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 JUNE 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
August 8, 2008, 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.







1





Table of Contents





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
            29Item
      4.
            Controls and Procedures
            29PART II
            OTHER INFORMATIONItem
      1.
            Legal Proceedings
            31Item
      1A.
            Risk Factors
            31Item
      2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            31Item
      3.
            Defaults Upon Senior Securities
            31Item
      4.
            Submission of Matters to a Vote of Security
      Holders
            31Item
      5.
            Other Information
            31Item
      6.
            Exhibits
            32Signature
            33





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)


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





June 30,
            
            
            Dec 31,2008
            
            
            2007ASSETS:Available-for-sale
      debt securities, at fair value
            
            $
            1,528,914
            
            
            $
            1,709,586Policy loans,
      at unpaid principal balances
            
            
            24,857
            
            
            
            22,819Other
      investments
            
            
            1,169
            
            
            
            1,251Fair value
      option investments
            
            
            5,020
            
            
            
            --Total
      investments
            
            
            1,559,960
            
            
            
            1,733,656Cash and cash
      equivalents
            
            
            149,118
            
            
            
            108,200Accrued
      investment income
            
            
            15,103
            
            
            
            17,518Receivables
            
            
            44,976
            
            
            
            37,178Deferred
      policy acquisition costs
            
            
            1,211,573
            
            
            
            1,009,612Receivable
      from related parties
            
            
            18,875
            
            
            
            527Other
      assets
            
            
            37,799
            
            
            
            20,214Separate
      account assets
            
            
            3,237,390
            
            
            
            3,389,356Total
      assets
            
            $
            6,274,794
            
            
            $
            6,316,261LIABILITIES:Policyholder
      deposit funds
            
            $
            983,252
            
            
            $
            1,134,635Policy
      liabilities and accruals
            
            
            1,140,455
            
            
            
            981,509Deferred
      income taxes
            
            
            142,515
            
            
            
            135,648Payable to
      related parties
            
            
            1,285
            
            
            
            28,969Other
      liabilities
            
            
            110,030
            
            
            
            48,303Separate
      account liabilities
            
            
            3,237,390
            
            
            
            3,389,356Total
      liabilities
            
            
            5,614,927
            
            
            
            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
            
            
            51,191
            
            
            
            53,906Accumulated
      other comprehensive loss
            
            
            (20,042
            )
            
            
            (11,783
            )Total
      stockholder’s equity
            
            
            659,867
            
            
            
            597,841Total
      liabilities and stockholder’s equity
            
            $
            6,274,794
            
            
            $
            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 Six Months Ended June 30, 2008 and 2007





Three
      Months Ended
            
            
            Six
      Months EndedJune 30,
            
            
            June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007REVENUES:Premiums
            
            $
            5,314
            
            
            $
            2,882
            
            
            $
            4,671
            
            
            $
            6,061Insurance and
      investment product fees
            
            
            87,717
            
            
            
            59,410
            
            
            
            171,582
            
            
            
            113,529Net
      investment income
            
            
            22,990
            
            
            
            27,192
            
            
            
            47,311
            
            
            
            55,086Net realized
      investment gains (losses)
            
            
            1,689
            
            
            
            359
            
            
            
            (18,340
            )
            
            
            189Total
      revenues
            
            
            117,710
            
            
            
            89,843
            
            
            
            205,224
            
            
            
            174,865BENEFITS
      AND EXPENSES:Policy
      benefits
            
            
            43,573
            
            
            
            36,481
            
            
            
            94,588
            
            
            
            76,461Policy
      acquisition cost amortization
            
            
            38,755
            
            
            
            26,923
            
            
            
            63,292
            
            
            
            50,526Other
      operating expenses
            
            
            25,707
            
            
            
            20,424
            
            
            
            53,807
            
            
            
            37,510Total
      benefits and expenses
            
            
            108,035
            
            
            
            83,828
            
            
            
            211,687
            
            
            
            164,497Income before
      income taxes
            
            
            9,675
            
            
            
            6,015
            
            
            
            (6,463
            )
            
            
            10,368Income tax
      (expense) benefit
            
            
            (3,360
            )
            
            
            (1,863
            )
            
            
            3,748
            
            
            
            (3,214
            )Net
      income (loss)
            
            $
            6,315
            
            
            $
            4,152
            
            
            $
            (2,715
            )
            
            $
            7,154COMPREHENSIVE
      INCOME:Net
      income (loss)
            
            $
            6,315
            
            
            $
            4,152
            
            
            $
            (2,715
            )
            
            $
            7,154Net
      unrealized investment losses
            
            
            (2,620
            )
            
            
            (5,206
            )
            
            
            (8,259
            )
            
            
            (4,271
            )Other
      comprehensive loss
            
            
            (2,620
            )
            
            
            (5,206
            )
            
            
            (8,259
            )
            
            
            (4,271
            )Comprehensive
      income (loss)
            
            $
            3,695
            
            
            $
            (1,054
            )
            
            $
            (10,974
            )
            
            $
            2,883ADDITIONAL
      PAID-IN CAPITAL:Capital
      contributions from parent
            
            $
            31,000
            
            
            $
            25,000
            
            
            $
            73,000
            
            
            $
            25,000RETAINED
      EARNINGS:Cumulative
      effect of retrospective application of change in accounting (Note
      2)
            
            
            (4,178
            )
            
            
            (5,451
            )
            
            
            (8,296
            )
            
            
            (3,613
            )Net income
      (loss)
            
            
            6,315
            
            
            
            4,152
            
            
            
            (2,715
            )
            
            
            7,154Adjustment
      for initial application of FIN 48 (Note 2)
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (1,000
            )OTHER
      COMPREHENSIVE INCOME:Other
      comprehensive loss
            
            
            (2,620
            )
            
            
            (5,206
            )
            
            
            (8,259
            )
            
            
            (4,271
            )Change
      in stockholder’s equity
            
            
            30,517
            
            
            
            18,495
            
            
            
            53,730
            
            
            
            23,270Stockholder’s
      equity, beginning of period, as previously reported
            
            
            629,350
            
            
            
            555,053
            
            
            
            606,137
            
            
            
            550,278Stockholder’s
      equity, end of period
            
            $
            659,867
            
            
            $
            573,548
            
            
            $
            659,867
            
            
            $
            573,548





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)


Six
Months Ended June 30, 2008 and 2007





Six
      Months EndedJune 30,2008
            
            
            2007OPERATING
      ACTIVITIES:Net income
      (loss)
            
            $
            (2,715
            )
            
            $
            7,154Net realized
      investment (gains) losses
            
            
            18,340
            
            
            
            (189
            )Investment
      income
            
            
            2,365
            
            
            
            3,417Deferred
      income taxes
            
            
            11,314
            
            
            
            13,213Increase in
      receivables
            
            
            (8,780
            )
            
            
            (4,581
            )Increase in
      deferred policy acquisition costs
            
            
            (154,825
            )
            
            
            (83,875
            )Increase in
      policy liabilities and accruals
            
            
            160,957
            
            
            
            77,231Other assets
      and other liabilities net change
            
            
            (69,457
            )
            
            
            (5,122
            )Cash
      from (for) operating activities
            
            
            (42,801
            )
            
            
            7,248INVESTING
      ACTIVITIES:Investment
      purchases
            
            
            (380,465
            )
            
            
            (502,550
            )Investment
      sales, repayments and maturities
            
            
            556,935
            
            
            
            715,629Cash
      from investing activities
            
            
            176,470
            
            
            
            213,079FINANCING
      ACTIVITIES:Policyholder
      deposit fund deposits
            
            
            168,853
            
            
            
            133,597Policyholder
      deposit fund withdrawals
            
            
            (325,389
            )
            
            
            (361,596
            )Capital
      contributions from parent
            
            
            63,785
            
            
            
            25,000Cash
      for financing activities
            
            
            (92,751
            )
            
            
            (202,999
            )Change
      in cash and cash equivalents
            
            
            40,918
            
            
            
            17,328Cash and cash
      equivalents, beginning of period
            
            
            108,200
            
            
            
            47,127Cash
      and cash equivalents, end of period
            
            $
            149,118
            
            
            $
            64,455





During the six
months ended June 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 Six Months Ended June 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 six-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. Certain balances shown “as originally reported” have been
reclassified to conform to the current period presentation.





Income
Statement





($
      in thousands)
            
            Three Months Ended June 30,
      2008As calculated under
              the new method
            
            
            As calculated under
              the former method
            
            
            Effect of ChangeInsurance and
      investment product fees
            
            $
            87,717
            
            
            $
            87,841
            
            
            $
            (124
            )Policy
      benefits
            
            
            43,573
            
            
            
            34,876
            
            
            
            8,697Policy
      acquisition cost amortization
            
            
            38,755
            
            
            
            41,176
            
            
            
            (2,421
            )Income tax
      (expense) benefit
            
            
            (3,360
            )
            
            
            (5,600
            )
            
            
            2,240Net income
      (loss)
            
            
            6,315
            
            
            
            10,475
            
            
            
            (4,160
            )








($
      in thousands)
            
            Three Months Ended June 30,
      2007As adjusted
            
            
            As originally reported
            
            
            Effect of ChangeInsurance and
      investment product fees
            
            $
            59,410
            
            
            $
            59,563
            
            
            $
            (153
            )Policy
      benefits
            
            
            36,481
            
            
            
            32,555
            
            
            
            3,926Policy
      acquisition cost amortization
            
            
            26,923
            
            
            
            28,243
            
            
            
            (1,320
            )Income tax
      (expense) benefit
            
            
            (1,863
            )
            
            
            (2,829
            )
            
            
            966Net income
      (loss)
            
            
            4,152
            
            
            
            5,945
            
            
            
            (1,793
            )








($
      in thousands)
            
            Six Months Ended June 30,
      2008As calculated under
              the new method
            
            
            As calculated under
              the former method
            
            
            Effect of ChangeInsurance and
      investment product fees
            
            $
            171,582
            
            
            $
            170,568
            
            
            $
            1,014Policy
      benefits
            
            
            94,588
            
            
            
            100,108
            
            
            
            (5,520
            )Policy
      acquisition cost amortization
            
            
            63,292
            
            
            
            56,692
            
            
            
            6,600Income tax
      (expense) benefit
            
            
            3,748
            
            
            
            3,725
            
            
            
            23Net income
      (loss)
            
            
            (2,715
            )
            
            
            (2,672
            )
            
            
            (43
            )








($
      in thousands)
            
            Six Months Ended June 30,
      2007As adjusted
            
            
            As originally reported
            
            
            Effect of ChangeInsurance and
      investment product fees
            
            $
            113,529
            
            
            $
            113,863
            
            
            $
            (334
            )Policy
      benefits
            
            
            76,461
            
            
            
            68,231
            
            
            
            8,230Policy
      acquisition cost amortization
            
            
            50,526
            
            
            
            53,505
            
            
            
            (2,979
            )Income tax
      (expense) benefit
            
            
            (3,214
            )
            
            
            (5,169
            )
            
            
            1,955Net income
      (loss)
            
            
            7,154
            
            
            
            10,784
            
            
            
            (3,630
            )





7
 Table of Contents





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





Balance
Sheet





($
      in thousands)
            
            June 30, 2008As calculated under
              the new method
            
            
            As calculated under the former
      method
            
            
            Effect of ChangeDeferred
      policy acquisition costs
            
            $
            1,211,573
            
            
            $
            1,216,373
            
            
            $
            (4,800
            )Policy
      liabilities and accruals
            
            
            1,140,455
            
            
            
            1,132,426
            
            
            
            8,029Deferred
      income tax liability
            
            
            142,515
            
            
            
            147,006
            
            
            
            (4,491
            )Retained
      earnings
            
            
            51,191
            
            
            
            59,529
            
            
            
            (8,338
            )








($
      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 estimated gross profits,
or 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.





8
 Table of Contents





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





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.





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
adjusted to reflect such change. This process is known as “unlocking”. 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
February 15, 2007, the Financial Accounting Standards Board (“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.





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.





9
 Table of Contents





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





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.





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.





10
 Table of Contents





3.
            Deferred
      Policy Acquisition Costs





Deferred
      Policy Acquisition Costs:
            
            Three
      Months Ended
            
            
            Six
      Months Ended($
      in thousands)
            
            June 30,
            
            
            June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Policy
      acquisition costs deferred
            
            $
            91,304
            
            
            $
            72,982
            
            
            $
            218,117
            
            
            $
            134,400Costs
      amortized to expenses:Recurring
      costs
            
            
            (40,943
            )
            
            
            (26,664
            )
            
            
            (68,254
            )
            
            
            (49,703
            )Realized
      investment (gains) losses
            
            
            2,188
            
            
            
            (259
            )
            
            
            4,962
            
            
            
            (823
            )Offsets to
      net unrealized investment gains or losses included in other comprehensive
      income
            
            
            25,995
            
            
            
            12,676
            
            
            
            47,136
            
            
            
            8,327Change in
      deferred policy acquisition costs
            
            
            78,544
            
            
            
            58,735
            
            
            
            201,961
            
            
            
            92,201Deferred
      policy acquisition costs, beginning of period
            
            
            1,133,029
            
            
            
            735,086
            
            
            
            1,009,612
            
            
            
            701,620Deferred
      policy acquisition costs, end of period
            
            $
            1,211,573
            
            
            $
            793,821
            
            
            $
            1,211,573
            
            
            $
            793,821








4.
            Investing
      Activities





Debt
securities





Fair
      Value and Cost of Debt Securities:
            
            June 30, 2008
            
            
            December 31, 2007($
      in thousands)
            
            Fair Value
            
            
            Cost
            
            
            Fair Value
            
            
            CostU.S.
      government and agency
            
            $
            47,198
            
            
            $
            46,879
            
            
            $
            65,774
            
            
            $
            64,884State and
      political subdivision
            
            
            12,477
            
            
            
            12,746
            
            
            
            11,029
            
            
            
            11,134Foreign
      government
            
            
            25,551
            
            
            
            23,500
            
            
            
            30,423
            
            
            
            27,716Corporate
            
            
            833,714
            
            
            
            883,680
            
            
            
            975,058
            
            
            
            998,982Mortgage-backed
            
            
            388,605
            
            
            
            413,522
            
            
            
            358,479
            
            
            
            372,733Other
      asset-backed
            
            
            221,369
            
            
            
            265,565
            
            
            
            268,823
            
            
            
            288,927Available-for-sale
      debt securities
            
            $
            1,528,914
            
            
            $
            1,645,892
            
            
            $
            1,709,586
            
            
            $
            1,764,376








Unrealized
      Gains and Losses from Debt Securities:
            
            June 30, 2008
            
            
            December 31, 2007($
      in thousands)
            
            Gains
            
            
            Losses
            
            
            Gains
            
            
            LossesU.S.
      government and agency
            
            $
            936
            
            
            $
            (617
            )
            
            $
            1,193
            
            
            $
            (303
            )State and
      political subdivision
            
            
            10
            
            
            
            (279
            )
            
            
            11
            
            
            
            (116
            )Foreign
      government
            
            
            2,052
            
            
            
            (1
            )
            
            
            2,732
            
            
            
            (25
            )Corporate
            
            
            3,230
            
            
            
            (53,196
            )
            
            
            8,774
            
            
            
            (32,698
            )Mortgage-backed
            
            
            740
            
            
            
            (25,657
            )
            
            
            2,654
            
            
            
            (16,908
            )Other
      asset-backed
            
            
            806
            
            
            
            (45,002
            )
            
            
            875
            
            
            
            (20,979
            )Debt
      securities gains (losses)
            
            $
            7,774
            
            
            $
            (124,752
            )
            
            $
            16,239
            
            
            $
            (71,029
            )Debt
      securities net losses
            
            
            
            
            
            $
            (116,978
            )
            
            
            
            
            
            $
            (54,790
            )





11
 Table of Contents





4.
            Investing
      Activities (continued)





Aging
      of Temporarily Impaired
            
            June 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
            
            $
            4,126
            
            
            $
            (12
            )
            
            $
            3,337
            
            
            $
            (605
            )
            
            $
            7,463
            
            
            $
            (617
            )State and
      political subdivision
            
            
            2,781
            
            
            
            (112
            )
            
            
            2,483
            
            
            
            (167
            )
            
            
            5,264
            
            
            
            (279
            )Foreign
      government
            
            
            --
            
            
            
            --
            
            
            
            499
            
            
            
            (1
            )
            
            
            499
            
            
            
            (1
            )Corporate
            
            
            312,796
            
            
            
            (14,013
            )
            
            
            308,324
            
            
            
            (39,183
            )
            
            
            621,120
            
            
            
            (53,196
            )Mortgage-backed
            
            
            101,153
            
            
            
            (6,913
            )
            
            
            163,118
            
            
            
            (18,744
            )
            
            
            264,271
            
            
            
            (25,657
            )Other
      asset-backed
            
            
            102,474
            
            
            
            (22,393
            )
            
            
            87,600
            
            
            
            (22,609
            )
            
            
            190,074
            
            
            
            (45,002
            )Total
      temporarily impaired securities
            
            $
            523,330
            
            
            $
            (43,443
            )
            
            $
            565,361
            
            
            $
            (81,309
            )
            
            $
            1,088,691
            
            
            $
            (124,752
            )Below
      investment grade
            
            $
            51,816
            
            
            $
            (4,295
            )
            
            $
            56,520
            
            
            $
            (12,647
            )
            
            $
            108,336
            
            
            $
            (16,942
            )Below
      investment grade after offsets for deferred policy acquisition cost
      adjustment and taxes
            
            
            
            
            
            $
            (690
            )
            
            
            
            
            
            $
            (2,122
            )
            
            
            
            
            
            $
            (2,812
            )Number
      of securities
            
            
            
            
            
            
            351
            
            
            
            
            
            
            
            338
            
            
            
            
            
            
            
            689





Below investment
grade debt securities with a fair value of less than 80% of the security’s
amortized costs totaled $(8,418) thousand at June 30, 2008. 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 June 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 offsets for deferred acquisition cost adjustment
      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
            
            
            Six
      Months Ended($
      in thousands)
            
            June 30,
            
            
            June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Debt
      securities
            
            $
            22,546
            
            
            $
            26,389
            
            
            $
            46,135
            
            
            $
            53,398Policy
      loans
            
            
            362
            
            
            
            (65
            )
            
            
            697
            
            
            
            190Other
      investments
            
            
            51
            
            
            
            108
            
            
            
            76
            
            
            
            118Other
      income
            
            
            21
            
            
            
            3
            
            
            
            112
            
            
            
            218Cash and cash
      equivalents
            
            
            489
            
            
            
            1,415
            
            
            
            1,287
            
            
            
            2,337Total
      investment income
            
            
            23,469
            
            
            
            27,850
            
            
            
            48,307
            
            
            
            56,261Investment
      expenses
            
            
            (479
            )
            
            
            (658
            )
            
            
            (996
            )
            
            
            (1,175
            )Net
      investment income
            
            $
            22,990
            
            
            $
            27,192
            
            
            $
            47,311
            
            
            $
            55,086





Net
realized investment gains (losses)





Sources
      and Types of Net Realized Investment
            
            Three
      Months Ended
            
            
            Six
      Months EndedGains
      (Losses):
            
            June 30,
            
            
            June 30,($
      in thousands)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Debt security
      impairments
            
            $
            (5,388
            )
            
            $
            --
            
            
            $
            (12,336
            )
            
            $
            (500
            )Debt security
      transaction gains
            
            
            836
            
            
            
            119
            
            
            
            1,202
            
            
            
            988Debt security
      transaction losses
            
            
            (365
            )
            
            
            (457
            )
            
            
            (2,124
            )
            
            
            (1,888
            )Other
      investments transaction gains (losses)
            
            
            (177
            )
            
            
            (7
            )
            
            
            (53
            )
            
            
            108Net
      transaction gains (losses)
            
            
            294
            
            
            
            (345
            )
            
            
            (975
            )
            
            
            (792
            )Change
      in fair value of embedded derivative liabilities
            
            
            6,783
            
            
            
            704
            
            
            
            (5,029
            )
            
            
            1,481Net
      realized investment gains (losses)
            
            $
            1,689
            
            
            $
            359
            
            
            $
            (18,340
            )
            
            $
            189





Debt security
impairments during the second quarter of 2008 included $5,388 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 Net Unrealized Investment
            
            Three
      Months Ended
            
            
            Six
      Months EndedGains
      (Losses):
            
            June 30,
            
            
            June 30,($
      in thousands)
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Debt
      securities
            
            $
            (32,207
            )
            
            $
            (20,421
            )
            
            $
            (62,188
            )
            
            $
            (14,695
            )Other
            
            
            2,181
            
            
            
            (263
            )
            
            
            2,346
            
            
            
            (201
            )Net
      unrealized investment losses
            
            $
            (30,026
            )
            
            $
            (20,684
            )
            
            $
            (59,842
            )
            
            $
            (14,896
            )Net
      unrealized investment losses
            
            $
            (30,026
            )
            
            $
            (20,684
            )
            
            $
            (59,842
            )
            
            $
            (14,896
            )Applicable
      deferred policy acquisition cost benefit
            
            
            (25,995
            )
            
            
            (12,676
            )
            
            
            (47,136
            )
            
            
            (8,327
            )Applicable
      deferred income tax expense
            
            
            (1,411
            )
            
            
            (2,802
            )
            
            
            (4,447
            )
            
            
            (2,298
            )Offsets to
      net unrealized investment losses
            
            
            (27,406
            )
            
            
            (15,478
            )
            
            
            (51,583
            )
            
            
            (10,625
            )Net
      unrealized investment losses included in other comprehensive
      income
            
            $
            (2,620
            )
            
            $
            (5,206
            )
            
            $
            (8,259
            )
            
            $
            (4,271
            )





14
 Table of Contents





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 six-month periods ended June 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 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.





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 June 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 and swaps. These investments are included in other investments on our
balance sheet.





Embedded
      Derivative Liabilities:
            
            June 30,
            
            
            Dec 31,($
      in thousands)
            
            2008
            
            
            2007GMWB
            
            $
            (74
            )
            
            $
            (1,512
            )GMAB
            
            
            5,273
            
            
            
            1,814GPAF
            
            
            1,505
            
            
            
            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:
            
            
            
            
            Net
      Amount
            
            
            Average($
      in thousands)
            
            Account
            
            
            At
      Risk After
            
            
            Attained
      AgeValue
            
            
            Reinsurance
            
            
            of AnnuitantGMDB return
      of premium
            
            $
            1,320,033
            
            
            $
            20,396
            
            
            59GMDB step
      up
            
            
            1,726,279
            
            
            
            109,054
            
            
            60GMDB earnings
      enhancement benefit (EEB)
            
            
            68,533
            
            
            
            126
            
            
            60GMDB greater
      of annual step up and roll up
            
            
            36,327
            
            
            
            6,159
            
            
            63Total
      GMDB at June 30, 2008
            
            $
            3,151,172
            
            
            $
            135,735GMIB
            
            $
            628,980
            
            
            
            
            
            
            60GMAB
            
            
            420,152
            
            
            
            
            
            
            55GMWB
            
            
            351,537
            
            
            
            
            
            
            61GPAF
            
            
            23,372
            
            
            
            
            
            
            75Total
      at June 30, 2008
            
            $
            1,424,041





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.





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.





16
 Table of Contents





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





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 June 30, 2008 and December 31, 2007, we held
additional universal life benefit reserves of $37,159 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.





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





Assets
      and Liabilities at Fair Value:
            
            As of June 30, 2008($
      in thousands)
            
            Level 1
            
            
            Level 2
            
            
            Level 3
            
            
            TotalAssetsAvailable-for-sale
      debt securities
            
            $
            9,990
            
            
            $
            1,282,567
            
            
            $
            236,357
            
            
            $
            1,528,914Separate
      account assets
            
            
            3,141,890
            
            
            
            93,581
            
            
            
            1,919
            
            
            
            3,237,390Fair value
      option investments
            
            
            --
            
            
            
            5,020
            
            
            
            --
            
            
            
            5,020Total
      assets
            
            $
            3,151,880
            
            
            $
            1,381,168
            
            
            $
            238,276
            
            
            $
            4,771,324LiabilitiesEmbedded
      derivative liabilities
            
            $
            --
            
            
            $
            --
            
            
            $
            6,704
            
            
            $
            6,704Total
      liabilities
            
            $
            --
            
            
            $
            --
            
            
            $
            6,704
            
            
            $
            6,704





17
 Table of Contents





6.
            Fair
      Value (continued)





Fair value option
investments include a structured loan asset valued at $5,020 thousand as of June
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.





Level
      3 Financial Assets and Liabilities:
            
            Three
      Months Ended
            
            
            Six
      Months Ended($
      in thousands)
            
            June 30, 2008
            
            
            June 30, 2008Assets
            
            
            Liabilities
            
            
            Assets
            
            
            LiabilitiesBalance,
      beginning of period
            
            $
            253,413
            
            
            $
            (13,487
            )
            
            $
            267,185
            
            
            $
            (1,675
            )Purchases/(sales),
      net
            
            
            (6,717
            )
            
            
            --
            
            
            
            (9,758
            )
            
            
            --Net transfers
      in and out of Level 3
            
            
            (20,931
            )
            
            
            --
            
            
            
            (14,090
            )
            
            
            --Realized
      gains (losses)
            
            
            (2,797
            )
            
            
            6,783
            
            
            
            (8,227
            )
            
            
            (5,029
            )Unrealized
      gains (losses) included in other comprehensive income
    (loss)
            
            
            15,230
            
            
            
            --
            
            
            
            3,720
            
            
            
            --Amortization/accretion
            
            
            78
            
            
            
            --
            
            
            
            (554
            )
            
            
            --Balance,
      end of period
            
            $
            238,276
            
            
            $
            (6,704
            )
            
            $
            238,276
            
            
            $
            (6,704
            )Portion
      of gain (loss) included in net income relating to those assets/liabilities
      still held
            
            $
            (5,029
            )
            
            $
            6,783
            
            
            $
            (11,612
            )
            
            $
            (5,029
            )





18
 Table of Contents





7.
            Income
      Taxes





For the three and
six months ended June 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
            
            
            Six
      Months EndedJune 30,
            
            
            June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Income taxes
      at statutory rate
            
            
            35.0
            %
            
            
            35.0
            %
            
            
            35.0
            %
            
            
            35.0
            %Investment
      income not subject to tax
            
            
            (0.3
            %)
            
            
            (4.0
            %)
            
            
            23.0
            %
            
            
            (4.0
            %)Effective
      income tax rates applicable to continuing operations
            
            
            34.7
            %
            
            
            31.0
            %
            
            
            58.0
            %
            
            
            31.0
            %





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 June 30, 2008, we had current taxes receivable of $4,005
thousand.





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.





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.





19
 Table of Contents





8.
            Contingent
      Liabilities (continued)





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





ITEM
      2.
            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) changes
in general market and business conditions, interest rates and the debt and
equity markets; (ii) the possibility that mortality rates, persistency rates or
funding levels may differ significantly from our pricing expectations; (iii) the
availability, pricing and terms of reinsurance coverage generally and the
inability or unwillingness of our reinsurers to meet their obligations to us
specifically; (iv) our dependence on non-affiliated distributors for our product
sales, (v) downgrades in our debt or financial strength ratings; (vi) our
dependence on third parties to maintain critical business and administrative
functions; (vii) our ability to attract and retain key personnel in a
competitive environment; (viii) the strong competition we face in our business
from  banks and other insurance companies; (ix)  tax
developments that may affect us directly, or indirectly through the cost of, the
demand for or profitability of our products or services; (x) other legislative
or regulatory developments; (xi) legal or regulatory actions; (xii) changes in
accounting standards; and (xiii) 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 six months ended June 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 estimated gross profits,
or 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





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
adjusted to reflect such change. This process is known as “unlocking”. 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.





These revisions are
not currently required or anticipated.





23
 Table of Contents





Results
of Operations





Summary
      Financial Data:
            
            Three
      Months Ended
            
            
            Increase
      (decrease) and($
      in thousands)
            
            June 30,
            
            
            percentage change2008
            
            
            2007
            
            
            2008 vs. 2007REVENUES:Premiums
            
            $
            5,314
            
            
            $
            2,882
            
            
            $
            2,432
            
            
            
            84
            %Insurance and
      investment product fees
            
            
            87,717
            
            
            
            59,410
            
            
            
            28,307
            
            
            
            48
            %Net
      investment income
            
            
            22,990
            
            
            
            27,192
            
            
            
            (4,202
            )
            
            
            (15
            %)Net realized
      investment gains
            
            
            1,689
            
            
            
            359
            
            
            
            1,330
            
            
            
            370
            %Total
      revenues
            
            
            117,710
            
            
            
            89,843
            
            
            
            27,867
            
            
            
            31
            %BENEFITS
      AND EXPENSES:Policy
      benefits
            
            
            43,573
            
            
            
            36,481
            
            
            
            7,092
            
            
            
            19
            %Policy
      acquisition cost amortization
            
            
            38,755
            
            
            
            26,923
            
            
            
            11,832
            
            
            
            44
            %Other
      operating expenses
            
            
            25,707
            
            
            
            20,424
            
            
            
            5,283
            
            
            
            26
            %Total
      benefits and expenses
            
            
            108,035
            
            
            
            83,828
            
            
            
            24,207
            
            
            
            29
            %Income before
      income taxes
            
            
            9,675
            
            
            
            6,015
            
            
            
            3,660
            
            
            
            61
            %Applicable
      income tax expense
            
            
            (3,360
            )
            
            
            (1,863
            )
            
            
            (1,497
            )
            
            
            80
            %Net
      income
            
            $
            6,315
            
            
            $
            4,152
            
            
            $
            2,163
            
            
            
            52
            %





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





Net income
increased 52% in the 2008 quarter. This result reflects higher mortality margins
and realized investment gains, partially offset by higher policy acquisition
cost amortization and lower interest margin.





Mortality margins
in universal life and variable universal life increased in 2008, driven by
increases in cost of insurance fee revenues that were only partially offset by
higher net benefits. While fluctuations in mortality are inherent in our
business, this improvement primarily reflects growth in the block of business
over recent years. Policy acquisition cost amortization increased $11,832
thousand in the current year. This increase was caused by growth in the
universal life business, the impact of market declines on annuity and variable
universal life, and higher surrenders. In addition, lower investment income,
only partially offset by a decrease in interest credited, drove a reduction in
interest margin for the period.





Summary
      Financial Data:
            
            Six
      Months Ended
            
            
            Increase
      (decrease) and($
      in thousands)
            
            June 30,
            
            
            percentage change2008
            
            
            2007
            
            
            2008 vs. 2007REVENUES:Premiums
            
            $
            4,671
            
            
            $
            6,061
            
            
            $
            (1,390
            )
            
            
            (23
            %)Insurance and
      investment product fees
            
            
            171,582
            
            
            
            113,529
            
            
            
            58,053
            
            
            
            51
            %Net
      investment income
            
            
            47,311
            
            
            
            55,086
            
            
            
            (7,775
            )
            
            
            (14
            %)Net realized
      investment gains (losses)
            
            
            (18,340
            )
            
            
            189
            
            
            
            (18,529
            )
            
            
            (9,803
            %)Total
      revenues
            
            
            205,224
            
            
            
            174,865
            
            
            
            30,359
            
            
            
            17
            %BENEFITS
      AND EXPENSES:Policy
      benefits
            
            
            94,588
            
            
            
            76,461
            
            
            
            18,127
            
            
            
            24
            %Policy
      acquisition cost amortization
            
            
            63,292
            
            
            
            50,526
            
            
            
            12,766
            
            
            
            25
            %Other
      operating expenses
            
            
            53,807
            
            
            
            37,510
            
            
            
            16,297
            
            
            
            43
            %Total
      benefits and expenses
            
            
            211,687
            
            
            
            164,497
            
            
            
            47,190
            
            
            
            29
            %Income before
      income taxes
            
            
            (6,463
            )
            
            
            10,368
            
            
            
            (16,831
            )
            
            
            (162
            %)Applicable
      income tax (expense) benefit
            
            
            3,748
            
            
            
            (3,214
            )
            
            
            6,962
            
            
            
            217
            %Net
      income (loss)
            
            $
            (2,715
            )
            
            $
            7,154
            
            
            $
            (9,869
            )
            
            
            (138
            %)





Six months ended June 30,
2008 compared to six months ended June 30, 2007





Net results for the
year-to-date period declined to a net loss of $2,715 thousand. This result was
driven by net realized losses, higher policy acquisition cost amortization and
higher operating expenses, only partially offset by improved mortality
margins.





24
 Table of Contents





Net realized
investment losses for the six months ended June 30, 2008 include a $5,029
thousand increase in the embedded derivative liabilities for our variable
products guarantees, as well as $12,336 thousand of impairments, including
$5,388 thousand related to residual mortgage-backed securities. In addition
policy acquisition cost amortization increased $12,766 thousand in the current
year, driven by growth in the universal life business, the impact of market
declines on annuity and variable universal life and higher surrenders. Operating
expenses also increased during 2008 as we continue to invest in the growth of
the business.





Partially
offsetting these reductions was an increase in mortality margins, reflecting the
growth of the 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 June
30, 2008, our general account held debt securities with a carrying value of
$1,528.9 million, representing 98.0% of total general account investments.
Public debt securities represented 80.1% of total debt securities, with the
remaining 19.9% represented by private debt securities.





Debt
      Securities by Type and Credit Quality:
            
            As of June 30, 2008($
      in thousands)
            
            Investment Grade
            
            
            Below Investment GradeFair Value
            
            
            Cost
            
            
            Fair Value
            
            
            CostU.S.
      government and agency
            
            $
            47,198
            
            
            $
            46,879
            
            
            $
            --
            
            
            $
            --State and
      political subdivision
            
            
            12,477
            
            
            
            12,746
            
            
            
            --
            
            
            
            --Foreign
      government
            
            
            13,534
            
            
            
            12,653
            
            
            
            12,017
            
            
            
            10,847Corporate
            
            
            722,334
            
            
            
            758,708
            
            
            
            111,380
            
            
            
            124,972Mortgage-backed
            
            
            387,780
            
            
            
            411,562
            
            
            
            825
            
            
            
            1,960Other
      asset-backed
            
            
            207,668
            
            
            
            249,854
            
            
            
            13,701
            
            
            
            15,711Total
      debt securities
            
            $
            1,390,991
            
            
            $
            1,492,402
            
            
            $
            137,923
            
            
            $
            153,490Percentage
      of total debt securities
            
            
            91
            %
            
            
            91
            %
            
            
            9
            %
            
            
            9
            %





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 June 30, 2008 in
our debt securities portfolio are diversified banking (6.7%), financial services
(5.9%), real estate investment trusts (3.0%), insurance (2.7%) and electric
utilities (2.4%).





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 of June30,
      2008on
      General Account Securities:
            
            
            
            
            0
      – 6
            
            
            6
      – 12
            
            
            Over
      12($
      in thousands)
            
            Total
            
            
            Months
            
            
            Months
            
            
            MonthsDebt
      securitiesTotal fair
      value
            
            $
            1,088,691
            
            
            $
            367,928
            
            
            $
            155,402
            
            
            $
            565,361Total
      amortized cost
            
            
            1,213,443
            
            
            
            383,599
            
            
            
            183,174
            
            
            
            646,670Unrealized
      losses
            
            $
            (124,752
            )
            
            $
            (15,671
            )
            
            $
            (27,772
            )
            
            $
            (81,309
            )Unrealized
      losses after offsets
            
            $
            (21,054
            )
            
            $
            (2,703
            )
            
            $
            (4,471
            )
            
            $
            (13,880
            )Number of
      securities
            
            
            689
            
            
            
            235
            
            
            
            116
            
            
            
            338Investment
      grade:Unrealized
      losses
            
            $
            (107,810
            )
            
            $
            (14,328
            )
            
            $
            (24,820
            )
            
            $
            (68,662
            )Unrealized
      losses after offsets
            
            $
            (18,242
            )
            
            $
            (2,491
            )
            
            $
            (3,993
            )
            
            $
            (11,758
            )Below
      investment grade:Unrealized
      losses
            
            $
            (16,942
            )
            
            $
            (1,343
            )
            
            $
            (2,952
            )
            
            $
            (12,647
            )Unrealized
      losses after offsets
            
            $
            (2,812
            )
            
            $
            (212
            )
            
            $
            (478
            )
            
            $
            (2,122
            )





Total net
unrealized losses on debt securities were $116,978 thousand (unrealized losses
of $124,752 thousand less unrealized gains of $7,774 thousand).





For debt securities
with gross unrealized losses, 86.6% of the unrealized losses after offsets
pertain to investment grade securities and 13.4% of the unrealized losses after
offsets pertain to below investment grade securities at June 30,
2008.





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 of June30,
      2008on
      General Account Securities:
            
            
            
            
            0
      – 6
            
            
            6
      – 12
            
            
            Over
      12($
      in thousands)
            
            Total
            
            
            Months
            
            
            Months
            
            
            MonthsDebt
      securitiesUnrealized
      losses over 20% of cost
            
            $
            (56,273
            )
            
            $
            (43,352
            )
            
            $
            (12,921
            )
            
            $
            --Unrealized
      losses over 20% of cost after offsets
            
            $
            (9,316
            )
            
            $
            (7,281
            )
            
            $
            (2,035
            )
            
            $
            --Number of
      securities
            
            
            99
            
            
            
            83
            
            
            
            16
            
            
            
            --Investment
      grade:Unrealized
      losses over 20% of cost
            
            $
            (47,855
            )
            
            $
            (40,659
            )
            
            $
            (7,196
            )
            
            $
            --Unrealized
      losses over 20% of cost after offsets
            
            $
            (7,990
            )
            
            $
            (6,857
            )
            
            $
            (1,133
            )
            
            $
            --Below
      investment grade:Unrealized
      losses over 20% of cost
            
            $
            (8,418
            )
            
            $
            (2,693
            )
            
            $
            (5,725
            )
            
            $
            --Unrealized
      losses over 20% of cost after offsets
            
            $
            (1,326
            )
            
            $
            (424
            )
            
            $
            (902
            )
            
            $
            --





26
 Table of Contents





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.





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 now even
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.





27
 Table of Contents





Most of our
residential mortgage-backed securities portfolio is highly rated. As of June 30,
2008, 94% of the total residential portfolio was rated AAA or AA. We have $76.3
million of sub-prime exposure, $47.2 million of Alt-A exposure, and $134.9
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 89% 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 June 30, 2008, we have taken
impairments of $11.1 million on our RMBS portfolio. This represents 2.9% of our
total residential mortgage-backed securities portfolio and 0.6% of the general
account. The losses consist of $8.0 million from prime, $2.7 million from Alt-A
and $.4 million from sub-prime.





Residential
Mortgage-Backed Securities:


($
      in thousands)
            
            As of June 30, 2008Book
            
            
            Market
            
            
            % General
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            BB
      andValue
            
            
            Value
            
            
            Account(1)
            
            
            AAA
            
            
            AA
            
            
            A
            
            
            BBB
            
            
            BelowCollateralAgency
            
            $
            119,539
            
            
            $
            119,128
            
            
            
            7.0
            %
            
            
            100.0
            %
            
            
            0.0
            %
            
            
            0.0
            %
            
            
            0.0
            %
            
            
            0.0
            %Prime
            
            
            145,811
            
            
            
            134,869
            
            
            
            7.9
            %
            
            
            93.6
            %
            
            
            0.2
            %
            
            
            0.0
            %
            
            
            5.9
            %
            
            
            0.3
            %Alt-A
            
            
            54,195
            
            
            
            47,216
            
            
            
            2.8
            %
            
            
            79.7
            %
            
            
            0.5
            %
            
            
            13.1
            %
            
            
            6.7
            %
            
            
            0.0
            %Sub-prime
            
            
            89,524
            
            
            
            76,343
            
            
            
            4.5
            %
            
            
            88.3
            %
            
            
            5.0
            %
            
            
            2.4
            %
            
            
            4.3
            %
            
            
            0.0
            %Total
            
            $
            409,069
            
            
            $
            377,556
            
            
            
            22.2
            %
            
            
            92.8
            %
            
            
            1.2
            %
            
            
            2.1
            %
            
            
            3.8
            %
            
            
            0.1
            %


_______


(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.





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. The financial strength
ratings as of June 30, 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
            
            A-
      (“Strong”)




28
 Table of Contents




On May 9, 2008, Fitch
affirmed our financial strength rating of A+. On May 8, 2008, Standard &
Poor’s affirmed our financial strength rating of A-.




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 June 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 June 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.





Risk
Based Capital





At
June 30, 2008, our estimated Total Adjusted Capital level was in excess of 350%
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 $194.2 million at June 30,
2008.








ITEM 3. 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.








ITEM 4. 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 June 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.





29
 Table of Contents





Changes
in Internal Control over Financial Reporting





During the three
months ended June 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








ITEM 1. 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





There are no
material changes to our Risk Factors as described in our 2007 Annual Report on
Form 10-K.








ITEM 2. 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.








ITEM 3. 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.








ITEM 4. 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)
            We are herein
      providing updated financial information of the Company for the three years
      ended December 31, 2007. Effective April 1, 2008, we changed our method of
      accounting for the cost of certain of our long duration reinsurance
      contracts and for the impact of reinsurance costs on deferred acquisition
      costs. Accordingly, portions of the following items from our 2007 Annual
      Report on Form 10-K (“Annual Report”) have been updated to reflect the
      accounting change.


·
            Part II, Item
      7 Management’s Discussion and Analysis of Financial Condition and Results
      of Operations


·
            Part II, Item
      8 Financial Statements and Supplementary
Data


This report updates
our Annual Report only to the extent this information is impacted by the
accounting change. The updated Annual Report information begins on page A-1 and
is incorporated herein by reference.





(b)
            No material
      changes.





31
 Table of Contents





ITEM 6. 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)18
            
            Preferability
      Letter from PricewaterhouseCoopers LLP31.1
            
            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.





32
 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:August
      14, 2008
            By:/s/
      Peter A. HofmannPeter A.
      HofmannSenior
      Executive Vice Presidentand
      Chief Financial Officer





33
 Table of Contents





Item 7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations


Management’s
narrative analysis of the results of operations is presented in lieu of
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, pursuant to General Instruction (I)(2)(a) of Form 10-K.





FORWARD-LOOKING
STATEMENTS





The
discussion in this Form 10-K 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) changes
in general market and business conditions, interest rates and the debt and
equity markets; (ii) the possibility that mortality rates, persistency rates or
funding levels may differ significantly from our pricing expectations; (iii) the
availability, pricing and terms of reinsurance coverage generally and the
inability or unwillingness of our reinsurers to meet their obligations to us
specifically; (iv) our dependence on non-affiliated distributors for our product
sales, (v) downgrades in our debt or financial strength ratings; (vi) our
dependence on third parties to maintain critical business and administrative
functions; (vii) our ability to attract and retain key personnel in a
competitive environment; (viii) the strong competition we face in our business
from  banks and other insurance companies; (ix)  tax
developments that may affect us directly, or indirectly through the cost of, the
demand for or profitability of our products or services; (x) other legislative
or regulatory developments; (xi) legal or regulatory actions; (xii) changes in
accounting standards; and (xiii) 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.





A-1
 Table of Contents





MANAGEMENT’S
NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS





This section
reviews our results of operations for each of the two years in the period ended
December 31, 2007. This discussion should be read in conjunction with our
financial statements in this Form 10-K.





Business
Overview and Earnings Drivers





We
provide life insurance and annuity products targeted at affluent and
high-net-worth individuals and institutions through a wide variety of
third-party financial professionals and intermediaries. In life insurance, our
main focus is on permanent life insurance (universal and variable universal
life) insuring one or more lives, but we also offer a portfolio of term life
insurance products. In annuities, we offer deferred and immediate variable
annuities with a variety of death benefit and guaranteed living benefit
options.





Our profitability
is driven by interaction of the following elements:





·
              Mortality
      margins in our variable universal and universal life product lines. We
      earn cost of insurance (COI) fees based on the difference between face
      amounts and the account values (referred to as the net amount at risk or
      NAR). We pay policyholder benefits and set up reserves for future benefit
      payments on these products. We define mortality margins as the difference
      between these fees and benefit costs. Mortality margins are affected
      by:


•
            Number and
      face amount of policies sold;


•
            Actual death
      claims net of reinsurance relative to our assumptions, a reflection of our
      underwriting and actuarial pricing discipline, the cost of reinsurance and
      the natural volatility inherent in this kind of risk;
  and


•
            The policy
      funding levels or actual account values relative to our assumptions, a
      reflection of policyholder behavior and investment
  returns.


·
            Fees on our
      life and annuity products. Fees consist primarily of asset- and
      premium-based fees (including mortality and expense charges) which we
      charge on our variable life and variable annuity products, and depend on
      the premiums collected and account values of those products. Fees also
      include surrender charges. Non-asset-based fees are charged to cover
      premium taxes and non-deferrable or renewal
  commissions.


·
            Net
      investment income (NII) earned on universal life and other policyholder
      funds managed as part of our general account, less the interest credited
      to policyholders on those funds, as well as NII earned on surplus that we
      allocate in support of these
products.


·
            Non-deferred
      expenses incurred in support of the
business.


·
            The deferred
      policy acquisition cost amortization, which is based on the amount of
      expenses deferred, actual results in each quarter and management’s
      assumptions about the future performance of the
  business.


·
            Net realized
      investment gains or losses on our general account
    investments.





Under accounting
principles generally accepted in the United States of America, or GAAP, premiums
and deposits for variable life, universal life and annuity products are not
recorded as revenues. For certain investment options of variable products,
deposits are reflected on our balance sheet as an increase in separate account
liabilities. Premiums and deposits for universal life, fixed annuities and
certain investment options of variable annuities are reflected on our balance
sheet as an increase in policyholder deposit funds. Premiums and deposits for
other products are reflected on our balance sheet as an increase in policy
liabilities and accruals.





A-2
 Table of Contents





Results
of Operations





Years
      Ended
            
            
            Increase
      (decrease) and($
      in thousands)
            
            December 31,
            
            
            percentage change2007
            
            
            2006
            
            
            2007 vs. 2006REVENUES:Premiums
            
            $
            18,602
            
            
            $
            13,575
            
            
            $
            5,027
            
            
            
            37
            %Insurance and
      investment product fees
            
            
            263,298
            
            
            
            180,779
            
            
            
            82,519
            
            
            
            46
            %Investment
      income, net of expenses
            
            
            109,607
            
            
            
            129,325
            
            
            
            (19,718
            )
            
            
            (15
            %)Net realized
      investment losses
            
            
            (7,043
            )
            
            
            (2,460
            )
            
            
            (4,583
            )
            
            
            (186
            %)Total
      revenues
            
            
            384,464
            
            
            
            321,219
            
            
            
            63,245
            
            
            
            20
            %BENEFITS
      AND EXPENSES:Policy
      benefits
            
            
            168,395
            
            
            
            154,951
            
            
            
            13,444
            
            
            
            9
            %Policy
      acquisition cost amortization
            
            
            120,041
            
            
            
            93,342
            
            
            
            26,699
            
            
            
            29
            %Other
      operating expenses
            
            
            83,601
            
            
            
            65,388
            
            
            
            18,213
            
            
            
            28
            %Total
      benefits and expenses
            
            
            372,037
            
            
            
            313,681
            
            
            
            58,356
            
            
            
            19
            %Income before
      income taxes
            
            
            12,427
            
            
            
            7,538
            
            
            
            4,889
            
            
            
            65
            %Applicable
      income tax expense
            
            
            (1,122
            )
            
            
            (1,070
            )
            
            
            (52
            )
            
            
            5
            %Net
      income
            
            $
            11,305
            
            
            $
            6,468
            
            
            $
            4,837
            
            
            
            75
            %





2007 vs.
2006





Net income improved
in 2007 to $11,305 thousand, up from $6,468 thousand in the prior year. This
result reflected improvements in mortality margins and fees, partially offset by
higher non-deferred expenses, reflecting investments in the growth of new
distribution and business initiatives, and by amortization of deferred policy
acquisition costs.





Mortality margins
in universal life and variable universal life products increased $35.3 million
in 2007, reflecting a $65.2 million increase in cost of insurance fees, only
partially offset by a $29.9 million increase in benefits. While fluctuations in
mortality are inherent in our business, this improvement primarily reflects
growth in the block of business over recent years. Fee revenues, net of premium
taxes and non-deferrable commissions, increased $16.3 million in 2007. However,
non-deferred expenses increased as we invested in new product development and
sales growth. In addition, higher mortality margins and increasing inforce
blocks created higher amortization expense of $122.2 million in 2007, compared
with $94.4 million in 2006.





Impact
of New Accounting Standards





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





Critical
Accounting Estimates





The analysis of our
results of operations is based upon our financial statements, which have been
prepared in accordance with 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. The
following are areas that we believe require significant judgments:





A-3
 Table of Contents





Accounting
Change





Effective April 1,
2008, we changed our method of accounting for the cost certain of our of long
duration reinsurance contracts accounted for in accordance with Statement of
Financial Accounting Standards No. 113, Accountingand Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts, or 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. Comparative amounts from prior periods have been adjusted to apply the
new method retrospectively in our financial statements in this Form 10-K.





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 estimated gross profits,
or 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.





A-4
 Table of Contents





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
adjusted to reflect such change. This process is known as “unlocking”. 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.





These revisions are
not currently required or anticipated.





Policy
Liabilities and Accruals





Reserves are
liabilities representing estimates of the amounts that will come due to our
policyholders at some point in the future. GAAP prescribes the methods of
establishing reserves, allowing some degree of managerial judgment.





See Note 2 to our
financial statements in this Form 10-K for more information.





A-5
 Table of Contents





Valuation
of Debt and Equity Securities





We
classify our debt and equity securities held in our general account as
available-for-sale and report them in our balance sheet at fair value. Fair
value is based on quoted market price, where available. When quoted market
prices are not available, we estimate fair value by discounting debt security
cash flows to reflect interest rates currently being offered on similar terms to
borrowers of similar credit quality, by quoted market prices of comparable
instruments and by independent pricing sources or internally developed pricing
models.





Fair
      Value of General Account Fixed Maturity Securities
            As of December 31,
  2007by
      Pricing Source:
            Fixed
            
            
            %
      of($
      in thousands)
            Maturities
            
            
            Totalat Fair Value
            
            
            Fair ValuePriced via
      independent market quotations
            
            $
            1,102,959
            
            
            65%Priced via
      matrices
            
            
            283,484
            
            
            17%Priced via
      broker quotations
            
            
            264,174
            
            
            15%Priced via
      other methods
            
            
            53,151
            
            
            3%Short-term
      investments(1)
            
            
            5,818
            
            
            0%Total
            
            $
            1,709,586
            
            
            100%


_______


(1)
            Short-term
      investments are valued at amortized cost, which approximates fair
      value.





Investments whose
value is considered by us to be other-than-temporarily impaired are written down
to fair value as a charge to realized losses included in our earnings. The
assessment of whether impairments have occurred is based on management’s
case-by-case evaluation of the underlying reasons for the decline in fair value.
We consider a wide range of factors about the security issuer and use our best
judgment in evaluating the cause of the decline in the estimated fair value of
the security and in assessing the prospects for near term recovery. Inherent in
our evaluation of the security are assumptions and estimates about the
operations of the issuer and its future earnings potential. Considerations we
use in the impairment evaluation process include, but are not limited
to:





·
              the length of
      time and the extent to which the market value has been below cost or
      amortized cost;


·
              the potential
      for impairments of securities when the issuer is experiencing significant
      financial difficulties;


·
              the potential
      for impairments in an entire industry sector or
  sub-sector;


·
              our ability
      and intent to hold the security for a period of time sufficient to allow
      for recovery of its value;


·
              unfavorable
      changes in forecasted cash flows on asset-backed securities;
      and


·
              other
      subjective factors, including concentrations and information obtained from
      regulators and rating
agencies.





The cost basis of
these written-down investments is adjusted to fair value at the date the
determination of impairment is made. The new cost basis is not changed for
subsequent recoveries in value. For mortgage-backed and other asset-backed debt
securities, we recognize income using a constant effective yield based on
anticipated prepayments and the estimated economic lives of the securities. When
actual prepayments differ significantly from anticipated prepayments, the
effective yield is recalculated to reflect actual payments to date and any
resulting adjustment is included in net investment income. For certain
asset-backed securities, changes in estimated yield are recorded on a
prospective basis and specific valuation methods are applied to these securities
to determine if there has been an other-than-temporary decline in
value.





See Note 6 to our
financial statements in this Form 10-K for more information.





A-6
 Table of Contents





Deferred
Income Taxes





We
account for income taxes in accordance with Statement of Financial Accounting
Standards No. 109, Accounting
for Income Taxes, or SFAS 109. The deferred income tax assets and/or
liabilities are determined by multiplying the differences between the financial
reporting and tax reporting bases for assets and liabilities by the enacted tax
rates expected to be in effect when such differences are recovered or settled.
The effect on deferred income taxes of a change in tax rates is recognized in
income in the period that includes the enactment date. Valuation allowances on
deferred income tax assets are estimated based on our assessment of the
realizability of such amounts.





We
have elected to file a consolidated federal income tax return for 2007 and prior
years. Within the consolidated tax return, we are required by regulations of the
Internal Revenue Service, or the IRS, to segregate the entities into two groups:
life insurance companies and non-life insurance companies. We are limited as to
the amount of any operating losses from the non-life group that can be offset
against taxable income of the life group. These limitations affect the amount of
any operating loss carryovers that we have now or in the future.





We
have determined, based on our earnings and future income, that it is more likely
than not that the deferred income tax assets will be realized. In determining
the adequacy of future income, we have considered projected future income,
reversal of existing temporary differences and available tax planning strategies
and actions that could be implemented, if necessary.





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.





See Note 9 to our
financial statements in this Form 10-K for more information.





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 General Account





Our general account
debt securities portfolio consists 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
December 31, 2007, our general account debt securities, with a carrying value of
$1,709.6 million, represented 98.6% of total general account investments. Public
debt securities represented 79.7% of total debt securities, with the remaining
20.3% represented by private debt securities.





A-7
 Table of Contents





Each year, the
majority of our general account’s net cash flows are invested in investment
grade debt securities. In addition, we maintain a portfolio allocation of
between 6% and 10% of debt securities in below investment grade rated bonds.
Allocations are based on our assessment of relative value and the likelihood of
enhancing risk-adjusted portfolio returns. The size of our allocation to below
investment grade bonds is also constrained by the size of our net worth. We are
subject to the risk that the issuers of the debt securities we own may default
on principal and interest payments, particularly in the event of a major
economic downturn. Our investment strategy has been to invest the majority of
our below investment grade rated bond exposure in the BB rating category, which
is equivalent to a Securities Valuation Office, or SVO, securities rating of 3.
The BB rating category is the highest quality tier within the below investment
grade universe, and BB rated securities historically experienced lower defaults
compared to B or CCC rated bonds. As of December 31, 2007, our total below
investment grade securities totaled $144.0 million, or 8.4%, of our total debt
security portfolio. Of that amount, $97.3 million, or 5.7%, of our debt security
portfolio was invested in the BB category. Our debt securities having an
increased risk of default (those securities with an SVO rating of four or
greater which is equivalent to B or below) totaled $46.7 million, or 2.7%, of
our total debt security portfolio.





Our general account
debt and equity securities are classified as available-for-sale and are reported
at fair value with unrealized gains or losses included in equity. Accordingly,
the carrying value of such securities reflects their fair value at the balance
sheet date. Fair value is based on quoted market price, where available. When
quoted market prices are not available, we estimate fair value for debt
securities by discounting projected cash flows based on market interest rates
currently being offered on similar terms to borrowers of similar credit quality,
by quoted market prices of comparable instruments and by independent pricing
sources or internally developed pricing models. Investments whose value, in our
judgment, is considered to be other-than-temporarily impaired are written down
to fair value as a charge to realized investment losses included in our
earnings. The cost basis of these written-down investments is adjusted to fair
value at the date the determination of impairment is made. The new cost basis is
not changed for subsequent recoveries in value.





Debt
      Securities by Type and Credit Quality:
            
            As of December 31,
2007($
      in thousands)
            
            Investment Grade
            
            
            Below Investment GradeFair Value
            
            
            Cost
            
            
            Fair Value
            
            
            CostUnited States
      government and agency
            
            $
            65,774
            
            
            $
            64,884
            
            
            $
            --
            
            
            $
            --State and
      political subdivision
            
            
            11,029
            
            
            
            11,134
            
            
            
            --
            
            
            
            --Foreign
      government
            
            
            11,477
            
            
            
            11,003
            
            
            
            18,946
            
            
            
            16,713Corporate
            
            
            857,431
            
            
            
            872,664
            
            
            
            117,627
            
            
            
            126,318Mortgage-backed
            
            
            358,479
            
            
            
            372,733
            
            
            
            --
            
            
            
            --Other
      asset-backed
            
            
            261,446
            
            
            
            281,404
            
            
            
            7,377
            
            
            
            7,523Total
      debt securities
            
            $
            1,565,636
            
            
            $
            1,613,822
            
            
            $
            143,950
            
            
            $
            150,554Percentage
      of total debt securities
            
            
            92
            %
            
            
            91
            %
            
            
            8
            %
            
            
            9
            %





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 has been to create a high level
of industry diversification. The top five industry holdings as of December 31,
2007 in our debt securities portfolio are banking (6.8%), diversified financial
services (6.7%), insurance (3.3%), REITs (2.7%) and broker dealers
(2.5%).





Total net
unrealized losses on debt securities were $54,790 thousand (unrealized losses of
$71,029 thousand less unrealized gains of $16,239 thousand).





A-8
 Table of Contents





At
the end of each reporting period, we review our security holdings 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. This analysis is provided for
investment grade and non-investment grade securities. Using this analysis,
coupled with our watch list, we review all securities whose fair value is less
than 80% of amortized cost (significant unrealized loss) with emphasis on below
investment grade securities with a continuous significant unrealized loss in
excess of six months. In addition, we review securities that had experienced
lesser percentage declines in value on a more selective basis to determine if a
security is other-than-temporarily impaired.





Our assessment of
whether an investment by us 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.





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





Duration
      of Gross Unrealized Losses onGeneral
      Account Securities:
            
            As of December31,
      2007($
      in thousands)
            
            
            
            
            0
      - 6
            
            
            6
      - 12
            
            
            Over
      12Total
            
            
            Months
            
            
            Months
            
            
            MonthsDebt
      SecuritiesTotal fair
      value
            
            $
            1,128,642
            
            
            $
            193,384
            
            
            $
            184,274
            
            
            $
            750,984Total
      amortized cost
            
            
            1,199,671
            
            
            
            210,133
            
            
            
            202,606
            
            
            
            786,932Unrealized
      losses
            
            $
            (71,029
            )
            
            $
            (16,749
            )
            
            $
            (18,332
            )
            
            $
            (35,948
            )Unrealized
      losses after offsets
            
            $
            (11,780
            )
            
            $
            (2,683
            )
            
            $
            (2,912
            )
            
            $
            (6,185
            )Number of
      securities
            
            
            654
            
            
            
            137
            
            
            
            106
            
            
            
            411Investment
      grade:Unrealized
      losses
            
            $
            (61,748
            )
            
            $
            (15,440
            )
            
            $
            (17,844
            )
            
            $
            (28,464
            )Unrealized
      losses after offsets
            
            $
            (10,182
            )
            
            $
            (2,467
            )
            
            $
            (2,836
            )
            
            $
            (4,879
            )Below
      investment grade:Unrealized
      losses
            
            $
            (9,281
            )
            
            $
            (1,309
            )
            
            $
            (488
            )
            
            $
            (7,484
            )Unrealized
      losses after offsets
            
            $
            (1,598
            )
            
            $
            (216
            )
            
            $
            (76
            )
            
            $
            (1,306
            )





For debt securities
with gross unrealized losses, 86.4% of the unrealized losses after offsets for
deferred policy acquisition costs and deferred income taxes pertain to
investment grade securities and 13.6% of the unrealized losses after offsets
pertain to below investment grade securities at December 31, 2007.





A-9
 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 onGeneral
      Account Securities:
            
            As of December31,
      2007($
      in thousands)
            
            
            
            
            0
      - 6
            
            
            6
      - 12
            
            
            Over
      12Total
            
            
            Months
            
            
            Months
            
            
            MonthsDebt
      SecuritiesUnrealized
      losses over 20% of cost
            
            $
            (17,781
            )
            
            $
            (17,781
            )
            
            $
            --
            
            
            $
            --Unrealized
      losses over 20% of cost after offsets
            
            $
            (2,780
            )
            
            $
            (2,780
            )
            
            $
            --
            
            
            $
            --Number of
      securities
            
            
            31
            
            
            
            31
            
            
            
            --
            
            
            
            --Investment
      grade:Unrealized
      losses over 20% of cost
            
            $
            (13,848
            )
            
            $
            (13,848
            )
            
            $
            --
            
            
            $
            --Unrealized
      losses over 20% of cost after offsets
            
            $
            (2,165
            )
            
            $
            (2,165
            )
            
            $
            --
            
            
            $
            --Below
      investment grade:Unrealized
      losses over 20% of cost
            
            $
            (3,933
            )
            
            $
            (3,933
            )
            
            $
            --
            
            
            $
            --Unrealized
      losses over 20% of cost after offsets
            
            $
            (615
            )
            
            $
            (615
            )
            
            $
            --
            
            
            $
            --





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.





Residential
Mortgage-Backed Securities





The weakness in the
U.S. real estate markets, increases in interest rates and the effects of relaxed
underwriting standards for mortgages and home equity loans have led to higher
delinquency rates for residential mortgage-backed securities, especially those
originated in 2006 and those designated as sub-prime. In addition, there have
been increased concerns in the financial markets about residential
mortgage-backed securities designated as


Alt-A.





Sub-prime mortgage
lending refers to the origination of residential mortgage loans to customers
with weak or impaired credit profiles, including, but not limited to, those with
the lowest credit scores. Alt-A mortgage lending refers to the origination of
residential mortgage loans to customers who are rated above the sub-prime
category but below top rated prime borrowers, for reasons including, but not
limited to, the election not to provide documentation for items such as income
sources.





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, 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.





A-10
 Table of Contents





Most of our
residential mortgage-backed securities portfolio is highly rated. As of December
31, 2007, over 94% of the total residential portfolio was rated AAA or AA. We
have $92,011 thousand of sub-prime exposure, which represents 5.0% of our
general account. Substantially all of our sub-prime exposure is investment
grade, and 97.6% is AAA rated, with another 1.7% 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. Our exposure to sub-prime mortgages originated after
2005 is less than 3% of our general account, with 99% of those securities rated
AAA.





Residential
Mortgage-Backed Securities:


($
      in thousands)
            
            As of December 31,
2007Book
            
            
            Market
            
            
            % General
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            BB
      andValue
            
            
            Value
            
            
            Account(1)
            
            
            AAA
            
            
            AA
            
            
            A
            
            
            BBB
            
            
            BelowCollateralAgency
            
            $
            42,631
            
            
            $
            42,247
            
            
            
            2.3
            %
            
            
            100.0
            %
            
            
            0.0
            %
            
            
            0.0
            %
            
            
            0.0
            %
            
            
            0.0
            %Prime
            
            
            179,353
            
            
            
            170,249
            
            
            
            9.2
            %
            
            
            90.3
            %
            
            
            0.6
            %
            
            
            0.0
            %
            
            
            9.1
            %
            
            
            0.0
            %Alt-A
            
            
            62,482
            
            
            
            58,684
            
            
            
            3.2
            %
            
            
            91.4
            %
            
            
            0.5
            %
            
            
            4.7
            %
            
            
            3.4
            %
            
            
            0.0
            %Sub-prime
            
            
            97,334
            
            
            
            92,011
            
            
            
            5.0
            %
            
            
            97.6
            %
            
            
            1.7
            %
            
            
            0.6
            %
            
            
            0.0
            %
            
            
            0.1
            %Total
            
            $
            381,800
            
            
            $
            363,191
            
            
            
            19.7
            %
            
            
            93.5
            %
            
            
            0.8
            %
            
            
            0.9
            %
            
            
            4.8
            %
            
            
            0.0
            %


_______


(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 and investment activities 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.





Additional
liquidity to meet cash outflows is available from our portfolio of liquid
assets. These liquid assets include substantial holdings of United States
government and agency bonds, short-term investments and marketable debt and
equity securities.





A
primary liquidity concern with respect to life insurance and annuity products is
the risk of early policyholder and contractholder withdrawal. We closely monitor
our liquidity requirements in order to match cash inflows with expected cash
outflows, and employ an asset/liability management approach tailored to the
specific requirements of each product line, based upon the return objectives,
risk tolerance, liquidity, tax and regulatory requirements of the underlying
products. In particular, we maintain investment programs intended to provide
adequate funds to pay benefits without forced sales of investments. Products
having liabilities with relatively long lives, such as life insurance, are
matched with assets having similar estimated lives, such as long-term bonds and
private placement bonds. Shorter-term liabilities are matched with investments
with short-term and medium-term fixed maturities.





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 Table of Contents




Annuity
      Actuarial Reserves and Deposit Fund Liability
            
            As of December 31,Withdrawal
      Characteristics:
            
            2007
            
            
            2006($
      in thousands)
            
            Amount(1)
            
            
            Percent
            
            
            Amount(1)
            
            
            PercentNot subject
      to discretionary withdrawal provision
            
            $
            34,807
            
            
            
            1
            %
            
            $
            28,769
            
            
            
            1
            %Subject to
      discretionary withdrawal without adjustment
            
            
            531,863
            
            
            
            12
            %
            
            
            595,654
            
            
            
            14
            %Subject to
      discretionary withdrawal with market value adjustment
            
            
            252,525
            
            
            
            6
            %
            
            
            398,092
            
            
            
            9
            %Subject to
      discretionary withdrawal at contract value less surrender
      charge
            
            
            355,558
            
            
            
            8
            %
            
            
            499,303
            
            
            
            11
            %Subject to
      discretionary withdrawal at market value
            
            
            3,279,915
            
            
            
            73
            %
            
            
            2,865,268
            
            
            
            65
            %Total
      annuity contract reserves and deposit fund liability
            
            $
            4,454,668
            
            
            
            100
            %
            
            $
            4,387,086
            
            
            
            100
            %


_______


(1)
            Annuity
      contract reserves and deposit fund liability amounts are reported on a
      statutory basis, which more accurately reflects the potential cash
      outflows and include variable product liabilities. Annuity contract
      reserves and deposit fund liabilities are monetary amounts that an insurer
      must have available to provide for future obligations with respect to its
      annuities and deposit funds. These are liabilities in our financial
      statements prepared in conformity with statutory accounting practices.
      These amounts are at least equal to the values available to be withdrawn
      by policyholders.





Individual life
insurance policies are less susceptible to withdrawals than annuity contracts
because policyholders may incur surrender charges and be required to undergo a
new underwriting process in order to obtain a new insurance policy. As indicated
in the table above, most of our annuity contract reserves and deposit fund
liabilities are subject to withdrawals.





Individual life
insurance policies, other than term life insurance policies, increase in cash
values over their lives. Policyholders have the right to borrow an amount up to
a certain percentage of the cash value of their policies at any time. As of
December 31, 2007, we had approximately $416,409 thousand in cash values with
respect to which policyholders had rights to take policy loans. The majority of
cash values eligible for policy loans are at variable interest rates that are
reset annually on the policy anniversary. Policy loans at December 31, 2007 were
$21,605 thousand.





The primary
liquidity risks regarding cash inflows from our investment activities are the
risks of default by debtors, interest rate and other market volatility and
potential illiquidity of investments. We closely monitor and manage these
risks.





We
believe that our current and anticipated sources of liquidity are adequate to
meet our present and anticipated needs.





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. The financial strength and
debt ratings as of March 1, 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
            
            A-
      (“Strong”)





A-12
 Table of Contents





Contractual
Obligations and Commercial Commitments





Contractual
Obligations and


Commercial
      Commitments:
            
            As of December 31, 2006($
      in thousands)
            
            Total
            
            
            2008
            
            
            2009–2010
            
            
            2011–2012
            
            
            ThereafterContractual
      ObligationsFixed
      contractual obligations(1)
            
            $
            --
            
            
            $
            --
            
            
            $
            --
            
            
            $
            --
            
            
            $
            --Other
      long-term liabilities(2)
            
            
            14,159,110
            
            
            
            87,338
            
            
            
            1,496,523
            
            
            
            1,329,308
            
            
            
            10,461,941Total
      contractual obligations(3)
            
            $
            14,159,110
            
            
            $
            87,338
            
            
            $
            1,496,523
            
            
            $
            1,329,308
            
            
            $
            10,461,941Commercial
      CommitmentsCommitments
      related to private placements
            
            $
            6,885
            
            
            $
            6,885
            
            
            $
            --
            
            
            $
            --
            
            
            $
            --Total
      commercial commitments
            
            $
            6,885
            
            
            $
            6,885
            
            
            $
            --
            
            
            $
            --
            
            
            $
            --


_______


(1)
            We have no
      fixed contractual obligations as all purchases are made by our parent
      company and the resulting expenses are allocated to us when
      incurred.





(2)
            Policyholder
      contractual obligations represent estimated benefits from life insurance
      and annuity contracts issued by us. Policyholder contractual obligations
      also include separate account liabilities, which are contractual
      obligations of the separate account assets established under applicable
      state insurance laws and are legally insulated from our general account
      assets.
              
              Future
      obligations are based on our estimate of future investment earnings,
      mortality, surrenders and applicable policyholder dividends. Actual
      obligations in any single year, or ultimate total obligations, may vary
      materially from these estimates as actual experience emerges. As described
      in Note 2 to our financial statements in this Form 10-K, policy
      liabilities and accruals are recorded on the balance sheet in amounts
      adequate to meet the estimated future obligations of the policies in
      force. The policyholder obligations reflected in the table above exceed
      the policy liabilities, policyholder deposit fund liabilities and separate
      account liabilities reported on our December 31, 2007 balance sheet
      because the above amounts do not reflect future investment earnings and
      future premiums and deposits on those policies. Separate account
      obligations will be funded by the cash flows from separate account assets,
      while the remaining obligations will be funded by cash flows from
      investment earnings on general account assets and premiums and deposits on
      contracts in force.




(3)
            Due to the
      uncertainty of the timing of future cash flows associated with our
      unrecognized tax benefits at December 31, 2007, we are unable to make
      reasonably reliable estimates of the period of cash settlement with the
      respective taxing authorities. Therefore, $525 thousand of unrecognized
      tax benefits have been excluded from this table. See Note 9 to our
      financial statements in this Form 10-K for additional information on
      unrecognized tax benefits.





Off-Balance
Sheet Arrangements





As
of 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.





Statutory
Capital and Surplus and Risk-Based Capital





Connecticut
Insurance Law requires that Connecticut life insurers report their risk-based
capital. Risk-based capital is based on a formula calculated by applying factors
to various asset, premium and statutory reserve items. The formula takes into
account the risk characteristics of the insurer, including asset risk, insurance
risk, interest rate risk and business risk. The Connecticut Insurance Department
has regulatory authority to require various actions by, or take various actions
against, insurers whose Total Adjusted Capital (capital and surplus plus AVR)
does not exceed certain risk-based capital levels.





A-13
 Table of Contents





The levels of
regulatory action, the trigger point and the corrective actions required are
summarized below:





Company Action Level – results
when Total Adjusted Capital falls below 200% of Authorized Control Level at
which point the company must file a comprehensive plan to the state insurance
regulators;





Regulatory Action Level –
results when Total Adjusted Capital falls below 150% of Authorized Control Level
where in addition to the above, insurance regulators are required to perform an
examination or analysis deemed necessary and issue a corrective order specifying
corrective actions;





Authorized Control Level –results when Total Adjusted Capital falls below 100% of Authorized
Control Level risk-based capital as defined by the NAIC where in addition to the
above, the insurance regulators are permitted but not required to place the
company under regulatory control; and





Mandatory Control Level –
results when Total Adjusted Capital falls below 80% of Authorized Control Level
where insurance regulators are required to place the company under regulatory
control.





At
December 31, 2007, our Total Adjusted Capital level was in excess of 350% of
Company Action Level. PNX management is committed to maintaining appropriate
capital levels for the Company to conduct business.





See Note 13 to our
financial statements in this Form 10-K for more information.





A-14
 Table of Contents





Report
of Independent Registered Public Accounting Firm





To
the Board of Directors and Stockholder of


PHL
Variable Insurance Company:





In
our opinion, the accompanying balance sheets and the related statements of
income, comprehensive income and changes in stockholder’s equity and of cash
flows presentfairly,
in all material respects, the financial position of PHL Variable Insurance
Company (the Company) at December 31, 2007 and 2006, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2007in
conformity with accounting principles generally accepted in the United States of
America.  These financial statements are the responsibility of the
Company’s management.  Our responsibility is to express an opinion on
these financial statements based on our audits.  We conducted our
audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States).  Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation.  We believe
that our audits provide a reasonable basis for our opinion.






/s/
PricewaterhouseCoopers LLP


Hartford,
Connecticut




March 7, 2008,
except as it relates to the effects to the change in accounting for reinsurance
of certain of the Company’s long duration insurance contracts as reflected in
Note 2 to the financial statements, as to which the date is July 31,
2008.





A-15
 Table of Contents





PHL
Variable Insurance Company


Balance
Sheet


($ in thousands,
except share data)


December
31, 2007 and 2006








2007
            
            
            2006ASSETS:Available-for-sale
      debt securities, at fair value
            
            $
            1,709,586
            
            
            $
            2,050,989Policy loans,
      at unpaid principal balances
            
            
            22,819
            
            
            
            15,542Other
      investments
            
            
            1,251
            
            
            
            1,612Total
      investments
            
            
            1,733,656
            
            
            
            2,068,143Cash and cash
      equivalents
            
            
            108,200
            
            
            
            47,127Accrued
      investment income
            
            
            17,518
            
            
            
            19,882Receivables
            
            
            37,178
            
            
            
            54,534Deferred
      policy acquisition costs
            
            
            1,009,612
            
            
            
            701,620Receivable
      from related parties
            
            
            527
            
            
            
            300Other
      assets
            
            
            20,214
            
            
            
            2,356Separate
      account assets
            
            
            3,389,356
            
            
            
            2,953,063Total
      assets
            
            $
            6,316,261
            
            
            $
            5,847,025LIABILITIES:Policyholder
      deposit funds
            
            $
            1,134,635
            
            
            $
            1,491,367Policy
      liabilities and accruals
            
            
            981,509
            
            
            
            709,583Deferred
      income taxes
            
            
            135,648
            
            
            
            94,708Payable to
      related parties
            
            
            28,969
            
            
            
            25,081Other
      liabilities
            
            
            48,303
            
            
            
            26,576Separate
      account liabilities
            
            
            3,389,356
            
            
            
            2,953,063Total
      liabilities
            
            
            5,718,420
            
            
            
            5,300,378CONTINGENT
      LIABILITIES (Note 14)STOCKHOLDER’S
      EQUITY:Common stock,
      $5,000 par value: 1,000 shares authorized; 500 shares
    issued
            
            
            2,500
            
            
            
            2,500Additional
      paid-in capital
            
            
            553,218
            
            
            
            503,234Retained
      earnings
            
            
            53,906
            
            
            
            43,602Accumulated
      other comprehensive loss
            
            
            (11,783
            )
            
            
            (2,689
            )Total
      stockholder’s equity
            
            
            597,841
            
            
            
            546,647Total
      liabilities and stockholder’s equity
            
            $
            6,316,261
            
            
            $
            5,847,025





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





A-16
 Table of Contents





PHL
Variable Insurance Company


Statement
of Income, Comprehensive Income and Changes in Stockholder’s Equity


($ in
thousands)


Years
Ended December 31, 2007, 2006 and 2005








2007
            
            
            2006
            
            
            2005REVENUES:Premiums
            
            $
            18,602
            
            
            $
            13,575
            
            
            $
            9,521Insurance and
      investment product fees
            
            
            263,298
            
            
            
            180,779
            
            
            
            109,270Investment
      income, net of expenses
            
            
            109,607
            
            
            
            129,325
            
            
            
            154,374Net realized
      investment losses
            
            
            (7,043
            )
            
            
            (2,460
            )
            
            
            (10,569
            )Total
      revenues
            
            
            384,464
            
            
            
            321,219
            
            
            
            262,596BENEFITS
      AND EXPENSES:Policy
      benefits
            
            
            168,395
            
            
            
            154,951
            
            
            
            130,279Policy
      acquisition cost amortization
            
            
            120,041
            
            
            
            93,342
            
            
            
            80,402Other
      operating expenses
            
            
            83,601
            
            
            
            65,388
            
            
            
            50,493Total
      benefits and expenses
            
            
            372,037
            
            
            
            313,681
            
            
            
            261,174Income before
      income taxes
            
            
            12,427
            
            
            
            7,538
            
            
            
            1,422Applicable
      income tax (expense) benefit
            
            
            (1,122
            )
            
            
            (1,070
            )
            
            
            2,801Net
      income
            
            $
            11,305
            
            
            $
            6,468
            
            
            $
            4,223FEES
      PAID TO RELATED PARTIES (NOTE 10)COMPREHENSIVE
      INCOME:Net
      income
            
            $
            11,305
            
            
            $
            6,468
            
            
            $
            4,223Net
      unrealized investment losses
            
            
            (9,095
            )
            
            
            (1,277
            )
            
            
            (9,986
            )Net
      unrealized derivative instruments losses
            
            
            --
            
            
            
            (807
            )
            
            
            (335
            )Other
      comprehensive loss
            
            
            (9,095
            )
            
            
            (2,084
            )
            
            
            (10,321
            )Comprehensive
      income (loss)
            
            $
            2,210
            
            
            $
            4,384
            
            
            $
            (6,098
            )ADDITIONAL
      PAID-IN  CAPITAL:Capital
      contributions from parent
            
            $
            49,984
            
            
            $
            --
            
            
            $
            --RETAINED
      EARNINGS:Adjustment
      for initial application of FIN 48 (Note 2)
            
            
            (1,000
            )
            
            
            --
            
            
            
            --Net
      income
            
            
            11,305
            
            
            
            6,468
            
            
            
            4,223ACCUMULATED
      OTHER COMPREHENSIVE INCOME:Other
      comprehensive loss
            
            
            (9,095
            )
            
            
            (2,084
            )
            
            
            (10,321
            )Change
      in stockholder’s equity
            
            
            51,194
            
            
            
            4,384
            
            
            
            (6,098
            )Stockholder’s
      equity, beginning of year
            
            
            546,647
            
            
            
            542,263
            
            
            
            548,361Stockholder’s
      equity, end of year
            
            $
            597,841
            
            
            $
            546,647
            
            
            $
            542,263





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





A-17
 Table of Contents





PHL
Variable Insurance Company


Statement
of Cash Flows


($ in
thousands)


Years
Ended December 31, 2007, 2006 and 2005








2007
            
            
            2006
            
            
            2005OPERATING
      ACTIVITIES:Net
      income
            
            $
            11,305
            
            
            $
            6,468
            
            
            $
            4,223Net realized
      investment losses
            
            
            7,043
            
            
            
            2,460
            
            
            
            10,569Investment
      (gains) losses
            
            
            1,473
            
            
            
            4,206
            
            
            
            (15,293
            )Deferred
      income taxes
            
            
            45,837
            
            
            
            22,473
            
            
            
            15,512(Increase)
      decrease in receivables
            
            
            (4,520
            )
            
            
            (6,939
            )
            
            
            4,091Increase in
      deferred policy acquisition costs
            
            
            (280,566
            )
            
            
            (177,236
            )
            
            
            (56,634
            )Increase in
      policy liabilities and accruals
            
            
            289,311
            
            
            
            213,753
            
            
            
            155,315Other assets
      and other liabilities change
            
            
            7,868
            
            
            
            (1,224
            )
            
            
            30,634Cash
      from operating activities
            
            
            77,751
            
            
            
            63,961
            
            
            
            148,417INVESTING
      ACTIVITIES:Investment
      purchases
            
            
            (890,909
            )
            
            
            (1,007,973
            )
            
            
            (1,148,093
            )Investment
      sales, repayments and maturities
            
            
            1,207,988
            
            
            
            1,728,360
            
            
            
            1,357,687Cash
      from investing activities
            
            
            317,079
            
            
            
            720,387
            
            
            
            209,594FINANCING
      ACTIVITIES:Policyholder
      deposit fund deposits
            
            
            266,750
            
            
            
            223,309
            
            
            
            236,099Policyholder
      deposit fund withdrawals
            
            
            (625,507
            )
            
            
            (986,348
            )
            
            
            (607,890
            )Capital
      contributions from parent
            
            
            25,000
            
            
            
            --
            
            
            
            --Cash
      for financing activities
            
            
            (333,757
            )
            
            
            (763,039
            )
            
            
            (371,791
            )Change
      in cash and cash equivalents
            
            
            61,073
            
            
            
            21,309
            
            
            
            (13,780
            )Cash and cash
      equivalents, beginning of year
            
            
            47,127
            
            
            
            25,818
            
            
            
            39,598Cash
      and cash equivalents, end of year
            
            $
            108,200
            
            
            $
            47,127
            
            
            $
            25,818





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





A-18
 Table of Contents





PHL
Variable Insurance Company


Notes
to Financial Statements


Years
Ended December 31, 2007, 2006 and 2005











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. Phoenix Home Life Mutual Insurance Company demutualized on June
25, 2001 by converting from a mutual life insurance company to a stock life
insurance company, became a wholly-owned subsidiary of PNX and changed its name
to Phoenix Life Insurance Company.








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, or GAAP, which
differ materially from the accounting practices prescribed by various insurance
regulatory authorities. We have reclassified certain amounts for 2006 and 2005
to conform with the 2007 presentation.





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.





Accounting
Change





Effective April 1,
2008, we changed our method of accounting for the cost certain of our of long
duration reinsurance contracts accounted for in accordance with Statement of
Financial Accounting Standards No. 113, Accountingand Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts, or 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. Comparative amounts from prior periods, including in Notes 3, 4 and
9, 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. Certain balances shown “as originally
reported” have been reclassified to conform to the current period
presentation.





A-19
 Table of Contents





2.  Basis
of Presentation and Significant Accounting Policies





Income
Statement





($
      in thousands)
            
            Year Ended December 31,
      2007As adjusted
            
            
            As originally reported
            
            
            Effect of ChangeInsurance and
      investment product fees
            
            $
            263,298
            
            
            $
            263,696
            
            
            $
            (398
            )Policy
      benefits
            
            
            168,395
            
            
            
            157,616
            
            
            
            10,779Policy
      acquisition cost amortization
            
            
            120,041
            
            
            
            124,015
            
            
            
            (3,974
            )Income tax
      (expense) benefit
            
            
            (1,122
            )
            
            
            (3,643
            )
            
            
            2,521Net income
      (loss)
            
            
            11,305
            
            
            
            15,987
            
            
            
            (4,682
            )








($
      in thousands)
            
            Year Ended December 31,
      2006As adjusted
            
            
            As originally reported
            
            
            Effect of ChangeInsurance and
      investment product fees
            
            $
            180,779
            
            
            $
            180,498
            
            
            $
            281Policy
      benefits
            
            
            154,951
            
            
            
            151,285
            
            
            
            3,666Policy
      acquisition cost amortization
            
            
            93,342
            
            
            
            91,168
            
            
            
            2,174Income tax
      (expense) benefit
            
            
            (1,070
            )
            
            
            (3,016
            )
            
            
            1,946Net income
      (loss)
            
            
            6,468
            
            
            
            10,081
            
            
            
            (3,613
            )








Balance
Sheet





($
      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 taxes
            
            
            135,648
            
            
            
            140,115
            
            
            
            (4,467
            )Retained
      earnings
            
            
            53,906
            
            
            
            62,202
            
            
            
            (8,296
            )








($
      in thousands)
            
            December 31, 2006As adjusted
            
            
            As originally reported
            
            
            Effect of ChangeDeferred
      policy acquisition costs
            
            $
            701,620
            
            
            $
            703,794
            
            
            $
            (2,174
            )Policy
      liabilities and accruals
            
            
            709,583
            
            
            
            706,198
            
            
            
            3,385Deferred
      income taxes
            
            
            94,708
            
            
            
            96,654
            
            
            
            (1,946
            )Retained
      earnings
            
            
            43,602
            
            
            
            47,215
            
            
            
            (3,613
            )





Adoption
of new accounting standards





We
adopted the provisions of the Financial Accounting Standards Board, or FASB,
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, or 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. See Note 9 to these financial statements for more
information.





A-20
 Table of Contents





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





In
September 2006, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements, or SAB 108. SAB 108 provides guidance for how errors should
be evaluated to assess materiality from a quantitative perspective. SAB 108
permits companies to initially apply its provisions by either restating prior
financial statements or recording the cumulative effect of initially applying
the approach as adjustments to the carrying values of assets and liabilities as
of January 1, 2006 with an offsetting adjustment to retained earnings. We
adopted SAB 108 on December 31, 2006 with no effect on our financial
statements.





In
March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets, an amendment of FASB Statement No. 140, or 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.





Effective January
1, 2006, we adopted SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments, or SFAS 155. SFAS 155 resolves certain issues
surrounding the accounting for beneficial interests in securitized financial
assets. Our adoption of SFAS 155 did not have a material effect on our financial
statements.





Effective January
1, 2006, we adopted FASB Staff Position Nos. FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments, or FSP 115-1. FSP
115-1 provides guidance as to the determination of other-than-temporarily
impaired securities and requires certain financial disclosures with respect to
unrealized losses. These accounting and disclosure requirements largely codify
our existing practices as to other-than-temporarily impaired securities and
thus, our adoption did not have a material effect on our financial
statements.





In
September 2005, the Accounting Standards Executive Committee, or 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, or 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
December 2007, the FASB issued SFAS No. 141(R), Accounting for Business
Combinations, or 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.





In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, or 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.





A-21
 Table of Contents





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





In
June 2007, the AICPA issued Statement of Position 07-1, Clarification of the Scope of the
Audit and Accounting Guide “Investment Companies” and Accounting by Parent
Companies and Equity Method Investors for Investments in Investment
Companies, or SOP 07-1. SOP 07-1 broadens the definition of an investment
company for application of this guidance. It provides that an entity that meets
the definition of an investment company use fair value as a basis of accounting
and reporting and that a parent retains the specialized fair value accounting of
the entity if certain criteria are met. On February 14, 2008, the FASB deferred
the effective date of SOP 07-1 indefinitely.





On
February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, or 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 material effect on our financial
statements.





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, or
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. We do not expect adoption of this statement to have a material impact
on our financial position and results of operations.





Significant
accounting policies





Investments





Debt
and equity securities





Our debt and equity
securities classified as available-for-sale are reported on our balance sheet at
fair value. Fair value is based on quoted market price, where available. When
quoted market prices are not available, we estimate fair value by discounting
debt security cash flows to reflect interest rates currently being offered on
similar terms to borrowers of similar credit quality (private placement debt
securities), by quoted market prices of comparable instruments (untraded public
debt securities) and by independent pricing sources or internally developed
pricing models (equity securities). We recognize unrealized investment gains and
losses on investments in debt and equity securities that we classify as
available-for-sale. We report these unrealized investment gains and losses as a
component of other comprehensive income, net of applicable deferred policy
acquisition costs and applicable deferred income taxes.





For mortgage-backed
and other asset-backed debt securities, we recognize income using a constant
effective yield based on anticipated prepayments and the estimated economic
lives of the securities. When actual prepayments differ significantly from
anticipated prepayments, the effective yield is recalculated to reflect actual
payments to date and any resulting adjustment is included in net investment
income. For certain asset-backed securities, changes in estimated yield are
recorded on a prospective basis and specific valuation methods are applied to
these securities to determine if there has been an other-than-temporary decline
in value.





A-22
 Table of Contents





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





Policy
loans





Policy loans are
carried at their unpaid principal balances and are collateralized by the cash
values of the related policies. We estimate the fair value of fixed rate policy
loans by discounting loan interest and loan repayments. We base the discount
rate on the 10-year U.S. Treasury rate. We assume that loan interest payments
are made at the fixed rate less 17.5 basis points and that loan repayments only
occur as a result of anticipated policy lapses. For variable rate policy loans,
we consider the unpaid loan balance as fair value, as interest rates on these
loans are reset annually based on market rates.





Other
investments





Other investments
primarily include other partnership interests in which we do not have control or
a majority ownership interest and are recorded using the equity method of
accounting. We record the net income from investments in partnerships in net
investment income.





Cash
and cash equivalents





Cash and cash
equivalents include cash on hand, amounts due from banks, money market
instruments and other debt instruments with maturities of three months or less
when purchased.





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 estimated gross profits,
or 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.





A-23
 Table of Contents





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





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
adjusted to reflect such change. This process is known as “unlocking”. 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.





Separate
account assets and liabilities





Separate account
assets and liabilities related to policyholder funds are carried at fair value.
Deposits, net investment income and realized investment gains and losses for
these accounts are excluded from revenues, and the related liability increases
are excluded from benefits and expenses. Fees assessed to the contractholders
for management services are included in revenues when services are
rendered.





Policy
liabilities and accruals





Policy liabilities
and accruals includes future benefit liabilities for certain life and annuity
products. We establish liabilities in amounts adequate to meet the estimated
future obligations of policies in force. Future benefit liabilities for
traditional life insurance are computed using the net level premium method on
the basis of actuarial assumptions as to contractual guaranteed rates of
interest, mortality rates guaranteed in calculating the cash surrender values
described in such contracts and morbidity. Future benefit liabilities for term
and annuities in the payout phase that have significant mortality risk are
computed using the net premium method on the basis of actuarial assumptions at
the issue date of these contracts for rates of interest, contract administrative
expenses, mortality and surrenders. We establish liabilities for outstanding
claims, losses and loss adjustment expenses based on individual case estimates
for reported losses and estimates of unreported losses based on past
experience.





Certain contracts
may also include additional death or other insurance benefit features, such as
guaranteed minimum death or income benefits offered with variable annuity
contracts or no-lapse guarantees offered with universal life insurance
contracts. An additional liability is established for these benefits by
estimating the expected present value of the excess benefits and recognizing the
excess ratably over the accumulation period based on total expected
assessments.





Policyholder
deposit funds





Amounts received as
payment for certain universal life contracts, deferred annuities and other
contracts without life contingencies are reported as deposits to Policyholder
deposit funds. The liability for universal life-type contracts is equal to the
balance that accrues to the benefit of the policyholders as of the financial
statement date, including interest credited, amounts that have been assessed to
compensate us for services to be performed over future periods, and any amounts
previously assessed against the policyholder that is refundable. The liability
for deferred annuities and other contracts without life contingencies is equal
to the balance that accrues to the benefit of the contract holder as of the
financial statement date which includes the accumulation of deposits plus
interest credited, less withdrawals and amounts assessed through the financial
statement date.





Contingent
liabilities





Amounts related to
contingent liabilities are accrued if it is probable that a liability has been
incurred and an amount is reasonably estimable.





A-24
 Table of Contents





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





Revenue
recognition





We
recognize premiums for long-duration life insurance products as revenue when due
from policyholders. We recognize life insurance premiums for short-duration life
insurance products as premium revenue pro rata over the related contract
periods. We match benefits, losses and related expenses with premiums over the
related contract periods.





Amounts received as
payment for interest sensitive life contracts, deferred annuities and other
contracts without life contingencies are considered deposits and are not
included in revenue. Revenues from these products consist primarily of fees
assessed during the period against the policyholders’ account balances for
mortality charges, policy administration charges and surrender charges. Fees
assessed that represent compensation for services to be provided in the future
are deferred and amortized into revenue over the life of the related contracts.
Related benefit expenses include universal life benefit claims in excess of fund
values, net investment income credited to policyholders’ account balances and
amortization of deferred policy acquisition costs.





Net
investment income and net realized investment gains (losses)





We
recognize realized investment gains (losses) on asset dispositions on a
first-in, first-out basis. We recognize realized investment losses when declines
in fair value of debt and equity securities are considered to be
other-than-temporarily impaired. We adjust the cost basis of these written down
investments to fair value at the date the determination of impairment is made
and do not change the new cost basis for subsequent recoveries in value. In
evaluating whether a decline in value is other than temporary, we consider
several factors including, but not limited to the following:





·
              the extent
      and the duration of the
decline;


·
              the reasons
      for the decline in value (credit event, interest related or market
      fluctuations);


·
              our ability
      and intent to hold the investment for a period of time to allow for a
      recovery of value; and


·
              the financial
      condition of and near term prospects of the
  issuer.





Income
taxes





We
account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes,
or SFAS 109. Accordingly, income tax expense or benefit is recognized based upon
amounts reported in the financial statements and the provisions of currently
enacted tax laws. We allocate income taxes to income, other comprehensive income
and additional paid-in capital, as applicable.





We
recognize current income tax assets and liabilities for estimated income taxes
refundable or payable based on the current year’s income tax returns. We
recognize deferred income tax assets and liabilities for the estimated future
income tax effects of temporary differences and carryovers. Temporary
differences are the differences between the financial statement carrying amounts
of assets and liabilities and their tax bases, as well as the timing of income
or expense recognized for financial reporting and tax purposes of items not
related to assets or liabilities. If necessary, we establish valuation
allowances to reduce the carrying amount of deferred income tax assets to
amounts that are more likely than not to be realized. We periodically review the
adequacy of these valuation allowances and record any reduction in allowances in
accordance with SFAS 109’s intraperiod allocation rules. We recognize interest
and penalties related to amounts accrued on uncertain tax positions and amounts
paid or refunded from federal and state income tax authorities in tax
expense.








3.  Reinsurance





We
use reinsurance agreements to provide for greater diversification of business,
control exposure to potential losses arising from large risks and provide
capacity for growth.





A-25
 Table of Contents





3.  Reinsurance
(continued)





We
remain liable to the extent that reinsuring companies may not be able to meet
their obligations under reinsurance agreements in effect. Failure of the
reinsurers to honor their obligations could result in losses to us;
consequently, we establish reserves for amounts deemed or estimated to be
uncollectible. To minimize our exposure to significant losses from reinsurance
insolvencies, we evaluate the financial condition of our reinsurers and monitor
concentration of credit risk arising from similar geographic regions, activities
or economic characteristics of the reinsurers.





Our reinsurance
program varies based on the type of risk, for example:





·
            On direct
      policies, the maximum of individual life insurance retained by us on any
      one life is $10 million on single life and joint first-to-die policies and
      $12 million for joint last-to-die policies, with excess amounts ceded to
      reinsurers.


·
            We cede 80%
      to 90% of the mortality risk on most new issues of term
      insurance.


·
            In August
      2006, we entered into an agreement to cede 50% of the risk on policies
      issued from July 1, 2002 through December 31, 2005, inclusive, with a net
      amount at risk of $2 million or
greater.


·
            On January 1,
      1996, we entered into a reinsurance agreement that covers 100% of the
      excess death benefits and related reserves for most variable annuity
      policies issued from January 1, 1983 through December 31, 1999, including
      subsequent deposits. We retain the guaranteed minimum death benefit risks
      on the remaining variable deferred annuities in force that are not covered
      by this reinsurance arrangement.


·
            We cede to
      Phoenix Life 100% of the guaranteed minimum accumulation and withdrawal
      benefits on our variable annuities.


·
            Effective
      January 1, 2008, we entered into an agreement to cede 75% of the risk in
      excess of $6.0 million on universal life and variable universal life
      policies issued from January 1, 2006 through December 31,
      2007.








Direct
      Business and Reinsurance:
            
            Year Ended
December 31,($
      in thousands)
            
            2007
            
            
            2006
            
            
            2005Direct
      premiums
            
            $
            87,132
            
            
            $
            71,350
            
            
            $
            55,277Premiums
      ceded to reinsurers
            
            
            (68,530
            )
            
            
            (57,775
            )
            
            
            (45,756
            )Premiums
            
            $
            18,602
            
            
            $
            13,575
            
            
            $
            9,521Direct policy
      benefits incurred
            
            $
            85,898
            
            
            $
            54,055
            
            
            $
            15,538Policy
      benefits assumed from reinsureds
            
            
            505
            
            
            
            965
            
            
            
            381Policy
      benefits ceded to reinsurers
            
            
            (44,707
            )
            
            
            (26,398
            )
            
            
            (9,572
            )Policy
      benefits
            
            $
            41,696
            
            
            $
            28,622
            
            
            $
            6,347Direct life
      insurance in-force
            
            $
            70,502,325
            
            
            $
            55,175,351
            
            
            $
            41,566,483Life
      insurance in-force assumed from reinsureds
            
            
            121,673
            
            
            
            104,826
            
            
            
            135,447Life
      insurance in-force ceded to reinsurers
            
            
            (48,687,754
            )
            
            
            (40,820,818
            )
            
            
            (30,459,568
            )Life
      insurance in-force
            
            $
            21,936,244
            
            
            $
            14,459,359
            
            
            $
            11,242,362Percentage of
      amount assumed to net insurance in-force
            
            
            0.55
            %
            
            
            0.72
            %
            
            
            1.20
            %





The policy benefit
amounts above exclude changes in reserves, interest credited to policyholders
and withdrawals, which total $126,699 thousand, $126,329 thousand and $123,932
thousand, net of reinsurance, for the years ended December 31, 2007, 2006 and
2005, respectively.





Irrevocable letters
of credit aggregating $26,986 thousand at December 31, 2007 have been arranged
with commercial banks in our favor to collateralize the ceded
reserves.





A-26
 Table of Contents





4.  Deferred
policy acquisition costs





Activity
      in Deferred Policy Acquisition Costs:
            
            Year Ended
December 31,($
      in thousands)
            
            2007
            
            
            2006
            
            
            2005Direct
      acquisition costs deferred
            
            $
            400,607
            
            
            $
            270,577
            
            
            $
            137,036Recurring
      costs amortized to expense
            
            
            (122,189
            )
            
            
            (94,429
            )
            
            
            (86,608
            )Credit
      related to investment gains or losses
            
            
            2,148
            
            
            
            1,087
            
            
            
            6,206Offsets to
      net unrealized investment gains or losses included in other comprehensive
      income (loss) (Note 12)
            
            
            27,426
            
            
            
            (4,930
            )
            
            
            39,223Change in
      deferred policy acquisition costs
            
            
            307,992
            
            
            
            172,305
            
            
            
            95,857Deferred
      policy acquisition costs, beginning of year
            
            
            701,620
            
            
            
            529,315
            
            
            
            433,458Deferred
      policy acquisition costs, end of year
            
            $
            1,009,612
            
            
            $
            701,620
            
            
            $
            529,315





During 2007, we
updated our system for calculating the SOP 03-1 reserves for guaranteed minimum
death benefits, resulting in a release in the benefit reserve and a
corresponding increase in deferred policy acquisition cost amortization for the
quarter. The effects of these adjustments resulted in an overall $1,649 thousand
pre-tax benefit to net income.





During 2006, we
benefited from an unlocking of assumptions primarily related to deferred policy
acquisition costs. The unlocking was driven by revised assumptions for expected
mortality, lapse experience, investment margins and expenses. The effects of the
unlocking resulted in an overall $6.7 million pre-tax charge to net income, as
well as increased unearned revenue liabilities by $1.3 million, increased
benefit reserves by $4.5 million, increased reinsurance liability by $1.2
million and decreased amortization by $0.4 million.








5.  Policy
liabilities and accruals





Policyholder
liabilities are primarily for universal life products and include deposits
received from customers and investment earnings on their fund balances which
range from 3.00% to 5.25% as of December 31, 2007, less administrative and
mortality charges.





Policyholder
deposit funds





Policyholder
deposit funds primarily consist of annuity deposits received from customers,
dividend accumulations and investment earnings on their fund balances, which
range from 2.9% to 14.0% as of December 31, 2007, less administrative
charges.








6.  Investing
Activities





Debt
and equity securities





Fair
      Value and Cost of Debt Securities:
            
            As of December 31,($
      in thousands)
            
            2007
            
            
            2006Fair Value
            
            
            Cost
            
            
            Fair Value
            
            
            CostU.S.
      government and agency
            
            $
            65,774
            
            
            $
            64,884
            
            
            $
            92,579
            
            
            $
            93,425State and
      political subdivision
            
            
            11,029
            
            
            
            11,134
            
            
            
            15,900
            
            
            
            16,281Foreign
      government
            
            
            30,423
            
            
            
            27,716
            
            
            
            49,884
            
            
            
            46,505Corporate
            
            
            975,058
            
            
            
            998,982
            
            
            
            1,157,781
            
            
            
            1,172,275Mortgage-backed
            
            
            358,479
            
            
            
            372,733
            
            
            
            452,641
            
            
            
            455,739Other
      asset-backed
            
            
            268,823
            
            
            
            288,927
            
            
            
            282,204
            
            
            
            280,086Available-for-sale
      debt securities
            
            $
            1,709,586
            
            
            $
            1,764,376
            
            
            $
            2,050,989
            
            
            $
            2,064,311





A-27
 Table of Contents





6.  Investing
Activities (continued)





Unrealized
      Gains (Losses) from
            
            As of December 31,Debt
      Securities:
            
            2007
            
            
            2006($
      in thousands)
            
            Gains
            
            
            Losses
            
            
            Gains
            
            
            LossesU.S.
      government and agency
            
            $
            1,193
            
            
            $
            (303
            )
            
            $
            295
            
            
            $
            (1,141
            )State and
      political subdivision
            
            
            11
            
            
            
            (116
            )
            
            
            17
            
            
            
            (398
            )Foreign
      government
            
            
            2,732
            
            
            
            (25
            )
            
            
            3,590
            
            
            
            (211
            )Corporate
            
            
            8,774
            
            
            
            (32,698
            )
            
            
            6,523
            
            
            
            (21,017
            )Mortgage-backed
            
            
            2,654
            
            
            
            (16,908
            )
            
            
            2,862
            
            
            
            (5,960
            )Other
      asset-backed
            
            
            875
            
            
            
            (20,979
            )
            
            
            3,857
            
            
            
            (1,739
            )Debt
      securities gains and losses
            
            $
            16,239
            
            
            $
            (71,029
            )
            
            $
            17,144
            
            
            $
            (30,466
            )Debt
      securities net losses
            
            
            
            
            
            $
            (54,790
            )
            
            
            
            
            
            $
            (13,322
            )








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 offsets for deferred policy acquisition cost
      adjustment 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, of which none
have been in a significant loss position 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.





A-28
 Table of Contents





6.  Investing
Activities (continued)





Aging
      of Temporarily Impaired
            
            As of December 31,
2006Debt
      and Equity 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
            
            $
            5,643
            
            
            $
            (19
            )
            
            $
            50,878
            
            
            $
            (1,122
            )
            
            $
            56,521
            
            
            $
            (1,141
            )State and
      political subdivision
            
            
            1,014
            
            
            
            (3
            )
            
            
            14,367
            
            
            
            (395
            )
            
            
            15,381
            
            
            
            (398
            )Foreign
      government
            
            
            4,024
            
            
            
            (10
            )
            
            
            9,323
            
            
            
            (201
            )
            
            
            13,347
            
            
            
            (211
            )Corporate
            
            
            152,344
            
            
            
            (1,595
            )
            
            
            689,660
            
            
            
            (19,422
            )
            
            
            842,004
            
            
            
            (21,017
            )Mortgage-backed
            
            
            78,465
            
            
            
            (693
            )
            
            
            257,905
            
            
            
            (5,267
            )
            
            
            336,370
            
            
            
            (5,960
            )Other
      asset-backed
            
            
            53,844
            
            
            
            (171
            )
            
            
            102,302
            
            
            
            (1,568
            )
            
            
            156,146
            
            
            
            (1,739
            )Total
      temporarily impaired securities
            
            $
            295,334
            
            
            $
            (2,491
            )
            
            $
            1,124,435
            
            
            $
            (27,975
            )
            
            $
            1,419,769
            
            
            $
            (30,466
            )Below
      investment grade
            
            $
            20,190
            
            
            $
            (377
            )
            
            $
            90,763
            
            
            $
            (3,859
            )
            
            $
            110,953
            
            
            $
            (4,236
            )Below
      investment grade after offsets for deferred policy acquisition cost
      adjustment and taxes
            
            
            
            
            
            $
            (45
            )
            
            
            
            
            
            $
            (550
            )
            
            
            
            
            
            $
            (595
            )Number
      of securities
            
            
            
            
            
            
            165
            
            
            
            
            
            
            
            565
            
            
            
            
            
            
            
            730





There were no
unrealized losses of below investment grade debt securities with a fair value
less than 80% of the securities amortized cost at December 31,
2006.





All of these
securities are considered to be temporarily impaired at December 31, 2006 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.





Statutory
deposits





Pursuant to certain
statutory requirements, as of December 31, 2007 and 2006, we had on deposit
securities with a fair value of $7,370 thousand and $8,216 thousand,
respectively, in insurance department special deposit accounts. We are not
permitted to remove the securities from these accounts without approval of the
regulatory authority.





Net
investment income





Sources
      of Net Investment Income:
            
            Year Ended
December 31,($
      in thousands)
            
            2007
            
            
            2006
            
            
            2005Debt
      securities
            
            $
            105,342
            
            
            $
            127,977
            
            
            $
            155,648Equity
      securities
            
            
            --
            
            
            
            --
            
            
            
            2Other
      investments
            
            
            162
            
            
            
            148
            
            
            
            183Other
      income
            
            
            421
            
            
            
            --
            
            
            
            --Policy
      loans
            
            
            1,472
            
            
            
            581
            
            
            
            479Cash and cash
      equivalents
            
            
            4,395
            
            
            
            3,089
            
            
            
            1,061Total
      investment income
            
            
            111,792
            
            
            
            131,795
            
            
            
            157,373Investment
      expenses
            
            
            (2,185
            )
            
            
            (2,470
            )
            
            
            (2,999
            )Net
      investment income
            
            $
            109,607
            
            
            $
            129,325
            
            
            $
            154,374





A-29
 Table of Contents





6.  Investing
Activities (continued)





Net
realized investment gains (losses)





Types
      of Realized Investment Gains (Losses):
            
            Year Ended
December 31,($
      in thousands)
            
            2007
            
            
            2006
            
            
            2005Debt
      security impairments
            
            $
            (3,287
            )
            
            $
            (411
            )
            
            $
            (2,651
            )Debt security
      transaction gains
            
            
            1,465
            
            
            
            2,955
            
            
            
            1,764Debt security
      transaction losses
            
            
            (2,827
            )
            
            
            (7,253
            )
            
            
            (9,254
            )Equity
      security transaction gains
            
            
            --
            
            
            
            --
            
            
            
            26Equity
      security transaction losses
            
            
            --
            
            
            
            --
            
            
            
            (13
            )Other
      investment transaction gains (losses)
            
            
            (2,394
            )
            
            
            2,249
            
            
            
            (441
            )Net
      transaction losses
            
            
            (3,756
            )
            
            
            (2,049
            )
            
            
            (7,918
            )Net
      realized investment losses
            
            $
            (7,043
            )
            
            $
            (2,460
            )
            
            $
            (10,569
            )





Unrealized
investment gains (losses)





Sources
      of Changes in Net Unrealized Investment Gains (Losses):
            
            Year Ended
December 31,($
      in thousands)
            
            2007
            
            
            2006
            
            
            2005Debt
      securities
            
            $
            (41,468
            )
            
            $
            2,956
            
            
            $
            (54,591
            )Equity
      securities
            
            
            --
            
            
            
            --
            
            
            
            5Other
      investments
            
            
            50
            
            
            
            10
            
            
            
            --Net
      unrealized investment gains (losses)
            
            $
            (41,418
            )
            
            $
            2,966
            
            
            $
            (54,586
            )Net
      unrealized investment gains (losses)
            
            $
            (41,418
            )
            
            $
            2,966
            
            
            $
            (54,586
            )Applicable
      deferred policy acquisition costs (Note 4)
            
            
            (27,426
            )
            
            
            4,930
            
            
            
            (39,223
            )Applicable
      deferred income tax benefit
            
            
            (4,897
            )
            
            
            (687
            )
            
            
            (5,377
            )Offsets to
      net unrealized investment losses
            
            
            (32,323
            )
            
            
            4,243
            
            
            
            (44,600
            )Net
      unrealized investment losses included in other comprehensive
      income
            
            $
            (9,095
            )
            
            $
            (1,277
            )
            
            $
            (9,986
            )





Investing
cash flows





Investment
      Purchases, Sales, Repayments and Maturities:
            
            Year Ended
December 31,($
      in thousands)
            
            2007
            
            
            2006
            
            
            2005Debt security
      purchases
            
            $
            (883,282
            )
            
            $
            (999,542
            )
            
            $
            (1,139,974
            )Equity
      security purchases
            
            
            --
            
            
            
            --
            
            
            
            --Other
      investment purchases
            
            
            (350
            )
            
            
            (1,060
            )
            
            
            (2,434
            )Policy loan
      advances, net
            
            
            (7,277
            )
            
            
            (7,371
            )
            
            
            (5,685
            )Investment
      purchases
            
            $
            (890,909
            )
            
            $
            (1,007,973
            )
            
            $
            (1,148,093
            )Debt
      securities sales
            
            $
            816,170
            
            
            $
            1,178,127
            
            
            $
            873,995Debt
      securities maturities and repayments
            
            
            390,297
            
            
            
            549,483
            
            
            
            477,568Equity
      security sales
            
            
            --
            
            
            
            --
            
            
            
            279Other
      investment sales
            
            
            1,521
            
            
            
            750
            
            
            
            5,845Investment
      sales, repayments and maturities
            
            $
            1,207,988
            
            
            $
            1,728,360
            
            
            $
            1,357,687





A-30
 Table of Contents





6.  Investing
Activities (continued)





The maturities of
debt securities, by contractual sinking fund payment and maturity are summarized
in the following table. Actual maturities may differ from contractual maturities
as certain borrowers have the right to call or prepay obligations with or
without call or prepayment penalties, and we may have the right to put or sell
the obligations back to the issuers.





Maturities
      of Debt Securities:
            
            As of December 31,
2007($
      in thousands)
            
            Cost
            
            
            Fair ValueDue in one
      year or less
            
            $
            139,910
            
            
            $
            139,540Due after one
      year through five years
            
            
            429,405
            
            
            
            424,704Due after
      five years through ten years
            
            
            455,099
            
            
            
            441,414Due after ten
      years
            
            
            739,962
            
            
            
            703,928Total
            
            $
            1,764,376
            
            
            $
            1,709,586








7.  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. In 2007 and 2006 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, or 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 for calculating the liabilities are generally consistent with those
      used for amortizing deferred policy acquisition
  costs.


·
            Liabilities
      associated with the guaranteed minimum income benefit, or 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.





Separate
      Account Investments of Account Balances of Contracts with
      Guarantees:
            
            As of December 31,($
      in thousands)
            
            2007
            
            
            2006Debt
      securities
            
            $
            494,660
            
            
            $
            456,148Equity
      funds
            
            
            2,213,164
            
            
            
            1,861,762Other
            
            
            80,657
            
            
            
            68,810Total
            
            $
            2,788,481
            
            
            $
            2,386,720





A-31
 Table of Contents





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





Changes
      in Guaranteed Liability Balances:
            Year
      Ended($
      in thousands)
            December 31, 2007Annuity
            
            
            AnnuityGMDB
            
            
            GMIBLiability
      balance as of January 1, 2007
            
            $
            26,979
            
            
            
            $
            3,568Incurred
            
            
            (21,813
            )
            
            
            
            2,137Paid
            
            
            (2,057
            )
            
            
            
            --Liability
      balance as of December 31, 2007
            
            $
            3,109
            
            
            
            $
            5,705








Changes
      in Guaranteed Liability Balances:
            Year
      Ended($
      in thousands)
            December 31, 2006Annuity
            
            
            AnnuityGMDB
            
            
            GMIBLiability
      balance as of January 1, 2006
            
            $
            27,749
            
            
            
            $
            2,474Incurred
            
            
            1,721
            
            
            
            
            1,094Paid
            
            
            (2,491
            )
            
            
            
            --Liability
      balance as of December 31, 2006
            
            $
            26,979
            
            
            
            $
            3,568





The reinsurance
recoverable asset related to the GMDB was $1,335 thousand and $17,139 thousand
as of December 31, 2007 and 2006, respectively.





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, or GMWB, a guaranteed minimum accumulation benefit, or GMAB, and a
guaranteed pay-out annuity floor, or GPAF.





The GMWB 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 have 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 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.





A-32
 Table of Contents





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





In
order to minimize the volatility associated with the GMWB and GMAB liabilities,
we have entered into a contract with Phoenix Life whereby we cede 100% of any
claims for these guarantees. Because this contract does not transfer sufficient
risk to be accounted for as reinsurance, we use deposit accounting for the
contract. As of December 31, 2007 and 2006, the embedded derivative for GMWB and
GMAB was immaterial. There were no benefit payments made for the GMWB or GMAB
during 2007 or 2006. See Note 10 to these financial statements for more
information.





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 policyholder 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:
            
            
            
            
            Net
      Amount
            
            
            Average($
      in thousands)
            
            Account
            
            
            At
      Risk After
            
            
            Attained
      AgeValue
            
            
            Reinsurance
            
            
            of AnnuitantGMDB return
      of premium
            
            $
            1,396,515
            
            
            $
            5,398
            
            
            59GMDB step
      up
            
            
            1,761,416
            
            
            
            33,481
            
            
            60GMDB earnings
      enhancement benefit (EEB)
            
            
            78,136
            
            
            
            --
            
            
            60GMDB greater
      of annual step up and roll up
            
            
            42,492
            
            
            
            3,582
            
            
            63Total
      GMDB at December 31, 2007
            
            $
            3,278,559
            
            
            $
            42,461GMIB
            
            $
            696,006
            
            
            
            
            
            
            59GMAB
            
            
            381,304
            
            
            
            
            
            
            55GMWB
            
            
            202,073
            
            
            
            
            
            
            61GPAF
            
            
            36,684
            
            
            
            
            
            
            74Total
      at December 31, 2007
            
            $
            1,316,067





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 of 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.





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 December 31, 2007 and 2006, we held
additional universal life benefit reserves of $25,930 thousand and $8,841
thousand, respectively.





A-33
 Table of Contents





8.  Fair
Value of Financial Instruments and Derivative Instruments





Fair
value of financial instruments





Carrying
      Amounts and Estimated Fair Values
            
            As of December 31,of
      Financial Instruments:
            
            2007
            
            
            2006($
      in thousands)
            
            Carrying
            
            
            Fair
            
            
            Carrying
            
            
            FairValue
            
            
            Value
            
            
            Value
            
            
            ValueCash and cash
      equivalents
            
            $
            108,200
            
            
            $
            108,200
            
            
            $
            47,127
            
            
            $
            47,127Debt
      securities
            
            
            1,709,586
            
            
            
            1,709,586
            
            
            
            2,050,989
            
            
            
            2,050,989Policy
      loans
            
            
            22,819
            
            
            
            22,819
            
            
            
            15,542
            
            
            
            15,542Financial
      assets
            
            $
            1,840,605
            
            
            $
            1,840,605
            
            
            $
            2,113,658
            
            
            $
            2,113,658Investment
      contracts
            
            $
            1,134,635
            
            
            $
            1,139,325
            
            
            $
            1,491,367
            
            
            $
            1,486,758Financial
      liabilities
            
            $
            1,134,635
            
            
            $
            1,139,325
            
            
            $
            1,491,367
            
            
            $
            1,486,758





Fair
value of investment contracts





We
determine the fair value of deferred annuities with an interest guarantee of one
year or less at the amount of the policy reserve. In determining the fair value
of deferred annuities with interest guarantees greater than one year, we use a
discount rate equal to the appropriate U.S. Treasury rate plus 100 basis points
to determine the present value of the projected account value of the policy at
the end of the current guarantee period.





Derivative
instruments





We
maintain an overall interest rate risk-management strategy that primarily
incorporates the use of interest rate swaps as hedges of our exposure to changes
in interest rates. Our exposure to changes in interest rates primarily results
from our commitments to fund interest-sensitive insurance liabilities, as well
as from our significant holdings of fixed rate financial
instruments.





We
recognized an after-tax gain of $0.0 million, $1.2 million and $0.3 million for
the years ended December 31, 2007, 2006 and 2005 (reported as other
comprehensive income in Statement of Income, Comprehensive Income and Changes in
Stockholder’s Equity), which represented the change in fair value of interest
rate forward swaps which had been designated as cash flow hedges of the
forecasted purchase of assets. For changes in the fair value of derivatives that
are designated as cash flow hedges of a forecasted transaction, we recognize the
change in fair value of the derivative in other comprehensive income. Amounts
related to cash flow hedges that are accumulated in other comprehensive income
are reclassified into earnings in the same period or periods during which the
hedged forecasted transaction (the acquired asset) affects earnings. For the
years 2007, 2006 and 2005, we reclassified after-tax gains of $0.0 million, $1.2
million and $0.3 million, respectively, into earnings related to these
derivatives.





We
held no derivative assets at December 31, 2007 and 2006. See Note 7 to these
financial statements for more information on our embedded derivatives related to
our variable annuity guarantees.








9.  Income
Taxes





Allocation
      of Income Taxes:
            
            Year Ended
December 31,($
      in thousands)
            
            2007
            
            
            2006
            
            
            2005Income tax
      expense (benefit) attributable to:Current
            
            $
            (44,715
            )
            
            $
            (21,403
            )
            
            $
            (18,313
            )Deferred
            
            
            45,837
            
            
            
            22,473
            
            
            
            15,512Income
      taxes applicable to net income (loss)
            
            
            1,122
            
            
            
            1,070
            
            
            
            (2,801
            )Other
      comprehensive loss
            
            
            (4,898
            )
            
            
            (1,121
            )
            
            
            (5,558
            )Income
      taxes applicable to comprehensive income (loss)
            
            $
            (3,776
            )
            
            $
            (51
            )
            
            $
            (8,359
            )Income
      taxes recovered
            
            $
            (30,557
            )
            
            $
            (24,094
            )
            
            $
            (14,288
            )





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 Table of Contents





9.  Income
Taxes (continued)





Effective
      Income Tax Rate:
            
            Year Ended
December 31,($
      in thousands)
            
            2007
            
            
            2006
            
            
            2005Income before
      income taxes
            
            $
            12,427
            
            
            $
            7,538
            
            
            $
            1,422Income taxes
      at statutory rate of 35.0%
            
            
            4,350
            
            
            
            2,638
            
            
            
            498Dividend
      received deduction
            
            
            (2,778
            )
            
            
            (1,572
            )
            
            
            (2,924
            )Tax
      interest
            
            
            1
            
            
            
            1
            
            
            
            (378
            )Other,
      net
            
            
            (451
            )
            
            
            3
            
            
            
            3Applicable
      income taxes (benefit)
            
            $
            1,122
            
            
            $
            1,070
            
            
            $
            (2,801
            )Effective
      income tax (benefit) rates
            
            
            9.0
            %
            
            
            14.2
            %
            
            
            (197.0
            )%








Deferred
      Income Tax Balances Attributable to Temporary Differences:
            
            As of December 31,($
      in thousands)
            
            2007
            
            
            2006Deferred
      income tax assets:Future
      policyholder benefits
            
            $
            145,582
            
            
            $
            103,886Unearned
      premiums / deferred revenues
            
            
            15,164
            
            
            
            10,719Investments
            
            
            5,948
            
            
            
            --Gross
      deferred income tax assets
            
            
            166,694
            
            
            
            114,605Deferred
      income tax liabilities:Deferred
      policy acquisition costs
            
            
            296,687
            
            
            
            206,752Investments
            
            
            --
            
            
            
            849Other
            
            
            5,655
            
            
            
            1,712Gross
      deferred income tax liabilities
            
            
            302,342
            
            
            
            209,313Deferred
      income tax liability
            
            $
            135,648
            
            
            $
            94,708





We
are included in the consolidated federal income tax return filed by PNX and are
party to a tax sharing agreement by and among PNX and its subsidiaries. In
accordance with this agreement, federal income taxes are allocated as if they
had been calculated on a separate company basis, except that benefits for any
net operating losses or other tax credits used to offset a tax liability of the
consolidated group will be provided to the extent such loss or credit is
utilized in the consolidated federal tax return.





We
are included in the consolidated federal income tax return filed by PNX. Within
the consolidated tax return, we are required by regulations of the Internal
Revenue Service, or IRS, to segregate the entities into two groups: life
insurance companies and non-life insurance companies. We are limited as to the
amount of any operating losses from the non-life group that can be offset
against taxable income of the life group. These limitations may affect the
amount of any operating loss carryovers that we have now or in the
future.





We
have determined, based on our earnings and projected future taxable income, that
it is more likely than not that deferred income tax assets at December 31, 2007
and 2006 will be realized.





As
of December 31, 2007, we had current taxes receivable of $10,184
thousand.





We
adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, or FIN 48, on January 1, 2007. As a result of the implementation
of FIN 48, we recognized a decrease 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 approximately
$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 rate upon recognition.





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 Table of Contents





9.  Income
Taxes (continued)





A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:





Reconciliation
      of the Beginning and Ending Amount of Unrecognized Tax
      Benefits:($
      in thousands)Balance at
      January 1, 2007
            
            $
            1,840Reductions
      for tax positions of prior years
            
            
            (975
            )Settlements
      with taxing authorities
            
            
            (340
            )Balance
      at December 31, 2007
            
            $
            525





Based upon the
timing and status of our current examinations by taxing authorities, we do not
believe that it is reasonably possible that any changes to the balance of
unrecognized tax benefits occurring in the next 12 months will result in a
significant change to the results of operations, financial condition or
liquidity. In addition, we do not anticipate that there will be additional
payments made or refunds received within the next 12 months with respect to the
years under audit. We do not anticipate any increases to the unrecognized tax
benefits that would have a significant impact on the financial position of the
company.





Our federal income
tax returns are routinely audited by the IRS. We are no longer subject to income
tax examinations by federal authorities for tax years prior to 2004. Our U.S.
federal income tax returns for 2004 and 2005 are currently being examined. We do
not believe that the examination will result in a material change in our
financial position. We are not currently under audit with any state taxing
authorities.





We
recognize interest and penalties related to amounts accrued on uncertain tax
positions and amounts paid or refunded from federal and state income tax
authorities in tax expense. The interest and penalties recorded during the
twelve month periods ending December 31, 2006 and 2007 were not material. We did
not have an accrual for the payment of interest and penalties as of December 31,
2007.








10.  Related
Party Transactions





Capital
Contributions





During the year
ended December 31, 2007, we received $49,984 thousand in capital contributions
from Phoenix Life, of which $25,000 thousand was in cash and $24,984 was in
securities.





Related
Party Transactions





The amounts
included in the following discussion are gross expenses, before deferrals for
policy acquisition costs.





Phoenix Life
provides services and facilities to us and is reimbursed through a cost
allocation process. The expenses allocated to us were $270,394 thousand,
$203,521 thousand and $108,701 thousand for the years ended December 31, 2007,
2006 and 2005, respectively. Amounts payable to Phoenix Life were $11,767
thousand and $18,650 thousand as of December 31, 2007 and 2006,
respectively.





During 2006, we
entered into a contract with Phoenix Life whereby we cede to Phoenix Life the
liabilities related to certain guarantees on our annuity products. Because this
contract does not transfer sufficient risk to qualify for reinsurance
accounting, we account for ceded liabilities as a deposit asset. The asset on
deposit with Phoenix Life was $3,051 thousand and $220 thousand at
December 31, 2007 and 2006, respectively. This amount is included in our
balance sheet in other general account assets. Amounts due to Phoenix Life under
this contract were $336 thousand and $215 thousand at December 31, 2007 and
2006, respectively.





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 Table of Contents





10.  Related
Party Transactions (continued)





Phoenix Investment
Partners Ltd., or PXP, an indirect wholly-owned subsidiary of PNX, through its
affiliated registered investment advisors, provides investment advisory services
to us for a fee. Investment advisory fees incurred by us for management of
general account assets under this arrangement were $2,172 thousand, $2,439
thousand and $2,993 thousand for the years ended December 31, 2007, 2006 and
2005, respectively. Amounts payable to the affiliated investment advisors were
$15 thousand and $106 thousand, as of December 31, 2007 and 2006, respectively.
Through July 2007 PXP provided investment advisory services to the variable
product separate accounts. They received variable product separate account fees
on our behalf, retained a portion of those fees, for services provided, and
forward the remainder to us. Amounts receivable from PXP for those fees were $0
thousand and $245 thousand as of December 31, 2007 and 2006, respectively. The
variable product separate account fees retained by PXP were $271 thousand, $684
thousand and $697 thousand for 2007, 2006 and 2005, respectively.





Effective August
2007, Phoenix Variable Advisors, Inc, or PVA, an indirect wholly-owned
subsidiary of Phoenix Life became the investment advisor for the variable
product separate accounts. They receive variable product separate account fees
on our behalf and forward them to us, net of sub-advisory fees they paid.
Amounts receivable from PVA for those fees were $276 thousand as of December 31,
2007.





Phoenix Equity
Planning Corporation, or PEPCO, a wholly-owned subsidiary of Phoenix Investment
Partners Ltd., is the principal underwriter of our annuity contracts. Until May
31, 2004, contracts could be purchased through registered representatives of our
former affiliate, W.S. Griffith Securities, Inc., or Griffith. Other outside
broker-dealers are licensed to sell our annuity contracts as well. We incurred
commissions for contracts underwritten by PEPCO of $48,331 thousand, $38,062
thousand and $35,422 thousand for the years ended December 31, 2007, 2006 and
2005, respectively. Amounts payable to PEPCO were $2,269 thousand and $278
thousand as of December 31, 2007 and 2006, respectively.





Phoenix Life pays
commissions to producers who sell our non-registered life and annuity products.
Commissions paid by Phoenix Life on our behalf were $159,847 thousand, $105,993
thousand and $54,927 thousand for the years ended December 31, 2007, 2006 and
2005, respectively. Amounts payable to Phoenix Life were $13,684 thousand and
$4,187 thousand as of December 31, 2007 and 2006, respectively.





Premium
processing services





We
provide payment processing services for Phoenix Life, wherein we receive
deposits on Phoenix Life annuity contracts, and forward those payments to
Phoenix Life. During 2006, we began including life insurance premiums in this
service. In connection with this service, at December 31, 2007 and 2006, we
had amounts due to Phoenix Life of $416 thousand and $1,914 thousand,
respectively. We do not charge any fees for this service.





We
also provide payment processing services for Phoenix Life and Annuity, a
wholly-owned indirect subsidiary of Phoenix Life, wherein we receive deposits on
certain Phoenix Life and Annuity annuity contracts, and forward those payments
to Phoenix Life and Annuity. During 2006, we began including life insurance
premiums in this service. In connection with this service, at December 31,
2007 and 2006, we had amounts due to Phoenix Life and Annuity of $482 thousand
and $16 thousand, respectively. We do not charge any fees for this
service.





In
certain instances Phoenix Life and Phoenix Life and Annuity may receive premiums
on behalf of PHLVIC. Amounts due from Phoenix Life were $237 thousand and $71
thousand as of December 31, 2007 and 2006, respectively. Amounts due from
Phoenix Life and Annuity were $15 thousand and $0 thousand as of
December 31, 2007 and 2006, respectively.





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 Table of Contents





11.  Employee
Benefit Plans and Employment Agreements





PNX has a
non-contributory, defined benefit pension plan covering substantially all of its
employees and those of its subsidiaries. Retirement benefits are a function of
both years of service and level of compensation. PNX also sponsors a
non-qualified supplemental defined benefit plan to provide benefits in excess of
amounts allowed pursuant to the Internal Revenue Code. PNX’s funding policy is
to contribute annually an amount equal to at least the minimum required
contribution in accordance with minimum funding standards established by the
Employee Retirement Income Security Act of 1974 (ERISA). Contributions are
intended to provide for benefits attributable not only to service to date, but
to service expected to be conferred in the future.





PNX sponsors
pension and savings plans for its employees, and employees and agents of its
subsidiaries. The qualified plans comply with requirements established by ERISA
and excess benefit plans provide for that portion of pension obligations, which
is in excess of amounts permitted by ERISA. PNX also provides certain health
care and life insurance benefits for active and retired employees. We incur
applicable employee benefit expenses through the process of cost allocation by
PNX.





In
addition to its pension plans, PNX currently provides certain health care and
life insurance benefits to retired employees, spouses and other eligible
dependents through various plans which it sponsors. A substantial portion of
PNX’s affiliate employees may become eligible for these benefits upon
retirement. The health care plans have varying co-payments and deductibles,
depending on the plan. These plans are unfunded.





Applicable
information regarding the actuarial present value of vested and non-vested
accumulated plan benefits, and the net assets of the plans available for
benefits is omitted, as the information is not separately calculated for our
participation in the plans. PNX, the plan sponsor, established an accrued
liability and amounts attributable to us have been allocated. The amount of such
allocated benefits is not significant to the financial statements.








12.  Other
Comprehensive Income





Sources
      of
            
            Year Ended
December 31,Other
      Comprehensive Income:
            
            2007
            
            
            2006
            
            
            2005($
      in thousands)
            
            Gross
            
            
            Net
            
            
            Gross
            
            
            Net
            
            
            Gross
            
            
            NetUnrealized
      gains (losses) on investments
            
            $
            (36,769
            )
            
            $
            (6,995
            )
            
            $
            7,264
            
            
            $
            1,516
            
            
            $
            (64,713
            )
            
            $
            (16,569
            )Net realized
      investment gains (losses) on available-for-sale securities included in net
      income
            
            
            (4,649
            )
            
            
            (2,100
            )
            
            
            (4,298
            )
            
            
            (2,793
            )
            
            
            10,127
            
            
            
            6,583Net
      unrealized investment gains (losses)
            
            
            (41,418
            )
            
            
            (9,095
            )
            
            
            2,966
            
            
            
            (1,277
            )
            
            
            (54,586
            )
            
            
            (9,986
            )Net
      unrealized losses on derivative instruments
            
            
            --
            
            
            
            --
            
            
            
            (1,241
            )
            
            
            (807
            )
            
            
            (516
            )
            
            
            (335
            )Other
      comprehensive income (loss)
            
            
            (41,418
            )
            
            $
            (9,095
            )
            
            
            1,725
            
            
            $
            (2,084
            )
            
            
            (55,102
            )
            
            $
            (10,321
            )Applicable
      deferred policy acquisition cost amortization
            
            
            (27,425
            )
            
            
            
            
            
            
            4,930
            
            
            
            
            
            
            
            (39,223
            )Applicable
      deferred income tax benefit
            
            
            (4,898
            )
            
            
            
            
            
            
            (1,121
            )
            
            
            
            
            
            
            (5,558
            )Offsets to
      other comprehensive income
            
            
            (32,323
            )
            
            
            
            
            
            
            3,809
            
            
            
            
            
            
            
            (44,781
            )Other
      comprehensive loss
            
            $
            (9,095
            )
            
            
            
            
            
            $
            (2,084
            )
            
            
            
            
            
            $
            (10,321
            )








Components
      of Accumulated
            
            As of December 31,Other
      Comprehensive Income:
            
            2007
            
            
            2006($
      in thousands)
            
            Gross
            
            
            Net
            
            
            Gross
            
            
            NetUnrealized
      losses on investments
            
            $
            (56,002
            )
            
            $
            (11,784
            )
            
            $
            (14,584
            )
            
            $
            (2,689
            )Unrealized
      gains on derivative instruments
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Accumulated
      other comprehensive loss
            
            
            (56,002
            )
            
            $
            (11,784
            )
            
            
            (14,584
            )
            
            $
            (2,689
            )Applicable
      deferred policy acquisition costs
            
            
            (37,873
            )
            
            
            
            
            
            
            (10,448
            )Applicable
      deferred income taxes
            
            
            (6,345
            )
            
            
            
            
            
            
            (1,447
            )Offsets to
      other comprehensive income
            
            
            (44,218
            )
            
            
            
            
            
            
            (11,895
            )Accumulated
      other comprehensive loss
            
            $
            (11,784
            )
            
            
            
            
            
            $
            (2,689
            )





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 Table of Contents





13.  Statutory
Financial Information and Regulatory Matters





We
are required to file annual statements with state regulatory authorities
prepared on an accounting basis prescribed or permitted by such authorities. The
State of Connecticut Insurance Department, or the Department, has adopted the
National Association of Insurance Commissioners’, or the NAIC’s, Accounting
Practices and Procedures manual effective January 1, 2001, or NAIC SAP, as a
component of its prescribed or permitted statutory accounting practices. As of
December 31, 2007, 2006 and 2005, the Department has not prescribed or permitted
us to use any accounting practices that would materially deviate from NAIC SAP.
Statutory surplus differs from equity reported in accordance with GAAP primarily
because policy acquisition costs are expensed when incurred, investment reserves
are based on different assumptions, life insurance reserves are based on
different assumptions and income taxes are recorded in accordance with the
Statement of Statutory Accounting Principles No. 10, Income Taxes, which limits
deferred income tax assets based on admissibility tests.





Connecticut
Insurance Law requires that Connecticut life insurers report their risk-based
capital. Risk-based capital is based on a formula calculated by applying factors
to various assets, premium and statutory reserve items. The formula takes into
account the risk characteristics of the insurer, including asset risk, insurance
risk, interest rate risk and business risk. Connecticut Insurance Law gives the
Connecticut Commissioner of Insurance explicit regulatory authority to require
various actions by, or take various actions against, insurers whose total
adjusted capital does not exceed certain risk-based capital levels. Our
risk-based capital was in excess of 350% of Company Action Level (the level
where a life insurance enterprise must submit a comprehensive plan to state
insurance regulators) as of December 31, 2007 and 2006.





Statutory
      Financial Data:
            
            As of or For the Year Ended
      December 31,($
      in thousands)
            
            2007
            
            
            2006
            
            
            2005Statutory
      capital and surplus
            
            $
            167,436
            
            
            $
            220,342
            
            
            $
            264,825Asset
      valuation reserve
            
            
            14,774
            
            
            
            14,320
            
            
            
            5,575Statutory
      capital, surplus and asset valuation reserve
            
            $
            182,210
            
            
            $
            234,662
            
            
            $
            270,400Statutory
      gain (loss) from operations
            
            $
            (98,589
            )
            
            $
            (33,094
            )
            
            $
            12,251Statutory
      net income (loss)
            
            $
            (102,297
            )
            
            $
            (33,994
            )
            
            $
            12,749





The Connecticut
Insurance Holding Company Act limits the maximum amount of annual dividends and
other distributions in any 12-month period to stockholders of Connecticut
domiciled insurance companies without prior approval of the Insurance
Commissioner. Under current law, we cannot make any dividend distribution during
2008 without prior approval.








14.  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.





A-39
 Table of Contents





14.  Contingent
Liabilities (continued)





Regulatory
Matters





State regulatory
bodies, the Securities and Exchange Commission, or SEC, the National Association
of Securities Dealers, Inc., or NASD, and other regulatory bodies regularly make
inquiries of us and, from time to time, conduct examinations or investigations
concerning our compliance with, among other things, insurance laws 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.






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