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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 001-16517
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 July 31 2004, the registrant had 94,708,223 shares of common stock outstanding.
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1
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Unaudited Interim Condensed Consolidated Financial Statements:
Unaudited Interim Condensed Consolidated Balance Sheet June 30, 2004
(unaudited) and December 31, 2003...................................................... 3
Unaudited Interim Condensed Consolidated Statement of Income and Comprehensive
Income for the three and six months ended June 30, 2004 and 2003 (unaudited)........... 4
Unaudited Interim Condensed Consolidated Statement of Cash Flows
for the six months ended June 30, 2004 and 2003 (unaudited)............................ 5
Unaudited Interim Condensed Consolidated Statement of Changes in Stockholders'
Equity for the three and six months ended June 30, 2004 and 2003 (unaudited)........... 6
Notes to Unaudited Interim Condensed Consolidated Financial Statements for the
three and six months ended June 30, 2004 and 2003 (unaudited).......................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 34
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................. 75
Item 4. Controls and Procedures.................................................................... 80
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 81
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities........... 82
Item 3. Defaults Upon Senior Securities............................................................ 82
Item 4. Submission of Matters to a Vote of Security Holders........................................ 82
Item 5. Other Information.......................................................................... 83
Item 6. Exhibits and Reports on Form 8-K........................................................... 83
Signature............................................................................................... 88
2
PART I.
FINANCIAL INFORMATION
ITEM 1. UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THE PHOENIX COMPANIES, INC.
Unaudited Interim Condensed Consolidated Balance Sheet
($ amounts in millions, except share data)
June 30, 2004 (unaudited) and December 31, 2003
2004 2003
--------------- ---------------
ASSETS:
Available-for-sale debt securities, at fair value............................ $ 12,944.9 $ 13,273.0
Available-for-sale equity securities, at fair value.......................... 319.3 312.0
Mortgage loans, at unpaid principal balances................................. 256.4 284.1
Venture capital partnerships, at equity in net assets........................ 249.3 234.9
Affiliate equity securities, at equity in net assets......................... 47.7 47.5
Policy loans, at unpaid principal balances................................... 2,238.7 2,227.8
Other investments............................................................ 399.5 402.0
--------------- ---------------
16,455.8 16,781.3
Available-for-sale debt and equity securities pledged as collateral,
at fair value.............................................................. 1,275.4 1,350.0
--------------- ---------------
Total investments............................................................ 17,731.2 18,131.3
Cash and cash equivalents.................................................... 623.7 447.9
Accrued investment income.................................................... 223.7 222.3
Receivables.................................................................. 206.3 224.9
Deferred policy acquisition costs............................................ 1,465.2 1,367.7
Deferred income taxes........................................................ 55.4 58.7
Intangible assets............................................................ 320.3 335.1
Goodwill..................................................................... 420.8 419.9
Other assets................................................................. 214.9 268.2
Separate account assets...................................................... 6,526.4 6,083.2
--------------- ---------------
Total assets................................................................. $ 27,787.9 $ 27,559.2
=============== ===============
LIABILITIES:
Policy liabilities and accruals.............................................. $ 13,069.4 $ 13,088.6
Policyholder deposit funds................................................... 3,542.2 3,642.7
Stock purchase contracts..................................................... 138.3 128.8
Indebtedness................................................................. 661.2 639.0
Other general account liabilities............................................ 494.5 525.7
Non-recourse collateralized obligations...................................... 1,400.7 1,472.0
Separate account liabilities................................................. 6,526.4 6,083.2
--------------- ---------------
Total liabilities............................................................ 25,832.7 25,580.0
CONTINGENT LIABILITIES AND COMMITMENTS (NOTES 11 & 12)
MINORITY INTEREST IN NET ASSETS OF CONSOLIDATED SUBSIDIARIES................. 33.4 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................................................... 2,429.4 2,428.8
Deferred compensation on restricted stock units.............................. (3.2) (3.6)
Accumulated deficit.......................................................... (336.8) (352.7)
Accumulated other comprehensive income....................................... 16.9 63.7
Treasury stock, at cost: 11,702,704 and 11,930,647 shares.................... (185.5) (189.4)
--------------- ---------------
Total stockholders' equity................................................... 1,921.8 1,947.8
--------------- ---------------
Total liabilities, minority interest and stockholders' equity................ $ 27,787.9 $ 27,559.2
=============== ===============
The accompanying notes are an integral part of these condensed financial statements.
3
THE PHOENIX COMPANIES, INC.
Unaudited Interim Condensed Consolidated Statement of Income and Comprehensive Income
($ amounts in millions, except per share data)
Three and Six Months Ended June 30, 2004 and 2003 (unaudited)
Three Months Six Months
-------------------------- -------------------------
2003 2003
2004 Restated 2004 Restated
------------ ------------ ------------ ------------
REVENUES:
Premiums................................................ $ 238.2 $ 248.5 $ 470.9 $ 494.6
Insurance and investment product fees................... 154.2 137.0 314.6 273.1
Investment income, net of expenses...................... 258.9 277.7 537.1 568.8
Net realized investment gains (losses).................. 15.6 (104.7) 18.1 (118.8)
------------ ------------ ------------ ------------
Total revenues.......................................... 666.9 558.5 1,340.7 1,217.7
------------ ------------ ------------ ------------
BENEFITS AND EXPENSES:
Policy benefits, excluding policyholder dividends....... 341.3 348.4 686.9 699.2
Policyholder dividends.................................. 105.3 94.2 211.2 210.7
Policy acquisition cost amortization.................... 23.1 25.9 45.7 53.9
Intangible asset amortization........................... 8.3 8.2 16.6 16.6
Interest expense on indebtedness........................ 9.9 9.9 19.7 19.7
Interest expense on non-recourse collateralized
obligations........................................... 7.5 12.6 16.4 25.9
Other operating expenses................................ 146.8 140.4 292.2 270.7
------------ ------------ ------------ ------------
Total benefits and expenses............................. 642.2 639.6 1,288.7 1,296.7
------------ ------------ ------------ ------------
Income (loss) from continuing operations before
income taxes and minority interest.................... 24.7 (81.1) 52.0 (79.0)
Applicable income tax (benefit)......................... 6.7 (34.2) 14.0 (36.6)
------------ ------------ ------------ ------------
Income (loss) from continuing operations
before minority interest.............................. 18.0 (46.9) 38.0 (42.4)
Minority interest in net income of
consolidated subsidiaries............................. (3.4) (2.3) (7.1) (5.1)
------------ ------------ ------------ ------------
Income (loss) from continuing operations................ 14.6 (49.2) 30.9 (47.5)
Income (loss) from discontinued operations.............. (0.2) (0.4) 0.1 (0.8)
------------ ------------ ------------ ------------
Net income (loss)....................................... $ 14.4 $ (49.6) $ 31.0 $ (48.3)
============ ============ ============ ============
EARNINGS PER SHARE:
Income (loss) from continuing operations - basic........ $ 0.15 $ (0.52) $ 0.33 $ (0.50)
Income (loss) from continuing operations - diluted...... $ 0.15 $ (0.52) $ 0.30 $ (0.50)
============ ============ ============ ============
Net income (loss) - basic............................... $ 0.14 $ (0.53) $ 0.33 $ (0.51)
Net income (loss) - diluted............................. $ 0.14 $ (0.53) $ 0.30 $ (0.51)
============ ============ ============ ============
Basic weighted-average common shares outstanding
(in thousands)........................................ 94,644 94,150 94,569 94,099
Diluted weighted-average common shares outstanding
(in thousands)........................................ 101,294 94,150 101,645 94,099
============ ============ ============ ============
COMPREHENSIVE INCOME:
Net income (loss)....................................... $ 14.4 $ (49.6) $ 31.0 $ (48.3)
------------ ------------ ------------ ------------
Net unrealized investment gains (losses)................ (124.8) 102.6 (63.2) 104.1
Net unrealized foreign currency translation adjustment.. (2.0) 5.8 0.4 4.8
Net unrealized derivative instruments gains (losses).... 49.9 61.9 16.0 72.9
------------ ------------ ------------ ------------
Other comprehensive income (loss)....................... (76.9) 170.3 (46.8) 181.8
------------ ------------ ------------ ------------
Comprehensive income (loss)............................. $ (62.5) $ 120.7 $ (15.8) $ 133.5
============ ============ ============ ============
The accompanying notes are an integral part of these condensed financial statements.
4
THE PHOENIX COMPANIES, INC.
Unaudited Interim Condensed Consolidated Statement of Cash Flows
($ amounts in millions)
Six Months Ended June 30, 2004 and 2003 (unaudited)
Six Months
-------------------------------
2003
2004 Restated
--------------- ---------------
OPERATING ACTIVITIES:
Premiums collected........................................................... $ 462.5 $ 485.5
Insurance and investment product fees collected.............................. 319.3 274.4
Investment income collected.................................................. 512.2 516.5
Policy benefits paid, excluding policyholder dividends....................... (562.7) (525.5)
Policyholder dividends paid.................................................. (184.9) (187.0)
Policy acquisition costs paid................................................ (89.4) (100.6)
Interest expense on indebtedness paid........................................ (18.6) (17.9)
Interest expense on collateralized obligations paid.......................... (16.4) (25.9)
Other operating expenses paid................................................ (282.3) (283.6)
Income taxes refunded........................................................ 2.4 9.6
--------------- ---------------
Cash from continuing operations.............................................. 142.1 145.5
Discontinued operations, net................................................. (16.5) (45.0)
--------------- ---------------
Cash from operating activities............................................... 125.6 100.5
--------------- ---------------
INVESTING ACTIVITIES:
Investment purchases......................................................... (1,956.0) (3,110.1)
Investment sales, repayments and maturities.................................. 2,097.3 2,297.6
Debt and equity securities pledged
as collateral purchases.................................................... (64.5) (4.5)
Debt and equity securities pledged as collateral sales....................... 99.8 26.2
Subsidiary purchases......................................................... (36.8) (19.2)
Subsidiary sales............................................................. 4.6 --
Premises and equipment additions............................................. (3.4) (5.8)
Premises and equipment disposals............................................. 25.9 --
Discontinued operations, net................................................. 6.6 (6.7)
--------------- ---------------
Cash from (for) investing activities......................................... 173.5 (822.5)
--------------- ---------------
FINANCING ACTIVITIES:
Policyholder deposit fund deposits........................................... 445.7 899.6
Policyholder deposit fund withdrawals........................................ (546.2) (550.8)
Other indebtedness proceeds.................................................. 25.0 --
Collateralized obligations proceeds.......................................... -- --
Collateralized obligations repayments........................................ (40.0) (32.4)
Common stock dividends paid.................................................. -- --
Minority interest distributions.............................................. (7.8) (9.3)
--------------- ---------------
Cash from (for) financing activities......................................... (123.3) 307.1
--------------- ---------------
Change in cash and cash equivalents.......................................... 175.8 (414.9)
Cash and cash equivalents, beginning of period............................... 447.9 1,110.5
--------------- ---------------
Cash and cash equivalents, end of period..................................... $ 623.7 $ 695.6
=============== ===============
Included in cash and cash equivalents above is cash pledged as collateral of $14.0 million and $41.3 million
at June 30, 2004 and 2003, respectively.
The accompanying notes are an integral part of these condensed financial statements.
5
THE PHOENIX COMPANIES, INC.
Unaudited Interim Condensed Consolidated Statement of Changes in Stockholders' Equity
($ amounts in millions, except share and per share data)
Three and Six Months Ended June 30, 2004 and 2003 (unaudited)
Three Months Six Months
-------------------------- -------------------------
2003 2003
2004 Restated 2004 Restated
------------ ------------ ----------- ------------
COMMON STOCK AND
ADDITIONAL PAID-IN CAPITAL:
Restricted stock units awarded as compensation
(18,694; 255,102; 64,767; and 649,839 units)........... $ 0.2 $ 2.0 $ 0.9 $ 5.0
Restricted stock units awarded as payment of liabilities
(0; 161,768; 0; and 161,768 units)..................... -- 1.5 -- 1.5
Stock options awarded as compensation
(80,000; 476,089; 210,000; and 476,089 options)........ 0.3 -- 0.5 --
Excess of cost over fair value of common shares
contributed to employee savings plan................... (0.5) (1.0) (0.8) (1.3)
DEFERRED COMPENSATION ON
RESTRICTED STOCK UNITS:
Compensation expense deferred on
restricted stock units awarded......................... -- (2.0) (0.5) (5.0)
Compensation expense recognized on
restricted stock units................................. 0.5 0.3 0.9 0.5
RETAINED EARNINGS
(ACCUMULATED DEFICIT):
Net income (loss)........................................ 14.4 (49.6) 31.0 (48.3)
Common stock dividend declared ($0.16 per share)......... (15.1) (15.1) (15.1) (15.1)
ACCUMULATED OTHER
COMPREHENSIVE INCOME:
Other comprehensive income (loss)........................ (76.9) 170.3 (46.8) 181.8
TREASURY STOCK:
Common shares contributed to employee savings plan
(91,804; 115,104; 226,085; and 157,437 shares)......... 1.7 1.8 3.9 2.5
------------ ------------ ------------ ------------
Change in stockholders' equity.......................... (75.4) 108.2 (26.0) 121.6
Stockholders' equity, beginning of period................ 1,997.2 1,840.2 1,947.8 1,826.8
------------ ------------ ------------ ------------
Stockholders' equity, end of period..................... $ 1,921.8 $ 1,948.4 $ 1,921.8 $ 1,948.4
============ ============ ============ ============
The accompanying notes are an integral part of these condensed financial statements.
6
THE PHOENIX COMPANIES, INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three and Six Months Ended June 30, 2004 and 2003 (unaudited)
1. Organization and Operations
Our unaudited interim condensed 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 whose 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 Unaudited Interim Condensed Consolidated
Statement of Income and Comprehensive Income, our Unaudited Interim Condensed Consolidated Statement of Cash
Flows and our Unaudited Interim Condensed Consolidated Statement of Changes in Stockholders' Equity to correct
an accounting error related to the method of consolidation for several of our sponsored collateralized
obligation trusts, which is 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 unaudited interim condensed 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 and six month periods in 2004 are not necessarily indicative of the results
that may be expected for the year 2004. These unaudited condensed 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
Other-Than Temporary Impairments: Portions of Emerging Issues Task Force Abstract EITF 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments, or EITF 03-1 are effective for
fiscal periods beginning after June 15, 2004. EITF 03-1 provides guidance as to the determination of
other-than-temporary impaired securities and requires additional disclosures with respect to unrealized
losses. These accounting and disclosure requirements largely codify our existing practices and thus, are not
anticipated to have a material affect on our consolidated financial statements.
Post-retirement Benefits: On May 19, 2004, the Financial Accounting Standards Board, or the FASB, issued FASB
Staff Position No. FAS 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003, or the FSP. For employers that sponsor post-retirement
benefit plans, or plan sponsors that provide prescription drug benefits to retirees, the FSP requires any
effects of the anticipated federal tax subsidy related to those drug benefits be treated as an actuarial gain.
The effect of the FSP is immaterial to our consolidated financial statements.
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 June 30, 2004.
Stock-based Compensation: A new standard was issued by the FASB in 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, our Consolidated Statement of Cash Flows, and our Consolidated
Statement of Changes in Stockholders' Equity to correct an error related 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 three and six months ended June 30, 2003 follow:
Revised and Originally Reported
Select Financial Components: Three Months Ended Six Months Ended
($ amounts in millions, except per share data) June 30, 2003 June 30, 2003
-------------------------------- --------------------------------
As Restated As Reported As Restated As Reported
--------------- ---------------- --------------- ---------------
Income statement data
Insurance and investment product fees...... $ 137.0 $ 137.4 $ 273.1 $ 273.9
Investment income, net of expenses......... 277.7 263.8 568.8 540.5
Realized investment losses................. (104.7) (104.6) (118.8) (116.9)
Interest expense on non-recourse
collateralized obligations............... 12.6 -- 25.9 --
Net loss from continuing operations........ (49.2) (49.1) (47.5) (45.6)
Net loss................................... $ (49.6) $ (49.5) $ (48.3) $ (46.4)
Earnings per share data
Loss from continuing operations - basic.... $ (0.52) $ (0.52) $ (0.50) $ (0.48)
Loss from continuing operations - diluted.. (0.52) (0.52) (0.50) (0.48)
Net loss - basic........................... (0.53) (0.53) (0.51) (0.49)
Net loss - diluted......................... $ (0.53) $ (0.53) $ (0.51) $ (0.49)
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 $2.1 million as a result of the management members exercising their put/call agreements.
This additional purchase price was allocated by PXP to goodwill and definite-lived intangible assets.
The minority interests in each of our less than wholly-owned asset management subsidiaries are subject to
agreements which existed at the time of the acquisitions, pursuant to which either the minority interest
holders or PXP may exercise their respective rights to sell or buy the minority interests on specified future
dates or upon the occurrence of certain events. Payments made to acquire minority interest under the
agreements are recorded as a step purchase. Accordingly, the purchase price is allocated to the portion of the
assets acquired and liabilities assumed based on their respective fair values.
On March 31, 2004, we completed the sale of 100% of the common stock held by us in Phoenix National Trust
Company. The effect of this transaction is immaterial to our consolidated financial statements. Phoenix
National Trust Company is presented as a discontinued operation in our consolidated financial statements for
all periods presented.
Effective May 31, 2004, we sold our retail broker-dealer operations to Linsco/Private Ledger Financial
Services, or LPL. As part of the transaction, advisors affiliated with WS Griffith Securities, Inc., or
Griffith, and Main Street Management Company, or Main Street, ceased to be affiliated with Phoenix but had the
opportunity to move to LPL as independent registered representatives.
9
Revenues net of eliminations and direct expenses net of deferrals and certain transaction related costs
included in our consolidated financial statements related to our retail affiliate operations sold during the
second quarter are as follows:
Revenues and Direct Expenses: Three Months Ended Six Months Ended
($ amounts in millions) June 30, June 30,
-------------------------- -------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Insurance and investment product fee revenues,
net of eliminations.................................. $ 14.0 $ 14.7 $ 26.8 $ 28.4
Direct other operating expenses, net of deferrals....... 19.2 22.2 44.7 42.6
Actual net expense savings to be realized from the sale of Griffith and Main Street will be dependent on the
effect this transaction has on future sales and persistency of inforce life and annuity business and thus,
actual net expense savings realized from the sale may fall short or exceed our current expectations of an
annual pre-tax earnings benefit of $10.0 million or more.
We incurred a $3.6 million net of tax charge, recorded as a realized investment loss, for an impairment of
goodwill related to Main Street and a $0.9 million net of tax charge for employee severance costs during the
first quarter of 2004 related to this divestiture. We realized a $2.7 million net of tax gain, recorded as a
realized investment gain, on the sale of the broker-dealer operations during the second quarter of 2004, and
we incurred an $8.4 million net of tax charge related to employee severance and lease termination costs,
offset by a $4.4 million after-tax gain related to curtailment accounting related to employee benefit plans.
As of June 30, 2004, our remaining liability for the employee severance cost was $6.9 million, which is
expected to be fully paid by early 2005. Our remaining liability for the lease termination cost was $4.3
million, which is expected to be fully paid by the end of 2008.
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, closed on July 2, 2004.
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 independent 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
certain other items are excluded because we do not consider them when evaluating the financial performance of
the segments. The size and timing of realized investment gains and losses are often subject to our discretion.
The
10
other 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.
Segment Information on Assets: June 30, Dec 31,
($ amounts in millions) 2004 2003
--------------- ---------------
Segment assets
Life and annuity segment.................................................... $ 24,525.3 $ 24,219.5
Asset management segment.................................................... 839.5 851.2
--------------- ---------------
Operating segment assets.................................................... 25,364.8 25,070.7
Venture capital segment..................................................... 206.2 196.3
Corporate and other segment................................................. 2,193.8 2,264.0
--------------- ---------------
Total segment assets........................................................ 27,764.8 27,531.0
Net assets of discontinued operations....................................... 23.1 28.2
--------------- ---------------
Total assets................................................................ $ 27,787.9 $ 27,559.2
=============== ===============
11
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- -------------------------------
Segment Information on Revenues and Income: 2003 2003
($ amounts in millions) 2004 Restated 2004 Restated
--------------- --------------- --------------- ---------------
Segment revenues
Life and annuity segment.................... $ 566.9 $ 578.9 $ 1,139.0 $ 1,151.4
Asset management segment.................... 66.5 58.6 136.7 115.9
Elimination of inter-segment revenues....... 1.1 (1.2) 1.8 (2.4)
--------------- --------------- --------------- ---------------
Operating segment revenues.................. 634.5 636.3 1,277.5 1,264.9
Venture capital segment..................... 4.4 5.8 16.0 29.7
Corporate and other segment................. 12.4 21.1 29.1 42.3
--------------- --------------- --------------- ---------------
Total segment revenues...................... 651.3 663.2 1,322.6 1,336.9
Net realized investment gains (losses)...... 15.6 (104.7) 18.1 (118.8)
Other....................................... -- -- -- (0.4)
--------------- --------------- --------------- ---------------
Total revenues.............................. $ 666.9 $ 558.5 $ 1,340.7 $ 1,217.7
=============== =============== =============== ===============
Segment income (loss)
Life and annuity segment.................... $ 33.8 $ 27.8 $ 59.6 $ 45.8
Asset management segment.................... 0.1 (5.7) 0.2 (11.5)
--------------- --------------- --------------- ---------------
Operating segment pre-tax income............ 33.9 22.1 59.8 34.3
Venture capital segment..................... 4.4 5.8 16.0 29.7
Corporate and other segment................. (16.0) (12.5) (28.7) (23.9)
--------------- --------------- --------------- ---------------
Total segment income before income taxes.... 22.3 15.4 47.1 40.1
Applicable income taxes..................... 5.7 3.5 13.0 11.0
--------------- --------------- --------------- ---------------
Total segment income........................ 16.6 11.9 34.1 29.1
Gain (loss) from discontinued operations,
net of income taxes....................... (0.2) (0.4) 0.1 (0.8)
Net realized investment gains (losses),
net of income taxes and other offsets..... 5.0 (59.3) 5.7 (73.6)
Restructuring costs, net of income taxes.... (7.0) (1.8) (8.9) (4.3)
Other income, net of income taxes........... -- -- -- 1.3
--------------- --------------- --------------- ---------------
Net income (loss)........................... $ 14.4 $ (49.6) $ 31.0 $ (48.3)
=============== =============== =============== ===============
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: June 30, Dec 31,
($ amounts in millions) 2004 2003
--------------- ---------------
Segment assets
Investments.................................................................. $ 15,737.9 $ 16,203.3
Cash and cash equivalents.................................................... 459.8 250.5
Receivables.................................................................. 253.7 228.1
Deferred policy acquisition costs............................................ 1,465.2 1,367.7
Deferred income taxes........................................................ 39.2 40.2
Goodwill and other intangible assets......................................... 10.2 15.3
Other general account assets................................................. 142.1 204.1
Separate accounts............................................................ 6,417.2 5,910.3
--------------- ---------------
Total segment assets......................................................... $ 24,525.3 $ 24,219.5
=============== ===============
12
Life and Annuity Segment Income: Three Months Ended Six Months Ended
($ amounts in millions) June 30, June 30,
-------------------------- -------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Segment income
Premiums................................................ $ 238.2 $ 248.5 $ 470.9 $ 494.6
Insurance and investment product fees................... 86.5 79.2 176.0 157.4
Net investment income................................... 242.2 251.2 492.1 499.4
------------ ------------ ------------ ------------
Total segment revenues.................................. 566.9 578.9 1,139.0 1,151.4
------------ ------------ ------------ ------------
Policy benefits, including policyholder dividends....... 437.1 449.9 886.1 905.2
Policy acquisition cost amortization.................... 24.3 24.7 46.5 52.2
Other operating expenses................................ 71.7 76.5 146.8 148.2
------------ ------------ ------------ ------------
Total segment benefits and expenses..................... 533.1 551.1 1,079.4 1,105.6
------------ ------------ ------------ ------------
Segment income before income taxes...................... 33.8 27.8 59.6 45.8
Allocated income taxes.................................. 10.2 8.4 17.4 12.4
------------ ------------ ------------ ------------
Segment income.......................................... 23.6 19.4 42.2 33.4
Net realized investment gains (losses),
net of income taxes and other offsets................. 1.5 3.9 (2.0) 2.6
Restructuring charges, after income taxes............... (5.4) -- (6.2) --
------------ ------------ ------------ ------------
Segment net income...................................... $ 19.7 $ 23.3 $ 34.0 $ 36.0
============ ============ ============ ============
Life and Annuity Segment Revenues by Product: Three Months Ended Six Months Ended
($ amounts in millions) June 30, June 30,
-------------------------- -------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Premiums
Term life insurance..................................... $ 2.7 $ 2.1 $ 5.4 $ 4.4
Other life insurance.................................... 3.9 2.9 6.5 5.2
------------ ------------ ------------ ------------
Total, non-participating life insurance................. 6.6 5.0 11.9 9.6
Participating life insurance............................ 231.6 243.5 459.0 485.0
------------ ------------ ------------ ------------
Total premiums.......................................... 238.2 248.5 470.9 494.6
------------ ------------ ------------ ------------
Insurance and investment product fees
Variable universal life insurance....................... 25.1 25.2 50.8 49.9
Universal life insurance................................ 28.4 22.8 55.1 46.4
Other life insurance.................................... 17.0 17.3 38.3 33.2
------------ ------------ ------------ ------------
Total, life insurance................................... 70.5 65.3 144.2 129.5
Annuities............................................... 16.0 14.1 31.8 27.9
------------ ------------ ------------ ------------
Total insurance and investment product fees............. 86.5 79.4 176.0 157.4
Net investment income................................... 242.2 251.0 492.1 499.4
------------ ------------ ------------ ------------
Segment revenues........................................ $ 566.9 $ 578.9 $ 1,139.0 $ 1,151.4
============ ============ ============ ============
Three Months Ended Six Months Ended
Deferred Policy Acquisition Costs: June 30, June 30,
($ amounts in millions) -------------------------- -------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Policy acquisition costs deferred....................... $ 42.5 $ 44.0 $ 89.5 $ 100.6
Costs amortized to expenses:
Recurring costs related to segment income............. (24.3) (24.7) (46.5) (52.2)
Decrease (increase) related to realized
investment gains or losses.......................... 1.2 (1.2) 0.8 (1.7)
Offsets to net unrealized investment gains or losses
included in other comprehensive income................ 87.3 (40.1) 53.7 (32.8)
------------ ------------ ------------ ------------
Change in deferred policy acquisition costs............. 106.7 (22.0) 97.5 13.9
Deferred policy acquisition costs,
beginning of period................................... 1,358.5 1,270.0 1,367.7 1,234.1
------------ ------------ ------------ ------------
Deferred policy acquisition costs, end of period........ $ 1,465.2 $ 1,248.0 $ 1,465.2 $ 1,248.0
============ ============ ============ ============
13
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 June 30, 2004 and December 31, 2003 follow: Confederation Life ($43.9 million and $36.0 million,
respectively), Valley Forge Life ($34.8 million and $37.4 million, respectively) and PFG Holdings ($9.6
million and $9.7, respectively).
Policy liabilities and accruals
Policyholder liabilities are primarily for participating life insurance policies and universal life insurance
policies. For universal life, this includes deposits received from customers and investment earnings on their
fund balances, which range from 4.00% to 6.00% at June 30, 2004 and 4.00% to 6.25% at December 31, 2003, less
administrative and mortality charges.
Policyholder deposit funds
Policyholder deposit funds primarily consist of annuity deposits received from customers, dividend
accumulations and investment earnings on their fund balances, which range from 1.1% to 12.3% at June 30, 2004
and 1.0% to 12.3% at December 31, 2003, less administrative charges.
Participating life insurance
Participating life insurance inforce was 36.8% and 38.8% of the face value of total individual life insurance
inforce at June 30, 2004 and December 31, 2003, respectively.
Closed block
In 1999, we began the process of reorganizing and demutualizing our then principal operating company, Phoenix
Home Life Mutual Insurance Company. We completed the process in June 2001, when all policyholder membership
interests in this mutual company were extinguished and eligible policyholders of the mutual company received
shares of common stock of The Phoenix Companies, Inc., together with cash and policy credits, as compensation.
To protect the future dividends of these policyholders, we also established a closed block for their existing
policies. Summary financial data for the closed block follows:
14
Closed Block Assets and Liabilities: June 30, Dec 31, Inception
($ amounts in millions) 2004 2003 (Dec 31, 1999)
------------ ------------ ------------
Debt securities....................................................... $ 6,736.1 $ 6,906.4 $ 4,773.1
Equity securities..................................................... 85.7 82.9 --
Mortgage loans........................................................ 214.4 228.5 399.0
Venture capital partnerships.......................................... 43.1 38.6 --
Policy loans.......................................................... 1,384.1 1,386.8 1,380.0
Other invested assets................................................. 53.8 46.7 --
------------ ------------ ------------
Total closed block investments........................................ 8,517.2 8,689.9 6,552.1
Cash and cash equivalents............................................. 223.7 40.5 --
Accrued investment income............................................. 118.7 120.2 106.8
Receivables........................................................... 48.5 43.0 35.2
Deferred income taxes................................................. 377.0 377.0 389.4
Other closed block assets............................................. 12.7 62.3 6.2
------------ ------------ ------------
Total closed block assets............................................. 9,297.8 9,332.9 7,089.7
------------ ------------ ------------
Policy liabilities and accruals....................................... 9,779.9 9,723.1 8,301.7
Policyholder dividends payable........................................ 383.8 369.8 325.1
Policyholder dividend obligation...................................... 371.8 519.2 --
Other closed block liabilities........................................ 82.1 63.0 12.3
------------ ------------ ------------
Total closed block liabilities........................................ 10,617.6 10,675.1 8,639.1
------------ ------------ ------------
Excess of closed block liabilities over closed block assets........... $ 1,319.8 $ 1,342.2 $ 1,549.4
============ ============ ============
Closed Block Revenues and Expenses and Changes Six Months Ended,
in Policyholder Dividend Obligations: Cumulative June 30,
($ amounts in millions) from -------------------------
Inception 2004 2003
------------ ------------ ------------
Closed block revenues
Premiums.............................................................. $ 4,691.6 $ 453.5 $ 478.2
Net investment income................................................. 2,492.3 281.1 286.6
Net realized investment gains (losses)................................ (93.0) 3.7 (2.9)
------------ ------------ ------------
Total revenues........................................................ 7,090.9 738.3 761.9
------------ ------------ ------------
Policy benefits, excluding dividends.................................. 4,847.3 486.9 508.9
Other operating expenses.............................................. 54.7 5.7 5.1
------------ ------------ ------------
Total benefits and expenses, excluding policyholder dividends......... 4,902.0 492.6 514.0
------------ ------------ ------------
Closed block contribution to income before dividends and income taxes. 2,188.9 245.7 247.9
Policyholder dividends................................................ 1,799.8 210.8 210.5
------------ ------------ ------------
Closed block contribution to income before income taxes............... 389.1 34.9 37.4
Applicable income taxes............................................... 136.7 12.3 13.1
------------ ------------ ------------
Closed block contribution to income................................... $ 252.4 $ 22.6 $ 24.3
============ ============ ============
Policyholder dividend obligation
Policyholder dividends provided through earnings...................... $ 1,852.3 $ 210.8 $ 210.5
Policyholder dividends provided through other comprehensive income.... 273.2 (159.5) 163.8
------------ ------------ ------------
Additions to policyholder dividend liabilities........................ 2,125.5 51.3 374.3
Policyholder dividends paid........................................... (1,695.0) (184.7) (187.0)
------------ ------------ ------------
Increase in policyholder dividend liabilities......................... 430.5 (133.4) 187.3
Policyholder dividend liabilities, beginning of period................ 325.1 889.0 910.7
------------ ------------ ------------
Policyholder dividend liabilities, end of period...................... 755.6 755.6 1,098.0
Less: policyholder dividends payable, end of period................... 383.8 383.8 382.3
------------ ------------ ------------
Policyholder dividend obligation, end of period....................... $ 371.8 $ 371.8 $ 715.7
============ ============ ============
15
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: June 30, Dec 31,
($ amounts in millions) 2004 2003
--------------- ---------------
Segment assets
Investments............................................................... $ 15.1 $ 11.8
Cash and cash equivalents................................................. 49.3 39.6
Receivables............................................................... 30.3 36.0
Intangible assets......................................................... 320.3 335.1
Goodwill.................................................................. 410.6 408.1
Other assets.............................................................. 13.9 20.6
--------------- ---------------
Total segment assets...................................................... $ 839.5 $ 851.2
=============== ===============
16
Three Months Ended Six Months Ended
Asset Management Segment Income: June 30, June 30,
($ amounts in millions) ------------------------------ -----------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Segment income
Investment product fees......................... $ 66.3 $ 58.4 $ 136.4 $ 115.6
Net investment income........................... 0.2 0.2 0.3 0.3
-------------- -------------- -------------- --------------
Total segment revenues.......................... 66.5 58.6 136.7 115.9
-------------- -------------- -------------- --------------
Intangible asset amortization................... 8.3 8.2 16.6 16.6
Other operating expenses........................ 54.6 54.2 112.7 106.1
-------------- -------------- -------------- --------------
Total segment expenses.......................... 62.9 62.4 129.3 122.7
-------------- -------------- -------------- --------------
Segment income (loss) before income taxes
and minority interest......................... 3.6 (3.8) 7.4 (6.8)
Allocated income taxes (benefit)................ 0.1 (2.3) 0.5 (4.4)
-------------- -------------- -------------- --------------
Segment income (loss) before minority interest.. 3.5 (1.5) 6.9 (2.4)
Minority interest in segment income of
consolidated subsidiaries..................... 3.5 1.9 7.2 4.7
-------------- -------------- -------------- --------------
Segment income (loss)........................... -- (3.4) (0.3) (7.1)
Restructuring charges, net of income taxes...... (0.2) (1.5) (0.3) (3.3)
Realized investment gains, net of income taxes.. -- -- 1.4 --
-------------- -------------- -------------- --------------
Segment net income (loss)....................... $ (0.2) $ (4.9) $ 0.8 $ (10.4)
============== ============== ============== ==============
Beginning in 2004, trail commissions related to mutual funds are classified as operating expenses, whereas in
prior years, trail 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. 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.
Asset management segment intangible assets and goodwill
Carrying Amounts of Intangible Assets and Goodwill: June 30, Dec 31,
($ amounts in millions) 2004 2003
--------------- ---------------
Asset management contracts with definite lives............................. $ 396.2 $ 396.1
Less: accumulated amortization............................................. 149.2 134.3
--------------- ---------------
Intangible assets with definite lives...................................... 247.0 261.8
Asset management contracts with indefinite lives........................... 73.3 73.3
--------------- ---------------
Intangible assets.......................................................... $ 320.3 $ 335.1
=============== ===============
Goodwill................................................................... $ 410.6 $ 408.1
=============== ===============
17
Activity in Intangible Assets and Goodwill: Three Months Ended Six Months Ended
($ amounts in millions) June 30, June 30,
------------------------------ -----------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Intangible assets
Asset purchases................................. $ -- $ 0.8 $ 1.8 $ 0.8
Asset amortization.............................. (8.3) (8.2) (16.6) (16.6)
-------------- -------------- -------------- --------------
Change in intangible assets..................... (8.3) (7.4) (14.8) (15.8)
Balance, beginning of period.................... 328.6 356.6 335.1 365.0
-------------- -------------- -------------- --------------
Balance, end of period.......................... $ 320.3 $ 349.2 $ 320.3 $ 349.2
============== ============== ============== ==============
Goodwill
Goodwill acquired............................... $ -- $ 1.2 $ 2.5 $ 1.2
-------------- -------------- -------------- --------------
Change in goodwill.............................. -- 1.2 2.5 1.2
Balance, beginning of period.................... 410.6 375.6 408.1 375.6
-------------- -------------- -------------- --------------
Balance, end of period.......................... $ 410.6 $ 376.8 $ 410.6 $ 376.8
============== ============== ============== ==============
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: six months ended December
31, 2004 - $16.5 million; 2005 - $32.5 million; 2006 - $27.6 million; 2007 - $26.5 million; 2008 - $26.2
million; 2009 - $25.0 million; and thereafter - $92.7 million. At June 30, 2004, the remaining
weighted-average amortization period for definite-lived intangible assets is 8.6 years.
5. Investing Activities
Debt and equity securities
Fair Value and Cost of Debt and Equity Securities: June 30, 2004 December 31, 2003
($ amounts in millions) ------------------------------ -----------------------------
Fair Value Cost Fair Value Cost
-------------- -------------- -------------- --------------
U.S. government and agency...................... $ 717.3 $ 676.0 $ 757.0 $ 714.5
State and political subdivision................. 479.1 448.8 510.3 468.4
Foreign government.............................. 280.0 271.3 260.4 239.0
Corporate....................................... 6,971.3 6,788.2 6,765.8 6,412.4
Mortgage-backed................................. 2,879.5 2,804.8 3,097.5 2,963.4
Other asset-backed.............................. 1,617.7 1,616.7 1,882.0 1,863.6
-------------- -------------- -------------- --------------
Debt securities................................. $ 12,944.9 $ 12,605.8 $ 13,273.0 $ 12,661.3
============== ============== ============== ==============
Amounts applicable to the closed block.......... $ 6,736.1 $ 6,460.2 $ 6,906.4 $ 6,471.1
============== ============== ============== ==============
Hilb, Rogal and Hamilton, or HRH, common stock.. $ 129.3 $ 42.2 $ 116.2 $ 42.2
Lombard International Assurance, S.A............ 41.6 41.6 41.1 41.1
Other equity securities......................... 148.4 136.0 154.7 139.1
-------------- -------------- -------------- -------------
Equity securities............................... $ 319.3 $ 219.8 $ 312.0 $ 222.4
============== ============== ============== ==============
Amounts applicable to the closed block.......... $ 85.7 $ 78.4 $ 82.9 $ 75.0
============== ============== ============== ==============
Our holdings in HRH common stock as of June 30, 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
18
gross investment gain of $91.8 million ($32.4 million net of offsets for applicable deferred acquisition costs
and deferred income taxes). See Note 6 for additional information.
Gross and Net Unrealized Gains and Losses from
General Account Debt and Equity Securities: June 30, 2004 December 31, 2003
($ amounts in millions) -------------------------- -------------------------
Gains Losses Gains Losses
------------ ------------ ------------ ------------
U.S. government and agency............................... $ 45.0 $ (3.7) $ 44.0 $ (1.5)
State and political subdivision.......................... 33.8 (3.5) 43.5 (1.6)
Foreign government....................................... 11.4 (2.7) 23.2 (1.8)
Corporate................................................ 282.2 (99.1) 400.4 (47.0)
Mortgage-backed.......................................... 102.7 (28.0) 143.4 (9.3)
Other asset-backed....................................... 35.4 (34.4) 55.6 (37.2)
------------ ------------ ------------ ------------
Debt securities gains (losses)........................... $ 510.5 $ (171.4) $ 710.1 $ (98.4)
============ ============ ============ ============
Debt securities net gains................................ $ 339.1 $ 611.7
============ ============
Hilb, Rogal and Hamilton common stock.................... $ 87.1 $ -- $ 74.0 $ --
Other equity securities.................................. 15.4 (3.0) 17.4 (1.8)
------------ ------------ ------------ ------------
Equity securities gains (losses)......................... $ 102.5 $ (3.0) $ 91.4 $ (1.8)
============ ============ ============ ============
Equity securities net gains.............................. $ 99.5 $ 89.6
============ ============
Mortgage loans
Carrying Values of Investments in Mortgage Loans: June 30, 2004 December 31, 2003
($ amounts in millions) -------------------------- -------------------------
Carrying Carrying
Value Fair Value Value Fair Value
------------ ------------ ------------ ------------
Property type
Apartment buildings...................................... $ 102.9 $ 107.8 $ 105.1 $ 106.7
Office buildings......................................... 39.7 41.6 49.0 49.7
Retail stores............................................ 93.9 98.3 109.0 110.7
Industrial buildings..................................... 29.8 31.2 33.7 34.2
Other.................................................... 0.1 0.1 0.1 0.1
------------ ------------ ------------ ------------
Subtotal................................................. 266.4 279.0 296.9 301.4
Less: valuation allowances............................... 10.0 -- 12.8 --
------------ ------------ ------------ ------------
Mortgage loans.......................................... $ 256.4 $ 279.0 $ 284.1 $ 301.4
============ ============ ============ ============
Amounts applicable to the closed block................... $ 214.4 $ 224.5 $ 228.5 $ 242.4
============ ============ ============ ============
19
June 30, 2004
-------------------------------------------------------------------
Aging of Temporarily Impaired General Less than 12 months Greater than 12 months Total
Account Debt 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................ $ 191.0 $ (3.7) $ -- $ -- $ 191.0 $ (3.7)
State and political subdivision........... 72.2 (3.5) 3.7 -- 75.9 (3.5)
Foreign government........................ 40.7 (2.3) 9.2 (0.4) 49.9 (2.7)
Corporate................................. 2,183.1 (73.7) 333.3 (25.4) 2,516.4 (99.1)
Mortgage-backed........................... 1,030.6 (26.4) 24.6 (1.6) 1,055.2 (28.0)
Other asset-backed........................ 456.2 (7.3) 118.1 (27.1) 574.3 (34.4)
---------- ----------- ---------- ----------- ---------- ----------
Debt securities........................... $3,973.8 $ (116.9) $ 488.9 $ (54.5) $4,462.7 $ (171.4)
Common stock.............................. 22.7 (2.7) 1.3 (0.3) 24.0 (3.0)
---------- ----------- ---------- ----------- ---------- ----------
Total temporarily impaired securities..... $3,996.5 $ (119.6) $ 490.2 $ (54.8) $4,486.7 $ (174.4)
========== =========== ========== =========== ========== ==========
Amounts inside the closed block........... $1,708.7 $ (64.6) $ 242.7 $ (23.5) $1,951.4 $ (88.1)
========== =========== ========== =========== ========== ==========
Amounts outside the closed block.......... $2,287.8 $ (55.0) $ 247.5 $ (31.3) $2,535.3 $ (86.3)
========== =========== ========== =========== ========== ==========
Amounts outside the closed block
that are below investment grade......... $ 163.1 $ (6.7) $ 68.9 $ (14.1) $ 232.0 $ (20.8)
========== =========== ========== =========== ========== ==========
After offsets for deferred acquisition
cost adjustment and taxes............... $ (2.7) $ (4.6) $ (7.3)
=========== =========== ==========
These securities are considered to be temporarily impaired at June 30, 2004 as each of these securities has
performed, and is expected to continue to perform, in accordance with their original contractual terms.
Unrealized losses on below investment grade debt securities held inside the closed block with a fair value of
less than 80% of the securities' amortized cost totals $7.1 million at June 30, 2004 ($0.0 after offsets for
change in policy dividend obligation). All of these securities have been in an unrealized loss for greater
than 12 months.
Unrealized losses on below investment grade debt securities outside the closed block with a fair value less
than 80% of the securities' amortized cost totals $10.1 million at June 30, 2004. Of these, $9.6 million ($6.2
million after offsets for taxes and deferred policy acquisition cost amortization) have been in an unrealized
loss for greater than 12 months.
Venture capital partnerships
Components of Net Investment Income Related to Venture Three Months Ended Six Months Ended
Capital Partnerships: June 30, June 30,
($ amounts in millions) -------------------------- ------------------------
2004 2003 2004 2003
------------ ------------ ------------ -----------
Net realized gains on partnership cash and stock
distributions............................................ $ 3.9 $ 2.6 $ 0.2 $ 1.5
Net unrealized gains (losses) on partnership investments. (0.4) 6.8 21.8 37.7
Partnership operating expenses........................... (1.7) (2.9) (2.6) (3.8)
------------ ------------ ------------ -----------
Net investment income.................................... $ 1.8 $ 6.5 $ 19.4 $ 35.4
============ ============ ============ ===========
Amounts applicable to the closed block................... $ (2.6) $ 0.7 $ 3.4 $ 5.7
============ ============ ============ ===========
Amounts applicable to the venture capital segment........ $ 4.4 $ 5.8 $ 16.0 $ 29.7
============ ============ ============ ===========
20
The effect of our adjusting estimated partnership results to actual results reflected in partnership financial
statements was to increase net investment income as follows:
Effect of Adjustment from Estimated Partnership Results to Three Months Ended Six Months Ended
Actual Partnership Financial Statements: June 30, June 30,
($ amounts in millions) -------------------------- ------------------------
2004 2003 2004 2003
------------ ------------ ------------ -----------
Closed block............................................. $ (3.7) $ -- $ 1.0 $ --
Venture capital segment.................................. 0.2 3.3 9.4 33.8
------------ ------------ ------------ -----------
Total.................................................... $ (3.5) $ 3.3 $ 10.4 $ 33.8
============ ============ ============ ===========
Three Months Ended Six Months Ended
Investment Activity in Venture Capital Partnerships: June 30, June 30,
($ amounts in millions) -------------------------- ------------------------
2004 2003 2004 2003
------------ ------------ ------------ -----------
Contributions............................................ $ 15.0 $ 11.9 $ 26.8 $ 24.8
Equity in earnings of partnerships....................... 1.8 6.5 19.4 35.4
Distributions............................................ (17.0) (8.2) (31.8) (11.3)
Proceeds from sale of partnership interests.............. -- -- -- (26.1)
Realized loss on sale of partnership interests........... -- (0.5) -- (14.3)
------------ ------------ ------------ -----------
Change in venture capital partnerships................... (0.2) 9.7 14.4 8.5
Venture capital partnership investments,
beginning of period.................................... 249.5 227.4 234.9 228.6
------------ ------------ ------------ -----------
Venture capital partnership investments,
end of period.......................................... $ 249.3 $ 237.1 $ 249.3 $ 237.1
============ ============ ============ ===========
To estimate the net equity in earnings of the venture capital partnerships for each quarter, we developed a
methodology to estimate the change in value of the underlying investee companies in the venture capital
partnerships. For public investee companies, we use quoted market prices at the end of each quarter, applying
liquidity discounts to these prices in instances where such discounts were applied in the underlying
partnerships' financial statements. For private investee companies, we apply a public industry sector index to
estimate changes in valuations each quarter. We apply this methodology consistently each quarter with
subsequent adjustments to reflect market events reported by the partnerships (e.g., new rounds of financing,
initial public offerings and write-downs by the general partners). Our methodology recognizes both downward
and upward adjustments in estimated values based on the indices, but when the general partner reduces the
value of a private investee company, we do not adjust the fair value upward (by applying the public sector
index) in excess of the most recent value reported by the general partner. Finally, we revise the valuations
we have assigned to the investee companies annually to reflect the valuations in the audited financial
statements received from the venture capital partnerships.
21
Unfunded Commitments and Investments in Venture Capital Partnerships: June 30, Dec 31,
($ amounts in millions) 2004 2003
--------------- ---------------
Unfunded commitments
Closed block................................................................. $ 61.1 $ 48.3
Venture capital segment...................................................... 55.3 76.7
--------------- ---------------
Total unfunded commitments................................................... $ 116.4 $ 125.0
=============== ===============
Venture capital partnerships
Closed block................................................................. $ 43.1 $ 38.6
Venture capital segment...................................................... 206.2 196.3
--------------- ---------------
Total venture capital partnerships........................................... $ 249.3 $ 234.9
=============== ===============
Affiliate equity securities
The fair value of our investment in Aberdeen common stock, based on the London Stock Exchange closing price at
August 2, 2004, June 30, 2004 and December 31, 2003, was $51.7 million, $54.5 million and $54.4 million,
respectively. The carrying value of our investment in Aberdeen, using the equity method of accounting, totaled
$38.6 million and $38.3 million at June 30, 2004 and December 31, 2003, respectively.
On May 25, 2004, Aberdeen closed on the sale of its UK and Continental European property investment management
business to an unrelated party. We recognized a pre-tax, non-cash realized gain of $1.2 million during the
second quarter of 2004 as a realized investment gain related to our share of Aberdeen's realized gain.
Net investment income
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ------------------------
Sources of Net Investment Income: 2003 2003
($ amounts in millions) 2004 Restated 2004 Restated
------------ ------------ ------------ -----------
Debt securities.......................................... $ 191.8 $ 199.5 $ 383.5 $ 386.9
Equity securities........................................ 1.6 0.9 2.0 2.2
Mortgage loans........................................... 5.4 7.3 11.3 19.4
Venture capital partnerships............................. 1.8 6.5 19.4 35.4
Affiliate equity securities.............................. (0.1) 0.5 0.2 0.7
Policy loans............................................. 41.7 42.6 83.9 85.2
Other investments........................................ 8.8 8.1 20.9 12.4
Cash and cash equivalents................................ 1.0 1.4 1.7 4.5
------------ ------------ ------------ -----------
Total investment income.................................. 252.0 266.8 522.9 546.7
Less: investment expenses.............................. 1.9 2.6 4.7 5.5
------------ ------------ ------------ -----------
Net investment income, general account investments....... 250.1 264.2 518.2 541.2
Debt and equity securities pledged as collateral (Note 7) 8.8 13.5 18.9 27.6
------------ ------------ ------------ -----------
Net investment income.................................... $ 258.9 $ 277.7 $ 537.1 $ 568.8
============ ============ ============ ===========
Amounts applicable to the closed block................... $ 133.5 $ 140.6 $ 281.1 $ 286.6
============ ============ ============ ===========
22
Net realized investment gains (losses)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ------------------------
Net Realized Investment Gains (Losses): 2003 2003
($ amounts in millions) 2004 Restated 2004 Restated
----------- ------------ ------------ -----------
Debt security impairments................................ $ (1.2) $ (19.8) $ (4.0) $ (45.4)
Equity security impairments.............................. -- (1.1) -- (1.1)
Mortgage loan impairments................................ -- (2.8) -- (3.2)
Venture capital partnership impairments.................. -- (0.3) -- (4.6)
Affiliate equity security impairments.................... -- (96.9) -- (96.9)
Other invested asset impairments......................... -- (1.2) (3.3) (9.9)
Debt and equity securities
pledged as collateral impairments...................... (3.6) (0.1) (8.3) (1.9)
----------- ------------ ------------ -----------
Impairment losses........................................ (4.8) (122.2) (15.6) (163.0)
----------- ------------ ------------ -----------
Debt security transaction gains.......................... 9.0 16.7 19.2 70.3
Debt security transaction losses......................... (2.9) (11.5) (6.1) (23.8)
Equity security transaction gains........................ 11.2 15.2 13.8 15.6
Equity security transaction losses....................... (0.5) (7.8) (0.9) (10.4)
Mortgage loan transaction gains (losses)................. -- (0.4) 0.2 (0.8)
Venture capital partnership transaction gains (losses)... -- (0.2) -- (9.7)
Other invested asset transaction gains (losses).......... 3.6 5.5 7.5 3.0
----------- ------------ ------------ -----------
Net transaction gains.................................... 20.4 17.5 33.7 44.2
----------- ------------ ------------ -----------
Net realized investment gains (losses)................... $ 15.6 $ (104.7) $ 18.1 $ (118.8)
----------- ------------ ------------ -----------
Net realized investment gains (losses)................... $ 15.6 $ (104.7) $ 18.1 $ (118.8)
----------- ------------ ------------ -----------
Applicable closed block
policyholder dividend obligation....................... 7.2 (9.5) 7.3 (1.0)
Applicable deferred policy acquisition costs............. (1.2) 1.2 (0.8) 1.7
Applicable deferred income taxes (benefit)............... 4.6 (37.1) 5.9 (45.9)
----------- ------------ ------------ -----------
Offsets to realized investment gains (losses)............ 10.6 (45.4) 12.4 (45.2)
----------- ------------ ------------ -----------
Net realized investment gains (losses)
included in net income................................. $ 5.0 $ (59.3) $ 5.7 $ (73.6)
=========== ============ ============ ============
Unrealized investment gains (losses)
Three Months Ended Six Months Ended
June 30, June 30,
Sources of Changes in ------------------------- ------------------------
Net Unrealized Investment Gains (Losses): 2003 2003
($ amounts in millions) 2004 Restated 2004 Restated
----------- ------------ ------------ -----------
Debt securities.......................................... $ (507.8) $ 279.8 $ (272.7) $ 254.3
Equity securities........................................ (14.2) 31.1 9.9 3.0
Debt and equity securities pledged as collateral......... (46.1) 32.5 (27.5) 64.0
Other investments........................................ (4.4) (0.7) (2.5) 0.6
----------- ------------ ------------ -----------
Net changes in unrealized investment gains (losses)...... $ (572.5) $ 342.7 $ (292.8) $ 321.9
=========== ============ ============ ============
Net unrealized investment gains (losses)................. $ (572.5) $ 342.7 $ (292.8) $ 321.9
----------- ------------ ------------ -----------
Applicable closed block
policyholder dividend obligation....................... (317.9) 160.2 (157.9) 163.7
Applicable deferred policy acquisition costs (benefit)... (87.3) 40.1 (53.7) 32.8
Applicable deferred income taxes (benefit)............... (42.5) 39.8 (18.0) 21.3
----------- ------------ ------------ -----------
Offsets to net unrealized investment gains (losses)...... (447.7) 240.1 (229.6) 217.8
----------- ------------ ------------ -----------
Net changes in unrealized investment gains (losses)
included in other comprehensive income................. $ (124.8) $ 102.6 $ (63.2) $ 104.1
=========== ============ ============ ============
23
6. Financing Activities
Stock purchase contracts and indebtedness
The carrying values and fair values of our stock purchase contracts as of June 30, 2004 and December 31, 2003
follow:
June 30, 2004 December 31, 2003
-------------------------------- -------------------------------
Stock Purchase Contracts: Carrying Fair Carrying Fair
($ amounts in millions) Value Value Value Value
--------------- --------------- --------------- ---------------
Stock purchase contracts stated amount...... $ 142.6 $ 138.3 $ 144.2 $ 128.8
Settlement amount adjustment................ (4.3) -- (15.4) --
--------------- --------------- --------------- ---------------
Stock purchase contracts.................... $ 138.3 $ 138.3 $ 128.8 $ 128.8
=============== =============== =============== ===============
In 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 June 30, 2004 and 2003, we recognized an increase (decrease)
in the fair value of the embedded derivative instrument of $6.0 million ($3.9 million after income taxes) and
$(6.2) million ($(4.0) million after income taxes), respectively, in other comprehensive income. For the six
months ended June 30, 2004 and 2003, we recognized an increase (decrease) in the fair value of the embedded
derivative instrument of $(11.1) million ($(7.2) million after income taxes) and $12.2 million ($7.9 million
after 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 three and six months ended June 30, 2004 and 2003. The quoted market price of HRH common stock,
which was $35.68 at June 30, 2004, was less than the price that we received at issuance of the stock purchase
contracts. For more information, see Notes 5 and 6 to our consolidated financial statements in our 2003 Annual
Report on Form 10-K.
June 30, 2004 December 31, 2003
-------------------------------- -------------------------------
Indebtedness: Carrying Fair Carrying Fair
($ amounts in millions) Value Value Value Value
--------------- --------------- --------------- ---------------
Surplus notes............................... $ 175.0 $ 187.4 $ 175.0 $ 188.8
Equity units................................ 153.7 233.1 153.7 232.1
Senior unsecured bonds...................... 300.0 297.0 300.0 311.2
Revolving credit facility................... 25.0 25.0 -- --
Interest rate swap.......................... 7.5 7.5 10.3 10.3
--------------- --------------- --------------- ---------------
Total indebtedness.......................... $ 661.2 $ 750.0 $ 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 $100.0 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, excluding the accounting effects of FIN 46-R, 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 $37.5 million three-year tranche of this credit
facility to fulfill an obligation
24
related to the Kayne Anderson Rudnick acquisition, as further described in Note 1 of these consolidated
financial statements. We were in compliance with all credit facility covenants at June 30, 2004.
Interest Expense on Indebtedness, Three Months Ended Six Months Ended
including Amortization of Debt Issuance Costs: June 30, June 30,
($ amounts in millions) ---------------------------- ----------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Stock purchase contract adjustment payments....... $ 2.1 $ 2.1 $ 4.1 $ 4.1
============= ============= ============= =============
Surplus notes...................................... $ 3.0 $ 3.0 $ 6.1 $ 6.1
Equity units....................................... 3.0 3.1 6.1 6.1
Senior unsecured bonds............................. 3.6 3.8 7.2 7.5
Bank credit facility and other..................... 0.3 -- 0.3 --
------------- ------------- ------------- -------------
Total interest expense on indebtedness............ $ 9.9 $ 9.9 $ 19.7 $ 19.7
============= ============= ============= =============
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, which was paid 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.
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. In particular, 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 $2.0 million and $2.2 million for the three months ended June 30, 2004 and
2003, respectively, and $3.4 million and $3.2 million for the six months ended June 30, 2004 and 2003,
respectively. These advisory fees 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 related to third-party equity investments for
consolidated trusts on our consolidated statement of income. The collateralized obligation trusts reside in
bankruptcy remote SPEs for 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 June 30, 2004 ($26.9 million of which relate to trusts
that are consolidated). Of that exposure, $54.7 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 June 30, 2004 and 2003. As of June 30, 2004, our
direct investment in the three consolidated collateralized obligation trusts is $26.9 million, $20.0 million
of which is an investment grade debt security. We recognized investment income on debt and equity securities
pledged as collateral, net of interest expense on collateralized obligations and applicable minority interest
of $0.8 million and $0.7 million for the three months ended June 30, 2004 and 2003, respectively, and $1.7
million and $1.1 million for the six months ended June 30, 2004 and 2003, respectively, related to these three
consolidated collateralized obligation trusts.
25
Five variable interest entities not consolidated by us under FIN 46-R represent collateralized obligation
trusts with approximately $1.6 billion of investment assets pledged as collateral. Our general account direct
investment in these unconsolidated variable interest entities is $49.5 million, $34.7 million of which are
investment grade debt securities at June 30, 2004. We recognized investment advisory fee revenues related to
the five unconsolidated variable interest entities of $1.2 million and $1.5 million for the three months ended
June 30, 2004 and 2003, respectively, and $1.7 million and $2.1 million for the six months ended June 30, 2004
and 2003, respectively.
Consolidated Variable Interest Entities: June 30, Dec 31,
($ amounts in millions) 2004 2003
------------ -----------
Assets Pledged as Collateral, at Fair Value
Phoenix CDO I................................................................... $ 115.2 $ 148.8
Phoenix CDO II.................................................................. 314.1 332.6
Phoenix-Mistic 2002-1 CDO, Ltd.................................................. 936.2 963.4