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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, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 333-55268
THE PHOENIX COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-0493340
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One American Row, Hartford, Connecticut 06102-5056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(860) 403-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common stock, $.01 par value New York Stock Exchange
7.45% Quarterly Interest Bonds, due 2032 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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. [ ]
As of February 28, 2002, the aggregate market value of voting common equity held by non-affiliates of the registrant was
$1,798,688,767 based on the last reported sale price of the registrant's common stock on the New York Stock Exchange. On
February 28, 2002, the registrant had 100,485,406 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the
end of the registrant's fiscal year are incorporated by reference in Part III.
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TABLE OF CONTENTS
Item No. Description Page
-------- ----------- -----------
Part I 1 Business................................................................................. 3
2 Properties............................................................................... 18
3 Legal Proceedings........................................................................ 18
4 Submission of Matters to a Vote of Security Holders...................................... 20
Part II 5 Market of Registrant's Common Equity and Related Stockholder Matters..................... 20
6 Selected Financial Data.................................................................. 20
7 Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................................ 23
7A Quantitative and Qualitative Disclosures About Market Risk............................... 47
8 Financial Statements and Supplementary Data.............................................. 50
Report of Independent Accountants........................................................ F-1
Consolidated Balance Sheets as of December 31, 2000 and 2001............................. F-2
Consolidated Statements of Income For the Years Ended December 31, 1999, 2000 and 2001... F-3 .....................................
Consolidated Statements of Cash Flows For the Years Ended December 31, 1999, 2000 and
2001..................................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income
For the Years Ended December 31, 1999, 2000 and 2001..................................... F-6
Notes to Consolidated Financial Statements............................................... F-7
Supplemental Unaudited Financial Information............................................. F-49
9 Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure..................................................................... 50
Part III 10 Directors and Executive Officers of the Registrant....................................... 51
11 Executive Compensation................................................................... 51
12 Security Ownership of Certain Beneficial Owners and Management........................... 52
13 Certain Relationships and Related Transactions........................................... 52
Part IV 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... 52
Signatures............................................................................... 53
Report of Independent Accountants on Financial Statement Schedule........................ F-50
Financial Statement Schedule............................................................. F-51
Exhibit Index............................................................................ E-1
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PART I
Item 1. Business
Description of Business
We are a leading provider of wealth management products and services offered through a variety of select advisors and
financial services firms to serve the accumulation, preservation and transfer needs of the affluent and high-net-worth
market, businesses and institutions. We refer to our products and services together as our wealth management solutions.
We offer a broad range of life insurance, annuity and investment management solutions through a variety of distributors.
These distributors include affiliated and non-affiliated advisors and financial services firms who make our solutions
available to their clients.
The affluent and high-net-worth market is a growing market with significant demand for customized products and services.
We define affluent as those households that have annual income of at least $100,000 or net worth, excluding primary
residence, of at least $500,000; and we define high-net-worth, a subset of the affluent category, as those households
that have net worth, excluding primary residence, of over $1,000,000. Our wealth management solutions are designed to
assist advisors and their clients in this target market to achieve three main goals:
o the accumulation of wealth, primarily during an individual's working years;
o the preservation of income and wealth during retirement and following death; and
o the efficient transfer of wealth in a variety of situations, including through estate planning, business
continuation planning and charitable giving.
We provide our wealth management solutions to the affluent and high-net-worth market through an array of distribution
channels, including:
o non-affiliated financial intermediaries such as national and regional broker-dealers, financial planning
firms, advisor groups and other insurance companies; and
o our affiliated retail producers, most of whom are registered representatives of our wholly-owned retail
broker-dealer WS Griffith Advisors, Inc. ("WS Griffith").
Segments
We provide our wealth management solutions through two operating segments-- Life and Annuity and Investment Management.
Both segments serve the affluent and high-net-worth market which presents opportunities to leverage their capabilities
and relationships. In addition, Investment Management, through Phoenix Investment Partners, Ltd. ("PXP"), a wholly-owned
subsidiary, and its affiliated asset managers, manages both the general account of our Life and Annuity business and
many of the portfolios available through Life and Annuity's product lines.
We report our remaining activities in two additional non-operating segments-- Venture Capital and Corporate and Other.
Venture Capital includes investments primarily in the form of limited partner interests in venture capital funds,
leveraged buyout funds and other private equity partnerships sponsored and managed by third parties. Corporate and Other
includes unallocated capital and expenses as well as certain businesses not of sufficient scale to report independently.
These segments are significant for financial reporting purposes, but do not contain products or services relevant to our
core wealth management operations.
Life and Annuity Segment
Through Life and Annuity, we offer a variety of life insurance and annuity products through affiliated and
non-affiliated distributors. We believe our competitive advantage in this segment consists of five main components:
o our innovative products;
o our diversified asset management capability;
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o our distribution relationships with institutions that have established customer bases in our target market;
o our ability to combine products and services that distributors and their clients find attractive; and
o our underwriting expertise.
Life and Annuity Products
Our life insurance products consist of variable universal life, universal life, whole life, term life and other
insurance products. Because of our target market, we are also a leading writer of second-to-die life insurance.
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 that gives the policyholder
flexibility in investment choices and, depending on the product, flexibility in premium payments and coverage amounts,
with limited guarantees. The policyholder may direct premiums and cash value into a variety of separate investment
accounts or to our general account (i.e., our aggregate assets other than those allocated to separate accounts). In the
separate investment accounts, the policyholder bears the entire risk of the investment results. We collect specified
fees for the management of these various investment accounts and the net return is credited directly to the
policyholder's account. With some variable universal products, by maintaining a certain premium level the policyholder
receives guarantees that protect the policy's death benefit if, due to adverse investment experience, the policyholder's
account balance is zero. We retain the right within limits to adjust the fees we assess for providing administrative
services. We also collect fees to cover mortality costs; these fees may be adjusted by us but may not exceed
contractually defined maximum levels.
Universal Life. Universal life products provide insurance coverage on the same basis as variable universal life
products, except that premiums, and the resulting accumulated balances, are allocated only to our general account for
investment. Universal life products may allow the policyholder to increase or decrease the amount of death benefit
coverage over the term of the policy, and also may allow the policyholder to adjust the frequency and amount of premium
payments. We credit premiums, net of specified expenses, to an account maintained for the policyholder. We credit
interest to the account at rates that we determine, subject to specified minimums. Specific charges are made against the
account for the cost of insurance protection and for expenses. We also collect fees to cover mortality costs; these fees
may be adjusted by us but may not exceed contractually defined maximum levels.
Term Life. Term life insurance provides a guaranteed benefit upon the death of the insured within a specified time
period, in return for the periodic payment of premiums. Specified coverage periods range from one to twenty years, but
not longer than the period over which premiums are paid. Premiums may be level for the coverage period or may vary. Term
insurance products are sometimes referred to as pure protection products, in that there are normally no savings or
investment elements. Term contracts expire without value at the end of the coverage period. Although we do not consider
term life insurance to be a core element of our strategic focus on the provision of wealth management solutions, we
continue to offer this product because many of our distribution sources expect a full product offering. Our term
insurance policies allow policyholders to convert to permanent coverage without evidence of insurability.
Whole Life. Whole life insurance products provide a guaranteed benefit over the lifetime of the insured in return for
the periodic payment of a fixed premium over a predetermined period. Premium payments may be required for the length of
the contract period to a specified age or for a specified period and may be level or change in accordance with a
predetermined schedule. Whole life insurance includes policies that provide a participation feature in the form of
dividends. Policyholders may receive dividends in cash or apply them to increase death benefits, provide paid-up
additional insurance or reduce the premiums required. Since our demutualization, we have continued to offer whole life
policies. We are subject to statutory restrictions limiting the amount of profits we can earn on such policies written
after the demutualization. We believe, however, that the impact of these restrictions on our earnings will be
immaterial, in part because we do not expect sales of participating whole life policies to be significant.
We offer a variety of variable and fixed annuities to meet the accumulation and preservation needs of the affluent and
high-net-worth market. These products enable the contractholder to save for retirement and also provide options which
protect against outliving assets during retirement. Our major sources of revenues from annuities are mortality and
expense fees charged to the contractholder, generally determined as a percentage of the market value of the underlying
assets under management.
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Annuities. While our variable annuity business has long been profitable, historically, our product offerings were
relatively limited, with only PXP funds as investment options and sales primarily attributable to our affiliated retail
distribution channel. In 1999, we began to enhance our variable annuity business by expanding product choices and
broadening our distribution sources. We also strengthened our management team by adding experienced management
personnel, hiring a dedicated wholesaling team of product specialists to market our product lines to our distribution
sources and expanding our investment options to be competitive in the broker-dealer market. In addition, during 2001 we
introduced two fixed annuities and one immediate annuity product.
Variable annuity contractholders can direct their investments into various investment accounts. Most investment accounts
are separate accounts of Phoenix Life Insurance Company or of its life insurance subsidiaries (the "Life Companies")
(i.e., the investments in each account are maintained separately from our general account and other separate accounts,
and are not part of the general liabilities of the Life Companies). Risks associated with investments in the separate
accounts are borne entirely by the contractholders. The contractholder may also choose to allocate all or a portion of
the assets to our general account, in which case we credit interest at rates we determine, subject to certain minimums.
Contractholders also may elect certain death benefit guarantees, for which they are assessed a specific charge.
Fixed annuities are general account products, which means that we bear the investment risk as funds are invested in our
general account, and a minimum fixed interest rate, reset from time to time, is credited to the contractholder's
account. Fixed annuities are useful as accumulation tools and may also be attractive as income preservation tools for
investors who wish to reduce their exposure to equity market volatility. Our fixed annuity products are single premium
products designed for broker-dealer and bank distribution. The broker-dealer product is invested in our general account
but provides for adjustments to the surrender value based on changes in interest rates if the contractholder withdraws
funds at any time other than at specified intervals.
Immediate annuities are purchased by means of a single lump sum payment and begin paying periodic income immediately. We
offer fixed and variable options. We believe this product is especially attractive to 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.
Life and Annuity is focused on the development of other products and distribution relationships that respond to the
affluent and high-net-worth market's demand for wealth management solutions.
Private Placement Life and Annuity Products. As part of our strategy to broaden our presence in the high-net-worth
market, we acquired majority ownership of PFG Holdings, Inc. ("PFG") in 1999. PFG provides individually customized life
and annuity offerings that include Corporate Owned Life Insurance ("COLI"), single premium life, second-to-die life and
variable annuity products. These products have minimum deposits of over $500,000, targeting the wealthiest segment of
the high-net-worth market. The average face amount of life insurance policies sold by PFG in 2001 was $17.4 million and
the average annuity deposit was $2.4 million.
Executive Benefits. Executive benefits are designed for corporations to fund special deferred compensation plans and
benefit programs for key employees. We offer a range of products to the executive benefits market. We view these
products, which are variations on our variable universal life products, as a source of growing fee-based business.
Trust Services. Through January 8, 2002 we provided trust services on a limited basis through our wholly-owned
Connecticut chartered trust company. On January 9, 2002, we converted our Connecticut chartered trust company to a
national trust bank, which will provide comprehensive trust, custody and other fiduciary services nationwide. We believe
that a nationwide trust capability will strengthen our relationships with distributors by enabling us to provide them
with directed trustee, custody and other trust-related fiduciary services for their clients who employ trusts as wealth
preservation and transfer tools. We are considering how to develop our trust capabilities to complement the services we
provide to distributors.
Life and Annuity Distribution
We target a broad range of distribution relationships with advisors and distribution entities that we consider to have
exceptional access to our target market. We seek to build relationships with distributors who are, or who have access
to, advisors to the affluent and high-net-worth market.
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Non-affiliated Distribution
We began to use non-affiliated distribution in 1954, primarily by selling life insurance products through agents of
other insurance companies. For many years, non-affiliated distribution has represented a significant portion of our
sales and in recent years we increased our emphasis on this distribution source.
Since late 1999, we significantly strengthened our wholesaling teams, in order to enhance our relationships with
distributors in each of our product areas. As of December 31, 2001, we employed fifty-seven life insurance wholesalers,
thirty-three variable annuity wholesalers and twenty-seven investment management wholesalers, compared to forty-two, one
and twenty-four, respectively, as of December 31, 1999.
During the years 2001 and 2000, 81% and 70%, respectively, of total life insurance sales, as measured by new annualized
and single premiums, were from non-affiliated distribution sources. Variable annuity sales through non-affiliated
distribution accounted for 80% and 42% of gross annuity deposits during 2001 and 2000, respectively.
The Team Phoenix Approach. In addition to broadening our distribution system by developing new relationships, it is our
strategy to deepen our market penetration by selling a greater array of products through existing distribution sources.
We seek to execute this strategy through collaborative account development, whereby our life insurance, annuity and
investment management wholesalers introduce one another to distributors with whom they have relationships, and encourage
those distributors to sell additional categories of our products. This Team Phoenix approach, which we initiated in
1999, often involves joint marketing presentations and specialized services to advisors. We believe having many of the
same investment choices available in each of our product lines contributes to the success of this approach since, in our
experience, a distributor already comfortable with our investment options in one product line is generally more
receptive to the idea of selling additional product lines.
National and Regional Broker-Dealers. National and regional broker-dealers are those brokerage firms that engage
individual advisors as employees rather than as independent contractors. To meet the evolving wealth management needs of
their customers, national and regional broker-dealers are beginning to offer products, such as life insurance, in which
they may have little experience. Simultaneously, many of these firms are seeking to rationalize their relationships with
product providers in favor of those that offer a range of products together with services designed to support advisors'
sales efforts. We believe our ability to offer wealth management solutions based on an array of life insurance, annuity
and investment management products positions us to benefit from these trends. For example, in 2001 our life products
represented 13% of Merrill Lynch Life Agency's non-proprietary life insurance sales. During that year, Merrill Lynch's
sales of our variable universal life products increased 15% by premium and its sales of all our products combined
increased 12%. Despite virtually no sales in 2000, Merrill Lynch's sales of our annuity products reached $246 million in
2001, after a successful product launch in September. The leading non-proprietary annuity sold in Merrill Lynch's system
in 2001 was our product. Our market share of life insurance products sold through A.G. Edwards also has grown
significantly, due in part to the wealth transfer training seminars we have conducted with advisors employed by that
firm. We were A.G. Edwards' fourth most significant life carrier in 2000 and 2001 in terms of sales, compared with our
position as eleventh in 1998.
Financial Planning Firms. Financial planning firms are brokerage firms that engage individual advisors as independent
contractors rather than as employees. Financial planning firms have begun to show significant interest in expanding
their offerings to include wealth preservation and transfer products. To capitalize on this trend, we focus on the
development of relationships directly with the financial planning firm rather than with the individual financial
planners. This entity-focused approach permits us to maximize the number of individual registered representatives who
potentially may sell our products. As an example of our focus on financial planning firms, in 2000 we exceeded $1.4
million in annualized life premiums through Financial Services Corporation ("FSC"). FSC, a leading financial planning
firm, is a subsidiary of Sun America. We are one of seven core life insurance carriers for the FSC Access Group, an
internal FSC producer group.
Advisor Groups. The recent industry trend toward affiliations among small independent financial advisors has led to
advisor groups becoming a distinct class of distributors. We believe we have a particularly strong position as a
provider of life insurance products through Partners Marketing Group, Inc. ("PartnersFinancial") which, since 1999, has
been an important component of the National Financial Partners ("NFP") organization. PartnersFinancial is a marketing
organization with reported revenues of $85.5 million for 2001 from life insurance broker-dealer and executive benefit
operations. We are one of PartnersFinancial's six core life carriers. We recently developed a co-branded second-to-die
life insurance product for NFP and, in early 2000, we began selling our products through NFP Securities, the
broker-dealer for NFP.
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Insurance Companies. Insurance companies have been moving their agents into an advisor/planner role, resulting in a
need to provide their agents, particularly their top producers, with a wider selection of life insurance products to
sell. Insurance companies responded to this need, in part, by negotiating arrangements with third party providers,
including other insurance companies. We are taking advantage of this trend by developing distribution relationships with
financial services providers such as AXA Financial Inc. ("AXA") and its outbrokerage outlet for internal producers, AXA
Network. In addition, we continue to maintain relationships with individual agents of other companies and independent
agents.
In March 2001, we entered into an agreement with a subsidiary of State Farm to provide various products and services to
State Farm and its subsidiaries and policyholders, including estate, retirement, executive benefits and charitable gift
planning. The agreement also offers us the opportunity to provide to State Farm's affluent customers, through qualified
State Farm agents, additional life and annuity products and services not previously available from those agents. We
trained and certified about 20% of State Farm's ten thousand securities-licensed agents, and we are certifying new
agents at a rate of 700 to 800 per month. Our relationship with State Farm gives us potential access to approximately
30% of the high-net-worth households in the United States.
Emerging Distribution Sources. PFG offers private placement life and annuity products through a variety of distribution
sources with access to the high-net-worth market including: family offices, financial institutions, accountants and
attorneys. We also offer our life and annuity products through non-traditional sources such as private banks and private
banking groups within commercial banks.
Affiliated Distribution
Our affiliated retail distribution channel consists primarily of career producers of Phoenix Life Insurance Company
("Phoenix Life"). Substantially all of our career producers are licensed securities representatives of our wholly-owned
broker-dealer, WS Griffith. Our career producers principally sell Phoenix Life products, but may sell the products of
other companies as well. In 2001, Phoenix Life products represented 70% of WS Griffith's sales from variable annuity and
life products, 76% of its total variable annuity deposits and 57% of its total variable universal life premiums. WS
Griffith recorded a 45% increase in registered investment management fees in 2001 compared to 2000. WS Griffith has over
900 affiliated retail producers.
To complement our affiliated distribution capability, we also own a majority interest in Main Street Management Company
("Main Street Management"), a broker-dealer with approximately 250 registered representatives and a strong focus on
variable products and mutual funds.
Life and Annuity Support and Services
We believe we have a competitive advantage in Life and Annuity due to our practice of providing distributors with a
variety of services, including:
o market education programs designed to help advisors better understand the financial product ownership
patterns of the affluent and high-net-worth market and to assist advisors in marketing to specific customer
segments such as senior corporate executives, business owners and high-net-worth households;
o marketing programs, including special events, that provide distributors access to the affluent and
high-net-worth market;
o 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 nine attorneys with an average of approximately
twenty years experience, who combine their advice with tailored presentations, educational materials and
specimen legal documents;
o separate nationwide teams of 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;
o investment management and investment allocation strategies including our Complementary Investment Analysis
tool which identifies investment options offered both by us and third parties that are suitable for an
individual's allocation needs;
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o an underwriting team with significant experience in evaluating the financial and medical underwriting risks
associated with affluent and high-net-worth individuals. These individuals generally purchase high face-value
policies, requiring more extensive underwriting analysis; and
o internet-accessible information that makes it easier for our distributors to do business with us. This
includes interactive product illustrations, educational and sales tools, and online access to forms,
marketing materials and policyholder account information.
Underwriting
Insurance underwriting is the process of examining, accepting or rejecting insurance risks, and classifying those
accepted, in order to charge appropriate premiums or assess appropriate mortality charges for each accepted risk.
Underwriting also determines the amount and type of reinsurance levels appropriate for a particular type of risk. By
using reinsurance, we can limit our risk.
We believe we have particular expertise in evaluating the underwriting risks relevant to our target market. We believe
this expertise enables us to make appropriate underwriting decisions, including, in some instances, the issuance of
policies on more competitive terms than other insurers would offer. Phoenix Life has a long tradition of underwriting
innovation. Beginning in 1955, we were among the first insurance companies to offer reduced rates to women. We believe
we were the second company to offer reduced rates for non-smokers, beginning in 1967. Our underwriting team includes
doctors and other medical staff to ensure, among other things, that we are focused on current developments in medical
technology.
Our underwriting standards for life insurance are intended to result in the issuance of policies that produce mortality
experience consistent with the assumptions used in product pricing. The overall profitability of our life insurance
business depends to a large extent on the degree to which our mortality experience compares to our pricing assumptions.
Our underwriting is based on our historical mortality experience, as well as on the experience of the insurance industry
and of the general population. We continually compare our underwriting standards to those of the industry, generally to
assist in managing our mortality risk and to stay abreast of industry trends.
Our life insurance underwriters evaluate policy applications on the basis of the information provided by the applicant
and others. We use a variety of methods to evaluate certain policy applications, such as those where the size of the
policy sought is particularly large, or where the applicant is an older individual, has a known medical impairment or is
engaged in a hazardous occupation or hobby. Consistent with industry practice, we require medical examinations and other
tests depending upon the age of the applicant and the size of the proposed policy.
Our COLI policies covering multiple lives are issued on a guaranteed issue basis, within specified limits per life
insured, whereby the amount of insurance issued per life on a guaranteed basis is related to the total number of lives
being covered and the particular need for which the product is being purchased. Guaranteed issue underwriting applies to
employees actively at work, and product pricing reflects the additional guaranteed issue underwriting risk.
Life and Annuity Competition
We face significant competition in our life insurance and variable annuity businesses from a wide variety of financial
institutions, including: insurance companies, investment management companies, banks, broker-dealers, and financial
planning firms. Our competitors include larger and, in some cases, more highly rated insurance companies and other
financial services companies. Some competitors have penetrated more markets and have greater resources than us. Many
competitors offer similar products and use similar distribution sources.
As we continue to focus on the development of our non-affiliated distribution system, we increasingly must compete with
other providers of life insurance and annuity products to attract and maintain relationships with productive
distributors that have the ability to sell our products. Our ability to attract distributors for our life insurance and
annuity products could be adversely affected if for any reason our products became less competitive or concerns arose
about our asset quality or ratings.
We also face competition for access to distributors of life insurance and variable annuity products. Much of this
competition is based on the pricing of products and the advisors' or distributors' compensation structures.
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Life and Annuity Financial Information
See Management's Discussion and Analysis in this Form 10-K for Life and Annuity segment financial information.
Investment Management Segment
We conduct activities in Investment Management largely through PXP and its subsidiaries, comprising two lines of
business-- private client and institutional. Through our private client line of business, we provide investment
management services principally on a discretionary basis, with products consisting of open-end mutual funds and managed
accounts. Managed accounts include intermediary programs sponsored and distributed by non-affiliated broker-dealers and
direct managed accounts 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 line of business, we provide discretionary and non-discretionary investment management
services primarily to corporations, multi-employer retirement funds and foundations, as well as to endowment, insurance
and other special purpose funds. In addition, we offer our institutional clients alternative financial products,
including structured finance products and closed-end funds. Structured finance products include collateralized debt and
bond obligations backed by portfolios of public high yield bonds, emerging markets bonds, commercial mortgage-backed and
asset-backed securities and/or bank loans.
We conduct activities in Investment Management largely through PXP and its subsidiaries. Investment Management also
includes our minority investment in Aberdeen Asset Management plc ("Aberdeen"). We acquired 22% of the common stock of
Aberdeen in a series of transactions from 1996 through May 2001.
Affiliated Asset Managers
We provide investment management services through eleven affiliated asset managers. We provide our affiliated asset
managers with a consolidated platform of distribution and administrative support. Each manager retains autonomy with
respect to the investment process while we monitor performance and ensure that each manager adheres to its stated
investment style. Our affiliated managers, and their respective styles, products and assets under management, are as
follows:
- -------------------------------------- ------------------------------- --------------------------------- ---------------------
Assets Under
Management at
Affiliated Advisor/ December 31, 2001
PXP Ownership/Location Investment Styles Products (in billions)
- -------------------------------------- ------------------------------- --------------------------------- ---------------------
- -------------------------------------- ------------------------------- --------------------------------- ---------------------
GoodwinSM Capital Advisors(1) Fixed Income - Mutual Funds
100% Sector Rotation Institutional Accounts
Hartford, CT Structured Finance Products
Phoenix Life General Account $16.3
- -------------------------------------- ------------------------------- --------------------------------- ---------------------
Seneca Capital Management LLC Equities - Mutual Funds
("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 $15.0
- -------------------------------------- ------------------------------- --------------------------------- ---------------------
Roger Engemann and Associates, Inc. Equities - Mutual Funds
("Engemann") / Classic Growth Sponsored Managed Accounts
100% / Pasadena, CA Direct Managed Accounts $7.6
- -------------------------------------- ------------------------------- --------------------------------- ---------------------
Duff & Phelps Investment Management Equities - Mutual Funds
Co. ("DPIM") / Core Sponsored Managed Accounts
100% / Chicago, IL Fixed Income - Institutional Accounts
Core Closed-end Funds $6.9
- -------------------------------------- ------------------------------- --------------------------------- ---------------------
OakhurstSM Asset Managers(1) Equities - Mutual Funds
100% / Scotts Valley, CA Systematic Value $2.1
- -------------------------------------- ------------------------------- --------------------------------- ---------------------
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- -------------------------------------- ------------------------------- --------------------------------- ---------------------
Assets Under
Management at
Affiliated Advisor/ December 31, 2001
PXP Ownership/Location Investment Styles Products (in billions)
- -------------------------------------- ------------------------------- --------------------------------- ---------------------
Zweig Fund Group ("Zweig") / Equities/Fixed Income - Mutual Funds
100% / New York, NY Tactical Asset Allocation Closed-end Funds
Market Neutral $2.0
- -------------------------------------- ------------------------------- --------------------------------- ---------------------
HollisterSM Investment Management(1) Equities - Mutual Funds
/ 100% / Traditional Value Managed Accounts
Sarasota, FL Institutional Accounts $1.0
- -------------------------------------- ------------------------------- --------------------------------- ---------------------
Walnut Asset Management LLC Equities - Direct Managed Accounts
("Walnut") / Relative Value Institutional Accounts
75% / Philadelphia, PA Fixed -
Quality Fixed Income $0.7
- -------------------------------------- ------------------------------- --------------------------------- ---------------------
Aberdeen Fund Managers(2) / Equities - Mutual Funds
Ft Lauderdale, FL International $0.4
- -------------------------------------- ------------------------------- --------------------------------- ---------------------
Capital West Asset Management, LLC Equities - Direct Managed Accounts
("CapWest") / 65% / Denver, CO Quantitative Value-Biased Institutional Accounts
Large Cap
Core Small Cap $0.1
- -------------------------------------- ------------------------------- --------------------------------- ---------------------
Kayne Anderson Rudnick Investment Equities - Sponsored Managed Accounts
Management, LLC ("KAR")(3) / 60% / Quality at Reasonable Price Direct Managed Accounts
Los Angeles, CA Mutual Funds (see footnote 3)
- -------------------------------------- ----------------------------------------------------------------- ---------------------
Total Assets Under Management $52.1
- -------------------------------------- ----------------------------------------------------------------- ---------------------
(1) A division of Phoenix Investment Counsel, Inc., an indirect wholly-owned subsidiary of PXP.
(2) A subsidiary of Aberdeen.
(3) A majority interest in KAR was acquired on January 29, 2002. At the date of closing, accounts totaling $7.5
billion in assets under management had consented to the transaction.
Investment Management also includes a minority investment by Phoenix Life in Aberdeen, a Scottish investment management
company with institutional and retail clients in the United Kingdom, as well as in continental Europe, Asia, Australia
and the U.S. Aberdeen has offices in seven countries, including Scotland, England, Singapore and the U.S. Our strategic
investment in Aberdeen provides us with a means of participating in global asset management.
Investment Management Products
Private Client Products
Managed Accounts. We provide investment management services through participation in sixty-one intermediary managed
account programs sponsored by various broker-dealers such as Merrill Lynch and Morgan Stanley Dean Witter. These
programs enable an advisor's client to select PXP 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. In 2001, we were one of the largest managers of
client assets in the "Consults" intermediary managed account program of Merrill Lynch. As of December 31, 2001 we
managed 39,010 accounts relating to such intermediary managed account programs, representing approximately $5.8 billion
of assets under management.
Mutual Funds. Our affiliated asset managers are investment advisers and/or sub-advisers to fifty-four open-end mutual
funds, which had aggregate assets under management of approximately $11.2 billion as of December 31, 2001. These mutual
funds are available primarily to retail investors. Fourteen of these funds are included as investment choices to
purchasers of our variable life and variable annuity products.
Institutional Products
Institutional Accounts. We have over six hundred 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.
10
Closed-End Funds. We manage the assets of five closed-end funds, each of which is traded on the New York Stock
Exchange: Duff & Phelps Utility Tax-Free Income, Inc.; Duff & Phelps Utility and Corporate Bond Trust; Duff & Phelps
Utilities Income, Inc.; The Zweig Fund, Inc.; and The Zweig Total Return Fund, Inc.
Structured Finance Products. We manage eight structured finance products, and also act as a sub-adviser to a structured
finance product sponsored by a third party. These products are collateralized debt and bond obligations backed by
portfolios of high yield bonds, emerging markets bonds and/or asset-backed securities.
Phoenix Life General Account and Related Assets. PXP manages most of the assets of the Life Companies' general
accounts, as well as other assets such as the Phoenix Life pension plan.
Investment Management Distribution and Marketing
We distribute our private client Investment Management products through advisors at non-affiliated national and regional
broker-dealers, advisor groups, and financial planning firms, as well as through WS Griffith and Main Street Management.
As of December 31, 2001, we employed twenty-seven wholesalers, supported by marketing staff, technology, and planning
and educational tools, to call on advisors at these distribution channels. All eleven of our asset managers are marketed
exclusively through this wholesaling platform, providing us with both operational efficiencies and significant
cross-selling opportunities.
We also have an Institutional Marketing Group, which markets our complete institutional product offering to consultants
and other institutional clients. This shared platform, which was first set up in 2000, is complemented by experienced
institutional salespersons at several of our affiliated asset managers.
We seek to expand private client distribution and marketing of our Investment Management products by leveraging the
relationships of our affiliated asset managers with broker-dealers to get additional asset managers represented in
existing intermediary programs, as well as by selling our mutual fund offerings to managed account clients. Similarly,
we expect to leverage our existing institutional investment advisory relationships by offering consultants and their
clients centralized access to all of our investment management styles, including alternative financial products.
Distribution of Private Client Products
We distribute managed accounts through financial intermediaries such as broker-dealers, and directly through our
affiliated asset managers. In particular, we attempt to leverage our distribution relationships for Life and Annuity
products to enhance our distribution of managed accounts. We believe distributors who are familiar with our Life and
Annuity products are more receptive to selling our managed account products. We distribute our mutual fund products
through non-affiliated national and regional broker-dealers, financial advisors and other financial institutions,
representing approximately 2,400 selling agreements and 23,000 registered representatives. We also distribute mutual
funds through our wholly-owned retail broker-dealer, WS Griffith.
Distribution of Institutional Products
We direct our institutional marketing efforts primarily toward investment management consultants who are retained by
institutional investors to assist in competitive reviews of potential investment managers. These consultants recommend
investment managers to their institutional clients based on their review of investment managers' performance histories
and investment styles. We maintain relationships with these consultants and provide information and materials to them in
order to facilitate their review of our funds.
11
PXP Assets Under Management
The following table presents information regarding the assets under management by PXP as of the dates indicated:
Asset Flow Summary
For the Year Ended December 31,
-------------------------------------------------
1999 2000 2001
------------- -------------- --------------
Private Client Products: (in millions)
Mutual Funds:
Assets under management, beginning of period.......................... $14,407.4 $ 18,073.4 $ 14,716.7
Deposits and reinvestments......................................... 1,657.8 2,068.5 1,817.8
Redemptions and withdrawals........................................ (3,216.3) (3,492.0) (2,756.4)
Asset flows from acquisitions, dispositions and reclassifications(1) 2,099.8 -- --
Performance (net of fees).......................................... 3,124.7 (1,933.2) (2,556.5)
------------- -------------- --------------
Assets under management, end of period............................. $ 18,073.4 $ 14,716.7 $ 11,221.6
============= ============== ==============
Intermediary Programs:
Assets under management, beginning of period.......................... $ 5,969.6 $8,689.7 $8,404.1
Deposits and reinvestments......................................... 2,002.5 3,668.9 2,607.7
Redemptions and withdrawals........................................ (876.1) (1,408.0) (2,316.0)
Asset flows from acquisitions, dispositions and reclassifications(5) -- -- 10.7
Performance (net of fees).......................................... 1,593.7 (2,546.5) (2,886.9)
------------- -------------- --------------
Assets under management, end of period................................ $ 8,689.7 $8,404.1 $5,819.6
============= ============== ==============
Direct Managed Accounts:
Assets under management, beginning of period.......................... $ 2,749.1 $3,509.9 $3,056.0
Deposits and reinvestments......................................... 140.7 200.5 114.2
Redemptions and withdrawals........................................ (158.2) (211.8) (230.4)
Asset flows from acquisitions, dispositions and
reclassifications(2)(5)......................................... 433.0 (130.0) 737.8
Performance (net of fees).......................................... 345.3 (312.6) (658.9)
------------- -------------- --------------
Assets under management, end of period................................ $3,509.9 $3,056.0 $3,018.7
============= ============== ==============
Institutional Products:
Assets under management, beginning of period.......................... $ 30,361.3 $ 34,328.4 $ 30,416.0
Deposits and reinvestments......................................... 5,843.7 5,572.5 4,989.0
Redemptions and withdrawals........................................ (5,025.6) (7,355.6) (3,766.9)
Asset flows from acquisitions, dispositions and
reclassifications(2)(3)(4)(5)................................... 1,246.5 (3,206.0) 1,054.1
Performance (net of fees).......................................... 1,902.5 1,076.7 (662.0)
------------- -------------- --------------
Assets under management, end of period................................ $ 34,328.4 $ 30,416.0 $ 32,030.2
============= ============== ==============
Total:
Assets under management, beginning of period.......................... $ 53,487.4 $ 64,601.4 $ 56,592.8
Deposits and reinvestments......................................... 9,644.7 11,510.4 9,528.7
Redemptions and withdrawals........................................ (9,276.2) (12,467.4) (9,069.7)
Asset flows from acquisitions, dispositions and reclassifications.. 3,779.3 (3,336.0) 1,802.6
Performance (net of fees).......................................... 6,966.2 (3,715.6) (6,764.3)
------------- -------------- --------------
Assets under management, end of period................................ $ 64,601.4 $ 56,592.8 $ 52,090.1
============= ============== ==============
- -------------
(1) Includes asset inflows of $2.1 billion related to the Zweig acquisition in 1999.
(2) Includes asset inflows of $0.7 billion related to the Walnut acquisition in 2001.
(3) Includes asset outflows of $3.3 billion in 2000 related to the sale of Cleveland operations.
(4) Includes asset inflows of $1.7 billion related to the Zweig acquisition and $0.8 billion related to the Phoenix
IPO in 1999 and 2001, respectively.
(5) Includes asset inflows of $0.1 billion from CapWest in 2001.
12
Investment Management Competition
We face substantial competition in all aspects of our investment management business.
In our private client business, we compete for affluent and high-net-worth customers with a large number of investment
management firms and others. We compete for mutual fund business with hundreds of fund companies. Many of our
competitors in the mutual fund industry are larger, have been established longer, offer less expensive products, have
deeper penetration in key distribution channels and have more resources. Competition in the private client segment is
based on several factors, including: investment performance, the ability to successfully penetrate distribution
channels, service to advisors and their clients, product development that meets the changing needs of advisors and their
clients, fees and expense control.
The institutional asset management business is also highly competitive, with over 23,000 registered investment advisory
firms active nationwide. Consolidation activity in recent years has increased the concentration of competitors within
certain asset classes. We compete with other investment management firms, insurance companies, banks and mutual fund
companies, many of which are larger and have greater resources. We believe the keys for competing successfully in the
institutional segment are investment performance and customer service. Our competitive strategy focuses on attracting
assets through superior performance. Consistent with this strategy, we continually evaluate opportunities to develop
internally or acquire investment management operations and strive to improve our investment management products and
services.
Investment Management Financial Information
See Management's Discussion and Analysis in this Form 10-K for Investment Management segment financial information.
Venture Capital Segment
We have invested in the venture capital markets for over twenty years through Phoenix Life's investment portfolio.
Venture capital represented 4% and 2% of total investments and cash and cash equivalents as of December 31, 2000 and
2001, respectively. The carrying value of our venture capital partnerships was $291.7 million as of December 31, 2001.
Our venture capital investments are primarily in the form of limited partnership interests in venture capital funds,
leveraged buyout funds and other private equity partnerships sponsored and managed by third parties. We refer to all of
these types of investments as venture capital. We currently have eighty-eight partnership investments through forty-one
sponsors. We believe our long-standing relationships and history of consistent participation with many well-established
venture capital sponsors gives us preferred access to attractive venture capital opportunities.
We view our venture capital investments as an opportunity to enhance our portfolio returns. Returns in recent years have
had a significant impact on our earnings, which has lead us to report venture capital as a separate reporting segment.
We generally allocate between 1.0% and 1.5% of annual investable cash flow to venture capital investments.
Venture Capital Financial Information
See Management's Discussion and Analysis in this Form 10-K for Venture Capital segment financial information.
Corporate and Other Segment
The Corporate and Other segment includes unallocated capital and expenses as well as certain businesses not of
sufficient scale to report independently. Corporate and Other also includes our international operations other than our
investments in Aberdeen and Lombard International Assurance, S.A. ("Lombard"). We are committed to establishing a
presence in select international growth markets when opportunities arise to enhance our wealth management strategy.
Generally we have targeted parts of the world where we believe there are significant opportunities in the asset
accumulation market, including pension management and/or specialized life products. As of December 31, 2001, through
this segment we had a total of $40.2 million invested in businesses in six countries.
Corporate and Other also includes an investment in Hilb, Rogal and Hamilton Company ("HRH") which we obtained upon our
sale of American Phoenix Corporation ("APC"), our property and casualty distribution subsidiary organized in 1981. In
1999, we sold our majority interest in APC to HRH for convertible debt and an equity interest in HRH, a publicly-traded
property and casualty company. We also have contractual rights to designate two nominees for election to HRH's board of
13
directors. As of December 31, 2001, two of our designees were serving as HRH directors. As of December 31, 2001, we
owned 6.4% of the outstanding HRH common stock, 14.8% on a diluted basis. This relationship provides us with a potential
strategic marketing opportunity through HRH's distribution network.
Corporate and Other Financial Information
See Management's Discussion and Analysis on this Form 10-K for Corporate and Other segment financial information.
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 with respect to policy riders. Cumulative account balances include deposits plus credited interest, less
expense and mortality charges and withdrawals. Reserves for future policy benefits for whole life policies are
calculated based on actuarial assumptions that include investment yields, mortality, lapses and expenses.
Reinsurance
While we have underwriting expertise and have experienced favorable mortality trends, we believe it is prudent to spread
the risk associated with our life insurance products through reinsurance. As is customary in the life insurance
industry, our reinsurance program is designed to protect us against adverse mortality experience generally and to reduce
the potential loss we might face from a death claim on any one life.
We cede risk to other insurers under various agreements that cover individual life insurance policies as a means of
reducing mortality risk. The amount of risk retained by us depends on our evaluation of the specific risk, subject, in
certain circumstances, to maximum limits based on characteristics of coverage. 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 with respect to 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 retention limit on any one life is $8 million ($10 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
("Confederation Life") in 1997. We entered into two separate reinsurance agreements in 1998 and 1999 to reinsure 80% of
the mortality risk on a substantial portion of its 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, 2001, we had ceded $75.8 billion in face amount of reinsurance, representing 68% of our total face
amount of $111.7 billion of life insurance in force. The following table lists our five principal life reinsurers,
together with the reinsurance recoverables on a statutory basis as of December 31, 2001, the face amount of life
insurance ceded as of December 31, 2001, and the reinsurers' respective A.M. Best ratings
Face Amount of
Reinsurance Life Insurance
Recoverables as of Ceded as of A.M. Best
Reinsurer December 31, 2001 December 31, 2001 Rating (1)
--------- ----------------- ----------------- ------
Transamerica Occidental Life Insurance
Company $6.2 million $8.8 billion A+
Life Reassurance Corp. of America (2) $5.2 million $8.9 billion A++
Allianz Life Insurance Co. Of North America $3.7 million $9.4 billion A++
Employers Reinsurance Corp. $3.9 million $8.0 billion A++
Annuity and Life Reassurance Ltd.(3) $2.4 million $4.4 billion A
- -------
(1) As of December 31, 2001.
(2) An affiliate of Swiss Re Life & Health America Inc.
(3) As of February 8, 2002, AM Best has placed the company under review with negative implications.
14
General Development of Business
The Phoenix Companies, Inc. was incorporated in Delaware in March 2000. Our principal executive offices are located at
One American Row, Hartford, Connecticut 06102-5056. Our telephone number is (860) 403-5000. Our website is located at
http://www.phoenixwm.com. (This URL is intended to be an inactive textual reference only. It is not intended to be an
active hyperlink to our website. The information on our website is not, and is not intended to be, part of this Form
10-K and is not incorporated into this report by reference.)
Phoenix Life was organized in Connecticut in 1851. In 1992, in connection with its merger with Home Life Insurance
Company ("Home Life"), the company redomiciled to New York and changed its name to Phoenix Home Life Mutual Insurance
Company ("Phoenix Mutual").
The Reorganization and Initial Public Offering
On December 18, 2000, the Board of Directors of Phoenix Mutual unanimously adopted a plan of reorganization which was
amended and restated on January 26, 2001. On June 25, 2001, the effective date of its demutualization, Phoenix Mutual
converted from a mutual life insurance company to a stock life insurance company, became a wholly-owned subsidiary of
The Phoenix Companies, Inc. ("Phoenix") and changed its name to Phoenix Life. At the same time, PXP became an indirect
wholly-owned subsidiary of Phoenix. All policyholder membership interests in the mutual company were extinguished on the
effective date and eligible policyholders of the mutual company received 56.2 million shares of common stock, $28.8
million of cash and $12.7 million of policy credits as compensation.
In addition, on June 25, 2001, Phoenix completed its initial public offering ("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 Dean Witter
exercised its right to purchase an additional 1,395,900 shares of the common stock of Phoenix at the IPO price of $17.50
per share less underwriter's discount. Net proceeds of $23.2 million were contributed to Phoenix Life.
Phoenix Life established a closed block for the benefit of holders of certain individual life insurance policies (closed
block policies). The purpose of the closed block is to ensure that the reasonable dividend expectations of
policyholders who own policies included in the closed block are met. On the effective date of the demutualization,
Phoenix Life allocated assets to the closed block in an amount that produces cash flows which, together with anticipated
revenue from the closed block policies, are reasonably expected to be sufficient in the aggregate: (i) to support the
obligations and liabilities relating to these policies, and (ii) to provide for a continuation of dividend scales in
effect at that time, if the experience underlying such scales continues. Appropriate adjustments will be made to the
dividend scales when actual experience differs from the aggregate experience underlying such scales. In particular,
actual experience may, in the aggregate, be more favorable than Phoenix Life assumed in establishing the closed block.
In that case, the policy dividend scale may be increased. Conversely, to the extent that actual experience is, in the
aggregate, less favorable than Phoenix Life assumed in establishing the closed block, the policy dividend scale may be
decreased, unless Phoenix Life chooses to use assets from outside the closed block to support the dividends. The assets
allocated to the closed block and any cash flows provided by those assets will solely benefit the holders of policies
included in the closed block, except in the unlikely event of Phoenix Life's liquidation.
In addition to the closed block assets, we hold assets outside the closed block in support of closed block liabilities.
Investment earnings on these assets less allocated expenses and the amortization of deferred acquisition costs provide
an additional source of earnings to our shareholders. In addition, the amortization of deferred acquisition costs
requires the use of various assumptions. To the extent that actual experience is more or less favorable than assumed,
shareholder earnings will be impacted.
In addition, Phoenix Life remains responsible for paying the benefits guaranteed under the policies included in the
closed block, even if cash flows and revenues from the closed block prove insufficient. Management does not believe that
Phoenix Life will have to pay these benefits from assets outside the closed block unless the closed block business
experiences very substantial adverse deviations in investment income, mortality, policy persistency or other experience
factors. Phoenix Life intends to accrue any additional contributions necessary to fund guaranteed benefits under the
closed block only if and when it becomes probable that Phoenix Life will be required to fund any shortage.
15
The following charts illustrate our corporate structure before and immediately after the demutualization.
STRUCTURE BEFORE DEMUTUALIZATION
POLICYHOLDERS, with 100% ownership of -
Phoenix Home Life Mutual Insurance Company, with 100% ownership of -
PM Holdings, Inc., with ownership interests in other domestic and foreign subsidiaries and with 100% ownership of -
Phoenix Investment Partners, Ltd.
STRUCTURE AFTER DEMUTUALIZATION
The Phoenix Companies, Inc., with 100% ownership of -
Phoenix Life Insurance Company, with 100$ ownership of -
PM Holdings, Inc., with ownership interests in other domestic and foreign subsidiaries
Phoenix Investment Management Company, Inc., with 100% ownership of -
Phoenix Investment Partners, Ltd., with ownership interests in other domestic and foreign subsidiaries
Phoenix Distribution Holding Company (1)
Phoenix National Trust Holding Company, with 100% ownership of -
Phoenix Charter Oak Trust Company (2)
- --------
(1) Direct and indirect subsidiaries of this holding company include PHL Associates, Inc., Main Street Management
and WS Griffith.
(2) See note 27 - "Subsequent Events" to the Consolidated Financial Statements in this Form 10-K.
As of December 31, 2001, we employed approximately 2,185 people, and we believe our relations with our employees are
good.
Strategic Acquisitions and Investments
We made a number of strategic acquisitions and investments designed to solidify our position as a leading provider of
wealth management solutions through advisors to the affluent and high-net-worth market and to businesses and
institutions.
Life and Annuity
o In 2000, we acquired a controlling interest in Main Street Management, a broker-dealer with approximately 250
registered representatives which generated over 80% of its 2000 revenues from sales of variable annuities
and mutual funds.
16
o In 1999, we acquired approximately 12% of Lombard, a pan-European life insurer based in Luxembourg which
provides unit-linked life assurance products designed exclusively for high-net-worth investors.
o In 1999, we acquired a controlling interest in PFG, which develops, markets and underwrites specialized
individually customized life and annuity products for high-net-worth investors.
o In 1998 and 2000, we purchased in a series of transactions a total of 9% of the common stock of Clark/Bardes,
Inc. ("Clark/Bardes"), which provides a variety of compensation and benefit services to corporations, banks
and healthcare organizations.
o In 1997, we acquired a $1.4 billion block of individual life and single premium deferred annuity business of
the former Confederation Life, a company in liquidation.
o In 1992, Phoenix Mutual merged with Home Life, which enabled us to expand our affiliated distribution, broaden
our product offerings, consolidate our back-office operations and create one of the fifteen largest mutual
life insurance companies in the United States of America.
Investment Management
o On January 29, 2002, we acquired a 60% interest in KAR, a Los Angeles-based investment management firm. KAR
provides investment management services to high-net-worth individuals, institutional accounts and sponsored
managed accounts. See "Recent PXP Acquisitions" in Management's Discussion and Analysis in this Form 10-K.
o On November 14, 2001, we acquired a 65% interest in CapWest, a Denver-based investment management firm. CapWest
provides investment management services to high-net-worth individuals, institutional accounts and sponsored
management accounts. See "Recent PXP Acquisitions" in Management's Discussion and Analysis in this Form
10-K.
o In January 2001, we acquired a 75% interest in Walnut, a Philadelphia-based investment management firm, and
Rutherford, Brown and Catherwood, LLC ("Rutherford"), its affiliated registered broker-dealer. Walnut
provides investment management services primarily to high-net-worth individuals and institutional accounts.
o In 1999, we acquired the retail mutual fund and closed-end fund businesses of Zweig, a New York-based asset
management firm with a conservative approach to equity investing with market downside protection.
o In 1997, we acquired Engemann, an asset management firm based in Pasadena. Engemann has an established presence
in the managed account business, as well as in the affluent and high-net-worth market.
o In 1997, we acquired approximately 75% of Seneca, an asset management firm based in San Francisco. Seneca is
primarily an institutional manager with a notable presence in the endowment and foundation markets, as well
as the affluent and high-net-worth market. In 2001, we transferred a 6.5% interest in Seneca to Seneca's
management.
o In a series of transactions from 1996 through May 2001, we acquired approximately 22% of the common stock of
Aberdeen, a Scottish firm that manages assets of institutional and retail clients in several countries. In
addition, we own subordinated notes of Aberdeen which are convertible at our option, subject to U.K. law.
o In 1995, we merged Phoenix Life's investment management operations with Duff & Phelps Corporation, a publicly
traded asset manager, thereby creating Phoenix Duff & Phelps Corporation, which is now known as PXP, a
non-public subsidiary of Phoenix.
o In 1993, we acquired National Securities and Research Corporation, an asset management firm with approximately
$3.0 billion of assets under management at the time of acquisition.
17
Divestitures of Non-Core Businesses
In keeping with our increased focus on providing wealth management solutions to the affluent and high-net-worth market,
since 1997 we repositioned our property and casualty distribution business as a non-core operation and disposed of three
businesses. We established and developed each of these businesses, and sold each as a going concern.
o Reinsurance Operations. We entered the individual life reinsurance market in the early 1960s and thereafter
expanded into related reinsurance lines including, group accident and group life and health reinsurance. In
addition to this business' lack of strategic fit with our current operations, pricing trends in reinsurance
in the late 1990s had turned unfavorable. In 1999, we sold our reinsurance business and placed the remaining
group accident and health reinsurance business in runoff.
o Real Estate Management Operations. In 1995, we established a separate real estate management operation. In
addition to its lack of strategic fit with our current operations, we sought to reduce our exposure to equity
real estate as an asset class. In a series of transactions in 1998, 1999 and 2000, we sold our real estate
management operations and disposed of the bulk of our equity real estate investments.
o Group Life and Health Insurance Operations. We entered the group life and health markets in the 1950s. In
addition to its lack of strategic fit with our current operations, in light of industry consolidation, this
business did not have the scale to compete adequately in the group insurance market. In 2000, we completed
the sale of these operations, including 97% of the capital stock of the insurance company which constituted
substantially all of such business, for cash and a 3% equity interest in GE Life and Annuity Assurance
Company.
Item 2. Properties
Our executive headquarters consist of our main office building at One American Row and two other buildings in Hartford,
Connecticut. We own these buildings and occupy most of the space contained in them. In addition to these properties, we
own offices in Enfield, Connecticut and East Greenbush, New York, for use in the operation of our business. We also
lease office space within and out of the United States of America as needed for our operations, including for use by our
sales force. We believe that our properties are adequate for our current and expected needs.
Item 3. Legal Proceedings
General
We are regularly involved in litigation, both as a defendant and as a plaintiff. The litigation naming us as a defendant
ordinarily involves our activities as an insurer, employer, investment adviser, investor or taxpayer. In addition, state
regulatory bodies, the SEC, the 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. These types of lawsuits and regulatory actions may be
difficult to assess or quantify, may seek recovery of very large and/or indeterminate amounts, including punitive and
treble damages, and their existence and magnitude may remain unknown for substantial periods of time. A substantial
legal liability or significant regulatory action against us could have a material adverse effect on our business,
results of operations and financial condition.
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, it is the opinion of our management that their
outcomes, after consideration of available insurance and reinsurance and the provisions made in our consolidated
financial statements, are not likely to have a material adverse effect on our consolidated financial condition.
However, given the large and/or indeterminate amounts sought in certain of these matters and the inherent
unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have
a material adverse effect on our operating results or cash flows.
Discontinued Reinsurance Business
The Life Companies' reinsurance business included, among other things, reinsurance by the Life Companies of other
insurance companies' group accident and health business. During 1999, the Life Companies placed its remaining group
18
accident and health reinsurance business into runoff, adopting a formal plan to terminate the related contracts as early
as contractually permitted and not entering into any new contracts. As part of its decision to discontinue its remaining
reinsurance operations, Phoenix Life reviewed the runoff block and estimated the amount and timing of future net
premiums, claims and expenses.
We established reserves for claims and related expenses that we expect to pay on our discontinued group accident and
health reinsurance business. These reserves are a net present value amount that is based on currently known facts and
estimates about, among other things, the amount of insured losses and expenses that we believe we will pay, the period
over which they will be paid, the amount of reinsurance we believe we will collect under our finite reinsurance and our
other reinsurance to cover our losses and the likely legal and administrative costs of winding down the business. In
2000, we strengthened our reserves for our discontinued reinsurance business by $97 million (pre-tax). Total reserves
were $30 million at December 31, 2001. In addition, in 1999 we purchased finite aggregate excess-of-loss reinsurance to
further protect us from unfavorable results from this discontinued business. The initial premium for this coverage was
$130 million. The maximum coverage available is currently $175 million and increases to $230 million by 2004.
The Life Companies is involved in two sets of disputes relating to reinsurance arrangements under which it reinsured
group accident and health risks. The first of these involves contracts for reinsurance of the life and health carveout
components of workers compensation insurance arising out of a reinsurance pool created and formerly managed by Unicover
Managers, Inc. ("Unicover"). In addition, the Life Companies is involved in arbitrations and negotiations pending in the
United Kingdom between multiple layers of reinsurers and reinsureds relating to transactions in which the Life Companies
participated involving certain personal accident excess-of-loss business reinsured in the London market.
In light of our provisions for our discontinued reinsurance operations through the establishment of reserves and the
finite reinsurance, based on currently available information, we do not expect these operations, including the
proceedings described above, to have a material adverse effect on our consolidated financial position. However, given
the large and/or indeterminate amounts involved and the inherent unpredictability of litigation, it is not possible to
predict with certainty the ultimate impact on us of all pending matters or of our discontinued reinsurance operations.
Teamsters Local 710 Claim
The Teamsters Local 710 pension account, which was a DPIM account from 1994 until 1997, has demanded that DPIM return
approximately $965,000 in investment management fees paid to DPIM by the Teamsters account. This demand arises out of
the direction by DPIM of client commission dollars in exchange for the referral of the Teamsters account to DPIM. To
date, the Teamsters account has not commenced litigation against DPIM. The outcome of this matter will not have any
material adverse effect on our business.
Policyholder Lawsuits Challenging the Plan of Reorganization
Three pending lawsuits seek to challenge Phoenix Life's reorganization and the adequacy of the information provided to
policyholders regarding the plan of reorganization. We believe that each of these lawsuits lacks merit. The first of
these lawsuits, Andrew Kertesz v. Phoenix Home Life Mut. Ins. Co., et al., was filed on April 16, 2001, in the Supreme
Court of the State of New York for New York County. The plaintiff seeks to maintain a class action on behalf of a
putative class consisting of the eligible policyholders of Phoenix Life as of December 18, 2000, the date the plan of
reorganization was adopted. Plaintiff seeks compensatory damages for losses allegedly sustained by the class as a result
of the demutualization, punitive damages and other relief. The defendants named in the lawsuit include Phoenix Life and
Phoenix and their directors, as well as Morgan Stanley & Co. Incorporated, financial advisor to Phoenix Life in
connection with the plan of reorganization.
The second lawsuit, Paulette M. Fantozzi v. Phoenix Home Life Mut. Ins. Co., et al., was filed on August 23, 2001, in
the Supreme Court of the State of New York for New York County. The allegations and relief requested in this
class-action complaint are virtually identical to the allegations and relief sought in the Kertesz lawsuit. The
defendants named in the Fantozzi action are the same as those named in Kertesz.
On October 19, 2001, motions to dismiss the claims asserted in the Kertesz and Fantozzi lawsuits were filed. These
motions are pending. We intend to vigorously defend against all claims asserted in these two pending lawsuits.
On October 22, 2001, Andrew Kertesz filed a proceeding pursuant to Article 78 of the New York Civil Practice Law and
Rules, Andrew Kertesz v. Gregory V. Serio, et al., in the Supreme Court of New York for New York County. The Article 78
petition seeks to vacate and annul the decision and order of the New York Superintendent, dated June 1, 2001, approving
the plan of reorganization. The petition names as respondents Phoenix Life and Phoenix and their directors and the New
York Superintendent. We believe that the allegations of the petition are meritless and intend to vigorously defend
against all the claims asserted.
19
Another lawsuit that sought to challenge the plan of reorganization, Billie J. Burns v. Phoenix Home Life Mut. Ins. Co.,
et al., was filed on April 4, 2001, in the Circuit Court of Cook County, Illinois County Department, Chancery Division.
A motion to dismiss that action was filed on May 4, 2001. On October 2, 2001, the court entered an order dismissing the
action for want of prosecution.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders of Phoenix during the fourth quarter of the fiscal year covered by
this report.
PART II
Item 5. Market of Registrant's Common Equity and Related Stockholder Matters
In connection with the June 25, 2001 demutualization of Phoenix Mutual, during the third and fourth quarters of 2001,
Phoenix issued 10,165 shares of common stock to eligible policyholders, effective as of June 25. In reliance on the
exemption under Section 3(a)(10) of the Securities Act of 1933, Phoenix issued such shares to policyholders in exchange
for their membership interests without registration under such Act.
The following table presents the high and low prices for the common stock of The Phoenix Companies, Inc. on the New York
Stock Exchange ("NYSE") for the periods indicated.
High Low
---------- ----------
For the period from June 21, 2001 through June 30, 2001............. $18.80 $16.75
Third Quarter....................................................... $19.35 $12.50
Fourth Quarter...................................................... $18.50 $12.80
Item 6. Selected Financial Data
The following table sets forth Phoenix's selected historical consolidated financial data as of and for each of the five
years ended December 31, 2001. We derived the data for the years ended December 31, 1999, 2000 and 2001 and as of
December 31, 2000 and 2001 from our audited consolidated financial statements included elsewhere in this Form 10-K. We
derived the data for the years ended December 31, 1997 and 1998 and as of December 31, 1997, 1998 and 1999 from audited
consolidated financial statements not included in this Form 10-K. Prior to June 25, 2001, Phoenix Life was the parent
company of our consolidated group. In connection with the demutualization, Phoenix Life became a subsidiary and Phoenix
became the parent company of our consolidated group.
We prepared the selected historical consolidated financial data, other than statutory data, in conformity with GAAP. We
derived the statutory data from the Annual Statements of Phoenix Life and its subsidiaries filed with insurance
regulatory authorities and prepared the statutory data in accordance with statutory accounting practices, which vary in
certain respects from GAAP.
You should read the following in conjunction with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and the notes thereto included in this Form 10-K.
20
Income Statement Data:(1) For the Year Ended December 31,
-----------------------------------------------------------------------
1997 1998 1999 2000 2001
----------- ----------- ----------- ----------- ----------
(in millions, except earnings per share)
Revenues:
Premiums............................... $ 1,087.7 $ 1,175.8 $1,175.7 $ 1,147.4 $1,112.7
Insurance and investment product fees.. 401.3 537.5 574.6 631.0 546.4
Net investment income.................. 720.7 859.6 953.1 1,129.6 835.1
Net realized investment gains (losses) 111.0 58.2 75.8 89.2 (72.4)
----------- ----------- ----------- ----------- ----------
Total revenues...................... 2,320.7 2,631.1 2,779.2 2,997.2 2,421.8
----------- ----------- ----------- ----------- ----------
Total benefits and expenses......... 2,155.9 2,474.3 2,513.5 2,839.7 2,670.5
----------- ----------- ----------- ----------- ----------
Income (loss) from continuing operations 124.8 91.9 162.1 94.8 (137.3)
Net income (loss) from discontinued
operations, net of income taxes(2).. 44.9 45.2 (72.9) (11.5) --
Cumulative effect of accounting changes(3) -- -- -- -- (65.4)
----------- ----------- ----------- ----------- ----------
Net income (loss)......................... $ 169.7 $ 137.1 $ 89.2 $ 83.3 $(202.7)
=========== =========== =========== =========== ==========
Pro forma earnings per share from
continuing operations(4)............ $ 1.19 $ .88 $ 1.55 $ .91 $(1.31)
=========== =========== =========== =========== ==========
Pro forma earnings per share(4) $ 1.62 $ 1.31 $ .85 $ .80 $(1.94)
=========== =========== =========== =========== ==========
Balance Sheet Data: As of December 31,
------------------------------------------------------------------------------
1997 1998 1999 2000 2001
------------ ------------ ------------ ------------ ------------
(in millions)
Total assets......................... $17,915.0 $18,798.0 $20,287.0 $20,313.2 $22,525.4
============ ============ ============ ============ ============
Long-term debt....................... $ 471.1 $ 449.3 $ 499.4 $ 425.1 $ 599.3
============ ============ ============ ============ ============
Total liabilities.................... $16,117.6 $16,969.4 $18,430.9 $18,335.4 $20,120.9
============ ============ ============ ============ ============
Minority interest in net assets of
consolidated subsidiaries......... $ 136.5 $ 92.0 $ 100.1 $ 136.9 $ 8.8
============ ============ ============ ============ ============
Total equity......................... $1,660.9 $1,736.6 $1,756.0 $1,840.9 $2,395.7
============ ============ ============ ============ ============
As of or for the Year Ended December 31,
------------------------------------------------------------------------------
1997 1998 1999 2000 2001
------------ ------------ ------------ ------------ ------------
Other Data: (in millions)
Assets under management.............. $54,742.8 $61,147.7 $73,181.4 $64,543.5 $61,215.1
============ ============ ============ ============ ============
Statutory Data:
Premiums and deposits................ $ 2,911.7 $ 2,578.8 $ 2,330.2 $ 2,344.8 $ 3,152.4
============ ============ ============ ============ ============
Net income........................... $ 66.6 $ 108.7 $ 131.3 $ 266.1 $ (13.4)
============ ============ ============ ============ ============
Policyholder surplus(5).............. $ 844.0 $ 905.3 $ 1,054.1 $ 1,322.8 $ 1,149.8
Asset valuation reserve ("AVR")(6)... 308.8 300.3 373.2 560.4 223.4
------------ ------------ ------------ ------------ ------------
Total surplus and AVR............. $ 1,152.8 $ 1,205.6 $ 1,427.3 $ 1,883.2 $ 1,373.2
============ ============ ============ ============ ============
- --------
(1) See note 3 to our consolidated financial statements included in this Form 10-K for a summary of our
significant accounting policies. The above income statement data have been derived from our audited
financial statements, which have been retroactively restated to reflect the adoption of all applicable
authoritative GAAP literature and accounting changes.
(2) During 1999, Phoenix Life discontinued the operations of three of its businesses which in prior years were
reflected as the following reportable business segments: reinsurance operations, real estate management
operations, and group life and health insurance operations.
21
The discontinuation of these businesses resulted from the sales of several operations and the
implementation of plans to withdraw from the remaining businesses. These transactions do not affect the
comparability of the financial data. The assets and liabilities of the discontinued operations have been
excluded from the assets and liabilities of continuing operations and separately identified in the balance
sheet data. Likewise, the income statement data have been restated for 1997 and 1998 to exclude from
continuing operations the operating results of discontinued operations. See note 14 to our consolidated
financial statements included in this Form 10-K.
(3) In the first quarter of 2001, we recognized the following cumulative effect adjustments for accounting
changes:
o Venture Capital
We record our investments in venture capital partnerships in accordance with the equity method of
accounting. We record our share of the net equity in earnings of the venture capital partnerships in
accordance with GAAP, using the most recent financial information received from the partnerships.
Historically, this information had been provided to us on a one-quarter lag. Due to the volatility in the
equity markets, we believed the one-quarter lag in reporting was no longer appropriate. Therefore, we
changed our method of applying the equity method of accounting to eliminate the quarterly lag in reporting.
We recorded a charge of $48.8 million (net of income taxes of $26.3 million) representing the cumulative
effect of this accounting change on the fourth quarter of 2000. The cumulative effect was based on the
actual fourth quarter 2000 financial results as reported by the partnerships.
o Derivatives
Effective January 1, 2001, we adopted a new accounting pronouncement, SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This adoption resulted in a cumulative effect adjustment of
$3.9 million (net of income taxes of $2.1 million). See note 3 to our consolidated financial statements
included in this Form 10-K.
In the second quarter of 2001, we recognized the following cumulative effect adjustment for accounting
changes:
o Securitized Financial Instruments
Effective April 1, 2001, we adopted EITF Issue No. 99-20, Recognition of Interest Income and Impairment on
Certain Investments ("EITF 99-20"). This pronouncement requires investors in certain asset-backed
securities to record changes in their estimated yield on a prospective basis and to apply specific
valuation methods to these securities for an other-than-temporary decline in value. Upon adoption of EITF
99-20, we recorded a $20.5 million charge to net income as a cumulative effect of accounting change, net of
income taxes.
(4) Earnings per share for the five years in the period ended December 31, 2001 is calculated pro-forma based
on 104.6 million weighted-average shares outstanding. The pro forma weighted-average shares outstanding
calculation excludes the period of time before the IPO, during which no common stock shares were issued.
(5) In accordance with accounting practices prescribed by the New York State Insurance Department, policyholder
surplus for 1997 and subsequent periods includes $175.0 million of total principal amount of surplus notes
outstanding.
(6) This statutory reserve is 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
Management's discussion and analysis reviews our consolidated financial condition as of December 31, 2000 and 2001; our
consolidated results of operations for the years ended December 31, 1999, 2000 and 2001; and, where appropriate, factors
that may affect our future financial performance. You should read this discussion in conjunction with "Selected
Financial Data" and our consolidated financial statements and the notes thereto included in this Form 10-K.
Overview
We are a leading provider of wealth management products and services offered through a variety of select advisors and
financial services firms to serve the accumulation, preservation and transfer needs of the affluent and high-net-worth
market, businesses and institutions. We refer to our products and services together as our wealth management solutions.
We offer a broad range of life insurance, annuity and investment management solutions through a variety of distributors.
These distributors include affiliated and non-affiliated advisors and financial services firms who make our solutions
available to their clients.
We provide our wealth management solutions through two operating segments - Life and Annuity and Investment Management.
Through Life and Annuity we offer a variety of life insurance and annuity products, including universal, variable
universal, whole and term life insurance, and a range of annuity offerings. We conduct activities in Investment
Management largely through Phoenix Investment Partners, Ltd. ("PXP") and its subsidiaries, comprising two lines of
business-- private client and institutional. Through our private client line of business, we provide investment
management services principally on a discretionary basis, with products consisting of open-end mutual funds and managed
accounts. Managed accounts include intermediary programs sponsored and distributed by non-affiliated broker-dealers and
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 most of our open-end mutual funds.
We report our remaining activities in two non-operating segments-- Venture Capital and Corporate and Other. Venture
Capital includes investments primarily in the form of limited partnership interests in venture capital funds, leveraged
buyout funds and other private equity partnerships sponsored and managed by third parties. See "Business--Venture Capital
Segment." Corporate and Other includes unallocated capital and expenses, as well as 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 wealth management
operations.
We derive our revenues principally from:
o premiums on whole life insurance;
o insurance and investment product fees on variable life and annuity products and universal life products;
o investment management and related fees; and
o net investment income and net realized investment gains.
Under accounting principles generally accepted in the United States of America ("GAAP"), premium and deposit collections
for variable life, universal life and annuity products are not recorded as revenues but are instead reflected on the
balance sheet as an increase in separate account liabilities (in the case of certain investment options of variable
products) or in policy liabilities and accruals (in the case of other products) or policyholder deposit funds (in the
case of fixed annuities and certain investment options of variable annuities).
Our expenses consist principally of:
o insurance policy benefits provided to policyholders, including interest credited on policyholders' general
account balances;
o policyholder dividends;
o amortization of deferred policy acquisition costs;
o amortization of goodwill and other intangible assets;
o interest expense;
o other operating expenses; and
o income taxes.
Our profitability depends principally upon:
o the adequacy of our product pricing, which is primarily a function of our ability to select underwriting
risks, as well as our mortality experience, our ability to generate investment earnings, our ability to
maintain expenses in accordance with our pricing assumptions, and our policies' persistency, meaning the
percentage of policies remaining in force from year to year as measured by premiums;
o the amount and composition of assets under management;
o the maintenance of our target spreads between the rate of earnings on our investments and dividend and
interest rates credited to customers; and
o our ability to manage expenses.
23
Prior to the demutualization, we focused on participating life insurance products, which pay policyholder dividends. As
of December 31, 2001, 75% 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 paid were $360.5 million, $378.0 million and $400.1
million for the years ended December 31, 1999, 2000 and 2001, respectively.
Our sales and financial results over the last several years have been affected by economic and industry trends.
Americans generally, have begun to rely less on whole life insurance, defined benefit retirement plans and social
security and other government programs to meet their post-retirement financial needs. Reflecting this trend, sales of
our whole life insurance products have declined in recent years. Concurrently, the baby boom generation has begun to
enter its prime savings years. These factors have had a positive effect on sales of our variable life and annuity
products, mutual funds and managed account products. See "Business--Market Opportunity."
Discontinued Operations
We discontinued the operations of several businesses that did not align with our business strategy. The discontinuation
involved the sales of several operations and the implementation of plans to withdraw from other businesses.
During 1999, we sold our real estate management business and signed a definitive agreement to sell our group life and
health insurance business. This latter sale was completed in the second quarter of 2000. We recorded net pre-tax gains
of $5.9 million in 1999 and $71.1 million in 2000 in connection with these dispositions.
Also in 1999, we exited our reinsurance business, which included individual life reinsurance, group life and health
reinsurance and group personal accident business, by selling the individual life and the group life and health
reinsurance businesses and placing the remaining group accident and health reinsurance business into runoff. We
recognized pre-tax losses of $173.1 million in 1999 and $103.0 million in 2000 in connection with this exit. See
"Business--Divestitures of Non-Core Businesses." Included in the 2000 loss is an increase in reserve estimates on the
group accident and health reinsurance business of $97.0 million (pre-tax). See note 14 to our audited consolidated
financial statements included in this Form 10-K.
The assets and liabilities of the discontinued operations are excluded from the assets and liabilities of continuing
operations and separately identified on our consolidated balance sheet. Net assets of the discontinued operations
totaled $25.5 million and $20.8 million as of December 31, 2000 and 2001, respectively. Our consolidated statements of
income have been restated for 1999 to exclude from continuing operations the operating results of discontinued
operations. See "Selected Financial Data" and note 14 to our consolidated financial statements included in this Form
10-K for information about the operating results of our discontinued operations.
Purchase of PXP Minority Interest
On September 10, 2000, Phoenix Life Insurance Company ("Phoenix Life") and PXP entered into an agreement and plan of
merger, by which Phoenix Life agreed to purchase PXP's outstanding common stock owned by third parties for a price of
$15.75 per share. In connection with this merger, which closed on January 11, 2001, Phoenix Life paid total cash of
$339.3 million to those stockholders. After the merger, some third party holders of PXP's convertible subordinated
debentures converted their debentures, and PXP redeemed all remaining outstanding debentures held by third parties. PXP
made cash payments totaling $38.2 million in connection with these conversions and redemptions. In addition, PXP accrued
non-recurring compensation expenses of $57.0 million to cash out restricted stock, $5.5 million of related compensation
costs,
24
$19.7 million in non-recurring retention costs and $3.9 million in non-recurring transaction costs during the year ended
December 31, 2001.
As a result of the merger, PXP became a wholly-owned subsidiary of Phoenix Life and PXP's shares of common stock were
de-listed from the New York Stock Exchange. In accordance with the plan of reorganization, on the effective date of the
demutualization Phoenix Life transferred to Phoenix Investment Management Company, Inc. all the outstanding shares of
common stock of PXP for $640.0 million, the fair market value of those shares on that date.
Phoenix Life obtained from internal sources the cash it paid to PXP's third party stockholders. In January 2001, PXP
borrowed $95.0 million under its then existing credit facility to fund payments with respect to outstanding restricted
stock and fund the redemption or conversion of its convertible subordinated debentures.
The purchase of the PXP minority interest as described above has resulted in intangible assets, primarily consisting of
investment management contracts and goodwill of $297.5 million, reflected on our consolidated balance sheets. We are
amortizing investment management contracts over their estimated lives, which generally range from five to sixteen years.
We are amortizing goodwill over a period of forty years through December 31, 2001. See Business Combinations/Goodwill
and Other Intangible Assets in Management's Discussion and Analysis of Financial Condition and Results of Operations
regarding goodwill amortization.
Recent PXP Acquisitions
In November 2001, we paid $5.0 million in cash for a 65% interest in Capital West Asset Management, LLC ("CapWest").
Under the terms of the purchase agreement, we may be obligated to pay more for our initial ownership interest in 2005
depending upon CapWest's future revenue growth through 2004. In addition, under the terms of the purchase agreement, we
will purchase an additional 10% ownership interest in CapWest. The remaining ownership interests in CapWest will be
retained by its management. At December 31, 2001, CapWest had approximately $138.0 million in assets under management.
Under the terms of an agreement executed in 2001 to purchase a majority interest in Kayne Anderson Rudnick Investment
Management, LLC ("KAR"), we purchased an initial 60% interest on January 29, 2002 and will purchase an additional 15%
ownership interest by 2007. The remaining ownership interests in KAR were retained by its management. The initial
purchase price was approximately $100 million; we may be obligated to pay additional sums in 2004 for the 60% interest
based upon management fee revenue growth through 2003. This transaction does not include the firm's broker-dealer, Kayne
Anderson Associates, or its hedge fund affiliate, Kayne Anderson Capital Advisors Inc. KAR had approximately $7.5
billion in assets under management at the time of closing. KAR's results of operations for 2001 are not included in our
consolidated results of operations.
The Demutualization
On June 25, 2001, Phoenix Life converted from a mutual life insurance company to a stock life insurance company and
became our wholly-owned subsidiary. Phoenix Life established a closed block for the benefit of holders of certain
individual life insurance policies (closed block policies). The purpose of the closed block is to ensure that the
reasonable dividend expectations of policyholders who own policies included in the closed block are met. The closed
block will continue in effect until the date none of such policies is in force. On the effective date of the
demutualization, Phoenix Life allocated assets to the closed block in an amount that produces cash flows which, together
with anticipated revenue from the closed block policies, are reasonably expected to be sufficient in the aggregate: (i)
to support the obligations and liabilities relating to these policies, and (ii) to provide for a continuation of
dividend scales in effect at that time, if the experience underlying such scales continues. Appropriate adjustments
will be made to the dividend scales when actual experience differs from the aggregate experience underlying such
scales. In particular, actual experience may, in the aggregate, be more favorable than Phoenix Life assumed in
establishing the closed block. In that case, the policy dividend scale may be increased. Conversely, to the extent
that actual experience is, in the aggregate, less favorable than Phoenix Life assumed in establishing the closed block,
the policy dividend scale may be decreased, unless Phoenix Life chooses to use assets from outside the closed block to
support the dividends. The assets allocated to the closed block and any cash flows provided by those assets will solely
benefit the holders of policies included in the closed block, except in the unlikely event of Phoenix Life's liquidation.
In addition to the closed block assets, we hold assets outside the closed block in support of closed block liabilities.
Investment earnings on these assets less allocated expenses and the amortization of deferred acquisition costs provide
an additional source of earnings to our shareholders. In addition, the amortization of deferred acquisition costs
requires the use of various assumptions. To the extent that actual experience is more or less favorable than assumed,
shareholder earnings will be impacted.
25
In addition, Phoenix Life remains responsible for paying the benefits guaranteed under the policies included in the
closed block, even if cash flows and revenues from the closed block prove insufficient. We funded the closed block to
provide for these payments and for continuation of dividends paid under 2000 policy dividend scales, assuming the
experience underlying such dividend scales continues. Therefore, we do not believe that Phoenix Life will have to pay
these benefits from assets outside the closed block unless the closed block business experiences very substantial
adverse deviations in investment, mortality, persistency or other experience factors. We intend to accrue any additional
contributions necessary to fund guaranteed benefits under the closed block when it becomes probable that we will be
required to fund any shortage.
As specified in the plan of reorganization, the allocation of assets for the closed block was made as of December 31,
1999. Consequently, cumulative earnings on the closed block assets and liabilities for the period January 1, 2000 to
December 31, 2001 in excess of expected cumulative earnings do not inure to stockholders and have been used to establish
a policyholder dividend obligation as of June 30, 2001. The initial policyholder dividend obligation for the period
January 1, 2000 to June 30, 2001 of $115.5 million consists of $45.2 million of earnings and unrealized gains on assets
in the closed block as of June 30, 2001 of $70.3 million. The increase in the policyholder dividend obligation for the
period July 1, 2001 to December 31, 2001 of $51.7 million pre-tax, consists of $13.2 million of pre-tax earnings and the
change in unrealized gains on assets in the closed block for the period July 1, 2001 to December 31, 2001 of $38.5
million, pre-tax.
We incurred costs relating to the demutualization, excluding costs relating to the initial public offering, of
approximately $38.0 million, net of income taxes of $9.7 million, of which $14.1 million was recognized for the year
ended December 31, 2000 and $23.9 million was recognized for the year ended December 31, 2001. We estimate we will have
additional expenses relating to the demutualization of approximately $1.0 million in 2002.
Recently Issued Accounting Standards
Securitized Financial Instruments. Effective April 1, 2001, we adopted Emerging Issues Task Force ("EITF") Issue No.
99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets ("EITF 99-20"). This pronouncement requires investors in certain asset-backed securities to record
changes in their estimated yield on a prospective basis and to apply specific valuation methods to these securities to
determine if there has been an other-than-temporary decline in value. Upon adoption of EITF 99-20, we recorded a $20.5
million charge to net income as a cumulative effect of accounting change, net of income taxes.
Derivative Financial Instruments. Effective January 1, 2001, we adopted Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), as amended by SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities ("SFAS 138"). As amended, SFAS 133 requires
all derivatives to be recognized on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through earnings.
On January 1, 2001, in accordance with the transition provisions of SFAS 133, we recorded a net-of-tax cumulative effect
adjustment of $1.3 million (gain) in earnings to recognize at fair value all derivatives that are designated as
fair-value hedging instruments. We also recorded an offsetting net-of-tax cumulative effect adjustment of $1.3 million
(loss) in earnings to recognize the difference attributable to the hedged risks between the carrying values and fair
values of the related hedged assets and liabilities. We also recorded a net-of-tax cumulative effect adjustment of $1.1
million in accumulated other comprehensive income to recognize, at fair value, all derivatives that are designated as
cash-flow hedging instruments.
For derivative instruments that were not designated as hedges, upon implementation of SF