The Company does not directly own or lease any office space. Phoenix and its affiliates provide services and facilities to PHL Variable and are reimbursed through a cost allocation process.
On May 31, 1994, PM Holdings accounted for the acquisition of the Company under the purchase method of accounting. The assets and liabilities of the Company were recorded at their fair value as of the date of acquisition and goodwill of approximately $775,000 was pushed-down to the Company from PM Holdings. The Company began offering variable annuities to the public in July 1995 and recorded its first product sales during the third quarter of 1995. By the end of 1995, variable annuity funds under management reached $18.8 million and net income for the year, at $7,000, was slightly above break even despite the somewhat higher operating expenses normally associated
with start-up operations. Policy acquisition expenses of ($42,000) resulted from interest on deferred costs that exceeded the amortization in this initial year.
Deposits from the sale of variable annuity products increased significantly in the following two years, reaching a $212.6 million level in 1997, up from the $142.6 million received in 1996. Variable annuity funds under management include contractholders' funds at interest and separate account liabilities ending the year at $403.7 million as of December 31, 1997, rising $232.6 million during 1997, from the $171.0 million level as of December 31,1996. The growth in annuity deposits during 1997 and 1996 occurred primarily in the separate accounts, with approximately 93% of the end of year variable annuity liabilities residing in separate accounts and 7% in guaranteed interest accounts. Although PHL Variable began offering variable annuities with a market value adjustment option during the third quarter of 1997, the sale of that product was insignificant to this year's results.
Policy acquisition expenses consist primarily of commissions and field distribution expenses. The increase in these expenses to $1.4 million in 1997 from $0.6 million in 1996 was a direct result of the significant increase in sales volume in those years, $212.6 million and $142.6 million in deposits, respectively.
Operating expenses include the cost of facilities and services under an expense allocation agreement with its ultimate parent, Phoenix. Operating expenses of $2.9 million for 1997 increased by $1.8 million (164%) from the $1.1 million incurred for 1996. The increase in this year's expenses were primarily attributable to the administration of a larger block of business, described previously.
Net income of $953,000 in 1997 showed a significant increase over the $300,000 of net income reported during 1996. As explained earlier, the growth in the variable annuity funds under management and related fees associated with that business have provided the biggest contribution to these results. A significant increase in revenues combined with appropriate control over expenses produced improved profit results. Gross revenues of $6.8 million in 1997 rose $4.2 million (162%) over 1996 revenues of $2.6 million. Benefits and expenses, totaling $5.3 million in 1997, grew $3.2 million (152%) over 1996 benefits and expenses of $2.1 million. Pretax income of $1.5 million in 1997 was up $1.0 million (200%) over the $0.5 million reported in 1996. Income taxes of $0.6 million for 1997 and $0.2 million for 1996 averaged 36.7% and 36.3% of pretax earnings for both years, respectively.
The liquidity requirements of PHL Variable are met by anticipating and managing the timing of cash uses and sources provided from the Company's insurance operations, investing activities and capital contributions of the Parent.
The Company's rapid growth has created a temporary need to supply additional cash in order to cover the acquisition costs incurred in operating activities. These liquidity requirements are currently being met through investing activities and by capital contributed by its Parent. Since acquiring PHL Variable, PM Holdings has made capital contributions of $6.0 million in 1995 and $5.0 million in 1997. In addition, on February 18, 1998, PM Holdings made a cash contribution of $12.0 million to the Company and anticipates that this contribution will cover the Company's forseeable liquidity needs.
Statement of Income and Equity for the Years Ended December 31, 1997, 1996 and 1995 ..........................................9
Statement of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 ..........................................10
To the Board of Directors and Stockholder of PHL Variable Insurance Company
PHL Variable Insurance Company ("PHL Variable" or the "Company") offers variable annuity products in the United States designed for individual purchasers and a group product offered to employees to fund qualified pension plan deposits. During the fourth quarter of 1997, the Company began offering an individual term product containing level premiums for ten years and annual changes thereafter. PHL Variable is a wholly-owned subsidiary of PM Holdings, Inc. ("PM Holdings"). PM Holdings is a wholly-owned subsidiary of Phoenix Home Life Mutual Insurance Company ("Phoenix").
The costs of acquiring new business, principally commissions, distribution and policy issue expenses, all of which vary with and are primarily related to the production of revenues, are deferred. Deferred policy acquisition costs are subject to recoverability testing at the time of policy issue and loss recognition at the end of each accounting period.
PHL VARIABLE INSURANCE COMPANY (A WHOLLY-OWNED SUBSIDIARY OF PM HOLDINGS, INC.) NOTES TO FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
Goodwill represents the excess of the cost of businesses acquired over the fair value of their net assets. The costs are amortized on the straight-line method over a period of 10 years, the expected period of benefit from the acquisition. Management periodically reevaluates the propriety of the carrying value of assets. Assets are considered impaired if the carrying value exceeds the expected future undiscounted cash flows. Such analyses are performed at least annually or more frequently if warranted by events or circumstances affecting the Company's business. At this time, management believes that no significant impairment of the remaining goodwill asset has occurred and that no reduction of the estimated useful lives is warranted.
Contractholder deposit funds consist of deposits received from customers and investment earnings on their fund balances, less administrative charges.
Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their recorded amounts for financial reporting purposes. These differences result primarily from policy liabilities, accruals and surrenders, policy acquisition expenses and unrealized gains or losses on investments.
Phoenix sponsors pension and savings plans for its employees and agents, and those of its subsidiaries. The multiemployer qualified plans comply with requirements established by the Employee Retirement Income Security Act of 1974 (ERISA) and excess benefit plans provide for that portion of pension obligations which is in excess of amounts permitted by ERISA. Phoenix also provides certain health care and life insurance benefits for active and retired employees. PHL Variable incurs applicable employee benefit expenses through the process of cost allocation by Phoenix.
The amortized cost and fair value of investments in debt securities as of December 31, 1997 were as follows:
The amortized cost and fair value of investments in debt securities as of December 31, 1996 were as follows:
The Company's investment in mortgage-backed securities at December 31, 1997 and 1996 were in sequential pay bonds.
Unrealized gains and losses on investments carried at fair value at December 31, were as follows:
The proceeds from sales and repayments of available-for-sale debt securities for the years ended December 31, 1997, 1996 and 1995 were $4.7 million, $3.2 million and $1.5 million, respectively. The gross realized losses associated with these sales were $0, $18,044 and $0 in 1997, 1996 and 1995, respectively.
Fair values are based on quoted market prices, where available, or quoted market prices of comparable instruments. Fair values of private placement debt securities are estimated using discounted cash flows that apply interest rates currently being offered with similar terms to borrowers of similar credit quality.
Contractholders' funds at interest have guarantees of less than one year for which interest credited is closely tied to rates earned on owned assets. For such liabilities, fair value is equal to the stated liability balances. The contract liability balances for December 31, 1997 and 1996 were $27.7 million and $11.6 million, respectively.
A summary of income taxes (benefits) in the Statement of Income and Equity for the year ended December 31, is as follows:
The income taxes attributable to the results of operations are different than the amounts determined by multiplying income before taxes by the statutory income tax rate. The sources of the difference and the tax effects of each for the year ended December 31, were as follows:
The deferred income tax asset (liability) represents the tax effects of temporary differences. The components were as follows:
Gross deferred income tax assets totaled $8.1 million and $3.8 million at December 31, 1997 and 1996, respectively. Gross deferred income tax liabilities totaled $6.9 million and $3.5 million at December 31, 1997 and 1996, respectively. It is management's assessment, based on the Company's earnings and projected future taxable income, that it is more likely than not that the deferred tax assets at December 31, 1997 and 1996, will be realized.
The Internal Revenue Service is currently examining the Company's tax return for 1995 and 1996. Management does not believe that there will be a material adverse effect on the financial statements as a result of pending tax matters.
Beginning in January 1996, PHL Variable entered into a reinsurance treaty that cedes death benefits to a reinsurer in excess of account balances on variable contracts. Premiums paid during 1997 and 1996 were $259 thousand and $49 thousand, respectively. Under this treaty, claims recovered were $1 thousand in 1997. No claims were recoverable in 1996.
The following reflects the amount of policy acquisition costs deferred and amortized for the years ended December 31:
Phoenix and its affiliates provide services and facilities to the Company and are reimbursed through a cost allocation process. Investment related expenses are allocated to PHL Variable from PM Holdings.
Insurance companies are required to file annual statements with state regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities. As of December 31, 1997, there were no material practices not prescribed by the Insurance Department of the State of Connecticut. Statutory equity differs from stockholder's equity reported in accordance with GAAP for life insurance companies primarily because policy acquisition costs are expensed when incurred, investment reserves are based on different assumptions, postretirement benefit costs are based on different assumptions and reflect a different method of adoption, life
The following reconciles the statutory net income of PHL Variable as reported to regulatory authorities to the net income as reported in these financial statements for the year ended December 31: