UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


—————————


FORM
10-Q


—————————


(Mark
one)




T
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934




FOR THE QUARTERLY PERIOD ENDED SEPTEMBER
30, 2008




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: 333-20277




PHL
VARIABLE INSURANCE COMPANY


(Exact name of
registrant as specified in its charter)




Connecticut
                  06-1045829(State or
      other jurisdiction of incorporation or organization)
                  (I.R.S.
      Employer Identification No.)One American
      Row, Hartford, Connecticut
                  06102-5056(Address of
      principal executive offices)
                  (Zip
      Code)




(860)
403-5000


(Registrant’s
telephone number, including area code)






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 T      NO
£




Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See definitions of
“large accelerated filer”, “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one):


Large
      accelerated filer £
                    Accelerated
      filer £
                    Non-accelerated filer T
                    Smaller reporting company £(Do
      not check if smaller reporting
company)




Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).




YES £      NO
T




PHL Variable
Insurance Company is a wholly-owned indirect subsidiary of The Phoenix
Companies, Inc., and there is no market for the registrant’s common stock. As of
November 7, 2007, there were 500 shares of the registrant’s common stock
outstanding.




The
registrant meets the conditions set forth in General Instruction H(1)(a) and (b)
of Form 10-Q and is therefore filing this Form with the reduced disclosure
format permitted by that General Instruction.













TABLE OFCONTENTS




PART
      I
              FINANCIAL
      INFORMATION
              PageItem
      1.
              Financial Statements
              3Item
      2.
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              21Item
      3.
              Quantitative and Qualitative Disclosures About Market
      Risk
              30Item
      4.
              Controls and Procedures
              30PART
      II
              OTHER
      INFORMATIONItem
      1.
              Legal Proceedings
              31Item
      1A.
              Risk Factors
              31Item
      2.
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              32Item
      3.
              Defaults Upon Senior Securities
              32Item
      4.
              Submission of Matters to a Vote of Security
      Holders
              32Item
      5.
              Other Information
              32Item
      6.
              Exhibits
              33Signature
              34





2
 Table of Contents





PART
I. FINANCIAL INFORMATION






Item
      1.
            FINANCIAL
      STATEMENTS




PHL
VARIABLE INSURANCE COMPANY


Unaudited
Interim Condensed Balance Sheet


($ in thousands,
except share data)


September
30, 2008 (unaudited) and December 31, 2007




Sept
      30,
                    
                    
                    Dec
      31,2008
                    
                    
                    2007ASSETS:Available-for-sale
      debt securities, at
      fairvalue
                    $
                    1,450,421
                    
                    
                    $
                    1,709,586Policy loans,
      at unpaid principal balances
                    
                    36,525
                    
                    
                    
                    22,819Other
      investments
                    
                    1,135
                    
                    
                    
                    1,251Fair value
      option investments
                    
                    4,875
                    
                    
                    
                    --Total
      investments
                    
                    1,492,956
                    
                    
                    
                    1,733,656Cash and cash
      equivalents
                    
                    86,249
                    
                    
                    
                    108,200Accrued
      investment income
                    
                    16,530
                    
                    
                    
                    17,518Receivables
                    
                    201,699
                    
                    
                    
                    37,178Deferred
      policy acquisition costs
                    
                    1,140,262
                    
                    
                    
                    1,009,612Receivable
      from related parties
                    
                    12,718
                    
                    
                    
                    527Other
      assets
                    
                    41,213
                    
                    
                    
                    20,214Separate
      account assets
                    
                    2,949,465
                    
                    
                    
                    3,389,356Total
      assets
                    $
                    5,941,092
                    
                    
                    $
                    6,316,261LIABILITIES:Policyholder
      deposit funds
                    $
                    930,620
                    
                    
                    $
                    1,134,635Policy
      liabilities and accruals
                    
                    1,183,467
                    
                    
                    
                    981,509Deferred
      income taxes
                    
                    131,613
                    
                    
                    
                    135,648Payable to
      related parties
                    
                    6,617
                    
                    
                    
                    28,969Other
      liabilities
                    
                    102,663
                    
                    
                    
                    48,303Separate
      account liabilities
                    
                    2,949,465
                    
                    
                    
                    3,389,356Total
      liabilities
                    
                    5,304,445
                    
                    
                    
                    5,718,420CONTINGENT LIABILITIES (Note 8)STOCKHOLDER’S
      EQUITY:Common stock,
      $5,000 par value: 1,000 shares authorized; 500 shares
    issued
                    
                    2,500
                    
                    
                    
                    2,500Additional
      paid-in capital
                    
                    626,218
                    
                    
                    
                    553,218Retained
      earnings
                    
                    34,718
                    
                    
                    
                    53,906Accumulated
      other comprehensive loss
                    
                    (26,789
                    )
                    
                    
                    (11,783
                    )Total
      stockholder’s equity
                    
                    636,647
                    
                    
                    
                    597,841Total
      liabilities and stockholder’s equity
                    $
                    5,941,092
                    
                    
                    $
                    6,316,261




The accompanying
notes are an integral part of these financial statements.





3
 Table of Contents





PHL
VARIABLE INSURANCE COMPANY


Unaudited
Interim Condensed Statement of Income and Comprehensive Income


and
Changes in Stockholder’s Equity


($ in
thousands)


Three
and Nine Months Ended September 30, 2008 and 2007




Three
      Months Ended
                                  
                                  
                                  Nine
      Months EndedSeptember
      30,
                                  
                                  
                                  September
      30,2008
                                  
                                  
                                  2007
                                  
                                  
                                  2008
                                  
                                  
                                  2007REVENUES:Premiums
                                  $
                                  5,423
                                  
                                  
                                  $
                                  4,199
                                  
                                  
                                  $
                                  10,094
                                  
                                  
                                  $
                                  10,260Insurance and
      investment product fees
                                  
                                  93,554
                                  
                                  
                                  
                                  67,356
                                  
                                  
                                  
                                  265,136
                                  
                                  
                                  
                                  180,885Net investment
      income
                                  
                                  22,510
                                  
                                  
                                  
                                  27,609
                                  
                                  
                                  
                                  69,821
                                  
                                  
                                  
                                  82,695Net realized
      investment losses
                                  
                                  (28,390
                                  )
                                  
                                  
                                  (1,987
                                  )
                                  
                                  
                                  (46,730
                                  )
                                  
                                  
                                  (1,798
                                  )Total
      revenues
                                  
                                  93,097
                                  
                                  
                                  
                                  97,177
                                  
                                  
                                  
                                  298,321
                                  
                                  
                                  
                                  272,042BENEFITS
      AND EXPENSES:Policy
      benefits
                                  
                                  51,774
                                  
                                  
                                  
                                  43,140
                                  
                                  
                                  
                                  146,362
                                  
                                  
                                  
                                  119,601Policy
      acquisition cost amortization
                                  
                                  46,533
                                  
                                  
                                  
                                  27,895
                                  
                                  
                                  
                                  109,825
                                  
                                  
                                  
                                  78,421Other
      operating expenses
                                  
                                  21,117
                                  
                                  
                                  
                                  20,640
                                  
                                  
                                  
                                  74,924
                                  
                                  
                                  
                                  58,150Total
      benefits and expenses
                                  
                                  119,424
                                  
                                  
                                  
                                  91,675
                                  
                                  
                                  
                                  331,111
                                  
                                  
                                  
                                  256,172Income (loss)
      before income taxes
                                  
                                  (26,327
                                  )
                                  
                                  
                                  5,502
                                  
                                  
                                  
                                  (32,790
                                  )
                                  
                                  
                                  15,870Income tax
      (expense) benefit
                                  
                                  9,853
                                  
                                  
                                  
                                  466
                                  
                                  
                                  
                                  13,601
                                  
                                  
                                  
                                  (2,748
                                  )Net
      income (loss)
                                  $
                                  (16,474
                                  )
                                  
                                  $
                                  5,968
                                  
                                  
                                  $
                                  (19,189
                                  )
                                  
                                  $
                                  13,122COMPREHENSIVE
      INCOME:Net
      income (loss)
                                  $
                                  (16,474
                                  )
                                  
                                  $
                                  5,968
                                  
                                  
                                  $
                                  (19,189
                                  )
                                  
                                  $
                                  13,122Net unrealized
      investment losses
                                  
                                  (6,746
                                  )
                                  
                                  
                                  (2,410
                                  )
                                  
                                  
                                  (15,005
                                  )
                                  
                                  
                                  (6,681
                                  )Comprehensive
      income (loss)
                                  $
                                  (23,220
                                  )
                                  
                                  $
                                  3,558
                                  
                                  
                                  $
                                  (34,194
                                  )
                                  
                                  $
                                  6,441ADDITIONAL
      PAID-IN CAPITAL:Capital
      contributions from parent
                                  $
                                  --
                                  
                                  
                                  $
                                  24,984
                                  
                                  
                                  $
                                  73,000
                                  
                                  
                                  $
                                  49,984RETAINED
      EARNINGS:Net income
      (loss)
                                  
                                  (16,474
                                  )
                                  
                                  
                                  5,968
                                  
                                  
                                  
                                  (19,189
                                  )
                                  
                                  
                                  13,122Adjustment for
      initial application of FIN 48 (Note 2)
                                  
                                  --
                                  
                                  
                                  
                                  --
                                  
                                  
                                  
                                  --
                                  
                                  
                                  
                                  (1,000
                                  )ACCUMULATED
      OTHER COMPREHENSIVE LOSS:Other
      comprehensive loss
                                  
                                  (6,746
                                  )
                                  
                                  
                                  (2,410
                                  )
                                  
                                  
                                  (15,005
                                  )
                                  
                                  
                                  (6,681
                                  )Change
      in stockholder’s equity
                                  
                                  (23,220
                                  )
                                  
                                  
                                  28,542
                                  
                                  
                                  
                                  38,806
                                  
                                  
                                  
                                  55,425Stockholder’s
      equity, beginning of period
                                  
                                  659,867
                                  
                                  
                                  
                                  573,528
                                  
                                  
                                  
                                  597,841
                                  
                                  
                                  
                                  546,645Stockholder’s
      equity, end of period
                                  $
                                  636,647
                                  
                                  
                                  $
                                  602,070
                                  
                                  
                                  $
                                  636,647
                                  
                                  
                                  $
                                  602,070




The accompanying
notes are an integral part of these financial statements.





4
 Table of Contents





PHL
VARIABLE INSURANCE COMPANY


Unaudited
Interim Condensed Statement of Cash Flows


($ in
thousands)


Nine
Months Ended September 30, 2008 and 2007




Nine
      Months EndedSeptember
      30,2008
                            
                            
                            2007OPERATING
      ACTIVITIES:Net
      income
                            $
                            (19,189
                            )
                            
                            $
                            13,122Net realized
      investment losses
                            
                            46,730
                            
                            
                            
                            1,798Investment
      income (loss)
                            
                            179
                            
                            
                            
                            (29
                            )Deferred
      income taxes
                            
                            4,045
                            
                            
                            
                            28,319(Increase)
      decrease in receivables
                            
                            (161,072
                            )
                            
                            
                            1,149Increase in
      deferred policy acquisition costs
                            
                            (51,111
                            )
                            
                            
                            (161,241
                            )Increase in
      policy liabilities and accruals
                            
                            202,607
                            
                            
                            
                            161,748Other assets
      and other liabilities net change
                            
                            (44,193
                            )
                            
                            
                            8,385Cash
      from (for) operating activities
                            
                            (22,004
                            )
                            
                            
                            53,251INVESTING
      ACTIVITIES:Investment
      purchases
                            
                            (894,831
                            )
                            
                            
                            (745,205
                            )Investment
      sales, repayments and maturities
                            
                            1,061,777
                            
                            
                            
                            985,648Cash
      from investing activities
                            
                            166,946
                            
                            
                            
                            240,443FINANCING
      ACTIVITIES:Policyholder
      deposit fund deposits
                            
                            223,693
                            
                            
                            
                            190,437Policyholder
      deposit fund withdrawals
                            
                            (454,371
                            )
                            
                            
                            (505,796
                            )Capital
      contributions from parent
                            
                            63,785
                            
                            
                            
                            25,000Cash
      for financing activities
                            
                            (166,893
                            )
                            
                            
                            (290,359
                            )Change
      in cash and cash equivalents
                            
                            (21,951
                            )
                            
                            
                            3,335Cash and cash
      equivalents, beginning of period
                            
                            108,200
                            
                            
                            
                            47,127Cash
      and cash equivalents, end of period
                            $
                            86,249
                            
                            
                            $
                            50,462




During the nine
months ended September 30, 2008, we received $73,000 thousand in capital
contributions, of which $63,785 thousand was in cash and $9,215 was in
securities.




The accompanying
notes are an integral part of these financial statements.





5
 Table of Contents





PHL
VARIABLE INSURANCE COMPANY


Notes
to Unaudited Interim Condensed Financial Statements


Three
and Nine Months Ended September 30, 2008 and 2007








1.
            Organization
      and Operations




PHL Variable
Insurance Company is a life insurance company offering variable and fixed
annuity and non-participating life insurance products. It is a wholly-owned
subsidiary of PM Holdings, Inc. PM Holdings, Inc. is a wholly-owned subsidiary
of Phoenix Life Insurance Company (“Phoenix Life”), which is a wholly-owned
subsidiary of The Phoenix Companies, Inc. (“PNX”), a New York Stock Exchange
listed company.






2.
            Basis
      of Presentation and Significant Accounting
  Policies




We
have prepared these financial statements in accordance with accounting
principles generally accepted in the United States of America (“GAAP”), which
differ materially from the accounting practices prescribed by various insurance
regulatory authorities.




Use
of estimates




In
preparing these financial statements in conformity with GAAP, we are required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from these estimates. We employ significant estimates and assumptions in the
determination of deferred policy acquisition costs; policyholder liabilities and
accruals; the valuation of investments in debt and equity securities; and
accruals for deferred income taxes and contingent liabilities. Our significant
accounting policies are presented in the notes to our financial statements in
our 2007 Annual Report on Form 10-K.




Our interim
financial statements do not include all of the disclosures required by GAAP for
annual financial statements. In our opinion, we have included all adjustments,
consisting of normal recurring adjustments, considered necessary for a fair
statement of the results for the interim periods. Financial results for the
three- and nine-month periods in 2008 are not necessarily indicative of the
results that may be expected for the year 2008. These unaudited financial
statements should be read in conjunction with our financial statements in our
2007 Annual Report on Form 10-K.




Accounting
Change




Effective April 1,
2008, we changed our method of accounting for the cost of certain of our long
duration reinsurance contracts accounted for in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 113, Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts(“SFAS 113”). In conjunction
with this change, we also changed our method of accounting for the impact of
reinsurance costs on deferred acquisition costs. SFAS 113 requires us to
amortize the estimated cost of reinsurance over the life of the underlying
reinsured contracts. Under our previous method, we recognized reinsurance
recoveries as part of the net cost of reinsurance and amortized this balance
over the estimated lives of the underlying reinsured contracts in proportion to
estimated gross profits (“EGPs”) consistent with the method used for amortizing
deferred policy acquisition costs. Under the new method, reinsurance recoveries
are recognized in the same period as the related reinsured claim. In conjunction
with this change, we also changed our policy for determining EGPs relating to
these contracts to include the effects of reinsurance, where previously these
effects had not been included.





6
 Table of Contents





2.
            Basis
      of Presentation and Significant Accounting Policies
      (continued)




We
adopted the new method because we believe that it better reflects the economics
of the underlying reinsurance activity by better matching the reinsurance
recovery with the insured loss that gave rise to that recovery. We also believe
that the new method is consistent with management's intent in purchasing
reinsurance, which is to protect the Company against large and unexpected
claims. Comparative amounts from prior periods have been adjusted to apply the
new method retrospectively in these financial statements. The following
financial statement line items were affected by the change in accounting
principle.




Income
Statement




($
      in thousands)
                          Three Months
      Ended September 30, 2008As calculated
      under
                            the new
      method
                          
                          As calculated
      under
                            the former
      method
                          
                          Effect of
      ChangeInsurance and
      investment product fees
                          $
                          93,554
                          
                          
                          $
                          93,756
                          
                          
                          $
                          (202
                          )Policy
      benefits
                          
                          51,774
                          
                          
                          
                          47,803
                          
                          
                          
                          3,971Policy
      acquisition cost amortization
                          
                          46,533
                          
                          
                          
                          48,912
                          
                          
                          
                          (2,379
                          )Income tax
      (expense) benefit
                          
                          9,853
                          
                          
                          
                          9,225
                          
                          
                          
                          628Net income
      (loss)
                          
                          (16,474
                          )
                          
                          
                          (15,308
                          )
                          
                          
                          (1,166
                          )
   ($
      in thousands)
                          Three Months
      Ended September 30, 2007As
      adjusted
                          
                          As originally
      reported
                          
                          Effect of
      ChangeInsurance and
      investment product fees
                          $
                          67,356
                          
                          
                          $
                          67,510
                          
                          
                          $
                          (154
                          )Policy
      benefits
                          
                          43,140
                          
                          
                          
                          39,107
                          
                          
                          
                          4,033Policy
      acquisition cost amortization
                          
                          27,895
                          
                          
                          
                          29,251
                          
                          
                          
                          (1,356
                          )Income tax
      (expense) benefit
                          
                          466
                          
                          
                          
                          (525
                          )
                          
                          
                          991Net income
      (loss)
                          
                          5,968
                          
                          
                          
                          7,808
                          
                          
                          
                          (1,840
                          )
   ($
      in thousands)
                          Nine Months
      Ended September 30, 2008As calculated
      under
                            the new
      method
                          
                          As calculated
      under
                            the former
      method
                          
                          Effect of
      ChangeInsurance and
      investment product fees
                          $
                          265,136
                          
                          
                          $
                          264,324
                          
                          
                          $
                          812Policy
      benefits
                          
                          146,362
                          
                          
                          
                          147,911
                          
                          
                          
                          (1,549
                          )Policy
      acquisition cost amortization
                          
                          109,825
                          
                          
                          
                          105,604
                          
                          
                          
                          4,221Income tax
      (expense) benefit
                          
                          13,601
                          
                          
                          
                          12,950
                          
                          
                          
                          651Net income
      (loss)
                          
                          (19,189
                          )
                          
                          
                          (17,980
                          )
                          
                          
                          (1,209
                          )
   ($
      in thousands)
                          Nine Months
      Ended September 30, 2007As
      adjusted
                          
                          As originally
      reported
                          
                          Effect of
      ChangeInsurance and
      investment product fees
                          $
                          180,885
                          
                          
                          $
                          181,373
                          
                          
                          $
                          (488
                          )Policy
      benefits
                          
                          119,601
                          
                          
                          
                          107,338
                          
                          
                          
                          12,263Policy
      acquisition cost amortization
                          
                          78,421
                          
                          
                          
                          82,757
                          
                          
                          
                          (4,336
                          )Income tax
      (expense) benefit
                          
                          (2,748
                          )
                          
                          
                          (5,693
                          )
                          
                          
                          2,945Net income
      (loss)
                          
                          13,122
                          
                          
                          
                          18,592
                          
                          
                          
                          (5,470
                          )





7
 Table of Contents





2.Basis
of Presentation and Significant Accounting Policies (continued)




Balance
Sheet




($
      in thousands)
                          September 30,
      2008As calculated
      under
                            the new
      method
                          
                          As calculated
      under the former method
                          
                          Effect of
      ChangeDeferred
      policy acquisition costs
                          $
                          1,140,262
                          
                          
                          $
                          1,142,682
                          
                          
                          $
                          (2,420
                          )Policy
      liabilities and accruals
                          
                          1,183,467
                          
                          
                          
                          1,171,264
                          
                          
                          
                          12,203Deferred
      income tax liability
                          
                          131,613
                          
                          
                          
                          136,731
                          
                          
                          
                          (5,118
                          )Retained
      earnings
                          
                          34,718
                          
                          
                          
                          44,223
                          
                          
                          
                          (9,505
                          )
   ($
      in thousands)
                          December 31,
      2007As
      adjusted
                          
                          As originally
      reported
                          
                          Effect of
      ChangeDeferred
      policy acquisition costs
                          $
                          1,009,612
                          
                          
                          $
                          1,007,811
                          
                          
                          $
                          1,801Policy
      liabilities and accruals
                          
                          981,509
                          
                          
                          
                          966,945
                          
                          
                          
                          14,564Deferred
      income tax liability
                          
                          135,648
                          
                          
                          
                          140,115
                          
                          
                          
                          (4,467
                          )Retained
      earnings
                          
                          53,906
                          
                          
                          
                          62,202
                          
                          
                          
                          (8,296
                          )




As
of January 1, 2007, the cumulative effect of the new method on our stockholders’
equity was a decrease of $3,613 thousand which was recorded to retained
earnings.




Following is a
description of our accounting for deferred policy acquisition costs, which has
been updated from our 2007 Annual Report on Form 10-K to reflect a change in our
method of accounting for the effects of reinsurance.




Deferred
policy acquisition costs




The costs of
acquiring new business, principally commissions, underwriting, distribution and
policy issue expenses, all of which vary with and are primarily related to
production of new business, are deferred.




We
amortize deferred policy acquisition costs based on the related policy’s
classification. For individual life insurance policies, deferred policy
acquisition costs are amortized in proportion to estimated gross margins. For
universal life, variable universal life and accumulation annuities, deferred
policy acquisition costs are amortized in proportion to EGPs. Policies may be
surrendered for value or exchanged for a different one of our products (internal
replacement). The deferred policy acquisition costs balance associated with the
replaced or surrendered policies is amortized to reflect these
surrenders.




Each year, we
develop future EGPs for the products sold during that year. The EGPs for
products sold in a particular year are aggregated into cohorts. Future EGPs are
projected for the estimated lives of the contracts. The amortization of deferred
policy acquisition costs requires the use of various assumptions, estimates and
judgments about the future. The assumptions, in the aggregate, are considered
important in the projections of EGPs. The assumptions developed as part of our
annual process are based on our current best estimates of future events, which
are likely to be different for each year’s cohort. Assumptions considered to be
significant in the development of EGPs include separate account fund
performance, surrender and lapse rates, interest margin, mortality, premium
persistency, funding patterns, expenses and reinsurance costs and recoveries.
These assumptions are reviewed on a regular basis and are based on our past
experience, industry studies, regulatory requirements and estimates about the
future.




To
determine the reasonableness of the prior assumptions used and their impact on
previously projected account values and the related EGPs, we evaluate, on a
quarterly basis, our previously projected EGPs. Our process to assess the
reasonableness of our EGPs involves the use of internally developed models,
together with studies and actual experience. Incorporated in each scenario are
our current best estimate assumptions with respect to separate account returns,
surrender and lapse rates, interest margin, mortality, premium persistency,
funding patterns, expenses and reinsurance costs and recoveries.





8
 Table of Contents





2.
            Basis
      of Presentation and Significant Accounting Policies
      (continued)




In
addition to our quarterly reviews, we complete a comprehensive assumption study
during the fourth quarter of each year. Upon completion of an assumption study,
we revise our assumptions to reflect our current best estimate, thereby changing
our estimate of projected account values and the related EGPs in the deferred
policy acquisition cost and unearned revenue amortization models as well as SOP
03-1 reserving models. The deferred policy acquisition cost asset, as well as
the unearned revenue reserves and SOP 03-1 reserves are then adjusted with an
offsetting benefit or charge to income to reflect such changes in the period of
the revision, a process known as “unlocking.”




Underlying
assumptions for future periods of EGPs are not altered unless experience
deviates significantly from original assumptions. For example, when lapses of
our insurance products meaningfully exceed levels assumed in determining the
amortization of deferred policy acquisition costs, we adjust amortization to
reflect the change in future premiums or EGPs resulting from the unexpected
lapses. In the event that we were to revise assumptions used for prior year
cohorts, our estimate of projected account values would change and the related
EGPs in the deferred policy acquisition cost amortization model would be
unlocked, or adjusted, to reflect such change. Continued favorable experience on
key assumptions, which could include increasing separate account fund return
performance, decreasing lapses or decreasing mortality could result in an
unlocking which would result in a decrease to deferred policy acquisition cost
amortization and an increase in the deferred policy acquisition costs asset.
Finally, an analysis is performed periodically to assess whether there are
sufficient gross margins or gross profits to amortize the remaining deferred
policy acquisition costs balances.




Adoption
of new accounting standards




On
October 10, 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position FAS 157-3 (“FSP FAS 157-3”), which clarifies the application of
SFAS No. 157, Fair Value Measurement(“SFAS 157”) in an inactive market. The FSP addresses application issues
such as how management’s internal assumptions should be considered when
measuring fair value when relevant observable data do not exist; how observable
market information in a market that is not active should be considered when
measuring fair value and how the use of market quotes should be considered when
assessing the relevance of observable and unobservable data available to measure
fair value. FSP FAS 157-3 was effective upon issuance. Our adoption of FSP FAS
157-3 had no material effect on our financial condition or results of
operations.




On
February 15, 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities (“SFAS
159”), which gives entities the option to measure eligible financial assets,
financial liabilities and firm commitments at fair value (i.e., the fair value
option), on an instrument-by-instrument basis, that are otherwise not permitted
to be accounted for at fair value under other accounting standards. The election
to use the fair value option is available when an entity first recognizes a
financial asset or financial liability or upon entering into a firm commitment.
Subsequent changes in fair value must be recorded in earnings. Additionally,
SFAS 159 allows for a one-time election for existing positions upon adoption,
with the transition adjustment recorded to beginning retained earnings. We
adopted SFAS 159 as of January 1, 2008 with no effect on our financial
statements.




In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes
a framework for measuring fair value and expands disclosures about fair value
measurements. SFAS 157 provides guidance on how to measure fair value when
required under existing accounting standards. The statement establishes a fair
value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value into three broad levels (“Level 1, 2 and 3”). Level 1 inputs
are observable inputs that reflect quoted prices for identical assets or
liabilities in active markets that we have the ability to access at the
measurement date. Level 2 inputs are observable inputs, other than quoted prices
included in Level 1, for the asset or liability. Level 3 inputs are unobservable
inputs reflecting our estimates of the assumptions that market participants
would use in pricing the asset or liability (including assumptions about risk).
Quantitative and qualitative disclosures will focus on the inputs used to
measure fair value for both recurring and non-recurring fair value measurements
and the effects of the measurements in the financial statements. We adopted SFAS
157 effective January 1, 2008 with no material impact on our financial position
and results of operations. See Note 6 to these financial statements for more
information.





9
 Table of Contents





2.
            Basis
      of Presentation and Significant Accounting Policies
      (continued)




We
adopted the provisions of the FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (“FIN 48”), on January 1, 2007. As a
result of the implementation of FIN 48, we recognized an increase in reserves
for uncertain tax benefits through a cumulative effect adjustment of
approximately $1,000 thousand, which was accounted for as a reduction to the
January 1, 2007 balance of retained earnings. Including the cumulative effect
adjustment, we had $1,840 thousand of total gross unrecognized tax benefits as
of January 1, 2007. The entire amount of unrecognized tax benefits would, if
recognized, impact the annual effective tax rate upon recognition.




In
March 2006, the FASB issued SFAS No. 156, Accounting
for Servicing of Financial Assets, an amendment of FASB Statement No. 140
(“SFAS 156”). SFAS 156 provides guidance on recognition and disclosure of
servicing assets and liabilities and was effective beginning January 1, 2007. We
adopted this standard effective January 1, 2007 with no material impact on our
financial position and results of operations.




In
September 2005, the Accounting Standards Executive Committee (“AcSEC”) of the
AICPA’s issued Statement of Position 05-1, Accounting
by Insurance Enterprises for Deferred Acquisition Costs in Connection With
Modifications or Exchanges of Insurance Contracts (“SOP 05-1”). SOP 05-1
provides guidance on accounting by insurance enterprises for deferred
acquisition costs on internal replacements of insurance and investment contracts
other than those specifically described in SFAS No. 97. The SOP defines an
internal replacement as a modification in product benefits, features, rights, or
coverages that occurs by the exchange of a contract for a new contract, or by
amendment, endorsement, or rider to a contract, or by the election of a feature
or coverage within a contract. This SOP is effective for internal replacements
occurring in fiscal years beginning after December 15, 2006. We adopted this
standard effective January 1, 2007 with no material effect on our financial
position and results of operations.




Accounting
standards not yet adopted




In
May 2008, the FASB issued SFAS No. 163, Accounting
for Financial Guarantee Insurance Contracts, an Interpretation of FASB Statement
No. 60 (“SFAS 163”). Financial guarantee insurance and reinsurance
contracts are contracts issued by insurance enterprises that provide protection
to the holder of a financial obligation from a financial loss in the event of a
default. The new accounting standard applies to recognition and measurement of
premium revenue and claim liabilities on such contracts and to related
disclosures. SFAS 163 will be effective for us on January 1, 2009. We do not
have financial guarantee insurance products and, accordingly, do not expect our
adoption of SFAS 163 to have an effect on our financial position and results of
operations.




In
May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS
162 identifies the sources of accounting principles and the framework for
selecting the principles used in the preparation of GAAP-basis financial
statements. The Standard is effective 60 days following SEC approval of the
Public Company Accounting Oversight Board amendments to remove the hierarchy of
generally accepted accounting principles from the auditing standards. SFAS 162
is not expected to have an impact on our financial position and results of
operations.




In
March 2008, the FASB issued SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133 (“SFAS 161”). This statement amends and expands the
requirement for qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative agreements. SFAS 161 will
be effective for us on January 1, 2009.




In
December 2007, the FASB issued SFAS No. 141(R), Accounting
for Business Combinations (“SFAS 141(R)”). SFAS 141(R) requires the
acquiring entity in a business combination to recognize all (and only) the
assets acquired and liabilities assumed in the transaction, establishes the
acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed and requires the acquirer to disclose all information
needed to evaluate and understand the nature and financial effect of the
combination and is effective beginning for fiscal years beginning after December
15, 2008. We will adopt this standard effective January 1, 2009 and do not
expect it to have a material impact on our financial position and results of
operations.





10
 Table of Contents





2.
            Basis
      of Presentation and Significant Accounting Policies
      (continued)




In
December 2007, the FASB issued SFAS 160, Noncontrolling
Interests in Consolidated Financial Statements (“SFAS 160”). SFAS 160
requires all entities to report noncontrolling interests in subsidiaries in the
same way—as equity in the consolidated financial statements and requires that
associated transactions be treated as equity transactions—and is effective
beginning for fiscal years beginning after December 15, 2008. We will adopt this
standard effective January 1, 2009 and do not expect it to have a material
impact on our financial position and results of operations.






3.
            Deferred
      Policy Acquisition Costs




Deferred
      Policy Acquisition Costs:
                        Three
      Months Ended
                        
                        
                        Nine
      Months Ended($
      in thousands)
                        September
      30,
                        
                        
                        September
      30,2008
                        
                        
                        2007
                        
                        
                        2008
                        
                        
                        2007Policy
      acquisition costs deferred
                        $
                        75,326
                        
                        
                        $
                        105,262
                        
                        
                        $
                        293,443
                        
                        
                        $
                        239,662Costs
      amortized to expenses:Recurring
      costs
                        
                        (49,512
                        )
                        
                        
                        (29,225
                        )
                        
                        
                        (117,766
                        )
                        
                        
                        (78,928
                        )Realized
      investment gains
                        
                        2,980
                        
                        
                        
                        1,331
                        
                        
                        
                        7,942
                        
                        
                        
                        508Deferred
      acquisition cost offset – ceded reserve and expense
    allowance
                        
                        (132,508
                        )
                        
                        
                        --
                        
                        
                        
                        (132,508
                        )
                        
                        
                        --Offsets to net
      unrealized investment gains or lossesincluded inother comprehensive income
                        
                        32,403
                        
                        
                        
                        8,777
                        
                        
                        
                        79,539
                        
                        
                        
                        17,104Change in
      deferred policy acquisition costs
                        
                        (71,311
                        )
                        
                        
                        86,145
                        
                        
                        
                        130,650
                        
                        
                        
                        178,346Deferred
      policy acquisition costs, beginning of period
                        
                        1,211,573
                        
                        
                        
                        793,821
                        
                        
                        
                        1,009,612
                        
                        
                        
                        701,620Deferred
      policy acquisition costs, end of period
                        $
                        1,140,262
                        
                        
                        $
                        879,966
                        
                        
                        $
                        1,140,262
                        
                        
                        $
                        879,966




Effective September
30, 2008, we executed a coinsurance agreement with our parent, Phoenix Life,
whereby we cede 90% of the results on universal life policies with issue dates
of January 1, 2008 and later. The resulting offset to deferred acquisition costs
is reflected in the table above.






4.
            Investing
      Activities




Debt
securities




Fair
      Value and Cost of Debt Securities:
                        September 30,
      2008
                        
                        
                        December 31,
      2007($
      in thousands)
                        Fair
      Value
                        
                        
                        Cost
                        
                        
                        Fair
      Value
                        
                        
                        CostU.S.
      government and agency
                        $
                        46,498
                        
                        
                        $
                        47,759
                        
                        
                        $
                        65,774
                        
                        
                        $
                        64,884State and
      political subdivision
                        
                        6,158
                        
                        
                        
                        6,539
                        
                        
                        
                        11,029
                        
                        
                        
                        11,134Foreign
      government
                        
                        25,084
                        
                        
                        
                        23,482
                        
                        
                        
                        30,423
                        
                        
                        
                        27,716Corporate
                        
                        828,909
                        
                        
                        
                        910,966
                        
                        
                        
                        975,058
                        
                        
                        
                        998,982Mortgage-backed
                        
                        332,596
                        
                        
                        
                        369,383
                        
                        
                        
                        358,479
                        
                        
                        
                        372,733Other
      asset-backed
                        
                        211,176
                        
                        
                        
                        249,070
                        
                        
                        
                        268,823
                        
                        
                        
                        288,927Available-for-sale
      debt securities
                        $
                        1,450,421
                        
                        
                        $
                        1,607,199
                        
                        
                        $
                        1,709,586
                        
                        
                        $
                        1,764,376






Unrealized
      Gains and Losses from Debt Securities:
                        September 30,
      2008
                        
                        
                        December 31,
      2007($
      in thousands)
                        Gains
                        
                        
                        Losses
                        
                        
                        Gains
                        
                        
                        LossesU.S.
      government and agency
                        $
                        812
                        
                        
                        $
                        (2,073
                        )
                        
                        $
                        1,193
                        
                        
                        $
                        (303
                        )State and
      political subdivision
                        
                        12
                        
                        
                        
                        (393
                        )
                        
                        
                        11
                        
                        
                        
                        (116
                        )Foreign
      government
                        
                        1,640
                        
                        
                        
                        (38
                        )
                        
                        
                        2,732
                        
                        
                        
                        (25
                        )Corporate
                        
                        2,619
                        
                        
                        
                        (84,676
                        )
                        
                        
                        8,774
                        
                        
                        
                        (32,698
                        )Mortgage-backed
                        
                        285
                        
                        
                        
                        (37,072
                        )
                        
                        
                        2,654
                        
                        
                        
                        (16,908
                        )Other
      asset-backed
                        
                        289
                        
                        
                        
                        (38,183
                        )
                        
                        
                        875
                        
                        
                        
                        (20,979
                        )Debt
      securities gains (losses)
                        $
                        5,657
                        
                        
                        $
                        (162,435
                        )
                        
                        $
                        16,239
                        
                        
                        $
                        (71,029
                        )Debt
      securities net losses
                        
                        
                        
                        
                        $
                        (156,778
                        )
                        
                        
                        
                        
                        
                        $
                        (54,790
                        )





11
 Table of Contents




Aging
      of Temporarily Impaired
                            September 30,
      2008Debt
      Securities:
                            Less than 12
      months
                            
                            
                            Greater than
      12 months
                            
                            
                            Total($
      in thousands)
                            Fair
                            
                            
                            Unrealized
                            
                            
                            Fair
                            
                            
                            Unrealized
                            
                            
                            Fair
                            
                            
                            UnrealizedValue
                            
                            
                            Losses
                            
                            
                            Value
                            
                            
                            Losses
                            
                            
                            Value
                            
                            
                            LossesDebt
      securitiesU.S.
      government and agency
                            $
                            6,752
                            
                            
                            $
                            (387
                            )
                            
                            $
                            2,255
                            
                            
                            $
                            (1,686
                            )
                            
                            $
                            9,007
                            
                            
                            $
                            (2,073
                            )State and
      political subdivision
                            
                            1,662
                            
                            
                            
                            (230
                            )
                            
                            
                            2,484
                            
                            
                            
                            (163
                            )
                            
                            
                            4,146
                            
                            
                            
                            (393
                            )Foreign
      government
                            
                            2,013
                            
                            
                            
                            (35
                            )
                            
                            
                            497
                            
                            
                            
                            (3
                            )
                            
                            
                            2,510
                            
                            
                            
                            (38
                            )Corporate
                            
                            372,931
                            
                            
                            
                            (24,652
                            )
                            
                            
                            319,997
                            
                            
                            
                            (60,024
                            )
                            
                            
                            692,928
                            
                            
                            
                            (84,676
                            )Mortgage-backed
                            
                            111,825
                            
                            
                            
                            (8,934
                            )
                            
                            
                            164,797
                            
                            
                            
                            (28,138
                            )
                            
                            
                            276,622
                            
                            
                            
                            (37,072
                            )Other
      asset-backed
                            
                            59,638
                            
                            
                            
                            (7,432
                            )
                            
                            
                            134,971
                            
                            
                            
                            (30,751
                            )
                            
                            
                            194,609
                            
                            
                            
                            (38,183
                            )Total
      temporarily impaired securities
                            $
                            554,821
                            
                            
                            $
                            (41,670
                            )
                            
                            $
                            625,001
                            
                            
                            $
                            (120,765
                            )
                            
                            $
                            1,179,822
                            
                            
                            $
                            (162,435
                            )Below
      investment grade
                            $
                            36,727
                            
                            
                            $
                            (5,365
                            )
                            
                            $
                            65,818
                            
                            
                            $
                            (19,428
                            )
                            
                            $
                            102,545
                            
                            
                            $
                            (24,793
                            )Below
      investment grade after offsetsfor
      deferred policy acquisition costadjustment
      and taxes
                            
                            
                            
                            
                            $
                            (756
                            )
                            
                            
                            
                            
                            
                            $
                            (2,973
                            )
                            
                            
                            
                            
                            
                            $
                            (3,729
                            )Number
      of securities
                            
                            
                            
                            
                            
                            359
                            
                            
                            
                            
                            
                            
                            
                            394
                            
                            
                            
                            
                            
                            
                            
                            753




Below investment
grade debt securities with a fair value of less than 80% of the security’s
amortized costs totaled $16,595 thousand at September 30, 2008, of which $7,050
thousand have been in an unrealized loss for greater than 12
months.




All of these
securities are considered to be temporarily impaired at September 30, 2008 as
each of these securities has performed, and is expected to continue to perform,
in accordance with their original contractual terms, and we have the ability and
intent to hold these securities until they recover their value.




In
determining that the securities are not other-than-temporarily impaired, we
considered and evaluated the factors cited below. In making these evaluations,
we must exercise considerable judgment. Accordingly, there can be no assurance
that actual results will not differ from our judgments and that such differences
may require the future recognition of other-than-temporary impairment charges
that could have a material effect on our financial position and results of
operations. In addition, the value of, and the realization of any loss on, a
debt security or equity security is subject to numerous risks, including
interest rate risk, market risk, credit risk and liquidity risk. The magnitude
of any loss incurred by us may be affected by the relative concentration of our
investments in any one issuer or industry. We have established specific policies
limiting the concentration of our investments in any single issuer and industry
and believe our investment portfolio is prudently diversified.




At
the end of each reporting period, we review all securities for potential
recognition of an other-than-temporary impairment. We maintain a watch list of
securities in default, near default or otherwise considered by our investment
professionals as being distressed, potentially distressed or requiring a
heightened level of scrutiny. We also identify securities whose carrying value
has been below amortized cost on a continuous basis for zero to six months, six
months to 12 months and greater than 12 months. Using this analysis, coupled
with our watch list, we review securities to determine if a security is
other-than-temporarily impaired.





12
 Table of Contents





4.
            Investing
      Activities (continued)




Our assessment of
whether an investment in a debt or equity security is other-than-temporarily
impaired includes whether the issuer has:




·
              defaulted on
      payment obligations;
 ·
              declared that
      it will default at a future point outside the current reporting
      period;
 ·
              announced
      that a restructuring will occur outside the current reporting
      period;
 ·
              severe
      liquidity problems that cannot be
resolved;
 ·
              filed for
      bankruptcy;
 ·
              a financial
      condition which suggests that future payments are highly
      unlikely;
 ·
              deteriorating
      financial condition and quality of
assets;
 ·
              sustained
      significant losses during the current
year;
 ·
              announced
      adverse changes or events such as changes or planned changes in senior
      management, restructurings, or a sale of assets;
  and/or
 ·
              been affected
      by any other factors that indicate that the fair value of the investment
      may have been negatively
impacted.




In
determining whether collateralized securities are impaired, we obtain underlying
mortgage data from the security’s trustee and analyze it for performance trends.
A security-specific stress analysis is performed using the most recent trustee
information. This analysis forms the basis for our determination of whether the
security will pay in accordance with the contractual cash flows.




If
we determine that the security is impaired, we write it down to its then current
fair value and record a realized loss in that period.




Aging
      of Temporarily Impaired
                            As of December
      31, 2007Debt
      Securities:
                            Less than 12
      months
                            
                            
                            Greater than
      12 months
                            
                            
                            Total($
      in thousands)
                            Fair
                            
                            
                            Unrealized
                            
                            
                            Fair
                            
                            
                            Unrealized
                            
                            
                            Fair
                            
                            
                            UnrealizedValue
                            
                            
                            Losses
                            
                            
                            Value
                            
                            
                            Losses
                            
                            
                            Value
                            
                            
                            LossesDebt
      SecuritiesU.S.
      government and agency
                            $
                            --
                            
                            
                            $
                            --
                            
                            
                            $
                            15,629
                            
                            
                            $
                            (303
                            )
                            
                            $
                            15,629
                            
                            
                            $
                            (303
                            )State and
      political subdivision
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            10,516
                            
                            
                            
                            (116
                            )
                            
                            
                            10,516
                            
                            
                            
                            (116
                            )Foreign
      government
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            2,464
                            
                            
                            
                            (25
                            )
                            
                            
                            2,464
                            
                            
                            
                            (25
                            )Corporate
                            
                            134,427
                            
                            
                            
                            (9,598
                            )
                            
                            
                            478,287
                            
                            
                            
                            (23,100
                            )
                            
                            
                            612,714
                            
                            
                            
                            (32,698
                            )Mortgage-backed
                            
                            105,599
                            
                            
                            
                            (9,822
                            )
                            
                            
                            162,554
                            
                            
                            
                            (7,086
                            )
                            
                            
                            268,153
                            
                            
                            
                            (16,908
                            )Other
      asset-backed
                            
                            137,632
                            
                            
                            
                            (15,661
                            )
                            
                            
                            81,534
                            
                            
                            
                            (5,318
                            )
                            
                            
                            219,166
                            
                            
                            
                            (20,979
                            )Total
      temporarily impaired securities
                            $
                            377,658
                            
                            
                            $
                            (35,081
                            )
                            
                            $
                            750,984
                            
                            
                            $
                            (35,948
                            )
                            
                            $
                            1,128,642
                            
                            
                            $
                            (71,029
                            )Below
      investment grade
                            $
                            39,024
                            
                            
                            $
                            (1,797
                            )
                            
                            $
                            67,088
                            
                            
                            $
                            (7,484
                            )
                            
                            $
                            106,112
                            
                            
                            $
                            (9,281
                            )Below
      investment grade after offsetsfor
      deferred policy acquisition costadjustment
      and taxes
                            
                            
                            
                            
                            $
                            (292
                            )
                            
                            
                            
                            
                            
                            $
                            (1,306
                            )
                            
                            
                            
                            
                            
                            $
                            (1,598
                            )Number
      of securities
                            
                            
                            
                            
                            
                            243
                            
                            
                            
                            
                            
                            
                            
                            411
                            
                            
                            
                            
                            
                            
                            
                            654




Below investment
grade debt securities with a fair value of less than 80% of the security’s
amortized costs totaled $(3,933) thousand at December 31, 2007. However, none of
this unrealized loss remained more than 20% below amortized cost for greater
than 12 months.




All of these
securities are considered to be temporarily impaired at December 31, 2007 as
each of these securities has performed, and is expected to continue to perform,
in accordance with their original contractual terms, and we have the ability and
intent to hold these securities until they recover their value.





13
 Table of Contents





4.
            Investing
      Activities (continued)




Net
investment income




Sources
      of Net Investment Income:
                          Three
      Months Ended
                          
                          
                          Nine
      Months Ended($
      in thousands)
                          September
      30,
                          
                          
                          September
      30,2008
                          
                          
                          2007
                          
                          
                          2008
                          
                          
                          2007Debt
      securities
                          $
                          21,987
                          
                          
                          $
                          26,139
                          
                          
                          $
                          68,121
                          
                          
                          $
                          79,538Policy
      loans
                          
                          421
                          
                          
                          
                          701
                          
                          
                          
                          1,119
                          
                          
                          
                          891Other
      investments
                          
                          67
                          
                          
                          
                          18
                          
                          
                          
                          143
                          
                          
                          
                          136Other
      income
                          
                          1
                          
                          
                          
                          181
                          
                          
                          
                          113
                          
                          
                          
                          398Cash and cash
      equivalents
                          
                          567
                          
                          
                          
                          1,050
                          
                          
                          
                          1,854
                          
                          
                          
                          3,387Total
      investment income
                          
                          23,043
                          
                          
                          
                          28,089
                          
                          
                          
                          71,350
                          
                          
                          
                          84,350Investment
      expenses
                          
                          (533
                          )
                          
                          
                          (480
                          )
                          
                          
                          (1,529
                          )
                          
                          
                          (1,655
                          )Net
      investment income
                          $
                          22,510
                          
                          
                          $
                          27,609
                          
                          
                          $
                          69,821
                          
                          
                          $
                          82,695




Net
realized investment gains (losses)




Sources
      and Types of
                            Three
      Months Ended
                            
                            
                            Nine
      Months EndedNet
      Realized Investment Gains (Losses):
                            September
      30,
                            
                            
                            September
      30,($
      in thousands)
                            2008
                            
                            
                            2007
                            
                            
                            2008
                            
                            
                            2007Debt security
      impairments
                            $
                            (6,241
                            )
                            
                            $
                            (421
                            )
                            
                            $
                            (18,577
                            )
                            
                            $
                            (921
                            )Debt security
      transaction gains
                            
                            134
                            
                            
                            
                            256
                            
                            
                            
                            1,336
                            
                            
                            
                            1,244Debt security
      transaction losses
                            
                            (749
                            )
                            
                            
                            (429
                            )
                            
                            
                            (2,874
                            )
                            
                            
                            (2,317
                            )Other
      investments transaction gains (losses)
                            
                            (62
                            )
                            
                            
                            (3
                            )
                            
                            
                            (83
                            )
                            
                            
                            106Net
      transaction losses
                            
                            (677
                            )
                            
                            
                            (176
                            )
                            
                            
                            (1,621
                            )
                            
                            
                            (967
                            )Change
      in fair value of embedded derivative liabilities
                            
                            (21,472
                            )
                            
                            
                            (1,390
                            )
                            
                            
                            (26,532
                            )
                            
                            
                            90Net
      realized investment losses
                            $
                            (28,390
                            )
                            
                            $
                            (1,987
                            )
                            
                            $
                            (46,730
                            )
                            
                            $
                            (1,798
                            )




Debt security
impairments during the third quarter of 2008 included $4,535 thousand related to
residential mortgage-backed securities. Based on a projected cash flow analysis
that incorporates delinquency levels, foreclosures and expected losses on
foreclosures, and indicates that we will not receive our contractual principal
from certain investments, we recorded impairment losses on those
investments.




Unrealized
investment gains (losses)




Sources
      of Changes in
                        Three Months
      Ended
                        
                        
                        Nine
      Months EndedNet
      Unrealized Investment Gains (Losses):
                        September
      30,
                        
                        
                        September
      30,($
      in thousands)
                        2008
                        
                        
                        2007
                        
                        
                        2008
                        
                        
                        2007Debt
      securities
                        $
                        (39,800
                        )
                        
                        $
                        (12,648
                        )
                        
                        $
                        (101,988
                        )
                        
                        $
                        (27,343
                        )Other
                        
                        (2,983
                        )
                        
                        
                        160
                        
                        
                        
                        (637
                        )
                        
                        
                        (41
                        )Net
      unrealized investment losses
                        $
                        (42,783
                        )
                        
                        $
                        (12,488
                        )
                        
                        $
                        (102,625
                        )
                        
                        $
                        (27,384
                        )Net unrealized
      investment losses
                        $
                        (42,783
                        )
                        
                        $
                        (12,488
                        )
                        
                        $
                        (102,625
                        )
                        
                        $
                        (27,384
                        )Applicable
      deferred policy acquisition cost benefit
                        
                        (32,404
                        )
                        
                        
                        (8,778
                        )
                        
                        
                        (79,540
                        )
                        
                        
                        (17,104
                        )Applicable
      deferred income tax benefit
                        
                        (3,633
                        )
                        
                        
                        (1,299
                        )
                        
                        
                        (8,080
                        )
                        
                        
                        (3,598
                        )Offsets to net
      unrealized investment losses
                        
                        (36,037
                        )
                        
                        
                        (10,077
                        )
                        
                        
                        (87,620
                        )
                        
                        
                        (20,702
                        )Net
      unrealized investment losses included in other comprehensive
      income
                        $
                        (6,746
                        )
                        
                        $
                        (2,411
                        )
                        
                        $
                        (15,005
                        )
                        
                        $
                        (6,682
                        )





14
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5.
            Separate
      Accounts, Death Benefits and Other Insurance Benefit
    Features




Separate account
products are those for which a separate investment and liability account is
maintained on behalf of the policyholder. Investment objectives for these
separate accounts vary by fund account type, as outlined in the applicable fund
prospectus or separate account plan of operations. Our separate account products
include variable annuities and variable life insurance contracts. The assets
supporting these contracts are carried at fair value and reported as Separate
account assets with an equivalent amount reported as Separate account
liabilities. Amounts assessed against the policyholder for mortality,
administration, and other services are included within revenue in insurance and
investment product fees. During the three and nine-month periods ended September
30, 2008 and 2007, there were no gains or losses on transfers of assets from the
general account to a separate account.




Many of our
variable contracts offer various guaranteed minimum death, accumulation,
withdrawal and income benefits. These benefits are offered in various forms as
described below. We currently reinsure a significant portion of the death
benefit guarantees associated with our in-force block of business. We establish
policy benefit liabilities for minimum death and income benefit guarantees
relating to certain annuity policies as follows:




·
              Liabilities
      associated with the guaranteed minimum death benefit (“GMDB”) are
      determined by estimating the expected value of death benefits in excess of
      the projected account balance and recognizing the excess ratably over the
      accumulation period based on total expected assessments. The assumptions
      used in estimating the liabilities are generally consistent with those
      used for amortizing deferred policy acquisition
  costs.
 ·
              Liabilities
      associated with the guaranteed minimum income benefit (“GMIB”) are
      determined by estimating the expected value of the income benefits in
      excess of the projected account balance at the date of annuitization and
      recognizing the excess ratably over the accumulation period based on total
      expected assessments. The assumptions used for calculating such guaranteed
      income benefit liabilities are generally consistent with those used for
      amortizing deferred policy acquisition
costs.




For annuities with
GMDB, 200 stochastically generated scenarios were used. For annuities with GMIB,
we used 1,000 stochastically generated scenarios.




The GMDB and GMIB
guarantees are recorded in policy liabilities and accruals on our balance sheet.
Changes in the liability are recorded in policy benefits on our statement of
operations. In a manner consistent with our policy for deferred policy
acquisition costs, we regularly evaluate estimates used and adjust the
additional liability balances, with a related charge or credit to benefit
expense if actual experience or other evidence suggests that earlier assumptions
should be revised.




We
also offer certain variable products with a guaranteed minimum withdrawal
benefit (“GMWB”), a guaranteed minimum accumulation benefit (“GMAB”) and a
guaranteed pay-out annuity floor (“GPAF”).




The GMWB rider
guarantees the policyholder a minimum amount of withdrawals and benefit payments
over time, regardless of the investment performance of the contract, subject to
an annual limit. Optional resets are available. In addition, we introduced a
feature for these contracts beginning in the fourth quarter of 2005 that allows
the policyholder to receive the guaranteed annual withdrawal amount for as long
as they are alive.




The GMAB rider
provides the contract holder with a minimum accumulation of their purchase
payments deposited within a specific time period, adjusted for withdrawals,
after a specified amount of time determined at the time of issuance of the
variable annuity contract.




The GPAF rider
provides the policyholder with a minimum payment amount if the variable annuity
payment falls below this amount on the payment calculation date.




The Combination
Rider includes the GMAB and GMWB riders as well as the GMDB rider at the
policyholder’s option.





15
 Table of Contents





5.
            Separate
      Accounts, Death Benefits and Other Insurance Benefit Features
      (continued)




The GMWB, GMAB and
GPAF represent embedded derivatives in the variable annuity contracts that are
required to be reported separately from the host variable annuity contract. They
are carried at fair value and reported in policyholder deposit funds. The fair
value of the GMWB, GMAB and GPAF obligation is calculated based on actuarial and
capital market assumptions related to the projected cash flows, including
benefits and related contract charges, over the lives of the contracts,
incorporating expectations concerning policyholder behavior. As markets change,
mature and evolve and actual policyholder behavior emerges, management
continually evaluates the appropriateness of its assumptions.




As
of September 30, 2008 and December 31, 2007, 100% of the aggregate account value
with the GMWB, GMAB and GPAF features was not reinsured. In order to minimize
the volatility associated with the unreinsured liabilities, we have established
an alternative risk management strategy. We began hedging our GMAB exposure in
2006 and GMWB exposure during the fourth quarter of 2007 using equity options,
equity futures, swaps and swaptions. These investments are included in other
investments on our balance sheet.




Embedded
      Derivative Liabilities:
                    Sept 30,
                    
                    
                    Dec
      31,($
      in thousands)
                    2008
                    
                    
                    2007GMWB
                    $
                    10,852
                    
                    
                    $
                    (1,512
                    )GMAB
                    
                    15,953
                    
                    
                    
                    1,814GPAF
                    
                    1,560
                    
                    
                    
                    1,373




For those
guarantees of benefits that are payable in the event of death, the net amount at
risk is generally defined as the current guaranteed minimum death benefit in
excess of the current account balance at the balance sheet date. For guarantees
of benefits that are payable upon annuitization, the net amount at risk is
generally defined as the present value of the minimum guaranteed annuity
payments available to the policy holder determined in accordance with the terms
of the contract in excess of the current account balance. For guarantees of
accumulation balances, the net amount at risk is generally defined as the
guaranteed minimum accumulation balance minus the current account
balance.




Additional
      Insurance Benefits
                                                          ($
      in thousands)
                                                        Account
      Value
                                                        
                                                        Net Amount At
      Risk After Reinsurance
                                                        
                                                        
                                                        Average
      Attained Age of AnnuitantGMDB return of
      premium
                                                        $
                                                        1,205,514
                                                        
                                                        
                                                        $
                                                        69,703
                                                        
                                                        
                                                        
                                                        60GMDB step
      up
                                                        
                                                        1,572,024
                                                        
                                                        
                                                        
                                                        260,513
                                                        
                                                        
                                                        
                                                        60GMDB earnings
      enhancement benefit (EEB)
                                                        
                                                        60,604
                                                        
                                                        
                                                        
                                                        1,564
                                                        
                                                        
                                                        
                                                        60GMDB greater
      of annual step up and roll up
                                                        
                                                        31,909
                                                        
                                                        
                                                        
                                                        9,914
                                                        
                                                        
                                                        
                                                        63Total
      GMDB at September 30, 2008
                                                        $
                                                        2,870,051
                                                        
                                                        
                                                        $
                                                        341,694Combination
      Rider
                                                        $
                                                        1,055
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        65GMAB
                                                        
                                                        394,631
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        55GMIB
                                                        
                                                        551,981
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        60GMWB
                                                        
                                                        385,722
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        60GPAF
                                                        
                                                        20,296
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        75Total
      at September 30, 2008
                                                        $
                                                        1,353,685




With the return of
premium, the death benefit is the greater of current account value or premiums
paid (less any adjusted partial withdrawals).




With the step up,
the death benefit is the greater of current account value, premiums paid (less
any adjusted partial withdrawals) or the annual step up amount prior to the
eldest original owner attaining a certain age. On and after the eldest original
owner attains that age, the death benefit is the greater of current account
value or the death benefit at the end of the contract year prior to the eldest
original owner’s attaining that age plus premium payments (less any adjusted
partial withdrawals) made since that date.





16
 Table of Contents





5.
            Separate
      Accounts, Death Benefits and Other Insurance Benefit Features
      (continued)




With EEB, the death
benefit is the greater of the premiums paid (less any adjusted partial
withdrawals) or the current account value plus the EEB. The EEB is an additional
amount designed to reduce the impact of taxes associated with distributing
contract gains upon death.




With greater of
annual step up and annual roll up, the death benefit is the greater of premium
payments (less any adjusted partial withdrawals), the annual step up amount, the
annual roll up amount or the current account value prior to the eldest original
owner attaining age 81. On and after the eldest original owner attained age 81,
the death benefit is the greater of current account value or the death benefit
at the end of the contract year prior to the eldest original owner’s attained
age of 81 plus premium payments (less any adjusted partial withdrawals) made
since that date.




Liabilities for
universal life are generally determined by estimating the expected value of
losses when death benefits exceed revenues and recognizing those benefits
ratably over the accumulation period based on total expected assessments. The
assumptions used in estimating these liabilities are consistent with those used
for amortizing deferred policy acquisition costs. A single set of best estimate
assumptions is used since these insurance benefits do not vary significantly
with capital markets volatility. At September 30, 2008 and December 31, 2007, we
held additional universal life benefit reserves of $45,571 thousand and $25,930
thousand, respectively.






6.
            Fair
      Value




SFAS No. 157 (“SFAS
157”) defines fair value, establishes a framework for measuring fair value,
establishes a fair value hierarchy based on the quality of inputs used to
measure fair value and enhances disclosure requirements for fair value
measurements. Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.




SFAS 157
establishes a three-level valuation hierarchy for disclosure of fair value
measurements. The valuation hierarchy is based upon the transparency of inputs
to the valuation of an asset or liability as of the measurement date. The three
levels, from highest to lowest, are defined as follows:













·
              Level 1 –
      inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active markets. Level 1 securities
      include highly liquid government bonds, mortgage products, exchange-traded
      equities and exchange-traded corporate
debt.
 ·
              Level 2 –
      inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the asset or liability, either directly or indirectly, for
      substantially the full term of the financial instrument. Examples of such
      instruments include certain high-yield debt
  securities.
 ·
              Level 3 –
      inputs to the valuation methodology are unobservable and significant to
      the fair value measurement. Securities classified within Level 3 include
      broker quoted investments, certain residual interests in securitizations
      and other less liquid securities. Most valuations that are based on
      brokers’ prices are classified as Level 3 due to a lack of transparency in
      the process they use to develop
prices.




A
financial instrument’s categorization within the valuation hierarchy is based
upon the lowest level of input that is significant to the fair value
measurement.





17
 Table of Contents





6.
            Fair
      Value (continued)




The following table
presents the financial instruments carried at fair value as of September 30,
2008, by SFAS 157 valuation hierarchy (as described above).




Assets
      and Liabilities at Fair Value:
                        As
      of September 30, 2008($
      in thousands)
                        Level
      1
                        
                        
                        Level
      2
                        
                        
                        Level
      3
                        
                        
                        TotalAssetsAvailable-for-sale
      debt securities
                        $
                        10,058
                        
                        
                        $
                        1,199,407
                        
                        
                        $
                        240,956
                        
                        
                        $
                        1,450,421Separate
      account assets
                        
                        2,854,062
                        
                        
                        
                        93,883
                        
                        
                        
                        1,520
                        
                        
                        
                        2,949,465Fair value
      option investments
                        
                        --
                        
                        
                        
                        4,875
                        
                        
                        
                        --
                        
                        
                        
                        4,875Total
      assets
                        $
                        2,864,120
                        
                        
                        $
                        1,298,165
                        
                        
                        $
                        242,476
                        
                        
                        $
                        4,404,761LiabilitiesEmbedded
      derivative liabilities
                        $
                        --
                        
                        
                        $
                        --
                        
                        
                        $
                        28,365
                        
                        
                        $
                        28,365Total
      liabilities
                        $
                        --
                        
                        
                        $
                        --
                        
                        
                        $
                        28,365
                        
                        
                        $
                        28,365




Fair value option
investments include a structured loan asset valued at $4,875 thousand as of
September 30, 2008. We elected to apply the fair value option to this note at
the time of its acquisition. We purchased the note to obtain principal
protection without sacrificing earnings potential. Election of the fair value
option allows current earnings recognition and is more consistent with
management’s view of the security’s underlying economics.




We
have an established process for determining fair values. Fair value is based
upon quoted market prices, where available. If listed prices or quotes are not
available, fair value is based upon internally developed models that use
primarily market-based or independently-sourced market parameters, including
interest rate yield curves, option volatilities and currency rates. Valuation
adjustments may be made to ensure that financial instruments are recorded at
fair value. These adjustments include amounts to reflect counterparty credit
quality, our own creditworthiness, liquidity and unobservable parameters that
are applied consistently over time.




Separate
Accounts




Separate account
assets are primarily invested in mutual funds but also have investments in fixed
maturity and equity securities. The separate account investments are valued in
the same manner, and using the same pricing sources and inputs, as the fixed
maturity, equity security and short-term investments of the Company. Mutual
funds are included in Level 1. Most debt securities and short-term investments
are included in Level 2.




Valuation
of Embedded Derivatives




Embedded
derivatives are guarantees that we make on certain variable annuity contracts,
including GMAB and GMWB. These embedded derivatives are fair valued using a risk
neutral stochastic valuation methodology. The inputs to our fair value
methodology include information derived from the asset derivatives market,
including the volatility surface and the swap curve. Several additional inputs
are not obtained from independent sources, but instead reflect our own
assumptions about what market participants would use in pricing the contracts.
These inputs are therefore considered “unobservable” and fall into Level 3 of
the fair value hierarchy. These inputs include mortality rates, lapse rates and
policyholder behavior assumptions. Because there are significant Level 3 inputs
included in our fair value methodology for these embedded derivative
liabilities, we consider the above-described methodology as a whole to be Level
3.




Level
3 Financial Assets and Liabilities




The following table
sets forth a summary of changes in the fair value of our Level 3 financial
assets and liabilities. As required by SFAS 157, financial assets and
liabilities are classified in their entirety based on the lowest level of input
that is significant to the fair value measurement. For example, a hypothetical
derivative contract with Level 1, Level 2 and significant Level 3 inputs would
be classified as a Level 3 financial instrument in its entirety. Subsequently,
even if only Level 1 and Level 2 inputs are adjusted, the resulting gain or loss
is classified as Level 3. Further, Level 3 instruments are frequently hedged
with instruments that are classified as Level 1 or Level 2 and, accordingly,
gains or losses reported as Level 3 in the table below may be offset by gains or
losses attributable to instruments classified in Level 1 or 2 of the fair value
hierarchy.





18
 Table of Contents





6.
            Fair
      Value (continued)




Level
      3 Financial Assets and Liabilities:
                                              Three
      Months Ended
                                              
                                              
                                              Nine
      Months Ended($
      in thousands)
                                              September
      30, 2008
                                              
                                              
                                              September
      30, 2008Assets
                                              
                                              
                                              Liabilities
                                              
                                              
                                              Assets
                                              
                                              
                                              LiabilitiesBalance,
      beginning of period
                                              $
                                              238,276
                                              
                                              
                                              $
                                              (6,704
                                              )
                                              
                                              $
                                              267,185
                                              
                                              
                                              $
                                              (1,675
                                              )Purchases/(sales),
      net
                                              
                                              (6,620
                                              )
                                              
                                              
                                              --
                                              
                                              
                                              
                                              (16,379
                                              )
                                              
                                              
                                              --Net transfers
      in and out of Level 3
                                              
                                              10,076
                                              
                                              
                                              
                                              --
                                              
                                              
                                              
                                              (4,014
                                              )
                                              
                                              
                                              --Realized gains
      (losses)
                                              
                                              (4,538
                                              )
                                              
                                              
                                              (21,661
                                              )
                                              
                                              
                                              (12,765
                                              )
                                              
                                              
                                              (26,690
                                              )Unrealized
      gains (losses) included in other comprehensive income
    (loss)
                                              
                                              5,014
                                              
                                              
                                              
                                              --
                                              
                                              
                                              
                                              8,734
                                              
                                              
                                              
                                              --Amortization/accretion
                                              
                                              268
                                              
                                              
                                              
                                              --
                                              
                                              
                                              
                                              (285
                                              )
                                              
                                              
                                              --Balance,
      end of period
                                              $
                                              242,476
                                              
                                              
                                              $
                                              (28,365
                                              )
                                              
                                              $
                                              242,476
                                              
                                              
                                              $
                                              (28,365
                                              )Portion
      of gain (loss) included in net income relating to those assets/liabilities
      still held
                                              $
                                              (5,006
                                              )
                                              
                                              $
                                              (21,661
                                              )
                                              
                                              $
                                              (16,618
                                              )
                                              
                                              $
                                              (26,690
                                              )






7.
            Income
      Taxes




For the three and
nine months ended September 30, 2008 and 2007, the effective income tax rates
applicable to income from continuing operations differ from the 35.0% U.S.
federal statutory tax rate. Items giving rise to the differences and the effects
are as follows:




Analysis
      of Effective Income Tax Rates:
                                
                                Three
      Months Ended
                                
                                
                                
                                Nine
      Months EndedSeptember
      30,
                                
                                
                                
                                September
      30,2008
                                
                                
                                
                                2007
                                
                                
                                
                                2008
                                
                                
                                
                                2007Income taxes
      at statutory rate
                                
                                35.0
                                %
                                
                                
                                35.0
                                %
                                
                                
                                35.0
                                %
                                
                                
                                35.0
                                %Investment
      income not subject to tax
                                
                                2.4
                                %
                                
                                
                                (26.5
                                )%
                                
                                
                                6.5
                                %
                                
                                
                                (17.7
                                )%Effective
      income tax rates applicable tocontinuing
      operations
                                
                                37.4
                                %
                                
                                
                                8.5
                                %
                                
                                
                                41.5
                                %
                                
                                
                                17.3
                                %




Our federal income
tax returns are routinely audited by the IRS and estimated provisions are
routinely provided in the financial statements in anticipation of the results of
these audits. Unfavorable resolution of any particular issue could result in
additional use of cash to pay liabilities that would be deemed owed to the IRS.
Additionally, any unfavorable or favorable resolution of any particular issue
could result in an increase or decrease, respectively, to our effective income
tax rate to the extent that our estimates differ from the ultimate resolution.
As of September 30, 2008, we had current taxes receivable of $8,582
thousand.




We have determined,
based on our earnings and projected future taxable income of the consolidated
group, that it is more likely than not that deferred income tax assets at
September 30, 2008, December 31, 2007 and2006 will be
realized.




See Note 2 to these
financial statements for information regarding the implementation of FIN
48.






8.
            Contingent
      Liabilities




Litigation
and Arbitration




We
are regularly involved in litigation and arbitration, both as a defendant and as
a plaintiff. The litigation and arbitration naming us as a defendant ordinarily
involves our activities as an insurer, investor, or taxpayer. It is not feasible
to predict or determine the ultimate outcome of all legal or arbitration
proceedings or to provide reasonable ranges of potential losses. We believe that
the outcomes of our litigation and arbitration matters are not likely, either
individually or in the aggregate, to have a material adverse effect on our
financial condition. However, given the large or indeterminate amounts sought in
certain of these matters and the inherent unpredictability of litigation and
arbitration, it is possible that an adverse outcome in certain matters could,
from time to time, have a material adverse effect on our results of operations
or cash flows in particular quarterly or annual periods.





19
 Table of Contents





8.
            Contingent
      Liabilities (continued)




Regulatory
Matters




State regulatory
bodies, the Securities and Exchange Commission (“SEC”), the Financial Industry
Regulatory Authority (“FINRA”) and other regulatory bodies regularly make
inquiries of us and, from time to time, conduct examinations or investigations
concerning our compliance with, among other things, insurance laws and
securities laws. We endeavor to respond to such inquiries in an appropriate way
and to take corrective action if warranted.




In
addition, federal and state regulatory authorities from time to time make
inquiries and conduct examinations regarding compliance by Phoenix Life and its
subsidiaries with securities and other laws and regulations affecting their
registered products. We endeavor to respond to such inquiries in an appropriate
way and to take corrective action if warranted. There has been a significant
increase in federal and state regulatory activity relating to financial services
companies, with a number of recent regulatory inquiries focusing on
late-trading, market timing and valuation issues. Our products entitle us to
impose restrictions on transfers between separate account sub-accounts
associated with our variable products.




In
2005, the Boston District Office of the SEC completed a compliance examination
of certain of PNX’s affiliates that are registered under the Investment Company
Act of 1940 or the Investment Advisers Act of 1940. Following the examination,
the staff of the Boston District Office issued a deficiency letter primarily
focused on perceived weaknesses in procedures for monitoring trading to prevent
market timing activity. The staff requested PNX to conduct an analysis as to
whether shareholders, policyholders and contract holders who invested in the
funds that may have been affected by undetected market timing activity had
suffered harm and to advise the staff whether PNX believes reimbursement is
necessary or appropriate under the circumstances. A third party was retained to
assist PNX in preparing the analysis. Based on this analysis, PNX advised the
SEC that it does not believe that reimbursement is appropriate.




Over the past
several years, a number of companies have announced settlements of enforcement
actions with various regulatory agencies, primarily the SEC and the New York
Attorney General’s Office. While no such action has been initiated against us,
it is possible that one or more regulatory agencies may pursue this type of
action against us in the future. Financial services companies have also been the
subject of broad industry inquiries by state regulators and attorneys general
which do not appear to be company-specific.




These types of
regulatory actions may be difficult to assess or quantify, may seek recovery of
indeterminate amounts, including punitive and treble damages, and the nature and
magnitude of their outcomes may remain unknown for substantial periods of time.
While it is not feasible to predict or determine the ultimate outcome of all
pending inquiries, investigations, legal proceedings and other regulatory
actions, or to provide reasonable ranges of potential losses, we believe that
their outcomes are not likely, either individually or in the aggregate, to have
a material adverse effect on our financial condition. However, given the large
or indeterminate amounts sought in certain of these actions and the inherent
unpredictability of regulatory matters, it is possible that an adverse outcome
in certain matters could, from time to time, have a material adverse effect on
our results of operation or cash flows in particular quarterly or annual
periods.





20
 Table of Contents





Item2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




FORWARD-LOOKING
STATEMENTS




The
discussion in this Form 10-Q may contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. We intend for
these forward-looking statements to be covered by the safe harbor provisions of
the federal securities laws relating to forward-looking statements. These
include statements relating to trends in, or representing management’s beliefs
about our future strategies, operations and financial results, as well as other
statements including, but not limited to, words such as “anticipate,” “believe,”
“plan,” “estimate,” “expect,” “intend,” “may,” “should” and other similar
expressions. Forward-looking statements are made based upon management’s current
expectations and beliefs concerning trends and future developments and their
potential effects on us. They are not guarantees of future performance. Actual
results may differ materially from those suggested by forward-looking statements
as a result of risks and uncertainties which include, among others: (i) the
effects of recent adverse market and economic developments on all aspects of our
business; (ii) changes in general market and business conditions, interest rates
and the debt and equity markets; (iii) the possibility that mortality rates,
persistency rates or funding levels may differ significantly from our pricing
expectations; (iv) the availability, pricing and terms of reinsurance coverage
generally and the inability or unwillingness of our reinsurers to meet their
obligations to us specifically; (v) our dependence on non-affiliated
distributors for our product sales, (vi) downgrades in our debt or financial
strength ratings; (vii) our dependence on third parties to maintain critical
business and administrative functions; (viii) our ability to attract and retain
key personnel in a competitive environment; (ix) the strong competition we face
in our business from banks and other insurance companies; (x)  tax
developments that may affect us directly, or indirectly through the cost of, the
demand for or profitability of our products or services; (xi) other legislative
or regulatory developments; (xii) legal or regulatory actions; (xiii) changes in
accounting standards; and (xiv) other risks and uncertainties described herein
or in any of our filings with the SEC. We undertake no obligation to update or
revise publicly any forward-looking statement, whether as a result of new
information, future events or otherwise.




MANAGEMENT’S
NARRATIVE ANALYSIS OF THE


RESULTS
OF OPERATIONS




This section
reviews our results of operations for the three and nine months ended September
30, 2008 and 2007. This discussion should be read in conjunction with the
unaudited interim condensed financial statements and notes contained in this
filing as well as in conjunction with our financial statements for the year
ended December 31, 2007 in our 2007 Annual Report on Form 10-K.




Overview




For an overview of
our current business and an explanation of the key drivers of our revenues,
expenses and overall profitability, please see the “Business Overview and
Earnings Drivers” discussion in Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations, in our 2007 Annual Report on Form
10-K.




Impact
of New Accounting Standards




For a discussion of
accounting standards, see Note 2 to our financial statements in this Form
10-Q.




Critical
Accounting Estimates




The analysis of our
results of operations is based upon our financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”). GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Critical accounting estimates are reflective of significant
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain.





21
 Table of Contents





As
further described below, during 2008 we changed our method of accounting for
reinsurance and for calculating deferred policy acquisition cost amortization.
See our 2007 Annual Report on Form 10-K for a discussion of additional critical
accounting estimates.




Accounting
Change




Effective April 1,
2008, we changed our method of accounting for the cost of certain of our long
duration reinsurance contracts accounted for in accordance with SFAS No. 113,
Accounting
and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts (“SFAS 113”). In conjunction with this change, we also changed
our method of accounting for the impact of reinsurance costs on deferred
acquisition costs. SFAS 113 requires us to amortize the estimated cost of
reinsurance over the life of the underlying reinsured contracts. Under our
previous method, we recognized reinsurance recoveries as part of the net cost of
reinsurance and amortized this balance over the estimated lives of the
underlying reinsured contracts in proportion to estimated gross profits (“EGPs”)
consistent with the method used for amortizing deferred policy acquisition
costs. Under the new method, reinsurance recoveries are recognized in the same
period as the related reinsured claim. In conjunction with this change, we also
changed our policy for determining EGPs relating to these contracts to include
the effects of reinsurance, where previously these effects had not been
included.




We
adopted the new method because we believe that it better reflects the economics
of the underlying reinsurance activity by better matching the reinsurance
recovery with the insured loss that gave rise to that recovery. We also believe
that the new method is consistent with management's intent in purchasing
reinsurance, which is to protect the Company against large and unexpected
claims. Following is a description of our accounting for deferred policy
acquisition costs, which has been updated from our 2007 Annual Report on Form
10-K to reflect a change in our method of accounting for the effects of
reinsurance.




Deferred
Policy Acquisition Costs




We
amortize deferred policy acquisition costs based on the related policy’s
classification. For individual life insurance policies, deferred policy
acquisition costs are amortized in proportion to estimated gross margins. For
universal life, variable universal life and accumulation annuities, deferred
policy acquisition costs are amortized in proportion to EGPs. Policies may be
surrendered for value or exchanged for a different one of our products (internal
replacement). The deferred policy acquisition costs balance associated with the
replaced or surrendered policies is amortized to reflect these
surrenders.




Each year, we
develop future EGPs for the products sold during that year. The EGPs for
products sold in a particular year are aggregated into cohorts. Future EGPs are
projected for the estimated lives of the contracts. The amortization of deferred
policy acquisition costs requires the use of various assumptions, estimates and
judgments about the future. The assumptions, in the aggregate, are considered
important in the projections of EGPs. The assumptions developed as part of our
annual process are based on our current best estimates of future events, which
are likely to be different for each year’s cohort. Assumptions considered to be
significant in the development of EGPs include separate account fund
performance, surrender and lapse rates, interest margin, mortality, premium
persistency, funding patterns, expenses and reinsurance costs and recoveries.
These assumptions are reviewed on a regular basis and are based on our past
experience, industry studies, regulatory requirements and estimates about the
future.




To
determine the reasonableness of the prior assumptions used and their impact on
previously projected account values and the related EGPs, we evaluate, on a
quarterly basis, our previously projected EGPs. Our process to assess the
reasonableness of our EGPs involves the use of internally developed models,
together with studies and actual experience. Incorporated in each scenario are
our current best estimate assumptions with respect to separate account returns,
surrender and lapse rates, interest margin, mortality, premium persistency,
funding patterns, expenses and reinsurance costs and recoveries.





22
 Table of Contents





In
addition to our quarterly reviews, we complete a comprehensive assumption study
during the fourth quarter of each year. Upon completion of an assumption study,
we revise our assumptions to reflect our current best estimate, thereby changing
our estimate of projected account values and the related EGPs in the deferred
policy acquisition cost and unearned revenue amortization models as well as SOP
03-1 reserving models. The deferred policy acquisition cost asset, as well as
the unearned revenue reserves and SOP 03-1 reserves are then adjusted with an
offsetting benefit or charge to income to reflect such changes in the period of
the revision, a process known as “unlocking.”




Underlying
assumptions for future periods of EGPs are not altered unless experience
deviates significantly from original assumptions. For example, when lapses of
our insurance products meaningfully exceed levels assumed in determining the
amortization of deferred policy acquisition costs, we adjust amortization to
reflect the change in future premiums or EGPs resulting from the unexpected
lapses. In the event that we were to revise assumptions used for prior year
cohorts, our estimate of projected account values would change and the related
EGPs in the deferred policy acquisition cost amortization model would be
unlocked, or adjusted, to reflect such change. Continued favorable experience on
key assumptions, which could include increasing separate account fund return
performance, decreasing lapses or decreasing mortality could result in an
unlocking which would result in a decrease to deferred policy acquisition cost
amortization and an increase in the deferred policy acquisition costs asset.
Finally, an analysis is performed periodically to assess whether there are
sufficient gross margins or gross profits to amortize the remaining deferred
policy acquisition costs balances.




The separate
account fund performance assumption is critical to the development of the EGPs
related to our variable annuity and variable life insurance businesses. As
equity markets do not move in a systematic manner, we use a mean reversion
method (reversion to the mean assumption), a common industry practice, to
determine the future equity market growth rate assumption used for the
amortization of deferred policy acquisition costs. This practice assumes that
the expectation for long-term appreciation is not changed by minor short-term
market fluctuations. The average long-term rate of assumed separate account fund
performance used in estimating gross profits was 6.0% (after fund fees and
mortality and expense charges) for the variable annuity business and 6.9% (after
fund fees and mortality and expense charges) for the variable life business at
both December 31, 2007 and 2006.




We
perform analysis with respect to the sensitivity of a change in the separate
account performance assumption as it is critical to the development of the EGPs
related to our variable annuity and variable life insurance business. Equity
market movements have a significant impact on the account value of variable life
and annuity products and the fees earned on these. EGPs could increase or
decrease with these movements in the equity market. Sustained and significant
changes in the equity markets could therefore have an impact on deferred policy
acquisition cost amortization. Periodically, we also perform analysis with
respect to the sensitivity of a change in assumed mortality as it is critical to
the development of the EGPs related to our universal life insurance
business.




As
part of our analysis of separate account returns, we perform two sensitivity
tests. If at December 31, 2007 we had used a 100 basis points lower separate
account return assumption (after fund fees and mortality and expense charges)
for both the variable annuity and the variable life businesses and used our
current best estimate assumptions for all other assumptions to project account
values forward from the current value to reproject EGPs, the estimated increase
to amortization and decrease to net income would be approximately $1,794
thousand, after-tax.




If, instead, at
December 31, 2007 we had used a 100 basis points higher separate account return
assumption (after fund fees and mortality and expense charges) for both the
variable annuity and variable life businesses and used our current best estimate
assumptions for all other assumptions to project account values forward from the
current value to reproject EGPs, the estimated decrease to amortization and
increase to net income would be approximately $1,783 thousand,
after-tax.





23
 Table of Contents




Results
of Operations




Summary
      Financial Data:
                              Three Months Ended
                              
                              
                              Increase
      (decrease) and($
      in thousands)
                              September
      30,
                              
                              
                              percentage
      change2008
                              
                              
                              2007
                              
                              
                              2008 vs.
      2007REVENUES:Premiums
                              $
                              5,423
                              
                              
                              $
                              4,199
                              
                              
                              $
                              1,224
                              
                              
                              
                              29
                              %Insurance and
      investment product fees
                              
                              93,554
                              
                              
                              
                              67,356
                              
                              
                              
                              26,198
                              
                              
                              
                              39
                              %Net investment
      income
                              
                              22,510
                              
                              
                              
                              27,609
                              
                              
                              
                              (5,099
                              )
                              
                              
                              (18
                              %)Net realized
      investment losses
                              
                              (28,390
                              )
                              
                              
                              (1,987
                              )
                              
                              
                              (26,403
                              )
                              
                              
                              1,329
                              %Total
      revenues
                              
                              93,097
                              
                              
                              
                              97,177
                              
                              
                              
                              (4,080
                              )
                              
                              
                              (4
                              %)BENEFITS
      AND EXPENSES:Policy
      benefits
                              
                              51,774
                              
                              
                              
                              43,140
                              
                              
                              
                              8,634
                              
                              
                              
                              20
                              %Policy
      acquisition cost amortization
                              
                              46,533
                              
                              
                              
                              27,895
                              
                              
                              
                              18,638
                              
                              
                              
                              67
                              %Other
      operating expenses
                              
                              21,117
                              
                              
                              
                              20,640
                              
                              
                              
                              477
                              
                              
                              
                              2
                              %Total
      benefits and expenses
                              
                              119,424
                              
                              
                              
                              91,675
                              
                              
                              
                              27,749
                              
                              
                              
                              30
                              %Income before
      income taxes
                              
                              (26,327
                              )
                              
                              
                              5,502
                              
                              
                              
                              (31,829
                              )
                              
                              
                              (578
                              %)Applicable
      income tax benefit
                              
                              9,853
                              
                              
                              
                              466
                              
                              
                              
                              9,387
                              
                              
                              
                              2,014
                              %Net
      income (loss)
                              $
                              (16,474
                              )
                              
                              $
                              5,968
                              
                              
                              $
                              (22,442
                              )
                              
                              
                              (376
                              %)




Three
months ended September 30, 2008 compared to three months ended September 30,
2007




Net income
decreased 376% in the 2008 quarter. This result reflects higher net realized
investment losses, higher amortization expense and lower interest margin. These
decreases to income were partially offset by higher mortality
margin.




Realized losses
during the third quarter were primarily driven by increases in the fair value of
embedded derivative liabilities in our variable annuity contracts. Realized
losses also include impairments of $4,535 thousand during the third quarter
related to residential mortgage-backed securities. Policy acquisition cost
amortization increased $18,638 thousand in the current year quarter. This
increase was caused by growth in the universal life business, the impact of
market declines on annuities and higher surrenders. Lower investment income,
combined with an increase in interest credited, drove a reduction in interest
margin for the period. Mortality margin in universal life increased in 2008,
driven by increases in cost of insurance fee revenues that were only partially
offset by higher net benefits.




Summary
      Financial Data:
                                      NineMonths Ended
                                      
                                      
                                      Increase
      (decrease) and($
      in thousands)
                                      September
      30,
                                      
                                      
                                      percentage
      change2008
                                      
                                      
                                      2007
                                      
                                      
                                      2008 vs.
      2007REVENUES:Premiums
                                      $
                                      10,094
                                      
                                      
                                      $
                                      10,260
                                      
                                      
                                      $
                                      (166
                                      )
                                      
                                      
                                      (2
                                      %)Insurance and
      investment product fees
                                      
                                      265,136
                                      
                                      
                                      
                                      180,885
                                      
                                      
                                      
                                      84,251
                                      
                                      
                                      
                                      47
                                      %Net investment
      income
                                      
                                      69,821
                                      
                                      
                                      
                                      82,695
                                      
                                      
                                      
                                      (12,874
                                      )
                                      
                                      
                                      (16
                                      %)Net realized
      investment losses
                                      
                                      (46,730
                                      )
                                      
                                      
                                      (1,798
                                      )
                                      
                                      
                                      (44,932
                                      )
                                      
                                      
                                      2,499
                                      %Total
      revenues
                                      
                                      298,321
                                      
                                      
                                      
                                      272,042
                                      
                                      
                                      
                                      26,279
                                      
                                      
                                      
                                      10
                                      %BENEFITS
      AND EXPENSES:Policy
      benefits
                                      
                                      146,362
                                      
                                      
                                      
                                      119,601
                                      
                                      
                                      
                                      26,761
                                      
                                      
                                      
                                      22
                                      %Policy
      acquisition cost amortization
                                      
                                      109,825
                                      
                                      
                                      
                                      78,421
                                      
                                      
                                      
                                      31,404
                                      
                                      
                                      
                                      40
                                      %Other
      operating expenses
                                      
                                      74,924
                                      
                                      
                                      
                                      58,150
                                      
                                      
                                      
                                      16,774
                                      
                                      
                                      
                                      29
                                      %Total
      benefits and expenses
                                      
                                      331,111
                                      
                                      
                                      
                                      256,172
                                      
                                      
                                      
                                      74,939
                                      
                                      
                                      
                                      29
                                      %Income before
      income taxes
                                      
                                      (32,790
                                      )
                                      
                                      
                                      15,870
                                      
                                      
                                      
                                      (48,660
                                      )
                                      
                                      
                                      (307
                                      %)Applicable
      income tax (expense) benefit
                                      
                                      13,601
                                      
                                      
                                      
                                      (2,748
                                      )
                                      
                                      
                                      16,349
                                      
                                      
                                      
                                      595
                                      %Net
      income (loss)
                                      $
                                      (19,189
                                      )
                                      
                                      $
                                      13,122
                                      
                                      
                                      $
                                      (32,311
                                      )
                                      
                                      
                                      (246
                                      %)





24
 Table of Contents





Nine
months ended September 30, 2008 compared to nine months ended September 30,
2007




Net results for the
year-to-date period declined 246% to a net loss of $19,189 thousand. This result
was driven by higher net realized investment losses, higher operating and
amortization expenses and lower interest margin. These decreases to income were
partially offset by improved mortality margins and increased fee
revenues.




Net realized
investment losses for the nine months ended September 30, 2008 include a $26,532
thousand increase in the embedded derivative liabilities for our variable
products guarantees, as well as $18,577 thousand of impairments, including
$16,019 thousand related to residential mortgage-backed securities. In addition,
policy acquisition cost amortization increased $31,404 thousand in the current
year, driven by growth in the universal life business, the impact of market
declines on annuities and higher surrenders. Operating expenses also increased
during 2008 as we continue to invest in the growth of the business. Partially
offsetting these reductions were increases in mortality margins and fee
revenues. Mortality margin in universal life increased in 2008, driven by
increases in cost of insurance fee revenues that were only partially offset by
higher net benefits. Fee revenues on our life and annuity products primarily
consist of asset- and premium-based fees and have increased in 2008 due to
growth of the in-force business.




General
Account




The invested assets
in our general account are generally of high quality and broadly diversified
across fixed income sectors, public and private income securities and individual
credits and issuers. Our investment professionals manage these general account
assets in investment segments that support specific product liabilities. These
investment segments have distinct investment policies that are structured to
support the financial characteristics of the related liabilities within them.
Segmentation of assets allows us to manage the risks and measure returns on
capital for our various products.




Separate
Accounts




Separate account
assets are managed in accordance with the specific investment contracts and
guidelines relating to our variable products. We generally do not bear any
investment risk on assets held in separate accounts. Rather, we receive
investment management fees based on assets under management. Assets held in
separate accounts are not available to satisfy general account
obligations.




Debt
and Equity Securities Held in Our General Account




Our general account
debt securities portfolios consist primarily of investment grade publicly-traded
and privately-placed corporate bonds, residential mortgage-backed securities,
commercial mortgage-backed securities and asset-backed securities. As of
September 30, 2008, our general account held debt securities with a carrying
value of $1,450,421 thousand, representing 97.2% of total general account
investments. Public debt securities represented 78.8% of total debt securities,
with the remaining 21.2% represented by private debt securities.




Debt
      Securities by Type and Credit Quality:
                        As of
      September 30, 2008($
      in thousands)
                        Investment
      Grade
                        
                        
                        Below
      Investment GradeFair
      Value
                        
                        
                        Cost
                        
                        
                        Fair
      Value
                        
                        
                        CostU.S.
      government and agency
                        $
                        46,498
                        
                        
                        $
                        47,759
                        
                        
                        $
                        --
                        
                        
                        $
                        --State and
      political subdivision
                        
                        6,158
                        
                        
                        
                        6,539
                        
                        
                        
                        --
                        
                        
                        
                        --Foreign
      government
                        
                        17,763
                        
                        
                        
                        16,607
                        
                        
                        
                        7,321
                        
                        
                        
                        6,875Corporate
                        
                        734,226
                        
                        
                        
                        795,223
                        
                        
                        
                        94,683
                        
                        
                        
                        115,743Mortgage-backed
                        
                        328,155
                        
                        
                        
                        364,942
                        
                        
                        
                        4,441
                        
                        
                        
                        4,441Other
      asset-backed
                        
                        189,862
                        
                        
                        
                        224,061
                        
                        
                        
                        21,314
                        
                        
                        
                        25,009Total
      debt securities
                        $
                        1,322,662
                        
                        
                        $
                        1,455,131
                        
                        
                        $
                        127,759
                        
                        
                        $
                        152,068Percentage
      of total debt securities
                        
                        91.2
                        %
                        
                        
                        90.5
                        %
                        
                        
                        8.8
                        %
                        
                        
                        9.5
                        %




We
manage credit risk through industry and issuer diversification. Maximum exposure
to an issuer is defined by quality ratings, with higher quality issuers having
larger exposure limits. Our investment approach emphasizes a high level of
industry diversification. The top five industry holdings as of September 30,
2008 in our debt securities portfolio are diversified banking (6.3%), financial
services (6.1%), real estate investment trusts (3.0%), insurance (2.7%) and
electric utilities (2.6%).





25
 Table of Contents





The following table
presents certain information with respect to our gross unrealized losses related
to our investments in general account debt securities. Applicable deferred
acquisition costs and deferred income taxes reduce the effect of these losses on
our comprehensive income.




Duration
      of Gross Unrealized Losses
                        As ofSeptember 30,
      2008on
      General Account Securities:
                        
                        
                        
                        0
      – 6
                        
                        
                        6
      – 12
                        
                        
                        Over
      12($
      in thousands)
                        Total
                        
                        
                        Months
                        
                        
                        Months
                        
                        
                        MonthsDebt
      securitiesTotal fair
      value
                        $
                        1,179,822
                        
                        
                        $
                        422,337
                        
                        
                        $
                        132,484
                        
                        
                        $
                        625,001Total
      amortized cost
                        
                        1,342,257
                        
                        
                        
                        443,543
                        
                        
                        
                        152,948
                        
                        
                        
                        745,766Unrealized
      losses
                        $
                        (162,435
                        )
                        
                        $
                        (21,206
                        )
                        
                        $
                        (20,464
                        )
                        
                        $
                        (120,765
                        )Unrealized
      losses after offsets
                        $
                        (25,004
                        )
                        
                        $
                        (3,553
                        )
                        
                        $
                        (3,022
                        )
                        
                        $
                        (18,429
                        )Number of
      securities
                        
                        753
                        
                        
                        
                        271
                        
                        
                        
                        88
                        
                        
                        
                        394Investment
      grade:Unrealized
      losses
                        $
                        (137,642
                        )
                        
                        $
                        (19,702
                        )
                        
                        $
                        (16,603
                        )
                        
                        $
                        (101,337
                        )Unrealized
      losses after offsets
                        $
                        (21,275
                        )
                        
                        $
                        (3,341
                        )
                        
                        $
                        (2,478
                        )
                        
                        $
                        (15,456
                        )Below
      investment grade:Unrealized
      losses
                        $
                        (24,793
                        )
                        
                        $
                        (1,504
                        )
                        
                        $
                        (3,861
                        )
                        
                        $
                        (19,428
                        )Unrealized
      losses after offsets
                        $
                        (3,729
                        )
                        
                        $
                        (212
                        )
                        
                        $
                        (544
                        )
                        
                        $
                        (2,973
                        )




Total net
unrealized losses on debt securities were $156,778 thousand (unrealized losses
of $162,435 thousand less unrealized gains of $5,657 thousand).




For debt securities
with gross unrealized losses, 85.1% of the unrealized losses after offsets
pertain to investment grade securities and 14.9% of the unrealized losses after
offsets pertain to below investment grade securities at September 30,
2008.





26
 Table of Contents





The following table
represents those securities whose fair value is less than 80% of amortized cost
(significant unrealized loss) that have been at a significant unrealized loss
position on a continuous basis.




Duration
      of Gross Unrealized Losses
                        As ofSeptember 30,
      2008on
      General Account Securities:
                        
                        
                        
                        0
      – 6
                        
                        
                        6
      – 12
                        
                        
                        Over
      12($
      in thousands)
                        Total
                        
                        
                        Months
                        
                        
                        Months
                        
                        
                        MonthsDebt
      securitiesUnrealized
      losses over 20% of cost
                        $
                        (82,071
                        )
                        
                        $
                        (54,703
                        )
                        
                        $
                        (18,730
                        )
                        
                        $
                        (8,638
                        )Unrealized
      losses over 20% of cost after offsets
                        $
                        (12,236
                        )
                        
                        $
                        (8,380
                        )
                        
                        $
                        (2,639
                        )
                        
                        $
                        (1,217
                        )Number of
      securities
                        
                        122
                        
                        
                        
                        92
                        
                        
                        
                        23
                        
                        
                        
                        7Investment
      grade:Unrealized
      losses over 20% of cost
                        $
                        (65,476
                        )
                        
                        $
                        (46,669
                        )
                        
                        $
                        (17,219
                        )
                        
                        $
                        (1,588
                        )Unrealized
      losses over 20% of cost after offsets
                        $
                        (9,692
                        )
                        
                        $
                        (7,042
                        )
                        
                        $
                        (2,426
                        )
                        
                        $
                        (224
                        )Below
      investment grade:Unrealized
      losses over 20% of cost
                        $
                        (16,595
                        )
                        
                        $
                        (8,034
                        )
                        
                        $
                        (1,511
                        )
                        
                        $
                        (7,050
                        )Unrealized
      losses over 20% of cost after offsets
                        $
                        (2,544
                        )
                        
                        $
                        (1,338
                        )
                        
                        $
                        (213
                        )
                        
                        $
                        (993
                        )




Our assessment of
whether an investment in a debt or equity security is other-than-temporarily
impaired includes whether the issuer has:


































·
              defaulted on
      payment obligations;
 ·
              declared that
      it will default at a future point outside the current reporting
      period;
 ·
              announced
      that a restructuring will occur outside the current reporting
      period;
 ·
              severe
      liquidity problems that cannot be
resolved;
 ·
              filed for
      bankruptcy;
 ·
              a financial
      condition which suggests that future payments are highly
      unlikely;
 ·
              deteriorating
      financial condition and quality of
assets;
 ·
              sustained
      significant losses during the current
year;
 ·
              announced
      adverse changes or events such as changes or planned changes in senior
      management, restructurings, or a sale of assets;
  and/or
 ·
              been affected
      by any other factors that indicate that the fair value of the investment
      may have been negatively
impacted.




In
determining whether collateralized securities are impaired, we obtain underlying
mortgage data from the security’s trustee and analyze it for performance trends.
A security-specific stress analysis is performed using the most recent trustee
information. This analysis forms the basis for our determination of whether the
security will pay in accordance with the contractual cash flows.




If
we determine that the security is impaired, we write it down to its then current
fair value and record a realized loss in that period.




In
determining that the securities giving rise to the previously mentioned
unrealized losses were not other-than-temporarily impaired, we evaluated the
factors cited above. In making these evaluations, we must exercise considerable
judgment. Accordingly, there can be no assurance that actual results will not
differ from our judgments and that such differences may require the future
recognition of other-than-temporary impairment charges that could have a
material affect on our financial position and results of operations. In
addition, the value of, and the realization of any loss on, a debt security or
equity security is subject to numerous risks, including interest rate risk,
market risk, credit risk and liquidity risk. The magnitude of any loss incurred
by us may be affected by the relative concentration of our investments in any
one issuer or industry. We have established specific policies limiting the
concentration of our investments in any single issuer and industry and believe
our investment portfolio is prudently diversified.





27
 Table of Contents





Residential
Mortgage-Backed Securities




The weakness in the
U.S. residential real estate markets, increases in mortgage rates and the
effects of relaxed underwriting standards for mortgages and home equity loans
have led to higher delinquency rates and losses for the residential
mortgage-backed securities market. Delinquency rates for all sectors of the
residential mortgage-backed market, including sub-prime, Alt-A and prime, have
increased beyond historical averages.




We
invest directly in residential mortgage-backed securities through our general
account. To the extent these assets deteriorate in credit quality and decline in
value for an extended period, we may realize impairment losses. We have been
focused on identifying those securities that can withstand significant increases
in delinquencies and foreclosures in the underlying mortgage pools before
incurring a loss of principal.




Most of our
residential mortgage-backed securities portfolio is highly rated. As of
September 30, 2008, 95% of the total residential portfolio was rated AAA or AA.
We have $72.5 million of sub-prime exposure, $40.2 million of Alt-A exposure,
and $124.6 million of prime exposure, which combined amount to 15% of our
general account. Substantially all of our sub-prime, Alt-A and prime exposure is
investment grade, with 91% being AAA rated and another 2% in AA securities. We
have employed a disciplined approach in the analysis and monitoring of our
mortgage-backed securities. Our approach involves a monthly review of each
security. Underlying mortgage data is obtained from the security’s trustee and
analyzed for performance trends. A security-specific stress analysis is
performed using the most recent trustee information. This analysis forms the
basis for our determination of whether the security will pay in accordance with
the contractual cash flows. Year-to-date through September 30, 2008, we have
taken impairments of $15.1 million on our residential mortgage-backed securities
portfolio. This represents 5.0% of our total residential mortgage-backed
securities portfolio and 1.0% of the general account. The losses consist of $8.5
million from prime, $6.1 million from Alt-A and $.5 million from
sub-prime.




Residential
      Mortgage-Backed Securities:($
      in thousands)
                                                              As of
      September 30, 2008Book
                                                              
                                                              
                                                              Market
                                                              
                                                              
                                                              
                                                              %
      General
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              BB
      andValue
                                                              
                                                              
                                                              Value
                                                              
                                                              
                                                              
                                                              Account(1)
                                                              
                                                              
                                                              
                                                              AAA
                                                              
                                                              
                                                              
                                                              AA
                                                              
                                                              
                                                              
                                                              A
                                                              
                                                              
                                                              
                                                              BBB
                                                              
                                                              
                                                              
                                                              BelowCollateralAgency
                                                              $
                                                              68,273
                                                              
                                                              
                                                              $
                                                              67,965
                                                              
                                                              
                                                              
                                                              4.3
                                                              %
                                                              
                                                              
                                                              100.0
                                                              %
                                                              
                                                              
                                                              0.0
                                                              %
                                                              
                                                              
                                                              0.0
                                                              %
                                                              
                                                              
                                                              0.0
                                                              %
                                                              
                                                              
                                                              0.0
                                                              %Prime
                                                              
                                                              140,847
                                                              
                                                              
                                                              
                                                              124,625
                                                              
                                                              
                                                              
                                                              7.9
                                                              %
                                                              
                                                              
                                                              94.6
                                                              %
                                                              
                                                              
                                                              0.4
                                                              %
                                                              
                                                              
                                                              0.0
                                                              %
                                                              
                                                              
                                                              4.7
                                                              %
                                                              
                                                              
                                                              0.3
                                                              %Alt-A
                                                              
                                                              49,927
                                                              
                                                              
                                                              
                                                              40,213
                                                              
                                                              
                                                              
                                                              2.5
                                                              %
                                                              
                                                              
                                                              83.9
                                                              %
                                                              
                                                              
                                                              0.7
                                                              %
                                                              
                                                              
                                                              2.3
                                                              %
                                                              
                                                              
                                                              4.2
                                                              %
                                                              
                                                              
                                                              8.9
                                                              %Sub-prime
                                                              
                                                              88,753
                                                              
                                                              
                                                              
                                                              72,453
                                                              
                                                              
                                                              
                                                              4.6
                                                              %
                                                              
                                                              
                                                              89.0
                                                              %
                                                              
                                                              
                                                              5.3
                                                              %
                                                              
                                                              
                                                              2.2
                                                              %
                                                              
                                                              
                                                              2.5
                                                              %
                                                              
                                                              
                                                              1.0
                                                              %Total
                                                              $
                                                              347,800
                                                              
                                                              
                                                              $
                                                              305,256
                                                              
                                                              
                                                              
                                                              19.3
                                                              %
                                                              
                                                              
                                                              93.1
                                                              %
                                                              
                                                              
                                                              1.5
                                                              %
                                                              
                                                              
                                                              0.8
                                                              %
                                                              
                                                              
                                                              3.1
                                                              %
                                                              
                                                              
                                                              1.5
                                                              %


_______


(1)Percentages based on Market Value.




Liquidity
and Capital Resources




In
the normal course of business, we enter into transactions involving various
types of financial instruments such as debt and equity securities. These
instruments have credit risk and also may be subject to risk of loss due to
interest rate and market fluctuations.




Our liquidity
requirements principally relate to the liabilities associated with various life
insurance and annuity products and operating expenses. Liabilities arising from
life insurance and annuity products include the payment of benefits, as well as
cash payments in connection with policy surrenders, withdrawals and
loans.




Historically, we
have used cash flow from operations, investment activities and capital
contributions from our shareholder to fund liquidity requirements. Our principal
cash inflows from life insurance and annuities activities come from premiums,
annuity deposits and charges on insurance policies and annuity contracts.
Principal cash inflows from investment activities result from repayments of
principal, proceeds from maturities, sales of invested assets and investment
income.





28
 Table of Contents





Ratings




Rating agencies
assign financial strength ratings to Phoenix Life and its subsidiaries based on
their opinions of the Companies’ ability to meet their financial obligations.
Ratings changes may result in increased or decreased interest costs in
connection with future borrowings. Such an increase or decrease would affect our
earnings and could affect our ability to finance our future growth. Downgrades
may also trigger defaults or repurchase obligations.




On
September 18, September 29, October 2 and October 10, 2008, A.M. Best Company,
Inc., Fitch Ratings Ltd., Moody’s Investors Service and Standard & Poor’s,
respectively, each revised its outlook for the U.S. life insurance sector to
negative from stable, citing, among other things, the significant deterioration
and volatility in the credit and equity markets, economic and political
uncertainty, and the expected impact of realized and unrealized investment
losses on life insurers’ capital levels and profitability.




Given these
developments, it is possible that rating agencies will heighten the level of
scrutiny that they apply to us, will request additional information from us, and
may adjust upward the capital and other requirements employed in their models
for maintenance of certain ratings levels.




We
cannot predict what additional actions rating agencies may take, or what actions
we may take in response to the actions of rating agencies, which could adversely
affect our business. As with other companies in the financial services industry,
our ratings could be downgraded at any time and without any notice by any rating
agency.




The financial
strength ratings as of October 31, 2008 were as follows:




Financial
      Strength Ratings ofRating
      Agency
                  
                  Phoenix Life
      and PHL Variable LifeA.M. Best
      Company, Inc.
                  
                  A
      (“Excellent”)Fitch
                  
                  A
      (“Strong”)Moody’s
                  
                  A3
      (“Good”)Standard
      & Poor’s
                  
                  BBB+
      (“Good”)




On
October 31, 2008, Fitch downgraded our financial strength rating to A from A+
and maintained its negative outlook. On October 31, 2008, Standard & Poor’s
downgraded our financial strength rating to BBB+ from A- and changed our outlook
to negative from stable.




These ratings are
not a recommendation to buy or hold any of our securities.




See our 2007 Annual
Report on Form 10-K for additional information as to liquidity and capital
resources.




Contractual
Obligations and Commercial Commitments




As
of September 30, 2008, there were no significant changes to our outstanding
contractual obligations and commercial commitments as disclosed in our 2007
Annual Report on Form 10-K.




Off-Balance
Sheet Arrangements




As
of September 30, 2008 and December 31, 2007, we did not have any significant
off-balance sheet arrangements as defined by Item 303(a)(4)(ii) of SEC
Regulation S-K.




Reinsurance




We
maintain life reinsurance programs designed to protect against large or unusual
losses in our life insurance business. Based on our review of their financial
statements, reputations in the reinsurance marketplace and other relevant
information, we believe that these reinsurers are financially sound and,
therefore, that we have no material exposure to uncollectible life
reinsurance.





29
 Table of Contents





Risk
Based Capital




At
September 30, 2008, our estimated Total Adjusted Capital level was in excess of
300% of Company Action Level. PNX management is committed to maintaining
appropriate capital levels for the Company to conduct business.




Statutory
Capital and Surplus




Our statutory basis
capital and surplus (including AVR) was $175.7 million at September 30,
2008.






Item3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




We
have omitted this information from this report as we meet the conditions set
forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore
filing this Form with the reduced disclosure format permitted by that General
Instruction.






Item4.
            CONTROLS
      AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures




We
have carried out an evaluation under the supervision and with the participation
of our management, including our Principal Executive Officer and our Principal
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of the controls
and procedures. Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance of achieving their control objectives.
Based upon our evaluation, these officers have concluded that, as of September
30, 2008, the disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed in the reports we
file and submit under the Securities and Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms.




Changes
in Internal Control over Financial Reporting




During the three
months ended September 30, 2008, there were no changes in our internal control
over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.





30
 Table of Contents





PART
II. OTHER INFORMATION






Item1.
            LEGAL
      PROCEEDINGS




We
are regularly involved in litigation and arbitration, both as a defendant and as
a plaintiff. In addition, various regulatory bodies regularly make inquiries of
us and, from time to time, conduct examinations or investigations concerning our
compliance with, among other things, insurance laws, securities laws, laws
governing the activities of broker-dealers and other laws and regulations
affecting our registered products. It is not feasible to predict or determine
the ultimate outcome of all legal or regulatory proceedings or to provide
reasonable ranges of potential losses. We believe that the outcomes of our
litigation and regulatory matters are not likely, either individually or in the
aggregate, to have a material adverse effect on our consolidated financial
condition. However, given the large or indeterminate amounts sought in certain
of these matters and the inherent unpredictability of litigation and regulatory
matters, it is possible that an adverse outcome in certain matters could, from
time to time, have a material adverse effect on our results of operations or
cash flows in particular quarterly or annual periods. See Item 1A, “Risk
Factors” in our 2007 Annual Report on Form 10-K and Note 8 to our financial
statements in this Form 10-Q for additional information.






Item 1A.
            RISK
      FACTORS




In
addition to the normal risks of business, we are subject to significant risks
and uncertainties, including those listed below. The risks described below
update the risk factors described in our 2007 Annual Report on Form 10-K and
should be read in addition to those risk factors. You should carefully consider
the following risk factors and the risk factors described in our 2007 Annual
Report on Form 10-K before investing in our securities, any of which could have
a significant or material adverse effect on our business, financial condition,
operating results or liquidity. This information should be considered carefully
together with the other information contained in this report and the other
reports and materials we file with the Securities and Exchange Commission. The
risks described below and in our 2007 Annual Report on Form 10-K are not the
only ones we face. Additional risks may also have an adverse effect on our
business, financial condition, operating results or liquidity.




Recent
market and economic developments may materially and adversely affect our
business, revenues, earnings, sales, assets under management, financial
condition and results of operations.




Recent markets have
experienced unprecedented credit and liquidity issues as well as volatility and
declines in the equity markets. Lending practices in past years, particularly in
the “sub-prime” market, coupled with dramatic declines in home prices, rising
mortgage defaults and increasing home foreclosures, have resulted in significant
write-downs of asset values by financial institutions, including
government-sponsored entities and major commercial and investment banks. These
write-downs, initially of mortgage-backed securities but spreading to most
sectors of the credit markets, and to credit default swaps and other derivative
securities, have caused many financial institutions to seek additional capital,
to merge with larger and stronger institutions, to be subsidized by the U.S.
government and, in some cases, to fail. Reflecting concern about the stability
of the financial markets generally and the strength of counterparties, credit
markets have worsened considerably, with many lenders and institutional
investors reducing, and in some cases, ceasing to provide funding to borrowers,
including other financial institutions. Additionally, concerns over increasing
unemployment, inflation and energy costs as well as geopolitical issues have
contributed to diminished expectations for the economy and the financial markets
going forward. These factors, combined with declining business and consumer
confidence and increased unemployment, have precipitated an economic slowdown
and fears of a prolonged recession. As a result, the financial markets and the
U.S. economy are experiencing a period of extreme volatility.




It
is difficult to predict how long the current economic and market conditions will
continue, how the coordinated actions of the U.S. government and other
international economic leaders will affect the current environment, and whether
the financial markets will continue to deteriorate and which aspects of our
products and/or business will be adversely affected. However, the resulting lack
of available credit, lack of confidence in the financial sector, increased
volatility in the financial markets and reduced business activity may materially
and adversely affect us. Recent market and economic developments, including a
17% decline in equity markets during October 2008, have affected, or have the
potential to affect, us negatively by:





31
 Table of Contents





·
            Affecting the
      value of our investments, which has resulted in, and may continue to
      result in, higher realized and/or unrealized
  losses;


·
            Raising the
      cost of some of our products, resulting in lower profits, because of
      higher reserves for guaranteed death benefits and living benefits, and
      higher DAC amortization because of lower revenue and higher reserves in
      the future;


·
            Increasing
      consumer concerns about the returns and attractiveness of our products,
      which may cause existing clients to surrender policies or withdraw assets,
      and diminish our ability to sell policies and attract assets from new and
      existing clients, which would result in lower sales and fee
      revenues;


·
            Reducing the
      ability and/or willingness of our reinsurers to meet their obligations, or
      adversely affecting the availability and cost of reinsurance, which would
      negatively affect our operating
results;


·
            Affecting the
      access to, reliability of, and service levels provided by our
      non-affiliated distribution intermediaries, which could materially affect
      our sales, redemptions and business
operations;


·
            Increasing
      competition from stronger rivals in a more consolidated financial services
      industry, driven by regulatory action or other opportunistic
      transactions;


·
            Causing
      regulators to change the laws and regulations that affect us, which may
      result in greater compliance costs and restrictions on our ability to do
      business;


·
            Encouraging
      litigation, arbitration and regulatory action in response to the increased
      frequency and magnitude of investment losses, which may result in
      unfavorable judgments, awards and settlements, regulatory fines and an
      increase in our related legal
expenses;


·
            Changing the
      accounting standards issued by the Financial Accounting Standards Board or
      other standard-setting bodies, which may adversely affect our financial
      statements;


·
            Reducing our
      ability to access existing or to obtain new financing in support of our
      business on favorable terms, or eliminating our ability to access existing
      or obtain new financing at all; and


·
            Damaging our
      reputation indirectly by association with the industries most seriously
      affected by market and economic developments, or directly due to a decline
      in investment performance or service levels, which may affect our ability
      to retain existing clients or attract new
  clients;




Any of these
negative effects may materially and adversely affect our business, revenues,
earnings, sales, assets under management, financial condition and results of
operations.






Item2.
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS




We
have omitted this information from this report as we meet the conditions set
forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore
filing this Form with the reduced disclosure format permitted by that General
Instruction.






Item3.
            DEFAULTS
      UPON SENIOR SECURITIES




We
have omitted this information from this report as we meet the conditions set
forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore
filing this Form with the reduced disclosure format permitted by that General
Instruction.






Item4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS




We
have omitted this information from this report as we meet the conditions set
forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore
filing this Form with the reduced disclosure format permitted by that General
Instruction.






Item
      5.
            OTHER
      INFORMATION




(a)
            None.




(b)
            No material
      changes.





32
 Table of Contents





Item6.
            EXHIBITS




Exhibit3.1
                
                Form of
      Amended and Restated Certificate of Incorporation (as amended and restated
      effective May 31, 1994) (incorporated herein by reference to Exhibit 3.1
      to the PHL Variable Insurance Company’s Annual Report on Form 10-K filed
      March 31, 2006)3.2
                
                Bylaws of PHL
      Variable Life Insurance Company (as amended and restated effective May 16,
      2002) (incorporated herein by reference to Exhibit 3.2 to the PHL Variable
      Insurance Company’s Annual Report on Form 10-K filed March 31,
      2006)10.1
                
                Services
      Agreement effective as of January 1, 1995 by and among PHL Variable
      Insurance Company, Phoenix Life Insurance Company, American Life and
      Reassurance Company, Phoenix American Life Insurance Company and Phoenix
      Home Life Mutual Insurance Company (incorporated herein by reference to
      Exhibit 10.1 to the PHL Variable Insurance Company’s Annual Report on Form
      10-K filed March 31, 2006)10.2
                
                Investment
      Management Agreement effective as of January 1, 1995 by and between PHL
      Variable Insurance Company and Phoenix Investment Counsel, Inc.
      (incorporated herein by reference to Exhibit 10.2 to the PHL Variable
      Insurance Company’s Annual Report on Form 10-K filed March 31,
      2006)10.3
                
                Amendment #1
      (effective as of January 1, 1998) to the Investment Management Agreement
      dated as of January 1, 1995 by and between PHL Variable Insurance Company
      and Phoenix Investment Counsel, Inc. (incorporated herein by reference to
      Exhibit 10.3 to the PHL Variable Insurance Company’s Annual Report on Form
      10-K filed March 31, 2006)10.4
                
                Amended and
      Restated Tax Allocation Agreement dated as of January 1, 2001 by and among
      The Phoenix Companies, Inc. and most of its subsidiaries (incorporated
      herein by reference to Exhibit 10.4 to the PHL Variable Insurance
      Company’s Annual Report on Form 10-K filed March 31,
  2006)10.5
                
                Amendment #1
      (effective as of January 1, 2006) to the Amended and Restated Tax
      Allocation Agreement dated as of January 1, 2001 by and among The Phoenix
      Companies, Inc. and most of its subsidiaries (incorporated herein by
      reference to Exhibit 10.5 to the PHL Variable Insurance Company’s Annual
      Report on Form 10-K filed March 31, 2006)31.1
                
                Certification
      of Philip K. Polkinghorn, Chief Executive Officer, pursuant to Section 302
      of the Sarbanes-Oxley Act of 2002*31.2
                
                Certification
      of Peter A. Hofmann, Chief Financial Officer, pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002*32
                
                Certification
      by Philip K. Polkinghorn, Chief Executive Officer and Peter A. Hofmann,
      Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002*


_________________




*
                  
                  Filed
      herewith






We
will furnish any exhibit upon the payment of a reasonable fee, which fee shall
be limited to our reasonable expenses in furnishing such exhibit.
Requests for copies should be directed to: Corporate Secretary, PHL Variable
Insurance Company, One American Row, P.O. Box 5056, Hartford, Connecticut
06102-5056.





33
 Table of Contents





SIGNATURE




Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.






PHL
      VARIABLE INSURANCE COMPANYDate: November
      14, 2008
                By: /s/
      Peter A. HofmannPeter A.
      HofmannSenior
      Executive Vice President and Chief Financial
  Officer






34