We prepared the selected historical consolidated financial data, other than statutory data, in conformity with GAAP. We derived the statutory data from the Annual Statements of Phoenix Life and its subsidiaries filed with insurance regulatory authorities and prepared the statutory data in accordance with statutory accounting practices, which vary in certain respects from GAAP.
(2) During 1999, Phoenix Life discontinued the operations of three of its businesses which in prior years were reflected as the following reportable business segments: reinsurance operations, real estate management operations, and group life and health insurance operations.
(3) In the first quarter of 2001, we recognized the following cumulative effect adjustments for accounting changes:
We record our investments in venture capital partnerships in accordance with the equity method of accounting. We record our share of the net equity in earnings of the venture capital partnerships in accordance with GAAP, using the most recent financial information received from the partnerships. Historically, this information had been provided to us on a one-quarter lag. Due to the volatility in the equity markets, we believed the one-quarter lag in reporting was no longer appropriate. Therefore, we changed our method of applying the equity method of accounting to eliminate the quarterly lag in reporting.
We recorded a charge of $48.8 million (net of income taxes of $26.3 million) representing the cumulative effect of this accounting change on the fourth quarter of 2000. The cumulative effect was based on the actual fourth quarter 2000 financial results as reported by the partnerships.
Effective April 1, 2001, we adopted EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Certain Investments ("EITF 99-20"). This pronouncement requires investors in certain asset-backed securities to record changes in their estimated yield on a prospective basis and to apply specific valuation methods to these securities for an other-than-temporary decline in value. Upon adoption of EITF 99-20, we recorded a $20.5 million charge to net income as a cumulative effect of accounting change, net of income taxes.
(4) Earnings per share for the five years in the period ended December 31, 2001 is calculated pro-forma based on 104.6 million weighted-average shares outstanding. The pro forma weighted-average shares outstanding calculation excludes the period of time before the IPO, during which no common stock shares were issued.
(6) This statutory reserve is intended to mitigate changes to the balance sheet as a result of fluctuations in asset values.
Management's discussion and analysis reviews our consolidated financial condition as of December 31, 2000 and 2001; our consolidated results of operations for the years ended December 31, 1999, 2000 and 2001; and, where appropriate, factors that may affect our future financial performance. You should read this discussion in conjunction with "Selected Financial Data" and our consolidated financial statements and the notes thereto included in this Form 10-K.
We provide our wealth management solutions through two operating segments - Life and Annuity and Investment Management. Through Life and Annuity we offer a variety of life insurance and annuity products, including universal, variable universal, whole and term life insurance, and a range of annuity offerings. We conduct activities in Investment Management largely through Phoenix Investment Partners, Ltd. ("PXP") and its subsidiaries, comprising two lines of business-- private client and institutional. Through our private client line of business, we provide investment management services principally on a discretionary basis, with products consisting of open-end mutual funds and managed accounts. Managed accounts include intermediary programs sponsored and distributed by non-affiliated broker-dealers and managed accounts sold and administered by us. These two types of managed accounts generally require minimum investments of $100,000 and $1 million, respectively. Our private client business also provides transfer agency, accounting and administrative services to most of our open-end mutual funds.
o insurance policy benefits provided to policyholders, including interest credited on policyholders' general account balances; o policyholder dividends; o amortization of deferred policy acquisition costs; o amortization of goodwill and other intangible assets; o interest expense; o other operating expenses; and o income taxes.
Also in 1999, we exited our reinsurance business, which included individual life reinsurance, group life and health reinsurance and group personal accident business, by selling the individual life and the group life and health reinsurance businesses and placing the remaining group accident and health reinsurance business into runoff. We recognized pre-tax losses of $173.1 million in 1999 and $103.0 million in 2000 in connection with this exit. See "Business--Divestitures of Non-Core Businesses." Included in the 2000 loss is an increase in reserve estimates on the group accident and health reinsurance business of $97.0 million (pre-tax). See note 14 to our audited consolidated financial statements included in this Form 10-K.
As a result of the merger, PXP became a wholly-owned subsidiary of Phoenix Life and PXP's shares of common stock were de-listed from the New York Stock Exchange. In accordance with the plan of reorganization, on the effective date of the demutualization Phoenix Life transferred to Phoenix Investment Management Company, Inc. all the outstanding shares of common stock of PXP for $640.0 million, the fair market value of those shares on that date.
The purchase of the PXP minority interest as described above has resulted in intangible assets, primarily consisting of investment management contracts and goodwill of $297.5 million, reflected on our consolidated balance sheets. We are amortizing investment management contracts over their estimated lives, which generally range from five to sixteen years. We are amortizing goodwill over a period of forty years through December 31, 2001. See Business Combinations/Goodwill and Other Intangible Assets in Management's Discussion and Analysis of Financial Condition and Results of Operations regarding goodwill amortization.
In November 2001, we paid $5.0 million in cash for a 65% interest in Capital West Asset Management, LLC ("CapWest"). Under the terms of the purchase agreement, we may be obligated to pay more for our initial ownership interest in 2005 depending upon CapWest's future revenue growth through 2004. In addition, under the terms of the purchase agreement, we will purchase an additional 10% ownership interest in CapWest. The remaining ownership interests in CapWest will be retained by its management. At December 31, 2001, CapWest had approximately $138.0 million in assets under management.
Under the terms of an agreement executed in 2001 to purchase a majority interest in Kayne Anderson Rudnick Investment Management, LLC ("KAR"), we purchased an initial 60% interest on January 29, 2002 and will purchase an additional 15% ownership interest by 2007. The remaining ownership interests in KAR were retained by its management. The initial purchase price was approximately $100 million; we may be obligated to pay additional sums in 2004 for the 60% interest based upon management fee revenue growth through 2003. This transaction does not include the firm's broker-dealer, Kayne Anderson Associates, or its hedge fund affiliate, Kayne Anderson Capital Advisors Inc. KAR had approximately $7.5 billion in assets under management at the time of closing. KAR's results of operations for 2001 are not included in our consolidated results of operations.
As specified in the plan of reorganization, the allocation of assets for the closed block was made as of December 31, 1999. Consequently, cumulative earnings on the closed block assets and liabilities for the period January 1, 2000 to December 31, 2001 in excess of expected cumulative earnings do not inure to stockholders and have been used to establish a policyholder dividend obligation as of June 30, 2001. The initial policyholder dividend obligation for the period January 1, 2000 to June 30, 2001 of $115.5 million consists of $45.2 million of earnings and unrealized gains on assets in the closed block as of June 30, 2001 of $70.3 million. The increase in the policyholder dividend obligation for the period July 1, 2001 to December 31, 2001 of $51.7 million pre-tax, consists of $13.2 million of pre-tax earnings and the change in unrealized gains on assets in the closed block for the period July 1, 2001 to December 31, 2001 of $38.5 million, pre-tax.
We incurred costs relating to the demutualization, excluding costs relating to the initial public offering, of approximately $38.0 million, net of income taxes of $9.7 million, of which $14.1 million was recognized for the year ended December 31, 2000 and $23.9 million was recognized for the year ended December 31, 2001. We estimate we will have additional expenses relating to the demutualization of approximately $1.0 million in 2002.
Derivative Financial Instruments. Effective January 1, 2001, we adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities ("SFAS 138"). As amended, SFAS 133 requires all derivatives to be recognized on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings.
For derivative instruments that were not designated as hedges, upon implementation of SFAS 133, we recorded a net-of-tax cumulative effect adjustment of $3.9 million in earnings to recognize these instruments at fair value. Gains and losses on derivatives that were previously deferred as adjustments to the carrying amount of hedged items were not included in the cumulative effect adjustment. There were no gains or losses on derivative instruments that were reported independently as deferred assets or liabilities that required de-recognition from the balance sheet.
Accounting for Demutualizations. Effective June 30, 2001, we adopted Statement of Position No. 00-3, Accounting by Insurance Enterprises for Demutualizations and Formations of Mutual Insurance Holding Companies and For Certain Long-Duration Participating Contracts ("SOP 00-3"). The provisions of SOP 00-3 provide guidance on accounting by insurance enterprises for demutualizations and the formation of mutual holding companies, including the emergence of earnings from and the financial statement presentation of the closed block established in connection with the demutualization. SOP 00-3 specifies that closed block assets, liabilities, revenues and expenses should be displayed with all other assets, liabilities, revenues and expenses of the insurance enterprise based on the nature of the particular item, with appropriate disclosures relating to the closed block.
SFAS 142 requires that goodwill be tested at least annually for impairment using a two-step process. The first step is to identify a potential impairment and, in the year of adoption, this step must be measured as of the beginning of the fiscal year. However, a company has six months from the date of adoption to complete the first step. The second step of the goodwill impairment test measures the amount of the impairment loss (measured as of the beginning of the year of adoption), if any, and must be completed by the end of a company's fiscal year. Intangible assets deemed to have an indefinite life would be tested for impairment using a one-step process, which compares the fair value to the carrying amount of the asset as of the beginning of the fiscal year in the year of adoption. We have prepared preliminary analyses in preparation of the adoption of SFAS 142, and expect to record a charge of approximately $120 million to $140 million which will be reflected as a cumulative effect of a change in accounting principle in the first quarter of 2002.
Impairment of Long-Lived Assets. In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"), effective January 1, 2002. Under SFAS 144, long-lived assets to be sold within one year must be separately identified and carried at the lower of carrying value or fair value less costs to sell.
Long-lived assets expected to be held longer than one year are subject to depreciation and must be written down to fair value upon impairment. Long-lived assets no longer expected to be sold within one year, such as some foreclosed real estate, must be written down to the lower of current fair value or fair value at the date of foreclosure adjusted to reflect depreciation since acquisition. We are currently reviewing the provisions of SFAS 144 and assessing the impact of adoption.
Critical accounting policies 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 is an explanation of our accounting policies considered most significant by management. See note 3 to the consolidated financial statements for further information on key accounting policies.
Policy Liabilities and Accruals. Most individual life and annuity products we sell are characterized by the payment of a level or single premium by the policyholder, even though the cost of the benefits and services is not level over the term of the contract. Accordingly, a liability is established to provide for the estimated cost of these future benefits and services.
The actuarial methods used to establish these liabilities depend on how the policy is classified. For individual participating life insurance policies, the liability for future benefits and services is calculated using the net level premium method with the contractual guaranteed rates of interest and mortality rates used in calculating the cash surrender values. The guaranteed interest rates range from 2.25% to 6.0%. For universal life, variable universal life and accumulation annuities, the policyholder deposits funds and investment earnings on fund balances, which range from 4.0% to 7.15%, and fees that have been assessed to compensate us for future services are held as a liability.
A liability is established for both reported claims not yet paid and claims incurred but not yet reported. This liability is based on our past experience and judgments about the future. In addition, analyses are performed periodically to assess adequacy of such liabilities. Changes in experience could result in additional liabilities.
Venture Capital Partnerships. Investments in venture capital partnerships are recorded in accordance with the equity method of accounting. The pro rata share of the earnings or losses of the partnerships, which represent realized and unrealized investment gains and losses, as well as operations of the partnership, is included in investment income. Our share of the net equity in earnings of the venture capital partnerships is recorded in accordance with GAAP, using the most recent financial information received from the partnerships. To estimate the net equity in earnings of the venture capital partnerships for each quarter, a methodology was developed to estimate the change in value of the underlying investee companies in the venture capital partnerships. For public investee companies, quoted market prices at the end of each quarter are used, applying liquidity discounts to these prices in instances where such discounts were applied in the underlying partnerships' financial statements. For private investee companies, a public industry sector index was implied to roll the value forward each quarter. This methodology is applied consistently each quarter with subsequent adjustments to reflect market events reported by the partnerships (e.g., new rounds of financing, initial public offerings and writedowns by the general partners). In addition, on an annual basis, the valuations that have been assigned to the investee companies will be revised to reflect the valuations contained in the audited financial statements received from the venture capital partnerships. If events or circumstances change, the estimate of the net equity in earnings of the venture capital partnerships could be affected and an adjustment to net investment income could result.
Minority interest in net income of consolidated subsidiaries...... (10.1) (14.1) (7.2) Equity in earnings of and interest earned from investments in unconsolidated affiliates.................................... 5.5 7.6 8.1 ------------- ----------- ----------- Income (loss) from continuing operations.......................... 162.1 94.8 (137.3) Discontinued operations: ------------------------ Income from discontinued operations, net of income taxes...... 36.1 9.4 -- Loss on disposal, net of income taxes......................... (109.0) (20.9) -- Cumulative effect of accounting changes for: -------------------------------------------- Venture capital partnerships, net of income taxes............. -- -- (48.8) Securitized financial instruments, net of income taxes........ -- -- (20.5) Derivative financial instruments, net of income taxes......... -- -- 3.9 ------------- ----------- ----------- Net income (loss)................................................. $ 89.2 $ 83.3 $ (202.7) ============= =========== ===========
The increase in net realized investment gains of 18% in 2000 was principally due to realized gains of $130.2 million from the sale of common stock of National Oilwell and other common stocks, offset by losses, primarily interest-rate-related, of $33.8 million from the sale of debt securities. Factors affecting the 1999 results included non-recurring gains of $40.1 million related to the sale of our property and casualty distribution subsidiary, $18.5 million from repayment of mortgages, $2.9 million from sales of real estate properties and $18.5 million from other invested assets primarily as a result of the sale of part of our holdings in Emprendimiento Compartido, S.A. ("EMCO").
In 2001, the increase in policy benefits, increase in policy liabilities and policyholder dividends of 1% was primarily due to higher interest credited on the guaranteed interest account of variable annuities. In 2000, the increase in policy benefits, increase in policy liabilities and policyholder dividends of 3% was primarily due to higher dividends on participating whole life policies and higher benefits for variable products due to growth in business. In addition, death benefits increased in 2000 for traditional and group executive ordinary life insurance, offset by a decline in policy benefits due to the runoff of the Confederation Life block.
The decrease in amortization of deferred policy acquisition costs of 62% in 2001 was primarily a result of a one-time adjustment to deferred policy acquisition costs in 2000 of $218.2 million in our participating block.
The increase in amortization of deferred policy acquisition costs of 141% in 2000 was due primarily to a one-time adjustment to deferred acquisition costs of $218.2 million in our participating block. In December 2000, we reallocated the assets supporting the participating life policies. This reallocation was approved by Phoenix Life's board of directors on December 18, 2000 and resulted in a reduction of approximately seventy-one basis points in the investment yield on the assets supporting participating policies. As a consequence, our regular evaluation of estimated future gross margins related to the participating policies resulted in a one-time increase in amortization of deferred acquisition costs due to the change in expected investment earnings from the invested assets allocated to support these policy liabilities. The reallocation of assets resulted in 2000 in the one-time adjustment to deferred policy acquisition costs described and will result in lower deferred policy acquisition cost amortization in future periods.
The increase in amortization of goodwill and other intangible assets of 34% in 2001 was primarily due to the increase in Investment Management amortization. This increase in amortization resulted from our purchase of the PXP minority interest in January 2001, our acquisition of a 75% interest in Walnut Asset Management LLC ("Walnut") in January 2001 and our payment of $50.0 million in September 2000 for the Roger Engemann and Associates, Inc. ("Engemann") acquisition.
The decrease in amortization of goodwill and other intangible assets of 8% in 2000 is due to the following: Life and Annuity amortization decreased $5.8 million primarily due to a write-off of goodwill in 1999, offset by the increase in
The increase in other operating expenses of 12% in 2000 is due to the following: Life and Annuity other operating expenses increased $24.6 million due primarily to increased compensation and related expenses reflecting continued growth in business, including additions to our staff of product specialists, incentive compensation and to investments in technology. Investment Management other operating expenses increased $35.9 million due to increases in various incentive compensation programs. Non-compensation related costs also increased primarily in support of company initiatives begun during the year. Corporate and Other operating expenses increased due to a contribution to our charitable foundation and expenses related to a decision to exit the physician practice management business. These expenses were offset by a reduction in expenses due to the sale of our property and casualty distribution subsidiary in May 1999.
Income tax benefit was $110.5 million in 2001, a decrease of $166.7 million, or 296% from $56.2 million in income tax expense for 2000. This change reflects a tax benefit from operating losses for the year ended December 31, 2001, compared to a tax expense on operating gains for the year ended December 31, 2000. The effective tax rate increased to 44% for the year ended December 31, 2001 compared to a nominal tax rate of 35%, primarily due to the elimination of the surplus tax liability.
The decrease in income from discontinued operations of 74% in 2000 was due primarily to the sale of the group insurance operations in April 2000. With respect to the decrease in discontinued operations' loss on disposal of 81% in 2000, there was a gain on sale from the group operations of $71.7 million, offset by losses of $103.0 million related to our reinsurance operations.
For the years ended December 31, 1999, 2000 and 2001, we do not believe inflation had a material effect on our consolidated results of operations, except insofar as inflation may have affected interest rates.
• is material to the segment's after-tax operating income; or • results from a business restructuring; or • results from a change in the regulatory environment; or • relates to other unusual circumstances (e.g., litigation).
We allocate capital to Investment Management on an historical cost basis and to insurance products based on 250% of company action level risk-based capital. We allocate net investment income based on the assets allocated to each segment. We allocate other costs and operating expenses to each segment based on a review of the nature of such costs, cost allocations using time studies, and other allocation methodologies.
For the Year Ended December 31, ---------------------------------------------- 1999 2000 2001 ------------- ------------ ------------ (in millions) Segment after-tax operating income: ----------------------------------- Life and Annuity................................................... $46.7 $19.6 $ 54.1 Investment Management.............................................. 23.9 23.9 (15.5) Venture Capital.................................................... 90.9 180.2 (54.9) Corporate and Other................................................ (15.3) (17.5) (8.9) Total segment after-tax operating ------------- ------------ ------------ income (loss)................................................... 146.2 206.2 (25.2) ------------- ------------ ------------ After-tax adjustments: ---------------------- Net realized investment gains (losses)............................. 49.2 55.0 (46.2) Deferred policy acquisition costs adjustment (1) -- (141.8) -- Early retirement pension adjustment (2)............................ (17.6) -- (15.5) Pension adjustment (3)............................................. -- -- 2.9 Demutualization expense (4)........................................ -- (14.1) (23.9) Surplus tax (5).................................................... (11.2) (10.4) 21.0 Portfolio (loss) gain (6).......................................... (3.8) 3.1 -- Loss on sublease transaction (7)................................... -- (.7) -- Partnership gains (8).............................................. -- -- 2.4 Restructuring charges (9).......................................... (.7) -- -- Expenses of purchase of PXP minority interest (10)..................................................... -- (.7) (52.8) Litigation settlement (11)......................................... -- (1.8) -- ------------- ------------ ------------ Total after-tax adjustments..................................... 15.9 (111.4) (112.1) ------------- ------------ ------------ GAAP Reported income: --------------------- Income (loss) from continuing operations.......................... $ 162.1 $ 94.8 $(137.3) ============= ============ ============ -------- (1) An increase to deferred policy acquisition costs amortization resulting from a change in estimated future investment earnings due to a reallocation in December 2000 of assets supporting the participating life policies.
(2) In 1999 and 2001, we offered special early retirement programs that enhanced the retirement benefits of employees who accepted the offer.
(5) As a mutual life insurance company, Phoenix Life was subject, in the periods indicated, to a surplus tax limiting the ability of mutual insurance companies to deduct the full amount of policyholder dividends from taxable income. Phoenix Life will not be subject to such a surplus tax for 2001 and future years, as a result of its demutualization in June 2001. Re-estimation of the surplus tax liability for prior years at September 30, 2001, resulted in the elimination of the liability
(9) Represents various restructuring charges including: expenses resulting from a senior executive exercising certain rights under an employment agreement, charges related to the outsourcing of fund accounting operations, and severance costs related to staff reductions resulting primarily from the closing of PXP's equity management department in Hartford and PXP's reductions in the institutional line of business.
The increase in insurance and investments product fees in 2000 and 2001 reflects the shift of sales from our traditional whole life business to variable products as follows:
expanded distribution system and a single case deposit of $200 million received in June 2001. Variable annuity benefits and surrenders were $516.6 million, a decrease of 18% from 2000. Fees related to our trust operations decreased $5.8 million due to the sale of our New Hampshire trust and agency operations. These decreases were offset by increases in fees related to our variable universal life products of $18.4 million, or 26%. Even though funds under management for variable universal life remained relatively flat over 2000, variable universal life fees increased because a significant portion of the fees are premium-based or are based upon net amount at risk. At December 31, 2001, funds under management for variable universal life were $1,096.0 million, an increase of $14.7 million, or 1%, from December 31, 2000. Funds under management decreased $194.0 million from December 31, 2000 due to negative investment performance. Variable universal life deposits were $336.1 million in 2001, an increase of 30% from 2000. Variable universal life benefits and surrenders were $32.9 million, a decrease of 7% from 2000.
• The increase in insurance and investment product fees of 9% in 2000 was due to the growth in our variable products business. Insurance and investment product fees for variable products and universal life increased $16.0 million, due to increased sales for the year and investment performance from late 1999 through September 30, 2000, offset, in part, by negative investment performance in the fourth quarter of 2000. Variable annuity sales were $687.0 million for 2000, an 80% increase from 1999. Variable universal life sales were $258.2 million for 2000, a 26% increase from 1999. These variable product sales were offset by benefits and surrenders of $668.8 million for 2000, remaining relatively unchanged from 1999. Total funds under management were $7.0 billion as of December 31, 2000, a 6% decrease from $7.4 billion as of December 31, 1999. Insurance and investment product fees also increased $8.2 million from WS Griffith due to an increase in commissions related to the sale of non-affiliated products.
The decrease in amortization of deferred policy acquisition costs of 4% in 2001 is primarily due to a one-time adjustment to deferred acquisition costs in 2000 of $218.2 million in our participating block. Whole life amortization expenses declined $25.5 million in 2000 due primarily to lower deferred acquisition expenses caused by decreased sales volume and $8.0 million due to the runoff of the Confederation Life whole life business. The decrease in amortization of deferred policy acquisition costs in 2000 excludes a one-time increase in 2000 in the amortization of deferred acquisition costs of $218.2 million in our participating block relating to the reallocation of assets supporting participating life policies. These decreases were offset by increased amortization on universal life products and term products, due to business growth.
The following table and discussion presents summary financial data relating to Investment Management for the years ended December 31, 1999, 2000 and 2001.
The decrease in investment product fees of 20% in 2001 was primarily the result of decreases of $8.5 billion and $1.4 billion in average assets under management for the private client and institutional lines of business, respectively. Our sale of PXP's Cleveland operations in June 2000 accounted for approximately $1.7 billion of the decrease in average institutional assets under management. At December 31, 2001, Investment Management had $52.1 billion in assets under management, a decrease of $4.5 billion, or 8%, from December 31, 2000. This decrease consisted of a $6.8 billion decrease due to investment performance, offset, in part, by net asset inflows of $.5 billion, a $0.8 billion increase as a result of our IPO, and increases of $0.7 billion and $0.1 billion resulting from the acquisition of a 75% interest in Walnut in January 2001 and a 65% interest in CapWest in November 2001, respectively. Sales of private client products in 2001 were $4.5 billion, a decrease of 24% from the same period in 2000, and redemptions from existing accounts were $5.3 billion, an increase of 4% from the same period in 2000. Sales of institutional accounts in 2001 were $5.0 billion, a decrease of 10% from the same period in 2000, and lost accounts and withdrawals from existing accounts were $3.8 billion, a decrease of 49% from the same period in 2000.
The increase in investment product fees of 14% in 2000 was the result of increases of $4.1 billion and $0.3 billion in average assets under management for the private client and institutional lines of business, respectively. Sales of private client products in 2000 were $5.9 billion, an increase of 56% from 1999, but were offset by redemptions of $5.1 billion, an increase of 20% from 1999. Sales of institutional accounts in 2000 were $5.6 billion, a decrease of 5% from 1999, but were offset by lost accounts and withdrawals from existing accounts, excluding the effect of the Cleveland sale, of $7.4 billion, an increase of 46% from 1999. PXP sold its Cleveland-based operations on June 30, 2000 and received cash of $5.0 million and a note receivable of $3.3 million. The transaction did not have a material impact on pre-tax results of operations. However, due to the inclusion of $8.5 million of non-deductible goodwill in the tax basis of the Cleveland operations, PXP recorded a $3.4 million tax expense.
The increases in amortization of goodwill and intangibles from 1999 through 2001 were due to the acquisition of Zweig in March 1999, the payment of $50.0 million in September 2000 for the Engemann acquisition and our acquisition of an interest in Walnut in January 2001. The 1999 to 2000 increase was offset, in part, by the reduction in intangible assets related to the sale of PXP's Cleveland operations in June 2000.
The decrease in interest expense of 17% in 2001 was due to debt repayments in the third quarter and a 2.8% decrease in the average interest rate paid on outstanding debt as compared to the same period in 2000. The increase in interest expense of 7% in 2000 resulted from financing the Zweig acquisition and the September payment to Engemann.
The changes in equity in earnings of and interest earned from investment in unconsolidated affiliates from 1999 through 2001 were due primarily to the equity in earnings of Aberdeen.
Our investments in Venture Capital are primarily in the form of limited partnership interests in venture capital funds, leveraged buyout funds and other private equity partnerships sponsored and managed by third parties. We refer to all of these types of investments as venture capital.
Net investment income consists of income from invested assets not allocated to other segments. The decrease of 61% in 2001 was primarily the result of the sale of assets to fund the purchase of the PXP minority interest in January 2001, partially offset by the earnings on the IPO proceeds. The increase of 45% in 2000 was primarily the result of higher average invested assets due to the proceeds from the sale of our group insurance operations.
The decrease in other operating expenses of 61% in 2001 was primarily due to decreases of $23.3 million in compensation and related expenses, $14.1 million of special charitable contributions made in 2000, which were not repeated in 2001, and the effect of our decision to exit our physician practice management business in the third quarter of 2000. The increase in other operating expenses of 17% in 2000 was due to a $10.5 million increase in contributions to our charitable foundation and $13.8 million in expenses related to our decision to exit our physician practice management business. These expenses included goodwill write-offs, expenses related to contract terminations and severance costs. In addition, other operating expenses increased $10.6 million due primarily to corporate advertising, litigation and the growth of Phoenix Global Solutions (India) Pvt. Ltd. ("PGS"). These expenses were offset, in part, by a $20.3 million reduction in expenses due to the sale of our property and casualty distribution subsidiary in May 1999.
The increase in equity in earnings of and interest earned from investments in unconsolidated affiliates of 100% in 2001 was due primarily to our equity in the increased earnings of Hilb, Rogal and Hamilton Company ("HRH") and EMCO. The increase of 56% in 2000 was due primarily to our equity in the increased earnings of HRH.
The invested assets in our general account are generally of high quality and broadly diversified across asset classes, sectors and individual credits and issuers. Our general account assets are managed by our Investment Management professionals. We manage our general account assets in investment segments that support specific product liabilities. These investment segments have distinct investment policies that are structured to support the financial characteristics of the specific liability or liabilities within them. Segmentation of assets allows us to manage the risks and measure returns on capital for our various businesses and products.
Investment trusts are assets held for the benefit of those institutional clients which have investments in structured finance products offered and managed by our investment management subsidiary. Investment trusts, for which PXP is the sponsor and actively manages the assets, and for which there is not a substantive amount of outside third party equity investment in the trust, are consolidated in the financial statements. In 2001, we determined that two out of the eight
o equity risk, which relates to the volatility of prices for equity and equity-like investments.
We also manage interest rate risk by emphasizing the purchase of securities that feature prepayment restrictions and call protection. Our product design and pricing strategies include the use of surrender charges or restrictions on withdrawals in some products. In addition, we selectively apply derivative instruments, such as interest rate swaps, swaptions, and floors to reduce the interest rate risk inherent in our portfolios. These derivatives are transacted with highly rated counterparties and monitored for effectiveness on an ongoing basis. We use derivatives exclusively for hedging purposes.
Each year, the majority of our net cash flows are invested in investment grade debt securities. However, we maintain a portfolio allocation 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 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 if a major economic downturn occurs. As of December 31, 2001, total debt securities having an increased risk of default (those securities with a Securities Valuation Office ("SVO") securities rating of four or greater) totaled $40.5 million, or 0.4%, of our total debt security portfolio, and our below investment grade debt securities represented 8% of our total debt security portfolio.
Conversely, during periods of declining interest rates, a decrease in the spread between interest and dividend rates to policyholders and returns on our investment portfolio could adversely affect our profitability. During such periods, life insurance and annuity products may be relatively more attractive investments, resulting in increased premium payments on products with flexible premium features, repayment of policy loans and increased percentages of policies remaining in force during a period when we are earning lower returns on our investments. For this reason, a sustained period of declining interest rates could cause cash flow problems for us.
A downgrade in our claims paying ability or financial strength ratings could increase policy surrenders and withdrawals, adversely affect relationships with distributors and reduce sales. Any of these occurrences would reduce our revenues from sales of life insurance policies.
In the normal course of business, we enter into transactions involving various types of financial instruments such as debt securities and equity securities. These instruments have credit risk and also may be subject to risk of loss due to interest rate and market fluctuations. We also make off-balance sheet commitments related to venture capital partnerships; as of December 31, 2001, total unfunded capital commitments were $166.8 million.
Our primary source of liquidity is dividends from Phoenix Life. Based on the historic cash flows and the current financial results of Phoenix Life, and subject to any dividend limitations which may be imposed upon Phoenix Life or any of its subsidiaries by regulatory authorities, we believe that cash flows from Phoenix Life's operating activities will be sufficient to enable us to make dividend payments on our common stock, pay our operating expenses, service our outstanding debt, make contributions to our subsidiaries and meet our other obligations. In addition, we have a master credit facility under which we have direct borrowing rights, as do Phoenix Life and PXP with our unconditional guarantee.
The dividend limitation imposed by the New York Insurance Law is based on the statutory financial results of Phoenix Life. Statutory accounting practices differ in certain respects from accounting principles used in financial statements prepared in conformity with GAAP. The significant differences relate to deferred acquisition costs, deferred income taxes, required investment reserves, reserve calculation assumptions and surplus notes.
We do not expect to receive significant dividend income from PXP for several years, because we expect that during this time PXP will use a substantial portion of its cash flows from operations to pay down its outstanding debt.
The following tables present selected consolidated balance sheet data for the years indicated for the purpose of discussing significant changes in our consolidated financial condition.
The increase in total investments of 12% in 2001 is due to the investments of our IPO and debt offering proceeds and growth in our annuity business.
The 94% decrease in minority interest in net assets of consolidated subsidiaries in 2001 is due to the purchase of the PXP minority interest, which resulted in PXP becoming our wholly-owned subsidiary.
The 86% decrease in net assets of discontinued operations in 2000 was due to the sale of our real estate management and group life and health businesses in 2000.
The 26% increase in policyholder deposit funds in 2001 was due to an increase in annuity deposits to the GIA option during 2000.
Individual life insurance policies, other than term life insurance policies, increase in cash values over their lives. Policyholders have the right to borrow from Phoenix Life an amount generally up to the cash value of their policies at any time. As of December 31, 2001, Phoenix Life had approximately $10.5 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. Phoenix Life's amount of policy loans has not changed significantly since 1999. Policy loans at December 31, 2001 were $2.2 billion.
As of December 31, 2001, we had outstanding debt of $299.2 million (not including the indebtedness of Phoenix Life and PXP described below under "Phoenix Life" and "PXP," respectively).
Master Credit Facility. In June 2001, we, Phoenix Life and PXP entered into a $375 million revolving credit facility which matures on June 10, 2005 (the "Master Credit Facility") and terminated Phoenix Life's and PXP's prior credit facilities. Bank of Montreal is the administrative agent for this credit facility. Each company has direct borrowing rights under this credit facility. We unconditionally guarantee loans to Phoenix Life and PXP. Base rate loans bear interest at the greater of the Bank of Montreal's prime commercial rate or the effective federal funds rate plus 0.5%. Eurodollar rate loans bear interest at LIBOR plus an applicable margin. At December 31, 2001, the outstanding balance under this facility was $125.1 million, subject to the Eurdollar rate structure. The credit agreement contains customary financial and operating covenants that include, among other provisions, requirements that we maintain a minimum stockholders' equity and a maximum debt to capitalization ratio; that Phoenix Life maintain a minimum risk based capital ratio and a minimum financial strength rating; and that PXP maintain a maximum debt to capitalization ratio and a minimum stockholder's equity.
As of December 31, 2001, Phoenix Life had $175.0 million of debt outstanding, but none under the Master Credit Facility.
Surplus Notes. In November 1996, Phoenix Life issued $175 million principal amount of 6.95% surplus notes due December 1, 2006. Each payment of interest or principal of the notes requires the prior approval of the New York Superintendent of Insurance and may be made only out of surplus funds which the Superintendent determines to be available for such payment under the New York Insurance Law. The notes contain neither financial covenants nor early redemption provisions and are to rank equally with any subsequently issued surplus, capital or contribution notes or similar obligations of Phoenix Life. Section 1307 of the New York Insurance Law provides that the notes are not part of the legal liabilities of Phoenix Life and are not a basis of any set-off against Phoenix Life.
Phoenix Life Subordinated Note. In exchange for the debentures held by it, Phoenix Life agreed to accept from PXP, in lieu of cash, a $69.0 million subordinated note due 2006, bearing interest annually at the rate of LIBOR plus two hundred basis points.
o Main Street Management had net capital of approximately $0.6 million. This amount exceeded Main Street Management's regulatory minimum of $55,081. The ratio of aggregate indebtedness to net capital for Main Street Management was 1.37 to 1.
o PHOENIXLINK had net capital of approximately $35,000. This amount exceeded PHOENIXLINK's regulatory minimum of $5,000. The ratio of aggregate indebtedness to net capital for PHOENIXLINK was 0 to 1.
o Rutherford had net capital of approximately $0.8 million. This amount exceeded Rutherford's regulatory minimum of $0.1 million. The ratio of aggregate indebtedness to net capital for Rutherford was 1.0 to 1.
The increase in net cash provided by operating activities of continuing operations in 2001 over 2000 is primarily due to a reduction in income tax payments in 2001, refunds in 2001 of income taxes paid in prior years, offset by higher non-recurring expenses due to the purchase of the PXP minority interest and lower insurance and investment product fees. The increase in 2000 as compared to 1999 resulted primarily from lower benefits paid to policyholders, primarily in the Confederation Life block, and higher insurance and investment product fees.
The increase in net cash used for investing activities for 2001 was primarily due to the IPO proceeds and a portion of the debt proceeds, offset by expenses related to purchase of the PXP minority interest in January 2001. The decrease in net cash used for investing activities of continuing operations for 2000 as compared to 1999 was due to the increase in proceeds from the sale of equity securities, the decrease in the purchases of available-for-sale debt securities and the decrease in acquisitions of new subsidiaries in 2000. These fluctuations were offset by decreases in proceeds from the sale and repayment of debt securities available-for-sale.
The increase in net cash provided by investing activities of discontinued operations for 2000 as compared to 1999 and 2001 was primarily due to proceeds from the sale of our group life and health operations.
The increase in net cash provided by financing activities in 2001 was due to our IPO and common stock issuance, our debt offering and a 392% increase in net variable annuity deposits in the GIA. The decrease in net cash provided by financing activities of continuing operations in 2000 as compared to 1999 resulted primarily from the decrease in short-term debt and bank borrowings and the increase in repayments of securities sold subject to repurchase agreements offset primarily by the increased variable annuity deposits into the guaranteed account option rather than the separate account option.