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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, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 333-55268
THE PHOENIX COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1599088
(State or other jurisdiction of (I.R.S. Employer 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]
Indicate by check mark whether the registrant is an accelerated filer (as defined I rule 12b-2 of the Act).
YES X NO ___
As of March 5, 2004, the aggregate market value of voting common equity held by non-affiliates of the
registrant was $1,347,288,765 based on the last reported sale price of the registrant's common stock on the New
York Stock Exchange. On March 5, 2004, the registrant had 94,546,580 shares of common stock outstanding; it had
no non-voting common equity.
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................................................................... 17
3 Legal Proceedings............................................................ 17
4 Submission of Matters to a Vote of Security Holders.......................... 19
Part II 5 Market of Registrant's Common Equity and Related Stockholder Matters......... 19
6 Selected Financial Data...................................................... 20
7 Management's Discussion and Analysis of Financial Condition and Results
of Operations.............................................................. 23
7A Quantitative and Qualitative Disclosures About Market Risk................... 75
8 Financial Statements and Supplementary Data.................................. 79
Report of Independent Auditors............................................... F-1
Consolidated Balance Sheet as of December 31, 2003 and 2002.................. F-2
Consolidated Statement of Income and Comprehensive Income For the
Years Ended December 31, 2003, 2002 and 2001............................... F-3
Consolidated Statement of Cash Flows For the Years Ended
December 31, 2003, 2002 and 2001........................................... F-4
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income For the Years Ended December 31, 2003, 2002 and 2001.. F-5
Notes to Consolidated Financial Statements................................... F-6
9 Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure....................................................... 79
9A Controls and Procedures...................................................... 79
Part III 10 Directors and Executive Officers of the Registrant........................... 79
11 Executive Compensation....................................................... 81
12 Security Ownership of Certain Beneficial Owners and Management............... 81
13 Certain Relationships and Related Transactions............................... 85
14 Principal Accountant Fees and Services....................................... 85
Part IV 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K............. 85
Signatures...................................................................................... 87
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
"Phoenix Investment Partners" refers to Phoenix Investment Partners, Ltd. and its direct and indirect
subsidiaries.
PART I
Item 1. Business
Description of Business
We are a manufacturer of insurance, annuity and asset management products for the accumulation, preservation
and transfer of wealth. We provide products and services to affluent and high-net-worth individuals through
their advisors and to institutions directly and through consultants. We offer a broad range of life insurance,
annuity and asset management products and services through a variety of distributors.
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 products and services 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 products and services through various distribution channels, such as:
• 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 have two operating segments, Life and Annuity and Asset Management, which include three product lines: life
insurance, annuities and asset management. Both segments serve the affluent and high-net-worth market, which
presents opportunities to leverage our capabilities and relationships. In addition to managing third-party
assets, Asset Management manages both the general accounts of the Life Companies and many of the separate
account portfolios available through variable life and annuity products.
We report our remaining results in two non-operating segments -- Venture Capital and Corporate and Other.
Venture Capital includes limited partnership interests in venture capital funds, leveraged buyout funds and
other
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private equity partnerships sponsored and managed by third parties. The segment does not include similar
investments that are part of the closed block. Corporate and Other includes indebtedness; unallocated assets,
liabilities and expenses; and 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 manufacturing operations.
Operating Segments
SUMMARY OF OPERATING SEGMENTS
December 31, 2003
Market Presence Distribution Channels Products
Life and Annuity
Non-affiliated distribution: • Variable universal life
insurance
• $45.5 billion of net life • National and regional • Universal life insurance
insurance inforce broker-dealers • Term life insurance
• Financial planning firms • Variable annuities
• $7.1 billion annuity assets • Advisor groups • Immediate annuities
under management • Insurance companies • Private placement life
• Banks insurance and annuities
• Executive benefits
Principal operating subsidiaries:
• Phoenix Life Affiliated distribution:
• PHL Variable Insurance Company • WS Griffith
• Main Street Management Company
Asset Management
Non-affiliated distribution: Private client products:
• $59.2 billion assets under • National and regional • Managed accounts
management broker-dealers • Mutual funds
• Advisor groups
• Institutional asset management
Principal operating subsidiary: consultants Institutional products:
• Phoenix Investment Partners • Financial planning firms • Institutional accounts
• Closed-end funds
Affiliated distribution: • Structured products
• Affiliated asset managers • Phoenix Life general and
• WS Griffith Advisors, Inc. separate accounts
• Main Street Management Company
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 and the
value-added the distributors provide those institutions;
• 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 accounts
of the Life Companies, or into the general account. In separate investment accounts, the policyholder bears the
entire risk of the investment results. We collect fees for the management of these various investment accounts
and the net return is credited directly to the policyholder's accounts. 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. Some universal life products provide guarantees that protect the
policy's death benefit if specified minimum premiums are paid. 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
thirty 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 annuities to meet the accumulation and preservation needs of the affluent and
high-net-worth market. Deferred annuities, in which funds accumulate for a number of years before periodic
payments begin, enable the contractholder to save for retirement and also provide options that protect against
outliving assets during retirement. Immediate annuities are purchased by means of a single lump sum payment and
begin paying periodic income immediately. 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.
Variable annuities are separate account products, which means that the contractholder bears the investment risk
as deposits are directed into a variety of separate investment 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. 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.
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.
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Executive Benefits. Many of our products are also designed to be used by corporations to fund special deferred
compensation plans and benefit programs for key employees, commonly referred to as executive benefits. We view
these products as a source of growing fee-based business.
Private Placement Life and Annuity Products. Private placement products are individually customized life and
annuity offerings that include 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.
The average face amount of life insurance policies sold by Philadelphia Financial Group, our private placement
distributor, in 2003 was $21.9 million and the average annuity deposit was $2.8 million.
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.
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.
In the executive benefits market, we issue life policies covering multiple lives 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 and mortality.
6
Reinsurance
While we have underwriting expertise and have experienced favorable mortality trends, we believe it is prudent
to spread the risks 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, 2003, we had ceded $77.2
billion in face amount of reinsurance, representing 62.1% of our total face amount of $122.6 billion of life
insurance inforce.
On January 1, 1996, we entered into a reinsurance arrangement that covers 100% of the excess death benefits and
related reserves for most variable annuity policies issued through December 31, 1999, including subsequent
deposits.
The following table lists our five principal life reinsurers, together with the reinsurance recoverables on a
statutory basis as of December 31, 2003, the face amount of life insurance ceded as of December 31, 2003, and
the reinsurers' A.M. Best ratings.
Reinsurance Face Amount of
Recoverable Life Insurance A.M. Best
Reinsurer Balances Ceded Rating(1)
-------------- -------------- ------------
Swiss Re Life & Health America, Inc............ $ 16.8 million $ 12.6 billion A+
Allianz Life Insurance Co. of North America.... $ 5.5 million $ 11.6 billion A+
AEGON USA(2).................................... $ 16.7 million $ 11.4 billion A+
Employers Reassurance Corporation.............. $ 9.0 million $ 8.6 billion A-
RGA Reinsurance Company........................ $ 3.1 million $ 7.9 billion A+
- --------
(1) A.M. Best ratings are as of December 31, 2003.
(2) Amounts include cessions to Transamerica Financial Life Insurance Company and Transamerica, both of which
are subsidiaries of AEGON.
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.
7
Asset Management Segment
We conduct activities in Asset Management with a focus on two customer groups -- private client and
institutional. Through our private client group, we provide asset management services principally on a
discretionary basis, with products consisting of open-end mutual funds 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 endowments and
special purpose funds. In addition, we manage closed-end funds and alternative financial products such as
structured finance products. Structured finance products include collateralized obligations such as
collateralized debt obligations, or CDOs, backed by portfolios of public high yield bonds, emerging markets
bonds, commercial mortgage-backed or asset-backed securities.
Affiliated Asset Managers
We offer investment management services through our affiliated asset managers. We provide our affiliated asset
managers with a consolidated platform of distribution and administrative support, thereby allowing each manager
to devote a high degree of focus to investment management activities. On an ongoing basis, we monitor the
quality of the affiliates' products by assessing their performance, style consistency and the discipline with
which they apply their investment process.
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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, 2003
Ownership/Location Investment Styles Products (in billions)
- ---------------------------------------------------------------------------------------------------------------
GoodwinSM Capital Advisors(1), Fixed Income - Mutual Funds
or Goodwin / 100% / Multi-Sector Institutional Accounts
Hartford, CT Structured Finance Products
Phoenix Life General Account $20.6
- ---------------------------------------------------------------------------------------------------------------
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 $14.2
- ---------------------------------------------------------------------------------------------------------------
Kayne Anderson Rudnick Equities - Sponsored Managed Accounts
Investment Management, LLC, Quality at Reasonable Price Direct Managed Accounts
or Kayne Anderson Institutional Accounts
Rudnick / 60.0% / Mutual Funds
Los Angeles, CA $10.3
- ---------------------------------------------------------------------------------------------------------------
Duff & Phelps Investment Equities - Mutual Funds
Management Co., or DPIM / REITs Sponsored Managed Accounts
100% / Chicago, IL Large Cap Value Direct Managed Accounts
Small Cap Core Institutional Accounts
Fixed Income - Closed-end Funds
Core $5.2
- ---------------------------------------------------------------------------------------------------------------
Engemann Asset Management, Equities - Mutual Funds
Inc., or Engemann / Classic Growth Sponsored Managed Accounts
100% / Pasadena, CA Direct Managed Accounts $4.4
- ---------------------------------------------------------------------------------------------------------------
OakhurstSM Asset Managers(1), Equities - Mutual Funds
or Oakhurst / 100% / Systematic Value
Scotts Valley, CA $2.3
- ---------------------------------------------------------------------------------------------------------------
Zweig Fund Group, or Zweig / Equities/Fixed Income - Mutual Funds
100% / New York, NY Tactical Asset Allocation Closed-end Funds
Market Neutral $1.4
- ---------------------------------------------------------------------------------------------------------------
Walnut Asset Management LLC, Equities - Direct Managed Accounts
or Walnut / 79.4% / Relative Value Institutional Accounts
Philadelphia, PA Fixed Income -
Quality Fixed Income $0.8
- ---------------------------------------------------------------------------------------------------------------
Total Assets Under Management $59.2
- ---------------------------------------------------------------------------------------------------------------
(1) Goodwin and Oakhurst are divisions of Phoenix Investment Counsel, Inc., an indirect wholly-owned
subsidiary of Phoenix Investment Partners.
Asset Management Products
Private Client Products
Managed Accounts. We provide investment management services through participation in 52 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 Phoenix Investment Partners'
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, 2003, we managed 57,655
accounts relating to such intermediary managed account programs, representing approximately $10.7 billion of
assets under management. In addition, we offer direct managed accounts, which are individual client accounts
sold and administered by us. We managed 3,615 direct managed accounts representing $4.9 billion of assets
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under management.
Mutual Funds. Our affiliated asset managers are investment advisors or sub-advisors to 39 open-end mutual
funds, which had aggregate assets under management of approximately $7.6 billion as of December 31, 2003. These
mutual funds are available primarily to retail investors. Of these funds, 14 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 institutional
assets under management totaled $12.7 billion as of December 31, 2003.
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 closed-end fund assets under management
totaled $4.2 billion as of December 31, 2003.
Structured Finance Products. We manage nine structured finance products, and also act as a sub-advisor to a
structured finance product sponsored by a third party. These products are collateralized obligations backed by
portfolios of high yield bonds, emerging markets bonds and/or asset-backed securities. Our structured bond
products assets under management totaled $3.6 billion as of December 31, 2003.
Life Companies' General Accounts and Related Assets. Phoenix Investment Partners manages most of the assets of
the Life Companies' general accounts, as well as certain assets of Phoenix-related entities such as separate
accounts and non-life subsidiaries. As of December 31, 2003, Phoenix Investment Partners managed $15.5 billion
of the Life Companies' assets.
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Asset Management Assets under Management
The following table presents information regarding the assets under management by Phoenix Investment Partners
for the years indicated:
Assets Under Management As of December 31,
--------------------------------------------------
(in millions) 2003 2002 2001
--------------- --------------- ---------------
TOTAL
Deposits.......................................... $ 7,032.5 $ 10,134.4 $ 9,528.7
Redemptions and withdrawals....................... (8,375.5) (9,950.3) (9,069.7)
Acquisitions(1)(3)(4) and dispositions............ -- 7,755.5 854.4
Performance....................................... 5,788.1 (7,863.2) (7,254.5)
Other(2)(5)....................................... 750.8 1,789.0 1,438.4
--------------- --------------- ---------------
Change in assets under management................. 5,195.9 1,865.4 (4,502.7)
Beginning balance................................. 53,955.5 52,090.1 56,592.8
--------------- --------------- ---------------
Ending balance.................................... $ 59,151.4 $ 53,955.5 $ 52,090.1
=============== =============== ===============
INSTITUTIONAL PRODUCTS
Deposits.......................................... $ 2,974.9 $ 4,380.4 $ 4,989.0
Redemptions and withdrawals....................... (3,452.2) (4,480.0) (3,766.9)
Acquisitions(1)(3) and dispositions............... -- 1,507.7 105.9
Performance....................................... 2,502.3 (2,773.1) (1,152.2)
Other(2)(5)....................................... (579.2) 1,789.0 1,438.4
--------------- --------------- ---------------
Change in assets under management................. 1,445.8 424.0 1,614.2
Beginning balance................................. 32,454.2 32,030.2 30,416.0
--------------- --------------- ---------------
Ending balance.................................... $ 33,900.0 $ 32,454.2 $ 32,030.2
=============== =============== ===============
PRIVATE CLIENT PRODUCTS
Mutual Funds
Deposits.......................................... $ 1,789.6 $ 1,332.8 $ 1,817.8
Redemptions and withdrawals....................... (2,266.7) (2,754.0) (2,756.4)
Acquisitions(4)................................... -- 333.5 --
Performance....................................... 1,748.0 (1,811.8) (2,556.5)
--------------- --------------- ---------------
Change in assets under management................. 1,270.9 (2,899.5) (3,495.1)
Beginning balance................................. 8,322.1 11,221.6 14,716.7
--------------- --------------- ---------------
Ending balance.................................... $ 9,593.0 $ 8,322.1 $ 11,221.6
=============== =============== ===============
Intermediary Managed Account Programs
Deposits.......................................... $ 2,064.2 $ 4,117.0 $ 2,607.7
Redemptions and withdrawals....................... (2,362.1) (2,317.9) (2,316.0)
Acquisitions(3)(4)................................ -- 4,723.5 10.7
Performance....................................... 1,590.3 (2,903.1) (2,886.9)
--------------- --------------- ---------------
Change in assets under management................. 1,292.4 3,619.5 (2,584.5)
Beginning balance................................. 9,439.1 5,819.6 8,404.1
--------------- --------------- ---------------
Ending balance.................................... $ 10,731.5 $ 9,439.1 $ 5,819.6
=============== =============== ===============
Direct Managed Accounts
Deposits.......................................... $ 203.8 $ 304.2 $ 114.2
Redemptions and withdrawals....................... (294.5) (398.4) (230.4)
Acquisitions(1)(3)(4)............................. -- 1,190.8 737.8
Performance....................................... (52.5) (375.2) (658.9)
Other(6).......................................... 1,330.0 -- --
--------------- --------------- ---------------
Change in assets under management................. 1,186.8 721.4 (37.3)
Beginning balance................................. 3,740.1 3,018.7 3,056.0
--------------- --------------- ---------------
Ending balance.................................... $ 4,926.9 $ 3,740.1 $ 3,018.7
=============== =============== ===============
_________
(1) Includes assets of $0.7 billion related to the Walnut acquisition in 2001.
(2) Includes assets of $0.9 billion related to the Phoenix initial public offering in 2001.
(3) Includes assets of $0.1 billion from Capital West, now part of DPIM, in 2001.
(4) Includes assets of $7.8 billion from Kayne Anderson Rudnick in 2002.
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(5) Includes net change in the Life Companies' general account assets.
(6) Includes reclassification of certain Seneca funds from institutional products to direct managed of $1.3
billion.
Asset Management Financial Information
See Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K for
Asset Management segment financial information.
Competition
We face significant competition from a wide variety of financial institutions, including insurance companies
and other asset management companies, as well as from proprietary products offered by our distribution sources
such as 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 greater access to key
distribution channels and have greater resources than us.
Competition in our businesses is based on several factors including ratings, investment performance, access to
distribution channels, service to advisors and their clients, product features, fees charged and commissions
paid.
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
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.
Our distribution strategy is to increase sales of profitable products by increasing the number of producers
selling Phoenix products within existing relationships, by offering a greater array of products through
existing distribution sources and by developing new relationships.
During 2002 and 2003, we focused on increasing the number of producers selling Phoenix products within existing
relationships. In 2003, over 2,600 new producers wrote life insurance business with us, over 2,300 new
producers wrote annuity business with us and over 9,100 new producers placed asset management business with us.
We also engage in collaborative account development among our life insurance, annuity and asset management
wholesalers through joint marketing presentations and specialized services to advisors. We also believe having
many of the same investment choices available in each of our product lines contributes to the success of our
strategy.
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.
12
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, 2003, we employed 69 life
insurance wholesalers, 18 variable annuity wholesalers and 20 asset management wholesalers, compared to 42, one
and 25, respectively, as of December 31, 1999.
During 2003, 2002 and 2001, 85%, 89% and 81%, respectively, of total life insurance sales, as measured by new
annualized and single premiums, were from non-affiliated distribution sources. Annuity sales through
non-affiliated distribution accounted for 84%, 87% and 80% of gross annuity deposits during 2003, 2002 and
2001, respectively. Asset management sales through non-affiliated distribution accounted for 99% of sales in
all three 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 our life and annuity products and related services to State Farm's
affluent and high-net-worth customers, through qualified State Farm agents. We are the only third-party
provider of life and annuity products and services at State Farm. By the end of 2003, we had trained and
certified approximately 8,950, or 87%, of State Farm's approximately 10,300 securities licensed agents to sell
Phoenix products. Our relationship with State Farm gives us potential access to approximately 30% of the
high-net-worth households in the U.S. For 2003, State Farm ranked second among our distributors in the sale of
life insurance and third in the sale of annuity products.
National and Regional Broker-Dealers. National and regional broker-dealers are brokerage firms that engage
financial 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 a variety of life insurance, annuity and asset
management products and services positions us to benefit from these trends. We have relationships across all
product lines in many important distribution outlets that target the high-net-worth market including UBS, A.G.
Edwards and Merrill Lynch.
Advisor Groups. The recent industry trend toward affiliations among small independent financial advisory firms
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 1999, has been an important component of the National Financial Partners, or NFP, organization.
Overall life sales with NFP grew 24% in 2002 and an additional 6% in 2003.
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 have 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 almost doubled in 2003. In addition, we continue to maintain
relationships with individual agents of other companies and independent agents.
Financial Planning Firms. Financial planning firms are brokerage firms that engage financial advisors as
independent contractors rather than as employees. Financial planning firms have begun to expand their offerings
to include wealth preservation and transfer products. To capitalize on this trend, we establish relationships
with the financial planning firm, and then build relationships with the individual advisors within the firm.
This approach permits us to maximize the number of individual registered representatives who potentially may
sell our products.
Emerging Distribution Sources. Philadelphia Financial Group offers private placement life and annuity products
through a variety of distribution sources with access to the high-net-worth market including family offices,
13
financial institutions, accountants and attorneys. We also offer our life and annuity products through
non-traditional sources such as private banks, private banking groups within commercial banks and regional and
commercial banks that are focused on their high-net-worth client base.
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 2003, our Life Companies' products represented 64% of its total variable annuity
deposits and 62% of its total variable universal life premiums. WS Griffith has over 700 affiliated retail
producers.
Our affiliated distribution capability also includes Main Street Management Company, a wholly-owned
broker-dealer with approximately 250 registered representatives and a strong focus on variable products and
mutual funds.
Institutional Products Distribution
We also have an Institutional marketing group, which markets our institutional product offering to consultants
and other institutional clients. The group also provides coordinated marketing support and services. These
shared services are complemented by experienced institutional salespeople and client service professionals at
several of our affiliated asset managers.
We direct our institutional marketing efforts primarily toward 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 through the service and support we provide our distributors,
including:
• 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 five attorneys with an average of
approximately twenty years' experience, who combine their advice with tailored presentations,
educational materials and specimen legal documents;
• market research and education programs designed to help advisors better understand which financial
products the affluent and high-net-worth market demands. We assist advisors in marketing to specific
customer segments such as senior corporate executives, business owners and high-net-worth households;
• nationwide teams of life, annuity and asset 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;
• asset management and investment allocation strategies, including our Complementary Investment Analysis
tool, which identifies investment options offered both by us and by third parties that are suitable
for an individual's allocation needs;
14
• an underwriting team with significant experience in evaluating the financial and medical underwriting
risks associated with high face-value policies and affluent and high-net-worth individuals; 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.
The Venture Capital segment represented 1% of total investments and cash and cash equivalents as of December
31, 2003 and 2002. The carrying value of partnership investments in the Venture Capital segment was $196.3
million as of December 31, 2003. The segment does not include venture capital investments held within our
closed block.
Our venture capital investments are limited partnership interests in venture capital funds, leveraged buyout
funds and other private equity partnerships sponsored and managed by third parties. We refer to all of these
types of investments as venture capital. We currently have 74 partnership investments through 44 sponsors in
our Venture Capital segment. 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 Phoenix Life.
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% and 2% of annual investable cash flow to
venture capital investments. Since 2002, we have made new venture capital commitments only in our closed block.
In addition, in February 2003, we sold a 50% interest in certain of our venture capital partnerships to an
outside party and transferred the remaining 50% interest in those partnerships to our closed block. The
carrying value of the partnerships sold and transferred totaled $52.2 million after realizing a loss of $19.4
million ($5.1 million recorded in 2002 and $14.3 million recorded in 2003). The unfunded commitments of the
partnerships sold and transferred totaled $27.2 million; the outside party and the closed block will each fund
half of these commitments.
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 indebtedness; unallocated assets, liabilities and expenses; and
certain businesses not of sufficient scale to report independently. Corporate and Other also includes certain
international operations. As of December 31, 2003, we had a total of $139.8 million in these international
holdings. Among our international holdings is 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. At December 31, 2003, our ownership in Aberdeen stock was 16.2%. See
Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 5 of the
consolidated financial statements in this Form 10-K for additional information.
See Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K for
Corporate and Other segment financial information.
15
General Development of Business
PNX was incorporated in Delaware in 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. All policyholder membership interests in the mutual company were
extinguished on the effective date. At the same time, Phoenix Investment Partners became an indirect
wholly-owned subsidiary of PNX.
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. Our shares outstanding were subsequently reduced through share repurchases through
October 2002.
The following chart illustrates our current corporate structure as of December 31, 2003.
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) Subsidiaries of Phoenix Distribution Holding Company include Main Street Management Company and WS
Griffith Advisors, Inc.
At December 31, 2003, we employed approximately 1,900 people. We believe our relations with our employees are
good.
16
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. In February 2004, we announced the execution of an agreement to sell our offices in Enfield,
which sale is expected to close during the second quarter of 2004. Business functions from Enfield will be
relocated to our existing Hartford offices and, if necessary, another facility in the Hartford, Connecticut
area. 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.
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 advisor, investor or taxpayer.
Several current proceedings are discussed below. In addition, state regulatory bodies, the Securities and
Exchange Commission, or SEC, the National Association of Securities Dealers, Inc., and other regulatory bodies
regularly make inquiries of us and, from time to time, conduct examinations or investigations concerning our
compliance with, among other things, insurance laws, securities laws, and laws governing the activities of
broker-dealers. For example, during 2003 the New York State Insurance Department began its routine quinquennial
financial and market conduct examination of Phoenix Life and its New York domiciled life insurance subsidiary
and several SEC offices conducted routine reviews of certain Phoenix investment advisors, broker-dealers and
close-end funds. The New York exam and one of these SEC exams are continuing; the other SEC exams conducted in
2003 have been completed and closed. We continue to actively cooperate with both regulators.
Recently, there has been a significant increase in federal and state regulatory activity relating to financial
services companies, particularly mutual fund companies. These regulatory inquiries have focused on a number of
mutual fund issues, including late-trading and valuation issues. Our mutual funds, which we offer directly to
retail investors and qualified retirement plans as well as through the separate accounts associated with
certain of our variable life insurance policies and variable annuity products, entitle us to impose
restrictions on frequent exchanges and trades in the mutual funds and on transfers between sub-accounts and
variable products. We, like many others in the financial services industry, have received requests for
information from the SEC and state authorities, in each case requesting documentation and other information
regarding various mutual fund regulatory issues. We continue to cooperate fully with these regulatory agencies
in responding to these requests. In addition, representatives from the SEC's Office of Compliance Inspections
and Examinations are conducting compliance examinations of our mutual fund, variable annuity and mutual fund
transfer agent operations.
A number of companies have announced settlements of enforcement actions with various regulatory agencies,
primarily the SEC and the New York Attorney General's Office. While no such action has been initiated against
us, it is possible that one or more regulatory agencies may pursue an action against us in the future.
These types of lawsuits and regulatory actions may be difficult to assess or quantify, may seek recovery of
indeterminate amounts, including punitive and treble damages, and the nature and magnitude of their outcomes
may remain unknown for substantial periods of time. While it is not feasible to predict or determine the
ultimate outcome of all pending investigations and legal proceedings or to provide reasonable ranges of
potential losses, we believe that their outcomes are not likely, either individually or in the aggregate, to
have a material adverse effect on our consolidated financial condition, after consideration of available
insurance and reinsurance and the provisions made in our consolidated financial statements. However, given the
large or indeterminate amounts sought in certain of these matters and litigation's inherent unpredictability,
it is possible that an adverse outcome
17
in certain matters could, from time to time, have a material adverse effect on our results of operations or
cash flows.
Discontinued Reinsurance Business
During 1999, our Life Companies placed their remaining group accident and health reinsurance business into
run-off, adopting a formal plan to terminate the related contracts as early as contractually permitted and not
entering into any new contracts. As part of the decision to discontinue these reinsurance operations, we
reviewed the run-off block and estimated the amount and timing of future net premiums, claims and expenses. We
also purchased finite aggregate excess-of-loss reinsurance, or finite reinsurance, to further protect us from
unfavorable results from this discontinued business.
We have established reserves for claims and related expenses that we expect to pay on our discontinued group
accident and health reinsurance business. These reserves are a net present value amount that is based on
currently known facts and estimates about, among other things, the amount of insured losses and expenses that
we believe we will pay, the period over which they will be paid, the amount of reinsurance we believe we will
collect under our finite reinsurance, the amounts we believe we will collect from our retrocessionaires and the
likely legal and administrative costs of winding down the business.
Our total reserves, including coverage available from our finite reinsurance and reserves for amounts
recoverable from retrocessionaires, were $185.0 million and $155.0 million as of December 31, 2003 and 2002,
respectively. Our total amounts recoverable from retrocessionaires related to paid losses were $165.0 million
and $65.0 million as of December 31, 2003 and 2002, respectively. We did not recognize any gains or losses
during the years 2003, 2002 and 2001.
Our Life Companies are involved in disputes relating to reinsurance arrangements under which they reinsured
group accident and health risks. The first of these involves contracts for reinsurance of the life and health
carveout components of workers compensation insurance arising out of a reinsurance pool created and formerly
managed by Unicover Managers, Inc., or Unicover. In one of those, the arbitration panel issued its decision on
October 8, 2002 and confirmed the award on January 4, 2003. The financial implications of this decision are
consistent with our Life Companies' current financial provisions. In our capacity as a retrocessionaire of the
Unicover business, our Life Companies had an extensive program of our own reinsurance in place to protect us
from financial exposure to the risks we had assumed. We are currently involved in separate arbitration
proceedings with three of our own retrocessionaires, which are seeking on various grounds to avoid paying any
amounts to us or have reserved rights. In addition, Phoenix Life is involved in arbitrations and negotiations
pending in the United Kingdom between multiple layers of reinsurers and reinsureds relating to transactions in
which it participated involving certain personal accident excess-of-loss business reinsured in the London
market. See Note 17 to our consolidated financial statements in this Form 10-K for more information.
In light of our provisions for our discontinued reinsurance operations through the establishment of reserves
and the finite reinsurance, based on currently available information, we do not expect these operations,
including the proceedings described above, to have a material adverse effect on our consolidated financial
position. However, given the large and/or indeterminate amounts involved and the inherent unpredictability of
litigation, it is not possible to predict with certainty the ultimate impact on us of all pending matters or of
our discontinued reinsurance operations.
Policyholder Lawsuit Challenging the Plan of Reorganization
A 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 challenging Phoenix Life's reorganization and the
adequacy of the information provided to policyholders regarding the plan of reorganization. The plaintiff
sought 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 sought
compensatory damages for losses allegedly
18
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 was granted. Although, the plaintiff filed a notice of appeal, he
failed to perfect the appeal by the deadline.
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.
PART II
Item 5. Market of Registrant's Common Equity and Related Stockholder Matters
Market
Shares of our common stock trade on the New York Stock Exchange under the ticker symbol "PNX".
Unregistered Shares
We issued the following shares of common stock to eligible policyholders of Phoenix Life, effective as of June
25, 2001, in connection with Phoenix Life's demutualization on that date: 56,174,373 shares in 2001; 4,237
shares in 2002; and 1,853 shares (to 16 persons) in 2003. We issued these shares to policyholders in exchange
for their membership interests without registration under the Securities Act of 1933 in reliance on the
exemption under Section 3(a)(10) of the Securities Act of 1933.
In 2003, we also issued 51,855 restricted stock units, or RSUs, to 10 of our independent directors, without
registration under that act in reliance on the exemption under Regulation D for accredited investors. Each RSU
is potentially convertible into one share of our common stock.
Stock Price
The following table presents the intraday high and low prices for our common stock on the New York Stock
Exchange for the years 2003 and 2002. The closing price of our common stock at December 31, 2003 was $12.04.
2003 2002
-------------------------------- --------------------------------
High Low High Low
-------------- --------------- --------------- ---------------
First Quarter................................ $ 9.25 $ 6.03 $ 19.75 $ 16.84
Second Quarter............................... $ 9.80 $ 6.95 $ 20.25 $ 15.50
Third Quarter................................ $ 12.10 $ 8.60 $ 18.01 $ 13.30
Fourth Quarter............................... $ 12.65 $ 10.26 $ 13.75 $ 6.50
Dividends
In 2003 and 2002, we paid a dividend of $0.16 per share to shareholders of record on June 14, 2003 and June 13,
2002, respectively. For a discussion of restrictions on our ability to pay dividends, see the Liquidity and
Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of
Operations.
19
Item 6. Selected Financial Data
Our selected historical consolidated financial data as of and for each of the five years ended December 31,
2003 follows ($ amounts in millions, except earnings per share). We derived the data for the years 2003, 2002
and 2001 from our consolidated financial statements in this Form 10-K. We derived the data for the years 2000
and 1999 from audited consolidated financial statements not in this Form 10-K. Also, we have restated or
reclassified certain amounts for prior years to conform with 2003 presentation as further described in Note 1
of our consolidated financial statements 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 generally accepted
accounting principles, or 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.
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 in this Form 10-K.
20
2002 2001
2003 Restated Restated 2000 1999
------------ ------------ ------------ ------------ ------------
Income Statement Data(1)
Premiums................................... $ 1,042.2 $ 1,082.0 $ 1,112.7 $ 1,147.4 $ 1,175.7
Insurance and investment product fees...... 565.3 560.5 543.2 624.5 569.1
Net investment income...................... 1,107.4 947.7 892.8 1,141.0 961.3
Net realized investment gains (losses)..... (100.5) (133.9) (84.9) 89.2 75.8
------------ ------------ ------------ ------------ ------------
Total revenues............................. $ 2,614.4 $ 2,456.3 $ 2,463.8 $ 3,002.1 $ 2,781.9
------------ ------------ ------------ ------------ ------------
Total benefits and expenses................ $ 2,624.6 $ 2,640.8 $ 2,709.1 $ 2,829.6 $ 2,502.0
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations... $ (4.1) $ (140.7) $ (147.3) $ 96.0 $ 166.2
Loss from discontinued operations,
net of income taxes(2)................... (2.1) (1.3) (2.5) (12.7) (77.0)
------------ ------------ ------------ ------------ ------------
Income (loss) before cumulative effect of
accounting changes....................... (6.2) (142.0) (149.8) 83.3 89.2
Cumulative effect of accounting changes(3). -- (130.3) (65.4) -- --
------------ ------------ ------------ ------------ ------------
Net income (loss).......................... $ (6.2) $ (272.3) $ (215.2) $ 83.3 $ 89.2
============ ============ ============ ============ ============
Basic and Diluted Earnings Per Share
Income (loss) from continuing operations(4) $ (0.04) $ (1.44) $ (1.41) $ 0.92 $ 1.59
============ ============ ============ ============ ============
Net income (loss)(4)....................... $ (0.07) $ (2.78) $ (2.06) $ 0.80 $ 0.85
============ ============ ============ ============ ============
Dividends per share....................... $ 0.16 $ 0.16 $ -- $ -- $ --
============ ============ ============ ============ ============
Ratio of Earnings to Fixed Charges
Ratio of earnings to fixed charges(5)...... 0.7 -- -- 4.3 7.0
Supplemental ratio of earnings to
fixed charges - including interest credited
on policyholder contract balances(6)..... 0.9 0.5 0.2 1.8 2.6
Balance Sheet Data
Cash and general account investments....... $17,229.2 $16,812.8 $14,400.4 $12,767.5 $11,768.8
============ ============ ============ ============ ============
Total assets............................... $27,559.2 $25,235.9 $22,535.9 $20,313.5 $20,283.9
============ ============ ============ ============ ============
Indebtedness............................... $ 639.0 $ 644.3 $ 599.3 $ 425.1 $ 499.4
============ ============ ============ ============ ============
Total liabilities.......................... $25,580.0 $23,381.0 $20,219.0 $18,335.4 $18,430.9
============ ============ ============ ============ ============
Minority interest in net assets of
consolidated subsidiaries................ $ 31.4 $ 28.1 $ 8.8 $ 136.9 $ 100.1
============ ============ ============ ============ ============
Total stockholders' equity................. $ 1,947.8 $ 1,826.8 $ 2,307.8 $ 1,840.9 $ 1,756.0
============ ============ ============ ============ ============
Third-Party Assets Under Management $42,841.6 $38,568.2 $38,604.3 $44,056.8 $52,082.1
============ ============ ============ ============ ============
Consolidated Statutory Data
Premiums and deposits...................... $ 3,364.9 $ 3,919.7 $ 3,144.8 $ 2,344.8 $ 2,330.2
============ ============ ============ ============ ============
Net income (loss).......................... $ (26.0) $ (130.7) $ (66.0) $ 266.1 $ 131.3
============ ============ ============ ============ ============
Capital and surplus(7)..................... $ 762.4 $ 861.4 $ 1,149.8 $ 1,322.8 $ 1,054.1
Asset valuation reserve (AVR)(8)........... 200.0 147.8 223.4 560.4 373.2
------------ ------------ ------------ ------------ ------------
Capital, surplus and AVR................... $ 962.4 $ 1,009.2 $ 1,373.2 $ 1,883.2 $ 1,427.3
============ ============ ============ ============ ============
- --------
(1) For a summary of our significant accounting policies, refer to the notes to our consolidated financial
statements in this Form 10-K. Certain 2002 and 2001 amounts have been revised from amounts previously
reported. See Note 1 to our consolidated financial statements in this Form 10-K for additional
information.
(2) During 2003, we signed a definitive purchase and sale agreement to sell Phoenix National Trust Company to
a third party. This sale is expected to close in the first quarter of 2004. The financial statement effect
of this transaction is immaterial to our consolidated financial statements.
21
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. Additional information on discontinued operations is included in Note 14 to our consolidated
financial statements included in this Form 10-K.
(3) During 2002, we recognized a cumulative effect adjustment of 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 in this Form 10-K.
During 2001, we recognized cumulative effect adjustments of accounting changes for venture capital
partnerships, derivative instruments and securitized financial instruments.
In 2001, 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 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 9 to our consolidated
financial statements 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 in this Form 10-K.
(4) We calculated earnings per share for each of the three years from 1999 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 2003, 2002 and 2001, the ratio of earnings to fixed charges for those years was
less than 1:1. We would need $13.3 million, $112.3 million and $131.6 million in additional earnings for
the years 2003, 2002 and 2001, respectively, to achieve a 1:1 coverage ratio.
(6) Due to our losses during 2003, 2002 and 2001, the ratio coverages, including interest credited on
policyholder contract balances, were less than 1:1. We would need $13.3 million, $112.3 million and $131.6
million in additional earnings for the years 2003, 2002 and 2001, respectively, to achieve a 1:1 coverage
ratio.
(7) In accordance with accounting practices prescribed by the New York State Insurance Department, Phoenix
Life's capital and surplus includes $175.0 million principal amount of surplus notes outstanding.
(8) The AVR is a statutory reserve intended to mitigate changes to the balance sheet as a result of
fluctuations in asset values.
22
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 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
Poor performance of the equity markets could adversely affect sales and assets under management of our asset
management, variable universal life and variable annuity products, as well as the performance of our venture
capital segment and potential future pension plan funding requirements.
While in 2003 the U.S. equity markets experienced strong growth, this growth was preceded by more than two
years of 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 were accompanied by
increased volatility.
There are four ways in which market declines and volatility have affected, or have the potential to affect, us
negatively.
• First, significant market volatility or declines may cause potential purchasers of our products to
refrain from investing, and current investors to withdraw from the markets or reduce their level of
investment. We cannot estimate the impact of prior market declines on our sales.
• Second, because the revenues of our asset 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 in 2000, 2001 and 2002 limited our fee revenues by reducing the value of the assets we
manage. Our assets under management at December 31, 2002 were 8.4% less than at December 31, 2000. We
could experience increasing surrenders and redemptions if equity markets perform poorly again. The
23
possibility of declines in assets under management is heightened by the fact that, as of December 31,
2003, approximately 28% of our variable universal life insurance assets under management excluding our
private placement business, and approximately 56% of our variable annuity assets under management
excluding our private placement business, were not subject to any surrender penalties. 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.
• Third, returns on venture capital investments are correlated with the performance of the equity markets.
During the severe market declines of 2002 and 2001, our venture capital investments decreased our income
from continuing operations by $38.5 million and $54.9 million, respectively. Conversely, in 2003 venture
capital decreased the loss from continuing operations by $23.5 million. It is possible we will again
experience declines related to our venture capital investments comparable to those experienced in 2002
and 2001.
• Fourth, the funding requirements of our pension plan are dependent on the performance of the equity
markets. The portfolio funding for the company's pension plan currently consists of 63% equities. In a
severe market decline, the value of the assets supporting the pension plan will decrease, increasing the
requirement for future funding. This funding requirement will increase expenses and decrease the earnings
of the company.
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 our closed block to produce cash flows that, together with additional revenues from
the closed block policies, are reasonably expected to support our obligations relating to these policies. Our
allocation of assets to the closed block was based on actuarial assumptions about our payment obligations to
closed block policyholders, the continuation of the non-guaranteed policyholder dividend scales in effect for
2000, 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
resulting from such an insufficiency.
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 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 are set forth in the chart below.
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Financial Strength Rating Senior Debt Rating
Rating Agency of Phoenix Life of PNX
- --------------------------------- ---------------------------------------- --------------------------------
A.M. Best Company, Inc. A ("Excellent") bbb+ ("Adequate")
Fitch AA- ("Very Strong") A- ("Strong")
Standard & Poor's A ("Strong") BBB ("Good")
Moody's A3 ("Good") Baa3 ("Adequate")
A.M. Best, Moody's and Standard & Poor's each have a stable outlook for our ratings, while Fitch has a negative
outlook.
Lower ratings increase borrowing costs. Additional downgrades may increase 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 recent 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, either past or future, 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 discontinued our reinsurance operations through a combination of sale, reinsurance and placement of
certain retained group accident and health reinsurance business into run-off. We adopted a formal plan to stop
writing new contracts covering these risks and to end the existing contracts as soon as those contracts would
permit. However, we remain liable for claims under those contracts. We also purchased finite reinsurance to
further protect us from unfavorable results from this discontinued business.
We have established reserves for claims and related expenses that we expect to pay on our discontinued group
accident and health reinsurance business. These reserves are a net present value amount that is based on
currently known facts and estimates about, among other things, the amount of insured losses and expenses that
we believe we will pay, the period over which they will be paid, the amount of reinsurance we believe we will
collect under our finite reinsurance, the amounts we believe we will collect from our retrocessionaires and the
likely legal and administrative costs of winding down the business. Our total reserves, including coverage
available from our finite reinsurance and reserves for amounts recoverable from retrocessionaires, were $185.0
million as of December 31, 2003. Our total amounts recoverable from retrocessionaires related to paid losses
were $165.0 million as of December 31, 2003.
We expect our reserves and reinsurance to cover the run-off of the business; however, the nature of the
underlying risks is such that the claims may take years to reach the reinsurers involved. Therefore, we expect
to pay claims out of existing estimated reserves for up to ten years as the level of business diminishes. In
addition, unfavorable claims experience is possible and could result in additional future losses. For these
reasons, we cannot know today what our actual claims experience will be.
In addition, we are involved in disputes relating to certain portions of our discontinued group accident and
health reinsurance business. See Note 17 to our consolidated financial statements in this Form 10-K for more
information.
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In establishing our reserves 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 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.
Legislation eliminating or modifying either the federal estate tax or the federal taxation of investment income
could adversely affect sales of and revenues from our life and annuity products. 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.
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 reducing the tax on dividends
and capital gains reduces the relative benefits that such deferral provides.
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. Second-to-die policies are often purchased by two people 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 21% and 35% of our new life insurance premiums and deposits in 2003 and
2002, respectively. President Bush and members of Congress have expressed a desire to modify the existing
legislation, which could result in faster or more complete reduction or repeal of the estate tax.
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. In 2003, the tax rate on long-term capital gains and
certain dividend income was reduced until 2008. President Bush and members of Congress have expressed a desire
to make these rate reductions permanent. If this happens, it could have a negative impact on our sales and
revenues. In addition, President Bush's Fiscal Year 2005 Budget proposed changes that would have created new
and expanded vehicles for tax-exempt savings. If enacted, the impact of these proposals cannot reasonably be
estimated.
Changes in interest rates could harm cash flow and profitability in our life and annuity businesses.
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 could require us to sell invested assets at a time when their
prices are depressed by the increase in interest rates, which could cause us to realize investment losses.
Conversely, during periods of declining interest rates, we could experience increased premium payments on
products with flexible premium features, repayment of policy loans and increased percentages of policies
remaining inforce. We would obtain lower returns on investments made with these cash flows. In addition,
borrowers may prepay or redeem mortgages and bonds in our investment portfolio so that we might have to
reinvest those proceeds in lower interest-bearing investments. As a consequence of these factors, we could
26
experience a decrease in the spread between the returns on our investment portfolio and amounts credited to
policyholders and contractholders, which could adversely affect our profitability.
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. There is substantial competition in most of our non-affiliated distributors.
Non-affiliated distribution sources have contributed significantly to our sales in recent years. For example,
Merrill Lynch, with over 13,000 registered representatives, accounted for 29% of our asset management combined
inflows for sponsored managed accounts and mutual funds in 2003. The loss or diminution of our relationships
with non-affiliated distributors could materially reduce our sales and revenues.
The independent trustees of our mutual funds and closed-end funds, as well as intermediary program sponsors,
managed account clients and institutional asset 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 Phoenix Investment Partners acts as investment advisor
or sub-advisor is registered under the Investment Company Act of 1940 and is governed by a board of trustees or
board of directors. SEC rules require a majority of each board's members to be independent, and proposed
amendments would increase that requirement to 75%. Each fund's board has the duty of deciding annually whether
to renew the contract under which Phoenix Investment Partners manages 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, in limited
circumstances, the shareholders may terminate an advisory contract with Phoenix Investment Partners and move
the assets to another investment advisor. The board members also may deem it to be in the best interests of a
fund's shareholders to make other decisions adverse to us, such as reducing the compensation paid to Phoenix
Investment Partners or imposing restrictions on Phoenix Investment Partners' management of the fund.
Our asset 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 relating to material portion of assets under management would
adversely affect our investment management fee revenues and could impair our intangible assets.
We face strong competition in our businesses from mutual fund companies, banks, asset 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 each of our businesses, comprising life insurance, annuities and asset
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 business overall, the nature of these businesses means that our actual and potential
competitors include a large number of mutual fund companies, banks, asset 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,
27
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 asset 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 and again in 2003, we experienced net asset withdrawals in our
private client products. 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 asset management businesses. We believe that our
success in competing for distributors depends on factors such as our financial strength and on the services we
provide to, and the relationships we develop with, these distributors. Our distributors are generally free to
sell products from a variety of providers, 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 asset 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 the Gramm-Leach-Bliley Act of 1999, which permits mergers among commercial
banks, insurers and securities firms under one holding company. Until passage of this 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.
Changes in insurance and securities regulation could affect our profitability by imposing further restrictions
on the conduct of our business.
Our life insurance and annuity businesses are subject to comprehensive state regulation and supervision
throughout the United States. State insurance regulators and the National Association of Insurance
Commissioners continually reexamine existing laws and regulations, and may impose changes in the future that
put further regulatory burdens on us, thereby increasing our costs of business. This could materially adversely
affect our results of operations and financial condition.
The U.S. federal government does not directly regulate the insurance business. However, federal legislation and
administrative policies in areas which include employee benefit plan regulation, financial services regulation
and federal taxation and securities laws could significantly affect the insurance industry and our costs.
We and some of the policies, contracts and other products that we offer are subject to various levels of
regulation under the federal securities laws administered by the SEC as well as regulation by those states and
foreign countries in which we provide investment advisory services, offer products or conduct other
securities-related activities. We could be restricted in the conduct of our business for failure to comply with
such laws and regulations. Future laws and regulations, or the interpretation thereof, could materially
adversely affect our results of operations and financial condition by increasing our expenses in having to
comply with these regulations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis reviews our consolidated financial condition at December 31, 2003 and 2002
restated; our consolidated results of operations for the years 2003, 2002 restated and 2001 restated; and,
where appropriate, factors that may affect our future financial performance. You should read this discussion in
conjunction with "Selected Financial Data" and our consolidated financial statements in this Form 10-K.
Overview
We are a manufacturer of insurance, annuity and asset management products for the accumulation, preservation
and transfer of wealth. We provide products and services to affluent and high-net-worth individuals through
their advisors and to institutions directly and through consultants. We offer a broad range of life insurance,
annuity and asset management products and services through a variety of distributors. These distributors
include affiliated and non-affiliated advisors and financial services firms who make our products and services
available to their clients.
We manufacture our products through two operating segments — Life and Annuity and Asset Management — which
include three product lines — life insurance, annuities and asset management. Through Life and Annuity we offer
a variety of life insurance and annuity products, including universal, variable universal, whole and term life
insurance, and a range of variable annuity offerings. Asset Management comprises two lines of business —
private client and institutional.
Through our private client line of business, we provide investment management services principally on a
discretionary basis, with products consisting of open-end mutual funds and managed accounts. Managed accounts
include intermediary programs sponsored and distributed by non-affiliated broker-dealers and direct managed
accounts sold and administered by us. Managed accounts sponsored and distributed by non-affiliated
broker-dealers generally require minimum investments of $100,000, and direct managed accounts sold and
administered by us generally require minimum investments of $1 million. Our private client business also
provides transfer agency, accounting and administrative services to most of our open-end mutual funds.
We report our remaining activities in two non-operating segments — Venture Capital and Corporate and Other.
Venture Capital includes limited partnership interests in venture capital funds, leveraged buyout funds and
other private equity partnerships sponsored and managed by third parties. These assets are investments of the
general accounts of our Life Companies. See Business—Venture Capital Segment. Corporate and Other includes
indebtedness; unallocated assets, liabilities and expenses; and certain businesses not of sufficient scale to
report independently. See Business—Corporate and Other Segment. These non-operating segments are significant
for financial reporting purposes, but do not contain products or services relevant to our core manufacturing
operations.
We derive our revenues principally from:
• premiums on whole life insurance;
• insurance and investment product fees on variable life and annuity products and universal life products;
• investment management and related fees; and
• net investment income and net realized investment gains.
Under GAAP, premium and deposit collections for variable life, universal life and annuity products are not
recorded as revenues. These collections are reflected on our balance sheet as an increase in separate account
liabilities for certain investment options of variable products. Collections for fixed annuities and certain
investment options of variable annuities are reflected on our balance sheet as an increase in policyholder
deposit funds. Collections for other products are reflected on our balance sheet as an increase in policy
liabilities and accruals.
29
Our expenses consist principally of:
• insurance policy benefits provided to policyholders, including interest credited on policyholders; general
account balances;
• policyholder dividends;
• deferred policy acquisition costs amortization;
• intangible assets amortization;
• interest expense;
• other operating expenses; and
• income taxes.
Our profitability depends principally upon:
• the adequacy of our product pricing, which is primarily a function of our:
• ability to select underwriting risks;
• mortality experience;
• ability to generate investment earnings;
• ability to maintain expenses in accordance with our pricing assumptions; and
• policies' persistency (the percentage of policies remaining inforce from year to year as measured by
premiums);
• the amount and composition of assets under management;
• the maintenance of our target spreads between the rate of earnings on our investments and dividend and
interest rates credited to customers; and
• our ability to manage expenses.
Prior to Phoenix Life's demutualization, we focused on participating life insurance products, which pay
policyholder dividends. As of December 31, 2003, 74% of our life insurance reserves were for participating
policies. As a result, a significant portion of our expenses consists, and will continue to consist, of such
policyholder dividends. Our net income is reduced by the amounts of these dividends. Policyholder dividends
expense was $418.8 million during 2003, $401.8 million during 2002 and $400.1 million during 2001.
Our sales and financial results over the last several years have been affected by demographic, industry and
market trends. The baby boom generation has begun to enter its prime savings years. Americans generally have
begun to rely less on defined benefit retirement plans, social security and other government programs to meet
their post-retirement financial needs. Product preferences have shifted between fixed and variable options
depending on market and economic conditions. These factors have had a positive effect on sales of our balanced
product portfolio including universal life, variable life and variable annuity products, as well as a broad
array of mutual funds and managed accounts.
Discontinued Operations
During the fourth quarter of 2003, we entered into a purchase and sale agreement to sell 100% of the common
stock held by us in Phoenix National Trust Company. This sale is expected to close in the first quarter of
2004. The financial statement effect of this transaction is immaterial to our consolidated financial
statements.
During 1999, we discontinued the operations of several businesses that did not align with our business strategy
including reinsurance, group life and health and real estate management operations. See Note 14 to our
consolidated financial statements in this Form 10-K for detailed information regarding our discontinued
operations.
30
Purchase of Phoenix Investment Partners Minority Interest
In 2001, we acquired the minority interest in Phoenix Investment Partners for $339.3 million. Prior to this
acquisition, Phoenix Investment Partners had been a publicly-held company listed on the New York Stock Exchange
in which we held approximately a 55.1% interest. See Note 4 to our consolidated financial statements in this
Form 10-K for detailed information regarding our acquisition of the Phoenix Investment Partners minority
interest.
Other Recent Acquisitions
Life Annuity
In May 2003, we acquired the remaining interest in PFG Holdings, Inc., or PFG, the holding company for our
private placement operation, not already owned by us for initial consideration of $16.7 million. Under the
terms of the purchase agreement, we may be obligated to pay additional consideration of up to $89.0 million to
the selling shareholders, including $13.0 million during the years 2004 through 2007 based on certain financial
performance targets being met, and the balance in 2008 based on the appraised value of PFG as of December 31,
2007. See Note 3 to our consolidated financial statements in this Form 10-K for further information regarding
PFG.
In 2002, we acquired the variable life and variable annuity business of Valley Forge Life Insurance Company (a
subsidiary of CNA Financial Corporation). See Note 3 to our consolidated financial statements in this Form 10-K
for further information regarding the acquisition of Valley Forge Life Insurance Company.
Asset Management
In 2002, we acquired a 60% interest in Kayne Anderson Rudnick for $102.4 million. In 2001, we acquired a 75%
interest in Walnut for $7.5 million in cash. We also paid $5.5 million in cash for a 65% interest in Capital
West, which is reported as part of DPIM. See Note 4 to our consolidated financial statements in this Form 10-K
for further information regarding Kayne Anderson Rudnick, Walnut and Capital West.
The Demutualization
Phoenix Home Life demutualized on June 25, 2001 by converting from a mutual life insurance company to a stock
life insurance company, became a wholly-owned subsidiary of PNX and changed its name to Phoenix Life Insurance
Company, or Phoenix Life. See Note 3 to our consolidated financial statements in this Form 10-K for detailed
information regarding the demutualization and closed block.
Recently Issued Accounting Standards
Variable Interest Entities. A new accounting standard was issued in January 2003 that interprets the existing
standard on consolidation. This new accounting standard was revised and reissued in December 2003 as FIN 46-R,
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, or FIN 46-R. It clarifies the
application of standards of consolidation to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from other parties ("variable interest
entities"). As of December 31, 2003, we adopted FIN 46-R for special purpose entities where we may hold a
variable interest. Our adoption of FIN 46-R resulted in no additional variable interest entities being
consolidated by us.
In 2003, we revised our method of consolidation for the years 2003, 2002 and 2001 for three collateralized
obligation trusts where we serve as investment advisor. Under the new method, the applicable assets,
liabilities, revenues, expenses and minority interest are presented on a disaggregated basis and investments
pledged as collateral are recorded at fair value with unrealized gains or losses recorded as a component of
accumulated other
31
comprehensive income, other-than-temporary impairment of investments are recorded as a charge to earnings, and
non-recourse collateralized obligations are recorded at unpaid principal balance. Prior to our revision of
previously reported 2003, 2002 and 2001 amounts, investments pledged as collateral were recorded at fair value
with asset valuation changes directly offset by changes in the corresponding liabilities in a manner similar to
separate accounts. See Note 1 a