Our executive headquarters consist of our main office building at One American Row in Hartford, Connecticut, which we own and occupy. We also lease space in two garages in Hartford, Connecticut for employee parking. Property is also leased for our home offices in East Greenbush, New York.
The discussion in this Annual Report on Form 10-K may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We intend for these forward-looking statements to be covered by the safe harbor provisions of the federal securities laws relating to forward-looking statements. These forward-looking statements include statements relating to trends in, or representing management’s beliefs about our future transactions, strategies, operations and financial results, and often contain words such as “will,” “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “may,” “should” and other similar words or expressions. Forward-looking statements are made based upon management’s current expectations and beliefs concerning trends and future developments and their potential effects on us. They are not guarantees of future performance. Our actual business, financial condition or results of operations may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties which include, among others: (i) unfavorable general economic developments including, but not limited to, specific related factors such as the performance of the debt and equity markets and changes in interest rates; (ii) the potential adverse affect of interest rate fluctuations on our business and results of operations; (iii) the effect of adverse capital and credit market conditions on our ability to meet our liquidity needs, our access to capital and our cost of capital; (iv) the effect of guaranteed benefits within our products; (v) potential exposure to unidentified or unanticipated risk that could adversely affect our businesses or result in losses; (vi) the consequences related to variations in the amount of our statutory capital due to factors beyond our control; (vii) the possibility that we not be successful in our efforts to implement a new business plan; (viii) the impact on our results of operations and financial condition of any required increase in our reserves for future policyholder benefits and claims if such reserves prove to be inadequate; (ix) changes in our investment valuations based on changes in our valuation methodologies, estimations and assumptions; (x) further downgrades in our debt or financial strength ratings; (xi) the possibility that mortality rates, persistency rates, funding levels or other factors may differ significantly from our assumptions used in pricing products; (xii) the availability, pricing and terms of reinsurance coverage generally and the inability or unwillingness of our reinsurers to meet their obligations to us specifically; (xiii) our ability to attract and retain key personnel in a competitive environment; (xiv) our dependence on third parties to maintain critical business and administrative functions; (xv) the strong competition we face in our business from banks, insurance companies and other financial services firms; (xvi) our reliance, as a holding company, on dividends and other payments from our subsidiaries to meet our financial obligations and pay future dividends, particularly since our insurance subsidiaries’ ability to pay dividends is subject to regulatory restrictions; (xvii) the potential need to fund deficiencies in our closed block; (xviii) tax developments that may affect us directly, or indirectly through the cost of, the demand for or profitability of our products or services; (xix) the possibility that the actions and initiatives of the U.S. Government, including those that we elect to participate in, may not improve adverse economic and market conditions generally or our business, financial condition and results of operations specifically; (xx) legislative or regulatory developments; (xxi) regulatory or legal actions; (xxii) potential future material losses from our discontinued reinsurance business; (xxiii) changes in accounting standards; (xxiv) the potential effect of a material weakness in our internal control over financial reporting on the accuracy of our reported financial results; and (xxv) other risks and uncertainties described herein or in any of our filings with the SEC. Certain other factors which may impact our business, financial condition or results of operations or which may cause actual results to differ from such forward-looking statements are discussed or included in our periodic reports filed with the SEC and are available on our website at www.phoenixwm.com under “Investor Relations.” You are urged to carefully consider all such factors. We do not undertake or plan to update or revise forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections, or other circumstances occurring after the date of this Form 10-K, even if such results changes or circumstances make it clear that any forward-looking information will not be realized. If we make any future public statements or disclosures which modify or impact any of the forward-looking statements contained in or accompanying this Form 10-K, such statements or disclosures will be deemed to modify or supersede such statements in this Form 10-K.
Management’s discussion and analysis reviews our consolidated financial condition at December 31, 2010 and 2009; our consolidated results of operations for the years 2010, 2009 and 2008; and, where appropriate, factors that may affect our future financial performance. This discussion should be read in conjunction with “Selected Financial Data” included in Item 6 and our consolidated financial statements in this Annual Report on Form 10-K.
In 2010, we pursued a business plan that focused on products and services that are less capital intensive and less ratings sensitive, continuing a direction set in 2009. This plan leverages existing strengths and includes our distribution subsidiary, Saybrus, as well as developing core life and annuity products for the middle market and expanding distribution within that market, and building sales through distribution partners for our alternative retirement solutions products.
We operate two businesses segments: Life and Annuity and Saybrus. The Life and Annuity segment includes individual life insurance and annuity products including universal life, variable universal life, term life and fixed and variable annuities. It also includes the results of our closed block, which consists primarily of participating whole life products. Saybrus is a recently formed distribution company that provides dedicated consultation services to partner companies as well as support for Phoenix’s product line within its own distribution channels. Saybrus has agreements with several financial services firms, including Edward Jones, to provide life insurance consulting services to the financial advisors of these firms.
Apart from the closed block, our Life and Annuity segment’s profitability is driven by interaction of the following elements:
Interest margins. Net investment income earned on universal life and other policyholder funds managed as part of our general account, less the interest credited to policyholders on those funds. Interest margins also include investment income on assets supporting the Company’s surplus.
Certain of our Life and Annuity products include guaranteed benefits. These include GMDBs, GMABs, GMWBs and GMIBs. Periods of significant and sustained downturns in equity markets, increased equity volatility or reduced interest rates would result in an increase in the valuation of the future policy benefit or policyholder account balance liabilities associated with such products, resulting in a reduction to earnings.
Mortality margins. Fluctuations in mortality are inherent in our lines of business. Prior to the impact of the deferred policy acquisition cost unlocking noted below, universal life mortality margins increased by $35.5 million to $187.6 million in the year ended December 31, 2010, compared to $152.1 million in the year ended December 31, 2009. This was a result of lower death benefits partially offset by lower fee income earned on cost of insurance charges. Mortality margins for variable universal life decreased by $2.2 million to $49.8 million in the year ended December 31, 2010, compared to $52.0 million in the year ended December 31, 2009, primarily a result of lower cost of insurance charges.
Interest margins. Investment income on assets backing surplus was $32.9 million in the year ended December 31, 2010, compared to a loss of $2.3 million in the year ended December 31, 2009. The increase of $35.2 million was primarily from improvement in valuations and distributions related to our venture capital partnerships and other invested assets. Universal life interest margins increased primarily as a result of lower interest credited. Variable annuity interest margins declined as a result of lower investment income on assets supporting these products partially offset by lower interest credited.
Deferred policy acquisition cost. Excluding the impact of realized investment gains, policy acquisition cost amortization increased $34.0 million to $300.4 million from $266.4 million in the years ended December 31, 2010 and 2009, respectively. An unlocking of assumptions related to deferred policy acquisition costs resulted in the acceleration of amortization of $46.4 million for the year ended December 31, 2010 and $42.5 million for the year ended December 31, 2009. Excluding the impact of unlocking, amortization increased related to universal life as a result of higher mortality margins and annuities as a result of lower market performance and smaller improvement in the net amount at risk related to death benefit and other insurance benefit reserves. This was partially offset by lower amortization on the closed block as a result of a decrease in surrenders.
Net realized investment gains or losses on our general account investments. Net realized investment losses improved $92.3 million to $9.9 million in the year ended December 31, 2010, compared to $102.2 million in the year ended December 31, 2009. The improvement in realized losses was a result of a significant decline in impairments of $58.8 million to $49.6 million compared to $108.4 million in 2010 and 2009, respectively. In addition, realized losses on derivative assets and liabilities improved $23.1 million to $7.9 million in 2010 compared to $31.0 million in 2009. This was primarily attributable to our net embedded derivatives associated with variable and fixed indexed annuity guarantees which improved $42.1 million to a gain of $11.1 million as of December 31, 2010 from a loss of $31.0 million as of December 31, 2009. Of this improvement in embedded derivatives, $29.7 million was associated with the non-performance risk factor. This was partially offset by losses of $19.0 million on our surplus hedge that was entered into during 2010.
Income taxes. The Company recorded an income tax benefit of $10.1 million to continuing operations in 2010, compared to an income tax expense of $108.9 million in 2009. As a result of the full valuation allowance position since 2009, a 0% effective tax rate was expected in 2010. However, as a result of an exception to the intraperiod allocation rules in accordance with ASC 740-20, Accounting for Income Taxes - Intraperiod Tax Allocation, a $12.1 million tax benefit was recorded to continuing operations, which was partially offset by current tax expense of $2.0 million. In 2009, tax expense of $108.9 million was recognized primarily as a result of the establishment of a full valuation allowance, net of unrealized losses on available-for-sale debt securities.
Since its formation in the fourth quarter of 2009, Saybrus’ results of operations have steadily improved throughout 2010 as revenue has increased and expenses have declined. Total revenue in 2010 was $6.0 million, $3.3 million of which was earned from partner companies as Saybrus gained traction in the marketplace. The remaining revenue of $2.7 million was earned from the sales of Phoenix life and annuity products. Operating expenses declined on a quarter by quarter basis from $7.8 million in the fourth quarter of 2009 to $25.0 million for the year ended December 31, 2010, with the decline primarily driven by Saybrus’ sales force compensation which transitioned from a fixed to a more variable compensation structure.
Although the U.S. economy is recovering, the potential for another economic downturn remains.
The availability of credit, consumer spending, business investment, capital market conditions and inflation affect our business. In an economic downturn, higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending may depress the demand for life insurance, annuities and investment products. In addition, this type of economic environment may result in higher lapses or surrenders of life and annuity policies we provide. Accordingly, the risks we face related to general economic and business conditions are pronounced.
On November 3, 2009, we announced the formation of a distribution company subsidiary, Saybrus Partners, Inc. and that Saybrus had entered into an agreement with financial services firm Edward Jones to provide life insurance consulting services to the firm’s financial advisors. Phoenix formed Saybrus as part of a series of actions to strengthen its market position and strategy. Saybrus provides dedicated consultation services to partner companies, as well as support for Phoenix’s product line within our own distribution channels. Saybrus signed two additional consulting clients in 2010.
On January 4, 2010, we signed a definitive agreement to sell PFG and its subsidiaries, including AGL Life Assurance Company, to Tiptree. Because of the divestiture, we determined that these operations are reflected as discontinued operations. The 2009 consolidated balance sheet has been presented with the gross assets and liabilities of discontinued operations in separate lines and the consolidated statements of income and comprehensive income have been presented with the net results from discontinued operations, shown after the results from continuing operations. For comparative purposes, we have reclassified prior period financial statements to conform to this change.
The definitive agreement contains a provision requiring the Company to indemnify Tiptree for any losses due to actions resulting from certain specified acts or omissions associated with the divested business prior to closing. There has been litigation filed that falls within this provision of the agreement. The Company intends to defend these matters vigorously. See Note 24 to our consolidated financial statements included under “Item 8: Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for additional information.
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. Critical accounting estimates are reflective of significant judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The following are areas that we believe require significant judgments:
We amortize deferred policy acquisition costs based on the related policy’s classification. For individual participating life insurance policies, deferred policy acquisition costs are amortized in proportion to estimated gross margins. For universal life, variable universal life and accumulation annuities, deferred policy acquisition costs are amortized in proportion to estimated gross profits (“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, an offset to deferred policy acquisition costs and accumulated other comprehensive income is recorded each period to the extent that had unrealized holding gains or losses from securities classified as available-for-sale actually been realized, an adjustment to deferred policy acquisition costs amortized using gross profits or gross margins would result.
To determine the reasonableness of the prior assumptions used and their impact on previously projected account values and the related EGPs, we evaluate, on a quarterly basis, our previously projected EGPs. Our process to assess the reasonableness of our EGPs involves the use of internally developed models together with actual experience. Actual gross profits that vary from management’s initial estimates in a given reporting period, result in increases or decreases in the rate of amortization recorded in the period.
We make guarantees on certain variable and fixed indexed annuity contracts, including GMAB and GMWB as well as provide credits based on the performance of certain indices (“index credits”) on our fixed annuity contracts that meet the definition of an embedded derivative. The GMAB and GMWB embedded derivatives are accounted for at fair value, using a risk neutral stochastic valuation methodology with changes in fair value recorded in realized investment gains. The inputs to our fair value methodology include information derived from the asset derivatives market, including the volatility surface and the swap curve. Several additional inputs are not obtained from independent sources, but instead reflect our internally developed assumptions related to mortality rates, lapse rates and policyholder behavior. The fair value of the embedded derivatives associated with our fixed indexed annuity is calculated using the budget method where the initial value is established based on the fair value of the options used to hedge the liabilities. The budget amount for future years is based on the impact of projected interest rates on the discounted liabilities. Several additional inputs reflect our internally developed assumptions related to lapse rates and policyholder behavior. As there are significant unobservable inputs included in our fair value methodology for these embedded derivative liabilities, we consider the above-described methodology as a whole to be Level 3 within the fair value hierarchy.
our intent to sell the security, or whether it is more likely than not that we will be required to sell it before recovery, and
The closed block policyholder dividend obligation, applicable deferred policy acquisition costs and applicable income taxes, which offset realized investment gains and losses and OTTIs, are each reported separately as components of net income.
For the year ended December 31, 2010, excluding the increase in the valuation allowance related to the adoption of a new accounting standard of $1.5 million (see Note 2 to our consolidated financial statements under Item 8 “Financial Statements and Supplementary Data-Adoption of New Accounting Standards” in this Annual Report on Form 10-K for more information) and the elimination of the valuation allowance resulting from the disposition of affiliates of $15.6 million, we recognized a net increase in the valuation allowance of $2.0 million.
As of December 31, 2010, $314.0 million of net operating and capital loss carryover benefits were included in the deferred tax asset. Of this amount, $181.0 million related to $517.1 million of federal net operating losses that are scheduled to expire between the years 2019 and 2030. An additional $128.1 million related to $366.0 million of federal capital losses that are scheduled to expire in 2012, 2013, 2014 and 2015. The remaining amount of $4.9 million is attributable to state income tax net operating losses. As of December 31, 2010, a valuation allowance of $129.9 million and $4.9 million was carried against the federal net operating loss carryforwards and state net operating loss carryforwards, respectively. As of December 31, 2010, a valuation allowance of $67.9 million was carried against the capital loss carryforwards after consideration of available capital deferred tax liabilities and tax planning actions.
As of December 31, 2010, we had deferred income tax assets of $1.6 million related to foreign tax credit carryovers, which are expected to expire between the 2015 and 2019 tax years. As of December 31, 2010, we had deferred income tax assets of $36.7 million related to general business tax credit carryovers, which are expected to expire between the years 2022 and 2030. As of December 31, 2010, a full valuation allowance was carried relative to the foreign tax and general business tax credits.
Effective March 31, 2010, all benefit accruals under our funded and unfunded defined benefit plans were frozen. This decision was inclusive of employees who had been grandfathered in the traditional formula (i.e., all participants ceased earning additional years of benefit accrual service and their pension benefit will be based on their earnings history as of March 31, 2010). This change was announced in 2009 and a curtailment was recognized which lowered our projected benefit obligation for the reduction in the expected years of future service.
See Note 17 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for more information on our pension and other post-employment benefits.
Policy acquisition cost amortization increased $37.6 million to $298.2 million from $260.6 million in the years ended December 31, 2010 and 2009, respectively. An unlocking of assumptions related to deferred policy acquisition costs resulted in the acceleration of amortization of $46.4 million for the year ended December 31, 2010 and $42.5 million for the year ended December 31, 2009. Excluding the impact of unlocking, amortization related to universal life increased as a result of higher mortality margins. Amortization related to annuities, excluding the impact of unlocking, also increased as a result of lower market performance and smaller improvement in the net amount at risk related to death benefit and other insurance benefit reserves. This was partially offset by lower amortization on the closed block as a result of decrease in surrenders.
Prior to the impact of the unlocking noted above, mortality margins in universal life decreased by $37.6 million to $152.1 million in 2009, compared to $189.7 million in 2008, resulting from unfavorable mortality in 2009. Mortality margins in variable universal life increased by $4.1 million to $52.0 million in 2009, compared to $47.9 million in 2008, resulting from favorable mortality in 2009. Fluctuations in mortality are inherent in our lines of business, as we tend to have larger-than-average policies in force.
Net investment income declined by $125.8 million to $786.7 million in 2009 from $912.5 million in 2008, primarily from lower investment income on alternative investments. The lower investment income included the following:
Investment income on assets supporting surplus declined by $26.9 million to a loss of $2.3 million in 2009, compared to $24.6 million in 2008. The decrease was primarily a result of lower income from our alternative investments which are reported to the Company on a one quarter lag basis in accordance with partnership accounting.
Our income tax expense related to continuing operations increased by $227.4 million to $108.9 million in 2009 from an income tax benefit of $118.5 million in 2008. In 2009, we increased the valuation allowance on the net deferred tax asset by $168.4 million after the application of intraperiod rules in accordance with ASC 740-20, Accounting for Income Taxes - Intraperiod Tax Allocation. The amount of the valuation allowance was determined based on our estimates of future taxable income over the periods in which the deferred tax assets are expected to reverse, including consideration of expiration of loss carryovers and credits.
Annuity funds on deposit increased during the years ended December 31, 2010 and 2009. Funds on deposit increased $106.2 million more during 2009 than in 2010. While positive market performance contributed to the increase in both years, the market recovery during 2009 resulted in a larger increase of funds. Partially offsetting lower market performance was an increase in deposits over prior year, reflecting new sales of our fixed indexed annuities and lower surrenders in 2010 compared to 2009.
Variable universal life funds on deposit decreased for the year ended December 31, 2010 compared to the year ended December 31, 2009. Deposits and fees and cost of insurance remained relatively flat. Benefits and surrenders offset performance for the year ended December 31, 2010 as a result of higher surrenders and lower market performance as compared to the year ended December 31, 2009.
Universal life funds on deposit decreased during both years ended December 31, 2010 and 2009. Fees and cost of insurance charges offset deposits and interest credited during both periods. Benefits and surrenders improved in 2010 compared to 2009 as a result of favorable mortality experience.
For the year ended December 31, 2009, universal life funds on deposit decreased $175.3 million. The decrease was primarily a result of lower sales and renewal premiums but also included the effects of less favorable mortality and higher surrenders than in the prior year. Assessments for cost of insurance fees were higher in the current year due to both the aging of the in-force block and an increase in the net amount at risk, primarily reflecting lower fund values as a percentage of the in-force amount.
For the years 2010, 2009 and 2008, 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 an Enterprise Risk Management Committee, chaired by the Chief Executive Officer, whose functions are 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.
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, private equity partnership interests 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 $47.5 million in available-for-sale equity securities on our balance sheet as of December 31, 2010.
If, instead, at December 31, 2010 we had reprojected EGPs using 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, the estimated decrease to amortization and increase to net income would have been approximately $4.6 million, before taxes.
In addition to these credit-related impairments recognized through earnings, we impaired securities to fair value through other comprehensive loss for any impairments related to non-credit related factors. These types of impairments were driven primarily by market or sector credit spread widening or by a lack of liquidity in the securities. The amount of impairments recognized as an adjustment to other comprehensive loss due to these factors was $55.6 million in 2010 and $93.1 million in 2009.
For debt securities outside of the closed block with gross unrealized losses, 46.1% of the unrealized losses after offsets pertain to investment grade securities and 53.9% of the unrealized losses after offsets pertain to below investment grade securities at December 31, 2010.
Cash flows from financing activities were $167.5 million for the year ended December 31, 2010, an increase of $364.1 million compared to cash flows for financing activities of $196.6 million for the year ended December 31, 2009. This was primarily the result of a decrease of $253.8 million in policyholder withdrawals as a result of lower surrenders. In addition, policyholder deposits increased $95.6 million as a result of new sales of fixed indexed annuities. See Note 7 to our consolidated financial statements under Item 8 “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for more information on financing activities.
Cash flows from discontinued operations were positive for the year ended December 31, 2010, an increase of $72.2 million compared to the year ended December 31, 2009. This was primarily a result of a decrease in available-for-sale assets related to the discontinued reinsurance operations business consistent with the net decline in policyholder benefits and accruals during 2010. This compared to an increase in available-for-sale assets consistent with the net increase in policyholder benefits and accruals during 2009.
Cash for operating activities decreased $648.4 million for the year ended December 31, 2009 versus 2008. The primary driver of this decrease was higher policy benefits of $856.8 million related to higher surrenders and benefit payments in 2009 which was partially offset by the repayment of loan balances upon surrender as reflected in cash from investing activities below. Premiums collected also decreased $106.3 million, primarily related to decrease in renewal premiums on participating policies within the closed block. In addition, there was a decrease in net investment income of $50.8 million as a result of lower investment yields and fewer cash distributions from venture capital investments. These items were partially offset by a reduction of policy acquisition costs paid of $330.3 million, as a result of lower sales, and an increase in fee income of $34.5 million, primarily related to higher cost of insurance fees.
Cash from investing activities increased by $422.5 million. The primary driver of this fluctuation was an increase of $283.8 million from repayment of outstanding loan balances primarily associated with one large surrender in the second quarter of 2009. The cash flows associated with surrenders are reflected in cash for operating activities which is offset by any outstanding loan balances at the time of surrender which is reflected in cash from investing activities. Investment purchases, net of sales, increased $181.6 million, which was partially offset by a decrease of $47.1 related to the deconsolidation of CDOs as of January 1, 2009.
In 2010 and 2009, the Company did not pay any stockholder dividends. In 2008, the Company paid dividends of $0.16 per share, totaling $18.8 million.
Our principal needs at the holding company level are debt service (net of amounts due on bonds repurchased), income taxes and operating expenses. Interest expense on senior unsecured bonds for the years ended December 31, 2010, 2009 and 2008 was $19.2 million, $20.6 million and $22.8 million, respectively. As of December 31, 2010, future minimum annual principal payments on senior unsecured bonds are $253.6 million in 2032.
Cash received from operating activities remained flat for the year ended December 31, 2010, compared with the year ended December 31, 2009. Income tax benefits declined as a result of the prior year tax benefit recognized for the year ended December 31, 2009 related to the 2008 spin-off of Virtus. However, this decline was offset by an increase in cash dividends from subsidiaries as well as a decline in operating expenses.
There was no cash activity related to financing activities in the current year as compared to prior year outflows related to the repurchase of our senior unsecured bonds.
Cash received from operating activities decreased for the year ended December 31, 2009, compared to the year ended December 31, 2008, related to lower cash dividends received from subsidiaries, which was partially offset by lower tax payments.
Cash used for financing activities decreased as there was no significant repayment of debt as compared to the prior year. Current year activity represents the repurchase of our senior unsecured bonds.
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, 2010, our Life Companies had approximately $11.2 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, 2010 were $2.4 billion.
The primary liquidity risks regarding cash inflows from the investing activities of our Life Companies are the risks of default by debtors, interest rate and other market volatility and potential illiquidity of investments. We closely monitor and manage these risks.
The financial strength and debt ratings as of March 7, 2011 were as follows:
The increase in total investments was primarily the result of an increase in the value of available-for-sale debt securities from lower interest rates and spread tightening in non-treasury sectors. Venture capital partnerships increased from improved valuations as well as equity in earnings for the partnerships. Fair value option investments increased as a result of the initial election of the fair value option on beneficial interests in securitized financial assets pursuant to our adoption of new accounting guidance as of July 1, 2010. See Note 2 to our consolidated financial statements under Item 8 “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for additional information.
Deferred policy acquisition costs decreased as a result of declines in offsets for unrealized losses on debt securities as well as amortization. Also contributing to the decrease was an unlocking of assumptions related to deferred policy acquisition costs during 2010 which resulted in an acceleration of amortization of $46.4 million, primarily in the universal life line of business.
The decrease in discontinued operations assets related to the sale of PFG. See Note 21 to our consolidated financial statements under Item 8 “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for more information.
Change in policyholder deposit funds was primarily a result of the increase in account balances from positive market performance as well as an increase in sales related to our fixed indexed annuity products.
The decrease in discontinued operations liabilities related to the sale of PFG. See Note 21 to our consolidated financial statements under Item 8 “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for more information.
Future operation lease obligations include amounts for leased property of our private placement discontinued operations of $0.2 million in 2011. All future obligations for leased property of our discontinued operations were assumed by the buyer upon completion of the sale on June 23, 2010. See Note 21 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for additional information.
Other purchase liabilities relate to open purchase orders and other contractual obligations. This amount does not include our expected pension contribution of approximately $16.4 million in 2011. See Note 17 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for additional information on pension and other postretirement benefits.
Due to the uncertainty of the timing of future cash flows associated with our unrecognized tax benefits at December 31, 2010, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities. Therefore, no unrecognized tax benefits have been excluded from this table. See Note 15 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for additional information on unrecognized tax benefits.
On June 23, 2010, the Company completed the divestiture of PFG and closed the transaction.
The definitive agreement contains a provision requiring the Company to indemnify Tiptree for any losses due to actions resulting from certain specified acts or omissions associated with the divested business prior to closing. There has been litigation filed that falls within this provision of the agreement. The Company intends to defend these matters vigorously.
Included within the January 4, 2010 agreement with Tiptree was a provision for the purchase of PLARNY pending regulatory approval. On September 24, 2010, approval was obtained from the State of New York Insurance Department for Tiptree and PFG Holdings Acquisition Corporation to acquire PLARNY for an amount equal to its aggregate capital and surplus. The transaction closed on October 6, 2010. Because of the divestiture, these operations are reflected as discontinued operations. We have reclassified prior period financial statements to conform to this change.
We provide our employees with post-employment benefits that include retirement benefits, through pension and savings plans, and other benefits, including health care and life insurance. Employee benefit expense related to these plans totaled $18.7 million, $46.7 million and $23.5 million for 2010, 2009 and 2008, respectively.