We prepared the following financial data, other than statutory data, in conformity with accounting principles generally accepted in the United States, or GAAP. We derived the statutory data from the Annual Statements of our Life Companies filed with state insurance regulatory authorities and prepared it in accordance with statutory accounting practices prescribed or permitted by state insurance regulators, which vary in certain material respects from GAAP.
Supplemental ratio of earnings to fixed charges - excluding interest credited on policyholder contract balances (3)(4)
We calculated earnings per share for the year 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.
The discussion in this Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company, intends these forward-looking statements to be covered by the safe harbor provisions of the federal securities laws relating to forward-looking statements. These include statements relating to trends in, or representing management’s beliefs about, the Company’s future strategies, operations and financial results, as well as other statements including, but not limited to, words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “may,” “should” and other similar expressions. Forward-looking statements are made based upon management’s current expectations and beliefs concerning trends and future developments and their potential effects on the Company. They are not guarantees of future performance. Actual results may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties which include, among others: (i) changes in general economic conditions, including changes in interest and currency exchange rates and the performance of financial markets; (ii) heightened competition, including with respect to pricing, entry of new competitors and the development of new products and services by new and existing competitors; (iii) the Company’s primary reliance, as a holding Company, on dividends and other payments from its subsidiaries to meet debt payment obligations, particularly since the Company’s insurance subsidiaries’ ability to pay dividends is subject to regulatory restrictions; (iv) regulatory, accounting or tax developments that may affect the Company or the cost of, or demand for, its products or services; (v) downgrades in the financial strength ratings of the Company’s subsidiaries or in the Company’s credit ratings; (vi) discrepancies between actual claims or investment experience and assumptions used in setting prices for the products of insurance subsidiaries and establishing the liabilities of such subsidiaries for future policy benefits and claims relating to such products; (vii) movements in the equity markets that affect our investment results, the fees we earn from assets under management and the demand for our variable products; (viii) the Company’s continued success in achieving planned expense reductions; (ix) the effects of closing the Company’s retail brokerage operations; and (x) other risks and uncertainties described in any of the Company’s filings with the SEC. The Company undertakes no obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events or otherwise.
Through our institutional group, we provide investment management services primarily to corporations, multi-employer retirement funds and foundations, as well as to endowments and special purpose funds. In addition, we manage structured finance products such as collateralized debt obligations, or CDOs, backed by portfolios of assets, for example, public high yield bonds, mortgage-backed or asset-backed securities.
Through December 31, 2005, we reported our remaining activities in two non-operating segments-Venture Capital and Corporate and Other. Venture Capital includes limited partnership interests in venture capital funds, leveraged buyout funds and other private equity partnerships sponsored and managed by third parties. These assets are investments of the general account of Phoenix Life. In October 2005, we entered into an agreement to sell approximately three quarters of the assets in our Venture Capital segment. As a result of the transaction, the Venture Capital segment will be eliminated, effective January 1, 2006, and earnings from the remaining assets will be allocated to the Life and Annuity segment. See Business-Venture Capital Segment. Corporate and Other includes indebtedness; unallocated assets, liabilities and expenses; and certain businesses not of sufficient scale to report independently. See Business-Corporate and Other Segment. These non-operating segments are significant for financial reporting purposes, but do not contain products or services relevant to our core manufacturing operations.
Under GAAP, premium and deposit collections for variable life, universal life and annuity products are not recorded as revenues. These collections are reflected on our balance sheet as an increase in separate account liabilities for certain investment options of variable products. Collections for fixed annuities and certain
Prior to Phoenix Life’s demutualization, we focused on participating life insurance products, which pay policyholder dividends. As of December 31, 2005, 74% 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 $364.4 million during 2005, $404.7 million during 2004 and $418.8 million during 2003.
Our sales and financial results over the last several years have been affected by demographic, industry and market trends. The baby boom generation has begun to enter its prime savings years. Americans generally have begun to rely less on defined benefit retirement plans, social security and other government programs to meet their postretirement financial needs. Product preferences have shifted between fixed and variable options depending on market and economic conditions. Our balanced product portfolio including universal life, variable life and variable annuity products, as well as a broad array of mutual funds and managed accounts, has been positioned to meet this shifting demand.
On January 11, 2005, we closed the sale of our interest in Lombard International Assurance S.A., or Lombard, to Friends Provident plc, or Friends Provident, for common shares in Friends Provident valued at $59.0 million. This transaction is further described in Note 1 to our consolidated financial statements in this Form 10-K. In connection with our disposition of Lombard, we entered into a total return swap agreement with a third party, which was settled with cash proceeds of $59.0 million on April 1, 2005 in exchange for all of our shares in Friends Provident.
Revenues net of eliminations and direct expenses net of deferrals and certain transaction-related costs included in our consolidated financial statements related to our retail affiliated broker-dealer operations sold during 2004 are as follows:
In 2003, we acquired the remaining interest in PFG Holdings, Inc., or PFG, the holding company for our private placement operation, for initial consideration of $16.7 million. Under the terms of the purchase agreement, we may be obligated to pay additional consideration of up to $77.4 million to the selling shareholders, including $7.0 million during 2006 and 2007 based on certain financial performance targets being met, and the balance in 2008 based on the appraised value of PFG as of December 31, 2007. During each of the two years in the period ended December 31, 2005, we paid $3.0 million under this obligation.
In March 2004, we acquired the remaining minority interests in Walnut Asset Management LLC and Rutherford Brown & Catherwood, LLC for $2.1 million. This additional purchase price was accounted for as a step-acquisition by PXP and was allocated to goodwill and definite-lived intangible assets, accordingly.
As a result of a step acquisition completed in 2005, PXP owns 100% of Kayne Anderson Rudnick Investment Management, LLC, or KAR. In 2002 we acquired a 60% equity interest in KAR for $102.4 million. In addition to the initial cost of the purchase, we made a payment of $30.1 million in the first quarter of 2004 based upon growth in management fee revenue for the purchased business through 2003. We had fully accrued for this payment as of December 31, 2003 and allocated it entirely to goodwill. In each of January 2005 and 2004, one member of KAR accelerated their portion of the 15% noncontrolling interest acquisitions, at which time we acquired an additional combined 0.3% of the company. We accrued $11.4 million related to the remaining 4.9% redemption required as of December 31, 2004 and allocated the purchase price to goodwill and definite-lived intangible assets. The two remaining 4.9% noncontrolling interest redemptions were accelerated and were acquired effective September 30, 2005, along with the remaining 25% noncontrolling interest for $77.2 million. Effective September 30, 2005, KAR became a wholly-owned subsidiary of PXP. PXP paid $9.7 million of the additional purchase price in October 2005 and issued promissory notes to the sellers in the amount of $67.0 million to finance the remainder of the acquisition, of which $9.8 million was paid on January 3, 2006. The remainder, plus deferred interest, is due in January 2007. The interest rate on the notes is 4.75%. Related to the initial purchase in 2002, we allocated $0.3 million of the initial purchase price to tangible net assets acquired and $102.1 million to intangible assets ($58.3 million to investment management contracts and $43.8 million to goodwill).
On May 2, 2005, we completed the acquisition of the minority interest in Seneca Capital Management, or Seneca, thereby increasing our ownership to 100%. The effect of this acquisition is not material to our consolidated financial statements.
In September 2005, the Accounting Standards Executive Committee, or AcSEC, of the American Institute of Certified Public Accountants, or AICPA, issued Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts, or SOP 05-1. SOP 05-1 provides guidance on accounting by insurance enterprises for deferred policy acquisition costs, or DAC, on internal replacements of insurance and investment contracts other than those specifically described in Statement of Financial Accounting Standards No. 97, or SFAS 97. The SOP defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. This SOP is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. We will adopt SOP 05-1 on January 1, 2007. We are currently assessing the impact of SOP 05-1 on our consolidated financial position and results of operations.
Share-Based Payment: On December 16, 2004 the Financial Accounting Standards Board, or the FASB, issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, or SFAS 123(R), which is effective January 1, 2006 and requires that compensation cost related to share-based payment transactions be recognized in financial statements at the fair value of the instruments issued. While prior to the issuance of SFAS 123(R), recognition of such costs at fair value was optional, we elected to do so for all share-based compensation that we awarded after December 31, 2002. Accordingly, we do not expect our adoption of SFAS 123(R) to have a material effect on our consolidated financial statements.
Other-Than-Temporary Impairments: FASB Staff Position Nos. FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, or FSP 115-1, is effective for reporting periods beginning after December 15, 2005. Earlier application is permitted. FSP 115-1 provides guidance as to the determination of other-than-temporarily impaired securities and requires certain financial disclosures with respect to unrealized losses. These accounting and disclosure requirements largely codify our existing practices as to other-than-temporarily impaired securities and thus, does not have a material effect on our consolidated financial statements.
Nontraditional Long-Duration Contracts and Separate Accounts: Effective January 1, 2004, we adopted the AICPA’s Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts, or SOP 03-1. SOP 03-1 provides guidance related to the accounting, reporting and disclosure of certain insurance contracts and separate accounts, including guidance for computing reserves for products with guaranteed benefits such as guaranteed minimum death benefits and for products with annuitization benefits such as guaranteed minimum income benefits. In addition, SOP 03-1 addresses the presentation and reporting of separate accounts, as well as rules concerning the capitalization and amortization of sales inducements. Since this new accounting standard largely codifies certain accounting and reserving practices related to applicable nontraditional long-duration contracts and separate accounts that we already followed, our adoption did not have a material effect on our consolidated financial statements.
The above non-cash credits (charges) to earnings and stockholders’ equity primarily relate to realized and unrealized investment losses within the CDOs. Upon maturity or other liquidation of the trusts, the fair value of the investments pledged as collateral will be used to settle the non-recourse collateralized obligations with any shortfall in such investments inuring to the third-party note and equity holders. To the extent there remains a recorded liability for non-recourse obligations after all the assets pledged as collateral are exhausted, such amount will be reduced to zero with a corresponding benefit to earnings. Accordingly, these investment losses and any future investment losses under this method of consolidation will ultimately reverse upon the maturity or other liquidation of the non-recourse collateralized obligations. These non-recourse obligations mature between 2011 and 2012 but contain call provisions. The call provisions may be triggered at the discretion of the equity investors based on market conditions and are subject to certain contractual limitations.
Deferred Policy Acquisition Costs (“DAC”) and Present Value of Future Profits (“PVFP”)
Investments whose value, in our judgment, is considered to be other-than-temporarily impaired are written down to fair value as a charge to realized losses included in our earnings. The cost basis of these written-down investments is adjusted to fair value at the date the determination of impairment is made. The new cost basis is not changed for subsequent recoveries in value. For mortgage-backed and other asset-backed debt securities, we recognize income using a constant effective yield based on anticipated prepayments and the estimated economic lives of the securities. When actual prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date and any resulting adjustment is included in net investment income. For certain asset-backed securities, changes in estimated yield are recorded on a prospective basis and specific valuation methods are applied to these securities to determine if there has been an other-than-temporary decline in value. We report mortgage loans at unpaid principal balances, net of valuation reserves on impaired mortgages. We consider a mortgage loan to be impaired if we believe it is probable that we will be unable to collect all amounts of contractual interest and principal as scheduled in the loan agreement. We do not accrue interest income on impaired mortgage loans when the likelihood of collection is doubtful.
See Note 5 to our consolidated financial statements and the Debt and Equity Securities and Enterprise Risk Management sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K for more information.
We record our equity in the earnings of venture capital partnerships in net investment income using the most recent financial information received from the partnerships and estimating the change in our share of partnership earnings for significant changes in equity market conditions during the quarter to eliminate the effect of any lag in reporting. We estimate the change in valuation each quarter by applying a public industry index if there has been a material shift in the S&P index, either upward or downward.
As of December 31, 2005, we had deferred tax assets of $49.9 million and $15.7 million related to net operating and capital losses, respectively, for federal income tax purposes and $10.0 million for state net operating losses. The related federal net operating losses of $142.6 million are scheduled to expire between the years 2016 and 2025. The federal capital losses of $44.8 million are scheduled to expire between 2009 and 2010. The state net operating losses relate to the non-life subgroup and are scheduled to expire as follows: $34.2 million in 2012 and 2014 and $91.3 million in 2019 through 2024. Due to the inability to combine the life insurance and non-life insurance subgroups for state income tax purposes, we established a $9.8 million and a $7.9 million valuation allowance at the end of 2005 and 2004, respectively, relative to the state net operating loss carryforwards.
As of December 31, 2005, our deferred income tax asset of $0.1 million related to foreign tax credit carryovers was expected to expire between the 2006 and 2008 tax years.
We have determined, based on our earnings and future income, that it is more likely than not that the deferred income tax assets after valuation allowance already recorded as of December 31, 2005 and 2004 will be realized. In determining the adequacy of future income, we have considered projected future income, reversal of existing temporary differences and available tax planning strategies that could be implemented, if necessary.
See Note 11 to our consolidated financial statements in this Form 10-K for more information on our pension and other postemployment benefits.
Income (loss) before income taxes, minority interest and equity in earnings of affiliates
Income (loss) from continuing operations before minority interest and equity in earnings of affiliates
Full year 2005 net income of $108.4 million, or $1.06 per diluted share, increased 25% over 2004 net income of $86.4 million, or $0.86 per diluted share, which was substantially improved from the 2003 net loss of $6.2 million, or $0.07 per diluted share. The increase for 2005 was the result of 35% growth in Life and Annuity pre-tax operating earnings and a lower effective tax rate, partially offset by lower earnings in Asset Management and Venture Capital and lower investment gains. Full year 2005 net income included a $35.1 million gain on the settlement of our HRH stock purchase contracts in November, a $9.0 million loss on the sale of certain venture capital partnerships, a $7.0 million loss on the sale of our equity investment in Aberdeen and $12.4 million of restructuring charges, principally related to restructuring of our asset management operations and completion of our outsourcing of information technology infrastructure to Electronic Data Systems, or EDS. Finally, full year 2005 results include $1.3 million in realized gains related to CDOs consolidated by us under FIN 46(R), compared to realized losses of $12.9 million in 2004.
The 2004 increase in net income was the result of higher pre-tax operating earnings from Life and Annuity, which grew by 44%, higher Asset Management earnings, higher net investment gains and a lower effective tax rate, partially offset by lower Venture Capital segment earnings in 2004 and a higher loss for the Corporate and Other segment in 2004. Full year 2004 net income included a $41.2 million gain on our equity investment in Aberdeen, a $6.4 million charge related to the fourth quarter tender of $144.8 million in surplus notes and restructuring charges of $21.9 million, principally related to severance and other transition costs related to the sale of our life and annuity retail affiliated distribution operations and the outsourcing of our information technology infrastructure to EDS. Full year 2003 net income includes a $55.0 million charge for the impairment of our equity investment in Aberdeen and restructuring charges of $8.5 million principally related to employee severance costs. Finally, full year 2004 results include $12.9 million in realized losses related to CDOs consolidated by us under FIN 46(R), compared to realized losses of $2.4 million for 2003.
Life and Annuity pre-tax segment income was $192.5 million in 2005, compared to $142.8 million in 2004 and $99.4 million in 2003. The life insurance business had pre-tax income of $180.5 million in 2005 compared to $130.1 million in 2004 and $100.5 million in 2003, while the annuity business had pre-tax income of $12.0 million in 2005 compared to $12.7 million in 2004 and a loss of $1.1 million in 2003. Full year improvements for Life and Annuity in 2005 reflect strong investment margins for life and annuity lines and continued favorable mortality and persistency. Life and Annuity benefited from an adjustment, or unlocking, of assumptions primarily related to DAC, which increased pre-tax segment income by $23.8 million for the second quarter. However, this benefit was reduced in the second half of 2005 as a result of higher DAC amortization, particularly for universal life. Even without the DAC unlocking, life and annuity earnings increased by more than 18% over 2004.
Life sales regained momentum in 2005, after declining in 2004 due to the sale of our retail affiliated distribution and our unwillingness to compete aggressively with products that contain no-lapse guarantees. Total life premiums and annualized life premiums were up by 33% and 69%, respectively, over 2004. We continued to benefit from the strength of our distribution relationships that have access to our target market, the value-added services and support we provide as well as our large-case underwriting expertise. We experienced a significant increase in large estate and business planning cases, some of which involved the use of non-recourse premium financing. In the first quarter of 2006 we affirmed our position that we will not accept sales of policies that employ this type of premium financing and do not contain strong evidence of insurance need and an insurable
interest. We believe our vigilance in monitoring this activity, along with regulatory developments in this area, may impact sales but expect the overall trend in life sales to remain positive in 2006. Annuity deposits decreased in 2005, reflecting lower-than-anticipated sales from new product introductions, while funds in lower returning discontinued annuity products continued to decline. Private placement life and annuity deposits, which are not included in life sales or annuity deposits, were $820.3 million for 2005, nearly four times the 2004 deposits of $212.7 million.
relating to the universal life contracts with low-priced no-lapse guarantees that prevailed in the market throughout the year. In addition, sales decreased as anticipated after the sale of our affiliated retail distribution operations to LPL during the second quarter and were slower to rebound than originally projected. The decrease in annuity deposits reflects our strategic decisions in the fall of 2003 to discontinue sales of deferred fixed annuities, and to focus annuity wholesaling on select distribution relationships, as well as the sale of our affiliated retail distribution operations in the second quarter of 2004.
Asset Management pre-tax segment loss was $10.5 million in 2005, compared to pre-tax income of $0.1 million in 2004 and a pre-tax segment loss of $8.7 million in 2003. The 2005 decrease was a result of lower revenues, due to declines in assets under management and lower performance fees and of a $10.6 million intangible asset impairment in the third quarter of 2005, offset by significantly lower expenses. In 2005, we completed the conversion of our asset management operations to a wholly-owned structure, refocused on retail distribution, adding more than 6,000 new producers, and expanded and strengthened our product offerings. These accomplishments put us in a stronger position for earnings growth. The improvement in 2004 results was driven by higher revenues from higher average assets under management and lower general and administrative expenses, partially offset by higher formulaic compensation expense, which is driven by higher investment product fee revenues.
December 31, 2005 assets under management for the Asset Management segment were $37.4 billion compared with $42.9 billion on December 31, 2004. Average assets under management were $41.3 billion as of December 31, 2005, compared to average assets under management of $44.9 billion and $42.9 billion in 2004 and 2003, respectively. Full year 2005 net flows were negative $5.6 billion (inflows of $10.3 billion; outflows of $15.9 billion) compared with negative net flows in 2004 of $6.6 billion (inflows of $6.7 billion; outflows of $13.3 billion), and negative net flows in 2003 of $1.2 billion (inflows of $7.0 billion; outflows of $8.2 billion). The full year 2005 negative net flows were driven by continued redemptions in managed accounts and institutional products, primarily related to certain underperforming equity strategies and the $1.2 billion redemption of the Phoenix-Mistic 2002-1 CDO, Ltd., or Mistic, in the third quarter of 2005. Sales increased 55% in 2005, driven by mutual fund sales, which increased 21% due to our emphasis on expanding relationships with advisors, as well as institutional sales, which more than doubled in 2005. The 2004 full year negative net flows were also driven primarily by outflows from certain underperforming equity strategies and by $1.7 billion of fixed income institutional redemptions during the year that were unrelated to performance. Fixed income products performed strongly, with positive net flows for 2004, excluding the institutional outflows noted above. Retail mutual fund sales rose by 12% in 2004, reflecting the strong fixed income and specialty fund performance.
Venture Capital had 2005 pre-tax segment income of $14.8 million compared to income of $19.3 million and $36.2 million in 2004 and 2003, respectively. The 2005 results reflected lower portfolio returns in our partnerships, while the 2004 and 2003 results reflected generally favorable private equity market conditions.
Our 2005 realized investment gains were $34.2 million (before offsets for DAC, policyholder dividend obligation liability and taxes) compared to realized investment losses of $0.8 million and $98.5 million in 2004 and 2003, respectively. After offsets, realized investment gains were $19.8 million in 2005, compared to losses of $7.2 million and $52.9 million in 2004 and 2003 respectively. Impairment losses, before offsets, of $35.3 million continued to decline from $49.5 million and $210.8 million in 2004 and 2003, respectively, as a result of the considerable improvement in credit market conditions since mid-2003. Impairment losses for 2004 include an $11.6 million impairment ($6.7 million after-taxes) related to our investment in an Argentina affiliate, while 2003 impairments include an $89.1 million impairment ($55.0 million after-taxes) of our equity investment in Aberdeen. Transaction gains, before offsets, of $69.5 million for 2005 compare with gains of $48.7 million in 2004 and $112.3 million in 2003. Transaction gains in 2005 include an $86.3 million realized gain on the settlement of HRH stock purchase contracts and a $13.9 million loss on the venture capital transaction. Transaction gains in 2003 included $35.3 million in pre-tax gains from the sale of certain of our equity investments.
Premium revenue decreased $61.9 million, or 6%, in 2005 from 2004, due primarily to decreases in premiums on the traditional life insurance block, which is comprised mainly of participating life insurance policies. Since our demutualization in 2001, we no longer sell participating life policies, resulting in a decline in participating life renewal premiums. In addition, there were large supplemental contract premiums in 2004 that did not recur in 2005.
Insurance and investment product revenue decreased $20.2 million, or 4%, in 2005 from 2004. Asset Management fees decreased $38.0 million in 2005 due primarily to lower average assets under management. Retail and institutional investment product fees decreased $23.1 million and $12.8 million, respectively, as a result of the decrease in average assets under management. Other investment product fees decreased $1.9 million due to decreased volumes in equity trading by certain investment managers, which resulted in fewer commissions earned. Approximately 52% of our management fee revenues were based on assets as of the beginning of a quarter, which causes fee revenues to lag behind changes in assets under management. These decreases were offset by Life and Annuity fees, which increased $23.0 million in 2005. This increase was due primarily to higher universal life fees, primarily cost of insurance fees, variable universal life fees and annuity fees. See the revenue by product discussion that follows for additional details. These increases were partially offset by lower other life revenues (excluding broker-dealer commissions and distribution fees), primarily related to the sale of our retail affiliated broker-dealer operations in May 2004. In addition, Corporate and Other revenues decreased in 2005 due to the sale of certain non-core businesses in 2004.
Net investment income increased $26.9 million, or 3%, in 2005 over 2004, due primarily to higher earnings from the Life and Annuity segment of $31.2 million, which were generated from partnership and private equity gains, higher funds on deposit, particularly for universal life and an increased invested asset base.
Net realized investment gains improved $35.0 million, to a gain of $34.2 million in 2005 from a loss of $0.8 million in 2004. This was due primarily to higher transaction-related gains of $20.8 million and lower impairment losses of $14.2 million, primarily related to investments pledged as collateral. Transaction-related gains included a realized gain for HRH stock that was delivered in settlement of the stock purchase contracts and the redemption of the Mistic CBO, offset by the realized loss on the sale of a portion of our venture capital assets.
Policy acquisition cost amortization increased $21.9 million, or 20%, in 2005 over 2004, due primarily to an increase of $18.0 million related to the effect of realized gains and higher amortization for universal life and annuities offset by the effects of unlocking. Amortization increased for universal life insurance due to higher insurance margins and growth of in-force policies and increased for annuities due to improved investment margins and higher surrenders.
Intangible asset impairments of $10.6 million in 2005 related to $13.2 million of identified intangible assets for certain investment contracts that had experienced significant outflows.
Other operating expenses, which include non-deferrable policy acquisition costs, commissions due to broker-dealer registered agents, finders fees, formulaic incentive compensation related to asset management revenue growth and other segment and administrative expenses, decreased $82.8 million, or 15%, in 2005 from 2004. The decrease is due to lower restructuring and non-recurring expenses of $24.5 million, lower Life and Annuity expenses of $21.4 million and lower Asset Management expenses of $35.9 million. The decrease in Life and Annuity expenses is due to lower broker-dealer commissions, which resulted from the sale of our retail affiliated broker-dealer operations in May 2004, partially offset by higher expenses due to business growth and investment in product development. The primary reason for the decrease in Asset Management expenses related to lower incentive compensation expense and lower mandatorily redeemable interest costs due to the acquisition of the outstanding remaining mandatorily redeemable noncontrolling interest in certain subsidiaries during the second and third quarters.
Premium revenue decreased $51.6 million, or 5%, in 2004 from 2003, due primarily to a $51.1 million decrease in participating life insurance premiums. Since our demutualization in 2001, we no longer sell participating life policies, resulting in a decline in renewal participating life premiums. This decline in policies in force reduces reserves, resulting in lower policyholder benefit costs.
revenues were based on assets as of the beginning of a quarter, which causes the trend in fees to lag behind that of assets under management. The increase in Life and Annuity revenues in 2004 was due primarily to higher universal life insurance fees of $14.3 million, principally from cost of insurance fees, and higher annuity fees due primarily to higher fee-based funds on deposit. Corporate and Other fees decreased in 2004 due to the sale of our India software services subsidiary.
Broker-dealer commission and distribution fee revenues decreased $24.6 million, or 30%, in 2004 from 2003, due to the sale of our retail affiliated broker-dealer operations in May 2004. This decrease was partially offset by a modest increase in broker-dealer commissions for Asset Management.
Net realized investment losses decreased by $97.7 million, or 99%, in 2004 compared to 2003, due primarily to significantly lower impairments in general account debt and equity securities as a result of the improved in credit environment in 2004, offset by lower transaction-related gains. Realized losses from impairments on general account debt securities decreased $60.6 million from 2003. Impairment losses in 2004 included $12.6 million in charges related to two international investments, while 2003 included a $96.9 million pre-tax charge for the impairment of three international investments, $89.1 million of which related to the impairment of our equity investment in Aberdeen.
Policyholder benefits, including dividends, decreased $45.9 million, or 2%, due primarily to lower benefits and changes in policy reserves and policyholder dividends for participating life resulting from a decline in renewal premiums, as discussed above; lower interest credited from reduced crediting rates, principally from universal life; and lower general account funds on deposit for annuities. These decreases were partially offset by a larger increase in the policyholder dividend obligation, higher reserves for annuities and higher benefits for universal life and variable universal life insurance. The increase in universal life and variable universal life benefits was due to a large death claim, for universal life, in the first quarter of 2004 combined with very favorable mortality for both lines of business in 2003.
Policy acquisition cost amortization increased $16.1 million, or 17%, in 2004 over 2003, due primarily to higher amortization for annuities from higher gross margins, growth in funds on deposit and lower relative performance in 2004. Amortization for variable universal life, universal life and term life increased modestly as a result of growth in funds on deposit, or in-force policies, for term life. The effect of realized gains (losses) on the amortization also contributed to the increase in 2004. These increases were partially offset by modestly lower amortization for participating life.
$22.3 million and surplus notes tender costs of $9.8 million in 2004. Life and Annuity expense decreased due primarily to reductions resulting from the sale of our retail affiliated broker-dealer operations in May 2004 and lower general and administrative and non-deferred expenses from expense reduction initiatives. Asset Management expense increased modestly due to an increase in formulaic compensation expense driven by higher investment management fees partially offset by the impact of expense reduction initiatives. In addition, Corporate and Other operating expenses increased due primarily to higher regulatory compliance and corporate information technology costs.
For the years 2005, 2004 and 2003, inflation did not have a material effect on our consolidated results of operations.
The criteria used to identify an item that will be excluded from segment income include: whether the item is infrequent and is material to the segment’s income; or whether it results from a business restructuring or a change in the regulatory requirements, or relates to other unusual circumstances (e.g., non-routine litigation). We include information on other items allocated to our segments in their respective consolidated financial statement footnotes for information only. Items excluded from segment 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 income and total segment return on equity are not substitutes for net income determined in accordance with GAAP and may be different from similarly titled measures of other companies.
Net realized investment gains (losses), net of income taxes and other offsets
For information regarding the allocation of these items to each segment, see the segment discussions below.
We evaluate the Company’s financial performance based, in part, on total segment return on equity, calculated as total segment income as a percentage of average adjusted stockholders’ equity(1). We believe this ratio measures the return management is generating on shareholder investment and the efficiency of the Company’s use of its assets and resources.
We allocate capital to our Life and Annuity segment based on risk-based capital for our insurance products. We used a 300% risk-based capital ratio for allocations in 2002 through 2005. Capital within our Life Companies that is unallocated is included in our Corporate and Other segment. We allocate capital to our Asset 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 tax benefits related to tax-advantaged investments to the segment that holds the investment. We allocate certain costs and expenses to the segments based on a review of the nature of the costs, time studies and other methodologies.
Net realized investment losses, net of income taxes and other offsets
Premium revenue decreased $61.9 million, or 6%, in 2005 from 2004, due primarily to lower premiums on the traditional life insurance block, which is comprised mainly of participating life insurance policies. Since our demutualization in 2001, we no longer sell participating life policies, resulting in a decline in participating life renewal premiums.
Insurance and investment product fee revenues increased $23.0 million, or 8%, in 2005 over 2004, due primarily to higher universal life fees, variable universal life fees and annuity fees. See the product revenue discussion below for additional details. These increases were partially offset by lower other life revenues (excluding broker-dealer commissions and distribution fees), primarily related to the sale of our retail affiliated broker-dealer operations in May 2004.
Allocated income taxes increased $14.9 million, or 41%, in 2005 over 2004, due primarily to higher pre-tax income offset by additional tax credits earned and tax benefits resulting from the completion of an IRS audit.
Other operating expenses, which include non-deferrable policy acquisition costs, broker-dealer commissions due to Griffith and Main Street registered agents and general and administrative costs, decreased $55.9 million, or 19% in 2004 from 2003. This decrease is principally due to lower broker-dealer commissions for Griffith and Main Street registered agents, reduced operating expenses as a result of the sale of our retail affiliated broker-dealer operations in May of 2004 and lower general and administrative non-deferred expenses as a result of recent expense reduction initiatives.
Annuity funds on deposit increased $335.2 million in 2005 compared to an increase of $354.9 million in 2004, with higher deposits offset by higher surrenders and lower relative performance in 2005. Included in deposits are large private placement deposits in the first and fourth quarters of 2005.
Life insurance and annuity sales and deposits fell short of our expectations in 2004 and were well below 2003 levels. Life insurance sales were lower due to our decision to maintain pricing and risk management discipline, particularly relating to the universal life contracts with low-priced, no-lapse guarantees that prevailed in the market throughout the year. In addition, sales decreased as anticipated after the sale of our affiliated retail distribution operations to LPL during the second quarter and were slower to rebound than originally projected. The decrease in annuity deposits reflects our strategic decisions in the fall of 2003 to discontinue sales of deferred fixed annuities and to focus annuity wholesaling on select distribution relationships, as well as the sale of our affiliated retail distribution operations in the second quarter of 2004.
Variable universal life insurance revenue increased $5.5 million, or 5%, in 2005 over 2004 due primarily to higher cost of insurance fees, slightly improved investment earnings and increased fees due to the unlocking discussed previously.
Other life insurance revenue decreased $32.0 million in 2005 from 2004, due primarily to lower broker-dealer commission and distribution fee revenues resulting from the sale of our retail affiliated broker-dealer operations in May 2004.
Annuity revenue increased $9.9 million, or 4%, in 2005 over 2004, due primarily to higher investment earnings resulting from the extension of asset duration and higher interest rates, higher fees from increased fee-based funds on deposit and modestly higher surrender charges.
Universal life insurance revenue increased $16.5 million, or 8%, in 2004 over 2003, due primarily to higher cost of insurance fees from the growth of in-force business, higher fees from higher premium deposits and slightly higher investment earnings from higher funds on deposit.
Other life insurance revenue decreased $28.5 million, or 46%, in 2004 from 2003, due primarily to lower broker-dealer commission and distribution fee revenues resulting from the sale of our retail affiliated broker-dealer operations in May 2004.
Variable universal life pre-tax income increased $33.9 million, or 95%, in 2005 over 2004, due primarily to the effects of unlocking, increased revenue and favorable mortality.
Universal life pre-tax income increased $13.5 million, or 39%, in 2005 over 2004, due to improved insurance margins from higher cost of insurance fees offset by slightly higher claims, improved investment earnings and a favorable unlocking adjustment. These increases in pre-tax income were partially offset by higher expenses, net of deferrals and higher DAC amortization from growth of the in-force block, higher margins and, in the second half of 2005, the effects of unlocking.
Traditional life pre-tax income increased $3.1 million, or 5%, in 2005 over 2004, due primarily to improved investment earnings in the open block of participating life insurance, partially offset by the effects of unlocking, lower earnings in term life insurance, from higher non-deferred expenses, and higher claims related to an old block of corporate owned life insurance. The decrease in premium revenues discussed above is largely offset by lower benefits, changes in reserves and dividends to policyholders.
Variable universal life pre-tax income increased $0.7 million, or 2%, in 2004 over 2003, due primarily to reduced expenses from lower sales and expense reduction initiatives combined with higher revenues, as discussed above. These increases were partially offset by higher benefit costs and slightly higher DAC amortization in 2004.
Universal life pre-tax income increased $12.7 million, or 59%, in 2004 over 2003, due primarily to higher revenues, as discussed above, lower interest credited from reduced crediting rates and lower general and administrative expenses. These increases were partially offset by higher benefit costs resulting from a large death claim in the first quarter of 2004, combined with very favorable mortality in 2003, which did not recur in 2004.
Traditional life pre-tax income increased $14.8 million, or 34%, in 2004 over 2003, due primarily to lower general and administrative expenses. Because operating expenses are excluded for the closed block, such operating expense savings inure to the benefit of shareholders. The decrease in revenues, as discussed above, are largely offset by lower benefits, changes in reserves and dividends to policyholders.
Annuity pre-tax income increased to $12.7 million in 2004 from a loss of $1.1 million in 2003, due primarily to higher revenues, as discussed above, lower interest credited from lower general account funds on deposit and reduced expenses from lower sales and expense reduction initiatives, partially offset by higher DAC amortization from higher gross margins, growth in funds on deposit, lower relative performance in 2004 and slightly higher benefit costs.
Investment product fees decreased $38.0 million, or 16%, in 2005 over 2004. This decrease was due primarily to a decrease in average assets under management compared to the prior year. Retail and institutional investment product fees decreased $23.1 million and $12.8 million, respectively, as a result of the decrease in average assets under management. Other investment product fees decreased $1.9 million due to decreased volumes in equity trading by certain investment managers, which resulted in fewer commissions earned. Approximately 52% of our management fee revenues were based on assets as of the beginning of a quarter, which causes fee revenues to lag behind changes in assets under management.
management fee revenues were based on assets as of the beginning of a quarter, which causes fee revenues to lag behind changes in assets under management.
Assets under management were $42.9 billion and $46.3 billion, at December 31, 2004 and 2003 respectively. The decrease in assets under management during 2004 was due primarily to net outflows of $6.6 billion for the year, offset, in part, by positive investment performance of $2.9 billion. Sales of retail products in 2004 were $3.8 billion, which was a decrease of 2% from 2003. The majority of this decline was due to reduced sales of sponsored managed accounts at Seneca and KAR. Redemptions of retail products in 2004 were $7.2 billion, which was an increase of 60% from 2003. This increase was primarily related to the loss of sponsored managed accounts at Seneca. Sales of institutional accounts in 2004 were $2.9 billion, which was an 8% decrease from 2003. Redemptions of institutional accounts in 2004 were $6.0 billion, which was an increase of 67% from 2003.
Allocated income tax benefits increased $5.6 million in 2004 over 2003 as a result of segment income in 2004 compared to segment losses in 2003 and additional state taxes allocated to the Asset Management segment.
The pre-tax segment loss for Corporate and Other increased $10.5 million, or 18%, in 2005 over 2004, due primarily to higher allocated corporate expenses and higher interest expense on indebtedness from our surplus notes refinancing transaction in December 2004 and our issuance of notes to finance the KAR acquisition. The decrease in interest income on collateralized debt obligations was fully offset by lower interest and administrative expenses on those collateralized debt obligations.
The decrease in interest income and increase in expenses on collateralized debt obligations were fully offset by lower interest expense on those collateralized debt obligations.
Investments pledged as collateral trusts are assets held for the benefit of those institutional clients which have investments in structured bond products offered and managed by our asset management subsidiary.
The table below shows the estimated interest rate sensitivity of our fixed income financial instruments measured in terms of fair value.
The funds in the RPE GIAs decreased by $298.0 million during 2005. We believe most contract holders currently view RPE as an alternative to money market investments.
Equity risk is the risk that we will incur economic losses due to adverse changes in equity prices. Our exposure to changes in equity prices primarily results from our variable annuity and variable life products, as well as from our holdings of common stocks, mutual funds and other equities. We manage our insurance liability risks on an integrated basis with other risks through our liability and risk management and capital and other asset allocation strategies. We also manage equity price risk through industry and issuer diversification and asset allocation techniques. We held $181.8 million in equity securities on our balance sheet as of December 31, 2005. A 10% decline or increase in the relevant equity price would have decreased or increased, respectively, the value of these assets by approximately $18.2 million as of December 31, 2005.
Net amount at risk on minimum guaranteed death benefits (before reinsurance)
Net amount at risk on minimum guaranteed death benefits (after reinsurance)
We establish a reserve for guaranteed minimum death benefits using a methodology consistent with the AICPA SOP No. 03-01, Accounting and Reporting by Insurance Enterprises for Certain Non-traditional Long Duration Contracts and for Separate Accounts. This reserve is determined using the net amount at risk taking into account estimates for mortality, equity market returns, and voluntary terminations under a wide range of scenarios at December 31, 2005 and 2004.
Certain annuity products sold by our Life Companies contain guaranteed minimum living benefits. These include guaranteed minimum accumulation, withdrawal, income and payout annuity floor benefits. We have established a hedging program for managing the risk associated with our new guaranteed minimum accumulation and withdrawal benefit features. As of December 31, 2005, sales of these benefits had not yet created a significant enough exposure to meet our requirement for executing derivative transactions under that hedge program. We continue to analyze and refine our strategies for managing risk exposures associated with all our separate account guarantees.
See Note 3 to our consolidated financial statements in this Form 10-K for more information regarding DAC.
We sponsor defined benefit pension plans for our employees. For GAAP accounting purposes, we assumed an 8.5% long-term rate of return on plan assets in the most recent valuations, performed as of December 31, 2005. To the extent there are deviations in actual returns, there will be changes in our projected expense and funding requirements. As of December 31, 2005, the projected benefit obligation for our defined benefit plans was in excess of plan assets by $258.4 million. We made payments totaling $27.7 million to the pension plan during 2005, including $5.7 million toward the estimated 2005 contribution and $22.0 million of additional contributions. Due to pending legislation, the amount of funding that will be required in the future is uncertain. However, we expect that our required contributions will be between $35.7 million and $68.9 million through 2010, based on current and proposed legislation. Regardless of the outcome of the pending legislation, we expect our estimated contribution for 2006 to be $1.9 million. See Note 11 to our consolidated financial statements in this Form 10-K for more information on our employee benefit plans.
Each year, the majority of our general account’s net cash flows are invested in investment grade debt securities. In addition, we maintain a portfolio allocation of between 6% and 10% of debt securities in below investment grade rated bonds. Allocations are based on our assessment of relative value and the likelihood of enhancing risk-adjusted portfolio returns. The size of our allocation to below investment grade bonds is also constrained by the size of our net worth. We are subject to the risk that the issuers of the debt securities we own may default on principal and interest payments, particularly in the event of a major economic downturn. Our investment strategy has been to invest the majority of our below investment grade rated bond exposure in the BB rating category, which is equivalent to a Securities Valuation Office, or SVO, securities rating of 3. The BB rating category is the highest quality tier within the below investment grade universe, and BB rated securities historically experienced
Our general account debt and equity securities are classified as available-for-sale and are reported at fair value with unrealized gains or losses included in equity. Accordingly, the carrying value of such securities reflects their fair value at the balance sheet date. Fair value is based on quoted market price, where available. When quoted market prices are not available, we estimate fair value for debt securities by discounting projected cash flows based on market interest rates currently being offered on similar terms to borrowers of similar credit quality, by quoted market prices of comparable instruments and by independent pricing sources or internally developed pricing models. Investments whose value, in our judgment, are considered to be other-than-temporarily impaired are written down to fair value as a charge to realized losses included in our earnings. The cost basis of these written-down investments is adjusted to fair value at the date the determination of impairment is made. The new cost basis is not changed for subsequent recoveries in value.
We manage credit risk through industry and issuer diversification. Maximum exposure to an issuer is defined by quality ratings, with higher quality issuers having larger exposure limits. Our investment approach has been to create a high level of industry diversification. The top five industry holdings as of December 31, 2005 in our debt securities portfolio are banking (6.1%), insurance (4.0%), diversified financial services (3.6%), electrical utilities (3.1%), and other foreign government (2.4%).
six months, greater than six months to 12 months, greater than 12 months to 24 months and greater than 24 months. This analysis is provided for investment grade and non-investment grade securities and closed block and outside of closed block securities. Using this analysis, coupled with our watch list, we review all securities whose fair value is less than 80% of amortized cost (significant unrealized loss) with emphasis on below investment grade securities with a continuous significant unrealized loss in excess of six months. In addition, we review securities that had experienced lesser percentage declines in value on a more selective basis to determine if a security is other-than-temporarily impaired.
announced adverse changes or events such as changes or planned changes in senior management, restructurings, or a sale of assets; and/or
On January 11, 2005, we disposed of our interests in Lombard International Assurance S.A., or Lombard, for proceeds of $59.0 million. We realized an after-tax gain of $9.3 million in the first quarter of 2005 related to this sale, including earn-out consideration received. We may be entitled to additional earn-out consideration based on Lombard’s financial performance through 2006.
Cash from investing activities increased $752.6 million in 2005 over 2004 due primarily to the dissolution of the Mistic CBO, offset by higher investment purchases in 2005. See Note 8 to our consolidated financial statements in this Form 10-K for additional information on the Mistic CBO.
Cash for financing activities increased $1,250.8 million in 2005 over 2004 due primarily to the dissolution of the Mistic CBO, discussed above, and net withdrawals of policyholder deposit funds.
Cash from continuing operations investing activities was $133.9 million for 2004 compared to cash for continuing operations investing activities of $1,139.2 million for 2003. The $1,273.1 million change was due primarily to lower investment purchases resulting from lower cash from operating and financing activities in 2004 and higher cash balances at the beginning of 2003 that were invested during 2003.
Cash for investing activities increased $14.3 million in 2005 from 2004 due to increases in capital contributions to subsidiaries.
Our primary sources of liquidity have been dividends from Phoenix Life and interest income received from PXP. Under New York Insurance Law, Phoenix Life can pay stockholder dividends to the holding company in any calendar year without prior approval from the New York Superintendent of Insurance in the amount of the lesser of 10% of Phoenix Life’s surplus to policyholders as of the immediately preceding calendar year or Phoenix Life’s statutory net gain from operations for the immediately preceding calendar year, not including realized capital gains. Phoenix Life paid a dividend of $35.1 million during 2005 and is able to pay a dividend of $88.6 million in 2006 under this provision. See Note 15 to our consolidated financial statements in this Form 10-K for more information on Phoenix Life statutory financial information and regulatory matters.
We sponsor postemployment benefit plans through pension and savings plans and postretirement health care and life insurance for employees of Phoenix Life and PXP. Funding of these obligations is provided by Phoenix Life and PXP on a 100% cost reimbursement basis through administrative services agreements with the holding company. See Note 11 to our consolidated financial statements in this Form 10-K for additional information.
PXP pays interest to the holding company on its debt from the holding company. The holding company does not expect to receive dividends from PXP in the near term because this subsidiary will likely use a substantial portion of its cash flows from operations to finish paying for additional ownership in its existing wholly-owned subsidiaries and to repay intercompany debt, including debt to the holding company and interest on debt.
On November 22, 2004, we entered into a $150.0 million three-year, unsecured senior revolving credit facility to replace our prior $150.0 million credit facility. Potential borrowers on the credit line are The Phoenix Companies, Inc., PXP and Phoenix Life. We unconditionally guarantee any loans under this facility to Phoenix Life and PXP. Base rate loans will bear interest at the greater of Wachovia Bank, National Association’s prime commercial rate or the federal funds rate plus 0.50%. Eurodollar rate loans will bear interest at LIBOR plus an applicable percentage based on our Standard & Poor’s and Moody’s ratings. PXP has taken a $25 million draw on this facility at the Eurodollar rate.
We were in compliance with all of our credit facility covenants at December 31, 2005. We obtained a waiver for our requirement to pay down the bank line with equity issuance proceeds in order to simplify the settlement of our existing equity units on February 16, 2006.
See Note 6 to our consolidated financial statements in this Form 10-K for additional information on financing activities.
The Life Companies’ liquidity requirements principally relate to: the liabilities associated with various life insurance and annuity products; the payment of dividends by Phoenix Life to us; operating expenses; contributions to subsidiaries; and payment of principal and interest by Phoenix Life on its outstanding debt obligations. Liabilities arising from life insurance and annuity products include the payment of benefits, as well as cash payments in connection with policy surrenders, withdrawals and loans. The Life Companies also have liabilities arising from the runoff of the remaining group accident and health reinsurance discontinued operations.
PXP’s liquidity requirements are primarily to fund operating expenses and pay its debt and interest obligations. PXP also requires liquidity to fund the costs of payments owed for additional ownership in existing wholly-owned subsidiaries, as well as any potential acquisitions. Historically, PXP’s principal source of liquidity has been cash flow from operations. We expect that cash flow from operations will continue to be its principal source of working capital. Its current sources of liquidity also include a revolving credit facility under which it has direct borrowing rights subject to our unconditional guarantee. We believe that PXP’s current and anticipated sources of liquidity are adequate to meet its present and anticipated needs. See Notes 4 and 6 to our consolidated financial statements in this Form 10-K for further details on our financing activities.
Trading equity securities decreased in 2005 as a result of the sale of our investment in Aberdeen.
The increase in DAC reflects growing blocks of funds on deposit for universal life, variable universal life and variable annuities, while the decrease for traditional life reflects the fact that we no longer sell participating life policies.
Policyholder contractual obligations represent estimated benefit payments, net of reinsurance and offset by expected future deposits and premiums on in-force contracts, from life insurance and annuity contracts issued by our life insurance subsidiaries. Future obligations are based on our estimate of future investment earnings, mortality, surrenders and applicable policyholder dividends. Included in the amounts above are policyholder dividends generated by estimated favorable future investment and mortality, in excess of guaranteed amounts for our closed block. Actual obligations in any single year, or ultimate total obligations, may vary materially from these estimates as actual experience emerges. Because future obligations anticipate future investment earnings, total policyholder contractual obligations exceed policyholder liabilities on our balance sheet at December 31, 2005.
Non-recourse obligations are not direct liabilities of ours, as they will be repaid from investments pledged as collateral recorded on our consolidated balance sheet. See Note 8 to our consolidated financial statements in this Form 10-K for additional information.
We have accounted for our acquisition of the remaining interest in PFG as a step-purchase acquisition. Accordingly, we recorded a definite-lived intangible asset of $9.8 million related to the PVFP acquired and a related deferred tax liability of $3.4 million. The PVFP intangible asset will be amortized over the remaining estimated life of the underlying insurance in force acquired, estimated to be 40 years. The remaining excess acquisition price of $13.5 million has been assigned to goodwill. We have not presented pro forma information as if PFG had been acquired at the beginning of January 2003, as it is not material to our financial statements. See Note 3 to our consolidated financial statements in this Form 10-K for more information.
We provide our employees with postemployment benefits that include retirement benefits, through pension and savings plans, and other benefits, including health care and life insurance. Employee benefit expense related to these plans totaled $28.2 million, $16.5 million and $33.1 million for 2005, 2004 and 2003, respectively.
We also have a postretirement benefit plan, which is unfunded and had projected benefit obligations of $(72.4) million and $(70.3) million as of December 31, 2005 and 2004, respectively.
See Note 11 to our consolidated financial statements in this Form 10-K for more information.
At December 31, 2005, Phoenix Life’s and each of its insurance subsidiaries’ Total Adjusted Capital levels were in excess of 300% of Company Action Level.
See Note 15 to our consolidated financial statements in this Form 10-K regarding the Life Companies’ statutory financial information and regulatory matters.
Our broker-dealer subsidiaries are each subject to the net capital requirements imposed on registered broker-dealers by the Securities Exchange Act of 1934. Each is also required to maintain a ratio of aggregate indebtedness to net capital that does not exceed 15:1. At December 31, 2005 the largest of these subsidiaries had net capital of approximately $10.0 million, which is $9.4 million in excess of its required minimum net capital of $0.6 million. The ratio of aggregate indebtedness to net capital for that subsidiary was 1:1. The ratios of aggregate indebtedness to net capital for each of our other broker-dealer subsidiaries were also below the regulatory ratio at December 31, 2005 and their respective net capital each exceeded the applicable regulatory minimum.