UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K/A

Amendment No. 1

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|           |                                                                                      
|---------- | -------------------------------------------------------------------------------------
|(Mark one)
|           |                                                                                      
|þ          | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the fiscal year ended December 31, 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 | (I.R.S. Employer Identification No.)
|incorporation or organization)  |                                     



|                                                     |           
|---------------------------------------------------- | ----------
|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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

| |     |   |  |    |   | 
| | --- | - |  | -- | - | 
| | YES |  ̈ |  | NO | þ | 



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

| |     |   |  |    |   | 
| | --- | - |  | -- | - | 
| | YES |  ̈ |  | NO | þ | 



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

| |     |   |  |    |   | 
| | --- | - |  | -- | - | 
| | YES | þ |  | NO |  ̈ | 



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ



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 definition of accelerated filer, large accelerated filer and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

|                          |                     |                                             |                            
|------------------------- | ------------------- | ------------------------------------------- | ---------------------------
|Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ                     | Smaller reporting company o
|                          |                     | (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 Act).

| |     |   |  |    |   | 
| | --- | - |  | -- | - | 
| | YES |  ̈ |  | NO | þ | 



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 March 15, 2009, there were 500 shares of the registrants common stock outstanding.



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







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Explanatory Note



This Amendment No. 1 on Form 10-K/A amends the Annual Report on Form 10-K of PHL Variable Insurance Company (the Company) for the year ended December 31, 2008, filed with the Securities and Exchange Commission on March 30, 2009 (the Original Form 10-K). In Part II, Item 8 our auditors have amended the Report of Independent Registered Public Accounting Firm (the Report) to refer to the financial position of the Company at December 31, 2007, which was inadvertently omitted from the Report in the Original Form 10-K. For purposes of this Form 10-K/A, and in accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended (Rule 12b-15), Part II, Item 8 has been amended and restated in its entirety. Other than the revisions to Part II, Item 8 described above, there are no other changes to the Original Form 10-K. No amendments have been made to this Form 10-K/A to reflect events occurring after the filing of the Original Form 10-K or to modify or update those disclosures affected by subsequent events. In addition, as required by Rule 12b-15, new certifications by our principal executive officer and principal financial officer are included herein as exhibits.















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TABLE OF CONTENTS



|              |                                                                               |   
|------------- | ----------------------------------------------------------------------------- | --
|Part II       |                                                                               |   
|              |                                                                               |   
|Item 8.       | Financial Statements and Supplementary Data                                   | 1 
|              | Balance Sheet                                                                 | 2 
|              | Statement of Income, Comprehensive Income and Changes in Stockholders Equity | 3 
|              | Statement of Cash Flows                                                       | 4 
|              | Notes to Financial Statements                                                 | 5 
|              |                                                                               |   
|              |                                                                               |   
|Part IV       |                                                                               |   
|              |                                                                               |   
|Item 15.      | Exhibits, Financial Statement Schedules                                       | 32
|              |                                                                              
|Signatures    | 33                                                                           
|Exhibit Index | 34                                                                           











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PART II





Item 8.

Financial Statements and Supplementary Data





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 present fairly, in all material respects, the financial position of PHL Variable Insurance Company at December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008 in 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.



As discussed in Note 16 to the financial statements, two significant distributors suspended sales of the Company's products and the Company had downgrades from four rating agencies.



As discussed in Note 2 to the financial statements, the Company changed the manner in which it accounts for reinsurance of long duration insurance contracts effective April 1, 2008.









/s/ PricewaterhouseCoopers LLP

Hartford, Connecticut

March 30, 2009







1





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PHL VARIABLE INSURANCE COMPANY

Balance Sheet

($ in thousands, except share data)

December 31, 2008 and 2007





|                                                                           |      |           |      |   |          
|-------------------------------------------------------------------------- | ---- | --------- | ---- | - | ---------
|                                                                           | 2008 |           | 2007
|                                                                           |      |           |      |   |          
|ASSETS:                                                                    |      |           |      |   |          
|Available-for-sale debt securities, at fair value                          | $    | 1,287,409 |      | $ | 1,709,586
|Policy loans, at unpaid principal balances                                 |      | 34,917    |      |   | 22,819   
|Other investments                                                          |      | 102,681   |      |   | 1,251    
|Fair value option investments                                              |      | 4,091     |      |   | --       
|Total investments                                                          |      | 1,429,098 |      |   | 1,733,656
|Cash and cash equivalents                                                  |      | 152,185   |      |   | 108,200  
|Accrued investment income                                                  |      | 14,804    |      |   | 17,518   
|Receivables                                                                |      | 325,996   |      |   | 158,808  
|Deferred policy acquisition costs                                          |      | 1,065,128 |      |   | 1,009,612
|Receivable from related parties                                            |      | 20,513    |      |   | 527      
|Other assets                                                               |      | 37,089    |      |   | 20,214   
|Separate account assets                                                    |      | 2,449,141 |      |   | 3,389,356
|Total assets                                                               | $    | 5,493,954 |      | $ | 6,437,891
|                                                                           |      |           |      |   |          
|LIABILITIES:                                                               |      |           |      |   |          
|Policyholder deposit funds                                                 | $    | 969,270   |      | $ | 1,134,635
|Policy liabilities and accruals                                            |      | 1,386,611 |      |   | 1,103,139
|Deferred income taxes                                                      |      | 33,291    |      |   | 135,648  
|Payable to related parties                                                 |      | 6,271     |      |   | 28,969   
|Other liabilities                                                          |      | 116,929   |      |   | 48,304   
|Separate account liabilities                                               |      | 2,449,141 |      |   | 3,389,356
|Total liabilities                                                          |      | 4,961,513 |      |   | 5,840,051
|                                                                           |      |           |      |   |          
|CONTINGENT LIABILITIES (Note 14)                                           |      |           |      |   |          
|                                                                           |      |           |      |   |          
|STOCKHOLDERS EQUITY:                                                      |      |           |      |   |          
|Common stock, $5,000 par value: 1,000 shares authorized; 500 shares issued |      | 2,500     |      |   | 2,500    
|Additional paid-in capital                                                 |      | 723,152   |      |   | 553,218  
|Retained earnings (accumulated deficit)                                    |      | (141,288) |      |   | 53,906   
|Accumulated other comprehensive loss                                       |      | (51,923)  |      |   | (11,784) 
|Total stockholders equity                                                 |      | 532,441   |      |   | 597,840  
|Total liabilities and stockholders equity                                 | $    | 5,493,954 |      | $ | 6,437,891



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





2





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PHL VARIABLE INSURANCE COMPANY

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

($ in thousands)

Years Ended December 31, 2008, 2007 and 2006





|                                                      |      |           |      |   |         |  |   |        
|----------------------------------------------------- | ---- | --------- | ---- | - | ------- |  | - | -------
|                                                      | 2008 |           | 2007 |   | 2006   
|                                                      |      |           |      |   |         |  |   |        
|REVENUES:                                             |      |           |      |   |         |  |   |        
|Premiums                                              | $    | 15,098    |      | $ | 18,602  |  | $ | 13,575 
|Insurance and investment product fees                 |      | 361,354   |      |   | 263,298 |  |   | 180,779
|Investment income, net of expenses                    |      | 90,963    |      |   | 109,607 |  |   | 129,325
|Net realized investment losses                        |      | (172,055) |      |   | (7,043) |  |   | (2,460)
|Total revenues                                        |      | 295,360   |      |   | 384,464 |  |   | 321,219
|                                                      |      |           |      |   |         |  |   |        
|BENEFITS AND EXPENSES:                                |      |           |      |   |         |  |   |        
|Policy benefits                                       |      | 218,415   |      |   | 168,395 |  |   | 154,951
|Policy acquisition cost amortization                  |      | 262,132   |      |   | 120,041 |  |   | 93,342 
|Other operating expenses                              |      | 97,504    |      |   | 83,601  |  |   | 65,388 
|Total benefits and expenses                           |      | 578,051   |      |   | 372,037 |  |   | 313,681
|Income (loss) before income taxes                     |      | (282,691) |      |   | 12,427  |  |   | 7,538  
|Income tax (expense) benefit                          |      | 87,497    |      |   | (1,122) |  |   | (1,070)
|Net income (loss)                                     | $    | (195,194) |      | $ | 11,305  |  | $ | 6,468  
|                                                      |      |           |      |   |         |  |   |        
|FEES PAID TO RELATED PARTIES (NOTE 11)                |      |           |      |   |         |  |   |        
|                                                      |      |           |      |   |         |  |   |        
|COMPREHENSIVE INCOME (LOSS):                          |      |           |      |   |         |  |   |        
|Net income (loss)                                     | $    | (195,194) |      | $ | 11,305  |  | $ | 6,468  
|Net unrealized investment losses                      |      | (40,139)  |      |   | (9,095) |  |   | (1,277)
|Net unrealized derivative instruments losses          |      | --        |      |   | --      |  |   | (807)  
|Other comprehensive loss                              |      | (40,139)  |      |   | (9,095) |  |   | (2,084)
|Comprehensive income (loss)                           | $    | (235,333) |      | $ | 2,210   |  | $ | 4,384  
|                                                      |      |           |      |   |         |  |   |        
|ADDITIONAL PAID-IN  CAPITAL:                          |      |           |      |   |         |  |   |        
|Capital contributions from parent                     | $    | 169,934   |      | $ | 49,984  |  | $ | --     
|                                                      |      |           |      |   |         |  |   |        
|RETAINED EARNINGS (ACCUMULATED DEFICIT):              |      |           |      |   |         |  |   |        
|Net income (loss)                                     |      | (195,194) |      |   | 11,305  |  |   | 6,468  
|Adjustment for initial application of FIN 48 (Note 2) |      | --        |      |   | (1,000) |  |   | --     
|                                                      |      |           |      |   |         |  |   |        
|ACCUMULATED OTHER COMPREHENSIVE INCOME:               |      |           |      |   |         |  |   |        
|Other comprehensive loss                              |      | (40,139)  |      |   | (9,095) |  |   | (2,084)
|Change in stockholders equity                        |      | (65,399)  |      |   | 51,194  |  |   | 4,384  
|Stockholders equity, beginning of year               |      | 597,840   |      |   | 546,646 |  |   | 542,262
|Stockholders equity, end of year                     | $    | 532,441   |      | $ | 597,840 |  | $ | 546,646



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



3





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PHL VARIABLE INSURANCE COMPANY

Statement of Cash Flows

($ in thousands)

Years Ended December 31, 2008, 2007 and 2006





|                                              |      |             |      |   |           |  |   |            
|--------------------------------------------- | ---- | ----------- | ---- | - | --------- |  | - | -----------
|                                              | 2008 |             | 2007 |   | 2006     
|                                              |      |             |      |   |           |  |   |            
|OPERATING ACTIVITIES:                         |      |             |      |   |           |  |   |            
|Net income (loss)                             | $    | (195,194)   |      | $ | 11,305    |  | $ | 6,468      
|Net realized investment losses                |      | 172,055     |      |   | 7,043     |  |   | 2,460      
|Investment (gains) losses                     |      | 1,931       |      |   | 1,473     |  |   | 4,206      
|Deferred income taxes (benefit)               |      | (85,666)    |      |   | 45,837    |  |   | 22,473     
|Increase in receivables                       |      | (281,490)   |      |   | (126,150) |  |   | (6,939)    
|Increase in deferred policy acquisition costs |      | 138,030     |      |   | (280,566) |  |   | (177,237)  
|Increase in policy liabilities and accruals   |      | 401,684     |      |   | 410,942   |  |   | 213,754    
|Other assets and other liabilities change     |      | (32,703)    |      |   | 7,867     |  |   | (1,224)    
|Cash from operating activities                |      | 118,647     |      |   | 77,751    |  |   | 63,961     
|                                              |      |             |      |   |           |  |   |            
|INVESTING ACTIVITIES:                         |      |             |      |   |           |  |   |            
|Investment purchases                          |      | (1,455,006) |      |   | (890,909) |  |   | (1,007,973)
|Investment sales, repayments and maturities   |      | 1,501,339   |      |   | 1,207,988 |  |   | 1,728,360  
|Cash from investing activities                |      | 46,333      |      |   | 317,079   |  |   | 720,387    
|                                              |      |             |      |   |           |  |   |            
|FINANCING ACTIVITIES:                         |      |             |      |   |           |  |   |            
|Policyholder deposit fund deposits            |      | 172,657     |      |   | 266,750   |  |   | 223,309    
|Policyholder deposit fund withdrawals         |      | (454,371)   |      |   | (625,507) |  |   | (986,348)  
|Capital contributions from parent             |      | 160,719     |      |   | 25,000    |  |   | --         
|Cash for financing activities                 |      | (120,995)   |      |   | (333,757) |  |   | (763,039)  
|Change in cash and cash equivalents           |      | 43,985      |      |   | 61,073    |  |   | 21,309     
|Cash and cash equivalents, beginning of year  |      | 108,200     |      |   | 47,127    |  |   | 25,818     
|Cash and cash equivalents, end of year        | $    | 152,185     |      | $ | 108,200   |  | $ | 47,127     



During the year ended December 31, 2008, we received $169,934 thousand in capital contributions, of which $83,785 thousand was in cash and $86,149 was in securities.



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



4





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PHL VARIABLE INSURANCE COMPANY

Notes to Financial Statements

Years Ended December 31, 2008, 2007 and 2006







1.

Organization and Operations



PHL Variable Insurance Company (PHL Variable or the 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 (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.



Risks Associated with Current Economic Environment



Over the past year, the U.S. economy has experienced unprecedented credit and liquidity issues and entered into recession. Following several years of rapid credit expansion, a sharp contraction in mortgage lending coupled with dramatic declines in home prices, rising mortgage defaults and increasing home foreclosures, resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to most sectors of the credit markets, and to credit default swaps and other derivative securities, have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions, to be subsidized by the U.S. government and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties many lenders and institutional investors have reduced and, in some cases, ceased to provide funding to borrowers, including other financial institutions. These factors, combined with declining business and consumer confidence and increased unemployment, have precipitated an economic slowdown and fears of a prolonged recession.



Even under more favorable market conditions, general factors such as the availability of credit, consumer spending, business investment, capital market conditions and inflation affect our business. For example, in an economic downturn, higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending may depress the demand for life insurance, annuities and investment products. In addition, this type of economic environment may result in higher lapses or surrenders of policies. Accordingly, the risks we face related to general economic and business conditions are more pronounced given the severity and magnitude of recent adverse economic and market conditions experienced.





5





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2.

Basis of Presentation and Significant Accounting Policies (continued)



More specifically, our business is exposed to the performance of the debt and equity markets, which have been materially and adversely affected by recent economic developments. Adverse conditions, including but not limited to, a lack of buyers in the marketplace, volatility, credit spread changes, and benchmark interest rate changes, have affected and will continue to impact the liquidity and value of our investments. In addition to other ways set forth in additional risk factors below, the ways that poor debt and equity market performance and changes in interest rates have adversely affected, and will continue to adversely affect, our business, financial condition, growth and profitability include, but are not limited to, the following:



·

The value of our investment portfolio has declined which has resulted in, and may continue to result in, higher realized and/or unrealized losses. For example, in 2008 the value of our general account investments decreased by $250,374 thousand, before offsets, due to net unrealized losses on investments. A widening of credit spreads, such as the market has experienced recently, increases the net unrealized loss position of our investment portfolio and may ultimately result in increased realized losses. The value of our investment portfolio can also be affected by illiquidity and by changes in assumptions or inputs we use in estimating fair value. Further, certain types of securities in our investment portfolio, such as asset-backed securities supported by residential and commercial mortgages, have been disproportionately affected. Continued adverse capital market conditions could result in further realized and/or unrealized losses.

·

Changes in interest rates also have other effects related to our investment portfolio. In periods of increasing interest rates, life insurance policy loans, surrenders and withdrawals could increase as policyholders seek investments with higher returns. This could require us to sell invested assets at a time when their prices are depressed by the increase in interest rates, which could cause us to realize investment losses. Conversely, during periods of declining interest rates, we could experience increased premium payments on products with flexible premium features, repayment of policy loans and increased percentages of policies remaining in force. We would obtain lower returns on investments made with these cash flows. In addition, borrowers may prepay or redeem bonds in our investment portfolio so that we might have to reinvest those proceeds in lower yielding investments. As a consequence of these factors, we could experience a decrease in the spread between the returns on our investment portfolio and amounts credited to policyholders and contract owners, which could adversely affect our profitability.

·

Asset-based fee revenues related to our variable life and annuity products have declined and may continue to decline.

·

The attractiveness of certain of our products may decrease because they are linked to the equity markets and assessments of our financial strength, resulting in lower profits. Increasing consumer concerns about the returns and features of our products or our financial strength may cause existing clients to surrender policies or withdraw assets, and diminish our ability to sell policies and attract assets from new and existing clients, which would result in lower sales and fee revenues.



These extraordinary economic and market conditions have materially and adversely affected us. In 2008 we had a net loss of $195,194 thousand. It is difficult to predict how long the current economic and market conditions will continue, whether the financial markets will continue to deteriorate and which aspects of our products and/or business will be adversely affected. However, the lack of credit, lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity are likely to continue to materially and adversely affect our business, financial condition and results of operations.





6





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2.

Basis of Presentation and Significant Accounting Policies (continued)



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.



Adoption of new accounting standards



In January 2009, the Financial Accounting Standards Board (FASB) issued FSP No. EITF 99-20-1, which amends the impairment guidance in EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets (EITF 99-20-1). The FSP revises EITF 99-20s impairment guidance to make it consistent with the requirements of SFAS No. 115 for determining whether an other-than-temporary impairment has occurred. The FSP is effective for these financial statements. Our adoption of the FSP had no material effect on our financial statements.



In December 2008, the FASB issued FASB Staff Position No. FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities, which requires public entities to provide additional disclosures about transfers of financial assets. It also requires sponsors that have a variable interest in a variable interest entity to provide additional disclosures about their involvement with variable interest entities. The FSP is effective for these financial statements. Our adoption of the FSP had no material effect on our financial statements.



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



In September 2008, the FASB issued FSP No. FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161. The FSP introduces new disclosure requirements for credit derivatives and certain guarantees. The FSP is effective for these financial statements. Our adoption of the FSP had no material effect on our financial statements.



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





7





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2.

Basis of Presentation and Significant Accounting Policies (continued)



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.



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. See Note 10 to these financial statements for more information.



In September 2006, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (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 Statement of Financial Accounting Standards 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.



Accounting standards not yet adopted



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 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.





8





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2.

Basis of Presentation and Significant Accounting Policies (continued)



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



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.



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 derivative instruments. We use derivative instruments to economically hedge our exposure on living benefits offered on certain of our variable products. We recognize derivative instruments on the balance sheet at fair value. The derivative contracts are reported as assets or liabilities in other investments and other liabilities, respectively, on the balance sheet, excluding embedded derivatives. Embedded derivatives are recorded on the balance sheet with the associated host contract.



We do not designate the purchased derivatives related to living benefits as hedges for accounting purposes. Changes in the fair value of derivative instruments are recognized in net realized investment gains (losses) in the period incurred.



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.





9





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2.

Basis of Presentation and Significant Accounting Policies (continued)



Deferred policy acquisition costs



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



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



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



In addition to our quarterly reviews, we complete a comprehensive assumption study during the fourth quarter of each year. Upon completion of an assumption study, we revise our assumptions to reflect our current best estimate, thereby changing our estimate of projected account values and the related EGPs in the deferred policy acquisition cost and unearned revenue amortization models as well as AICPA Statement of Position No. 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts for Separate Accounts (SOP 03-1), reserving models. The deferred policy acquisition cost asset, as well as the unearned revenue reserves and SOP 03-1 reserves are then adjusted with an offsetting benefit or charge to income to reflect such changes in the period of the revision, a process known as unlocking.



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





10





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2.

Basis of Presentation and Significant Accounting Policies (continued)



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 contract owners 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.



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.



11





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2.

Basis of Presentation and Significant Accounting Policies (continued)



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. For fixed maturities, we accrue the new cost basis to par or the estimated future cash flows over the expected remaining life of the security. 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.



A debt security impairment is deemed other-than-temporary if:



·

we do not have the ability and intent to hold an investment until a forecasted recovery of fair value up to (or beyond) the cost of the investment which, in certain cases, may mean until maturity; or

·

it is probable that we will be unable to collect all amounts due according to the contractual terms of the debt security.



Impairments due to deterioration in credit that result in a conclusion that non-collection is probable are considered other-than-temporary. Other declines in fair value (for example, due to interest rate changes, sector credit rating changes or company-specific rating changes that do not result in a conclusion that non-collection of contractual principal and interest is probable) may also result in a conclusion that an other-than-temporary impairment has occurred.



Further, in situations where we have asserted our ability and intent to hold a security to a forecasted recovery, but now no longer have the ability and intent to hold until recovery, an impairment should be considered other-than-temporary, even if collection of cash flows is probable. The determination of the impairment is made when the assertion to hold to recovery changes, not when the decision to sell is made.



Income taxes



We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes (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.



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.



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2.

Basis of Presentation and Significant Accounting Policies (continued)



Within the consolidated tax return, we are required by regulations of the Internal Revenue Service (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.





3.

Reinsurance



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



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. Due to the recent downgrade of Scottish Re, we will continue to closely monitor the situation and will reassess the recoverability of the reinsurance recoverable during the interim reporting periods of 2009.



Our reinsurance program varies based on the type of risk. Listed below are some examples and our most significant recent reinsurance agreements:



·

On all direct life insurance 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 70% to 90% of the mortality risk on most new issues of term insurance.

·

Effective January 1, 2008, we entered into an agreement to cede 50% to 75% of the risk in between $6.0 million to $10.0 million on universal life and variable universal life policies issued from January 1, 2006 through December 31, 2007, inclusive.

·

Effective September 30, 2008, we entered into an agreement to cede 90% of all the benefit risks on Phoenix Accumulator Universal Life III and IV policies issued on January 1, 2008 or later.

·

Effective November 30, 2008, we ceded all the benefit risks, net of existing reinsurance, on all the term life business inforce as of December 31, 2008, excluding the term plans introduced in 2008.



|                                                       |                         |              |      |   |              |  |   |             
|------------------------------------------------------ | ----------------------- | ------------ | ---- | - | ------------ |  | - | ------------
|Direct Business and Reinsurance:                       | Year Ended December 31,
|($ in thousands)                                       | 2008                    |              | 2007 |   | 2006        
|                                                       |                         |              |      |   |              |  |   |             
|Direct premiums                                        | $                       | 91,872       |      | $ | 87,132       |  | $ | 71,350      
|Premiums ceded to reinsurers                           |                         | (76,774)     |      |   | (68,530)     |  |   | (57,775)    
|Premiums                                               | $                       | 15,098       |      | $ | 18,602       |  | $ | 13,575      
|                                                       |                         |              |      |   |              |  |   |             
|Direct policy benefits incurred                        | $                       | 151,636      |      | $ | 85,898       |  | $ | 54,055      
|Policy benefits assumed from reinsureds                |                         | 140          |      |   | 505          |  |   | 965         
|Policy benefits ceded to reinsurers                    |                         | (113,207)    |      |   | (44,707)     |  |   | (26,398)    
|Policy benefits                                        | $                       | 38,569       |      | $ | 41,696       |  | $ | 28,622      
|                                                       |                         |              |      |   |              |  |   |             
|Direct life insurance in-force                         | $                       | 84,226,234   |      | $ | 70,502,325   |  | $ | 55,175,351  
|Life insurance in-force assumed from reinsureds        |                         | 94,595       |      |   | 121,673      |  |   | 104,826     
|Life insurance in-force ceded to reinsurers            |                         | (64,400,218) |      |   | (48,687,754) |  |   | (40,820,818)
|Life insurance in-force                                | $                       | 19,920,611   |      | $ | 21,936,244   |  | $ | 14,459,359  
|Percentage of amount assumed to net insurance in-force |                         | 0.47%        |      |   | 0.55%        |  |   | 0.72%       





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3.

Reinsurance (continued)



The policy benefit amounts above exclude changes in reserves, interest credited to policyholders and withdrawals, which total $179,846 thousand, $126,699 thousand and $126,329 thousand, net of reinsurance, for the years ended December 31, 2008, 2007 and 2006, respectively.



Irrevocable letters of credit aggregating $27,712 thousand at December 31, 2008 have been arranged with commercial banks in our favor to collateralize the ceded reserves.





4.

Deferred policy acquisition costs



|                                                                                                               |                         |           |      |   |           |  |   |         
|-------------------------------------------------------------------------------------------------------------- | ----------------------- | --------- | ---- | - | --------- |  | - | --------
|Activity in Deferred Policy Acquisition Costs:                                                                 | Year Ended December 31,
|($ in thousands)                                                                                               | 2008                    |           | 2007 |   | 2006     
|                                                                                                               |                         |           |      |   |           |  |   |         
|Policy acquisition costs deferred                                                                              | $                       | 284,659   |      | $ | 400,607   |  | $ | 270,577 
|Costs amortized to expenses:                                                                                   |                         |           |      |   |           |  |   |         
|Recurring costs                                                                                                |                         | (281,333) |      |   | (122,189) |  |   | (94,429)
|Realized investment gains (losses)                                                                             |                         | 19,201    |      |   | 2,148     |  |   | 1,087   
|Deferred policy acquisition cost offset  ceded reserve
  and expense allowance                                |                         | (160,556) |      |   | --        |  |   | --      
|Offsets to net unrealized investment gains or losses
  included in other comprehensive income (loss) (Note 12) |                         | 193,545   |      |   | 27,426    |  |   | (4,930) 
|Change in deferred policy acquisition costs                                                                    |                         | 55,516    |      |   | 307,992   |  |   | 172,305 
|Deferred policy acquisition costs, beginning of year                                                           |                         | 1,009,612 |      |   | 701,620   |  |   | 529,315 
|Deferred policy acquisition costs, end of year                                                                 | $                       | 1,065,128 |      | $ | 1,009,612 |  | $ | 701,620 



Upon completion of a study during the fourth quarter of 2008, we updated our best estimate assumptions used to project expected gross profits and margins in the deferred policy acquisition cost amortization schedules. Major projection assumptions updated include mortality, lapse experience, expense, net investment income, and separate account investment return. In our review to develop the best estimate for these assumptions, we examined our own experience and market conditions. We updated our maintenance expenses and reallocated them among various lines of business. We also updated our projected separate account investment return assumption to the long term investment return as of January 1, 2009. The impact was to fully absorb the actual investment performance through December 31, 2008 into the amortization of deferred policy acquisition cost amortization and the projection of benefits under SOP 03-1 for the guaranteed minimum death benefit (GMDB) and guaranteed minimum income benefit (GMIB) riders. The greatest impact of the unlocking was on the annuity block, where the effects of these adjustments resulted in an overall increase in deferred policy acquisition cost amortization for the annuity block of $100,318 thousand and an increase in the GMIB and GMDB reserves of $10,899 thousand and $3,760 thousand, respectively. The UL/VUL lines had an increase of $924 thousand to pre-tax net income due to unlocking.



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 year. 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, 2008, less administrative and mortality charges.



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6.

Investing Activities



Debt and equity securities



|                                        |                    |           |      |   |            |  |      |           |  |   |          
|--------------------------------------- | ------------------ | --------- | ---- | - | ---------- |  | ---- | --------- |  | - | ---------
|Fair Value and Cost of Debt Securities: | As of December 31,
|($ in thousands)                        | 2008               |           | 2007
|                                        | Fair Value         |           | Cost |   | Fair Value |  | Cost
|                                        |                    |           |      |   |            |  |      |           |  |   |          
|U.S. government and agency              | $                  | 42,708    |      | $ | 43,689     |  | $    | 65,774    |  | $ | 64,884   
|State and political subdivision         |                    | 5,715     |      |   | 6,536      |  |      | 11,029    |  |   | 11,134   
|Foreign government                      |                    | 31,087    |      |   | 30,130     |  |      | 30,423    |  |   | 27,716   
|Corporate                               |                    | 775,982   |      |   | 923,313    |  |      | 975,058   |  |   | 998,982  
|Mortgage-backed                         |                    | 286,837   |      |   | 354,953    |  |      | 358,479   |  |   | 372,733  
|Other asset-backed                      |                    | 145,080   |      |   | 233,607    |  |      | 268,823   |  |   | 288,927  
|Available-for-sale debt securities      | $                  | 1,287,409 |      | $ | 1,592,228  |  | $    | 1,709,586 |  | $ | 1,764,376



|                                 |                    |       |        |   |           |  |        |        |  |   |         
|-------------------------------- | ------------------ | ----- | ------ | - | --------- |  | ------ | ------ |  | - | --------
|Unrealized Gains (Losses) from   | As of December 31,
|Debt Securities:                 | 2008               |       | 2007  
|($ in thousands)                 | Gains              |       | Losses |   | Gains     |  | Losses
|                                 |                    |       |        |   |           |  |        |        |  |   |         
|U.S. government and agency       | $                  | 1,189 |        | $ | (2,170)   |  | $      | 1,193  |  | $ | (303)   
|State and political subdivision  |                    | --    |        |   | (821)     |  |        | 11     |  |   | (116)   
|Foreign government               |                    | 1,206 |        |   | (249)     |  |        | 2,732  |  |   | (25)    
|Corporate                        |                    | 2,632 |        |   | (149,963) |  |        | 8,774  |  |   | (32,698)
|Mortgage-backed                  |                    | 1,691 |        |   | (69,807)  |  |        | 2,654  |  |   | (16,908)
|Other asset-backed               |                    | 259   |        |   | (88,786)  |  |        | 875    |  |   | (20,979)
|Debt securities gains and losses | $                  | 6,977 |        | $ | (311,796) |  | $      | 16,239 |  | $ | (71,029)
|Debt securities net losses       |                    |       |        | $ | (304,819) |  |        |        |  | $ | (54,790)



|                                                                                                   |                         |         |                        |   |          |  |            |         |       |   |            |  |   |         |  |   |          
|-------------------------------------------------------------------------------------------------- | ----------------------- | ------- | ---------------------- | - | -------- |  | ---------- | ------- | ----- | - | ---------- |  | - | ------- |  | - | ---------
|Aging of Temporarily Impaired                                                                      | As of December 31, 2008
|Debt Securities:                                                                                   | Less than 12 months     |         | Greater than 12 months |   | Total   
|($ in thousands)                                                                                   | Fair                    |         | Unrealized             |   | Fair     |  | Unrealized |         | Fair  |   | Unrealized
|                                                                                                   | Value                   |         | Losses                 |   | Value    |  | Losses     |         | Value |   | Losses    
|Debt Securities                                                                                    |                         |         |                        |   |          |  |            |         |       |   |            |  |   |         |  |   |          
|U.S. government and agency                                                                         | $                       | 2,753   |                        | $ | (84)     |  | $          | 1,856   |       | $ | (2,086)    |  | $ | 4,609   |  | $ | (2,170)  
|State and political subdivision                                                                    |                         | 2,395   |                        |   | (137)    |  |            | 3,319   |       |   | (684)      |  |   | 5,714   |  |   | (821)    
|Foreign government                                                                                 |                         | 15,891  |                        |   | (248)    |  |            | 499     |       |   | (1)        |  |   | 16,390  |  |   | (249)    
|Corporate                                                                                          |                         | 322,514 |                        |   | (37,561) |  |            | 259,454 |       |   | (112,402)  |  |   | 581,968 |  |   | (149,963)
|Mortgage-backed                                                                                    |                         | 57,731  |                        |   | (14,981) |  |            | 138,408 |       |   | (54,826)   |  |   | 196,139 |  |   | (69,807) 
|Other asset-backed                                                                                 |                         | 40,215  |                        |   | (16,623) |  |            | 97,761  |       |   | (72,163)   |  |   | 137,976 |  |   | (88,786) 
|Total temporarily impaired securities                                                              | $                       | 441,499 |                        | $ | (69,634) |  | $          | 501,297 |       | $ | (242,162)  |  | $ | 942,796 |  | $ | (311,796)
|                                                                                                   |                         |         |                        |   |          |  |            |         |       |   |            |  |   |         |  |   |          
|Below investment grade                                                                             | $                       | 48,201  |                        | $ | (16,379) |  | $          | 55,610  |       | $ | (28,721)   |  | $ | 103,811 |  | $ | (45,100) 
|Below investment grade after offsets
  for deferred policy acquisition cost
  adjustment and taxes |                         |         |                        | $ | (2,258)  |  |            |         |       | $ | (4,665)    |  |   |         |  | $ | (6,923)  
|Number of securities                                                                               |                         |         |                        |   | 332      |  |            |         |       |   | 402        |  |   |         |  |   | 734      



Unrealized losses of below investment grade debt securities with a fair value of less than 80% of the securities amortized cost totaled $39,705 thousand at December 31, 2008 ($5,942 thousand after offsets for taxes and deferred policy acquisition cost amortization), of which $943 thousand is greater than 20% and over 12 months.



These securities are considered to be temporarily impaired at December 31, 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.



15





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6.

Investing Activities (continued)



|                                                                                                   |                         |         |                        |   |          |  |            |         |       |   |            |  |   |           |  |   |         
|-------------------------------------------------------------------------------------------------- | ----------------------- | ------- | ---------------------- | - | -------- |  | ---------- | ------- | ----- | - | ---------- |  | - | --------- |  | - | --------
|Aging of Temporarily Impaired                                                                      | As of December 31, 2007
|Debt Securities:                                                                                   | Less than 12 months     |         | Greater than 12 months |   | Total   
|($ in thousands)                                                                                   | Fair                    |         | Unrealized             |   | Fair     |  | Unrealized |         | Fair  |   | Unrealized
|                                                                                                   | Value                   |         | Losses                 |   | Value    |  | Losses     |         | Value |   | Losses    
|Debt Securities                                                                                    |                         |         |                        |   |          |  |            |         |       |   |            |  |   |           |  |   |         
|U.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     



Unrealized losses of 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.



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.



Unrealized investment gains (losses)



|                                                                          |                         |           |      |   |          |  |   |        
|------------------------------------------------------------------------- | ----------------------- | --------- | ---- | - | -------- |  | - | -------
|Sources of Changes in Net Unrealized Investment Gains (Losses):           | Year Ended December 31,
|($ in thousands)                                                          | 2008                    |           | 2007 |   | 2006    
|                                                                          |                         |           |      |   |          |  |   |        
|Debt securities                                                           | $                       | (250,029) |      | $ | (41,468) |  | $ | 2,956  
|Other investments                                                         |                         | (345)     |      |   | 50       |  |   | 10     
|Net unrealized investment gains (losses)                                  | $                       | (250,374) |      | $ | (41,418) |  | $ | 2,966  
|                                                                          |                         |           |      |   |          |  |   |        
|Net unrealized investment gains (losses)                                  | $                       | (250,374) |      | $ | (41,418) |  | $ | 2,966  
|Applicable deferred policy acquisition costs (Note 4)                     |                         | (193,545) |      |   | (27,425) |  |   | 4,930  
|Applicable deferred income tax benefit                                    |                         | (16,690)  |      |   | (4,898)  |  |   | (687)  
|Offsets to net unrealized investment losses                               |                         | (210,235) |      |   | (32,323) |  |   | 4,243  
|Net unrealized investment losses included in
  other comprehensive income | $                       | (40,139)  |      | $ | (9,095)  |  | $ | (1,277)



Statutory deposits



Pursuant to certain statutory requirements, as of December 31, 2008 and 2007, we had on deposit securities with a fair value of $7,774 thousand and $7,370 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.





16





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6.

Investing Activities (continued)



Net investment income



|                                  |                         |         |      |   |         |  |   |        
|--------------------------------- | ----------------------- | ------- | ---- | - | ------- |  | - | -------
|Sources of Net Investment Income: | Year Ended December 31,
|($ in thousands)                  | 2008                    |         | 2007 |   | 2006   
|                                  |                         |         |      |   |         |  |   |        
|Debt securities                   | $                       | 89,141  |      | $ | 105,342 |  | $ | 127,977
|Other investments                 |                         | 2       |      |   | 162     |  |   | 148    
|Other income                      |                         | 113     |      |   | 421     |  |   | --     
|Policy loans                      |                         | 1,677   |      |   | 1,472   |  |   | 581    
|Cash and cash equivalents         |                         | 2,018   |      |   | 4,395   |  |   | 3,089  
|Total investment income           |                         | 92,951  |      |   | 111,792 |  |   | 131,795
|Investment expenses               |                         | (1,988) |      |   | (2,185) |  |   | (2,470)
|Net investment income             | $                       | 90,963  |      | $ | 109,607 |  | $ | 129,325



Net realized investment gains (losses)



|                                                             |                         |           |      |   |         |  |   |        
|------------------------------------------------------------ | ----------------------- | --------- | ---- | - | ------- |  | - | -------
|Types of Realized Investment Gains (Losses):                 | Year Ended December 31,
|($ in thousands)                                             | 2008                    |           | 2007 |   | 2006   
|                                                             |                         |           |      |   |         |  |   |        
|Debt security impairments                                    | $                       | (52,057)  |      | $ | (3,287) |  | $ | (411)  
|Debt security transaction gains                              |                         | 1,550     |      |   | 1,465   |  |   | 2,955  
|Debt security transaction losses                             |                         | (2,952)   |      |   | (2,827) |  |   | (7,253)
|Other investment transaction gains (losses)                  |                         | (85)      |      |   | (51)    |  |   | 526    
|Net transaction losses                                       |                         | (1,487)   |      |   | (1,413) |  |   | (3,772)
|Realized gains (losses) on derivative assets and liabilities |                         | (118,511) |      |   | (2,343) |  |   | 1,723  
|Net realized investment losses                               | $                       | (172,055) |      | $ | (7,043) |  | $ | (2,460)



Investing cash flows



|                                                        |                         |             |      |   |           |  |   |            
|------------------------------------------------------- | ----------------------- | ----------- | ---- | - | --------- |  | - | -----------
|Investment Purchases, Sales, Repayments and Maturities: | Year Ended December 31,
|($ in thousands)                                        | 2008                    |             | 2007 |   | 2006     
|                                                        |                         |             |      |   |           |  |   |            
|Debt security purchases                                 | $                       | (1,339,880) |      | $ | (883,282) |  | $ | (999,542)  
|Other investment purchases                              |                         | (103,028)   |      |   | (350)     |  |   | (1,060)    
|Policy loan advances, net                               |                         | (12,098)    |      |   | (7,277)   |  |   | (7,371)    
|Investment purchases                                    | $                       | (1,455,006) |      | $ | (890,909) |  | $ | (1,007,973)
|                                                        |                         |             |      |   |           |  |   |            
|Debt securities sales                                   | $                       | 1,196,688   |      | $ | 816,170   |  | $ | 1,178,127  
|Debt securities maturities and repayments               |                         | 268,509     |      |   | 390,297   |  |   | 549,483    
|Other investment sales                                  |                         | 36,142      |      |   | 1,521     |  |   | 750        
|Investment sales, repayments and maturities             | $                       | 1,501,339   |      | $ | 1,207,988 |  | $ | 1,728,360  



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, 2008
|($ in thousands)                       | Cost                    |           | Fair Value
|                                       |                         |           |            |   |          
|Due in one year or less                | $                       | 209,796   |            | $ | 207,422  
|Due after one year through five years  |                         | 361,007   |            |   | 318,870  
|Due after five years through ten years |                         | 363,159   |            |   | 281,186  
|Due after ten years                    |                         | 658,266   |            |   | 479,931  
|Total                                  | $                       | 1,592,228 |            | $ | 1,287,409







17





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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 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 for calculating 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 and GMIB, 200 stochastically generated scenarios were used.



|                                                                               |                    |           |      |   |          
|------------------------------------------------------------------------------ | ------------------ | --------- | ---- | - | ---------
|Separate Account Investments of Account Balances of Contracts with Guarantees: | As of December 31,
|($ in thousands)                                                               | 2008               |           | 2007
|                                                                               |                    |           |      |   |          
|Debt securities                                                                | $                  | 460,610   |      | $ | 494,660  
|Equity funds                                                                   |                    | 1,459,448 |      |   | 2,213,164
|Other                                                                          |                    | 108,383   |      |   | 80,657   
|Total                                                                          | $                  | 2,028,441 |      | $ | 2,788,481



|                                          |                   |         |         |   |       
|----------------------------------------- | ----------------- | ------- | ------- | - | ------
|Changes in Guaranteed Liability Balances: | Year Ended       
|($ in thousands)                          | December 31, 2008
|                                          | Annuity           |         | Annuity
|                                          | GMDB(1)           |         | GMIB   
|                                          |                   |         |         |   |       
|Liability balance as of January 1, 2008   | $                 | 3,109   |         | $ | 5,706 
|Incurred                                  |                   | 10,281  |         |   | 15,659
|Paid                                      |                   | (3,809) |         |   | --    
|Liability balance as of December 31, 2008 | $                 | 9,581   |         | $ | 21,365



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



(1)

The reinsurance recoverable asset related to the GMDB was $0 thousand and $1,335 thousand as of December 31, 2008 and 2007, respectively.





18





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7.

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



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, these contracts have a feature that allows the policyholder to receive the guaranteed annual withdrawal amount for as long as they are alive.



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



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



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



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.



In order to minimize the volatility associated with the GMWB and GMAB liabilities, we previously entered into a contract with Phoenix Life whereby we cede 100% of any claims for these guarantees. However, as of December 31, 2008, we recaptured the GMAB for policies issued up to December 31, 2008 and the GMWB for policies issued up to December 31, 2007. The contract remains in place for future issues. 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, 2008 and 2007, the embedded derivative liabilities for GMWB, GMAB, and GPAF are listed in the table below. There were no benefit payments made for GMWB or GMAB during 2008 or 2007. For GPAF, there were $322 thousand benefit payments made for 2008 and an immaterial amount paid for 2007. See Note 11 to these financial statements for more information.



In order to minimize the volatility associated with the unreinsured liabilities, we have established an alternative risk management strategy. As of recapture, we have begun to hedge the GMAB and GMWB exposure using equity options, equity futures, swaps and swaptions. These investments are included in other investments on our balance sheet.



|                                 |              |         |      |   |        
|-------------------------------- | ------------ | ------- | ---- | - | -------
|Embedded Derivative Liabilities: | December 31,
|($ in thousands)                 | 2008         |         | 2007
|                                 |              |         |      |   |        
|GMWB                             | $            | 63,663  |      | $ | (1,512)
|GMAB                             |              | 52,768  |      |   | 1,814  
|GPAF                             |              | 1,597   |      |   | 1,373  
|Total embedded derivatives       | $            | 118,028 |      | $ | 1,675  





19





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7.

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



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 Age
|                                           | Value   |           | Reinsurance   |   | of Annuitant
|                                           |         |           |               |   |              |  |  |   
|GMDB return of premium                     | $       | 1,022,891 |               | $ | 175,465      |  |  | 60
|GMDB step up                               |         | 1,334,746 |               |   | 476,867      |  |  | 60
|GMDB earnings enhancement benefit (EEB)  |         | 49,978    |               |   | 7,291        |  |  | 60
|GMDB greater of annual step up and roll up |         | 28,080    |               |   | 15,165       |  |  | 63
|Total GMDB at December 31, 2008            | $       | 2,435,695 |               | $ | 674,788      |  |  |   
|                                           |         |           |               |   |              |  |  |   
|Combination                                | $       | 5,105     |               |   |              |  |  | 59
|GMAB                                       |         | 326,719   |               |   |              |  |  | 55
|GMIB                                       |         | 449,877   |               |   |              |  |  | 60
|GMWB                                       |         | 391,077   |               |   |              |  |  | 60
|GPAF                                       |         | 15,071    |               |   |              |  |  | 75
|Total at December 31, 2008                 | $       | 1,187,849 |               |   |              |  |  |   



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, 2008 and 2007, we held additional universal life benefit reserves of $56,051 thousand and $25,930 thousand, respectively.







20





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8.

Derivative Instruments



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 had no after-tax gains for the years ended December 31, 2008 and 2007 and recognized an after-tax gain of $1,241 thousand for the year ended December 31, 2006 (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 2008 and 2007, we had no reclassified after-tax gains and for the year 2006 we reclassified an after-tax gain of $1,241 thousand into earnings related to these derivatives.



We use derivatives to manage certain risks in our general account portfolio as well as our insurance liabilities. Our derivatives generally do not qualify for hedge accounting treatment and are stated at fair value (market value) with changes in valuation reported in net realized capital gains/losses.



|                                                      |          |         |          |      |                    |   |           |  |   |   
|----------------------------------------------------- | -------- | ------- | -------- | ---- | ------------------ | - | --------- |  | - | --
|Derivative Instruments Held in General Account:       |          |         |          |      | As of December 31,
|($ in thousands)                                      |          |         |          |      | 2008              
|                                                      | Notional |         |          |      |                    |   |          
|                                                      | Amount   |         | Maturity |      | Asset              |   | Liability
|                                                      |          |         |          |      |                    |   |           |  |   |   
|Interest rate swaps                                   | $        | 100,000 |          | 2018 |                    | $ | 15,839    |  | $ | --
|Swaptions                                             |          | 190,000 |          | 2009 |                    |   | 10,928    |  |   | --
|Put options                                           |          | 175,000 |          | 2018 |                    |   | 56,265    |  |   | --
|Futures contracts                                     |          | 129,019 |          | 2009 |                    |   | 18,551    |  |   | --
|Total general account derivative instrument positions | $        | 594,019 |          |      |                    | $ | 101,583   |  | $ | --



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



Interest Rate Swaps



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 use interest rate swaps that effectively convert variable rate cash flows to fixed cash flows in order to hedge the interest rate risks associated with guaranteed minimum living benefit (GMAB/GMWB) rider liabilities.



Interest Rate Options



We use interest rate options, such as swaptions, to hedge against market risks to assets or liabilities from substantial changes in interest rates. An interest rate swaption gives us the right but not the obligation to enter into an underlying swap. Swaptions are options on interest rate swaps. All of our swaption contracts are receiver swaptions, which give us the right to enter into a swap where we will receive the agreed-upon fixed rate and pay the floating rate. If the market conditions are favorable and the swap is needed to continue hedging our inforce liability business, we will exercise the swaption and enter into a fixed rate swap. If a swaption contract is not exercised by its option maturity date, it expires with no value.





21





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8.

Derivative Instruments (continued)



Exchange Traded Future Contracts



We use equity index futures to hedge the market risks from changes in the value of equity indices, such as S&P 500, associated with guaranteed minimum living benefit (GMAB/GMWB) rider liabilities. Positions are short-dated, exchange-traded futures with maturities of three months.



Equity Index Options



The Company uses the following derivative contracts to hedge against market risks from changes in volatility, interest rates and equity indices associated with our Life and Annuity products:



·

Equity index options, such as S&P 500 puts for the variable annuity guaranteed minimum living benefit (GMAB/GMWB) rider liabilities;

·

Equity index options, such as S&P 500 European calls for the Equity Index Universal Life (EIUL); and

·

Equity index options, such as S&P European, Asian and Binary calls for the Equity Index Annuity (EIA).



An equity index put option affords the Company the right to sell a specified equity index at the established price determined at the time the instrument was purchased. The Company may use short-dated options, which are traded on exchanges or use long-dated over-the-counter options, which require entering into an agreement with another party (referred to as the counterparty).



An equity index call option affords the Company the right to buy a specified equity index at the established price determined at the time the instrument was purchased. The Company used exact-dated options, which are traded over-the-counter with another party (referred to as the counterparty) to closely replicate the option payoff profile embedded in EIA and EIUL liabilities.





9.

Fair value of Financial Instruments



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.





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9.

Fair Value of Financial Instruments (continued)



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.



|                                           |                    |           |       |   |           |  |       |           |  |   |          
|------------------------------------------ | ------------------ | --------- | ----- | - | --------- |  | ----- | --------- |  | - | ---------
|Carrying Amounts and Estimated Fair Values | As of December 31,
|of Financial Instruments:                  | 2008               |           | 2007 
|($ in thousands)                           | Carrying           |           | Fair  |   | Carrying  |  | Fair 
|                                           | Value              |           | Value |   | Value     |  | Value
|                                           |                    |           |       |   |           |  |       |           |  |   |          
|Cash and cash equivalents                  | $                  | 152,185   |       | $ | 152,185   |  | $     | 108,200   |  | $ | 108,200  
|Debt securities                            |                    | 1,287,409 |       |   | 1,287,409 |  |       | 1,709,586 |  |   | 1,709,586
|Policy loans                               |                    | 34,917    |       |   | 34,917    |  |       | 22,819    |  |   | 22,819   
|Financial assets                           | $                  | 1,474,511 |       | $ | 1,474,511 |  | $     | 1,840,605 |  | $ | 1,840,605
|                                           |                    |           |       |   |           |  |       |           |  |   |          
|Investment contracts                       | $                  | 969,270   |       | $ | 986,908   |  | $     | 1,134,635 |  | $ | 1,139,325
|Financial liabilities                      | $                  | 969,270   |       | $ | 986,908   |  | $     | 1,134,635 |  | $ | 1,139,325



The following table presents the financial instruments carried at fair value as of December 31, 2008, by SFAS 157 valuation hierarchy (as described above).



|                                      |                         |           |         |   |           |  |       |         |  |   |          
|------------------------------------- | ----------------------- | --------- | ------- | - | --------- |  | ----- | ------- |  | - | ---------
|Assets and Liabilities at Fair Value: | As of December 31, 2008
|($ in thousands)                      | Level 1                 |           | Level 2 |   | Level 3   |  | Total
|Assets                                |                         |           |         |   |           |  |       |         |  |   |          
|Available-for-sale debt securities    | $                       | 8,459     |         | $ | 1,127,679 |  | $     | 151,271 |  | $ | 1,287,409
|Derivative assets                     |                         | --        |         |   | 101,583   |  |       | --      |  |   | 101,583  
|Separate account assets               |                         | 2,360,656 |         |   | 87,884    |  |       | 601     |  |   | 2,449,141
|Fair value option investments         |                         | --        |         |   | 4,091     |  |       | --      |  |   | 4,091    
|Total assets                          | $                       | 2,369,115 |         | $ | 1,321,237 |  | $     | 151,872 |  | $ | 3,842,224
|Liabilities                           |                         |           |         |   |           |  |       |         |  |   |          
|Embedded derivative liabilities       | $                       | --        |         | $ | --        |  | $     | 118,028 |  | $ | 118,028  
|Total liabilities                     | $                       | --        |         | $ | --        |  | $     | 118,028 |  | $ | 118,028  



Fair value option investments include a structured loan asset valued at $4,091 thousand as of December 31, 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. The majority of the valuations of Level 3 assets were internally calculated or obtained from independent third-party broker quotes.



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.



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.



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9.

Fair Value of Financial Instruments (continued)



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.



SFAS 157 requires a credit standing adjustment. The credit standing adjustment reflects the adjustment that market participants would make to reflect the risk that guaranteed benefit obligations may not be fulfilled (nonperformance risk). SFAS 157 explicitly requires nonperformance risk to be reflected in fair value. The Company calculates the credit standing adjustment by applying an average credit spread for companies similar to Phoenix when discounting the rider cash flows for calculation of the liability. This average credit spread is recalculated every quarter and so the fair value will change with the passage of time even in the absence of any other changes that affect the valuation.



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:                                                     | Year Ended December 31,
|($ in thousands)                                                                              | 2008                   
|                                                                                              | Assets                  |          | Liabilities
|                                                                                              |                         |          |             |   |          
|Balance, beginning of year                                                                    | $                       | 267,185  |             | $ | (1,675)  
|Purchases/(sales), net                                                                        |                         | (17,555) |             |   | --       
|Net transfers in and out of Level 3                                                           |                         | (13,973) |             |   | --       
|Realized gains (losses)                                                                       |                         | (19,911) |             |   | (116,353)
|Unrealized gains (losses) included in other comprehensive income (loss)                       |                         | (63,942) |             |   | --       
|Amortization/accretion                                                                        |                         | 68       |             |   | --       
|Balance, end of year                                                                          | $                       | 151,872  |             | $ | (118,028)
|Portion of gain (loss) included in net income relating to those assets/liabilities still held | $                       | (34,655) |             | $ | (116,353)





10.

Income Taxes



|                                              |                         |           |      |   |          |  |   |         
|--------------------------------------------- | ----------------------- | --------- | ---- | - | -------- |  | - | --------
|Allocation of Income Taxes:                   | Year Ended December 31,
|($ in thousands)                              | 2008                    |           | 2007 |   | 2006    
|                                              |                         |           |      |   |          |  |   |         
|Income tax expense (benefit) attributable to: |                         |           |      |   |          |  |   |         
|Current                                       | $                       | (1,831)   |      | $ | (44,715) |  | $ | (21,403)
|Deferred                                      |                         | (85,666)  |      |   | 45,837   |  |   | 22,473  
|Income taxes applicable to net income (loss)  |                         | (87,497)  |      |   | 1,122    |  |   | 1,070   
|Other comprehensive loss                      |                         | (16,690)  |      |   | (4,898)  |  |   | (1,121) 
|Income taxes applicable to comprehensive loss | $                       | (104,187) |      | $ | (3,776)  |  | $ | (51)    
|Income taxes recovered                        | $                       | (13,262)  |      | $ | (30,557) |  | $ | (24,094)



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10.

Income Taxes (continued)



|                                        |                         |           |      |   |         |  |   |        
|--------------------------------------- | ----------------------- | --------- | ---- | - | ------- |  | - | -------
|Effective Income Tax Rate:              | Year Ended December 31,
|($ in thousands)                        | 2008                    |           | 2007 |   | 2006   
|                                        |                         |           |      |   |         |  |   |        
|Income before income taxes              | $                       | (282,691) |      | $ | 12,427  |  | $ | 7,538  
|Income taxes at statutory rate of 35.0% |                         | (98,942)  |      |   | 4,350   |  |   | 2,638  
|Dividend received deduction             |                         | (2,584)   |      |   | (1,803) |  |   | (1,572)
|FIN 48 increase (decrease)              |                         | 1,242     |      |   | (975)   |  |   | --     
|Tax interest                            |                         | (2)       |      |   | 1       |  |   | 1      
|Valuation allowance increase            |                         | 12,800    |      |   | --      |  |   | --     
|Other, net                              |                         | (11)      |      |   | (451)   |  |   | 3      
|Applicable income taxes (benefit)       | $                       | (87,497)  |      | $ | 1,122   |  | $ | 1,070  
|Effective income tax rates              |                         | 31.0%     |      |   | 9.0%    |  |   | 14.2%  



|                                                                    |                    |          |      |   |        
|------------------------------------------------------------------- | ------------------ | -------- | ---- | - | -------
|Deferred Income Tax Balances Attributable to Temporary Differences: | As of December 31,
|($ in thousands)                                                    | 2008               |          | 2007
|                                                                    |                    |          |      |   |        
|Deferred income tax assets:                                         |                    |          |      |   |        
|Future policyholder benefits                                        | $                  | 156,424  |      | $ | 145,582
|Unearned premiums / deferred revenues                               |                    | 28,603   |      |   | 15,164 
|Investments                                                         |                    | 37,595   |      |   | 5,948  
|Net operating loss carryover benefits                               |                    | 1,491    |      |   | --     
|Valuation allowance                                                 |                    | (16,000) |      |   | --     
|Gross deferred income tax assets                                    |                    | 208,113  |      |   | 166,694
|                                                                    |                    |          |      |   |        
|Deferred income tax liabilities:                                    |                    |          |      |   |        
|Deferred policy acquisition costs                                   |                    | 237,947  |      |   | 296,687
|Other                                                               |                    | 3,457    |      |   | 5,655  
|Gross deferred income tax liabilities                               |                    | 241,404  |      |   | 302,342
|Deferred income tax liability                                       | $                  | 33,291   |      | $ | 135,648



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.



Within the consolidated tax return, we are required by regulations of the Internal Revenue Service (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.



Significant management judgment is required in determining the provision for income taxes and, in particular, any valuation allowance recorded against our deferred tax assets. We carried a valuation allowance of $16,000 thousand on $224,113 thousand of deferred tax assets at December 31, 2008, due to uncertainties related to our ability to utilize some of the deferred tax assets that are expected to reverse as capital losses. The amount of the valuation allowance has been determined based on our estimates of taxable income over the periods in which the deferred tax assets will be recoverable.



We concluded that a valuation allowance on the remaining $208,113 thousand of deferred tax assets at December 31, 2008, was not required. Our methodology for determining the realizability of deferred tax assets involves estimates of future taxable income from our operations and consideration of available tax planning strategies and actions that could be implemented, if necessary. These estimates are projected through the life of the related deferred tax assets based on assumptions that we believe to be reasonable and consistent with current operating results. Changes in future operating results not currently forecasted may have a significant impact on the realization of deferred tax assets. In concluding that a valuation allowance was not required on the remaining deferred tax assets, we considered the more likely than not criteria pursuant to SFAS 109.





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10.

Income Taxes (continued)



As of December 31, 2008, we had $1,491 thousand related to federal net operating losses which are scheduled to expire in 2028.



As of December 31, 2008, we had current taxes payable of $1,247 thousand.



We adopted the provisions of 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 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.



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: | 2008 |         | 2007
|($ in thousands)                                                                |      |         |     
|Balance, beginning of year                                                      | $    | 525     |      | $ | 1,840
|Additions (reductions) for tax positions of prior years                         |      | 1,242   |      |   | (975)
|Settlements with taxing authorities                                             |      | (1,715) |      |   | (340)
|Balance, end of year                                                            | $    | 52      |      | $ | 525  



The amount of unrecognized tax benefits at December 31, 2008 that would, if recognized, impact the annual effective tax rate upon recognition was $52 thousand.



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 material impact on the financial position of the company.



Our federal income tax returns are routinely audited by the IRS. During 2008, the IRS completed its examination of the 2004 and 2005 federal income tax returns. There is one issue, in the 2004 tax year, within the life insurance company tax group, which will proceed to the appeals level. The timing for resolution of this matter remains uncertain due to the nature of the appeals process. We do not believe that the appeals outcome will result in a material change in our financial position. Examinations have not commenced for tax years 2006 through 2007. 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, 2008 and 2007 were not material. We did not have an accrual for the payment of interest and penalties as of December 31, 2008.





11.

Related Party Transactions



Capital Contributions



During the year ended December 31, 2008, we received $169,934 thousand in capital contributions from Phoenix Life, of which $83,785 thousand was in cash and $86,149 was in securities.



Related Party Transactions



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



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11.

Related Party Transactions (continued)



Phoenix Life provides services and facilities to us and is reimbursed through a cost allocation process. The expenses allocated to us were $221,925 thousand, $270,394 thousand and $203,521 thousand for the years ended December 31, 2008, 2007 and 2006, respectively. Amounts payable to Phoenix Life were $2,662 thousand and $27,263 thousand as of December 31, 2008 and 2007, respectively.



We have a contract with Phoenix Life whereby we cede to Phoenix Life certain of the liabilities related to 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 $2,150 thousand and $3,051 thousand at December 31, 2008 and 2007, respectively. This amount is included in our balance sheet in other general account assets. At December 31, 2008, the amount due from Phoenix Life under this contract was $4,808 thousand. At December 31, 2007, the amount due to Phoenix Life under this contract was $336 thousand.



Goodwin Capital Advisers, Inc. (Goodwin), an indirect wholly-owned subsidiary of PNX, 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 $1,982 thousand, $2,172 thousand and $2,439 thousand for the years ended December 31, 2008, 2007 and 2006, respectively. Amounts payable to Goodwin were $1 thousand and $15 thousand, as of December 31, 2008 and 2007, respectively.



Effective August 2007, Phoenix Variable Advisors, Inc (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 $170 thousand and $276 thousand as of December 31, 2008 and 2007, respectively.



Effective in 2009, Phoenix Equity Planning Corporation (PEPCO), an indirect wholly-owned subsidiary of PNX, is the principal underwriter of our annuity contracts. Outside broker-dealers are licensed to sell our annuity contracts as well. Prior to December 31, 2008, a subsidiary of Virtus Investment Partners, Inc., a former affiliate, served as the principal underwriter of our annuity contracts. We incurred commissions for contracts underwritten by the former affiliate of $47,810 thousand, $48,331 thousand and $38,062 thousand for the years ended December 31, 2008, 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 $186,112 thousand, $159,847 thousand and $105,993 thousand for the years ended December 31, 2008, 2007 and 2006, respectively. Amounts payable to Phoenix Life were $3,501 thousand and $13,684 thousand as of December 31, 2008 and 2007, 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, 2008 and 2007, we had amounts due to Phoenix Life of $2,766 thousand and $416 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, 2008 and 2007, we had amounts due to Phoenix Life and Annuity of $27 thousand and $482 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 PHL Variable. Amounts due from Phoenix Life were $591 thousand and $237 thousand as of December 31, 2008 and 2007, respectively. Amounts due from Phoenix Life and Annuity were $2,562 thousand and $15 thousand as of December 31, 2008 and 2007, respectively.



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12.

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.





13.

Other Comprehensive Income



|                                                                                           |                         |           |      |   |          |  |     |          |       |   |          |  |   |         |  |   |        
|------------------------------------------------------------------------------------------ | ----------------------- | --------- | ---- | - | -------- |  | --- | -------- | ----- | - | -------- |  | - | ------- |  | - | -------
|Sources of                                                                                 | Year Ended December 31,
|Other Comprehensive Income:                                                                | 2008                    |           | 2007 |   | 2006    
|($ in thousands)                                                                           | Gross                   |           | Net  |   | Gross    |  | Net |          | Gross |   | Net     
|                                                                                           |                         |           |      |   |          |  |     |          |       |   |          |  |   |         |  |   |        
|Unrealized losses on investments                                                           | $                       | (303,833) |      | $ | (71,010) |  | $   | (46,067) |       | $ | (11,195) |  | $ | (1,332) |  | $ | (4,070)
|Net realized investment losses on
  available-for-sale securities included
  in net income |                         | 53,459    |      |   | 30,871   |  |     | 4,649    |       |   | 2,100    |  |   | 4,298   |  |   | 2,793  
|Net unrealized investment gains (losses)                                                   |                         | (250,374) |      |   | (40,139) |  |     | (41,418) |       |   | (9,095)  |  |   | 2,966   |  |   | (1,277)
|Net unrealized losses on derivative
  instruments                                          |                         | --        |      |   | --       |  |     | --       |       |   | --       |  |   | (1,241) |  |   | (807)  
|Other comprehensive income (loss)                                                          |                         | (250,374) |      | $ | (40,139) |  |     | (41,418) |       | $ | (9,095)  |  |   | 1,725   |  | $ | (2,084)
|Applicable deferred policy acquisition
  cost amortization                                 |                         | (193,545) |      |   |          |  |     | (27,425) |       |   |          |  |   | 4,930   |  |   |        
|Applicable deferred income tax benefit                                                     |                         | (16,690)  |      |   |          |  |     | (4,898)  |       |   |          |  |   | (1,121) |  |   |        
|Offsets to other comprehensive income                                                      |                         | (210,235) |      |   |          |  |     | (32,323) |       |   |          |  |   | 3,809   |  |   |        
|Other comprehensive loss                                                                   | $                       | (40,139)  |      |   |          |  | $   | (9,095)  |       |   |          |  | $ | (2,084) |  |   |        



|                                             |                    |           |      |   |          |  |     |          |  |   |         
|-------------------------------------------- | ------------------ | --------- | ---- | - | -------- |  | --- | -------- |  | - | --------
|Components of Accumulated                    | As of December 31,
|Other Comprehensive Income:                  | 2008               |           | 2007
|($ in thousands)                             | Gross              |           | Net  |   | Gross    |  | Net
|                                             |                    |           |      |   |          |  |     |          |  |   |         
|Unrealized losses on investments             | $                  | (306,376) |      | $ | (51,923) |  | $   | (56,002) |  | $ | (11,784)
|Unrealized gains on derivative instruments   |                    | --        |      |   | --       |  |     | --       |  |   | --      
|Accumulated other comprehensive loss         |                    | (306,376) |      | $ | (51,923) |  |     | (56,002) |  | $ | (11,784)
|Applicable deferred policy acquisition costs |                    | (231,418) |      |   |          |  |     | (37,873) |  |   |         
|Applicable deferred income taxes             |                    | (23,035)  |      |   |          |  |     | (6,345)  |  |   |         
|Offsets to other comprehensive income        |                    | (254,453) |      |   |          |  |     | (44,218) |  |   |         
|Accumulated other comprehensive loss         | $                  | (51,923)  |      |   |          |  | $   | (11,784) |  |   |         





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14.

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 (the Department) has adopted the National Association of Insurance Commissioners (the NAICs) Accounting Practices and Procedures manual effective January 1, 2001 (NAIC SAP) as a component of its prescribed or permitted statutory accounting practices. As of December 31, 2008, 2007 and 2006, 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 325% of Company Action Level (the level where a life insurance enterprise must submit a comprehensive plan to state insurance regulators) as of December 31, 2008 and 2007.



|                                                       |                                          |           |      |   |           |  |   |         
|------------------------------------------------------ | ---------------------------------------- | --------- | ---- | - | --------- |  | - | --------
|Statutory Financial Data:                              | As of or For the Year Ended December 31,
|($ in thousands)                                       | 2008                                     |           | 2007 |   | 2006     
|                                                       |                                          |           |      |   |           |  |  
|Statutory capital and surplus                          | $                                        | 273,028   |      | $ | 167,436   |  | $ | 220,342 
|Asset valuation reserve                                |                                          | 343       |      |   | 14,774    |  |   | 14,320  
|Statutory capital, surplus and asset valuation reserve | $                                        | 273,371   |      | $ | 182,210   |  | $ | 234,662 
|Statutory gain (loss) from operations                  | $                                        | (138,012) |      | $ | (98,589)  |  | $ | (33,094)
|Statutory net income (loss)                            | $                                        | (187,032) |      | $ | (102,297) |  | $ | (33,994)



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 2009 without prior approval.





15.

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 investment advisor.



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. Based on current information, 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 consolidated 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.





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15.

Contingent Liabilities (continued)



Regulatory Matters



State regulatory bodies, the SEC, the Financial Industry Regulatory Authority (FINRA), the IRS and other regulatory bodies regularly make inquiries of us and, from time to time, conduct examinations or investigations concerning our compliance with laws and regulations related to, among other things, our insurance and broker-dealer subsidiaries, securities offerings and registered products. We endeavor to respond to such inquiries in an appropriate way and to take corrective action if warranted.



For example, in the fourth quarter of 2008, the State of Connecticut Insurance Department initiated the on-site portion of a routine financial examination of PHL Variable for the five year period ending December 31, 2008.



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. 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. Based on current information, we believe that the outcomes of our 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 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.





16.

Subsequent Events



On March 3, 2009, State Farm informed us that it intends to suspend the sale of Phoenix products pending a re-evaluation of the relationship between the two companies. During 2008, State Farm was our largest distributor of annuity and life insurance products accounting for approximately 25% of our total life insurance premiums and approximately 72% of our annuity deposits.



On March 4, 2009, National Life Group also informed us that it intends to suspend the sale of Phoenix products. In 2008, National Life was our second largest distributor of annuity products accounting for approximately 13% of our annuity deposits.



On March 4, 2009, Fitch downgraded our financial strength rating to BBB+ from A and placed the rating on Rating Watch Negative.



On March 10, 2009, A.M. Best Company, Inc. downgraded our financial strength rating to B++ from A and maintained its negative outlook. On January 15, 2009, A.M Best Company, Inc. affirmed our financial strength rating of A and changed our outlook to negative from stable.



On March 10, 2009, Moodys Investor Services downgraded our financial strength rating to Baa2 from Baa1. The outlook is negative. On February 19, 2009, Moodys Investor Service downgraded our financial strength rating to Baa1 from A3. The ratings remain on review for possible further downgrade as was previously announced on December 9, 2008.



On March 10, 2009, Standard & Poors downgraded our financial strength rating to BBB- from BBB and maintained it negative outlook. On March 2, 2009, Standard and Poors downgraded our financial strength rating to BBB from BBB+. At the same time, Standard and Poors removed the ratings from CreditWatch, where they had been placed with negative implications on February 10, 2009. The outlook is negative.



Effective March 12, 2009, National Financial Partners (NFP) suspended sales of Phoenix products. In 2008, NFP accounted for approximately 11% of our total life insurance premiums.





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16.

Subsequent Events (continued)



The actions by these key distribution partners and rating agencies will likely have a material adverse effect on our future results. We are currently assessing the impact of these recent developments on our business prospects, operations and strategy.



On March 23, 2009, Dona D. Young announced her retirement from PNX. James D. Wehr, Senior Executive Vice President and Chief Investment Officer will replace her as President and Chief Executive Officer.







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PART IV



Item 15.

Exhibits, Financial Statement Schedules



(a)

Documents filed as part of this Form 10-K/A include:



1.

Financial Statements. The financial statements listed in Part II of the Table of Contents to this Form 10-K/A are filed as part of this Form 10-K/A;

2.

Financial Statement Schedules. All financial statement schedules are omitted as they are not applicable or the information is shown in the financial statements or notes thereto; and

3.

Exhibits. Those items listed in the Exhibit Index in Section E of this report which are marked with an (*) are filed with this report.



*    *    *    *    *







32





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SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) 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 COMPANY

(Registrant)



|       |                 |  |                                                            
|------ | --------------- |  | -----------------------------------------------------------
|Dated: | August 14, 2009 |  | By: /s/ Philip K. Polkinghorn                              
|       |                 |  | Philip K. Polkinghorn                                      
|       |                 |  | President                                                  
|       |                 |  | (Principal Executive Officer)                              
|       |                 |  |                                                            
|Dated: | August 14, 2009 |  | By: /s/ Peter A. Hofmann                                   
|       |                 |  | Peter A. Hofmann                                           
|       |                 |  | Senior Executive Vice President and Chief Financial Officer
|       |                 |  | (Principal Financial Officer)                              
|       |                 |  |                                                            
|Dated: | August 14, 2009 |  | By: /s/ David R. Pellerin                                  
|       |                 |  | David R. Pellerin                                          
|       |                 |  | Senior Vice President and Chief Accounting Officer         
|       |                 |  | (Principal Accounting Officer)                             





Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below, dated August 14, 2009, by the following persons on behalf of the Registrant and in the capacities indicated.





|                                |  |  |                                
|------------------------------- |  |  | -------------------------------
|/s/ James D. Wehr               |  |  | /s/ Christopher M. Wilkos      
|James D. Wehr, Director         |  |  | Christopher M. Wilkos, Director
|                                |  |  |                                
|/s/ Philip K. Polkinghorn       |  |  |                                
|Philip K. Polkinghorn, Director |  |  |                                
|                                |  |  |                                







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EXHIBIT INDEX



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                          | 
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                         
|3.1     |  | 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)                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                         
|23.1    |  | Consent of Independent Registered Public Accounting Firm*                                                                                                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                         
|31.1    |  | Certification of Philip K. Polkinghorn, President, 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, President 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.





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