Our executive headquarters consist of our main office building at One American Row and two other buildings in Hartford, Connecticut. We own these buildings and occupy most of the space contained in them. In addition to these properties, we own offices in Enfield, Connecticut and East Greenbush, New York, for use in the operation of our business. We also lease office space within and out of the United States of America as needed for our operations, including for use by our sales force. We believe that our properties are adequate for our current and expected needs.
The following table sets forth Phoenix's selected historical consolidated financial data as of and for each of the five years ended December 31, 2001. We derived the data for the years ended December 31, 1999, 2000 and 2001 and as of December 31, 2000 and 2001 from our audited consolidated financial statements included elsewhere in this Form 10-K. We derived the data for the years ended December 31, 1997 and 1998 and as of December 31, 1997, 1998 and 1999 from audited consolidated financial statements not included in this Form 10-K. Prior to June 25, 2001, Phoenix Life was the parent company of our consolidated group. In connection with the demutualization, Phoenix Life became a subsidiary and Phoenix became the parent company of our consolidated group.
You should read the following in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes thereto included in this Form 10-K.
Income Statement Data:(1) For the Year Ended December 31, ----------------------------------------------------------------------- 1997 1998 1999 2000 2001 ----------- ----------- ----------- ----------- ---------- (in millions, except earnings per share) Revenues: Premiums............................... $ 1,087.7 $ 1,175.8 $1,175.7 $ 1,147.4 $1,112.7 Insurance and investment product fees.. 401.3 537.5 574.6 631.0 546.4 Net investment income.................. 720.7 859.6 953.1 1,129.6 835.1 Net realized investment gains (losses) 111.0 58.2 75.8 89.2 (72.4) ----------- ----------- ----------- ----------- ---------- Total revenues...................... 2,320.7 2,631.1 2,779.2 2,997.2 2,421.8 ----------- ----------- ----------- ----------- ---------- Total benefits and expenses......... 2,155.9 2,474.3 2,513.5 2,839.7 2,670.5 ----------- ----------- ----------- ----------- ---------- Income (loss) from continuing operations 124.8 91.9 162.1 94.8 (137.3) Net income (loss) from discontinued operations, net of income taxes(2).. 44.9 45.2 (72.9) (11.5) -- Cumulative effect of accounting changes(3) -- -- -- -- (65.4) ----------- ----------- ----------- ----------- ---------- Net income (loss)......................... $ 169.7 $ 137.1 $ 89.2 $ 83.3 $(202.7) =========== =========== =========== =========== ========== Pro forma earnings per share from continuing operations(4)............ $ 1.19 $ .88 $ 1.55 $ .91 $(1.31) =========== =========== =========== =========== ========== Pro forma earnings per share(4) $ 1.62 $ 1.31 $ .85 $ .80 $(1.94) =========== =========== =========== =========== ==========
Balance Sheet Data: As of December 31, ------------------------------------------------------------------------------ 1997 1998 1999 2000 2001 ------------ ------------ ------------ ------------ ------------ (in millions) Total assets......................... $17,915.0 $18,798.0 $20,287.0 $20,313.2 $22,525.4 ============ ============ ============ ============ ============ Long-term debt....................... $ 471.1 $ 449.3 $ 499.4 $ 425.1 $ 599.3 ============ ============ ============ ============ ============ Total liabilities.................... $16,117.6 $16,969.4 $18,430.9 $18,335.4 $20,120.9 ============ ============ ============ ============ ============ Minority interest in net assets of consolidated subsidiaries......... $ 136.5 $ 92.0 $ 100.1 $ 136.9 $ 8.8 ============ ============ ============ ============ ============ Total equity......................... $1,660.9 $1,736.6 $1,756.0 $1,840.9 $2,395.7 ============ ============ ============ ============ ============
As of or for the Year Ended December 31, ------------------------------------------------------------------------------ 1997 1998 1999 2000 2001 ------------ ------------ ------------ ------------ ------------ Other Data: (in millions) Assets under management.............. $54,742.8 $61,147.7 $73,181.4 $64,543.5 $61,215.1 ============ ============ ============ ============ ============ Statutory Data: Premiums and deposits................ $ 2,911.7 $ 2,578.8 $ 2,330.2 $ 2,344.8 $ 3,152.4 ============ ============ ============ ============ ============ Net income........................... $ 66.6 $ 108.7 $ 131.3 $ 266.1 $ (13.4) ============ ============ ============ ============ ============ Policyholder surplus(5).............. $ 844.0 $ 905.3 $ 1,054.1 $ 1,322.8 $ 1,149.8 Asset valuation reserve ("AVR")(6)... 308.8 300.3 373.2 560.4 223.4 ------------ ------------ ------------ ------------ ------------ Total surplus and AVR............. $ 1,152.8 $ 1,205.6 $ 1,427.3 $ 1,883.2 $ 1,373.2 ============ ============ ============ ============ ============ --------
(1) See note 3 to our consolidated financial statements included in this Form 10-K for a summary of our significant accounting policies. The above income statement data have been derived from our audited financial statements, which have been retroactively restated to reflect the adoption of all applicable authoritative GAAP literature and accounting changes.
The discontinuation of these businesses resulted from the sales of several operations and the implementation of plans to withdraw from the remaining businesses. These transactions do not affect the comparability of the financial data. The assets and liabilities of the discontinued operations have been excluded from the assets and liabilities of continuing operations and separately identified in the balance sheet data. Likewise, the income statement data have been restated for 1997 and 1998 to exclude from continuing operations the operating results of discontinued operations. See note 14 to our consolidated financial statements included in this Form 10-K.
Effective January 1, 2001, we adopted a new accounting pronouncement, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This adoption resulted in a cumulative effect adjustment of $3.9 million (net of income taxes of $2.1 million). See note 3 to our consolidated financial statements included in this Form 10-K.
In the second quarter of 2001, we recognized the following cumulative effect adjustment for accounting changes:
We report our remaining activities in two non-operating segments-- Venture Capital and Corporate and Other. Venture Capital includes investments primarily in the form of limited partnership interests in venture capital funds, leveraged buyout funds and other private equity partnerships sponsored and managed by third parties. See "Business--Venture Capital Segment." Corporate and Other includes unallocated capital and expenses, as well as certain businesses not of sufficient scale to report independently. See "Business--Corporate and Other Segment." These non-operating segments are significant for financial reporting purposes, but do not contain products or services relevant to our core wealth management operations.
o premiums on whole life insurance; o insurance and investment product fees on variable life and annuity products and universal life products; o investment management and related fees; and o net investment income and net realized investment gains.
o the adequacy of our product pricing, which is primarily a function of our ability to select underwriting risks, as well as our mortality experience, our ability to generate investment earnings, our ability to maintain expenses in accordance with our pricing assumptions, and our policies' persistency, meaning the percentage of policies remaining in force from year to year as measured by premiums; o the amount and composition of assets under management; o the maintenance of our target spreads between the rate of earnings on our investments and dividend and interest rates credited to customers; and o our ability to manage expenses.
Prior to the demutualization, we focused on participating life insurance products, which pay policyholder dividends. As of December 31, 2001, 75% of our life insurance reserves were for participating policies. As a result, a significant portion of our expenses consists, and will continue to consist, of such policyholder dividends. Our net income is reduced by the amounts of these dividends. Policyholder dividends paid were $360.5 million, $378.0 million and $400.1 million for the years ended December 31, 1999, 2000 and 2001, respectively.
Our sales and financial results over the last several years have been affected by economic and industry trends. Americans generally, have begun to rely less on whole life insurance, defined benefit retirement plans and social security and other government programs to meet their post-retirement financial needs. Reflecting this trend, sales of our whole life insurance products have declined in recent years. Concurrently, the baby boom generation has begun to enter its prime savings years. These factors have had a positive effect on sales of our variable life and annuity products, mutual funds and managed account products. See "Business--Market Opportunity."
We discontinued the operations of several businesses that did not align with our business strategy. The discontinuation involved the sales of several operations and the implementation of plans to withdraw from other businesses.
During 1999, we sold our real estate management business and signed a definitive agreement to sell our group life and health insurance business. This latter sale was completed in the second quarter of 2000. We recorded net pre-tax gains of $5.9 million in 1999 and $71.1 million in 2000 in connection with these dispositions.
The assets and liabilities of the discontinued operations are excluded from the assets and liabilities of continuing operations and separately identified on our consolidated balance sheet. Net assets of the discontinued operations totaled $25.5 million and $20.8 million as of December 31, 2000 and 2001, respectively. Our consolidated statements of income have been restated for 1999 to exclude from continuing operations the operating results of discontinued operations. See "Selected Financial Data" and note 14 to our consolidated financial statements included in this Form 10-K for information about the operating results of our discontinued operations.
On September 10, 2000, Phoenix Life Insurance Company ("Phoenix Life") and PXP entered into an agreement and plan of merger, by which Phoenix Life agreed to purchase PXP's outstanding common stock owned by third parties for a price of $15.75 per share. In connection with this merger, which closed on January 11, 2001, Phoenix Life paid total cash of $339.3 million to those stockholders. After the merger, some third party holders of PXP's convertible subordinated debentures converted their debentures, and PXP redeemed all remaining outstanding debentures held by third parties. PXP made cash payments totaling $38.2 million in connection with these conversions and redemptions. In addition, PXP accrued non-recurring compensation expenses of $57.0 million to cash out restricted stock, $5.5 million of related compensation costs,
$19.7 million in non-recurring retention costs and $3.9 million in non-recurring transaction costs during the year ended December 31, 2001.
Phoenix Life obtained from internal sources the cash it paid to PXP's third party stockholders. In January 2001, PXP borrowed $95.0 million under its then existing credit facility to fund payments with respect to outstanding restricted stock and fund the redemption or conversion of its convertible subordinated debentures.
On June 25, 2001, Phoenix Life converted from a mutual life insurance company to a stock life insurance company and became our wholly-owned subsidiary. Phoenix Life established a closed block for the benefit of holders of certain individual life insurance policies (closed block policies). The purpose of the closed block is to ensure that the reasonable dividend expectations of policyholders who own policies included in the closed block are met. The closed block will continue in effect until the date none of such policies is in force. On the effective date of the demutualization, Phoenix Life allocated assets to the closed block in an amount that produces cash flows which, together with anticipated revenue from the closed block policies, are reasonably expected to be sufficient in the aggregate: (i) to support the obligations and liabilities relating to these policies, and (ii) to provide for a continuation of dividend scales in effect at that time, if the experience underlying such scales continues. Appropriate adjustments will be made to the dividend scales when actual experience differs from the aggregate experience underlying such scales. In particular, actual experience may, in the aggregate, be more favorable than Phoenix Life assumed in establishing the closed block. In that case, the policy dividend scale may be increased. Conversely, to the extent that actual experience is, in the aggregate, less favorable than Phoenix Life assumed in establishing the closed block, the policy dividend scale may be decreased, unless Phoenix Life chooses to use assets from outside the closed block to support the dividends. The assets allocated to the closed block and any cash flows provided by those assets will solely benefit the holders of policies included in the closed block, except in the unlikely event of Phoenix Life's liquidation.
In addition to the closed block assets, we hold assets outside the closed block in support of closed block liabilities. Investment earnings on these assets less allocated expenses and the amortization of deferred acquisition costs provide an additional source of earnings to our shareholders. In addition, the amortization of deferred acquisition costs requires the use of various assumptions. To the extent that actual experience is more or less favorable than assumed, shareholder earnings will be impacted.
In addition, Phoenix Life remains responsible for paying the benefits guaranteed under the policies included in the closed block, even if cash flows and revenues from the closed block prove insufficient. We funded the closed block to provide for these payments and for continuation of dividends paid under 2000 policy dividend scales, assuming the experience underlying such dividend scales continues. Therefore, we do not believe that Phoenix Life will have to pay these benefits from assets outside the closed block unless the closed block business experiences very substantial adverse deviations in investment, mortality, persistency or other experience factors. We intend to accrue any additional contributions necessary to fund guaranteed benefits under the closed block when it becomes probable that we will be required to fund any shortage.
Securitized Financial Instruments. Effective April 1, 2001, we adopted Emerging Issues Task Force ("EITF") Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets ("EITF 99-20"). This pronouncement requires investors in certain asset-backed securities to record changes in their estimated yield on a prospective basis and to apply specific valuation methods to these securities to determine if there has been an other-than-temporary decline in value. Upon adoption of EITF 99-20, we recorded a $20.5 million charge to net income as a cumulative effect of accounting change, net of income taxes.
On January 1, 2001, in accordance with the transition provisions of SFAS 133, we recorded a net-of-tax cumulative effect adjustment of $1.3 million (gain) in earnings to recognize at fair value all derivatives that are designated as fair-value hedging instruments. We also recorded an offsetting net-of-tax cumulative effect adjustment of $1.3 million (loss) in earnings to recognize the difference attributable to the hedged risks between the carrying values and fair values of the related hedged assets and liabilities. We also recorded a net-of-tax cumulative effect adjustment of $1.1 million in accumulated other comprehensive income to recognize, at fair value, all derivatives that are designated as cash-flow hedging instruments.
As a result of the adoption of SOP 00-3, we recorded a charge of $30.3 million to equity in the second quarter of 2001 representing the establishment of the policyholder dividend obligation along with the corresponding impact on deferred policy acquisition costs and deferred income taxes.
Business Combinations/Goodwill and Other Intangible Assets. In June 2001, SFAS No. 141, Business Combinations ("SFAS 141"), and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), were issued. SFAS 141 and SFAS 142 are effective for July 1, 2001 and January 1, 2002, respectively. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and separate recognition of intangible assets apart from goodwill if such intangible assets meet certain criteria. SFAS 141 also requires that upon adoption of SFAS 142 a company reclassify the carrying amounts of certain intangible assets into or out of goodwill, based on certain criteria. SFAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their initial recognition. Under SFAS 142, amortization of goodwill, including goodwill and other intangible assets with indefinite lives recorded in past business combinations, will discontinue upon adoption of this standard, and reporting units must be identified for the purpose of assessing potential future impairments of goodwill. We recognized $16.5 million in goodwill amortization during 2001. Goodwill amortization will not be recognized after 2001 in accordance with SFAS 142. In addition, goodwill recorded as a result of business combinations completed during the six-month period ending December 31, 2001 will not be amortized.
The discussion and analysis of our financial condition and results of operations are based upon our consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Deferred Policy Acquisition Costs ("DAC"). 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.
The amortization process requires the use of various assumptions, estimates and judgments about the future. The primary assumptions are expenses, investment performance, mortality and contract cancellations (i.e., lapses, withdrawals and surrenders). These assumptions are reviewed on a regular basis and are generally based on our past experience, industry studies, regulatory requirements and judgments about the future. Changes in these assumptions could result in adjustment to the amortization of DAC. Finally, analyses are performed periodically to assess whether there are sufficient gross margins or gross profits to amortize the remaining DAC balances.
Debt Securities. Debt securities are primarily reported either at fair value based on quoted market prices where available or quoted market prices of comparable instruments, or estimated using discounted cash flows that reflect interest rates currently being offered with similar terms to borrowers of similar credit quality, such as for private placement bonds. Debt securities are considered impaired when a decline in fair value is considered to be other than temporary. If events or circumstances change, the assumptions used to assess fair value could be affected and additional impairment losses could result.
The following table and discussion presents summary consolidated financial data for the years ended December 31, 1999, 2000 and 2001. For the Year Ended December 31, ------------------------------------------- 1999 2000 2001 ------------- ----------- ----------- (in millions) Revenues: --------- Premiums....................................................... $1,175.7 $1,147.4 $1,112.7 Insurance and investment product fees.......................... 574.6 631.0 546.4 Net investment income.......................................... 953.1 1,129.6 835.1 Net realized investment gains (losses)......................... 75.8 89.2 (72.4) ------------- ----------- ----------- Total revenues.............................................. 2,779.2 2,997.2 2,421.8 ------------- ----------- ----------- Benefits and expenses: ---------------------- Policy benefits and increase in policy liabilities............. 1,373.1 1,409.8 1,406.7 Policyholder dividends......................................... 360.5 378.0 400.1 Amortization of deferred policy acquisition costs.............. 147.9 356.0 133.0 Amortization of goodwill and other intangible assets........... 40.1 36.9 49.4 Interest expense............................................... 34.0 32.7 27.3 Demutualization expenses....................................... -- 21.8 25.9 Other operating expenses....................................... 557.9 604.5 628.1 ------------- ----------- ----------- Total benefits and expenses................................. 2,513.5 2,839.7 2,670.5 ------------- ----------- ----------- Income (loss) from continuing operations before income taxes, minority interest and equity in earnings of and interest earned from investments in unconsolidated affiliates......... 265.7 157.5 (248.7)
The decrease in premiums of 2% and 3% in 2000 and 2001, respectively, was primarily due to whole life premiums, which decreased $17.1 million and $24.8 million in 2000 and 2001, respectively, reflecting the shift to variable products, for which revenues are recognized through insurance and investment product fees. There were also decreases of $9.4 million and $4.0 million in 2000 and 2001, respectively, due to the runoff of the Confederation Life whole life business.
The decrease in insurance and investment product fees of 13% in 2001 was due to the following: Investment Management fees decreased $66.3 million, or 20%, primarily as a result of decreases in average assets under management partially due to negative investment performance and our sale of PXP's Cleveland operations in June 2000. Corporate and Other fees decreased $15.5 million, or 55%, primarily due to lower fees resulting from our decision to exit our physician practice management business in the third quarter of 2000. These decreases were slightly offset by the increases in fees in Life and Annuity of $1.1 million, or 0.4%, primarily as a result of increased sales of variable universal life products.
The increase in insurance and investment product fees of 10% in 2000 was due to the following: Investment Management fees increased $40.1 million, primarily from increases in average assets under management due to investment performance from late 1999 through September 2000, offset, in part, by negative performance in the fourth quarter of 2000. Life and Annuity fees increased $25.0 million due to increased sales of variable products and investment performance from late 1999 through September 30, 2000, offset, in part, by negative investment performance in the fourth quarter of 2000. In addition, sales of non-affiliated products increased through WS Griffith Advisors, Inc. ("WS Griffith"), resulting in increased commission revenue. Corporate and Other fees decreased $14.1 million, primarily due to the sale of our property casualty distribution subsidiary in May 1999.
Net investment income decreased 26% in 2001 primarily due to the decrease in Venture Capital net investment income of $361.8 million, or 131%, due to equity market performance in the technology sector, which produced favorable returns in 2000, but suffered significant declines during 2001. During the first quarter of 2001 we changed our method of applying the equity method of accounting to our venture capital partnerships to eliminate the quarterly lag in reporting. See-- "Venture Capital Segment" and note 5 of our consolidated financial statements. Corporate and Other net investment income decreased $29.2 million, primarily the result of the sale of assets to fund the purchase of the PXP minority interest in January 2001, partially offset by the earnings on the IPO proceeds. These decreases were also partially offset by increases in Life and Annuity net investment income $99.5 million, or 13%, due to higher average invested assets. Average invested assets, excluding venture capital partnerships, were $12,958.9 million in December 2001, an increase of $1,262.6 million, or 11%, from $11,696.3 million in December 2000. The yield on average invested assets, excluding venture capital partnerships, was 7.4% for the twelve months ended December 2001, compared to 7.5% for the comparable period in 2000.
The decrease in net realized gains of 181% in 2001 was due primarily to credit related realized losses of $78.8 million mostly attributable to the impairment of Enron and related entities, Argentine issuers, Global Crossing Ltd. and several collateralized debt obligations. Also in 2001, a $4.7 million loss was recorded due to a subsequent price adjustment on the sale of our Cleveland office, which occurred in June 2000. In 2000, non-recurring gains of $130.2 million on the sale of common stock were recorded. Offsetting these were non-recurring interest-related losses on debt securities of $33.8 million.
Investment Management amortization of $1.5 million. This increase resulted primarily from increased amortization related to our acquisition of Zweig Fund Group ("Zweig") in March 1999 and to the final payment of $50.0 million in September 2000 for the Engemann acquisition, and was offset, in part, by the reduction in intangible assets related to our sale of PXP's Cleveland operations in June 2000.
The increase in other operating expenses of 4% in 2001 is primarily due to the increase of $100.7 million in non-recurring items including expenses of $84.9 million related to the acquisition of the PXP minority interest and of $23.8 million related to an early retirement program. The increase in other operating expenses is partially offset by the decrease in Corporate and Other of $57.9 million related to decreases of $23.3 million in compensation and related expenses, decreases of $14.1 million in special charitable contributions given in 2000 and our decision to exit our physician practice management business in the third quarter of 2000. Investment Management other operating expenses also decreased $10.4 million primarily as a result of reduced incentive compensation for certain subsidiaries that, in accordance with their respective operating agreements, receive compensation directly related to earnings, which have declined as a result of investment performance.
The decrease in minority interest in net income of consolidated subsidiaries of 49% in 2001 was due to our purchase of the PXP minority interest in January 2001.
We evaluate segment performance on the basis of segment after-tax operating income. Realized investment gains and some non-recurring items are excluded because management does not consider them when evaluating the financial performance of the segments. The size and timing of realized investment gains are often subject to management's discretion. Non-recurring items are removed from segment after-tax operating income if, in management's opinion, they are not indicative of overall operating trends. While some of these items may be significant components of our net income reported in accordance with GAAP, we believe segment after-tax operating income is an appropriate measure which represents the net income attributable to the ongoing operations of our business. The criteria used by management to identify non-recurring items and to determine whether to exclude a non-recurring item from segment after-tax operating income include whether the item is infrequent and:
The following table presents a reconciliation of segment after-tax operating income to GAAP reported income from continuing operations.
(3) Reduction in pension plan cost due to a change in the corridor used to amortize deferred gains and losses.
(6) Related to the reimbursement and subsequent reinsurance recovery of two mutual fund investment portfolios which had inadvertently sustained losses.
(7) Represents one-time expenses related to sublease transactions on certain office space.
(11) Represents a charge related to a litigation settlement with former clients of PXP and its former financial consulting subsidiary.
The following table and discussion presents summary financial data relating to Life and Annuity for the years ended December 31, 1999, 2000 and 2001.
• The increase in insurance and investment product fees of 0.4% in 2001 was due to the following. Insurance and investment product fees for variable annuities decreased because average assets under management decreased as a result of negative investment performance. At December 31, 2001, funds under management for variable annuities were $4.7 billion, an increase of $0.3 billion, or 8%, from December 31, 2000. The decrease in funds under management due to negative investment performance was $0.6 billion from December 31, 2000. Variable annuity sales were $1.5 billion for the year ended 2001, an increase of 117% from 2000 primarily as a result of our
The increase in net investment income of 3% and 13% in 2000 and 2001, respectively, was primarily the result of higher average invested assets.
The increase in policy benefits, increase in policy liabilities and policyholder dividends of 1% in 2001 was primarily due to higher interest credited on the guaranteed interest account of variable annuities. The increase in policy benefits, increase in policy liabilities and policyholder dividends of 3% in 2000 was primarily due to the increase in dividends of $18.5 million due to increases in cash values on whole life policies. Policy benefits were $14.1 million higher in 2000 for variable products due to growth in the business, and $26.0 million higher for whole life business, due primarily to a reinsurance accounting adjustment reflecting, as a liability, future profits expected to accrue to our reinsurers as a result of improvements in mortality.
Other operating expenses remained relatively flat in 2001. The increase in other operating expenses of 7% in 2000 was primarily related to the growth of our Life and Annuity business, including an increase of $11.5 million in compensation expenses resulting, in part, from additions to our staff of product specialists and incentives, an increase of $5.5 million in expenses related to technology initiatives and an increase of $8.4 million due to growth in WS Griffith and PHL Associates, Inc. These expenses were offset, in part, by a decrease in amortization of goodwill and other intangible assets of $5.8 million due to a write-off of goodwill in 1999.
For the Year Ended December, 31 -------------------------------------------------- Operating Results: 1999 2000 2001 -------------- --------------- ------------- (in millions) Revenues: --------- Investment product fees................... $284.3 $324.4 $258.1 Net investment income..................... 3.1 2.6 1.6 -------------- --------------- ------------- Total revenues..................... $287.4 $327.0 $259.7 -------------- --------------- ------------- Expenses: --------- Amortization of goodwill and other intangible assets................ $30.3 $ 31.8 $49.0 Interest expense.......................... 16.8 17.9 14.9 Other operating expenses.................. 187.0 222.9 212.5 -------------- --------------- ------------- Total expenses.................... 234.1 272.6 276.4 -------------- --------------- ------------- Income (loss) from continuing operations before income taxes, minority interest and equity in earnings of and interest earned from investments in unconsolidated affiliates.............. 53.3 54.4 (16.7) Income tax expense (benefit).............. 23.0 25.7 (2.6) Minority interest in net income of consolidated subsidiaries.............. (10.1) (11.0) (6.9) Equity in earnings of and interest earned from investments in unconsolidated affiliates............................. 3.7 6.2 5.5 -------------- --------------- ------------- Segment after-tax operating income (loss) 23.9 23.9 (15.5) -------------- --------------- ------------- After-tax adjustments: ---------------------- Net realized investment gains........... -- 5.2 .5 Portfolio (loss) gain................... (3.8) 3.1 -- Partnership gains....................... -- 2.4 Loss on sublease transaction............ -- (.7) -- Restructuring charges................... (.7) -- Expenses of purchase of PXP minority interest............................ -- (.7) (52.8) Litigation settlement................... -- (1.8) -- -------------- --------------- ------------- Total after-tax adjustments............... (4.5) 5.1 (49.9) -------------- --------------- ------------- GAAP reported income: --------------------- Income (loss) from continuing operations $19.4 $ 29.0 $ (65.4) ============== =============== =============
The decrease in other operating expenses of 5% in 2001 was primarily the result of reduced incentive compensation for certain subsidiaries that, in accordance with their respective operating agreements, receive compensation directly related to earnings, which have declined as a result of investment performance. The increase in other operating expenses of 19% in 2000 was primarily due to various incentive compensation programs relating to increased sales and improved investment performance and the addition of wholesaling and other marketing positions in both the private client and institutional lines of business in the third quarter of 2000. Non-compensation related costs increased primarily in support of company initiatives begun during the year which related primarily to distribution and technology.
The decrease in minority interest in net income of consolidated subsidiaries of 37% in 2001 was due primarily to our purchase of the PXP minority interest in January 2001. The increase of 9% in 2000 was due to the increased earnings of PXP.
We record our investments in venture capital partnerships in accordance with the equity method of accounting. Our pro rata share of the earnings or losses of the partnerships, which represent realized and unrealized investment gains and losses, as well as operations of the partnership, is included in our investment income. We record our share of the net equity in earnings of the venture capital partnerships in accordance with GAAP, using the most recent financial information received from the partnerships. Historically, this information had been provided to us on a one-quarter lag. Due to the volatility in the equity markets, we believed the one-quarter lag in reporting was no longer appropriate. Therefore, we changed our method of applying the equity method of accounting to eliminate the quarterly lag in reporting. We removed the lag in reporting by estimating the change in our share of the net equity in earnings of the venture capital partnerships for the period from December 31, 2000, the date of the most recent financial information provided by the partnerships, to our then current reporting date of March 31, 2001. To estimate the net equity in earnings of the venture capital partnerships for each quarter, we developed a methodology to estimate the change in value of the underlying investee companies in the venture capital partnerships. For public investee companies, we used quoted market prices at the end of each quarter, applying liquidity discounts to these prices in instances where such discounts were applied in the underlying partnerships' financial statements. For private investee companies, we applied a public industry sector index to roll the value forward each quarter. We applied this methodology consistently each quarter with subsequent adjustments to reflect market events reported by the partnerships (e.g., new rounds of financing, initial public offerings and writedowns by the general partners). In addition, we will annually revise the valuations we have assigned to the investee companies to reflect the valuations contained in the audited financial statements received from the venture capital partnerships. Our venture capital earnings remain subject to variability.
In the first quarter of 2001, we recorded a charge of $48.8 million (net of income taxes of $26.3 million) representing the cumulative effect of this accounting change on the fourth quarter of 2000. The cumulative effect was based on the actual fourth quarter 2000 financial results as reported by the partnerships.
The following table and discussion presents summary financial data relating to Venture Capital for the years ended December 31, 1999, 2000 and 2001.
For the Year Ended December, 31 -------------------------------------------------- Operating Results: 1999 2000 2001 -------------- --------------- ------------- (in millions) Revenues: --------- Net investment income (loss)............... $139.9 $277.3 $ (84.5) -------------- --------------- ------------- Operating income (loss) before income taxes............................ 139.9 277.3 (84.5) Expenses: --------- Income tax expense (benefit)............... 49.0 97.1 (29.6) -------------- --------------- ------------- Segment after-tax operating income (loss)(1)............................... $ 90.9 $180.2 $ (54.9) ============== =============== ============= ------------------- (1) Excludes a charge of $48.8 million representing the cumulative effect of an accounting change in the first quarter of 2001, as described above.
The following table and discussion presents summary financial data relating to Corporate and Other for the years ended December 31, 1999, 2000 and 2001.
For the Year Ended December 31, -------------------------------------------- Operating Results: 1999 2000 2001 ------------ ------------- ----------- (in millions) Revenues: --------- Insurance and investment product fees......... $42.2 $28.1 $12.6 Net investment income......................... 31.3 47.5 18.3 ------------ ------------- ----------- Total revenues......................... 73.5 75.6 30.9 ------------ ------------- ----------- Benefits and expenses: ---------------------- Policy benefits and increase in policy liabilities................................. 10.0 12.0 9.6 Interest expense.............................. 17.2 14.7 12.4 Other operating expenses...................... 87.8 102.4 40.3 ------------ ------------- ----------- Total expenses........................ 115.0 129.1 62.3 ------------ ------------- ----------- Operating loss before income taxes, minority interest and equity in earnings of and interest earned from investments in unconsolidated affiliates............... (41.5) (53.5) (31.4) Income tax benefit.......................... (24.4) (34.7) (19.9) Equity in earnings of and interest earned from investments in unconsolidated affiliates................................. 1.8 1.3 2.6 ------------ ------------- ----------- Segment after-tax operating loss.............. (15.3) (17.5) (8.9) ------------ ------------- ----------- After-tax adjustments: ---------------------- Net realized investment gains (losses)...... 38.9 65.6 (26.9) Early retirement pension adjustment......... (17.6) -- (15.5) Pension adjustment.......................... -- -- 2.9 Demutualization expense..................... -- (14.1) (23.9)
Surplus tax............................. (11.2) (10.4) 21.0 ------------ ------------- ----------- Total after-tax adjustments................... $10.1 $41.1 $ (42.4) ------------ ------------- ----------- GAAP reported income: --------------------- Income (loss) from continuing operations $ (5.2) $23.6 $ (51.3) ============ ============= ===========
The decrease in policy benefits and increase in policy liabilities of 20% in 2001 was primarily due to a decrease in reserves related to our group pension business. The increase in policy benefits and increase in policy liabilities of 20% in 2000 was primarily due to an increase in reserves related to our group pension business.
The decrease in interest expense of 16% and 15% in 2001 and 2000, respectively, was due to a decrease in corporate borrowings.
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. Generally, assets held in separate accounts are not available to satisfy general account obligations.
investment trusts that PXP sponsored did not have a substantive amount of outside equity and, as a result, we concluded that consolidation was required. Our financial exposure is limited to our share of equity and bond investments in these vehicles and there are no financial guarantees from, or recourse to, us for these investment trusts. Asset valuation changes are directly offset by changes in the corresponding liabilities. We receive investment management fees for services provided to the trust.
o credit risk, which relates to the uncertainty associated with the ongoing ability of an obligor to make timely payments of principal and interest;
We manage credit risk through fundamental analysis of the underlying obligors, issuers and transaction structures. We employ a staff of specialized and experienced credit analysts who review obligors' management, competitive position, financial statements, cash flow, coverage ratios, liquidity and other key financial and non-financial information. These specialists recommend the investments needed to fund our liability guarantees within 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 integrity of their current credit ratings.
We manage equity risk, as well as credit risk, through industry and issuer diversification and asset allocation. Maximum exposure to an issuer 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.
Our debt security 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, 2001, debt securities represented 68% of general account invested assets, with a carrying value of $9,599.2 million. Public debt securities represented 76% of this total amount, with the remaining 24% represented by private debt securities. In the fourth quarter of 2001, we reclassified our held-to-maturity debt securities to available-for-sale. Our debt securities are classified as available-for-sale and are reported at fair value with unrealized gains or losses included in equity.
The following table displays the SVO ratings for our debt security portfolio as of the dates indicated, along with an equivalent S&P rating agency designation. The majority of our bonds are investment grade, with 92% invested in Categories 1 and 2 securities as of December 31, 2001.
As of December 31, ---------------------------- SVO Rating S&P Equivalent Designation 2000 2001 ---------- ---------------------------------------- ------------ ------------ (in millions) 1 AAA/AA/A $5,359.3 $6,130.8 2 BBB 1,979.7 2,686.7 3 BB 573.9 581.6 4 B 240.6 173.0 5 CCC and lower 15.5 38.6 6 In or near default 3.9 23.3 ------------ ------------ Total 8,172.9 9,634.0 Less debt securities of discontinued operations................. 114.3 34.8 ------------ ------------ Total debt securities, continuing operations.................... $8,058.6 $9,599.2 ============ ============
The following table displays the credit quality of our public debt security portfolio as of the dates indicated.
As of December 31, ---------------------------- SVO Rating S&P Equivalent Designation 2000 2001 ---------- ---------------------------------------- ------------ ------------ (in millions) 1 AAA/AA/A $4,285.0 $5,019.3 2 BBB 1,083.7 1,667.9 3 BB 491.5 452.9 4 B 200.2 150.4 5 CCC and lower 1.5 18.0 6 In or near default 1.4 19.8 ------------ ------------ Total $6,063.3 $7,328.3 ============ ============
The following table displays the credit quality of our private debt security portfolio as of the dates indicated.
As of December 31, ---------------------------- SVO Rating S&P Equivalent Designation 2000 2001 ---------- ---------------------------------------- ------------ ------------ (in millions) 1 AAA/AA/A $1,074.3 $1,111.5 2 BBB 896.0 1,018.8 3 BB 82.4 128.7 4 B 40.4 22.6 5 CCC and lower 14.0 20.6 6 In or near default 2.5 3.5 ------------ ------------ Total $2,109.6 $2,305.7 ============ ============
Downturns in securities markets have adversely affected and could continue to adversely affect revenues from our investment management business.
There are two main ways in which market declines and volatility have affected, or have the potential to affect, our revenues negatively. First, significant market volatility or declines may cause potential purchasers of our products to refrain from new or additional investments, and current investors to withdraw from the markets or reduce their rates of investment. Second, because the revenues of our investment management and variable products businesses are to a large extent based on fees related to the value of assets under our management, the decline in the securities markets has reduced, and could further reduce, our fee revenues by reducing the value of the investment assets we manage.
Claims paying ability ratings, sometimes referred to as financial strength ratings, indicate a rating agency's view of an insurance company's ability to meet its obligations to its insureds. These ratings are key factors underlying the competitive position of life insurers. In particular, several of the non-affiliated distributors of our life insurance products refuse to do business with insurance companies that are rated lower than AA- for financial strength by Standard & Poor's Ratings Services, or the equivalent of such rating issued by other recognized ratings agencies. Phoenix Life currently has ratings of AA- ("Very Strong") from Standard & Poor's, Aa3 ("Excellent") from Moody's Investors Service, Inc., A ("Excellent") from A.M. Best Company, Inc. and AA ("Very High") from Fitch IBCA. A ratings downgrade or the potential for such a downgrade for Phoenix Life could adversely affect our ability to compete. Any of these occurrences could have a material adverse effect on our revenues from sales of life insurance policies.
Under the New York Insurance Law, the ability of Phoenix Life to pay stockholder dividends to us in any calendar year in excess of the lesser of:
(1) 10% of Phoenix Life's surplus to policyholders as of the immediately preceding calendar year; or
(2) Phoenix Life's statutory net gain from operations for the immediately preceding calendar year, not including realized capital gains,
is subject to the discretion of the New York Superintendent of Insurance.
As of December 31, -------------------------------- 2000 2001 -------------- -------------- (in millions) Total investments....................... $ 11,877.4 $ 13,263.8 Goodwill and other intangible assets.... 582.6 858.6 Investments in unconsolidated affiliates 173.2 330.6 Policy liabilities and accruals......... 11,372.6 11,993.4 Policyholder deposit funds.............. 678.4 1,368.2 Long-term debt.......................... 425.1 599.3 Other liabilities....................... 473.3 595.1 Minority interest in net assets of consolidated subsidiaries............ 136.9 8.8
The increase in goodwill and other intangible assets of 47% in 2001 is primarily due to the purchase of the PXP minority interest, from which we recorded $297.5 million in such assets.
The 91% increase in investments in unconsolidated affiliates in 2001 is primarily related to the reclassification of Aberdeen and HRH convertible subordinated notes from held-to-maturity to available-for-sale and the resulting market appreciation recorded on that transfer.
The 5% increase in policy liabilities and accruals in 2001 is primarily due to increased life insurance reserves and the establishment of the PDO.
The 102% increase in policyholder deposit funds in 2001 is due to an increase in annuity deposits to the guaranteed interest account ("GIA") option during 2001. Annuity deposits increased primarily as a result of successful product launches.
The 41% increase in long-term debt in 2001 is due to our public debt offering during the fourth quarter of 2001.
The 5% increase in total investments in 2000 was primarily due to growth in our venture capital partnerships from realized gains of $129.2 million, net unrealized gains on securities and a general increase in business.
The 23% decrease in deferred policy acquisition costs in 2000 was the result of a one-time adjustment to deferred policy acquisition costs of $218.2 million in our participating block.
Historically, Phoenix Life has used cash flow from operations and investment activities to fund its liquidity requirements. Phoenix Life's principal cash inflows from its life insurance and annuities activities come from premiums, annuity deposits and charges on insurance policies and annuity contracts, as well as dividends and distributions from subsidiaries. Phoenix Life's principal cash inflows from its investment activities result from repayments of principal, proceeds from maturities, sales of invested assets and investment income.
Additional sources of liquidity to meet unexpected cash outflows are available from Phoenix Life's portfolio of liquid assets. These liquid assets include substantial holdings of U.S. government and agency bonds, short-term investments and marketable debt and equity securities. The cash Phoenix Life received as consideration for the transfer of shares of common stock of PXP and other subsidiaries following the demutualization was a non-recurring source of liquidity. Pursuant to the plan of reorganization, this cash payment was $659.8 million.
Phoenix Life's current sources of liquidity also include a master credit facility under which it has direct borrowing rights, subject to Phoenix's unconditional guarantee (see "Debt Financing"). Following the demutualization, Phoenix Life no longer has access to the cash flows generated by the closed block assets.
A primary liquidity concern with respect to life insurance and annuity products is the risk of early policyholder and contractholder withdrawal. Phoenix Life closely monitors its liquidity requirements in order to match cash inflows with expected cash outflows, and employs 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
The following table summarizes Phoenix Life's annuity contract reserves and deposit fund liabilities in terms of contractholders' ability to withdraw funds for the indicated periods:
As of December 31, ----------------------------------------------- 2000 2001 ---------------------- ---------------------- Amount % Amount % ------------ ------- ----------- ------- (dollars in millions) Not subject to discretionary withdrawal provision........ $ 182.8 4% $ 173.9 3% Subject to discretionary withdrawal without adjustment... 688.3 14% 1,054.8 21% With market value adjustment............................. 17.2 --% 239.1 5% Subject to discretionary withdrawal at contract value less surrender charge..................................... 173.9 3% 453.3 9% Subject to discretionary withdrawal at market value...... 4,041.5 79% 3,087.5 62% ----------- ------- ----------- ------- Total annuity contract reserves and deposit fund liability. $5,103.7 100% $5,008.6 100% =========== =========== ----------
The primary liquidity concerns with respect to Phoenix Life's cash inflows from its investment activities are the risks of default by debtors, interest rate and other market volatility and potential illiquidity of investments. Phoenix Life closely monitors and manages these risks.
Debt offering. On December 19, 2001, we completed a debt offering of $300 million, thirty-year senior unsecured bonds at a coupon of 7.45%. The bonds are traded on the New York Stock Exchange under the symbol PFX. The carrying value at December 31, 2001 was $299.2 million.
As of December 31, 2001, PXP had $344.2 million of debt outstanding, including:
Phoenix Subordinated Note. PXP paid down $150 million in debt from its Master Credit Facility and borrowed from Phoenix in the form of a $150 million subordinated note due 2007, bearing interest annually at the rate of LIBOR plus seventy-two basis points.
Master Credit Facility. As of December 31, 2001, PXP had $125.1 million of debt outstanding under the Master Credit Facility described above.
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 financial statements and reputations in the reinsurance marketplace, we believe that these third party reinsurers are financially sound and, therefore, that we have no material exposure to uncollectable life reinsurance.
Section 1322 of the New York Insurance Law requires that New York life insurers report their risk based capital ("RBC"). RBC 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. Section 1322 gives the New York Superintendent of Insurance explicit regulatory authority to require various actions by, or take various actions against, insurers whose total adjusted capital does not exceed certain RBC levels. As of December 31, 2001 and 2000, Phoenix Life's total adjusted capital was in excess of each of these RBC levels. Each of the U.S. insurance subsidiaries of Phoenix Life is also subject to these same RBC requirements. As of December 31, 2001 and 2000, the total adjusted capital of each of these insurance subsidiaries was in excess of each of their respective RBC levels.
o PEPCO had net capital of approximately $8.0 million. This amount exceeded PEPCO's regulatory minimum of $0.7 million. The ratio of aggregate indebtedness to net capital for PEPCO was 1.30 to 1.
o PSC had net capital of approximately $0.9 million. This amount exceeded PSC's regulatory minimum of $44,656. The ratio of aggregate indebtedness to net capital for PSC was 0.73 to 1.
o PFG Distribution Company had net capital of approximately $8,660. This amount exceeded PFG Distribution Company's regulatory minimum of $5,000. The ratio of aggregate indebtedness to net capital for PFG Distribution Company was 3.46 to 1.
The following table presents summary consolidated cash flow data for the periods indicated for the purpose of illustrating changes in the components of our cash flows. For the Year Ended December 31, ---------------------------------------------- 1999 2000 2001 ------------ ------------- ------------- (in millions) Net cash provided by operating activities of continuing operations $ 318.0 $ 375.1 $ 444.1 Net cash used for operating activities of discontinued operations (76.7) (264.6) (75.1) Net cash used for investing activities of continuing operations (419.9) (1.9) (1,927.5) Net cash provided by investing activities of discontinued operations 105.6 259.5 77.5 Net cash provided by financing activities of continuing operations 80.4 35.2 1,576.5
The increase in net cash used for operating activities of discontinued operations for 2000 as compared to 1999 and 2001 resulted primarily from the payment of cash settlements in 2000 to several of the companies involved in Unicover, which is associated with the runoff of our group accident and health reinsurance block, and from the remaining operating activities of our discontinued operations.