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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 Identification No.)
incorporation or organization)
One American Row, Hartford, Connecticut 06102-5056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(860) 403-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common stock, $.01 par value New York Stock Exchange
7.45% Quarterly Interest Bonds, due 2032 New York Stock Exchange
7.25% Equity Units New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Stock Purchase Contracts
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 twelve months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past ninety days. YES X NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. [X]
As of February 28, 2003, the aggregate market value of voting common equity held by non-affiliates of the
registrant was $728,592,354 based on the last reported sale price of the registrant's common stock on the New
York Stock Exchange. On February 28, 2003, the registrant had 94,045,583 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed pursuant to Regulation 14A within 120 days
after the end of the registrant's fiscal year are incorporated by reference in Part III.
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TABLE OF CONTENTS
Item No. Description Page
Part I 1 Business...................................................................... 3
2 Properties.................................................................... 18
3 Legal Proceedings............................................................. 18
4 Submission of Matters to a Vote of Security Holders........................... 19
Part II 5 Market of Registrant's Common Equity and Related Stockholder Matters.......... 20
6 Selected Financial Data....................................................... 20
7 Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................... 24
7A Quantitative and Qualitative Disclosures About Market Risk.................... 69
8 Financial Statements and Supplementary Data................................... 72
Report of Independent Accountants............................................. F-1
Consolidated Balance Sheet as of December 31, 2002 and 2001................... F-2
Consolidated Statement of Income and Comprehensive Income For the Years Ended
December 31, 2002, 2001 and 2000............................................ F-3
Consolidated Statement of Cash Flows For the Years Ended December 31, 2002,
2001 and 2000............................................................... F-4
Consolidated Statement of Changes in Stockholders' Equity and Comprehensive
Income For the Years Ended December 31, 2002, 2001 and 2000................. F-5
Notes to Consolidated Financial Statements.................................... F-6
9 Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure.................................................................. 72
Part III 10 Directors and Executive Officers of the Registrant............................ 72
11 Executive Compensation........................................................ 73
12 Security Ownership of Certain Beneficial Owners and Management................ 73
13 Certain Relationships and Related Transactions................................ 73
14 Controls and Procedures....................................................... 74
Part IV 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............. 74
Signatures.................................................................... 76
Certifications................................................................ 77
Exhibit Index................................................................. E-1
2
Unless otherwise stated, at all times on and after June 25, 2001, the effective date of Phoenix Home Life
Mutual Insurance Company's demutualization,"Phoenix", "we," "our" or "us" means The Phoenix Companies, Inc.,
"PNX", and its direct and indirect subsidiaries. At all times prior to June 25, 2001, "we," "our" or "us" means
Phoenix Home Life Mutual Insurance Company (which has been known as Phoenix Life Insurance Company since June
25, 2001) and its direct and indirect subsidiaries. Furthermore, "Phoenix Life" refers to Phoenix Life
Insurance Company, "Life Companies" refers to Phoenix Life and its direct and indirect subsidiaries and "PXP"
refers to Phoenix Investment Partners, Ltd. and its direct and indirect subsidiaries.
PART I
Item 1. Business
Description of Business
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.
The affluent and high-net-worth market is a growing market with significant demand for customized products and
services. We define affluent as those households with net worths of $500,000 or greater, excluding their
primary residence. We define high-net-worth, a subset of the affluent category, as those households that have
net worth, excluding primary residence, of over $1,000,000. Our wealth management solutions are designed to
assist advisors and their clients in this target market to achieve three main goals:
• the accumulation of wealth, primarily during an individual's working years;
• the preservation of income and wealth during retirement and following death; and
• the efficient transfer of wealth in a variety of situations, including through estate
planning, business continuation planning and charitable giving.
We provide our wealth management solutions through various distribution channels, including:
• non-affiliated financial intermediaries such as national and regional broker-dealers, banks,
financial planning firms, advisor groups and other insurance companies; and
• our affiliated retail producers, most of whom are registered representatives of our wholly-owned
retail broker-dealer WS Griffith Advisors, Inc., or WS Griffith.
Segments
We provide our wealth management solutions through two operating segments — Life and Annuity and Investment
Management. Both segments serve the affluent and high-net-worth market, which presents opportunities to
leverage their capabilities and relationships. In addition to managing third-party assets, Investment
Management, through PXP, manages both the general account of our Life and Annuity business and many of the
separate account portfolios available through Life and Annuity's product line.
We report our remaining activities in two non-operating segments — Venture Capital and Corporate and Other.
Venture Capital includes investments primarily in the form of limited partnership interests in venture capital
funds,
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leveraged buyout funds and other private equity partnerships sponsored and managed by third parties. Corporate
and Other includes unallocated capital and expenses as well as certain businesses not of sufficient scale to
report independently. These segments are significant for financial reporting purposes, but do not contain
products or services relevant to our core wealth management operations.
SUMMARY OF OPERATING SEGMENTS
Market Presence (Dec. 31, 2002) Distribution Channels Products
Life and Annuity
Non-affiliated distribution: • Variable universal life
insurance
• $112.8 billion of net life • National and regional • Universal life insurance
insurance in force broker-dealers • Term life insurance
• $5.8 billion annuity assets • Financial planning firms • Variable annuities
under management • Advisor groups • Fixed annuities
• Insurance companies • Immediate annuities
• Banks • Private placement life
Principal operating subsidiary: insurance and annuities
• Phoenix Life Affiliated distribution: • Executive benefits
• WS Griffith Advisors, Inc. • Trust services
• Main Street Management Company
Investment Management
Non-affiliated distribution: Private client products:
• $54.0 billion assets under • National and regional • Managed accounts
management broker-dealers • Mutual funds
• Advisor groups
• Institutional investment
Principal operating subsidiary: management consultants Institutional products:
• PXP • Financial planning firms • Institutional accounts
• Closed-end funds
Affiliated distribution: • Structured products
• WS Griffith Advisors, Inc. • Phoenix Life general and
• Affiliated asset managers separate accounts
• Main Street Management Company
Operating Segments
Life and Annuity Segment
Our Life and Annuity segment offers a variety of life insurance and annuity products through affiliated and
non-affiliated distributors. We believe our competitive advantage in this segment consists of five main
components:
• our innovative products;
• our diversified asset management capability;
• our distribution relationships with institutions that have access to our target market;
• our ability to combine products and services that distributors and their clients find attractive;
and
• our underwriting expertise.
Life and Annuity Products
Life Products
Our life insurance products include variable universal life, universal life, term life and other insurance
products. Because of our target market, we are a leading writer of second-to-die life insurance. Second-to-die
products are
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typically used for estate planning purposes and insure two lives rather than one, with the policy proceeds paid
after the death of both insured individuals.
Variable Universal Life. Variable universal life products provide insurance coverage and give the policyholder
various investment choices, flexible premium payments and coverage amounts and limited guarantees. The
policyholder may direct premiums and cash value into a variety of separate investment accounts – accounts that
are maintained separately from the other assets of the Life Companies and are not part of the general account
of the Life Companies. In separate investment accounts, the policyholder bears the entire risk of the
investment results. We collect fees for the management of these various investment accounts and the net return
is credited directly to the policyholder's account. With some variable universal products, by maintaining a
certain premium level the policyholder receives guarantees that protect the policy's death benefit if, due to
adverse investment experience, the policyholder's account balance is zero. We retain the right within limits to
adjust the fees we assess for providing administrative services. We also collect fees to cover mortality costs;
these fees may be adjusted by us but may not exceed contractual limits.
Universal Life. Universal life products provide insurance coverage on the same basis as variable universal life
products, except that premiums, and the resulting accumulated balances, are allocated only to our general
account for investment. Universal life products may allow the policyholder to increase or decrease the amount of
death benefit coverage over the term of the policy, and also may allow the policyholder to adjust the frequency
and amount of premium payments. We credit premiums, net of expenses, to an account maintained for the
policyholder. We credit interest to the account at rates that we determine, subject to certain minimums.
Specific charges are made against the account for expenses. We also collect fees to cover mortality costs; these
fees may be adjusted by us but may not exceed contractual limits.
Term Life. Term life insurance provides a guaranteed benefit upon the death of the insured within a specified
time period, in return for the periodic payment of premiums. Specified coverage periods range from one to
twenty years, but not longer than the period over which premiums are paid. Premiums may be level for the
coverage period or may vary. Term insurance products are sometimes referred to as pure protection products, in
that there are normally no savings or investment elements. Term contracts expire without value at the end of
the coverage period. Our term insurance policies allow policyholders to convert to permanent coverage,
generally without evidence of insurability.
Annuity Products
We offer a variety of variable and fixed annuities to meet the accumulation and preservation needs of the
affluent and high-net-worth market. These products enable the contractholder to save for retirement and also
provide options that protect against outliving assets during retirement. Our major sources of revenues from
annuities are mortality and expense fees charged to the contractholder, generally determined as a percentage of
the market value of any underlying separate account balances, and the excess of investment income over credited
interest for funds invested in our general account.
Variable Annuities. Variable annuities are separate account products, which means that the contractholder bears
the investment risk as deposits are directed into a variety of separate accounts. The contractholder typically
can also direct funds to a general account option in which case we credit interest at rates we determine,
subject to certain minimums. Contractholders also may elect certain enhanced death benefit guarantees, for
which they are assessed a specific charge.
While we have written variable annuities since 1982, historically, our product offerings were relatively
limited, with only PXP funds as investment options and sales primarily attributable to our affiliated retail
distribution channel. In 1995, we began to enhance our variable annuity business by adding non-PXP fund
managers. In 1999, we began broadening our distribution sources. We also strengthened our management team by
adding experienced management personnel, hiring a dedicated wholesaling team of product specialists to market
our product lines to our distribution sources and expanding our investment options to be competitive in the
broker-dealer market.
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Fixed Annuities. Fixed annuities are general account products, which means that we bear the investment risk as
funds are invested in our general account, and a fixed interest rate subject to certain contractual minimums,
reset from time to time, is credited to the contractholder's account. Fixed annuities are useful as
accumulation tools and may also be attractive as income preservation tools for investors who wish to reduce
their exposure to equity market volatility. Our fixed annuity products are designed, not only for insurance
distribution, but also for broker-dealer and bank distribution. The broker-dealer product is invested in our
general account but adjusts the surrender value based on changes in interest rates if the contractholder
withdraws funds at any time other than at specified intervals, subject to guaranteed minimum rates.
Immediate Annuities. Immediate annuities are purchased by means of a single lump sum payment and begin paying
periodic income immediately. We offer fixed and variable options. We believe this product is especially
attractive to those affluent and high-net-worth retirees who are rolling over pension or retirement plan assets
and seek an income stream based entirely or partly on equity market performance.
Other Products and Services
Life and Annuity is focused on the development of other products and distribution relationships that respond to
the affluent and high-net-worth market's demand for wealth management solutions.
Private Placement Life and Annuity Products. Private placement products are individually customized life and
annuity offerings that include Corporate Owned Life Insurance, or COLI, single premium life, second-to-die life
and variable annuity products. These products have minimum deposits of over $500,000, targeting the wealthiest
segment of the high-net-worth market. As part of our strategy to broaden our presence in the high-net-worth
market, we acquired majority ownership of PFG Holdings, Inc., or PFG, a provider of private placement products,
in 1999. The average face amount of life insurance policies sold by PFG in 2002 was $15.2 million and the
average annuity deposit was $4.0 million.
Executive Benefits. Executive benefits are designed for corporations to fund special deferred compensation plans
and benefit programs for key employees. We offer a range of products to the executive benefits market. We view
these products as a source of growing fee-based business.
Trust Services. Through January 8, 2002 we provided trust services on a limited basis through our wholly-owned
Connecticut chartered trust company. On January 9, 2002, we converted this company to a national trust bank,
which provides comprehensive trust, custody and other fiduciary services nationwide. Having a nationwide trust
capability has strengthened our relationships with distributors by enabling us to provide them with directed
trustee, custody and other trust-related fiduciary services for their clients who employ trusts as wealth
preservation and transfer tools. We are considering how to develop our trust capabilities to complement the
services we provide to distributors.
Underwriting
Insurance underwriting is the process of examining, accepting or rejecting insurance risks, and classifying
those accepted in order to charge appropriate premiums or mortality charges. Underwriting also involves
determining the amount and type of reinsurance appropriate for a particular type of risk.
We believe we have particular expertise in evaluating the underwriting risks relevant to our target market. We
believe this expertise enables us to make appropriate underwriting decisions, including, in some instances, the
issuance of policies on more competitive terms than other insurers would offer. Phoenix Life has a long
tradition of underwriting innovation. Beginning in 1955, we were among the first insurance companies to offer
reduced rates to women. We believe we were the second company to offer reduced rates to non-smokers, beginning
in 1967. Our underwriting team includes doctors and other medical staff to ensure, among other things, that we
are focused on current developments in medical technology.
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Our underwriting standards for life insurance are intended to result in the issuance of policies that produce
mortality experience consistent with the assumptions used in product pricing. The overall profitability of our
life insurance business depends to a large extent on the degree to which our mortality experience compares to
our pricing assumptions. Our underwriting is based on our historical mortality experience, as well as on the
experience of the insurance industry and of the general population. We continually compare our underwriting
standards to those of the industry to assist in managing our mortality risk and to stay abreast of industry
trends.
Our life insurance underwriters evaluate policy applications on the basis of the information provided by the
applicant and others. We use a variety of methods to evaluate certain policy applications, such as those where
the size of the policy sought is particularly large, or where the applicant is an older individual, has a known
medical impairment or is engaged in a hazardous occupation or hobby. Consistent with industry practice, we
require medical examinations and other tests depending upon the age of the applicant and the size of the
proposed policy.
Our group life policies covering multiple lives are issued on a guaranteed issue basis, within specified limits
per life insured, whereby the amount of insurance issued per life on a guaranteed basis is related to the total
number of lives being covered and the particular need for which the product is being purchased. Guaranteed
issue underwriting applies to employees actively at work, and product pricing reflects the additional
guaranteed issue underwriting risk.
Reserves
We establish and report liabilities for future policy benefits on our consolidated balance sheet to reflect the
obligations under our insurance policies and contracts. Our liability for variable universal life insurance and
universal life insurance policies and contracts is equal to the cumulative account balances, plus additional
reserves we establish for policy riders. Cumulative account balances include deposits plus credited interest,
less expense and mortality charges and withdrawals. Reserves for future policy benefits for whole life policies
are calculated based on actuarial assumptions that include investment yields, mortality, lapses and expenses.
Reinsurance
While we have underwriting expertise and have experienced favorable mortality trends, we believe it is prudent
to spread the risk associated with our life insurance products through reinsurance. As is customary in the life
insurance industry, our reinsurance program is designed to protect us against adverse mortality experience
generally and to reduce the potential loss we might face from a death claim on any one life.
We cede risk to other insurers under various agreements that cover individual life insurance policies. The
amount of risk ceded depends on our evaluation of the specific risk and applicable retention limits. Under the
terms of our reinsurance agreements, the reinsurer agrees to reimburse us for the ceded amount in the event a
claim is incurred. However, we remain liable to our policyholders for ceded insurance if any reinsurer fails to
meet its obligations. Since we bear the risk of nonpayment by one or more of our reinsurers, we cede business
to well-capitalized, highly rated insurers. While our current retention limit on any one life is $10 million
($12 million on second-to-die cases), we may cede amounts below those limits on a case-by-case basis depending
on the characteristics of a particular risk. Typically our reinsurance contracts allow us to reassume ceded
risks after a specified period. This right is valuable where our mortality experience is sufficiently favorable
to make it financially advantageous for us to reassume the risk rather than continue paying reinsurance
premiums.
We reinsure 80% of the mortality risk on a block of policies acquired from Confederation Life Insurance
Company, or Confederation Life, in 1997. We entered into two separate reinsurance agreements in 1998 and 1999
to reinsure a substantial portion of our otherwise retained individual life insurance business. In addition, we
reinsure up to 90% of the mortality risk on some new issues. As of December 31, 2002, we had ceded $74.3
billion in face amount of reinsurance, representing 65.9% of our total face amount of $112.8 billion of life
insurance in force.
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The following table lists our five principal life reinsurers, together with the reinsurance recoverables on a
statutory basis as of December 31, 2002, the face amount of life insurance ceded as of December 31, 2002, and
the reinsurers' A.M. Best ratings.
Reinsurance Face Amount of
Recoverable Life Insurance A.m. Best
Reinsurer Balances Ceded Rating (1)
--------- ----------------- ----------------- -----------------
AUSA Life Insurance Co.(2) ............................ $ 5.8 million $ 9.5 billion A+
Swiss Re Life & Health America, Inc................... $ 9.4 million $ 13.5 billion A++
Allianz Life Insurance Co. of North America........... $ 3.7 million $ 10.4 billion A+
Employers Reinsurance Corp............................ $ 4.2 million $ 8.9 billion A+
XL Capital............................................ $ 4.6 million $ 7.3 billion NR-5(3)
- -------
(1) A.M. Best ratings are as of December 31, 2002.
(2) AUSA Life Insurance Co. is a subsidiary of Aegon N.V.
(3) The A.M. Best rating for the XL Capital group is A+. The NR-5 rating is
assigned to insurers that either request not to be formally rated or
were rated in the past and no longer provide financial information to
A.M. Best.
Life and Annuity Financial Information
See Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K for
Life and Annuity segment financial information.
Investment Management Segment
We conduct activities in Investment Management with a focus on two customer groups — private client and
institutional. Through our private client group, we provide investment management services principally on a
discretionary basis, with products consisting of open-end mutual funds and managed accounts. Managed accounts
include intermediary programs sponsored and distributed by non-affiliated broker-dealers, and direct managed
accounts which are sold and administered by us. These two types of managed accounts generally require minimum
investments of $100,000 and $1 million, respectively. Our private client business also provides transfer
agency, accounting and administrative services to most of our open-end mutual funds.
Through our institutional group, we provide discretionary and non-discretionary investment management services
primarily to corporations, multi-employer retirement funds and foundations, as well as to endowment, insurance
and other special purpose funds. In addition, we offer our institutional clients alternative financial
products, including structured finance products and closed-end funds. Structured finance products include
collateralized debt obligations, or CDOs, and collateralized bond obligations, or CBOs, backed by portfolios of
public high yield bonds, emerging markets bonds, commercial mortgage-backed and asset-backed securities or bank
loans.
Affiliated Asset Managers
We provide investment management services through our affiliated asset managers. We provide our affiliated
asset managers with a consolidated platform of distribution and administrative support. Each manager has
autonomy with its investment process while we monitor performance and ensure that each manager adheres to its
stated investment style.
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Our affiliated managers, and their respective styles, products and assets under management, are as follows:
- ---------------------------------------------------------------------------------------------------------------
Assets Under
Management at
Affiliated Advisor/ December 31, 2002
PXP Ownership/location Investment Styles Products (in billions)
- ---------------------------------------------------------------------------------------------------------------
GoodwinSM Capital Advisors(1), or Fixed Income – Mutual Funds
Goodwin / 100% / Sector Rotation Institutional Accounts
Hartford, CT Structured Finance Products
Phoenix Life General Account $18.6
- ---------------------------------------------------------------------------------------------------------------
Seneca Capital Management LLC, Equities – Mutual Funds
or Seneca / 68.4% / Growth with Controlled Risk Sponsored Managed Accounts
San Francisco, CA Earnings-Driven Growth Direct Managed Accounts
Tax Sensitive Growth Institutional Accounts
Fixed Income– Structured Finance Products
Value Driven $12.0
- ---------------------------------------------------------------------------------------------------------------
Kayne Anderson Rudnick Equities – Sponsored Managed Accounts
Investment Management, LLC, or Quality at Reasonable Price Direct Managed Accounts
Kayne Anderson Rudnick / 60% / Institutional Accounts
Los Angeles, CA Mutual Funds $8.6
- ---------------------------------------------------------------------------------------------------------------
Duff & Phelps Investment Equities – Mutual Funds
Management Co., or DPIM / Core Sponsored Managed Accounts
100% / Chicago, IL Fixed Income– Institutional Accounts
Core Closed-end Funds $6.2
- ---------------------------------------------------------------------------------------------------------------
Roger Engemann and Associates, Equities – Mutual Funds
Inc., or Engemann / Classic Growth Sponsored Managed Accounts
100% / Pasadena, CA Direct Managed Accounts $4.0
- ---------------------------------------------------------------------------------------------------------------
Zweig Fund Group, or Zweig / Equities/Fixed Income – Mutual Funds
100% / New York, NY Tactical Asset Allocation Closed-end Funds
Market Neutral $1.7
- ---------------------------------------------------------------------------------------------------------------
OakhurstSM Asset Managers(1), or Equities – Mutual Funds
Oakhurst / 100% / Systematic Value
Scotts Valley, CA $1.5
- ---------------------------------------------------------------------------------------------------------------
Walnut Asset Management LLC, Equities – Direct Managed Accounts
or Walnut / 76% / Relative Value Institutional Accounts
Philadelphia, PA Fixed Income–
Quality Fixed Income $0.7
- ---------------------------------------------------------------------------------------------------------------
HollisterSM Investment Equities – Mutual Funds
Management(1), Hollister / 100% / Traditional Value Managed Accounts
Sarasota, FL Institutional Accounts $0.5
- ---------------------------------------------------------------------------------------------------------------
Capital West Asset Management, Equities – Direct Managed Accounts
LLC, or Capital West / 65% / Quantitative Value Institutional Accounts
Denver, CO Large Cap Sponsored Managed Accounts
Core Small Cap $0.2
- ---------------------------------------------------------------------------------------------------------------
Total Assets Under Management $54.0
- ----------------------------------------------------------------------------------------------------------------
(1) Goodwin, Oakhurst and Hollister are divisions of Phoenix Investment Counsel, Inc., an indirect wholly-owned
subsidiary of PXP.
Investment Management segment also includes our minority investment by Phoenix Life in Aberdeen Asset
Management PLC, or Aberdeen, a Scottish investment management company with institutional and retail clients in
the United Kingdom, as well as in continental Europe, Asia, Australia and the U.S. We acquired 21.8% of the
common stock of Aberdeen in a series of transactions from 1996 through May 2001. Aberdeen has offices in seven
countries, including Scotland, England, Singapore and the U.S.
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Investment Management Products
Private Client Products
Managed Accounts. We provide investment management services through participation in 53 intermediary
managed account programs sponsored by various broker-dealers such as Merrill Lynch, Morgan Stanley and Salomon
Smith Barney. These programs enable the sponsor's client to select one or more of PXP's affiliated asset
managers as the provider of discretionary portfolio management services, in return for an asset-based fee paid
by the client to the broker-dealer, which then pays a management fee to us. Seven of these programs include
more than one of our affiliated asset managers. As of December 31, 2002 we managed 64,494 accounts relating to
such intermediary managed account programs, representing approximately $9.4 billion of assets under management.
In addition, we offer direct managed accounts which are individual client accounts sold and administered by us.
We managed 3,701 direct managed accounts representing $3.7 billion of assets under management.
Mutual Funds. Our affiliated asset managers are investment advisers or sub-advisers to 57 open-end mutual
funds, which had aggregate assets under management of approximately $8.3 billion as of December 31, 2002. These
mutual funds are available primarily to retail investors. Thirteen of these funds are included as investment
choices to purchasers of our variable life and variable annuity products.
Institutional Products
Institutional Accounts. We have over 750 institutional clients, consisting primarily of medium-sized pension
and profit sharing plans of corporations, government entities and unions, as well as endowments and foundations,
public and multi-employer retirement funds and other special purpose funds. Our assets under management totaled
$12.3 billion as of December 31, 2002.
Closed-End Funds. We manage the assets of five closed-end funds, each of which is traded on the New York Stock
Exchange: DTF Tax-Free Income Inc.; Duff & Phelps Utility and Corporate Bond Trust Inc.; DNP Select Income
Inc.; The Zweig Fund, Inc. and The Zweig Total Return Fund, Inc. Our assets under management totaled $4.0
billion as of December 31, 2002.
Structured Finance Products. We manage nine structured finance products, and also act as a sub-adviser to a
structured finance product sponsored by a third party. These products are collateralized debt and bond obligations
backed by portfolios of high yield bonds, emerging markets bonds and/or asset-backed securities. Our assets under
management totaled $3.5 billion as of December 31, 2002.
Life Companies' General Accounts and Related Assets. PXP manages most of the assets of the Life Companies'
general accounts, as well as assets of Phoenix-related entities. As of year-end 2002, PXP managed $14.5 billion,
of the Life Companies' assets.
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PXP Assets under Management
The following table presents information regarding the assets under management by PXP for the years 2002, 2001
and 2000 (in millions):
2002 2001 2000
-------------- -------------- --------------
TOTAL:
Deposits....................................................... $ 10,134.4 $ 9,528.7 $ 11,510.4
Redemptions and withdrawals.................................... (9,950.3) (9,069.7) (12,467.4)
Acquisitions(1)(4)(5) and dispositions(2) ........................ 7,755.5 854.4 (3,336.0)
Performance.................................................... (7,863.2) (7,254.5) (3,856.9)
Other(3)(6)..................................................... 1,789.0 1,438.4 141.3
-------------- -------------- --------------
Change in assets under management.............................. 1,865.4 (4,502.7) (8,008.6)
Beginning balance.............................................. 52,090.1 56,592.8 64,601.4
-------------- -------------- --------------
Ending balance................................................. $ 53,955.5 $ 52,090.1 $ 56,592.8
============== ============== ==============
INSTITUTIONAL PRODUCTS:
Deposits....................................................... $ 4,380.4 $ 4,989.0 $ 5,572.5
Redemptions and withdrawals.................................... (4,480.0) (3,766.9) (7,355.6)
Acquisitions(1)(4) and dispositions (2).......................... 1,507.7 105.9 (3,206.0)
Performance.................................................... (2,773.1) (1,152.2) 935.4
Other(3)(6) ..................................................... 1,789.0 1,438.4 141.3
-------------- -------------- --------------
Change in assets under management.............................. 424.0 1,614.2 (3,912.4)
Beginning balance.............................................. 32,030.2 30,416.0 34,328.4
-------------- -------------- --------------
Ending balance................................................. $ 32,454.2 $ 32,030.2 $ 30,416.0
============== ============== ==============
PRIVATE CLIENT PRODUCTS:
Mutual Funds:
Deposits....................................................... $ 1,332.8 $ 1,817.8 $ 2,068.5
Redemptions and withdrawals.................................... (2,754.0) (2,756.4) (3,492.0)
Acquisitions(5)................................................. 333.5 -- --
Performance.................................................... (1,811.8) (2,556.5) (1,933.2)
-------------- -------------- --------------
Change in assets under management.............................. (2,899.5) (3,495.1) (3,356.7)
Beginning balance.............................................. 11,221.6 14,716.7 18,073.4
-------------- -------------- --------------
Ending balance................................................. $ 8,322.1 $ 11,221.6 $ 14,716.7
============== ============== ==============
Intermediary Programs:
Deposits....................................................... $ 4,117.0 $ 2,607.7 $ 3,668.9
Redemptions and withdrawals.................................... (2,317.9) (2,316.0) (1,408.0)
Acquisitions(4)(5) .............................................. 4,723.5 10.7 --
Performance.................................................... (2,903.1) (2,886.9) (2,546.5)
-------------- -------------- --------------
Change in assets under management.............................. 3,619.5 (2,584.5) (285.6)
Beginning balance.............................................. 5,819.6 8,404.1 8,689.7
-------------- -------------- --------------
Ending balance................................................. $ 9,439.1 $ 5,819.6 $ 8,404.1
============== ============== ==============
Direct Managed Accounts:
Deposits....................................................... $ 304.2 $ 114.2 $ 200.5
Redemptions and withdrawals.................................... (398.4) (230.4) (211.8)
Acquisitions(1)(4)(5) ............................................ 1,190.8 737.8 (130.0)
Performance.................................................... (375.2) (658.9) (312.6)
-------------- -------------- --------------
Change in assets under management.............................. 721.4 (37.3) (453.9)
Beginning balance.............................................. 3,018.7 3,056.0 3,509.9
-------------- -------------- --------------
Ending balance................................................. $ 3,740.1 $ 3,018.7 $ 3,056.0
============== ============== ==============
(1) Includes assets of $0.7 billion related to the Walnut acquisition in 2001.
(2) Includes asset outflows of $3.3 billion in 2000 related to the sale of Cleveland operations.
(3) Includes assets of $0.9 billion related to the Phoenix IPO in 2001.
(4) Includes assets of $0.1 billion from Capital West in 2001.
(5) Includes assets of $7.8 billion from Kayne Anderson Rudnick in 2002.
(6) Includes net change in the Life Companies' general account assets.
11
Investment Management Financial Information
See Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K for
Investment Management segment financial information.
Competition
We face significant competition in our life insurance, annuity and investment management businesses from a wide
variety of financial institutions, including insurance companies, other investment management companies, banks,
broker-dealers, and financial planning firms. Our competitors include larger and, in some cases, more highly
rated insurance companies and other financial services companies. Many competitors offer similar products, use
similar distribution sources, offer less expensive products, have deeper penetration in key distribution
channels and have greater resources than us.
Competition in our life, annuity and investment management businesses is based on several factors including:
ratings, investment performance, the ability to penetrate distribution channels, service to advisors and their
clients, product development that meets the changing needs of advisors and their clients, fees and expense
management.
As we continue to focus on the development of our non-affiliated distribution system, we increasingly must
compete with other providers of life insurance, annuity and private client products to attract and maintain
relationships with productive distributors that have the ability to sell our products. In particular, our
ability to attract distributors for our products could be adversely affected if for any reason our products
became less competitive or concerns arose about our asset quality or ratings.
Distribution
The Team Phoenix Approach
Our strategy is to deepen our market penetration by selling a greater array of products through existing
distribution sources and to broaden our distribution system by developing new relationships. We seek to execute
this strategy through collaborative account development, whereby our life insurance, annuity and investment
management wholesalers introduce one another to distributors with whom they have relationships, and encourage
those distributors to sell additional categories of our products. This Team Phoenix approach, which we
initiated in 1999, often involves joint marketing presentations and specialized services to advisors. In
mid-year 2002, we strengthened our commitment to this approach by aligning all three of our wholesaling teams
under the leadership of one individual. We believe having many of the same investment choices available in each
of our product lines contributes to the success of this approach since, in our experience, a distributor
already comfortable with our investment options in one product line is generally more receptive to the idea of
selling additional product lines.
In 2001, we focused on account acquisition, opening relationships at new firms or adding additional product
lines within relationships. During 2002, we focused on increasing the number of producers selling Phoenix
products within existing relationships. In life insurance, nine of our top 10 firms had increases in life
insurance sold, as measured by new annualized life insurance premiums. Annuities showed increases at the four
largest firms. In addition, over 6,500 new producers wrote annuity business with us over the course of 2002 and
over 9,700 new producers placed investment management business with us in 2002.
We target a broad range of distribution relationships with advisors and distribution entities that we consider
to have exceptional access to our target market. We seek to build relationships with distributors who are, or
who have access to, advisors to the affluent and high-net-worth market.
12
Non-affiliated Distribution
We began to use non-affiliated distribution in 1954, primarily by selling life insurance products through
agents of other insurance companies. For many years, non-affiliated distribution has represented a significant
portion of our sales and in recent years we increased our emphasis on this distribution source.
Since late 1999, we have significantly strengthened our wholesaling teams, in order to enhance our
relationships with distributors in each of our product areas. As of December 31, 2002, we employed 76 life
insurance wholesalers, 39 variable annuity wholesalers and 50 investment management wholesalers, compared to
42, one and 24, respectively, as of December 31, 1999.
During the years 2002, 2001 and 2000, 88%, 81% and 70%, respectively, of total life insurance sales, as
measured by new annualized and single premiums, were from non-affiliated distribution sources. Variable annuity
sales through non-affiliated distribution accounted for 87%, 80% and 42% of gross annuity deposits during 2002,
2001 and 2000, respectively. Investment Management sales through non-affiliated distribution accounted for 99%
of sales in all three previous years.
State Farm. In March 2001, we entered into an agreement with a subsidiary of State Farm Mutual Automobile
Insurance Company, or State Farm, to provide various products and services to State Farm and its subsidiaries
and policyholders, including estate, retirement, executive benefits and charitable gift planning. The agreement
also offers us the opportunity to provide to State Farm's affluent customers, through qualified State Farm
agents, additional life and annuity products and services not previously available from those agents. By the
end of 2002, we had completed a national rollout of Phoenix products to State Farm agents and had trained and
certified approximately 7,600, or 76%, of State Farm's 10,000 securities licensed agents. Our relationship with
State Farm gives us potential access to approximately 30% of the high-net-worth households in the U.S. For
2002, State Farm ranked third among our distributors in the sale of life insurance and fifth in the sale of
annuity products.
National and Regional Broker-Dealers. National and regional broker-dealers are those brokerage firms that engage
individual advisors as employees rather than as independent contractors. To meet the evolving wealth management
needs of their customers, national and regional broker-dealers offer products from third-party providers such
as Phoenix. Simultaneously, many of these firms are seeking to reduce the number of relationships they have
with product providers in favor of those that offer a range of products together with services designed to
support advisors' sales efforts. We believe our ability to offer wealth management solutions based on a variety
of life insurance, annuity and investment management products positions us to benefit from these trends. For
example, in 2002 we ranked second in Merrill Lynch Life Agency's non-proprietary life insurance sales. Despite
virtually no sales in 2000, Merrill Lynch's sales of our annuity products grew significantly for the second
year in a row. We had the leading non-proprietary annuity sold in Merrill Lynch's system in 2002. In addition,
we were one of the largest managers of client assets in the "Consults" intermediary managed account program of
Merrill Lynch in 2002.
Financial Planning Firms. Financial planning firms are brokerage firms that engage individual advisors as
independent contractors rather than as employees. Financial planning firms have begun to show significant
interest in expanding their offerings to include wealth preservation and transfer products. To capitalize on
this trend, we focus on the development of relationships directly with the financial planning firm rather than
with the individual financial planners. This entity-focused approach permits us to maximize the number of
individual registered representatives who potentially may sell our products. As an example of our success among
financial planning firms, annualized life premiums through Financial Services Corporation, or FSC, a subsidiary
of Sun America, in 2002 were $2.2 million, up 37% from 2001. This level of production ranked us third among
insurance carriers for the FSC Access Group, an internal FSC producer group.
Advisor Groups. The recent industry trend toward affiliations among small independent financial advisors has led
to advisor groups becoming a distinct class of distributors. We believe we have a particularly strong position
as a provider of life insurance products through Partners Marketing Group, Inc., or PartnersFinancial, which,
since
13
1999, has been an important component of the National Financial Partners, or NFP, organization. Overall life
sales with NFP grew 24% in 2002.
Insurance Companies. Insurance companies have been moving their agents into an advisor/planner role, resulting
in a need to provide their agents, particularly their top producers, with a wider selection of life insurance
products to sell. Insurance companies responded to this need, in part, by negotiating arrangements with third
party providers, including other insurance companies. We are taking advantage of this trend by developing
distribution relationships with financial services providers such as AXA Financial Inc., or AXA, and its
brokerage outlet for internal producers, AXA Network. Life sales through AXA Network grew 19% in 2002. In
addition, we continue to maintain relationships with individual agents of other companies and independent
agents.
Emerging Distribution Sources. PFG offers private placement life and annuity products through a variety of
distribution sources with access to the high-net-worth market including family offices, financial institutions,
accountants and attorneys. We also offer our life and annuity products through non-traditional sources such as
private banks and private banking groups within commercial banks.
Affiliated Distribution
Our affiliated retail distribution channel consists primarily of Phoenix Life career producers. Substantially
all of our career producers are licensed securities representatives of our wholly-owned broker-dealer, WS
Griffith. Our career producers principally sell our Life Companies' products, but may sell the products of
other companies as well. In 2002, our Life Companies' products represented 65% of WS Griffith's variable
annuity and life sales, 67% of its total variable annuity deposits and 61% of its total variable universal life
premiums. WS Griffith has over 940 affiliated retail producers.
Our affiliated distribution capability also includes Main Street Management Company, a broker-dealer with
approximately 250 registered representatives and a strong focus on variable products and mutual funds. Main
Street Management is one of our majority-owned subsidiaries.
Institutional Products Distribution
We also have an Institutional marketing group, which markets our institutional product offering to consultants
and other institutional clients. This shared platform, which was first set up in 2000, is complemented by
experienced institutional salespersons at several of our affiliated asset managers.
We direct our institutional marketing efforts primarily toward investment management consultants who are
retained by institutional investors to assist in competitive reviews of potential investment managers. These
consultants recommend investment managers to their institutional clients based on their review of investment
managers' performance histories and investment styles. We maintain relationships with these consultants and
provide information and materials to them in order to facilitate their review of our funds.
Support and Services
We believe we have a competitive advantage due to our practice of providing distributors with a variety of
services, including:
• market education programs designed to help advisors better understand the financial product
ownership patterns of the affluent and high-net-worth market and to assist advisors in marketing to
specific customer segments such as senior corporate executives, business owners and high-net-worth
households;
• marketing programs, including special events, that provide distributors access to the affluent and
high-net-worth market;
14
• customized advice on estate planning, charitable giving planning, executive benefits and retirement
planning, provided by a staff of professionals with specialized expertise in the advanced
application of life insurance and variable annuity products. This staff includes eight attorneys
with an average of approximately twenty years' experience, who combine their advice with tailored
presentations, educational materials and specimen legal documents;
• separate nationwide teams of life, annuity and investment management product specialists who
provide education and sales support to distributors and who can act as part of the advisory team
for case design and technical support;
• investment management and investment allocation strategies, including our Complementary Investment
Analysis tool, which identifies investment options offered both by us and third parties that are
suitable for an individual's allocation needs;
• an underwriting team with significant experience in evaluating the financial and medical
underwriting risks associated with affluent and high-net-worth individuals, who generally purchase
high face-value policies requiring more extensive underwriting analysis; and
• internet-accessible information that makes it easier for our distributors to do business with us,
including interactive product illustrations, educational and sales tools, and online access to
forms, marketing materials and policyholder account information.
Non-operating Segments
Venture Capital Segment
We have invested in the venture capital markets for over 25 years through Phoenix Life's investment portfolio.
Venture capital represented 1% and 2% of total investments and cash and cash equivalents as of December 31,
2002 and 2001, respectively. The carrying value of partnership investments in the venture capital segment was
$227.8 million as of December 31, 2002.
Our venture capital investments 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 currently have 110 partnership investments
through 55 sponsors. We believe our long-standing relationships and history of consistent participation with
many well-established venture capital sponsors gives us preferred access to attractive venture capital
opportunities. These assets are investments of our life insurance subsidiary.
Historically, we viewed our venture capital investments as an opportunity to enhance returns on our
participating life products. In the past, we allocated between 1.0% and 2.0% of annual investable cash flow to
venture capital investments.
In February 2003, we reached an agreement to sell a 50% interest in certain of our venture capital partnerships
to an outside party and transfer the remaining 50% interest to our closed block. The carrying value of the
partnerships being sold and transferred totaled $53.5 million after realizing a loss of $5.1 million in 2002 to
reflect the proceeds being received. The unfunded commitments of the partnerships being sold and transferred
totaled $28.1 million; the outside party and the closed block will each fund half of these commitments. The
partnerships will constitute less than 0.5% of the assets of the closed block after they are transferred.
15
Venture Capital Financial Information
See Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K for
Venture Capital segment financial information.
Corporate and Other Segment
The Corporate and Other segment includes unallocated capital and expenses as well as certain businesses not of
sufficient scale to report independently. Corporate and Other also includes our international operations other
than our investments in Aberdeen and Lombard International Assurance, S.A., or Lombard. As of December 31,
2002, we had a total of $50.6 million invested in businesses in six countries through this segment.
Corporate and Other also includes an investment in Hilb, Rogal & Hamilton Company, or HRH, which we obtained
upon our sale of American Phoenix Corporation to HRH in 1999. In November 2002, we sold a portion of our HRH
common stock in a public offering. Concurrently, in a separate public offering, we sold prepaid forward
contracts issued by us that will settle in November 2005 in shares of HRH common stock. To secure our
obligation to deliver these shares, we pledged the maximum number of shares deliverable under the forward
contracts. We continued to own 266,770 shares of HRH common stock which were not so pledged. As of December 31,
2002, we owned 13.3% of the outstanding HRH common stock, 11.9% on a diluted basis.
Corporate and Other Financial Information
See Management's Discussion and Analysis of Financial Condition and Results of Operations on this Form 10-K for
Corporate and Other segment financial information.
General Development of Business
PNX was incorporated in Delaware in March 2000. Our principal executive offices are located at One American
Row, Hartford, Connecticut 06102-5056. Our telephone number is (860) 403-5000. Our website is located at
PhoenixWealthManagement.com. (This URL is intended to be an inactive textual reference only. It is not intended
to be an active hyperlink to our website. The information on our website is not, and is not intended to be,
part of this Form 10-K and is not incorporated into this report by reference.)
Phoenix Mutual Insurance Company was organized in Connecticut in 1851. In 1992, in connection with its merger
with Home Life Insurance Company, or Home Life, the company redomiciled to New York and changed its name to
Phoenix Home Life Mutual Insurance Company, or Phoenix Home Life.
On June 25, 2001, the effective date of its demutualization, Phoenix Home Life converted from a mutual life
insurance company to a stock life insurance company, became a wholly-owned subsidiary of PNX and changed its
name to Phoenix Life Insurance Company. At the same time, PXP became an indirect wholly-owned subsidiary of
PNX. All policyholder membership interests in the mutual company were extinguished on the effective date.
In addition, on June 25, 2001, PNX completed its initial public offering, or 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 were $807.9 million,
which was contributed to Phoenix Life, as required under the plan of reorganization. On July 24, 2001, Morgan
Stanley & Co. Incorporated exercised its right to purchase 1,395,900 additional shares of the common stock of
PNX at the IPO price of $17.50 per share less underwriter's discount. Net proceeds of $23.2 million were
contributed to Phoenix Life. Subsequent share repurchases have reduced the total number of our shares
outstanding to 94.0 million at December 31, 2002.
16
The following chart illustrates our current corporate structure.
THE PHOENIX COMPANIES, INC.
---------------------------------------------------------------------------------------------------
| | | |
100% 100% 100% 100%
--------------- ------------------------- --------------------- ---------------------
PHOENIX LIFE PHOENIX INVESTMENT PHOENIX PHOENIX NATIONAL
INSURANCE MANAGEMENT COMPANY DISTRIBUTION TRUST HOLDING
COMPANY INC. HOLDING COMPANY(1) COMPANY
--------------- ------------------------- --------------------- ---------------------
| |
100% 100%
-------------------- ------------------------------------
PM HOLDINGS, INC. PHOENIX INVESTMENT PARTNERS, LTD
-------------------- ------------------------------------
| |
Various %s Various %s
----------------------------------------- ------------------------------------------
OTHER DOMESTIC AND FOREIGN SUBSIDIARIES OTHER DOMESTIC AND FOREIGN SUBSIDIARIES
----------------------------------------- ------------------------------------------
- --------
(1) Direct and indirect subsidiaries of Phoenix Distribution Holding Company include PHL Associates, Inc.,
Main Street Management and WS Griffith.
At December 31, 2002, we employed approximately 2,125 people. We believe our relations with our employees are
good.
17
Item 2. Properties
Our executive headquarters consist of our main office building at One American Row and two other buildings in
Hartford, Connecticut. We own these buildings and occupy most of the space contained in them. In addition to
these properties, we own offices in Enfield, Connecticut and East Greenbush, New York for use in the operation
of our business. We also lease office space within and out of the United States of America as needed for our
operations, including use by our sales force. In conjunction with our strategic plan, we have implemented a
comprehensive facilities plan. The plan includes the sale of our Enfield, Conn., offices. Business functions
from Enfield will be relocated to our existing Hartford offices and a yet-to-be identified smaller facility in
Hartford or north of Hartford.
Item 3. Legal Proceedings
General
We are regularly involved in litigation, both as a defendant and as a plaintiff. The litigation naming us as a
defendant ordinarily involves our activities as an insurer, employer, investment adviser, investor or taxpayer.
Several current proceedings are discussed below. In addition, state regulatory bodies, the Securities and
Exchange Commission, or SEC, the National Association of Securities Dealers, Inc. and other regulatory bodies
regularly make inquiries of us and, from time to time, conduct examinations or investigations concerning our
compliance with, among other things, insurance laws, securities laws, and laws governing the activities of
broker-dealers. For example, the New York State Insurance Department has recently begun its routine
quinquennial financial and market conduct examination of Phoenix Life Insurance Company and one of its New York
domiciled subsidiaries and the SEC has recently begun a routine examination of the books and records of certain
of our Life Companies' separate accounts. We are actively cooperating with both regulators.
These types of lawsuits and regulatory actions may be difficult to assess or quantify, may seek recovery of
indeterminate amounts, including punitive and treble damages, and 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.
It is not feasible to predict or determine the ultimate outcome of all pending investigations and legal
proceedings or to provide reasonable ranges of potential losses. We believe that their outcomes are not likely
to have a material adverse effect on our consolidated financial condition, after consideration of available
insurance and reinsurance and the provisions made in our consolidated financial statements.
However, given the indeterminate amounts sought in certain of these matters and litigation's inherent
unpredictability, it is possible that an adverse outcome in certain matters could, from time to time, have a
material adverse effect on our operating results or cash flows.
Discontinued Reinsurance Business
During 1999, our Life Companies placed their remaining group accident and health reinsurance business into
run-off, adopting a formal plan to terminate the related contracts as early as contractually permitted and not
entering into any new contracts. As part of the decision to discontinue these reinsurance operations, we
reviewed the run-off block and estimated the amount and timing of future net premiums, claims and expenses.
We 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 finite reinsurance and other reinsurance and the
likely
18
legal and administrative cost of winding down the business. Total reserves were $35.0 million and total
reinsurance recoverables were $65.0 million at December 31, 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 maximum coverage available is currently $120.0 million. The amount of our total financial
provisions at December 31, 2002 was, therefore, $90.0 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 they reinsured
group accident and health risks. The first of these involves contracts for reinsurance of the life and health
carveout components of workers compensation insurance arising out of a reinsurance pool created and formerly
managed by Unicover Managers, Inc., or Unicover. In one of those, the arbitration panel issued its decision on
October 8, 2002. The financial implications of this decision are consistent with our Life Companies' current
financial provisions. In addition, Phoenix Life is involved in arbitrations and negotiations pending in the
United Kingdom between multiple layers of reinsurers and reinsureds relating to transactions in which it
participated involving certain personal accident excess-of-loss business reinsured in the London market.
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
Two 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 PNX 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 the claims asserted in this lawsuit has been granted. The plaintiff has
filed an appeal. The company will rigorously defend this suit.
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 sought to vacate and annul the decision and order of the New York
Superintendent, dated June 1, 2001, approving the plan of reorganization. The petition named as respondents
Phoenix Life and PNX and their directors and the New York Superintendent. A motion to dismiss this lawsuit has
recently been granted and the appeal period has expired.
Two additional lawsuits challenging the plan have been dismissed. We are not aware of any other lawsuits
challenging the reorganization or the plan.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of our security holders during the fourth quarter of the fiscal year covered
by this report.
19
PART II
Item 5. Market of Registrant's Common Equity and Related Stockholder Matters
In connection with Phoenix Life's June 25, 2001 demutualization, during 2002, we issued 4,201 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, we issued these shares to policyholders in exchange for their
membership interests without registration under that act.
The following table presents the high and low prices for our common stock on the New York Stock Exchange for
the year 2002 and the period from June 21, 2001 through December 31, 2001. The closing price of our common
stock on December 31, 2002 was $7.60.
2002 2001
------------------------------- ------------------------------
High Low High Low
-------------- -------------- ------------------------------
First Quarter................................... $ 19.75 $ 16.84 -- --
Second Quarter.................................. $ 20.25 $ 15.50 $ 18.80 $ 16.90
Third Quarter................................... $ 18.01 $ 13.30 $ 19.35 $ 12.50
Fourth Quarter.................................. $ 13.75 $ 6.50 $ 18.50 $ 12.80
Item 6. Selected Financial Data
Our selected historical consolidated financial data as of and for each of the five years ended December 31,
2002 follows (dollars in millions, except earnings per share). We derived the data for the years 2002, 2001 and
2000 from our consolidated financial statements included elsewhere in this Form 10-K. We derived the data for
the years 1999 and 1998 from audited consolidated financial statements not included in this Form 10-K. Prior to
June 25, 2001, Phoenix Life was the parent company of our consolidated group. In connection with its
demutualization, Phoenix Life became a subsidiary and PNX became the parent company of our consolidated group.
We prepared the following financial data, other than statutory data, in conformity with GAAP. We derived the
statutory data from the Annual Statements of our Life Companies filed with insurance regulatory authorities and
prepared it in accordance with statutory accounting practices, which vary in certain respects from GAAP.
20
You should read the following in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements included in this Form 10-K.
2002 2001 2000 1999 1998
------------ ------------ ------------- ------------- ------------
Income Statement Data:(1)
Premiums.................................... $ 1,081.9 $ 1,112.7 $ 1,147.4 $ 1,175.7 $ 1,175.8
Insurance and investment product fees....... 563.4 546.4 631.0 574.6 537.5
Net investment income....................... 915.2 847.6 1,141.3 961.5 862.0
Net realized investment gains (losses)...... (107.6) (72.4) 89.2 75.8 58.2
------------ ------------ ------------- ------------- ------------
Total revenues.............................. $ 2,452.9 $ 2,434.3 $ 3,008.9 $ 2,787.6 $ 2,633.5
------------ ------------ ------------- ------------- ------------
Total benefits and expenses................. $ 2,613.0 $ 2,670.5 $ 2,839.7 $ 2,513.5 $ 2,474.3
------------ ------------ ------------- ------------- ------------
Income (loss) from continuing operations.... $ (115.7) $ (137.3) $ 94.8 $ 162.1 $ 91.9
Income (loss) from discontinued operations,
net of income taxes(2) .................... -- -- (11.5) (72.9) 45.2
Income (loss) before cumulative effect of
accounting changes........................ (115.7) (137.3) 83.3 89.2 137.1
Cumulative effect of accounting changes(3) .. (130.3) (65.4) -- -- --
------------ ------------ ------------- ------------- ------------
Net income (loss)........................... $ (246.0) $ (202.7) $ 83.3 $ 89.2 $ 137.1
============ ============ ============= ============= ============
Basic and Diluted Earnings Per Share:
Income (loss) from continuing operations (4). $ (1.18) $ (1.31) $ .91 $ 1.55 $ .88
============ ============ ============= ============= ============
Net income (loss)(4) ........................ $ (2.51) $ (1.94) $ .80 $ .85 $ 1.31
============ ============ ============= ============= ============
2002 2001 2000 1999 1998
------------ ------------ ------------- ------------- ------------
Ratio of Earnings to Fixed Charges:
Ratio of earnings to fixed charges(5) ....... -- -- 4.2 6.9 5.3
Supplemental ratio of earnings to
fixed charges-including interest credited
on policyholder contract balances(6) ...... 0.6 0.3 1.8 2.5 2.0
2002 2001 2000 1999 1998
------------ ------------ ------------- ------------- ------------
Balance Sheet Data:
Cash and investments........................ $ 16,780.3 $ 14,420.4 $ 12,597.4 $ 11,600.7 $ 11,534.5
Total assets................................ $ 25,245.7 $ 22,535.9 $ 20,313.2 $ 20,287.0 $ 18,798.0
============ ============ ============= ============= ============
Indebtedness................................ $ 644.3 $ 599.3 $ 425.1 $ 499.4 $ 449.3
============ ============ ============= ============= ============
Total liabilities........................... $ 23,203.2 $ 20,131.4 $ 18,335.4 $ 18,430.9 $ 16,969.4
============ ============ ============= ============= ============
Minority interest in net assets of
consolidated subsidiaries................. $ 10.8 $ 8.8 $ 136.9 $ 100.1 $ 92.0
============ ============ ============= ============= ============
Total stockholders' equity.................. $ 2,031.7 $ 2,395.7 $ 1,840.9 $ 1,756.0 $ 1,736.6
============ ============ ============= ============= ============
Assets Under Management:(7) ................. $ 63,813.9 $ 61,212.2 $ 64,543.6 $ 73,185.4 $ 61,206.3
============ ============ ============= ============= ============
Consolidated Statutory Data:
Premiums and deposits....................... $ 3,919.7 $ 3,144.8 $ 2,344.8 $ 2,330.2 $ 2,578.8
============ ============ ============= ============= ============
Net income (loss)........................... $ (130.7) $ (66.0) $ 266.1 $ 131.3 $ 108.7
============ ============ ============= ============= ============
Capital and surplus(8) ...................... $ 861.0 $ 1,149.8 $ 1,322.8 $ 1,054.1 $ 905.3
Asset valuation reserve ("AVR")(9) .......... 147.8 223.4 560.4 373.2 300.3
------------ ------------ ------------- ------------- ------------
Total statutory capital, surplus and AVR.... $ 1,008.8 $ 1,373.2 $ 1,883.2 $ 1,427.3 $ 1,205.6
============ ============ ============= ============= =============
- --------
(1) For a summary of our significant accounting policies, refer to the notes to our consolidated financial
statements included elsewhere in this Form 10-K.
21
(2) During 1999, Phoenix Home Life discontinued the operations of three of its businesses which in prior years
were reflected as the following reportable business segments: reinsurance operations, group life and health
insurance operations and real estate management operations.
The discontinuation of these businesses resulted from the sales of several operations and the
implementation of plans to withdraw from the remaining businesses. These transactions do not affect the
comparability of the financial data. The assets and liabilities of the discontinued operations have been
excluded from the assets and liabilities of continuing operations and separately identified in the balance
sheet data. Likewise, our income statement data have been restated for 1998 to exclude from continuing
operations the operating results of discontinued operations. Additional information on discontinued
operations is included in Note 13 to our consolidated financial statements included elsewhere in this Form
10-K.
(3) During 2002, we recognized a cumulative effect adjustment for an accounting change for goodwill and other
intangible assets. Effective January 1, 2002, we adopted the new accounting standard for goodwill and other
intangible assets, including amounts reflected in equity-method investments. This adoption resulted in a
cumulative effect adjustment of $130.3 million (after income taxes of $11.4 million). Additional
information on this accounting change is included in Notes 1 and 4 to our consolidated financial statements
included elsewhere in this Form 10-K.
During 2001, we recognized cumulative effect adjustments for accounting changes for venture capital
partnerships, derivative instruments and securitized financial instruments.
We changed our method of applying the equity method of accounting for our venture capital partnerships. We
recorded a charge of $48.8 million (after 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. Additional information on this
accounting change is included in Notes 1 and 5 to our consolidated financial statements included elsewhere
in this Form 10-K.
Effective January 1, 2001, we adopted a new accounting pronouncement for derivative instruments. This
adoption resulted in a cumulative effect adjustment of $3.9 million (after income taxes of $2.1 million).
Additional information on this accounting change is included in Notes 1 and 14 to our consolidated
financial statements included elsewhere in this Form 10-K.
Effective April 1, 2001, we adopted a new accounting pronouncement for recognition of interest income and
impairment on certain investments. This pronouncement requires investors in certain asset-backed securities
to record changes in their estimated yield on a prospective basis and to apply specific valuation methods
to these securities for an other-than-temporary decline in value. Upon adoption, we recorded a $20.5
million charge to net income as a cumulative effect of accounting change, net of income taxes. Additional
information on this accounting change is included in Notes 1 and 5 to our consolidated financial statements
included elsewhere in this Form 10-K.
(4) We calculated earnings per share for each of the four years from 1998 through 2001 on a pro forma basis,
based on 104.6 million weighted-average shares outstanding. The pro forma weighted-average shares
outstanding calculation for 2001 is based on the weighted-average shares outstanding for the period from
the demutualization and IPO to the end of the year.
(5) Due to our losses during 2002 and 2001, the ratio coverages for those periods were less than 1:1. We would
need $88.2 million and $122.3 million in additional earnings for the years 2002 and 2001, respectively to
achieve a 1:1 coverage ratio.
(6) Due to our losses during 2002 and 2001, the ratio coverages, including interest credited on policyholder
contract balances were less than 1:1. We would need $88.2 million and $122.3 million in additional earnings
for the years 2002 and 2001, respectively to achieve a 1:1 coverage ratio.
(7) Assets under management consist of third party assets managed by our investment management subsidiary PXP,
plus total assets as reflected in our consolidated financial statements, adjusted to reflect total rather
than net assets of discontinued operations.
22
(8) In accordance with accounting practices prescribed by the New York State Insurance Department, Phoenix
Life's capital and surplus for 1998 and subsequent periods includes $175.0 million of total principal
amount of surplus notes outstanding.
(9) The AVR is a statutory reserve intended to mitigate changes to the balance sheet as a result of
fluctuations in asset values.
23
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENT
The following discussion may contain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The company intends these forward-looking statements to be covered by the safe
harbor provisions of the federal securities laws relating to forward-looking statements. These include
statements relating to trends in, or representing management's beliefs about, the company's future strategies,
operations and financial results, as well as other statements including words such as "anticipate", "believe,"
"plan," "estimate," "expect," "intend," "may," "should" and other similar expressions. Forward-looking
statements are made based upon management's current expectations and beliefs concerning trends and future
developments and their potential effects on the company. They are not guarantees of future performance. Actual
results may differ materially from those suggested by forward-looking statements as a result of risks and
uncertainties which include, among others: (i) changes in general economic conditions, including changes in
interest and currency exchange rates and the performance of financial markets; (ii) heightened competition,
including with respect to pricing, entry of new competitors and the development of new products and services by
new and existing competitors; (iii) the company's primary reliance, as a holding company, on dividends and
other payments from its subsidiaries to meet debt payment obligations, particularly since the company's
insurance subsidiaries' ability to pay dividends is subject to regulatory restrictions; (iv) regulatory,
accounting or tax changes that may affect the cost of, or demand for, the products or services of the company's
subsidiaries; (v) downgrades in the claims paying ability or financial strength ratings of the company's
subsidiaries or in its credit ratings; (vi) discrepancies between actual claims experience and assumptions used
in setting prices for the products of insurance subsidiaries and establishing the liabilities of such
subsidiaries for future policy benefits and claims relating to such products; (vii) movements in the equity
markets that affect our investment results, including those from venture capital, the fees we earn from assets
under management and the demand for our variable products; (viii) the company's success in achieving planned
expense reductions; and (ix) other risks and uncertainties described in any of the company's filings with the
SEC. The company undertakes no obligation to update or revise publicly any forward-looking statement, whether
as a result of new information, future events or otherwise.
RISKS RELATED TO OUR BUSINESS
Continued poor performance of the equity markets could adversely affect sales of our investment management,
variable universal life and variable annuity products. Sales of all of our products could also be adversely
affected by a general economic downturn.
The U.S. equity markets experienced strong growth followed by substantial declines. From April 1, 2000 through
December 31, 2002, the Nasdaq Composite Index and the Standard & Poor's 500 Index fell 70.79% and 41.29%,
respectively. These market declines have been accompanied by increased volatility.
There are two main ways in which market declines and volatility have affected, or have the potential to affect,
our revenues negatively.
• First, significant market volatility or declines may cause potential purchasers of our products to
refrain from new or additional investments, and current investors to withdraw from the markets or
reduce their rates of ongoing investment. At this time we cannot estimate the impact to date of the
market on our sales.
• Second, because the revenues of our investment management and variable products businesses are to a
large extent based on fees related to the value of assets under our management, the poor
performance of the equity markets has limited our fee revenues by reducing the value of the
investment assets we manage. Our assets under management at December 31, 2002 were 1.3% less than
at December 31, 2000. The possibility of declines in assets under management is heightened by the
fact that as of December 31, 2002, approximately 20% of our variable universal life insurance
assets under management excluding our private
24
placement business, and approximately 61% of our variable annuity assets under management excluding
our private placement business, were not subject to any surrender penalties. It is also possible
that we could begin to experience increasing surrenders if equity markets continue to perform
poorly. The surrender charges applicable to our variable universal life insurance policies and
variable annuities typically decline over a period of years and generally expire after 10 years.
Moreover, surrenders of life insurance policies and annuities require faster amortization of
deferred policy acquisition costs, which would reduce our profitability. Our total expense for
amortization of deferred policy acquisition costs was $59.2 million in 2002.
In addition to the effects of poorly performing equity markets, a general economic downturn could have a
negative effect on households in our target affluent and high-net-worth market and therefore could hurt sales
of our products.
We experienced significant operating losses in 2002. Continued significant operating losses could impair our
ability to access the capital markets or repay our debt obligations.
We experienced losses from continuing operations before cumulative effect of accounting changes of $115.7
million in 2002. Continuing operating losses could impair our ability to raise debt or equity capital or pay
amounts due under our debt obligations.
Some of our investments outside the closed block have limited liquidity, which could hurt our cash flow.
The plan of reorganization relating to our demutualization in June 2001 required Phoenix Life to establish and
operate an arrangement, known as a closed block, to ensure that the reasonable dividend expectations of
policyholders who own certain individual insurance policies of Phoenix Life are met, and that benefits under
such policies are paid. Phoenix Life must retain within the closed block the cash flows produced by closed
block assets in order to pay policy benefits and dividends to closed block policyholders, which means that
these cash flows are not available to us to meet unexpected cash needs in our other businesses. The assets that
are within the closed block include a substantial portion of our most liquid assets.
As of December 31, 2002, $7.5 billion, or 48% of the invested assets outside the closed block, consisted of
investments in private debt securities, mortgage loans, real estate, policy loans, equity securities and
limited partnership interests, including our venture capital investments, all of which have limited liquidity.
If we need to sell such investments because we require significant amounts of cash on short notice in excess of
our normal cash requirements, as could be the case if we experience unexpectedly sudden and high volumes of
non-participating insurance policy and annuity surrenders, we might have difficulty doing so at attractive
prices or in a timely manner. This could cause a drain on our cash and, therefore, limit the cash we have
available to meet our other obligations.
We might need to fund deficiencies in our closed block, which would result in a reduction in net income and
could result in a reduction in investments in our on-going business.
We have allocated assets to the closed block required by our demutualization in an amount that will produce
cash flows that, together with anticipated revenues from the policies included in the closed block, are
reasonably expected to be sufficient to support obligations and liabilities relating to these policies. These
obligations and liabilities include, but are not limited to, provisions for the payment of claims and certain
expenses and taxes, and provisions for the continuation of the policyholder dividend scales in effect for 2000,
if the experience underlying such scales continues, and for appropriate adjustments in such scales if the
experience changes. Our allocation of assets to the closed block was based on actuarial assumptions about our
payment obligations to closed block policyholders, as well as assumptions about the investment earnings the
closed block assets will generate over time. Since such assumptions are to some degree uncertain, it is
possible that the cash flows generated by the closed block assets and the anticipated revenues from the
policies included in the closed block will prove insufficient to provide for the benefits guaranteed under
these policies. We would have to fund the shortfall
25
resulting from such an insufficiency. Moreover, even if these assets, cash flows and revenues are sufficient,
we may choose to support closed block policyholder dividend payments with assets and cash flows from outside of
the closed block.
Venture capital earnings are dependent on the performance of the equity markets, which means that this
segment's effect on our income from continuing operations has been volatile.
At times in the last five years Venture Capital has represented a large component of our total income or loss
from continuing operations. Venture Capital is a higher risk, less liquid investment, the value of which is
prone to significant fluctuation. Income from Venture Capital represented 190% and 56% of our total income from
continuing operations in 2000 and 1999, respectively. In 2002 and 2001, however, our venture capital
investments decreased our income from continuing operations by $38.5 million and $54.9 million, respectively,
representing 33% and 40% of our total loss from continuing operations in 2002 and 2001, respectively. The
performance of the partnerships depends upon the economic performance of the underlying assets held by the
partnerships, which is difficult to predict.
Our Venture Capital portfolio has a large technology component and includes investments in other sectors such
as telecommunications, the asset values of which tend to move in close relation with the technology sector. The
decrease in this portfolio's income in 2002 and 2001 resulted primarily from equity market declines in the
technology sector and other related sectors. It is possible that we will continue to experience declines
related to our venture capital investments.
In addition, the returns we achieve in Venture Capital depend in large part on the efforts and performance
results obtained by the managers of the partnerships in which we invest. We have neither an active role in the
day to-day management of the partnerships in which we invest, nor the ability to approve the specific
investment management decisions made by the managers of the partnerships. Although we evaluate each potential
partnership investment based on criteria such as the performance history of the partnership and its manager, as
well as the partnership's investment strategies, the past performance of a partnership and its manager may not
be a reliable indicator of future results. Furthermore, the managers, key personnel and investment strategies
of a partnership may change at any time without our consent.
The recent downgrades to PNX's debt ratings and Phoenix Life's financial strength ratings, as well as the
possibility of future downgrades, could increase policy surrenders and withdrawals, adversely affect
relationships with distributors, reduce new sales and earnings from our life insurance products and increase
our future borrowing costs.
Rating agencies assign Phoenix Life claims paying ability ratings, sometimes referred to as financial strength
ratings, and assign us debt ratings, based in each case on their opinions of the relevant company's ability to
meet its financial obligations.
Financial strength ratings indicate a rating agency's view of an insurance company's ability to meet its
obligations to its insureds. These ratings are therefore key factors underlying the competitive position of
life insurers. The current financial strength and debt ratings, including information concerning recent rating
agency actions, are set forth in the chart below.
26
Financial Strength Rating Senior Debt Rating
Rating Agency of Phoenix Life of PNX
- --------------------------------- ----------------------------------------- ------------------------------------
A.M. Best Company, Inc. A ("Excellent") affirmed March 7, bbb+ ("Adequate") from a
2003 ("Strong") on March 7, 2003
Fitch IBCA AA- ("Very Strong") from A- ("Strong") from A
AA ("Very Strong") on ("Strong") on September 19,
September 19, 2002 2002
Standard & Poor's A+ ("Strong") from AA- BBB+ ("Good") from A-
("Very Strong") on October ("Strong") on October 16,
16, 2002 2002
Moody's A3 ("Good") from Aa3 Baa3 ("Adequate") from A3
("Excellent") on November 25, ("Good") on November 25, 2002
2002
A.M. Best and Moody's each have a stable outlook for our ratings, while Fitch IBCA and Standard & Poor's have a
negative outlook.
As a consequence of these ratings downgrades, we may experience increased interest costs in connection with
future borrowings. Such increased costs would decrease our earnings and could reduce our ability to finance our
future growth on a profitable basis. The downgrades did not trigger any defaults or repurchase obligations.
In addition, the downgrades could adversely affect Phoenix Life's relationships with its existing distributors
and its ability to establish additional distributor relationships. If this were to occur, we might experience a
decline in sales of certain products and the persistency of existing customers. At this time, we cannot
estimate the impact on sales or persistency. If there were a significant decline in Phoenix Life's sales or
persistency, our results of operations would be materially adversely affected.
We could have material losses in the future from our discontinued reinsurance business.
In 1999, we sold our individual life reinsurance business and discontinued the operations of our group accident
and health and group life reinsurance business. We adopted a plan to stop writing new contracts covering these
risks and end our existing contracts as soon as those contracts would permit. However, we remain liable for
claims under those contracts.
We have 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 proceeds we believe we will collect under finite reinsurance and other reinsurance
and the likely legal and administrative cost of winding down the business. Total reserves were $35 million and
total reinsurance recoverable balances were $65 million at December 31, 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 maximum coverage available is currently $120 million. The amount of our total
financial provisions at December 31, 2002 was therefore $90 million, consisting of reserves, less reinsurance
recoverable balances, plus the amount currently available from our finite aggregate excess-of-loss reinsurance,
and represents our best estimate of the provisions required for the payment of our entire remaining loss
exposure on the discontinued group accident and health reinsurance business.
27
Because we must use estimates in establishing our loss and expense reserves, they are subject to uncertainty.
In the case of our discontinued group accident and health reinsurance business, several factors make estimating
the required provisions more difficult. First, it may take a number of years for the claims on the large
majority of the remaining business to be reported to us. In many cases, the types of losses involved will
develop over a relatively long period. Further, some of our remaining contracts cover losses that will be
incurred in 2003 and subsequent years. For these reasons, we cannot know today what our actual claims
experience will be.
In addition, we are involved in two sets of disputes relating to certain portions of our discontinued group
accident and health reinsurance business. See Note 17 to our consolidated financial statements for more
information.
In establishing our provisions described above for the payment of insured losses and expenses on this
discontinued business, we have made assumptions about the likely outcome of the disputes referred to above,
including an assumption that substantial recoveries would be available from our reinsurers on all of our
discontinued reinsurance business. However, the inherent uncertainty of arbitrations and lawsuits, including
the uncertainty of estimating whether any settlements we may enter into in the future would be on favorable
terms, makes it hard to predict the outcomes with certainty. Given the need to use estimates in establishing
loss reserves, and the difficulty in predicting the outcome of arbitrations and lawsuits, our actual net
ultimate exposure likely will differ from our current estimate. If future facts and circumstances differ
significantly from our estimates and assumptions about future events with respect to the disputes referred to
above or other portions of our discontinued reinsurance business, our current reserves may need to be increased
materially, with a resulting material adverse effect on our results of operations and financial condition.
A challenge to the plan of reorganization is outstanding.
A pending lawsuit seeks to challenge Phoenix Life's reorganization and the adequacy of the information provided
to policyholders regarding the plan of reorganization. We believe that this lawsuit lacks merit. The lawsuit,
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. Plaintiff 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, Phoenix, directors of Phoenix Life, as well as Morgan Stanley & Co. Incorporated,
financial advisor to Phoenix Life in connection with the plan of reorganization. A motion to dismiss the claims
asserted in this lawsuit has recently been granted. The plaintiff has filed a notice of appeal.
Legislation eliminating or modifying either the federal estate tax or the federal taxation of investment
income could adversely affect revenues from our life insurance products because some of them are specifically
designed and marketed as policies that help a decedent's heirs to pay this tax. In addition, some of the Bush
Administration's legislative proposals would reduce or eliminate the benefit of deferral of taxation for our
insurance and annuity products.
Legislation eliminating or modifying either the federal estate tax or the federal taxation of investment income
could adversely affect revenues from our life insurance and annuity products. Some of our life insurance
products are specifically designed and marketed as policies that help a decedent's heirs to pay estate tax. In
addition, our life insurance and annuity products generally benefit from the deferral of federal income
taxation on the accretion of their value.
Legislation enacted in the spring of 2001 increased the size of estates exempt from the federal estate tax,
phased in reductions in the estate tax rate between 2002 and 2009 and repealed the estate tax entirely in 2010.
This legislation, despite its reinstatement of the estate tax in 2011, could have a negative effect on our
revenues from the sale of estate planning products including in particular sales of second-to-die life
insurance policies. These policies insure the lives of both a husband and wife, with the policy proceeds
payable after both spouses have died. A second-to-die policy effectively enables a couple to pre-fund its
heirs' estate tax obligations by making
28
the policy proceeds available to the heirs at the time estate taxes are due. Second-to-die policies are often
purchased by couples whose assets are largely illiquid, and whose heirs otherwise might have to attempt to
liquidate part of the estate in order to pay the tax. Second-to-die policies represented 35% and 22% of our new
life insurance premiums and deposits in 2002 and 2001, respectively, and the repeal, increase in exemption or
the reduction of the rate, of the federal estate tax may reduce the attractiveness of second-to-die policies
sold for this purpose. President Bush and members of Congress have expressed a desire to modify the existing
legislation, which modification could result in faster or more complete reduction or repeal of the estate tax.
For example, the President's Budget for Fiscal Year 2004 introduced a proposal to make the repeal of the estate
tax permanent. Any such change could have a further negative effect on our revenues from estate planning
products.
The attractiveness to our customers of many of our products is due, in part, to favorable tax treatment.
Current federal income tax laws generally permit the tax-deferred accumulation of earnings on the premiums paid
by the holders of annuities and life insurance products. Taxes, if any, are payable on income attributable to a
distribution under the contract for the year in which the distribution is made. Death benefits under life
insurance contracts may be received free of federal income tax. Legislative changes that would have the effect
of reducing the taxes imposed on investment income could reduce or eliminate the relative benefit of such
deferral of taxation for our insurance, annuity and investment products. President Bush's Fiscal Year 2004
Budget includes changes that would permit corporations to pay tax-free dividends to shareholders and that would
create new and expanded vehicles for tax-exempt savings, including "Lifetime Savings Accounts" which would
permit large annual contributions and tax-free build-up and distributions. There can be no assurance whether or
when any such proposal would be enacted. However, enactment of one or both of these proposals, either in the
form proposed by President Bush or in a modified form, could have a negative impact on our revenues.
Changes in interest rates could harm cash flow and profitability in our life and annuity businesses.
Cash flows relating to, and the profitability of, our life insurance and annuity businesses are sensitive to
interest rate changes. In periods of increasing interest rates, life insurance policy loans and surrenders and
withdrawals may increase as policyholders seek investments with higher perceived returns. This process could
result in cash outflows requiring us to sell invested assets at a time when the prices of those assets are
adversely affected by the increase in market interest rates, which could cause us to suffer realized investment
losses.
Conversely, during periods of declining interest rates, a decrease in the spread between interest and dividend
rates to policyholders and returns on our investment portfolio could adversely affect our profitability. During
such periods, life insurance and annuity products may be relatively more attractive investments, resulting in
increased premium payments on products with flexible premium features, repayment of policy loans and increased
percentages of policies remaining in force during a period when we are earning lower returns on our own new
investments. For this reason, a sustained period of declining interest rates could cause cash flow problems for
us. In addition, lower returns on our investments could prove inadequate for us to meet contractually
guaranteed minimum payments to holders of our life and annuity products. We also face the risk in a declining
interest rate environment that borrowers may prepay or redeem mortgages and bonds in our investment portfolio
as they seek to borrow at lower market rates, so that we might have to reinvest proceeds we receive from these
prepayments or redemptions in lower interest-bearing investments.
Our product sales are highly dependent on our relationships with non-affiliated distributors. If these
relationships ended or diminished, our revenues would suffer accordingly.
We sell our products through our affiliated retail producers and non-affiliated advisors, broker-dealers and
other financial intermediaries. Non-affiliated distribution sources have contributed significantly to our sales
in recent years. For example, Merrill Lynch, with over 15,000 registered representatives, accounted for 42% of
our Investment Management private client asset inflows in 2002. The loss or diminution of our relationships
with non-affiliated distributors could materially reduce our revenues from sales of our products. The risk of
such loss or diminution is significant and ongoing, since we face substantial competition in seeking to
convince non-affiliated distributors to sell our products, rather than those offered by our competitors.
29
The independent trustees of our mutual funds and closed-end funds, as well as intermediary program sponsors,
managed account clients and institutional investment management clients, could terminate their contracts with
us. This would reduce our Investment Management fee revenues and could also impair our intangible assets.
Each of the mutual funds and closed-end funds for which PXP acts as investment adviser or sub-adviser is
registered under the Investment Company Act of 1940 and is governed by a board of trustees or board of
directors. The Investment Company Act requires that at least 40% of these board members be unaffiliated with
PXP. Each fund's board has the duty of deciding annually whether to renew the contract appointing PXP to manage
the fund. Board members have a fiduciary duty to act in the best interests of the shareholders of their funds.
Either the board members or the shareholders may terminate an advisory contract with PXP and move the assets to
another investment adviser. The board members also may deem it to be in the best interests of a fund's
shareholders to make decisions adverse to us, including reducing the compensation paid to PXP or imposing
restrictions on PXP's management of the fund.
Our investment management agreements with institutional clients, intermediary program sponsors (who "wrap," or
make available, our investment products within the management agreements they have with their own clients),
direct managed account clients and institutional clients are generally terminable by these sponsors and clients
upon short notice without penalty. As a result, there would be little impediment to these sponsors or clients
terminating our agreements if they became dissatisfied with our performance.
The termination of any of the above agreements representing a material portion of assets under management would
adversely affect our Investment Management fee revenues.
We face strong competition in our wealth management businesses from mutual fund companies, banks, investment
management firms and other insurance companies. This competition may impair our ability to retain existing
customers, attract new customers and maintain our profitability.
We face strong competition in our wealth management businesses, comprising of life insurance, annuities and
investment management. We believe that our ability to compete is based on a number of factors, including
product features, investment performance, service, price, distribution, capabilities, scale, commission
structure, name recognition and financial strength ratings. While there is no single company that we identify
as a dominant competitor in our wealth management business, the nature of these businesses means that our
actual and potential competitors include a large number of mutual fund companies, banks, investment management
firms and other insurance companies, many of which have advantages over us in one or more of the above
competitive factors. Recent industry consolidation, including acquisitions of insurance and other financial
services companies in the United States by international companies, has resulted in larger competitors with
financial resources, marketing and distribution capabilities and brand identities that are stronger than ours.
Larger firms also may be able to offer, due to economies of scale, more competitive pricing than we can. In
addition, some of our competitors are regulated differently than we are, which may give them a competitive
advantage; for example, many non-insurance company providers of financial services are not subject to the costs
and complexities of insurance regulation by multiple states.
Our ability to compete in the investment management business depends in particular on our investment
performance. We may not be able to accumulate and retain assets under management if our investment results
underperform the market or the competition, since such underperformance likely would result in asset
withdrawals and reduced sales. For example, from 1993 through 1999, we experienced net asset withdrawals in our
retail investment management business. We attribute this in part to underperformance in some of our mutual
funds and managed accounts.
We compete for distribution sources in our life, annuity and investment management businesses. We believe that
our success in competing for distributors depends on factors such as our financial strength and on the services
we
30
provide to, and the relationships we develop with, these distributors. Our distributors are generally free
to sell products from whichever providers they wish, which makes it important for us to continually offer
distributors products and services they find attractive. If our products or services fall short of
distributors' needs, we may not be able to establish and maintain satisfactory relationships with distributors
of our life insurance, annuity and investment management products. Accordingly, our revenues and profitability
would suffer.
National banks, with their pre-existing customer bases for financial services products, may increasingly
compete with insurers, as a result of recently enacted legislation removing restrictions on bank affiliations
with insurers. This legislation, the Gramm-Leach-Bliley Act of 1999, permits mergers that combine commercial
banks, insurers and securities firms under one holding company. Until passage of the Gramm-Leach-Bliley Act,
prior legislation had limited the ability of banks to engage in securities-related businesses and had
restricted banks from being affiliated with insurance companies. The ability of banks to increase their
securities-related business or to affiliate with insurance companies may materially and adversely affect sales
of all of our products by substantially increasing the number and financial strength of our potential
competitors.
We might be unable to attract or retain personnel who are key to our business, especially in Investment
Management.
The success of our business is dependent to a large extent on our ability to attract and retain key employees.
Our investment management business, in particular, depends on the employment of experienced securities analysts
and portfolio managers. In addition, our wealth management businesses are dependent on the employment of highly
productive sales personnel. Competition in the job market for these types of professionals is generally
intense, and is particularly acute with respect to experienced securities analysts and portfolio managers such
as those needed by PXP. In general, our employees are not subject to employment contracts or non-compete
arrangements.