The new term product introduced during 1997 generated $230,000 in premium revenues. Investment product fees represent contract charges assessed against variable annuity fund values. For the year ended December 31, 1997, these fees totaled $5.1 million, a $3.6 million (240%) increase from $1.5 million reported in 1996. The higher fees were attributed to higher fund balances generating additional revenues. During 1997, fees were earned on approximately $287 million in average funds under management versus approximately $95 million in average funds producing revenues for 1996. Net investment income rose to $1.5 million in 1997, a $0.4 million (36%) improvement over the $1.1 million earned in the prior year.
Policy benefits and payments include primarily the interest credited on the guaranteed interest accounts and the cost of reinsuring the minimum death benefit on variable annuity contracts. Guaranteed interest contract balances rose to $27.7 million at December 31, 1997 from an $11.6 million balance a year earlier and this increase is reflected in a higher amount of interest credited. In addition, the cost of reinsurance on the growing block of variable annuity business increased to $259,000 in 1997 from $49,000 in 1996.
In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of PHL Variable Insurance Company at December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PHL VARIABLE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF PM HOLDINGS, INC.) BALANCE SHEET - --------------------------------------------------------------------------------
PHL VARIABLE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF PM HOLDINGS, INC.) STATEMENT OF INCOME AND EQUITY - --------------------------------------------------------------------------------
These financial statements have been prepared in accordance with generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates used in determining contractholder liabilities, taxes and valuation allowances are discussed throughout the Notes to Financial Statements. Certain reclassifications have been made to the 1996 and 1995 amounts to conform with the 1997 presentation.
Investments in debt securities include bonds and asset-backed securities, including collateralized mortgage obligations. PHL Variable classifies its debt securities as either held-to-maturity or available-for-sale investments. Debt securities held-to-maturity consist of private placement bonds reported at amortized cost, net of impairments, that management intends and has the ability to hold until maturity. Debt securities available-for-sale are reported at fair value with unrealized gains or losses included in equity and consist of public bonds that management may not hold until maturity. Debt securities are considered impaired when a decline in value is considered to be other than temporary.
Short-term investments are carried at amortized cost, which approximates fair value.
Realized investment gains and losses, other than those related to separate accounts for which PHL Variable does not bear the investment risk, are determined by the specific identification method and reported as a component of revenue. A realized investment loss is recorded when an investment valuation reserve is determined. Valuation reserves are netted against the asset categories to which they apply and changes in the valuation reserves are included in realized investment gains and losses. Unrealized investment gains and losses on debt securities available-for-sale are included as a separate component of equity, net of deferred income taxes and deferred policy acquisition costs.
Cash and cash equivalents includes cash on hand, money market instruments and short-term investments purchased with a maturity of less than three months.
Deferred policy acquisition costs are amortized in proportion to total estimated gross profits over the expected average life of the contracts using estimated gross margins arising principally from investment, mortality and expense margins and surrender charges based on historical and anticipated experience, updated at the end of each accounting period.
Revenues for investment-related products consist of net investment income and contract charges assessed against the fund values. Related benefit expenses primarily consist of net investment income credited to the fund values after deduction for investment and risk charges.
For the tax year ended December 31, 1997, PHL Variable will file a separate federal income tax return. The Company filed separate federal income tax returns for the years ended December 31, 1996 and 1995.
Applicable information regarding the actuarial present value of vested and nonvested accumulated plan benefits, and the net assets of the plans available for benefits is omitted, as the information is not separately calculated for the Company's participation in the plans. The amount of such allocated benefits is immaterial to the financial statements. However, with respect to the Phoenix employee pension plan, the total assets of the plan exceeded the actuarial present value of vested benefits at January 1, 1997, the date of the most recent actuarial valuation.
Information pertaining to the Company's investments, net investment income and realized and unrealized investment gains and losses follows:
The amortized cost and fair value of debt securities, by contractual maturity, as of December 31, 1997 are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties, or PHL Variable may have the right to put or sell the obligations back to the issuers.
The components of net investment income for the year ended December 31, were as follows:
Financial instruments that are subject to fair value disclosure requirements (insurance contracts are excluded) are carried in the financial statements at amounts that approximate fair value. The fair values presented for certain financial instruments are estimates which, in many cases, may differ significantly from the amounts which could be realized upon immediate liquidation. In cases where market prices are not available, estimates of fair value are based on discounted cash flow analyses which utilize current interest rates for similar financial instruments which have comparable terms and credit quality.
In connection with the Company's term product introduced in 1997, automatic treaties have been established with four reinsurers, covering 90% of the net amount at risk, on a first-dollar basis. No claims were recoverable in 1997.
insurance reserves are based on different assumptions and income tax expense reflects only taxes paid or currently payable.
The following reconciles the statutory surplus and asset valuation reserve (AVR) of PHL Variable as reported to regulatory authorities to equity as reported in these financial statements:
The Connecticut Insurance Holding Act limits the maximum amount of annual dividends or other distributions available to stockholders of Connecticut insurance companies without prior approval of the Insurance Commissioner. Under current law, the maximum dividend distribution which may be made by PHL Variable during 1998 without prior approval is subject to restrictions relating to statutory surplus.