The U.S. equity markets experienced strong growth followed by substantial declines. From April 1, 2000 through December 31, 2002, the Nasdaq Composite Index and the Standard & Poor's 500 Index fell 70.79% and 41.29%, respectively. These market declines have been accompanied by increased volatility.
Venture capital earnings are dependent on the performance of the equity markets, which means that this segment's effect on our income from continuing operations has been volatile.
Our product sales are highly dependent on our relationships with non-affiliated distributors. If these relationships ended or diminished, our revenues would suffer accordingly.
The termination of any of the above agreements representing a material portion of assets under management would adversely affect our Investment Management fee revenues.
• Deferred Policy Acquisition Costs, or DAC, and Present Value of Future Profits, or PVFP 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. In connection with the 1997 acquisition of the Confederation Life business, we recognized an asset for the present value of future profits (PVFP) representing the present value of estimated net cash flows embedded in the existing contracts acquired. This asset is included in deferred acquisition costs (DAC).
See Note 3 to our consolidated financial statements and Item 7a, Quantitative and Qualitative Disclosures About Market Risk for more information.
The decrease in policy acquisition cost amortization in 2001 was primarily a result of a one-time adjustment to deferred policy acquisition costs of $218.2 million in our participating block in 2000.
to minimum death benefit guarantees on certain of our variable annuity products increased $8.7 million during 2002 as the result of an increase in net minimum death benefit exposure from $5.8 million at December 31, 2001 to $234.9 million at December 31, 2002. $176.6 million of this exposure increase was the result of the third-quarter acquisition of a block of annuity business from Valley Forge Life Insurance Company, with the remaining increase in exposure resulting from the impact of the overall decline in equity markets on fund balances.
The decrease in premiums in 2001 was primarily due to whole life premiums, which decreased $24.8 million. The decline reflects the shift to variable products, for which revenues are recognized through insurance and investment product fees. There was also a decrease from the run-off of the Confederation Life whole life business.
See Note 4 to our consolidated financial statements for more information.
The decrease in net investment income was primarily driven by stock market performance in technology and related sectors, which produced very favorable returns in 2000 but suffered significant declines during 2001.
Total net unrealized gains were $783.8 million. Of that amount, $305.6 million was outside the closed block ($129.4 million after applicable deferred policy acquisition costs and deferred income taxes) and $478.2 million was in the closed block ($0.0 million after applicable policyholder dividend obligation).
0 - 6 6 - 12 12 - 24 Over 24 Total Months Months Months Months ----------- ----------- ----------- ----------- ----------- Total equity securities Number of positions....................... 216 175 5 29 7 ---------- ----------- ----------- ----------- ----------- Total fair value.......................... $ 120.9 $ 101.6 $ 0.3 $ 16.6 $ 2.4 Total cost................................ 136.3 108.2 0.4 24.9 2.8 ---------- ----------- ----------- ----------- ----------- Unrealized loss........................... $ (15.4) $ (6.6) $ (0.1) $ (8.3) $ (0.4) ========== =========== =========== =========== ===========
In the normal course of business, we enter into transactions involving various types of financial instruments such as debt securities and equity securities. These instruments have credit risk and also may be subject to risk of loss due to interest rate and market fluctuations.
The increase in policy liabilities and accruals in 2001 was primarily due to increased life insurance reserves and the establishment of the policyholder dividend obligation.
The primary liquidity concerns regarding the Life Companies' cash inflows from its investment activities are the risks of default by debtors, interest rate and other market volatility and potential illiquidity of investments. The Life Companies closely monitor and manage these risks.
PXP's liquidity requirements are primarily to fund operating expenses and pay outstanding debt and interest obligations. PXP also will require liquidity to fund the costs of acquisitions or any contingent payments for previous acquisitions. Historically, PXP's principal source of liquidity has been cash flows from operations. We expect that cash flow from operations will continue to be PXP's principal source of working capital. PXP, together with PNX and Phoenix Life, has entered into a revolving credit facility. Under this facility, PXP has direct borrowing rights, subject to PNX's unconditional guarantee. We believe that PXP's current and anticipated sources of liquidity are adequate to meet its present and anticipated needs. See Note 6 to our consolidated financial statements for further details on our financing activities.
We maintain life reinsurance programs designed to protect against large or unusual losses in our life insurance business. Over the last several years in response to the reduced cost of reinsurance coverage, we increased the amount of individual mortality risk coverage purchased from third party reinsurers. Based on our review of their
Our broker-dealer subsidiaries are each subject to the net capital requirements imposed on registered broker-dealers by the Securities Exchange Act of 1934. Each is also required to maintain a ratio of aggregate indebtedness to net capital that does not exceed 15 to 1. The largest of these subsidiaries had net capital of approximately $7.0 million. This amount exceeded the regulatory minimum of $0.9 million. The ratio of aggregate indebtedness to net capital for that subsidiary was 2.0 to 1. The ratios of aggregate indebtedness to net