account assets............................................. 6,461.6 6,083.2 378.4
------------- ------------- ------------
Total assets........................................................ $ 28,156.8 $ 27,559.2 $ 597.6
============= ============= ============
LIABILITIES:
Policy liabilities and accruals..................................... $ 13,335.3 $ 13,088.6 $ 246.7
Policyholder deposit funds.......................................... 3,556.4 3,642.7 (86.3)
Stock purchase contracts and indebtedness........................... 811.9 767.8 44.1
Other general account liabilities................................... 519.0 525.7 (6.7)
Non-recourse collateralized obligations............................. 1,445.0 1,472.0 (27.0)
Separate account liabilities........................................ 6,461.6 6,083.2 378.4
------------- ------------- ------------
Total liabilities................................................... 26,129.2 25,580.0 549.2
------------- ------------- ------------
MINORITY INTEREST:
Minority interest in net assets of consolidated subsidiaries........ 30.4 31.4 (1.0)
------------- ------------- ------------
STOCKHOLDERS' EQUITY:
Common stock and additional paid in capital......................... 2,429.9 2,429.8 0.1
Deferred compensation on restricted stock units..................... (3.2) (3.6) 0.4
Accumulated deficit................................................. (336.1) (352.7) 16.6
Accumulated other comprehensive income.............................. 93.8 63.7 30.1
Treasury stock...................................................... (187.2) (189.4) 2.2
------------- ------------- ------------
Total stockholders' equity.......................................... 1,997.2 1,947.8 49.4
------------- ------------- ------------
Total liabilities, minority interest and stockholders' equity....... $ 28,156.8 $ 27,559.2 $ 597.6
============= ============= ============
61
Three months ended March 31, 2004 vs. December 31, 2003
Available-for-sale debt securities increased $358.0 million, or 3%, in 2004 from December 31 2003, reflecting
appreciation of bond values due to lower interest rates, investment of cash flows from operations and the
investment of December 31, 2003 cash in debt securities.
Cash and cash equivalents decreased $126.2 million, or 28%, in 2004 from December 31, 2003, primarily due to
cash outflows for the purchase of debt securities and reductions in cash in the consolidated CDOs from paydowns
and investment in securities.
Available-for-sale equity securities increased $26.9 million, or 9%, in 2004 from December 31, 2003, primarily
due to the increase in the fair market value of our HRH common stock.
Available-for-sale debt and equity securities pledged as collateral increased $39.2 million, in 2004 from
December 31, 2003, primarily due to investment of available cash and an increase in fair value of assets,
partially offset by distributions.
Deferred policy acquisition costs decreased $9.2 million, or 1%, in 2004 from the comparable period in 2003,
due primarily to offsets for unrealized investment gains included in other comprehensive income, partially
offset by business growth. See Note 3 to our consolidated financial statements in this Form 10-Q for additional
information.
Composition of Deferred Policy Acquisition Cost Assets by Product:
($ amounts in millions) Mar 31, 2004 Dec 31, 2003 Change
--------------- --------------- ---------------
Variable universal life.................................... $ 330.1 $ 328.7 $ 1.4
Universal life............................................. 168.9 169.3 (0.4)
Variable annuities......................................... 253.6 260.3 (6.7)
Fixed annuities............................................ 45.9 45.2 0.7
Participating life......................................... 530.3 536.7 (6.4)
Other...................................................... 29.7 27.5 2.2
--------------- --------------- ---------------
Total deferred policy acquisition costs.................... $ 1,358.5 $ 1,367.7 $ (9.2)
=============== =============== ===============
Policy liabilities and accruals increased $246.7 million, or 2%, in 2004 over December 31, 2003, primarily due
to growth in policyholder inforce and the policyholder dividend obligation from the affect of unrealized gains
for the three months ended March 31, 2004.
Policyholder deposit funds decreased $86.3 million, or 2%, in 2004 from December 31, 2003, primarily due to net
withdrawals from variable annuity guaranteed interest account sub-accounts.
Stock purchase contracts and indebtedness increased $44.1 million, or 6%, in 2004 from December 31, 2003,
primarily due to borrowing $25.0 million on our bank credit facility and a $17.1 million decrease in the fair
value of the HRH embedded derivative resulting from the increase in the fair value of HRH common stock during
2004. See Note 6 of our consolidated financial statements in this Form 10-Q for additional information.
Non-recourse collateralized obligations decreased $27.0 million, or 2%, in 2004 from December 31, 2003, due to
distributions to investors, partially offset by an increase in the non-recourse derivative cash flow hedges.
Contractual Obligations and Commercial Commitments
As of March 31, 2004, we had $2,030.1 million of outstanding contractual obligations, excluding derivative
instruments, and $128.6 million in commercial commitments.
62
Contractual Obligations and
Commercial Commitments:
($ amounts in millions) Remainder 2009
Total of 2004 2005 - 2006 2007 - 2008 and Later
------------ ------------ ------------ ------------ ------------
Contractual Obligations Due
Indebtedness(1)............................. $ 653.7 $ -- $ 200.0 $ 153.7 $ 300.0
Operating lease obligations................ 38.7 8.6 16.7 10.2 3.2
Other purchase liabilities(2)(6) ............ 32.8 17.7 12.5 2.6 --
------------ ------------ ------------ ------------ ------------
Subtotal................................... $ 725.2 $ 26.3 $ 229.2 $ 166.5 $ 303.2
Non-recourse collateralized obligations(3).. 1,304.9 -- -- -- 1,304.9
------------ ------------ ------------ ------------ ------------
Total contractual obligations.............. $ 2,030.1 $ 26.3 $ 229.2 $ 166.5 $ 1,608.1
============ ============ ============ ============ ============
Commercial Commitment Expirations
Standby letters of credit(4)................ $ 9.0 $ 9.0 $ -- $ -- $ --
Other commercial commitments(5)(6)........... 119.6 3.3 4.2 24.1 88.0
------------ ------------ ------------ ------------ ------------
Total commercial commitments............... $ 128.6 $ 12.3 $ 4.2 $ 24.1 $ 88.0
============ ============ ============ ============ ============
- -------
(1) Indebtedness amounts include principal only.
(2) Other purchase liabilities relate to open purchase orders and other contractual obligations.
(3) Non-recourse obligations are not direct liabilities of ours as they will be repaid from
investments pledged as collateral recorded on our consolidated balance sheet. See Note 7 to our
consolidated financial statements in this Form 10-Q for additional information.
(4) Our standby letters of credit automatically renew on an annual basis.
(5) Other commercial commitments relate to venture capital partnerships. These commitments can be
drawn down by private equity funds as necessary to fund their portfolio investments through the end
of the funding period as stated in each agreement. The amount collectively drawn down by the private
equity funds in our portfolio during the first quarter of 2004 was $11.8 million.
(6) Obligations and commitments related to post-employment benefit plans and commitments related to
recent business combinations are not included in amounts presented in this table. See the discussion
on the following pages.
Commitments Related to Recent Business Combinations
Under the terms of purchase agreements related to certain recent business combinations, we are subject to
certain contractual obligations and commitments related to additional purchase consideration and put/call
arrangements summarized as follows:
Kayne Anderson Rudnick
Phoenix has an arrangement in which existing non-Phoenix members of Kayne Anderson Rudnick will sell a portion
of their membership interests in Kayne Anderson Rudnick, representing 14.7%, to Phoenix at a rate of 33.3% per
year at December 31, 2004, 2005 and 2006. The total purchase price will equal net investment advisory fees for
each year times 4.5 times 4.9% (the proportionate interest purchased). Such amounts are paid during the
following quarter. Under certain circumstances, the purchases may be accelerated.
There is also a put/call arrangement with respect to the remaining 25% of the total membership interests. The
purchase price will be equal to investment advisory fees for the relevant contract year multiplied by 4.5
multiplied by the amount of membership interest purchased. The contract year is defined as the twelve months
ending December 31, 2006 and each calendar year thereafter. The pricing on the put/calls will be determined
within 60 days after each such year-end and can be exercised within 60 days of the finalization of the price.
All of these membership interests acquired will be reissued to members/employees of Kayne Anderson Rudnick. The
reissuance process involves PXP contributing the interests to Kayne Anderson Rudnick and then Kayne Anderson
Rudnick selling the interests to the members/employees. The members/employees will not pay cash for these
purchases but will enter into a note payable agreement with Kayne Anderson Rudnick. PXP will have preferential
distribution rights with respect to payments of principal and interest on these notes. Under certain
63
circumstances, these interests can be issued without a note payable or other consideration. In addition, in
certain circumstances, the purchases may be accelerated. Once these interests are purchased and then reissued,
the amount of cash that PXP will need to pay to repurchase them in the future will be based on the growth in
Kayne Anderson Rudnick's revenues since the reissuance dates. There is no expiration date for the put/call
agreements. There is no cap or floor on the put/call price.
In January 2004 and August 2003, certain members of Kayne Anderson Rudnick accelerated their put/call
arrangements. The purchase price for their interests totaled $1.7 million and $4.5 million, respectively, which
was recorded as additional purchase price by PXP and allocated to goodwill and definite-lived intangible
assets. A portion of the January 2004 put/call effectively increased our ownership interest in Kayne Anderson
Rudnick to 60.3%.
PFG
In May 2003, we acquired the remaining interest in PFG not already owned by us for initial consideration of
$16.7 million. Under the terms of the purchase agreement, we may be obligated to pay additional consideration
of up to $89.0 million to the selling shareholders, including $13.0 million during the years 2004 through 2007,
based on certain financial performance targets being met, and the balance in 2008, based on the appraised value
of PFG as of December 31, 2007.
We have accounted for our acquisition of the remaining interest in PFG as a step-purchase acquisition.
Accordingly, we recorded a definite-lived intangible asset of $9.8 million related to the PVFP acquired and a
related deferred tax liability of $3.4 million. The PVFP intangible asset will be amortized over the remaining
estimated life of the underlying insurance inforce acquired, estimated to be 40 years. The remaining
acquisition price plus transaction costs of $7.6 million has been assigned to goodwill. We have not presented
pro forma information as if PFG had been acquired at the beginning of January 2003, as it is not material to
our financial statements.
Seneca
We have a put/call arrangement with respect to the membership interests in Seneca not owned by PXP. The
purchase price is equal to Seneca's investment advisory fees for the relevant year multiplied by 3.5 multiplied
by the amount of the interest purchased. The pricing on the put/calls will be determined within 60 days after
each calendar year-end and can be exercised within 60 days of the finalization of the price. All of these
interests acquired will be reissued to members/employees of Seneca. The reissuance process involves PXP
contributing the interests to Seneca and then Seneca selling them to the members/employees. The
members/employees do not pay cash for these purchases, but enter into a note payable agreement with Seneca. PXP
has preferential distribution rights with respect to payments of principal and interest on these notes. Since
these interests have already been purchased by PXP and reissued at least once, the amount of cash that PXP will
need to pay to repurchase them in the future will be the amount related to the growth in Seneca's revenues
since the various reissuance dates. There is no cap or floor on the put/call price. The put/call agreements
will expire after the year ended December 31, 2007.
Off-Balance Sheet Arrangements
As of March 31, 2004 and December 31, 2003, we did not have any significant off-balance sheet arrangements as
defined by Item 303(a)(4)(ii) of SEC Regulation S-K. See Note 7 to our consolidated financial statements in
this Form 10-Q for information on variable interest entities.
64
Reinsurance
We maintain life reinsurance programs designed to protect against large or unusual losses in our life insurance
business. Based on our review of their financial statements and reputations in the reinsurance marketplace, we
believe that these third-party reinsurers are financially sound and, therefore, that we have no material
exposure to uncollectible life reinsurance. See Note 11 to our consolidated financial statements in this Form
10-Q for additional information.
Statutory Capital and Surplus and Risk Based Capital
Phoenix Life's consolidated statutory basis capital and surplus (including AVR) increased from $962.4 million
at December 31, 2003 to $1,010.0 million at March 31, 2004. The principal factors resulting in this increase
are an increase in admitted deferred income tax assets of $14.7 million and unrealized investment gains of
$39.0 million, partially offset by a net loss of $7.5 million.
At March 31, 2004, Phoenix Life's and each of its insurance subsidiaries' RBC levels were in excess of 300% of
Company Action Level.
On April 30, 2004, Phoenix Life paid a dividend of $69.7 million to The Phoenix Companies, as Phoenix
Life's sole shareholder.
Net Capital Requirements
Our broker-dealer subsidiaries are each subject to the net capital requirements imposed on registered
broker-dealers by the Securities Exchange Act of 1934. Each is also required to maintain a ratio of aggregate
indebtedness to net capital that does not exceed 15:1. The largest of these subsidiaries had net capital of
approximately $7.5 million, which is $6.8 million in excess of its required minimum net capital of $0.7
million. The ratio of aggregate indebtedness to net capital for that subsidiary was 1:1. The ratios of
aggregate indebtedness to net capital for each of our other broker-dealer subsidiaries were also below the
regulatory ratio at March 31, 2004 and their respective net capital each exceeded the applicable regulatory
minimum.
Obligations Related to Pension and Post-Retirement Employee Benefit Plans
We have two defined benefit pension plans covering our employees. The employee pension plan, covering
substantially all of our employees, provides benefits up to the amount allowed under the Internal Revenue Code.
The supplemental plan provides benefits in excess of the primary plan. Retirement benefits under both plans are
a function of years of service and compensation. The employee pension plan is funded with assets held in a
trust, while the supplemental plan is unfunded.
As previously disclosed in our consolidated financial statements for the year ended December 31, 2003, we
expect to contribute $107.8 million to the employee pension plan through 2008, including $7.2 million
during 2004. A quarterly estimated contribution of $2.5 million was made to the pension plan in April
2004.
65
The most recent valuation of the employee pension plan was conducted as of December 31, 2003.
December 31, 2003
------------------------------------
Funded Status of Qualified and Non-Qualified Pension Plans: Employee Supplemental
($ amounts in millions) Plan Plan
----------------- ----------------
Plan assets, end of year................................................. $ 368.9 $ --
Projected benefit obligation, end of year................................ (460.6) (124.8)
----------------- ----------------
Plan assets less than projected benefit obligations, end of year......... $ (91.7) $ (124.8)
================= ================
The post-retirement plan is unfunded. The projected benefit obligation and, therefore, its funded status was
$(78.7) million and $(74.2) million as of December 31, 2003 and 2002, respectively.
We expect to revalue our employee benefit plan assets and liabilities during the second quarter of 2004 in
connection with the pending sale of Griffith and Main Street. We expect to recognize a curtailment gain during
the second quarter as a result of this revaluation. We are also evaluating our required pension funding, taking
into account the effects of the Pension Fund Act of 2004 as well as the pending sale of Griffith and Main
Street. We expect our future funding requirements to be reduced as a result of the Pension Funding Act of 2004
and the Griffith and Main Street transaction.
See Note 9 of the consolidated financial statements included in this Form 10-Q for additional information.
Related Party Transaction
State Farm Mutual Automobile Insurance Company, or State Farm, currently owns of record more than five percent
of our outstanding common stock. During the three months ended March 31, 2004 and 2003, our subsidiaries paid
total compensation of $6.8 million and $4.9 million, respectively, to entities, which were either subsidiaries
of State Farm or owned by State Farm employees, for the sale of our insurance and annuity products.
66
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Exposures and Risk Management
We must effectively manage, measure and monitor the market risk generally associated with our insurance and
annuity business and, in particular, our commitment to fund insurance liabilities. We have developed an
integrated process for managing market risk, which we conduct through our Corporate Finance Department,
Corporate Portfolio Management Department, Life and Annuity Financial Department, and additional specialists at
the business segment level. These groups confer with each other regularly. We have implemented comprehensive
policies and procedures at both the corporate and business segment level to minimize the effects of potential
market volatility.
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 insurance operations and our investment activities. Our primary market
risk exposure is to changes in interest rates, although we also have exposures to changes in equity prices and
foreign currency exchange rates. We also have credit risk in connection with our derivative contracts.
Interest Rate Risk
Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. Our
exposure to interest rate changes primarily results from our commitment to fund interest-sensitive insurance
liabilities, as well as from our significant holdings of fixed rate investments. Our insurance liabilities
largely comprise dividend-paying individual whole life and universal life policies and annuity contracts. Our
fixed maturity investments include U.S. and foreign government bonds, securities issued by government agencies,
corporate bonds, asset-backed securities, mortgage-backed securities and mortgage loans, most of which are
mainly exposed to changes in medium-term and long-term U.S. Treasury rates.
We manage interest rate risk as part of our asset/liability management process and product design procedures.
Asset/liability strategies include the segmentation of investments by product line and the construction of
investment portfolios designed to specifically satisfy the projected cash needs of the underlying product
liability. We manage the interest rate risk inherent in our assets relative to the interest rate risk inherent
in our insurance products. We identify potential interest rate risk in portfolio segments by modeling asset and
product liability durations and cash flows under current and projected interest rate scenarios.
One of the key measures we use to quantify this interest rate exposure is duration. Duration is one of the most
significant measurement tools in measuring the sensitivity of the fair value of assets and liabilities to
changes in interest rates. For example, if interest rates increase by 100 basis points, or 1%, the fair value
of an asset with a duration of five years is expected to decrease by 5%. We believe that as of March 31, 2004,
our asset and liability portfolio durations were well matched, especially for the largest segments of our
balance sheet (i.e., participating and universal life). Since our insurance products have variable interest
rates (which expose us to the risk of interest rate fluctuations), we regularly undertake a sensitivity
analysis that calculates liability durations under various cash flow scenarios.
The selection of a 100 basis point immediate, parallel increase or decrease in interest rates is a hypothetical
rate scenario used to demonstrate potential risk. While a 100 basis point immediate, parallel increase or
decrease does not represent our view of future market changes, it is a reasonably possible hypothetical
near-term change that illustrates the potential impact of such events. Although these fair value measurements
provide a representation of interest rate sensitivity, they are based on our portfolio exposures at a point in
time and may not be representative of future market results. These exposures will change as a result of
on-going portfolio transactions in response to new business, management's assessment of changing market
conditions and available investment opportunities.
67
To calculate duration, we project asset and liability cash flows and discount them to a net present value using
a risk-free market rate adjusted for credit quality, sector attributes, liquidity and any other relevant
specific risks. Duration is calculated by revaluing these cash flows at an alternative level of interest rates
and by determining the percentage change in fair value from the base case.
We also employ product design and pricing strategies to manage interest rate risk. Product design and pricing
strategies include the use of surrender charges or restrictions on withdrawals in some products.
The table below shows the estimated interest rate sensitivity of our fixed income financial instruments
measured in terms of fair value. Given that our asset and liability portfolio durations were well matched for
the periods indicated, we would expect market value gains or losses in assets to be largely offset by
corresponding changes in liabilities.
As of March 31, 2004
----------------------------------------------------------
Interest Rate Sensitivity of -100 Basis +100 Basis
Fixed Income Financial Instruments: Carrying Carrying Fair Point
($ amounts in millions) Value Change Value Change
------------- ------------- ------------- -------------
Cash and cash equivalents.......................... $ 321.7 $ 322.0 $ 321.7 $ 321.4
Available-for-sale debt securities................. 13,631.0 14,266.5 13,631.0 12,996.1
Commercial mortgages............................... 271.5 294.9 288.6 282.3
------------- ------------- ------------- -------------
Subtotal........................................... 14,224.2 14,883.4 14,241.3 13,599.8
Debt and equity securities pledged as collateral... 1,389.2 1,463.1 1,389.2 1,315.3
------------- ------------- ------------- -------------
Totals............................................. $ 15,613.4 $ 16,346.5 $ 15,630.5 $ 14,915.1
============= ============= ============= =============
We use derivative financial instruments, primarily interest rate swaps, to manage our residual exposure to
fluctuations in interest rates. We enter into derivative contracts only with highly rated financial
institutions to reduce counterparty credit risks and diversify counterparty 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. Generally, 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 general account interest rate derivatives measured
in terms of fair value. These exposures will change as our insurance liabilities are created and discharged and
as a result of ongoing portfolio and risk management activities.
As of March 31, 2004
-------------------------------------------------------------------------
Weighted- -100 +100
Interest Rate Sensitivity of Average Basis Basis
Derivatives: Notional Term Point Point
($ amounts in millions) Amount (Years) Change Fair Value Change
------------- ------------- ------------- ------------- -------------
Interest rate swaps................. $ 540.0 10.2 $ 34.1 $ 21.1 $ 8.1
Other............................... 50.0 4.2 -- 0.1 0.3
------------- ------------- ------------- -------------
Totals - general account............ $ 590.0 $ 34.1 $ 21.2 $ 8.4
============= ============= ============= =============
Non-recourse interest rate swaps
held in consolidated CDO trusts... $ 1,145.1 6.3 $ 188.5 $ 140.1 $ 93.6
============= ============= ============= ============= =============
68
See Note 9 to the consolidated financial statements in our 2003 Annual Report on Form 10-K for more information
on derivative instruments.
Equity Risk
Equity risk is the risk that we will incur economic losses due to adverse changes in equity prices. Our
exposure to changes in equity prices primarily results from our commitment to fund our variable annuity and
variable life products, as well as from our holdings of common stocks, mutual funds and other equities. We
manage our insurance liability risks on an integrated basis with other risks through our liability and risk
management and capital and other asset allocation strategies. We also manage equity price risk through industry
and issuer diversification and asset allocation techniques. We held $338.9 million in equity securities on our
balance sheet as of March 31, 2004. A 10% decline or increase in the relevant equity price would have decreased
or increased, respectively, the value of these assets by approximately $33.9 million as of March 31, 2004.
Certain annuity products sold by our Life Companies contain guaranteed minimum death benefits. The guaranteed
minimum death benefit feature provides annuity contract holders with a guarantee that the benefit received at
death will be no less than a prescribed amount. This minimum amount is based on the net deposits paid into the
contract, the net deposits accumulated at a specified rate, the highest historical account value on a contract
anniversary, or more typically, the greatest of these values. To the extent that the guaranteed minimum death
benefit 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 March 31, 2004 and December 31, 2003, the
difference between the guaranteed minimum death benefit and the current account value (net amount at risk) for
all existing contracts was $166.4 million and $183.1 million, respectively. These represent our exposure to
loss should all of our contractholders have died on either March 31, 2004 or December 31, 2003, respectively.
Guaranteed Minimum Death Benefit Exposure: Mar 31, Dec 31,
($ amounts in millions) 2004 2003 Change
------------- -------------- -------------
Net amount at risk on minimum guaranteed death benefits
(before reinsurance)........................................... $ 564.4 $ 616.9 $ (52.5)
Net amount at risk reinsured..................................... (398.0) (433.8) 35.8
------------- -------------- -------------
Net amount at risk on minimum guaranteed death benefits
(after reinsurance)............................................ $ 166.4 $ 183.1 $ (16.7)
============= ============== =============
Weighted-average age of contractholder........................... 61 59 2
============= ============== =============
Payments Related to Guaranteed Minimum Death Benefits, Three Months Ended
Net of Reinsurance Recoveries: March 31,
($ amounts in millions) 2004 2003
-------------- -------------
Death claims payments before reinsurance........................................ $ 1.4 $ 2.3
Reinsurance recoveries.......................................................... (0.7) (1.9)
-------------- -------------
Net death claims payments....................................................... $ 0.7 $ 0.4
============== =============
Effective January 1, 2004, we adopted the AICPA SOP No. 03-1, "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts." Since this new
accounting standard largely codifies accounting and reserving practices that we already followed, our adoption
did not materially effect our consolidated financial statements. This reserve is determined using the net
amount at risk taking into account estimates for mortality, equity market returns, and voluntary terminations
under a wide range of scenarios at March 31, 2004 and December 31, 2003.
69
Reserves Related to Guaranteed Minimum Death Benefits,
Net of Reinsurance Recoverables: Mar 31, Dec 31,
($ amounts in millions) 2004 2003
-------------- -------------
Statutory reserve (after reinsurance).......................................... $ 16.5 $ 17.3
GAAP reserve (after reinsurance)............................................... 6.9 7.6
We also provide reserves for guaranteed minimum income benefits and guaranteed payout annuity floor benefits.
The statutory reserves for these totaled $0.7 million and $0.5 million at March 31, 2004 and December 31, 2003,
respectively. The GAAP reserves for these totaled $0.2 million and $0.0 million at March 31, 2004 and December
31, 2003, respectively.
Mar 31,
Interest Rate Sensitivity of Deferred Policy Acquisition Cost Asset -10% 2004 + 10%
and Guaranteed Minimum Death Benefit Liability: Equity Carrying Equity
($ amounts in millions) Market Value Market
------------- ------------ -------------
Deferred policy acquisition costs (variable annuities).............. $ 284.8 $ 286.6 $ 288.0
Deferred policy acquisition costs (variable universal life)......... 323.7 324.6 325.0
Guaranteed minimum death benefit liability (variable annuities)..... 9.6 6.9 5.1
See Note 3 to our consolidated financial statements in this Form 10-Q for more information regarding deferred
policy acquisition costs.
We sponsor defined benefit pension plans for our employees. For GAAP accounting purposes, we assumed an 8.5%
long-term rate of return on plan assets in the most recent valuations, performed in 2003 and 2002. To the
extent there are deviations in actual returns, there will be changes in our projected expense and funding
requests. As of December 31, 2003, the projected benefit obligation for our defined benefit plans was in excess
of plan assets by $183.1 million. We expect to contribute $107.8 million to the employee pension plan through
2008, including $7.2 million during 2004. See Note 9 to our consolidated financial statements in this Form 10-Q
for more information on our employee benefit plans.
Foreign Currency Exchange Risks
Foreign currency exchange risk is the risk that we will incur economic losses due to adverse changes in foreign
currency exchange rates. Our functional currency is the U.S. dollar. Our exposure to fluctuations in foreign
exchange rates against the U.S. dollar results from our holdings in non-U.S. dollar-denominated debt and equity
securities and through our investments in foreign subsidiaries and affiliates. The principal currencies that
create foreign currency exchange rate risk for us are the British pound sterling, due to our investments in
Aberdeen and Lombard International Assurance, S.A. and the Argentine peso, due to our investment in EMCO.
During the three months ended March 31, 2004 and 2003, we recorded, through other comprehensive income, foreign
currency translation adjustment gains (losses) of $3.6 million and $(3.0) million, respectively, related to
changes in valuation of the British pound sterling and $0.1 million and $1.2 million, respectively, for the
Argentine peso.
Foreign Currency Exchanged Gains (Losses) in Accumulated
Other Comprehensive Income by Currency: Mar 31, Dec 31,
($ amounts in millions) 2004 2003 Change
--------------- --------------- ---------------
British pound sterling..................................... $ 22.8 $ 19.2 $ 3.6
Argentine peso............................................. (8.7) (8.8) 0.1
Other...................................................... (0.1) (0.1) --
--------------- --------------- ---------------
Total gains................................................ $ 14.0 $ 10.3 $ 3.7
=============== =============== ===============
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. We have developed controls and procedures to ensure that
information required to be disclosed by us in reports we file or submit pursuant to the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the rules and forms of the
SEC. Based on their review, our Chief Executive Officer and Chief Financial Officer each concluded that our
disclosure controls and procedures, as in effect on March 31, 2004, were effective, both in design and
operation, for achieving the foregoing purpose.
Changes in Internal Control over Financial Reporting. During the calendar quarter ended on March 31, 2004,
there were no changes in our internal control over financial reporting that have materially affected, or are
reasonably like to materially affect, our internal control over financial reporting.
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PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
General
We are regularly involved in litigation, both as a defendant and as a plaintiff. The litigation naming us as a
defendant ordinarily involves our activities as an insurer, employer, investment advisor, investor or taxpayer.
Several current proceedings are discussed below. In addition, state regulatory bodies, the Securities and
Exchange Commission, or SEC, the National Association of Securities Dealers, Inc., and other regulatory bodies
regularly make inquiries of us and, from time to time, conduct examinations or investigations concerning our
compliance with, among other things, insurance laws, securities laws, and laws governing the activities of
broker-dealers. For example, during 2003 the New York State Insurance Department began its routine quinquennial
financial and market conduct examination of Phoenix Life and its New York domiciled life insurance subsidiary
and several SEC offices conducted routine reviews of certain Phoenix investment advisors, broker-dealers and
close-end funds. The New York exam and one of these SEC exams are continuing; the other SEC exams conducted in
2003 have been completed and closed. We continue to actively cooperate with both regulators.
Recently, there has been a significant increase in federal and state regulatory activity relating to financial
services companies, particularly mutual fund companies. These regulatory inquiries have focused on a number of
mutual fund issues, including late-trading and valuation issues. Our mutual funds, which we offer directly to
retail investors and qualified retirement plans as well as through the separate accounts associated with
certain of our variable life insurance policies and variable annuity products, entitle us to impose
restrictions on frequent exchanges and trades in the mutual funds and on transfers between sub-accounts and
variable products. We, like many others in the financial services industry, have received requests for
information from the SEC and state authorities, in each case requesting documentation and other information
regarding various mutual fund regulatory issues. We continue to cooperate fully with these regulatory agencies
in responding to these requests. In addition, representatives from the SEC's Office of Compliance Inspections
and Examinations are conducting compliance examinations of our mutual fund, variable annuity and mutual fund
transfer agent operations.
A number of companies have announced settlements of enforcement actions with various regulatory agencies,
primarily the SEC and the New York Attorney General's Office. While no such action has been initiated against
us, it is possible that one or more regulatory agencies may pursue an action against us in the future.
These types of lawsuits and regulatory actions may be difficult to assess or quantify, may seek recovery of
indeterminate amounts, including punitive and treble damages, and the nature and magnitude of their outcomes
may remain unknown for substantial periods of time. While it is not feasible to predict or determine the
ultimate outcome of all pending investigations and legal proceedings or to provide reasonable ranges of
potential losses, we believe that their outcomes are not likely, either individually or in the aggregate, to
have a material adverse effect on our consolidated financial condition, after consideration of available
insurance and reinsurance and the provisions made in our consolidated financial statements. However, given the
large or indeterminate amounts sought in certain of these matters and litigation's inherent unpredictability,
it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse
effect on our results of operations or cash flows.
Discontinued Reinsurance Business
During 1999, our Life Companies placed their remaining group accident and health reinsurance business into
run-off, adopting a formal plan to terminate the related contracts as early as contractually permitted and not
entering into any new contracts. As part of the decision to discontinue these reinsurance operations, we
reviewed the run-off block and estimated the amount and timing of future net premiums, claims and expenses. We
also purchased
72
finite aggregate excess-of-loss reinsurance, or finite reinsurance, to further protect us from unfavorable
results from this discontinued business.
We have established reserves for claims and related expenses that we expect to pay on our discontinued group
accident and health reinsurance business. These reserves are a net present value amount that is based on
currently known facts and estimates about, among other things, the amount of insured losses and expenses that
we believe we will pay, the period over which they will be paid, the amount of reinsurance we believe we will
collect under our finite reinsurance, the amounts we believe we will collect from our retrocessionaires and the
likely legal and administrative costs of winding down the business.
Our total reserves, including coverage available from our finite reinsurance and reserves for amounts
recoverable from retrocessionaires, were $165.0 million as of March 31, 2004. Our total amounts recoverable
from retrocessionaires related to paid losses were $155.0 million as of March 31, 2004. We did not recognize
any gains or losses during the three months ended March 31, 2004.
Our Life Companies are involved in disputes relating to reinsurance arrangements under which they reinsured
group accident and health risks. The first of these involves contracts for reinsurance of the life and health
carveout components of workers compensation insurance arising out of a reinsurance pool created and formerly
managed by Unicover Managers, Inc., or Unicover. In one of those, the arbitration panel issued its decision on
October 8, 2002 and confirmed the award on January 4, 2003. The financial implications of this decision are
consistent with our Life Companies' current financial provisions. In our capacity as a retrocessionaire of the
Unicover business, our Life Companies had an extensive program of our own reinsurance in place to protect us
from financial exposure to the risks we had assumed. We are currently involved in separate arbitration
proceedings with three of our own retrocessionaires, which have sought on various grounds to avoid paying any
amounts to us or have reserved rights. In addition, Phoenix Life is involved in arbitrations and negotiations
pending in the United Kingdom between multiple layers of reinsurers and reinsureds relating to transactions in
which it participated involving certain personal accident excess-of-loss business reinsured in the London
market. See Note 11 to our consolidated financial statements in this Form 10-Q for more information.
In light of our provisions for our discontinued reinsurance operations through the establishment of reserves
and the finite reinsurance, based on currently available information, we do not expect these operations,
including the proceedings described above, to have a material adverse effect on our consolidated financial
position. However, given the large and/or indeterminate amounts involved and the inherent unpredictability of
litigation, it is not possible to predict with certainty the ultimate impact on us of all pending matters or of
our discontinued reinsurance operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) During the first quarter of 2004, we issued 9,344 restricted stock units, or RSUs, to 10 of our
independent directors, without registration under the Securities Exchange Act of 1934 in reliance on the
exemption under Regulation D for accredited investors. Each RSU is potentially convertible into one share
of our common stock.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of The Phoenix Companies, Inc. was held on April 29, 2004.
(b) The following individuals were elected as directors at the meeting for terms expiring in 2007: Jean S.
Blackwell, Arthur P. Byrne, Ann Maynard Gray and Dona D. Young.
Each of the following individuals continued to serve as directors after the meeting: Sal. H. Alfiero,
Peter C. Browning, Sanford Cloud, Jr., Richard N. Cooper, Gordon J. Davis, Esq., John E. Haire, Jerry J.
Jasinowski, Thomas S. Johnson and Marilyn E. LaMarche.
(c) With respect to election of four Directors, the shares present were voted as follows:
Number of Shares Voted For Number of Shares Withheld
Jean S. Blackwell 55,895,090 746,495
Arthur P. Byrne 55,897,830 743,755
Ann Maynard Gray 55,895,130 746,455
Dona D. Young 55,759,310 882,275
With respect to ratification of the appointment of PricewaterhouseCoopers LLP as independent
auditors, the shares present were voted as follows:
FOR AGAINST ABSTAIN
55,889,337 419,828 332,420
(d) Not applicable.
ITEM 5. OTHER INFORMATION
(a) None.
(b) No material changes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.2 The Phoenix Companies, Inc. Stock Incentive Plan (incorporated herein by reference to Exhibit 10.2
to The Phoenix Companies, Inc. Registration Statement on Form S-l (Registration No. 333-55268),
filed on February 9, 2001, as amended)
10.3 Phoenix Home Life Mutual Insurance Company Mutual Incentive Plan (incorporated herein by reference
to Exhibit 10.3 to The Phoenix Companies, Inc. Registration Statement on Form S-1 (Registration No.
333- 55268), filed on February 9, 2001, as amended)
10.4 The Phoenix Companies, Inc. Directors Stock Plan (incorporated herein by reference to Exhibit 10.4
to The Phoenix Companies, Inc. Registration Statement on Form S-l (Registration No. 333-55268),
filed on February 9, 2001, as amended)
10.5 Phoenix Home Life Mutual Insurance Company Excess Benefit Plan (incorporated herein by reference to
Exhibit 10.5 to The Phoenix Companies, Inc. Registration Statement on Form S-l
74
(Registration No. 333- 55268), filed on February 9, 2001, as amended)
10.6 Amendment to Phoenix Home Life Mutual Insurance Company Excess Benefit Plan (incorporated herein by
reference to Exhibit 10.6 to The Phoenix Companies, Inc. Registration Statement on Form 8-1
(Registration No. 333-55268), filed on February 9, 2001, as amended)
10.7 Second Amendment to Phoenix Home Life Mutual Insurance Company Excess Benefit Plan (incorporated
herein by reference to Exhibit 10.1 to The Phoenix Companies, Inc. Registration Statement on Form
S-l (Registration No. 333-55268), filed on February 9, 2001, as amended)
10.8 Third Amendment to The Phoenix Companies, Inc. Excess Benefit Plan, as amended and restated
effective January 1, 1988 (incorporated herein by reference to Exhibit 10.8 to The Phoenix
Companies, Inc. annual report of Form 10-K filed March 27, 2001)
10.9 Fourth Amendment to The Phoenix Companies, Inc. Excess Benefit Plan, as amended and restated
effective January 1994 (incorporated herein by reference to Exhibit 10.9 to The Phoenix Companies,
Inc. annual report of Form 10-K filed March 27, 2001)
10.10 Phoenix Home Life Mutual Insurance Company Excess Investment Plan (incorporated herein by reference
to Exhibit 10.8 to The Phoenix Companies, Inc. Registration Statement on Form S-1 (Registration No.
333- 55268), filed on February 9, 2001, as amended)
10.11 Amendment to Phoenix Home Life Mutual Insurance Company Excess Investment Plan (incorporated herein
by reference to Exhibit 10.9 to The Phoenix Companies, Inc. Registration Statement on Form S-1
(Registration No. 333-55268), filed on February 9, 2001, as amended)
10.12 Second Amendment to Phoenix Home Life Mutual Insurance Company Excess Investment Plan (incorporated
herein by reference to Exhibit 10.10 to The Phoenix Companies, Inc. Registration Statement on Form
S-l (Registration No. 333-55268), filed on February 9, 2001, as amended)
10.13 Third Amendment to Phoenix Home Life Mutual Insurance Company Excess Investment Plan (incorporated
herein by reference to Exhibit 10.11 to The Phoenix Companies, Inc. Registration Statement on Form
S-1 (Registration No. 333-55268), filed on February 9, 2001, as amended)
10.14 The Phoenix Companies, Inc. Nonqualified Supplemental Executive Retirement Plan, as amended and
restated effective January 1, 2003 (incorporated herein by reference to Exhibit 10.14 to The
Phoenix Companies, Inc. annual report in Form 10-K filed March 21, 2003)
10.15 Phoenix Investment Partners 2001 Phantom Option Plan (incorporated herein by reference to Exhibit
10.15 to The Phoenix Companies, Inc. annual report in Form 10-K filed March 21, 2003)
10.16 Phoenix Investment Partners 2002 Phantom Option Plan (incorporated herein by reference to Exhibit
10.16 to The Phoenix Companies, Inc. annual report in Form 10-K filed March 21, 2003)
10.17 Phoenix Investment Partners, Ltd 2002 Management Incentive Plan - Corporate (incorporated herein by
reference to Exhibit 10.17 to The Phoenix Companies, Inc. annual report in Form 10-K filed March
21, 2003)
10.18 Phoenix Investment Partners, Ltd 2002 - Associate Incentive Plan (incorporated herein by reference
to Exhibit 10.18 to The Phoenix Companies, Inc. annual report in Form 10-K filed March 21, 2003)
10.19 Phoenix Investment Partners, Ltd 2002 Investment Incentive Plan - DPIM Fixed Income
75
(incorporated herein by reference to Exhibit 10.19 to The Phoenix Companies, Inc. annual report in
Form 10-K filed March 21, 2003)
10.20 The Phoenix Companies, Inc. 2003 Restricted Stock, Restricted Stock Unit and Long-Term Incentive
Plan (incorporated herein by reference to Exhibit B to The Phoenix Companies, Inc. 2003 Proxy
Statement, filed on March 21, 2003)
10.21 Stockholder Rights Agreement dated as of June 19, 2001 (incorporated herein by reference to Exhibit
10.24 to The Phoenix Companies, Inc. Registration Statement on Form S-l (Registration No.
333-73896), filed on November 21, 2001, as amended)
10.22 Binder of Reinsurance dated as of September 30, 1999, between Phoenix Home Life Mutual Insurance
Company, American Phoenix Life & Reassurance Company and European Reinsurance Company of Zurich
(Bermuda Branch)(+) (incorporated herein by reference to Exhibit 10.36 to The Phoenix Companies,
Inc. Registration Statement on Form S-1 (Registration No. 333-55268), filed on February 9, 2001, as
amended)
10.23 Amendment No. 1 dated as of February 1, 2000, to the Binder of Reinsurance, dated as of September
30, 1999, between Phoenix Home Life Mutual Insurance Company, American Phoenix Life & Reassurance
Company and European Reinsurance Company of Zurich (Bermuda Branch)( +) (incorporated herein by
reference to Exhibit 10.37 to The Phoenix Companies, Inc. Registration Statement on Form S-l
(Registration No. 333-55268), filed on February 9, 2001, as amended)
10.24 Stock Purchase Agreement dated as of June 23, 1999, between Banco Suquia S.A. and PM Holdings, Inc.
(incorporated herein by reference to Exhibit 10.41 to The Phoenix Companies, Inc. Registration
Statement on Form S-l (Registration No. 333-55268), filed on February 9, 2001, as amended)
10.25 Acquisition Agreement dated as November 10, 1999, between Selling Management Shareholders, Aberdeen
Asset Management PLC, The Standard Life Assurance Co., The Non-Selling Management Shareholders,
Lombard International Assurance SA and PM Holdings, Inc. (incorporated herein by reference to
Exhibit 10.43 to The Phoenix Companies, Inc. Registration Statement on Form S-l (Registration No.
333-55268), filed on February 9, 2001, as amended)
10.26 Stock Purchase Agreement dated as of November 12, 1999, by and between TCW/EMCO Holding LLC and PM
Holdings, Inc. (incorporated herein by reference to Exhibit 10.44 to The Phoenix Companies, Inc.
Registration Statement on Form S-l (Registration No. 333-55268), filed on February 9, 2001, as
amended)
10.27 Subordination Agreement dated as of June 11, 2001 between Phoenix Home Life Mutual Insurance
Company and Phoenix Investment Partners, Ltd. (incorporated herein by reference to Exhibit 10.64 to
The Phoenix Companies, Inc. Registration Statement on Form S-l (Registration No. 333-55268), filed
on February 9, 2001, as amended)
10.28 Standstill Agreement dated May 18, 2001, between The Phoenix Companies, Inc. and State Farm Mutual
Insurance Company (incorporated herein by reference to Exhibit 4.2 to The Phoenix Companies, Inc.
Registration Statement on Form S-1 (Registration No. 333-55268), filed on February 9, 2001, as
amended)
10.29 Shareholder's Agreement dated as of June 19, 2001, between The Phoenix Companies, Inc. and State
Farm Mutual Insurance Company (incorporated herein by reference to Exhibit 10.56 to The Phoenix
Companies, Inc. Registration Statement on Form S-1 (Registration No. 333-73896), filed on November
21, 2001, as amended)
76
10.30 Acquisition Agreement, dated as of November 12, 2001, by and among Kayne Anderson Rudnick
Investment Management, LLC, the equity holders named therein and Phoenix Investment Partners, Ltd.
(incorporated herein by reference to Exhibit 10.57 to The Phoenix Companies, Inc. Registration
Statement on Form S-1 (Registration No. 333-73896), filed on November 21, 2001, as amended)
10.31 Subordination Agreement dated as of December 27, 2001 between The Phoenix Companies, Inc. and
Phoenix Investment Partners, Ltd. (incorporated herein by reference to Exhibit 10.64 to The Phoenix
Companies, Inc. annual report on Form 10-K filed March 27, 2001)
10.32 Subordination Agreement dated as of January 29, 2002 between The Phoenix Companies, Inc. and
Phoenix Investment Partners, Ltd. (incorporated herein by reference to Exhibit 10.65 to The Phoenix
Companies, Inc. annual report on Form 10-K filed March 27, 2001)
10.33 Credit Agreement dated as of December 22, 2003 between The Phoenix Companies, Inc., Phoenix Life
Insurance Company, Phoenix Investment Partners, Ltd. and various financial institutions
(incorporated herein by reference to Exhibit 10.33 to The Phoenix Companies, Inc. annual report on
Form 10-K filed March 22, 2004)
10.34 Technical Amendment to Credit Agreement dated as of April 16, 2004 by and among The Phoenix
Companies, Inc., Phoenix Life Insurance Company, Phoenix Investment Partners, Ltd. and various
financial institutions*
10.35 Executive Employment Agreement dated as of January 1, 2003, between The Phoenix Companies, Inc. and
Dona D. Young (incorporated herein by reference to Exhibit 99.1 to The Phoenix Companies, Inc.
current report on Form 8-K dated January 1, 2003)
10.36 Employment Continuation Agreement dated January 1, 2003, between The Phoenix Companies, Inc. and
Dona D. Young (incorporated herein by reference to Exhibit 99.2 to The Phoenix Companies, Inc.
current report on Form 8-K dated January 1, 2003)
10.37 Restricted Stock Units Agreement dated as of January 25, 2003, between The Phoenix Companies, Inc.
and Dona D. Young (incorporated herein by reference to Exhibit 10.1 to The Phoenix companies, Inc.
quarterly report on Form 10-Q filed August 14, 2003)
10.38 Retirement and Transition Agreement dated September 27, 2002, between Robert W. Fiondella and The
Phoenix Companies, Inc. (incorporated herein by reference to Exhibit 99.2 to The Phoenix Companies,
Inc. current report on Form 8-K dated September 30, 2002)
10.39 Amendment dated February 10, 2003 to Retirement and Transition Agreement between The Phoenix
Companies, Inc. and Robert W. Fiondella (incorporated herein by reference to Exhibit 10.49 to The
Phoenix Companies, Inc. annual report on Form 10-K filed March 21, 2003)
10.40 Change in Control Agreement dated as of November 6, 2000, between Phoenix Home Life Mutual
Insurance Company and Michael J. Gilotti (incorporated herein by reference to Exhibit 10.50 to The
Phoenix Companies, Inc. annual report on Form 10-K filed March 21, 2003)
10.41 Severance Agreement dated December 20, 2000, between Phoenix Home Life Mutual Insurance Company and
Michael J. Gilotti (incorporated herein by reference to Exhibit 10.51 to The Phoenix Companies,
Inc. annual report on Form 10-K filed March 21, 2003)
10.42 Change in Control Agreement dated as of January 1, 2003, between The Phoenix Companies, Inc.
77
and Michael J. Gilotti (incorporated herein by reference to Exhibit 10.52 to The Phoenix Companies,
Inc. annual report on Form 10-K filed March 21, 2003)
10.43 2002 Incentive Plan for Michael J. Gilotti (incorporated herein by reference to Exhibit 10.53 to
The Phoenix Companies, Inc. annual report on Form 10-K filed March 21, 2003)
10.44 Change in Control Agreement dated as of February 1, 2001, between Phoenix Investment Partners, Ltd.
and Michael E. Haylon (incorporated herein by reference to Exhibit 10.54 to The Phoenix Companies,
Inc. annual report on Form 10-K filed March 21, 2003)
10.45 Severance Agreement dated as of February 1, 2001, between Phoenix Investment Partners, Ltd. and
Michael E. Haylon (incorporated herein by reference to Exhibit 10.55 to The Phoenix Companies, Inc.
annual report on Form 10-K filed March 21, 2003)
10.46 Change in Control Agreement dated as of January 1, 2003, between The Phoenix Companies, Inc. and
Michael E. Haylon (incorporated herein by reference to Exhibit 10.56 to The Phoenix Companies, Inc.
annual report on Form 10-K filed March 21, 2003)
10.47 Offer Letter dated April 14, 2003 by The Phoenix Companies, Inc. to Daniel T. Geraci (incorporated
herein by reference to Exhibit 10.2 to The Phoenix Companies, Inc. quarterly report on Form 10-Q
filed August 14, 2003)
10.48 Change in Control Agreement dated as of May 12, 2003, between The Phoenix Companies, Inc. and
Daniel T. Geraci (incorporated herein by reference to Exhibit 10.3 to The Phoenix Companies, Inc.
quarterly report on Form 10-Q filed August 14, 2003)
10.49 Restricted Stock Units Agreement dated as of May 12, 2003 between The Phoenix Companies, Inc. and
Daniel T. Geraci (incorporated herein by reference to Exhibit 10.4 to The Phoenix Companies, Inc.
quarterly report on Form 10-Q filed August 14, 2003)
10.50 Change in Control Agreement dated as of January 1, 2003, between The Phoenix Companies, Inc. and
Coleman D. Ross (incorporated herein by reference to Exhibit 10.49 to The Phoenix Companies, Inc.
annual report on Form 10-K filed March 22, 2004)
10.51 Offer Letter dated February 9, 2004, by The Phoenix Companies, Inc. to Philip K. Polkinghorn
(incorporated herein by reference to Exhibit 10.50 to The Phoenix Companies, Inc. annual report on
Form 10-K filed March 22, 2004)
10.52 Change in Control Agreement dated as of March 8, 2004, between The Phoenix Companies, Inc. and
Philip K. Polkinghorn*
10.53 Restricted Stock Units Agreement dated as of March 8, 2004 between The Phoenix Companies, Inc. and
Philip K. Polkinghorn*
12 Ratio of Earnings to Fixed Charges*
31.1 Certification of Dona D. Young, Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
31.2 Certification of Michael E. Haylon, Chief Financial Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
32 Certification by Dona D. Young, Chief Executive Officer and Michael E. Haylon, Chief Financial
78
Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
* Filed herewith
(+) Portions subject to confidential treatment request
Phoenix will furnish any exhibit upon the payment of a reasonable fee, which fee shall be limited to
Phoenix's reasonable expenses in furnishing such exhibit.
(b) Reports
During the three months ended March 31, 2004, we filed the following reports on Form 8-K:
• Filed February 9, 2004, containing a news release of The Phoenix Companies, Inc. dated February
9, 2004, regarding its financial results for the year ended December 31, 2003, and its Financial
Supplement for the three and twelve months ended December 31, 2003.
• Filed February 9, 2004, concerning certain amendments to the Code of Ethics of The Phoenix Companies,
Inc.
• Filed February 24, 2004, containing a news release regarding the appointment of Philip K. Polkingham as
Executive Vice President of the Life and Annuity Manufacturing Operations of The Phoenix Companies,
Inc.
• Filed March 15, 2004, containing a news release regarding The Phoenix Companies' filing of Form 10-K
for the fiscal year ended December 31, 2003, which report included revisions to certain previously
reported 2003, 2002 and 2001 net income and balance sheet amounts due to a change in consolidation
methodology related to certain collateralized debt obligation pools and the adoption of a new
accounting standard, FIN 46-R.
• Filed March 15, 2004, containing a revised Financial Supplement reflecting the above-disclosed
accounting changes.
• Filed March 23, 2004, containing a news release about the execution of a definitive agreement for the
sale of the retail broker-dealer operations of The Phoenix Companies, Inc. to Linsco/Private Ledger.
79
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.
THE PHOENIX COMPANIES, INC.
Date: May 10, 2004 By: /s/ Michael E. Haylon
Michael E. Haylon, Executive Vice President
and Chief Financial Officer
80