Our executive headquarters consist of our main office building at One American Row in Hartford, Connecticut, which we own and occupy. In December 2008, we sold a second Hartford office building which was no longer needed. We lease property in East Greenbush, New York and Greenfield, Massachusetts. We also lease office space elsewhere in the U.S. as needed for our operations.
Our selected historical consolidated financial data as of and for each of the five years in the period ended December 31, 2008 follows. We derived the balance sheet data for 2008 and 2007 and the income statement data for the years 2008, 2007 and 2006 from our consolidated financial statements in this Form 10-K. We derived the balance sheet data for 2006, 2005 and 2004 and the income statement data for the years 2005 and 2004 from audited consolidated financial statements not in this Form 10-K. We have reclassified certain amounts for prior years to conform with our 2008 presentation.
The following should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements in this Form 10-K.
Due to our losses during 2008, the ratio coverages, excluding interest credited on policyholder contract balances, were less than 1:1. We would need $476.7 million in additional earnings for the year 2008 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 $174.1 million, $156.5 million, $156.5 million, $186.7 million and $186.7 million of surplus notes outstanding at December 31, 2008, 2007, 2006, 2005 and 2004, respectively.
Management’s discussion and analysis reviews our consolidated financial condition at December 31, 2008 and 2007; our consolidated results of operations for the years 2008, 2007 and 2006; 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 and annuity products through a wide variety of third-party financial professionals and intermediaries, supported by wholesalers and financial planning specialists employed by us. These products and services reflect a particular focus on the high-net-worth and affluent market. Our life and annuity business encompasses a broad range of product offerings. The principal focus of our life insurance business 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. Our annuity products include deferred and immediate variable annuities with a variety of death benefit and guaranteed living benefit options.
A substantial but gradually declining share of net income derives 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. See Note 4 to our consolidated financial statements in this Form 10-K for more information on the Closed Block.
Apart from the Closed Block, our profitability is driven by interaction of the following elements:
Under GAAP, premiums and deposits for variable life, universal life and annuity products are not recorded as revenues. For certain investment options of variable products, deposits are reflected on our balance sheet as an increase in separate account liabilities. Premiums and deposits for universal life, fixed annuities and certain investment options of variable annuities are reflected on our balance sheet as an increase in policyholder deposit funds. Premiums and deposits for other products are reflected on our balance sheet as an increase in policy liabilities and accruals.
Debt and Financial Strength Ratings. Recent adverse economic and market conditions have increased the number of debt and financial strength ratings for insurance companies being lowered or placed on negative outlooks. We have recently been downgraded and some of our ratings have negative outlooks. Please see “Management’s Discussion and Analysis-Liquidity and Capital Resources.” Further downgrades and outlook changes related to us or the life insurance industry may occur at any time and without notice by any rating agency. Downgrades or outlook changes could increase policy surrenders and withdrawals, adversely affect relationships with distributors, reduce new sales, reduce our ability to borrow and increase our future borrowing costs.
Recent economic market conditions and industry trends primarily affected us in the following areas:
The negative impact of recent market conditions was partially offset by lower operating expenses and favorable mortality margins in our universal life products, as well as favorable mortality experience in our term life business. Operating expenses decreased in 2008 by $14.2 million compared to 2007 primarily driven by $17 million in expense reductions and operational improvement initiatives in 2008. In 2008 universal life mortality margins, before unlocking impacts, were $189.7 million, as compared to $120.2 million and $95.7 million in 2007 and 2006, respectively.
The prospect of continued challenges in the economy, including the potential for an extended or deepening recession, may have further material adverse effects on our business, financial condition and results of operations. In such an environment we would face lower fees and net investment income from life and annuity products, additional net realized investment losses on our general account investments, including further other-than-temporary impairments, higher costs for guaranteed benefits, and the potential for further deferred policy acquisition cost unlocking.
In light of these factors, in the first quarter of 2009 we announced a strategic repositioning of our business. We intend to build our future business by leveraging existing manufacturing strengths and partnering capabilities in ways that will be less capital intensive and ratings sensitive. We have developed a three-pronged strategy that shifts the focus of new business development to private labeling, expanding alternative retirement product offerings, and developing new distribution channels for core product offerings.
A strong emphasis on maintaining liquidity to meet policyholder and other financial obligations.
Pursuit of further cost reduction initiatives and a focus on creating a more efficient organization to improve our operating effectiveness and lower costs.
For a discussion of accounting standards and change in accounting, see Note 2 to our consolidated financial statements in this Form 10-K.
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 accounting principles generally accepted in the United States of America (“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:
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, expenses and reinsurance costs and recoveries. These assumptions are reviewed on a regular basis and are based on our past experience, industry studies, regulatory requirements and estimates about the future.
Reserves are liabilities representing estimates of the amounts that will come due to our policyholders at some point in the future. GAAP prescribes the methods of establishing reserves, allowing some degree of managerial judgment.
See Note 2 to our consolidated financial statements and the Enterprise Risk Management section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K for more information.
For goodwill, we perform impairment tests at least annually. For goodwill, 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. As of December 31, 2008, we did not have any intangible assets recorded on our balance sheet.
See Note 8 to our consolidated financial statements in this Form 10-K for more information.
Investments whose value is considered by us to be other-than-temporarily impaired are written down to fair value as a charge to net realized investment losses included in our earnings. The assessment of whether impairments have occurred is based on management’s case-by-case evaluation of the underlying reasons for the decline in fair value. We consider a wide range of factors about the security issuer and use our best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near term recovery. Inherent in our evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations we use in the impairment evaluation process include, but are not limited to:
Historically, for securitized financial asset securities subject to EITF Issue No. 99-20, we periodically updated our best estimate of cash flows over the life of the security. In estimating cash flows, we use assumptions based on current market conditions that we believe market participants would use. If the fair value was less than amortized cost, or there was an adverse change in the timing or amount of expected future cash flows since the prior analysis, an other-than-temporary impairment was recognized. Projections of future cash flows were subject to change based on new information regarding performance, data received from third party sources, and internal judgments regarding the future performance of the underlying collateral.
The cost basis of these written-down investments is adjusted to fair value at the date the determination of an other-than-temporary impairment is made. The new cost basis is not changed for subsequent recoveries in value. For mortgage-backed and other asset-backed debt securities, we recognize income using a constant effective yield based on anticipated prepayments and the estimated economic lives of the securities. When actual prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date and any resulting adjustment is included in net investment income. For certain asset-backed securities, changes in estimated yield are recorded on a prospective basis and specific valuation methods are applied to these securities to determine if there has been an other-than-temporary decline in value. We report mortgage loans at unpaid principal balances, net of valuation reserves on impaired loans. We consider a mortgage loan to be impaired if we believe it is probable that we will be unable to collect all amounts of contractual interest and principal as scheduled in the loan agreement. We do not accrue interest income on impaired mortgage loans when the likelihood of collection is doubtful.
See Note 9 to our consolidated financial statements and the Debt and Equity Securities and Enterprise Risk Management sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K for more information.
We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. The deferred tax assets and/or liabilities are determined by multiplying the differences between the financial reporting and tax reporting basis 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.
Significant management judgment is required in determining the provision for income taxes and, in particular, any valuation allowance recorded against our deferred tax assets. We carried a valuation allowance of $287.9 million on $744.6 million of deferred tax assets at December 31, 2008, due to uncertainties related to our ability to utilize some of the deferred tax assets. The amount of the valuation allowance has been determined based on our estimates of taxable income over the periods in which the deferred tax assets will be recoverable, including consideration of expiration of capital loss carryovers.
We have elected to file a consolidated federal income tax return for 2008 and prior years. Within the consolidated tax return, we are required by regulations of the Internal Revenue Service (“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.
As of December 31, 2008, we had deferred tax assets of $101.8 million and $262.2 million related to net operating and capital losses, respectively, for federal income tax purposes. The related federal net operating loss carryovers of $291.0 million are scheduled to expire between the years 2019 and 2028. The related federal capital loss carryovers of $749.2 million are scheduled to expire in 2009, 2010, 2012 and 2013. At the end of 2008, a valuation allowance of $241.6 million was established relative to the capital loss carryforwards.
As of December 31, 2008, we had deferred income tax assets of $14.6 million related to foreign tax credit carryovers, which are expected to expire between the 2011 and 2017 tax years.
Our federal income tax returns are routinely audited by the IRS, and estimated provisions are routinely provided in the financial statements in anticipation of the results of these audits. Unfavorable resolution of any particular issue could result in additional use of cash to pay liabilities that would be deemed owed to the IRS. Additionally, any unfavorable or favorable resolution of any particular issue could result in an increase or decrease, respectively, to our effective income tax rate to the extent that our estimates differ from the ultimate resolution. As of December 31, 2008, we had current taxes payable of $9.1 million, including $8.7 million of unrecognized tax benefits.
See Note 16 to our consolidated financial statements in this Form 10-K for more information related to income taxes.
Results for year ended December 31, 2008 reflect losses in our discontinued asset management operations as well as negative impacts from the decline in equity markets and return on variable products. The consolidated net loss for the year was $726.0 million, or $(6.35) per diluted share, down 717% from the prior year.
Non-deferred expenses decreased to $263.7 million in 2008, compared to $277.9 million in 2007, or $14.2 million, reflecting actions to reduce expenses as we reposition our business to compete in a rapidly changing environment. These expenses also included $6.3 million in costs associated with the spin-off of our asset management business. In addition, higher mortality margins and increasing in-force blocks created higher policy costs amortization expense of $236.2, compared to $188.9 million in 2007. Amortization in 2008 also increased $183.8 million due to an unlocking of assumptions, while 2007 amortization increased by $4.1 million for an unlocking in that year.
Net income from continuing operations improved slightly in 2007 to $116.6 million, up from $113.8 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.
Mortality margins in universal life and variable universal life products increased $55.2 million in 2007, reflecting a $78.1 million increase in cost of insurance fees, only partially offset by a $22.9 million increase in benefits. While fluctuations in mortality are inherent in our business, this improvement primarily reflects growth in the block of business over recent years. Fee revenues increased $12.5 million in 2007 for asset-based fees. Net investment income on surplus and assets supporting the open-block traditional life products increased $11.2 million in 2007. Non-deferred expenses increased as we invested in new product development and sales growth. In addition, higher mortality margins and increasing inforce blocks created higher amortization expense of $198.5 million in 2007, compared with $152.1 million in 2006. Amortization in 2007 also increased $4.1 million due to an unlocking of assumptions, while 2006 amortization was lowered $19.1 million for an unlocking in that year.
Annuity funds on deposit increased by $551.9 million in 2007 compared to an increase of $639.5 million in 2006. This change was due to lower overall deposits and performance, offset by lower benefits and surrenders on our discontinued annuity funds. 2006 deposits were higher, largely due to a large private placement deposit of $886.8 million in the fourth quarter. 2006 surrenders were higher from our discontinued annuity products and due to a $206.6 million scheduled maturity from an institutionally-placed contract in 2006.
Universal life funds on deposit increased $132.1 million in 2008 compared to $219.8 million in 2007 primarily as a result of sales growth and higher interest credited, partially offset by higher benefits and surrenders, as well as fees and cost of insurance.
See Note 13 to our consolidated financial statements in this Form 10-K for more information.
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. We have established an Operational Risk Committee, chaired by the Chief Risk Officer, to develop an enterprise-wide framework for managing and measuring operational risks. This committee generally meets monthly and has a membership that represents all significant operating, financial and staff departments of the Company. Among the risks the committee reviews and manages and for which it provides general oversight are key person dependency risk, business continuity risk, disaster recovery risk and risks related to the Company’s information technology systems.
Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. Our exposure to interest rate changes results primarily from our interest-sensitive insurance liabilities and from our significant holdings of fixed rate investments. Our insurance liabilities largely comprise dividend-paying individual whole life and universal life policies and annuity contracts. Our fixed maturity investments include U.S. and foreign government bonds, securities issued by government agencies, corporate bonds, asset-backed securities, mortgage-backed securities and mortgage loans, most of which are exposed to changes in medium-term and long-term U.S. Treasury rates.
See Note 14 to our consolidated financial statements in this Form 10-K for more information on derivative instruments.
We manage credit risk through the fundamental analysis of the underlying obligors, issuers and transaction structures. Through Goodwin, our asset management affiliate, we employ a staff of experienced credit analysts who review obligors’ management, competitive position, cash flow, coverage ratios, liquidity and other key financial and non-financial information. These analysts recommend the investments needed to fund our liabilities while adhering to diversification and credit rating guidelines. In addition, when investing in private debt securities, we rely upon broad access to management information, negotiated protective covenants, call protection features and collateral protection. We review our debt security portfolio regularly to monitor the performance of obligors and assess the stability of their current credit ratings.
Foreign currency exchange risk is the risk that we will incur economic losses due to adverse changes in foreign currency exchange rates. Our functional currency is the U.S. dollar. Our exposure to fluctuations in foreign exchange rates against the U.S. dollar primarily results from our holdings in non-U.S. dollar-denominated debt and equity securities which are not material to our consolidated financial statements at December 31, 2008.
Each year, the majority of our general account’s net cash flows are invested in investment grade debt securities. In addition, we maintain a portfolio allocation of between 6% and 10% of debt securities in below investment grade rated bonds. Allocations are based on our assessment of relative value and the likelihood of enhancing risk-adjusted portfolio returns. The size of our allocation to below investment grade bonds is also constrained by the size of our net worth. We are subject to the risk that the issuers of the debt securities we own may default on principal and interest payments, particularly in the event of a major economic downturn. Our investment strategy has been to invest the majority of our below investment grade rated bond exposure in the BB rating category, which is equivalent to a Securities Valuation Office (“SVO”) securities rating of 3. The BB rating category is the highest quality tier within the below investment grade universe, and BB rated securities historically experienced lower defaults compared to B or CCC rated bonds. As of December 31, 2008, our total below investment grade securities totaled $805.1 million, or 8.2%, of our total debt security portfolio. Of that amount, $475.3 million, or 4.8%, of our debt security portfolio was invested in the BB category.
Most of our residential mortgage-backed securities portfolio is highly rated. As of December 31, 2008, 97% of the total residential portfolio was rated AAA or AA. We have $165.2 million of sub-prime exposure, $192.2 million of Alt-A exposure and $458.8 million of prime exposure, which combined amount to 6% of our general account. Substantially all of our sub-prime, Alt-A and prime exposure is investment grade, with 82% being AAA rated and another 11% in AA securities. 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. Year-to-date through December 31, 2008, we have taken impairments of $83.1 million on our residential mortgage-backed securities portfolio. This represents 4.7% of our total residential mortgage-backed securities portfolio and 0.6% of the general account. The losses consist of $25.9 million from prime, $32.3 million from Alt-A and $24.9 million from sub-prime.
Includes $63 million of commercial mortgage-backed CDOs also outlined in the CDO exposure exhibit.
We employ a comprehensive process to determine whether or not a security is in an unrealized loss position and are other-than-temporarily impaired. This assessment is done on a security-by-security basis and involves significant management judgment, especially given the significant market dislocations.
it is probable that we will be unable to collect all amounts due according to the contractual terms of the debt security.
Given the significant credit spread widening and lack of liquidity in the current environment, management exercised significant judgment with respect to certain securities in determining whether impairments were other-than-temporary. This included securities with $530.3 million ($204.8 million after offsets) of gross unrealized losses of 50% or more for which no other-than-temporary impairment was ultimately indicated. In making its assessments, management used a number of issuer-specific quantitative and qualitative assessments of the probability of receiving contractual cash flows, including the issue’s implied yields to maturity, cumulative default rate based on the issue’s rating, comparisons of issue specific spreads to industry or sector spreads, specific trading activity in the issue, other market data such as recent debt tenders and upcoming refinancing exposure, as well as fundamentals such as issuer credit and liquidity metrics, business outlook and industry conditions. In addition to these reviews, management in each case assessed its ability and intent to hold the securities for an extended time to recovery, up to and including maturity.
Total net unrealized losses on debt and equity securities were $1,644.3 million (unrealized gains of $109.4 million less unrealized losses of $1,753.7 million). Of that net amount, $858.9 million was outside the Closed Block ($249.1 million after applicable deferred policy acquisition costs and deferred income taxes) and $785.4 million was in the Closed Block ($264.2 million after applicable policyholder dividend obligation).
If we determine that the security is impaired, we write it down to its then current fair value and record a realized loss in that period.
The following table represents those securities whose fair value is less than 80% of amortized cost (significant unrealized loss) that have been at a significant unrealized loss position on a continuous basis.
Cash from operating activities decreased $148.4 million compared to 2007. This decrease was primarily driven by higher death benefits paid of $207.5 million and lower investment income. The higher death benefits were due to death claims incurred in late 2007, but not paid until early 2008. The lower investment income was primarily due to lower yields and lower earnings on alternative investments. These items were partially offset by higher fees of $102.0 million, primarily cost of insurance on our universal life products and lower acquisition costs primarily due to lower universal life sales. Historically cash flows from operations have been positive, but the timing of the payment for the death benefits in January 2008 caused the current year to have higher than usual death benefits.
Cash from discontinued operations decreased $86.5 million primarily due to lower levels of cash settlements in our discontinued reinsurance business and, to a lesser extent, non-recurring expenses associated with the spin-off of our asset management business.
Cash from investing activities improved due to lower capital requirement for the discontinued reinsurance business and the sale of an Argentine subsidiary. See Note 3 to our consolidated financial statements in this Form 10-K for more information.
See Note 10 to our consolidated financial statements in this Form 10-K for additional information on financing activities.
Our primary sources of liquidity have been dividends from Phoenix Life and interest income from our former asset management subsidiary, Virtus. Under New York Insurance Law, Phoenix Life can pay stockholder dividends to the holding company in any calendar year without prior 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 paid dividends of $83.8 million during 2008 and is able to pay a dividend of $53.4 million in 2009 under this provision. See Note 22 to our consolidated financial statements in this Form 10-K for more information on Phoenix Life statutory financial information and regulatory matters.
The credit facility contains covenants that require us at all times to maintain a minimum level of consolidated tangible net worth, based on GAAP standards in effect on June 6, 2006 and excluding the effect of FIN 46(R). In addition, Phoenix Life must maintain a maximum consolidated debt-to-capital ratio of 30%, a minimum risk-based capital ratio of 325%, a minimum A.M. Best financial strength rating of “A-”, a minimum level of surplus on a statutory basis and a minimum parent cash flow coverage ratio.
We were in compliance with all of our credit facility covenants as of December 31, 2008. We have limited ability to absorb future declines in net worth under the debt-to-capital and tangible net worth covenants. In the event that we fail to meet the requirements of the credit facility covenants, we would evaluate the costs and benefits of amending or replacing the facility as part of its ongoing liquidity management.
On January 6, 2009, we filed an automatic shelf registration statement with the SEC (our “existing shelf registration statement”) for the potential offering and sale of debt and equity securities. The existing shelf registration statement allows for the following types of securities to be offered: common stock, debt securities, preferred stock, depositary shares, warrants, stock purchase contracts and stock purchase units of PNX. Because we were a well-known seasoned issuer (“WKSI”) at the time of filing, as defined in Rule 405 under the Securities Act of 1933, the existing shelf registration statement went effective immediately upon filing. As we are no longer a WKSI as of the date hereof, we intend to promptly file a new registration statement on Form S-3 as a non-automatic shelf registration statement (the “new shelf registration statement”). However, as we followed applicable SEC guidance in filing the existing shelf registration statement, we believe we will be able to offer and sell securities under the existing registration statement until such time as the new shelf registration statement is declared effective by the SEC. Our intent is for the new shelf registration to be substantially similar to and, upon being declared effective, to replace the existing shelf registration statement. We intend to retain the ability, in our discretion, to offer and sell up to a maximum of $750 million of securities under the new shelf registration statement during the three-year life of the shelf.
In 2008 and 2007, we paid dividends of $0.16 per share, totaling $18.8 million and $18.4 million, respectively. In February 2009, our Board of Directors determined that the Company will not pay an annual dividend on its common stock during fiscal year 2009.
Cash from investing activities changed to net inflows in 2007 from net outflows in 2006 primarily due to activities related to our equity units. In 2006, we used the proceeds from the equity units remarketed as senior unsecured obligations to purchase debt securities, while in 2007 we began liquidating certain debt security holdings to prepare for the final payment on the senior unsecured obligations.
Cash for financing activities changed to a net outflow in 2007 from a net inflow in 2006 due to the receipt of equity unit proceeds in 2006 which did not recur in 2007.
The Life Companies’ liquidity requirements principally relate to: the liabilities associated with various life insurance and annuity products; the payment of dividends by Phoenix Life to the parent company; operating expenses; contributions to subsidiaries; and payment of principal and interest by Phoenix Life on its outstanding debt obligations. Liabilities arising from life insurance and annuity products include the payment of benefits, as well as cash payments in connection with policy surrenders, withdrawals and loans. The Life Companies also have liabilities arising from the runoff of the remaining group accident and health reinsurance discontinued operations.
Phoenix Life’s current sources of liquidity also include the revolving credit facility under which Phoenix Life has direct borrowing rights, discussed above, subject to our unconditional guarantee. Since the demutualization, Phoenix Life’s access to the cash flows generated by the Closed Block assets has been restricted to funding the Closed Block.
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 Superintendent of Insurance of the State of New York and may be made only out of surplus funds which the Superintendent determines to be available for such payments under New York insurance law.
Rating agencies assign Phoenix Life financial strength ratings and assign the holding company debt ratings based in each case on their opinions of the relevant company’s ability to meet its financial obligations. Ratings declines may result in lower sales, higher surrenders and increased or decreased interest costs in connection with future borrowings.
On February 19, 2009, Moody’s Investor Service downgraded our financial strength rating to Baa1 from A3 and downgraded our senior debt rating to Ba1 from Baa3. The ratings remain on review for possible further downgrade as was previously announced on December 9, 2008.
The financial strength and debt ratings as of March 4, 2009 were as follows:
Available-for-sale equity securities decreased as we actively manage the portfolio to obtain beneficial statutory capital treatment.
Venture capital partnerships increased due to additional contributions, partially offset by distributions of $18.5 million.
Receivables in 2008 included higher amounts recoverable from reinsurers, primarily due to new reinsurance contracts effective in 2008.
Deferred policy acquisition costs increased due to the effect of unrealized investment losses included in other comprehensive income and the deferral of acquisition costs related primarily to universal life sales, partially offset by amortization.
Other assets in 2007 included assets associated with our discontinued asset management operations. The decrease in 2008 was driven by impairment charges on goodwill and other intangible assets and the subsequent distribution of the asset management business in a spin-off dividend.
Separate account assets decreased in 2008 due to unrealized investment losses. Separate account liabilities decreased by a corresponding amount.
Indebtedness decreased due to the repayment in February 2008 of our equity unit notes.
See Note 6 to our consolidated financial statements in this Form 10-K for additional information.
We provide our employees with postemployment 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 $23.5 million, $26.1 million and $33.8 million for 2008, 2007 and 2006, respectively.
Phoenix Life’s and its subsidiaries’ combined statutory basis capital and surplus (including AVR) decreased from $1,055.6 million at December 31, 2007 to $853.7 million at December 31, 2008. The principal factors resulting in this decrease were losses from operations of $83.6 million, net realized losses of $185.4 million and dividends to its sole shareholder, The Phoenix Companies, Inc., of $83.8 million. Offsetting these decreases were reinsurance agreements contributing $90.4 million to surplus.