We prepared the following financial data, other than statutory data, in conformity with accounting principles generally accepted in the United States of America (“GAAP”). We derived the statutory data from the Annual Statements of our Life Companies filed with state insurance regulatory authorities and prepared it in accordance with statutory accounting practices prescribed or permitted by state insurance regulators, which vary in certain material respects from GAAP.
Due to our losses during 2008, the ratio of earnings to fixed charges for that year was less than 1:1. We would need $476.7 million in additional earnings for the year 2008 to achieve a 1:1 coverage ratio.
On December 31, 2008, we completed the spin-off of our asset management business through a pro rata distribution of common stock of our majority-owned subsidiary, Virtus, formerly known as Phoenix Investment Partners, Ltd., to our shareholders.
Interest margins. Net investment income (“NII”) earned on universal life and other policyholder funds managed as part of our general account, less the interest credited to policyholders on those funds.
Over the past year, the U.S. economy has experienced unprecedented credit and liquidity issues and entered into recession. Following several years of rapid credit expansion, a sharp contraction in mortgage lending coupled with dramatic declines in home prices, rising mortgage defaults and increasing home foreclosures, resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to most sectors of the credit markets, and to credit default swaps and other derivative securities, have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions, to be subsidized by the U.S. government and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced and, in some cases, ceased to provide funding to borrowers, including other financial institutions. These factors, combined with declining business and consumer confidence and increased unemployment, have precipitated an economic slowdown and fears of a prolonged recession.
Statutory capital and surplus and risk-based capital (“RBC”) ratios. Regulated life insurance entities are subject to risk-based capital requirements which are a function of these entities’ statutory capital and surplus and risk-based capital requirements. The impact of economic and market environment has both reduced statutory capital and increased risk-based capital requirements in a variety of ways. For instance, realized losses reduce available capital and surplus, equity market declines increase the amount of statutory reserves that insurers are required to hold for variable annuity guarantees while increasing risk-based capital requirements and credit downgrades of securities increase risk-based capital requirements. We have recently taken capital management actions to improve our capitalization and RBC ratio including, but not limited to, the sale of certain securities in our portfolio and entry into reinsurance arrangements. We may take similar actions in the future. Further, we have been approved to become a savings and loan holding company and have submitted an application to participate in the CPP under the TARP program and are currently considering whether to participate. Participation in the CPP would require that we complete the acquisition of a savings and loan company, submit to regulation by the Office of Thrift Supervision and adopt certain restrictions on our executive compensation practices.
Deferred policy acquisition cost amortization. In 2008 we had an unlocking of deferred policy acquisition costs resulting in an acceleration of amortization of $163.5 million, as compared to an unlocking impact to amortization of $4.1 million and $(19.1) million in 2007 and 2006, respectively. We revised our estimates of future gross profits or margins, which generally are used to amortize deferred policy acquisition costs primarily based on equity market movements, net investment income, actual mortality experience, and premium persistency, resulting in a reduction in overall projected gross profits or margins, and an acceleration of the amortization of deferred policy acquisition costs.
Net realized investment gains or losses on our general account investments. In 2008 we had net realized losses of $295.8 million, as compared to net realized losses of $6.0 million and net realized gains of $75.2 million in 2007 and 2006, respectively. The realized losses in 2008 were primarily driven by impairments on debt investment securities of $149.6 million as well as increased transaction-related losses on debt and equity securities. A widening of credit spreads, such as the market has experienced recently, has further exacerbated the losses incurred.
Fees on our life and annuity products. In 2008, before the impact of the unlocking noted above, we earned net asset-based fees on our variable life and annuity products of $78.9 million, as compared to $83.5 million and $72.6 million in 2007 and 2006, respectively. The decrease in net asset-based fees was driven by market-driven declines in the separate account assets, resulting in lower assets under management and, accordingly, lower fees. In 2008 we recognized premium and policy-based fees of $55.0 million, as compared to $47.3 million and $42.3 million in 2007 and 2006, respectively. The increase is primarily driven by higher premiums in our universal life business.
Interest margins. In 2008 our universal life interest margin was $15.5 million, as compared to margins of $23.6 million and $24.7 million in 2007 and 2006, respectively. In 2008 our annuity interest margin was $17.5 million, as compared to margins of $23.9 million and $28.5 million in 2007 and 2006, respectively. These declines were primarily driven by lower yields on our debt securities and lower asset balances. In addition to the above, interest on assets backing surplus was $64.6 million in 2008, as compared to $78.8 million and $74.1 million in 2007 and 2006, respectively. The decrease was driven by lower income from venture capital partnerships investments.
In 2008 we had a net loss of $726.0 million, compared to net income of $117.6 million and $95.3 million in 2007 and 2006, respectively. Of the net loss in 2008, $551.6 million was related to our discontinued asset management business and was driven by $536.7 million of non-cash impairment charges related to goodwill and intangibles. The decline in net income not related to the discontinuation of our asset management business was primarily a result of the impacts of recent adverse market conditions on deferred policy acquisition cost amortization and investment results.
A focus on capital preservation through risk management, reinsurance, product design changes and other potential approaches in order to maintain strong statutory risk-based capital ratios and capital to absorb additional adverse market events.
On March 3, 2009, State Farm informed us that it intends to suspend the sale of Phoenix products pending a re-evaluation of the relationship between the two companies. During 2008, State Farm was our largest distributor of annuity and life insurance products accounting for approximately 27% of our total life insurance premiums and approximately 68% of our annuity deposits.
On March 4, 2009, National Life Group also informed us that it intends to suspend the sale of Phoenix products. In 2008, National Life was our second largest distributor of annuity products accounting for approximately 14% of our annuity deposits.
On December 20, 2007, we sold all of the outstanding stock of Emprendimiento Compartido S.A. (“EMCO”), an Argentine wholly-owned subsidiary. We realized an after-tax loss of $4.8 million on this sale. This loss and EMCO’s results up through the date of sale are reported in discontinued operations in our consolidated financial statements in this Form 10-K. Prior year results have also been reported in discontinued operations.
On February 7, 2008, we announced that our board of directors had decided to pursue the spin-off our asset management subsidiary, Virtus Investment Partners, Inc. (“Virtus”), formerly known as Phoenix Investment Partners, Ltd., excluding the assets and business of Goodwin Capital Advisers, Inc. (“Goodwin”) in order to enhance stockholder value. On December 12, 2008, our board of directors formally approved the spin-off and declared a dividend payable to each holder of record at the close of business on December 22, 2008 of one share of Virtus common stock for every 20 shares of our common stock held by such holder. We distributed 100% of Virtus common stock to our stockholders (other than shares withheld to satisfy certain withholding obligations) on December 31, 2008. Following the spin-off, we and Virtus are independent of each other and have separate boards of directors and management.
In connection with the spin-off, Virtus and we entered into a separation agreement and several other agreements to complete the separation of the asset management business from us and to distribute Virtus common stock to our stockholders. These agreements govern the relationship between Virtus and us following the spin-off and also provide for the allocation of employee benefits, taxes and other liabilities and obligations attributable to periods prior to the spin-off. The agreements include a transition services agreement, tax separation agreement and employee matters agreement.
We amortize deferred policy acquisition costs and present value of future profits based on the related policy’s classification. For individual participating life insurance policies, deferred policy acquisition costs and present value of future profits are amortized in proportion to estimated gross margins. For universal life, variable universal life and accumulation annuities, deferred policy acquisition costs and present value of future profits are amortized in proportion to estimated gross profits (“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.
In addition to our quarterly reviews, we complete a comprehensive assumption study during the fourth quarter of each year. Upon completion of an assumption study, we revise our assumptions to reflect our current best estimate, thereby changing our estimate of projected account values and the related EGPs in the deferred policy acquisition cost and unearned revenue amortization models as well as AICPA Statement of Position No. 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts for Separate Accounts (“SOP 03-1”), reserving models. The deferred policy acquisition cost asset, as well as the unearned revenue reserves and SOP 03-1 reserves are then adjusted with an offsetting benefit or charge to income to reflect such changes in the period of the revision, a process known as “unlocking.”
The fair value of our liability for guaranteed minimum accumulation benefit (“GMAB”) and guaranteed minimum withdrawal benefit (“GMWB”) riders are calculated in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), as modified by SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 requires a Credit Standing Adjustment. The Credit Standing Adjustment reflects the adjustment that market participants would make to reflect the risk that guaranteed benefit obligations may not be fulfilled (“nonperformance risk”). SFAS 157 explicitly requires nonperformance risk to be reflected in fair value. The Company calculates the Credit Standing Adjustment by applying an average credit spread for companies similar to Phoenix when discounting the rider cash flows for calculation of the liability. This average credit spread is recalculated every quarter and so the fair value will change with the passage of time even in the absence of any other changes that affect the valuation. For example, the December 31, 2008 fair value of $118.5 million would increase to $128.4 million if the chosen spread decreased by 50 basis points. If the chosen spread increased by 50 basis points the fair value would decrease to $107.6 million.
We concluded that a valuation allowance on the remaining $456.7 million of deferred tax assets at December 31, 2008, was not required. Our methodology for determining the realizability of deferred tax assets involves estimates of future taxable income from our operations and consideration of available tax planning strategies and actions that could be implemented, if necessary, as well as the expiration dates and amounts of carryforwards related to net operating losses, capital losses, foreign tax credits and general business tax credits. These estimates are projected through the life of the related deferred tax assets based on assumptions that we believe to be reasonable and consistent with current operating results. Changes in future operating results not currently forecasted may have a significant impact on the realization of deferred tax assets.
In concluding that a valuation allowance was not required on the remaining deferred tax assets, we considered both the positive and negative evidence regarding our ability to generate sufficient taxable income to realize those deferred tax assets. Positive evidence included having achieved profitability for financial reporting purposes from 2004 through 2007. Further positive evidence included the fact that the net operating losses will not begin to expire until 2023, while projected earnings indicate that the deferred tax assets will be offset by taxable earnings prior to that expiration. Negative evidence included a history of net operating losses in the non-life insurance company group. In weighing the positive and negative evidence above, we considered the more likely than not criteria pursuant to SFAS 109. Based on this analysis we concluded that it was more likely than not that the deferred tax assets of $456.7 million would be realized.
As of December 31, 2008, we had deferred income tax assets of $33.0 million related to general business tax credit carryovers, which are expected to expire between the years 2022 and 2028.
The net loss from continuing operations of $174.4 in 2008 compares to net income of $116.6 million in 2007, or a decline of $291.0 million. This result reflected unlocking of deferred policy acquisition costs resulting in accelerated amortization of $183.8 million, as compared to an unlocking of $4.1 million in 2007. It also reflected the adverse impacts of the markets on our investments, specifically overall declines and credit spread widening, resulting in $295.8 million in realized capital losses.
Our effective tax rate was higher in 2008 than in 2007 in part due to the release in 2007 of a valuation allowance related to foreign tax credits that did not repeat and the release in 2008 of reserves for unrecognized tax benefits related to settlements with taxing authorities.
Our 2007 results reflect the growth of our inforce business and funds on deposit in our life and annuity products over the last several years. Consolidated net income for the year was $117.6 million, or $1.01 per diluted share, up 23% from the prior year.
After-tax realized investment losses of $5.8 million, net of offsets, in 2007 compared with net gains of $21.0 million in 2006. This increase in net loss was mainly driven by debt security impairments taken during 2007 as credit markets deteriorated and by a large gain on a collateralized debt obligation in 2006 that did not recur in 2007. Impairments taken on structured finance products, which are in part backed by sub-prime mortgages, were $21.5 million after-tax in 2007. Partially offsetting these increases in net loss were expense reductions and lower interest expense from the repayment of surplus notes and promissory notes in late 2006 and early 2007, respectively.
Our effective income tax rate was lower in 2007 than in 2006 in part due to the release of a valuation allowance that was previously established due to uncertainty about our ability to utilize foreign tax credits. During 2007, we determined that we would be able to utilize foreign tax credits on our future tax returns and released the valuation allowance.
Results from discontinued operations improved in 2007 to net income of $1.0 million, from a net loss of $18.5 million in the prior year. The main driver of this improvement was an impairment charge on intangible assets taken in 2006 that did not recur in the current year. We also saw a modest improvement of $6.2 million in fee revenues from higher average assets under management, resulting mainly from mutual fund assets.
Annuity funds on deposit decreased by $2.3 billion in 2008 compared to an increase of $551.9 million in 2007. This change was due to lower overall deposits and a significant drop due to weak market performance.
Variable universal life funds on deposit decreased by $718.4 million in 2008 compared to an increase of $383.2 million in 2007. This change was primarily due to lower market performance.
Variable universal life funds on deposit increased by $383.2 million in 2007 compared to an increase of $213.1 million in 2006. This change was due to higher deposits and business assumed by our private placement business, partially offset by lower market performance.
Stockholders’ equity decreased during 2008 by $1.4 billion to $865.0 million at December 31, 2008, compared to $2,279.0 million at December 31, 2007. The decrease was primarily driven by the net loss of $726.0 million and other comprehensive loss of $605.5 million, of which $530.5 million is unrealized depreciation, net of offsets. In addition, the distribution via spin-off dividend of our discontinued asset management business of $71.1 million contributed to the decrease. Total assets decreased $4.6 billion to $25.8 billion at December 31, 2008, primarily due to equity depreciation in the separate accounts of $2.9 billion and lower fair values of debt securities, driven by widening credit spreads.
For the years 2008, 2007 and 2006, inflation did not have a material effect on our consolidated results of operations.
We have a comprehensive, enterprise-wide risk management program. Our Chief Risk Officer reports to the Chief Financial Officer and monitors our risk management activities. We have established an Enterprise Risk Management Committee, chaired by the Chief Executive Officer, to establish risk management principles, monitor key risks and oversee our risk-management practices. Several management committees oversee and address issues pertaining to all our major risks-operational, market and product-as well as capital management.
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 (“ALCO”) chaired by the Chief Financial Officer.
One of the key measures we use to quantify our interest rate exposure is duration, 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 or liability with a duration of five is expected to decrease by 5%. We believe that as of December 31, 2008, 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. We also calculate key rate durations for assets and liabilities that show the impact of interest rate changes at specific points on the yield curve. In addition, we monitor the short- and medium-term asset and liability cash flows profiles by portfolio to manage our liquidity needs.
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. We held $25.2 million in available-for-sale equity securities on our balance sheet as of December 31, 2008. A 10% decline or increase in the relevant equity price would have decreased or increased, respectively, the fair value of these assets by approximately $2.5 million as of December 31, 2008.
Certain life and annuity products sold by our Life Companies contain guaranteed minimum living benefits. These include guaranteed minimum accumulation, withdrawal, income and payout annuity floor benefits. The guaranteed minimum accumulation benefit (“GMAB”) guarantees a return of deposit to a policyholder after 10 years regardless of market performance. The guaranteed minimum withdrawal benefit (“GMWB”) guarantees that a policyholder can withdraw 5% for life regardless of market performance. The guaranteed minimum income benefit (“GMIB”) guarantees that a policyholder can convert his or her account value into a guaranteed payout annuity at a guaranteed minimum interest rate and a guaranteed mortality basis, while also assuming a certain level of growth in the initial deposit. The guaranteed payout annuity floor benefit (“GPAF”) guarantees that the variable annuity payment will not fall below the dollar amount of the initial payment. We have established a hedging program for managing the risk associated with our guaranteed minimum accumulation and withdrawal benefit features. We began hedging our GMAB exposure in 2006 and GMWB exposure during the fourth quarter of 2007. 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 $53.7 million and $12.2 million at December 31, 2008 and 2007, respectively. The GAAP reserves totaled $140.5 million and $7.9 million at December 31, 2008 and 2007, respectively.
If, instead, at December 31, 2008 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 $2.9 million, before taxes.
See Note 6 to our consolidated financial statements in this Form 10-K for more information regarding deferred policy acquisition costs.
We sponsor defined benefit pension plans for our employees. For GAAP accounting purposes, we assumed an 8.5% long-term rate of return on plan assets in the most recent valuations, performed as of December 31, 2008. To the extent there are deviations in actual returns, there will be changes in our projected expense and funding requirements. As of December 31, 2008, the projected benefit obligation for our funded and unfunded defined benefit plans was in excess of plan assets by $175.2 million and $132.5 million, respectively. We made a payment of $20.0 million to the pension plans during 2007. We made no payments to the pension plans during 2008. We have not made a final determination on our ultimate pension funding methodology for 2009. We have no required contributions in the first quarter, and we will be reviewing our funding assumptions in the second quarter to determine what, if any, contributions are to be made later in the year. See Note 18 to our consolidated financial statements in this Form 10-K for more information on our employee benefit plans. In February 2007, we announced a change to our pension plan that was effective July 1, 2007. The change is designed to decrease the volatility of our pension expense over time.
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, 2008, our general account debt securities, with a carrying value of $9,831.0 million, represented 74.0% of total general account investments. Public debt securities represented 70.4% of total debt securities, with the remaining 29.6% represented by private debt securities.
We consolidate debt and equity securities on our consolidated balance sheet that are pledged as collateral for the settlement of collateralized obligation liabilities related to two collateralized obligation trusts which we sponsor. See Note 13 of our consolidated financial statements in this Form 10-K for additional information on these debt and equity securities pledged as collateral.
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 net realized investment losses included in our earnings. The cost basis of these written-down investments is adjusted to fair value at the date the determination of impairment is made. The new cost basis is not changed for subsequent recoveries in value.
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, 2008 in our debt securities portfolio were banking (6.0%), electrical utilities (4.1%), insurance (3.2%), diversified financial services (3.0%) and services (2.4%).
Impairment losses increased from $51.9 million in 2007 to $245.0 million in 2008. Affiliate transaction gains of $13.7 million and $10.4 million for the years ended December 31, 2007 and 2006, respectively, were attributable to the earn-out associated with the sale of Lombard that occurred in the first quarter of 2005. Transaction activity resulted in a loss of $38.7 million for the year ended December 31, 2008 compared to a net gain of $46.9 million for the year ended December 31, 2007. This decrease was primarily due to the sale of equities in the closed block portfolio in 2008. See Note 9 to our consolidated financial statements in this Form 10-K for additional information.
At the end of each reporting period, we review all securities for potential recognition of an other-than-temporary impairment. We maintain a watch list of securities in default, near default or otherwise considered by our investment professionals as being distressed, potentially distressed or requiring a heightened level of scrutiny. We also identify all securities whose carrying value has been below amortized cost on a continuous basis for zero to six months, six months to 12 months and greater than 12 months. Using this analysis, coupled with our watch list, we review 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 experienced lesser declines in value on a more selective basis to determine whether any are other-than-temporarily impaired.
Fixed maturity other-than-temporary impairments taken in the later half of 2008 were concentrated in asset-backed securities and in corporate debt of service companies and financial institutions. These impairments were driven primarily by significant rating downgrades, bankruptcy or other adverse financial conditions of respective issuers. In our judgment, these credit events or other adverse conditions of the respective issuers have caused, or will lead to, a deficiency in the contractual cash flows related to the investment and, therefore, resulted in other than temporary impairments. Total impairments taken in 2008 related to such credit-related circumstances were $224.0 million.
In addition, further impairments were taken as a result of circumstances where we cannot assert our ability or intent to hold for a period of time to allow for recovery of value. In certain of these circumstances the decrease in fair value, at the time the impairment was recorded, was driven primarily by market or sector credit spread widening or by liquidity concerns and we believe the recoverable value of the investment based on the expected cash flows is greater than the current fair value. The amount of impairments taken due to these factors was $22.8 million in 2008.
The following tables present certain information with respect to our gross unrealized losses related to our investments in general account debt securities, both outside and inside the Closed Block, as of December 31, 2008. In the tables, we separately present information that is applicable to unrealized losses both outside and inside the Closed Block. See Note 4 to our consolidated financial statements in this Form 10-K for more information regarding the Closed Block. Applicable deferred policy acquisition costs and deferred income taxes further reduce the effect on our comprehensive income.
For debt securities outside of the Closed Block with gross unrealized losses, 82.4% of the unrealized losses after offsets pertain to investment grade securities and 17.6% of the unrealized losses after offsets pertain to below investment grade securities at December 31, 2008.
The following table represents those securities whose fair value is less than 80% of amortized cost (significant unrealized loss), that have been at a significant unrealized loss position on a continuous basis.
For debt securities in the Closed Block with gross unrealized losses, 84.8% of the unrealized losses pertain to investment grade securities and 15.2% of the unrealized losses pertain to below investment grade securities at December 31, 2008.
In 2005, we disposed of our interests in Lombard International Assurance S.A. (“Lombard”). In the first quarters of 2007 and 2006, we realized after-tax gains of $8.9 million and $6.5 million, respectively, which included earn-out gain consideration received. We are not entitled to any additional consideration related to this sale going forward.
Liquidity refers to the ability of a company to generate sufficient cash flow to meet its cash requirements. Capital resources refer to the ability to raise new capital to meet operating and growth needs.
Cash from investing activities decreased primarily due to lower proceeds from sales, repayments and maturities, net of new purchases of $308.1 million, resulting from lower policyholder withdrawals.
Cash for operating activities decreased primarily due to net outflows of $12.1 million due to higher cash settlements in our discontinued reinsurance business in 2006 compared to the lower settlement activity in 2007.
Effective as of November 7, 2008, the Company and its subsidiary, Phoenix Life (Phoenix Life, together with the Company, the “Borrowers”) amended our existing $150 million unsecured senior revolving credit facility (the “Amendment”). Please see Part II Item 5 of our September 30, 2008 Quarterly Report on Form 10-Q for a discussion of the terms of the Amendment.
We sponsor postemployment benefit plans through pension and savings plans for employees of Phoenix Life. Funding of these obligations is provided by Phoenix Life on a 100% cost reimbursement basis through administrative services agreements with the holding company. See Note 18 to our consolidated financial statements in this Form 10-K for additional information.
A primary liquidity concern with respect to life insurance and annuity products is the risk of early policyholder and contract owner withdrawal. Our Life Companies closely monitor their 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, our Life Companies 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, private placement bonds and mortgage loans. Shorter-term liabilities are matched with investments with short-term and medium-term fixed maturities.
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, 2008, our Life Companies had approximately $12.9 billion 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, 2008 were $2.5 billion.
During 2008, Phoenix Life paid dividends of $83.8 million to the Company, as Phoenix Life’s sole shareholder. Under New York Insurance Law, Phoenix Life can pay dividends to The Phoenix Companies in any calendar year without the approval from the New York Superintendent of Insurance in the amount of the lesser of 10% of Phoenix Life’s surplus to policyholders as of the immediately preceding calendar year or Phoenix Life’s statutory net gain from operations for the immediately preceding calendar year, not including realized capital gains. Phoenix Life’s statutory gain from operations was $53.4 million for the year ended December 31, 2008. The maximum dividend that Phoenix Life can pay in 2009 without prior approval is $53.4 million.
On March 4, 2009, Fitch downgraded our financial strength rating to BBB+ from A and placed the rating on Rating Watch Negative. On October 31, 2008, Fitch downgraded our financial strength rating to A from A+ and maintained its negative outlook.
On March 2, 2009, Standard and Poor’s downgraded our financial strength rating to BBB from BBB+ and downgraded our senior debt rating to BB from BB+. At the same time, Standard and Poor’s removed the ratings from CreditWatch, where they had been placed with negative implications on February 10, 2009. The outlook is negative. On October 31, 2008, Standard & Poor’s downgraded our financial strength rating to BBB+ from A- and downgraded our senior debt rating to BB+ from BBB-. They also revised our outlook to negative from stable.
On January 15, 2009, A.M Best Company, Inc. affirmed our financial strength rating of A and changed our outlook to negative from stable and also revised our senior debt rating outlook to negative from stable.
Available-for-sale debt securities decreased primarily due to unrealized losses driven by credit spread widening.
Other investments increased primarily to new investments made in partnerships and increased derivative assets that support our GMAB and GMWB product rider liabilities.
Available-for-sale debt and equity securities pledged as collateral decreased due to unrealized investment losses and principal repayments.
Other purchase liabilities relate to open purchase orders, required pension funding and other contractual obligations.
Future obligations are based on our estimate of future investment earnings, mortality, surrenders and applicable policyholder dividends. Included in the amounts above are policyholder dividends generated by estimated favorable future investment and mortality, in excess of guaranteed amounts for our Closed Block. 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 consolidated 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, 2008 Consolidated 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.
Non-recourse obligations are not direct liabilities of ours, as they will be repaid from investments pledged as collateral recorded on our consolidated balance sheet. See Note 13 to our consolidated financial statements in this Form 10-K for additional information.
Due to the uncertainty of the timing of future cash flows associated with our unrecognized tax benefits at December 31, 2008, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities. Therefore, $8.7 million of unrecognized tax benefits have been excluded from this table. See Note 16 to our consolidated financial statements in this Form 10-K for additional information on unrecognized tax benefits.
Other commercial commitments relate to venture capital partnerships. The venture capital commitments can be drawn down by private equity funds as necessary to fund their portfolio investments through the end of the funding period as stated in each agreement.
The changes in the projected benefit obligations of the employee plan and the supplemental plan at December 31, 2008 as compared to December 31, 2007 are principally the result of accrued service cost and interest cost.
We made no payments to the pension plans during 2008. We have not made a final determination on our ultimate pension funding methodology for 2009. We have no required contributions in the first quarter, and we will be reviewing our funding assumptions in the second quarter to determine what, if any, contributions are to be made later in the year.
See Note 18 to our consolidated financial statements in this Form 10-K for more information.
As of December 31, 2008, we did not have any significant off-balance sheet arrangements as defined by Item 303(a)(4)(ii) of SEC Regulation S-K. See Note 13 to our consolidated financial statements in this Form 10-K for more information on variable interest entities.
We maintain life reinsurance programs designed to protect against large or unusual losses in our life insurance business. We actively monitor the financial condition and ratings of our reinsurance partners throughout the term of the reinsurance contract. Due to the recent downgrade of Scottish Re, we will continue to closely monitor the situation and will reassess the recoverability of the reinsurance recoverable during the interim reporting periods of 2009. Based on our review of their financial statements, reputations in the reinsurance marketplace and other relevant information, we believe that we have no material exposure to uncollectible life reinsurance.
At December 31, 2008, Phoenix Life’s Total Adjusted Capital level was in excess of 325% of Company Action Level and each of its insurance subsidiaries’ levels were in excess of 325%.