UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  FORM 10-K  (Mark one)þANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934  For the fiscal year ended December 31, 2006  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)  Connecticut06-1045829(State or other jurisdiction of(I.R.S. Employer Identification No.)incorporation or organization)One American Row,
Hartford, Connecticut06102-5056(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 ̈
NOþ  Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. YES ̈
NOþ  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. YESþ
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 or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ̈
Accelerated filer ̈
Non-accelerated filerþ  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ̈
NOþ  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 31, 2007, 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.    1    TABLE OF CONTENTS  Item No.DescriptionPagePart I1Business31ARisk Factors71BUnresolved Staff Comments112Properties113Legal Proceedings114Submission of Matters to a Vote of Security Holders12Part II5Market for Registrants Common Equity, Related Stockholder Matters and
  Issuer Purchases of Equity Securities136Selected Financial Data137Managements Discussion and Analysis of Financial Condition and
  Results of Operations147AQuantitative and Qualitative Disclosures About Market Risk258Financial Statements and Supplementary Data28Report of Independent Registered Public Accounting FirmF-1Balance Sheet as of December 31, 2006 and 2005F-2Statement of Income and Comprehensive Income For the Years Ended
  December 31, 2006, 2005 and 2004F-3Statement of Cash Flows For the Years Ended December 31, 2006, 2005 and
2004F-4Notes to Financial StatementsF-59Changes in and Disagreements with Accountants on Accounting and
  Financial Disclosure289AControls and Procedures289BOther Information28Part III10Directors, Executive Officers and Corporate Governance2911Executive Compensation2912Security Ownership of Certain Beneficial Owners and Management and
  Related Stockholder Matters2913Certain Relationships and Related Transactions, and Director Independence2914Principal Accounting Fees and Services29Part IV15Exhibits, Financial Statement Schedules31Signatures32Exhibit IndexE-1   2    Unless otherwise stated,
we, our or us means PHL Variable Insurance
Company (the Company or PHL Variable) and its direct and
indirect subsidiaries. Furthermore, Phoenix Life refers to Phoenix
Life Insurance Company and PNX refers to The Phoenix Companies, Inc.   PART I  Item 1. Business  Description of Business  We are a manufacturer of life insurance
and annuity products. We provide these products and services through a wide
variety of third-party financial professionals, such as national and regional
broker-dealers, banks, financial planning firms, advisor groups and other
insurance companies.  We target the affluent and
high-net-worth market, a growing market with significant demand for customized
products and services. We define affluent as those households with a net worth
of $500,000 or greater, excluding their primary residence. We define
high-net-worth, a subset of the affluent category, as those households that have
net worth, excluding primary residence, of over $1,000,000. Our products and
services are designed to assist advisors and their clients in this target market
to achieve three main goals:  ·
theaccumulationof wealth, primarily during an
individuals working years;·
thepreservationof income and wealth to
provide for a secure retirement; and·
the efficienttransferof wealth in a variety
of situations, including through estate planning, business continuation planning
and charitable giving.  We offer a variety of life insurance
and annuity products through third-party distributors. We believe our
competitive advantage in this segment consists of six main components:  ·
our innovative products;·
our broad asset management capabilities;·
our relationships with distributors that have access to our
target market;·
the value-added our wholesalers provide those distributors;·
our ability to combine products and services that
distributors and their clients find attractive; and·
our underwriting expertise.  Products  Life Products  Our life insurance products include
variable universal life, universal life, term life and other insurance products.
We offer single life, first-to-die and second-to-die products. Under
first-to-die policies, up to five lives may be insured with the policy proceeds
paid after the death of the first of the five insured lives. Second-to-die
products are typically used for estate planning purposes and insure two lives
rather than one, with the policy proceeds paid after the death of both insured
individuals.  Variable Universal Life:
Variable universal life products provide insurance coverage and give the
policyholder various investment choices, flexible premium payments and coverage
amounts and limited guarantees. The policyholder may direct premiums and cash
value into a variety of separate investment accounts (accounts that are
maintained separately from the other assets of the Company) or into the general
account. In separate investment accounts, the policyholder bears the entire risk
of the investment results. We collect fees for the management of these various
investment accounts and the net return is credited directly to the
policyholders accounts. With some variable universal products, by
maintaining a certain premium level the policyholder receives guarantees that
protect the policys death benefit if, due to adverse investment
experience, the policyholders account balance is zero. We retain the right
within limits to adjust the fees we assess for providing administrative   3    services. We also collect fees to cover
mortality costs; these fees may be adjusted by us but may not exceed contractual
limits.  Universal Life:Universal life
products provide insurance coverage on the same basis as variable universal life
products, except that premiums, and the resulting accumulated balances, are
allocated only to our general account for investment. Universal life products
may allow the policyholder to increase or decrease the amount of death benefit
coverage over the term of the policy, and also may allow the policyholder to
adjust the frequency and amount of premium payments. We credit premiums, net of
expenses, to an account maintained for the policyholder. The account earns
interest at rates determined by us, subject to certain minimums. Specific
charges are made against the account for expenses. We also collect fees to cover
mortality costs; these fees may be adjusted by us but may not exceed contractual
limits.  Some universal life products provide
secondary guarantees that protect the policys death benefit even if there
is insufficient value in the policy to pay the monthly charges and mortality
costs. These secondary guarantees are provided as long as the policyholder is
able to fulfill the premium requirements of the secondary guarantee.  Term Life:Term life insurance
provides a guaranteed benefit upon the death of the insured within a specified
time period, in return for the periodic payment of premiums. Specified coverage
periods range from one to 30 years, but not longer than the period over which
premiums are paid. Premiums may be level for the coverage period or may vary.
Term insurance products are sometimes referred to as pure protection products,
in that there are normally no savings or investment elements. Term contracts
generally expire without value at the end of the coverage period. Our term
insurance policies allow policyholders to convert to permanent coverage,
generally without evidence of insurability.  Annuity Products  We offer a variety of variable
annuities to meet the accumulation and preservation needs of the affluent and
high-net-worth market. Deferred annuities, in which funds accumulate for a
number of years before periodic payments begin, enable the contractholder to
save for retirement and provide options that protect against outliving assets
during retirement. Immediate annuities are purchased by means of a single lump
sum payment and begin paying periodic income immediately. We believe this
product is especially attractive to those affluent and high-net-worth retirees
who are rolling over pension or retirement plan assets and seek an income stream
based entirely or partly on equity market performance.  Variable annuities are separate account
products, which means that the contractholder bears the investment risk as
deposits are directed into a variety of separate investment accounts. Typically,
the contractholder can also direct funds to a general account option, which
earns interest at rates determined by us, subject to certain minimums.
Contractholders also may elect certain enhanced living benefit guarantees, for
which they are assessed a specific charge. For example, our Guaranteed Minimum
Withdrawal Benefit option guarantees an income stream for the lifetime of the
contractholder and their spouses. Our major sources of revenues from annuities
are mortality and expense fees charged to the contractholder, determined as a
percentage of the market value of any underlying separate account balances, and
the excess of investment income over credited interest for funds invested in our
general account.  Other Products and Services  We develop other products and
distribution relationships that respond to the affluent and high-net-worth
markets demand for wealth management solutions.  For example, many of our products are
designed to be used by corporations to fund special deferred compensation plans
and benefit programs for key employees, commonly referred to as executive
benefits. We view these products as a source of growing fee-based business. In
addition, our products can be applied to a number of situations to meet the
sophisticated needs of business owners and individuals, including for charitable
giving.   4    Underwriting  Insurance underwriting is the process
of examining, accepting or rejecting insurance risks, and classifying those
accepted in order to charge appropriate premiums or mortality charges.
Underwriting also involves determining the amount and type of reinsurance
appropriate for a particular type of risk.  We believe we have particular expertise
in evaluating the underwriting risks relevant to our target market. We believe
this expertise enables us to make appropriate underwriting decisions, including,
in some instances, the issuance of policies on more competitive terms than other
insurers would offer. We have a tradition of underwriting innovation. In 2006,
we became the first insurer to offer premium discounts over time for
policyholders who maintain a healthy weight in the years after the initial
underwriting decision. Our underwriting team includes doctors and other medical
staff to ensure, among other things, that we are focused on current developments
in medical technology.  Our underwriting standards for life
insurance are intended to result in the issuance of policies that produce
mortality experience consistent with the assumptions used in product pricing.
The overall profitability of our life insurance business depends, to a large
extent, on the degree to which our mortality experience compares to our pricing
assumptions. Our underwriting is based on our historical mortality experience,
as well as on the experience of the insurance industry and of the general
population. We continually compare our underwriting standards to those of the
industry to assist in managing our mortality risk and to stay abreast of
industry trends.  Our life insurance underwriters
evaluate policy applications on the basis of the information provided by the
applicant and others. We use a variety of methods to evaluate certain policy
applications, such as those where the size of the policy sought is particularly
large, or where the applicant is an older individual, has a known medical
impairment or is engaged in a hazardous occupation or hobby. Consistent with
industry practice, we require medical examinations and other tests depending
upon the age of the applicant and the size of the proposed policy.  In the executive benefits market, we
issue life policies covering multiple lives on a guaranteed issue basis, within
specified limits per life insured, whereby the amount of insurance issued per
life on a guaranteed basis is related to the total number of lives being covered
and the particular need for which the product is being purchased. Guaranteed
issue underwriting applies to employees actively at work, and product pricing
reflects the additional guaranteed issue underwriting risk.  Reserves  We establish and report liabilities for
future policy benefits on our balance sheet to reflect the obligations under our
insurance policies and contracts. Our liability for variable universal life
insurance and universal life insurance policies and contracts is equal to the
cumulative account balances, plus additional reserves we establish for policy
riders. Cumulative account balances include deposits plus credited interest,
less expense and mortality charges and withdrawals.  Reinsurance  While we have underwriting expertise
and have experienced favorable mortality trends, we believe it is prudent to
spread the risks associated with our life insurance products through
reinsurance. As is customary in the life insurance industry, our reinsurance
program is designed to provide for greater diversification of business, control
exposure to potential losses arising from large risks and provide capacity for
growth.  We cede risk to other insurers under
various agreements that cover individual life insurance policies. The amount of
risk ceded depends on our evaluation of the specific risk and applicable
retention limits. Under the terms of our reinsurance agreements, the reinsurer
agrees to reimburse us for the ceded amount in the event a claim is incurred.
However, we remain liable to our policyholders for ceded insurance if any
reinsurer fails to meet its obligations. Since we bear the risk of nonpayment by
one or more of our reinsurers, we cede business to well-capitalized, highly
rated insurers. While our current retention limit on any one life is $10 million
for single life and joint first-to-die policies and $12 million for joint
last-to-die policies, we may cede amounts below those limits on a case-by-case
basis depending on the characteristics of a particular risk. Typically our
reinsurance contracts allow us to reassume ceded risks after a specified period.
This right is valuable where our mortality experience is   5    sufficiently favorable to make it
financially advantageous for us to reassume the risk rather than continue paying
reinsurance premiums.  We reinsure up to 90% of the mortality
risk on most new issues of term insurance.  In August of 2006, we entered into an
agreement to reinsure 50% of the risk on policies issued from July 1, 2002
through December 31, 2005, inclusive, with a net amount at risk of
$2,000,000 or greater. As of December 31, 2006, we had ceded $40.8 billion
in face amount of reinsurance, representing 74% of our total face amount of
$55.3 billion of life insurance in force.  We reinsure 100% of guaranteed minimum
death benefits on variable annuities issued before January 1, 2000, including subsequent deposits. We retain the guaranteed
minimum death benefit risks on the remaining variable deferred annuities in
force that are not covered by this reinsurance arrangement. We cede to Phoenix
Life 100% of the guaranteed minimum accumulation and withdrawal benefits on our
variable annuities.  The following table lists our five
principal life reinsurers.  Reinsurance
Face Amount ofRecoverable
Life Insurance
A.M. BestReinsurer
Balances
Ceded
Rating(1)As of December 31, 2006RGA Reinsurance Company$3.1

$14.1

A+AEGON USA$1.8

$9.3

A+Swiss Re Life & Health America, Inc.$1.9

$2.8

A+Munich American Reassurance Corp$0.2

$2.3

B+Scottish Re$1.2

$5.2

Bu(1) _______ (1) Rating is currently under review.  General Development of Business  PHL Variable Insurance Company, or
PHLVIC, was incorporated in Connecticut in 1981. Our principal executive offices
are located at One American Row, Hartford, Connecticut 06102-5056. Our telephone
number is (860) 403-5000. Our website is located at www.phoenixwm.com.
(This and all other URLs included herein are intended to be inactive textual
references only. They are not intended to be an active hyperlink to our website.
The information on our website is not, and is not intended to be, part of this
Form 10-K and is not incorporated into this report by reference.)  Our indirect parent, Phoenix Life, was
organized in Connecticut in 1851. In 1992, in connection with its merger with
Home Life Insurance Company, Phoenix Life redomiciled to New York.  On June 25, 2001, the effective
date of its demutualization, Phoenix Life converted from a mutual life insurance
company to a stock life insurance company and became a wholly-owned subsidiary
of PNX. In addition, on June 25, 2001, PNX completed its initial public
offering, or IPO.   6    The following chart illustrates our
corporate structure as of December 31, 2006.  THE PHOENIX COMPANIES, INC.100%

Various %sPHOENIX LIFEINSURANCE COMPANY

OTHER DOMESTIC
AND FOREIGN SUBSIDIARIES100%PM
HOLDINGS, INC.100%

Various %sPHL VARIABLE INSURANCE COMPANY

OTHER DOMESTIC AND FOREIGN SUBSIDIARIES   Item 1A. Risk Factors  In addition to the normal risks of
business, we are subject to significant risks and uncertainties, including those
listed below. You should carefully consider the following risk factors before
investing in our securities, any of which could have a significant or material
adverse effect on our business, financial condition, operating results or
liquidity. This information should be considered carefully together with the
other information contained in this report and the other reports and materials
we file with the Securities and Exchange Commission. The risks described below
are not the only ones we face. Additional risks may also have a significant or
material adverse effect on our business, financial condition, operating results
or liquidity.  Poor performance of the equity
markets could adversely affect variable universal life and variable annuity
products.  The U.S. equity markets can be volatile
and experience both periods of strong growth and of substantial declines.  There are two ways in which equity
market declines and volatility have affected, or have the potential to affect,
us negatively.  ·
First, because the fee revenues of our variable products
businesses are based on the value of assets under our management, poor
performance of the equity markets limits our fee revenues by reducing the value
of the assets we manage.·
Second, significant market volatility or declines could cause
potential purchasers of our products to refrain from purchasing and current
owners to withdraw from the markets or reduce their exposure to equity products.  Changes in interest rates could harm
cash flow and profitability in our life and annuity businesses.  Our life insurance and annuity
businesses are sensitive to interest rate changes. In periods of increasing
interest rates, life insurance policy loans, surrenders and withdrawals could
increase as policyholders seek investments with higher perceived 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,   7    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 contractholders, which could
adversely affect our profitability.  Our profitability may decline if
mortality rates or persistency rates differ significantly from our pricing
expectations.  We set prices for many of our insurance
and annuity products based upon expected claims and payment patterns, using
assumptions for mortality rates, or likelihood of death, of our policyholders.
Pricing of our insurance and annuity products is also based in part upon
expected persistency of these products, which is the probability that a policy
or contract will remain in force from one period to the next. Significant
deviations in actual experience from our pricing assumptions could have an
adverse effect on the profitability of our products. In addition, such
deviations could cause us to increase the amortization of our deferred policy
acquisition cost balances, which would also have an adverse impact on
profitability. Although most of our current products permit us to increase
premiums or adjust other charges and credits during the life of the policy or
contract, the adjustments permitted under the terms of the policies or contracts
may not be sufficient to maintain
 profitability. Some of our products do not permit us to increase premiums or
adjust other charges and credits or limit those adjustments during the life of
the policy or contract.  We may incur losses due to our
reinsurers being unwilling or unable to meet their obligations under reinsurance
contracts and the availability, pricing and adequacy of reinsurance may not be
sufficient to protect us against losses.  As an insurer, we have a regular
program of reinsurance to reduce the losses that may arise from catastrophes or
other events that can cause unfavorable underwriting results. As of
December 31, 2006, 74% of the total face amount of PNXs written
policies was ceded to reinsurers. Under these reinsurance arrangements, other
insurers assume a portion of our losses and related expenses; however, we remain
liable as the direct insurer on all risks reinsured. Consequently, ceded
reinsurance arrangements do not eliminate our obligation to pay claims and we
are subject to our reinsurers credit risk with respect to our ability to
recover amounts due from them. Although we evaluate periodically the financial
condition of our reinsurers to minimize our exposure to significant losses from
reinsurer insolvencies, our reinsurers may become financially unsound or choose
to dispute their contractual obligations by the time their financial obligations
become due. The inability or unwillingness of any reinsurer to meet its financial obligations to
us could negatively affect our operating results. In addition, market conditions
beyond our control determine the availability and cost of the reinsurance we are
able to purchase. No assurances can be made that reinsurance will remain
continuously available to us to the same extent and on the same terms and rates
as are currently available. If we were unable to maintain our current level of
reinsurance or purchase new reinsurance protection in amounts that we consider
sufficient and at prices that we consider acceptable, we would have to either
accept an increase in our net exposure, reduce the amount of business we write,
or develop other alternatives to reinsurance.  We depend on non-affiliated
distribution for our product sales and if our relationships with these
distributors were harmed, we could suffer a loss in revenues.  We distribute our products through
non-affiliated advisors, broker-dealers and other financial intermediaries.
There is substantial competition for business within most of these distributors.
We believe that our sales through these distributors depend on factors such as
our financial strength, the quality of our products and the services we provide
to, and the relationships we develop with, our distributors. Our largest
distributors of life insurance include a subsidiary of State Farm Mutual
Automobile Company, or State Farm, and National Financial Partners, or NFP. In
2006, State Farm accounted for approximately 29% and NFP accounted for
approximately 13% of PNXs new life insurance and annuity sales based on
first year commissions. PNX has had distribution arrangements with State Farm
since our initial public offering in 2001 and with NFP since 1995. Our
distributors are generally free to sell products from a variety of providers,
which makes it important for us to continually offer distributors products and services they find attractive.
We may not be able to establish or maintain satisfactory relationships with
distributors if our products or services do not meet their needs. Accordingly,
our revenues and profitability would suffer.   8    Downgrades to PNXs debt
ratings and our financial strength ratings could increase policy surrenders and
withdrawals, adversely affect relationships with distributors, reduce new sales
and earnings from certain of our life insurance products and increase our future
borrowing costs.  Rating agencies assign us financial
strength ratings, and assign PNX debt ratings, based in each case on their
opinions of the relevant companys ability to meet its financial
obligations.  Financial strength ratings reflect a
rating agencys view of an insurance companys ability to meet its
obligations to its insureds. These ratings are therefore key factors underlying
the competitive position of life insurers. Downgrades could adversely affect our
reputation and, hence, our relationships with existing distributors and our
ability to establish additional distributor relationships. If this were to
occur, we might experience a decline in sales of certain products and the
persistency of existing customers. At this time, we cannot estimate the impact
on sales or persistency. A significant decline in our sales or persistency could
have a material adverse effect on our financial results.  Any rating downgrades may result in
increased interest costs in connection with future borrowings. Such an increase
would decrease our earnings and could reduce our ability to finance our future
growth on a profitable basis. Downgrades may also trigger defaults or repurchase
obligations.  Our business operations, investment
returns, and profitability could be adversely impacted by inadequate performance
of third-party relationships.  We are dependent on certain third-party
relationships to maintain essential business operations. These services include,
but are not limited to, information technology infrastructure, application
systems support, mutual fund and shareholder accounting services, transfer agent
and cash management services, custodial services, records storage management,
backup tape management, security pricing services, medical information, payroll,
and employee benefit programs. In addition, we maintain contractual
relationships with certain investment advisory and investment management firms
to leverage their expertise. These firms manage select investments or portions
of portfolios under sub-advisory agreements.  We periodically negotiate provisions
and renewals of these relationships and there can be no assurance that such
terms will remain acceptable to such third parties or us. An interruption in our
continuing relationship with certain of these third parties or any material
delay or inability to deliver essential services could materially affect our
business operations and, potentially, adversely affect our profitability.  We might be unable to attract or
retain personnel who are key to our business.  The success of our business is
dependent to a large extent on our ability to attract and retain key employees.
Competition in the job market for professionals such as sales personnel and
actuaries is generally intense. In general, our employees are not subject to
employment contracts or non-compete agreements. Any inability to retain our key
employees, or attract and retain additional qualified employees, could have a
negative impact on us.  We face strong competition in our
businesses from mutual fund companies, banks, asset management firms and other
insurance companies. This competition could impair our ability to retain
existing customers, attract new customers and maintain our profitability.  We face strong competition in each of
our businesses, comprising life insurance and annuities. We believe that our
ability to compete is based on a number of factors, including product features,
investment performance, service, price, distribution capabilities, scale,
commission structure, name recognition and financial strength ratings. While
there is no single company that we identify as a dominant competitor in our
business overall, our actual and potential competitors include a large number of
mutual fund companies, banks, asset management firms and other insurance
companies, many of which have advantages over us in one or more of the above
competitive factors. Recent industry consolidation, including acquisitions of
insurance and other financial services companies in the U.S. by global
companies, has resulted in larger competitors with financial resources,
marketing and distribution capabilities and brand identities that are stronger
than ours. Larger firms also
may be able to offer, due to economies of scale, more competitive pricing than
we can. In addition, some of our competitors are regulated differently than we
are, which may give them a competitive advantage; for example, many non-   9    insurance company providers of
financial services are not subject to the costs and complexities of insurance
regulation by multiple states. If we do not compete effectively in this
environment, our profitability and financial condition would be materially
adversely affected.  Changes in tax laws may decrease
sales and profitability of products.  Under current federal and state income
tax law, certain products we offer, primarily life insurance and annuities,
receive favorable tax treatment. This favorable treatment may give certain of
our products a competitive advantage over noninsurance products. Congress from
time to time considers legislation that would reduce or eliminate the favorable
policyholder tax treatment currently applicable to life insurance and annuities.
Congress also considers proposals to reduce the taxation of certain products or
investments that may compete with life insurance and annuities. Legislation that
increases the taxation on insurance products or reduces the taxation on
competing products could lessen the advantage or create a disadvantage for
certain of our products making them less competitive. Such proposals, if
adopted, could have a material adverse effect on our financial position or
ability to sell such products and could result in the surrender of some existing
contracts an
d policies. In addition, changes in the federal estate tax laws could negatively
affect the demand for the types of life insurance used in estate planning.  Potential changes in federal and
state regulation may increase our business costs and required capital levels,
which could adversely affect our business, consolidated operating results,
financial condition or liquidity.  We are subject to extensive laws and
regulations. These laws and regulations are complex and subject to change.
Moreover, they are administered and enforced by a number of different
governmental authorities, including foreign regulators, state insurance
regulators, state securities administrators, the Securities and Exchange
Commission, the New York Stock Exchange, the National Association of Securities
Dealers, the U.S. Department of Justice, and state attorneys general, each of
which exercises a degree of interpretive latitude. Consequently, we are subject
to the risk that compliance with any particular regulators or enforcement
authoritys interpretation of a legal issue may not result in compliance
with another regulators or enforcement authoritys interpretation of
the same issue, particularly when compliance is judged in hindsight. In
addition, there is risk that any particular regulators or enforcement
authoritys interpretation
 of a legal issue may change over time to our detriment, or that changes in the
overall legal environment may, even absent any particular regulators or
enforcement authoritys interpretation of a legal issue changing, cause us
to change our views regarding the actions we need to take from a legal risk
management perspective, thus necessitating changes to our practices that may, in
some cases, limit our ability to grow and improve the profitability of our
business.  State insurance laws regulate most
aspects of our U.S. insurance businesses, and our insurance subsidiaries are
regulated by the insurance departments of the states in which they are domiciled
and licensed. State laws in the U.S. grant insurance regulatory authorities
broad administrative powers with respect to, among other things:  ·
licensing companies and agents to transact business;·
calculating the value of assets to determine compliance with
statutory requirements;·
mandating certain insurance benefits; regulating certain
premium rates; reviewing and approving policy forms;·
regulating unfair trade and claims practices, including
through the imposition of restrictions on marketing and sales practices,
distribution arrangements and payment of inducements;·
establishing statutory capital and reserve requirements and
solvency standards;·
fixing maximum interest rates on insurance policy loans and
minimum rates for guaranteed crediting rates on life insurance policies and
annuity contracts;·
approving changes in control of insurance companies;·
restricting the payment of dividends and other transactions
between affiliates;·
and regulating the types, amounts and valuation of
investments.  State insurance regulators and the
National Association of Insurance Commissioners, or NAIC, regularly re-examine
existing laws and regulations applicable to insurance companies and their
products. Changes in all of these laws and regulations, or in interpretations
thereof, are often made for the benefit of the consumer at the expense of the
insurer and thus could have a material adverse effect on our business,
consolidated operating results, financial condition and liquidity. Compliance
with these laws and regulations is also time consuming and   10    personnel-intensive, and changes in
these laws and regulations may increase materially our direct and indirect
compliance costs and other expenses of doing business, thus having an adverse
effect on our business, consolidated operating results, financial condition and
liquidity.  Legal and regulatory actions are
inherent in our businesses and could result in financial losses or harm to our
businesses.  We are regularly involved in litigation
and arbitration, both as a defendant and as a plaintiff. For example, in the
last few years Phoenix Life has been involved in disputes relating to certain
portions of its discontinued group accident and health reinsurance business. In
addition, various regulatory bodies regularly make inquiries of PNX and its
subsidiaries and, from time to time, conduct examinations or investigations
concerning compliance with, among other things, insurance laws, securities laws,
and laws governing the activities of broker-dealers. Recently, there has been a
significant increase in federal and state regulatory activity relating to
financial services companies, with a number of recent regulatory inquiries
focusing on late-trading, market timing and valuation issues. Financial services
companies have also been the subject of broad industry inquiries by state
regulators and attorneys general which do not appear to be company-specific. PNX
and its subsidiaries have been the subject of market timing and distribution practice
inquiries in the past, and we continue to cooperate with the applicable
regulatory authorities in these matters. While no regulatory authority has ever
taken action against us with regard to these inquiries, we may be subject to
further related or unrelated inquiries or actions in the future.  It is not feasible to predict or
determine the ultimate outcome of all legal or regulatory proceedings or to
provide reasonable ranges of potential losses. We believe that the outcomes of
our litigation and regulatory matters are not likely, either individually or in
the aggregate, to have a material adverse effect on our consolidated financial
condition. However, given the large or indeterminate amounts sought in certain
of these matters and the inherent unpredictability of litigation and regulatory
matters, it is possible that an adverse outcome in certain matters could, from
time to time, have a material adverse effect on our results of operations or
cash flows in particular quarterly or annual periods.   Item 1B. Unresolved
Staff Comments  The registrant has omitted this
information from this report as the registrant is not an accelerated filer or a
large accelerated filer, as defined in Rule 12b-2 of the Exchange Act and is not
a well-known seasoned issuer as defined in Rule 405 of the Securities Act.   Item 2. Properties  Our executive headquarters consist of
an office building at One American Row in Hartford, Connecticut owned by our
parent company and space in East Greenbush, New York which is leased by our
parent company. For the use of space in these buildings, we pay rent through
expense allocations from our parent company. We do not own any real estate.   Item 3. Legal
Proceedings  We are regularly involved in litigation
and arbitration, both as a defendant and as a plaintiff. In addition, various
regulatory bodies regularly make inquiries of us and, from time to time, conduct
examinations or investigations concerning our compliance with, among other
things, insurance laws, securities laws, laws governing the activities of
broker-dealers and other laws and regulations affecting our registered products.
It is not feasible to predict or determine the ultimate outcome of all legal or
regulatory proceedings or to provide reasonable ranges of potential losses. We
believe that the outcomes of our litigation and regulatory matters are not
likely, either individually or in the aggregate, to have a material adverse
effect on our consolidated financial condition. However, given the large or
indeterminate amounts sought in certain of these matters and the inherent
unpredictability of litigation and regulatory matters, it is possible that an
adverse outcome
 in certain matters could, from time to time, have a material adverse effect on
our results of operations or cash flows in particular quarterly or annual
periods. See Item 1A, Risk Factors and Note 14 to our financial
statements in this Form 10-K for additional information.   11    Item 4. Submission of
Matters to a Vote of Security Holders  The registrant has omitted this
information from this report as 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.   12    PART II  Item 5. Market for
Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity
Securities   Common Stock  Shares of our common stock are not
publicly traded and are all owned indirectly by our ultimate parent company,
PNX.  Dividends  We did not pay any dividends during the
three years ended December 31, 2006.    Item 6. Selected
Financial Data  The registrant has omitted this
information from this report as 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.   13    Item 7. Managements Discussion and Analysis of Financial Condition and Results of
OperationsManagements narrative analysis of the results of operations is
presented in lieu of Managements Discussion and Analysis of Financial
Condition and Results of Operations, pursuant to General Instruction (I)(2)(a)
of Form 10-K.  FORWARD-LOOKING
STATEMENTS  The discussion in this
Form 10-K may contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. We intend for these
forward-looking statements to be covered by the safe harbor provisions of the
federal securities laws relating to forward-looking statements. These include
statements relating to trends in, or representing managements beliefs
about our future strategies, operations and financial results, as well as other
statements including, but not limited to, words such as anticipate,
believe, plan, estimate, expect,
intend, may, should and other similar
expressions. Forward-looking statements are made based upon managements
current expectations and beliefs concerning trends and future developments and
their potential effects on us. They are not guarantees of future performance.
Actual results may differ materially from those suggested by forward-looking statements as a result of
risks and uncertainties which include, among others: (i) movements in the
equity markets and interest rates that affect our investment results, the fees
we earn from our assets under management and the demand for our variable
products; (ii) the possibility that mortality rates or persistency may
differ significantly from our pricing expectations; (iii) the availability,
pricing and adequacy of reinsurance coverage generally and the inability or
unwillingness of our reinsurers to meet their obligations to us specifically;
(iv) our dependence on non-affiliated distributors for our product sales;
(v) downgrades in our financial strength ratings; (vi) our dependence
on third parties to maintain critical business and administrative functions;
(vii) our ability to attract and retain key personnel in a competitive
environment; (viii) heightened competition,
including with respect to pricing, entry of new competitors and the development
of new products and services by new and existing competitors;
(ix) legislative, regulatory, accounting or tax developments that may
affect us directly, or indirectly through the cost of, or demand for, our
products or services; (x) legal or regulatory actions; and (xi) other
risks and uncertainties described herein or in any of our filings with the SEC.
We undertake no obligation to update or revise publicly any forward-looking
statement, whether as a result of new information, future events or otherwise.   14    MANAGEMENTS
NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS  This section reviews our results of
operations for the two years ended December 31, 2006. This discussion
should be read in conjunction with our financial statements in this
Form 10-K.  Overview  We are a manufacturer of life insurance
and annuity products. We provide these products and services through a wide
variety of third-party financial professionals. We
manufacture a variety of life insurance and annuity products, including
universal, variable universal and term life insurance and a range of variable
annuity offerings.  Our profitability depends principally
upon:  ·
the adequacy of our product pricing, which is primarily a
function of our:
ability to
select appropriate underwriting risks;
mortality
experience;
ability to
generate investment earnings;
ability to
maintain expenses in accordance with our pricing assumptions; and
persistency
on policies issued (the percentage of policies remaining in force from year to
year as measured by premiums);·
the amount and composition of funds on deposit;·
the maintenance of our target spreads between the rate of
earnings on our investments and interest rates credited to customers; and·
our ability to manage expenses.  We derive our revenues principally
from:  ·
premiums on life insurance;·
insurance and investment product fees on variable life and
annuity products and universal life products; and·
net investment income and net realized investment gains.  Under accounting principles generally
accepted in the United States of America, or GAAP, premium and deposit
collections for variable life, universal life and annuity products are not
recorded as revenues. For certain investment options of variable products,
collections are reflected on our balance sheet as an increase in separate
account liabilities. Collections for universal life, fixed annuities and certain
investment options of variable annuities are reflected on our balance sheet as
an increase in policyholder deposit funds. Collections for other products are
reflected on our balance sheet as an increase in policy liabilities and
accruals.  Our expenses consist principally of:  ·
insurance policy benefits provided to policyholders,
including interest credited on policies;·
deferred policy acquisition cost amortization;·
other operating expenses; and·
income taxes.  Our sales and financial results are
always affected by demographic, industry and market trends. For example, the
baby boom generation is in its prime savings years and Americans generally have
begun to rely less on defined benefit retirement plans, Social Security and
other government programs to meet their postretirement financial needs. In
addition, product preferences have shifted between fixed and variable options
depending on market and economic conditions. Our balanced product portfolio,
including universal life, variable life and variable annuity products positions
us to meet this shifting demand.  Impact of New Accounting Standards  For a discussion of accounting
standards, see Note 2 to our financial statements in this Form 10-K.   15    Critical Accounting Estimates  The analysis of our results of
operations is based upon our financial statements, which have been prepared in
accordance with GAAP. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.  Critical accounting estimates are
reflective of significant judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain. The
following are areas that we believe require significant judgments:  Deferred Policy Acquisition Costs  We amortize deferred policy acquisition
costs based on the related policys classification. For individual life
insurance policies, deferred policy acquisition costs are amortized in
proportion to estimated gross margins. For universal life, variable universal
life and accumulation annuities, deferred policy acquisition costs are amortized
in proportion to estimated gross profits, or EGPs. Policies may be surrendered
for value or exchanged for a different one of our products (internal
replacement). The deferred policy acquisition costs balance associated with the
replaced or surrendered policies is amortized to reflect these surrenders.  Each year, we develop future EGPs for
the products sold during that year. The EGPs for products sold in a particular
year are aggregated into cohorts. Future EGPs are projected for the estimated
lives of the contracts. The amortization of deferred policy acquisition costs
requires the use of various assumptions, estimates and judgments about the
future. The assumptions, in the aggregate, are considered important in the
projections of EGPs. The assumptions developed as part of our annual process are
based on our current best estimates of future events, which are likely to be
different for each years cohort. Assumptions considered to be significant
in the development of EGPs include separate account fund performance, surrender
and lapse rates, interest margin, mortality, premium persistency and expenses.
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 and expenses.  Underlying assumptions for future
periods of EGPs are not altered unless experience deviates significantly from
original assumptions. For example, when lapses of our insurance products
meaningfully exceed levels assumed in determining the amortization of deferred
policy acquisition costs, we adjust amortization to reflect the change in future
premiums or EGPs resulting from the unexpected lapses. In the event that we were
to revise assumptions used for prior year cohorts, our estimate of projected
account values would change and the related EGPs in the deferred policy
acquisition cost amortization model would be adjusted to reflect such change.
This process is known as unlocking. Continued favorable experience
on key assumptions, which could include increasing separate account fund return
performance, decreasing lapses or decreasing mortality could result in an
unlocking which would result in a decrease to deferred policy acquisition cost
amortization and
an increase in the deferred policy acquisition cost 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 cost
balances.  The separate account fund performance
assumption is critical to the development of the EGPs related to our variable
annuity and variable life insurance businesses. As equity markets do not move in
a systematic manner, we use a mean reversion method (reversion to the mean
assumption), a common industry practice to determine the future equity market
growth rate assumption used for the amortization of deferred policy acquisition
costs. This practice assumes that the expectation for long-term appreciation is
not changed by minor short-term market fluctuations. The average long-term rate
of assumed separate account fund performance used in estimating gross profits
was 6.0% (after fund fees and mortality and expense charges) for the variable
annuity business and 6.9% (after fund fees and mortality and expense charges)
for the variable life business at both December 31, 2006 and 2005.   16     We perform analysis
with respect to the sensitivity of a change in the separate account performance
assumption as it is critical to the development of the EGPs related to our
variable annuity and variable life insurance business. Equity market movements
have a significant impact on the account value of variable life and annuity
products and the fees earned on these. EGPs could increase or decrease with
these movements in the equity market. Sustained and significant changes in the
equity markets could therefore have an impact on deferred policy acquisition
cost amortization. We also perform analysis with respect to the sensitivity of a
change in assumed mortality as it is critical to the development of the EGPs
related to our universal life insurance business.  In our current year
unlocking, we concluded that a revision had to be made to our assumed mortality
assumption. If, at December 31, 2006, we had increased our assumed
mortality by 5%, the decrease to net income would have been $5,000 thousand
after tax. If instead, at December 31, 2006, we had decreased our
assumed mortality by 5%, the after-tax increase to net income would have been
$4,236 thousand.  At our most recent
unlocking of separate account performance, we concluded that a revision of 100
basis points to previously projected account returns and related EGPs was
required. If at December 31, 2006 we had used a 100 basis points lower
separate account return assumption (after fund fees and mortality and expense
charges) for both the variable annuity and the variable life businesses and used
our current best estimate assumptions for all other assumptions to project
account values forward from the current value to reproject EGPs, the estimated
increase to amortization and decrease to net income would be approximately
$2,041 thousand, after-tax, for the year ended December 31, 2006.  If instead we had
used a 100 basis points higher separate account return assumption (after fund
fees and mortality and expense charges) for both the variable annuity and
variable life businesses and used our current best estimate assumptions for all
other assumptions to project account values forward from the current value to
reproject EGPs, the estimated decrease to amortization and increase to net
income would be approximately $2,238 thousand, after-tax, for the year ended
December 31, 2006.  These revisions are
not currently required or anticipated but we believe they could be reasonably
likely to occur based on our past experience.  Policy Liabilities
and Accruals  Reserves are
liabilities representing estimates of the amounts that will come due to our
policyholders at some point in the future. GAAP prescribes the methods of
establishing reserves, allowing some degree of managerial judgment.  See Note 2 to
our financial statements in this Form 10-K for more information.  Valuation of Debt
and Equity Securities  We classify our debt
and equity securities held in our general account as available-for-sale and
report them in our balance sheet at fair value. Fair value is based on quoted
market price, where available. When quoted market prices are not available, we
estimate fair value by discounting debt security cash flows to reflect interest
rates currently being offered on similar terms to borrowers of similar credit
quality, by quoted market prices of comparable instruments and by independent
pricing sources or internally developed pricing models.  Fair Value of General Account Fixed Maturity Securities
As of December 31, 2006by Pricing Source:Fixed
% of($ in thousands)Maturities
Totalat Fair Value
Fair ValuePriced via independent market quotations$1,391,922
68%Priced via matrices
378,014
18%Priced via broker quotations
214,330
10%Priced via other methods
54,459
3%Short-term investments(1)
12,264
1%Total
$
2,050,989
100% _______ (1)Short-term investments are valued at amortized cost, which approximates fair value.   17      Investments whose value, in our
judgment, is considered to be other-than-temporarily impaired are written down
to fair value as a charge to realized losses included in our earnings. The
assessment of whether impairments have occurred is based on managements
case-by-case evaluation of the underlying reasons for the decline in fair value.
Management considers a wide range of factors about the security issuer and uses
its best judgment in evaluating the cause of the decline in the estimated fair
value of the security and in assessing the prospects for near term recovery.
Inherent in managements evaluation of the security are assumptions and
estimates about the operations of the issuer and its future earnings potential.
Consideration used by the Company in the impairment evaluation process include,
but are not limited to:  ·
the length of time and the extent to which the market value
has been below cost or amortized cost;·
the potential for impairments of securities when the issuer
is experiencing significant financial difficulties;·
the potential for impairments in an entire industry sector or
sub-sector;·
our ability and intent to hold the security for a period of
time sufficient to allow for recovery of its value;·
unfavorable changes in forecasted cash flows on asset-backed
securities; and·
other subjective factors, including concentrations and
information obtained from regulators and rating agencies.  The cost basis of these written-down
investments is adjusted to fair value at the date the determination of
impairment is made. The new cost basis is not changed for subsequent recoveries
in value. For mortgage-backed and other asset-backed debt securities, we
recognize income using a constant effective yield based on anticipated
prepayments and the estimated economic lives of the securities. When actual
prepayments differ significantly from anticipated prepayments, the effective
yield is recalculated to reflect actual payments to date and any resulting
adjustment is included in net investment income. For certain asset-backed
securities, changes in estimated yield are recorded on a prospective basis and
specific valuation methods are applied to these securities to determine if there
has been an other-than-temporary decline in value.  See Note 6 to our financial
statements in this Form 10-K for more information.  Deferred Income Taxes  We account for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, or SFAS 109. The deferred tax
assets and/or liabilities are determined by multiplying the differences between
the financial reporting and tax reporting bases for assets and liabilities by
the enacted tax rates expected to be in effect when such differences are
recovered or settled. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. Valuation
allowances on deferred tax assets are estimated based on our assessment of the
realizability of such amounts.  We have elected to file a consolidated
federal income tax return for 2006 and prior years. Within the consolidated tax
return, we are required by regulations of the Internal Revenue Service, or the
IRS, to segregate our companies into two groups: life insurance companies and
non-life insurance companies. We are limited as to the amount of any operating
losses from one group that can be offset against taxable income of the other
group. These limitations affect the amount of any operating loss carryforwards
that we have recorded in our deferred tax assets now or in the future.  We have determined, based on our
earnings and future income, that it is more likely than not that the deferred
income tax assets will be realized and no valuation allowance is necessary. In determining the adequacy of
future income, we have considered projected future income, reversal of existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.  Our federal income tax returns are
routinely audited by the IRS and estimated provisions are routinely provided in
the financial statements in anticipation of the results of these audits. While
it is often difficult to predict the outcome of these audits, including the
timing of any resolution of any particular tax matter, we believe that our
reserves, as recorded in other liabilities on the balance sheet, are adequate
for all open tax years. Unfavorable resolution of any particular issue could
result in additional use of cash to pay liabilities that would be deemed owed to
the IRS. Additionally, any unfavorable or favorable resolution of any particular
issue could result in an increase or decrease, respectively, to our effective
income tax rate to the extent that our estimates differ from the ultimate
resolution.   18    See Note 8 to our financial
statements in this Form 10-K for more information.  General Account  The invested assets in our general
account are generally of high quality and broadly diversified across fixed
income sectors, public and private income securities and individual credits and
issuers. Our investment professionals manage these general account assets in
investment segments that support specific product liabilities. These investment
segments have distinct investment policies that are structured to support the
financial characteristics of the related liabilities within them. Segmentation
of assets allows us to manage the risks and measure returns on capital for our
various products.  Separate Accounts  Separate account assets are managed in
accordance with the specific investment contracts and guidelines relating to our
variable products. We generally do not bear any investment risk on assets held
in separate accounts. Rather, we receive investment management fees based on
assets under management. Assets held in separate accounts are not available to
satisfy general account obligations.  Debt and Equity Securities Held in
General Account  Our general account debt securities
portfolio consists primarily of investment-grade publicly traded and privately
placed corporate bonds, residential mortgage-backed securities, commercial
mortgage-backed securities and asset-backed securities. As of December 31,
2006, our general account debt securities, with a carrying value of $2,051.0
million, represented 99.0% of total general account investments. Public debt
securities represented 80.2% of total debt securities, with the remaining 19.8%
represented by private debt securities.  Each year, the majority of our general
accounts net cash flows are invested in investment grade debt securities.
In addition, we maintain a portfolio allocation of between 6% and 10% of debt
securities in below investment grade rated bonds. Allocations are based on our
assessment of relative value and the likelihood of enhancing risk-adjusted
portfolio returns. The size of our allocation to below investment grade bonds is
also constrained by the size of our net worth. We are subject to the risk that
the issuers of the debt securities we own may default on principal and interest
payments, particularly in the event of a major economic downturn. Our investment
strategy has been to invest the majority of our below investment grade rated
bond exposure in the BB rating category, which is equivalent to a Securities
Valuation Office, or SVO, securities rating of 3. The BB rating category is the
highest quality tier within the below investment grade universe, and BB rated
securities historically experienced lower defaults compared to B or CCC rated
bonds. As of December 31, 2006, our total below investment grade securities
totaled $192.2 million, or 9.4%, of our total debt security portfolio. Of that
amount, $136.3 million, or 6.6%, of our debt security portfolio was invested in
the BB category. Our debt securities having an increased risk of default (those
securities with an SVO rating of four or greater which is equivalent to B or
below) totaled $55.9 million, or 2.7%, of our total debt security portfolio.  Our general account debt and equity
securities are classified as available-for-sale and are reported at fair value
with unrealized gains or losses included in equity. Accordingly, the carrying
value of such securities reflects their fair value at the balance sheet date.
Fair value is based on quoted market price, where available. When quoted market
prices are not available, we estimate fair value for debt securities by
discounting projected cash flows based on market interest rates currently being
offered on similar terms to borrowers of similar credit quality, by quoted
market prices of comparable instruments and by independent pricing sources or
internally developed pricing models. Investments whose value, in our judgment,
is considered to be other-than-temporarily impaired are written down to fair
value as a charge to realized losses included in our earnings. The cost basis of
these written-down investments is adjusted to fair value at the date the
determination of
 impairment is made. The new cost basis is not changed for subsequent recoveries
in value.   19    Debt Securities by Type and Credit Quality:
As of December 31, 2006($ in thousands)
Investment Grade
Below Investment GradeFair Value
Cost
Fair Value
CostUnited States government and agency$92,579
$93,425
$--
$--State and political subdivision
15,900

16,281

--

--Foreign government
23,833

23,466

26,051

23,039Corporate
1,002,018

1,013,370

155,763

158,905Mortgage-backed
452,641

455,739

--

--Other asset-backed
271,810

269,742

10,394

10,344Total debt securities
$
1,858,781
$
1,872,023
$
192,208
$
192,288Percentage of total debt securities
91%

91%

9%

9%  We manage credit risk through industry
and issuer diversification. Maximum exposure to an issuer is defined by quality
ratings, with higher quality issuers having larger exposure limits. Our
investment approach has been to create a high level of industry diversification.
The top five industry holdings as of December 31, 2006 in our debt
securities portfolio are diversified financial services (6.8%), banking (5.6%),
insurance (3.0%), REITs (2.6%),and electric utilities (2.6%).  Total net unrealized losses on debt
securities were $13.3 million (unrealized losses of $30.5 million less
unrealized gains of $17.2 million).  At the end of each reporting period, we
review our security holdings for potential recognition of an
other-than-temporary impairment. We maintain a watch list of securities in
default, near default or otherwise considered by our investment professionals as
being distressed, potentially distressed or requiring a heightened level of
scrutiny. We also identify securities whose carrying value has been below
amortized cost on a continuous basis for zero to six months,
greater than six months to 12 months and greater than 12 months. This analysis
is provided for investment grade and non-investment grade securities. Using this
analysis, coupled with our watch list, we review all securities whose fair value
is less than 80% of amortized cost (significant unrealized loss) with emphasis
on below investment grade securities with a continuous significant unrealized
loss in excess of six months. In addition, we review securities that had
experienced lesser percent
age declines in value on a more selective basis to determine if a security is
other-than-temporarily impaired.  Our assessment of whether an investment
by us in a debt or equity security is other-than-temporarily impaired includes
whether the issuer has:  ·
defaulted on payment obligations;·
declared that it will default at a future point outside the
current reporting period;·
announced that a restructuring will occur outside the current
reporting period;·
severe liquidity problems that cannot be resolved;·
filed for bankruptcy;·
a financial condition which suggests that future payments are
highly unlikely;·
deteriorating financial condition and quality of assets;·
sustained significant losses during the current year;·
announced adverse changes or events such as changes or
planned changes in senior management, restructurings, or a sale of assets;
and/or·
been affected by any other factors that indicate that the
fair value of the investment may have been negatively impacted.   20    The following table presents certain
information with respect to our gross unrealized losses related to our
investments in general account debt securities. Applicable deferred acquisition
costs and deferred income taxes reduce the effect of these losses on our
comprehensive income.  Duration of Gross Unrealized Losses onGeneral Account Securities:
As of December 31, 2006($ in thousands)
0 - 6
6 - 12
Over 12Total
Months
Months
MonthsDebt SecuritiesTotal fair value$1,419,769
$119,064
$176,270
$1,124,435Total amortized cost
1,450,235

119,770

178,055

1,152,410Unrealized losses
$
(30,466)
$
(706)
$
(1,785)
$
(27,975)Unrealized losses after offsets$(4,154)
$(101)
$(228)
$(3,825)Unrealized losses over 20% of cost$--
$
--
$--
$--Unrealized losses over 20% of cost after offsets$--
$--
$--
$--Investment grade:Unrealized losses$(26,230)
$(493)
$(1,621)
$(24,116)Unrealized losses after offsets$(3,559)
$(76)
$(208)
$(3,275)Unrealized losses over 20% of cost$--
$--
$--
$--Unrealized losses over 20% of cost after offsets$--
$--
$--
$--Below investment grade:Unrealized losses$(4,236)
$(213)
$(164)
$(3,859)Unrealized losses after offsets$(595)
$(25)
$(20)
$(550)Unrealized losses over 20% of cost$--
$--
$--
$--Unrealized losses over 20% of cost after offsets$--
$--
$--
$--  For debt securities with gross
unrealized losses, 85.7% of the unrealized losses after offsets pertain to
investment grade securities and 14.3% of the unrealized losses after offsets
pertain to below investment grade securities at December 31, 2006.  In determining that the securities
giving rise to the previously mentioned unrealized losses were not
other-than-temporarily impaired, we evaluated the factors cited above. In making
these evaluations, we must exercise considerable judgment. Accordingly, there
can be no assurance that actual results will not differ from our judgments and
that such differences may require the future recognition of other-than-temporary
impairment charges that could have a material affect on our financial position
and results of operations. In addition, the value of, and the realization of any
loss on, a debt security or equity security is subject to numerous risks,
including interest rate risk, market risk, credit risk and liquidity risk. The
magnitude of any loss incurred by us may be affected by the relative
concentration of our investments in any one issuer or industry. We have
established specific policies limiting the concentration of our investments in
any single issuer and industry and believe our investment portfolio is prudently diversified.  Liquidity and Capital Resources  In the normal course of business, we
enter into transactions involving various types of financial instruments such as
debt and equity securities. These instruments have credit risk and also may be
subject to risk of loss due to interest rate and market fluctuations.  Our liquidity requirements principally
relate to the liabilities associated with various life insurance and annuity
products and operating expenses. Liabilities arising from life insurance and
annuity products include the payment of benefits, as well as cash payments in
connection with policy surrenders, withdrawals and loans.   21    Historically, we have used cash flow
from operations and investment activities to fund liquidity requirements. Our
principal cash inflows from life insurance and annuities activities come from
premiums, annuity deposits and charges on insurance policies and annuity
contracts. Principal cash inflows from investment activities result from
repayments of principal, proceeds from maturities, sales of invested assets and
investment income.  Additional liquidity to meet cash
outflows is available from our portfolio of liquid assets. These liquid assets
include substantial holdings of United States government and agency bonds,
short-term investments and marketable debt and equity securities.  A primary liquidity concern with
respect to life insurance and annuity products is the risk of early policyholder
and contractholder withdrawal. We closely monitor our liquidity requirements in
order to match cash inflows with expected cash outflows, and employ an
asset/liability management approach tailored to the specific requirements of
each product line, based upon the return objectives, risk tolerance, liquidity,
tax and regulatory requirements of the underlying products. In particular, we
maintain investment programs intended to provide adequate funds to pay benefits
without forced sales of investments. Products having liabilities with relatively
long lives, such as life insurance, are matched with assets having similar
estimated lives, such as long-term bonds and private placement bonds.
Shorter-term liabilities are matched with investments with short-term and
medium-term fixed maturities.  Annuity Actuarial Reserves and Deposit Fund Liability
As of December 31,Withdrawal Characteristics:
2006
2005($ in thousands)
Amount(1)
Percent
Amount(1)
PercentNot subject to discretionary withdrawal provision$28,769
1%
$25,639
1%Subject to discretionary withdrawal without adjustment
595,654
14%

891,259
18%Subject to discretionary withdrawal with
  market value adjustment
398,092
9%

654,576
14%Subject to discretionary withdrawal at contract value
  less surrender charge
499,303
11%

702,492
15%Subject to discretionary withdrawal at market value
2,865,268
65%

2,470,791
52%Total annuity contract reserves and deposit fund liability
$
4,387,086
100%
$
4,744,757
100% _______ (1)Annuity contract reserves and deposit fund liability amounts are reported on a statutory basis, which more accurately reflects the potential cash outflows and include variable product liabilities. Annuity contract reserves and deposit fund liabilities are monetary amounts that an insurer must have available to provide for future obligations with respect to its annuities and deposit funds. These are liabilities in our financial statements prepared in conformity with statutory accounting practices. These amounts are at least equal to the values available to be withdrawn by policyholders.  Individual life insurance policies are
less susceptible to withdrawals than annuity contracts because policyholders may
incur surrender charges and be required to undergo a new underwriting process in
order to obtain a new insurance policy. As indicated in the table above, most of
our annuity contract reserves and deposit fund liabilities are subject to
withdrawals.  Individual life insurance policies,
other than term life insurance policies, increase in cash values over their
lives. Policyholders have the right to borrow an amount up to a certain
percentage of the cash value of their policies at any time. As of
December 31, 2006, we had approximately $321.3 million in cash values with
respect to which policyholders had rights to take policy loans. The majority of
cash values eligible for policy loans are at variable interest rates that are
reset annually on the policy anniversary. Policy loans at December 31, 2006
were $14.4 million.  The primary liquidity risks regarding
cash inflows from our investment activities are the risks of default by debtors,
interest rate and other market volatility and potential illiquidity of
investments. We closely monitor and manage these risks.  We believe that our current and
anticipated sources of liquidity are adequate to meet our present and
anticipated needs.   22    Rating agencies assign financial
strength ratings to Phoenix Life and its subsidiaries based on their opinions of
the Companies ability to meet their financial obligations. Ratings changes
may result in increased or decreased interest costs in connection with future
borrowings. Such an increase or decrease would affect our earnings and could
affect our ability to finance our future growth. Downgrades may also trigger
defaults or repurchase obligations. The financial strength and debt ratings as
of March 31, 2007 were as follows:  Financial
Strength Ratings ofRating Agency
Phoenix Life and
PHL Variable LifeA.M. Best Company,
Inc.
A
(Excellent)Fitch
A+
(Strong)Standard &
Poors
A-
(Strong)Moodys
A3
(Good)  Contractual Obligations and
Commercial Commitments  Contractual Obligations andCommercial Commitments:
As of December 31, 2006($ in thousands)
Total
2007
2008  2009
2010  2011
ThereafterContractual ObligationsFixed contractual obligations(1)$--
$--
$--
$--
$--Other long-term liabilities(2)
9,914,607

867,377

1,384,137

1,138,713

6,524,380Total contractual obligations
$
9,914,607
$867,377
$1,384,137
$1,138,713
$6,524,380 _______ (1)We have no fixed contractual obligations as all purchases are made by our parent company and the resulting expenses are allocated to us when incurred.(2)Policyholder contractual obligations represent estimated benefits from life insurance and annuity contracts issued by us. Policyholder contractual obligations also include separate account liabilities, which are contractual obligations of the separate account assets established under applicable state insurance laws and are legally insulated from our general account assets.Future obligations are based on
our estimate of future investment earnings, mortality, surrenders and applicable
policyholder dividends. Actual obligations in any single year, or ultimate total
obligations, may vary materially from these estimates as actual experience
emerges. As described in Note 2 to our financial statements in this
Form 10-K, policy liabilities and accruals are recorded on the balance
sheet in amounts adequate to meet the estimated future obligations of the
policies in force. The policyholder obligations reflected in the table above
exceed the policy liabilities, policyholder deposit fund liabilities and
separate account liabilities reported on our December 31, 2006 balance
sheet because the above amounts do not reflect future investment earnings and future premiums and deposits
 on those policies. Separate account obligations will be funded by the cash
flows from separate account assets, while the remaining obligations will be
funded by cash flows from investment earnings on general account assets and
premiums and deposits on contracts in force.  Off-Balance Sheet Arrangements  As of December 31, 2006, we did
not have any significant off-balance sheet arrangements as defined by Item
303(a)(4)(ii) of SEC Regulation S-K.  Reinsurance  We maintain life reinsurance programs
designed to protect against large or unusual losses in our life insurance
business. Based on our review of their financial statements, reputations in the
reinsurance marketplace and other relevant information, we believe that these
third-party reinsurers are financially sound and, therefore, that we have no
material exposure to uncollectible life reinsurance.  Statutory Capital and Surplus and
Risk-Based Capital  Connecticut Insurance Law requires that
Connecticut life insurers report their risk-based capital. Risk-based capital is
based on a formula calculated by applying factors to various asset, premium and
statutory reserve items. The formula takes into account the risk characteristics
of the insurer, including asset risk, insurance risk, interest rate risk and
business risk. The Connecticut Insurance Department has regulatory authority to
require   23    various actions by, or take various
actions against, insurers whose Total Adjusted Capital (capital and surplus plus
AVR) does not exceed certain risk-based capital levels.  The levels of regulatory action, the
trigger point and the corrective actions required are summarized below:  Company
Action Level  results when Total Adjusted Capital falls below 200% of
Authorized Control Level at which point the company must file a comprehensive
plan to the state insurance regulators;Regulatory
Action Level  results when Total Adjusted Capital falls below 150% of
Authorized Control Level where in addition to the above, insurance regulators
are required to perform an examination or analysis deemed necessary and issue a
corrective order specifying corrective actions;Authorized
Control Level results when Total Adjusted Capital falls below 100% of
Authorized Control Level risk-based capital as defined by the NAIC where in
addition to the above, the insurance regulators are permitted but not required
to place the company under regulatory control; andMandatory
Control Level  results when Total Adjusted Capital falls below 80% of
Authorized Control Level where insurance regulators are required to place the
company under regulatory control.  At December 31, 2006, our Total
Adjusted Capital level was in excess of 300% of Company Action Level.  See Note 13 to our financial
statements in this Form 10-K for more information.  Results of Operations  ($ in thousands)
Year Ended December 31,2006
2005
ChangeREVENUES:Premiums$13,575
$9,521
$4,054Insurance and investment product fees
180,498

109,270

71,228Investment income, net of expenses
129,325

154,374

(25,049)Net realized investment gains (losses)
(2,460)

(10,569)

8,109Total revenues
320,938

262,596

58,342BENEFITS AND EXPENSES:Policy benefits
151,285

130,279

21,006Policy acquisition cost amortization
91,168

80,402

10,766Other operating expenses
65,388

50,493

14,895Total benefits and expenses
307,841

261,174

46,667Income before income taxes
13,097

1,422

11,675Applicable income taxes (benefit)
3,016

(2,801)

5,817Net income$10,081
$4,223
$5,858  2006 vs. 2005  Premiums increased 43% in 2006 due to
higher sales of our term life insurance products.  Insurance and investment product fees
increased 65% in 2006 due to both higher sales and growth of in force contracts
for universal life products in 2006, partially offset by an adjustment or
unlocking of assumptions, which reduced fee revenues by $1.3
million. In addition, fees increased modestly for variable universal life and
annuity products.  Investment income decreased 16% in 2006
due primarily to lower interest earned on annuities, offset by higher investment
earnings for life insurance products, particularly universal life insurance.
Interest earned on annuities decreased mainly as a result of lower funds on
deposit in the general account, primarily related to discontinued products and a
$206.6 million scheduled maturity of an institutionally-placed contract.  Net realized investment losses
decreased 77% in 2006 due to lower transaction related losses and a decline in
impairments in 2006 compared to 2005.   24    Policy benefits increased 16% in 2006
due to an increase in universal life claims as a result of growth of in force
contracts and due to an unlocking of assumptions which increased reserves on
universal life policies. This increase was partially offset by lower interest
credited on annuities due to lower funds on deposit, as discussed above.  Amortization of deferred policy
acquisition costs increased 13% in 2006 due primarily to higher deferred policy
acquisition cost balances and improved investment margins for universal life and
annuities, partially offset by the effects of an adjustment or
unlocking of assumptions. The unlocking was driven by revised
assumptions regarding mortality experience and interest rate spreads.  Other operating expenses increased 29%
in 2006 as a result of higher non-deferred expenses, including maintenance
expenses, indirect expenses and premium taxes driven primarily by the growth of
universal life insurance.   Item 7A. Quantitative
and Qualitative Disclosures About Market Risk  Enterprise Risk Management  During 2003, PNX implemented a
comprehensive, enterprise-wide risk management program under which PHL
Variables operations are covered. Early in 2004, PNX appointed a Chief
Risk Officer, reporting to the Chief Financial Officer, to oversee all of our
risk management activities. PNX has established an Enterprise Risk Management
Committee, chaired by the Chief Executive Officer of PNX, to ensure our risk
management principles are followed and our objectives are accomplished. In
addition, PNX has established several management committees overseeing and
addressing issues pertaining to all our major risksoperational, market and
product, as well as capital management.  Operational Risk  Operational risk is the risk of loss
resulting from inadequate or failed internal processes, people and systems or
from external events. PNX has established an Operational Risk Committee, chaired
by the Chief Risk Officer, to develop an enterprise-wide framework for managing
and measuring operational risks. This committee meets monthly and has a
membership that represents all significant operating, financial and staff
departments of PNX.  Market Risk  Market risk is the risk that we will
incur losses due to adverse changes in market rates and prices. We have exposure
to market risk through both our investment activities and our insurance
operations. Our investment objective is to maximize after-tax investment return
within defined risk parameters. Our primary sources of investment risk are:  ·
interest rate risk, which relates to the market price and
cash flow variability associated with changes in market interest rates;·
credit risk, which relates to the uncertainty associated with
the ongoing ability of an obligor to make timely payments of principal and
interest; and·
equity risk, which relates to the volatility of prices for
equity and equity-like investments.  We measure, manage and monitor market
risk associated with our insurance and annuity business, as part of our ongoing
commitment to fund insurance liabilities. We have developed an integrated
process for managing the interaction between product features and market risk.
This process involves our Corporate Finance, Corporate Portfolio Management,
Life and Annuity Finance, and Life and Annuity Product Development departments.
These areas coordinate with each other and report results and make
recommendations to our Asset-Liability Management Committee, or ALCO, chaired by
the Chief Financial Officer.  We also measure, manage and monitor
market risk associated with our general account investments, both backing
insurance liabilities and supporting surplus. This process involves our
Corporate Portfolio Management personnel and Goodwin Capital Advisors, or
Goodwin, the Hartford-based asset management affiliate of PNX.   25    These organizations work together, make
recommendations and report results to our Investment Policy Committee, chaired
by the Chief Investment Officer. Please refer to the sections that follow,
including Debt and Equity Securities Held in General Account, for
more information on our investment risk exposures. We regularly refine our
policies and procedures to appropriately balance market risk exposure and
expected return.  Interest Rate Risk Management  Interest rate risk is the risk that we
will incur economic losses due to adverse changes in interest rates. Our
exposure to interest rate changes primarily results from our interest-sensitive
insurance liabilities and from our significant holdings of fixed rate
investments. Our insurance liabilities largely comprise universal life policies
and annuity contracts. Our fixed maturity investments include U.S. and foreign
government bonds, securities issued by government agencies, corporate bonds,
asset-backed securities and mortgage-backed securities, most of which are mainly
exposed to changes in short-term and medium-term U.S. Treasury rates.  We manage interest rate risk as part of
our asset-liability management and product development processes.
Asset-liability management strategies include the segmentation of investments by
product line and the construction of investment portfolios designed to satisfy
the projected cash needs of the underlying product liabilities. All
asset-liability strategies are approved by the ALCO. We manage the interest rate
risk in portfolio segments by modeling and analyzing asset and product liability
durations and projected cash flows under a number of interest rate scenarios.  One of the key measures we use to
quantify our interest rate exposure is duration, as a measure of the sensitivity
of the fair value of assets and liabilities to changes in interest rates. For
example, if interest rates increase by 100 basis points, or 1%, the fair value
of an asset with a duration of five years is expected to decrease by 5%. We
believe that as of December 31, 2006, our asset and liability portfolio
durations were well matched, especially for our largest and most
interest-sensitive segments. We regularly undertake a sensitivity analysis that
calculates liability durations under various cash flow scenarios.  The selection of a 100 basis point
immediate increase or decrease in interest rates at all points on the yield
curve is a hypothetical rate scenario used to demonstrate potential risk. While
a 100 basis point immediate increase or decrease of this type does not represent
our view of future market changes, it is a hypothetical near-term change that
illustrates the potential effect of such events. Although these fair value
measurements provide a representation of interest rate sensitivity, they are
based on our portfolio exposures at a point in time and may not be
representative of future market results. These exposures will change as a result
of on-going portfolio transactions in response to new business,
managements assessment of changing market conditions and available
investment opportunities.  To calculate duration, we project asset
and liability cash flows and discount them to a net present value using a
risk-free market rate increased for credit quality, liquidity and any other
relevant specific risks. Duration is calculated by revaluing these cash flows at
an alternative level of interest rates and by determining the percentage change
in fair value from the base case.  We also manage interest rate risk by
emphasizing the purchase of securities that feature prepayment restrictions and
call protection. Our product design and pricing strategies include the use of
surrender charges or restrictions on withdrawals in some products.  The table below shows the estimated
interest rate sensitivity of our fixed income financial instruments measured in
terms of fair value.  Interest Rate Sensitivity of Fixed IncomeFinancial Instruments:As of December 31, 2006($ in thousands)

-100 Basis


+100 BasisCarrying
Point


PointValue
Change
Fair Value
ChangeCash and cash equivalents$47,127$47,165$47,127$47,089Available-for-sale debt securities2,050,9892,112,5002,050,9891,989,441Total
$
2,098,116
$
2,159,665
$
2,098,116
$
2,036,530   26    In 1999, we began selling Retirement
Planners Edge, or RPE, a no-load variable annuity. RPE was designed to attract
contributions into variable sub-accounts on which we earn mortality and expense
fees. However, the bulk of the funds were allocated to guaranteed interest
accounts, or GIAs, which offered a 3% guaranteed interest rate. We anticipated
the liabilities would be of a short duration and with the low level of interest
rates, we were unable to invest funds at a rate that guaranteed a spread that
covered commissions and interest credited. In September 2002, we stopped
accepting applications for RPE, although existing policyholders have the right
to make subsequent cumulative gross deposits up to $1 million per contract.  Annuity Deposit Fund Balances:
As of December 31,($ in thousands)
2006
2005Policyholder Deposit FundsRetirement Planners Edge GIAs$392,079
$783,129Other variable annuity GIAs
477,927

558,257Variable annuity GIAs
870,006

1,341,386Fixed annuities
606,604

894,052Total variable annuity GIAs and fixed annuities
$
1,476,610
$
2,235,438  The funds in the RPE GIAs decreased by
$391,050 thousand during 2006. We believe most contract holders currently view
RPE as an alternative to money market investments and made significant
withdrawals in 2006 as money market rates rose significantly above the 3%
guaranteed interest rate on the product.  Credit Risk Management  We manage credit risk through the
fundamental analysis of the underlying obligors, issuers and transaction
structures. Through Goodwin, we employ a staff of experienced credit analysts
who review obligors management, competitive position, cash flow, coverage
ratios, liquidity and other key financial and non-financial information. These
analysts recommend the investments needed to fund our liabilities while adhering
to diversification and credit rating guidelines. In addition, when investing in
private debt securities, we rely upon broad access to management information,
negotiated protective covenants, call protection features and collateral
protection. We review our debt security portfolio regularly to monitor the
performance of obligors and assess the stability of their current credit
ratings.  We also manage credit risk through
industry and issuer diversification and asset allocation. Maximum exposure to an
issuer or derivatives counterparty is defined by quality ratings, with higher
quality issuers having larger exposure limits. We have an overall limit on below
investment-grade rated issuer exposure.  Equity Risk Management  Equity risk is the risk that we will
incur economic losses due to adverse changes in equity prices. Our exposure to
changes in equity prices primarily results from our variable annuity and
variable life products, as well as from our holdings of common stocks, mutual
funds and other equities. We manage our insurance liability risks on an
integrated basis with other risks through our liability and risk management and
capital and other asset allocation strategies. We also manage equity price risk
through industry and issuer diversification and asset allocation techniques.  Certain of our annuity products contain
guaranteed minimum death benefits. The guaranteed minimum death benefit feature
provides annuity contract holders with a guarantee that the benefit received at
death will be no less than a prescribed amount. This minimum amount is based on
the net deposits paid into the contract, the net deposits accumulated at a
specified rate, the highest historical account value on a contract anniversary
or, if a contract has more than one of these features, the greatest of these
values. To the extent that the guaranteed minimum death benefit is higher than
the current account value at the time of death, we incur a cost. This typically
results in an increase in annuity policy benefits in periods of declining
financial markets and in periods of stable financial markets following a
decline. Net of reinsurance, the difference between the guaranteed minimum death
benefit and the current account value (net amount at risk) for all existing
contracts was $46,610 thousand and $74,878 thousand as of December 31, 2006 and
2005, respectively. This is our exposure to loss should all of our
contractholders have died on either December 31, 2006 or 2005.   27    Certain of our annuity products contain
guaranteed minimum living benefits. These include guaranteed minimum
accumulation, withdrawal, income and payout annuity floor benefits. We have
entered into a contract with Phoenix Life whereby we cede 100% of any claims for
the accumulation and withdrawal guarantees. We continue to analyze and refine
our strategies for managing risk exposures associated with all our separate
account guarantees. The statutory reserves for these totaled $6,545 thousand and
$3,913 thousand at December 31, 2006 and 2005, respectively. The GAAP
reserves totaled $4,833 thousand and $3,484 thousand at December 31, 2006
and 2005, respectively.  See Note 4 to our financial
statements in this Form 10-K for more information regarding deferred policy
acquisition costs.  Foreign Currency Exchange Risk
Management  Foreign currency exchange risk is the
risk that we will incur economic losses due to adverse changes in foreign
currency exchange rates. Our functional currency is the U.S. dollar. Our
exposure to fluctuations in foreign exchange rates against the U.S. dollar
primarily results from our holdings in non-U.S. dollar-denominated debt and
equity securities which are not material to our financial statements at
December 31, 2006.   Item 8. Financial
Statements and Supplementary Data  The Financial Statements required by
this item are presented beginning on page F-1.   Item 9. Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure  None.   Item 9A. Controls and
Procedures  Evaluation of disclosure controls
and procedures  We have carried out an evaluation under
the supervision and with the participation of our management, including our
Principal Executive Officer and our Principal Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. There are inherent limitations to the effectiveness of any system of
disclosure controls and procedures, including the possibility of human error and
the circumvention or overriding of the controls and procedures. Accordingly,
even effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives. Based upon our evaluation,
these officers have concluded that, as of December 31, 2006, the disclosure
controls and procedures were effective to provide reasonable assurance that
information required to be disclosed in the reports we file and submit under the
Securities and Exchange Act of 1934 is recorded, processed, summarized and
reported within
 the time period specified in the SECs rules and forms.  Changes in internal control over
financial reporting  During the three months ended
December 31, 2006, there were no changes that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.   Item 9B. Other
Information  None.   28    PART III  Item 10. Directors,
Executive Officers and Corporate Governance  The registrant has omitted this
information from this report as 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.   Item 11. Executive
Compensation  The registrant has omitted this
information from this report as 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.   Item 12. Security
Ownership of Certain Beneficial Owners and Management  The registrant has omitted this
information from this report as 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.   Item 13. Certain
Relationships and Related Transactions, and Director Independence  The registrant has omitted this
information from this report as 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.   Item 14. Principal
Accounting Fees and Services  The following is a description of the
fees earned by PricewaterhouseCoopers LLP for services rendered to the Company
for each of the two years in the period ended December 31, 2006:  ($ in thousands)
2006
2005Audit fees$666
$332Audit-related fees
--

--Tax fees
--

--All other fees
--

--Total fees$666
$332  Audit Fees: Audit fees consist
of fees billed for professional service rendered for the annual audits of the
Companys financial statements and the review of the Companys interim
condensed financial statements. Audit fees also include fees for services that
are closely related to the audit, such as consents related to SEC registration
statements and audits of the Companys sponsored separate accounts. The
increase in audit fees was primarily due to a higher allocation of separate
account audit fees in 2006 compared to 2005.  Audit-related Fees: There were
no other audit-related fees incurred during the two years in the period ended
December 31, 2006.  All Other Fees: The Company did
not incur any charges from PricewaterhouseCoopers LLP for other services
rendered to the Company for matters such as general consulting for each of the
two years in the period ended December 31, 2006.   29    Audit Committee: A Special
Meeting of the Board of Directors of the Company was held on December 23,
2005. The Company recommended and the Board established an Audit Committee. For
the two fiscal years ended December 31, 2006, neither the Board of
Directors nor the Audit Committee had preapproved any audit, audit-related,
recurring or non-audit services.  At the Special Meeting, the Board
established a policy to assure the independence of its independent registered
public accounting firm. Prior to each fiscal year, the Audit Committee will
receive a written report from PwC describing the elements expected to be
performed in the course of its audit of the Companys financial statements
for the coming year. The Audit Committee may approve the scope and fees not only
for the proposed audit, but also for various recurring audit-related services.
For services of its independent registered public accounting firm that are
neither audit-related nor recurring, a Company vice president may submit in
writing a request to the Companys internal auditor, accompanied by
approval of the Companys Chief Financial Officer or Chief Accounting
Officer. The Audit Committee may pre-approve the requested service as long as it
is not a prohibited non-audit service and the performance of such service would
be consistent with all applicable rules on auditor independence. The Audit Committee may also
delegate pre-approval authority to one or more of its members.   30    PART IV  Item 15. Exhibits,
Financial Statement Schedules  (a)
Documents filed as part of this Form 10-K include:1.
Financial
Statements. The financial statements listed in Part II of the Table of
Contents to this Form 10-K are filed as part of this Form 10-K;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; and3.
Exhibits. Those
items listed in the Exhibit Index in Section E of this report which
are marked with an (*) are filed with this report.  *    *
   *    *    *   31    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:April 2, 2007
By:
/s/ Philip K. PolkinghornPhilip K.
PolkinghornPresident(Principal Executive Officer)Dated:April 2, 2007
By:
/s/ Michael E. HaylonMichael
E. HaylonExecutive
Vice President and Chief Financial Officer(Principal Financial Officer)Dated:April 2, 2007
By:
/s/ Katherine P. CodyKatherine
P. CodySenior
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 April 2, 2007, by the following persons on behalf of the
Registrant and in the capacities indicated.   /s/ Michael E. Haylon

/s/
James D. WehrMichael E. Haylon, Director

James D.
Wehr, Director/s/ Philip K. PolkinghornPhilip K. Polkinghorn, Director   32    EXHIBIT INDEX  Exhibit3.1
Form of Amended and Restated Certificate of Incorporation (as amended and
restated effective May 31, 1994)(incorporated herein by reference to Exhibit 3.1
to the PHL Variable Insurance Companys Annual Report on Form 10-K filed
March 31, 2006)3.2
Bylaws of PHL Variable Life Insurance Company (as amended and restated effective
May 16, 2002)(incorporated herein by reference to Exhibit 3.2 to the PHL
Variable Insurance Companys Annual Report on Form 10-K filed March 31,
2006)10.1
Services Agreement effective as of January 1, 1995 by and among PHL Variable
Insurance Company, Phoenix Life Insurance Company, American Life and Reassurance
Company, Phoenix American Life Insurance Company and Phoenix Home Life Mutual
Insurance Company (incorporated herein by reference to Exhibit 10.1 to the PHL
Variable Insurance Companys Annual Report on Form 10-K filed March 31,
2006)10.2
Investment Management Agreement effective as of January 1, 1995 by and between
PHL Variable Insurance Company and Phoenix Investment Counsel, Inc.
(incorporated herein by reference to Exhibit 10.2 to the PHL Variable Insurance
Companys Annual Report on Form 10-K filed March 31, 2006)10.3
Amendment #1 (effective as of January 1, 1998) to the Investment Management
Agreement dated as of January 1, 1995 by and between PHL Variable Insurance
Company and Phoenix Investment Counsel, Inc. (incorporated herein by reference
to Exhibit 10.3 to the PHL Variable Insurance Companys Annual Report on
Form 10-K filed March 31, 2006)10.4
Amended and Restated Tax Allocation Agreement dated as of January 1, 2001 by and
among The Phoenix Companies, Inc. and most of its subsidiaries (incorporated
herein by reference to Exhibit 10.4 to the PHL Variable Insurance Companys
Annual Report on Form 10-K filed March 31, 2006)10.5
Amendment #1 (effective as of January 1, 2006) to the Amended and Restated Tax
Allocation Agreement dated as of January 1, 2001 by and among The Phoenix
Companies, Inc. and most of its subsidiaries (incorporated herein by reference
to Exhibit 10.5 to the PHL Variable Insurance Companys Annual Report on
Form 10-K filed March 31, 2006)23.1
Consent of Independent Registered Accounting Firm*31.1
Certification of Philip K. Polkinghorn, Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002*31.2
Certification of Michael E. Haylon, Chief Financial Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002*32
Certification by Philip K. Polkinghorn, Chief Executive Officer and Michael E.
Haylon, 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.   E-1       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 sheet and the related statements of income, comprehensive income and
changes in stockholders equity and of cash flows presentfairly, in all material respects, the financial position of PHL
Variable Insurance Company (the Company) atDecember
31, 2006 and 2005, and the results of its operations and its cash flows for each
of the three years in the period endedDecember 31,
2006in conformity with accounting principles
generally accepted in the United States of America.  These financial
statements are the responsibility of the Companys management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.  We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board (United States).
 Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation.  We believe that
our audits provide a reasonable basis for our opinion.   /s/ PricewaterhouseCoopers LLP  Hartford, Connecticut March 23, 2007  F-1       PHL VARIABLE
INSURANCE COMPANY Balance Sheet ($ in thousands, except
share data) December 31, 2006
and 2005   2006
2005ASSETS:Available-for-sale debt securities, at fair value$2,050,989
$2,789,491Policy
loans, at unpaid principal balances
15,542

8,171Other
investments
1,612

1,129Total
investments
2,068,143

2,798,791Cash
and cash equivalents
47,127

25,818Accrued
investment income
19,882

30,837Deferred policy acquisition costs
703,794

529,315Receivable from related parties
300

31,355Other
assets
39,751

25,354Separate account assets
2,953,063

2,537,685Total assets$
5,832,060
$
5,979,155LIABILITIES:Policyholder deposit funds$1,491,367
$2,256,129Policy
liabilities and accruals
689,059

487,573Deferred income taxes
96,654

73,356Payable
to related parties
25,081

66,551Other
liabilities
26,576

15,598Separate account liabilities
2,953,063

2,537,685Total liabilities
5,281,800

5,436,892CONTINGENT LIABILITIES (Note 14)STOCKHOLDERS EQUITY:Common
stock, $5,000 par value: 1,000 shares authorized; 500 shares issued
2,500

2,500Additional paid-in capital
503,234

503,234Retained earnings
47,215

37,134Accumulated other comprehensive loss
(2,689)

(605)Total stockholders equity
550,260

542,263Total liabilities and stockholders equity$
5,832,060
$
5,979,155  The accompanying notes are an integral
part of these financial statements.   F-2    PHL VARIABLE
INSURANCE COMPANY Statement of Income,
Comprehensive Income and Changes in Stockholders Equity ($ in thousands) Years Ended
December 31, 2006, 2005 and 2004   2006
2005
2004REVENUES:Premiums$13,575
$9,521
$7,367Insurance and investment product fees
180,498

109,270

83,300Investment income, net of expenses
129,325

154,374

143,862Net
realized investment gains (losses)
(2,460)

(10,569)

5,121Total revenues
320,938

262,596

239,650BENEFITS AND EXPENSES:Policy benefits
151,285

130,279

136,760Policy acquisition cost amortization
91,168

80,402

45,027Other
operating expenses
65,388

50,493

35,683Total benefits and expenses
307,841

261,174

217,470Income before income taxes
13,097

1,422

22,180Applicable income taxes (benefit)
3,016

(2,801)

5,465Net income$
10,081
$
4,223
$
16,715FEES PAID TO RELATED PARTIES (NOTE 9)COMPREHENSIVE INCOME:Net income$10,081
$4,223
$16,715Net
unrealized investment losses
(1,277)

(9,986)

(14,802)Net
unrealized derivative instruments losses
(807)

(335)

(336)Other comprehensive loss
(2,084)

(10,321)

(15,138)Comprehensive income (loss)$
7,997
$
(6,098)
$
1,577ADDITIONAL PAID-IN  CAPITAL:Capital contributions from parent$--
$--
$19,000RETAINED EARNINGS:Net
income
10,081

4,223

16,715ACCUMULATED OTHER COMPREHENSIVE INCOME:Other
comprehensive loss
(2,084)

(10,321)

(15,138)Change in stockholders equity
7,997

(6,098)

20,577Stockholders equity, beginning of year
542,263

548,361

527,784Stockholders equity, end of year$
550,260
$
542,263
$
548,361  The accompanying notes are an integral
part of these financial statements.  F-3    PHL VARIABLE
INSURANCE COMPANY Statement of Cash Flows ($ in thousands) Years Ended
December 31, 2006, 2005 and 2004   2006
2005
2004OPERATING ACTIVITIES:Net
income$10,081
$4,223
$16,715Net
realized investment (gains) losses
2,460

10,569

(5,121)Investment (gains) losses
4,206

(15,293)

(5,634)Deferred income taxes
24,419

15,512

15,627Increase in deferred policy acquisition costs
(179,410)

(56,634)

(61,761)Increase in policy liabilities and accruals
210,368

155,315

135,384Other
assets and other liabilities change
(8,163)

34,725

(19,262)Cash from operating activities
63,961

148,417

75,948INVESTING ACTIVITIES:Investment purchases
(1,007,973)

(1,148,093)

(1,506,835)Investment sales, repayments and maturities
1,728,360

1,357,687

1,503,161Cash from (for) investing activities
720,387

209,594

(3,674)FINANCING ACTIVITIES:Policyholder deposit fund deposits
223,309

236,099

365,166Policyholder deposit fund withdrawals
(986,348)

(607,890)

(497,814)Capital contributions from parent
--

--

19,000Cash for financing activities
(763,039)

(371,791)

(113,648)Change in cash and cash equivalents
21,309

(13,780)

(41,374)Cash
and cash equivalents, beginning of year
25,818

39,598

80,972Cash and cash equivalents, end of year
$
47,127
$
25,818
$
39,598  The accompanying notes are an integral
part of these financial statements.  F-4    PHL VARIABLE
INSURANCE COMPANY Notes to Financial
Statements Years Ended
December 31, 2006, 2005 and 2004    1. Organization and
Operations  PHL Variable Insurance Company is a
life insurance company offering variable and fixed annuity and non-participating
life insurance products. It is a wholly-owned subsidiary of PM Holdings, Inc. PM
Holdings, Inc. is a wholly-owned subsidiary of Phoenix Life Insurance Company
(Phoenix Life), which is a wholly-owned subsidiary of The Phoenix Companies,
Inc. (PNX), a New York Stock Exchange listed company. Phoenix Home Life Mutual
Insurance Company demutualized on June 25, 2001 by converting from a mutual
life insurance company to a stock life insurance company, became a wholly-owned
subsidiary of PNX and changed its name to Phoenix Life Insurance Company. We
have reclassified certain amounts for 2005 and 2004 to conform with the 2006
presentation.   2. Basis of
Presentation and Significant Accounting Policies  Use of estimates  In preparing these financial statements
in conformity with accounting principles generally accepted in the United
States, or 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 taxes and
contingent liabilities.  Adoption of new accounting standards  In September 2006, the Securities and
Exchange Commission staff issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements, or SAB 108.
SAB 108 provides guidance for how errors should be evaluated to assess
materiality from a quantitative perspective. SAB 108 permits companies to
initially apply its provisions by either restating prior financial statements or
recording the cumulative effect of initially applying the approach as
adjustments to the carrying values of assets and liabilities as of
January 1, 2006 with an offsetting adjustment to retained earnings. We
adopted SAB 108 on December 31, 2006 with no effect on our financial
statements.  Effective January 1, 2006, we
adopted Statement of Financial Accounting Standards No. 155, Accounting
for Certain Hybrid Financial Instruments, or SFAS 155.
SFAS 155 resolves certain issues surrounding the accounting for beneficial
interests in securitized financial assets. Our adoption of SFAS 155 did not
have a material effect on our financial statements.  Effective January 1, 2006, we
adopted FASB Staff Position Nos. FAS 115-1 and FAS 124-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments, or FSP 115-1. FSP 115-1 provides guidance as to
the determination of other-than-temporarily impaired securities and requires
certain financial disclosures with respect to unrealized losses. These
accounting and disclosure requirements largely codify our existing practices as
to other-than-temporarily impaired securities and thus, our adoption did not
have a material effect on our financial statements.  F-5    2. Basis of
Presentation and Significant Accounting Policies (continued)  Effective January 1, 2004, we
adopted the American Institute of Certified Public Accountants, or AICPA,
Statement of Position 03-1, Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate
Accounts, or SOP 03-1. SOP 03-1 provides guidance related to
the accounting, reporting and disclosure of certain insurance contracts and
separate accounts, including guidance for computing reserves for products with
guaranteed benefits such as guaranteed minimum death benefits and for products
with annuitization benefits such as guaranteed minimum income benefits. In
addition, SOP 03-1 addresses the presentation and reporting of separate
accounts, as well as rules concerning the capitalization and amortization of
sales inducements. Since this new accounting standard largely codifies certain
accounting and reserving practices related to applicable nontraditional
long-duration contracts and separate accounts that we already followed, our adoption did not have
a material effect on our financial statements.  Accounting standards not yet adopted  In February 2007, the FASB issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities, orSFAS 159. SFAS 159 provides companies with
an option to report selected financial assets and liabilities at fair value.
SFAS 159 is effective for fiscal years beginning after November 15, 2007,
and early adoption is permitted provided the entity also elects to apply the
provisions of SFAS No. 157, Fair Value Measurements, at the same time. We
are currently assessing the impact of SFAS 159 on our financial position
and results of operations.  In September 2006, the FASB issued SFAS
No. 157, Fair Value Measurements, or SFAS 157.
SFAS 157 defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. SFAS 157
provides guidance on how to measure fair value when required under existing
accounting standards. The statement establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels (Level 1, 2 and 3). Level 1 inputs are observable
inputs that reflect quoted prices for identical assets or liabilities in active
markets that we have the ability to access at the measurement date. Level 2
inputs are observable inputs, other than quoted prices included in Level 1, for
the asset or liability. Level 3 inputs are unobservable inputs reflecting our
estimates of the assumptions that market participants would use in pricing the
asset or liability (including assumptions about risk). Quantitative and qualitative
disclosures will focus on the inputs used to measure fair value for both
recurring and non-recurring fair value measurements and the effects of the
measurements in the financial statements. SFAS 157 is effective for fiscal
years beginning after November 15, 2007, with earlier application
encouraged only in the initial quarter of an entitys fiscal year. We are
currently assessing the impact of SFAS 157 on our financial position and
results of operations.  In June 2006, the FASB issued
FIN 48, Accounting for Uncertainty in Income Taxes, or
FIN 48. FIN 48 clarifies the accounting for income taxes by
prescribing a minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. FIN 48 also provides
guidance on measurement and classification of taxes and introduces new
disclosure requirements. This guidance is effective for fiscal years beginning
after December 15, 2006. We anticipate that FIN 48 will not have a
material effect on our GAAP equity as of January 1, 2007.  In March 2006, the FASB issued SFAS No.
156, Accounting for Servicing of Financial Assets, an amendment of FASB
Statement No. 140, or SFAS 156. SFAS 156 provides guidance
on recognition and disclosure of servicing assets and liabilities and is
effective beginning January 1, 2007. We do not expect our adoption of
SFAS 156 to have a material impact on our financial statements.  F-6    2. Basis of
Presentation and Significant Accounting Policies (continued)  In September 2005, the Accounting
Standards Executive Committee, or AcSEC, of the AICPAs issued Statement of
Position 05-1, Accounting by Insurance Enterprises for Deferred
Acquisition Costs in Connection With Modifications or Exchanges of Insurance
Contracts, or SOP 05-1. SOP 05-1 provides guidance on
accounting by insurance enterprises for deferred acquisition costs on internal
replacements of insurance and investment contracts other than those specifically
described in SFAS No. 97, Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments, or SFAS 97. The SOP defines
an internal replacement as a modification in product benefits, features, rights,
or coverages that occurs by the exchange of a contract for a new contract, or by
amendment, endorsement, or rider to a contract, or by the election of a feature
or coverage within a contract. This SOP is effective for internal replacements occurring
in fiscal years beginning after December 15, 2006. We will adopt SOP 05-1
on January 1, 2007. Our adoption is not expected to have a material effect
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
other partnership interests in which we do not have control or a majority
ownership interest and are recorded using the equity method of accounting. We
record the net income from investments in partnerships in net investment income.  Cash and cash equivalents  Cash and cash equivalents include cash
on hand, amounts due from banks, money market instruments and other debt
instruments with maturities of three months or less when purchased.  F-7    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 estimated gross profits, or EGPs. Policies may be surrendered
for value or exchanged for a different one of our products (internal
replacement). The deferred policy acquisition costs balance associated with the
replaced or surrendered policies is amortized to reflect these surrenders.  Each year, we develop future EGPs for
the products sold during that year. The EGPs for products sold in a particular
year are aggregated into cohorts. Future EGPs are projected for the estimated
lives of the contracts. The amortization of deferred policy acquisition costs
requires the use of various assumptions, estimates and judgments about the
future. The assumptions, in the aggregate, are considered important in the
projections of EGPs. The assumptions developed as part of our annual process are
based on our current best estimates of future events, which are likely to be
different for each years cohort. Assumptions considered to be significant
in the development of EGPs include separate account fund performance, surrender
and lapse rates, interest margin, mortality, premium persistency and expenses.
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 and expenses. Underlying
assumptions for future periods of EGPs are not altered unless experience
deviates significantly from original assumptions. For example, when lapses of
our insurance products meaningfully exceed levels assumed in determining the
amortization of deferred policy acquisition costs, we adjust amortization to
reflect the change in future premiums or EGPs resulting from the unexpected
lapses. In the event that we were
to revise assumptions used for prior year cohorts, our estimate of projected
account values would change and the related EGPs in the deferred policy
acquisition cost amortization model would be adjusted to reflect such change.
This process is known as unlocking. Continued favorable experience
on key assumptions, which could include increasing separate account fund return
performance, decreasing lapses or decreasing mortality could result in an
unlocking which would result in a decrease to deferred policy acquisition cost
amortization and an increase in the deferred policy acquisition costs asset.
Finally, an analysis is performed periodically to assess whether there are
sufficient gross margins or gross profits to amortize the remaining deferred
policy acquisition cost balances.  Separate account assets and
liabilities  Separate account assets and liabilities
related to policyholder funds are carried at fair value. Deposits, net
investment income and realized investment gains and losses for these accounts
are excluded from revenues, and the related liability increases are excluded
from benefits and expenses. Fees assessed to the contractholders for management
services are included in revenues when services are rendered.  F-8    2. Basis of
Presentation and Significant Accounting Policies (continued)  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.  F-9    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. 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.  Applicable deferred policy acquisition
costs and applicable income taxes, which offset realized investment gains and
losses, are each reported separately as components of net income.  Income taxes  We recognize income tax expense or
benefit 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 carryforwards. 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 through earnings.   3. Reinsurance  We use reinsurance agreements to
provide for greater diversification of business, control exposure to potential
losses arising from large risks and provide capacity for growth.  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, estimates are established 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.  F-10    3. Reinsurance (continued)  Our reinsurance program varies based on
the type of risk, for example:  ·
On direct policies, the maximum of individual life insurance
retained by us on any one life is $10 million on single life and joint
first-to-die policies and $12 million for joint last-to-die policies, with
excess amounts ceded to reinsurers.·
We reinsure up to 90% of the mortality risk on most new
issues of term insurance.·
In August of 2006, we entered into an agreement to reinsure
50% of the risk on policies issued from July 1, 2002 through
December 31, 2005, inclusive, with a net amount at risk of $2,000,000 or
greater.·
We reinsure 100% of guaranteed minimum death benefits on
variable annuities issued before January 1, 2000, including subsequent deposits.
We retain the guaranteed minimum death
benefit risks on the remaining variable deferred annuities in force that are not
covered by this reinsurance arrangement.·
We cede to Phoenix Life 100% of the guaranteed minimum
accumulation and withdrawal benefits on our variable annuities.  Direct Business and Reinsurance:
Year Ended December 31,($ in thousands)
2006
2005
2004Direct premiums$71,350
$55,277
$43,348Premiums ceded to reinsurers
(57,775)

(45,756)

(35,981)Premiums$
13,575
$
9,521
$
7,367Direct policy benefits incurred$54,055
$15,538
$37,846Policy benefits assumed from reinsureds
965

381

286Policy benefits ceded to reinsurers
(26,398)

(9,572)

(26,767)Policy benefits$
28,622
$
6,347
$
11,365Direct life insurance in-force$55,175,351
$41,566,483
$30,623,344Life insurance in-force assumed from reinsureds
104,826

135,447

155,964Life insurance in-force ceded to reinsurers
(40,820,818)

(30,459,568)

(23,057,775)Life insurance in-force$
14,459,359
$
11,242,362
$
7,721,533Percentage of amount assumed to net insurance in-force
0.72%

1.20%

2.02%  The policy benefit amounts above
exclude changes in reserves, interest credited to policyholders and withdrawals,
which total $122.7 million, $123.9 million and $125.4 million, net of
reinsurance, for the years ended December 31, 2006, 2005 and 2004,
respectively.   4. Deferred policy
acquisition costs  Activity in Deferred Policy Acquisition Costs:
Year Ended December 31,($ in thousands)
2006
2005
2004Direct acquisition costs deferred$270,577
$137,036
$106,788Recurring costs amortized to expense
(92,255)

(86,608)

(45,027)Credit related to investment gains or losses
1,087

6,206

--Offsets to net unrealized investment gains or losses
  included in other comprehensive income (Note 11)
(4,930)

39,223

(912)Change in deferred policy acquisition costs
174,479

95,857

60,849Deferred policy acquisition costs, beginning of year
529,315

433,458

372,609Deferred policy acquisition costs, end of year$
703,794
$
529,315
$
433,458  F-11    4. Deferred policy
acquisition costs (continued)  Upon completion of a study during the
fourth quarter of 2006, we updated, or unlocked, 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 expected mortality and lapse experience, investment margins and
expenses. In our review to develop the best estimate, we examined our own
experience, industry studies, market conditions and input from reinsurers. The
deferred policy acquisition costs unlocking for universal life and variable
universal life was driven largely by improved mortality. We also reflected
higher interest earned in the investment margin for universal life and
annuities, consistent with recent experience and maintenance expenses were
shifted among various lines of business.  The deferred policy acquisition costs
unlocking that resulted from these updated assumptions, along with related
adjustments, resulted in an overall $6.7 million pre-tax charge to net income.
The change in deferred policy acquisition costs also impacted our assumptions in
reserves. As a result, we recorded an additional universal life reserve. The
effects of the unlocking and related adjustments increased unearned revenue
liabilities by $1.3 million, benefit reserves by $4.5 million, reinsurance
liabilities by $1.2 million and decreased amortization by $0.4 million.  During 2005, amortization of deferred
policy acquisition costs was increased by an unlocking of assumptions. The 2005
unlocking was driven by revised assumptions regarding mortality experience
offset by interest rate and spread adjustments for annuities.   5. Policy liabilities
and accruals  Policyholder liabilities are primarily
for universal life products and include deposits received from customers and
investment earnings on their fund balances which range from 4.00% to 5.25% as of
December 31, 2006, less administrative and mortality charges.  Policyholder deposit funds  Policyholder deposit funds consist of
annuity deposits received from customers and investment earnings on their fund
balances, which range from 3.0% to 14.0%, less administrative charges.   6. Investing
Activities  Debt and equity securities  Fair Value and Cost of Debt Securities:
As of December 31,($ in thousands)
2006
2005Fair Value
Cost
Fair Value
CostU.S. government and agency$92,579
$93,425
$124,552
$125,673State and political subdivision
15,900

16,281

28,585

28,934Foreign government
49,884

46,505

73,412

69,275Corporate
1,157,781

1,172,275

1,490,696

1,506,917Mortgage-backed
452,641

455,739

648,124

649,346Other asset-backed
282,204

280,086

424,122

425,634Available-for-sale debt securities$
2,050,989
$
2,064,311
$
2,789,491
$
2,805,779  The non-income producing debt
securities owned as of December 31, 2006 and 2005 are immaterial to our
financials.  F-12    6. Investing
Activities (continued)  Unrealized Gains (Losses) from
As of December 31,Debt Securities:
2006
2005($ in thousands)
Gains
Losses
Gains
LossesU.S. government and agency$295
$(1,141)
$369
$(1,490)State and political subdivision
17

(398)

239

(588)Foreign government
3,590

(211)

4,539

(402)Corporate
6,523

(21,017)

14,560

(30,781)Mortgage-backed
2,862

(5,960)

6,141

(7,363)Other asset-backed
3,857

(1,739)

2,052

(3,564)Debt securities gains and losses$
17,144
$
(30,466)
$
27,900
$
(44,188)Debt securities net losses$
(13,322)


$
(16,288)   Aging of Temporarily Impaired
As of December 31, 2006Debt Securities:
Less than 12 months
Greater than 12 months
Total($ in thousands)Fair
Unrealized
Fair
Unrealized
Fair
UnrealizedValue
Losses
Value
Losses
Value
LossesDebt SecuritiesU.S. government and agency$5,643
$(19)
$50,878
$(1,122)
$56,521
$(1,141)State and political subdivision
1,014

(3)

14,367

(395)

15,381

(398)Foreign government
4,024

(10)

9,323

(201)

13,347

(211)Corporate
152,344

(1,595)

689,660

(19,422)

842,004

(21,017)Mortgage-backed
78,465

(693)

257,905

(5,267)

336,370

(5,960)Other asset-backed
53,844

(171)

102,302

(1,568)

156,146

(1,739)Total temporarily impaired securities$
295,334
$
(2,491)
$
1,124,435
$
(27,975)
$
1,419,769
$
(30,466)Below investment grade$
20,190
$
(377)
$
90,763
$
(3,859)
$
110,953
$
(4,236)Below investment grade after offsets
  for deferred acquisition cost
  adjustment and taxes

$
(45)


$
(550)


$
(595)  All of these securities are considered
to be temporarily impaired at December 31, 2006 as each of these securities
has performed, and is expected to continue to perform, in accordance with their
original contractual terms, and we have the ability and intent to hold these
securities until they recover their value.  Aging of Temporarily Impaired
As of December 31, 2005Debt and Equity Securities:
Less than 12 months
Greater than 12 months
Total($ in thousands)Fair
Unrealized
Fair
Unrealized
Fair
UnrealizedValue
Losses
Value
Losses
Value
LossesDebt SecuritiesU.S. government and agency$62,372
$(714)
$33,369
$(776)
$95,741
$(1,490)State and political subdivision
7,854

(15)

16,067

(573)

23,921

(588)Foreign government
14,877

(269)

4,834

(133)

19,711

(402)Corporate
651,536

(18,520)

340,112

(12,261)

991,648

(30,781)Mortgage-backed
245,240

(3,751)

165,412

(3,612)

410,652

(7,363)Other asset-backed
140,801

(1,797)

101,004

(1,767)

241,805

(3,564)Total temporarily impaired securities$
1,122,680
$
(25,066)
$
660,798
$
(19,122)
$
1,783,478
$
(44,188)Below investment grade$
72,000
$
(2,888)
$
40,186
$
(2,667)
$
112,186
$
(5,555)Below investment grade after offsets
  for deferred acquisition cost
  adjustment and taxes

$
(469)


$
(305)


$
(774)  All of these securities are considered
to be temporarily impaired at December 31, 2005 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.  F-13    6. Investing Activities (continued)  Statutory deposits  Pursuant to certain statutory
requirements, as of December 31, 2006 and 2005, we had on deposit
securities with a fair value of $8.2 million and $8.4 million, respectively, in
insurance department special deposit accounts. We are not permitted to remove
the securities from these accounts without approval of the regulatory authority.  Net investment income  Sources of Net Investment Income:
Year Ended December 31,($ in thousands)
2006
2005
2004Debt securities$127,977
$155,648
$145,354Equity securities
--

2

44Other investments
148

183

178Policy loans
581

479

122Cash
and cash equivalents
3,089

1,061

1,000Total investment income
131,795

157,373

146,698Less: Investment expenses
(2,470)
(2,999)

(2,836)Net investment income
$
129,325
$
154,374
$
143,862  Net realized investment gains
(losses)  Types of Realized Investment Gains (Losses):
Year Ended December 31,($ in thousands)
2006
2005
2004Debt security impairments$(411)
$(2,651)
$--Debt security transaction gains
2,955

1,764

6,015Debt security transaction losses
(7,253)

(9,254)

(3,581)Equity security transaction gains
--

26

2,286Equity security transaction losses
--

(13)

--Other investment transaction gains (losses)
2,249

(441)

402Cash equivalent transaction losses
--

--

(1)Net transaction gains (losses)
(2,049)

(7,918)

5,121Net realized investment gains (losses)$
(2,460)
$
(10,569)
$
5,121  Unrealized investment gains (losses)  Sources of Changes in Net Unrealized Investment Gains (Losses):
Year Ended December 31,($ in thousands)
2006
2005
2004Debt securities$2,956
$(54,591)
$(19,782)Equity securities
--

5

(1,953)Other investments
10

--

(125)Net unrealized investment gains (losses)$
2,966
$
(54,586)
$
(21,860)Net unrealized investment gains (losses)$2,966
$(54,586)
$(21,860)Applicable deferred policy acquisition costs (Note 4)
4,930

(39,223)

912Applicable deferred income tax benefit
(687)

(5,377)

(7,970)Offsets to net unrealized investment losses
4,243

(44,600)

(7,058)Net unrealized investment losses included in
  other comprehensive income$
(1,277)
$
(9,986)
$
(14,802)  F-14    6. Investing Activities (continued)  Investing cash
flows  Investment Purchases, Sales, Repayments and Maturities:
Year Ended December 31,($ in thousands)
2006
2005
2004Debt security purchases$(999,542)
$(1,139,974)
$(1,505,651)Equity security purchases
--

--

(40)Other investment purchases
(1,060)

(2,434)

(411)Policy loan advances, net
(7,371)

(5,685)

(733)Investment purchases$
(1,007,973)
$
(1,148,093)
$
(1,506,835)Debt securities sales$1,178,127
$873,995
$886,091Debt securities maturities and repayments
549,483

477,568

591,962Equity security sales
--

279

8,798Other investment sales
750

5,845

16,310Investment sales, repayments and maturities$
1,728,360
$
1,357,687
$
1,503,161  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, 2006($ in thousands)
Cost
Fair ValueDue in one year or less$164,631
$163,602Due after one year through five years
586,444

580,449Due after five years through ten years
508,489

504,843Due after ten years
804,747

802,095Total$2,064,311
$
2,050,989   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 2006 and 2005 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 in the
footnotes to the table below. We currently reinsure a significant portion of the
death benefit guarantees associated with our in-force block of business. We
establish policy benefit liabilities for minimum death and income benefit
guarantees relating to certain annuity policies as follows:  ·
Liabilities associated with the guaranteed minimum death benefit, or GMDB, are
determined by estimating the expected value of death benefits in excess of the
projected account balance and recognizing the excess ratably over the
accumulation period based on total expected assessments. The assumptions used in
estimating the liabilities are generally consistent with those used for
amortizing deferred policy acquisition costs.·
Liabilities associated with the guaranteed minimum income benefit, or GMIB, are
determined by estimating the expected value of the income benefits in excess of
the projected account balance at the date of annuitization and recognizing the
excess ratably over the accumulation period based on total expected assessments.
The assumptions used for calculating such guaranteed income benefit liabilities
are generally consistent with those used for calculating the guaranteed death
benefit liabilities.  F-15     7. Separate Accounts,
Death Benefits and Other Insurance Benefit Features (continued)  For annuities with GMDB, 500
stochastically generated scenarios were used. For annuities with GMIB, we used
10,000 stochastically generated scenarios.  Separate Account Investments of Account Balances of Contracts with
Guarantees:
As of December 31,($ in thousands)
2006
2005Debt securities$456,148
$427,337Equity funds
1,861,762

1,573,287Other
68,810

55,791Total
$
2,386,720
$
2,056,415   Changes in Guaranteed Liability Balances:Year Ended(Net of Reinsurance Recoverables)
December 31, 2006($ in thousands)Annuity
AnnuityGMDB
GMIBLiability balance as of January 1, 2006$9,812
$2,474Incurred
1,399

1,094Paid
(1,371)

--Liability balance as of December 31, 2006
$
9,840
$
3,568   Changes in Guaranteed Liability Balances:Year Ended(Net of Reinsurance Recoverables)
December 31, 2005($ in thousands)Annuity
AnnuityGMDB
GMIBLiability balance as of January 1, 2005$8,528
$745Incurred
2,571

1,729Paid
(1,287)

--Liability balance as of December 31, 2005
$
9,812
$
2,474  The reinsurance recoverable asset
related to the GMDB was $27,992 thousand and $28,144 thousand as of
December 31, 2006 and 2005, respectively.  The GMDB and GMIB guarantees are
recorded in policy liabilities and accruals on our balance sheet. Changes in the
liability are recorded in Policy benefits on our statement of operations. In a
manner consistent with our policy for deferred policy acquisition costs, we
regularly evaluate estimates used and adjust the additional liability balances,
with a related charge or credit to benefit expense if actual experience or other
evidence suggests that earlier assumptions should be revised.  We also offer
certain variable products with a guaranteed minimum withdrawal benefit, or GMWB,
and a guaranteed minimum accumulation benefit, or GMAB.  The GMWB
guarantees the policyholder a minimum amount of withdrawals and benefit payments
over time, regardless of the investment performance of the contract, subject to
an annual limit. Optional resets are available In addition, we have introduced a
feature for these contracts beginning in the fourth quarter of 2005, that allows
the policyholder to receive the guaranteed annual withdrawal amount for as long
as they are alive.  The GMAB rider
provides the contract holder with a minimum accumulation of their purchase
payments deposited within a specific time period, adjusted for withdrawals,
after a specified amount of time determined at the time of issuance of the
variable annuity contract.  The GMWB and GMAB
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.  F-16    7. Separate Accounts,
Death Benefits and Other Insurance Benefit Features (continued)  The fair value of the GMWB and GMAB
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 have entered into a contract
with Phoenix Life whereby we cede 100% of any claims for these guarantees.
Because this contract does not transfer sufficient risk to be accounted for as
reinsurance, we us deposit accounting for the contract. As of December 31,
2006 and 2005, the embedded derivative for GMWB and GMAB was immaterial. There
were no benefit payments made for the GMWB or GMAB during 2006 or 2005. See Note
9 to these financial statements for more information.  For those guarantees of benefits that
are payable in the event of death, the net amount at risk is generally defined
as the current guaranteed minimum death benefit in excess of the current account
balance at the balance sheet date. For guarantees of benefits that are payable
upon annuitization, the net amount at risk is generally defined as the present
value of the minimum guaranteed annuity payments available to the policy holder
determined in accordance with the terms of the contract in excess of the current
account balance. For guarantees of accumulation balances, the net amount at risk
is generally defined as the guaranteed minimum accumulation balance minus the
current account balance.  Additional Insurance Benefits:
Net Amount
Average($ in thousands)Account
At Risk After
Attained AgeValue
Reinsurance
of AnnuitantGMDB return of premium(1)$1,315,738
$7,962

59GMDB step up(2)
1,648,220

34,628

61GMDB earnings enhancement benefit (EEB)(3)
77,382

3

59GMDB greater of annual step up and roll up(4)
37,713

4,017

62Total GMDB at December 31, 2006
$
3,079,053
$
46,610GMIB$603,412
$--

59GMAB
206,069

--

54GMWB
27,133

--

67Total at December 31, 2006
$
836,614
$
-- __________ (1)Return of premium: The death benefit is the greater of current account
value or premiums paid (less any adjusted partial withdrawals).(2)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.(3)EEB: The death benefit is the greater of the premiums paid (less any
adjusted partial withdrawals) or the current account value plus the EEB.(4)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 currant 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, 2006, we held additional universal life
benefit reserves of $8,841 thousand.  F-17     8. Income Taxes  Allocation of Income Taxes:
Year Ended December 31,($ in thousands)
2006
2005
2004Income tax expense (benefit) attributable to:Current$(21,403)
$(18,313)
$(10,162)Deferred
24,419

15,512

15,627Income taxes applicable to net income (loss)
3,016

(2,801)

5,465Other comprehensive loss
(1,121)

(5,558)

(8,151)Income taxes applicable to comprehensive income (loss)$
1,895
$
(8,359)
$
(2,686)Income taxes recovered$
(24,094)
$
(14,288)
$
(3,450)   Reconciliation of Statutory Tax Rate to Effective Tax Rate:
Year Ended December 31,($ in thousands)
2006
2005
2004Income before income taxes$13,097
$1,422
$22,180Income taxes at statutory rate of 35.0%
4,584

498

7,763Tax benefit attributable to tax-advantaged investment income
(1,572)

(2,924)

(2,264)Tax interest
1

(378)

--Other, net
3

3

(34)Applicable income taxes (benefit)$
3,016
$
(2,801)
$
5,465Effective income tax (benefit) rates
23.0%

(197.0)%

24.6%   Deferred Income Tax Assets (Liabilities) Attributable to Temporary
Differences:
As of December 31,($ in thousands)
2006
2005Deferred income tax assets:Future policyholder benefits$102,603
$63,793Unearned premiums / deferred revenues
10,817

7,482Net operating loss carryover benefits
--

7,970Other
--

1,137Gross deferred income tax assets
113,420

80,382Deferred tax liabilities:Deferred policy acquisition costs
207,513

150,281Employee benefits
--

1,907Investments
849

1,550Other
1,712

--Gross deferred income tax liabilities
210,074

153,738Deferred income tax liability
$
96,654
$
73,356  We are included in the life/non-life
consolidated federal income tax return filed by PNX.  We have determined, based on our
earnings and projected future taxable income, that it is more likely than not
that deferred income tax assets at December 31, 2006 and 2005 will be
realized.  As of December 31, 2006, we had
current taxes payable of $2,974 thousand.   9. Related Party
Transactions  The amounts included in the following
discussion are gross expenses, before deferrals for policy acquisition costs.  Phoenix Life provides services and
facilities to us and is reimbursed through a cost allocation process. The
expenses allocated to us were $203,521 thousand, $108,701 thousand and $82,050
thousand for the years ended December 31, 2006, 2005 and
2004, respectively. Amounts payable to Phoenix Life were $18,650 thousand and
$42,373 thousand as of December 31, 2006 and 2005, respectively.  F-18     9. Related Party
Transactions (continued)  During 2006, we entered into a contract
with Phoenix Life whereby we cede to Phoenix Life the liabilities related to
certain guarantees on our annuity products. Because this contract does not
transfer sufficient risk to qualify for reinsurance accounting, we account for
ceded liabilities as a deposit asset. The asset on deposit with Phoenix Life was
$220 thousand at December 31, 2006. This amount is included in our balance
sheet in other general account assets.  Phoenix Investment Partners Ltd. (PXP), an
indirect wholly-owned subsidiary of PNX, through its affiliated registered
investment advisors, provides investment advisory services to us for a fee.
Investment advisory fees incurred by us for management of general account assets
under this arrangement were $2,439 thousand, $2,993 thousand and $2,810 thousand
for the years ended December 31, 2006, 2005 and 2004, respectively. Amounts
payable to the affiliated investment advisors were $106 thousand and $0
thousand, as of December 31, 2006 and 2005, respectively. PXP receives
variable product separate account fees on our behalf. They retain a portion of
those fees, for services provided, and forward the remainder to us. Amounts
receivable from PXP for those fees were $245 thousand and $181 thousand as of
December 31, 2006 and 2005, respectively. The variable product separate account fees
retained by PXP were $684 thousand, $697 thousand and $1,120 thousand for 2006,
2005 and 2004, respectively.  Phoenix Equity Planning Corporation
(PEPCO), a wholly-owned subsidiary of Phoenix Investment Partners Ltd., is the
principal underwriter of our annuity contracts. Until May 31, 2004,
contracts could be purchased through registered representatives of our former
affiliate, W.S. Griffith Securities, Inc. (Griffith). Other outside
broker-dealers are licensed to sell our annuity contracts as well. We incurred
commissions for contracts underwritten by PEPCO of $38,062 thousand, $35,422
thousand and $39,491 thousand for the years ended December 31, 2006, 2005
and 2004, respectively. Amounts payable to PEPCO were $278 thousand and $2,162
thousand as of December 31, 2006 and 2005, 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 $105,993 thousand, $54,927 thousand and
$28,962 thousand for the years ended December 31, 2006, 2005 and 2004,
respectively. Amounts payable to Phoenix Life were $4,187 thousand and $11,090
thousand as of December 31, 2006 and 2005, respectively.  Until May 31, 2004, Griffith,
formerly an indirect wholly-owned subsidiary of PNX, sold certain of our
non-participating life insurance products through its insurance agents.
Concessions paid by us for products sold through Griffith were $96 thousand for
the five months ended May 31, 2004.  Effective May 31, 2004, PNX sold
Griffith to an unrelated third party.  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, 2006 and 2005, we had amounts due to Phoenix Life of $1,843
thousand and $16,354 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, 2006 and 2005, we had amounts
due to Phoenix Life and Annuity of $16 thousand and $19 thousand, respectively.
We do not charge any fees for this service.  Until 2006, Phoenix Life provided life
insurance premium processing services to us for life insurance policies. In
connection with this service, at December 31, 2005, we had policy-related
receivables of $31,119 thousand. Phoenix Life did not charge us for these
services.  F-19    10. 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.   11. Other
Comprehensive Income  Sources of
Year Ended December 31,Other Comprehensive Income:
2006
2005
2004($ in thousands)
Gross
Net
Gross
Net
Gross
NetUnrealized gains (losses) on investments$7,264
$1,516
$(64,713)
$(16,569)
$(17,140)
$(11,734)Net realized investment gains (losses) on
  available-for-sale securities included
  in net income
(4,298)

(2,793)

10,127

6,583

(4,720)

(3,068)Net unrealized investment gains (losses)
2,966

(1,277)

(54,586)

(9,986)

(21,860)

(14,802)Net unrealized losses on derivative
  instruments
(1,241)

(807)

(516)

(335)

(517)

(336)Other comprehensive income (loss)
1,725
$
(2,084)

(55,102)
$
(10,321)

(22,377)
$
(15,138)Applicable deferred policy acquisition
  cost amortization
4,930



(39,223)



912Applicable deferred income tax benefit
(1,121)



(5,558)



(8,151)Offsets to other comprehensive income
3,809



(44,781)



(7,239)Other comprehensive loss$
(2,084)


$
(10,321)


$
(15,138)   Components of Accumulated
As of December 31,Other Comprehensive Income:
2006
2005($ in thousands)
Gross
Net
Gross
NetUnrealized losses on investments$(14,584)
$(2,689)
$(17,550)
$(1,412)Unrealized gains on derivative instruments
--

--

1,241

807Accumulated other comprehensive loss
(14,584)
$
(2,689)
(16,309)
$
(605)Applicable deferred policy acquisition costs
(10,448)



(15,378)Applicable deferred income taxes
(1,447)



(326)Offsets to other comprehensive income
(11,895)



(15,704)Accumulated other comprehensive loss$
(2,689)


$
(605)  F-20      12. Fair Value of
Financial Instruments and Derivative Instruments  Fair value of financial instruments  Carrying Amounts and Estimated Fair Values
As of December 31,of Financial Instruments:
2006
2005($ in thousands)Carrying
Fair
Carrying
FairValue
Value
Value
ValueCash and cash equivalents$47,127
$47,127
$25,818
$25,818Debt securities
2,050,989

2,050,989

2,789,491

2,789,491Policy loans
15,542

15,542

8,171

8,171Financial assets
$
2,113,658
$
2,113,658
$
2,823,480
$
2,823,480Investment contracts$1,491,367
$1,486,758
$2,256,129
$2,250,695Financial liabilities$
1,491,367
$
1,486,758
$
2,256,129
$
2,250,695  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 150 basis points to determine the present
value of the projected account value of the policy at the end of the current
guarantee period.  Derivative instruments  We maintain an overall interest rate
risk-management strategy that primarily incorporates the use of interest rate
swaps as hedges of our exposure to changes in interest rates. Our exposure to
changes in interest rates primarily results from our commitments to fund
interest-sensitive insurance liabilities, as well as from our significant
holdings of fixed rate financial instruments.  We recognized an after-tax gain of $1.2
million, $0.3 million and $0.3 million for the years ended December 31,
2006, 2005 and 2004 (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 have
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 2006, 2005 and
2004, we reclassified after-tax gains of $1.2 million, $0.3 million and $0.3
million, respectively, into earnings related to these same derivatives.  We held no positions in derivative
instruments at December 31, 2006 and 2005.   13. Statutory
Financial Information and Regulatory Matters  We are required to file annual
statements with state regulatory authorities prepared on an accounting basis
prescribed or permitted by such authorities. There were no practices not
prescribed by the State of Connecticut Insurance Department as of
December 31, 2006, 2005 and 2004. Statutory surplus differs from equity
reported in accordance with GAAP primarily because policy acquisition costs are
expensed when incurred, investment reserves are based on different assumptions,
life insurance reserves are based on different assumptions and income taxes are
recorded in accordance with the Statement of Statutory Accounting Principles No.
10, Income Taxes, which limits deferred tax assets based on
admissibility tests.  F-21    13. Statutory
Financial Information and Regulatory Matters (continued)  Connecticut
Insurance Law requires that Connecticut life insurers report their risk-based
capital. Risk-based capital is based on a formula calculated by applying factors
to various assets, premium and statutory reserve items. The formula takes into
account the risk characteristics of the insurer, including asset risk, insurance
risk, interest rate risk and business risk. Connecticut Insurance Law gives the
Connecticut Commissioner of Insurance explicit regulatory authority to require
various actions by, or take various actions against, insurers whose total
adjusted capital does not exceed certain risk-based capital levels. Our
risk-based capital was in excess of 300% of Company Action Level (the level
where a life insurance enterprise must submit a comprehensive plan to state
insurance regulators) as of December 31, 2006 and 2005.  Statutory Financial Data:
As of or For the Year Ended December 31,($ in thousands)
2006
2005
2004Statutory capital and surplus$220,342
$264,825
$245,831Asset valuation reserve
14,320

5,575

7,370Statutory capital, surplus and asset valuation reserve$234,662
$270,400
$253,201Statutory gain (loss) from operations$(33,094)
$12,251
$(2,574)Statutory net income (loss)$(33,994)
$12,749
$(3,254)  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 2007 without prior
approval.   14. Contingent
Liabilities  Litigation and Arbitration  We are regularly involved in litigation
and arbitration, both as a defendant and as a plaintiff. The litigation and
arbitration naming us as a defendant ordinarily involves our activities as an
insurer, investor, or taxpayer. It is not feasible to predict or determine the
ultimate outcome of all legal or arbitration proceedings or to provide
reasonable ranges of potential losses. We believe that the outcomes of our
litigation and arbitration matters are not likely, either individually or in the
aggregate, to have a material adverse effect on our 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.  Regulatory Matters  State regulatory bodies, the Securities
and Exchange Commission, or SEC, the National Association of Securities Dealers,
Inc., or NASD, and other regulatory bodies regularly make inquiries of us and,
from time to time, conduct examinations or investigations concerning our
compliance with, among other things, insurance laws and securities laws. We
endeavor to respond to such inquiries in an appropriate way and to take
corrective action if warranted.  For example, during 2003 and 2004, the
SEC conducted examinations of certain Phoenix Life variable products and certain
Phoenix Life affiliated investment advisers and mutual funds. In 2004, the NASD
also commenced examinations of two affiliated broker-dealers; the examinations
were closed in April 2005 and November 2004, respectively. In February 2005, the
NASD notified PNX that it was asserting violations of trade reporting
rules by a subsidiary. PNX responded to the NASD allegations in May
2005. Thereafter, in January 2007, the NASD notified PNX that the matter
is being referred for potential violations and possible action.  F-22    14. Contingent
Liabilities (continued)  In addition, Federal and state
regulatory authorities from time to time make inquiries and conduct examinations
regarding compliance by Phoenix Life and its subsidiaries with securities and
other laws and regulations affecting their registered products. We endeavor to
respond to such inquiries in an appropriate way and to take corrective action if
warranted. There has been a significant increase in federal and state regulatory
activity relating to financial services companies, with a number of recent
regulatory inquiries focusing on late-trading, market timing and valuation
issues. Our products entitle us to impose restrictions on transfers between
separate account sub-accounts associated with our variable products.  In 2004 and 2005, the Boston District
Office of the SEC conducted a compliance examination of certain of PNXs
affiliates that are registered under the Investment Company Act
of 1940 or the Investment Advisers Act of 1940. Following the examination, the
staff of the Boston District Office issued a deficiency letter primarily focused
on perceived weaknesses in procedures for monitoring trading to prevent market
timing activity. The staff requested PNX to conduct an analysis as to whether
shareholders, policyholders and contract holders who invested in the funds that
may have been affected by undetected market timing activity had suffered harm
and to advise the staff whether PNX believes reimbursement is necessary or
appropriate under the circumstances. A third party was retained to assist PNX in
preparing the analysis. Based on this analysis, PNX advised the SEC that it does
not believe that reimbursement is appropriate.  Over the past several years, a number
of companies have announced settlements of enforcement actions with various
regulatory agencies, primarily the SEC and the New York Attorney Generals
Office. While no such action has been initiated against us, it is possible that
one or more regulatory agencies may pursue this type of action against us in the
future.  Financial services companies have also
been the subject of broad industry inquiries by state regulators and attorneys
general which do not appear to be company-specific. In this regard, in 2004, PNX
received a subpoena from the Connecticut Attorney Generals office
requesting information regarding certain distribution practices since 1998. Over
40 companies received such a subpoena. PNX cooperated fully and has had no
further inquiry since filing its response.  These types of regulatory actions may
be difficult to assess or quantify, may seek recovery of indeterminate amounts,
including punitive and treble damages, and the nature and magnitude of their
outcomes may remain unknown for substantial periods of time. While it is not
feasible to predict or determine the ultimate outcome of all pending inquiries,
investigations, legal proceedings and other regulatory actions, or to provide
reasonable ranges of potential losses, we believe that their outcomes are not
likely, either individually or in the aggregate, to have a material adverse
effect on our 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.  F-23