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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission file number 333-55268
THE PHOENIX COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1599088
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One American Row, Hartford, Connecticut 06102-5056
(860) 403-5000
----------------------------------------------------
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X. No__.
Indicated by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Yes X. No__.
On April 30 2004, the registrant had 94,600,151 shares of common stock outstanding.
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1
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet at March 31, 2004 (unaudited) and December 31, 2003............... 3
Consolidated Statement of Income and Comprehensive Income for the three months
ended March 31, 2004 and 2003 (unaudited).................................................. 4
Consolidated Statement of Cash Flows for the three months ended March 31, 2004
and 2003 (unaudited)....................................................................... 5
Consolidated Statement of Changes in Stockholders' Equity for the three months ended
March 31, 2004 and 2003 (unaudited)........................................................ 6
Notes to Consolidated Financial Statements for the three months ended March 31, 2004
and 2003 (unaudited)....................................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........32
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................67
Item 4. Controls and Procedures........................................................................71
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................72
Item 2. Changes in Securities and Use of Proceeds......................................................73
Item 3. Defaults Upon Senior Securities................................................................73
Item 4. Submission of Matters to a Vote of Security Holders............................................74
Item 5. Other Information..............................................................................74
Item 6. Exhibits and Reports on Form 8-K...............................................................74
Signature...................................................................................................80
2
PART I.
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
THE PHOENIX COMPANIES, INC.
Consolidated Balance Sheet
($ amounts in millions, except per share data)
March 31, 2004 (unaudited) and December 31, 2003
2004 2003
--------------- ---------------
ASSETS:
Available-for-sale debt securities, at fair value............................. $ 13,631.0 $ 13,273.0
Available-for-sale equity securities, at fair value........................... 338.9 312.0
Mortgage loans, at unpaid principal balances.................................. 271.5 284.1
Venture capital partnerships, at equity in net assets......................... 249.5 234.9
Affiliate equity securities, at equity in net assets.......................... 49.3 47.5
Policy loans, at unpaid principal balances.................................... 2,239.4 2,227.8
Other investments............................................................. 414.3 402.0
--------------- ---------------
17,193.9 16,781.3
Available-for-sale debt and equity securities pledged as collateral,
at fair value. 1,389.2 1,350.0
--------------- ---------------
Total investments............................................................. 18,583.1 18,131.3
Cash and cash equivalents..................................................... 321.7 447.9
Accrued investment income..................................................... 232.3 222.3
Receivables................................................................... 167.3 224.9
Deferred policy acquisition costs............................................. 1,358.5 1,367.7
Deferred income taxes......................................................... 24.8 58.7
Intangible assets with definite lives......................................... 255.3 261.8
Goodwill and other indefinite-lived intangible assets......................... 491.1 493.2
Other assets.................................................................. 261.1 268.2
Separate account assets....................................................... 6,461.6 6,083.2
--------------- ---------------
Total assets.................................................................. $ 28,156.8 $ 27,559.2
=============== ===============
LIABILITIES:
Policy liabilities and accruals............................................... $ 13,335.3 $ 13,088.6
Policyholder deposit funds.................................................... 3,556.4 3,642.7
Stock purchase contracts...................................................... 145.1 128.8
Indebtedness.................................................................. 666.8 639.0
Other general account liabilities............................................. 519.0 525.7
Non-recourse collateralized obligations....................................... 1,445.0 1,472.0
Separate account liabilities.................................................. 6,461.6 6,083.2
--------------- ---------------
Total liabilities............................................................. 26,129.2 25,580.0
--------------- ---------------
MINORITY INTEREST:
Minority interest in net assets of consolidated subsidiaries.................. 30.4 31.4
--------------- ---------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value 106,376,363 and 106,376,363 shares issued........ 1.0 1.0
Additional paid-in capital.................................................... 2,428.9 2,428.8
Deferred compensation on restricted stock units............................... (3.2) (3.6)
Accumulated deficit........................................................... (336.1) (352.7)
Accumulated other comprehensive income........................................ 93.8 63.7
Treasury stock, at cost: 11,796,366 and 11,930,647 shares.................... (187.2) (189.4)
--------------- ---------------
Total stockholders' equity.................................................... 1,997.2 1,947.8
--------------- ---------------
Total liabilities, minority interest and stockholders' equity................. $ 28,156.8 $ 27,559.2
=============== ===============
The accompanying notes are an integral part of these financial statements.
3
THE PHOENIX COMPANIES, INC.
Consolidated Statement of Income and Comprehensive Income
($ amounts in millions, except per share data)
Three Months Ended March 31, 2004 and 2003 (unaudited)
2003
2004 Restated
--------------- ---------------
REVENUES:
Premiums...................................................................... $ 232.7 $ 246.1
Insurance and investment product fees......................................... 160.4 136.1
Investment income, net of expenses............................................ 278.2 291.1
Net realized investment gains (losses)........................................ 2.5 (14.1)
--------------- ---------------
Total revenues................................................................ 673.8 659.2
--------------- ---------------
BENEFITS AND EXPENSES:
Policy benefits, excluding policyholder dividends............................. 345.6 350.8
Policyholder dividends........................................................ 105.9 116.5
Policy acquisition cost amortization.......................................... 22.6 28.0
Intangible asset amortization................................................. 8.3 8.4
Interest expense on indebtedness.............................................. 9.8 9.8
Interest expense on non-recourse collateralized obligations................... 8.9 13.3
Other operating expenses...................................................... 145.4 130.3
--------------- ---------------
Total benefits and expenses................................................... 646.5 657.1
--------------- ---------------
Income from continuing operations before income taxes and minority interest... 27.3 2.1
Applicable income tax (benefit)............................................... 7.3 (2.4)
--------------- ---------------
Income from continuing operations before minority interest.................... 20.0 4.5
Minority interest in net income of consolidated subsidiaries.................. (3.7) (2.8)
--------------- ---------------
Income from continuing operations............................................. 16.3 1.7
Income (loss) from discontinued operations.................................... 0.3 (0.4)
--------------- ---------------
Net income.................................................................... $ 16.6 $ 1.3
=============== ===============
EARNINGS PER SHARE:
Income from continuing operations - basic..................................... $ 0.17 $ 0.02
Income from continuing operations - diluted................................... $ 0.16 $ 0.02
=============== ===============
Net income - basic............................................................ $ 0.18 $ 0.01
Net income - diluted.......................................................... $ 0.16 $ 0.01
=============== ===============
Basic weighted-average common shares outstanding (in thousands)............... 94,512 94,046
Diluted weighted-average common shares outstanding (in thousands)............. 102,008 95,014
=============== ===============
COMPREHENSIVE INCOME:
Net income.................................................................... $ 16.6 $ 1.3
--------------- ---------------
Net unrealized investment gains............................................... 38.4 1.4
Net unrealized foreign currency translation adjustment........................ 2.6 (1.0)
Net unrealized derivative instruments gains (losses).......................... (10.9) 11.1
--------------- ---------------
Other comprehensive income.................................................... 30.1 11.5
--------------- ---------------
Comprehensive income.......................................................... $ 46.7 $ 12.8
=============== ===============
The accompanying notes are an integral part of these financial statements.
4
THE PHOENIX COMPANIES, INC.
Consolidated Statement of Cash Flows
($ amounts in millions)
Three Months Ended March 31, 2004 and 2003 (unaudited)
2003
2004 Restated
--------------- ---------------
OPERATING ACTIVITIES:
Premiums collected............................................................ $ 236.0 $ 249.0
Insurance and investment product fees collected............................... 166.8 138.7
Investment income collected................................................... 241.7 242.8
Policy benefits paid, excluding policyholder dividends........................ (261.0) (267.7)
Policyholder dividends paid................................................... (91.7) (93.9)
Policy acquisition costs paid................................................. (47.0) (44.0)
Interest expense on indebtedness paid......................................... (6.3) (5.5)
Interest expense on collateralized obligations paid........................... (8.9) (13.2)
Other operating expenses paid................................................. (175.3) (172.2)
Income taxes refunded......................................................... 6.7 15.8
--------------- ---------------
Cash from continuing operations............................................... 61.0 49.8
Discontinued operations, net.................................................. (14.4) (17.1)
--------------- ---------------
Cash from operating activities................................................ 46.6 32.7
--------------- ---------------
INVESTING ACTIVITIES:
Investment purchases (Note 5)................................................. (940.7) (1,825.8)
Investment sales, repayments and maturities (Note 5).......................... 934.8 1,080.1
Debt and equity securities pledged as collateral purchases.................... (30.7) (4.5)
Debt and equity securities pledged as collateral sales........................ -- --
Subsidiary purchases.......................................................... (29.2) --
Premises and equipment additions.............................................. (2.7) (2.1)
Discontinued operations, net.................................................. 1.4 (6.7)
--------------- ---------------
Cash for investing activities................................................. (67.1) (759.0)
--------------- ---------------
FINANCING ACTIVITIES:
Policyholder deposit fund receipts (repayments), net.......................... (86.3) 283.3
Other indebtedness proceeds................................................... 25.0 --
Collateralized obligations proceeds (repayments), net......................... (38.2) (26.0)
Common stock dividends paid................................................... -- --
Minority interest distributions............................................... (6.2) (7.0)
--------------- ---------------
Cash from (for) financing activities.......................................... (105.7) 250.3
--------------- ---------------
Change in cash and cash equivalents........................................... (126.2) (467.0)
Cash and cash equivalents, beginning of period................................ 447.9 1,110.5
--------------- ---------------
Cash and cash equivalents, end of period...................................... $ 321.7 $ 634.5
=============== ===============
Included in cash and cash equivalents above is cash pledged as collateral of $2.1 million and $26.5 million at
March 31, 2004 and 2003, respectively.
The accompanying notes are an integral part of these financial statements.
5
THE PHOENIX COMPANIES, INC.
Consolidated Statement of Changes in Stockholders' Equity
($ amounts in millions, except share and per share data)
Three Months Ended March 31, 2004 and 2003 (unaudited)
2003
2004 Restated
--------------- ---------------
COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL:
Additional common shares issued in demutualization (0 and 1,073 shares)....... $ -- $ --
Restricted stock units awarded as compensation (46,073 and 394,737 units)..... 0.7 3.0
Stock options awarded as compensation (130,000 and 0 options)................. 0.2
Excess of cost over fair value of common shares contributed to
employee savings plan....................................................... (0.3) (0.3)
DEFERRED COMPENSATION ON RESTRICTED STOCK UNITS:
Compensation expense deferred on restricted stock units awarded............... (0.5) (3.0)
Compensation expense recognized on restricted stock units..................... 0.4 0.2
RETAINED EARNINGS (ACCUMULATED DEFICIT):
Net income.................................................................... 16.6 1.3
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Other comprehensive income.................................................... 30.1 11.5
TREASURY STOCK:
Common shares contributed to employee savings plan (134,281 and
42,333 shares).............................................................. 2.2 0.7
--------------- ---------------
Change in stockholders' equity................................................ 49.4 13.4
Stockholders' equity, beginning of period..................................... 1,947.8 1,826.8
--------------- ---------------
Stockholders' equity, end of period........................................... $ 1,997.2 $ 1,840.2
=============== ===============
The accompanying notes are an integral part of these financial statements.
6
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2004 and 2003 (unaudited)
1. Organization and Operations
Our consolidated financial statements include the accounts of The Phoenix Companies, Inc., its subsidiaries and
certain sponsored collateralized obligation trusts as described in Note 7. The Phoenix Companies, Inc. is a
holding company and our operations are conducted through subsidiaries, the principal ones of which are Phoenix
Life Insurance Company, or Phoenix Life, and Phoenix Investment Partners, Ltd., or PXP. We have eliminated
significant intercompany accounts and transactions in consolidating these financial statements. We have
restated certain 2003 amounts on our Consolidated Statement of Income and Comprehensive Income, our
Consolidated Statement of Cash Flows and our Consolidated Statement of Changes in Stockholders' Equity, as
further described below. Also, we have reclassified certain amounts for 2003 to conform with 2004 presentation.
We have prepared these financial statements in accordance with generally accepted accounting principles, or
GAAP. In preparing these financial statements in conformity with GAAP, we are required to make estimates and
assumptions that affect the reported amounts of assets and liabilities at reporting dates and the reported
amounts of revenues and expenses during the reporting periods. Actual results will differ from these estimates
and assumptions. We employ significant estimates and assumptions in the determination of: deferred policy
acquisition costs; policyholder liabilities and accruals; the valuation of intangible assets; the valuation of
investments in debt and equity securities and venture capital partnerships; the valuation of deferred tax
assets; pension and other post-employment benefits liabilities; and accruals for contingent liabilities. Our
significant accounting policies are presented in the notes to our consolidated financial statements in our 2003
Annual Report on Form 10-K.
Our interim financial statements do not include all of the disclosures required by GAAP for annual financial
statements. In our opinion, we have included all adjustments, consisting of normal, recurring adjustments,
considered necessary for a fair statement of the results for the interim periods. Financial results for the
three-month period in 2004 are not necessarily indicative of the results that may be expected for the year
2004. These unaudited consolidated financial statements should be read in conjunction with our consolidated
financial statements in our 2003 Annual Report on Form 10-K.
Accounting changes and restatement of prior periods
Post-retirement Benefits: On January 12, 2004, the Financial Accounting Standards Board, or the FASB, issued
FASB Staff Position No. FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003, or the FSP. The FSP permitted employers that sponsor
post-retirement benefit plans, or plan sponsors that provide prescription drug benefits to retirees, to defer
accounting for any effects of the anticipated federal tax subsidy related to those drug benefits. We have
elected to defer the associated accounting. Accordingly, the accumulated post-retirement benefit obligation and
net periodic post-retirement benefit cost reflected in our financial statements and accompanying notes do not
reflect the effects of any anticipated federal tax subsidy. In accordance with the FSP, our deferral must
remain in effect until the earlier of: (a) the issuance of guidance by the FASB on how to account for the
federal subsidy to be provided to plan sponsors under the Act or (b) the remeasurement of plan assets and
obligations subsequent to January 31, 2004.
Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when
issued, could require us to change amounts reported herein as of March 31, 2004 and for the three months then
ended.
7
Nontraditional Long-Duration Contracts and Separate Accounts: Effective January 1, 2004, we adopted the AICPA's
Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts, or SOP 03-1. SOP 03-1 provides guidance related to the
accounting, reporting and disclosure of certain insurance contracts and separate accounts, including guidance
for computing reserves for products with guaranteed benefits such as guaranteed minimum death benefits and for
products with annuitization benefits such as guaranteed minimum income benefits. In addition, SOP 03-1
addresses the presentation and reporting of separate accounts, as well as rules concerning the capitalization
and amortization of sales inducements. Since this new accounting standard largely codifies certain accounting
and reserving practices related to applicable nontraditional long-duration contracts and separate accounts that
we already followed, our adoption did not have a material effect on our consolidated financial statements.
Variable Interest Entities: In January 2003, a new accounting standard was issued, FASB Interpretation No. 46,
or FIN 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, that interprets the
existing standards on consolidation. FIN 46 was subsequently reissued as FIN 46-R in December 2003, with FIN
46-R providing additional interpretation as to existing standards on consolidation. FIN 46-R clarifies the
application of standards of consolidation to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from other parties (variable interest
entities). Variable interest entities are required to be consolidated by their primary beneficiaries if they do
not effectively disperse risks among all parties involved. The primary beneficiary of a variable interest
entity is the party that absorbs a majority of the entity's expected losses, receives a majority of its
expected residual returns, or both, as a result of holding variable interests. As required under the original
standard, on February 1, 2003, we adopted the new standard for variable interest entities created after January
31, 2003 and for variable interest entities in which we obtain an interest after January 31, 2003. In addition,
as required by the revised standard, on December 31, 2003 we adopted FIN 46-R for Special Purpose Entities, or
SPEs, in which we hold a variable interest that we acquired prior to February 1, 2003. FIN 46-R requires our
application of its provisions to non-SPE variable interest entities for periods ending after March 15, 2004.
The adoption of FIN 46-R for our non-SPE variable interest entities did not have a material effect on our
consolidated financial statements at March 31, 2004.
Stock-based Compensation: A new standard by the FASB was issued in December 2002 which amends an existing
standard on accounting for stock-based compensation. The new standard provides methods of transition for a
voluntary change to fair value accounting for stock-based compensation. We adopted fair value accounting for
stock-based compensation in 2003 using the prospective method of transition provided by the new standard, which
results in expense recognition for stock options awarded after December 31, 2002. See Note 9 for additional
information.
Consolidated Collateralized Obligation Trusts: We have restated certain 2003 amounts on our Consolidated
Statement of Income and Comprehensive Income and our Consolidated Balance Sheet with respect to our method of
consolidation for several of our sponsored collateralized obligation trusts, as further described in our 2003
Annual Report on Form 10-K.
8
Originally reported and restated amounts for the quarter ended March 31, 2003 follow:
Revised and Originally Reported Select Financial Components: Three Months Ended
($ amounts in millions, except per share data) March 31, 2003
---------------------------------
As Restated As Reported
--------------- ----------------
Income statement data
Insurance and investment product fees.................................... $ 136.1 $ 136.5
Investment income, net of expenses....................................... 291.1 276.6
Realized investment losses............................................... (14.1) (12.3)
Interest expense on non-recourse collateralized obligations.............. 13.3 --
Net income from continuing operations.................................... 1.7 3.6
Net income............................................................... $ 1.3 $ 3.2
Earnings per share data
Income from continuing operations - basic................................ $ 0.02 $ 0.04
Income from continuing operations - diluted.............................. 0.02 0.04
Net income - basic....................................................... 0.01 0.03
Net income - diluted..................................................... $ 0.01 $ 0.03
Business combinations and divestitures
In 2002, we acquired a 60% interest in Kayne Anderson Rudnick Investment Management, LLC, or Kayne Anderson
Rudnick, for $102.4 million; management of the company retained the remaining ownership interest. In addition
to the initial cost of the purchase, we made a subsequent payment, during the three months ended March 31,
2004, of $30.1 million, based upon growth in management fee revenue for the purchased business through the end
of 2003. This payment had been accrued for by PXP as goodwill as of December 31, 2003. In January 2004, one
member of Kayne Anderson Rudnick accelerated his put/call agreement at which time we acquired an additional
0.3% of Kayne Anderson Rudnick. We are also obligated to purchase an additional 14.7% interest in the company
by 2007.
We acquired the remaining minority interest in Walnut Asset Management LLC and Rutherford Brown & Catherwood,
LLC in March 2004 for $2.1 million as a result of the management members exercising their put/call agreements.
This additional purchase price was allocated by PXP to goodwill and definite-lived intangible assets.
On March 31, 2004, we completed the previously announced sale of 100% of the common stock held by us in Phoenix
National Trust Company. The effect of this transaction is immaterial to our consolidated financial statements.
Phoenix National Trust Company is presented as a discontinued operation in our consolidated financial
statements for all periods presented.
On March 22, 2004, we entered into a definitive agreement to sell our retail broker-dealer operations to
Linsco/Private Ledger Financial Services, or LPL. As part of the transaction, advisors affiliated with WS
Griffith Securities, Inc., or Griffith, and Main Street Management Company, or Main Street, will transition to
LPL as independent registered representatives. The transaction, which is subject to regulatory approvals and
other customary closing conditions, is expected to close on or about June 1, 2004. The expected proceeds and
related net gain on the sale of Griffith and Main Street is not material to our consolidated financial
statements.
We incurred a $3.6 million net of tax charge, recorded as a realized investment loss, related to Main Street
and a $0.6 million net of tax charge for severance during the first quarter of 2004 related to this pending
divestiture.
On May 7, 2004, we signed a definitive agreement to sell Phoenix Global Solutions, Inc., our India-based
information technology subsidiary, to Tata Consultancy Services, a division of Tata Sons Ltd. This transaction,
which is not material to our consolidated financial statements, is subject to regulatory approval and is
expected to close during the second quarter of 2004.
9
2. Business Segments
We are a manufacturer of insurance, annuity and asset management products for the accumulation, preservation
and transfer of wealth. We provide products and services to affluent and high-net-worth individuals through
their advisors and to institutions directly and through consultants. We offer a broad range of life insurance,
annuity and asset management products through a variety of distributors. These products are managed within two
operating segments -- Life and Annuity and Asset Management. We report our remaining activities in two
non-operating segments -- Venture Capital and Corporate and Other.
The Life and Annuity segment includes individual life insurance and annuity products including participating
whole life, universal life, variable life, term life and variable annuities. The Asset Management segment
includes private client and institutional investment management and distribution, including managed accounts,
open-end mutual funds and closed-end funds. We provide more information on the Life and Annuity and Asset
Management operating segments in Note 3 and Note 4, respectively.
The Venture Capital segment includes our equity share in the operating income and the realized and unrealized
investment gains of our venture capital partnership investments held in the general account of Phoenix Life,
but outside the closed block. We provide more information on this segment in Note 5. The Corporate and Other
segment includes all interest expense, as well as several smaller subsidiaries and investment activities which
do not meet the thresholds of reportable segments. These include international operations and the run-off of
our group pension and guaranteed investment contract businesses.
We evaluate segment performance on the basis of segment income. Realized investment gains and losses and some
non-recurring items are excluded because we do not consider them when evaluating the financial performance of
the segments. The size and timing of realized investment gains and losses are often subject to our discretion.
The non-recurring items are removed from segment after-tax operating income if, in our opinion, they are not
indicative of overall operating trends. While some of these items may be significant components of net income,
we believe that segment income is an appropriate measure that represents the earnings attributable to the
ongoing operations of the business.
The criteria used to identify an item that will be excluded from segment income include: whether the item is
infrequent and is material to the segment's income; or whether it results from a business restructuring, or a
change in regulatory requirements, or relates to other unusual circumstances (e.g., non-routine litigation). We
include information on other items allocated to our segments in their respective notes for information only.
Items excluded from segment income may vary from period to period. Because these items are excluded based on
our discretion, inconsistencies in the application of our selection criteria may exist. Segment income is not a
substitute for net income determined in accordance with GAAP and may be different from similarly titled
measures of other companies.
We allocate indebtedness and related interest expense to our Corporate and Other segment. We allocate capital
to our Life and Annuity segment based on risk-based capital, or RBC, for our insurance products. We used 300%
of RBC levels for 2004 and 2003. Capital within our life insurance companies that is unallocated is included in
our Corporate and Other segment. We allocate capital to our Asset Management segment on the basis of the
historical capital within that segment. We allocate net investment income based on the assets allocated to the
segments. We allocate certain costs and expenses to the segments based on a review of the nature of the costs,
time studies and other methodologies. Investment income on debt and equity securities pledged as collateral as
well as interest expense on non-recourse collateralized obligations, both related to three consolidated
collateralized obligation trusts we sponsor, are included in the Corporate and Other segment. Excess investment
income on debt and equity securities pledged as collateral represent investment advisory fees earned by our
asset management subsidiary and are allocated to the Asset Management segment as investment product fees for
segment reporting purposes only.
10
Segment Information on Assets:
($ amounts in millions) Mar 31, 2004 Dec 31, 2003
--------------- ---------------
Segment assets
Life and annuity segment...................................................... $ 24,832.4 $ 24,219.5
Asset management segment...................................................... 830.4 851.2
--------------- ---------------
Operating segment assets...................................................... 25,662.8 25,070.7
Venture capital segment....................................................... 202.2 196.3
Corporate and other segment................................................... 2,264.5 2,264.0
--------------- ---------------
Total segment assets.......................................................... 28,129.5 27,531.0
Net assets of discontinued operations......................................... 27.3 28.2
--------------- ---------------
Total assets.................................................................. $ 28,156.8 $ 27,559.2
=============== ===============
Three Months Ended
March 31,
--------------------------------
Segment Information on Revenues and Income: 2003
($ amounts in millions) 2004 Restated
--------------- ---------------
Segment revenues
Life and annuity segment...................................................... $ 572.1 $ 572.5
Asset management segment...................................................... 70.2 57.4
Elimination of inter-segment revenues......................................... 0.8 (1.2)
--------------- ---------------
Operating segment revenues.................................................... 643.1 628.7
Venture capital segment....................................................... 11.6 23.9
Corporate and other segment................................................... 16.6 21.2
--------------- ---------------
Total segment revenues........................................................ 671.3 673.8
Net realized investment gains (losses)........................................ 2.5 (14.1)
Other......................................................................... -- (0.5)
--------------- ---------------
Total revenues................................................................ $ 673.8 $ 659.2
=============== ===============
Segment income
Life and annuity segment...................................................... $ 25.8 $ 18.0
Asset management segment...................................................... 0.1 (5.8)
--------------- ---------------
Operating segment pre-tax income.............................................. 25.9 12.2
Venture capital segment....................................................... 11.6 23.9
Corporate and other segment................................................... (12.7) (11.4)
--------------- ---------------
Total segment income before income taxes...................................... 24.8 24.7
Applicable income taxes....................................................... 7.3 7.5
--------------- ---------------
Total segment income.......................................................... 17.5 17.2
Gain (loss) from discontinued operations, net of income taxes................. 0.3 (0.4)
Net realized investment gains (losses), net of income taxes and other offsets. 0.8 (14.3)
Restructuring costs, net of income taxes...................................... (2.0) (2.5)
Other income, net of income taxes............................................. -- 1.3
--------------- ---------------
Net income.................................................................... $ 16.6 $ 1.3
=============== ===============
In the second quarter of 2003, we transferred our equity investment in Aberdeen Asset Management PLC, or
Aberdeen, from our Asset Management segment to the Corporate and Other segment. As a result, we have
reclassified prior year information for consistency.
11
3. Life and Annuity Segment
The Life and Annuity segment includes individual life insurance and annuity products of Phoenix Life and
certain of its subsidiaries and affiliates (together, our Life Companies), including universal life, variable
universal life, term life and fixed and variable annuities. It also includes the results of our closed block,
which consists primarily of participating whole life products. Segment information on assets, segment income
and deferred policy acquisition costs follows:
Life and Annuity Segment Assets:
($ amounts in millions)
Mar 31, 2004 Dec 31, 2003
--------------- ---------------
Segment assets
Investments................................................................... $ 16,562.5 $ 16,203.3
Cash and cash equivalents..................................................... 200.7 250.5
Receivables................................................................... 224.4 228.1
Deferred policy acquisition costs............................................. 1,358.5 1,367.7
Deferred income taxes......................................................... 11.6 40.2
Goodwill and other intangible assets.......................................... 7.2 15.3
Other general account assets.................................................. 174.2 204.1
Separate accounts............................................................. 6,293.3 5,910.3
--------------- ---------------
Total segment assets.......................................................... $ 24,832.4 $ 24,219.5
=============== ===============
Life and Annuity Segment Income: Three Months Ended
($ amounts in millions) March 31,
--------------------------------
2004 2003
--------------- ---------------
Segment income
Premiums...................................................................... $ 232.7 $ 246.1
Insurance and investment product fees......................................... 89.5 78.1
Net investment income......................................................... 249.9 248.3
--------------- ---------------
Total segment revenues........................................................ 572.1 572.5
--------------- ---------------
Policy benefits, including policyholder dividends............................. 449.0 455.3
Policy acquisition cost amortization.......................................... 22.2 27.5
Other operating expenses...................................................... 75.1 71.7
--------------- ---------------
Total segment benefits and expenses........................................... 546.3 554.5
--------------- ---------------
Segment income before income taxes............................................ 25.8 18.0
Allocated income taxes........................................................ 7.2 4.0
--------------- ---------------
Segment income................................................................ 18.6 14.0
Net realized investment losses, net of income taxes and other offsets......... (3.5) (1.3)
Restructuring charges, after income taxes..................................... (0.8) --
--------------- ---------------
Segment net income............................................................ $ 14.3 $ 12.7
=============== ===============
Three Months Ended
March 31,
Deferred Policy Acquisition Costs: --------------------------------
($ amounts in millions) 2004 2003
--------------- ---------------
Policy acquisition costs deferred............................................. $ 47.0 $ 56.6
Costs amortized to expenses:
Recurring costs related to segment income................................... (22.2) (27.5)
Decrease related to realized investment gains or losses..................... (0.4) (0.5)
Offsets to net unrealized investment gains or losses included in other
comprehensive income........................................................ (33.6) 7.3
--------------- ---------------
Change in deferred policy acquisition costs................................... (9.2) 35.9
Deferred policy acquisition costs, beginning of period........................ 1,367.7 1,234.1
--------------- ---------------
Deferred policy acquisition costs, end of period.............................. $ 1,358.5 $ 1,270.0
=============== ===============
12
We have included in deferred policy acquisition costs the present value of future profits from two major
reinsurance assumed transactions and the purchase of the minority interest in a subsidiary. The amounts
included at March 31, 2004 and December 31, 2003 follow: Confederation Life ($27.1 million and $36.0 million,
respectively), Valley Forge Life ($36.1 million and $37.4 million, respectively) and PFG Holdings ($9.6 million
and $9.7, respectively).
Policy liabilities and accruals
Policyholder liabilities are primarily for participating life insurance policies and universal life insurance
policies. For universal life, this includes deposits received from customers and investment earnings on their
fund balances, which range from 4.0% to 6.0% at March 31, 2004 and 4.0% to 6.25% at December 31, 2003, less
administrative and mortality charges.
Policyholder deposit funds
Policyholder deposit funds primarily consist of annuity deposits received from customers, dividend
accumulations and investment earnings on their fund balances, which range from 1.1% to 12.3% at March 31, 2004
and 1.0% to 12.3% at December 31, 2003, less administrative charges.
Participating life insurance
Participating life insurance in-force was 37.8% and 38.8% of the face value of total individual life insurance
in-force at March 31, 2004 and December 31, 2003, respectively. The premiums on participating life insurance
policies were 54.9% and 68.9% of total individual life insurance premiums for the three months ended March 31,
2004 and 2003, respectively.
Annuity funds under management
Three Months Ended
March 31,
Annuity Funds Under Management: --------------------------------
($ amounts in millions) 2004 2003
--------------- ---------------
Deposits...................................................................... $ 215.0 $ 425.7
Performance................................................................... 211.2 20.2
Fees.......................................................................... (15.3) (11.5)
Benefits and surrenders....................................................... (218.6) (254.2)
--------------- ---------------
Change in funds under management.............................................. 192.3 180.2
Funds under management, beginning of period................................... 7,143.8 5,833.4
--------------- ---------------
Annuity funds under management, end of period................................. $ 7,336.1 $ 6,013.6
=============== ===============
Closed block
In December 1999, we began the process of reorganizing and demutualizing our then principal operating company,
Phoenix Home Life Mutual Insurance Company. We completed the process in June 2001, when all policyholder
membership interests in this mutual company were extinguished and eligible policyholders of the mutual company
received shares of common stock of The Phoenix Companies, Inc., together with cash and policy credits, as
compensation. To protect the future dividends of these policyholders, we also established a closed block for
their existing policies. Summary financial data for the closed block follows:
13
Closed Block Assets and Liabilities: Inception
($ amounts in millions) Mar 31, 2004 Dec 31, 2003 (Dec 31, 1999)
--------------- --------------- ----------------
Debt securities............................................. $ 7,135.8 $ 6,906.4 $ 4,773.1
Equity securities........................................... 84.5 82.9 --
Mortgage loans.............................................. 218.2 228.5 399.0
Venture capital partnerships................................ 47.3 38.6 --
Policy loans................................................ 1,393.0 1,386.8 1,380.0
Other invested assets....................................... 50.8 46.7 --
--------------- --------------- ----------------
Total closed block investments.............................. 8,929.6 8,689.9 6,552.1
Cash and cash equivalents................................... 43.0 40.5 --
Accrued investment income................................... 120.4 120.2 106.8
Receivables................................................. 41.4 43.0 35.2
Deferred income taxes....................................... 378.2 377.0 389.4
Other closed block assets................................... 37.3 62.3 6.2
--------------- --------------- ----------------
Total closed block assets................................... 9,549.9 9,332.9 7,089.7
--------------- --------------- ----------------
Policy liabilities and accruals............................. 9,752.0 9,723.1 8,301.7
Policyholder dividends payable.............................. 377.1 369.8 325.1
Policyholder dividend obligation............................ 686.1 519.2 --
Other closed block liabilities.............................. 65.8 63.0 12.3
--------------- --------------- ----------------
Total closed block liabilities.............................. 10,881.0 10,675.1 8,639.1
--------------- --------------- ----------------
Excess of closed block liabilities over closed block assets. $ 1,331.1 $ 1,342.2 $ 1,549.4
=============== =============== ================
Closed Block Revenues and Expenses and Changes
in Policyholder Dividend Obligations: Three Months Ended,
($ amounts in millions) Cumulative March 31,
from ---------------------------------
Inception 2004 2003
--------------- --------------- ----------------
Closed block revenues
Premiums.................................................... $ 4,462.7 $ 224.6 $ 238.7
Net investment income....................................... 2,358.8 147.6 146.0
Net realized investment gains (losses)...................... (91.0) (1.9) 11.5
--------------- --------------- ----------------
Total revenues.............................................. 6,730.5 370.3 396.2
--------------- --------------- ----------------
Policy benefits, excluding dividends........................ 4,605.5 245.0 254.2
Other operating expenses.................................... 51.6 2.6 2.7
--------------- --------------- ----------------
Total benefits and expenses, excluding policyholder
dividends................................................. 4,657.1 247.6 256.9
--------------- --------------- ----------------
Closed block contribution to income before dividends and
income taxes.............................................. 2,073.4 122.7 139.3
Policyholder dividends...................................... 1,701.8 105.5 116.5
--------------- --------------- ----------------
Closed block contribution to income before income taxes..... 371.6 17.2 22.8
Applicable income taxes..................................... 130.6 6.1 8.0
--------------- --------------- ----------------
Closed block contribution to income......................... $ 241.0 $ 11.1 $ 14.8
=============== =============== ================
Policyholder dividend obligation
Policyholder dividends provided through earnings............ $ 1,747.0 $ 105.5 $ 116.5
Policyholder dividends provided through other
comprehensive income...................................... 592.7 160.0 3.5
--------------- --------------- ----------------
Additions to policyholder dividend liabilities.............. 2,339.7 265.5 120.0
Policyholder dividends paid................................. (1,601.6) (91.3) (93.7)
--------------- --------------- ----------------
Increase in policyholder dividend liabilities............... 738.1 174.2 26.3
Policyholder dividend liabilities, beginning of period...... 325.1 889.0 910.5
--------------- --------------- ----------------
Policyholder dividend liabilities, end of period............ 1,063.2 1,063.2 936.8
Less: policyholder dividends payable, end of period......... 377.1 377.1 374.6
--------------- --------------- ----------------
Policyholder dividend obligation, end of period............. $ 686.1 $ 686.1 $ 562.2
=============== =============== ================
14
4. Asset Management Segment
We conduct activities in Asset Management with a focus on two customer groups -- private client and
institutional. Through our private client group, we provide asset management services principally on a
discretionary basis, with products consisting of open-end mutual funds, closed-end funds and managed accounts.
Managed accounts include intermediary programs sponsored and distributed by non-affiliated broker-dealers and
direct managed accounts which are sold and administered by us. Our private client business also provides
transfer agency, accounting and administrative services to most of our open-end mutual funds.
Through our institutional group, we provide discretionary and non-discretionary asset management services
primarily to corporations, multi-employer retirement funds and foundations, as well as to endowment and special
purpose funds. In addition, we manage alternative financial products, including structured finance products.
Structured finance products include collateralized obligations backed by portfolios of public high yield bonds,
emerging markets bonds, commercial mortgage-backed and asset-backed securities or bank loans. See Note 7 for
additional information.
We offer asset management services through our affiliated asset managers. We provide these affiliated asset
managers with a consolidated platform of distribution and administrative support, thereby allowing each manager
to devote a high degree of focus to investment management activities. On an ongoing basis, we monitor the
quality of the affiliates' products by assessing their performance, style consistency and the discipline with
which they apply their investment process. Segment information on assets, segment income and intangible assets
and goodwill follows:
Asset Management Segment Assets:
($ amounts in millions) Mar 31, 2004 Dec 31, 2003
--------------- ---------------
Segment assets
Investments................................................................... $ 12.0 $ 11.8
Cash and cash equivalents..................................................... 35.4 39.6
Receivables................................................................... 31.1 36.0
Intangible assets with definite lives......................................... 255.3 261.8
Goodwill and other indefinite-lived intangible assets......................... 483.9 481.4
Other assets.................................................................. 12.7 20.6
--------------- ---------------
Total segment assets.......................................................... $ 830.4 $ 851.2
=============== ===============
Three Months Ended
March 31,
Asset Management Segment Income: --------------------------------
($ amounts in millions) 2004 2003
--------------- ---------------
Segment income
Investment product fees....................................................... $ 70.1 $ 57.2
Net investment income......................................................... 0.1 0.2
--------------- ---------------
Total segment revenues........................................................ 70.2 57.4
--------------- ---------------
Intangible asset amortization................................................. 8.3 8.4
Other operating expenses...................................................... 58.1 52.0
--------------- ---------------
Total segment expenses........................................................ 66.4 60.4
--------------- ---------------
Segment income (loss) before income taxes and minority interest............... 3.8 (3.0)
Allocated income taxes (benefit).............................................. 0.4 (2.1)
--------------- ---------------
Segment income (loss) before minority interest................................ 3.4 (0.9)
Minority interest in segment income of consolidated subsidiaries.............. 3.7 2.8
--------------- ---------------
Segment loss.................................................................. (0.3) (3.7)
Restructuring charges, net of income taxes.................................... -- (3.0)
Realized investment gains, net of income taxes................................ 1.4 --
Other......................................................................... (0.1) 1.3
--------------- ---------------
Segment net income (loss)..................................................... $ 1.0 $ (5.4)
=============== ===============
15
Beginning in 2004, trailing commissions related to mutual funds are classified as operating expenses, whereas
in prior years, trailing commissions were presented as a deduction to investment product fees. The Asset
Management segment charges investment management fees, on a cost recovery basis, to the Life Companies for
managing their general account assets. Beginning in 2004, these fees, as well as the associated expenses, have
been eliminated. This treatment has no effect on the segment's net income. Prior year amounts have been
reclassified to conform to current year presentation.
Intangible assets and goodwill
Carrying Amounts of Intangible Assets and Goodwill:
($ amounts in millions) Mar 31, 2004 Dec 31, 2003
--------------- ---------------
Asset management contracts with definite lives................................ $ 396.2 $ 396.1
Less: accumulated amortization................................................ 140.9 134.3
--------------- ---------------
Intangible assets with definite lives......................................... $ 255.3 $ 261.8
=============== ===============
Goodwill...................................................................... $ 410.6 $ 408.1
Asset management contracts with indefinite lives.............................. 73.3 73.3
--------------- ---------------
Goodwill and other indefinite-lived intangible assets......................... $ 483.9 $ 481.4
=============== ===============
Activity in Intangible Assets and Goodwill: Three Months Ended
($ amounts in millions) March 31,
--------------------------------
2004 2003
--------------- ---------------
Intangible assets with definite lives
Asset purchases............................................................... $ 1.8 $ --
Asset amortization............................................................ (8.3) (8.4)
--------------- ---------------
Change in intangible assets with definite lives............................... (6.5) (8.4)
Balance, beginning of period.................................................. 261.8 291.7
--------------- ---------------
Balance, end of period........................................................ $ 255.3 $ 283.3
=============== ===============
Goodwill and other indefinite-lived intangible assets
Asset purchases............................................................... $ 2.5 $ --
--------------- ---------------
Change in goodwill and other indefinite-lived intangible assets............... 2.5 --
Balance, beginning of period.................................................. 481.4 448.9
--------------- ---------------
Balance, end of period........................................................ $ 483.9 $ 448.9
=============== ===============
Upon acquisition, we calculate and record the fair value of definite-lived intangible assets based on their
discounted cash flows. To conduct subsequent tests for impairments, we calculate the current fair value of the
asset, compare it to the recorded value, and record an impairment if warranted. For purposes of our testing for
goodwill and indefinite-lived intangible asset impairments, we calculate the fair value of each reporting unit
based on the sum of a multiple of revenue and the fair value of the unit's tangible net assets.
The estimated aggregate intangible asset amortization expense in future periods is: nine months ended December
31, 2004 - $24.8 million, 2005 - $32.3 million, 2006 - $27.3 million, 2007 - $26.2 million, 2008 - $26.5
million, 2009 - $24.9 million and thereafter - $93.3 million. At March 31, 2004, the remaining weighted-average
amortization period for definite-lived intangible assets is 8.8 years.
16
5. Investing Activities
Debt and equity securities
Fair Value and Cost of Debt March 31, 2004 December 31, 2003
and Equity Securities: --------------------------------- --------------------------------
($ amounts in millions) Fair Value Cost Fair Value Cost
--------------- --------------- --------------- ---------------
U.S. government and agency................. $ 780.9 $ 704.5 $ 757.0 $ 714.5
State and political subdivision............ 515.0 462.7 510.3 468.4
Foreign government......................... 274.0 245.2 260.4 239.0
Corporate.................................. 7,167.7 6,689.4 6,765.8 6,412.4
Mortgage-backed............................ 3,094.2 2,910.5 3,097.5 2,963.4
Other asset-backed......................... 1,799.2 1,771.9 1,882.0 1,863.6
--------------- --------------- --------------- ---------------
Debt securities............................ $ 13,631.0 $ 12,784.2 $ 13,273.0 $ 12,661.3
=============== =============== =============== ===============
Amounts applicable to the
closed block............................. $ 7,135.8 $ 6,542.3 $ 6,906.4 $ 6,471.1
=============== =============== =============== ===============
Hilb, Rogal and Hamilton, or HRH,
common stock............................. $ 138.1 $ 42.2 $ 116.2 $ 42.2
Lombard International Assurance, S.A....... 42.1 42.1 41.1 41.1
Other equity securities.................... 158.7 140.9 154.7 139.1
--------------- --------------- --------------- ---------------
Equity securities.......................... $ 338.9 $ 225.2 $ 312.0 $ 222.4
=============== =============== =============== ===============
Amounts applicable to the
closed block............................. $ 84.5 $ 76.6 $ 82.9 $ 75.0
=============== =============== =============== ===============
Our holdings in HRH common stock as of March 31, 2004 are available to be used in November 2005 to settle stock
purchase contracts issued by us. Upon settlement of such stock purchase contracts, we will recognize a gross
investment gain of $91.8 million ($32.4 million net of offsets for applicable deferred acquisition costs and
deferred income taxes). See Note 6 for additional information.
Gross and Net Unrealized Gains and
Losses from General Account Debt March 31, 2004 December 31, 2003
and Equity Securities: --------------------------------- --------------------------------
($ amounts in millions) Gains Losses Gains Losses
--------------- --------------- --------------- ---------------
U.S. government and agency................. $ 76.6 $ (0.2) $ 44.0 $ (1.5)
State and political subdivision............ 52.4 (0.1) 43.5 (1.6)
Foreign government......................... 29.0 (0.2) 23.2 (1.8)
Corporate.................................. 510.1 (31.8) 400.4 (47.0)
Mortgage-backed............................ 185.6 (1.9) 143.4 (9.3)
Other asset-backed......................... 62.1 (34.8) 55.6 (37.2)
--------------- --------------- --------------- ---------------
Debt securities gains (losses)............. $ 915.8 $ (69.0) $ 710.1 $ (98.4)
=============== =============== =============== ===============
Debt securities net gains.................. $ 846.8 $ 611.7
=============== ===============
Hilb, Rogal and Hamilton common stock...... $ 95.9 $ -- $ 74.0 $ --
Other equity securities.................... 20.3 (2.5) 17.4 (1.8)
--------------- --------------- --------------- ---------------
Equity securities gains (losses)........... $ 116.2 $ (2.5) $ 91.4 $ (1.8)
=============== =============== =============== ===============
Equity securities net gains................ $ 113.7 $ 89.6
=============== ===============
17
Mortgage loans
Carrying Values of Investments March 31, 2004 December 31, 2003
in Mortgage Loans: ----------------------------- ----------------------------
($ amounts in millions) Carrying Carrying
Value Fair Value Value Fair Value
-------------- ------------- ------------- -------------
Property type
Apartment buildings.......................... $ 103.8 $ 105.4 $ 105.1 $ 106.7
Office buildings............................. 41.1 41.6 49.0 49.7
Retail stores................................ 107.9 109.6 109.0 110.7
Industrial buildings......................... 30.1 30.5 33.7 34.2
Other........................................ 0.1 0.1 0.1 0.1
-------------- ------------- ------------- -------------
Subtotal..................................... 283.0 287.2 296.9 301.4
Less: valuation allowances................... 11.5 -- 12.8 --
-------------- ------------- ------------- -------------
Mortgage loans............................... $ 271.5 $ 287.2 $ 284.1 $ 301.4
============== ============= ============= =============
Amounts applicable to the
closed block............................... $ 218.2 $ 231.5 $ 228.5 $ 242.4
============== ============= ============= =============
March 31, 2004
Aging of Temporarily ----------------------------------------------------------------------
Impaired General Account Debt Less than 12 months Greater than 12 months Total
and Equity Securities ----------------------- ----------------------- ----------------------
($ amounts in millions) Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------- ----------- ----------- ----------- ----------- ----------
Debt securities
U.S. government and agency....... $ 5.9 $ (0.2) $ 0.1 $ -- $ 6.0 $ (0.2)
State and political subdivision.. 19.9 (0.1) -- -- 19.9 (0.1)
Foreign government............... 11.0 (0.2) -- -- 11.0 (0.2)
Corporate........................ 583.1 (16.0) 185.7 (15.8) 768.8 (31.8)
Mortgage-backed.................. 276.0 (1.8) 14.4 (0.1) 290.4 (1.9)
Other asset-backed............... 198.9 (6.8) 121.3 (28.0) 320.2 (34.8)
----------- ----------- ----------- ----------- ----------- -----------
Debt securities.................. $ 1,094.8 $ (25.1) $ 321.5 $ (43.9) $ 1,416.3 $ (69.0)
Common stock..................... 25.4 (2.2) 0.9 (0.3) 26.3 (2.5)
----------- ----------- ----------- ----------- ----------- -----------
Total temporarily impaired
securities..................... $ 1,120.2 $ (27.3) $ 322.4 $ (44.2) $ 1,442.6 $ (71.5)
=========== =========== =========== =========== =========== ===========
Amounts inside the closed
block.......................... $ 530.1 $ (15.0) $ 131.4 $ (12.8) $ 661.5 $ (27.8)
=========== =========== =========== =========== =========== ===========
Amounts outside the closed
block.......................... $ 590.1 $ (12.3) $ 191.0 $ (31.4) $ 781.1 $ (43.7)
=========== =========== =========== =========== =========== ===========
Amounts outside the closed
block that are below
investment grade............... $ 65.1 $ (4.0) $ 46.8 $ (7.9) $ 111.9 $ (11.9)
=========== =========== =========== =========== =========== ===========
After offsets for deferred
acquisition cost adjustment
and taxes...................... $ (1.6) $ (3.0) $ (4.6)
=========== =========== ===========
Below investment grade debt securities outside the closed block with a fair value less than 80% of the
security's amortized cost totals $7.0 million at March 31, 2004, $4.3 million ($1.6 million after offsets for
taxes and deferred policy acquisition cost amortization) of which has been in an unrealized loss for greater
than 12 months.
Below investment grade debt securities held in the closed block with a fair value of less than 80% of the
securities' amortized cost totals $9.0 million at March 31, 2004, $4.9 million ($0 after offsets for change in
policy dividend obligation) of which has been in an unrealized loss for greater than 12 months.
These securities are considered to be temporarily impaired at March 31, 2004 as each of these securities has
performed, and is expected to continue to perform, in accordance with their original contractual terms.
18
Venture capital partnerships
Three Months Ended
Components of Net Investment Income Related to Venture Capital March 31,
Partnerships: --------------------------------
($ amounts in millions) 2004 2003
--------------- ---------------
Net realized losses on partnership cash and stock distributions.......... $ (3.7) $ (1.1)
Net unrealized gains on partnership investments.......................... 22.2 30.9
Partnership operating expenses........................................... (0.9) (0.9)
--------------- ---------------
Net investment income.................................................... $ 17.6 $ 28.9
=============== ===============
Amounts applicable to the closed block................................... $ 6.0 $ 5.0
=============== ===============
Amounts applicable to the venture capital segment........................ $ 11.6 $ 23.9
=============== ===============
The effect of our adjusting estimated partnership results to actual results reflected in partnership financial
statements was to increase net investment income as follows:
Three Months Ended
Effect of Adjustment from Estimated Partnership Results to March 31,
Actual Partnership Financial Statements: --------------------------------
($ amounts in millions) 2004 2003
--------------- ---------------
Closed block............................................................. $ 4.7 $ --
Venture capital segment.................................................. 9.2 30.5
--------------- ---------------
Total.................................................................... $ 13.9 $ 30.5
=============== ===============
Three Months Ended
March 31,
Investment Activity in Venture Capital Partnerships: --------------------------------
($ amounts in millions) 2004 2003
--------------- ---------------
Contributions............................................................ $ 11.8 $ 12.9
Equity in earnings of partnerships....................................... 17.6 28.9
Distributions............................................................ (14.8) (3.1)
Proceeds from sale of partnership interests.............................. -- (26.1)
Realized loss on sale of partnership interests........................... -- (13.8)
--------------- ---------------
Change in venture capital partnerships................................... 14.6 (1.2)
Venture capital partnership investments, beginning of period............. 234.9 228.6
--------------- ---------------
Venture capital partnership investments, end of period................... $ 249.5 $ 227.4
=============== ===============
Unfunded Commitments and Investments in Venture
Capital Partnerships:
($ amounts in millions) Mar 31, 2004 Dec 31, 2003
--------------- ---------------
Unfunded commitments
Closed block............................................................. $ 50.6 $ 48.3
Venture capital segment.................................................. 69.0 76.7
--------------- ---------------
Total unfunded commitments............................................... $ 119.6 $ 125.0
=============== ===============
Venture capital partnerships
Closed block............................................................. $ 47.3 $ 38.6
Venture capital segment.................................................. 202.2 196.3
--------------- ---------------
Total venture capital partnerships....................................... $ 249.5 $ 234.9
=============== ===============
Affiliate equity securities
The fair value of our investment in Aberdeen common stock, based on the London Stock Exchange closing price at
May 6, 2004, March 31, 2004 and December 31, 2003, was $56.0 million, $65.5 million and $54.4 million,
19
respectively. The carrying value of our investment in Aberdeen on the equity method of accounting totaled $39.6
million and $38.3 million at March 31, 2004 and December 31, 2003, respectively.
Net investment income
Three Months Ended
March 31,
--------------------------------
Sources of Net Investment Income: 2003
($ amounts in millions) 2004 Restated
--------------- ---------------
Debt securities............................................................ $ 192.1 $ 187.2
Equity securities.......................................................... 0.4 1.3
Mortgage loans............................................................. 5.9 12.1
Venture capital partnerships............................................... 17.6 28.9
Affiliate equity securities................................................ 0.3 0.2
Policy loans............................................................... 42.2 42.6
Other investments.......................................................... 12.1 4.3
Cash and cash equivalents.................................................. 0.7 3.3
--------------- ---------------
Total investment income.................................................... 271.3 279.9
Less: investment expenses.................................................. 3.2 2.9
--------------- ---------------
Net investment income, general account investments......................... 268.1 277.0
Debt and equity securities pledged as collateral (Note 7).................. 10.1 14.1
--------------- ---------------
Net investment income...................................................... $ 278.2 $ 291.1
=============== ===============
Amounts applicable to the closed block..................................... $ 147.6 $ 146.0
=============== ===============
Net realized investment gains (losses) Three Months Ended
March 31,
--------------------------------
Sources and Types of Net Realized Investment Gains (Losses): 2003
($ amounts in millions) 2004 Restated
--------------- ---------------
Debt security impairments.................................................. $ (2.8) $ (22.5)
Mortgage loan impairments.................................................. -- (0.4)
Venture capital partnership impairments.................................... -- (4.3)
Other invested asset impairments........................................... (3.3) (8.7)
Debt and equity securities pledged as collateral impairments............... (4.7) (4.9)
--------------- ---------------
Impairment losses.......................................................... (10.8) (40.8)
--------------- ---------------
Debt security transaction gains............................................ 10.2 53.6
Debt security transaction losses........................................... (3.2) (12.3)
Equity security transaction gains.......................................... 2.6 0.4
Equity security transaction losses......................................... (0.4) (2.6)
Mortgage loan transaction gains (losses)................................... 0.2 (0.4)
Venture capital partnership transaction gains (losses)..................... -- (9.5)
Other invested asset transaction gains (losses)............................ 3.9 (2.5)
--------------- ---------------
Net transaction gains...................................................... 13.3 26.7
--------------- ---------------
Net realized investment gains (losses)..................................... $ 2.5 $ (14.1)
--------------- ---------------
Net realized investment gains (losses)..................................... $ 2.5 $ (14.1)
--------------- ---------------
Applicable closed block policyholder dividend obligation................... 0.1 8.5
Applicable deferred policy acquisition costs............................... 0.4 0.5
Applicable deferred income taxes (benefit)................................. 1.2 (8.9)
--------------- ---------------
Offsets to realized investment gains....................................... 1.7 0.1
--------------- ---------------
Net realized investment gains (losses) included in net income.............. $ 0.8 $ (14.2)
=============== ===============
20
Unrealized investment gains (losses)
Three Months Ended
March 31,
Sources of Changes in Net Unrealized Investment Gains (Losses): --------------------------------
($ amounts in millions) 2003
2004 Restated
--------------- ---------------
Debt securities............................................................ $ 235.1 $ (25.5)
Equity securities.......................................................... 24.1 (28.1)
Debt and equity securities pledged as collateral........................... (4.7) 31.5
Other investments ......................................................... 1.9 1.3
--------------- ---------------
Net unrealized investment gains (losses)................................... $ 256.4 $ (20.8)
=============== ===============
Net unrealized investment gains (losses)................................... $ 256.4 $ (20.8)
--------------- ---------------
Applicable closed block policyholder dividend obligation................... 160.0 3.6
Applicable deferred policy acquisition costs (benefit)..................... 33.6 (7.3)
Applicable deferred income taxes (benefit)................................. 24.4 (18.5)
--------------- ---------------
Offsets to net unrealized investment gains (losses)........................ 218.0 (22.2)
--------------- ---------------
Net unrealized investment gains (losses) included in
other comprehensive income............................................... $ 38.4 $ 1.4
=============== ===============
6. Financing Activities
Stock purchase contracts and indebtedness
Carrying value and fair value of our stock purchase contracts and indebtedness as of March 31, 2004 and
December 31, 2003 follows:
March 31, 2004 December 31, 2003
----------------------------- ----------------------------
Stock Purchase Contracts: Carrying Fair Carrying Fair
($ amounts in millions) Value Value Value Value
------------- ------------- ------------- -------------
Stock purchase contracts stated amount......... $ 143.4 $ 145.1 $ 144.2 $ 128.8
Settlement amount adjustment................... 1.7 -- (15.4) --
------------- ------------- ------------- -------------
Stock Purchase Contracts....................... $ 145.1 $ 145.1 $ 128.8 $ 128.8
============= ============= ============= =============
In November 2002, we issued stock purchase contracts in a public offering. The stock purchase contracts are
prepaid forward contracts issued by us that will be settled in shares of Hilb, Rogal and Hamilton Company, or
HRH, common stock. Upon issuance of the stock purchase contracts, we designated the embedded derivative
instrument as a hedge of the forecasted sale of our investment in HRH, whose shares underlie the stock purchase
contracts. All changes in the fair value of the embedded derivative instrument are recorded in other
comprehensive income. For the three months ended March 31, 2004 and 2003, we recognized an increase (decrease)
in the fair value of the embedded derivative instrument of $(17.1) million ($(11.1) million after income taxes)
and $18.4 million ($12.0 million after income taxes), respectively, in other comprehensive income. These
changes in the fair value of the embedded derivative are primarily due to fluctuations in the quoted market
price of HRH common stock during the respective quarters ended March 31, 2004 and 2003. The quoted market price
of HRH common stock, which was $38.10 at March 31, 2004, was equal to the price that we received at issuance of
the stock purchase contracts. For more information, see Notes 5 and 6 to our consolidated financial statements
in our 2003 Annual Report on Form 10-K.
21
March 31, 2004 December 31, 2003
--------------------------------- --------------------------------
Indebtedness: Carrying Fair Carrying Fair
($ amounts in millions) Value Value Value Value
--------------- --------------- --------------- ---------------
Surplus notes............................. $ 175.0 $ 185.9 $ 175.0 $ 188.8
Equity units.............................. 153.7 254.9 153.7 232.1
Senior unsecured bonds.................... 300.0 311.9 300.0 311.2
Revolving credit facility................. 25.0 25.0 -- --
Interest rate swap........................ 13.1 13.1 10.3 10.3
--------------- --------------- --------------- ---------------
Total indebtedness........................ $ 666.8 $ 790.8 $ 639.0 $ 742.4
=============== =============== =============== ===============
On December 22, 2003, we closed on a new $150.0 million unfunded, unsecured senior revolving credit facility to
replace our $100 million credit facility, which expired on that date. This new facility consists of two
tranches: a $112.5 million, 364-day revolving credit facility and a $37.5 million, three-year revolving credit
facility. Under the 364-day facility, we have the ability to extend the maturity date of any outstanding
borrowings for one year from the termination date. Potential borrowers on the new credit line are the holding
company, Phoenix Life and PXP. Financial covenants require the maintenance at all times of: consolidated
stockholders' equity of $1,775.0 million, stepping up by 50% of quarterly positive net income and 100% of
equity issuances; a maximum consolidated debt-to-capital ratio of 30%; a minimum consolidated fixed charge
coverage ratio (as defined in the credit agreement) of 1.25:1; and, for Phoenix Life, a minimum risk-based
capital ratio of 250% and a minimum A.M. Best Financial Strength Rating of A-. On March 15, 2004, PXP borrowed
$25.0 million from the $37.5 million three-year tranche of our $150.0 million senior revolving credit facility
to fulfill an obligation related to the Kayne Anderson Rudnick acquisition as further described in Note 1 of
these consolidated financial statements. We were in compliance with all credit facility covenants at March 31,
2004.
On April 16, 2004, we executed a technical amendment to the credit agreement, effective as of December 31,
2003, to: (1) exclude the accounting effects of FIN 46-R from the definition of shareholders' equity and (2)
clarify that the lenders did no intend to treat CDOs as indebtedness, for purposes of calculating financial
covenant compliance.
Three Months Ended
Interest Expense on Indebtedness, including Amortization of Debt Issuance March 31,
Costs: --------------------------------
($ amounts in millions) 2004 2003
--------------- ---------------
Stock purchase contract adjustment payments.................................. $ 2.0 $ 2.0
=============== ===============
Surplus notes................................................................ $ 3.1 $ 3.1
Equity units................................................................. 3.0 3.0
Senior unsecured bonds....................................................... 3.6 3.7
Bank credit facility and other............................................... 0.1 --
--------------- ---------------
Total interest expense on indebtedness....................................... $ 9.8 $ 9.8
=============== ===============
Stock purchase contract adjustment payments are included in other operating expenses.
Common stock dividends
On April 29, 2004, we declared a cash dividend of $0.16 per share, payable July 12, 2004 to shareholders of
record on June 14, 2004. In the prior year, we declared a dividend of $0.16 per share on April 28, 2003 to our
shareholders of record on June 13, 2003; we paid that dividend on July 11, 2003.
22
7. Investments Pledged as Collateral and Non-recourse Collateralized Obligations
We are involved with various entities in the normal course of business that may be deemed to be variable
interest entities and, as a result, we may be deemed to hold interests in those entities. We serve as the
investment advisor to eight collateralized obligation trusts that were organized to take advantage of bond
market arbitrage opportunities, including the three in the table below. These eight collateralized obligation
trusts are investment trusts with aggregate assets of $3.1 billion that are primarily invested in a variety of
fixed income securities acquired from third parties. These collateralized obligation trusts, in turn, issued
tranched collateralized obligations and residual equity securities to third parties, as well as to our
principal life insurance subsidiary's general account. Our asset management affiliates earned advisory fees of
$1.4 million and $1.0 million for the quarters ended March 31, 2004 and 2003, respectively, which are either
recorded as investment product fees for unconsolidated trusts or reflected as investment income on debt and
equity securities pledged as collateral, net of interest expense on collateralized obligations and applicable
minority interest for consolidated trusts on our consolidated statement of income. The collateralized
obligation trusts reside in bankruptcy remote SPEs in which we provide neither recourse nor guarantees.
Accordingly, our sole financial exposure to these collateralized obligation trusts stems from life insurance
subsidiary's general account direct investment in certain debt or equity securities issued by these
collateralized obligation trusts. Our maximum exposure to loss with respect to our life insurance subsidiary's
direct investment in the eight collateralized obligation trusts is $76.1 million at March 31, 2004 ($27.0
million of which relate to trusts that are consolidated). Of that exposure, $49.1 million ($20.0 million of
which relate to trusts that are consolidated) relates to investment grade debt securities and loss of
management fees.
We consolidated three collateralized obligation trusts as of March 31, 2004 and 2003. As of March 31, 2004, our
direct investment in the three consolidated collateralized obligation trusts is $27.0 million, $20.0 million of
which is an investment grade debt security as of March 31, 2004. We recognized investment income on debt and
equity securities pledged as collateral, net of interest expense on collateralized obligations and applicable
minority interest of $0.9 million and $0.3 million for the quarters ended March 31, 2004 and 2003,
respectively, related to these three consolidated collateralized obligation trusts.
Five variable interest entities not consolidated by us under FIN 46-R represent collateralized obligation
trusts with approximately $1.7 billion of investment assets pledged as collateral. Our general account direct
investment in these unconsolidated variable interest entities is $49.1 million, $34.1 million of which are
investment grade debt securities at March 31, 2004. We recognized investment advisory fee revenues related to
the five unconsolidated variable interest entities of $0.1 million and $0.3 million for the quarters ended
March 31, 2004 and 2003, respectively.
Consolidated Variable Interest Entities:
($ amounts in millions)
Mar 31, 2004 Dec 31, 2003
--------------- ---------------
Assets Pledged as Collateral, at Fair Value
Phoenix CDO I................................................................ $ 114.9 $ 148.8
Phoenix CDO II............................................................... 327.7 332.6
Phoenix-Mistic 2002-1 CDO, Ltd............................................... 970.6 963.4
--------------- ---------------
Total........................................................................ $ 1,413.2 $ 1,444.8
=============== ===============
Non-recourse Collateralized Obligations
Phoenix CDO I (March 2011 maturity).......................................... $ 151.0 $ 183.2
Phoenix CDO II (December 2012 mandatorily redeemable)........................ 374.5 375.6
Phoenix-Mistic 2002-1 CDO, Ltd. (September 2014 maturity).................... 919.5 913.2
--------------- ---------------
Total........................................................................ $ 1,445.0 $ 1,472.0
=============== ===============
Assets pledged as collateral are comprised of available-for-sale debt and equity securities at fair value of
$1,389.2 million and $1,350.0 million at March 31, 2004 and December 31, 2003, respectively. In addition, cash
and
23
accrued investment income of $24.0 million and $94.8 million are included in these amounts at March 31, 2004
and December 31, 2003, respectively.
Non-recourse collateralized obligations are comprised of callable collateralized obligations of $1,304.9
million and $1,344.3 million at March 31, 2004 and December 31, 2003, respectively, and non-recourse derivative
cash flow hedge liabilities of $140.1 million (notional amount of $1,145.1 million with maturities of
2005-2013) and $127.8 million (notional amount of $1,211.3 million with maturities of 2005-2013) at March 31,
2004 and December 31, 2003, respectively. Minority interest liabilities related to third-party equity
investments in the consolidated variable interest entities is $24.2 million and $22.3 million at March 31, 2004
and December 31, 2003, respectively.
Fair Value and Cost of Debt and Equity Securities March 31, 2004 December 31, 2003
Pledged as Collateral: -------------------------- -------------------------
($ amounts in millions) Fair Value Cost Fair Value Cost
----------- ------------ ------------ -----------
Debt securities pledged as collateral.................. $ 1,388.3 $ 1,268.0 $ 1,348.8 $ 1,247.4
Equity securities pledged as collateral................ 0.9 0.7 1.2 0.7
----------- ------------ ------------ -----------
Total debt and equity securities
pledged as collateral................................ $ 1,389.2 $ 1,268.7 $ 1,350.0 $ 1,248.1
=========== ============ ============ ===========
Gross and Net Unrealized Gains and Losses from March 31, 2004 December 31, 2003
Debt and Equity Securities Pledged as Collateral: -------------------------- -------------------------
($ amounts in millions) Gains Losses Gains Losses
----------- ------------ ------------ -----------
Debt securities pledged as collateral.................. $ 150.0 $ (29.8) $ 129.7 $ (28.3)
Equity securities pledged as collateral................ 0.6 (0.3) 0.7 (0.2)
----------- ------------ ------------ -----------
Total.................................................. $ 150.6 $ (30.1) $ 130.4 $ (28.5)
=========== ============ ============ ===========
Net unrealized gains................................... $ 120.5 $ 101.9
=========== ============
As of March 31, 2004
---------------------------------------------------------------------
Aging of Temporarily Impaired Debt and Less than 12 months Greater than 12 months Total
Equity Securities Pledged as Collateral: ----------------------- ---------------------- ----------------------
($ amounts in millions) Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
---------- ------------ ---------- ----------- ---------- -----------
Debt securities pledged as collateral
by type
Corporate................................. $ 8.9 $ (1.3) $ 48.6 $ (6.3) $ 57.5 $ (7.6)
Mortgage-backed........................... 13.6 (1.8) 26.9 (12.5) 40.5 (14.3)
Other Asset-backed........................ -- -- 37.6 (7.9) 37.6 (7.9)
---------- ------------ ---------- ----------- ---------- -----------
Debt securities........................... $ 22.5 $ (3.1) $ 113.1 $ (26.7) $ 135.6 $ (29.8)
Equity securities pledged as collateral... -- (0.1) -- (0.2) -- (0.3)
---------- ------------ ---------- ----------- ---------- -----------
Total temporarily impaired securities
pledged as collateral................... $ 22.5 $ (3.2) $ 113.1 $ (26.9) $ 135.6 $ (30.1)
========== ============ ========== =========== ========== ===========
Gross unrealized losses related to debt securities pledged as collateral whose fair value is less than the
security's amortized cost totals $30.1 million at March 31, 2004. Debt securities with a fair value less than
80% of the security's amortized totaled $19.3 million at March 31, 2004. The majority of these debt securities
are investment grade issues that continue to perform to their original contractual terms at March 31, 2004.
We recognized a $4.7 million and a $4.9 million charge to earnings in the quarters ended March 31, 2004 and
2003, respectively, related to the other-than-temporary impairment of debt securities pledged as collateral.
$3.7 million and $3.1 million of the 2004 and 2003 charge, respectively, relate to our direct investment in
these consolidated trusts.
24
The effect of the method of consolidation of theses three collateralized debt obligation trusts was to decrease
our net income $1.0 million and $1.8 million for the three months ended March 31, 2004 and 2003, respectively,
and to decrease our stockholders' equity by $79.4 million and $77.3 million as of March 31, 2004 and December
31, 2003, respectively.
The above non-cash charges to earnings and stockholders' equity primarily relate to realized investment and
unrealized investment and derivative cash flow gains (losses) within the collateralized obligation trusts,
which will ultimately be borne by third-party investors in the non-recourse collateralized obligations.
Accordingly, these losses and any future gains or losses under this method of consolidation will ultimately
reverse upon the deconsolidation, maturity or other liquidation of the non-recourse collateralized obligations.
GAAP requires us to consolidate all the assets and liabilities of these collateralized obligation trusts, which
results in the recognition of realized and unrealized losses even though we have no legal obligation to fund
such losses in the settlement of the collateralized obligations. The FASB continues to evaluate, through the
issuance of FASB staff positions, the various technical implementation issues related to consolidation
accounting. We will continue to assess the impact of any new implementation guidance issued by the FASB as well
as evolving interpretations among accounting professionals. Additional guidance and interpretations may affect
our application of consolidation accounting in future periods.
The amount of derivative cash flow hedge ineffectiveness recognized for the three months ended March 31,
2004 and 2003 is not material to our consolidated financial statements.
8. Income Taxes
Three Months Ended
March 31,
--------------------------------
Income Taxes (Benefit)