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,” “is targeting,” “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; (ii) the potential adverse affect of interest rate fluctuations on our business and results of operations; (iii) 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; (iv) the possibility that mortality rates, persistency rates, funding levels or other factors may differ significantly from our assumptions used in pricing products; (v) the effect of limited access to external sources of liquidity and financing; (vi) the effect of guaranteed benefits within our products; (vii) potential exposure to unidentified or unanticipated risk that could adversely affect our businesses or result in losses; (viii) the consequences related to variations in the amount of our statutory capital could adversely affect our business; (ix) the possibility that we may not be successful in our efforts to implement a business plan focused on new market segments; (x) changes in our investment valuations based on changes in our valuation methodologies, estimations and assumptions; (xi) the impact of downgrades in our debt or financial strength ratings; (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 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 federal and state governments, 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) regulatory developments or actions may harm our business; (xxi) legal actions could adversely affect our business or reputation; (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.
The Phoenix Companies, Inc. (the “Company” or “PNX”) is a holding company incorporated in Delaware. Our operating subsidiaries provide life insurance and annuity products through independent agents and financial advisors. Our policyholder base includes both affluent and middle market consumers, with our more recent business concentrated in the middle market. Most of our life insurance in force is permanent life insurance (whole life, universal life and variable universal life) insuring one or more lives. Our annuity products include deferred fixed and variable annuities with a variety of death benefit and guaranteed living benefit options.
Since 2009, we have focused on selling products and services that are less capital intensive and less sensitive to our ratings. In 2011, 93% of Phoenix product sales were fixed indexed annuities. In addition, we have expanded sales of other insurance companies’ policies through our distribution subsidiary, Saybrus Partners, Inc. (“Saybrus”).
A substantial but gradually declining amount of our Life and Annuity segment earnings derive from the closed block, which consists primarily of participating life insurance policies sold prior to our demutualization and initial public offering in 2001. We do not expect the net income contribution from the closed block to deviate materially from its actuarially projected path as long as actual cumulative earnings meet or exceed expected cumulative earnings. See Note 4 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 the closed block.
Non-deferred operating expenses are expenses related to servicing policies, premium taxes, reinsurance allowances, non-deferrable acquisition expenses and commissions and general overhead. They also include pension and other benefit costs which involve significant estimates and assumptions.
Income tax expense/benefit consists of both current and deferred tax provisions. Computation of these amounts is a function of pre-tax income and the application of relevant tax law and GAAP accounting guidance. In valuing our deferred tax assets, we make significant judgments with respect to the reversal of certain temporary book-to-tax differences, specifically estimates of future taxable income over the periods in which the deferred tax assets are expected to reverse, including consideration of the expiration dates and amounts of carryforwards related to net operating losses, capital losses, foreign tax credits and general business tax credits. We have recorded a valuation allowance against a significant portion of our deferred tax assets based on our assessment of the realizability of those assets. This assessment could change in the future, resulting in a release of the valuation allowance and a benefit to income.
Policy benefits. Policy benefits decreased $6.8 million in 2011 compared to 2010. Unlocking adjustments increased policy benefits by $4.8 million in 2011 compared to a decrease of $7.7 million in 2010. Excluding the impact of unlocking, the decrease in policy benefit expense on life insurance products was primarily a result of lower interest credited consistent with declining funds under management on universal life products, partially offset by higher death benefits. In addition, the change in fair value of the fixed indexed annuity embedded derivatives and the liabilities associated with guarantees resulted in expense of $2.5 million and $5.4 million, respectively, in 2011. Expense related to the change in value of variable annuity guarantees was $30.3 million in 2011 compared to a benefit of $11.6 million in 2010.
Interest margins. Universal life interest margins increased primarily as a result of lower interest credited consistent with declining funds under management, partially offset by lower net investment income. Annuity interest margins increased primarily as a result of higher investment income attributable to growth in fixed indexed annuity funds under management. Investment income on assets backing surplus was $24.1 million in 2011, compared to $32.9 million in 2010. The decrease of $8.8 million was related to changes in valuation on partnership investments.
Operating expenses. Non-deferred operating expenses decreased $40.6 million to $225.7 million in 2011, compared to $266.3 million in 2010. The decrease in operating expenses was a result of lower professional fees and outside services as well as lower compensation related expenses.
Income taxes. The Company recorded an income tax expense of $1.9 million to continuing operations in 2011, compared to an income tax benefit of $10.1 million to continuing operations in 2010. A deferred tax expense of $1.4 million in 2011 related to the establishment of a valuation allowance on a beginning-of-the-year deferred tax balance, which was not previously recognized. Additionally, current tax expense of $0.5 million was recognized related to alternative minimum tax (“AMT”). In 2010, 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.
Since its formation in the fourth quarter of 2009, Saybrus’ results of operations have steadily improved as revenue has increased and expenses have declined. Inclusive of intercompany transactions, revenue in 2011 was $18.2 million, compared with $6.0 million in 2010. Of these amounts, revenue of $11.3 million and $2.7 million was earned from the sales of Phoenix life and annuity products in 2011 and 2010, respectively. Operating expenses declined to $19.5 million in 2011 from $25.0 million in 2010. This decline was primarily driven by a decrease in compensation related expenses.
On November 3, 2009, we announced the formation of a distribution company subsidiary, Saybrus 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 additional consulting clients in 2010 and 2011.
In March 2009, our two largest life and annuity distributors, State Farm and National Life Group, stopped selling Phoenix products. The actions by these and other distribution partners were primarily in response to downgrades by rating agencies and ultimately reduce our ability to borrow. We have responded by refocusing our strategy on less rating-sensitive activities and market segments.
Private placement bond and limited partnership investments previously managed under Goodwin will continue to be managed by Phoenix under its subsidiary, Phoenix Life.
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 under “Item 8: Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for additional information.
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. The transaction closed on October 6, 2010. Because of the divestiture, these operations are reflected as discontinued operations.
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 adjusted to reflect these surrenders. In addition, an offset to deferred policy acquisition costs and accumulated other comprehensive income (“AOCI”) is recorded each period for unrealized gains or losses on securities classified as available-for-sale as if they had been realized, an adjustment to deferred policy acquisition costs amortized using gross profits or gross margins would result.
The projection of EGPs requires the extensive use of actuarial assumptions, estimates and judgments about the future. Future EGPs are generally projected on a policy-by-policy basis for the estimated lives of the contracts. Assumptions are set separately for each product and are reviewed at least annually based on our current best estimates of future events. The following table summarizes the most significant assumptions used in the categories set forth below:
Separate account return assumptions are derived from the long-term returns observed in the asset classes in which the separate accounts are invested, reduced by fund fees and mortality and expense charges. Short-term deviations from the long-term expectations are expected to revert to the long-term assumption over five years.
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, analysis of market and industry trends, and other external events. 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.
Separate account returns: Declines in equity markets have been reflected in the separate account return assumptions for variable annuities and variable universal life business to maintain reasonable reversion-to-mean rates of return. As part of our analysis of separate account returns, we performed two sensitivity tests. If, at December 31, 2011, we had reprojected EGPs using a 100 basis point lower separate account return assumption (after fund fees and mortality and expense charges) and used our current best estimate assumptions for all other assumptions, the estimated increase to amortization and decrease to net income would have been approximately $6.1 million, before taxes. Conversely, a 100 basis point increase in the separate account return assumption would have decreased amortization and increased net income by approximately $3.8 million, before taxes.
Interest rates and default rates: The long-term decline in interest rates has resulted in reduced EGPs for certain products and may increase future amortization related to certain products. However, the impact of such a change would depend, among other things, on changes in long-term default rates, the relative change between short-term and long-term interest rates, the ability and management’s preparedness to change policy credited rates or insurance charges, and management’s view on how sustained a decrease in interest rates would be.
Policyholder behavior: Changes in surrender and premium persistency assumptions have been based on actual experience and have resulted in both increases and decreases to projected EGPs. Policyholder behavior assumptions have been difficult to predict because they are subject to a combination of individual and external environmental factors. The impact of such changes is not uniform across different types of policies or time periods, with increases in amortization for some policies or time periods offset by decreases in others. In addition, changes in policyholder charges or credited rates directly affect EGPs and may also affect policyholder behavior in the future.
Reserves are liabilities representing estimates of amounts that will come due to policyholders at some point in the future. Certain death and other insurance benefit features require an additional liability be held above the account value liability representing the present value of future benefits in excess of policyholders’ funds and recognizing this excess ratably based on expected assessments. For universal life policies, we calculate this liability based on our best estimate of surrender and lapse rates, interest margin, mortality, premium persistency, funding patterns, and reinsurance costs and recoveries. Coincident with our deferred policy acquisition cost reviews, these assumptions are assessed on a regular basis based on our past experience, industry studies, regulatory requirements and estimates about the future. Additional policyholder liabilities related to GMIB and GMDB variable annuity contract riders are calculated using stochastic projections as they tend to vary with capital market movements.
See Note 2 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” and the “Enterprise Risk Management” section of “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K for more information.
Our fair value calculation of variable annuity GMAB and GMWB embedded derivative liabilities includes a credit standing adjustment (the “CSA”). The CSA represents the adjustment that market participants would make to reflect the risk that guaranteed benefit obligations may not be fulfilled (“non-performance risk”). In analyzing various alternatives to the CSA calculation, we determined that we could not use credit default swap spreads as there are no such observable instruments on Phoenix’s life insurance subsidiaries nor could we consistently obtain an observable price on the surplus notes issued by Phoenix Life, as the surplus notes are not actively traded. Therefore, when discounting the rider cash flows for calculation of the fair value of the liability, we calculated the CSA that reflects the credit spread (based on a Standard & Poor’s BB- credit rating) for financial services companies similar to the Company’s life insurance subsidiaries.
We classify our debt and equity securities as available-for-sale and report them in our balance sheet at fair value. Fair value is based on quoted market price, where available. When quoted market prices are not available, we estimate fair value by discounting debt security cash flows to reflect 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.
we either intend to sell the security, or it is more likely than not that we will be required to sell the security before recovery; or
Impairments due to deterioration in credit that result in a conclusion that the present value of cash flows expected to be collected will not be sufficient to recover the amortized cost basis of the security are considered other than temporary. Other declines in fair value (for example, due to interest rate changes, sector credit rating changes or company-specific rating changes) that result in a conclusion that the present value of cash flows expected to be collected will not be sufficient to recover the amortized cost basis of the security may also result in a conclusion that an OTTI has occurred.
On a quarterly basis, we review all securities in an unrealized loss position for potential recognition of an OTTI. In addition, 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 fair 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.
We account for income taxes in accordance with ASC 740, Accounting for Income Taxes. Deferred tax assets and/or liabilities are determined by multiplying the differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances on deferred tax assets are estimated based on our assessment of the realizability of such amounts.
As of December 31, 2011, we performed our assessment of the realization of deferred tax assets. This assessment included consideration of the gross deferred tax liabilities as a source of income as well as the cumulative loss incurred over the three-year period ended December 31, 2011. As a result of the cumulative loss and all other relevant considerations, we concluded that our estimates of future taxable income and certain tax planning strategies did not constitute sufficient positive evidence to assert that it is more likely than not that certain deferred tax assets would be realizable before expiration. We believe it is reasonably possible that the Company will begin to record positive three-year cumulative income during 2012, which could result in a reduction of the valuation allowance and a benefit to income tax expense.
As of December 31, 2011, a valuation allowance of $254.5 million has been recorded on net deferred tax assets of $372.7 million. We have concluded that a valuation allowance on the remaining $118.2 million of deferred tax assets attributable to available-for-sale debt securities with gross unrealized losses was not required due to our ability and intent to hold these securities until recovery of fair value or contractual maturity, thereby avoiding realization of taxable capital losses. This conclusion is consistent with prior periods.
For the year ended December 31, 2011, we recognized a net increase in the valuation allowance of $13.5 million compared to 2010. Accounting guidance requires that changes in the valuation allowance be allocated to various financial statement components of income or loss. The net increase to the valuation allowance corresponds to an increase of $1.6 million in income statement related deferred tax balances and an increase of $11.9 million in OCI-related deferred tax balances. The increase of $1.6 million in income statement related deferred tax balances is comprised of an increase of $7.8 million recorded to discontinued operations partially offset by a decrease of $6.2 million recorded to continuing operations. These movements in the valuation allowance offset movements in the net pre-valuation allowance deferred tax balances.
The tax provision reported in continuing operations of $1.9 million consists primarily of a deferred tax expense of $1.4 million related to the establishment of a valuation allowance on a beginning-of-the-year deferred tax balance, which was not previously recognized. Additionally, current tax expense of $0.5 million was recognized related to AMT. For the AMT, the expected deferred tax asset offset to the AMT credit carryforward was eliminated by an increase in the valuation allowance.
Policy acquisition cost amortization decreased $87.6 million to $210.6 million in 2011. This decrease in amortization was attributable to the unlocking of assumptions as a result of annual comprehensive reviews of assumptions in the third quarters of 2011 and 2010. The unlocking resulted in an overall decrease in amortization of $2.9 million in 2011, compared to an acceleration of amortization of $46.4 million in 2010. In 2011, the unlocking primarily related to changes in assumptions for universal life policies which resulted in a decrease of $35.8 million from higher expected fees partially offset by an increase of $34.0 million from lower premium persistency. In 2010, the unlocking was primarily driven by increased lapses in portions of our universal life business which resulted in $36.6 million of additional amortization. Excluding the impact of the unlocking, amortization was lower by $41.4 million primarily related to universal life as a result of less favorable mortality experience during 2011.
Operating expenses decreased $46.0 million to $245.2 million in 2011, compared to $291.2 million in 2010. The decrease in operating expenses was a result of lower professional fees and outside services as well as lower compensation related expenses.
The Company recorded an income tax expense of $1.9 million to continuing operations in 2011, compared to an income tax benefit of $10.1 million to continuing operations in 2010. A deferred tax expense of $1.4 million in 2011 was related to the establishment of a valuation allowance on a beginning-of-the-year deferred tax balance, which was not previously recognized. Additionally, current tax expense of $0.5 million was recognized related to AMT. In 2010, 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.
Premium revenue declined as a result of lower renewal premiums on traditional life lines of business, as well as lower paid up additions on policies within the closed block, as a result of the change in the 2011 dividend scale.
Net investment income increased by $57.9 million to $844.6 million for 2010 compared to $786.7 million for 2009. The increase was primarily due to improved valuations and distributions from limited partnerships and other investments. These increases were partially offset by a decline in net investment income related to long-term debt securities as a result of lower yields and loss in income on previously impaired bonds.
We 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 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.
Policy acquisition cost amortization increased $37.6 million to $298.2 million in 2010 from $260.6 million in 2009. An unlocking of assumptions related to deferred policy acquisition costs resulted in an acceleration of amortization of $46.4 million in 2010 and $42.5 million in 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.
The effective tax rate for 2011, 2010 and 2009 was 5.9%, 29.1% and (125.0%), respectively. The principal cause of the difference between the effective rate and the U.S. statutory rate of 35% in 2011 was the dividend received deduction and a decrease in the valuation allowance. The principal cause of the difference between the effective tax rate and the U.S. statutory rate of 35% in 2010 was an adjustment to tax attribute carryovers as a result of the effective settlement of an IRS audit, partially offset by a decrease in the valuation allowance.
We also measure, manage and monitor market risk associated with our investments, both those backing insurance liabilities and those supporting surplus. This process primarily involves Corporate Portfolio Management. This organization makes recommendations and reports results to our Investment Policy Committee, chaired by the Chief Investment Officer. Please refer to the sections that follow, including “Debt and Equity Securities”, following this discussion of Enterprise Risk Management, for more information on our investment risk exposures. We regularly refine our policies and procedures to appropriately balance market risk exposure and expected return.
If, instead, at December 31, 2011 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 $3.8 million, before taxes.
See Note 6 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for more information regarding deferred policy acquisition costs.
Effective March 31, 2010, all benefit accruals under all of our defined benefit plans were frozen. This change was announced in 2009 and a curtailment was recognized at that time for the reduction in the expected years of future service.
We invest in a variety of debt and equity securities. We classify these investments into various sectors using industry conventions; however, our classifications may differ from similarly titled classifications of other companies. We classify debt securities into investment grade and below-investment-grade securities based on ratings prescribed by the National Association of Insurance Commissioners (“NAIC”). In a majority of cases, these classifications will coincide with ratings assigned by one or more Nationally Recognized Standard Ratings Organizations (“NRSROs”); however, for certain structured securities, the NAIC designations may differ from NRSRO designations based on the amortized cost of the securities in our portfolio.
Most of our RMBS portfolio is highly rated. At December 31, 2011, 94.0% of the total residential portfolio was rated investment grade. We hold $476.7 million of RMBS investments backed by prime rated mortgages, $319.5 million backed by Alt-A mortgages and $158.9 million backed by sub-prime mortgages, which combined amount to 6.2% of our total investments. The majority of our prime, Alt-A and sub-prime exposure is investment grade, with 70.5% being rated NAIC-1 and 16.2% rated NAIC-2. We have employed a disciplined approach in the analysis and monitoring of our mortgage-backed securities. Our approach involves a monthly review of each security. Underlying mortgage data is obtained from the security’s trustee and analyzed for performance trends. A security-specific stress analysis is performed using the most recent trustee information. This analysis forms the basis for our determination of whether the security will pay in accordance with the contractual cash flows. RMBS impairments during the year ended December 31, 2011 totaled $10.3 million. These impairments consist of $3.4 million from prime, $3.8 million from Alt-A and $3.1 million from sub-prime.
Individual categories may not agree with the Debt Securities by Type table on previous page due to nature of underlying collateral.
Includes commercial mortgage-backed CDOs with amortized cost and market values of $47.8 million and $33.1 million, respectively.
Fixed income OTTIs recorded in 2011 were primarily concentrated in structured securities and corporate bonds. These impairments were driven primarily by increased collateral default rates and rating downgrades. In our judgment, these credit events or other adverse conditions of the issuers have caused, or will most likely lead to, a deficiency in the contractual cash flows related to the investment. Therefore, based upon these credit events, we have determined that OTTIs exist. Total debt impairments recognized through earnings related to such credit-related circumstances were $25.7 million in 2011, $49.0 million in 2010 and $93.0 million in 2009. There were no equity security or limited partnership and other investment OTTIs in 2011 and $0.6 million and $15.4 million in 2010 and 2009, respectively, were recognized.
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 $38.9 million in 2011, $55.6 million in 2010 and $93.1 million in 2009.
Net unrealized investment gains and losses on securities classified as available-for-sale and certain other assets are included in our consolidated balance sheet as a component of AOCI. The table below presents the special category of AOCI for debt securities that are other-than-temporarily impaired when the impairment loss has been split between the credit loss component (in earnings) and the non-credit component (separate category of AOCI).
For debt securities outside of the closed block with gross unrealized losses, 42.4% of the unrealized losses after offsets pertain to investment grade securities and 57.6% of the unrealized losses after offsets pertain to below-investment-grade securities at December 31, 2011.
For debt securities inside the closed block with gross unrealized losses, there were no unrealized losses after offsets at December 31, 2011.
Cash flows used for investing activities increased $629.4 million during the year ended December 31, 2011 compared to the year ended December 31, 2010. The primary driver of this fluctuation was an increase in purchases of available-for- sale debt securities which was directly attributable to the increase in deposits related to fixed indexed annuities. In addition, sales of available-for-sale debt securities declined as a result of lower reinvestment rates. Cash proceeds of $1.0 million were received related to the sale of Goodwin in 2011 while $32.9 million of cash proceeds related to the sale of PFG and PLARNY were received in 2010.
Cash flows provided by financing activities increased $748.7 million to cash inflows of $916.2 million during the year ended December 31, 2011, compared to $167.5 million during the year ended December 31, 2010. This improvement was primarily a result of increase in policyholder deposits related to sales of fixed indexed annuities. See Note 9 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 financing activities.
We sponsor post-employment benefit plans through pension and savings plans for employees of Phoenix Life. Funding of the majority of these obligations is provided by Phoenix Life on a 100% cost reimbursement basis through administrative services agreements with the holding company. 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.
Cash used for financing activities of $0.7 million related to the repurchase of senior unsecured bonds.
Cash provided by 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.
In 2004, we issued $175.0 million principal of surplus notes with a scheduled maturity of 30 years for proceeds of $171.6 million, net of discount and issue costs. Interest payments are at an annual rate of 7.15%, require the prior approval of the NYDFS and may be made only out of surplus funds which the NYDFS determines to be available for such payments under New York insurance law.
The financial strength and debt ratings as of March 14, 2012 were as follows:
Deferred policy acquisition costs decreased related to variable universal life, universal, variable annuities and traditional life products primarily as a result of amortization for the year ended December 31, 2011. The deferred policy acquisition cost balance associated with the fixed annuities increased as the amortization of the block was offset by the increase in deferred expenses related to sales of our fixed indexed annuities. The table below presents deferred policy acquisition cost by product.
Separate accounts decreased primarily from variable annuity surrenders and universal life fees and cost of insurance charges during 2011.
The decrease in total stockholders’ equity was primarily a result of other comprehensive loss from the increase in unrecognized loss and prior service costs on our pension and other post-employment plans as a result of the decline in interest rates.
See Note 16 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for additional information.
Annuity funds on deposit increased $412.1 million during the year ended December 31, 2011 compared to an increase of $79.4 million during the year ended December 31, 2010. The higher increase in 2011 was driven by deposits related to the growth in sales of the fixed index annuity product partially offset by lower fund performance and larger surrenders related to variable annuity products.
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 2012. 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.
Private placement bonds and limited partnership investments previously managed under Goodwin will continue to be managed by Phoenix under its subsidiary, Phoenix Life.
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. On June 23, 2010, the Company completed the divestiture of PFG and closed the transaction.
We have three defined benefit pension plans covering our employees. The employee pension plan, covering substantially all of our employees, provides benefits up to the amount allowed under the Internal Revenue Code. The two supplemental plans provide benefits in excess of the primary plan. Retirement benefits under the plans are a function of years of service and compensation. Effective March 31, 2010, all benefit accruals under all of our defined benefit plans were frozen. This change was announced in 2009 and a curtailment was recognized at that time for the reduction in the expected years of future service.
The employee pension plan is a qualified plan that is funded with assets held in a trust. It is the Company’s practice to make contributions to the qualified pension plan at least sufficient to avoid benefit restrictions under funding requirements of the Pension Protection Act of 2006. This generally requires the Company to maintain assets that are at least 80% of the plan’s liabilities as calculated under the applicable regulations at the end of the prior year. Under these regulations, the qualified pension plan is currently funded at 80% of the funding target liabilities as of December 31, 2011.
The funded status of the qualified pension plan based on the projected benefit obligations for the years ended December 31, 2011 and 2010 are summarized in the following table:
To meet the above funding objectives, we made contributions to the pension plan totaling $17.4 million and $25.7 million during 2011 and 2010, respectively. Over the next 12 months, we expect to make contributions of approximately $16.4 million from the Company’s operating cash flow, of which approximately $3.4 million will be made in the first quarter of 2012.
The Company also has two supplemental plans that provide benefits to certain executives in excess of the primary plan. These plans are unfunded and represent general obligations of the Company. We fund periodic benefit payments to retirees as they become due under these plans from cash-flow from operations. The projected benefit obligations for the years ended December 31, 2011 and 2010 were $141.2 million and $133.3 million, respectively.
We also have a postretirement benefit plan, which is unfunded and had projected benefit obligations of $58.8 million and $58.8 million as of December 31, 2011 and 2010, respectively. We fund periodic benefit payments under this plan from cash flows from operations as they become due.
We have agreements with certain of our employees that provide for additional retirement benefits. In the year ended December 31, 2011, the estimated liability for these guarantees was $17.9 million.
Due to the financial distress of Scottish Re and the withdrawal of its ratings in June, 2009, we are continuing to monitor its financial situation and assess the recoverability of the reinsurance recoverable on a quarterly basis. As of December 31, 2011, the Company has ceded reserves of $56.5 million and a reinsurance receivable balance of $1.9 million with Scottish Re. Based on our review of its financial statements, reputation in the reinsurance marketplace and other relevant information, we believe that we have no material exposure to uncollectible life reinsurance. As such, no allowance has been established.
Effective October 1, 2011, Phoenix Life entered into an agreement that provides modified coinsurance for approximately one-third of the closed block policies. This contract did not meet the requirements of risk transfer in accordance with GAAP. Therefore, assets and liabilities and premiums and benefits are netted on our consolidated balance sheet and consolidated income statement, respectively, as the right of offset exists.
Phoenix Life’s statutory basis capital and surplus (including AVR) increased from $763.2 million at December 31, 2010 to $845.7 million at December 31, 2011. The principal factors resulting in this increase were net gain from operations of $130.5 million offset by dividends paid to PNX of $64.8 million.
The estimated RBC of Phoenix Life as of December 31, 2011 was in excess of 200% of the Company Action Level.