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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 Identification No.)
incorporation or organization)
One American Row, Hartford, Connecticut 06102-5056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(860) 403-5000
Securities registered pursuant to section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common stock, $.01 par value New York Stock Exchange
7.45% Quarterly Interest Bonds, due 2032 New York Stock Exchange
7.25% Equity Units New York Stock Exchange
Securities registered pursuant to Section 12(G) of the Act:
Stock Purchase Contracts
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past ninety days. YES X NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
YES X NO ___
As of June 30, 2004, the aggregate market value of voting common equity held by non-affiliates of the
registrant was approximately $1.2 billion based on the last reported sale price of $12.25 per share of the
common stock on the New York Stock Exchange on that date. On February 28, 2005, the registrant had 94,942,332
shares of common stock outstanding; it had no non-voting common equity.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed pursuant to Regulation 14A within 120 days
after the end of the registrant's fiscal year are incorporated by reference in Part III.
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TABLE OF CONTENTS
Item No. Description Page
Part I 1 Business........................................................................ 3
2 Properties...................................................................... 17
3 Legal Proceedings............................................................... 17
4 Submission of Matters to a Vote of Security Holders............................. 18
Part II 5 Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities......................................... 19
6 Selected Financial Data......................................................... 20
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... 23
7A Quantitative and Qualitative Disclosures About Market Risk...................... 86
8 Financial Statements and Supplementary Data..................................... 86
Report of Independent Registered Public Accounting Firm......................... F-1
Consolidated Balance Sheet as of December 31, 2004 and 2003..................... F-3
Consolidated Statement of Income and Comprehensive Income For the Years
Ended December 31, 2004, 2003 and 2002........................................ F-4
Consolidated Statement of Cash Flows For the Years Ended
December 31, 2004, 2003 and 2002.............................................. F-5
Consolidated Statement of Changes in Stockholders' Equity and Comprehensive
Income For the Years Ended December 31, 2004, 2003 and 2002................... F-6
Notes to Consolidated Financial Statements...................................... F-7
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................................... 86
9A Controls and Procedures......................................................... 86
9B Other Information............................................................... 87
Part III 10 Directors and Executive Officers of the Registrant.............................. 87
11 Executive Compensation.......................................................... 88
12 Security Ownership of Certain Beneficial Owners and Management.................. 89
13 Certain Relationships and Related Transactions.................................. 91
14 Principal Accountant Fees and Services.......................................... 91
Part IV 15 Exhibits and Financial Statement Schedules...................................... 92
Signatures................................................................................................ 93
Exhibit Index............................................................................................. E-1
2
Unless otherwise stated, at all times on and after June 25, 2001, the effective date of Phoenix Home Life
Mutual Insurance Company's demutualization, "Phoenix," "we," "our" or "us" means The Phoenix Companies, Inc.
(the "Company" or "PNX") and its direct and indirect subsidiaries. At all times prior to June 25, 2001, "we,"
"our" or "us" means Phoenix Home Life Mutual Insurance Company (which has been known as Phoenix Life Insurance
Company since June 25, 2001) and its direct and indirect subsidiaries. Furthermore, "Phoenix Life" refers to
Phoenix Life Insurance Company, "Life Companies" refers to Phoenix Life and its direct and indirect
subsidiaries and "Phoenix Investment Partners" refers to Phoenix Investment Partners, Ltd. and its direct and
indirect subsidiaries.
PART I
Item 1. Business
Description of Business
We are a manufacturer of insurance, annuity and asset management products for the accumulation, preservation
and transfer of wealth. We provide products and services to affluent and high-net-worth individuals through
their advisors and to institutions directly and through consultants. We offer a broad range of life insurance,
annuity and asset management products and services through a variety of distributors.
The affluent and high-net-worth market is a growing market with significant demand for customized products and
services. We define affluent as those households with a net worth of $500,000 or greater, excluding their
primary residence. We define high-net-worth, a subset of the affluent category, as those households that have
net worth, excluding primary residence, of over $1,000,000. Our wealth management products and services are
designed to assist advisors and their clients in this target market to achieve three main goals:
• the accumulation of wealth, primarily during an individual's working years;
• the preservation of income and wealth during retirement and following death; and
• the efficient transfer of wealth in a variety of situations, including through estate planning,
business continuation planning and charitable giving.
We distribute our wealth management products and services through various financial intermediaries such as
national and regional broker-dealers, banks, financial planning firms, advisor groups and other insurance
companies.
Segments
We have two operating segments, Life and Annuity and Asset Management, which include three product lines: life
insurance, annuities and asset management. Both segments serve the affluent and high-net-worth market, which
presents opportunities to leverage our capabilities and relationships.
We report our remaining results in two non-operating segments — Venture Capital and Corporate and Other.
Venture Capital includes: limited partnership interests in venture capital funds; leveraged buyout funds; and
other private equity partnerships sponsored and managed by third parties. The segment does not include similar
investments that are part of the closed block. Corporate and Other includes: indebtedness; unallocated assets,
liabilities and expenses; and certain businesses not of sufficient scale to report independently. These
segments are significant for financial reporting purposes, but do not contain products or services relevant to
our core manufacturing operations.
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Operating Segments
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SUMMARY OF OPERATING SEGMENTS
December 31, 2004
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Market Presence Distribution Channels Products
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Life and Annuity
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• $48.1 billion of net life • National and regional broker-dealers • Variable universal life insurance
insurance in force • Financial planning firms • Universal life insurance
• $7.6 billion of annuity assets • Advisor groups • Term life insurance
under management • Insurance companies • Variable annuities
• Banks • Immediate annuities
• Private placement life
Principal operating subsidiaries: insurance and annuities
• Phoenix Life
• PHL Variable Insurance Company
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Asset Management
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Private client products:
• $42.9 billion of third-party • National and regional broker-dealers • Managed accounts
assets under management • Institutional asset management • Mutual funds
consultants • Closed-end funds
Principal operating subsidiary: • Financial planning firms Institutional products:
• Phoenix Investment Partners • Affiliated asset managers • Institutional accounts
• Structured products
• Phoenix Life general and
separate accounts
Life and Annuity Segment
Our Life and Annuity segment offers a variety of life insurance and annuity products through non-affiliated
distributors. We believe our competitive advantage in this segment consists of six main components:
• our innovative products;
• our broad asset management capability;
• our distribution relationships with institutions that have access to our target market;
• the value-added our distributors provide those institutions;
• our ability to combine products and services that distributors and their clients find attractive; and
• our underwriting expertise.
Life and Annuity Products
Life Products
Our life insurance products include variable universal life, universal life, term life and other insurance
products. We offer single life, first-to-die and second-to-die products. Under first-to-die policies, up to
five lives may be insured with the policy proceeds paid after the death of the first of the five insured lives.
Second-to-die products are typically used for estate planning purposes and insure two lives rather than one,
with the policy proceeds paid after the death of both insured individuals.
Variable Universal Life. Variable universal life products provide insurance coverage and give the policyholder
various investment choices, flexible premium payments and coverage amounts and limited guarantees. The
policyholder may direct premiums and cash value into a variety of separate investment accounts, accounts that
are maintained separately from the other assets of the Life Companies and are not part of the general accounts
of the Life Companies, or into the general account. In separate investment accounts, the policyholder bears the
entire
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risk of the investment results. We collect fees for the management of these various investment accounts and the
net return is credited directly to the policyholder's accounts. With some variable universal products, by
maintaining a certain premium level the policyholder receives guarantees that protect the policy's death
benefit if, due to adverse investment experience, the policyholder's account balance is zero. We retain the
right within limits to adjust the fees we assess for providing administrative services. We also collect fees to
cover mortality costs; these fees may be adjusted by us but may not exceed contractual limits.
Universal Life. Universal life products provide insurance coverage on the same basis as variable universal life
products, except that premiums, and the resulting accumulated balances, are allocated only to our general
account for investment. Universal life products may allow the policyholder to increase or decrease the amount
of death benefit coverage over the term of the policy, and also may allow the policyholder to adjust the
frequency and amount of premium payments. Some universal life products provide guarantees that protect the
policy's death benefit if specified minimum premiums are paid. We credit premiums, net of expenses, to an
account maintained for the policyholder. We credit interest to the account at rates that we determine, subject
to certain minimums. Specific charges are made against the account for expenses. We also collect fees to cover
mortality costs; these fees may be adjusted by us but may not exceed contractual limits.
Term Life. Term life insurance provides a guaranteed benefit upon the death of the insured within a specified
time period, in return for the periodic payment of premiums. Specified coverage periods range from one to 30
years, but not longer than the period over which premiums are paid. Premiums may be level for the coverage
period or may vary. Term insurance products are sometimes referred to as pure protection products, in that
there are normally no savings or investment elements. Term contracts expire without value at the end of the
coverage period. Our term insurance policies allow policyholders to convert to permanent coverage, generally
without evidence of insurability.
Annuity Products
We offer a variety of variable annuities to meet the accumulation and preservation needs of the affluent and
high-net-worth market. Deferred annuities, in which funds accumulate for a number of years before periodic
payments begin, enable the contractholder to save for retirement and also provide options that protect against
outliving assets during retirement. Immediate annuities are purchased by means of a single lump sum payment and
begin paying periodic income immediately. We believe this product is especially attractive to those affluent
and high-net-worth retirees who are rolling over pension or retirement plan assets and seek an income stream
based entirely or partly on equity market performance.
Variable annuities are separate account products, which means that the contractholder bears the investment risk
as deposits are directed into a variety of separate investment accounts. The contractholder typically can also
direct funds to a general account option in which case we credit interest at rates we determine, subject to
certain minimums. Contractholders also may elect certain enhanced living benefit guarantees, for which they are
assessed a specific charge. For example, in the fourth quarter of 2004 we introduced a Guaranteed Minimum
Accumulation Benefit option to our products which guarantees an account value of at least 105% of premium after
10 years assuming other contractual obligations are met. Our major sources of revenues from annuities are
mortality and expense fees charged to the contractholder, generally determined as a percentage of the market
value of any underlying separate account balances, and the excess of investment income over credited interest
for funds invested in our general account.
Other Products and Services
Life and Annuity is focused on the development of other products and distribution relationships that respond to
the affluent and high-net-worth market's demand for wealth management solutions.
For example, many of our products are designed to be used by corporations to fund special deferred compensation
plans and benefit programs for key employees, commonly referred to as executive benefits. We view these
products as a source of growing fee-based business. In addition, our products can be applied to a number of
situations to meet the sophisticated needs of business owners and individuals, including for charitable giving.
5
Private Placement Life and Annuity Products. Private placement products are individually customized life and
annuity offerings that include single premium life, second-to-die life and variable annuity products. These
products have minimum deposits of over $500,000, targeting the wealthiest segment of the high-net-worth market.
The average face amount of life insurance policies sold by Philadelphia Financial Group, our private placement
distributor, in 2004 was $15.6 million and the average annuity deposit was $0.8 million.
Underwriting
Insurance underwriting is the process of examining, accepting or rejecting insurance risks, and classifying
those accepted in order to charge appropriate premiums or mortality charges. Underwriting also involves
determining the amount and type of reinsurance appropriate for a particular type of risk.
We believe we have particular expertise in evaluating the underwriting risks relevant to our target market. We
believe this expertise enables us to make appropriate underwriting decisions, including, in some instances, the
issuance of policies on more competitive terms than other insurers would offer. Phoenix Life has a long
tradition of underwriting innovation. Beginning in 1955, we were among the first insurance companies to offer
reduced rates to women. We believe we were the first company to offer reduced rates to non-smokers across all
policy lines, beginning in 1967. Our underwriting team includes doctors and other medical staff to ensure,
among other things, that we are focused on current developments in medical technology.
Our underwriting standards for life insurance are intended to result in the issuance of policies that produce
mortality experience consistent with the assumptions used in product pricing. The overall profitability of our
life insurance business depends, to a large extent, on the degree to which our mortality experience compares to
our pricing assumptions. Our underwriting is based on our historical mortality experience, as well as on the
experience of the insurance industry and of the general population. We continually compare our underwriting
standards to those of the industry to assist in managing our mortality risk and to stay abreast of industry
trends.
Our life insurance underwriters evaluate policy applications on the basis of the information provided by the
applicant and others. We use a variety of methods to evaluate certain policy applications, such as those where
the size of the policy sought is particularly large, or where the applicant is an older individual, has a known
medical impairment or is engaged in a hazardous occupation or hobby. Consistent with industry practice, we
require medical examinations and other tests depending upon the age of the applicant and the size of the
proposed policy.
In the executive benefits market, we issue life policies covering multiple lives on a guaranteed issue basis,
within specified limits per life insured, whereby the amount of insurance issued per life on a guaranteed basis
is related to the total number of lives being covered and the particular need for which the product is being
purchased. Guaranteed issue underwriting applies to employees actively at work, and product pricing reflects
the additional guaranteed issue underwriting risk.
Reserves
We establish and report liabilities for future policy benefits on our consolidated balance sheet to reflect the
obligations under our insurance policies and contracts. Our liability for variable universal life insurance and
universal life insurance policies and contracts is equal to the cumulative account balances, plus additional
reserves we establish for policy riders. Cumulative account balances include deposits plus credited interest,
less expense and mortality charges and withdrawals. Reserves for future policy benefits for whole life policies
are calculated based on actuarial assumptions that include investment yields and mortality.
6
Reinsurance
While we have underwriting expertise and have experienced favorable mortality trends, we believe it is prudent
to spread the risks associated with our life insurance products through reinsurance. As is customary in the
life insurance industry, our reinsurance program is designed to protect us against adverse mortality experience
generally and to reduce the potential loss we might face from a death claim on any one life.
We cede risk to other insurers under various agreements that cover individual life insurance policies. The
amount of risk ceded depends on our evaluation of the specific risk and applicable retention limits. Under the
terms of our reinsurance agreements, the reinsurer agrees to reimburse us for the ceded amount in the event a
claim is incurred. However, we remain liable to our policyholders for ceded insurance if any reinsurer fails to
meet its obligations. Since we bear the risk of nonpayment by one or more of our reinsurers, we cede business
to well-capitalized, highly rated insurers. While our current retention limit on any one life is $10 million
($12 million on second-to-die cases), we may cede amounts below those limits on a case-by-case basis depending
on the characteristics of a particular risk. Typically our reinsurance contracts allow us to reassume ceded
risks after a specified period. This right is valuable where our mortality experience is sufficiently favorable
to make it financially advantageous for us to reassume the risk rather than continue paying reinsurance
premiums.
We reinsure 80% of the mortality risk on a block of policies acquired from Confederation Life Insurance
Company, or Confederation Life, in 1997. We entered into two separate reinsurance agreements in 1998 and 1999
to reinsure a substantial portion of our otherwise retained individual life insurance business. In addition, we
reinsure up to 90% of the mortality risk on some new issues. As of December 31, 2004, we had ceded $80.0
billion in face amount of reinsurance, representing 62.5% of our total face amount of $128.1 billion of life
insurance in force.
On January 1, 1996, we entered into a reinsurance arrangement that covers 100% of the excess death benefits and
related reserves for most variable annuity policies issued through December 31, 1999, including subsequent
deposits. We retain the guaranteed minimum death benefit risks on the remaining variable deferred annuities in
force that are not covered by this reinsurance arrangement.
The following table lists our five principal life reinsurers, together with the reinsurance recoverables on a
statutory basis as of December 31, 2004, the face amount of life insurance ceded as of December 31, 2004, and
the reinsurers' A.M. Best ratings.
Reinsurance Face Amount of
Recoverable Life Insurance A.M. Best
Reinsurer Balances Ceded Rating(1)
------------------- ------------------ ------------------
RGA Reinsurance Company......................... $ 19.8 million $ 21.4 billion A+
AEGON USA....................................... $ 15.2 million $ 12.8 billion A+
Swiss Re Life & Health America, Inc............. $ 13.6 million $ 11.6 billion A+
Employers Reassurance Corporation............... $ 6.2 million $ 8.0 billion A-
XL Capital...................................... $ 6.9 million $ 6.2 billion A+
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(1)A.M. Best ratings are as of December 31, 2004.
Life and Annuity Financial Information
See Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K for
Life and Annuity segment financial information.
7
Asset Management Segment
We conduct activities in Asset Management with a focus on two customer groups — private client and
institutional. Through our private client group, we provide asset management services principally on a
discretionary basis, with products consisting of open-end mutual funds, 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. These two types of managed accounts generally
require minimum investments of $100,000 and $1 million, respectively. Our private client business also provides
transfer agency, accounting and administrative services to most of our open-end mutual funds.
Through our institutional group, we provide discretionary and non-discretionary investment management services
primarily to corporations, multi-employer retirement funds and foundations, as well as to endowments and
special purpose funds. In addition, we manage alternative financial products such as structured finance
products. Structured finance products include collateralized obligations such as collateralized debt
obligations, or CDOs, backed by portfolios of public high yield bonds or commercial mortgage-backed or
asset-backed securities.
Affiliated Asset Managers
We offer investment management services through our affiliated asset managers. We provide our affiliated asset
managers with a consolidated platform of distribution support, thereby allowing each manager to devote a high
degree of focus to investment management activities. On an ongoing basis, we monitor the quality of the
affiliates' products by assessing their performance, style consistency and the discipline with which they apply
their investment process.
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Our affiliated managers, and their respective styles, products and assets under management, are as follows:
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Assets Under
Management at
Affiliated Advisor/ December 31, 2004
Ownership/Location Investment Styles Products (in billions)
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GoodwinSM Capital Advisors(1), Fixed Income – Mutual Funds
or Goodwin / 100% / Multi-Sector Institutional Accounts
Hartford, CT Structured Finance Products $6.1
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Seneca Capital Management Equities – Mutual Funds
LLC, or Seneca / 68.4% / Growth with Controlled Risk Sponsored Managed Accounts
San Francisco, CA Earnings-Driven Growth Direct Managed Accounts
Tax Sensitive Growth Institutional Accounts
Fixed Income – Structured Finance Products
Value Driven $12.1
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Kayne Anderson Rudnick Equities – Sponsored Managed Accounts
Investment Management, LLC, Quality at Reasonable Price Direct Managed Accounts
or Kayne Anderson Rudnick / Institutional Accounts
65.2% / Los Angeles, CA Mutual Funds $10.4
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Duff & Phelps Investment Equities – Mutual Funds
Management Co., or DPIM / REITs Sponsored Managed Accounts
100% / Chicago, IL Large Cap Value Direct Managed Accounts
Small Cap Core Institutional Accounts
Fixed Income – Closed-end Funds
Core $5.9
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Engemann Asset Management, Equities – Mutual Funds
INC.(1), or Engemann / 100% / Classic Growth Sponsored Managed Accounts
Pasadena, CA Direct Managed Accounts
Institutional Accounts $3.8
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OakhurstSM Asset Managers(1), Equities – Mutual Funds
or Oakhurst / 100% / Large Cap Value
Scotts Valley, CA Large Cap Core $2.0
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Walnut Asset Management LLC, Equities – Direct Managed Accounts
or Walnut / 100% / Relative Value Institutional Accounts
Philadelphia, PA Fixed Income –
Quality Fixed Income $0.8
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Zweig Fund Group, or Zweig / Equities/Fixed Income – Mutual Funds
100% / New York, NY Tactical Asset Allocation Closed-end Funds
Market Neutral
Small Cap Value $1.3
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Sub-advised Assets Equities – Mutual Funds
Mid-cap Value
International $0.5
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Total Third-Party Assets Under Management $42.9
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(1) As of December 31, 2004, Goodwin and Oakhurst were divisions of Phoenix Investment Counsel, Inc., an
indirect wholly-owned subsidiary of Phoenix Investment Partners. Effective January 1, 2005, Oakhurst became
a division of Engemann.
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Asset Management Products
Private Client Products
Managed Accounts. We provide investment management services through participation in 52 intermediary managed
account programs sponsored by various broker-dealers such as Merrill Lynch, Morgan Stanley and Salomon Smith
Barney. These programs enable the sponsor's client to select one or more of Phoenix Investment Partners'
affiliated asset managers as the provider of discretionary portfolio management services, in return for an
asset-based fee paid by the client to the broker-dealer, which then pays a management fee to us. Seven of these
programs include more than one of our affiliated asset managers. As of December 31, 2004, we managed 43,667
accounts relating to such intermediary managed account programs, representing approximately $9.0 billion of
assets under management. In addition, we offer direct managed accounts, which are individual client accounts
sold and administered by us. As of December 31, 2004, we managed 3,127 direct managed accounts representing
$4.5 billion of assets under management.
Mutual Funds. Our affiliated asset managers are investment advisors or sub-advisors to 39 open-end mutual
funds, which had aggregate assets under management of $10.2 billion as of December 31, 2004. These mutual funds
are available primarily to retail investors. Of these funds, 14 are included as investment choices to
purchasers of our variable life and variable annuity products.
Closed-End Mutual Funds. We manage the assets of five closed-end funds, each of which is traded on the New York
Stock Exchange: DTF Tax-Free Income Inc.; Duff & Phelps Utility and Corporate Bond Trust Inc.; DNP Select
Income Inc.; The Zweig Fund, Inc. and The Zweig Total Return Fund, Inc. Our closed-end fund assets under
management totaled $4.3 billion as of December 31, 2004.
Institutional Products
Institutional Accounts. We have over 1,000 institutional clients, consisting primarily of medium-sized pension
and profit sharing plans of corporations, government entities and unions, as well as endowments and
foundations, public and multi-employer retirement funds and other special purpose funds. Our institutional
assets under management totaled $12.0 billion as of December 31, 2004.
Structured Finance Products. We manage eight structured finance products. These products are collateralized
obligations backed by portfolios of high yield bonds, emerging markets bonds and/or asset-backed securities.
Our structured bond products assets under management totaled $2.9 billion as of December 31, 2004.
Life Companies' General Accounts. Goodwin, in conjunction with Phoenix Life's portfolio management group,
manages most of the assets of the Life Companies' general accounts. As of December 31, 2004, Phoenix Investment
Partners managed $13.2 billion of the Life Companies' assets. The assets under management, revenues and
expenses associated with the general accounts are not included in the Asset Management segment.
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Asset Management Assets under Management
The following table presents information regarding the third-party assets under management by Phoenix
Investment Partners for the years indicated:
As of December 31,
Assets Under Management ------------------------------------------------
($ amounts in millions) 2004 2003 2002
--------------- --------------- ---------------
TOTAL
Deposits................................................ $ 6,669.8 $ 6,987.8 $ 10,246.8
Redemptions and withdrawals............................. (13,255.8) (8,148.6) (9,575.6)
Acquisitions(1) and dispositions........................ -- -- 7,422.0
Performance............................................. 2,923.0 5,788.1 (7,863.1)
Other................................................... 311.0 (202.1) (118.3)
--------------- --------------- ---------------
Change in assets under management....................... (3,352.0) 4,425.2 111.8
Beginning balance....................................... 46,260.5 41,835.3 41,723.5
--------------- --------------- ---------------
Ending balance.......................................... $ 42,908.5 $ 46,260.5 $ 41,835.3
=============== =============== ===============
INSTITUTIONAL PRODUCTS
Deposits................................................ $ 2,743.9 $ 2,974.7 $ 4,312.6
Redemptions and withdrawals............................. (5,750.9) (3,452.2) (4,480.0)
Acquisitions and dispositions........................... -- -- 1,507.7
Performance............................................. 997.2 2,304.3 (2,178.9)
Other(2) ................................................ 37.5 (19.9) (1,294.6)
--------------- --------------- ---------------
Change in assets under management....................... (1,972.3) 1,806.9 (2,133.2)
Beginning balance....................................... 16,866.5 15,059.6 17,192.8
--------------- --------------- ---------------
Ending balance.......................................... $ 14,894.2 $ 16,866.5 $ 15,059.6
=============== =============== ===============
PRIVATE CLIENT PRODUCTS
Mutual Funds
Deposits................................................ $ 1,816.0 $ 1,744.8 $ 1,513.1
Redemptions and withdrawals............................. (2,301.9) (2,039.8) (2,379.2)
Performance............................................. 975.5 1,946.3 (2,406.0)
Other................................................... 273.5 (182.2) (153.7)
--------------- --------------- ---------------
Change in assets under management....................... 763.1 1,469.1 (3,425.8)
Beginning balance....................................... 13,735.6 12,266.5 15,692.3
--------------- --------------- ---------------
Ending balance.......................................... $ 14,498.7 $ 13,735.6 $ 12,266.5
=============== =============== ===============
INTERMEDIARY MANAGED ACCOUNT PROGRAMS
Deposits................................................ $ 1,637.1 $ 2,064.3 $ 4,116.9
Redemptions and withdrawals............................. (4,177.4) (2,362.1) (2,317.9)
Acquisitions(1) ......................................... -- -- 4,723.4
Performance............................................. 844.7 1,590.2 (2,902.9)
--------------- --------------- ---------------
Change in assets under management....................... (1,695.6) 1,292.4 3,619.5
Beginning balance....................................... 10,731.5 9,439.1 5,819.6
--------------- --------------- ---------------
Ending balance.......................................... $ 9,035.9 $ 10,731.5 $ 9,439.1
=============== =============== ===============
DIRECT MANAGED ACCOUNTS
Deposits................................................ $ 472.8 $ 204.0 $ 304.2
Redemptions and withdrawals............................. (1,025.6) (294.5) (398.5)
Acquisitions(1) ......................................... -- -- 1,190.9
Performance............................................. 105.6 (52.7) (375.3)
Other(2) ................................................ -- -- 1,330.0
--------------- --------------- ---------------
Change in assets under management....................... (447.2) (143.2) 2,051.3
Beginning balance....................................... 4,926.9 5,070.1 3,018.8
--------------- --------------- ---------------
Ending balance.......................................... $ 4,479.7 $ 4,926.9 $ 5,070.1
=============== =============== ===============
________
(1)Includes assets of $7.8 billion from Kayne Anderson Rudnick in 2002.
(2)Includes reclassification of certain Seneca funds from institutional products to direct managed
of $1.3 billion.
11
Asset Management Financial Information
See Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K for
Asset Management segment financial information.
Competition
We face significant competition from a wide variety of financial institutions, including insurance companies
and other asset management companies, as well as from proprietary products offered by our distribution sources
such as banks, broker-dealers and financial planning firms. Our competitors include larger and, in some cases,
more highly-rated insurance companies and other financial services companies. Many competitors offer similar
products, use similar distribution sources, offer less expensive products, have greater access to key
distribution channels and have greater resources than us.
Competition in our businesses is based on several factors including ratings, investment performance, access to
distribution channels, service to advisors and their clients, product features, fees charged and commissions
paid.
As we continue to focus on the development of our distribution channels, we increasingly must compete with
other providers of life insurance, annuity and private client products to attract and maintain relationships
with productive distributors that have the ability to sell our products. In particular, our ability to attract
distributors for our products could be adversely affected if for any reason our products became less
competitive or concerns arose about our asset quality, financial strength or ratings.
Distribution
We maintain a broad range of distribution relationships. We seek to build relationships with distributors who
are, or who have access to, advisors to the affluent and high-net-worth market. In May 2004, we disposed of our
affiliated retail distribution channel to focus our distribution efforts on our non-affiliated distribution
channels, in which we have a long history. We began to use non-affiliated distribution in 1954, primarily by
selling life insurance products through agents of other companies.
Our distribution strategy is to increase sales of profitable products by increasing the number of producers
selling Phoenix products within existing relationships, by offering a greater array of products through
existing distribution sources and by developing new relationships.
Since 2002, we have focused on increasing the number of producers selling Phoenix products within existing
relationships. In 2004, over 600 new producers wrote life insurance business with us, over 700 new producers
wrote annuity business with us and over 10,900 new producers placed asset management business with us.
Since late 1999, we have significantly strengthened our wholesaling teams, in order to enhance our
relationships with distributors in each of our product areas. As of December 31, 2004, we employed 63 life
insurance wholesalers, 19 annuity wholesalers and 13 asset management wholesalers, compared to 42, one and 25,
respectively, as of December 31, 1999.
We also engage in collaborative account development among our life insurance, annuity and asset management
wholesalers through joint marketing presentations and specialized services to advisors. We believe having many
of the same investment choices available in each of our product lines contributes to the success of our
strategy.
State Farm. In 2001, we entered into an agreement with a subsidiary of State Farm Mutual Automobile Insurance
Company, or State Farm, to provide our life and annuity products and related services to State Farm's affluent
and high-net-worth customers, through qualified State Farm agents. We are the only third-party provider of life
and annuity products and services at State Farm. By the end of 2004, we had trained and certified approximately
10,474, or 92%, of State Farm's approximately 11,437 securities licensed agents to sell Phoenix products. Our
12
relationship with State Farm gives us potential access to approximately 30% of the high-net-worth households in
the United States. For 2004, State Farm ranked first among our distributors in the sale of life insurance and
second in the sale of annuity products.
National and Regional Broker-Dealers. National and regional broker-dealers are brokerage firms that engage
financial advisors as employees rather than as independent contractors. To meet the evolving wealth management
needs of their customers, national and regional broker-dealers offer products from third-party providers such
as Phoenix. Simultaneously, many of these firms are seeking to reduce the number of relationships they have
with product providers in favor of those that offer a range of products together with services designed to
support advisors' sales efforts. We believe our ability to offer a variety of life insurance, annuity and asset
management products and services positions us to benefit from this trend. We have relationships across all
product lines in many important distribution outlets that target the high-net-worth market including UBS, A.G.
Edwards and Merrill Lynch.
Advisor Groups. The recent industry trend toward affiliations among small independent financial advisory firms
has led to advisor groups becoming a distinct class of distributors. We believe we have a particularly strong
position as a provider of life insurance products through Partners Marketing Group, Inc., or PartnersFinancial,
which, since 1999, has been an important component of the National Financial Partners, or NFP, organization.
Insurance Companies. Insurance companies have been moving their agents into an advisor/planner role, resulting
in a need to provide their agents, particularly their top producers, with a wider selection of life insurance
products to sell. Insurance companies responded to this need, in part, by negotiating arrangements with
third-party providers, including other insurance companies. We have distribution relationships with financial
services providers such as AXA Financial Inc., or AXA, and its brokerage outlet for internal producers, AXA
Network. In addition, we continue to maintain relationships with individual agents of other companies and
independent agents.
Financial Planning Firms. Financial planning firms are brokerage firms that engage financial advisors as
independent contractors rather than as employees. Financial planning firms have begun to expand their offerings
to include wealth preservation and transfer products. To capitalize on this trend, we establish relationships
with the financial planning firm, and then build relationships with the individual advisors within the firm.
This approach permits us to maximize the number of individual registered representatives who potentially may
sell our products.
Emerging Distribution Sources. Philadelphia Financial Group offers private placement life and annuity products
through a variety of distribution sources with access to the high-net-worth market including family offices,
financial institutions, accountants and attorneys. We also offer our life and annuity products through
non-traditional sources such as private banks, private banking groups within commercial banks and regional and
commercial banks that are focused on their high-net-worth client base.
Affiliated Distribution
Effective as of May 31, 2004, Linsco/Private Ledger Financial Services, or LPL, purchased our affiliated retail
distribution operations and as a result, we no longer have affiliated distribution channels. As part of the
transaction, advisors affiliated with WS Griffith Securities, Inc., or Griffith, and Main Street Management
Company, or Main Street, had the opportunity to move to LPL as independent registered representatives. As of
December 31, 2004, LPL had successfully recruited about 45% of Griffith's representatives, representing
approximately 50% of Griffith's total 2003 gross dealer concessions. Since the sale, the Company has pursued an
expansion in its distribution relationship with LPL, adding life and annuity products to existing asset
management offerings and recently commenced a plan to market these products through LPL and its more than 5,500
producers.
13
During 2004, 2003 and 2002, 6%, 15% and 11%, respectively, of total life insurance sales, as measured by new
annualized and single premiums, were conducted through affiliated distribution sources. Annuity sales through
affiliated distribution accounted for 18%, 18% and 35% of gross annuity deposits, excluding discontinued
products, during 2004, 2003 and 2002, respectively. In all three years, asset management sales through
affiliate distribution accounted for 1% of sales.
Institutional Products Distribution
We have an Institutional Marketing Group, or IMG, which markets our institutional product offerings to
consultants and other institutional clients. There are experienced institutional salespeople at several of our
affiliated asset managers, as well as specialists in products such as sub-advisory and defined contribution
investment only retirement services who operate across the enterprise. IMG also provides coordinated marketing
support and services.
We direct our institutional marketing efforts primarily toward consultants who are retained by institutional
investors to assist in competitive reviews of potential investment managers. These consultants recommend
investment managers to their institutional clients based on their review of investment managers' performance
histories and investment styles. We maintain relationships with these consultants and provide information and
materials to them in order to facilitate their review of our funds.
Support and Services
We believe we have a competitive advantage through the service and support we provide our distributors,
including:
• customized advice on estate planning, charitable giving planning, executive benefits and retirement
planning, provided by a staff of professionals with specialized expertise in the advanced application
of life insurance and variable annuity products. This staff includes three attorneys with an average of
approximately 15 years' experience, who combine their advice with tailored presentations, educational
materials and specimen legal documents;
• market research and education programs designed to help advisors better understand which financial
products the affluent and high-net-worth market demands. We assist advisors in marketing to specific
customer segments such as senior corporate executives, business owners and high-net-worth households;
• nationwide teams of life, annuity and asset management product specialists who provide education and
sales support to distributors and who can act as part of the advisory team for case design and
technical support;
• asset management and investment allocation strategies, including our Complementary Investment Analysis
tool, which identifies investment options offered both by us and by third parties that are suitable for
an individual's allocation needs;
• an underwriting team with significant experience in evaluating the financial and medical underwriting
risks associated with high face-value policies and affluent and high-net-worth individuals; and
• internet-accessible information that makes it easier for our distributors to do business with us,
including interactive product illustrations, educational and sales tools, and online access to forms,
marketing materials and policyholder account information.
Non-operating Segments
Venture Capital Segment
We have invested in the venture capital markets for over 25 years through Phoenix Life's investment portfolio.
The Venture Capital segment represented 1% of total investments and cash and cash equivalents as of both
December 31, 2004 and 2003. The carrying value of partnership investments in the Venture Capital segment was
14
$202.9 million as of December 31, 2004. The segment does not include venture capital investments held within
Phoenix Life's closed block.
Phoenix Life's venture capital investments are limited partnership interests in venture capital funds,
leveraged buyout funds and other private equity partnerships sponsored and managed by third parties. We refer
to all of these types of investments as venture capital. We currently have 110 partnership investments through
49 sponsors in our Venture Capital segment. We believe our long-standing relationships and history of
consistent participation with many well-established venture capital sponsors gives us preferred access to
attractive venture capital opportunities.
Historically, we viewed our venture capital investments as an opportunity to enhance returns on our
participating life products. In the past, we allocated between 1% and 2% of Phoenix Life's annual investable
cash flow to venture capital investments. Since 2002, we have made new venture capital commitments only in our
closed block. In addition, in February 2003, we sold a 50% interest in certain of our venture capital
partnerships to an outside party and transferred the remaining 50% interest in those partnerships to our closed
block. The carrying value of the partnerships sold and transferred totaled $52.2 million after realizing a loss
of $19.4 million ($5.1 million recorded in 2002 and $14.3 million recorded in 2003).
See Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K for
Venture Capital segment financial information.
Corporate and Other Segment
The Corporate and Other segment includes: indebtedness; unallocated assets; liabilities and expenses; and
certain businesses not of sufficient scale to report independently. Corporate and Other also includes certain
international operations. As of December 31, 2004, we had a total of $156.1 million in these international
holdings. Among our international holdings was Aberdeen Asset Management PLC, or Aberdeen, a Scottish
investment management company with institutional and retail clients in the United Kingdom, as well as in
continental Europe, Asia, Australia and the United States. At December 31, 2004, our ownership in Aberdeen
stock was 16.5%. On January 14, 2005 we closed the sale of our equity holdings in Aberdeen for net proceeds of
$70.4 million. See Management's Discussion and Analysis of Financial Condition and Results of Operations and
Note 5 to our consolidated financial statements in this Form 10-K for more information.
See Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K for
Corporate and Other segment financial information.
15
General Development of Business
PNX was incorporated in Delaware in 2000. Our principal executive offices are located at One American Row,
Hartford, Connecticut 06102-5056. Our telephone number is (860) 403-5000. Our website is located at
www.PhoenixWealthManagement.com. (This and all other URLs are intended to be inactive textual references only.
They are not intended to be an active hyperlink to our website. The information on our website is not, and is
not intended to be, part of this Form 10-K and is not incorporated into this report by reference.)
Phoenix Mutual Life Insurance Company was organized in Connecticut in 1851. In 1992, in connection with its
merger with Home Life Insurance Company, or Home Life, the company redomiciled to New York and changed its name
to Phoenix Home Life Mutual Insurance Company, or Phoenix Home Life.
On June 25, 2001, the effective date of its demutualization, Phoenix Home Life converted from a mutual life
insurance company to a stock life insurance company, became a wholly-owned subsidiary of PNX and changed its
name to Phoenix Life Insurance Company. All policyholder membership interests in the mutual company were
extinguished on the effective date. At the same time, Phoenix Investment Partners became an indirect
wholly-owned subsidiary of PNX.
In addition, on June 25, 2001, PNX completed its initial public offering, or IPO, in which 48.8 million shares
of common stock were issued at a price of $17.50 per share. Net proceeds from the IPO were $807.9 million,
which was contributed to Phoenix Life, as required under the plan of reorganization. On July 24, 2001, Morgan
Stanley & Co. Incorporated exercised its right to purchase 1,395,900 additional shares of the common stock of
PNX at the IPO price of $17.50 per share less underwriter's discount. Net proceeds of $23.2 million were
contributed to Phoenix Life. Our shares outstanding were subsequently reduced through share repurchases through
October 2002.
The following chart illustrates our corporate structure as of December 31, 2004.
--------------------------------
THE PHOENIX COMPANIES, INC.
--------------------------------
|
|-----------------------------------------------------|
100% 100%
------------------- ------------------------
PHOENIX LIFE PHOENIX INVESTMENT
INSURANCE MANAGEMENT COMPANY,
COMPANY INC.
------------------- ------------------------
| |
100% 100%
------------------- ----------------------------------------
PM HOLDINGS, INC. PHOENIX INVESTMENT PARTNERS, LTD.
------------------- ----------------------------------------
| |
Various %s Various %s
| |
-------------------------------------------- -------------------------------------------
OTHER DOMESTIC AND FOREIGN SUBSIDIARIES OTHER DOMESTIC AND FOREIGN SUBSIDIARIES
-------------------------------------------- -------------------------------------------
At December 31, 2004, we employed approximately 1,500 people. We believe our relations with our employees are
good.
16
Item 2. Properties
Our executive headquarters consist of our main office building at One American Row and two other buildings in
Hartford, Connecticut. We own these buildings and occupy most of the space contained in them. In addition to
these properties, we own offices in East Greenbush, New York for use in the operation of our business. In
February 2005, we entered into an agreement for the sale and short-term leaseback of the East Greenbush
property with an anticipated relocation in 2006 of business functions currently located at that property to a
site to be leased in the Albany area. In May 2004, we sold our offices in Enfield, Connecticut. Business
functions from Enfield are being relocated to our existing Hartford offices. We also lease office space within
and out of the United States as needed for our operations.
Item 3. Legal Proceedings
General
We are regularly involved in litigation, both as a defendant and as a plaintiff. The litigation naming us as a
defendant ordinarily involves our activities as an insurer, employer, investor or taxpayer. Several current
proceedings are discussed below. In additional, state regulatory bodies, the Securities and Exchange
Commission, or SEC, the National Association of Securities Dealers, Inc., or NASD, and other regulatory bodies
regularly make inquiries of us and, from time to time, conduct examinations or investigations concerning our
compliance with, among other things, insurance laws, securities laws, and laws governing the activities of
broker-dealers. For example, during 2003 and 2004, the New York State Insurance Department conducted its
routine quinquennial financial and market conduct examination of Phoenix Life and its New York domiciled life
insurance subsidiary and the SEC conducted examinations of certain Phoenix Life variable products and certain
Phoenix Life affiliated investment advisors and mutual funds. The New York State Insurance Department's report,
for the five-year period ending December 31, 2002, was recently received. It cited no material violations. In
2004, the NASD also commenced examination of Phoenix broker-dealers, which is ongoing. The NASD recently
notified the Company of apparent violations by one of our broker-dealer subsidiaries of certain trade reporting
requirement. The Company is developing its response. We continue to actively cooperate with these regulators.
Federal and state regulatory authorities from time to time make inquiries and conduct examinations regarding
compliance by Phoenix Life and its subsidiaries with securities and other laws and regulations affecting their
registered products. The Company endeavors to respond to such inquiries in an appropriate way and to take
corrective action if warranted. Recently, there has been a significant increase in federal and state regulatory
activity relating to financial services companies, with a number of recent regulatory inquiries focusing on
late-trading, market timing and valuation issues. Our products entitle us to impose restrictions on transfers
between separate account sub-accounts associated with our variable products.
The Boston District Office of the SEC recently completed a compliance examination of certain of the Company's
affiliates that are registered under the Investment Company Act of 1940 or the Investment Advisers Act of 1940.
Following the examination, the staff of the Boston District Office issued a deficient letter primarily focused
on perceived weaknesses in procedures for monitoring trading to prevent market timing activity. The staff
requested the Company to conduct an analysis as to whether shareholders, policyholders and contract holders who
invested in the funds that may have been affected by undetected market timing activity had suffered harm and to
advise the staff whether the Company believes reimbursement is necessary or appropriate under the
circumstances. A third party has been retained to assist the Company in preparing the analysis. Until this
analysis is completed, whether any of these affiliates of The Phoenix Companies, Inc. would be required to make
any reimbursement payments and if so the amount thereof cannot be determined.
17
A number of companies have recently announced settlements of enforcement actions with various regulatory
agencies, primarily the SEC and the New York Attorney General's Office. While no such action has been initiated
against us, it is possible that one or more regulatory agencies may pursue this type of action against us in
the future.
We recently received a subpoena from the Connecticut Attorney General's office requesting information regarding
certain distribution practices since 1998. Over 40 companies received such a subpoena. We are cooperating
fully.
These types of regulatory actions may be difficult to assess or quantify, may seek recovery of indeterminate
amounts, including punitive and treble damages, and the nature and magnitude of their outcomes may remain
unknown for substantial periods of time. While it is not feasible to predict or determine the ultimate outcome
of all pending investigations and legal proceedings or to provide reasonable ranges of potential losses, we
believe that their outcomes are not likely, either individually or in the aggregate, to have a material adverse
effect on our consolidated financial condition, or consideration of available insurance and reinsurance and the
provision made in our consolidated financial statements. However, given the large or indeterminate amounts
sought in certain of these matters and litigation's inherent unpredictability, it is possible that an adverse
outcome in certain matters could, from time to time, have a material adverse effect on our results of operation
or cash flows.
Discontinued Reinsurance Business
During 1999, our Life Companies placed their remaining group accident and health reinsurance business into
run-off, adopting a formal plan to terminate the related contracts as early as contractually permitted and not
entering into any new contracts. As part of the decision to discontinue these reinsurance operations, we
reviewed the run-off block and estimated the amount and timing of future net premiums, claims and expenses. We
also purchased aggregate excess-of-loss reinsurance to further protect us from unfavorable results from this
discontinued business. On February 7, 2005 we notified the aggregate excess-of-loss reinsurer that we were
exercising our option to commute this contract. The commutation will be effective during the second quarter of
2005. The effect of the commutation will not be material to our consolidated financial statements.
We have established reserves for claims and related expenses that we expect to pay on our discontinued group
accident and health reinsurance business. These reserves are based on currently known facts and estimates
about, among other things, the amount of insured losses and expenses that we believe we will pay, the period
over which they will be paid, the amount of reinsurance we believe we will collect under our aggregate
excess-of-loss reinsurance, the amounts we believe we will collect from our retrocessionaires and the likely
legal and administrative costs of winding down the business.
Our total reserves, including coverage available from our aggregate excess-of-loss reinsurance and reserves for
amounts recoverable from retrocessionaires, were $110.0 million and $185.0 million as of December 31, 2004 and
2003, respectively. Our total amounts recoverable from retrocessionaires related to paid losses were $60.0
million and $165.0 million as of December 31, 2004 and 2003, respectively. We did not recognize any gains or
losses during the years 2004, 2003 and 2002.
See the Risks Related to Our Business section of Management's Discussion and Analysis as well as Note 17 to our
consolidated financial statements in this Form 10-K for additional information.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of our security holders during the fourth quarter of the fiscal year covered
by this report.
18
PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market
Shares of our common stock trade on the New York Stock Exchange under the ticker symbol "PNX". As of February
14, 2005, there were approximately 270,000 registered holders of our common stock.
Unregistered Shares
We issued the following shares of common stock to eligible policyholders of Phoenix Life, effective as of June
25, 2001, in connection with Phoenix Life's demutualization on that date: 56,174,373 shares in 2001; 4,237
shares in 2002; 1,853 shares in 2003; and 54 shares in 2004. We issued these shares to policyholders in
exchange for their membership interests without registration under the Securities Act of 1933 in reliance on
the exemption under Section 3(a)(10) of the Securities Act of 1933.
In 2004, we also issued 43,334 restricted stock units, or RSUs, to 11 of our independent directors, without
registration under that act in reliance on the exemption under Regulation D for accredited investors. Each RSU
is potentially convertible into one share of our common stock.
Stock Price
The following table presents the intraday high and low prices for our common stock on the New York Stock
Exchange for the years 2004 and 2003. The closing price of our common stock at December 31, 2004 was $12.50.
2004 2003
----------------------------- -----------------------------
High Low High Low
-------------- -------------- -------------- --------------
First Quarter................................ $ 14.53 $ 12.06 $ 9.25 $ 6.03
Second Quarter............................... $ 14.21 $ 11.08 $ 9.80 $ 6.95
Third Quarter................................ $ 12.34 $ 9.51 $ 12.10 $ 8.60
Fourth Quarter............................... $ 12.60 $ 9.47 $ 12.65 $ 10.26
Dividends
In 2004 and 2003, we paid a dividend of $0.16 per share to shareholders of record on June 14, 2004 and June 13,
2003, respectively. For a discussion of restrictions on our ability to pay dividends, see the Liquidity and
Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Repurchases
We did not repurchase any shares of our common stock during the two years ended December 31, 2004.
19
Item 6. Selected Financial Data
Our selected historical consolidated financial data as of and for each of the five years ended December 31,
2004 follows ($ amounts in millions, except earnings per share). We derived the balance sheet data for 2004 and
2003 and the income statement data for the years 2004, 2003 and 2002 from our consolidated financial statements
in this Form 10-K. We derived the balance sheet data for 2002, 2001 and 2000 and the income statement data for
the years 2001 and 2000 from audited consolidated financial statements not in this Form 10-K. We have
reclassified certain amounts for prior years to conform with our 2004 presentation. Prior to June 25, 2001,
Phoenix Life was the parent company of our consolidated group. In connection with its demutualization, Phoenix
Life became a subsidiary and PNX became the parent company of our consolidated group.
We prepared the following financial data, other than statutory data, in conformity with accounting principles
generally accepted in the United States, or GAAP. We derived the statutory data from the Annual Statements of
our Life Companies filed with state insurance regulatory authorities and prepared it in accordance with
statutory accounting practices prescribed or permitted by state insurance regulators, which vary in certain
material respects from GAAP.
You should read the following in conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations and our consolidated financial statements in this Form 10-K.
20
Selected Financial Data:
($ amounts in millions) 2004 2003 2002 2001 2000
------------- ------------- ------------- -------------- -------------
Income Statement Data
Premiums............................... $ 990.6 $ 1,042.2 $ 1,082.0 $ 1,112.7 $ 1,147.4
Insurance and investment product fees.. 534.9 500.9 493.8 469.7 559.1
Broker-dealer commission and
distribution fee revenues............ 56.9 81.5 85.0 96.3 97.3
Net investment income.................. 1,075.7 1,107.4 940.5 882.9 1,131.9
Unrealized gain on trading equity
securities........................... 85.9 -- -- -- --
Net realized investment gains
(losses)............................. (0.8) (98.5) (133.9) (84.9) 89.2
------------- ------------- ------------- -------------- -------------
Total revenues......................... $ 2,743.2 $ 2,633.5 $ 2,467.4 $ 2,476.7 $ 3,024.9
============= ============= ============= ============== =============
Total benefits and expenses............ $ 2,606.0 $ 2,653.7 $ 2,671.0 $ 2,738.8 $ 2,867.1
============= ============= ============= ============== =============
Income (loss) from continuing
operations........................... $ 86.3 $ (4.1) $ (140.7) $ (147.3) $ 96.0
Income (loss) from discontinued
operations, net of income taxes...... 0.1 (2.1) (1.3) (2.5) (12.7)
------------- ------------- ------------- -------------- -------------
Income (loss) before cumulative effect
of accounting changes................ 86.4 (6.2) (142.0) (149.8) 83.3
Cumulative effect of accounting
changes.............................. -- -- (130.3) (65.4) --
------------- ------------- ------------- -------------- -------------
Net income (loss)...................... $ 86.4 $ (6.2) $ (272.3) $ (215.2) $ 83.3
============= ============= ============= ============== =============
Basic Earnings Per Share(1)
Income (loss) from continuing
operations........................... $ 0.91 $ (0.04) $ (1.44) $ (1.41) $ 0.92
============= ============= ============= ============== =============
Net income (loss)...................... $ 0.91 $ (0.07) $ (2.78) $ (2.06) $ 0.80
============= ============= ============= ============== =============
Diluted Earnings Per Share(1)
Income (loss) from continuing
operations........................... $ 0.86 $ (0.04) $ (1.44) $ (1.41) $ 0.92
============= ============= ============= ============== =============
Net income (loss)...................... $ 0.86 $ (0.07) $ (2.78) $ (2.06) $ 0.80
============= ============= ============= ============== =============
Dividends per share.................... $ 0.16 $ 0.16 $ 0.16 $ -- $ --
============= ============= ============= ============== =============
Ratio of Earnings to Fixed Charges
Ratio of earnings to fixed charges(2) .. 1.7 -- -- -- 1.8
Supplemental ratio of earnings to
fixed charges - excluding interest
credited on policyholder contract
balances(3) .......................... 4.5 -- -- -- 4.1
Balance Sheet Data
Cash and general account investments... $ 17,334.6 $ 17,242.8 $ 16,812.8 $ 14,400.4 $ 12,767.5
============= ============= ============= ============== =============
Total assets........................... $ 28,362.6 $ 27,559.2 $ 25,235.9 $ 22,535.9 $ 20,313.5
============= ============= ============= ============== =============
Indebtedness........................... $ 690.8 $ 639.0 $ 644.3 $ 599.3 $ 425.1
============= ============= ============= ============== =============
Total liabilities...................... $ 26,299.2 $ 25,588.8 $ 23,389.9 $ 20,266.6 $ 18,341.6
============= ============= ============= ============== =============
Minority interest in net assets of
consolidated subsidiaries............ $ 41.0 $ 22.6 $ 19.2 $ 1.2 $ 130.7
============= ============= ============= ============== =============
Total stockholders' equity............. $ 2,022.4 $ 1,947.8 $ 1,826.8 $ 2,307.8 $ 1,840.9
============= ============= ============= ============== =============
Asset Management Segment
Third-party assets under
management......................... $ 42,908.5 $ 46,260.5 $ 41,835.3 $ 41,723.5 $ 47,391.9
============= ============= ============= ============== =============
Consolidated Statutory Data
Premiums, deposits and fees............ $ 2,151.1 $ 3,364.9 $ 3,919.7 $ 3,144.8 $ 2,344.8
============= ============= ============= ============== =============
Net income (loss)...................... $ 46.3 $ (26.0) $ (130.7) $ (66.0) $ 266.1
============= ============= ============= ============== =============
Capital and surplus(4)................. $ 814.6 $ 762.4 $ 861.4 $ 1,149.8 $ 1,322.8
Asset valuation reserve, or AVR(5)..... 221.2 200.0 147.8 223.4 560.4
------------- ------------- ------------- -------------- -------------
Capital, surplus and AVR............... $ 1,035.8 $ 962.4 $ 1,009.2 $ 1,373.2 $ 1,883.2
============= ============= ============= ============== =============
21
_________
(1) We calculated earnings per share for each of the two years from 2000 through 2001 on a pro forma basis,
based on 104.6 million weighted-average shares outstanding. The pro forma weighted-average shares
outstanding calculation for 2001 is based on the weighted-average shares outstanding for the period from the
demutualization and IPO to the end of the year.
(2) Due to our losses during 2003, 2002 and 2001, the ratio of earnings to fixed charges for those years was
less than 1:1. We would need $11.4 million, $113.6 million and $131.6 million in additional earnings for the
years 2003, 2002 and 2001, respectively, to achieve a 1:1 coverage ratio.
(3) Due to our losses during 2003, 2002 and 2001, the ratio coverages, excluding interest credited on
policyholder contract balances, were less than 1:1. We would need $11.4 million, $113.6 million and $131.6
million in additional earnings for the years 2003, 2002 and 2001, respectively, to achieve a 1:1 coverage
ratio.
(4) In accordance with accounting practices prescribed by the New York State Insurance Department, Phoenix
Life's capital and surplus includes $205.2 million and $175.0 million principal amount of surplus notes
outstanding at December 31, 2004 and 2003, respectively.
(5) The AVR is a statutory reserve intended to mitigate changes to the balance sheet as a result of
fluctuations in asset values.
22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENT
The following discussion may contain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The Phoenix Companies, Inc., or the Company, intends these forward-looking
statements to be covered by the safe harbor provisions of the federal securities laws relating to
forward-looking statements. These include statements relating to trends in, or representing management's
beliefs about, the Company's future strategies, operations and financial results, as well as other statements
including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "may," "should" and
other similar expressions. Forward-looking statements are made based upon management's current expectations and
beliefs concerning trends and future developments and their potential effects on the Company. They are not
guarantees of future performance. Actual results may differ materially from those suggested by forward-looking
statements as a result of risks and uncertainties which include, among others: (i) changes in general economic
conditions, including changes in interest and currency exchange rates and the performance of financial markets;
(ii) heightened competition, including with respect to pricing, entry of new competitors and the development of
new products and services by new and existing competitors; (iii) the Company's primary reliance, as a holding
Company, on dividends and other payments from its subsidiaries to meet debt payment obligations, particularly
since the Company's insurance subsidiaries' ability to pay dividends is subject to regulatory restrictions;
(iv) regulatory, accounting or tax developments that may affect the Company or the cost of, or demand for, its
products or services; (v) downgrades in the financial strength ratings of the Company's subsidiaries or in the
Company's credit ratings; (vi) discrepancies between actual claims experience and assumptions used in setting
prices for the products of insurance subsidiaries and establishing the liabilities of such subsidiaries for
future policy benefits and claims relating to such products; (vii) movements in the equity markets that affect
our investment results, including those from venture capital, the fees we earn from assets under management and
the demand for our variable products; (viii) the Company's continued success in achieving planned expense
reductions; (ix) the effects of closing the Company's retail brokerage operations; and (x) other risks and
uncertainties described in any of the Company's filings with the SEC. The Company undertakes no obligation to
update or revise publicly any forward-looking statement, whether as a result of new information, future events
or otherwise.
23
RISKS RELATED TO OUR BUSINESS
Poor relative investment performance of some of our equity asset management strategies has led to material
redemptions which have reduced assets under management and revenues. We could have continued underperformance
and outflows.
In 2004, 61% of third-party assets under management underperformed against their respective one-year
benchmarks. Partly as a result, our asset management business experienced net outflows of $6.6 billion during
the year. This poor relative performance could continue, which could result in lower assets under management
and lower revenues.
Poor performance of the equity markets could adversely affect sales and assets under management of our asset
management, variable universal life and variable annuity products, as well as the performance of our Venture
Capital segment and potential future pension plan funding requirements.
The United States equity markets can be volatile and experience both periods of strong growth and of
substantial declines.
There are four ways in which equity market declines and volatility have affected, or have the potential to
affect, us negatively.
• First, because the fee revenues of our asset management and, to a lesser degree, variable products
businesses are based on the value of assets under our management, poor performance of the equity
markets limits our fee revenues by reducing the value of the assets we manage.
• Second, returns on venture capital investments are correlated with the performance of the equity
markets. During the severe market declines of 2002 and 2001, our venture capital investments decreased
our income from continuing operations by $38.5 million and $54.9 million, respectively. If equity
markets decline, we could again experience losses in our venture capital investments.
• Third, the funding requirements of our pension plan are dependent on the performance of the equity
markets. As of December 31, 2004, the portfolio funding the Company's pension plan consisted of 67%
equities. In a severe market decline, the value of the assets supporting the pension plan would
decrease, increasing the requirement for future funding. This funding requirement would increase
expenses and decrease the earnings of the Company.
• Fourth, significant market volatility or declines could cause potential purchasers of our products to
refrain from investing, and current investors to withdraw from the markets or reduce their level of
investment. We cannot estimate the impact of prior market declines on our sales.
Changes in interest rates could harm cash flow and profitability in our life and annuity businesses.
Our life insurance and annuity businesses are sensitive to interest rate changes. In periods of increasing
interest rates, life insurance policy loans and surrenders and withdrawals could increase as policyholders seek
investments with higher perceived returns. This could require us to sell invested assets at a time when their
prices are depressed by the increase in interest rates, which could cause us to realize investment losses.
Conversely, during periods of declining interest rates, we could experience increased premium payments on
products with flexible premium features, repayment of policy loans and increased percentages of policies
remaining in force. We would obtain lower returns on investments made with these cash flows. In addition,
borrowers may prepay or redeem mortgages and bonds in our investment portfolio so that we might have to
reinvest those proceeds in lower interest-bearing investments. As a consequence of these factors, we could
experience a decrease in the spread between the returns on our investment portfolio and amounts credited to
policyholders and contractholders, which could adversely affect our profitability.
24
We depend on non-affiliated distribution for our product sales and if our relationships with these distributors
were harmed, we could suffer a loss in revenues.
We distribute our products through non-affiliated advisors, broker-dealers and other financial intermediaries.
There is substantial competition for business within most of these distributors. We believe that our sales
through these distributors depend on factors such as our financial strength, the quality of our products and on
the services we provide to, and the relationships we develop with, these distributors. Our distributors are
generally free to sell products from a variety of providers, which makes it important for us to continually
offer distributors products and services they find attractive. We may not be able to establish or maintain
satisfactory relationships with distributors if our products or services do not meet their needs. Accordingly,
our revenues and profitability would suffer.
Downgrades to PNX's debt ratings and Phoenix Life's financial strength ratings could increase policy surrenders
and withdrawals, adversely affect relationships with distributors, reduce new sales and earnings from certain
of our life insurance products and increase our future borrowing costs.
Rating agencies assign Phoenix Life financial strength ratings, and assign us debt ratings, based in each case
on their opinions of the relevant company's ability to meet its financial obligations.
Financial strength ratings reflect a rating agency's view of an insurance company's ability to meet its
obligations to its insureds. These ratings are therefore key factors underlying the competitive position of
life insurers. The current financial strength and debt ratings are set forth in the chart below.
Financial Strength Rating Senior Debt Rating
Rating Agency of Phoenix Life of PNX
--------------------------- --------------------------- --------------------------
A.M. Best Company, Inc. A ("Excellent") Bbb+ ("Adequate")
Fitch AA- ("Very Strong") A- ("Strong")
Standard & Poor's A ("Strong") BBB ("Good")
Moody's A3 ("Good") Baa3 ("Adequate")
Moody's and Standard & Poor's each have a stable outlook for our ratings, while A.M. Best and Fitch have a
negative outlook.
Any rating downgrades may result in increased interest costs in connection with future borrowings. Such an
increase would decrease our earnings and could reduce our ability to finance our future growth on a profitable
basis.
Downgrades may also trigger defaults or repurchase obligations.
Downgrades could adversely affect our reputation and, hence, our relationships with existing distributors and
our ability to establish additional distributor relationships. If this were to occur, we might experience a
decline in sales of certain products and the persistency of existing customers. At this time, we cannot
estimate the impact on sales or persistency. A significant decline in our sales or persistency could have a
material adverse effect on our financial results.
25
We might need to fund deficiencies in our closed block, which would result in a reduction in net income and
could result in a reduction in investments in our on-going business.
We have allocated assets to our closed block to produce cash flows that, together with additional revenues from
the closed block policies, are reasonably expected to support our obligations relating to these policies. Our
allocation of assets to the closed block was based on actuarial assumptions about our payment obligations to
closed block policyholders and the continuation of the non-guaranteed policyholder dividend scales in effect
for 2000, as well as assumptions about the investment earnings the closed block assets will generate over time.
Since such assumptions are to some degree uncertain, it is possible that the cash flows generated by the closed
block assets and the anticipated revenues from the policies included in the closed block will prove
insufficient to provide for the benefits guaranteed under these policies even if the non-guaranteed
policyholder dividend scale were to be cut. If this were to occur, we would have to fund the resulting
shortfall from assets outside of the closed block, which could adversely affect our profitability.
The independent trustees of our mutual funds and closed-end funds, intermediary program sponsors, managed
account clients and institutional asset management clients could terminate their contracts with us. This would
reduce our investment management fee revenues.
Each of the mutual funds and closed-end funds for which Phoenix Investment Partners acts as investment advisor
or sub-advisor is registered under the Investment Company Act of 1940 and is governed by a board of trustees or
board of directors. SEC rules require a majority of each board's members to be independent, and proposed
amendments would increase that requirement to 75%. Each fund's board has the duty of deciding annually whether
to renew the contract under which Phoenix Investment Partners manages the fund. Board members have a fiduciary
duty to act in the best interests of the shareholders of their funds. Either the board members or, in limited
circumstances, the shareholders may terminate an advisory contract with Phoenix Investment Partners and move
the assets to another investment advisor. The board members also may deem it to be in the best interests of a
fund's shareholders to make other decisions adverse to us, such as reducing the compensation paid to Phoenix
Investment Partners or imposing restrictions on Phoenix Investment Partners' management of the fund.
Our asset management agreements with institutional clients, intermediary program sponsors (who "wrap," or make
available, our investment products within the management agreements they have with their own clients), direct
managed account clients and institutional clients are generally terminable by these sponsors and clients upon
short notice without penalty. As a result, there would be little impediment to these sponsors or clients
terminating our agreements if they became dissatisfied with our performance.
The termination of any of the above agreements relating to material portion of assets under management would
adversely affect our investment management fee revenues and could require us to impair the goodwill or
intangible assets associated with our asset management partners.
We might be unable to attract or retain personnel who are key to our business.
The success of our business is dependent to a large extent on our ability to attract and retain key employees.
Competition in the job market for professionals such as securities analysts, portfolio managers, sales
personnel and actuaries is generally intense. In general, our employees are not subject to employment contracts
or non-compete agreements.
Goodwill or intangible assets associated with our Asset Management business could become impaired requiring a
non-cash charge to earnings in the event of significant market declines, net outflows of assets, changes in
investment management contracts or the departure of key employees.
As of December 31, 2004, our Asset Management business had $725.3 million in goodwill and intangible assets
associated with our various partners. The amount of goodwill and intangible assets on our balance sheet is
26
supported by the assets under management and the related revenues of each of the partners. It might be
necessary to impair those assets if:
• we experienced a drop in assets under management due to a significant market decline or continued
outflows such as in 2004 when we had net outflows of $6.6 billion;
• a material investment management contract, such as one with one of our mutual funds, were terminated, in
this case by the independent trustees; or
• certain key employees at our Asset Management partners left the Company, which could cause outflows as
clients opt to withdraw their funds following such departures.
We face strong competition in our businesses from mutual fund companies, banks, Asset Mmanagement firms and
other insurance companies. This competition could impair our ability to retain existing customers, attract new
customers and maintain our profitability.
We face strong competition in each of our businesses, comprising life insurance, annuities and asset
management. We believe that our ability to compete is based on a number of factors, including product features,
investment performance, service, price, distribution capabilities, scale, commission structure, name
recognition and financial strength ratings. While there is no single company that we identify as a dominant
competitor in our business overall, our actual and potential competitors include a large number of mutual fund
companies, banks, asset management firms and other insurance companies, many of which have advantages over us
in one or more of the above competitive factors. Recent industry consolidation, including acquisitions of
insurance and other financial services companies in the United States by international companies, has resulted
in larger competitors with financial resources, marketing and distribution capabilities and brand identities
that are stronger than ours. Larger firms also may be able to offer, due to economies of scale, more
competitive pricing than we can. In addition, some of our competitors are regulated differently than we are,
which may give them a competitive advantage; for example, many non-insurance company providers of financial
services are not subject to the costs and complexities of insurance regulation by multiple states. Further,
national banks, with their pre-existing customer bases for financial services products, may compete with
insurers as a result of the Gramm-Leach-Bliley Act of 1999, which permits mergers among commercial banks,
insurers and securities firms under one holding company.
We could have material losses in the future from our discontinued reinsurance business.
In 1999, we discontinued our reinsurance operations through a combination of sale, reinsurance and placement of
certain retained group accident and health reinsurance business into run-off. We adopted a formal plan to stop
writing new contracts covering these risks and to end the existing contracts as soon as those contracts would
permit. However, we remain liable for claims under those contracts. We also purchased aggregate excess-of-loss
reinsurance to further protect us from unfavorable results from this discontinued business. On February 7, 2005
we notified the aggregate excess-of-loss reinsurer that we were exercising our option to commute this contract.
The commutation will be effective during the second quarter of 2005. The effect of the commutation will not be
material to our consolidated financial statements.
We have established reserves for claims and related expenses that we expect to pay on our discontinued group
accident and health reinsurance business. These reserves are based on currently known facts and estimates
about, among other things, the amount of insured losses and expenses that we believe we will pay, the period
over which they will be paid, the amount of reinsurance we believe we will collect under our aggregate
excess-of-loss reinsurance, the amounts we believe we will collect from our retrocessionaires and the likely
legal and administrative costs of winding down the business. Our total reserves, including coverage available
from our reinsurance and reserves for amounts recoverable from retrocessionaires, were $110.0 million as of
December 31, 2004. Our total amounts recoverable from retrocessionaires related to paid losses were $60.0
million as of December 31, 2004.
27
We expect our reserves and reinsurance to cover the run-off of the business; however, the nature of the
underlying risks is such that the claims may take years to reach the reinsurers involved. Therefore, we expect
to pay claims out of existing estimated reserves for up to ten years as the level of business diminishes. In
addition, unfavorable claims experience is possible and could result in additional future losses. For these
reasons, we cannot know today what our actual claims experience will be.
In addition, we are involved in disputes relating to certain portions of our discontinued group accident and
health reinsurance business. See Note 17 to our consolidated financial statements in this Form 10-K for more
information.
In establishing our reserves described above for the payment of insured losses and expenses on this
discontinued business, we have made assumptions about the likely outcome of the disputes referred to above,
including an assumption that substantial recoveries would be available from our reinsurers on all of our
discontinued reinsurance business. However, the inherent uncertainty of arbitrations and lawsuits, including
the uncertainty of estimating whether any settlements we may enter into in the future would be on favorable
terms, makes it hard to predict outcomes with certainty. Given the need to use estimates in establishing loss
reserves, and the difficulty in predicting the outcome of arbitrations and lawsuits, our actual net ultimate
exposure likely will differ from our current estimate. If future facts and circumstances differ significantly
from our estimates and assumptions about future events with respect to the disputes referred to above or other
portions of our discontinued reinsurance business, our current reserves may need to be increased materially,
with a resulting material adverse effect on our results of operations and financial condition.
Some of the Bush administration's legislative proposals would reduce or eliminate the benefit of deferral of
taxation for our insurance and annuity products. In addition, legislation eliminating or modifying either the
federal estate tax or the federal taxation of investment income could adversely affect sales of and revenues
from our life and annuity products.
The attractiveness to our customers of many of our products is due, in part, to favorable tax treatment.
Current federal income tax laws generally permit the tax-deferred accumulation of earnings on the premiums paid
by the holders of annuities and life insurance products. In 2003, the tax rate on long-term capital gains and
certain dividend income was reduced until 2008. President Bush's 2006 budget proposal would make these rate
reductions permanent. If this happens, it could have a negative impact on our sales and revenues. In addition,
President Bush has indicated that fundamental changes to the Internal Revenue Code of 1986, as amended, or the
Code, are among his legislative priorities for his second term. These changes might include the adoption of a
flat tax, value-added tax or similar alternative structure, modifications to Social Security, the creation of
new and expanded vehicles for tax-exempt savings and lower taxes on investment income. The impact of these
proposals, if enacted, cannot reasonably be estimated.
Some of our life insurance products are specifically designed and marketed as policies that help a decedent's
heirs to pay estate tax. Legislation enacted in the spring of 2001 increased the size of estates exempt from
the federal estate tax, phased in reductions in the estate tax rate between 2002 and 2009 and repealed the
estate tax entirely in 2010. This legislation, despite its reinstatement of the estate tax in 2011, could have
a negative effect on our revenues from the sale of estate planning products. President Bush and members of
Congress have expressed a desire to modify the existing legislation, which could result in faster or more
complete reduction or repeal of the estate tax.
Changes in insurance and securities regulation could affect our profitability by imposing further restrictions
on the conduct of our business.
Our life insurance and annuity businesses are subject to comprehensive state regulation and supervision
throughout the United States. State insurance regulators and the National Association of Insurance
Commissioners, or the NAIC, continually reexamine existing laws and regulations, and may impose changes in the
future that put further regulatory burdens on us, thereby increasing our costs of doing business or otherwise
28
harm our business. This could have a material adverse affect on our results of operations and financial
condition.
The United States federal government does not directly regulate the insurance business. However, federal
legislation and administrative policies in areas which include employee benefit plan regulation, financial
services regulation and federal taxation and securities laws could significantly affect each of our businesses,
most notably our costs.
We and some of the policies, contracts and other products that we offer are subject to various levels of
regulation under the federal securities laws administered by the SEC as well as regulation by those states and
foreign countries in which we provide investment advisory services, offer products or conduct other
securities-related activities. We could be restricted in the conduct of our business for failure to comply with
such laws and regulations. Future laws and regulations, or the interpretation thereof, could have a material
adverse effect on our results of operations and financial condition by increasing our expenses in order to
comply with these regulations.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis reviews our consolidated financial condition at December 31, 2004 and
2003; our consolidated results of operations for the years 2004, 2003 and 2002; and, where appropriate, factors
that may affect our future financial performance. This discussion should be read in conjunction with "Selected
Financial Data" and our consolidated financial statements in this Form 10-K.
Overview
We are a manufacturer of insurance, annuity and asset management products for the accumulation, preservation
and transfer of wealth. We provide products and services to affluent and high-net-worth individuals through
their advisors and to institutions directly and through consultants. We offer a broad range of life insurance,
annuity and asset management products and services through a variety of distributors. These distributors
include independent advisors and financial services firms who make our products and services available to their
clients.
We manufacture our products through two operating segments — Life and Annuity and Asset Management — which
include three product lines — life insurance, annuities and asset management. Through Life and Annuity we
offer a variety of life insurance and annuity products, including universal, variable universal, term life
insurance, and a range of variable annuity offerings. Asset Management comprises two lines of business —
private client and institutional.
Through our private client line of business, we provide investment management services principally on a
discretionary basis, with products consisting of open-end mutual funds, closed-end funds and managed accounts.
Managed accounts include intermediary programs sponsored and distributed by non-affiliated broker-dealers and
direct managed accounts sold and administered by us. These two types of managed accounts generally require
minimum investments of $100,000 and $1 million, respectively. Our private client business also provides
transfer agency, accounting and administrative services to our open-end mutual funds.
Through our institutional group, we provide discretionary and non-discretionary investment management services
primarily to corporations, multi-employer retirement funds and foundations, as well as to endowments and
special purpose funds. In addition, we manage alternative financial products such as structured finance
products. Structured finance products include collateralized obligations such as collateralized debt
obligations, or CDOs, backed by portfolios of public high yield bonds, commercial mortgage-backed or
asset-backed securities.
We report our remaining activities in two non-operating segments — Venture Capital and Corporate and Other.
Venture Capital includes limited partnership interests in venture capital funds, leveraged buyout funds and
other private equity partnerships sponsored and managed by third parties. These assets are investments of the
general accounts of our Life Companies. See Business—Venture Capital Segment. Corporate and Other includes
indebtedness; unallocated assets, liabilities and expenses; and certain businesses not of sufficient scale to
report independently. See Business—Corporate and Other Segment. These non-operating segments are significant
for financial reporting purposes, but do not contain products or services relevant to our core manufacturing
operations.
We derive our revenues principally from:
• premiums on whole life insurance;
• insurance and investment product fees on variable life and annuity products and universal life
products;
• investment management and related fees; and
• net investment income and net realized investment gains.
30
Under GAAP, premium and deposit collections for variable life, universal life and annuity products are not
recorded as revenues. These collections are reflected on our balance sheet as an increase in separate account
liabilities for certain investment options of variable products. Collections for fixed annuities and certain
investment options of variable annuities are reflected on our balance sheet as an increase in policyholder
deposit funds. Collections for other products are reflected on our balance sheet as an increase in policy
liabilities and accruals.
Our expenses consist principally of:
• insurance policy benefits provided to policyholders, including interest credited on policies;
• policyholder dividends;
• deferred policy acquisition costs amortization;
• intangible assets amortization;
• interest expense;
• other operating expenses; and
• income taxes.
Our profitability depends principally upon:
• the adequacy of our product pricing, which is primarily a function of our:
• ability to select appropriate underwriting risks;
• mortality experience;
• ability to generate investment earnings;
• ability to maintain expenses in accordance with our pricing assumptions; and
• policies' persistency (the percentage of policies remaining in force from year to year as measured
by premiums);
• the amount and composition of assets under management;
• the maintenance of our target spreads between the rate of earnings on our investments and dividend and
interest rates credited to customers; and
• our ability to manage expenses.
Prior to Phoenix Life's demutualization, we focused on participating life insurance products, which pay
policyholder dividends. As of December 31, 2004, 74.0% of our life insurance reserves were for participating
policies. As a result, a significant portion of our expenses consists, and will continue to consist, of such
policyholder dividends. Our net income is reduced by the amounts of these dividends. Policyholder dividends
expense was $404.7 million during 2004, $418.8 million during 2003 and $401.8 million during 2002.
Our sales and financial results over the last several years have been affected by demographic, industry and
market trends. The baby boom generation has begun to enter its prime savings years. Americans generally have
begun to rely less on defined benefit retirement plans, social security and other government programs to meet
their postretirement financial needs. Product preferences have shifted between fixed and variable options
depending on market and economic conditions. Our balanced product portfolio including universal life, variable
life and variable annuity products, as well as a broad array of mutual funds and managed accounts, is well
positioned to meet this shifting demand.
Discontinued Operations
During 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 not material to our consolidated financial statements. Phoenix National Trust
Company is presented as a discontinued operation in our consolidated financial statements for all periods
presented.
31
In 1999, we discontinued our reinsurance operations. See Note 14 to our consolidated financial statements in
this Form 10-K for detailed information regarding our discontinued operations.
Recent Acquisitions and Dispositions
Life and Annuity
On October 25, 2004, we entered into an agreement with Friends Provident plc, or Friends Provident, to sell our
12% interest in Lombard International Assurance S.A., or Lombard, and to relinquish our notes receivable from
Lombard's affiliate, Insurance Development Holdings A.G., or IDH. This transaction closed on January 11, 2005
for consideration of $59.0 million and, under the terms of the sale, we may be entitled to additional
consideration, in the form of cash, based on Lombard's financial performance through 2006. We currently expect
to recognize an after-tax realized gain of between $7.0 million and $10.0 million in the first quarter of 2005
related to our sale of Lombard.
During the second quarter of 2004, we sold our retail affiliated broker-dealer operations to LPL. As part of
the transaction, advisors affiliated with Griffith and Main Street had the opportunity to move to LPL as
independent registered representatives. As of December 31, 2004, LPL had successfully recruited about 45% of
Griffith's total representatives, representing about 50% of Griffith's total gross dealer concessions. As of
December 31, 2004, we have not determined the ultimate persistency of the business written by these advisors,
but our experience through that date shows no material deterioration, reflecting the quality of our in-force
products and the professionalism of these advisors. As part of this transaction, we are expanding our
distribution relationship with LPL, adding life and annuity products to our existing asset management
offerings, and we have recently commenced a marketing plan to position these products within LPL and its more
than 5,500 producers.
Revenues net of eliminations and direct expenses net of deferrals and certain transaction related costs
included in our consolidated financial statements related to our retail affiliated broker-dealer operations
sold during 2004 are as follows:
Year Ended December 31,
Revenues and Direct Expenses Of ----------------------------------
Retail Affiliated Broker-dealer Operations: 2004 2003 2002
($ amounts in millions) ---------- ----------- ----------
Insurance and investment product fees revenues, net of eliminations..... $ 32.0 $ 60.8 $ 61.8
Direct other operating expenses, net of deferrals....................... 38.7 72.8 74.4
During 2004, we incurred a $3.6 million after-tax charge for an impairment of goodwill related to Main Street,
offset by a $2.7 million after-tax gain on the sale of the broker-dealer operations. Both the charge and the
gain were recorded to realized investment gains and losses. In addition, we incurred a $10.2 million after-tax
charge related to lease termination costs, offset by a $4.4 million after-tax gain related to curtailment
accounting in connection with employee benefit plans.
In 2003, we acquired the remaining interest in PFG Holdings, Inc., or PFG, the holding company for our private
placement operation, for initial consideration of $16.7 million. Under the terms of the purchase agreement, we
may be obligated to pay additional consideration of up to $86.5 million to the selling shareholders, including
$10.0 million during 2005 through 2007 based on certain financial performance targets being met, and the
balance in 2008 based on the appraised value of PFG as of December 31, 2007. During the year ended December 31,
2004, we paid $3.0 million under this obligation.
In 2002, we acquired the variable life and variable annuity business of Valley Forge Life Insurance Company (a
subsidiary of CNA Financial Corporation). See Note 3 to our consolidated financial statements in this Form 10-K
for further information regarding the acquisition of Valley Forge Life Insurance Company.
32
Asset Management
In March 2004, we acquired the remaining minority interests in Walnut Asset Management LLC and Rutherford Brown
& Catherwood, LLC for $2.1 million. This additional purchase price was accounted for as a step-acquisition by
Phoenix Investment Partners and was allocated to goodwill and definite-lived intangible assets, accordingly.
In 2002 we acquired a 60% equity interest in Kayne Anderson Rudnick, LLC, or Kayne Anderson Rudnick, for $102.4
million. This acquisition was accounted for using the purchase method under FASB Statement No. 141, Business
Combinations, or SFAS 141. In connection with this acquisition, the Acquisition Agreement and the related
Amended and Restated Operating Agreement resulted in the creation of mandatorily redeemable noncontrolling
interests, or noncontrolling interests, representing 40% of Kayne Anderson Rudnick's members' interests held by
certain of its members. Certain of these noncontrolling interests in Kayne Anderson Rudnick have scheduled
redemption dates (5% at each date) as of December 31, 2004, 2005, and 2006, at a price based upon operating
results of Kayne Anderson Rudnick for the year then ended. These 15% noncontrolling interests, as well as the
remaining 25% of Kayne Anderson Rudnick's noncontrolling interests, are mandatorily redeemable upon death of a
member and, as such, are reported as a liability on our consolidated balance sheet in accordance with FASB
Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity, or SFAS 150. Separate agreements in connection with the 25% noncontrolling interests held by certain
Kayne Anderson Rudnick's members give the noncontrolling interest-holders the right to require Phoenix
Investment Partners to redeem all or a part of their noncontrolling interest at specified future dates and at a
price determined based upon operating results of Kayne Anderson Rudnick. Conversely, the terms of these
agreements also give Phoenix Investment Partners the right to redeem the outstanding minority interests at the
same price as the noncontrolling interest-holder may exercise its right to sell. These agreements may expire
unexercised should Kayne Anderson Rudnick's operating results decline from the initial measurement date.
In addition to the initial cost of the purchase of Kayne Anderson Rudnick, in the first quarter of 2004 we made
a payment of $30.1 million in contingent consideration, which was based upon management fee revenues for the
purchased business through the end of 2003. Phoenix Investment Partners had accrued for this payment as of
December 31, 2003 and allocated it entirely to goodwill.
In January 2004, one member of Kayne Anderson Rudnick accelerated his portion of the 15% noncontrolling
interest redemption, at which time we acquired an additional 0.3% of the company. Phoenix Investment Partners
has accrued $11.4 million related to the remaining 4.9% redemption required as of December 31, 2004, has
accounted for this payment as a step-acquisition and has allocated the purchase price to goodwill and
definite-lived intangible assets, accordingly. The two remaining 4.9% noncontrolling interest redemptions will
be accounted for as step-acquisitions as the purchase price contingency resolves.
During 2004, we purchased a contract to manage the assets of the FMI Sasco Contrarian Value Fund, an open-end
mutual fund. This transaction is not material to our consolidated financial sta