Due to our losses during 2003, the ratio of earnings to fixed charges for that year was less than 1:1. We would need $8.9 million in additional earnings for the year 2003 to achieve a 1:1 coverage ratio.
This ratio is disclosed for the convenience of investors and may be more comparable to the ratio disclosed by other issuers of fixed income securities. See Exhibit 12 to this report on Form 10-K for a reconciliation of the supplemental ratio of earnings to fixed charges.
Due to our losses during 2003, the ratio coverages, excluding interest credited on policyholder contract balances, were less than 1:1. We would need $8.9 million in additional earnings for the year 2003 to achieve a 1:1 coverage ratio.
In accordance with accounting practices prescribed by the New York State Insurance Department, Phoenix Life’s capital and surplus includes $156.5 million, $156.5 million, $186.7 million, $186.7 million and $157.5 million of surplus notes outstanding at December 31, 2007, 2006, 2005, 2004 and 2003, respectively.
The discussion in this 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 include statements relating to trends in, or representing management’s beliefs about our future strategies, operations and financial results, as well as other statements including, but not limited to, words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “may,” “should” and other similar 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. Actual results may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties which include, among others: (i) changes in general market and business conditions, interest rates and the debt and equity markets; (ii) the possibility that mortality rates, persistency rates or funding levels may differ significantly from our pricing expectations; (iii) the availability, pricing and terms of reinsurance coverage generally and the inability or unwillingness of our reinsurers to meet their obligations to us specifically; (iv) our dependence on non-affiliated distributors for our product sales, (v) downgrades in our debt or financial strength ratings; (vi) our dependence on third parties to maintain critical business and administrative functions; (vii) the ability of independent trustees of our mutual funds and closed-end funds, intermediary program sponsors, managed account clients and institutional asset management clients to terminate their relationships with us; (viii) our ability to attract and retain key personnel in a competitive environment; (ix) the poor relative investment performance of some of our asset management strategies and the resulting outflows in our assets under management; (x) the possibility that the goodwill or intangible assets associated with our asset management business could become impaired, requiring a charge to earnings; (xi) the strong competition we face in our business from mutual fund companies, banks, asset management firms and other insurance companies; (xii) 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; (xiii) the potential need to fund deficiencies in our Closed Block; (xiv) tax developments that may affect us directly, or indirectly through the cost of, the demand for or profitability of our products or services; (xv) other legislative or regulatory developments; (xvi) legal or regulatory actions; (xvii) changes in accounting standards; (xviii) the potential effects of the spin-off of PXP on our expense levels, liquidity and third-party relationships; and (xix) other risks and uncertainties described herein or in any of our filings with the SEC. We undertake no obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events or otherwise.
Management’s discussion and analysis reviews our consolidated financial condition at December 31, 2007 and 2006; our consolidated results of operations for the years 2007, 2006 and 2005; and, where appropriate, factors that may affect our future financial performance. This discussion should be read in conjunction with “Selected Financial Data” and our consolidated financial statements in this Form 10-K.
We provide life insurance, annuity and investment products targeted at affluent and high-net-worth individuals and institutions through a wide variety of third-party financial professionals and intermediaries. We operate two businesses and report our results in two corresponding operating segments-Life and Annuity and Asset Management. The Life and Annuity business encompasses a broad range of product offerings. In life insurance, our main focus is on permanent life insurance (universal and variable universal life) insuring one or more lives, but we also offer a portfolio of term life insurance products. In annuities, we offer deferred and immediate variable annuities with a variety of death benefit and guaranteed living benefit options. The Asset Management business is operated as a multi-boutique model, in which individual portfolio management teams manage distinct investment strategies but share common distribution, administrative and operational support. In addition, certain investment strategies are sub-advised by unaffiliated investment management companies. Asset management products include open-end mutual funds, closed-end funds and separately managed accounts. Separately managed accounts include assets managed within intermediary programs that are sponsored and distributed by non-affiliated broker-dealers, as well as direct managed accounts which are sold and administered by us. In addition, we manage institutional accounts and several structured finance products, such as collateralized debt obligations.
Actual death claims net of reinsurance relative to our assumptions, a reflection of our underwriting and actuarial pricing discipline, the cost of reinsurance and the natural volatility inherent in this kind of risk; and
Net investment income (NII) earned on universal life and other policyholder funds managed as part of our general account, less the interest credited to policyholders on those funds, as well as NII earned on surplus that we allocate in support of these products.
The deferred policy acquisition cost amortization, which is based on the amount of expenses deferred, actual results in each quarter and management’s assumptions about the future performance of the business.
Within Asset Management, our profitability is primarily driven by the following factors:
New deposits less redemptions (net flows) in the current period; and
Upon completion of the spin-off, our shareholders will have separate, publicly-traded ownership interests in the Company and PXP. PXP will consist of the Company’s entire asset management business, with the exception of Goodwin Capital Advisors, Inc., which will remain with the Company and continue to manage the Company’s general account assets. The Company and PXP will be independent of each other and have separate boards of directors and management. To facilitate PXP’s separation from the Company, each company will continue certain existing arrangements during a transition period following completion of the spin-off.
On December 20, 2007, we sold all of the outstanding stock of Emprendimiento Compartido S.A., or EMCO, an Argentine wholly-owned subsidiary. We realized an after-tax loss of $4.8 million on this sale. EMCO’s results are reported as a discontinued operation in our financial statements included in this Form 10-K.
On May 18, 2006, we acquired the rights to advise, distribute and administer the Harris Insight® Funds, now known as the Insight Funds from Harris Investment Management, Inc., or Harris. Harris continues to manage the majority of the Insight Funds as subadviser.
On January 14, 2005, we closed the sale of our equity holdings in Aberdeen Asset Management PLC, or Aberdeen, a United Kingdom-based asset management company, for net proceeds of $70.4 million, resulting in an after-tax realized investment loss of $7.0 million, in our 2005 consolidated statement of operations.
Effective May 31, 2004, we sold our retail affiliated broker-dealer operations to Linsco/Private Ledger Financial Services, or LPL. During 2005, we realized a gain of $1.5 million related to contingent consideration based on gross distribution concessions earned by LPL during the first year following the sale.
Each year, we develop future EGPs for the products sold during that year. The EGPs for products sold in a particular year are aggregated into cohorts. Future EGPs are projected for the estimated lives of the contracts. The amortization of deferred policy acquisition costs and present value of future profits requires the use of various assumptions, estimates and judgments about the future. The assumptions, in the aggregate, are considered important in the projections of EGPs. The assumptions developed as part of our annual process are based on our current best estimates of future events, which are likely to be different for each year’s cohort. Assumptions considered to be significant in the development of EGPs include separate account fund performance, surrender and lapse rates, interest margin, mortality, premium persistency, funding patterns and expenses. These assumptions are reviewed on a regular basis and are based on our past experience, industry studies, regulatory requirements and estimates about the future.
As part of our analysis of separate account returns, we perform two sensitivity tests. If at December 31, 2007 we had used a 100 basis points lower separate account return assumption (after fund fees and mortality and expense charges) for both the variable annuity and the variable life businesses and used our current best estimate assumptions for all other assumptions to project account values forward from the current value to reproject EGPs, the estimated increase to amortization and decrease to net income would be approximately $2.3 million, after-tax.
If, instead, at December 31, 2007 we had used a 100 basis points higher separate account return assumption (after fund fees and mortality and expense charges) for both the variable annuity and variable life businesses and used our current best estimate assumptions for all other assumptions to project account values forward from the current value to reproject EGPs, the estimated decrease to amortization and increase to net income would be approximately $2.2 million, after-tax.
For goodwill and intangible assets, we perform impairment tests at the reporting-unit level at least annually. For definite-lived intangible assets, we test for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. In 2005, in conjunction with the conversion of our Asset Management business to a wholly owned structure, we consolidated our asset management related goodwill into a single reporting unit for purposes of goodwill impairment testing. For purposes of the impairment test for our asset management-related goodwill, the fair value of the reporting unit is based on the sum of: a multiple of revenue plus the fair value of the unit’s tangible fixed assets. For goodwill in our Life and Annuity segment, we calculate the fair value of the reporting unit based on the sum of its statutory book value, value of business in force and value of estimated new business. For purposes of indefinite-lived intangible assets, we calculate the fair value of the assets as a multiple of revenue. For purposes of definite-lived intangible assets, we calculate the fair value based on projected cash flows. For intangible assets with definite lives, all amortization expense has been, and continues to be, calculated on a straight-line basis.
See Note 9 to our consolidated financial statements in this Form 10-K for more information.
We have elected to file a consolidated federal income tax return for 2007 and prior years. Within the consolidated tax return, we are required by regulations of the Internal Revenue Service, or IRS, to segregate the entities into two groups: life insurance companies and non-life insurance companies. We are limited as to the amount of any operating losses from the non-life group that can be offset against taxable income of the life group. These limitations may affect the amount of any operating loss carryovers that we have now or in the future.
We have determined, based on our earnings and future income, that it is more likely than not that the deferred income tax assets after valuation allowance recorded as of December 31, 2007 and 2006 will be realized. In determining the adequacy of future income, we have considered projected future income, reversal of existing temporary differences and available tax planning strategies and actions that could be implemented, if necessary.
Our 2007 results reflect the growth of our inforce business and funds on deposit in our life and annuity products over the last several years. Consolidated net income for the year was $123.9 million, or $1.07 per diluted share, up 24% from the prior year.
Net income in our Life and Annuity segment improved slightly in 2007 to $147.6 million, up from $144.8 million in the prior year. This result reflected improvements in mortality margin, fees, and net investment income, largely offset by higher non-deferred expenses, reflecting investments in the growth of new distribution and business initiatives, and by amortization of deferred policy acquisition costs.
Our 2006 consolidated net income was $99.9 million, or $0.88 per diluted share, down 8% from the prior year.
Net income in our Life and Annuity segment decreased from 2005 to 2006 by $19.0 million. This decrease was primarily driven by net realized investment losses, lower interest margin and higher amortization of deferred policy acquisition costs. Life and Annuity realized investment losses increased $23.7 million to a net loss of $1.0 million in 2006, due to a $35.1 million gain on the settlement of stock purchase contracts in 2005 that did not recur in 2006. Also, the interest margin in 2006 was $11.2 million lower than during the prior year, reflecting the effects of a $30.8 million decrease in investment income on assets backing universal life and annuity liabilities with only a $19.6 million decrease in interest credited on those liabilities. In addition, the growth of policies inforce contributed to an increase in amortization expense in 2006 which more than offset the $19.1 million reduction to amortization that resulted from a 2006 unlocking of assumptions. Total amortization expense in 2006 was $152.1 million, $37.6 million higher than in the prior year.
Asset Management segment results decreased to a net loss of $25.8 million in 2006 compared with a net loss of $14.4 million in 2005. This was primarily driven by a higher intangible asset impairment of $32.5 million during 2006. In addition, fee revenues were $19.7 million lower in 2006, due to lower average assets, excluding money market mutual funds under management. Partially offsetting these decreases were lower expenses driven by lower employment expenses.
We incurred loss of $19.1 million in Corporate and Other during 2007, a $31.4 million improvement from a loss of $50.5 million in the prior year. The primary drivers were after-tax realized investment gains of $21.0 million, compared with net realized losses of $2.6 million in 2005, and lower expenses. The increase in net realized gains was mainly driven by a large gain on a collateralized debt obligation in 2006. In addition, allocated expenses were $7.0 million lower in 2006 than in 2005.
Stockholders’ equity increased during 2007 by $53.8 million to $2,289.9 million at December 31, 2007 primarily due to net income of $123.9 and share-based compensation expense of $14.0 million during the year, partially offset by other comprehensive losses of $63.5 million and payment of a stockholder dividend of $18.4 million. Total assets increased $1,199.7 million to $30,206.9 million at December 31, 2007, primarily due to higher deferred policy acquisition costs related to product sales and higher separate account assets related to both new deposits and market performance. These increases were partially offset by lower fair values of debt securities, driven by widening credit spreads.
The effective tax rate for 2007, 2006 and 2005 was 20.6%, 30.1% and 20.1%, respectively. The principal cause of the difference between the effective rate and the U.S. statutory rate of 35% for 2007 was investment income not taxed (i.e., dividend received deduction, or DRD, and low income housing tax credits) and the reversal of the valuation allowance relative to foreign tax credit carryovers. For 2006, the principal cause was investment income not taxed (i.e., dividend received deduction, or DRD, and low income housing tax credits). Income taxes paid (received) in 2007, 2006 and 2005 were $6.4 million, $0.9 million and $(25.4) million, respectively. See Note 16 to our consolidated financial statements in this Form 10-K for more information related to income taxes.
The criteria used to identify an item that will be excluded from operating income include: whether the item is infrequent and is material to the segment’s income; or whether it results from a change in regulatory requirements, or relates to other unusual circumstances. Items excluded from operating income may vary from period to period. Because these items are excluded based on our discretion, inconsistencies in the application of our selection criteria may exist. Operating income, and other measures that are derived from or incorporate operating income, are not substitutes for net income determined in accordance with GAAP and may be different from similarly titled measures of other companies. However, the Company believes that the presentation of operating income as measured for management purposes enhances the understanding of results of operations by highlighting the results from ongoing operations and the underlying profitability factors of our business.
Results of Operations by Segment as Reconciled to Consolidated Net Income:
Realized investment gains (losses), net of income taxes and other offsets
Total revenues increased due to significant increases to insurance, investment management and product fees, primarily cost of insurance fees, resulting from higher sales and growth of in-force business. Our separate account based fees increased due to higher funds on deposit driven by positive investment performance and higher annuity sales. Fees associated with investment management of our underlying funds also increased. Partially offsetting these increases was a decrease in renewal premiums in our Closed Block.
Total segment benefits and expenses increased primarily due to the following:
Policy acquisition cost amortization increased for variable universal and universal life due to the effects of unlockings in both years. The 2007 unlocking increased amortization by $4.1 million, while the 2006 unlocking decreased amortization by $19.1 million. The 2007 amortization was also higher due to an increase in insurance margins for universal life due to higher cost of insurance charges, offset by higher death benefits. Amortization for the annuity line decreased because of the unlocking that increased the amortization in 2006.
Other operating expenses, which includes non-deferrable policy acquisition costs and general and administrative costs, increased due to higher incentive accruals resulting from improved company performance and higher technology and infrastructure expenses, reflecting investments in the growth of new distribution and business initiatives.
Policy benefits, including policyholder dividends, decreased primarily due to lower benefit and changes in reserves for participating life insurance, primarily related to lower renewal premiums and lower scheduled withdrawals for corporate-owned life insurance. In addition, dividend expense was lower and interest credited for annuities declined in 2006. Dividend expense decreased due to the change in the dividend scale in the fourth quarter of 2005, partially offset by an increase in the change for the policyholder dividend obligation. Interest credited for annuities decreased due to the decline in general account funds on deposit, related primarily to discontinued products. These decreases were partially offset by higher benefit costs for universal life, which resulted from growth of policies in force.
Other operating expenses decreased primarily due to lower non-deferred expenses and modestly lower non-deferred commission expenses.
Allocated income taxes increased primarily due to higher operating income before income taxes and the absence of tax benefits recorded in 2005 that were associated with the resolution of certain tax matters with the IRS.
Variable universal life funds on deposit increased by $383.2 million in 2007 compared to an increase of $213.1 million in 2006. This change was due to higher deposits and business assumed by our private placement business, partially offset by lower performance.
Universal life funds on deposit increased $170.0 million in 2006 compared to an increase of $123.4 million in 2005. This improvement was primarily due to higher deposits and lower benefits and surrenders, partially offset by higher fees and cost of insurance charges in 2006.
Variable universal life insurance revenue increased primarily from higher cost of insurance charges and higher asset-backed fees resulting from growing funds.
Universal life pre-tax operating income increased due to higher fees, cost of insurance charges and investment income resulting from higher sales and funds under management. This was partially offset by an increase in death benefits, non-deferred operating expenses, interest paid on higher funds under management and an increase in policy acquisition cost amortization due to higher insurance margins.
Annuity pre-tax operating income increased due to lower policy acquisition cost amortization because there was a $15.3 million loss from unlocking in 2006 but a more modest $2.0 million gain from unlocking in 2007.
Variable universal life pre-tax operating income decreased primarily due to higher amortization of deferred policy acquisition costs related to unlocking in 2006 versus 2005 and higher claims in 2006. The effect of unlocking decreased amortization of deferred policy acquisition costs by $17.0 million in 2006 compared to a reduction of $29.1 million in 2005.
Universal life pre-tax operating income increased primarily due to higher insurance margins, with the growth in revenues (discussed above) outpacing the increase in benefits, and higher investment earnings. These increases were partially offset by higher amortization of deferred policy acquisition costs, primarily from improved insurance margins and modestly higher expenses. Amortization was also affected by unlocking which decreased amortization by $12.7 million in 2006 compared to a decrease of $17.6 million in 2005.
Our investment management fees are based on assets under management. Approximately 36% of our investment management fees were based on beginning of quarter assets under management while the remaining 64% were based on average daily closing asset values. The following table shows average assets under management.
The following table presents information regarding the third-party assets under management by PXP for the years indicated:
Total segment expenses decreased primarily due to a $32.5 million pre-tax impairment in the first quarter of 2006 on $33.4 million of identified intangible assets related to certain investment management contracts. This impairment resulted from the termination of the associated management contracts and related lost revenues.
Investment management fees decreased primarily due to a decrease in average assets under management (excluding money market mutual funds) for both retail and institutional strategies. Mutual fund ancillary fees and other revenue increased due to an increased amount of mutual fund assets under management.
Other operating expenses decreased due to lower employment expenses due to lower salary expense because of a lower number of employees and a decrease in incentive compensation expense, which was primarily driven by lower investment management fees. In addition, mandatorily redeemable interest costs decreased due to the acquisition of the remaining outstanding mandatorily redeemable noncontrolling interests in certain of our asset management subsidiaries during the second and third quarters of 2005.
The operating loss before income taxes for Corporate and Other decreased primarily due to higher investment earnings, lower allocated corporate expenses and the elimination of interest expense related to the HRH purchase contracts. The HRH stock purchase contracts were settled in 2005.
See Note 14 to our consolidated financial statements in this Form 10-K for more information.
During 2003, we implemented a comprehensive, enterprise-wide risk management program. Early in 2004, we appointed a Chief Risk Officer, reporting to the Chief Financial Officer, to oversee all of our risk management activities. We have established an Enterprise Risk Management Committee, chaired by the Chief Executive Officer, to follow our risk management principles and accomplish our objectives. In addition, we have established several management committees overseeing and addressing issues pertaining to all our major risks-operational, market and product-as well as capital management.
We use derivative financial instruments, primarily interest rate swaps, to manage our residual exposure to fluctuations in interest rates. We enter into derivative contracts with a number of highly rated financial institutions, to both diversify and reduce overall counterparty credit risk exposure.
The chart below shows the sensitivity of deferred policy acquisition costs for variable annuities and variable universal life to equity market movements. The market movements raise or lower funds under management, which affects future asset-based fees collected, which changes future estimated gross profits, which impacts deferred policy acquisition costs.
Our general account debt securities portfolio consists primarily of investment grade publicly traded and privately placed corporate bonds, residential mortgage-backed securities, commercial mortgage-backed securities and asset-backed securities. As of December 31, 2007, our general account debt securities, with a carrying value of $11,970.0 million, represented 78.9% of total general account investments. Public debt securities represented 72.5% of total debt securities, with the remaining 27.5% represented by private debt securities.
We consolidate debt and equity securities on our consolidated balance sheet that are pledged as collateral for the settlement of collateralized obligation liabilities related to two collateralized obligation trusts which we sponsor. See Note 14 of our consolidated financial statements in this Form 10-K for additional information on these debt and equity securities pledged as collateral.
We manage credit risk through industry and issuer diversification. Maximum exposure to an issuer is defined by quality ratings, with higher quality issuers having larger exposure limits. Our investment approach has been to create a high level of industry diversification. The top five industry holdings as of December 31, 2007 in our debt securities portfolio were banking (7.0%), diversified financial services (4.0%), electrical utilities (3.7%), insurance (3.4%) and oil (2.1%).
The weakness in the U.S. real estate markets, increases in interest rates and the effects of relaxed underwriting standards for mortgages and home equity loans have led to higher delinquency rates for residential mortgage-backed securities, especially those originated in 2006 and those designated as sub-prime. In addition, there have been increased concerns in the financial markets about residential mortgage-backed securities designated as Alt-A.
Our assessment of whether an investment in a debt or equity security is other-than-temporarily impaired includes whether the issuer has:
The following tables present certain information with respect to our gross unrealized losses related to our investments in general account debt securities, both outside and inside the Closed Block, as of December 31, 2007. In the tables, we separately present information that is applicable to unrealized losses both outside and inside the Closed Block. We believe it is unlikely that there would be any effect on our net income related to the realization of investment losses inside the Closed Block due to the current sufficiency of the policyholder dividend obligation liability in the Closed Block. See Note 5 to our consolidated financial statements in this Form 10-K for more information regarding the Closed Block. Applicable deferred policy acquisition costs and deferred income taxes further reduce the effect on our comprehensive income.
For debt securities outside of the Closed Block with gross unrealized losses, 87.7% of the unrealized losses after offsets pertain to investment grade securities and 12.3% of the unrealized losses after offsets pertain to below investment grade securities at December 31, 2007.
Cash from operating activities decreased primarily due to proceeds from the sale of trading equity securities of $129.7 million in 2005 from the sale of our investments in Aberdeen and Lombard, higher policy acquisition costs of $141.4 million, lower premiums received of $91.5 million and higher benefits paid of $69.7 million. In addition, income taxes changed by $26.3 million to $0.9 million paid in 2006 compared with $25.4 million received in 2005. The decreases to cash were partially offset by increased investment income and fees received of $25.1 million and $77.1 million, respectively, and lower dividends and operating expenses paid of $58.2 million and $80.4 million, respectively.
Cash for financing activities decreased primarily due to collateralized obligation repayments which decreased $969.6 million, related mainly to the liquidation of the Mistic CDO, and proceeds received from the settlement of the equity units of $153.7 million. These decreases were offset by higher net withdrawals of policyholder deposit funds of $400.6 million and higher loan pay downs of $55.4 million in 2006. The increase in withdrawals of policyholder deposit funds in 2006 was due to higher surrenders of annuities invested in the general account, primarily related to discontinued products, and a $206.6 million scheduled maturity of an institutionally-placed contract.
We were in compliance with all of our credit facility covenants at December 31, 2007.
Rating agencies assign Phoenix Life financial strength ratings and assign us debt ratings based in each case on their opinions of the relevant company’s ability to meet its financial obligations. Ratings changes may result in increased or decreased interest costs in connection with future borrowings. Such an increase or decrease would affect our earnings and could affect our ability to finance our future growth. Downgrades may also trigger defaults or repurchase obligations.
The financial strength and debt ratings as of February 25, 2008 were as follows:
Following our announcement of the Spin-Off of our Asset Management business, on February 8, 2008 A.M. Best Company, Inc. affirmed our A financial strength rating and placed our bbb senior debt rating on positive outlook. On February 11, 2008, Fitch affirmed it’s A+ financial strength rating and withdrew its senior debt rating. On February 7, 2008, Moody’s affirmed our A3 financial strength rating as well as our Baa3 senior debt rating and Standard & Poor’s affirmed our A- financial strength rating as well as our BBB- senior debt rating.
Historically, our Life Companies have used cash flow from operations and investment activities to fund liquidity requirements. Their principal cash inflows from life insurance and annuities activities come from premiums, annuity deposits and charges on insurance policies and annuity contracts. In the case of Phoenix Life, cash inflows also include dividends, distributions and other payments from subsidiaries. Principal cash inflows from investment activities result from repayments of principal, proceeds from maturities, sales of invested assets and investment income. The principal cash inflows from our discontinued group accident and health reinsurance operations come from our reinsurance, recoveries from other retrocessionaires and investment activities. See Note 24 to our consolidated financial statements in this Form 10-K for additional information.
Additional liquidity to meet cash outflows is available from our Life Companies’ portfolios of liquid assets. These liquid assets include substantial holdings of U.S. government and agency bonds, short-term investments and marketable debt and equity securities.
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, 2007, our Life Companies had approximately $13.5 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, 2007 were $2.4 billion.
During 2007, Phoenix Life paid dividends of $92.2 million to the Company, as Phoenix Life’s sole shareholder. Under New York Insurance Law, Phoenix Life can pay dividends to The Phoenix Companies in any calendar year without the approval from the New York Superintendent of Insurance in the amount of the lesser of 10% of Phoenix Life’s surplus to policyholders as of the immediately preceding calendar year or Phoenix Life’s statutory net gain from operations for the immediately preceding calendar year, not including realized capital gains. Phoenix Life’s statutory gain from operations was $115.2 million for the year ended December 31, 2007. The maximum dividend that Phoenix Life can pay in 2008 without prior approval is $83.8 million.
PXP’s liquidity requirements are primarily to fund operating expenses and pay its debt and interest obligations. PXP also requires liquidity to fund any potential acquisitions. Historically, PXP’s principal source of liquidity has been cash flow from operations. We expect that cash flow from operations will continue to be its principal source of working capital. Its current sources of liquidity also include a revolving credit facility under which it has direct borrowing rights subject to our unconditional guarantee. We believe that PXP’s current and anticipated sources of liquidity are adequate to meet its present and anticipated needs.
See Note 11 to our consolidated financial statements in this Form 10-K for further details on our financing activities.
Other investments increased primarily due new investments made in mezzanine partnerships and direct equity holdings. In addition, we began hedging our GMAB and GMWB liabilities in 2006 and 2007 respectively, and consequently, have increased derivative assets in 2007 related to additional sales of products with those riders.
Policyholder deposit funds decreased due to net outflows, primarily from discontinued annuity products.
The changes in the projected benefit obligations of the employee plan and the supplemental plan at December 31, 2007 as compared to December 31, 2006 are principally the result of accrued service cost and interest cost.
Phoenix Life’s consolidated statutory basis capital and surplus (including AVR) decreased from $1,134.8 million at December 31, 2006 to $1,055.6 million at December 31, 2007. The principal factors resulting in this decrease were the dividend of $92.2 million paid to the parent and the acquisition costs associated with a significant increase in new business.
Company Action Level - results when Total Adjusted Capital falls below 200% of Authorized Control Level at which point the Company must file a comprehensive plan to the state insurance regulators;
Authorized Control Level - results when Total Adjusted Capital falls below 100% of Authorized Control Level risk-based capital as defined by the NAIC where in addition to the above, the insurance regulators are permitted but not required to place the Company under regulatory control; and
Mandatory Control Level - results when Total Adjusted Capital falls below 80% of Authorized Control Level where insurance regulators are required to place the Company under regulatory control.