Our executive headquarters consist of our main office building at One American Row and two other buildings in Hartford, Connecticut. We own these buildings and occupy most of the space contained in them. In addition to these properties, we own offices in Enfield, Connecticut and East Greenbush, New York for use in the operation of our business. We also lease office space within and out of the United States of America as needed for our operations, including use by our sales force. In conjunction with our strategic plan, we have implemented a comprehensive facilities plan. The plan includes the sale of our Enfield, Conn., offices. Business functions from Enfield will be relocated to our existing Hartford offices and a yet-to-be identified smaller facility in Hartford or north of Hartford.
Our selected historical consolidated financial data as of and for each of the five years ended December 31, 2002 follows (dollars in millions, except earnings per share). We derived the data for the years 2002, 2001 and 2000 from our consolidated financial statements included elsewhere in this Form 10-K. We derived the data for the years 1999 and 1998 from audited consolidated financial statements not included in this Form 10-K. Prior to June 25, 2001, Phoenix Life was the parent company of our consolidated group. In connection with its demutualization, Phoenix Life became a subsidiary and PNX became the parent company of our consolidated group.
2002 2001 2000 1999 1998 ------------ ------------ ------------- ------------- ------------ Income Statement Data:(1) Premiums.................................... $ 1,081.9 $ 1,112.7 $ 1,147.4 $ 1,175.7 $ 1,175.8 Insurance and investment product fees....... 563.4 546.4 631.0 574.6 537.5 Net investment income....................... 915.2 847.6 1,141.3 961.5 862.0 Net realized investment gains (losses)...... (107.6) (72.4) 89.2 75.8 58.2 ------------ ------------ ------------- ------------- ------------ Total revenues.............................. $ 2,452.9 $ 2,434.3 $ 3,008.9 $ 2,787.6 $ 2,633.5 ------------ ------------ ------------- ------------- ------------ Total benefits and expenses................. $ 2,613.0 $ 2,670.5 $ 2,839.7 $ 2,513.5 $ 2,474.3 ------------ ------------ ------------- ------------- ------------
Income (loss) from continuing operations.... $ (115.7) $ (137.3) $ 94.8 $ 162.1 $ 91.9 Income (loss) from discontinued operations, net of income taxes(2) .................... -- -- (11.5) (72.9) 45.2 Income (loss) before cumulative effect of accounting changes........................ (115.7) (137.3) 83.3 89.2 137.1 Cumulative effect of accounting changes(3) .. (130.3) (65.4) -- -- -- ------------ ------------ ------------- ------------- ------------ Net income (loss)........................... $ (246.0) $ (202.7) $ 83.3 $ 89.2 $ 137.1 ============ ============ ============= ============= ============
Consolidated Statutory Data: Premiums and deposits....................... $ 3,919.7 $ 3,144.8 $ 2,344.8 $ 2,330.2 $ 2,578.8 ============ ============ ============= ============= ============ Net income (loss)........................... $ (130.7) $ (66.0) $ 266.1 $ 131.3 $ 108.7 ============ ============ ============= ============= ============ Capital and surplus(8) ...................... $ 861.0 $ 1,149.8 $ 1,322.8 $ 1,054.1 $ 905.3 Asset valuation reserve ("AVR")(9) .......... 147.8 223.4 560.4 373.2 300.3 ------------ ------------ ------------- ------------- ------------ Total statutory capital, surplus and AVR.... $ 1,008.8 $ 1,373.2 $ 1,883.2 $ 1,427.3 $ 1,205.6 ============ ============ ============= ============= =============
(3) During 2002, we recognized a cumulative effect adjustment for an accounting change for goodwill and other intangible assets. Effective January 1, 2002, we adopted the new accounting standard for goodwill and other intangible assets, including amounts reflected in equity-method investments. This adoption resulted in a cumulative effect adjustment of $130.3 million (after income taxes of $11.4 million). Additional information on this accounting change is included in Notes 1 and 4 to our consolidated financial statements included elsewhere in this Form 10-K.
During 2001, we recognized cumulative effect adjustments for accounting changes for venture capital partnerships, derivative instruments and securitized financial instruments.
We changed our method of applying the equity method of accounting for our venture capital partnerships. We recorded a charge of $48.8 million (after 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. Additional information on this accounting change is included in Notes 1 and 5 to our consolidated financial statements included elsewhere in this Form 10-K.
(4) We calculated earnings per share for each of the four years from 1998 through 2001 on a pro forma basis, based on 104.6 million weighted-average shares outstanding. The pro forma weighted-average shares outstanding calculation for 2001 is based on the weighted-average shares outstanding for the period from the demutualization and IPO to the end of the year.
(5) Due to our losses during 2002 and 2001, the ratio coverages for those periods were less than 1:1. We would need $88.2 million and $122.3 million in additional earnings for the years 2002 and 2001, respectively to achieve a 1:1 coverage ratio.
(6) Due to our losses during 2002 and 2001, the ratio coverages, including interest credited on policyholder contract balances were less than 1:1. We would need $88.2 million and $122.3 million in additional earnings for the years 2002 and 2001, respectively to achieve a 1:1 coverage ratio.
(7) Assets under management consist of third party assets managed by our investment management subsidiary PXP, plus total assets as reflected in our consolidated financial statements, adjusted to reflect total rather than net assets of discontinued operations.
(8) In accordance with accounting practices prescribed by the New York State Insurance Department, Phoenix Life's capital and surplus for 1998 and subsequent periods includes $175.0 million of total principal amount of surplus notes outstanding.
• Second, because the revenues of our investment management and variable products businesses are to a large extent based on fees related to the value of assets under our management, the poor performance of the equity markets has limited our fee revenues by reducing the value of the investment assets we manage. Our assets under management at December 31, 2002 were 1.3% less than at December 31, 2000. The possibility of declines in assets under management is heightened by the fact that as of December 31, 2002, approximately 20% of our variable universal life insurance assets under management excluding our private
In addition to the effects of poorly performing equity markets, a general economic downturn could have a negative effect on households in our target affluent and high-net-worth market and therefore could hurt sales of our products.
Some of our investments outside the closed block have limited liquidity, which could hurt our cash flow.
We might need to fund deficiencies in our closed block, which would result in a reduction in net income and could result in a reduction in investments in our on-going business.
We have allocated assets to the closed block required by our demutualization in an amount that will produce cash flows that, together with anticipated revenues from the policies included in the closed block, are reasonably expected to be sufficient to support obligations and liabilities relating to these policies. These obligations and liabilities include, but are not limited to, provisions for the payment of claims and certain expenses and taxes, and provisions for the continuation of the policyholder dividend scales in effect for 2000, if the experience underlying such scales continues, and for appropriate adjustments in such scales if the experience changes. Our allocation of assets to the closed block was based on actuarial assumptions about our payment obligations to closed block policyholders, as well as assumptions about the investment earnings the closed block assets will generate over time. Since such assumptions are to some degree uncertain, it is possible that the cash flows generated by the closed block assets and the anticipated revenues from the policies included in the closed block will prove insufficient to provide for the benefits guaranteed under these policies. We would have to fund the shortfall
At times in the last five years Venture Capital has represented a large component of our total income or loss from continuing operations. Venture Capital is a higher risk, less liquid investment, the value of which is prone to significant fluctuation. Income from Venture Capital represented 190% and 56% of our total income from continuing operations in 2000 and 1999, respectively. In 2002 and 2001, however, our venture capital investments decreased our income from continuing operations by $38.5 million and $54.9 million, respectively, representing 33% and 40% of our total loss from continuing operations in 2002 and 2001, respectively. The performance of the partnerships depends upon the economic performance of the underlying assets held by the partnerships, which is difficult to predict.
Our Venture Capital portfolio has a large technology component and includes investments in other sectors such as telecommunications, the asset values of which tend to move in close relation with the technology sector. The decrease in this portfolio's income in 2002 and 2001 resulted primarily from equity market declines in the technology sector and other related sectors. It is possible that we will continue to experience declines related to our venture capital investments.
Financial Strength Rating Senior Debt Rating Rating Agency of Phoenix Life of PNX --------------------------------- ----------------------------------------- ------------------------------------
Fitch IBCA AA- ("Very Strong") from A- ("Strong") from A AA ("Very Strong") on ("Strong") on September 19, September 19, 2002 2002
Standard & Poor's A+ ("Strong") from AA- BBB+ ("Good") from A- ("Very Strong") on October ("Strong") on October 16, 16, 2002 2002
Moody's A3 ("Good") from Aa3 Baa3 ("Adequate") from A3 ("Excellent") on November 25, ("Good") on November 25, 2002
As a consequence of these ratings downgrades, we may experience increased interest costs in connection with future borrowings. Such increased costs would decrease our earnings and could reduce our ability to finance our future growth on a profitable basis. The downgrades did not trigger any defaults or repurchase obligations.
In 1999, we sold our individual life reinsurance business and discontinued the operations of our group accident and health and group life reinsurance business. We adopted a plan to stop writing new contracts covering these risks and end our existing contracts as soon as those contracts would permit. However, we remain liable for claims under those contracts.
We have established reserves and reinsurance recoverables for claims and related expenses that we expect to pay on our discontinued group accident and health reinsurance business. These reserves and reinsurance recoverables are a net present value amount that is based on currently known facts and estimates about, among other things, the amount of insured losses and expenses that we believe we will pay, the period over which they will be paid, the amount of reinsurance proceeds we believe we will collect under finite reinsurance and other reinsurance and the likely legal and administrative cost of winding down the business. Total reserves were $35 million and total reinsurance recoverable balances were $65 million at December 31, 2002. In addition, in 1999 we purchased finite aggregate excess-of-loss reinsurance to further protect us from unfavorable results from this discontinued business. The maximum coverage available is currently $120 million. The amount of our total financial provisions at December 31, 2002 was therefore $90 million, consisting of reserves, less reinsurance recoverable balances, plus the amount currently available from our finite aggregate excess-of-loss reinsurance, and represents our best estimate of the provisions required for the payment of our entire remaining loss exposure on the discontinued group accident and health reinsurance business.
Because we must use estimates in establishing our loss and expense reserves, they are subject to uncertainty. In the case of our discontinued group accident and health reinsurance business, several factors make estimating the required provisions more difficult. First, it may take a number of years for the claims on the large majority of the remaining business to be reported to us. In many cases, the types of losses involved will develop over a relatively long period. Further, some of our remaining contracts cover losses that will be incurred in 2003 and subsequent years. For these reasons, we cannot know today what our actual claims experience will be.
In addition, we are involved in two sets of disputes relating to certain portions of our discontinued group accident and health reinsurance business. See Note 17 to our consolidated financial statements for more information.
A pending lawsuit seeks to challenge Phoenix Life's reorganization and the adequacy of the information provided to policyholders regarding the plan of reorganization. We believe that this lawsuit lacks merit. The lawsuit, Andrew Kertesz v. Phoenix Home Life Mut. Ins. Co., et al., was filed on April 16, 2001, in the Supreme Court of the State of New York for New York County. The plaintiff seeks to maintain a class action on behalf of a putative class consisting of the eligible policyholders of Phoenix Life as of December 18, 2000, the date the plan of reorganization was adopted. Plaintiff seeks compensatory damages for losses allegedly sustained by the class as a result of the demutualization, punitive damages and other relief. The defendants named in the lawsuit include Phoenix Life, Phoenix, directors of Phoenix Life, as well as Morgan Stanley & Co. Incorporated, financial advisor to Phoenix Life in connection with the plan of reorganization. A motion to dismiss the claims asserted in this lawsuit has recently been granted. The plaintiff has filed a notice of appeal.
Legislation eliminating or modifying either the federal estate tax or the federal taxation of investment income could adversely affect revenues from our life insurance and annuity products. Some of our life insurance products are specifically designed and marketed as policies that help a decedent's heirs to pay estate tax. In addition, our life insurance and annuity products generally benefit from the deferral of federal income taxation on the accretion of their value.
the policy proceeds available to the heirs at the time estate taxes are due. Second-to-die policies are often purchased by couples whose assets are largely illiquid, and whose heirs otherwise might have to attempt to liquidate part of the estate in order to pay the tax. Second-to-die policies represented 35% and 22% of our new life insurance premiums and deposits in 2002 and 2001, respectively, and the repeal, increase in exemption or the reduction of the rate, of the federal estate tax may reduce the attractiveness of second-to-die policies sold for this purpose. President Bush and members of Congress have expressed a desire to modify the existing legislation, which modification could result in faster or more complete reduction or repeal of the estate tax. For example, the President's Budget for Fiscal Year 2004 introduced a proposal to make the repeal of the estate tax permanent. Any such change could have a further negative effect on our revenues from estate planning products.
Cash flows relating to, and the profitability of, our life insurance and annuity businesses are sensitive to interest rate changes. In periods of increasing interest rates, life insurance policy loans and surrenders and withdrawals may increase as policyholders seek investments with higher perceived returns. This process could result in cash outflows requiring us to sell invested assets at a time when the prices of those assets are adversely affected by the increase in market interest rates, which could cause us to suffer realized investment losses.
The independent trustees of our mutual funds and closed-end funds, as well as intermediary program sponsors, managed account clients and institutional investment management clients, could terminate their contracts with us. This would reduce our Investment Management fee revenues and could also impair our intangible assets.
Our ability to compete in the investment management business depends in particular on our investment performance. We may not be able to accumulate and retain assets under management if our investment results underperform the market or the competition, since such underperformance likely would result in asset withdrawals and reduced sales. For example, from 1993 through 1999, we experienced net asset withdrawals in our retail investment management business. We attribute this in part to underperformance in some of our mutual funds and managed accounts.
provide to, and the relationships we develop with, these distributors. Our distributors are generally free to sell products from whichever providers they wish, which makes it important for us to continually offer distributors products and services they find attractive. If our products or services fall short of distributors' needs, we may not be able to establish and maintain satisfactory relationships with distributors of our life insurance, annuity and investment management products. Accordingly, our revenues and profitability would suffer.
National banks, with their pre-existing customer bases for financial services products, may increasingly compete with insurers, as a result of recently enacted legislation removing restrictions on bank affiliations with insurers. This legislation, the Gramm-Leach-Bliley Act of 1999, permits mergers that combine commercial banks, insurers and securities firms under one holding company. Until passage of the Gramm-Leach-Bliley Act, prior legislation had limited the ability of banks to engage in securities-related businesses and had restricted banks from being affiliated with insurance companies. The ability of banks to increase their securities-related business or to affiliate with insurance companies may materially and adversely affect sales of all of our products by substantially increasing the number and financial strength of our potential competitors.
The success of our business is dependent to a large extent on our ability to attract and retain key employees. Our investment management business, in particular, depends on the employment of experienced securities analysts and portfolio managers. In addition, our wealth management businesses are dependent on the employment of highly productive sales personnel. Competition in the job market for these types of professionals is generally intense, and is particularly acute with respect to experienced securities analysts and portfolio managers such as those needed by PXP. In general, our employees are not subject to employment contracts or non-compete arrangements.
Management's discussion and analysis reviews our consolidated financial condition at year-end 2002 and 2001; our consolidated results of operations for the years 2002, 2001 and 2000; 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 included in this Form 10-K.
We are a leading provider of wealth management products and services offered through a variety of select advisors and financial services firms to serve the accumulation, preservation and transfer needs of the affluent and high-net-worth market, businesses and institutions. We refer to our products and services together as our wealth management solutions. We offer a broad range of life insurance, annuity and investment management solutions through a variety of distributors. These distributors include affiliated and non-affiliated advisors and financial services firms who make our solutions available to their clients.
• insurance policy benefits provided to policyholders, including interest credited on policyholders' general account balances; • policyholder dividends; • deferred policy acquisition costs amortization; • intangible assets amortization; • interest expense; • other operating expenses; and • income taxes.
Prior to the demutualization, we focused on participating life insurance products, which pay policyholder dividends. As of year-end 2001, 75% of our life insurance reserves were for participating policies. As a result, a significant portion of our expenses consists, and will continue to consist, of such policyholder dividends. Our net income is reduced by the amounts of these dividends. Policyholder dividends expense was $401.8 million during 2002, $400.1 million during 2001 and $378.0 million during 2000.
During 1999, we discontinued the operations of several businesses that did not align with our business strategy including reinsurance, group life and health and real estate management operations. See Note 13 to our consolidated financial statements for detailed information regarding our discontinued operations.
In 2001, we acquired the minority interest in PXP for $339.3 million. Prior to this acquisition, PXP had been a publicly-held company listed on the New York Stock Exchange in which we held a 55.1% interest. See Note 4 to our consolidated financial statements for detailed information regarding our acquisition of the PXP minority interest.
Phoenix Home Life demutualized on June 25, 2001 by converting from a mutual life insurance company to a stock life insurance company, became a wholly-owned subsidiary of PNX and changed its name to Phoenix Life Insurance Company (Phoenix Life). See Note 7 to our consolidated financial statements for detailed information regarding the demutualization and closed block.
Goodwill and Other Intangible Assets. At the beginning of 2002, we adopted a new accounting standard for goodwill and other intangible assets, including amounts reflected in our carrying value of equity-method investments. Under this new standard, we discontinued recording amortization expense on goodwill and other intangible assets with indefinite lives, but we continue recording amortization expense for those assets with definite estimated lives. See Note 4 to our consolidated financial statements for a comprehensive discussion of the adoption of the new standard and its effects on our consolidated financial statements.
Stock-based Compensation: A new standard was issued which amends an existing standard on accounting for stock-based compensation. The new standard provides methods of transition for a voluntary change to fair value accounting for stock-based compensation. It also requires annual and quarterly disclosures about the method of accounting for stock-based compensation and tabular information about the effect of the method of accounting for stock-based compensation. See Note 10 to our consolidated financial statements for more discussion on the requirements of the new standard as it relates to our business.
We amortize DAC and PVFP based on the related policy's classification. For individual participating life insurance policies, DAC and PVFP are amortized in proportion to estimated gross margins. For universal life, variable universal life and accumulation annuities, DAC and PVFP are amortized in proportion to estimated gross profits. Policies may be surrendered for value or exchanged for a different one of our products (internal replacement). The DAC balance associated with the replaced or surrendered policies is amortized to reflect these surrenders.
We regularly evaluate our estimated gross profits, or EGPs, to determine if actual experience or other evidence suggests that earlier estimates should be revised. Several assumptions considered to be significant in the development of EGPs include separate account fund performance, surrender and lapse rates, estimated interest spread and estimated mortality. The separate account fund performance assumption is critical to the development of the EGPs related to our variable annuity and variable and interest-sensitive life insurance businesses. The average long-term rate of assumed separate account fund performance used in estimating gross profits was 7% for the variable annuity business and 8% for the variable life business at December 31, 2002.
• Policy Liabilities and Accruals (Note 3 to our consolidated financial statements and Item 7a, Quantitative and Qualitative Disclosures About Market Risk for more information)
• Goodwill and Other Intangible Assets At the beginning of 2002, we adopted the new accounting standard for goodwill and other intangible assets, including amounts reflected in our carrying value of equity-method investments. Under this new standard, we discontinued recording amortization expense on goodwill and other intangible assets with indefinite lives, but we continue recording amortization expense for those intangible assets with definite estimated lives. For goodwill and indefinite-lived intangible assets, we perform impairment tests at the reporting-unit level at least annually. For purposes of the impairment test, the fair value of the reporting units is based on the sum of: a multiple of revenue, plus the fair value of the units' tangible fixed assets. Prior to 2002, we amortized goodwill principally over 40 years and investment management contracts and employment contracts over five to 16 years and three to seven years, respectively. All amortization expense has been and continues to be calculated on a straight-line basis.
See Note 5 to our consolidated financial statements, Debt and Equity Securities section of Management's Discussion and Analysis and Item 7a, Quantitative and Qualitative Disclosures About Market Risk for more information.
To estimate the net equity in earnings of the venture capital partnerships for each quarter, we developed a methodology to estimate the change in value of the underlying investee companies in the venture capital partnerships. For public investee companies, we used quoted market prices at the end of each quarter, applying liquidity discounts to these prices in instances where such discounts were applied in the underlying partnerships' financial statements. For private investee companies, we applied a public industry sector index to roll the value forward each quarter. We apply this methodology 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). Our methodology recognizes both downward and upward change in value of the underlying investee companies, but we do not exceed the last reported value by the partnerships. In addition, we annually revise the valuations we have assigned to the investee companies to reflect the valuations in the audited financial statements received from the venture capital partnerships.
The following table and discussion presents summary consolidated financial data for the years ended December 31, 2002, 2001 and 2000 (in millions).
REVENUES: Premiums....................................$ 1,081.9 $ 1,112.7 $ 1,147.4 $ (30.8) $ (34.7) Insurance and investment product fees....... 563.4 546.4 631.0 17.0 (84.6) Investment income, net of expenses.......... 915.2 847.6 1,141.3 67.6 (293.7) Net realized investment gains (losses)...... (107.6) (72.4) 89.2 (35.2) (161.6) ----------- ----------- ----------- ----------- ----------- Total revenues.............................. 2,452.9 2,434.3 3,008.9 18.6 (574.6) ----------- ----------- ----------- ----------- -----------
BENEFITS AND EXPENSES: Policy benefits, excluding policyholder dividends................................. 1,436.1 1,406.7 1,409.8 29.4 (3.1) Policyholder dividends...................... 401.8 400.1 378.0 1.7 22.1 Policy acquisition cost amortization........ 59.2 133.0 356.0 (73.8) (223.0) Intangible asset amortization............... 32.5 49.4 36.9 (16.9) 12.5 Intangible asset impairments................ 66.3 -- -- 66.3 -- Interest expense............................ 31.4 27.3 32.7 4.1 (5.4) Demutualization expenses.................... 1.8 25.9 21.8 (24.1) 4.1 Other operating expenses.................... 583.9 628.1 604.5 (44.2) 23.6 ----------- ----------- ----------- ----------- ----------- Total benefits and expenses................. 2,613.0 2,670.5 2,839.7 (57.5) (169.2) ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations before income taxes and minority interest (160.1) (236.2) 169.2 76.1 (405.4) Applicable income taxes (benefit)........... (56.8) (106.1) 60.3 49.3 (166.4) ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations before minority interest.................. (103.3) (130.1) 108.9 26.8 (239.0) Minority interest in net income of subsidiaries.............................. 12.4 7.2 14.1 5.2 (6.9) ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations.... (115.7) (137.3) 94.8 21.6 (232.1) Income from discontinued operations......... -- -- 9.4 -- (9.4) Loss on disposal of discontinued operations. -- -- (20.9) -- 20.9 ----------- ----------- ----------- ----------- ----------- Income (loss) before cumulative effect of accounting changes........................ (115.7) (137.3) 83.3 21.6 (220.6) Cumulative effect of accounting changes..... (130.3) (65.4) -- (64.9) (65.4) ----------- ----------- ----------- ----------- ----------- Net income (loss) ..........................$ (246.0) $ (202.7) $ 83.3 $ (43.3) $ (286.0) =========== =========== =========== =========== ===========
Premium revenue declined $30.8 million in 2002 primarily as the result of a shift in sales from traditional life products to variable universal life, universal life and annuity products. Insurance and investment product fees increased $17.0 million in 2002. Variable universal life and universal life fees increased $9.4 million and $8.6 million, respectively, due to higher funds under management driven by strong sales of universal life and variable universal life product, particularly in 2001 and 2002. Annuity fees declined $4.8 million as the result of lower funds under management in variable sub-accounts.
The fluctuation in both premiums and insurance and investment product fees reflect our continued emphasis on variable universal life, universal life and annuity product sales, rather than on traditional life product sales.
Investment product fees remained constant compared to 2001. The acquisition of a 60% interest in Kayne Anderson Rudnick in January 2002 increased investment product fees, but was offset by a corresponding decrease resulting from reductions in other assets under management and changes to fee structures.
Net investment income increased $67.6 million, or 8.0%, in 2002 as compared to 2001, primarily as the result of an increase of invested assets related to the guaranteed interest account portion of our annuity business, principally from the late 2001 and 2002 sales of the Retirement Planners Edge (RPE) variable annuity. Smaller increases in net investment income for variable universal life were offset by a modest decrease in universal life net investment income coupled with lower new money rates, reinvestment rates and asset defaults. Interest spread, or the excess of interest earned on guaranteed interest accounts as compared to interest credited on guaranteed interest accounts, increased by $8.8 million as compared to 2001. Improved interest spread on annuity guaranteed interest accounts is the result of a $1.2 billion increase in guaranteed interest account balances at December 31, 2002 as compared to December 31, 2001, offset by lower new money rates and the investment of related assets in short term, more liquid instruments. We experienced a decline in interest spread in the second half of 2002 as further described in the General Account section of the Management's Discussion and Analysis. The yield on average invested assets, excluding venture capital partnerships, was 6.6% for the year 2002, compared to 7.3% for the year 2001.
The increase in policy benefits of $29.4 million, or 2.1%, in 2002 as compared to 2001 is primarily due to a $48.2 million increase in interest credited on the guaranteed interest accounts portion of our annuity business, primarily from late 2001 and 2002 sales of RPE (see General Account section of Management's Discussion & Analysis). In addition, expense related to minimum death benefit guarantees on certain of our variable annuity products increased $8.7 million during 2002 as the result of an increase in net minimum death benefit exposure from $5.8 million at December 31, 2001 to $234.9 million at December 31, 2002. $176.6 million of this exposure increase was the result of the third-quarter acquisition of a block of annuity business from Valley Forge Life Insurance Company, with the remaining increase in exposure resulting from the impact of the overall decline in equity markets on fund balances.
The decrease in intangible asset amortization was due to our adoption of a new standard on goodwill and intangible assets with indefinite lives which requires that, upon adoption, amortization cease for goodwill and intangible assets with indefinite lives. See Note 4 to our consolidated financial statements for more information.
As a result of adopting the new standard on goodwill and intangible assets with indefinite lives, an impairment charge of $66.3 million was recorded during the third quarter as discussed further in Note 4 to our consolidated financial statements.
The increase in minority interest expense was the result of our January 2002 acquisition of a majority interest in Kayne Anderson Rudnick.
Net investment income decreased 26% in 2001 primarily due to the decrease in Venture Capital net investment income of $361.8 million resulting from equity market performance in the technology sector, which produced favorable returns in 2000, but suffered significant declines during 2001. During the first quarter of 2001, we changed our method of applying the equity method of accounting to our venture capital partnerships to eliminate the quarterly reporting lag (see "Venture Capital Segment" and Note 5 to our consolidated financial statements.) Corporate and Other net investment income decreased $29.2 million, 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. These decreases were also partially offset by increases in Life and Annuity net investment income of $99.5 million due to higher average invested assets. Average invested assets, excluding venture capital partnerships, were $13 billion in December 2001, an increase of $1.3 billion from $11.7 billion in
December 2000. The yield on average invested assets, excluding venture capital partnerships, was 7.3% for the year 2001, compared to 7.5% for the year 2000.
The decrease in net realized gains in 2001 was due primarily to credit-related realized losses of $78.8 million, mostly attributable to the impairment of Enron and related entities, Argentine issuers, Global Crossing Ltd. and several collateralized debt obligations. Also in 2001, a $4.7 million loss was recorded due to a subsequent price adjustment on the 2000 sale of our Cleveland office. In 2000, we recorded non-recurring gains of $130.2 million on the sale of common stock. Offsetting these were non-recurring interest-related losses on debt securities of $33.8 million.
The decrease in minority interest in net income of subsidiaries in 2001 was due to our purchase of the PXP minority interest in 2001.
In 2001, we also changed our accounting for venture capital partnerships to remove the lag in reporting their operating results and we recorded the effect of this change as a charge to earnings as further described in Notes 1 and 5 to our consolidated financial statements.
We evaluate segment performance on the basis of segment operating income. Realized investment gains and some non-recurring items are excluded because we do not consider them when evaluating the financial performance of the segments. The size and timing of realized investment gains are often subject to our discretion. The non-recurring items are removed from segment after-tax operating income if, in our opinion, they are not indicative of overall operating trends. While some of these items may be significant components of net income reported in accordance with GAAP, we believe that segment-operating income is an appropriate measure that represents the earnings attributable to the ongoing operations of the business. Also, all interest expense is included in the Corporate and other segment, as well as several smaller subsidiaries and investment activities, which do not meet the thresholds of reportable segments. These include international operations and the run-off of our group pension and guaranteed investment contract businesses.
The criteria used to identify a non-recurring item and to determine whether to exclude it from segment operating income include: whether the item is infrequent and is material to the segment's operating income; or if it results from a business restructuring, or from a change in the regulatory environment, or relates to other unusual circumstances (e.g., litigation). We include information on non-recurring items allocated to our operating segments in their respective notes for information only. Non-recurring items excluded from segment 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. Segment operating income is not a substitute for net income determined in accordance with GAAP and may be different from similarly titled measures of other companies.
We allocate capital to our Life and Annuity segment based on risk-based capital (RBC) for our insurance products. We used 300% RBC levels for 2002 and 250% RBC levels prior thereto. Capital within our Life Companies that is unallocated is included in our Corporate and Other segment. We allocate capital to our Investment Management segment on the basis of the historical capital within that segment. We allocate net investment income based on the assets allocated to the segments. We allocate certain costs and expenses to the segments based on a review of the nature of the costs, time studies and other methodologies.
The following table presents a reconciliation of segment after-tax operating income (loss) to consolidated income (loss) from continuing operations for the years ended December 31, 2002, 2001 and 2000 (in millions).
Life and Annuity................................................. $ 51.0 $ 51.6 $ 13.2 Investment Management............................................ (54.0) (5.8) 35.6 Venture Capital.................................................. (38.6) (54.9) 180.2 Corporate and Other.............................................. (20.1) (19.3) (29.8) ------------ ------------ ------------ Total segment after-tax operating income (loss).................. (61.7) (28.4) 199.2 ------------ ------------ ------------
The increase in policy benefits and dividends of $55.0 million, or 3.0%, in 2002 as compared to 2001 is primarily due to a $48.2 million increase in interest credited on the guaranteed interest accounts portion of our annuity business, mostly from late 2001 and 2002 sales of RPE (see General Account section of Management's Discussion & Analysis). Our policyholder dividend obligation decreased by $4.6 million as a result of realized losses partially offset by continuing favorable mortality and persistency experience. In addition, expense related
Minority interest expense relates to our 67% owned subsidiary, PFG Holdings.
See Note 3 to our consolidated financial statements for more information.
Changes ------------------------ 2002 2001 2000 2002 / 01 2001 / 00 ----------- ----------- ----------- ----------- ----------- Results of Operations Investment product fees..................... $ 258.1 $ 258.1 $ 324.4 $ -- $ (66.3) Net investment income....................... 10.9 10.1 12.3 0.8 (2.2) ----------- ----------- ----------- ----------- ----------- Total segment revenues...................... 269.0 268.2 336.7 0.8 (68.5) ----------- ----------- ----------- ----------- ----------- Intangible asset amortization............... 32.5 49.0 31.8 (16.5) 17.2 Intangible asset impairments................ 66.3 -- -- 66.3 -- Other operating expenses.................... 218.3 212.5 222.9 5.8 (10.4) ----------- ----------- ----------- ----------- ----------- Total segment expenses...................... 317.1 261.5 254.7 55.6 6.8 ----------- ----------- ----------- ----------- ----------- Segment operating income before income taxes and minority interest............... (48.1) 6.7 82.0 (54.8) (75.3) Allocated income taxes (benefit)............ (6.0) 5.6 35.4 (11.6) (29.8) ----------- ----------- ----------- ----------- ----------- Segment operating income before minority interest.................................. (42.1) 1.1 46.6 (43.2) (45.5) Minority interest in segment operating income ................................... 11.9 6.9 11.0 5.0 (4.1) ----------- ----------- ----------- ----------- ----------- Segment operating income (loss)............. $ (54.0) $ (5.8) $ 35.6 $ (48.2) $ (41.4) =========== =========== =========== =========== ===========
Investment product fees remained constant compared to 2001. The acquisition of a 60% interest in Kayne Anderson Rudnick in January 2002 increased investment product fees by $41.2 million. A corresponding decrease resulted from reductions in other assets under management and changes to fee structures. Excluding Kayne Anderson Rudnick, total average assets under management decreased by $4.6 billion. Average assets under management for the private client line of business, excluding Kayne Anderson Rudnick, decreased $5.1 billion, decreasing investment product fees by $34.1 million. Although assets under management for the institutional line of business increased by $0.5 billion, a change in the Phoenix general account fee structure effective July 1, 2001 contributed primarily to a $6.9 million decrease in institutional investment product fees. At December 31, 2002, Investment Management had $54.0 billion in assets under management, an increase of $1.9 billion, or 4%, from December 31, 2001. This increase consisted of $7.7 billion from the acquisition of Kayne Anderson Rudnick, net asset inflows of $0.2 billion, including the issuance of a $1.0 billion CDO in August 2002, and $1.8 billion of increased annuity deposits in our Phoenix general account offset, in part, by a decrease of $7.9 billion resulting from investment performance.
The increase in minority interest in net income of subsidiaries in 2002 was due primarily to our purchase of Kayne Anderson Rudnick.
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 decrease in other operating expenses in 2001 was primarily the result of reduced incentive compensation for certain subsidiaries that, in accordance with their respective operating agreements, receive compensation directly related to earnings or revenues, which have declined as a result of investment performance.
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. We record our investments in venture capital partnerships in accordance with the equity method of accounting. (See Venture Capital Partnerships in the Critical Accounting Policies section of the Management's Discussion & Analysis.) Venture capital is an investment of the general account of our life insurance subsidiary.
In the first quarter of 2001, we recorded a charge of $48.8 million (net of income taxes of $26.3 million) representing the cumulative effect of our venture capital partnership 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.
The reduction in net investment loss in 2002 was primarily due to a reduced impact of industry sector indices on lower partnership holdings balances in 2002 compared to 2001. The loss in 2002 was primarily driven by stock market performance, most notably in technology and related sectors.
The following table and discussion presents summary financial data relating to Corporate and Other for the years 2002, 2001 and 2000 (in millions).
The increase in other expenses, net is due to a decrease in net investment income caused mainly by a decrease in invested assets in 2002, including a re-allocation of assets to the Life and Annuity segment which was effective January 1, 2002. The decrease was partially offset by our equity in increased earnings of unconsolidated affiliates, including HRH, in 2002. This was further offset by a decrease in other operating expense was due primarily to our exit from our physician practice management business during 2001 and lower unallocated corporate expenses in 2002. We also experienced modestly higher technology-related costs allocated to this segment.
The decrease in other expenses, net was primarily due to lower operating expenses of $62.1 million offset by lower investment income of $28.1 million and lower fee income of $15.5 million. The decrease in other operating expenses 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.
Amounts held by our policyholders in variable annuity guaranteed interest accounts, or GIAs, including RPE and fixed annuities, as of year-end 2002 and 2001 follow (in millions):
As interest rates declined during the second half of 2002, we experienced reduced interest spreads on RPE guaranteed interest account liabilities as we invested related cash inflows in shorter-term, lower yielding, primarily publicly traded, investment-grade debt securities to correspond with what we believe to be short duration liabilities. To the extent short-term interest rates remain below the regulatory required minimum crediting rate of 3%, we expect to continue to experience spread compression on our variable guaranteed investment account annuity liabilities, particularly on the RPE guaranteed investment account fund balances. In addition, we anticipate that, to the extent RPE guaranteed interest account balances do not lapse or transfer to variable sub-accounts, spread compression and additional commission payments on RPE fund balances will result in losses on our RPE variable annuity during the next 12 to 24 months.
Total Debt Securities Public Debt Securities Private Debt Securities SVO S&P Equivalent ----------------------- ------------------------ ------------------------- Rating Designation 2002 2001 2002 2001 2002 2001 -------- ---------------- ---------- --------- --------- --------- --------- ---------
Gross Gross Net Fair Unrealized Unrealized Unrealized Type of Debt Security by Type Value Cost Gains Losses Gains (Losses) ----------------------------- -------------- ------------ ----------- ------------ --------------
Credit Quality ----------------------------------------------------------- Investment Grade Below Investment Grade ----------------------------- ---------------------------- Type of Debt Security by Type and Credit Quality Fair Value Cost Fair Value Cost ------------------------------------------------ ------------ ------------ ------------ ------------
Foreign government.......................... $ 123.1 $ 120.3 $ 2.8 $ -- $ -- Corporate................................... 703.3 513.1 87.1 63.1 40.0 Mortgage-backed............................. 86.3 83.8 2.2 .3 -- Other asset-backed.......................... 156.3 68.5 13.3 55.1 19.4 ------------ ----------- ----------- ----------- ------------ Total debt securities....................... $ 1,069.0 $ 785.7 $ 105.4 $ 118.5 $ 59.4 ============ =========== =========== =========== ============
Percentage of total debt securities......... 9% 7% 1% 1% --% ============ =========== =========== =========== ============
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 philosophy has been to create a high level of industry diversification. The top five industry holdings as of December 31, 2002 in our debt securities portfolio are banking (3%), financial services (2%), leasing/rental (2%), grocery (2%) and electric utilities (2%).
Our corporate bond exposure to recently troubled industries including telecommunication equipment, telephone utilities, airlines, and media, publishing and broadcasting comprise less than 4% of the debt securities portfolio. In addition, within the asset-backed securities sector our exposure to securitized aircraft receivable securities comprises approximately 1.5% of the debt securities portfolio, with less than one third of that exposure rated below investment grade.
The following table presents certain information with respect to realized investment losses (in millions). Losses from "other than temporary impairment" charges are reported separately. These impairment charges were determined based on our assessment of factors to be enumerated below, as they pertain to the individual securities determined to be other than temporarily impaired. Sources and types of net realized investment gains (losses) for the years 2002, 2001 and 2000 follow:
Debt securities....................................................... $ (122.9) $ (72.6) $ (7.5) Equity securities..................................................... (9.8) -- -- Mortgage loans........................................................ (0.6) (6.1) (1.8) Real estate........................................................... -- -- (6.1) Venture capital partnerships.......................................... (5.1) -- -- Other invested assets................................................. (22.0) (3.7) -- ----------- ----------- ----------- Impairment losses..................................................... (160.4) (82.4) (15.4) ----------- ----------- ----------- Debt securities....................................................... 48.4 21.7 (46.9) Equity securities..................................................... 2.1 (8.8) 146.8 Mortgage loans........................................................ 0.2 7.1 4.8 Real estate........................................................... 4.0 (2.5) 1.8 Other invested assets................................................. (1.9) (7.5) (1.9) ----------- ----------- ----------- Net transaction gains................................................. 52.8 10.0 104.6 ----------- ----------- ----------- Net realized investment gains (losses)................................ $ (107.6) $ (72.4) $ 89.2 =========== =========== ===========
Net realized investment gains (losses)................................ $ (107.6) $ (72.4) $ 89.2 ----------- ----------- ----------- Closed block applicable policyholder dividend obligation (reduction).. (40.3) (15.4) -- Applicable deferred acquisition costs (benefit)....................... (7.2) 10.5 (10.7) Applicable deferred income taxes (benefit)............................ (20.8) (24.5) 32.9 ----------- ----------- ----------- Offsets to realized investment gains (losses)......................... (68.3) (29.4) 22.2 ----------- ----------- ----------- Net realized investment gains (losses) included in net income......... $ (39.3) $ (43.0) $ 67.0 =========== =========== ===========
Gross and net unrealized gains and losses from debt and equity securities at year-end 2002 follow (in millions):
Gross unrealized losses on debt securities outside of the closed block at December 31, 2002 by duration of unrealized loss and by credit quality follow (in millions, except number of positions):
0 - 6 6 - 12 12 - 24 Over 24 Total Months Months Months Months ----------- ----------- ----------- ----------- ----------- Total debt securities: Number of positions....................... 170 101 16 35 18 ----------- ----------- ----------- ----------- ----------- Total fair value.......................... $ 592.3 $ 333.7 $ 45.3 $ 130.4 $ 82.9 Total amortized cost...................... 693.7 385.4 52.5 160.5 95.3 ----------- ----------- ----------- ----------- ----------- Unrealized loss........................... $ (101.4) $ (51.7) $ (7.2) $ (30.1) $ (12.4) =========== =========== =========== =========== ===========
Investment grade debt securities: Number of positions....................... 119 79 10 18 12 ----------- ----------- ----------- ----------- ----------- Total fair value.......................... $ 458.9 $ 281.9 $ 30.6 $ 78.1 $ 68.3 Total amortized cost...................... 520.3 316.7 33.0 92.5 78.1 ----------- ----------- ----------- ----------- ----------- Unrealized loss........................... $ (61.4) $ (34.8) $ (2.4) $ (14.4) $ (9.8) =========== =========== =========== =========== ===========
Below investment grade debt securities: Number of positions....................... 51 22 6 17 6 ----------- ----------- ----------- ----------- ----------- Total fair value.......................... $ 133.4 $ 51.8 $ 14.7 $ 52.3 $ 14.6 Total amortized cost...................... 173.4 68.7 19.5 68.0 17.2 ----------- ----------- ----------- ----------- ----------- Unrealized loss........................... $ (40.0) $ (16.9) $ (4.8) $ (15.7) $ (2.6) =========== =========== =========== =========== ===========
As indicated in the above tables, there were 30 investment grade debt security positions held outside the closed block that have been in an unrealized loss position for more than 12 months as of December 31, 2002 (12 of which have been in an unrealized loss position for more than 24 months). The aggregate unrealized loss relating to these positions was $24.2 million as of that date ($9.8 million of which relate to holdings in an unrealized loss position for more than 24 months). None of the 30 investment grade debt securities held outside the closed block were considered to be other than temporarily impaired as of December 31, 2002. Six individual public issues aggregated $19.0 million in unrealized losses, all of which continue to, and in our opinion, are expected to continue to perform to their original contractual terms as of December 31, 2002. One security acquired before 2000 is a AAA-rated security structured to receive coupon payments indexed to the performance of the S&P 500. The security has declined in fair value due to the drop in the S&P 500 index but is defeased with U.S. treasury strips. One security acquired in 1998 is a AAA-rated interest-only security that has declined in fair value due to the drop in interest rates. Two securities are A-rated bank issues that have declined in fair value due to an increase in required credit spreads for these securities. One security is an A2/AA- rated issue that has declined in fair value due to the default of the servicer of the pool of manufactured housing loans that are collateral for the transaction. One security is collateralized by oil receivables and has declined in fair value due to a recently ended strike by oil workers in Venezuela. The remaining 24 investment grade debt securities held outside the closed block that have been in an unrealized loss position for more than 12 months as of December 31, 2002 have
There were 23 below-investment grade debt security positions held outside the closed block that have been in an unrealized loss position for more than 12 months as of December 31, (six of the previously mentioned securities have been in an unrealized position for more than 24 months). The aggregate gross pre-tax unrealized loss relating to these 23 positions was $18.3 million ($6.8 million after offsets for applicable deferred acquisition costs and taxes). $2.6 million ($0.9 million after offsets) of these unrealized losses have been in an unrealized loss position for more than 24 months. Two of the previously mentioned 23 securities with unrealized losses of $6.4 million ($2.6 million after offsets) had unrealized losses greater than 20% of cost continuously for greater than 12 months. None of the 23 previously mentioned securities held outside the closed block were considered to be other-than-temporarily impaired as of December 31, 2002. Of the 23 below-investment grade securities, six individual publicly-traded issues comprised approximately $14.5 million of the gross unrealized loss ($5.3 million after offsets), all of which continue to and, in our opinion, are expected to continue to perform as to their original contractual terms. Two of these holdings are in collateralized airline pass-through certificates, three are in energy sector issues, and one holding is a Latin American-related finance investment. The remaining 17 below investment grade debt securities held outside the closed block that have been in an unrealized loss position for more than 12 months as of December 31, 2002 have $3.8 million in unrealized losses ($1.5 million after offsets). Each of the remaining 17 holdings has gross unrealized losses less than $0.8 million. These securities represent holdings in airline pass-through certificates and in the energy, telecommunications and retail sectors. We believe that these unrealized losses are temporary in nature and are primarily related to temporary market conditions affecting the overall equity, credit and interest rate markets as well as the airline, energy and Latin American sectors. In addition, our analysis of the issuers' financial strength and our analysis of underlying collateral supported the conclusion that these securities were not other than temporarily impaired. Finally, as of December 31, 2002, we have the ability and intent to hold these securities until their value has fully recovered.
Gross unrealized losses on debt securities in the closed block at December 31, 2002 by duration of unrealized loss and by credit quality follow (in millions, except number of positions):
Investment grade debt securities: Number of positions....................... 77 53 3 20 1 ----------- ----------- ----------- ----------- ----------- Total fair value.......................... $ 320.8 $ 188.2 $ 13.8 $ 111.4 $ 7.4 Total amortized cost...................... 350.0 193.0 16.5 132.1 8.4 ----------- ----------- ----------- ----------- ----------- Unrealized loss........................... $ (29.2) $ (4.8) $ (2.7) $ (20.7) $ (1.0) =========== =========== =========== =========== ===========
Below investment grade debt securities: Number of positions....................... 44 23 4 16 1 ----------- ----------- ----------- ----------- ----------- Total fair value.......................... $ 190.0 $ 100.8 $ 17.8 $ 68.5 $ 2.9 Total amortized cost...................... 234.7 112.9 24.2 94.1 3.5 ----------- ----------- ----------- ----------- ----------- Unrealized loss........................... $ (44.7) $ (12.1) $ (6.4) $ (25.6) $ (0.6) =========== =========== =========== =========== ===========
As indicated in the above tables, there were 21 investment grade debt security positions held in the closed block that have been in an unrealized loss position for more than 12 months as of December 31, 2002 (one of which has been in an unrealized loss position for more than 24 months). The aggregate unrealized loss relating to these positions was $21.7 million as of that date ($1.0 million of which relates to a security in an unrealized loss position for more than 24 months). None of the 21 investment grade securities held in the closed block were considered to be other than temporarily impaired as of December 31, 2002. Nine individual public issues aggregated $18.0 million in unrealized losses, all of which continue to, and in our opinion, are expected to continue to perform to their original contractual terms as of December 31, 2002. One issue is an A-rated lumber-collateralized holding that has declined in fair value due to a decline in the price of lumber. Two securities are A-rated bank issues that have declined in fair value due to an increase in required credit spreads for these securities. Four issues are collateralized aircraft financings that have declined in fair value due to airline bankruptcies, reduced travel and higher risk premiums required for aircraft-related investments. One issue is a Latin American energy company that has declined in fair value due to an increase in required credit spreads, while another issue declined in fair value due to an increase in required credit spreads for the underlying issuer. The remaining 12 investment grade debt securities held in the closed block that have been in an unrealized loss position for more than 12 months as of December 31, 2002 have $3.7 million in unrealized losses. Each of the remaining 12 securities has unrealized losses less than $0.8 million. These securities represent holdings in mortgage or asset-backed securities and holdings in airlines other transportation, energy, paper products and banking sectors. We are of the opinion that these unrealized losses are temporary in nature and are primarily related to temporary market conditions affecting the overall equity, credit and interest rate markets, as well as the energy sectors. In addition, our analysis of the issuers' financial strength and our analysis of underlying collateral supported the conclusion that these securities were not other than temporarily impaired. Finally, as of December 31, 2002, we have the ability and intent to hold these securities until their value has fully recovered.
There were 17 below investment grade security positions held in the closed block that have been in an unrealized loss position for more than 12 months as of December 31, 2002 (one of which has been in an unrealized loss position for more than 24 months). The aggregate gross pre-tax unrealized loss relating to these positions was $26.2 million ($0.6 million of which relates to a security in an unrealized loss position for more than 24 months). None of the 17 previously mentioned securities held in the closed block were considered to be other-than-temporarily impaired as of December 31, 2002. Three of these securities with unrealized losses of $4.9 million had unrealized losses greater than 20% of cost continuously for greater than 12 months.
Of the 17 below investment grade positions, ten individual public issues comprise approximately $23.7 million of the gross unrealized loss, all of which continue to and, in our opinion, are expected to continue to perform as to their original contractual terms. One issue is a European media company for which required credit spreads have increased since purchase. One issue is a multi-line insurance company holding that has declined in fair value due to financial losses. One issue is a media company holding whose fair value has declined due to rating downgrades and weakness in the theater market. Two issues are energy/power generation related holdings that have declined in fair value due to downgrades, bankruptcies and weakness in the energy market. One issue is a collateralized airplane lease related holding that has declined in fair value due to airline bankruptcies, reduced travel and higher risk premiums required for aircraft-related investments. One issue is a security that has declined in fair value due to the default of the servicer of the pool of manufactured housing loans that are collateral for the transaction and potential reductions in future cash flows. The remaining seven below investment grade debt securities held in the closed block that have been in an unrealized loss position for more than 12 months as of December 31, 2002 have $2.5 million in unrealized losses. Each of the remaining seven holdings has gross unrealized losses less than $0.8 million. These securities represent holdings in airline pass-through certificates, other asset backed securities, and in the energy and consumer products sectors. We are of the opinion that these unrealized losses are temporary in nature and are primarily related to temporary market conditions affecting the overall equity, credit and interest rate markets as well as the airline and energy sectors. In addition, our analysis of the issuers' financial strength and our analysis of underlying collateral supported the conclusion that these securities were not other than temporarily impaired. Finally, as of December 31, 2002, we have the ability and intent to hold these securities until their value has fully recovered.
Our ownership of Aberdeen common stock included 4% of the company's outstanding shares that we purchased in May 2001 for $46.8 million and 18% of its outstanding shares that we purchased between 1996 and 1999 for $62.3 million. The carrying value of our equity investment in Aberdeen was $119.3 million and $103.9 million at December 31, 2002 and 2001, respectively. The fair value, based on quoted market price of underlying shares, of our equity investment in Aberdeen was $43.6 million and $221.1 million at December 31, 2002 and 2001, respectively. Included in our carrying value of Aberdeen was approximately $49.8 million of goodwill as of December 31, 2002 related to acquisition of Aberdeen common stock
to some 400,000 investors worldwide. On February 21, 2003, Aberdeen announced the closing of the retail funds transaction, which resulted in proceeds of £86.8 million (or $138.0 million).
We will continue to evaluate our carrying value in Aberdeen for other than temporary impairment, taking into account Aberdeen's underlying business fundamentals during 2003. A significant deterioration of Aberdeen's underlying business fundamentals, or financial performance, a materially adverse regulatory development related to the split capital trusts, or a prolonged period where our carrying value is in excess of fair value could lead us to determine that an other-than-temporary impairment exists. Should we make such a determination, we would write down the carrying value of our equity investment to fair value as a charge to realized investment losses for the period that we make the determination.
PNX's primary uses of liquidity include dividend payments on its common stock, loans or contributions to its subsidiaries, debt servicing and general corporate expenses.
PNX's primary source of liquidity has been from dividends from Phoenix Life. Under New York Insurance Law, Phoenix Life can pay stockholder dividends to PNX in any calendar year without prior approval from the New York Superintendent of Insurance (Superintendent) 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 will be able to pay $44.5 million in dividends in 2003 without special permission from the Superintendent. Any amount in excess of this is subject to the discretion of the Superintendent. See Note 15 to our consolidated financial statements for more information on Phoenix Life statutory financial information and regulatory matters.
PNX does not expect to receive dividends from PXP in the near term because we expect that during this time PXP will use a substantial portion of its cash flows from operations to pay contingent consideration from prior acquisitions and to pay down its outstanding debt and meet interest obligations to PNX and to Phoenix Life.
The following table presents selected consolidated balance sheet data as of December 31, 2002, 2001 and 2000 for the purpose of discussing significant changes in our consolidated financial condition (in millions):
Assets: Total investments......................... $ 15,721.8 $ 13,604.9 $ 11,877.4 $ 2,116.9 $ 1,727.5 Cash and cash equivalents................. 1,058.5 815.5 720.0 243.0 95.5 Deferred policy acquisition costs......... 1,234.1 1,123.7 1,019.0 110.4 104.7 Goodwill and other intangible assets...... 762.0 858.6 582.6 (96.6) 276.0
Liabilities: Policy liabilities and accruals........... 12,680.0 11,846.4 11,372.6 833.6 473.8 Policyholder deposit funds................ 3,395.7 1,515.2 678.4 1,880.5 836.8 Indebtedness.............................. 644.3 599.3 425.1 45.0 174.2 Stock purchase contracts.................. 147.2 -- -- 147.2 -- Other general account liabilities......... 542.9 605.6 473.3 (62.7) 132.3 Minority interest in net assets of subsidiaries............................ 10.8 8.8 136.9 2.0 (128.1)
correspond with the anticipated duration of the liabilities, resulting in an increase in cash and cash equivalents during 2002. See the General Account section of Management's Discussion and Analysis for more information.
The $110.4 million increase in the deferred policy acquisition cost asset during 2002 is the result of capitalized costs related to 2002 sales in excess of 2002 amortization of prior years costs. See Note 3 to our consolidated financial statements for more information.
The increase in policy liabilities and accruals was due to additional life insurance reserves and a $10.4 million increase in the policyholder dividend obligation. The increase in the policyholder dividend obligation was primarily due to continued favorable mortality. See Note 7 to the consolidated financial statements for more information.
The increase in policyholder deposit funds was the result of increased sales of variable annuity products, primarily Retirement Planners Edge (RPE), and fixed annuity products. See Management's Discussion & Analysis - General Account for further discussion.
Stock purchase contracts represents delivery obligations under stock purchase contracts related to the third quarter HRH transaction. See note 6 to our consolidated financial statements for further information.
The increase in goodwill and other intangible assets in 2001 was primarily due to $297.5 million related to the purchase of the PXP minority interest.
The decrease in minority interest in net assets of consolidated subsidiaries in 2001 was due to our purchase of the PXP minority interest, which resulted in PXP becoming our wholly-owned subsidiary.
2002 2001 ----------------------- ---------------------- Amount Percent Amount Percent ----------- ---------- ----------- ---------- Not subject to discretionary withdrawal provision........... $ 168.1 3% $ 173.9 3% Subject to discretionary withdrawal without adjustment(2) ... 2,073.3 35% 1,054.8 21% Subject to discretionary withdrawal with market value Adjustment................................................ 649.7 11% 239.1 5% Subject to discretionary withdrawal at contract value less Surrender charge.......................................... 701.5 11% 453.3 9% Subject to discretionary withdrawal at market value......... 2,386.5 40% 3,087.5 62% ----------- ---------- ----------- ---------- Total annuity contract reserves and deposit fund liability.. $ 5,979.1 100% $ 5,008.6 100% =========== ========== =========== ==========
(1) Contract reserves and deposit fund liability amounts are reported on a statutory basis, which more accurately reflects the potential cash outflows. Amounts include variable product liabilities. Annuity contract reserves and deposit fund liabilities are monetary amounts that an insurer must have available to provide for future obligations with respect to its annuities and deposit funds. These are liabilities on the balance sheet of financial statements prepared in conformity with statutory accounting practices. These amounts are at least equal to the values available to be withdrawn by policyholders.
(2) The increase in amounts subject to discretionary withdrawal without adjustment has resulted from sales of a short maturity guaranteed rate contract without surrender charges. Assets supporting this product consist of high quality commercial paper and high quality short maturity fixed income instruments. Asset and liability cash flows are monitored on a frequent basis. See General Account section of Management's Discussion and Analysis.
Individual life insurance policies, other than term life insurance policies, increase in cash values over their lives. Policyholders have the right to borrow from the Life Companies an amount generally up to the cash value of their policies at any time. As of December 31, 2002, the Life Companies had approximately $10.7 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. The Life Companies' amount of policy loans has not changed significantly since 1999. Policy loans at December 31, 2002 were $2.2 billion.
On July 23, 2002, Phoenix Life, through a wholly-owned subsidiary, acquired the variable life and variable annuity business of Valley Forge Life Insurance Company (a subsidiary of CNA Financial Corporation), effective July 1, 2002. See Note 3 to our consolidated financial statements for further discussion.
(1) Amounts include principal only. See Note 6 to our consolidated financial statements for more information on our financing activities. (2) See Note 16 to our consolidated financial statements for more information on our lease obligations. (3) All of our standby letters of credit automatically renew on an annual basis. (4) These represent off-balance sheet commitments related to venture capital partnerships. These unfunded commitments can be drawn down by the various private equity funds (which numbered 78 at December 31, 2002) as necessary to fund their portfolio investments through the end of the funding period as stated in each agreement. The amount collectively drawn down by the private equity funds in our portfolio over the year 2002 was $43.0 million, including $11.2 million in the fourth quarter of 2002. The amounts collectively drawn down by the private equity funds in our portfolio over the previous three years were $47.0 million in 2001, $96.9 million in 2000 and $108.5 million in 1999. During that same three-year period, the private equity funds in our portfolio have made cash and stock distributions to us of $63.0 million in 2001, $245.0 in 2000 and $101.4 in 1999. Cash and stock distributions to us for the year 2002 were $41.7.
Phoenix Life's consolidated statutory basis capital and surplus (including asset valuation reserve) decreased from $1,373.2 million at December 31, 2001 to $1,008.8 million at December 31, 2002. The principal factors resulting in this decrease include:
Section 1322 of the New York Insurance Law requires that New York life insurers report their RBC. RBC is based on a formula calculated by applying factors to various asset, premium and statutory reserve items. The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk and business risk. Section 1322 gives the Superintendent explicit regulatory authority to require various actions by, or take various actions against, insurers whose total adjusted capital does not exceed certain RBC levels. As of December 31, 2002 and 2001, Phoenix Life's total adjusted capital was in excess of each of these RBC levels. Each of the insurance subsidiaries of Phoenix Life is also subject to these same RBC requirements. Each of the Life Subsidiaries' RBC was in excess of 300% of Company Action Level (the level where a life insurance enterprise must submit a comprehensive plan to state insurance regulators) as of December 31, 2002 and 2001.
See Note 15 to our consolidated financial statements regarding the Life Companies' statutory financial information and regulatory matters.
capital for each of the other broker-dealer subsidiaries were also below the regulatory ratio at December 31, 2002, and their respective net capital each exceeded the applicable regulatory minimum.
The following table presents summary consolidated cash flow data for the years 2002, 2001 and 2000 (in millions):
Cash from operations.......................................... $ 283.7 $ 444.1 $ 375.1 Cash for discontinued operations.............................. (43.7) (75.1) (264.6) Cash for investing activities................................. (1,690.7) (1,927.5) (1.9) Cash from investing activities of discontinued operations..... 43.7 77.5 259.5 Cash from financing activities................................ 1,650.0 1,576.5 35.2
The decrease in cash used for investing activities for 2002 compared to 2001 is due primarily to higher acquisition costs of subsidiary purchases in 2001. 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 increase in net cash provided by investing activities of discontinued operations for 2000 as compared to 2001 was primarily due to proceeds from the sale of our group life and health operations.
The increase in cash from financing for 2002 compared to 2001 is due to proceeds from the equity units and stock purchase contract transactions, plus increases in policyholder deposit fund receipts. This was offset by the proceeds from our IPO and debt offering in 2001. The increase in net cash provided by financing activities in 2001 compared to 2000 was due to our IPO and common stock issuance, our debt offering and an increase in policyholder deposit funds.