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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 JUNE 30, 2002
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 06-0493340
(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__.
On June 30, 2002, the registrant had 98,002,217 shares of common stock outstanding.
========================================================================================================================================
PART I.
FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THE PHOENIX COMPANIES, INC.
Consolidated Balance Sheet
(Amounts in millions, except per share data)
June 30, 2002 and December 31, 2001
2002 2001
-------------- ---------------
ASSETS:
Available-for-sale debt securities, at fair value................. $ 10,679.8 $ 9,607.7
Equity securities, at fair value.................................. 316.9 290.9
Mortgage loans, at unpaid principal balances...................... 497.3 535.8
Real estate, at lower of cost or fair value....................... 75.2 83.1
Venture capital partnerships, at equity in net assets............. 261.8 291.7
Affiliate equity and debt securities.............................. 349.8 330.6
Policy loans, at unpaid principal balances........................ 2,182.5 2,172.2
Other investments................................................. 284.1 282.4
-------------- ---------------
Total investments............................................. 14,647.4 13,594.4
Cash and cash equivalents......................................... 662.7 815.5
Accrued investment income......................................... 213.0 203.1
Premiums, accounts and notes receivable........................... 163.3 147.8
Reinsurance recoverable balances.................................. 29.1 21.3
Deferred policy acquisition costs................................. 1,212.1 1,123.7
Premises and equipment............................................ 115.5 117.7
Deferred income taxes............................................. -- 1.8
Goodwill and other intangible assets.............................. 847.6 858.6
Net assets of discontinued operations............................. 20.8 20.8
Other general account assets...................................... 64.5 50.7
Separate account and investment trust assets...................... 5,365.2 5,570.0
-------------- ---------------
Total assets.................................................. $ 23,341.2 $22,525.4
============== ===============
LIABILITIES:
Policy liabilities................................................ $ 12,314.0 $11,993.4
Policyholder deposit funds........................................ 2,224.9 1,368.2
Deferred income taxes............................................. 22.0 --
Indebtedness...................................................... 604.3 599.3
Other general account liabilities................................. 602.1 595.1
Separate account and investment trust liabilities................. 5,354.5 5,564.9
-------------- ---------------
Total liabilities............................................. 21,121.8 20,120.9
-------------- ---------------
MINORITY INTEREST:
Minority interest in net assets of subsidiaries................... 7.8 8.8
-------------- ---------------
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value: 1.0 billion shares authorized;
106.4 million shares issued................................... 1.0 1.0
Additional paid-in capital........................................ 2,410.4 2,410.4
Accumulated deficit............................................... (185.2) (30.8)
Accumulated other comprehensive income............................ 121.3 81.1
Treasury stock, at cost: 8.4 million and 4.5 million shares....... (135.9) (66.0)
-------------- ---------------
Total stockholders' equity.................................... 2,211.6 2,395.7
-------------- ---------------
Total liabilities, minority interest and stockholders' equity. $ 23,341.2 $22,525.4
============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
THE PHOENIX COMPANIES, INC.
Consolidated Statement of Income and Comprehensive Income
(Amounts in millions, except per share data)
Three and Six Months Ended June 30, 2002 and 2001
Three Months Six Months
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES:
Premiums.................................................. $ 259.4 $ 267.2 $ 516.8 $ 533.2
Insurance and investment product fees..................... 145.9 139.7 286.2 285.2
Net investment income..................................... 215.7 225.7 446.9 393.9
Net realized investment losses............................ (28.6) (4.9) (63.6) (20.5)
------------ ------------ ------------ ------------
Total revenues........................................ 592.4 627.7 1,186.3 1,191.8
------------ ------------ ------------ ------------
BENEFITS AND EXPENSES:
Policy benefits........................................... 338.9 332.2 672.8 666.3
Policyholder dividends.................................... 107.5 89.7 181.7 196.0
Policy acquisition cost amortization...................... 11.4 26.9 .5 62.0
Intangible asset amortization............................. 7.8 11.3 15.9 24.5
Interest expense.......................................... 7.7 7.7 15.4 14.8
Demutualization expenses.................................. .6 8.8 1.5 19.5
Other operating expenses.................................. 179.1 140.2 315.1 377.6
------------ ------------ ------------ ------------
Total benefits and expenses........................... 653.0 616.8 1,202.9 1,360.7
------------ ------------ ------------ ------------
Income (loss) before income taxes and minority interest... (60.6) 10.9 (16.6) (168.9)
Applicable income tax expense (benefit)................... (26.7) 5.2 (14.4) (63.8)
------------ ------------ ------------ ------------
Income (loss) before minority interest.................... (33.9) 5.7 (2.2) (105.1)
Minority interest in net income of subsidiaries........... 3.3 1.7 6.1 3.5
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of accounting
changes................................................ (37.2) 4.0 (8.3) (108.6)
Cumulative effect of accounting changes:
Goodwill impairment................................... -- -- (130.3) --
Securitized financial instruments..................... -- (20.5) -- (20.5)
Venture capital partnerships.......................... -- -- -- (48.8)
Derivative financial instruments...................... -- -- -- 3.9
------------ ------------ ------------ ------------
Net loss.................................................. $ (37.2) $ (16.5) $ (138.6) $ (174.0)
============ ============ ============ ============
BASIC AND DILUTED EARNINGS PER SHARE:
Income (loss) before cumulative effect of accounting
changes................................................ $ (.37) $ .04 $ (.08) $ (1.04)
Cumulative effect of accounting changes .................. -- (.20) (1.30) (.62)
------------ ------------ ------------ ------------
Net loss.................................................. $ (.37) $ (.16) $ (1.38) $ (1.66)
============ ============ ============ ============
Weighted-average common shares outstanding ............... 99.5 104.6 100.3 104.6
============ ============ ============ ============
Pro forma amounts assuming retroactive application
of accounting changes:
Net income (loss)......................................... $ (37.2) $ 9.1 $ (8.3) $ (98.5)
============ ============ ============ ============
Earnings per share........................................ $ (.37) $ .09 $ (.08) $ (.94) .09 (.94)
============ ============ ============ ============
DIVIDENDS DECLARED PER SHARE ............................. $ .16 $ -- $ .16 $ --
============ ============ ============ ============
COMPREHENSIVE INCOME:
Net loss.................................................. $ (37.2) $ (16.5) $ (138.6) $ (174.0)
------------ ------------ ------------ ------------
Other comprehensive income:
Net unrealized investment gains (losses).............. 72.1 4.7 48.1 (3.6)
Net unrealized foreign currency translation adjustment
and other......................................... 10.4 (4.5) (7.9) (12.2)
------------ ------------ ------------ ------------
Total other comprehensive income (loss)........... 82.5 .2 40.2 (15.8)
------------ ------------ ------------ ------------
Comprehensive income (loss)............................... $ 45.3 $ (16.3) $ (98.4) $ (189.8)
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
THE PHOENIX COMPANIES, INC.
Consolidated Condensed Statement of Cash Flows
(Amounts in millions)
Three and Six Months Ended June 30, 2002 and 2001
Three Months Six Months
---------------------------- --------------------------
2002 2001 2002 2001
------------ ----------- ----------- -----------
OPERATING ACTIVITIES:
Cash from operations......................................... $ 42.6 $179.8 $47.6 $155.2
------------ ----------- ----------- -----------
INVESTING ACTIVITIES:
Debt security sales, maturities and repayments............... 794.6 1,548.1 1,304.6 2,344.8
Equity security sales........................................ 12.3 36.8 25.4 76.5
Mortgage loan maturities and principal repayments............ 25.7 9.2 39.0 33.5
Venture capital partnership distributions.................... 3.1 13.8 12.3 23.0
Real estate and other invested assets sales.................. 16.2 17.2 38.4 19.9
Debt security purchases...................................... (1,212.0) (1,749.9) (2,185.8) (2,731.0)
Equity security purchases.................................... (14.7) (8.4) (28.8) (31.9)
Venture capital partnership investments...................... (7.5) (11.2) (20.5) (24.1)
Other invested asset purchases............................... (30.1) (33.9) (50.1) (46.5)
Subsidiary purchases......................................... (23.6) (27.6) (134.4) (394.8)
Policy loan advances, net.................................... (19.7) (27.8) (10.3) (44.3)
Premises and equipment additions............................. (2.0) (4.2) (6.3) (8.1)
------------ ----------- ----------- -----------
Cash for continuing operations............................... (457.7) (237.9) (1,016.5) (783.0)
Cash from discontinued operations............................ 10.1 22.0 35.5 38.0
------------ ----------- ----------- -----------
Cash for investing activities................................ (447.6) (215.9) (981.0) (745.0)
------------ ----------- ----------- -----------
FINANCING ACTIVITES:
Policyholder deposit fund receipts, net...................... 540.9 (14.3) 856.8 86.6
Indebtedness proceeds........................................ -- -- -- 180.0
Indebtedness repayments...................................... -- (10.4) -- (144.6)
Common stock repurchases..................................... (35.6) -- (68.5) --
Common stock issuance........................................ -- 807.9 -- 807.9
Payments to policyholders in demutualization................. -- (28.7) -- (28.7)
Minority interest distributions.............................. (2.0) (.9) (7.7) (5.6)
------------ ----------- ----------- -----------
Cash from financing activities............................... 503.3 753.6 780.6 895.6
------------ ----------- ----------- -----------
Cash and cash equivalents changes............................ 98.3 717.5 (152.8) 305.8
Cash and cash equivalents, beginning of period............... 564.4 308.3 815.5 720.0
------------ ----------- ----------- -----------
Cash and cash equivalents, end of period..................... $662.7 $ 1,025.8 $662.7 $ 1,025.8
============ =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
THE PHOENIX COMPANIES, INC.
Consolidated Statement of Changes in Stockholders' Equity
(Amounts in millions)
Three and Six Months Ended June 30, 2002 and 2001
Three Months Six Months
---------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------- ------------
Stockholders' equity, beginning of period ...... $2,218.9 $ 1,670.6 $ 2,395.7 $1,840.9
Common stock and additional paid-in capital:
Common shares issuable in demutualization ...... -- 1,621.7 -- 1,621.7
Policyholder credits and cash payments in
demutualization.............................. -- (41.5) -- (41.5)
Common shares issued in initial public offering. -- 807.9 -- 807.9
Accumulated deficit:
Net loss........................................ (37.2) (16.5) (138.6) (174.0)
Common stock dividends declared................. (15.8) -- (15.8) --
Transfer from retained earnings to common stock
and additional paid-in capital in demutualization -- (1,621.7) -- (1,621.7)
Policyholder dividend obligation equity
adjustment................................... -- (30.3) -- (30.3)
Other equity adjustments........................ -- -- -- 3.2
Accumulated other comprehensive income:
Other comprehensive income (loss)............... 82.5 .2 40.2 (15.8)
Treasury stock:
Common shares acquired.......................... (36.8) -- (69.9) --
------------ ------------ ------------ -------------
Stockholders' equity, end of period ............ $2,211.6 $2,390.4 $2,211.6 $2,390.4
============ ============ ============= ============
The accompanying notes are an integral part of these consolidated financial statements.
THE PHOENIX COMPANIES, INC.
Notes to the Unaudited Consolidated Financial Statements
1. Description of Business
The Phoenix Companies, Inc. and its subsidiaries ("Phoenix") provide wealth management products and services offered through a
variety of select advisors and financial services firms to serve the accumulation, preservation and transfer needs of the affluent
and high net worth market, businesses and institutions. Phoenix offers a broad range of life insurance, annuity and investment
management solutions through a variety of distributors. These products and services are managed within two operating segments
(Life and Annuity and Investment Management) and two additional reporting segments (Venture Capital and Corporate and Other). See
note 6, "Segment Information."
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") for interim financial information. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair
statement have been included. Operating results for the three and six months ended June 30, 2002 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2002. These unaudited consolidated financial statements should
be read in conjunction with the consolidated financial statements of Phoenix for the year ended December 31, 2001 on Form 10-K.
3. Reorganization and Initial Public Offering
On December 18, 2000, the board of directors of Phoenix Home Life Mutual Insurance Company ("Phoenix Mutual") unanimously adopted
a plan of reorganization, which was amended and restated on January 26, 2001. On June 25, 2001, the effective date of the
demutualization, Phoenix Mutual converted from a mutual life insurance company to a stock life insurance company, became a wholly
owned subsidiary of Phoenix and changed its name to Phoenix Life Insurance Company ("Phoenix Life"). At the same time, Phoenix
Investment Partners, Ltd. ("PXP") became an indirect wholly owned subsidiary of Phoenix. On the effective date of the
demutualization, all eligible policyholders of the mutual company received 56.2 million shares of common stock, $28.8 million of
cash and $12.7 million of policy credits as compensation for their policyholder membership interests in the mutual company. The
demutualization was accounted for as a reorganization. Accordingly, Phoenix's retained earnings immediately following the
demutualization and the closing of the Initial Public Offering ("IPO") on June 25, 2001 (net of the cash payments and policy
credits that were charged directly to retained earnings) were reclassified to common stock and additional paid-in capital. In
addition, Phoenix Life established a closed block for the benefit of holders of certain of its individual life insurance policies.
The purpose of the closed block is to protect, after demutualization, the reasonable policy dividend expectations of the holders
of the policies included in the closed block. The closed block will continue in effect until such date as none of such policies
are in force. See note 7, "Closed Block."
On June 25, 2001, Phoenix closed its IPO, in which 48.8 million shares of common stock were issued at a price of $17.50 per share.
Net proceeds from the IPO totaling $807.9 million were contributed to Phoenix Life. On July 24, 2001, the lead underwriter
exercised its right to purchase 1,395,900 shares of the common stock of Phoenix at the IPO price of $17.50 per share less
underwriters' discount. Additional proceeds of $23.2 million were contributed to Phoenix Life.
4. Summary of New Significant Accounting Policies
Goodwill and Other Intangible Assets
Effective January 1, 2002, Phoenix adopted a new accounting standard for goodwill and other intangible assets, including amounts
reflected in equity-method investments. The standard primarily addresses the accounting for goodwill and intangible assets
subsequent to their initial recognition. Under the standard, amortization of goodwill and other intangible assets with indefinite
lives recorded in past business combinations was discontinued after 2001 and reporting units have been identified for the purpose
of assessing potential future impairments of goodwill. In accordance with the standard, amortization of goodwill and
indefinite-lived assets has not been recognized after 2001. Phoenix recognized $5.1 million and $10.1 million (after-tax) in
goodwill and other intangible assets amortization during the three and six months ended June 30, 2001, respectively, that would
not have been recognized had the new accounting standard been in effect in those periods.
The standard also requires that goodwill and indefinite-lived intangible assets be tested at least annually for impairment. Upon
adoption of the standard, goodwill and indefinite-lived intangibles were tested for impairment by comparing the fair value to the
carrying amount of the asset as of the beginning of 2002. Adopting the standard in 2002 resulted in a cumulative effect of
accounting change which decreased after-tax income by $130.3 million ($1.30 per share) for the six months ended June 30, 2002,
primarily due to declines in the market value of investment management business units previously acquired.
5. Significant Transactions
Management Restructuring Reserve
Phoenix recorded a reserve of $33.5 million, pre-tax ($21.8 million, after-tax) in the second quarter of 2002 primarily in
connection with organizational and employment-related costs.
Variable Life and Annuity Business Acquisition
On June 21, 2002, Phoenix entered into a binding agreement, effective July 1, 2002, through a wholly-owned subsidiary to acquire
the variable life and variable annuity business of Valley Forge Life Insurance Company, a subsidiary of CNA Financial Corporation,
through a coinsurance arrangement. The business acquired comprises a total account value of approximately $624 million as of March
31, 2002. Phoenix paid a ceding commission in the amount of $31 million. The transaction closed on July 23, 2002 and will be
included in the September 30, 2002 quarter.
PXP's Purchase of Kayne Anderson Rudnick Investment Management, LLC
On January 29, 2002, PXP acquired a majority interest in Kayne Anderson Rudnick. In accordance with the terms of the acquisition
agreement, PXP purchased an initial 60% interest, with future purchases of an additional 15% to occur by 2007. Kayne Anderson
Rudnick's management retained the remaining ownership interests. In addition to the cash payment of approximately $100 million
made at closing, a subsequent payment may be made in 2004 based upon management fee revenue growth of the purchased business
through 2003. Kayne Anderson Rudnick, based in Los Angeles, California, had approximately $9.2 billion in assets under management
at June 30, 2002. Kayne Anderson Rudnick's results of operations for the period beginning January 30, 2002 through June 30, 2002
are included in our consolidated results of operations for the six months ended June 30, 2002. Our 2001 results do not include the
financial results of Kayne Anderson Rudnick. Pro forma amounts reflecting the Kayne Anderson Rudnick acquisition as of the
beginning of 2001 are not presented as they do not materially differ from amounts presented.
Stock Repurchase Program
On January 7, 2002, Phoenix announced its authorization to repurchase up to an aggregate of five million additional shares of its
outstanding common stock, bringing the total share repurchase authorization up to an aggregate of 11 million shares. Purchases can
be made on the open market, as well as through negotiated transactions, subject to market prices and other conditions. The
repurchase program may be modified, extended or terminated by the board of directors at any time. At June 30, 2002, Phoenix had
repurchased 8.4 million shares of its common stock at an average price of $16.19 per share, including 3.9 million shares acquired
in the six months ended June 30, 2002 at an average price of $17.83 per share.
On August 5, 2002, Phoenix announced its authorization to repurchase up to two million additional shares of its outstanding
common stock, bringing the total share repurchase authorization up to an aggregate of 13 million shares of common stock.
Deferred Policy Acquisition Costs
In the first quarter of 2002, Phoenix revised the mortality assumptions used in the development of estimated gross margins for the
traditional participating block of business to reflect favorable experience. This revision resulted in a $22.1 million increase in
deferred policy acquisition costs.
6. Segment Information
The following tables provide certain information about Phoenix's operating segments as of June 30, 2002, December 31, 2001 and for
each of the three and six months ended June 30, 2002 and 2001 (in millions).
Three Months Six Months
--------------------------- ---------------------------
Consolidated revenues: 2002 2001 2002 2001
------------ ----------- ----------- -----------
Life and Annuity...................................... $575.4 $561.4 $1,133.6 $1,123.9
Investment Management................................. 73.7 66.7 143.6 139.9
------------ ----------- ----------- -----------
Total operating segment revenues................... 649.1 628.1 1,277.2 1,263.8
Venture Capital....................................... (29.9) 5.6 (34.9) (51.7)
Corporate and Other................................... 6.3 1.8 16.5 8.4
------------ ----------- ----------- -----------
Total segment revenues............................. 625.5 635.5 1,258.8 1,220.5
Net realized investment losses........................ (28.6) (4.9) (63.6) (20.5)
Other non-recurring revenue items..................... -- 3.8 -- 3.8
Elimination of inter-segment revenues................. (4.5) (6.7) (8.9) (12.0)
------------ ----------- ----------- -----------
Total revenues..................................... $592.4 $627.7 $1,186.3 $1,191.8
============ =========== =========== ===========
Life and Annuity revenues:
Premiums.............................................. $259.4 $267.2 $ 516.8 $ 533.2
Insurance and investment product fees................. 78.9 75.9 156.5 154.2
Net investment income................................. 237.1 218.3 460.3 436.5
------------ ----------- ----------- -----------
Total revenues..................................... $575.4 $561.4 $1,133.6 $1,123.9
============ =========== =========== ===========
Investment Management revenues:
Investment product fees............................... $ 70.1 $ 66.1 $ 136.8 $ 136.8
Net investment income................................. 3.6 .6 6.8 3.1
------------ ----------- ----------- -----------
Total revenues..................................... $ 73.7 $ 66.7 $ 143.6 $ 139.9
============ =========== =========== ===========
Income (loss):
Life and Annuity...................................... $ 27.9 $38.6 $ 56.1 $ 47.6
Investment Management................................. .8 .2 2.7 1.9
----------- ----------- ----------- -----------
Total operating segment pre-tax operating income.. 28.7 38.8 58.8 49.5
Venture Capital....................................... (29.9) 5.6 (34.9) (51.7)
Corporate and Other................................... (12.0) (21.2) (20.7) (40.1)
----------- ----------- ----------- -----------
Total segment pre-tax operating income (loss)..... (13.2) 23.2 3.2 (42.3)
Applicable income tax expense (benefit)............... (9.1) 3.9 (5.5) (21.7)
----------- ----------- ----------- -----------
Segment operating income (loss)....................... (4.1) 19.3 8.7 (20.6)
Non-operating losses, net:
Net realized investment losses........................ (10.7) (3.3) (9.1) (13.4)
Other non-recurring items............................. (22.4) (12.0) (7.9) (74.6)
----------- ----------- ----------- -----------
Income (loss) before cumulative effect of accounting
changes............................................ $(37.2) $ 4.0 $ (8.3) $(108.6)
=========== =========== =========== ===========
2002 2001
------------- --------------
Consolidated assets:
Life and Annuity............................................................ $20,203.7 $18,925.0
Investment Management....................................................... 1,124.8 1,165.0
Venture Capital............................................................. 261.8 291.7
Corporate and Other......................................................... 1,730.1 2,122.9
------------- --------------
Total segment assets..................................................... 23,320.4 22,504.6
Net assets of discontinued operations....................................... 20.8 20.8
------------- --------------
Total assets............................................................. $23,341.2 $22,525.4
============= ==============
7. Closed Block
On the date of demutualization, Phoenix Life established a closed block for the benefit of holders of certain individual
participating life insurance policies and annuities of Phoenix Life for which Phoenix Life had a dividend scale payable in 2000.
See note 15 of Phoenix's consolidated financial statements for the year ended December 31, 2001 in Phoenix's Form 10-K for more
information on the closed block.
As specified in the plan of reorganization, the allocation of assets for the closed block was made as of December 31, 1999.
Consequently, cumulative earnings on the closed block assets and liabilities for the period January 1, 2000 to June 30, 2002 in
excess of expected cumulative earnings did not inure to stockholders and have been used to establish a policyholder dividend
obligation as of June 30, 2002. For the six months ended June 30, 2002, the increase in the policyholder dividend obligation of
$112.9 million, pre-tax, consists of $15.7 million of pre-tax losses offset by
the change in unrealized gains on assets in the closed block of $128.6 million, pre-tax.
The following sets forth certain summarized financial information relating to the closed block as of June 30, 2002 and December
31, 2001 (in millions):
2002 2001
-------------- ------------
LIABILITIES:
Policy liabilities and policyholder deposit funds..................... $ 9,273.3 $ 9,150.2
Policyholder dividends payable........................................ 372.2 357.3
Policyholder dividend obligation...................................... 280.1 167.2
Other closed block liabilities........................................ 101.8 48.8
-------------- ------------
Total closed block liabilities........................................ 10,027.4 9,723.5
-------------- ------------
ASSETS:
Available-for-sale debt securities at fair value...................... 6,195.6 5,742.0
Mortgage loans........................................................ 378.3 386.5
Policy loans.......................................................... 1,405.1 1,407.1
Cash and cash equivalents............................................. 43.6 176.6
Accrued investment income............................................. 129.0 125.3
Premiums receivable................................................... 39.4 41.1
Deferred income taxes................................................. 397.4 392.8
Other closed block assets............................................. 24.0 18.3
-------------- ------------
Total closed block assets............................................. 8,612.4 8,289.7
-------------- ------------
Excess of closed block liabilities over closed block assets
representing maximum future earnings to be recognized from
closed block assets and liabilities................................ $ 1,415.0 $ 1,433.8
============== ============
CHANGE IN POLICYHOLDER DIVIDEND OBLIGATION:
Balance at beginning of period........................................ $ 167.2 $ 115.5
Change during the period.............................................. 112.9 51.7
-------------- ------------
Balance at end of period.............................................. $ 280.1 $ 167.2
============== ============
The following sets forth certain summarized financial information relating to the closed block for the six months ended June 30,
2002 (in millions):
REVENUES:
Premiums..................................................... $499.4
Net investment income........................................ 279.8
Realized investment losses, net.............................. (49.3)
----------
Total revenues............................................... 729.9
----------
EXPENSES:
Benefits to policyholders.................................... 514.4
Dividends to policyholders................................... 197.0
Other operating costs and expenses........................... 5.3
Change in policyholder dividend obligation................... (15.7)
----------
Total benefits and expenses.................................. 701.0
----------
Contribution from the closed block, before income taxes...... 28.9
Income tax expense........................................... 10.1
----------
Contributions from closed block, after income taxes ......... $ 18.8
==========
8. Discontinued Reinsurance Operations
In 1999, Phoenix exited its reinsurance operations through a combination of sale, reinsurance and placement of certain components
into run-off. The reinsurance segment consisted primarily of individual life reinsurance operations as well as group accident and
health reinsurance business. Phoenix placed the retained group accident and health reinsurance business into run-off. Phoenix
adopted a formal plan to stop writing new contracts covering these risks and end the existing contracts as soon as those contracts
would permit. However, Phoenix remained liable for claims under those
contracts.
Phoenix has established reserves and reinsurance recoverables for claims and related expenses that we expect to pay on our
discontinued group accident and health reinsurance business. These reserves and reinsurance recoverables 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 and our other reinsurance to cover our losses and the likely legal and administrative cost of winding down
the business. Total reserves were $35 million and total reinsurance recoverables were $80 million at June 30, 2002. In addition,
in 1999 we purchased finite aggregate excess-of-loss reinsurance to further protect us from unfavorable results from this
discontinued business. The initial premium for this coverage was $130 million. The maximum coverage available is currently $190
million and increases to $230 million by 2004. The amount of our total financial provisions at June 30, 2002 was therefore $145
million, consisting of reserves, less reinsurance recoverables, plus the amount currently available from our finite aggregate
excess-of-loss reinsurance. Based on the most recent information available, Phoenix did not recognize any additional reserve
provisions during the first six months of 2002.
Phoenix's reserves and aggregate excess-of-loss reinsurance coverage are expected 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, Phoenix
expects to pay claims out of existing estimated reserves for up to ten years as the level of business diminishes.
A significant portion of the claims arising from the discontinued group accident and health reinsurance business arises from the
activities of Unicover Managers, Inc. ("Unicover"). Unicover organized and managed a group, or pool, of insurance companies
("Unicover pool") and certain other facilities, which reinsured the life and health insurance components of workers' compensation
insurance policies issued by various property and casualty insurance companies. Phoenix was a member of the Unicover pool. Phoenix
terminated its participation in the Unicover pool effective March 1, 1999.
Phoenix is 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, Phoenix is involved in several disputes in which the pool members assert that they can deny coverage
to certain insurers that claim that they purchased reinsurance coverage from the pool.
Further, Phoenix was, along with Sun Life Assurance of Canada ("Sun Life") and Cologne Life Reinsurance Company ("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, Phoenix
joined an arbitration proceeding that Sun Life had begun against the members of the Unicover pool and the Unicover facilities. In
this arbitration, Phoenix and Sun Life sought to cancel their retrocession agreement on the grounds that material misstatements
and nondisclosures were made to them about, among other things, the amount of risks they would be reinsuring. The arbitration
proceedings are ongoing only with respect to the Unicover pool, because Phoenix, Sun Life and Cologne Life reached settlement with
the two Unicover facilities in the first quarter of 2000.
In its capacity as a retrocessionaire of the Unicover business, Phoenix had an extensive program of its own reinsurance in place
to protect it from financial exposure to the risks it had assumed. Currently, Phoenix is involved in separate arbitration
proceedings with certain of its own retrocessionaires which are seeking on various grounds to avoid paying any amounts to Phoenix.
Most of these proceedings remain in their preliminary phases. Because the same retrocession program that covers Phoenix's Unicover
business covers a significant portion of its other remaining group accident and health reinsurance business, Phoenix could have
additional material losses if one or more of its retrocesssionaires successfully avoids its obligations.
A second set of disputes involves personal accident business that was reinsured in the London reinsurance market in the mid-1990s
in which Phoenix participated. The 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 arbitrations in which those top layer
companies are attempting 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 Phoenix believes that similar discussions will follow for the remaining years. Although Phoenix is vigorously
defending its contractual rights, Phoenix is actively involved in the attempt to reach negotiated business solutions.
Given the uncertainty associated with litigation and other dispute resolution proceedings, and the expected long-term development
of net claims payments, the estimated amount of the loss on disposal of reinsurance discontinued operations may differ from actual
results. However, it is management's opinion, after consideration of the provisions made in these financial statements, that
future developments will not have a material effect on Phoenix's consolidated financial position.
The assets and liabilities of the discontinued operations have been excluded from the assets and liabilities of continuing
operations and separately identified on the Consolidated Balance Sheet. Net assets of the discontinued operations totaled $20.8
million and $20.8 million as of June 30, 2002 and December 31, 2001, respectively.
There were no discontinued reinsurance operating results for the six months ended June 30, 2002 and 2001 because the operations
were discontinued prior to January 1, 2001.
9. Commitments and Contingencies
Certain group accident and health reinsurance business has become the subject of disputes concerning the placement of the business
with reinsurers and the recovery of the reinsurance. See note 8, "Discontinued Operations."
PXP has commitments under the terms of two of its acquisition agreements. PXP may be obligated to pay an additional amount in 2005
for its initial ownership interest in Capital West Asset Management, LLC depending upon Capital West Asset Management's revenue
growth through 2004. PXP may also be obligated to pay an additional amount in 2004 for its initial ownership interest in Kayne
Anderson Rudnick based upon Kayne Anderson Rudnick's management fee revenue growth through 2003. In addition, PXP will purchase
additional ownership interests in Capital West Asset Management and Kayne Anderson Rudnick by 2007.
Phoenix makes off-balance sheet commitments related to venture capital partnerships. As of June 30, 2002, total unfunded capital
commitments were $152.6 million.
Phoenix has letters of credit provided by commercial banks totaling $11.0 million as of June 30, 2002.
Phoenix has entered into agreements with certain of its executives that provide benefits under some circumstances. Phoenix may be
obligated to pay under these agreements if exercised before June 30, 2005.
10. Stock Options
Phoenix has a plan through which it makes options available to employees at the discretion of its board of directors. Non-employee
directors receive option grants under a separate plan at the discretion of the board of directors. Exercise prices are generally
fixed at the market value of the company's common stock at the date of grant. Under the employee plan, options vest and are
exercisable over a three-year period. The employee plan authorized the issuance of up to 5% of the total number of common stock
shares outstanding immediately after the IPO in June 2001. Under the directors plan, options vest and are exercisable immediately,
provided no options may be exercised until after the second anniversary of the company's IPO. All options have an expiration date
not exceeding ten years. The directors plan authorized the issuance of not more than 500,000 shares. Transactions under the
Phoenix option plans during the three and six months ended June 30, 2002 include 4,451,906 options granted at $16.20 per share, no
options were forfeited, exercised or expired. None of the options were exercisable at June 30, 2002.
Phoenix has chosen to account for these stock options in accordance with initial accounting guidance that treats these options as
capital transactions, not as compensation expense. Accordingly, Phoenix is providing pro forma disclosures of earnings and
earnings per share as if it had elected to treat the options as compensation expense (in millions, except per share amounts):
Three Six
Months Months
---------- ------------
Net income (loss):
As reported................................................ $(37.2) $(138.6)
Pro forma.................................................. $(40.1) $(141.5)
Basic earnings per share:
As reported................................................ $(.37) $(1.38)
Pro forma.................................................. $(.40) $(1.41)
The total pro forma cost related to the second quarter option grants that would be recognized as compensation expense over the
next three years is $17.9 million (after-tax), of which $2.9 million of costs, principally non-recurring, would have been
recognized in the three months ended June 30, 2002.
The pro forma adjustment relating to options granted during the quarter ended June 30, 2002 is based on a fair value method using
the Black-Scholes option pricing model. Valuation and related assumption information consists of: expected volatility at 34.9%,
risk-free interest rate at 5.5% and common share dividend yield of 0.9%. The Black-Scholes option valuation model was developed
for use in estimating the fair value of options that have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including the expected share price volatility. Because
Phoenix's share options have characteristics significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, especially in a security traded for only a short time,
in Phoenix's opinion the existing models do not necessarily provide a reliable measure of the fair value of its share options.
Notwithstanding these concerns, the Black-Scholes model was used to develop the above pro forma costs.
11. Earnings Per Share
The 2001 weighted-average shares outstanding calculation is pro forma and is based on the weighted-average shares outstanding for
the period of time from the demutualization and initial public offering to the end of the year.
Common stock equivalents have not been included because the effect would be anti-dilutive. If the effect had been dilutive, common
stock equivalent shares would have been 497,911 shares (4,451,906 shares assumed issued less 3,953,995 shares assumed repurchased)
and their weighted-average effect on the quarter and year-to-date periods would have been 33,194 shares and 16,597 shares,
respectively.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis reviews: our consolidated financial condition as of June 30, 2002 as compared to December 31,
2001; our consolidated results of operations for the three and six months ended June 30, 2002 and 2001; and, where appropriate,
factors that may affect our future financial performance. This discussion and analysis should be read in conjunction with the
unaudited interim financial statements and notes thereto of The Phoenix Companies, Inc. ("Phoenix") contained in this filing as well
as in conjunction with the audited financial statements and related notes included in our Annual Report on Form 10-K for the year
ended December 31, 2001.
This quarterly report contains statements that constitute forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These include statements relating to trends in, or representing management's beliefs about, Phoenix'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 rates and currency exchange rates; (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) Phoenix's primary reliance, as a
holding company, on dividends from its subsidiaries to meet debt payment obligations and the applicable regulatory restrictions on
the ability of the subsidiaries to pay such dividends; (iv) regulatory, accounting or tax changes that may affect the cost of, or
demand for, the products or services of Phoenix's subsidiaries; (v) downgrades in the claims paying ability or financial strength
ratings of Phoenix's subsidiaries; (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) Phoenix's success in
achieving its planned expense reductions; and (ix) other risks and uncertainties described from time to time in Phoenix's filings
with the Securities and Exchange Commission. Phoenix specifically disclaims any obligation to update or revise any forward-looking
statement, whether as a result of new information, future developments or otherwise.
We are a leading provider of wealth management products and services offered through a variety of select advisors and financial
services firms to serve the accumulation, preservation and transfer needs of the affluent and high-net-worth market, businesses and
institutions. We refer to our products and services together as our wealth management solutions. We offer a broad range of life
insurance, annuity and investment management solutions through a variety of distributors. These distributors include affiliated and
non-affiliated advisors and financial services firms who make our solutions available to their clients.
Our Demutualization
On June 25, 2001, Phoenix Home Life Mutual Insurance Company ("Phoenix Mutual") converted from a mutual life insurance company to a
stock life insurance company, became a wholly owned subsidiary of Phoenix and changed its name to Phoenix Life Insurance Company
("Phoenix Life"). At the same time, Phoenix Investment Partners, Ltd. ("PXP") became an indirect wholly owned subsidiary of Phoenix.
Phoenix Life established a closed block for the benefit of holders of certain individual life insurance policies (closed block
policies). The purpose of the closed block is to ensure that the reasonable dividend expectations of policyholders who own policies
included in the closed block are met. The closed block will continue in effect until the date none of such policies is in force. On
June 25, 2001, Phoenix Life allocated assets to the closed block in an amount that produces cash flows which, together with
anticipated revenue from the closed block policies, are reasonably expected to be sufficient in the aggregate to support the
obligations and liabilities relating to these policies and to provide for a continuation of dividend scales in effect at that time,
if the experience underlying such scales continues. Appropriate adjustments will be made to the dividend scales when actual
experience differs from the aggregate experience underlying such scales.
In addition to the closed block assets, we hold assets outside the closed block in support of closed block liabilities. Investment
earnings on these assets less allocated expenses and the amortization of deferred acquisition costs provide an additional source of
earnings to our stockholders. In addition, the amortization of deferred acquisition costs requires the use of various assumptions.
To the extent that actual experience is more or less favorable than assumed, stockholder earnings will be impacted.
In addition, Phoenix Life remains responsible for paying the benefits guaranteed under the policies included in the closed block,
even if cash flows and revenues from the closed block prove insufficient. We funded the closed block to provide for these payments
and for continuation of dividends paid under 2000 policy dividend scales, assuming the experience underlying such dividend scales
continues. Therefore, we do not believe that Phoenix Life will have to pay these benefits from assets outside the closed block unless
the closed block business experiences very substantial adverse deviations in investment, mortality, persistency or other experience
factors. We intend to accrue any additional contributions necessary to fund guaranteed benefits under the closed block if and when it
becomes probable that we will be required to fund any shortage.
The allocation of assets for the closed block was made as of December 31, 1999. Consequently, cumulative earnings on the closed block
assets and liabilities for the period January 1, 2000 to June 30, 2002 in excess of expected cumulative earnings do not inure to
stockholders and have been used to establish a policyholder dividend obligation as of June 30, 2002. For the six months ended June
30, 2002, the increase in the policyholder dividend obligation of $112.9 million pre-tax consists of $15.7 million of pre-tax losses
offset by the change in unrealized gains on assets in the closed block of $128.6 million, pre-tax.
We incurred costs relating to the demutualization, excluding costs relating to the initial public offering, of $39.2 million, net of
income taxes of $10.3 million, of which $14.1 million was recognized in the year ended December 31, 2000, $23.9 million was
recognized in the year ended December 31, 2001 and $1.2 million was recognized in the six months ended June 30, 2002.
Recently Issued Accounting Standards
Business Combinations/Goodwill and Other Intangible Assets. Effective January 1, 2002, we adopted a new accounting standard for
goodwill and other intangible assets, including amounts reflected in equity-method investments. The standard primarily addresses the
accounting for goodwill and intangible assets subsequent to their initial recognition. Under the standard, amortization of goodwill
and other intangible assets with indefinite lives recorded in past business combinations was discontinued after 2001 and reporting
units have been identified for the purpose of assessing potential future impairments of goodwill. In accordance with the standard,
amortization of goodwill and indefinite-lived assets has not been recognized after 2001.
The standard also requires that goodwill and indefinite-lived intangible assets be tested at least annually for impairment. Upon
adoption of the standard, goodwill and indefinite-lived intangible assets were tested for impairment by comparing the fair value to
the carrying amount of the asset as of the beginning of 2002. The effect of adopting the standard in 2002 decreased after-tax income
by $130.3 million ($1.30 per share) for the six months ended June 30, 2002, primarily due to declines in the market value of
investment management business units previously acquired.
Consolidated Results of Operations
The following table presents summary consolidated financial data for the three and six months ended June 30, 2002 and 2001 (in
millions).
Three Months Six Months
---------------------------------------- ---------------------------------------
2002 2001 Change 2002 2001 Change
---------- ----------- ---------- ---------- --------- ----------
REVENUES:
Premiums.................................. $259.4 $267.2 $(7.8) $516.8 $533.2 $(16.4)
Insurance and investment product fees..... 145.9 139.7 6.2 286.2 285.2 1.0
Net investment income..................... 215.7 225.7 (10.0) 446.9 393.9 53.0
Net realized investment losses............ (28.6) (4.9) (23.7) (63.6) (20.5) (43.1)
---------- ----------- ---------- ---------- --------- ----------
Total revenues....................... 592.4 627.7 (35.3) 1,186.3 1,191.8 (5.5)
---------- ----------- ---------- ---------- --------- ----------
BENEFITS AND EXPENSES:
Policy benefits........................... 338.9 332.2 6.7 672.8 666.3 6.5
Policyholder dividends.................... 107.5 89.7 17.8 181.7 196.0 (14.3)
Policy acquisition cost amortization ..... 11.4 26.9 (15.5) .5 62.0 (61.5)
Intangible asset amortization............. 7.8 11.3 (3.5) 15.9 24.5 (8.6)
Interest expense.......................... 7.7 7.7 -- 15.4 14.8 .6
Demutualization expenses.................. .6 8.8 (8.2) 1.5 19.5 (18.0)
Other operating expenses.................. 179.1 140.2 38.9 315.1 377.6 (62.5)
---------- ----------- ---------- ---------- --------- ----------
Total benefits and expenses.......... 653.0 616.8 36.2 1,202.9 1,360.7 (157.8)
---------- ----------- ---------- ---------- --------- ----------
Income (loss) before income taxes
and minority interest.................. (60.6) 10.9 (71.5) (16.6) (168.9) 152.3
Applicable income tax (benefit)expense.... (26.7) 5.2 (31.9) (14.4) (63.8) 49.4
---------- ----------- ---------- ---------- --------- ----------
Income (loss) before minority interest.... (33.9) 5.7 (39.6) (2.2) (105.1) 102.9
Minority interest in net income of
subsidiaries........................... 3.3 1.7 1.6 6.1 3.5 2.6
---------- ----------- ---------- ---------- --------- ----------
Income (loss) before cumulative
effect of accounting changes........... (37.2) 4.0 (41.2) (8.3) (108.6) 100.3
Cumulative effect of accounting
changes:
Goodwill impairment................... -- -- -- (130.3) -- (130.3)
Securitized financial instruments .... -- (20.5) 20.5 -- (20.5) 20.5
Venture capital partnerships and
derivative financial instruments. -- -- -- -- (44.9) 44.9
---------- ----------- ---------- ---------- --------- ----------
Net loss ................................. $ (37.2) $(16.5) $ (20.7) $(138.6) $ (174.0) $ 35.4
========== =========== ========== ========== ========= ==========
The fluctuations in both premiums and insurance and investment product fees for the comparative three-month and six-month periods
reflect our continued emphasis on variable universal life, universal life and annuity product sales, rather than on traditional life
product sales.
The decrease in net investment income for the comparative three-month periods was due primarily to a second quarter loss estimate in
our venture capital portfolio, reflecting the impact of the weak equity markets and declines in the industry sector indices on our
partnership holdings, partially offset by increased investment income attributable to higher asset balances resulting from the
investment of proceeds from our IPO and growth in the fixed portion of our annuity business. The increase in net investment income
for the comparative six-month periods was due primarily to decreased losses in our venture capital portfolio in 2002 and increased
investment income attributable to higher invested asset balances from the investment of proceeds from our IPO and growth in our
annuity business.
The increases in realized investment losses for the comparative three-month and six-month periods were due primarily to increased
credit related losses in the telecommunications industry and collateralized debt obligation holdings. The majority of these losses
were in the closed block.
The increase in policyholder dividends for the comparative three-month periods was due to the growth of our policyholder dividend
obligation resulting from favorable mortality and persistency experience. In addition, in the three months ended June 30, 2001, there
was a one-time favorable adjustment of $15.8 million related to the establishment of the closed block, pursuant to accounting rules
for newly demutualized companies. The decrease for the comparative six-month periods was due primarily to net realized investment
losses in the first quarter of 2002.
The decreases in policy acquisition cost amortization for the comparative three-month and six-month periods were primarily due to
favorable mortality and persistency experience and revised mortality assumptions. Deferred policy acquisition costs for individual
participating life insurance policies are amortized in proportion to estimated gross margins. The amortization process requires the
use of various assumptions, estimates and judgments about the future. The primary assumptions involve expenses, investment
performance, mortality and contract cancellations (i.e., lapses, withdrawals and surrenders). These assumptions are reviewed on a
regular basis and are generally based on our past experience, industry studies, regulatory requirements and judgments about the
future. In the first quarter of 2002, we revised the mortality assumptions used in the development of estimated gross margins to
reflect favorable experience and, as a result, the amortization cost decreased.
The decreases in intangible assets amortization for the comparative three-month and six-month periods resulted primarily from our
adoption of the new accounting pronouncement that eliminates the amortization of goodwill and indefinite-lived intangible assets
beginning January 1, 2002, offset, in part, by the amortization of intangible assets related to PXP's acquisition of a majority
interest in Kayne Anderson Rudnick.
The increase in other operating expenses for the comparative three-month periods was due primarily to a reserve of $33.5 million in
connection with organizational and employment-related contracts and the expenses of Kayne Anderson Rudnick, acquired on January 29,
2002. The decrease in other operating expenses for the comparative six-month periods was due to the divestiture of our physician
practice management business in 2001.
Our effective income tax benefit rate of 44.0% and 86.3% for the three months and six months ended June 30, 2002, respectively,
differed from the statutory U.S. federal income tax benefit rate of 35% as a result of the tax benefits associated with low income
housing tax credits, non-taxable dividend and interest income and the recovery of non-taxable amounts related to an IRS settlement.
The effective income tax benefit rate of 47.7% and 37.7% for the three months and six months ended June 30, 2001, respectively, also
differed from the statutory income tax benefit rate of 35% as a result of the non-deductible demutualization expenses offset by the
tax benefits associated with low income housing tax credits and non-taxable dividend and interest income.
Based on the current low level of pre-tax operating income in relation to permanent tax benefits, future changes in pre-tax operating
income may produce disproportionate changes to the effective income tax rate. As a result, the effective income tax rate for the
three and six months ended June 30, 2002 should not be considered an estimate of the effective income tax rate for the year 2002. The
effective benefit rate for the year 2001, excluding the equity tax applicable to mutual life insurance company operations and
nondeductible demutualization expenses, was 39%.
The increases in minority interest in net income of subsidiaries for the comparative three-month and six-month periods were due to
increased earnings at PXP's subsidiaries in which there is minority interest, including the recently acquired Kayne Anderson Rudnick.
Results of Operations by Segment
We evaluate segment performance on the basis of segment after-tax operating income. Realized investment gains 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 are often subject to our discretion. 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 reported in accordance with generally accepted accounting principles ("GAAP"), we believe that segment
after-tax operating income is an appropriate measure that represents the net income attributable to the ongoing operations of our
business. The criteria used to identify non-recurring items and to determine whether to exclude a non-recurring item from segment
after-tax operating income include whether the item is infrequent and:
o is material to the segment's after-tax operating income; or
o results from a business restructuring; or
o results from a change in the regulatory environment; or
o relates to other unusual circumstances (e.g., litigation).
Non-recurring items excluded from segment after-tax operating income may vary from period to period. Because such items are excluded
based on our discretion, inconsistencies in the application of our selection criteria may exist. Segment after-tax operating income
is not a substitute for net income determined in accordance with GAAP and may be different from similarly titled measures of other
companies.
Segment Allocations
We allocate capital to Investment Management on an historical cost basis and to insurance products based on 250% of company action
level risk-based capital. We allocate net investment income based on the assets allocated to each segment. We allocate other costs
and operating expenses to each segment based on a review of the nature of such costs, cost allocations using time studies, and other
allocation methodologies.
The following table presents a reconciliation of segment after-tax operating income to GAAP reported income for the three and six
months ended June 30, 2002 and 2001 (in millions).
Three Months Six Months
-------------------------------------- ----------------------------------------
2002 2001 Change 2002 2001 Change
---------- ---------- ---------- ---------- ----------- ----------
SEGMENT OPERATING INCOME:
Life and Annuity.................... $ 18.1 $ 25.2 $(7.1) $ 36.4 $ 31.1 $5.3
Investment Management............... 2.2 1.8 .4 4.6 2.0 2.6
---------- ---------- ----------- ---------- ---------- ----------
Total operating segments......... 20.3 27.0 (6.7) 41.0 33.1 7.9
Venture Capital..................... (19.4) 3.7 (23.1) (22.7) (33.6) 10.9
Corporate and Other................. (5.0) (11.4) 6.4 (9.6) (20.1) 10.5
---------- ---------- ---------- ---------- ----------- ----------
Total segment operating income (loss) (4.1) 19.3 (23.4) 8.7 (20.6) 29.3
---------- ---------- ---------- ---------- ----------- ----------
ADJUSTMENTS:
Net realized investment losses...... (10.7) (3.3) (7.4) (9.1) (13.4) 4.3
Management restructuring reserve ... (21.8) -- (21.8) (21.8) -- (21.8)
Deferred policy acquisition costs
mortality assumptions refinement -- -- -- 15.1 -- 15.1
Pension adjustment.................. -- .6 (.6) -- (11.3) 11.3
Demutualization expenses............ (.6) (12.1) 11.5 (1.2) (19.0) 17.8
Partnership gains................... -- 2.4 (2.4) -- 2.4 (2.4)
Expense of purchase of PXP minority
interest....................... -- (2.9) 2.9 -- (46.7) 46.7
---------- ---------- ---------- ---------- ----------- ----------
Total adjustments................ (33.1) (15.3) (17.8) (17.0) (88.0) 71.0
---------- ---------- ---------- ---------- ----------- ----------
Income (loss) before cumulative effect
of accounting changes............. $ (37.2) $ 4.0 $(41.2) $ (8.3) $(108.6) $100.3
========== ========== ========== ========== =========== ==========
Life and Annuity Segment
The following table presents summary financial data relating to Life and Annuity for the three and six months ended June 30, 2002 and
2001 (in millions).
Three Months Six Months
---------------------------------------- ---------------------------------------
2002 2001 Change 2002 2001 Change
---------- ----------- ---------- ---------- --------- ----------
REVENUES:
Premiums.................................. $ 259.4 $267.2 $(7.8) $516.8 $533.2 $(16.4)
Insurance and investment product fees..... 78.9 75.9 3.0 156.5 154.2 2.3
Net investment income..................... 237.1 218.3 18.8 460.3 436.5 23.8
---------- ----------- ---------- ---------- --------- ----------
Total revenues....................... 575.4 561.4 14.0 1,133.6 1,123.9 9.7
---------- ----------- ---------- ---------- --------- ----------
BENEFITS AND EXPENSES:
Policy benefits and dividends............. 455.0 419.7 35.3 894.7 857.3 37.4
Policy acquisition cost amortization ..... 12.3 26.9 (14.6) 27.0 62.0 (35.0)
Other operating expenses.................. 80.2 76.2 4.0 155.8 157.0 (1.2)
---------- ----------- ---------- ---------- --------- ----------
Total benefits and expenses.......... 547.5 522.8 24.7 1,077.5 1,076.3 1.2
---------- ----------- ---------- ---------- --------- ----------
Operating income before income taxes...... 27.9 38.6 (10.7) 56.1 47.6 8.5
Applicable income tax expense ............ 9.8 13.4 (3.6) 19.7 16.5 3.2
---------- ----------- ---------- ---------- --------- ----------
Segment operating income.................. $ 18.1 $ 25.2 $(7.1) $ 36.4 $ 31.1 $ 5.3
========== =========== ========== ========== ========= ==========
The fluctuations in both premiums and insurance and investment product fees for the comparative three-month and six-month periods
reflects our continued emphasis on variable universal life, universal life and annuity product sales, rather than on traditional life
product sales.
The increases in net investment income for the comparative three-month and six-month periods resulted from increases in invested
assets, primarily from the fixed portion of our annuity business.
The increases in policy benefits and dividends for the comparative three-month and six-month periods were due primarily to the growth
of our policyholder dividend obligation resulting from favorable mortality and persistency experience and higher interest credited on
annuity deposits. Also, in the three months ended June 30, 2001, there was a one-time favorable adjustment of $15.8 million related
to the establishment of the closed block, pursuant to the accounting rules for newly demutualized companies.
The decreases in policy acquisition cost amortization for the comparative three-month and six-month periods were primarily due to
favorable mortality and persistency experience and revised mortality assumptions. Deferred policy acquisition costs for individual
participating life insurance policies are amortized in proportion to estimated gross margins. The amortization process requires the
use of various assumptions, estimates and judgments about the future. The primary assumptions involve expenses, investment
performance, mortality and contract cancellations (i.e., lapses, withdrawals and surrenders). These assumptions are reviewed on a
regular basis and are generally based on our past experience, industry studies, regulatory requirements and judgments about the
future. In the first quarter of 2002, we revised the mortality assumptions used in the development of estimated gross margins to
reflect favorable experience and, as a result, the amortization cost decreased.
The following table presents variable annuity funds under management data for the three and six months ended June 30, 2002 and 2001
(in millions).
Three Months Six Months
---------------------------- ----------------------------
2002 2001 2002 2001
------------- ----------- ------------ -----------
Deposits.............................. $ 661.0 $ 377.4 $ 1,236.4 $ 664.0
Performance........................... (219.0) 203.0 (220.4) (345.1)
Fees.................................. (15.7) (17.0) (31.6) (35.1)
Benefits and surrenders............... (198.4) (137.9) (332.6) (288.1)
------------- ----------- ------------ -----------
Change in funds under management...... 227.9 425.5 651.8 (4.3)
Beginning balance..................... 5,173.0 3,973.4 4,749.1 4,403.2
------------- ----------- ------------ -----------
Ending balance........................ $ 5,400.9 $ 4,398.9 $ 5,400.9 $ 4,398.9
============= =========== ============ ===========
Investment Management Segment
The following table presents summary financial data relating to Investment Management for the three and six months ended June 30,
2002 and 2001 (in millions).
Three Months Six Months
---------------------------------------- ---------------------------------------
2002 2001 Change 2002 2001 Change
---------- ----------- ---------- ---------- --------- ----------
REVENUES:
Investment product fees................ $70.1 $ 66.1 $ 4.0 $136.8 $136.8 $ --
Net investment income.................. 3.6 .6 3.0 6.8 3.1 3.7
---------- ----------- ---------- ---------- --------- ----------
Total revenues.................... 73.7 66.7 7.0 143.6 139.9 3.7
---------- ----------- ---------- ---------- --------- ----------
EXPENSES:
Intangible asset amortization.......... 7.8 11.8 (4.0) 15.9 24.3 (8.4)
Other operating expenses............... 61.8 53.0 8.8 118.9 110.2 8.7
---------- ----------- ---------- ---------- --------- ----------
Total expenses.................... 69.6 64.8 4.8 134.8 134.5 .3
---------- ----------- ---------- ---------- --------- ----------
Income before income taxes
and minority interest............... 4.1 1.9 2.2 8.8 5.4 3.4
Applicable income tax benefit ......... (1.4) (1.6) .2 (1.9) (.1) (1.8)
---------- ----------- ---------- ---------- --------- ----------
Income before minority interest in net
income of subsidiaries.............. 5.5 3.5 2.0 10.7 5.5 5.2
Minority interest in net income of
subsidiaries........................ 3.3 1.7 1.6 6.1 3.5 2.6
---------- ----------- ---------- ---------- --------- ----------
Segment operating income.............. $ 2.2 $ 1.8 $ .4 $ 4.6 $ 2.0 $ 2.6
========== =========== ========== ========== ========= ==========
The increase in investment product fees for the comparative three-month periods was primarily the result of increases of $3.9 billion
and $2.5 billion in average assets under management for the private client and institutional lines of business, respectively, offset,
in part, by a decrease in the fee structure in the third quarter of 2001 for the general account. PXP's acquisition of Kayne Anderson
Rudnick in January 2002 accounted for approximately $6.5 billion and $1.2 billion of the increases in average private client and
institutional assets under management, respectively. These increases in average assets were offset by decreases in both the private
client and institutional lines of business as a result of poor market performance during the second quarter of 2002. Sales of private
client products in the second quarter of 2002 were $2.1 billion, an increase of 58% from the same period in 2001, and redemptions
from existing accounts were $1.5 billion, an increase of 7% from the same period in 2001. Sales of institutional accounts in the
second quarter of 2002 were $1.0 billion, a decrease of 45% from the same period in 2001, and lost accounts and withdrawals from
existing accounts were $2.1 billion, an increase of 271% from the same period in 2001.
The increases in net investment income for the comparative three-month and six-month periods were due primarily to equity in the
increased earnings of our investment in Aberdeen, an unconsolidated affiliate.
The decreases in intangible assets amortization for the comparative three-month and six-month periods resulted primarily from our
adoption of the new accounting pronouncement that eliminates the amortization of goodwill and indefinite-lived intangible assets
beginning January 1, 2002, offset, in part, by our acquisition of a majority interest in Kayne Anderson Rudnick.
Other operating expenses for the comparative three-month and six-month periods increased due primarily to expenses of Kayne Anderson
Rudnick, acquired on January 29, 2002, offset, in part, by a decrease in the private client sales force primarily during the fourth
quarter of 2001 and decreases in incentive compensation and other operating expenses.
The increases in minority interest in net income of subsidiaries for the comparative three-month and six-month periods were due to
increased earnings at PXP's subsidiaries in which there is minority interest, including the recently acquired Kayne Anderson Rudnick.
The following table presents funds under management data for the three and six months ended June 30, 2002 and 2001 (in millions).
Three Months Six Months
------------------------------- ----------------------------
2002 2001 2002 2001
-------------- ------------- ------------ ------------
TOTAL:
Deposits............................................. $ 3,063.6 $ 3,064.9 $ 5,328.0 $ 5,608.4
Redemptions and withdrawals.......................... (3,615.7) (1,999.7) (5,480.6) (4,192.0)
Acquisitions......................................... -- -- 7,650.1 713.9
Performance.......................................... (4,104.0) 1,708.5 (3,958.8) (4,770.9)
Other................................................ 518.8 807.6 928.2 807.6
-------------- ------------- ------------ ------------
Change in funds under management .................... (4,137.3) 3,581.3 4,466.9 (1,833.0)
Beginning balance.................................... 60,694.3 51,178.5 52,090.1 56,592.8
-------------- ------------- ------------ ------------
Ending balance....................................... $ 56,557.0 $54,759.8 $ 56,557.0 $ 54,759.8
============== ============= ============ ============
INSTITUTIONAL PRODUCTS:
Deposits............................................. $ 960.5 $ 1,732.7 $ 1,793.3 $ 2,862.5
Redemptions and withdrawals.......................... (2,071.5) (558.1) (2,794.8) (1,201.4)
Acquisitions......................................... -- -- 1,507.7 --
Performance.......................................... (1,112.0) 372.6 (1,538.0) (954.2)
Other................................................ 518.8 807.6 928.2 807.6
-------------- ------------- ------------ ------------
Change in funds under management .................... (1,704.2) 2,354.8 (103.6) 1,514.5
Beginning balance.................................... 33,630.8 29,575.7 32,030.2 30,416.0
-------------- ------------- ------------ ------------
Ending balance....................................... $ 31,926.6 $31,930.5 $ 31,926.6 $ 31,930.5
============== ============= ============ ============
PRIVATE CLIENT PRODUCTS:
Mutual Funds:
Deposits............................................. $ 370.6 $ 543.8 $ 652.6 $ 1,107.3
Redemptions and withdrawals.......................... (728.0) (754.7) (1,331.6) (1,498.1)
Acquisitions......................................... -- -- 333.5 --
Performance.......................................... (1,110.0) 778.3 (1,200.1) (1,609.5)
-------------- ------------- ------------ ------------
Change in funds under management .................... (1,467.4) 567.4 (1,545.6) (2,000.3)
Beginning balance.................................... 11,143.4 12,149.0 11,221.6 14,716.7
-------------- ------------- ------------ ------------
Ending balance....................................... $ 9,676.0 $ 12,716.4 $ 9,676.0 $ 12,716.4
============== ============= ============ ============
Intermediary Programs:
Deposits............................................. $ 1,665.5 $ 768.7 $ 2,775.0 $ 1,578.9
Redemptions and withdrawals.......................... (705.9) (629.3) (1,107.3) (1,394.9)
Acquisitions......................................... -- -- 4,723.4 --
Performance.......................................... (1,715.1) 345.7 (1,090.2) (1,927.7)
-------------- ------------- ------------ ------------
Change in funds under management .................... (755.5) 485.1 5,300.9 (1,743.7)
Beginning balance.................................... 11,876.0 6,175.3 5,819.6 8,404.1
-------------- ------------- ------------ ------------
Ending balance....................................... $ 11,120.5 $ 6,660.4 $ 11,120.5 $ 6,660.4
============== ============= ============ ============
Direct Managed Accounts:
Deposits............................................. $ 67.0 $ 19.7 $ 107.1 $ 59.7
Redemptions and withdrawals.......................... (110.3) (57.6) (246.9) (97.6)
Acquisitions......................................... -- -- 1,085.5 713.9
Performance.......................................... (166.9) 211.9 (130.5) (279.5)
-------------- ------------- ------------ ------------
Change in funds under management .................... (210.2) 174.0 815.2 396.5
Beginning balance.................................... 4,044.1 3,278.5 3,018.7 3,056.0
-------------- ------------- ------------ ------------
Ending balance....................................... $ 3,833.9 $ 3,452.5 $ 3,833.9 $ 3,452.5
============== ============= ============ ============
Venture Capital Segment
Our investments in Venture Capital are primarily in the form of limited partnership interests in venture capital funds, leveraged
buyout funds and other private equity partnerships sponsored and managed by third parties. We refer to all of these types of
investments as venture capital.
We record our investments in venture capital partnerships in accordance with the equity method of accounting. Our pro rata share of
the earnings or losses of the partnerships, which represent realized and unrealized investment gains and losses, as well as
operations of the partnerships, is included in our investment income. We record our share of the net equity in earnings of the
venture capital partnerships in accordance with GAAP, using the most recent financial information received from the partnerships.
Historically, this information had been provided to us on a one-quarter lag. Due to the volatility in the equity markets, we believed
the one-quarter lag in reporting was no longer appropriate. Therefore, beginning in the first quarter of 2001 we changed our method
of applying the equity method of accounting to eliminate the quarterly lag in reporting. We removed the lag in reporting by
estimating the change in our share of the net equity in earnings of the venture capital partnerships for the period from December 31,
2000, the date of the most recent financial information provided by the partnerships, to our then current reporting date of March 31,
2001. To estimate the net equity in earnings of the venture capital partnerships for each quarter, we developed a methodology to
estimate the change in value of the underlying investee companies in the venture capital partnerships. For public investee companies,
we used quoted market prices at the end of each quarter, applying liquidity discounts to these prices in instances where such
discounts were applied in the underlying partnerships' financial statements. For private investee companies, we applied a public
industry sector index to roll the value forward each quarter. We applied this methodology consistently each quarter with subsequent
adjustments to reflect market events reported by the partnerships (e.g., new rounds of financing, initial public offerings and
writedowns by the general partners). In addition, on an annual basis we revised the valuations we have assigned to the investee
companies to reflect the valuations contained in the audited financial statements received from the venture capital partnerships. Our
venture capital earnings remain subject to equity market volatility.
In the first quarter of 2001, we recorded a charge of $48.8 million (net of income taxes of $26.3 million) representing the
cumulative effect of this accounting change on the fourth quarter of 2000. The cumulative effect was based on the actual fourth
quarter 2000 financial results as reported by the partnerships.
The following table presents summary financial data relating to Venture Capital for the three and six months ended June 30, 2002 and
2001 (in millions).
Three Months Six Months
---------------------------------------- ---------------------------------------
2002 2001 Change 2002 2001(1) Change
---------- ----------- ---------- ---------- --------- ----------
Net investment income (loss)............. $(29.9) $ 5.6 $(35.5) $(34.9) $(51.7) $ 16.8
Applicable income tax (benefit)expense... (10.5) 1.9 (12.4) (12.2) (18.1) 5.9
---------- ----------- ---------- ---------- --------- ----------
Segment operating income (loss) ...... $(19.4) $ 3.7 $(23.1) $(22.7) $(33.6) $ 10.9
========== =========== ========== ========== ========= ==========
(1) Information for 2001 excludes the charge of $48.8 million representing the cumulative effect of an accounting change as
described above.
The decrease in net investment income for the comparative three-month periods was primarily due to a second quarter 2002 loss
estimate reflecting the impact of the weak equity markets and declines in the industry sector indices on our partnership holdings.
The increase in net investment income for the comparative six-month periods was primarily due to declines in the sector indices
applied against higher beginning investment balances in 2001.
Corporate and Other Segment
The following table presents summary financial data relating to Corporate and Other for the three months ended June 30, 2002 and 2001
(in millions).
Three Months Six Months
---------------------------------------- ---------------------------------------
2002 2001 Change 2002 2001 Change
---------- ----------- ---------- ---------- --------- ----------
REVENUES:
Insurance and investment product fees.... $ 3.1 $ 2.9 $ .2 $ 5.9 $ 6.6 $ (.7)
Net investment income (loss) ............ 3.2 (1.1) 4.3 10.6 1.8 8.8
---------- ----------- ---------- ---------- --------- ----------
Total revenues...................... 6.3 1.8 4.5 16.5 8.4 8.1
---------- ----------- ---------- ---------- --------- ----------
EXPENSES:
Policy benefits, excluding
policyholder dividends................ 2.6 2.2 .4 6.2 5.0 1.2
Interest expense......................... 7.7 7.7 -- 15.4 14.8 .6
Other operating expenses................. 8.0 13.1 (5.1) 15.6 28.7 (13.1)
---------- ----------- ---------- ---------- --------- ----------
Total expenses...................... 18.3 23.0 (4.7) 37.2 48.5 (11.3)
---------- ----------- ---------- ---------- --------- ----------
Loss before income taxes................. (12.0) (21.2) 9.2 (20.7) (40.1) 19.4
Applicable income tax benefit............ (7.0) (9.8) 2.8 (11.1) (20.0) 8.9
---------- ----------- ---------- ---------- --------- ----------
Segment operating loss.................. $ (5.0) $(11.4) $ 6.4 $ (9.6) $(20.1) $ 10.5
========== =========== ========== ========== ========= ==========
The increase in net investment income for the comparative three-month periods was due primarily to an increase in invested assets.
The increase for the comparative six-month periods was due primarily to equity in increased earnings of affiliates including Hilb,
Rogal and Hamilton Company. The increases in both periods were offset by asset re-allocation to the Life and Annuity segment,
effective January 1, 2002.
The decreases in other operating expenses for the comparative three-month and six-month periods were due to the exit from our
physician practice management business in 2001 and lower unallocated corporate expenses in 2002 compared to 2001.
General Account
The invested assets in our general account are generally of high quality and broadly diversified across asset classes, sectors and
individual credits and issuers. Our Investment Management professionals manage our 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 specific liability or liabilities within them. Segmentation of assets allows us to manage the risks
and measure returns on capital for our various businesses and products.
Separate Account and Investment Trust Assets
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. Generally, assets held in separate accounts are not available to satisfy general account
obligations.
Investment trusts are assets held for the benefit of those institutional clients which have investments in structured finance
products offered and managed by our investment management subsidiary. Investment trusts for which PXP is the investment advisor and
actively manages the assets, and for which there is not a substantive amount of outside third party equity investment in the trust,
are consolidated in the financial statements. In 2001, we determined that two out of the eight investment trusts that PXP managed did
not have a substantive amount of outside equity and, as a result, we concluded that consolidation was required. Our financial
exposure is limited to our share of equity and bond investments in these vehicles and there are no financial guarantees from, or
recourse to, us for these investment trusts. Asset valuation changes are directly offset by changes in the corresponding
liabilities. We receive investment management fees for services provided to the trusts.
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:
o credit risk, which relates to the uncertainty associated with the ongoing ability of an obligor to make timely payments of
principal and interest;
o interest rate risk, which relates to the market price and cash flow variability associated with changes in market
interest rates; and
o equity risk, which relates to the volatility of prices for equity and equity-like investments.
We manage credit risk through fundamental analysis of the underlying obligors, issuers and transaction structures. We employ a staff
of specialized and experienced credit analysts who review obligors' management, competitive position, financial statements, cash
flow, coverage ratios, liquidity and other key financial and non-financial information. These specialists recommend the investments
needed to fund our liability guarantees within 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
integrity 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 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, such as interest rate swaps, swaptions, and floors 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 equity risk, as well as 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 Securities
Our debt security portfolio consists primarily of investment-grade publicly traded and privately placed corporate bonds; residential
mortgage-backed securities; commercial mortgage-backed securities; and asset-backed securities. As of June 30, 2002, debt securities
represented 70% of general account invested assets, with a carrying value of $10,679.8 million. Public debt securities represented
77% of this total amount, with the remaining 23% consisted of private debt securities. Our debt securities are classified as
available-for-sale and are reported at fair value with unrealized gains or losses included in equity.
Each year, the majority of our net cash flows are invested in investment-grade debt securities. However, we maintain a portfolio
allocation 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 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 if a major economic downturn occurs. As of June 30,
2002, total debt securities having an increased risk of default (those securities with a Securities Valuation Office ("SVO")
securities rating of four or greater) totaled $136.3 million, or 1% of our total debt security portfolio, and our below
investment-grade debt securities represented 7.2% of our total debt security portfolio.
The following table displays the SVO ratings for our debt security portfolio as of June 30, 2002 and December 31, 2001 (in millions),
along with an equivalent S&P rating agency designation. The majority of our bonds are investment grade, with 93% invested in
Categories 1 and 2 securities as of June 30, 2002.
Debt Securities by Credit Quality
Total Debt Securities Public Debt Securities Private Debt Securities
SVO S&P Equivalent -------------------------- --------------------------- ---------------------------
Rating Designation 2002 2001 2002 2001 2002 2001
- ----------- ------------------ ----------- ----------- ------------ ----------- ----------- -----------
1 AAA/AA/A $ 7,062.2 $ 6,139.3 $ 5,825.1 $5,019.3 $ 1,237.1 $1,120.0
2 BBB 2,848.6 2,686.7 1,765.7 1,667.9 1,082.9 1,018.8
----------- ----------- ------------ ----------- ----------- -----------
Total investment grade 9,910.8 8,826.0 7,590.8 6,687.2 2,320.0 2,138.8
3 BB 632.7 581.6 517.3 452.9 115.4 128.7
4 B 97.2 173.0 89.2 150.4 8.0 22.6
5 CCC and lower 28.6 38.6 10.2 18.0 18.4 20.6
6 In or near default 10.5 23.3 9.0 19.8 1.5 3.5
----------- ----------- ------------ ----------- ----------- -----------
Total 10,679.8 9,642.5 $ 8,216.5 $7,328.3 $ 2,463.3 $2,314.2
============ =========== =========== ===========
Less debt securities of
discontinued operations...... -- 34.8
------------ -----------
Total debt securities,
continuing operations........ $10,679.8 $ 9,607.7
============ ===========
Liquidity and Capital Resources
In the normal course of business, we enter into transactions involving various types of financial instruments such as debt securities
and equity securities. These instruments have credit risk and also may be subject to risk of loss due to interest rate and market
fluctuations. We also make off-balance sheet commitments related to venture capital partnerships; as of June 30, 2002, such total
unfunded capital commitments were $152.6 million.
Liquidity refers to the ability of a company to generate sufficient cash flow to meet its cash requirements. The following discussion
combines liquidity and capital resources as these subjects are interrelated. Consistent with the discussion of our results of
operations, we discuss liquidity and capital resources on both consolidated and segment bases.
The Phoenix Companies, Inc. (unconsolidated)
Our primary uses of liquidity include the payment of dividends on our common stock, loans or contributions to our subsidiaries, debt
service and the funding of our general corporate expenses.
Our primary source of liquidity is dividends from Phoenix Life. Under the New York Insurance Law, Phoenix Life can pay stockholder
dividends to us in any calendar year without prior approval in the amount of the lesser of:
(1) 10% of Phoenix Life's surplus to policyholders as of the immediately preceding calendar year; or
(2) Phoenix Life's statutory net gain from operations for the immediately preceding calendar year, not including realized
capital gains.
Any amount in excess of this is subject to the discretion of the New York Superintendent of Insurance.
The dividend limitation imposed by the New York Insurance Law is based on the statutory financial results of Phoenix Life. Statutory
accounting practices differ in certain respects from accounting principles used in financial statements prepared in conformity with
GAAP. The significant differences relate to deferred acquisition costs, deferred income taxes, required investment reserves, reserve
calculation assumptions and surplus notes.
We believe we will receive dividends from Phoenix Life sufficient to enable us to make dividend payments on our common stock, pay our
operating expenses, service our outstanding debt, make contributions to our subsidiaries and meet our other obligations. In addition,
we have a master credit facility under which we have direct borrowing rights, as do Phoenix Life and PXP with our unconditional
guarantee.
We do not expect to receive significant dividend income from PXP for several years, because we expect that during this time PXP will
use a substantial portion of its cash flows from operations to pay down its outstanding debt.
PXP
PXP's cash requirements are primarily to fund operating expenses and repay outstanding debt. PXP also will require liquidity to fund
the costs of any future acquisitions or make contingent payments on previous 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 for the foreseeable future. PXP, together with Phoenix and Phoenix Life, has entered into a master credit facility.
Under this facility, PXP has direct borrowing rights, subject to Phoenix's unconditional guarantee. See "Debt Financing-- Master
Credit Facility." We believe that PXP's current and anticipated sources of liquidity are adequate to meet its present and anticipated
needs.
Phoenix Life
Phoenix Life's liquidity requirements principally relate to: the liabilities associated with its various life insurance and annuity
products; the payment of dividends to us; operating expenses; contributions to subsidiaries; and payment of principal and interest on
outstanding debt obligations. Phoenix Life's liabilities arising from its life insurance and annuity products include the payment of
benefits, as well as cash payments in connection with policy surrenders, withdrawals and loans. Phoenix Life also has liabilities
arising from the runoff of the remaining group accident and health reinsurance discontinued operations.
Historically, Phoenix Life has used cash flows from operations and investment activities to fund its liquidity requirements. Phoenix
Life's principal cash inflows from its life insurance and annuity activities come from premiums, annuity deposits and charges on
insurance policies and annuity contracts. Cash flows also came from dividends and distributions from subsidiaries. Phoenix Life's
principal cash inflows from its investment activities result from repayments of principal, proceeds from maturities, sales of
invested assets and investment income.
Additional sources of liquidity to meet unexpected cash outflows are available from Phoenix Life's portfolio 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. The cash Phoenix Life received as consideration for the transfer of shares of common stock of PXP and other subsidiaries
following the demutualization was a non-recurring source of liquidity. Pursuant to the plan of reorganization, this cash payment was
$659.8 million.
Phoenix Life's current sources of liquidity also include a master credit facility under which Phoenix Life has direct borrowing
rights, subject to our unconditional guarantee (see "Debt Financing"). Since the demutualization, Phoenix Life has no longer had
access to the cash flows generated by the closed block assets for any purpose other than funding the closed block.
A primary liquidity concern with respect to life insurance and annuity products is the risk of early policyholder and contractholder
withdrawal. Phoenix Life closely monitors its liquidity requirements in order to match cash inflows with expected cash outflows, and
employs 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, Phoenix Life
maintains 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
such as short-term and medium-term fixed maturities.
The following table summarizes Phoenix Life's annuity contract reserves and deposit fund liabilities in terms of contractholders'
ability to withdraw funds as of June 30, 2002 and December 31, 2001 (dollars in millions):
Withdrawal Characteristics of Annuity Contract
Reserves and Deposit Fund Liabilities (1)
2002 2001
----------------------- ----------------------
Amount % Amount %
----------- --------- ----------- -------
Not subject to discretionary withdrawal provisions ...... $ 169.0 3% $ 173.9 3%
Subject to discretionary withdrawal without adjustment(2) 1,629.3 29% 1,054.8 21%
Subject to discretionary withdrawal with market value
adjustment............................................ 481.8 9% 239.1 5%
Subject to discretionary withdrawal at contract value
less surrender charge................................. 500.7 9% 453.3 9%
Subject to discretionary withdrawal at market value ..... 2,777.9 50% 3,087.5 62%
----------- --------- ----------- -------
Total annuity contract reserves and deposit fund
liability............................................. $ 5,558.7 100% $ 5,008.6 100%
=========== ========= =========== =======
__________
(1) Contract reserves and deposit fund liability amounts are reported on a statutory basis, which more accurately reflects the
potential cash outflows. Amounts 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.
(2) The increase in amounts subject to discretionary withdrawal without adjustment has resulted from sales of a short maturity
guaranteed rate contract without surrender charges. Assets supporting this product consist of high quality commercial paper and
high quality short maturity fixed income instruments. Asset and liability cash flows are monitored on a frequent basis, but no
less than weekly.
Individual life insurance policies are less susceptible to withdrawals than are 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 Phoenix Life's 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 from Phoenix Life an amount generally up to the cash value of their policies at any time. As of June 30,
2002, Phoenix Life had approximately $10.2 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. Phoenix Life's amount of policy loans has not changed significantly since 1999. Policy loans at June 30, 2002 were $2.2
billion.
On June 21, 2002, Phoenix Life entered into a binding agreement, effective July 1, 2002, through a fully-owned subsidiary to acquire
the variable life and variable annuity business of Valley Forge Life Insurance Company through a coinsurance arrangement. The
business acquired comprises a total account value of approximately $624 million as of March 31, 2002. Phoenix Life paid a ceding
commission in the amount of $31 million. The transaction closed on July 23, 2002.
The primary liquidity concerns with respect to Phoenix Life's cash inflows from its investment activities are the risks of default by
debtors, interest rate and other market volatility and potential illiquidity of investments. Phoenix Life closely monitors and
manages these risks.
We believe that Phoenix Life's current and anticipated sources of liquidity are adequate to meet its present and anticipated needs.
Debt Financing
As of June 30, 2002, we had outstanding indebtedness of $604.3 million (excluding the inter-company indebtedness of PXP and Phoenix
Life described below under "PXP" and "Phoenix Life," respectively) consisting of our debt offering, master credit facility and
surplus notes.
Debt offering. On December 19, 2001, we completed a debt offering of $300 million, thirty-year senior unsecured bonds at a coupon of
7.45%. The bonds are traded on the New York Stock Exchange under the symbol PFX. The carrying value at June 30, 2002 was $304.3
million.
Master Credit Facility. In June 2001, we, PXP and Phoenix Life entered into a $375 million revolving credit facility which matures on
June 10, 2005 (the "Master Credit Facility") and terminated PXP's and Phoenix Life's prior credit facilities. The Bank of Montreal is
the administrative agent for this credit facility. Each company has direct borrowing rights under this credit facility. We
unconditionally guarantee loans to PXP and Phoenix Life. Base rate loans bear interest at the greater of the Bank of Montreal's prime
commercial rate or the effective federal funds rate plus 0.5%. Eurodollar rate loans bear interest at LIBOR plus an applicable
margin. At June 30, 2002, the outstanding balance under this facility was $125 million, subject to the Eurodollar rate structure. The
credit agreement contains customary financial and operating covenants that include, among other provisions, requirements that we
maintain a minimum stockholders' equity and a maximum debt to capitalization ratio; that Phoenix Life maintain a minimum risk based
capital ratio and a minimum financial strength rating; and that PXP maintain a maximum debt to capitalization ratio and a minimum
stockholder's equity.
PXP
As of June 30, 2002, PXP had $484 million of indebtedness outstanding, including:
Master Credit Facility. As of June 30, 2002, PXP had $125 million of debt outstanding under the Master Credit Facility, bearing
interest annually at applicable LIBOR plus thirty-six basis points.
Phoenix Senior Note. During the first quarter of 2002, PXP borrowed $20 million from Phoenix to fund significant non-operating cash
outflows. The senior note matures in 2006 and bears interest annually at 7.6%.
Phoenix 2002 Subordinated Notes. During the second quarter of 2002, PXP borrowed $20 million from Phoenix to fund significant
non-operating cash outflows. The two $10 million subordinated notes mature in 2006 and bear interest annually at 7.6%. During the
first quarter of 2002, PXP borrowed an additional $100 million from Phoenix to fund the purchase of Kayne Anderson Rudnick. This
subordinated note is due in 2007 and bears interest at the rate of 7.6%.
Phoenix Life Subordinated Note. In exchange for the debentures held by it, Phoenix Life agreed to accept from PXP, in lieu of cash, a
$69.0 million subordinated note due 2006, bearing interest annually at the rate of Three Month LIBOR plus two hundred basis points.
Phoenix 2001 Subordinated Note. In December 2001, PXP paid down $150 million in debt from the Master Credit Facility and borrowed
from Phoenix in the form of a $150 million subordinated note due 2007, bearing interest annually at the rate of Three Month LIBOR
plus seventy-two and a quarter basis points.
Phoenix Life
As of June 30, 2002, Phoenix Life had $175 million of indebtedness outstanding, but none under the Master Credit Facility.
Surplus Notes. In November 1996, Phoenix Life issued $175 million principal amount of 6.95% surplus notes due December
1, 2006. Each payment of interest or principal of the notes requires the prior approval of the New York Superintendent of Insurance
and may be made only out of surplus funds which the Superintendent determines to be available for such payment under the New York
Insurance Law. The notes contain neither financial covenants nor early redemption provisions and are to rank equally with any
subsequently issued surplus, capital or contribution notes or similar obligations of Phoenix Life. Section 1307 of the New York
Insurance Law provides that the notes are not part of the legal liabilities of Phoenix Life and are not a basis of any set-off
against Phoenix Life.
Reinsurance
We maintain life reinsurance programs designed to protect against large or unusual losses in our life insurance business. Over the
last several years in response to the reduced cost of reinsurance coverage, we increased the amount of individual mortality risk
coverage purchased from third party reinsurers. 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
uncollectable life reinsurance.
Risk Based Capital
Section 1322 of the New York Insurance Law requires that New York life insurers report their risk based capital ("RBC"). RBC is based
on a formula calculated by applying factors to various asset, premium and statutory reserve items. The formula takes into account the
risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk and business risk. Section 1322 gives
the New York Superintendent of Insurance explicit regulatory authority to require various actions by, or take various actions
against, insurers whose total adjusted capital does not exceed certain RBC levels. As of December 31, 2001, Phoenix Life's total
adjusted capital was in excess of each of these RBC levels. Each of the U.S. insurance subsidiaries of Phoenix Life is also subject
to these same RBC requirements. As of December 31, 2001, the total adjusted capital of each of these insurance subsidiaries was in
excess of each of their respective RBC levels.
Net Capital Requirements
The broker-dealer subsidiaries of Phoenix are each subject to the net capital requirements imposed on registered broker-dealers by
the Securities Exchange Act of 1934. Each company is also required to maintain a ratio of aggregate indebtedness to net capital that
does not exceed 15 to 1. The largest of these subsidiaries had net capital of approximately $8.0 million. This amount exceeded the
regulatory minimum of $0.8 million. The ratio of aggregate indebtedness to net capital for that subsidiary was 1.5 to 1. The ratios
of aggregate indebtedness to net capital for each of the other broker-dealer subsidiaries were also below the margin limit at June
30, 2002.
Consolidated Cash Flows
The following table presents summary consolidated cash flow data for the six months ended June 30, 2002 (in millions):
Cash from operations.......................... $ 47.6
Cash from financing activities................ 780.6
Cash for investing activities................. (981.0)
Cash from operations is due to cash operating income primarily from lower benefits paid to policyholders offset by deferred
acquisition costs paid.
Cash from financing activities is primarily attributable to policyholder deposit funds offset by the repurchase of our common stock.
Cash used for investing activities was from operations and financing activities and was primarily invested in debt securities.
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 risk, which we conduct
through our Corporate Portfolio Management Department, Actuarial Department, Corporate Finance 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 risks 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. 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 June 30, 2002 and December 31, 2001, our asset and liability portfolio durations were well
matched, especially for the largest segments of our balance sheet (i.e., whole life 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
ongoing portfolio transactions in response to new business, management's assessment of changing market conditions and available
investment opportunities.
To calculate duration, we project asset and liability cash flows and discount them to a net present value using a risk-free market
rate 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 tables below show the interest rate sensitivity of our fixed income financial instruments measured in terms of fair value as of
June 30, 2002 and December 31, 2001 (in millions). Given that our asset and liability portfolio durations were well matched for the
periods indicated, it is expected that market value gains or losses in assets would be largely offset by corresponding changes in
liabilities.
2002: Fair Value
-------------------------------------------------------
Book -100 Basis As of +100 Basis
Value Point Change 6/30/02 Point Change
-------------- ----------------- ------------- ----------------
Cash and short term investments... $ 867.1 $ 867.8 $ 867.1 $ 866.4
Floating rate notes............... 135.8 137.3 138.5 139.7
Long-term bonds................... 10,019.7 10,677.5 10,174.9 9,698.6
Commercial mortgages ............. 497.3 532.2 513.9 496.5
------------ ------------ ------------ ------------
Total....................... $ 11,519.9 $ 12,214.8 $ 11,694.4 $ 11,201.2
============ ============ ============ ============
2001: Fair Value
-------------------------------------------------------
Book -100 Basis As of +100 Basis
Value Point Change 12/31/01 Point Change
-------------- ----------------- ------------- ----------------
Cash and short term investments... $ 514.8 $ 515.2 $ 514.8 $ 514.4
Floating rate notes............... 150.0 152.4 150.0 147.6
Long-term bonds................... 9,490.7 10,145.8 9,657.2 9,193.2
Commercial mortgages ............. 535.8 594.5 571.6 549.8
------------ ------------ ------------ ------------
Total....................... $ 10,691.3 $ 11,407.9 $ 10,893.6 $ 10,405.0
============ ============ ============ ============
With respect to our residual exposure to fluctuations in interest rates, we use various derivative financial instruments to manage
such exposure to fluctuations in interest rates, including interest rate swap agreements, interest rate caps, interest rate floors,
interest rate swaptions and foreign currency swap agreements. To reduce counterparty credit risks and diversify counterparty
exposure, we enter into derivative contracts only with highly rated financial institutions.
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.
We enter into interest rate floor, cap and swaption contracts for our assets and our insurance liabilities as a hedge against
substantial changes in interest rates. We do not enter into such contracts for trading purposes. Interest rate floor and interest
rate cap agreements are contracts with a counterparty which require the payment of a premium and give us the right to receive over
the term of the contract the difference between the floor or cap interest rate and a market interest rate on specified future dates
based on an underlying notional principal. Swaption contracts are options to enter into an interest rate swap transaction on a
specified future date and at a specified interest rate. Upon the exercise of a swaption, we receive either a swap agreement at the
pre-specified terms or cash for the market value of the swap. We pay the premium for these instruments on a quarterly basis over the
term of the contract and recognize these payments in computing net investment income.
The tables below show the interest rate sensitivity of our interest rate derivatives measured in terms of fair value as of June 30,
2002 and December 31, 2001 (dollars in millions). These exposures will change as our insurance liabilities are created and discharged
and as a result of ongoing portfolio and risk management activities.
2002: Fair Value
Weighted -----------------------------------------------------
Notional Average Term -100 Basis As of +100 Basis
Amount (Years) Point Change 6/30/02 Point Change
--------------- -------------- ---------------- ----------- ------------------
Interest rate floors $ 85.0 1.0 $ 1.3 $ .3 $(.4)
Interest rate swaps 571.0 11.7 27.1 13.5 (.1)
Interest rate caps 50.0 6.0 (0.2) .2 .9
------------ ---------- -------- ---------
Total $ 706.0 $ 28.2 $ 14.0 $ .4
============ ========== ======== =========
2001: Fair Value
Weighted -----------------------------------------------------
Notional Average Term -100 Basis As of +100 Basis
Amount (Years) Point Change 12/31/01 Point Change
--------------- -------------- ---------------- ----------- ------------------
Interest rate floors $ 110.0 1.4 $ 1.7 $ .4 $ (.4)
Interest rate swaps 590.0 12.2 25.0 6.4 (12.1)
Interest rate caps 50.0 6.5 -- .4 1.3
------------ ---------- --------- ----------
Total $ 750.0 $ 26.7 $ 7.2 $ (11.2)
============ ========== ========= ==========
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 $316.9 million and
$290.9 million in equities on our balance sheet as of June 30, 2002 and December 31, 2001, respectively. A 10% decline in the
relevant equity price would decrease the value of these assets by approximately $32 million and $29 million as of June 30, 2002 and
December 31, 2001, respectively. Conversely, a 10% increase in the relevant equity price would increase the value of these assets by
approximately $32 million and $29 million as of June 30, 2002 and December 31, 2001, respectively.
Foreign Exchange Risks
Foreign 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 fixed maturity securities and equity securities and through our investments in foreign
subsidiaries and affiliates. The principal currencies that create foreign exchange rate risk for us are the British pound sterling,
due to our investment in Aberdeen Asset Management and Lombard, and the Argentine Peso, due to our investment in EMCO. In the second
quarter of 2002, we had a favorable foreign currency translation adjustment recorded in other comprehensive income of $10.4 million
related to the British pound sterling. On a year-to-date basis, this favorable adjustment was offset by a first quarter 2002 charge
of $11.1 million related to the devaluation of the Argentine peso.
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 adviser, investor or taxpayer. In addition, state regulatory bodies, the
SEC, the NASD and other regulatory bodies regularly make inquiries of us and, from time to time, conduct examinations or
investigations concerning our compliance with, among other things, insurance laws, securities laws, and laws governing the activities
of broker-dealers. These types of lawsuits and regulatory actions may be difficult to assess or quantify, may seek recovery of very
large and/or indeterminate amounts, including punitive and treble damages, and their existence and magnitude may remain unknown for
substantial periods of time. A substantial legal liability or significant regulatory action against us could have a material adverse
effect on our business, results of operations and financial condition.
While it is not feasible to predict or determine the ultimate outcomes of all pending investigations and legal proceedings or to
provide reasonable ranges of potential losses, it is the opinion of our management that such outcomes, after consideration of
available insurance and reinsurance and the provisions made in our consolidated financial statements, are not likely to have a
material adverse effect on our consolidated financial condition.
However, given the large and/or indeterminate amounts sought in certain of these matters and the inherent unpredictability of
litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on our
operating results or cash flows.
Discontinued Reinsurance Business
Our life companies' reinsurance business included, among other things, reinsurance by the life companies of other insurance
companies' group accident and health business. During 1999, our life companies placed their remaining group accident and health
reinsurance business into runoff, 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 remaining
reinsurance operations, we reviewed the runoff block and estimated the amount and timing of future net premiums, claims and expenses.
We established reserves and reinsurance recoverables for claims and related expenses that we expect to pay on our discontinued group
accident and health reinsurance business. These reserves and reinsurance recoverables 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 and
our other reinsurance to cover our losses and the likely legal and administrative cost of winding down the business. Total reserves
were $35 million and total reinsurance recoverables were $80 million at June 30, 2002. In addition, in 1999 we purchased finite
aggregate excess-of-loss reinsurance to further protect us from unfavorable results from this discontinued business. The initial
premium for this coverage was $130 million. The maximum coverage available is currently $190 million and increases to $230 million by
2004. The amount of our total financial provisions at June 30, 2002 was therefore $145 million, consisting of reserves, less
reinsurance recoverables, plus the amount currently available from our finite aggregate excess-of-loss reinsurance.
Our life companies are involved in disputes relating to reinsurance arrangements under which it 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. ("Unicover"). 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 Phoenix Life participated involving certain personal accident excess-of-loss business
reinsured in the London market.
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.
Policyholder Lawsuits Challenging the Plan of Reorganization
Three pending lawsuits seek to challenge Phoenix Life's reorganization and the adequacy of the information provided to policyholders
regarding the plan of reorganization. We believe that each of these lawsuits lacks merit. The first of these lawsuits, Andrew
Kertesz v. Phoenix Home Life Mut. Ins. Co., et al., was filed on April 16, 2001, in the Supreme Court of the State of New York for
New York County. The plaintiff seeks to maintain a class action on behalf of a putative class consisting of the eligible policyholders
of Phoenix Life as of December 18, 2000, the date the plan of reorganization was adopted. The Plaintiff also seeks compensatory
damages for losses allegedly sustained by the class as a result of the demutualization, punitive damages and other relief. The
defendants named in the lawsuit include Phoenix Life and Phoenix and their directors, as well as Morgan Stanley & Co. Incorporated,
financial advisor to Phoenix Life in connection with the plan of reorganization. A Motion to Dismiss was filed on October 19, 2001
and is pending.
The second lawsuit, Paulette M. Fantozzi v. Phoenix Home Life Mut. Ins. Co., et al., was filed on August 23, 2001, in the Supreme
Court of the State of New York for New York County. The allegations and relief requested in this class-action complaint are virtually
identical to the allegations and relief sought in the Kertesz lawsuit. The defendants named in the Fantozzi action are the same as
those named in Kertesz. Phoenix filed a Motion to Dismiss and the Fantozzi case was dismissed with prejudice on April 12, 2002.
On October 22, 2001, Andrew Kertesz filed a proceeding pursuant to Article 78 of the New York Civil Practice Law and Rules, Andrew
Kertesz v. Gregory V. Serio, et al., in the Supreme Court of New York for New York County. The Article 78 petition seeks to vacate
and annul the decision and order of the New York Superintendent, dated June 1, 2001, approving the plan of
reorganization. The petition names as respondents Phoenix Life and Phoenix and their directors and the New York Superintendent. We
believe that the allegations of the petition are meritless and intend to vigorously defend against all the claims asserted. A Motion
to Dismiss dated January 4, 2002 was filed and a decision is pending.
Another lawsuit that sought to challenge the plan of reorganization, Billie J. Burns v. Phoenix Home Life Mut. Ins. Co., et al., was
filed on April 4, 2001, in the Circuit Court of Cook County, Illinois County Department, Chancery Division. A motion to dismiss that
action was filed on May 4, 2001. On October 2, 2001, the court entered an order dismissing the action for want of prosecution.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the June 25, 2001 demutualization of Phoenix Mutual, during the three months ended June 30, 2002, Phoenix issued
4,503 shares of common stock to eligible policyholders, effective as of June 25, 2001. In reliance on the exemption under Section
3(a)(10) of the Securities Act of 1933, Phoenix issued such shares to policyholders in exchange for their membership interests
without registration under such Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held Wednesday, May 15, 2002, to consider and act upon the following matters:
(a) The stockholders elected all persons nominated for directors as set forth in the company's proxy statement filed March
27, 2002. Each nominee for director was elected as follows for terms to expire in 2005:
For Withheld
------------- --------------
Sal H. Alfiero.................. 60,394,392 625,674
Richard N. Cooper............... 60,137,554 882,512
John E. Haire................... 60,400,557 619,509
Thomas S. Johnson............... 60,407,564 612,502
Marilyn E. LaMarche............. 60,386,965 633,101
Philip R. McLoughlin(1)......... 60,394,804 625,262
(1) As a result of his written resignation as an officer of the Company, effective September 1, 2002, Mr. McLoughlin will also
automatically cease to be a director on that date.
The following directors, whose terms expire in 2003 or 2004, will continue to serve as directors:
Term Expiration Date
--------------------------
J. Carter Bacot...................... 2003
Arthur P. Byrne...................... 2004
Peter C. Browning.................... 2003
Sanford Cloud, Jr.................... 2003
Gordon J. Davis, Esq................. 2003
Robert W. Fiondella.................. 2004
Ann Maynard Gray..................... 2004
Jerry J. Jasinowski.................. 2003
John W. Johnstone, Jr................ 2003
Robert F. Vizza...................... 2004
Robert G. Wilson..................... 2004
Dona D. Young........................ 2004
(b) The stockholders ratified the appointment of PricewaterhouseCoopers LLP as independent accountants for the company for
the fiscal year ending December 31, 2002 as follows:
For Against Abstentions
--------------- ---------------- --------------
58,517,003 2,128,250 374,813
ITEM 5. OTHER INFORMATION
On July 30, 2002, Standard & Poor's Ratings Services placed its ratings of The Phoenix Companies, Inc. and its subsidiaries on
CreditWatch with negative implications. The revised rating puts Phoenix under increased surveillance for a possible downgrade in the
short-term.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
During the three months ended June 30, 2002, Phoenix did not file any reports on Form 8-K.
The following exhibits are attached to this Form 10-Q:
Exhibit Number
10.70 Supplemental Retirement Plan Agreement, dated as of December 18, 2001, between The Phoenix Companies,
Inc. and Carl T. Chadburn.
10.71 Amendment, dated August 5, 2002, to Employment-Related Agreements between The Phoenix Companies, Inc.
and Philip R. McLoughlin.
99.1 Chief executive officer certification of the Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 2002 of The Phoenix Companies, Inc.
99.2 Chief financial officer certification of the Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 2002 of The Phoenix Companies, Inc.
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.
By /s/ Coleman D. Ross
Coleman D. Ross, Executive Vice President and
Chief Financial Officer
August 13, 2002