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Form 10-Q
United States
Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d)
of The Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2002
------------------
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
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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
incorporation or organization) Identification No.)
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One American Row, Hartford, Connecticut 06102-5056
(860) 403-5000
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(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X. No__.
On September 30, 2002, the registrant had 94,368,382 shares of common stock outstanding.
Part I.
Financial Information
Item 1. Unaudited Consolidated Financial Statements
THE PHOENIX COMPANIES, INC.
Consolidated Balance Sheet
(in millions, except share data)
September 30, 2002 and December 31, 2001
2002 2001
------- --------
ASSETS:
Available-for-sale debt securities, at fair value................. $ 11,818.6 $ 9,607.7
Equity securities, at fair value.................................. 274.1 290.9
Mortgage loans, at unpaid principal balances...................... 491.8 535.8
Real estate, at lower of cost or fair value....................... 76.6 83.1
Venture capital partnerships, at equity in net assets............. 231.7 291.7
Affiliate equity and debt securities.............................. 323.9 330.6
Policy loans, at unpaid principal balances........................ 2,181.0 2,172.2
Other investments................................................. 298.3 282.4
------- -------
Total investments............................................. 15,696.0 13,594.4
Cash and cash equivalents......................................... 712.0 815.5
Accrued investment income......................................... 228.0 203.1
Premiums, accounts and notes receivable........................... 159.6 147.8
Reinsurance recoverable balances.................................. 40.3 21.3
Deferred policy acquisition costs................................. 1,235.5 1,123.7
Premises and equipment............................................ 113.3 117.7
Deferred income taxes............................................. 38.7 1.8
Goodwill and other intangible assets.............................. 774.4 858.6
Net assets of discontinued operations............................. 20.8 20.8
Other general account assets...................................... 66.1 50.7
Separate account and investment trust assets...................... 5,536.0 5,570.0
------- -------
Total assets.................................................. $24,620.7 $22,525.4
============== ===============
LIABILITIES:
Policy liabilities................................................ $12,692.5 $11,993.4
Policyholder deposit funds........................................ 3,180.9 1,368.2
Indebtedness...................................................... 613.6 599.3
Other general account liabilities................................. 538.6 595.1
Separate account and investment trust liabilities................. 5,536.0 5,564.9
-------- --------
Total liabilities............................................. 22,561.6 20,120.9
-------- --------
MINORITY INTEREST:
Minority interest in net assets of subsidiaries................... 11.5 8.8
------- -------
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value: 1.0 billion shares authorized; 106.4
million shares issued.................................. 1.0 1.0
Additional paid-in capital........................................ 2,424.4 2,410.4
Accumulated deficit............................................... (278.2) (30.8)
Accumulated other comprehensive income............................ 92.0 81.1
Treasury stock, at cost: 12.0 million and 4.5 million shares...... (191.6) (66.0)
-------- --------
Total stockholders' equity.................................... 2,047.6 2,395.7
---------- ----------
Total liabilities, minority interest and stockholders' equity $24,620.7 $22,525.4
============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
THE PHOENIX COMPANIES, INC.
Consolidated Statement of Income and Comprehensive Income
(in millions, except per share data)
Three and Nine Months Ended September 30, 2002 and 2001
Three Months Nine Months
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES:
Premiums............................................... $ 297.1 $ 302.7 $ 813.9 $ 836.0
Insurance and investment product fees.................. 139.4 129.1 425.6 414.3
Net investment income.................................. 228.8 194.7 675.7 588.6
Net realized investment losses......................... (10.5) (16.7) (74.1) (37.2)
------------ ------------ ------------ ------------
Total revenues..................................... 654.8 609.8 1,841.1 1,801.7
------------ ------------ ------------ ------------
BENEFITS AND EXPENSES:
Policy benefits........................................ 397.9 390.4 1,070.7 1,056.7
Policyholder dividends................................. 112.7 105.7 294.4 301.7
Policy acquisition cost amortization................... 41.1 33.3 41.6 95.3
Goodwill impairment.................................... 66.3 -- 66.3 --
Intangible asset amortization.......................... 8.9 12.7 24.8 37.2
Interest expense....................................... 7.7 6.4 23.1 21.2
Demutualization expenses............................... .2 5.3 1.7 24.8
Other operating expenses............................... 135.9 118.8 451.0 496.4
------------ ------------ ------------ ------------
Total benefits and expenses........................ 770.7 672.6 1,973.6 2,033.3
------------ ------------ ------------ ------------
Loss before income taxes and minority interest......... (115.9) (62.8) (132.5) (231.6)
Applicable income tax benefit.......................... (26.0) (43.2) (40.4) (106.9)
------------ ------------ ------------ ------------
Loss before minority interest.......................... (89.9) (19.6) (92.1) (124.7)
Minority interest in net income of subsidiaries........ 3.1 1.6 9.2 5.1
------------ ------------ ------------ ------------
Loss before cumulative effect of accounting changes.... (93.0) (21.2) (101.3) (129.8)
Cumulative effect of accounting changes:
Goodwill impairment................................ -- -- (130.3) --
Securitized financial instruments.................. -- -- -- (20.5)
Venture capital partnerships....................... -- -- -- (48.8)
Derivative financial instruments................... -- -- -- 3.9
------------ ------------ ------------ ------------
Net loss............................................... $ (93.0) $ (21.2) $(231.6) $ (195.2)
============ ============ ============ ============
BASIC AND DILUTED EARNINGS PER SHARE:
Loss before cumulative effect of accounting changes $ (.96) $ (.20) $ (1.02) $ (1.24)
Cumulative effect of accounting changes................ -- -- (1.32) (.63)
------------ ------------ ------------ ------------
Net loss............................................... $ (.96) $ (.20) $ (2.34) $ (1.87)
============ ============ ============ ============
Weighted-average common shares outstanding ............ 96.6 105.3 99.1 104.6
============ ============ ============ ============
PRO FORMA AMOUNTS ASSUMING RETROACTIVE APPLICATION OF
ACCOUNTING CHANGES:
Net loss............................................... $ (93.0) $ (15.9) $(101.3) $ (114.4)
============ ============ ============ ============
Loss per share......................................... $ (.96) $ (.15) $ (1.02) $ (1.09)
============ ============ ============ ============
DIVIDENDS PER SHARE.................................... $ .16 $ -- $ .16 $ --
============ ============ ============ ============
COMPREHENSIVE INCOME:
Net loss............................................... $ (93.0) $ (21.2) $(231.6) $ (195.2)
------------ ------------ ------------ ------------
Other comprehensive income:
Change in net unrealized investment gains (losses). $ (35.5) $ 16.6 $ 12.6 $ 13.0
Change in net unrealized foreign currency translation
adjustment and other........................... 6.2 14.4 (1.7) 2.2
------------ ------------ ------------ ------------
Total other comprehensive income (loss)........ (29.3) 31.0 10.9 15.2
------------ ------------ ------------ ------------
Comprehensive income (loss)............................ $(122.3) $ 9.8 $(220.7) $ (180.0)
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
THE PHOENIX COMPANIES, INC.
Consolidated Condensed Statement of Cash Flows
(in millions)
Three and Nine Months Ended September 30, 2002 and 2001
Three Months Nine Months
---------------------------- --------------------------
2002 2001 2002 2001
------------ ----------- ----------- -----------
OPERATING ACTIVITIES:
Cash from operations......................................... $ 48.0 $ 79.2 $ 95.6 $ 234.4
------------ ----------- ----------- -----------
INVESTING ACTIVITIES:
Debt security sales, maturities and repayments............... 842.1 418.2 2,146.7 2,763.0
Equity security sales........................................ 13.9 28.1 39.3 104.6
Mortgage loan maturities and principal repayments............ 5.9 18.9 44.9 52.4
Venture capital partnership capital distributions............ 16.7 5.2 29.0 28.2
Real estate and other invested assets sales.................. 24.1 9.8 62.5 29.7
Debt security purchases...................................... (1,498.4) (1,012.7) (3,684.2) (3,743.7)
Equity security purchases.................................... (13.2) (19.2) (42.0) (51.1)
Venture capital partnership investments...................... (11.3) (11.2) (31.8) (35.3)
Other invested asset purchases............................... (34.1) (4.9) (84.2) (51.4)
Subsidiary purchases......................................... (1.7) (20.3) (136.1) (415.1)
Policy loan advances, net.................................... 1.5 (11.0) (8.8) (55.3)
Premises and equipment additions............................. (5.4) (6.5) (11.7) (14.6)
------------ ----------- ----------- -----------
Cash for continuing operations............................... (659.9) (605.6) (1,676.4) (1,388.6)
Cash (for) from discontinued operations...................... (12.1) 17.4 23.4 55.4
------------ ----------- ----------- -----------
Cash for investing activities................................ (672.0) (588.2) (1,653.0) (1,333.2)
------------ ----------- ----------- -----------
FINANCING ACTIVITES:
Policyholder deposit fund receipts, net...................... 745.2 133.5 1,602.0 220.1
Indebtedness proceeds........................................ -- -- -- 180.0
Indebtedness repayments...................................... -- (30.1) -- (174.7)
Common stock repurchases..................................... (56.0) (35.6) (124.5) (35.6)
Common stock issuance........................................ -- 23.1 -- 831.0
Common stock dividend payment................................ (15.8) -- (15.8) --
Payments to policyholders in demutualization................. -- -- -- (28.7)
Minority interest distributions.............................. (.1) (.1) (7.8) (5.7)
------------ ----------- ----------- -----------
Cash from (for) financing activities......................... 673.3 90.8 1,453.9 986.4
------------ ----------- ----------- -----------
Cash and cash equivalents changes............................ 49.3 (418.2) (103.5) (112.4)
Cash and cash equivalents, beginning of period............... 662.7 1,025.8 815.5 720.0
------------ ----------- ----------- -----------
Cash and cash equivalents, end of period..................... $ 712.0 $ 607.6 $ 712.0 $ 607.6
============ =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
THE PHOENIX COMPANIES, INC.
Consolidated Statement of Changes in Stockholders' Equity
(in millions)
Three and Nine Months Ended September 30, 2002 and 2001
Three Months Nine Months
---------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------- ------------
STOCKHOLDERS' EQUITY, BEGINNING OF PERIOD............. $2,211.6 $2,390.4 $2,395.7 $1,840.9
COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL:
Common shares issuable in demutualization ............ -- -- -- 1,621.7
Policyholder credits and cash payments in
demutualization.................................... -- -- -- (41.5)
Common shares issued in initial public offering....... -- -- -- 807.9
Other common shares issued............................ -- 23.1 -- 23.1
Restricted stock units awarded........................ 8.0 -- 8.0 --
Other additional paid-in capital...................... 6.0 -- 6.0 --
ACCUMULATED DEFICIT:
Net loss.............................................. (93.0) (21.2) (231.6) (195.2)
Common stock dividends declared....................... -- -- (15.8) --
Transfer from retained earnings to common stock
and additional paid-in capital in demutualization.. -- -- -- (1,621.7)
Policyholder dividend obligation equity
adjustment......................................... -- (14.2) -- (44.5)
Other equity adjustments.............................. -- -- -- 3.2
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Other comprehensive income (loss), net ............... (29.3) 31.0 10.9 15.2
TREASURY STOCK:
Common shares acquired................................ (55.7) (42.6) (125.6) (42.6)
------------ ------------ ------------- ------------
STOCKHOLDERS' EQUITY, END OF PERIOD................... $2,047.6 $ 2,366.5 $2,047.6 $ 2,366.5
============ ============ ============= ============
The accompanying notes are an integral part of these consolidated financial statements.
THE PHOENIX COMPANIES, INC.
Notes to the Unaudited Consolidated Financial Statements
1. Description of Business
The Phoenix Companies, Inc. and its subsidiaries ("Phoenix") provide 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. Phoenix offers a broad range of life insurance, annuity and investment
management solutions through a variety of distributors. These products and services are managed within two operating segments
(Life and Annuity and Investment Management) and two additional reporting segments (Venture Capital and Corporate and Other). See
note 6, "Segment Information."
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") for interim financial information. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair
statement have been included. Operating results for the three and nine months ended September 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2002. These unaudited consolidated financial
statements should be read in conjunction with the consolidated financial statements of Phoenix for the year ended December 31,
2001 on Form 10-K.
3. Reorganization and Initial Public Offering
On December 18, 2000, the board of directors of Phoenix Home Life Mutual Insurance Company ("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 the
demutualization, Phoenix Mutual converted from a mutual life insurance company to a stock life insurance company, became a
wholly-owned subsidiary of Phoenix and changed its name to Phoenix Life Insurance Company ("Phoenix Life"). At the same time,
Phoenix Investment Partners, Ltd. ("PXP"), Phoenix's investment management subsidiary, became an indirect wholly-owned subsidiary
of Phoenix. On the effective date of the demutualization, all 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 for their policyholder
membership interests in the mutual company. The demutualization was accounted for as a reorganization. Accordingly, Phoenix's
retained earnings immediately following the demutualization and the closing of the Initial Public Offering ("IPO") on June 25,
2001 (net of the cash payments and policy credits that were charged directly to retained earnings) were reclassified to common
stock and additional paid-in capital. In addition, Phoenix Life established a closed block for the benefit of holders of certain
of its individual life insurance policies. The purpose of the closed block is to protect, after demutualization, the reasonable
policy dividend expectations of the holders of the policies included in the closed block. The closed block will continue in effect
until such date as none of such policies are in force. See note 7, "Closed Block."
On June 25, 2001, Phoenix closed its 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 totaling $807.9 million were contributed to Phoenix Life. On July 24, 2001, the lead underwriter
exercised its right to purchase 1,395,900 shares of the common stock of Phoenix at the IPO price of $17.50 per share less
underwriters' discount. Additional proceeds of $23.2 million were contributed to Phoenix Life.
4. Summary of New Significant Accounting Policies
Goodwill and Other Intangible Assets
Effective January 1, 2002, Phoenix adopted the new accounting standard for goodwill and other intangible assets, including amounts
reflected in equity-method investments. The standard primarily addresses the accounting for goodwill and intangible assets
subsequent to their initial recognition. Under the standard, amortization of goodwill and other intangible assets with indefinite
lives recorded in past business combinations was discontinued after 2001 and reporting units have been identified for the purpose
of assessing potential future impairments of goodwill. In accordance with the standard, amortization of goodwill and
indefinite-lived assets has not been recognized after 2001. Phoenix recognized $5.3 million and $15.4 million (after-tax) in
goodwill and other intangible assets amortization during the three and nine months ended September 30, 2001, respectively, that
would not have been recognized had the new accounting standard been in effect in those periods.
The standard also requires that goodwill and indefinite-lived intangible assets be tested at least annually for impairment. Upon
adoption of the standard, Phoenix tested goodwill and indefinite-lived intangibles for impairment by comparing the fair value to
the carrying amount of the asset as of the beginning of 2002. Adopting the standard in 2002 resulted in a cumulative effect of
accounting change which decreased after-tax income by $130.3 million ($1.32 per share) for the nine months ended September 30,
2002, primarily related to the company's investment management segment.
In the third quarter of 2002, Phoenix tested its goodwill in accordance with the new accounting standard. Phoenix determined that
the carrying value of goodwill of certain PXP reporting units had become impaired and recorded a charge of $66.3 million ($62.3
million after-tax) in the third quarter.
5. Significant Transactions
Management Restructuring Reserve
Phoenix recorded a reserve of $33.5 million, pre-tax ($21.8 million, after-tax) in the second quarter of 2002 primarily in
connection with organizational and employment-related costs. In the third quarter of 2002, the reserve was increased $5.6 million,
pre-tax, ($3.6 million, after-tax) for additional related costs.
Collateralized Bond Obligation
In August 2002, PXP closed the Phoenix-Mistic 2002-1 CBO, Ltd. $1 billion collateralized bond obligation consisting primarily of
investment grade fixed income assets. The related assets and liabilities are included in separate account and investment trust
assets and liabilities at September 30, 2002.
Variable Life and Annuity Business Acquisition
On July 23, 2002, Phoenix Life, through a wholly-owned subsidiary, acquired the variable life and variable annuity business of
Valley Forge Life Insurance Company (a subsidiary of CNA Financial Corporation), effective July 1, 2002. The business acquired had
a total account value of about $557.0 million as of June 30, 2002. This transaction was effected through a coinsurance agreement.
The business acquired generated a $3.9 million loss, after taxes, for the three and nine months ended September 30, 2002.
PXP's Purchase of Kayne Anderson Rudnick Investment Management, LLC
On January 29, 2002, PXP acquired a majority interest in Kayne Anderson Rudnick. In accordance with the terms of the acquisition
agreement, PXP purchased an initial 60% interest, with future purchases of an additional 15% to occur by 2007. Kayne Anderson
Rudnick's management retained the remaining ownership interests. In addition to the cash payment of approximately $100 million
made at closing, a subsequent payment may be made in 2004 based upon management fee revenue growth of the purchased business
through 2003. Kayne Anderson Rudnick, based in Los Angeles, California, had approximately $8.1 billion in assets under management
at September 30, 2002. Kayne Anderson Rudnick's results of operations for the period beginning January 30, 2002 through September
30, 2002 are included in our consolidated results of operations for the nine months ended September 30, 2002. Our 2001 results do
not include the financial results of Kayne Anderson Rudnick. Had Kayne Anderson Rudnick been acquired at the beginning of 2001, it
would have contributed the following to Phoenix's consolidated revenues and income before tax and minority interest for the three
and nine months ended September 30, 2001 (in millions):
Three Months Nine Months
------------------ ------------------
Revenues..................................... $ 10.5 $ 28.5
Income before taxes and minority interest ... 4.0 9.3
Stock Repurchase Program
Phoenix has a stock repurchase program with a total share repurchase authorization of 13 million shares. Purchases can be made on
the open market, as well as through negotiated transactions, subject to market prices and other conditions. The repurchase program
may be modified, extended or terminated by the board of directors at any time. At September 30, 2002, Phoenix had repurchased 12.0
million common stock shares at an average price of $15.92 per share, including 7.5 million shares acquired in the nine months
ended September 30, 2002 at an average price of $16.61 per share.
Deferred Policy Acquisition Costs
In the first quarter of 2002, Phoenix revised the mortality assumptions used in the development of estimated gross margins for the
traditional participating block of business to reflect favorable experience. This revision resulted in a pre-tax $22.1 million
decrease in deferred policy acquisition cost amortization expense in the first quarter of 2002. In the third quarter of 2002,
Phoenix revised the long-term market return assumption for the variable annuity block of business from 8% to 7%. In addition, as
of September 30, 2002, Phoenix recorded an impairment charge related to the recoverability of its deferred acquisition cost asset
related to the variable annuity business. The revision in long-term market return assumption and the impairment charge resulted
in a $13.5 million pre-tax ($8.8 million after-tax) increase in policy acquisition cost amortization expense in the third quarter
of 2002.
6. Segment Information
The following tables provide certain information about Phoenix's operating segments as of September 30, 2002, December 31, 2001 and
for each of the three and nine months ended September 30, 2002 and 2001 (in millions).
Three Months Nine Months
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ----------- ----------- -----------
Consolidated revenues:
Life and Annuity...................................... $ 620.9 $ 603.1 $ 1,754.5 $ 1,727.0
Investment Management................................. 65.6 65.3 209.2 205.2
------------ ----------- ----------- -----------
Total operating segment revenues................... 686.5 668.4 1,963.7 1,932.2
Venture Capital....................................... (22.0) (48.5) (56.9) (100.2)
Corporate and Other................................... 4.7 11.7 21.2 20.2
------------ ----------- ----------- -----------
Total segment revenues............................. 669.2 631.6 1,928.0 1,852.2
Net realized investment losses........................ (10.5) (16.7) (74.1) (37.2)
Other non-recurring revenue items..................... -- -- -- 3.8
Elimination of inter-segment revenues................. (3.9) (5.1) (12.8) (17.1)
------------ ----------- ----------- -----------
Total revenues..................................... $ 654.8 $609.8 $ 1,841.1 $ 1,801.7
============ =========== =========== ===========
Life and Annuity revenues:
Premiums.............................................. $ 297.1 $ 302.8 $ 813.9 $ 836.0
Insurance and investment product fees................. 78.7 72.0 235.2 226.2
Net investment income................................. 245.1 228.3 705.4 664.8
------------ ----------- ----------- -----------
Total revenues..................................... $ 620.9 $ 603.1 $1,754.5 $1,727.0
============ =========== =========== ===========
Investment Management revenues:
Investment product fees............................... $ 62.6 $ 63.4 $ 199.4 $ 200.2
Net investment income................................. 3.0 1.9 9.8 5.0
------------ ----------- ----------- -----------
Total revenues..................................... $ 65.6 $ 65.3 $ 209.2 $ 205.2
============ =========== =========== ===========
Income (loss):
Life and Annuity...................................... $ (1.9) $ 11.6 $ 54.2 $ 59.2
Investment Management................................. (65.2) (3.2) (62.5) (1.3)
----------- ----------- ----------- -----------
Total operating segment pre-tax operating income.. (67.1) 8.4 (8.3) 57.9
Venture Capital....................................... (22.0) (48.5) (56.9) (100.2)
Corporate and Other................................... (12.7) (1.9) (33.4) (42.0)
----------- ----------- ----------- -----------
Total segment pre-tax operating loss.............. (101.8) (42.0) (98.6) (84.3)
Applicable income tax benefit......................... (20.0) (14.7) (25.5) (36.4)
----------- ----------- ----------- -----------
Segment operating loss................................ (81.8) (27.3) (73.1) (47.9)
Non-operating losses, net:
Net realized investment losses........................ (7.6) (10.7) (16.7) (24.1)
Other non-recurring income (losses)................... (3.6) 16.8 (11.5) (57.8)
----------- ----------- ----------- -----------
Loss before cumulative effect of accounting changes $ (93.0) $ (21.2) $(101.3) $(129.8)
=========== =========== =========== ===========
September 30, December 31,
2002 2001
----------------- ----------------
Consolidated assets:
Life and Annuity............................................................. $ 20,482.3 $18,925.0
Investment Management........................................................ 1,034.0 1,165.0
Venture Capital.............................................................. 230.6 291.7
Corporate and Other.......................................................... 2,853.0 2,122.9
----------------- ----------------
Total segment assets...................................................... 24,599.9 22,504.6
Net assets of discontinued operations........................................ 20.8 20.8
----------------- ----------------
Total assets.............................................................. $24,620.7 $22,525.4
================= ================
7. Closed Block
On the date of demutualization, Phoenix Life established a closed block for the benefit of holders of certain individual
participating life insurance policies and annuities of Phoenix Life for which Phoenix Life had a dividend scale payable in 2000.
See note 15 of Phoenix's consolidated financial statements for the year ended December 31, 2001 in Phoenix's Form 10-K for more
information on the closed block.
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 September 30, 2002
in excess of expected cumulative earnings did not inure to stockholders and have been used to establish a policyholder dividend
obligation as of September 30, 2002.
The following summarizes certain financial information relating to the closed block as of September 30, 2002 and December 31, 2001
(in millions):
2002 2001
-------------- ------------
Liabilities:
Policy liabilities and policyholder deposit funds..................... $ 9,377.2 $ 9,150.2
Policyholder dividends payable........................................ 369.5 357.3
Policyholder dividend obligation...................................... 530.6 167.2
Other closed block liabilities........................................ 45.3 48.8
-------------- ------------
Total closed block liabilities........................................ 10,322.6 9,723.5
-------------- ------------
Assets:
Available-for-sale debt securities at fair value...................... 6,449.4 5,742.0
Mortgage loans........................................................ 375.5 386.5
Policy loans.......................................................... 1,402.5 1,407.1
Cash and cash equivalents............................................. 96.1 176.6
Accrued investment income............................................. 129.1 125.3
Premiums receivable................................................... 40.0 41.1
Deferred income taxes................................................. 404.1 392.8
Other closed block assets............................................. 23.3 18.3
-------------- ------------
Total closed block assets............................................. 8,920.0 8,289.7
-------------- ------------
Excess of closed block liabilities over closed block assets
representing maximum future earnings to be recognized from
closed block assets and liabilities................................ $ 1,402.6 $ 1,433.8
============== ============
The following summarizes the components of the change in our policyholder dividend obligation for the nine months ended September
30, 2002 and the six months ended December 31, 2001 (in millions):
2002 2001
------------ -----------
Change In Policyholder Dividend Obligation:
Balance at beginning of period........................................ $ 167.2 $ 115.5
Unrealized gains on assets............................................ 364.4 38.5
Excess of cumulative (loss) income.................................... (1.0) 13.2
-------------- ------------
Balance at end of period.............................................. $ 530.6 $ 167.2
============== ============
The following summarizes certain financial information relating to the closed block for the nine months ended September 30, 2002
(in millions):
Revenues:
Premiums................................................ $788.9
Net investment income................................... 422.8
Realized investment losses, net......................... (50.3)
----------
Total revenues.......................................... 1,161.4
----------
Expenses:
Benefits to policyholders............................... 811.4
Dividends to policyholders.............................. 294.6
Other operating costs and expenses...................... 8.6
Change in policyholder dividend obligation.............. (1.0)
----------
Total benefits and expenses............................. 1,113.6
----------
Contribution from the closed block, before income taxes 47.8
Income tax expense...................................... 16.6
----------
Contributions from closed block, after income taxes..... $ 31.2
==========
8. Income Taxes
The income taxes attributable to losses before cumulative effect of accounting changes are different than the amounts determined by
multiplying income before income taxes by the statutory income tax rate. The sources of the difference and the income tax effects
of each for the three months and the nine months periods ended September 30, 2002 and 2001were as follows (dollars in millions):
Three Months Nine Months
---------------------------------------------- -----------------------------------------------
2002 2001 2002 2001
--------------------- --------------------- --------------------- ---------------------
Amount % Amount % Amount % Amount %
---------- ------- ---------- ------- ---------- ------ ---------- -------
Income tax expense
(benefit) at statutory
rate.................... $(40.6) (35)% $(22.0) (35)% $(46.4) (35)% $(81.1) (35)%
Goodwill impairment....... 19.5 17% -- -- 19.5 15% -- --
Dividend received
deduction and tax
exempt interest.......... (1.6) (1)% (1.0) (2)% (2.6) (2)% (4.6) (2)%
Minority interest ........ (1.1) (1)% (0.6) (1)% (3.2) (2)% (1.8) (1)%
Low income housing
tax credit............... (1.0) (1)% (1.1) (2)% (3.1) (2)% (3.1) (1)%
Demutualization
expenses................. -- -- 0.7 1% 0.2 -- 6.8 3%
Differential earnings
(equity tax)............ -- -- (21.0) (33)% -- -- (21.0) (9)%
Other, net................ (1.2) (1)% 1.8 3% (4.8) (4)% (2.1) (1)%
---------- ------- ---------- ------- ---------- ------ ---------- -------
Income tax expense
(benefit)............... $(26.0) (22)% $(43.2) (69)% $(40.4) (30)% $(106.9) (46)%
========== ======= ========== ======= ========== ====== ========== =======
9. Discontinued Reinsurance Operations
In 1999, Phoenix exited its reinsurance operations through a combination of sale, reinsurance and placement of certain components
into run-off. The reinsurance segment consisted primarily of individual life reinsurance operations as well as group accident and
health reinsurance business. Phoenix placed the retained group accident and health reinsurance business into run-off. Phoenix
adopted a formal plan to stop writing new contracts covering these risks and end the existing contracts as soon as those contracts
would permit. However, Phoenix remained liable for claims under those contracts.
Phoenix has established reserves and reinsurance recoverables for claims and related expenses that we expect to pay on our
discontinued group accident and health reinsurance business. These reserves and reinsurance recoverables 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 cost of winding down
the business. Total reserves were $40 million and total reinsurance recoverables were $80 million at September 30, 2002. In
addition, in 1999 we purchased finite aggregate excess-of-loss reinsurance to further protect us from unfavorable results from
this discontinued business. The maximum coverage available is currently $150 million. The amount of our total financial
provisions at September 30, 2002 was therefore $110 million, consisting of reserves, less reinsurance recoverables, plus the
amount currently available from our finite aggregate excess-of-loss reinsurance. Based on the most recent information available,
Phoenix did not recognize any additional reserve provisions during the first nine months of 2002.
Phoenix's reserves and aggregate excess-of-loss reinsurance coverage are expected to cover the run-off of the business; however,
the nature of the underlying risks is such that the claims may take years to reach the reinsurers involved. Therefore, Phoenix
expects to pay claims out of existing estimated reserves for up to ten years as the level of business diminishes.
A significant portion of the claims arising from the discontinued group accident and health reinsurance business arises from the
activities of Unicover Managers, Inc. ("Unicover"). Unicover organized and managed a group, or pool, of insurance companies
("Unicover pool") and certain other facilities, which reinsured the life and health insurance components of workers' compensation
insurance policies issued by various property and casualty insurance companies. Phoenix was a member of the Unicover pool. Phoenix
terminated its participation in the Unicover pool effective March 1, 1999.
Phoenix is involved in disputes relating to the activities of Unicover. Under Unicover's underwriting authority, the Unicover pool
and Unicover facilities wrote a dollar amount of reinsurance coverage that was many times greater than originally estimated. As a
member of the Unicover pool, Phoenix is involved in several disputes in which the pool members assert that they can deny coverage
to certain insurers that claim that they purchased reinsurance coverage from the pool.
Further, Phoenix was, along with Sun Life Assurance of Canada ("Sun Life") and Cologne Life Reinsurance Company ("Cologne Life"),
a retrocessionaire (meaning a reinsurer of other reinsurers) of the Unicover pool and two other Unicover facilities, providing the
pool and facility members with reinsurance of the risks that the pool and facility members had assumed. In September 1999, Phoenix
joined an arbitration proceeding that Sun Life had begun against the members of the Unicover pool and the Unicover facilities. In
this arbitration, Phoenix and Sun Life sought to cancel their retrocession agreement on the grounds that material misstatements
and nondisclosures were made to them about, among other things, the amount of risks they would be reinsuring. The arbitration
proceeded only with respect to the Unicover pool, because Phoenix, Sun Life and Cologne Life reached settlement with the two
Unicover facilities in the first quarter of 2000. On October 8, 2002, the arbitration panel issued its decision. The financial
implications of the decision are consistent with Phoenix's current financial provisions.
In its capacity as a retrocessionaire of the Unicover business, Phoenix had an extensive program of its own reinsurance in place
to protect it from financial exposure to the risks it had assumed. Currently, Phoenix is involved in separate arbitration
proceedings with certain of its own retrocessionaires which are seeking on various grounds to avoid paying any amounts to Phoenix.
Most of these proceedings remain in their preliminary phases. Because the same retrocession program that covers Phoenix's Unicover
business covers a significant portion of its other remaining group accident and health reinsurance business, Phoenix could have
additional material losses if one or more of its retrocesssionaires successfully avoids its obligations.
A second set of disputes involves personal accident business that was reinsured in the London reinsurance market in the mid-1990s
in which Phoenix participated. The disputes involve multiple layers of reinsurance, and allegations that the reinsurance program
created by the brokers involved in placing those layers was interrelated and devised to disproportionately pass losses to a top
layer of reinsurers. Many companies who participated in this business are involved in arbitrations in which those top layer
companies are attempting to avoid their obligations on the basis of misrepresentation. Because of the complexity of the disputes
and the reinsurance arrangements, many of these companies are currently participating in negotiations of the disputes for certain
contract years, and Phoenix believes that similar discussions will follow for the remaining years. Although Phoenix is vigorously
defending its contractual rights, Phoenix is actively involved in the attempt to reach negotiated business solutions.
Given the uncertainty associated with litigation and other dispute resolution proceedings, and the expected long-term development
of net claims payments, the estimated amount of the loss on disposal of reinsurance discontinued operations may differ from actual
results. However, it is management's opinion, after consideration of the provisions made in these financial statements, that
future developments will not have a material effect on Phoenix's consolidated financial position.
The assets and liabilities of the discontinued operations have been excluded from the assets and liabilities of continuing
operations and separately identified on the Consolidated Balance Sheet. Net assets of the discontinued operations totaled $20.8
million as of September 30, 2002 and December 31, 2001.
There were no discontinued reinsurance operating results for the nine months ended September 30, 2002 and 2001.
10. Commitments and Contingencies
Certain group accident and health reinsurance business has become the subject of disputes concerning the placement of the business
with reinsurers and the recovery of the reinsurance. See note 9, "Discontinued Reinsurance Operations."
Phoenix has commitments under the terms of two of its acquisition agreements. Phoenix may be obligated to pay an additional amount
in 2005 for its initial ownership interest in Capital West Asset Management, LLC depending upon Capital West Asset Management's
revenue growth through 2004. Phoenix may also be obligated to pay an additional amount in 2004 for its initial ownership interest
in Kayne Anderson Rudnick based upon Kayne Anderson Rudnick's management fee revenue growth through 2003. In addition, Phoenix
will purchase additional ownership interests in Capital West Asset Management and Kayne Anderson Rudnick by 2007.
As of September 30, 2002, Phoenix had off-balance sheet unfunded commitments totaling $164.1 million to 78 different private
equity funds. These unfunded commitments can be drawn down by the various private equity funds as necessary to fund their
portfolio investments over the next three years. The amount collectively drawn down by the private equity funds in our portfolio
over the nine months ended September 30, 2002 was $31.8 million. The amounts collectively drawn down by the private equity funds
in our portfolio over the last three years were $47.0 million in 2001, $96.9 million in 2000 and $108.5 million in 1999. During
that same three-year period, the private equity funds in our portfolio have made cash and stock distributions to Phoenix valuing
$63.1 million in 2001, $245.1 million in 2000 and $101.4 million in 1999. Cash and stock distributions to Phoenix for the nine
months ended September 30, 2002 were $34.8 million.
Phoenix has letters of credit provided by commercial banks totaling $10.3 million as of September 30, 2002.
Phoenix has entered into certain agreements with a small number of both Phoenix Life's and PXP's key executives that will, in
certain circumstances, provide separation benefits upon the termination of an executive's employment by the company for reasons
other than death, disability, cause or retirement, or by the executive for "good reason," as defined in the agreements. For most
of these executives, the agreements provide this protection only if the termination occurs following (or is effectively connected
with) the occurrence of a change of control, as defined in the agreements. For additional details, see our proxy statement for
the 2002 Annual Meeting of Shareholders and the various employment-related contracts contained as exhibits in our filings with the
Securities and Exchange Commission.
11. Stock-based Compensation
Stock Options
Phoenix has a plan through which it makes options available to employees at the discretion of its board of directors. Non-employee
directors receive option grants under a separate plan at the discretion of the board of directors. Exercise prices are generally
fixed at the market value of the company's common stock at the date of grant. Under the employee plan, options vest and are
exercisable over a three-year period. Under the directors plan, options vest and are exercisable immediately, provided no options
may be exercised until after the second anniversary of the company's IPO. The employee plan authorized the issuance of up to 5% of
the total number of common stock shares outstanding immediately after the IPO in June 2001, or 5.3 million shares. All options
have an expiration date not exceeding ten years. The directors plan authorized the issuance of not more than 500,000 shares.
Phoenix granted 5,000 options during the three months ended September 30, 2002 and 4,456,906 options during the nine months ended
September 30, 2002. The options granted during the second quarter were granted at $16.20 and the options granted during the third
quarter were granted at $15.90. During the three and nine months ended September 30, 2002, 7,500 options were forfeited; no
options were exercised and none expired. No options were exercisable at September 30, 2002.
Phoenix has chosen to account for these stock options in accordance with initial accounting guidance that treats these options as
capital transactions, not as compensation expense. Accordingly, Phoenix is providing pro forma disclosures of earnings and
earnings per share as if it had elected to treat the options as compensation expense (in millions, except per share amounts):
Three Nine
Months Months
------------ ------------
Net income (loss):
As reported................................................ $ (93.0) $ (231.6)
Pro forma.................................................. $ (95.4) $ (236.9)
Basic earnings per share:
As reported................................................ $ (.96) $ (2.34)
Pro forma.................................................. $ (.99) $ (2.39)
Pro forma after-tax compensation expense is $2.4 million for the three months ended September 30, 2002 and $5.3 million for the
nine months ended September 30, 2002. The options related to approximately $1.3 million of the pro forma expense have fully vested
as of September 30, 2002 and there will be no additional pro forma expense recognition for those options.
The pro forma adjustment relating to options granted is based on a fair value method using the Black-Scholes option pricing model.
Valuation and related assumption information consists of: expected volatility at 34.9%, risk-free interest rate at 5.5% and common
share dividend yield of 0.9%. The Black-Scholes option valuation model was developed for use in estimating the fair value of
options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected share price volatility. Because Phoenix's share options have characteristics
significantly different from those of traded options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, especially in a security traded for only a short time, in Phoenix's opinion the existing models do
not necessarily provide a reliable measure of the fair value of its share options. Notwithstanding these concerns, the
Black-Scholes model was used to develop the above pro forma costs.
Restricted Stock Units
During the third quarter of 2002, Phoenix awarded 573,477 restricted stock units valued at $13.95 per share. The entire expense
associated with the award was recognized for the three months ended September 30, 2002 with a corresponding credit to additional
paid-in capital. The restriction period for this award ends June 25, 2006, at which time shares of Phoenix common stock will be
issued to settle the restricted stock units obligation.
12. Earnings Per Share
The 2001 weighted-average shares outstanding calculation is pro forma and is based on the weighted-average shares outstanding for
the period from the demutualization and initial public offering to the end of the year.
Common stock equivalents, including stock options and restricted stock units, have not been included in the earnings per share
calculation because the effect would be anti-dilutive. If the effect had been dilutive, there would have been 573,477 common stock
equivalent shares from restricted stock units. The weighted-average effect from the restricted stock units on the quarter would
have been 19,116 shares, and the year-to-date effect would have been 6,372 shares.
13. Subsequent Event
At September 30, 2002, Phoenix owned approximately 6.1% (13.95% when the convertible subordinated debenture is included) of the
common stock of Hilb, Rogal and Hamilton Company, or HRH, a publicly-traded insurance intermediary. Phoenix acquired 1,730,084
shares of HRH common stock in 1999. Also in 1999, Phoenix acquired a 5.25% convertible subordinated debenture issued by HRH for
$32.0 million. We converted the debenture, which would have matured on May 3, 2014, into 2,813,186 shares of HRH common stock on
November 12, 2002.
Our investment in HRH common stock is reported on the equity method. Our investment in HRH's convertible debenture is reported at
fair value with net unrealized gains or losses included in equity. The notes and common stock are classified as affiliate equity
and debt securities in the consolidated balance sheet.
On November 13, 2002, Phoenix sold 3,622,500 stock purchase contracts, including 472,500 stock purchase contracts pursuant to an
over-allotment option granted to the underwriters of the offering. The purchase contracts were sold at a price of $38.10 per
purchase contract.
Under each purchase contract, Phoenix will make quarterly contract adjustment payments at the rate of 7.0 percent of the initial
price per year, payable quarterly beginning on February 13, 2003. Contract holders will receive shares of HRH from us on November
13, 2005. The number of shares to be delivered for each purchase contract on the settlement date will range between 0.8197 shares
and 1.000 shares, depending on HRH's stock price during a specified period prior to the settlement date.
The purchase contract offering was concurrent with a separate secondary offering of 1,804,000 shares of HRH common stock, 654,000
of which were being offered by Phoenix, with the remaining 1,150,000 being offered by HRH. Those shares initially were priced at
$38.10 per share. Phoenix also granted the underwriters an over-allotment option of up to 266,770 shares.
After deducting for underwriting discounts and commissions, Phoenix received $156.5 million in aggregate net proceeds from the
stock purchase contracts offering, the exercise of the related over-allotment option, and the separate secondary offering. Phoenix
will convey these net proceeds (or approximately $166 million if the remaining underwriters' over-allotment option is exercised)
to Phoenix Life (our subsidiary that originally owned the stock and convertible notes), which will use the proceeds for general
corporate purposes. Assuming the remaining over-allotment options are exercised, Phoenix would recognize an additional pre-tax
GAAP realized gain of approximately $23 million in the fourth quarter of 2002 and at least $94 million in the fourth quarter of
2005. In addition, Phoenix Life would recognize a pre-tax statutory gain of approximately $54.5 million in the fourth quarter of
2002.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's discussion and analysis reviews: our consolidated financial condition as of September 30, 2002 as compared to December
31, 2001; our consolidated results of operations for the three and nine months ended September 30, 2002 and 2001; and, where
appropriate, factors that may affect our future financial performance. This discussion and analysis should be read in conjunction
with our unaudited interim financial statements and notes thereto of The Phoenix Companies, Inc. ("Phoenix") contained in this filing
as well as in conjunction with the audited financial statements and related notes included in our Annual Report on Form 10-K for the
year ended December 31, 2001.
This quarterly report contains statements that constitute forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These include statements relating to trends in, or representing our beliefs about, our future
strategies, operations and financial results, as well as other statements including words such as "anticipate," "believe," "plan,"
"estimate," "expect," "intend," "may," "should" and other similar expressions. Forward-looking statements are made based upon our
current expectations and beliefs concerning trends and future developments and their potential effects on the company. They are not
guarantees of future performance. Actual results may differ materially from those suggested by forward-looking statements as a result
of risks and uncertainties, which include, among others:
o changes in general economic conditions, including changes in interest and currency exchange rates and the performance of
financial markets;
o heightened competition with respect to pricing, entry of new competitors and the development of new products and services by
new and existing competitors;
o our primary reliance, as a holding company, on dividends from our subsidiaries to meet debt payment obligations and the
applicable regulatory restrictions on the ability of our subsidiaries to pay such dividends;
o regulatory, accounting or tax changes that may affect the cost of, or demand for, the products or services of our
subsidiaries;
o downgrades in the claims paying ability or financial strength ratings of our subsidiaries;
o discrepancies between actual claims experience and assumptions used in setting prices for the products of insurance
subsidiaries' and establishing the liabilities of such subsidiaries for future policy benefits and claims relating to such
products;
o movements in the equity markets that affect our investment results, including those from venture capital, the fees we earn
from assets under management and the demand for our variable products;
o our success in achieving planned expense reductions; and
o other risks and uncertainties described from time to time in our filings with the Securities and Exchange Commission.
We specifically disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information,
future developments or otherwise.
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.
Our Demutualization
On June 25, 2001, Phoenix Home Life Mutual Insurance Company ("Phoenix Mutual") converted from a mutual life insurance company to a
stock life insurance company (Phoenix Life Insurance Company, or "Phoenix Life") and became a wholly-owned subsidiary of Phoenix. At
the same time, Phoenix Investment Partners, Ltd. ("PXP") became an indirect wholly-owned subsidiary of Phoenix.
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
June 25, 2001, 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 to support the
obligations and liabilities relating to these policies and 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 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 stockholders. 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, stockholder earnings will be affected.
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 believe that Phoenix Life will not have to pay these benefits from assets outside the closed block, unless
the closed block business experiences substantial adverse deviations in investment, mortality, persistency or other experience
factors. We will accrue contributions necessary to fund guaranteed benefits under the closed block if it becomes probable that we
will be required to fund any shortage.
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 September 30, 2002 in excess of expected cumulative earnings do not inure to
stockholders and have been used to establish a policyholder dividend obligation as of September 30, 2002. For the nine months ended
September 30, 2002, the increase in the policyholder dividend obligation of $363.4 million pre-tax consists of $1.0 million of
pre-tax losses offset by the change in unrealized gains on assets in the closed block of $364.4 million, pre-tax.
We incurred costs relating to the demutualization, excluding costs relating to the initial public offering, of $39.2 million, net of
income taxes of $10.2 million, of which $14.1 million was recognized in the year ended December 31, 2000, $23.9 million was
recognized in the year ended December 31, 2001 and $1.2 million was recognized in the nine months ended September 30, 2002.
Recently Issued Accounting Standard
Goodwill and Other Intangible Assets. Effective January 1, 2002, we adopted the new accounting standard for goodwill and other
intangible assets, including amounts reflected in equity-method investments. The standard primarily addresses the accounting for
goodwill and intangible assets subsequent to their initial recognition. Under the standard, amortization of goodwill and other
intangible assets with indefinite lives recorded in past business combinations was discontinued after 2001 and reporting units have
been identified for the purpose of assessing potential future impairments of goodwill. In accordance with the standard, amortization
of goodwill and indefinite-lived assets has not been recognized after 2001.
The standard also requires that goodwill and indefinite-lived intangible assets be tested at least annually for impairment. Upon
adoption of the standard, we tested our goodwill and indefinite-lived intangible assets for impairment by comparing the fair value to
the carrying amount of the asset as of the beginning of 2002. The effect of adopting the standard in 2002 decreased after-tax income
by $130.3 million ($1.32 per share) for the nine months ended September 30, 2002, primarily due to declines in the market value of
investment management business units previously acquired.
In the third quarter of 2002, we tested our goodwill in accordance with the new accounting standard. We determined that the carrying
value of certain goodwill had become impaired. Consequently, we wrote-off $66.3 million ($62.3 million after-tax) of goodwill in the
third quarter. See note 4 of the unaudited consolidated financial statements in this Form 10-Q.
Significant Transactions
Management Restructuring Reserve. We recorded a reserve of $33.5 million, pre-tax ($21.8 million, after-tax) in the second quarter of
2002 primarily in connection with organizational and employment-related costs. In the third quarter of 2002, the reserve was
increased $5.6 million, pre-tax ($3.6 million, after-tax) for additional related costs.
Collateralized Bond Obligation. In August 2002, PXP closed the Phoenix-Mistic 2002-1 CBO, Ltd. $1 billion collateralized bond
obligation consisting primarily of investment grade fixed income assets. The related assets and liabilities are included in separate
account and investment trust assets and liabilities at September 30, 2002.
Variable Life and Annuity Business Acquisition. On July 23, 2002, Phoenix Life, through a wholly-owned subsidiary, acquired the
variable life and variable annuity business of Valley Forge Life Insurance Company (a subsidiary of CNA Financial Corporation),
effective July 1, 2002. The business acquired had a total account value of about $557.0 million as of June 30, 2002. This transaction
was effected through a coinsurance agreement. The business acquired generated a $3.9 million operating loss, after taxes, for the
three and nine months ended September 30, 2002.
Kayne Anderson Rudnick. On January 29, 2002, PXP acquired a majority interest in Kayne Anderson Rudnick. In accordance with the terms
of the acquisition agreement, PXP purchased an initial 60% interest, with future purchases of an additional 15% to occur by 2007.
Kayne Anderson Rudnick's management retained the remaining ownership interests. In addition to the cash payment of approximately
$100 million made at closing, a subsequent payment may be made in 2004 based upon growth in management fee revenues of the purchased
business through 2003. Kayne Anderson Rudnick, based in Los Angeles, California, had approximately $8.1 billion in assets under
management at September 30, 2002. Kayne Anderson Rudnick's results of operations for the period beginning January 30, 2002 through
September 30, 2002 are included in our consolidated results of operations for the nine months ended September 30, 2002. Our 2001
results do not include the financial results of Kayne Anderson Rudnick. Had Kayne Anderson Rudnick been acquired at the beginning of
2001, it would have contributed $10.5 million to Phoenix's consolidated revenues for the quarter ended September 30, 2001, and it
would have contributed $4.0 million to income from operations (pre-tax and excluding minority interest) for the quarter. Kayne
Anderson Rudnick's contribution to consolidated revenues for the nine months ended September 30, 2001 would have been $28.5 million,
and its contribution to income from operations would have been $9.3 million for the nine months ended September 30, 2001.
Stock Repurchase Program. We have a stock repurchase program with a total share repurchase authorization of 13 million shares.
Purchases can be made on the open market, as well as through negotiated transactions, subject to market prices and other conditions.
The repurchase program may be modified, extended or terminated by the board of directors at any time. At September 30, 2002, we had
repurchased 12.0 million shares of our common stock at an average price of $15.92 per share, including 7.5 million shares acquired in
the nine months ended September 30, 2002 at an average price of $16.61 per share.
Deferred Policy Acquisition Costs. In the first quarter of 2002, we revised the mortality assumptions used in the development of
estimated gross margins for the traditional participating block of business to reflect favorable experience. This revision resulted
in a pre-tax $22.1 million decrease in policy acquisition cost amortization expense in the first quarter of 2002. In the third
quarter of 2002, we revised the long-term market return assumption for the annuity block of business from 8% to 7%. In addition, as
of September 30, 2002, Phoenix recorded an impairment charge related to the recoverability of its deferred acquisition cost asset
related to the variable annuity business. The revision in long-term market return assumption and the impairment charge resulted in a
$13.5 million pre-tax ($8.8 million after-tax) increase in policy acquisition cost amortization expense in the third quarter of 2002.
Consolidated Results of Operations
The following table presents summary consolidated financial data for the three and nine months ended September 30, 2002 and 2001 (in
millions).
Three Months Nine Months
---------------------------------------- ---------------------------------------
2002 2001 Change 2002 2001 Change
---------- ----------- ---------- ---------- --------- ----------
REVENUES:
Premiums................................ $297.1 $ 302.7 $ (5.6) $813.9 $836.0 $(22.1)
Insurance and investment product fees... 139.4 129.1 10.3 425.6 414.3 11.3
Net investment income................... 228.8 194.7 34.1 675.7 588.6 87.1
Net realized investment losses.......... (10.5) (16.7) 6.2 (74.1) (37.2) (36.9)
---------- ----------- ---------- ---------- --------- ----------
Total revenues..................... 654.8 609.8 45.0 1,841.1 1,801.7 39.4
---------- ----------- ---------- ---------- --------- ----------
BENEFITS AND EXPENSES:
Policy benefits......................... 397.9 390.4 7.5 1,070.7 1,056.7 14.0
Policyholder dividends.................. 112.7 105.7 7.0 294.4 301.7 (7.3)
Policy acquisition cost amortization ... 41.1 33.3 7.8 41.6 95.3 (53.7)
Goodwill impairment..................... 66.3 -- 66.3 66.3 -- 66.3
Intangible asset amortization........... 8.9 12.7 (3.8) 24.8 37.2 (12.4)
Interest expense........................ 7.7 6.4 1.3 23.1 21.2 1.9
Demutualization expenses................ .2 5.3 (5.1) 1.7 24.8 (23.1)
Other operating expenses................ 135.9 118.8 17.1 451.0 496.4 (45.4)
---------- ----------- ---------- ---------- --------- ----------
Total benefits and expenses........ 770.7 672.6 98.1 1,973.6 2,033.3 (59.7)
---------- ----------- ---------- ---------- --------- ----------
Income (loss) before income taxes
and minority interest................ (115.9) (62.8) (53.1) (132.5) (231.6) 99.1
Applicable income tax (benefit)expense.. (26.0) (43.2) 17.2 (40.4) (106.9) 66.5
---------- ----------- ---------- ---------- --------- ----------
Income (loss) before minority interest (89.9) (19.6) (70.3) (92.1) (124.7) 32.6
Minority interest in net income of
subsidiaries......................... 3.1 1.6 1.5 9.2 5.1 4.1
---------- ----------- ---------- ---------- --------- ----------
Income (loss) before cumulative
effect of accounting changes......... (93.0) (21.2) (71.8) (101.3) (129.8) 28.5
Cumulative effect of accounting
changes:
Goodwill impairment................. -- -- -- (130.3) -- (130.3)
Securitized financial instruments... -- -- -- -- (20.5) 20.5
Venture capital partnerships........ -- -- -- -- (48.8) 48.8
Derivative financial instruments.... -- -- -- -- 3.9 (3.9)
---------- ----------- ---------- ---------- --------- ----------
Net loss................................ $ (93.0) $ (21.2) $ (71.8) $ (231.6) $ (195.2) $ (36.4)
========== =========== ========== ========== ========= ==========
The fluctuations in both premiums and insurance and investment product fees for the comparative three-month and nine-month periods
reflect our continued emphasis on variable universal life, universal life and annuity product sales, rather than on traditional life
product sales.
The increases in net investment income for the comparative three-month and nine-month periods were due primarily to decreased losses
in our venture capital portfolio in 2002 and increased investment income, including equity in the increased earnings of our
investments in Aberdeen. Investment income increased in 2002 due to higher invested asset balances from the investment of proceeds
from our IPO, our December 2001 debt offering and growth in our annuity business. The increase was partially offset by a drop in new
money rates during 2002.
The increase in realized investment losses for the comparative nine-month periods was due primarily to increased credit related
losses in the telecommunications industry and collateralized debt obligation holdings. The majority of these losses were in the
closed block.
The increase in policyholder dividends for the comparative three-month periods was due primarily to the growth of our policyholder
dividend obligation resulting from favorable mortality and persistency experience.
The increase in policy acquisition cost amortization for the comparative three-month periods was due primarily to a $13.5 million
pre-tax acceleration of deferred acquisition costs primarily related to the variable annuity business. It resulted from a revision of
our long-term market return assumption for annuities from 8% to 7% and an impairment charge related to the recoverability of our
deferred acquisition cost asset related to our variable annuities business. The Valley Forge block we acquired at the beginning of
the quarter, which experienced significant declines in assets due to equity market declines, accounts for $4.5 million of this
acceleration. The increase in amortization was partially offset by favorable mortality and persistency experience in other blocks of
business.
The decrease in policy acquisition cost amortization for the comparative nine-month periods was primarily due to favorable mortality
and persistency experience and revised mortality assumptions, offset by a $13.5 million acceleration of deferred acquisition cost
expense related to our annuity business in the third quarter of 2002. Deferred policy acquisition costs for individual participating
life insurance policies are amortized in proportion to estimated gross margins. The amortization process requires the use of various
assumptions, estimates and judgments about the future. The primary assumptions involve expenses, investment performance, mortality
and contract cancellations (i.e. lapses, withdrawals and surrenders). These assumptions are reviewed on a regular basis and are
generally based on our past experience, industry studies, regulatory requirements and judgments about the future. In the first
quarter of 2002, we revised the mortality assumptions used in the development of estimated gross margins to reflect favorable
experience and, as a result, the amortization cost decreased.
Goodwill impairment for the three-month and nine-month periods ended September 30, 2002 relates to goodwill associated with certain
of our investment management partners. In the third quarter of 2002, we tested our goodwill in accordance with the new accounting
standard. We determined that the carrying value of certain goodwill had become impaired and recorded a charge of $66.3 million ($62.3
million after-tax) in the third quarter.
The decreases in intangible asset amortization for the comparative three-month and nine-month periods were due to our current year
adoption of the recently issued goodwill accounting standard, which ended the amortization of goodwill and indefinite-lived assets on
January 1, 2002.
Interest expense increased in both current year reporting periods due to higher levels of indebtedness in 2002 than in 2001.
The increase in other operating expenses for the comparative three-month periods was due primarily to higher Life and Annuity expenses
and the non-recurring management restructuring charge of $5.6 million, pre-tax. Life and Annuity expenses were higher due principally
to pension costs, slightly higher compensation and corporate overhead absorption. The decrease in other operating expenses for the
comparative nine-month periods was due mostly to lower non-recurring charges and Corporate and Other segment expenses. This decrease
was partially offset by increases in Life and Annuity and Investment Mnagement segment expenses. Life and Annuity expenses were higher
due primarily to pension costs, slightly higher compensation and corporate overhead absorption. Investment Management expenses were
higher due to the expenses of Kayne Anderson Rudnick. We acquired a majority interest in Kayne Anderson Rudnick on January 29, 2002.
Our effective income tax benefit rates of 22.4% and 30.5% for the three months and nine months ended September 30, 2002,
respectively, differed from the statutory U.S. federal income tax benefit rate of 35% as a result of the tax benefits associated with
low income housing tax credits, non-taxable dividend and interest income and the recovery of non-taxable amounts related to an IRS
settlement, offset by the tax on nondeductible goodwill impairment charges. The effective income tax benefit rates of 68.8% and
46.2% for the three months and nine months ended September 30, 2001, respectively, also differed from the statutory income tax
benefit rate of 35% as a result of the non-deductible demutualization expenses offset by the tax benefits associated with low income
housing tax credits and non-taxable dividend and interest income.
Based on the current low level of pre-tax operating income in relation to permanent tax benefits, future changes in pre-tax operating
income may produce disproportionate changes to the effective income tax rate. As a result, the effective income tax rate for the
three and nine months ended September 30, 2002 should not be considered an estimate of the effective income tax rate for the year
2002. The effective benefit rate for the year 2001, excluding the equity tax applicable to mutual life insurance company operations
and nondeductible demutualization expenses, was 39%.
Results of Operations by Segment
We evaluate segment performance on the basis of segment operating income. Realized investment gains and some non-recurring items are
excluded because we do not consider them when evaluating the financial performance of the segments. The size and timing of realized
investment gains are often subject to our discretion. Non-recurring items are removed from segment operating income if, in our
opinion, they are not indicative of overall operating trends. While some of these items may be significant components of net income
reported in accordance with generally accepted accounting principles ("GAAP"), we believe that segment operating income is an
appropriate measure that represents earnings attributable to the ongoing operations of our business. The criteria used to identify
non-recurring items and to determine whether to exclude a non-recurring item from segment operating income include whether the item
is infrequent and:
o is material to the segment's operating income; or
o results from a business restructuring; or
o results from a change in the regulatory environment; or
o relates to other unusual circumstances (e.g., litigation).
Non-recurring items excluded from segment after-tax operating income may vary from period to period. Because such items are excluded
based on our discretion, inconsistencies in the application of our selection criteria may exist. Segment after-tax operating income
is not a substitute for net income determined in accordance with GAAP and may be different from similarly titled measures of other
companies.
Segment Allocations
We allocate capital to Investment Management on an historical cost basis and to our Life and Annuity segment based on 250% of company
action level risk-based capital. We allocate net investment income based on the assets allocated to each segment. We allocate other
costs and operating expenses to each segment based on the nature of such costs, cost allocations using time studies, and other
allocation methodologies.
The following table presents a reconciliation of segment operating income to GAAP reported income for the three and nine months ended
September 30, 2002 and 2001 (in millions).
Three Months Nine Months
-------------------------------------- ----------------------------------------
2002 2001 Change 2002 2001 Change
---------- ---------- ---------- ---------- ----------- ----------
SEGMENT OPERATING INCOME (LOSS):
Life and Annuity........................... $ (1.2) $ 7.6 $ (8.8) $ 35.2 $ 38.7 $ (3.5)
Investment Management...................... (60.0) (.8) (59.2) (55.4) (1.8) (53.6)
---------- ----------- ---------- ---------- ---------- ----------
Total operating segments................ (61.2) 6.8 (68.0) (20.2) 36.9 (57.1)
Venture Capital............................ (14.3) (31.5) 17.2 (37.0) (65.1) 28.1
Corporate and Other........................ (6.3) (2.6) (3.7) (15.9) (19.7) 3.8
---------- ---------- ---------- ---------- ----------- ----------
Total segment operating loss............ $(81.8) $ (27.3) (54.5) (73.1) $ (47.9) (25.2)
---------- ---------- ---------- ---------- ----------- ----------
ADJUSTMENTS:
Net realized investment losses............. (7.6) (10.7) 3.1 (16.7) (24.1) 7.4
Management restructuring reserve........... (3.6) -- (3.6) (25.4) -- (25.4)
Deferred policy acquisition costs
mortality assumptions refinement...... -- -- -- 15.1 -- 15.1
Pension adjustment......................... -- 2.9 (2.9) -- 2.9 (2.9)
Surplus tax................................ -- 21.0 (21.0) -- 21.0 (21.0)
Demutualization expenses................... -- (3.9) 3.9 (1.2) (22.9) 21.7
Early retirement pension adjustment........ -- -- -- -- (11.3) 11.3
Partnership gains.......................... -- -- -- -- 2.4 (2.4)
Expense of purchase of PXP minority
interest.............................. -- (3.2) 3.2 -- (49.9) 49.9
---------- ---------- ---------- ---------- ----------- ----------
Total adjustments....................... (11.2) 6.1 (17.3) (28.2) (81.9) 53.7
---------- ---------- ---------- ---------- ----------- ----------
Income (loss) before cumulative effect
of accounting changes.................... $(93.0) $ (21.2) $(71.8) $ (101.3) $(129.8) $ 28.5
========== ========== ========== ========== =========== ==========
Life and Annuity Segment
The following table presents summary financial data relating to Life and Annuity for the three and nine months ended September 30,
2002 and 2001 (in millions).
Three Months Nine Months
---------------------------------------- ---------------------------------------
2002 2001 Change 2002 2001 Change
---------- ----------- ---------- ---------- --------- ----------
REVENUES:
Premiums............................. $297.1 $302.8 $ (5.7) $813.9 $836.0 $ (22.1)
Insurance and investment product fees 78.7 72.0 6.7 235.2 226.2 9.0
Net investment income................ 245.1 228.3 16.8 705.4 664.8 40.6
---------- ----------- ---------- ---------- --------- ----------
Total revenues.................. 620.9 603.1 17.8 1,754.5 1,727.0 27.5
---------- ----------- ---------- ---------- --------- ----------
BENEFITS AND EXPENSES:
Policy benefits and dividends........ 506.0 493.7 12.3 1,400.7 1,351.0 49.7
Policy acquisition cost amortization. 41.2 33.3 7.9 68.2 95.3 (27.1)
Other operating expenses............. 75.6 64.5 11.1 231.4 221.5 9.9
---------- ----------- ---------- ---------- --------- ----------
Total benefits and expenses..... 622.8 591.5 31.3 1,700.3 1,667.8 32.5
---------- ----------- ---------- ---------- --------- ----------
Operating income (loss) before
income taxes....................... (1.9) 11.6 (13.5) 54.2 59.2 (5.0)
Applicable income tax expense
(benefit).......................... (.7) 4.0 (4.7) 19.0 20.5 (1.5)
---------- ----------- ---------- ---------- --------- ----------
Segment operating income (loss)...... $ (1.2) $ 7.6 $ (8.8) $ 35.2 $ 38.7 $ (3.5)
========== =========== ========== ========== ========= ==========
The fluctuations in both premiums and insurance and investment product fees for the comparative three-month and nine-month periods
reflect our continued emphasis on variable universal life, universal life and annuity product sales, rather than on traditional life
product sales.
The increases in net investment income for the comparative three-month and nine-month periods resulted from increases in invested
assets, primarily from the fixed portion of our annuity business. The increase was partially offset by lower new money rates.
The increases in policy benefits and dividends for the comparative three-month and nine-month periods were due primarily to the
growth of our policyholder dividend obligation resulting from favorable mortality and persistency experience. Also, in the nine
months ended September 30, 2001, there was a one-time favorable adjustment (expense reduction) of $15.8 million, before-tax, related
to the establishment of the closed block, pursuant to the accounting rules for newly demutualized companies.
The increase in policy acquisition cost amortization expense for the comparative three-month periods was due primarily to a $13.5
million pre-tax ($8.8 million after-tax) acceleration of deferred acquisition costs primarily related to the variable annuity
business in the third quarter. It resulted from a revision of our long-term market return assumption for annuities from 8% to 7%. In
addition, $4.5 million of this acceleration is related to the Valley Forge block which we acquired at the beginning of the quarter
and which experienced significant declines in assets due to equity market declines. The increase in amortization was partially offset
by favorable mortality and persistency experience in other blocks of business.
The decrease in policy acquisition cost amortization for the comparative nine-month periods was primarily due to favorable mortality
and persistency experience and revised mortality assumptions, offset by a $13.5 million acceleration of deferred acquisition cost
expense related to our annuity business in the third quarter of 2002. Deferred policy acquisition costs for individual participating
life insurance policies are amortized in proportion to estimated gross margins. The amortization process requires the use of various
assumptions, estimates and judgments about the future. The primary assumptions involve expenses, investment performance, mortality
and contract cancellations (i.e. lapses, withdrawals and surrenders). These assumptions are reviewed on a regular basis and are
generally based on our past experience, industry studies, regulatory requirements and judgments about the future. In the first
quarter of 2002, we revised the mortality assumptions used in the development of estimated gross margins to reflect favorable
experience and, as a result, the amortization cost expense decreased.
The increases in other operating expenses for the comparative three-month and nine-month periods were due primarily to higher benefit
costs, mainly pension-related costs for the nine-month period. The segment also experienced slightly higher compensation expense and
corporate overhead absorption costs.
The following table presents variable annuity funds under management data for the three and nine months ended September 30, 2002 and
2001 (in millions).
Three Months Nine Months
---------------------------- ----------------------------
2002 2001 2002 2001
------------- ----------- ------------ -----------
Deposits.............................. $ 804.2 $ 235.5 $ 2,040.6 $ 899.5
Performance........................... (294.7) (578.4) (515.1) (932.9)
Fees.................................. (13.8) (15.5) (45.4) (50.6)
Benefits and surrenders............... (191.9) (109.6) (524.5) (388.3)
------------- ----------- ------------ -----------
Change in funds under management...... 303.8 (468.0) 955.6 (472.3)
Beginning balance..................... 5,400.9 4,398.9 4,749.1 4,403.2
------------- ----------- ------------ -----------
Ending balance........................ $ 5,704.7 $ 3,930.9 $5,704.7 $ 3,930.9
============= =========== ============ ===========
Investment Management Segment
The following table presents summary financial data relating to Investment Management for the three and nine months ended September
30, 2002 and 2001 (in millions).
Three Months Nine Months
---------------------------------------- ---------------------------------------
2002 2001 Change 2002 2001 Change
---------- ----------- ---------- ---------- --------- ----------
REVENUES:
Investment product fees.................. $ 62.6 $ 63.4 $ (.8) $199.4 $200.2 $ (.8)
Net investment income.................... 3.0 1.9 1.1 9.8 5.0 4.8
---------- ----------- ---------- ---------- --------- ----------
Total revenues...................... 65.6 65.3 .3 209.2 205.2 4.0
---------- ----------- ---------- ---------- --------- ----------
EXPENSES:
Goodwill impairment...................... 66.3 -- 66.3 66.3 -- 66.3
Intangible asset amortization............ 8.7 12.5 (3.8) 24.6 36.8 (12.2)
Other operating expenses................. 52.7 54.4 (1.7) 171.6 164.6 7.0
---------- ----------- ---------- ---------- --------- ----------
Total expenses...................... 127.7 66.9 60.8 262.5 201.4 61.1
---------- ----------- ---------- ---------- --------- ----------
Income (loss) before income taxes
and minority interest................. (62.1) (1.6) (60.5) (53.3) 3.8 (57.1)
Applicable income tax benefit ........... (5.2) (2.4) (2.8) (7.1) .5 (7.6)
---------- ----------- ---------- ---------- --------- ----------
Income (loss) before minority interest
in net income of subsidiaries......... (56.9) .8 (57.7) (46.2) 3.3 (49.5)
Minority interest in net income of
subsidiaries.......................... 3.1 1.6 1.5 9.2 5.1 4.1
---------- ----------- ---------- ---------- --------- ----------
Segment operating income (loss).......... $(60.0) $ (.8) $(59.2) $(55.4) $ (1.8) $ (53.6)
========== =========== ========== ========== ========= ==========
Poor equity market performance during the second and third quarters of 2002 decreased investment product fees. This decrease was
largely offset by $1.2 billion increases in average assets under management for each of the private client and institutional lines of
business during the third quarter. Our acquisition of Kayne Anderson Rudnick increased assets under management by $7.6 billion, and
the issuance of the Phoenix-Mistic CBO increased assets under management by $1 billion.
The increases in net investment income for the comparative three-month and nine-month periods were due primarily to equity in the
increased earnings of our investments in Aberdeen, an unconsolidated affiliate.
The goodwill impairment expense of $66.3 million for the three-month and nine-month periods ended September 30, 2002 relates to
goodwill associated with certain of our investment management partners. In the third quarter of 2002, we tested our goodwill in
accordance with the new accounting standard. We determined that the carrying value of certain goodwill had become impaired and
recorded a charge of $66.3 million ($62.3 million after-tax) in the third quarter.
The decreases in intangible asset amortization for the comparative three-month and nine-month periods were due to our current year
adoption of the recently issued goodwill accounting statement, which ended the amortization of goodwill and indefinite-lived assets
effective January 1, 2002.
The decrease in other operating expenses for the comparative three-month periods was due primarily to employment related expenses
which decreased $1.3 million. This decrease primarily resulted from reductions of management incentive accruals and performance-based
incentive plans at certain partners, partially offset by an increase in pension costs. Additionally, non-employment related expenses
decreased $0.5 million largely due to a reduced use of outside consultants.
The increase in other operating expenses for the comparative nine-month periods was due to employment related expenses at Kayne
Anderson Rudnick. Excluding Kayne Anderson Rudnick, other operating expenses for the comparative nine-month period decreased. This
decrease was primarily from reductions of management incentive accruals and performance-based incentive plans at certain partners,
partially offset by an increase in pension costs. Additionally, non-employment related expenses decreased $3.1 million ($7.1
million, excluding Kayne Anderson Rudnick) due primarily to reductions in the use of outside consultants, and decreased professional
fees and distribution costs.
The increases in minority interest in net income of subsidiaries for the comparative three-month and nine-month periods were due to
our acquisition of Kayne Anderson Rudnick earlier this year. The effect of this acquisition was partially offset by decreased
earnings at other subsidiaries in which there are minority investors.
The following table presents assets under management data for the three and nine months ended September 30, 2002 and 2001 (in
millions).
Three Months Nine Months
------------------------------- ----------------------------
2002 2001 2002 2001
-------------- ------------- ------------ ------------
TOTAL:
Deposits........................................ $ 3,009.1 $ 2,091.9 $ 8,337.1 $ 7,700.2
Redemptions and withdrawals..................... (2,599.0) (2,455.9) (8,079.6) (6,647.8)
Acquisitions.................................... 105.3 -- 7,755.4 713.9
Performance..................................... (4,377.6) (5,763.4) (8,336.4) (10,409.8)
Other........................................... 600.3 126.3 1,528.5 809.4
-------------- ------------- ------------ ------------
Change in funds under management................ (3,261.9) (6,001.1) 1,205.0 (7,834.1)
Beginning balance............................... 56,557.0 54,759.8 52,090.1 56,592.8
-------------- ------------- ------------ ------------
Ending balance.................................. $53,295.1 $48,758.7 $ 53,295.1 $ 48,758.7
============== ============= ============ ============
INSTITUTIONAL PRODUCTS:
Deposits........................................ $ 1,798.6 $ 1,082.8 $ 3,591.9 $ 3,945.3
Redemptions and withdrawals..................... (1,178.3) (1,169.3) (3,973.1) (2,370.7)
Acquisitions.................................... -- -- 1,507.7 --
Performance..................................... (1,063.1) (1,165.2) (2,601.1) (1,994.9)
Other........................................... 600.3 126.3 1,528.5 809.4
-------------- ------------- ------------ ------------
Change in funds under management................ 157.5 (1,125.4) 53.9 389.1
Beginning balance............................... 31,926.6 31,930.5 32,030.2 30,416.0
-------------- ------------- ------------ ------------
Ending balance.................................. $32,084.1 30,805.1 $ 32,084.1 $ 30,805.1
============== ============= ============ ============
PRIVATE CLIENT PRODUCTS:
Mutual Funds:
Deposits........................................ $ 318.4 $ 384.7 $ 971.0 $ 1,492.0
Redemptions and withdrawals..................... (610.5) (661.1) (1,942.1) (2,159.2)
Acquisitions.................................... -- -- 333.5 --
Performance..................................... (994.6) (2,163.3) (2,194.7) (3,772.8)
-------------- ------------- ------------ ------------
Change in funds under management................ (1,286.7) (2,439.7) (2,832.3) (4,440.0)
Beginning balance............................... 9,676.0 12,716.4 11,221.6 14,716.7
-------------- ------------- ------------ ------------
Ending balance.................................. $ 8,389.3 $ 10,276.7 $ 8,389.3 $ 10,276.7
============== ============= ============ ============
Intermediary Programs:
Deposits........................................ $ 802.9 $ 582.8 $ 3,577.9 $ 2,161.6
Redemptions and withdrawals..................... (731.6) (553.5) (1,838.9) (1,948.3)
Acquisitions.................................... -- -- 4,723.4 --
Performance..................................... (1,994.5) (1,801.1) (3,084.7) (3,728.8)
-------------- ------------- ------------ ------------
Change in funds under management ............... (1,923.2) (1,771.8) 3,377.7 (3,515.5)
Beginning balance............................... 11,120.5 6,660.4 5,819.6 8,404.1
-------------- ------------- ------------ ------------
Ending balance.................................. $ 9,197.3 $ 4,888.6 $ 9,197.3 $ 4,888.6
============== ============= ============ ============
Direct Managed Accounts:
Deposits........................................ $ 89.2 $ 41.6 $ 196.3 $ 101.3
Redemptions and withdrawals..................... (78.6) (72.0) (325.5) (169.6)
Acquisitions.................................... 105.3 -- 1,190.8 713.9
Performance..................................... (325.4) (633.8) (455.9) (913.3)
-------------- ------------- ------------ ------------
Change in funds under management ............... (209.5) (664.2) 605.7 (267.7)
Beginning balance............................... 3,833.9 3,452.5 3,018.7 3,056.0
-------------- ------------- ------------ ------------
Ending balance.................................. $ 3,624.4 $ 2,788.3 $ 3,624.4 $ 2,788.3
============== ============= ============ ============
Venture Capital Segment
Our investments in Venture Capital 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 record our investments in venture capital partnerships in accordance with the equity method of accounting. Our pro rata share of
the earnings or losses of the partnerships, which represent realized and unrealized investment gains and losses, as well as
operations of the partnerships, is included in our investment income. 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, beginning in the first quarter of 2001 we changed our method
of applying the equity method of accounting to eliminate the quarterly lag in reporting. We removed the lag in reporting by
estimating the change in our share of the net equity in earnings of the venture capital partnerships for the period from December 31,
2000, the date of the most recent financial information provided by the partnerships, to our then current reporting date of March 31,
2001. To estimate the net equity in earnings of the venture capital partnerships for each quarter, we developed a methodology to
estimate the change in value of the underlying investee companies in the venture capital partnerships. For public investee companies,
we used quoted market prices at the end of each quarter, applying liquidity discounts to these prices in instances where such
discounts were applied in the underlying partnerships' financial statements. For private investee companies, we applied a public
industry sector index to roll the value forward each quarter. We applied this methodology consistently each quarter with subsequent
adjustments to reflect market events reported by the partnerships (e.g., new rounds of financing, initial public offerings and
writedowns by the general partners). In addition, on an annual basis we revised the valuations we have assigned to the investee
companies to reflect the valuations contained in the audited financial statements received from the venture capital partnerships. Our
venture capital earnings remain subject to equity market volatility.
In the first quarter of 2001, 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.
The following table presents summary financial data relating to Venture Capital for the three and nine months ended September 30,
2002 and 2001 (in millions).
Three Months Nine Months
---------------------------------------- ---------------------------------------
2002 2001 Change 2002 2001(1) Change
---------- ----------- ---------- ---------- --------- ----------
Net investment income (loss)............ $ (22.0) $ (48.5) $ 26.5 $(56.9) $ (100.2) $ 43.3
Applicable income tax expense
(benefit)............................. (7.7) (17.0) 9.3 (19.9) (35.1) 15.2
---------- ----------- ---------- ---------- --------- ----------
Segment operating income (loss)......... $ (14.3) $ (31.5) $ 17.2 $(37.0) $ (65.1) $ 28.1
========== =========== ========== ========== ========= ==========
(1) Information for the nine months ended September 30, 2001 excludes the charge of $48.8 million represen